Midas Holdings

Kim Eng on 11 Mar 2013

Expect more clear visibility after the NPC. China’s 12th National People's Congress (“NPC”) has kicked off in Beijing last week and will last for about two weeks. New policies, budget approval and legislation will be discussed during the NPC session and the new policies will be gradually announced to public after NPC closes. We expect more clear visibility in the development of high-speed railways after the NPC.

Restructuring of Ministry of Railways? It seems that the Ministry of Railways may soon be restructured as part of a wider exercise by the Chinese government to streamline its ministries. According to Chinese local media, the plan will be discussed during the NPC this time around to break up the Ministry of Railways. Its regulatory functions will be absorbed by the Ministry of Transport, while the operation of its rail business will be transferred to a separate SOE. This SOE will take charge of the passenger lines, including the high-speed rail, as well as the signal system, the facilities and ticketing arrangements.

Expect a more efficient decision making and execution. We hope that the restructuring will herald a new round of reform aimed at unraveling the tangled relationship between business and government, to further transform the rail sector to be more market-oriented. As we all know, the tender for high-speed train has been paused for almost two years and the train supply cannot meet the demand especially after several new lines commenced operation last year. We think the potential reforms will herald a more efficient decision-making process and accelerate the order flow.

Remain positive on order win outlook, maintain BUY. We are still positive on the order win outlook for Midas. Although in a recent media interview during the NPC, the Minister of Railways, Sheng Guangzu denied the previous market rumor that the high-speed train tender will resume in April, he did indicate that the tender could be resumed if demand increases in the future. We maintain our BUY rating and raise our target price to SGD0.75, pegged to 1.5x FY13 P/B. The key risk mainly lies in order wins taking place later than we expected.