As Matt Richey noted in his write-up in Stocks 2004, the Motley Fool's annual investors guide, Guangdong Province is the engine that drives the burgeoning Chinese economy, and increasingly, China's low-cost, high-quality manufacturing is the engine that drives the global economy.
So, what is it that drives Guangdong Province? As is somewhat typical in China, it's a monopoly: In a country where there is a heavy dependence on railroads for transportation of goods and people, the major rail line in the most important manufacturing center there is controlled by Guangshen Railway (NYSE:GSH), which has "H" shares that trade in Hong Kong and New York.
Guangshen Railway owns the important Guangzhou-Shenzhen rail line and operates a passenger train from Shenzhen across the border into Hong Kong. Its revenues break down as approximately 70% passenger tickets, 20% freight, with the rest coming from ancillary services. And Guangshen recently went through a large capital program to modernize its facilities. But with the continued easing of travel restrictions between mainland China and Hong Kong, demand continues to significantly outstrip the rail and train capacity to provide.
Yesterday, China's Ministry of Railways (which owns two-thirds of Guangshen Railway) announced that it plans to double passenger capacity on the Guangzhou-Shenzhen route by constructing a fourth rail line, at a projected cost of some US$430 million. The Ministry's goal is to make rail travel between the two cities "as convenient as bus travel."
The Ministry plans to fund part of the cost of the new rail by selling a portion of its "A" shares of Guangshen into the domestic stock market, essentially doing a capital raise on behalf of the company by selling part of its own stake. This means that the company is essentially gaining access to a doubling of its rail capacity without needing to tap either the debt or the equity markets.
It's simply a model that doesn't exist in the U.S., for better or for worse. Guangshen Railway could see its passenger capacity on its core route doubled over the next two years, at a minimal cost to the company itself. It also can expect to compete on additional lines that the Ministry is building in Guangdong Province, including a high-speed link between Guangzhou and Zhuhai (which is a special economic zone bordering Macau), and on expansion of links from Guangzhou to Wuhan. All of this spells increasing opportunity for Guangshen.
Of course, the standard disclaimers apply. This is a Chinese company, and Chinese corporate governance standards have never been considered the vanguard, and whenever the government is selling, you must assume that it is because it is in its advantage to do so. Still, Berkshire Hathaway's (NYSE:BRK.a) (NYSE:BRK.B) Warren Buffett noted when he purchased shares in PetroChina (NYSE:PTR) that its level of disclosure was at a level that he wished more American companies would emulate, and while Guangshen Railway lacks the specific incantation from the Oracle of Omaha, I must note that I have been impressed with its corporate communications, its conservatism, and its payout policies. And Guangshen's dividend check (at a yield north of 4.4%) cashed just fine, thank you very much.
See also:
- Seeing Red in China, by Bill Mann
- One Big Investing Mistake, by Bill Mann
- The China Syndrome, by Rick Aristotle Munarriz
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Bill Mann owns shares in Guangshen Railways and Berkshire Hathaway. He also loves railroads.
