The Olympics are coming and Beijing is already looking the part. With 12 months to go, two of the 12 new sporting venues are already completed, the Beijing National Stadium – already dubbed the ‘bird’s nest’ – will be ready in March, and the National Aquatics Centre, or ‘Water Cube’, looks like it will be winning design awards for years. There’s just one thing missing – a reliable supply of electricity to power them.
The Chinese capital and surrounding areas are expected to face a 1,100 megawatt shortage this summer (enough to power around one million Chinese homes), just as they need to start ramping up construction in preparation for next year’s games. Beijing is by no means alone. Some parts of China only receive electricity for three to four hours a day, and with the country’s total power consumption growing at an annual rate of 15%, the problem will only get worse. This is nothing new. China has been suffering from severe power shortages since 2000. Clearly, though, dealing with the problem has acquired a real sense of urgency in light of the anticipated influx of tourists and the fact that the world’s attention will shortly be focused on the Chinese capital.
It’s all down to a shortage of one material: coal. It’s not that coal is in short supply – far from it. Inexpensive and abundant, it’s the ideal fuel to keep 70% of Chinese power plants puffing. China already produces two billion tonnes of the stuff a year and there’s more than enough for the power plants.
The real problem is that the coal is not getting to where it needs to be. In fact, this summer alone one government agency reckons that China as a whole will be short of 3,000 megawatts of capacity because the country’s infrastructure is simply too underdeveloped to get the coal quickly and efficiently to the power plants that need it. Most of the country’s coal is dug out of mines in its western provinces, but it then needs to get to power plants located on the eastern seaboard. Although rail is the quickest and the cheapest means of moving the fuel, the proportion of coal shipped by rail has fallen sharply in recent years. In 2001, 80% of coal production was moved by rail – now that figure is down to just 55%. And yet coal is responsible for nearly half of all freight moved by rail in China.
It’s no surprise that the railways are clogged up. Although China’s network accounts for just 6% of the world’s rail tracks, it already moves 24% of its traffic. And if there was the capacity, it could be carrying a lot more. “Our railroad service can only satisfy 35% of cargo demand,” says Huang Min, chief economist with China’s Railways Ministry. Chinese railway companies are still having to turn away 60% of all new freight transport requests – everyone from copper to gold miners need to move their products from the western provinces to the ports of the east. That congestion is also bad news for construction companies, which face delays in deliveries of imported iron-ore shipments from the ports.
So the road system is being forced to take up the slack. But it was never designed to carry the heavily laden 30-tonne trucks that now use them. And even as they are churned up by freight trucks, rapidly growing car ownership among ordinary Chinese people is putting even more pressure on the network. So road transport is an expensive and temporary solution at best.
That’s why China is embarking on the biggest roll out of train tracks seen since the American West was first opened to the steam engine. The government is rapidly expanding rail infrastructure, with plans to increase the rail network to more than 90,000 kilometres by 2010. That’s a 20% rise in the size of the country’s network. That should start to help alleviate some of the pressure from the massive freight demands already imposed on the transport system.
And it’s not just freight that needs to be taken into consideration. Urban populations are expected to grow by 300 million in China in the next 20 years, which will require a big change in how these cities shuttle around their inhabitants. They can’t all drive a car to work, especially not if the Chinese government wants to improve on its terrible pollution record.
That means equally large resources are being ploughed into passenger railways. Over the next ten years, 15 cities in China will build subways and urban light railways with a total length of 1,700 km, the official Xinhua News Agency reported recently. At present, ten cities have subways and urban railtracks with a total length of 602.3km. “Chinese railway equipment is a huge market with significant growth in the next 20 years at least,” Merrill Lynch said in a recent research report.
So it’s no surprise that the world’s railway manufacturers are now flocking to China. Germany’s Siemens has just built the world’s first commercially operating Maglev train between Shanghai and Pudong International Airport, while French power station builder and rail manufacturer Alstom announced that it will supply e120m worth of subway trains to China this year. And with Western firms carefully guarding their technical expertise with transfer agreements (whereby they give Chinese partners the technology and knowledge needed to build equipment, but not to update it), this should remain a buoyant market for European manufacturers for a long time to come.
