MTR Corporation Limited (66) Earnings Call Transcript & Summary

[Interpreted] Our friends on the media, good afternoon. I am Linda Choy, Corporate Affairs Director of the company. In view of the continuing pandemic and in order to ensure your safety, we will be webcasting our 2020 interim results announcement. Let me first -- I think you can choose to turn into either the English or Chinese channel of the webcast. Let me first of all introduce to you the MTR representatives. Sitting in the middle is our Chief Executive Officer, Dr. Jacob Kam. To his right, we have our Managing Director, Operations and Mainland business; Mr. Adi Lau; and also our Property Director, Mr. David Tang. To the left of Dr. Kam, we have our Financial Director, Mr. Herbert Hui; Commercial Director, Ms. Jeny Yeung; and also our Project Director, Mr. Roger Bayliss. Regarding the program today, Dr. Kam will, first of all, review on the interim results of the MTR Corporation for the year 2020. After that, Mr. Herbert Hui will give you an overview of our financial position. Following that, Dr. Kam will share with you the outlook and strategy of the company. And finally, we'll be answering your questions. Our friends from the media may submit questions through online through the webcast platform, and we'll do our best to answer all your questions. Without further do, I now defer to Dr. Kam.

[Interpreted] Good afternoon, ladies and gentlemen. I'd like to welcome all of you to the 2020 MTR interim results announcement. Since the beginning of the year, the COVID-19 pandemic has posed unprecedented challenges to Hong Kong and the global economy. The business of the MTR was also inevitably affected. In July, we issued a profit warning to inform the market that our profit from recurrent businesses and drop -- has dropped substantially and there was also a significant loss from revaluation of our investment property portfolio. Like our peers in the corporate world, we are coping with the many challenging arising from the pandemic, and we need to tackle an uncertain business environment as we move forward. Thanks to the collective effort of the team, our financial position remains solid, and we should continue to keep our development momentum with new projects on the horizon. In the coming report, I will introduce the new development of our business. I will, first of all, provide you a summary of our performance in the first half. Amid the pandemic, MTR staff continue to serve the people of Hong Kong in a highly professional manner to ensure that we can keep Hong Kong moving. In the first half of 2020, our train service delivery and passenger journeys on-time in our heavy rail network stood at world-class level of 99.9%. Our Hong Kong transport operations, station commercial businesses and property rental businesses have been affected to different extents in the first half. Total patronage dropped by 38% come -- together with the investment property revaluation loss, the net loss attributable to shareholders was around $0.3 billion. Our Mainland of China and international businesses have also been affected. With the resumption of work and production in China, we're expecting a gradual recovery of our business there. For international businesses, our teams are also working hard to minimize the financial and operational impact. Despite the various challenges, we continue to upgrade and improve our railway assets and services. In the first half, we have invested resources on this front to achieve sustainable growth for our businesses. Our pursuit for digitalization is also another ongoing priority. The introduction of artificial intelligence robots, the use of big data, the upgrading of MTR mobile apps are only a few examples of our efforts to enhance customer experience and strengthening our maintenance management. Such efforts will continue to contribute to building Hong Kong into a smart city. We would also like to announce that Phase 1 of The LOHAS, our new shopping mall, will open soon, with shops and facilities to meet residents' daily needs. Together with the acquisition of the remaining interest in Telford Plaza II and PopCorn2, we have enhanced the corporation's investment property portfolio. On property development, we awarded the tender for LOHAS Park Package 12 in February. Market responses to the launch of OCEAN MARINI LOHAS Park Package 9C and Sea to Sky Package 8 in March and June, respectively, were good. Railway projects have played an important role in the development of Hong Kong in the last 4 decades. They generated plenty of job during construction periods that were instrumental in driving the growth of communities upon the completion of the new lines. Our corporation will continue to contribute and support the future railway development. The remaining works of the Shatin to Central Link Project will be completed very soon. The Tuen Ma Line Phase 1 was opened for -- to passenger service in February this year, providing passengers with a more convenient and reliable service. With the additional funding for the Shatin to Central line (sic) [ Shatin to Central Link ] project approved, we are now going full