MIDAS HOLDINGS – BUYING INTO ’S FAST-GROWING RAILWAY SECTOR

Price: S$1.01 (Target price S$1.20) October 11, 2010 [email protected]

Country CHINA FY Mo. S$ mn 2008A 2009A 2010E 2011E Region Asia Revenues 138 150 194 275 Ticker (Reuters/ Bloomberg) MIDA SP EBITDA 46.2 54.4 57.5 83.5 Sector Cyclical EPS 0.03 0.04 0.05 0.07 Industry Transport CFPS 0.04 0.05 0.06 0.08 Mkt. Cap Large FV/EBITDA 90.4x 85.5x 58.9x 50.2x Investment Style Growth P/E 27.9x 24.3x 22.0x 14.7x Up/ Downside (to target price) 19% Price Performance 2007 2008 2009 YTD Report Type Initiation Absolute 16.9% -68.1% 89.7% 9.8% Recommendation BUY Relative 0.3% -18.7% 26.2% 3.3%

52-week Range 0.79-1.16 2 Year Price Chart Dividend/Yield 0.7 % Market Cap (US$ mn) 732 Avg Daily Volume (‘000) 6,000 Est. 5-year EPS Growth 18 % Chen & Patrick/ Controlling Shareholder/% 26% L-T Debt/Capital 5 % ROE (2010 E) 12 % Current Book Value/ Share 0.35

Price/Book 2.9 x Source: Company, Riedel Research Group Inc. Relative price performance shown relative to STI RMB/S$ = 5.0 CFPS = Net profit+depreciation per share

• We recently visited Midas’ aluminium alloy extrusion plant in Jilin and the -train manufacturing plant in Nanjing belonging to its 32.5%-owned joint venture Nanjing SR Puzhen Rail Transport Co’s (NPRT). We came away with very positive view about the group’s growth prospects.

• We are also very positive of China’s railway sector in particular the high-speed rail (HSR) and metro rail segment, which the China authorities are giving priority in their development program, given that China is anxious to relieve the bottlenecks in road transport and to move towards cutting carbon emissions. The 12th Five-Year Plan 2011-15, due to be released early next year, should give a further boost to the sector.

• Midas is expanding its plant capacity for production of aluminium extrusion profiles, which are mainly supplied to manufacturers of high-speed and metro train cars. To keep ahead of its competitors, it is moving downstream to fabrication of train car frames. When the expansion is completed in

MIDAS HOLDINGS – BUYING INTO CHINA’S FAST-GROWING RAILWAY SECTOR

Page 1 of 12 www.riedelresearch.com

1Q2011, Midas’ earnings will grow strongly by 50% in 2011 and 18% in 2012.

• The jewel in Midas is probably the 32.5% stake in NPRT, which holds one of the five licenses in China to manufacture HSR or metro cars. NPRT is licensed to produce only metro cars. The associate’s profit contribution has been rising significantly since NPRT’s inception in 2007.

• The key risks are likely to come from the increase in industry capacity and competition from new entrants into the industry.

• Midas is currently trading at slightly above its peer PE average. The rise of 11% in price over the past month probably reflected the proposal of dual listing in Hong Kong. We recommend a BUY rating for the stock based on the very positive outlook of the industry and the limited opportunities to invest directly in a train builder. Looking at Midas’ 2012 earnings, we have a price target of $1.20, 19% upside.

Industry Highlights Rail Development and Positive Implications for Midas Rail transport development has gained high priority in the Chinese government’s development strategy over the past decade. While the government aims to extend the rail networks, it is particularly focused on ramping up the development of high-speed rail (HSR) transport on a national scale, and the development of urban rail transport and inter-city HSR rail transport systems. China’s high-speed trains travel at 350km/h, which is faster than their earlier definition of 250km/h. The train cars that run on HSR railways in China typically are made of material comprising aluminium alloy. Production of aluminium alloy extrusion products for the body frames of HSR and metro train cars is the currently the main business of Midas Holdings.

Size of National Rail Network By 2009, China already had 86,000 km of operating railway mileage, making it second longest railway network after the United States, which has 260,000 km. The network should reach 90,000 km of operating railway mileage by the end of this year. China is planning to extend its rail network to reach 120,000 km by 2020.

