Midas Holdings Limited (Midas) recorded a weak start to the year as 1Q15 PATMI declined 5.3% YoY to RMB10.9m, which was below our expectations, as it formed only 17.8% of our FY15 forecast. 1Q15 revenue increased 8.0% YoY to RMB320.6m, driven mainly by its core business. Start-up costs continue to be a drag on results and will likely remain so in the near-term. While we acknowledge the growth potential in China’s rail industry is huge with an estimated RMB2.8t railway spending between 2016-2020, as well as longer-term Silk Road Plan developments, we expect growth for rail equipment makers to be more back-end loaded. Hence, we think Midas’ near-term outlook is likely to be muted. Incorporating the disappointing 1Q15 results, we cut our FY15/16 PATMI forecasts by 21.4%/22.0%. Rolling forward our valuation to 0.65x blended FY15/16 NAV, our FV remains unchanged at S$0.375. Maintain HOLD.
Weak showing from 1Q15 performance
Midas Holdings Limited (Midas) recorded a weak start to the year as 1Q15 PATMI declined 5.3% YoY to RMB10.9m, which was below our expectations, as it formed only 17.8% of our FY15 forecast. 1Q15 revenue increased 8.0% YoY to RMB320.6m, driven mainly by its core business, Aluminium Alloy Extruded Products Division. Although gross margin improved 4.8ppt YoY to 28.8%, its 1Q15 performance was weighed down by a 30.9% jump in expenses to RMB92.1m, driven by higher start-up costs pertaining to its two new plants. Although the Luoyang plant started commercial production in 2Q15, we think it will take at least until end of the year to ramp-up its utilization. Hence, with its light alloy plant targeted to start only from FY16 onwards, we expect start-up costs to still be a drag on its core business in the near-term.
Near-term strong growth not expected
In addition to the persistent start-up costs expected over FY15 and FY16, we believe there are several reasons to remain cautious over Midas’ growth outlook. We acknowledge that the growth potential in China’s rail industry is huge in the longer-term on strong commitments shown by the Chinese government over the Silk Road Plan. Even though the National Railway Administration’s draft plan indicated China’s commitment to invest RMB2.8t over the next five years on railway spending as part of the 13th Five-Year Plan (2016-2020), we do not expect strong growth immediately. The reason is clear – based on historical trends, building of rail infrastructure had always been the priority for rail spending in a given Five-Year plan, while equipment and trains manufacturing spending had always been back-end loaded. Given that Midas is a supplier of extrusion products for train’s carriages, mainly in China, we think growth will remain slow for now. Meanwhile, more overseas orders should help to boost its near-term growth.
Cut forecasts; maintain HOLD
Incorporating the disappointing 1Q15 results, we cut our FY15/16 PATMI forecasts by 21.4%/22.0% on muted outlook. Rolling forward our valuation to 0.65x blended FY15/16 NAV, our FV remains unchanged at S$0.375. Maintain HOLD.
Midas Holdings Limited (Midas) recorded a weak start to the year as 1Q15 PATMI declined 5.3% YoY to RMB10.9m, which was below our expectations, as it formed only 17.8% of our FY15 forecast. 1Q15 revenue increased 8.0% YoY to RMB320.6m, driven mainly by its core business, Aluminium Alloy Extruded Products Division. Although gross margin improved 4.8ppt YoY to 28.8%, its 1Q15 performance was weighed down by a 30.9% jump in expenses to RMB92.1m, driven by higher start-up costs pertaining to its two new plants. Although the Luoyang plant started commercial production in 2Q15, we think it will take at least until end of the year to ramp-up its utilization. Hence, with its light alloy plant targeted to start only from FY16 onwards, we expect start-up costs to still be a drag on its core business in the near-term.
Near-term strong growth not expected
In addition to the persistent start-up costs expected over FY15 and FY16, we believe there are several reasons to remain cautious over Midas’ growth outlook. We acknowledge that the growth potential in China’s rail industry is huge in the longer-term on strong commitments shown by the Chinese government over the Silk Road Plan. Even though the National Railway Administration’s draft plan indicated China’s commitment to invest RMB2.8t over the next five years on railway spending as part of the 13th Five-Year Plan (2016-2020), we do not expect strong growth immediately. The reason is clear – based on historical trends, building of rail infrastructure had always been the priority for rail spending in a given Five-Year plan, while equipment and trains manufacturing spending had always been back-end loaded. Given that Midas is a supplier of extrusion products for train’s carriages, mainly in China, we think growth will remain slow for now. Meanwhile, more overseas orders should help to boost its near-term growth.
Cut forecasts; maintain HOLD
Incorporating the disappointing 1Q15 results, we cut our FY15/16 PATMI forecasts by 21.4%/22.0% on muted outlook. Rolling forward our valuation to 0.65x blended FY15/16 NAV, our FV remains unchanged at S$0.375. Maintain HOLD.
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