China Stock Market: ADR report

Posted February 14, 2008

“Don’t suppose GSH will stay at its current low price. The company has high growth expectations in the next few years. And that will have more to do with its stock expectations than its current price does.” – Stephanie Grimmett.

by Stephanie Grimmett

Baltimore – (TFN): “Oh, we’re having a blizzard,” my mother tells me nonchalantly on the phone a couple of weeks ago. “And I ran into the ditch in the 4Runner this afternoon.”

She says this last part while giggling (if you’d ever met my mother, you’d understand that even as a 60-year-old woman she giggles, sometimes uncontrollably, with the glee of a little girl at her first slumber party.).

That day, my mother’s old reliable Toyota veered into a ditch and got stuck in slick, muddy snow as she was driving into town.

“Thank goodness Julie Cross was driving by. So I hitched a ride in with her and called the boys over at Leslies’s to get the car out.”

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The boys at Leslie’s, our local service station, pulled her car out and delivered it to the parking lot of her office in a couple of hours. One of them reported she needed to get her alignment fixed, but other than that the car was fine.

This is what a blizzard is like where I grew up. I don’t even remember the power going out as a child. I’m sure it did. We had winds up to 70 miles-per-hour howling across the hills and the vales and a windchill factor of something like 20 to 30 degrees below zero. You know that had to snap a few power lines and upend electrical poles in the flatlands.

But instead of despair and darkness, I mostly remember sitting in my room, sometimes with the lights on at midday, depending how low the clouds were hanging and how sideways the snow was blowing, and watching the drifts crawl across the yard, keeping track of how long it took to engulf our fence… or my dad’s pickup truck.

I don't remember any, but my mother informs me that, yes, a few people have died in our blizzards. Ranchers who miscalculated could get caught out checking the cows when a whiteout hit and lose their bearings. But a death toll of 60 people in one month is unheard of.

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China Stock Market: China in hibernation

I don’t know if it’s because of the high population density, the strength of the storms or due to an unprepared or ineffectual emergency system (not that I’m saying China has an unprepared or ineffectual emergency system. I’m sure they’re very capable and efficient, just like the U.S. has proved itself to be in recent years.). But 60 people have been reported dead in China’s blizzards this winter. And the country has felt a direct loss of 53.8 billion yuan due to the weather. That’s $7.5 billion down the drain because of snow and ice.

Transportation hit a standstill during the storms that blew across much of the southern half of China, and a good deal of the movement from the south to the north is still restricted while electricity is restored, roads are cleared and millions of gallons of deicer are poured over everything that’s supposed to move.

China’s solution to the problem of mobility was to call out the army and “armed police,” according to government newspaper The People’s Daily. And I’m sure machine-gun toting troops driving down the street in tanks (“Well, sir, we knew the tanks could make it through the snow… we thought they’d be a stabilizing influence on the populace, what with all of that sub-zero looting and rioting they’ve been thinking about doing… yes, I know the snow is confining most of them to their homes, but still.”) was a comforting sight for Chinese citizens.

The storms hit China’s manufacturing center at Guangzhou hard enough to knock out all travel, which was a sad note for the area’s large population of migrant workers trying to return home for the Lunar New Year (think of it as the Chinese culture’s version of Christmas: It’s the holiday when most of the country is trying to get home.).

China Stock Market: ADRs hit the rails

The weather has done nothing good for Guangshen Railways ADR (GSH: NYSE), either. The rail company’s trains were completely shut down because of storms and ice on the lines. And GSH has not had a happy time of it.

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To be fair, Guangshen’s stock hit the skids in early November. Market flux slammed GSH last year. Fearful first-time foreign-market investors skittered out of the stock three months ago, and shares bottomed around $31 in early February when reports of a snowed-in China reached U.S. shores.

Guangshen owns and operates local and regional rail lines in the bustling industrial hub of the Pearl River Delta, mostly between the cities of Guangzhou and Shenzhen, thus the company’s name. And, possibly most importantly, Guangshen is the only train service linking Hong Kong to mainland China.

The Guangdong Province, where Guangshen operates is (I’m betting, based on its location and size, since China doesn’t like to share such details with the rest of us) the largest manufacturing center in the country. GDP growth rate for the region averages about a third more than that of the rest of China, meaning, while China grows around 10% a year, Guangdong grows more like 13%. And it doesn’t look like that’s going to change anytime soon.

China Stock Market: Down but soon to rise again

Guangdong has the growth of the mainland economy feeding it from one side and the growth of Hong Kong feeding it from the other.

Movement between Hong Kong and the mainland will only increase in coming years, as financial markets continue to pull eastward and relations between China and the outside world continue to relax.

The Chinese government is pushing toward higher quality and more complexity in its products. You may still get your kids’ Tonka toys from Guangzhou in the next few years, but you might also start getting your computers and your TVs from there, too, which means even more new companies in Guangdong and more transportation needs.

Zacks hit GSH when it was down last week, saying that Guangshen was valued correctly at its current price. But value has never really gone for much in Chinese stocks. Bubbling hope and exuberance always have more to do with prices than actual worth in the Chinese markets.

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Don’t suppose GSH will stay at its current low price. The company has high growth expectations in the next few years. And that will have more to do with its stock expectations than its current price does.

When the big freeze of 2008 is finally behind GSH, when Guangshen can reopen all of its train lines to regular travel and resume construction on its new lines, the turnaround we saw beginning this month will continue.

Buy Guangshen Railways ADR (GSH: NYSE) at its current depressed prices before the steam under the stock starts to build again and you lose your chance.

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