August 11, 2017 12:12 am JST

Hong Kong's MTR pumps brakes on property development

Rail operator warns of economic uncertainty despite 46% profit jump

JENNIFER LO, Nikkei staff writer

MTR chief executive Lincoln Leong Kwok-kuen, center, delivers the company's interim results on Aug. 10. (Photo by Jennifer Lo)

HONG KONG -- MTR, Hong Kong's sole railway operator, intends to ease up on soliciting bids for residential construction near its stations as it braces for the impact of greater land availability on sales.

The company, which builds residences and shopping malls around its stops, on Thursday said it would tender out only one residential project in Wong Chuk Hang, in the south of Hong Kong Island, later this year. That is down from six projects announced in March.

"In the past few months, apart from government land sales and redevelopment projects, there has been a massive increase in land supply from the private sector," said David Tang Chi-fai, MTR's property director.

With a current building pipeline of 18,000 flats, "we have to consider the capacity of the market [to absorb them]," Tang told reporters at an earnings briefing.

Tang's cautious remarks stood in contrast with MTR's stronger results for the first half. Net profit jumped 46.1% on the year to 7.48 billion Hong Kong dollars ($958 million), as gains in property revaluation outweighed high depreciation and interest expenses after the opening of two new lines last year -- the Kwun Tong Line extension and the South Island Line.

Total revenue rose 40.8% to HK$30 billion, largely driven by brisk property income. The company reaped HK$6.8 billion from the sale of housing projects in mainland China, such as the Tiara development in the southern city of Shenzhen.

Nevertheless, MTR is wary of economic uncertainty. Its advertising revenue in the first half fell 3.8% on the year, to HK$479 million, due to the dwindling print advertising market in Hong Kong.

Rental reversion -- a gauge of changes in rental rates upon lease renewal -- in its shopping malls also declined 2.2% on the year, dragged down by a "somewhat challenging" retail market with fewer mainland tourists, MTR said. "These are some of the economic uncertainties that may continue to challenge the overall business environment in Hong Kong and for MTR," chief executive Lincoln Leong Kwok-kuen said.

Service disruptions

MTR is majority-owned by the Hong Kong government, which has a 76% stake. The local train operator has expanded its footprint globally, with roughly half of its first-half revenue coming from overseas businesses that span railway operations in Australia, Europe, and mainland China, as well as property development.

Recently, the company has been under fire for frequent service delays. On Tuesday, a signaling fault hit an urban line in Kowloon during the evening rush hour -- the fifth major breakdown in two weeks. The same line was affected by a 10.5-hour service disruption on Aug. 5, potentially costing MTR a record fine of more than HK$20 million.

Commenting on the incidents, Leong said MTR has maintained an on-time arrival rate of 99.9%, which he described as "relatively reasonable" by international standards.

"We have a very robust and time-tested asset management system, under which we operate and replace and upgrade all our system," he said, adding that MTR's spending on railway maintenance will "significantly increase" from last year's HK$8 billion.

MTR shares ended Thursday's session 0.54% higher, at HK$46.4, before the results were announced. The stock has gained 29% since the start of the year, outperforming the Hang Seng Index's 25% increase.

Asia300

MTR Corp. Ltd.

Hong Kong

Market(Ticker): HKG(66)
Sector:
Industry:
Transportation
Railroads
Market cap(USD): 34,939.59M
Shares: 6,006.95M

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