Excerpts from analyst's report
OCBC Investment Research analyst: Eugene Chua (left)
Key customers merged to boost global competitiveness
Midas Holdings Ltd (Midas) generates a large portion of its revenue from China’s railway sector, where its major customers had been China’s two largest licensed train manufacturers – CSR Corp (CSR) and CNR Corp (CNR).
On 30 Dec 14, the merger of CSR and CNR to form a single entity – CRRC -- was announced, through a share-swap where each CNR share will be exchanged for 1.1 CSR share.
At first glance, the merger looks positive for Midas, but we think it is still too early to determine how CRRC may allocate contracts to their existing suppliers.
The key rationale is to increase their competitiveness in the global railway market while eliminating bidding competition between them.
Between CSR and CNR, the latter has always been Midas’ main customer. While the merger may bring in more international contracts for CRRC, we expect the impact on Midas to be more mixed than positive:
FV unchanged; maintain HOLD
As we continue to expect muted earnings in the upcoming few quarters, we retain our current assumptions. Hence, based on 0.6x target blended FY15F P/B, our FV estimate remains unchanged at S$0.30 for now. Maintain HOLD.