2017 Stock Code: 66 Hong Kong Property andHong Kong Other Businesses ANNUAL REPORT CONNECTING FORWARD Hong Kong Station Commercial Businesses Station Commercial Hong Kong
Hong Kong Network Expansion Hong Kong Transport Operations Hong Kong Mainland of China and International Businesses
MTR Corporation Limited | Annual Report 2017 : (852) 2993 2111 : (852) 2798 8822 www.mtr.com.hk MTR Corporation Limited MTR Headquarters Building, Telford Plaza Kowloon Bay, Kowloon, Hong Kong GPO Box 9916, Hong Kong Telephone Facsimile VISION We aim to be a leading multinational company that connects and grows communities with caring service.
CORPORATE STRATEGY Enhancing our corporate reputation • Deepen engagement with customers • Become the pride of Hong Kong • Build global brand
Strengthening and growing the Hong Kong business • Expand the network • Grow non-fare businesses • Modernise MTR
Accelerating Mainland China and International Business growth • Deepen presence in existing hubs • Develop new hubs • Explore property development opportunities in hubs
VALUES • Excellent Service • Value Creation • Mutual Respect • Enterprising Spirit CONTENTS
Overview Corporate Governance Highlights 115 Corporate Governance Report 2 – Performance 135 Audit Committee Report 4 – Caring 138 Risk Management 6 – Our Future 142 Risk Committee Report 8 – 2017 Financials 144 Capital Works Committee Report 10 Hong Kong Operating Network with 145 Remuneration Committee Report Future Extensions 150 Board and Executive Directorate 12 Mainland of China and International 166 Key Corporate Management Businesses at a Glance 167 Report of the Members of the Board 14 Chairman’s Letter 18 CEO’s Review of Operations and Outlook Financials and Other Information Business Review and Analysis 197 Contents of Consolidated Accounts and Notes 198 Independent Auditor’s Report Business Review 201 Consolidated Profit and Loss Account 38 – Hong Kong Transport Operations 202 Consolidated Statement of Comprehensive Income 52 – Hong Kong Station Commercial Businesses 203 Consolidated Statement of Financial Position 58 – Hong Kong Property and Other Businesses 204 Consolidated Statement of Changes in Equity 70 – Hong Kong Network Expansion 205 Consolidated Cash Flow Statement 78 – Mainland of China and International Businesses 206 Notes to the Consolidated Accounts 88 Financial Review 295 Glossary 100 Ten-Year Statistics 102 Investor Relations 104 Corporate Responsibility 110 Human Resources 114 MTR Academy HIGHLIGHTS PERFORMANCE
New Retail Space 99.9% Passenger Opened Journeys on-time Telford Plaza II
Maritime Square 2 8th floor Safety 7th floor 5.5% fewer reportable events
Express 98.6% Rail Link complete
Awarded Wong Chuk Hang Station property packages Shatin to 81.2% 2 Central Link complete
2 MTR Corporation Over 2 in HongKong Total patronage billion handed overtobuyers Shenzhen Tiara in High riseunitsof signed Concession Agreement Metro Line5 Hangzhou
Weekday Patronage Weekday Patronage
180
Global Average Global Average
since 2008 Awarded franchise franchise Railway South Western %
franchise Service Metropolitan Rail Melbourne’s Annual Report 2017
extension 3
Financials and Other Information Corporate Governance Business Review and Analysis Overview HIGHLIGHTS CARING
Customer Experience
New Functions in Breastfeeding Free Mobile Device MTR Mobile App to offer more Facilities Charging Service Personalised in 20 interchange stations Experience at 13 Stations
Community Connect Over HK$31 million 7,000 community investment young people joined our youth programmes including 295“More Time Reaching Community” STEM projects involving more than participating Challenge 6,800 volunteer headcount
73 Artworks in 45 stations
4 MTR Corporation G’day! Hallå!
People
Overview 你好 ! 你好
Providing our hello!
rd 43,622 Ranked 33 staff worldwide in with a fulfilling FORTUNE Business Review and Analysis Companies That Change working © 2017 Time Inc. environment Used under license. The World – 2017
The only
Hong Kong Corporate Governance Environment company in Top 50 list
running train services on Financials and Other Information schedule 99.9% of the 99.9% time
low train fares for commuters without relying on direct 15.1% taxpayer subsidies reduction in electricity consumption for each passenger-km in heavy Green Bond issuance for rail compared to 2008 upcoming generation of low-carbon transit projects
Annual Report 2017 5 HIGHLIGHTS OUR FUTURE Rail Gen 2.0
HK$6 billion for HK$3.3 billion Signalling System 93 Upgrade 8-car trains 160 HK$745 million for Chillers Replacement
40 New Light Rail vehicles km Railway 43 2 will be added to the projects in progress Hong Kong network
Outside of Hong Kong Seeking opportunities in:
Norway
Canada Sweden United Kingdom Mainland of China
Australia
6 MTR Corporation Strategy Development Railway Hong Kong Property in Siu HoWanDepotdevelopment Potential 18,000 7 RailwayProjectsunder Over 14,000 1 to besubmitted proposal Project 4 submitted proposals Project
tendered built inpropertypackages residential unitstobe 2 properties portfolio in ourinvestment 34% expansion bringing about units in unitsin 2014 2 Malls New invitation awaiting Projects
in Target completion for HongKongsection Guangzhou South Between HongKongand Shenzhen North Between HongKongand Futian, Shenzhen Between HongKongand Estimated JourneyTime Rail Network directly totheNationalHigh-speed West KowloonStationwillconnect Rail Link Express the third quarter of the thirdquarterof
km 2018
Annual Report 2017 48 23 14
mins mins mins
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Financials and Other Information Corporate Governance Business Review and Analysis Overview HIGHLIGHTS 2017 FINANCIALS
FINANCIAL PERFORMANCE
Revenue from Total Revenue Underlying Net Assets Net Debt-to- Recurrent Business Profit Equity Ratio Businesses
HK$ HK$ HK$ HK$ 48.4 billion 55.4 billion 10.5 billion 166.4 billion 20.6 %
SUMMARY OF PAST PERFORMANCE
Tota R n Operating Profit Before (HK$ million) Depreciation, Amortisation and Variable Annual Payment (HK$ million)
55,440 21,088 19,639 19,011 17,624 15,795
2017 2013 2014 2015 2016 2017
Tota t r inar i i n p r ar (HK$ million) (HK$)
263,768 1.12
2017 2017
8 MTR Corporation ^ # * KEY FIGURES (in %) Proportion offranchisedpublictransport boardings(in%)
Fare revenueperpassenger(inHK$)
Average numberofpassengers(thousand) Market capitalisationat31December(HK$million) Share priceat31December(inHK$) Total equityattributabletoshareholdersoftheCompany Obligations underserviceconcession Loans, otherobligationsandbankoverdrafts Total assets Profit attributabletoshareholdersoftheCompanyarisingfromunderlyingbusinesses Operating profitbeforedepreciation,amortisationandvariableannualpayment Profit onHongKongpropertydevelopment Operating profitbeforeHongKongpropertydevelopment,depreciation,amortisation Ordinary dividendpershare(inHK$) Revenue Financial highlights Total passengerboardingsinHongKong(million) Operations highlights Basic earningspersharearisingfromunderlyingbusinesses(inHK$) Basic earningspershare(inHK$) Share information Operating margin(in%) Financial ratios Return onaverageequityattributabletoshareholdersoftheCompanyarisingfrom Operating margin(excludingMainlandofChinaandinternationalsubsidiaries)(in%) Interest cover(times) Net debt-to-equityratio*(in%) Group’s netdebt-to-equity ratioasat31December2016would haveincreasedfrom20.2%to 28.9%. If theHK$2.20pershareofsecondtranche ofspecialdividendpayabletotallingHK$13billionasat31December2016had been paidasat31December2016,the equity ratioasat31December2017would havebeen23.7%. If thelandpremiuminrespectofWongChuk HangStationPackage2(whichwaspaidinJanuary2018)excludedfromthe cashbalance,theGroup’snetdebt-to- Including obligationsunderserviceconcession andloanfromholdersofnon-controlling interests ascomponentsofdebts. – LightRailandBus – AirportExpress – Cross-boundary Service – Cross-boundaryService – Domestic Service – DomesticService – LightRailandBus(weekday) – AirportExpress(daily) – Cross-boundaryService(daily) – DomesticService(weekday) – LightRailandBus and variableannualpayment – Otherbusinesses – MainlandofChinapropertydevelopment – MainlandofChinaandinternationalrailway,propertyrental – HongKongpropertyrentalandmanagementbusinesses – HongKongstationcommercialbusinesses – AirportExpress – Cross-boundaryService – HongKongtransportoperations – DomesticService underlying businesses(in%)
management subsidiaries management subsidiaries (in HK$ million) HK$ (in
275,156 166,304 263,768 1,637.9 19,991 10,470 42,043 10,515 21,088 16,990 18,201 64.75 29.11 649.2 308.4 4,772 229.2 2,378 6,996 4,900 5,975 45.80 1,097 112.5 2017 49.1 3.08 7.84 45.5 16.6 1.12 1.77 2.83 36.1 53.3 15.0 20.6 6.7 # 222,629 149,461 257,340 1,586.5 17,313 10,507 39,939 17,624 13,478 17,655 61.85 28.71 644.7 309.5 4,608 229.1 2,423 1,348 4,741 5,544 37.70 9,446 113.3 2016 48.4 3.09 7.81 44.1 16.1 1.07 1.61 1.74 38.3 53.9 12.7 20.2 311 5.9 ^ Annual Report 2017 Inc./(Dec.) % (2.2%) pts. (0.6%) pt. 2.3 times 0.4% pt. 0.7% pt. 0.8% pt. 419.0 252.7 15.5 23.6 11.3 21.5 11.3 19.7 26.1 62.6 (0.2) (0.4) (1.9) (0.4) (0.6) 4.7 1.4 0.3 0.7 3.3 3.6 0.1 3.4 7.8 2.5 5.3 3.0 4.7 3.1 3.2 9.9 9
Financials and Other Information Corporate Governance Business Review and Analysis Overview HONG KONG OPERATING NETWORK WITH n n FUTURE EXTENSIONS o
Legend Station Proposed Station Shenzhen Metro Network Interchange Station Proposed Interchange Station Racing days only * o Ma C a
n i Existing Airport Express Island Line Ma On Shan Line Tsuen Wan Line Disneyland Resort Line Kwun Tong Line South Island Line Tung Chung Line Network East Rail Line Light Rail Tseung Kwan O Line West Rail Line T n an in
Projects in Guangzhou-Shenzhen- Shatin to Central Link (Tai Wai to Hung Hom Section) Hong Kong Express Rail Link Shatin to Central Link (Hung Hom to Admiralty Section) Progress
Tai o Northern Link and Tung Chung West Extension Potential Future on n on Kwu Tung Station and Possible Tung Chung East in 48 Extensions under Station Tuen Mun South Extension 41 47 East Kowloon Line Hung Shui Kiu Station a Railway Development n Tai o Mar t South Island Line (West) Roa 33 Strategy 2014 49 North Island Line Tin i ai 36 50 Ma n an ai a n i i T rritori n n
ni r it Tai i on Properties Owned / Developed / Managed by the Corporation i an 01 Telford Gardens / Telford Plaza I and II 31 Citylink Plaza 30 39 02 World-wide House 32 MTR Hung Hom Building / 27 35 03 Admiralty Centre Hung Hom Station Carpark 29 T n M n Ra o r M n 04 Argyle Centre 33 Trackside Villas o Tan 05 Luk Yeung Sun Chuen / Luk Yeung Galleria 34 The Capitol / Le Prestige / Hemera 35 The Palazzo 31 Cit n 06 New Kwai Fong Gardens T n M n o t 07 Sun Kwai Hing Gardens 36 Lake Silver 28 a Tin T n05 an Tai o a a 08 Fairmont House 37 Festival City Tin ai 09 Kornhill / Kornhill Gardens 38 The Riverpark 45 ai07 in 38 10 Fortress Metro Tower 39 Century Gateway C n 11 Hongway Garden / Infinitus Plaza 42 The Austin / Grand Austin T n an t 40 T p 06 37 12 Perfect Mount Gardens 45 City Point ai on Tai ai 13 New Jade Garden 18 in n 14 Southorn Garden T in i M i oo o on Tai in 15 Heng Fa Chuen / Heng Fa Villa / Paradise Mall ai in o oon ia on i Property Developments ai C i o Ton C oi an 16 Park Towers C n a an Under Construction / Planning ia or po i n an R ort 25 17 Felicity Garden a C oi n Tin 46 i o o oon n 18 Tierra Verde / Maritime Square 1 / Maritime Square 2 34 LOHAS Park Packages nn a a Ma in 19 Tung Chung Crescent / Citygate / Novotel Citygate / a ip M i 40 Tai Wai Station o Tat o a Seaview Crescent / Coastal Skyline / Caribbean Coast irport rin o oon 41 Tin Wing Stop C on ar ai Ta a 24 20 Central Park / Island Harbourview / Park Avenue / Mon 01 43 Wong Chuk Hang Station Packages 20 Mon an a Harbour Green / Bank of China Centre / HSBC Centre / 04 o o a t n 44 Ho Man Tin Station Packages on Olympian City One / Olympian City Two Ca Car 44 To Toi a a a Ta o pi Ma o 51 Yau Tong Ventilation Building on in T n C n a t T i an 21 The Waterfront / Sorrento / The Harbourside / 19 Man n Ton 23 Tin The Arch / Elements / The Cullinan / The Harbourview T n 42 26 21 a Tin Place / W Hong Kong / International Commerce T n C n a Ton T n a poa an C n tin or an Centre / The Ritz-Carlton, Hong Kong Ti West Rail Line Property t n o oon T i n 22 One International Finance Centre / Two International t a o 51 n T i 32 Finance Centre / IFC Mall / Four Seasons Hotel / Developments (As Agent for o oon Four Seasons Place anta an the Relevant Subsidiaries of a t T i 10 23 Central Heights / The Grandiose / The Wings / a T i ortr i 22 09 34 PopCorn 1 / PopCorn 2 / Crowne Plaza Hong Kong a t KCRC) ai in n or ar on on Ta ar Kowloon East / Holiday Inn Express Hong Kong Kowloon 11 Ca 17 i ition a ort C ntr 12 East / Vega Suites 39 Century Gateway 16 oint 02 arr a Tai oo 15 24 Residence Oasis / The Lane 45 Ocean Pride / Ocean Supreme / Tin n an nn To n a 25 No.8 Clear Water Bay Road / Choi Hung Park & Ride PARC CITY / THE PAVILIA BAY / City Point C ntra 14 ai an o an 26 Metro Town 46 Cullinan West 03 C ai Ca a a a i an 27 Royal Ascot / Plaza Ascot 47 The Spectra / Long Ping Station (South) 08 ira t n a C n 28 Ocean Walk 48 Yuen Long Station on on an 13 29 Sun Tuen Mun Centre / Sun Tuen Mun Shopping Centre 49 Kam Sheung Road Station Packages 30 Hanford Garden / Hanford Plaza 50 Pat Heung Maintenance Centre C ai an n Mar o pita C rport Tin an r n
a 43
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10 MTR Corporation Beijing n n Intercity Through Train Route Map
o Shanghai
Beijing Line Zhaoqing*Guangzhou Shanghai Line Guangdong Line Foshan o Ma C a Dongguan HONG KONG SAR n i * Due to the redevelopment of railway control point at Zhaoqing, services to/from Zhaoqing has been suspended since 16 April 2017 until further notice. Overview T n an in
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41 47 a n Tai o Mar t Roa 33 49 Tin i ai 36 50 Ma n an ai a n i i T rritori
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ni r it Tai i on i an 30 39 27 35 29 T n M n Ra o r M n o Tan
31 Cit n T n M n o t 28 a Tin T n05 an Tai o a a Tin ai 45 ai07 in 38 Corporate Governance
T n an t 40 C T p n 06 37 ai on
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Annual Report 2017 11 MAINLAND OF CHINA AND INTERNATIONAL BUSINESSES AT A GLANCE
Stockholm
London Stockholm Metro MTR Express Stockholm Commuter Rail (Stockholms pendeltåg)
TfL Rail/ South Elizabeth Line Western Railway
Mainland of China Beijing Tianjin Shenzhen Macau
Metro Line 4 Shopping Mall Metro Line 4 Light Rapid Transit 24 Stations 28.2 km 15 Stations 20.5 km Taipa Line Metro Line 4 – Daxing Line Hangzhou Tiara (consultancy service) 11 Stations 21.8 km Metro Line 1 Shopping Mall Metro Line 14* 31 Stations 48 km 37 Stations 47.3 km Metro Line 1 Extension Metro Line 16* 3 Stations 5.6 km 29 Stations 49.8 km Metro Line 5 Ginza Mall (under construction) 38 Stations 51.5 km Europe Australia United Kingdom Sweden Melbourne
TfL Rail/Elizabeth Line* Stockholm Metro Stockholm Metropolitan 40 Stations 118 km 100 Stations 108 km Commuter Rail Rail Service (Stockholms pendeltåg) 219 Stations 390 km South Western MTR Express 53 Stations 247 km Railway 6 Stations 457 km Sydney 203 Stations 998 km Sydney Metro Northwest (under construction) * Currently under partial operation 13 Stations 36 km
12 MTR Corporation BUSINESSES ATAGLANCE MAINLAND OFCHINAANDINTERNATIONAL Ginza Mall Metro Line4 Light Rapid Transit Light RapidTransit Metro Line 4 – Metro Line4– Daxing Line Taipa Line Metro Line5 Tianjin Beijing Macau Metropolitan Metropolitan Rail Service Shenzhen Hangzhou Shopping Mall Metro Line14 Melbourne Metro Line1 Sydney Metro Line4 Metro Line16 Metro Line1Extension Tiara Sydney Metro Sydney Metro Northwest Annual Report 2017 Shopping Mall 13
Financials and Other Information Corporate Governance Business Review and Analysis Overview CHAIRMAN’S LETTER
Photographed at West Kowloon Station
14 MTR Corporation
Dear ShareholdersandotherStakeholders, “ increased recognition of the MTR brand. Our efforts increased recognition oftheMTRbrand.Ourefforts Alongside thesesuccesses,Iam verypleasedtosee Melbourne’s MetropolitanRailService inAustralia. and therenewedseven-yearconcession tooperate year SouthWesternRailwayfranchise intheUK Line 5Public-Private-Partnershipproject,theseven- three importantcontracts,theHangzhouMetro and overseas.Duringthepastyear,wewereawarded contributed toourgrowthintheMainlandofChina Our proventrackrecordinHongKonghas ensuring MTR’sfinancialsustainability. this conclusionbringbenefitstoourpassengers,while existing network.Thenewarrangementsarisingfrom while wecontinuetomaintainandupgradeour has addedtoourabilityinvestinnewinfrastructure Mechanism (“FAM”)withGovernmentinMarch2017 conclusion oftheearlyreviewFareAdjustment Development Strategy2014(“RDS2014”).The four newrailwaylinestobebuiltundertheRailway have alsosubmittedproposalstoGovernmentfor Shatin toCentralLink,aremakinggoodprogress.We Kong ExpressRailLink(“ExpressLink”)andthe Kong SectionoftheGuangzhou-Shenzhen-Hong railway projectsunderconstruction,namelytheHong reputation. InHongKong,ourhomebase,thetwo and internationally,enhanceourcorporate accelerate ourexpansionintheMainlandofChina to strengthenandgrowourHongKongbusiness, all areasofourthree-prongedstrategy,whichis Over thepastyear,wehaveseenachievementsin everyone atMTRisworkingtowards. sustainable railtransportservices,avisionthat to becominganadmiredworld-classoperatorof I’m verypleasedtosaythatMTRisontherighttrack many challengesandachievedremarkableresults. Chairman. Overthepasttwoyears,MTRhasovercome It hasbeenalittlemorethantwoyearssinceIbecame China and internationally, and enhance our corporate reputation. ” Hong Kong business, accelerate our expansion in the Mainland of our three-pronged which strategy, and is grow our strengthen to Over year, the past we have seen achievements in all areas of
HK$1.12 pershare. HK$0.25 pershare,bringsthefull yeardividendto Board, whichtogetherwiththe interim dividendof of HK$0.87persharehasbeenproposed byyour after revaluationofHK$2.83.Afinal ordinarydividend to HK$16,829million,representing earningspershare to shareholdersoftheCompanyincreasedby64.1% investment propertyrevaluation, net profit attributable HK$10,515 million.Includingthegainarisingfrom from underlyingbusinessesincreasedby11.3%to 2017. Asaresult,profitattributabletoshareholders from HK$530millionin2016toHK$1,935 saw propertydevelopmentprofitincrease,rising development, andsundrysourcesfromHongKong, in Shenzhen,ourfirstMainlandChinaproperty Interim Report.ThebookingofprofitfromTiara opening ofourtwonewraillines,asnotedinthe depreciation andinterestexpensesrelatingtothe by 3.8%toHK$8,580million,largelyduethe for theyearfromrecurrentbusinessesdecreased satisfactory. Profitattributabletoequityshareholders The Company’sfinancialresultsfor2017were Association (“HKMA”). “Silver Award”fromtheHongKongManagement recognised withour2016AnnualReportwinningthe as wellourcomprehensivedisclosure,were Our transparencyandstakeholdercommunications, business model. significant benefitsachievedbyourRailplusProperty have beenincludedinthelist,whichrecognises World” Top50companieslist.Wewerehonouredto to beincludedinthe2017FORTUNE“Change In addition,weweretheonlyHongKongcompany Year 2017”intheIDCDigitalTransformationAwards. being named“AsiaPacificDigitalTransformerofthe apps andvariousdigitisationinitiativesledtoMTR to improvecustomerservicesthroughtheuseof Annual Report 2017
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Financials and Other Information Corporate Governance Business Review and Analysis Overview CHAIRMAN’S LETTER
OUR NETWORK on average around 6.49 million passengers every weekday in 2017. We continue to pursue further railway and related Safety always comes first in our operations, and I am pleased to property development opportunities outside of Hong Kong. report that our safety performance has further improved, with In the Mainland of China, we are exploring opportunities an overall 5.5% drop in reportable incidents on our heavy rail in the Guangdong-Hong Kong-Macau Bay Area, Chengdu, and light rail networks. Our heavy rail train service delivery was Hangzhou and Beijing. In the UK, we are bidding for the Wales maintained at 99.9% of the time over the year, a truly world-class and Borders rail franchise and the West Coast Partnership rail performance. Nevertheless, we would never be complacent franchise. In the Nordic region, we are bidding for Norway’s and are mindful that during 2017 there were several incidents Traffic Package South (Trafikkpakke Sør) railway operating that caused inconvenience to passengers, including a signalling concession, as well as looking at more projects in the region. system failure on the Kwun Tong Line in August. Investigations In Australia, we are pushing forward our interests in the have been conducted to understand the causes and reduce the second metro project in Sydney – the Sydney Metro City and reoccurrence of similar incidents in future. Southwest. In North America, we are looking into a railway Safety and reliability require continuous investment in both project in Toronto, Canada. people and assets. Under the umbrella of “Rail Gen 2.0”, we have made various significant investments, including building OUR CUSTOMERS new railway lines, and upgrading and replacing major assets Our aim is to provide our customers with a world-class level on existing railway lines, to deliver excellent services to our of railway service at affordable prices, while continuing to customers. invest to maintain the quality of the network and meet future The Express Rail Link remains on target for completion in demand. Rail Gen 2.0 covers an over HK$10 billion worth asset the third quarter of this year and we are in discussion with replacement programme involving new trains introduction Government regarding the future operation and maintenance and enhanced signalling systems that are now well underway. arrangements for the line. The proposed co-location We are constantly striving to make customers’ journeys better arrangement at the West Kowloon Station announced in July through bringing in new services, such as mobile device 2017 by Government and the Standing Committee of the charging services at selected stations and the breastfeeding National People’s Congress’s approval of the agreement signed facilities recently provided in interchange stations. We are also between the Mainland of China and Government in December harnessing technology to make our operations even safer and 2017 are important steps to maximise convenience for more efficient, while improving our customers’ experience. We passengers and unlock the high-speed rail’s full potential. For are conscious of the need to stay transparent and responsive the Shatin to Central Link, we expect to complete the Tai Wai to as a company and we are making efforts in this area. Hung Hom Section and the Hung Hom to Admiralty Section by Conclusion of the early review of FAM in 2017 has balanced mid-2019 and 2021 respectively. As previously communicated, the interests of different stakeholders, particularly between this project has been affected by a number of events outside meeting the public’s expectation for lower rates of fare our control. Following a detailed review, we submitted a adjustment and ensuring the financial sustainability of the revised cost estimate to Government on 5 December 2017, Corporation. During the year, we provided over HK$2.6 billion with the latest estimate for the main construction works having of on-going fare concessions to different passenger groups. increased by HK$16.5 billion to HK$87.3 billion. We will continue to focus on ensuring our services remain Under RDS 2014, a total of seven new rail projects are to be affordable for the benefit of the community, and in this spirit, built over a number of years, and Government has so far invited we welcome the Public Transport Fare Subsidy Scheme MTR to submit proposals for five of them. We have submitted announced by the Chief Executive of Hong Kong in her four of them and are currently in discussion with Government inaugural Policy Address in October 2017. We will fully support over the submitted proposals. In the longer term, Government Government in its implementation. has proposed additional transport corridors as part of the vision set out in its “Hong Kong 2030+” plan and we look forward to OUR PEOPLE participating in these projects in the years ahead. The greatest assets of the Company are the well-trained With our continued growth outside of Hong Kong, our and dedicated people we employ. We take great care of franchises in the Mainland of China and overseas carried our people by providing them with a fulfilling working
16 MTR Corporation with theMTRvolunteeringteamwinning“7 scheme. Theeffortsofourvolunteerswerewellrecognised, spirit, reflectedinour“MoreTimeReachingCommunity” Our colleaguesinMTRpossessanextraordinaryvolunteering Hong KongandtheSwedishInstitute. jointly organisedwiththeConsulateGeneralofSwedenin “Swedish Dads”PhotoExhibitionatElements,whichwas Station. InDecember2017,wehostedtheaward-winning Design toproducenewartworkproposalsforShamShuiPo Company partneredwithTheSavannahCollegeofArtand of ourcommunitythrough“ArtinMTR”programme.The We alsoleverageonourresourcestoenrichtheculturallife additional supportforyoungpeopleintheircareerplanning. while our“PathwaystoEmployment”programmeprovided secondary-school studentsintheircareer-and-lifeplanning, our “’Train’forLife’sJourneys”programmesupported160 in real-worldengineeringchallenges.Duringthesummer, Kong andHKEdCity,toengagesecondary-schoolstudents Challenge” programme,alongwithJuniorAchievementHong mathematics (“STEM”)subjects,welaunchedthe“STEM students toexplorescience,technology,engineeringand supporting youngpeopleintheirlife’sjourney.Toencourage platform extendsthisideafurtherintosociety,withafocuson through ourrailwaybusinesses.Our“CommunityConnect” As acompany,weaimtoconnectandgrowcommunities COMMUNITY CONTRIBUTIONS TOTHE the detailedarrangements. in Hangzhouanddiscussionsarenowunderwayregarding Hangzhou MetroGrouptosetupabranchcampusofMTRA 2017, wesignedanMemorandaofUnderstandingwith October for therailwayindustryinanumberofcountries.In just overayearago,MTRAisnowdevelopingprofessionals countries, throughtheMTRAcademy(“MTRA”).Established Kong butalsointheMainlandofChinaand“BeltRoad” to developnewtalentsforthefuture,notjustinHong We arecapitalisingonthedepthofexpertiseinCompany the RandstadGroupin2017. being namedthemostattractiveemployerinHongKongby environment. OureffortshavebeenrecognisedwithMTR and Iamverypleased toseethatourefforts have been citizen andpromotesustainable businesspractices, We continuetopursueourgoals tobeagoodcorporate Service andRoadShow. Volunteer Award”co-organised bytheAgencyForVolunteer th Hong Kong HongKong another successfulyear. we serve!Unitedinourpurpose,willworktomake2018 company, acompanycloselyconnectedtothecommunities staff fortheirdedicationinmakingMTRagreatmultinational counsel duringthepastyear,andeacheveryoneofour Finally, IwishtothankallofmyfellowDirectorsfortheirwise Commissioner forTransportonthesamedate. effect from11October2017byvirtueofherappointmentas has becomeaNon-executiveDirectoroftheCompanywith Director oftheCompanyonsamedate.MsMableChan with effectfrom15July2017,ceasedtobeaNon-executive who ceasedtoholdthepostofCommissionerforTransport and theTreasury)respectively.MrsIngridYeungHoPoi-yan, Chan Ka-keung,Ceajer(formerSecretaryforFinancialServices (former SecretaryforTransportandHousing)Professor taking overfromProfessorAnthonyCheungBing-leung the Treasury)becameNon-executiveDirectorsinJuly2017, Mr JamesHenryLauJr.(SecretaryforFinancialServicesand Frank ChanFan(SecretaryforTransportandHousing) Independent Non-executiveDirectorsonthesamedate.Mr Brandler andMrJohannesZhouYuanjoinedtheBoardas Meeting on17May2017.MrAndrewCliffordWinawer Independent Non-executiveDirectoratourAnnualGeneral who servedontheBoardforovernineyears,retiredasan to theCompanyduringtheirtenures.MrNgLeung-sing, thank thosewhohaveretiredfortheirvaluablecontributions I wouldliketowelcomeournewBoardmembers,andalso impressive performance. operations isanessentialfactorindrivingMTR’sconsistently The strengthofourBoardanditseffectiveoversight BOARD TRANSITION Hong Kong,8March 2018 Chairman Professor FrederickMaSi-hang Sustainability Award2016/2017”organisedbyHKMA. recognised bywinningtheinaugural“HongKong
Annual Report 2017 17
Financials and Other Information Corporate Governance Business Review and Analysis Overview CEO’S REVIEW OF OPERATIONS AND OUTLOOK
A composite photograph at Hin Keng Station
18 MTR Corporation Dear ShareholdersandotherStakeholders, years, 2017 and was ayear ” progress for MTR. ofstability “ Building on the successes and achievements ofprevious Maritime Square 2 (formerly known as the Maritime Maritime Square 2(formerlyknownastheMaritime of TelfordPlazaIIwhichopened inJuly2017and the newretailspaceonseventh andeighthfloors property rentalbusinesses.These alsobenefitedfrom supporting growthinourstation commercialand environment improvedinthesecondhalfof2017, Company’s financialsustainability.HongKong’sretail all passengers,whilecontinuingtomaintainthe (“FAM”), withtheresultingarrangementsbenefiting the earlyreviewofFareAdjustmentMechanism with Governmentanimportantmilestone,being likewise world-class.InMarch2017weconcluded maintained at99.9%.Oursafetyperformancewas journeys on-timeinourheavyrailnetworkwere while bothtrainservicedeliveryandpassenger South IslandLine.Trainfrequencywasincreased, operations oftheKwunTongLineextensionand weekday, contributedpartlybythefirstfullyearof in patronageto5.76millionpassengertripsper Kong transportoperationsachieveda3.0%increase which supportedourlocalbusinesses.OurHong In HongKong,theeconomystrengthenedin2017, every weekdayin2017. to 2017atotalof12millionpassengertripsglobally growth inaverageweekdaypassengertripsfrom2008 have grownaroundtheworld,asevidencedbya180% last year.Asaresultofthisstrategy,ourbusinesses a comprehensivereviewthatwasundertakenearlier proven successfulovertheyearsandwasreaffirmedby enhancing ourcorporatereputation.Thisstrategyhas Mainland ofChinaandinternationalbusinesses, the HongKongbusiness,acceleratinggrowthinour three-pronged strategyofstrengtheningandgrowing progress forMTR.Wecontinuedtodeliveronour previous years,2017wasayearofstabilityand Building onthesuccessesandachievementsof of rail travel. This is currently led by the two new of railtravel.This iscurrentlyledbythetwonew “Rail Gen2.0”,ourvisionforthe next generation Our neartermrailexpansionin Hong Kongfallsunder financial results. Shenzhen, andtheprofitsbookedcontributedtoour handed overtobuyersthehigh-riseunitsatTiarain development businessintheMainlandofChina,we further foranadditionalthreeyears.Inourproperty Metropolitan RailService,withanoptiontoextend a seven-yearextensiontooperateMelbourne’s from August2017,whileinAustraliawewereawarded Western Railwayfranchisethatwillrunforsevenyears our 30%ownedassociatewasawardedtheSouth respect ofHangzhouMetroLine5(“HZL5”).IntheUK, for aPublic-PrivatePartnership(“PPP”)projectin Municipal GovernmentandHangzhouMetroGroup signed theConcessionAgreementwithHangzhou to expandourpresence.IntheMainlandofChina,we customers, whileselectivelypursuingopportunities reliable andimprovedservicestothesatisfactionofour weekday in2017.Inthesemarkets,wedelivered an averageofaround6.49millionpassengersevery Outside ofHongKong,ourrailbusinessescarried Kam SheungRoadStationPackage1inMay2017. Canton RailwayCorporation(“KCRC”),weawarded and, asagentfortherelevantsubsidiaryofKowloon- Station inFebruaryandDecember2017respectively and secondpropertypackagesatWongChukHang our propertytenderingactivities,weawardedfirst at SeaandWingsIIofLOHASParkPackage4.In sundry sources.Pre-saleswerelaunchedfortheWings sale ofinventoryunits,carparkingspacesandother property developmentprofitwasderivedmainlyfrom as wellmoreshopsinourrailstations.HongKong Square extension)thatopenedinDecember2017, Annual Report 2017 19
Financials and Other Information Corporate Governance Business Review and Analysis Overview CEO’S REVIEW OF OPERATIONS AND OUTLOOK
rail projects under construction, the Hong Kong Section of China property development profits, depreciation, of the Guangzhou-Shenzhen-Hong Kong Express Rail Link amortisation and variable annual payment increasing by (“Express Rail Link”) and the Shatin to Central Link. These 4.3% to HK$17,677 million. As noted in the Interim Report, the projects were respectively 98.6% and 81.2% complete as significant increase in revenue was predominately due to the at 31 December 2017. In December 2017, we submitted to recognition of sales proceeds from the Tiara development Government our revised estimate of the Cost to Complete in Shenzhen. Excluding the Mainland of China property (“CTC”) of the Shatin to Central Link. Government is in the development, revenue for the year would have increased process of reviewing this estimate. Rail Gen 2.0 also covers by 10.5%. Excluding the Company’s Mainland of China major asset replacement programmes, notably for trains and and international subsidiaries, revenue grew by 3.6% and signalling systems on our existing network, and these are operating profit by 2.5%, with operating margin declining by making reasonable progress. Government’s strategy remains 0.6 percentage point to 53.3%. Recurrent profit attributable for rail to be the backbone of public transportation in Hong to equity shareholders, being net profit before property Kong, and in the medium term seven new railway projects development profits (from both Hong Kong and the Mainland are proposed under Railway Development Strategy 2014 of China) and investment properties revaluation, decreased (“RDS 2014”). We have now submitted proposals for four of by 3.8% to HK$8,580 million, mainly due to higher costs, these projects, namely, the extension of the West Rail Line to particularly depreciation and interest expenses following the Tuen Mun South, the Northern Link (and Kwu Tung Station), opening of the two new lines in Hong Kong in the last quarter the East Kowloon Line and the Tung Chung West Extension of 2016. Post tax profit from property developments (from (and Tung Chung East Station). We have also received the both Hong Kong and the Mainland of China) was HK$1,935 invitation from Government to submit a proposal for the fifth million, and was mainly derived from the booking of profit project, the North Island Line on Hong Kong Island, which from Tiara in Shenzhen and sundry sources in Hong Kong. will be submitted in the second half of 2018. Looking even Excluding investment properties revaluation, net profit from further ahead, the ”Strategic Studies on Railways and Major underlying businesses attributable to equity shareholders Roads beyond 2030” with reference to the vision depicted rose by 11.3% to HK$10,515 million, mainly due to the higher in “Hong Kong 2030+: Towards a Planning Vision and level of property development profits for the year. Gain in Strategy Transcending 2030”, is planned to be taken forward revaluation of investment properties was HK$6,314 million, as by Government in 2018. It will identify the major transport compared with HK$808 million in 2016. As a result, net profit corridors including railways, which are required to support attributable to equity shareholders was HK$16,829 million, Hong Kong’s long-term land use strategy. equivalent to earnings per share of HK$2.83 after revaluation. Your Board has proposed a final ordinary dividend of HK$0.87 We are also continuing to examine how to best leverage per share, which together with the interim dividend of our existing rail facilities for more residential developments HK$0.25 per share brings the full year dividend to HK$1.12 to meet demand for housing. The Environmental Impact per share, an increase of 4.7%. Additionally, the second and Assessment reports for the proposed development above our final tranche of the special dividend of HK$2.20 per share Siu Ho Wan depot in Lantau were approved by Government relating to the agreement with Government regarding the in November 2017 and the statutory planning procedures further funding arrangements for the Express Rail Link (“XRL commenced in January 2018. The gazetted road works Agreement”) was paid on 12 July 2017, at the same time as scheme for another site, the Yau Tong Ventilation Building, payment of the 2016 final ordinary dividend. was approved in August 2017. Outside of Hong Kong, we are pursuing a number of rail HONG KONG BUSINESSES franchise opportunities in the Mainland of China, the Nordic Leveraging off the “Rail plus Property” business model, our countries, the UK and Australia, and are also reviewing potential businesses in Hong Kong centre on our rail network and also rail related property developments in these countries. include significant station commercial activities, property Total revenue for 2017 increased by 22.7% to HK$55,440 rental as well as property developments over and around million, with operating profit before Hong Kong and Mainland stations and depots.
20 MTR Corporation Fare revenuefromourHongKongtransportoperationsissummarisedbelow: Patronage andRevenue implemented topromotesafetyinournetwork.Programmes performance. Duringtheyearnumerousinitiativeswere network andlightrailthanin2016,anotherexcellent 5.5% fewerreportableeventsontheHongKongheavyrail Safety isanabsolutepriorityforMTRandin2017therewere Safety HK$1,656 million. charges significantly,resultinginEBITdecreasingby35.6%to highlighted, hasincreasedthedepreciationandamortisation 2018/2019. Theopeningofthetwonewlines,aspreviously while fareadjustmentfor2017/2018wasrolledoverto to HK$7,475million,mainlydueincreasesinstaffcosts, from thegrowthinpatronage.EBITDAdecreasedby2.1% by 3.1%toHK$18,201millionin2017,benefitingmainly Total revenueoftheHongKongtransportoperationsrose Financial Performance Transport Operations Total FareRevenue Intercity Light RailandBus Airport Express EBIT Margin(in%) EBITDA Margin(in%) Operating profitbeforeinterestandfinancechargesafter Operating profitbeforedepreciation,amortisationand Total Revenue Hong KongTransportOperations Cross-boundary Service Domestic Service Fare Revenue In HK$million In HK$million variable annualpayment(“EBIT”) variable annualpayment(“EBITDA”)
more portablefireextinguisherswereinstalledinstations. station evacuationprocedureswerelaunchedin2017and awareness aboutfiresafetyandimprovetheirknowledgeof management. Severalprogrammestostrengthencustomers’ various initiativestoraisepublicawarenessandenhancerisk submitted toGovernmenton25April2017andcontained robust, orderly,speedyandeffective.Thepanel’sreportwas investigate theincidentconcludedthatitshandlinghadbeen February 2017.TheExecutiveReviewPanelsetupto response tothearsonattackononeofourtrains10 Our “safetyfirst”culturewaswelldemonstratedbyour relevant safetyperformancefurther. Gap SpecialTaskForcewasformedtolookintoimproving to enhancesafetyonescalatorscontinued,whileaPlatform Year ended31December Year ended31December 18,035 12,840 18,201 41.1% 1,656 1,076 3,277 7,475 2017 2017 9.1% 135 707 17,489 12,395 17,655 14.6% 43.2% 3,252 2,572 7,633 2016 2016 137 707 998 Annual Report 2017 Inc./(Dec.) % Inc./(Dec.) % (5.5%) pts. (2.1%) pts. (35.6) (1.5) (2.1) 3.1 7.8 0.8 3.6 3.1 – 21
Financials and Other Information Corporate Governance Business Review and Analysis Overview CEO’S REVIEW OF OPERATIONS AND OUTLOOK
Our patronage benefited from the stronger economy and the The next scheduled review of the FAM will be in 2022/2023, opening in 2016 of the two new rail lines. In 2017, for all of our with its application starting in mid-2023. rail and bus passenger services, total patronage increased by After applying the FAM formula, the special annual adjustment 2.6%, for the first time surpassing 2,000.0 million passenger of 0.6 percentage point and the one-off 10% discount, the trips per annum. Average weekday patronage increased by calculated Overall Fare Adjustment Rate for 2017/2018 came 3.0% to 5.76 million. to +1.49%. This is within the range of ±1.5%, under which, For the Domestic Service (comprising the Kwun Tong, Tsuen according to the FAM, the adjustment rate has been rolled Wan, Island, Tung Chung, Tseung Kwan O, Disneyland Resort, over to the following year (2018/2019). Hence, there was no East Rail (excluding the Cross-boundary Service), West Rail, adjustment of MTR fares in 2017/2018. Ma On Shan and South Island lines), total patronage reached Frequent MTR travellers commuting on medium to long 1,637.9 million, a 3.2% increase over 2016. The Cross-boundary distance journeys to the urban area and across the harbour can Service to Lo Wu and Lok Ma Chau saw patronage decrease continue to enjoy fare savings by using five types of “Monthly by 0.6% to 112.5 million, mainly as a result of continued strong Pass Extra” and MTR City Saver. Furthermore, the validity of competition from other modes of transport. Patronage on the the MTR City Saver sold from 1 July 2017 onwards has been Airport Express rose by 3.0% to 16.6 million, supported by an extended from 30 days to 40 days, counting from the day of increase in air passenger traffic. first use. The “Early Bird Discount Promotion” Programme has Market Share also been extended for one year up to 31 May 2018. The Company’s overall share of the franchised public transport These saving schemes are in addition to our ongoing fare market in Hong Kong in 2017 was 49.1%, compared to 48.4% concessions and promotions, which amounted to over HK$2.6 in 2016. Within this total, the share of cross-harbour traffic was billion in 2017 and target eligible passengers such as students and 69.6%, compared to 68.6% in 2016. Competition from other the elderly. MTR is currently the only major transport operator in modes of transport reduced our share of the Cross-boundary Hong Kong to provide discounts to students on every trip. business from 51.2% to 50.8%. Our market share to and from Fares on the Airport Express were raised by an average of 9.6% the airport increased marginally from 21.4% to 21.5%. from 18 June 2017. This is the first adjustment to fares for this Fare Adjustments, Promotions and Concessions service since its opening in 1998. On 21 March 2017, we announced that the early review of the On 11 October 2017, the Chief Executive of the Hong Kong FAM, conducted jointly with Government, had concluded, SAR in her inaugural Policy Address proposed a Public resulting in revised arrangements designed to benefit all Transport Fare Subsidy Scheme. We welcome the scheme and passengers, whilst ensuring the financial sustainability of will fully support its implementation. the Company. During the review process, we listened to the opinions of different stakeholders, including passengers Service Performance and shareholders. Two important pillars of the FAM remain Train service delivery and passenger journeys on-time in unchanged, namely the FAM formula itself and the “direct- our heavy rail network in 2017 remained at a world-class drive” nature of the formula’s application. However, new level of 99.9%, exceeding both the targets in our Operating features have been introduced which will benefit all Agreement and our own, more stringent, Customer Service passengers such as a 0.6 percentage point special annual Pledges. More than 2.11 million train trips were made on our reduction in the fare adjustment rate over each of the six heavy rail network and around 1.09 million trips on our light years from 2017/2018 to 2022/2023, a 10% reduction in the rail network during the year. In 2017 there were nine delays on overall fare adjustment rate in 2017/2018 and a 3% rebate the heavy rail network and one delay on the light rail network, for Octopus trips for at least six months each year over the six each lasting 31 minutes or more which were caused by factors years to 2022/2023. A new HK$0.3 discount will be offered for within our control. We continue to work diligently to reduce passengers using Octopus interchanging between MTR and both the number of delays and their impact on passengers. Green Minibus routes from the second quarter of 2018.
22 MTR Corporation the last quarter of 2017. The number of advertising units in the lastquarterof 2017.Thenumberofadvertising unitsin advertising. Overalladvertisingspend startedtorecoverin advertising spendandtheincrease incompetitionfromonline million in2017,mainlyattributable toadownturninoverall Advertising revenuedecreased slightly by1.7%toHK$1,071 stations whichwerepreviouslyclosedforre-development. Chai stations,aswelltheopeningof15shopsatvarious opening of11newshopsatHungHom,KowloonandWan with 31December2016.Theincreasewasmainlyduetothe an increaseof24shopsand1,565squaremetrescompared occupying 58,716squaremetresofretailspace,representing As at31December2017,therewere1,416stationshops, and theSouthIslandLine,increasesinDutyFreeShoprents. shops followingtheopeningofKwunTongLineextension continuous trademixrefinements,anincreaseinthenumberof growth reflectedpositiverentalreversionasaresultof increased by7.8%toHK$5,975millionin2017.Therevenue Total revenueoftheHongKongstationcommercialbusinesses The HongKongstationcommercialbusinessesachievedgoodresultsin2017. Financial Performance Station CommercialBusinesses of electricalcontactsinajunctionboxnearNgauTau resulted fromintermittentdatalosscausedbythecorrosion procedures. Itwasfoundthatthesignallingfaulthad was managedinasafemanneraccordingtoestablished for improvement.Thepanelconcludedthattheincident incident andthehandlingprocedures,identifyareas an ExecutiveReviewPaneltoexaminethecauseof on theKwunTongLinethatcauseddelays.Wesetup On 5August2017,asignallingsystemproblemoccurred EBIT Margin(in%) EBITDA Margin(in%) EBIT EBITDA Total Revenue Other StationCommercialIncome Telecommunication Income Advertising Revenue Station RetailRentalRevenue Hong KongStationCommercialBusinesses In HK$million data cables. atypical situationsandenhancingtheregularmaintenanceof communications andinformationdisseminationduringsuch now beingimplemented.Theseincludeimprovingpassenger in October2017.Otherrecommendationsbythepanelare converted toafibreopticsystemwithhigherfaulttolerance incident infuture,thecopperdatalinksystemconcernedwas Kok Station.Toreducetheriskofasimilarsignallingfailure the upgrade of equipment in April 2017. the upgradeofequipment inApril2017. able toenjoyenhancedWi-Fiservices at84stationsfollowing capacity andenabledmore4Gservices. Customersarenow stations andfourtunnelsections duringtheyearincreaseddata of anewmobilephonenetwork intheconcoursesoften Tong LineextensionandtheSouthIslandLine.Installation enhancement projects,aswellthenewlyopenedKwun incremental revenuefromnewservicecontractsandcapacity to HK$635million.Theincreasewasmainlytheresultof Revenue fromtelecommunicationsin2017grewby13.2% Tsuen Wan,MaOnShanandWestRaillineswererevamped. addition over900advertisinglightboxesalongtheIsland, Hong KongStationand14suchscreensatAirportStation.In installation of16new65-inchhigh-definitionLCDscreensat needs. Duringtheyear,twodigitalzoneswerecreatedby creative solutionsandnewdigitalformatstomeetmarket To improveourcompetitiveness,wehavebeendeveloping stations andtrainsincreasedto46,735by31December2017. Year ended31December 79.0% 91.6% 4,722 5,474 5,975 1,071 4,143 2017 126 635 78.7% 90.4% 4,362 5,012 5,544 1,090 3,723 2016 170 561 Annual Report 2017 Inc./(Dec.) % 1.2% pts. 0.3% pt. (25.9) 13.2 11.3 (1.7) 8.3 9.2 7.8 23
Financials and Other Information Corporate Governance Business Review and Analysis Overview CEO’S REVIEW OF OPERATIONS AND OUTLOOK
Property Businesses Residential property prices remained strong in 2017, but there In the commercial sector, Grade-A office rents in Central was significant divergence in demand between the primary continued to perform well during 2017. Demand from and secondary property markets. Transaction volumes in Mainland enterprises and multinational companies remained the primary market were buoyed by new projects for which strong, although there were signs of tenants becoming the developers offered competitive financing schemes. more cost conscious. However, in the retail segment, rents The secondary market was more impacted by a range of remained under pressure, despite a rebound in tourist Government cooling measures which progressively took numbers and a recovery in retail sales. The rate at which retail effect. Despite a strong recovery in sales volume during the rents declined moderated towards the end of 2017, but the first six months, transactions were down year-on-year in the sector continued to be impacted by tourist spend and the second half. However, residential prices continued to rise, with popularity of e-commerce. the Mass Centa-City Leading Index increasing to 166.73 by the end of 2017, having started the year at 146.16.
Property Rental and Management Businesses Financial Performance The financial performance of our Hong Kong property rental and property management businesses is summarised as follows:
Year ended 31 December In HK$ million 2017 2016 Inc./(Dec.) % Hong Kong Property Rental and Property Management Businesses Revenue from Property Rental 4,608 4,451 3.5 Revenue from Property Management 292 290 0.7 Total Revenue 4,900 4,741 3.4 EBITDA 4,098 3,930 4.3 EBIT 4,082 3,912 4.3 EBITDA Margin (in %) 83.6% 82.9% 0.7% pt. EBIT Margin (in %) 83.3% 82.5% 0.8% pt.
Property rental revenue increased by 3.5% in 2017, mainly increase in lettable area with the opening, in July 2017, of the due to rental increases in accordance with existing lease converted retail space at Telford Plaza II (which added 3,400 agreements. Rental reversion in our shopping mall portfolio square metres of gross floor area (“GFA”)) and, in December in Hong Kong recorded a 1.7% fall during the year. As at 31 2017, of Maritime Square 2 (which added another 12,100 December 2017, our shopping malls in Hong Kong and the square metres GFA of new space). In the fourth quarter of Company’s 18 floors in Two International Finance Centre were 2017, the second phase of the “sports and wellbeing” zone 100% let. was progressively opened in Paradise Mall.
