Merger madness: Midas at risk with CNR and CSR fusion

Competition will possibly intensify.

China’s two largest licensed train manufacturers, CSR Corp (CSR) and CNR Corp (CNR), formed CRRC on 30 Dec 2014, hoping to increase their competitiveness in the global railway market while eliminating bidding competition between them.

According to a report by OCBC, the merger looks positive for Midas, but it is still too early to determine how CRRC may allocate contracts to their existing suppliers.

Between CSR and CNR, the latter has always been Midas’ main customer. While the merger may bring in more international contracts for CRRC, OCBC expects the impact on Midas to be more mixed than positive:

1) post-merger, CRRC is likely to win more overseas railway contracts, which could benefit Midas, assuming contracts for train car bodies flow down to Midas,

2) however, CRRC will also have higher bargaining power over suppliers, as it becomes the giant in the domestic railway market, which increases its ability to squeeze the margins of Midas,

3) another perspective is that when merged, CRRC will be able to save costs by eliminating overlapping expenses such as those on R&D, reducing need to pressure its suppliers, and lastly,

4) while Midas may have higher possibility of winning more contracts from CSR when CSR’s businesses are carried over into CRRC, it will also face intense competition from CSR’s existing suppliers.