Based on the center of the high-speed rail network, the main assets of the Beijing-Shanghai high-speed railway with steady operating performance are lines, land, and stations, and there are no EMU resources. In terms of asset attributes, lines, land, and stations are long-term resources, and the need for reinvestment is low, and the company's ability to generate cash flow exceeds its apparent profitability.
On the one hand, the Beijing-Shanghai high-speed railway connects the Beijing-Tianjin-Hebei and Yangtze River Delta economic circles, and has natural monopoly properties. The location gives the company a unique traffic and profit advantage. Although the four provinces of Hebei, Jiangsu, Shandong, and Anhui are economically developed, the number of train rides per capita is significantly lower than the three eastern provinces, and it is expected that there is still plenty of room for growth in demand. On the other hand, the Beijing-Shanghai high-speed railway radiates the entire country through the high-speed rail network, and will also benefit from network effects. In 2020, the Beijing-Shanghai high-speed rail merger and acquisition of Beijing-Fuzhou and Anhui began with a single line and moved to a regional road network. The epitaxial merger and acquisition will become a necessary part of the growth of the Beijing-Shanghai high-speed railway. Continued mergers and acquisitions are also expected to strengthen the company's network effect and competitive advantage.
The Beijing-Shanghai high-speed railway has a stable position in the national railway network. Although the proportion of mileage has decreased, its share of traffic volume is stable. The passenger traffic volume of China's railways can roughly describe the operation of the Beijing-Shanghai high-speed railway. Past data showed good consistency. This is the result of a stable position.
Entrust the transportation site to collect rent, and the main line business bears the risk
The railway industry has the characteristics of a “full network”, but China's high-speed rail uses a contract transportation management model with a more detailed division of labor. As the main participants, road network companies and transportation companies have incomplete assets, which also means that they can increase leverage to compete to optimize efficiency.
All trains are carried out by transportation companies, but passenger ticket prices are settled by classification: the revenue from train tickets for this line goes to the road network company, and the road network company pays the train rental fee to the transportation company; the revenue from cross-line train tickets goes to the transportation company, and the transportation company pays the road network rental fee to the road network company. Whether the road network company is responsible for the main line train or the transportation company is responsible for the cross-line train, only if the revenue exceeds the cash flow balance point can contribute the margin. The road network company's balance point requires a passenger occupancy rate of 46%, and the balance point of the transportation company requires a passenger occupancy rate of 38%.
Using the entrustment transportation management model, the number of employees in road network companies is very small, but railway passenger transportation is still a labor-intensive industry, and labor-related costs are reflected in outsourced transportation management expenses. According to the “Beijing-Shanghai High-speed Railway Entrusted Transportation Management Contract”, entrustment transportation management expenses are signed every three years, and the “comprehensive unit price+compound growth” billing method is used. The compound growth rate is determined based on labor cost increases (75% weight) and price increases (25% weight). As a result, the Beijing-Shanghai High Speed Rail has faced rigid upward pressure on labor costs for a long time.
The Beijing-Shanghai high-speed railway faces the problem of production capacity saturation, and the growth rate of main line and cross-line train business has been slowing down before 2020. As demand continues to grow, although the mechanism for forming ticket prices is still unclear, the market-based doors of high-speed rail have already been opened, and the Beijing-Shanghai high-speed railway has increased terminal fares in two steps; for cross-line trains, the existing rules set prices according to the busyness of the road network, which spontaneously makes prices flexible.
Resource allocation has a huge impact on companies. Minor changes in train operation maps involve the distribution of benefits between transportation companies and road network companies. Based on available information, we are unable to predict and discern resource allocation guidelines, but long-term investors should pay attention to this.
Long-term investment value depends on how to deal with supply and demand
The Beijing-Shanghai High Speed Rail is a leading high-speed rail passenger transport company in China. It connects the Beijing-Tianjin-Hebei and Yangtze River Delta economic circles. It naturally has a natural location advantage, while enjoying the high-speed rail network effect. Long-term growth has benefited from the increase in passenger traffic in the hinterland and radiated regions. Under the entrustment management operation model, the company's costs continue to rise rigidly, but cross-line trains contribute relatively stable profits. Main line trains bear limited macroeconomic exposure, and the business model and profit level are expected to be stable. As production capacity of the Beijing-Shanghai High Speed Rail becomes saturated, the company's epitaxial mergers and acquisitions and endogenous price increases open up room for long-term growth. We expect the company's net profit to be 11.3 billion, 13.1 billion, and 15 billion dollars respectively from 2023 to 2025, corresponding to PE 22 times, 19 times, and 17 times, respectively, to maintain a “buy” rating.
Risk warning
1. Macroeconomic fluctuations; 2. Entrusted transportation costs; 3. Parallel line diversion; 4. Profit assumptions are unfounded or fall short of expectations.