Worst is over. Midas returned to the black in 3Q13, recording a net profit of CNY16.8m from a loss of CNY6.1m a year ago. 3Q13 revenue jumped 48.5% YoY. The key surprise: Stronger-than-expected turnaround of NPRT (the JV with CSR). Balance sheet also showed some improvement. We believe that the worst is behind us and the strong order win momentum, especially from high speed train sector, should support a sharp earnings rebound from FY14 onwards. Maintain BUY and TP SGD0.75, based on 1.5x P/B.

Some operational highlights. First, 3Q13 utilization rate continued to improve to 55% in 3Q13 (2Q13: 50%). We expect this to improve to 65% in FY14 on the back of higher order book (3Q13: CNY900m; 2Q13: CNY700m). Second, 3Q13 GP margin declined to 20.8% from 22.5% in 2Q13 due to more low-margin jobs. But, margin should improve as more high-margin jobs such as high speed train orders come in. Third, NPRT recovery is stronger than we expected as 9M13 contribution of CNY10m already hit our previous full-year forecast. Order book of NPRT stays high at CNY15b.

We expect more contract wins from high speed train space. CRC has opened the second round high-speed train tender for 258 train sets. We are still not sure about the contract win split between CNR and CSR but results should be out in early December. CSR won most of the contracts in this first tender round in Sep 2013. But market expects CNR to win more this time given the roughly equal market share between CSR and CNR historically. We believe that Midas would benefit if more contracts are rewarded to CNR given the fact that Midas has been CNR’s preferred supplier for a long time. We expect Midas to win close to CNY1b and CNY700m contracts in high speed train sector for FY14/15 respectively (see Figure 2).

More order wins to re-rate the stock. At the current 1x FY14 P/B, we do not see much downside risk to the share price. Admittedly, the stock does not look cheap at 22x FY14 EPS but continuous order win momentum especially from the high speed train project should fuel positive market sentiment and further re-rate the stock.

Source: Maybank Kim Eng Research - 18 Nov 2013