Midas Holdings reported 2Q14 earnings which came in below our expectations. Although revenue rose 18.4% YoY to CNY336.3m, PATMI slumped 44.2% to S$8.3m. We believe China’s railway sector still carries strong growth potential. However, we slash our FY14 and FY15 PATMI forecasts by 53.4% and 50.0%, respectively, partly to take into account the completed acquisition of the remaining 45% stake in Jilin Midas Light Alloy Co. (Midas owned 55% previously), which is expected to commence operations only in 2H15. We believe this is a necessary move by Midas to diversify away from the railway sector for its long-term growth prospects. However, we expect start-up losses to continue in the near-term. Rolling forward our valuations to 1.0x (previously 1.2x) blended FY14/15F P/B, our fair value estimate declines from S$0.61 to S$0.50. As Midas’ share price has fallen by 19.6% YTD, we believe its negatives have already been priced in. Maintain BUY.
2Q14 PATMI significantly below our expectations
Midas Holdings reported 2Q14 earnings which came in below our expectations. Although revenue rose 18.4% YoY to CNY336.3m, PATMI slumped 44.2% to S$8.3m. This was largely due to a spike in administrative expenses (+44.7% YoY) and finance costs (+57.2% YoY), as well as a higher effective tax rate of 59.8% (2Q13: 28.1%). An interim dividend of 0.25 S cent/share was declared, similar to 1H13. For 1H14, revenue jumped 30.2% to CNY633.2m, forming 45.6% of our FY14 forecast. Although PATMI surged 98.6% to CNY19.8m, this constituted only 22.1% of our full-year projection of CNY89.6m, which was already the lowest on the street (prior to release of 2Q14 results). Midas and its associate NPRT’s order books stood at CNY750m and CNY10b, respectively, as at 30 Jun 2014.
China’s railway sector still carries strong growth potential
China incurred CNY235.2b of railway fixed asset investments (FAI) from Jan to Jun this year. This can be broken down into CNY199.6b for infrastructure spending and CNY35.6b for capex on equipment. Given that China has set a railway FAI target of CNY800b for 2014, we expect its railway spending to accelerate in 2H14. This is a reasonable assumption as the government has to boost spending on key sectors such as railway in order to hit its economic growth target.
Share price has pulled back sharply YTD; maintain BUY
We slash our FY14 and FY15 PATMI forecasts by 53.4% and 50.0%, respectively, partly to take into account the completed acquisition of the remaining 45% of the equity interest in Jilin Midas Light Alloy Co. (Midas owned 55% previously). We believe this is a necessary move by Midas to diversify away from the railway sector for its long-term growth prospects. However, as operations are only expected to occur in 2H15 and hiring of staffs has already been happening in preparation, we expect start-up losses to continue in the near-term. Hence, we lower our P/B target peg from 1.2x to 1.0x. Rolling forward our valuations to 1.0x blended FY14/15F P/B, our fair value estimate declines from S$0.61 to S$0.50. As Midas’ share price has fallen by 19.6% YTD, we believe its negatives have already been priced in. Maintain BUY.
Midas Holdings reported 2Q14 earnings which came in below our expectations. Although revenue rose 18.4% YoY to CNY336.3m, PATMI slumped 44.2% to S$8.3m. This was largely due to a spike in administrative expenses (+44.7% YoY) and finance costs (+57.2% YoY), as well as a higher effective tax rate of 59.8% (2Q13: 28.1%). An interim dividend of 0.25 S cent/share was declared, similar to 1H13. For 1H14, revenue jumped 30.2% to CNY633.2m, forming 45.6% of our FY14 forecast. Although PATMI surged 98.6% to CNY19.8m, this constituted only 22.1% of our full-year projection of CNY89.6m, which was already the lowest on the street (prior to release of 2Q14 results). Midas and its associate NPRT’s order books stood at CNY750m and CNY10b, respectively, as at 30 Jun 2014.
China’s railway sector still carries strong growth potential
China incurred CNY235.2b of railway fixed asset investments (FAI) from Jan to Jun this year. This can be broken down into CNY199.6b for infrastructure spending and CNY35.6b for capex on equipment. Given that China has set a railway FAI target of CNY800b for 2014, we expect its railway spending to accelerate in 2H14. This is a reasonable assumption as the government has to boost spending on key sectors such as railway in order to hit its economic growth target.
Share price has pulled back sharply YTD; maintain BUY
We slash our FY14 and FY15 PATMI forecasts by 53.4% and 50.0%, respectively, partly to take into account the completed acquisition of the remaining 45% of the equity interest in Jilin Midas Light Alloy Co. (Midas owned 55% previously). We believe this is a necessary move by Midas to diversify away from the railway sector for its long-term growth prospects. However, as operations are only expected to occur in 2H15 and hiring of staffs has already been happening in preparation, we expect start-up losses to continue in the near-term. Hence, we lower our P/B target peg from 1.2x to 1.0x. Rolling forward our valuations to 1.0x blended FY14/15F P/B, our fair value estimate declines from S$0.61 to S$0.50. As Midas’ share price has fallen by 19.6% YTD, we believe its negatives have already been priced in. Maintain BUY.
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