Midas

Midas: 2 Conflicting reports in street today. (Namely SCB downgrade to Underperform from In-line and OCBC maintain Buy but increase TP to $0.51 (1) Midas: SCB downgrades to Underperform from In-line and cuts TP to $0.35 from $0.40. House cites Underperform rating given expensive valuations and concerns over its low utilisation levels and a weakening balance sheet as reasons for downgrade. Note that Midas share price has performed well due to new orders for the company and its associate. However, with a railway backlog of Rmb600m as of Jun12, Midas needs more big new orders to hit current forecasts. Think the current stock price adequately accounts for recent new orders and expectations of new contracts for the Chinese railway industry. Believe that Midas may be losing market share, as its railway sales as a proportion of CSR plus CNR’s high-speed and metro sales has fallen since 2007. Margins shrinking due to low utilisation levels. Midas 1H12 net margin fell to 3.7% from 20.2% in 1H11 as its capacity increase since 2009 led to a bigger cost base on lower revenue; coupled with losses at its associate. Given its slower than- industry growth rate and new capacity in Henan, expect utilisation levels and margins to remain low. Even incorporating a strong rebound in 2013, Midas looks expensive at 16x 2013E P/E. Given its more commoditised business and deteriorating profitability, think it should trade at a discount to CSR, which is at around 13x 2013E P/E. TP is based on 13x FY13E P/E, up from previous multiple of 12x to take into account co’s recent successful new order wins. (2) Midas: OCBC maintain BUY rating on Midas and raise fair value estimate from $0.435 to $0.51 in light of the brighter prospects in China’s railway sector. The latest data on total railway fixed asset investments (FAI) in China exhibited an encouraging 92.7% YoY surge to CNY72.7b for the month of Sep, which house believe highlights the progressive recovery in the sector. Another positive development came from the China Ministry of Railways’ (MOR) decision to raise its 2012 railway FAI target from CNY610b to CNY630b, having only previously done so in Sep. Moving forward, see further re-rating catalysts for Midas when China’s MOR resumes the re-tendering of new HSR passenger train car contracts in the near future and continued traction gains in Midas’ orders win momentum from the urban rail and power industries.