Value Analysis of the Road Transport Industry — This Article Is All You Need

Figure: Industrial Chain of the Transportation Sector As of the end of 2019, China’s national railway operating mileage reached 139,000 kilometers, an increase of 8,000 kilometers year-on-year; high-speed railway operating mileage increased by 6,000 kilometers. The total length of national highways reached 5,012,500 kilometers, up by 166,000 kilometers year-on-year, including an increase of 7,000 kilometers in expressway mileage. Three new civil aviation transport airports and four new cities with scheduled air services were added. Upgrades to the general trunk road network accelerated: by end-2019, the railway double-track rate and electrification rate rose by 1.0 and 1.9 percentage points year-on-year, respectively; the mileage of grade-II and above highways increased by 24,000 kilometers year-on-year; the proportion of high-grade pavement on national and provincial trunk roads reached 87.0%. Mileage of grade-III and higher inland waterways increased by 357 kilometers, and the number of coastal port berths capable of handling vessels of 10,000 tons or more rose by 69. The basic service network continued expanding: rural road mileage reached 4,200,500 kilometers by end-2019, up by 160,800 kilometers year-on-year—including increases of 31,000 km, 24,000 km, and 106,000 km for county-level, township-level, and village-level roads, respectively. In 2019, commercial passenger volume totaled 17.604 billion person-trips; passenger turnover reached 3.534906 trillion person-kilometers; commercial freight volume totaled 4.6224 billion metric tons; freight turnover reached 19.404456 trillion ton-kilometers. Railways carried 3.66 billion passengers (up 8.4% year-on-year) and achieved passenger turnover of 1.470664 trillion person-kilometers (up 4.0%). Total railway freight volume reached 4.389 billion metric tons (up 7.2%), with freight turnover at 3.018195 trillion ton-kilometers (up 4.3%). Commercial highway passenger volume totaled 13.012 billion person-trips (down 4.8%), with passenger turnover at 885.708 billion person-kilometers (down 4.6%). Commercial highway freight volume totaled 3.4355 billion metric tons (up 4.2%), with freight turnover at 5.963639 trillion ton-kilometers (up 0.4%). Chapter II: Business Model and Revenue Model 2.1 Railway Transportation Industrial Chain Figure: Railway Freight Industrial Chain China’s railways are primarily divided into passenger and freight segments. Railway freight constitutes the core of railway transportation, accounting for over 90% of total freight turnover. Although railway passenger fares per unit distance are significantly higher than freight rates, passenger revenue accounts for approximately 40% of total railway revenue—making it a major component of railway operations. However, given the public-service nature of much passenger rail service—where most passenger trains operate at a loss or minimal profit—this analysis focuses primarily on railway freight. Among freight categories, coal shipments dominate, comprising over half of total railway freight volume. Thus, railway transportation is predominantly centered on “black cargo” (coal, ores, steel), whose downstream industries include steel and power generation. Notably, substantial national investment in high-speed rail infrastructure in recent years has driven rapid growth in passenger rail share. “White cargo”—non-commodity goods—accounts for a relatively small portion of railway freight. Due to its non-bulk nature, white cargo typically requires consolidation at logistics hubs to maximize transport efficiency; its downstream recipients are generally distribution centers. 2.2 Highway Transportation Industrial Chain Highway transportation offers strong adaptability. Compared with other transport modes, it delivers shorter transit times and faster delivery speeds for both passengers and freight.

APU Research Report: Norfolk Southern Corporation (NSC)—A Southeastern U.S. Railroad Dominator

In 2020, Norfolk Southern Corporation experienced cash flow difficulties: its operating cash flow declined by 43.8% to USD 380 million in the first quarter and by 34.8% to USD 1.34 billion in the first nine months, compared to the same periods last year. Though the company saw a modest recovery from the beginning of the year—driven by urgent capacity restoration—lower pricing offset the gains from increased volume, resulting in no significant overall improvement. Moreover, Norfolk Southern’s decision to raise its share repurchase rate further strained its cash flow. 3.6 Deteriorating Asset-Liability Structure Norfolk Southern’s debt-to-asset ratio has long exceeded the 60% safety threshold. Although the company undertook a major internal restructuring of its asset composition in 2017, this did not reverse the underlying upward trend in its debt-to-asset ratio—which again breached the safety threshold in 2019. A sound debt-to-asset ratio is fundamental to stable corporate operations; thus, Norfolk Southern urgently needs to rebalance its asset structure. Amid the ongoing pandemic, its financial condition has deteriorated further, and management has acknowledged this issue. 04 Risk Factors 4.1 Industry Risk Economic conditions significantly impact the railway transportation sector. Global or domestic economic downturns reduce both producer and consumer activity, severely affecting corporate performance. As a real-economy enterprise focused exclusively on railway transportation, the emergence of the pandemic dealt a devastating blow to Norfolk Southern—not only harming broader socioeconomic conditions but also reducing customer numbers and disrupting supply chain operations, pushing the company’s financial position into deficit. Additionally, facing survival pressures, Norfolk Southern implemented layoffs during the pandemic—a move that damaged its social reputation—posing further latent risks to future development. 4.2 Governmental and Regulatory Constraints Beyond standard U.S. federal laws and regulations, Norfolk Southern’s rail operations are subject to additional oversight by the U.S. Surface Transportation Board (STB). The STB imposes extra costs on Norfolk Southern’s daily operations—including non-essential expenditures such as fuel—and levies substantial taxes. Approximately 90% of Norfolk Southern’s revenue derives from tax-exempt freight shipments or freight transported under contractual agreements; only a tiny fraction comes from shipments subject to publicly set tariff rates—demonstrating the profound regulatory influence on its business. 4.3 Uncertainty in Oil Prices Increases Operational Risk Oil expenses constitute Norfolk Southern’s largest cost item; petroleum consumption is also essential for railway operations and many non-core activities. Volatility in environmental factors has weakened global oil demand, yet macroeconomic policy interventions and OPEC production adjustments have caused sharp fluctuations in international oil prices. Determining the optimal timing and price for oil procurement will be a critical strategic question for Norfolk Southern in 2020. 05 Investment Recommendation Since its IPO, Norfolk Southern’s stock price has surged from an initial USD 11.94 to a peak of USD 248.12—delivering an investment return exceeding 20-fold.

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Norfolk Southern executives warned that rising fuel prices will negatively impact Q3 operating ratios, creating a 250-basis-point headwind, though the company continues to gain freight share and advance its merger review with Union Pacific.

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Norfolk Southern Sees Fuel Prices Weighing on Third Quarter Despite Freight Share Gains

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