China Trains With World’s Most Tracks Double SharesBloomberg News
Zhu Yi used to nap on the five-hour train ride home to Wuhan from Zhuzhou in central China. Now that a fast rail line has cut the trip to an hour and 40 minutes, he can spend more time selling information-management systems.
Before, “it took three days to get a project done,” said Zhu, 31, a sales manager for Beijing Lanxum New Technology Co. in Wuhan. “Now it’s so fast I can work out a solution for the client and be back home on the same day.”
The view from Zhu’s reclining seat shows how China’s push to build a 16,000-kilometer high-speed passenger network by 2020 is carrying China’s industrial boom inland. All along the trackside are earth movers and excavators clearing land and beginning construction. They merge into a blur as the express accelerates to 350 kilometers (218 miles) an hour.
The country’s planned 2 trillion yuan ($300 billion) in spending will give it almost as much track by 2012 as the entire rest of the world, even before the network is completed.
The new trains will transform China’s economy in the way bullet trains did in Japan in the 1960s and 1970s, according to Beijing-based China International Capital Corp., the top-ranked brokerage for China research in Asiamoney magazine’s annual survey.
“China’s high-speed rail program is altering the landscape of consumer and property markets,” said Jing Ulrich, JPMorgan Chase & Co.’s China equities and commodities head in Hong Kong.
China’s bullet-train spending has buoyed rail stocks since a 4-trillion-yuan stimulus was announced in November 2008. Shares of Dalian-based China Railway Tielong Container Logistics Co., which provides railroad, truck and water transportation services, have risen 2.5 times since then. China Railway Erju Co. in Chengdu, which designs and builds railways, has more than doubled.
Companies providing rolling stock and equipment to train operators have some of the best growth prospects in the country, said Anderson Chow, a Hong Kong-based analyst with Macquarie Capital Securities. Overall investment in China’s railway industry will total 3.8 trillion yuan from 2011 to 2015, about 50 percent more than in the last five years, he estimates.
Earnings growth at CSR Corp., which makes locomotives and wagons, will surge an annual average 38 percent over the next three years, said Chow. At Zhuzhou CSR Times Electric Co. in Zhuzhou, which makes electrical systems for railways, earnings will rise an average of about 35 percent annually over the same period, he said.
“If you look around the China market there are very few companies that give you that sort of certainty for earnings growth,” Chow said.
The nation’s $90 billion in spending on the network last year far exceeds the $8 billion that President Barack Obama allocated in stimulus for U.S. fast trains earlier this year.
The difference “is a confirmation of China’s rise and an indication of U.S. demise,” said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington. “We in the U.S. are doing little to nothing and will pay a price in slower growth now and in the future.”
Japan’s bullet trains triggered “explosive growth” in tourism-related retail sales along their routes in the decade after Shinkansen services began in 1964, CICC said. Less-developed cities such as Hiroshima, Nagoya and Fukuoka “started to play catch-up in industrial production growth.” Morgan Stanley is selling its 34.3 percent stake in CICC, four people with direct knowledge of the deal said.
In China, more businesses will move inland to capitalize on labor as much as 50 percent cheaper than in the more affluent eastern areas of the country, and on lower land and rental costs. Increased rail capacity also will reduce freight bottlenecks, the bank said.
Beijing Lanxum’s Zhu said the bullet trains helped him increase sales about 15 percent this year in Zhuzhou, Hunan’s second-biggest city, because he can contact more clients.
Changsha, population 6 million and the capital of Hunan province, shows how the fast trains are altering the landscape in central China. He Chuan Road features an array of dusty shops selling tires, noodles and groceries, typical of many provincial cities. Just around the corner towers the 200,000-square meter Changsha South Railway Station, its glass curtain walls capped by a 38-meter-high waved roof.
The coming of the trains prompted CITIC Capital’s Stanley Ching to bet 1.5 billion yuan on CITIC’s purchase of the ID Mall shopping complex in the city center, about 30 minutes from the station. He plans to add a chain of branded retail malls over the next three to five years, mostly in second- and third-tier cities along the high-speed rail routes.
“Changsha’s been a very promising city but it needed a big push to turn it into a regional hub,” said Ching, Hong Kong- based head of real estate at CITIC Capital, which manages more than $3 billion in private equity, in a telephone interview. “High-speed rail is that big push.”
China’s industrial transformation may be greater than Japan’s because its rail network will be bigger and its trains faster, according to JP Morgan’s Ulrich. A Chinese high-speed train today reached 486.1 kilometers per hour in what state-run Xinhua News said was a world record for an unmodified commercial locomotive. A specially equipped French TGV set a world record of 574.8 kilometers per hour in April 2007.
“Places west of Shanghai can become part of China’s giant east coast export zone, and that’s already starting to happen,” said Arthur Kroeber, managing director of Beijing-based Dragonomics, an economic advisory firm whose clients include Fortune 500 companies and hedge funds.
China has more than 7,000 kilometers of high-speed track so far. By 2012, Beijing plans to have 42 lines in operation, covering 13,000 kilometers. Within a decade all provincial capitals and cities with more than 500,000 citizens will have high-speed links, the Ministry of Railways says. Already, the Chinese rail system is larger than any other country’s, according to the Paris-based International Union of Railways.
