THIS CIRCULAR IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION This Circular does not constitute, or form part of, an offer or invitation, or solicitation or inducement of an offer, to subscribe for or purchase any of the MTRC Shares or other securities of the Company. If you are in any doubt as to any aspect of this Circular, or as to the action to be taken, you should consult a licensed securities LR 14.63(2)(b) dealer, bank manager, solicitor, professional accountant or other professional adviser. LR 14A.58(3)(b) If you have sold or transferred all your MTRC Shares, you should at once hand this Circular to the purchaser or transferee or to the bank, licensed securities dealer or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee. The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this Circular, makes no representation as to its LR 14.58(1) accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the LR 14A.59(1) whole or any part of the contents of this Circular. App. 1B, 1 LR 13.51A RAIL MERGER (1) CONNECTED TRANSACTIONS (2) VERY SUBSTANTIAL ACQUISITION Joint Financial Advisers to the Company Goldman Sachs (Asia) L.L.C. UBS Investment Bank Independent Financial Adviser to the Independent Board Committee and the Independent Shareholders Merrill Lynch (Asia Pacific) Limited It is important to note that the purpose of distributing this Circular is to provide the Independent Shareholders of the Company with information, amongst other things, on the proposed Rail Merger, so that they may make an informed decision on voting in respect of the EGM Resolution. A letter from the Board is set out on pages 15 to 46 (inclusive) of this Circular. A letter from the Independent Board Committee, containing its advice to the Independent Shareholders, is set out on pages 47 to 48 (inclusive) of this Circular. A letter from Merrill Lynch (Asia Pacific) Limited, the Independent Financial Adviser, containing its advice to the Independent Board Committee and to the Independent Shareholders is set out on pages 49 to 84 (inclusive) of this Circular. A notice convening the Merger EGM to be held on Tuesday, 9 October 2007 at 11:00 a.m. at Rotunda 3 (6/F) Hongkong International Trade & Exhibition Centre, 1 Trademart Drive, Kowloon Bay, Hong Kong is set out on pages N-1 to N-2 of this Circular. A Proxy Form for use in relation to the Merger EGM is also enclosed with this Circular. Please note that refreshments will not be served at the Merger EGM. Whether or not you are able to attend the Merger EGM, you are requested to complete and return the Proxy Form in accordance with the instructions printed thereon, to the Company’s registrar, Computershare Hong Kong Investor Services Limited, Rooms 1806-1807, 18th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong, as soon as possible and in any event not later than 48 hours before the time appointed for the Merger EGM or any adjourned meetings thereof. Completion and return of a Proxy Form will not preclude you from attending and voting in person at the Merger EGM or at any adjourned meetings thereof should you so wish. 3 September 2007 EXPECTED TIMETABLE 2007 Latest time for lodging transfer forms (accompanied by Share certificates) in order to be entitled to attend and vote at the Merger EGM ........4:30 p.m. on Friday, 5 October Latest time for lodging Proxy Forms for the Merger EGM ............11:00 a.m. on Sunday, 7 October Closure of the register of members of the Company for determination of entitlements to attend and vote at the Merger EGM ............9:00 a.m. on Monday, 8 October until 4:30 p.m. on Tuesday, 9 October Suspension of trading of MTRC Shares .................................... Tuesday, 9 October Merger EGM .............................................11:00 a.m. on Tuesday, 9 October Announcement of the results of the Merger EGM ...............onorbefore Wednesday, 10 October Resumption of trading of MTRC Shares ......................9:30 a.m. on Wednesday, 10 October — i — SUMMARY This summary aims to give you an overview of the background to, reasons for and benefits of the Rail Merger and certain other information which is contained in this Circular. Because this is a summary, it does not contain all the information which is important to Shareholders. Shareholders should read the whole document before deciding how to vote with respect to the EGM Resolution. BACKGROUND TO THE RAIL MERGER In February 2004, the Government invited the Company and KCRC to commence discussions relating to a possible merger of the MTRC Railway and the KCRC Railway. On 11 April 2006, the Company and the Government entered into a Memorandum of Understanding with respect to the Rail Merger. Although it was not binding, the Memorandum of Understanding set out the understanding reached between the Company