Midas yesterday announced winning two high speed rail (HSR) projects was a good news. She had respectively won RMB185.4m and RMB143.5m with CNR Changshun and CNR Tangshan, both are long existing customers of Midas. In total the contract value was RMB328.9m. This will be added as part of the revenue for Q2 2015, which puts it on par with all the other past quarters. Unless Midas wins more contracts, the operating profit would not be able to turn around the meagre net profit given this level of revenue. The reason being that administrative and financial costs have been stubbornly high.
Apparently both of these cost components do not seem to able to go away easily. Midas has been quite debt-laden recently, and even in Q1 2015, it is still a net-borrower, borrowing RMB590m while returning RMB274.85m. This would mean that the future finance cost is going to get worse compare to the present situation. Furthermore, the administrative cost seemed to be increasing tremendously eversince the operation in the 2nd plant on Luoyang in Henan Province. The management has to take drastic steps to reduce this component. If both cost coponents fail reduce significantly, the only dependent component is its associate company, Nanjing SR Puzhen Rail Trasport (NPRT). This would be the only dark horse for Midas to depend on for Midas to improve its net profit. For the past few quarters, the interest cover has been 0.31, 0.89, 0.00041 and 0.27.
(Brennen Pak has been a stock investor for more than 25 years. He is the Principal Trainer of BP Wealth Learning Centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”) – The ebook version may be purchased via www.investingnote.com.