Pandemic Slams the Brakes on Rail Equipment Giant’s Growth

Leading rail-equipment supplier CRRC Corp. Ltd. (601766.SH) reported its first annual revenue decline in three years in 2020, as the global pandemic dampened orders from its main domestic customer and prompted overseas buyers to delay payments.

The company reported revenue last year of 227.7 billion yuan ($34.6 billion), down 0.59% from 2019. Its profit fell by a larger 3.93% to 11.3 billion yuan, according to its latest earnings report released on Tuesday.

“The year 2020 was an extraordinary year, bringing challenges such as the Covid-19 pandemic, world-wide economic recession, intensified Sino-U.S. trade friction, and an in-depth adjustment to China’s rail transport industry,” Chairman Sun Yongcai said in a statement accompanying the results.

“In 2021, the global economy is expected to stage a recovery in growth; however, due to the severe impact of the Covid-19 pandemic, the global economic situation is still complex and severe, and the recovery is likely to be unstable and uneven. Different trends in countries, industries and groups, and the regionalization and localization of industrial supply chain are already becoming more obvious, and the various derivative risks caused by the pandemic cannot be ignored.”

A major falloff in rail passenger volume, especially in the first half of the year at the outbreak’s height in China, led to a sharp drop in business from CRRC’s largest customer, China State Railway Group Co. Ltd. (China Railway), the national rail operator. Pandemic-induced delays aside, the debt-heavy China Railway is also cutting costs through measures like extending time between inspections and doing more repair and maintenance work itself.

Longer term, CRRC is also facing slower growth as China’s high-speed rail system matures following a massive multibillion-dollar build-out over the last decade. Earlier this month, the nation’s economic planner said it was introducing guidelines to limit new high-speed rail construction along underused routes, seeking to prevent projects that give short-term boosts to local economies but added to regional governments’ large debt. 

Those factors led to an unusually large 26.5% drop in revenue from CRRC’s core rail equipment business, which constitutes about 40% of its total, according to its annual report. All major types of rail equipment posted double-digit declines, including a 39% drop in the number of locomotives sold, and a massive 85% plunge in the number of passenger coach sales. Sales of multi-carriage trains fell by a milder 12.5%, while cargo carriage sales fell 30.5%.

While business from China Railway was weak, trends were more positive from CRRC’s other clients, mostly individual cities building urban subway systems and related infrastructure. That part of the business grew 32.12% last year to 58 billion yuan, accounting for about a quarter of CRRC’s total.

Many were expecting that part of the business to grow because it’s considered part of the “new infrastructure” that Beijing and local governments have prioritized for development. Such infrastructure includes not only city rail, but other more high-tech areas such as smart power grids and 5G telecoms networks. Accordingly, CRRC officials forecast that part of the business would continue to grow this year to 60 billion yuan or more.

The company also saw weakness internationally, as economic activity slowed in much of the world for most of last year. CRRC signed overseas deals worth 42.1 billion yuan last year, down 12.47% from 2019. Actual revenue from its foreign businesses also dropped 14.11% to 17.06 billion yuan, falling short of its 20 billion yuan goal announced at the start of the year.

CRRC management again blamed the pandemic for the weak overseas performance, as customers sought to delay some payments. But they were more optimistic about the current year, expressing confidence the company could meet the previous 20 billion yuan sales target.

CRRC officials said it was difficult to give forecasts for its domestic business in the current year because China Railway has yet to provide a specific purchasing plan. But it forecast that passenger carriage sales could continue to fall, while all the other major categories could increase.

Contact reporter Yang Ge (geyang@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

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