China is upgrading some existing conventional rail lines to accommodate HSR trains and constructing new lines dedicated specially to run HSR trains. According to the Ministry of Railways’ long-term plan, it is building a HSR network consisting of four east-west lines and four north-south lines. The north-south lines include the 1,318 km long Beijing-Shanghai line, which will be ready in 2011. China has planned to expand the HSR network from the current 7,000 km to 13,000 km by 2012 and at least 25,000 km by 2020.

Huge Potential for Growth in Metro Lines Even more phenomenal is the recent growth of China’s urban rail transit system. China has issued directives to give priority to the development of urban rail transit in order to improve efficiency of transport resources and relieve urban road traffic jam. From 10 cities with 31 metro lines and operating mileage of over 800 km in 2008, the number has increased to 15 with 55 metro lines and operating mileage of 1,500 km by the end of this year. Currently, the cities which

MIDAS HOLDINGS – BUYING INTO CHINA’S FAST-GROWING RAILWAY SECTOR

Page 2 of 12 www.riedelresearch.com

already have metro lines are Beijing, Shanghai, Tianjin, Guangzhou, Shenzhen, Wuhan, Nanjing, Chongqing, Changchun, Harbin, Shenyang, , Xian, Chengdu and . Another 8 cities are preparing to build their metro lines: Ningbo, Wuxi, Changsha, Zhengzhou, Dalian, Nanchang, Qingdao, and Fuzhou. They will have an aggregate of 1,000-1,500 km of metro lines.

Cities that qualify for metro construction in China must satisfy the criteria of having population of over 3m, GDP exceeding Rmb100 bn and annual fiscal revenue exceeding Rmb10 bn. By the end of 2008, already 50-60 cities met the criteria. According to the 17-City Urban Rail Transit Scheme, the Chinese government had approved the rail transport plans in 17 cities, which are planning to construct 65 metro lines by 2015 with the total lengths of 1,856 km and the total investments exceeding Rmb675 bn (US$96.5 bn). These investments will raise total urban rail transit lines to 3,400 km.

Inter-City HSR Lines Another focus of the authorities is the building of inter-city HSR system to provide an alternative to the domestic flight network. A number of new HSR railways are being built and will be finished in the coming few years, of which notable examples are the completed Beijing-Tianjin line (117 km, completed in 2008) and the recently completed Shanghai-Nanjing line (301 km completed in July 2010). Some 4,000 km of inter-city HSR lines are in various stages of planning and construction.

Big Budget for Rail Infrastructure For the 11th Five-Year Plan in 2006-2010, China invested heavily in railway networks, spending about Rmb1.25 bn. In the next decade, China had initially planned to increase the network from 90,000 km to 110,000 km by 2020. But, as a result of the 2008 global financial crisis, it brought its 2020 deadline forward by eight years to 2012 as part of its economic stimulus package. By 2020, the railway network is expected to increase further to 120,000 km and China plans to build high- speed railways covering 80% of the current domestic flight network and 70% of the country’s key cities according to the Ministry of Railways.

With China’s focus on the environment and choice of transportation modes with lower emission, we expect the forthcoming 12th Five-Year Plan in 2011-2015 to benefit the railway sector and particularly the HSR segment. The outline for the 12th Five-Year Plan in 2011-2015, which should be finalized earlier next year, already indicates the investment in urban rail transport alone will exceed Rmb700 bn during the plan.

Duopoly of Infrastructure Builders The two listed Chinese companies, Group (390 HK) and China Railway Construction Group (1186 HK), form a duopoly in the railway infrastructure market with a combined 85% share of the market in China. The third player is China Communications Construction (1800 HK).

Train Car Manufacturers are Direct Beneficiaries Train car or rolling stock manufacturers are direct beneficiaries of the rapid expansion in rail network. In particular, the increased HSR and metro line network entails an increase in demand for train cars. China’s Ministry of Railways has projected 8,880 train cars to run on 13,000 km of HSR by 2012. It has so far awarded contracts for more than 5,700 train cars and has committed to build more than 10,000 train cars in 2009-10 to cater to the needs of a larger rail network. The value of each locally-made train car is about Rmb5-7 mn compared with Rmb12 mn for imported ones. More contracts are expected to be awarded. The potential is tremendous for train car manufacturers and their parts supplies. Assuming that HSR density (train cars per km) remains unchanged at 0.7 (which is very low by international standard as developed countries have average of 1.8), come 2020 when 25,000 km of HSR network is completed, there should be a need for 17,000 train cars. With further economic development, China is expected to increase the HSR density density.

