MTR Corporation Limited (66) Earnings Call Transcript & Summary

Ladies and gentlemen, friends of the media, welcome, everyone, annual results, MTR 2021. I am Osbert Kwan, the General Manager for Corporate Communication. We are going online for this session. First of all, we would like to introduce to us the speakers: Dr. Jacob Kam, the CEO of MT Operation. We then have Mr. Adi Lau, Managing Director, Mainland China Business and Global Operations Standards of MTR Corporation. And we have Mr. Herbert Hui, Finance Director. We have Ms. Jeny Yeung, Hong Kong Transport Services Director. And we have Mr. David Tang, Property and International Business Director, as well Mr. Roger Bayliss, Capital Works Director. Now this press conference will mainly be conducted in Chinese. Jacob will go through the review of results 2021, and then Herbert will go through the finances with that. And then Jacob will come back to give us the outlook. And then, we'll have a Q&A session, and you will be able to send us your questions through our broadcast platform.

Ladies and gentlemen, friends of the media, greetings to you. Welcome to the MTR Corporation annual results 2021. We regret that we have originally planned to take this opportunity of the results announcement to have a good face-to-face engagement with you but because of the ramp in COVID situation, for everybody's safety, we have no choice but to hold this meeting online. When COVID has stabilized, we will arrange another meeting for us to actually meet face-to-face. Before I review with you last year's performance, I'd like to take this opportunity to thank all our colleagues in the corporation in the past 2 years, with unprecedented challenges to our company to Hong Kong and to all the cities that we provide services to. What gives me consolation is that during this very hard time, every colleague in all our business units have been able to continue to stand united and committed to keep the cities moving by serving with excellence through this pandemic. And amid the fifth wave of COVID, some of our colleagues or their family members have been infected with the virus, and we wish them a quick recovery. While we strive to overcome the manpower shortage challenges caused by the increasing number of colleagues affected, we have also enhanced our medical support to our colleagues. And we continue to do our utmost to provide a safe and healthy working environment. Rooted in Hong Kong, the corporation is fully committed to serving the local community. This is a very difficult time of COVID, in addition to continuation of our 3.8% special fare rebate, we have introduced a number of measures to support different groups of the community, including provision of free tickets to support health care workers, rental relief for our station and shopping mall tenants, collaboration with charitable organizations to serve food and daily necessities to those who need, offering more parking spaces to the taxi industry, and making available our stations and premises to support community vaccination and COVID testing as well enabling cross-boundary rail freight service for essential items and goods. And further, MTR volunteers will also support the community in the fight against the pandemic. The corporation will fully cooperate with the government's efforts and continue to walk with Hong Kong to ride out the trying times together. Moving on to the corporation's performance. Last year, we managed to maintain both passenger journeys on time and train service delivery on our heavy rail network at a world-class level of 99.9% despite many challenges. Last year in June, the 56 kilometers Tuen Ma Line commenced service as the first railway station in Hong Kong to permanently display archeological relics. The new Siu Ho Wan station has become a popular attraction. On the day when Tuen Ma Line commenced service, I heard someone saying -- a rail fan actually saying, so excited that the Tuen Ma Line is now open. I was as thrilled as this person on the first day of operation, and I share the excitement and our passengers. I believe many citizens are looking forward to the opening of the Cross-harbour extension of the East Rail line, which will commence service in the next few months. The new extension will further enhance the overall railway network and better connect people from the new territories and Kowloon with Hong Kong Island. Fare revenue is a major source of income for us and contributes to maintaining our financial and business sustainability. However, in 2021, our business situation has remained very difficult in terms of patronage and revenue. Despite the slight easing of the pandemic last year, Hong Kong and the global economy have yet to fully recover. While local patronage at the end of 2021 was improving, the cross-boundary rail services have remained suspended, and the patronage of the Airport Express remain very low. As a result, the fare revenue from passenger services could only recover to about 60% of pre-pandemic levels. At the same time, the combined recurrent revenue from station, commercial and shopping malls was also well below the levels before the pandemic. In this difficult period, our Rail plus Property business model plays an important role in maintaining the overall financial sustainability of our businesses. In 2021, the corporation recorded a recurrent business profit of HKD 1.8 billion. Property development profit was HKD 9.3 billion and a loss of HKD 