• Start-up costs eroded 2Q growth
• Outlook is still muted
• Cut forecasts; maintain HOLD

Start-up costs still dragging core business

Midas Holdings Limited’s (Midas) 2Q15 revenue grew 11.3% YoY to RMB374.3m, driven by higher revenue from its Aluminium Alloy Extruded Products division, which grew 13.5% to RMB370.0m. Overall gross margin for 2Q15 improved 2.3ppt YoY to 27.7%. That said, startup costs continued to drag its performance as selling and distribution and administrative expenses grew 35.6% and 5.1% to RMB18.5m and RMB40.7m, respectively.

Finance costs also increased 25.5% to RMB38.7m due to interest for borrowings and costs relating to discounted notes receivables. However, as a result of a 71.4% plunge in tax expense, 2Q15 PATMI grew 39.4% YoY to RMB11.6m. On similar reasons, 1H15 revenue rose 9.7% to RMB694.9m while PATMI grew 13.4% to RMB 22.5m and formed 46.7% of our FY15 forecast.

Uncertainty over near-term growth outlook

We believe Midas’ near-term growth outlook remains uncertain:

1) with commercial production to start only in FY16, Midas’ ability to ramp up and achieve steady sales growth for its new business in producing basic materials (an extremely competitive industry) such as metal plates and sheets is still unclear,

2) with its new Luoyang plant (existing business) likely to take at least until end FY15 or even 1H16 to ramp-up its utilization,

3) while investments in China’s railway industry is expected to further increase on strong commitments by the Chinese government to expand high-speed rail network and urban metro system, we think near-term growth for Midas is likely to remain slow since equipment and trains manufacturing spending had historically always been back-end loaded.

All said, we think Midas will still be able to tap on partners for growth in overseas export orders, having seen increasing proportion of export business to total revenue.

Lower FV to S$0.31

Incorporating the weak 2Q15 results and uncertain near-term outlook, we cut our FY15/16F PATMI forecasts by 4.8%/1.1%. One of the key risks is the pace and ability to execute the ramp up of its new light alloy business. Based on 0.6x blended FY15/16F NAV, we lower our FV from S$0.375 to S$0.31. Maintain HOLD.

Source: OCBC Research - 18 Aug 2015