A standstill in Chinese rail industry. Our analysis of Midas's recent results and discussions with management suggests that the Chinese rail industry may be at a virtual standstill following the dismissal of the former head of the Ministry of Railways (MOR) and investigations into the train crash in July.

3Q11 a prelude for next few quarters. As expected, Midas posted a poor set of 3Q11 results after giving a profit warning. While the market focused on its orderbook, we had warned that the latter remained in a state of flux, especially since its customers in China are often powerful state-owned enterprises. Net profit was down both QoQ and YoY by more than 50% despite capacity expansion. Working capital was another worrying aspect; it ballooned by Rmb119m in 3Q11 alone.

Too much uncertainty for now. What happened essentially in 3Q11 was that its main customer CNR took slower delivery from Midas as it in turn delivered less trains to MOR due to the various recalls and investigations. This likewise was the cause behind 32.5%-owned metromanufacturing associate NPRT turning in a loss in the quarter.

Don't read too much into recent measures for MOR. With no new orders in sight following the dismissal of the former MOR head, the slowdown in upstream delivery will invariably affect suppliers like Midas over the next three quarters at the least. Much has been made out of recent measures to help MOR raise funds, but this may not necessarily be for new orders.

Downgrade to Sell. We expect things to get worse before they get better and downgrade the stock to Sell. We also cut our FY11-12 earnings estimates by about 30% to account for slower execution on orderbook (estimated Rmb840m). Our target price of $0.30 is pegged at 8x FY12F PER, where we expect support from our more draconian SOTP-based worst-case value. (Read full report)

Reports from CIMB  - Investors have taken the last train out, we stay put