Reasons to buy Midas for 2013 recovery

Midas Holdings: BUY S$0.36; Bloomberg: MIDAS SP
Poised for a turnaround;
Price Target : 12-Month S$ 0.50 (Prev S$ 0.49)
By: Paul YONG CFA +65 6398 7951

• We visited Midas’ production facilities in Luoyang, Nanjing and
Jilin recently
• The Group’s production capabilities and capacity has expanded
during this lull period
• Winning more orders from wider sources should help boost the
Group’s profitability
• Maintain BUY with TP S$0.50 (1x FY13 P/B)


Enhanced capacity and capabilities. Whilst orders have been slow in coming
through to Midas, it has been enhancing both its production capacity and
capabilities, in addition to diversifying its product range. Jilin Midas
now has an aluminium extrusion production capacity of 50,000 tonnes per
annum and can fabricate a complete range of train parts, including for
export.

More contracts to flow in, and boost profitability in 2013 and 2014. We
expect Midas to comfortably win orders of c. RMB1bn from metro, export and
the non-rail segments (power and other extrusion products) over the next 12
months, while high-speed train orders will depend on how soon the Ministry
of Railway (MoR) makes its purchases. If the MoR does order 400 train sets,
as people in the industry expect, we project that Midas could win c. RMB1bn
worth of high-speed train orders for delivery over the next 2-3 years.
Meanwhile, associate Nanjing Puzhen should also see an earnings turnaround
on its strong RMB8.5bn order book.

BUY for 2013 turnaround story, TP S$0.50. Midas is currently trading at
0.7x FY13 P/B, which we see as attractive for a turnaround story. We
believe the stock should re-rate as contracts start to flow in once again
for the Group. Our TP is based on 1x FY13 P/B.

Bear Run?

STI has broken below a Double Top.

 






                          

                                                                           

How long more to go is anybody's guess. But as usual, I will be preparing a buying list.

 

 

Stock Market Outlook 2013 - Market Authority

This is the time of the year to make preparations. Of course, prior to preparations, I must have a general feel of the markets. The only way to do this is to read up on market outlooks. This one, by John Thomas of Market Authority goes like this:


The 4 likely black swans
1) The Presidential Election. Most of Wall Street is hoping for a Romney win, but bracing themselves for an Obama one. No matter who wins, I expect a post-election surge in stock prices as a great mantel of uncertainty has been lifted from the markets. And as we all know, markets hate uncertainty.

2) The Fiscal Cliff. The media is ramping up their warnings of the dire impact of the "fiscal cliff" further scaring investors out of risk positions in everything from stocks to gold. The only real tangible impact of this "wolf crying" was to give a much-welcomed lower low in risk assets in October.


3) The Next European Quantitative Easing. Another round of monetary easing is due on the form of an additional "Long Term Refinancing Operation" or LTRO. The last one was for €500 billion, or $650 billion. Make that a double.

4) The New Year Reallocation Push. Add these annual flows to the positive developments outlined above, and you have the ingredients for a serious rise in stock prices. I think we could get as high as 1,600 for the S&P 500 in the first quarter of 2013.

This will however be the last 10% of a 140% move off of the March, 2009 low. This next ramp in share prices could be setting up us for the Greatest "Sell in May and go away" of all time. While president Obama may be puffing his chest out over one of the greatest stock market performances on record, he may well go down in history for "The Great Obama Crash of 2013."

Let me list the reasons why I expect a recession in 2013:

• The retirement of the baby boomer generation will continue to act as a drag on the economy for another decade, paring growth by 1%-2% a year.
  
• While the resolution of the fiscal cliff will be hailed as a great accomplishment, the bottom line is that a $4 trillion agreement will take 25% out of our GDP. 
    
• Look for Europe to remain in recession, adding more dead weight to corporate earnings here.
• Ditto for China, where a growth recession is delivering a serious blow to any company involved in the commodities sector, including steel, coal, iron ore, and copper. However, things may pick up after March 2013, after the leadership changes.
    
• While QE3 will give us a nice 4-6 month boost to asset prices, it can't do it forever. 
    
• We will enter the next recession with the highest unemployment rate in history, now 7.8%. .
  
• The year after a presidential election is always a great year to have a recession because it gives the ruling party three years to dig out before the next one.
  
• All of the gains in the stock market since June have been achieved through multiple expansion - from 12.7X to 14x today and 16X by March, Corporate earnings have actually been flat to falling during this time. Many companies are now hunkering down and reducing spending in expectation of a 2013 recession. This is why capital spending only reached half of the peak spending seen in the previous cycle.

If I am wrong with this analysis, the markets will bounce along sideways in an environment of falling volatility. That's why I am positioning myself with in-the-money calls spreads in order to profit from every possible scenario.

