Midas (DMG)

Midas secures RMB62m contract from CNR Changchun

The news: Midas announced that its Aluminium Alloy Division, Jilin Midas Aluminium Industries Co., Ltd has secured a RMB62m contract from CNR Changchun Railway Vehicles Co., Ltd for the Shanghai Metro Line 12 Project. Jilin Midas will supply aluminium alloy extrusion profiles for 41 train sets, or 246 train cars (1 train set = 6 train cars), with delivery expected to take place from 2011 to 2013. The contract is expected to have a positive impact on the Group’s financials for the FY11-13.

Our thoughts: Since the start of 2011, the PRC railway infrastructure industry outlook has been clouded with uncertainties following a change of top official at Ministry of Railways (MOR) in Feb 10, and a 1Q11 pre-tax loss of RMB3.7b recorded by the agency, which have resulted in Midas’ and its peers’ dismal share price performances year-to-date. Nonetheless, with MOR’s recent positive assurance that China railway construction will continue to accelerate over the next five years (i.e. 30,000 km of new lines, investments will total RMB2.8t, and nationwide operational mileage to reach 120,000km) and as new contracts are awarded, sentiments towards the sector might soon improve.

At trough valuation of 1.4x P/B, we believe share price could see inflection point should order win announcements gather momentum. Midas’ order book tallied at RMB1.2b (4Q10: RMB1.3b) as of 1Q11, with RMB228m new order wins for the year. We continue to like Midas for its dominant market position and deem current risk/reward trade-off as attractive. Maintain BUY at TP of S$0.98, pegged to 18x FY11F P/E.