EAST ASIA SECURITIES COMPANY LIMITED
9/F, 10 Des Voeux Road Central, Hong Kong. Dealing: 3608 8000 Research: 3608 8096 Facsimile: 3608 6132
HONG KONG RESEARCH th 11 March 2009
Analyst: Sabina Cheng
MTR CORPORATION LIMITED Sector HKSE Code Market Price HSI Shares Issued Market Cap 52-week Hi / Lo
: : : : : : :
Transportation 00066 HK$16.86 (11/03/2009) 11,930.66 (11/03/2009) 5,661.222 million HK$95,448.20 million HK$30.05 / HK$13.00
Raymond CH’IEN Kuo-fung
Chief Executive Officer
SUMMARY OF THE FINAL RESULTS FOR THE YEAR ENDED 31
Final Results Highlights
• • • • • • • • •
Turnover Operating expenses EBITDA Profit on property developments Operating profit before depreciation Depreciation Interest & finance charges Change in fair value of investment properties Profit attributable to shareholders
Underlying profit (excluding investment property revaluation and related deferred tax) EPS – Basic Final DPS Total DPS
• • •
Total passenger boarding (in millions) Domestic Service Cross-boundary Service Airport Express Light Rail Average number of passengers (in thousands) Domestic Service (weekday) Cross-boundary Service (daily) Airport Express (daily) Light Rail (weekday)
FY2008 HK$ million 17,628 -8,303 9,325 4,670 13,995 -2,930 -1,998 -146 8,284 8,185
FY2007 HK$ million 10,690 -4,778 5,912 8,304 14,216 -2,739 -1,316 8,011 15,180 8,571
Change 64.9% 73.8% 57.7% -43.8% -1.6% 7.0% 51.8% -101.8% -45.4% -4.5%
1.47 0.34 0.48
2.72 0.31 0.45
-46.0% 9.7% 6.7%
1,205.4 93.4 10.6 137.7
915.80 8.2 10.2 11.1
31.6% 1,039.0% 3.9% 1,140.5%
3,514 255.2 29 385.1
3,364 252.3 27.9 378.6
4.5% 1.1% 3.9% 1.7%
This report has been prepared solely for information purposes and we 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. The information is based upon information which we consider reliable, but accuracy or completeness is not guaranteed. Opinions expressed herein are subject to change without notice. At time of this report, East Asia Securities Company Limited has no position in securities of the company or companies mentioned herein, while its group companies may from time to time have interests in securities of the company or companies mentioned herein.
EAST ASIA SECURITIES COMPANY LIMITED •
MTR Corporation (“MTRC”) reported a 45.4% y-o-y drop in net profit to HK$8.28 billion for the year ended 31st Dec 2008, which was weaker than expectations, dragged down by lower property development income and lack of investment property revaluation gains during the year. Excluding investment property revaluations and related deferred tax, the underlying profit declined by 4.5% to HK$8.19 billion.
Profit from property developments decreased 43.8% to HK$4.67 billion due to a high base in 2007 from the booking of Le Point in Tseung Kwan O. The major profit contributors included, proceeds from The Capitol (Package 1) of LOHAS Park and The Palazzo at Fo Tan; the sale of units from inventory at Harbour Green and The Arch; the deferred income recognition, mainly from properties along the Airport Railway, such as Coastal Skyline and Caribbean Coast in Tung Chung Station, and Elements in Kowloon Station. Che Kung Temple was awarded in April while Tsuen Wan West 7, a West Rail Property project, was awarded in September.
Turnover increased by 64.9% to HK$17.63 billion. Fare revenue rose 61.2% to HK$11.47 billion, whilst non-fare revenue (including station commercial revenues, rail related businesses, property development, property rental and management and other businesses) increased 72.3% to HK$6.16 billion.
FY2008 HK$ million % 65.0% 11,467
FY2007 HK$ million 7,115
Station commercial & other businesses
Property ownership & management
MTRC’s overall share of the franchised public transport market increased to 42.7% in December 2008 as compared to 41.6% in the same month last year. Share of crossharbour traffic rose to 63.6% from 62.5% in 2007, and share of traffic to and from the airport rose to 24% from 23% in 2007. However, its market share in the Cross-boundary business declined to 56.2% from 57.0% in 2007 due to continued strong competition. Station commercial and other businesses registered a 98.1% revenue growth to HK$3.45 billion. Excluding Rail Merger impact, there was only 33.4% growth in revenue. Revenue from advertising grew 25.0% to HK$741 million; revenue from station retail grew 210% to HK$1.55 billion driven by the increase in rentals from retail and Duty Free shops; revenue from telecommunications rose 49% to HK$356 million, due to a one-off payment received on termination of a telecommunication license; and revenue from consultancy services declined 18% to HK$158 million due to the more focused strategy on consulting services and the completion of majority of the works on Shanghai Metro Line 9 Phase 1, which opened in December 2007.
