Airline shares rise as rail falls
The central government's decision on Wednesday to freeze railway projects hammered rail stocks but drove up airline shares yesterday.
The battering of China Railway Group's shares prompted the state-owned rail construction company to abort plans to raise fresh capital of 6.24 billion yuan (HK$7.61 billion) through a placement.
China Railway fell 6 per cent to a record low of HK$2.17 in Hong Kong while its A shares in Shanghai dipped 0.6 per cent to 3.19 yuan.
Other rail stocks were not spared. The biggest fall in the sector was recorded by CSR Corp, which dropped 7.8 per cent to close at HK$4.38. In Shanghai, the company's stock slid 1.7 per cent to 5.28 yuan.
China Railway Construction Corp dropped 5.3 per cent to a record low of HK$3.40 and 0.2 per cent to 4.73 yuan.
The sell-off came after a State Council meeting chaired by Premier Wen Jiabao on Wednesday called for a temporary halt to approvals for new railway projects, and a safety re-evaluation of those that had been approved but had not started construction.
Currently, the mainland has 6,000 kilometres of operating high-speed railway and 10,000 kilometres of high-speed railway under construction, said CCB International Securities analyst Dr Eliza Liu Hongke.
'This will have a very negative impact on railway stocks,' Liu said, adding that it would now be a long time before new railway projects were approved.
The massive debt of the Ministry of Railways was also expected to hinder the approval of substantial new rail projects.
The ministry's debt exceeded 2 trillion yuan, Liu said.
'Banks consider this a major problem. The current rail expenditure of 700 billion yuan per year is unsustainable,' she said.
In August last year, China Railway's shareholders approved the company's plan to make a private placement of 1.52 billion A shares on the Shanghai Stock Exchange to 10 investors, including its state-owned parent China Railway Engineering Corp.
China Railway's A-share price of 3.19 yuan yesterday was well below its planned placement price of 4.11 yuan.
'China Railway's share price is very low. If it does the placement now, its shares will be heavily diluted,' JPMorgan analyst Karen Li said.
'In light of the adjustment to the macroeconomic policies of the state, there are uncertainties over obtaining government approvals and, as a result, the private placement of A shares has not been implemented,' China Railway said.
However, shares of mainland airlines rose yesterday as the suspension of high-speed rail projects is expected to ease the drain of passenger from airlines to rail transport in the medium term.
'The news is a medium to long-term positive for airlines, because placing the investment plans on new railways on review means the plans will not resume in the short term,' said Kelvin Lau, a transport analyst at Daiwa Capital Markets.
China Southern Airlines, considered the most vulnerable to competition from high-speed trains since 80 per cent of its revenue is from domestic routes, jumped the most. Its share price surged 6.9 per cent to close at HK$4.95.
China Eastern Airlines Corp finished 6.5 per cent higher at HK$ 3.61. Air China rose 2.9 per cent to HK$7.81.