Midas was listed on SGX on 23 Feb 2004 at an IPO offer price of S$0.115 1 . Midas has three main business divisions, viz. Aluminum Alloy, Polyethylene Pipe (PE) and Agency and Procurement. They are described in detail below:
A) Aluminium alloy
Aluminium has several favourable characteristics such as being highly versatile, light and a good conductor of heat and electricity. Thus, it is used in a myriad of industries. Midas’s aluminium alloy is used in the transportation industry for manufacturing products such as body frames of MRT, LRT trains etc. Aluminium alloy can also be utilised in the power industry to manufacture transmission cables and mechanical parts for industrial equipment. This manufacturing is done by its wholly owned subsidiary Jilin Midas Aluminium Industries Co., Ltd. which is located in north eastern China, close proximity to major customers such as Changchun Railway Vehicles. This division contributed about 95% to 3QFY09 revenue.
B) PE
Midas manufactures two basic types of PE Pipes – Water PE Pipes and Gas PE Pipes. For gas pipes, they are typically used by gas companies which supply flammable gas to consumers. Midas targets China’s municipal cities, for their gas transmission and water distribution infrastructure projects.
C) Agency and procurement
The agency and procurement division serves as a central procurement center for its Aluminium Alloy and PE divisions. It does the import, export and wholesale of aluminium alloy, polyethylene pipes, metal materials and other related products.
Both PE and Agency and procurement divisions currently have insignificant revenue contribution.
INVESTMENT MERITS
A) Bright industry outlook
With reference to Chart 1 , rail penetration remains low in China at 59 rail km per million of population vis-à-vis 184 rail km per million of population in Japan. Thus, it is apparent that China would continue to increase their railway lines and the number of trains servicing the lines. According to the official Xinhua agency, Yan Hexiang, a senior Ministry of Railways official reiterated on 23 Nov 09 that China will continue to have over 120,000 km of track by 2020, up from 78,000 km at the end of 2007. China has also stated in previous interviews that they would invest more than CNY700b a year in rail construction on average over the next three years after a rise to CNY600b this year. Thus, the outlook is bright for companies like Midas.
Chart 1: Various countries’ rail penetration per million of population
Source: US Central Intelligence Agency World Factbook 2008
B) One of the four licensed metro rolling stock manufacturers
Midas is one of the four licensed metro rolling stock manufacturers through its 32.5%-owned associate company Nanjing SR Puzhen Rail Transport (NRPT). Midas has an estimated 80% market share of the large section aluminium extrusion market as it supplies to all rolling stock manufacturers. Going forward, NPRT is expected to have a more significant contribution to Midas as revenue recognition accelerates with its RMB5.5b order books to be delivered from 2H09 onwards.
C) Excellent reputation for quality and management
Midas was the only company in China to be awarded the prestigious International Railway Industry Standard (IRIS) certification in Jul 2009. This is a testament of Midas’ commitment to quality products.
Midas has also been named by Forbes Asia as Forbes Asia’s Best Under A Billion Company consecutively for four years from 2006 to 2009. This reflects the excellent stewardship of Midas under its management.
D) Abundant stock catalysts
There will be abundant stock catalysts in the near and medium term. They come from the following five aspects, namely announcement of contracts awarded by China North Locomotive and Rolling Stock (CNR) and China South Locomotive and Rolling Stock (CSR); significant contribution from NPRT; more than doubling of its aluminium alloy extrusion production lines; dual listing and increasing traction from its fabrication lines.
Firstly, China’s Ministry of Railways has closed its 2nd tender for the production of 4,160 high speed train cars (double of previous tender) and contracts have been awarded to CNR and CSR in late September. Contract announcement awarded by them to Midas should be imminent within the next two months.
NPRT is expected to have a significant contribution as more train cars would be delivered in 4QFY09. According to a Kim Eng report, Midas’s profit share is estimated to be approximately $6.4m in FY09 as compared to S$1.0m contributed for 9MFY09. In my opinion, I have a more conservative estimate of around S$3.5m contribution in FY09.
Midas would be expanding its aluminium alloy extrusion production lines from the current 20,000 tonnes to 50,000 tonnes by end 2010. This would have a huge positive impact to its financial results as Midas is currently capped by its capacity.
