EUR 850.00 For Business Accounts Only

Morningstar | Strong Performance for Hong Kong Offsets Mixed International Operation in MTR's 1H18 Result

Narrow-moat MTR’s first-half result was largely in line with expectations with the underlying operations in Hong Kong performing well. While there are operational concerns regarding the well-publicised Shatin-Central, or SCL, link, we do not see the issue will alter the current business structure of MTR and the rail plus property model. Our estimates and fair value of HKD 42 is unchanged and we see the company as fairly valued.

Management has appointed a third-party assessment on the safety of the platform in Hung Hom Station Extension and the Board, in conjunction with an external consultant, will review MTR's process and procedures. We expect operational improvements in the latter while higher expenditure may result if the assessment deems the platform unsafe. MTR is the project manager and the government is the ultimate owner of the SCL project, and will bear the cost of any higher expenditure. However, the government can pursue MTR on the company's negligence in performing its obligation under the agreement with total liability capped at the fees MTR receive from the government as project manager. We do not expect the above to impact MTR's current offshore operation but its international expansion strategy may slow in the near term as it focuses on the domestic, Hong Kong business.

The underlying Hong Kong business continues to perform well. Patronage increased across all services with the highlight being cross-border service patronage, which has seen a recovery in market share. Tourist arrivals from the mainland increased provided a boost. Revenue growth is also compounded by higher average fares and we note that this was without an adjustment in fares under the fare mechanism. We maintain our patronage forecasts with cross patronage forecast at 5%, slightly below first half growth of 5.9% as we anticipate a weaker renminbi may lead to slower tourist arrivals from the mainland.

The higher patronage in the first half flowed through the higher Station Commercial Businesses, which is mainly led by retail revenue, was 11% stronger. Rental and management business saw slower growth as rental reversion at its malls declined 2.2%. This is mainly due to the rollover of rental agreements signed three years ago as the retail market in Hong Kong reached its peak. While retail in Hong Kong has declined sharply off its peak, the market has recovered last year and we expect this to soften the decline in rental reversion going forward. This is also supported by a staggered lease expiry profile. The completion of two malls in 2020 and 2022, respectively, will add to MTR's recurring cash flow and forms part of its return in the rail plus property model.

Land tending at Yau Tong Ventilation Building was completed with the package awarded to Sino Land and CSI while the Wong Chuk Hang Station Package 3 was awarded to CK Asset Holdings. Depending on market conditions, MTR is looking will tender the Ho Man Tin Station Package 2 and LOHAS Park Package 11. The above packages will underpin long-term return for MTR. In the medium term, the completion of a number of residential projects in the earlier awarded LOHAS Park Package will contribute meaningfully from 2020. For the projects completing this year and 2019, contribution to profit is small as MTR is acting as manager of the projects and will only receive an agency fees.

MTR's overseas operation was mixed with good performance in Mainland China and Australia offset by Europe, mainly for its Sweden Pendeltagen operation.