Tuesday 28 April 2015

Midas Holdings

OCBC on 27 Apr 2015

Over the past two weeks, shares of Midas’ key customers and peers in China re-rated and we think it is due to market expectations of strong domestic railway spending by the Chinese government over the next five years, growth potential outside of China driven by the Silk Road Plan, and increased competitiveness of CRRC to win more overseas projects. We believe the longer-term outlook China’s rail businesses are certainly positive. However, we prefer to remain cautious on Midas in the near-term on persistent start-up costs, uncertainty over its new business segment as well as whether competitiveness between suppliers of CSR and CNR will increase post-merger. As Midas has exposure to China’s potential growth in rail industry through CNR, we raise our valuation from 0.6x to 0.65x FY15F P/B (-0.75SD to 5-year historical mean), but still discounted for near-term weakness and uncertainty. Consequently, our FV increases from S$0.330 to S$0.375. Maintain HOLD.

Re-rating of customers and peers in China
Over the past two weeks, shares of Midas’ key customers in China re-rated as CSR Corp (CSR) and China CNR Corp (CNR) share prices spiked more than 50% while its peer, China Zhongwang Holdings Ltd saw a 31% increase in share price over the same period. We believe these increases came after: 1) the release of the details of China’s Silk Road Plan in end Mar-15 and, 2) regulatory approval in early Apr-15 of the merger between CSR and CNR to form CRRC. We believe the re-rating is due to market expectations of strong domestic railway spending by the Chinese government over the next five years, growth potential outside of China driven by the Silk Road Plan, and increased competitiveness of CRRC to win more overseas projects. Also, we think railway spending planned for the 13th five-year-plan (FYP) (2016-2020) will not differ much from the 12th FYP (2011-2015), which is in the region of RMB3.0t. On these reasons, we believe the longer-term outlook China’s rail businesses are certainly positive.

Uncertainty and near-term weakness for Midas
While the growth potential in China’s rail industry is huge over the longer-term, we prefer to remain cautious on Midas in the near-term: 1) start-up costs from its two new plants are likely to continue to erode earnings; Luoyang plant (existing business segment) is targeted to generate revenue from 2Q15 while the Liaoyuan plant (new business segment) is only expected to generate revenue from 2Q16 onwards, 2) uncertainty over whether its new business segment of producing basic materials is able to gain traction quickly, since competition is likely to be high, 3) post-merger, the door opens up for suppliers of CSR and CNR to compete and try to gain share of orders from each other but at this stage, it remains uncertain over how this situation will play out.

Maintain HOLD on higher FV
As Midas has exposure to China’s potential growth in rail industry through CNR, we raise our valuation from 0.6x to 0.65x FY15F P/B (-0.75SD to 5-year historical mean), but still discounted for near-term weakness and uncertainty. Consequently, our FV increases from S$0.330 to S$0.375. Maintain HOLD.

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