MTR Corporation Limited (66) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, who are present at the scene and those watching online. I am Linda Choy, the company's Affairs and Branding Director. I'd like to welcome all of you to the 2022 interim results announcement of the MTRC. First of all, let me introduce to you our management on the podium. Sitting in the middle, we have Dr. Jacob Kam, Chief Executive Officer. On his right, we have Mr. Adi Lau, Managing Director, Mainland China Business and Global Operations Standards. We also have Mr. David Tang, Property and International Business Director; as well as Mr. Devlin, Capital Works Director. On Dr. Kam's left-hand side, we have Mr. Herbert Hui, our Financial Director; and Ms. Jeny Yeung, Hong Kong Transport Services Director. The press release -- the press conference will be conducted in Chinese. Dr. Kam will, first of all, give you a highlight of the 2022 interim results of the company. Following that, Mr. Herbert Hui will walk us through the financial results. Dr. Kam will then next share with you the outlook of the company. And finally, there will be a Q&A session. So without further ado, Dr. Kam.

Thank you, Linda. Good afternoon, ladies and gentlemen. Welcome to the MTR Corporation's interim results 2022 press conference. In the first half of the year, Hong Kong was still under the shade of the pandemic. The corporation continued to stand united with the community in the fight against the pandemic and kept Hong Kong and the other cities we serve moving. This year marks the 25th anniversary of the establishment of the Hong Kong SAR. Over the past 25 years, we have expanded our network to cover all 18 districts to bring greater convenience to our customers and also commence the Hong Kong section of the high-speed rail, which further facilitates travel between Hong Kong and various mainland cities. The East Rail Line extended its service to the Hong Kong Island in May this year, increasing the coverage and connectivity of the railway network. And on its first service day, we were thrilled to witness, with our passengers, this century-old railway crossing the harbor. Following the commissioning of the extended East Rail Line, we are now moving ahead with our 5 new railway projects and supporting the relevant planning under the Northern Metropolis Development Strategy, which will further expand the existing railway network and enhance our connection with other cities in the Greater Bay Area. Internationally, our U.K. business has also turned a new chapter, the Central Operating Section of Elizabeth line, which is operated by our wholly-owned subsidiary command service, in May, providing efficient and quality services to passengers in London. I want to express my gratitude to all colleagues who stood side-by-side to overcome all the challenges amid the pandemic and achieve these remarkable milestones. The fifth wave of the pandemic in the first half of the year posed great challenges to Hong Kong. Despite the challenges, the corporation, which has been rooted in Hong Kong for over 40 years, has endured the difficult times together with the people of Hong Kong. We extended our 3.8% special fare rebate again, and there has been no fare increase for the third consecutive time, including a fare reduction under the established mechanism. We also provided rental reductions for affected tenants of the 14 MTR malls and our station shops, with 100% rental waivers for premises required to be closed by the government under the pandemic. The rental relief of the corporation has provided since the pandemic outbreak amounting to several billion dollars. In addition, we made facilities available to support community vaccinations and cooperated with the government in many anti-pandemic efforts. The sustainability of the corporation greatly relies on our diversified business portfolio. We need continuous and stable income to cope with the massive capital requirements for railway construction and operations as well as maintenance and asset renewal for the railways' decades-long life cycle. The corporation has also invested to introduce green and innovative measures for the new railway projects, aiming to go smart and go beyond with the community. Amid the fifth wave of the pandemic, the public drastically reduced their commuting and posed challenges to our businesses. The domestic service patronage in the first half has decreased 11.7% as compared to the same period last year. The domestic patronage from late February to early March this year even dropped by more than half compared to the same period last year. This was the sharpest reduction since the start of the pandemic. In addition, cross-boundary services have remained suspended and the patronage of the Airport Express was far below pre-pandemic levels. The EBIT loss from Hong Kong transport operations since the outbreak of the pandemic in 2020 has reached over $10 billion, which showcases the difficult times that we have walked through with Hong Kong. Furthermore, the pandemic has severely affected recurrent income from the station commercial businesses and the shopping malls. Despite these