Midas

Midas: Earnings were a huge disappointment, 2Q14 down 44.2% y/y to RMB 8.3m due to large start-up costs chalked up by its two new plants. 1H14 earnings, though up 98.6% y/y to RMB 19.8m, formed only 15.7% of full year street forecast. 2Q14 revenue increased 18.4% y.y to RMB 336.3m, led by 19.6% y/y increase to RMB 326.1m in its main business Aluminium Alloy Extruded Products. GPM rose 2.9ppt to 25.4%, bringing gross profit up 33.9% y/y to RMB 85.4m. However, bottomline was affected by significantly higher administrative expenses (+44.7% y/y to RMB 38.7m) and finance costs (+57.2% y/y to RMB 30.8m), incurred by construction of plant, addition of PPE and new staff costs. Borrowings increased 40.0% (or RMB 1.04b) y/y to RMB 3.64b, of which about 15% was used to finance new working capital. As a result, net gearing increased from 0.48x in Dec13 to 0.62x in Jun14. Earnings visibility is low beyond 2H14. YTD contract wins totalled RMB 589m, however, RMB 464m are HSR contracts won by fully-owned Jilin Midas that will be completely recognised by 2H14. Meanwhile, it is inevitable for Midas to continue incurring high costs on its organic expansion efforts in Luoyang. Non-HSR order wins are lacking, and Midas’ venture into cold-rolled aluminium plates and sheets is still clouded with uncertainty. It is widely expected for China Railway Corp to tender new HSR projects in 2H14 to achieve its target of RMB 800b fixed asset investment in 2014. Midas expects to benefit with prospective awards, but recent high-profile corruption probes surrounding and restructuring of the railway sector raise doubts to Midas’ ability to clinch deals. In view of its ballooning expansion costs, Midas’ bottomline earnings are highly sensitive to topline revenue. As such, there is an urgent need for Midas to up its order momentum to ensure revenue growth or at least, sustain its revenue stream. Midas maintains first interim cash dividend of 0.25 Singapore cents, trades at 62.3x annualized 1H14 P/E