steam ahead with the project. The full opening of the Tuen Ma Line is expected to be open in the third quarter of 2021. The target opening of the Hung Hom to Admiralty Station (sic) [ Hung Hom to Admiralty Section ] in the first half of '20 -- first quarter of 2022 is still facing challenges, but we will do our utmost to meet the target. Moving on to the Railway Development Strategy in 2014. In the first half, we have received invitation from the government to proceed with the detailed planning and design of the Tung Chung Line Extension [indiscernible] and the Tuen Mun South Extension, which will, in future, become an extension of Tuen Ma Line. Design detail -- design-related works already commenced for these 2 projects, and we will continue to work closely with relevant government departments to proceed with the works. The Tung Chung Line Extension project will benefit incumbent and future residents of North Lantau by improving accessibility and providing railway connection to the core of Hong Kong and to meet government land and housing supply program. Construction is expected to commence in 2023. Target completion rate -- completion in 2029. The Tuen Mun South Extension project will benefit residents in Tuen Mun South of areas by enhancing transport network and will provide a convenient interchange with local light rail system. Construction is expected to commence in 2023, completion in 2030. Turning to property development. We're in the discussion with the government on the development plan for Siu Ho Wan Depot. The initial plan includes providing public and private housing units as well as [ convenient ] facilities. The OZP amendments to the Tung Chung traction substation and Pak Shing Kok Ventilation Building sites were also gazetted in June this year. We have also made good progress in Mainland of China international businesses. Hangzhou Metro Line 5 achieved full opening in April this year. We also was awarded Shenzhen Metro Line 13 PPP project. A JV will be established for the investment, construction and operation of Shenzhen Line 13 for a term of 30 years. Shenzhen Metro Line 4 North Extension is expected to be open by the end of the year. And also a JV was signed in June 2020 with Chengdu Rail Transport Group to set up a new company to explore the development -- execute station -- to develop station commercial and related business in Chengdu. In Australia, detailed design work have commenced for the Sydney Metro and Southwest Line. Our diversified business portfolio has enabled us to maintain sustainable development of our business, and we sail through challenging waters presented by the pandemic. MTR grows with Hong Kong and connects with the lives of the people of Hong Kong. Since February, we have launched various support measures to ride out the tough times with the communities and our tenants. In February, we announced that we will provide rental concessions to our stations and mall tenants. Until now, we're still offering support according to tenants' actual situation and business nature. We are serving millions of passengers every day. With the growing impact of the pandemic, we decided to roll out various fare discounts to our passengers. Since July, a 20% fare discount is being offered to all Octopus users for 6 months and a price reduction is also offered for different ticketing schemes to help alleviate the economic burden. To provide a safe and hygienic environment for our customers and colleagues, we have strengthened our ventilation, disinfection and cleaning measures across the MTR stations, train compartments, our malls and estates. We've also enhanced the protective measures for our staff and -- so as to provide passengers and our staff with a safe environment for travel and work. We are committed to sustainable community development and have continued to invest resources into environment, social and government initiatives. ESG considerations have been incorporated into our business strategies in order to meet and balance the current and future needs of our stakeholders. On environmental sustainability, combating climate change is our top priority. As a responsible corporation, we are doing our part. We pride ourselves as a green and low-carbon mode of transport, and we continue to introduce more environmentally friendly initiatives, such as implementing energy reduction and pollution prevention measures. We are developing further strategies and long-term objectives. We also encourage and engage our customers and business partners in future efforts to reduce carbon emissions. We work hard to enhance the experience of our customers. In addition to safe and reliable services, we continuously invest to enhance our facilities for customers. We also want our customers to have more enjoyable journeys. Through our Art in MTR program, we have added 5 pieces -- 5 new art pieces in the last 6 months to the 82 permanent art pieces in our stations. Amongst them, the artwork in Wan Chai is a collaboration with Hong Kong Ballet and in Kai Tak, well, the artwork and Kai Tak Station also aroused our memory of the old airport. Meanwhile, we aim to create a work environment