Singapore Company Guide

Midas Holdings Edition 1 Version 1 | Bloomberg: MIDAS SP | Reuters: MIDA.SI

Refer to important disclosures at the end of this report

DBS Group Research. Equity

1 Dec 2015

BUY

Recovery underway Maintain BUY; more substantial recovery from 2016 onwards. onwards. We see value in Midas’ share at 0.5x FY16 P/BV currently as we project that the Group’s earnings will to start to recover more substantially from 2016 onwards, as contribution from its new aluminium plate and sheet plant kicks in. We see the stock rerating towards our TP of S$0.49, based on 0.9x FY16 P/BV as earnings improve and ROE increases.

Last Traded Price: S$0.305 (STI STI : 2,855.94) Price Target: S$0.49 (59% upside) Potential Catalyst: Earnings recover and/or contract wins Where We Differ: Differ: We see the stock as undervalued Analyst Paul YONG CFA +65 6682 3712 [email protected]

Decent order books with potential for more, underpinned by strong railway demand. demand. With an order book of over RMB1bn for its core aluminium alloy extrusion segment, and over RMB10bn for its associate Nanjing Puzhen Railway Transport, Midas is in a good position to win more orders to raise its utilisation and earnings on the back of firm demand for highspeed and metro trains in China and abroad.

Price Relative S$

Relative Index

0.6

213

0.6

193

0.5

173

0.5

153

0.4

133

0.4

113

0.3

93

0.3

73

0.2 Nov-11

Nov-12

Midas Holdings (LHS)

Forecasts and Valuation FY Dec (RMB m) Revenue EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (S cts) EPS Pre Ex. (S cts) EPS Gth (%) EPS Gth Pre Ex (%) Diluted EPS (S cts) Net DPS (S cts) BV Per Share (S cts) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%)

Nov-13

Nov-14

53 Nov-15

Relative STI INDEX (RHS)

2014A 2014A 1,318 351 56 57 57 1.0 1.0 19 19 1.0 0.5 54.4 29.7 29.7 24.1 12.0 1.8 0.6 0.8 1.9

Earnings Rev (%): Consensus EPS (S S cts): cts : Other Broker Recs:

2015F 2015F 1,484 417 70 54 54 1.0 1.0 (5) (5) 1.0 0.5 54.8 31.2 31.2 3.8 10.3 1.8 0.6 0.9 1.8

2016F 2016F 2,787 686 213 168 168 3.1 3.1 212 212 3.1 1.1 57.3 10.0 10.0 nm 7.2 3.5 0.5 1.0 5.4

2017F 2017F 3,138 740 254 199 199 3.6 3.6 19 19 3.6 1.1 59.9 8.4 8.4 7.7 6.6 3.5 0.5 1.0 6.2

(33) 1.0 B: 1

(17) 2.3 S: 0

2.4 H: 2

Source of all data: Company, DBS Bank, Bloomberg Finance L.P

ASIAN INSIGHTS www.dbsvickers.com ed: TH / sa: YM

New business division division to diversify revenues and drive recovery. recovery. The completion of the alloy plate and sheet plant will raise the Group’s capabilities by boosting Midas’ annual aluminium alloy production capacity from 50,000 tonnes in FY15 to 160,000 tonnes in FY16. It should help to diversify its revenues away from the rail segment as the new alloy plate and sheet products will also be in demand from the aviation, shipbuilding, automobile, general industry and packaging sectors Valuation: Valuation is undemanding at just 0.5x P/BV, which is at its 55year low. Our target price of S$0.49 for Midas Holdings is based on 0.9x P/BV, which we use as our valuation multiple given that 5.4% ROAE projected for 2016F is still below the Group’s cost of capital. Key Risks to Our View: Insufficient demand or greater competition would impact earnings. Lack of new rail order wins or failure to generate interest for plate and sheet products could derail Midas from its recovery, while greater competition could erode margins. At A Glance Issued Capital (m shrs) Mkt. Cap (S$m/US$m) Major Shareholders Chen Wei Ping (%) Chew Hwa Kwang, Patrick (%) Free Float (%) 3m Avg. Daily Val (US$m) ICB Industry : Basic Materials / Industrial Metals

1,218 371 / 263 10.8 10.0 79.2 0.82

VICKERS SECURITIES

Company Guide Midas Holdings Aluminium Alloy Extrusion Capacity (tonnes)

CRITICAL DATA POINTS TO WATCH Earnings Drivers: Improving utilisation… Since the Group’s capacity more than doubled to 50,000 tonnes per annum in 2011 (further details below), we estimate that utilisation has gradually improved from a low of 50% in 2011 to 65% in 2014, and to an assumed 70% between 2015F and 2017F. However, this is still below the peak utilisation of c.95% in 2009 and 2010. Midas should be a beneficiary of China’s ambitious plans to develop its high-speed railway network, and also the burgeoning demand for metro trains in the country’s cities. At the same time, Midas has also been developing its export orders as well.

