Midas Holdings

OCBC on 10 Sept 2012

Since we upgraded Midas Holdings (Midas) to ‘Buy’ on 16 Aug 2012, its JV company NPRT and itself have gone on to secure more contract wins, thus boosting its share price. Meanwhile, more positive industry news flow has emerged, with China’s NDRC approving 25 urban rail projects amounting to ~CNY842.7b. China Railway Group also said that the Chinese government would boost targeted railway infrastructure investments from CNY470b to CNY496b in 2012. While we expect Midas’ financials to remain lacklustre in the near-term as it transitions towards a recovery in FY13, we expect management to secure more metro, power and international railway contract wins in the meantime. We maintain our forecasts and BUY rating but lift our fair value estimate to S$0.435 (previously S$0.41) as we increase our valuation peg from 0.8x to 0.85x FY13F P/B on the back of the improved sentiment in China’s railway sector.

Order wins momentum gains traction
We upgraded Midas Holdings (Midas) to ‘Buy’ on 16 Aug 2012, based on the premise of an expected pickup in its order wins momentum. Since then, Midas’ 32.5%-owned JV company Nanjing SR Puzhen Rail Transport (NPRT) announced an intercity rail contract win of CNY588m (NPRT’s share of the contract is ~76%), while Midas also clinched contracts totalling CNY123.4m for two power industry players. The latter would provide diversification for Midas beyond the railway sector. Its share price has also jumped 13.2% since our upgrade, which compares favourably to the 1.6% decline registered by the STI during the same period.

More positive industry news flow
China’s National Development and Reform Commission (NDRC) recently approved 25 urban rail projects amounting to ~CNY842.7b, with completion ranging from 2015 to 2020. Cities involved include Guangzhou, Shenzhen and Shanghai. Meanwhile, China Railway Group also said that the Chinese government would boost targeted railway infrastructure investments from CNY470b to CNY496b this year. We believe these events signify the government’s commitment to stimulate the economy and develop its rail transport sector.

Worst likely over, but no quick fix to near-term financial woes
Notwithstanding the brighter industry outlook, there is currently still a stalemate on new high-speed passenger train car orders from China’s Ministry of Railways, although there are signs that the impasse could be over soon. We expect Midas’ financials to remain lacklustre over the next 2-3 quarters as it transitions towards a recovery in FY13. However, we expect management to strengthen its order book with more metro, power and international railway contracts in the meantime. In our opinion, the positive sentiment from new contract wins would likely override negativity surrounding its weak results in the near term. We maintain our forecasts and BUY rating but lift our fair value estimate to S$0.435 (previously S$0.41) as we increase our valuation peg from 0.8x to 0.85x FY13F P/B on the back of the improved sentiment in China’s railway sector.