CRCC limits Mecca rail losses to 1.38b yuan

PUBLISHED : Monday, 24 January, 2011, 12:00am
UPDATED : Monday, 24 January, 2011, 12:00am

Analysts have hailed the sale of a loss-making light rail project in Saudi Arabia by China Railway Construction Corp (CRCC) to its parent company as beneficial for the firm's shareholders.

On Friday, CRCC sold the light rail project in Mecca to its state-owned parent of the same name, which owns 61.33 per cent of CRCC, for 2.08 billion yuan (HK$2.46 billion), CRCC told the Hong Kong and Shanghai stock exchanges. CCRC is listed on both exchanges.

As a result, CRCC will bear no more than 1.385 billion yuan of the project's losses. It will pass on to its parent all further losses plus all the risks and responsibilities for the Mecca railway, as of October 31 last year.

On October 25, CRCC - one of China's largest railway builders - announced that its losses from the Mecca project could be as much as 4.15 billion yuan.

'This will be good for shareholders. This puts the loss-making project behind them,' Anderson Chow, head of infrastructure research for Asia at Macquarie, said.

'This decision appears positive, as it gives better protection to CRCC's minority shareholders, and should go down well with the market given the stock previously fell on the write-off announced in October 2010,' Karen Li, a JP Morgan analyst, said. CRCC said the deal may help cut further losses from the project or even achieve a turnaround for the project.

'Such an arrangement is favourable in protecting the company's shareholders, especially minority shareholders,' it said.

The 18-kilometre light rail project was designed to transport Muslim pilgrims during the annual haj pilgrimage in Mecca, the holy Muslim city, and started operations during the pilgrimage in November last year.

CRCC signed the 6.65 billion Saudi riyal (HK$13.78 billion) contract with the Saudi government on February 10, 2009. As a sign of its importance, the agreement was penned in the presence of Chinese President Hu Jintao and Saudi King Abdullah bin Abdulaziz Al Saud.

The losses arose because the estimated cost ballooned from 12.35 billion yuan to 16.07 billion yuan, partly because the Saudi government substantially increased its demands on the project, CRCC said.

'There were certainly political drivers for the project to be done in time for the pilgrimage in November last year,' said an analyst.

A railway consultant said a senior Chinese leader had demanded that the railway be completed in time for the pilgrimage in November 2010, despite commercial and engineering difficulties.

Saudi Arabia joined China in boycotting the Nobel Peace Prize awards ceremony for Chinese dissident Liu Xiaobo in Oslo, Norway, in December last year. In 2009, China overtook the United States as the biggest importer of Saudi oil.

By selling the project to its state-owned parent, CRCC is no longer obliged as a listed company to disclose negotiations on compensation and other aspects of the project, a financial analyst said.

'Negotiations between China and Saudi Arabia can be politically sensitive. Neither side wants the negotiations to be made public,' the analyst said.

Cost blowout

Cost of the light rail project jumped 30 per cent above estimates

In October, CRCC announced the project's losses, in yuan, could reach as much as: 4.15b yuan