Midsouth Holdings Ltd: Driving to new heights

Fibre Reinforced Plastics (FRP) producer Midsouth Holdings (MIDS)
recently posted a strong set of FY06 and 1Q07 results. Riding on its good
long term relationships with its existing customers, MIDS is also able to
pursue 8 more main heavy truck producers, further diversifying its income
risks. MIDS has the capability to diversify into other markets like shipping,
aircraft, wind turbines and marine sports. The global demand for recreational
boats (most of which use fibreglass hulls) in 2006 was estimated at
US$26.4b and is anticipated to grow to US$37b by 2011. For FY07, we
forecast strong revenue growth of 36.6% to RMB626.8m and continued
good earnings quality with net profit expanding 30.6% to RMB147.2m. For
FY08, we are forecasting revenue growth of 33% to RMB835.7m and net
profit growth of 26.7% to RMB186.5m. Based on a substantial 64% discount
to Minth Group and a 86% discount to heavy truck manufacturers, we
derive a conservative fair value of S$$1.01 (24% upside) at a blended FY07/
08 of 10x PER. We initiate coverage on Midsouth with a BUY rating.


Good performance in FY06 and 1Q07. Fibre Reinforced Plastics (FRP)
producer Midsouth Holdings (MIDS) delivered strong FY06 results with
revenue growth of 43.4% to RMB458.8m and net profit growth of 35.4% to
RMB112.7m. This strong growth continued into 1Q07 with topline increasing
41.9% YoY to RMB115.2m and net profit rising 30.7% YoY to RMB28.2m.
More business to chase. Besides having good long term relationships
with its existing clients, Midsouth's scope of potential new customers is
large. Midsouth is currently manufacturing for 3 heavy truck producers,
however, there are about 8 more main heavy truck producers in China that
Midsouth can possibly pursue business with.
Possibilities abound for FRP products. Industries that Midsouth can
possibly penetrate are shipping, aircraft, wind turbines and marine sports
(canoes and kayaks). The global demand for recreational boats (most of
which use fibreglass hulls) in 2006 was at US$26.4b and is anticipated to
grow to US$37b by 2011. Another area that has huge potential is the wind
turbine industry. The EU installed a net worth of about €9b of wind turbines
in 2006, a 23% YoY increase from 2005. We understand that manufacturers
like Vestas are already outsourcing fibreglass nacelle and blade
manufacturing in China.
Initiate with BUY. We forecast strong revenue growth of 36.6% YoY to
RMB626.8m for FY07 and anticipate continued good earnings quality with
net profit expanding 30.6% YoY to RMB147.2m. We expect further doubledigit
improvements in FY08. Based on a substantial 64% discount to Minth
Group and a 86% discount to heavy truck manufacturers, we derive a
conservative fair value of S$$1.01 at a blended FY07/08 PER of 10x. This
presents an attractive 24% potential upside from its current share price
and an opportunity to get into a company that will ride the waves of
industrialisation in China and yet be in a position to diversify into other
lucrative markets like marine and wind power. We have not factored in
future earnings from M&A. We initiate coverage on Midsouth with a BUY
rating.