Rail & Infrastructure

Path to profit

Will state firms get a free ride on Xi Jinping’s new Silk Road?

A warning sign is seen near seafront construction site of Chinese real estate project of a port city in Colombo

On hold: CCCC’s port in Colombo

During last weekend’s tomb- sweeping holiday, state broadcaster CCTV devoted extended airtime to a commemoration of Chinese workers killed in Tanzania and Pakistan.

Hundreds of workers are buried there, having lost their lives building the Tanzania-Zambia railway and the Karakoram Highway in Pakistan.

Conceived during the Mao era, neither project turned a profit. China saw them more as a way of winning new friends during an era of diplomatic isolation. More recently the Chinese have been investing overseas again, although this time their efforts are flanked by greater financial and technological nous.

As we reported in issue 275, Xi Jinping’s “one belt, one road” blueprint envisages a network of highways, railways and ports linking China to central and south Asia, and then further afield to the Middle East and Europe. The establishment of the Asian Infrastructure Investment Bank (AIIB), meanwhile, is viewed as a means to finance some of these plans, with Xi telling last year’s APEC summit that infrastructure spending in Asia would top $8 trillion in the next 10 years.

China Communication Construction Corporation (CCCC) has the kind of pedigree that suggests it could benefit from the “one belt, one road” roadmap. Its predecessor helped to build the Karakoram Highway, and the Economic Information Daily says the company has a long tradition of moving in tandem with national-level plans.

CCCC is the largest port construction and design company in China, as well as the largest dredging firm. One of its key focuses has been the Pearl River Delta region, where the central government has been seeking to integrate Hong Kong and Macau more closely with the mainland. CCCC is involved in building a 50-kilometre bridge linking the two former colonial territories to Zhuhai, and it is also working on a Rmb38 billion ($6 billion) project to build a Dubai-style artificial island in Hengqin, an area near Macau which is three times the size of the former Portuguese enclave.

Driven by investor excitement about the Silk Road concept, Hong Kong-listed CCCC has seen its stock climb nearly 60% this year. As of Wednesday it carried a market value of $50 billion, although it is still trading on just 13 times its reported earnings.

Barely a year ago analysts were attributing a much lower valuation, based on profit margins in the low single digits. But investors now seem to see more reason to buy, with China’s ambitious infrastructure plan expected to result in stronger returns.

“CCCC is one of the top 10 stocks for investors along the new Silk Road,” the Hong Kong Economic Times suggests, pointing to the fact that it has already engaged in projects in a number of Asian countries.

Other state infrastructure firms such as China Railway Construction (CRCC) and China Railway Corp (CRC) have also registered strong gains this year, while stocks at the two state train makers CNR and CSR soared more than 40% this week when their merger was officially confirmed.

So does everything look rosy for the infrastructure giants? When China’s diplomatic relations come to the fore, there is always the risk that sweetheart deals will be cut with customers. CRCC’S light rail project in Mecca in Saudi Arabia cost the company Rmb4 billion in losses in 2010, for instance. Reportedly, company bosses were told to grin and bear it, as energy diplomacy was the order of the day in Beijing.

One of CCCC’s flagship projects is also struggling with the vagaries of international politics, after a $1 billion port-building programme in Sri Lanka was put on hold following a change of government in Colombo. Last month Xinhua said that the state construction giant is losing $380,000 each day that the project is delayed.

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