Company Reports

Established in 1975, MTR is the sole rail operator in Hong Kong following the rail merger with Kowloon-Canton Railway in 2007. It operates a rail-based transport system, comprising domestic rail services, light rail, Airport Express, and cross-boundary and a high-speed rail service to the mainland. With an average weekday patronage of over 5 million passengers and growing, the company is one of the world’s busiest rail operators. MTR differentiates itself from traditional rail operators with its "rail-plus-property" funding model. It is given the rights for property development along the rail corridor as a government incentive to induce construction. The high-quality rail network and unusual business model of rail plus property are MTR's key strengths, underpinning our narrow economic moat rating.

Narrow-moat MTR delivered in-line 2023 results. The company reported a 19% year-on-year growth in its revenue from recurring business, as the transport and retail-related businesses benefited from border reopening. Property development profit was weak but within expectation, given the timing of project completions.

We maintain our fair value estimate of HKD 42 for narrow-moat MTR following the announcement of the early termination of the loss-making Stockholm commuter rail service, or Stockholms pendeltag, in March 2024, ahead of the contract expiration in 2026. We believe this is due to the challenging environment given the shortage of operational staff and maintenance issues. We are mildly positive on the early termination as it allows the company to cut losses on an unprofitable venture and reallocate its resources to other parts of its business. While we estimate a 2%-3% hit to its 2024-26 top line due to the early termination, we expect a 1% accretion to MTR’s bottom line over the same period. That said, we lower our 2023 earnings per share forecast by 9% to HKD 1.18, as the company expects to incur a total of SEK 1 billion, or a HKD 700-million charge in 2023 for 1) the exit fee; 2) the provision for inventory and assets to be transferred to the new operator with no consideration; and 3) the assets to be written off. We maintain our 2023 dividend per share forecast of HKD 1.35 given MTR’s progressive dividend policy. Our long-term view for the company remains unchanged, as we continue to expect MTR to benefit from market share gains from other public transportation modes as the company continues to expand its railway network. We think the shares are currently attractive with a 30% discount to our fair value estimate, as of the Nov. 1 close price.

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.

Established in 1975, MTR is the sole rail operator in Hong Kong following the rail merger with Kowloon-Canton Railway in 2007. It operates a rail-based transport system, comprising domestic rail services, light rail, Airport Express, and cross-boundary and a high-speed rail service to the mainland. With an average weekday patronage of more than 5.5 million passengers and growing, the company is one of the world’s busiest rail operators. MTR differentiates itself from traditional rail operators with its "rail-plus-property" funding model. It is given the rights for property development along the rail corridor as a government incentive to induce construction. The high-quality rail network and unusual business model of rail plus property are MTR's key strengths, underpinning our narrow economic moat rating.

We maintain our fair value estimate of HKD 42 per share after attending MTR’s preblackout meeting, which showed that its latest operating statistics are in line with our expectations. Our long-term thesis that MTR should benefit from a market share gain from other modes of public transportation as it further expands its railway network is unchanged, and we continue to see shares as undervalued, with a 14% discount to our fair value estimate, as of the July 4 closing price.

Our fair value estimate for narrow-moat-rated MTR is unchanged at HKD 42 as we finetune our fare growth assumptions following the company’s fare adjustment mechanism, or FAM, review. We believe the updated FAM calculation and the increase in the minibus interchange discount have a minor negative impact on fare growth in the next five years. In addition, 2023 fare growth will be further pressured by the deferral of the 0.2 percentage point fare adjustment and 1.65 percentage points accumulated fare increase (cut from 2.85%) under the affordability-linked arrangement to 2024. That said, we think the overall impact on transport revenue is minimal, and we continue to expect the reopening of borders to drive recovery in the company’s recurring earnings.

