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Sector 20: Indusrial Goods/Transport

CBA Brilliance China Automotive: Profitable maker of BMW's and mini-buses
CEA China Eastern Airlines: Shanghai-based profitable airline
GSH Guangshen Railroad: Very profitable railroad between Guangzhou- Hong Kong
ZNH China Southern Airlines: Guangzhou-based profitable airline

China's key companies in the industrial goods/transport sector all face the same issues as their peers in other countries. Some of them are quite interesting, and they are profitable, but none are as rock solid as the ones I pointed out in the China energy or telecom services sectors.

This group of four has two airlines, one railroad and one manufacturer of autos and commercial mini-vans.

The railroad, Guangzhen Railway, is the most financially/operationally stable of the four companies, and the best investment choice. Just don't expect it to make you a gazillion dollars in trading its securities if you are a buy-and-hold investor.

The other three companies are up and down and present good trading opportunities, as does GSH, but they also present long-term risk issues.

Aviation in China is an interesting industry in that government is highly involved " sometime for the better, and sometimes not.

The industry used to be a profitable one, with a lot of small regional airlines flying. Then discounting started to hurt the prospects of the big ones that were owned by the bigger provincial governments. So Beijing regulated the discounters out of business and voila the big guys just sat back on their huge costs and inefficiencies and soon became unprofitable.

Then the federal government stepped in and allowed a restructuring of the industry's 10 biggest carriers into just three. One was based in Beijing (Air China), one in Shanghai (China Eastern) and one in Guangzhou (China Southern). Each held exclusive rights to commute between the three cities. Also, the 15 percent import duties on planes and parts were dropped, and foreign investment levels were permitted to grow from 35 pct to 49.9 pct.

Voila, profit.

But the past year has been a challenging one, so the federal government has stepped in again, in February, and has approved the first discount air carrier " Okay Airlines " so discounting is now going to be ok and several other applications have been submitted.

All through the Far East, there is heavy discounting of air fares, but China has always stayed away from the business model of the Ryanair (Ireland) or AirAsia (Malaysia), until now. So I say ok to Okay.

And I feel that the big three, Air China, China Southern and China Eastern are going to come out ok. But, they had better do it soon, because they don't have very impressive looking balance sheets.

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Guangzhen Railway (NYSE: GSH) operates from Guangzhou to Shenzhen, near Hong Kong.

This company is rock solid financially, unlike all the others in this group of four. It also pays out a good dividend, with a yield close to 4 percent.

At Friday's close of $18.13, the market cap is $1.57 billion.

EBITDA margin is a very impressive 33.9, and while low at 6.5 pct, the Return On Equity is a constant 6.5, so there is no issue there.

This is after all a railway, and one that compares favorably to, for example, Union Pacific (UNP), which is under 5.0, and CSX Corp (NYSE: CSX), which is at 6.0, according to ROE data at Yahoo Finance.

As a trader, I'd feel more comfortable if the stock had a pullback of 10 percent here, to get into my $15.50-$16.00 accumulation zone.

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China Eastern Airlines (NYSE: CEA) is the major China airline that operates out of Shanghai.

At Friday's close of $19.54, the market cap is about $950 million.

EBITDA margin is 12.1, ROE 11.3, and PE 9.6. The PE is low because, in my view, the balance sheet needs restructuring. If interest rates start to zoom from here, this is a company that may have some debt-related issues to deal with.

Like China Southern Air, lower fuel oil prices would help profitability as well as its share price.

The stock had a pullback in late February, but has recovered. It is still close to an accumulation zone. Like China Southern Air, though, I feel it is about 10 percent over-priced.

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China Southern Airlines (NYSE: ZNH) is the major China airline that operates out of Guangzhou.

At Friday's close of $18.35, the market cap is about $1.61 billion.

EBITDA margin is 11.4, ROE 9.4, and PE 9.5. Like China Eastern Air, the PE is low because, I feel, the balance sheet needs to be restructured. Interest rates that rise sharply could be problematic.

The stock had quite a dip in January, but has recovered. I feel it is still about 10 percent over-priced, but is close to an accumulation zone.

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Brilliance China Automotive (NYSE: CBA) is a large manufacturer of cars, including the BMW 3 and 5 series, plus commercial vehicles including mini-vans.

2004 was a terrible year for this company as it ran into a number of problems that caused the stock that started the year at $60 to close out the year at just $20, close to its tangible book value. So far this year, the stock has formed a base at $20-$22, closing Friday at $21.63. The market cap is $790 million, and the float is small.

The company is not strong financially, but the EBITDA margin is over 20 percent. Return on Equity, however, is below 10. The stock may appeal to value investors or GARP investors because of the high tangible book value per share and the low (0.53) PEG ratio.

I like the stock, but only for short-term trading, and for retail (100-share) trades only.

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The bottom line is that I like all 18 of the stocks in my China Inc series, but some are far superior, and unfortunately these four in the industrial goods/transportation sector don't make it to the top of the list. Neither do they make it to my Global 100 Best Companies list, like CNOOC, Petrochina, China Mobile and China Telecom.

I like to say, however, that as equity markets ebb and flow, there will be trading opportunities, and I'll be trading this group too.

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The charts used here are from Investertech, which is a service I use because it offers multiple charts to a page, and charts in multiple time frames. The info summaries come from Yahoo Finance, which deserves the "Very Best of the Web" accolade. Finally, the excellent financial data, and any quote monitors, I show come from ADVFN. Starting in March, I'm going to get involved in the ADVFN chat rooms because this service is starting to add online price data from all the major stock exchanges in the world, and I want to encourage that. As better services become available, I'll use them too. Please let me know your favorites.

BCara@BillCara.com