1.6 billion arising from fair value measurement of investment property was recorded. As a result, the net profit attributable to shareholders of the corporation for the year was HKD 9.6 billion. Property development profit is one-off. Last year, we had the booking of profits from a number of property projects, but the EBIT from Hong Kong transport operations was still at a loss of HKD 4.3 billion. As we headed into 2022, the community started facing a drastic resurgence of COVID-19 cases in Hong Kong, leaving all businesses badly battered. Given the current situation, our businesses will need more time to return to normal. However, I strongly believe that with our agility and concerted efforts, we will definitely overcome the challenges. At MTR, we will continue to enhance our customer experience and make investments to contribute to Hong Kong's medium- to long-term growth. We are planning to invest a total of over HKD 100 billion on new railway projects and the Siu Ho Wan Depot topside development. In addition, investment will also be made into asset upgrade as well as technology application across our businesses. We strive to improve the traveling experiences of our customers by providing more personalized, convenient, caring, inclusive and sustainable services as we seek to go smart, go beyond with the community. The corporation's digital and engine 2 business strategy embraces innovation and technology to drive efficiency and contribute to building Hong Kong into a smart city, and we're working together with the universities in this regard. And we continue to develop our smart and customer-centric service. In fact, last year, we further enhanced our MTR mobile app to help our customers enjoy more convenience. We have also gradually introduced information about franchise bus and green mini bus services to the next bus function and a variety of electronic payment options to our passengers as a further step towards smart mobility. The corporation is also committed to deploying smart maintenance technologies, such as equipment monitoring and big data analytics to improve our service reliability as well as our maintenance efficiency. At the same time, we will continue to improve our environmental, social and governance initiatives, that's ESG, across all our businesses for sustainable and long-term growth. Railway is a green and low-carbon mode of transport. We are committed to energy saving and emission reduction across railway operations. To show our commitment to building a green future, I want to announce that MTR will set science-based targets for 2030 in reducing carbon emissions from our railway and property business in Hong Kong. And this is with a goal to achieve carbon neutrality by the year of 2050. And this is the science-based targets that we have set out for ourselves. As an integral part of the Hong Kong community and the global village, we hope that our carbon neutrality vision will bring a better future for our next generation. Also, we will continue to listen and respond to the needs of different passengers through improving accessibility and services to build a more inclusive society. In Hong Kong, we continue to carry out our asset renewal work on four urban railway lines. We are also bringing in new trains by upgrading the functions of existing signaling system. And the first new train is expected to come into service this year. And at the same time, the hardware replacement of the new signaling system continues. The software assurance process is carried out by our contractor, taking longer than expected due to certain complexities and the epidemic. This work is of critical importance to ensure the safety of the new signaling system. We will continue to work closely with our contractor to progress the project. And at the same time, we will explore other feasibility options. On railway development, the new railway projects under Railway Development Strategy 2014, have achieved good progress. The Tung Chung Line Extension and the Tuen Mun South Extension have already been gazetted. And detailed planning and design work has also commenced on the Northern Link and Hung Shui Kiu Station and on the -- which is on the Tuen Ma Line. The study is underway on the possible addition of the new Science Park or Pak Shing Kok Station to the East Rail Line. In addition, the corporation is pleased to support the government on the new railway projects under the Northern Metropolis Development Strategy, which was announced in the 2021 policy address. We will leverage our expertise in railway development and operations to contribute to this future growth of Hong Kong, our home. Our property development plays an instrumental role in supporting the sustainability of our railway business. The profits from property development helped to fund the construction of new railway projects as well as asset upgrades and replacement. Last year, the corporation awarded the, THE SOUTHSIDE Packages 5 and 6, the presales of LOHAS Park LP 10, together with Southland, and La Marina of THE SOUTHSIDE received enthusiastic responses. Detailed design and advanced work has started on Siu Ho Wan Depot topside development, and we have also started advising expression of interest for the Pak Shing Kok Ventilation Building development. The Mainland China and international businesses of the corporation continued to grow steadily last year. At the end of the year, the full Beijing Metro Line 14 and Phase 1 of the Beijing