Analysing its ability to stay solvent.  As highlighted again by the recent FY3/12 performance, we believe there is no longer any earnings visibility for Midas. Net profit was down 75% yoy to just RMB 15.3m, after its second consecutive profit warning. We believe this is now already priced into the stock, and an analysis of its cashflow and ability to stay solvent is a more useful exercise.

No earnings visibility.   Under its accounting standards, revenue recognition is upon delivery to customers. Given the slowdown within the entire supply chain, delivery schedule for its estimated RMB650m orderbook is arbitrary at best. Book value is there, but is the company burning cash? Midas has a current book value of SGD 49cents/ share and is now trading at just 0.6x P/B. Interestingly, its current market cap of SGD371m is not far off from the SGD330m it raised from two equity exercises in July 2009 and Sep 2010. We think current share price reflects either solvency concerns or the integrity of Midas’s book value.

Operating cash flow can still be positive. Midas’s operating cash flow this quarter was negative RMB43m. This deficit can be reduced if Midas chooses to operate at lower utilization (hence reducing inventory cash burden of negative RMB 52m). Given that FY3/12 is a seasonally weak quarter, we think Midas can still achieve marginally positive operating cash flow.

Cash position should tide it till 2013 easily. The cash outflow burden however, comes from its capex plans at its 2nd plant in Luoyang, which will represent a commitment of RMB500 m this year. With a cash position of RMB671m, Midas should still have sufficient cash to tide it till 2013, even if no further bank credit is given. The hope would be for the rail industry to show positive signs of recovery by then.

Maintain Hold. To reflect renewed concerns on the robustness of Midas’s book value, we have taken a 30% discount from its fixed assets as well as receivables and inventory. Such a methodology derives a TP of S$0.32. We maintain HOLD but continue to stay vigilant for any buying opportunity on a potential turnaround.

MIDAS SECURES TWO METRO CONTRACTS WORTH RMB62.2 MILLION

- First contract worth RMB33.7 million for the supply of aluminium alloy extrusion profiles and certain fabricated parts for Ningbo Metro Line 1

- Second contract awarded by JV company NPRT for the supply of aluminium alloy extrusion profiles to Nanjing Metro Line 10