Midas

Midas: China’s CSR/CNR have announced a merger via the conversion of one CNR share into 1.1 CSR shares. The new entity will be renamed CRRC. Other positive news flows for China’s high-speed railway (HSR) sector in the past two months included a resumption of Thailand’s HSR plan and talks for HSR projects in India and Russia. China has been eager to make headway in heavy-machinery and infrastructure-project exports. Creating a train-making giant reflects its ambition of producing mega state-backed conglomerates with the clout to grab international market share. Maybank-KE believes it will have bigger pricing power over its suppliers, including Midas. This implies short-term margin squeeze. Longer term, suppliers may be compensated by bigger volume, especially if CRRC wins orders in the international market. Although they were the top two train makers in the world, CNR and CSR only had a combined global market share of 2-3% currently. Maybank-KE lowers TP from $0.75 to $0.52. Nevertheless, house maintains BUY rating. Catalysts are still expected from more contract wins.