CECEP COSTIN’s 1H12 revenue increased just 2.3% YoY and was 27.0%below our expectation. Net profit plunged 20.7% YoY and missed ourforecast by 28.8% as 1) gross profit margin declined 1.4 ppts YoY to29.9%, 2) distribution expense ratio increased 0.7 ppts YoY, 3) Higherfinance costs and 4) effective tax rate increased 2.4 ppts Still, the lower1H12 gross margin of 29.9% was better than our expectation for 26.7%.
We expect no further capacity expansion. The Company disclosed thatthe land for its planned recycled chemical fibre capacity has not beendelivered by the local government and the Company considers that it ispossible that the land might not be delivered at all. Also considering theCompany’s 19.2% decline in 1H12 chemical fibre sales volume, we assumethat the chemical fibre production capacity will not increase as previouslyexpected.
Revise down forecasted FY12 and FY13 EPS by 23.5% and 27.1%,respectively, on lower revenue, higher distribution expense ratio, highereffective tax rate and higher finance costs.
Reduce target price to HKD3.54, based on 10.0x FY12 PER, downgraderating to ‘Accumulate’. Our target price is a 37.9% discount to our DCFderived NAV of HKD5.70 and represents 11.0% upside potential.