As filed with the Securities and Exchange Commission on April 28, 2022
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 20-F
(Mark One)
| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31 , 2021
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
or
| SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
Commission file number: 1-14362
广深铁路股份有限公司
(Exact name of Registrant as specified in its charter)
(Translation of Registrant’s name into English)
(Jurisdiction of incorporation or organization)
(Address of Principal Executive Offices)
Telephone: 2558-8150
(86 -755 )
Email: ir@gsrc.com
Facsimile:
(86-755)
2559-1480 (Name, Telephone,
E-mail
and/or Facsimile number and Address of Company Contact Person) Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of Each Class |
Trading Symbol(s) |
Name of Each Exchange on which Registered | ||
None |
None |
None |
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: American Depositary Shares, each representing 50
Class H ordinary shares, par value RMB 1.00 per share
Indicate the number of outstanding shares of each of the Registrant’s classes of capital or common stock as of December 31, 2021:
| Domestic shares (A shares), par value RMB1.00 per share |
||||
| H shares, par value RMB1.00 per share |
* |
| * | Includes 56,505,700 H shares in the form of American Depositary Shares. |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”). Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation Yes ☒ No ☐
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2
of the Exchange Act. | ☒ | Accelerated Filer | ☐ | Non-Accelerated File | ☐ | Emerging Growth Company |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13 (a) of the Exchange Act. ☐
| † | The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. |
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| U.S. GAAP ☐ | |
Other ☐ | ||||||
| by the International Accounting Standards Board | ☒ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule ☒
12b-2
of the Exchange Act). Yes ☐ No TABLE OF CONTENTS
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ii
Forward-Looking Statements
Certain information contained in this annual report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements can be identified by the use of words or phrases such as “is expected to”, “will”, “is anticipated”, “plan to”, “estimate”, “believe”, “may”, “intend”, “should” or similar expressions, or the negative forms of these words, phrases or expressions, or by discussions of strategy. Such statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from our historical results and those presently anticipated or projected. You are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date on which such statements were made. Among the factors that could cause our actual results in the future to differ materially from any opinions or statements expressed with respect to future periods include changes in the economic policy of the PRC government, changes in the Pearl River Delta economy and elsewhere in mainland China, increased competition from other means of transportation, delays in major development projects, occurrence of health epidemics, such as the ongoing
COVID-19
global pandemic, and political instability in Hong Kong or China, foreign currency fluctuations and other factors beyond our control. When considering such forward-looking statements, you should keep in mind the factors described in “Item 3. Key Information – D. Risk Factors” and other cautionary statements appearing in “Item 5. Operating And Financial Review And Prospects” of this annual report. Such risk factors and statements describe circumstances that could cause actual results to differ materially from those contained in any forward-looking statement.
Certain Terms and Conventions
Solely for the convenience of the reader, this annual report contains translations of amounts from RMB into U.S. dollars and vice versa at the rate of RMB6.3726 to US$1.00, the certified exchange rate for December 30, 2021 as published by the Federal Reserve Board of the United States, except where we specify that a different rate has been used. You should not construe these translations as representations that the RMB amounts actually represent U.S. dollar amounts or could be converted into U.S. dollars at that rate or at all.
We prepare and publish our consolidated financial statements in RMB.
Various amounts and percentages set out in this document have been rounded and, accordingly, may account for apparent discrepancies in the tables appearing herein. Unless the context otherwise requires or otherwise specified:
| • | “Acquisition” means our acquisition of the railway transportation business between Guangzhou and Pingshi and the related assets and liabilities from Yangcheng Railway Company according to the asset purchase agreement dated November 15, 2004 between Yangcheng Railway Company and us. |
| • | “China” or “PRC” means the People’s Republic of China. |
| • | “CRH” means a China Railway High-Speed train. |
| • | “CSRC” means China Securities Regulatory Commission. |
| • | “CSRG” means China State Railway Group Co., Ltd., f/k/a/ China Railway Corporation or “CRC”, which was set up on March 14, 2013 by the First Session of the 12th National People’s Congress of the PRC to perform the commercial functions formerly performed by the Ministry of Railways and was renamed to its current name with the approval of State Council of PRC on June 18, 2019. |
| • | “Company”, “we”, “our”, “our Company”, the “Group”, or “us” means Guangshen Railway Company Limited, a joint stock limited company incorporated in Shenzhen, China with limited liability, and its subsidiaries on a consolidated basis. |
| • | “CSRG Group” means CSRG together with the subsidiaries transferred from MOR. |
| • | “EMU” means electric multiple unit, a multiple unit train consisting of self-propelled carriages. |
| • | “GMSR” means Guangmeishan Railway Limited Company. |
| • | “GRCL” means Guangmeishan Railway Company Limited. |
| • | “GRGC” means China Railway Guangzhou Group Co., Ltd., f/k/a Guangzhou Railway (Group) Company Limited, our largest shareholder. |
| • | “GSR” means Ganzhou-Shaoguan Railway Company Limited. |
| • | “GSRC” or “SR” means Guangdong Sanmao Railway Company Limited. |
| • | “GZR” means Guangzhou-Zhuhai Railway Company Limited. |
| • | “HKSE” means the Stock Exchange of Hong Kong Limited. |
1
| • | “HKSE Listing Rules” means the Rules Governing the Listing of Securities on the HKSE. |
| • | “Hong Kong” means The Hong Kong Special Administrative Region of the PRC. |
| • | “Hong Kong dollars” or “HKD” means Hong Kong dollars, the lawful currency of Hong Kong. |
| • | “Macau” means the Macau Special Administrative Region of the PRC. |
| • | “MOF” means the Ministry of Finance of the PRC. |
| • | “MOR” means the Ministry of Railways, which was dissolved by the First Session of the 12th National People’s Congress of PRC. |
| • | “MOT” means Ministry of Transport. |
| • | “MTR” means MTR Corporation Limited. |
| • | “NDRC” means the National Development and Reform Commission of the PRC. |
| • | “PBOC” means the People’s Bank of China. |
| • | “Pearl River Delta” means the area in and adjacent to the southern part of Guangdong Province, PRC, surrounding the mouth of the Pearl River and its lower reaches. |
| • | “Reform” means the transfer of (i) administrative functions pertaining to railway development planning and policies from the MOR to the MOT, (ii) other administrative functions previously performed by the MOR to the National Railway Administration, supervised by the MOT, and (iii) commercial functions previously performed by the MOR to the CRC, in accordance with the approved plan on State Council Institutional Reform and Transformation of Government Functions and Approval On Setting Up China Railway Company by the State Council. |
| • | “RMB” means Renminbi Yuan, the lawful currency of the PRC. |
| • | “Restructuring” means the restructuring conducted in connection with our initial public offering in 1996 during which we succeeded to the railroad and certain other businesses of our predecessor company and certain assets and liabilities of GRGC. |
| • | “SAMR” means the State Administration for Market Regulation of China. |
| • | “SEC” means the U.S. Securities and Exchange Commission. |
| • | “tonne” means metric ton; and one ton is approximately 2,205 pounds in weight. |
| • | “US$”, “USD” or “U.S. dollars” means U.S. dollars, the lawful currency of the United States. |
| • | “Yangcheng Railway Company” means Guangdong Yangcheng Railway Enterprise Co., Ltd., a wholly owned subsidiary of GRGC, or its predecessor, Guangzhou Railway Group Yangcheng Railway Enterprise Development Company. |
PART I
ITEM 1. |
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS |
Not applicable.
ITEM 2. |
OFFER STATISTICS AND EXPECTED TIMETABLE |
Not applicable.
ITEM 3. |
KEY INFORMATION |
Selected Financial Data
The following selected consolidated data relating to our Consolidated Balance Sheets as of December 31, 2019, 2020 and 2021, and our Consolidated Comprehensive Income Statements and Consolidated Cash Flow Statements for each of the years ended December 31, 2019, 2020 and 2021 are derived from our audited consolidated financial statements included elsewhere in this annual report and should be read in conjunction with “Item 5. Operating And Financial Review And Prospects.” The Selected Consolidated Balance Sheets Data as of December 31, 2017 and 2018 and our Consolidated Comprehensive Income Statements and Consolidated Cash Flow Statements for each of the years ended December 31, 2017 and 2018 are derived from our audited consolidated financial statements that are not included in this annual report.
2
The consolidated financial statements from which the selected consolidated financial data set forth below have been derived were prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB.
Year ended December 31, |
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2017 |
2018 |
2019 |
2020 |
2021 |
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RMB |
RMB |
RMB |
RMB |
RMB |
US$ |
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in thousands except for per share/ADS data) |
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| Income Statement Data: |
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| Revenue from Railroad and Related Business |
||||||||||||||||||||||||
| - Passenger transportation |
7,757,077 | 8,108,384 | 8,009,590 | 4,114,522 | 6,169,109 | 968,068 | ||||||||||||||||||
| - Freight transportation |
1,893,594 | 1,849,360 | 2,112,596 | 1,698,576 | 2,035,437 | 319,404 | ||||||||||||||||||
| - Railway network usage and other transportation related services |
7,644,230 | 8,865,635 | 9,903,382 | 9,572,330 | 10,814,585 | 1,697,045 | ||||||||||||||||||
| Subtotal |
17,294,901 | 18,823,379 | 20,025,568 | 15,385,428 | 19,019,131 | 2,984,517 | ||||||||||||||||||
| Revenue from other businesses |
1,036,521 | 1,004,639 | 1,152,783 | 963,938 | 1,187,026 | 186,270 | ||||||||||||||||||
| Total revenue |
18,331,422 | 19,828,018 | 21,178,351 | 16,349,366 | 20,206,157 | 3,170,787 | ||||||||||||||||||
| Railroad and Related business operating expenses |
(15,850,056 | ) | (17,610,188 | ) | (18,942,185 | ) | (17,242,305 | ) | (20,475,287 | ) | (3,213,019 | ) | ||||||||||||
| Other businesses operating expenses |
(1,082,531 | ) | (1,048,025 | ) | (1,134,229 | ) | (944,485 | ) | (1,099,355 | ) | (172,513 | ) | ||||||||||||
| Other (losses)/gains-net |
(48,477 | ) | (108,613 | ) | (29,096 | ) | (3,841 | ) | 134,718 | 21,140 | ||||||||||||||
| Operating profit/(loss) |
1,350,358 | 1,062,253 | 1,072,841 | (652,262 | ) | (1,193,154 | ) | (187,232 | ) | |||||||||||||||
| Profit/(loss) attributable to equity holders of the Company |
1,015,361 | 784,059 | 748,439 | (557,876 | ) | (973,119 | ) | (152,704 | ) | |||||||||||||||
| Operating profit/(loss) per share |
0.19 | 0.15 | 0.15 | (0.09 | ) | (0.17 | ) | (0.03 | ) | |||||||||||||||
| Earnings/(losses) per share for profit attributable to equity holders of the Company |
||||||||||||||||||||||||
| - Basic and diluted |
0.14 | 0.11 | 0.11 | (0.08 | ) | (0.14 | ) | (0.02 | ) | |||||||||||||||
| Dividends declared per share |
0.08 | 0.06 | 0.06 | — | — | — | ||||||||||||||||||
| Earnings/(losses) per ADS for profit attributable to equity holders of the Company |
7.17 | 5.53 | 5.28 | (3.94 | ) | (6.87 | ) | (1.08 | ) | |||||||||||||||
| Balance Sheet Data (at year end): |
||||||||||||||||||||||||
| Working capital |
892,911 | (65,568 | ) | 226,893 | (885,902 | ) | (1,304,655 | ) | (204,728 | ) | ||||||||||||||
| Fixed assets-net |
23,617,138 | 24,184,248 | 23,566,081 | 23,016,415 | 24,010,161 | 3,767,718 | ||||||||||||||||||
| Leasehold land payments |
1,980,278 | 1,924,496 | — | — | — | — | ||||||||||||||||||
| Total assets |
33,994,238 | 35,402,237 | 36,893,133 | 36,780,453 | 37,403,422 | 5,869,413 | ||||||||||||||||||
| Equity attributable to equity holders of the Company |
28,684,677 | 28,852,299 | 29,175,726 | 28,192,838 | 27,241,949 | 4,274,857 | ||||||||||||||||||
| Share capital, issued and outstanding (domestic shares 5,652,237; H shares 1,431,300), RMB1.00 per value domestic shares |
5,652,237 | 5,652,237 | 5,652,237 | 5,652,237 | 5,652,237 | 866,243 | ||||||||||||||||||
| H shares |
1,431,300 | 1,431,300 | 1,431,300 | 1,431,300 | 1,431,300 | 219,356 | ||||||||||||||||||
| Cash Flow Statement Data: |
||||||||||||||||||||||||
| Net cash generated from operating activities |
2,634,839 | 3,261,421 | 2,395,245 | 1,336,173 | 1,002,468 | 157,309 | ||||||||||||||||||
| Net cash used in investing activities |
(2,264,647 | ) | (2,113,132 | ) | (2,087,032 | ) | (927,513 | ) | (926,112 | ) | (145,327 | ) | ||||||||||||
| Net cash used in financing activities |
(569,333 | ) | (570,032 | ) | (484,632 | ) | (485,762 | ) | (62,126 | ) | (9,749 | ) | ||||||||||||
| Payment for acquisition of fixed assets and construction-in-progress |
(2,273,426 | ) | (2,683,053 | ) | (2,441,116 | ) | (853,347 | ) | (1,060,262 | ) | (166,378 | ) | ||||||||||||
| Dividends paid to the Company’s shareholders |
(569,333 | ) | (566,683 | ) | (425,012 | ) | (425,012 | ) | — | — | ||||||||||||||
| Other Data: |
||||||||||||||||||||||||
| Railroad transportation operating income/(loss) |
1,444,845 | 1,510,218 | 1,083,383 | (1,856,877 | ) | (1,456,156 | ) | (228,502 | ) | |||||||||||||||
| Other businesses operating (loss)/income |
(46,010 | ) | (4,537 | ) | 18,554 | 19,453 | 87,671 | 13,757 | ||||||||||||||||
| (1) | Translation of amounts from RMB into US$, for the convenience of the reader has been made at RMB6.3726 to US$1.00, the certified exchange rate for December 30, 2021 as published by the Federal Reserve Board of the United States. No representation is made that the RMB amounts could have been, or could be, converted into U.S. dollars at that rate on December 31, 2021 or on any other date. |
3
Dividends
The Company did not issue any dividend for the year ended December 31, 2021. Under the impact of the
COVID-19
pandemic, the Company faced great operating and financial pressure. Taking into consideration the current operating position of the Company and the capital requirements for maintaining the normal operation of the Company, the Board proposed not to make profit or dividend distribution or capitalize capital reserve into share capital for 2021. This proposal has been considered and approved at the eleventh meeting of the ninth session of the Board of the Company, and will be delivered to the annual general meeting of shareholders to be held in June 2022 (the “2021 Annual General Meeting”) for approval. The independent directors of the Company unanimously agree that the proposal is in compliance with the relevant regulatory rules and the Articles of Association, conforms to the Company’s current actual situation, will enhance the Company’s sustainable and stable development, and will not damage the interests of small and medium shareholders, and agree to submit the proposal to the Company’s 2021 Annual General Meeting for consideration. In accordance with our Articles of Association, dividends for our domestic shares are paid in RMB while dividends for our H shares are calculated in RMB and paid in Hong Kong dollars. Hong Kong dollar dividend payments are converted by the depositary and distributed to holders of ADSs in U.S. dollars. The exchange rate was based on the average of the closing exchange rates for RMB to Hong Kong dollars as announced by the People’s Bank of China, or the PBOC, during the calendar week preceding the date on which the dividend was declared.
A. |
Reserved |
B. |
Capitalization and Indebtedness |
Not applicable.
C. |
Reasons for the Offer and Use of Proceeds |
Not applicable.
D. |
Risk Factors |
Risks Relating to Conducting Business in China
Substantially all of our assets are located in China and substantially all of our revenue is derived from our operations in China. Accordingly, our results of operations and prospects are subject, to a significant extent, to the economic, political and legal developments in China.
China’s economic, political and social conditions, as well as government policies, could affect our business.
As we are established, and operate substantially all of our businesses, in China, any changes in the political, economic and social conditions of the PRC or any changes in PRC governmental policies or regulations, including a change in the PRC government’s economic or monetary policies or railway or other transportation regulations, may have a material adverse effect on our business and our results of operations. For example, in August 2020, the NDRC approved plans for further improving the intercity rail system in the Greater Bay Area of southern China, and our Company was given a primary responsibility for developing the necessary infrastructure and connecting it with our existing network. In addition, the PRC government has been accelerating the transition of freight shipping from the road network to the rail network in order to reduce costs and pollution emissions and improve the transportation system generally, which is also expected to have a positive effect on our Company. However, these plans and policies may not be fully implemented, may not achieve the desired effects or may be impacted by other governmental policies and priorities in the future. Therefore, the expected positive impact on our Company may not be fully realized, which could have a material adverse impact on our operations and the value of our ADSs. In addition, if the focus of the PRC government shifts in terms of societal or economic priorities in the transportation sector, new policies could be enacted that could have a directly negative impact on our Company.
Since our largest shareholder, GRGC, and its actual controller, CSRG, are state-owned enterprises, the PRC government may adjust the operations of GRGC and/or CSRG at any time, both directly and indirectly through regulatory changes and increased enforcement of existing laws and regulations. Such adjustment could also take the form of managerial changes, or changes in strategic focus areas of our Company, any of which could materially affect our results of operations, financial condition or the strategic development of our Company.
4
The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value. Since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties.
In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Rules and regulations in China can also change quickly with little advance notice.
