COSTIN’s 1H11 net income increased 32.7% YoY to 128.9 million, 1.6%below our 1H11 forecast. Revenue grew 54.3% YoY to RMB651 million.
Gross margin declined 3.5 percentage points YoY to 31.3%, but COSTINexpects that FY11 gross margin will be higher than what it was in 1H11.
COSTIN’s non-woven materials production capacity to increase morethan previously expected. In June 2011, COSTIN increased its non-wovenmaterial production capacity by 31.1% to 160.3 million yards, which is morethan we had expected. Production commencement of COSTIN’s newnon-woven high-thermal resistance filtration materials has been delayed tillSeptember 2011, but the planned production capacity is now 18 million m2,which is 80% more than the 10 million m2 capacity we were expecting.
We lower our FY11 diluted EPS forecast by 4.8% due to the dilutiveeffect of COSTIN’s convertible bond issuance but increase expectedFY12-13 diluted EPS by 0.9% and 6.1%, respectively, on higherexpected revenue. We forecast FY11-13 diluted EPS of RMB0.386,RMB0.564 and RMB0.708, respectively, representing 39.2% FY10-13CAGR.
We maintain our ‘Buy’ rating and HKD8.50 target price, which is basedon 18.1x FY11PE and represents 12.4x FY12PE, 9.8x FY13PE and 0.7xFY10-13PEG. Our target price is a 30% discount to our DCF based NAV ofHKD12.21.