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

We maintain our fair value estimate of HKD 42 for narrow-moat MTR 00066 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.

We expect MTR’s second-half performance to be driven by a further recovery in tourism, which would support cross-boundary and high-speed rail passenger numbers, as well as the rental property and duty-free stores business. However, we continue to assume a full recovery in these segments only in 2024 as tourism in 2023 remains capped by labor shortages, flight capacity constraints, and outbound tourism during the summer holiday period. On top of that, the opening of The Wai in July and The Southside, due to open in fourth-quarter 2023, should also generate additional rental income for the firm. Over the longer term, we continue to see MTR benefiting from market share gains from other modes of public transportation as the company continues to expand its railway network.