MIDAS: Will its train recover speed fast next year?

Venue: Raffles City Convention Centre

Time & date: 2.30 pm, April 30

In Wenzhou in July 2011: Two high-speed trains collided due to a faulty signalling system, killing 40 passengers and injuring about 200.

THE FALLEN stock price of Midas Holdings was a key grouse of shareholders at its recent AGM which attracted a crowd of a few hundred shareholders.

Midas -- which manufactures aluminum alloy extrusion products used for making train bodies -- has a large shareholder base of 16,900 shareholders, of whom individual investors make up a relatively high proportion.

CEO Patrick Chew, 49, and executive chairman Chen Weiping, 51, are the top 2 shareholders with 10.8 and 10% stakes, respectively. 

(This stock is discussed in the NextInsight forum thread here.)

Patrick Chew explained what had happened in the high-speed railway industry in China, and asked shareholders to patiently wait for the Chinese government to re-start its rail expansion programme.

My key takeaways:

1. Sunk share price: The stock has fallen from around 95 cents at the start of 2011 to just 37 cents recently.

Patrick Chew said: “Our share price has been affected by the turmoil in the Chinese high-speed rail industry."

Midas stock price is down about 60% from the start of 2011 for a market cap of about S$450 million. Chart: Bloomberg.

He recapped the sacking of the Minister of Railway in Feb 2011; and the serious high-speed train collisions in Wenzhou in July.

Subsequently, nationwide checks were carried out on rail safety, leading to a drought in tenders launched for train projects and a suspension in construction of projects that had already started.

“Up to 1H2011, we were doing relatively well,” said Mr Chew. In 1H, net profit went up 20% to RMB123.4 million.

But in 2H, Midas added just another RMB64 million to its net profit.

Mr Chew said Midas would have suffered even more if it had depended solely on high-speed train projects – instead it also had metro train business and exports.

“Before the global financial crisis, yes, our share price hit as high as $2.30. Other companies also did well. One company hit $8 but now it’s $1.

“But at least now we can see some light at the end of the tunnel. Chinese media reports said the Ministry of Railway will be coming out with new tenders.”

2. Excess production overcapacity: In 2009, 2010 and 2011, Midas added a lot of capacity after taking into account the government’s massive rail programme.

Patrick Chew: “Who could have expected the things that happened last year?”

Midas’ expansion led to a spike up in costs in administration, labour, operating, etc.

3. Weaker financials: A shareholder pointed out that borrowings have gone up 2.5X in FY2011, the cash holding was down 50%, and the free cash flow has turned negative. What’s Midas’ orderbook and what’s its strategy now?

Patrick Chew, CEO, Midas: “We hope this is a transition year and hopefully by next year we will see a recovery."

Patrick Chew said the orderbook was RMB800 m as at end-2011 and would last 1.5 years at least.

While waiting for the PRC high-speed rail orders to return, Midas is pursuing metro projects which are growing as well as export orders from Bombardier, Alstom and Siemens. “I’m optimistic that orders will flow through.”

Regarding the higher borrowings, Patrick explained that Midas’ receivables were piling up as the Chinese Ministry of Railway faced credit issues. “We were not paid as regularly as before, so we had to borrow more in 3Q and 4Q.”

But the turning point was at end-2011, when the MOR issued bonds to raise funds and the Ministry of Finance injected funds into the MOR, totaling RMB200 billion.

Patrick: “It was only last year that we were in a net debt position. Previous years we were net cash. If we were not so prudent, our balance sheet would not have the ability to go for short-term funding.”

4. Inventory more than doubled: Why from RMB190 million to RMB478 million, when Midas has a RMB800 million orderbook?

The CFO, Tan Kai Teck, explained that deliveries to customers slowed down as projects were suspended and customers had not received regular payments from the Ministry of Railway.

In the meantime, Midas had kept its production going.

Midas’ key customers are state-owned enterprises which used to observe credit terms of 90-120 days, but these have gone up to over 200 days.

Prospects are looking better, though. As at end-2011, not only has the Ministry sold bonds but Midas’ customers have done some equity financing through placement of new shares and through rights issues.

5. Why new JV? A shareholder questioned the wisdom of Midas increasing production capacity through a JV (Jilin Midas Light Alloy) where Midas has to inject another US$25 million, leading to more financing costs, etc.

Patrick Chew: Midas would produce products to diversify its reliance from the railway sector, a move that is necessary since China's current 5-year plan ends 2015 and its commitment to rail expansion in the next 5-year plan is yet to be unveiled.

The JV will produce high precision, high specifications aluminum alloy plates, sheets, strips and foils from 2015, targeting at the aviation, shipbuilding, auto and rail industries.

The JV capex can be capitalised and won't hit the profit & loss statement, said Patrick.

6. Brighter outlook: CEO: “We hope this is a transition year, and hopefully by next year we will see a recovery. Wen Jiabao (China premier) has said that China’s funding and development for rail will go according to plan.”