▊ Midas’s 3Q13 net profit topped our expectations by a mile on the back of robust sales and the strong contribution from Midas’s associate, NPRT. Things are also looking brighter for its balance sheet, with inventory days and receivable days falling to one-year lows. Midas’s 9M13 net profit was above our expectation, at 80% of our FY13 forecast. We raise FY13 EPS by 45% as we expect stronger earnings growth in 4Q13 from the recognition of new HSR contracts. However, we cut FY14-15 EPS by 4-6% for higher finance costs. Maintain Outperform and target price of $0.74, based on 1.29x CY14 P/BV (20% discount to average P/BV during 2010-11). New HSR contract wins is the key catalyst.
Midas’s 3Q revenue grew 6.0% qoq, while net profit increased 12.4% qoq. Gross margin compressed to 20.8% (2Q: 22.5%) due to: 1) the lower-margin products taken on to increase capacity utilisation, and 2) the rise in per unit production cost. However, 3Q net margin rose to 5.5% (2Q: 5.2%) due to the strong Rmb10.9m associates’ contribution from NPRT. We believe margins will trend up in 4Q when Midas recognises its first HSR contract since FY11. Net gearing rose to 47.2% in 3Q (2Q: 40.2%) as Midas took on long- term debt to fund working capital and capex for the new cold rolling plant.
Worst is over
Midas’s inventory days and receivable days improved for the second consecutive quarter in 3Q, falling to 209 and 376 days, respectively. Trade receivables fell by Rmb23.9m qoq – the first fall in seven quarters – suggesting that Midas is receiving payments withheld for old contracts. We believe the worst is over, and Midas is on track to achieve its inventory days target of 120-150 days.
New contracts in 1Q14
The China Railway Corporation (CRC) recently announced open tenders for 258 high-speed train sets (78 sets for 250km/h, 180 sets for 350km/h). This is below our initial expectation of 314 train sets but we believe that the remaining 56 sets will be granted via a closed tender to either CSR or CNR. We estimate that Midas will win Rmb545m of HSR orders in this procurement round, based on its historical record of 90% CNR order wins (Figure 8). The orders are likely to materialise in 1Q14.