60,000

60,000

2016F

2017F

55,000 53,200

50,000

50,000

2013A

2014A

45,600 38,000 30,400 22,800 15,200 7,600 0 2015F

Extrusion Utilisation (%) 71.4

70

70

70

2015F

2016F

2017F

65 60

57.1 42.8

..... ... on an enlarged capacity. Midas has been investing heavily from 2009 onwards to expand its aluminium alloy extrusion capacity from 20,000 tonnes per annum at the end of 2009 to 50,000 tonnes per annum in 2011 and 60,000 tonnes per annum by 2016F, the latest of which was the setting up of a new facility in Luoyang, Henan. NewNew NewNew business division to diversify revenues and drive recovery. recovery. The completion of the alloy plate and sheet plant will raise the Group’s capabilities by boosting Midas’ annual aluminium alloy production capacity from 50,000 tonnes in FY14 to 160,000 tonnes in FY16. It will also help to diversify its revenues away from the rail segment as the new alloy plate and sheet products will also be in demand from the aviation, shipbuilding, automobile, general industry and packaging sectors. Change in product mix to lead to lower gross margins but higher volumes should drive better better profitability. profitability While the aluminium plate and sheet segment is projected to command lower gross margins versus the extrusion segment (18% vs 29% in 2016), the greater volume and revenue generated by this segment should help boost Midas’ net earnings over time.

28.6 14.3 0.0 2013A

2014A

Aluminium Plates & Sheets Capacity (tonnes) 102,000

100,000

100,000

2016F

2017F

81,600 61,200 40,800 20,400 0

0

0

0

2013A

2014A

2015F

Plates & Sheets Utilisation (%) 65

65.7 57.4 50

49.2 41.0 32.8 24.6

Stable contribution from its 32.5% stake in JV, Nanjing SR Puzhen Rail Transport Co.., Ltd (NPRT). (NPRT) NPRT is one of only four licensed metro train assembly companies in China, and has an order book of over RMB10bn. With strong domestic demand for metro train cars, and a large order book, we expect NPRT to at least be able to make a stable contribution of between RMB30m and RMB35m per year to Midas’ bottom line between 2015F and 2917F.

16.4 8.2 0.0

0

0

0

2013A

2014A

2015F

2016F

2017F

Overall gross margin (%) 28.8

29.1

26.6 24.5

24.3

24.1

2016F

2017F

23.3 17.5 11.6 5.8 0.0 2013A

2014A

2015F

Source: Company, DBS Bank

ASIAN INSIGHTS Page 2

VICKERS SECURITIES

Company Guide Midas Holdings

Balance Sheet: Balance sheet is a little stretched. Following a substantial period of capital investment to expand its capacity in aluminium alloy extrusion and capability in aluminium plates and sheets, which has been largely funded by debt, the Group’s net gearing is projected to be between 0.9x and 1x between 2015F and 2017F. Share Price Drivers: More railway contracts. contracts. If the Group is able to sustain its ability to secure railway contracts, it should be able to lift long-term prospects, especially given the robust growth outlook of the Chinese railway industry. Rampamp-up of new business. Midas is on track for trial production for its new alloy plate and sheet business in 4Q and will likely begin commercial production at end-2015 but is already in the process of speaking to potential customers. Given its track record in the industry, it should be able to ramp-up production quickly to drive earnings and prices.

Leverage & Asset Turnover (x) 0.4 1.20 0.4 1.00 0.3 0.80 0.3 0.60 0.2

0.40

0.2

0.20 0.00

0.1 2013A

2014A

2015F

Gross Debt to Equity (LHS)

2016F

2017F

Asset Turnover (RHS)

Capital Expenditure RM 1,000.0 900.0 800.0 700.0 600.0 500.0 400.0 300.0 200.0 100.0

Key Risks: Highly dependent on rail transport industry. Midas’ profitability is heavily dependent on the railway industry, especially in the Chinese high-speed rail segment which could be risky because at its peak, it accounted for over 50% of Midas’ earnings. This also explains the stock’s poor performance in the last two years when no new contracts were handed out. In 1H15, the overall rail transport segment contributed to c.83.1% of Group revenue, but we should see lower contributions going forward through diversification from the new alloy plate and sheet business.

