Midas Holdings

DMG & Partners Research, Nov 20

MIDAS' Q3 FY2013 revenue surged 48.5 per cent y-o-y to 301.0 million yuan (S$61 million), as utilisation of its production lines continued to improve (Q3 FY2013: 55 per cent, Q2 FY2013: 50 per cent). However, as it took on more low-margin jobs, the gross margin dipped to 20.8 per cent (Q2 FY2013: 22.5 per cent; Q3 FY2012: 31.5 per cent). Going forward, we expect profitability to improve as more high-speed train orders, which command higher margins, are secured.

The China Railway Corporation recently released a second tender for train cars. China CSR Corp and China CNR Co secured the bulk of the first tender's orders a few months ago. The results of the second tender are expected to be announced in December 2013, with China CSR and China CNR being the likely winners again. As both companies are major customers of Midas, it is in a good position to secure more orders. This is expected to boost its current orderbook of 900 million yuan, with deliveries scheduled for 2014 and 2015. In the meantime, its associate Nanjing SR Puzhen Rail Transport (NPRT)'s orderbook is currently at 8.5 billion yuan.

Midas' FY2013 PATMI (profit after tax and minority interests) is expected to be boosted by NPRT's strong performance this year. NPRT's Q3 2013 performance has already exceeded our FY2013 forecast numbers. We raise our revenue estimates after taking into account the expected continued improvement in Midas' capacity utilisation. However, we lower our gross margin assumption for FY2013 and factor in higher operating expenses, which results in our PATMI estimate of 32.9 million yuan for the period (from 80 million yuan). FY2014 is expected to be stronger, as gross margins improve along with higher revenue and strong contributions from NPRT. Maintain "buy".

BUY