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These Are The Companies Profiting From China’s Belt And Road Initiative

Last updated on April 20th, 2018 at 03:54 am

China’s Belt and Road Initiative (BRI) also known as the One Belt and One Road Initiative (OBOR), is an ambitious, trillion-dollar infrastructure project that aims to connect countries along two primary trade routes known as the “Silk Road Economic Belt” and the “Maritime Silk Road” in an effort to enhance connectivity, investment, international trade, and economic development.

The “Silk Road Economic Belt” represents the land-based route, and is named after the ancient trading route known as “Silk Road” which went through China, Central Asia, West Asia, the Middle East and Europe. The “Maritime Silk Road” represents the sea route which, like the original maritime trade route, linked Chinese ports with ports located in Southeast Asia, the Indian subcontinent, the Mediterranean, Europe and Africa.

"One Belt, One Road" map showing the Silk Road Economic Belt and the Maritime Silk Road under China's One Belt, One Road (aka Belt and Road) Initiative.

By various measures, BRI is one of the largest infrastructure and investment projects in history. About 70 countries representing about two-thirds of the world’s population and accounting for about one-third of the global economy are participating in Belt and Road projects. Under the initiative, some US$ 900 billion worth of projects are currently either under way or in detailed planning stages according to data from China Development Bank.

While some projects have encountered roadblocks and delays, numerous others are ongoing. Ongoing projects under the initiative include the Eurasian Railway Program (an 81,000 km railway linking China with Europe), the Colombo Port City (CPC) development project in Sri Lanka, the Khorgos Gateway project in Kazakhstan (a railway linking China with Kazakhstan), the Hungary-Serbia high speed railway (a 350km railway line from Budapest to Belgrade), the Gwadar deep sea port project in Pakistan, the China-Laos Railway (a 414km railway linking Laos with China), the Karot Hydropwer project in Pakistan, the Sino-Oman Industrial City in Oman’s port of Duqm, the Malaysia-China Kuantan Industrial Park in Malaysia, the Kohala hydropower project in Pakistan, the Melaka Gateway in Malaysia, the Yanbu Refinery in Saudi Arabia, and the Kunming-Singapore High Speed Railway (a 3,000 km railway line connecting China to Southeast Asia) to name a few.

Projects under the BRI initiative fall into one of six economic corridors, namely:

  1. The China-Indochina Peninsula Economic Corridor (CICPEC)
  2. The China-Mongolia-Russia Economic Corridor (CMREC)
  3. The New Eurasian Land Bridge (NELB)
  4. The China-Central Asia-West Asia Economic Corridor (CCWAEC)
  5. The China-Pakistan Economic Corridor (CPEC)
  6. The Bangladesh-China-India-Myanmar Economic Corridor (BCIM)

BRI projects that have been successfully completed include the Ethiopia-Djibouti High Speed Rail Link (a 752km railway linking Ethiopia’s capital to the Port of Djibouti), the Amsterdam-Yiwu railway (an 11,000km railway linking  Amsterdam in Netherlands with  Yiwu in China’s Zhejiang province), the Baku-Tbilisi-Kars Railway (an 846km railway linking Baku in Azerbaijan, Tbilisi in Georgia and Kars in Turkey), the Nairobi-Mombasa railway (a US$ 3 billion railway project linking Kenya’s capital Nairobi,  with Kenya’s port city of Mombasa), and the Rudbar Lorestan hydropower station in Iran to name a few.

The initiative is expected to unlock substantial commercial opportunities in the decades to come. With the initiative already having a positive impact on the bottom lines of some companies, many other companies around the world are keen to participate and are positioning themselves for a share of the pie.

 

Caterpillar (NYSE:CAT)

American heavy-machinery manufacturer Caterpillar which has been investing heavily in China the world’s largest construction and mining equipment market in the world, expects strong sales growth in 2018 boosted by robust business from China’s Belt and Road Initiative. The company said Asia-Pacific sales grew 22% in the fourth quarter of 2017, with half of the increase coming from China alone where contractors buy much of the machinery for BRI projects to take advantage of the initiative’s tax rebates and export them to the relevant countries where the BRI project is being carried out.

The company has also been flexing its finance arm to boost sales, lending to Chinese companies including state-owned enterprises.

Caterpillar is involved in BRI projects in 20 countries such as Kazakhstan, Sri Lanka, and Pakistan supplying heavy machinery such as drills, excavators, and hydraulic mining shovels for BRI projects such as roads, ports, mines, and oil fields.

