11

We remain firmly optimistic

Recommend railway sector：Potential to beat expectation on the back of changing government’s positioning of the railway sector

Chain of benefits: Investment-Equipment-Operation

Rising earnings sensitivity to rate hike

Daqin Railway as top pick：Freight rate reform ready to go

Highest earnings sensitivity to rate hike (doubling potential)

Cheapest valuation (8.8x 2013e P/E; 5.7% dividend yield)

GSR as second pick：Passenger rate reform to come later than freight rate reform

Lower earnings sensitivity to rate hike than Daqin (30%~50% at the most)

More expensive valuation(15.0x 2013e P/E; 2.7% dividend yield)

2

Reform of freight rate formation mechanism ： rate hike, market orientation, flexibility

New mechanism ： Market mechanism, upper limit based on price relations, downward adjustment allowed

Old mechanism ： Government control, cost plus pricing, dual-pricing

Source ： China Railway Corporation ， CICC Research Source ： China Railway Corporation ， CICC Research

Freight rate= base 1+ base 2*distance +railway construction fund +

electrification surcharge

Railway construction fund ＝ rate(Rmb 0.033/FTK)*weight*distance

Electrification surcharge ＝ rate (Rmb 0.012 /FTK)*WT.*electrified

distance

Some joint-stock transport companies and JV railways could implement

special freight rate (such as GSR and Daqin)

Railway operators could make downward revision to freight rate

Railway construction funds to be merged into and adjusted together

with freight rate and all lines adopting universal rates would

collect funds

Converging special rate and general rate for lines whose special rate is

simliar to the general rate(for example: Daqin line,

Guangping section of Beijing-Guangzhou Line).

Upper limit according to market-based calculation Absolute rate decided by administrative guidance

12% 2%

18%

1%8%42%

17%

High-speed Inter-city trans D train Z train T train K train Others

3

Passenger rate ： later than freight rate reform ， adjustment for fastest and slowest train unlikely, and 10%~20% change likely

Passenger rate is positively related to train conditions and distance; base rate has not been changed for years

Source ： CICC Research Source ： China Railway Corporation ， CICC Research

Passenger rate ＝ base rate*distance*price relation between

carriage class + insurance (now abolished) + air-conditioning

Price relation between carriage class ： hard/ soft seat:

hard/soft bed at 1.0: 2.0: 2.2: 3.85

Quality passenger train ： new air-conditioned train could revise

up rate by 50% at most

Passenger base rate has not been changed since 1995

Structural rise for passenger rate (due to opening of HSRs, etc.

RMB/RPK Old New Growth

1952 0.0131 0.0170 30%

1989 0.0170 0.0386 127%

1995 0.0386 0.0586 52%

Price relation would also be adopted; adjustment for fastest and slowest train restricted due to railway’s public function and price hearings; price for other classes might rise more significantly.

Fare Rate(Rmb/person-mile)

Percentage(as of hard seat rate)

0.05861 100

0.11722 200

Ordinary Type 0.01172 20

Express TypeTwice as much as the

ordinary type

Upper Berth 0.06447 110

Middle Berth 0.07033 120

Lower Berth 0.07619 130

Upper Berth130% as much as theopen type upper berth

Lower Berth130% as much as theopen type lower berth

Upper Berth 0.10257 175

Lower Berth 0.11429 195

0.12308 210

0.13480 230

0.01465 25Air Conditional Fee

Semi-cushioned Berth

Open Type

CompartmentType

Cushioned Berth

Advanced CushionedBerth

Upper Berth

Lower Berth

Ticket Fare Rate Table

Ticket Type

Hard Seat

Soft Seat

Fast Extra ticket

5.3

13.8

17.4

0

2

4

6

8

10

12

14

16

18

20

Scenario 1 Scenario 2 Scenario 3

Rmb 0.01

0.4

1.31.5

2.9

0

0.5

1

1.5

2

2.5

3

3.5

Scenario 1 Scenario 2 Scenario 3 Scenario 4

Rmb 0.01

4

Potential rate hike scale and earnings sensitivity

Calculation of Daqin’s sensitivity to rate hike Calculation of GSR’s sensitivity to rate hike

Source ： Company Data ， CICC Research Source ： Company Data ， CICC Research

Optimal Scenario: Ordinary freight rate

+Rmb0.025; Special freight rate +Rmb0.035

(converging with ordinary rate); Rmb0.033 railway

construction fund returned; Long haul passenger

rate +15%.

