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Thursday August 19, 2010
GuangShen Railway (GSH): All aboard
by Ian Wyatt, editor Top Stock Insights  An aggressive build-out of rail infrastructure will benefit GuangShen Railway (GSH), operates 225 trains - half of which half are on high speed rails serving the major destinations of Guangzhou and Shenzhen.China's government plans to invest at least $100 billion per year in railway construction during the next three years. Passenger freight is the most important business segment in the company and currently accounts for 62% of total revenues. The recovery in the global economy resulted in increased passenger volume this year. In addition to tan expanding rail network and increasing passenger fares, the expected growth of the Chinese economy, which has averaged 10% for the past couple of years, will continue to support greater demand for freight train shipments. 
The company's top-line revenues have grown at a compound annual rate of 34% over the last five years, increasing from $400 million in 2005 to $1.8 billion in 2009. Despite the global economic crisis, Guangshen's revenues jumped 6% in 2009 - while its peers reported negative growth. Sales are expected to grow 5.5% to $1.9 billion in 2010 for the aforementioned reasons: the addition of new lines should result in additional passenger fares, and possibly an increase in transport rates. Furthermore, freight volumes will likely increase from a resumption of global economic growth. Beyond its solid revenue stream, the company also has a good history of earnings. Last Year EPS growth outpaced revenue growth as EPS jumped 12% to $1.41 from $1.25 in 2008. Along with this strong earnings growth, the stock also pays an attractive 3% annual dividend. Shares currently trade with a PE of 12, a significant discount to the industry average PE of 18. Given the company's reliable earnings history, EPS can reach $1.50 this year - a conservative figure that slightly outpaces projected sales growth of 5.5%. It's reasonable for Guangshen to trade with a PE of 15 which would still put it at a discount to the industry. Applying this valuation on shares to my EPS estimate of $1.50 yields a one-year target price of $22. Transportation infrastructure spending is supported by China's government and is resulting in an expanding rail network and growing demand for both passenger travel and freight transport. It won't be long before this stock leaves the station, and you won't want to miss it. Learn more about this financial newsletter at Ian Wyatt's Top Stock Insights. |
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