CRRC on track to take over Skoda Transportation AS

China Railway Rolling Stock Corp (CRRC), the country’s largest railway vehicle and equipment manufacturer, is in takeover talks with Czech Republic’s Skoda Transportation AS, a move to further increase its market share in Europe’s railway markets.

CRRC in a statement addressed to the Hong Kong Stock Exchange said that it was holding talks about the purchase of Plzen-based engineering group Skoda Transportation.

CRRC Zhuzhou Electric Locomotive Co, one of CRRC’s manufacturers mainly producing electric locomotives, is in charge of the talks to buy a 100 percent stake in Skoda Transportation, the Hunan-based company said on Sunday.

The Czech company mainly produces trams, electric locomotives, carriages and electric buses, as well as traction motors or complete drives for traffic systems. If the deal is sealed, this will be the first time the Chinese group has taken over a full-set rail transit equipment manufacturer.

The filing did not disclose the takeover price. The two parties have yet to sign any legally binding transaction document. However, according to estimates, the Chinese company, which is the biggest producer of trains in the world, could payout Kc50Bn.

“If the transaction materialised, it would be one of the biggest sales of an engineering company in the Czech Republic,” the Chinese media said. According to an information, Skoda Transportation’s owners are nine individuals. This move will further extend CRRC’s presence in European markets.

In the statement for the stock exchange, the Chinese say that they are interested in Skoda Transportation with its subsidiaries. No legally binding purchase documents have been signed. CRRC’s shares grew by 2 percent on the announcement.

Its trains are to appear also in the Czech Republic in two to three years, Czech private rail operator Leo Express has ordered three trains from CRRC.

Group Skoda Transportation is the biggest producer of railway vehicles in Central and Eastern Europe. Its sales reached a record Kc18.3bn last year and were 11 percent higher than in 2014. Net profit was worth Kc588m in 2015. The Czech engineering group exported 54 percent of production.

“CRRC is shifting its focus to overseas expansion. Acquiring local companies is a more convenient method for CRRC to gain more access to Europe, compared with building the market by itself,” said Cheng Hui, a researcher at the Institute of Transportation Research at the National Development and Reform Commission.

The sales revenue of Skoda Transportation reached 677 million euros ($721.3 million) in 2015, while its net income amounted to 22 million euros. The company has more than 5,000 employees.

Industry data show there is huge potential for the global rail transportation industry from a long-term perspective.

The global railway market is now valued at 162 billion euros, of which CRRC accounts for 15 percent, according to data from SCI Verkehr, an independent consultancy company for the transportation sector. The capacity is projected to exceed 190 billion euros in 2018, with an annual growth rate of 3.4 percent.

The deal is seen as CRRC’s latest effort to expand overseas. Prior to that, CRRC’s subsidiaries including CRRC Zhuzhou Electric Locomotive, Zhuzhou CRRC Times Electric Co and CRRC Sifang Co invested 3 billion yuan ($434.4 million) to acquire European technologies and manufacturing parts suppliers including the United Kingdom-based Dynex and Germany’s Boge Elastmetall GmbH.

Zhao Mingde, director of CRRC’s strategy and planning department, said CRRC will turn into a multinational company. As it expands abroad, the company aims to manufacture in key markets, purchase local materials and utilize local manpower.