No more speed bumps
The overall operating environment has become more positive for Midas and we expect investor sentiment to improve. We anticipate that order momentum will rise in 2014, starting with a potential high-speed rail (HSR) contract and an international metro contract in 1Q14.
Our rating changes from Outperform to Add, as per our new rating structure. Investors should add the stock to their portfolios before the consensus re-rating after the next HSR contract is won. Our target price remains unchanged at S$0.74, based on 1.29x CY14 P/BV (20% below the FY10-11 mean). The key catalyst is the HSR order wins.
New contracts in 1Q14 to boost gross margins
Midas has two potential new contracts in 1Q14: 1) a HSR contract, the value of which we estimate at Rmb545m, and 2) an international metro contract. We believe that these contracts will boost its gross margin from the all-time low of 20.8% in 3Q13 to 27-28% in FY14. Midas‟s gross margins have been depressed in recent quarters due to the lower-margin projects (i.e. freight wagons) taken on to utilise the spare capacity from the lack of HSR contracts. We believe that the recognition of Midas‟s maiden HSR contract (post-2011) in 4Q13 will ease the pressure on its margins.
Improving balance sheet
In 3Q13, Midas‟s trade receivables fell for the first time in seven quarters, contracting Rmb23.9m qoq. This signals that the collection of payments withheld for old contracts is finally proceeding at a faster pace. Inventory days have also improved, falling to 209 days in 3Q13 (238 days in 2Q13). Midas is on track to achieve its inventory days target of 120-150 days.
Diversifying into cold rolling
Since the erosion in profits from the Chinese railway industry standstill in mid-2011, Midas has been wary of over-reliance on a single industry to drive its earnings. As part of its diversification, Midas is building an aluminium cold rolling plant, Jilin Midas Light Alloy, to produce high-precision aluminium plates and sheets. This new plant, which will target the automotive, aviation and shipbuilding sectors, is slated for opening in early-2015. We believe that this reflects good forward planning by Midas, as there may be limited growth in China‟s railway industry after 2020, when most of the government‟s railway expansion plans are completed.
Publish date: 29/11/13