We talked over here a fair bit about Toll Road companies like MIIF and China Merchant Pacific having a good yield with a good moat. Well recent government actions have seem to reduce the moats pretty well.
Already MIIF’s Hua Nan Express way have indicated that they will have their toll reduced by the state government, so this is not just a risk analysis but a reality.
Recently China have declared 20 out of 365 days, during holidays these roads will all be toll free for passenger vehicles.
The sad thing is whenever we find something good, it seems to be taken away from us. China Merchant Pacific have indicated that perhaps 5% of their revenues will be hit by the holidays.
China government indicated that they will build more roads and expressway. But with all these moves I doubt many private companies will want to fund them.
At the stroke of midnight Monday, drivers in China’s Henan province no longer had to pay a 10 yuan (or around $1.50) toll to cross the 5.5 kilometer Zhengzhou Yellow River Bridge that links the cities of Zhengzhou and Xinxiang.
The toll wasn’t scrapped because of some end-of-Golden Week bout of generosity on the part of local government.
Instead, it was a grudging acknowledgement by bridge operators Henan Zhongyuan Expressway Co. that it could no longer charge for crossing the bridge, irreverently nicknamed the “Blood Sucker” by the cities’ hard-pressed residents.
Built in 1986 for 178 million yuan, the bridge recouped enough from tolls to repay debts just after one decade according to a 2008 investigation by China National Audit Office cited by a report by the state-run China News Service.
From 1996 up until the 2008 audit report, Zhongyuan Expressway amassed 1.45 billion yuan ($230 million) in earnings, the audit report said.
But it has taken four more years of toll paying since the audit report before drivers could take a toll-free spin across the span.
Internet users took to Sina Corp.’s Weibo microblogging service to express their indignation.
“So they grabbed so much money … then nobody’s responsible for anything?” wrote one.
“The National Audit Office has already ruled this kind of toll fee as ‘illegal.’ How come this kind of illegal action could last as long as 16 years?” asked another, adding: “Will anybody get punished because of that? Where has all the illegal income gone to? Anybody apologized to the public?”
“The National Audit Office should do its job and provide people with their rights to use those roads and bridge for free,” commented another microblogger.
The abolition of the bridge toll follows the waiver of most highway tolls during the recent week-long national holiday that drew to a close Sunday.
Experts say such a top-down approach by the Chinese government is eroding the patience of investors in the country’s highways.
Analyst Patrick Xu at Barclays estimates that the hit in the past week for listed Chinese highway operators could be as much as 4% of total annual revenue.
“The decision to waive may have benefited road users but it hurt investors,” he said, adding that the unilateral decision by the government was a breach of contract and “not justifiable.”
Still, institutional and retail investors have little chance of taking action given that local and central government combined tend to hold around 50% of the shares of the listed highway entities. “All investors can do is sell their shares,” said Mr. Xu.
He noted that new contract value for highway construction at listed companies has fallen sharply in the first half of 2012 compared with the same period a year earlier, something he attributed mainly to the government’s recent policy stance on tolls, which he said sent a “very negative signal.”
Meanwhile, the government continues to target infrastructure development. In recent months the National Development and Reform Commission, China’s top economic planning agency, approved 13 projects to build new roads 2,018 kilometer in length.
While the value of those projects was not disclosed, analysts say the country’s road network is comparatively developed so most of China’s recent infrastructure development plans focus on rail and subway. In September, for example, NDRC approved $112.1 billion worth of subway projects.
China Railway Construction Co., which in addition to railways is active in road construction, has seen its new contract value for highway construction fall to 38 billion yuan in the first six months of this year compared with 54 billion in the same period a year earlier, he said.
Stocks for China’s main highway operators were mostly lower down at the close of markets in Shanghai and Hong Kong Monday.
Sichuan Expressway (601107.SH) was down 0.66% at CNY3.02; Shenzhen Expressway (600548.SH) dropped 0.92% to CNY3.24; Chongqing Road & Bridge (600106.SH) fell 1.0% to CNY3.98.
Anhui Expressway (995.HK) was up 0.59% at HKD3.42 while Zhejiang Expressway (576.HK) was down 0.53% at HKD5.64. – WSJ CHINA