How to Play China's Railway Boom

Tony Sagami

I use public transportation, usually subways and trains, all the time when I am in Asia. Not to save money but to save time because the roads in most large Asian cites are packed like sardines and move slower than a snail.

And while I was happy to hear the U.S. Department of Transportation announce a sweeping $1.58 billion construction package for 27 public transportation projects around the United States, I couldn't help but think it's peanuts compared to what the Chinese are spending on public transportation projects.

Example: It took Chinese engineers only 39 months to build a $33 billion, 818-mile, high-speed railway line that links Beijing with Shanghai, the financial center of China.

Trains will travel at speeds up to 220 mph and make the trip in less than five hours, less than half the time of the previous 10-hour trip. The line will run 63 pairs of trains a day and can carry up to 80 million passengers a year.

For an informative one-minute YouTube video about this new railroad, click here.

“This is the pride of China and the Chinese people,” said He Huawu, chief engineer of the Ministry of Railways. “It took just 39 months to build such a high-standard and world-renowned high-speed rail line, which is a gift for the 90th anniversary of the Party.”

For only 1,750 yuan or $270, you could buy a business-class seat on the Beijing to Shanghai route.

The Beijing to Shanghai route is like traveling from Milwaukee, Wisconsin, to Dallas, Texas. Can you imagine zipping from Milwaukee to Dallas, a more-than-14-hour drive, in less than five hours?

How much does it cost to ride on this speeding bullet train? Less than you think! The price for the cheapest ticket is about 410 yuan or about $70, which is about half the price of what a two-hour airplane ticket would cost.

And for only 1,750 yuan or $270, you could buy a business-class seat that is very similar to business class on an airplane. These leather-clad seats will fully recline into a bed, has a personal video screen with touch screen controls, and a stewardess to serve food/drinks.

This Beijing-Shanghai route isn't an isolated example of Chinese transportation. In fact, it is just the newest piece of the country's railroad ambitions. China plans to expand its railroads to 27,960 miles by the end of 2015 and is going to spend a near-unbelievable $430 billion (yup, $430 BILLION) on its railway network in the next five years.

That sort of makes our new $1.58 billion package from the DOT look pretty puny, doesn't it?

Beijing-Tibet Rail Line

This isn't the first high-speed bullet train China has built. Perhaps its most impressive feat of railroad engineering was the Beijing to Tibet line built in 2006.

The Beijing-Tibet line is a feat of engineering magic and the first tracks ever built over such difficult terrain. Most of the railroad is more than 13,000 feet above sea level; at its highest point, the tracks reach 16,640 feet. The elevation is so extreme, and the mountain air so thin, that ballpoint pens and packaged foods sometimes burst. And if you take your laptop computer or MP3 player, watch out. Tiny air bags that are used to cushion disc drives are likely to pop.

333img2.jpg
Tibetans will likely see rapid change
from the new high-speed train. Some
Chinese companies will just see
accelerating profits.

Can you imagine what it was like to lay these tracks? For four long years, 35,000 workers toiled in the bitter cold to complete the task at a cost of $4.5 billion.

China isn't stopping at 27,960 miles of railroad tracks either. Beyond 2015, it has ambitions to someday have high-speed rail lines extend southward to Singapore and westward to India, Russia, Germany, and even France!

Moving More Freight Cars

When governments start throwing around billions of dollars, let alone $430 billion, it is unlikely that these railroad lines will break even. Like most public transportation services — including the United States — China's government expects to lose money on this rail line.

Making money on these rail lines isn't the goal, however. China's ambitious high-speed rail program is designed partly to shift passenger traffic off existing tracks, allowing for faster and cheaper transport of raw materials, such as coal and wheat, as well as finished products from Chinese factories to the shipping docks.

“The high-speed network strengthens the economic development in China,” said He Huawu, the chief engineer in China's railways ministry. As usual, the Chinese are looking at their long-term, big picture needs.

Are there any investment opportunities in those grandiose rail plans? You bet your butt there is.

First of all, the competition for passengers on the lucrative and BUSY Beijing-Shanghai corridor will undoubtedly cost China Eastern Airlines (NYSE:CEA) and China Southern Airlines (NYSE:ZNH) some business, so I'd be a little worried if I owned either of those stocks.

An obvious winner is China Railway Construction (1186.HK), the largest railroad construction company in China. CRC, by the way, is partially owned by the Chinese government, so you know it will get a lion's share of the construction contracts.

China Railway Construction trades on the Hong Kong Stock Exchange and is currently trading for a little more than $1 a share. Yep, one measly dollar once you factor in the currency translation.

If you're one of the investors who refuses to buy stocks on a foreign exchange (a big mistake in my view), you can also buy CRC on the U.S. over-the-counter market under the symbol CWYCF.PK.

Remember, ALWAYS use limit orders whenever you buy or sell stocks on the over-the-counter market.

Lastly, if you connect the dots, there are other ancillary but crucial suppliers in the railroad construction food chain. All that railway construction fueled the demand for 20 million tons of steel and 120 million tons of cement in 2010.

General Steel (NYSE:GSI) and Anhui Conch Cement (0914.HK or AHCHY.PK) supplied a big chunk of those basic building blocks.

Remember, you don't have to rush out and invest in any of the stocks I talk about in this column right away. As always, timing is everything so you need to do your own research and decide when the time is right for you. Plus, the China growth story still has several decades to run so you've got lots of time.

Best wishes,

Tony

P.S. Want even MORE insight into harnessing the profit potential of the booming Asian economies? Check out my monthly Asia Stock Alert. I think it may be the best investment you'll ever make. Click here to learn more.


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Posted 07-09-2011 10:34 AM by Tony Sagami