Investing in China: better roads are needed too
It’s not just the rail network that needs investment – China’s roads are still not fit for the volumes of traffic using them. According to the World Health Organisation, for example, worldwide 1.2 million people die on the roads every year. Of these, 20% are in China. The death rate per 10,000 automobiles is eight times the level seen in America, even though there are just six cars for every 100 Chinese people, compared to 90 and 80 in the US and UK respectively.
But then the car is a new concept to many Chinese. The country didn’t become known as the ‘Kingdom of Bicycles’ through choice. Until the late 1980s, laws prevented ordinary Chinese from owning their own cars, making the humble two-wheeler a product of necessity rather than a sign of modesty. Today, 27 million cars jostle for space along the roads of a country that barely boasted a national road network two decades ago. Last year, Chinese drivers bought seven million more cars, a figure expected to top eight million this year, with 140 million cars predicted to hit the roads by 2015.
This is good news for car manufacturers, who are stepping up production to match surging demand. Chinese auto makers Geely and Chery are the current market leaders, with a 25% market share between them. We had a look at some of the car manufacturers set to benefit from the booming Chinese market in issue 339. Yet the roads are already choked and passengers and logistics firms are feeling the pain of those traffic jams. It costs twice as much to ship a container overland from Chongqing in central China to Shanghai as it does to move the same container from Los Angeles to Shanghai, even though the distance is seven times longer.
Again, the government is taking steps to deal with the problem. According to the World Bank, 25,000 miles of toll expressways were built between 1990 and 2005. By 2020, the country will have built 53,000 such roads, most of which will be financed by collecting tolls. Such is the scale of road building in China that this is the most economic way to fund their development. But it also makes driving in China somewhat pricey. For example, a 25-mile trip from Beijing’s northern suburbs to the Great Wall will cost about $5 – a fee that many British drivers would bridle at, never mind their less-well-off Chinese counterparts. But of course, all that toll revenue is good news for the companies who will actually be building and operating China’s road network.
Investing in China: come fly with me
An increasingly wealthy population means that as well as taking to the roads, the Chinese are upping their air miles. Air traffic is increasing at a rate of 40% a year, which has seen the country’s aeroplane fleet double in the past decade. But the infrastructure is struggling to keep up. “Our human resources and facilities can’t support such fast growth,” Yang Yuanyuan, head of the General Administration of Civil Aviation of China, said in a 23 July interview with Bloomberg. “Our air traffic control and even the roads leading to airports are facing congestion.”
Beijing International Airport’s problems are typical of those faced by the country’s airports. Last year, it handled 48.7 million passengers, way above its initial design capacity of 35 million. China’s capital city is expecting 1.7 million visitors for the Olympics and squeezing the ones coming by plane through its terminal will prove a massive task. So it’s a good thing that the airport’s new terminal is expected to open in March, especially for airlines such as Air China, which operate almost 50% of the flights going through the airport. “The larger, new terminal will make it easier for Air China to add flights,” says Jack Xu, a Shanghai-based analyst at SinoPac Securities Asia Ltd on Bloomberg. “The new terminal guarantees space.” There’s also a new runway being added, which should more than double the airport’s annual capacity to 78 million passengers. In the first six months of the year it handled 26 million passengers, a 16% jump from last year.
Indeed, the government has now embarked on a massive airport building scheme that will see 200 airports in China by 2010 and 250 by 2020. All the while, airlines such as China Southern Airlines, Air China, Hainan Airlines and Shanghai Airlines are planning on adding to their fleets this year. Chinese carriers added an extra 45 aircraft to their fleets in the first four months of 2007 and are set to take delivery of 150 in total this year, from 135 in 2006. According to the Chinese Civil Aviation Authority, that will increase to 140 new aircraft in 2008, 160 in 2009 and 140 in 2010 as the number of air routes into the country multiply.
