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Edited Transcript of 66.HK earnings conference call or presentation 8-Aug-19 9:45am GMT

Half Year 2019 MTR Corp Ltd Earnings Presentation

HK Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of MTR Corp Ltd earnings conference call or presentation Thursday, August 8, 2019 at 9:45:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chak-pui Kam

MTR Corporation Limited - CEO & Director

* Chui-lok Ng

MTR Corporation Limited - Head of IR & Retirement Benefits

* Leung-wah Hui

MTR Corporation Limited - Finance Director

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Presentation

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Chui-lok Ng, MTR Corporation Limited - Head of IR & Retirement Benefits [1]

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Good afternoon, ladies and gentlemen. Welcome to the MTR Interim Results Announcement 2019. It's my pleasure today to introduce to you our new management team here with us today. At the center of the stage is Dr. Jacob Kam, our CEO, who used to be our Managing Director. And this is the first time he host this meeting in his new role. And as some of you know, he has been serving MTR for close to 0.25 century and knows MTR inside out. So don't hesitate to ask him any questions that you might have. And also a veteran of MTR, sitting at your right -- far right-hand side is Mr. Roger Bayliss, our Projects Director, who rejoined us early this year, having worked in MTR's project team for a long period of time. And the rest of us needs no introduction. So next to Mr. Bayliss is Mr. David Tang, Property Director. And sitting on the right-hand side of Dr. Kam is Mr. Herbert Hui, Finance Director. And sitting next to me is Ms. Lisa Seto, our General Manager, Financial Control. And my name is Candy Ng, Head of IR and Retirement Benefits.

So very soon, we're going to have Dr. Kam talk about our results highlights and business overview. After that, Mr. Herbert Hui will give you more details of our financial results. And there will be time for Q&A before end of the session.

Without further ado, I would like to hand over to Dr. Kam, please.

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Chak-pui Kam, MTR Corporation Limited - CEO & Director [2]

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Thank you, Candy. Good afternoon, ladies and gentlemen. For a moment, I thought Candy is going to disclose my age. Thank you for joining our 2019 interim results. I'm deeply honored to have been appointed as the new CEO. Although I'm new to this role, I have been with the company for 24 years, and I'm therefore familiar with the achievements that MTR has made over the years as well as the challenges that it now faces.

When I began my duties as CEO, I said that I welcome the opportunity to build on our strengths and restore our reputation as one of the world's leading providers of railway services. I also stated to my colleagues that I have 3 main priorities for our immediate future. The first is to restore, regain people's confidence in our ability to construct world-class railways. The second is to continue providing a safe, reliable and value-for-money service to customers, while the third is to ensure that our large and complex business is managed effectively and efficiently in Hong Kong and globally.

This year, we celebrate our 40th anniversary. During the first half, our recurrent profit and underlying profit decreased by 40.8 -- 40.6% and 26%, respectively, mainly due to the provisions we made in relation to Shatin-Central Link and South Western Railway franchise. Excluding the provisions, our recurrent profit and underlying profit would have increased by 13.8% and 26.4%, respectively, mainly due to higher contributions from station commercial and businesses outside of Hong Kong and the increase in property development profit. The MTR Board has declared an interim ordinary dividend of HKD 0.25 per share.

In Hong Kong, our businesses in the first 6 months performed reasonably well. Train service delivery and passengers' journey on-time in our heavy rail network were maintained at above 99.9%, whilst train frequency was increased further. This was the best half yearly performance in terms of passenger journey on-time since the merger in 2007. Our high-speed rail has also been gaining customer acceptance and achieved its record high patronage of 104,000 on the third day of Chinese New Year. Station commercial and property rental both record positive rental reversion during the period. In property tendering, we awarded LOHAS Park Package 11 to a consortium of developers.

Outside of Hong Kong, our business also made satisfactory progress. Among other achievements, we opened 2 new lines, the Sydney Metro Northwest line and the initial section of Hangzhou Metro Line 5. In the Mainland of China, performance remained strong, led by the continuous patronage growth. Although our Stockholms pendeltåg has reduced the loss with improved operations performance and customer satisfaction, it will likely remain in a loss-making position for a few years. South Western Railway franchise in U.K. continued to suffer due to a variety of factors, and we made a provision of GBP 43 million.