The two leading rolling stock manufacturers in China are China South Locomotive and Rolling

MIDAS HOLDINGS – BUYING INTO CHINA’S FAST-GROWING RAILWAY SECTOR

Page 3 of 12 www.riedelresearch.com

Stock (abbreviated CSR; 1766 HK) and China CNR Corporation (listed in China). CSR supplies 70% of China's HSR trains in operation. Through subsidiaries and joint venture companies, CSR and CNR control the five companies that are licensed to produce metro cars and high-speed train cars. CNR is licensed to produce both types of vehicles in Changchun and only HSR cars in Tangshan. CSR is licensed to produce both types of vehicles in Sifang and only metro cars in Zhuzhou and in Nanjing via its 62.5%-owned subsidiary CSR Nanjing Puzhen Rolling Stock (NPRT).

Midas Holdings holds a 32.5% stake in NPRT, which is licensed to produce only metro cars.

Component Manufacturers are Indirect Beneficiaries There are eight suppliers of large-section aluminium extrusion products to the railway industry in China, where the market size is over Rmb500 mn. Shandong Nanshan Aluminium (600219 CH) and Longkou Conglin Aluminum Co Ltd, a subsidiary of Shandong Congling Group, are the main suppliers of aluminium extrusion parts. Midas Holdings is also a supplier of aluminium extrusion parts for metro cars and plans to fabricate metro cars. China Zhongwang (1333 HK) has also started venturing into production of aluminium extrusion parts.

However, the industry could be facing more competition with increased capacity. Shandong Nanshan Aluminium currently has 14 extrusion presses and is reported to be doubling its capacity with an order of 14 from SMS Meer. Longkou Conglin has 18 presses with a capacity to produce 100,000 tons of aluminium extrusion profiles. Midas will raise its production capacity to 50,000 tons by the end of this year.

High Entry Barriers and Competition The barriers to entry are high for rolling stock manufacturers and their component suppliers. The production of rolling stock is licensed by the Chinese authority. While the production of aluminium extrusion products does not require any certification or licensing, the specifications for the products are very high and it is tough getting onto the supply panel.

However, we do not discount the possibility that other established aluminium extrusion manufacturers such as privately-owned Jilin Liyuan Aluminium may enter the rail sector as there are reports from manufacturers of machine presses that some of these aluminium extrusion manufacturers have ordered presses that can produce profiles for railways.

Breaking into the Global Market CSR and CNR, owing to their dominant position in the large domestic market, rank among the world’s top five largest rolling stock manufacturers. The world’s biggest rolling stock manufacturers are Bombardier (Canada), Alstrom (France) and Siemens (Germany). CSR is now exploring to export to the markets of developed and developing countries. China has started exporting HSR cars to Singapore, Australia, Hong Kong, and India. It is also negotiating deals on building railways and subways with Vietnam and Argentina. An increase in export of HSRs will benefit both train car manufacturers like NPRT and aluminium extrusion manufacturers like Midas.

Attractiveness of Investment in Sector The rail sector has attracted new investors to participate in the sector. In April this year, Bank of China invested Rmb6 bn to buy a 4.5% stake in Beijing Shanghai High Speed Railway Co, which is the operator of the 1,318 km Beijing-Shanghai express rail link. In May 2010, it announced plans to invest US$1.1 billion in a railway project linking Shanxi and Shandong provinces.

Aluminium Corporation of China has recently announced a joint venture with Swedish-based Sapa Group, which is one of the world’s biggest aluminium extrusion companies, start an extrusion plant in southern China by mid-end 2011.

Industry Risks There has been no major accident involving HSR cars, but any occurrence would raise issues

MIDAS HOLDINGS – BUYING INTO CHINA’S FAST-GROWING RAILWAY SECTOR

Page 4 of 12 www.riedelresearch.com

about safety and product defects and may impact the reputation and future production of such train cars in China and their acceptability overseas.

Train car manufacturers and component manufacturers are both exposed to the risk of rising raw material prices especially aluminium prices, even though they could hedge risks by entering fixed- price and cost-plus contracts with customers.

There is the issue of intellectual property rights over HSR technology and designs. While there are only murmurings on this issue currently and China’s stand on the issue appears watertight, we do not discount the remote possibility that the issue will gain momentum when China exports more aggressively to overseas markets and compete directly with its previous business joint venture partners.

