Rail & Infrastructure

Let the train take the strain

China’s most profitable high-speed train route makes Rmb6.6 billion

busy train

Crowded line: the busy Beijing to Shanghai bullet train line may get a stock market listing

When Britain’s opposition leader, Jeremy Corbyn, was filmed sitting on a train carriage floor for a three-hour journey between London and Newcastle last week, national newspaper columnists were aghast. If his team couldn’t even organise his diary well enough to reserve him a seat, how could they ever be trusted to run the country?

But it turns out that Corbyn was making a political point. He believes the UK’s railway network should be renationalised to serve its customers rather than its shareholders.

The Labour leader said he could have upgraded himself to first class where there were plenty of seats, but instead chose to highlight the lack of available seats for the vast majority of passengers (network owner Virgin Trains refuted this and subsequently released video footage showing Corbyn walking past empty second class seats in coach H and said that he later spent most of the journey in a seat after making his film on the floor).

Corbyn’s team countered there were bags or coats on the empty seats in coach H and The Independent found some fellow passengers that also claimed the train was very full. That said, the bulk of Britain’s media seems to have concluded the video was a PR stunt and to the delight of his detractors the story has now become one of Corbyn’s credibility. Virgin meanwhile has said it will add 65 new Azuma trains in 2018 to boost capacity.

As the UK debate about the merits of public ownership of the railways turns farcical, China is moving in the opposite direction with plans to introduce more private finance into its indebted railway sector. The industry needs new capital after releasing ambitious plans to expand the overall network to 175,000 kilometres of track by 2025, as well as boosting the high-speed rail component to 38,000km from last year’s 19,000km. There are further rumours that the government is planning to float the network’s most profitable line, the Beijing-Shanghai High Speed Rail Company, on the Shanghai Stock Exchange.

Speculation first surfaced at the end of July when details of the company’s profits were published for the first time in the overseas bond prospectus for one of its smaller shareholders, Tianjin Railway Construction, which owns a 4.5% stake.

The information showed that the 1,300km line between Beijing and Shanghai made net profit of Rmb6.6 billion ($993 million) in 2015. National Business Daily calculates that the operator made Rmb50 per customer, based on the spending of almost 130 million passengers who booked tickets (equivalent to almost a tenth of China’s population).

The newspaper also notes that the company has been reorganising assets to make an IPO more achievable (hiving off train maintenance and a couple of connecting lines to other companies, for example).

Research analysts at CICC also believe an IPO makes a lot of sense as it will help the parent company, China Railway Corp (CRC), to deleverage and finance itself more efficiently.

In particular, spinning off some of its profitable lines will free up funds so that the government can boost subsidies in poorer and less population-dense provinces in the west of the country, where many new railway lines are still to be built.

Thanks to the government’s emphasis on investing in transport, CRC now has assets of Rmb6.2 trillion, equivalent to about 9.2% of China’s GDP. More alarmingly, domestic newspapers have also pointed out that CRC’s Rmb4.2 trillion debt is twice the size of Greece’s.

This has prompted debate about the wisdom of building more train lines, particularly high-speed ones, in provinces where they may not recoup their costs.

In a Caixin Weekly article, Beijing Jiaotong University professor, Zhao Jian, argues that China needs to call a halt to new construction of the high-speed rail network.

His main complaint is that too much of the rail-building programme is based on “central targets rather than economic reality, and may result in huge amounts of idle capacity and equally large debt, which will be difficult to repay”.

Zhao also warns that high-speed rail costs twice as much as conventional rail and relies on passengers rather than freight to pay its way.

Caixin then suggests that the Chinese authorities also need to be more selective about where they sell their high-speed rail technology overseas, given that a number of countries are rethinking their bullet line proposals because they are unlikely to recoup their original investment. CRC, for example, has signed contracts to develop high-speed lines in Laos and Venezuela, which may never come to fruition (although a project to build a 143km line between Bandung and Jakarta in Indonesia finally received the full complement of construction permits this week, the People’s Daily has reported.)

CICC argues that high-speed rail pays its way in China because of the country’s urban population density, which is the key to profitability.

Concentration of population in particular cities or regions is the key factor. In Japan, for example, population density is the reason that East Japan Railway (JR East) is so profitable. It serves the incredibly dense Tokyo metropolitan area of 40 million people, as well as running the bullet trains north of the capital. This network – the world’s busiest railway – transports 17 million passengers a day and it is likely to be the main benchmark for the prospective listing by Beijing-Shanghai High-Speed Rail.

CICC analysts say that the Chinese line’s transport density is still only half that of Japan’s Shinkansen trains, which means there is plenty of potential earnings upside – particularly given China continues to urbanise at a rapid pace. If Beijing-Shanghai High-Speed Rail follows the JR East model, it is also likely to boost its future profits with commercial, residential and retail property development along the line and around the stations.

National Business Daily also believes that the owners of the Beijing-Shanghai line will want to use some of the IPO proceeds to develop a second high-speed connection between Beijing and Shanghai. A planning sketch was included in the government’s recent rail network development plan, although officials haven’t announced formally that they intend to proceed with its construction.

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