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1、ContentsPIVOTALQUESTIONS4 HYPERLINK l _TOC_250013 Q:CanChinasrailwaysystemgeneratereasonablereturns? HYPERLINK l _TOC_250012 What progress is Chinas railway system making?5 HYPERLINK l _TOC_250011 OverviewofChinasrailwaysystem HYPERLINK l _TOC_250010 Financialsstillweakbutimprovementswitnessed HYPER

2、LINK l _TOC_250009 Aggressiveexpansionleadstohighleverage HYPERLINK l _TOC_250008 What can China learn from developed countries?10 HYPERLINK l _TOC_250007 ChinasHSRlengthdominatewhileoperationsstilltoimprove HYPERLINK l _TOC_250006 CasestudyofJapan:privatisationisthekeydriver HYPERLINK l _TOC_250005

3、 CasestudyofEurope:deregulationasalong-termcatalyst HYPERLINK l _TOC_250004 What can developing countries learn from China?22 HYPERLINK l _TOC_250003 HSRoperationmightitselfgenerategoodreturns HYPERLINK l _TOC_250002 Whatsbeyondthefinancialbenefits? HYPERLINK l _TOC_250001 Leveragingthecapitalmarket

4、tofinancerailwayinvestments27 HYPERLINK l _TOC_250000 CasestudiesofChineseHSRsWHATS PRICED IN33China railway related research reviewChinaRailwaydetailedanalysis#3: HYPERLINK /shared/d2adIHebhpUFPRD Howwillhighway-to-railwayconversionaffect HYPERLINK /shared/d2adIHebhpUFPRD freight transportation in

5、China? 1/14/2019ChinaRailwaydetailedanalysis#2: HYPERLINK /shared/d2yxd3wezgpyc6f UBSEvidenceLab:Whatdidweobservefrom HYPERLINK /shared/d2yxd3wezgpyc6f our analysis of HSR commute times?8/3/2018ChinaRailwaydetailedanalysis#1: HYPERLINK /shared/d2rD5YXRcFiIGSy UBSEvidenceLab:howsignificantisthehigh-

6、HYPERLINK /shared/d2rD5YXRcFiIGSy speed railway network effect? 7/3/2018China Construction: HYPERLINK /shared/d2XeQ4J97bdeC85 UBS Evidence Lab inside: from builders to operators, what is HYPERLINK /shared/d2XeQ4J97bdeC85 the market missing in PPP? 5/29/2019ChinaRailway: HYPERLINK /shared/d2CSKobCYq0

7、Ht2 UBSEvidenceLabInside:read-throughsfromtheChinadomestic HYPERLINK /shared/d2CSKobCYq0Ht2 travel survey 3/11/2019China Railway: HYPERLINK /shared/d2WkQbW52W/ What can we expect from railway reform? 3/5/2019China Railway: HYPERLINK /shared/d2pBhGw3ob Revising up 2020 railway FAI to Rmb850bn, a hist

8、orical high 8/9/2018China Railway SectorUBSResearchUBS Research THESIS MAP MOSTFAVOUREDLEAST FAVOUREDDaqin Railway, Guangshen Railway, CRCC, CRG, Zhuzhou CRRC and CRSCPIVOTALQUESTIONSQ: Can Chinas railway system generate reasonablereturns?Yes. We think reasonable financial returns could be achieved

9、by increasing volume and tariffs, leveraging railway networks and reforming tariff structures. On top of the financial returns, we believe there are also significant economic and social benefits, which tend to be difficult to quantify.WeconsiderChinasHSRexpansionareplicablemodelforotherdevelopingcou

10、ntries. HYPERLINK l _bookmark0 moreQ: How will the highway-to-railway (H2R) conversion affect various industrials companies? We expect the H2R conversion to help the government reach its 30% railway freight volume growth target during 2017-20. However, we expect railway freight turnover growth to be

11、 smaller, at 23% during2017-20E.RailwaycompaniesshouldbenefitfromtheH2Rconversion,whileheavy-dutytrucks (HDT) makers and toll road operators may suffer. HYPERLINK /shared/d2adIHebhpUFPRD How will highway-to-railway conversion affect freight transportation in China? 1/14/2019Q: Will railway reform ac

12、celeration bring significant benefits to listed railway operators?Yes. We are optimistic on Chinas railway reform and expect listed operators to benefit from: 1) asset injections; 2) land value monetisation; and 3) potential tariff hikes. In addition, we expect railway reform to accelerate in 2019.

