** The Most Lucrative Investment Opportunity in Old Economy Rail Stocks?

We all know the importance of the railroad in linking the nation from coast to coast in its early beginnings. Railways allow for the transportation of people and goods across an expansive territory; but for businesses, it’s even more vital as an avenue to ship goods, such as oil, chemicals, and other commodities. 

While the North American rail system is massive, the real major growth in this area right now—and looking forward—is the colossal build-up that’s taking place across China. 

I’m talking about tens of thousands of miles of rail, and it’s expanding deeper into rural areas. The use of high-speed rail, especially, is gaining in demand and popularity. We are seeing high-speed rail between Beijing and Shanghai that has cut down the travel time for commuting this 800-mile route from the previous 12 hours or so to just four hours. 

The railroad sector in China is estimated to reach US$65.0 billion by the end of 2016, according to TransWorldNews. The freight area is viewed as lucrative, accounting for about 60% of the total value. 

Now we are seeing additional capital being pumped into the railroad sector after China announced a stimulus program to inject some life into the stalling economy and infrastructure. 

About $24.0 billion has been earmarked for adding lines in central and western China. (Source: “China Outlines Measures to Support Growth as Goal Recedes,” Bloomberg, April 3, 2014.) 

Besides the Chinese hotel sector, which I really like, the railroad expansion in China offers up more opportunities for investors. Considering the country has about 1.3 billion people to move plus freight, you surely understand my bullishness. 

If you want to try to benefit from the renaissance in China’s rail sector, a company that I like and have been following for a while is U.S.-listed, Shenzhen, China-based Guangshen Railroad Company Limited (NYSE/GSH). Besides being listed on the Hong Kong Exchange with its “A” shares listed on the Shanghai Stock Exchange, the company’s American depositary shares (ADS) are also listed on the New York Stock Exchange (NYSE). 

 

Chart courtesy of www.StockCharts.com 

The company currently provides passenger services, including the Guangzhou–Shenzhen intercity train service in southern China that connects these two economic and manufacturing hubs, and the Hong Kong Through train passenger service, operated in conjunction with MTR Corporation in Hong Kong. Having been to these areas, I can tell you that they are extremely busy passenger hubs, considering Guangzhou has about 15 million inhabitants alone, while Hong Kong has about eight million. Shenzhen is relatively small with just one million people; however, it’s also just a subway ride away from the main areas of Hong Kong, meaning it’s a busy stop-over point. 

At this time, passenger services produce the most revenue for the company. However, the company’s freight unit can transport full-load cargo, single-load cargo, containers, bulky and overweight cargo, dangerous cargo, fresh and live cargo, and oversized cargo. 

The fundamentals for Guangshen are attractive with the company reporting 10 straight years of revenue growth, from $409.95 million in 2002 to $2.42 billion in 2012. The growth is expected to continue with an estimated $2.75 billion in revenue in 2013, according to Thomson Financial. Guangshen reported 11 straight years of profits. 

Given the massive build-up of China’s railroad system, companies like Guangshen are attractive as a longer-term above-average investment opportunity for the aggressive investor. 

This article The Most Lucrative Investment Opportunity in Old Economy Rail Stocks? was originally published at Daily Gains Letter