China Railway Jumps on Sale of Unprofitable Contract

China Railway Construction Corp., the world’s largest listed builder, rose in Shanghai after selling an unprofitable contract to its state-controlled parent for 2.08 billion yuan ($316 million).

The builder climbed 3.6 percent at the close of trading to 7.43 yuan, after earlier gaining as much 7.4 percent. The Beijing-based company was suspended on the past two trading days.

Selling the contract for a light-rail system in Mecca, Saudi Arabia will allow the company to limit losses on it to 1.39 billion yuan, according to a Jan. 21 statement. The builder in October said it expected a 4.15 billion yuan loss from the project, partly because of changes in requirements and the need for “large amounts” of manpower and resources to ensure on-time completion,

“We view this move as positive to minority shareholders’ interests, and it implies strong support from the Chinese government to the railway industry’s ‘go overseas’ strategy,” Ingrid Wei, a Credit Suisse Group AG analyst, said in note to clients. “We expect the share price to rebound strongly.”

The bank upgraded the construction company’s Hong Kong shares to ‘neutral’ from ‘underperform’ and raised its target price to HK$11.88 from HK$10.13. The builder’s shares in the city dropped 0.2 percent to HK$9.70 at the close.

Compensation Payout?

The builder will still book a loss of 4.1 billion yuan in 2009 and 2010 income, while the 2.08 billion yuan will be booked as capital surplus in future, according to the Credit Suisse note. The project loss may also be reduced through compensation from the customer, it said.

The construction company’s parent, also called China Railway Construction Corp., will assume all rights and obligations under the Mecca contract from Oct. 31, 2010, according to the company’s statement.

The rail line began operations in November and has achieved more than 35 percent of capacity, the statement said. Full operations are expected to begin in May. The group will be responsible for running and maintaining the line for three years under the terms of the contract, according to the statement.

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