Investment Theme in tact. Midas reported a net loss of RMB5m for 1QFY13 as guided by the company last weekend. Our investment theme for Midas remains to be a bet on improving order flow in 2013 and a turnaround in earnings in 2014. We don’t expect too much further downside from here because share price has reacted negatively post company’s profit warning last weekend and is now trading at book value. We maintain BUY and target price of SGD0.75, pegged to 1.25x FY14 book value. Key catalyst for the stock is continuous order wins and the resumption of high speed train tender in China.

Earnings still suffering as expected. 1Q13 revenue dropped by 12% yoy to RMB202m due to the slowdown in the PRC railway industry. Bottom line declined to RMB5m loss from RMB15m gain last year. The main reason for the loss is RMB4m loss from NPRC, a JV company between Midas and CSR. Current low utilization of only 40% also increased per unit production cost which in turn lowered the margin. Weak earnings delivery will continue in 2Q13 at least.

Key takeaways from conference call. 1) The management expects RMB400-500m order win from metro sector and similar amount of order win from overseas market. This implies further RMB500-600m order win for the rest of the year on the top of current RMB650m order book. 2) On the high speed rail sector, management remains optimistic on the likelihood of the high speed train tender resumption in 2H13. It will be a significant catalyst for the stock if it materializes.

BUY maintained. We reiterate our BUY call on Midas and keep our target price of SGD0.75. Midas share price is largely driven by contract wins and YTD Midas has won more than RMB370m worth contracts. Although earnings will continue to suffer in the short term, we expect a better order flow this year, which will drive a turnaround in 2014 earnings. Midas is trading around book value currently, which in our view provides a floor to share price. 28.0x FY13 PER looks not cheap but if Midas can manage to turnaround the business in the next two years, FY14/15 PER will look reasonable.

Source: Maybank Kim Eng Research - 16 May 2013