As at 31 December 2017, the Company’s attributable share Hong Kong property management revenue in 2017 increased of investment properties in Hong Kong was 218,251 square by 0.7% to HK$292 million. As at 31 December 2017, over metres of lettable floor area of retail properties, 39,410 square 96,000 residential units and over 772,000 square metres of metres of lettable floor area of offices and 17,764 square commercial space were managed by MTR. metres of property for other use. Our retail properties saw an
24 MTR Corporation in May 2017. in May2017. Investment LimitedandK.Wah InternationalHoldingsLimited by SinoLandCompanyLimited, ChinaOverseasLand& Kam SheungRoadStationPackage 1toaconsortiumformed As agentfortherelevantsubsidiaryofKCRC,weawarded by KerryPropertiesLimitedandSinoLandCompanyLimited. Hang StationPackage2wasawardedtoaconsortiumformed Limited inFebruary2017.InDecember2017,WongChuk Infrastructure LimitedandPingAnRealEstateCompany 1 wasawardedtoaconsortiumformedbyRoadKing In ourpropertytendering,WongChukHangStationPackage with about96%of912unitssoldbyyearend. continued atTheSpectra(theLongPingStation(North)site), followed inAugust2017withall953unitssold.Pre-salesalso of PARCCITY(theTsuenWanWestStation(TW5)Citysidesite) 1,436 unitssoldrespectivelybytheendofyear.Thelaunch (TW5) Baysidesite),withabout99%of970unitsand87% Ocean PrideandSupreme(theTsuenWanWestStation year end.MayandJuly2017sawthelaunchesrespectivelyof 1,050 unitsandabout44%of1,188respectivelysoldby March andNovember2017respectively,withabout92%of and CullinanWestIIatNamCheongStationwerelaunchedin with about98%of983unitssoldbyyearend.CullinanWest Wan WestStation(TW6)site)waslaunchedinJanuary2017 were launchedduringtheyear.THEPAVILIABAY(theTsuen agent fortherelevantsubsidiariesofKCRC,aseriespre-sales For WestRailpropertydevelopmentprojectswherewearethe 5 areplannedtobelaunchedinMarch2018. II hadbeensold.Pre-salesforMALIBUofLOHASParkPackage Wings atSeaandabout36%ofthe1,132units respectively. Byyearend,about97%ofthe1,040units II ofLOHASParkPackage4inSeptemberandOctober2017 Pre-sales werelaunchedforWingsatSeaand development projects. finalisation ofdevelopmentaccountsforcompletedproperty spaces, aswellfurtherprofitbookingsarisingfromthe well asTheSpectra),thesaleofinventoryunitsandcarparking Ocean Pride,Supreme,THEPAVILIABAY,PARCCITYas developments (includingCullinanWestandII, sources, suchasagencyfeeincomefromWestRailproperty amounted toHK$1,097million,andwasderivedfromsundry Profit fromHongKongpropertydevelopmentin2017 Property Development New LinesunderConstruction Rail Gen2.0 development. and MajorRoadsbeyond2030”mayaddevenfurtherrail long term,Government’s“StrategicStudiesonRailways increase theHongKongrailnetworkby35kmwhilstin public transportation,projectsunderRDS2014willpotentially technology. BeyondRailGen2.0,withrailasthebackboneof initiatives toenhancecustomerexperiencethroughtheuseof and replacementstotheexistingrailnetwork,aswell projects underconstruction,alsocoversmajorupgrades growth inHongKongwhich,additiontothetwonewrail Rail Gen2.0encapsulatesourneartermrailbusiness Growing ourHongKongRailBusiness BUSINESSES GROWTH HONG KONG completed inJuly2017. panels fortheiconicroofof Station EntranceBuildingwas line wereconnectedon5July2017. Installationoftheglass systems oftheHongKongandMainlandsections other statutoryinspections.Thesignallingandcommunication Services DepartmentcommencedinMay2017,followedby energised. StatutoryinspectionofthestationbyFire 97.8% complete,alltracksintunnelslaidandoverheadlines December 2017,withcivilworksatWestKowloonStation This keyprojectwas98.6%completeoverallasat31 Rail Link. by GovernmenttomanagetheconstructionofExpress high-speed railstationsintheworld.MTRhasbeenentrusted area) WestKowloonStation,oneofthelargestunderground by theapproximately400,000-squaremetre(usablefloor speed railnetworkintheMainlandofChina.Itwillbeserved connect HongKongtoShenzhen,Guangzhouandthehigh The 26-kmhigh-speedcross-boundaryExpressRailLinkwill Express RailLink the overallHongKongrailnetwork. Shatin toCentralLink,willaddanother43kmroutelength under construction,namelytheExpressRailLinkand years, underRailGen2.0,thetwocurrentrailwayprojects Our HongKongrailnetworkcovers230.9km.Overthecoming
Annual Report 2017 25
Financials and Other Information Corporate Governance Business Review and Analysis Overview CEO’S REVIEW OF OPERATIONS AND OUTLOOK
The structural work at West Kowloon Station is substantially Shatin to Central Link complete. Architectural Builder’s Works and Finishes and The ten-station 17-km Shatin to Central Link, which was Building Services works are underway. In particular, works entrusted to MTR by Government, will create vital new links in the Customs, Immigration & Quarantine (“CIQ”) areas across Hong Kong. It is a strategic railway that connects and under the purview of the Corporation are in line with the extends the existing network. The first phase of the Shatin to programme, but the timely completion of all the CIQ facilities Central Link is the 11-km Tai Wai to Hung Hom Section and remains on the critical path. the second phase is the 6-km Hung Hom to Admiralty Section. When the Tai Wai to Hung Hom Section is completed, it will In August 2017 all nine trains for the new line had arrived in extend the existing Ma On Shan Line from Tai Wai via six Hong Kong from the factory in Qingdao and cross-boundary stations to the West Rail Line to form the “East West Corridor”. dynamic testing was completed in December 2017. To give When the Hung Hom to Admiralty Section is completed, members of the public a preview of the trains, XRL Train Open it will extend the existing East Rail Line across the harbour Days were held at the Shek Kong Stabling Sidings in October to Exhibition Centre Station (formerly known as Exhibition 2017, providing visitors with an in-train experience through Station) and Admiralty Station through Hung Hom to form the guided tours. “North South Corridor”. The target opening date of the Express Rail Link remains the Upon completion, the Shatin to Central Link will connect third quarter of 2018 and trial operations are expected to several existing railway lines and enhance the connectivity of commence in the second quarter. We are in discussion with the entire Hong Kong railway network. Travelling time will be Government regarding the future operation and maintenance reduced significantly between New Territories North, Kowloon arrangements for this line. and Hong Kong. Alternative routes will also become available We welcomed the announcement made on 25 July 2017 by to travellers, which will provide customers with more route Government regarding the proposed co-location arrangement choices particularly in the busy cross-harbour section of the for the Express Rail Link. The co-location arrangement will Tsuen Wan Line and the Tai Wai to Kowloon Tong section of maximise the service convenience for passengers and help East Rail Line. realise the line’s full transport, social and economic benefits. Overall, this project was about 81.2% complete by 31 In accordance with the “Three-step Process” to implement December 2017, with the Tai Wai to Hung Hom Section and these arrangements, on 18 November 2017 the Government Hung Hom to Admiralty Section 93.9% and 63.6% complete of the HKSAR and the People’s Government of Guangdong respectively. Province signed the Co-operation Arrangement between the For the Tai Wai to Hung Hom Section, track laying works Mainland and the HKSAR on the Establishment of the Port have been completed, as have the structural works for the at the West Kowloon Station for Implementing Co-location last two new stations, namely To Kwa Wan Station (formerly Arrangement (“Co-operation Arrangement”) to kick-start the known as Ma Tau Wai Station) and Sung Wong Toi Station necessary work to implement the future clearance procedures (formerly known as To Kwa Wan Station). This signifies the for the Express Rail Link. The Co-operation Arrangement substantial completion of all civil and structural works on this was subsequently approved by the Standing Committee of section of the line. The final report of the archaeological works the National People’s Congress on 27 December 2017. We for the Sung Wong Toi Station works site was accepted by welcome these two steps in the process and look forward to the Antiquities and Monuments Office in June 2017. Steady completion of the third and final step, which is the enactment progress is now being made on the electrical and mechanical of the necessary legislation by the Legislative Council of the (“E&M”) works and interior fitting out works at stations. As the HKSAR (“LegCo”). new section will connect to the existing West Rail and Ma On Shan lines, the commissioning and testing works of this rail corridor will be highly complex, involving multi-disciplinary interfaces and integration with various new and old systems
26 MTR Corporation six-month delay due to a number of external factors, including six-month delayduetoanumber ofexternalfactors,including Hung HomtoAdmiraltySection, wehadpreviouslyreporteda section hasbeenadvancedbysix monthstomid-2019.Forthe has beenreducedandtheestimated completionofthis number ofdelayrecoverymeasures,thelength the teamsinvolvedandsuccessfulimplementationofa area ledtoan11-monthdelay.However,withhardworkby discovery ofarchaeologicalrelicsintheSungWongToiStation external events.FortheTaiWaitoHungHomSection, the ShatintoCentralLinkhasbeenimpactedbycertainkey number oftimespreviously,theprogrammefordelivery Despite reasonableconstructionprogress,andasreporteda Line, andwetargettheworkstobecompletedinmid-2019. traffic hoursisnowinfullswingonthewholeofEastRail new signallingsystemswithEastRailLinetrainsduringnon- East RailLinewillbere-signalled.Thedynamictestingofthe As partoftheHungHomtoAdmiraltySection,existing installation arewellunderway. part ofthestation,structuralworksandbuildingservice lines. TocaterfortheShatintoCentralLink,inextended the ShatintoCentralLink,Island,TsuenWanandSouthIsland Admiralty Stationwillbecomeamajorinterchangehubfor impact onroadusers. Drive tocreateadditionalworksareaswhilereducingthe stages alongConventionAvenue,FlemingRoadandExpo management schemesarebeingimplementedatdifferent space limitationsinWanChaiNorth,temporarytraffic and fullexcavationofthestationisprogressing.Dueto walls ofExhibitionCentreStationissubstantiallycomplete by theendof2017.Constructionworkfordiaphragm and unfavourablegroundconditions,was54.8%complete site handover,incompleteentrustedworksbyotherparties Exhibition CentreStation,whichhasbeenaffectedbylate seabed ofVictoriaHarbourasatFebruary2018. nine ofthe11immersedtubeunitshavebeeninstalledon rail tunnel connecting the Hung Hom and Causeway Bay areas, excavation workshavebeencompleted.Forthecross-harbour For theHungHomtoAdmiraltySection,alltunnel-boring night duringnon-traffichours. works, includingdynamictesting,arebeingcarriedoutat existing railwaylinesisnotaffected,someofthenecessary in theoperatingrailway.Toensurethatnormaloperationof to $87,328 million, representing an increase of 23% of the to $87,328million,representing anincreaseof23%the Central LinkbyHK$16,501million fromHK$70,827million estimate ofthemainconstruction worksoftheShatinto construction sites,theCompany hasincreasedthelatest for additionalscopeandlateorincompletehandoverof such asthearchaeologicalfinds,Governmentrequests Taking intoaccountanumberoffactors,includingissues submitted toGovernmentforreviewon5December2017. SCL EntrustmentAgreementandthelatestestimatewas estimated CTCforthemainconstructionworksunder The Companycompletedadetailedreviewofthe CTC wouldneedtoberevisedupwardssignificantly. infrastructure projectsinHongKong,theShatintoCentralLink difficulties similartothoseencounteredbymostmajor to thecontinuingchallengesposedbyexternalfactorsand million. TheCompanyhaspreviouslyannouncedthat,due to CentralLink(“SCLEntrustmentAgreement”)wasHK$70,827 Agreement forConstructionandCommissioningoftheShatin the mainconstructionworksunder2012Entrustment The sumentrustedtotheCompanybyGovernmentfor 2017. million wasapprovedbyLegCoFinanceCommitteeinJune from theoriginalfunding.TheadditionalfundingofHK$848 funding neededinexcessofamountsretainedbyGovernment Public WorksSubcommitteetheapplicationforadditional million. InJanuary2017,GovernmentsubmittedtotheLegCo Advance WorksEntrustmentAgreement”)wasHK$7,350 for AdvanceWorksRelatingtotheShatinCentralLink(“SCL the advanceworksunder2011EntrustmentAgreement The amountentrustedtotheCompanybyGovernmentfor third parties. progress andrecoverdelayscausedbyexternalevents diligently toexploreandimplementmeasuresimprove to AdmiraltySection,ourprojectteamscontinuework For boththeTaiWaitoHungHomSectionand completion in2021. the HungHomtoAdmiraltySectionisstilltargetedfor months (toatotalexpecteddelayofninemonths).However, of thissectionhasbeenfurtherdelayedbyanadditionalthree contractor atanothersiteWanChaiNorth,thecompletion entrusted workshandedoverbyanotherthirdparty the newExhibitionCentreStation.Asaresultofincomplete the latehandoverbyathirdpartyofconstructionsitesfor Annual Report 2017 27
Financials and Other Information Corporate Governance Business Review and Analysis Overview CEO’S REVIEW OF OPERATIONS AND OUTLOOK
cost of the main works. In our assessment, around 70% of the Contracts for the replacement of 160 chillers at 38 stations increase (net of contingencies) is attributable to additional and four depots were awarded. Installation works for the costs arising from external factors, such as the handling of replacement of the first 29 chillers in seven stations and archaeological finds at the work sites of Sung Wong Toi two depots commenced in December 2017, with targeted Station, the late or incomplete handover of construction completion in April 2018. This will be followed by the sites in Wan Chai North, as well as unbudgeted additional replacement of chillers in our other stations and depots. scope (including foundation works for a future top-side Under the Shatin to Central Link project, the existing 28 7-car development at Exhibition Centre Station). trains on the West Rail Line are being converted to 8-car trains Major Asset Upgrades and Replacements to enhance existing train services and to serve the future East on the Existing Network West Corridor of the new line. By 31 December 2017, 24 of Major asset upgrades and replacements in the Hong Kong the converted 8-car trains had entered service on the West rail network include the purchase of new trains and light rail Rail Line and all are targeted to be in service by mid-2018. vehicles, and the replacement of signalling systems and chiller On the Ma On Shan Line, all of the 4-car trains had been systems and so on. In 2017, more than HK$8.6 billion was replaced by 8-car trains by December 2017. Our project to spent on maintaining, upgrading and renewing our Hong retrofit Automatic Platform Gates on the Ma On Shan Line was Kong railway assets. also completed in December 2017, one year earlier than the
A total of HK$6 billion is being spent on 93 new, more original target. comfortable 8-car trains to replace those on the Kwun Tong, Enhancing the Customer Experience Tsuen Wan, Island and Tseung Kwan O lines. The first 8-car through Technology train was delivered to Hong Kong in January 2018, with the Under Rail Gen 2.0, in addition to new lines and major asset final batch of trains due to be delivered in 2023. The trains will upgrades, we aim to enhance our passengers’ journey undergo stringent testing and commissioning procedures in experience through the application of new technology. Hong Kong before they are put into service. We have launched a series of digital initiatives, including improvements to the MTR Mobile app, which leverage on With demand for our light rail services increasing, we are innovative technology to provide more personalised services replacing 30 light rail vehicles and purchasing ten additional to customers while facilitating smoother railway operations. vehicles, all at a cost of HK$745 million. The first batch of light rail vehicles will be delivered to Hong Kong in 2018 and the These improvements saw MTR named “Asia Pacific vehicles will enter passenger service progressively between Digital Transformer of the Year 2017” in the “IDC Digital 2019 and 2023. Transformation Awards”, an award recognising institutions that have significantly transformed markets using digital and The existing signalling systems on the Island, Kwun Tong, disruptive technologies in the Asia Pacific region. Tsuen Wan, Tseung Kwan O, Tung Chung and Disneyland Resort lines, as well as the Airport Express, are undergoing The MTR Mobile app has over 1 million monthly active users replacement at a total cost of HK$3.3 billion. The Tsuen Wan and in September 2017, two new functions, “In-station Line is being re-signalled first, and installation of new signalling Finder” and “Fast Exit” were launched. In-station Finder, for equipment along the trackside and in indoor areas has been which Admiralty Station served as a pilot station, allows users substantially completed. Train testing during non-traffic hours to find their way to interchange platforms and station facilities is underway. The Tsuen Wan Line re-signalling is targeted for more easily. Fast Exit, which applies to all railway stations, completion towards the end of 2018 or early 2019. It will be recommends to passengers the specific train car and door followed by other lines progressively. The overall completion is that will be nearest to their desired exit at their destination expected in 2026. station. The enhanced Traffic News function now provides more timely operational and alternative transportation
28 MTR Corporation backbone of public transport, Government is planning to backbone ofpublictransport,Government isplanningto meet thelongertermdemandfor transportwithrailasthe 2030” toexamineHongKong’sfuturedevelopment.To 2030+: TowardsaPlanningVisionandStrategyTranscending Government isconductingtheplanningstudy,“HongKong Station andtheSouthIslandLine(West). respect oftheremainingtwoprojects,namelyHungShuiKiu second halfof2018.WeawaitGovernment’sinvitationin while thatfortheNorthIslandLinewillbesubmittedin Tung ChungWestExtension(andEastStation), Line. Wehavealsosubmittedtheprojectproposalfor Northern Link(andKwuTungStation)andtheEastKowloon project proposalsfortheTuenMunSouthExtension, We arenowindiscussionwithGovernmentonthesubmitted Tung ChungEastStation)andtheNorthIslandLine. the EastKowloonLine,TungChungWestExtension(and South Extension,theNorthernLink(andKwuTungStation), proposals forfiveoftheseprojects,namelytheTuenMun implemented underRDS2014andhasinvitedustosubmit Government hasidentifiedsevenadditionalrailprojectstobe Beyond thetwonewRailGen2.0projectsunderconstruction, New RailProjectsbeyondGen2.0 by thefirsthalfof2018. to TsimShaTsui,EastTsuiandCausewayBaystations Ma Chaustations.Thetrialschemewillbegraduallyextended and WeChatPayatcertainticketmachinesLoWuLok December 2017werolledoutatrialschemetoacceptAlipay With electronicpaymentsbecomingincreasinglypopular,in offering amorepersonalisedexperience. customers withinformationabouttheirdestination,aswell function waslaunchedfortheMTRMobileappthatprovides based ontheirtravelpatterns.InJanuary2018,a“Chatbot” helps passengerschoosethetickettypewithlowestfare and intheMTRMobileappJune2017.Thisnewfunction Suggestion” functionwasalsolaunchedontheMTRwebsite the MTRMobileappandonwebsite.Anew“Ticket introduced torepresentthereal-timestatusofeachraillinein even better,Green,YellowandRedindicatorshavebeen service delays.Tohelppassengersplantheirjourneysahead information topassengersintheeventofextendedtrain would be commercially viable. would becommerciallyviable. this preliminarystagethereisno assurancethateitherproject gazetted roadworksschemewasapprovedinAugust2017.At Ventilation Building,wascompletedinApril2017andthe 2018. Therezoningprocessforasecondsite,theYauTong Planning BoardforDistrictCouncilconsultationon5January Siu HoWanOutlineZoningPlanbeingagreedbytheTown statutory planningprocedurescommencedwiththedraft were approvedbyGovernmentinNovember2017.The approvals. TheEnvironmentalImpactAssessmentreports be built,subjecttothenecessaryzoningandotherstatutory Wan onLantauIslandaround14,000residentialunitscould property alongourrailwaylines.AbovedepotinSiuHo We continuetolookforotheropportunitiesdevelop next sixyears. over 1.15millionsquaremetres,willbecompletedthe construction. Over18,000residentialunits,withatotalGFAof tendered outandarenowinvariousstagesofplanning or so,12MTRpropertydevelopmentpackageshavebeen In ourresidentialdevelopment,duringthepastfouryears for completionbytheendof2020and2022respectively. both developmentsareinprogress,withtheprojectstargeted shopping centre.Foundationandsuperstructureworksat namely thenewLOHASParkshoppingcentreandTaiWai floors ofTelfordPlazaII,twoprojectsremainunderway, completion ofMaritimeSquare2andseventheighth increasing attributableGFAbyapproximately34%.Following a further105,120squaremetresGFAtotheretailportfolio, portfolio inHongKongwillexpandthroughtheadditionof Over thenextfouryearsorsoourinvestmentproperties property developments. additional opportunitiesforresidentialandcommercial The expansionofourHongKongrailnetworkyields Expanding thePropertyPortfolio Lantau Metropolis and New Territories North. Lantau MetropolisandNewTerritoriesNorth. demand arisingfromthetwostrategicgrowthareas,East required tosatisfytransportneedsbeyond2030,includingthe the strategictransportinfrastructurenetwork(includingrail) Major Roadsbeyond2030”in2018.Thisstudywillexamine take forwardtherelated“StrategicStudiesonRailwaysand Annual Report 2017 29
Financials and Other Information Corporate Governance Business Review and Analysis Overview CEO’S REVIEW OF OPERATIONS AND OUTLOOK
MAINLAND OF CHINA AND INTERNATIONAL BUSINESSES Outside of Hong Kong, we have leveraged our expertise to build a portfolio of railway related businesses in the Mainland of China, Europe and Australia. Our railway businesses outside of Hong Kong carried an average of around 6.49 million passengers per weekday in 2017.
Financial Performance
Year ended 31 December
In HK$ million 2017 2016 Inc./(Dec.) % Mainland of China Businesses Railway, Property Rental and Property Management Subsidiaries Revenue 811 814 (0.4) EBITDA 144 167 (13.8) EBIT 137 159 (13.8) Property Development Subsidiaries Revenue 6,996 1,348 419.0 EBITDA 2,314 366 532.2 EBIT 2,314 366 532.2 Share of Profit of Associates and Joint Venture 290 226 28.3 International Businesses Railway Subsidiaries Revenue 16,179 12,664 27.8 EBITDA 758 421 80.0 EBIT 629 309 103.6 Share of Profit of Associates 31 60 (48.3)
Mainland of China and International Businesses Total EBITDA 3,216 954 237.1 Total EBIT 3,080 834 269.3 Total EBITDA Margin (in %) 13.4% 6.4% 7.0% pts. Total EBIT Margin (in %) 12.8% 5.6% 7.2% pts.
EBIT from Mainland of China and International Railway, Property Rental and Management Subsidiaries (net of non-controlling interest) plus Share of Profit from Railway Associates and Joint Venture (before interest and tax) 1,467 888 65.2
Profit for the year attributable to shareholders of the Company: – Arising from the Mainland of China and International Railway, Property Rental and Management Businesses 879 516 70.3 – Arising from the Mainland of China Property Development Businesses 1,019 263 287.5 Total 1,898 779 143.6
Number of passengers carried by our Railway Subsidiaries and Associates outside of Hong Kong (in million) 1,940 1,828 6.1
30 MTR Corporation weekday patronage of about 77,000. Full line operation, which weekday patronageofabout77,000. Fulllineoperation,which 2017 thelinerecorded25million passengertripsandaverage Section, commencedoperation on31December2016.In BJL16 is a PPP project and the first phase, the 19.6-km Northern Pingleyuan StationonthislineopenedinDecember2017. weekday patronageofabout687,000in2017.Thenew recorded acombined220millionpassengertripsandaverage The firstthreephasesofBJL14,whicharenowoperational, respectively 2.1%and3.1%higherthan2016. average weekdaypatronagewasmorethan1.33million, the DaxingLinewasabout451millionpassengertripsand four lines.Fortheyear,combinedridershipofBJL4and On-time performancein2017averaged99.9%acrossthe the NorthernSectionofBeijingMetroLine16(“BJL16”). (“BJL4”), theDaxingLine,BeijingMetroLine14(“BJL14”)and (“BJMTR”) operatesfourlines,namelyBeijingMetroLine4 In Beijing,our49%associateBeijingMTRCorporationLimited Beijing Railway BusinessesintheMainlandofChina representing 10.2%ofourtotalrecurrentprofits. net aftertaxprofitsofHK$879milliononanattributablebasis, associates andjointventureoutsideofHongKongcontributed our railway,propertyrentalandmanagementsubsidiaries, 2017. ExcludingtheMainlandofChinapropertydevelopment, operating theSouthWesternRailwayfranchisesinceAugust in November2016,partlyoffsetbythecontributionfrom for LondonOvergroundRailOperationsLtd.(“LOROL”) of associateswasmainlyduetotheendconcession took overinDecember2016.Thedecreaseshareofprofit our newfranchise,MTRPendeltågenABinSweden,whichwe (“SMNW”) PPPproject,aswellafull-yearcontributionfrom the designanddeliveryworksofSydneyMetroNorthwest subsidiaries wasmainlyduetoinitialprofitrecognitionfrom of 80.0%toHK$758millioninEBITDAfromourrailway during theyear.InourInternationalbusinesses,increase Shenzhen, thesalesproceedsandrelatedcostswerebooked With thehandoverofhigh-riseandpodiumunitsinTiara operating expensesatShenzhenMetroLine4(“SZL4”). by 13.8%toHK$144millionin2017,mainlyduehigher rental andpropertymanagementsubsidiariesdecreased In theMainlandofChina,EBITDAfromourrailway,property arrangements for this extension. arrangements forthisextension. Shenzhen MunicipalGovernmentregardingtheoperational by theendof2020.MTR(SZ)isindiscussionwith to makeprogresstowardsaprojecttargetcompletion Shenzhen MunicipalGovernment.Thecivilworkscontinue Northern ExtensionofSZL4,whichwillbefinancedbythe management agreementtosupervisetheconstructionof Our consultancysubsidiaryinShenzhenenteredintoaproject financial viabilityofSZL4isexpectedtobeimpacted. fare adjustmentsarenotimplementedsoon,thelong-term Government regardingfareadjustments.Ifappropriate that discussionscontinuewithintheShenzhenMunicipal from ashadowfaresubsidymechanism.Weunderstand businesses inBeijingandHangzhou,MTR(SZ)doesnotbenefit since westartedoperatingthelinein2010.Unlikeourrail to increaseonSZL4,therehasbeennoinfares As notedpreviously,althoughpatronagehascontinued performance was99.9%. average weekdaypatronagereaching580,000.On-time 2017, withpatronagegrowingby5.4%to210millionand (“MTR(SZ)”), achievedgoodoperationalperformanceduring SZL4, operatedbyMTRCorporation(Shenzhen)Limited Shenzhen enter servicearoundtheendof 2019. in YuhangDistrict,withatotalof 38stations.Itisexpectedto Xiangzhanglu StationinXiaoshan DistricttoLutingluStation The 51.5kmHZL5isanundergroundmetrolinerunningfrom Government andHangzhouMetroGroupon26June2017. was signedbytheCompanywithHangzhouMunicipal The ConcessionAgreementforHZL5,anotherPPPproject, mainly duetoaone-offprovision. at 99.9%.TheshareoflossincreasedtoHK$68millionin2017 performance wasexcellent,withon-timetrain with averageweekdaypatronageof616,000.Operational line isgrowingandincreasedby13%in2017to225million, Limited, operatesHangzhouMetroLine1.Patronageonthis Our 49%associateinHangzhou,HangzhouMTRCorporation Hangzhou December 2017. after 2018.Theline’snewNongdananluStationopenedin will markthestartofoperatingconcession,istargeted Annual Report 2017 31
Financials and Other Information Corporate Governance Business Review and Analysis Overview CEO’S REVIEW OF OPERATIONS AND OUTLOOK
The construction of the HZL5 project is divided into Part A and Beijing, Ginza Mall, is undergoing a partial revamp and was Part B. Part A relates to the line’s civil construction and Part B 99% occupied as at 31 December 2017 excluding the area covers the E&M systems and rolling stock. Hangzhou Metro under revamp. Group is responsible for the investment in, and construction of, Part A. We and Hangzhou Metro Group formed a joint-venture European Railway Businesses company in September 2017 to undertake the investment United Kingdom in, and construction of, Part B, as well as the operations and MTR Corporation (Crossrail) Limited, a wholly owned maintenance for 25 years after commencement of passenger subsidiary of the Company, operates services under the “TfL service. We have a 60% interest in this joint venture company. Rail” brand on a 32.5-km, 14-station route between Liverpool The total Part B investment is estimated at RMB 10.9 billion Street Station and Shenfield as the first phase in the Crossrail which will be financed by the joint venture company through operating concession. The next phase, providing services bank borrowings and equity investments from shareholders. between Paddington Station and Heathrow Airport, is planned We anticipate an equity investment from MTR of RMB 2.616 to start in May 2018. TfL Rail will be renamed the Elizabeth Line billion into this joint venture. Tendering and construction when the tunnel section through central London is completed works of the line are now in full swing. and becomes operational, targeted for December 2018. It will eventually extend to 118 km from east to west across London Property Businesses in the Mainland of China and serve 40 stations. Since June 2017, new trains have been Tiara at Shenzhen Metro Longhua Line Depot Site Lot 1 saw progressively introduced into operation. the previously sold high-rise residential units, which form the vast majority of the development, handed over to buyers Through our associate, First MTR South Western Trains Ltd, in June 2017. The project has a total developable GFA of we have partnered with FirstGroup plc on the South Western approximately 206,167 square metres, including a retail centre Railway franchise, as a 30% shareholder. The tender was of about 10,000 square metres (GFA), which is scheduled awarded in March 2017 by the Department for Transport to open in late 2018, subject to approval by the Shenzhen (“DfT”) and the franchise was taken over in August 2017. South Municipal Government. Profits were booked in 2017 in respect Western Railway is one of the UK’s largest rail networks, with a of all the units handed over to buyers. route length of 998 km serving 203 stations, covering London and south western England. Since taking over the franchise, In March 2017, a framework agreement was signed with a services have been affected by industrial action, which has subsidiary of Beijing Capital Land Limited for the disposal been taken across a number of UK franchises at the same time. of our 49% interest in Tianjin TJ-Metro MTR Construction We have made every effort to maintain our railway services Company Limited, as well as the conditional future acquisition and minimise the associated disruption to passengers. of a shopping centre to be developed on the Beiyunhe Station site. Relevant government approval was obtained for the Nordic Region disposal of our 49% interest in July 2017 and the Sale and MTR is the largest rail operator in Sweden in terms of Purchase Agreement for the shopping centre was signed on passenger volume. We operate three key rail businesses in 26 January 2018. the country, namely Stockholm Metro, MTR Express and the Stockholm commuter rail (“Stockholms pendeltåg”). Our property development businesses in the Mainland of China achieved significant growth in revenue and profit due The operational performance of Stockholm Metro in 2017 was to development bookings related to Tiara. The Company also good, with new highs recorded for operational performance manages self-developed and other third party properties in and customer satisfaction. Annual ridership was estimated at the Mainland of China which, as at 31 December 2017, had 353 million and average weekday patronage at 1.25 million. a total GFA of 390,000 square metres. Our shopping mall in
32 MTR Corporation enhancements to railway operations, asset maintenance enhancements torailwayoperations, assetmaintenance agreement, MTMiscommitted to deliveringfurther extension option.Underthenew operationsandmaintenance new concessionforsevenyearstoMTM,withathree 2017 theGovernmentofVictoriaannouncedawarda concession endedinNovember2017,andSeptember the franchisewastakenoverin2009.Theoriginaleight-year 2017, withpunctualityrecordedat92%,against87%when metro network.Operationalperformancewassatisfactoryin Melbourne Pty.Ltd.(“MTM”)operatesthe390-km In Melbourne,our60%ownedsubsidiaryMetroTrains Australian RailwayBusinesses hard toensurethedeliveryofourcommittedservicelevel. withholding ofservicepaymentsbyourclient.Weareworking timetable inDecember2017provedchallenging,resultinga of theconcession,althoughintroductionanew perspective, improvementshavebeenseensincethetakeover been satisfactory.Fromanoperationalandcustomerservice and atotalroutelengthof247km.Financialperformancehas pendeltåg servesthegreaterStockholmarea,has53stations associate togetherwithEuroMaintRailAB.Stockholms of rollingstockundertakenbyEmtrainAB,a50%owned for fourmoreyears.Theconcessionincludesthemaintenance runs fortenyearstoDecember2026,withanoptionextend the Stockholmspendeltågserviceunderaconcessionthat Our wholly-ownedsubsidiaryMTRPendeltågenABoperates loyalty programme. delivery ofqualityservices,enhancedmarketing,andourown this lossthroughincreasingpatronagebywayofcontinued to reportalossin2017,andwearemakingeveryeffortstem our originalexpectations.Asaresult,thesubsidiarycontinued 2016. Passengernumbershavecontinuedtorise,albeitbelow departures haveincreasedto104perweeksinceDecember rail operatorintheSwedishQualityIndex2017.Weekly and customerserviceperformance,makingittheleading Stockholm andGothenburg,deliveredexcellentoperational which operatestheMTRExpressintercityservicebetween MTR Express(Sweden)AB,ourwholly-ownedsubsidiary part ofthemetrofleet. awarded thecontractforamid-lifeupgradeprogramme for StockholmMetro,alsoperformedsatisfactorilyandwas MTR TechAB,whichcarriesoutrollingstockmaintenance integrated propertydevelopment abovethedepot. Daxing Line,NanzhaoluDepotcapacity expansion,and BJMTR forstudiesonthesouthward extensionoftheBeijing District People’sGovernmentofBeijingMunicipality,BIICand In November2017,theCompanysignedaLoIwithDaxing operation ofotherrailwayprojects. in Beijingadditiontoinvestmentin,constructionand predominantly rail-relatedpropertydevelopmentprojects with BIICtoextendthestrategicco-operationother, Depot). InJanuary2017wesignedaLetterofIntent(“LoI”) along BJL4andtheDaxingLine(includingNanzhaolu development aboveselectedexistingstationanddepotsites to conductjointpreliminarystudiesonintegratedproperty one ofthepartnersinBJMTR)andBJMTRNovember2016 Beijing InfrastructureInvestmentCorporationLimited(“BIIC”, MTR signedaCooperationFrameworkAgreementwith Mainland ofChinaandMacau potential toexpandintonewmarkets. rail-related propertydevelopmentsandPPP’s,aswellthe of businessesbutalsobyseekingnewopportunitiessuchas expanding inexistingmarketsnotonlythroughtypes Growth outsideourhomemarketofHongKongcomesfrom Growth OutsideofHongKong each direction. each direction. capacity toprovidemetrotrainserviceeverytwominutesin extending intothecentralbusinessdistrict,withanultimate testing. FuturestagesofSydneyMetrowillseemetroservice to SydneyinSeptember2017andhasbeenundergoing for theproject,areprogressing.Thefirsttrainwasdelivered the depotandstations,aswellpre-operationalplanning stations upgradedtometrostandards.Constructionworksfor SMNW lineincludeseightnewmetrostationsandfiveexisting project, whichisthefirststageofSydneyMetro.The36-km as thefutureoperationsandmaintenanceofSMNWPPP responsible forthedesign,constructionandfinancing,aswell In Sydney,MTRisamemberofconsortiumwhich and stations,aswellcreatingmorecareeropportunities. cameras, providingmorepassengerinformation,cleanertrains infrastructure androllingstockreliability,upgradingCCTV more peakservices,increasingmaintenancetoimprove and customerserviceinMelbourne.Theseincludeadding Annual Report 2017 33
Financials and Other Information Corporate Governance Business Review and Analysis Overview CEO’S REVIEW OF OPERATIONS AND OUTLOOK
BJMTR is also seeking other railway opportunities in Beijing to property development opportunities over and around rail expand its network further. stations in Stockholm.
In August 2017, we signed a LoI with Chengdu Rail Transit In Australia, we are pursuing the Sydney Metro City and Group covering strategic cooperation on metro, metro related Southwest (“SMCSW”) project, a 30-km extension of SMNW. property development and metro operations management Early works by Transport for New South Wales (“TfNSW”) training. We are now investigating the metro PPP and transit- have commenced and the line is targeted to open in 2024. oriented development opportunities in the city. The SMCSW Consortium, formed by MTR and certain other participants in SMNW, submitted a non-binding initial In Hangzhou, we are in discussion on another metro PPP proposal to TfNSW in March 2017 to participate in the SMCSW project and are also exploring metro related property project. Subsequently, a commitment deed was entered into development opportunities. with TfNSW in December 2017 which will allow the SMCSW We are also in active discussions with local governments and Consortium to submit an updated proposal in late 2018 to other bodies in Guangdong-Hong Kong-Macau Bay Area to deliver and integrate trains and systems, as well as to operate explore rail and property development opportunities around the SMCSW line. stations and depots that would leverage our experience and As a potential step into North America, we were pre-qualified track record in Shenzhen and Hong Kong. as operator for the Toronto Regional Express Rail project In Macau, we were awarded a service contract to provide in Canada in December 2017. The project will transform project management and technical assistance to the 11-station the existing GO Transit diesel-rail commuter system into 9.3-km Macau Light Rapid Transit Taipa Line for Gabinete para an electrified railway network in the Greater Toronto and as Infra-estruturas de Transportes of the Government of the Hamilton area. The bid process for the project (including the Macao Special Administrative Region in 2016. operator) is expected to commence later in 2018. International In the UK, we submitted our bid for the Wales and Borders rail FINANCIAL REVIEW franchise in December 2017 and the decision is expected in Profit and Loss the second quarter of 2018. In partnership with Guangshen In 2017, the Group recorded a substantial 22.7% increase Railway Company Limited, an associated company of China in revenue to HK$55,440 million, reflecting mainly the Railway Corporation, we have been shortlisted to bid for the contributions from Tiara, the full 12-month operation of the West Coast Partnership franchise in the UK. The franchisee will Stockholms pendeltåg service by MTR Pendeltågen AB since operate railway services on the West Coast Main Line from the franchise commencement in December 2016 and the April 2019, and will act as the “shadow operator” to advise increase in design and construction activities of the SMNW High Speed Two (“HS2”) Limited and DfT on the preparation PPP project. and operation of the initial HS2 services between London and Operating profit from recurrent businesses (being operating Birmingham, scheduled to commence in 2026. The tender is profit before Hong Kong and Mainland of China property expected to be released in the first quarter of 2018. In addition, development profits, depreciation, amortisation and variable we are exploring property development opportunities over annual payment) increased by 4.3% to HK$17,677 million. and around rail stations in the UK. The increase was mainly due to higher EBITDAs of the Hong In the Nordic region, a number of Norwegian rail services will Kong station commercial and property rental businesses be privatised and we submitted our first tender in March 2018 resulting from the rental income growth of our Duty Free for the Traffic Package South (Trafikkpakke Sør) Operating Shops, station shops and shopping malls, as well as higher Concession in southern Norway. We are also examining EBITDA of the Mainland of China and international businesses
34 MTR Corporation tax thereforeincreasedby22.1% toHK$14,300million. variable annualpayment,operating profitbeforeinterestand property developmentprofits,depreciation, amortisationand After takingintoaccountHongKongandMainlandofChina charged atthetopprogressiverateof35%. by 8.2%toHK$1,933millionwithincrementalrevenue quarter of2016.VariableannualpaymenttoKCRCincreased Tong LineextensionandtheSouthIslandinlast to HK$4,855million,mainlyduetheopeningofKwun Depreciation andamortisationchargesincreasedby17.6% majority ofthedevelopment. high-rise unitshandedoveratTiarawhichcomprisedthevast It wasderivedpredominantlyfromprofitrecognitionofthe Government fortheTiaradevelopment,wasHK$2,314million. development, afterprofitsharingwith the Shenzhen Municipal Operating profitfromourMainlandofChinaproperty development projects. the finalisationofdevelopmentcostsforcompletedproperty car parkingspaces,andfurthersurplusproceedsarisingfrom BAY, PARCCityandTheSpectra),salesofinventoryunits Cullinan WestII,OceanPride,Supreme,THEPAVILIA property developments(mainlyincludingCullinanWestand million, derivedfromtheagencyfeeincomeWestRail Hong KongpropertydevelopmentprofitwasHK$1,097 percentage pointto53.3%. operating marginfromrecurrentbusinessesdecreasedby0.6 Company’s MainlandofChinaandinternationalsubsidiaries, combined withtherolloveroffareadjustments.Excluding and higherstaffcostsinHongKongTransportOperations maintenance (O&M)operationscarryloweroperatingmargin, China andinternationalbusinesseswhereoperations mainly duetohighercontributionsfromourMainlandof businesses decreasedby2.2percentagepointsto36.5%, carry outropereplacement.Operatingmarginfromrecurrent Ngong PingCableCarfrom9January2017to4June from NgongPing360duetotheservicesuspensionof to 2018/2019accordingtheFAM,aswelllowerEBITDA costs whilstfareadjustmentin2017/2018wasrolledover Hong KongTransportOperationsmainlyduetohigherstaff The increasewaspartlyoffsetbyadecreaseinEBITDAof design andconstructionactivitiesoftheSMNWPPPproject. resulting fromtherecognitionofoperatingprofit increase in total assets was partly offset by the decrease in increase intotalassetswaspartly offsetbythedecreasein resulting fromthepurchaseoftax reservecertificates.The as welltheincreaseindebtorsandotherreceivablesmainly upgrade worksforourexistingHongKongrailwaynetwork, from revaluationgainoninvestmentproperties,renewaland million, mainlyduetotheincreaseinfixedassetsarising Total assetsincreasedbyHK$6,428milliontoHK$263,768 at 31December2017. million asat31December2016toHK$166,426 assets increasedbyHK$16,870millionfromHK$149,556 Our financialpositionremainedstrong.TheGroup’snet Statement ofFinancialPosition 2017, comparedto5.9%in2016. shareholders arisingfromunderlyingbusinesseswas6.7%in to HK$1,935million.Returnonaverageequityattributable property developmentprofitincreasedfromHK$530million decreased by3.8%toHK$8,580million,whilepost-tax per shareofHK$1.77.Withinthistotal,ourrecurrentprofit by 11.3%toHK$10,515million,withunderlyingearnings the underlyingprofitattributabletoshareholdersincreased revaluation whichisanon-cashaccountingadjustment, from HK$1.74toHK$2.83.Excludinginvestmentproperty million in2017.Earningspersharethereforeincreased62.6% interests ofHK$56million,increasedby64.1%toHK$16,829 tax ofHK$3,318millionandprofitssharedbynon-controlling Net profitattributabletoshareholders,afterdeductingincome concession endedinNovember2016. partly offsetbylowercontributionsfromLOROLasthe of profitsfromBJMTRresultingrevenueimprovement, with 2016.Theincreasewasprimarilyduetohighershare venture wasHK$321million,anincreaseof12.2%ascompared million. Ourshareofprofitfromotherassociatesandjoint Octopus HoldingsLimiteddecreasedby30.5%toHK$173 compression particularlyinoffices.Ourshareofprofitfrom gain amountedtoHK$6,314millionreflectingmainlyyield are nolongercapitalised.Investmentpropertyrevaluation Island Linewhich,whenthelinesopenedatendof2016, costs relatingtotheKwunTongLineextensionandSouth representing anincreaseof47.9%over2016duetointerest Interest andfinancechargeswereHK$905million, Annual Report 2017 35
Financials and Other Information Corporate Governance Business Review and Analysis Overview CEO’S REVIEW OF OPERATIONS AND OUTLOOK
property development in progress upon profit recognition of million. Taking into account the cash investment into the HZL5 Tiara, as well as the decrease in cash balances after dividend joint venture of HK$310 million and other payments, total cash payments. Total liabilities decreased by HK$10,442 million to outflow amounted to HK$27,500 million in 2017. HK$97,342 million. This was mainly due to the payment of the Therefore, net cash outflow before financing amounted second tranche of special dividend previously accrued, partly to HK$4,036 million. Including the cash inflow from net offset by the increase in total borrowings. The Group’s net borrowings of HK$1,494 million and the effect of exchange debt-to-equity ratio increased from 20.2% at 31 December rate changes on cash position in foreign currencies, the 2016 to 20.6% at 31 December 2017. If the land premium in Group’s cash balance decreased by HK$1,936 million to respect of Wong Chuk Hang Station Package 2 (which was HK$18,354 million at 31 December 2017. paid in January 2018) was excluded from the cash balance, the Group’s net debt-to-equity ratio at 31 December 2017 would HUMAN RESOURCES have been 23.7%. The Company, together with our subsidiaries, employed Cash Flow 17,524 people in Hong Kong and 10,781 people outside of Net cash generated from operating activities increased Hong Kong as at 31 December 2017. Our associates employed by HK$2,468 million to HK$19,603 million in 2017, mainly an additional 15,317 people in and outside of Hong Kong. We reflecting higher operating EBITDA and a decrease in tax have a stable workforce, with a low staff turnover rate in Hong payments. Receipts from property developments were Kong at 4.5% in 2017. HK$3,344 million, a decrease of HK$2,059 million compared to We firmly believe that people are MTR’s most valuable asset 2016, mainly due to substantial cash receipts in 2016 from the and we make great efforts to support the personal growth Tiara development, partly offset by higher cash receipts from and career development of our employees, so as to meet the Hong Kong property developments in 2017. Including other changing manpower needs of our business. Robust human cash receipts of HK$517 million primarily from the proceeds of resources strategies are in place in Hong Kong, and in our share issuance under our share option scheme and dividend Mainland of China and international business hubs to support received from Octopus Holdings Limited, net cash receipts our current operational needs and future business growth. We amounted to HK$23,464 million in 2017. nurture our talents by assessing their potential and meeting Total capital expenditure was HK$8,523 million. This their specific development needs through various means comprised HK$5,226 million for the purchase of assets for including coaching, job rotation and overseas assignments. our Hong Kong existing railways and related operations, We also provide comprehensive training and development HK$1,342 million for the settlement of payables relating to programmes to our colleagues. During 2017, our colleagues the Hong Kong railway extension projects, HK$1,127 million in Hong Kong attended an average of 7.1 training days. To for investment in Hong Kong property related businesses engage our people as well as to listen to their views, more and HK$828 million for investment in Mainland of China and than 7,800 two-way staff communication sessions were held in overseas subsidiaries. Total capital expenditure was lower than 2017 to collect opinions and suggestions. 2016 by HK$3,416 million due to higher capital expenditure in Our commitment to inspiring, engaging and developing our 2016 for our Hong Kong railway extension projects. people was recognised by several awards during the year. MTR The Group also paid HK$2,537 million in fixed and variable was named as the most attractive employer in Hong Kong at annual payments to KCRC in accordance with the Service the “Randstad Employer Brand Awards 2017”, marking the fifth Concession Agreement with KCRC, as well as ordinary year in a row we have been included among the top five and dividends and the second tranche of special dividend under the second time we have achieved first place. The Company the XRL Agreement to our shareholders totalling HK$15,358 was also honoured with five awards in “Human Resources Asia Recruitment Awards 2017” organised by Human Resources Magazine for our achievements in talent acquisition and management. In recognition of our efforts in talent
36 MTR Corporation be subject to market conditions although given the normal be subjecttomarketconditions althoughgiventhenormal in ourstationcommercialandproperty rentalbusinesseswill Express RailLinkinthethirdquarterof2018.Rentalreversions with Government,welookforwardtotheopeningof Furthermore, subjecttofinalisationoftheoperatingagreement in mid-2018willincludethe1.49%carriedoverfrom2017. adjustment ratefor2017/2018into2018/2019,the growth inpassengervolume.Withtheroll-overofFAM benefit ourHongKongtransportbusinesswithcontinuous Economic growthandthereboundintouristarrivalswill geopolitical uncertainties. areas ofconcernremain,includingrisingUSinterestratesand exports, trendswhichmaycontinueinto2018.Nonetheless, also improved,withrecoveryintouristarrivals,retailsalesand expected tocontinuein2018.HongKong’seconomyhas Global economicgrowthpickedupin2017,withthetrend OUTLOOK planning anddetailedcollaborationarrangements. the railtransportfield.Discussionsareunderwayregarding railway executivesandprofessionalsconductresearchin The campuswilldeliverahighqualitytrainingcurriculumfor Metro GrouptosetupabranchcampusofMTRAinHangzhou. signed aMemorandumofUnderstandingwithHangzhou of Indonesia’sfirstmasstransitsystem.InOctober2017,MTR as PTMRTJakarta,whichisseekingsupportforitsdevelopment professional supportfororganisationsinvariouscountries,such MTRA isgainingincreasingrecognitiongloballyandprovides Kong andoverseasattendedMTRAprogrammes. for thecommunity.In2017,over1,000participantsfromHong courses tonurturethenextgenerationofrailwayprofessionals countries. MTRAalsooffersaccreditedprogrammesandshort from HongKongtotheMainlandofChinaand“BeltRoad” quality programmeswhichextendtheCompany’srailexpertise railway managementandengineeringcentrethatoffershigh The MTRAcademy(“MTRA”)hascontinuedtodevelopasa MTR ACADEMY by theHongKongManagementAssociation. for ExcellenceinTrainingandDevelopment2017”organised development, theCompanyreceivedtwohonoursin“Award Hong Kong,8March2018 Chief ExecutiveOfficer Lincoln LeongKwok-kuen levels ofperformance. commitment toexcellencethatunderpinourconsistentlyhigh contributions duringtheyear.Itistheirhardworkand Finally, IwishtothankallmycolleaguesatMTRfortheir related propertydevelopments. franchise opportunitiesandarealsoreviewingpotentialrail China andinternationally,wearepursuinganumberofrail in Australia.ToaccelerateourexpansiontheMainlandof renewed concessionforMelbourne’sMetropolitanRailService from theSouthWesternRailwayfranchiseinUKand Kong in2018willbesupportedbyafullyearcontribution The financialperformanceofourbusinessesoutsideHong provide about4,200residentialunitsintotal. Ventilation Buildingsite.Thesepackagesareexpectedto third packageatWongChukHangStationandtheYauTong Ho ManTinStation,oureleventhpackageatLOHASPark, or so.Thesepackagesarelikelytobeoursecondpackageat property developmentpackagesoverthenext12months 2018. Subjecttomarketconditions,weaimtenderoutfour which wecurrentlyexpecttoreceivetowardstheendof Wings atSeaandIIofLOHASParkPackage4, be dependentontheissuanceofOccupationPermitfor Profit fromHongKongpropertydevelopmentin2018will LOHAS ParkandTaiWaishoppingcentreprojects. the openingofMaritimeSquare2,weareprogressingwith dependent oneconomicconditionsinHongKong.Following in 2015maybeachallenge.Ouradvertisingbusinesswill three-year tenancycycle,maintainingthepeakrentsachieved Annual Report 2017 37
Financials and Other Information Corporate Governance Business Review and Analysis Overview BUSINESS REVIEW HONG KONG TRANSPORT OPERATIONS
99.9% passenger journeys 230.9km on-time route length 11 rail lines 93 stations
5.76 million average weekday patronage in Hong Kong Early review of FAM concluded with all passengers to benefit
38 MTR Corporation Our Aims and Achievements We aim to be the best public transport service provider in Hong Kong, offering safe, reliable and caring service to our customers. At the same time we seek to generate sustainable returns, thereby enabling us to make the investments required to maintain high levels of service and meet customers’ present and future needs. These involve replacing and upgrading our existing railway assets as well as investing in new railway lines. Together, they form “Rail Gen 2.0”, a next generation rail that will support Hong Kong’s development as an economy and as a society.
In 2017, our services were again amongst the safest and most reliable in the world. We continue to gain a deeper understanding of our customers to allow us to plan ahead and devise enhancements to our services, as outlined in our 2030 Customer Experience Vision Blueprint. To support the Belt and Road initiative, the MTR Academy shall play a strategic role in promoting the export of Hong Kong’s railway industry skills and knowledge.
Our Challenges • Express Rail Link opening in the third quarter • Safety of project interfaces: of 2018: ensure a smooth transition from project completion prepare for passenger service commissioning to operations in order to ensure the safety of all and provide efficient and reliable high-speed rail concerned journeys to the public by the third quarter of 2018 • Workforce transition and digitisation: • Managing major asset upgrades and deliver extensive training to our railway operations replacements: employees relevant to the innovative technologies carry out required major asset upgrades and we are introducing replacements without compromising our service performance or the customer experience
Our Strategies • Safety First, Excellent Service: • Customer Engagement and Experience: cultivate our robust “Safety First” culture. Equip staff understand and deliver what matters most to our with clear guidelines and sound training regarding customers, enhancing the travelling experience and operations and customers. Continue to raise meeting the needs arising from an aging population customers’ safety awareness and service digitisation • Maintaining Very High Performance Standards: • Staff Development: maintain world-class levels of service performance treat people as our most valuable asset, be that exceed the targets set out in the Operating committed to inspire, engage and develop our Agreement and our own more demanding employees while continuing to offer long-term, Customer Service Pledges. Continue our stringent rewarding careers in various disciplines maintenance regime, investing significantly in • MTR Academy: renewing and upgrading our railway assets aim to become a globally recognised railway management and engineering centre of excellence providing programmes for our staff, Hong Kong and the global railway industry
Annual Report 2017 39 BUSINESS REVIEW HONG KONG TRANSPORT OPERATIONS
EBITDA HK$7,475m 2.1%
EBIT HK$1,656m 35.6%
40 MTR Corporation FINANCIAL PERFORMANCE extinguishers wereinstalledinstations. were launchedin2017.Inaddition,moreportablefire their knowledgeofstationevacuationprocedures customers’ awarenessaboutfiresafetyandimprove management. Severalprogrammestostrengthen initiatives toraisepublicawarenessandenhancerisk Government on25April2017andcontainedvarious and effective.Thepanel’sreportwassubmittedto that itshandlinghadbeenrobust,orderly,speedy we setuptoinvestigatetheincidentconcluded on 10February2017.TheExecutiveReviewPanel our responsetothearsonattackononeoftrains Our “safetyfirst”culturewaswelldemonstratedby another excellentperformance. heavy railnetworkandlightthanin2016, were 5.5%fewerreportableeventsontheHongKong Safety isanabsolutepriorityforMTRandin2017there SAFETY to increasesinstaffcosts,whilefareadjustmentfor decreased by2.1%toHK$7,475million,mainlydue mainly fromthegrowthinpatronage.EBITDA rose by3.1%toHK$18,201millionin2017,benefiting Total revenueoftheHongKongtransportoperations In HK$million Total Revenue Hong KongTransportOperations Operating profitbeforedepreciation,amortisationand Operating profitbeforeinterestandfinancecharges EBIT Margin(in%) EBITDA Margin(in%) variable annualpayment(“EBITDA”) after variableannualpayment(“EBIT”)
Causeway Baystations. Admiralty, WanChaiand subsequently extendedto Tong Stationandwas label commencedatKwun a new“PlatformGap”safety performance further. Trialof was formedtolookintoimprovingrelevantsafety continued, whileaPlatformGapSpecialTaskForce Programmes toenhancesafetyonescalators HK$1,656 million. significantly, resultinginEBITdecreasingby35.6%to increased thedepreciationandamortisationcharges of thetwonewlines,aspreviouslyhighlighted,has 2017/2018 wasrolledoverto2018/2019.Theopening Year ended31December 18,201 41.1% 7,475 1,656 2017 9.1% 17,655 14.6% 43.2% 7,633 2,572 2016 Annual ReportR 2017eport Inc./(Dec.) % (5.5%) pts. (2.1%) pts. (35.6) (2.1) 3.1 41
Financials and Other Information Corporate Governance Business Review and Analysis Overview BUSINESS REVIEW HONG KONG TRANSPORT OPERATIONS
PATRONAGE AND REVENUE Fare revenue figures from our Hong Kong transport operations are as follows:
Year ended 31 December In HK$ million 2017 2016 Inc./(Dec.) % Fare Revenue Domestic Service 12,840 12,395 3.6 Cross-boundary Service 3,277 3,252 0.8 Airport Express 1,076 998 7.8 Light Rail and Bus 707 707 – Intercity 135 137 (1.5) Total Fare Revenue 18,035 17,489 3.1
Our patronage benefited from the stronger economy and the Service to Lo Wu and Lok Ma Chau saw patronage decrease opening in 2016 of the two new rail lines. Total patronage for all by 0.6% to 112.5 million, mainly as a result of continued strong of our rail and bus passenger services increased by 2.6%, for the competition from other modes of transport. Patronage on the first time surpassing 2,000.0 million passenger trips per annum. Airport Express rose by 3.0% to 16.6 million, supported by an increase in air passenger traffic. For the Domestic Service (comprising the Kwun Tong, Tsuen Wan, Island, Tung Chung, Tseung Kwan O, Disneyland Resort, Average weekday patronage for all of our rail and bus East Rail (excluding the Cross-boundary Service), West Rail, passenger services in Hong Kong in 2017 rose by 3.0% to 5.76 Ma On Shan and South Island lines), total patronage reached million. The Domestic Service, which accounts for the majority 1,637.9 million, a 3.2% increase over 2016. The Cross-boundary of this patronage, reported a 3.6% increase to 4.77 million.
