Growth That Can’t Be Contained

09/17/2008 12:00 am EST

Focus: GLOBAL

Yiannis Mostrous

Editor, The Capitalist Times

Infrastructure remains compelling, says Yiannis Mostrous, editor of Silk Road Investor.

China is the dominant player in the ports sector, by far the largest container traffic market in the world. The Chinese government continues to aggressively develop its ports to better handle growing demand for freight traffic. By 2010, China’s Ministry of Communications predicts the capacity of all deepwater berths should reach 4.6 billion tons, a growth rate of 12.8%.

Industry experts estimate that the total cost to upgrade facilities will approach $64 billion; $36 billion [of that] will be spent during the 2008-2010 period. The government’s current plan calls for specialized ports that can handle—apart from containers—coal, oil, liquefied natural gas, and iron ore. To make these ports more efficient, eight coordinated transportation systems are being developed to transport goods, while also accommodating non-trade-related cars and passengers.

On the global stage, the economic slowdown means some recently announced infrastructure projects are on hold. But China’s economy will grow by 8% to 9% this year and next. The government’s commitment to and financial muscle in support of boosting domestic demand as the main engine of China’s economic development means any shock would have to be extremely severe to stop the process.

Dalian Port (Hong Kong: 2880, OTC: DLPTF), my favorite port operator in China, reported a 69.4% increase in net profit for the first half of 2008 on strong growth in crude imports, which have high profitability. And traffic growth and tariff increases boosted revenues and margins at key container terminals.

Operating on the southern tip of Northeast China, Dalian Port is benefiting from the region’s revitalized economy and has become one of the mainland’s biggest oil hubs. The Port of Dalian is one of China’s four strategic oil reserve bases and the largest oil/liquefied chemicals port in Northeast China.

In 2007, the Port handled 3.7 million twenty-foot equivalent units of container boxes and 34.4 million tons of oil. The company is on track for a similar performance this year. Oil contributes 50% of earnings, with revenues growing 20% year over year.

Dalian’s recurrent earnings should continue to grow as oil imports remain strong and its storage capacity expands. The company will open 12 new oil storage tanks by the end of the year and plans to construct more in 2009.

The stock is down since [we] originally recommended it in early summer, but has recovered 20% of that slide since August. Dalian Port remains a Buy at current prices. (It closed at $3.35, HK, Monday—Editor.)

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