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Edited Transcript of 66.HK earnings conference call or presentation 5-Mar-20 8:30am GMT

Full Year 2019 MTR Corp Ltd Earnings Presentation

Kowloon Bay Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of MTR Corp Ltd earnings conference call or presentation Thursday, March 5, 2020 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chak-pui Kam

MTR Corporation Limited - CEO & Director

* Leung-wah Hui

MTR Corporation Limited - Finance Director

* Siu-Min Choy

MTR Corporation Limited - Corporate Affairs Director

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Presentation

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Siu-Min Choy, MTR Corporation Limited - Corporate Affairs Director [1]

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[Interpreted] Good afternoon, friends from the media. I am Linda Choy, the Corporate Affairs Director of the company. I'm very pleased to meet you today. In view of the recent COVID epidemic and to ensure your safety, we will be announcing the company's 2019 results via webcast.

Let me, first of all, introduce to you our -- the representatives of the corporation. Sitting in the middle is Dr. Jacob Kam, our Chief Executive Officer. Towards the right, we have Mr. Adi Lau, Managing Director, Operations and Mainland Businesses; as well as Property Director, Mr. David Tang. To Dr. Kam's left, you -- we have Mr. Herbert Hui, Financial Director; and Ms. Jeny Yeung, Commercial Director; as well as Mr. Roger Bayliss, our Project Director.

Regarding the procedure today. Dr. Kam will, first of all, run you through the company's results for 2019. Following that, Mr. Herbert Hui will give a presentation of the financial results. And following that, Dr. Kam will talk about the outlook and the future development of the company. Finally, there will be a Q&A session, and you may submit your questions online. We will try our best to answer your questions.

And now without further ado, I'll defer to Mr. -- to Dr. Kam.

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

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[Interpreted] Thank you, Linda. Good afternoon, our friends from the media. 2019 has been the most challenging year in the corporation's 40-year history. Amid the public order events, our railway networks suffered severe damages in the second half of 2019 with train operations interrupted many times.

Since the beginning of the year, the COVID-19 epidemic has caused a significant impact on Hong Kong and the rest of the world. We have -- always pay attention to safety and health of our passengers and staff. We have announced the infection protection of our staff and our customers. We've also been working together with the people of Hong Kong to fight against this outbreak. We have also donated 100,000 surgical masks to those in need in the community.

We will also ensure no fare increase this year for our passengers using Octopus. And the February and March rental of our small to medium tenants has been reduced by half. Large corporate tenants will also be supported on individual basis. I believe that -- the dedication of the people of Hong Kong and also my colleagues who have worked tirelessly and professionally over the past 9 months to keep Hong Kong moving.

Excluding the impact from external events, train service delivery and passenger journeys on time in our heavy rail network in 2019 remained at a world-class level of 99.9%. At the same time, we have continued to make progress in railway planning, property development and the Mainland of China and international businesses. These have demonstrated that our solid foundations will support our future development.

In our local transport operations, the patronage fell to 5.61 million passenger journeys per weekday, a drop of 4.5%. Other businesses such as station commercial and shopping malls were also affected. We've also deployed extra manpower to repair the damaged station facilities. By the end of December 2019, the estimated cost of recovering station facilities damaged due to the public order events was more than HKD 0.6 billion.

Apart from the impact of the public order events, we also were concerned over the East Rail Line derailment instance on September 17 last year. Safety is of utmost importance to the MTRC. I, myself as the Chief Executive, and my management team have a responsibility when any such instance occurs.

After the derailment incident, we have formed an investigation panel to find out the cause of the instance so as to prevent any recurrence. We have announced the investigation result this Tuesday, and we have already implemented some of the improvement measures in the report. And we will also carry out test for newly introduced technologies which will help to further enhance our track maintenance work.

In my 30 years of experience as an engineer, we have often encountered new problems. It is important for us to acquire new knowledge and gain experience through tackling the problems. Over the past 40 years, the growth of MTR has also come through continuous learning. Indeed, we could have done better in handling this incident. My -- our team have learned the lesson from the incident, and we're determined to improve through these new measures. Our whole team, from frontline staff to the management, will keep learning to enable us to provide better service in the future.

Regarding our other businesses, our stations and shopping malls were affected during the period of the public order events. We have offered rental concessions to the affected tenants. For those tenants, who are unable to operate their businesses because of station or more closures initiated by the company, we have also granted rental management and miscellaneous concessions on days with businesses being affected.