42 MTR Corporation marginally from21.4%to21.5%. share toandfromtheairportincreased business from51.2%to50.8%.Ourmarket reduced ourshareoftheCross-boundary Competition fromothermodesoftransport traffic was69.6%,comparedto68.6%in2016. Within thistotal,theshareofcross-harbour 2017 was49.1%,comparedto48.4%in2016. public transportmarketinHongKong The Company’soverallshareofthefranchised MARKET SHARE 10.2 (Percentage) perator n on ar et areo a or ran port (Percentage) perator ro n t e ar our ar et areo a or ran port 27.0 24.7 13.7 10 7 27 2 1 3.4 2.3 2 201 201 201 201 49.1 69.6 7 7 Annual Report 2017 ra an err e reen n u t er u e R err e u e R 43
Financials and Other Information Corporate Governance Business Review and Analysis Overview BUSINESS REVIEW HONG KONG TRANSPORT OPERATIONS
a en er an are are ren
22 2 200 1 00 2,000 a roll n e 20 2 000 (avg. 7.2% 18.0 1 200 1 1 00 growth p.a.) 1 1 00 u er o 1 000 o po te 1 1 00 a en er on u er (million) 00 r e n e 12 1 200 r t ale (avg. 4.2% 10 7 9.02 1 000 growth p.a.) 2 00 00 are Re enue (HK$ billion) A era e are 00 le t ale 00 e lu e A rport 00 pre an A era e are 200 nter t er e 2 200 (HK$) (avg. 3.9% 0 0 le t ale 0 growth p.a.) 201 201 201 201 2017 1 0 1 0 2000 2010 2017
FARE ADJUSTMENTS, PROMOTIONS AND CONCESSIONS Our fares are governed by the Fare Adjustment Mechanism • Rebate linked directly to business profit. A 3% rebate is (“FAM”), which is subject to regular review. On 21 March 2017, being offered for each Octopus trip for at least six months we announced that the early review of the FAM, conducted each year from 2017/2018 to 2022/2023. This will be done jointly with Government, had concluded, resulting in revised by topping up where necessary the concession amount arrangements designed to benefit all passengers, whilst set aside in accordance with an enhanced Profitability- ensuring the financial sustainability of the Company. During Linked Arrangement and Service Performance-Linked the review process, we listened to the opinions of different Arrangement. The rebate for 2017/2018 ended on 17 stakeholders, including passengers and shareholders. Two December 2017 important pillars of the FAM remain unchanged, namely In addition to the above two new features, a new discount the FAM formula itself and the “direct-drive” nature of the of HK$0.3 for interchange between MTR and 500-plus GMB formula’s application. However, two key new features have routes will be offered to Octopus users starting from the been introduced that benefit passengers directly: second quarter of 2018. • Special adjustment for six years. The calculated fare The next scheduled review of the FAM will be in 2022/2023, adjustment rate is being reduced by 0.6 percentage with its application starting in mid-2023. point each year from 2017/2018 to 2022/2023 through a special annual adjustment outside of the FAM formula. After applying the FAM formula, the special annual adjustment For 2017/2018, the overall fare adjustment rate has been of 0.6 percentage point and the one-off 10% discount, the further reduced by 10% calculated Overall Fare Adjustment Rate for 2017/2018 came to +1.49%. This is within the range of ±1.5%, under which, according to the FAM, the adjustment rate has been rolled over to the following year (2018/2019). Hence, there was no adjustment of MTR fares in 2017/2018.
44 MTR Corporation billion in 2017 and target eligible passengers such as students billion in2017andtargeteligible passengerssuchasstudents concessions andpromotions,whichamountedtooverHK$2.6 These savingschemesareinadditiontoourongoingfare also beenextendedforoneyearupto31May2018. first use.The“EarlyBirdDiscountPromotion”Programmehas extended from30daysto40days,countingthedayof the MTRCitySaversoldfrom1July2017onwardshasbeen Pass Extra”andMTRCitySaver.Furthermore,thevalidityof continue toenjoyfaresavingsbyusingfivetypesof“Monthly distance journeystotheurbanareaandacrossharbourcan Frequent MTRtravellerscommutingonmediumtolong and willfullysupportitsimplementation. Transport FareSubsidyScheme.MTRwelcomesthescheme SAR inherinauguralPolicyAddressproposedaPublic On 11October2017,theChiefExecutiveofHongKong service sinceitsopeningin1998. from 18June2017.Thisisthefirstadjustmenttofaresforthis Fares ontheAirportExpresswereraisedbyanaverageof9.6% every trip. operator inHongKongtoprovidediscountsstudentson and theelderly.MTRiscurrentlyonlymajortransport Annual Report 2017 45
Financials and Other Information Corporate Governance Business Review and Analysis Overview BUSINESS REVIEW HONG KONG TRANSPORT OPERATIONS
SERVICE PERFORMANCE Train service delivery and passenger journeys on-time in our On 5 August 2017, a signalling system problem occurred on heavy rail network in 2017 remained at a world-class level the Kwun Tong Line that caused delays. We set up an Executive of 99.9%. As a result, we exceeded both the targets in our Review Panel to examine the cause of the incident and the Operating Agreement and our own more stringent, Customer handling procedures, and identify areas for improvement. Service Pledges. More than 2.11 million train trips were made The panel concluded that the incident was managed in a safe on our heavy rail network and around 1.09 million trips were manner according to established procedures. The signalling made on our light rail network during the year. In 2017 there fault was found to have resulted from intermittent data loss were nine delays on the heavy rail network and one delay on caused by the corrosion of electrical contacts in a junction the light rail network, each lasting 31 minutes or more which box near Ngau Tau Kok Station. To reduce the risk of a similar were caused by factors within our control. We continue to signalling failure incident in future, the copper datalink system work diligently to reduce both the number of delays and the concerned was converted to a fibre optic system with a higher impact on passengers. fault tolerance in October 2017. Other recommendations
International Performance Comparisons: the 17-member Community of Metros (CoMET)
Metro Metro Metro Metro Metro Metro Metro Metro Metro Metro Metro Metro Metro Metro Metro Metro Metro system network data (2016) MTR* A B C D E F G H I J K L M O P Q
Passenger journeys (million) 1,700 1,593 553 1,008 1,543 1,399 1,663 581 2,367 1,785 1,552 489 672 768 1,970 888 740
Car kilometres (million) 288 455 128 199 251 585 383 180 821 559 262 110 135 135 487 115 127
Route length (km) 200 460 146 187 301 427 226 286 339 532 206 115 104 130 588 69 131
Number of stations 91 232 173 147 164 270 163 248 189 425 303 66 100 79 305 61 108
* The Lines included in the CoMET metro benchmarking programme are Kwun Tong Line, Tsuen Wan Line, Island Line, South Island Line, Tung Chung Line, Tseung Kwan O Line, Disneyland Resort Line, East Rail Line, Ma On Shan Line and West Rail Line. The Airport Express is excluded from the benchmarking.
Note: The other metros in the comparison are London Underground, New York City Transit, Sistema de Transporte Colectivo, Régie Autonome des Transports Parisiens Metro, Régie Autonome des Transports Parisiens Réseau Express Régional, Metropolitano de São Paulo, Moscow Metro, Metro de Madrid, Metro de Santiago, Berliner Verkehrsbetriebe, SMRT Corporation Limited, Delhi Metro Rail Corporation Limited, Shanghai Metro Operation Corporation, Beijing Mass Transit Railway Operation Corporation, Taipei Rapid Transit Corporation and Guangzhou Metro Corporation. The benchmarking agreement prohibits specifically identifying the data by metro system.
46 MTR Corporation en ar n o par on MTR’s highlevelofservicewasagainrecognisedbyanumberawards,somewhicharelistedinthetablebelow: RECOGNITION OFOURSERVICES the regularmaintenanceofdatacables. dissemination duringsuchatypicalsituationsandenhancing improving passengercommunicationsandinformation by thepanelarenowbeingimplemented.Theseinclude (passenger kmpercapacitykm) System utilisation (passenger journeyson-time) Service reliability MTR Performancevs.Best • • Best .hkWebsiteAwards2016 • Customer ServiceExcellenceAward2017 • • IDC DigitalTransformationAwards2017 • • Top ServiceAwards2017 • • Sing TaoServiceAwards2016 • • • Hong KongServiceAwards2017 Awards Received Bus Light Rail Airport Express Domestic andCross-boundaryservices Service QualityIndex
2016 Most Liked.hkWebsiteAward Commercial Category(CorporateStream)–GoldAward Grand Award–Gold Asia PacificDigitalTransformeroftheYear Hong KongDigitalTransformeroftheYear Best StaffAward–Bronze Category AwardofPublicTransportation Category AwardofCorporateVoluntaryTeam Category AwardofPublicTransportation Distinguished Achievement10-yearAward Corporate ResponsibilityAward Public TransportationCategoryAward 201 70.0 72 7 99.9 e t er or an e 100 (number ofpassengerspertrackkm) Density (percentage oftrainson-time) Punctuality 2017 70 69 83 69 70 7 99.9 2016 69 69 83 69 Cost andStaffEfficiency Service Quality Index and Fare Index respectively: Service QualityIndexandFarerespectively: measured byregularsurveysandresearch,reflectedinthe Customer satisfactionregardingourservicesandfaresis (revenue pertotalcost) Cost efficiency MTR Performancevs.Best Bus Light Rail Airport Express Domestic andCross-boundaryservices Fare Index 2016 2015 Organisation Hong KongInternetRegistrationCorporationLimited Hong KongAssociationforCustomerServiceExcellence International DataCorporation Next Magazine Sing TaoDaily East WeekMagazine 100 100 (capacity kmperstaffhour) Staff efficiency Best Performance=100 Annual Report 2017 2017 66 68 73 58 88.4 2016 100 66 68 74 58 47
Financials and Other Information Corporate Governance Business Review and Analysis Overview BUSINESS REVIEW HONG KONG TRANSPORT OPERATIONS
Operations Performance in 2017
Customer Performance Service Actual Service performance item Requirement Pledge Target Performance Train service delivery – Kwun Tong Line, Tsuen Wan Line, Island Line, Tseung Kwan O Line, South Island Line, Tung Chung Line, Disneyland Resort Line and Airport Express 98.5% 99.5% 99.9% – East Rail Line (including Ma On Shan Line) 98.5% 99.5% 99.9% – West Rail Line 98.5% 99.5% 99.9% – Light Rail 98.5% 99.5% 99.9% Passenger journeys on-time – Kwun Tong Line, Tsuen Wan Line, Island Line, Tseung Kwan O Line, South Island Line, Tung Chung Line and Disneyland Resort Line 98.5% 99.5% 99.9% – Airport Express 98.5% 99.0% 99.9% – East Rail Line (including Ma On Shan Line) 98.5% 99.0% 99.9% – West Rail Line 98.5% 99.0% 99.9% Train punctuality – Kwun Tong Line, Tsuen Wan Line, Island Line, Tseung Kwan O Line, South Island Line, Tung Chung Line and Disneyland Resort Line 98.0% 99.0% 99.7% – Airport Express 98.0% 99.0% 99.9% – East Rail Line (including Ma On Shan Line) 98.0% 99.0% 99.9% – West Rail Line 98.0% 99.0% 99.9% – Light Rail 98.0% 99.0% 99.9% Train reliability: train car-km per train failure causing delays ≥ 5 minutes – Kwun Tong Line, Tsuen Wan Line, Island Line, Tseung Kwan O Line, South Island Line, Tung Chung Line, Disneyland Resort Line and Airport Express N/A 650,000 5,202,676 – East Rail Line (including Ma On Shan Line) and West Rail Line N/A 650,000 8,158,284 Ticket reliability: smart ticket transactions per ticket failure – Kwun Tong Line, Tsuen Wan Line, Island Line, Tseung Kwan O Line, South Island Line, Tung Chung Line, Disneyland Resort Line, Airport Express, East Rail Line (including Ma On Shan Line) and West Rail Line N/A 9,500 68,442 Add value machine reliability – Kwun Tong Line, Tsuen Wan Line, Island Line, Tseung Kwan O Line, South Island Line, Tung Chung Line, Disneyland Resort Line and Airport Express 98.0% 99.0% 99.8% – East Rail Line (including Ma On Shan Line) 98.0% 99.0% 99.9% – West Rail Line 98.0% 99.0% 99.8% – Light Rail N/A 99.0% 99.7% Ticket machine reliability* – Kwun Tong Line, Tsuen Wan Line, Island Line, Tseung Kwan O Line, South Island Line, Tung Chung Line, Disneyland Resort Line and Airport Express 97.0% 99.0% 99.7% – East Rail Line (including Ma On Shan Line) 97.0% 99.0% 99.8% – West Rail Line 97.0% 99.0% 99.5% Ticket gate reliability – Kwun Tong Line, Tsuen Wan Line, Island Line, Tseung Kwan O Line, South Island Line, Tung Chung Line, Disneyland Resort Line and Airport Express 97.0% 99.0% 99.9% – East Rail Line (including Ma On Shan Line) 97.0% 99.0% 99.9% – West Rail Line 97.0% 99.0% 99.9% Light Rail platform Octopus processor reliability N/A 99.0% 99.9% Escalator reliability – Kwun Tong Line, Tsuen Wan Line, Island Line, Tseung Kwan O Line, South Island Line, Tung Chung Line, Disneyland Resort Line and Airport Express 98.0% 99.0% 99.9% – East Rail Line (including Ma On Shan Line) 98.0% 99.0% 99.9% – West Rail Line 98.0% 99.0% 99.9% Passenger lift reliability – Kwun Tong Line, Tsuen Wan Line, Island Line, Tseung Kwan O Line, South Island Line, Tung Chung Line, Disneyland Resort Line and Airport Express 98.5% 99.5% 99.7% – East Rail Line (including Ma On Shan Line) 98.5% 99.5% 99.8% – West Rail Line 98.5% 99.5% 99.7% Temperature and ventilation – Trains, except Light Rail: to maintain a cool, pleasant and comfortable train environment generally at or below 26°C N/A 97.5% 99.9% – Light Rail: on-train air-conditioning failures per month N/A <3 0 – Stations: to maintain a cool, pleasant and comfortable environment generally at or below 27°C for platforms and 29°C for station concourses, except on very hot days N/A 92.0% 99.8% Cleanliness – Train compartment: cleaned daily N/A 99.0% 99.9% – Train exterior: washed every 2 days (on average) N/A 99.0% 100.0% Northwest Transit Service Area Bus Service – Service Delivery N/A 99.0% 99.6% – Cleanliness: washed daily N/A 99.0% 100.0% Passenger enquiry response time within six working days N/A 99.0% 100.0%
* Performance data for Light Rail will be available after completion of installation, testing and trial operations of the new ticket machines.
48 MTR Corporation completion towards the end of 2018 or early 2019. It will be completion towards theendof2018orearly2019. Itwillbe is underway.The TsuenWanLinere-signallingis targetedfor substantially completed.Traintesting duringnon-traffichours equipment alongthetrackside and inindoorareashasbeen Line isbeingre-signalledfirst,and installationofnewsignalling replacement atatotalcostofHK$3.3 billion.TheTsuenWan Resort lines,aswelltheAirportExpress,areundergoing Tsuen Wan,TseungKwanO,TungChungandDisneyland The existingsignallingsystemsontheIsland,KwunTong, Upgrade ofSignallingSystem 2019 and2023. vehicles willenterpassengerserviceprogressivelybetween rail vehicleswillbedeliveredtoHongKongin2018andthe vehicles, allatacostofHK$745million.Thefirstbatchlight replacing 30lightrailvehiclesandpurchasingtenadditional With demandforourlightrailservicesincreasing,weare New LightRailVehicles Hong Kongbeforetheyareputintoservice. undergo stringenttestingandcommissioningproceduresin final batchoftrainsduetobedeliveredin2023.Thewill train wasdeliveredtoHongKonginJanuary2018,withthe Tsuen Wan,IslandandTseungKwanOlines.Thefirst8-car comfortable 8-cartrainstoreplacethoseontheKwunTong, A totalofHK$6billionisbeingspenton93new,more New Trains on theExistingNetwork Major AssetUpgradesandReplacements headed “HongKongNetworkExpansion”. information ontheseprojectscanbefoundunderthesection the MainlandofChinawhentheyarecompleted.Further will improveconnectivityacrossHongKongandwith Hong KongExpressRailLinkandShatintoCentralLink, namely theHongKongSectionofGuangzhou-Shenzhen- The tworemainingnewrailwayprojectsunderconstruction, New RailwayProjects and renewingourHongKongrailwayassets. more thanHK$8.6billionwasspentonmaintaining,upgrading customer experiencethroughtheuseoftechnology.In2017, on theexistingrailnetwork,aswellinitiativestoenhance construction, alsocoversmajorupgradesandreplacements Hong Kong,whichinadditiontothetwonewrailprojectsunder Rail Gen2.0encapsulatesourneartermrailbusinessgrowthin RAIL GEN2.0 original target. also completedinDecember2017,oneyearearlierthanthe retrofit AutomaticPlatformGatesontheMaOnShanLinewas converted 8-cartrainshadcomeintoservice.Ourprojectto replaced by8-cartrains.Asof31December2017,allnewand existing 154-cartrainsontheMaOnShanLinehavealsobeen Rail Lineandallaretargetedtobeinservicebymid-2018.The the converted8-cartrainshadenteredserviceonWest West Corridorofthenewline.By31December2017,24 to enhanceexistingtrainservicesandservethefutureEast trains ontheWestRailLinearebeingconvertedto8-car Under theShatintoCentralLinkproject,existing287-car Major InterfacingWorks replacement ofchillersinourotherstationsanddepots. completion inApril2018.Theseworkswillbefollowedbythe two depotscommencedinDecember2017,withtargeted replacement ofthefirst29chillersinsevenstationsand and fourdepotswereawarded.Installationworksforthe Contracts forthereplacementof160chillersat38stations Replacement ofChillers the event of extended train service delays. To help passengers the eventofextended trainservicedelays.Tohelp passengers and alternativetransportationinformation topassengersin Traffic Newsfunctionnowprovides moretimelyoperational to theirdesiredexitatdestination station.Theenhanced passengers thespecifictraincar and doorthatwillbenearest Fast Exit,whichappliestoallrailwaystations,recommends to interchangeplatformsandstationfacilitiesmoreeasily. Station servedasapilotstation,allowsuserstofindtheirway “Fast Exit”werelaunched.In-stationFinder,forwhichAdmiralty in September2017,twonewfunctions,“In-stationFinder”and The MTRMobileapphasover1millionmonthlyactiveusersand to customerswhilefacilitatingsmootherrailwayoperations. innovative technologytoprovidemorepersonalisedservices improvements totheMTRMobileapp,whichleverageon We havelaunchedaseriesofdigitalinitiatives,including experience throughtheapplicationofnewtechnology. upgrades, weaimtoenhanceourpassengers’journey Under RailGen2.0,inadditiontonewlinesandmajorasset through Technology Enhancing theCustomerExperience expected in2026. followed byotherlinesprogressively.Theoverallcompletionis Annual Report 2017 49
Financials and Other Information Corporate Governance Business Review and Analysis Overview BUSINESS REVIEW HONG KONG TRANSPORT OPERATIONS
plan their journeys ahead even better, Green, Yellow and Red provides customers with information about their destination, as indicators have been introduced to represent the real-time well as offering a more personalised experience. status of each rail line in the MTR Mobile app and on the MTR With electronic payments becoming increasingly popular, in website. A new “Ticket Suggestion” function was also launched December 2017 we rolled out a trial scheme to accept Alipay on the MTR website and MTR Mobile app in June 2017. This and WeChat Pay at certain ticket machines at Lo Wu and Lok new function helps passengers choose the ticket type with the Ma Chau stations. The trial scheme will be gradually extended lowest fare based on their travel patterns. In January 2018, a to Tsim Sha Tsui, East Tsim Sha Tsui and Causeway Bay stations “Chatbot” function was launched for the MTR Mobile app that by the first half of 2018.
OTHER NETWORK IMPROVEMENTS Providing more frequent services A new 300-metre long footbridge connecting Tsz Ching Estate Further enhancements to train services during 2017 and Tsz Wan Shan Shopping Centre was opened for public commenced in February, when 148 extra weekly train trips use on 19 October 2017. This is the last pedestrian facility were added to the Kwun Tong, Tsuen Wan and Island lines, built under the Shatin to Central Link project to improve the increasing frequency and convenience, especially on Fridays walking environment for pedestrians in the Tsz Wan Shan area. and at weekends. A new pedestrian subway and entrance at Wan Chai Station were opened in December 2017 to enhance connectivity. Enhancing station facilities The improvement works at Mong Kok Station were completed, Responding to Changing Needs with one new escalator installed in August 2017. One new As outlined in our 2030 Customer Experience Vision Blueprint, lift was installed at Kowloon Tong Station in December 2017. we are gaining a deeper understanding of customers Six hydraulic lifts at Kwun Tong, Quarry Bay, Causeway Bay, which enables us to respond to their needs. During 2017, Kowloon Tong and Fanling stations were refurbished as service improvements were made in line with this vision, traction lifts and opened for public use during the year. including free mobile device charging service at “iCentres”
50 MTR Corporation System Information works toinstallpublictoiletsattwointerchangestations, free EntranceD1onTaikooShingRoad.InOctober2017, wheelchair userstofacilitatetheiruseofthestation’sbarrier- a trialschemebeganofferingfreeaccessible-carservicefor gradually rolledoutstartingfrom2018.InSeptember2017, developing therelatedage-friendlyprovisionswhichwillbe toilet provisionandinformationprovision.Wearenow four keyareasforimprovement,namelyaccessibility,mobility, To meettheneedsofanageingpopulation,wehaveidentified renovation works. interchange stationsalongsidewiththeirrespectivemajor of installingpublictoiletsandbabycareroomsatseven breastfeeding environment.Wearealsointheprocess 2017, providingpassengersinneedwithacomfortable rest roomslocatedin20interchangestationssinceDecember colleagues, wehavecreatedbreastfeedingspaceatthestaff With theunderstandingandjointeffortsofourstation growing needsforbreastfeedingfacilitiesinthecommunity. and LokMaChaustations.Wehavealsorespondedtothe in 13stationsandadditional“FreeWi-Fi”hotspotsatLoWu Minimum trainheadway(second) Daily hoursofoperation Number ofrailcars Total routelength(km) Railway operationdata – – – –
– – –
– – – – – East RailLineandMaOnShan Express andLightRail Island Line,TungChungDisneylandResortWestRailAirport Island Line,TsuenWanKwunTongTseungKwanOSouth Light Rail Disneyland Resort Line Disneyland ResortLine West Rail Line West RailLine Airport Express Airport Express Hong Kong to Tsing Yi Hong KongtoTsingYi Hong Kong to Tung Chung Hong KongtoTungChung Tung ChungLine Tseung Kwan O Line Tseung KwanOLine Ma On Shan Line Ma OnShanLine Hung Hom to Lok Ma Chau Hung HomtoLokMaChau Hung Hom to Lo Wu Hung HomtoLoWu Hung Hom to Sheung Shui Hung HomtoSheungShui East RailLine South Island Line South IslandLine Island Line Island Line Kwun Tong Line Kwun TongLine Tsuen Wan Line Tsuen WanLine board informationontheAirportExpressandbuses. completed during2017.Improvementswerealsomadetoon- Wan, IslandandTseungKwanOlineshadsubstantiallybeen of PassengerInformationDisplaysinKwunTong,Tsuen information forpassengers,rolloutofthenewgeneration As partofourcontinuingeffortstoensuretimelyandrelevant Improving passengercommunications merchant coupons. domestic ridesonMTR,aHK$50MTRMallsGiftVoucherand a speciallydesignedfreeone-daypassforunlimited month wereeligibletoredeemabirthdaypackcontaining Card holderswhosebirthdayfellontheluckydaydrawneach programme concludedon31March2017.HongKongIdentity The popular12-monthlong“HappyBirthday•HappyJourney” completed during2017. of anurseryroomatHungHomIntercityDepartureHallwas re-layout ofmale,femaleandaccessibletoiletsprovision and areexpectedtobecompletedbythefirsthalfof2019.A namely TiuKengLengandYauTongstations,commenced Morning Peak Morning Peak 270 270 171 600 240 360 133 180 600 327 212 200 112 126 120 Evening Peak Evening Peak 230.9 2,244 2017 19.5 19.0 300 270 210 600 240 360 133 240 600 327 200 200 124 140 120 Morning Peak Morning Peak 270 270 171 600 240 360 133 180 600 327 212 200 112 126 120 Annual Report 2017 Evening Peak Evening Peak 230.9 2,146 2016 19.5 19.0 300 270 210 600 240 360 133 240 600 327 200 200 124 140 120 51
Financials and Other Information Corporate Governance Business Review and Analysis Overview BUSINESS REVIEW HONG KONG STATION COMMERCIAL BUSINESSES
1,416 46,735 station shops with advertising units 58,716 m2 in stations and trains 4G data access along the journey
T
52 MTR Corporation Our Aims and Achievements We aim to enhance the journey experience of our customers by offering them railway related services. These mainly cover station retail outlets, advertising and telecommunications. Our strategy is to explore how best to use our stations, trains and other assets to provide such services and generate non-fare-related revenues for the Company.
During 2017, new shops and brands were added, offering customers greater choice. New advertising formats were introduced to raise our customers’ awareness while on the network. We have increased the number of e-shops sales packages to capture the trend towards online-to-offline commerce. New digital screens were introduced in Hong Kong and Airport stations, some with multi-touch functions for interaction with customers. We have continued to work with telecom operators to upgrade mobile and Wi-Fi services.
Despite a weak retail environment and pressure on rents, station shops recorded positive rental reversion due to their diverse trade mix and relevance to daily life.
Our Challenges Station Retail • The surge of advertising spending on mobile • New forms of e-commerce present new challenges platforms continues at the expense of traditional to traditional retailers media • Retail sales have grown moderately from their low Telecommunications in 2016 but operators remain cautious regarding • Demand for more data capacity is pushing telecom expansion operators to upgrade their systems, while to Advertising prevent service interruption, works are confined to • Advertisers are cautious regarding advertising a daily two-hour non-traffic window spending and favour more in-store promotions
Our Strategies Station Retail involve interactive mobile apps using Beacon and • Strategic development to optimise trade floor augmented reality technology space and retail value on existing and new lines • Continue with the digital transformation of product • Business development to broaden the tenant base development, marketing communications and and maximise growth opportunities sales packaging • Trade mix refinement to enhance customer service Telecommunications and rental reversions • Explore new technologies with telecom operators to enhance mobile communications for our Advertising customers • Offer flexible, timely sales packages and innovative solutions to advertisers to meet their changing needs, for example through campaigns that
Annual Report 2017 53 BUSINESS REVIEW HONG KONG STATION COMMERCIAL BUSINESSES
EBITDA EBIT HK$5,474m HK$4,722m 9.2% 8.3%
54 MTR Corporation ( o er al u ne e Re enue ro on tat on achieved goodresults. As illustratedbelow,in2017,thefinancialperformanceofHongKongstationcommercialbusinesses FINANCIAL PERFORMANCE the SouthIslandLine,andincreasesinDutyFreeShoprents. number ofshopsfollowingtheopeningKwunTongLineextensionand reversion asaresultofcontinuoustrademixrefinements,anincreaseinthe 7.8% toHK$5,975millionin2017.Therevenuegrowthreflectedpositiverental Total revenueoftheHongKongstationcommercialbusinessesincreasedby HK$ million) In HK$million Station RetailRentalRevenue Hong KongStationCommercialBusinesses Advertising Revenue Telecommunication Income Other StationCommercialIncome Total Revenue Operating profitbeforedepreciation,amortisationand Operating profitbeforeinterestandfinancecharges EBITDA Margin(in%) EBIT Margin(in%) 201 variable annualpayment(“EBITDA”) after variableannualpayment(“EBIT”) 2 1 0 7 1 201 1 7 1 11 7 1 0 201 0 1 10 1 201 72 1 0 0 1 170 5,975 2017 1,071 635 126 4 , 143 tat on reta l A ert n er e ele o un at on t er
Year ended31December 91.6% 79.0% 4,143 1,071 5,975 5,474 4,722 2017 635 126 90.4% 78.7% 3,723 1,090 5,544 5,012 4,362 2016 561 170 Annual Report 2017 Inc./(Dec.) % 1.2% pts. 0.3% pt. (25.9) 11.3 13.2 (1.7) 7.8 9.2 8.3 55
Financials and Other Information Corporate Governance Business Review and Analysis Overview BUSINESS REVIEW HONG KONG STATION COMMERCIAL BUSINESSES
STATION RETAIL As at 31 December 2017, there were 1,416 station and Yuen Long stations which were previously closed for shops, occupying 58,716 square metres of retail space, re-development. representing an increase of 24 shops and 1,565 square MTR Shops are supported by a “Style to Go” brand metres compared with 31 December 2016. The increase positioning and this was boosted in 2017 by a thematic was mainly due to the opening of 11 new shops at Hung campaign featuring two local artists. During the year, Hom, Kowloon and Wan Chai stations, as well as the 24 new brands were introduced and featured in posters opening of 15 shops at Nam Cheong, Tin Shui Wai, Tsing across the network. Yi, Tsuen Wan West, Shek Mun, Tuen Mun, Lok Ma Chau
56 MTR Corporation along theIsland,TsuenWan,MaOnShanandWestRaillines wererevamped. Station and14suchscreensatAirportStation.Inaddition,over 900advertisinglightboxes created bytheinstallationof16new65-inchhigh-definitionLCDscreensatHongKong and newdigitalformatstomeetmarketneeds.Duringtheyear,twozoneswere To improveourcompetitiveness,wehavebeendevelopinganumberofcreativesolutions 46,735 by31December2017. last quarterof2017.Thenumberadvertisingunitsinstationsandtrainsincreasedto competition fromonlineadvertising.Overalladvertisingspendstartedtorecoverinthe was mainlyattributabletoadownturninoveralladvertisingspendandtheincrease Advertising revenuedecreasedslightlyby1.7%toHK$1,071millionin2017.Thedecline ADVERTISING services at84stations. upgrade ofequipment inApril2017,customers havebeenabletoenjoyenhanced Wi-Fi in theconcoursesoftenstations andfourtunnelsectionsduringtheyear.Following phone networkofferingincreased datacapacityandmore4Gserviceswascompleted We continuetoenhancemobile andinternetconnectivity.Installationofanewmobile South IslandLine. enhancement projects,aswellthenewlyopenedKwunTong Lineextensionandthe was mainlytheresultofincrementalrevenuefromnewservice contractsandcapacity Revenue fromtelecommunicationsin2017grewby13.2% to HK$635million.Theincrease TELECOMMUNICATIONS Annual Report 2017 57
Financials and Other Information Corporate Governance Business Review and Analysis Overview BUSINESS REVIEW HONG KONG PROPERTY AND OTHER BUSINESSES
Over 18,000 residential units under property packages tendered
managing over 96,000 residential units 13 shopping malls in our portfolio
58 MTR Corporation Our Aims and Achievements We aim to be an industry leader in creating integrated communities for Hong Kong citizens. The route to success is the creation of sustainable communities through developing sites along our rail network and providing excellent service as manager of these developments. This relies on expertise that covers all aspects of property development and management, together with strong community engagement. In 2017, two property development packages were awarded, Wong Chuk Hang Package 1 and 2. As agent for the relevant subsidiary of KCRC, we awarded Kam Sheung Road Station Package 1. We continue to look for new development opportunities along our railway network that would increase housing supply. Our property management business continued to win awards. Work pressed ahead on the major expansion of our investment properties portfolio, with Maritime Square 2 and the seventh and eighth floors of Telford Plaza II opened during the year.
Our Challenges Property Rental Property Management • Expanding our investment properties portfolio • Statutory changes will bring opportunities and without affecting existing railway operations and challenges to the residential property management new railway projects industry in Hong Kong, ranging from licensing to procurement and maintenance • Change in customer behaviour and retail space demand due to development of e-commerce Property Development • The market is vulnerable to potential interest rate rises and global capital market fluctuations
Our Strategies Property Safety • Promote green projects with greater energy • Safety at our construction sites, investment and efficiency to foster health and sustainability in our managed properties and adjoining railway facilities managed properties is our top priority Property Development Property Rental • Optimise the integration between our property • Sustain the growth in profit and capital value in our developments and the railway network, as well as investment properties portfolio in Hong Kong other modes of transport
• Maintain the value of our investment properties • Expand, through seeking the rezoning of feasible portfolio through optimising our shopping malls, existing railway sites and through applying the while achieving 34% growth in attributable GFA by proven “Rail plus Property” integrated development adding new high quality retail space model to potential new rail projects under RDS2014
• Develop sustainable and innovative strategies to • Deliver property developments awarded to a high combat the impact of e-commerce standard, on time and within budget Property Management • Pursue continuous improvement in our standards • Enhance our property management service so that through innovation and capturing new development we meet or exceed customer requirements and opportunities expectations
Annual Report 2017 59 BUSINESS REVIEW HONG KONG PROPERTY AND OTHER BUSINESSES
Property Rental and Management
EBITDA HK$4,098m 4.3%
EBIT HK$4,082m 4.3%
Property Development Profit
HK$1,097m
60 MTR Corporation summarised asfollows: The financialperformanceofourHongKongpropertyrentalandmanagementbusinessesis FINANCIAL PERFORMANCE space). In the fourth quarter of 2017, the second phase space). Inthefourthquarterof2017, thesecondphase added another12,100squaremetresGFAofnew known astheMaritimeSquareextension)(which in December2017,ofMaritimeSquare2(formerly 3,400 squaremetresofgrossfloorarea(“GFA”))and, converted retailspaceatTelfordPlazaII(whichadded in lettableareawiththeopening,July2017,of for otheruse.Ourretailpropertiessawanincrease area ofofficesand17,764squaremetresproperty properties, 39,410squaremetresoflettablefloor 218,251 squaremetresoflettablefloorarearetail share ofinvestmentpropertiesinHongKongwas As at31December2017,theCompany’sattributable Finance Centrewere100%let. and theCompany’s18floorsinTwoInternational December 2017,ourshoppingmallsinHongKong Kong recordeda1.7%fallduringtheyear.Asat31 reversion inourshoppingmallportfolioHong in accordancewithexistingleaseagreements.Rental 3.5% in2017.Thiswasmainlyduetorentalincreases Hong Kongpropertyrentalrevenueincreasedby PROPERTY RENTAL Revenue fromPropertyRental Hong KongPropertyRentaland In HK$million Revenue fromPropertyManagement Total Revenue Operating profitbeforedepreciation,amortisationand Operating profitbeforeinterestandfinancecharges EBITDA Margin(in%) EBIT Margin(in%) variable annualpayment(“EBITDA”) after variableannualpayment(“EBIT”) Management Businesses
Awards HongKong2017. at theRoyalInstitutionofCharteredSurveyors(RICS) Excellence” intheRetailTeamofYearCategory revamp project,ParadiseMallwonthe“Certificateof & Commercial”.Inrecognitionofitssuccessful in thecategoryof“PropertyManagement–Industrial Plus Award2017”fromCLPPowerHongKongLimited Economic Times.TelfordPlazareceivedthe“Green Shopping MallAward2016/17”fromHongKong News. Elementsalsoreceivedthe“MyFavourite “Best MallAwards”presentedbyNextMediaAction Week Magazine;bothmallswerealsoawardeesofthe Hong KongServiceAwards2017organisedbyEast and the“ExcellenceServiceAward”respectivelyat received the“ShoppingMallAwardforWarmService” of awardsintheyear.ElementsandTelfordPlaza Our retailportfolioagaingarneredalargenumber opened inParadiseMall. of the“sportsandwellbeing”zonewasprogressively Year ended31December 83.6% 83.3% 4,608 4,900 4,098 4,082 2017 292 82.9% 82.5% 4,451 4,741 3,930 3,912 2016 290 Annual Report 2017 Inc./(Dec.) % 0.7% pt. 0.8% pt. 3.5 0.7 3.4 4.3 4.3 61
Financials and Other Information Corporate Governance Business Review and Analysis Overview BUSINESS REVIEW HONG KONG PROPERTY AND OTHER BUSINESSES
Investment Property Portfolio in Hong Kong (as at 31 December 2017)
Company’s Lettable floor No. of parking ownership Location Type area (sq. m.) spaces interest Telford Plaza I, Kowloon Bay, Kowloon Shopping Centre 39,305 – 100% Car park – 993 100% Telford Plaza II 7-8/F, Kowloon Bay, Kowloon Shopping Centre 2,397 – 100% Telford Plaza II 3-6/F, Kowloon Bay, Kowloon Shopping Centre 19,063 – 50% Car park – 136 50% Luk Yeung Galleria, Tsuen Wan, New Territories Shopping Centre 11,094 – 100% Car park – 651 100% Paradise Mall, Heng Fa Chuen, Hong Kong Shopping Centre 15,353 – 100% Wet Market 1,216 – 100% Kindergarten 2,497 – 100% Car park – 415 100% Maritime Square 1, Tsing Yi Shopping Centre 29,161 – 100% Kindergarten 920 – 100% Car park – 220 100% Motorcycle park – 50 100% Maritime Square 2, Tsing Yi Shopping Centre 6,448 – 100% Car park – 65 100% Motorcycle park – 21 100% The Lane, Hang Hau Shopping Centre 2,629 – 100% Car park – 16 100% Motorcycle park – 1 100% PopCorn 2, Tseung Kwan O Shopping Centre 8,456 – 70% Car park – 50 70% PopCorn 1, Tseung Kwan O Shopping Centre 12,173 – 50% Car park – 115 50% Motorcycle park – 16 50% G/F, No. 308 Nathan Road, Kowloon Shop Unit 70 – 100% G/F, No. 783 Nathan Road, Kowloon Shop Unit 36 – 100% New Kwai Fong Gardens, Kwai Chung, New Territories Kindergarten 540 – 100% Car park – 126 100% International Finance Centre (“ifc”), Central, Hong Kong – Two ifc Office 39,410 – 100% – One and Two ifc Car park – 1,308 51% Phase I, Carpark Building, Kornhill, Quarry Bay, Hong Kong Car park – 292 100% Roof Advertising Signboard, Admiralty Centre, Advertising signboard – – 100% No. 18 Harcourt Road, Hong Kong Ten Shop Units, First Floor Podium, Admiralty Centre, Shop unit 286 – 50% No. 18 Harcourt Road, Hong Kong Olympian City One, Tai Kok Tsui, Kowloon Indoor sports hall 13,219 – 100% Olympian City Two, Tai Kok Tsui, Kowloon Shop unit 1,096 – 100% Choi Hung Park & Ride Public Car Park, Car park – 54 100% No. 8 Clear Water Bay Road, Choi Hung, Kowloon Motorcycle Park – 10 100% Park & Ride – 450 100% Elements, No. 1 Austin Road West, Kowloon Shopping Centre 45,800 – 81% Car park – 898 81% Cross Border Coach Terminus, No. 1 Austin Road West, Kowloon Coach terminus 5,113 – 100% Kindergarten, No. 1 Austin Road West, Kowloon Kindergarten 1,045 – 81% Plaza Ascot, Fo Tan Shopping Centre 7,720 – 100% Royal Ascot, Fo Tan Residential 2,784 – 100% Car park – 20 100% Ocean Walk, Tuen Mun Shopping Centre 6,083 – 100% Car park – 32 100% Sun Tuen Mun Shopping Centre, Tuen Mun Shopping Centre 9,022 – 100% Car park – 421 100%
62 MTR Corporation Properties heldforsale(asat31December2017) • • • • • • • All propertiesareheldbytheCompanyanditssubsidiariesunderGovernmentLeasesforover 50 yearsexceptfor: Investment PropertyPortfolioinHongKong(asat31December2017)(continued) *** ** * The Arch,No.1AustinRoadWest,Kowloon Bank ofChinaCentre,No.11HoiFaiRoad,Kowloon Hemera, LOHASPark,TseungKwanO Festival City,No.1MeiTinRoad,Shatin Lake Silver,No.599SaiShaRoad,Shatin The Palazzo,No.28LokKingStreet,Shatin Harbour Green,No.8ShamMongRoad,Kowloon The Grandiose,No.9TongChunStreet,TseungKwanO Residence Oasis,No.15PuiShingRoad,HangHau,TseungKwanO The Riverpark,No.8CheKungMiuRoad,Shatin Location Olympian CityOne,No.11HoiFaiRoad,Kowloon Location Hanford Plaza, Tuen Mun Hanford Plaza,TuenMun Retail Floorand1-6/F.,CitylinkPlaza,Shatin The Capitol,LOHASPark Le Prestige,LOHASPark The Riverpark,CheKungTemple Hemera, LOHAS Park Hemera, LOHASPark The ShopUnitsandKindergartenofRiverpark,CheKungTemplewheretheGovernmentLeaseexpireson21July2058 Citylink PlazawheretheGovernmentLeasesexpireon1December2057 LOHAS ParkwheretheGovernmentLeaseexpireson16May2052 PopCorn 2wheretheGovernmentLeaseexpireson27March2052 The LanewheretheGovernmentLeaseexpireson21October2052 Choi HungPark&RidewheretheGovernmentLeaseexpireson11November2051 No. 1AustinRoadWest,PlazaAscot,RoyalOceanWalk,SunTuenMunShoppingCentreandHanfordwheretheGovernmentLeasesexpireon30June2047 Telford PlazaIandII,LukYeungGalleria,MaritimeSquare12,NewKwaiFongGardens,ifc,OlympianCity,Elements,CrossBorderCoachTerminusKindergartenat Saleable area Brochure grossfloorareaasperpreviously issuedmarketingbrochures Lettable floorarea Car park Residential Car park Car park Residential Car park Car park Kindergarten Retail Residential Motorcycle park Car park Retail Residential Kindergarten Motorcycle park Motorcycle park Car park Residential Car park Shopping centre Type Type Car park Car park Shopping Centre Shopping Centre Shopping Centre for the Elderly for theElderly Residential CareHome Shop Unit Car park Car park Kindergarten Kindergarten Kindergarten Shop Unit Kindergarten Kindergarten Lettable floor Lettable floor Lettable floor Lettable floor area area (sq. m.) (sq. m.) 12,154 12,154 1,476 1,000 3,000 1,674 2,000 1,299 6,026 1,924 1,924 2,571 2,571 548 749 212 391 391 800 800 708 708 154 985 985 – – – – – – – – – – – – – *** ** *** ** * *** No. of parking No. ofparking No. of parking No. ofparking spaces spaces 117 330 137 240 22 22 38 38 15 12 24 18 Annual Report 2017 2 – – – – – – – – 5 5 – – – – – – – – – – Company’s Company’s Company’s Company’s ownership ownership ownership ownership interest interest 92.88% 92.88% 92.88% 92.88% 73.10% 38.5% 38.5% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 40% 40% 40% 55% 55% 55% 55% 50% 70% 71% 87% 87%
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Financials and Other Information Corporate Governance Business Review and Analysis Overview BUSINESS REVIEW HONG KONG PROPERTY AND OTHER BUSINESSES
n e t ent ropert e Distribution of Hong Kong Property Management Income (Percentage) 77.1 0 000 5.2 2017 70 7 000 10.2 0 000
0 000 alue o 5.2 0 3,814 000 n e t ent 10.4 7 2 222 propert e 18.6 18.1 66.3 66.0 0 2 7 000 (HK$ billion) le t ale Residential 20 2 000 et rental Retail 10 1 000 n o e (HK$ million) Office 0 0 r t ale 201 201 201 201 2017 2016 Car park
PROPERTY MANAGEMENT Hong Kong property management revenue in 2017 Two of our managed properties gained awards from increased by 0.7% to HK$292 million. As at 31 December Occupational Safety and Health Council. The Palazzo 2017, over 96,000 residential units and over 772,000 square received a “Gold Award of the Safety Culture Award” in the metres of commercial space were managed by MTR. “Best Property Safety Management Award 2016 to 2017”
As in previous years, the excellence of our property while The Arch received a “Merit Award” in the council’s management secured a number of awards during 2017. “Best Property Management Awards”.
PROPERTY DEVELOPMENT Profit from Hong Kong property development in 2017 Sea II had been sold. Pre-sales for MALIBU of LOHAS Park amounted to HK$1,097 million, and was derived from Package 5 are planned to be launched in March 2018. sundry sources, such as agency fee income from West For West Rail property development projects where we are Rail property developments (including Cullinan West the agent for the relevant subsidiaries of KCRC, a series of and Cullinan West II, Ocean Pride, Ocean Supreme, THE pre-sales were launched during the year. THE PAVILIA BAY PAVILIA BAY, PARC CITY as well as The Spectra), the sale of (the Tsuen Wan West Station (TW6) site) was launched in inventory units and car parking spaces, as well as further January 2017 with about 98% of 983 units sold by year end. profit bookings arising from the finalisation of development Cullinan West and Cullinan West II at Nam Cheong Station accounts for completed property development projects. were launched in March and November 2017 respectively, Pre-sales were launched for Wings at Sea and Wings at Sea with about 92% of 1,050 units and about 44% of 1,188 II of LOHAS Park Package 4 in September and October 2017 units respectively sold by year end. May and July 2017 respectively. By year end, about 97% of the 1,040 units of saw the launches respectively of Ocean Pride and Ocean Wings at Sea and about 36% of the 1,132 units of Wings at Supreme (the Tsuen Wan West Station (TW5) Bayside
64 MTR Corporation by KerryPropertiesLimitedand SinoLandCompanyLimited. Hang StationPackage2wasawarded toaconsortiumformed Limited inFebruary2017.InDecember2017,WongChuk Infrastructure LimitedandPingAnRealEstateCompany 1 wasawardedtoaconsortiumformedbyRoadKing In ourpropertytendering,WongChukHangStationPackage units soldbyyearend. (the LongPingStation(North)site),withabout96%of912 with all953unitssold.Pre-salesalsocontinuedatTheSpectra West Station(TW5)Citysidesite)waslaunchedinAugust2017, respectively bytheendofyear.PARCCITY(theTsuenWan site), withabout99%of970unitsand87%1,436sold next sixyears. over 1.15millionsquaremetres,willbecompletedthe construction. Over18,000residentialunits,withatotalGFAof tendered outandarenowinvariousstagesofplanning or so,12MTRpropertydevelopmentpackageshavebeen In ourresidentialdevelopment,duringthepastfouryears in May2017. Investment LimitedandK.WahInternationalHoldings by SinoLandCompanyLimited,ChinaOverseas& Kam SheungRoadStationPackage1toaconsortiumformed As agentfortherelevantsubsidiaryofKCRC,weawarded Annual Report 2017 65
Financials and Other Information Corporate Governance Business Review and Analysis Overview BUSINESS REVIEW HONG KONG PROPERTY AND OTHER BUSINESSES
Progress of Property Development Packages Awarded
Project Status
Location Design Foundation Works Superstructure
LOHAS Park Package 4 Completed Completed In progress
Tai Wai Station Completed In progress In progress
LOHAS Park Package 5 Completed Completed In progress
LOHAS Park Package 6 Completed Completed In progress To be started in first half Tin Wing Stop Completed In progress of 2018 LOHAS Park Package 7 Completed Completed In progress To be started in first half LOHAS Park Package 8 Completed of 2018 To be started in first half LOHAS Park Package 9 Completed Completed of 2018 To be started in first half LOHAS Park Package 10 Completed Completed of 2018 To be started in first half Ho Man Tin Station Package 1 In progress of 2018
Wong Chuk Hang Station Package 1 In progress
Wong Chuk Hang Station Package 2 In progress
West Rail Line Property Development Plan The Company acts as development agent for the West Rail property projects.
Actual/Expected Site Area tender Actual/Expected Station/Site (hectares) award date completion date Property Development Packages awarded Tuen Mun 2.65 August 2006 By phases from 2012 – 2014 Tsuen Wan West (TW7) 2.37 September 2008 2014 Nam Cheong 6.18 October 2011 By phases from 2017 – 2019 Long Ping (North) 0.99 October 2012 2017 Tsuen Wan West (TW5) Cityside 1.34 January 2012 2018 Tsuen Wan West (TW5) Bayside 4.29 August 2012 2018 Tsuen Wan West (TW6) 1.38 January 2013 2018 Long Ping (South) 0.84 June 2013 2019 Yuen Long 3.91 August 2015 2022 Kam Sheung Road Package 1 4.17 May 2017 2025 28.12 Property Development Packages to be awarded Kam Sheung Road Package 2 About 5.17 2024 – 2025 2031 – 2032 Pat Heung Maintenance Centre About 23.56 Under review Under review 28.73 Total 56.85
66 MTR Corporation 2 1 Notes: Property DevelopmentPackagestobeAwarded ^ * # Property DevelopmentPackagesCompletedduringtheyearandAwarded Yuen Long Ho ManTinStation Wong ChukHangStation LOHAS ParkStation Location Yuen LongStation Nam CheongStation Long PingStation Kam SheungRoadStation Wong ChukHangStation Tin WingStop Tai WaiStation Tai Wai Wings atSeaII Wings atSeaand LOHAS ParkStation Package 1 Ho ManTinStation Location PARC CITY Tsuen WanWestStation Cullinan West The Spectra Package 1 Package 1 Tin Wing Package 5 Ocean PrideandSupreme Long Ping(South) Package 2 Package 6 THE PAVILIABAY Package 7 Package 8 Package 9 Package 10 These propertydevelopmentpackagesare subjecttoreviewinaccordancewithplanningapproval,landgrantconditionsand completionofstatutoryprocesses. Property developmentpackagesforwhich weareactingasdevelopmentagentfortherelevantsubsidiariesofKCRCnotinclud ed. including a24-hourpedestrianwalkwayandcoveredlandscapeplaza excluding abicycleparkwithcycletrack as developmentagentfortherelevantsubsidiariesofKCRC # # # # # Sun Hung Kai Properties Limited Sun HungKaiPropertiesLimited Company Limited Company Limited New WorldDevelopment Sun HungKaiPropertiesLimited Goldin FinancialHoldingsLimited Developers Chinachem Group Sun HungKaiPropertiesLimited Sino LandCompanyLimited K. WahInternationalHoldingsLimitedand K. WahInternationalHoldingsLimited Limited and China OverseasLand&Investment Sino LandCompanyLimited, Ping AnRealEstateCompanyLimited Road KingInfrastructureLimitedand Sun HungKaiPropertiesLimited Wheelock andCompanyLimited CK AssetHoldingsLimited Chinachem Group Sino LandCompanyLimited Kerry PropertiesLimitedand Nan FungGroupHoldingsLimited Vanke Property(Overseas)Limited New WorldDevelopmentCo.Ltd.and Wheelock andCompanyLimited CK AssetHoldingsLimited Wheelock andCompanyLimited Nan FungGroupHoldingsLimited Residential Retail Residential Residential Type
Retail Residential Retail Residential Residential Residential Type Retail Residential Kindergarten Retail Residential Residential Residential Residential Retail Residential Residential Kindergarten Retail Residential Residential Residential Residential Residential Kindergarten Retail Residential Residential Kindergarten Residential Residential Gross floor area Gross floorarea About 320,000 Notes 1and2 258,100 59,400 59,400 (sq. m.) 47,000 floor area floor area 126,455 190,480 122,302 214,700 114,896 102,336 167,100 136,970 104,110 69,000 69,000 11,210 66,114 26,660 48,675 53,600 91,051 40,000 41,990 45,800 62,711 44,500 70,260 97,000 75,400 11,535 60,620* (sq. m.) 1,000 1,160 Gross Gross 205 550 810 ^ package tenders November 2014 December 2016 December 2017 December 2015 February 2017 February 2015 October 2014 October 2011 October 2012 October 2015 2018 –2021 January 2012 January 2015 January 2013 August 2015 August 2012 March 2016 award date June 2013 June 2015 Period of Period of April 2014 May 2017 Tender Tender
Annual Report 2017 completion date completion date By phases from By phasesfrom By phases from By phasesfrom 2023 –2026 2018 –2019 2017 –2019 Expected Expected Expected Expected 2022 2022 2022 2017 2022 2021 2018 2025 2019 2023 2019 2018 2020 2018 2022 2021 2022 2022
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EXPANDING THE PROPERTY PORTFOLIO As our Hong Kong rail network expands, this yields on schedule. The Company will contribute a total of HK$4.98 additional opportunities for residential and commercial billion to the development, of which HK$2.44 billion has property developments. already been invested. The remaining HK$2.54 billion will be paid upon the completion of mall construction, which is Investment Properties expected to be in 2019. MTR will also bear the fit out cost of Over the next four years or so our investment properties the shopping centre. Upon completion of the project, MTR will portfolio in Hong Kong will expand significantly as more retain the ownership of the shopping centre, in addition to retail space is added. Two of these projects were completed profit sharing from the whole development. in 2017, namely the Maritime Square 2 and the seventh and eighth floors of Telford Plaza II. A further 105,120 square Property Development metres GFA will be added by the two that remain under We are continuing to examine suitable sites along our railway construction, namely the new LOHAS Park shopping centre lines where other properties might be developed. and the Tai Wai shopping centre. Above our depot in Siu Ho Wan on Lantau Island around The Tai Wai Shopping Centre will have 60,620 square metres 14,000 residential units could be built, subject to the necessary GFA and is targeted to complete in 2022. Foundation and zoning and other statutory approvals. The Environmental superstructure works are in progress and on schedule. The Impact Assessment reports for this project were approved Company has already contributed HK$7.5 billion to this by Government in November 2017. The statutory planning development package, and will, in addition to profit sharing procedures commenced with the draft Siu Ho Wan Outline from the whole development, retain ownership of the mall Zoning Plan being agreed by the Town Planning Board for when completed and bear the fit-out costs. District Council consultation on 5 January 2018.