In our growth strategy, we continue to make progress on Shatin-Central Link. As of June 2019, the project is 90.2% complete. The government has accepted our recommendation that the Tuen Ma Line should open in phases with the first phase from Tai Wai Station to Kai Tak Station targeted to open in the first quarter of 2020.

As for the 7 new projects under RDS 2014, we have previously submitted proposals for 5 of them. We were recently invited by the government to submit proposals for the remaining 2 projects.

In our property development, about 21,000 residential units are under construction, most of which are planned to be delivered over the next 5 years. And in our property rental business, we will add 3 new shopping centers to our portfolio during the coming few years, enlarging our existing portfolio by 49% in terms of GFA.

Outside Hong Kong, we expect to open the full line service for Hangzhou Metro Line 5. And as announced by Macau government, that Macau LRT Taipa Line will be opened by the end of the year. We are also working on the financial close of the Sydney Metro City and Southwest project and continue to pursue opportunities elsewhere.

Looking at our individual businesses. For Hong Kong transport operations, total patronage increased 2.5% to 1.02 billion, as a result of the increase in domestic service patronage and contribution from high-speed rail.

For our new HSR service, high-speed rail service, we saw growing acceptance among passengers. Total patronage of the HSR in the first half of 2019 was 9.9 million. On 10th of July 2019, we started to enhance the service by increasing the total number of long-haul train pairs from 13 to 17 and the number of destinations from 44 to 58.

Average fare of our domestic service increased by 1.7% as a result of the 3.14% fare increase in June 2018, partly offset by various fare concession offered. To thank our passengers on our 40th anniversary, we have announced a fare promotions package for more than HKD 800 million from mid-2019 to mid-2020. According to the fare adjustment mechanism, fair adjustment of 3.3% was applied starting 30th of June 2019, but actual fare rise will take effect only after 4th of April 2020, owing to rebate for Octopus passengers.

Our Rail Gen 2.0 vision for the future of railway transport in Hong Kong includes major upgrades and replacements to our existing rail network with a view to enhancing our customer experience. Up to July, we received delivery of 7 new trains, which are currently in the process of being tested and commissioned. Other customer experience enhancement includes new drinking water dispensers, public toilets and baby care rooms in stations. All of the enhancements carried out so far have received a very positive response from passengers and are part of our commitment to improving station facilities and providing a caring service.

Turning to our station commercial business. Revenue increased by 15.6%, mainly due to the incremental contribution from HSR. Advertising revenue also reported strong growth, benefited from the positive sales momentum carried forward from second half of 2018. And station shops posted positive rental reversion during the period.

Revenue from Hong Kong property rental and management businesses increased by 4.7%, mainly due to favorable rental reversion. Our shopping malls in Hong Kong achieved a positive 3% rental reversion during the first half of 2019. Occupancy rates were close to 100% at both our shopping malls and 18 floors in Two ifc.

Pretax profit from Hong Kong property development was HKD 898 million, mainly from the sales of inventory at Lake Silver and Wings at Sea II. During the period, presales of MONTARA and GRAND MONTARA were launched with all of the 1,120 units sold. In our property tendering activities, we awarded LOHAS Park Package 11 to a consortium comprising Sino Land, K. Wah and China Merchants.

Turning to our growth initiatives in Hong Kong. Our Hong Kong rail network covers 257 kilometers, and there is now one remaining rail project under construction, namely the Shatin to Central Link. During the first half of the year, we continued the progress for Shatin to Central Link with 99.7% of the Tai Wai to Hung Hom Section and 78.8% of the Hung Hom to Admiralty Section completed. On Hong Kong Island, 4 tunnels were completed. Civil works continue at Exhibition Centre Station, with fit-out and railway systems work progressing elsewhere.

Under the entrustment agreement, government is responsible for the funding of the relevant work for the Shatin to Central Link. In December 2017, we provided the government an updated estimated cost of HKD 87.3 billion for the construction works. The company intends to carry out a further review and revalidation of the cost to complete within 2019 while the company continues to exercise rigorous cost control on the project.

