A Chinese Fixer-Upper

10/13/2010 12:11 pm EST


Yiannis Mostrous

Editor, The Capitalist Times

A damaged pipeline is obscuring Dalian Port’s excellent long-term prospects, writes Yiannis G. Mostrous in The Silk Road Investor.

Without improvements in infrastructure, the ambitious goals to boost domestic demand in emerging markets will be unsustainable. Without upgrading their infrastructure, these countries won’t be able to achieve the savings from reduced costs and a faster production cycle. This is particularly important for Asia, because the region is leading the charge on global economic growth.

Emerging economies are in a race against time to build up their infrastructure, as breakneck urbanization is pressuring existing infrastructure. To understand the extent of this transformation, consider that China has accounted for more than 40% of the world’s total steel use over the past two years.

The majority of stimulus funding in developing economies was allocated to infrastructure projects during the financial crisis, and there’s no reason to expect this spending to stop. Growth in infrastructure spending may slow as governments rein in their stimulus measures. But the overall trend should remain intact. Developing nations are experiencing a strong economic recovery and are in dire need of massive infrastructure upgrades.

Dalian Port (Hong Kong: 2880, OTC: DLPTF) is one of the smaller ports in China. But its location on the southern tip of northeast China has allowed it to benefit from the region’s revitalized economy. The company has subsequently emerged as one of the mainland’s largest oil hubs. Dalian Port is currently one of China’s four strategic oil-reserve bases, as well as the largest oil and liquefied chemicals port in northeast China.

Recently a top executive from the company said that the July explosion at two of the port’s crude oil pipelines will [hurt] the company’s revenues and earnings.

Dalian Port’s chairman Xing Liangzhong said that while [most] of the port’s services have returned to normal, its oil shipments continue to feel the effects of the explosion. Xing noted that oil shipping accounts for about 30% of profits. Transshipping services will remain at a virtual standstill until pipelines are repaired in the first quarter of next year.

But Xing said that overall shipping at the port had returned to 2008 levels after a rough 2009, due largely to government policies aimed at shoring up the domestic economy. With the global economic recovery slowly finding its feet and domestic demand on the rise, he said that overall shipping at Dalian Port should increase by 17% this year, and that the 2011 growth rate could top this figure.

Dalian Port’s first-half net profit grew by 19.9% year-over-year to RMB326.3 million ($48 million), driven by improving operating profits. Revenues came in at RMB900.8 million ($135 million), a gain of 19.7% on the back of volume increases in imported crude oil and exported refined oil.  The local shares offer a 9% dividend yield. Buy Dalian Port up to HK$7.00 in Hong Kong or up to $0.50 on the US over-the-counter (OTC) market.

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