Midas Holdings

Kim Eng on 11 Sept 2012

PRC govt announces fiscal stimulus. Last week, the PRC government announced via the National Development and Reform Commission (NDRC) that it has approved more than 60 infrastructure projects, worth RMB 1 trillion. These include highway roads, ports and rail projects. We believe this is a very positive development for Midas, and will benefit contract orderflow going forward.

Approves 25 rail transit projects in a single day. NDRC approved 25 new rail projects totaling an estimated RMB 700b yuan, which is to be built over the next three-eight years. These are a combination of metro/ inter-city rail projects over 19 cities. Given Beijing’s approval, the necessary funding should not be an issue. We estimate about 25% of the RMB 700b to be for rail equipment. Midas’s 32.5%-owned associate Nanjing Puzhen Rail Transport (NPRT) will be a direct beneficiary, and will likely return strongly to the black from next year onwards.

Positive for Midas too. In terms of downstream extrusion, Midas has a 60% market share currently, which should realistically be maintainable, given its expansion into a 2nd Luoyang plant to capture central China projects. This would imply RMB4.4b worth of contracts, or spread over eight years, baseload annual revenue of RMB 330 (against FY2011 revenue of RMB1.1b). This is excluding possible high-speed train contracts next year, which will still be the main driver of revenue growth.

What does this move imply? The approval of 25 rail projects in a single-day is unprecedented. In our opinion this signifies 1) The PRC government is determined to ensure its economy does not falter and may consider more stimulus options 2) Improving rail transport infrastructure is still one of the more viable investment considerations.

2H2013/ 2014 earnings recovery crystallizing, Upgrade to BUY. Although our baseline assumption is still for high-speed contracts to resume by mid-2013, the probability of it happening even before the leadership transition end of this year has increased. This will be a major catalyst for the stock and will support a very strong earnings recovery in 2H2013/ 2014. Given these circumstances, we believe Midas should re-rate at least to its book-value of SGD48 cents, which will represent an attractive 20% return from current levels. Upgrade to BUY from HOLD.