Midas sees short-term profit squeeze as two train-making giants merge

But larger volumes may be in the horizon.

Mainboard-listed Midas will see a short-term profit squeeze following the merger of China’s two biggest train-makers, CSR and CNR.

The merger will produce a new entity called CRRC, reflecting the country’s ambition of producing mega state-backed conglomerates with the clout to grab international market share.

According to Maybank Kim Eng, CRRc will have greater pricing power over its suppliers, which will spell a margin squeeze for Midas.

“Longer term, suppliers may be compensated by bigger volume, especially if CRRC wins orders in the international market. Although they were the top two train makers in the world, CNR and CSR only had a combined global market share of 2-3% currently. We lower FY15E/16E EPS by 40/29% for lower margin assumptions and slower-than-expected earnings recognition. Our TP drops from SGD0.75 to SGD0.52, now at a more conservative 1x FY15E P/BV, from 1.5x. Nevertheless, catalysts are still expected from more contract wins,” stated the report.

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