The LOHAS Park Shopping Centre will have 44,500 square A second possible site is the Yau Tong Ventilation Building. The metres GFA and is targeted to complete by the end of 2020. rezoning process for this project was completed in April 2017 Foundation and superstructure works are in progress and and the gazetted road works scheme was approved in August 2017. At this preliminary stage there is no assurance that either project would be commercially viable. 68 MTR Corporation December 2017, more than 10,000 service providers in Hong December 2017,morethan10,000 serviceprovidersinHong Limited in2017declinedby30.5% toHK$173million.Asat31 The Company’sshareofnetprofit fromOctopusHoldings Octopus The DailyTelegraphintheUK2014. following similarawardsfromCNN.comintheUS2015and the onlycablecarinAsiatohavegainedthisstatusthreetimes, as oneof“TheWorld’s10bestcablecars”.NgongPing360is In June2017,NgongPing360wasrecognisedbyUSAToday fell by38.9%to1.04million. 32.7% in2017toHK$263million.Visitornumbersfortheyear associated themevillage(“NgongPing360”)decreasedby In consequence,revenueattheNgongPingCableCarand the successfulcompletionofropereplacementproject. the public.CableCarserviceresumedon5June2017after which timetheassociatedthemevillageremainedopento 4 June2017fortheplannedropereplacementworks,during The NgongPingCableCarwasclosedbetween9Januaryand Ngong Ping360 OTHER BUSINESSES assistance totheMacauLightRapid Transitproject. contract toprovideprojectmanagement andtechnical 64.8% toHK$356million,mainlycontributedbytheservice Revenue fromourconsultancybusinessin2017increasedby consultancy servicestoclientsinandoutsideofHongKong. As oneoftheworld’sleadingrailwayoperatorsweoffer Consultancy Business regular use. issued On-LoanAdultOctopuswasintroducedtoencourage an “InactiveOctopusAdministrativeFee”applicabletonewly HK$35 toHK$50enhancecustomerconvenience,while limit” fornewlyissuedOn-LoanOctopuswasincreasedfrom were effectivestartingfrom1October2017.The“convenience New measuresforthenewlyissuedOn-LoanAdultOctopus reached 14.5millionandHK$193.6respectively. 34.4 million.Averagedailytransactionvolumesandvalue other stored-valueOctopusproductsincirculationreached Kong wereacceptingOctopusforpayment.Totalcardsand Annual Report 2017 69
Financials and Other Information Corporate Governance Business Review and Analysis Overview BUSINESS REVIEW HONG KONG NETWORK EXPANSION
Railway Development Strategy 2014 project proposals Express Rail Link 4 submitted 26km target completion in third quarter of 2018
Shatin to Central Link 17km 10 stations Tai Wai to Hung Hom Section target completion in mid-2019 Hung Hom to Admiralty Section target completion in 2021
70 MTR Corporation Our Aims and Achievements The expansion of our Hong Kong railway network contributes to our goals by enhancing connectivity and ensuring we meet future transport needs. All new railway projects owned by MTR and those entrusted to MTR by Government take years of careful planning and diligent execution to ensure they meet the community’s expectations for safety, efficiency and the environment.
Following the opening of the Kwun Tong Line extension and the South Island Line (East) in 2016, our focus is the Express Rail Link and the Shatin to Central Link. These projects are particularly challenging in their scale and complexity. As they are of great importance to Hong Kong and generate much public interest, we communicate openly and effectively with a wide range of stakeholders. Both projects are making significant progress towards their scheduled openings.
We continue to work with Government on its strategy to continue using railway as the backbone in the development of Hong Kong’s public transport network. Under RDS 2014, Government has identified seven additional rail projects. Project proposals for four of these lines have been submitted to Government and we are now preparing a fifth project proposal.
Our Challenges • Carry out cross-boundary testing and • Adopt innovative design and technology in various commissioning of trains and systems, as well as the aspects of construction projects. For example, West interface with the Mainland authorities, to complete Kowloon Station has been designed to allow ample statutory inspections in time for the scheduled sunlight to penetrate through into different areas of opening of the Express Rail Link the building • Ensure smooth transition of all systems and trains, • Maintain knowledge and experience gained during so that the existing West Rail Line can be seamlessly construction projects so they can be applied to connected to the existing Ma On Shan Line by the future opportunities under RDS 2014 new Shatin to Central Link
Our Strategies • Delivery Targets: • Growth and Development: Implement good project management practices to Create a dynamic and interactive platform to ensure good progress on the two projects entrusted develop effective project proposals for new by Government. The Express Rail Link is scheduled railway projects through RDS 2014, and establish a to open by the third quarter of 2018. The Shatin to pipeline of future project deliveries in Hong Kong. Central Link Tai Wai to Hung Hom Section and the Leverage opportunities from such projects to grow Hung Hom to Admiralty Section are scheduled to competency that can contribute to the Company’s open by mid-2019 and 2021 respectively business diversification and long-term sustainability • Interfacing Effectiveness: Strengthen collaboration among internal departments and with key external stakeholders. Enhance integration on the handover of railway extension projects to the operating railway
Annual Report 2017 71 BUSINESS REVIEW HONG KONG NETWORK EXPANSION
Express Shatin to Central Link Rail Link Tai Wai to Hung Hom to Hung Hom Section Admiralty Section 98.6% 93.9% 63.6% complete complete complete
72 MTR Corporation Works and Finishes and Building Services works Works andFinishes andBuildingServicesworks substantially complete.Architectural Builder’s The structuralworkatWestKowloon Stationis Building wascompletedinJuly 2017. panels fortheiconicroofof Station Entrance connected on5July2017.Installationoftheglass Hong KongandMainlandsectionsofthelinewere The signallingandcommunicationsystemsofthe in May2017,followedbyotherstatutoryinspections. station bytheFireServicesDepartmentcommenced overhead linesenergised.Statutoryinspectionofthe Station 97.8%complete,alltracksintunnelslaidand December 2017,withcivilworksatWestKowloon This keyprojectwas98.6%completeoverallasat31 the constructionofExpressRailLink. MTR hasbeenentrustedbyGovernmenttomanage underground high-speedrailstationsintheworld. area) WestKowloonStation,oneofthelargest approximately 400,000-squaremetre(usablefloor the MainlandofChina.Itwillbeservedby Guangzhou andthehighspeedrailnetworkin Rail LinkwillconnectHongKongtoShenzhen, The 26-kmhigh-speedcross-boundaryExpress Express RailLink length totheoverallHongKongrailnetwork. Shatin toCentralLink,willaddanother43kmroute Kong ExpressRailLink(“ExpressLink”)andthe Kong SectionoftheGuangzhou-Shenzhen-Hong railway projectsunderconstruction,namelytheHong the comingyears,underRailGen2.0,twocurrent Our HongKongrailnetworkcovers230.9km.Over RAIL GEN2.0:NEWLINESUNDERCONSTRUCTION Rail Gen 2.0, with rail as the backbone of public Rail Gen2.0,withrailasthebackboneofpublic experience throughtheuseoftechnology.Beyond network, aswellinitiativestoenhancecustomer major upgradesandreplacementsontheexistingrail new railprojectsunderconstruction,alsocovers growth inHongKongwhich,additiontothetwo Rail Gen2.0encapsulatesourneartermrailbusiness even furtherraildevelopment. Railways andMajorRoadsbeyond2030”mayadd long term,Government’s“StrategicStudieson the HongKongrailnetworkby35kmwhilstin Strategy 2014(“RDS2014”)willpotentiallyincrease transportation, projectsunderRailwayDevelopment this line. arrangements for and maintenance the futureoperation Government regarding We areindiscussionwith are expectedtocommenceinthesecondquarter. remains thethirdquarterof2018andtrialoperations The targetopeningdateoftheExpressRailLink guided tours. providing visitorswithanin-trainexperiencethrough at theShekKongStablingSidingsinOctober2017, preview ofthetrains,XRLTrainOpenDayswereheld in December2017.Togivemembersofthepublica and cross-boundarydynamictestingwascompleted arrived inHongKongfromthefactoryQingdao In August2017allninetrainsforthenewlinehad facilities remainsonthecriticalpath. programme, butthetimelycompletionofallCIQ purview oftheCorporationareinlinewith Immigration &Quarantine(“CIQ”)areasunderthe are underway.Inparticular,worksintheCustoms,
Annual Report 2017
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We welcomed the announcement made on 25 July 2017 by welcome these two steps in the process and look forward to Government regarding the proposed co-location arrangement completion of the third and final step, which is the enactment for the Express Rail Link. The co-location arrangement will of the necessary legislation by the Legislative Council of the maximise the service convenience for passengers and help HKSAR (“LegCo”). realise the line’s full transport, social and economic benefits. Shatin to Central Link In accordance with the “Three-step Process” to implement The ten-station 17-km Shatin to Central Link, which was these arrangements, on 18 November 2017 the Government entrusted to MTR by Government, will create vital new links of the HKSAR and the People’s Government of Guangdong across Hong Kong. It is a strategic railway that connects and Province signed the Co-operation Arrangement between the extends the existing network. The first phase of the Shatin to Mainland and the HKSAR on the Establishment of the Port Central Link is the 11-km Tai Wai to Hung Hom Section and at the West Kowloon Station for Implementing Co-location the second phase is the 6-km Hung Hom to Admiralty Section. Arrangement (“Co-operation Arrangement”) to kick-start the When the Tai Wai to Hung Hom Section is completed, it will necessary work to implement the future clearance procedures extend the existing Ma On Shan Line from Tai Wai via six for the Express Rail Link. The Co-operation Arrangement stations to the West Rail Line to form the “East West Corridor”. was subsequently approved by the Standing Committee of When the Hung Hom to Admiralty Section is completed, the National People’s Congress on 27 December 2017. We it will extend the existing East Rail Line across the harbour
74 MTR Corporation the Antiquities and Monuments Office in June 2017. Steady the AntiquitiesandMonumentsOfficeinJune2017.Steady for theSungWongToiStationworkssitewasacceptedby section oftheline.Thefinalreportarchaeologicalworks substantial completionofallcivilandstructuralworksonthis (formerly knownasToKwaWanStation).Thissignifiesthe known asMaTauWaiStation)andSungWongToiStation last twonewstations,namelyToKwaWanStation(formerly have beencompleted,asthestructuralworksfor For theTaiWaitoHungHomSection,tracklayingworks Admiralty Section93.9%and63.6%completerespectively. 2017, withtheTaiWaitoHungHomSectionand Overall, thisprojectwasabout81.2%completeby31December East RailLine. Tsuen WanLineandtheTaiWaitoKowloonTongsectionof choices particularlyinthebusycross-harboursectionof to travellers,whichwillprovidecustomerswithmoreroute and HongKong.Alternativerouteswillalsobecomeavailable reduced significantlybetweenNewTerritoriesNorth,Kowloon the entireHongKongrailwaynetwork.Travellingtimewillbe several existingrailwaylinesandenhancetheconnectivityof Upon completion,theShatintoCentralLinkwillconnect “North SouthCorridor”. Station) andAdmiraltyStationthroughHungHomtoformthe to ExhibitionCentreStation(formerlyknownas additional worksareaswhilereducingtheimpactonroadusers. Convention Avenue,FlemingRoadandExpoDrivetocreate schemes arebeingimplementedatdifferentstagesalong limitations inWanChaiNorth,temporarytrafficmanagement and fullexcavationofthestationisprogressing.Duetospace walls ofExhibitionCentreStationissubstantiallycomplete by theendof2017.Constructionworkfordiaphragm and unfavourablegroundconditions,was54.8%complete site handover,incompleteentrustedworksbyotherparties Exhibition CentreStation,whichhasbeenaffectedbylate seabed ofVictoriaHarbourasatFebruary2018. nine ofthe11immersedtubeunitshavebeeninstalledon rail tunnel connecting the Hung Hom and Causeway Bay areas, excavation workshavebeencompleted.Forthecross-harbour For theHungHomtoAdmiraltySection,alltunnel-boring night duringnon-traffichours. works, includingdynamictesting,arebeingcarriedoutat existing railwaylinesisnotaffected,someofthenecessary in theoperatingrailway.Toensurethatnormaloperationof interfaces andintegrationwithvariousnewoldsystems corridor willbehighlycomplex,involvingmulti-disciplinary Shan lines,thecommissioningandtestingworksofthisrail new sectionwillconnecttotheexistingWestRailandMaOn (“E&M”) worksandinteriorfittingoutatstations.Asthe progress isnowbeingmadeontheelectricalandmechanical Annual Report 2017 75
Financials and Other Information Corporate Governance Business Review and Analysis Overview BUSINESS REVIEW HONG KONG NETWORK EXPANSION
Admiralty Station will become a major interchange hub for the new Exhibition Centre Station. As a result of incomplete the Shatin to Central Link, Island, Tsuen Wan and South Island entrusted works handed over by another third party lines. To cater for the Shatin to Central Link, in the extended contractor at another site at Wan Chai North, the completion part of the station, structural works and building service of this section has been further delayed by an additional three installation are well underway. months (to a total expected delay of nine months). However, the Hung Hom to Admiralty Section is still targeted for As part of the Hung Hom to Admiralty Section, the existing completion in 2021. East Rail Line will be re-signalled. The dynamic testing of the new signalling systems with East Rail Line trains during non- For both the Tai Wai to Hung Hom Section and the Hung Hom traffic hours is now in full swing on the whole of the East Rail to Admiralty Section, our project teams continue to work Line, and we target the works to be completed in mid-2019. diligently to explore and implement measures to improve progress and recover delays caused by external events and Despite reasonable construction progress, and as reported a third parties. number of times previously, the programme for delivery of the Shatin to Central Link has been impacted by certain key The amount entrusted to the Company by Government for external events. For the Tai Wai to Hung Hom Section, the the advance works under the 2011 Entrustment Agreement discovery of archaeological relics in the Sung Wong Toi Station for Advance Works Relating to the Shatin to Central Link (“SCL area led to an 11-month delay. However, with hard work by Advance Works Entrustment Agreement”) was HK$7,350 the teams involved and the successful implementation of a million. In January 2017, Government submitted to the number of delay recovery measures, the length of the delay LegCo Public Works Subcommittee the application for has been reduced and the estimated completion of this additional funding needed in excess of amounts retained section has been advanced by six months to mid-2019. For the by Government from the original funding. The additional Hung Hom to Admiralty Section, we had previously reported a funding of HK$848 million was approved by LegCo Finance six-month delay due to a number of external factors, including Committee in June 2017. the late handover by a third party of construction sites for
76 MTR Corporation second half of 2018. We await Government’s invitation in second halfof2018.WeawaitGovernment’s invitationin while thatfortheNorthIslandLine willbesubmittedinthe Tung ChungWestExtension(and TungChungEastStation), Line. Wehavealsosubmittedthe projectproposalforthe Northern Link(andKwuTungStation)andtheEastKowloon project proposalsfortheTuenMunSouthExtension, We arenowindiscussionwithGovernmentonthesubmitted Tung ChungEastStation)andtheNorthIslandLine. the EastKowloonLine,TungChungWestExtension(and South Extension,theNorthernLink(andKwuTungStation), proposals forfiveoftheseprojects,namelytheTuenMun implemented underRDS2014andhasinvitedustosubmit Government hasidentifiedsevenadditionalrailprojectstobe Beyond thetwonewRailGen2.0projectsunderconstruction, NEW RAILPROJECTSBEYONDGEN2.0 to Governmentforreviewon5December2017.Takinginto Entrustment Agreementandthelatestestimatewassubmitted CTC forthemainconstructionworksunderSCL The Companycompletedadetailedreviewoftheestimated revised upwardssignificantly. Central LinkCosttoComplete(“CTC”)wouldneedbe major infrastructureprojectsinHongKong,theShatinto factors anddifficultiessimilartothoseencounteredbymost that, duetothecontinuingchallengesposedbyexternal HK$70,827 million.TheCompanyhaspreviouslyannounced Shatin toCentralLink(“SCLEntrustmentAgreement”)was Agreement forConstructionandCommissioningofthe the mainconstructionworksunder2012Entrustment The sumentrustedtotheCompanybyGovernmentfor side developmentatExhibitionCentreStation). additional scope(includingfoundationworksforafuturetop- construction sitesinWanChaiNorth,aswellunbudgeted of SungWongToiStation,thelateorincompletehandover such asthehandlingofarchaeologicalfindsatworksites is attributabletoadditionalcostsarisingfromexternalfactors, assessment, around70%oftheincrease(netcontingencies) an increaseof23%thecostmainworks.Inour million fromHK$70,827to$87,328million,representing construction worksoftheShatintoCentralLinkbyHK$16,501 the Companyhasincreasedlatestestimateofmain scope andlateorincompletehandoverofconstructionsites, archaeological finds,Governmentrequestsforadditional account anumberoffactors,includingissuessuchasthe Lantau MetropolisandNewTerritories North. demand arisingfromthetwostrategic growthareas,theEast required tosatisfytransportneeds beyond2030,includingthe the strategictransportinfrastructurenetwork(includingrail) Major Roadsbeyond2030”in2018.Thisstudywillexamine take forwardtherelated“StrategicStudiesonRailwaysand backbone ofpublictransport,Governmentisplanningto meet thelongertermdemandfortransportwithrailas 2030” toexamineHongKong’sfuturedevelopment.To 2030+: TowardsaPlanningVisionandStrategyTranscending Government isconductingtheplanningstudy,“HongKong Station andtheSouthIslandLine(West). respect oftheremainingtwoprojects,namelyHungShuiKiu Annual Report 2017 77
Financials and Other Information Corporate Governance Business Review and Analysis Overview BUSINESS REVIEW MAINLAND OF CHINA AND INTERNATIONAL BUSINESSES
1,940 million passengers carried outside of Hong Kong
Around railway 9 services 6.49 million in average weekday patronage 4 countries outside of Hong Kong
Around 1,960 km operating route length outside of Hong Kong
78 MTR Corporation Our Aims and Achievements As part of our aim to become a leading multinational company, we are taking our strategy of growing and connecting communities into markets beyond Hong Kong. We have established a presence in three key geographies – the Mainland of China, Europe and Australia. In each of these, we aim to become recognised as the best rail operator through focusing on delivering what customers really want.
In 2017, our existing operations in the Mainland of China, the UK, Sweden and Australia continued to improve their reliability and levels of customer satisfaction. During the year, we were awarded South Western Railway franchise in the UK and our concession to operate Melbourne’s Metropolitan Rail Service was extended for seven years. We also signed the concession agreement for Hangzhou Metro Line 5 and handed over the majority of flats from Tiara in Shenzhen, our first property development outside Hong Kong.
Our Challenges • Increasing competition in the passenger rail of customer satisfaction and operational market both in the Mainland of China and performance overseas, as more rail operators compete outside their home markets • Different operating and investment models are required in the Mainland of China and overseas • Increasing expectations from clients and markets customers towards rail operators in terms
Our Strategies
• Leverage on our world leading performance in • Selectively pursue opportunities in new markets delivering integrated railway services to capture construction, operation and maintenance • Strengthen our partnerships with clients and local opportunities in our existing markets stakeholders
• Adapt our business models, such as “Rail plus • Ensure best practices are shared among our Property”, to suit the Mainland and overseas businesses in and outside of Hong Kong, contexts to achieve our aim of becoming a leading multinational company
Annual Report 2017 79 BUSINESS REVIEW MAINLAND OF CHINA AND INTERNATIONAL BUSINESSES
EBITDA EBIT HK$3,216m HK$3,080m 237.1% 269.3%
80 MTR Corporation FINANCIAL PERFORMANCE (“PPP”) project, as well as a full-year contribution from (“PPP”) project,aswellafull-year contributionfrom Metro Northwest(“SMNW”)Public PrivatePartnership from thedesignanddeliveryworks oftheSydney subsidiaries wasmainlyduetoinitial profitrecognition of 80.0%toHK$758millioninEBITDA fromourrailway the year.InourInternationalbusinesses,increase sales proceedsandrelatedcostswerebookedduring high-rise andpodiumunitsinTiaraShenzhen,the Shenzhen MetroLine4(“SZL4”).Withthehandoverof in 2017,mainlyduetohigheroperatingexpensesat subsidiaries decreasedby13.8%toHK$144million property rentalandmanagement In theMainlandofChina,EBITDAfromourrailway, Total EBITDA Mainland ofChinaandInternationalBusinesses Revenue Railway Subsidiaries International Businesses Revenue Railway, PropertyRentalandManagementSubsidiaries Mainland ofChinaBusinesses In HK$million
Total EBIT EBITDA Total EBITDAMargin(in%) EBIT Total EBITMargin(in%) Share ofProfitAssociates Revenue Property DevelopmentSubsidiaries EBIT fromMainlandofChinaandInternationalRailway, EBITDA EBIT – ArisingfromtheMainlandofChinaandInternational Profit fortheyearattributabletoshareholdersofCompany: Share ofProfitAssociatesandJointVenture – Arising from the Mainland of China Property – ArisingfromtheMainlandofChinaProperty
Total Number ofpassengerscarriedbyourRailwaySubsidiariesand
Operating profit before depreciation, amortisation and Operating profitbeforedepreciation,amortisationand Operating profit before interest and finance charges and Operating profitbeforeinterestandfinancecharges Railway AssociatesandJointVenture(beforeinteresttax) (net ofnon-controllinginterest)plusShareProfitfrom Property RentalandManagementSubsidiaries associates outsideofHongKong(inmillion) Railway, PropertyRentalandManagementBusinesses Development Businesses variable annualpayment(“EBITDA”) after variableannualpayment(“EBIT”)
recurrent profits. an attributablebasis,representing 10.2%ofourtotal contributed netaftertaxprofits ofHK$879millionon associates andjointventureoutside ofHongKong railway, property rentaland management subsidiaries, the MainlandofChinapropertydevelopment,our Railway franchisesinceAugust2017.Excluding the contributionfromoperatingSouthWestern Operations Ltd.inNovember2016,partlyoffsetby end oftheconcessionforLondonOvergroundRail in shareofprofitassociateswasmainlyduetothe which wetookoverinDecember2016.Thedecrease our newfranchise,MTRPendeltågenABinSweden, Year ended31December 16,179 13.4% 12.8% 3,216 3,080 6,996 2,314 1,467 2,314 1,019 1,898 1,940 2017 811 144 758 137 629 879 290 31 12,664 1,348 1,828 2016 6.4% 5.6% 954 814 834 167 421 309 159 366 888 366 516 226 263 779 60 Annual Report 2017 Inc./(Dec.) % Inc./(Dec.) % 7.0% pts. 7.2% pts. 237.1 269.3 103.6 419.0 532.2 532.2 287.5 143.6 (13.8) (13.8) (48.3) 27.8 80.0 65.2 70.3 28.3 (0.4) 6.1 81
Financials and Other Information Corporate Governance Business Review and Analysis Overview BUSINESS REVIEW MAINLAND OF CHINA AND INTERNATIONAL BUSINESSES
RAILWAY BUSINESSES IN THE MAINLAND OF CHINA Beijing 2017 the line recorded 25 million passenger trips and average In Beijing, our 49% associate Beijing MTR Corporation Limited weekday patronage of about 77,000. Full line operation, which (“BJMTR”) operates four lines, namely Beijing Metro Line 4 will mark the start of the operating concession, is targeted (“BJL4”), the Daxing Line, Beijing Metro Line 14 (“BJL14”) and after 2018. The line’s new Nongdananlu Station opened in the Northern Section of Beijing Metro Line 16 (“BJL16”). On- December 2017. time performance in 2017 averaged 99.9% across the four lines. Shenzhen Beijing Metro Line 4 and the Daxing Line SZL4, operated by MTR Corporation (Shenzhen) Limited For the year, the combined ridership of BJL4 and the Daxing (“MTR(SZ)”), achieved good operational performance during Line was about 451 million passenger trips and average 2017. Patronage grew by 5.4 % to 210 million and average weekday patronage was more than 1.33 million, respectively weekday patronage reached 580,000. On-time performance 2.1% and 3.1% higher than 2016. was 99.9%.
Beijing Metro Line 14 As noted previously, although patronage has continued to increase on SZL4, there has been no increase in fares The first three phases of BJL14 are now operational. They since we started operating the line in 2010. Unlike our rail recorded a combined 220 million passenger trips and average businesses in Beijing and Hangzhou, MTR(SZ) does not benefit weekday patronage of about 687,000 in 2017. The new from a shadow fare subsidy mechanism. We understand Pingleyuan Station on this line opened in December 2017. that discussions continue within the Shenzhen Municipal Beijing Metro Line 16 Government regarding fare adjustments. If appropriate BJL16 is a PPP project and the first phase, the 19.6-km Northern fare adjustments are not implemented soon, the long-term Section, commenced operation on 31 December 2016. In financial viability of SZL4 is expected to be impacted.
82 MTR Corporation (“HZL5”), another PPP project, was signed by the Company (“HZL5”), anotherPPPproject,wassignedbytheCompany The ConcessionAgreementforHangzhouMetroLine5 Hangzhou MetroLine5 mainly duetoaone-offprovision. at 99.9%.TheshareoflossincreasedtoHK$68millionin2017 performance wasexcellent,withon-timetrain with averageweekdaypatronageof616,000.Operational line isgrowingandincreasedby13%in2017to225million, Limited, operatesHangzhouMetroLine1.Patronageonthis Our 49%associateinHangzhou,HangzhouMTRCorporation Hangzhou MetroLine1andExtension Hangzhou arrangements forthisextension. Shenzhen MunicipalGovernmentregardingtheoperational completion byendof2020.MTR(SZ)isindiscussionwiththe works continuetomakeprogresstowardsaprojecttarget financed bytheShenzhenMunicipalGovernment.Thecivil construction oftheNorthernExtensionSZL4,whichwillbe a projectmanagementagreementtosupervisethe Our consultancysubsidiaryinShenzhenenteredinto in fullswing. venture. Tenderingandconstructionworksofthelinearenow investment fromMTRofRMB2.616billionintothisjoint investments fromshareholders.Weanticipateanequity joint venturecompanythroughbankborrowingsandequity estimated atRMB10.9billionwhichwillbefinancedbythe in thisjointventurecompany.ThetotalPartBinvestmentis commencement ofpassengerservice.Wehavea60%interest as welltheoperationsandmaintenancefor25yearsafter to undertaketheinvestmentin,andconstructionof,PartB, Group formedajoint-venturecompanyinSeptember2017 in, andconstructionof,PartA.WeHangzhouMetro Hangzhou MetroGroupisresponsiblefortheinvestment covers theelectricalandmechanicalsystemsrollingstock. Part B.Arelatestotheline’scivilconstructionandB The constructionoftheHZL5projectisdividedintoPartAand end of2019. a totalof38stations.Itisexpectedtoenterservicearoundthe in XiaoshanDistricttoLutingluStationYuhangDistrict,with underground metrolinerunningfromXiangzhangluStation Metro Groupon26June2017.The51.5kmHZL5isan with theHangzhouMunicipalGovernmentand Annual Report 2017 83
Financials and Other Information Corporate Governance Business Review and Analysis Overview BUSINESS REVIEW MAINLAND OF CHINA AND INTERNATIONAL BUSINESSES
PROPERTY BUSINESSES IN THE MAINLAND OF CHINA Our property development businesses in the Mainland of of the Company’s 49% interest in Tianjin TJ-Metro MTR China achieved significant growth in revenue and profit due Construction Company Limited, as well as the conditional to development bookings related to Tiara at Shenzhen Metro future acquisition of a shopping centre to be developed on Longhua Line Depot Site Lot 1. the Beiyunhe Station site. Relevant government approval was obtained for the disposal of our 49% interest in July 2017 and Shenzhen the Sale and Purchase Agreement for the shopping centre was The previously sold high-rise residential units of Tiara, which signed on 26 January 2018. form the vast majority of the development, were handed over to buyers in June 2017. The project has a total developable Property Rental and Management GFA of approximately 206,167 square metres. This includes Businesses a retail centre of about 10,000 square metres (GFA), which is The Company manages self-developed and other third party scheduled to open in late 2018, subject to approval by the properties in the Mainland of China which, as at 31 December Shenzhen Municipal Government. Profits were booked in 2017 2017, had a total GFA of 390,000 square metres. Our shopping in respect of all the units handed over to buyers. mall in Beijing, Ginza Mall, is undergoing a partial revamp and was 99% occupied as at 31 December 2017 excluding the area Tianjin under revamp. In March 2017, a framework agreement was signed with a subsidiary of Beijing Capital Land Limited for the disposal
EUROPEAN RAILWAY BUSINESSES United Kingdom route length of 998 km serving 203 stations, covering London and south western England. Since taking over the franchise, TfL Rail / Elizabeth Line services have been affected by industrial action, which has In London, MTR Corporation (Crossrail) Limited, a wholly been taken across a number of UK franchises at the same time. owned subsidiary of the Company, operates services under We have made every effort to maintain our railway services the “TfL Rail” brand on a 32.5-km, 14-station route between and minimise the associated disruption to passengers. Liverpool Street Station and Shenfield as the first phase in the Crossrail operating concession. The next phase, providing Sweden services between Paddington Station and Heathrow Airport, MTR is the largest rail operator in Sweden in terms of is planned to start in May 2018. TfL Rail will be renamed passenger volume. We operate three key rail businesses in the Elizabeth Line when the tunnel section through central the country, namely Stockholm Metro, MTR Express and the London is completed and becomes operational, which Stockholm commuter rail (“Stockholms pendeltåg”). is targeted for December 2018. It will eventually extend to 118 km from east to west across London and serve 40 Stockholm Metro stations. Since June 2017, new trains have been progressively The operational performance of Stockholm Metro in 2017 was introduced into operation. good, with new highs recorded for operational performance and customer satisfaction. Annual ridership was estimated at South Western Railway 353 million and average weekday patronage at 1.25 million. Through our associate, First MTR South Western Trains Ltd, we have partnered with FirstGroup plc on the South Western MTR Tech AB Railway franchise, as a 30% shareholder. The tender was The Company’s wholly-owned subsidiary MTR Tech AB, which awarded in March 2017 by the Department for Transport carries out rolling stock maintenance for Stockholm metro, (“DfT”) and the franchise was taken over in August 2017. South also performed satisfactorily. It was awarded the contract for a Western Railway is one of the UK’s largest rail networks, with a mid-life upgrade programme for part of the metro fleet.
84 MTR Corporation to conduct joint preliminary studies on integrated property to conductjoint preliminarystudiesonintegrated property one ofthepartnersinBJMTR)and BJMTRinNovember2016 Beijing InfrastructureInvestment CorporationLimited(“BIIC”, MTR signedaCooperationFramework Agreementwith Beijing Mainland ofChinaandMacau GROWTH INITIATIVESOUTSIDEOFHONG KONG stock reliability,upgradingCCTVcameras,providingmore increasing maintenancetoimproveinfrastructureandrolling These enhancementsincludeaddingmorepeakservices, asset maintenanceandcustomerserviceinMelbourne. to deliveringfurtherenhancementsrailwayoperations, operations andmaintenanceagreement,MTMiscommitted to MTM,withathreeyearsextensionoption.Underthenew announced theawardofanewconcessionforsevenyears 2017, andinSeptember2017theGovernmentofVictoria The originaleight-yearconcessionendedinNovember franchise wastakenoverin2009. 2017, withpunctualityrecordedat92%,against87%whenthe metro network.Operationalperformancewassatisfactoryin Melbourne Pty.Ltd.(“MTM”)operatesthe390-km In Melbourne,our60%ownedsubsidiaryMetroTrains Melbourne’s MetropolitanRailService AUSTRALIAN RAILWAYBUSINESSES loyalty programme. delivery ofqualityservices,enhancedmarketing,andourown this lossthroughincreasingpatronagebywayofcontinued to reportalossin2017,andwearemakingeveryeffortstem our originalexpectations.Asaresult,thesubsidiarycontinued 2016. Passengernumbershavecontinuedtorise,albeitbelow departures haveincreasedto104perweeksinceDecember leading railoperator in theSwedish Quality Index2017. Weekly customer serviceperformanceduringtheyear,makingit and Gothenburg.Itdeliveredexcellentoperational operates theMTRExpressintercityservicebetweenStockholm MTR Express(Sweden)AB,ourwholly-ownedsubsidiarywhich MTR Express hard toensurethedeliveryofourcommittedservicelevel. withholding ofservicepaymentsbyourclient.Weareworking timetable inDecember2017provedchallenging,resultinga of theconcession,althoughintroductionanew perspective, improvementshavebeenseensincethetakeover been satisfactory.Fromanoperationalandcustomerservice and atotalroutelengthof247km.Financialperformancehas pendeltåg servesthegreaterStockholmarea,has53stations associate togetherwithEuroMaintRailAB.Stockholms of rollingstockundertakenbyEmtrainAB,a50%owned for fourmoreyears.Theconcessionincludesthemaintenance runs fortenyearstoDecember2026,withanoptionextend the Stockholmspendeltågserviceunderaconcessionthat Our wholly-ownedsubsidiaryMTRPendeltågenABoperates Stockholm commuterrail operation ofother railwayprojects. in Beijingadditiontoinvestment in,constructionand predominantly rail-relatedproperty developmentprojects with BIICtoextendthestrategic co-operationtoother, Depot). InJanuary2017wesigned aLetterofIntent(“LoI”) along BJL4andtheDaxingLine (includingtheNanzhaolu development aboveselectedexistingstationanddepotsites each direction. capacity toprovidemetrotrainserviceeverytwominutesin extending intothecentralbusinessdistrict,withanultimate testing. FuturestagesofSydneyMetrowillseemetroservice to SydneyinSeptember2017andhasbeenundergoing for theproject,areprogressing.Thefirsttrainwasdelivered the depotandstations,aswellpre-operationalplanning stations upgradedtometrostandards.Constructionworksfor SMNW lineincludeseightnewmetrostationsandfiveexisting project, whichisthefirststageofSydneyMetro.The36-km as thefutureoperationsandmaintenanceofSMNWPPP responsible forthedesign,constructionandfinancing,aswell In Sydney,MTRisamemberofconsortiumwhich Sydney MetroNorthwest creating morecareeropportunities. passenger information,cleanertrainsandstations,aswell Annual Report 2017 85
Financials and Other Information Corporate Governance Business Review and Analysis Overview BUSINESS REVIEW MAINLAND OF CHINA AND INTERNATIONAL BUSINESSES
In November 2017, the Company signed a LoI with the Daxing on the West Coast Main Line commencing in April 2019. It will District People’s Government of Beijing Municipality, BIIC and also act as the “shadow operator” to advise High Speed Two BJMTR for studies on the southward extension of the Beijing (“HS2”) Limited and DfT on the preparation and operation of Daxing Line, Nanzhaolu Depot capacity expansion, and the initial HS2 services between London and Birmingham, integrated property development above the depot. scheduled to commence in 2026. The tender is expected to be released in the first quarter of 2018. BJMTR is also seeking other railway opportunities in Beijing to expand its network further. In addition, we are exploring property development opportunities over and around rail stations in the UK. Chengdu In August 2017, we signed a LoI with Chengdu Rail Transit Nordic Region Group covering strategic cooperation on metro, metro related In the Nordic Region, a number of Norwegian rail services will property development and metro operations management be privatised and we submitted our first tender in March 2018 training. We are now investigating the metro PPP and transit- for the Traffic Package South (Trafikkpakke Sør) Operating oriented development opportunities in the city. Concession in southern Norway.
Hangzhou We are also examining property development opportunities In Hangzhou, we are in discussion on another metro PPP over and around rail stations in Stockholm. project and are also exploring metro related property Australia development opportunities. In Australia, we are pursuing the Sydney Metro City and Guangdong-Hong Kong-Macau Bay Area Southwest (“SMCSW”) project, a 30-km extension of SMNW. We are also in active discussions with local governments and Early works by Transport for New South Wales (“TfNSW”) others bodies in Guangdong-Hong Kong-Macau Bay Area to have commenced and the line is targeted to open in 2024. explore rail and property development opportunities around The SMCSW Consortium, formed by MTR and certain other stations and depots that would leverage our experience and participants in SMNW, submitted a non-binding initial track record in Shenzhen and Hong Kong. proposal to TfNSW in March 2017 to participate in the SMCSW project. Subsequently, a commitment deed was entered into In Macau, we were awarded a service contract to provide with TfNSW in December 2017 which will allow the SMCSW project management and technical assistance to the 11-station Consortium to submit an updated proposal in late 2018 to 9.3-km Macau Light Rapid Transit Taipa Line for Gabinete para deliver and integrate trains and systems, as well as to operate as Infra-estruturas de Transportes of the Government of the the SMCSW line. Macao Special Administrative Region in 2016. North America United Kingdom In North America, we were pre-qualified as operator for the In the UK, we submitted our bid for the Wales and Borders rail Toronto Reginal Express Rail project in Canada in December franchise in December 2017 and the decision is expected in 2017. The project will transform the existing GO Transit diesel- the second quarter of 2018. rail commuter system into an electrified railway network in the In partnership with Guangshen Railway Company Limited, Greater Toronto and Hamilton area. The bid process for the an associated company of China Railway Corporation, we project (including the operator) is expected to commence later have been shortlisted to bid for the West Coast Partnership in 2018. franchise in the UK. The franchisee will operate railway services
86 MTR Corporation 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Notes: Mainland ofChinaandInternationalRailwayBusinessesataGlance BJL14, Mainland of China BJL14, MainlandofChina Projects InProgress Melbourne’s Metropolitan Australia TfL Rail/ElizabethLine, Europe (“BJL4”) (“BJL4”) Beijing MetroLine4 Mainland ofChina Projects InOperation Sweden Stockholm commuterrail, Stockholm Metro,Sweden South WesternRailway, (“BJL16”) (“BJL16”) Beijing MetroLine16 MTR Express,Sweden Shenzhen MetroLine4 Hangzhou MetroLine5, BJL16, MainlandofChina Australia Australia Sydney MetroNorthwest, (“HZL1”) (“HZL1”) Hangzhou MetroLine1 Daxing Line of BJL4 Daxing LineofBJL4 HZL1 Extension HZL1 Extension (“BJL14”) (“BJL14”) Beijing MetroLine14 Sydney MetroNorthwest haseightnewstationsandfiveretrofitted stations,anda13-km existinglineextendedwitha23-km newlineconstruction. Subject toarrangementofthegovernment ofNewSouthWales,Australia. Subject toHangzhouMunicipalGovernment’s arrangement. BJL16 PPPconcessionwillstartafterfullline opens. BJL14 PPPconcessionstartedon31December 2015. 15 yearsbytheStateGovernmentofVictoria inAustralia. In September2017,theeight-yearoperating concessionofMelbourne’sMetropolitanRailServicewasextendedforanotherseven years(from2017to2024)atotalof MTR PendeltågenABmanages50outofthe total53stationsintheStockholmcommuterrail. Rolling stockmaintenanceisprovidedbya 50:50jointventurebetweenMTRNordicandEuroMaintRailAB. MTR Expressisnotresponsibleforthemanagement ofthesestations. The licensetooperatethisserviceissubjectrenewal. MTR Expressinitialservicecommencedon21March2015withfullschedulestartedin August 2015. In September2015,theeight-yearoperatingconcessionofStockholmMetrowasextended foranothersixyears(from2017to2023)atotalof14byStockholmauthority. Rolling stockmaintenanceisprovidedbyoursubsidaryMTRTechAB. First MTRSouthWesternTrainsmanages186outofthetotal203stationsin WesternRailway. MTR Crossrailwillmanage28outofthetotal40stationsinElizabethLine. July 2010. Shenzhen MetroLine4Phase1assetsareownedbytheMunicipalGovernment andMTRCorporation(Shenzhen)LimitedtookovertheoperationofPhase1in The O&MconcessionofBJL16Phase1willrununtilfulllineopens. BJL14 Phase2EastSectionhas12stations,11opened(oneiscurrentlybypassed). Phase 3Middle Sectionhas11stations,tenopened(oneiscurrentlybypassed). Rail Service Rail Service United Kingdom United Kingdom United Kingdom Mainland of China Mainland ofChina
Shareholding Corporation Corporation Mixed Mixed 100% 100% 100% 100% 100% MTR MTR 49% 60% 49% 30% 49% 60% 49% 49% 49% 49% 49% O&M Concession O&M Concession O&M Concession O&M Concession O&M Concession O&M Concession O&M Concession O&M Concession O&M Concession O&M Concession PPP (Operations, PPP (Operations, Trains & System) Trains &System) Operations and Operations and Build-Operate- Public-Private- Public-Private- Maintenance Maintenance Open Access Open Access Partnership Partnership Concession Concession Operation Operation Business (“O&M”) (“O&M”) Transfer Transfer (“PPP”) (“PPP”) Model PPP PPP PPP PPP PPP PPP PPP PPP PPP Note 11 Note 6 Note 3 Note 3
Commencement of Commencement of Phase 1: December Phase 1:December Phase 2: June 2011 Phase 2:June2011 Section: May 2013 Section: May2013 Phase 1: July 2010 Phase 1:July2010 Commencement Commencement Expected Date of Expected Dateof September 2009 September 2009 November 2009 November 2009 November 2009 November 2009 November 2012 November 2012 November 2015 November 2015 December 2016 December 2016 December 2010 December 2010 December 2015 December 2015 December 2014 Phase 3 Middle Phase 3Middle of Franchise / of Franchise/ Phase 1 West Phase 1West August 2017 August 2017 Phase 2 East Phase 2East March 2015 March 2015 After 2018 After 2018 After 2018 Operation May 2015 May 2015 Full Line: Full Line: Full Line: Full Line: Section: Section: Section: 2016 2016 2019 2019 2019 2019 Note17 Note16 Note 8
End together End together Until full line Until fullline Concession Concession concession concession Franchise / Franchise / with HZL1 with HZL1 (years) Period opens opens N/A N/A 30 30 30 30 15 25 10 14 30 15 30 25 10 30 30 8 7 Note 15 Note 14 Note 13 Note 9 Note 7 Note 2 Note 14 Phase 3 Middle Phase 3Middle Phase 1 West Phase 1West Phase 2 East Phase 2East Full Line:29 Full Line:37 Phase 1: 10 Phase1:10 Phase 2:10 Section: 11 Section: 12 Number of Number of Phase 1: 5 Phase 1:5 Section: 7 Stations Stations 219 100 203 203 13 38 53 53 40 40 24 31 11 6 3 Note 18 Note 18 Note 12 Note 10 Note 5 Note 4 Note 2 Note 2 Note 1 Note 1
Annual Report 2017 Phase 3 Middle Phase 3Middle Route Length Route Length Full Line:49.8 Full Line:47.3 Phase 1 West Phase 1West Phase 1: 19.6 Phase 1:19.6 Section: 16.6 Section: 16.6 Section: 14.8 Section: 12.4 Phase 2 East Phase 2East Phase 1: 4.5 Phase 1:4.5 Phase 2:16 (km) 51.5 28.2 21.8 247 457 998 118 390 108 5.6 36 36 48 Note 18 87
Financials and Other Information Corporate Governance Business Review and Analysis Overview FINANCIAL REVIEW
Underlying Business Profit grew by 11.3% to HK$10,515 million Total Revenue increased by 22.7%
Strong Credit Ratings
AA+by Standard & Poor’s (long-term)
88 MTR Corporation the Companyareprovidedinfollowingsections. business profitandnetattributabletoshareholdersof The financialreviewoftheGroup’stotalrevenue,underlying shareholders oftheCompanytoHK$16,829million. million anda64.1%increaseinnetprofitattributableto 11.3% increaseinourunderlyingbusinessprofittoHK$10,515 In 2017,theGroupachievedreasonablefinancialresults,witha revaluation, whichisanon-cashaccountingitem. with anygainordeficitarisingfrominvestmentproperty arrived atafteradjustingfortheunderlyingbusinessprofit Net profitattributabletoshareholdersoftheCompanyis referred toasunderlyingbusinesses). development businesses(togetherwithrecurrent Businesses andOtherBusinesses)(ii)property International Railway,PropertyRentalandManagement Rental &ManagementBusinesses,MainlandofChinaand Station CommercialBusinesses,HongKongProperty (comprising HongKongTransportOperations, The Group’sbusinessesconsistof(i)recurrent PROFIT ANDLOSS
(HK$million) otalRe enue u ne otal Re enue activities oftheSydneyMetroNorthwest(SMNW)PPPproject. December 2016andtheincreaseindesignconstruction MTR PendeltågenABsincethefranchisecommencementin 12-month operationoftheStockholmspendeltågserviceby reflecting mainlythecontributionsfromTiara,full Total revenueincreasedby22.7%toHK$55,440million, In 2017,theGrouprecordedanoverallrevenuegrowth. 5 2017 5,440 5 4 1 1 2 6 ,97 ,90 8,201 6,990 ,37 ,99 5 0 8 6 1 201 7 1 1 7 2 2 1 17 an ana e ent u ne e on ropert Rental ana e ent u ar e ropert Rentalan nternat onal Ra l a a nlan o naan t er u ne e e elop ent a nlan o na ropert otal Re enue perat on on ran port o er al u ne e on tat on Annual Report 2017 89
Financials and Other Information Corporate Governance Business Review and Analysis Overview FINANCIAL REVIEW
Underlying Business Profit and Net Profit Attributable to Shareholders of the Company
2017 vs 2016 HK$ million 2017 2016 Inc./(Dec.) Recurrent Businesses EBITDA 17,677 16,947 730 4.3% Depreciation and Amortisation (4,855) (4,127) 728 17.6% Variable Annual Payment (1,933) (1,787) 146 8.2% EBIT 10,889 11,033 (144) (1.3%) Interest and Finance Charges (1,051) (702) 349 49.7% Share of Profit or Loss of Associates and Joint Venture 494 537 (43) (8.0%) Income Tax (1,696) (1,858) (162) (8.7%) Non-controlling Interests (56) (94) (38) (40.4%) Recurrent Business Profit 8,580 8,916 (336) (3.8%) Property Development Businesses Post-tax Property Development Profit – Hong Kong Property Development 916 267 649 243.1% – Mainland of China Property Development 1,019 263 756 287.5% Post-tax Property Development Profit 1,935 530 1,405 265.1% Underlying Business Profit 10,515 9,446 1,069 11.3% Investment Property Revaluation 6,314 808 5,506 681.4% Net Profit Attributable to Shareholders of the Company 16,829 10,254 6,575 64.1% Earnings per Share (in HK$) HK$2.83 HK$1.74 HK$1.09 62.6% Earnings per Share on Underlying Business Profit (in HK$) HK$1.77 HK$1.61 HK$0.16 9.9% Total EBITDA Margin (in %) 36.1% 38.3% (2.2%) pts. Total EBITDA Margin (excluding Mainland of China and International Subsidiaries) (in %) 53.3% 53.9% (0.6%) pt. Total EBIT Margin^ (in %) 23.8% 25.2% (1.4%) pts. Total EBIT Margin (excluding Mainland of China and International Subsidiaries)^ (in %) 32.2% 34.8% (2.6%) pts. Return on Average Equity Attributable to Shareholders of the Company Arising from Underlying Businesses (in %) 6.7% 5.9% 0.8% pt.
^ Excluding Profit on Hong Kong Property Development and Share of Profit or Loss of Associates and Joint Venture
Re urrent u ne A Island Line, as well as increase in interest and finance charges as interest cost relating to these two lines can no longer be Re urrent u ne A u ne capitalised after opening. These were partly offset by higher (HK$ million) otal Re urrent u ne A EBIT of Hong Kong Station Commercial Businesses, Hong Kong t er u ne e Property Rental and Management Businesses, and subsidiaries 17,677 60 1 7 902 a nlan o na an of Mainland of China and International Railway, Property 1 nternat onal Ra l a ropert Rental an Rental and Management Businesses. Further details of the 4,098 0 ana e ent u ar e divisional performance are set out in the ensuing paragraphs. on on ropert Rental an ana e ent u ne e 5,474 012 Post-tax Property Development Profit on on tat on o er al u ne e Post-tax property development profit in 2017 was HK$1,935 on on million, mainly derived from profit recognition of the high-rise 7,475 7 ran port perat on units handed over at Tiara in Shenzhen (which formed the vast ro e t tu e an u ne e elop ent pen e majority of the development) and sundry income sources in (332) 1 2017 201 Hong Kong.
Recurrent Business Profit Dividend Recurrent business profit decreased by 3.8% to HK$8,580 In line with the Company’s progressive ordinary dividend million, mainly due to increase in depreciation and policy, the Board has proposed a final ordinary dividend of amortisation charges resulting from the full 12-month effect of HK$0.87 per share (with a scrip dividend option offered), the opening of the Kwun Tong Line Extension and the South giving a full year ordinary dividend of HK$1.12 per share, higher than the HK$1.07 per share in 2016.
90 MTR Corporation (HK$million) otalRe enue percentage points to9.1%. 35.6% toHK$1,656millionandEBIT margindecreasedby5.5 top progressiverateof35%.As a result,EBITdecreasedby million astheincrementalfarerevenue waschargedatthe annual paymenttoKCRCincreased by4.6%toHK$1,340 the twonewlinesandaddition ofnewassets.Variable by 18.5%toHK$4,479million,mainlyduetheopeningof Depreciation andamortisationchargesincreasedsignificantly 2017, aswellrefundofGovernmentrentandratesin2016. the full12-monthoperatingcostsfortwonewlinesin expenses increasedmainlyowingtohigherstaffcostsand surpassing the2billionpassengertripsperannummark.Total of allourrailandbuspassengerservicesincreasedby2.6%, 4.7% anddecreasedby0.1%respectively.Totalpatronage Intercity services,whicharenotsubjecttoFAM,increasedby Bus Serviceby0.5%.AveragefaresforAirportExpressand 1.4%, whileaveragefaresforLightRaildecreasedby0.1%and Service increasedby0.3%andCross-boundary Line inthelastquarterof2016.AveragefaresforDomestic of theKwunTongLineExtensionandnewSouthIsland mainly duetothepatronagecontributionsafteropening June 2017,totalrevenueincreasedby3.1%.Theincreasewas Despite theroll-overoffareincreaseunderFAMin * Hong KongTransportOperations RECURRENT BUSINESSES
EBIT* Margin(in%) EBITDA Margin(in%) EBIT* EBITDA Total Expenses Total Revenue HK$ million 135 EBIT representsEBITDAnetofdepreciation,amortisationandvariableannualpayment 18,201 2017 3,277 1,076 707 12,840 166 1 7 17 201 (10,726) 18,201 12 2 2 707 1 41.1% 1,656 7,475 2017 9.1% (10,022) 17,655 14.6% 43.2% 2,572 7,633 2016 o e t er e ro oun ar er e A rport pre t Ra lan u er e nter t er e t er Ra l relate n o e otal Re enue (5.5%) (2.1%) 2017 vs2016 (916) (158) 704 546 Inc./(Dec.) pts. pts. (35.6%) (2.1%) 7.0% 3.1% (HK$million) otalRe enue Hong KongStationCommercialBusinesses * percentage pointto79.0%. by 8.3%toHK$4,722millionand EBITmarginincreasedby0.3 subject tovariableannualpayment.Asaresult,EBITincreased by 17.3%toHK$589millionowingahigherlevelofrevenue related revenue.VariableannualpaymenttoKCRCincreased station commercialbusinessesinlinewiththedecreases due toloweroperatingcostsrelatingadvertisingandother other stationcommercialbusinesses.Totalexpensesdecreased were partlyoffsetbydecreasesinrevenuefromadvertisingand contracts andcapacityenhancementprojects.Theincreases revenue fromthetwonewlines,aswellservice telecommunication revenueincreasedduetoincremental of amoreresilienttrademixinourstationshops.Inaddition, of thetwonewlines,aswellpositiverentalreversionbecause increase inthenumberofstationshopsfollowingopening existing contractoftheDutyFreeShopatLoWuStation,an new contractoftheDutyFreeShopatLokMaChauStationand retail revenue.Thisreflectedrentalincomegrowthfromthe Total revenueincreasedby7.8%mainlyduetohigherstation EBIT* Margin(in%) EBITDA Margin(in%) EBIT* EBITDA Total Expenses Total Revenue HK$ million EBIT representsEBITDAnetofdepreciation,amortisationandvariableannualpayment 5,975 2017 4,143 1,071 635 126 201 72 1 0 0 1 170 79.0% 91.6% 4,722 5,474 5,975 2017 (501) 78.7% 90.4% 4,362 5,012 5,544 2016 (532) tat on Reta l A ert n ele o un at on o er al u ne e t er tat on otal Re enue Annual Report 2017 2017 vs2016 0.3% 1.2% 360 462 431 Inc./(Dec.) (31) pt. pts. (5.8%) 8.3% 9.2% 7.8% 91
Financials and Other Information Corporate Governance Business Review and Analysis Overview FINANCIAL REVIEW
Hong Kong Property Rental and Mainland of China and International Railway, Management Businesses Property Rental and Management Subsidiaries
2017 vs 2016 2017 vs 2016 HK$ million 2017 2016 Inc./(Dec.) HK$ million 2017 2016 Inc./(Dec.) Total Revenue 4,900 4,741 159 3.4% Total Revenue 16,990 13,478 3,512 26.1% Total Expenses (802) (811) (9) (1.1%) Total Expenses (16,088) (12,890) 3,198 24.8% EBITDA 4,098 3,930 168 4.3% EBITDA 902 588 314 53.4% EBIT* 4,082 3,912 170 4.3% EBIT# 766 468 298 63.7% EBITDA Margin (in %) 83.6% 82.9% 0.7% pt. EBITDA Margin (in %) 5.3% 4.4% 0.9% pt. EBIT* Margin (in %) 83.3% 82.5% 0.8% pt. EBIT # Margin (in %) 4.5% 3.5% 1.0% pt.
