Updated Fare Adjustment Mechanism for MTR

Our fair value estimate for narrow-moat-rated MTR 00066 is unchanged at HKD 42 per share as we fine-tune our fare growth assumptions following the company’s fare adjustment mechanism review. We believe the updated fare adjustment mechanism calculation and the increase in the minibus interchange discount will have a minor negative impact on fare growth in the next five years. 2023 fare growth will be further pressured by the deferral of the 0.2-percentage-point fare adjustment and 1.65-percentage-point 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 maintain our long-term thesis that MTR will continue to take market share from other modes of public transport as it extends its network. We expect a decline in 2023 net income due to lower property development profit but expect a pickup from 2024 with more project completions expected. We think the shares are currently undervalued at a 9.9% discount to our fair value estimate as of the March 21 close price.