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Dubbed the “Golden Week,” the National Day holiday (normally October 1-7) is a traditional peak travel period for many Chinese who hit the road. But this year’s holiday was different from years past: most motorists across the country were exempt from paying toll fees.
The Chinese Government in August decided to lift highway tolls on roads and bridges nationwide for passenger vehicles with seven seats or less during four major Chinese holidays—Spring Festival, Tomb Sweeping Day, May Day and National Day. For the last National Day holiday, it came into effect on September 30 and ran until October 7.
Driven by the new policy, the number of travelers on highways totaled 85 million by 4 p.m. on September 30, the first day of the holiday, up 13.3 percent year on year, said the Ministry of Transport.
With more people than usual on the road, China’s major expressways saw congestion beginning as early as 5 a.m. on September 30.
On some roads, car accidents caused congestion and slowed traffic to a speed of less than 20 km per hour.
As of 3 p.m. on September 30, congestion was reported on 24 expressways in 16 provinces, due to accidents and a sharp increase of cars on road.
“Congestion after the toll-free policy is within our expectation,” added Xu Yunfei, an expert in transportation in Shandong Province. “We should stick to this policy and keep on implementing it.”
But it would strike a blow to Chinese highway companies. Industry insiders predict a 2-percent drop in their market performance.
China’s highway construction has been in a rapid-expansion phase since 1988, when the first highway was completed in Shanghai. The Chinese Government adopted the principle of“building roads with bank loans and paying off debt with toll fees,” and the standard has been in effect until today.
By the end of 2011, the total length of highway had amounted to 85,000 km. China’s roads—and highways in particular—have withstood over 75 percent of the country’s freight volume and over 90 percent of passenger volume. Toll fees have become a major source of revenue for highway companies and local governments.
Profitable, but indebted
Most people would assume that high-profit sectors in China include banking, alcohol and real estate, but financial reports of listed highway companies reveal that this industry is not necessarily struggling.
In 2011, the total revenue of all 19 listed highway companies was 41.48 billion yuan($6.57 billion), a 22-percent year-on-year increase and the gross profit margin was 53.53 percent, according to hexun.com, China’s biggest financial news Web portal. The gross profit margin of 19 listed highway companies was as high as 61.76 percent in the first half of 2012, according to Wind Information Co. Ltd. (Wind Info), a Shanghai-based leading service provider of financial data, information and software.
Toll fees account for over 90 percent of the income of listed highway companies, according to their financial reports.
Although profits are high, the return on equity (ROE) for the highway industry is only 10.43 percent, lower than other sectors. Some analysts argue that the ROE is lower because of massive previous investments, and investors should be aware of this fact.
“If you analyze the financial statements of highway companies carefully, you will find that the ROE is not as high as the gross profit margin may indicate,” said Guo Shenghui, Securities Representative of Hubei Chutian Expressway.
Moreover, despite the exorbitant profits, most highway companies are heavily in debt due to their ongoing expansion plans.
Massive profits lure companies to further expand their construction projects. This expansion brings debt and that debt is passed onto passengers. The entire sector is locked into this system.
The total debt of these highway companies amounted to 124.79 billion yuan ($19.78 billion) in the first half of 2012, up 18.48 percent from the previous year, according to Wind Info.
In June 2011, the Yunnan Provincial Road Development Investment Co. Ltd. broke its contract with a bank because it failed to pay back its debt and interest payments on time. Although the problem was eventually resolved, liability plagues the highway industry and rating agencies have lowered the credit ratings of road construction businesses.
“Some highway companies have a very high asset-liability ratio,” said Zhang Xiaode, a professor at the Chinese Academy of Governance. “Most highway companies have a government-backed financing platform. If credit policies are tightened and the income of highway companies shrinks, the whole industry chain could break, leading to a government debt crisis.”
The asset-liability ratio of Henan Zhongyuan Expressway Co. Ltd. and Guangxi Wuzhou Communications Co. Ltd. was as high as 79.07 percent and 71.02 percent, respectively. The liability ratio of Hubei Chutian Expressway Co. Ltd. was 68.53 percent.
“The whole highway industry is now cash-strained,” said Guo of Hubei Chutian Expressway.
Unlisted highway companies face an even more severe situation. The liability ratio in transportation investment companies in six provinces has exceeded 70 percent, according to a report from Dongxing Securities at the end of 2011.
The future
To charge or not to charge—that’s the big road question, which requires long-term negotiation among the Central Government, local governments and highway companies.
Toll charges may even account for an astounding 15 percent of China’s GDP and are a major engine for local GDP growth, said Zhao Haijun, an independent researcher.
In response to the outcry over high toll fees, five ministries, including the National Development and Reform Commission and the Ministry of Transport, launched a oneyear campaign against irregular toll charges in June last year, including confronting companies that had already paid off their debts.
From a major crackdown on over charg- ing to a free pass on holidays, it may be no surprise where the Central Government is headed with road tolls.
“Judging from ongoing highway reform, road tolls will eventually be lifted nationwide,”said Zhang. “Maintenance fees should be earmarked by central and local governments.”
Some argue that scrapping toll fees nationwide is not a realistic or feasible move.
Listed highway companies belong to shareholders. How can the country decide to scrap all or some toll charges? Toll fees cannot simply be removed. Besides, highway construction needs a large amount of capital and securing investment is a lengthy process, which is why so little private capital has been injected into the sector, an industry insider told the China Economic Weekly.
After the crackdown, 12 of the 19 listed highway companies saw profits fall, according to the China Economic Weekly.
