It has been learned from the "intelligent finance and economics" APP that CITIC Securities has released a research report stating that the explanation of the "Decision of the Central Committee of the Communist Party of China on Further Comprehensive Deepening Reform and Advancing Modernization with Chinese Characteristics" proposes "promoting the independent operation of natural monopoly links in the energy, railway, telecommunications, water conservancy, public utilities and other industries and the market-oriented reform of competitive links to improve the regulatory system and mechanism." The main body of the "independent operation of natural monopoly link" is the national railway network infrastructure, and the "market-oriented reform of competitive links" could promote high-quality development by deeply integrating social capital and operating entities, effectively reducing logistics costs through adjusting transport structures, and enhancing the profit levels of railway operation enterprises. Achieving localized effective competition and overall competitiveness is the direction, and reform is expected to improve the sector's valuation.

Event: The explanation of the "Decision of the Central Committee of the Communist Party of China on Further Comprehensive Deepening Reform and Advancing Modernization with Chinese Characteristics" mentions railway system reform in multiple places, including "promoting the independent operation of natural monopoly links in the energy, railway, telecommunications, water conservancy, public utilities and other industries and the market-oriented reform of competitive links to improve the regulatory system and mechanism."; "promoting price reforms in water, energy, transportation and other fields"; "deepening the reform of comprehensive transportation system, promoting the railway system reform, developing general aviation and low-altitude economy, and promoting the optimization of toll-road policies."

The opinion of Citic Securities is as follows:

The main body of the "independent operation of natural monopoly link" is the national railway network infrastructure, and the construction of a modern infrastructure system is still ongoing.

By the end of 2023, the national railway operating mileage will reach 0.159 million kilometers, of which the operating mileage of high-speed rail is 0.045 million kilometers, and China's high-speed rail operating mileage may account for nearly 70% of the world's, the railway projects among the 102 major projects determined in the "14th Five-Year Plan" are orderly pushed forward, focusing on "laying foundations, benefiting the long-term, and making up for shortcomings, adjusting structure." The bank thinks that the main body of the natural monopoly link's independent operation may be the railway network infrastructure, as a network-type infrastructure industry, railway transportation features public welfare, monopoly, foundation, and obvious external economic effects. At present, China's railway network is still in the construction period, and the regulatory department may maintain control over key areas such as the railway network in the future. In March 2019, the government work report first proposed natural monopoly industries such as railways, and implemented net operation separation based on their characteristics, comprehensively promoting competitive businesses to the market.

The market-oriented promotion of competitive links could promote high-quality development by deeply integrating social capital and operating entities, effectively reducing logistics costs through adjusting transport structures, and enhancing the profit-making ability of operating enterprises.

By 2023, China Railway Group's net profit margin is only 0.27%, and there has been a long-standing problem of weak railway operation capabilities. The market-oriented reform of competitive links is expected to raise the profit-making ability of operating companies. The bank believes that the "market-oriented reform of competitive links" or reflecting the opening up of competitive businesses apart from public welfare roles to promote the diversification and moderate competition of market subjects of railway transportation businesses, is mainly concentrated in high-speed rail passenger transport and railway freight transport. For example, railway freight transportation accelerates its transformation towards modern logistics supply chains, and deeply integrates with social capital and operating entities to promote high-quality development. At the same time, the market-oriented level of the price system of high-speed rail passenger transport and railway freight transport continues to improve, effectively enhancing the service experience and using price means to improve the level of water-railway and road-railway intermodal transportation, to reduce the overall social logistics costs, and the bottleneck of social capital investment in railways is expected to be lifted.

With reference to the railway reform in the United States, market-based pricing and effective competition may be the key.

Benchmarking the railway reform process of the United States and Japan, network operation separation, and regional companies dominated by trunk lines may be the direction of China's railway restructuring, achieving localized effective competition and overall competitiveness. In the future, public welfare services such as passenger transport may be subsidized by the government, while competitive businesses such as high-speed rail and freight transport are expected to be promoted to the market. In 1970, the railway system in the United States was on the verge of bankruptcy. A series of reform measures such as the Staggers Act, the separation of passenger transport government subsidies, the merger and joint operation of railway enterprises, and the relaxation of regulation to allow contract rates were implemented. Currently, seven Class I railway freight companies and one Amtrak passenger company have basically formed an operating model of combining cargo with passenger trains, and the reform has revitalized railway freight transport. From 1980 to 2016, the transportation efficiency index increased by 2.6 times, and the operating income of Class I railways increased by 213% from 28.7 billion USD in 1980 to 61.2 billion USD in 2008. Market-based pricing and effective competition are the key to revitalizing railways.

The domestic policy top-level design, the reform of the railroad system is expected to accelerate, and the marketization of competitive links is expected to enhance the profit-making ability of railroad operation companies.

Railway freight prices are leading the marketization of passenger transportation. On October 23, 2020, Beijing-Shanghai high-speed railway announced the proposal of optimizing and adjusting ticket prices, firing the first shot of market-oriented high-speed railway ticket prices. At present, there are seven levels of ticket prices for Beijing-Shanghai high-speed railway, solving the problems of demand imbalance and supply-demand contradictions, realizing product structure differentiation and high-quality and low-price. Starting from May 30, 2023, the optimized and adjusted ticket prices of 300 kilometers and above EMUs running on the Shanghai-Nanjing intercity and the Ningbo-Hangzhou high-speed railway will be announced, and the market-oriented scope of high-speed railway ticket prices will continue to expand. Under the background of top-level design, the Bank expects that the railway system reform is expected to accelerate, and the marketization of competitive links is expected to improve the profitability of railway operating companies.

Risk factors: Railway reform is not as expected, structural changes in high-speed railway demand exceed expectations, and demand for commodity is lower than expected.