Company Highlights Overview and business description Midas Holdings was incorporated in November 2000 and listed in February 2004 in Singapore Stock Exchange. It operates two divisions: aluminium alloy division and PE pipe division. The aluminium alloy plant is strategically located in Liaoyuan City, Jilin Province, China to take advantage of the ample opportunities for development in infrastructur e and rail transport sectors in the country. The PE pipe plant is located in Shanxi Province.

Alluminium Alloy Division – The Main Growth Engine This aluminium alloy division accounted for 95.4% of total revenue in 2009. Midas is raising capacity in this division, which it sees as the main growth engine. The division currently has four presses and will have its fifth press by the end of this year. It produces large-section aluminium alloy extrusion products that are used widely in the transportation industry such as in high-speed trains, MRT trains, LRT trains, cars, ships and aircraft. The first two presses have a force of 75 Mega Newton (MN) and 55 MN and their combined output is up to 20,000 tons. The large section aluminium alloy extrusion products produced can be up to 28 metres long and 0.7 metres wide for profiles and 0.48 metres in diameter for large diameter tubes and rods.

The third 36 MN press was only commissioned in 1Q2010 and commenced commercial production in 2Q2010. The fourth press of 110 MN press is in trial production. The fifth press 95 MN is expected to be installed and commissioned by 4Q2010. When all the presses are in full operation, they will have a combined capacity of up to 50,000 ton capacity by 1Q2011. The extrusion capacity is the equivalent of 4,000-4,500 train cars.

We visited the plant in Liaoyuan City and observed that it was a hive of activity even though effectively only two lines were in operation. Apparently, Midas has an order book size of Rmb1.4 bn. The plant employs 1,050 workers and will raise staff strength to 1,300.

MIDAS HOLDINGS – BUYING INTO CHINA’S FAST-GROWING RAILWAY SECTOR

Page 5 of 12 www.riedelresearch.com

Moving Downstream to Fabrication of Train Car Frames Midas is venturing downstream into fabrication of train car frames. The two new fabrication lines, which are expected to complete at the end of the year, will bring the total annual capacity to 1,000 train cars. This new downstream business will enable the company to capture more value added to its business thereby improve margins, expand product offerings and be less susceptible to changes in raw material prices. This move also enables Midas to stay ahead of its competitors.

PE Pipes Division is a Secondary Activity The PE pipes division is no longer the primary business it was when Midas was initially publicly listed. The contribution to revenue was only 4.6% in 2009. The division manufactures PE pipes for use in various piping networks, including gas piping networks and water distribution networks. PE pipes are made of high density polyethylene and are a viable substitute for concrete and metal pipes. They are easier and safer to install, more durable and flexible and are non-toxic.

Associate NPRT is a Valuable Asset for Midas Nanjing SR Puzhen Rail Transport Co Ltd (NPRT) commenced commercial production in 2007. The shareholders are CSR (62.5%), Midas (32.5%) and a Nanjing district government (5%) and Midas is represented on the board of directors of NPRT. Currently, it has a capacity to assemble 300 metro cars using aluminium alloy and 100 using stainless steel. The stainless steel car line is dedicated only to production of steel cars. The capacity will be increased to 400 aluminium metro cars and 200 steel metro cars by the end of this year.

At the plant, we saw several steel cars built for Bombay (India) waiting to be delivered. We also saw the trains which NPRT assembles for Hong Kong’s MTR. Output could be further increased if the company adds more shift to its current schedule of one shift. NPRT achieved revenue of Rmb3.9 bn in 2009, just after two years of being in business. It contributed S$3.3 mn (Rmb16 mn) in associate profits to Midas in 2009. It now has an order book Rmb6-7 bn with deliveries stretching to 2013.

