Midas - A Strong 3Q13
Midas' 3Q13 PATAMI was at CNY16.4m vs a CNY6.1m loss a year ago. This was boosted by its associate NPRT booking CNY10.9m in earnings (vs a CNY7.0m loss in 3Q12). Operating profit was lower y-o-y, dragged down by lower gross margins and higher operating costs. Nonetheless, the company remains in a good position to secure more orders over the next few quarters. Maintain BUY with a TP of SGD0.75.
Revenue grows but gross profit is lower. Midas' 3Q13 revenue surged 48.5% y-o-y to CNY301.0m, as utilisation of its production lines continued to improve (3Q13: 55%, 2Q13: 50%). However, as it took on more low-margin jobs, the gross margin dipped to 20.8% (2Q13: 22.5%; 3Q12: 31.5%). Going forward, we expect profitability to improve as more high-speed train orders, which command higher margins, are secured.
Order flow is improving. The China Railway Corporation recently released a second tender for train cars. China CSR Corp (1766 HK, NR) and China CNR Co (601299 CH, NR) secured the bulk of the first tender's orders a few months ago. The results of the second tender are expected to be announced in Dec 2013, with China CSR and China CNR being the likely winners again. As both companies are major customers of Midas, it is in a good position to secure more orders. This is expected to boost its current orderbook of CNY900m, with deliveries scheduled for 2014 and 2015. In the meantime, its associate Nanjing SR Puzhen Rail Transport (NPRT)'s orderbook is currently at CNY8.5bn.
Higher revenue estimates, but at lower gross margin assumptions. Midas' FY13 PATAMI is expected to be boosted by NPRT's strong performance this year. NPRT's 3Q13 performance has already exceeded our FY13F numbers. We raise our revenue estimates after taking into account the expected continued improvement in Midas' capacity utilisation. However, we lower our gross margin assumption for FY13 and factor in higher operating expenses, which results in our PATAMI estimate of CNY32.9m for the period (from CNY80m). FY14 is expected to be stronger, as gross margins improve along with higher revenue and strong contributions from NPRT. Maintain BUY.