Investing

3 Industries for Long Term Investing: Part 2 (Rail)

Following our earlier post on the 3 industries for long term investing where we spoke about how the e-commerce industry has a good chance of getting good investment returns, we would like to offer our perspective on another industry that we think would be growing for the next 10 – 20 years.

Reports show that the world is becoming increasingly urbanised as more people are moving to cities. Over 54% of people across the globe have been living in urban areas since 2014. The current estimated urban population is 3.9 billion and it is approximated that 3 million people around the world are moving to cities every week. Migration is driving much of the increase in urbanization, causing cities to grow and become denser.

As cities become denser, land use has to be optimised. However, there is an opportunity cost for land use. For example, to support the increase of vehicles due to urban population growth, there would be a need to grow road networks and carparks, which would take up land area that could otherwise be used for residential or commercial development. Which would yield a better economic return, roads/carparks or residential/commercial properties? The latter is the clear answer. LTA eloquently highlighted the issue in their Land Transport Masterplan (LTMP) 2013. You can view it in the figure below.

Source: LTA
Source: LTA

Road networks within the cities will not grow as fast as the population.

A sensible government of a densely populated city would deduce this and push for policies to encourage public transport, more specifically mass transit systems.

Mass transit system is a system of large-scale public transportation in a given metropolitan area. Buses, trams, light and heavy rail are some examples of mass transit systems.

When running at optimum capacity, bus and trams are not as efficient as rail. This is because rail has a higher economy of scale for the power it takes to transport the amount of load carried. Some studies state that electrical powered vehicles are more efficient than petrol/diesel powered ones. Even Warren Buffet was quoted in his 2010 letters to shareholders “that [rail] is three times more fuel-efficient than trucking is…When traffic travels by rail, society benefits”.

Rail is the preferred mass transit system as cities expand and become denser.

Let’s give a few examples of how the metro rails in various metropolitan cities are expanding.

In Asia, when you mention railway or metro, many would immediately think of Japan. It is well known for its very developed rail network and timeliness of trains. Despite its widely-extensive and already developed network, there are still plans to expand its inter-city rail (Shinkansen) and rail network within its city in preparation for Olympics 2020, as shown in the examples below.

Source: Nippon
Source: Nippon
Source: JR East Annual Report
Source: JR East Annual Report

Another country that is very famous for its well developed metro system is Hong Kong. The metro system is run by Mass Transit Railway (MTR) Corp Limited. You can see the rail expansion in the figure below or read them here.

Source: MTR Annual Report
Source: MTR Annual Report

At home, the Land Transport Authority released a Land Transport Masterplan 2013. In the plan, it envisaged a more connected Singapore by year 2020 spearheaded by, once again, the increase in rail lines within Singapore City as shown in the diagram below. In addition, cross border lines such as the Singapore-Kuala Lumpur high-speed rail terminus are upcoming game changer in the nation’s transport system.

Source: LTMP 2013
Source: LTMP 2013

Singapore is not the only city in South-East Asia undergoing rail expansion. Both Bangkok and Jakarta have been interested to increase connectivity via rail. Though Jakarta has seen bumps on its rail execution, Bangkok has decent progress with their metro network expansion. You can see Bangkok’s current metro network and its future development in the figures below.

Bangkok current BTS Map Source: http://www.bangkok.com/
Bangkok current BTS Map
Source: Company’s Annual Report
Source: Mass Rapid Transit Authority of Thailand
Bangkok Future MRT Plans.  Source: Mass Rapid Transit Authority of Thailand

An industry for long term investment

The list could go on and on to include Sydney, London, Stockholm, Taiwan, Seoul, Shanghai, Beijing, etc. The point is, with net migration into prospering cities due to people seeking better living standards, cities will grow and become denser. This results in cities’ emphasis to develop their rail system.

With that, one of the ways we could capitalize on a country/city’s growing economy is by investing in their rail operators. We would be analyzing some of the region’s listed rail operators. So sign up for our newsletters to receive updates!

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