MTR Corporation Limited (66) Earnings Call Transcript & Summary

[Interpreted] I am Linda Choy, Corporate Affairs and Branding Director. I'd like to welcome you all to the MTR Corporation's interim results announcement 2023. First of all, let me introduce to you our management on the podium. In the middle, we have Dr. Jacob Kam, our CEO; to his right, we have Ms. Jeny Yeung, Transport Services Director; and also Dr. Tony Lee, Operations Director. To his left, we have Mr. Herbert Hui, Finance Director; and Mr. David Tang, Property and International Business Director; as well as Mr. Carl Devlin, Capital Works Director. The press conference will mainly be conducted in Cantonese with interpretation service provided. Dr. Kam will, first of all, give you a gist of the interim results for 2023. Following that, Mr. Hui will give us the financial highlights. Dr. Kam will then give us -- tell us about the outlook of the company. Following that, we will have a Q&A session. We've limited time and we would beg for your indulgence, if we're not able to answer all the questions. Dr. Kam. Thank you.

[Interpreted] Good afternoon, ladies and gentlemen. Welcome to the MTR's Interim Results 2023 Press Conference. I'm very happy to share with you the corporation's business review in the first half of the year. In the first half of 2023, we have achieved some new milestones, and we also have continued to keep cities moving with our smart city, smart railway initiatives to foster Hong Kong's development as a smart city. The corporation continues to put in a lot of resources on railway asset management and accelerate the application of innovation and technology to enhance customer service, advanced railway asset maintenance and renewal and develop new railway projects. With the gradual recovery of Hong Kong, the resumption of cross-border boundary service in January, the patronage of domestic and cross-boundary services have gradually recovered, with domestic service patronage recently reaching over 90% of the pre-pandemic level. Our station commercial businesses have also shown improvement. We have also maintained a world-class level of 99.9% for both train service delivery and passenger journey on time on our heavy rail network in the first half of the year. With our smart railway initiative, the company strives to provide a more caring and personalized travel experience to our passengers through continuous application and development of new technologies, such as upgrading entry and exit gates at stations and offer e-payment options. We also plan to introduce credit card ticketing service by the end of the year, providing further convenience in smart mobility for our passengers. We will continue to invest resources on smart railway asset management, putting in more than HKD 65 billion in railway asset maintenance and renewal in the next 5 years, including the establishment of the MTRS Estuary Lab, exploring the application of new technologies in railway asset management, such as AI and Internet of Things to foster smart railway development. We will also introduce new technologies and green features in the design, construction and operation of our new railway projects. The new railway projects will create employment opportunities and connect more communities. These projects can further improve development potential of the land in the area. The main construction works for the Tung Chung Line Extension project commenced in May. This will help improve the transport facilities and also improve the potential of the area, and also facility connection to Hong Kong with the GBA. The main construction work for the Tung Chung Line Extension project commenced in May, construction of other railway projects, including Tuen Mun South, Kwun Tung -- Kwu Tung Station and Oyster Bay Station on Tung Chung Line are expected to commence later this year. The Hung Shui Kiu Station and Tuen Ma Line, like I said in February this year, Northern Line -- Northern Link project is expected to be settled later this year, and we will invest more than HKD 100 billion in new railway projects. In property development business, subject to market conditions, we plan to first tender out Tung Chung East Station Package 1 in the next 12 months. Other projects are under preparation, including the technical studies, land grant, statutory procedures and will be launched subject to market conditions. For MTR Malls, The Wai at Tai Wai Station had a soft opening in July, while THE SOUTHSIDE at Wong Chuk Hang Station is scheduled to open in phases in the fourth quarter. We will continue to explore property development opportunities along our existing and future railway lines, creating more vibrant and sustainable communities for people in different districts. During the COVID pandemic, we have announced facilities at the Hong Kong -- West Kowloon Station during the pandemic and have added new destinations such as Guangzhou -- Guangzhoudong and