 

Recession 2013

 

All of this adds up to a big "R" for 2013, and share prices will no doubt reflect this. But I'm not looking for a major collapse a la 2008-2009, which saw a 53% plunge in the (SPX). I'm thinking more like a 25% to 37% pull back from a 1,600 top to no worse than 1,000. Those predicting Armageddon-like meltdown to 600, 300, or worse will be wrong by miles.

My reasoning is very simple. To get those huge, cataclysmic sell off of 500-800 Dow points a day you need to have a massive amount of leverage in the financial system. You had that six years ago, with equity hedge funds levered by 200% and bond funds betting the ranch with 1,000% or more long positions.

Conditions couldn't be any more different today. Hedge funds are typically running modest longs of 10%-20%. If they asked for 200% leverage, their prime brokers would probably tell them to go to hell and close their accounts. Morgan Stanley (MS) and Goldman Sachs (GS) are now running more bankerly 10X leverage. Individual stock investors have gone missing in action.

Biggest Buying Opportunity

Hopefully, it will be a short recession, maybe six months in duration, or only two back-to-back down quarters. After that, one of the biggest buying opportunities of the decade will set up for all asset classes. That will be the subject of a future report.

China at the point of reversal

China shares are bottoming, and reversing. This is indicative that the worst is over for the Chinese economy. Look at the table below. These are shares of companies most likely to benefit from the lastest Chinese quantitative easing - railway construction.

	3 months ago	Now	% change
Anhui	19.1	27.4	43%
China Coms	5.75	7.6	32%
China Railway Constr	5.71	7.7	35%
China Railway Grp	2.83	3.79	34%
Zhuzhou	16.38	23.5	43%
Midas	0.27	0.44	63%

 
Chart of Midas below. Notice that it is breaking out of a double bottom formation.

Time to buy Chinese shares.

Once-in-a-generation buying opportunity

Albert Edwards, global strategist of Societe Generale, says the US is headed for recession, and that a hard landing looms for China. This could lead to a more than 60% to 70% crash in the S& 500, and a more than 80% collapse in copper prices, all within the next 18 months.

Who is Albert Edwards? He is the economist who foresaw the Asian financial crisis in the 1990s. In fact, he warned clients back in 1995,1996. The crisis became full blown by 1997. He also foresaw the tech bubble in 2000. Now, he says, another crisis is looming. What are the reasons for this?

1. US will be unable to avoid a major recession
2. US stocks are now very expensive
3. Spillover effects to the rest of the world
4. Asian and Europe equities will get cheaper
5. Most people are way too complacent that policies will work in China

Conclusion
The world might now be in similar situation to early 2008.

Implication
Deadline for crash is March 2014. Between now and then, short the markets. Then wait for the once-in-a-generation opportunity to buy very cheap equities. Start to deploy cash as the index is on the way down to 400-500. More importantly, have a lot of cash on stand-by.

Midas Touch

The Chinese government has announced a RMB1 trillion ($196 billion) stimulus, targeting at infrastructure spending.

So who benefits? “We are reinstating our buy recommendation on Midas Holdings after having downgraded it to hold in mid-July this year as we believe that the China government’s announcement yesterday means that it is a question of “when” and not “if” the two-year drought in high-margined high-speed rail contracts ends,” notes Lim & Tan in a research report.

Midas’ 32.5%-owned associate company Nanjing SR Puzhen Rail Transport Co (NPRT) managed to clinch some RMB3.25 million of contracts this year, bringing its order book to RMB847 billion, to be delivered over the next three years. Since Midas is the preferred aluminium extrusion supplier to NPRT, the metro train contract wins will benefit Midas.

Separately, Midas is also winning contracts from the maiden power industry in China with RMB123 million worth of new contracts announced earlier this week, increasing their order books by 21% to RMB723 million.  According to Lim & Tan, Midas’ earnings is expected to rebound 133% in 2013 to RMB182 million, translating to a prospective PE of 12 times, down from 2012’s 27 times.

Adapted from The Edge Online

Building a short list

The signs are there ... stock markets are buildingup to a climax yet again. The VIX at all-time low, the stock indices approaching all-time highs, and Europe approaching a recession soon. It is time to get ready a list for shorting. There are several waysto do it.

1. Short the indices.

Key shorting candidates include Dow Jones Index, DAX and FTSE (since they are the centre of attention).


2. Short stocks

Facebook (alas, I should have shorted it in its 30s, but it was in a rising market at that time) and the local stocks who have outperformed on the STI. Will be compiling a list to short.

Question is: When to start shorting. According to my indicators, within the next few weeks.