9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: 2308 8200 Research: 3608 8096 Facsimile: 3608 6132 HONG KONG RESEARCH Analyst: Carmen Wong 12 th March 2013 MTR CORPORATION LIMITED ( 香港鐵路有限公司 ) Sector : Transportation Chairman : Dr. Raymond Ch ien Kuofung HKSE Code : 00066 Market Price : HK$31.95 (12/03/2012) Chief Executive Officer : Jay Herbert Walder HSI : 22,890.60 (12/03/2012) Shares Issued : 5,794.8 million Market Cap : HK$185,144.1 million 52-week Hi / Lo : HK$32.90 / HK$24.60 SUMMARY OF THE FINAL RESULTS FOR THE YEAR ENDED 31 ST DECEMBER 2012 Final Results Highlights 2012 2011 HK$ million HK$ million Change Turnover 35,739 33,423 6.9% Operating expenses (22,656) (21,299) 6.4% EBITDA 13,083 12,124 7.9% Profit on property developments 3,238 4,934 (34.4%) Operating profit before depreciation, amortisation and variable annual payment arising from the Rail Merger 16,321 17,058 (4.3%) Depreciation and amortisation (3,208) (3,206) 0.1% Interest and finance charges (879) (921) (4.6%) Change in fair value of investment properties 3,757 5,088 (26.2%) Profit attributable to shareholders 13,532 15,556 (13.0%) Underlying profit (excluding investment property revaluation) 9,775 10,468 (6.6%) Earnings per share Basic HK$2.34 HK$2.69 (13.0%) Final dividend per share HK$0.54 HK$0.51 5.9% Total dividend per share HK$0.79 HK$0.76 3.9% Total number of passenger boarding (in millions) Domestic Service 1,431.0 1,366.6 4.7% Cross-boundary Service 109.7 103.9 5.6% Airport Express 12.7 11.8 7.6% Light Rail and Bus 213.2 205.2 3.9% Average number of passengers (in thousands) Domestic Service (weekday) 4,148.0 3,968.0 4.0% Cross-boundary Service (daily) 299.7 284.6 4.9% Airport Express (daily) 34.7 32.3 7.1% Light Rail and Bus (weekday) 597.3 576.7 3.6% EBITDA margin (excluding railway franchises outside of HK) 54.4% 55.6% (1.2 ppt) This report has been prepared solely for information purposes and we, East Asia Securities Company Limited are not soliciting any action based upon it. Neither this document nor its contents shall be construed as an offer, invitation, advertisement, inducement or representation of any kind or form whatsoever. This document is based upon information, which we consider reliable, but accuracy and completeness are not guaranteed. Opinions expressed herein are subject to change without notice. At the time of preparing this report, we have no position in securities of the company or companies mentioned herein, while other Bank of East Asia Group companies may from time to time have interests in securities of the company or companies mentioned herein.
