Why China's traffic jams are an investment opportunity

The annual migration from Beijing and other cities during Chinese New Year is best avoided if possible. The traffic jams and overloaded trains are a hellish prospect to most of us, but to others they also reveal one of the most promising investment opportunities in 2013.

China’s new leaders continue to make urbanisation a policy priority, but now, analysts reckon, the focus is on investment in railways and, particularly, subways. There is likely to be far more emphasis on improving quality of life, noted Anderson Chow, HSBC’s head of infrastructure research for Asia-Pacific, through projects such as mass transit systems aimed at improving traffic congestion.

China’s urban rail transit totalled 2,274 kilometres in 2012 and the network will be doubled to 4,380km by 2015, fuelled by an annual investment of nearly Rmb400 billion ($64 billion) each year, UBS estimated.

In 2013 alone, the rail transit network will grow tenfold as the newly built metro lines in different cities will start taking passengers, noted analysts of the Swiss bank. The National Development and Reform Commission approved the building or extension of subways in 20 cities last year. Central China’s Wuhan, a second-tier city of 9 million people, plans to complete one metro line every year for the next five years.

China Railway Group (CRG), the country’s key rail transit contractor with a 50% market share, is likely to be the biggest beneficiary of the construction boom. Shares in CRG nearly doubled from HK$2.44 ($0.31) to HK$4.53 in 2012. The stock closed at HK$4.35 yesterday, 12% lower than its January 9 peak of HK$4.94, as investors cashed in some early gains. The company’s stock is currently valued at 9.3 times its 2013 forecast earnings.

Railway builders and operators will also be generously greased by investment money. “Railway infrastructure investment for the ongoing projects remains strong, now there are close to 20,000km of railway under construction,” said HSBC’s Chow.

The overall investment on railway and related infrastructure is around Rmb28 trillion during the five-year plan.

China’s spending on railway infrastructure increased significantly in 2012. The railway ministry’s China budget was revised up four times, from the initial Rmb500 billion ($80 billion) at the start of the year to Rmb630 billion during the fourth quarter of last year.

“We see the potential for upward revisions during the year and expect 2013 railway investment to be Rmb680 billion,” said Chow.

China laid 5,800km of new railway lines last year, and in 2013 it plans to complete another 5,200km of new track at an average cost of about Rmb100 million per kilometre.

China for years encouraged private car ownership as a way of improving people’s livelihoods, but the result has been congestion and pollution. Mass transit systems are now seen as a more environmentally friendly solution, though they also bring their own side effects.

It will first of all drain the coffers of China’s local governments, which are supposed to fund a significant share of construction. The railways ministry, the controlling shareholder of all leading railway groups of China, currently has a debt ratio of 56%, according to UBS, which means local authorities will need to accelerate their land sales to replenish cash reserves.

Nevertheless, as with any Beijing-orchestrated construction, once the project plans are there, money will follow. Rail building will be a major theme of 2013, which is also good news for rail operators and equipment manufacturers.

So, avoid the painful congestion on Beijing’s ring roads and be a couch potato during the Chinese New Year holiday — but invest your red packets in railway stocks.