Construction contracts for the long-awaited Shanghai-Beijing high-speed line were smaller than expected at RMB83.7 billion combined, Fu Chenghao writes in the Shanghai Daily, meaning winning bidders are likely to do less well than hoped. However, their suppliers could be in line for a windfall

The recent announcement that construction of the long-awaited Beijing-Shanghai high speed rail line would soon commence was a milestone for China’s railway infrastructure sector.

The 1,318-kilometer Shanghai-Beijing high-speed link will allow trains to run at speeds of up to 350 kilometers per hour, more than halving the travel time between the two cities to five hours.

The Ministry of Railway has earmarked RMB300 billion this year for building railway infrastructure as part of its five-year (2006-2010) US$172.4 billion (RMB1.25 trillion) state rail infrastructure program. This follows an estimated RMB256 billion allocated to the program last year and RMB155 billion in 2006, indicating spending is on a fast track. The five-year budget is quadruple the allocation for 2001-2005 and does not include a further RMB250 billion allocated for train purchases and upgrades.

A wide range of domestically listed companies, from construction contractors and equipment manufacturers to cement and steel producers and insurers, stand to benefit over the coming years.

This is despite the fact that the recently announced RMB83.7 billion worth of contracts for civil engineering work on the Shanghai-Beijing project - divided into six separate contracts - was much smaller than expected. Previous media reports said the contract would be at least RMB100 billion, and many analysts said the bid winners would only gain a tiny boost to their share earnings.

China Railway Group Ltd, Asia's leading rail and metro line contractor, which was listed in Shanghai and Hong Kong last month, won RMB22 billion worth of contracts covering two sections, while listing hopeful China Railway Construction Corp won another two sections worth a combined RMB33.7 billion. Sinohydro Corp and Hong Kong-listed China Communications Construction Co won RMB14.3 billion and RMB13.7 billion worth of work, respectively.

Citing the lower-than-expected contract values, analysts said the successful bidders would probably not make a handsome return from the project. For example, Sinohydro's RMB14.3 billion winning bid to build a 266.6 kilometer section of line translates into a civil engineering cost of only RMB54 million per kilometer, way below the world average for high-speed railroads, according to Everbright Securities analyst Huang Xuejun.

The winning bid was even lower than the RMB56 million per kilometer contract awarded for construction of the Harbin-Dalian railway, which was initially designed to allow trains to run at just 200 kilometers per hour. "This heralds increasing competition in the rail infrastructure sector,'' Huang said, although he added that China Railway Group and China Railway Construction were likely to maintain their leading roles in the industry.

Orient Securities analyst Luo Guo said it was hard to predict likely profits for the China Railway Group from the Shanghai-Beijing project. He warned investors that its stock price was too high because investors had factored in an expectation of increasing returns in the rail infrastructure sector, which had not materialized.

Orient rated China Railway Group "neutral'', maintaining its earnings per share forecast for the firm at RMB0.16 for 2007, RMB0.2 for 2008 and RMB0.26 for 2009. Morgan Stanley estimated earnings per share for the company at RMB0.11, RMB 0.22 and RMB0.32 for each of the three years. The Shanghai-Beijing line contract would increase China Railway Group's earnings per share by just RMB0.02 every year between this year and 2010, according to Shi Lei, an analyst at Essence Securities.

Construction for the Shanghai-Beijing rail is expected to start as early as tomorrow, with a view to the project being completed by 2010. The total investment in the lime is expected to be RMB220 billion, according to China International Capital Corp.

Other sectors also stand to benefit from such rail projects, including machinery makers and construction material producers. Makers of drilling rigs, excavators and bulldozers in line to supply the railway builders were also likely to gain credibility with investors given the large workload, tight schedule and high degree of difficulty for the project, CICC said.

Among them, makers of rotary drilling rigs were likely to see the strongest growth in orders, CICC analysts said. The Shanghai-Beijing rail project is expected to need 100 new rotary drilling rigs this year and next year. Just 400 to 500 rigs were sold in China last year. The single Shanghai-Beijing project would contribute significantly to the rotary drilling rig sector's annual growth, the analysts said.

This article was originally published in Chinese in the Shanghai Daily on January 18, 2008. The China Perspective takes no responsibility for the accuracy of the original article.