MTR Corp: Why Hong Kong’s Subway Operator is Still Riding High

Hong Kong’s public Mass Transit Railway, better known as the MTR Corporation Limited (SEHK:66), is the envy of many major metropolitan cities. Boosting a 99.9% on-time punctuality rate, the MTR carries almost 6 million passengers a day – the most effective way to get around the city for many Hong Kong residents.

Despite its punctuality and convenience, the public transport system still generates complaints from commuters. Unsurprisingly given the population density in Hong Kong, the most common bugbear is the large crowds during the morning and evening rush hours. But while the MTR is now battling rising construction costs on its new extensions and stations, the rail operator is also looking to fix its reputation.

These problems have stemmed from signaling issues that caused major delays in October 2018, while the incompatibility of two signaling systems led to one of its few crashes (albeit on a test run) in March 2019. The timing of these incidents were particularly embarrassing since the government is looking to promote Hong Kong as the infrastructure pioneer in China’s Greater Bay Area Initiative.

Dominating transport links

Yet, despite all this, MTR’s share price remains near an all-time high, and sports a price-to-earnings (PE) ratio close to 22x. The share price has been supported by a few factors. One is the market share dominance of its train lines versus other forms of public transport. In 2018, the MTR controlled 49.3% market share in this category, ahead of buses (35.1%) and green minibuses (13.4%).

Much of this is due to the network size, which stretches 231 km across 93 stations and 68 light rail stops. Organic growth includes a 2.0% rise in domestic services and 1.1% average fare increase last year, so steady growth in an unsteady world could justify its valuation.

Property play

But also assuaging investors, perhaps at riders’ expense, is MTR’s corporate structure. The Hong Kong government is the listed company’s largest shareholder at 76%, producing the question of whether a conflict of interest exists. The MTR has clearly benefitted from this relationship, expanding its rail network with government partnerships and often acquiring land access. After this, it then pays its largest shareholder the right to run a railway built with public funding in accordance to its concession approach.

This market leadership leverages MTR’s property and commercial business, which is also a significant earnings contributor. Last year, the company earned HK$21.5 billion in operating profit. Of this, HK$8.2 billion came from Hong Kong’s transport operations, HK$5.9 billion from the station commercial business and HK$4.2 billion from the property rental and management business.

Earnings boost

MTR also has more than HK$100 billion in invested properties sitting on its books, meaning the company is influenced by cyclical swings in the property market. Given the sustained robust residential demand in Hong Kong, this could be a significant boost for earnings when recognised later.

While its multiple may appear expensive, MTR’s earnings visibility justifies its valuation and should continue to be supportive of the share price. So for investors, buying into Hong Kong’s dominant rail operator isn’t just a play on rising demand for public transport but can also serve as a useful avenue for exposure to Hong Kong’s residential property market.



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