The economic environment in the PRC differs significantly from the United States and many Western European countries in terms of its structure, stage of development, capital reinvestment, growth rate, level of government involvement, resource allocation, self-sufficiency, rate of inflation and balance of payments position. The PRC government’s economic reform policies since 1978 have resulted in a gradual reduction in state planning in the allocation of resources, pricing and management of assets, and a shift towards the utilization of market forces. The PRC government is expected to continue its reforms, and many of its economic and monetary policies still need to be developed and refined. In addition, we operate in the infrastructure and transportation sector, which is still highly subject to central planning initiatives, and certain changes in governmental policies from time to time may negatively affect our business and operations. Given the PRC government’s significant oversight and discretion over the conduct of our business through GRGC, the PRC government may substantially influence our operations in a variety of ways at any time, including through regulation of the prices of our services, allocation of railway lines, setting of industry safety, worker welfare, environmental and other standards, regulating or restricting imports of equipment we require, or regulating travel generally in the PRC, which could result in a material change in our operations and/or the value of our ADSs. For example, increasingly strict environmental standards could require us to phase out our remaining internal combustion engine trains before we originally planned. In addition, changing safety standards could require us to make additional investments in our safety systems and equipment, including overpasses, guardrails, signage and other systems, the costs of which may adversely impact the value of our ADSs. As another example, in 2016, the NDRC delegated its authority to set baseline ticket pricing standards for high-speed trains to CSRG. If CSRG increases or decreases the ticket prices for trains in our operation area, our revenue from railroad businesses will be affected accordingly. In April 2019, the PRC government lowered the value-added tax rate for railway transportation services from 10% to 9%, and CSRG lowered the baseline pricing standards for national railway transportation services. Accordingly, we lowered our transportation and ticket pricing. For further information on the ticket pricing, see “Item 4. Information On The Company – B. Business Overview – Pricing.” While we believe the PRC government weighs heavily factors such as continuity and economic and social stability when creating and implementing laws and policies, we cannot assure you that future changes in governmental policies or regulation will not have a material adverse effect on our business, operations or results of operations. For example, a shift in emphasis away from rail transportation towards other forms of passenger and freight transportation services, could have a direct, immediate and substantial negative impact on our business. Similarly, an increase in the cost of our fuel, which is also subject to governmental price-setting mechanisms, could significantly increase our costs. Any of these types of China-specific legal and regulatory risks could result in a material change in our operations and/or the value of our ADSs or could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.
Any future issuance of securities by our Company to foreign investors would be subject to review and approval of the CSRC, and the CSRC may refuse to grant such approval. Furthermore, on December 19, 2020, the NDRC and MOFCOM promulgated the Foreign Investment Security Review Measures, which took effect on January 18, 2021. Under the Foreign Investment Security Review Measures, investments in military, national defense-related areas or in locations in proximity to military facilities, or investments that would result in acquiring the actual control of assets in certain key sectors, such as critical agricultural products, energy and resources, equipment manufacturing, infrastructure, transport, cultural products and services, IT, Internet products and services, financial services and technology sectors, are required to be approved by designated governmental authorities in advance. These additional restrictions may make it more difficult for us, as an infrastructure-related company, to obtain approval for any issuance of securities to foreign investors. While we have no current plan to issue securities for fund-raising purposes, if we did decide to do so, we may not be able to receive the required approvals in a timely manner or at all, which could adversely affect our access to funding and our business operations generally.
5
Government control of currency conversion may adversely affect our operations and financial results.
Our books and records are maintained and our financial statements are prepared and presented in RMB, which is not a freely convertible currency. All foreign exchange transactions involving RMB must be transacted through banks and other institutions authorized by the PBOC. We receive substantially all of our revenue in RMB. We need to convert a portion of our revenue into other currencies to meet our foreign currency obligations, such as payment of cash dividends on our H shares and equipment purchases from overseas regions. In addition, the existing foreign exchange limitations under PRC law could affect our ability to obtain foreign currencies through debt financing, or to obtain foreign currencies for capital expenditures or for distribution of cash dividends on our H shares.
Since the subsidiaries and parent companies of the Company are all located in China, the transfer of cash and assets together with the distribution of profits and dividends also occur in China. The Company has distributed cash dividends for 24 consecutive years from its listing in 1996 to 2019 and has not encountered any regulatory obstacles in terms of cross-border cash transfer and foreign currency exchanges. Taking the 2019 dividend distribution for an example, the details of the cash dividend distribution process are as follows: (1) the cash dividends of the major shareholder of
A-shares,
GRGC, were paid in RMB directly and (2) the cash dividends of other shareholders of A-shares
were paid via the Shanghai Branch of China Securities Depository in RMB after tax deduction, which were then distributed to each shareholder. The tax deduction of different categories of shareholders is as follows: (1) for resident enterprise shareholders (including institutional investors), the Company does not withhold the enterprise income tax, which shall be otherwise declared and paid by the shareholders themselves; (2) for natural person investors and funds, the Company does not withhold any tax and the individual income tax will be levied or exempted in proportion to the holding period as of when the shares are transferred after the share registration date; (3) for Qualified Foreign Institutional Investors and non-resident
enterprise investors, the Company withholds 10% of the enterprise income tax; and (4) for Hong Kong investors, the Company withholds 10% of the individual income tax. The cash dividends of
H-share
shareholders shall be converted to Hong Kong dollars by the Company after tax deduction and paid in HK dollars to the specific dividend distribution account of the Company in Bank of China (Hong Kong) Trust Co., Ltd. based on the register of shareholders provided by Hong Kong Securities Registration Co., Ltd. The tax deduction of different categories of shareholders is as follows: (1) for individual shareholders of H-shares,
the Company withholds 10% of the individual income tax, and (2) for non-individual
shareholders of H-shares,
the Company withholds 10% of the enterprise income tax. The cash dividends of ADS holders are distributed by the depository bank, JPMorgan, after its receipt of the cash dividends distributed in HK dollars and the conversion of them into US dollars.
The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of foreign currency out of China.
We received substantially all of our revenues in RMB for the years ended December 31, 2020 and 2021. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends or other payments to our overseas shareholders or ADS holders, or otherwise satisfy our foreign currency-denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the SAFE by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders or ADS holders, which could negatively impact the price of our ADSs.
Rising threats of international tariffs, including tariffs applied to goods traded between the United States and China, could materially and adversely affect the Chinese economy and our business.
Since the beginning of 2018, there has been increasing rhetoric, in some cases coupled with legislative or executive action, from several U.S. and foreign leaders regarding tariffs against foreign imports of certain materials. More specifically, there have been several rounds of U.S. tariffs on Chinese goods taking effect in the past few years, some of which prompted retaliatory Chinese tariffs on U.S. goods. The institution of trade tariffs both globally and between the U.S. and China specifically carries the risk of negatively impacting China’s overall economic condition, which could have negative repercussions on the Company. Furthermore, imposition of tariffs could cause a decrease in freight traffic, which would directly affect our business.
6
Fluctuation of the RMB could adversely affect our financial condition and results of operations.
The value of the RMB fluctuates and is subject to changes in market conditions as well as China’s political and economic conditions. Since 1994, the conversion of RMB into foreign currencies, including Hong Kong and U.S. dollars, has been based on rates set by the PBOC, which are set daily based on the previous day’s inter-bank foreign exchange market rates and current exchange rates on the world financial markets. On July 21, 2005, the PRC government changed its
decade-old
policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed floating band against a basket of certain foreign currencies. On April 14, 2012, the PRC government further allowed the floating band of RMB’s trading prices against the U.S. dollar to widen from 0.5% to 1% on each business day effective from April 2012, and further widened the floating band to 2% in March 2014. In recent years, the PBOC has been developing a mechanism for formulating the midpoint rate of the RMB. On August 11, 2015, it announced the implementation of the RMB exchange rate formation mechanism reform to allow the market to play a bigger role in exchange rate determination. On December 11, 2015, the China Foreign Exchange Trade System launched the RMB exchange-rate index, which strengthened the reference to a currency basket to better maintain the stability of the RMB exchange rate against the currencies in the basket. As a result, the RMB/USD central parity formation mechanism of “closing rate + exchange-rate movements of a basket of currencies” was developed. In June 2016, the Foreign Exchange Self-Disciplinary Mechanism was established, allowing financial institutions to play a more important role in maintaining orderly operations in the foreign-exchange market and in an environment for fair competition. In February 2017, the Foreign Exchange Self-Disciplinary Mechanism adjusted the reference period for the central parity against the currency basket from 24 hours ahead of submitting the quotes to 15 hours between the closing on the previous trading day and the submission of the quotes, which avoided repeated references to the daily movements of the USD exchange rate in the central parity of the following day. As a result, the PBOC guided the RMB weaker by lowering the midpoint rate to reflect the prevailing market rate, while emphasizing the use of the closing rate on the preceding day as a reference when deciding the midpoint rate. In the past few years, the exchange rate had been under market pressure to depreciate. PBOC had used up over U.S. $1 trillion of China’s foreign currency reserves to stabilize the currency. This depreciation halted in 2017, and the RMB appreciated against the U.S. dollar during this one-year
period. In 2018 and 2019, the RMB exchange rate against the U.S. dollar depreciated significantly, mainly due to changes in political and economic conditions, including trade friction between China and the U.S. In 2020, the RMB appreciated approximately 6.7% against the U.S. dollar and in 2021, the RMB appreciated approximately 2.3% against the U.S. dollar. We have certain U.S. dollar-denominated and HK dollar-denominated assets and the appreciation of RMB could result in a decrease of the value of these assets. For further information on our foreign exchange risks and certain exchange rates, see “Item 3. Key Information – A. Selected Financial Data” and “Item 11. Quantitative And Qualitative Disclosures About Market Risk – Currency Risks.” Although the RMB exchange rate against the U.S. dollar appreciated in 2021, we cannot assure you that any future movements in the exchange rate of RMB against the United States dollar or other foreign currencies will not adversely affect our results of operations and financial condition. The differences with respect to the PRC legal system could limit the legal protections available to you.
As the PRC and the U.S. have different legal systems and the court decisions in China do not have binding force on subsequent cases, there are significant differences between the PRC legal system and the U.S. legal system. China has a civil law system based on written statutes, which, unlike common law systems, is a system in which decided judicial cases have little precedential value. Furthermore, interpretation of statutes and regulations may be subject to government policies reflecting domestic political changes. The relative inexperience of China’s judiciary in many cases creates additional uncertainty as to the outcome of litigation. In addition, enforcement of existing laws or contracts based on existing laws may be uncertain and sporadic, and it may be difficult to obtain swift and equitable enforcement within China. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property and procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.
Changes in laws and policy could negatively affect our business and operations. Conflicting regulatory requirements could also increase our compliance costs and subject us to regulatory scrutiny. Any further escalation in geopolitical tensions or a trade war, or news and rumors of any escalation, could affect activity levels within our region of operation and have a material and adverse effect on our business, results of operations, and/or the trading prices of our ADSs and/or other securities. Any restrictions imposed by the United States or other countries on capital flows into China or China-based companies may prevent potential investors from investing in us, and the trading prices and liquidity of our ADSs and/or other securities may suffer as a result.
In addition, our ability to issue new securities or otherwise continue to support liquidity in the trading of our outstanding securities is subject to regulation by the PRC central government. Foreign ownership of our Company or our ability to continue to issue new securities in the U.S. are subject to continued approvals of the PRC government, which could be revoked or changed at any time, and which consequently could cause the trading in our ADSs and other securities to become illiquid without notice and/or significantly and adversely impact their trading prices.
7
While the trend of legislation over recent decades has significantly enhanced the protection of foreign investment and allowed for more control by foreign parties of their investments in Chinese enterprises, there can be no assurance that a change in leadership, social or political disruption, or unforeseen circumstances affecting China’s political, economic or social life, will not affect the PRC’s ability to continue to support and pursue these reforms. Such a shift or other significant changes in laws or regulations for whatever reason, could have a material adverse effect on the company business and prospects and could happen quickly with little or no advance notice.
In addition, because the PRC Company Law is different in certain important aspects from company laws in Hong Kong, the United States and other common law countries and regions and because the PRC laws and regulations dealing with business and economic matters, including PRC securities laws, are still evolving, you may not enjoy the same shareholder protections to which you may be entitled in Hong Kong, the United States or other jurisdictions.
Because all of our operations are in China, our business is subject to the complex and rapidly evolving laws and regulations there. The Chinese government may exercise significant oversight and discretion over the conduct of our business and may intervene in or influence our operations at any time, which could result in a material change in our operations and/or the value of our ADSs.
As a business operating in China, we are subject to the laws and regulations of the PRC, which can be complex and evolve rapidly. The PRC government has the power to exercise significant oversight and discretion over the conduct of our business, and the regulations to which we are subject may change rapidly and with little notice to us or our shareholders. As a result, the application, interpretation, and enforcement of new and existing laws and regulations in the PRC are often uncertain. In addition, these laws and regulations may be interpreted and applied inconsistently by different agencies or authorities, and inconsistently with our current policies and practices. New laws, regulations, and other government directives in the PRC may also be costly to comply with, and such compliance or any associated inquiries or investigations or any other government actions may:
| • | Delay or impede our development, |
| • | Result in negative publicity or increase our operating costs, |
| • | Require significant management time and attention, and |
| • | Subject us to remedies, administrative penalties and even criminal liabilities that may harm our business, including fines assessed for our current or historical operations, or demands or orders that we modify or even cease our business practices. |
The promulgation of new laws or regulations, or the new interpretation of existing laws and regulations, in each case that restrict or otherwise unfavorably impact the ability or manner in which we conduct our business and could require us to change certain aspects of our business to ensure compliance, which could decrease demand for our products or services, reduce revenues, increase costs, require us to obtain more licenses, permits, approvals or certificates, or subject us to additional liabilities. To the extent any new or more stringent measures are required to be implemented, our business, financial condition and results of operations could be adversely affected as well as materially decrease the value of our ADSs.
Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us.
The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value. Since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties. For example, the enforcement of laws and rules and regulations in China can change quickly with little advance notice and there are risks that the Chinese government may intervene or influence our operations at any time, or may exert more control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our operations and/or the value of our ADSs.
From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.
8
We are subject to extensive and evolving legal system in the PRC,
non-compliance
with which, or changes in which, may materially and adversely affect our business and prospects, and may result in a material change in our operations and/or the value of our ADSs or could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of our ADSs to significantly decline or be worthless. PRC companies are subject to various PRC laws, regulations and government policies and the relevant laws, regulations and policies continue to evolve. Recently, the PRC government is enhancing supervision over companies seeking listings overseas and some specific business or activities such as the use of variable interest entities and data security or anti-monopoly. The PRC government may adopt new measures that may affect our operations or may exert more oversight and control over offerings conducted outside of China and foreign investment in China-based companies, and we may be subject to challenges brought by these new laws, regulations and policies. However, since these laws, regulations and policies are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties. Furthermore, as we may be subject to additional, yet undetermined, laws and regulations, compliance may require us to obtain additional permits and licenses, complete or update registrations with relevant regulatory authorities, adjust our business operations, as well as allocate additional resources to monitor developments in the relevant regulatory environment. However, under the stringent regulatory environment, it may take much more time for the relevant regulatory authorities to approve new applications for permits and licenses, and complete or update registrations and we cannot assure you that we will be able to comply with these laws and regulations in a timely manner or at all. The failure to comply with these laws and regulations may delay, or possibly prevent, us to conduct business, accept foreign investments, or be listed overseas.
In addition, the PRC government has recently indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers. On July 6, 2021, the relevant PRC government authorities issued Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law. These opinions emphasized the need of strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies, and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies. As a
follow-up,
on December 24, 2021, the State Council subsequently issued a draft of the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies, and the CSRC issued a draft of Administration Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies for public comments. These draft measures propose to establish a new filing-based regime to regulate overseas offerings and listings by domestic companies. Specifically, an overseas offering and listing by a PRC company, whether done directly or indirectly, and whether an initial public offering or a follow-on
offering, must first be filed with the CSRC. The examination and determination of an indirect offering and listing would be conducted on a substance-over-form basis, and an offering and listing would be deemed as a PRC company’s indirect overseas offering and listing if the issuer meets the following conditions: (i) any of the operating income, gross profit, total assets, or net assets of the PRC enterprise in the most recent fiscal year was more than 50% of the relevant line item in the issuer’s audited consolidated financial statement for that year; and (ii) senior management personnel responsible for business operations and management are mostly PRC citizens or are ordinarily resident in the PRC, and the principal place of business is in the PRC. The issuer or its affiliated PRC entity, as the case may be, would be required to file with the CSRC for its initial public offering, follow-on
offering and other equivalent offering activities. In particular, the issuer would need to submit the filing with respect to its initial public offering and listing within three business days after its initial filing of the listing application, and submit the filing with respect to its follow-on
offering within three business days after the completion of the follow-on
offering. Failure to comply with the filing requirements could result in fines to the relevant PRC companies, suspension of their businesses, revocation of their business licenses and permits and fines for the controlling shareholder and other responsible persons. These draft measures also set forth regulatory prohibitions on overseas offerings and listings by PRC enterprises in certain circumstances. As of the date of this annual report, both CSRC rules are still in draft form and have not come into effect. Upon finalization of the rules and their coming into effect, we could be required to complete the filing with the CSRC in order to pursue a future
follow-on
offering, if any. We thus cannot assure you that we will remain fully compliant with all new regulatory requirements or any future implementation rules on a timely basis, or at all. In addition, as an infrastructure-related company in the railway industry, it is possible that the PRC government could impose limits on companies in our sector. If this were to occur, we may be required to cancel our ADSs and otherwise restrict foreign ownership, which would likely have a significant negative impact on the value of our ADSs and our shares generally. There are substantial uncertainties as to whether these draft measures to regulate direct or indirect overseas offering and listing will be further amended, revised or updated, and what their timetable for implementation and final content will be. As the CSRC may formulate and publish guidelines for filings in the future, these draft measures did not provide for detailed requirements of the substance and form of the filing documents. In a Q&A document released on the CSRC’s official website on December 24, 2021, the respondent CSRC official indicated that the proposed new filing requirement will start with new issuers and listed companies seeking
follow-on
financing and other financing activities. As for the filings for other listed companies, the regulator would grant adequate transition periods and apply separate arrangements. Given the substantial uncertainties surrounding the draft CSRC filing requirements, we cannot assure you that, if ever required, we would be able to complete the filings and fully comply with the relevant new rules on a timely basis, if at all. 9
In addition, we cannot assure you that any new rules or regulations promulgated in the future will not impose additional requirements on us. If it is determined in the future that filing and approval from the CSRC or other regulatory authorities or other procedures, including the cybersecurity review under the Measures for Cybersecurity Review and the Draft Measures for Internet Data Security, are required for our offshore offerings, it is uncertain whether we can obtain such approval or complete such filing procedures and how long it may take. Furthermore, any such approval or filing could be subsequently rescinded or rejected. Any failure to obtain or delay in obtaining such approval or completing such filing procedures for our offshore offerings, or a rescission of any such approval or filing if obtained by us, could subject us to sanctions by the CSRC or other PRC regulatory authorities. These regulatory authorities may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from our offshore offerings into China or take other actions that could materially and adversely affect our business, financial condition, results of operations, and prospects, as well as the trading price of our listed securities. The CSRC or other PRC regulatory authorities also may take actions requiring us, or making it advisable for us, to halt our offshore offerings before settlement and delivery of the shares offered. Consequently, if investors engage in market trading or other activities in anticipation of and prior to settlement and delivery, they do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or other regulatory authorities later promulgate new rules or explanations requiring that we obtain their approvals or complete the required filings or other regulatory procedures for our prior offshore offerings, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties or negative publicity regarding such approval requirements could materially and adversely affect our business, prospects, financial condition, reputation, and the trading price of our listed securities.