Metro Line 17 came into service. And also, we took over Malartag operations in Sweden, and we'll continue to explore business opportunities in the Mainland, including the Greater Bay area and overseas markets. Taking into account our financial position and future capital requirements, the Board has declared a final ordinary dividend of HKD 1.02 per share, bringing the total ordinary dividend for the year to HKD 1.27 per share. At this point, I want to highlight the continued challenges the corporation is facing. The new wave of the pandemic hit Hong Kong well before our recurrent revenue has returned to pre-pandemic levels. And our property profits are nonrecurrent. We also need to ensure sustainable growth by planning to invest over HKD 100 billion on new railway projects and Siu Ho Wan Depot topside development and a further CapEx of HKD 50 billion, mainly on asset upgrade and maintenance over the next 3 years. We, therefore, need to maintain a diversified business portfolio for long-term financial sustainability. The MTR team has strengthened our corporate governance and we will do our best to push forward our new railway projects with professionalism and to keep Hong Kong moving. Ladies and gentlemen, if I brief you on last year's business performance, I want to express my thanks to all my colleagues at the MTR who have continued staying united, committed to keeping cities moving by serving with excellence through the pandemic. Amidst the fifth wave of COVID-19, some of our colleagues and their other family members have been infected with the virus. We wish them a quick recovery. While we strive to overcome the manpower shortage challenges caused by the increasing number of colleagues affected, we've also enhanced our medical support to our colleagues, and we continue to do our utmost to provide a safe and healthy working environment. Rooted in Hong Kong, the corporation is fully committed to serving the local community. At this difficult time, in addition to the continuation of our 3.8% special fare rebate. We have introduced a number of measures to support different groups of the community, including provision of free tickets to support health care workers rental relief for our station and shopping malls tenants, collaboration with charitable organizations to serve food and daily necessities to those in need, offering more parking spaces to taxi industry, also making available our stations and premises to support community vaccination and COVID testing and enabling cross-boundary rail freight service for essential goods. MTR volunteers, we also support community in a fight against the pandemic. The corporation will fully cooperate with government's efforts and continue to work with Hong Kong to ride out the trying times together. Moving on to the corporation's performance. Last year, we managed to maintain both passenger journeys on time and train service delivery on our heavy rail network at a world-class level of 99.9% despite many challenges. Last year in June, the 56 kilometers Tuen Ma Line commenced service. As the first railway station in Hong Kong to permanently display archeological relics, the new Siu Ho Wan station has become a popular attraction. I was thrilled on the first day of operation and share the excitement with our passengers. I believe many citizens are looking forward to the opening of Cross-harbour extension of the East Rail line, which will commence service in the next few months. The next extension will further enhance the overall railway network and better connect people from the new territories and Kowloon with Hong Kong Island. Fare revenue is a major source of income for MTR and contributes to maintaining our financial and business sustainability. However, in 2021, our business situation has remained very difficult in terms of patronage and revenue. Despite a slight easing of the pandemic last year, Hong Kong and the global economy have yet to fully recover. While local patronage by the end of 2021 was improving, the cross-boundary rail services have remained suspended and the patronage of the Airport Express remains very low. As a result, the fare revenue from passenger service could only recover to about 60% of the pre-pandemic levels. At the same time, the combined recurring revenue from station, commercial and shopping malls was also well below the levels before the pandemic. In this difficult period, our Rail plus Property business model plays an important role in maintaining the overall financial sustainability of our businesses. In 2021, the corporation recorded a recurrent business profit of HKD 1.8 billion. Property development profit was HKD 9.3 billion and a loss of HKD 1.6 billion arising from fair value measurement of investment property was recorded. As a result, the net profit attributable to shareholders of the corporation for the year was HKD 9.6 billion. Property development profit is one-off. Last year, we had a benefit of booking of profits from a number of property projects, but the EBIT from Hong Kong transport operations was still at a loss of HKD 4.3 billion. As we headed into 2022, the community started facing a drastic resurgence of COVID-19 cases in Hong Kong, leaving all businesses badly battered. Given the current situation, our businesses will need more time to return to normal. However, I strongly believe that with our agility and concerted efforts, we will definitely overcome the challenges. At MTR, we will continue to