MTR: Hong Kong Railway and Investment Properties Businesses Gradually Recover on Border Reopening

We maintain our fair value estimate of HKD 42 per share after attending MTR’s 00066 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.

As expected, overall patronage numbers in the first five months of 2023 continued to improve as borders are now fully reopened—in particular, that of the airport express, cross-boundary, and high-speed rail businesses increased significantly from the same period last year as tourists gradually return. We continue to assume overall 2023 passenger volume to be below 2018 levels (before the pandemic and social unrest), as labor and flight capacity constraints hinder the recovery of Hong Kong tourism. We expect the constraints to ease over the course of the second half of 2023, driving a full recovery of passenger volume in 2024. Positively, management noted that year-on-year retail sales growth at station kiosks and shopping malls outperformed Hong Kong’s overall retail sales growth of 21.7% in the first four months of 2023. That said, we think outward tourism will cap MTR’s retail sales growth while its bottom line will see pressure from the effects of rising energy cost and business cost inflation. On the other hand, we expect MTR’s property rental and management business to be supported by the opening of The Wai and The Southside in late July and the fourth quarter of 2023, respectively.