This “Censored” Profit-Builder “Registered Huge Blip”

Who's the big subway operator teased by Jeff Opdyke?

By Travis Johnson, Stock Gumshoe, April 11, 2011

Today’s hype-ly delight comes in for a newsletter by Jeff Opdyke, who used to be a Wall Street Journal writer (columnist, most recently — which is why his name might sound familiar from the weekend “Love and Money” column that he quit last month), and gave that up for what is probably a dramatically more remunerative career as a newsletter guy and stockpicker for the Sovereign Society (yes, one of the gajillion “affiliates and subsidiaries” of Agora).

He hit the ground running at the Sovereign Society last year, and I’ve written a couple times about his teaser picks — the first one was about the Greenland rare earths craze that was fueled by a half dozen newsletters, he teased that “coup of the century” pick in December; and the second was Limoneira, which he thought should be starting a huge uptrend a few weeks from now (so far it looks like it was as expensive as I and many commenters feared, the price is down substantially … but, to be fair, the “announcement” that he said could catapult the shares isn’t expected until April 30).

This latest tease of his comes in for his Emerging Market Strategist, which is a new letter they’re launching for him — and it’s a pricey one, at $795 (though of course, it’s a huge discount off the “normal” price of $2,500, a price, I assume, that no one has actually paid).

(And yes, just to be clear — being a member of the Stock Gumshoe Irregulars is only $49 a year … but that’s a huge discount off the “normal” price of, oh, let’s say $599. Insert smiley face here.)

So … if you read Opdyke’s final column for the Wall Street Journal, you might have noticed that the hefty travel load of his newsletter job was stressing out his family. So toss that in with the fact that this newsletter is called Emerging Market Strategist, and you won’t be surprised to hear that he’s pitching foreign stocks that don’t have US listings and that most of us won’t have heard of.

Of course, it’s not nearly exciting enough to say that these stocks are off the beaten path — we have to make up a mysterious name for them to make it even sexier, right? In this case, he’s calling ’em “Censored Stocks.” To give you a taste, here’s how the pitch for the newsletter gets us revved up:

“Former WSJ Reporter’s Shocking Discovery:

Your Discount Brokerage Account May Be Costing You Thousands of Dollars a Year!

“Millions of investors have saved a bundle of money trading online.

“But one industry expert claims you may have been intentionally cut off from the most powerful wealth-building stocks on the market….

“If you think Wall Street is rigged against you, you’re right.

Each day, Morgan Stanley, Merrill Lynch and dozens of discount brokerages ‘censor’ 74% of the world’s top-performing stocks.

“Wall Street brokers refuse to sell these shares to retail clients… because they don’t earn a high commission from them.

“Yet over the past seven years, ‘Censored’ stocks have outperformed regular stocks by 300%….

“…’censored’ stocks could be your ticket to incredible riches.”

And, of course, the gigunga-size promise:

“In this letter, I’ll tell you exactly how to play Jeff’s next big opportunities with the potential to turn $2,000 into $30,600.”

He tells us that these kinds of frontier and emerging market picks give you several ways to “win” — they give you foreign currency exposure and often very large dividends; they aren’t covered by Wall Street analysts so sometimes even billion-dollar companies are cheap and “undiscovered”; and they’re in booming consumer economies so they have the wind at their backs (those are all paraphrased, but I think I got the gist of his arguments for this broad investing theme).

So what stocks is he picking for his frontier markets fun and profit? He teases three of them, I’m going to look at (and for) one of them today, then if they look interesting I’ll cover (assuming I can uncover) the others later on.

Here’s the pitch for the one that caught my attention:

“New ‘Censored’ Profit-Builder #2: This giant Asian subway operator boasts a legal monopoly in its home country… with more than 200 kilometers of track and 84 stations. It’s also a leading property developer with over 29 million square feet of commercial and residential space. It shares in the profits with its property development partners but doesn’t share the losses. Profit Potential: 800%”

Sound good, right? “Sharing profits without sharing losses” sounds better than good, actually, kind of like being a Wall Street banker yourself.

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It’s a small blip of a tease, so shouldn’t take long to chop it up and pour it into the Mighty, Mighty Thinkolator … and voila! This is MTR Corporation (0066 in Hong Kong, MTRJY for the 10:1 pink sheets ADR, MTRJF for the foreign pink sheet listing — MTRJY generally has better volume).

