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?
P/E Ratio (TTM)
|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.