One of the greatest economic booms in American history coincided with the construction of the first transcontinental railway. Not only did the project employ thousands of people, it opened new vistas and businesses opportunities. After its first full year of operation in 1869, the flow of goods on the railway would have been valued at about $1.6 billion of today’s dollars.

China recognizes the high potential value of railroads and their tie to economic activity, particularly since it’s geographically the fourth largest country in the world with a landmass of more than 3.7 million square miles.

Thanks to China’s sheer size, a robust rail network is a necessity when it comes to exploiting the country’s vast reserves of coal, iron ore, crude oil, natural gas and a host of other commodities. To move these goods between production fields and industrial centers, the distances are enormous.

China has a relatively well-developed rail network in its coastal regions, but the interior of the country where most of those resources are located is largely underserved by railroads. At the same time, its existing network is plagued by delays because of heavy congestion.

Because of the need for additional capacity and the proven link between railroads and growth, the Chinese government is making railroad investment a cornerstone of its most recent plan to spur the economy.

The government recently announced that it plans to spend about RMB650 billion on rail development this year, with the goal of investing at least RMB3.3 trillion and building 20,000 kilometers of new railroad by the end of 2015. It also plans to grant ownership and operating rates on some city and regional connections to local governments and private investors.

So far this year, China has already sunk RMB215.9 billion into its railways, up 21.5 percent on a year-over-year basis according to the China Railway Corporation, so there’s plenty of additional spending yet to come in 2013 alone.

In addition to easing overcapacity in the country’s coal, steel and cement industries, the investment is also geared towards improving capacity issues in passenger movement. Despite its population of 1.3 billion, China currently only has about 93,000 kilometers of track compared to 230,000 km in the US. Consequently, railroad investment will clearly remain a high priority for Beijing in the years to come.

The Plays

Long-Term Portfolio holding Anhui Conch Cement (Hong Kong: 914, OTC: ANCHY) has already rallied on the news, with shares up by just over 14 percent over the trailing month before spending has even begun in earnest.

The company is China’s largest producer of cement and clinker, an aggregate that is ground and used to produce “Portland” cement (the most common and versatile type of cement). After a strong run up late last year, shares of Anhui Conch lost nearly a third of their value from January to early July, on signs of a sluggish Chinese economy and a sharp downturn in construction.

But vast amounts of cement are used when laying railroad beds and precast cement railroad ties are increasingly prevalent, particularly in harsher environments. When China increased railroad spending as part of its 2008 stimulus program, revenue at Anhui Conch shot up by 29 percent, largely thanks to the government’s growing investment in railroads.

While the new spending program isn’t quite as large as the one in 2008, it could boost revenues at Anhui Conch by as much as 25 percent about current levels over the next few years.

Continue buying Anhui Conch Cement up to HKD40.

China Railway Group (Hong Kong: 390, OTC: CRWOF) is China’s largest construction company, completing 4,896 kilometers of track in 2012 alone. Its operations extend beyond just railroads, though. Last year alone, the company completed a total of 1,028 kilometers of highways.

China Railway Group enjoys a significant advantage because it provides a full range of options, including survey, design, consulting and construction services, allowing it to see a project all the way through from the planning to construction phases.

Shares are currently trading at an extremely attractive price-to-earnings (P/E) ratio of just 9.4, one of its lowest in years. The drop in valuation largely stems from the Chinese government’s curtailment of its infrastructure spending over the past few years, from fear of overheating the economy. But with the Chinese government as one of the company’s largest customers, the new spending program should disproportionately benefit China Railway Group.

The company has also been developing a growing global business, winning clients in South Africa, Cambodia and South America in recent years.

As a state-owned enterprise, China Railway Group will likely handle the bulk of the new railroad construction and is a solid buy up to HK6.

While diesel-powered locomotives play an important role in China’s railroads, the country has increasingly focused on high-speed electric trains as a cleaner, faster alternative to move both passengers and freight. China currently operates the world’s longest high-speed rail network at 9,300 kilometers.

Another major beneficiary of China’s railway spending program will be CSR Corp (Hong Kong: 1766, OTC: CSRGF), China’s largest train manufacturer in China that has been enjoying growing sales both at home and abroad.

In addition to being the third-largest high-speed train producer in the world, the country’s technology is also used in the manufacture of electric vehicles, marine crankshafts and diesel engines, construction machinery and wind turbines. Its CRH380A high-speed train set a world record in 2010 after reaching 486.1 kilometers per house during a trial run.

Already enjoying a dominant position in the Chinese train making market, CSR recently inked an agreement with General Electric (NYSE: GE) to establish a 50-50 joint venture to produce high-speed trains in the US.

Over the trailing year, shares of CSR Corp have been essentially flat despite an 11.95 percent increase in last year’s revenues. But basic earnings per share declined 8.3 percent to RMB0.299, due to a sharp increase in cost of sales related to the introduction of new locomotive models. New models always result in higher upfront costs until enough have been manufactured to streamline production processes and recoup research and development costs.

Given that CSR is certain to benefit from China’s growing railroad spending program, costs will become less of a concern as volume of production ramps up, in turn boosting earnings.

Buy CSR Corp up to HKD6.50.