that is engaging and supportive to our staff, whom we consider to be our most valuable asset. MTR has also adopted international standards of best practice in corporate governance with a well-defined governance structure, board diversity and mechanisms for effective crisis management. Before I ask Herbert to report on the financial performance, I want to give you a short summary. Due to the outbreak of the epidemic and deteriorating economy, profit from recurring businesses for the first half of 2020 decreased by 84% to around $0.4 billion. Property development profit was $5.2 billion. Together with the HKD 6 billion revaluation loss from investment properties, the net loss attributable to shareholders during the first half of 2020 was around $0.3 billion. Having considered all financial conditions, the MTR Board has decided an interim dividend -- ordinary dividend of HKD 0.25 per share. Now I want to say a few words in English. [ COVID-19 ] pandemic has posed unprecedented challenges to Hong Kong and the global economy. MTR Corporation's businesses have also inevitably been heavily impacted. As disclosed in the profit warning issued in July, our profit from recurring businesses have dropped substantially, and there was also a significant loss from revaluation of our investment property portfolio. But with the collective efforts of our colleagues, we still maintain a solid financial position, and we'll continue to move forward. I will now provide a summary on our performance in the first half of 2020. We continue to keep Hong Kong moving. Our train service delivery and passenger journeys on-time in our heavy rail network remained at a world-class level of 99.9%. However, our transport operations, station retail businesses and investment property businesses have been affected. Total patronage has dropped by 38% as compared to last year. Together with the revaluation loss from investment property, attributable loss to shareholders during the first half was HKD 300 million. Our Mainland of China and international businesses were also impacted to different extents by the COVID-19 pandemic. For our business in Mainland of China, we are expecting a gradual recovery. For international business, our teams are working hard to minimize the financial and operations impact. Despite various challenges, we still strive for sustainable growth and continue to upgrade and improve our railway assets. In addition, we have continued with our digitalization efforts including the introduction of artificial intelligence, robots, maintenance big data analytics and upgrading the MTR mobile app to enhance our customers' experience and strengthen our maintenance management. We also want to announce that Phase 1 of The LOHAS, our latest shopping mall, will open soon, with shops and facilities to meet residents' daily needs. Together with the acquisition of the remaining interest in Telford Plaza II and PopCorn2, we have enhanced the corporation's investment property portfolio and its contribution to profit. In our property development business, we awarded LOHAS Park Package 12 in February. Good market responses were received on our property launches at OCEAN MARINI and Sea to Sky. Over the past 40 years, new railway development has been playing an important role in the development of Hong Kong. The Tuen Ma Line Phase 1 was open for passenger service in February this year. With the additional funding for the Shatin to Central Link project approved, we are now going full steam ahead for the project delivery. The full opening of the Tuen Ma Line is expected to be in the third quarter of 2021. And as for the Hung Hom to Admiralty Station (sic) [ Hung Hom to Admiralty Section ], we have a challenging target to open a section in the first quarter of 2022. The corporation will continue to contribute to future railway development in Hong Kong. Turning to the Railway Development Strategy 2014. We welcome government's decision to invite us to proceed with the detailed planning and design of Tung Chung Line Extension and Tuen Mun South Extension. Tuen Mun South Extension will, in the future, become an extension of Tuen Ma Line. Design-related work has already commenced for the 2 projects. Upon completion of the projects, these lines will enhance connectivity and convenience of residents and contribute to the ongoing urban development of Hong Kong. Turning to the property development. We are in discussion with the government on the development plan of Siu Ho Wan Depot. The outlined zoning plan amendments for Tung Chung Traction Substation and Pak Shing Kok Ventilation Building sites have been gazetted in June. We made good progress in our Mainland of China and international businesses including the full opening of Hangzhou Metro Line 5 in April, the recent tender award for Shenzhen Metro Line 13, the joint venture formed in Chengdu to explore station retail opportunities and the expected opening of Shenzhen Line 4 North Extension by the end of this year. Works are also progressing smoothly for the Sydney Metro City and Southwest Line. Our diversified business portfolio has enabled us to maintain sustainable development of