MTR Corporation ( MTRC or the Group ) reported a 13.0% year-on-year decline in net profit to HK$13,532 million for the year ended 31 st December 2012. Underlying profit was better than expectation, despite a slippage of 6.6% year-on-year to HK$9,775 million. The decrease in profits was mainly dragged by a lower profit contribution from property development segment which was down 34.4% from HK$4,934 million in 2011 to HK$3,238 million in 2012. Revenue breakdown: 2012 2011 HK$ million % HK$ million % Change Hong Kong transport operations 14,523 40.6% 13,509 40.4% 7.5% Hong Kong station commercial activities 3,680 10.3% 3,422 10.2% 7.5% Hong Kong property rental and management 3,401 9.5% 3,083 9.2% 10.3% Railway franchises outside of Hong Kong 12,786 35.8% 12,411 37.1% 3.0% Other businesses Total 1,349 3.8% 998 3.0% 35.2% 35,739 100.0% 33,423 100.0% 6.9% Total revenue grew 6.9% year-on-year to HK$35,739 million. Revenue from Hong Kong transport operations, the top revenue contributor with 40.6% contribution, continued to show steady revenue growth of 7.5% to HK$14,523 million, on the back of an 4.7% increase in the total patronage from its rail and bus passenger services as well as 2.9% rise for its average fare per passenger. EBITDA margin expanded by 0.5 percentage point to 46.1% from the previous year. MTRC s overall share of the franchised public transport market increased to 46.4% in 2012 as compared to 45.4% in 2011. Share of cross-harbour traffic rose moderately to 66.7% from 66.2% in 2011. Its market share in cross-boundary business declined slightly from 54.5% to 54.2%, amid strong competition particularly from buses. Meanwhile, its market share in air passengers stayed unchanged at 21.8%. Revenue from station commercial activities showed steady growth of 7.5% year-on-year to HK$3,680 million, as higher rentals (+12.4% year-on-year) and advertising revenue (+12.0% year-onyear) offset lower revenue from telecommunications (-20.8% year-on-year). As at 31 st December 2012, the number of shops increased to 1,331 versus 1,294 as at 31 st December 2011. EBITDA margin marginally increased by 0.1 percentage point to 89.1% from 2011. Revenue from property rental and management businesses leaped 10.3% year-on-year to HK$3,401 million, driven by an average 16% increase in rental reversion. As at 31 st December 2012, the occupancy rate of its 13 shopping malls in Hong Kong and the Group s 18 floors at Two International Finance Centre was close to 100%. EBITDA margin increased by 0.6 percentage point to 81.6% from the previous year. Profit from property development was HK$3,238 million in 2012, a decrease of 34.4% year-on-year, which mainly comprised of profits from The Riverpark at Che Kung Temple Station, as well as inventory units sold at Festival City in Tai Wai, Lake Silver in Ma On Shan and The Palazzo in Fo Tan. In addition, the Group tendered a number of sites during the period, which included i) Tsuen Wan West Station (TW5) Cityside, ii) Tsuen Wan West Station (TW5) Bayside, iii) Long Ping Station (North) and iv) Tsuen Wan West Station (TW6) sites in January 2012, August 2012, October 2012 and January 2013 respectively. 2
Revenue from railway franchises outside Hong Kong grew steadily at 3.0% year-on-year to HK$12,786 million, thanks to a full-year contribution from Phase 2 of the Shenzhen Metro Longhua Line which opened for service in June 2011 and higher revenue from Metro Trains Melbourne Pty. Ltd ( MTM ) following its network expansion during the year. EBITDA margin climbed to 4.7% in 2012 from 3.6% in 2011. In respect of its associates, namely i) Beijing MTR Corporation Limited ( BJMTR ), ii) London Overground Rail perations Limited ( LOROL ), iii) Tunnelbanan Teknik Stockholm AB and iv) Hangzhou MTR Corporation Limited ( HZMTR ), after-tax profit (excluding one-off accounting adjustments) soared 51.7% year-on-year to HK$176 million, mainly attributable to strong earnings growth in BJMTR (+121.4% year-on-year). As at 31 st December 2012, total outstanding borrowings amounted to HK$23,222 million, slightly increased from HK$23,168 million a year ago. However, with its strong operating cash inflow (+7.8% year-on-year to HK$13,151 million), its net debt to equity ratio improved from 11.4% by end- December 2011 to 10.9% by end-december 2012. Although earnings per share fell 13.0% year-on-year to HK$2.34, the Group announced a 5.9% increase in final dividend of HK$0.54 per share. Total dividend per share slightly increased from HK$0.76 in 2011 to HK$0.79 in 2012, representing payout ratio of 33.8% (versus 28.3% in 2011). Outlook & Prospect Muted property development profit in 2013. Due to a lack of project completions, the Group is not expected to book any profits from its current projects under development in 2013 except sale of its inventory units. Completion of LOGAS Park Phase 3 project will be delayed from 2013 to 2014. Besides, MTRC plans to tender the development of a few sites over the next 12 months, including i) Tai Wai