China may issue at least 38.4 billion yuan ($6.2 billion) of high-speed train tenders within the next two months, ending a more than yearlong hiatus following a fatal crash.
The government will probably seek bids for between 300 and 400 train sets, according to Hong Kong-based Citigroup Inc. analyst Paul Gong, who made the estimate after meetings with the nation’s two major trainmakers. Jefferies Group Inc. and Everbright Securities Co. made similar predictions. A set comprises of eight or 16 carriages.
A revival of purchases would be a boost for CSR Corp Ltd. (1766) and China CNR Corp. (601299), the nation’s two big trainmakers, whose shares are yet to recover from a slump following the July 2011 train disaster. The government may resume orders as it steps up railway building as part of wider plans to stoke economic growth.
“This is obviously great news for Chinese trainmakers,” Gong said in a Nov. 6 interview. “The order will help to remove concerns that the country may shift its focus from high-speed trains after the fatal crash.”
Both CSR and CNR shares outperformed benchmark indexes in Hong Kong and Shanghai trading today.
The dual-listed CSR closed unchanged at 4.48 yuan in Shanghai, the second best performer on the Shanghai Stock Exchange 50 A (SSE50) Share Index, and gained 0.3 percent to close at HK$6.35 in Hong Kong. China CNR fell 0.7 percent to 4.02 yuan, while the benchmark Shanghai Stock Exchange Composite Index dropped 1.6 percent. The Hang Seng Index fell 2.4 percent.
CSR has made preparations for possible tenders, it said in an e-mailed reply to Bloomberg News questions. China CNR said it expects demand for more high-speed trains as new lines open. The Beijing-based companies both said they didn’t know when the Ministry of Railways would issue its next tender. Calls to the ministry went unanswered.
No high-speed train tenders have been placed since last year’s crash near the eastern city of Wenzhou, which killed 40 people. An official report into the accident said it was caused by mismanagement and design flaws in a signaling system.
Construction slowed after the disaster amid safety concerns and because the ministry was struggling to sell bonds to finance work. The yield gap between its one-year notes and government debt has now fallen to around 126.6 basis points, about half the figure in October 2011, according to Chinabond data, as state support eases concerns about its debts. The ministry had 2.12 trillion yuan of long-term debt as of Sept. 30, according to an Oct. 26 audit report posted on Chinabond.com.cn.
High-speed train purchases were also slowing before the crash amid a corruption investigation that led to the downfall of then-Rail Minister Liu Zhijun. The ministry ordered about 1,100 high-speed carriages in 2010 and 2011, before the crash, compared with about 6,000 in 2009, according to data compiled by Citigroup.
CSR, which builds high-speed trains itself and in a venture with Bombardier Inc. (BBD/B), has fallen 8.6 percent in Hong Kong trading since the disaster, while the benchmark Hang Seng Index has dropped 3.9 percent. China CNR Corp. has slumped 35 percent in Shanghai while the Shanghai Composite Index has dropped 25 percent. Both trainmakers generated more than 90 percent of sales in China last year. The companies also make wagons, mainline trains and subway units.
China has ordered 705 high-speed train sets, or 7,264 carriages, in the past five years, according to an Oct. 9 report by the official People’s Daily, citing an interview with Rail Minister Sheng Guangzu. A carriage for a 250 kilometer per hour (155 mile per hour) train costs about 16 million yuan, while one for a 350 kph train costs about 24 million yuan, the report said, citing Gong.
A resumption of high-speed orders may not immediately affect trainmakers’ earnings as the ministry will only accept units when it needs them, Jefferies analysts Julian Bu and Zhi Aik Yeo said in a Nov. 2 note. For instance, CSR’s venture with Montreal-based Bombardier didn’t begin handing over trains ordered in a 27 billion yuan deal in 2009 until the third quarter of this year, they said.
“Having orders by itself means very little,” the Hong Kong-based analysts said. “What matter is the delivery schedule.”
The ministry may order as few as 63 sets or as many as 950 through 2015, depending upon how trains are used and how much importance the government puts on costs, they said. It may plump for a middle-ground order of about 400, which could be its last major purchase, they said.
China needs more bullet trains as it plans to lay about 8,000 kilometers on high-speed track over the next three years. The high-speed rail network, which opened in 2007, is due to reach 16,000 kilometers based on a five-year plan running through 2015. It was 7,563 kilometers long at the end of September, according to the October People’s Daily report.
China has boosted spending plans for railways at least four times since July as it contends with economic growth that cooled to 7.4 percent in the third quarter, the slowest pace in three years. The government also announced approvals for subway projects in 18 cities in September.
The Ministry of Railways now plans to spend 630 billion yuan on fixed-asset investments, including building new lines and buying equipment this year, according to a bond prospectus issued last month. That’s 7.4 percent more than last year’s tally of 586.3 billion yuan.
“Boosting rail investment is a good way to boost economic growth,” said Xu Minle, a Shanghai-based analyst at Bank of China Ltd. “Unlike roads, rail demand is not saturated. It can also add jobs and drive demand for raw materials without causing pollution.”
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