Guangshen Railway-H/A,Buy/Hold,Tariff adjustment –more to come

The first adjustment since HSR tariffs were deregulated: Chinese news agencyCaixin recently reported that China Railway Corporation (CRC) may raise tariffs on200km/h high speed rail (HSR) services in the southeast coastal area from April 2017.

    According to the news report, Class II seat ticket prices would increase by 25-30%while Class I seat ticket prices would increase by 65-70%. The report also mentionedthat the operating speed of the HSR services would be raised back to the originaldesigned speed limit of 250km/hr (the speed was lowered to 200km/hr after a majorHSR accident in 2011). We have not yet seen a formal announcement from CRC. Butthe report stated that the new ticket prices would start to appear on the official railticket reservations website 12306.cn from 22 March 2017. Guangshen Railwaymanagement has confirmed it is making preparations for a ticket price change. In2015, NDRC deregulated HSR tariffs, allowing CRC to set HSR tariffs based onmarket forces. This would be the first time since then CRC has raised its HSR tariff.

    A potential 5% earnings boost for Guangshen Railway: The company operatesGuangzhou-Shenzhen and Guangzhou-Chaoshan 200km/h intercity services inGuangdong province. We think the potential tariff increase in April 2017 would onlybenefit the Guangzhou-Chaoshan line, which accounts for about 14% of GuangshenRailway daily service revenue. We estimate the potential impact to FY17 earningscould be about 6.3%. The company has tariff setting autonomy on its Guangzhou-Shenzhen intercity line but may not adjust tariffs on this service in April. The tariffincrease supports our view that rail industry reform is set to speed up in 2017.

    Depending on the public reaction to the tariff increase, we think this could be the startof a broader programme of passenger tariff adjustments.

    Earnings impact summary: We increase our revenue forecasts for FY17 and FY18by 1.3% to reflect the potential tariff adjustment on the Guangzhou-Chaoshanintercity line. Given the tariff adjustment is unlikely to lead to additional costs, weexpect the increase in revenue to result in a 5.2% after-tax earnings impact. Ourtarget prices for the H/A shares also rise to HKD6.30/RMB5.9.

    Additional tariff increases could be a catalyst: Maintain Buy on the H-shares andHold rating on the A-shares. We think the likelihood of further tariff increasesfollowing this initial adjustment could continue to support share price momentum andimprove ROE. CRC’s plan to introduce mixed asset ownership could lead to potentialasset injection opportunities.