We are transferring coverage of MTR, with narrow moat and stable moat trend ratings. We have lowered our fair value estimate to HKD 42 per unit from HKD 45, following an update to our model assumptions and factoring a higher near-term cost of debt from future interest rates hikes. Our fair value estimate implies a price/book ratio of 1.5 times. In our view, the reopening of the Hong Kong and China borders and resumption of cross-boundary travel and duty-free business will support a strong recovery in the revenue and earnings contribution of its core recurrent business. However, we think the positive outlook has been priced in, given the run-up in its share price toward the end of 2022, and we see the company as fairly valued currently.

Established in 1975, MTR is the sole rail operator in Hong Kong following the rail merger with Kowloon-Canton Railway in 2007. It operates a rail-based transport system, comprising domestic rail services, light rail, Airport Express, and cross-border and a high-speed rail service to the mainland. With an average weekday patronage of more than 5.5 million passengers and growing, the firm is one of the world’s busiest rail operators. MTR differentiates itself from traditional rail operators with its "rail-plus-property" funding model. It is given the rights for property development along the rail corridor as a government incentive to induce construction. The high-quality rail network and unusual business model of rail plus property are MTR's key strengths, underpinning our narrow economic moat rating.

Established in 1975, MTR is the sole rail operator in Hong Kong following the rail merger with Kowloon-Canton Railway in 2007. It operates a rail-based transport system, comprising domestic rail services, light rail, Airport Express, and cross-border and a high-speed rail service to the mainland. With an average weekday patronage of more than 5.5 million passengers and growing, the firm is one of the world’s busiest rail operators. MTR differentiates itself from traditional rail operators with its "rail-plus-property" funding model. It is given the rights for property development along the rail corridor as a government incentive to induce construction. The high-quality rail network and unusual business model of rail plus property are MTR's key strengths, underpinning our narrow economic moat rating.

Narrow-moat MTR reached a land exchange agreement with the Hong Kong government on the Siu Ho Wan depot conversion project. In our view, the project provides a small increment to its overall rail network with the addition of one rail station. We think the opportunity lies in the development of residential real estate totaling 20,000 units, and of commercial real estate in a shopping mall. The land premium due to the government was not disclosed but MTR noted the calculation is based on market value, less construction costs of the new Oyster Bay Station, costs in reprovisioning the depot and site formation for the development of residential and commercial properties. MTR estimates total capital expenditure to be HKD 36 billion, incurred over a 15-year period. In line with previous projects, the commercialization of this project includes the tendering of the residential development with MTR having the option to receive an upfront payment for the project tendered out, a back-end profit share to the project, or a combination of both. In our view, the retail mall could be retained by MTR, adding to the group’s investment property portfolio. With the mall likely to be located above the new station, recurring cash flow is supported by tenants in the consumer defensives sector, serving the immediate catchment area. We leave our fair value estimate of HKD 45 per share unchanged but we have made slight adjustments to patronage assumptions.

In line with expectation, MTR’s first-half result reflected the impact of the lockdown with the transport operations losing money. The recurrent business excluding the booking of properties was at a HKD 678 million loss. However, revenue was 3.2% higher helped by better overseas contribution. We maintain our patronage assumption for the improvement seen in June to continue in the second half. Domestic patronage in June edged higher to 121.6 million and we assume patronage of 123 million per month in the third quarter, and further increase to 125 million per month in the fourth quarter. The opening of the final phase of the Shatin-Central Link in May is supportive of patronage growth in the overall network as population movement continues to improvement. We also note patronage is generally seasonally higher in the fourth quarter.

Following another extended lockdown in the first half of 2022, we expect narrow-moat-rated MTR to report a weak first-half result. In the pre-close meeting, management noted its malls underperformed Hong Kong retail sales, while rent decline in the station kiosk in the first half has slowed.

Established in 1975, MTR is the sole rail operator in Hong Kong following the rail merger with Kowloon-Canton Railway in 2007. It operates a rail-based transport system, comprising domestic rail services, light rail, Airport Express, and cross-border and a high-speed rail service to the mainland. With an average weekday patronage of more than 5.5 million passengers and growing, the firm is one of the world’s busiest rail operators. MTR differentiates itself from traditional rail operators with its "rail-plus-property" funding model. It is given the rights for property development along the rail corridor as a government incentive to induce construction. The high-quality rail network and unusual business model of rail plus property are MTR's key strengths, underpinning our narrow economic moat rating.