MTR is indeed the operator of Hong Kong’s rail transit system (subway and light rail), which does have 84 stations and “over 200km” of track — actually 218.2km, per the company) and their airport connect train, along with some other transport assets — and over the last half-dozen years they’ve also been expanding internationally, winning contracts to operate the Stockholm subway, a new rail line to serve the London Olympics, and lines in Melbourne, Daxing, Shenzen and Beijing. They say that their expansion goal (it’s hard to expand dramatically in Hong Kong, though they are still building out new stations and extensions — about 25% growth in system size planned) is to invest in the buildout of mainland Chinese urban rail and in “asset light” management of transit in other countries (as with the Stockholm subway, which they won a contract to manage but did not build and don’t own).

Aside from profitably operating a large transit system in a transit-dependent and extremely dense city, they also profit from their land rights and ownership or management of stations, by bringing in advertising, retail tenants, etc., and they also own some substantial real estate that I assume was initially connected to transit station or system land: a dozen shopping malls and 18 floors of a massive commercial tower in Hong Kong, and a mall in Beijing.

I looks like about 2/3 of revenue now comes from the Hong Kong rail system, including fare revenue and station and related revenue, and the non-Hong Kong businesses really just came on board as big revenue producers in 2010 — the Hong Kong business is also higher margin than their projects off-island, though they’re all surprisingly (at least to me) profitable, with the overall operating margin at 37%. Property development and management has also become a pretty big part of their business, making up about HK$4 billion of their HK$15 million in operating profit in 2010.

MTR doesn’t carry much debt, which is a little big surprising (in a good way — they make enough to cover their debt service 10X over), but they do have some complexity in their reports — in part because they manage but don’t own some of their network, particularly the Kowloon-Canton Railway that they manage for the city of Hong Kong, which still owns that portion, and per the agreement they owe regular payments to the city. Their earnings look awfully nice, though, for a company operating a near monopoly and with some interesting overseas expansion possibilities, particularly in mainland China. Importantly, they also have the right to raise rates for inflation in Hong Kong (base rates sound very low to me at less than US$1, though I’m sure they’re high for a working class HK salary).

Of course, that brings in political repercussions, too — after living in Washington, DC for many years I can tell you that people always, always, always hate fare increases — and that’s when the system doesn’t even come close to paying for itself, I can’t imagine the outcry we would have seen if the DC Metro was profitable and they tried to raise rates.

But I got off track — I was talking about earnings. The company posted HK$2.10 in “basic” earnings per share, HK$1.51 after excluding change in fair value of investment properties and deferred tax, and they paid a dividend of 59 HK cents. The shares closed overnight in HK at HK$28.90, so that’s about an average PE ratio of around 14 if you include the windfall boom from investment properties, or a bit above-average (19) if you used the adjusted 1.51 number. This is also a company with a dividend-growth focus, which is not necessarily typical outside of the US — they have grown the dividend each year for the past decade, even in years (like 2006 and 2008) when year-over-year earnings fell. 2010 was truly a standout year for revenue and earnings growth and I don’t know if that will repeat, but the numbers look pretty solid.

The only other reasonably-large transit operator I can think of who’s publicly traded is Veolia Environnement (VE in NY), which counts transit operations as but a part of its stable of municipal outsourcing businesses (they’re arguably better known for their water treatment businesses) — Veolia is a little bit smaller, with a market cap of about $15 billion, and they carry a lot more debt and pay a higher dividend, with a base of businesses that is certainly more geographically diversified but is also, at least not in recent years, growing nearly as quickly as MTR.

So does that sound like the kind of company you’d like to own a piece of? It is indeed somewhat difficult to trade in the US, though whether that means it’s “censored” is I suppose, in the eye of the investor. Buying the shares on the pink sheets at a reasonable price ought to be possible if you’re patient, and it’s certainly very liquid if you can trade in Hong Kong directly (this is a large cap company, market cap over US$20 billion).

The 10:1 ADR in New York trades most days and it looks like it’s pretty close to the fair price per HK trading (note that if you decide to buy those ADRs, you need to check the price on the HK exchange, translate it to US$, then multiply by 10 to get the fair price since each ADR represents 10 HK shares … as of this moment, the MTRJY ADR ought to be priced at about $37.20). And, of course, if you can’t trade directly in a foreign market it’s always worth noting that there’s friction in both buying and selling of lightly-traded pink sheets stocks — you often have to pay a premium to buy, and accept a haircut to sell, particularly if you’re in a hurry.

So … given all that, if you decide Jeff Opdyke is right and you want to own shares of this transit company or think it’s worth some research, whether or not you believe his projection of 800% potential profits, let us know what you think with a comment below.