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Railway builders forecast earnings drop this year

PUBLISHED : Monday, 09 April, 2012, 12:00am
UPDATED : Monday, 09 April, 2012, 12:00am

China Railway Group and China Railway Construction Corporation (CRCC), the companies that build most of the mainland's railways, expect lower earnings this year amid sharp falls in the nation's spending on railway projects.

The state-owned companies are listed in Shanghai and Hong Kong.

China Railway Erju, a Shanghai-listed subsidiary of China Railway, expects a 70 per cent fall in net profit in the first quarter.

'Due to the slowdown in construction of high-speed railway in China, we forecast the company's construction revenue will significantly decrease in the first quarter, causing our profit to drop substantially,' it said.

The group, however, aims to win 650 billion yuan (HK$797 billion) of contracts this year, up 14 per cent on last year's 570.8 billion yuan of projects, which in turn were down 22 per cent on deals in 2010.

Revenue for this year is forecast at 431 billion yuan, down 2.5 per cent from 442.22 billion yuan last year.

'China Railway's target of 14 per cent increase in new contracts looks aggressive,' said a report from Daiwa Capital Markets. Daiwa forecasts that China Railway will see revenue of 427 billion yuan this year against the company's target of 431 billion yuan.

CRCC, meanwhile, has set a revenue target of 430 billion yuan this year, 6 per cent lower than the 457.37 billion yuan posted last year. CRCC's target of 430 billion yuan this year is below a Bloomberg estimate of 479.64 billion yuan in a poll.

The company aims to win 550 billion yuan of contracts this year, after securing 681.18 billion yuan of deals last year. The new railways component of last year's contracts plunged 68.3 per cent to 137.36 billion yuan.

The companies' reduced expectations reflect the steep drop in the mainland's spending on new railways, which plunged 67.5 per cent to 20.8 billion yuan in the first two months of this year, according to the website of the Ministry of Railways.

Rail spending has been declining since the arrest of former Railways Minister Liu Zhijun for suspected corruption in February last year. Liu launched the nation's high-speed railways programme, making it the world's longest high-speed railway at over 8,000 kilometres, However, the project left the ministry with more than two trillion yuan of debt.

'The domestic economy remains beset by a host of problems such as imbalanced and unsustainable development. Competition in the international market is set to intensify with growing instability and uncertainty. A market environment that is even more complex and challenging is ahead of us,' said China Railway.

SinoPac Securities last week cut its revenue forecast for China Railway by 9 per cent this year and 7 per cent for next year.

To offset the rail downturn, China Railway is moving into areas such as airport construction, mining, property development and road building.

'The move is a bit late and it will take time for the diversification to take effect in offsetting the decline in demand from railway construction. Taken together with its poor managerial capabilities, we don't see the stock as a choice for long-term investors,' said a SinoPac report.

China Railway's net profit declined 9.6 per cent to 6.69 billion yuan last year, while turnover dipped 3.1 per cent to 442.22 billion yuan.

The fall was attributed to tighter credit policies which resulted in lower investment in railway construction, a substantial fall in the number of railway projects open for bidding, a lack of funding for the projects in progress and delays in or suspension of projects.

As of the end of last year, China Railway posted a net operating cash outflow of 13.5 billion yuan, compared to a net cash operating inflow of one billion yuan in 2010.

'China Railway will remain troubled by cash-flow issues because the Ministry of Railways and local governments are still in fund shortage, and the company needs a great deal of capital for its property development segment,' said SinoPac.

CRCC is also diversifying. Chairman Meng Fengchao has said the company will focus on housing construction, municipal work, water conservancy and electric power, and will actively explore mining, energy, and dredging projects.

'The company attaches great importance to restructuring. Looking into 2012, the company will strengthen transformation and upgrading, cost reduction and efficiency,' said Meng.

CRCC's revenue was down 2.72 per cent to 457.37 billion yuan last year, but net profit jumped 82.6 per cent to 7.88 billion yuan. Overseas revenue fell 23.5 per cent to 17.2 billion yuan in the period.

'The continuous unrest, wars and riots in North Africa and Middle East since 2011 have affected the company's overseas operations. The weak global economic recovery, overall bleak prospect of the international economy, and growth of trade protectionism all lead to relatively high uncertainty in overseas construction operations,' said CRCC.

When civil war broke out in Libya earlier last year, CRCC evacuated thousands of workers from its projects in the North African country.


The number of hours it takes to travel from Beijing to Shanghai on a high-speed train travelling at 300km/h


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