Established in 1975, MTR is the sole rail operator in Hong Kong following the rail merger with Kowloon-Canton Railway in 2007. It operates a predominantly rail-based transport system, comprising domestic rail services, light rail, Airport Express, and cross-border and a high-speed rail service to the mainland. With an average weekday patronage of more than 5.8 million passengers and growing, the firm is one of the world’s busiest rail operators. MTR differentiates itself from traditional rail operators with its "rail-plus-property" funding model. It is given the rights for property development along the rail corridor as a government incentive to induce construction. The high-quality rail network and unusual business model of rail plus property are MTR's key strengths, underpinning our narrow economic moat rating.

MTR’s second-half result was slightly better than the first half, as restrictive measures were relaxed in the second half of 2021. This has provided an uplift in patronage across the rail network and an improvement in station commercial revenue, mainly in advertisement revenue. Second-half underlying net profit of HKD 7 billion, took full-year net profit to HKD 11.1 billion. The booking of development properties supported net profit, along with good cost control. Despite domestic patronage recovering to near prepandemic level in the second half, the transport business remained loss making in the second half as borders with mainland China and the world remained largely closed. This remains a key driver for a full recovery in earnings and a positive catalyst for the stock.

MTR provided a generally positive outlook in its pre-close meeting ahead of the firm’s second-half fiscal 2021 result. Domestic passenger traffic had mostly recovered to 90% of the pre-pandemic level, prior to the latest omicron variant outbreak. A recovery in domestic passenger traffic also resulted in improvement in some station commercial related revenue, mainly in advertising. A recovery in rents for station kiosks and investment properties is expected to take longer, though negative rental reversions slowed in the second half of fiscal 2021, compared with the first half.

Established in 1975, MTR is the sole rail operator in Hong Kong following the rail merger with Kowloon-Canton Railway in 2007. It operates a predominantly rail-based transport system, comprising domestic rail services, light rail, Airport Express, and cross-border and a high-speed rail service to the mainland. With an average weekday patronage of more than 5.8 million passengers and growing, the firm is one of the world’s busiest rail operators. MTR differentiates itself from traditional rail operators with its "rail-plus-property" funding model. It is given the rights for property development along the rail corridor as a government incentive to induce construction. The high-quality rail network and unusual business model of rail plus property are MTR's key strengths, underpinning our narrow economic moat rating.

MTR's first-half results were resilient with revenue and operating profit improving on the second half of fiscal 2020. Operating profit from its recurrent business was HKD 3.90 billion, compared with HKD 1.20 billion in the second half of fiscal 2020. This was driven by a higher level of patronage for the domestic service and overseas income. Station commercial revenue, which is tied to patronage, and rental from investment properties, was steady on a half-on-half basis. The first-half dividend was in line with the same period last year at HKD 0.25 per share and our full-year forecast of HKD 1.23 is reaffirmed. Our fair value estimate is adjusted to HKD 45.00 per share from HKD 46.00 as we anticipate a slower recovery in fiscal 2021, mainly for the cross-border and airport express patronage, and patronage-related income in station commercial revenue.

Established in 1975, MTR is the sole rail operator in Hong Kong following the rail merger with Kowloon-Canton Railway in 2007. It operates a predominantly rail-based transport system, comprising domestic rail services, light rail, Airport Express, and cross-border and a high-speed rail service to the mainland. With an average weekday patronage of more than 5.8 million passengers and growing, the firm is one of the world’s busiest rail operators. MTR differentiates itself from traditional rail operators with its "rail-plus-property" funding model. It is given the rights for property development along the rail corridor as a government incentive to induce construction. The high-quality rail network and unusual business model of rail plus property are MTR's key strengths, underpinning our narrow economic moat rating.