Base Scenario: In 2014, ordinary freight rate

+Rmb0.02, special freight rate +Rmb0.015 and no

change to railway construction fund and long haul

passenger rate.

Conservative Scenario: In 2014, ordinary freight

rate +Rmb0.015, special freight rate +Rmb0.01

and no change to railway construction fund and

long haul passenger rate.

Scenario 1 General Freight Rate +Rmb0.01

Scenario 2 Speical Freight Rate +Rmb0.01

Scenario 3 Rmb0.01 of Railway Construction Funds is returned

0.876 0.876 0.876

0.133 0.107 0.080

0.483 0.207 0.138

0.574

0.000

0.500

1.000

1.500

2.000

2.500

Optimal Scenario Base Scenario Conservative Scenario

EPS before price hike From increased general freight rate

From increased special freight rate From return of construction fundsRmb

2.067

1.0941.190

0.199 0.199 0.199

0.010 0.008 0.006

0.044 0.025 0.013

0.050

0.031

0.000

0.050

0.100

0.150

0.200

0.250

0.300

0.350

Optimal Scenario Base Scenario Conservative Scenario

EPS before price hike From increased general freight rate

From increased special freight rate From return of construction funds

From price hike for long-distance trainsRmb

0.232 0.217

0.333

Scenario 1 General Freight Rate +Rmb0.01

Scenario 2 Speical Freight Rate +Rmb0.01

Scenario 3 Rmb0.01 of Railway Construction Funds is returned

Scenario 4 Longhaul Passenger Rate +5%

5

Catalysts ： 1 ） 1Q13 results ； 2 ） 3rd Plenary Session in Nov. ；3 ） Rate hike likely to materialize in early 2014

Daqin’s 3Q13 results likely to rise >15% on low base and rate hike in this Feb.

Railway and rate reform likely to get more attention during the 3rd Plenary Session in Nov.

Rate hike likely to materialize after the Spring Festival (1ST Feb.). More likely to occur in April than in Feb.

Source ： Wind ， CICC Research Source ： CICC Research

Source ： CICC Research

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Coal volume of Daqin YoY growth10,000 tonnesDaqin's coal volume and YoY growth

7.3

8.6 9.3 9.3 9.6

10.5 10.8

12.2

13.8

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

2

4

6

8

10

12

14

16

16-Dec-03 1-Apr-05 10-Apr-06 5-Nov-07 1-Jul-08 13-Dec-09 1-Apr-11 20-May-12 20-Feb-13

Rmb/ tonne Basic tariff 1 YoY growth

0.030

0.040 0.043 0.045

0.048 0.054 0.055

0.063

0.075

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

16-Dec-03 1-Apr-05 10-Apr-06 5-Nov-07 1-Jul-08 13-Dec-09 1-Apr-11 20-May-12 20-Feb-13

Rmb/ tonne-km Basic tariff 2 YoY growth

6

Risk Analysis ： 1 ） small downside risk to traffic volume

Thermal power generation accelerated and a 8%-10% growth likely in 2H13

Narrowing price spread for domestic and imported coals; thermal coal imports stay flat YoY

Falling inventory in ports and power plants

Source ： CICC Research

Source ： Wind ， sxcoal.com ， CICC Research

Source ： Wind ， sxcoal.com ， CICC Research

55.2

76.2

42.4

34.8

0

10

20

30

40

50

60

70

80

90

1H12 1H13

Coal volume through self-owned ports Through third-party ports

mn tonnes

7

Risk Analysis ： 2 ） Sound results from Shuohuang line traffic diversion pressure test; medium risk still mild