MIDAS HOLDINGS – BUYING INTO CHINA’S FAST-GROWING RAILWAY SECTOR

Page 6 of 12 www.riedelresearch.com

Figure 1: List of Midas Holdings’ and NPRT Projects No. of Value of Contract Train Contract Date Cars (Rmb mn) Customer Name of Project Delivery Date Extrusion 2009 Jun 800 306.0 Changchun Railway CRH3-380 project 2H2009-2011 Jun 800 297.0 Tangshan Railway CRH3-380 project 2H2009-2011 Jun 320 115.0 Tangshan Railway CRH3-300 project 2H2009-2011 Jun 160 57.0 Tangshan Railway CRH3-380 project 2H2009-1H2010 Jun 240 70.0 Changchun Railway CRH5 EMU project 2H2009-2010 Jul 204 27.0 Changchun Railway Saudi Arabia Metro project 2H2009-1H2011 Jul 140 27.0 Changchun Railway Iran Metro project 2H2009-2011 Jul 40 6.0 Changchun Railway Changchun Light Rail project 2H2009-2010 Jul 120 26.0 CSR Zhuzhou Elec Guangzhou Airport Line 2H2009-2010 Oct 400 152.0 Changchun Railway CRH3-380 project 2010-2011 Total 3,224 1,083.0 2010 Jan 219 38.7 Changchun Railway Downtown Line in Singapore Feb 2010-Jun 2015 Jan 96 21.9 Nanjing Puzhen Shenzhen project Feb 2010-May 2011 Jan 1,120 353.0 Bombardier Sifang Qingdao CRH1 350-380 km/h EMU HSR 2010-2014 Jun 160 59.0 CNR Changchun Railway Veh CRH5 EMU (250 km/h) 2010 Jul 192 58.0 Nanjing SR Puzhen Pearl River Delta Inter-City Train 2010-2011 Jul 288 72.0 Nanjing SR Puzhen 2010-2012 Total 2,075 602.6 Fabrication Jul 2009 48.0 Changchun Railway Changchun Light Rail project 4Q2009-2010 Jul 2009 73.8 Tangshan Railway CRH3-300 project 2h2009-1h2011 Jul 2010* 475 Bombardier Sifang Qingdao CRH1 350-380 km/h EMU HSR 2010-2014

NPRT 2009 Sep 288 1,109.0 Hangzhou Metro Co Hangzhou Metro Line 1 May 2011-Aug 2013 Nov 112 500.0 Co Shenzhen Metro Line 4 P2 2011-2012 Dec 192 1,560.0 Guangdong Railway Co Pearl River Delta Inter-City Train 2H2011-Dec 2013 Total 592 3,169.0 2010 Apr 100 474.0 Co Suzhou Metro Line 1 project 4Q2010-2012 May # 144 1,140.0 Transit Co Shanghai Metro Line 13 2012-2013 Total 244 1,614.0 * Letter of Intent expiring Dec 2011 # Contract is to consortium in which NPRT has 70% stake Source: Company, Riedel Research

Major Market Share with Strong Customer Base Midas is a major supplier of aluminium alloy extrusion profiles in China and had 66% of share of market for aluminium alloy extrusion products used in HSR and metro train cars in the country in 2009. Its customer base consists of all the major domestic train manufacturers such as CNR Changchun Railway Vehicles Co Ltd, CNR Tangshan Railway Vehicles Co Ltd, Nanjing SR Puzhen Rail Transport Co Ltd, CSR Zhuzhou Electric Locomotive Co Ltd, Bombardier Sifang (Qingdao) Transportation Ltd, and the top three global train manufacturers, Alstrom, Siemens and Bombardier.

Midas’ Business Strengths The extrusion business has high barriers to entry because of the stringent requirements on products. Midas has an early mover advantage and has accumulated a 7-year track record of supplying aluminium alloy extrusion products to more than 30 metro and high-speed train projects in China since 2003. It also obtained numerous awards and certification from its customers attesting to the quality of its products. Midas is also able to strengthen its strategic advantage by

MIDAS HOLDINGS – BUYING INTO CHINA’S FAST-GROWING RAILWAY SECTOR

Page 7 of 12 www.riedelresearch.com

signing non-disclosure agreements with its mould suppliers, thereby controlling the threat of new entrants and existing competition.

These are the milestones in Midas’ achievements: 1. Certified as an approved supplier to Changchun Bombardier Railway Vehicles Co Ltd in January 2006. 2. Entered a master agreement with Siemens whereby the latter will engage them as a long term high technology supplier of aluminium alloy extrusion products. 3. The first supplier in China to be included in Alstrom’s “Leading Partners 150” program in 2008. 4. Awarded the prestigious EN 15085-2 certification for the welding of railway vehicles and components issued by GSI SLV Duisburg, one of the largest welding engineering institutes in Europe, in December 2009. 5. Awarded the prestigious International Railway Industry Standard (RIS) certification, the first company in China to receive the certification under the category of “Manufacturing and Services of Aluminium Alloy Carbody Profile and Parts for Rail Cars”, in 2009.