enhance our customer experience and make investments to contribute to Hong Kong's medium- to long-term growth. We are planning to invest a total of over HKD 100 billion on new railway projects, and the Siu Ho Wan Depot topside development. In addition, investment will also be made into asset upgrade as well as technology application. The corporation's digital and Engine 2 business strategy embraces innovation and technology to drive efficiency and contribute to building Hong Kong into a smart city. We continue to develop our smart and customer-centric service. Last year, we further enhanced our MTR mobile app to help our customers enjoy more convenience. We have also gradually introduced information about franchise bus and green mini bus services to the next bus function, and a variety of electronic payment options to our passengers as a further step towards smart mobility. The corporation is also committed to deploying smart maintenance technologies such as equipment monitoring and big data analytics to improve service reliability and maintenance efficiency. We also continue to implement environmental, social and governance, ESG, initiatives across all businesses for sustainable and long-term growth. Railway is a green and low-carbon mode of transport. We are committed to energy saving and emission reduction across railway operations. To show our commitment to bring -- to building a green future, I want to announce that MTR will set science-based targets for 2030 in reducing carbon emission from our railway and property business in Hong Kong, with a goal to achieve carbon neutrality by 2050 as an integral part of the Hong Kong community and the global village, we hope that our carbon neutrality vision will bring a better future for our next generations. Also, we will continue to listen and respond to the needs of different passengers through improving accessibility and services to build a more inclusive society. In Hong Kong, we continue to carry out our asset renewal work on our four urban railway lines. We're also bringing in new trains by upgrading the functions of the existing signaling system, and the first train is expected to come into service this year. At the same time, the hardware replacement of the new signaling system continues, but the software assurance processes carried out by our contractor are taking much longer than expected due to the technical complexities and the pandemic. This work is of critical importance to ensure the safety of the new signaling system. We continue to work closely with our contractor to progress the project, and at the same time, we will explore other feasible options. On railway development, the new railway projects under the Railway Development Strategy 2014 have achieved good progress. The Tung Chung Line extension and the Tuen Mun South Extension have already been gazetted. Detailed planning and design work has also commenced on the Northern Link and the Hung Shui Kiu Station on the Tuen Ma Line. A study is underway on the possible addition of a new Pak Shing Kok station to the East Rail Line. In addition, the corporation is pleased to support the government on the new railway projects under the Northern Metropolis Development Strategy, announced in the 2021 policy address. We will leverage our expertise in railway development and operations to contribute to this future growth of Hong Kong. Our property development plays an instrumental role in supporting the sustainability of our railway business. The profits from property development helped to fund the construction of new railway projects as well as asset upgrades and replacement. Last year, the corporation was awarded THE SOUTHSIDE Packages 5 and 6, the presales of LOHAS Park LP 10 together with Southland and La Marina of THE SOUTHSIDE received enthusiastic responses. Detail design and advanced work have started on the Siu Ho Wan Depot topside development. We have also started -- expression of interest for the Pak Shing Kok Ventilation Building development. The Mainland China and international business of the corporation continued to grow steadily last year. At the end of last year, the full Beijing Metro Line 14 and Phase 1 of Beijing Metro Line 17 came into service. At the same time, we took over Malartag operations in Sweden. We'll continue to explore business opportunities in the Mainland China, including the Greater Bay Area and overseas markets. Taking into account our financial position and future capital requirements, the MTR Board has declared a final ordinary dividend of HKD 1.02 per share, bringing the total ordinary dividend for the year to HKD 1.27 per share. At this point, I want to highlight the continued challenges the corporation is facing. The new wave of pandemic hit Hong Kong well before our recurring revenue has returned to pre-pandemic levels, and our property profits are nonrecurring. We also need to ensure sustainable growth by planning to invest over HKD 100 billion on new railway projects and Siu Ho Wan Depot topside development and a further CapEx of HKD 50 billion mainly on asset upgrade and maintenance over the next 3 years. We, therefore, need to maintain our diversified business portfolio for long-term financial sustainability. The MTR team has strengthened our corporate governance and we do our best to push forward our new railway projects with professionalism to keep Hong Kong moving. Now, I'll pass to Herbert to present the financial performance last year.

