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Asia300

Profit at Hong Kong rail operator MTR falls 21% on property woes

Chief executive distances company from controversial express railway link to mainland

MTR's Chief Executive Lincoln Leong Kwok-kuen, center, attends a briefing to announce the company's full-year earnings on March 7. (Photo by Jennifer Lo)

HONG KONG -- Hong Kong railway operator MTR saw its net profit tumble 21% on the year in 2016 due to a slower property development market, but the company is getting a boost from mainland Chinese developers competing for land in the territory.

Net profit at the territory's sole railway operator totaled 10.25 billion Hong Kong dollars ($1.32 billion), dragged down by an 89% slide in earnings from building apartments located near its stations. Its recurring profit, excluding property development, rose 4.1% to HK$8.92 billion.

Group profit from property development was "muted" last year and would "remain so in 2017," said MTR's Property Director David Tang Chi-fai at an earnings briefing Tuesday. However, over the next year, the group aims to solicit bids for housing projects comprising 8,000 apartment units, including those located near such centrally located stations as Ho Man Tin and Wong Chuk Hang.

Last month, MTR received 14 bids for a site next to Wong Chuk Hang Station in southern Hong Kong -- the most it has ever received for a tender along a railway line. A joint venture led by the property arm of China's Ping An Insurance snapped up the residential site for an estimated HK$8 billion to HK$10 billion. The deal came at a time when a weaker yuan has capital fleeing the mainland.

Commenting on the deal, MTR's Chief Executive Lincoln Leong Kwok-kuen said: "It's good news that our sites are popular among many investors." Asked about the impact of such deals on already-soaring prices of land and housing, he said the group makes a point of reaching an understanding with its partners on the need to restrict the construction of "miniflats" in Hong Kong.

On Tuesday, shares in MTR closed 0.6% lower, at HK$41.45, before the full-year earnings were announced. The stock underwent a slight correction after the U.S. presidential election in November, although it has climbed 10% since the beginning of the year, outperforming the benchmark Hang Seng Index's 7.6% rise.

Growing talk of a looming U.S. interest rate hike and rising bond yields have dampened investor interest in utilities, which are "conventionally viewed as bond proxies," wrote Nomura analysts in a note last month. The bank maintains a "buy" rating for MTR, saying it is "more than a typical utility" due to its distinctive business model and sustainable dividend over the long run.

The Hong Kong government is MTR's largest shareholder, with a 76% stake. Despite being a local operator, MTR has a global presence. It has recently opened rail lines in Beijing and Stockholm, and the group has submitted tenders for projects in the U.K. and applied for a franchise extension in Australia.

A high-speed railway project it is involved with on the mainland has been plagued by troubles. Slated for completion in the third quarter of next year, the rail line linking Hong Kong and southern China has been beset by construction delays and mounting costs, which have swelled to HK$84 billion from the initially proposed HK$65 billion.

Another challenge facing the project is a controversial plan to establish joint immigration checkpoints in the heart of Hong Kong. A blueprint obtained by the local media on Monday showed that such facilities include the construction of detention rooms for passengers.

Critics say mainland officials should not be allowed to enforce customs and immigration laws in Hong Kong, as that would jeopardize the "one country, two systems" principle that has governed the former British colony since its return to Chinese sovereignty in 1997.

Asked about the project, Leong merely reiterated MTR's role as a "project manager" and said space had been set aside for building the immigration checkpoints. "You should post your questions to the government instead," he said.

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