* EBIT represents EBITDA net of depreciation, amortisation and variable annual payment # EBIT represents EBITDA net of depreciation and amortisation
otal Re enue A (HK$ million) (HK$ million)
4,900 902 7 1 292 20 2 0 124 otal A
251 a nlan o na ropert 2 Rental an ana e ent
1 en en etro on ua ne 4,608 1 214 ne etro ort e t 0 otal Re enue 59 el ourne ra n on on ro ra l ropert ana e ent 234 ropert Rental R or 1 2017 201 2017 201
^ Representing businesses in Sweden which include MTR Nordic AB, Property rental revenue saw a 3.5% increase in 2017. The MTR Tunnelbanan AB, MTR Tech AB, MTR Express (Sweden) AB & MTR Pendeltågen AB openings of the seventh and eighth floors of Telford Plaza Total revenue increased by 26.1%, total expenses by 24.8%, II in July 2017 and Maritime Square 2 in December 2017 and total EBITDA by 53.4%. In Australia, EBITDA of HK$251 contributed partly to the growth. This, together with the full million was recognised for the SMNW PPP project. However, the year impact of positive rental reversion of shopping malls EBITDA of MTM decreased mainly due to higher expenses from in Hong Kong at 3.4% in 2016, more than offset the impact operations, as well as margin decrease in its project activities. In from the negative rental reversion of shopping malls at 1.7% Sweden, the higher EBITDA of Nordic Group was mainly brought in 2017. As at 31 December 2017, our shopping malls and by the contributions from MTR Pendeltågen AB. In the United the Company’s 18 floors in Two International Finance Centre Kingdom, the EBITDA of London Crossrail maintained at a similar remained close to 100% let. Property management income level to 2016. In the Mainland of China, EBITDA of Shenzhen increased slightly, whilst total expenses decreased mainly Metro Longhua Line decreased mainly due to higher growth in due to the one-off provision made in 2016. As a result, EBIT operating costs. increased by 4.3% to HK$4,082 million and EBIT margin increased by 0.8 percentage point to 83.3%. Total depreciation and amortisation charges increased by 13.3% to HK$136 million. As a result, EBIT increased by 63.7% to HK$766 million and EBIT margin increased by 1.0 percentage point to 4.5%.
92 MTR Corporation (HK$million) otalRe enue compared withaprofitinEBITof HK$80millionin2016. Ping 360,alossinEBITofHK$5millionwasrecorded2017 After accountingforthedepreciationchargesofNgong more activitiesinconsultancybusinesses. Rapid TransitProject.Totalexpensesincreasedasaresultof management andtechnicalassistancetotheMacauLight mainly duetothecontributionsfromourcontractprovide Income fromconsultancybusinessesincreasedby64.8% January 2017to4Junecarryoutropereplacement. the servicesuspensionofNgongPingCableCarfrom9 Revenue fromNgongPing360decreasedby32.7%dueto to CentralLink,whichisbookedonacostrecoverybasis. from entrustmentworksontheExpressRailLinkandShatin Income fromprojectmanagementservicestoGovernmentis * Other Businesses EBIT* Margin(in%) EBITDA Margin(in%) EBIT* EBITDA Total Expenses Total Revenue HK$ million EBIT representsEBITDAnetofdepreciationandamortisation 2,378 2017 1,725 34 263 356 2 2 201 1 21 1 7 0 2 (2,318) 2,378 2017 2.5% -ve 60 (5) (2,278) 2,423 2016 3.3% 6.0% 145 80 on n 0 on ultan u ne e o ern ent ro e t ana e ent or ellaneou u ne e otal Re enue (3.5%) 2017 vs2016 Inc./(Dec.) (85) (45) (85) 40 N/A pts. (58.6%) (1.9%) 1.8% N/A (HK$million) ShareofProfit Venture ofRecurrentBusinesses Share ofProfitfromAssociatesandJoint the SouthIslandLine. 12-month operationsoftheKwunTongLineExtensionand Depreciation andamortisationincreasedmainlyduetothefull Depreciation andAmortisation BJMTR resultingfromrevenueimprovement. The decreasewaspartlyoffsetbyhighershareofprofitsfrom from LOROLastheconcessionendedinNovember2016. Octopus HoldingsLimited,aswelllowercontributions businesses decreasedmainlyduetoshareoflowerprofitfrom Share ofprofitfromassociatesandjointventurerecurrent 2017 494 (14) (68) 173 358 32 13 2016 537 (14) (36) 249 264 74 of RecurrentBusinesses Associates andJointVenture Total ShareofProfitfrom BJMTR Trains Ltd First MTRSouthWestern LOROL Others HZMTR Octopus HoldingsLimited Annual Report 2017 93
Financials and Other Information Corporate Governance Business Review and Analysis Overview FINANCIAL REVIEW
PROPERTY DEVELOPMENT BUSINESSES Post-tax Profit from Hong Kong Post-tax Profit from Mainland of China Property Development Property Development Post-tax profit from Hong Kong Property Development in Post-tax profit from Mainland of China Property Development 2017 was derived from the agency fee income from the West in 2017 was derived predominantly from profit recognition of Rail property developments (mainly including Cullinan West, the high-rise units handed over at Tiara which comprised the Cullinan West II, Ocean Pride, Ocean Supreme, THE PAVILIA vast majority of the development. This was HK$756 million BAY, PARC City and The Spectra), sales of inventory units and higher than 2016 when profit of the first batch of units handed car parking spaces, and further surplus proceeds arising from over at Tiara was recognised. the finalisation of development costs for completed property development projects. This was HK$649 million higher than 2016 mainly due to higher agency fee income recorded in 2017.
STATEMENT OF FINANCIAL POSITION
At 31 December At 31 December 2017 vs 2016 HK$ million 2017 2016 Inc./(Dec.) Fixed Assets 209,772 201,942 7,830 3.9% Property Development in Progress 14,810 17,484 (2,674) (15.3%) Interests in Associates and Joint Venture 6,838 7,015 (177) (2.5%) Debtors and Other Receivables 7,058 4,073 2,985 73.3% Cash, Bank Balances and Deposits 18,354 20,290 (1,936) (9.5%) Other Assets 6,936 6,536 400 6.1% Total Assets 263,768 257,340 6,428 2.5%
Total Loans and Other Obligations (42,043) (39,939) 2,104 5.3% Creditors and Other Payables (28,166) (32,629) (4,463) (13.7%) Amounts Due to Related Parties (2,226) (11,783) (9,557) (81.1%) Obligations Under Service Concession (10,470) (10,507) (37) (0.4%) Deferred Tax Liabilities (12,760) (12,125) 635 5.2% Other Liabilities (1,677) (801) 876 109.4% Total Liabilities (97,342) (107,784) (10,442) (9.7%)
Net Assets 166,426 149,556 16,870 11.3%
Represented by: Total Equity Attributable to Shareholders of the Company 166,304 149,461 16,843 11.3% Non-controlling Interests 122 95 27 28.4% Total Equity 166,426 149,556 16,870 11.3%
94 MTR Corporation receipts fromHongKongpropertydevelopment. shareholders. Thedecreasewaspartlyoffsetbythecash special dividendundertheXRLAgreementtoindependent account, aswellthepaymentofsecondtranche for ascreditorsnowbeingrecognisedintheprofitandloss sales proceedsofTiarapreviouslyreceivedandaccounted Creditors andotherpayablesdecreasedmainlyduetothe Creditors andOtherPayables Bond Framework. HK$3 billionofthesenoteswereissuedpursuanttoourGreen fixed ratenotesissuedbytheCompany,ofwhichmorethan Total loansandotherobligationsincreasedmainlyduetothe Total LoansandOtherObligations development. activities andcashreceiptsinrespectofHongKongproperty The decreasewaspartlyoffsetbycashinflowfromoperating XRL Agreement,ordinarydividendsandcapitalexpenditure. payments ofthesecondtranchespecialdividendunder Cash, bankbalancesanddepositsdecreasedmainlydueto Cash, BankBalancesandDeposits Beiyunhe StationsiteofTianjinMetroLine6. future acquisitionofashoppingcentretobedevelopedonthe purchase oftaxreservecertificatesandprepaymentforthe Debtors andotherreceivablesincreasedmainlyduetothe Debtors andOtherReceivables profit recognitionofTiara. Property developmentinprogressdecreasedmainlydueto Property DevelopmentinProgress for ourexistingHongKongrailwaynetwork. investment properties,aswellrenewalandupgradeworks Fixed assetsincreasedmainlyduetorevaluationgainonour Fixed Assets ordinary dividendduringtheyear. payments of2016finalordinarydividendand2017interim due totheprofitrecordedforyear,partlyoffsetby The increaseintotalequityofHK$16,870millionwasmainly Total Equity XRL AgreementtotheGovernment. payment ofthesecondtranchespecialdividendunder Amounts duetorelatedpartiesdecreasedmainlythe Amounts DuetoRelatedParties e t er n apa l t # 20 0 0 10 IfthelandpremiuminrespectofWongChukHangStationPackage2(whichwas 0 debt-to-equity ratioat31December2017wouldhavebeen23.7% paid inJanuary2018)wasexcludedfromthecashbalance,Group’snet 15.0 times 20.6% 2017 # 12 7 t e 20 2 201 0 10 1 20 e e t a et e t to e u t rat o ntere t o er R ta Annual Report 2017 95
Financials and Other Information Corporate Governance Business Review and Analysis Overview FINANCIAL REVIEW
Cash Flow for the Year Ended 31 December 2017 (HK$ million)
30,000
25,000 3,344 19,603 20,000
15,000 (5,644) 14,201 (15,358) (2,537) Ordinary (310) (255) Dividends 10,000 Special 5,000 Dividend
0 1,494 Net Cash Receipts Maintenance Fixed and Investments Others Net Cash Dividend (5,000) Generated from from Capital Variable in Joint Venture Inflow before (2,542) Payments to (2,879) Operating Property Expenditure Annual Dividend Cash Inflow Net Decrease Shareholders (10,000) Activities Developments on Existing Payments Payments to Capital from Net in Cash of the Assets Shareholders Expenditure Borrowings Company (15,000) of the Company for Railway and Capital Extension (20,000) Expenditure Projects for Railway and Extension New Property Projects and Projects New Property Projects
CASH FLOW
HK$ million 2017 2016 Net Cash Generated From Operating Activities 19,603 17,135 Receipt from Hong Kong and Shenzhen Property Developments 3,344 5,403 Other Receipts 517 1,160 Net Cash Receipts 23,464 23,698
Capital Expenditure (8,523) (11,939) Fixed Annual Payment (750) (750) Variable Annual Payment (1,787) (1,649) Net Interest Payment (578) (519) Investments in Associates and Joint Venture (310) (1,273) Other Payments (92) (112) Dividends Paid to Shareholders of the Company (15,358) (18,508) Dividends Paid to Holders of Non-controlling Interests (102) (108) Total Cash Outflow (27,500) (34,858)
Net Cash Outflow before Financing (4,036) (11,160) Cash Inflow from Net Borrowings 1,494 19,431 (Decrease)/Increase in Cash (2,542) 8,271
Cash, Bank Balances and Deposits as at 1 January 20,290 12,318 (Decrease)/Increase in Cash (2,542) 8,271 Effect of Exchange Rate Changes 606 (299) Cash, Bank Balances and Deposits as at 31 December 18,354 20,290
96 MTR Corporation ap tal pen ture Preferred Financing Model and Debt Profile (HK$ million) The Preferred Financing Model exemplifies the Company’s prudent approach to debt management and helps ensure a prudent and well-balanced debt portfolio
(Preferred Financing Model) vs. Actual debt profile Overview As at 31 December 2017 11 (0-5) 0 1 022 Source (35-70) 61.5 (30-65) 37.6 (0-15) 0.9 1 0 (Percentage) otal ap tal pen ture 8,523 Capital market instruments Export credits Bank loans Short term loans and overdrafts 828 a nlan o na an nternat onal u ar e Interest rate base 1,127 2 (40-70) 61.0 (30-60) 39.0 (Percentage) 1,342 on on ropert relate ro e t Fixed rate Floating rate Maturity on on Ra l a (15-50) 33.1 (15-60) 17.8 (25-55) 49.1 (Percentage) ten on ro e t 5,226 Within 2 years 2 to 5 years Beyond 5 years 1 ur a e o A et or Average fixed rate debt maturity: 15.4 years on on ran port an Currency Relate perat on (85-100) 100.0 2017 201 (Percentage) Business Review and Analysis Hedged
Financing Horizon (12-24) 17 (Month)
Investment in Joint Venture Interest rates in Hong Kong followed a similar yield-curve Investment in joint venture in 2017 related to equity flattening pattern. The 3-month HKD HIBOR rose from contribution for our investment in Hangzhou Metro Line 5. 1.02% p.a. to 1.31% p.a. at year end as domestic liquidity was Corporate Governance mopped up by the issuance of HK$80 billion of exchange fund Dividend Payments to Shareholders of the bills by HKMA. The 5-year, 10-year and 15-year HKD swap rates Company ended the year lower at 2.12% p.a., 2.28% p.a. and 2.47% p.a. Dividend payments to shareholders of the Company in 2017 respectively from 2.32% p.a., 2.63% p.a. and 2.79% p.a. at the included an amount of HK$13,009 million being the second start of the year, with lows of 1.44% p.a., 1.79% p.a. and 1.93% and final tranche of special dividend paid under the XRL p.a. during the year.
Agreement. Taking advantage of the lower long-term interest rates, the Company issued several fixed rate notes totalling HK$7.7 Financials and Other Information FINANCING ACTIVITIES billion through private placements, with maturities ranging The US economy continued to display strength and resilience, from 5 to 30 years in HK, US and AU dollars. These notes with strong labour market conditions but subdued inflation. helped to further extend and diversify the Company’s debt Nevertheless, the US Federal Reserve carried out three 0.25% maturity profile. More than HK$3 billion of these notes were rate hikes in 2017 and started shrinking its balance sheet in issued pursuant to our Green Bond Framework as we saw October, seeing the low inflation rate as transitory. increasing investor interest in our green bonds following the debut green bond issuance in 2016. Notably the Company With this backdrop, while 3-month USD LIBOR rose from issued Asia’s first off-shore AU dollar green medium term note 1.00% p.a. to 1.69% p.a. for the year, longer-term USD interest and the first HK dollar green bond through private placements. rates did not show the same trend. The 10-year Treasury yield In recognition of our efforts in social responsibility, the Group ended the year at 2.41% p.a., slightly lower than the 2.44% p.a. was awarded “Asia SRI Issuer of the Year” by mtn-i. FORTUNE seen at the start of the year, after touching a low of 2.04% p.a. also highlighted our Green Bond issuance as a consideration in September, while the 30-year Treasury yield dropped from factor when naming the Group on the “Change the World” 3.07% p.a. to 2.74% p.a. over the year. Top 50 list.
Annual Report 2017 97 FINANCIAL REVIEW
COST OF BORROWING The Group’s consolidated gross debt position increased from Group decreased to 2.5% from 2.9% p.a. due to the lower HK$39,939 million at year-end 2016 to HK$42,043 million at interest rates on the new fixed rate borrowings. year-end 2017. The weighted average borrowing cost of the
FINANCING CAPACITY The Group’s capital expenditure programme consists of three The Group believes that based on its available cash balance parts – Hong Kong railway projects (including maintenance), and unused committed banking facilities, as well as its ready Hong Kong property investment and development, and access to both the loan and debt capital markets, it will Mainland of China and overseas investments. have sufficient financing capacity to fund the above capital expenditure. Capital expenditure for Hong Kong railway projects comprises of spending related to new projects owned by the Company, ap tal pen ture an n e t ent as well as outlays for maintaining and upgrading existing 201 2020 rail lines. Capital expenditure for concession projects like the otal pen n or t e ne t t ree ear ro 201 to 2020 Express Rail Link (“XRL”) and the Shatin to Central Link (“SCL”) e t ate at ll on are generally funded by the Government and therefore not (Percentage) included in the Group’s capital expenditure programme, although the Company may have to pick up some costs for the XRL if the total cost exceeds HK$84.42 billion and will 29 36 on on incur certain costs for the rolling stock and signalling systems a ntenan e A Estimated expenditure: attributable to the East Rail and Ma On Shan Lines in relation to on on 2018 – HK$13.7 billion e Ra l a ro e t the SCL project. 2019 – HK$21.4 billion 2020 – HK$14.7 billion A an e Ra l a or relate to Capital expenditure for Hong Kong property investment and a nlan na development comprises mainly of costs associated with works 13 er ea n e t ent for property development, fitting-out and renovating the 12 on on ropert 10 shopping centres, and partial development costs for certain # Advance Railway Works involve modifications to or upgrades or expansion of property development projects. Expenditures for Mainland assets for which MTR is responsible under the existing service concession agreement with KCRC. This will predominantly be covered by the reduction of China and overseas investment are primarily the equity in future maintenance CAPEX during the construction period of SCL Project contribution to the Beijing Metro Line 16, Hangzhou Metro which MTR would have otherwise incurred.
Line 5 and Sydney Metro Northwest projects. Credit ratings Short-term* Long-term * Standard & Poor’s A-1+/A-1+ AA+/AA+ Moody’s -/P-1 Aa2/Aa2 Rating & Investment a-1+ AA+ Information, Inc. (R&I)
* Ratings for Hong Kong dollar/foreign currency denominated debts respectively
98 MTR Corporation otal Re enue Operating Profit^ Contributions
(HK$ billion) (HK$ billion) Total Operating Profit^ otal Re enue Mainland of China Property a nlan o na Development ropert e elop ent 55.4 Hong Kong Property
t er u ne e 21.1 Development Overview 19.6 7.0 19.0 2.3 Other Businesses 2 a nlan o na an 2.3 17.6 1.1 1 7 nternat onal Ra l a 4.2 2.9 0.4 Mainland of China and 0 2 1 15.8 0.2 0.3 0.9 7 2 ropert Rental an 0.6 International Railway, 2 0.2 0.1 0.7 2 2 ana e ent 1.4 0.9 Property Rental and 1 17.0 0.2 3.9 4.1 1 u ar e 0.8 3.7 Management Subsidiaries 12 12 3.4 1 2 on on 3.1 Hong Kong Property Rental and Management 4.9 ropert Rental 5.0 5.5 2 4.5 4.8 Businesses 6.0 an ana e ent 4.1 u ne e 0 Hong Kong Station Commercial Businesses on on tat on Hong Kong Transport 18.2 o er al u ne e 7.6 7.5 1 2 1 2 1 17 7 6.7 7.0 7.2 Operations on on ran port Project Studies and perat on (0.5) (0.5) (0.3) (0.4) (0.3) Business Development 201 201 201 201 2017 (0.1) (0.1) Expenses 2013 2014 2015 2016 2017
^ Representing operating profit before depreciation, amortisation and variable Business Review and Analysis annual payment
perat n ar n Net Results from Underlying Businesses (Percentage) (HK$ billion) perat n ar n (before depreciation, 0 60 amortisation, variable 55.4 53.3 annual payment and excluding Mainland of 50 0 China and international
subsidiaries) Corporate Governance 40 perat n ar n 0 Total Revenue 36.1 (before depreciation, amortisation and 30 Operating profit before depreciation, variable annual 21.1 0 payment) amortisation and 23.8 20 variable annual perat n ar n 10.5 payment 20 (after depreciation, amortisation and 10 Profit from variable annual underlying 10 payment) 0 businesses 201 201 201 201 2017 2013 2014 2015 2016 2017 Financials and Other Information e A et ro t (HK$ billion)
209.8 201 29.8 17 7 2 170 7 1 2 2 7 27 7 2 otal e A et 102.9 10 er e 7 7 7 on e on a et t er propert plant an e u p ent 77.1 1 7 70 0 n e t ent propert e 201 201 201 201 2017
Annual Report 2017 99 TEN-YEAR STATISTICS
2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 Financial Consolidated Profit and Loss Account (in HK$ million) Total revenue 55,440 45,189 41,701 40,156 38,707 35,739 33,423 29,518 18,797 17,628 Operating profit before depreciation, amortisation and variable annual payment 21,088 17,624 19,011 19,639 15,795 16,133 17,058 14,951 13,069 14,009 Depreciation and amortisation 4,855 4,127 3,849 3,485 3,372 3,208 3,206 3,120 2,992 2,944 Interest and finance charges 905 612 599 545 732 879 921 1,237 1,504 1,998 Investment property revaluation gain/(loss) 6,314 808 2,100 4,035 4,425 3,757 5,088 4,074 2,798 (146) Profit for the year 16,885 10,348 13,138 15,797 13,208 13,514 15,688 12,844 10,101 8,035 Profit attributable to shareholders of the Company arising from underlying businesses 10,515 9,446 10,894 11,571 8,600 9,618 10,468 8,657 7,303 8,185 Ordinary dividend proposed and declared 6,728 6,317 6,207 6,116 5,335 4,575 4,396 3,405 2,977 2,715 Earnings per share (in HK$) 2.83 1.74 2.22 2.69 2.25 2.31 2.69 2.21 1.77 1.43 Consolidated Statement of Financial Position (in HK$ million) Total assets 263,768 257,340 241,103 227,152 215,823 206,687 197,684 181,660 176,492 159,345 Loans, other obligations and bank overdrafts 42,043 39,939 20,811 20,507 24,511 23,577 23,168 21,057 23,868 31,289 Obligations under service concession 10,470 10,507 10,564 10,614 10,658 10,690 10,724 10,749 10,625 10,656 Total equity attributable to shareholders of the Company 166,304 149,461 170,055 163,325 152,557 142,904 131,907 121,914 110,479 101,431 Financial Ratios Operating margin (in %) 36.1 38.3 38.7 38.4 37.2 36.1 36.3 37.0 50.6 53.0 Operating margin (excluding Mainland of China and international subsidiaries) (in %) 53.3 53.9 53.3 53.1 53.4 53.6 55.6 55.1 53.8 53.2 Net debt-to-equity ratio (in %) 20.6 20.2 11.3 7.6 11.8 11.0 11.6 12.3 24.9 40.6 Interest cover (times) 15.0 12.7 14.4 15.2 11.5 13.0 14.5 10.5 7.1 6.0 Employees Hong Kong Corporate management and support departments 1,882 1,837 1,792 1,756 1,676 1,600 1,486 1,362 1,319 1,235 Station commercial businesses 191 192 182 170 158 148 144 144 137 125 Operations 11,591 11,349 10,891 10,404 10,033 9,460 9,244 9,026 8,789 8,708 Projects 2,144 2,615 2,684 2,764 2,804 2,495 2,109 1,794 1,365 995 Property and other businesses 1,440 1,416 1,384 1,350 1,305 1,273 1,282 1,291 1,242 1,170 Mainland of China and international businesses 276 230 194 180 182 224 179 212 239 197 Outside of Hong Kong Offshore employees 10,781 9,866 8,157 7,530 7,078 6,955 6,851 6,672 7,059 1,646 Total 28,305 27,505 25,284 24,154 23,236 22,155 21,295 20,501 20,150 14,076
100 MTR Corporation ∆ ^
Intercity – daily average Intercity –dailyaverage Bus –weekdayaverage Light Rail – weekday average Light Rail–weekdayaverage Airport Express – daily average Airport Express–dailyaverage Cross-boundary Service–dailyaverage Domestic Service – weekday average Domestic Service–weekdayaverage Average numberofpassengers Intercity Intercity Bus Bus Light Rail Light Rail Airport Express Airport Express Cross-boundary Service Cross-boundary Service Domestic Service Domestic Service Total numberofpassengers(thousand) Hong KongTransportOperations Reportable eventspermillionpassengerscarried Light Rail Light Rail Airport Express Airport Express Domestic and Cross-boundary services Domestic andCross-boundaryservices Revenue car-kmoperated(thousand) Bus Bus Light Rail Light Rail Light Rail Light Rail Airport Express Airport Express Airport Express Domestic and Cross-boundary services Domestic andCross-boundaryservices Average caroccupancy Domestic andCross-boundaryservices Average passengerkmtravelled Operating profit Operating profit Operating profit Operating costs Operating costs Operating costs Number ofreportableevents Domestic Service,Cross-boundary Safety Performance Total revenue HK$ perpassengercarried Total revenue HK$ percar-kmoperated Proportion offranchisedpublic Number ofreportableevents Light Rail Number ofstaffandcontractors'accidents Reportable eventspermillionpassengerscarried Number ofstaffandcontractors’accidents injury’, orunabletofullycarryouthis/her normaldutiesforaperiodexceeding3daysimmediately after theaccident. Department accordingtoMTROrdinance, asaresultofwhichanemployeetheCorporation or ofacontractorwiththeCorporation issuffering‘fatalinjury’,‘serious Any accidentconnectedwiththeoperation oftherailwayorwithmaintenancethereof,whichisnotifiabletoRailwayBranc h, Electrical&MechanicalServices trespassing ontotracks,toaccidentsonescalators, liftsandmovingpaths. the SecretaryforTransportandHousing,Government oftheHongKongSARunderMassTransit RailwayRegulations,rangingfrom suicides/attemptedsuicides, Reportable eventsareoccurrencesaffecting railwaypremises,plantandequipment,ordirectlyaffectingpersons(withwitho ut injuries),thatarereportableto (thousand) (number ofpassengers) Service and Airport Express Service andAirportExpress (Hong KongTransportOperations) (Hong KongTransportOperations) transport boardings(%)
^ ^
∆ ∆ ^ ^ 1,637,898 178,502 112,549 301,541 50,744 16,621 11,145 23,202 2017 4,772 3,698 1,148 28.5 10.8 4.17 24.0 4.93 28.5 9.10 52.5 49.1 0.65 0.58 146 503 308 104 4.5 2.7 10 46 44 20 63 46 5 1,586,522 178,709 113,274 287,828 50,413 16,133 11,152 23,276 2016 4,608 3,739 1,134 28.4 10.9 4.33 25.3 4.73 27.7 9.06 53.0 48.4 0.66 1.07 144 500 309 191 4.5 2.7 10 44 44 20 64 61 8 1,577,457 176,149 114,241 284,487 50,537 15,725 11,034 23,242 2015 4,577 4,080 1,246 28.4 11.0 4.10 24.1 4.63 27.2 8.73 51.3 48.5 0.73 0.89 145 493 313 157 4.5 2.7 11 43 44 19 65 64 6 1,547,757 174,199 113,049 273,771 50,404 14,881 10,728 23,232 2014 4,490 4,348 1,327 28.6 11.0 4.05 24.2 4.47 26.8 8.52 51.0 48.1 0.79 0.70 144 487 310 122 4.5 2.7 12 41 45 18 67 57 4 1,474,659 171,652 111,362 269,141 47,738 13,665 10,554 23,216 2013 4,297 4,324 1,408 29.0 11.0 4.04 23.5 4.27 24.9 8.31 48.4 46.9 0.88 0.69 137 482 305 118 4.5 2.8 12 37 45 17 65 67 4 1,431,040 167,210 109,707 260,890 45,962 12,695 10,453 23,134 2012 4,148 4,028 1,761 29.0 10.9 4.02 23.4 4.18 24.2 8.20 47.6 46.4 1.13 0.90 131 466 300 151 4.5 2.8 11 35 45 16 65 58 2 1,366,587 161,289 103,881 254,407 43,956 11,799 10,166 19,603 2011 3,968 3,787 1,769 29.4 10.9 3.97 22.8 4.02 23.1 7.99 45.9 45.4 1.19 1.02 126 451 285 164 4.5 2.8 10 32 45 18 63 44 7 1,298,714 154,522 253,067 40,883 11,145 99,954 19,833 2010 3,770 3,244 9,586 1,592 29.4 10.9 3.95 21.7 3.91 21.5 7.86 43.2 44.3 1.13 1.07 118 433 274 165 4.5 2.8 31 45 17 60 46 9 5 Annual Report 2017 1,218,796 143,489 247,930 37,522 94,016 19,643 2009 3,544 2,921 9,869 8,950 1,539 29.5 10.7 3.66 19.3 4.08 21.5 7.74 40.8 42.6 1.16 1.02 107 402 258 146 4.6 2.9 27 46 15 57 60 11 8 1,205,448 137,730 245,856 34,736 10,601 93,401 19,891 2008 3,514 3,220 8,984 1,514 29.4 10.4 3.76 19.7 4.07 21.2 7.83 40.9 42.0 1.16 0.99 385 255 136 4.6 3.0 99 29 46 16 55 42 9 5 101
Financials and Other Information Corporate Governance Business Review and Analysis Overview INVESTOR RELATIONS
INVESTORS AND MTR CORPORATION ACCESS TO INFORMATION MTR has been active in the international capital markets for Our corporate website provides all investors with equal more than 30 years. In Asia, we are widely regarded as a leader and timely access to Company information. The Investor’s in investor relations practice, known for our high standards Information section gives a level of information disclosure in of corporate governance and disclosure. We believe that by readily accessible form. Financial reports, patronage figures, communicating our strategies, business development and together with other Company news and stock exchange future outlook clearly, we can enhance shareholder value. We filings, are easily accessible on the website. therefore stay in regular contact with both institutional and In addition to the shareholder services offered by retail investors. Computershare, our dedicated hotline answered over 36,000 enquiries from individual shareholders in 2017. COMMUNICATING WITH INSTITUTIONAL INVESTORS INDEX AND RECOGNITION Engagement with the investment community has made MTR MTR Corporation Limited’s shares have been listed on the one of the most widely covered listed companies in Hong Stock Exchange of Hong Kong since 2000, and have been Kong, followed by many local and international brokers, as included as one of the Hang Seng Index constituent stocks well as a wide range of institutional investors. since 2001.
Management makes every effort to ensure that investors have Our Annual Report also achieves considerable recognition. a thorough understanding of our business and to this end we The 2016 report won the “Silver Award” under the “General participate regularly in investor conferences and roadshows. Category” in the 2017 “Best Annual Report Awards” organised During 2017, we held over 370 meetings with institutional by the Hong Kong Management Association. The same report investors and research analysts in Hong Kong and elsewhere. also won ten awards in the 2017 “International ARC Awards” organised by MerComm, Inc. in New York.
SHARE PRICE PERFORMANCE
120 0
110
100 2
R are pr e (HK$) r t ale 0 R are pr e relat e to (Relative Index) 0 le t ale 2017 January December
102 MTR Corporation Bloomberg Reuters 0066.HK The StockExchangeofHongKong Ordinary Shares Stock Codes SHARE INFORMATION as at31December2017 Market Capitalisation Free float (75.19%) Hong KongSARGovernmentShareholding Shares outstanding Ordinary Shares 31 DECEMBER2017 SHAREHOLDINGS ASAT future fundingneedsoftheCompany. growth, however,remainsdependentuponthefinancialperformanceand value ofordinarydividendspershareannually.Theprospectivedividend this policyistosteadilyincreaseoratleastmaintaintheHongKongdollar MTR iscommittedtoaprogressiveordinarydividendpolicy.Theaimof Dividend Policy Dividend perShare DIVIDEND PERFORMANCE Financial yearend 2018 interimdividendpaymentdate Announcement of2018interimresults 2017 finaldividendpaymentdate Book closureperiod Last daytoregisterfor2017finaldividend Annual GeneralMeeting Announcement of2017annualresults FINANCIAL CALENDAR2018 (paid on12July2017) Second andFinalTrancheofSpecialDividend 2017 FinalOrdinaryDividend 2017 InterimOrdinaryDividend 2016 TotalOrdinaryDividend
66 HKEquity 66 HK$275,156 million (24.81%) 1,490,581,168 shares 4,517,196,134 shares 6,007,777,302 shares 31 December October August On orabout11July 23 Mayto28 21 May 16 May 8 March 2.20 0.87 0.25 1.07 (in HK$)
Telephone: (852)28818888. Our enquiryhotlineisoperationalduringnormalofficehours: “Shareholders’ Communications”ontheenvelope. Hong Kong.AnysuchletterfromtheShareholdersshouldbemarked Limited, MTRHeadquartersBuilding,TelfordPlaza,KowloonBay,Kowloon, management bywritingtotheCompanySecretary,MTRCorporation information (totheextentitispubliclyavailable)fromBoardand Shareholders are,atanytime,welcometoraisequestionsandrequest Shareholder Enquiries Facsimile: Telephone: 183 Queen’sRoadEast,WanChai,HongKong 17M Floor,HopewellCentre, Computershare HongKongInvestorServicesLimited addressed inwritingtotheRegistrar: change ofnameoraddress,andlosssharecertificatesshouldbe Any mattersrelatingtoyourshareholding,suchastransferofshares, Shareholder Services CONTACTS Facsimile: Telephone: Hong Kong MTR HeadquartersBuilding,TelfordPlaza, KowloonBay,Kowloon, MTR CorporationLimited,incorporated anddomiciledinHongKong. Registered Office Principal PlaceofBusinessand corporate websiteathttp://www.mtr.com.hk Our annual/interimreportsandaccountsarealsoavailableonlineatour Kowloon, HongKong MTR HeadquartersBuilding,TelfordPlaza,KowloonBay, Corporate AffairsDivision,MTRCorporationLimited If youarenotashareholder,pleasewriteto: 183 Queen’sRoadEast,WanChai,HongKong 17M Floor,HopewellCentre Computershare HongKongInvestorServicesLimited Shareholders canobtaincopiesofourannualreportbywritingto: Annual Report2017 Email: [email protected] Kowloon, HongKong MTR HeadquartersBuilding,TelfordPlaza,KowloonBay, Investor RelationsDepartment,MTRCorporationLimited please contact: For enquiriesfrominstitutionalinvestorsandsecuritiesanalysts, Investor Relations (852) 25296087 (852) 28628628 (852) 27988822 (852) 29932111
Annual Report 2017
103
Financials and Other Information Corporate Governance Business Review and Analysis Overview CORPORATE RESPONSIBILITY
volunteering 295 projects serving HK$31m individuals in community 94,238 investment initiatives
15.1% reduction HK$24m from 2008 levels in the amount of in in-kind support for electricity used for each passenger- NGOs and community kilometre in our heavy rail network organisations
Our rail and property services are closely linked to the and other services provided to customers. Revenue lives of the people and communities we serve. Here at generated from these services is in turn distributed MTR, underpinned by our sustainable financial model, to stakeholders, including suppliers, employees, corporate responsibility is therefore about operating capital providers, shareholders, Government and the safely and responsibly in all aspects of our business community at large. and contributing positively to the development of the For the past 18 years, we have provided a detailed communities in which we operate. account of our approach and performance in our The contributions we make goes beyond the annual Sustainability Report, in line with the disclosure profit we generate for our shareholders. We create requirements of the Hong Kong Stock Exchange economic value through the transport, property Environmental, Social and Governance Reporting Guide.
104 MTR Corporation 8 7 6 5 4 3 2 1 Notes: Economic ValueGenerated VALUE ADDEDANDDISTRIBUTIONSTATEMENTIN2017 Total: 56,560 and upgradeofourHongKongrailwaysystem, butbeforepaymentofthesecondandfinaltranche ofspecialdividendundertheXRL AgreementofHK$13.0billion. (before depreciation,amortisationanddeferred tax)fortheyearretained,afteramountsdistributed toourstakeholdersandinvestedinassetmaintenance,renewal Economic valueretainedforreinvestment to generatefutureeconomicvalues.Thisrepresents underlyingbusinessprofitattributabletoshareholders oftheCompany place on10February2017),andexcludesongoing fareconcessionsandpromotionsofHK$2,672 millionandin-kinddonationsofHK$24 million. Includes donations,sponsorshipsandother communityengagementcontributions(inclusiveofHK$6.8milliondonationmade tovictimsofthearsonattackthattook billion (HK$9,756milliontotheFinancialSecretary IncorporatedoftheHKSARGovernmentand HK$3,253milliontoothershareholders). Represents ordinarydividendspayoutduring theyear.Excludespaymentofsecondandfinaltranchespecialdividend undertheXRLAgreementofHK$13.0 Represents currentincometaxandexcludes deferredtaxfortheyear. Excludes interestexpensescapitalisedforassetcreationofHK$373million. Excludes operatingcostsrelatingtoHongKongrailwaysystemmaintenanceofHK$1,678 million. For simplicity,operatingcostsincludeinterestincomeandshareofprofitorlossassociates andjointventure,nettedwithprofitattributabletonon-controllinginterests. Excludes staffcostsrelatingtoHongKongrailwaysystemmaintenanceofHK$2,104 million andcapitalisedforassetcreationofHK$1,191million. Before takingintoaccountstaffcostsofHK$23million. 5,975 Commercial Businesses Hong KongStation Revenue from 1,120 Property Development Profit fromHongKong 2,378 Other Businesses Revenue from 23,986 International Subsidiaries Mainland ofChinaand Revenue from 18,201 Operations Hong KongTransport Revenue from 4,900 Management Businesses Rental and Hong KongProperty Revenue from
1 Economic ValueDistributed in-kind donations)7 fare concessionsand Investment (excludes Community Taxes Annual Payments Fixed andVariable Railway System Existing HongKong Expenditure on and Upgrade Renewal Maintenance, Staff Costs Operating Costs for Reinvestment Economic ValueRetained Dividends Ordinary Finance Costs Interest & 5 6 2 4 3 (HK$ MILLION) 8
Business Partners Railway System Governments Shareholders Government Community Annual Report 2017 Hong Kong Hong Kong Employees Suppliers & Suppliers & 13,660 17,057 2,683 8,646 1,584 4,765 2,908 Lenders Existing Existing Total: 56,560 HKSAR HKSAR 659 Other Other KCRC 31
51,993 4,567 105
Financials and Other Information Corporate Governance Business Review and Analysis Overview CORPORATE RESPONSIBILITY
GOVERNANCE AND POLICIES Our Vision, Mission and Values embody the commitment we Issued in 2008, our Supplier Code of Practice provides a basic, make to acting responsibly. They are supported by a strong compulsory behavioural framework for ethical standards, corporate governance framework. human and labour rights, and supply chain management. Full compliance with the code is a requirement of all MTR We follow clear policies and management directives under procurement contracts and suppliers are responsible for the Corporation General Instructions and the Corporate ensuring that their own suppliers comply with the code. We have Responsibility Policy, which was updated in July 2017. The updated the code to incorporate our Green Procurement Policy, Board’s Corporate Responsibility Committee has strategic which encourages sustainability practices among our suppliers. oversight of our corporate responsibility commitments and reports to the Board of Directors on these issues. Our Corporate Responsibility Steering Committee supports the Executive Directorate team in reviewing, monitoring and implementing responsible business practices across all divisions.
HOW WE OPERATE AS A BUSINESS Safety Environment and Natural Resources Providing customers with a safe and reliable railway service is at Our aim is to become one of the most resource-efficient the very heart of our operations. Our “safety first” culture covers and ecologically sustainable railways and property services customers, staff, contractors and anyone else who legitimately providers in the world. An electrically-powered mass transit enters our railway facilities. We invest heavily in maintenance to railway is widely regarded as the most environmentally ensure our assets contribute to high levels of safety and carry sustainable way to transport millions of people in large cities. out initiatives to address specific safety issues. Our efforts to Our biggest contribution to the environment therefore comes ensure continuous improvement in customer safety led to a from avoiding pollution, such as through reducing roadside 5.5% reduction in reportable events on the Hong Kong heavy emissions and road congestion, and making better use of rail and light rail network in 2017 compared with the previous limited land resources as more people travel by rail. Our new year. Further details on customer safety are set out in the lines in Hong Kong are increasing this contribution by adding section headed “Hong Kong Transport Operations”. to the number of journeys that can be made by train.
MTR’s approach to the safety of staff, contractors and systems Our Corporate Responsibility Policy commits us to managing is no less rigorous. Our safety assurance process involves environmental issues. The independently audited ISO 14001 assessing operational safety impacts throughout the project environmental management system certification process lifecycle, with consistent checks at each milestone. We fosters accountability among employees and partners. integrate, verify and validate safety requirements through We are also responding to climate change, guided by the both a top-down and bottom-up approach, including contract recommendations from leading scientists. Initiatives in this requirements, safety integrity level assessments for safety- area range from reviewing our design standards to preparing related and safety-critical systems and design, as well as response procedures for extreme weather events. onsite verification and validation activities. We also employ Our approach to environmental issues begins with the independent safety assessors to check the adequacy and Environmental Impact Assessments we make before starting effectiveness of the development processes for our safety all major construction and operations activities. We also critical systems. These assessors are involved at all stages of implement comprehensive environmental management and construction and installation projects. monitoring plans for impacts relating to noise, air and water quality, waste, energy use, and biodiversity.
106 MTR Corporation in Hong Kong, as well as other international sources. in HongKong,aswellotherinternational sources. Department andElectricalMechanical ServicesDepartment to guidelinespublishedbytheEnvironmental Protection Council forSustainableDevelopment,andalsomakereference by theWorldResourcesInstituteandBusiness in accordancewiththeGreenhouseGasProtocolestablished (“GHG”) emissions.WemonitorScope1,2and3GHGemissions Since 2002,wehavebeenreportingonourGreenhouseGas Intelligence, toincreaseefficiency. We arealsoharnessingnewtechnology,suchasArtificial environmentally-friendly equipmentatstationsanddepots. improve energyefficiencybyinstallingmoreadvancedand in alarge-scalechillerreplacementprogrammethatwill had achievedareductionof15.1%.MTRiscurrentlyinvesting kilometre inourheavyrailnetwork.Bytheendof2017,we 2020 intheamountofelectricityusedforeachpassenger- Our targetistoachievea21%reductionfrom2008levelsby we continuetofindwaysreduceourenergyconsumption. Improving environmentalefficiencyisanimportantgoaland and InternationalBusinesses”. levels aredetailedinthesection headed“MainlandofChina passengers perweekdayin2017 andoureffortstoraiseservice Hong Kong,wefurthercarryan averageofaround6.49million section headed“HongKongTransportOperations”.Outsideof services weprovideforthem.Furtherdetailsaresetoutinthe to understandtheneedsofourcustomersandimprove the dailylivesofmanypeopleinourcity.Weconstantlystrive each weekdayandourtrainserviceshaveabigimpacton On average,5.76millionpassengersuseMTRinHongKong Our Customers Resources”. Further detailsaresetoutinthesectionheaded“Human skilled workforcetoprovidecaringserviceourcustomers. development opportunities.Thisalsoensuresthatwehavea full potential,weprovideawidevarietyoftrainingand our success.Tonurturetalentsandhelpthemreachtheir The dedicationandcommitmentofourstaffarethekeyto Our People Annual Report 2017 107
Financials and Other Information Corporate Governance Business Review and Analysis Overview CORPORATE RESPONSIBILITY
HOW WE CONTRIBUTE TO SOCIETY As a corporate citizen, we leverage our assets, skills and A major initiative is our annual summer programme, “‘Train’ resources to connect, grow and support communities to help for life’s journeys” programme. In 2017, 160 secondary-school them thrive. students from 93 schools completed this 10-day programme. Through workshops, camps and work experiences at MTR, the “Community Connect” is our platform for initiatives that aim programme strengthened participants’ confidence, enhanced to support the young and old, while enhancing the liveability their communications and leadership skills, broadened of our city. All of our programmes are carefully developed students’ social networks, and their understanding of career to nurture the communities we serve across all 18 districts options. of Hong Kong. We invest in young people, who are our customers, future leaders, innovators and game changers. We also continued to seek feedback from young people We contribute to making the city more connected and on our initiatives. The Youth Forum, our young think tank, vibrant through staff volunteering, and collaborating with exchanges views with MTR management on a regular basis. non-governmental organisations and social enterprises to Four of the five projects chosen by the public under our address evolving community needs. We also enhance the “Pathways to Employment” programme are running at full travelling experience through integrating art into our station steam. Our implementation partners are working towards architecture and enabling artists to display their work in our making the transition from education to work less daunting stations and shopping malls. by teaching secondary-school girls how to code, enhancing the learning environment with fellows supporting teachers, Youth developing young people to support children’s rights, and Our vision for youth development is to empower young incubating artisans to be commercially viable. people so that they have the skills, knowledge and Last but not least, in 2017 the Corporation launched a new opportunities to create a bright future for themselves and their programme – STEM Challenge – to encourage secondary- communities. In 2017, over 7,000 young people participated in school students to explore science, technology, engineering our youth programmes.
108 MTR Corporation a SilverPrizeinthe “8 We alsoreceivedseveralawards duringtheyear,including on directtaxpayersubsidies. time andforourlowtrainfares commutersthatdonotrely particularly forrunningtrainservices onschedule99.9%ofthe for corporateresponsibilitybyFORTUNE,whichpraisedMTR company amongthetop50globalinstitutionsrecognised “Change theWorld”listin2017.WewereonlyHongKong business modelcameasMTRwasnamedintheFORTUNE low-carbon transitservicesandsustainableRailProperty Exceptional internationalrecognitionofourhighquality, responsibility in2017. We continuedtoreceiveglobalrecognitionforcorporate RECOGNITION FORCORPORATERESPONSIBILITY million donatedtopassengersinjuredintheTsimShaTsui investment wasmadeduringtheyear.IncludingHK$1.8 volunteering activities,aroundHK$31millionofcommunity Supplementing ourextensivecommunitysupportand four volunteeringactivitieswithMTRelements. November 2017,witharound100volunteersparticipatingin members. Wealsoheldourfirst“MTRVolunteeringMonth”in renovated NgongPing360throughover400DistrictCouncil people from18districtsweretakenonexcursionstothenewly programme waslaunchedin2017which10,000elderly people, children,youthandunderprivilegedfamilies.Anew benefited theelderly,mentallyandphysicallychallenged 6,800 participatingvolunteerheadcount.Theprojectsmainly and retirees,a12%increasefrom2016,involvingmorethan of 295projectswereinitiatedandorganisedbyourstaff “More TimeReachingCommunity”scheme.In2017,atotal At theheartofour“CommunityConnect”programmeis Community Outreach overseas operationsinthesummerof2018. outstanding teamswillbeofferedtheopportunitytovisitour vision for“InclusiveandSustainableCommunities”.Three Secondary 3oraboveareinvitedtoformteamssharetheir how STEMskillsareappliedinpractice.Studentsenrolled programme aimstoenhancestudents’understandingof from JuniorAchievementHongKongandHKEdCity,the and mathematics(“STEM”)subjects.Designedwithsupport th Hong Kong Corporate Citizenship HongKongCorporate Citizenship among theworld’sroadandrail transportcompanies. rating intheMSCISustainability Indexes,makingMTRaleader Corporate SustainabilityIndex.We alsoachievedan“AAA” Pacific Index,theFTSE4Good andtheHangSeng investor indices,includingtheDowJonesSustainabilityAsia/ The Companyremainsaconstituentmemberofrelevant the environment. commitment tocaringforthecommunity,ouremployeesand was awardedthe“10YearsPlusCaringCompanyLogo”forour Management Association.Forthethirdconsecutiveyear,MTR the “HongKongSustainabilityAward”fromHong Award” organisedbytheHongKongProductivityCouncil,and art themesundertheCommunityConnectplatform. art anddesigninstitutionstohostfourexhibitionsonvarious In 2017,theCorporationhasalsocollaboratedwithdifferent completed in2018. The designsarebeingintegratedintothestationandwillbe for production:“UrbanIdentity”and“ChairsofShamShuiPo”. presented bystudents,twowereselectedasfinalproposals Sham ShuiPoStation.Amongtheseveninstallationconcepts Hong Kongtodevelopconceptsforanartinstallationin students fromSavannahCollegeofArtandDesign(“SCAD”) During theyear,wecollaboratedwithateamof14design across 45stationsduringtheyear. permanent artworksbylocalandinternationalartiststo73 stations acrossHongKong.Wealsoincreasedthenumberof range ofactivitieswasheldin2017,with64events environment throughhighqualityworksofart.Adiverse Our “ArtinMTR”programmeenrichestheMTRtravelling Art andCulture these shopshaveopenedforbusinessin2017. which arerunbynon-governmentalorganisations.Nineof made availableatnominalrentsforleasebysocialenterprises in 2016,12retailshopsalongtheWestRailLinehavebeen non-profit organisationstosupporttheirworkin2017.Starting MTR isalsoprovidingfreeadvertisingspacetomorethan60 donated bytheCompanyinSeptember2017. arson incidentinFebruary2017,withafurtherHK$5million Annual Report 2017 109
Financials and Other Information Corporate Governance Business Review and Analysis Overview HUMAN RESOURCES
The
“Most Attractive “ In 2017, we ran Employer in Hong Kong 7,154 staff training courses by the Randstad Group in Hong Kong
The Company, together with our subsidiaries and associates employed people in Hong Kong 43,622 and worldwide
People are our most valuable asset and we are RECRUITMENT AND committed to inspiring, engaging and developing RETENTION our employees. This commitment was recognised In support of our current operational needs and by a number of awards, with MTR being named as future business growth, a range of active manpower the “Most Attractive Employer in Hong Kong” by the resourcing activities were carried out during 2017, Randstad Group in 2017, the second time we have including a series of Recruitment Days and Community achieved first place. We were also honoured with five Recruitment, as well as participating in Career Expo. A awards at the “Human Resources Asia Recruitment total of 1,558 people were hired during the year and Awards 2017” organised by Human Resources staff turnover remained low at 4.5% in Hong Kong. Magazine for our achievements in talent acquisition and management. We recruited 30 high calibre graduates into the Company’s different graduate development The Company together with our subsidiaries programmes in 2017 to meet our long-term succession employed 17,524 people in Hong Kong and 10,781 and manpower needs. A further 165 apprentices and people outside of Hong Kong as at 31 December technician associates were recruited to fill our technical 2017. Our associates also employed an additional and maintenance positions in future. The Company 15,317 people in Hong Kong and worldwide.
110 MTR Corporation also recruited young people into the one-year Junior Tradesman Mobility Review was conducted during 2017 with a view Associate Training Programme, in collaboration with the Labour to identifying and meeting manpower needs, encouraging Department’s Youth Employment and Training Programme. cross-hub talent moves and supporting employee career development. Overview We continue to offer summer internships to local university students with disabilities or special educational needs in In order to attract, retain and motivate our people, we offer support of Hong Kong’s Talent-wise Employment Charter. In competitive pay and benefits, with both short and long- July and August 2017, we partnered with Ebenezer School term incentive schemes as well as a broad range of career & Home for the Visually Impaired to run a pilot internship development opportunities. The Company also has a robust scheme for their students to promote equal opportunity and performance management system, a performance-based youth employment. As part of the Company’s initiatives on pay review mechanism and various motivational schemes youth development and engagement, we also offered 179 to recognise and reward employees for their performance intern placements to students in Degree, Associate Degree or and contributions.
Higher Diploma courses during 2017. Business Review and Analysis Our Corporate Talent Pipeline enables the Company to The Company continues to build up manpower to support identify and develop talents at different levels. Talents are also growth in Hong Kong, the Mainland of China and overseas, offered cross-divisional and cross-geographical job rotations to and formulates a strategic resourcing plan through the broaden their horizons and enrich their experience in different Integrated Manpower Resource Planning. A Workforce areas of the Company. Corporate Governance Financials and Other Information
Annual Report 2017 111 HUMAN RESOURCES
STAFF MOTIVATION AND ENGAGEMENT To motivate and engage our people, we run a number of In 2017, we held more than 7,800 two-way communication initiatives and programmes every year. Following our first sessions under the “Enhanced Staff Communication global Staff Engagement Survey conducted in end 2016, we Programme”. A revamp of the programme is in progress developed a Corporate Initiatives Action Plan with nine to enhance the effectiveness of communicating corporate follow-up actions, and more than 50 working groups were messages. Other initiatives to foster strong communication formed at corporate, divisional and departmental levels to include management communication sessions, forums and drive improvement actions. luncheons with Executives.
Our well-established Staff Consultation Mechanism serves as We continued to share corporate updates and stories among an effective communication channel between management employees worldwide through MTRconnects, our internal and staff. We also hold Management Communication communication platform. The view rate was over 1,177,000 Meetings twice a year, with managers from the Mainland of by 31 December 2017, with more than 20,600 unique China and overseas hubs joining through live broadcasts. visitors recorded.
A CULTURE OF CONTINUOUS LEARNING AND DEVELOPMENT To help staff unleash their full potential, we offer a range of We received recognition for our efforts in training and training and development programmes in areas including development through several local and international awards customer services, operational and managerial skills, and in 2017, including two Campaign Awards in the “Hong Kong personal improvement. In 2017, we ran 7,154 training courses Management Association Award for Excellence in Training & in Hong Kong, providing each employee with an average of Development”. We were also awarded the IOC (International 7.1 training days. Olympics Committee) Trophy as the only award recipient in East Asia, for the contributions in the “Life Skills Training Programme for retired athletes”.
DRIVING WORK IMPROVEMENT The Company continues to encourage collective innovation, million. More than 900 people attended the Corporate WIT process improvement and staff engagement through our Annual Presentation Ceremony, which was held in July 2017, Work Improvement Team (“WIT”) programme. More than with delegates also coming from our Mainland of China and 60 training classes were organised to promote innovation International Business hubs. Also, through the Staff Suggestion and continuous improvement, and over 1,000 projects were Scheme, we continue to drive work improvements and submitted in 2017, yielding total cost savings of around HK$46 cultivate innovation among our colleagues.