0.0 2013A

2014A

2015F

2016F

2017F

Capital Expenditure (-)

ROE (%) 6.0% 5.0% 4.0% 3.0% 2.0% 1.0%

Increased competition could affect pricing power. Given the improved sentiment surrounding China’s high-speed railway segment, competitors could look to ramp up capacity to grab market share away from Midas. This in turn could affect its margins because Midas has historically won over 60% of the contract value available for aluminium profiles used in China’s high-speed passenger railway segment.

0.0% 2013A

2014A

2015F

2016F

Forward PE Band (x) (x) 88.7

+2sd: 81.9x

78.7 68.7

+1sd: 63.8x

58.7

Uncertainty in global economy. According to Bloomberg, c.13.7% of 2014 revenues was generated outside of China. With uncertainty in Europe and fragile recovery in the US, weak global economic conditions might impede Midas’ ability to grow outside of China. Company background Midas Holdings Ltd. manufactures aluminium alloy extrusion products for the passenger rail transport, power and other industries. The company also designs, manufactures and installs polyethylene pipes, and will begin production for aluminium alloy plates and sheets in 2015.

2017F

48.7

Avg: 45.8x

38.7 28.7

-1sd: 27.7x

18.7 8.7 Nov-11

-2sd: 9.7x Nov-12

Nov-13

Nov-14

PB Band (x) 1.3

(x)

1.2

+2sd: 1.14x

1.1 1.0

+1sd: 0.96x

0.9 0.8

Avg: 0.79x

0.7

-1sd: 0.61x

0.6 0.5

-2sd: 0.44x

0.4 0.3 Nov-11

Nov-12

Nov-13

Nov-14

Source: Company, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 3

Company Guide Midas Holdings

Key Assumptions FY Dec Aluminium Alloy Extrusion Capacity (tonnes) Extrusion Utilisation (%) Aluminium Plates & Sheets Capacity (tonnes) Plates & Sheets Utilisation (%) Overall gross margin (%) Segmental Breakdown FY Dec Revenues (RMB m) Aluminium Alloy Extrusion Aluminium Alloy Plates and Sheets PE Pipe Total Gross Profit (RMB m) Aluminium Alloy Extrusion Aluminium Alloy Plates and Sheets PE Pipe Total Gross Profit Margins (%) Aluminium Alloy Extrusion Aluminium Alloy Plates and Sheets PE Pipe Income Statement (RMB m) FY Dec Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) PrePre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

2013A 2013A

2014A 2014A

2015F 2015F

2016F 2016F

2017F 2017F

50,000 60.0 0.00 0.00 24.5

50,000 65.0 0.00 0.00 26.6

55,000 60,000 70.0 70.0 0.00 100,000 0.00 50.0 28.8 24.3

60,000 70.0 100,000 65.0 24.1

2013A 2013A

2014A 2014A

2015F 2015F

2016F 2016F

2017F 2017F

1,098 0 49 1,148

1,295 0 23 1,318

1,459 0 25 1,484

1,592 1,170 25 2,787

1,592 1,521 25 3,138

272 0 9 281

341 0 4 345

423 0 5 428

462 211 5 677

462 289 5 755

24.8 N/A 18.4

26.3 N/A 18.0

29.0 N/A 18.0

29.0 18.0 18.0

29.0 19.0 18.0

2013A 2013A

2014A 2014A

2015F 2015F

2016F 2016F

2017F 2017F

1,148 (866) 281 (159) 122 0 14 (76) 0 60 (17) 5 0 48 48 271

1,318 (968) 350 (195) 155 0 29 (128) 0 56 (3) 4 0 57 57 351

1,484 (1,056) 428 (218) 210 0 30 (170) 0 70 (16) 0 0 54 54 417

2,787 (2,110) 677 (281) 396 0 35 (219) 0 213 (44) 0 0 168 168 686

3,138 (2,383) 755 (317) 438 0 35 (219) 0 254 (55) 0 0 199 199 740

32.0 13.9 (1.1) 71.3

14.8 29.4 27.2 18.6

12.6 18.6 34.9 (4.7)

87.8 64.8 89.0 211.9

12.6 7.8 10.5 18.5

24.5 10.6 4.2 1.6 0.8 1.7 62.5 1.6

26.6 11.8 4.3 1.9 0.8 2.3 52.7 1.2

28.8 14.1 3.6 1.8 0.7 2.4 55.3 1.2

24.3 14.2 6.0 5.4 2.2 4.6 35.4 1.8

24.1 13.9 6.4 6.2 2.4 4.9 29.9 2.0

Source: Company, DBS Bank

ASIAN INSIGHTS Page 4

VICKERS SECURITIES

Company Guide Midas Holdings

Quarterly / Interim Income Statement (RMB m) 3Q2014 4Q2014 FY Dec 3Q2014 4Q2014 Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) PrePre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA

