TRANSPORTATION：BEIJING-SHANGHAI HIGH-SPEED RAILWAY OPERATOR-CHINA‘S MOST PREMIUM RAILWAY FIRM TO GO

　　Comments

    　　As China’s most premium railway asset, Beijing-Shanghai High-speed Railway operator plans to gofor public float. The Beijing-Shanghai High-speed Railway route is 1,318 kilometers in length,connects Beijing and Shanghai, the two biggest cities, and goes through Hebei Province, ShandongProvince, Anhui Province, and Jiangsu Province, the four provinces with huge economic volumeand population. Besides, the railway boasts 24 stations, among which Beijingnan Railway Station,Tianjinxi Railway Station, Jinanxi Railway Station, Nanjingnan Railway Station and ShanghaiHongqiao Railway Station are China’s important transportation hubs. Beijing-Shanghai High-speedRailway line goes through the busiest and fastest capacity growth areas, earning the title of “GoldRailway”.

    　　Steady growth of capacity and revenue pushes profits up rapidly. In 2018, Beijing-Shanghai Railwayserved 190 million passengers (with a 12.9% CAGR of 2016~2018), and its passenger turnover was88.6 billion passenger-km (with a 10.7% CAGR of 2016~2018). The increased passenger transportvolume is mainly from newly-operated cross-routes, and the passenger load factor rose from72.5% in 2016 to 78.34% in 2018. The operating income in 2018 was CNY 31.2 bn, with CAGRstanding at 8.9% during 2016~2018. The operating income was mainly from passengertransportation of CNY 15.8 bn, and highway network service of CNY 15.1 bn, with CAGR of 5.5%and 12.6% respectively. In 2018, the net profits in 2018 was CNY 10.2 bn, with CAGR of 13.9%from 2016 through 2018, net profit ratio reached 38%, and its ROE achieved 8.4%.

    　　The raised funds are planned to acquire Beijing-Fuzhou Railway passenger line Anhui Co. Ltd whichowns four routes but still remains in loss. The raised funds by IPO are planned to buy 65% stake ofBeijing-Fuzhou Railway passenger line Anhui Co. Ltd with consideration of CNY 50 bn and anappreciation rate of 15%. At present, Beijing-Fuzhou Railway passenger line Anhui Co. Ltd havetwo established routes, Hefei-Bengbu Passenger Express and Hefei-Fuzhou Railway (AnhuiSegment), each with operation mileage of 132 kilometers and 388.6 kilometers respectively.

    　　Shangqiu-Hangzhou High-speed Railway (Anhui Segment) and Zhengzhou-Fuyang High SpeedRailway (Anhui Segment) are expected to put into operation in 2020 and 2019 respectively, eachwith operation mileage of 592 kilometers and 69 kilometers. At present, the net asset ofBeijing-Fuzhou High-speed Railway Anhui Co. Ltd is CNY 67.2 bn, and in 2018 it lost CNY 1.2 bn.

    　　Earnings forecast and valuation

    　　We used two valuation methods to value Beijing-Shanghai High-speed Railway operator. 1) P/Eratio valuation method: we estimate the company’s P/E ratio of 22.99X and equity valuation ofCNY 235.58 bn, based on its net profits of CNY 10.25 bn in 2018. 2) DCF valuation method:

    　　Supposing its WACC was 6%, 7%, and 8%: with the optimistic hypothesis, the equity valuation ofBeijing-Shanghai High-speed Railway were CNY 413.1 bn, CNY344.6 bn, and 293.7 bn respectively;with the neutral hypothesis, its equity valuation was CNY 314.0 bn, CNY 263.8 bn, and 226.4 bn;with the pessimistic hypothesis, it was CNY 243.4 bn, CNY 205.5 bn and CNY 177.1 bnrespectively.

    　　We also used DCF method to make valuation of Beijing-Fuzhou High-speed Railway Anhui Co. Ltd.

    　　Supposing its debt ratio maintains at present level, and its WACC was 6%, 7% and 8%: with theoptimistic hypothesis, its equity valuation was CNY 87.2 bn, CNY 53.8 bn and CNY 32 bn; with theneutral hypothesis, its equity valuation was CNY 63,2 bn, CNY 35.5 bn and CNY17.4 bn; and withthe pessimistic hypothesis, the valuation was CNY 44.7 bn, CNY 23.1 bn and 8.4 bn respectively.

    　　Potential risks

    　　slower-than-expected IPO process; declined passenger capacity affected by macro-economy andhighway traffic; changes in commissioned operating and clearance costs