Company Update, 19 November 2014

Midas (MIDAS SP)

Neutral (from Buy)

Basic Materials - Metals Market Cap: USD281m

Target Price: Price:

SGD0.33 SGD0.30 Macro Risks

More Reasons To Be Cautious Than Optimistic

Growth Value

Midas (MIDAS SP) Price Close

Relative to Straits Times Index (RHS)

0.57

111

0.52

101

0.47

91

0.42

81

0.37

71

0.32

61

0.27 30

51

25





15

Sep-14

Jul-14

May-14

Jan-14

Mar-14

5 Nov-13

Vol m

10



Source: Bloomberg

1.50m/1.19m

Cons. Upside (%)

50.0

Upside (%)

10.0

52-wk Price low/high (SGD)



0.30 - 0.52

Free float (%)

79

Share outstanding (m)

1,218

Shareholders (%) Sr. management

20.8

Dimensional Fund

2.5

Ecclesiastical Insurance

1.0

Share Performance (%)



China railway order flows to resume. China’s National Development and Reform Commission has approved new railway construction projects worth ~CNY1,000bn in Oct-Nov 2014. While these projects should keep Midas’ orderbook filled for 2-3 years, the timing of orders and its delivery schedule (and hence, revenue recognition) would be tough to predict. Tough lessons learnt from high dependence on railways. Almost all of its current CNY1.1bn orderbook is for the supply of parts to the railway sector, which made up for 55-75% of its revenue over 2010-2013. While a weak inflow of railway orders over the last 2-3 years has forced Midas to diversify away from the sector, this also resulted in high capex, increased leverage and rising interest costs amidst weak growth. Diversification has risks. Midas will start producing aluminium plates and sheets at its 100,000 tonnes per annum (tpa) plant in 2015. However, the segment is highly competitive and we believe Midas will have to keep margins lower initially to build a market presence, and expect this segment to contribute 13% of gross profit in 2015. Better plays on China railway sector. Winston Cao, our Hong Kongbased analyst views China Railway Group (390 HK, BUY, TP: HKD6.55) and China CNR (6199 HK, BUY, TP: HKD8.47) as better plays on rising domestic railway fixed asset investments. Both stocks offer higher ROE and are trading at lower P/Es compared with Midas (see Figure 6). Valuations are rich. At 0.6x 2015 P/BV, Midas is trading at the bottom of its historical P/BV valuation. However, this valuation seems justified by its dismal 1.6% 2015 ROE. Our SGD0.33 TP is based on a 0.65x 2015 P/BV, which implies a 42.0x 2015 P/E and 1.0x 2015 PEG. Dec-12

Dec-13

Dec-14F

Dec-15F

Dec-16F

870

1,148

1,286

1,739

2,367

Reported net profit (CNYm)

27.8

47.7

32.5

46.3

81.2

Recurring net profit (CNYm)

27.8

47.7

32.5

46.3

81.2

(85.1)

71.3

(31.9)

42.5

75.4

Recurring EPS (CNY)

0.02

0.04

0.03

0.04

0.07

DPS (CNY)

0.04

0.02

0.02

0.02

0.04

Shekhar Jaiswal +65 6232 3894

Recurring P/E (x)

61.9

36.1

53.0

37.2

21.2

[email protected]

P/B (x)

0.58

0.58

0.58

0.58

0.57

YTD

1m

3m

6m

12m

Absolute

(41.2)

1.7

(25.9)

(33.3)

(40.0)

Relative

(45.0)

(2.1)

(25.2)

(34.1)

(42.7)

Forecasts and Valuations Total turnover (CNYm)

Recurring net profit growth (%)

P/CF (x) Dividend Yield (%) EV/EBITDA (x) Return on average equity (%) Net debt to equity (%) Our vs consensus EPS (adjusted) (%)

na

6.25

na

na

na

2.7

1.7

1.2

1.7

3.0

11.6

13.6

14.7

13.8

12.6

0.9

1.6

1.1

1.6

2.7

28.5

47.8

83.6

98.9

112.5

(11.1)

(42.4)

(58.3)

Source: Company data, OSK-DMG

See important disclosures at the end of this report

  3  . 3 0 . 2

0 0 .2 0 0 Midas reported improved operations, but its 9M14 profit fell 19% YoY to . 0 CNY21m amidst rising interest costs. Recovering railway order inflows 0 and the start of its new plates & sheets business could translate into 0 43% YoY growth in 2015. However, downside risks from delays in the start of the new business, which is also highly competitive and may likely yield lower margins, as well as expensive valuations, have led us to resume coverage with NEUTRAL and a SGD0.33 TP (10% upside).

