MTR Earnings: Patronage and Retail Recovery Continues To Support Revenue Growth

We maintain our fair value estimate of HKD 42 for narrow-moat MTR following its first-half results and think shares are currently attractive with an approximate 17% discount to our fair value estimate as of Aug 11. Year-on-year revenue growth of 6% is in line with our expectations as the reopening of the border supports rail passenger numbers and a retail recovery. However, earnings beat our forecasts on the back of an improved margin and lower finance costs as the company was able to maintain a relatively low average borrowing cost of 3.3% in the first half of 2023. Meanwhile, profit from Hong Kong development properties dropped 92% year on year, but that was within our expectations given the lack of major projects completed during the year. We have raised our 2023 EPS by 24% to HKD 1.29 after incorporating better operating margins, lower finance costs, and a HKD 1 billion noncash valuation gain. Our longer-term earnings forecasts are largely unchanged as we have already assumed the normalization of margins and finance costs in 2024-25.