In our Hong Kong property development business, we awarded tenders for LOHAS Park Package 11 and Wong Chuk Hang Station Package 4 last year, followed by the tender award of LOHAS Park Package 12 in February this year. These 3 projects will provide a total of 4,650 residential units.

With regard to our new railway projects, the Tuen Ma Line Phase 1 was opened for passenger service on February 14. 2 new stations at Hin Keng and Kai Tak and the extended Diamond Hill stations are now in service. Passengers can now travel between Kai Tak Station in East Kowloon and Ma On Shan without interchange. With the commissioning of the Tuen Ma Line Phase 1, the expanded Diamond Hill Station has now become a new interchange station between the Tuen Ma Line and Kwun Tong Line, bringing about a diversion effect and allowing passengers from NT North and East to travel onward to East Kowloon and Hong Kong Island East, thus easing of traffic at Kowloon Tong Station.

Regarding the Hung Hom Station extension work, the suitable end measures for the Hung Hom's stabling sidings have also been substantially completed in January 2020. The implementation of the appropriate measures to the south approach tunnel of the extension is progressing with target completion in mid-2020. We expect a full commencement of the Tuen Ma Line in 2021, while -- and will -- which will enhance the overall travel and commuting for the public.

The target opening of the Hung Hom to Admiralty Section in Q1 2022 is still facing challenges as the project owner, the government, is responsible for the cost of the Shatin to Central Link project. We have completed a further review of the cost to complete. The construction cost has increased by HKD 10.8 billion. There is also an additional project management cost of HKD 1.371 billion. These add up to $12.172 billion, exclude -- but does not include the costs relating to the Hung Hom Station construction incident. The cost increase is less than the previously estimated amount of $16.501 billion announced in December 2017.

The government has made an application at LegCo for additional funding. The government and the corporation attended the LegCo railways committee meeting to provide an explanation on the funding application. We will continue to work closely with the government on the application, and I hope that additional funding will be approved by LegCo during the current session.

Moving on to the Railway Development Strategy 2014. We welcome the government's announcement in 2019 Policy Address, inviting the corporation to commence the detailed planning and design for the Tuen Mun South Extension to Northern Link as well as the Tung Chung Line Extension. We will maintain close communication with the government on these projects.

In our Mainland of China and international businesses, we made good progress during the year by commencing services on the initial section of Hangzhou Metro Line 5 and on the Macao LRT Taipa Line as well as the Sydney Metro North West Line in Australia. The passenger service between Paddington and Reading of TfL Rail in London has also commenced. The rail will now be renamed the Elizabeth Line.

In the Mainland of China, we were awarded the Beijing Metro Line 17 Operations and Maintenance concession. In Australia, the corporation, as a member of the Northwest Rapid Transit consortium, concluded public-private partnership project agreement on Sydney Metro, which will extend the current Sydney Metro North West Line to the Sydney Metro City and Southwest lines in 2024.

With regard to our financial performance, the profit from the recurring businesses decreased almost by half, by 44.8% to HKD 4.98 billion due to provisions relating to the Shatin to Central Link project in Hong Kong and the South Western Railway franchise in the U.K. and the impact brought about by public order events. Profit tax -- post-tax profits of $5.58 billion were mainly derived from the share of the surplus proceeds from LOHAS Park Package 5, MALIBU and sharing in kind of the LOHAS Package 7.

Taking an account profit from property development, the profit from our underlying businesses in 2019 was 6.2% lower at $10.56 billion. The MTR Board has declared a final dividend of HKD 0.98 per share resulting in a full year ordinary dividend of HKD 1.23 per share. Once again, I would like to thank our 49,000 global staff members of the company for their hard work and dedication in serving our customers all around the world.

Good afternoon, ladies and gentlemen. 2019 has been the most challenging year in the corporation's 40 years' history. Amid the public order events in the second half of 2019, our railway network suffered severe damages with train operations interrupted many times.

Since the beginning of 2020, the coronavirus epidemic has caused a significant impact on Hong Kong. We have stepped up ventilation and cleaning in our trains and stations. We have also enhanced the hygiene protection of staff. Furthermore, we have donated 100,000 surgical masks to the community. We will also ensure no effective fare increase this year to our passengers using Octopus.

The February and March rent of the small to medium-sized tenants at all MTR stations and 13 shopping malls will be reduced by half. I deeply appreciate the dedication of the people of MTR who have worked tirelessly and professionally in these past 9 months to keep Hong Kong moving.

Excluding the impact from external events, train service delivery and passenger journeys on time in our heavy rail network in 2019 remained at a world-class level of 99.9%. And at the same time, we have continued to make progress in railway planning, property development and the Mainland of China and international businesses. These have demonstrated that our solid foundations will support our future development.