Midas has appointed Credit Suisse in evaluating and preparing for the dual listing. Dual listing is expected to increase Midas profile and shareholder base and allows it to secure additional equity financing if necessary. Dual listing may also create a short term quick upside as speculators and punters pile into Midas (remember that China XLX soared 77% on its HK dual listing day, despite stratospheric valuations).
Midas reached another milestone in its long term strategy to be an integrated manufacturer and one-stop service supplier to the rail transportation industry by winning three fabrication contracts worth of RMB121.8m. This is likely to gain traction in 2H2010 and 2011 onwards as companies would like to see Midas track record in this segment before awarding more contracts to Midas.
INVESTMENT RISKS
A) Margins dependent on fluctuations in raw material cost to a certain extent
Midas is exposed to mainly two kinds of raw materials, viz. plastic resin for PE and aluminium alloys for its aluminium alloy division. As PE is an insignificant revenue contributor, I will focus more on aluminium alloy. According to prospectus, aluminium alloy accounted for 64% of its cost of sales in FY2002 (except for the prospectus, there is no explicit mention of aluminium alloy as a percentage of cost of sales in its other financial statements). I expect aluminium alloy to account for at least 50% of its cost of sales in FY2009 which makes it an important raw material. However, according to most metal analysts, aluminum prices are unlikely to surge due to excess inventories. Besides, Midas mitigated this problem by structuring 70% of its contracts on a back to back basis while the remaining 30% are on a cost plus basis.
B) Lumpy nature on revenue
Midas recognizes its revenue on a completed contract basis thus it will be expected that certain quarters may be better than other quarters, depending on the size of the contracts completed.
C) Excessive reliance on one aluminium alloy supplier
Yingyuan Special Aluminium Industry Co supplies more than 90% of Midas’ aluminium requirement. Midas is cognizant of this supplier risk and has expressed intention to expand into upstream aluminium billet production if its aluminium alloy requirement hits 40,000 tonnes, so as to gain economies of scale.
D) Capital intensive industry
According to OCBC research, one aluminium alloy extrusion production line costs about S$32m or RMB160m. This excludes land cost. Thus, Midas has to manage its cash flow properly between investing in value added capital expenditure and distributing as dividends to shareholders.
CONCLUSION
With reference to Table 1 below, Midas is trading in line with its peers based on FY09F PE. However, Midas is likely to have high growth in FY10 and “explosive” growth in FY11, thus I believe it would be sound to base on FY11F results. Based on 18.4x FY11F earnings, Midas’ share price works out to be about S$1.18. This represents an approximate 31% upside since its close of S$0.90 on last Fri.
Table 1: Comparison of Midas and its competitors
Source: Bloomberg
1 The IPO price was adjusted for a stock split of two for one in July 2004.
Article by: Ernest Lim is an assistant treasury and investment manager at Infocomm Development Authority of Singapore (IDA). Prior to joining IDA in 2009, he was with Legacy Capital Group Pte Ltd, a boutique asset management and private equity firm, as an investment manager since 2006. He received a Bachelor of Accountancy (Honours) from Nanyang Technological University in 2005. He is a Chartered Financial Analyst, as well as, a Certified Public Accountant Singapore.
My Take:
This counter has been on the buy list of several brokerage houses, largely on a buy call.
As mentioned by Ernest above, this counter has got fundamental and is not just another S-Chip. In fact, this counter is not really be a S-chip even thou its key business is in China as the guy who run it is actually a Singaporean...brother of Mr Chew Hua Seng (of Raffles Education).
It is worthwhile to put Midas on your radar screen, for the very fact, that it is a dual-listing play (it is going for HK Dual Listing) and that it has secured several contracts of late.
Chart wise, it is worthwhile to consider accumulating this counter around 90cents to 91 cents level with stop below 89cents. 95 is key resistance level to breach.
--> This stock watch is issued around 8.45am this morning to my client.
This blog is a selections of my investment views to my client. If you find it useful or have additional information to share, please do let me know. These blogs are my personal views and is not meant to solicit any sales or investment on any securities or investment. I may have vested interest in some of the counters or investment products, hence please invest at your own risk. As usual invest in what you understand and do your own homework as usual.
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