MTR Corporation Limited (66) Earnings Call Transcript & Summary

[Interpreted] Good afternoon our friends from the media. I am Linda Choy, Corporate Affairs Director of the MTR Corporation. I'd like to welcome you all to the MTRC Annual Results 2020 Presentation. We are having a virtual and actual briefing today. Let me first of all introduce to you the representative of our management. Sitting in the middle is Dr. Jacob Kam, our Chief Executive Officer. To Dr. Kam's right, we have Mr. Adi Lau, Managing Director, Operations and Mainland Business; and also Mr. David Tang, Property and International Business Director. On the left of Dr. Kam, we have Mr. Herbert Hui, Finance Director; and Ms. Jeny Yeung, Commercial Director. Since Mr. [ Paul ], the Project Director, is overseas, today, we have Mr. James Chow, Divisional General Manager, Projects, Construction, attending on this behalf. The briefing will be held in both English and Chinese. Dr. Kam will, first of all, brief you on the business review for the year. Dr. -- Mr. Hui will then present to you the financial results, following which Dr. Kam will wrap up with a review. And finally, there will be a Q&A session. So without further ado, I'll now pass over the floor to Dr. Kam.

[Interpreted] Thank you, Linda. Good afternoon, ladies and gentlemen. I'd like to welcome you all to our 2020 annual results presentation. 2020 has been the most challenging year in our 40 years of business history. The COVID-19 pandemic continues to impact our businesses, both inside and outside Hong Kong. Despite all these challenges, our financials remain sound. Myself and all our colleagues will continue to focus on implementing the diversified -- development of our diversified business portfolio. In the coming decade, we intend to invest around HKD 100 billion on several new railway projects and the Siu Ho Wan property development. These projects will enhance our railway network in Hong Kong and also generate a huge number of jobs and new business opportunities. We've also formulated a new visionary corporate strategy to keep our cities moving sustainably and continue to provide quality service for our passengers so that we can continue to move forward. I will first of all, provide you with a summary of our performance in the year 2020. Following that, I'll go through our new corporate strategy. The total patronage of our transport operations dropped by 31.5% in 2020. Overall loss in our recurrent businesses for the year was HKD 1.1 billion. Property development profit was HKD 5.5 billion. The revaluation loss on our investment properties was HKD 9.2 billion. Therefore, the net loss attributable to shareholders for the year was HKD 4.8 billion. Last year, we maintained our train service delivery and passenger journeys on time on our heavy rail network at a world-class level of 99.9%. Nevertheless, we understand our passengers have high expectations of our service, and we will continue to strive for further improvement. In these difficult times, amidst the pandemic, we have been riding the tide with the community. With the support of the SAR government in Hong Kong, we have provided the 20% rebate on every Octopus strip. In addition, we've also provided rental concessions for our station and MTR mall tenants. We -- and other concessions. We have also enhanced our ventilation, cleaning and disinfection across our railway lines and managed properties to ensure a safe environment for our customers and staff. We launched various initiatives to support the community, including the donation of tablet devices to underprivileged children to facilitate their online learning. Beginning March last year, we have also been providing free airport express tickets to health care workers to travel between the urban area and AsiaWorld-Expo Station medical facilities, and also provide mobile blood donation stations for the public to donate blood. We also continued to invest in digitalization and applying new technologies to enhance passenger experience. In January, we introduced a QR code ticket to bring a new experience of smart mobility to passengers. We continued to adopt big data analysis, AI and robotics to further enhance railway asset management as well as customer service. Earlier last year, the Tuen Ma Line Phase 1 was opened to provide more convenient railway service. We are now in full swing to complete the trial operations in order to open the full Tuen Ma Line in the third quarter of this year. The -- in February, we commenced operations of the new signaling system and trains on the East Rail Line. However, due to various challenges, the target for opening the Hung Hom to Admiralty section of the East Rail Line in the first quarter of 2020 is now significantly at risk. We are now working with utmost efforts to complete the remaining works as soon as possible. I'd also like to undertake that we have -- say that we have actually learned from our experience gain and enhanced control of the Shatin to Central Link project, including strengthening the monitoring of the remaining works and strengthening staff training and improving our work culture. At the same time, we are actively extending our businesses. Regarding the next-generation of new railway projects, the government invited us to proceed with the detailed planning and design of the Tung Chung Line Extension, Tuen Mun South Extension, Kwu Tung Station and the Northern Link. We have awarded consultancy contracts for the detailed planning and design of the Tung Chung Line Extension and Tuen Mun South Extension. Procurement of the design of the Kwu Tung Station and Northern Link is also in progress. We will invest into the construction of these new lines under