MTR Corporation Limited (66) Earnings Call Transcript & Summary

[Interpreted] So thank you very much. I will now invite the Chief Executive and our management to take the seats. And I now give the floor to Ms. Linda Choy, Corporate Affairs and Branding Director.

[Interpreted] Good afternoon, ladies and gentlemen. I'm Linda Choy, Corporate Affairs and Branding Director of the company. I'd like to welcome you all to the 2022 results announcement of the MTRC. Today, it's the first time that we have an on-site press conference. We are very pleased to meet you all here. Let me, first of all, introduce to you the -- our corporate representatives. Sitting in the middle, we have Dr. Jacob Kam, our Chief Executive Officer. To his right, we have Ms. Jeny Yeung, Transport Director, Services; and also Dr. Tony Lee, Operations Director; and also Mr. Carl Devlin, Capital Works Director. To Dr. Kam's left, we have our Financial Director, Mr. Herbert Hui and Mr. David Tang, Properties and International Business Director. The results announcement today will be conducted in Chinese. Dr. Kam will, first of all, give you a highlight of the company's performance in 2022. Following that, Mr. Herbert Hui will give you the financial highlights. Dr. Lee will then next share with you the business outlook for the company following that there will be a Q&A session. With no further ado, I now defer to Dr. Kam.

[Interpreted] Good afternoon, ladies and gentlemen. Welcome to the MTR Corporation's Annual Results 2022 press conference. As the pandemic prevention measures are easing gradually, I am so happy today that we can meet face-to-face with you all today as we did at results announcements in the past. In 2022, the fifth wave of COVID post severe challenges to the community. MTR colleagues stood united to keep cities moving and provide quality services to Hong Kong and the cities we serve in the Mainland China and overseas. In May 2022, the East Rail Line extended its services to Hong Kong Island, which was well received by the public. The service also provides more convenience for people traveling between Hong Kong and Shenzhen and in the same month in London, the central operating section of the Elizabeth line operated by the corporation commenced service. Phase 3 of Beijing Metro Line 16 also started its operation at the end of the year. In addition, the 93 new trains purchased by the corporation for urban lines, also known as Q-trains, have been gradually delivered. The first of these trains was put into service on the Kwun Tong Line last November and the operation is smooth so far. Stepping into 2023, society is gradually returning to normal cross-boundary services of Lok Ma Chau Station and the High Speed Rail, Hong Kong section and Lo Wu station have been resumed. In February of the year, the average daily patronage of cross-boundary railway services and High Speed Rail Hong Kong section reached almost half of the pre-pandemic level with increasing number of travelers and visitors. A patronage of Airport Express has also been rebounding since the end of last year. In 2022, our recurrent business profit was about HKD 160 million. Property development profit was HKD 10.5 billion, loss of HKD 810 million arising from fair value measurement of investment properties was recorded. As a result, the net profit attributable to shareholders of the corporation for the year was HKD 9.8 billion. EBIT from Hong Kong transport operations in 2022 recorded a loss of HKD 4.7 billion. In the 3 years of the pandemic, the total EBIT loss of transport operations has exceeded HKD 14 billion. A larger property development profit in 2022 came from the booking of profits from a number of property projects. And this profit is nonrecurrent. We need to make substantial investments in railway operation and asset maintenance every year, as well as new railway development in Hong Kong to maintain our world-class service. The corporation always strives to support the community. Apart from providing ongoing fare concessions during the pandemic, the corporation also provided additional relief measures, including fair concessions, no fair adjustments or fair reduction under the fair adjustment mechanism for passengers and rental reductions or waivers for our tenants to ride through the difficult times together. The relevant fare and rental concessions amounted to billions of Hong Kong dollars. Our colleagues strive to maintain professional service last year. In local transport operations, we managed to keep train service delivery and passenger journeys on time for our heavy rail network at a world-class level of 99.9%. We also keep upgrading our facilities. New train which was put into service on the Kwun Tong Line last November has provided passengers with an enhanced traveling experience. As of now, 4 new trains have been put into service and the overall operation is smooth. The signaling system replacement is another important asset renewal project, and corporation is making every effort to push forward the relevant works. And 4 urban lines will gradually adopt a new signaling system in the future. To support the government strategy for the future development of Hong Kong, the corporation is also moving ahead with new railway projects at an investment of over HKD 100 billion. In addition to the project planning and management, it is also very important to plan and