Management The Executive Chairman Chen Wei Ping and CEO Patrick Chew are entrepreneurs who have approximately 25 years of experience each and have wide experience in doing business in China. (Patrick Chew’s brother is Chew Hua Seng, the CEO of SGX-listed Raffles Education Group.) The main operating subsidiary, Jilin Midas Aluminium Industries Co Ltd, which produces aluminium alloy extrusion profiles is managed by General Manager Wang Jia Xin, who joined the group in 2002. Wang, who is 55 years old, is the brains behind the technical aspects of the operations down to plant construction and installation of equipment. It is difficult to find very experienced personal in the business. We are uncertain if there is any succession plan or key man insurance for Wang, who is perceived to be quite indispensible.

Company Risks While Midas may have the advantage of having awards and certification to its track record, we believe that competition is intensifying in the aluminium alloy extrusion business because existing players are expanding capacity and new entrants are tempted to join the growing rail industry. Furthermore, should licenses be issued to new train manufacturers, there is no certainty that the latter will choose Midas as their supplier of aluminium extrusion profiles.

Financials Steady Growth in Past 5 Years Midas has an enduring sales and earnings growth record and enjoyed a decent growth compound annual growth rate (CAGR) of 19-20% in its revenue and profit figures in the past five years. Between 2005 and 2009, its revenue grew from S$70.5 mn to S$150 mn, on a CAGR of 20%. Gross profit and net profit increased by 19.1% and 19.5% respectively from S$26.2 mn to S$56.6 mn, and from S$18.3 mn to S$37.3 mn (excluding discontinued operations). Gross profit margin held at an annual rate ranging from 32% to 37%. The bulk of the earnings came from operations and in 2009 97% of gross profit was derived from aluminium extrusion business. Associate contribution from NPRT also increased sharply from S$1.3 mn in 2007 to S$3.3 mn in 2009 and S$4.1 mn in 1H2010. The high ROE of 19.9% in 2005 slid to 11.5% in 2009 as a result of heavy investment in expanding capacity and low returns from its investments in associate NPRT in initial years.

MIDAS HOLDINGS – BUYING INTO CHINA’S FAST-GROWING RAILWAY SECTOR

Page 8 of 12 www.riedelresearch.com

Figure 2: Midas’ Financial Performance 2004A-2012F

Source: Company, Riedel Research

Sound Financial Position Midas had cash balance of S$103.2 mn at the end of June 2010. This was helped by the issue of 120 mn new shares which were placed out to investors at 75.5c in July 2009. At the same time, total debt amounted S$147.7 mn. The bank loans were given to the subsidiaries and are secured by mortgage of land use rights, property, plant and equipment and some trade receivables with net book value of S$160.9 mn and guarantee by the group company and a third party. Debt/equity ratio was 0.43x. Earnings before tax of S$26 mn were more than adequate to cover interest expense of S$1.7 mn in 1H2010.

Cash Flow Sufficient For Capex While Midas’ business has fairly high capital intensity, it has sufficient cash flow to fund its capital expenditure. Mida has annual operating cash flow in excess of S$50 mn, which together with its cash balance of S$103.2 mn, is sufficient to fund its capital expenditure requirements of S$50 mn for the three extrusion lines and two fabrication lines. Our cash flow forecast has not taken into account any fund raising possibility. We do not expect major capex in 2012 in the light of the expansion in 2010. Maintenance expenditure will however increase but will not be as significant as capex.

Figure 3: Midas – Cash Flow

S$ mn 2008A 2009A 2010F 2011F 2012F EBITDA 46.2 54.4 57.5 83.5 98.0 Changes in working capital (52.7) (6.4) (17.3) (31.9) (17.7) Taxes (6.1) (9.1) (9.7) (14.6) (18.4) Other operating items (0.3) (0.4) (2.0) (2.0) (2.0) Operating cash flow (12.9) 38.5 28.4 35.0 59.8 Capex (108.2) (105.1) (71.0) (62.5) (44.0) Free cash flow (121.1) (66.6) (42.6) (27.5) 15.8 Others 153.5 135.4 70.8 49.6 38.6 Net change in cash position 32.4 68.8 28.3 22.1 54.4 Source: Company, Riedel Research Group Inc.

