CRCC, CREC deny merger reports

Tie-up could avoid cutthroat competition: expert

Leading railway construction companies China Railway Construction Corp (CRCC) and China Railway Engineering Corp (CREC) late Tuesday denied media reports that the two State-backed companies are set to merge.

CRCC and CREC's listed arm China Railway Group said in two separate statements filed with the Shanghai Stock Exchange that they had received no information about a merger from the government authorities and that they were not planning such a deal.

The statements came after a report on Tuesday by financial news portal aastocks.com, which said that the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) was considering a combination of the two firms. The report did not disclose the identity of its sources.

Following the report, CRCC's shares on the Shanghai Stock Exchange rose 5.33 percent to 14.42 yuan ($2.3) on Tuesday. And Shanghai-listed China Railway Group saw its shares close at 8.89 yuan, up 5.96 percent.

Neither CRCC nor CREC could be reached for comment by press time. In response to Global Times phone call inquiries over the matter, SASAC said they did not know anything about the reported merger.

However, Wang Mengshu, a railway tunnel expert and a deputy to the National People's Congress, told the Global Times on Tuesday that the commission is discussing the feasibility of combining CRCC and CREC together.

A merger would avoid the increasingly vicious competition between the two companies, which has had the -effect of cutting each other's profit during their expansion overseas, said Wang, who is deputy chief engineer at China Railway Tunnel Group and an ardent supporter of the merger suggestion.

According to China Railway Group's latest financial report, its net profit reached 7.07 billion yuan during the first nine months of 2014, up 12.69 percent year-on-year but well below the growth rate of 46.44 percent in the same period in 2013.

CRCC also suffered a slowdown, reporting a 5.22 percent rise year-on-year in net profit in the first three quarters of 2014 to 7.5 billion yuan - the growth rate was 37.52 percent in the same period of 2013.

Both firms run businesses such as infrastructure construction and real estate in South Africa, Asia and the Middle East, according to media reports.

This merger, if it goes ahead, would not be the first combination of resources in the railway sector.

In September 2014, China's top two railway manufacturers - China CNR Corp and CSR Corp - also issued -statements refuting media reports about their merger. But in December 2014, CNR and CSR announced that the merger would go ahead, in a move that analysts said was mainly intended to prevent unhealthy price competition.

As China's economy slows, the central government is likely to try to cultivate big international brands in high-end industries in order to stabilize growth, analysts said.

A merger of CRCC and CREC would help fast-track the development of China's railway technology as well as its overseas expansion, said Wang, adding that the industrial chain could also be upgraded during the process.

However, Zhao Jian, a professor at Beijing Jiaotong University, was less optimistic about the potential for a tie-up.

A merger between CRCC and CREC is unlikely, Zhao told the Global Times Tuesday, as their combination would contribute little to the competitiveness of China's overall railway technology in the global market.

A merger may help the two companies in gaining more market share and price advantages during their overseas expansion, but it would not necessarily benefit the overall industry, he said without elaboration.