Reform of China's railway sector - the last vestige of the planned economy - has prised open the door for mainland rail lines to tap foreign funding. The move began when Guangshen Railway Co became the mainland's first overseas-listed railway, or H share, with a 4.21 billion yuan (about HK$3.91 billion) dual flotation in Hong Kong and the United States in 1996. 'I expect more rail lines will go for listing. Even though the overall railway sector is loss-making, some rail lines are profitable,' company secretary Yi Aiguo said. One profit-maker is Sanmao Railway Co, which is planning a flotation of 200 million B shares in Shenzhen to raise between $300 million and $400 million during the first half this year. Sanmao's chief accountant Pang Yueyun said the 80 km Chunan-Luoding Railway which feeds Sanmao, as well as the 580 km Guangzhou-Meizhou-Shantou line, are expected to sell shares on the domestic market shortly. Both Guangshen and Sanmao are bolstered by their participation in the highly lucrative markets of Guangdong province. Guangshen, which runs the rail service between Guangzhou, Shenzhen and Hong Kong, was the country's most profitable state-owned line when it was picked to issue shares abroad in 1994. The 357 km Sanmao Railway - which runs west from Sanshui in Guangdong's south to Maoming in Guangdong's southwest - provides freight and passenger services in the fastest-emerging region of the province. Both railways enjoy pricing flexibility, which is rare in China where Beijing continues to maintain a tight grip over fare-setting. Guangshen generates the bulk of its income from passenger traffic in the highly competitive Guangzhou-Shenzhen corridor, while Sanmao derives 70 per cent of its turnover from freight transport. Sanmao's clients include mines and petrochemical plants, which rely heavily on railways for reliable and cost-effective means of long-haul, freight-transport services. Mr Pang said there was increasing competition from road transport, particularly in short-haul freight services covering 300 km or less, but the bulk of the railway's long-haul freight services were unlikely to be affected. 'Roads are faster than railways, although they are more expensive,' he said. Road-freight prices, for example, were more than 30 fen per tonne/km, or about double Sanmao's most expensive rate. 'Railways remain the mainstay for low-value goods such as coal, construction materials and steel. How much is needed to carry a tonne of bricks on roads?' Mr Pang said. Sanmao benefits from its position at the crossroads of the railway network linking the mainland's coast and southwest interior. '[The railway's] future is determined by the government's policy of developing the inland regions in the west,' Mr Pang said. Unlike Sanmao, Guangshen is more of a regional player, with business limited to traffic along the Guangzhou-Shenzhen route. Its connections with Hong Kong have played a significant role in its development. However, the railway's overall passenger flows have declined since 1994, hurt by fierce competition brought about by a proliferation of expressway bus operators, a substantial rise in ticket prices, and the mainland's austerity programme. 'Although Guangshen is the sole railroad operator between Guangzhou and Shenzhen in the country's rapidly developing Pearl River delta, its future prospects are not particularly exciting due to traffic diversion to roads in the region as well as stagnant immigration to the Shenzhen special economic zone,' Credit Lyonnais Securities Asia analyst Charles Huang said. To attract customers, Guangshen is spending listing proceeds on high-speed and electrification projects that will enable it to provide faster and more frequent services. At the end of last year, Guangshen had 23 pairs of high-speed trains operating at speeds of 160 kph - 45 per cent faster than regular train service. Eighteen of the train pairs run between Guangzhou and Shenzhen. The remaining five operate as through-trains between Kowloon and Guangzhou. The railway is now moving to upgrade the trains to operate at 200 km/h. Guangshen has made use of fare cuts to reverse downward passenger flows. In November 1996, the company slashed fares on domestic high-speed passenger services. 'We find our strategy very successful because it has caused passengers to switch from cheaper soft and hard seats on ordinary train services to more expensive high-speed services,' Mr Yi said. The service also has enhanced the railway's competitiveness against other modes of transport. Passengers using high-speed services jumped to about 280,000 a month in November and December 1996, compared with less than 100,000 before the cut. That passenger level was maintained throughout last year. But the cut-rate fares also have had their price. Guangshen's first-half net profit dropped a dismal 14.7 per cent to 435.15 million yuan, hit by a fall in freight revenues and restrictions on the entry of mainland passengers in the run-up to Hong Kong's return to China. Passengers transported rose 10.03 per cent to 12.46 million, but this was offset by an average 20 per cent drop in domestic high-speed train fares. Analysts are sceptical about the railway's ability to reverse current downward trends. 'Only restructuring or business diversification would improve the company's prospects and potentially boost the share price,' Mr Huang of Credit Lyonnais said.