112 MTR Corporation Staff Distribution by Geographical Location Staff Productivity – Earnings Per Employee* (Percentage) *Hong Kong businesses excluding property development (HK$ million) Overview 0.96 0.97 0.92 0.94 2.3 0.89 6.2 2017
12.8
6.32.0 11.5 Hong Kong 16.1 64.1 61.9 16.8 Australia
Sweden
Mainland of China
2016 Others 2013 2014 2015 2016 2017 Business Review and Analysis Corporate Governance Financials and Other Information
Annual Report 2017 113 MTR ACADEMY
The MTR Academy (“MTRA”) has continued to develop as The Academy supports the development and delivery of an a railway management and engineering centre that offers Applied Learning subject “Railway Studies”, hosted by the high quality programmes which extend the Company’s Hong Kong College of Technology. The programme was rail expertise from Hong Kong to the Mainland of China approved by the Education Bureau in September 2017 and and “Belt and Road” countries. MTRA also offers accredited has become one of the electives of the Senior Secondary programmes and short courses to nurture the next generation School Curriculum. It is the first railway related Applied of railway professionals for the community. In 2017, over 1,000 Learning subject approved for the Hong Kong Diploma of participants from Hong Kong attended MTRA programmes. Secondary Education Examination (HKDSE). The subject will be first offered in the Secondary School Academic Year The Academy currently offers two accredited programmes, 2018/2019. Promotion of the course to secondary schools has namely the Advanced Diploma in Railway Engineering and commenced in November 2017. the Diploma in Transport Studies. There are over 100 part-time students studying these programmes. The first graduating Overseas, MTRA is gaining increasing recognition globally class from the Academy will be in October 2018. and provides professional support for organisations in various countries, such as MRT Jakarta, which is seeking support for Railway companies in Indonesia, Macau and Qatar looked to its development of Indonesia’s first mass transit system. In MTRA for customised training and development support in October 2017, MTR signed an MoU with Hangzhou Metro 2017. Over 100 executives from 17 countries attended the Group to set up a branch campus of MTRA in Hangzhou. The MTRA’s Corporate and Thematic Programmes to enhance their campus will deliver a high quality training curriculum for knowledge on pursuing operational excellence. Participants railway executives and professionals and conduct research in came from countries including Brazil, Denmark, India, Japan, the rail transport field. Discussions are underway regarding the Korea, Myanmar, Singapore and the United Kingdom. planning and detailed collaboration arrangements. MTRA has signed Memoranda of Understanding (“MoUs”) MTRA is also playing a key role in the Rail Transit Excellence with several tertiary institutions in Hong Kong and overseas, Community (“RTEC”), a multi-faceted platform to enable collaborating in the development of academic programmes railway operators of “Belt and Road” countries to network at various levels. This year marks the launch of the pilot of which MTR is a founding member. It currently comprises subject in Professional Master Programme in Rail System seven other metro groups from Thailand, Malaysia, Indonesia, Engineering & Management with the Asian Institute Philippines, Macau, Saudi Arabia and Turkey. RTEC facilitates of Technology, Thailand and witnesses the continued collaborative efforts in pursuit of rail transit best practices, partnership with the Hong Kong Polytechnic University in management systems and operational excellence. MTR hosted MSc in Electrical Engineering (Railway Systems). the inaugural forum of RTEC in October 2017.
114 MTR Corporation continuing connectedtransactionsin2017. annual reviewandconfirmationtotheCompanyof Independent Non-executiveDirectorsinperformingtheir Audit CommitteeoftheCompanytoassistCompany’s adequate andeffectivereporteditsfindingstothe control proceduresputinplacebytheCompanywere Based onthisyear’sreview,IADconcludedthattheinternal transactions andtherelatedinternalcontrolprocedures. (“IAD”) hasreviewedtheCompany’scontinuingconnected in January2016,theCompany’sInternalAuditDepartment into accounttheStockExchange’srecommendationissued Letter GL73-14issuedbytheStockExchangeandtaking Starting from2017,actinginaccordancewithGuidance complied withtheCode. During theyearended31December2017,Companyhas COMPLIANCE CORPORATE GOVERNANCECODE in Appendix14totheListingRules. out intheCorporateGovernanceCode(the“Code”)contained Company hasappliedtheprinciplesofCodeProvisionsset that theCompanyhasadoptedandhighlightshow This Reportdescribesthecorporategovernancebestpractices formalise bestpracticesforadoptionbytheCompany. its stakeholders.TheBoardcontinuestoseekidentifyand proper managementoftheCompanyininterestsall good corporategovernanceisfundamentalinensuringthe Members oftheBoardandfirmlybelievesthat Corporate governanceisthecollectiveresponsibilityof PRACTICES CORPORATE GOVERNANCE CORPORATE GOVERNANCEREPORT for theroll-outofnewrequirements. conclusions, theCompanyhascommencedworktoprepare executive director.Pendingpublicationoftheconsultation consideration whenassessingtheindependenceofanon- Corporate GovernanceReportandtoexpandthefactorsfor Rules, torequiredisclosureofanominationpolicyinthe provision relatingtoboarddiversityformpartoftheListing Related ListingRules”to,interalia,upgradethecurrentCode entitled “ReviewoftheCorporateGovernanceCodeand Exchange inNovember2017aconsultationpaper is supportiveoftheproposalsputforwardbyStock to meettheexpectationsofstakeholders.TheCompany of theevolvingbusinessandregulatoryenvironment robustness ofitscorporategovernanceframeworkinlight arena ofcorporategovernancetoensurethesuitabilityand The Companycontinuestomonitordevelopmentsinthe Annual Report 2017 115
Financials and Other Information Corporate Governance Business Review and Analysis Overview CORPORATE GOVERNANCE REPORT
THE BOARD OF DIRECTORS Overall Management The overall management of the Company’s business is vested in the Board. Pursuant to the Articles of Association and the “Protocol: Matters Reserved for the Board” (the “Protocol”) adopted by the Board, the Board has delegated the day-to-day management of the Company’s business to the Executive Committee, and focuses its attention on matters affecting the Company’s overall strategic policies, corporate governance, finances and shareholders. These include financial statements, dividend policy, significant changes in accounting policy, annual operating budget, certain material contracts, strategies for future growth, major financing arrangements and major investments, corporate governance functions, risk management and internal control systems, treasury policies and fare structures.
Below is a diagram of the governance structure of the Company:
Audit Committee
Remuneration Committee Board
Risk Committee
Nominations Committee
Capital Works Committee
Note 1 Corporate Responsibility Committee Executive Committee Note 2
Business/Functional Management Committees Note 3
Notes: 1. All Board Committees are provided with sufficient resources to discharge their duties and can seek independent professional advice (as and when required) at the Company’s expense, to perform their responsibilities. The Terms of Reference of each Committee are available on the websites of both the Company (www.mtr.com.hk) and the Stock Exchange. 2. The Executive Committee is delegated by the Board to handle day-to-day management of the Company’s business pursuant to the Company’s Articles of Association and the Protocol; and is chaired by the Chief Executive Officer (“CEO”) (who is supported by the other 11 Members of the Executive Directorate). 3. Key Business/Functional Management Committees are listed out on page 128 of this Report.
116 MTR Corporation Attendance ofMeetingsandTrainingin2017 Members oftheBoardandExecutiveDirectorate Lucia LiKa-lai Professor ChanKa-keung,Ceajer Non-executive Directors Changes during2017 Jeny YeungMei-chun Dr PhilcoWongNai-keung David TangChi-fai Linda SoKa-pik Gillian ElizabethMeller Adi LauTin-shing Herbert HuiLeung-wah Dr PeterRonaldEwen Morris CheungSiu-wa Margaret ChengWai-ching Dr JacobKamChak-pui Lincoln LeongKwok-kuen Members oftheExecutiveDirectorate&Committee Ng Leung-sing Independent Non-executiveDirectors Commissioner forTransport (Secretary forFinancialServicesandtheTreasury) James HenryLauJr Johannes ZhouYuan Abraham ShekLai-him James Kwan Yuk-choi James KwanYuk-choi Vincent ChengHoi-chuen Benjamin Tang Kwok-bun Benjamin TangKwok-bun (ex-Secretary forFinancialServicesandtheTreasury) Total NumberofMeetings Lucia LiKa-lai Risk CommitteeMember Lincoln LeongKwok-kuen(CEO) Executive Director(“ED”) Alasdair GeorgeMorrison Anthony ChowWing-kin Dr PamelaChanWongShui Andrew CliffordWinawerBrandler Independent Non-executiveDirectors(“INED”) (Mable Chan) Commissioner forTransport (Hon Chi-keung) Permanent SecretaryforDevelopment(Works) Dr AllanWongChi-yun Audit CommitteeMember ex-Commissioner forTransport(IngridYeungHoPoi-yan) (Frank ChanFan) Secretary forTransportandHousing Dr AllanWongChi-yun (Professor AnthonyCheungBing-leung) ex-Secretary forTransportandHousing Dr Eddy Fong Ching Dr EddyFongChing Dr DorothyChanYuenTak-fai Lau Ping-cheung,Kaizer Professor FrederickMaSi-hang Non-executive Directors(“NED”) Members oftheBoard (5) (20) (10) (10) (4) (3) (2)
(14) (12) (13) (13) (9) (8) (11) (7) (19)
(1) (15) (Chairman) (Chairman) (16) (6)
(17)
(18) 7/7 4/4 7/7 6/7 7/7 7/7 6/7 6/7 5/7 4/4 1/1 7/7 3/4 7/7 7/7 2/3 0/2 2/4 2/3 2/4 6/7 7/7 2/3 RM 7/7 7/7 7/7 7 Board Meetings N/A N/A N/A N/A N/A 2/2 2/2 1/2 2/2 2/2 1/2 2/2 0/2 1/2 2/2 2/2 2/2 2/2 0/2 2/2 2/2 2/2 2/2 2/2 2/2 2/2 SM 2 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 0/1 0/1 1/1 1/1 1/1 1/1 1/1 PM 1 4/4 1/1 0/1 2/2 3/3 4/4 4/4 3/3 1/1 AC 4 C Board CommitteesMeetings 2/2 N/A N/A 2/2 2/2 0/1 1/1 2/2 1/2 2/2 NC 2 C Attendance 4/4 4/4 4/4 3/4 0/2 2/2 0/2 3/4 2/2 RC 4 C CWC 5/5 5/5 5/5 5/5 2/5 4/5 5/5 5 C
RiskC 5/5 0/1 3/3 2/2 3/3 2/3 1/1 2/5 1/2 4/5 5/5 5 C
CRC 2/2 2/2 2/2 2/2 2/2 2/2 1/1 1/2 2/2 2 C Annual General Annual General Meeting 2017 N/A N/A N/A N/A N/A N/A 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 0/1 1/1 1/1 1/1 1/1 1/1 1/1 1/1 0/1 1/1 1/1 1/1 1/1 0/1 1/1 0/1 1/1 1/1 1/1 Annual Report 2017 1 Training √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ Ω 117
Financials and Other Information Corporate Governance Business Review and Analysis Overview CORPORATE GOVERNANCE REPORT
Legend: Board Meetings C – Chairman of the committee RM – Regular Meeting(s) SM – Special Meeting(s) Ω – This includes (i) continuous professional development through attending PM – Private Meeting expert briefings/seminars/conferences relevant to the Company’s business or Board Committee Meetings directors’ duties arranged by the Company or external organizations, and reading AC – Audit Committee regulatory/corporate governance or industry related updates; and (ii) attending induction and familiarisation programmes for newly appointed Directors NC – Nominations Committee RC – Remuneration Committee CWC – Capital Works Committee RiskC – Risk Committee CRC – Corporate Responsibility Committee
Notes: 1. Professor Frederick Ma Si-hang attended one SM by teleconference. 2. Mr James Henry Lau Jr (Secretary for Financial Services and the Treasury) was appointed as a NED and a member of each of the NC and the RC of the Company, all with effect from 4 July 2017. The alternate director of Mr Lau, acting on his behalf, attended one RM and two RC meetings. 3. Mr Frank Chan Fan, who was appointed to the post of the Secretary for Transport and Housing with effect from 1 July 2017, had, by virtue of his aforesaid appointment, become a NED and a member of each of the NC and the RC of the Company, all with effect from the same date. The alternate director of Mr Chan, acting on his behalf, attended one RM, one PM and two RC meetings. 4. Mr Hon Chi-keung attended one RM by teleconference. The alternate director of Mr Hon, acting on his behalf, attended one CWC and two RiskC meetings. 5. Ms Mable Chan, who was appointed to the post of the Commissioner for Transport with effect from 11 October 2017, had, by virtue of her aforesaid appointment, become a NED and a member of each of the AC and the RiskC of the Company, all with effect from the same date. 6. Mr Andrew Clifford Winawer Brandler was elected as a new Board Member and became an INED after the conclusion of the 2017 AGM held on 17 May 2017 (“2017 AGM”), and was appointed by the Board as a member of each of the AC and the RiskC of the Company at the same time. He attended one RM by teleconference. 7. Mr Vincent Cheng Hoi-chuen attended one RC meeting by teleconference. 8. Mr Anthony Chow Wing-kin attended one RC meeting by teleconference. 9. Mr Lau Ping-cheung, Kaizer attended one CRC meeting by teleconference. 10. Ms Lucia Li Li Ka-lai ceased to be a member of the RiskC; and became a member of the CRC of the Company, both with effect from the conclusion of the 2017 AGM. 11. Mr Alasdair George Morrison attended one RM and one SM by teleconference. 12. Mr Abraham Shek Lai-him attended one RM and one CWC meeting by teleconference. 13. Dr Allan Wong Chi-yun ceased to be a member of the AC; and became a member of the NC of the Company, both with effect from the conclusion of the 2017 AGM. 14. Mr Johannes Zhou Yuan was elected as a new Board Member and became an INED after the conclusion of the 2017 AGM, and was appointed by the Board as a member of each of the AC and the RiskC of the Company at the same time. He attended one AC meeting by teleconference. 15. Mr Lincoln Leong Kwok-kuen attended one SM by teleconference. Mr Leong was not invited to attend the PM which was held by the Chairman. 16. Professor Chan Ka-keung, Ceajer ceased to be a NED and a member of each of the NC and the RC of the Company, all with effect from 4 July 2017. Professor Chan attended one SM by teleconference. The alternate director of Professor Chan, acting on his behalf, attended one RM, one NC meeting and the 2017 AGM. Professor Chan did not attend the first session of the SM held on 20 March 2017 in relation to the early review of the Fare Adjustment Mechanism to avoid any actual or perceived conflict of interest. 17. Professor Anthony Cheung Bing-leung ceased to hold the post of the Secretary for Transport and Housing with effect from 1 July 2017, and, as a result, ceased to be a NED and a member of each of the NC and the RC of the Company, all with effect from the same date. The alternate directors of Professor Cheung, acting on his behalf, attended one RM and two SM. The alternate director of Professor Cheung did not attend the first session of the SM held on 20 March 2017 in relation to the early review of the Fare Adjustment Mechanism to avoid any actual or perceived conflict of interest. 18. Mrs Ingrid Yeung Ho Poi-yan ceased to hold the post of the Commissioner for Transport with effect from 15 July 2017, and, as a result, ceased to be a NED and a member of each of the AC and the RiskC of the Company, all with effect from the same date. The alternate director of Mrs Yeung, acting on her behalf, attended one RM. Mrs Yeung did not attend the first session of the SM held on 20 March 2017 in relation to the early review of the Fare Adjustment Mechanism to avoid any actual or perceived conflict of interest. 19. The alternate director of the Commissioner for Transport attended two RM (one of which by teleconference), one AC meeting and one RiskC meeting. 20. Mr Ng Leung-sing retired as an INED of the Company, and ceased to be a member of each of the NC and the RiskC of the Company, all with effect from the conclusion of the 2017 AGM.
118 MTR Corporation • • directors” oftheCompany(the“Additional Directors”).Theyare: MTR Ordinance,hasappointedthreepersonsas“additional HKSAR, intheexerciseofherrightunderSection8 shareholder oftheCompany.TheChiefExecutive Company asat31December2017,andisasubstantial holds approximately75.19%oftheissuedshares Government, throughTheFinancialSecretaryIncorporated, an efficientandeffectivemanner. support theexecutionofCompany’sbusinessstrategiesin of skillsandexperiencesufficientlydiverseperspectivesto Company’s Boardcurrentlypossessestheappropriatebalance Committee mentionedabovehasconfirmedthatthe directors. Inaddition,thereviewbyNominations one-third ofaboardmadeupindependentnon-executive which iswellabovetheListingRulesrequirementofhaving comprises morethantwo-thirdsoftheCompany’sBoard, As shownintheabovechart,numberofINEDscurrently is appropriateinlightoftheCompany’sstrategy. Members), andconsidersthatthecurrentBoardcomposition of theBoard(includingskillandexperience its annualreviewofthestructure,sizeandcomposition NEDs andanED.TheNominationsCommitteehasconducted The Boardcurrentlyhas20Members,madeupofINEDs, to 165ofthisAnnualReport. Board andtheExecutiveDirectoratearesetoutonpages150 Exchange. BiographicaldetailsofeachtheMembers websites oftheCompany(www.mtr.com.hk)andStock and theirrolesfunctionsisavailableontherespective A listofMemberstheBoardandExecutiveDirectorate Composition oftheBoard
5 (Works) (currently heldbyMrHonChi-keung);and The officeofthePermanentSecretary forDevelopment (currently heldbyMrFrankChan Fan); The officeoftheSecretaryforTransport andHousing 1 14 ED NEDs INEDs • • • The non-executiveChairmanisresponsiblefor: and separate. The postsoftheChairmanandCEOaredistinct Chairman andCEO • • • • The CEOis: • • • • the Board. the dispassionate and by consideration to objective are subject intoare taken account issues that and relevant by Board the Company the of all of shareholders thatensuring interests the contribute also to INEDs the addition, In shareholders. its and Company the of interests best the promoting for to Board the experience valuable their bring actively Board the of Members backgrounds, professional and business diverse Coming from Financial ServicesandtheTreasury. Another NED,MrJamesHenryLauJr,istheSecretaryfor the requirementtoactinbestinterestsofCompany. subject totheusualcommonlawdutiesofdirectors,including purposes inthesamewayasotherDirectorsandare,therefore, The AdditionalDirectorsareallNEDsandtreatedfor •
Members oftheExecutiveDirectorate; Monitoring theperformanceofCEOandother Chairing andmanagingtheoperationsofBoard; the BoardandExecutiveDirectorate. Responsible forperformingabridging functionbetween Company; and Responsible totheBoardformanaging thebusinessof Chairman oftheExecutiveCommittee; Head oftheExecutiveDirectorate; procedures. Establishing goodcorporategovernancepracticesand and effective contributiontothediscussionatBoardMeetings; Encouraging MembersoftheBoardtomakeafulland of theBoardinatimelymanner; Ensuring viewsonallissuesareexchangedbyMembers culture ofopenness; Providing leadershipfortheBoardandpromotinga business isprovidedtotheBoardonatimelybasis; Making surethatadequateinformationabouttheCompany’s held byMsMableChan). The officeoftheCommissionerforTransport(currently Annual Report 2017
119
Financials and Other Information Corporate Governance Business Review and Analysis Overview CORPORATE GOVERNANCE REPORT
Board Committees • Assisting the Board in reviewing a list of desirable skills/ experience/perspectives for the Board (the “List”); and The Board Committee memberships and the attendance record of each Member of the Board in 2017 is set out on • Assessing the independence of INEDs. pages 117 to 118 of this Annual Report. During the year, the Committee conducted reviews and made corresponding recommendations to the Board in respect of Audit Committee the following matters: Details of the Audit Committee, including its duties and work • The size, structure and composition of the Board and performed during the year are set out in the Audit Committee the List; Report (pages 135 to 137) of this Annual Report. • The appointment of new Board Members by shareholders Risk Committee at the 2017 AGM; Details of the Risk Committee, including its duties and work • The re-election of Members of the Board retiring at the 2017 AGM; and performed during the year are set out in the Risk Committee Report (pages 142 to 143) of this Annual Report. • An annual assessment of the independence of each INED of the Company. Capital Works Committee Corporate Responsibility Committee Details of the Capital Works Committee, including its duties Principal responsibilities: and work performed during the year are set out in the Capital Works Committee Report (page 144) of this Annual Report. • Overseeing the Company’s stakeholder engagement and external communication strategies; Remuneration Committee • Recommending the Corporate Responsibility Policy to the Details of the Remuneration Committee, including its duties Board for approval; and work performed during the year are set out in the • Monitoring and overseeing the implementation of the Remuneration Committee Report (pages 145 to 149) of this Company’s Corporate Responsibility Policy and related initiatives; Annual Report. • Identifying emerging corporate responsibility issues arising Nominations Committee from external trends; Principal responsibilities: • Reviewing the Company’s annual Sustainability Report and recommending approval by the Board; • Nominating and recommending to the Board candidates for filling vacancies on the Board, and the positions of CEO, • Reviewing the Company’s environmental and social Finance Director and Chief Operating Officer (provided performance; and that the Chief Operating Officer position exists); • Providing updates to the Board on matters falling within • Considering candidates for the position of Finance Director the Committee’s remit as required. and Chief Operating Officer recommended by the CEO, or any other candidates (provided that the CEO shall have the Please also refer to the “Corporate Responsibility” section right to first agree to such other candidates); (pages 104 to 109) of this Annual Report.
• Making recommendations to the Board on the Work performed during the year: appointment or re-appointment of Members of the Board and succession planning for Members of the Board; • Approval of a new programme for secondary schools; • Giving consideration to the Board Diversity Policy (the “BD • Review of a new direction and initiatives for employee Policy”) when identifying suitably qualified candidates volunteering; to become Members of the Board, although Board • Monitoring of the progress of various youth, elderly and appointments will continue to be made on a merit basis; district-level community engagement and investment • Reviewing the size, structure and composition of the Board programmes; on an annual basis; • Review and recommendation of the 2016 Sustainability • Assisting the Board in reviewing the achievement of Report to the Board for its approval; and objectives pursuant to the BD Policy; • Consideration of the Company’s performance on various local and international sustainability indices.
120 MTR Corporation appointment and are eligible for election at that meeting. appointment andareeligiblefor electionatthatmeeting. must retireatthefirstannualgeneralmeetingaftertheir Members oftheBoardwhoareappointedby • • • time eitherby: A personmaybeappointedasaMemberoftheBoardatany Members oftheBoard Appointment, Re-electionandRemovalof training toupdateherskillsandknowledge. In 2017,MsMellerundertookover15hoursofprofessional • • • • • • reports totheCEO.HerroleasCompanySecretaryincludes: Director (“L&EBD”)andaMemberoftheExecutiveDirectorate, Ms GillianElizabethMeller,beingLegalandEuropeanBusiness Company Secretary
Additional Directors. the ChiefExecutiveofHKSARincase Committee oftheCompany;or the BoarduponrecommendationofNominations Company (www.mtr.com.hk);or of theCompany”,whichisavailableonwebsite the “AppointmentProcedureforMembersofBoard the shareholdersingeneralmeetingaccordancewith Board meetings. legislation orotherregulationstobeprovidedat Arranging fortrainingonrelevantneworamended attend relevantseminarsandcourses; Directors andMembersoftheExecutiveDirectorateto Recommending MembersoftheBoard,theirAlternate law (commonandlegislation)theListingRules; as thegeneralandspecificdutiesofdirectorsunder business operationsandpracticesoftheCompany,aswell formal andtailoredinductionprogrammeonkeyareasof upon theirappointment,toreceiveacomprehensive, Arranging forMembersoftheBoard/AlternateDirectors, Advising theBoardonallcorporategovernancematters; Ensuring thecorrectBoardproceduresarefollowed; the Board; Providing accesstoadviceandservicesforMembersof
the diversityandeffectivenessof theBoard. would bevaluableadditionsto the Board,therebyenhancing the UnitedStatesofAmericaandinregulatoryorganisations the financialsectorinHongKong,MainlandofChinaand public utilitiessector;andtherichexperienceofMrZhouin in boththepublicandprivatesectorand,particular, formed theviewthatextensiveexperienceofMrBrandler new INEDsforappointmentinMay2017.TheCommittee Clifford WinawerBrandlerandMrJohannesZhouYuanas Committee inconsideringthenominationofMrAndrew The BDPolicywastakenintoaccountbytheNominations continued effectiveness. the BoardinreviewingBDPolicyannuallytoensureits As mentionedabove,theNominationsCommitteeassists suitable candidates. made onameritbasistakingintoaccountavailableand female MembersontheBoard,allappointmentsareultimately is consciousofmaintaininganappropriateproportion and inorderfortheBoardtobeeffective.WhileCompany are requiredtosupporttheexecutionofitsbusinessstrategy balance ofskills,experienceanddiversityperspectivesthat to ensurethatitsBoardMembershavetheappropriate objective andprovidesthattheCompanyshouldendeavour website (www.mtr.com.hk).TheBDPolicysetsoutaclear The CompanyhasposteditsBDPolicyontheCompany’s Board Diversity Board Committee(s),foraperiodnotexceedingthreeyears. NED oranINEDandasthechairmanamemberofrelevant specifying thetermsofhis/hercontinuousappointmentasa (with theexceptionofAdditionalDirectors)andINEDs, The CompanyhasaservicecontractwitheachoftheNEDs subject toanyrequirementretirebyrotation. except bytheChiefExecutiveofHKSARandarenot The AdditionalDirectorsmaynotberemovedfromoffice meeting inquestion,arethosewhowillretirebyrotation. was heldinthethirdcalendaryearpriortoannualgeneral last electedorre-electedattheannualgeneralmeetingwhich general meetingoftheCompany,BoardMemberswhowere the Boardarerequiredtoretirebyrotation.Ateachannual Except fortheAdditionalDirectors,allotherMembersof Annual Report 2017 121
Financials and Other Information Corporate Governance Business Review and Analysis Overview CORPORATE GOVERNANCE REPORT
Gender
Male (16) Female (4)
Designation
INED (14) NED (5) ED (1)
Age Group
50-54 (1) 55-59 (2) 60-64 (4) 65-69 (10) ≥70 (3)
Number of Years as Board Members (Years) 0-3 (14) 4-6 (3) 7-9 (2) ≥10 (1)
Outside Directorships (Number of companies) 0-3 (15) 4-6 (2) 7-9 (1) ≥10 (2)
Statutory Confirmations Meeting” on page 126 of this Report) in December 2017 to, For the year ended 31 December 2017, the Company amongst other things, review the contribution required from has received confirmation from each INED about his/her a director to perform his/her responsibilities to the Company, independence under the Listing Rules. As part of its duties set and whether he/she is spending sufficient time in performing out in its Terms of Reference, the Nominations Committee has them. The review also assessed the performance of the Board reviewed these confirmations and assessed the independence as a whole and concluded that all Board Members have made of the INEDs, and continues to consider each of them to a positive contribution to the Board and the Company. be independent. Before each regular Board meeting, the Company reminds Each Member of the Board ensures that he/she can give each Board Member to update his/her “Declaration of Other sufficient time and attention to the affairs of the Company Directorships, Major Appointments and Interests” (the and contribute to the development of the Company’s “Declaration”). The Declaration of each Alternate Director is strategy and policies through independent, constructive and sent to him/her for update on a quarterly basis. In addition, informed comments. each Member of the Board and each Alternate Director is required to confirm his/her other directorships, major Regarding disclosure of the number and nature of offices held appointments and interests to the Company twice a year. by Members of the Board in public companies or organisations and other significant commitments, as well as their identity Save as disclosed in this Annual Report, none of the Members and the time involved (the “Commitments”), to the Company, of the Board or the Executive Directorate has any relationship all Members of the Board have disclosed their Commitments (including financial, business, family or other material or to the Company in a timely manner. relevant relationships) with another Member of the Board or
In light of the above, the Chairman held a Private Meeting the Executive Directorate. (details of which are set out under the section titled “Private
122 MTR Corporation performed duringtheyearended 31December2017: was doneinMarch2018.Below isasummaryofthework on CorporateGovernanceFunctions andthelatestreview Governance dutiesinaccordance withitsTermsofReference The BoardconductedanannualreviewofitsCorporate FUNCTIONS REVIEW CORPORATE GOVERNANCE cover wasrequired. and thefinancialstrengthofinsurancepanel,noadditional Company toMembersoftheBoard,broadpolicywording and, giventhis,togetherwiththeindemnityprovidedby review inyear2017wasthatthelevelofcoveradequate Directorate orMembersoftheBoard.Theconclusion separate coverwillberequiredforMembersoftheExecutive cover againstothersimilarcompaniesandconsiderswhether other relevantfactors.Thereviewbenchmarkstheamountof policy inlightofrecenttrendstheinsurancemarketand undertakes anannualreviewoftheCompany’sD&Oinsurance excess. Toensuresufficientcoverisprovided,theCompany Board andofficersoftheCompanydonothavetobearany Officers’ (“D&O”)LiabilityInsuranceforwhichMembersofthe the practiceofCompanytoarrangeDirectors’and As permittedundertheArticlesofAssociation,ithasbeen DIRECTORS’ INSURANCE Model Code. have alsobeenrequestedtocomplywiththeprovisionsof 571 oftheLawsHongKong)(the“SFO”))Company, same meaningasintheSecuritiesandFuturesOrdinance(Cap. possession ofInsideInformation(whichtermshallbearthe because oftheirofficeintheCompany,arelikelytobe Senior managers,othernominatedmanagersandstaffwho, complied withtheModelCodethroughoutyear. Directors andallMembersoftheExecutiveDirectoratehave Members oftheBoardand(whereapplicable)theirAlternate having madespecificenquiry,theCompanyconfirmsthatall Appendix 10totheListingRules(the“ModelCode”).After The CompanyhasadoptedtheModelCodesetoutin LISTED ISSUERS TRANSACTIONS BYDIRECTORSOF MODEL CODEFORSECURITIES on their respective areas of business. on theirrespectiveareasofbusiness. Directorate togetherwithsenior managersreporttotheBoard At regularBoardmeetings,Members oftheExecutive Board, inthethirdquarterofeachyear. Chairman, beforecommunicatingwithotherMembersofthe fixed bytheCompanySecretarywithagreementof The Boardmeetingdatesforthefollowingyearareusually before theintendeddateofBoardmeeting. together withBoardPapersareusuallysentatleastthreedays to includeamatterintheagendaofmeeting.The than oneweekbeforetherelevantBoardmeetingiftheywish to informtheChairmanorCompanySecretarynotless Chairman oftheCompany.MembersBoardareadvised the CompanySecretary(theL&EBD)andapprovedby The draftagendaforregularBoardmeetingsispreparedby approved procedures. Company’s expense,ifnecessary,inaccordancewiththe and maytakeindependentprofessionaladviceatthe Board havefullandtimelyaccesstorelevantinformation The Boardmeetsinpersonregularly,andallMembersofthe BOARD PROCEEDINGS ( Functions areavailableonthewebsitesofCompany The TermsofReferenceonCorporateGovernance environment andanychangestotheCompany’sbusiness. kept underreviewinlightofthechanginglegalandregulatory Company inlightofitscurrentcorporatestrategy.Theywillbe Governance Functionsareadequateandappropriateforthe The BoardconsidersthattheCompany’sCorporate • • • • • www.mtr.com.hk) andtheStockExchange. Review oftheCompany’scompliancewithCode. Conduct andDirectors’Manual; Development, reviewandmonitoringoftheCode requirements; practices oncompliancewithlegalandregulatory Review andmonitoringoftheCompany’spolicies senior management; professional developmentofMemberstheBoardand Review andmonitoringofthetrainingcontinuous corporate governanceframeworkandtheBDPolicy; and practicesoncorporategovernance,includingthe Development andreviewoftheCompany’spolicies Annual Report 2017 123
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The CEO Executive Summary, provided to the Board on a relates to a resolution he or she is not allowed to vote on but monthly basis, covers the overall strategies, principal issues he or she shall be included in the quorum for all other parts and key events of the Company for the relevant month, with a of that meeting. This reduces potential conflicts which might look ahead to key issues or events in the following three to six otherwise arise between the Company’s business and an months. This Summary, together with the discussions at Board individual Board Member’s other interests or appointments. meetings, ensures that Members of the Board have a general If a conflict arises between the interests of the Company and understanding of the Company’s business and provides those of Government, each Government-nominated Director up-to-date information to enable them to make informed and any Director holding a senior Government position, is not decisions for the benefit of the Company. included in the quorum for that part of the meeting which All Members of the Board have access to the advice and relates to the contract, transaction, arrangement or other services of the Company Secretary, who is responsible for proposal being considered by the Board and in relation to ensuring that the correct Board procedures are followed which the conflict exists and is not allowed to vote on the and advising the Board on all corporate governance matters. related resolution. Members of the Board also have full access to Members of the There are a number of contractual arrangements that have Executive Directorate as and when they consider necessary. been entered into between the Company and Government An electronic meeting solution has been introduced for (and its related entities), some of which are continuing in the Company’s Board meetings and Executive Committee nature. As Government is a substantial shareholder of the meetings starting from the third quarter of 2017. Apart Company, such contractual arrangements are connected from contributing to the Company’s environmental efforts, transactions (and in some cases continuing connected the electronic meeting solution also enables Members of transactions) for the purposes of the Listing Rules. The sections the Board and the Executive Committee to access meeting headed “Connected Transactions” and “Continuing Connected documents and join virtual meetings remotely in a secure, Transactions” (pages 177 to 194) of this Annual Report explain efficient and convenient manner. how, in accordance with the Listing Rules, these transactions have been treated.
MATERIAL INTERESTS AND VOTING Matters to be decided at Board meetings are decided by All Members of the Board and the Executive Directorate are a majority of votes from Members of the Board allowed to required to comply with their common law duty to act in the vote, although the usual practice is that decisions reflect the best interests of the Company and have particular regard to consensus of the Board. the interest of the Company’s shareholders as a whole. To this end, all of them are required to declare the nature and BOARD MEETINGS extent of their interests, if any, in any contract, transaction, The Board held 10 meetings in 2017 (including seven Regular arrangement or other proposal to be considered by the Board Meetings, two Special Meetings and one Private Meeting), well at Board meetings. exceeding the requirement of the Code which requires every Unless specifically permitted by the Articles of Association, listed issuer to hold board meetings at least four times a year. a Member of the Board cannot cast a vote on any contract, In October 2017, the Board held its meeting in Hangzhou, transaction, arrangement or any other kind of proposal followed by a visit to Beijing, and took the opportunity in which he/she has an interest which he/she knows is to understand the Company’s investments and future material. For this purpose, the interests of a person who is investment opportunities in both cities. connected with a Member of the Board (including any of his/ her associates) are treated as the interests of the Member Regular Meetings of the Board himself/herself. Interests purely as a result of At each Regular Meeting, the Board reviewed, discussed an interest in the Company's shares, debentures or other and, where appropriate, approved matters relating to the securities are disregarded. A Member of the Board may not Company’s different businesses and financial performance. be included in the quorum for such part of a meeting that
124 MTR Corporation Operations • Operations • Projects • • held in2017included: In addition,otherkeymattersdiscussedatBoardmeetings – – – – – – – – – – – 2017 AGM: – – – – – – – – – – – – Corporate Governancematters,including: Receipt ofupdatesonby-lawreview exercise;and Receipt ofupdatesonmajorincidents; Works ManagementOfficeprojects; Receipt ofupdatesonsignalling replacementand Receipt of2016trainserviceperformancesummary; Link; Receipt ofupdatesontheprogressExpressRail for theprojectsubmissiontoGovernment;and Central Linkandapprovaloftherevisedestimatedcost Receipt ofupdatesontheprogressShatinto and LokMaChauLoop; Receipt ofupdatesonGovernment’sHongKong2030+ 2014; Government undertheRailwayDevelopmentStrategy Approval oftheCompany’sproposalsforsubmissionto Approval ofcontractawardsrelatingtorailwayprojects; Members; Recommendation ofthenominationtwonewBoard Members oftheBoard;and Recommendation ofthere-electionretiring composition; Approval ofchangesDirectorsandBoardCommittee Approval ofSustainabilityReport2016;and meetings andMTRAcademyCouncilmeetings; Receipt oftheproceedingsvariousBoardCommittee Receipt ofCorporateSafetyGovernanceAnnualReport; Assessment oftheindependenceINEDs; management andinternalcontrolsystems; Review oftheeffectivenessCompany’srisk Review ofEnterpriseRiskManagementReports; Review oftheBoard’sCorporateGovernanceFunctions; Board; Review ofthestructure,sizeandcomposition Review ofDirectors’feesforNEDsandINEDs; Approval ofDirectors’Manualupdates; Receipt ofshareholderanalysisandinvestors’feedback; Board attheCompany’sregistered office. Secretary andareopenforinspection byallMembersofthe meeting. MinutesofBoardmeetings arekeptbytheCompany changes willbereflectedintheformalminutesofrelevant minutes, theywilldiscussitatthatmeetingandanyagreed If MembersoftheBoardhaveanycommentsondraft formally adoptsthedraftminutesatsubsequentmeeting. after themeeting.TheapprovalprocedureisthatBoard of theBoardfortheircommentswithinareasonabletime expressed. ThedraftminutesarecirculatedtoallMembers concerns raisedbyMembersoftheBoardordissentingviews considered bytheBoardanddecisionsreached,includingany Company Secretaryorherdelegatewithdetailsofthematters The minutesofBoardmeetingsarepreparedbythe Financial • Financial • • • Property • – – – – – – Commercial andMarketing – Human Resources – – – – – Mainland ChinaandInternationalBusinesses – Approval of2018BudgetandLongerTermForecast. Receipt ofOctopusBusinessPerformanceReview;and review; Receipt ofNgongPing360Limited2016performance Approval of2017InterimReportandAccounts; Approval of2016AnnualReportandAccounts; relating tosomeoftherailwaylinesinHongKong; Award ofcontractforadvertisingsalesagencyservices employee incentive scheme; employee incentivescheme; Approval of2017AnnualPayReviewandnew development project; development project; Approval forbidsubmissionoverseasproperty in HongKong;and Receipt ofupdatesonpropertydevelopmentprojects Hong Kong; Approval ofpropertydevelopmenttenderawardin railway projects in overseas and Mainland China; railway projectsinoverseasandMainlandChina; Approval ofbidsubmission/investmentproposalsfor Business andDevelopment; Receipt of updates on Mainland China and International cleaning services; equipment attheCompany’sstationsanddepot, Award ofcontractsrelatingtoreplacement Annual Report 2017 125
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Special Meetings INDUCTION PROGRAMME AND A number of matters were covered in the two Special OTHER TRAINING Meetings, including: Induction Programme • Approval of property development tender award in Hong Kong; On appointment, each new Member of the Board (including Government nominated Directors), Alternate Director • Review of the Fare Adjustment Mechanism (the “FAM”); and Member of the Executive Directorate is given a • Approval of the principles for revising the Company’s fares comprehensive, formal and tailored induction programme under the FAM; which covers: • Approval of fare revision for Airport Express; and • the roles of a director from the strategic, planning and • Approval of tender submission for an overseas franchise. management perspective, as well as the essence of corporate governance and the trends in these areas; and Private Meeting • the general and specific duties of a director under general The Chairman held a Private Meeting in December 2017. law (common law and legislation) and the Listing Rules.
During the first part of the Private Meeting, at which neither In addition to the above, a Familiarization Programme to the CEO nor any other Member of the Executive Directorate understand the key areas of the Company’s business and was present, the Board: operations is also provided.
• discussed the performance of Members of the Executive All Members of the Board, Alternate Directors and Members Directorate; of the Executive Directorate are also given a Directors’ Manual • reviewed the contribution required from a director in on their appointment which sets out, amongst other things, performing his/her responsibilities to the Company, and directors’ duties and the Terms of Reference of the Board on its whether he/she had been spending sufficient time in Corporate Governance Functions and of its Board Committees. performing them; and The Directors’ Manual is updated from time to time to reflect developments in those areas. The latest update to the Directors’ • assessed the performance of the Board as a whole. Manual was approved by the Board on 16 January 2018. Following the discussions, the Board concluded that all Board Members have contributed positively to the Board and Training and Continuous Professional the Company. Development
During the second part of the Private Meeting, which the Members of the Board and the Executive Human Resources Director and Legal and European Business Directorate Director were invited to join, the Board reviewed and To assist Members of the Board and the Executive Directorate approved the proposed terms for renewing the contract of the in continuing their professional development, the Company CEO for a further term commencing from 16 March 2018 to Secretary recommends them to attend relevant seminars and 31 March 2020 (both dates inclusive), the terms of which had courses at the cost of the Company. previously been endorsed by the Remuneration Committee of Board Visits the Company. In September 2017, certain Members of the Board and the The attendance record of each Member of the Board (and each Executive Directorate visited West Kowloon Terminus and Member of the Executive Directorate) during the year is set out Shek Kong Stabling Sidings to gain a first hand understanding on pages 117 to 118 of this Annual Report. of the construction progress of the Express Rail Link. In October 2017, the Board held a Regular Meeting in Hangzhou, and arrangements were made for Members of the
126 MTR Corporation leading businesses, an “Executive Leaders Consortium” has leading businesses,an“Executive LeadersConsortium”has management andbusinesstopics. Forlearningfromother share cutting-edgeresearchand insightsoncontemporary professors fromrenownedbusiness schoolsareengagedto leadership andmanagementskillsoftheSeniorExecutives, To supporttheenhancementofbusinessacumen, benchmarking visitswhichareorganisedonanon-goingbasis. programme consistsofaseriesworkshops,seminarsand developed fortheSeniorExecutivesofCompany.This A comprehensiveandtailoredtrainingprogrammehasbeen Senior Executives 118 ofthisAnnualReport. has receivedduringtheyear,whichissetoutonpages117to also providedtotheCompanyarecordoftraininghe/she Each MemberoftheBoardandExecutiveDirectoratehas abreast ofthelatestdevelopmentsonthisfront. of theExecutiveDirectoratefromtimetokeepthem to MembersoftheBoard,AlternateDirectorsand Materials onthesubjectofcorporategovernanceareprovided Training appraised ofthenewbusinessopportunitiesthere. and serviceperformanceofthelocalrailwayoperations visits, visitingMemberswerebriefedonthelatestbusiness railway operationsinHangzhouandBeijing.Duringthe Board andtheExecutiveDirectoratetovisitCompany’s Board VisitinHangzhou consolidated accounts, the Finance Division is responsible for consolidated accounts, theFinanceDivisionisresponsible for Directorate. Forboththeannual andinterimreports to theBoardhavebeenreviewed byMembersoftheExecutive In supportoftheabove,consolidated accountspresented are setoutonpage132ofthisAnnual Report. of theexternalauditorCompany(the“ExternalAuditor”) that areprudentandreasonable.Thereportingresponsibilities financial periods.Judgmentsandestimateshavebeenmade December 2017,haveappliedthemconsistentlywithprevious the notestoconsolidatedaccountsforyearended31 those newandamendedaccountingpoliciesasdisclosedin have selectedappropriateaccountingpoliciesand,apartfrom the yearended31December2017,MembersofBoard year thenended.Inpreparingtheconsolidatedaccountsfor financial performanceandconsolidatedcashflowsforthe as at31December2017,andoftheGroup’sconsolidated view oftheconsolidatedfinancialpositionGroup prepared onagoingconcernbasisandgivetruefair accounts oftheGroup.Theconsolidatedare Members oftheBoardareresponsibleforconsolidated ACCOUNTABILITY above trainingactivities. Senior Executiveshavebeenactivelyparticipatinginthe benchmark bestpracticeswithotherleadingcompanies. Kong, providingaplatformforSeniorExecutivestolearnand been establishedwithotherleadingcompaniesinHong Annual Report 2017 127
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clearing them with the External Auditor and then the Audit the Company’s various core businesses and functions. Key Committee. In addition, all new and amended accounting committees include: standards and requirements, as well as any changes in • Operations Executive Management Committee accounting policies adopted by the Group, have been • Property Executive Management Committee discussed and approved at the Audit Committee before • Project Control Group adoption by the Group. • Investment Committee RISK MANAGEMENT AND INTERNAL • European Business Management Committee CONTROL SYSTEMS • Australian and International Consultancy Business Management Committee The Board is responsible for the internal control system • Mainland China Business Management Committee and the risk management system (the “ERM” system) of the Company and its subsidiaries, setting appropriate policies • Information Technology Executive Management Committee and reviewing the effectiveness of the internal control system and the ERM system. The internal control system and • Financial Planning Committee the ERM system, with processes put in place by the Board, • Corporate Safety Management Committee management and other personnel, are designed to manage • Enterprise Risk Committee (as opposed to eliminate) the risk of failure and provide • Executive Tender Panel/Tender Board reasonable assurance, and not absolute assurance, against • Corporate Responsibility Steering Committee material misstatement or loss, regarding the achievement of objectives in the following areas: • Cost Control Committee (Projects) • Effectiveness and efficiency of operations • Executive Cost Control Committee (Projects) • Reliability of financial reporting • Corporate Cyber Security Committee • Compliance with applicable laws and regulations • Corporate Security Management Committee • Effectiveness of risk management Internal Audit Systems Overview The IAD provides independent, objective assurance and consulting services designed to add value and improve the The Executive Committee is responsible for: Company’s operations. Key responsibilities of the IAD include: • Implementing the Board’s policies on risk management and internal controls; • Carrying out analysis and independent appraisal of the • Identification and evaluation of the risks faced by the adequacy and effectiveness of the risk management and Company for consideration by the Board; internal control systems of the Company;
• Designing, operating and monitoring a suitable internal • Recommending improvements to existing management control system and an ERM system; and controls and resources utilisation; and • Providing assurance to the Board that it has done so, together with a confirmation that these systems are • Performing special reviews, investigations and consulting effective and adequate. and advisory services related to corporate governance and controls as commissioned by management or the Audit In addition, all employees have responsibility for internal Committee of the Company. controls and risk management within their areas of accountability. The Head of Internal Audit reports directly to the CEO and the Audit Committee. The IAD has unrestricted access Business/Functional Management to information that allows it to review all aspects of the Committees Company’s risk management, control and governance A number of committees have been established to assist the processes. On a regular basis, it conducts audits on Executive Committee in the management and control of financial, operational and compliance controls, and the risk
128 MTR Corporation departmental procedures and manuals, committees, working working committees, departmental proceduresandmanuals, and constructionworksinrailway projects,CGIs,divisional/ units andfunctions,thesafety oftheoperatingrailway To ensuretheefficientandeffective operationofbusiness Compliance withStatutesandRegulations Control ActivitiesandProcesses (pages 135to137)ofthisAnnualReport. Report” (pages142to143)and“AuditCommittee Committee respectivelyaresetoutinthe“Risk and workperformedin2017bytheRiskCommitteeAudit the effectivenessofsystemsatleastannually.Theduties and internalcontrolsystemonanongoingbasisreviews Committee respectively,overseestheCompany’sERMsystem The Board,assistedbytheRiskCommitteeandAudit Board Oversight Annual Report. “Risk Management”section(pages138to141)ofthis review theeffectivenessofERMsystemaresetoutin significant risksbeingmanagedandtheprocessusedto used toidentify,evaluateandmanagesignificantrisks,the More detailsofthefeaturesERMsystem,process corporate governancefunctions. facing theCompanyandsupportsBoardindischargingits individual businessunitmanagerstomanagethekeyrisks process whichaimstoassisttheExecutiveCommitteeand It involvesacorporate-widesystematicriskmanagement sustain businesssuccessandcreatevalueforstakeholders. Company’s corporategovernanceframeworkandhelpsto The ERMsystemisanessentialandintegralpartofthe ERM system control system. the adequacyandeffectivenessofCompany’sinternal reports totheAuditCommitteeincludinghisopinionon Audit Internal of Head the are covered.Onahalf-yearlybasis, assessment toensurethatbusinessactivitieswithhigherrisks Committee’s approval.Theauditsareselectedbasedonarisk IAD producesanannualinternalauditplanfortheAudit audits reportsarerectifiedwithinareasonabletime.The for ensuringthatcontroldeficiencieshighlightedininternal Relevant membersofthemanagementteamareresponsible management functionsoftheCompanyanditssubsidiaries.
Executive Committee andtheAuditCommittee. and managementinitiatedinvestigations arereportedtothe handled bytheHumanResources ManagementDepartment handled bytheWhistleBlowing Panel,plusstaffcomplaints public. Everyhalfyear,asummary ofallwhistle-blowingcases staff, partieswhodealwiththeCompanyaswellgeneral reputational impactsontheCompany.Thepolicyappliestoall have orcouldsignificantadversefinancial,legal compliances withlawsandtheCompany’spoliciesthat concerns relatedtofraudulentorunethicalactsnon- A whistle-blowingpolicyhasbeenputinplacetodealwith Whistle-blowing Policy systems within their areas of responsibility. systems withintheirareasofresponsibility. on theeffectivenessofinternalcontrolsandriskmanagement are requiredtoconductannualassessmentsandcertifications Managers/Project Managersforoverseassubsidiaries/projects, Divisional Directors,DepartmentHeads,includingGeneral Audit Committee. are reportedannuallytotheExecutiveCommitteeand status ofrectificationandactionstakentopreventrecurrence including potentialandactualnon-compliances,the Issues relatingtocompliancewithstatutesandregulations, • • • • support, theyarerequiredto: applicable totheirownfunctionalunits.Withnecessarylegal for ensuringcompliancewiththestatutesandregulations Managers foroverseassubsidiaries/projects,areresponsible All DepartmentHeads,includingGeneralManagers/Project financial information. accounting recordsandtimelypreparationofreliable assets, ensuringtheaccuracyandcompletenessof expenditures/payments, safeguardingtheCompany’s are establishedforpreventingordetectingunauthorised CGIs andvariousdepartmentalproceduresmanuals their effectiveness. achieve, monitorandenforceinternalcontrolsevaluate groups andqualityassuranceunitsareestablishedto Committee. Committee. to therespectiveDivisionalDirectorsandExecutive Report anypotentialandactualsignificantnon-compliances regulations havebeencompliedwith;and Review atleastonceayearthattherelevantstatutes/ Assess theirimpactontheCompany’soperations; Identify anyneworupdatedstatutes; Annual Report 2017
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Inside Information Policy and concluded that it was effective. The details are set out The Company has developed a system with established in the “Process of System Effectiveness Review” of the Risk policies, processes and procedures across all relevant Management section (page 141) of this Annual Report. Division(s) and Department(s) for the handling and Evaluation of the Effectiveness of the dissemination of Inside Information. The system includes Internal Control System the following: For the year ended 31 December 2017, the Audit Committee, • A CGI, issued in 2016, which sets out: with delegated authority from the Board, evaluated the (i) the internal processes for identifying, assessing and effectiveness of the internal control system of the Company escalating potential Inside Information to the Executive Committee and the Board; and its subsidiaries based on the following: (ii) the responsibilities of Model Code Managers (as • A review of significant issues arising from internal audit defined below) in preserving the confidentiality of reports and the external audit reports; Inside Information, escalating upwards any such • Private sessions with internal and external auditors; potential information and cascading down the message and responsibilities to relevant staff; and • A review of the annual assessment and certification of internal controls from Members of the Executive (iii) the process for disclosure of Inside Information; Directorate, management of overseas subsidiaries and • Training is provided to Members of the Board and the Department Heads in their areas of responsibility; Executive Directorate, Executive Managers, Department • A review of papers submitted/prepared by the Executive Heads and managers who are classified as Model Code Committee and the IAD covering periodic Financial Managers (on the basis that they are likely to be in Reports and Accounts; preview of Annual Accounting and possession of Inside Information because of their positions Financial Reporting issues; Annual Internal Audit Plan; in the Company) from time to time. In particular, Members IAD’s Half-yearly Reports; Whistle-blowing Reports; Report of the Executive Directorate, Executive Managers, on the Company’s Risk Management and Internal Control Department Heads and Model Code Managers have System; Report on Evaluation of Effectiveness of IAD; and been required to complete a computer-based training Report on Outstanding Litigation and Compliance Issues; programme (“CBT Programme”) on Inside Information. and The CBT Programme will be re-run periodically to provide continuous training; and • The results from internal audits performed during the year on the effectiveness of the internal control system of the • On-going training sessions on the latest developments/ Company and its subsidiaries. requirements of the SFO are arranged as appropriate. The Audit Committee concluded that the internal control The Board considers that the Company's existing system system was effective. and measures are effective and appropriate compliance mechanisms to provide assurance that the Company and Evaluation of the Adequacy of Resources its officers observe their disclosure obligations in respect of of the Company’s Accounting, Financial Inside Information. Reporting and Internal Audit Functions For the year ended 31 December 2017, the annual assessment Evaluation of the Effectiveness of the Risk performed by Finance Division and IAD concluded that there Management System were adequate resources, staff qualifications and experience, The Company has surpassed the relevant best practices in training programmes and budget of the Company’s the Code by completing an effectiveness review of the ERM accounting, financial reporting and internal audit functions. system for the Company and its subsidiaries, and extending the review to the Company’s associates operating in Mainland The Company is committed to recruit, train and develop a China and overseas. For the year ended 31 December 2017, team of qualified and competent accountants in order to the Risk Committee, with delegated authority from the Board, oversee the Group’s financial reporting and other accounting- evaluated the effectiveness of the ERM system of the Company related matters. A process to capture and update relevant
130 MTR Corporation systems are effective and adequate. There were no significant systems areeffectiveandadequate. Therewerenosignificant the yearended31December2017, andconsidersthatsuch subsidiaries’ riskmanagementand internalcontrolsystemsfor has conducteditsannualreviewoftheCompany’sand internal controlsystemsonanongoingbasis.TheBoard Committee, overseentheCompany’sriskmanagementand The Boardhas,throughtheRiskCommitteeandAudit Board’s AnnualReview programmes andbudgetwereadequate. staff oftheCompany'sinternalauditfunction,anditstraining considered theresources,qualificationsandexperienceof Audit Committee.Basedontheabove,Committee the internalauditfunctionandreportsreviewresultsto adequacy ofstaffresources,qualificationsandexperience Head ofInternalAuditconductsaformalannualreviewonthe competency, qualificationsandexperiencerequired.The staff developmentprogrammesareinplacetoaddressthe internal auditisinplace.Properrecruitmentprocessesand capture updatedstandardsandbestpracticesrelatingto and improvetheCompany’soperations.Aprocessto assurance andconsultingservicesdesignedtoaddvalue internal auditorstoprovideindependentandobjective recruit, trainanddevelopateamofqualifiedcompetent In termsofinternalaudit,theCompanyisalsocommittedto and theirtrainingprogrammesbudgetwereadequate. of theCompany'saccountingandfinancialreportingfunction, considered theresources,qualificationsandexperienceofstaff Committee. Basedontheabove,AuditCommittee annual reviewandreporttheresultstoAudit officers totheFinanceDirectorwhowillconductaformal process isconfirmedonanannualbasisbythedesignated qualifications andexperiencerequired.Adherencetothe programmes areinplacetoaddressthecompetency, Company-wide recruitmentprocessesandstaffdevelopment critically reviewedduringtheannualbudgetingexercise. deliver theaccountingandfinancialreportingfunctionare are compliedwith.Resourcesandprovisionsrequiredto and theCompaniesOrdinanceundertheirresponsibility Hong KongFinancialReportingStandards,theListingRules will ensurerelevantstandardsandordinancesincluding and accountingfunctionisinplace.Designatedofficers laws, rulesandregulationsapplicabletothereporting 2017 respectively. shadow team,wereconductedinSeptemberandDecember exercises, onefortheCrisisManagementTeamandits arrangements andtoprovidepracticesformembers.Two held tovalidatethecrisismanagementorganisationand information. RegularCrisisManagementTeamexercisesare issues andstrategicactionsdisseminatecrisisrelated information systemtokeeptrackofthelatestcrisissituation, The operationoftheCrisisManagementTeamisaidedbyan world-class standardsandup-to-datethroughregularreviews. members. TheCrisisManagementPlaniskeptinlinewith which, amongotherthings,setsoutthedutiesofrespective its operationisgovernedbyaCrisisManagementPlan the ExecutiveDirectorateandManagers, Crisis ManagementTeamcomprisesrelevantMembersof of theCrisisManagementTeamineventacrisis.The has anestablishedmechanismtoactivatetheformation Government departmentsandshareholders,theCompany timely communicationwithprincipalstakeholderssuchas in anorganisedandhighlyeffectivemanner,including that theCompanywillrespondtoandrecoverfromcrises leading railwayoperatorsandinordertohelpensure To upholdthereputationofbeingoneworld’s CRISIS MANAGEMENT framework (the “Governance Framework”) to ensure that it framework (the“GovernanceFramework”) toensurethatit the Companyhasimplemented amanagementgovernance these subsidiariesandassociates areseparatelegalentities, Mainland ofChinaandoverseas.Notwithstandingthefactthat which operateindependentbusinessesinHongKong,the The Companyhasanumberofsubsidiariesandassociates ASSOCIATES GOVERNANCE OFSUBSIDIARIESAND components tobeadequate. ended 31December2017,andconsiderstheaboveresource financial reportingandinternalauditfunctionsfortheyear programmes andbudgetoftheCompany’saccounting, resources, staffqualificationsandexperience,training The Boardhasconductedareviewoftheadequacy identified duringtheyear. control failings,weaknessesorsignificantareasofconcern Annual Report 2017 131
Financials and Other Information Corporate Governance Business Review and Analysis Overview CORPORATE GOVERNANCE REPORT
exercises an appropriate level of control and oversight as a environment and in complete confidence if they have genuine shareholder of these subsidiaries and associates. suspicions about wrongdoings.