Changsha’s fast rail link enables CITIC Capital to hire senior staff from coastal cities such as Shenzhen to manage the retail malls, said Ching.
When the Guangzhou-Shenzhen line opens next year, travel time to Changsha will shrink to about 2.5 hours from more than 9 hours. Another line, scheduled for completion in 2014, will cut travel time between Guangzhou and Yunfu, a city of 2.6 million in Guangdong province, to 40 minutes from more than 2 hours.
Companies based in Yunfu, such as stainless-steel tableware maker Linkfair Group and agricultural company Wen’s Group, will benefit, said John Scales, Beijing-based transport sector coordinator at the World Bank. The link will help them recruit designers and research staff, according to a World Bank case study on the city to be published next year, said Scales.
China’s development of locomotives has won its companies overseas orders in Argentina, Saudi Arabia and Venezuela, and the nation is competing to build a high-speed railway in California costing more than $40 billion.
Beijing-based CSR Corp., China’s largest maker of rail vehicles, plans to partner with Fairfield, Connecticut-based General Electric Co. on bids for U.S. high-speed train contracts, CSR Chairman Zhao Xiaogang told reporters in Hong Kong today. The companies may compete for lines in California, Florida and elsewhere on the east coast, Zhao said.
In Brazil, Beijing-based China Railway Construction Corp. and China CNR are leading a group bidding for a line that may cost as much as 33.1 billion reais ($19.2 billion).
The overseas expansion has brought new risks to the sector’s stocks. Shares of China Railway Construction, builder of more than half the nation’s railroads, fell the most in almost two years Oct. 26 after it predicted a 4.15-billion yuan loss from a Mecca, Saudi Arabia rail project.
Credit Suisse Group AG that day lowered its stock rating on the company to “underperform” from “outperform.” China Railway Construction reported a 1.36 billion yuan loss for the three months ended September on Oct. 28, compared with a 1.45-billion yuan profit a year earlier.
Critics in China, including professors at Peking University and Beijing Jiaotong University, say the network’s high cost makes it financially unviable in a country where the average urban worker made 32,244 yuan last year, less than one-eighth of the $39,054 average wage in the U.S., according to data from the U.S. and Chinese governments.
Peking University finance professor Michael Pettis called the network a “trophy.” Zhao Jian, a professor of economics at Beijing Jiaotong University, said in a commentary in the China Daily newspaper in April that the “blind pursuit” of high-speed rail is “highly likely to develop into a debt crisis.”
U.S. Rail Bonds
Railroads played a role in the collapse of the U.S. corporate bond market in the late 1800s. The market had grown in prominence on Wall Street as railroad barons looked to raise cash to expand into the American West. Then came a flood of defaults, which prompted lenders to start demanding certain protections, known as covenants, written into bond contracts.
The 1870s proved to be “a disastrous decade” as default rates reached 35 percent, according to a Stanford University research paper.
Russell Hoss, manager of the Newport Beach, California-based EPH China Fund, said investors in China may do better buying companies with businesses along the new lines.
“The best way to play high-speed rail is via branded consumer companies expanding in inland cities that are being linked to the east coast by the new tracks,” he said, declining to name companies.
The $90 million fund’s only rail-linked investment is Nanjing-based China High Speed Transmission Equipment Group Co., which raised first-half revenue from its rail power business more than sixfold to 15 billion yuan.
Kroeber said construction of new track for the network will free up space on existing lines for freight, generating enough revenue over 15 years to pay for the new lines. China’s rail network is “bursting at the seams,” he said.
Freight has doubled between Guangzhou and Wuhan since the route opened in December, said He Huawu, the railway ministry’s chief engineer, in an interview. The separation of passenger and cargo lines will release seven times the capacity for container transportation, according to Shanghai-based Shenyin & Wanguo Securities Co.
Singapore-based DBS Asset Management, which in April set up the China Rail Network Opportunities Fund, sees a long-term expansion.
“Companies in this space are going to see a high level of growth over a sustained period,” said Singapore-based fund manager Chan Kum Kong, who helps DBS Asset Management oversee S$25.6 billion ($19.3 billion). “In an environment where there is a lot of uncertainty, we thought this provided a high level of comfort.”
The fund includes shares in such companies as Fuzhou-based department store Fujian Dongbai (Group) Co., Ltd., which Chan expects to record earnings growth of more than 40 percent over the next two to three years, in part driven by greater mobility of labor spurred by high-speed rail links, he said.
New York-based Echo Lake Capital owns stock in concrete maker China Advanced Construction Materials Group Inc. because it’s poised to “benefit significantly from China’s high-speed rail construction and infrastructure build-out,” said fund manager Ephraim Fields in e-mailed answers to questions.
The Nasdaq-listed company, which supplies more than 50 percent of its concrete to high-speed rail, is also beginning to benefit from development in cities joined by the new lines, said Beijing-based Chairman and Chief Executive Officer Han Xianfu in an interview. It expects to pour 1.5 million cubic meters of concrete for a township near Wuhan spurred by the Guangzhou-Wuhan-Zhengzhou line, said Han.
“Now, business is driven mainly by the supply of concrete for the high-speed rail network,” said Han. “In 10 years, the story will be about how we capitalized on urbanization projects created by that network.”
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