Midas: Future orders should be plentiful

China to buy high-speed trains for RMB39.2b. It was announced this week that the Ministry of Railways (MOR) had signed a deal with state-owned vehicle producer CNR Corporation Ltd (CNR) for the purchase of 100 high-speed China Railway High-Speed (CRH) train-sets for RMB39.2b or S$8.7b.

Details of the purchase. These trains are classified under the CRH category, meaning they would have the capability of exceeding speeds of 200km/h. In fact, they are reported to have designed speeds of up to 350km/h, and will be travelling between Beijing and Shanghai in 2011, in conjunction with the completion of the 1,318km high-speed railway between both cities currently under construction.

100% home-made. The contract does not include any foreign parties, as Chinese companies own the core technologies for the CRH trains and have complete intellectual rights over them. All 100 units will be self-developed and manufactured under the CNR Group, with Tangshan Railway Vehicle Co. and Changchun Railway Vehicle Co. (both subsidiaries) given the responsibility for production. This signifies the effective and successful transfer of knowhow and technological expertise from the European train car and railway systems experts after years of collaboration.

More purchases to follow. Officials say that there would be plenty more purchases of such magnitude in the coming years upon completion of more passenger railway lines in China. The MOR has planned to spend RMB500b to buy trains over the next four years, and such purchases will provide strong support for related industries.

A strong signal of healthy order flow for Midas. Midas, a producer of aluminium-alloy (AA) extrusion panels for train car bodies in China, with a market share of around 80% will be a strong beneficiary of such government-linked purchases.

We have learnt each CRH train-set will consist of around 16 cars, which will require around 160 tonnes of AA extrusions per train-set. According to our estimates, should they win part of this contract based on their existing market share, it should easily fulfil the maximum annual production capacity of one AA line, which is a substantial order size.

Hence, with a fairly strong certainty in continued announcements of such purchases/projects, we are confident strong flow of orders slated to arrive for Midas will be strong going forward. We will initiate coverage on Midas soon, but based on our back-of-the-envelope forecasts, the Group is trading at 9.7x FY09 and 7.1x FY10 P/E at its last traded price. Do note that its closest peers, listed in Shanghai and Hong Kong, are trading at an average of 20.8x FY09 and 16.7x FY10 P/E.

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