In 2017, the Company completed a review of the Governance To enable new recruits to embrace the Company’s values Framework to refine the management governance and ethical commitments, they will be briefed on the Code of requirements and the implementation process, promoting Conduct as part of the staff induction programmes. The Code increased collaboration between the corresponding functions of Conduct is also uploaded onto the Company’s website in the Company on the one hand and the subsidiaries and (www.mtr.com.hk). associates on the other hand. In addition, the Code of Conduct serves as a guideline to Pursuant to the Governance Framework, the Company establish a comparable ethical culture in our subsidiaries and exercises its control and oversight through formulation of a associates in Hong Kong, the Mainland of China and overseas. governance structure that is tailored for individual subsidiaries and associates through (i) imposition of certain internal EXTERNAL AUDITOR controls in key areas; and (ii) adoption of management The Company engages KPMG as its External Auditor. In practices and policies that are appropriate to the business order to maintain KPMG’s independence and objectivity and nature and local situation. As a result, adequate internal the effectiveness of the audit process in accordance with controls will be adopted by subsidiaries and associates and applicable standards, the Audit Committee, under its Terms of the Company will be consulted and notified on important Reference, pre-approves all audit services to be provided by matters, complemented by regular reporting and assurance. KPMG and discusses with KPMG the nature and scope of their Compliance with this governance structure is reported by audit and reporting obligations before the audit commences. subsidiaries and associates with significant operations on an The Audit Committee also reviews and pre-approves the annual basis. engagement of KPMG to provide any non-audit services, for BUSINESS ETHICS complying with relevant legal requirements and seeks to balance the maintenance of objectivity with value for money. Practising integrity and responsible business ethics is paramount to the Company’s continued success. The The nature of audit and non-audit services provided by KPMG Company’s Code of Conduct lays down the requirements of and fees paid to KPMG (including any entity that is under the Company in terms of ethical practices and obliges staff common control, ownership or management with KPMG or to operate transparently and under the highest principles of any entity that a reasonable and informed third party having fairness, impartiality and integrity in all of the places where the knowledge of all relevant information would reasonably Company does business. conclude as part of KPMG nationally or internationally) are set out in note 9D to the consolidated accounts on page 220 of The Code of Conduct is reviewed and updated periodically to this Annual Report. ensure appropriateness and compliance with corporate and regulatory requirements. Following a comprehensive rewrite For maintaining integrity and objectivity as the External of the Code of Conduct in 2015, a regular review of the content Auditor of the Company, KPMG implements policies is underway and the revised Code is planned to be released and procedures to comply with professional ethics and to all staff in the first quarter of 2018. Education programmes independence policies and requirements applicable to the including seminars and mandatory computer-based training work it performs. In addition, KPMG requires its audit partner are in place to raise staff awareness. Staff members are also serving the Group to rotate off the audit engagement with encouraged to report existing or perceived violations or the Group at least once every seven years in accordance with malpractices. Proper procedures have already been put in the Hong Kong Institute of Certified Public Accountants/ place pursuant to the whistle-blowing policy of the Company, International Federation of Accountants Code of Ethics. under which staff members can raise their concerns in a safe
132 MTR Corporation (2) (1) resolutions passed: 2017 AGM,belowisasuccinctsummaryofthe For thebenefitofthoseshareholderswhodidnotattend comprised Noticeofthe2017AGM)dated10April2017. the resolutionsissetoutin2017AGMCircular(which supported byover95%ofthevotescast.Thefulltext resolution no.3comprisingfiveseparateresolutions),each A totalof12resolutionswerepassedatthe2017AGM(with conducted byelectronicmeans. the ArticlesofAssociationtocallapollonallresolutions right astheChairmanof2017AGMunderArticle71 resolutions wereconsidered,theChairmanexercisedhis substantially separateissueatthe2017AGM.Before The Chairmanproposedseparateresolutionsforeach Resolutions passedatthe2017AGM and management. shareholders oftheCompanyandCompany’sDirectors to facilitatesmoothanddirectcommunicationbetweenthe planned tocontinueprovidingsimultaneousinterpretation The 2018AGMhasbeenscheduledon16Mayanditis the sameevening. and postedontheCompany’swebsite(www.mtr.com.hk)in did notattendtheAGM,wholeproceedingswerewebcast Bay, HongKong.TofacilitatetheCompany’sshareholderswho Kowloonbay InternationalTrade&ExhibitionCentre,Kowloon The 2017AGMwasheldon17MayatRotunda3(6/F), Company toattendAGMsanswershareholders’questions. of theExecutiveDirectorateandExternalAuditor Company, thechairmanofeachBoardCommittee,allMembers operations. IthasbeenthepracticeforChairmanof with theDirectorsaboutCompany’sperformanceand opportunity forshareholderstocommunicateface of communicationwithitsshareholders.Itprovidesan The Company’sAGMisoneoftheprincipalchannels Annual GeneralMeeting(the“AGM”) SHAREHOLDERS COMMUNICATION WITH year ended31December 2016; Declaration ofafinaldividend HK$0.82pershareforthe for theyearended31December 2016; Reports oftheDirectorsand AuditorsoftheCompany Adoption oftheauditedStatement ofAccountsandthe
requesting shareholders. requesting shareholders. or electronicform,whichmustbe authenticatedbythe in likeformandmaybesentto the Companyinhardcopy meeting. Therequestmayconsist ofseveraldocuments include thetextofaresolutionto bemovedatthegeneral general natureofthebusinesstobedealtwith,andmay The requestingshareholdersmuststateintheirrequestthe general meetingoftheCompany. meetings mayrequesttheDirectorsofCompanytocalla rights ofalltheshareholdershavingarighttovoteatgeneral Shareholders representingatleast5%ofthetotalvoting Company. Directors oftheCompanymaycallageneralmeeting Calling GeneralMeetings same dayaftertheAGM. Company (www.mtr.com.hk)andtheStockExchangeon The pollresultswerepostedonthewebsitesofboth * (8) (7) (6) (5) (4)
(3) (The fulltextoftheresolutionissetoutinNotice2017AGM.) date ofpassingthisresolution*. cent. oftheaggregatenumbersharesinissueasat buy backsharesintheCompany,notexceedingtenper Grant ofageneralmandatetotheBoardDirectors date ofpassingthisresolution*;and cent. oftheaggregatenumbersharesinissueasat additional sharesintheCompany,notexceedingtenper to allot,issue,grant,distributeandotherwisedealwith Grant ofageneralmandatetotheBoardDirectors remuneration; authorisation oftheBoardDirectorstodeterminetheir Re-appointment ofKPMGasAuditorstheCompanyand Company; Zhou) asanewMemberoftheBoardDirectors Election ofMrZhouYuan(alsoknownasJohannes Member oftheBoardDirectorsCompany; Election ofMrAndrewCliffordWinawerBrandlerasanew (e) (d) (c) (b) (a) of theBoardDirectorsCompany; Re-election ofMrAbrahamShekLai-himasaMember Member oftheBoardDirectorsCompany; Re-election ofMrAlasdairGeorgeMorrisonasa Member oftheBoardDirectorsCompany; Re-election ofDrDorothyChanYuenTak-faiasa Member oftheBoardDirectorsCompany; Re-election ofDrPamelaChanWongShuiasa Member oftheBoardDirectorsCompany; Re-election ofProfessorFrederickMaSi-hangasa Annual Report 2017 133
Financials and Other Information Corporate Governance Business Review and Analysis Overview CORPORATE GOVERNANCE REPORT
The Directors of the Company are required to call the general CONSTITUTIONAL DOCUMENT meeting within 21 days after the date on which the Company The Company’s Articles of Association (in both English and receives such requests, and the general meeting must be Chinese) are available on the websites of both the Company held on a date not more than 28 days after the date of the (www.mtr.com.hk) and the Stock Exchange. During the year notice convening the general meeting. If the requests include ended 31 December 2017, there was no change to the Articles a resolution to be moved at the general meeting, the notice of Association. of the general meeting must include notice of the resolution. If the resolution is to be proposed as a special resolution, the For and on behalf of the Board Directors of the Company are required to specify the intention to propose the resolution as a special resolution in the notice of the general meeting. Gillian Elizabeth Meller If, within 21 days after the date on which the Company Company Secretary receives the required requests, the Directors of the Hong Kong, 8 March 2018 Company do not proceed duly to call a general meeting, the shareholders who requested the general meeting, or any of them representing more than one-half of the total voting rights of all of them, may themselves call a general meeting, provided that the general meeting must be called for a date not more than 3 months after the date on which the Company receives the required requests.
Procedures for Shareholders Putting Forward Proposals Shareholders may put forward proposals for consideration at a general meeting according to the Companies Ordinance and the Articles of Association.
As regards proposing a person for election as a director, please refer to the “Appointment Procedure for Members of the Board of the Company” which is available on the website of the Company (www.mtr.com.hk).
Enquiries from Shareholders The Company has a Shareholders’ Communication Policy (available on the website of the Company (www.mtr.com.hk)) to provide shareholders with information about the Company to enable them to engage actively with the Company and exercise their rights as shareholders in an informed manner.
The Company’s Shareholders Communication Policy has set out, amongst other things, a channel for shareholders’ access to the Board and management by writing to the Company Secretary of the Company.
Please also refer to the Investor Relations section (pages 102 to 103) of this Annual Report on other means of communication with shareholders.
134 MTR Corporation • • • Company’s externalauditor Oversight oftherelationshipwith comprise thefollowing: the StockExchange),dutiesofCommitteeprimarily respective websitesoftheCompany(www.mtr.com.hk)and Under theCommittee’sTermsofReference(availableon DUTIES OFTHECOMMITTEE for undertakingnon-auditwork. approves theappointmentofCompany’sexternalauditor Committee, uponrequest,alsoconsidersand,ifthinksfit, an additionalmeetingiftheyconsideritnecessary.The the Committee,externalauditororFDmayrequest The Committeemeetsfourtimesayear,andtheChairmanof Committee, othersmayalsobeinvitedtoattendmeetings. attend allmeetingsoftheCommittee.Atdiscretion (the “HeadofIA”)andrepresentativestheexternalauditor The FinanceDirector(the“FD”),theHeadofInternalAudit or formerpartnerofKPMG,theCompany’sexternalauditor. Annual Report.NoneoftheCommitteeMembersisapartner records during2017aresetoutonpages117to118ofthis of theCommittee’smembershipandMembers’attendance Independent Non-executiveDirectorsoftheCompany.Details consists ofsixNon-executiveDirectors,fivewhomare Company (referredtoasthe“Committee”inthisreport) As atthedateofthisReport,AuditCommittee AUDIT COMMITTEEREPORT commences; and of itsauditandreportingobligationsbeforethe Discussing withtheexternalauditornatureandscope audit processinaccordancewithapplicablestandards; independence andobjectivitytheeffectivenessof Reviewing andmonitoringtheexternalauditor’s remuneration andtermsofsuchengagement; Company’s externalauditor,andapprovingthe appointment, re-appointmentandremovalofthe Making recommendationstotheBoardon • • • Company Review ofthefinancialinformation • • procedures reporting systemandinternalcontrol Oversight oftheCompany’sfinancial • person. with MembersoftheExecutiveDirectorateandanyother auditor maywishtoraise,eitherprivatelyortogether Discussing anymattersthattheHeadofIAorexternal auditor, andManagement,aswhenrequired; basis withtheHeadofIA,representativesexternal Chairman oftheCommitteefurthermeetsonanadhoc dealing withtheCompany’sfinancialinformation.The Liaising withtheBoardandExecutiveDirectoratein information tobemadepublic; announcements regardingtheCompany’sfinancial the preliminaryannouncementofresultsandother interim andannualreportsaccounts,togetherwith Monitoring theintegrityoffinancialstatements, and theirtrainingprogrammesbudget; Company’s accountingandfinancialreportingfunction, resources, qualificationsandexperienceofstaffthe Overseeing Management’sreviewoftheadequacy and toprotectitsassets; Board tomonitortheCompany’soverallfinancialposition been carriedout.Thesecontrolsandsystemsallowthe systems; withareporttotheBoardthatsuchreviewhas of theCompany’sfinancialcontrolsandinternalcontrol through reviewing,atleastannually,theeffectiveness controls andinternalcontrolsystemsonanongoingbasis Assisting theBoardinoverseeingCompany’sfinancial impair itsindependenceorobjectivity. external auditor’sprovisionofnon-auditservicesdoesnot Pre-approving non-auditservicesandensuringthatthe Annual Report 2017 135
Financials and Other Information Corporate Governance Business Review and Analysis Overview AUDIT COMMITTEE REPORT
• Reviewing and approving the annual Internal Audit Plan In January each year, the secretary of the meetings pre-agrees which includes audits on the efficiency of chosen activities key agenda items for the year with the Chairman of the or operations of the Company; Committee who makes a final determination on the agenda for the regular Committee meetings. • Reviewing periodic reports from the Head of IA and the follow-up of major action plans recommended, and putting forward recommendations to the Board, where WORK PERFORMED BY THE appropriate; and COMMITTEE IN 2017 In 2017, the Committee held four meetings. Representatives • Reviewing the annual assessment conducted by the Head of the external auditor, the FD and the Head of IA attended of IA on the adequacy of the resources, qualifications all four meetings to report and answer questions about their and experience of staff of the Company’s internal audit work. The Committee devoted its attention to the review of function, and its training programmes and budget. the Company’s annual and interim results announcement/ Further details of the above are set out in the “Risk accounts at the February and August meetings respectively, Management and Internal Control Systems” section of the allowing more time to review and discuss the Company’s Corporate Governance Report on pages 128 to 131 of this internal controls, internal audit and other activities at the May Annual Report. and November meetings. The Committee invited from time to Reporting to the Board time relevant Members of the Executive Directorate to join the financial presentation by the FD, and requested the General The Chairman of the Committee summarises the activities of Manager – Procurement and Contracts (Projects) to join the the Committee and highlights issues arising therefrom by a presentation by the Projects Director to update the Committee report to the Board after each Committee meeting. on the latest cost position of the Company’s railway projects The minutes of Committee meetings are prepared by under construction. the secretary of the meetings with details of the matters Major work performed by the Committee in 2017 included: considered by the Committee Members and decisions reached, including any concerns raised by the Committee Financial Members, dissenting views expressed, and suggestions for • Review of the draft 2016 Annual Report and Accounts and enhancing the governance and internal control systems of 2017 Interim Report and Accounts, including the financial the Company. The draft minutes are circulated to Committee impact of the Company’s new railway projects in progress, Members for comments within a reasonable time after each and the relevant disclosure notes in the said Accounts and meeting. The Committee formally adopts the draft minutes at recommendation of the same for the Board’s approval; the next subsequent meeting, after taking into account any • Review of the carrying value of the Group’s fixed assets comments that the Committee Members may have on the and receipt of updates on the cost to complete for the draft minutes. Minutes of the Committee meetings are open Company’s railway projects under construction; for inspection by Committee Members at the Company’s registered office.
136 MTR Corporation • • • • • • External Auditor • • • • • • • • Internal Audit • • audit; Review andapprovalofKPMG’s feeproposalforthe2017 requirements forauditsoflistedentities); Review ofthe2016Auditor’sReport(undernew Annual Accountsand2017InterimAccounts; Receiving KPMG’sreportonthesalientfeaturesof2016 KPMG; Pre-approval ofauditandnon-auditservicesprovidedby fees received; Review ofsummaryKPMGservicestotheCompanyand ended 31December2017; Review ofKPMG’sAuditPlanandstrategyfortheyear presence ofManagement. Holding ofprivatesessionswiththeHeadIAwithout Approval ofthe2018InternalAuditPlan;and Assurance Framework; Receiving anupdateontheHongKongRailwayProjects Internal AuditDepartmentfor2016; Review oftheReportonEvaluationEffectiveness Review ofWhistle-blowingProgressReports; Review ofContinuingConnectedTransactionsfor2016; Company); was separatelyreviewedbytheRiskCommitteeof system, astheriskmanagementsystemeffectiveness Effectiveness for2016(focusedontheinternalcontrol Review ofRiskManagementandInternalControlSystems Review ofInternalAuditDepartment’sReports; financial reportingissues. Preview of2017interimandannualaccounting confirmation ofthefinancialfigures”;and “2016 payoutunder‘2008VariableIncentiveScheme’- the RemunerationCommitteeofpaperheaded Review ofandrecommendationforpresentationto • • Others The AuditCommitteeReporthasbeenreviewedandendorsedbytheCommittee. Hong Kong,8March2018 Audit CommitteeChairman Dr EddyFongChing at the2018AnnualGeneralMeeting. auditor for2018approvalbytheCompany’sShareholders willingness tocontinueinoffice)astheGroup’sexternal the re-appointmentofKPMG(whichhasindicatedits independence andobjectivity,thereforerecommended The CommitteewassatisfiedwithKPMG’swork,its EXTERNAL AUDITOR RE-APPOINTMENT OF • • of MTR’ssubsidiaries. Receiving theAudit/Risk/GovernanceCommitteeMinutes Agreements; and regulations, OperatingAgreementandRailMergerRelated potential litigation,compliancewithstatutesand Review ofthe2016reportonoutstandinglitigation/ without thepresenceofManagement. Holding ofprivatesessionswithrepresentativesKPMG and of the2016AnnualAccountsand2017InterimAccounts; confirmation ofindependenceinitsauditreportrespect providing non-auditservices;andreceiving/notingKPMG’s factors whenapprovingtheappointmentofKPMGin Considering KPMG’sindependenceandotherrelevant
Annual Report 2017 137
Financials and Other Information Corporate Governance Business Review and Analysis Overview RISK MANAGEMENT
SYSTEM FEATURES introduction of a new Risk Oversight Group, a forum attended by 3-4 Executives each time on a rotational and quarterly basis Business units across the Company embrace the Company’s for risk discussion, and a new half-yearly Blue Sky Workshop Enterprise Risk Management (“ERM”) framework that for all Executives. underpins their day-to-day business activities. The framework provides a simple and effective management process to: The Company’s risks are rigorously identified, assessed and managed. Each risk is evaluated on the basis of the likelihood • Identify and review risks across all business units of the of the identified risk and the consequence of the risk event, organisation taking into consideration the control measures in place. A • Prioritise resources to manage risks risk matrix is used to determine risk ratings (E1 – E4), with E1 • Give management a clear view of the significant risks being a very high risk and E4 being a low risk. The risk ratings facing the Company reflect the required management attention and risk treatment effort, and take into account the Company’s risk appetite. • Support decision making and project execution for better The highest category of risks, “E1”, is subject to Board, Risk business performance Committee and Executive Committee oversight. The Board, with the assistance of the Risk Committee, oversees While risk taking is inevitable in the course of business, the the Company’s ERM framework and top risks, whereas the Company’s appetite for risk varies, but is particularly low in Executive Committee, with the support of the Enterprise Risk certain areas, such as in relation to safety and the provision of Committee (“ERC”), is overall accountable for the ERM policy a reliable transport service. and system implementation and continuous improvement.
In 2017, the Company strengthened the top-down input to the Company’s risk management process through the
• Exercise ongoing risk oversight • Establish appropriate risk management strategies Board • Oversee the ERM framework assisted by • Review top risks and emerging risks Risk Committee* • Conduct annual review of ERM system effectiveness
• Implement and continuously improve ERM framework • Enterprise Risk Committee - Chaired by Legal and European Business Director Executive Committee - Comprises representatives from key business functions assisted by Enterprise Risk Committee - Steers framework implementation and improvement - Reviews Company’s top risks and key emerging risks - Reports to Executive Committee and Risk Committee quarterly, and to Board every six months
• Establish arrangements and implement risk management process consistent with the Company’s ERM framework and Business Units policy • Capture identified risks in risk registers for regular review and monitoring
* See the Risk Committee Report (pages 142 – 143 of this Annual Report) for duties and work performed by the Committee in 2017
138 MTR Corporation * operations, finance,treasury,safetyandinsurance. for differentareasincludingbutnotlimitedtoconstruction, environment. Riskmanagementstrategiesaredeveloped growth businessesandfromtheconstantlychangingbusiness and managesignificantrisksarisingfromitsrecurrent The Companytakesproactivemeasurestoidentify,evaluate SIGNIFICANT RISKS MANAGEMENT PROCESSFOR • • • • • • Areas belowarenotexhaustive Identify Risk* regulations Change inlawsand brainstorming and riskdriversfor List ofrunningissues significant risks which maypose issues ortrends New andemerging business ventures New projectsor environment Changing external Existing businesses • • Evaluate Risk (E1-E4) (E1-E4) using theriskmatrix Determine riskrating the riskevent and consequenceof estimating likelihood Evaluate riskby are captured. risks andthosecuttingacrossdifferentareasofthebusiness and brainstormemergingrisksquarterlytoensurethatkey Risk CommitteereviewtheCompany’senterpriseriskprofile emerge. Inaddition,theERC,ExecutiveCommitteeand used toassisttheERCinidentifyingpotentialrisksthatmay the changingbusinessandexternalenvironments,whichis maintains alistofrunningissuesandriskdriverspertinentto The ERMTeamwithintheLegalandSecretarialDivision • • • • • appropriate level mitigated toan Accept once effective andefficient risks wherecost insurance totransfer Transfer –takeout place toimplement and ensureownersin and effectiveness evaluate adequacy controls inplaceto Mitigate –review to doso appetite andpossible Avoid riskswhereno risk appetite Take intoaccount Treat Risk* • • – – – – reports to Periodic ERM registers Capture risksinrisk Monitor Risk Report and Board Risk Committee Committee Executive Committee Enterprise Risk Annual Report 2017
139
Financials and Other Information Corporate Governance Business Review and Analysis Overview RISK MANAGEMENT
Focus areas for risk management of the Company include:
Effective and Balanced Relationship with Key Stakeholders
Key Challenges • Strive to seek a balance between the sometimes competing demands of the Company’s key stakeholders
Key Controls • Implement engagement plan for key stakeholders to maintain effective communication channels • Observe the Company’s operating obligations and maintain good performance of the Company
Operations Safety and Service Incidents
Key Challenges • Major railway service incidents • Management of crowding
Key Controls • Investigations/technical studies conducted on individual incidents to identify opportunities for continuous improvement • Enhanced crowd management plans in place • Signalling systems being upgraded to enable more frequent train services to be run in the longer term • Works Management Office established to oversee the integrated management of the combined risk of concurrent major capital projects that may have an impact on the operating railway
New Projects Cost and Delivery
Key Challenges • Shortage and ageing of contractor workers • Close proximity of construction activities to operating railway and urban developments • Management of interfaces with different parties • Adherence to the programme and cost of the projects
Key Controls • Work with Government to facilitate recruitment of workers and applications for labour importation • Close coordination with parties involved in interfacing activities and enhancement of design and construction methodology • Training for contractor workers and staff on railway safety • Stringent control of contingency funds
Workforce Transition/Competence/Institutional Knowledge/Resourcing
Key Challenges • Stream of staff reaching retirement age in coming years after MTR train service has been in operation since 1979 • Manpower shortages and retention challenge in several job types
Key Controls • Proactive manpower sourcing and succession planning • Skills and competency enhancement • Provide flexible resource pools and improve staff mobility for growth businesses • Explore innovative solutions to mitigate manpower shortage
New Business Model/Technological Disruption/Competition
Key Challenges • Current business model disrupted by new technology • Manage competition from other transport modes
Key Controls • Capitalise on e-commerce and technology to explore new business models • Monitor competition from other transport modes and implement initiatives to maintain market share
Delivery of Growth Strategy
Key Challenges • Challenging business model for future new lines in Hong Kong • Strong competition for business opportunities outside Hong Kong
Key Controls • Formulate innovative business models for new lines in Hong Kong • Maximise branding effect of the Company • Conduct regular environmental scan for new business opportunities outside Hong Kong
Security Threat (cyber/physical)
Key Challenges • Threat of cyber-attack on Operations and IT systems • Terrorist attack threat, in particular for railway operations of the Company outside Hong Kong
Key Controls • Enhance IT network resilience to protect the Company against cyber attacks • Implement cyber security protection systems for railway operations systems • Enhance governance of corporate security framework
140 MTR Corporation • • benchmarking andexperiencesharingthroughvariouschannels: We keepourselvesabreastofthelatestdevelopmentsinriskmanagement throughreviewswithusers,cross-industry • • • • Key improvementsintheERMsystemimplementedwithin2017include: CONTINUOUS PROCESSIMPROVEMENT and adequacyoftheCompany’sERMsystemconcludedthatitwaseffectiveadequate,basedonanumberreviewareas. For theyearended31December2017,RiskCommittee,withdelegatedauthorityfromBoard,evaluatedeffectiveness on 23February2018. December 2017totheExecutiveCommittee,whichconfirmedreviewresults,on8February2018,andRiskCommittee European BusinessDirector,whochairstheERC,presentedERMsystemeffectivenessreviewresultsforyearended31 On behalfoftheExecutiveCommittee,ERCevaluateseffectivenessERMsystematleastannually.TheLegaland Process ofSystemEffectivenessReview
• Factors consideredduringthereview • • • • • and overseas,throughthein-house “Audit&RiskForum”heldinHongKongJune2017andperiodic teleconferencemeetings Cross-learning amongriskmanagers fromdifferentbusinessunits,includingsubsidiariesandassociates intheMainlandofChina Sharing andlearningofbestpractice throughthetenthUKERMRoundtableandninthHK ERM Roundtablemeetings also promotedriskawarenessintheirrespectivelocalbusiness units toechoHeadquarters’efforts an onlinegame.Over400staffparticipatedinvariousactivities during theRAWevent.KeybusinessunitsoutsideHongKong applicable forriskmanagement,alunchtimeseminaronassessment tools,aseriesofinteractivehalf-dayworkshops,and promote riskawarenessacrossalllevelsoftheorganisation.The eventincludedaworkshoponforward-thinkingtools In lateOctober2017,theCompanylauncheditsRiskAwareness Week(“RAW”)eventforthefourthyeartocontinue were alsoorganisedandattendedbyover110managerssupervisors studies werediscussed;anotherseriesofhalf-dayworkshopsfocusingonriskmanagementprinciplesandawareness managers/ERC members/divisionalriskcoordinatorsatwhichglobaltrendsandlessonslearntfromexternalreallifecase In June2017,aseriesofhalf-dayriskmanagementworkshopswereattendedbyover100departmentheads/senior focused riskdiscussionattheenterpriselevel and managedbybusinessunitsaspartofnormalhavebeenarchivedfromtheenterpriseriskmap,toenablemore Enterprise riskshavebeenreviewedforfurtherdifferentiationandthoseassessedtobemoreappropriatelymonitored controls, assessmentoftheeffectivenesscontrolsandreinforcementforwardrisktrends The riskregistertemplatehasbeenenhanced,supplementedbyguidelines,toenablebetterarticulationofrisksand annual reviewoftheriskmanagementsystem Review areassuggestedintheCorporateGovernanceCodeforBoard’s Risk managementtrainingsandpromotionsactivitiesheldin2017 Benchmarking/roundtable/peer groupideasexchange Risk managementofsubsidiariesandassociates Enhancements resultingfromthe2016ERMsystemeffectivenessreview Heads andofsubsidiaries/associates Annual internalcertificationofriskmanagementeffectivenessbyDepartment 31 December2017 year ended adequate forthe effective and ERM systemwas Conclusion Annual Report 2017
141
Financials and Other Information Corporate Governance Business Review and Analysis Overview RISK COMMITTEE REPORT
As at the date of this Report, the Risk Committee of the is updated as required to include any topical subjects or risks Company (referred to as the “Committee” in this report) that may emerge during the year. The Committee provides consists of seven non-executive Directors, five of whom observations and, where applicable, recommendations to are Independent Non-executive Directors of the Company management, based on their reviews and discussions. (“INEDs”). Details of the Committee’s members and their The secretary of the meetings draws up agendas for each attendance records during 2017 are set out on pages 117 to meeting in consultation with the chairman of the Committee, 118 of this Annual Report. making reference to the list of reviews and presentations determined by the Committee, as well as topical matters at the DUTIES OF THE COMMITTEE relevant time. The Committee’s Terms of Reference are available on the The chairman of the Committee summarises the activities of respective websites of the Company (www.mtr.com.hk) and the Committee and highlights issues arising therefrom by a The Stock Exchange of Hong Kong Limited. report to the Board after each Committee meeting. The principal duties of the Committee include reviewing the The minutes of the Committee meetings are prepared by Company’s Enterprise Risk Management (“ERM”) framework, the secretary of the meetings with details of the matters guidelines, policy and procedures for risk assessment and risk considered by the Committee Members, including management; reviewing the Company’s top risks and key recommendations and any observations raised by the emerging risks and the controls in place to mitigate such risks; Committee Members. Draft minutes are circulated to the monitoring the Company’s risk profile; conducting “deep dive” Committee Members before adoption. The Committee reviews on selected key risk areas; reviewing the effectiveness formally adopts the draft minutes at its next subsequent of the ERM function; and reviewing the Company’s crisis meeting, after taking into account any comments that the management arrangements. Committee Members may have on the draft minutes. The Committee assists the Board in overseeing the Company’s A total of four meetings have been scheduled to be held on a ERM system on an ongoing basis. The Committee reviews the quarterly basis in 2018. effectiveness of the Company’s ERM system annually, and reports to the Board in relation to such review. More details of the features of the ERM system and processes, the significant WORK PERFORMED BY THE areas of risk being managed, and the process used to review COMMITTEE IN 2017 the effectiveness of the ERM system are set out in the “Risk In 2017, the Committee held four meetings. During the year, Management” section on pages 138 to 141 of this Annual the Committee reviewed the Company’s ERM quarterly reports Report. Each year, the Committee agrees on a list of reviews and the effectiveness of the Company’s ERM system for the and presentations in respect of selected key risk areas to be year ended 31 December 2016. A review of the Company’s considered for that year, taking into account the ongoing ERM annual report and ERM system effectiveness for the year activities of the Company at the material time; and invites ended 31 December 2017 was conducted by the Committee relevant management to present on the subjects and conduct on 23 February 2018. interactive discussions. The list of matters to be considered
142 MTR Corporation • • • • • • The Committeeconsideredthefollowingkeymattersin2017: questions onERMrelatedmatters. attended allfourmeetingsin2017toreportandanswer Manager –EnterpriseRisk,representingtheERMfunction, Manager –Governance&RiskManagementandtheSenior The LegalandEuropeanBusinessDirector,theGeneral action bymanagement. recommendations providedbytheCommitteeforappropriate or presentationstotheCommittee,withcommentsand managers wereinvitedtopresentonthe“deepdive”reviews planned. RelevantMembersoftheExecutiveDirectorateand the year,whichreviewsandpresentationstookplaceas reviews andpresentationsonselectedkeyriskareasfor first meeting,theCommitteeagreedonalistof“deepdive” risks andkeyemergingateachofitsmeetings.At The CommitteereviewedtheCompany’sriskprofile,top Light railsafetyandmanagementofcrowding Line (East)andmanagementofcrowding Operation ofKwunTongLineExtensionandSouthIsland Escalator safetyinrailwayoperationandproperty Arson incidenton10February2017 Management ofterroristattackrisk railway operatingsystems) MTR subsidiaries’/associates’cybersecurity(including The RiskCommitteeReporthasbeenreviewedandendorsedbytheCommittee. Hong Kong,8March2018 Risk CommitteeChairman Alasdair GeorgeMorrison • • • • • • • • Major globalrailaccidentssummaryoverviews Application ofBuildingInformationModelling New railwayextensions in theMainlandofChina Governance measuresonpropertydevelopmentprojects Strategic manpowerplanning operation Meeting ageingpopulationchallengesforrailway Political landscapeandchallenges Governance arrangementsformajorprojects Annual Report 2017 143
Financials and Other Information Corporate Governance Business Review and Analysis Overview CAPITAL WORKS COMMITTEE REPORT
As at the date of this Report, the Capital Works Committee of WORK PERFORMED BY THE the Company (referred to as the “Committee” in this report) COMMITTEE IN 2017 consists of seven Non-executive Directors, six of whom In 2017, the Committee held five meetings at which the are Independent Non-executive Directors of the Company following key matters were reviewed and considered: (“INEDs”). Details of the Committee’s members and their attendance records during 2017 are set out on pages 117 to • reports on the progress and cost status of the Company’s 118 of this Annual Report. capital projects under construction including the Express Rail Link and Shatin to Central Link
DUTIES OF THE COMMITTEE • half-yearly reports on projects-related audits conducted by The Committee’s Terms of Reference are available on the the Company’s Internal Audit Department website of the Company (www.mtr.com.hk). • half-yearly reports on the construction programme and The principal duties of the Committee include overseeing any cost status of all the awarded development projects of the capital project of the Company in Hong Kong and outside of Company’s Property Division in Hong Kong, in particular Hong Kong involving design and/or construction activities update on the Tai Wai Station Property Development (“Relevant Project”) with a capital value in excess of HK$10 The Projects Director and the General Manager – Procurement billion and any other Relevant Project, in the event that such & Contracts (Projects) attended all five Committee meetings Relevant Project is four months or more behind programme in 2017 to report and answer questions on progress of on an overall basis; reviewing the progress of such projects, projects and cost related matters. Other Executives and senior from both a programme and cost perspective; checking managers were also invited to attend Committee meetings that there are adequate resources for and supervision when required. of such projects; keeping under review the Company’s communication strategy and crisis management plan in respect of each of such projects; and reporting to the Board on a quarterly basis and on ad hoc basis if the Committee deems appropriate, in respect of the above.
The secretary of the meetings draws up agendas for each meeting in consultation with the chairman of the Committee, which may take into account topical matters relating to the projects at the relevant time.
The chairman of the Committee summarises the activities of the Committee and highlights issues arising therefrom by a report to the Board after each Committee meeting.
The minutes of the Committee meetings are prepared by the secretary of the meetings with details of the matters considered by the Committee Members, including recommendations and any observations raised by the Committee Members. Draft minutes are circulated to the Dr Allan Wong Chi-yun Committee Members before adoption. The Committee Capital Works Committee Chairman formally adopts the draft minutes at its next subsequent Hong Kong, 8 March 2018 meeting, after taking into account any comments that the
Committee Members may have on the draft minutes. The Capital Works Committee Report has been reviewed and endorsed by the Committee.
144 MTR Corporation • • • include: The principalresponsibilitiesoftheRemunerationCommittee remuneration. or anyofhisassociatesisinvolvedindecidingown the Committeeonrelevantissues.NoindividualDirector to obtainoutsideindependentprofessionaladvicesupport of theChairman,RemunerationCommitteeisauthorised Non-executive Director.Asnecessaryandwiththeagreement Chairman oftheRemunerationCommitteeisanindependent four ofwhomareindependentNon-executiveDirectors.The Currently, theCommitteehassevenNon-executiveDirectors, of theirrecommendations. both theChairmanandChiefExecutiveOfficerinrespect of theExecutiveDirectorate,Committeeconsultswith consults withtheChairmanandincaseofotherMembers remuneration oftheChiefExecutiveOfficer,Committee packages oftheNon-executiveDirectors.Indetermining make recommendationstotheBoardonremuneration of theCompany’sremunerationpolicy,andtoconsider and otherMembersoftheExecutiveDirectorateinlight also theremunerationpackagesofChiefExecutiveOfficer variable incentivescheme,long-termand and approveremunerationissuespertainingtotheCompany’s Throughout theyear,Committeemetregularlytodiscuss Directorate. Chief ExecutiveOfficerandotherMembersofthe review anddeterminetheremunerationpackagesfor packages oftheNon-executiveDirectors,aswellto Company’s remunerationpolicyandthe authority toconsiderandrecommendtheBoard The RemunerationCommitteehasbeendelegatedthe INTRODUCTION REMUNERATION COMMITTEEREPORT Directorate; and remuneration packagesofMembers oftheExecutive Determining, withdelegatedresponsibility, the Non-executive Directors; Recommending totheBoardremunerationof facilitate theemploymentoftopqualitypersonnel; Formulating aremunerationpolicyandpracticesthat Executive Directorate. transparent remunerationpolicycoveringitsBoardand Company alsorecognisestheimportanceofaformaland and employingmotivatingtopqualitypersonnel.The The Companyiscommittedtoeffectivecorporategovernance remuneration. financial performance,anddesirabilityofperformance-based and itssubsidiaries,marketpractices,financialnon- and scope,employmentconditionselsewhereintheCompany paid bycomparablecompanies,jobresponsibilities,duties consideration anumberofrelevantfactorssuchassalaries and performance.Toachievethis,theCompanyhastakeninto appropriate andalignswiththeCompany’sgoals,objectives It istheCompany’spolicytoensurethatremuneration REMUNERATION POLICY • • recommendations totheBoard: and considersthefollowingfactorsastheyputforward the Company,Committeeundertakesperiodicreviews remunerated fortheirtimeandresponsibilitiesdevotedto To ensurethatNon-executiveDirectorsareappropriately annual director’sfees. remuneration ofNon-executiveDirectorsisintheform Members oftheBoardwhoareNon-executiveDirectors.The to theBoardfromtimeonremunerationof The RemunerationCommitteemakesrecommendations NON-EXECUTIVE DIRECTORS REMUNERATION FOR authorised bytheRemunerationCommitteeofCompany. This RemunerationCommitteeReporthasbeenreviewedand Reference andareconsistentwiththeCode. The Committee’sresponsibilitiesaresetoutinitsTermsof • Time commitment; Fees paidbycomparablecompanies; reference totheBoard’scorporategoalsandobjectives. remuneration ofMemberstheExecutiveDirectorateby Reviewing andapprovingperformance-based
Annual Report 2017 145
Financials and Other Information Corporate Governance Business Review and Analysis Overview REMUNERATION COMMITTEE REPORT
• Responsibilities of the Non-executive Directors; and Variable Incentives • Employment conditions elsewhere in the Company. The Chief Executive Officer, other Members of the Executive Directorate and selected management of the Company Details of remuneration for Non-executive Directors are set are eligible to receive an annual cash incentive under the out in note 10 to the accounts. The current Non-executive Company’s Variable Incentive Scheme, the rules of which are Director remuneration framework, since 1 January 2017, regularly reviewed by the Remuneration Committee. is set out below: Under the current scheme rules, the payouts are based on (HK$) the performance of the Company and the individuals. The Board Company’s performance is measured by both financial and – Chairman 1,500,000 non-financial factors including: – Other Members 300,000 Audit Committee and • Return on fixed assets; Capital Works Committee – Chairman 150,000 • Rolling three-year operating profit; – Other Members 90,000 • Fulfillment of the Customer Service Pledges; and Risk Committee, Remuneration Committee, Nominations Committee, and Corporate • Fulfillment of Performance Requirements in relation to Responsibility Committee “Train Service Delivery”, “Passenger Journeys on Time” and – Chairman 110,000 “Train Punctuality” as defined in Schedule 2, Part 1 of the – Other Members 60,000 Operating Agreement.
Payouts will be automatically reduced if the Company REMUNERATION FOR EMPLOYEES does not achieve any one or more of the Performance The Company’s remuneration structure for its employees, Requirements. They will also be adjusted subject to the including the Chief Executive Officer and other Members of Company’s achievement of all the Customer Service Pledges. the Executive Directorate, comprises: Following the end of each year, the Company engages • fixed compensation – base salary, allowances and benefits- an independent expert to conduct a review and audit of in-kind (e.g. medical); its performance versus the Performance Requirements • variable incentives – discretionary or performance-based and Customer Service Pledges. The results of this audit are payment and other business-specific cash incentive plans; shared with the Remuneration Committee to determine if adjustments to the payouts under the scheme are appropriate. • long-term incentives – e.g. restricted shares and performance shares; and Individual performance ratings are part of the thorough annual performance assessment process that is applied • retirement schemes. throughout the Company. The performance ratings and The specifics of these components are described below. assessments reflect the full range of factors over which the individual has accountability, including operational, other non- Fixed Compensation financial and financial factors. Individual performance ratings Base salary and allowances are set and reviewed annually. The for the Members of the Executive Directorate are determined annual review process takes into consideration the Company’s by the Chief Executive Officer, and the performance for the remuneration policy, competitive market positioning, market Chief Executive Officer is assessed by the Chairman. practice, as well as the Company’s and the individuals’ performance. Benefits-in-kind are reviewed as and when appropriate taking into consideration market practices.
146 MTR Corporation for anyoptionstobeexercised. Requirements includedintheOperatingAgreementorder the CompanyhassatisfiedeachofthreeKeyPerformance that optionscannotbeexercisedundertheSchemeunless June 2014.TheSchemeincludesaprovisionwhichspecifies no newgrantofoptionscouldbemadeafter5:00p.m.on6 success oftheCompany.Underterms2007Scheme, subsidiaries theopportunitytoparticipateingrowthand is intendedtoprovideemployeesoftheCompanyandits Annual GeneralMeetingon7June2007.The2007Scheme approved andadoptedbyshareholdersattheCompany’s The 2007ShareOptionScheme(the“2007Scheme”)was (i) 2007ShareOptionScheme the “2014ShareIncentiveScheme”). Scheme andtheExecutiveShareIncentive(formerly During 2017,theCompanymaintained2007ShareOption Long-Term Incentives business growth. the pastyearandtomotivatestaffstriveforcontinuous to theCompany’sgoodperformanceandachievementsin or aboveperformance,asarecognitionoftheircontribution the MembersofExecutiveDirectorate,withcompetent In 2017,discretionaryawardswereprovidedtostaff,including Discretionary Awards specific businesstargetsoftheCompany. incentive schemestomotivatethestaffconcernedreach In addition,theCompanyoperatesotherbusiness-related approximately 15-30%oftotalcashcompensation. other MembersoftheExecutiveDirectoraterepresent Target incentivelevelsfortheChiefExecutiveOfficerand payouts undertheschemearemadeannually. performance exceedspre-definedthresholdstandards,then 13th monthpayandportionsoftheirfixedallowances.If was originallyfundedbyparticipantsforegoingtheir A portionofthetargetincentivelevelsunderscheme by theRemunerationCommitteefromtimetotime. period, andanyotherperformanceconditions,asdetermined performance metricandinrespectofsuch the Company,assessedbyreferencetosuchBoard-approved Shares areawardedwhichvestsubjecttotheperformanceof performance oftherelevanteligibleemployee.Performance Restricted Sharesareawardedonthebasisofindividual including MembersoftheExecutiveDirectorate,in2017. were grantedtoselectedemployeesoftheCompany, Shares. AwardsundertheExecutiveShareIncentiveScheme granted anawardofRestrictedSharesand/orPerformance Executive ShareIncentiveScheme.Anawardholdermaybe Scheme asawardholdersinaccordancewiththerulesof employee toparticipateintheExecutiveShareIncentive absolute discretion,determinethecriteriaforanyeligible The RemunerationCommitteemay,fromtimetotime,atits drive theachievementofstrategicobjectivesCompany. interest withthelong-termsuccessofCompanyandto retain managementandkeyemployees,toalignparticipants’ The purposesoftheExecutiveShareIncentiveSchemeareto by theCompany). January 2015foratermof10years(unlessterminatedearlier 2007 Schemeon6June2014.Thetookeffect1 Executive ShareIncentiveScheme,followingtheexpiryof On 15August2014,theBoardapprovedadoptionof (ii) ExecutiveShareIncentiveScheme the accounts. Company undertheSchemesaresetoutinnotes10&45to of theExecutiveDirectorateandselectedemployees Details ofthe2007SchemeandoptionsgrantedtoMembers the ReportofMembersBoard. Interests inSharesandUnderlyingoftheCompany” the 2007Schemearesetoutunderparagraph“Directors’ of theExecutiveDirectorateasat31December2017under Options exercisedandoutstandinginrespectofeachMember Annual Report 2017 147
Financials and Other Information Corporate Governance Business Review and Analysis Overview REMUNERATION COMMITTEE REPORT
In general, the Company will pay to the third party trustee (a) MTR Retirement Scheme (the “Trustee”) monies and may give directions or a The MTR Retirement Scheme is a defined benefit scheme recommendation to the Trustee to apply such amount of registered under the Occupational Retirement Schemes monies and/or such other net amount of cash derived from Ordinance (Cap. 426) (the “ORSO”) and has been granted an shares held as part of the funds of the trust to acquire existing MPF Exemption Certificate by the Mandatory Provident Fund shares from the market. Such shares will be held on trust by Schemes Authority (the “MPFA”). the Trustee for the relevant award holder. The Trustee shall not The MTR Retirement Scheme has been closed to new exercise any voting rights in respect of any shares held in the employees from 1 April 1999 onwards. It provides benefits trust and no award holder is entitled to instruct the Trustee based on the greater of a multiple of final salary times service to exercise the voting rights in respect of any unvested award and a factor times the accumulated member contributions shares. with investment returns. Members’ contributions are based on As part of the overall governance of the Executive Share fixed percentages of base salary. The Company’s contributions Incentive Scheme, the Company reviews scheme features on a are determined by reference to an annual actuarial valuation regular basis to ensure continued relevance and effectiveness. carried out by an independent actuarial consulting firm. In 2017, the Company appointed an independent consultant to conduct a review of the Executive Share Incentive Scheme (b) MTR Provident Fund Scheme and obtained the Remuneration Committee’s approval The MTR Provident Fund Scheme is a defined contribution on certain refinements which have come into effect on scheme registered under the ORSO and has been granted 1 January 2018. Changes include the renaming of the an MPF Exemption Certificate by the MPFA. All benefits 2014 Share Incentive Scheme to become “Executive Share payable under the MTR Provident Fund Scheme are calculated Incentive Scheme” and the entitlement of award holders to by reference to members’ own contributions and the cash dividends accrued in respect of unvested Restricted Company’s contributions, together with investment returns Shares that are granted on or after 1 January 2018. Certain on these contributions. Both members’ and the Company’s administrative provisions of the scheme rules have also been contributions are based on fixed percentages of members’ updated to streamline the administration of the Executive base salary. Share Incentive Scheme. (c) MTR MPF Scheme Details of the Executive Share Incentive Scheme and shares The MTR MPF Scheme is a defined contribution scheme granted to Members of the Executive Directorate and selected covered under an MPF master trust registered with the MPFA. employees of the Company under the Executive Share It covers those employees who did not opt for or who are Incentive Scheme are set out in notes 10 & 45 to the accounts. not eligible to join the MTR Retirement Scheme or the MTR Retirement Schemes Provident Fund Scheme. Both members and the Company In Hong Kong, the Company operates four retirement each contribute to the MTR MPF Scheme at the mandatory schemes under trust, the MTR Corporation Limited Retirement levels as required by the Mandatory Provident Fund Schemes Scheme (the “MTR Retirement Scheme”), the MTR Corporation Ordinance (Cap. 485) (the “MPFSO”). The Company makes Limited Provident Fund Scheme (the “MTR Provident Fund additional contributions above the mandatory level for eligible Scheme”) and two Mandatory Provident Fund Schemes (the members who joined the MTR MPF Scheme before 1 April “MTR MPF Scheme” and the “KCRC MPF Scheme”) with details 2008, subject to individual terms of employment. as follows:
148 MTR Corporation • • • DURING THEYEAR REMUNERATION COMMITTEE WORK PERFORMEDBYTHE overseas, theirrespectivelocallawsandregulations. the caseofsubsidiariesinMacau,MainlandChinaand in thecaseofsubsidiariesHongKong,MPFSOand, operates retirementschemesestablishedinaccordancewith, of China,UnitedKingdom,SwedenandAustraliatheGroup For subsidiarycompaniesinHongKong,Macau,theMainland Provident FundScheme. effective from16March2015,participatesintheMTR Mr. LincolnLeong,theCompany’sChiefExecutiveOfficer the MTRProvidentFundSchemeorMPFScheme. Scheme. OtherexecutiveDirectorsareeligibletojoineither before 1April1999areeligibletojointheMTRRetirement The executiveDirectorswhowerehiredbytheCompany the MPFSO. the KCRCMPFSchemeatmandatorylevelsasrequiredby Scheme. BothmembersandtheCompanyeachcontributeto MTR ProvidentFundSchemebutopttore-jointheKCRCMPF members oftheKCRCMPFschemeandareeligibletojoin It coversthoseformerKCRCemployeeswhowerepreviously covered underanMPFmastertrustregisteredwiththeMPFA. The KCRCMPFSchemeisadefinedcontributionscheme (d) KCRCMPFScheme the ExecutiveShareIncentiveScheme; performance shareawardsforeligibleemployeesunder reviewed andapprovedrestrictedshareand/or performance period; performance-based variableincentiveschemeforthe2016 reviewed andapprovedpayoutsundertheCompany’s in the2016AnnualReport; Approved the2016RemunerationReportasincorporated
Hong Kong,23February2018 Remuneration CommitteeChairperson Dr DorothyChanYuenTak-fai year ended31December2017. to thefivehighestpaidemployeesofCompanyfor Please refertonote10theaccountsforinformationrelating 10 totheaccounts. shown belowandtheremunerationdetailsaresetoutinnote Executive Directorate(excludingshare-basedpayments)is The totalremunerationoftheMembersBoardand DIRECTORS EXECUTIVE AND REMUNERATION OFNON- • • • • Total Retirement schemecontributions Variable remunerationrelated Base salaries,allowancesand Fees in HK$million to performance to performance other benefits-in-kind Incentive Scheme. to takeeffectin2018andrefinementsofExecutiveShare approved theadoptionofanewCoreIncentiveScheme for MembersofExecutiveDirectorate;and reviewed andapprovedthecontractrenewalarrangement took effectinJuly2017; packages forMembersoftheExecutiveDirectorate,which conducted anannualreviewoftheremuneration Directors; reviewed andapprovedthepaystructureforExecutive
102.0 Annual Report 2017 2017 11.7 19.5 61.0 9.8 2016 90.9 18.9 55.7 9.6 6.7 149
Financials and Other Information Corporate Governance Business Review and Analysis Overview BOARD AND EXECUTIVE DIRECTORATE
Non-executive Chief Executive Non-executive Independent Chairman Officer Director Non-executive n irma O D D Director Cha CE NE INE
Member of Audit Member of Member of Member of Committee Nominations Remuneration Capital Works Committee Committee Committee AC NC RC CWC
Member of Risk Member of Director Chairman of Committee Corporate of the the relevant Responsibility Company’s Board b) RiskC CRC Committee Dir (Su Subsidiary(ies) Committee
MEMBERS OF THE BOARD
Professor Ma holds a Bachelor of Arts (Honours) degree Professor Chairman NC majoring in economics and history from The University of Frederick Hong Kong. He was conferred the Honorary Doctor of Social Ma Si-hang CRC RC Sciences by Lingnan University in October 2014 and the Age 66 Honorary Doctor of Social Science by City University of Hong Dir (Sub) Kong in October 2016. Professor Ma was awarded the Gold Bauhinia Star medal in 2009 and was appointed a Justice of Professor Ma joined the Board as an Independent the Peace in 2010. Non-executive Director in July 2013. He was then re- designated as a Non-executive Director on 30 November 2015 and appointed as Non-executive Chairman since 1 January 2016. Lincoln CEO Professor Ma has extensive experience in banking and financial Leong Kwok-kuen sector. He is currently an independent non-executive director Age 57 CRC of FWD Group and a director of Husky Energy Inc.. Dir (Sub) Professor Ma was an independent non-executive director of Agricultural Bank of China Limited, Aluminum Corporation of Mr Leong joined the Company in February 2002 as the Finance China Limited and Hutchison Port Holdings Management Pte. Director and has been a Member of the Executive Directorate Limited, and also a non-executive director of China Mobile since then. He was re-titled as the Finance & Business Communications Corporation and COFCO Corporation. He Development Director in May 2008, and was appointed as was previously the Secretary for Financial Services and the the Deputy CEO in July 2012 and the Acting CEO in August Treasury of the HKSAR Government and a Non-executive 2014. Mr Leong was appointed as the CEO in March 2015, and Director of the Company from 2002 to 2007. Professor has been a Member of the Board since then. As the CEO, he is Ma held the position of the Secretary for Commerce and responsible for the Group’s overall performance in and outside Economic Development of the HKSAR Government from of Hong Kong. 2007 to July 2008. Prior to joining the Company, Mr Leong worked in the He is the Council Chairman of The Education University of accountancy and investment banking industries in London, Hong Kong, a member of the International Advisory Council Vancouver and Hong Kong. of China Investment Corporation and the Global Advisory Council of the Bank of America. He is a non-executive director of Mandarin Oriental International Limited, chairman of the Quality Assurance
150 MTR Corporation United Statesof America. Business Administrationdegree fromHarvardBusinessSchool, University ofCambridge,United KingdomandaMasterof Arts) degreeinModernandMedieval Languagesfromthe Mr BrandlerholdsaBachelorof Arts (subsequentlyMasterof of TheInstituteCharteredAccountantsinEnglandandWales. Governors oftheChineseInternationalSchool.Heisamember Mr BrandlerisalsocurrentlytheChairmanofBoard of theIndependentCommissionAgainstCorruption. Commerce andamemberoftheOperationsReviewCommittee is theformerchairmanofTheHongKongGeneralChamber Pacific CorporateFinanceatSchrodersbasedinHongKong.He an investmentbanker,hislastpositionbeingHeadofAsia Prior tojoiningCLPHoldingsLimitedin2000,MrBrandlerwas Tai PingCarpetsInternationalLimited. and ShanghaiHotels,Limited,anon-executivedirectorof is alsothenon-executivedeputychairmanofTheHongkong and currentlyisanon-executivedirectorofthatcompany.He an executivedirectorbetweenOctober2013andApril2014, executive officerofCLPHoldingsLimitedfrom2000to2013, Brandler wasformerlythegroupmanagingdirectorandchief He isthechairmanofSirEllyKadoorie&SonsLimited.Mr Mr BrandlerhasjoinedtheBoardsince17May2017. Age 61 Winawer Brandler Andrew Clifford United Kingdom. of Artsdegree)fromtheUniversityCambridgein He holdsaBachelorofArtsdegree(subsequentlyMaster Chartered InstituteofLogisticsandTransportinHongKong. and Canadain1986.MrLeongisacharteredfellowofThe He qualifiedasacharteredaccountantinEngland1985 Company Limited. non-executive directorofHongKongAircraftEngineering of HongKong.MrLeongwaspreviouslyanindependent member oftheBoardDirectorsTheCommunityChest of TheHongKongHousingSociety,andavice-patron Council oftheUniversityGrantsCommittee,vice-chairman
RiskC INED AC
Sciences, University ofHongKong,andwasawardedaDoctorSocial She isagraduateandanHonoraryFellowofTheChinese Kong HousingAuthorityandEstateAgentsAuthority. Commission ofHongKong,HospitalAuthority,The Princess MargaretHospital,andamemberoftheLawReform and theCourt,chairmanofgoverningcommittee chairman oftheHongKongBaptistUniversityCouncil chairman ofHongKongDepositProtectionBoard,deputy Dr ChanwaschiefexecutiveoftheConsumerCouncil, patron. SheisalsocurrentlypatronofConsumersInternational. Chest ofHongKongformanyyears,andiscurrentlyitsvice- Board. DrChanhadservedontheboardofTheCommunity of HongKongandamemberthePrivateColumbariaAppeal Kong, anindependentdirectoroftheTravelIndustryCouncil chairman ofTheBoys’andGirls’ClubsAssociationHong She ischairmanofTheInsuranceComplaintsBureau,vice- Dr ChanhasjoinedtheBoardsinceJuly2013. Age 71 Chan WongShui Dr Pamela Fund Advisory Committee, a board member of the Hong Fund AdvisoryCommittee,aboard memberoftheHong the chairpersonofSustainable AgriculturalDevelopment executive directorofAMSPublic TransportHoldingsLimited, and ContinuingEducation.DrChan isanindependentnon- advisor ofInternationalCollege ofHKUSchoolProfessional Resources), HeadofCentreforLogistics&Transport,and She iscurrentlytheDeputyDirector(Administrationand Dr ChanhasjoinedtheBoardsinceJuly2013. Age 68 Chan YuenTak-fai Dr Dorothy Dr ChanholdsaBachelorofLawsdegreefromPekingUniversity. , by the Hong Kong Baptist University. honoris causa,bytheHongKongBaptistUniversity. Annual Report 2017 INED RC Dir (Sub) INED CWC CRC NC
151
Financials and Other Information Corporate Governance Business Review and Analysis Overview BOARD AND EXECUTIVE DIRECTORATE
Kong R&D Centre for Logistics and Supply Chain Management 2008, Mr Cheng was appointed a member of the National Enabling Technologies Limited, an advisor to the Serco Group Committee of the 11th Chinese People’s Political Consultative (HK) Limited and a member of the Board of Governors of the Conference (the ‘CPPCC’) and a senior adviser to the 11th Hong Kong Institute for Public Administration. She is also an Beijing Municipal Committee of the CPPCC. Honorary Fellow of the Chartered Institute of Logistics and He holds a Bachelor of Social Science degree in Economics Transport (‘CILT’) and CILT’s Global Advisor for Women in from The Chinese University of Hong Kong and a Master Logistics and Transport. of Philosophy degree in Economics from The University Dr Chan was a member of the Social Welfare Advisory of Auckland. In 2005, Mr Cheng was conferred the degree Committee and the Advisory Council on Environment of the of Doctor of Social Science, honoris causa, by The Chinese HKSAR Government, and the International President of CILT. University of Hong Kong and the degree of Doctor of Business She was previously the Deputy Commissioner for Transport of Administration, honoris causa, by The Open University of Hong Government from 1995 to 2002. From 2000 to 2002, Dr Chan Kong. He was also awarded the Gold Bauhinia Star medal was the Alternate Director to the office of the Commissioner in 2005. for Transport, a Non-executive Director of the Company.
