Capital of new railway firm 1tr yuan
Spin-off from ministry seen viable even as debt of 2.7 trillion yuan remains unresolved
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China Railway Corp, the railway operator to be spun off from the dissolved Ministry of Railways, will have registered capital of 1.04 trillion yuan (HK$1.3 trillion), the central government announced yesterday.
However, the ministry's 2.7 trillion yuan debt remains unresolved.
Beijing announced the break-up of the ministry last weekend, with its regulatory function absorbed into the Ministry of Transport and its operations spun off into China Railway.
The firm's registered capital dwarfs the market capitalisation of most Hong Kong-listed companies, including railway builder China Railway Group, which is HK$78.8 billion, and Cheung Kong's HK$268 billion. HSBC has a market capitalisation of HK$1.57 trillion.
"Before the historical debt of the railways ministry is resolved, the state will temporarily not tax the company's profit," the government said on its website.
The ministry's debt stood at 2.7 trillion yuan at the end of September last year, as it suffered a loss of 8.54 billion yuan for the first nine months.
China Railway Corp has a viable capital structure, said Ivan Chung, a senior credit officer at Moody's Investors Service, an international rating agency.
"The company is technically solvent. It looks like a viable balance sheet for them to start a business with," Chung said.
With registered capital of 1.04 trillion yuan and debt of 2.7 trillion yuan, the company had a debt-asset ratio of 73 per cent, which was comparable to that of most state-owned enterprises, Chung said.
"Its leverage is not low, but acceptable," he said.
China Railway Corp would be controlled by the central government, with its financing managed by the Ministry of Finance, the government said.
Whether and when the company could be floated or some of its subsidiaries listed depended on its profitability, Chung said.
"The current railway model is not commercially viable, with its low fares, large workforce and inefficiencies," he said. "They need to change their business model. Otherwise, the company cannot attract investors."
To improve profitability, China Railway Corp might have to cut staff, Chung said.
The ministry has about two million employees.
"How do you resolve such a huge debt? There are fears that ticket prices and freight rates will increase," said Zheng Tianxiang, a transport professor at Sun Yat-sen University in Guangzhou.
At a recent press conference in Beijing, a ministry official said rail ticket prices and freight rates would not increase for now.
Because railways are a public service, Zheng said ticket prices were unlikely to rise much.