Since it remains unclear how the Opinions will be interpreted, amended and implemented by the relevant PRC governmental authorities, it remains uncertain how PRC governmental authorities will regulate overseas listings in general and whether we are required to obtain any specific regulatory approvals for our offshore offerings. If the PRC regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for our future offshore offerings, we may be unable to obtain such approvals in a timely manner, or at all, and such approvals may be rescinded even if obtained. Any such circumstance could significantly limit or completely hinder our ability to continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless.
Possible future actions by the Chinese government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer ADSs to investors and could cause the value of our securities to significantly decline, possibly even to zero.
Any failure or perceived failure by us to comply with the PRC anti-monopoly laws and regulations may result in governmental investigations or enforcement actions, litigation or claims against us and could have an adverse effect on our business, financial condition and results of operations.
The PRC anti-monopoly enforcement agencies have strengthened enforcement under the PRC Anti-Monopoly Law in recent years. On December 28, 2018, the SAMR, issued the Notice on Anti-monopoly Enforcement Authorization, pursuant to which its province-level branches are authorized to conduct anti-monopoly enforcement within their respective jurisdictions. On September 11, 2020, the Anti-Monopoly Commission of the State Council issued the Anti-monopoly Compliance Guideline for Operators, which requires operators to establish anti-monopoly compliance management systems under the PRC Anti-Monopoly Law to manage anti-monopoly compliance risks.
10
On October 23, 2021, the Standing Committee of the National People’s Congress issued a discussion draft of the amended Anti-Monopoly Law, which proposes to increase the fines for illegal concentration of the business operators to “no more than ten percent of its last year’s sales revenue if the concentration of the business operator has or may have an effect of excluding or limiting competition; or a fine of up to RMB5 million if the concentration of business operator does not have an effect of excluding or limiting competition.” The draft also proposes for the relevant authority to investigate transactions where there is evidence that the concentration has or may have the effect of eliminating or restricting competition, even if such concentration does not reach the filing threshold. The strengthened enforcement of the Anti-Monopoly Law could result in investigations on our acquisition transactions conducted in the past and make our acquisition transactions in the future more difficult due to the prior filing requirement. The PRC anti-monopoly laws may increase our compliance burden, particularly in the context of relevant PRC authorities recently strengthening supervision and enforcement of the Anti- Monopoly Law. Given that we do not hold a dominant market position in the relevant markets and we have not entered into any monopolistic agreement, we are in compliance with the currently effective PRC anti-monopoly laws in all material aspects; however, if the PRC regulatory authorities identify any of our activities as monopolistic under the PRC Anti-Monopoly Law or identify us as holding a dominant market position or of abusing such dominant position, we may be subject to other investigations and administrative penalties, such as termination of monopolistic acts and confiscation of illegal gains. There are significant uncertainties associated with the evolving legislative activities and varied local implementation practices of anti-monopoly and competition laws and regulations in China, especially with respect to the enactment timetable, final content, interpretation and implementation of the amended Anti-Monopoly Law. If it is enacted as proposed, it will be more difficult to complete an acquisition transaction. It may also be costly for us to adjust our business practices in order to comply with these evolving laws, regulations, rules, guidelines and implementations. Any
non-compliance
or associated inquiries, investigations and other governmental actions may divert significant management time and attention and our financial resources, lead to negative publicity, liabilities or administrative penalties, and thereby may materially and adversely affect our financial condition, results of operations and business prospects. If we are required to take any rectifying or remedial measures or are subject to any penalties, our reputation and business operations may be materially and adversely affected. Any changes in our right to own and operate our business and assets, our right to profit and our right of asset disposal as previously granted by the MOR and the State Council may have a material adverse effect on our business and results of operations.
We have been granted certain rights by the MOR and the State Council, with respect to certain aspects of our railroad and related businesses and operations, and also received legal clarification and confirmation of our asset ownership, corporate powers and relationships with service providers and other entities in the national railway system, in connection with our Restructuring. These rights include the right to own and operate our business and assets, the right to profit and the right of asset disposal. Although these rights were granted to us indefinitely, we cannot assure you that these rights will not be affected by future changes in PRC governmental policies or regulations or that other railway operators will not be granted similar rights within our service region. For example, since the MOT and National Railway Administration have assumed the administrative duties formerly performed by the MOR, there may be changes in the regulatory landscape for such rights. If another railway operator is granted similar rights within our service region, the level of competition we face will increase significantly.
The revenue or charges for certain long-distance passenger train and freight transportation businesses are ultimately determined by China State Railway Group Co., Ltd. in accordance with the unified settlement rules.
As described in “Item 7. Major Shareholders And Related Party Transactions – B Related Party Transactions” and Note 40 to our audited consolidated financial statements included elsewhere in the annual report, due to the fact that the railway business is centrally managed by CSRG within the PRC, we work in cooperation with CSRG and other railway companies controlled by CSRG for the operation of certain long-distance passenger train and freight transportation businesses within the PRC. The revenue generated from these long-distance passenger and freight transportation businesses is collected and settled by the CSRG according to its settlement systems. The charges for the use of the rail lines and services provided by other railway companies are also settled by the CSRG based on its systems. Although we can, to a certain extent, calculate the revenue and charges settled by the CSRG based on our own data and information, the amount of settlement is ultimately determined by the CSRG. Such amounts may differ from our own calculations.
Extensive government regulation of the railway transportation industry may limit our flexibility in responding to market conditions, competition or changes in our cost structure.
We are subject to extensive PRC laws and regulations relating to the railway transportation industry. The PRC governmental authorities currently regulate pricing, speed, train routes, new railway construction projects, and investment in the railway transportation industry.
11
Railroad transportation services and railway infrastructure and transportation generally are considered key parts of China’s comprehensive transportation system. Furthermore, railway passenger transportation is one of the most common and popular modes of transportation in China. Because it is critical to ensure the safety of railway passengers, any material changes to the Company or its operations may need to be approved by the relevant government departments-in-charge of transportation, state-owned assets management and foreign investment management in accordance with relevant Chinese laws and regulations. Furthermore, any actions that have the potential, or may be perceived, to weaken the industry or the operations of any of its major operators, including the Company, would similarly require high-level approvals, Such actions might include the transfer of significant amounts of money, capital or other assets out of China or entering into business transactions with
non-Chinese
parties, such as for the provision of key equipment or supplies for the Company, or acquisition of the shares or capital of such non-Chinese
parties. Such approvals may not be possible to obtain, or could take significant amounts of time or effort to obtain, which could limit our ability to take such actions. It could also cause other non-Chinese
parties to refrain from attempting to enter into such business arrangements with us, which could hamper our growth or development. Any of these consequences could also have a negative impact on the value of our ADSs. In March 2013, the First Session of the 12th National People’s Congress of the PRC considered and approved the plan on State Council institutional reform and transformation of government functions, pursuant to which the Ministry of Railways (“MOR”) was dissolved. In accordance with the plan, administrative functions pertaining to railway development planning and policies were transferred to the Ministry of Transport (“MOT”), other administrative functions previously performed by the MOR were transferred to the National Railway Administration, supervised by the MOT, and commercial functions previously performed by the MOR were transferred to the China State Railway Group Co., Ltd. (“CSRG”), f/k/a China Railway Corporation (“CRC”) established in March 2013 and was renamed to China State Railway Group Co., Ltd. in June 2019 (the “Reform”). In January 2014, the National Railway Bureau was established. It oversees seven regional railway supervision and administration bureaus, including the Guangzhou Railway Supervision and Administration Bureau, which supervises China Railway Guangzhou Group Co., Ltd., f/k/a Guangzhou Railway (Group) Company (“GRGC”) and China Railway Nanning Bureau Group Company. The Reform was completed on January 1, 2017 and as a result thereof, the actual controlling entity of our Company’s largest shareholder became the CSRG. There may be uncertainty in the division of functions with the MOR or the entities previously controlled or owned by it in our future relationships with the MOT, the National Railway Administration and the CSRG. Our commercial transactions may be renegotiated and the regulatory landscape may change.
Any significant change in the relevant regulations of the PRC government as a result of these reforms or for any other reason is likely to have a material impact on our business and results of operations. In addition, our ability to respond to changes in our market conditions may be limited by those regulations set by the MOT, National Railway Administration and other PRC governmental authorities.
China Railway Guangzhou Group Co., Ltd., as our largest shareholder and one of our major service providers, may have interests that conflict with the best interests of our other shareholders and our Company.
CSRG, which was established as a wholly state-owned enterprise on March 14, 2013 to perform the corporate functions formerly performed by the Ministry of Railways, owns 100% of shares of GRGC as its actual controller. GRGC in turn owns 37.1% of shares of our Company. Although CSRG is a state-owned enterprise, the Chinese government does not generally directly interfere with our operations through political orders or otherwise. Nonetheless, our strategic direction and the value of our securities are affected by the decisions and votes of our shareholders, including GRGC, and the Chinese government may exert its influence through the shareholder votes cast by GRGC at our shareholder meetings.
Even though GRGC owns less than a majority of the shares of our Company, it can still exert significant influence over our Company as our largest shareholder under the terms of our Company’s corporate governance structure. The structure of our Company’s corporate governance consists of the general meeting of shareholders, the board of directors, the board of supervisors, and the management team. As the largest shareholder of the Company, GRGC exercises its shareholder rights according to its shareholding percentage and controls the Company through the general meeting of shareholders. As a result, GRGC could potentially elect the majority of the board of directors of the Company and otherwise be able to control us. GRGC also has sufficient voting control to effect or withhold transactions without the concurrence of our minority shareholders, for example, if GRGC votes against certain important proposals of the Company, it may affect the operation and the value of the securities of the Company. As our largest shareholder, GRGC has the ability to exercise a controlling influence over our business and affairs, including, but not limited to, decisions with respect to:
| • | mergers, acquisition, other business combinations or disposition of assets; |
| • | issuance of any additional shares or other equity securities; |
| • | the timing and amount of dividend payments; and |
| • | the strategic development of our Company. |
12
Before our A Share Offering, in December 2006, GRGC held 67% of our issued share capital and was our controlling shareholder. Although the equity interest held by GRGC in our Company decreased to approximately 41% after the completion of the A Share Offering and further to approximately 37.1% as a result of the transfer by GRGC of a portion of its equity interest in our Company to the National Social Security Fund Council in September 2009, GRGC can still exercise substantial influence over our Company. GRGC’s ownership percentage enables it to exercise substantial influence over (i) our policies, management and affairs; (ii) our determinations on the timing and amount of dividend payments and our adoption of amendments to certain of the provisions of our Articles of Association and (iii) the outcome of most corporate actions. Subject to the requirements of applicable laws and regulations in China and the HKSE Listing Rules, GRGC may also cause us to effect certain corporate transactions.
GRGC’s interests may sometimes conflict with the interests of the other shareholders. We cannot assure you that GRGC, as our single largest shareholder, will always vote its shares in a way that benefits the other shareholders of our Company. In addition to its relationship with us as our single largest shareholder, GRGC, by itself or through its affiliates, such as Yangcheng Railway Enterprise Development Company, a wholly owned subsidiary of GRGC, and Guangmeishan Railway Co., Ltd., also provides us with certain services, for which we have limited alternative sources of supply. The interests of GRGC and its affiliates as providers of these services may also conflict with our interests. We have entered into service agreements, and our transactions with GRGC and its affiliates have been conducted on open, fair and competitive commercial terms. However, we only have limited leverage in negotiating with GRGC and its affiliates over the specific terms of the agreements for the provision of these services as there are no alternate suppliers. See “Item 4. Information On The Company – B. Business Overview – Major Suppliers and Service Providers” and “Item 7 Major Shareholders And Related Party Transactions – B. Related Party Transactions” for additional information regarding the services provided to us by GRGC and its subsidiaries.
It may be difficult or impossible for you to bring an action against us or against our directors and executive officers in China, and foreign judgments obtained against us or our directors and executive officers by our shareholders may not be enforceable in China.
We are incorporated in China and conduct all of our operations in China. In addition, all of our executive officers and directors reside in China and most or all of the assets of these persons are in China. As a result, it may not be possible to effect service of process within or outside the United States upon our executive officers and directors, including with respect to matters arising from the U.S. federal securities laws, applicable state securities laws or otherwise.
Our corporate affairs are governed by our memorandum and articles of association and by the Company Law of the PRC. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us are to a large extent governed by the laws of China. In addition,
PRC-incorporated
companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States. Therefore, it may also be difficult or impossible for you to bring an action against us or against our directors and executive officers in China in the event that you believe that your rights have been infringed upon under U.S. securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of China may not permit you to enforce a judgment obtained from a foreign court or tribunal against our assets or the assets of our directors and executive officers.
The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of reciprocity with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, the PRC courts will not enforce a foreign judgment against us or our directors and officers if they determine that the judgment violates the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our executive officers, directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.
13
Risks Associated with Economic Uncertainty and Global Pandemics on Our Business
Any recurrence of a global financial crisis or economic downturn could materially and adversely affect our business, financial condition, results of operations and prospects.
The global financial markets have been, and continue to be, volatile. The global financial crisis, concerns over inflation or deflation, energy costs, geopolitical risks, and the availability and cost of financing contributed to the unprecedented levels of market volatility and adversely affected the expectations for the continuous growth of the global economy, the capital markets and the consumer industry. These factors, combined with others, resulted in a severe global economic downturn and also a slowdown in the Chinese economy. This change in the macro-economic conditions had an adverse impact on our business and operations by causing a decrease in the number of passengers and the volume of freight that we transported.
Recent events, including the recent potential changes in international policies of the United States, United Kingdom’s vote to exit the European Union, the outbreak of the
COVID-19
pandemic and the ongoing war in Ukraine, caused more volatility and a steep and abrupt downturn to the global financial markets and created a level of uncertainty for multi-national companies. The on-going
war in Ukraine is disrupting global supply chains and could result in government-mandated and voluntary restrictions on the transportation of goods and would therefore negatively affect the global economy. Such volatility and downturn may continue as the COVID-19
pandemic continues to spread. Credit markets and the debt and equity capital markets have been distressed and the uncertainty surrounding the future of the global credit markets has resulted in reduced access to credit worldwide, particularly for the transportation industry. These issues, along with significant write-offs in the financial services sector, the repricing of credit risk and the current weak economic conditions, have made, and will likely continue to make, it difficult to obtain additional financing. The current state of global financial markets and current economic conditions might adversely impact our ability to issue additional equity at prices that will not be dilutive to our existing shareholders or preclude us from issuing equity at all. Economic conditions may also adversely affect the market price of our securities. We face risks attendant to changes in economic environments, changes in interest rates, and instability in the banking and securities markets around the world, among other factors. We cannot predict how long the current market conditions will last. However, any recurrence of a global financial crisis as a result of the recent market volatility arising from the concerns over among other issues, the containment of the
COVID-19
virus, may adversely affect the growth of the Chinese economy, which could adversely affect our business, financial condition, results of operations and prospects. Outbreaks of disease epidemics and pandemics and governmental responses thereto could adversely affect our business.
In addition, public health threats, such as the
COVID-19
pandemic, influenza and other highly communicable diseases or viruses, outbreaks of which have from time to time occurred in various parts of the world in which we operate could adversely impact our operations, the timing of completion of any outstanding or future newbuilding projects, as well as the operations of our customers. Any of these public health threats and related consequences could adversely affect our financial results. The outbreak of the increase of 16.8%; meanwhile our railway passenger volume had been recovering gradually since March 2020 as the
COVID-19
pandemic, a virus causing potentially deadly respiratory tract infections originating in China, has already caused severe global disruptions and negatively affected economic conditions regionally as well as globally and otherwise impacted our operations and the operations of our customers and suppliers. Governments in affected countries, including Chinese government, have imposed travel bans, quarantines and other emergency public health measures. These restrictions, and future prevention and mitigation measures, had an adverse impact on global economic conditions. In addition, the Omicron variant and the Delta variant of COVID-19
have begun to spread rapidly over the world in 2021 and affected our business, as well as our passengers. As a result of the COVID-19
pandemic, the Company has experienced the suspension of services at various stations due to closed borders, locked-down cities, and other similar preventative measures that have significantly reduced our passenger volume in 2021 resulting in a substantial drop in revenue from passenger transportation, an increase in costs incurred by the epidemic prevention measures we have taken, and we expect the settlement periods for recovering our trade receivables will be longer which may subject us to higher credit risk. In 2021, the passenger traffic volume of railways nationwide has increased to 2.53 billion people throughout the year, representing a year-on-year
COVID-19
pandemic was effectively controlled in China and enterprises gradually resumed operation and production, and nationwide railways actively adopted the operating strategies to support the railway industry in China, uncertainties regarding the resurgence of the COVID-19
pandemic in China and the economic impact of the COVID-19
pandemic outbreak is likely to result in sustained market turmoil, which could also negatively impact our business, financial condition and cash flows. 14
Risks Associated with Industry Dynamics and Competition
We face competition, which may adversely affect our business growth and results of operations.
