Event

􀂃 We spoke to management regarding the unexpected development in

China over the weekend – the dismissal and investigation of the

country’s Minister of Railways Liu Zhijun for “serious disciplinary

violations”, possibly linked to corruption. We expect this may have a

negative impact on the Chinese rail industry in the near term.

Our View

􀂃 Mr Liu will be replaced by Mr Sheng Guangzu, formerly Minister of

General Administration of Customs. We believe the replacement

heralds policy risks, as Mr Liu has been a strong proponent of massive

investments in China’s railway network, in particular high‐ speed rail,

since his appointment in 2003.

􀂃 We doubt Midas will be implicated in any corruption wrongdoing.

Neither have any of its contracts being rescinded since the company

does not deal direct with the Chinese Ministry of Railways (MOR). The

latter gives out contracts to upstream train manufacturers, who, in

turn, hand them out to component suppliers like Midas.

􀂃 Nonetheless, it would be reasonable to assume that the new minister

would need some time to assess MOR’s current situation and

direction. This might result in contract flow‐ down drying up for at

least 3‐ 6 months. However, management is confident that this does

not alter the long‐ term positive outlook for the sector, since an

important national policy like railways is unlikely to have been

determined by one man in the first place.

Action & Recommendation

We see risks to our FY12F earnings if contract wins should hit an impasse,

given that only about 40% is backed by existing orderbook recognition

(85% for FY11F). Without any positive catalyst, we downgrade the stock

to HOLD and cut our target price from $1.15 to $0.78, pegged at 15x

FY11F PER. Even in our worse‐ case scenario, Midas is worth at least

$0.70, taking into account its assets (45% is net cash) and orderbook. 

2011-02-17）