Model Portfolio rmcduff:RMG1

Traffic Patterns Normalized

Guangshen Railroad: (GSH-NYSE: $17.29)

All amounts, unless stated otherwise, are expressed in US dollars. Amounts are converted from Chinese Yuan at the rate of $.1463. Estimates are my own, and may differ materially from analyst reports.

ADR Shares Outstanding: 141.67 million.
Total liabilities cash (09/30/08): $724 million.

Estimated EBITDA for 2008: $434 million.
Estimated EBITDA for 2009: $503 million

Estimated 2008 year end EV/EBITDA ratio: 7.4X
Estimated 2009 year end EV/EBITDA ratio: 6.3X

Guangshen Railway's 9 month revenue reports provided the first indications in 2008, of normalized traffic flows

Primarily a passenger railroad, GSH revenues are heavily front loaded to the 1st quarter of the fiscal year. This coincides with the January spring festival holiday travel period. Accordingly, as much as 30% of the total years' revenues, and up to 35% of annualized EBITDA are earned in the first quarter of each fiscal year.

In 2008, massive snowfalls in the transport basin resulted in a complete shutdown of rail transport for much of the spring festival. Travellers did not choose alternative transport, as all roads were closed. The Chinese government simply advised migrant workers to stay put during the holiday period.

The cessation of holiday travel produced a reduction in 1st quarter revenue growth, as well a drop in 1st quarter EBITDA. 2nd quarter revenues and EBITDA demonstrated improvement, but were not sufficient to overcome the 1st quarter drop.

The 3rd quarter has proved to be more indicative of GSH potential. My estimated 9 month EBITDA has now surpassed that earned in the first nine months of 2007.

While modest, it now appears that GSH has the potential to increase 2008 total EBITDA by up to 6% above 2007 numbers. Revenues could be roughly 17% above 2007 year end figures.

GSH has now completed its major purchases of rolling stock in the near term

The firm completed the most significant expansion of its history. Between 2004-2007, Guangshen purchased a major trunk line and completed a $450 million high speed rail line expansion.

Rolling stock purchases were the focus of capital spending in 2008. Most of the equipment purchases have now been delivered, and are producing planned revenue growth. Net liabilities have increased by more than $258 million in 2008. Only two more train sets are scheduled for 2009 delivery. I anticipate a steady reduction in total indebtedness from here.

Guangshen appears to be setting up for a robust 2009

Based on my current EV/EBITDA ratio, the investing public seems to have lost complete faith in the Chinese secular growth play. Analysts too, appear to be extrapolating the current lack of economic growth, well beyond any reasonable time frame for historic global slowdowns. In short, I consider the consensus view to be too sceptical, by far.

$65-70 oil will revitalize the global economy much faster than policy initiatives ever will. I consider the current economic slowdown to be a major buying opportunity for the next economic cycle.

The 3rd quarter report for GSH confirms that EBITDA growth has turned for the better. To the chagrin of current holders, recent market volatility has temporarily trumped positive fundamental news.

As to mid term outlook for Guangshen Railroad, it appears bright. With additional rolling stock, the new high speed rail line will be more fully utilized. This should prove highly beneficial to both the top and bottom lines.

Based on my forecast, Guangzhou Railroad now appears to be selling for the lowest EV/EBITDA ratio in almost 10 years. With a major capital expenditure program now completed, the focus for 2009 will turn to revenue growth and margin expansion.

GSH traditionally sells for a premium to North American rails, due to better secular growth trends and less emphasis on commodity hauling. This is one of the few instances that I have seen, where this Chinese passenger line sells for discount to North American commodity hauling peers. I believe that the shares are too cheap by far.