20

Avg Turnover (SGD/USD)

   

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Platform

1

Midas (MIDAS SP) 19 November 2014

Results Review Figure 1: Midas’ 3Q14 results review unit

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

QoQ(%)

YoY(%)

Income statement Revenue

CNYm

202

284

301

360

297

336

324

-4%

8%

Cost of revenue

CNYm

(151)

(220)

(238)

(256)

(226)

(251)

(237)

-6%

-1%

Gross profit

CNYm

51

64

63

104

71

85

88

3%

40%

Selling and distribution

CNYm

(9)

(11)

(13)

(22)

(14)

(14)

(17)

23%

26%

Administrative expense

CNYm

(26)

(27)

(26)

(39)

(34)

(39)

(36)

-6%

42%

Operating income

CNYm

16

26

24

43

24

33

34

4%

45%

Interest income

CNYm

0

1

0

1

1

3

1

-77%

113%

Interest expense

CNYm

(19)

(20)

(16)

(21)

(23)

(31)

(36)

15%

117%

Share of results of an associate

CNYm

(4)

3

11

4

13

9

0

-96%

-97%

Other operating income

CNYm

2

9

2

(3)

1

1

2

185%

7%

Profit before tax

CNYm

(4)

19

20

16

15

2

-87%

-91%

Tax

CNYm

(1)

(5)

(4)

(6)

(5)

(9)

(1)

-92%

-81%

Profit after tax

CNYm

(6)

14

17

18

11

6

1

-79%

-93%

Minority Interest

CNYm

1

1

4

1

2

0

-90%

-166%

Profit for equity holders

CNYm

1

-82%

-91%

Post tax significant income (asset sales etc)

CNYm

-

-

-

-

-

-

-

0%

0%

Post tax significant expense (disc'd ops etc)

CNYm

-

-

-

-

-

-

-

0%

0%

Profit for equity holders (clean)

CNYm

-82%

-91%

Depreciation & amortisation EBITDA

(5)

24

(0)

15

16

21

(5)

15

16

CNYm

30

32

29

CNYm

(14)

(5)

(5)

12

21

8

12

8

1

45

38

37

34

-11%

15%

270

(14)

(4)

1

-122%

-118%

Margins Gross margin

%

25.2%

22.5%

20.8%

28.8%

24.0%

25.4%

27.0%

Operating margin

%

8.0%

9.3%

7.9%

12.0%

8.0%

9.8%

10.6%

Net margin

%

-2.4%

5.2%

5.5%

5.9%

3.9%

2.5%

0.5%

Segment revenue Aluminium alloy

CNYm

196

273

288

342

296

326

319

-2%

11%

PE pipe

CNYm

7

11

14

18

0

10

5

-47%

-60%

Source: Company data

Figure 2: Aluminium extrusion remains the largest revenue contributor

Figure 3: A major portion of Midas’ aluminium extrusion revenue remains dependent on the railway industry

400

400

350

350

300

300

250

250

200

200

150

289 303

342 273 288

248

100

199

296

326 319

222 210 192 206 196

3Q12

1Q13

50% 40% 30%

100

1Q12

60% 44%

150

50

3Q11

100% 87% 82% 90% 81%81% 80% 79% 76%73% 80% 72% Please values above to have them entered in y 67%fill in the67% 65% 70% 61%

36%

50

1Q11

Title: Source:

3Q13

1Q14

3Q14

20% 10% 0% 1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

Aluminium extrusion revenue (CNY m) Aluminium extrusion revenue (CNY m)

PE pipe revenue (CNY m)

