The first contract worth RMB306mln was awarded by CNR Changchun Railway Vehicles Co Ltd and Midas will supply aluminium alloy extrusion profiles for 50 train sets or 800 train cars while the second contract worth RMB297mln was awarded by CNR Tangshan Railway Vehicles Co Ltd and Midas will supply aluminium alloy extrusion profiles for another 50 train sets or 800 train cars for the “CRH3-380” project. Both contracts are expected to be fulfilled from 2H 2009 till 2011.
According to Patrick Chew, Midas’s CEO, this is the single largest project win in the company’s history and both customers are repeat customers, demonstrating their confidence in the quality and delivery service of the company. This will also position them favourably into the downstream aluminium alloy extrusion component fabrication business. He expects to continue to benefit from the government’s RMB4 trn stimulus package which has a strong emphasis on the rail infrastructure market.
Based on the contracts secured by Midas since early 2007 (see Exhibit 5) the latest RMB603mln contract compares extremely well with full year 2007’s total contracts of RMB245mln, full year 2008’s RMB405mln and its current order book of RMB600mln. This explains management’s recent decision to invest in a fourth production line sometime in 2010/2011.
With the latest contract win, we believe the 3rd new production line (50% increase in production capacity) coming on-stream in 1H 2010 should reach full utilization rate fairly quickly, potentially providing upside surprises to consensus estimates next year. However, even without the positive surprise element, the stock is only trading at 11x next year’s earnings on an expected growth rate of 30%, giving an undemanding PEG of 0.37x. We maintain BUY.
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