In our local transport operations, the patronage fell to 5.61 million passengers' journeys per weekday, a drop of 4.5% when compared with 2018. Other businesses such as station commercial and shopping malls were also affected.

In addition, the business of some tenants in our stations or shopping malls was affected during the period of the public order events. We have offered rental concessions to the affected tenants. In our Hong Kong property development business, we awarded 2 property packages in 2019 and 1 property package in February 2020. These 3 projects will provide a total of 4,650 residential units.

With regard to our new railway projects, the Tuen Ma Line Phase 1 was opened for passenger service on the 14th of February this year as the first part of Shatin to Central Link. Suitable measures at Hung Hom Station extension and adjacent structures are progressing in accordance with plan, with the target completion in mid-2020.

Full opening of the Tuen Ma Line is expected to be in 2021. The target opening of the Hung Hom to Admiralty Section in quarter 1 2022 is still facing challenges. Efforts are being made with the aim of meeting the program.

Regarding the project cost to complete, as the project owner, government is responsible for the cost of the Shatin to Central Link project. We have completed a further review of the cost to complete. The construction cost increased by HKD 10.8 billion. There is also an additional project management cost of HKD 1.37 billion. These add up to HKD 12.2 billion and do not include the costs related to Hung Hom Station construction incident. This cost increase is less than the previously estimated increase of HKD 16.5 billion, which was announced in December 2017.

The government has made an application to the Legislative Council for additional funding. We will work closely with government on the application. I hope that the Legislative Council will support and approve the additional funding within this LegCo session.

Moving on to the Railway Development Strategy 2014. We welcome the government's announcement in 2019 inviting the corporation to commence the detailed planning and design for Tuen

Mun South Extension; Northern Link, including Kwu Tung Station; as well as Tung Chung Line Extension. We will maintain close communication with the government on these projects.

In our Mainland of China and international businesses, we made good progress during the year by commencing services on the initial section of Hangzhou Metro Line 5 and on the Macao LRT Taipa Line as well as the Sydney Metro North West Line in Australia. The passenger service between Paddington and Reading of TfL Rail in London has also commenced. TfL Rail will be renamed the Elizabeth Line.

In the Mainland of China, we were awarded the Beijing Metro Line 17 Operations and Maintenance concession. In Australia, the existing NRT consortium, of which we are a member, concluded the Sydney Metro City and Southwest PPP project agreement.

With regard to our financial performance, the profit from recurring businesses decreased almost by half by 44.8% to HKD 4.98 billion due to provisions relating to the Shatin to Central Link project and the South Western Railway franchise and the impact brought about by public order events.

Taking into account the profit from property development, the profit from our underlying businesses in 2019 was 6.2% lower at HKD 10.6 billion. Having considered all financial conditions, the MTR Board has declared a final ordinary dividend of HKD 0.98 per share resulting in a full year ordinary dividend of HKD 1.23 per share.

Here, I want to thank our 49,000 global staff members for their hard work and dedication to serve our customers all around the world.

Now I hand over to Herbert to introduce the financial performance of the corporation in 2019.

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

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[Interpreted] Thank you, Jacob. Let me now highlight our financial results for the year 2019. In Hong Kong, revenue from our recurring businesses increased by 1.3% mainly due to the full year contribution from the high-speed rail services. Recurring profit decreased by 48% mainly due to the impact brought about by the public order events as well as the provision of HKD 2 billion made in relation to the Shatin-Central Link.

Outside of Hong Kong, revenue from our recurrent businesses increased by 1%. Recurring profit decreased by 11.8% mainly due to the revision of 436 billion -- HKD 436 million made to the South Western Railway franchise in the U.K. Hence, the recurring profit of group decreased by 44.8% to HKD 4.98 billion. Excluding public order events impact and the 2 provisions, recurring profit of the group as a whole would have been $9.7 billion, a 7.7% increase from last year.

Turning to the profit contribution from our different business segments. In Hong Kong, EBIT of our transport operations was at a loss of $591 million, mainly affected by the public order events in the second half of the year. Our station commercial EBIT rose by 1.9%, mainly driven by the full year contribution from the HSR. Property rental and management businesses EBIT was up by about 1%. Outside of Hong Kong, EBIT of our Mainland business and international recurrent businesses, up by 4.4%.

