New lines put MTR cash levels under strain

In the next two years, rail operator will have to shoulder expenses of up to HK$52.8b while waiting for fund flows from property projects

PUBLISHED : Monday, 26 August, 2013, 12:00am
UPDATED : Monday, 26 August, 2013, 4:52am

MTR's new rail projects are expected to strain the firm's cash position over the next two years, with a dearth of profit from property sales over the past 18 months compounding its predicament.

Four analysts contacted by the South China Morning Post ahead of the company's interim results announcement today said they expected the underlying profit of the city's sole rail operator to fall between 3.5 per cent and 6.4 per cent to less than HK$4 billion in the first half.

Meanwhile, the median estimate of 12 analysts polled by Bloomberg forecast the group's full-year earnings to decline 17.85 per cent year on year.

While profit growth from the local transport business and its related commercial and rental income were expected to remain solid, the group's new lines - likely to boost the network's capacity by 25 per cent - will only begin contributing to MTR from early 2015. In the next two years, the group will have to shoulder expenses of up to HK$52.8 billion as the amount of works peak for its five new rail projects.

"The group may risk heightening its net debt to equity ratio again like in 2007, if it needs to seek project financing or bank loans to bridge the funding gap," said Kenny Tang Sing-hing, general manager of securities and asset management of AMTD Financial planning.

The group worked over the years to bring down its gearing ratio to 10.9 per cent last year from a high of 46.5 per cent before its merger with the Kowloon Canton Railway in 2007.

Capital expenditure amounted to HK$11.13 billion last year, while the cash balance stood at HK$18.6 billion last December.

Credit Suisse expected that pre-sales of flats would begin this year at two MTR developments - Lohas Park Phase 3 and Austin Station. But while they will provide the market a total of 2,224 flats, Benjamin Lo of Nomura Securities said sales proceeds from these projects might be booked as late as the second half of next year. "Lohas Park should receive its occupation permit next year, but Austin Station could wait a little longer," Lo said.

While the outlook for this year remained dim, MTR is set to enter a new growth era in 2015 when four of its new domestic lines come into full service - two of them will include property development rights.

The group has also been working hard to replicate its "rail plus property model" on the mainland. This month it won a site above the Beiyunhe station on Tianjin Metro Line 6. Together with its development above the Longhua station of Shenzhen Metro Line 4 and another project in Foshan still under negotiation, there will be three rail projects on the mainland using the model.

Outside China, the group is also bidding on five projects in London and Sydney.

Deputy chief executive Lincoln Leong has conceded the mainland will fuel the company's growth. "Before the merger, the total length of MTR's network was 91km, but our rail network in Beijing alone measures 63.4km, and that is just one city," he said.

Twelve of the 15 analysts polled by Bloomberg posted an average target price of HK$31.97 for the company's shares in the next 12 months. Its shares rose 0.3 per cent to HK$28.40 on Friday.