Hong Kong company reporting season

Hong Kong railway operator MTR posts 37.5 per cent decline in net profit for half year

PUBLISHED : Tuesday, 09 August, 2016, 5:45pm
UPDATED : Tuesday, 09 August, 2016, 10:58pm

MTR Corp, Hong Kong’s sole operator of mass transit railways, has warned of more possible project delays and cost overruns as it posted a 37.5 per cent year-on-year decline in net profit for the first six months of the year on the back oflower property development profits.

In a briefing to reporters MTR chief executive Lincoln Leong Kwok-kuen said that “given the very tight timetable, there remains a number of risks” that could mean the end-December target completion date is not met on the HK$16.9 billion South Island line (East) linking Admiralty to Wong Chuk Hang. He added that costs in excess of the budgeted HK$16.9 billion are “not expected to be material”.

Outstanding jobs to be completed include civil, electrical and mechanical work, as well as inspection by the government.

In addition, citing “external events” including archaeological finds, late handover of critical work sites by other parties and additional underground works, Leong said the 17-km Shatin-to-Central Link is “likely” to see its cost estimate “revised upwards significantly”.

He declined to give any cost revision estimate, saying a cost review will only be completed in the second half of next year since the north-south segment of the project is only 35 per cent complete.

MTR had previously said an 11-month delay and unforeseen work arising from the archaeological finds would cost an additional HK$4.1 billion.

It said for the Shatin link, all costs payable to contractors are borne by the government, while MTR is responsible for the expansion and upgrade of some assets including rolling stock and control systems. However, the government has the right to make claims against MTR if it is found to be negligent in performing its work.

The company, 75.7 per cent owned by the city’s government, on Tuesday reported a net profit of HK$5.12 billion, down from HK$8.19 billion in the year-earlier period.

Core profit, which excludes investment property revaluation gains and losses, fell 25.7 per cent to HK$5.07 billion.

It was better than the 35 per cent core profit decline estimated by analysts at Bank of America-Merrill Lynch.

An interim dividend of 25 HK cents per share was declared, the same as in last year’s first-half.

For the whole of 2016, 11 analysts polled by Thomson Reuters have an average net profit forecast of HK$9.2 billion, 29.2 per cent lower than HK$13 billion in the year-earlier period.

“[The] global economic outlook remains uncertain,” MTR said in a filing to Hong Kong’s stock exchange just after the market closed on Tuesday. “However, our Hong Kong transport, and station and property rental business are defensive by nature.”

No property project launches are expected in the year’s second-half, Leong said.

It expects to book some property development profits from its Tiara project in Shenzhen before the end of the year.

It also expects to put out for tender some new property projects for potential partners to participate in, on land lots in Lohas Park in Tseung Kwan O, Ho Man Tin and Wong Chuk Hang by the end of March next year, subject to market conditions.

Actual implementation of this arrangement will give rise to numerous political issues which are rather difficult to deal with
Jonas Kan, Daiwa Capital Markets

First-half net profit from railway and related operations grew 7.75 per cent year on year to HK$4.87 billion, while that from property development dropped 91 per cent to HK$207 million. Profits from investment property revaluation fell to HK$48 million from HK$1.36 billion.

MTR said in April it agreed to the government’s request to review the controversial fare adjustment mechanism, a year ahead of the next scheduled review date in 2018, so that any agreed revision will take effect next year.

The joint review will start “shortly”, it said at the time.

The mechanism, last reviewed in April 2013, was criticised for giving rise to repeated price increases as fares are linked to factors including wages and productivity. Its critics include the city’s No. 2 official Carrie Lam Cheng Yuet-ngor.

MTR chairman Frederick Ma Si-hung in April rejected lawmakers’ calls to cap MTR’s railway earnings, or consider its profit level when adjusting fares, saying the government is the biggest loser if profits are squeezed.

He suggested that the government should subsidise fares with the dividend it receives from MTR instead.

Transport minister Anthony Cheung Bing-leung, however, said MTR should strike a balance between profits and the public’s ability to afford higher fares.

“A positive solution for all stakeholders is difficult but not inconceivable ... it is not impossible [for the MTR’s conflicting duty to maximise return and consider society’s welfare] to be separated and resolved ... by creative use of the multibillion dollar dividends[the government] is likely to receive from the MTR every year,” said Daiwa Capital Markets head of Hong Kong research Jonas Kan in a report.

“That said, actual implementation of this arrangement will give rise to numerous political issues which are rather difficult to deal with.”

Bank of America-Merrill Lynch analysts said in a note that they expected household income could be introduced as a new factor in fare adjustment determinations. Although they do not expect a major negative outcome, a profit margin-reducing minor impact could not be ruled out, they added.

Leong would not be drawn on what new factor MTR deems appropriate to be added or changed in the mechanism to avoid the criticism.

MTR has planned total capital expenditure of HK$40 billion between this year and 2018, of which HK$20 billion has been budgeted for 2016, according to credit rating agency Fitch.

Fitch analysts expected its capital expenditure to remain high in the longer term, citing the government’s plan to add 34.8 kilometres of railways over the next 10 to 15 years.

MTR’s shares have risen 13.2 per cent since the start of the year, outperforming the Hang Seng Index’s 2.5 per cent gain.

The firm joined other regulated public utilities in the city in outperforming the benchmark, as investors chase stocks that provide relatively steady dividend returns on expectations that interest rates will remain near zero for longer amid the sluggish outlook of the global economy.