First move by rail giants puts merger on track

The nation's two biggest train makers, China CNR Corp and CSR Corp, have submitted the first draft of their merger plan to the State Council that will see CSR issuing shares to amalgamate with CNR.

CSR will buy all CNR shares through a secondary public offering, and the latter will delist from the capital market, 21st Century Business Herald reported on Wednesday, citing anonymous sources at the State-owned Assets Supervision and Administration Commission.

The new company will be named China Railway Vehicle Corp, the report said.

News office heads at CSR and CNR's headquarters in Beijing told China Daily they could not provide immediate comment.

They said the companies will make an announcement soon to update investors and clients at home and abroad.

Railway transportation specialist Liu Youmei, who is also an academic at the Chinese Academy of Engineering, said the plan will have little impact on changing manufacturing, research and development in China and will not cost that much to carry out.

"The merger is not just about making a change, but is a big step in preventing unhealthy competition in overseas markets and aiding the further development of China's rail and relevant industries," Liu said.

On Oct 27, CNR and CSR said they were preparing for a major development. Their shares were suspended from trading in Shanghai and Hong Kong at the same time.

The merger will create a new train manufacturing giant, which is expected to hold assets of more than 300 billion yuan ($48.6 billion).

China CNR Corp and CSR Corp have a combined market value of $26 billion in Hong Kong trading and employed 172,647 workers at the end of 2013.

Feng Hao, a rail transportation researcher at the National Development and Reform Commission, said the two train makers have business contracts regarding intellectual property with Siemens of Germany, France's Alstom and Mitsubishi Corp of Japan.

This means they cannot export six types of electric multiple unit trains that China currently sells overseas.

Feng said that unlike CNR, CSR solely owns the patent for certain types of these trains and can ship them to global markets. Its overseas sales were also higher than CNR's in the first half of this year and this could be why the government allowed CSR to take the lead in the merger.

CSR's global sales totaled 4.59 billion yuan in the first half of 2014, while CNR's exports volume was 2.32 billion yuan. CSR's operating revenue was also 20 billion yuan higher than CNR's in the first three quarters of this year.

The trading suspension has continued to boost the stock value of the two companies.

According to official statistics, the two corporations hold the lion's share in the world's high-speed train market, with total sales revenue equal to that of the rest of the world's top five makers combined.

Wang Zhigang, an official at the State-owned Assets Supervision and Administration Commission, said the merger should be encouraged.

He said that as the industry evolves, domestic companies should join hands in boosting international development, rather than focusing on mutual competition.

"It is time for them to make joint efforts to tap the overseas market," Wang said.