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MTR Corporation Limited: Making progress in mass transit railway systems [free access]

November 1, 2009

Background

Hong Kong-based MTR Corporation Limited (MTR) is one of the world’s leading rail-based transport service providers. Originally established in 1975 as Mass Transit Railway Corporation, the company was christened MTR after the Hong Kong Special Administrative Region Government sold 23 per cent of its issued share capital in an initial public offering in 2000. Later in 2007, MTR acquired the operations of the Kowloon-Canton Railway Corporation (KCRC). 

 

Since its inception, the company has considerably expanded its ambit of operations. Besides railway operations, MTR is also involved in other business segments such as development of residential and commercial projects, property leasing, advertising, telecommunication services, and international consultancy services. Railway operations, however, continue to dominate the company’s portfolio.

 

Current Status

MTR is currently engaged in urban mass transit railway systems in Hong Kong operating a 211.6 km long urban rail network covering 82 stations with about 1,920 cars. The company has been implementing various rail-based projects, both in Hong Kong and China. It is also constructing many link projects such as pedestrian subways, footbridges, cover walkways, and MTR entrances on a public-private partnership (PPP) basis.

 

In Hong Kong, MTR is currently implementing three projects: All these projects are currently under construction-execution.

 

(1) Construction of a noise enclosure on top of the existing viaducts at the western end of Tsing Yi station by about 60 metre.

(2) Construction of a 3 km long underground extension of the existing MTR Island Line from Sheung Wan to Kennedy Town, known as the West Island Line. Three stations at Sai Ying Pun, Hong Kong University, and Kennedy Town will be constructed under the project which has been designed so that over 90 per cent of the residents can access the rail facility by foot. The project is expected to be operational by 2014.

(3) Construction of the Cheung Lai Street Pedestrian Subway and Entrance Works at MTR Lai Chi Kok Station. 

 

In China, MTR is implementing metro projects such as the Beijing Metro and Shenzhen Metro.

 

Beijing Metro Line 4 between Hong Kong and Beijing was implemented on September 29, 2009, by a PPP between MTR and the Beijing municipal government. The USD2.24 billion project runs 29 km long with 24 stations from Gongyixiqiao Station in Fengtai district to the northwest Haidian district, terminating at Anheqiao North station. MTR invested in operations and electric and mechanical works while the municipal government invested in construction. The project is expected to attract a daily ridership of about 700,000 people. Profits are expected from the third year of operations and return on investment is expected to take about 10 years.

 

MTR’s other metro project in China, the Shenzhen Metro Line 4, is currently under construction. The 15.8 km network consists of 5 km of underground section and 10.8 km of at-grade and elevated sections. Ten stations are planned for the network, two underground, one-at-grade station, and seven elevated. In addition, a maintenance depot will be constructed at Longsheng Station. The tendering process for procurement of all civil electrical and mechanical works has been completed. The project is estimated to require an investment of USD0.87 billion, all of which is provided by MTR. A concession agreement was signed in March 2009 with the Shenzhen municipal government.

 

Future Projects

MTR also has several future metro rail projects lined up such as the Guangzhou-Shenzhen-Hong Kong Express Rail Link, Shatin to Central Link, Kwun Tong Line extension, and South Island Line.

 

MTR has recently signed a joint venture (JV) agreement with the Hangzhou Metro Group Company Limited for the investment, construction, and operation of Hangzhou Metro Line 1. The USD3.22 billion Line 1 project is divided into two parts – A and B. The civil construction of Part A will be undertaken by Hangzhou Metro Group and the investment and construction of Part B, which covers the electrical and mechanical system and operation of the metro line, will be undertaken by the JV.

 

Besides Hong Kong and China, the company is also securing contracts at other places. MTR's majority-owned subsidiary, Metro Trains Melbourne (MTM), has signed a franchise agreement with the Victoria Government in Australia to operate and maintain the Melbourne train system for an initial period of eight years beginning on November 30, 2009. MTR holds a 60 per cent stake in MTM, and the remaining 40 per cent stake is held by two Australian industry organisations, UGL Rail and John Holland.

 

MTR has won USD2.581 billion contract to operate the Stockholm metro in Sweden for eight years. Besides train and station operations, MTR will also provide servicing and maintenance of trains. The contract, scheduled to begin from November 2009, includes an optional six-year extension. As per the agreement, Stockholm Public Transport will annually pay MTR a fixed amount of USD294.19 million, plus an incentive of up to USD17.42 million.

 

Financial Health

The company has been consistently recording impressive financial growth in recent times. Its consolidated turnover in 2008 stood at USD2.27 billion, an increase of 64.9 per cent over 2007. The total asset base increased to USD20.56 billion (2.36 per cent), and the operating margin improved to 52.9 in 2008 as against 55.3 in 2007.