our business as we sail through the challenging waters presented by COVID-19. MTR grows with Hong Kong and connects with the lives of Hong Kong people. During this difficult time, we are making the most of our limited resources to ride out the tough times with the communities and our tenants. Since February, we have provided rental concessions to our stations and MTR mall tenants. For the millions of passengers we serve every day, we are offering a 20% fare discount to all Octopus users for 6 months starting from July to help alleviate the economic burden. To provide a safe and hygienic environment for our customers and colleagues, we have strengthened our ventilation, disinfection and cleaning measures across the MTR stations, train compartments, our shopping malls and the estates that we manage. We have also enhanced the protective measures for our staff. We are committed to sustainable community development and have continued to invest resources into environment, social and governance initiatives. ESG considerations have been incorporated into our business strategies so as to meet and balance the current and future needs of our stakeholders. On the subject of sustainable environment, combating climate change is our top priority. As a responsible corporation, we are doing our part. MTR prides itself for being a green and low-carbon mode of transport, and we continue to introduce more environmentally friendly initiatives such as implementing energy reduction and pollution prevention measures. We are developing further strategies and long-term objectives. We will encourage and engage our customers and business partners in further efforts to reduce carbon emissions. We work hard to enhance the experience of our customers. In addition to safe and reliable services, we continuously invest to enhance our facilities for customers. Furthermore, we want our customers to have more enjoyable journeys. Through our Art in MTR program, we have added 5 new art pieces in the last 6 months to the 82 permanent art pieces in our stations. These works of art are much appreciated by many passengers. Meanwhile, we aim to create a work environment that is engaging and supportive to our staff, whom we consider to be our most valuable asset. MTR has also adopted international standards of best practice in corporate governance with a well-defined governance structure, board diversity and mechanisms for effective crisis management. Before asking Herbert to report the financial performance, I want to give you a short summary. Due to the outbreak of COVID-19 and the deteriorating economy, profit from recurrent businesses decreased by 84% to HKD 400 million. Property development profit was HKD 5.2 billion. Together with the HKD 6 billion revaluation loss from investment properties, the attributable loss to shareholders during the first half of 2020 was HKD 300 million. Having considered all financial conditions, the MTR Board has declared an interim dividend of HKD 0.25 per share. Now I will hand over to Herbert to introduce our financial performance.

[Interpreted] Thank you, Jacob. Let me now highlight our financial results for the first half of 2020. In Hong Kong, revenue and profit from our recurrent businesses decreased by 37% and 89%, respectively, mainly due to the outbreak of COVID-19 and the deteriorating economy. Outside of Hong Kong, revenue from our recurrent businesses decreased by 1% and recurrent profit was HKD 142 million. Hence, recurrent profits of the group decreased by 84% to HKD 433 million and underlying profit was HKD 5.6 billion, mainly due to the booking of property development profit. Together with the HKD 6 billion revaluation loss from investment properties, net loss attributable to shareholders in the first half of the year was HKD 334 million. Overall, COVID-19 post unprecedented challenges globally, and the group reported a net loss for the first time since our IPO. However, the group's financial position remains sound. As of June 2020, we had cash and equivalent of HKD 18 billion plus undrawn committed facilities of HKD 8.5 billion. Net debt-to-equity ratio was only 19%. The Board has declared an interim dividend of HKD 0.25 per share, same as last year. Turning to the profit contributions from our different business segments. In Hong Kong, earnings before interest and tax, or EBIT, of our transport operations was at a loss of $2.6 billion, mainly due to the decline in patronage and revenue loss after the closure of cross boundary services. Our station commercial EBIT decreased 50%, mainly due to the revenue loss from duty-free shops and rental concessions offered to tenants. Property rental and management business EBIT decreased by 1.6%. The group has offered a considerable amount of rental relief to ease tenants' pressure. Nonetheless, only a small portion had been charged to the P&L for this interim period following the appropriate accounting principles. Outside of Hong Kong, EBIT of our Mainland of China and international recurrent businesses increased by 8%. Excluding the one-off South Western Train provision made in the first half of 2019, EBIT would have decreased 49%, mainly