Although Chinese rivals such as Sany Heavy Industries (SHA:600031) and Zoomlion Heavy Industry Sci & Tch Co Ltd (SHE:000157) dominate the local market and are expanding their international presence, Caterpillar’s advanced technology, superior reputation for quality and reliability, and extensive global dealer network in over 180 countries, (compared with Caterpillar’s key rival Sany Heavy Industries which has dealers in 100 countries) are solid competitive advantages that have put the company in a better position to capture orders for BRI-related projects. Caterpillar’s wider international dealership network is particularly advantageous considering the fact that while both companies maintain active dealerships in developed markets such as the United States and Europe, Caterpillar has a relatively wider footprint in developing markets where much of the Belt and Road projects are being carried out.

For instance, thanks to Caterpillar’s strong brand name and its active, experienced dealer network in Sri Lanka (unlike Sany Heavy Industries which is relatively unknown and has a relatively limited presence in the country), Caterpillar captured a number of equipment orders for the Colombo Port development project in Sri Lanka which required machinery such as hydraulic excavators.

 

COSCO Group (SHA:601919) (HKG:1919)

 Chinese shipping giant COSCO has been riding on China’s Belt and Road Initiative to aggressively expand and strengthen its global presence helped by a supportive government and access to low-interest loans which enable the company to make more aggressive bids for port assets compared to competitors; loans from Chinese state banks to fund BRI-related initiatives are as low as 2.5%.

In 2017, COSCO acquired APM Terminals Zeebrugge in Belgium, and acquired a 51% equity interest in Spanish port company Noatum Port Holdings which operates terminals at ports such as the Valencia port and railroad terminals in Madrid.

In 2016, the company acquired a 51% stake in Piraeus Port, which is the largest port in Greece, and has launched of a number of projects to upgrade the port to help make it a transshipment hub for expanding trade between Asia and Eastern Europe.

COSCO has signed a 35-year concession agreement with Abu Dhabi Ports (which operates Khalifa Port) that sees COSCO building and operating a new container terminal at Khalifa Port in Abu Dhabi, in an ambitious plan that aims to almost double the container handling capacity at Khalifa Port over the next several years by adding 2.4 million TEUs to  the existing 2.5 million TEUs.

COSCO acquired a stake in the Khorgos Gateway in Kazakhstan, an ambitious BRI project that aims to develop the biggest dry port in the world. The project, which Chinese president Xi Jinping called “the project of the century” connects Kazakhstan to China by rail.

Kazakhstan, the world’s largest landlocked country, sits right in the middle of China’s Silk Road Economic Belt. The country’s strategic location makes it a key link in transport routes between markets in Asia and Europe. Overland freight routes pass through Kazakhstan from all directions and with trade expected to grow along the Belt and Road, freight volumes are expected to accelerate in the decades to come making the China-led transportation projects significantly important to landlocked Kazakhstan and other countries in Central Asia such as Azerbaijan.

Volumes of rail freight moving between China and Europe are on the rise; during 2013 and 2016, rail freight volumes grew more than three-fold in just two years to over 300,000 tons in 2016 according to data from aviation consulting firm Seabury Consulting (owned by Accenture).

Bar chart showing China-Europe rail freight volumes ('000 tons) in 2013 and 2016. - LD Investments

China-Europe rail freight volumes registered a CAGR of 65% between 2013 and 2016, far surpassing growth rates in other trade types.

Bar chart showing CAGR of ocean trade, air trade, international express, parcels by mail and the China-Europe rail pre financial crisis and post crisis - LD Investments

Yet, much of China-Europe cargo is still carried by sea and to a lesser extent by air; more than 90% of trade between China and Europe occurs via ocean, while rail accounts for less than 5% of goods moved between China and Europe (most of which is carried through the Trans-Siberian railway).  However, rail is considerably cheaper than air and faster than sea and rail is particularly competitive to transport goods between points located deep inland.

Thus, there is a case for rail freight transport as Chinese manufacturing bases relocate from coastal areas where wages and realty prices are rising, to areas further inland where wages and property prices are more competitive.

China-EU transit volumes transported via Kazakhstan amounted to just about 32,000 TEU in 2015, which is just about 1% of total China-EU container traffic according to data from The Brookings Institution. However, driven by the relocation of manufacturing bases in Western China, and greater trade among Belt and Road countries, there is potential for Kazakhstan to increase the volume of transit container traffic to 240,000 TEU by 2030.