Let's now go to our consolidated statement of financial position. Total assets increased by -- increased to HKD 289 billion, HKD 14.5 billion increase from last year, mainly due to the booking of our shopping mall in LOHAS Park Package 7 and increase in cash. Total liabilities increased by $8.3 billion to $102 billion, mainly due to the 2 provisions made and the increase in deferred income. As such, total equity increased to HKD 187 billion.

Turning now to our cash flow. Our operating activities generated $17.8 billion inflow, net of fixed and variable annual payments, maintenance CapEx and others. Our cash flow from recurrent businesses was just under HKD 8 billion. Receipts from various property development projects were HKD 9.2 billion. Hong Kong railway extension projects and property-related CapEx was $3.9 billion mainly due to the balance payment in respect of LOHAS Park -- LOHAS Package 7. After the dividend payments net of repayment of borrowings and others, net cash inflow was $3.3 billion.

Next, our financial and credit ratios. Total group borrowings decreased by $749 million to $39 billion, due mainly to the loan repayment previously mentioned. Average borrowing cost was 2.9%. Net debt to equity ratio dropped by 2.7% to 15.4%, and our interest cover improved to 15.3x. On our 3-year CapEx plan, total CapEx from 2020 to 2022 is $45.2 billion, of which 54% will be for the maintenance or replacement of existing Hong Kong railway assets, 18% for new Hong Kong railway projects, 2% for Mainland of China and overseas and 26% for Hong Kong property.

Turning to our sustainable development. We will continue to commit to various ESG strategy and initiatives, which are critical in meeting and balancing the current and future needs of our stakeholders.

Taking the MTR is a way of green travel. We will continue to implement energy reduction initiatives and adopt pollution prevention measures. We've also developed a climate change strategy to integrate relevant considerations into our business strategy and operations. We are dedicated to delivering safe and reliable services with pleasant and amiable experience for our customers. We will continue to leverage on our resources, assets and expertise to make positive social impacts.

We have initiated various corporate governance measures such as ensuring Board diversity and the adequacy of Board skills matrix. We are now looking at ways to further enhance our internal control and risk management practices.

With that, I will now hand back to Jacob for our outlook for 2020.

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

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[Interpreted] As I said in the beginning of my remarks, 2019 has been the most challenging year in our 40-year history. The corporation will still be facing many challenges in 2020, including the possible downturn in the global and local economy, the uncertain state of China-U. S. trade relations and possible continuation of social unrest in Hong Kong.

COVID-19, the epidemic, had -- that started from the beginning of the year, continues to disrupt the normal operation of society. In the past 2 months, we have enhanced our anti-infection measures, but our operations and property businesses will be inevitably affected. Work from home and school closure measures, coupled with much reduced tourists and local leisure travelers, are having significant negative impact on the patronage of our domestic service.

Together with this expansion of cross-boundary and high-speed rail services, total patronage of the group's railway services in Hong Kong for January and February was down 34% as compared to the same period in 2019. Including some relief measures on rentals and significant impact on our Mainland China businesses, the unaudited estimated total financial impact for the first 2 months of this year amounted to around HKD 1.3 billion.

Nevertheless, we have launched special relief measures to help in the tough times in Hong Kong, and we will keep monitoring the situation and implement appropriate measures. We will stand together with the citizens of Hong Kong.

Regarding Shatin to Central Link, we will continue to work closely with the government on the funding application. We hope that the additional funding will be approved within this LegCo session. We'll continue to look forward to the SLC Project (sic) [SCL Project] with our best efforts with the aim of opening the full link as soon as possible.

Property development business, subject to market conditions, may expect to tender out 3 property development projects in the coming 12 months that will provide 4,050 residential units in total. Booking of development profits for LOHAS Park Package 6 will be dependent on construction progress, and the LOHAS mega shopping center for LOHAS Park will open in the second half of this year.

We are deploying more digital technology to improve customer service and business management. We will make use of big data analytics, AI, IoT and robotics to improve railway asset and maintenance management and engineering, planning and construction management. We also plan to notably upgrade our customer information and MTR Mobile App functions. We will progress to realize our vision for smart city, smart mobility.

Finally, I want to extend a tremendous vote of thanks to all our MTR staff who continue to show their commitment to serve the public during the challenging times. They have played a critical role in maintaining the highest level of professionalism and providing excellent service to our customers. We also received recognition from many members of the public for our efforts and we are grateful for their support.

With the support and collaboration of our colleagues and our customers, MTR has been able to maintain high-quality service. We have very solid foundations and a strong business. Although 2019 was a challenging year filled with difficulties, we took our responsibilities seriously and continued to grow our businesses. Let's continue to work together to keep Hong Kong and the MTR moving forward in the coming year. Thank you.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]