Ride the rails on Guangshen (GSH)

"On the heels of a blockbuster profit report, were are delighted to recommend Guangshen Railway Company (NYSE: GSH) as the latest addition to our model portfolio," says Jim Trippon.

The editor of the The China Stock Digest explains, "The company’s expansion plans and its favorable geographic position indicate that Guangshen will be a major beneficiary of China’s growth."

"On the day we put out our 'buy' alert, the company announced a staggering 92.4% increase in net profits, yet the company’s ADRs hardly responded, creating an excellent buying opportunity. Profits have now topped $200 million and the company continues to expand.

"Guangshen is a little-known company among Americans and unless you had taken a train ride from Hong Kong to the boomtown of Shenzhen, there’s little chance you’d be aware of it.

"The company is serving passengers and expanding capacity in one of the wealthiest and busiest nodes of the new Chinese economy. It’s considered the 'most modernized' railway in China, and demand continues to grow as the Chinese government permits the flow of passengers between Mainland boomtowns and the Hong Kong special administrative zone.

"China’s plan to spend almost $13 billion to upgrade its railway network has helped fuel a rally among railway stocks, and we believe the long term trend will continue. Demand is high because railway transportation is considered one of the great bottlenecks in the Chinese economy.

"Because there are fears that the train system may become overloaded with freight and passenger traffic in coming years, the railway has plans to build four more lines and to buy more rolling stock.

"Looking forward, the company is building more lines, acquiring more high-speed trains and buying up regional railroads. Although the company is constrained by price controls, its profit picture indicates an ongoing control of costs. Guangshen’s profit margin is 17.86%.

"Although Guangshen’s P/E ratio, above 20, is slightly higher than the industry standard of 18, Guangshen is growing much more rapidly than its peers. Consequently we’re recommending this stock as a 'Buy' at a price of $29 or less.

"Our target sales price for GSH is $45 and our stop loss profit protector is $20. We don’t believe the stock has much downside risk as its book value is above $20 per share and earnings are growing."

Editor's note: Jim Trippon has just finalized plans for his next investor tour to China. Scheduled for October 8-21, 2008, the trip will feature exclusive access to top Chinese business and government officials. For more information, call (888) 853-1456.