- Huge discounts to A-share & HK-listed peers unjustified.
- Cheaper exposure to China’s rail sector. HSR orders could bump up utilisation to 75% from 70%, with good operating leverage.
- Reiterate BUY with SGD0.50 TP still at 1x FY15 P/BV. Catalysts from stronger contract momentum.
Following the Chinese government's "One Belt, One Road" initiative and the merger of CNR/CSR, A-share and HK-listed railway companies have been re-rated dramatically. CSR’s and CNR’s A shares have catapulted 759/716% respectively in the past 12 months. The contagion has spread to CSR’s/CNR’s suppliers in the market’s search for proxies. Nanshan Aluminum (600219 CH), one of CSR’s key suppliers, has rallied 142% in the same period. Midas, however, has fallen behind, trading at huge discounts to peers.
… unjustified
We believe investors’ misgivings about potential market-share losses and margin squeeze after the CSR/CNR merger are unwarranted. This is because: 1) the entire industry is in good shape; 2) we believe Midas’s ability to bag contracts from its longterm customers is uncompromised; and 3) it should be able to protect its margins as aluminium alloy extrusion profile products make up only 3% of a train body’s value. Midas has gained 32% in the past month but is still trading at 0.7x FY15 P/BV. Reiterate BUY with catalysts expected from contract wins. We believe it provides cheaper exposure to China’s rail sector, with downside limited by its 0.7x FY15 P/BV. Our TP is set at conservative 1x FY15 P/BV.
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