Guangshen Railway Has Potential, But A Lot Rides On Reform

China's Guangshen Railway (NYSE:GSH) is a rare listed Chinese rail asset and it owns high-quality assets in Guangdong, but the nature of the Chinese rail market takes a lot of important strategic options out of management's hands. The state-owned China Railway Corporation (CRC) is getting more realistic about market-based reforms, though, and that has created some credible optimism regarding fare pricing power and the possibility of asset injections/acquisitions for Guangshen in the not-so-distant future.

Guangshen Railway's shares have done alright over the last year, but a lot of that appears predicated on those reforms that may allow the company to meaningfully increase its ticket prices. Absent those reforms, the company is likely going to find it hard to drive strong revenue growth due to competition with its Guangzhou-Shenzhen line, though an expansion of its railway operation services offers above-average revenue growth and good returns on capital (albeit less impressive margins). Guangshen's shares don't look remarkably undervalued, but with two-for-one potential profit leverage on fare hikes, slight undervaluation today and meaningful upside in a bull-case scenario merit a closer look.

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Guangshen Railway Has Potential, But A Lot Rides On Reform