9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: 2308 8200 Research: 3608 8096 Facsimile: 3608 6132 HONG KONG RESEARCH Analyst: Carmen Wong 14 th August 2015 MTR CORPORATION LIMITED ( 香港鐵路有限公司 ) Sector : Transportation Chairman : Dr. Raymond Ch ien Kuo-fung HKSE Code : 00066 Market Price : HK$36.75 (14/08/2015) Chief Executive Officer : Lincoln Leong Kwok-kuen HSI : 23,991.03 (14/08/2015) Shares Issued : 5,848.48 million Market Cap : HK$214,932 million 52-week Hi / Lo : HK$40.00 /HK$29.95 SUMMARY OF THE INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 TH JUNE 2015 Interim Results Highlights 1H15 1H14 y-o-y HK$ million HK$ million Change Turnover 20,210 19,471 3.8% Operating expenses (11,864) (11,640) 1.9% EBITDA 8,346 7,831 6.6% Profit on property developments 2,811 245 1047.3% Operating profit before depreciation, amortisation and variable annual payment arising from the Rail Merger 11,157 8,076 38.2% Depreciation and amortisation (1,880) (1,688) 11.4% Interest and finance charges (295) (274) 7.7% Change in fair value of investment properties 1,362 3,523 (61.3%) Profit attributable to shareholders 8,189 7,912 3.5% Underlying profit (excluding investment property revaluation) 6,827 4,389 55.5% Earnings per share Basic HK$1.40 HK$1.36 2.9% Interim dividend per share HK$0.25 HK$0.25 Unchanged Total number of passenger boarding (in millions) Domestic Service 772.5 736.5 4.9% Cross-boundary Service 56.2 54.5 3.1% Airport Express 7.6 7.1 7.0% Light Rail and Bus 111.1 109.2 1.7% Average number of passengers (in thousands) Domestic Service (weekday) 4,534.0 4,329.0 4.7% Cross-boundary Service (daily) 310.7 301.1 3.2% Airport Express (daily) 41.9 39.4 6.3% Light Rail and Bus (weekday) 632.3 621.1 1.8% EBITDA margin (excluding China and international subsidiaries) 57.0% 56.4% +0.6 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 3.5% year-on-year increase in net profit to HK$8,189 million for the six months ended 30 th June 2015. Excluding investment properties revaluation, underlying profit jumped 55.5% from the previous year to HK$6,827 million, ahead of consensus estimates of HK$6,000 million on stronger-than-expected growth of property development business. Revenue showed modest growth of 3.8% year-on-year to HK$20,210 million in 1H15. Excluding China and international subsidiaries, revenue would have increased by 6.9% year-on-year to HK$14,029 million. Revenue breakdown: 1H15 1H14 y-o-y HK$ million % HK$ million % Change Hong Kong transport operations 8,147 40.3% 7,729 39.7% 5.4% Hong Kong station commercial activities 2,579 12.8% 2,377 12.2% 8.5% Hong Kong property rental and management 2,255 11.2% 2,026 10.4% 11.3% Overseas subsidiaries 6,181 30.6% 6,350 32.6% (2.7%) Other businesses 1,048 5.2% 989 5.1% 6.0% Total 20,210 100.0% 19,471 100.0% 3.8% Revenue from Hong Kong transport operations, the top revenue contributor with 40.3% contribution, continued to show steady growth of 5.4% to HK$8,147 million, on the back of a 4.2% increase in the total patronage from its rail and bus passenger services as well as a 0.8% rise in the average fare per passenger. EBITDA margin edged down by 1.6 percentage points to 46.6% from a year ago on growing electricity tariff and rising labour costs. MTRC s overall share of the franchised public transport market increased to 48.5% for the five months of 2015 as compared to 47.0% for the same period last year. Share of cross-harbour traffic improved from 66.7% in 2013 to 68.2% in 2014. Market share in cross-boundary business decreased from 52.1% for the first 5 months of 2014 to 50.8% for the first 5 months this year, amid strong competition particularly from buses. Meanwhile, its market share to and from the airport slightly declined from 22.2% a year ago to 21.6%. Revenue from station commercial activities grew 8.5% year-on-year to HK$2,579 million, driven by an increase in rental rates. In particular, station retail revenue, advertising revenue and telecommunications revenue increased by 11.2%, 2.3% and 5.0% year-on-year to HK$1,743 million, HK$497 million and HK$252 million, respectively. As at 30 th June 2015, the number of shops in its stations increased to 1,356, against 1,350 shops at the end of 2014. EBITDA margin marginally declined by 10 basis points year-on-year to 90.4% in 1H15. Revenue from property rental and management businesses leaped 11.3% year-on-year to HK$2,255 million, as its shopping mall portfolio achieved an average 12% increase in rental reversion during the period. As at 30 th June 2015, the occupancy rate of its shopping malls in Hong Kong and the Group s 18 floors at Two International Finance Centre was close to 100%, same as that at the end of 2014. EBITDA margin edged up by 50 basis points year-on-year to 84.2% in 1H15. 2
