China’s high speed rail manufacturers China North Railway (CNR) and China South Railway (CSR) announced that their merger had passed overseas antitrust scrutiny.
Speaking with the China Economic Weekly, a famous railway industry expert Mengshu Wang said that Beijing had started to study a possible merger between China Railway Construction Corporation (CRCC) and China Railway Group (CRG). Shares of CRCC (1186.HK) and CRG (390.HK) jumped 4.8% and 2.3% respectively. Wang cited reducing Chinese companies’ competition overseas as one reason for the merger. The main argument for the two train makers’ merger is that they were fighting and outbidding each other overseas.
Wall Street analysts from Deutsche Bank and UBS question if the merger makes sense.
Deutsche Bank’s Phyllis Wang thinks CRCC and CRG don’t compete with each other that much overseas:
Compared with CNR/CSR merger, 1) CRG and CRCC’s overseas competition was less fierce than that of CNR and CSR in the past years, which was one of the key drivers behind the CNR/CSR merger; 2) constructors have lower needs for cutting-edge technology localization and integration compared to rolling stock players; 3) less synergy could be realized from non-railway and non-subway business; and 4) consolidation should be much more complex due to higher asset scale (joint assets of CRG/CRCC was 5x of CNR/CSR at end-2013).
UBS’s Robin Xu agrees the two businesses are too complex. A merger would be difficult:
We think a merger between CRCC and CRG might be difficult to execute given the two companies’ complicated business structures. Other than the infrastructure business (including construction and design), both companies are involved in machinery, property development and other non-core businesses. Even within the infrastructure business, both companies have many subsidiaries focusing on different regions (the figures below show the major subsidiaries of both companies).
Merger or not, both stocks are in the right industry. China will release its “One Belt and One Road” plan next week, aiming to export its engineering expertise overseas.