Mainland China trainmaker faces concerns over its funding outlook

Mainland decision to move away from reliance on infrastructure investments is bad news for CNR and its planned listing in Hong Kong

PUBLISHED : Monday, 10 March, 2014, 5:59am
UPDATED : Monday, 10 March, 2014, 5:59am

This year was meant to be a good one for CNR, one of China's two largest trainmakers, with a planned listing in Hong Kong.

The company was caught in the spotlight of the deadly 2011 Wenzhou bullet train crash that killed 40 people and sparked a public outcry over safety.

Now CNR faces a particularly worrisome outlook for its funding plan, which is estimated to be about US$1.5 billion. Last week, Premier Li Keqiang stressed in his first government work report that Beijing was committed to lessening its reliance on fixed-asset investment for future growth.

That was a clear warning signal to investors that China's decade-long dependence on investment in low-yielding infrastructure projects was entering a challenging phase, especially after the formation of China Railway Corp, which took over train operations from the dismantled Ministry of Railways in March last year.

CNR's short-term borrowing skyrocketed by 200 per cent to 17.3 billion yuan in September

China Railway Corp, which has amassed more than 2.9 trillion yuan (HK$3.7 trillion) in outstanding debt, trimmed its investment in high-speed trains by 33.8 billion yuan to 630 billion in 2014, but plans to increase the railway network by 1,014 kilometres to 5,353 kilometres.

China's opaque railways industry, mired in corruption and mismanagement, has also been blamed for the suicide of China Railways president Bai Zhongren, who jumped to his death in January.

Against this background, a capital shortage has prompted the cash-strapped CNR to expedite its funding plan in order to shore up its shaky financial and operating state.

For example, CNR's short-term borrowing skyrocketed by 200 per cent to 17.3 billion yuan in September from the same period a year earlier, while it suffered a net operating cash outflow of 10.1 billion yuan, up 84 per cent from the same period in 2013, attributed to a surge in uncollected receivables.

The CNR deal is seemingly another tough deal coming down the IPO pipeline after state-owned lender China Everbright Bank's share sale in Hong Kong last year raised more than US$3 billion - the largest IPO in the city that year - but has since performed badly.

Despite the unfavourable conditions, a banker with direct knowledge of the deal reaffirmed that the listing needs to be completed by June since the company is tentatively scheduled for a hearing with the Hong Kong stock exchange in April.

It is understood that the CNR deal will be offered at a discount of 15 per cent on its Shanghai-traded shares, which have dropped more than 12 per cent this year.

Looking at the Hong Kong stock market, all of CNR's listed peers have fallen between 12 and 21 per cent this year.

Being patient may be worth more than a bold move.