Getting back on track

PHOTO: Getting back on track

MIDAS Holdings' recovery, which has been brewing for some time, is finally showing on its accounts.

"Our third quarter results were respectable. It's very clear that there has been a turnaround. The worst is over," states CEO Patrick Chew unequivocally in an interview with The Business Times last Friday, a day after the company - which makes aluminium parts for trains - reported that it swung to a net profit of 16.4 million yuan (S$3.4 million) from a net loss of 6.1 million yuan a year ago.

"The last few quarters of negative cash flow have now turned positive. The environment is clearly improving, and when the tender for high-speed trains was announced in August, we got it very fast, by October.

"Gross profit margins, that have come down to 21 per cent, should be at a floor and will creep back as we shift our product mix back to more transport."

The lucrative high-margin contracts for making aluminium bodies for high-speed train cars might be starting to roll in again, two years after the deadly 2011 Wenzhou high-speed train crash threw the train industry into a slump and along with it, Midas's fortunes. Compared to 2011, Midas's 2012 revenues fell by a fifth to 870 million yuan, while net profit had dived 85 per cent to 28 million yuan.

But even as its China order book is perking up, Midas is looking beyond grubbing from the same pot of gold.

It is expanding its core business of making aluminium components for train cars beyond China into Europe, and even won a contract to make Singapore MRT car bodies earlier this year. It is innovating by prefabricating ready-made parts for companies instead of just supplying the aluminium profiles for them to shape.

The company is also collaborating with local universities to do research and development work into new aluminium-related products for use in another industry altogether. Mr Chew, however, declined to divulge further details.

A new plant that manufactures aluminium plates and sheets to supply other transport industries such as automobiles or aviation is also being built and will be ready by 2015.

"In those days, from 2007 to 2009, everything was booming. It was only in 2011 that things started unravelling. We know now that we cannot be too single-sector focused," Mr Chew says.

"We are diversifying our product offerings, mitigating our risks. Who knows if sometimes things happen again and set you back by another two years."

For its third quarter results ended Sept 30, Midas also reported that revenue increased by 48.5 per cent from 203 million yuan a year ago to 301 million yuan. In a report last Thursday, CIMB Research also noted, in a report, the improvement of some financial metrics.

Days of sales outstanding - a measure of how long a company takes to collect revenue after a sale is made, the lower the better - have come down from a peak of almost 500 days in the first quarter of the year to just under 400 days in the third quarter.

Days of inventory outstanding, or how long a company holds its finished goods before selling it - again, the lower the better - have come down from over 350 days in the first quarter to just over 200 days in the third quarter.

While Midas has announced a stream of contract wins in the past year for slower metro train cars, the moment the market was waiting for came on Oct 21, when the company announced it had won high-speed train contracts worth 167.5 million yuan by subsidiaries of state-owned enterprise China CNR Corporation, which manufactures trains for the domestic market.

The contract was a harbinger of what could come. Midas shares, which had been trading at around 45 cents, shot up to around 50 cents. Maybank Kim Eng Research had said in September that it estimates Midas to snag around 1 billion yuan of contract wins each year in 2014 and 2015 in the high-speed sector alone.

"Now there's a second round of tenders for (more) train sets than the first round. We expect the results to be known before mid-December," Mr Chew says. "We have a very good relationship with all the major train makers as we have been supplying them since 2002 or 2003, and participated in most of their projects in China." The two main state-owned enterprises that make trains are China CNR and China CSR, and Midas gets contracts from their subsidiaries.

The Chinese central government is committed to driving a recovery in railway infrastructure spending, Mr Chew notes. The China Railway Corporation, China's national railway operator, had announced raising its annual investments in fixed assets to 660 billion yuan in 2013.

Midas's slice of the pie goes something like this. Out of the total amount of committed infrastructure spending, 20 per cent is on train equipment. The niche area of aluminium parts Midas makes accounts for 2 to 3 per cent of that. And in China, Mr Chew estimates that Midas has a 60 per cent market share of the train aluminium profiles business. "We were a very early player, the second company in China that started manufacturing all this in 2002. We built our market share over the years," he says.

On competition, he says: "The number of industry players have since grown to around 12, versus five when we first started. But only five or six now have the track record and quality to supply train companies."

Born in 1962 to a fisherman father and housewife mother, Mr Chew was the second youngest sibling in a large family of 10. He left school after his A Levels in 1980 and was involved in various businesses, including prawn farming, shipping and a timber business in China.

"I may not have excelled academically, but I have an urge to do well in life. Coming from a poor background, it's all about hunger. It drives you. You must do something, work for it and lead a better life," he says.

It was during his days in the timber business in China 20 years ago that he noticed how vital transportation is - when he had difficulty getting the timber cargo out of forested areas.

He set up Midas in 2000 with a partner, and the company was listed in Singapore in 2004.

Says Mr Chew: "When we stumbled upon this (aluminium) business, we saw the potential for China. Rail is still the most economical form of transport. Aluminium is three times lighter than steel, which was used for trains then ... as a businessman, you have to see the trend."

"There are always risks associated with the material aluminium," he continues. "But in the near future, even if (China) does away with aluminium, we can still use our capacity for other industries and go into lower margin products.

"For now, we will make as much as possible, and strike while the iron is hot."

This column is an expanded version of CEO Speaks, where views are curated from a wider range of corporate leaders to better capture all that's going on in the business world.

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