Transferring Coverage of MTR; Border Reopening Drives Recovery

We are transferring coverage of MTR 00066, with narrow moat and stable moat trend ratings. We have lowered our fair value estimate to HKD 42 per unit from HKD 45, following an update to our model assumptions and factoring a higher near-term cost of debt from future interest rates hikes. Our fair value estimate implies a price/book ratio of 1.5 times. In our view, the reopening of the Hong Kong and China borders and resumption of cross-boundary travel and duty-free business will support a strong recovery in the revenue and earnings contribution of its core recurrent business. However, we think the positive outlook has been priced in, given the run-up in its share price toward the end of 2022, and we see the company as fairly valued currently.

MTR’s second-half result was slightly better than the first half’s, which was hurt by the fifth wave of the pandemic. This was in line with our expectations, as second-half 2022 revenue rose 7.6% from first-half 2022 revenue from the gradual lifting of pandemic restrictions in Hong Kong. Management shared that average weekday patronage has rebounded to 87% of the prepandemic level, following the resumption of cross-boundary and high speed rail services. We believe the recovery will continue gradually through 2023 and forecast full-year patronage to recover to 97% of its prepandemic level. Operating leverage should kick in, with further potential upside from the fair adjustment mechanism that management expects to be concluded in the first half of 2023.