«High-speed Railway»
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16 may

China: profiting from high speed rail

How can portfolio investors make money out of China’s high-speed rail project? After all Beijing isn’t looking for partners for the state-run scheme, the largest infrastructure project in history.

Morgan Stanley has come up with a plan — invest in listed companies which stand to profit from the inter-linking of China’s big cities in everything from rolling stock manufacturers to Starbucks.

Morgan Stanley’s report doesn’t say a lot about recent controversies about the project’s management or costs. But perhaps it doesn’t need to — it wouldn’t be the first time a big infrastructure scheme lost money for its owners but generated profits for other people.

The engineering achievements are already colossal, with the network expanding from 407km in 2003 to 8,358km by January 2011 and on target to reach 13,000km by the year-end, spending Rmb700bn ($106bn) this year alone. Morgan Stanley forecasts in its base scenario that the system will reach 16,000km by 2015 and link at least 200 cities, with 50 per cent of the population and 67 per cent of GDP.

The report concedes that this could drop to 15,000km “as macro tightening and anti-corruption sentiment could dominate the mindset of China’s senior government officials.”

This bearish forecast reflects the railway ministry’s recent announcement of a possible cut in future capital spending from Rmb4,000bn to Rmb2,000bn-3,000bn in the 2011-15  five-year plan. The plans are being revised after the railway minister was removed for “disciplinary violations” — amid claims of corruption in the high-speed rail project.

Last month, Beijing lowered operating speeds on the network from 350km/hour to 300km/hour in response to safety and cost concerns.

Jerry Lou, a Morgan Stanley China strategist and one of the main authors, told beyondbrics that these factors could reduce the size of the network. But the reductions would come in the least cost-effective lines — for example those in China’s sparsely-populated far west. He said: 

Clearly cuts have come but they won’t have huge economic impact. The lines with a smaller economic impact are being down-sized but the overall economic benefit will not be down-sized.

Morgan Stanley’s main interest is identifying the companies that can profit from this economic benefit  — and are accessible for international portfolio investors.

The sectors with likely opportunities are: budget hotels, restaurants, tourism, consumer staples, retailers, car rental companies, commercial and residential property, railway infrastructure and rolling stock.

Sectors which could come under new pressure are aviation, including sales of regional jets, and toll roads.

Morgan Stanley proposes two equity investment baskets. The first is composed of Hong Kong listed companies:

The second is a basket of global stocks ranging from CSR rolling stock maker to Walt Disney:

Many of these companies, will of course, benefit whether or not the high-speed railway per se fulfils the great hopes that have been invested in it.  Such is the momentum of China’s urbanisation that the 200 cities that will be linked are likely to grow regardless.  But good transport will accelerate the process — and the profits that can be made.

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