Midas Holdings

Maybank Kim Eng Research on 27 May 2013

THE newly formed China Railway Corporation (spun off from the former Ministry of Railways) made its capital market debut with the sale of 20 billion yuan bonds last Thursday.

The proceeds from the sales will go towards rail construction, the purchase of rolling stocks and working capital. In our view, it is a necessary move to get China's ambitious railway plans back in gear and could potentially result in more intensive investments in the second half of the year.

We continue to like Midas as a major beneficiary of the investments in China railway sector, and maintain our "buy" rating and target price of S$0.75.

China Railway Corp inherited all the liabilities of the former Ministry of Railways and the heavy debt burden affects its cash-generation ability. The funding source is thus crucial to the development of China railway system.

People had some concern that the high gearing and the restructuring of the China Ministry of Railways could cause some slowdown in this sector. Now it seems that the funding has returned to normal.

The RMB20 billion bonds are just the first batch of the RMB 150 billion bonds that China Railway is expected to issue this year.

Total investment in the China rail sector YTD also lags behind the full-year investment target of RMB650 billion, because of the restructuring of the Ministry of Railways. That implies more aggressive fund raisings and investments in H2 2013. We are looking at RMB500-600 million order wins in the metro sector in H2 2013. But the key point to watch remains the potential resumption of high speed train tenders in H2 2013, which can significantly boost Midas' profitability if they materialise.

We are still positive on the likelihood of the tender in H2 2013.

We suggest investors to remain patient. Although earnings will still suffer in 2013, we expect YTD order to win momentum to continue on the back of more aggressive investments by China Railway Corp, which will result in an earnings turnaround in 2014. Maintain "buy" and target price of S$0.75.

BUY