Analysts are betting on higher earnings growth for China Railway Group and China Railway Construction Corp (CRCC) but warned of risks facing the two mainland rail construction giants.
Macquarie analyst Anderson Chow forecast China Railway's earnings per share would grow 155 per cent from this year to 2010, while CRCC's earnings per share would grow 102 per cent.
Credit Suisse analyst Ingrid Wei predicted China Railway's earnings per share would jump 90 per cent from this year to 2010, while CRCC's would double.
Core Pacific-Yamaichi analyst Roslyn Ji forecast China Railway's net profit would grow 168 per cent to 6.12 billion yuan (HK$6.9 billion) in 2010 from 2.83 billion yuan this year, while CRCC's net profit would grow 87 per cent to 7.62 billion yuan in 2010 from 4.08 billion yuan this year.
Ms Ji's outlook for the two state-owned firms, which are listed in Hong Kong and Shanghai, ranged from 'optimistic to totally optimistic'. This was mainly due to heavy spending on rail as part of Beijing's stimulus package to tackle the financial crisis. The government recently said railway investments were expected to reach 600 billion yuan next year and 1 trillion yuan in 2010.
China Railway and CRCC controlled more than 90 per cent of the country's rail construction market, said Ms Wei. 'Railway investment will gather pace after being behind highways and ports for a long time. The government plans indicate a compound annual growth rate of 62.9 per cent for railway investment from 2008 to 2010.'
However, Mr Chow warned: 'Our earnings forecast for China Railway is not certain. We have an underperform rating on [it]. The company is too diversified.'
China Railway had businesses in residential property on the mainland, which is in a downturn, as well as mining there and abroad, Mr Chow said. He pointed to China Railway's mining operations in the Congo, where a civil war is raging. China Railway has a capital commitment of US$3.1 billion to mining and infrastructure deals in the African nation.
'Mining is too much of a risk for China Railway. Most of China Railway's mining projects are greenfield and it is not a mining company.'
China Railway let lapse a nickel mining agreement in Australia with that country's listed mining firm Jervois Mining on its October 31 deadline.
Ms Ji admitted CRCC faced overseas risks, pointing to its rail project in Nigeria, which was taken over by the Nigerian government.