With policy support, railway rolling stock is expected to be replaced and upgraded at an accelerating pace, boosting revenue for railway equipment makers


By KGI Asia

Chinese Premier Li Qiang delivered his first government work report at the 14th National People’s Congress in Beijing, announcing growth targets of about 5% for GDP and 3% for the consumer price index (CPI). Li said achieving this year’s growth targets would be “not easy” adding it would require policy focus. Accordingly, we now expect the announcement of new policy measures to boost development in various sectors. For example, the work report mentioned the need to stimulate consumption, which might suggest that support may be coming for spending on things like home appliances, tourism, new energy vehicles and electronic products.

At the same time, government officials attending the fourth meeting of the Central Financial and Economic Affairs Commission pointed out the need to reduce logistics costs across various sectors; optimize and adjust transportation structures; promote the transition from road to rail for shipping commodities such as coal and minerals; and to facilitate the roll-out of new energy equipment in rail systems. China currently has nearly 10,000 combustion engine locomotives running on its rails, including some DC-powered ones from the 1950s and 1960s. Such equipment produces heavy pollution and noise, and consumes too much energy, and thus needs to be replaced or upgraded.

The National Railway Administration of China said it would improve and update subsidy policies to accelerate the adoption of new energy locomotives to reach the goal of eliminating old combustion engine locomotives by 2027. According to China’s Transport Ministry, the number of trips on the country’s rails reached 3.85 billion last year, up 130.4% from 2022. The figure totaled 484 million during this year’s eight-day Lunar New Year holiday, up 39% year-on-year and 18.8% higher than the same period of 2019, suggesting railway passenger travel has recovered from the Covid pandemic.

Meanwhile, the National Railway Administration invested 764.5 billion yuan ($107 billion) in national railway fixed assets in 2023, up 7.5% year-on-year. New highs for railway passenger capacity mean demand for updating railway rolling stocks will continue to rise, which is also a goal set out in a State Council document titled “Action plan to promote large-scale equipment renewal and trade-ins of consumer goods.”

With the right policy support, we expect the pace of rolling stock replacement and updating to accelerate, driving growth for railway equipment makers.

High value-added contracts

CRRC Corp. Ltd. (1766.HK) is China’s leading rail transit equipment manufacturer and solutions provider. It recently announced a contract for the advanced refurbishment of multiple-unit (MU) trains worth 14.78 billion yuan, its first such high value-added agreement so far this year, surpassing the total value for all its advanced contracts last year. In January and October 2023, it announced advanced refurbishment contracts totaling 7.01 billion yuan and 7.27 billion yuan, respectively.

In fact, China doubled the number of new multiple-unit trains it added between 2010 and 2014 compared with the number from 2007 to 2009. And according to China State Railway Group’s maintenance regulations, multiple-unit trains should be serviced based on mileage traveled, supplemented by inspection and repair at specific intervals. The fact that multiple-unit trains added since 2010 are now entering the maintenance phase, combined with policy support, means CRRC’s prospects look quite good. As a result, we have decided to set a target share price of HK$5.30 for the stock, implying a further upside of 20%.

This commentary is the views of the writer and does not necessarily reflect the views of Bamboo Works

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