• Stable gross margins
• Lower interest rates helped
• No interim dividend

Cheaper finance costs boost earnings

Midas Holdings Limited’s (Midas) 2Q16 revenue grew 2.3% YoY to RMB382.8m, mainly due to a 3.1% growth in its Aluminium Alloy Extruded Products (AEP) segmental revenue to RMB381.4m. Midas’ 2Q16 overall and AEP’s gross margins remained stable at 27.8% and 28.0%, respectively.

The 6.7% YoY decline in 2Q16 selling and distribution expenses was offset by a 4.2% increase in administrative expenses. However, 2Q16 finance costs declined 24.5% to RMB29.2m mainly due to lower interest rates of bank borrowings and lower amount of outstanding loans. Consequently, even as income tax jumped 384.5% YoY to RMB12.3m mainly due to higher withholding tax expense, 2Q16 PATMI jumped 61.8% YoY to RMB18.7m.

For 1H16, PATMI rose 27.6% YoY to RMB28.7m, which formed 47.5% of our FY16 PATMI forecast. This growth was mainly driven by cheaper finance costs and higher AEP’s gross margin, despite a 1.2% YoY decline in 1H16 revenue.

Still waiting for ramp up in new light alloy business

Looking ahead, we believe investors should monitor the progress in the ramp up of Midas’ two new businesses:

1) JMLA (expected to start commercial production in 2H16), which produces cold-rolled aluminium alloy plates and sheets, and

2) the recently acquired Huicheng Capital, which specialises in aluminium stretch plates as well as hot-rolled aluminium alloy plates and coils.

While these businesses allow Midas to diversify away from its dependence on rail industry, we note that these two businesses focus on supplying basic raw materials. This means gross margins will be lower, being in a highly competitive environment with low barriers to entry. Hence, the ability to ramp up these two businesses in order to have economies of scale is crucial to profitability.

Lower FV on cut in forecasts

All said, on missed earnings, and uncertain outlook over ramp up of its new businesses, we cut our FY16/17F PATMI by 8.5%/5.5%. Consequently, as we update SGD-RMB exchange rate, our FV decreases from S$0.295 to S$0.250, based on lower target peg to 0.50x FY16F P/B. Maintain HOLD.  

Source: OCBC Research - 15 Aug 2016