Trains are the most popular way of traveling far distances in China. They carry two times the amount of freight and passengers compared to Russian trains, and 3 times as much as U.S. trains. China's railways transported 1.36 billion passengers in 2007. The number of train passengers has been increasing by approximately 15 percent a year. Railways are essential in the Chinese economy. China transports over 50 percent of domestic trade by train, which is more than any other developed nation. China has over nearly 50,000 miles of train track, compared to under 500 miles in Ethiopia and under 25,000 miles in France. China is the biggest producer of railways in the entire world. It builds approximately 3,700 miles of track per year.
Guangshen Railway Analysis
Guangshen Railway (NYSE:GSH) is the only major Chinese railway stock on the New York stock exchange. It has a Price-to-Book ratio of only 0.72, which reveals that investors remain hesitant investing in Chinese companies. However, Guangshen Railway is not a fraudulent company and is a major railroad in China. The company's Payout Ratio is less than 50 percent, which should give investors confidence that the company is not overextending itself with paying its dividends. Future dividend hikes are likely, as Guangshen's cash flow remains robust, and the Payout Ratio is less than half of free cash flow. As the table below illustrates, Guangshen railroad has increased its dividend or maintained it for the last five years. This provides a safety net for investors who are concerned about the volatility and downturns.
Guangshen's Dividend Hike History
May 22, 2012
Apr 26, 2011
May 17, 2010
May 21, 2009
May 21, 2008
May 23, 2007
Since Guangshen is well below book value, it can be viewed as a value play. The future growth for the company rests in China's necessity for coal along with the various freight products that are transported on a daily basis. Similarly, as the population grows, and more travelers choose to ride trains due to the convenience, revenues will increase. As an experienced traveler of China, I had the opportunity to witness first-hand the tremendous traffic jams that occurred daily. Chinese citizens alternate driving on odd and even days according to their license plate. This only mitigates the situation to a certain degree. Future passenger train growth is inevitable, with the driving situation as well as the future increase in population.
Melco Crown Entertainment's expansion and outlook
Another sector in the Chinese economy that is in its expansion phases is the gaming industry. Melco Crown Entertainment (NASDAQ:MPEL) is poised for accelerated growth in the coming years. Melco Crown is one of the major casino operators in Macau along with Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN). Macau is the largest gaming hub in the world and the only legal casino destination in China, which makes the demand for gambling at these casinos extremely high. Overall revenues in 2012 exceeded three times the revenues of the Las Vegas strip. Macau is by far the world's hottest gaming region with tremendous action.
Melco Crown has been an explosive stock. While it has overall beaten analysts' expectations throughout the last two years. Its stock has more than tripled since 2010 and continues to soar. Macau casinos' total revenue rose a remarkable 29.5 percent in March 2013 year over year. Mainland Chinese as well as VIP gamblers internationally continued to push their luck in Macau as the Macau Statistics and Census Bureau revealed last week that the total visitation to Macau increased 11.5 percent year over year in February, to 2,376,840. The increase was mostly from Mainland China, which accounted for a 17.4 percent increase year over year and Hong Kong, which was a 15.8 percent year over year increase.
Melco Crown has recently announced its plans to raise $400 million for a new casino project in Manila Bay, Philippines. It is in the process of developing an integrated resort in Manila Bay and is estimated to be completed by the middle of 2014. It will cater to the mass market as well as the high end VIP gamblers throughout the world. The resort will be upscale and include luxury restaurants and bars. The deal was finalized with Belle Corp. last week.
China offers a tremendous growth opportunity for patient investors who are willing to endure volatility. An overall uptrend in these two dominant Chinese based companies will likely continue. The current expansion of Melco Crown Entertainment and Guangshen Railway prove that they are in their early stages of growth. Investors who muster up the courage to invest in these pure Chinese companies could stand to benefit handsomely.