Recovery still at early stage. Following a meeting with management recently, we believe that Midas is on track for recovery in the medium term once it overcomes the lingering difficulties that will persist in the next few quarters. Potential contract wins from upstream customers such as CSR and CNR, China’s two largest train makers, will help restore the company’s profit back to a more normal level. Midas has also been working hard to diversify its revenue base, including moving up the value chain into the fabrication business, strengthening its foothold in the power industry and venturing further overseas. Though such diversification and building of new factories will eat into margins in the short term, they will ensure Midas’s sustainability in the long term.

More years to go for China’s high-speed rail. As far as we know, there are no major changes to China’s original plan to build 16,000km of high-speed rail lines by 2020. The fatal railway accident and corruption scandal in 2011 put a spanner in the works and only about half of the targeted length has been completed so far. This means a reacceleration of construction is possible in the next few years.

Upstream customers’ order wins a key catalyst. CSR and CNR are Midas’s two major customers. In the past two years, the building of new high-speed trains has lagged the construction of rail lines. With the Harbin-Dalian high-speed railway starting operation this month and more lines coming on-stream next year, we do not think the current number of trains is enough to meet demand. Should the Ministry of Railways resume the tender process for high-speed trains next year, we believe Midas will be a major beneficiary given its long-term track record and good reputation.

Expect earnings recovery from 2H13. Assuming the Ministry of Railways issues a new round of high-speed train tenders early next year, we expect Midas may be able to record earnings recovery in 2H13 or 1H14, give and take six months for delivery. In our view, Midas’s current share price will be supported by 0.8x FY13F P/BV. Maintain BUY and TP of SGD0.48.

Source: Maybank Kim Eng Research - 06 Dec 2012