Overseas rail projects will generate more revenue than MTR's domestic operations by 2020 as the city's sole rail operator gears up for international expansion.
MTR wants more overseas projects, especially on the mainland, where it is promoting its rail-and-property model as a solution to debt-laden railway businesses. While Shenzhen's Metro Line 4 is now the only railway that has adopted this model, MTR said it was discussing with the Foshan and Guangzhou governments the building of an inter-city link where building costs would be subsidised by developments along the route.
Lincoln Leong, MTR's deputy chief executive, said there were more potential projects in the western and coastal regions of the mainland.
As more mainland cities look to the property financing model as an alternative to heavily subsidised rail projects, fewer new rail projects in Hong Kong would use the model. That is because any new lines extending the old Kowloon-Canton Railway (KCR) network must stay in the hands of the government.
The Northern Link and the Tuen Mun-Tsuen Wan Link now in the middle of public consultation, for example, will be funded and owned by the government, with MTR merely acting as a franchise operator.
While franchise operations offer higher returns in percentage terms, they generate lower earnings than projects built and run by MTR. As the State Council is looking for more sustainable ways to finance rail development and Premier Li Keqiang told his cabinet last Wednesday that inter-city and suburban lines would be open to private investors, the mainland could be a source of growth for MTR.
But Leong said Hong Kong would remain MTR's "bread and butter" market for a long time.
"The ebitda [earnings before interest, tax, depreciation and amortisation] margin of our local rail-and-station commercial operations exceeds 50 per cent, while our overseas projects, usually awarded to us in the form of franchises, have a margin of 3 to 5 per cent," he said.
Half of the 10 new rail projects planned for after 2015 - including the South Island Line (West) and the North Island Line - are not part of the old KCR network and can still remain under MTR's ownership.
That said, the mainland is an important market for MTR, especially considering that the rail-and-property model has allowed the company to get hold of valuable land in prime locations.
"On the mainland, most of the space above railway stations and depots is empty because it is not easy to put up a building there without expertise and know-how. That land will be wasted anyway if we don't use it," Leong said. "Now the government can use what we pay for the land to subsidise the railway's operation."
Unlike in Hong Kong, where development rights along the line are awarded as part of a rail project, the two require separate bidding on the mainland, although bidding is said to be "tailor-made" for the operator. For Shenzhen Line 4, MTR receives an annual subsidy of 520 million yuan (HK$658 million) for the line's operation and maintenance like other rail projects in the country. But unlike current practice, it bears the loss if the subsidy and fare income fail to cover expenses.
Analysts said separating the rail and property businesses would increase MTR's risk when such projects grew in number.
"In Hong Kong, MTR contracts out the property projects to developers, which pay for the construction costs and bear most of the risk. But under the mainland model, MTR literally becomes the developer," said Cusson Leung of Credit Suisse.
But he said it was natural for MTR to look for growth overseas, as he expected the firm's land bank in the city to be depleted by around 2020.
While MTR's rail lines in London, Stockholm, Melbourne and the mainland contributed HK$35.7 billion, or 35.8 per cent, of revenue last year, they made up less than 6 per cent of the corporation's bottom line. Leong said mainland and overseas projects would soon make up a bigger portion of earnings, with six more lines being bid on.