Source: Company data

See important disclosures at the end of this report

Transport (RHS) (% of aluminium revenue) Source: Company data

2

Midas (MIDAS SP) 19 November 2014

Key Earnings Drivers Figure 4: Key assumptions 2013

2014

2015

2016

Segment capacity Aluminium alloy extruded products

tonnes/year

Aluminium alloy plates & sheets

tonnes/year

50,000

50,000

-

-

60,000

60,000

100,000

100,000

Utilisation Aluminium alloy extruded products

%

Aluminium alloy plates & sheets

%

45%

53%

48%

51%

20%

50%

Revenue by segment Aluminium alloy extruded products

CNYm

Aluminium alloy plates & sheets

CNYm

PE pipe

CNYm

1,098

1,265

1,358

1,446

349

884

49

22

32

38

24.8%

25.8%

26.9%

27.8%

0.0%

16.1%

19.2%

25.0%

20.0%

20.0%

Gross profit margin Aluminium alloy extruded products

%

Aluminium alloy plates & sheets

%

PE pipe

%

18.0%

Source: Company data, OSK-DMG

Valuation and target price At 0.6x 2015 P/BV, Midas is trading at 1SD below its historical 1-year forward P/BV. While this may suggest that valuations could have bottomed out, we believe its current low valuation is justified, supported by its low 1.6% 2015 ROE. Its peers, which are trading at higher 0.71-1.64x 2015 P/BVs, also have significantly higher 6.114.9% 2015 ROEs. Our SGD0.33 TP is based on a 0.65x 2015 P/BV, which implies a 42.0x 2015 P/E and 1.0x 2015 PEG.

Figure 5: Target price derivation Financial year ended

x

P/E-based valuation P/BV-based valuation

2015

42.00

0.33

0.65

0.33

Source: OSK-DMG

Figure 6: Relative valuation comparables BBG Company name

ticker

Price Rating

(LCY)

TP

M Cap

P/E

EV/EBITDA

P/BV

ROE

(LCY) (USD m) CY14 CY15 CY16 CY14 CY15 CY16 CY14 CY15 CY16 CY15

EPS Net growth Margin CY15

CY15 4.6%

Chinese rail part CSR Corp

1766 HK

Neutral

7.89

7.47

13,232

14.5

12.6

11.6

9.0

7.8

7.1

2.11

1.89

1.70 15.8%

14.5%

China CNR

6199 HK

Buy

7.66

8.47

12,753

11.6

10.8

9.9

8.5

7.9

7.2

1.33

1.25

1.13 12.2%

6.6%

5.0%

Zhuzhou CSR Times

3898 HK

NR

33.35

-

5,055

12.4

11.1

9.9

9.8

8.6

7.6

2.28

1.97

1.71 19.6%

12.3%

17.3%

31,040

12.9

11.6

10.6

8.9

8.0

7.2

1.82

1.64

1.46 14.9%

10.9%

6.8%

Weighted average China rail infra China Communications

1800 HK

Neutral

7.06

5.82

16,473

7.1

6.6

6.0

9.3

8.1

7.1

0.86

0.79

0.72 12.4%

6.4%

3.3%

China Railway Const'

1186 HK

Buy

8.14

10.97

13,517

6.7

5.5

4.9

5.6

4.8

4.4

0.87

0.77

0.68 14.8%

21.2%

1.8%

China Railway Group

390 HK

Buy

5.15

6.55

15,086

7.8

6.3

5.5

8.7

7.4

6.7

0.90

0.80

0.71 13.5%

23.8%

1.8%

45,076

7.2

6.2

5.5

8.0

6.9

6.2

0.88

0.79

0.70 13.5%

16.7%

2.3%

2,197

15.8

11.8

10.1

10.1

8.0

7.1

0.75

0.71

0.67

6.1%

34.1%

6.4%

2,197

15.8

11.8

10.1

10.1

8.0

7.1

0.75

0.71

0.67

6.1%

34.1%

6.4%

286

53.8

37.8

21.5

14.1

11.9

9.9

0.59

0.59

0.58

1.6%

42.5%

2.7%

Weighted average Aluminum extrusion Shandong Nanshan

600219 CH NR

6.95

-

Weighted average Midas Holdings Ltd

MIDAS SP Neutral

0.31

0.33

Source: Bloomberg, Company data, OSK-DMG

See important disclosures at the end of this report

3

Midas (MIDAS SP) 19 November 2014

Figure 7: Midas’ 1-year forward P/E based on core earnings 100.0

Figure 8: Midas’ 1-year forward EV/EBITDA 25.0

Title: Source:

20.0

Please fill in the values above to have them entered in y

90.0

80.0 70.0

60.0

15.0

50.0 40.0

10.0

30.0 20.0

5.0

10.0 Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

-

Jan-14

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Source: Bloomberg, Company data, OSK-DMG

