Midas Holdings - Forming a pedestal for growth

Clearing hurdles. We visited Midas Holdings (Midas) and its 32.5% owned associate, Nanjing Puzhen Railway Transport (NPRT) in China. At NPRT, we were updated on the investment plans of the Chinese government to utilise rail transport building as one of the measures to pump prime the economy. While these investments plans are "industry talk" and yet to be concretised (in terms of actual size and timing), our initial survey of NPRT's capacity expansion (500 cars/year by end 2009) invokes our confidence that it is primed to capture a sizable portion of the market. Midas' 3rd lineexpansion is also making good progress while its current capacity is strongly utilised (~80%), frequently operating on three shifts. Concurrently, Midas has started downstream operations with strong interests displayed by all three train manufacturers to engage this service. It has embarked on small projects as a testbed for bigger contracts in the future.

Competition. Management acknowledges that there are companies keen to get in on the act in view of the proposed massive investment by the PRC government. However, we do not think more licenses will be issued by the three main train manufacturers to control quality for critical structures like train bodies. Case in point is that Midas continues to command ~80% of the aluminium (Al) profile market for train cars in the PRC despite the presence of four other competitors. A couple have even been operating even before Midas. However, when the magnitude of the orders gets overwhelming in the next few years, there could be possibilities of new Al profile suppliers.

Setting up for success. Rise in core earnings for Al profiles will likely be marginal but could spring surprises if utilisation improves and margins edge up if better margined back-to-back contracts are signed. We iterate that NPRT will drive earnings with delivery of 30-35% of its 768 train car order book this year. NPRT is pursuing four more projects that could add up to 400 cars to its order book. Economies of scale will accelerate and we should see better contributions.

Maintain BUY. We maintain our BUY call with fair value of S$0.63 based on 14x FY09F PER. 2010 will see earnings kicker from its 3rd line, bigger and better-margin NPRT contributions and margin enhancers from its complementary downstream activities. In the meantime, Midas is likely to trade in tandem with sentiments of S-chips and share price catalysts could come from contract wins.

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