Out of steam

Rail industry’s taken a bullet

Since China first launched its stimulus package in 2008, investing in railway stocks has been a popular choice for domestic investors looking to gain exposure to the state’s massive infrastructure spend. Companies such as China Railway Construction (CRC), China South Locomotive and Rolling Stock Corporation (CSR), and China Railway Group (CRG), all became hot tips for cashing in on the railway boom.

As we have reported extensively in WiC, a string of scandals this year has removed a lot of the sector’s sheen. Last month, a deadly train crash near Wenzhou further undermined confidence in China’s new high-speed future (see Talking Point, WiC117).

All of this is bad news for the companies building the network.

The official word on the crash is that lightning caused signalling systems to fail. But a wider safety review has become a top priority for the industry.

China CNR Corporation, for example, has said it will recall 54 of the trains that currently run on the flagship Beijing-Shanghai line (New Century reported this was due to cracks in their axles). The Ministry of Railways also suspended delivery of an order for 17 of the company’s trains, awaiting safety inspections, reports the Wall Street Journal.

Although CNR denied that the recall would affect future deliveries to customers, an analyst told CBN that the inspection process was bound to cause uncertainty and could lead to a significant decrease in sales revenue in the second half of the year.

Another major manufacturer of high-speed trains, CSR, is also facing a tougher future. In its mid-year report for 2011 published last week, it announced Rmb2 billion ($312 million) worth of net profit, a healthy 85% increase on the same period last year. But a look beneath the topline figures and the picture isn’t completely positive: CSR’s cashflow deficit rocketed to Rmb7.7 billion in the first half of 2011, from just Rmb520 million in the same period in 2010. Accounts receivable have more than doubled to Rmb26.6 billion too.

What’s also worrying is that approximately 60% of money owed to CSR is from clients associated with the Ministry of Railways, which is said to be short on funds and extending payment periods with its suppliers. In the first six months of the year, the ministry’s debt hit an unprecedented Rmb2 trillion.

A cash-strapped ministry means less expenditure for new lines. After top official Liu Zhijun was dumped from office on corruption allegations, the ministry decided to reduce railway investment under the latest Five Year Plan from Rmb3.5 trillion to Rmb2.8 trillion.

Then, on August 10, not long after the Wenzhou crash, the State Council ordered the suspension of new railway projects. The Ministry then announced another decrease in expenditure. Investment in new rail construction slumped 26% last month, reports the Shanghai Daily.

Uncertainty on what’s next for the high-speed rail network, along with a gloomy outlook for orders, means pressure on profitability. Investors know this: after the crash on July 23, shares in the railway companies plummeted. By Tuesday this week the Hong Kong stocks of CSR, CRC and CRG were all down by more than 30%, compared with a 13% drop for Hong Kong as a whole over the same period.

Investor caution is also hitting company efforts to raise cash. Both CRG and CSR have abandoned capital raising plans in recent days. Last week, Beijing-Shanghai High-Speed Railway, the operator of the new bullet train route, also decided to shelve a proposed dual listing in Shanghai and Hong Kong (the plan was to raise $5 billion as early as next year, reported Reuters).

In the latest news, top speeds have again been reduced on the network. Railway shares or the trains themselves, the industry is braking fast into slowdown…

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