EV/ EBITDA -1 std=10.6 Source: Bloomberg, Company data, OSK-DMG

Figure 9: Midas’ 1-year forward P/BV based on core earnings

Figure 10: Midas’ 1-year forward P/BV vs ROE

P/E

Avg. P/E=43

-1 std=19.5

+1 std=66.5

6.0

7.0

5.0

6.0

Jan-14

Avg. EV/ EBITDA=14.8 +1 std=19

Title: Source:

20% 18% 16%

Please fill in the values above to have them entered in y

5.0

14%

4.0

12%

4.0

10%

3.0 3.0 2.0

6%

2.0

4%

1.0

1.0

-

-

Jan-08

8%

Jan-09 P/BV

Jan-10

Jan-11

Avg. P/BV=1.5

Jan-12

Jan-13

-1 std=0.5

Source: Bloomberg, Company data, OSK-DMG

See important disclosures at the end of this report

Jan-14 +1 std=2.5

2% 0%

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

P/BV

Jan-13

Jan-14

ROE

Source: Bloomberg, Company data, OSK-DMG

4

Midas (MIDAS SP) 19 November 2014

Financial Exhibits Profit & Loss (CNYm)

Dec-12

Dec-13

Dec-14F

Dec-15F

Total turnover

870

1,148

1,286

1,739

2,367

Cost of sales

(618)

(1,311)

(1,789)

Gross profit Gen & admin expenses

(866)

(954)

Dec-16F

251

281

332

428

579

(100)

(117)

(148)

(191)

(260)

Selling expenses

(40)

(55)

(59)

(78)

(107)

Operating profit

111

110

125

159

212

Operating EBITDA

232

245

277

328

395

(115)

(129)

(147)

(165)

(179)

Depreciation of fixed assets Amortisation of intangible assets Operating EBIT Net income from investments

(6) 111

(7)

(5)

(5)

(5)

110

125

159

212

(6)

14

30

35

37

Other recurring income

8

10

5

6

8

Interest income

5

2

7

6

Interest expense

(74)

(76)

Pre-tax profit

(118)

4

(140)

(145)

44

60

49

66

116

(18)

(17)

(19)

(20)

(35)

2

5

3

-

-

Profit after tax & minorities

28

48

32

46

81

Reported net profit

28

48

32

46

81

Recurring net profit

28

48

32

46

81

Taxation Minority interests

Source: Company data, OSK-DMG

Cash flow (CNYm)

Dec-12

Dec-13

Dec-14F

Dec-15F

Dec-16F

Operating profit

111

110

125

159

212

Depreciation & amortisation

121

136

152

170

184

Other operating cash flow

(420)

98

(217)

(191)

(356)

Operating cash flow

(189)

40

Interest received Interest paid Tax paid

343

60

138

5

2

7

6

(67)

(63)

(118)

(140)

(7)

(19)

(20)

(35)

Cash flow from operations

(246)

276

(71)

(16)

(136)

Capex

(401)

(862)

(525)

(425)

(300)

(83)

(15)

(32)

(485)

(878)

(557)

Other investing cash flow Cash flow from investing activities

5

4 (145)

(300)

(46)

Increase in debt

379

Other financing cash flow

285

-

(276)

-

-

Cash flow from financing activities

618

1,096

694

120

121

661

547

1,046

1,113

(112)

494

66

Total cash generated Forex effects Implied cash at end of period

(1) 547

1,126

6 1,046

(30)

(425)

Dividends paid

Cash at beginning of period

(30)

-

1,000

1,113

(30)

(29)

150

150

(321)

792 (315)

-

-

792

477

Source: Company data, OSK-DMG

See important disclosures at the end of this report

5

Midas (MIDAS SP) 19 November 2014

Financial Exhibits Balance Sheet (CNYm)

Dec-12

Dec-13

Dec-14F

Dec-15F

Dec-16F

Total cash and equivalents

547

1,046

1,113

792

477

Inventories

701

629

536

580

822

1,008

1,000

1,358

1,594

2,039

Accounts receivable Other current assets Total current assets Total investments

22

12

12

12

12

2,278

2,687

3,019

2,977

3,349

197

193

222

258

295

2,249

3,033

3,411

3,671

3,793

Intangible assets

325

318

313

308

303

Total other assets

40

37

69

69

69

Total non-current assets

2,811

3,581

4,016

4,306

4,460

Total assets

Tangible fixed assets

5,089

6,268

7,035

7,284

7,809

Short-term debt

999

2,082

3,598

3,748

3,898

Accounts payable

367

420

464

546

870

1,366

2,502

4,061

4,294

4,767

473

516

-

-

-

2

2

2

2

475

518

2

2

2

Total liabilities

1,841

3,020

4,064

4,296

4,769

Share capital

2,167

2,167

2,167

2,167

2,167

797

802

805

821

874

2,963

2,969

2,971

2,988

3,040

Total current liabilities Total long-term debt Other liabilities Total non-current liabilities

