Guanshen Railway (GSH)

[Investorman]

Zacks.com
GSH's Current Price is Fair
Monday February 4, 2:02 pm ET
By Paul Cheung, CFA

Guangshen Railway Company Limited (NYSE: GSH - News) announced strong growth of revenue for the first three quarters of 2007 due to acquisition of the railway transportation assets of the Guangping Line. The company is well-positioned to leverage the railway growth opportunity in China especially in Guangdong province. However, the government's price regulation for railway transportation would negatively affect the company's earnings when its costs increase. Overall, we think its current price fairly reflects its prospects.

On October 25, Guangshen Railway announced the unaudited operating results of the company for the nine months ended September 30, 2007. During the Period, under the China Accounting Standards for Business Enterprises, the company realized a consolidated revenue from operation of RMB7,442 million and a net profit of RMB1,136 million. Earnings per share were RMB0.16 ($1.06 per ADS).

The railway tariff is regulated by Chinese government. This would negatively affect the company's earnings when its costs increase. Second, with respect to passenger transportation, the company faces competition from bus services. Bus fares are lower than the fares for its high-speed passenger train services. Furthermore, buses can offer added convenience to passengers by departing from or arriving at locations outside their central terminals, such as hotels. Third, with respect to freight transportation, the company faces increasing competition from truck transportation in the medium- and short-distance freight transportation market as the expressway and highway networks in our service region and neighboring areas have increasingly improved.

Based on our estimate for fiscal year 2008 earnings per ADR, the stock is trading at 18.3x, which is higher than the industry average. Using a P/E multiple of 19.3x our fiscal year 2008 earnings per ADR estimate yields a target price of $34.75, which we believe reflects the company's prospects. Thus, we are maintaining Hold rating on the stock.