Revenue from overseas subsidiaries including i) MTR Stockholm AB ( MTRS ), ii) Metro Trains Melbourne Pty. Ltd ( MTM ), iii) MTR Corporation (Shenzhen) Limited ( SZMTR ), iv) MTR Express (Sweden), v) MTR Crossrail in London, as well as vi) property rental and management businesses in China, dropped 2.7% year-on-year to HK$6,181 million. Operating profit fell 9.5% year-on-year, mainly attributable to i) unfavourable currency movements such as depreciations of Sweden Krona and Australian dollar to Hong Kong dollar and ii) start-up costs for its new rail businesses including MTR Express (Sweden) AB and MTR Crossrail in London which commenced services in March 2015 and May 2015 respectively. In respect of its associates, namely i) Beijing MTR Corporation Limited ( BJMTR ), ii) London Overground Rail Operations Limited ( LOROL ), iii) Tunnelbanan Teknik Stockholm AB and iv) Hangzhou MTR Corporation Limited ( HZMTR ), its overall share of profits from these associates increased significantly from HK$24 million in 1H14 to HK$49 million in 1H15, thanks to improved performance from its Beijing and Hangzhou railway associates. Profit from property development jumped by more than 10 times year-on-year to HK$2,811 million in 1H15, mainly attributable to the booking of LOHAS Park Package 3 ( Hemera ) in Tseng Kwan O with all 1,648 residential units being sold. In addition, tenders for i) Tin Wing Stop in Tin Shui Wai, ii) LOHAS Park Packages 6 & 7 in Tseng Kwan O, and iii) Yuen Long Station site (where MTRC acting as agent) were awarded to developers in 1H15. MTRC s balance sheet remained healthy. As at 30 th June 2015, its net debt to equity ratio stood at 9.1%, compared to 7.6% as at 31 st December 2014. MTRC reported earnings per share of HK$1.40/ share for 1H15, an increase of 2.9% year-on-year. Yet, its interim dividend remained flat at HK$0.25/ share (1H14: HK$0.25/ share). Payout ratio slipped from 18.4% in 1H14 to 17.9% in 1H15 accordingly. Outlook & Prospect Lack of property booking in the near term. Although the Group has presold around 700 units of the Tiara project in Shenzhen in 1H15 and plans to launch the remaining 990 units in 2H15, profit for this project is not expected to be booked until 2017 upon delivery to buyers. Subject to market conditions, the Group plans to tender out 2 to 3 more sites at LOHAS Park Station in the next six months or so. Expansion of investment property portfolio. MTRC is expanding its investment property portfolio in Hong Kong, including i) Tai Wai Shopping Mall (target opening in 2021), ii) LOHAS Park Shopping Mall (target opening at the end of 2020), iii) addition of 12,100 square meter of gross floor area at Maritime Shopping Centre in Tsing Yi by end of 2017, and iv) conversion of office space at Telford Plaza in Kowloon Bay into additional retail space by mid of 2017. Updates on new rail lines. Cost overruns and completion delays for the four remaining new rail lines in Hong Kong remain the major overhang for the Group. In particular, the estimated total costs for Express Rail Link, South Island Line (East) and Kwun Tong Line Extension have been escalated from HK$71.5 billion, HK$15.2 billion and HK$5.9 billion to HK$85.3 billion, HK$16.9 billion and HK$7.2 billion respectively. The estimated opening date for Kwun Tong Line Extension and Express Rail Link delayed from mid of 2016 and end of 2017 to 3Q-4Q 2016 and 3Q18 respectively. 3
New Rail Lines Estimated Opening Date Estimated Project Cost South Island Line (East) (87% By end-2016 (same as earlier HK$16.9bn vs. HK$15.2bn* completion as of June 2015) announcement) Kwun Tong Line Extension (81%) By 3Q-4Q 2016 vs. mid-2016* HK$7.2bn vs. HK$5.9bn* Express Rail Link (71%) By 3Q18 vs. end-2017* HK$85.3bn vs. HK$71.5bn* Shatin to Central Link (37%) By 2019-2021 (same as earlier announcement) N/A Source: MTRC * According to MTRC s announcement in March 2015 Further expansion opportunities in China. The Group will continue its expansion of railway businesses in China and will target cities with the presence of existing railway networks, as patronage should be easier to ramp up with the addition of new lines to the existing networks due to network effect. Additionally, MTRC is expected to win further businesses in China by implementing its rail-plus-railway business model as in Hong Kong. For instance, MTRC had signed a Memorandum of Understanding (MOU) with the Chongqing Municipal Government for rail and property development in the municipality. Valuation: Shares of MTRC are trading at a fair valuation of 7.3% discount to 2015E NAV and 19.3x 2015E P/E, against with its historical average of 12% and 18.5x respectively. Despite its resilient and defensive nature for the rail business amid macro uncertainties, lack of property bookings, as well as cost overruns and project delays for its new rail lines will remain the major concerns for investors. Recommendation: Hold 4
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