Midas - operating margins of 42% is unlikely to be sustainable over the long-term

Good outlook. Management is upbeat on prospects given the group's dominant position in the manufacturing of train car bodies for China's rail transport industry. The group's market share in this segment is estimated at 80%. The group expects competition to heat up and its eventual market share to trend towards 50% (smaller share of bigger pie). Its fully-owned subsidiary Jilin Midas' orderbook is S$100m whereas associate Nanjing SR Puzhen Rail Transport (NSRPT; 32.5%-owned) has an orderbook of Rmb4.5bn. Management expects Jilin's orderbook to rise by S$200-300m in 2H as new contracts are awarded under China's stimulus package.

50% rise in capacity by 2010. Current capacity for Jilin Midas is 20,000tonnes/year but this will rise to 30,000 tonnes/year by 1Q2010 with the addition of a new production line (to the current two). Utilisation of current capacity is circa 80% but management expects new contract wins to drive demand for capacity growth. Should demand rises ahead if projections, the group can add new capacity, with a lead time of 1-1.5 years at a cost of S$30m/production line.

Competition heating up. Given the good outlook for the rail transport industry, management expects competition to intensify. In order to be ahead of the curve, the group plans to go upstream to fabricate modules for traincar bodies. This is part of the group's strategy to be an integrated player in this space.

Strong financials. Midas has a net cash balance of S$9m (S$0.01/share). Operating cashflows remain strong, with net operating cashflow of S$15m in 1Q09. In the absence of any major unplanned capex or M&A proposal, management has no plans for any capital-raising as capex will be internally funded.

Good prospects but competition is key. Though outlook is promising, competition could be a concern as limited growth for railway-related spending in other countries could result in most players focusing on China. Other than overseas players, local China companies (such as Zhongwang) are likely competitors too. Hence, we think Midas' 1Q09 operating margins of 42% is unlikely to be sustainable over the long-term.

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