MTR to take HK$3 b hit over project delays

Decline in property development business prompts the corporation to seek rail-related opportunities outside HK as interim profit rises 28.5pc

PUBLISHED : Monday, 25 August, 2014, 5:36pm
UPDATED : Tuesday, 26 August, 2014, 1:08am

MTR Corp said it would absorb the HK$3 billion cost overrun on the delayed West Island and South Island lines as the firm unveiled a 28.5 per cent rise in first-half earnings to HK$7.9 billion.

However, profit from property development stumbled 54.6 per cent from a year earlier to HK$203 million.

The city's sole rail operator's first-half operations were overshadowed by the announcements of delays in its new rail projects in Hong Kong, in particular the Hong Kong section of the Guangzhou-Shenzhen-Hong Kong Express Rail Link.

MTR said in the results announcement that delay of the West Island Line and South Island Line projects would incur additional costs of HK$3 billion. It said at the press briefing that the two lines were owned by the company.

Compared to the whole project, the magnitude of cost overrun is not huge

"Compared to the whole project, the magnitude of cost overrun is not huge, but the entrustment agreement of the Sha Tin-Central Link and the Express Rail Link might lead to problems if negligence were found," said Jonas Kan, an analyst at Daiwa Securities.

The cost estimate for the West Island Line project was adjusted upwards by HK$1.3 billion to HK$18.5 billion, while that of the South Island Line was raised by HK$1.7 billion to HK$15.2 billion, the results statement said.

"The company is undergoing a transformation. Property income will become a bonus to the recurring rail-related income," said Kan. He believed property profit might rebound in 2017 at the earliest when more project sales could be booked.

Under the Express Rail Link entrustment agreement signed in November 2008, the government has the right to claim against MTR for negligence in performing its obligations. The rail operator said it had not received any notice from the government regarding claims at the end of June and it was unable to "estimate reliably the financial effect on the company" owing to the project delays.

MTR typically records more profit from property development in the second half than the first half of the year. Its profit from property development in the first half has been falling year on year since 2010. In that year, the firm reported HK$3.7 billion in profit from property development for the six months to June.

"The drop in profit was mainly due to [lower] sales from inventory units and [lower] agency fees from the West Rail property developments," said acting chief executive Lincoln Leong. "With strong pre-sales at sites C and D at the Austin station, progress will be made on both projects, depending on the issuance of occupancy permits."

Total revenue at MTR increased 1.3 per cent to HK$19.5 billion. Revenue from its Hong Kong transport operations grew 6.5 per cent to HK$7.7 million.

The company said it would continue to seek opportunities for rail-related business in mainland China, Europe and Australia, given the decline in profits from property development at home.

Shares in MTR at one stage added 3 per cent yesterday to a new 52-week peak at HK$32.30 before finishing the session 1.28 per cent firmer at HK$31.70 before the announcement of its interim results.