Yahoo Finance 
SI Research: Midas Holdings – Potential Arbitrage Opportunity?
Midas Holdings (Midas) attracted a lot of attention two weeks ago as it surged 43.2 percent in a single trading day on 3 January 2018 with 459.8 million shares changing hands. This came after the group’s announcement that its joint venture company, CRRC Nanjing Puzhen Rail Transport which it has a 32.5 percent stake in, has successfully secured three metro train car supply contracts worth Rmb2.7 billion in China. Deliveries for the contracts are scheduled between 2018 and 2020, and are expected to contribute positively to Midas’s financial performance for the financial years 2018 and 2020.
We can buy a can of coke for slightly more than a dollar in a neighborhood coffee shop, but the price tag carried by an identical drink in a high-class restaurant can easily jump by multiple times. Midas was listed on the Singapore Exchange (SGX) in February 2004 and has a secondary listing on the Stock Exchange of Hong Kong (HKEX) in October 2010. Similar to the example mentioned above, the exact same company was actually valued very differently on the two separate bourses. This issue, we shall take a closer look at this interesting counter and explore if there is any hidden value left to be uncovered.
About the Company
Midas’ core business is in the manufacturing of aluminium alloy extrusion products which accounted for 87.1 percent of the group’s FY16 revenue. The products are primarily used as body frames of high-speed trains and metro trains, as well as mechanical parts for industrial equipment and transmission cables in power stations.
With the acquisition of Huicheng Capital in July 2016, Midas’ aluminium alloy stretched plates division complimented the group’s core business by contributing 12.2 percent to its FY16 revenue. The stretched plates, being lightweight, corrosion resistant and high-strength with high precision manufacturing technology, have wide applications in industries ranging from aviation, aerospace, rail transportation, marine, automotive and petrochemical sectors.
The remaining 0.7 percent of Midas’ FY16 revenue came from its PolyEthylene (PE) pipe division. Considered as substitutes for traditional concrete and metal pipes, the PE pipes are relatively light-weight, chemically inert and more cost efficient to be used in gas piping networks and water distribution networks.
On a geographical basis, majority of Midas’ FY16 revenue is derived from China at 76.4 percent while the rest came from other international markets.
Stellar Financial Performances
Over the last five years, Midas displayed remarkable growth with its revenue expanding at a compounded annual growth rate (CAGR) of 14.3 percent to Rmb1.5 billion in FY16. Likewise, net profit also increased at an impressive CAGR of 37.9 percent to Rmb100.8 million.
Source: Company’s Annual Reports
9M17 revenue rose 24.2 percent to Rmb1.1 billion driven by higher export sales. Correspondingly, gross profit climbed 32.2 percent with an improved gross profit margin at 29.3 percent attributed to higher margins from both extruded products and stretched plates divisions. Coupled with higher share of profit from its associated company, CRRC Nanjing Puzhen Rail Transport, net profit more than doubled to Rmb108.3 million. As Midas’ 9M17 net profit has already surpassed that of FY16’s figures, we could expect the group to report another record year in the upcoming final quarter barring any unforeseen circumstances.
Burdened By Heavy Debts
If there is any concern which we might have that could jeopardise Midas’ growth, it would be the group’s relatively high debts and finance costs. Midas’ total borrowings over the last five years expanded at a CAGR of 33.3 percent from Rmb1.5 billion to Rmb4.7 billion in FY16, although the figure dipped slightly to Rmb4.5 billion in 9M17. As at 30 September 2017, gearing derived from total loans divided by the sum of total equity and total loans inclusive of finance leases stood at 0.52 times.
Midas’ heavier debts resulted in increasing finance costs, which took out a significant chunk off its earnings before interest and taxes (EBIT). In 9M17, the finance costs of Rmb127.1 million consumed nearly half of the group’s EBIT of Rmb251.5 million, with the interest coverage ratio standing at a precarious level of merely two times.
Source: Company’s Annual Reports
Uncloaking Concealed Value
Midas last changed hands on the HKEX at HK$2.89 as at 15 January 2018, which is equivalent to around $0.49 based on an exchange rate of HK$5.92 for every Singapore dollar. Comparing to the group’s last traded price of $0.165 on 15 January on the SGX, this translated to a significant discount of more than 66.2 percent.
In comparison to other counters which are also dual-listed on HKEX and SGX, Midas exhibits the greatest price disparity offering the highest discount. Moreover, Midas’ current share price offered a 61.8 percent discount to its net asset value of $0.43 with price-to-book ratio standing at 0.4 times, once again implying a considerable amount of the group’s intrinsic value yet to be discovered.
Source: Finance Yahoo, updated 15 January 2018
Arbitrageurs who are keen to take advantage of the price difference may want to consider buying the cheaper Midas shares on SGX and sell them at a higher price on the HKSE. To do so, one needs to request his broker to transfer the shares from his SGX Central Depository account to Hong Kong, which may takes up to two or three weeks. Thereafter he may then liquidate the shares on HKSE once the transfer is completed. Nonetheless, caution is advised as investors should also take into account the higher transaction fees involved as well as the risk of price fluctuation during the process.
Pursuant to the 19th National Congress of the Communist Party of China, the Ministry of Transport has reaffirmed its commitment to materialise the plans of a well-developed transportation system. The total length of China’s high-speed rail is estimated to reach 38,000 kilometers by 2025 and 45,000 kilometers by 2030. We see Midas as a beneficiary of China’s “One Belt One Road” initiative and a proxy to participate in the growth of the country’s railway expansion plans. Future earnings increment could lead to a potential re-rating of Midas’ value and thus justify investors to take a closer look at this counter.