On 26th of March 2019 interim report of the COI, Commission of Inquiry, investigating workmanship at Hung Hom Station extension, concluding that the station is structurally safe. It also made recommendations for improving the corporation's project management practices. Many of these recommendations concurred with the findings of our own review conducted by the Capital Works Committee of the Board. We have already begun implementing some of these recommendations, and we'll continue to strengthen our project management through technology solutions as well as additional training.

On 18th of July 2019, government has accepted our recommendations that the Tuen Ma Line should open in phases with the first phase from Tai Wai Station to Kai Tak Station targeted to open in the first quarter of 2020, to progress the Shatin to Central Link project and to facilitate the phased opening. We will fund on an interim basis certain costs arising from the Hung Hom incidents and associated with the phased opening. Currently, we -- our best estimate of such cost is around HKD 2 billion in aggregate. In light of this, we made a provision of HKD 2 billion in our consolidated profit and loss account for the first half of 2019.

Beyond the Shatin to Central Link, government has identified 7 new rail projects under RDS 2014. We have submitted project proposals for 5 of these projects. In May and June 2019, this year, the government invited us to submit proposals for the remaining 2 projects being Hung Shui Kiu Station and South Island Line West, which are targeted to be submitted in 2020.

We are making good progress in the expansion of our shopping center portfolio. Over the next 4 years also, we will add 3 shopping malls, increasing our retail portfolio by 49% in terms of attributable GFA. The LOHAS Park shopping centers, The LOHAS, is targeted to open in the second half of 2020. With Hong Kong's largest indoor ice rink and the largest cinema in Tseung Kwan O, The LOHAS will be home to nearly 150 retail tenants including entertainment, leisure and community facilities.

In our property business, together with LOHAS Park Package 11, which was tendered out in April, 15 MTR property development packages are under various stages of development. These will provide about 21,000 residential units, and most of which will be delivered over the next 5 years.

We are also exploring with government how best to advance the plan for the Siu Ho Wan Depot Site, which may be developed into a community comprising about 14,000 public and private housing units. The Outline Zoning Plan was approved in February 2019.

Outside of Hong Kong, excluding property development, recurrent profit was down by 57%, mainly due to the provision made on South Western Railway franchise. Excluding that provision, recurrent profit outside of Hong Kong would have increased by 70%, mainly due to the steady growth in Mainland China and reduced loss from Nordic.

In the Mainland of China, Beijing, Shenzhen and Hangzhou post steady growth in patronage. In May, the initial section of Hangzhou Line 5 was opened.

In Sweden, the loss of Stockholms pendeltåg reduced to HKD 83 million as operational performance demonstrated satisfactory improvement. However, the franchise is still likely to remain in a loss-making position for a few years.

In U.K., our associate company, First MTR South Western Trains Limited, is negotiating with the U.K. government to agree potential commercial and contractual remedies. Our new rail service, Sydney Metro Northwest, opened in May with fully automated line -- trains and platform screen doors, offers a safe and convenient new service for the passengers in Sydney.

We continue to explore our growth initiatives outside of Hong Kong. In the Mainland of China, we continue to pursue rail and transit-oriented development opportunities in various cities and regions, including Beijing, Hangzhou, Chengdu and the Greater Bay Area. In Australia, we are currently in discussion with the client, Sydney Metro, for the financial close of the Sydney Metro City and Southwest project expected by later this year.

With that, I'll now pass it over to Herbert to give more details in our financial figures.

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Leung-wah Hui, MTR Corporation Limited - Finance Director [3]

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Okay. Thank you, Jacob. Let me now highlight our financial results for the first half of 2019. In Hong Kong, revenue from our recurrent businesses increased by 11%, mainly due to the incremental revenue from high-speed rail services. Recurrent profit decreased by 39%, mainly due to the provision, as you heard, from the Shatin-Central Link, the $2 billion provision. Excluding such provision, recurrent profit in Hong Kong would have increased by 9.1% to $4.5 billion.

Outside of Hong Kong, revenue from our recurrent businesses increased marginally by 1%. However, recurrent profit decreased by 57.3%, mainly due to the provision of the -- for the South Western Railway franchise in the amount of $436 million. And excluding such provision, our recurrent profit outside of Hong Kong would have increased by 70.2% to $582 million.

