• FY15 above expectation
• JMLA still undergoing trial production
• Likely to see margin erosion

FY15 revenue grew more than we expected

Post FY15 results announcement, we had a call with the management of Midas Holdings Limited (Midas) and noted that its 14.7% growth in FY15 revenue to RMB1.51b was the result of an increase in deliveries of orders from both overseas and domestic (China) markets. This growth was driven mainly by its Aluminium Alloy Extruded Products (AEP) segment, and Midas saw its new AEP plant in Luoyang, which started commercial production in 2Q15, turned profitable from 3Q15 onwards.

FY15 gross margin also improved 0.3ppt to 26.9% on higher AEP gross margin. With a higher proportion of its revenue from export orders, the resulting increase in transport, travelling and packaging costs contributed to the 21.0% jump in selling and distribution expenses to RMB73.4m. Even as income tax jumped 614.3% to RMB20.0m on lower deferred tax income recognized in FY15, Midas’ FY15 PATMI recorded a slight 1.5% growth to RMB57.2m.

Wait for more consistent contributions from new businesses

FY15 was a year of transition as Midas focused on building two new plants and we saw start-up costs eroded part of its revenue growth. Luoyang plant (AEP) started commercial production in 2Q15 while its new Jilin plant for Jilin Midas Light Alloy (JMLA) business is still in the trial production phase. Management still expect JMLA to commence trial production in FY16 with the costs incurred for trial production capitalized. JMLA is also incurring staff costs with no revenue generated during this start-up phase. Even when JMLA starts commercial production, we expect gross margin to be thin, producing aluminium plates and sheets that are raw material inputs for other industries. Also with depreciation expenses kicking in, we do not expect JMLA to turn profitable in the near-term. Note that we have also yet to factor in the potential impact from the proposed acquisition of Huicheng Capital as it is still pending approvals.

Maintain HOLD

As we expect AEP to grow as the Luoyang plant ramps up, we increase our FY16F PATMI by 17.7% but lower our target peg to 0.55x FY16F P/B (-0.8SD 7-year mean) as we await better visibility from its new light alloy business. Maintain HOLD with a slightly higher FV of S$0.295 (prev: S$0.29).

Source: OCBC Research - 4 Mar 2016