“We’ve already reported results of last year’s crackdown to industry supervisors,”said Guo of Hubei Chutian Expressway. “We don’t know what the government is going to do next, so the future of highway toll charges is still unclear.”
The Chinese Government in August decided to lift highway tolls on roads and bridges nationwide for passenger vehicles with seven seats or less during four major Chinese holidays—Spring Festival, Tomb Sweeping Day, May Day and National Day. For the last National Day holiday, it came into effect on September 30 and ran until October 7.
Driven by the new policy, the number of travelers on highways totaled 85 million by 4 p.m. on September 30, the first day of the holiday, up 13.3 percent year on year, said the Ministry of Transport.
With more people than usual on the road, China’s major expressways saw congestion beginning as early as 5 a.m. on September 30.
On some roads, car accidents caused congestion and slowed traffic to a speed of less than 20 km per hour.
As of 3 p.m. on September 30, congestion was reported on 24 expressways in 16 provinces, due to accidents and a sharp increase of cars on road.
“Congestion after the toll-free policy is within our expectation,” added Xu Yunfei, an expert in transportation in Shandong Province. “We should stick to this policy and keep on implementing it.”
But it would strike a blow to Chinese highway companies. Industry insiders predict a 2-percent drop in their market performance.
China’s highway construction has been in a rapid-expansion phase since 1988, when the first highway was completed in Shanghai. The Chinese Government adopted the principle of“building roads with bank loans and paying off debt with toll fees,” and the standard has been in effect until today.
By the end of 2011, the total length of highway had amounted to 85,000 km. China’s roads—and highways in particular—have withstood over 75 percent of the country’s freight volume and over 90 percent of passenger volume. Toll fees have become a major source of revenue for highway companies and local governments.
Profitable, but indebted
Most people would assume that high-profit sectors in China include banking, alcohol and real estate, but financial reports of listed highway companies reveal that this industry is not necessarily struggling.
In 2011, the total revenue of all 19 listed highway companies was 41.48 billion yuan($6.57 billion), a 22-percent year-on-year increase and the gross profit margin was 53.53 percent, according to hexun.com, China’s biggest financial news Web portal. The gross profit margin of 19 listed highway companies was as high as 61.76 percent in the first half of 2012, according to Wind Information Co. Ltd. (Wind Info), a Shanghai-based leading service provider of financial data, information and software.
Toll fees account for over 90 percent of the income of listed highway companies, according to their financial reports.
Although profits are high, the return on equity (ROE) for the highway industry is only 10.43 percent, lower than other sectors. Some analysts argue that the ROE is lower because of massive previous investments, and investors should be aware of this fact.
“If you analyze the financial statements of highway companies carefully, you will find that the ROE is not as high as the gross profit margin may indicate,” said Guo Shenghui, Securities Representative of Hubei Chutian Expressway.
Moreover, despite the exorbitant profits, most highway companies are heavily in debt due to their ongoing expansion plans.
Massive profits lure companies to further expand their construction projects. This expansion brings debt and that debt is passed onto passengers. The entire sector is locked into this system.
The total debt of these highway companies amounted to 124.79 billion yuan ($19.78 billion) in the first half of 2012, up 18.48 percent from the previous year, according to Wind Info.
In June 2011, the Yunnan Provincial Road Development Investment Co. Ltd. broke its contract with a bank because it failed to pay back its debt and interest payments on time. Although the problem was eventually resolved, liability plagues the highway industry and rating agencies have lowered the credit ratings of road construction businesses.
“Some highway companies have a very high asset-liability ratio,” said Zhang Xiaode, a professor at the Chinese Academy of Governance. “Most highway companies have a government-backed financing platform. If credit policies are tightened and the income of highway companies shrinks, the whole industry chain could break, leading to a government debt crisis.”
The asset-liability ratio of Henan Zhongyuan Expressway Co. Ltd. and Guangxi Wuzhou Communications Co. Ltd. was as high as 79.07 percent and 71.02 percent, respectively. The liability ratio of Hubei Chutian Expressway Co. Ltd. was 68.53 percent.
“The whole highway industry is now cash-strained,” said Guo of Hubei Chutian Expressway.
Unlisted highway companies face an even more severe situation. The liability ratio in transportation investment companies in six provinces has exceeded 70 percent, according to a report from Dongxing Securities at the end of 2011.
The future
To charge or not to charge—that’s the big road question, which requires long-term negotiation among the Central Government, local governments and highway companies.
Toll charges may even account for an astounding 15 percent of China’s GDP and are a major engine for local GDP growth, said Zhao Haijun, an independent researcher.
In response to the outcry over high toll fees, five ministries, including the National Development and Reform Commission and the Ministry of Transport, launched a oneyear campaign against irregular toll charges in June last year, including confronting companies that had already paid off their debts.
From a major crackdown on over charg- ing to a free pass on holidays, it may be no surprise where the Central Government is headed with road tolls.
“Judging from ongoing highway reform, road tolls will eventually be lifted nationwide,”said Zhang. “Maintenance fees should be earmarked by central and local governments.”
Some argue that scrapping toll fees nationwide is not a realistic or feasible move.
Listed highway companies belong to shareholders. How can the country decide to scrap all or some toll charges? Toll fees cannot simply be removed. Besides, highway construction needs a large amount of capital and securing investment is a lengthy process, which is why so little private capital has been injected into the sector, an industry insider told the China Economic Weekly.
After the crackdown, 12 of the 19 listed highway companies saw profits fall, according to the China Economic Weekly.
“We’ve already reported results of last year’s crackdown to industry supervisors,”said Guo of Hubei Chutian Expressway. “We don’t know what the government is going to do next, so the future of highway toll charges is still unclear.”