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Morningstar | Guangshen Is Well Positioned to Benefit From China's Railway Reform

Guangshen Railway is one of the key railway operators in Southern China's prosperous Guangdong province. With key assets situated in the Pearl River Delta, its operations comprise both passenger and freight and connect southern China's three largest population centres: Guangzhou, Shenzhen, and Hong Kong. Guangshen's favourable geographic location and high-quality railway assets are key strengths. While rising competition from high-speed rail poses a threat to Guangshen's profitability and competitive strength, we think the company will benefit from ongoing railway reform, which should offset some of that negative impact.Passenger transportation is Guangshen's most critical business segment, with the Guangzhou-Shenzhen intercity express railway its crown jewel. On one of China's most heavily travelled rail lines, as many as 100 pairs of trains each day cross the roughly 90 miles between Guangzhou and Shenzhen. Historical volume growth has been strong, and despite challenges from various economic vicissitudes, the Guangshen intercity express railway has consistently delivered strong volume growth, averaging 18% annually during 2007-11. However, with the December 2011 launch of new high-speed service between Guangzhou and Shenzhen, the growth fell to an average of 1.5% over 2012-18. Initiated in March 2013, China’s railway reform initiative has sought to ease the significant debt burden of China Railway Corporation, the national railway operator. CRC’s debt woes have their roots in the years of aggressive railway network expansion in China, when two decades of cost inflation and centralized pricing kept a cap on profitability. We expect the intensifying railway reform--tariff hikes, increasing pricing autonomy, and railway asset securitisation, as well as railway land utilization--to drive CRC’s operating efficiency, improve the earnings outlook, and ease its debt burden. With Guangshen a potential beneficiary of a tariff hike, operation efficiency improvement, and asset injections, we expect its profitability to continue chugging ahead, which bodes favourably for its long-run competitive positioning.