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Chinese Policy Boosts The Bullish Case For Midas
Tradeable, Tradeable Ideas | 07 April 2014
Related stocks:
5EN
By: Lim Si Jie
Articles (169) Profile
  • In view of China’s mini-stimulus package on new railways and railway upgrades, there is set to be growing demand for Midas’ products.
  • Midas’ consistent and sound financials give investors a margin of safety to buy into its shares.
  • Technical indicators signal a potential uptrend in Midas’ share price.

Company Profile

Midas Holdings Limited (SGX:5EN) is a manufacturer of aluminium alloy extruded products for the passenger rail transportation sector in the People’s Republic of China (PRC). Midas has an established track record of supplying aluminium alloy extruded products to train manufacturers in the rapidly growing passenger rail transportation sector.

Midas also holds a strategic 32.5 percent equity investment in Nanjing SR Puzhen Rail Transport Co., Ltd (“NPRT”), an associate company engaged in the development, manufacturing and sale of metro trains, bogies and their related parts. NPRT is licensed to manufacture metro trains on a nationwide basis in the PRC.

Reading Into Midas’ Annual Report

In 2013’s annual report, Midas’s order book was boosted by RMB812.5 million worth of contracts from both Chinese and international customers. They also managed to secure supply contracts from the PRC market for about 10 metro projects .

In March 2014, Midas announced that it had won contracts from CNR Changchun Railway Vehicles (a subsidiary of state-owned enterprise, CNR Corporation Limited) worth RMB71.9 million. It is worth noting that this contract was won before the announcement of the stimulus package.

China’s Mini-Stimulus Package

Recently, the PRC’s State Council released plans to sell $24 billion of US bonds this year to build railways in the less-developed central and western regions. The State Council plans to build more than 6,600 kilometres of new rail lines.

It also plans to set up a $35-billion fund dedicated to rail financing. Railways have been deemed a priority to link underdeveloped regions to the booming coastal cities thereby boost growth in central and western PRC.

Midas’ rail manufacturing is poised to benefit from this stimulus on top of its metro train manufacturing.

Fundamental Analysis

Consensus estimates amongst analysts forecast that Midas will see an increase in its revenue as well as earnings in 2014 and 2015. This is further supported by Midas’ sales (five year) growth rate that performed better than the industry benchmark.

At Midas’ current share price ($0.47), its price-to-sales ratio is merely 2.43, which is far below the industry benchmark.

Midas’ margins on a five year average are above the industry benchmark. They represent Midas’ consistent profitability in the past five years. In addition, Midas’ five year ROA and ROI have been on par with the industry benchmark.

These are indicative evidence of Midas’ consistent and sound fundamentals which create a margin of safety for investors.

Midas has been consciously acquiring capital goods (property, plant and equipment) for the past five years. This is evident in its capital spending growth rate which is twice the rate of the industry benchmark.

To me, this suggests that Midas has been trying to equip itself to handle a burst in demand for its products. This foresight now seems to have been rewarded with the significant increase in rail spending by the Chinese State Council.

Looking At The Charts

The volume of Midas shares being traded more than doubled on 4 April 2014. Looking back at the historical volume, trading shot up to record volume in October 2013. After the sharp increase in volume, Midas share price climbed rapidly.

With the Average Directional Index (ADX) at 31 (D+ value more than D- value), it indicates that Midas share price is trending upwards.

Further confirmation can be gathered from the positive and rising MACD histogram.

#Bullish

In conclusion, I am rather bullish on Midas in the long run, especially with the reassuring news of greater demand for Midas products from China’s recently announced mini stimulus package.

In the short run, investors may want to be patient to wait for signals of consolidation at $0.47 before entering Midas for the breakout.

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Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

Midas Hldgs  -- -- --   
Business: Manufacturer of aluminium alloy extrusion products for China's rail transportation sector. [FY16 Turnover] Aluminium alloy (99.3%), polyethylene pipe (0.7%).

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