Midas Holdings - Rail infrastructure still far from optimal in PRC

Midas established a strong presence in the highly specialised aluminium alloy train profiles market in the PRC within a short span. Despite being a late entrant, it has secured an impressive 80%-market share for components that are used in high-speed train/metro bodies. It is also the only PRC supplier certified by all top three global train manufacturers: Alstom, Siemens and Bombardier.

Midas is a key beneficiary of the PRC government’s recent fiscal stimulus package, where an additional RMB750b was set aside for the rail infrastructure industry. Currently, only 10 out of 48 heavily-populated cities have a rapid transit network, a sign of China’s rudimentary rail transport system.

Midas took a 32.5-% stake in Nanjing SR Puzhen Rail Transport (NPRT) back in Sep 2006, which holds one of only four licenses in the manufacturing of complete metro train units in the PRC. Its bottomline contribution is still out of sight, possibly disappointing the market. However, with the high barrier of entry to the market and sizeable order book of RMB4.5b, this JV could be the wild card in the medium term.

Due to its prudent stance and effective capital management, Midas has been in a net cash position since its listing despite paying attractive and regular dividends. This will allow the group to fund its expansion plans for the next growth phase, including capex plans of S$85m.

With FY09 being a year of consolidation for Midas as its 3rd production line and downstream fabrication activities come onboard, we have used FY10 estimated profits in our SOTP approach. We value Midas at 12X its net core earnings and 15X NPRT net profits. Our target price of S$0.69 will provide a 31.4% upside.

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