China Railway Sector:Potential set back on exporting high speed rail to USA

　　XpressWest announced it would end the deal with ChinaRailway International on west US high speed railway project

　　Share price in the sector corrected by 4-5% today and wethink this could be due to negative sentiment on the news

　　Companies that are reported to be part of the consortiuminclude CRG 390 HK/601390 CH and CRRC Corp 1766HK/601766 CH

　　Las Vegas to Los Angeles high speed rail developer drops Chinese partner:According to XpressWest, the high speed passenger rail developer for the Las Vegas toSouthern California, announced last night that they decided to terminate its joint venturewith China Railway International to build the 370km high-speed rail line with anestimated investment of US12.7bn. XpressWest indicated one of its major challengeswas a federal government requirement that high-speed passenger trains must bemanufactured in the USA to secure regulatory approvals. The China RailwayInternational is a consortium which includes China Railway Group (390 HK/601390 CH,Hold/Reduce, TP HKD5.5/RMB4.9), CRRC Corp (1766 HK/601766 CH, Hold/Reduce,TP HKD8.4/RMB7.4) andChina State Construction Engineering Corp 601668 CH (notrated, mkt price RMB5.42). It is interesting to note the different requirements fordomestic content for trains between the US federal government and municipalgovernments. CRRC Corp has been awarded major subway train contracts in Bostonand Chicago with investment in local assembly plants in those cities.

　　Negative sentiment impact – Financial impact for the Chinese companies involvedin the consortium would be limited but the news could be a negative on sentiment forthe sector as investors lower their expectations for potential overseas project wins.

　　As part of the “Road and Belt Initiative”, China intends to export high speed railtechnology to overseas markets but the latest development highlights the difficultywith regulatory approval and project financing. Currently Chinese companies areonly involved with the Indonesian high speed passenger rail project between Jakartaand Bandung. A Russian high speed rail project between Moscow and Kazan is atthe project design stage (being carried out by China Railway Group) but has nodefinite timing on the tender for the project construction.

　　Cautious on major Chinese construction companies – We maintain our cautiousview on the major Chinese construction companies. While their new contract flow inthe domestic market has been strong in 1H16, we think their double digit newcontract growth is not likely to be sustainable. The potential execution risks with theiroverseas projects could also hurt sentiment in the near term.