Accelerating to high speed
China’s aggressive railway expansion plans present a tremendous opportunity for Midas given the company’s 60% market share and strong track record in the industry. We estimatethat Midas can win Rmb2.5bn-3.2bn worth of high-speed rail (HSR) orders by end-2015.
We raise our FY14-15 EPS to 17-19% above consensus; the market is likely to follow suit. We believe further HSR contract wins could catalyse the stock. Maintain Outperform, with our target price unchanged at S$0.74, based on 1.29x CY14 P/BV (20% discount to average P/BV during 2010-11).
China’s railway spending
To improve connectivity between provinces and cities across China, the government plans to add 11,200 high-speed train cars (10,400 currently) and extend the high-speed railway to 18,000km by 2015. To achieve this, it has allocated a Rmb3.3tr budget for railway investments over the current five-year plan period that ends in 2015. In 2011-12, Rmb1.21tr was spent on building railway infrastructure, which leaves a budget of Rmb2.09tr for 2013-15. As the procurement of railway equipment (including train cars) tends to be back-end loaded, there could be an increase in the remaining budget to Rmb2.16tr that the market has yet to factor in. Based on Midas’s 60% market share, we estimate that it could win Rmb2.5bn-3.2bn of HSR orders by end-2015.
Midas has built up several competitive advantages over the years: 1) close relationships with its key customers, CNR Changchun, CNR Tangshan and CSR Bombardier Sifang, 2) having the dies to produce a variety of extrusion profiles, and 3) strong track record of manufacturing quality products. As a result, we believe Midas can maintain its position as a preferred supplier to its key customers, which will help it to retain its leading market share of 60% and win the bulk of the HSR contracts.
Further re-rating likely
Midas is currently trading at 0.9x P/BV (1 s.d. below mean). We believe its discounted valuations are unjustified given the strong order momentum that is likely to come in 4Q13-2015. In the next round of procurement alone, we believe Midas could win Rmb545m of HSR contracts, an upward revision from our previous estimate of Rmb309m. This will provide a further re-rating catalyst for the stock.
Publish date: 30/10/13