Bank of China to pay 7.5b yuan for coal railway stake
Bank of China (BOC) will pay 7.5 billion yuan (HK$8.55 billion) for a 14.5 per cent stake in a company that will operate a coal railway on the mainland, a move analysts say could lead to the railway's listing.
It is the second time in a month that the leading state-owned bank has made an equity investment in the mainland's railways, which are being aggressively expanded. Last month, the bank paid six billion yuan for a 4.5 per cent stake in a state-owned firm that will operate the Beijing-Shanghai high-speed link.
The dedicated coal rail line will need total investment of 99.8 billion yuan. The firm that will build and operate the railway has registered capital of 51.9 billion yuan, BOC said.
On May 6, BOC, which is listed in Shanghai and Hong Kong, signed an agreement with other investors to set up a company to build and operate a 1,260-kilometre railway to transport coal from Shanxi province in the west through Henan to Shandong province in the east.
The railway is scheduled to be completed in 41/2 years. BOC has the right to appoint one director and one supervisor to the company.
BOC's investment will be made through its Hong Kong-based subsidiary, Bank of China Group Investment, and is meant to be long term, JP Morgan analyst Karen Li said.
'This investment can bring reasonable returns, will help the bank diversify its services and bring more opportunities for the bank in large-scale investments in rail construction and market-oriented reform of the railway sector,' the bank said.
Local state-run railway firms in the three provinces that the rail link will pass through own 83.5 per cent of the firm. The remaining 2 per cent is held by two Chinese coal companies.
'MOR [Ministry of Railways] needs lots of funding given the huge capex [capital expenditure] of the railway,' Li said. 'We do know MOR wants to do more IPOs of its assets. So it's possible this railway company will have an IPO.'
Beijing embarked on an aggressive railway construction programme in late 2008 as part of its stimulus package to tackle the global financial crisis. Railway investment totalled 600 billion yuan last year and is expected to reach 700 billion yuan this year and another 700 billion yuan next year.
'An IPO is possible, as BOC would want to get a return on investment,' CIMB-GK analyst Rebecca Tang said. 'It would take many years for BOC to recover its investment if it relied on the railway's operating profits alone, so an IPO would be a good idea.'
BOC's investment is positive news for the development of the country's rail network because the ministry's finances are tight. 'The ministry needs to take out loans to fund railways, so it will welcome private equity and private sector investment,' Tang said.
Evan Auyang, a former infrastructure consultant at McKinsey and currently deputy managing director of Kowloon Motor Bus, agreed.
'It is important for the MOR to leverage private funding sources,' Auyang said. 'Private funding averaged only 7 to 10 per cent in the past and this needs to increase, especially given the recent credit tightening.'
Lining up
Investment is bank's second in mainland railways in a month
BOC also bought a 4.5 per cent stake in the firm that will run the Beijing-Shanghai high-speed link for, in yuan: 6b yuan