Our passenger and freight transportation businesses face competition from other means of transportation, such as road, air and water transportation. In our passenger transportation business, we compete with the bus and ferry services operating within Hong Kong, Guangzhou, Shenzhen and elsewhere in our service region. We compete for passengers with bus and ferry services in terms of price, speed, comfort, reliability, convenience, service quality, frequency of service and safety. In our freight transportation business, we primarily compete with water, truck and air transportation services operating within our service region. We increasingly compete for freight business with truck operators, shipping companies and airline companies on the basis of price, reliability, capacity, convenience, service quality, and safety. The implementation of the toll-free policy on national toll roads during holidays and special periods in China made road transport more cost-competitive than rail transport during those periods. In addition, the intercity traffic system is gradually expanding within the Pearl River Delta region and there are a number of new high-speed intercity passenger rail lines in operation or under construction within our service territory. As a result, the competition in both passenger and freight transportation in our service territory could increase significantly.
We expect competition to increase in the future as the marketization reform of the railway industry (including the reformation of the investment and financing system, the transportation management system and the pricing system) gradually deepens. In July 2016, the NDRC, MOT and CSRG jointly approved the construction of an “eight horizontal and eight vertical” high- speed railway network to connect major populous and industry-intensive cities in China. With the establishment of the “eight horizontal and eight vertical” high-speed railway network and the Pearl River Delta Intercity railway network, the number of high-speed trains and intercity trains connecting the Pearl River Delta and other major mainland cities is increasing. The Jiangmen-Maoming section of the high-speed railway commenced operation in September 2018, the
Shenzhen-Maomong
Railway commenced operation in July 2018, the Shenzhen-Hongkong
section of the Guangzhou-Shenzhen-Hongkong
Meizhou-Shantou
passenger line commenced operation in October 2019, the Guangzhou-Dongguan-Shenzhen
Intercity passenger line commenced operation in December 2019, the Huadu-Qingcheng section of the Guangzhou-Qingcheng
Intercity passenger line, the Huadu-Baiyun Airport North of Guangzhou East Ring Intercity passenger line commenced operation in November 2020 and the Ganzhou-Shenzhen
high-speed railway commenced operation in December 2021. Although we commenced the operation of more cross-network EMUs between Guangzhou East-Chaozhou/Shantou/Xiamen and adjusted the actual operational chart of such EMUs according to the actual passenger flow, we may experience a decrease in the number of passengers using our Guangzhou-Shenzhen
intercity train and long-distance train services in the future, which could materially and adversely affect our revenue from railway passenger transportation services. Furthermore, improvements in the high-speed railway network in China may further increase the competition we face and materially and adversely affect our revenue and results of operations. We believe that the entry barrier to the industry will decrease, investors in the industry will become more diversified and the State’s high-speed railway network with Four East-West Lines and Four South-North Lines and numerous intercity railways will complete construction and commence operation, leading to increased competition within the industry itself. See “Item 4. Information On The Company – B. Business Overview – Competition” for additional information regarding our competition.
Any significant decrease in the overall levels of business, industrial, manufacturing and tourism activities within the Pearl River Delta region and elsewhere in China may have a material adverse effect on our revenue and results of operations.
The volume of freight and the number of passengers we transport are affected by the overall levels of business, industrial, manufacturing and tourism activities within the Pearl River Delta region, especially Guangdong and Hong Kong, which is our main service region, and elsewhere in China, which is in turn affected by many factors beyond our control, such as applicable policies and regulations of the PRC government, perceptions regarding the attractiveness of investing or operating a business within our service region, consumer confidence levels and interest rate levels. Any significant decrease in the overall levels of passenger travel or freight transportation, whether due to an economic slowdown, political and governmental instability in Hong Kong or China, or other reasons, such as freezing weather, floods, earthquake and other natural disasters or the recent
COVID-19
pandemic, a recurrence of the SARS epidemic or outbreaks of avian flu, H1N1 or H7N9 influenza, dengue fever, Ebola virus or other similar health epidemics, may have a material adverse effect on our business, results of operations and financial condition. A slowdown in economic growth in China could also adversely impact our customers, prospective customers, suppliers, and partners in China, which could have a material adverse effect on our results of the operations and financial condition. There is no guarantee that economic downturns, whether actual or perceived, any further decrease in economic growth rates or an otherwise uncertain economic outlook in China will not occur or persist in the future, that they will not be protracted or that governments will respond adequately to control and reverse such conditions, any of which could materially and adversely affect our business, financial condition and results of operations. Furthermore, following China’s accession to the World Trade Organization, the policy advantages that Shenzhen currently enjoys due to its status as a special economic zone may be phased out, and its economic growth rate may not be sustained in the long run. Other coastal regions, ports and free trade zones in China may develop at a faster pace and become more competitive than Shenzhen. As a result, part of the freight currently imported or exported through ports in Hong Kong, Shenzhen or Guangzhou may be shipped through other ports in China, which may adversely affect our freight transportation business.
15
Changes in freight composition in our freight transportation business may adversely affect our results of operations.
Historically, our freight transportation revenue was derived mainly from the transportation of construction materials, coal, iron ore, oil, steel and chemicals, in which our railroad transportation services have an advantage over other means of transportation, such as road transportation services. With the restructuring of these industries, the movement of labor, the upgrading of the industrial structure and a shift in the Pearl River Delta economy towards technology businesses, we may experience reduced demand for our freight transportation services. For example, some products and materials, such as advanced technological products, which tend to be compact, may be instead shipped by road or air. We face significant competition in the transportation of such
low-volume,
high-value products. Changes in freight composition may affect the usage volume and pricing of our freight transportation services and adversely affect our results of operations. Risks Associated with Our Business
Significant increases in electricity prices could harm our business.
Significant increases in the cost of electricity could increase the costs of our passenger and freight transportation. The electricity we use, including electricity used for our lines, is supplied through various entities under control of China Southern Power Grid Company Limited on normal commercial terms. Any increase in the cost of electricity in Guangdong could increase our railway operating expenses. In 2019, 2020 and 2021, we paid approximately RMB498.6 million, RMB372.0 million and RMB427.0 million, respectively, in electricity charges. Significant increases in electricity prices could have a material adverse effect on our financial condition and results of operations.
Our railroads connect with the railroads of other operators and any disruption in the operation of those railroads, or our cooperation with other operators, could have a material adverse effect on our business and operations.
Our railroads are an integral part of the PRC national railway network. Our railroads connect with the Beijing-Guangzhou line in the north, the rail line in the east, all of which are owned and operated by other operators. See “Item 4. Information On The Company – A. History and Development of the Company – Service Territory” for additional information. Our train services use these other railroads to carry passengers and freight to locations outside of our service territory. The performance of our domestic long distance trains services and our Hong Kong Through Trains depends on the smooth operation of these railroads and our cooperation with the operators of these railroads. Any disruption in the operation of these railroads, or our cooperation with any one of these railroad operators for any reason, could have a material adverse effect on our business and results of operations.
Shenzhen-Kowloon
rail line in the south, the Guangzhou-Maoming
rail line in the west, and the Guangzhou-Meizhou-Shantou
Significant changes with respect to the PRC railway industry could adversely affect our business and results of operations.
The investment in the construction of railway-related fixed assets during the 13th Five-Year Plan (from 2016 to 2020) achieved a record of RMB3.99 trillion and 4208 km of new railways has been built in 2021. However, we cannot assure you that there will not be any significant changes with regard to the actual amount the CSRG will invest in the railway industry in the future. As the railway industry is heavily reliant on capital expenditures on infrastructure construction, the reduced investment in infrastructure construction may have material adverse impact on our future development and results of operations. In addition, to ensure the safe operation of high-speed railway transportation, the CSRG also set speed limits on certain high-speed railways. Corresponding with the reduced speed limits, the ticket fare of the affected high-speed railways may be reduced. Although the speed limits do not affect the railways we operate, we cannot assure you that the future policies of the PRC government authorities in relation to railway speed limits will not affect us.
We have very limited insurance coverage.
We do not maintain any insurance coverage against third party liabilities, except compulsory automobile liability insurance. Passengers in China can voluntarily purchase accident insurance while purchasing a train ticket at RMB3.0 per person for a maximum coverage of up to RMB300,000 for an adult, or RMB100,000 for a minor, for death, injury and disability claims, and up to RMB30,000 for an adult, or RMB10,000 for a minor, for medical services and treatments, as a result of an accident. However, since we do not maintain any insurance coverage for most of our property, for business interruption or for environmental damage arising from accidents that occur in the course of our operations, we have to pay for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our results of operations and financial condition.
16
Risks Associated with Regulatory Compliance
We could incur significant costs for violations of applicable environmental laws and regulations.
Our railroad operations and real estate ownership are subject to extensive national and local environmental laws and regulations concerning, among other things, gaseous emissions, wastewater discharge, disposal of solid waste and noise control. In particular, our Guangzhou locomotive maintenance depot has been identified as key pollutant discharge units by the PRC government’s environmental protection departments in 2020. In addition, environmental liabilities may arise from claims asserted by adjacent landowners or other third parties. As of December 31, 2021, we had not incurred any such liabilities and therefore, had not made any provision for such liabilities. We may also be required to incur significant expenses to remediate any violation of applicable environmental laws and regulations. In 2021, our environmental protection-related expenses for the key pollutant discharge units were approximately RMB6.72 million, mainly related to the maintenance of our environmental protection equipment. In the event any of our other depots or operations are identified as key pollutant discharge units by the PRC governments in the future, we will likely incur additional liabilities and expenses associated therewith.
We may encounter difficulties in complying with the Sarbanes-Oxley Act of 2002.
The United States Securities and Exchange Commission, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company in the United States to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal control over financial reporting. In addition, an independent registered public accounting firm must report on the effectiveness of the company’s internal control over financial reporting. Although we have concluded that we maintained effective internal control over financial reporting for each of the years ended December 31, 2019, 2020 and 2021, we may not be able to conclude in future years that we have effective internal control over financial reporting, in accordance with the Sarbanes-Oxley Act of 2002. See “Item 15. Controls And Procedures.”
Moreover, in future years, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may disagree. If our independent registered public accounting firm is not satisfied with our internal control over financial reporting or the level at which our internal control over financial reporting is designed or operated, or if the independent registered public accounting firm interprets the requirements, rules or regulations differently than we do, then they may issue an adverse opinion. Any of these possible outcomes could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our reporting processes, which could adversely impact the market price of our H shares and ADSs. In addition, we will continue to incur significant costs and use significant management and other resources in order to comply with Section 404 of the Sarbanes-Oxley Act of 2002.
Risks Associated with Technology and Cybersecurity
Technological problems attributable to accidents, human error, severe weather or natural disasters could affect the performance or perception of our railway and result in decreases in customers and revenue, unexpected expenses and loss of market share.
Our operations may be affected from time to time by equipment failures, delays, collisions and derailments attributable to accidents, human error or natural disasters, such as typhoons or floods.
As our high-speed train service becomes technologically more complex, it may become more difficult for us to upkeep and repair our equipment and facilities as well as to maintain our service and safety standards. Furthermore, as we heavily rely on third parties for technical upgrades and support with regard to certain equipment and facilities, in case of any problems arising during our operation, our own staff may lack the technical expertise to identify and fix the problems in time. Moreover, the newly upgraded equipment may not be fully compatible with our existing operation system and may not meet our safety, security or other standards. The use of such equipment and facilities could result in malfunctions or defects in our services. In addition to potential technical complications, natural disasters could interrupt our rail services, thus leading to decreased revenue, increased maintenance and higher engineering costs.
If we experience any equipment failures, delays, temporary cancellations of schedules, collisions and derailments, or any deterioration in the performance or quality of any of our services, it could result in personal injuries, damage of goods, customer claims of damages, customer refunds and loss of goodwill. These problems may lead to decreases in customers and revenue, damage to our reputation, unexpected expenses, loss of passengers and freight customers, incurrence of significant warranty and repair costs, diversion of our attention from our transportation service efforts or strained customer relations, any one of which could materially adversely affect our business. For example, on July 23, 2011, two high-speed trains collided on the Yongtaiwen railway line in the suburbs of Wenzhou, Zhejiang Province, China. 40 people were killed and 172 people were injured in this accident. Although we believe we have maintained effective safety measures and there has been no such collision accidents on railway lines operated by us since our inception, we cannot assure you that similar accidents will not occur on our railway lines in the future. The occurrence of any such accident could have a material adverse impact on us.
17
Substantial uncertainties exist with respect to the interpretation and implementation of cybersecurity-related regulations and cybersecurity review as well as any impact these may have on our business operations.
We may become subject to a variety of laws and regulations in the PRC regarding privacy, data security, cybersecurity, and data protection. These laws and regulations are continuously evolving and developing. In particular, there are numerous laws and regulations regarding privacy and the collection, sharing, use, processing, disclosure, and protection of personal information and other user data. Such laws and regulations may vary in scope, may be subject to differing interpretations, and may be inconsistent among different jurisdictions.
We obtain certain limited personal information and other data regarding customers and employees through about various aspects of our operations. The integrity and protection of our customers, employees and company data is critical to our business. Our customers and employees expect that we will adequately protect their personal information. We are required by applicable laws to keep strictly confidential the personal information that we collect, and to take adequate security measures to safeguard such information.
The Civil Code of the PRC (issued by the PRC National People’s Congress on May 28, 2020 and effective from January 1, 2021) provides the main legal basis for privacy and personal information infringement claims under the Chinese civil laws. PRC regulators, including the Cyberspace Administration of China (“CAC”), Ministry of Industry and Information Technology (“MIIT”), and the Ministry of Public Security have been increasingly focused on regulation in the areas of data security and data protection.
In November 2016, the Standing Committee promulgated the Cyber Security Law of the PRC, or the CSL, which took effect on June 1, 2017. The CSL is the first PRC law that systematically lays out the regulatory requirements on cybersecurity and data protection, subjecting many previously under-regulated or unregulated activities in cyberspace to government scrutiny. The legal consequences of violation of the CSL include penalties of warning, confiscation of illegal income, suspension of related business, winding up for rectification, shutting down of websites, and revocation of business licenses or relevant permits. In April 2020, the Chinese government promulgated the Cybersecurity Review Measures, which came into effect on June 1, 2020.
On August 20, 2021, the Standing Committee promulgated the Personal Information Protection Law, which integrates the various rules with respect to personal information rights and privacy protection and took effect on November 1, 2021. The Personal Information Protection Law requires, among others, that (i) the processing of personal information should have a clear and reasonable purpose which should be directly related to the processing purpose and should be conducted in a method that has the minimum impact on personal rights and interests, and (ii) the collection of personal information should be limited to the minimum scope necessary to achieve the processing purpose and avoid the excessive collection of personal information. Personal information processors shall adopt necessary measures to safeguard the security of the personal information they handle. The offending entities could be ordered to correct, or to suspend or terminate the provision of services, and face confiscation of illegal income, fines or other penalties. We have limited interactions with individual customers, which means our potential access or exposure to customers’ personal information is limited.
CAC, together with 12 other government agencies issued the revised version of the Cybersecurity Review Measures 2020 (“the New Measures”) on December 28, 2021. The New Measures became effective on February 15, 2022 and replaced the Cybersecurity Review Measures 2020. The New Measures provide that critical information infrastructure operators (“CIIOs”) that purchase network products and services and network platform operators that carry out data processing activities should apply for cybersecurity review if national security will or may be affected. If we are not able to comply with the cybersecurity and data privacy requirements in a timely manner, or at all, we may be subject to government enforcement actions and investigations, fines, penalties, suspension of our
non-compliant
operations, among other sanctions, which could materially and adversely affect our business and results of operations. As of the date of this response annual report, we have not been subject to any investigations relating to cybersecurity made by the CAC, and we have not received any inquiry, notice, warning, or sanctions in such respect. We cannot assure you that PRC regulatory agencies, including the CAC, would take the same view as we do, and there is no assurance that we can fully or timely comply with such laws. In the event that we are subject to any mandatory cybersecurity review or other specific actions required by the CAC, we face uncertainty as to whether any clearance or other required actions can be timely completed, if at all. Given such uncertainty, we may be further required to suspend our relevant business, shut down our websites, or face other penalties, which could materially and adversely affect our business, financial condition, and results of operations.
18
Risks Relating to Our Shareholders
We voluntarily delisted our ADSs from the NYSE which could reduce the liquidity and market price of our ADSs and underlying shares.
Our Board of Directors approved the voluntarily withdrawal of our American depository shares (“ADSs”) from listing on the NYSE, primarily due to a number of considerations, including the significant administrative burden and costs of maintaining the listing of the ADSs on the NYSE and the registration of the ADSs with the SEC and complying with the periodic reporting and other related obligations of the Exchange Act. We filed a Form 25 with the SEC on November 16, 2020 in order to delist our Shares from the NYSE, which occurred ten days thereafter upon effectiveness of the Form 25.
