The news: China's rail construction investment slumped 26% last month after a deadly highspeed train collision prompted officials to suspend approvals for new projects and impose more safety checks. Rail construction investment in July amounted to RMB41.2 b (S$7.7b), compared with RMB55.8b a year earlier, based on Ministry of Railways data released Aug 15. It was the biggest drop in eight months.
The railway ministry said in May that rail construction investment this year will total RMB600b, down from an earlier estimate of RMB700b.Total rail construction investment in the first seven months of the year dropped 2.5 per cent from a year earlier to RMB283b, according to the ministry data.
Our thoughts: While the slowdown in rail investment is negative for the PRC railway sector, we believe this is within expectations. Since the high-speed train crash in Jul11, investors are expecting possible slower award of contracts due to repercussion in domestic and overseas markets as the authority will likely engage in a thorough review of controls in place to ensure passenger safety to address public concerns.
Midas’ share price is down some 60% YTD, underperforming STI’s -11%. However, at 9x FY11F
P/E and 0.8x P/B (-1SD and -1.3SD to its six-year historical mean of 20x and 4x respectively), we believe the lack of visibility, in terms of timing for a turnaround or upside catalyst, has been largely priced in, and see an attractive risk-reward trade-off. Furthermore, we reason that as China increase its urbanization rate by 1% per year, it will need to rely on better railway infrastructure to improve its current transportation system. In addition, China will likely continue to develop its domestic rail technology rather than rely on overseas train makers.
Midas’ extrusion order wins tallied RMB323m YTD, and close to 82% and 35% of our FY11 and
FY12 estimates for extrusion are backed by announced order wins respectively. Reiterate BUY at TP of S$0.65, pegged to 15x FY11F P/E.
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