Zhunchi line to start operation in 2013 Shenhua has low exposure to third-party railways and ports; Decent pressure test results from Daqin

Insufficient port capacity to check traffic diversion from Shenhua

Source ： Company Data ， CICC Research

Source ： Company Data ， CICC ResearchSource ： Company Data ， CICC Research

Capacity expected to reach 30mn-50mn ton at early operation

Shenhua reduced delivery through third-party railways and ports in 1H13, but Daqin recorded stable traffic volume

The 70mn tons coal transported by Daqin unlikely to be affected much

1H13 1H12 YoY

Self-owned Railways 101.7 87.0 16.9%

Shenshuo Railway 24.5 21.1 16.1%

Shuohuang - Huangwan Railway 62.7 52.7 19.0%

Dahuai Railway 9.7 8.9 9.0%

Baoshen Railway 4.8 4.3 11.6%

State-owned Railway 22.4 21.8 2.8%

Total 124.1 108.8 14.1%

Shenhua's railway turnover

8

Risk Analysis ： 3 ） Controllable diversion from other lines

Source ： Company Data ， CICC Research

LinesAssessment of traffic diversion

risk

Mid-west Shanxi(Jinzhongnan)

No material impact

Caozhun

（ Zhangtang line）

To start operation in 2015; high construction cost; traffic diversion unlikely to exceed 50mn tons.

BJ-SH 、 BJ-GZAt economical disadvantage due to high rates; Diversion from north-south lines conducive to Daqin’s rate hike

Northern Shanxicoal transport

Route 1 (Daqin) Route 2 (Zhuncao) Route 3(Zhunchi/Shuohuang)

Routes Datong-QHD-SH Datong-Zhangjiakou-Tangshan-SH Datong-Shenchi-Huanghua-SH

Railway length(km) 653 840 772

Railway fare(Rmb/tonne-km) 0.12 0.112~0.15 0.112~0.12

Railway fare(Rmb/tonne) 78 119 91

Railway Handling charges(Rmb/tonne) 28 28 28

Seabound freight rate(Rmb/tonne) 36 40 38

Port handling charges(Rmb/tonne) 48 48 48

Total costs(Rmb/tonne) 190 234 205

Western Inner Mongoliacoal transport

Route 1 (Daqin) Route 2 (Zhuncao) Route 3(Zhunchi/Shuohuang)

Routes Zhungeer-Datong-QHD-SH Zhungeer-Tangshan-SH ZGE-Shenchi-Huanghua-SH

Railway length(km) 922 966 915

Railway fare(Rmb/tonne-km) 0.12~0.15 0.15 0.12~0.15

Railway fare(Rmb/tonne) 119 145 120

Railway Handling charges(Rmb/tonne) 28 28 28

Seabound freight rate(Rmb/tonne) 36 40 38

Port handling charges(Rmb/tonne) 48 48 48

Total costs(Rmb/tonne) 230 260 233

9

Risk Analysis ： 4 ） Traffic diversion pressure ahead in 2H14

Source: Company data, CICC research

最快 2013 年底月开通

~20 min

>40 min

~40 min

To be open in 2H14

Estimated traffic diversion from GSHR

GSR expects Futian Station of Guangzhou-Shenzhen High-speed Railway to start operation in 2H14.

We do not expect much traffic diversion before the opening of Futian Station, but a 5% decline in traffic volume in 2H14 would negatively affect GSR’s earnings by ~8%.

