China Railway Sector
China signed Jakarta-Bandung railway project contract with Indonesian local construction contractors
Analyst: Johnson Hu/Cynthia Wang Tel: (8621) 54047225-809
What's new
According to news report, China Railway Co (CRC) formally signed contract with Indonesian companies to form a JV for Jakarta-Bandung railway project. This confirms that China won this Indonesia railway project.
Our vievs
- Jakarta-Bandung railway project has a length of 150km with estimated total investment of about US$6b. According to previous news reports, China will provide US$5.5b loan with a low interest rate of 2%. The lending period will be 40-50 years. China also promised that the railway will be completed in 2018. The project is expected to launch in Nov and will be completed in 2018. According to Indonesia's Bandung Institute of Technology estimate, the average daily passenger volume will reach 44,000 at the initial stage. If the average ticket price sets at 200,000 rupiah (about Rmb100), the annual ticket revenue will reach 3.2t rupiah (about US$250m).
- Two key reasons for China to beat Japan: a) Japan side only provides a portion of financing and Indonesia government needs take some financial burden as well as guarantee on debt repayment while China can offer fully financing support for this project without loan repayment guarantee, b)China will complete the railway construction in three years but Japanese contractors feel difficult to fulfill the task. China and Indonesia will form a JV with Indonesia side taking 60% of interest in this project while China holding 40% stake. In addition, China also promises to share high-speed rail technology with Indonesia, use local labor and about two-thirds of the raw materials used in the project to be bought from local market.
- Currently, it is difficult to estimate the profitability for CRC due to the lack of detailed disclosure on investment plan, financing and currency settlement. The key potential participants of the project from China are CRG (390 HK, HOLD) and CRRC (1766 HK, HOLD) as well its subsidiary Zhuzhou CSR (3898 HK, BUY).
- China's recent winning of US XpressWest, a milestone high-speed rail project in advanced countries, and Jakarta-Bandung railway should help China break through both emerging and developed countries' markets. We expect China railway companies to gain more market share in overseas projects on the back of the competitive edges in cost control, strong execution in project construction and proven track record in high-speed rail technology and operation. UK No 2. HSR project and India New Delhi to Mumbai HSR project will be the next projects for China to compete in overseas market. We expect OBOR and rapid growing urban rail transit (URT) to offset a slowdown of railway investment growth in domestic market.
Regards,
Johnson Hu, CFA
Equity Research
UOB Kay Hian
Tel:(8621) 54047225-809
Email:johnsonhu@uobkayhian.com
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