• Higher revenue but lower GPM
• No change in near-term outlook
• Maintain HOLD
Higher revenue helped offset start-up costs
Midas Holdings Limited’s (Midas) 3Q15 results came in above our expectations as revenue grew 27.2% YoY to RMB412.2m, driven by higher revenue from its Aluminium Alloy Extruded Products (AEP) segment, which grew 28.1% to RMB408.3m. However, as Midas’ new Luoyang plant has just commenced commercial production on lower margin AEP products, 3Q15 gross margin declined 1.1ppt YoY to 25.9%. While 3Q15 selling and distribution expenses decreased 1.4% YoY to RMB16.5m, administrative expenses grew 17.6% to RMB42.9m on higher staff costs, in-line with revenue growth. Part of the increase in administrative expenses was also contributed by the start-up costs of its new light alloy business, which is still in trial production phase (i.e. no revenue contribution). Consequently, while income tax jumped 757.8% YoY to RMB5.8m, 3Q15 PATMI recorded an 845.3% YoY growth to RMB13.9m, which formed 30.3% of our FY15 forecasts.
Muted near-term growth outlook
Over the near-term, we believe Midas’ growth outlook remains uncertain and more likely muted:
1) while commercial production for its new light alloy plant (JMLA) is expected to start in 1H16, we think it takes time to ramp up earnings for this relatively low margin business,
2) its new Luoyang plant is currently still taking in orders for the production of lower margin components as it takes time to build up its track record before customers are comfortable to engage the Luoyang plant in the production of higher margin products,
3) while investments in China’s railway industry is expected to further increase for the remaining of this year to meet the original budget, we think orders for equipment and trains manufacturers will only flow in closer to end FY16 or even FY17. That said, we still think Midas will be able to further grow its overseas export orders, having seen an increasing proportion of export business to total revenue (3Q15: ~17%).
Incorporating 3Q15 results, we raise our FY15F PATMI by 6.7% but pare our FY16F PATMI by 12.5% on weaker margins outlook. Rolling forward to 0.6x FY16F P/B (-1SD 5-year mean), our FV increases from S$0.31 to S$0.33. Maintain HOLD. (Read Report)