Result Analysis: Write-down for Shenzhen Metro Line 4
- 1H22 underlying profit jumped 78% to HK$7.1bn on substantially higher property development profit
- Impairment provision of HK$962m made for Shenzhen Metro Line 4
- Core business recovering gradually
- TP lowered to HK$46.45, reiterate BUY
MTRC’s 1H22 net profit was 77% higher at HK$4.7bn. Stripping out the fair value change on investment properties, MTRC recorded 78% profit growth to HK$7.1bn in 1H22. Excluding an impairment provision for Shenzhen Metro Line 4, the company’s underlying profit would have been HK$8.1bn, broadly in line with our estimate. Recurrent earnings plunged 69% to HK$284m, primarily due to the COVID resurgence. Interim DPS was 68% higher at HK$0.42.
MTRC recognized an impairment loss of HK$962m for the Shenzhen Metro Line 4. There has not been any fare increase since the company started to operate the line in 2010 while operating costs have been rising. Since it is expected to take longer to establish the mechanism and procedure for fare adjustment, this would impact the long-term viability of this line, which could become a drag on earnings.
Revenue from the Hong Kong transportation operation fell 3% to HK$5.82bn led by lower patronage amid the fifth wave of the pandemic outbreak. Domestic service operations recorded a decline of 11.7% in patronage in 1H22. However, with economic activities normalizing following the gradual relaxation of social distancing measures since late Apr, patronage of domestic service operations grew 1.6% and 2.9% in May-22 and Jun-22 respectively. With easing border control measures, Airport Express showed >10% patronage growth in May-22 and Jun-22.
Station commercial income fell marginally by 1% to HK$1.48bn mainly dragged by lower station retail rental income. For station kiosks, rental decline upon renewals or new letting narrowed to 13.5% from FY21’s 17%.
Revenue from property rental and management fell by modest 8.1% on increased rental concession. In Jun-22, occupancy of retail malls remained high at 99% while Two IFC (18 floors) was 92% let. The overall negative reversionary growth for retail portfolio further narrowed to 6.8% in 1H22 from FY21’s 8.6%.
Pre-leasing at The Wai in Tai Wai and The Southside in Wong Chuk Hang is progressing well and these are expected to commence operations in 2H23.
With EBITDA margin contracting to 27.8% from 1H21’s 32.7%, EBITDA from the Hong Kong railway and related operations fell 19% to HK$2.71bn.
Mainland China and international rail business exhibited mixed performance. EBIT from China business fell 15% due to reduced patronage led by the COVID while that from international business more than doubled.
Pre-tax development profit more than doubled to HK$9.28bn which stemmed primarily from LP 10 in Tseung Kwan O, South Land and La Marina in Wong Chuk Hang. In 2H22, MTRC will make an initial booking of the gain from fair value measurement of The Wai.
YTD, MTRC has tendered out the Pak Shing Kok Ventilation Building site to the New World/China Merchant Property consortium and awarded the development rights of Tung Chung Traction Substation site to Chinachem Group, In the coming twelve months or so, MTRC will offer Tung Chung East Station Package 1 site and Oyster Bay Ph 1 Package 1 for tender, subject to entering into project agreements with the government/signing the land grant.
Thanks to strong cash receipts from Hong Kong property development business, gearing improved to 12.7% in Jun-22 from Dec-21’s 18.1%. This is despite lower shareholder’s equity caused by revaluation loss on investment properties.
The stock is trading at a 13% discount to our assessed current NAV. Most of its core businesses is on the road to recovery with the easing of pandemic-related restrictions. On the other hand, the Shenzhen Metro Line 4 could be an earnings drag if fare are unable to be raised. Longer term, significant rail network expansion could bring in more property development opportunities to support its growth. BUY despite lower TP of HK$46.35. This is derived by assigning target discounts of 20% and 10% to our estimated Jun-2023 valuations of investment and development properties, respectively.