Accordingly, our last day of trading on the NYSE was on November 26, 2020, the last trading day prior to the effectiveness of the Form 25. Our ADSs are currently traded as Pink Sheets on the market (the “OTC Market”) and our ticker symbol was changed from GSH to GNGYF.
over-the-counter
The delisting of our shares from the NYSE could negatively impact us because it could: (i) reduce the liquidity and market price of our ADSs, (ii) reduce the number of investors willing to hold or acquire our ADSs, which could negatively impact our ability to raise equity financing, (iii) limit our ability offer and sell freely tradable securities, including under U.S. state securities laws, thereby preventing us from accessing the public capital markets in the U.S. and (iv) impair our ability to provide equity incentives to our employees. Trading on the OTC Market may be volatile and sporadic, which could depress the market price of our ADSs and make it difficult for our shareholders to resell their ADSs.
Selling our ADSs on the OTC Market could be more difficult because smaller quantities of ADSs would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of us may be reduced. In addition, broker-dealers have certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our ADSs, further limiting the liquidity of our ADSs. As a result, the market price of our ADSs may be depressed, and as a result it may be more difficult to sell our ADSs. Such delisting from the NYSE and potential declines in our stock price could also greatly impair our ability to raise additional necessary capital through equity or debt financing in the United States if needed in the future.
Additionally, we intend to file a Form 15F with the SEC to deregister our ADSs and the underlying ordinary shares under the Exchange Act once we have met the criteria for deregistration. Thereafter, all of our reporting obligations under the Exchange Act will be suspended unless the Form 15F is subsequently withdrawn or denied. Deregistration of ADSs and termination of our reporting obligations under the Exchange Act are expected to become effective 90 days after the filing of Form 15F with the SEC.
Once the Form 15F is filed, we will publish the information required under Rule
12g3-2(b)
of the Exchange Act on our website, www.gsrc.com
. We will also continue to comply with our financial reporting and other obligations as a listed-issuer on The Stock Exchange of Hong Kong Limited. Risks Associated with Chinese Accounting Firms
The PCAOB is currently unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections over our auditor deprives our investors with the benefits of such inspections.
Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this annual report, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Since our auditor is located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our auditor is not currently inspected by the PCAOB.
This lack of the PCAOB inspections in China prevents the PCAOB from fully evaluating audits and quality control procedures of our independent registered public accounting firm. As a result, we and investors of our ordinary shares and ADSs are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors of our stock to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.
19
As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national laws (China’s national laws in particular), the HFCAA was signed into law on December 18, 2020. The HFCAA states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection for the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the trading market in the U.S. Accordingly, under the current law this could happen in 2024.
over-the-counter
The HFCAA or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the market price of our ADSs could be adversely affected. Additionally, whether the PCAOB will be able to conduct inspections of our auditor before the issuance of our financial statements on Form which would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with delisting would have a negative impact on the price of our ADSs. Also, it would significantly affect our ability to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition, and prospects. If our ADSs are prohibited from trading in the
20-F
for the year ended December 31, 2023, which is due by April 30, 2024, or at all, is subject to substantial uncertainty and depends on a number of factors out of our control. If we are unable to meet the PCAOB inspection requirement in time, our ADSs will not be permitted for trading “over-the-counter”,
over-the-counter
market in the U.S. there is no certainty that we will be able to list on a non-U.S.
exchange or that a market for our shares will develop outside of the U.S. While we voluntarily delisted our ADSs from the NYSE in November 2020, our shares may be prohibited from being traded in the over-the-counter market under the Holding Foreign Companies Accountable Act, or the HFCAA, if the PCAOB is unable to inspect or fully investigate auditors located in China. Under the current law, delisting and prohibition from over-the-counter trading in the U.S. could take place in 2024. If this happens, there is no certainty that we will be able to list our ADSs or shares on a non-U.S. exchange or that a market for our shares will develop outside of the U.S. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.
On June 22, 2021, the U.S. Senate passed a bill known as the Accelerating Holding Foreign Companies Accountable Act, or the AHFCAA, to amend Section 104(i) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7214(i)) to prohibit securities of any registrant from being listed on any of the U.S. securities exchanges or traded if the auditor of the registrant’s financial statements is not subject to PCAOB inspection for two consecutive years, instead of three consecutive years as currently enacted in the HFCAA. The potential enactment of the AHFCAA would decrease the number of trading. If this bill were enacted, our ADSs could be prohibited from trading in the U.S. in 2023.
over-the-counter
non-inspection
years from three years to two, thus reducing the time period before our ADSs may be prohibited from over-the-counter
over-the-counter
On December 2, 2021, the SEC adopted final amendments to its rules implementing the HFCAA (the “Final Amendments”). The Final Amendments include requirements to disclose information, including the auditor name and location, the percentage of shares of the issuer owned by governmental entities, whether governmental entities in the applicable foreign jurisdiction of the auditor have a controlling financial interest in the issuer, and the name of each official of the Chinese Communist Party who is a member of the board of the issuer. The Final Amendments also establish procedures the SEC will follow in identifying an issuer as a “Commission Identified Issuer” if the issuer has filed an annual report containing an audit report issued by a registered public accounting firm that the PCAOB has determined it is unable to inspect or investigate completely, and will then impose a trading prohibition on an issuer after it is identified as a Commission-Identified Issuer for three consecutive years. While we understand that there have been communications among the CSRC, the SEC and the PCAOB regarding the potential for inspection of PCAOB-registered accounting firms in China, we and our auditors still may not be able to comply with the requirements imposed by the HFCAA or the AHFCAA. The market prices of our ADSs and ordinary shares could be adversely affected as a result of anticipated negative impact of the HFCAA or the AHFCAA upon, as well as negative investor sentiment towards, China-based companies, such as our Company, whose securities are traded in the U.S., regardless of their actual operating performance.
20
On December 16, 2021, the PCAOB issued the HFCAA Determination Report relaying to the SEC its determinations that the board is unable to inspect or investigate completely registered public accounting firms in mainland China and Hong Kong, including our auditor, PricewaterhouseCoopers Zhong Tian LLP. Therefore, we expect to be identified as a “Commission Identified Issuer” shortly after the filing of this annual report on Form 20-F. On February 4, 2022, the U.S. House of Representatives passed the America Creating Opportunities for Manufacturing
Pre-Eminence
in Technology and Economic Strength (the “America Competes Act”) of 2022 which includes the same proposed amendments as the AHFCAA passed by the Senate. The America Competes Act, however, includes a broader range of legislation not related to the HFCAA in response to the U.S. Innovation and Competition Act passed by the Senate in 2021. The U.S. House of Representatives and U.S. Senate would need to agree on amendments to these respective bills to align their content and pass their amended bills before the President would be able to sign them into law. It is unclear when the U.S. Senate and U.S. House of Representatives will resolve the differences in the U.S. Innovation and Competition Act, the AHFCAA and the America Competes Act of 2022 bills currently passed, or when the U.S. President will sign the bill to make the amendment into law, if at all. In March 2022, the SEC issued its first “Conclusive list of issuers identified under the HFCAA” indicating that those companies are now formally subject to the delisting provisions if they remain on the list for three consecutive years. As of April 12, 2022, 23 China-based companies had been identified by SEC and were given 15 business days to respond. The identification occurred after these companies had filed their annual reports to the SEC and their share prices subsequently decreased. As such, it is likely that we will be added to the HFCAA list by the SEC after the filing of our annual report, and the value of our ADSs may be materially adversely affected.
If additional remedial measures are imposed on the Big Four
PRC-based
accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by the SEC, we may have difficulties complying with the requirements of the Exchange Act. In December 2012, the SEC instituted administrative proceedings against the Big Four
PRC-based
accounting firms, including our independent registered public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ audit work papers with respect to certain PRC-based
companies that are publicly traded in the United States. On January 22, 2014, the administrative law judge presiding over the matter rendered an initial decision that each of the firms had violated the SEC’s rules of practice by failing to produce audit work papers to the SEC. The initial decision censured each of the firms and barred them from practicing before the SEC for a period of six months. The Big Four
PRC-based
accounting firms appealed the administrative law judge’s initial decision to the SEC. The administrative law judge’s decision does not take effect unless and until it is endorsed by the SEC. In February 2015, the four China-based accounting firms each agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC and audit U.S.-listed companies. The settlement required the firms to follow detailed procedures and to seek to provide the SEC with access to PRC firms’ audit documents via the CSRC. If future document productions fail to meet specified criteria, the SEC retains the authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. While we cannot predict if the SEC will further review the four China-based accounting firms’ compliance with specified criteria or if the results of such a review would result in the SEC imposing penalties such as suspensions or restarting the administrative proceedings, if the accounting firms are subject to additional remedial measures, our ability to file our financial statements in compliance with SEC requirements could be impacted. A determination that we have not timely filed financial statements in compliance with SEC requirements could ultimately lead to the termination of the registration of our ADSs under the Exchange Act, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.
ITEM 4. |
INFORMATION ON THE COMPANY |
A. |
History and Development of the Company Overview |
We were established as a joint stock limited company under the Company Law of the PRC on March 6, 1996. Our legal name is
广深铁路股份有限公司
, and its English translation is Guangshen Railway Company Limited. Our registered office is located at No. 1052 Heping Road, Luohu District, Shenzhen, Guangdong Province, The People’s Republic of China, 518010. Our telephone number is
(86-755)
2558-8150 and our fax number is (86-755)
2559-1480. In May 1996, our H shares (stock code: 00525) were listed on the HKSE and our American Depositary Shares, or ADSs (ticker symbol: GSH), were listed on the NYSE. Our A shares (stock code: 601333) were listed on the Shanghai Stock Exchange in December 2006. From November 26, 2020, our ADSs were delisted from the NYSE and were traded on the OTC Market with ticker symbol changed from GSH to GNGYF. We are currently the only PRC railway enterprise with shares concurrently listed in Shanghai, Hong Kong and the United States.
21
We are mainly engaged in passenger and freight transportation businesses on the Railway, which is 481.2 kilometers long, running vertically through Guangdong Province. The
Shenzhen-Guangzhou-Pingshi
Guangzhou-Pingshi
Railway is the southern part of Beijing-Guangzhou Railway, which connects Northern China with Southern China. The Guangzhou-Shenzhen
Railway is strategically located and links with major railway networks in China, including the Beijing-Guangzhou, Beijing-Kowloon, Sanshui-Maoming, Pinghu-Nantou, and Pinghu-Yantian lines, as well as with the Xiamen-Shenzhen Railway, Guangzhou-Dongguan-Shenzhen
Intercity Railway and the East Rail Line in Hong Kong, which form integral components of the transportation network in the PRC. Passenger transportation is our principal business, which includes the transportation businesses of operating model by dispatching one pair of our domestically manufactured electric multiple units trains, known as “China Railway High-Speed trains” or “CRHs,” every 10 minutes on average during peak hours between Guangzhou and Shenzhen. The through-trains passing Hong Kong jointly operated by us and the MTR Corporation Limited (“MTR”) are one of the most important means of transportation between Guangzhou and Hong Kong. We have organized and operated a number of long-distance trains running from and to Guangzhou and Shenzhen that linked with most of the provinces, autonomous regions and municipals across the nation.
Guangzhou-Shenzhen
intercity trains (including Guangzhou East to Chaozhou-Shantou
cross-network EMU trains), long-distance trains and Hong Kong Through Trains. We have adopted an “As-Frequent-As-Buses”
Freight transportation is another important segment of our transportation business. We are well equipped with comprehensive freight facilities and are able to efficiently transport full load cargo, single load cargo, containers, bulky and overweight cargo, dangerous cargo, fresh and live cargo, and oversized cargo. Our rail lines operated are closely knitted with the major ports in Guangzhou and Shenzhen and are connected to several large industrial zones, logistics zones, and plants and mines in the Pearl River Delta region via railroad sidings. The major market of our freight transportation business is domestic
mid-to
long-distance transportation, which is a market segment in which we enjoy competitive advantages. We have extended our passenger and freight transportation business to include railway operation services with the commencement of Wuhan- Guangzhou Passenger Railway Line in December 2009. As of the date of this annual report, we have provided such services to Wuhan-Guangzhou Passenger Railway Line Co., Ltd., Guangdong Guangzhu Intercity Rail Transportation Company Limited, Kong Express Rail Link Company Limited,
Guangzhou-Shenzhen-Hong
Guangzhou-Zhuhai
Railway Company Limited, Xiamen-Shenzhen Railway (Guangdong) Company Limited, Ganzhou-Shaoguan
Railway Company Limited, Nanning-Guangzhou Railway Company Limited, Guiyang-Guangzhou Railway Company Limited, Guangdong Pearl River Delta Intercity Railway Traffic Company Limited, MaoZhan Railway Company Limited, Guangdong Shenmao Railway Company Limited and Guangdong Meizhou-Shantou
Passenger Railway Line Company Limited. With the successful completion and commencement of operation of a series of high-speed railways and intercity railways in the “Pan Pearl River Delta,” our geographical coverage of railway operation service will be more extensive. In 2021, our operations, especially the passenger transportation business, continued to be impacted by the decline of 4.84%, while our freight delivery volume amounted to 18,836,519 tonnes, representing a increase of 15.75%. Additionally, we recorded an operating revenue of RMB20.21 billion, representing a increase of 23.6%; consolidated loss attributable to shareholders amounted to RMB973.12 million, representing a decline of 74.4%; and our basic losses per share amounted to RMB0.14.
COVID-19
pandemic, although to a lesser degree than 2020, and we recorded a passenger delivery volume of 40,778,226 people, representing a year-on-year
year-on-year
year-on-year
year-on-year
2021 is the first year of the Chinese government’s 14th Five-Year Plan. Although there are still many uncertainties in light of the
COVID-19
pandemic and the external environment, China’s economy has returned to normal, and the market demand of the national railway passenger and freight transportation is gradually picking up. We will seize the opportunities, follow the government’s new development philosophy and keep actively in line with the key national strategies such as the “Belt and Road” initiative, Guangdong-Hong Kong-Macao Greater Bay Area and Shenzhen Pilot Demonstration Zone. Further, we will promote the structural reforms on the supply side of railway transportation, strengthen cost control, continue to improve transportation service quality and operation and management level, and comprehensively promote the Company to achieve the development of higher safety, higher quality, greater efficiency and stronger sustainability and security. Background, Restructuring and Acquisition
The railroad system between Guangzhou and Shenzhen was part of the original “Canton-Kowloon” railroad, which began operations in 1911. In 1949, following the establishment of the PRC, the railroad was divided into two sections, with the first linking Guangzhou and Shenzhen, and the second, across the Hong Kong border and separately owned, linking Luohu and the Kowloon peninsula in Hong Kong. The Guangzhou to Shenzhen railroad has been operated since 1949 by a
sub-division
of the Guangzhou Railway Bureau, a predecessor to GRGC. 22
In 1979, Guangshen Railway Company, our predecessor, in conjunction with Kowloon–Canton Railway, which has been merged into the MTR, was engaged in the joint operation of Hong Kong Through Train passenger services between Guangzhou and Hong Kong.
In 1984, to exploit the rapid growth in the Pearl River Delta, Guangshen Railway Company, our predecessor, was established pursuant to the approval of the State Council as a state-owned enterprise administered by the Guangzhou Railway Bureau. At that time, Guangshen Railway Company had only a single-line railroad. Since then, large capital expenditures have been made to expand and upgrade its facilities and services. In 1987, construction of the second line was completed. In 1991, Guangshen Railway Company began the construction of a semi-high-speed rail line and purchased locomotives and passenger coaches, which can provide passenger train services at speeds of more than 160 kilometers per hour. Commercial operation of the EMUs commenced in December 1994.
We were established as a joint stock limited company on March 6, 1996 following the Restructuring, which was carried out to reorganize the railroad assets and related businesses of Guangshen Railway Company and certain of its subsidiaries. As part of the Restructuring, 2,904,250,000 state legal person shares, par value RMB1.00 per share, of our Company were issued to GRGC, a state-owned enterprise controlled by the MOR. Guangshen Railway Company retained the assets, liabilities and businesses not assumed by us, including units providing staff quarters and social services such as health care, education, public security and other ancillary services, as well as subsidiaries or joint ventures whose businesses do not relate to railroad operations and do not compete with our businesses. As part of our Restructuring, Guangshen Railway Company was renamed Guangzhou Railway (Group) Guangshen Railway Enterprise Development Company.
Since April 1, 1996, we have been able to set our own prices for our EMU train services and charge a premium over average national prices for our other passenger and freight train services. See “Item 4. Information On The Company – B. Business Overview – Regulatory Overview – Pricing” for a more detailed description of our pricing scheme.
We completed our initial public offering of class H ordinary shares, or H shares, and our American depositary shares, or ADSs, in May 1996. In that offering, we issued a total of 1,431,300,000 H shares, par value RMB1.00 per share. Our H shares are listed for trading on the HKSE and our American depositary shares, or ADSs, each representing 50 H shares, are currently traded as Pink Sheets on the OTC Market.
On November 15, 2004, we entered into an asset purchase agreement with Yangcheng Railway Company to acquire the railway transportation business between Guangzhou and Pingshi and related assets and liabilities, or the Acquisition. In order to finance such Acquisition, on December 13, 2006, we issued 2,747,987,000 A shares that are now listed for trading on the Shanghai Stock Exchange (stock code: 601333) and raised approximately RMB10.0 billion from the A Share Offering. After the A Share Offering, approximately 41% of our issued and outstanding shares were owned by GRGC, while institutional and public shareholders own approximately 59% of our issued and outstanding ordinary shares, including A shares, H shares and ADSs.
On December 28, 2006, we paid RMB5.27 billion out of the proceeds raised from the A Share Offering to Yangcheng Railway Company. On January 1, 2007, the railway transportation business of the
Guangzhou-Pingshi
Railway came under our control as a result of the Acquisition. As a result, our operations expanded from a regional railway to a national trunk line network and our operating railway distance extended from 152 kilometers to 481.2 kilometers, running vertically through the entire Guangdong Province. In June 2007, we paid the remaining balance in the amount of RMB4.87 billion to Yangcheng Railway Company. In April 2010, in order to further reduce our administrative expenses and improve the overall efficiency of our administration system, we made efforts to optimize our internal management structure, including establishing the General Administrative Department, the Human Resources Department, the Planning and Finance Department, the Operation Management Department and the Audit Department, each of which is under the supervision of our general manager, and outsourcing all other administrative functions to external service providers.