13、HYPERLINK /shared/d2WkQbW52W/ What can we expect from railway reform? 3/5/2019UBSVIEWPositive on the railway sector. We expect Chinas railway operators to benefit from the H2R conversion and accelerated railway reform. We believe the railway system could offer significant economicandsocialreturnsasw

14、ellasfinancialreturns.Inourview,otherdevelopingcountriescould replicate Chinas HSR network.WHATSPRICEDIN?Wethinkthemarkethasbeenconcernedtherailwaysystemssignificantcapexandhighleverage would hurt listed railway operators performances. However, we believe the market has not fully pricedinthepotentia

15、leffectsofChinasrailwaynetworkexpansionorpotentialtariffhikes.EVIDENCEConductedinJuneandDecember2018,UBSEvidenceLabscommutingtimeanalysisof172HSRlines andtravellersfeedbackinitsdomestictravelsurveysuggesthigherutilisationofHSRsandapotential HSRnetworkexpansion.OurcasestudiesofJapanandEuropesrailways

16、ystemsindicateflexibletariff schemesanddiversifiedbusinesscouldhelpimproveoperatingprofits.Ourin-depthanalysisofHSRs returnsshowcasesvariousbenefitsfromtheaggressiveexpansionoftheHSRnetwork.OverviewofChinasHSRSource: China Railway, National Development and Reform Commission (NDRC), National Bureau o

17、f Statistics of China (NBS), UBS EvidenceLabChina Railway SectorUBSResearchPIVOTALQUESTIONSreturn Q: Can Chinas railway system generate reasonable returns?UBS VIEWYes. We think reasonable financial returns could be achieved by increasing volumeandtariffs,leveragingrailwaynetworksandreformingtariffst

18、ructures. Ontopofthefinancialreturns,webelievetherearealsosignificanteconomic andsocialbenefits,whichtendtobedifficulttoquantify.WeconsiderChinas HSRexpansionareplicablemodelforotherdevelopingcountries.EVIDENCEUBS Evidence Labs commuting time analysis of 172 HSR lines andfeedback fromtravellersinits

19、domestictravelsurveysuggesthigherutilisationofHSRsanda potential HSR network expansion.OurcasestudiesofJapansandEuropesrailwaysystemsindicateflexibletariff schemesandadiversifiedbusinesscouldhelpimproveoperatingprofits.Our in-depth analysis of HSRs returns highlights various benefits of an aggressiv

20、e expansion of the HSR network, including boosting tourism, accelerating urbanisation and alleviatingpoverty.Our case studies of two of Chinas most profitable HSRs and also Chinas railwayfootprintsabroadsuggestChinasHSRmodelisaprofitablebusiness model for other developing countries to follow.WHATS P

21、RICED IN?We think the market has been cautious about Chinese HSRs low return and high leverage. In addition, we suggest the market does not expect railway reforms to increase tariffs and promote asset injections for Chinas existing railway operators, as this has been delayed for a long time.Investor

22、stendtoquestionthehighleverageofChinasrailwaysystem,especially thegovernmentsfocusonHSRinthepastdecade.UBSEvidenceLabsproprietary analysisofrailwaysystemsinChina,JapanandEuropeindicatedthat:1)Chinahas the most extensive railway network in the world but its pricing and operating mechanism still have

23、room to improve; 2) there is financial upside in operating HSRsthroughvolumeandtariffimprovements,whilecostsarerelativelyfixed;andtherearevariousspill-overeconomicandsocialbenefitsbesidesfinancialreturns. We believe Chinas HSR network provides a profitable model for other countries (suchasBeltandRoa