the ownership model and funding arrangements, including the Rail Plus Property model. For property development, last year, we awarded tenders for LOHAS Park Package 12 and 13 and opened the LOHAS Park -- the LOHAS shopping mall. We also named Wong Chuk Hang Station Property Development, The Southside, and have awarded its Package 5 property development tender this year. The development of Ho Man Tin Station Package 1 has now been taken over by the Great Eagle Group. For the Mainland of China and International businesses, we have maintained steady growth. In Mainland of China, a wholly owned subsidiary won Shenzhen Metro Line 13 project. We also opened a North Extension of the Shenzhen Metro Line 4, Phase 3 of the Hangzhou Metro Line 1, the full line of Hangzhou Metro Line 5 and Phase 2 of the Beijing Metro Line 16. In Chengdu, our joint venture is exploring and developing station commercial and related businesses. In Hangzhou, our joint venture was awarded several rolling stock overhaul contracts. In our International business, we were awarded the operations and maintenance concession for the Mälartåg Train Service in Sweden for 8 years. Despite the challenges amidst the pandemic, we remain confident in our business. We have rolled out a new corporate strategy to enhance our long-term sustainability and to pursue our business growth and also enhance our long-term competitiveness and to grab the opportunities for business growth. The new strategy is based on 3 pillars: first, to attain full potential of our Hong Kong core businesses; second, to maintain a steady growth in the Mainland of China and International businesses; and thirdly, to invest in new technology and build new growth engines. The new strategy also reaffirms our commitment to sustainable community development. We are committed to embedding environment, social and governance objectives, that is, ESG, into our daily businesses to create value for all our stakeholders. Railway is a low-carbon industry, and we have been working hard to adopt the various initiatives to lower carbon emission. Last year, we issued $1.2 billion of green bond on conservancy and greening projects. This year, we'll continue to launch a long-term strategy on reducing carbon emission. We have also been actively promoting social inclusion, and we have provided more tariff-free access and baby care rooms in our stations to meet customer needs. We also organized different events and activities to enable young people in their career and life planning. For all of our businesses, we maintained a high standard of corporate governance to safeguard the interest of our shareholders and stakeholders. Before I pass to Herbert to report to you on our financial results, I'd like to reiterate that despite the fact that the pandemic has caused significant and serious impact on our businesses, however, our financial position remains sound. Taking into account our financial position and future capital expenditure requirements, the MTR Board has proposed a final dividend of HKD 0.98 per share, resulting in a full year dividend of HKD 1.23 per share. Good afternoon, ladies and gentlemen. 2020 has been the most challenging year in our 40-year business history. The COVID-19 pandemic impacted our businesses, both inside and outside Hong Kong. Despite the challenges, our businesses remain stable. According to our current estimate, in the coming decade, we intend to invest around HKD 100 billion in several new railway projects and the Siu Ho Wan Depot property development. These projects will enhance the Hong Kong railway network and will also generate a large number of jobs and new business opportunities for Hong Kong. We have also formulated a visionary new corporate strategy to keep cities moving sustainably. I will first provide a summary of our performance in the year 2020. The total patronage for our Hong Kong transport operations dropped by 31.5% in 2020. Overall loss in our recurrent businesses for the year was HKD 1.1 billion. Property development profit was HKD 5.5 billion. The revaluation loss on investment properties, being a noncash item, was HKD 9.2 billion. Therefore, the net loss attributable to shareholders for 2020 was at HKD 4.8 billion. Last year, we maintained train service delivery and passenger journeys on time on our heavy rail network at a world-class level of 99.9%. Nevertheless, we understand our passengers have high expectations of our service, and we will continue to strive for further improvement. In these difficult times, amid the pandemic, we have been riding the tides with the community. With the support of Hong Kong government, we have provided the 20% rebate on every Octopus trip. In addition, we have provided rental concessions for our station and MTR mall tenants. We have enhanced ventilation, cleaning and disinfection across our railway lines and managed properties to ensure a safe environment for our customers and staff. We launched various initiatives to support the community, including the donation of tablet devices to underprivileged children to facilitate their online learning. We have also been providing free Airport Express tickets to health care workers to travel between the urban area and AsiaWorld-Expo Station medical facilities for the pandemic. We continue to invest in digitalization and applying new technologies to enhance passenger experience. In January, we introduced the QR code ticket to bring a new experience of smart mobility to passengers. We also continue to adopt big data analysis, artificial intelligence and robotics to further enhance railway asset management as well as customer service. The Tuen Ma Line Phase 1 was opened in early 2020 to provide more