How Midas Holdings will milk benefits from China Railway Corp

High-speed train tenders expected in 2H.

According to Maybank Kim Eng, the newly formed China Railway Corporation (spun off from former Ministry of Railways) made its capital market debut with the sale of Rmb20bn bonds last Thursday.

The proceeds from the bond sales will go towards rail construction, the purchase of rolling stocks and working capital. In Maybank's view, it is a necessary move to get China’s ambitious railway plans back in gear and could potentially result in more intensive investments in the second half of this year. Maybank continues to like Midas as a major beneficiary of the investments in China railway sector.

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Easing concerns on funding source. China Railway Corp inherited all the liabilities of the former Ministry of Railways and the heavy debt burden affects its cash generation ability.

Thus, the funding source is crucial to the development of China railway system. People had some concern that the high gearing and the restructuring of the China Ministry of Railways could cause some slowdown in this sector. Now it seems that the funding has returned to normal.

Expecting more aggressive investments in 2H13. The RMB20b bonds are just the first batch of the RMB150b bonds that China Railway is expected to issue this year.

Total investment in the China rail sector YTD also lags behind the full year investment target of RMB650b due to the restructuring of the Ministry of Railways. That implies more aggressive fund raisings and investments in 2H13. We are looking at RMB500-600m order wins in metro sector in 2H13.

But the key point to watch remains the potential resumption of high speed train tenders in 2H13, which can significantly boost Midas’ profitability if theymaterialize. We are still positive on the likelihood of the tender in 2H13.