24、dcountries),andshouldbereplicated.WhatprogressisChinasrailway systemmaking?Overview of Chinas railway systemWe think China has one of the worlds most advanced rail transit system interms oftechnologyandoperatinglength,focusingonHSRandurbanrailtransit(URT) and accommodating divergent travelling deman

25、d. According to China State RailwayGroup(CHINARAILWAY,previouslyknownasChinaRailwayCorporation CRC), a high-speed railway is defined by its travelling speed of at least 200km/hour. In China, the highest speed is around350km/hour.Figure 1: Chinas rail transit system, by end-2018China has a world lead

26、ing network of HSR and URTRail transitHSRConventional railUrban rail transitSubwayLight railMonorailCommuterrailModerntramMaglevRail transitHSRConventional railUrban rail transitSubwayLight railMonorailCommuterrailModerntramMaglevAutomatedPeople Mover SystemsRailwayUrban rail transitHigh-speed rail

27、Conventional railSubwayLight railMonorail Commuter rail Modern tramMaglevAPMOperating length (km)29,000102,0004,354255996573295810Construction cost (Rmb m/km)100-15050-80500-800280-330100-150200-300100-150300-600400-600Unit fare (Rmb/passenger-km)0.30-0.800.06-0.200.15-0.500.10-0.500.10-0.500.15-0.5

28、00.10-0.301.00-1.700.15-0.50Capacity (persons/train)600-1,000600-1,0002,000-3,000600-1,000300-500600-1,000100-300300-600300-500Speed (km/h)250(200in160some cases)60-12050-6050-6060-12050-60100-50060-120Source: CHINA RAILWAY, China Association of Metros, UBSCHINA RAILWAY is a wholly state-owned enter

29、prise responsible for the construction and operation of the national railway, which accounts for 92% of the total railway-operating length in China as of end-2018. According to CHINA RAILWAY, private railway is usually constructed and managed by local governmentsand/ordedicatedenterprises.AsforURT,t

30、henetworksystemineach city is generally managed by investment holding companies established by local state-ownedassetssupervisionandadministrationcommissions(SASAC).URT companyJV company: private railwayJV company: national railwayLocal SASACInvestment company/DedicatedenterpriseRegional Administrat

31、ionNational Railway AdministrationDesign institutes National laboratories Engineering centersSASACLocal governmentCHINA RAILWAYMinistry of TransportCentral Peoples GovernmentFigure 2: Management structure of Chinas rail transit systemURT companyJV company: private railwayJV company: national railway

32、Local SASACInvestment company/DedicatedenterpriseRegional AdministrationNational Railway AdministrationDesign institutes National laboratories Engineering centersSASACLocal governmentCHINA RAILWAYMinistry of TransportCentral Peoples GovernmentSource: CHINA RAILWAY, China Association of Metros, UBSFi

33、nancials still weak but improvements witnessedHefty railway losses persist while cash flow is improvingPassenger volume and turnover carried by the HSR increased significantly inthe past decade due to the sizeable expansion of the HSR network. In 2018, HSR accounts for around 65% and 50% of overall

34、passenger volume and turnover, respectively.Figure 3: Passenger volume carried by HSR accounts for 65% of overall volume in 2018m passengerFigure 4: Passenger turnover carried by HSR accounts for 50% of overall turnover in 2018bn passenger-km0200820092010201120122013201420082009201020112012201320142

35、0152016201720182019E2020E0200820092010201120122013201420152016201720182019E200820092010201120122013201420152016201720182019E2020EHSRConventionalrailHSR as %oftotalHSRConventionalrailHSR as % oftotalSource:CHINARAILWAY,UBSestimatesSource: CHINA RAILWAY, UBSestimatesin in in a in in We to or Satisfact