 

Railway operations and related businesses accounted for a major share in the revenue generation of the company in 2008. The revenue contribution from rail operations in 2008 stood at USD1.48 billion, an increase of 61 per cent over the previous fiscal. The rail related business segment, such as providing consultancy services, bandwidth services on the railway telecommunication system, freight, leasing advertising and retail space businesses, contributed USD445.03 million (98 per cent). The property ownership, management and other business segment responsible for managing, developing, selling and leasing commercial and residential properties at existing railway land assets and new railway projects contributed USD349.94 million (47.9 per cent).

 

MTR has continued its impressive performance in the first half of 2009. Its overall share in the franchised public transport market has increased to 42 per cent, as against 41.6 per cent during the same period in the previous fiscal. Revenue from stations and rail related businesses stood at USD213.29 million, representing an increase of 0.5 per cent over the same period in the previous fiscal.

 

MTR Corporation-SWOT Analysis

 

The outlook for MTR looks promising as the company reported strong revenue growth with improved operational performance. Recent mergers and acquisitions by the company, as well as a focus on network expansion and development, will offer ample growth opportunities. A SWOT analysis of MTR is given below.

 

Strengths: During the period 2004-08, the company’s revenue grew at a CAGR of 20.54 per cent. MTR outperformed the growth of S&P 500 companies (maintained by Standard & Poor) in revenue and market share. The impressive growth has been made possible due to better competitive positioning and superior products and services. Also, the company traded at price/earnings of 18.92 by the end of 2008, which is above the average figure of 9.2 by S&P 500 companies. The company also provides intercity services to the Mainland of China along with bus operations in Hong Kong. The company has also managed to significantly improve its operational performances. The company received about 19,300 transport-related complaints and suggestions in 2008, a reduction of 4.4 per cent compared to 2007.

 

Weaknesses: One of the possible drawbacks of the company, as ascertained by various analyses, is potential interference by the government. The Hong Kong government holds about 76.6 per cent share in the company, which makes it hard to rule out interference in management decisions which could adversely affect business. The fare structure of operations is decided by the government, which may have a negative impact on the operating ratio. The company’s return on equity stood at 8.5 per cent at the end of 2008 as against the 12.9 per cent by the S&P 500 companies. A lower return on equity indicates that the company may not be using shareholders money as efficiently, generating lower returns compared to other companies in the S&P index.

 

Opportunities: The merger with the Kowloon-Canton Railway Corporation (KCRC) in 2007 helped MTR in acquiring rail-related businesses and projects. The merger is further expected to consolidate and strengthen the scale and profitability of   the rail-related operations of the company. MTR is also working on network expansion projects. The extension of the Island Line comprises underground stations at Sai Ying Pun, University and Kennedy Town. The company is planning to add six new lines of about 60 km to its rail network. This will result in increases sales and an improvement in its overall business. MTR is also planning to invest USD85.27 million to acquire 10 new trains from Changchun Railway Vehicle Company Limited. The new trains, expected to begin operations between 2011 and 2015, will increase the services provided by the company and increase frequency to meet traffic growth which could, in turn, improve its revenues.

 

Threats: The transportation sector is highly competitive and MTR faces challenges from Hutchison Whampoa Limited, Jardine Matheson Holdings Limited, and New World Development Company Limited in winning contracts and deciding pricing, quality, services and network. The company’s revenue and its overall business may also be affected by the current financial downturn.



                                                                                                                                               Financial profile (USD million)

Particulars

2008

2007

2006

2005

Turnover

2,274.58

1,379.35

1,231.09

1,181.03

Total assets

20,559.74

20,086.19

15,538.19

14,666.58

Operating profit before depreciation and amortisation

1,805.81

1,834.32

1,421.68

1,451.09

Profit attributable to equity shareholders

1,068.90

1,958.71

1,001.16

1,090.32

Source: MTR Corporation

 

                                                                                                                                                          Key financial ratios (%)

Particulars

2008

2007

2006

2005

Operating margin

52.9

55.3

54.5

55.7

Non-fare revenue as a % of turnover

35.0

33.4

31.6

31.4

Return on average equity attributable to equity shareholders (excluding change in fair value of investment properties and related deferred tax)

8.7

10.2

8.1

9.3

Net debt-to-equity ratio

42.1

48.5

36.3

39.9

Source: MTR Corporation

 

                                                                                                                         Operating profit contribution (USD million)

Particulars

2008

2007

2006

2005

2004

Railway operations and related businesses

954.84

593.55

529.03

516.13

464.51

Property development

606.45

1,070.97

748.39

787.09

593.55

Property ownership, management and other businesses

245.16

167.74

141.94

141.94

116.13

Total

1,806.45

1,831.29

1,419.36

1,445.16

1,174.19

Source: MTR Corporation