Published:
December 22, 2008
This company is one that stands to
profit from
China's recently announced economic stimulus package.
Guangshen Railway
(NYSE: GSH, $19.23) offers passenger and freight
railway services in southern China, with passenger-related
revenues accounting for about 80% of its total. The company's
service territory covers an area of about 500 kilometers (300
miles), mainly in an area of southern China known as the Pearl
River Delta.
Catalyst(s): The main catalyst for GSH is the
fast-growing economy in its core area of operations, covering
the cities of Guangzhou and Shenzhen, as well as Hong Kong. The
Pearl River Delta is one of the most prosperous and fastest-growing
regions in China, which spells rising demand for passenger and
freight traffic.
GSH is capitalizing on the growth in its core area of operations
by expanding services. For example, the company has added
parallel lines to its existing railroads allowing it to increase
traffic capacity and increase the speed of its trains. Some of
the company's passenger trains now run at 200 kilometers per
hour (125 miles per hour), among the fastest trains operating
anywhere in China.
The result of track and train upgrades is that GSH is now
capable of offering train services as frequently as every 10
minutes along key routes on its network.
In addition to economic growth, my staff and I see the recent
Chinese stimulus package as a major catalyst for Guangshen. One of the
10 announced priorities of the package was railroad
infrastructure; some analysts believe that railways could be the
focus of as much as $100 billion of the $586 billion package.
This may involve the Chinese government actually offering
assistance to GSH in building new lines of track or opening up
new service territories. Such an expansion would allow further
expansion of traffic volumes across GSH's network; more traffic
spells higher fares for the company.
Competitive Advantages: There are two potential
sources of competition for GSH: other rail carriers and other
modes of transport, such as roads.
My staff and I see the first as of only minor concern. The
Chinese railroad industry is heavily regulated by the
government, both in terms of competition and rates charged. It's
unlikely the government would allow another firm to compete
directly with GSH on its routes. And to date the government has
allowed GSH to expand its fares to allow it to reinvest in
network improvements.
Road and air transport are potential competitors. But railways
are the most fuel-efficient mode of transport. And road and air
travel are more severely impacted by traffic than train travel.
In the end, trains are a remarkably efficient means of moving
passengers and freight. While road and air links in GSH's region
will see increases in volumes, rail offers many advantages and
its unlikely to see much of an erosion in growth.
Valuation and Outlook: GSH trades at 12 times
forward earnings and has a long term growth rate of +16%. The
stock is trading at a sizeable discount to its long-term growth
rate. And despite the recent slowdown in the Chinese economy,
it's likely the Pearl River Delta region will remain an economic
hub; it'll be among the first to see a recovery from the
slowdown.
GSH
benefits from strong growth potential in its core region of
operations coupled with a massive government stimulus package
aimed at railroads. GSH looks like a solid "Buy" candidate under
$25.
Paul Tracy
Editor
StreetAuthority
Market Advisor
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