36、ory passenger revenue growth, but cost from HSR network expansion increased fasterFigure 5: CHINA RAILWAYs revenue breakdownFigure 6: CHINA RAILWAYs operating profit andmarginRmb1,2002008-20082009201020112012201320142015201620172018FreightPassenger2009201020112012201320142015201620172018Othertranspo

37、rtatrevenueOtherYoY (Passenger,RHS)25%20%15%10%5%0%Rmb80706050403020102008020082009201020112012201320142015201620172018OperatingprofitOPM200920102011201220132014201520162017201814%12%10%8%6%4%2%0%Source:CHINARAILWAYNote:Operatingprofit=revenuebusinesstaxirrigationfundtransportation expenses(incl.dep

38、reciation)otherexpenses;OPM=operatingprofit/net revenue(totalrevenuenetofsalestaxandwaterresourceconstructionfunds). Source: CHINARAILWAYDespiteCHINARAILWAYsimprovingprofitaftertaxinrecentyears,itsnetprofit afterinterestexpensesremainedsignificantlyinnegativeterritory.However,CHINA RAILWAYs free cas

39、h flow has improved and it has lower incremental net debtin recent years.Railways: accounting loss remained significant, but FCF has been improvingFigure 7: CHINA RAILWAYs significant accounting lossesFigure 8: but its cash flow has beenimprovingRmb20100(10)(20)(30)(40)(50)(60)(70)(80)20042005200620

40、0720082009200420052006200720082009201020112012201320142015201620172018Rmb1,50002004200520062007200420052006200720082009201020112012201320142015201620172018PATInterestexpenseNote:PAT=revenuebusinesstaxirrigationfundtransportationexpenses (incl.depreciation)otherexpensesnon-operatingexpenses+profitfro

41、m ancillarybusinessconstructionfundsaftertaxincometax.Source: CHINA RAILWAYDebtissuelessincreaseincashDebtrepaymentSource: CHINARAILWAYWe believe the major purpose of railway reform is to reduce the mismatch between the high leverage of the railway system and the low asset securitisation ratio. The

42、similarity of railway and toll road systems is that both carry similartotal assets of roughly Rmb8trn and liabilities of more than Rmb5trn as of end-2018. However,wethinktheassetsecuritisationratio(definedaslistedassetsdividedby total assets) is much lower for the railway system than the toll road s

43、ystem as of end-2018. We are optimistic that listed railway operators will likely receive an injection of many high-quality railway assets to boost theirportfolio.Asset securitisation was low for railways compared with highwaysFigure 9: Balance-sheet comparison between railway and toll road systemsF

44、igure 10: Assets and asset securitisation ratio comparison between railway and toll road systemsRmb trnRailway total gearing : 65.1%ListedTotal Railway A share total H share total Toll road CompayRailwayTollRoadRmbtrnRailway Securitization ratio:ListedTotal Railway A share total H share total Toll r

45、oad CompayRailwayTollRoad98.08765432108.2Toll Road totalgearing:64.2%95.25.385.25.3765432108.0TollRoadSecuritizationratio:7%8.2AssetLiabilityRailwayToll RoadNote: End-2018 data for railways and end-2017 data for toll roads. Source: CHINA RAILWAY, Ministry of TransportNote:End-2018dataforrailwaysande

46、nd-2017datafortollroads;listedrailway operatorsincludeDaqinRailway,GuangshenRailwayandTielongLogistics;listed toll road operators include 20 A-share listed (incl. dual-listed) and four pure H- share listed.Source: WindDespite CHINA RAILWAYs losses, company data shows several major coastal HSR lines

47、turned profitable after three to five years of operation. This was spurred by high population density in the covered hinterland and mounting demand for business and leisure travel, supported by the strong economic growth in coastal areas.AtypicalexampleistheBeijing-ShanghaiHSR,whichopenedinJune2011

48、and became profitable after only three years in operation. Other profitable HSRs include Shanghai-Nanjing, Guangzhou-Shenzhen, Shanghai-Hangzhou, Nanjing- HangzhouandXiamen-Shenzhen.Webelievetheserailwayassetscouldbeeither listedindividuallyorinjectedintocurrentlistedrailwayoperatorstoimproveCHINA R

