By LYNETTE KHOO
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RAILCAR profile maker Midas Holdings has come into market focus, cheered by recent contract wins totalling a whopping one billion yuan (S$214 million). The latest contracts secured over the past two months even exceeded the management target of $200 million and $300 million worth of new contracts for high-speed train and metro train projects.
Investors tired of hearing negative news surrounding S-chips or Chinese listings here, would probably find such development at Midas a welcome relief for a sector rocked by accounting scandals.
Could Midas turn these contracts into gold for its shareholders? For investors seeking out gems in the S-chips sector, this stock may well be worth a look.
Midas is by SGX definition a Chinese listing based on its principal place of business and controlling stakeholding. Its chairman Chen Wei Ping, a Chinese national, has the single largest stakeholding of 20.7 per cent. Patrick Chew, its Singaporean CEO, owns a 14.3 per cent stake. The duo co-founded the firm in 2000.
Investors worried about credibility issues clouding S-chips may find some comfort with Midas' board composition and management. Out of five directors, three are independent directors who are Singaporeans. The two executive directors are the chairman and CEO.
Within its management, the chief financial officer who guards the group's kitty, is a Singaporean while the general managers responsible for business operations are Chinese nationals, who arguably know best about how to run a business in China.
Since 2003, Midas has been involved in many high profile rail transport projects in China, including the Beijing-Tianjin High Speed Train Project and Shanghai Metro Lines.
There isn't a better time than now for Midas to focus on its aluminium alloy business, as the Chinese government rolls out its behemoth fiscal package with major commitments to railway infrastructure.
These would set its earnings momentum going, after profit before tax grew 15.3 per cent to $40.7 million last year (net profit grew a smaller 2.4 per cent to $32.7 million due to higher taxation), and the group gathered another 11.2 per cent year-on-year growth in net profit for the first three months this year to $8.5 million.
The group expects its third production line to be ready by 2010, which will raise annual capacity by 50 per cent to 30,000 tonnes.
Mr Chew has maintained that there is no concrete plans for a fourth producton line at the moment yet, though some analysts are already expecting a further expansion as a natural course of action.
Its cash hoard, which stood at $42.7 million as of March 31, and a healthy gross gearing ratio of 14.6 per cent can lend support to that growth.
With many Chinese cities also planning to build metro lines, its 32.5 per cent associate Nanjing SR Puzhen Rail Transport Co (NPRT) is set to benefit from this high growth market where players are limited. There are only four rolling stock companies in China, including NPRT, licensed to make and sell metro trains on a nationwide basis.
But as with any investment, this stock is not devoid of risks. It is subject to increases in prices of and shortages in the supply of raw materials. Being a young company with less than a decade of operating track record, Midas is heavily dependent on certain repeat customers.
It currently faces competition from at least five key rivals in supplying aluminium alloy profiles: Shandong Conglin Group Co, Aleris Aluminium (Tianjin) Co, Southwest Aluminium Co, Shandong Nanshan Aluminium Co and Liaoning Zhongwang Group Co.
Valuation-wise, Midas is already trading at historical price-to-earnings (PE) ratio of 19 times, compared to the Straits Times Index PE ratio of 12 times. But some analysts believe that high PE is justifiable for a growing stock.
For the past two months, Midas has been riding the wave of contract wins, and with some breakthroughs. One was its first foray into the downstream fabrication business with two contracts worth 73.8 million yuan this month. The second was a beachhead into the Middle East market with two contracts worth 54 million yuan.
The pipeline of new contracts appears strong. More contracts may result from the conclusion of a second bidding by the Ministry of Railway in China this month for 320 new train sets for 350km/h high-speed train projects, according to Kim Eng analyst James Koh. Regardless of who wins the bid, this could still translate into new contracts for Midas.
If all goes well for the group, these contracts would generate good cashflows and better earnings visibility over the next two to three years.
The jury is out on whether Midas would make good on its name to turn these contracts into great fortunes for its shareholders. But for investors keen on an exposure to a booming industry in China, this S-chip may be worth a closer look.
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