Chengdudong Stations, reaching a total of 68 directly connected high-speed rail stations since January. This expansion provides more convenience for passengers traveling between Hong Kong and the Mainland. With the support of the Mainland authorities and Hong Kong government, the corporation will launch the Flexi-trip arrangement for Futian journeys on August 14, further enhancing the traveling convenience and flexibility for passengers traveling between Hong Kong and Shenzhen. As the operator of the high-speed railway, we are committed to delivering professional services and maintaining effective community communications across the high-speed rail system. We will continue to liaise with the railway -- Mainland railway authorities to offer greater flexibility and convenience to passengers, facilitating the 1-hour living circle in the Greater Bay Area. We will -- We have also been active in providing ESG initiatives. As a low-carbon transport operator, we will support the adoption of innovative green transport technologies for the green future. Our first double-decker electric bus in the design and product -- is in a design and production stage, which is expected to be completed by the end of the year. We also plan to introduce at least 30 e-buses to our feeder bus fleet in the coming years. And we have also started preparatory work for the feasibility of introducing hydrogen fuel light-rail vehicles, with implementation being subject to statutory approval. The company also endeavors to incorporate greenhouse gas emission reduction measures in all of our businesses. We are pleased that SBTI has approved our science-based carbon reduction targets to cut around 1/2 of our greenhouse emission by 2030, supporting the long-term goal of achieving carbon neutral by 2050. As we expand our network with new railway projects, green features will be incorporated in the design and operation of new railway lines. We will also provide accessible facilities in our stations, trains and properties to offer a barrier-free convenient traveling experience to our passengers. We also will integrate -- have also integrated -- strive to integrate art into our passengers' journey. In June, we decorated our station for rubber duck sticker to bring delight to our passengers' delay -- delight and the Living Arts Stage at Hong Kong station, we also have relaunched to offer a platform for performance to showcase their talent. In Mainland and our international business, the remaining section of Beijing Metro Line 16 expected to open by the end of the year, while Beijing Metro Line 17 and Shenzhen Line 13 are under construction. For overseas business, the concession for the Metropolitan Train Service in Melbourne was extended to 2026. We will continue to explore opportunities for railway and property development in China, the Greater Bay area and overseas. In the first half of the year, the corporation successfully concluded the FAM review with the government, in which Fair Adjustment will be linked to company's property development profit. We've also introduced our Thank You Day arrangement and enhancing the service performance rebate by offering a passenger a 50% discount on designated days. Fare revenue is a major stable source of income. Together with our rail, plus property development product, we'll be able to maintain financial sustainability as well as finance new railway projects and renew and upgrade our existing railway assets. These together continue to sustain a world-class railway service for our customers. In the first half of the year, the corporation's recurring business profit was HKD 2.4 billion, and the property development profit was HKD 0.7 billion. Gain from fair value measurement of our investment properties was HKD 1 billion. After taking into full account the corporation's financial position and future funding requirements, the MTR Board has declared an interim ordinary dividend of HKD 0.42 per share. Good afternoon, ladies and gentlemen. I'm very happy to share with you the corporation's business review in the first half of the year. We keep on moving with our smart railway initiatives, including enhancing customer experience, advancing asset management and developing new railway projects. Since the resumption of cross-boundary services in January, the patronage of domestic and cross-boundary services have gradually recovered with our domestic service patronage recently reaching over 90% of the pre-pandemic level. Furthermore, our station commercial business has also shown improvement. We have also maintained a world-class level of 99.9% for both train service delivery and passenger journey on time on our heavy rail network in the first half of this year. With our smart railway initiatives, the corporation strives to provide a more caring and personalized traveling experience to our passenger through continuous application and development of new technologies, including offering more