MIDAS HOLDINGS – BUYING INTO CHINA’S FAST-GROWING RAILWAY SECTOR

Page 9 of 12 www.riedelresearch.com

Dual Listing To Raise Funds Midas has announced that it is seeking to list its shares in the Hong Kong Stock Exchange. While the main objective of the dual listing is to provide better valuation for the company’s shares vis-à- vis its Hong Kong peers, the listing being in the form of new share issue in Hong Kong will raise fresh funds for the company. It has just proposed to issue 220 mn offer shares and 33 mn over- allotment shares. The pricing has not been determined and announced yet but based on the closing price of S$1.00, it will raise S$253 mn or HK$1.4 bn. The funds raised will be sufficient to provide financing for its expansion over the next 3 years.

Dividend Midas paid a reduced dividend 0f 0.75c in 2009 compared with 1.5c in 2008. For 1H2010, it paid out 0.75c and it is likely that it will restore the 1.5c in total this year.

Projections/Outlook Latest Results – 2Q210 Last month, Midas released its 2Q10 results. Its sales grew 25.8% because of higher sales volume and contribution from its third line. Gross profit fell 1.4% with margin lowered from 41.3% to 32.4% because of an increase in raw material costs. Midas was hit because 50% of its contracts were not back to back and therefore unprotected against raw material price fluctuation. Low utilization rate for the third line and start-up costs also affected margins. The increase of 16.5% in net profit was attributed to associate NPRT, which contributed to S$2.4 mn against S$213,000 previously.

The half-year results reflected weaker gross margins while net profit also benefitted from higher associate contribution.

Figure 4: Summary of 2Q and 6 Months 2010 Results

S$ mn 2Q 09 2Q 10 % Change YOY 6m 09 6m 10 % Change YOY Sales 37.8 47.6 25.8% 69.0 93.6 35.6% Gross Profit 15.6 15.4 -1.4% 28.8 30.4 5.6% Operating Profit 12.2 11.6 -4.9% 22.8 22.2 -2.5% Net Income (Loss) 9.5 11.1 16.5% 17.5 21.0 19.9% Gross Margin (%) 41.3% 32.4% 41.7% 32.5% Operating Margin (%) 32.3% 24.4% 33.1% 23.8% Net Margin (%) 25.2% 23.3% 25.4% 22.5% EPS (cents) 1.1 1.1 2.1 2.1 Source: Company

Earnings Outlook 2010 earnings is expected to be helped by contribution from third line but margins will remain weak because of start-up costs for the fourth line (now on trial run) and fifth line plus fabrication lines. We expect stronger contribution from NPRT in the 2H10 leading to our projected full-year contribution of S$9.5 mn. We project full-year net profit of S$44.3 mn.

The full capacity of 50,000 tons will be in operation in 1Q11 plus the fabrication lines. They are expected to be the main engine of growth for Midas. Gross margins should improve to about 35%. We project S$12 mn and S$15 mn associate profit contribution for 2011 and 2012. 2011 is likely to see a 50% rise in net profit to S$66.4 mn and 18% rise in 2012 to S$78.6 mn.

MIDAS HOLDINGS – BUYING INTO CHINA’S FAST-GROWING RAILWAY SECTOR

Page 10 of 12 www.riedelresearch.com

Figure 5: Midas -- Earnings Summary

S$ mn 2008A 2009A 2010F 2011F 2012F Revenue 138.2 150.0 194.0 275.0 320.0 Growth -1.6% 8.5% 29.3% 41.8% 16.4% Gross profit 47.2 56.6 64.0 96.3 113.6 Gross margin 34.2% 37.7% 33.0% 35.0% 35.5% Operating profit 38.3 43.9 46.5 71.0 84.0 Operating margin 27.7% 29.3% 24.0% 25.8% 26.3% Growth 6.4% 14.5% 6.0% 52.7% 18.3% Net profit * 30.6 37.3 44.3 66.4 78.6 Net margin 22.2% 24.8% 22.8% 24.2% 24.6% Growth -4.1% 21.7% 18.8% 50.0% 18.3% Source: Company, Riedel Research Group, Inc.

* Net profit for 2008 and 2009 excluded profit from discontinued operations

Valuation & Recommendation Share Performance Midas’ share price has risen 11% in the past month, perhaps in anticipation of the announcement on details of the dual listing, which was first proposed in April 2010. Since the start of this year, the share has outperformed the ST Index by 3.3% and the Hang Seng China Enterprises Index by 16%.

