The Group is principally engaged in the following core businesses - railway design, construction, operation, maintenance and investment in Hong Kong, Macau, the Mainland of China and a number of overseas cities; project management in relation to railway and property development businesses in Hong Kong and the Mainland of China; station commercial business including leasing of station retail space, leasing of advertising space inside trains and stations and enabling of telecommunication services on the railway system in Hong Kong; property business including property development and investment, management and leasing management of investment properties (including shopping malls and offices) in Hong Kong and the Mainland of China; investment in Octopus Holdings Limited; and provision of railway management, engineering and technology training.
The Group's profit attributable to shareholders for the year ended 31-12-2018 amounted to HKD 16.01 billion, a decrease of 4.9% compared with previous corresponding period. Basic earnings per share was HKD 2.6431. A final dividend of HKD 0.95 per share was declared. Turnover amounted to HKD 53.93 billion, a decrease of 2.7% over the same period last year. (Announcement Date: 07 Mar 2019)
Business Review - For the year ended December 31, 2018
As MTR prepares to celebrate its 40th anniversary, I am pleased to report that, despite a number of challenges, the Company’s financial and operational results for the year 2018 were satisfactory, as we adhered to our three-pronged strategy to strengthen and grow our Hong Kong business, accelerate growth in our Mainland of China and international businesses, and enhance our corporate reputation.
On 23 September 2018, we began operations of the Guangzhou-Shenzhen-Hong Kong High Speed Rail (Hong Kong Section) (“HSR”), opening a major new chapter for Hong Kong rail transport and its connections to the Mainland of China. This, together with the expansion of the Hong Kong economy in 2018, supported a 2.2 % rise in total patronage for our Hong Kong transport operations, with 5.88 million passenger trips per weekday. Train service delivery and passenger journeys on-time in our heavy rail network1 were maintained at a world-class 99.9% whilst train frequency was increased further. This excellent overall performance came despite a major disruption affecting four lines caused by a signal system incident in October 2018. Overall, our train service, as measured by passenger journeys on-time for the period January to September 2018, was our best performance since the Rail Merger in 2007. Our safety record also remained world-class, with a further reduction in reportable incidents.
Hong Kong’s retail sector continued to recover during the year, benefitting our station commercial and property rental businesses. The 35 new shops opened in the Hong Kong West Kowloon Station, one of the largest underground high-speed rail stations in the world, and the full year impact of the new retail space on the seventh and eighth floors of Telford Plaza II and in Maritime Square 2 further strengthened these businesses.
Hong Kong property development profit for 2018 was derived from booking of profits from Wings at Sea and Wings at Sea II (LOHAS Park Package 4), sales of inventory car parking spaces, as well as further surplus proceeds released from completed property development projects. Pre-sales for MALIBU (LOHAS Park Package 5) were launched in March 2018 and were very well received, followed by LP6 (LOHAS Park Package 6) in September 2018. In our property tendering activities, we awarded three tenders during the year, being the Yau Tong Ventilation Building site, Wong Chuk Hang Station Package 3 Property Development and Ho Man Tin Station Package 2 Property Development.
Outside of Hong Kong, the performance of our rail businesses was mixed, as we faced serious challenges in both our Stockholm commuter rail service and the South Western Railway franchise, which will be elaborated further in the section headed “Mainland of China and International Businesses”. However, the other businesses performed either in line with or above our expectations. In the UK, MTR Crossrail began operating rail services between London’s Paddington Station and Heathrow Airport. In April 2018, we were awarded the operations and maintenance (“O&M”) contract for the Macau Light Rapid Transit (“LRT”) Taipa Line.
“Rail Gen 2.0” is our vision for the next generation of rail travel. Having delivered four new rail projects over the last four and a half years, including HSR, it is now focused on the fifth and final rail project under construction, namely the Shatin to Central Link. This project continues to make progress, with all immersed tube tunnel units successfully installed in Victoria Harbour and work on stations well advanced overall. However, we have faced a number of allegations concerning workmanship, documentation and timely reporting on certain construction matters relating to three stations of this link, in particular regarding works at the Hung Hom Station extension. This has raised a considerable amount of public concern. We have engaged an external consultant as well as undertaken internal reviews to strengthen our project reporting and processes, and continue to cooperate with the Commission of Inquiry (“COI”) whose interim report was submitted to the Chief Executive on 25 February 2019.
Rail Gen 2.0 in addition covers the major asset replacement programmes on our existing network, notably for trains, air conditioning systems and signalling systems, and these programmes made further progress during 2018. When implemented, these improvements are expected to increase train service capacity on a number of lines by about 10% and enhance station environment. We also continue to make use of appropriate new technologies to promote digitisation so as to improve operational efficiency and enhance convenience for our customers.
Government has reinforced its vision for railways to remain the backbone of public transportation in Hong Kong, a strategy that was reaffirmed in the HKSAR Chief Executive’s Policy Address on 10 October 2018. Seven new railway projects have been proposed under the Railway Development Strategy 2014 (“RDS 2014”). We are providing Government with further information to enable it to move ahead with our submitted proposals for five of these projects, namely the Tuen Mun South Extension (“TMS”), the Northern Link (and Kwu Tung Station) (“NOL”), the East Kowloon Line (“EKL”), the Tung Chung West Extension (and Tung Chung East Station) (“TCW”) and the North Island Line (“NIL”). We also look forward to receiving the invitation from Government for proposals for the remaining two projects under RDS 2014, namely Hung Shui Kiu Station and the South Island Line (West).
