November 05th, 2008 | Caijing Magazine Nigeria Puts Brakes on China Rail Contract
The suspension of an US$ 8 billion Nigerian railway project may highlight emerging risks to Chinese companies overseas.
By intern reporter Xiao Huan and staff reporter Zhou Lingling
China’s top railway builder, China Railway Construction Corp. (CRCC), has been forced to idle its US$ 8.3 billion project in Nigeria, raising concerns about the state-owned company’s exposure to overseas risks.
CRCC announced November 3 that Nigeria’s Transportation Ministry informed the company about the temporary suspension of its Lagos-Kano railway modernization project, which is aimed at linking the African nation’s north and south. The ministry said it would re-evaluate the contract in about three months.
The news sent CRCC (SSE: 601186) shares plunging 9.23 percent to close at 7.77 yuan the next day on the Shanghai exchange. The company’s shares in Hong Kong likewise fell 18.5 percent to HK$ 7.99, the steepest plunge since its initial public offering in March.
CRCC won the Lagos-Kano project bid in November 2006 through its subsidiary China Civil Engineering Construction Co. The project calls for upgrading 1,315 kilometers of track between coastal Lagos and the northern city Kano. It’s the largest overseas contract ever for a Chinese company.
CRCC did not give a detailed explanation of the Nigerian decision, but a Citic Securities report said a recent change in Nigeria’s leadership led to reviews of the country’s major foreign contracts. The deal had been backed by the Chinese government and former Nigerian president Olusegun Obasanjo, who was replaced by current President Umaru Yar’Adua last year.
CRCC said the company’s top management would accompany government leaders during future discussions with Nigerian officials.
Citic Securities doubts the project will be terminated. However, a China International Capital Co. Ltd. (CICC) report said “overseas projects remain the biggest risk” for the rail builder.
As of September 30, CRCC had 409 billion yuan in outstanding contracts, including 134 billion yuan in overseas contracts. The Nigerian project accounts for almost 14 percent of the monetary value of all CRCC’s outstanding contracts, CICC said.
“On one hand, with economic fluctuation in Nigeria, the government may be unable to afford such a large project,” the report noted. “On the other hand, the Nigerian government may revise contract terms, affecting the scale and profit of the project.”
Although CICC’s report fueled market concerns, a CRCC source told Caijing the company has not lost money on the project. The project is still at an early stage, following a US$ 250 million advance payment by the Nigerian government.
A Citic Securities analyst said the project should have little impact on CRCC’s financial performance over the next two years. “The suspension may affect the company’s short-term overseas revenues, but its impact on total revenues and profits will be limited,” the analyst said.
At the same time, due to the worsening global economy, CICC has warned about emerging risks for Chinese companies with major overseas projects.
For example, the Chinese investment firm Citic Pacific recently reported huge losses tied to its investment in an Australian iron ore project.
“Under the tight capital chain of investors and declining domestic demand for iron ore, the (Citic Pacific) project needs further evaluation,” said CICC.