Follow the Zhejiang Expressway

Some feel this neglected toll road company, whose stock price rose 35.6% last year, is a good buy.
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HONG KONG -- Most of the stocks to be added to

Morgan Stanley Capital International's China Free

index have done little since the reshuffling of the index was announced late March, though many of those stocks are expected to start moving closer to

June 1.

Before joining the herd of indices in Asia, however, consider not one of the companies being added to the index, but rather a neglected, unglamorous company that makes nothing cyber, yet makes plenty of money:

Zhejiang Expressway

.

Listed in Hong Kong and available to foreign investors (and with a secondary listing in London pending), Zhejiang Expressway is a toll road company in one of China's richest provinces. Ironically, as earnings rise, the company's stock price falls, to the point that it now trades at a 56% discount to net asset value. What gives?

"They have no technology concept," says a frustrated Maurien Yau, infrastructure analyst at

HSBC

, which has no investment banking relationship with Zhejiang. The company is at the top of her buy list, but the crowd in Hong Kong -- besotted with profitless technology stocks -- has shown no interest. Zhejiang's price is down 40% in eight months.

Zhejiang now trades at less than 8 times this year's projected earnings. Sales in the first two months of this year were up 30% over the same period in 1999. Earnings last year rose 35.6%, yet the stock is trading just above its low reached at the bottom of the Asian financial crisis in the summer of 1998.

And while the company doesn't export goods or technology, it's a derivative way to play expanding China trade: Things that get made in Zhejiang, up the highway from Shanghai, have to get trucked somehow from the industrial park to the port or airport on their way out of China -- hence, toll roads.

Also, if China joins the

World Trade Organization

, sectors including Internet services, chemicals, banking, insurance and retailing will be hit with "dramatic change" from added competition, according to a report by consulting firm

McKinsey

. Few toll roads get built, so as growth happens in Zhejiang, the road this company has constructed should continue to receive more traffic.

Not many mutual funds hold a great deal of Zhejiang stock, although the

(DRFMX) - Get Report

Dreyfus Emerging Markets fund was on record as holding the stock a few months back, attracted by the stock's low valuation and steady cash flow.

Another fund with 1.4% of its funds in Zhejiang is the

closed-end

Greater China

(GCH)

fund, now trading at a 26% discount to net asset value. The fund kept pace with Hong Kong's benchmark

Hang Seng

index until the financial crisis in Asia, and since then has lagged it. No mystery there, since half the Hang Seng is made up of three highflying stocks:

China Telecom

,

Hutchison Whampoa

(HUWHY)

and HSBC

(HBC)

.

But as Hong Kong loses market weighting relative to China, and as these three popular stocks hit valuations far above those in the rest of the region, value stocks such as Zhejiang could easily make a comeback.

Corporate management in China may not be the greatest on Earth, but a 56% discount to book value can accommodate quite a few bumps in the toll road.