Midas

Midas: 2Q15 net profit of Rmb11.6m (+39.4% y/y) brought its 1H15 earnings to just 33% of street's full-year forecasts which is a reflection of the overall slowdown of government investment in China’s rail sector.

Maybank-KE reckons the merger between China's two largest train makers, CNR and CSR, now known as CRRC Corp could have delayed investment decisions in 1H15.

For the quarter, revenue rose 11.3% to Rmb374.3m, driven by higher contributions from the aluminium alloy extruded products division (+13.5%).

Gross margin improved to 27.7% (2Q14: 25.4%, 1Q15: 28.8%) due to a change in sales mix.

However, selling and distribution expenses surged 35.6% from higher consumables and staff costs, while share of associate profits from 32.5%-owned Nanjing SR Puzhen Rail Transport fell 18.7% to Rmb6.9m due to a different project mix.

Subsequently, pretax profit fell 5.2% to Rmb14.1m.

But bottom line was boosted a 71% drop in tax expense to Rmb2.5m as 55%-owned Jilin Midas was taxed at a concessionary rate of 15% instead of 25%, as well as the absence of minority interest (2Q14: Rmb2.3m).

Interim DPS of 0.25¢ was maintained.

Maybank-KE expects government rail spending to accelerate in 2H15 following the completion of the CNR/CSR merger. As a gauge, just Rmb265b was invested in 1H15 compared to the full-year target of Rmb800b.

The house maintains its Buy rating but shaves its TP slightly by 1¢ to $0.49, pegged at 1x 2016e P/B.