July rail passenger growth slowed, but Daqin Railway and Beijing-Shanghai HSR remain UBS preferred picks

Overview

This report is UBS's monthly tracking of the China railway sector, focusing on July rail passenger and high-speed rail service volumes, Beijing-Shanghai HSR fares and sell-out rates, Daqin Line freight performance, and its preference views on Daqin Railway and Beijing-Shanghai HSR. The report shows that rail passenger service growth slowed from June in July, while Beijing-Shanghai HSR fares and sell-out rates came under short-term pressure, although Daqin Line freight continued to grow strongly.

Core views

The core views are: first, national railway and high-speed rail services continued to grow in July MTD, but at a slower pace than in June; second, Beijing-Shanghai HSR's second-class sell-out rate and first- and second-class fares weakened due to the late start of the summer travel season and typhoon impacts, although its share relative to airlines has recently increased; third, Daqin Line freight growth continued to lead, and second-quarter results are expected to rebound; fourth, UBS remains positive on Daqin Railway's dividend appeal and the long-term earnings leverage from market-oriented fare reforms at Beijing-Shanghai HSR.

Analysis framework

The report primarily uses the UBS Evidence Lab China Railway Traffic Monitor to track national railway, high-speed rail, major G-train service volumes, Beijing-Shanghai HSR fares, sell-out rates, and changes in high-speed rail's share relative to airlines, combined with official or industry-standard passenger and freight volume data and company earnings estimates.

Methodology notes

• alternative data trackingUBS Evidence Lab China Railway Traffic Monitor

  Observes changes in passenger demand through high-frequency indicators such as railway and high-speed rail service volumes, major-route G-train services, fares, and sell-out rates.

  This method is used to identify trends including the slowdown in July rail passenger growth, weakening Beijing-Shanghai HSR fares and sell-out rates, and high-speed rail's rising share relative to airlines.

• valuation methodologyDCF

  The Beijing-Shanghai HSR target price is based on the DCF methodology.

  The report states that Beijing-Shanghai HSR is valued on a DCF basis, with key variables including passenger traffic recovery, realization of fare increases, and injections of high-quality railway assets.

• valuation methodologyDividend yield methodology

  The Daqin Railway target price is based on the dividend yield methodology.

  The report emphasizes that a rebound in Daqin Railway's earnings and improved free cash flow could support 2026-28E dividends, and notes a 2027E dividend yield of 5.3%.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Daqin Railway

  UBS preferred rail freight name on which it reiterated a Buy view.

  Strengths

  Daqin Line freight volume remained strong, with Q226 freight volume up 11% year over year; UBS estimates Q226 net profit at approximately Rmb1.9bn, up 25% year over year, and a 2027E dividend yield of 5.3%.

  Weaknesses

  The business is sensitive to coal demand and freight conditions on specific routes.

  Comparison

  Compared with high-speed rail passenger names, Daqin Railway's current investment thesis depends more on freight volume, margins, and dividend delivery.

  Risks

  Weaker-than-expected coal consumption, competing routes constructed by the government, the pace of convertible bond conversion, and changes in carbon-neutrality plans.

• Beijing-Shanghai HSR

  UBS preferred high-speed rail passenger name on which it reiterated a Buy view.

  Strengths

  Market-oriented reforms and fare adjustments for popular services could unlock long-term earnings potential, while high-speed rail's market share relative to airlines has recently increased.

  Weaknesses

  The second-class sell-out rate fell 15 percentage points year over year in the short term, while first- and second-class fares both declined 1% MTD.

  Comparison

  Compared with Daqin Railway, Beijing-Shanghai HSR is more driven by passenger demand recovery, fare reform, and asset injections.

  Risks

  Slower-than-expected passenger traffic recovery at Beijing-Shanghai HSR, slower-than-expected ramp-up at Beijing-Fuzhou Anhui, and less-than-expected realization of fare increases.

• China railway sector

  The industry theme covered by the report.

  Strengths

  National railway and high-speed rail services continued to grow year over year, with some routes, such as Guangzhou-Shenzhen G-train services, growing rapidly.

  Weaknesses

  July MTD passenger service growth was below June's level, while June freight volume was broadly flat year over year.

  Comparison

  Passenger growth slowed but remains subject to market-oriented reform catalysts, while Daqin Line freight significantly outperformed the national railway freight sector overall.

  Risks

  High dependence on China Railway, lower-than-expected government spending, slower-than-expected overseas growth, lower-than-expected passenger traffic growth, substantial increases in raw material prices, and rapid RMB appreciation.

Key data

• June China railway passenger volumeup 2% year over yearBroadly in line with the growth rate in May.
• July MTD average daily national railway/high-speed rail services+4%/+6%Below June's +6%/+7%.
• Guangzhou-Shenzhen G-train service volumeup 11% year over yearAmong the stronger-performing major routes.
• Shanghai-Xi'an G-train service volumedown 1% year over yearAmong the weaker-performing major routes.
• Beijing-Shanghai and Beijing-Xi'an G-train service volumesflat year over yearNo growth in July MTD.
• Beijing-Shanghai Line technology-enhanced Fuxing train service volumeup 1% MTDBelow June's 3% year-over-year growth.
• Beijing-Shanghai HSR second-class sell-out rateaverage down 15 percentage points year over year over the past three weeksThe report attributes this to the late start of the summer travel season and typhoon impacts.
• Beijing-Shanghai G-train first-/second-class faresboth down 1% MTDBusiness-class fares were flat MTD.
• June China railway freight volumebroadly flat year over yearUp 4% year over year in May.
• June Daqin Line freight volumeup 14% year over yearUp 18% year over year in May.
• Q226 Daqin Line freight volumeup 11% year over yearAbove market expectations.
• Daqin Railway Q226 estimated net profitapproximately Rmb1.9bn, up 25% year over yearUBS believes margins improved.
• Daqin Railway 2027E dividend yield5.3%UBS considers it attractive.

Impact & implications

In the near term, rail passenger and Beijing-Shanghai HSR fare data indicate relatively weak demand momentum, which could weigh on market expectations for the pace of high-speed rail passenger recovery. However, if summer demand normalizes and actual fare adjustments for popular services are implemented, Beijing-Shanghai HSR could still realize earnings leverage. On the freight side, strong Daqin Line growth and margin improvement reinforce the earnings rebound and dividend thesis for Daqin Railway.

Risks

• The China railway sector has relatively high dependence on China Railway.
• Government spending may be lower than expected.
• Overseas growth may be lower than expected.
• Passenger traffic growth may be lower than expected.
• Substantial increases in raw material prices may compress earnings.
• Rapid RMB appreciation may have an adverse impact.
• Passenger traffic recovery at Beijing-Shanghai HSR or the ramp-up of Beijing-Fuzhou Anhui may be slower than expected.
• Daqin Railway may face weaker-than-expected coal consumption and risks from the construction of competing routes.

What to watch

• Whether actual fare adjustments for popular services are implemented.
• Whether the Beijing-Shanghai HSR second-class sell-out rate can recover after summer demand is released.
• Changes in high-speed rail's share relative to airlines on the Beijing-Shanghai route.
• Whether Daqin Line freight volume can sustain high growth.
• Delivery of Daqin Railway's 2026-28E free cash flow and dividends.
• Whether rail passenger service growth reaccelerates in August and subsequent months.