MTR Corporation (66 HK) EQUITIES
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Flashnote 6 January 2017 EQUITIES MTR Corporation (66 HK) CONGLOMERATES Reduce: Outlook remains lacklustre Hong Kong Pre-blackout meeting confirmed lacklustre business outlook REDUCE Valuation still rich despite recent share price weakness TARGET PRICE (HKD) PREVIOUS TARGET (HKD) Maintain Reduce with an unchanged TP of HKD33.5 33.50 Pre-blackout meeting provided little encouragement. MTR hosted a pre-blackout SHARE PRICE (HKD) UPSIDE/DOWNSIDE analyst meeting on 5 January 2017 in which management outlined the company’s 38.30 -12.5% performance in 2H16 and its outlook for 2017. We saw little evidence of a significant (as of 04 Jan 2017) improvement in MTR’s fundamental outlook over our current expectation. Share price MARKET DATA has been weak in recent months, but the stock remain expensive in our view, trading Market cap (HKDm) 226,155 Free float 24% at a 4% discount to our NAV estimate, or 25x 2017e PE, despite flat earnings growth Market cap (USDm) 29,162 BBG 66 HK 3m ADTV (USDm) 22 RIC 0066.HK to 2018e and offering just a 2.9% regular dividend yield in 2017e (based on the current share price on an ex-div basis, i.e. after the upcoming special dividend FINANCIALS AND RATIOS (HKD) (HKD2.2/sh) in July). Year to 12/2015a 12/2016e 12/2017e 12/2018e HSBC EPS 1.87 1.56 1.55 1.48 HSBC EPS (prev) - - - - Core business outlook remains lacklustre. 1) patronage growth remained sluggish Change (%) - - - - in 2H16 (+0.4% through 11M16, vs +0.2% in 1H16) and we expect organic patronage Consensus EPS 1.83 1.55 1.65 1.65 PE (x) 20.5 24.6 24.7 25.9 growth to only improve modestly (c1%) in 2017, driven by moderate growth in Dividend yield (%) 2.8 8.5 8.5 2.8 economic activity and visitor arrival; 2) average fare growth slowed in 2H16 (vs 6.2% EV/EBITDA (x) 15.8 16.4 16.9 16.6 ROE (%) 6.5 5.5 5.8 5.7 in 1H16), due to lower FAM formula (2.65% vs 4.3% in 2015) and neutral impact from concessions (compared with 1H16 which benefited from a one-off low base in 1H15), 52-WEEK PRICE (HKD) and fare growth could slow further in 2017, as inflation has come down (CCPI in Nov 46.00 2016 was 1.2%); 3) rental reversion is likely to have deteriorated further (from +3.2% 38.50 in 1H16 and +12% in 2015), as retail sales continued to decline, albeit at a slower 31.00 pace due to stabilisation in the macro trends (visitor arrivals and retail sales) over the 01/16 07/16 01/17 Target price: 33.50 High: 44.00 Low: 32.46 Current: 38.30 last few months. Going forward, we expect the recovery to be bumpy (for example, November’s retail numbers were worse than expected), and a stronger USD (& HKD) Source: Thomson Reuters IBES, HSBC estimates could act as a headwind in 2017. Samuel Hui* Development property pipeline update. Following the successful tender of Ho Man Analyst, HK/China conglomerates Tin Phase One property development to a consortium led by Goldin Financial in The Hongkong and Shanghai Banking Corporation Limited [email protected] December 2016, MTR plans to tender Wong Chuk Hang Phase One within 1Q17, +852 2996 6743 while LOHAS Park Phase 11 could follow later this year, depending on market Michelle Kwok* conditions. We also note that LOHAS Park Phase Four (developed by SHKP) and Analyst The Hongkong and Shanghai Banking Corporation Limited Phase Five (Wheelock) have been included into the developers’ respective pre-sale [email protected] plans in 2H17. However we do not expect earnings contribution until 2019 or beyond. +852 2996 6918 Maintain Reduce rating with an unchanged target price of HKD33.5 (implied * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is downside of 12.5%). Our target price of HKD33.5 (unchanged) is based on a 16% not registered/ qualified pursuant to FINRA regulations discount to NAV (unchanged) to our NAV estimate of cHKD40 (unchanged). We maintain our Reduce rating given weak fundamentals, and our view the stock is likely to underperform in a rising rate environment. Key upside risk is a sharp decline in interest rates, leading to