severe challenges, our team have maintained professional services and managed to keep both passenger journeys on time and train service delivery on our heavy rail network at a world-class level of 99.9%. And to maintain our world-class railway services, the corporation continues to invest more than $10 billion every year to maintain and upgrade the existing railway assets and facilities. The diversified business portfolio, coupled with the rail plus property development model, plays a vital role in maintaining our financial stability and long-term sustainable development of the corporation with excellent service. In the first half of the year, the corporation's recurring business loss was about HKD 700 million, and the property development profit was HKD 7.8 billion, mainly due to the booking of profits from a number of property projects. Our property development income fluctuates with the property development cycle, while fare revenue as well as income from station commercial, shopping malls and office rental businesses provide stable and recurrent revenue. The EBIT from Hong Kong transport operations was still at a loss of HKD 2.8 billion. The corporation is committed to providing customer-centric service and improving work efficiency with the use of technology. We have signed MoUs with local universities and other institutions to develop innovative railway technology applications that will contribute to building a smart city. In addition, the corporation has entered the Web3 era and started the Metaverse journey to further interact with our customers. In Hong Kong, we continue to carry out signaling system upgrades on our 4 urban railway lines. The replacement of the trackside signaling has been progressing while the software safety assurance processes carried out by our contractor is taking longer than expected. The corporation is exploring other alternatives, including upgrading the existing signaling system or reducing the modifications required for the new signaling software so that the new system can be put into service as soon as possible. We will continue to ensure the existing system remains in good condition to provide safe, reliable and quality services. In addition, the new trains are being equipped with the existing signaling system in phases, and the first new train is expected to be put into urban line service within this year. Rail transport is a low-carbon mode of transport. We are committed to integrating green features and energy-efficient measures to build a sustainable community. The corporation will set 2030 science-based carbon reduction targets for its railway and property businesses in Hong Kong and has submitted a commitment letter to the science-based targets initiative. We also aim to achieve carbon neutrality by 2050 to promote a green future. On rail development, as invited by the government, detailed planning and design for the Tung Chung Line Extension, Tuen Mun South Extension, Kwu Tung Station on the East Rail Line, Northern Link and Hung Shui Kiu Station have already commenced. The Tung Chung Line Extension and Kwu Tung Station projects have been gazetted. And the railway scheme for the Tuen Mun South Extension has also been authorized. While advancing the projects, the corporation continues to adopt the rail plus property development model for suitable new railway lines, and all new projects are subject to signing of relevant agreements with the government. At the same time, we have started a technical study for a new Science Park/ Pak Shek Kok Station on the East Rail Line. We will continue communicating with the government for the Northern Metropolis Development Strategy to contribute to the long-term development of Hong Kong. On property development in the first half of the year, the presales of 2 packages at THE SOUTHSIDE, 4 packages at LOHAS Park as well as 2 other property developments at Yuen Long Station and Kam Sheung Road Station, for which we act as an agent for KCRC, were carried out with an enthusiastic response. In addition, the property development tenders for Pak Shing Kok Ventilation Building sites and the Tung Chung Traction Substation site have been awarded. Detailed design, advanced work for Oyster Bay Property Development has also commenced. We'll start preparation work for the tender for the Tung Chung East Station Package 1 as soon as possible after signing the project agreement with the government, which is anticipated this year. The rail plus property development model provides funds for the construction, operation and maintenance of new railway projects, which has allowed Hong Kong people to enjoy a high standard of railway services for many years. More importantly, this allows the corporation to adopt the transit-oriented development, TOD, which we excel at to build communities for Hong Kong, and this includes fostering the development of new communities and revitalizing districts, contributing to the social and economic development in Hong Kong and providing more housing supply. Some sites can even be used for public housing. For example, half of the units in the Oyster Bay Property Development will be public housing in