Transportation stocks are usually a good barometer of overall economic health. Trucking companies, airfreight shipping firms, and railroad operators thrive when the economy thrives. Conversely, these are among the first to be hit when the economy falters. Slower business activity means less need for transportation of goods and people. While American railroad operators such as Burlington Northern (BNI), Union Pacific (UNP) and others moved up in the recent market rally, the group remains well off its 2008 highs.
If railroad stocks are a sign in the US economy, what about booming China? Guangshen Railway Co. (GSH) is one of China’s largest railroad companies. As such, it stands poised to benefit as China’s economy does the only thing it knows how to do: grow. Oddly enough, Guangshen is the only railroad listed on the New York Stock Exchange based in a country other than the U.S. or Canada.
We’ve highlighted the allure of China in the past. We’ve talked about individual Chinese stocks that may provide investors with tidy returns. For instance, we still view one of China’s dominant mobile phone carriers as a win: China Unicom (CHU).
Guangshen Railway should benefit from China’s growing appetite for infrastructure projects. After all, someone has to move all that steel and other construction materials across a very large country. Rail operators like Guangshen will also be counted on to deliver oil, coal, copper and other commodities to destinations throughout mainland China.
The stock, which yields 2.5%, has returned more than 28% thus far in 2009. There is heavy resistance in the $25-26 area, so a move above that level on high volume should inspire more buying. Guangshen is reasonably valued compared to other China stocks at less than 19 times earnings for the trailing 12 months. Keep in mind this is a mega-cap name, with a market cap of $167B. You can look at it as a core holding for any China portfolio, but don’t expect a grand slam.
Guangshen actually made money in 2008 while enduring some of the worst headwinds a transportation company can face. Hollywood could not have scripted a worse picture for Guangshen, which saw its profits erode due to higher fuel costs, a catastrophic snowstorm, and weak shipping demand. Yet, the company was profitable.
GSH looks to be a prime beneficiary of China’s $500 billion+ economic stimulus package, which is partly responsible for a fourth consecutive increase in the Chinese Producer Manufacturing Index, released today. In a hot bed of economic growth with a strong balance sheet, Guangshen Rail is a great way to get involved in China’s infrastructure boom. To buy into continued Chinese development, go with GSH.
