Analysis of Reasons for Beijing-Shanghai High-Speed Railway's ROE Remaining Below 8% After Acquiring Beijing-Fuzhou Anhui Company

Based on collected public information and market data, I will detailedly analyze the reasons why Beijing-Shanghai High-Speed Railway’s ROE has remained below 8% after acquiring Beijing-Fuzhou Anhui Company.

601816.SH
5.21 yuan (as of December 29, 2024)
P/E ratio 19.52x, P/B ratio 1.25x

As one of China’s most important passenger dedicated lines, Beijing-Shanghai High-Speed Railway connects the two core cities of Beijing and Shanghai, and is an important part of the “Eight Vertical and Eight Horizontal” high-speed railway main corridor. The company was listed on the Shanghai Stock Exchange in January 2020, being China’s first high-speed railway stock.

According to public information, Beijing-Shanghai High-Speed Railway completed the equity acquisition of Beijing-Fuzhou Anhui Company (Beijing-Fuzhou Railway Anhui Company) [0]. Beijing-Fuzhou Anhui Company is mainly responsible for the construction and operation of high-speed railway projects in Anhui Province such as the Shangqiu-Hefei-Hangzhou Railway.

1. Regional Network Integration:
   Achieve network connection between Beijing-Shanghai High-Speed Railway and Beijing-Fuzhou Railway in Anhui through acquisition
2. Business Expansion:
   Extend business scope from the Beijing-Shanghai Line to newly built lines like the Shangqiu-Hefei-Hangzhou Railway
3. Scale Effect:
   Improve overall efficiency through unified operation and management

High-speed railway construction is a typical heavy asset industry. After the acquisition, the company’s asset scale increased significantly, but newly built lines need a long cultivation period to reach profit expectations.

• Asset scale expanded significantly after the acquisition [0]
• Passenger flow cultivation for newly built lines takes 3-5 years
• Fixed asset depreciation costs continue to increase

• Passenger Flow Cultivation Period:
  The Shangqiu-Hefei-Hangzhou Railway was opened relatively recently, and passenger flow density has not yet reached the design capacity
• High Operation Costs:
  Fixed costs (equipment maintenance, staff salaries, energy consumption) of high-speed railway lines are relatively rigid
• Depreciation Pressure:
  Depreciation expenses from huge fixed asset investments continue to suppress profits

• The acquisition requires a large amount of capital investment, which may be completed through debt financing
• Increase in interest-bearing liabilities leads to rising financial costs
• According to financial data, long-term loans and interest expenses erode the company’s profits [0]

• Operation integration of two different lines requires time and costs
• One-time expenses are incurred from unified management systems, staff placement, system docking, etc.
• Synergies cannot be maximized in the short term

• Passenger flow recovery after the pandemic still takes time
• Fluctuations in business travel demand under economic recovery
• Railway passenger pricing is controlled by policies, with limited flexibility

• Fixed costs account for a high proportion of high-speed railway operations, and passenger load factor fluctuations have a large impact on profits
• Newly acquired lines are in loss-making or low-profit states, dragging down overall profit margins

• Asset scale growth rate is faster than revenue growth rate after the acquisition
• New lines’ capacity utilization is not yet saturated

• Debt financing ratio may be high
• The role of financial leverage in boosting ROE is limited

1. Gradual Maturity of Passenger Flow Cultivation:
   Passenger flow of the Shangqiu-Hefei-Hangzhou Railway will continue to grow over time
2. Release of Synergies:
   Cost optimization is expected after completion of operation integration
3. Price Adjustment Expectations:
   Market-oriented reform of railway passenger pricing mechanisms may bring room for price increases
4. Policy Support:
   The state continues to support high-speed railway development, and relevant support policies are expected

1. Impact of macroeconomic fluctuations on passenger demand
2. Uncertainty of continuous losses for newly built lines
3. Pressure of rising debt costs

P/E ratio of 19.52x, which is in the reasonable range of the railway transportation industry [0]

• Passenger flow growth of lines under Beijing-Fuzhou Anhui Company
• Changing trends of the company’s overall gross profit margin and net profit margin
• Improvement progress of debt structure and financial costs
• Cost savings from the release of synergies

The acquisition of Beijing-Fuzhou Anhui by Beijing-Shanghai High-Speed Railway is an important step in the company’s strategic layout. Although ROE is dragged down by newly acquired assets in the short term, the acquisition helps enhance the company’s network coverage and competitive advantages in the medium-to-long term. Investors are advised to focus on integration progress and passenger flow cultivation, and rationally evaluate investment value.

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[0] Jinling AI Financial Database - Beijing-Shanghai High-Speed Railway Financial Data and Market Information