Midas Holdings

OCBC on 16 Aug 2012

Midas Holdings (Midas) reported a dismal set of 2Q12 results, with PATMI plunging 97.5% YoY to RMB1.6m on the back of a 30.0% dip in revenue to RMB219.8m. Results were significantly below ours and the street’s expectations. Interim DPS was also lowered from 0.5 S cents in 1H11 to 0.25 S cents in 1H12. Nevertheless, there is growing optimism of a recovery in China’s high-speed railway (HSR) sector. We believe that FY12 would be a non-event for Midas as it is transitioning into a recovery in FY13. We upgrade Midas from Hold to BUY as we switch our valuation matrix to 0.8x FY13F P/B. This is premised on an anticipated pick up in Midas’ orders win momentum and likelihood of a resumption of HSR passenger train car contracts by China’s Ministry of Railways in the near future, which would provide a catalyst for Midas’ share price. Our new fair value is S$0.41 (previously S$0.30).

Dismal 2Q12 results, dragged by associate and higher costs
In line with its earlier profit guidance, Midas Holdings (Midas) reported a dismal set of 2Q12 results, with net profit plunging 97.5% YoY and 89.6% QoQ to RMB1.6m. Revenue for the quarter was RMB219.8m, representing a 30.0% YoY and a 4.6% QoQ decline. The fall in net profit was attributed to higher operating expenses and finance costs, as well as a RMB14.1m share of loss from its associated company, Nanjing SR Puzhen Rail Transport (NPRT). For 1H12, revenue dipped 26.2% to RMB450.2m, or 46.0% of our FY12 forecast; net profit slumped 86.3% to RMB16.9m, forming just 14.8% and 13.9% of ours and the street’s full-year estimates, respectively. Another disappointment came from a cut in interim dividend to 0.25 S cents/share (1H11: 0.5 S cents/share). Current order book for Midas stands at RMB600m, while that of NPRT is RMB8b.

Growing optimism on China’s high-speed rail transport industry
China’s Ministry of Railways (MOR) recently raised its railway infrastructure investment target by ~16% to RMB470b for 2012, boosting its total railway fixed asset investment (FAI) goal to RMB580b. We see this as a huge positive for the whole sector, as it reaffirms the government’s commitment to develop its railway industry.

Near-term weakness to persist, slash estimates
We slash our FY12 and FY13 PATMI projections by 60.2% and 14.9%, respectively. We now value Midas based on 0.8x FY13F P/B (1 SD below its historical average forward P/B), given that FY12 appears to be a non-event for Midas and there is a lack of earnings visibility in the near term.

Position for recovery in orders win, upgrade to BUY
But we are upgrading Midas from Hold to BUY with a new fair value estimate of S$0.41 (previously S$0.30). We position our buy rating on the premise of an expected recovery in its orders win momentum and the likelihood of a resumption of high-speed railway (HSR) passenger train car contracts by MOR in the near future, which would provide a catalyst for Midas’ share price.