Company Update: Patronage of domestic service operations recovered to >90% of pre-COVID level
In 2H21, average weekday patronage of domestic service has recovered to >90% of the pre-COVID level. Supported by normalising economic activities, the patronage of domestic service operations jumped 31% in 2H21, bringing the full-year growth to 24%.
While retail sales of station kiosks grew broadly in line with the overall retail market, rental reversion remained in the negative territory. Due to the pandemic-led border closure, duty-free shops remained closed. On the other hand, advertising revenue continued its recovery in 2H21. Overall, we estimate that station commercial business recorded a 6% drop in revenue in FY21.
Tenants’ sales growth of MTRC’s shopping malls outperformed the broad market. Rental concession granted to its mall tenants were significantly reduced in 2H21, along with domestic consumption recovery. That said, negative rental reversion continued to work its way through its retail portfolio.
Launched for pre-sale in Aug 21, La Marina (Wong Chuk Hang Station Package 2), a joint venture with a consortium equally owned by Kerry Properties and Sino Land, drew strong market interest, particularly from property investors. About 483 units, or 81% of the total, have been taken up for HK$11.7bn or HK$35,700psf on average. Robust demand for Wong Chuk Hang Station Packages 1 & 2 should bode well for the sales response to other packages. With the aid of successful project pre-sales, MTRC has high visibility of its development earnings in FY22-23.
MTRC decided not to accept any tender for Tung Chung Traction Substation from any of the five developers that submitted the bid, as they failed to meet the company’s expectations. The tender outcome, however, does not come as a surprise. Reportedly, the land premium is fixed at HK$4.765bn or HK$5,072psf, which appears quite high in our view. Besides, the long construction period also increases investment risks. Tung Chung Traction Substation will provide a GFA of 0.94msf when completed. We believe MTRC will re-negotiate with the government to lower the land premium before retendering the project.
In 1Q22, MTRC plans to offer the Pak Shing Kok Ventilation Building project in Tseung Kwan O for tender. This project will provide 550 residential units upon completion.
In Oct 21, MTRC was invited to study the construction of a new Science Park/Pak Shek Kok Station of the East Rail Line.
The stock is trading at a 14% discount to our appraised current NAV. While the spread of the Omicron variant may cast a shadow over the company’s business recovery, significant rail network expansion should bring in more property opportunities to support its long-term profit growth. Maintain BUY with HK$48.40 TP. This is derived by assigning target discounts of 20% and 10% to our estimated Dec 2022 valuations of investment and development properties, respectively.