China Railway Group’s proposed sale of equity stakes is credit positive

Last Wednesday, China Railway Group Limited (CRG, A3 stable) announced that it had an agreement with
nine investors to sell equity interests of 23.8%-29.4% in its four subsidiaries for RMB11.6 billion. The
company plans to use the proceeds primarily to pay down debt and expects to complete the transaction by
the end of this month. The transaction would be credit positive for CRG because it would reduce leverage
and strengthen its balance sheet.

CRG will continue to have majority stakes in the four subsidiaries. After completing the transaction, CRG
will hold a 74.68% equity interest in China Railway Erju Engineering Co., Ltd.; 70.62% in China Railway No.3
Engineering Group Co., Ltd.; 73.02% in China Railway No. 5 Engineering Group Co., Ltd.; and 76.19% in
China Railway No. 8 Engineering Group Co., Ltd. The nine investors will own the remaining stakes of the
four subsidiaries.

Assuming that CRG uses 100% of the proceeds to pay down debt, adjusted debt would fall 6% from
RMB193 billion at year-end 2017, reducing adjusted debt/EBITDA by 0.26x to 4.06x from 4.32x at
year-end 2017.

We expect CRG’s adjusted debt/EBITDA over the next one to two years to remain around 4.3x as of yearend
2017, because the planned equity stake sales and higher earnings will offset sizable investments in real
estate development and public-private partnership projects and capital spending. Higher revenue will drive
improved earnings.

CRG’s revenue will likely grow annually by mid-single digits in 2018-19, underpinned by a strong order
backlog of RMB2.57 trillion at year-end 2017, continued overseas expansion and the likelihood that China’s
solid spending on infrastructure, including urban rail networks and roads, will continue over the next two
years. We expect CRG to maintain an adjusted EBITDA margin over the next two years of about 6.5%,
which it was in 2017, given its extended service offerings and continued cost and expense controls.