Retained earnings reserve Shareholders' equity Minority interests

2

284

280

-

-

-

Total equity

3,248

3,248

2,971

2,988

3,040

Total liabilities & equity

5,089

6,268

7,035

7,284

7,809

Source: Company data, OSK-DMG

Key Ratios (CNY)

Dec-12

Dec-13

Dec-14F

Dec-15F

Dec-16F

Revenue growth (%)

(19.5)

32.0

12.1

35.1

36.2

Operating profit growth (%)

(53.6)

(1.3)

14.2

26.6

33.6

Net profit growth (%)

(85.1)

71.3

(31.9)

42.5

75.4

EPS growth (%)

(85.1)

71.3

(31.9)

42.5

75.4

Bv per share growth (%)

(0.3)

0.2

0.1

0.6

1.8

Operating margin (%)

12.8

9.5

9.7

9.1

8.9

Net profit margin (%)

3.2

4.2

2.5

2.7

3.4

Return on average assets (%)

0.6

0.8

0.5

0.6

1.1

Return on average equity (%)

0.9

1.6

1.1

1.6

2.7

28.5

47.8

83.6

98.9

112.5

0.04

0.02

0.02

0.02

0.04

(0.20)

0.23

(0.06)

(0.01)

(0.11)

Net debt to equity (%) DPS Recurrent cash flow per share Source: Company data, OSK-DMG

See important disclosures at the end of this report

6

Midas (MIDAS SP) 19 November 2014

SWOT Analysis  Midas is a leading manufacturer of aluminium extrusion profiles for China’s high-speed trains

 Remains highly dependent on China’s railway sector orders for earnings growth

 Well-recognised by global train manufacturers, which has led to it receiving large orders for supply extrusion profiles for non-Chinese trains

 Rising competition from other aluminium extrusion suppliers could lead to margin erosion

 New aluminium plates and sheets business would enable Midas to dilute its high dependence on the Chinese railway sector

 Diversification into the aluminium plates and sheets business exposes the company to a market segment that is intensely competitive

P/E (x) vs EPS growth

P/BV (x) vs ROAE

1

4%

30

-14%

20

-43%

1

2%

10

-71%

1

1%

0

-100%

1

0%

P/E (x) (lhs)

EPS growth (rhs)

Source: Company data, OSK-DMG

P/B (x) (lhs)

Jan-16

5%

14%

Jan-15

1

40

Jan-14

6%

Jan-13

1

43%

Jan-12

71%

50

Jan-16

60

Jan-15

7%

Jan-14

1

Jan-13

100%

Jan-12

70

Return on average equity (rhs)

Source: Company data, OSK-DMG

Company Profile Midas manufactures aluminium alloy extrusion products for the passenger rail transport, power and other industries. The company also designs, manufactures and installs polyethylene pipes.

See important disclosures at the end of this report

7

Midas (MIDAS SP) 19 November 2014

Recommendation Chart 0.75

0.75

0.75

0.75

0.50

0.29

0.37

0.40 0.36

0.65

0.98

1.20

1.28

na

1.36

0.73

Price Close 1.19 Recommendations & Target Price 1.09 0.99 0.89 0.79 0.69 0.59 0.49 0.39 0.29 Buy Neutral 0.19 Nov-09 Feb-11

Sell

Trading Buy

Jun-12

Take Prof it

Not Rated

Sep-13

Source: OSK-DMG, Bloomberg Date

Recommendation

2013-11-20

Buy

Target Price Price 0.75

0.50

2013-08-16

Buy

0.75

0.53

2013-05-15

Buy

0.75

0.48

2013-03-22

Buy

0.75

0.52

2013-02-28

Buy

0.75

0.52

2013-01-23

Buy

0.75

0.53

2013-01-09

Buy

0.75

0.49

2012-11-16

Buy

0.50

0.37

2012-09-18

Buy

0.50

0.41

2012-05-15

Neutral

0.29

0.31

Source : OSK-DMG, Bloomberg

See important disclosures at the end of this report

8

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