The expansion of our investment property portfolio continues, as construction proceeds on two new shopping centres, one at LOHAS Park and the other at Tai Wai, and plans are drawn up for a third, at Wong Chuk Hang; together these three new centres will increase our attributable gross floor area (“GFA”) by approximately 49%, amounting to 152,120 square metres. In our property development business, we continue to make progress, together with our development partners, with about 20,000 residential units currently under construction or planning, the majority of which will be delivered to the market over the next six years or so. We are also exploring with Government how best to advance the plan for the Siu Ho Wan Depot Site, which may be developed into a community comprising 14,000 public and private housing units as well as community facilities. We are seeking further opportunities to leverage our other railway assets to provide more housing for Hong Kong.
Outside of Hong Kong, we continue to pursue rail franchise and rail-related property development opportunities in the Mainland of China and internationally. In the Mainland of China, we signed agreements during the year with parties at city or district level in Beijing, Hangzhou, Chengdu, Shunde and at provincial level in Zhejiang, covering the joint pursuit of railway and rail-related property development projects. In the UK, we have submitted our bid for the West Coast Partnership franchise, in Canada a pre-qualification bid for a railway network upgrade project in the Greater Toronto and Hamilton area, while in Australia, the Contract Finalisation Deed has been signed for Sydney Metro City and Southwest (“SMCSW”) systems delivery and operations.
Total revenue for 2018 decreased by 2.7% to HK$53,930 million when compared with 2017, the decrease being mainly the result of the contribution from residential units sold at our Tiara development in Shenzhen in 2017, which was not repeated in 2018. Operating profit before Hong Kong and Mainland of China property development profits, depreciation, amortisation and variable annual payment increased by 6.6% to HK$18,843 million. Excluding contributions from the Company’s Mainland of China and international railway, property development, rental and management businesses, revenue in Hong Kong grew by 5.6% and operating profit by 7.4%, with operating margin increasing by 1.0 percentage point to 54.5%. Recurrent profit attributable to equity shareholders, being net profit before property development profits (from both Hong Kong and the Mainland of China) and investment properties revaluation, was HK$9,020 million, an increase of 5.1% compared to 2017. Post-tax profit from property developments was HK$2,243 million. Excluding investment properties revaluation, net profit from underlying businesses attributable to equity shareholders increased by 7.1% to HK$11,263 million, due to the increase in recurrent profit and strong property development profits in Hong Kong. Gain in revaluation of investment properties was HK$4,745 million, as compared to HK$6,314 million in 2017. As a result, net profit attributable to equity shareholders was HK$16,008 million, equivalent to earnings per share of HK$2.64 after revaluation. Your Board has proposed a final dividend HK$0.95 per share, which when added to the interim dividend of HK$0.25 per share, would result in a full year dividend of HK$1.20 per share, 7.1% higher than the HK$1.12 per share for 2017.
Business Outlook - For the year ended December 31, 2018
After solid economic growth for much of 2018 and a rebound in the retail and tourism sectors in Hong Kong, the picture appears less clear going into 2019. In particular, there are uncertainties over US interest rates and slowing global growth as well as geo-political tensions, all of which will affect Hong Kong. For MTR, however, the sustained trends of increasing urbanisation and environmental awareness will lend solid support and present opportunities to our business.
For our Hong Kong transport operations, continued economic growth and the full-year operation of HSR will support passenger volume increases. While the delivery of the Shatin to Central Link is dependent on a number of factors, including the results of the holistic review of the Hung Hom Station extension mentioned previously, we are looking into the feasibility of the phased opening of Tuen Ma Line. This requires careful study of a number of issues including necessary modifications to the signalling system. The outlook of our station commercial and property rental businesses will be subject to market conditions though partly moderated by the stable rent structure in the typical three-year tenancy cycle.
In our property development business, the booking of development profits for LOHAS Park Package 5 (with about 97% units sold) and the shopping centre of LOHAS Park Package 7 in 2019 is now dependent on the construction progress. Subject to market conditions, over the next 12 months or so, we aim to tender out three property development packages. These packages are likely to be our eleventh and twelfth packages at LOHAS Park and our fourth package at Wong Chuk Hang Station. These packages are expected to provide about 4,500 residential units in total. In the first half of 2019 we expect to commence the pre-sale of our seventh property development package at LOHAS Park.
Outside of Hong Kong, our businesses should continue to perform reasonably overall. However, we are still working to overcome the serious operational challenges faced by the Stockholm commuter rail and the South Western Railway franchises, as well as the lower than expected patronage at MTR Express. During 2019, we expect to open three more lines outside of Hong Kong namely SMNW, Macau LRT Taipa Line and HZL5. However, these are not expected to make a material financial contribution in 2019. We will continue to seek new opportunities to grow in both the Mainland of China and internationally.
As we continue our work on the Shatin to Central Link and with three new lines outside of Hong Kong set to open, 2019 will be a busy year for MTR. This seems a fitting way to celebrate 40 years of operations during which MTR has grown into a multinational organisation of which Hong Kong can be justly proud.
I would like to welcome Mr Roger Bayliss as Projects Director with effect from 18 March 2019.
I take this opportunity to bid farewell to all our stakeholders at MTR as I retire from the Company after 31 March 2019. I also give very special thanks to all our 47,000 colleagues worldwide for their hard work, great support, resilience to adversity and customer focus. Through them, MTR continues to deliver on its promise to provide safe, reliable and high quality services in all our businesses globally. In our busy and complicated world, heroes are not often recognised. I salute all of the heroes of MTR, who should take pride in their achievements, while learning from their mistakes and continuing to improve. Finally I welcome Dr Jacob Kam as the new Chief Executive Officer of MTR. Jacob has many years of experience at MTR and has led a number of our key businesses. He is dedicated to the Company and with the support of all our colleagues will lead the Company to greater heights.
Source: MTR Corporation (00066) Annual Results Announcement