Thank you, Jacob. Let me go through the highlights of our financial results for 2021. Recurring business profits in Hong Kong and outside of Hong Kong increased to HKD 979 million and HKD 829 million, respectively, mainly due to the gradual recovery from COVID-19. Hence, the group's recurring business profits increased to HKD 1.8 billion, albeit slightly significantly below the pre-coronavirus level due to the close of boundaries. Underlying business profit was HKD 11.2 billion, 155% increase as compared to last year, mainly due to a higher property development profit. Together with the HKD 1.6 billion loss from fair value maintenance of measurement of investment properties, net profit attributable to shareholders for 2021 was HKD 9.6 billion. The group's financial position remains sound. As for the end of December 2021, we had cash and equivalent and undrawn committed facilities of over HKD 36 billion. Net debt-to-equity ratio improved to 18.1%. The Board has proposed a final ordinary dividend of HKD 1.02, or HKD 1.02 per share. Full year ordinary dividend will therefore be HKD 1.27, 3.3% up compared with last year. Turning to our business segment performance. In Hong Kong, EBIT from our transport operations was a loss of HKD 4.3 billion, narrowed from the same period last year. This is mainly due to the recovery in domestic service patronage. Nevertheless, revenue was still significantly below pre-coronavirus level due to boundary closures. Our station commercial EBIT decreased by 0.6% due to the duty-free shops being still affected by the boundary closure and the granting of various rental concessions. Advertising revenue grew significantly in the second half of 2021, helping to narrow the decline in station commercial EBIT. Property rental and management business EBIT decreased by 3.3%, also due to the various rental concessions and negative reversion, but partly offset by the full year effect of newly opened shopping malls. Outside of Hong Kong, EBIT of our Mainland China and international subsidiaries increased by 138%, led by the recovery from Mainland China and Australia. Moving on to our consolidated statement of financial position. Total asset increased to -- increased by HKD 1.5 billion to HKD 292 billion, mainly from investments in railway assets and proceeds from property-related businesses. Total liability decreased by HKD 1.5 billion to HKD 112 billion, mainly due to debt repayment. As such, total equity increased by HKD 3.1 billion to HKD 180 billion. Turning to our cash flow. Our operating activities generated HKD 7.8 billion of inflow. Net receipts from property development was HKD 16.6 billion, net railway maintenance CapEx and others. Our cash inflow before financing was HKD 14.6 billion. After net debt repayment and dividend payment, net cash inflow during the period was HKD 100 million. Next, our financial and credit ratios. Total group borrowings decreased by HKD 6.6 billion to 48 -- HKD 43.8 billion. Average borrowing cost decreased by 0.1% to 2.2%. Net debt-to-equity ratio decreased by 4.4 percentage points to a healthy level of 18.1%. Interest cover was 14.4x. As for our 3-year CapEx plan, total CapEx from 2022 to 2024 is estimated to be HKD 53.7 billion, of which 62% will be used for the maintenance and replacement of existing trains, signaling and power systems and other Hong Kong railway assets; 10% for new Hong Kong railway projects, initial planning and design; 13% for Mainland China and overseas investment; and finally, 15% for Hong Kong property. With that, I will now hand back to Jacob to go through our outlook.

