China to Push Ahead With Rail IPOs to Fund Expansion

By Tian Ying

Oct. 15 (Bloomberg) -- China, the world's biggest railway operator, will push ahead with plans to sell shares in state- owned train companies even after a 64 percent slump in the mainland stock market this year.

``We will sell shares once conditions are ripe,'' Wang Yongping, a Ministry of Railways spokesman, said in an interview in Beijing yesterday. ``We are facing some difficulties in the market, but I believe we will make it through.'' He declined to provide a timeframe for the initial public offering plans.

China aims to sell rail shares in Hong Kong and on the mainland to help fund a 1.25 trillion yuan ($183 billion) expansion plan designed to ease congestion on the nation's rail system. The country's locomotives haul about one-fourth of global rail traffic on tracks accounting for about 6 percent of the worldwide train network.

``It is very expensive to expand tracks, but the government has to'' in order to support the country's economic growth, said Richard Lee, an analyst with Core Pacific in Hong Kong. ``The capital gap is going to be quiet huge and the government needs to raise funds''

China first laid out plans for rail share sales at least two years ago. The country intends to lay 17,000 kilometers (10,500 miles) of track in the five years ending 2010 to ease delays in hauling coal, metals, grain and other commodities throughout the country. New lines will also be paid for with bank loans and by using funds from the central and local governments, Wang said.

Freight Demand

Train operators can only meet 35 percent of freight transport demand at present, said Wang. That may rise to 90 percent within five years, helped by the construction of more than 20 cargo and passenger railway lines, he added.

Daqin Railway Co., operator of China's biggest coal transport line, raised 15 billion yuan in an initial public offering in 2006. The funds have helped the company expand its total annual capacity to 350 million tons, three times its original designed capacity, Wang said. The figure will rise to 400 million tons as early as next year, Wang added.

Still, the company has dropped 54 percent this year in Shanghai trading, alongside a 64 percent plunge for the CSI 300 Index. Guangshen Railway Co. has lost 41 percent in Hong Kong, compared with a 39 percent slump for the Hang Seng Index. Its Shanghai shares have slumped 59 percent.

China South IPO

The market plunge has damped demand for new share sales as investors hang onto cash. China South Locomotive & Rolling Stock Corp., the nation's biggest maker of rail vehicles, priced the Hong Kong portion of its August share sale in the middle of a range it used to canvass investor interest.

The company raised $1.48 billion selling shares in Shanghai and Hong Kong. The Hong Kong-traded stock has gained 15 percent from its offer price, compared with a 20 percent decline for the Hang Seng Index. In Shanghai, the company has surged 67 percent from its sale, while the CSI 300 Index has lost 22 percent.

China Railway Group, which controls more than 40 percent of the country's railway-building market, has also outperformed the market since selling shares last year. In Hong Kong, it has slipped 3 percent from the sale price, compared with a 43 percent decline for the Hang Seng Index. In Shanghai, the company is trading 23 percent above the offer price, while the CSI 300 Index has lost 60 percent.

To contact the reporter on this story: Tian Ying in Beijing on ytian@bloomberg.net