Rail­way-re­lated sec­tor takes beat­ing

Shanghai Daily - - BIZ INSIGHT - Ly­dia Chen

CHINA’S de­ci­sion to re­duce its in­vest­ment in rail­ways in the next five years has been quick to rip­ple through cap­i­tal mar­kets.

Shares of com­pa­nies such as CSR Corp and China CNR Corp — two ma­jor builders of na­tional rail cars — have been tum­bling since the Min­istry of Rail­ways an­nounced it will cut its rail in­vest­ment tar­get to 2.8 tril­lion yuan ( US$ 432.8 bil­lion) from 3.5 tril­lion yuan over the next five years. Spend­ing in 2011 alone will shrink 14 per­cent to 600 bil­lion yuan.

The cut­backs re­flect mount­ing debt as­so­ci­ated with rail­way con­struc­tion, con­cerns about prof­itabil­ity of new rail lines and a min­istry bud­get deep in deficit.

It’s a far cry from last year, when China’s multi-tril­lion-yuan plans to build 16,000 kilo­me­ters of high-speed rail track that criss­cross the coun­try was a show­piece of the coun­try’s eco­nomic growth strat­egy.

In May, in­vest­ment in rail­way in­fra­struc­ture de­clined 16.9 per­cent, the first drop since 2008. Com­bined in­vest­ment in the first five months to­taled 198.6 bil­lion yuan. That was up 13.4 per­cent from a year ear­lier but down from 25.7 per­cent growth five months ago.

CNR shares have lost 14.5 per­cent so far this year, clos­ing at 6.67 yuan yes­ter­day. For the year to date, China Rail­way Con­struc­tion Co is down 12.3 per­cent and China Rail­way Group has lost 10.7 per­cent. CSR shares have tum­bled 14.8 per­cent since the start of this year.

The Shang­hai Com­pos­ite In­dex has dropped 4.4 per­cent so far this year.

So what’s be­hind the rail sec­tor’s slow­ing en­gine.

UBS said in a re­port this month that the slash in govern­ment in­vest­ment may cast a shadow over prospects for rail­way-re­lated firms as or­ders for new rolling stock drop dras­ti­cally, hurt­ing cor­po­rate earn­ings.

Un­der its re­vised bud­get plans, the min­istry will give top pri­or­ity to projects un­der con­struc­tion and will pro­ceed cau­tiously in giv­ing the green light to new projects, the Swiss-based in­vest­ment bank said.

Rail-re­lated prof­its this year and next will be un­der­pinned by or­ders al­ready placed and likely to be filled freight ca­pac­ity to rise up to 500 mil­lion tons on ma­jor routes next year.

For its part, Haitong Se­cu­ri­ties is fore­cast­ing 6 per­cent ca­pac­ity growth in rail freight fol­low­ing the open­ing of the Shang­hai-Bei­jing high-speed line on July 1.

The three firms were also on the rec­om­men­da­tion list of CITIC Se­cu­ri­ties, China’s largest listed bro­ker­age.

CITIC gave a “buy” rat­ing to Daqing and Guang­shen, while sug­gest­ing in­vestors “ac­cu­mu­late” stock on Tie­long.

Daqin Rail­way Co edged up 1.1 per­cent so far this year to close at 8.01 yuan yes­ter­day. Guang­shen ad­vanced 16 per­cent to close at 4.05 yuan on Tues­day. The com­pany was sus­pended from trad­ing yes­ter­day. Tie­long plunged 30 per­cent to close at 10.11 yuan yes­ter­day.

For the air­line in­dus­try as a whole, CITIC says the im­pact of the Shang­hai-Bei­jing high-speed rail line will be lim­ited.

China Eastern and Air China stand to be the most af­fected, with a di­ver­sion of about 30 per­cent of their pas­sen­gers to the high-speed line, CITIC said.

China Eastern shares have lost 23 per­cent so far this year while Air China has nose­dived 31 per­cent.

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