Station site, ii) Tin Shui Wai Light Rail site, iii) LOHAS Park Phase 4 and iv) Long Ping Station (South) site. However, in light of expected increase in land supply, the tendering may become less attractive to developers, resulting in lower profit sharing to MTRC. Review of the Fare Adjustment Mechanism ( FAM ) to be an overhang for the shares. The fiveyear review of the FAM will be concluded by end of March 2013, which will act as key overhang for MTRC shares in the near term. Additional hurdles such as MTRC s service level will likely be incorporated into the FAM, which may trim the pricing power of the Group. Implementation of the mechanism will be started from June 2013. Good progress in construction of new rail lines in Hong Kong. Four rail lines namely i) the West Island Line, ii) the South Island Line (East), iii) the Kwun Tong Line Extension and iv) the Express Rail Link (Hong Kong section) are targeted to commence operations in 2014-2015, and the projects have achieved completion of 65%, 30%, 31% and 31% respectively. For Shatin to Central Link, formal project authorization and funding approval have been obtained and construction is now underway. The section between Tai Wai and Hung Hom and the section between Hung Hom and Admiralty are scheduled to be completed in 2018 and 2020 respectively. Potential growth from further expansion outside Hong Kong. The Group is expected to continue exploring opportunities in overseas markets, offering upside potential for the shares in the long-term. For instance, MTRC has joined a consortium to submit an indication of interest for a Sidney project. Concern over higher gearing ratio. To cope with network expansion, MTRC expects capital expenditure (CAPEX) of HK$29 billion in 2013, with total CAPEX of HK$53 billion for 2013-2015 (versus HK$11 billion in 2012). The surge in CAPEX would lift its gearing ratio up to around 20% in 2013 and probably cap the upside on dividend payment. 3
Shares of MTRC are trading at 12.3% discount to 2013E NAV, comparable to its historical average of 8.8%. Downside risks include weak-than-expected patronage, a larger than expected drop in property prices, unfavourable adjustment on FAM, and delays in launching new rail lines and property projects. Recommendation: Hold 4
Important Disclosure / Analyst Declaration / Disclaimer This report is published by East Asia Securities Company Limited, a wholly-owned subsidiary of The Bank of East Asia, Limited ( BEA ). Each research analyst primarily responsible for the content of this report (whether in part or in whole) certifies that (i) the views on the companies and securities mentioned in this report accurately reflect his/her personal views; and (ii) no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. This report has been prepared solely for information purposes and has no intention whatsoever to solicit any action based upon it. Neither this report nor its contents shall be construed as an offer, invitation, advertisement, inducement or representation of any kind or form whatsoever. This report is based upon information, which East Asia Securities Company Limited considers reliable, but accuracy or completeness is not guaranteed. The analysis or opinions expressed in this report only reflect the views of the relevant analyst as at the date of the release of this report which are subject to change without notice. Any recommendation contained in this report does not have regard to the specific investment objectives, financial situation and the particular needs of any specific recipient. This report should not be regarded by recipients as a substitute for the exercise of their own judgment. Investments involve risks and investors should exercise prudence in making their investment decisions and obtain separate legal or financial advice, if necessary. East Asia Securities Company Limited and / or The Bank of East Asia Group accepts no liability whatsoever for any direct or consequential loss arising from any use of or reliance on this report or further communication given in relation to this report. At the time of preparing this report, East Asia Securities Company Limited has no position in securities of the company or companies mentioned herein, while BEA along with its affiliates/associates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this report. BEA and its affiliates/associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. BEA and/or any of its affiliates/associates may beneficially own a total of 1% or more of any class of common equity securities of the company or companies mentioned in this report and may, within the past 12 months, have received compensation and/or within the next 3 months seek to obtain compensation for investment banking services from the company or companies mentioned in the report. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of, or located in, any locality, state, country or other jurisdiction, publication, availability or use would be contrary to law and regulation. 5