e-payment options. We will continue to invest resources on smart railway asset management, putting in more than HKD 65 billion on railway asset maintenance and renewal in the next 5 years. We'll also introduce new technologies and green features in the design, construction and operations of our new railway projects. The main construction works for the Tung Chung Line extension project commenced in May, while the construction of other new railway projects, including the Tuen Mun South Extension, Kwu Tung Station on the East Rail Line and Oyster Bay Station on the Tung Chung Line is also expected to commence later this year. The new railway projects will create employment opportunities and connect more communities. These projects can further improve the development potential of the land along the lines and facilitate the connection between Hong Kong and the Greater Bay Area. In our property business, subject to market conditions, we plan to first tender out Tung Chung East Package 1 in the next 12 months or so. For MTR Malls, Wai [ Fong ], the shopping mall atop Tai Wai station, had its soft opening in July, while THE SOUTHSIDE side at Wong Chuk Hang Station is scheduled to be opened in phases starting from the fourth quarter of this year. We'll continue to explore property development opportunities along our existing and future railway lines. In our High Speed Rail service, we enhanced the facilities and services at the West Kowloon station during the pandemic and have added new destinations, including Guangzhoudong and Chengdudong Stations, reaching a total of 68 directly connected high-speed rail stations since January. This expansion provides more convenience for passengers traveling between Hong Kong and the Mainland. The corporation will also launch the Flexi-trip arrangement for Futian journeys on 14th of August, further enhancing the convenience and flexibility to passengers. We'll continue to liaise with relevant Mainland railway authorities to offer greater flexibility and convenience to passengers, facilitating the 1-hour living circle in the Greater Bay Area. We are committed to embedding ESG objectives into our businesses. As an operator for low-carbon public transport service, MTR supports the adoption of green innovative transport technologies for a green future. MTR's first double-decker electric bus is in the design and production stage, which is expected to complete by end of this year. We also plan to introduce at least 30 e-buses to our feeder bus fleet in the coming few years. Moreover, we have started the preparatory work for the trial on hydrogen-fueled light-rail vehicles. The corporation also endeavors to incorporate greenhouse gas emission reduction measures in all of our businesses. We are pleased that SBTI organization has approved our science-based carbon reduction targets to cut around 1/2 of the greenhouse gas emission by 2030, supporting our long-term goal of achieving carbon neutrality by 2050. The corporation also strives to integrate art into passengers' journeys. In June, we decorated some stations with the rubber duck stickers to bring delights to our passengers' journeys. The Living Art Stage at Hong Kong station was also relaunched to offer a platform for performers to showcase their talents. In our Mainland China and international businesses, the remaining section of Beijing Metro Line 16 is expected to open by the end of this year, while the remaining sections of Beijing Metro Line 17 and Shenzhen Metro Line 13 are under construction. For overseas businesses, the concession for the metropolitan train service in Melbourne was extended to mid-2026. We will continue to explore opportunities for railway and property development in the Mainland of China, including the Greater Bay Area and overseas. In the first half of the year, the corporation successfully concluded the Fair Adjustment Mechanism review with the government, in which the fair adjustment will be linked to the corporation's Hong Kong property development profit. We also introduced a new Thank You Day arrangement for enhancing the service performance rebate. Fare revenue is a major stable source of income. Together with our rail plus property model -- development model, we are able to maintain financial sustainability as well as financing new railway projects and renewing and upgrading of existing railway assets. All these continue to work together to provide a world-class railway service to our customers. In the first half of this year, the corporation's recurrent business profit was HKD 2.4 billion, and the property development profit was HKD 0.7 billion. Gain from fair value measurement of investment properties was HKD 1 billion. After taking into full account the corporation's financial position and future funding requirements, the MTR Board has declared an interim ordinary dividend of HKD 0.42 per share. I'll now pass to Herbert to report some of our financial highlights.