support of the government's housing strategies. Our Mainland of China international business continued to make solid progress. Construction of the remaining sections of Beijing Metro Line 16 continues. Full line is expected to open after 2022. In Shenzhen, the Shenzhen Metro Line 4 maintains stable operations. There has been no increase in the line's fares since we started our operation in 2010. As it is anticipated that the mechanism and procedures for fare adjustments will take a longer time to implement and patronage will remain at a lower level for a period of time, an impairment provision has been made in respect of this line. Regarding our overseas business, the Elizabeth line in the U.K. has been operating smoothly since opening. In Australia, both the Sydney and Melbourne Metro train operations remained stable and welcomed by the customers. The Board stated in the last annual report that the interim dividend will represent around 1/3 of the total annual dividends. Accordingly, an interim ordinary dividend of HKD 0.42 per share is declared. I want to stress that the pandemic continues to pose many challenges to our businesses. Our property development profit is nonrecurrent, and fare revenue is still our major source of stable recurrent revenue. We will review the fare adjustment mechanism in the second half of the year as stipulated in the operating agreement, and it is expected to be concluded in the first half 2023. The review is under preparation and we're listening to opinions from various stakeholders. In fact, the corporation has been providing various fare concessions to passengers from all walks of life. Even under the loss in EBIT from Hong Kong transport operations and rental relief offered to tenants since the outbreak of the pandemic, we are still providing various fare concessions amounting to HKD 2.8 billion this year. And furthermore, we'll continue to implement environmental, social and governance, that's ESG, initiatives across all businesses to enable the corporation's long-term and sustainable development. Now I want to say a few words in English. Good afternoon, ladies and gentlemen. In the first half of 2022, the corporation continued to stand united with the community in the fight against the pandemic and we keep Hong Kong and the other cities we serve moving. This year marks the 25th anniversary of the establishment of the Hong Kong SAR. Over the past 25 years, we have expanded our network to cover all 18 districts and commence the Hong Kong section of high-speed rail to bring greater convenience to our customers. The East Rail Line extended its service to Hong Kong Island in May this year, increasing the connectivity of the railway network. On its first service days, we were thrilled to witness with our passengers this century-old railway crossing the harbor. Internationally, the central operating section of Elizabeth line in the U.K. commenced service in May, providing efficient and quality services to passengers in London. I want to express my gratitude to all colleagues who stood side-by-side to overcome all the challenges amid the pandemic and achieve these remarkable milestones. The fifth wave of the pandemic poses great challenges to Hong Kong. Despite the challenges, the corporation has endured the difficult times together with the people of Hong Kong. We extended our 3.8% special fare rebate again, and there is no fare increase for 3 consecutive times, including a fare reduction under the established mechanism. We also provided rental reductions or waivers for our affected tenants. In addition, we supported community vaccination and cooperated with government in many of its anti-pandemic efforts. The sustainability of the corporation greatly relies on our diversified business portfolio. We need continuous and stable income to cope with the massive capital requirements for railway construction and operations as well as maintenance and asset renewal for the railways' decades-long life cycle. The corporation has also introduced green and innovative measures for the new railway projects, aiming to go smart and go beyond with the community. Amid the fifth wave of the pandemic, the domestic service patronage in the first half of this year has decreased by 11.7% as compared to the same period last year. In addition, the cross-boundary services have remained suspended and the patronage of the Airport Express was far below the pre-pandemic levels. Furthermore, the pandemic has severely affected the recurring business income from the stations and shopping malls. Despite the severe challenges, our team have maintained -- our teams have maintained professional services and managed to keep both passenger journeys on time and train service delivery on our heavy rail network at a world-class 99.9%. To maintain our world-class railway services, the corporation continues to invest more than HKD 10 billion every year to maintain and upgrade the existing railway assets. The diversified business portfolio, coupled with the rail plus property development model, plays a vital role in maintaining our financial stability and the long-term sustainable development of the