and the Government regarding the structure and key terms of the Rail Merger. LegCo approved the Rail Merger Ordinance on 8 June 2007, and on 9 August 2007, the Transaction Agreements for the implementation of the Rail Merger were executed (other than those which are required to be executed thereafter). The Transaction Agreements are inter-conditional and, subject to certain conditions, including the Company being required to obtain approval from the Independent Shareholders, will come into effect on the Merger Date. REASONS FOR AND BENEFITS OF THE RAIL MERGER The Rail Merger represents a major milestone in the Company’s development as one of the leaders in public transportation in Hong Kong. The Directors consider the terms of the Rail Merger to be fair and reasonable and in the interests of the Company and the Shareholders as a whole. The Directors recommend the Independent Shareholders to vote in favour of the EGM Resolution for the following reasons: • Enhancement of value — As further described on pages 21 to 23 of this Circular, if the Rail Merger had become effective on 1 January 2006, there would have been: (i) a 2006 pro-forma underlying earnings per share (“EPS”) accretion of 13.0% over the Company’s 2006 Underlying EPS of HK$1.08. This is before taking into account the estimated impact of (a) the proposed fare reduction, (b) the implementation of the Fare Adjustment Mechanism, (c) the Variable Annual Payment (which is not required to be paid in respect of the first 36 months following the Rail Merger) and (d) estimated full synergies (which are expected to be realised over the first three years after the Merger Date). If all the above were taken into account, the Directors also consider the potential accretion over the 2006 Underlying EPS to be notable; (ii) an increase in pro-forma pre-tax profit for 2006 from the Company’s rail and related, and property rental and management businesses (excluding property development income and change in fair value of investment properties) of 81.1%. This is before taking into account items (a)-(d) in paragraph (i) above. If all the above were taken into account, the Directors also consider the potential accretion to be very significant; and (iii) a net increase of 50.5% in consolidated cashflow from operating activities after including HK$2,719 million of consolidated cashflow from operating activities of KCRC (excluding the payment of the Upfront Payment). This is before taking into account the estimated impact of items (a)-(d) in paragraph (i) above, and the Fixed Annual Payment and capital expenditure to maintain and upgrade the KCRC System. If all the above were taken into account, the Directors also consider the potential accretion to consolidated cashflow from operating activities to be very significant. — Based on JLL’s professional valuation of the property development rights and investment properties, there would be a pre-tax surplus of HK$2,824 million (HK$2,330 million post-tax) over the consideration payable by the Company in respect of such rights and investment properties at a cost of HK$7,750 million, which represents an increase of 36.4%. — ii — SUMMARY — Improvements in the Company’s earnings and cashflow, together with the general financial performance of the Company, will be amongst the factors taken into account by the Board when it considers dividend levels. • Benefits to the rail business — The Rail Merger will provide the Company with significant growth through an expanded rail network. The expanded network will increase the Company’s franchised public transport market share in Hong Kong from approximately 25% to approximately 40%. — The Rail Merger will also bring significant additional future expansion in the form of the Kowloon Southern Link and potentially, possible future railway lines such as the Northern Link and the Express Rail Link, as well as the Shatin to Central Link. — Non-fare rail-related revenues would increase by 50.6% from HK$1,542 million to HK$2,322 million (based on an aggregation of the relevant revenues of the Company and KCRC for the year ended 31 December 2006). — The Company believes that the Fare Adjustment Mechanism offers a predictable, objective and transparent solution to fare adjustment as it is a direct-drive formula, giving the Company a measure of certainty with respect to its fares. — There will be both cost and revenue synergies which are expected to be up to HK$450 million annually once all the proposed synergy programmes are fully implemented (which is expected to be over the first three years after the Merger Date). • Benefits to the property business — The Property Package, which forms part of the Rail Merger, comprises the development rights (or the economic benefits thereto), investment properties and a property management business.