Is Midas Holdings a Play on China’s Railway Sector?

China Train

 

 

 

 

 

 

 

Midas Holdings Ltd (SGX: 5EN) is one of the leading manufacturers of aluminum alloy extruded products for train manufacturers operating within the rail transportation sector in China. The Group was incorporated on 17 November 2000, got listed on SGX in 2004 and subsequently in 2010 on the HKSE as well.

 

Midas Holdings has three business segments, namely:

1. Aluminion Allow Extruded Products Division

Accounts for 95.7% of total revenue in FY2013. Produces downstream fabrication of train car body components. Some of the Group’s customers include CNR Chagchun Railway Vehicles CO, CNR Tangshan Railway Vehicles Co and the top three global manufacturers which are Alstom Transport, Siemens AG and Bombardier.

 

2. PE Pipe Division

Accounts for 4.3% of total revenue in FY2013. Manufactures for gas piping networks and water distribution networks.

 

3. Aluminum Allow Plate Plates and Sheets Division

High precision and specification aluminum alloy plates, sheets, strips and foils. commercial production expected in 2015.

 

When Aluminium Poop Hits the Fan

In 2011, China’s Railway Minister, Liu Zhijun was caught for a corruption scandal which led to a prosecution in 2013. Coincidentally, in the later part of 2011 a deadly train crash occurred near the city of Wenzhou which questioned the safety of China’s railway infrastructure. Both incidents have since led to a temporary slowdown in the mainland’s railway projects.

 

The railway sector is a key part of the Chinese government’s economic development projects. In early 2013, the central government restructured the old Ministry of Railways (MOR) into an operating company (for commercial objectives), with regulatory oversight from the Ministry of Transport (MOT). Significant changes and improvements were made since.

 

A Possible Recovery?

As revenue contribution from the rail transport industry accounted for a major proportion, overall revenue decreased in FY2012 to RMB870 million, down from RMB1.08 billion over a year earlier. The rail transport industry contributed 57.1% of total revenue in FY2012, as compared to 78% in FY2011. This was due to the railway sector slowdown after the corruption scandal and train crash occurred stated earlier. However, with the restructuring of the Ministry of Railway into two separate entities, business is expected to resume.

 

Midas Holdings is well-positioned to ride with China’s railway infrastructure development. However, the company continued to pile on debt as it expanded aggressively since its dual-listing in 2010. Net debt / EBITDA has increased significantly to 6x in FY2013, up from 1.3x in FY2010.

 

Value In Action

There seems to be potential growth for Midas Holdings given the Chinese government’s aggressive push on the country’s railway infrastructure.

 

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All views and opinions articulated in the article were expressed in Willie’s personal capacity and do not in any way represent those of his employer and other related entities. Willie does not own any shares in the companies mentioned above

 

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