Distance TimeGuangzhou Guangzhou South (Panyu) ~20km >40min Connected with subway, has some attractivenessDongguan Humen ~30km ~40min Almost no diversion effect for traffic from the urban

Shenzhen North (Longhua) ~10km ~20min Connected with subway, has some attractivenessFutian 0 0 Estimated to be open in 2014, obvious diversion effect

City Main stationsFrom central city

Traffic analysis

Shenzhen

-5% -10% -15% -20% -30% -50%

Earningschanges

-7.5% -14.7% -22.1% -29.4% -44.2% -73.7%

2014 Change of the traffic of Guangshen intercity railway

Comparable valuationsCompany Name Ticker Currency Price

Marketcap.

(USD m)CAGR PEG

2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E 12~14 12E

Domestic A share rail comps

Daqin Railway 601006.SH CNY 7.33 17,810 9.5 8.8 8.4 1.5 1.3 1.2 16.4 14.5 14.1 5.3 5.7 6.0 6% 1.3Guangshen Railway 601333.SH CNY 3.01 3,546 16.2 15.0 15.1 0.8 0.8 0.8 5.1 5.3 5.1 2.7 2.7 2.6 3% 4.4Tielong Logistics 600125.SH CNY 6.38 1,361 18.0 16.6 14.8 2.0 1.9 1.7 11.9 11.8 12.1 1.7 1.7 1.7 10% 1.4Average 14.6 13.5 12.8 1.5 1.3 1.2 11.1 10.5 10.4 3.2 3.4 3.4 7% 1.9Median 16.2 15.0 14.8 1.5 1.3 1.2 11.9 11.8 12.1 2.7 2.7 2.6 4% 3.3H-share rail compsGuangshen Railway 525.HK HKD 4.15 3,546 17.9 16.2 16.2 0.9 0.9 0.8 5.1 5.3 5.1 2.4 2.5 2.5 5% 3.1

International railway companies

AsiaMTR Corporate 66.HK HKD 29.95 22,390 17.7 19.9 16.3 1.2 1.2 1.1 9.7 5.7 7.1 2.6 2.7 2.9 4% 3.7East Japan Railway 9020.JP JPY 8,300 32,949 30.2 18.0 16.4 1.8 1.6 1.5 5.9 9.6 9.6 1.3 1.5 1.6 36% 0.5Central Japan Railway 9022.JP JPY 12,110 25,071 17.9 12.2 10.2 1.8 1.6 1.4 10.5 13.8 14.5 0.8 0.8 0.9 32% 0.3West Japan Railway 9021.JP JPY 4,245 8,458 27.9 13.9 14.0 1.2 1.1 1.1 4.2 8.2 7.7 2.1 2.6 2.6 41% 0.3Hankyu Holdings 9042.JP JPY 578 7,385 18.6 21.3 16.7 1.4 1.3 1.2 7.9 6.6 7.4 0.9 0.9 0.9 5% 3.1Container Corp of India CCRI.IN INR 709 2,118 15.8 14.5 14.0 2.5 2.2 2.0 16.5 15.9 14.8 1.6 1.7 1.7 6% 2.2SMRT Corp MRT.SP SGD 1.295 1,547 16.4 17.7 22.7 2.5 2.5 2.4 15.1 13.6 10.5 5.8 4.0 2.4 -15% n.m.Average 20.6 16.8 15.8 1.8 1.6 1.5 10.0 10.5 10.2 2.1 2.0 1.9 14% 1.1Median 17.9 17.7 16.3 1.8 1.6 1.4 9.7 9.6 9.6 1.6 1.7 1.7 5% 3.2North AmericaUnion Pacific UNP.US USD 154.92 71,859 18.7 16.3 14.2 3.7 3.4 3.0 20.5 21.5 23.1 1.6 1.8 2.0 15% 0.9Norfolk Southern NSC.US USD 74.39 23,206 13.9 13.5 11.9 2.4 2.3 2.1 17.7 17.2 17.9 2.6 2.7 2.9 8% 1.5CSX Corp CSX.US USD 25.45 25,929 14.5 14.2 12.8 2.9 2.7 2.4 21.3 19.4 20.1 2.1 2.3 2.5 7% 1.9Canadian National Railway CNR.CN CAD 100.33 40,599 16.4 16.5 14.5 3.9 3.6 3.3 24.7 22.2 22.8 1.5 1.7 2.0 6% 2.3Canadian Pacific Railway CP.CN CAD 126.06 21,250 31.5 20.3 15.9 4.3 3.6 3.1 9.9 19.0 21.1 1.1 1.1 1.3 41% 0.4Average 19.0 16.1 13.9 3.4 3.1 2.8 18.8 19.9 21.0 1.8 2.0 2.1 17% 0.8Median 16.4 16.3 14.2 3.7 3.4 3.0 20.5 19.4 21.1 1.6 1.8 2.0 8% 1.9