On November 30, 2013, we entered into an agreement to acquire the freight service business and related assets of China Railway Express Co., Ltd. Guangzhou Branch (“CREC”) and China Railway Container Transport Co. Ltd. Dalang Processing Station (“CRCT”), the subsidiaries of the CSRG which operate freight service business. The purchase considerations for CREC and CRCT were approximately RMB102.3 million and RMB79.9 million, respectively. On the same day, control of the assets and operations of CREC and CRCT were transferred to us. The results of the operations of the above-mentioned entities have been included in our consolidated comprehensive income statement from November 30, 2013 onwards.
On May 29, 2014, we entered into an agreement with Guangzhou Railway (Group) Company Guangzhou Railway Economic Development Co., Ltd. to acquire certain assets and liabilities in relation to the freight service business. The total amount of assets were RMB161.7 million and total amount of liabilities were RMB39.3 million. The purchase price was approximately RMB122.4 million.
23
On October 20, 2014, we entered into an agreement with Guangzhou Railway (Group) Guangshen Railway Enterprise Development Company to acquire approximately an additional 17.7% equity interest in Zengcheng Lihua Stock Company Limited (“Zengcheng Lihua”). The purchase price was approximately RMB4.7 million. Upon the completion of the acquisition, we held an aggregate of approximately 44.7% equity interest in Zengcheng Lihua. On February 12, 2015, we obtained control of Zengcheng Lihua and began to consolidate its financial statements from that date.
On October 26, 2016, we entered into agreements to acquire certain railway operating assets of GRGC, Guangmeishan Railway Company Limited (“GRCL”) and Guangdong Sanmao Railway Company Limited (“GSRC”). GRCL and GSRC are subsidiaries of GRGC that operate passenger and freight transport service business. The purchase prices to GRGC, GRCL and GSRC were approximately RMB28.7 million, RMB453.7 million and RMB249.7 million, respectively. On October 26, 2016, we obtained control of the above-mentioned railway operation assets and began to consolidate the results of operations of GRGC, GRCL and GSRC in our consolidated comprehensive income statement from that date.
Service Territory
Our rail lines traverse the Pearl River Delta and run vertically through Guangdong Province, an area that benefited early from the PRC economic reform policies that began in the late 1970s. Throughout the 1980s and early 1990s, the economy of the Pearl River Delta, fueled by foreign investments, grew rapidly. The Pearl River Delta is currently one of the most affluent and fastest growing areas in China.
As of March 31, 2022, we had 48 stations situated on our rail lines, providing passenger and freight transportation services for cities, towns and ports situated along the corridors and Hong Kong Through Train passenger service, which we serve in conjunction with the MTR. We also provide railway operation services to other Chinese domestic railway companies.
Shenzhen-Guangzhou-Pingshi
The railroad is an integral component of the PRC national railway network, and provides nationwide access to passenger and freight traffic from southern China to other regions of mainland China as described below:
Shenzhen-Guangzhou-Pingshi
Northbound
Southbound
Westbound
Guangzhou-Maoming
rail line operated by GSRC, a company in which GRGC holds a 49.1% equity interest, which runs through the western part of Guangdong Province, connecting with other rail lines that continue on into the Guangxi Zhuang Autonomous Region, which provides access to southwestern China. Nanning-Guangzhou Railway and Guiyang-Guangzhou Railway commenced operation on December 26, 2014, and are connected with our line at Guangzhou Station, and Guangzhou and Guilin North. Nanning- Guangzhou Railway is owned by Nanning-Guangzhou Railway Company Limited, a subsidiary of Nanning Railway Bureau of CSRG. Guiyang- Guangzhou Railway is owned by Guiyang-Guangzhou Railway Company Limited, a subsidiary of Chengdu Railway Bureau of CSRG. We provide the operational services to Nanning-Guangzhou Railway and Guiyang-Guangzhou Railway. Our line also connects with Guangzhou-Foshan-Zhaoqing
Intercity Railway, in which Guangdong Provincial Railway Construction Investment Group Co., Ltd. and CSRG jointly invested. Eastbound
Guangzhou-Meizhou-Shantou
Guangzhou-Dongguan-Shenzhen
Intercity passenger line. Guangzhou-Meizhou-Shantou
Guangzhou-Dongguan-Shenzhen
Intercity passenger line, which is mainly invested by Guangdong Provincial Railway Construction Investment Group Co., Ltd, connects with Guangzhou East to Xintang section of our rail line. At Pinghu, our rail line connects with two local rail lines: one of them, Pingnan Railway, principally serves three ports located in western Shenzhen—Shekou, Chiwan and Mawan, which is under renovation and expansion to add passenger transport and sea-railway
cargo transport capabilities—and the other, Pingyan Railway, serves Yantian port, an international deep-water port located in eastern Shenzhen. At the Huangpu and Xiayuan stations in Guangzhou, our line connects with Huangpu port and Xinsha port. Our rail line also connects with certain industrial districts, commercial districts and the facilities of many of our customers through spur lines, which are rail lines running off the main line that are used and typically financed by a freight customer or a group of freight customers and maintained by us for a fee. We believe that the customers connected to these spur lines and customers with goods that must be shipped through these regional ports are likely to use our services on a long-term basis. 24
Capital Expenditure
Our capital expenditure includes payments for acquisition of fixed assets and and prepayments for fixed assets, net of related payables. In 2019, 2020 and 2021, our total capital expenditures were RMB2,441.1 million, RMB853.3 million and RMB1060.3 million, respectively.
construction-in-progress,
For more information concerning the Company’s principal capital expenditure and divestitures currently in progress, including the distribution of these investments geographically and the method of financing, see “Item 5. Operating And Financial Review And Prospects – B. Liquidity and Capital Resources.”
The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, see
https://www.sec.gov/
. B. |
Business Overview |
Business Operations
Our principal businesses are railroad passenger transportation, freight transportation, railway network usage and other transportation-related services, which collectively generated 94.1% of our total revenue in 2021. The remaining 5.9% of our total revenue in 2021 mainly consisted of
on-board
catering services, leasing, sales of materials, sale of goods and other businesses related to railway transportation. The table below summarizes our railroad and related business revenue and traffic volume for the periods indicated:
Year ended December 31, |
||||||||||||||||||||
2017 |
2018 |
2019 |
2020 |
2021 |
||||||||||||||||
| Passenger Transportation |
||||||||||||||||||||
| Total passenger transportation revenue (RMB millions) |
7,757.08 | 8,108.38 | 8,009.59 | 4,114.52 | 6,169.11 | |||||||||||||||
| Total passengers (millions) |
85.13 | 89.35 | 85.13 | 42.85 | 40.78 | |||||||||||||||
| Total passenger-kilometers (millions) |
25,528.73 | 25,497.28 | 24,058.23 | 12,931.16 | 12,053.94 | |||||||||||||||
| Revenue per passenger-kilometer (RMB) (1) |
0.34 | 0.32 | 0.33 | 0.32 | 0.51 | |||||||||||||||
| Freight Transportation |
||||||||||||||||||||
| Total freight transportation revenue (RMB millions) |
1,893.59 | 1,849.36 | 2,112.60 | 1,698.58 | 2,035.44 | |||||||||||||||
| - Revenues from freight charges (RMB millions) (2) |
1,741.97 | 1,609.69 | 1,740.91 | 1,456.61 | 1,701.85 | |||||||||||||||
| - Other revenues from freight transportation (RMB millions) |
151.62 | 239.67 | 371.69 | 241.98 | 333.59 | |||||||||||||||
| Outbound freight volume - tonnes (millions) |
15.86 | 15.71 | 16.24 | 16.27 | 18.84 | |||||||||||||||
| Revenue per tonne (RMB) (3) |
109.83 | 102.46 | 107.20 | 89.53 | 90.33 | |||||||||||||||
| Full-distance volume of outbound freight traffic, or tonne-kilometers (millions) (4) |
10,700.48 | 134,417.00 | 149,982.69 | 131,865.78 | 149,734.69 | |||||||||||||||
| Revenue per tonne-kilometer (RMB)(5) |
0.18 | 0.014 | 0.014 | 0.013 | 0.014 | |||||||||||||||
| Railway Network Usage and Other Transportation Related Services |
7,644.23 | 8,865.64 | 9,903.38 | 9,572.33 | 10,814.59 | |||||||||||||||
| (1) | Revenue per passenger-kilometer is calculated by dividing total passenger transportation revenue by total passenger-kilometers. Management believes that revenue per passenger-kilometer is a useful measure for assessing the revenue levels of our passenger transportation business. |
| (2) | Freight transportation on the PRC national railway system is subject to government-mandated pricing. Since January 1, 2018, the pricing model of freight transportation on the national railway system was changed from section fares system to freight consignment system. As a result, our freight revenue is mainly the income for the whole-route freight transportation fees for the outbound freight delivered by us. We also have to pay service fees to other railway companies providing the freight transportation service along the route. |
| (3) | Revenue per tonne is calculated by dividing revenues from freight charges by total tonnage of outbound freight. Management believes that revenue per tonne is a useful measure for assessing the revenue levels of our freight transportation business. |
| (4) | Starting from 2018, total tonne-kilometers represents the full-distance volume of our outbound freight traffic, whereas the “volume of freight traffic” as presented in 2017 and previous years refers to the volume of freight traffic (including the outbound, arrival and pass-through freight) transported over the distance then-managed by us under the section fares system. |
25
| (5) | Revenue per tonne-kilometer is calculated by dividing total freight revenue by total tonne-kilometers. Management believes that revenue per tonne-kilometer is a useful measure for assessing the revenue levels of our freight transportation business. |
Passenger Transportation
Passenger transportation accounted for 30.5% of our total revenue and 32.4% of our revenue from railway businesses in 2021. Our passenger train services can be categorized as follows:
| • | transportation business of Guangzhou-Shenzhen intercity express trains; |
| • | long-distance trains; |
| • | Through Trains in Hong Kong; and |
| • | Other revenue from passenger transportation. |
As of December 31, 2021, there were a total of 240 pairs of passenger trains in our operation area according to the then train schedule (each pair of trains meaning trains making one round-trip between two points), of which:
| • | 90 pairs of intercity high-speed passenger trains between Guangzhou and Shenzhen (including 15 pairs of Guangzhou East to the Chaozhou-Shantou and Meizhou cross-network EMU trains); |
| • | 9 pairs of Hong Kong Through Trains, the operation of which has been suspended due to the shutdown of Hong Kong boarder by the Hong Kong government as a result of the COVID-19 pandemic since January 30, 2020; and |
| • | 141 pairs of long-distance trains. Long-distance trains included long-distance passenger trains operated by us between the following departure and terminal stations during 2021: |
| Departure/Terminal Station |
Terminal/Departure Station | |
| Guangzhou | Beijing West, Nanjing, Shanghai South, Dazhou, Wuchang, Yantai, Wenzhou, Zhangjiajie West, Xinyi, Jingdezhen North, Maoming | |
| Guangzhou East | Beijing West, Xiamen North, Meizhou, Shantou | |
| Shenzhen | Shanghai South, Urumqi, Qingdao, Luoyang, Meizhou | |
| Shenzhen East | Chengdu East, Zhangjiajie West, Guiyang | |
| Dongguan East | Chengdu, Hefei, Lanzhou West, Huizhou | |
| Shantou | Wuchang | |
| Huizhou | Dazhou, Wuchang, Wanzhou | |
| Sanya | Beijing West | |
Long-distance trains also included domestic long-distance trains that are operated by other operators but originate or terminate on, or pass through, our railroad.
The table below sets out passenger transportation revenue and volumes for our Hong Kong Through Trains and domestic trains for each of the periods indicated:
Total Passenger |
||||||||||||||||||||||||||||||||||||
Transportation Revenue (million RMB yuan) |
Total Passengers (million people) |
Revenue per Passenger |
||||||||||||||||||||||||||||||||||
2019 |
2020 |
2021 |
2019 |
2020 |
2021 |
2019 |
2020 |
2021 |
||||||||||||||||||||||||||||
| Guangzhou-Shenzhen Trains |
3,102.0 | 1,648.6 | 1,897.0 | 40.0 | 18.1 | 17.4 | 77.6 | 91.1 | 109.0 | |||||||||||||||||||||||||||
| Hong Kong Through Trains |
261.2 | 14.5 | 0 | 1.9 | 0.1 | 0 | 137.5 | 145.3 | 0 | |||||||||||||||||||||||||||
| Long-distance Trains (1) |
4,111.8 | 2,106.1 | 3,878.5 | 43.2 | 24.6 | 23.4 | N/A | N/A | N/A | |||||||||||||||||||||||||||
| Other Revenues from Passenger Transportation |
534.6 | 345.3 | 393.6 | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Combined passenger operations |
8,009.6 | 4,114.5 | 6,169.1 | 85.1 | 42.8 | 40.8 | N/A | N/A | N/A | |||||||||||||||||||||||||||
| (1) | Our revenue of long-distance passenger trains includes both the revenue from the passengers arriving at our railway stations and the revenue from the passengers departing from our railway stations. However, the number of our long-distance passengers only includes the passengers departing from our railway stations. As a result, we believe that the “per passenger revenue” cannot fairly reflect the financial status of our passenger transportation business. |
26
Guangzhou-Shenzhen
TrainsGuangzhou-Shenzhen
trains decreased by 3.9% from 18.1 million in 2020 to 17.4 million in 2021. The revenue from our Guangzhou-Shenzhen
trains increased by 15.1% from RMB 1648.6 million in 2020 to RMB 1897.0 million in 2021. The increase in revenue of Guangzhou-Shenzhen
trains was primarily due to the operation of 9 pairs of inter-city trains in the section between Guangzhou South Station (Foshan West Station) and Yangjiang since April 1, 2021, which has increased the revenue of inter-city trains. Hong Kong Through Trains
COVID-19
pandemic. Before the suspension in 2020, we operate jointly with the MTR with altogether 9 pairs of Hong Kong Through Trains. The MTR is responsible for the operation of 3 pairs of Canton-Kowloon Through Trains while we are responsible for the remaining 6 pairs of Hong Kong Through Trains. In addition, we also provide railway network usage services to MTR for the Hong Kong Through Trains it operates in the section between Shenzhen Station and Guangzhou East Station. Revenue from these Hong Kong Through Trains on the
Guangzhou-Hong
Kong section is shared between MTR and us, in proportion to our track mileage for the Hong Kong Through Train services, with 81.2% accruing to us and 18.8% to MTR. In addition, we share all related costs with MTR at the same rate for the Hong Kong Through Train services. Most of the passengers taking our Hong Kong Through Trains are from Hong Kong, Macau, Taiwan regions and foreign countries, and many are business travelers. As the prices for our Hong Kong Through Train services are higher than the prices we charge for our domestic train services, these Hong Kong Through Train services produce higher
per-passenger
revenue than our other passenger train services. In 2021, the volume of passengers who traveled on the Hong Kong Through Trains decreased by 100% from 0.1 million in 2020 to zero in 2021. The revenue from Hong Kong Through Trains decreased by 100% from RMB14.5 million in 2020 to zero in 2021. This decrease in passenger volume and revenue was mainly due to the impact of the
COVID-19
pandemic. The operations of the Hong Kong Through Trains have been entirely suspended since January 30, 2020, when the government of Hong Kong announced the suspension of services of Hung Hom Station as a result of the COVID-19
pandemic. Domestic Long-distance Trains
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Major Stations
| Station |
Location |
Connected Railways |
Passenger Transportation Business |
Total Passengers for 2021 (millions) |
||||||
| Guangzhou Station | Yuexiu District, Guangzhou | Beijing-Guangzhou Railway, Guangzhou-Maoming Railway, Guangzhou-Shenzhen Railway, Guangzhou-Foshan-Zhaoqing Intercity Railway, Line 2 and Line 5 of Guangzhou’s subway system |
Long-distance trains, intercity trains between Guangzhou and Shenzhen |
12.81 | ||||||
| Guangzhou East Station | Tianhe District, Guangzhou | Beijing-Guangzhou Railway, Guangzhou-Shenzhen Railway, Xiamen-Shenzhen Railway, Guangzhou-Dongguan-Shenzhen intercity passenger line, Line 1 and Line 3 of Guangzhou’s subway system |
Long-distance trains, intercity trains between Guangzhou and Shenzhen, Hong Kong Through Trains | 11.00 | ||||||
| Shenzhen Station | Luohu District, Shenzhen | Guangzhou-Shenzhen Railway,Hong Kong railway, Luobao Line of Shenzhen’s subway system |
Long-distance trains, inter-city trains between Guangzhou and Shenzhen |
5.96 | ||||||
| Shaoguan East Station | Shaoguan | Beijing-Guangzhou Railway |
Long-distance trains |
1.58 | ||||||
Freight Transportation
Revenue from our freight transportation accounted for 10.1% of our total revenue and 10.7% of our revenue from railroad businesses in 2021. Our principal market for freight is domestic medium and long-haul freight, originating and/or terminating outside the corridor. We are well equipped with various freight facilities and can efficiently transport full load cargo, single load cargo and containers. We have established business cooperation with ports, logistics bases and specialized building materials markets in our service region.