manage the capital requirements of the future railway network. The Corporation signed the project agreement with the government on the Tung Chung Line Extension last week. This project, together with Oyster Bay Station, the Tuen Mun South Extension and Kwu Tung Station on the East Rail Line are all expected to gradually commence construction this year, and we have started the advanced works of these projects. The Hung Shui Kiu Station project has been gazetted in February of the year, and our team will endeavor to advance these projects in an orderly manner. In respect of property development, we continued the presale of THE SOUTHSIDE packages 1 and 2 and LOHAS Park packages 10 and 11 last year. The contracts for the Pak Shing Kok Ventilation Building property development and Tung Chung Traction Substation property development have also been awarded. Subject to market conditions, the Oyster Bay Packages 1 and 2 and Tung Chung East Station Package 1 development are expected to be tendered in the next 12 months. Over the years, while building railway lines under the Rail plus Property development model, the corporation has been able to support Hong Kong to build new communities and inject vitality into old districts. Railway construction requires a substantial and long-term investment. On top of that, we also need to invest in railway operation, maintenance and asset replacement and upgrades. The R&P model helps the corporation maintain its financial stability and long-term sustainability. Subject to project requirements and the development strategy of the government, the corporation will adopt the R plus P model or other suitable financing arrangements for new railway projects to speed up the construction and support the development of Hong Kong. With a commitment to creating a safe, accessible and customer-centric traveling environment, we have applied technology in our businesses to promote social inclusion and smart mobility. We strive to further enhance our operating and maintenance performance with the use of technology. We have also signed MOUs with local universities and other institutions to develop more innovative solutions for railway and related businesses. Railway transport is a low-carbon mode of transport. Moreover, the corporation has incorporated green features in the design and planning of future stations and property development projects. We have submitted our 2030 science-based carbon reduction targets for our railway and property businesses in Hong Kong to the science-based target initiative, SBTi, and target to achieve carbon neutrality by 2050. And during the year, we completed the chiller replacement program at stations, making passengers' journeys more comfortable and reducing carbon emissions. We installed solar panels at some stations and depots to support development of renewable energy. We also launched a new retail program, LOUDER, at our malls to offer young entrepreneurs and integrated online to offline retail platform, promoting the development of innovative businesses and creating more opportunities for the community. We have developed an environmental social governance, ESG investment framework to measure, review and monitor relevant investment projects, helping the corporation effectively allocate financial resources to appropriate initiatives. The corporation strives to enhance passengers traveling experience by incorporating artworks into our network to promote public art appreciation. Last year, we collaborated with M+ and local artists to enhance passenger journey experience with world-class art works and local art production. In addition, the corporation has launched the Legacy Train Revitalization Program, giving retired train cars a second life. We donated retired train components to community partners, which has improved the learning motivations of students with special education needs. Our Mainland China and international businesses have achieved steady development. The full line of Beijing Metro Line 16 expected to open this year. Our operating contracts at the Elizabeth line in Southwestern Railway and the U.K. have been extended. After taking into full account of the corporation's financial position and future capital requirements, the Board has proposed a final ordinary dividend of HKD 0.89 per share, bringing the total ordinary dividend for the year to HKD 1.31 per share. Ladies and gentlemen, in 2022, despite the challenges posed by the fifth wave of COVID, MTR colleagues stood united to keep cities moving. In May 2022, the East Rail Line extended its services to Hong Kong Island, increasing the connectivity of the railway network. In the same month, in London, the central operating section of the Elizabeth line operated by the corporation commenced service. Phase III of the Beijing Metro Line 16 also started its operations at the end of 2022. In addition, the first of the 93 new Q-trains was put into service on the Kwun Tong Line last November. Stepping into 2023, the city is gradually returning to normal. The cross-boundary services of Lok Ma Chau station, the High Speed Rail Hong Kong section and Lo Wu Station have been resumed. The patronage of the Airport Express have also been gradually rebounding since the end of last year. Now I'll talk about our performance last year. In 2022, our recurrent business profit was around HKD 160 million. Property development profit