Midas

CIMB Research on 28 June 2012

MIDAS's share price is hovering near its all-time low of 26 cents. With recent positive developments in China's railway industry, we smell new contracts in the wind.

A high-speed rail contract award could free Midas from the shackles of its year-long nightmare. When orders return, expect margin expansion on higher utilisation and inventory rundown.

We also expect the share price to react positively once new contracts are secured. Maintain "outperform" with an unchanged target price of 41 cents, still based on 11.7 times CY2013 PE (0.5 standard deviation below historical five-year average).

Total railway fixed asset investments target has been raised to 550 billion yuan or $111 billion (from 516 billion yuan). The gradual easing of credit available to the railway industry should also bolster liquidity and lower its financing burden.

A potential reform for the Ministry of Railway will bode well for the sustainability of railway development in the longer run.

Industry observers are already expecting new orders in H2 2012. Potential contract wins will act as price catalysts as margins should expand from the current lows on higher capacity utilisation.

In addition, we expect Midas's reliance on short-term debt to finance working capital to wane as liquidity returns to the industry.

While there is a possibility that the order drought could continue into 2013, Midas's diversification into international markets and exposure to the metro segment should provide some support for its orderbook that currently stands at 650 million yuan.

Management is confident of getting at least 500 million yuan worth of orders this year. We think this provides earnings visibility for at least 1.5 years.

In the longer term, Midas also plans to venture into other industrial segments like automotive, aviation, and shipping. In addition, we are comforted by management's ambitions to move up the value chain, by providing fabricating services on top of its profile manufacturing capabilities.

At 28 cents, Midas is trading at 7.9 times CY2013 PE, near its all-time low of 6.1 times PE. While lacklustre performance could ensue in the coming months, we think that a potential contract win could catalyse its share price.

OUTPERFORM