China Railway Sector:Passenger volume continued increasing quickly;Beijing-Shanghai HSR reportedly made profit

Strong passenger traffic growth in H116.

    According to the website of China Railway Corporation (CRC), railway passenger trafficincreased 12.4% YoY in H116 and all 18 railway bureaus recorded positive YoYnumbers, among which Chengdu railway bureau was the strongest YoY, at 20.9%.

    CRC implemented the largest re-arrangement of railway schedules of the past 10 yearson 15 May 2016, adding 100 sets of multiple-unit (MU) trains to further release highspeedrailway (HSR) transportation capacity. HSR has become the main driver ofpassenger volume growth, with the number of passengers taking MU trains in April/theDragon Boat Festival (8-11 June) up a respective 27%/30% YoY.

    Media report: Beijing-Shanghai HSR recorded net profit of Rmb6.58bn in 2015.

    According to Tencent News, Beijing-Shanghai HSR had net assets of Rmb131.17bn atend-2015, with a debt-to-asset ratio of 27.7%. In 2015, the HSR posted operatingrevenue/total profit/net profit of Rmb23.42bn/6.66bn/6.58bn, respectively. Please seeour 17 Nov 2014 sector report, Entering an era of reform, for further discussion aboutpassenger traffic growth and the profitability of China's HSRs.

    HSR operators allowed to set ticket prices, implying big potential.

    The National Development and Reform Commission allowed railway operators to settheir own HSR fares as of 1 Jan 2016. China's MU train/HSR fares are 64%/50% lower,respectively, than domestic airplane ticket prices, and much lower than fares of foreignHSRs. We believe China's HSR fares have relatively big potential; however, we thinkprices will increase gradually and rise first on busy railway lines with high passengertraffic, given the social welfare responsibilities of railway operators.

    Top pick: Guangshen Railway - A.

    We think Guangshen Railway is likely to be the biggest beneficiary of railway passengerfare reform and maintain our Buy rating and price target of Rmb4.90, derived usingDCF-based methodology (8.3% WACC).