was HKD 10.5 billion and a loss of HKD 810 million arising from fair value measurement of investment properties was recorded. As a result, the net profit attributable to shareholders of the corporation for the year was HKD 9.8 billion. The EBIT from Hong Kong transport operations recorded a loss of HKD 4.7 billion. In the 3 years of the pandemic, the total EBIT loss of the transport operations has exceeded HKD 14 billion. Our larger than normal property development profit in 2022 came from the booking of profits from a number of property projects, and this profit is nonrecurrent. We need to make substantial investments on railway operations and asset maintenance every year as well as on new railway development to maintain our world-class service. The cooperation always strives to support the community. Apart from providing ongoing fare concessions, the corporation also provided additional relief measures for our passengers and tenants during the pandemic. Talking about our railway service, in 2022, we managed to keep train service delivery and passenger journeys on time for our heavy rail network at a world-class level of 99.9%. The first of the new trains that was put into service on the Kwun Tong Line, last November, has provided passengers with an enhanced traveling experience. The singling system replacement is another important as a renewal project. The corporation is making every effort to push forward the relevant works. The corporation is also moving ahead with new railway projects at an investment of over HKD 100 billion. We signed a project agreement with the government on the Tung Chung Line Extension last week. This project, together with Oyster Bay Station, the Tuen Mun South Extension and Kwu Tung Station on the East Rail Line, are all expected to commence construction this year. The Hung Shui Kiu Station project has been consented in February this year. Our team will endeavor to advance these projects in an orderly manner. In respect of property development, we continued the presale of THE SOUTHSIDE packages 1 and 2 and LOHAS Park packages 10 and 11 last year. The contracts for the Pak Shing Kok Ventilation Building property development and Tung Chung Traction Substation property development have also been awarded. Subject to market conditions, the Oyster Bay packages 1 and 2, and the Tung Chung East Station Package 1 development are expected to be tendered in the next 12 months. Over the years, while building railway lines under the Rail plus Property, R+P development model, the corporation has been able to support Hong Kong to build new communities and inject vitality into all districts. Railway construction requires a substantial and long-term investment. On top of that, we also need to invest on railway operations, maintenance and asset replacement and upgrades. The R+P model helps the corporation maintains its financial stability and long-term sustainability. Subject to the project requirements and the development strategy of the government, the corporation will adopt the R+P development model or other suitable financing arrangements for the new railway projects. With a commitment to creating a safe, accessible and customer-centric traveling environment, we have applied technology in our businesses to promote social inclusion and smart mobility. We have also signed MOUs with local universities and other institutions to develop more innovative solutions for railway and related businesses. Railway transport is a low-carbon mode of transport. Moreover, the corporation has incorporated green features in the design and planning of future stations and property development projects. We have submitted our 2030 science-based carbon reduction targets for our railway and property businesses in Hong Kong to the science-based targets initiative, SBTi. And we also target to achieve carbon neutrality by 2050. During the year, we completed the chiller replacement program at stations, making passengers' journeys more comfortable and reducing carbon emissions. We installed solar panels at some stations and depots to support the development of renewable energy. We also launched a new retail program, LOUDER, at our malls to offer young entrepreneurs and integrated online-to-offline retail platform and thereby to create more opportunities for the community. We have developed an environmental, social and governance, ESG investment framework to help the corporation effectively allocate financial resources to appropriate initiatives. The corporation strives to enhance passengers traveling experience by incorporating art works into our network to promote public art appreciation. In addition, the corporation has launched the Legacy Train Revitalization Program to give retired trains a second life and foster social inclusion through collaborations with schools and NGOs. Our Mainland China and international business have achieved steady development. The full line of Beijing Metro Line 16 is expected to open this year. Our operating contracts of the Elizabeth line and Southwestern Railway in the U.K. have been extended. After taking into full account the corporation's financial position and future capital requirements, the Board has proposed a final ordinary dividend of HKD 0.89 per share, bringing the total ordinary dividend for the year to HKD 1.31 per share. I'll pass to Herbert to report some of our financial highlights.