49、AILWAYs leverage.Some HSRs are already profitable accounting wiseFigure11:ProfitabilityofmajorcoastalHSRlines,2017Rmb1443%29%28%35%25%18%1243%29%28%35%25%18%108642Beijing- ShanghaiShanghai- NanjingGZ-SZShanghai- HangzhouBeijing- ShanghaiShanghai- NanjingGZ-SZShanghai- HangzhouNanjing- Hangzhou100%80

50、%60%40%20%0%Xiamen- ShenzhenNet profitNet margin (RHS)Xiamen- ShenzhenSource: Company dataAggressive expansion leads to high leverageThrough decades of efforts, China has built up a comprehensive railway system, among which the HSR operating length has exceeded 29,000km by the end of 2018. According

51、 to a recent report published by the World Bank (Chinas High- Speed Rail Development, 6 June 2019), key factors contributing to the rapid implementationoftheHSRnetworkinChinainclude:1)well-developedlong-term plan together with detailed Five-Year Plans in favour of railway design and planning;2)minim

52、alchangestoindividualprojectplansonceapprovedandstrong governmental support throughout the construction period; 3) joint-venture structureensuringtheactiveparticipationofprovincialandlocalgovernments;andChinas railway expansion has an impact on the HSR networkcooperation among rail manufacturers and

53、 research institutions, such as universities, laboratories and engineering centres, enables quick adaptions of innovations and upgrades.Figure 12: Map of Chinas HSR networkSource: UBS Evidence LabAsaresult,therehavebeensignificantfixed-assetinvestments(FAI)inrailwaysin thepastdecade,atRmb7.5trn(Rmb7

54、55bnannually),basedondatafromCHINA RAILWAY.WethinkthisexplainswhyCHINARAILWAYsnetgearingrosetomore than 150% at the end of Q119. However, we remain confident railway FAI will likely reach Rmb820bn/Rmb850bn in 2019E/2020E (please refer to our report HYPERLINK /shared/d2uxZrKIBq/ “China infrastructure

55、 back in focus: deciphering FAI growth by sector”, published on 17 July 2019.Significant railway FAI led to highly geared railway system in ChinaFigure 13:RailwaysFAIFigure 14: CHINA RAILWAY was highly geared in thepastRmb9008002005200620052006200720082009201020112012201320142015 HYPERLINK /shared/d

56、2uxZrKIBq/ 2016201720182019E2020E80%60%40%20%0%-20%-40%Rmb4,5002009201020112012201320142015201620172018Q119-2009201020112012201320142015201620172018Q119180%160%140%120%100%80%60%40%20%0%RailwayinfrastructureFAIRailway equipmentFAI YoY (total,RHS)NetdebtNet gearing(RHS)Source:CHINARAILWAY,UBSestimate

57、sNote:netdebt=long-terminterestingbearingdebt+short-termliabilitiescash and bank deposits.Source: CHINA RAILWAYWhat can China learn from developed countries?After a comprehensive comparison of the rail transit systems in developed countries, we conclude: 1) China has the world-leading rail transit n

58、etwork (especiallyitsHSRnetwork),whileitsoperationsstillhaveroomforimprovements;2) we think China enjoys considerable advantages in terms of construction costs and tariffs compared with its global peers but its tariff scheme is far less flexible, suggesting upside in profitability; 3) Chinas railway

59、 investment has mainly been fuelled by CHINA RAILWAY, which is less diversified than other countries other countries railway investment funding source; and 4) HSR is generally more competitive than airlines on short-to-medium distance routes worldwide.OurcasestudiesofJapanandEuropesuggestthat:1)besi

60、desnationalrailways, therearemanyprivateplayersintheJapanandEuroperailwaymarkets;2)railway businesses alone could generate decent profits owing to the high population density, even without financial support from the government; 3) many railway operatorshavenon-railwaybusinessesincludingrealestateand