Midas

Midas: 3Q14 bottom line disappoints again as it plunged 91% to a dismal Rmb1.5m, mainly the result of unchecked costs. 3Q14 and 9M14 earnings respectively made up only 1.4% and 25.4% of Bloomberg’s full year FY14 profits. Gross profit rose 39.9% y/y to Rmb87.7m as cost of sales was Rmb1.9m lower despite sales being 7.7% or Rmb23.1m higher at Rmb324.2m. The higher GPM was mainly market driven, as ASP of the LME 3-month aluminium alloy in 3Q14 (US$2048/mt) is 13.5% higher than 3Q13 (US$1805/mt), lifting ASP of aluminium alloy extruded products (AAEP) as well. Hence, although undisclosed, we suspect sales volume of its core AAEP is at flat to down. Operating efficiency is a concern, increase in Opex due to start-up costs at the two new plants should have started to stabilize by 3Q14. However, we saw Opex continued to rise 1.5% q/q on the back of 3.6% lower revenue. Y/y, opex rose 36.8% to Rmb53.2m, driven by higher packaging expenses and staff costs as well as higher depreciation and higher start-up costs for new plants. Profit from its 32.5%-owned associate decimated from Rmb10.8m a year ago to Rmb0.3m, mainly the result of higher operating expenses as well. In 3Q14, Midas won two new metro contracts in Changchun and Nanchang worth Rmb52.2b and several awards but failed to win investors’ interest. A cause for concern is its trade and other receivables, which rose Rmb149m from Jun14 despite revenue being Rmb12.1m lower. Also, net gearing soared from 0.62x at Jun14 to 0.86x at Sep14. Management is hopeful that Midas can continue to benefit from the planned acceleration in infrastructure investments in China. We remain circumspect on the short-term earnings prospects of Midas, until and unless it can check its opex, secure enough contracts to boost utilisation at the two new plants in Luoyang and Jilin, and improve its receivables turnover. In the long-term, however, we believe Midas can stand to benefit from the continued railway expansion efforts in China, as well as its proving track record in overseas projects. At $0.295, the stock trades at 0.57x P/BV and is close to it 52-week low of $0.285