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Ray Chan

Investors looking for safe bets in the market have long been drawn to monopolistic state-owned companies that offer the prospect of steady returns - with that reassuring government backing. But it does not always play out that way.
The high-profile merger of China's two largest train makers, China CNR Corp and CSR Corp, went smoothly enough this year. But shares in the new entity, CRRC Corp, have headed down the wrong track.
Since their debut on June 8 - days before the country's stock market peak - the shares have fallen 40 per cent, about double the drop in the Shanghai benchmark from its June 12 high.
CRRC has 90 per cent of the domestic market for the production of railway locomotives, bullet trains, passenger trains and metro vehicles. The impetus for the merger was the quest for a deeper push into overseas markets.
In a research report, Macquarie equities analyst Patrick Dai said: "Although CRRC enjoys a cost advantage relative to its international peers, the company does not have a strong brand name in the international market, and this may prove a hindrance in terms of winning contracts.
"Overseas markets often have higher product quality standards, and hence the company may incur product liabilities due to defective products."
Revenues from exports accounted for 7 per cent of the overall sales of CSR and CNR last year, and the merged company aims to more than double this to 15 per cent.
In an embarrassing setback, New Zealand's national rail operator KiwiRail stopped using 40 trains that CNR supplied last year after asbestos had been found in them.
Yuan strength may also make it harder in developing CRRC's overseas business. While the yuan has gained against some major currencies, it fell 2.4 per cent against the US dollar last year - its first annual depreciation against the greenback since the central bank ended its dollar peg in 2005.
"CRRC may eventually lose its cost advantage if the yuan experiences rapid appreciation," Dai said.
Taking a longer view, Barclays analyst Song Yang said in a report last month: "We expect these synergies from the merger and improving gross margins resulting from reduced price competition to be phased in in three years, not immediately.
"We rate CRRC 'overweight' and view it as one of our best ideas among China capital goods companies.
"We expect CRRC to expand its dominance from China to the global market."
Dai said: "We believe the merger will enable CRRC to compete more effectively in terms of technology and cost base in international markets.
"The One Belt, One Road plan calls for the development of railways, waterways and roads to ensure the connectivity of the transport network to facilitate regional trade and stimulate economic growth in the region, which should bring overseas growth opportunities for domestic construction and railway equipment companies."
He was referring to the initiative that has become a key plank of Beijing's international economic strategy.
Vincent Chan, the head of China research at Credit Suisse, said investors should be wary of the hype over the initiative as government-led investments did not necessarily translate into economic returns.
ray.utchan@scmp.com


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Portfolio

Merged China train maker shows not all state firms are safe bets

CRRC's train models on display at an exhibition in Beijing. The company's shares are performing badly. Photo: Xinhua

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Comment

Shares of CRRC, the high-profile combination of CNR and CSR, have fallen 40pc since their debut


Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


Column

Portfolio | Merged China train maker shows not all state firms are safe bets

Shares of CRRC, the high-profile combination of CNR and CSR, have fallen 40pc since their debut