Morningstar | MTR Signs Operational Agreement with Hong Kong Government on High Speed Rail Link
MTR has reached an operational agreement with the Hong Kong Government for the Express Rail Link, or XRL, which will kick off its service from late September 2018. The 10-year agreement was expected and reaffirms MTR's position as the only operator in Hong Kong and our narrow economic moat rating on the company. We estimate the rate of return close is largely in line with the company's expected return for rail projects in Hong Kong. Our estimate assumes current government forecast of daily patronage of 80,000 and fares to various destination on the mainland. We have factored the operational agreement into our forecasts and fair value increases to HKD 43 from HKD 42 and the company is slightly undervalued, but we require a larger margin of safety and our 3-star rating is unchanged.Under the operational agreement and supplement to the Existing Service Concession Agreement with the Kowloon-Canton Railway Corporation, or KCRC, MTR will receive 10% of XRL’s positive discounted net cash flow, at the MTR's discount rate, and fixed payment totaling HKD 7.97 billion from KCRC over the 10-year concession period. Revenue from the XRL will be added to the existing variable annual payment by MTR to KCRC, calculated based on the existing method of 35% for revenue above revenue of HKD 7.5 billion. The revenue will include station commercial revenue. An adjustment will also be made to patronage revenue regarding the deviation between forecast and actual patronage. MTR is responsible for the variation above or below 15% of patronage forecast while the risk is split between MTR of 30% and KCRC of 70% if the variation exceeds 15%.
MTR is a railway operator. Co. operates a rail-based transportation system in Hong Kong, comprising Domestic and Cross-boundary services, an Airport Express railway and a light rail system. Co. also provides intercity services to and from the Mainland of China as well as a small bus operation in Hong Kong offering convenient feeder services. Co.'s segments include: Hong Kong transport operations; Hong Kong station commercial businesses; Hong Kong property rental and management businesses; Hong Kong property development; railway, property rental and management businesses outside Hong Kong; Mainland of China property development; and other businesses.
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