Peer Comparison The railway builders, train builders and component suppliers are trading at a sector average PE of 19.7x (historical) and 18.1x and 14.2 (forward 2010 and 2011). We have excluded China Zhongwang, which is a major aluminium extrusion producer and is attempting to enter the railway sector. This is because it is trading at a low historical and forward PE of 5.2x due to specific company factors and is likely to distort the sector average PE.

Midas is trading at historical PE of 24.3x and forward PE of 22x and 14.7x, which appear to be above the sector average. However, if we use CSR and Shangdong Nanshan Aluminium as the average for comparison as their businesses bear closer resemblance to Midas, these two companies have average forward PE of 22.2x and 16.9x. Midas PE is very close to this average and lower for 2011.

Figure 6: Valuation for Peers

Company name Code Market cap PE PE PE (HK$ bn or Rmb bn) 2009A 2010F 2011F CSR 1766HK 77.5 34.4 28.3 20.2 China Railway Construction 1186HK 109.9 14.9 14.3 11.9 China Railway Group 390HK 107.9 15.5 14.3 11.2 China Comm Construction 1800HK 106.7 11.3 11.1 9.6 Zhuzhou CSR Times 3898HK 24.2 24.8 24.4 18.9 Shangdong Nanshan Aluminium 600219 CH 17.4 17.0 16.2 13.5 Average 19.7 18.1 14.2 Midas MIDA SP 5.6 24.3 22.0 14.7 Source: Bloomberg

Valuation of Company As its associate company, NPRT, is a sizeable and valuable part of the group and is valued at a higher PE than the rest of the group, we have split the valuation of the group into the two businesses in the following table: aluminium extrusion and its NPRT. We use its closest

MIDAS HOLDINGS – BUYING INTO CHINA’S FAST-GROWING RAILWAY SECTOR

Page 11 of 12 www.riedelresearch.com

comparatives: CSR’s PE to value the business of NPRT and Shangdong Nanshan Alluminium’s PE to value Midas’ aluminium extrusion business. We arrive at a value of $1.00 based on 2011 earnings. We do not have CSR and Shangdong Nanshan Alluminium’s PE but using their same 2011 PE, we arrive at $1.20 valuation for Midas based on its 2012 earnings.

Midas operates in a growth industry and our BUY recommendation is based on the industry’s growth prospects and the potential of appreciation in valuation of stocks in the sector. The sector is expected to grow at about 30% in 2011 while Midas’ earnings are projected to grow at 50% and 18% in 2011 and 2012.

At the current share price, Midas is fairly valued as we believe it already reflected the price catalyst effect of the dual listing announcement. There could still be some more room for price appreciation based on industry outlook. We are looking at a price target of $1.20.

Figure 7: Valuation of Midas

EPS c 10F EPS c 11F Valuation cents/share Valuation cents/share 2010 2011 Associate company, NPRT 0.8 1.0 22.6 20.2 Aluminium extrusion business 3.8 5.9 61.6 79.7 Total of Midas 4.6 6.9 84.2 99.9 Basis of valuation – PE (x) Using CSR’s PE for NPRT 28.3 20.2 Using Shandong Nanshan Aluminium’s PE of Midas aluminiun extrusion business 16.2 13.5

Source: Riedel Research

Institution Ownership The Capital Group Companies, Inc is the institution with the largest shareholding of 8.3% (80.74 mn shares) in as at 10th February 2010.

Major Shareholders Chairman Chen Wei Ping and CEO Patrick Chew each owns 13.57% (130.9 mn shares) and 12.52% (120.7 mn shares) respectively, giving them a combined stake of only 26.09%.

Figure 8: Midas – Valuation and Ratios

2008A 2009A 2010F 2011F 2012F P/E ratio (x) 27.9 24.3 22.0 14.7 12.4 PEG ratio (x) -6.6 1.7 2.1 0.3 0.7 Price/book (x) 4.1 3.0 2.6 2.2 1.9 Price/sales (x) 6.2 6.0 5.0 3.5 3.0 ROAE (%) 14.6 11.5 12.0 15.3 15.3 ROAA (%) 23.2 10.7 9.0 10.8 10.7 ROAIC (%) 28.7 12.7 10.0 12.6 12.5 Source: Riedel Research Group, Inc.

MIDAS HOLDINGS – BUYING INTO CHINA’S FAST-GROWING RAILWAY SECTOR

Page 12 of 12 www.riedelresearch.com