SHANGHAI (Reuters) - China’s top trainmakers, China CNR 601299.SS6199.HK and CSR Corp (601766.SS)(1766.HK), are in merger talks to create a giant able to compete globally with the likes of Siemens (SIEGn.DE) and Bombardier (BBDb.TO), state media reported on Tuesday.
China built the world’s longest high-speed train network in less than a decade and has expressed its desire to export its technology. The two state-owned firms however have fiercely competed against each other while trying to sell trains abroad.
CNR board secretary Xie Jilong said at a shareholder meeting in Beijing on Tuesday that the merger “is not up to us, it has become a national strategy, to be determined by the government,” the semi-official China Business News (CBN) reported.
“(Mergers) are the trend, and we are all waiting, currently there are no specific plans,” he was quoted as saying. CBN, without saying how it obtained the information, also said state counselor Wang Yong had been asked to supervise the process.
The official China Securities Journal, citing unidentified sources, said the firms had set up working groups to discuss the integration, and that investment bank China International Capital Corp had been appointed to oversee the reorganization.
The newspaper, quoting one industry source, said the biggest concern at the moment was related to the pair’s projects and personnel changes.
CNR and CSR halted trading of their shares on Monday, issuing statements saying they would resolve “major issues” as soon as possible and would resume trading within five working days. Zhuzhou CSR Times Electric (3898.HK), a CSR subsidiary, also suspended trading.
CNR and CSR did not respond to requests for comment.
Last month, CNR and CSR dismissed a report by financial news magazine Caixin that the government was looking to merge the firms to better compete with foreign rivals such as Germany’s Siemens and Canada’s Bombardier.
A merged CNR-CSR would have combined annual revenue of about 200 billion yuan ($32.71 billion) based on 2013 company data, compared with Siemens’ 75.9 billion euros ($96.5 billion) and Bombadier’s $18.2 billion.
CNR on Tuesday said its nine-month net profit rose 65 percent to 4 billion yuan. CSR is scheduled to report on Friday, according to the Shanghai Stock Exchange.
The official Xinhua news agency, quoting Chinese Academy of Engineering railway expert Wang Mengshu, said a merger was aimed at reducing unhealthy competition between the two and to promote China’s high-speed rail products overseas.
The trainmakers were demerged from the government in 2000 to promote competition, and have profited from China’s drive to connect the vast country by rail. Their main domestic customer is national operator China Railway Corporation.
But they have clashed in their chase for overseas sales. In 2011, they fought a price war for a Turkish contract, which eventually went to a South Korean firm. Two years later they were embroiled in a dispute over supplying trains to Argentina, leading the now-defunct Ministry of Railways to openly criticize the firms, according to Caixin.
Most recently, both firms have separately indicated their early interest in supplying trains to California’s proposed $68 billion high-speed network. The Californian rail authority has yet to issue formal requests for proposals.
CNR, which listed on the Hong Kong stock exchange in May, posted 2013 sales of 97.24 billion yuan and net profit of 4.13 billion yuan, while CSR reported full-year revenue of 97.89 billion yuan and net profit of 4.14 billion yuan.
“We estimate 14 percent potential profit accretion if CSR and CNR were to merge into one entity,” Barclays analyst Yang Song said in a Sept. 23 note, citing the removal of price competition and lower research and development costs.
“Most developed countries do not have two competing railway equipment manufacturers,” she said.
Additional reporting by Shanghai Newsroom; Editing by Stephen Coates