Thank you, Herbert. The world has been plagued by the pandemic for more than 2 years. Committed to our mission to keep cities moving and our customer-centered strategy, we continue to provide our passengers with safe and reliable railway services. We also promote smart mobility to provide the public with more convenient and inclusive traveling experiences. While patronage rebounded last year, the corporation's performance has yet to recover to the pre-pandemic level as our cross-boundary railway services remains suspended with a significant drop in tourist traffic. The severity of the pandemic has further added to our challenges since the beginning of this year. Our recurring revenues, including railway businesses as well as station and more businesses have undergone unprecedented adverse impact and outlook for the next few months is somewhat uncertain. We will continue to monitor the pandemic situation and work hard to overcome the challenges. As long as we stay positive and stand United, I have confidence that we will get over the tough time and make the most of our opportunities going forward. Looking ahead, we will be -- it will be a major milestone with the commissioning of the extension of the East Railway line. On property development, the corporation has started inviting expression of interest for the Pak Shing Kok Ventilation Building property development, subject to market conditions -- and our entering into a project agreement on the Tung Chung Line extension with the government, Tung Chung East Station Package 1 will also be put to tender. Furthermore, Tung Chung traction substation will be re-tendered in due course. Together with the tender for Siu Ho Wan Depot topside property development Phase I Package 1, which is subject to entering into a project agreement with the government. And signing of the land grant, the four property developments are expected to provide more than 5,000 residential units. About half of the units in the Siu Ho Wan project will be public housing. Also, plans are underway to launch the presale of LOHAS Park Package 11, THE SOUTHSIDE Package 4 and Ho Man Tin Package 2 this year, with approximately 3,500 residential units to be provided. The property development profit from LOHAS Park, LP 10 and SOUTHLAND and La Marina of THE SOUTHSIDE is expected to be booked later on this year. We will continue to explore the development opportunities of sites along existing and future railway lines. The corporation's purpose has always -- is always to keep cities moving. In Hong Kong, we operate the heavy rail, the light rail network and the MTR bus services carrying millions of passengers to the destinations every day. Transport authorities and railway operators in other cities are facing severe financial difficulty amid the pandemic, However, thanks to the Rail plus Property model, which is an important source of railway financing, we have the resources not only to provide world-class railway services, but also to continue railway asset upgrades and new line investments. We can do all that without using public funds. Over the year, the Rail plus Property model has been upgraded to Rail plus Community model. While MTR continues coordinating with different developers to create seamless connectivity and build vibrant communities in Hong Kong. Receipts from property development can also help us upgrade our railway assets and also the building of new railway lines. Looking ahead, we are planning to invest more than HKD 100 billion in new railway projects under the Railway Development Strategy 2014, as well as the Siu Ho Wan Depot topside development. We also work with the government on the railway projects proposed in the Northern Metropolis development strategy and also the new East rail line, Pak Shing Kok station near Science Park. We will continue to invest more than HKD 10 billion on asset maintenance, replacement and upgrade in order to provide more efficient and carrying railway services. Meanwhile, we will continue to invest resources on technology applications and innovations to drive sustainable growth. We will keep exploring opportunities in developing railway and property projects in Mainland China and including the Greater Bay Area and overseas. Last, but not the least, I want to thank all our colleagues around the world for their professionalism and dedication. As a team, we will continue to work together to keep Hong Kong moving and keep every city reserve moving. Together, we will go smart, go beyond into the future. Thank you very much.