Midas Holdings outlook brightens on possible new China train tenders

2Q13 beats expectations as NPRT turns around. Midas Holdingsā?? 2Q13 results came in above our expectations, with revenue and PATMI soaring 29.2% and 834.1% YoY to CNY284.0m and CNY14.9m, respectively. Midas started to supply aluminium alloy extrusion profiles for freight wagons to its existing customers (previously focused on passenger train cars). This helped to boost its topline growth, although gross margin dipped 9.0ppt to 22.5% due to lower margins for freight wagons. The spike in earnings was largely due to a turnaround from its associated company, Nanjing SR Puzhen Rail Transport (NPRT), which contributed a share of profit of CNY3.1m in 2Q13 as compared to a hefty CNY14.1m share of loss in 2Q12. While we note that profit from operations actually fell 15.2% YoY to CNY35.9m, it was still ahead of our forecast. For 1H13, revenue grew 8.0% to CNY486.4m, while PATMI fell 40.8% to CNY10.0m due to a net loss in 1Q13. This constituted 53.4% and 28.6% of our FY13 projections, respectively. We are expecting 2H13 PATMI to improve significantly on a HoH basis. An interim DPS of 0.25 S cents was declared, similar to 1H12 and our forecast. As at 30 Jun 2013, the order book for Midas and NPRT stood at CNY700m and CNY9b, respectively.

Positive industry news flow raises optimism. China Railway Corporation (CRC) recently increased its railway fixed assets investment target by CNY10b to CNY660b in 2013, of which ~CNY530b is expected to be spent on railway infrastructure and the balance on rolling stock procurement. There are expectations that new high-speed train tenders may be resumed soon by CRC, and we understand that the major train manufacturers (customers of Midas) have already been making preparations in anticipation of this.

Increase valuation peg and reiterate BUY. We raise our FY13 revenue and PATMI forecasts by 12.6% and 16.0%, respectively. Our FY14 estimates are unchanged. Ascribing a higher P/B target peg of 1.3x (equivalent to its 5-year average forward P/B) due to a more positive industry outlook and rolling forward our valuations to blended FY13/14F BVPS, we raise our fair value estimate on Midas from S$0.54 to S$0.65. Reiterate BUY. 

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