Railway-related sector takes beating
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.