Thus, COSCO is well positioned to profit from expanding trade among Belt and Road countries. According to its 2017 annual results, 62% of the company’s total container shipping capacity was deployed along Belt and Road routes, comprising 180 container vessels with a total capacity of 1.15 million TEU.

 

China Merchants Port Holdings (HKG:0144)

China’s leading port operator China Merchants Port Holdings (CMPort) is actively involved in China’s Belt and Road initiative which has helped the state-owned conglomerate expand its international presence.

At the end of 2017, the company owns 31 ports in across 16 countries and five continents and the number is likely to grow in the coming years as the company aggressively snaps up terminals worldwide, helped by an encouraging regulatory environment for BRI-related projects and easy access to cheap BRI-financing from state banks (typically funding comes as a loan from the state-owned Export Import Bank of China, which usually have long maturity periods of about 20 years, and low interest rates of about 2%).

The company built and owns a stake in the new Doraleh Multipurpose Port, a US$ 600 million “flagship” project in Djibouti which recently began operations.

The company participated in upgrading the port facilities and the planning and construction of the Djibouti Free Trade Zone.

CMPort owns and operates the Colombo International Container Terminal (CICT) which saw an 18.5% YoY increase in container throughput to 2.39 million TEUs last year, making it one of CMPort’s top performing overseas port facilities in terms of volume growth last year. The boost helped CMPort handle a total container throughput of 102.9 million TEU in 2017 surpassing the 100 million TEU container throughput milestone for the first time.

As of 2017, Colombo was ranked among the top 30 busiest ports in the world in terms of container traffic. Colombo sits at the heart of China’s 21st Century Maritime Silk Road making it a strategically important location on the East-West shipping route.  As trade grows between China and other BRI countries, Colombo is poised to capture some of the increase in container traffic.

CMPort has also acquired an 85% stake in Sri Lanka’s Hambantota International Port Group Ltd which is involved in the Hambantota port development project in Sri Lanka.

Hambantota, located about 200km south of Colombo, holds immense potential to develop into a top container port in its own right. Hambantota’s strategic location coupled with its owner China Merchants Port Holdings’ global clout and commercial relationships with its network of Chinese shippers could help Hambantota emerge as a major port.

In the longer term, CMPort is poised to profit as container throughput grows along with growing trade among Belt and Road countries. The total value of China’s imports and exports to Belt and Road countries reached 7.37 trillion yuan (about US$ 1.14 trillion), a 17.8% increase YoY in 2017 according to Huang Songping, spokesperson for the General Administration of Customs. The value of imports and exports to Belt and Road countries accounted for 26.5% of China’s total imports and exports in 2017.

 

Alibaba (NYSE:BABA)

China’s new Silk Road is going digital and China’s largest e-commerce platform, Alibaba, is positioning itself to profit from the anticipated increase in trade among Belt and Road countries in the decades to come.

Alibaba’s finance affiliate Ant Financial which owns China’s most popular mobile payment app, Alipay, has been expanding its global reach by rolling out the payment app in countries along the Belt and Road such as Malaysia, Indonesia, Pakistan, Cambodia, Laos, Myanmar, and Vietnam. Ant Financial has also signed a partnership with London-based Standard Chartered Bank to collaborate on enhancing financial inclusion in Belt and Road countries.

Alibaba is also positioning itself as the platform of choice for SMEs in Belt and Road countries looking to capitalize on cross-border trade opportunities as a result of greater trade connectivity the BRI initiative is expected to bring.

Alibaba is leading the charge, together with the Malaysia Digital Economy Cooperation (MDEC) to develop a ‘Digital Free Trade Zone’ in Malaysia, a BRI-project expected to facilitate trade between Chinese and Southeast Asian SMEs. The effort includes a regional e-commerce and logistics “hub” near the Kuala Lumpur International Airport and an electronic World Trade Platform (eWTP) which offers Malaysian SMEs the necessary infrastructure for cross border ecommerce such as order fulfillment, logistics, and centralized customs clearance services. Already more than 1,900 Malaysian businesses have signed up to use the eWTP hub. The e-commerce and logistics “hub”, which is expected to be developed by the end of 2019, will be jointly developed by Malaysia Airports Holdings Berhad (KLSE:AIRPORT) and Cainiao Network (Alibaba’s logistics arm).