Shenzhen-Guangzhou-Pingshi
The majority of the freight we transport is high-volume, medium to long-distance freight received from and/or transferred to other rail lines. A portion of the freight we transport both originates and terminates in the corridor. Since January 1, 2018, the charging model of the national railway freight transportation in China has changed to a freight consignment system from the previous section fares system. As a result, we reclassified our freight business into two categories as follows:
Shenzhen-Guangzhou-Pingshi
| • | Revenues from freight charges, which mainly represents the revenues from the total freight charges of our outbound freight transportation, whereas the revenues from outbound freight and inbound freight as presented in previous years refer to the revenue of freight transportation (including the outbound, pass-through and arrival freight) charged by the distance managed by us under the section fares system; and |
| • | Other revenues from freight transportation, which mainly represents the revenue from freight services for transportation between the stations and receiving locations designated by our customers. |
Revenue from freight transportation business in 2021 was RMB2,035.4 million, an increase of 19.8% from RMB1,698.6 million in 2020. Since January 1, 2018, the pricing model of freight transportation on the national railway system was changed from a segment charging system to a carrier system. As a result, we have collected the whole-route freight transportation fees for the outbound freight delivered by us, and have paid the service fees to other railway companies providing the freight transportation service. The increase in freight transportation revenue was mainly because the Company vigorously carried out the activities and campaigns to boost the capacity of its freight transportation, actively implemented the national policy of “Highway Transportation to Railway Transportation”, fully explored freight resources, and strengthened the organization of goods transportation, resulting in a significant increase in outbound freight volume, and the according increase in the revenue from freight transportation.
year-on-year
Our outbound freight volume was 18.8 million tonnes in 2021, an increase of 15.3% from 16.3 million tonnes in 2020. The increase in outbound freight volume was mainly due to the strategy to make full use of our freight transportation capacity released by the decline in passenger flow and to strengthen the network of freight transportation, which have increased the volume of freight transportation.
We serve a broad customer base and ship a wide range of goods in our freight transportation business. We are not dependent upon any particular customers or industries. We transport a broad range of goods, which can generally be classified as follows: metal ores, coal, containers, construction materials, steel, petroleum, and other goods.
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The majority of our inbound freight consists of raw materials and essential production materials for manufacturing, industrial and construction activities, while the majority of our outbound freight consists of imported mineral ores as well as coal and goods produced or processed within our service territory, for customers throughout China and abroad.
Railway Network Usage and Other Transportation-Related Services Business
Revenue from our railway network usage and other transportation-related services accounted for 53.5% of our total revenue and 53.5% of our revenue from railroad businesses in 2021. In 2021, our revenue from railway network usage and other transportation-related services was RMB10,814.6 million, representing an increase of 13.0% from RMB9,572.3 million in 2020. The increase in the revenue from railway network usage and other transportation-related services was mainly because with the gradual recovery of railway passenger traffic nationwide, the workload of transportation services provided by the Company for other railway companies increased, resulting in the corresponding increase in the revenue therefrom and the Company recorded new revenue from the settlement of transportation capability guarantee charges.
The following table shows the composition of our revenue from railway network usage and other transportation-related services for each of the periods indicated:
2019 |
2020 |
2021 |
||||||||||
(RMB millions) |
||||||||||||
| Railway Network Usage |
4,206.9 | 3,595.5 | 3,788.3 | |||||||||
| Passenger transportation network usage services |
2,979.3 | 3,382.1 | 2,306.4 | |||||||||
| Freight transportation network usage services |
1,227.6 | 1,213.4 | 1,481.9 | |||||||||
| Other Transportation-Related Services(1) |
5,696.5 | 5,976.8 | 7,026.3 | |||||||||
| Railway operation services |
3,790.4 | 3,661.5 | 3,775.6 | |||||||||
| Other Services(2) |
1,906.1 | 2,315.3 | 3,250.7 | |||||||||
| Total |
9,903.4 | 9,572.3 | 10,814.6 | |||||||||
| (1) | Other transportation-related services include provision of railway operation services and other services. |
| (2) | Other services include lease of locomotive and passenger trains, fueling of locomotive and passenger trains, parcel transportation and other transportation. |
Other Businesses
Revenue from our other businesses accounted for 5.9% of our total revenue in 2021. Our other businesses mainly consist of train repairs,
on-board
catering services, leasing, sales of materials and supplies, sales of goods and other businesses that are related to railway transportation. Revenue from our other businesses was RMB1,187.0 million in 2021, compared to RMB964 million in 2020, representing an increase of 23.1%. The increase was mainly due to the increases in the revenue from the sales of materials and supplies and the revenue from train maintenance services.
Seasonality of Our Railway Transportation Business
There is some seasonality in our businesses. The first quarter of each year typically contributes the highest portion of our annual revenue, mainly because it coincides with the Spring Festival holidays when Chinese people customarily travel from all over the country back to their hometowns. In addition, the Spring Festival holidays, the Qingming Festival holidays, the Labor Day holidays, the Dragon Boat Festival holidays, summer holidays and the National Day holidays in China are also high travel seasons. During these holidays, we usually operate additional passenger trains to meet the increased transportation demand. Notwithstanding the foregoing, the typical factors for seasonality in our business were overshadowed by the
COVID-19
pandemic that began at the end of 2019. 29
Sales
Passenger Transportation
Our passenger tickets are currently sold primarily through the internet. Passengers also can buy tickets at the ticket counters and automatic selling machines that are located in our train stations as well as through telephone. Additionally, our tickets are sold in Hong Kong and major cities in the Guangdong Province through ticket agents, travel agents and hotels, at our usual prices plus nominal commissions.
Hong Kong Through Train tickets are sold in Guangdong Province through Guangzhou East, Changping and Foshan railway stations, as well as through various ticket outlets, hotels and travel agents. In Hong Kong, these tickets are sold exclusively by the MTR. As MTR’s sales network for these tickets is relatively limited, MTR has engaged the China Travel Service (HK) Ltd., or CTS, as the primary agent for such sales on a
non-exclusive
basis. In all of our railway stations, we have adopted a real-name system for passenger tickets, and promoted paperless
e-ticket
services, which allow passengers with valid government IDs to purchase tickets online, at station ticket windows or automatic ticket selling machines. Passengers can choose to pay for tickets by e-payment
via WeChat, Alipay and Unionpay. All passengers need to scan codes to pass ticket inspection machines. We also allow passengers to use cash, WeChat or Alipay on the train to extend ticket coverage. As of December 31, 2021, we had a total of 239 automatic ticket- selling machines, 397 automatic ticket inspection machines and 190 reimbursement voucher printers along our rail line. The current settlement method for passenger transportation was stipulated by the MOR and is still under execution by CSRG. It provides that all revenue from passenger train services (including revenue generated from luggage and parcel services) is considered passenger transportation revenue and belongs to the railway company that operates that train. The railway company in turn pays other railway companies the fees for the use of their rail lines, hauling services,
in-station
passenger services, water supply, electricity for electric locomotives and contact wire use fees, etc. Under this settlement method, the railway companies operating the long-distance train services are required to pay us the following fees: (i) the portion of the revenue from the sale of tickets that is higher than the PRC national railway standards due to our special pricing standards and (ii) other fees including those for railroad line usage, in-station
passenger service, haulage service, power supply for electric locomotives, usage fees of contact wires and water supply. This settlement method does not apply to the settlement of our revenue from the passenger trains between Guangzhou and Shenzhen, between Beijing and Hong Kong, between Shanghai and Hong Kong, between Zhaoqing and Hong Kong and the Hong Kong Through Trains. See “Item 4. Information On The Company – B. Business Overview – Regulatory Overview – Pricing.” In October 2016, we acquired parts of the railway operation assets of GRCL and GSRC. As a result of the acquisition, we expanded our service scope of railway operation of the
Shenzhen-Pinshi
rail line to the entire Guangdong Province, which improved the supply of passenger trains and our competitiveness in passenger transportation. Freight Transportation
In May 2013, CSRG restructured the businesses between CRCT, CREC and China Railway Special Cargo Services Co., Ltd. (“CRSCS”). After the restructuring, CRCT took charge of the container operation and management and left the container transportation business with all relevant assets to State Railway Bureaus (including GRGC). CREC transformed into a logistics company, providing services to the public, while National Railway Bureau was responsible for the operation and management of luggage carts, postal trains, postal and parcel express special trains and operational bases. CRSCS expanded the businesses into container, mail and luggage transportation.
On November 30, 2013, we entered into an asset transfer agreement with China Railway Express Co., Ltd. Guangzhou Branch (“CREC GB”) and China Railway Container Transport Co. Ltd. Dalang Processing Station (“CRCT DS”). CREC GB and CRCT DS are all subsidiaries of CSRG. The consideration for CREC GB and CRCT DS were approximately RMB102.3 million and RMB79.9 million, respectively. On the same day, control of the assets and operations of CREC and CRCT were transferred to us. The results of operations of the above-mentioned entities have been included in our consolidated comprehensive income statements starting on November 30, 2013.
Our revenue from container, postal transportation and postal and parcel express special train services have been included into transportation revenue after business optimization.
We and State Railway Bureaus (including GRGC) pay CSRG a fee for railway containers, which is collected by the CRCT. Special cargo transportation income, partially paid to National Railway Bureau and us as railroad usage fees and locomotive traction fees, is attributable to CRSCS.
CSRG charges a freight fee for railway freight transportation that covers all fees incurred from loading goods, transportation from departure station to arrival station and ultimately to the designated destination. freight fees are charged
door-to-door
Door-to-door
one-time
on the consignor’s account and are evidenced by consignment invoice, which lists all chargeable services with corresponding prices. Since January 1, 2018, we have collected the whole-route freight transportation fees for the outbound freight delivered by us, and have paid the service fees to other railway companies providing the freight transportation service.
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Competition
We provide passenger and freight transportation services on the Railway. We expect competition to increase in the future as the marketization reform of the railway industry (including the reformation of the investment and financing system, the transportation management system and the pricing system) gradually deepens. We compete for long-distance traveling passengers against other railway service providers operating within our service territory. In addition, in areas where our railroad connects with lines of other railway companies, such as in the Guangzhou area where our railroad connects with the Line, we face competition from the railway companies operating in these areas. We believe that the entry barrier to the industry will decrease, investors in the industry will become more diversified and the State’s high-speed railway network in the Medium and Long-term Railway Network Planning (2016-2030) with Eight East-West Lines and Eight South-North Lines of high-speed railway network and numerous intercity railways will complete construction and commence operation, leading to increased competition within the industry itself.
Shenzhen-Guangzhou-Pingshi
Guangzhou-Maoming
Line, and in the Dongguan area where our railroad connects with the Guangzhou-Meizhou-Shantou
We also face competition from the providers of a variety of other means of transportation within our service territory. With respect to passenger transportation, we face competition from bus services, which are available between Guangzhou and Hong Kong, between Guangzhou and Shenzhen and between many other locations that we provide passenger transportation services. Bus fares are typically lower than the fares for our passenger train services. Furthermore, buses can offer added convenience to passengers by departing from or arriving at locations outside their central terminals, such as hotels. However, train services generally offer greater speed, safety and reliability than bus services. In addition, since the implementation of our operating model, our high-speed train services and Hong Kong Through Train services have enabled us to compete more effectively with bus operators in terms of speed and frequency. We also compete to a lesser extent with commercial air passenger transportation services and ferry services operating between Guangzhou and Hong Kong.
“As-Frequent-As-Buses”
With respect to freight transportation, we face increasing competition from truck transportation in the
medium-and
short-distance freight transportation market as the expressway and highway networks in our service region and neighboring areas have increasingly improved. By comparison, in the long-distance freight transportation market, especially in the areas where water transportation is not well developed, our freight transportation service has many advantages compared to truck transportation due to the higher cost of truck transportation, susceptibility of truck transportation to traffic conditions and a scarcity of heavy duty trucks. Our freight transportation also competes with water transportation as the waterway networks have increasingly improved. Supported by its more extensive network, railway freight transportation is more competitive in terms of speed and safety compared to water transportation, especially in those areas that are far from coasts and main waterways. As air freight is very expensive and attracts a different group of customers, we do not consider that our freight transportation services face significant competition from air freight. In China, a significant portion of the bulky freight with low added-value is still transported by railroad. In addition, CSRG recently proposed to conduct deeper reform to adopt more modernized methods for railway freight transportation, including, but not limited to, the use of the internet to book and manage all cargos, which would further market freight transportation-related services and may increase competition from companies that have adopted more modernized methods in railway freight transportation. Equipment, Tracks and Maintenance
As of December 31, 2021, we operated 175 diesel locomotives, 60 electric locomotives, 36 EMUs and 2,182 passenger coaches for our operations.
The freight cars we use are all leased from CSRG, to which we pay uniform rental fees based on the national standards set by CSRG. The amounts of such usage fees we paid to CSRG in 2019, 2020 and 2021 were approximately RMB268.2million, RMB274.0 million and RMB315.2 million, respectively.
We operate CRHs that we purchased from Bombardier Sifang Power (Qingdao) Transportation Ltd. and Bombardier Sweden Transportation Ltd. Each CRH is designed to have a top speed of 200 kilometers per hour. CRHs allow us to deliver safety, speed, comfort and quality in our transport services and have increased our efficiency and competitiveness.
Our repair and maintenance facilities, including our Guangzhou passenger vehicle maintenance facility, Shipai passenger vehicle maintenance facility, Shenzhen North passenger vehicle maintenance facility, Guangzhou vehicle maintenance facility and Guangzhou North vehicle maintenance facility, provide services for general maintenance and routine repairs on our coaches and locomotives. Major repairs and overhauls are performed by manufacturers or qualified railway companies or plants. The repair and maintenance services for the CRHs are provided by our Guangzhou EMU vehicle maintenance facility.
We believe that our existing tracks and equipment meet the needs of our current business and operations. Most of the rails and ties on our main lines have been installed within the last decade and are maintained and upgraded on an ongoing basis as required. In 2019, 2020 and 2021, we replaced approximately 20 kilometers, 9.5 kilometers and 71 kilometers of railway lines, respectively.
Major Suppliers and Service Providers
GRGC, our single largest shareholder, and its subsidiaries are major suppliers of our materials and supplies. In 2021, we purchased approximately RMB770.7 million in materials and supplies from GRGC and its subsidiaries, which represented 64.7% of our total purchase of materials and supplies. See “Item 7. Major Shareholders And Related Party Transactions – B. Related Party Transactions.”
31
The companies or bureaus owned or controlled by CSRG, including the GRGC, our single largest shareholder, are our major customers. In 2021, we collected approximately RMB5,603.7 million from GRGC and its subsidiaries, which represented 27.7% of our operating revenues.
The electricity we use, including electricity used for our lines, is supplied through various entities under the jurisdiction of the Guangdong provincial power bureau on normal commercial terms. In 2019, 2020 and 2021, we paid approximately RMB489.6 million, RMB372.04 million and RMB427.0 million, respectively, for electricity charges.
Regulatory Overview
As a joint stock limited company with publicly traded shares, we are subject to regulation by the PRC securities regulatory authorities with respect to our compliance with PRC securities laws and regulations.
Prior to March 14, 2013, we were regulated by the MOR. However, on March 14, 2013, the First Session of the 12th National People’s Congress of the PRC considered and approved the plan on State Council institutional reform and transformation of government functions, pursuant to which the MOR was dissolved. In accordance with the plan, administrative functions pertaining to railway development planning and policies were transferred to the MOT, other administrative functions previously performed by the MOR were transferred to the National Railway Administration, supervised by the MOT, and commercial functions previously performed by the MOR were transferred to the CSRG. The Reform was completed on January 1, 2017 and as a result, the actual controlling entity of our largest shareholder became CRC, which was renamed to CSRG on June 18, 2019. See “Item 3. Key Information – D. Risk Factors – Risks Relating to Our Business – Extensive government regulation of the railway transportation industry may limit our flexibility in responding to market conditions, competition or changes in our cost structure.”
National Railway System
Railroads in the PRC fall largely into three categories: state-owned railroads, jointly owned railroads and local railroads. The PRC central government holds the equity interests in state-owned railroads. According to the 2018 Railway Statistics Bulletin published by the National Railway Administration, in 2018 the weekly passenger and freight carried by state-owned railroads (i.e. railroads controlled by CSRG Group) accounted for 99.4% and 89.5% of those carried by railways nationwide, respectively. Prior to the dissolution of the MOR, the state-owned railway system was operated as a nationwide integrated system under the supervision and management of the MOR. Jointly owned railroads are jointly invested and operated by the central government of the PRC, the local government and other foreign or domestic investors. Local railroads consist of regional lines usually within provincial or municipal boundaries that have been constructed under the sponsorship of local governments or local enterprises to serve local needs. Although the MOR did not operate other railroads, it provided guidance, coordination, supervision and assistance with respect to industry matters to such other railroads. The MOR’s responsibilities include the centralized coordination of train routing and scheduling nationwide, planning of freight shipments and freight car allocations, overseeing equipment standardization and maintenance requirements, and financial oversight and revenue clearing throughout the national railway system. After the dissolution of the MOR, the administrative functions formerly performed by the MOR were assigned to the MOT and the National Railway Administration, while the commercial functions formerly performed by the MOR were assigned to the CSRG.
Railway group companies are directly responsible for passenger and freight transportation as well as the coordination and supervision of operations carried out by train stations within their respective service territory. There are currently 18 railway group companies overseeing distinct portions of the national railway system.
Transport Operations
Prior to the dissolution of the MOR, the transport operations of the PRC national railway system were organized under the centralized regulation of the MOR. In order to promote efficient utilization of the railroad network nationwide, the MOR supervised and coordinated traffic flow on national trunk lines and through any connection points, where two rail lines operated by different companies connect to each other, in the system. Based on route capacity, available equipment and national priorities, the MOR formulated and issued the plans to the railway companies or railway group companies regarding routings on trunk lines, allocation of transportation capacities between railway companies or railway group companies at the connection points and allocation of freight cars to railway companies or railway group companies. The MOR also regulated the dispatch of empty freight cars to designated locations in order to enhance the utilization rate of the freight cars within the national railway system. Within the plans set forth by the MOR, each railway company and railway group company supervised and coordinated traffic within its own jurisdiction.
Currently, the plans and schedules for our passenger and freight services that were conducted solely on our own lines were determined by us; while our passenger and freight services that ran beyond our own lines were subject to overall planning and scheduling of GRGC or CSRG.
