Rail & Infrastructure

Hangzhou express

Work begins on a public-private high-speed line


Emptier stations this year...

It goes without saying that 2020 was a miserable time for the travel industry. That includes China, which was one of the few countries to get its economy moving again in the second half of the year.

There was a pick-up in domestic tourism over the Golden Week break last October (see WiC514). But sentiment is still very subdued as we head into the Chinese New Year holiday this week. Railway stations typically teeming with travellers have been reporting passenger flows of about a quarter of normal levels.

The same sense of malaise is being felt on China’s bullet trains, including the operator of the Beijing-Shanghai High-Speed Railway (BSHSR), the country’s most profitable line. It has reported that net profits will show a decline of more than two-thirds over 2020, not what investors anticipated last January when they signed up for China’s largest IPO of the year (excluding secondary listings).

BSHSR raised Rmb30.67 billion ($4.4 billion) but the pandemic derailed secondary market trading soon after its debut on the Shanghai Stock Exchange. After climbing to an early high of Rmb7.78 in February last year, the stock slid to Rmb5.16 this month, just above its Rmb4.88 IPO price.

Is there any light at the end of the tunnel for BSHSR?

The answer largely depends on how soon the Chinese start to travel on the railways again and whether they return in the same numbers as before the virus.

In 2020, rail passenger numbers across the whole of the country fell almost 40%. But in the previous year they had grown 8.4%, which made high-speed rail seem like a decent bet for investors, with traffic increasing faster than GDP.

But the government reacted to the pandemic by deprioritising rail, with new track investment dropping to Rmb782 billion in 2020, the first time it had slipped below Rmb800 billion since 2013. State-owned China Railway Group said recently that its main focus was optimising its existing network rather than putting down more line. However, in early February there were signs of a new line emerging in the sector: quite literally, in fact, as the first stretch of the Hangzhou-Shaoxing-Taizhou Railway was laid down.

This 271km bullet train project is the first to be completed on a PPP (public-private partnership) basis. Shanghai-based conglomerate Fosun owns a 51% stake in the company (called HSTR), which has a ‘build, own, operate, transfer’ contract for the line. Other investment partners include China Railway Group and the Zhejiang provincial government.

It is the first of eight such PPP schemes designed to bring more private-sector discipline to infrastructure development and reduce local governments’ debt burdens. HSTR will run the railway for 30 years after it opens later this year, before handing it back to the provincial government at the end of the contract. In the interim, it has the freedom to set its own ticket prices. Even before Covid-19 had struck, Fosun said that investment returns on the railway weren’t likely to be very high, but that they would be stable. In an interview with China Daily, officials added that the plan was to boost profits from related ventures such as retail, tourism and real estate. No doubt that’s still the objective as the pandemic subsides.

Longer-term the line also has socio-economic and demographic trends in its favour. A World Bank report on China’s high-speed railways has concluded that continuing urbanisation will drive passenger growth, for instance.

How quickly HSTR recoups its investment is still to be seen, although the original agreement incorporates an element of subsidisation, which the government could tweak to reflect post-pandemic realities.

More broadly, the high-speed network is set to benefit from the involvement of a wider range of companies. In 2018 Tencent and Zhejiang Geely invested in a 40% stake in China Railway Group’s joint venture to provide WiFi on the nationwide train network. The JV, known as China Railway Gecent Technology, then forged a further partnership with HSTR a year later to deploy artificial intelligence applications that include passenger flow management. That could be much in demand when rail traffic finally returns.

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