Wednesday, September 11, 2013

Midas :The Catalyst Worth Waiting For Is Here (MKE)

Midas Holdings
Buy (unchanged)
Share price: SGD0.475
Target price: SGD0.75 (unchanged)
The Catalyst Worth Waiting For Is Here

 Up-stream customers won high-speed train orders. Last weekend, China Railway Corp (CRC) announced the result of its first high-speed train tender in past two years. A total of 159 train sets order have been split between CSR (108 train sets) and CNR (51 train sets). We believe this is just the beginning of a new train purchase cycle by Chinese government. As one of the key suppliers to CSR and CNR, we expect Midas to win around RMB250-300m contracts in the high-speed train sector this year and RMB1b each year in FY14/15. We continue to like Midas as we expect positive news flow and contract wins to continue to drive the share price up. Maintain BUY and target price SGD0.75, pegged to 1.5x P/B.


More trains to come and CNR has potential to catch up. Generally speaking, CNR’s contract win would be a bigger catalyst for Midas given the track record and long term relationship between Midas and CNR. To be fair, the result of the first round tender is slightly below our expectation as CNR won only 32% of total orders compared with its historical market share of 40%. But we remain confident on the order win outlook for Midas because (1) we believe that CNR has the potential to catch up with more contract wins in the future given its similar capacity and technology as CSR and (2) Midas could expand its customer base to other manufacturers such as CSR and BST (a JV between Bombardier and CSR) going forward.

High-speed train related contract wins to boost order book. Usually it takes two months before up-stream customers like CSR and CNR pass contracts to down-stream suppliers like Midas. Based on the train purchase plan by CRC, we expect Midas to win around RMB250-300m supply contracts in high-speed train space this year. But it is very small compared to what we are likely to see in FY14/15. If CRC can purchase 1400 train sets by FY15 as we expect, we could potentially see RMB1b contract wins each year from high-speed train sector alone in FY14/15, which could potentially boost Midas’ order book to RMB1.5b in FY15 onwards.

Investment theme intact. We believe short-term share price drivers for Midas will remain news flow and contract wins before earnings delivery in 2HFY14. Historically Midas’ P/B closely followed its order book, which makes us believe that currently undemanding P/B multiples deserve a re-rating if order book could be substantially boosted to RMB1b or above.

The first high-speed train tender in the past two years. China Railway Corp (CRC) announced the result of its first high-speed train tender in the past two years. CSR won all the 250km/h trains tender (91 sets) while CNR won all the 350km/h trains that are specially used for extremely cold weather. In the normal 350km/h train bid, CSR won 17 train sets out of 22 while CNR won the rest. The result is slightly different from what we expected before as we thought CNR could at least win some small amount from 250km/h category. CNR’s share of 32% this time round is slightly below its historical market share of 40%. However, we are not overly concerned at this stage as CNR is still expected to pass orders for downstream parts to Midas.

The first high-speed train tender in the past two years. China Railway Corp (CRC) announced the result of its first high-speed train tender in the past two years. CSR won all the 250km/h trains tender (91 sets) while CNR won all the 350km/h trains that are specially used for extremely cold weather. In the normal 350km/h train bid, CSR won 17 train sets out of 22 while CNR won the rest. The result is slightly different from what we expected before as we thought CNR could at least win some small amount from 250km/h category. CNR’s share of 32% this time round is slightly below its historical market share of 40%. However, we are not overly concerned at this stage as CNR is still expected to pass orders for downstream parts to Midas.

Expect record high order book by FY15. On our estimates, if CRC’s train purchase program is carried out as scheduled, we should be able to see Midas’ order book more than double from now by FY15 and surpass the historical high of RMB1.3b in 2010.

Funding and account receivables are the key risks but they seem manageable now. In our view, high account receivables are the biggest risk for Midas. The risk is more on the liquidity side rather than credit side because we do not think Midas’ clients (mainly CSR and CNR) will default as they are strongly backed by the PRC government. Liquidity risk also seems manageable for now. Midas has RMB417m cash on its balance sheet as at June 2013 and it can tap bond markets to meet future funding requirements. There is no plan for any equity raising in the mid-term future according to management.

Valuation and recommendation. We believe that short term key share price drivers for Midas will remain to be news flow and contract wins before earnings delivery in 2HFY14. Midas’ current 1.0x P/B is at the low end of the historical range partly due to the current low order book. We can see from Figure 3 that historically Midas’ P/B is highly correlated to its order book, which makes us believe that current undemanding P/B multiple deserves a re-rating if high-speed train order wins can boost order book to RMB1b and above. Maintain BUY with TP SGD0.75, pegged to 1.5x P/B.




Source/Extract/Excerpts/来源/转贴/摘录: MKE-Research,
Publish date: 10/09/13

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