Ride the Rails in China

China's Guangshen Railway (NYSE: GSH  ) reported its 2011 results earlier this week, and this choo-choo is really pulling its weight. Revenue climbed the grade nearly 9% higher than 2010 while expenses crawled up by about 7%. Revenues growing faster than expenses pulled over 20% more earnings into the station than the previous year. Across the board, the railroad experienced higher passenger traffic, freight traffic, and network usage.

Earnings of 0.25 renminbi per A or H share translates to a little more than $2 per American depositary share traded in the U.S. The company trades in three markets: "A" shares in Shanghai, "H" shares in Hong Kong, and ADS in the U.S. with each ADS representing 50 H shares. Even better news to this dividend hound, the planned annual dividend payment is an 11% increase over the 2010 payout, rising to about $0.79 per ADS for a yield just north of 4%.

Revenue growth, earnings growth, and a dividend hike all sound great, but how does Guangshen stack up against some other railroads?

Company

P/E Ratio (TTM)

Dividend Yield

Guangshen 9.9 4.1%
Union Pacific (NYSE: UNP  ) 16.1 2.2%
Canadian National (NYSE: CNI  ) 13.3 1.8%
CSX (NYSE: CSX  ) 10.2 2.2%
Norfolk Southern (NYSE: NSC  ) 10.1 2.8%

Source: Yahoo! Finance and author's calculation. TTM = trailing 12 months.

Guangshen not only offers the lowest P/E ratio and highest dividend yield, but even reduced Chinese economic growth targets of 7.5% are much higher than the low single-digit growth in the U.S. and Canadian economies. The faster-growing economy should translate to faster business growth for Guangshen compared to U.S. and Canadian railroads.

Guangshen's discount valuation doesn't come without trade-offs. Risks that aren't part of owning the U.S. or Canadian rails include:

  • The largest shareholder is a government company, and those interests may not align with other shareholders.
  • Pricing, speeds, routes, and other business operations are regulated or controlled by the Chinese government.
  • Guangshen operates with a currency, the renminbi, with a controlled exchange rate.

Even with those risks, Guangshen's valuation, dividend yield, and exposure to one of the world's fastest growing economies are enough to earn it a CAPScall on my scorecard and a place in my portfolio.

Fool contributor Russ Krull owns shares of Guangshen Railway but none of the other companies mentioned. Motley Fool newsletter services have recommended buying shares of Canadian National Railway and Guangshen Railway. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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