Global railway: average 18.8 15.9 14.6 2.2 2.0 1.8 12.7 13.1 13.3 2.2 2.3 2.3 13% 1.1Global railway: median 17.8 16.2 14.7 1.9 1.8 1.6 11.2 13.7 13.1 1.9 2.1 2.2 10% 1.4

*Figures are CICC estimates; others are market data from Bloomberg and Wind.

2013-09-09

Dividend yield(%)

P/E(X)

P/B(X)

ROE(%)

Historical PE/PB Band

Daqin Railway

GSR

Tielong Container Logistics

0.0

0.5

1.0

1.5

2.0

2.5

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

525.HK forward PB Average

Average+1xSTDEV Average-1xSTDEV

0

5

10

15

20

25

30

35

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

525.HK Forward PE Average

Average+1xSTDEV Average-1xSTDEV

-

10

20

30

40

50

60

06-A

ug

06-N

ov

07-F

eb

07-M

ay

07-A

ug

07-N

ov

08-F

eb

08-M

ay

08-A

ug

08-N

ov

09-F

eb

09-M

ay

09-A

ug

09-N

ov

10-F

eb

10-M

ay

10-A

ug

10-N

ov

11-F

eb

11-M

ay

11-A

ug

11-N

ov

12-F

eb

12-M

ay

12-A

ug

12-N

ov

13-F

eb

13-M

ay

13-A

ug

601006.CH Forward PE Average

Average+1xSTDEV Average-1xSTDEV

-

1

2

3

4

5

6

7

8

9

10

06-A

ug

06-N

ov

07-F

eb

07-M

ay

07-A

ug

07-N

ov

08-F

eb

08-M

ay

08-A

ug

08-N

ov

09-F

eb

09-M

ay

09-A

ug

09-N

ov

10-F

eb

10-M

ay

10-A

ug

10-N

ov

11-F

eb

11-M

ay

11-A

ug

11-N

ov

12-F

eb

12-M

ay

12-A

ug

12-N

ov

13-F

eb

13-M

ay

13-A

ug

601006.CH Forward PB Average

Average+1xSTDEV Average-1xSTDEV

0

10

20

30

40

50

02-M

ay

02-N

ov

03-M

ay

03-N

ov

04-M

ay

04-N

ov

05-M

ay

05-N

ov

06-M

ay

06-N

ov

07-M

ay

07-N

ov

08-M

ay

08-N

ov

09-M

ay

09-N

ov

10-M

ay

10-N

ov

11-M

ay

11-N

ov

12-M

ay

12-N

ov

13-M

ay

600125.CH Forward PE Average

Average+1xSTDEV Average-1xSTDEV

0.0

1.0

2.0

3.0

4.0

5.0

6.0

02-J

un

02-D

ec

03-J

un

03-D

ec

04-J

un

04-D

ec

05-J

un

05-D

ec

06-J

un

06-D

ec

07-J

un

07-D

ec

08-J

un

08-D

ec

09-J

un

09-D

ec

10-J

un

10-D

ec

11-J

un

11-D

ec

12-J

un

12-D

ec

13-J

un

600125.CH forward PB Average

Average+1xSTDEV Average-1xSTDEV