First bond issuance by China Railway Corp. The newly formed China Railway Corporation (spun off from former Ministry of Railways) made its capital market debut with the sale of Rmb20bn bonds last Thursday. The proceeds from the bond sales will go towards rail construction, the purchase of rolling stocks and working capital. In our view, it is a necessary move to get China’s ambitious railway plans back in gear and could potentially result in more intensive investments in the second half of this year. We continue to like Midas as a major beneficiary of the investments in China railway sector. Maintain our BUY rating and target price of SGD0.75.

Easing concerns on funding source. China Railway Corp inherited all the liabilities of the former Ministry of Railways and the heavy debt burden affects its cash generation ability. Thus, the funding source is crucial to the development of China railway system. People had some concern that the high gearing and the restructuring of the China Ministry of Railways could cause some slowdown in this sector. Now it seems that the funding has returned to normal.

Expecting more aggressive investments in 2H13. The RMB20b bonds are just the first batch of the RMB150b bonds that China Railway is expected to issue this year. Total investment in the China rail sector YTD also lags behind the full year investment target of RMB650b due to the restructuring of the Ministry of Railways. That implies more aggressive fund raisings and investments in 2H13. We are looking at RMB500-600m order wins in metro sector in 2H13. But the key point to watch remains the potential resumption of high speed train tenders in 2H13, which can significantly boost Midas’ profitability if they materialize. We are still positive on the likelihood of the tender in 2H13.

Patience will be rewarded. We suggest investors to remain patient. Although earnings will still suffer in 2013, we expect YTD order win momentum to continue on the back of more aggressive investments by China Railway Corp, which will result in an earnings turnaround in 2014. Maintain BUY and target price of SGD0.75.

Source: Maybank Kim Eng Research - 27 May 2013