What You Need To Know About MTR Corporation Limited
April 4, 2016
MTR Corporation Limited (SEHK:0066) is one of the largest transport companies in the world. Established in 1975, Mass Transit Railway Corporation was a state-owned corporation with the objective of kick-starting the mass transit transportation system in Hong Kong.
In 2000, the company was restructured and privatized through an initial public offering (Hong Kong SAR Government sold 23% of its issued share capital) on the Stock Exchange of Hong Kong becoming the current day MTR Corporation Limited. And today, over 40 years since its establishment, MTR Corproation is a HK$220 billion company synonymous with the mass transit railway of Hong Kong.
MTR Corporation is one of the largest transport companies in the world. Although MTR Corporation started as just the mass transit railway operator of Hong Kong, the company has since expanded its businesses into China and other markets. Currently, the company operates transportation companies in 6 cities outside of Hong Kong and serviced more than 1.45 billion passengers a year. Moreover, the company also lease out its commercial spaces such as station retail spaces and advertising in trains and stations.
MTR Corporation has 4 Core Operating segments:
1. Hong Kong Transportation Operations (HK$16.2 billion | 40% FY2014 Rev): Railway transport services bringing people from point A to point B. Did we also mention that they also have a small feeder bus service?
2. Hong Kong Station Commercial Business (HK$5 billion | 12% FY2014 Rev): Rental of shop and advertisement space in railway stations. In 2014, MTR Corporation had 1,350 station ships totaling 55,696 sqm of retail space. Being a landlord in prime areas sure has its perks.
3. Hong Kong Property and Other Business (HK$4.2 billion | 10% FY2014 Rev): MTR Corporation also has a sizeable property business in Hong Kong. Recent launches included The Austin (2013), Grand Austin (2014) and LOHAS Park. Basically, they would co-invest with development companies (Sun Hung Kai Properties Ltd, Wheelock and Company Ltd and Nan Fung Group Holdings Ltd) to develop residential properties for sale with a focus on areas along their railway lines. Other investments include commercial properties, cable car business (Ngong Ping 360), card payment systems (think Octopus card) etc.
4. Mainland China and International Business (HK$12.6 billion | 31% FY2014 Rev): Construct, operate and maintain overseas (China, United Kingdom, Sweden and Australia) railway operations as well as selected property developments in China.
At the end of the day with the bulk of Revenue from transportation operations, MTR Corporation can be seen as a proxy for a global rail transportation company.
KEY STATISTICS (FY2015)
Net Revenue: HK$41.7 Billion
Total Assets: HK$241.1 Billion
Earnings per Share: HK$2.22
Dividend per Share: HK$ 1.40
Net Income Margin: 31.1% ROE: 7.9%
1. Strong Recurring Base
MTR Corp has built its business on the back of its recurring revenue model. Its rail operations, commercial leasing and advertising spaces are all generating revenue on a recurring basis. All these have produced a strong recurring income and cash flow for the company.
For Feb 2016, MTR Lines had a total of 122,437,000 passenger trips = daily average of over 4,000,000 passenger trips! This was before including their Airport Express and Cross-boundary lines. And if you were wondering, yes, the Disneyland Resort Line is operated by them as well.
In perspective Hong Kong has a population of slightly over 7.3 million and MTR Corporation had a 48.1% of this market’s franchised public transport market in 2014 (KMB was 2nd with a market share of 24.1%).
This means that the company has a strong base to ensure its survival and a regenerative business model for it to grow on.
2. Huge Expansion Potential
With its experience in managing transportation systems and a very healthy balance sheet, the company is in a good position to bid for operational projects overseas or in China to further expand its business. Right now, its business in Hong Kong still contributes a huge portion of its operating profit (63% of FY2014 Rev).
Given that the opportunity oversea and China are much bigger than its domestic market, MTR Corporation has the potential to significantly grow its business in the future.
Population-wise the potential looks pretty clear:
Hong Kong SAR: ~7.3 million
People’s Republic of China: ~1.36 billion (yep, that’s with a B)
In simple maths, 1.36 billion is over 186x of 7.3 million.
As of Mar 2016, the company had already successfully entered the markets in China, United Kingdom, Sweden and Australia. There is no reason why the company cannot continue expanding within and beyond these markets.
3. Relatively Consistent Margins & Cash Flows
Normally for Operating Margin, we would look at the one after depreciation, amortisation and variable annual payments (basically net all operating expenses – remember depreciation and amortisation are still expenses!) – so that’s the purple line.
And a consistent OPM of the mid 20% seem rather decent on our books!
Sidenote: We could be mistaken but it appears that this OPM excluded MTR Corporation’s profit from their Hong Kong Property development segment.
However, operating mass transit systems require high capital expenditure. The company spent more than HK$10 billion every year since 2010 on capital expenditure, maintaining and expanding on its routes. The maintenance and upgrades to MTR Corporation’s existing Hong Kong rail system cost over HK$6 billion in 2014!
If the company is not able to generate a reasonable return on investment from these capital expenditures, it might be damaging to existing shareholders.
Being a transportation company for the public, safety is high important. If the company were to face any major safety issues, it might erode the confidence of the public in them and that might be extremely damaging for the company.
Moreover, now with the threat of terrorism on the rise, risk management for terrorism-related incidents might result in higher operating expenses.
THOUGHTS ON VALUATION
MTR Corporation is current trading at about 17 times its earnings and offers a 2.8% yield. It is not trading at its lowest valuation from it last ten years of history.
Given the strong recurring nature of its business and a strong balance sheet, the company might be worth a deeper look even at current market valuation.
1. SMRT Corporation Limited
2. Nagoya Railroad Company
3. ComfortDelGro Corporation Limited
1. Government of Hong Kong – 75.6%
2. Blackrock Inc – 0.67%
3. Aberdeen Asset Management – 0.66%
Morningstar – Income Statement
Morningstar – Balance Sheet
Submit your email address for important market updates and FREE case studies!We will only provide you with information relevant to value investing. You can unsubscribe at any time. Your contact details will be safeguardedThe information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley’s personal capacity and do not in any way represent those of his employer and other related entities.
Disclosure: Stanley Lim does not own any companies mentioned above.