32
Where our service runs beyond our own line, clearance by and coordination with GRGC is necessary. Prior to the dissolution of the MOR, to the extent that we operated long-distance services beyond GRGC’s jurisdiction, they were subject to coordination and clearance by the MOR. Currently, they were subject to coordination and clearance by CSRG. In addition, in order to enable GRGC and the MOR to allocate freight cars and control traffic going through connection points, we were required to provide GRGC with prior electronic notice through internal network, on a daily basis, of the number and types of freight cars we required, as well as the number of our freight trains that would go through particular connection points. Currently, the daily notice is still provided to GRGC and the allocation of freight cars and control of traffic through connection points are carried out by GRGC and the CRC. Furthermore, we were required to carry out special shipping tasks, such as emergency aid and military and diplomatic transport, as directed by the MOR (and now by CSRG) or GRGC. Revenue from military and diplomatic transport generally account for less than 1.0% of our total transportation revenue. Emergency aid transport was required only during periods of natural disasters declared by the PRC government, and was provided with reduced fees.
Pricing
Prior to the dissolution of the MOR, the MOR was generally responsible for preparing a proposal for the baseline pricing standards for the nationwide railway system with respect to freight and passenger transportation. Such proposed pricing standards would take effect after being approved by and/or filed with relevant PRC government authorities. Currently, CSRG is responsible for the preparing and filing of such proposal for the baseline pricing standards.
Pursuant to relevant approvals from the NDRC and other relevant PRC government authorities, we have some discretion to adjust and determine our service price. With respect to our freight transportation services within our
Guangzhou-Shenzhen
lines, we may set our prices within a range between 50% and 150% of national price levels. With respect to our passenger transportation services, we may set the prices for our regular speed Guangzhou-Shenzhen
trains within a range between 25% and 225% of national price levels, and may freely determine the prices for our high-speed express trains between Guangzhou and Shenzhen. In addition, we set the prices for our Hong Kong Through Trains in consultation with MTR, our business partner and the prices for our Hong Kong Through Trains are higher than the prices we charge for our domestic train services. Hong Kong Through Trains are currently suspended due to the ongoing COVID-19 pandemic. Environmental Protection
Our operations are subject to a wide variety of PRC national and local environmental laws and regulations, including those governing waste discharge, generation, treatment and disposal of hazardous materials, land reclamation, air and water emissions and mining matters. In particular, our Guangzhou locomotive maintenance depot has been identified as a key pollutant discharge unit by the PRC government’s environmental protection departments in 2021. To enforce standards set forth under these laws and regulations, national environmental protection authorities imposed discharge fees in proportion to the amount of discharge prior to January 1, 2018. The relevant PRC government agencies are authorized to order any operations that exceed discharge limits to take remediation measures as approved by the relevant agency, or order the closure of any operations that fail to comply with applicable regulations. In December 2016, the PRC government promulgated the Environmental Protection Tax Law which became effective from January 1, 2018. The Environmental Protection Tax Law has replaced discharge fees with environmental protection tax levies, which are calculated based on the pollution equivalents converted from pollutant emissions.
We believe that we are in material compliance with all applicable PRC national and local environmental protection laws and regulations. We have not been fined or cited for any activities that have caused environmental damages. We have 14 wastewater treatment facilities used for purposes of treating wastewater generated from cleaning of special cargo freight cars, locomotives, coaches and from residential use of our employees. Since the implementation of the Environmental Protection Tax Law in January 1, 2018, we pay regular taxes to local authorities for the discharge of waste substances. In 2021, our environmental protection-related expenses for the key pollutant discharge units were approximately RMB6.72 million, mainly related to the maintenance of our environmental protection equipment.
Insurance
We do not currently maintain any insurance coverage with third party carriers against third party liabilities except compulsory automobile liability insurance. Consistent with what we believe to be the customary practice among railway operators in the PRC, we do not maintain insurance coverage for our property and facilities (other than for our automobiles), for business interruption or for environmental damage arising from accidents on our property or relating to our operations. As a result, in the event of an accident or other event causing loss, destruction or damage to our property or facilities, causing interruption to our normal operations or causing liability for environmental damage or
clean-up,
we will be liable for such damages. See “Item 3. Key Information – D. Risk Factors – Risks Relating to Our Business – We have very limited insurance coverage.” In addition, we have purchased liability insurance for our directors, supervisors and senior executives. We have taken out basic retirement insurance, basic medical insurance, work-related personal injury insurance policies and childbearing insurance for our employees.
33
C. |
Organizational Structure |
The following table lists our significant subsidiaries as of December 31, 2021:
Country of Incorporation |
Percentage of Interest held by our Company |
|||||||
| Dongguan Changsheng Enterprise Company Limited |
PRC | 51 | % | |||||
| Shenzhen Fu Yuan Enterprise Development Company Limited |
PRC | 100 | % | |||||
| Shenzhen Pinghu Qun Yi Railway Store Loading and Unloading Company Limited |
PRC | 100 | % | |||||
| Guangshen Railway Economic and Trade Enterprise Company Limited |
PRC | 100 | % | |||||
| Shenzhen Railway Station Passenger Services Company Limited |
PRC | 100 | % | |||||
| Guangzhou Railway Huangpu Service Company Limited |
PRC | 100 | % | |||||
| Zengcheng Lihua Stock Company Limited (1) |
PRC | 44.7 | % | |||||
| (1) | According to the Articles of Association of Zengcheng Lihua, the remaining shareholders are all natural persons and none of these individuals holds more than 0.5% equity interest in Zengcheng Lihua. All directors of Zengcheng Lihua were appointed by the Company. After considering all shareholders of Zengcheng Lihua other than the Company are individuals with individual interest holding of less than 0.5% and such individuals do not act in concert, and also all directors of Zengcheng Lihua were appointed by the Company, the directors of the Company consider that the Company has the de facto control over the board and the substantial financial and operating decisions of Zengcheng Lihua. |
The following chart illustrates our current corporate organization structure.
34
As of December 31, 2021, the
non-wholly
owned subsidiaries individually and in the aggregate were not significant to us. Therefore, the non-wholly
owned subsidiaries are not listed hereunder and the financial information of such subsidiaries are not disclosed. D. |
Property, Plant and Equipment |
We occupy a total area of approximately 41.1 million square meters, among which, we own the land use right of approximately 13.1 million square meters on which our buildings and facilities of
Guangzhou-Shenzhen
railway are located, we lease approximately 27.8 million square meters from GRGC for the Guangzhou-Pingshi
Railway. With respect to the land for which we hold the land use rights, the terms range from 36.5 to 50 years, terminating between 2027 and 2047. We will renew the term of extend land use right upon its expiry in strict compliance with requirements of relevant laws and regulations. With respect to the land leased from GRGC, the term is 20 years, terminating in 2027. Based on the land lease agreement we entered into with GRGC in 2004, we can renew such lease at our discretion upon the expiration of the term of such land lease.
As of December 31, 2021, the ownership certificates of land with an aggregate carrying value of approximately RMB524,884,000 that was acquired through assets/business acquisition and group restructuring have not yet been changed from the names of the respective original owners to our name, and we had not obtained the ownership certificates of the land use rights, or Land Certificates, of certain parcels of land with an aggregate carrying value of approximately RMB1,154.6 million. After consultation with our PRC legal counsel, we believe there is no legal hurdle for us to obtain the Land Certificates and we do not believe the current lack of Land Certificates will lead to any material adverse impact on the operation of our business. Accordingly, we do not consider any provision for impairment necessary. For additional information regarding the Land Certificates that we have not obtained, see Note 8 to our audited consolidated financial statements included elsewhere in this annual report.
As of December 31, 2021, we had not obtained the ownership certificates of certain buildings, or Building Ownership Certificates, which had an aggregate carrying value of approximately RMB1,903.7 million. After consultation with our PRC legal counsel, we believe that there is no legal hurdle for us to apply for and obtain the Building Ownership Certificates and it should not lead to any material adverse impact on the operation of our business. Accordingly, we do not consider any provision for impairment necessary. For additional information regarding the types of buildings for which we have not obtained Building Ownership Certificates, see Note 6 to our audited consolidated financial statements included elsewhere in this annual report.
Railroad operators typically require substantial land use rights for track, freight and maintenance yards, stations and related facilities. The availability of convenient rail transportation generally enhances the value of land along a rail line. While we have not traditionally engaged in commercial development of our land use rights for use other than in connection with our existing businesses, we are currently exploring opportunities to better monetize our land use rights. For example, in April 2018 the Company entered into the Resumption Compensation Agreement, as amended and supplemented, with the Guangzhou Land Development Center (“GLDC”) (as purchaser) and other vendors, whereby GLDC agreed to pay us a
one-time
fee of approximately RMB1,304.7 million for our land use rights covering an area of 37,117 square meters. On May 29, 2020, the Company entered into a supplemental agreement (the “Supplemental Agreement”) with GLDC (as purchaser) and other vendors, pursuant to which the compensation amount payable to the Company was tentatively adjusted to be RMB1,202.9 million covering the actual area of 35,092 square meters. On November 12, 2020, the Company signed the Land Handover Confirmation (the “Land Handover Confirmation”) with GLDC and other vendors pursuant to which the Company and GLDC determined conditions required for the handover of the land proposed for resumption were deemed to be fulfilled, and the GLDC agreed to take over the land. The transfer of assets was completed in 2020 and gains on disposal of such assets were recognized as by the Company as “derecognition of land use right” in the amount of RMB1,188.6 million. For details, see “Item 10. Additional Information – C. Material Contracts”. In addition, in August 2018, we contracted with Guangzhou Railway Property Company, a wholly owned subsidiary of GSRC, to carry out the preliminary work of a comprehensive land development project of the Guangzhou East Freight Yard. We plan to continue to improve our asset returns by enhancing the management and development of our assets. Any development projects will require approval from PRC government authorities responsible for regulating land development.
As of March 31, 2022, we had 48 stations situated on our rail line, of which the Guangzhou East Station is the largest, occupying an area of 41,925 square meters.
For additional information regarding our property, plant and equipment, see “Item 4. Information On The Company – B. Business Overview – Equipment, Tracks and Maintenance” and Note 6 to our audited consolidated financial statements included elsewhere in this annual report.
ITEM 4A. |
UNRESOLVED STAFF COMMENTS |
The staff of the SEC previously provided comments on the Company’s Annual Report on Form 20-F for the year ended December 31, 2020. The comments related mostly to requests for additional disclosure relating to political, regulatory and legal risks in connection with doing business as a state-owned enterprise in a key infrastructure-related industry in China, as well as risks relating to changes in regulatory policies that could impact the Company’s business. The Company has addressed these comments in this Annual Report, but many of these changes have not yet been reviewed by the SEC staff. After reviewing this Annual Report and the related comment response letter, the SEC staff may request additional disclosure or raise other questions.
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ITEM 5. |
OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
This discussion and analysis should be read in conjunction with our audited consolidated financial statements included elsewhere in this annual report. Our audited consolidated financial statements are prepared in accordance with International Financial Reporting Standards as issued by IASB.
Overview
Our principal businesses are railroad passenger and freight transportation as well as railway network usage and other transportation related services on the railway and certain long-distance passenger transportation services. We also operate the Hong Kong Through Trains under a cooperative arrangement with MTR in Hong Kong. Prior to the Acquisition, our key strategic focus was to provide high-speed passenger train services in the corridor by providing passenger transportation, freight transportation and railway network usage and other transportation related services to our customers. In addition to our core railroad transportation business, we also engage in other businesses that complement our core businesses, including
Shenzhen-Guangzhou-Pingshi
Guangzhou-Shenzhen
corridor. After the Acquisition, we have aimed to establish ourselves as a comprehensive railway service provider on the Shenzhen-Guangzhou-Pingshi
on-board
and station sales, restaurant services, as well as advertising and tourism. For the year ended December 31, 2021, our total revenue was RMB20,206.2 million, loss attributable to equity holders was RMB973.12 million, and losses per share were RMB0.14. Railroad and related business revenue accounted for 95.5%, 94.7% and 94.1% of our total revenue in 2019, 2020 and 2021, respectively.
Passenger transportation is our principal business. In 2021, the total number of our passengers was 40.8 million, representing a decrease of 4.8% from 42.9 million in 2020. Our passenger transportation revenue was RMB6,169.1 million in 2021, representing an increase of 49.9% from RMB4,114.5 million in 2020.
Our outbound freight transportation totaled 18.8 million tonnes of freight in 2021, representing an increase of 15.8% from 16.3 million tonnes in 2020. Our freight transportation revenue in 2021 was RMB2,035.4 million, representing an increase of 19.8% from RMB1,698.6 million in 2020.
Revenue from our railway network usages and other transportation related services business was RMB10,814.6 million in 2021, representing an increase of 13.0% from RMB9,572.3 million in 2020.
Revenue from our other businesses was RMB1,187.0 million in 2021, representing an increase of 23.1% compared to RMB964 million in 2020.
Impact of the
COVID-19
pandemic The decline of 4.8%, while our freight delivery volume amounted to 18.8 million tonnes, representing a increase of 15.8%. Additionally, we recorded an operating revenue of RMB20,206.2 billion, representing a increase of 23.6%, our consolidated loss attributable to shareholders amounted to RMB973.1 million, representing a decline of 74.4%, and our basic losses per share was RMB0.14.
COVID-19
pandemic, which has spread rapidly and enveloped most of the world is a global health crisis, resulting in significant disruptions among transportation and travel throughout China, Europe, the United States and other countries, which caused volatility and a steep and abrupt downturn to the global financial markets and created significant uncertainty for multi-national companies. In 2021, our operations, especially the passenger transportation business, continued to be impacted by the COVID-19
pandemic, although to a lesser degree than 2020, and we recorded a passenger delivery volume of 40.8 million people, representing a year-on-year
year-on-year
year-on-year
year-on-year
As a result of governmental and civil actions, the domestic outbreak in China has become more controlled and business activities are beginning to increase. Nevertheless, based on a preliminary review and analysis of our unaudited consolidated management accounts for the three months ended March 31, 2022 and information currently available to us, we expect to record a net loss for the first quarter of 2022. We will continue to evaluate the specific impact the
COVID-19
outbreak will have on our financial position. The extent of such impact will depend on the development and duration of the pandemic as well as the implementation of control measures. We will continue to closely monitor this public health crisis and evaluate and attempt to mediate its impact on our financial position and operating results. 36
A. |
Operating Results |
Principal Factors Affecting Our Results of Operations
Economic Development in the Pearl River Delta Region and the PRC.
Guangzhou-Shenzhen
intercity trains, certain long-distance trains and Hong Kong Through Trains. Our results of operations relating to passenger transportation are influenced by the economic development in the Pearl River Delta region. The level of economic activities in the Pearl River Delta region, including the economic cooperation among Hong Kong, Macau and China, affects the number of business people and migrant workers traveling in this region. In addition, the average income levels of residents in this region and elsewhere in the PRC affects the number of the tourists departing from or arriving at our train stations. The majority of the freight we transport is large-volume, medium-to
long-distance freight received from and/or transferred to other railway lines. Economic development in the PRC, including but not limited to the Pearl River Delta region, determines the market demand for such goods as coal, iron ore, steel and therefore indirectly affects the market demand of freight train transportation service. Furthermore, the global financial markets and economic downturn as result of the recent COVID-19
pandemic have adversely affected economies and businesses around the world, including in China. This change in the macro-economic conditions had an adverse impact on our business and operations and caused a decrease in the number of passengers and the volume of freight that we transported. Although the extent of the continuing impact of the current COVID-19
coronavirus outbreak on our future results is uncertain, the global economic downturn, the stability of the Eurozone and the decreased growth rate of China’s economy may have a material and adverse effect on our businesses, results of operations and financial condition. Competitive Pressure from Other Railway Operators and Other Means of Transportation.
COVID-19
pandemic, we adjusted our train services and suspended the operation of some long- distance trains. In addition, the opening of the Guangzhou-Shenzhen
high-speed railway, the rapid growth in the number of privately owned vehicles and a higher penetration of bus services also affected the number of train passengers traveling short distances and any significant decrease in the air transportation prices affects the number of train passengers traveling long distances. Our sales of the freight transportation services are also affected by the competition from other means of transportation, such as water, truck and freight transportation services. We also expect competition to increase in the future as the marketization reform of the railway industry (including the reformation of the investment and financing system, the transportation management system and the pricing system) gradually deepens. We believe that the entry barrier to the industry will decrease, investors in the industry will become more diversified and the State’s high-speed railway network with Four East-West Lines and Four South-North Lines and numerous intercity railways will complete construction and commence operation, leading to increased competition within the industry itself.
PRC Policies.
Year Ended December 31, 2021 Compared with Year Ended December 31, 2020
Revenue
In 2021, the total revenue of the Company was RMB20,206 million, representing an increase of 23.6% as compared to RMB16,349 million in 2020. Our revenue from railroad passenger transportation service, freight transportation service and railway network usage and other transportation related services were RMB6,169 million, RMB2,035 million and RMB10,815 million, respectively, accounting for approximately 30.5%, 10.1% and 53.5% of our total revenue in 2021, respectively.
Passenger Transportation
Chaozhou-Shantou
and Meizhou cross-network EMU trains), 9 pairs of Hong Kong Through Trains (suspended) and 141 pairs of long- distance trains. In 2021, the total number of our passengers was 40.8 million, representing a decrease of 4.8% from 42.9 million in 2020. Our passenger transportation revenue was RMB6,169.1 million in 2021, representing an increase of 49.9% from RMB4,114.5 million in 2020. During the reporting period, increases in revenue from passenger transportation and passenger delivery volume were mainly due to the new operation of nine pairs of inter-city trains in the section between Guangzhou South Station (Foshan West Station) and Yangjiang and the new operation of 10 pairs of cross-network long-distance EMU trains since April 1, 2021, which has increased the revenue of passenger transportation.
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The following table sets forth our revenue from passenger transportation and the number of passengers for 2020 and 2021: