Another Approach to China: Toll Road Stocks

by: Roger Nusbaum

For the last couple of years I've been interested in and trying to learn about publicly traded toll roads. At first I wondered if they might be some sort of low volatility, low correlation proxy for capturing the story on the ground for whatever country or region a particular road might be in.

There are several publicly traded toll roads in Asia and several European countries have them, as does Australia (one that I know of in Australia, anyway). From what I can tell, China has more of these than any other country. If you go to Google Finance, which I am learning is far superior to Yahoo Finance in many ways once you get used to it, and type the word "expressway" in the quote box and then click get quote it will pull up a lengthy list of Chinese toll road stocks. There might be as many as 15 most of which seemed to be named for the provinces.

Many of the 15 are only traded in Shanghai, so US-based investors don't have access but it looks as though five of the 15 have US ticker symbols including the two largest companies in the space Jiangsu Expressway (OTCPK:JEXYY) and Zhejiang Expressway (OTCPK:ZHEXY), with market caps of HKD35 billion and HKD29 billion, respectively. The other three that trade in the US are Sichuan Expressway (OTCPK:SEXHF), Anhui Expressway (OTCPK:AUHEF) and Shenzhen Expressway (OTC:SHZNF). The first two are ADRs, so they cover multiple ordinary shares per ADR, while the last three which are ordinary shares and so are very low priced because like many stocks traded in Asia the prices per share are very low. (Click to enlarge)

The chart captures the Shanghai or Hong Kong version of each of the five plus the Shanghai Composite. Looking at the chart may not tell you much but it saves the time of looking for the symbols and it lets anyone so inclined play around with different time frames or compare it to other stocks or ETFs or whatever.

In the time charted, Sichuan Expressway looks to be the best performer but over shorter periods they have each taken a turn being the best performer and the laggard. The second chart compares one of the toll roads, Zhejiang Expressway, to Yinli Green Energy (NYSE:YGE), Huaneng Power (NYSE:HNP) and iShares FTSE/Xinhua 25 ETF (NYSEARCA:FXI). This might give a sense of how a larger toll road did versus a couple of other things from China or give some ideas about what to compare to for anyone interested in looking at these a little closer.

It is no shock that a toll road would be less volatile than a solar products maker. Huaneng looks like it has been a little more volatile but not much more, and at times FXI has been more volatile and at other times not. I would imagine, however, that if there is ever a market consequence for the lending concerns now surrounding China then I think FXI would become more volatile than a typical toll road stock.

Some of the toll road stocks show up in some of the infrastructure ETF. The stocks seem to be a cross between industrials and utilities. They seem to track the broader market with varying amounts of volatility. I do believe that pound for pound there is less business risk here than with other segments of the Chinese market. They are obviously not banks lending money to people, they are not exporters (but they are beneficiaries as goods move from factories to shipping ports), they don't make commoditized items, they don't mine commodities and they don't build buildings or have to lease them out. Some traffic is sort of like a staple; trips that have to be taken. Some traffic is discretionary as more and more people buy cars for the first time and want to hit the open road. It is common for the toll road operators to also operate gas stations, rest stops and other services along the road, even hotels.

I believe the business to be less volatile than businesses from other stock sectors but that does not always translate to stock price. Both ADRs are profitable companies, with PEs in the mid teens and a track record for healthy dividends. Additionally, they have each been around for quite a while. Any stock could implode at any time but I think it is a good bet they are not out and out frauds which some people worry about.

When I first got interested in this space I bought a few shares of the Jiangsu ADRs in my IRA and still them. I only considered the two ADRs. In the time I've owned Jiangsu it has generally been less volatile than Zhejiang, which is not so great on the way up but much better on the way down. I also own it for one client with a very specific mandate where it fits. Shortly after I bought it in my account I felt confident enough in it to begin adding it for clients. I called into the Schwab Global desk and the person I spoke left me with the impression that it would be difficult to buy the number of ADRs I would need (keep in mind too that we are a small firm) but Schwab charges a bloody fortune for trading overseas so for now no across the board position.

As a side note, it is truly astounding the extent to which Schwab was way in front of foreign trading and is now embarrassingly behind.