Costin’s FY11 net profit increased 13.0% YoY, but was 24.4% below our forecast. Results from the new thermal resistant materials segment as well as the revenue contribution from the newly added non-woven production capacity were less than expected.
Planned composite synthetic leather production capacity has been delayed again. However, we are uncertain that the economic environment can justify this segment by 2013 and so we remove it from our forecasts.
Revise down forecasted FY12 and FY13 EPS by 26.2% and 26.6%, respectively. We forecast FY12-FY14 EPS of RMB0.45, RMB0.53 and RMB0.62, representing 25.3% CAGR.
We revise down our target price to HKD5.13 based on 9.2x FY12 PER, representing 0.5x FY11-FY14 PEG. Despite 2H11 results not meeting expectations, we think Costin is currently undervalued due to its below own-average historical PER, low PEG ratio and PER below other non-wovens companies. Our target pric e is equivalent to 13.0x FY11 PER, which is equivalent to the share’s historical average TTM PER.