convenient railway service. We are now in full swing to complete trial operations in order to open the full Tuen Ma Line in the third quarter of this year. This February, we commenced operations of the new signaling system and trains on the East Rail Line. However, due to a number of major challenges, the target for opening the Hung Hom to Admiralty section of the East Rail Line in the first quarter of 2022 is now significantly at risk. We are working with our utmost efforts to complete the remaining works as soon as possible. We have also enhanced control of the Shatin to Central Link project following the experience gained, including strengthening the monitoring of the remaining works. Regarding the next generation of new railway projects, the government has invited us to proceed with the detailed planning and design of the Tung Chung Line Extension, Tuen Mun South Extension and Kwu Tung Station and Northern Link. We have awarded consultancy contracts for detailed planning and design of the Tung Chung Line Extension and Tuen Mun South Extension. Procurement of the design of Kwu Tung Station and Northern Link is in progress. We will invest into the construction of these new lines under the ownership model and the funding arrangement includes the Rail Plus Property model. For property development. Last year, we awarded the tenders for LOHAS Park Package 12 and Package 13, and we opened the LOHAS shopping mall. We also named our Wong Chuk Hang Station Property Development, The Southside, and have awarded its Package 5 property development tender this year. The development of Ho Man Tin Station Package 1 has been taken over by Great Eagle Group. For the Mainland of China and International businesses, we have maintained steady growth. In the Mainland of China, our wholly owned subsidiary won the Shenzhen Metro Line 13 project. We also opened the Northern Extension of Shenzhen Metro Line 4. We've opened Phase 3 of Hangzhou Metro Line 1, the full line of Hangzhou Metro Line 5 and Phase 2 of Beijing Metro Line 16. In Chengdu, our joint venture is exploring and developing station commercial and related businesses. In Hangzhou, our joint venture was awarded several rolling stock overhaul contracts. In our International business, we were awarded the operations and maintenance concession for the Mälartåg Train Service in Sweden for 8 years. Despite the challenges amid the pandemic, we remain confident in our business. We have rolled out a new corporate strategy to enhance our long-term sustainability and to pursue business growth. The new strategy is based on 3 pillars: first, to obtain full potential of our Hong Kong core business; second, to maintain a steady growth in the Mainland of China and International businesses; third, to invest in new technology and build new growth engines. The new strategy also reaffirms our commitment to sustainable community development. We are committed to embedding environment, social and governance, ESG, objectives into our daily businesses to create value for all our stakeholders. This year, we will take a further step forward by launching a long-term strategy for reducing greenhouse gas emission. We are also keen to further promote social inclusion and contribute to the continuous development of the community. We have enhanced station facilities such as more barrier-free access and baby care rooms to meet customers' needs. We also organized different events to engage youngsters in career and life planning. We will maintain a high standard of corporate governance to safeguard the interest of our shareholders and stakeholders. Before I pass to Herbert to report on the financial results, I want to reiterate that our financial position remains sound. Taking into account our financial position and future capital expenditure requirements, the MTR Board has proposed a final dividend of HKD 0.98 per share, resulting in a full year dividend of HKD 1.23 per share. Now I will hand over to Herbert to introduce our financial performance.

[Interpreted] Thank you, Jacob. Let me now highlight to you our financial results for 2020. In Hong Kong, revenue decreased by 36.8%, therefore, reporting a loss from recurrent businesses of HKD 1.5 billion, mainly due to the outbreak of COVID-19 and the deteriorating economy. Outside of Hong Kong, revenue from our recurrent businesses increased by 1.6%, whereas profit decreased by 21.7% to HKD 411 million, again dragged by the pandemic. Hence, the group registered a loss from recurrent businesses of HKD 1.1 billion. Underlying business profit decreased by 58.5% to HKD 4.4 billion, mainly due to the decline in recurrent business profits. Together with the HKD 9.5 billion revaluation deficits from investment properties, net loss attributable to shareholders for 2020 was HKD 4.8 billion. COVID-19 presented stiff challenges to our businesses that resulted in the first full year net loss since our IPO. That being said, the group's financial position remains sound. As at the end of 2020, we had cash and equivalent and undrawn committed facilities of a total of over HKD 300 billion. Net debt-to-equity ratio was only 22.5%. The Board has proposed a final dividend of HKD 0.98 per share, bringing the full year dividend to HKD 1.23 per share, same as last year. Turning now to the profit contributions from our different business segments. In Hong Kong, EBIT from our transport operations was a loss of HKD 5.4 billion mainly due to the 31.5% decline in overall patronage to HKD 1.31 billion. Our station commercial EBIT dropped by 51% due, mainly, to the revenue decline in duty-free shops, and also, the revenue decline from advertising. Property rental and management business EBIT only dropped by 