due to COVID-19 impacts. Now moving on to our consolidated statements of financial position. Total asset decreased by HKD 1.6 billion to HKD 288 billion, mainly due to the revaluation loss from investment properties, partly offset by the profit booking from LP6. Total liabilities increased by HKD 5.2 billion to HKD 108 billion, mainly due to increase in borrowings and dividend payable. As such, total equity decreased slightly to HKD 180 billion. Turning to our cash flow. Our operating activities generated HKD 0.7 billion inflow. Net of variable annual payments and maintenance CapEx, our cash outflow from recurrent businesses was about HKD 5 billion. Receipts from various property development projects were HKD 3.5 billion. Hong Kong railway extension projects and property-related CapEx was HKD 3.6 billion, mainly due to the acquisition of the remaining interest in Telford Plaza and PopCorn. After new borrowings and others, our net cash outflow was HKD 2.9 billion. On our financing and credit ratios. Total group borrowings increased by HKD 2.2 billion to HKD 41.6 billion. Average borrowing costs slightly decreased to 2.6%. Net debt-to-equity ratio increased by 3.5 percentage points to 18.9%, still being a very healthy level. And our interest cover was 14.2x. On our 3-year CapEx plan, the total CapEx from 2020 to 2022 is HKD 41.9 billion, of which 55% will be used for the maintenance and replacement of existing Hong Kong railway assets, 12% for new Hong Kong railway projects and 6% for Mainland of China and overseas investments and 27% for Hong Kong property. With that, I will hand back to Jacob for our outlook and strategy.

[Interpreted] Thank you. MTR has been growing with Hong Kong and serving Hong Kong for over 40 years. We and our city have been going through the unprecedented challenges arising from the social unrest last year as well as the epidemic this year. We still face a lot of uncertainties for the business environment in the short run. The impact of COVID-19 outbreak on the group is likely to continue for some time, but the timing and scale of the impact is difficult to predict. Nonetheless, our financial position remains solid. At this time, the corporation has to continue to serve our community in order to support the continuous development of our city, and we need to show extra care to our customers and our 18,000 colleagues and listen to their concerns. We will continue our hard work and contribute to the development of Hong Kong to meet the expectations of our stakeholders, including our shareholders, customers and the community we are serving as well as the government. The corporation remains cautiously optimistic about the future development. To overcome the challenges we are facing, we will continue to strengthen our business and take advantage of our diversified business portfolio. We will strive for innovation with the use of technology while exercising rigorous cost control. Regarding the Shatin to Central Link, our team will continue to take forward the project with our best efforts to bring to completion the full Tuen Ma Line and the extended section of the existing East rail line across the harbor to the Hong Kong Island. The design-related works for the Tung Chung Line Extension and Tuen Mun South Extension are also in progress. And we will continue to move forward our Mainland of China and international businesses. Our property development business side, subject to market conditions, we plan to tender out 3 property development packages, which will provide a total of around 4,350 residential units. Today, our businesses are driven by a confluence of factors and include the fast-changing environment, emergence of new technologies as well as new normal brought by the epidemic. As a company that always strives to maintain our competitiveness and make continuous improvement, we are embarking on a reexamination of our future strategic direction with the aim of strengthening our existing core competitive edges as well as delivering excellent, efficient and caring services. We seek to attain the full potential of our Hong Kong core business while maintaining the growth of our Mainland China international business. Technology will play an instrumental role as both an enabler and a new growth engine through our investment in rail tech and mobility services. We are committed to connecting and growing communities. And one of our key foci is our new corporate strategy to redefine a strong ESG vision, setting new environmental goals and continuing to invest in the communities we serve and create new opportunities to respond to the needs of society. We aim to leverage our resources and knowledge to create value for the environment and society, and I look forward to sharing with you the details in due course. I would want to express tremendous note of thanks to the staff globally, who continue to show their commitment to serving the public and are demonstrate -- and in demonstrating their professionalism and efforts during the COVID-19 pandemic. We continue to work together now and beyond to keep Hong Kong moving. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]