Rail & Infrastructure

Coupling stock

Fosun-led consortium inks deal for China’s first private railway line

Guo-Guangchang-w

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The first railways in China were financed, engineered and operated by foreigners (see WiC23). They were built during the Qing Dynasty and faced major opposition from members of the imperial court, who saw the train lines as symbols of foreign incursion on their empire. When the Communist Party came to power, the railways were taken under government control, where they have remained.

But last week a group of eight privately-held companies signed an agreement with the Zhejiang provincial government to develop a high-speed railway line connecting the provincial capital, Hangzhou, with the city of Taizhou, via Shaoxing. The “Hangshaotai” line will be China’s first Public-Private Partnership (PPP) high-speed service, and the first to be privately-controlled.

The line will stretch 269 kilometres, making nine stops and travelling at a maximum speed of 350km per hour.

News of the deal first came out towards the end of 2016, but the finer details of the PPP have been under review in the interim. Fosun was the first private-sector firm to agree to join the partnership, China Daily reported in September last year. But at that time the company did not disclose how much it would contribute to the project’s coffers.

The Global Times reported that the Hangshaotai line was one of eight tracks sanctioned by the National Development and Reform Commission to showcase the PPP model for high-speed railways. While construction of the line began in December, the newspaper noted that “issues such as ownership, pricing power and operation still need to be solved” (an interesting omission, given how key all three of those issues are).

The agreement last week answered some of those questions about ownership, valuing the project at Rmb41 billion ($6.2 billion), with the consortium of private companies taking a 51% stake in the scheme’s Rmb12 billion registered capital.

The project will adopt a BOOT model, meaning “build, own, operate and transfer”. According to China Daily, the private companies and the local government will set up a joint venture to manage the construction of the line, and at the end of the 34-year contract period (which includes four years for construction) ownership of the line will be transferred to the local government.

However, China Daily also claims that while the joint venture will determine things such as ticket prices, the state-owned China Railway Corp (CRC) and its Shanghai subsidiary will “be in charge of the daily operation” of the line, suggesting the BOOT acronym may be a tad disingenuous.

The ability of the private companies to determine ticket prices might be slightly restricted too. Liang Jun, an academic from the Guangdong Academy of Social Sciences told Time Weekly: “Railways are China’s economic lifelines. You can’t just consider commercial profits without considering social benefits.”

Local media also contends that Fosun will be obliged to consider the “social benefits” when determining its pricing scheme. Wen Xiaodong, president of Shanghai Sunvision Capital (the Fosun investment unit that is taking part in the PPP) conceded that “although the return from this investment will not be extremely high, it will be quite stable… It will also be helpful in terms of the overall mixed-ownership reform of China’s railway industry.”

Mixed-ownership reform is a buzzword across China’s SOE sector. Last month China Unicom, one of the state-owned telcos, took on private investors for the first time, attracting the BAT internet trio. On that occasion there was also talk that the deal was really better for the SOE than its new shareholders (see WiC378).

The CRC, the national railway operator incorporated in 2013 after the powerful Ministry of Railways was dismantled, is in urgent need of reform. Last year it saw its debt rise to Rmb4.7 trillion, an increase of 15.4% on the year before. For CRC, reform will partly take the form of consolidating its constituent entities (a feat made harder by the firm’s vow that there will be no “layoffs”, Caixin reports) and partly by attracting private investment.

According to Time Weekly, CRC has already solicited the likes of SF Express and Alibaba as investors in some of its subsidiaries. Thus far, SF Express has been the only company to show interest, indicating it would “ardently research and actively participate in CRC’s reforms”.

The courier firm has been losing market share to the Tonglu Gang (see WiC344) so a partnership with the state’s rail behemoth could prove helpful. An expert on China’s freight train industry told Time Weekly, “SF Express has a lot of planes. For long distance delivery they have a distinct advantage. But for short distance services they’re lacking overall. High-speed rail can supplement this shortcoming and help the company develop.”

As for Alibaba and Tencent, Liang Jun from the Guangdong Academy of Social Sciences reckons they have been less forthcoming about reaching a partnership with CRC because they have less to gain from a pairing. CRC wants to utilise Tencent and Alibaba’s skills to streamline its own business operations. “From this perspective, the two sides can enter a business relationship, buying and selling services. There’s no need for them to invest in each other’s stock,” reckons Liang.

As for Fosun, the move into rail will reinforce its patriotic credentials and flag that it is investing at home. Earlier in the summer it was one of four high-profile firms (alongside HNA, Wanda and Anbang) that received a public rap on the knuckles from Beijing for racking up too much debt on foreign acquisitions – many of which were deemed to be in non-core areas and even labelled as artful capital flight.

Unlike its peers in this grouping, Fosun has managed to keep its M&A flowing overseas – in part by partnering with state-owned firms when making the acquisitions. As we pointed out in WiC377 it hooked up with Shanghai Pharmaceutical to buy US drug maker Arbor; with Sanyuan Foods to purchase French margarine maker St Hubert; and alongside Nanjing Nangang to buy German engineering player Koller.

The timing of the Hangshaotai investment is therefore significant, as it comes in the same week that Fosun has gone it alone to buy 74% of Indian drugs firm Gland Pharma for $1.1 billion. That acquisition is clearly more palatable to Beijing when a 34-year commitment to the train sector makes plain that Fosun boss Guo Guangchang is on hand to offer the appropriate levels of ‘national service’.


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