1.9%. This is mainly due to relief measures provided to tenants during the pandemic, with only some of which was expensed in 2020, according to accounting standards. And the contribution from newly acquired and opened malls also helped to offset some of the decline. Outside of Hong Kong, EBIT of our Mainland of China and International, recurrent businesses dropped by 25%, again, because of the pandemic. Next, I'd like to talk about our consolidated financial position. Total asset increased by HKD 1.4 billion to about HKD 291 billion mainly due to underlying business profits and new assets commissioned, offsetting the revaluation deficits from investment properties. Total liabilities was up by HKD 11.2 billion to HKD 114 billion, mainly due to the issuance of a 2 -- USD 1.2 billion green bond during the year. As such, total equity decreased by HKD 9.8 billion to HKD 177 billion. Turning to our cash flow. Our operating activities generated HKD 772 million of inflow. Net of the fixed and variable annual payments to KCRC and maintenance CapEx, our net cash outflow recurring businesses was about HKD 8.4 billion. Receipts from various property development projects was HKD 8.6 billion. Hong Kong railway extension projects and property-related CapEx was HKD 4.2 billion, including the HKD 3 billion on the acquisition of the remaining interest in Telford Plaza II and PopCorn 2. After dividend paid and net borrowing and others, net cash outflow was HKD 872 million. Next, our financial -- financing and credit ratios. Total group borrowings increased by HKD 10.9 billion to HKD 50.3 billion. Average borrowing cost dropped by 0.5% to 2.3%. Net debt-to-equity ratio was up by 7.1% to 22.5%, still being a healthy level. And our interest cover was 8.2x. On our CapEx plan for the next 3 years, total CapEx from 2021 to 2023 is projected to be HKD 47.1 billion, of which 65% will be used for the maintenance, replacement of existing trains, signaling and power systems and other Hong Kong railway assets; 7% for new Hong Kong railway projects, preliminary planning and designs; and the other 7% for the Mainland of China and overseas investments; and the remaining 21% for Hong Kong property. With that, I will now hand back to Jacob for our outlook.

[Interpreted] Thank you, Herbert. Hong Kong is our home. We have been riding the tides with Hong Kong over the years. We will continue to face the future together with Hong Kong. I believe that with our solid financial position, diversified business portfolio and our professional teams, I believe that our corporation will remain resilient and will be able to recover and thrive with Hong Kong. In 2021, we still need to overcome different challenges caused by the pandemic. It may take more than 1 year to resume patronage level close to the previous records. It is also expected that the rental incomes will continue to be adjusted downwards this year. Part of the rental concession from last year will also be booked this year according to the accounting standard. The duty-free shop business will depend on the return of cross-boundary visitors. Advertising revenue is also affected by the pace of economic recovery. But in the long run, our new corporate strategy will enhance the sustainable development of our businesses and increase our long-term competitiveness. We -- our Hong Kong businesses will continue to be our core. To keep up with the latest development and meet future needs, we will continue to pursue new opportunities in Hong Kong and Greater Bay Area and invest in digitalization and new technologies to enhance customer experience. Looking forward to the railway development, we will continue with the detailed planning and design of the Tung Chung Line Extension and the Tuen Mun South Extension, and we'll start the detailed planning and design of the Kwu Tung Station and the Northern Link. In property development, the Siu Ho Wan Depot development project is expected to offer around 20,000 residential units, of which half will be public sector subsidized housing. Its design and planning of the advanced works have now commenced. It is expected that around HKD 100 billion will be invested in this new railway and property development projects. I believe these projects will help to boost Hong Kong's economy and generate employment opportunities. In the future, I hope that MTR will continue to generate employment and business opportunities for Hong Kong. Other than these projects, the Hung Shui Kiu Station and other railway development strategy projects, we've already submitted our proposals to the government. Depending on the state of the market in the next 12 months, we will be calling tender for several property developments, including the Hong Kong [ South Side ] Phase 2 and the Tung Chung site and the Pak Shing Kok site. After signing a contract regarding the Tung Chung Line project, for the Tung Chung East Station, we are recalling tender for Phase 1 of the development there. For South Side Phases 1 and 2 and also the [ Tai Wai Station ], work is ongoing, and we are now exploring current and future railway projects, including the development -- property development potential of Tung Chung Line and so on. And we will also continue to explore new opportunities outside of Hong Kong, especially the transfer infrastructures in the Greater Bay Area. The Hong Kong MTR is able to develop sustainably and remain financially sound, thanks to the valuable assets of the company, which is our staff. I would like to extend my gratitude to all our colleagues for the dedication. The pandemic still continues to pose challenges, but we will continue to move forward with Hong Kong. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]