Rail ministry will be forced to tighten its belt
The mainland's Ministry of Railways will be heavily indebted next year despite a cash injection of 200 billion yuan (HK$245 billion), with little choice but to slash spending, an analyst predicts.
Using Railways Ministry data, Masterlink Securities analyst James Chung forecast rail construction spending will drop to as low as 300 billion yuan, from 444 billion yuan this year and 794.9 billion yuan last year. The figures are well below the ministry's target of 600 billion yuan spending this year and 550 billion yuan next year.
'Next year, cash flow will be very tight, so the amount of rail projects will drop,' said Chung.
He calculates that next year's spending on construction will have to be low in order for the cash-strapped ministry to have positive cash flow. If the bill was 440 billion yuan, the ministry would suffer a net cash outflow of 166.7 billion yuan.
By comparison, the Railways Ministry projects it will have a net cash inflow of 1.13 billion yuan this year, compared with 35.49 billion yuan last year. Bank loans to the ministry will plunge 40 per cent this year and 24 per cent next year, Chung forecasts.
'China's big four state banks have reached the limit of their lending to the Railways Ministry,' he said. 'The ministry has already borrowed a lot. If it borrows more, its interest payment will be very big. Its annual interest payment is nearly 200 billion yuan. This is too expensive.'
The ministry's leverage ratio has soared from below 45 per cent in 2007 to nearly 60 per cent, according to the ministry.
Its repayment of principal plus interest is forecast to jump from 150.12 billion yuan last year to 230 billion yuan this year and 250 billion yuan next year, according to the ministry's data and Chung's calculations.
'Besides bank loans, issuing bonds will also be a problem for the Railways Ministry,' Chung said. The amount of bonds issued will drop from 240 billion yuan this year to a maximum of 130 billion yuan next year, Chung predicts.
On November 1, the Railways Ministry confirmed it would soon receive 200 billion yuan. Chung said China Development Bank would contribute 100 billion yuan, while the Agricultural Bank of China would supply 50 billion yuan.
The mainland's two dominant train makers, CSR and China CNR, recently received payment in arrears of 23 billion yuan from the Railways Ministry, China Business News reported.
The newspaper quoted a source saying that the Railways Ministry owed CNR and CSR a total of 44 billion yuan as of September 30.
JPMorgan analyst Karen Li said CSR chairman Zhao Xiaogang recently told analysts all his company's accounts receivable from the Railways Ministry would be completely paid off by the end of this year.
She said the mainland's two dominant rail construction firms, China Railway Group and China Railway Construction, were hopeful that most of their receivables would be paid off by the end of this year.
'In the next few months, the Railways Ministry is definitely getting funding,' she said. 'This is positive.'
Many rail projects remained suspended but should resume next month, the management of the two rail construction firms told Li.