China to Merge Two Rail-Car Makers
Trading in CNR(6199 HK) , CSR (1766 HK)Shares Halted in Hong Kong; No Comment From Companies
Chinese officials are looking to combine China CNR Corp. and CSR Corp. , according to an affiliate of the official Xinhua News Agency and other state media on Tuesday. The effort is being led by China’s State-owned Assets Supervision and Administration Commission, or Sasac, according to the report by the Economic Information Daily, which was carried by Xinhua. Further details weren’t clear.
An official at CNR Corp. declined to comment and CSR couldn’t be immediately reached for comment. Sasac officials didn’t respond to a request for comment. The two companies on Monday halted trading in their shares in Hong Kong pending a disclosure on a “substantial matter.” The companies are also traded in Shanghai.
A deal would combine two already-big companies with increasingly global ambitions. They already sell train and subway cars domestically and in developing nations but have increasingly trained their sights on the west. Last week CNR said it won the local industry’s first major contract in the U.S., with an agreement to supply 284 subway cars for $556.6 million to the state of Massachusetts.
A potential combination would come as Beijing is looking to shake up its sluggish state-owned enterprises, which economists have warned are dragging on China’s long-term growth. Chinese officials have taken steps in recent months to allow private capital to invest in industries like energy.
But a combination such as CNR-CSR would be a step back because it would reduce competition, said Nicholas Lardy, a China scholar with the Peterson Institute for International Economics in Washington who has studied state-owned enterprises. “The argument that they are undercutting each other in bidding on foreign projects is nonsense,” he said. "The solution is to harden budget constraints so they can’t finance losses by additional borrowing.
It also raises questions about China’s seriousness in pushing its antimonopoly laws, said Derek Scissors, a resident scholar at the American Enterprise Institute. Those laws have been under a microscope in recent months as foreign companies ranging from Volkswagen AG’s Audi to dairy makers to technology firms like Microsoft Corp. and Qualcomm Corp. have been investigated by antitrust authorities.
A combination would be “bad optics,” Mr. Scissors said, though in practical terms, “keeping CNR and CSR is just as bad for competition. There’s not much difference between a national monopoly and what are now effectively two regional monopolies.”
A combination would follow an ambitious plan by Beijing to remake a rail industry long beset by corruption, debt and safety issues. Its former railway minister, Liu Zhijun, was ousted in early 2011 over accusations of bribery and abuse of power and was given a de facto life sentence by a Chinese court two years later. Later in 2011, the industry came under heavy public scrutiny when two high-speed trains collided in the eastern Chinese city of Wenzhou, killing 40 and injuring 172.
Including shares owned by the government, both CNR and CSR have market capitalizations of roughly $10 billion in Shanghai, according to data provider FactSet.
CNR raised an additional US$1.2 billion in an initial public offering in Hong Kong in May to pay down debt, buy new equipment and develop new projects. On Tuesday, it posted a third-quarter net profit of 3.96 billion yuan (about $648 million), up 65% from a year earlier, thanks to higher orders for train cars.
In its filings, CNR said it faces competition from CSR as well as from global players such as Canada’s Bombardier Inc., France’s Alstom SA and Germany’s Siemens AG, among others.
Despite setbacks, China’s railway industry has continued to expand over the past two years. China’s railway investment accelerated in July and August amid concerns about slowing economic growth in China. Government spending on the rail network rose 20% in the first eight months of the year to 405 billion yuan, according to state media.
The nation has invested heavily in rail over the past decade. At the end of 2013, the total length of China’s railway network exceeded 100,000 kilometers, of which high-speed rail accounted for roughly 11%, or 11,028 kilometers. China’s State Council, or cabinet, has said more than 6,600 kilometers of new rail lines will be put into operation this year.