China’s US$4.3 billion IPO highlights investor confidence in world’s largest rail network

Frank Tang

China’s first initial public offering allowing investors to buy shares in the world’s largest rail network proved hugely popular this week, with interest in the initial public offering for the Beijing – Shanghai High-Speed Railway line oversubscribed by 126 times.

On Monday, more than 12 million retail investors expressed interest in the initial public offering (IPO) for the company which is owned by the state-owned China Railway, and was aiming to raise 30 billion yuan (US$4.3 billion) in Shanghai.

According to exchange filings on Tuesday, the issuer was forced to offer some shares previously assigned for institutional investors to online bidders, although only 0.79 per cent of the bids from retail investors were successful.

The offering matches the 30 billion yuan raised by Postal Savings Bank of China last month, and a similar amount raised in 2015 by Guotai Junan Securities.

In 2018, the 1,300km line reported an annual profit of 10.2 billion yuan (US$1.5 billion) despite having only 67 employees, according to its prospectus, making it one of the most profitable parts of the system.

Last week, Lu Dongfu, the chairman of China Railway, said the listing was just the beginning for the state-owned enterprise. In 2020, China Railway is set to list its special cargo services unit, its railcar maker Jingying Heavy Industry and the Beijing Tieke Shougang Railway Technology Corporation, a subsidiary that develops high-speed railway equipment.

China Railway will look into the feasibility of floating shares of other lines and business groups, Lu added.

The successful offering showcased public confidence in the high-speed railway system, which is often hailed by Beijing as an example achievement of China’s economic development model, and provides encouragement for China Railway, which has been largely relying on governmental funding, bank loans and bonds.

Money from the IPO will be used to fund the purchase of a 65.1 per cent stake in a Chinese railway operator for 50 billion yuan (US$7.2 billion), according to the prospectus, highlighting a desire from the government to tap he capital markets to fund its growth instead of relying solely on state funds.

High-speed rail has obvious competitive edge over flights, ordinary trains and buses. Its future competitors are mainly new lines in the same directions

Huatai Securities

“High-speed rail has obvious competitive edge over flights, ordinary trains and buses. Its future competitors are mainly new lines in the same directions,” said a note from brokerage firm Huatai Securities.

It will also bring in much-needed cash for China’s railway investment, with the overall debt level of China Railway already high. At the end of September, China Railway had debts totalling 5.4 trillion yuan (US$774 billion), with its return on assets just 0.07 per cent in 2018.

According to its own report, the group paid only 80 billion yuan (US$11.5 billion) in interest in 2018, or an annualised interest rate of just 1.6 per cent, compared to the one-year loan prime rate in China of 4.2 per cent.

China should maintain capital spending on traditional infrastructure projects including transport and new facilities such as 5G networks to ensure steady economic growth, according to Zhang Jun, chief economist at Morgan Stanley Huaxin Securities.

“Despite the high debt piles of China Railway, they are relatively transparent and controllable,” Zhang said.

China plans to spend 800 billion yuan (US$115 billion) on railway investment in 2020, which would be on par with the past five years. In 2020, a total of 2,000km of high-speed railway lines will start operation, which is more than the total high-speed network in Germany.

China operates the world's largest high-speed railway network, with 35,000km in total.

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