Midas Holdings

Kim Eng on 16 Aug 2012

Barely missing the red ink. 2Q12 net profit of RMB1.6m was significantly below expectations, showing another quarterly downtrend in profitability. As evident from the 30% yoy revenue decline, delivery to customers remain lacklustre and utilisation remains low. We expect this to persist for the rest of the year. At this point, we believe investors will have to buy into a 2H13-2014 possible earnings recovery story.

Revenue decline evident of lower delivery. 2Q12 revenue was down 30% yoy and also 5% qoq against a seasonally slow 1Q12 (due to Chinese New Year period). We understand capacity utilisation is estimated at about 45-50%, while fabrication revenue still accounts for a small part of total revenue. On the positive side, gross margins remained healthy at 31.5%, which is a testament to the company’s cost-plus strategy for extrusion. Also, operating cash has turned positive this quarter, which is a sign that the worse may be over.
Other factors for profit decline. 32.5%-owned associate also turned in a loss for the quarter, despite an RMB8b order book. Profit visibility from this remains lumpy and they are now also likely to show a loss for the year. Another factor for this quarter was the very high finance costs. Previously, some bank borrowings used for construction of PPE were capitalized. Income tax rate was exceptionally high this quarter, attributed to withholding taxes paid for dividend payment.

A possible 2H2013/2014 earnings recovery. We note that Midas has continued to win metro and international contracts, with orderbook now standing at RMB600m. Nonetheless, given the much higher volume, winning high-speed rail contracts, will be vital to an earnings recovery. We now see this more likely to happen after the PRC leadership change at the end of this year, implying an earnings recovery may be more likely in 2H13/2014. Midas’s 2nd extrusion plant in Luoyang will be up and running by then, allowing them to take full advantage.

Maintain Hold. We believe most of the bad news may be priced in by now, though earnings visibility remains poor and recovery may take several more quarters at least. Therefore, we continue to use a discount to book value methodology to value Midas, deriving a TP of S$0.36. We maintain HOLD, but stay vigilant for buying opportunities.