[Interpreted] Let me highlight our financial results for 2022. Recurring businesses in Hong Kong and outside of Hong Kong recorded HKD 384 million profit and HKD 227 million loss, respectively, mainly due to the fifth wave of COVID-19 and impairment provision for SZL4. Underlying business profit was HKD 10.6 billion, a 4.6% decrease as compared to last year, mainly due to the lower recurring business profit. Together with the HKD 810 million loss from fair value measurement of investment properties, net profit attributable to shareholders for 2022 was HKD 9.8 billion. The group's financial position continues to remain healthy. As at the end of December, we had cash, bank balances and deposits and undrawn committed facilities totaling over HKD 30 billion. Net debt-to-equity ratio was 23.3%. The Board proposed a final dividend of HKD 0.89 per share together with HKD 0.42 to interim dividend per share. Full year dividend was HKD 1.31 per share, an increase of 3.1% compared to last year. Turning to our business segmental profits. In Hong Kong, EBIT from our transport operations was a loss of HKD 4.7 billion, mainly due to the adverse impact of the fifth wave of COVID-19 in early 2022. Now Station Commercial EBIT decreased 8.8%, a result of lower advertising revenue and negative rental reversions due to the pandemic. And duty-free shops remain closed as a result of the closure of boundary crossing stations. Property rental and management business EBIT decreased by 6.1% due to negative rental reversions. Outside of Hong Kong, EBIT of our Mainland China and international subsidiaries increased due to higher contributions from Australia. Moving on to our consolidated statement of financial position. Total assets increased by HKD 35 billion to HKD 327 billion, mainly due to the addition of Oyster Bay Property Development and Tai Wai shopping mall. Total liabilities increased by HKD 35 billion to HKD 147 billion, mainly due to the corresponding accounting treatment relating to Oyster Bay project and increase in borrowings. As such, total equity remained at around HKD 180 billion. Turning to cash flows. Our operating activities generated HKD 6.8 billion of inflow. Net receipts from property development was HKD 4.9 billion net of CapEx and others. Our cash inflow before financing was close to HKD 0.5 billion. After dividend payment, net debt drawdown and others, the decrease in cash was HKD 4.8 billion. On our financing and credit ratios, total group borrowings increased by HKD 4.1 billion to HKD 47.8 billion. The Fed raised interest rates several times during the year, 70% of our borrowings were in fixed rates, which helps to mitigate the adverse impact of such interest rate hikes. Average borrowing cost for 2022 was 2.5%, representing an increase of 0.3 percent points as compared to last year. Net debt-to-equity ratio was 23.3%, representing an increase of 5.2 points, mainly due to land premium payment for Oyster Bay property development. Our interest coverage was 14.2x. On our 3-year CapEx plan, total CapEx from 2023 to 2025 is estimated to be HKD 65.2 billion, of which 59% or HKD 38 billion will be used for Hong Kong railway maintenance CapEx. This was higher than previous years, mainly due to several railway system maintenance and asset replacement projects are taking place at the same time, including trains, signaling and power systems. 24% will be used for new Hong Kong railway projects, including the newly signed Oyster Bay station and Tung Chung Line Extension projects. 6% for Mainland China and overseas investments and 11% for Hong Kong property. With that, I will hand back to Jacob to go through our outlook.

[Interpreted] Thank you, Herbert. With our city moving towards normality, transport demand by local passengers and visitors is increasing gradually. The Hong Kong economy is also recovering, which will benefit the future development of our corporation. Next year, the MTR Corporation will have been serving Hong Kong for 45 years. We will continue to invest into replacing and upgrading railway asset as well as building new railway lines to support the future development of Hong Kong. Fair revenue is still a major source of stable revenue. The fair revenue has dropped substantially over the 3 years of the pandemic. The corporation is reviewing the fair adjustment mechanism, and we have listened carefully the views and concerns of the community. We will continue to communicate closely with the government and the review is expected to be concluded in the first half of this year. In the next 3 years, we need to invest over HKD 10 billion on average every year on railway asset replacement and upgrades by the annual expenditure and regular maintenance exceeds HKD 5 billion. In the next 10 years or so, the corporation will invest over HKD 100 billion on new railway projects under the Railway Development Strategy 2014, and the Oyster Bay project. The Tung Chung Line Extension, Kwu Tung Station on the East Rail Line, Oyster Bay station, Tuen Mun South Extension projects are expected to commence construction this year. And the corporation will also support the government's Northern Metropolis Development Strategy and the 3 strategic railways proposed in the 2022 policy address to further expand the rail network and support the sustainable development of the community. With respect to property development, our 2 new malls, The Wai in Tai Wai station, THE SOUTHSIDE in Wong Chuk Hang station are expected to open this year. The new Oyster Bay project will provide about [ 20,000 ] public and private housing units. The project will incorporate green and smart concepts, so as to develop a low-carbon economy. And subject to market conditions in the next 12 months or so, we expect to tender out Oyster Bay Packages 1 and 2, and the Tung Chung East Station Package 1 property development. Subject to construction and sale progress, we anticipate initial property development profit booking from LOHAS Park Package 11 and THE SOUTHSIDE Package 4 and Ho Man Tin Station Package 2. We will continue to explore opportunities on railways and properties overseas and in the Mainland of China, including the Guangdong-Hong Kong-Macao-Greater Bay area. Finally, I would like to express my heartfelt gratitude to my colleagues for their hard work and dedication in serving the public over the last 3 years amid the pandemic. Looking forward, the corporation will continue to offer customer-centric services in order to keep cities moving and "Go Smart Go Beyond" the community. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]