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Yes, You Can Make Money on China’s Collapsing Infrastructure

Stocks in this article: SHI PTR

BEIJING (TheStreet) -- China is admitting a dirty little secret hidden beneath its rising skylines: The nation's network of underground utility and petrochemical pipelines is a hazardous mess.

That admission, appearing in the form of a recent government order to fix the problem, is good news for companies that build, supply and and manage pipelines as well as their stock investors.

It's also proof the government wants to coax its cooling economy with infrastructure spending. Premier Li Keqiang has ruled out a full-fledged stimulus program to encourage GDP growth. Nevertheless, Beijing is funneling plenty of taxpayer money into "micro-stimulus" infrastructure projects, from new roads to high-speed railways.

In the next infrastructure overhaul, all urban sewer, water, steam and power cable pipelines are to be carefully surveyed and upgraded in dozens of cities over the next five years, according to the order issued by the State Council.

Beijing hasn't said how much it might spend to fix poorly made, sloppily installed and aging pipelines in cities such as Qingdao, Lanzhou and Shenzhen. But it's a serious undertaking that won't come cheap.

About three miles of sewer pipes blew up last fall in Qingdao, killing 62 people at home and on streets. Officials blamed the blast on fumes seeping from an old, leaking Sinopec (SHI) petroleum pipeline buried near the sewers.

In April, officials said, oil leaking from a defective Sinopec pipeline in Lanzhou contaminated a public water system serving about three million people. The oil pipe was buried under the water channel.

Land cave-ins tied to pipeline failures have been killing Shenzhen residents for at least eight years. Last year, for example, five people died when a culvert collapsed.

The Ministry of Housing and Urban-Rural Development is overseeing the initiative, said the official Xinhua news agency, with the goal of extending the lifespan of all underground utility services by 50 years.

Before contractors start laying new pipes, however, city officials nationwide will have to survey existing pipelines and sort out which government agency, company or utility is responsible for what piece of pipe. It won't be easy. In Guangzhou, according to the local newspaper Southern Metropolis Daily, about 30 entities control various sections of an underground system encompassing about 620 miles of pipes.

China's estimated 63,000 miles of state-owned oil and gas pipelines are to be checked and improved as well. Most are owned by PetroChina (PTR).

In January, according to official media, the oil companies including Sinopec were criticized by the State Administration of Work Safety for using corroding and poorly planned pipelines. Petrochemical and public utility pipelines have been installed too close and in a "very chaotic" way in many cities, an administration official said.

Stock pickers expect several pipe companies to benefit from the government order. Favorites include plastic storm water pipe manufacturers Newchoice Pipe, whose stock shot up 6% Monday to close at 16.15 yuan, and Weixing New Materials, whose stock jumped 7% to 11.98 yuan. Both are listed on the Shenzhen exchange.

Also Monday in Shenzhen, shares in Yanggao, a maker of valves and pipe fittings, finished 10% higher while pipe-maker Goody Technology ended the day up 4%.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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