Riding the Rails

01/19/2007 12:00 am EST

Focus:

Robert Hsu

Editor, China Strategy and Asia Edge

It may not be the Orient Express, but Robert Hsu's new recommendation is picking up steam, due to China's exponential growth, as well as the government's plans to pour money into its railroad infrastructure over the next five years...

"Guangshen Railway (GSH NYSE) controls the passenger and freight railway system between Guangzhou and Shenzhen, the two largest and most prosperous cities in southern China. It also provides the only railway linking Mainland China to Hong Kong, and the company is the first and only Chinese railway company listed on an overseas stock exchange.

"As the primary mode of transportation between Chinese regions, the country's rail system is undersupplied and overcrowded. China plans to spend $13 billion on its train network by adding an additional 10,000 miles of tracks by 2010. That's solid 25% growth from the current level.

"Guangshen is in a strong position to benefit. Passenger transportation and freight transportation account for 86% and 14% of total revenue, respectively. In addition, GSH is one of the largest property owners in Southern China, controlling huge stretches of property along its tracks.

"The Guangshen Railway is the most modern train system in China. It is the first electric and wholly-fenced high-speed railway with three lines, and also the first in China to operate high-speed passenger trains that can reach speeds of 125 miles per hour.

"Guangshen Railway is a state-owned monopoly that is controlled by Gaungdong Province, the wealthiest and most economically advanced region in China. However, it's a well-run company, and this is one case where its government-backed status is a plus because it has a major transportation monopoly in the most prosperous region in China.

"The company's purchase of the Guangzhou-Pingshi railway--expected to wrap up in the next few months--will more than triple Guangshen Railway's current operating mileage from nearly 100 to 300 miles.

"Profits are also expected to double, to $204 million from roughly $86 million in 2006. After that, earnings are expected to grow more than 25% a year for the next five years. GSH stands to benefit from China's booming tourism industry, growing over 15% a year, as well as recently announced fare hikes, of 20% to 50%.

"Recently, the stock reached its 52-week high before pulling back to the low $30s. I view this pullback as a great buying opportunity as the fundamental trends driving the stock remain firmly in place. Buy GSH under $35. I'm targeting a pop to $49 within the next six months, which would be a very nice 55% return from the current price."

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