Building slowdown hits rail sector
Despite having been thrown a 300 billion yuan (HK$366 billion) lifeline, the mainland's cash-strapped rail sector is having to issue bonds to repay debts, and the slump in rail spending accelerated in November.
China Railway 25th Bureau Group plans to issue 200 million yuan of one-year bonds on December 22, of which 85 per cent will be used to pay off debts.
The company is a subsidiary of China Railway Group, a state-owned infrastructure construction conglomerate listed in Shanghai and Hong Kong.
China Railway 25th Bureau's gearing ratio stood at 86 per cent on September 30, which is high, according to Brilliance Rating, a mainland credit rating agency. The rail company suffered a net operating cash outflow of 79.58 million yuan in the first nine months of this year, in contrast to a net operating cash inflow of 627.48 million yuan at the end of last year, according to its bond prospectus. China Railway 25th Bureau's accounts receivable rose 35.4 per cent to 1.98 billion yuan on September 30 from 1.39 billion yuan at the end of last year, mainly because of slow payments from its main customer, the Railways Ministry.
During the first nine months of this year, China Railway 25th Bureau's new contracts plunged 56 per cent to 8.89 billion yuan, according to its prospectus. 'The main reason is the change in the pace of the nation's rail construction. This year, the value of rail project tenders by the Railways Ministry fell 90 per cent.'
Rail construction spending by the Railways Ministry in the first 11 months of this year fell 34.7 per cent to 396.32 billion yuan, a sharper decline than the 28 per cent fall in the first 10 months this year, according to the ministry's website.
Karen Li an analyst at JP Morgan, said: 'It's 100 per cent sure the Railways Ministry will miss its target of 600 billion yuan of rail construction spending for the whole of this year. January and February will see many stalled rail projects resume construction, but it will be a very gradual recovery in the first quarter.'
The Railways Ministry announced in November that it would be getting 200 billion yuan of funds, mostly in bank loans. In addition, the ministry issued 100 billion yuan of long-term bonds in October and November.
Most of this 300 billion yuan was earmarked for paying off the ministry's debts to railway companies, Li said: 'There is not much money left for new railway projects. The Railways Ministry definitely needs more money.'
Another reason for the slowdown in rail construction is because a report on the high-speed train accident of July 23 has not yet been released, Li added. Contractors expect this report to stipulate new railway standards as part of the government efforts to improve safety, but are uncertain what standards to adopt, said Li. 'That is a key reason holding back rail projects.'