MTR Reaches Agreement on Siu Ho Wan Project; Relaxation of Mainland Borders Remains Key Catalyst

Narrow-moat MTR reached a land exchange agreement with the Hong Kong government on the Siu Ho Wan depot conversion project. In our view, the project provides a small increment to its overall rail network with the addition of one rail station. We think the opportunity lies in the development of residential real estate totaling 20,000 units, and of commercial real estate in a shopping mall. The land premium due to the government was not disclosed but MTR noted the calculation is based on market value, less construction costs of the new Oyster Bay Station, costs in reprovisioning the depot and site formation for the development of residential and commercial properties. MTR estimates total capital expenditure to be HKD 36 billion, incurred over a 15-year period. In line with previous projects, the commercialization of this project includes the tendering of the residential development with MTR having the option to receive an upfront payment for the project tendered out, a back-end profit share to the project, or a combination of both. In our view, the retail mall could be retained by MTR, adding to the group’s investment property portfolio. With the mall likely to be located above the new station, recurring cash flow is supported by tenants in the consumer defensives sector, serving the immediate catchment area. We leave our fair value estimate of HKD 45 per share unchanged but we have made slight adjustments to patronage assumptions.