Analysts’ Breakdown: Riding A Chinese Turnaround With Midas

China intends to invest heavily in its railway infrastructure in 2013. According to the country’s 12th Five-Year national development plan, China will invest around Rmb600 billion ($119 billion) to Rmb650 billion ($125 billion) this year. State newspaper, The People’s Daily quoted a senior engineer at the China Railway Construction Company as saying that both the planned railway investment and length of railways to be constructed in 2013 will far surpass that of 2012.

The Midas Touch?
Enter Midas Holdings, with its 32.5 percent equity stake in Nanjing SR Puzhen Rail Transport Company (NPRT). The joint venture is one of only four companies licensed to manufacture and sell metro trains on a nationwide basis. NPRT’s grasp on the sector bodes well for Midas. In its FY11 annual report, Midas reported that revenue from the rail transport industry contributed a cool 78 percent to its main aluminium alloy division or 75 percent of Midas’ total revenue.

Given that Midas’ fortunes are tied closely to the railway transport industry, would NPRT’s recent contract win from Suzhou New District Tramway Company (valued at Rmb338 million or $67 million) spell more possible contracts down the road? Here are some snippets into analysts’ views on this and the prospects for Midas.

To further add impetus to the initial five-year investment plan, Andy Wong and Carmen Lee of OCBC Research note that,

“Vice Premier Li Keqiang is a strong advocate of urbanisation as a means of boosting China’s economic growth… We believe that it makes economic and social sense for the government to develop its railway transportation network.”

Andy and Carmen’s Call: BUY , with target price of $0.60 (potential upside of 5.3 percent*)

The management of Midas seems to also substantiate such an increasing trend as in a note to its clients, Daniel Lau of CIMB mentioned that,

“… our checks with management suggest that order momentum on the ground is gradually picking up with major clients restarting negotiations with key suppliers.”

Daniel’s Call: BUY , with target price of $0.59 (potential upside of 3.5 percent*)

The 18-Month Lull
It is also important to realise that the Chinese railway transportation industry had earlier been going through an 18-month period that was near devoid of high-speed railway contracts. This was largely due to the removal of the then Chinese Railways Minister Liu Zhijun in February 2011 on suspicions of corruption and a fatal high-speed railway accident near Wenzhou in July 2011. During this period however, Midas has not been slacking and instead embarked on a capacity and capabilities enhancement process.

Paul Yong of DBS Vickers writes more,

“… in addition to diversifying its product range, Jilin Midas now has… (additional aluminium production capacity) of 50,000 tonnes per annum and can fabricate a complete range of train parts, including for export.”

Preparing For The Future
With these increased capabilities and capacity, and assuming a typical 18 to 24 months order to delivery cycle, Midas could be on track to deliver good financial performances in 2013 and 2014. In a sign of business astuteness and acumen, Midas is also seen to be preparing for 2015 and beyond. OSK Research’s Lynette Tan observes that,

“Midas, which plans to diversify into the production of aluminium alloy plates and sheets (used in the aviation, shipbuilding and automobile industries), has set up a joint venture company with Jilin Kaitong Engineering. It is building a plant with an expected capacity of 200,000 tonnes, which is envisaged to be operational in 2015.”

Lynette’s Call: BUY , with target price of $0.75 (potential upside of 31.6 percent*)

In summation, it seems that analysts are relatively bullish on the prospects of Midas. That being said, they seem to be waiting for more contract wins before they consider further re-rating of the counter. It is also worthy to note that Midas is currently outperforming the broader market. How long these tail-winds continue to boost Midas remains to be seen.

*Based on Midas’ closing price of $0.57 on 28 January 2013.

Editor’s note:
Have any thoughts/comments or feedback regarding this article? Reach out to me on my twitter account, @Tradeable . I will also discuss and tweet about various other investment and economic related news in Singapore and beyond, there.