Investment positives

We initiate coverage with a HOLD rating and a target price ofRmb27.15, or 75x 2017e P/E.

Why a HOLD rating

To acquire Swiftpass and enter mobile payment

market. 1) The firm is to acquire a 100% stake in Swiftpassfor Rmb2.05bn and enter the mobile payment sector. 2)Mobile payment is booming and th eQR code has beenrecongized by regulator.

Swiftpass’ unique business model drives growth and

builds up strong barriers. 1) The “bank model” initiatedby Swiftpass helps acquire merchant clients and GMVthrough WeChat and banks. The revenue sharing modelboosts earnings. 2) Swiftpass works with >70 bankingclients and enjoys first mover advantage. Swiftpass is tryingto obtain large banking clients; declining tariffs help reducethe number of new entrants in the field.

How do we differ from the market。We expectSwiftpass’ net profit will likely beat earnings promise due tocurrent GMV and 2017 market exploration plan. We believeSwiftpass will speed up industrial application and financialservices to acquire merchant and banking clients.Potential catalysts: 1) Swiftpass earnings beat; 2) Swiftpassprovides value added financial services.

Financials and valuation

We forecast 2016/17/18e EPS at Rmb0.26/0.35/0.45mn (CAGRat 31%); considering the Swiftpass acquisition, we forecastSwiftpass net profit at Rmb145/212/281mn and grant Swiftpassa valuation of Rmb12.7bn, implying 60x 2017e P/E. We give themicrofiber business a valuation of Rmb5bn (30x 2017e P/E). Weforecast the overall valuation of Huafon Microfibre at~Rmb17.7bn.

Risks

The CSRC does not approve the Swiftpass acquisition; thebusiness model is impacted by changes in mobile paymentregulations and the market landscape; Weak demand formicrofiber materials.