corporation. In the first half of this year, the corporation's recurring business loss was about HKD 700 million, and the property development profit was HKD 7.8 billion. Our nonrecurring property development income fluctuates with the property development cycle, while fare revenue as well as revenue from station commercial, shopping malls and office rental businesses provide a stable and recurring revenue. The EBIT from Hong Kong transport operations was still at a loss of HKD 2.8 billion. The corporation is committed to providing customer-centric service and improving work efficiency with the use of technology. We have signed MoU with local universities and other institutions to develop innovative railway technology applications that will contribute to building a smart city. In addition, the corporation has started the Metaverse journey to further interact with our customers. In Hong Kong, we continue to carry out signaling system upgrades on our 4 urban railway lines. The replacement of the trackside signaling hardware has been progressing, while the software safety assurance processes carry out by our contractor are taking longer than expected. The corporation now maintains normal operations of the existing system and is exploring other alternatives, including upgrading the existing signaling system or reducing the modifications required for the new signaling software. In addition, the new trains for the urban lines are being equipped with the existing signaling system in phases, and the first new train is expected to be put into service within this year. Rail transport is a low-carbon mode of transport. We are committed to integrating green features and energy efficiency measures to build a sustainable community. The corporation will set 2030 science-based carbon reduction targets for its railway and property businesses in Hong Kong. We also aim to achieve carbon neutrality by 2050. We are now moving ahead with our 5 new railway projects and supporting the planning under the Northern Metropolis Development Strategy, which will further expand the existing railway network and enhance our connection with other cities in the Greater Bay Area. On the current railway projects, the Tung Chung Line Extension and Kwu Tung Station projects have been consented, and the railway scheme for Tuen Mun South extension has also been authorized. At the same time, we have started a technical study for a new Science Park/ Pak Shek Kok Station on the East Rail Line. On property development in the first half of this year, the presales of 2 packages at THE SOUTHSIDE, 4 packages at LOHAS Park as well as 2 other property developments for which we act as the agent for KCRC, were carried out with an enthusiastic response. In addition, the property development tenders for Pak Shing Kok Ventilation Building sites and the Tung Chung Traction Substation site have been awarded. The detailed design and advanced work for Oyster Bay Property Development has also commenced. We will start preparation work for the tender for the Tung Chung East Station Package 1 as soon as possible after signing the project agreement with the government, which is anticipated this year. The rail plus property development model provides funds for new railway projects. And more importantly, this allows the corporation to adopt transit-oriented development, TOD, which we excelled at to build communities for Hong Kong and provide more housing supply. On Mainland of China and international business, our mainland China and international business continued to make solid progress. The construction of the remaining sections of Beijing Metro Line 16 continues, and the full line is expected to open after 2022. In Shenzhen, Shenzhen Metro Line 4 maintained stable operations. There has been no increase in Shenzhen Line 4's fares since we started operating the line in 2010. As it is anticipated, the mechanism and procedures for fare adjustments will take longer time to implement, and patronage will remain at a lower level for a period of time. An impairment provision has been made in respect of Shenzhen Line 4. Regarding our overseas business, the Elizabeth line in U.K. has been operating smoothly since its opening. In Australia, both the Sydney and Melbourne Metro Train operations remain stable and welcomed by the customers. The Board stated in the last annual report that the interim dividend will represent about 1/3 of the total annual dividends. Accordingly, interim ordinary dividend of HKD 0.42 per share is declared. I want to stress that the pandemic continues to pose many challenges to our businesses. Our property development profit is nonrecurrent, and fare revenue is still our major source of stable recurrent revenue. We will review the fare adjustment mechanism in the second half of this year as stipulated in the operating agreement and it is expected to be concluded in the first half of 2023. Furthermore, we will also continue to implement environmental, social and governance, ESG, initiatives across all businesses to enable the corporation's long-term and sustainable development. Now I'll pass to Herbert to report some of our financial highlights.