[Interpreted] Thank you, Jacob. Let me highlight our financial results for the first half 2023. Recurring businesses in Hong Kong recorded HKD 2.2 billion profit, mainly due to business recovery following the resumption of cross-boundary services. Recurring businesses outside of Hong Kong recorded HKD 0.2 billion profit. Underlying business profit was HKD 3.15 billion, a 56% decrease as compared to last year, mainly due to the high base last year resulting from profits of 3 property projects being recognized at the same time. Together with a HKD 1 billion gain from fair value measurement of investment properties, net profit attributable to shareholders for the first half was HKD 4.2 billion. The group's financial position continues to remain healthy. As at the end of June 2023, we had cash, bank balances, deposits and undrawn committed facilities totaling over HKD 37 billion. Net debt-to-equity ratio remained at a healthy 22.3%. The Board declared an interim dividend of HKD 0.42 per share, same as last year. Turning to our business segmental profits. In Hong Kong, EBIT from our transport operations still incurred a loss of about HKD 0.8 billion, but significantly narrowed from last year. This was mainly due to the increase in domestic patronage and the revenue contribution from cross-boundary service assumptions. Our station commercial EBIT increased 63.8%, mainly due to the reopening of duty-free shops. 0 Property rental and management business EBIT increased by 6.7%, mainly due to the reduction in rental concessions after the pandemic had subsided. Outside of Hong Kong, EBIT of our Mainland China and international subsidiaries decreased, mainly due to the challenges faced by our Nordic operations and the depletion of government subsidy for Shenzhen Line 4 last year. Now moving on to our consolidated statement of financial position. Total assets increased by HKD 15 billion to HKD 342 billion, mainly due to the increase in cash balance and the receipt of the shopping mall, THE SOUTHSIDE. Total liabilities increased by HKD 17 billion to HKD 146 billion, mainly due to the accrual for the 2022 financial -- final dividend and increase in borrowings. As such, total equity was at HKD 178 billion. Turning to our cash flows. Our operating activities generated HKD 3.9 billion of inflow. Net receipts from property development was HKD 4.5 billion. Net of HKD 5.2 billion CapEx and others, our cash inflow before financing was HKD 3.1 billion. After net debt drawdown and others, increase in cash was HKD 7.8 billion. Financing and credit ratios. Total group borrowings increased by HKD 5.5 billion to HKD 53.3 billion. About 70% of borrowings were in fixed rates which helps to mitigate the adverse impact of the interest rate hikes. Average borrowing costs for the first half of 2023 was 3.3%, representing an increase of 1.1 percentage points as compared to last year. Net debt-to-equity ratio was 22.3%, a decrease of 1% as compared to 6 months ago. Interest cover was 9.2x. For our 3-year CapEx plan, total CapEx from 2023 to 2025 is estimated to be HKD 74.7 billion, of which 55% or HKD 41 billion will be used for Hong Kong railway maintenance CapEx. This is higher than previous years, mainly because several railway maintenance and asset replacement projects are taking place at the same time, including train, signaling and power systems. 25% will be used for new Hong Kong railway projects, including Oyster Bay Station and Tung Chung Line Extension projects; 15% for Hong Kong property; and the remaining 5% for Mainland China and overseas investments. With that, I will hand back to Jacob to go through our outlook.

[Interpreted] Thank you, Herbert. MTR has been serving Hong Kong for over 40 years. In line with the future development of Hong Kong, our railway has entered a new chapter with smart railway to enhance existing railway services, build new railways, create job opportunities and stimulate the economic development of Hong Kong. The construction of the Tung Chung Line Extension has commenced and upon completion, will enhance connectivity with and outside of North Lantau, fostering economic employment growth in the district. We continue to work closely with the government on other new railway projects and support the strategy of using railways as a backbone of public transport system. We'll apply our professional knowledge and extensive railway experience in new railway projects to contribute to sustainable development of Hong Kong. The railway lines under the government's plans for the Northern Metropolis development strategy and the new science park, Pak Shek Kok, stations are currently in design stage. We'll continue to maintain close communication with the government to advance these projects. We are committed to bringing in a new era of smart railway by accelerating the use of innovation and technology to enhance railway operation and asset management. We will continue to implement smart asset management initiatives to enhance train safety and reliability. We'll also leverage innovative technologies such as AI, cloud computing, big data in the construction of new railway lines. We will explore and adopt innovation and technology from the design to the construction stage to streamline processes, enhance safety and ensure quality. On property business, subject to market conditions, we plan to tender out about 4,000 units in the next 12 months or so. Tung Chung East Station Package 1 will be the first tender to be put to the market. We also expect to continue to book profit from LOHAS Park Package 11 in the second half. The new railway projects will be supported by the financial arrangements from rail plus property development and model to ensure the corporation's sustainable development. We continue to explore development opportunities in Mainland China, including the Hong Kong, Greater Bay, Macau area. Finally, I would like to express my heartfelt gratitude to the business team for their professionalism and dedication. In particular, I would like to thank Herbert who will be retiring at the end of the year for his leadership in the finance function over the years and the many valuable contributions he has made to the corporation. Our company embarks on a new chapter in railway development. We are fully prepared to embrace the latest technologies and provide our customers with professional and caring services to Go Smart Go Beyond with the community. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]