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CHINA COMMUNICATIONS CONSTRUCTION COMPANY LTD.: Founded by the China Communications Construction Group, the China Communications Construction Co. Ltd. is the first large state-owned transportation infrastructure group, which has entered the overseas capital market, with its stock selected as a component of the Morgan Stanley Capital International Index (MSCI), as well as the Hang Seng China Enterprises Index (HSCEI). It ranks 224 globally in the list of Fortune 500 companies for 2010 according to revenues. The Group is the largest port construction company and also boasts of a leading position in road and bridge construction as well as design in China. It also occupies a dominant position in dredging, railways, and port machinery manufacturing businesses. Some important road projects undertaken by this company are the Jinan-Qingdao Expressway, Shanghai-Nanjing Expressway, Beijing Capital Airport Expressway, Beijing-Tianjin-Tanggu Expressway and the Beijing-Zhuhai Expressway.

Earnings Growth

Risks involved in road projects

The primary risks involved in the development of any road project can be classified as follows :

Development risks: These relate to the risks faced by the concessionaire or the sponsor before the initiation of construction, in the form of land acquisition for the project, environmental clearance and creditworthiness issues.

Construction risks: Risks that arise during the course of the construction of the road project such as difficult site conditions, engineering and technical difficulties as well as poor performance of suppliers and contractors.

Operation risks: These are the significant risks that arise once the road is operational and the tolls are collected in the form of incorrectly estimated traffic demand, toll levels and the toll collection technology.

As most expressway projects have a strong backing and support of the government, development and construction risks for China’s expressways are limited. However, operational risks do pose a few real challenging issues for Chinese toll roads.

One problem facing the toll road sector are the toll rates, which appear exorbitant at 12 cents per mile, working out to be more than the cost of fuel for many types of cars. For instance, given the vast expanse of the country, a road trip from the South of China to the capital Beijing would cost about $200 in tolls. This poses a major challenge for toll road companies seeking to increase their toll incomes and profit margins. However, one possible solution has been the adoption of weight-based toll methodology for freight vehicles by the 27 provinces and municipalities, which has yielded results in terms of an increase in toll incomes and improved profit performances too.

Moreover, these road projects are often plagued with uncertainties relating to traffic levels and the demand for toll roads, which result in inaccurately estimated toll revenues. Traffic volumes are highly sensitive to domestic as well as external macroeconomic conditions. This has been experienced by China during the recent global economic crisis when toll roads that served export activities, connecting important ports, saw a decline in traffic levels.

Another issue of concern could be the fact that the rapid and ongoing expansion of the expressway network in the country may exceed the existing demand and as well lead to a division of traffic from toll roads earlier constructed. This duplication may lead to lower revenues for several such toll roads.

The Chinese government has also committed over $300 billion to the construction of high speed rail lines during the next 20 years. While currently the expanse of the rail network in the country does not adequately link all its cities as well as its road network does, this could emerge as a significant competition to the Chinese toll roads in the future, undermining their profitability.

Despite challenges, prospects for the future remain bright

The Chinese toll road sector seems to have rebounded strongly since the commencement of 2010, clocking strong increases in toll revenues and net profits in the first quarter. Jiangsu Expressway, Zhejiang Expressway, Shenzhen Expressway and Sichuan Expressway have all registered double digit growth in their earnings supported by a robust recovery in traffic volumes. While Zhejiang Expressway recorded a 16% increase in toll revenues during this period, Shenzhen Expressway witnessed a phenomenal 61.2.4% increase. Sichuan Expressway also recorded a healthy 13% rise in its toll incomes in the first three months of this year compared to the previous year. Even if economic growth in China moderates after the frenzied expansion in recent years, the reorientation of the country’s economy towards domestic consumption could still help the toll road sector. Needless to say, the world-class, extensive, and expansive road network is expected to help China preserve its economic muscle.