Thank you, Jacob. Let me highlight our financial results for the first half of 2022. Recurrent business in Hong Kong and outside of Hong Kong recorded losses of HKD 232 million and HKD 446 million, respectively, mainly due to the fifth wave of the COVID pandemic and the impairment loss of Shenzhen Line 4. Underlying business profit was HKD 7.1 billion, 78% increase as compared with the same period last year, mainly due to profit booking from 3 of our property development projects in the first half. Together with the HKD 2.4 billion loss from fair value measurement of investment properties, net profit attributable to shareholders for the first half of 2022 was HKD 4.7 billion. The group's financial position continues to remain sound. As at the end of June, we had cash and equivalent and undrawn committed facilities totaling over HKD 30 billion. Net debt-to-equity ratio improved to 12.7%. Interim dividend represents around 1/3 of the total dividends for the year. Therefore, the Board has accordingly declared an interim dividend of HKD 0.42 per share. Turning now to our business segmental profits. In Hong Kong, EBIT from our transport operations was a loss of $2.8 billion, mainly due to the adverse impact of the fifth wave of the pandemic on domestic patronage. Our station commercial EBIT decreased by 4.1% as a result of negative rental reversions due to the pandemic. Property rental and management business EBIT decreased by 9.8% due to concessions granted to tenants and negative tenant rental reversions. Outside of Hong Kong, EBIT of our Mainland China and international recurrent businesses increased by 77.8% led by the fare recovery and project booking in Australia. Moving on to our consolidated statement of financial position. Total assets increased slightly, by HKD 212 million, to HKD 292 billion. Total liabilities increased by HKD 2.3 billion to HKD 114 billion, mainly due to the accrual for 2021 final dividend. As such, total equity decreased by HKD 2.1 billion to HKD 178 billion. Turning to our consolidated cash flow. Our operating activities generated HKD 3.8 billion of inflow. Net receipts from property development was HKD 11.2 billion. Net of CapEx in others, our cash inflow before financing was HKD 10.4 billion. After net debt repayment and others, net cash inflow during the period was HKD 5.5 billion. Next, our financing and credit ratios. Total group borrowings decreased by HKD 4.5 billion to HKD 39.3 billion. The Fed has increased interest rates several times recently. However, 76% of our borrowings are in fixed rates, which mitigates the adverse impact of the interest rate hikes. Average borrowing cost was 2.2%. Net debt-to-equity ratio dropped by 5.4% to 12.7%. And our interest cover was 19.8x. On our 3-year CapEx plan, total CapEx from 2022 to 2024 is estimated to be $53.6 billion, averaging $18 billion per annum, of which around 2/3 or -- are destined for Hong Kong railway assets. 62% will be used for the maintenance and replacement of existing trains, signaling and power systems and other Hong Kong railway assets, 11% for new Hong Kong railway projects, initial planning and design, 12% for Mainland and [ overseas ] investments and 50% for Hong Kong property business. With that, I will now hand back to Jacob to go through our outlook.

We are committed to providing safe, reliable and efficient railway services to the public to keep cities moving and actively investing in the future development. The extended East Rail Line enhances the accessibility of the Hong Kong railway network, which lays an essential foundation for future railway development. Railway and urban development are interrelated. And looking ahead, we will invest HKD 100 billion in new railway projects and the Oyster Bay Property Development under the Railway Development Strategy 2014. And we will be working with the government on the railway projects proposed in the Northern Metropolis Development Strategy. The corporation has a wealth of experience to progress new railway projects, and most of them are extensions of existing railway lines. We will develop all projects with a robust approach and make every effort to contribute to the future development of Hong Kong. We continue to enhance our service and show our care for the society in order to Go Smart Go Beyond. Apart from investing more than HKD 10 billion every year on existing asset upgrades and maintenance, we will also invest more than HKD 1 billion for the development of smart operations and maintenance in the coming 5 years. So as to enhance customer experience, we will continue to explore railway and property development opportunities in the Mainland of China, including Guangdong, Hong Kong, Macau Greater Bay Area and overseas. We will also work hard to implement our ESG goals and foster the sustainable growth of the corporation. For property development, subject to market conditions, we anticipate tendering out the Tung Chung East Station Package 1 and Oyster Bay Property Development Phase 1 Package 1 over the next 12 months or so after entering into relevant project agreements with the government. And at the same time, applications for presell consent for THE SOUTHSIDE Package 4, Ho Man Tin Station Package 2 and LOHAS Park Package 12 are in progress. Subject to construction progress, we may also make a booking for the shopping mall, The Wai in Tai Wai and -- in the second half of the year and The Wai and THE SOUTHSIDE mall in Wong Chuk Hang are expected to open next year. Last but not least, I want to express my heartfelt thanks again to our colleagues for their professionalism and continuous efforts in keeping Hong Kong and all the cities we serve moving. In the future, we will continue to connect and build communities with an innovative, inclusive and sustainable approach. We will Go Smart Go Beyond with all our fellow citizens. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]