The Beijing Olympics is China’s chance to show itself in the best light – the last thing it wants is for its transport network to let it down. But the development of this vast country’s infrastructure will mean healthy profits for those involved, which will last well beyond next year.
The best routes to profits in China
China’s $200bn railway spending plan in 2006-2010 has lifted the fortunes of many firms in the railway sector, but it’s also raised their share prices. “In this sector there are not many to choose from and those that are listed now have probably gone up too much because of the (growth) story,” says Nicholas Yeo, a fund manager at Aberdeen Asset Management on Reuters.
Hong Kong-listed Zhuzhou CSR Times Electric (3898 HK) looks a bit pricey on a p/e of 33. Investors should look out for initial public offerings on the way later this year from China Northern and China Southern. Meanwhile, the Western firms they are partnered with are perhaps the best (and safest) ways to profit from the railway boom.
A good bet might be French company Alstom (AOMD FR), which is a play on both the rail sector and coal production. The group saw orders jump 62% to e7.6bn and revenue 27% to e4.05bn in the three months to June, trouncing City estimates. As well as winning contracts to upgrade ageing coal facilities in the US and expanding Middle Eastern power grids, it signed new deals with China and France’s SNCF to supply train carriages. “Alstom should have fantastic growth this year and next,” said Christel Monot, an analyst at UBS in Paris with a “buy” rating on the stock. She had been expecting quarterly sales of e3.7bn and orders of e6.6bn. “Given they have such a strong position in coal-fired stations, there’s great potential for retrofits and upgrades,” she tells Bloomberg.
The firms building and operating China’s growing road network look much better value than their rail rivals. They include Jiangsu Expressway Co. Ltd (0177 HK), Hopewell Highway Infrastructure Ltd (737 HK), Shenzhen Expressway Company Ltd (548 HK) and Zhejiang Expressway Co. Ltd (576 HK). Hopewell is of particular interest. The group develops and operates roads, tunnels and bridges in the Pearl River Delta region bordering Hong Kong and is rumoured to be in the running to win a significant part of the Hong Kong-Zhuhai-Macau Bridge project. Proposed 20 years ago by the company’s founder, at 18 miles the bridge would be one of the world’s longest, connecting Hong Kong with the world’s new gambling capital, Macau, and the city of Zhuhai on the mainland, part of China’s industrial heartland. The group trades on a forward p/e of 17.
The growth in car ownership is also good news for one very attractively priced firm, which should benefit regardless of whichever brand dominates the Chinese motor industry. Changhang Minsheng APLL Logistics Co. Ltd (8217 HK) is a logistics firm that deliver cars for manufacturers all across China. It trades on a p/e of 11 and an estimated price-to-earnings-growth ratio of 0.71. Needless to say, improvements in road and rail infrastructure should also make life much easier for this firm.
When it comes to air travel, the main players are Air China, China Southern Airlines Corp and China Eastern Airlines Corp. Between them, they control about 80% of China’s domestic aviation market, and almost all overseas traffic into the country. Air China (0753 HK/AIRC:LSE) is the country’s flag carrier and its largest operator. The company services 78 domestic airports and 39 international ones from its Beijing hub. It’s already adding routes as the Beijing Olympics approach, with more routes being added to the US, France, UK, and Russia, as well as plans to open another to Pyongyang, the North Korean capital.
Air China’s shares shot up 17% in one day last week as the airline said that profits had soared 2,000% to $119m in the first six months of the year on the back of the booming Chinese travel market. While analysts were quick to point out that under international accounting rules, profits only doubled, the share still look like they’re a buy. “With passenger numbers set to continue rising ahead of the Beijing Olympics, the airline’s earnings momentum will be maintained… there’s further upside potential,” Kenny Tang, of Tung Tai Securities in Hong Kong, tells The Wall Street Journal.