Midas Holdings still has a positive order win outlook: Maybank

Optimism prevails as tenders could soon resume.

Maybank Kim Eng said it takes comfort in the fact that the Chinese Minister of Railways, Sheng Guangzu, has indicated that the tender for high-speed trains that has been on hold for the past two years could resume should there be a demand spike.

Here's the full analysis from Maybank Kim Eng:

Expect more clear visibility after the NPC. China’s 12th National People's Congress (“NPC”) has kicked off in Beijing last week and will last for about two weeks. New policies, budget approval and legislation will be discussed during the NPC session and the new policies will be gradually announced to public after NPC closes. We expect more clear visibility in the development of high-speed railways after the NPC.

Restructuring of Ministry of Railways? It seems that the Ministry of Railways may soon be restructured as part of a wider exercise by the Chinese government to streamline its ministries. According to Chinese local media, the plan will be discussed during the NPC this time around to break up the Ministry of Railways. Its regulatory functions will be absorbed by the Ministry of Transport, while the operation of its rail business will be transferred to a separate SOE. This SOE will take charge of the passenger lines, including the high-speed rail, as well as the signal system, the facilities and ticketing arrangements.

Expect a more efficient decision making and execution. We hope that the restructuring will herald a new round of reform aimed at unraveling the tangled relationship between business and government, to further transform the rail sector to be more market-oriented. As we all know, the tender for high-speed train has been paused for almost two years and the train supply cannot meet the demand especially after several new lines commenced operation last year. We think the potential reforms will herald a more efficient decision-making process and accelerate the order flow.

Remain positive on order win outlook, maintain BUY. We are still positive on the order win outlook for Midas. Although in a recent media interview during the NPC, the Minister of Railways, Sheng Guangzu denied the previous market rumor that the high-speed train tender will resume in April, he did indicate that the tender could be resumed if demand increases in the future. We maintain our BUY rating and raise our target price to SGD0.75, pegged to 1.5x FY13 P/B. The key risk mainly lies in order wins taking place later than we expected.

Still positive on China rail sector. Although there is still no schedule for the high-speed train tender and the current minister of railways Sheng Guangzu also denied in a media interview that the tender will resume in April, we are still positive on the China rail sector. Based on the new high-speed rail construction process in China, the total high-speed rail line is expected to reach 7500km by the end of 2014 from 4200km now. Usually the tender for trains will be at least one year ahead of the completion of rail line. Minister Sheng did not rule out the possibility in the interview that the tender could resume this year if ridership continues to rise. The potential restructuring of China Ministry of Railways could also introduce a big difference. Thus we would not be surprised if the tender takes place in 2013.

We have partly factored in the potential order wins. Our revenue forecast has partly factored in the potential order wins on top of existing order book of around RMB500m. On our estimates, every new high-speed train set for Midas’s upstream customers, namely CSR and CNR, might translate to RMB7m order for Midas. Market estimates that the Ministry of Railways would order 300 new train sets in 2013, which is largely in line with our expectation, although the timing is still unclear.

NPRC will turn around this year. NPRC, the JV with NCR to manufacture metro trains, booked a loss of RMB5.7m in FY12 due to the delay of order delivery. We expect NPRC to turn around in FY13 supported by the urbanization and the subway construction boom in China. NPRC announced several substantial order wins YTD, which boosted its order book to above RMB10b, a record high and it will perhaps surprise the market in the upside in FY13.

1x PB provides a floor for share price. Midas share price has dropped by 7% in March and is now trading below book. We recommend the investors to be patient for the new order wins as the current 1x PB provides a floor for the share price. We do not think Midas can be re-rated to its historical trading PB of 2.2x in the short term but 1.5x PB is still achievable. Our target PB of 1.5x is also in line with CNR’s current PB. Midas looks not cheap from a PER perspective. However if our assumption on the order wins materialises this year, FY14 PER will be significantly reduced.