Turning to profit contributions from our different business segments. In Hong Kong, EBIT of our transport operations was down 17%, mainly due to the higher depreciation and amortization expenses resulting from new assets commissioned and higher staff costs. Our station commercial EBIT rose 11%, mainly benefiting from the contributions of high-speed rail as well as the growth in station kiosk and duty-free shop. Property rental and management business EBIT was up 4.7%.

And outside of Hong Kong, EBIT of our Mainland China and international recurrent businesses decreased 23%, mainly due to the $436 million provision in respect of South Western Railway franchise. Therefore, post-tax recurrent profit of the group decreased by 40.6% to $2.7 billion. And again, excluding both provisions regarding Shatin-Central Link and South Western Railway, our recurrent profit would have increased by 13.8% to $5.1 billion.

Moving on to our consolidated statement of financial position. Total assets increased to $282 billion, $8 billion increase from last year -- end of last year, mainly due to the revaluation gains on our investment properties and the increase in cash. Total liabilities increased by $8.1 billion to $102 billion, mainly due to the accrual for the 2018 final dividend and the provision relating to Shatin Central Link. As such, total equity was $180 billion.

Turning to cash flow. Our operating activities generated a $10 billion inflow. Receipts from property development were $4.6 billion. Maintenance CapEx for existing assets, including railway and property assets in Hong Kong and overseas, was $2.8 billion. Variable annual payment to KCRC was $2.3 billion. Investment in loans to associate and joint venture were $800 million. After the net repayment of borrowings of $3.9 billion, net cash inflow was $3.6 billion.

On our financing and credit ratios, total group borrowings decreased by $3 billion to 38 -- to $37 billion due to our loan repayment just mentioned. Average borrowing cost was at 2.8%. Net debt-to-equity ratio decreased by 3.7 percentage points to 14.4%, and our interest cover increased to 13.4x.

On our 3-year CapEx plan, total CapEx from 2019 to 2021 is estimated to be $47.4 billion, of which 54% for the maintenance of existing Hong Kong railway assets, 13% for new Hong Kong railway projects, 10% for Mainland of China and overseas and 23% for Hong Kong property.

Moving on to our sustainable development. We continue to commit to various ESG strategy and initiatives, which we believe are critical in meeting and balancing the current and future needs of our stakeholders. In the first half of this year, we continue with environmental initiatives, including chiller replacement and solar photovoltaic systems installation. New water dispensers were installed to support reduction of single-use beverage packaging. Various seminars on responsible procurement, energy saving and waste management were also conducted for our staff.

We have organized a series of corporate responsibility initiatives, demonstrating the creativity talent from our younger generation as well as to enhance our business initiatives from youth perspective. We have also reached out to primary school students through various interactive sessions, role-playing and the daily duties of our station staff.

With that, I'll still pass back to Jacob for the outlook for the rest of the year.

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Chak-pui Kam, MTR Corporation Limited - CEO & Director [4]

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Thank you, Herbert. During the remainder of 2019, we will need to contend with a variety of risks, including uncertainties surrounding the global and local economy, particularly trade conflicts, the possibility of an economic recession and political risks. We will also work with government to agree on the details of the phased opening of Tuen Ma Line, targeting to open in the first quarter of 2020.

Even though our commercial operations in Hong Kong have some defensiveness against slower economic growth, our rental renewals will be dependent on the development of the market conditions. Elsewhere, we are still working to overcome the challenges faced by Stockholms pendeltåg in Sweden as well as the South Western Railway franchise in U.K. By the end of 2019, we expect to commence full line services of Hangzhou Metro Line 5 and Macau LRT Taipa Line, as announced by the Macau government. And we are working on the financial close of Sydney Metro City and Southwest project.

In addition, subject to market conditions, we aim to tender out Wong Chuk Hang Station Package 4 and LOHAS Park Package 12 over the next 6 months or so, providing a total of 2,650 residential units. In our property development business in the second half of the year, the booking of development profits for MALIBU and The LOHAS is dependent on construction progress.

That completes our presentation. Thank you.