Midas

Midas: (The Edge) Co’s orderbook appears to be thinning, standing now at Rmb712.2m, down from Rmb800m as at end Dec. Recent railway accident and high-profile sacking of former railway minister means that China is going to move much more carefully in the future development of its railway infrastructure, with analysts noting that the best times are over. Sector’s growth is also being capped by the huge debt load that China’s Ministry of Railways has built up. Ministry of Railways is only allowed to raise debts of up to 40% of its net assets, which has resulted in cash conversion cycles across the whole sector deteriorating. Yet Midas is chosing to expand, and is on track to finish an aluminium extrusion production line with a capacity of 10,000 tonnes in Luoyang, as its key customer CSR corp is expanding there. DMG note that Midas is suffering because it is very niche, but if metro and high speed rail contracts pick up, they will fly. JP Morgan appears more positive, citing that a recovery is just around the corner for China Railways, either through a lifting of the cap on the Ministry of Railways debt issuance or through a recapitalization exercise, which could spur activity and profitability along the supply chain. Looking ahead, house expects rail capex to accelerate from June, supported by recent remarks by key govt official and intention to use capex as a counter cyclical tool. Whatever the case, extremely low valuations are keeping many analysts from recommending anything less than a hold. Even the most bearish house concedes that there could be little downside from here.