Kevin Scully, executive chairman, NRA Capital. NextInsight file photoI HAD A good meeting with the management of Midas late last week.
My key findings are as follows:
a) the bulk of the Q1-2013 loss came from its associate Nanjing SR Puzhen Rail Transport Co - similar to its loss in Q1-2012 and was due primarily to fewer trains being delivered.
b) Midas has a healthy order book of more than RMB8bn of which RMB1.5bn is its own and another RMB7bn from its associate Nanjing SR Puzhen Rail Transport Co. In 2013 alone, Midas has secured about RMB400mn in new orders while its associate has secured contracts of about RMB1bn.
c) A typical contract for Midas and its associates lasts about 24 months - so we can expect better revenue and profit in the coming quarters.
d) group gearing is now about 34% and should rise to just over 50% in 2013 as its completes its RMB600-800mn capex upgrade
e) current utilisation is around 40% which gives Midas the much needed capacity to accept and deliver new high speed train orders as and when they are tendered out.
f) no issue with its receivables which are usually from the Rail and now Transport Ministries. No provisions are required and they expect that the aging of these will fall back below the 12 month level in 2013 now that the Ministries have been recapitalised.
g) China Zhongwang is not a direct competitor although its also in the aluminium extrusion business. In terms of capacity its about 20 times bigger than Midas with annual output of up to 1mn tonnes compared to 50,000 tonnes for Midas. Its trading at about 5-6 times PER according to Bloomberg. The initial euphoria surround ZhongWang has subsided and it would appear on valuation terms that its doesnt enjoy the same investor confidence as Midas.
h) Midas like us.....continues to wait for the release of high speed train orders which are long overdue and behind schedule. The delay is linked to the formation of the new Ministry of Transport and also that new China President Xi Jinping is more concerned with tackling corruption which may in the short term slowdown its pump priming activities.
Conclusion
My key conclusion is that there is no change in the reasons and rationale for recommending Midas which remains undervalued. The Q1-2013 results although reflecting a loss does not detract from its growing and more healthy order book which should start to kick-in in the second half of 2013.
I still like the stock and see this weakness as a good medium term buying opportunity. Remains as a Stock Pick.
The above article was recently published on www.nracapital.com, and is reproduced with permission
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