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Politics

Chinese state builder goes global with Belt and Road projects

New regulations imposed to slow public-private partnerships at home

Malaysian Prime Minister Najib Razak and Transport Minister Liow Tiong Lai look at a model of the East Coast Rail Line at Kuantan Bahang, Malaysia on Aug. 9.   © Reuters

HONG KONG -- China Communications Construction is counting on President Xi Jinping's Belt and Road Initiative to accelerate its global expansion amid tightening regulations at home.

In early August, the state-owned rail and road builder commenced an $11 billion project to build a 688km railway in Malaysia's east coast, one of the largest projects by investment scale since the Chinese initiative spanning 65 countries was announced in 2013.

The deal came after the company landed its first project in the European Union last November, and followed nearly two decades of operations in Asia, Africa and the Middle East. Overseas business contributed 22% of its first-half revenue this year.

China Communications Construction Chief Financial Officer Fu Junyuan, right, delivers first-half results on Aug. 30. (Photo by Jennifer Lo)

"We saw a big jump in overseas contracts thanks to the Belt and Road Initiative," said Fu Junyuan, executive director and chief financial officer at China Communications Construction. In 2016 alone, the company signed 100 Belt and Road-related contracts worth $10 billion, bringing the total to $37 billion to date.

"Overseas development will be our focus," Fu told reporters at an earnings briefing on Wednesday, although he stressed that the company would also not neglect to grow its domestic business.

Fu's remarks came after the company said it expected the growth of public-private partnerships to slow at home, as a result of the government's attempt to tighten credit and regulate the PPP sector. "We'll only pick the best of the best projects," said Fu, adding that the company would be more "cautious" in choosing PPP projects moving ahead.

The scaling back was a deviation from the company's bullish outlook for the sector and its pledge to become a dedicated PPP investor last year. Of the 431.2 billion yuan ($65.4 billion) in new contracts it signed in the first six months of 2017, only 9% was channeled to PPP projects. This compared with around 26% for the full year in 2016.

The company also said it would step up to become a city development operator. While stressing real estate is not its sole interest, it is currently involved in the building of industrial parks in the eastern coastal province of Zhejiang and port facilities in Nansha of southern Guangdong province.

Its first-half revenue rose 3.8% to 189.29 billion yuan from a year ago, lifted by a 52% jump in new contracts. Net profit was up 8.7% at 7.87 billion yuan during the period, despite an 8% drop in second-quarter earnings.

Nomura's China industrials analyst Patrick Xu attributed the earnings decline to rising administrative expenses, assets write-downs and finance costs. "We think these are the typical symptoms of excessive investment in PPP projects," he wrote in a note released on Wednesday.

Describing the company's first-half earnings as "disappointing," Xu welcomed its new PPP strategies. "It seems that management has started to slow growth in investment projects [like PPP] and is attempting to shore up the company's cash flow and balance sheet."

State-owned peer China Railway Construction posted a 12% increase in first-half net profit to 6.52 billion yuan, on an 8.3% increase in revenue at 288. 96 billion yuan. The company saw its free cash flow shrink to -42 billion yuan from -24 billion yuan, which Nomura analysts said was driven by its bigger investment in PPP projects.

The Hong Kong-listed shares of China Communications Construction closed 1.7% lower at HK$10.42 on Wednesday, after it posted its results a day earlier. China Railway Construction shares were down 0.6% at HK$10.1, against a 0.7% gain in the Hang Seng China Enterprises Index.

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