EAST ASIA SECURITIES COMPANY LIMITED Property ownership and management revenue increased 47.9% to HK$2.71 billion. Demand for both office and retail space was strong in 1H 2008 but the rate of growth began to slow in 2H 2008. Property rental income was HK$2.35 billion, an increase of 48.4% over 2007, driven by full year impact of Elements Phase 1, the opening of Elements Phase 2, and positive rental reversion. •
Operating expenses was up 73.8% to HK$8.30 billion. EBITDA went up 57.7% to HK$9.33 billion, with EBITDA margin dropping to 52.9% from 55.3% in FY2007.
In 2008, Hong Kong Government granted approval to MTRC for 3 additional lines (Shatin to Central Link, Kwun Tong Line Extension and Express Rail Link). Outside HK, Shenzhen Metro Line 4, was approved by National Development and Reform Commission. Principle agreements were signed for railway projects in Shenyang and Hangzhou whilst a MOU was signed for Daxing Line in Beijing. Meanwhile MTRC also won Stockholm Metro operating concession.
Depreciation charge increased by 7.0% y-o-y to HK$2.93 billion.
As of 31st Dec 2008, total debt of MTRC dropped to HK$31.29 billion (31st Dec 2007: HK$34.05 billion). With shareholders’ funds at HK$97.82 billion, total net debt/equity ratio fell to 42.1% from 48.5% in FY2007.
Both basic and diluted EPS fell by 46.0% to HK$1.47. A final DPS of HK$0.34 was proposed, taking the full-year DPS to HK$0.48, an increase of 6.7% y-o-y. Payout ratio jumped to 32.65% from 16.54% in FY2007.
Outlook & Prospect •
Slowdown in growth of investment property income As at December 2008, investment portfolio of MTRC included mainly the 12 shopping centres and 2 offices with 221,661 sq.m. and 41,059 sq.m. respectively. There was rental revision of 20% in 2008. Management stays positive on renewals of leases or re-letting. Nevertheless, given no new additions and deepening recession in Hong Kong, rental income growth is expected to slowdown this year.
No project tender in the near term MTRC originally planned to launch Lohas Park IV for tendering in 2008, but it was on hold in view of the poor market conditions. The Group indicated that it would not release any projects for tendering in the near term.
Provisions were made at Capitol and Palazzo The Group made provision for the Capitol in Tseung Kwan O and The Palazzo in Shatin, but the amount was not disclosed and was estimated by the market to be around HK$500 million - HK$2 billion.
Upcoming launch in development properties Depending on market conditions, the Group will launch Lake Silver at Wu Kai Sha at HK$4,250 psf and Tai Wai Maintenance Center at around HK$5,000 psf. They are of low profit margins as the development cost for the former is about HK$3,700 psf and HK$4,000 psf for the latter.
Continued expansion of railway networks but earnings are unlikely to grow rapidly until FY2014/2015 In Hong Kong, Kowloon Southern Link and Tseng Kwan O South Line will commence their services this year but are unlikely to offer big lifts to boarding figures, given limited additional population coverage with these lines. In fact, railway earnings are unlikely to grow rapidly until FY2014/2015 when major projects such as West Island Line and Shatin-toCentral Line are completed. 3
EAST ASIA SECURITIES COMPANY LIMITED •
Significant progress in expanding railway business outside Hong Kong At present, MTRC’s mainland railway projects include Guangzhou-Shenzhen-HK Express Link (expected to commerce service in 2015), Shenzhen Line 4 (expected to commerce service in 2011), Hangzhou Line 1 (expected to commerce service in 2012) and Shenyang (Metro Line 1 and 2) (expected to commerce service in 2010 and 2012 respectively). Meanwhile, it has won a 19.7 billion kronor ($2.4 billion) deal to run the subway in the Swedish capital with operating right of the subway for eight years and the possibility for a six-year extension.
Fair valuation The counter is currently trading at HK$16.86 with 26% discount to its NAV of HK$22.7. With a stable yield of around 2.9%, this stock is regarded as a defensive play as its recurrent income from its railway operations is expected to help buffer a potential decline in contributions from its development property segment.
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