MTR: 2023 Earnings Under Pressure Due to One-Off Charge on Stockholm Commuter Rail Service

Established in 1975, MTR 00066 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.

MTR is experienced in building durable returns via integrated rail transport and property development. The firm benefits from land development rights, allowing for substantial value uplift on previously underutilized land, as part of its total return. In the past decade, the property development business averaged 25%-30% of total assets, which helps to boost overall returns. Rail network expansion is the key growth driver. In our view, a growing rail network supports steady patronage growth, boosts traffic for the firm’s rental business, and provides property development opportunities. Growth opportunities remain in Hong Kong with several line extensions, and new stations, over the next 10 years and its operation has gained market share from other modes of public transport. MTR has also invested outside of Hong Kong, building on its existing offshore operation.

MTR’s overseas expansion remains in the early stages, with total asset contribution averaging about 10% over the past three years. While city rail projects in China present good opportunities, MTR is likely to face less favorable regulatory treatment, and state-owned enterprises as their competitors accept lower returns on projects, in our opinion. Its international rail operations include operation and management concessions in the U.K., Sweden, and Australia.