Dragged into negative territory. 3Q12 results fell into negative territory for the first time, though we think this is already largely expected. This is a continuation of the very difficult 2012 for Midas so far, which has seen a drought of new railway contracts as well as poor utilisation at existing production facilities.

First quarterly loss. Net loss came in at RMB6.1m, bringing 9M12 net profit down to RMB10.7m. This quarter, revenue declined 22% yoy, even while expenses rose. Admin expenses were up 34%, mostly as a result of higher overheads associated with expanding production capacity. 32.5%-owned Nanjing Puzhen Rail Transport (NPRT) continued its losses this year.

Cash flow position should improve by end of the year. Operating cash flow for 9M12 so far comes up to negative RMB137m as a result of both lower sales as well as a longer working capital cycle. However, the company still has a substantial cash position of RMB820.6m. Furthermore, management believes some receivables may clear up as the company approaches year-end, which is typically a period of settlement by its customers.

Upstream customers may win contracts soon. Recent press reports in China suggest that Ministry of Railway is ready to start handing China Southern Railway (CSR) and China Northern Railway (CNR), Midas’s two main upstream customers, new high-speed rail contracts as early as 1Q2013. Such a development will be very positive for Midas, which is well-positioned for contract wins given its track record as well as an additional facility in Luoyang which will be ready in 2013.

Risks and reward. We recognize the earnings risk involved, should new major contracts not materialize as expected, given the dwindling orderbook (currently est at RMB400m). However, trading at 0.75x P/B, we believe most of this has been priced-in, and investors may reap the gain by positioning ahead of a recovery in 2013/2014. Our TP of SGD0.48, pegged at 1x P/B remains unchanged. Maintain BUY.

Source: Maybank Kim Eng Research - 16 Nov 2012