Midas Holdings

Kim Eng on 7 Mar 2012

Don’t hold your breath for a turnaround. As we had warned, Midas’s recent 4Q11 results were lacklustre. With China’s rail industry remaining sluggish, we are convinced that any turnaround in fortunes for Midas will likely come after this year.

Delivery to customers painfully slow. Revenue slipped by 19% QoQ during 4Q11, a clear sign that delivery to customers had been painfully slow. With new capacity coming on-stream, inventory build-up in the quarter alone totalled Rmb100m. As the first quarter is seasonally weaker, we are already anticipating another disappointing quarter.

Some silver linings. Midas was awarded a “New High Tech Enterprise” tax status in China, enabling it to enjoy a concessionary tax rate of 15% for three years versus a normal tax rate of 25%. This propped up its profitability in 4Q11 as tax provisions fell significantly. Nanjing Puzhen Rail Transport (NPRT), its 32.5%-owned associate, also swung around and was operating in the black again. NPRT has an orderbook of Rmb7b but its execution has been too inconsistent to provide any clear visibility.

Tie-up with Kaitong Engineering. Midas recently entered into a joint-venture agreement with Kaitong Engineering to focus on light aluminium alloy products for other industries, such as aviation and shipping. Kaitong, which is a privately-held local business group with myriad interests in China, will hold a 45% stake via an equity injection of US$45m. However, the gestation period for this JV will be long as it will be a greenfield project and contributions will start to flow in after 2015.

Trading below book. The stock is trading at 0.8x P/BV, which we believe will provide a very strong floor to share price. Midas’s book consists mainly of property, plant and equipment built up over the past 2-3 years in support of China’s rail industry.

Maintain Hold. Our FY12 earnings estimates are significantly below the consensus, which we deem to be too optimistic. Midas has a current orderbook of Rmb800m, but this may be quickly depleted if it fails to secure any major contract wins this year. Our SOTP-based target price is raised slightly to $0.41, pegged at a 20% discount to its book value. Maintain Hold.