1Q2015 1Q2015

2Q2015 2Q2015

3Q2015 3Q2015

324 (237) 88 (51) 37 0 0 (36) 0 2 (1) 0 1 1 71

361 (255) 106 (50) 56 0 7 (39) 0 24 12 0 35 35 120

321 (228) 92 (54) 38 0 9 (35) 0 12 (1) 0 11 11 82

374 (271) 104 (58) 46 0 7 (39) 0 14 (3) 0 12 12 88

412 (305) 107 (55) 52 0 2 (35) 0 19 (6) 0 14 14 97

(3.6) (14.6) (0.2) (82.3)

11.2 69.7 49.8 2,286.2

(11.1) (31.7) (31.6) (68.8)

16.8 6.4 20.5 5.8

10.1 11.1 14.0 17.8

27.0 11.4 0.5

29.4 15.4 9.7

28.8 11.9 3.4

27.7 12.2 3.1

25.9 12.7 3.3

Balance Sheet (RMB m) FY Dec

2013A 2013A

2014A 2014A

2015F 2015F

2016F 2016F

2017F 2017F

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets

3,351 193 37 1,046 629 1,000 12 6,268

3,929 208 55 1,210 564 1,392 0 7,358

4,252 239 55 1,123 488 1,220 0 7,376

4,447 274 55 449 916 1,909 0 8,050

4,280 309 55 509 1,032 2,149 0 8,334

ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder’s Equity Minority Interests Total Cap. & Liab.

2,082 420 0 516 2 2,969 280 6,268

1,604 616 7 2,131 2 2,997 0 7,358

1,604 610 7 2,131 2 3,022 0 7,376

1,604 1,145 7 2,131 2 3,160 0 8,050

1,604 1,290 7 2,131 2 3,300 0 8,334

1,221 (1,551) 319.2 196.6 332.1 0.2 1.1 0.8 0.5 0.5 33.9 0.8

1,333 (2,526) 331.2 236.1 271.8 0.2 1.4 1.2 0.8 0.8 19.8 0.8

1,091 (2,613) 321.2 254.3 218.2 0.2 1.3 1.1 0.9 0.9 13.4 0.9

1,673 (3,286) 204.9 172.7 138.1 0.4 1.2 0.9 1.0 1.0 12.0 1.0

1,884 (3,226) 236.0 210.0 168.0 0.4 1.3 0.9 1.0 1.0 2.7 1.0

Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)

Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)

Source: Company, DBS Bank

ASIAN INSIGHTS

VICKERS SECURITIES Page 5

Company Guide Midas Holdings

Cash Flow Statement (RMB m) 2013A FY Dec 2013A Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (RMB cts) Free CFPS (RMB cts)

60 136 (7) (14) 100 1 276 (880) 0 0 0 2 (878) (30) 1,126 0 0 1,096 6 499 14.4 (49.6)

2014A 2014A

2015F 2015F

2016F 2016F

2017F 2017F

56 167 (1) (29) (152) 29 70 (741) (1) 0 8 0 (733) (30) 1,144 0 (306) 808 19 163 18.2 (55.1)

70 177 (16) (30) 242 0 443 (500) 0 0 0 0 (500) (30) 0 0 0 (30) 0 (87) 16.5 (4.7)

213 255 (44) (35) (582) 0 (194) (450) 0 0 0 0 (450) (30) 0 0 0 (30) 0 (673) 31.9 (52.9)

254 267 (55) (35) (212) 0 220 (100) 0 0 0 0 (100) (60) 0 0 0 (60) 0 60 35.4 9.8

Source: Company, DBS Bank Target Price & Ratings History

S$ Dat e

Closing Price

1:

02 Mar 15

0.32

0.49

BUY

2:

15 May 15

0.38

0.49

BUY

3:

19 May 15

0.38

0.49

BUY

S.No.

0.41

23 0.36

T arget Rat ing Pric e

1 0.31

0.26

0.21 Nov-14

Mar-15

Jul-15

Not e : Share price and Target price are adjusted for corporate actions.

Source: DBS Bank

ASIAN INSIGHTS Page 6

VICKERS SECURITIES

Company Guide Midas Holdings

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

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The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. 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As of the date the report is published, the analyst and his/her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). COMPANYCOMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates have a proprietary position in Midas recommended in this report as of 31 Oct 2015. 2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report. 3. Compensation for investment banking services: DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

ASIAN INSIGHTS

VICKERS SECURITIES Page 7

Company Guide Midas Holdings

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