Midas Holdings

CIMB Research, Oct 29

WE raise our FY2014-15 EPS to 17-19 per cent above consensus; the market is likely to follow suit. We believe further high-speed rail (HSR) contract wins could catalyse the stock. We maintain "outperform", with our target price unchanged at $0.74, based on 1.29 times CY2014 P/B (20 per cent discount to average P/B during 2010-11).

To improve connectivity between provinces and cities across China, the government plans to add 11,200 high-speed train cars (from 10,400 currently) and extend the high-speed railway network to 18,000 km by 2015.

To achieve this, it has allocated a 3.3 trillion yuan ($670 billion) budget for railway investments over the current five-year plan period that ends in 2015.

In 2011-12, 1.21 trillion yuan was spent on building railway infrastructure, which leaves a budget of 2.09 trillion yuan for 2013-15.

As the procurement of railway equipment (including train cars) tends to be back-end loaded, there could be an increase in the remaining budget to 2.16 trillion yuan that the market has yet to factor in.

Based on Midas' 60 per cent market share, we estimate that it could win 2.5 billion to 3.2 billion yuan of HSR orders by end-2015.

Midas has built up several competitive advantages over the years:

• Close relationships with its key customers, CNR Changchun, CNR Tangshan and CSR Bombardier Sifang;
• Having the dies to produce a variety of extrusion profiles; and
• A track record of manufacturing quality products.

As a result, we believe Midas can maintain its position as a preferred supplier to its key customers, which will help it to retain its leading market share of 60 per cent and win the bulk of the HSR contracts.

Midas is currently trading at 0.9 times P/B (one standard deviation below mean). We believe its discounted valuations are unjustified, given the strong order momentum that is likely to come in Q4 2013-2015. In the next round of procurement alone, we believe Midas could win 545 million yuan of HSR contracts, an upward revision from our previous estimate of 309 million yuan.

This will provide a further re-rating catalyst for the stock.

OUTPERFORM