Banking on a strong 2H
2Q13net profit recovered from a net loss in 1Q. This was due to strong core revenue and positive contributions from its associate, NPRT. We expect 2H13to compensate for theweak1H13.Midas is on track to meet our full-year target given the current earnings momentum.
1H13 net profit formed 25% of our full-year estimate and 11% of consensus. We deem this in line as we expect FY13 revenues to be back-end loaded with the resumption of high speed rail (HSR) contracts in 2H. We maintain our Outperform call and target price, still based on 1.29x CY13 P/BV (20% discount to 2010-11 P/BV). The catalyst is the resumption of HSR contracts.
Turnaround in net profit
2Q13 revenue of Rmb284m (+40.3% qoq, +29.2% yoy) was strong on the back of steady contributions from the transport industry. However, gross profit margins fell to 22.5% (1Q: 25.2%) due to a change in product mix and lower capacity utilization. Its associate, NPRT saw a turnaround in 2Q after winning Rmb3.8bn metro contracts in 1H13, and contributed Rmb3.1m to Midas’ PBT. The group reported a net profit of Rmb14.9m in 2Q13 (vs. a net loss of Rmb4.9m in 1Q). Given the earnings momentum in 2Q13, Midas is on track to meet our full-year net profit estimate of Rmb40m.
Evidence points strongly to HSR contracts in 2H
Last month, China’s cabinet revised its railway investment budget to Rmb3.3tr for the remainder of its five-year plan that ends in 2015. This is Rmb500bn more than the figure announced in the previous plan. Since train car manufacturers typically take between 18-24 months for delivery, China Railway Corp. has to issue HSR orders by the end of 2013 to meet its 2015 investment target. Thus, we are fairly certain that Midas can expect to receive HSR orders in 2H13, which would bolster earnings in 2H after a weak 1H.
Midas is currently trading at 0.95x CY13 P/BV, still below its historical mean of 1.46x. We believe the resumption of HSR contracts will be a major price catalyst.
Publish date: 15/08/13