The three major railway policies have transmitted positive signals for railway construction

In recent days, the railway construction has been gradually warming up, and the railway construction funds have apparently become loose. With the continuous investment of funds, the railway construction will gradually increase, which undoubtedly infuses the railway stocks that have been long-lost.

Policy 1: Printing and Distributing "Guiding Opinions on the Entry of Bidding for Railway Engineering Projects into Local Public Resource Trading Market"

Recently, the Office of the Leading Group and the Ministry of Railway of the Central Government’s outstanding issues in the construction of governance projects issued the “Guiding Opinions on the Invitation and Submission of Bidding for Railway Engineering Projects into Local Public Resource Trading Markets,” explicitly requesting the abolition of the Ministry of Railways and the 18 Railway Bureaus (companies). In the original railway engineering transaction center, all railway engineering projects entered the local public resource trading market according to the principle of ownership or authorization. This means that the railway bidding system has undergone major reforms, canceling the original railway engineering transaction center of the Ministry of Railways and 18 railway bureaus (companies), and all railway engineering projects have entered the local market for bidding.

Interpretation: Over the years, the national railway system has become self-contained and has been referred to by some as an “independent kingdom.” Its operating efficiency and imprecise working methods have been criticized. The opening of the railway industry to private capital is conducive to the deepening of the reform of the railway system and the transformation of the functions of the Ministry of Railways. It also brings new investment opportunities for more powerful private enterprises. Although this guidance does not involve financial issues, it is interpreted by the market as a concern for railway construction.

Policy 2: Publish "Implementation Opinions on Encouraging and Guiding Private Capital to Invest in Railways"

The Ministry of Railways issued the "Opinions on Encouraging and Guiding Private Capital to Invest in Railways" on May 16. From the aspects of railway project construction, equipment manufacturing, railway enterprise restructuring and reorganization, almost all private capital is open to the outside world. It stated that “to encourage and guide private capital to enter the railway field in accordance with the law”, “market access standards and preferential support policies must be open and transparent, treat all types of investment entities equally, and impose no additional conditions on private capital”.

Policy 3: The Ministry of Railways issued 20 billion yuan of short-term short-selling bonds on May 17 to issue 20 billion yuan of 365-day unsecured short-term financing bills. The bonds issued this time will be the first short-term short-selling of bonds of the Ministry of Railways this year. The value date is May 18 and the due date is May 18, 2013. The successful bid interest rate is 3.69%. The tender interest rate set for this period of short-term financing bills ranged from 3.51% to 4.51%. As of the issuance of short-term financing bills in this period, the Ministry of Railways and its affiliates have issued debt financing instruments that have not yet reached maturity totaling 623 billion yuan. Among them, the total amount of China's railway construction bonds is 472 billion yuan, corporate bonds are 4 billion yuan, the total amount of short-term financing bills is 35 billion yuan, and the total amount of medium-term notes is 112 billion yuan. In 2012, detailed data on infrastructure investment and financing of the Ministry of Railways shows that the Ministry of Railways plans to invest 400 billion yuan in total, including mid-term and short-term financing bills of 100 billion yuan, bank loans of 110 billion yuan, railway construction bonds of 100 billion yuan, railway construction funds and financial allocations. It was 60 billion yuan and 30 billion yuan respectively.

The Ministry of Railway's "Funding Prospectus" shows that the funds raised by the Ministry of Railways in this period's short-term financing bills will be used for capital turnover in the construction of railways and the purchase and operation of locomotives and vehicles. As of the end of last year, the Ministry of Railways had obtained more than 2 trillion yuan of bank-intended credit.

At present, the market has been worried about the high financial leverage and weak profitability of the Ministry of Railways. Data shows that from 2002 to 2011, the Ministry of Railways' net debt/equity rose from a level higher than 30% to 110%. The annual average compound annual growth rate of freight and passenger transportation of the Ministry of Railways was only 5.8% and 5.3%, respectively, and its EBIT margin was reduced from 26% in 2002 to 13% in 2011.

Regarding the reasons for the low profitability of the high-speed rail, Gao Hua Securities analyst said that its freight and passenger transportation prices are set by the NDRC rather than the Ministry of Railways itself, and the pricing mechanism does not aim at the profit of the Ministry of Railways. From 2002 to 2011, the average annual compound growth of average freight and passenger transportation prices of the Ministry of Railways was 5.8% and 5.3%, respectively, and its profitability also decreased from 26% in 2002 to 13% in 2011.

According to the May Ministry of Railways data, in the first quarter of this year, the Ministry of Railways had a loss of RMB 6,979 million and a debt ratio of 60.62%. Its current ratio (total liquid assets/total current liabilities) was 86.8%, which was higher than the 74.7% at the end of 2011.

Concerned about profitability, the above analysts in the Gao Hua Securities Industry believe that the Ministry of Railways can afford to invest. The main reason is that the railway's public service attributes are strong, and its economic benefits exceed the high-speed rail's own financial return. For example, China's high-speed rail will receive cross-subsidization of freight lines, while the cargo's profitability is still strong. The purpose of building a high-speed rail is to release the existing passenger railway capacity to freight, and the demand for the latter far exceeds the existing capacity.

The release of these three major policies was interpreted by the market as a seismic booster for the railway sector, and the railway sector was stimulated by a number of stocks that are now rising daily. The government's three policies have transmitted positive signals. The policy supports the construction of the railway clearly and the railway construction in the future will steadily advance.