lower WACC/cap rates. Disclosures & Disclaimer Issuer of report: The Hongkong and Shanghai Banking Corporation Limited This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. View HSBC Global Research at: https://www.research.hsbc.com EQUITIES ● CONGLOMERATES 6 January 2017 Financials & valuation: MTR Corporation Ltd Reduce Financial statements MTR: Sum-of-the-parts NAV breakdown Year to 12/2015a 12/2016e 12/2017e 12/2018e (HKDm) (HKD/sh) % of GAV Profit & loss summary (HKDm) HK railways 54,858 9.4 21% HK transport operations 16,916 17,784 18,441 19,212 - Existing rail 50,009 8.6 19% HK station commercial 5,380 5,535 5,643 5,762 - New rail 4,849 0.8 2% HK property rental and mgmt 4,533 4,535 4,545 4,566 HK station and related 96,171 16.5 36% Non-HK rail subsids 12,572 14,146 14,853 15,596 - Station shops 61,460 10.5 23% Expanded Rails & Stations and 2,300 2,386 2,829 2,952 - Other station commercial 21,936 3.8 8% other revenue - New stations 8,509 1.5 3% Total operating expenses (27,230) (29,196) (30,725) (32,155) - Octopus and others 4,265 0.7 2% EBITDA 14,471 15,190 15,587 15,932 Investment Properties 81,147 13.9 31% Depreciation and amortisation (3,849) (4,370) (5,147) (5,351) Development properties 21,803 3.7 8% Property development profits 2,751 445 1,081 227 China and Overseas railways 11,793 2.0 4% EBIT after prop dev profits 13,373 11,265 11,520 10,808 HO costs and others 1.5 1.6 1.7 Profit from associates and JCE's 361 541 613 737 Total Enterprise value 263,883 45.2 100% Net interest expense (599) (647) (911) (1,034) Net debt + HO costs (31,532) (5.4) Non-operating profit/loss 2,100 48 0 0 Equity value 232,352 39.8 PBT 15,235 11,207 11,223 10,511 Source: HSBC estimates Taxation (2,237) (1,941) (2,031) (1,771) Minority interests (144) (120) (120) (114) Net profit 12,854 9,146 9,071 8,626 MTR: NAV discount Underlying NP 10,894 9,098 9,071 8,626 Recurring NP (ex prop dev) 8,565 8,787 8,309 8,437 60% Cash flow summary (HKDm) 40% Cash flow from operations 12,153 12,818 12,572 13,147 Capex (21,670) (15,133) (10,583) (8,100) 20% Changes in investments 8,274 (1,452) 310 922 New shares issued 0 0 0 0 0% Dividends paid (5,905) (19,161) (19,161) (6,305) -20% Others -14,146 -17,335 -11,023 -7,928 Net change in cash (6,575) 299 (1,962) 1,064 -40% Cash beginning 18,893 12,318 12,617 10,655 Cash at end 12,318 12,617 10,655 11,719 -60% Balance sheet summary (HKDm) 1/01 1/03 1/05 1/07 1/09 1/11 1/13 1/15 1/17 Share capital 46,317 46,317 46,317 46,317 NAV discount Historical average Reserves 123,738 113,843 103,873 106,308 Source: HSBC estimates Shareholders' funds 170,055 160,160 150,190 152,625 Long-term liabilities 19,272 42,500 57,400 58,800 Note: Priced at close of 04 Jan 2017 Minority interests 116 116 116 116 Price relative Deferred tax and others 12,782 12,782 12,782 12,782 Total capital employed 202,225 215,558 220,488 224,323 Fixed assets 175,719 198,526 202,072 203,294 47.00 47.00 Other assets 44,098 34,584 37,844 39,312 Current assets 21,286 21,277 19,351 20,440 Total assets 241,103 254,387 259,266 263,046 42.00 42.00 37.00 37.00 Ratio, growth and per share analysis Year to 12/2015a 12/2016e 12/2017e 12/2018e 32.00 32.00 Y-o-y % change 27.00 27.00 Revenue 4% 6% 4% 4% 2015 2016 2017 EBITDA -4% -10% 7% -3% MTR Corporation Ltd Rel to HANG SENG INDEX Operating profit 2% 1% -4% 1% PBT -16% -27% 0% -6% Source: HSBC HSBC EPS -6% -16% 0% -5% Ratios (%) ROIC ex-exceptional 8% 6% 6% 5% ROE ex-exceptional 9% 8% 9% 8% ROA 5% 4% 3% 3% Operating margin 26% 24% 23% 22% Core profit margin 26% 20% 20% 18% Interest cover (x) 15.0 14.2 10.9 9.9 Net debt/equity 11% 26% 39% 39% Net debt/EBITDA (x) 1.1 2.7 3.5 3.7 Per share data (HKD) Reported EPS (fully diluted) 2.22 1.57 1.55 1.48 HSBC EPS (fully diluted) 1.87 1.56 1.55 1.48 DPS 1.06 3.26 3.26 1.06 BV 29.11 27.42 25.71 26.13 2 EQUITIES ● CONGLOMERATES 6 January 2017 Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Samuel Hui and Michelle Kwok Important disclosures Equities: Stock ratings and basis for financial analysis HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions.