CNR, CSR merger likely to rattle global competition

Beijing pushing for merger of nation's leading rolling stock makers to reduce competition, but move would also have global impact on pricing

PUBLISHED : Wednesday, 29 October, 2014, 5:57am
UPDATED : Wednesday, 29 October, 2014, 6:36am

Foreign rolling stock makers like Alstom and Siemens have good reason to feel nervous over the anticipated merger of China's two leading train makers, China CNR Corporation and CSR Corporation, analysts say.

CNR and CSR, both listed in Hong Kong and Shanghai, produce roughly 90 per cent of the trains that run on the mainland but their combined share of the overseas rolling stock market is less than 10 per cent.

Guotai Junan analyst Gary Wong said if they merged he would not be surprised to see that share grow to between 30 and 40 per cent in five years.

Their overseas market share has already been growing quickly. In the first half of this year, CSR's overseas revenue leapt 125 per cent to 4.57 billion yuan (HK$5.79 billion), while CNR's rose 65.6 per cent to 3.83 billion yuan.

Haitong International Securities forecasts that overseas deals will contribute 25 per cent of CSR's total revenue in 2016, up from 9 per cent in the first half of this year. The cumulative total of CNR's export contracts jumped 178.2 per cent to US$1.54 billion in the first half, according to its interim report.

Industry consultants Frost & Sullivan estimated the global rolling stock market (including China) was worth €51.5 billion (HK$507.3 billion) last year. Guotai Junan's Wong estimates that China accounts for half of that market.

Barclays analyst Song Yang said the central government's main motivation for the merger was to avoid competition between the two firms. She said rolling stock produced by international peers like Alstom and Siemens was 100 to 150 per cent more expensive than CSR and CNR's, adding that the merger would give them stronger pricing power.

According to Bloomberg, the weighted average cost of capital for Siemens and Alstom is 7.7 per cent, while that of CSR is 10.8 per cent and that of CSR is 6.7 per cent.

Wong said a merged entity could set higher prices that were still cheaper than those of international peers, and thus boost profit margins.

"If they combine, they will earn much more," he said. "They will have more money for acquisitions and R&D. They can grow bigger much faster. So Alstom and Siemens should be worried."

Wong said when CSR and CNR bid for a subway contract in Argentina in 2012, CNR initially submitted a quotation of US$2.4 million per carriage, while CSR quoted a price of US$1.27 million. "That shocked the Argentinian government," he said, which then capped bids at US$1.27 million per carriage. CNR submitted a quotation of US$1.26 million in the second round, but CSR won with a bid of US$1.21 million, roughly half of international prices but similar to Chinese prices.

According to media reports, both CSR and CNR have submitted bids for up to 95 high-speed trains for the California high-speed railway in the US, with the contract estimated to be worth US$4.28 billion.

British Prime Minister David Cameron has said he would welcome Chinese investment in high-speed railways in Britain. He recently backed a proposed high-speed railway - dubbed the HS3 - linking cities in northern England.

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