Guangshen Railway Company Limited (HKG:525), which is in the transportation business, and is based in China, received a lot of attention from a substantial price movement on the SEHK over the last few months, increasing to HK$4.58 at one point, and dropping to the lows of HK$3.21. This high level of volatility gives investors the opportunity to enter into the stock, and potentially buy at an artificially low price. A question to answer is whether Guangshen Railway’s current trading price of HK$3.21 reflective of the actual value of the mid-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at Guangshen Railway’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.
What’s the opportunity in Guangshen Railway?
The stock seems fairly valued at the moment according to my relative valuation model. In this instance, I’ve used the price-to-equity (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Guangshen Railway’s ratio of 17.14x is trading slightly above its industry peers’ ratio of 15.26x, which means if you buy Guangshen Railway today, you’d be paying a relatively fair price for it. And if you believe Guangshen Railway should be trading in this range, then there isn’t really any room for the share price grow beyond what it’s currently trading. So, is there another chance to buy low in the future? Given that Guangshen Railway’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us an opportunity to buy later on. This is based on its high beta, which is a good indicator for share price volatility.
What does the future of Guangshen Railway look like?
Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. Guangshen Railway’s earnings over the next few years are expected to increase by 47.8%, indicating a highly optimistic future ahead. This should lead to more robust cash flows, feeding into a higher share value.
What this means for you:
Are you a shareholder? 525’s optimistic future growth appears to have been factored into the current share price, with shares trading around its fair value. However, there are also other important factors which we haven’t considered today, such as the financial strength of the company. Have these factors changed since the last time you looked at 525? Will you have enough confidence to invest in the company should the price drop below its fair value?
Are you a potential investor? If you’ve been keeping tabs on 525, now may not be the most optimal time to buy, given it is trading around its fair value. However, the optimistic forecast is encouraging for 525, which means it’s worth further examining other factors such as the strength of its balance sheet, in order to take advantage of the next price drop.
Price is just the tip of the iceberg. Dig deeper into what truly matters – the fundamentals – before you make a decision on Guangshen Railway. You can find everything you need to know about Guangshen Railway in the latest infographic research report. If you are no longer interested in Guangshen Railway, you can use our free platform to see my list of over 50 other stocks with a high growth potential.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.