MTR shares recover in Hong Kong over bailout plan after cost overruns in high-speed rail link to mainland China

Line should be completed in the third quarter of 2018, three years later than originally planned

PUBLISHED : Tuesday, 01 December, 2015, 2:04pm
UPDATED : Tuesday, 01 December, 2015, 6:31pm

A taxpayer bailout for MTR Corporation’s long-delayed high-speed train line to the mainland was broadly welcomed yesterday by investment analysts who argued that stretched gearing ratios and added repayment costs were worth it to ensure the track will finally be finished.

An extra HK$19.6 billion in government support will take final estimated construction costs to HK$84.42 billion, with MTRC left on the hook for any further cost overruns.

Reflecting the generally positive reaction, MTRC shares quickly recovered from a more than 2 per cent slip in early trading on Tuesday to close up 1.94 per cent at HK$36.70, with 12.1 million shares changing hands, the highest one-day volume in seven weeks.

“Its a constructive step that’s better than having the issue dragging on,” analyst Jonas Kan at Daiwa Securities said, although the government has reserved the right to take MTRC to arbitration if it thinks there has been negligence in the construction process, highlighting an area of potential liability for the railway and property management firm.

If either lawmakers on the Finance Committee or shareholders reject the funding request – unlikely as the government owns around 75 per cent of shares – the 26km railway line linking West Kowloon to the mainland China border will stop in its tracks.

If the latest proposal gets the green light, the line should be completed in the third quarter of 2018, three years later than originally planned after delays from excavating harder than expected rock in Kowloon. It has already cost about HK$50 billion and is 75 per cent finished.

For its part, the MTRC has agreed to pay a special dividend totalling HK$25.76 billion at the rate of HK$4.40 per share – four times last year’s payout – to cover the cost of the bailout.

The cost to MTRC from the special dividend is likely to lower 2016 year-end net profits by about 6 per cent and also weaken 2017 net profits by 4 per cent, while the firm’s gearing ratio will surge 21 percentage points between 2015 and year end 2017, Jefferies analysts wrote on Tuesday.

“The special dividend was a positive surprise, as it optimises what has been an under-geared balance sheet and improves returns. We estimate net debt to equity to 39 per cent by 2017 (previously 19 per cent),” analysts at UBS wrote.

Citi analyst George Choi was less sanguine, writing in a research note that investors had not priced in the risk of another cost overrun. He has a sell rating on the firm.

READ MORE: Hong Kong to Guangzhou express rail link facing delay of up to 2 years, says MTR

“This resolution is tricky by nature as it is financially engineered by utilising the gearing headroom to fulfil government need without upsetting minority shareholders on special dividend. The two-year payment instalment will mitigate share volatility. Maintaining the progressive dividend policy is a sign of solid financial management despite additional cash outflow,” Jefferies analysts wrote.

The bailout arrangement is not expected to affect MTRC’s credit rating, the firm said in an exchange filing on Monday evening.