She holds a Bachelor of Social Sciences degree, a Master of Social Sciences degree in Public Administration and a Doctor Anthony INED of Philosophy degree from The University of Hong Kong. Chow Wing-kin Age 67 RC
CWC Vincent INED
Cheng Hoi-chuen Mr Chow has joined the Board since May 2016. Age 69 RC He is a solicitor admitted to practise in Hong Kong and
CRC England and Wales. Mr Chow has been a practising solicitor in Hong Kong for over 34 years and is currently Mr Cheng has joined the Board since July 2009. the Senior Consultant and Global Chairman of the law firm Messrs. Guantao & Chow Solicitors and Notaries. He is a He is an independent non-executive director of CLP Holdings China Appointed Attesting Officer and an arbitrator of the Limited, Great Eagle Holdings Limited, Hui Xian Asset South China International Economic and Trade Arbitration Management Limited, China Minsheng Banking Corp., Ltd., Commission/Shenzhen Court of International Arbitration. Shanghai Industrial Holdings Limited, Wing Tai Properties Mr Chow is currently the deputy chairman of the board of Limited, Hutchison Whampoa Limited, and CK Hutchison stewards of The Hong Kong Jockey Club, a non-executive Holdings Limited. director of Kingmaker Footwear Holdings Limited, and an Mr Cheng was an executive director of HSBC Holdings plc and independent non-executive director of S. F. Holding Co., Ltd.. the Advisor to its Group Chief Executive, and a non-executive He was a non-executive director of China City Construction director of Swire Properties Limited. In public service, he was Group Holdings Limited, an independent non-executive vice chairman of the China Banking Association, chairman of director of Fountain Set (Holdings) Limited, the president of the Independent Commission on Remuneration for Members The Law Society of Hong Kong from 1997 to 2000 and is the of the Executive Council and the Legislature, and Officials former chairman of the Process Review Panel for the Securities under the Political Appointment System of the HKSAR, a and Futures Commission of Hong Kong. member of the Exchange Fund Advisory Committee of the Hong Kong Monetary Authority and a member of the Advisory Mr Chow was appointed a Justice of the Peace in 1998 and Committee on Post-service Employment of Civil Servants. In awarded the Silver Bauhinia Star medal in 2003.
152 MTR Corporation Gold Bauhinia Star medal in 2008. Gold BauhiniaStarmedalin2008. appointed asaJusticeofthePeacein1996andwasawarded Social SciencesbyTheOpenUniversityofHongKong.Hewas of KentintheUnitedKingdom,andanHonoraryDoctor was awardedanHonoraryDoctorofCivilLawbytheUniversity Dr FongholdsaBachelordegreeinSocialSciencefromand Public Accountants. England andWalestheHongKongInstituteofCertified He isamemberoftheInstituteCharteredAccountantsin China untilhisretirementin2003. in capitalmarketsworkHongKongandtheMainlandof senior auditpartnerwithPricewaterhouseCoopersspecializing Hong KongAcademyforPerformingArts.DrFongwasalsoa Pearl RiverDeltaBusinessCouncil,andacouncilmemberofThe member ofTheHongKongHousingAuthorityandtheGreater Authority andtheExchangeFundInvestmentLimited,a Corporation Limited,theMandatoryProvidentFundSchemes past publicdutiesincludedirectorofTheHongKongMortgage of theCouncilTheOpenUniversityHongKong.Hisother Futures Commissionfrom2006to2012andthepastchairman Dr Fongwasthenon-executivechairmanofSecuritiesand Chartered Bank(China)Limited. Standard CharteredBank(HongKong)Limitedand Intermediaries, andanindependentnon-executivedirectorof in relationtotheRegulationofMandatoryProvidentFund He iscurrentlythechairmanofProcessReviewPanel Dr FonghasjoinedtheBoardsinceJanuary2015. Age 71 Fong Ching Dr Eddy INED AC Dir (Sub) NC Hong Kong. Hong Kong. Business AdministrationfromTheChineseUniversityof in degree Master a from TheUniversityofHongKong,and Mr KwanholdsaBachelorofSciencedegreeinEngineering Building ServicesEngineersoftheUnitedKingdom. Energy InstituteandFellowoftheCharteredInstitution Mechanical Engineers,FellowoftheIGEM, Honorary FellowoftheHKIE,Institution Registered ProfessionalEngineer(Gas),aCharteredEngineer, Kong UniversityofScienceandTechnologyin2011isa He wasawardedanHonoraryFellowshipbyTheHong HKSAR Government. Disciplined ServicesSalariesandConditionsofServicethe Training Council,andtheStandingCommitteeon Council, theTransport AdvisoryCommittee,theVocational Mr KwanisaformermemberoftheConstructionIndustry The HongKongInstitutionofEngineers(‘HKIE’)in2004/2005. Managers) (‘IGEM’)intheUnitedKingdom2000/2001and (currently knownasTheInstitutionofGasEngineers& He wasalsothePresidentofTheInstitutionGasEngineers and adirectorofShenzhenGasCorporationLimited. officer ofTheHongKongandChinaGasCompanyLimited, senior adviser,anexecutivedirectorandthechiefoperating Towngas ChinaCompanyLimited.MrKwanwaspreviouslya He iscurrentlyanindependentnon-executivedirectorof Mr KwanhasjoinedtheBoardsinceOctober2014. Age 66 Kwan Yuk-choi James Annual Report 2017 RiskC INED CWC 153
Financials and Other Information Corporate Governance Business Review and Analysis Overview BOARD AND EXECUTIVE DIRECTORATE
Lau Ping-cheung, INED CWC Lucia INED Kaizer Li Li Ka-lai Age 66 CRC Age 63 AC
Dir (Sub) CRC
Mr Lau has joined the Board since August 2015. Mrs Li has joined the Board since October 2014.
He is a chartered surveyor and has substantial experience She is a retired civil servant. Mrs Li was Director of Accounting and involvements in construction, real estate and Services of the HKSAR Government from October 2003 to infrastructure projects both in Hong Kong and the January 2009. She has been a member of a task force formed Mainland of China. Currently, Mr Lau is the managing by the Commissioner for Innovation and Technology to follow director of Biel Asset Management Co., Ltd. and an up the Director of Audit’s Report No. 61 with regard to the independent non-executive director of Kingboard Small Entrepreneur Research Assistance Programme since 15 Laminates Holdings Limited. He is one of the Founders July 2014. of Hong Kong Coalition of Professional Services and Mrs Li was formerly a member of the Public Service has been the Chairman since June 2012. Mr Lau is also a Commission, a member of the Communications Authority member of the Lantau Development Advisory Committee, and a board member and treasurer of Chung Ying Theatre the Economic Development Commission, the Basic Law Company (HK) Limited. Promotion Steering Committee, the Council of The Hong Kong Polytechnic University, and the Vice-Chairman She is a Fellow member of the Hong Kong Institute of Certified of the Vetting Committee of the Professional Services Public Accountants. Advancement Support Scheme. He is also a member of the Mrs Li holds a Master of Arts degree from The Chinese Chinese People’s Political Consultative Conference of Shanghai, University of Hong Kong. She was awarded the Silver Bauhinia and a fellow of The Hong Kong Institute of Surveyors. Star medal in 2009. Mr Lau is a former president of The Hong Kong Institute of Surveyors, a former chairman of the Royal Institution of Chartered Surveyors (HK Branch), and a former member of the HKSAR Legislative Council. He is also a former Alasdair George non-executive director of the Urban Renewal Authority, Morrison INED a former member of the Council of the City University Age 69 of Hong Kong, and a former member of the Long Term RiskC AC Housing Strategy Steering Committee.
Mr Lau holds a Higher Diploma in Quantity Surveying Mr Morrison has joined the Board since July 2010. from the Hong Kong Polytechnic (now known as The Hong Kong Polytechnic University) and a Master degree He is also an independent non-executive director of Pacific in Construction Project Management from The University Basin Shipping Limited and a Senior Advisor to Bain Capital of Hong Kong. Asia, LLC.
Mr Morrison was a Senior Advisor of Citigroup Asia Pacific, a member of the Financial Services Development Council of the HKSAR Government, and a member of the Board of Grosvenor Group Limited in the United Kingdom, the Operations
154 MTR Corporation Against Corruption. Against Corruption. Committee onCorruptionoftheIndependentCommission Fund SchemesAuthorityandamemberoftheAdvisory is alsoanon-executivedirectoroftheMandatoryProvident non-executive directorofITCPropertiesGroupLimited.He Investments Limited,andvicechairmananindependent and anindependentnon-executivedirectorofChuang’sChina Everbright GrandChinaAssetsLimited.MrShekischairman Holdings Limited,GoldinFinancialand Holdings Limited,HopHingGroupLaiFung Cement HoldingsLimited,CosmopolitanInternational Company Limited,SJMHoldingsChinaResources Management (CP)Limited,CountryGardenHoldings Limited, RegalPortfolioManagementEagleAsset Chuang’s ConsortiumInternationalLimited,NWSHoldings Holdings Limited,LifestyleInternational He isanindependentnon-executivedirectorofPaliburg Mr ShekhasjoinedtheBoardsinceDecember2007. Business SchoolintheUnitedStatesofAmerica. the ProgramforManagementDevelopmentatHarvard Cambridge intheUnitedKingdom.MrMorrisonalsoattended Arts (subsequentlyMasterofArts)fromtheUniversity He graduatedfromEtonCollegeandholdsaBachelorof Morgan StanleyAsia. Management CommitteeandChiefExecutiveOfficerof April 2007,andhewasalsoamemberofMorganStanley’s Chairman ofMorganStanleyAsia,basedinHongKong,until Director from1994to2000.Subsequently,MrMorrisonwas the JardineMathesonGroup,wherehewasGroupManaging Cooperation Committee.From1971to2000,heworkedfor Corruption, andtheHongKong/EuropeanUnionBusiness Review CommitteeoftheIndependentCommissionAgainst Age 72 Shek Lai-him Abraham INED NC CWC Bauhinia Starmedalin2013. Justice ofthePeacein1995andwasawardedGold from TheUniversityofSydney.MrShekwasappointedas He holdsaBachelorofArtsdegreeandDiplomainEducation Mortgage CorporationLimited. Complaints CouncilandadirectorofTheHongKong Mr ShekwasvicechairmanoftheIndependentPolice awarded theGoldBauhiniaStarmedalin2012. Leadership CentreforFinancialSectorSupervision.Hewas Oxford, LondonBusinessSchool,andTorontoInternational and Sociology.MrTanghasalsostudiedattheUniversityof He graduatedfromTheUniversityofHongKonginEconomics Audit Committee. Limited andamemberofTheUniversityHongKong’s director ofPrincipalInsuranceCompany(HongKong) Mr Tangwaspreviouslyanindependentnon-executive executive directorofBEReinsuranceLimited. Foundation’s AuditCommitteeandanindependentnon- of theCommunicationsAuthority,amemberCroucher Independent CommissionAgainstCorruption,amember member oftheAdvisoryCommitteeonCorruption He isChairmanoftheOperationsReviewCommitteeanda report waspresentedtotheChiefExecutiveinApril2013. of VesselsNearLammaIslandin2012andtheCommission’s Commissioner oftheCommissionInquiryIntoCollision 2003 untilheretiredinJuly2012.MrTangwasappointeda China astheDirectorofAuditHKSARinDecember by theCentralGovernmentofPeople’sRepublic Printer andtheCommissionerofInsurance.Hewasappointed 1990s toearly2000s,MrTangservedastheGovernment He joinedtheHongKongCivilServicein1974.Fromlate Mr TanghasjoinedtheBoardsinceOctober2014. Age 66 Tang Kwok-bun Benjamin Annual Report 2017 RiskC INED RC 155
Financials and Other Information Corporate Governance Business Review and Analysis Overview BOARD AND EXECUTIVE DIRECTORATE
Corporation Limited and concurrently chief financial officer of Hong Kong Futures Exchange Limited, responsible for the Dr Allan Exchanges’s finance, treasury, risk and clearing functions. Mr INED Wong Chi-yun NC Zhou was UBS AG’s China country head from 1994 to 1998, Age 67 responsible for the bank’s investment banking, commercial CWC Dir (Sub) banking, asset management and private banking businesses in China. From 1988 to 1994, he worked at State Street Bank in Boston where he founded and managed the research Dr Wong has joined the Board since August 2015. department. Prior to that, Mr Zhou taught at Brandeis He is the chairman and group chief executive officer of VTech University, United States of America. Holdings Limited, the deputy chairman and an independent He was educated at Peking University, the Mainland of China non-executive director of The Bank of East Asia, Limited, an and Brandeis University, United States of America. independent non-executive director of China-Hongkong Photo Products Holdings Limited and Li & Fung Limited.
Dr Wong holds a Bachelor of Science degree in Electrical Engineering from The University of Hong Kong, a Master of James NED Science degree in Electrical and Computer Engineering from Henry Lau Jr the University of Wisconsin and an Honorary Doctorate of Age 67 NC Technology from The Hong Kong Polytechnic University. He was appointed as a Justice of the Peace in 1995, and awarded RC a member of the Most Excellent Order of the British Empire in 1997. Dr Wong was awarded the Silver Bauhinia Star medal Mr Lau has been appointed as the Secretary for Financial and the Gold Bauhinia Star medal in 2003 and Services and the Treasury of the HKSAR Government with 2008 respectively. effect from 1 July 2017 and has joined the Board since 4 July 2017.
He sits on the boards of several public bodies including the Airport Authority Hong Kong, Mandatory Provident Fund Johannes INED Schemes Authority and West Kowloon Cultural District Zhou Yuan Authority, and is the Chairman of the Kowloon-Canton Railway Age 62 AC Corporation, and an ex-officio member of the Financial Services Development Council, Hong Kong in his official RiskC capacity. Mr Lau is also, in his official capacity, a director of Hongkong International Theme Parks Limited. Mr Zhou has joined the Board since 17 May 2017. He joined the Hong Kong Government as an Administrative He retired in June 2016 as Chief Strategic Officer of China Officer (‘AO’) in 1979 and was promoted through the ranks Investment Corporation (‘CIC’). Mr Zhou joined CIC in 2008 to AO Staff Grade C in April 1988. Mr Lau joined the Hong and held a variety of portfolios of responsibilities including Kong Monetary Authority (‘HKMA’) in April 1993 and was the alternative assets, direct investments, asset allocation, Head and Executive Director of various divisions of the HKMA and finance/treasury. Prior to that, he led Asia business until 2004. In July 2004, he was seconded to The Hong Kong development at Chicago Mercantile Exchange. From 2001 to Mortgage Corporation Limited as Chief Executive Officer until 2005, Mr Zhou worked as a financial researcher and consultant, he retired in December 2012. Mr Lau was the Under Secretary working on assignments ranging in asset management, for Financial Services and the Treasury from January 2014 to private equity, hedge funds, risk models, financial software June 2017. architecture, and financial market reform, with consulting work He holds a Bachelor of Mathematics (Computer Science and done for China Securities Regulatory Commission, Shanghai Statistics) Honours Degree and a Master of Mathematics Futures Exchange, as well as a number of western firms. From Degree in Computer Science from the University of 1998 to 2001, he was chief executive officer of HKFE Clearing Waterloo, Canada.
156 MTR Corporation of Hong Kong) since 7 April 2015. of HongKong)since7April2015. the MassTransitRailwayOrdinance (Chapter556oftheLaws appointed bytheChiefExecutive oftheHKSARpursuantto keung hasjoinedtheBoardasa Non-executiveDirector Permanent SecretaryforDevelopment(Works)(HonChi- Age 59 (Hon Chi-keung) (Works) for Development Permanent Secretary University ofAberdeen,UnitedKingdom.) Hong Kong,andaMasterdegreeinMedicalPhysicsfromthe Master degreeinBusinessManagementfromTheUniversityof He holdsaBachelorofSciencedegreeinEngineeringand and theInstitutionofMechanicalEngineers,UnitedKingdom. Mr ChanisafellowofTheHongKongInstitutionEngineers December 2011toJune2017. of theElectricalandMechanicalServicesTradingFundfrom of ElectricalandMechanicalServicestheGeneralManager and MechanicalServicesinJanuary2009wastheDirector 2005. HewasappointedastheDeputyDirectorofElectrical and toGovernmentElectricalMechanicalEngineerinMay was promotedtoChiefElectronicsEngineerinFebruary2001 as anAssistantElectronicsEngineerinAugust1982.MrChan He joinedtheElectricalandMechanicalServicesDepartment Authority HongKong. Hong KongHousingAuthorityandaboardmemberofAirport Mr Chan,inhisofficialcapacity,actsasthechairmanofThe since 1July2017. Railway Ordinance(Chapter556oftheLawsHongKong) the ChiefExecutiveofHKSARpursuanttoMassTransit joined theBoardasaNon-executiveDirectorappointedby Secretary forTransportandHousing(FrankChanFanhas Age 60 (Frank ChanFan) Housing Transport and Secretary for RiskC CWC NED NED NC RC Age 52 (Mable Chan) Transport Commissioner for Hong Kong.) Hong Kong.) General BusinessManagementfromTheChineseUniversityof She holdsaBachelorofBusinessAdministrationdegreein Tunnel CompanyLimitedandRoute3(CPS)Limited. Western HarbourTunnelCompanyLimited,Tate’sCairn Company, Limited,NewHongKongTunnelCompany Bus Company(1973)Limited,CitybusThe“Star”Ferry Limited, NewWorldFirstBusServicesLantao Bus Company(1933)Limited,LongWin transport-related companiesincludingTheKowloonMotor Ms Chanisalso,inherofficialcapacity,adirectorofseveral and departments. Government in1989andhasservedvariouspolicybureaux She joinedtheAdministrativeServiceofHongKong October 2017. Ordinance (Chapter556oftheLawsHongKong)since11 Executive oftheHKSARpursuanttoMassTransitRailway Board asaNon-executiveDirectorappointedbytheChief Commissioner forTransport(MableChanhasjoinedthe of Hong Kong.) of HongKong.) a MasterdegreeinPublicAdministrationfromTheUniversity Mr HonholdsaBachelorofSciencedegreeinEngineeringand United Kingdom. Kingdom andafellowoftheInstitutionCivilEngineers, a fellowoftheCharteredInstituteArbitrators,United He isafellowofTheHongKongInstitutionEngineers, since January2011. and hasbeenDirectorofCivilEngineeringDevelopment Mr HonjoinedtheHongKongGovernmentinAugust1983
Annual Report 2017 RiskC NED AC 157
Financials and Other Information Corporate Governance Business Review and Analysis Overview BOARD AND EXECUTIVE DIRECTORATE
From left to right: Gillian Elizabeth Meller , Dr Peter Ronald Ewen, Jeny Yeung Mei-chun, Morris Cheung Siu-wa, Dr Jacob Kam Chak-pui, Lincoln Leong Kwok-kuen, Herbert Hui Leung-wah, David Tang Chi-fai, Adi Lau Tin-shing, Linda So Ka-pik, Dr Philco Wong Nai-keung, Margaret Cheng Wai-ching
MEMBERS OF THE 1 May 2016 and a Member of the Executive Directorate since January 2011. He is responsible for overseeing the Company’s EXECUTIVE DIRECTORATE transport operations in Hong Kong and its rail and property Lincoln Leong Kwok-kuen businesses in the Mainland of China. In addition, Dr Kam is responsible for overseeing railway operations standards and ensuring mutual learning of best practices among all the His biographical details are set out on pages 150 and 151. Company’s railway operations globally.
He qualified as a chartered engineer in the United Kingdom in 1989. Dr Kam is a vice-president and a chartered fellow of The Dr Jacob Kam Chak-pui Chartered Institute of Logistics and Transport in Hong Kong, Managing Director – and a chartered fellow of The Institution of Occupational Operations and Mainland Business Safety and Health in the United Kingdom. He is also a corporate Age 56 Dir (Sub) member of both the Institution of Mechanical Engineers in the United Kingdom and The Hong Kong Institution of Engineers.
Dr Kam joined the Company in 1995 and had held various Dr Kam is the chairman of the Regional and Suburban Railways management positions in Operations, Projects and China & Assembly of the International Association of Public Transport International Business Divisions. He was the Operations Director (UITP), a council member of Vocational Training Council and a between January 2011 and April 2016. Dr Kam has been the member of Hong Kong Quality Assurance Agency Governing Managing Director – Operations and Mainland Business since Council.
158 MTR Corporation Corporation Limited (‘HSBC’) and was Head of Human Corporation Limited(‘HSBC’)and wasHeadofHuman Ms ChengwaswithTheHongkong andShanghaiBanking Resources between1997and2001. From2001to2013, 1997, andwaswithJPMorganas VicePresident,Human human resourcesrolesinCitibank, N.A.between1993and rich seniormanagementexperience.Shetookupdifferent Ms Chengisaseasonedhumanresourcespractitionerwith administration affairs. is responsibleforalloftheCompany’shumanresourcesand Member oftheExecutiveDirectoratesince1June2016.She Ms ChenghasbeentheHumanResourcesDirectoranda Age 52 Human ResourcesDirector Margaret ChengWai-ching (University CollegeLondon),bothintheUnitedKingdom. in MechanicalEngineeringfromtheUniversityofLondon from theUniversityofSouthampton,andadoctoraldegree He holdsaBachelorofSciencedegreeinCivilEngineering CRC Dir (Sub) Vocational Qualifications. of theHongKongCouncilforAccreditation ofAcademicand chairman ofitsPoliceSub-Committee, andacouncilmember and ConditionsofServicethe HKSARGovernmentandthe of TheStandingCommitteeonDisciplinedServicesSalaries Committee oftheLabourandWelfareBureau,amember Education Bureau,amemberoftheManpowerDevelopment Standing CommitteeonLanguageEducationandResearch, the of member Sector undertheQualificationsFramework,a Advisory CommitteefortheHumanResourceManagement serving asthevicechairmanofCross-IndustryTraining of TheHongKongManagementAssociation.Sheisalso of HumanResourceManagement,andacouncilmember Council andafellowmember,oftheHongKongInstitute Ms ChengiscurrentlyavicepresidentoftheExecutive Clearing Limited. Head ofHumanResourcestheHongKongExchangesand she leftHSBC.BeforejoiningtheCompany,wasGroup Resources, HongKongandGlobalBusiness,AsiaPacificwhen A composite photograph at the West Kowloon Station construction site. A compositephotographattheWestKowloonStationconstructionsite. Annual Report 2017 159
Financials and Other Information Corporate Governance Business Review and Analysis Overview BOARD AND EXECUTIVE DIRECTORATE
Ms Cheng holds a Bachelor of Arts degree in Business Dr Peter Ronald Ewen Administration from The California State University, the United Engineering Director States of America. Age 58 Dir (Sub) Morris Cheung Siu-wa President of MTR Academy Dr Ewen has been the Engineering Director and a Member of the Executive Directorate since 22 February 2016. He Age 56 Dir (Sub) is responsible for driving excellence in the Company’s engineering functions and strengthening its control and check Mr Cheung joined the Company in 1983 as a Graduate and balance processes, and overseeing the procurement and Engineer, and has progressed over the years to senior contract administration function. management positions in Operations and Projects Divisions. He was seconded to Ngong Ping 360 Limited as its Managing Dr Ewen started his career in the Royal Air Force of the United Director from 2007 to 2009. In July 2009, Mr Cheung was Kingdom in 1976 and attained the rank of Air Vice-Marshal. appointed Chief of Operating and in January 2011, he took up He served in different capacities, including Chief of Staff the position of Chief of Operations Engineering. Mr Cheung Support, Executive Officer and Chief Engineer (Air). In his was the Human Resources Director between July 2012 and last role as Director Air Support, Dr Ewen was responsible June 2015 and the European Business Director between for the procurement, in-service support and airworthiness June 2015 and June 2016. He has been the President of MTR of the fleets of large aircraft of the Royal Air Force, including Academy since 1 July 2016 and a Member of the Executive Strategic and Tactical Airlift, Air-to-Air Refuelling, Maritime Directorate since July 2012. Mr Cheung is responsible for Patrol, and Air Intelligence Surveillance Target Acquisition spearheading and overseeing the development of the MTR and Reconnaissance capabilities. Before joining the Academy, with an objective to develop competent railway Company, he was a Procurement Advisor for Rail Franchising professionals and raise the quality of local and regional rail in the Department for Transport – Rail, United Kingdom services through offering programmes related to railway and the Head of Air for Airbus Defence and Space, United management, operations, engineering and customer Kingdom respectively. service, and undertaking rail-related research. He has a wide Dr Ewen is a chartered engineer and a fellow of the Royal range of management experience and deep knowledge of Aeronautical Society. the Company. He holds a Bachelor of Science (First Class Honours) degree Mr Cheung is a fellow of The Hong Kong Institution of in Engineering Management from the University of Lincoln, Engineers, The Institution of Engineering and Technology and United Kingdom and a Doctor of Philosophy degree from The Chartered Institute of Logistics & Transport in Hong Kong. International Management Centres Association, United He holds a Bachelor of Science degree in Engineering and a Kingdom. Dr Ewen was awarded Companion of the Most Master of Science degree in Engineering from The University Honourable Order of the Bath in 2015. of Hong Kong, a Master of Business Administration degree from the City Polytechnic of Hong Kong (now called City University of Hong Kong) and a Master of Science degree in Financial Analysis from The Hong Kong University of Science and Technology.
160 MTR Corporation University ofPennsylvania. Advanced ManagementPrograminWhartonBusinessSchool, The ChineseUniversityofHongKong.Hehascompletedthe London andaMasterofBusinessAdministrationdegreefrom (First ClassHonours)fromtheCityUniversityBusinessSchool, Mr HuiholdsaBachelorofSciencedegreeinBusinessStudies before re-joiningtheCompanyin2016. Chief FinancialOfficerofK.WahInternationalHoldingsLimited Digital ChinaHoldingsLimitedfrom2011to2012.Hewasthe Company from2004to2011,andtheChiefFinancialOfficerof Mr HuiwasGeneralManager–CorporateFinanceofthe Co-Head, CorporateFinanceExecutionwhenheleftin2004. Chief OperatingOfficer,InvestmentBanking,AsiaPacificand and ShanghaiBankingCorporationLimited)wasthe Investment BankingandMarketsDivisionofTheHongkong Wardley CorporateFinanceLimited(laterknownasCorporate, Hui leftin1990topursueacareercorporatefinancewith began hiscareeratMorganStanleyAsiaLimitedin1988.Mr corporate financeandinvestmentbankingexperience.He Mr Huiisacharteredfinancialanalystandhasextensive relations aswellmaterialsandstoresfunctions. also leadstheCompany’sinformationtechnology,investor reporting, corporatefinancing,andthetreasuryfunction.He financial planningandcontrol,budgeting,accounting financial managementofalltheCompany’saffairs,including Directorate since2July2016.MrHuiisresponsibleforthe has beentheFinanceDirectorandaMemberofExecutive and aMemberoftheExecutiveCommitteeon1June2016.He Mr HuijoinedtheCompanyasFinanceDirector–Designate Age 55 Finance Director Herbert HuiLeung-wah Dir (Sub) of America. of America. degree fromtheUniversityofMichiganinUnitedStates Engineering fromTheUniversityofHongKongandanMBA He holdsaBachelorofScience(Honour)degreeinCivil Urban RailPlatform. Executive CommitteeandthechairmanofUITPAsia-Pacific International AssociationofPublicTransport(UITP)Asia-Pacific China HongKongRailwayInstitution,vicepresidentofthe and TransportinHongKong.MrLauisthepresidentof a charteredfellowofTheCharteredInstituteLogistics fellow ofTheHongKongInstitutionEngineers.Heisalso Institution ofCivilEngineersintheUnitedKingdomanda Mr Lauisacharteredengineer,corporatememberofthe railway operationsinHongKong. May 2016.HeisresponsibleforoverseeingtheCompany’s Director andaMemberoftheExecutiveDirectoratesince1 2012 andDecember2017.MrLauhasbeentheOperations and ChairmanofNgongPing360LimitedbetweenJanuary Director –OperatingbetweenAugust2013andApril2016, Operating inOctober2011andwasappointedastheDeputy the MainlandofChina.HetookuppositionChief system inHongKongandtheCompany’srailbusinesses operations andmaintenanceoftheCompany’srailway management positionsrelatedtothedesign,construction, Mr LaujoinedtheCompanyin1982andhadheldvarious Age 58 Operations Director Adi LauTin-shing Annual Report 2017 Dir (Sub) 161
Financials and Other Information Corporate Governance Business Review and Analysis Overview BOARD AND EXECUTIVE DIRECTORATE
Gillian Elizabeth Meller Ms So has extensive administrative and public relations Legal and European Business Director experience. She worked in the Hong Kong Government from 1989 to 2013 in various policy bureaux and departments Age 45 Dir (Sub) including Constitutional Affairs Branch, Transport Branch and Security Bureau. Ms So also served as the Press Secretary Ms Meller joined the Company in August 2004 as Legal Adviser to the Chief Secretary for Administration and the Financial and became Deputy Legal Director in December 2010. She Secretary from 1999 to 2001 and acted as the Spokesman and was the Legal Director & Secretary between September Coordinator of the HKSAR Government team sent to Thailand 2011 and June 2016. Ms Meller has been the Legal and in 2004 to assist Hong Kong residents affected by the tsunami. European Business Director since 1 July 2016 and a Member Before she left the Administrative Service, Ms So was the of the Executive Directorate since September 2011. She is Deputy Secretary of Commerce and Economic Development responsible for the provision of commercial legal support (Commerce & Industry) from 2009 to 2011. After leaving the and advice to all aspects of the Company’s business. Ms Government, she took up the role of the Director General of Meller is also responsible for managing and overseeing the the Federation of Hong Kong Industries. growth of the Company’s European Business, in addition Ms So is currently a member of the Hong Kong Public Libraries to her responsibility for the strategic management of the Advisory Committee and the Advisory Board of The Hong Company’s insurance programmes and its governance and Kong Red Cross. risk management function. She holds a Bachelor of Arts degree in Economics Before joining the Company, she was Director of Legal Services (subsequently a Master of Arts degree) from the University of for Metronet Rail SSL Limited in London, the United Kingdom, Cambridge in the United Kingdom. and a solicitor at CMS Cameron McKenna in London, the United Kingdom. Ms Meller is qualified to practise as a solicitor in Hong Kong David Tang Chi-fai and England and Wales. She is a vice chairman of the Legal Property Director Committee of The Hong Kong General Chamber of Commerce, Age 53 Dir (Sub) a member of the Standing Committee on Company Law Reform, a vice-president of The Hong Kong Institute of Chartered Secretaries (‘HKICS’) and a fellow of both The Institute Mr Tang joined the Company in August 2004 as Contracts of Chartered Secretaries and Administrators and the HKICS. & Commercial Manager – China Business. He held senior management positions in the Legal and Procurement Division, Ms Meller holds a Master of Arts degree in Geography from and the China and International Business Division before he the University of Oxford and obtained her postgraduate was transferred to Property Division in 2009. Mr Tang was qualifications in law from The College of Law in Guildford, both appointed Deputy Property Director in July 2011 and has in the United Kingdom. been the Property Director and a Member of the Executive Directorate since October 2011. He is responsible for all of the property development projects of the Company in Linda So Ka-pik Hong Kong from layout planning, scheme design through to Corporate Affairs Director project construction completion, as well as asset and leasing Age 50 CRC management of investment properties (including shopping malls and offices) and property management of office Ms So has been the Corporate Affairs Director and a Member buildings and residential units. of the Executive Directorate since September 2015. She is responsible for overseeing stakeholder engagement, external communications and corporate responsibility.
162 MTR Corporation University, Australia. University, Australia. a DoctorofBusinessAdministration degreefromCurtin Engineering fromtheUniversity ofToronto,Canada,and Engineering degreeinConstruction Managementand from theUniversityofManitoba, Canada,aMasterof He holdsaBachelorofSciencedegreeinCivilEngineering Engineers intheUnitedKingdom. Dr WongisafellowmemberofHKIEandtheInstitutionCivil Occupational DeafnessCompensationBoard. of ConstructionIndustryCouncil,andamemberthe Committee ofVocationalTrainingCouncil,acouncilmember Construction CollaborativeDegreeProgrammesAdvisory He wasformerlythechairmanofEngineeringDiscipline, Benevolent FundCommitteeofTheLighthouseClub. Institution ofEngineers(‘HKIE’)andthechairman Dr WongistheseniorvicepresidentofTheHongKong projects inHongKong,theMainlandofChinaandoverseas. implementation anddeliveryoflarge-scaleinfrastructure He hasover35yearsofexperienceinbusinessmanagement, Company’s railwaynetworkexpansionprojectsinHongKong. since October2014.DrWongisresponsibleforoverseeingthe Projects DirectorandaMemberoftheExecutiveDirectorate Projects Director–DesignateinAugust2014.Hehasbeenthe Manager –ShatintoCentralLinkandwasappointedas Dr WongjoinedtheCompanyinNovember2011asGeneral Age 63 Projects Director Dr PhilcoWongNai-keung (formerly BristolPolytechnic)intheUnitedKingdom. Quantity SurveyingfromtheUniversityofWestEngland Mr TangholdsaBachelorofScience(Honours)degreein Urban RenewalAuthorityoftheHKSARGovernment. Institute ofSurveyors.Heisanon-executivedirectorthe Institution ofCharteredSurveyorsandTheHongKong Mr TangisacharteredsurveyorandmemberoftheRoyal as aGroupTraineeofGeorgeWimpeyPlc. in theUnitedKingdomandHongKongafterstartinghiscareer administration, projectmanagementandquantitysurveying He hadalmost20years’workingexperienceincontract Manager –HongKong&ChinaRegionforAcciona,S.A. Manager –HongKong&ChinaRegion,andDeputyGeneral Before joiningtheCompany,MrTangwasCommercial Management StudiesfromTheUniversityofHongKong. She holdsaBachelorofSocialSciencesdegreemajoringin of theHKSARGovernment. Technology oftheInnovationandCommission on PublicityandPublicEducationinInnovation Ms YeungwasamemberoftheAdvisoryCommittee Development AdvisoryCommittee. the HongKongTradeDevelopmentCouncilInfrastructure Committee ofTheHongKongManagementAssociation,and Partnership Programme,theMarketingManagement Committee onEnhancingSelf-RelianceThroughDistrict a memberoftheHongKongTourismBoard,Advisory Kong CyberportManagementCompanyLimited.Sheisalso Transport inHongKong.MsYeungisadirectorof chartered fellowofTheCharteredInstituteLogisticsand She isafellowofTheCharteredInstituteMarketingand Bank (HongKong)LimitedandCitibankinHongKong. and businessdevelopmentpositionsinStandardChartered Before joiningtheCompany,MsYeungheldvariousmarketing Ping 360Limited. businesses. SheisalsothechairmanofboardNgong development andthemanagementofvariousnon-fare Brand. MsYeungisalsoresponsibleforcustomerservice railway servicesaswellmanagingandenhancingtheMTR 2011. SheisresponsibleforthemarketingofCompany’s a MemberoftheExecutiveDirectoratesinceSeptember 2011. MsYeunghasbeentheCommercialDirectorand Manager –Marketing&StationCommercialuntilAugust Committee in2004.ShewasthenappointedasGeneral Marketing ManagerandbecameamemberoftheExecutive Ms YeungjoinedtheCompanyinNovember1999as Age 53 Commercial Director Jeny YeungMei-chun Annual Report 2017
Dir (Sub) 163
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CHANGES IN INFORMATION Changes in information of Directors during 2017 and up to the date of this Report which are required to be disclosed pursuant to the Listing Rules are set out below:
(i) Changes in Biographical Details
Nature and Name of Organisation and Effective Date of Name of Director Position Held Change Members of the Board Professor Frederick Ma Si-hang The Hong Kong Polytechnic University Cessation • Professor of Finance Practice of the Institute of Advanced Executive Education (26 January 2017) The Education University of Hong Kong Appointment • Council Chairman (25 April 2017) COFCO Corporation Cessation • Non-executive Director (4 December 2017) Professor Chan Ka-keung, Ceajer Government Cessation (Resigned on 4 July 2017) • Secretary for Financial Services and the Treasury (1 July 2017) Airport Authority Hong Kong Cessation • Member of the Board (1 July 2017) Mandatory Provident Fund Schemes Authority (Hong Kong) Cessation • Board of Director (1 July 2017) West Kowloon Cultural District Authority (Hong Kong) Cessation • Member of the Board (1 July 2017) Kowloon-Canton Railway Corporation Cessation • Chairman (1 July 2017) Financial Services Development Council, Hong Kong Cessation • Ex-officio Member (1 July 2017) Hongkong International Theme Parks Limited Cessation • Director (1 July 2017) Dr Pamela Chan Wong Shui Hong Kong Baptist University Cessation • Deputy Chairman of the Council and the Court (1 January 2017) Private Columbaria Appeal Board (Hong Kong) Appointment • Member (29 September 2017) The Insurance Complaints Bureau (Hong Kong) Appointment • Chairman (16 January 2018) Lau Ping-cheung, Kaizer Vetting Committee of the Professional Services Advancement Support Scheme Appointment (Hong Kong) (1 January 2017) • Vice-Chairman Biel Asset Management Company Limited Appointment • Managing Director (1 November 2017) SOCAM Asset Management (HK) Limited Cessation • Project Director (1 November 2017) Lucia Li Li Ka-lai Communications Authority (Hong Kong) Cessation • Member (1 April 2017) Public Service Commission of Government Cessation • Member (1 February 2018) Ng Leung-sing Chiyu Banking Corporation Cessation (Retired on 17 May 2017) • Vice Chairman (27 March 2017) Abraham Shek Lai-him Independent Commission Against Corruption (Hong Kong) Appointment • Member of the Advisory Committee on Corruption (1 January 2017) TUS International Limited Cessation • Independent Non-executive Director (6 January 2017) Goldin Financial Holdings Limited Appointment • Independent Non-executive Director (9 January 2017)
164 MTR Corporation For detailsofthechangesinDirectors’ remuneration,pleaserefertopages145146and221 to225oftheAnnualReport. (ii) ChangesinDirectors’ Remuneration Members oftheExecutiveDirectorate Jeny YeungMei-chun Dr PhilcoWongNai-keung Linda SoKa-pik Gillian ElizabethMeller Adi LauTin-shing Morris CheungSiu-wa Margaret ChengWai-ching Dr JacobKamChak-pui Benjamin TangKwok-bun (Continued) Abraham ShekLai-him Name ofDirector • Ngong Ping360Limited • Innovation andTechnologyCommissionofGovernment • Construction IndustryCouncil • The HongKongInstitutionofEngineers • The HongKongRedCross • Vice-President The HongKongInstituteofCharteredSecretaries • The HongKongGeneralChamberofCommerce • Member Standing CommitteeonCompanyLawReform(HongKong) • Ngong Ping360Limited • International AssociationofPublicTransport(UITP) • of Government The StandingCommitteeonDisciplinedServicesSalariesandConditionsofService • Hong KongCouncilforAccreditationofAcademicandVocationalQualifications • Education BureauofGovernment • Hong KongQualityAssuranceAgency • International AssociationofPublicTransport(UITP) • • Independent CommissionAgainstCorruption(HongKong) • Principal InsuranceCompany(HongKong)Limited • The UniversityofHongKong • Member Communications Authority(HongKong) • Midas InternationalHoldingsLimited • Everbright GrandChinaAssetsLimited • ITC CorporationLimited Position Held Name ofOrganisationand Chairman oftheboard Innovation andTechnology Member oftheAdvisoryCommitteeonPublicityandPublicEducationin Council Member Senior VicePresident Member oftheAdvisoryBoard Vice ChairmanoftheLegalCommittee Chairman oftheboard Chairman oftheAsiaPacificDivision Chairman ofthePoliceSub-Committee Council Member Member oftheStandingCommitteeonLanguageEducationandResearch Member oftheGoverningCouncil Chairman oftheRegionalandSuburbanRailwaysAssembly Member oftheAdvisoryCommitteeonCorruption Chairman oftheOperationsReviewCommittee Independent Non-executiveDirector Member ofAuditCommittee Independent Non-executiveDirector Independent Non-executiveDirector Independent Non-executiveDirector (1 January2018) Appointment (1 July2017) Cessation (1 February2018) Cessation (28 June2017) Appointment (24 November2017) Appointment (1 March2018) Appointment (13 June2017) Appointment (1 February2017) Appointment (1 January2018) Cessation (May 2017) Cessation (1 January2018) Appointment (1 October2017) Appointment (1 July2017) Appointment (21 November2017) Appointment (May 2017) Appointment (1 January2018) Appointment (1 December2017) Cessation (23 November2017) Cessation (1 April2017) Appointment (26 January2018) Cessation (16 January2018) Appointment (28 March2017) Cessation Change Effective Dateof Nature and Annual Report 2017 165
Financials and Other Information Corporate Governance Business Review and Analysis Overview KEY CORPORATE MANAGEMENT
Lincoln Leong Kwok-kuen Mainland China & Carmen Li Wai-ching Chief Executive Officer General Manager – Intercity Jacob Kam Chak-pui International Business Ronald Cheng Kin-wai Managing Director – Operations and Mainland Business Australia General Manager – Planning & Development Commercial & Marketing Terry Wong Ping-sau Richard Keefe Deputy Director – Australian Business General Manager – Rolling Stock Fleet Jeny Yeung Mei-chun Cheris Lee Yuen-ling Commercial Director Michael Houghton Chief Executive Officer (Metro Trains Melbourne) General Manager – Safety & Quality Karen Woo Kit-sum Ivan Lai Ching-kai Chan Keng-sam General Manager – Branding and Mainland China & International General Manager – Works Management Business Marketing Chief Executive Officer – Metro Trains Sydney (w.e.f. 1 March 2018) David Yam Pak-nin Lu Wong Ho-leung Annie Leung Ching-man Head of Infrastructure Works General Manager – Customer Experience Development General Manager – Business Development Andrew Lezala Cheung Chi-keung Raymond Yuen Lap-hang Head of Operating – West Region General Manager – Marketing & Planning Managing Director (Metro Trains Australia) Roger Ho Ho-wai Siman Tang Margaret Chu Fung-kuen Head of Operations Strategic Business Management General Manager – Station Retail Trains and Systems Director (Sydney Metro Northwest Project) Lee Kim-hung Corporate Affairs Europe Head of Workshops Jeremy Long Stella Kwan Mun-yee Linda So Ka-pik Chief Executive Officer – European Business Corporate Affairs Director Managing Director of Ngong Ping 360 Mats Johannesson Gordon Lam Bik-shun Osbert Kwan Wing-cheung Chief Executive Officer – MTR Express Deputy General Manager – Media & Corporate Communications Project Manager – Signalling (DUAT) Peter Viinapuu John Woo Shui-wah Lam Chan Lam-sang Chief Executive Officer – MTR Nordic (up to 14 January 2018) Deputy General Manager – Projects & Property Communications Senior Head of Operating – North & East Regions Håkan Nilsson Maggie So Man-kit Acting Chief Executive Officer – MTR Nordic (w.e.f. 15 January 2018) Projects General Manager – Corporate Relations Dan Hildebrand Philco Wong Nai-keung Corporate Strategy Chief Executive Officer – MTR Pendeltågen Projects Director Denise Ng Kee Wing-man Johan Oscarsson Andrew Mead General Manager – Corporate Strategy Chief Executive Officer – MTR Tech Chief Architect (ARBUK) Henrik Dahlin Clement Ngai Yum-keung Engineering Chief Executive Officer – MTR Tunnelbanan Chief Design Manager – SCL and Head of Project Engineering Peter Ewen Steve Murphy Henry Young Engineering Director Managing Director (MTR Crossrail) Chief Programming Engineer Dono Tong Kwok-wai Headquarters Peter Leung Man-fat Design & Delivery Director – SMC&SW General Manager – Operations Projects Choi Tak-tsan Stephen Chik Wai-keung General Manager – Global Operations Standards Ken Wong Kin-wai General Manager – Planning & Civil Engineering General Manager – Projects Scott Mackenzie Mainland China Patrick Lun Tak-wo General Manager – Procurement & Contracts (Projects) Jeremy Xu Muhan General Manager – Projects Management Office Vincent Simon Ho Deputy Director – Mainland China Business (up to 20 March 2018) Head of Corporate Safety Yi Min Lee Tze-man Wong Sha Chief Advisor – Mainland China Business General Manager – SCL and Head of E&M Construction Head of E&M Engineering Rick Wong Hoi-wah Jason Wong Chi-chung Angus Lee Chun-ming Chief of Engineering (Beijing) General Manager – SCL Civil – EWL and PMO (w.e.f. 21 March 2018) Head of Intelligent Portfolio Office Edmund Wong Wai-ming Aidan Rooney Raymond Au Koon-shan Deputy General Manager – Operations (Beijing) General Manager – SCL Civil – NSL Principal Contracts Administration Manager – SCL Ben Lui Gon-yee Simon Tang Wai-yung Tim Edmonds Deputy General Manager – Operations (Hangzhou) General Manager – XRL Principal Contracts Administration Manager – XRL (w.e.f. 1 January 2018) Leung Chi-lap Stephen Hamill Lawrence Chung Kwok-leung General Manager – XRL E&M Project Manager – Technical Support Deputy General Manager – Projects (Beijing) Nelson Cheng Wai-hung Charles Fok Chi-cheong Project Manager – Cost Control Finance Deputy General Manager – Projects (Hangzhou Line 5) Chan Chun-sing Herbert Hui Leung-wah (w.e.f. 1 March 2018) Project Manager – Rolling Stock Finance Director John Kwok Chor-kwong David Salisbury Sammy Jim Kwok-wah Deputy General Manager – Special Projects Project Manager – SCL Civil – EWL 1 General Manager – Corporate Finance (up to 31 December 2017) Neil Ng Wai-hang Lisa Seto Siu-wah Wilson Shao Shing-ming Project Manager – SCL Civil – NSL 1 General Manager – Financial Control General Manager – Beijing & Tianjin Tim Leung Chi-tim Ted Suen Yiu-tat Jia Jun Project Manager – SCL E&M Head of Information Technology General Manager – Business Development (Mainland China) Terence Law Che-chung Candy Ng Chui-lok Frank Liu Zhui-ming Project Manager – Signalling Head of Investor Relations and Retirement Benefits General Manager – Hangzhou Tommy Lam Choi-fung David Pang Hoi-hing Nelson Ng Wai-hung Project Manager – XRL Railway Systems Treasurer General Manager – Hangzhou Line 5 Calum Smith Human Resources & Administration Felix Leung Ping-kin Project Manager – XRL Terminus (up to 15 February 2018) General Manager – Jingjinji Property Charles Lau Kam-keung Margaret Cheng Wai-ching Oscar Ho Ka-wa Project Manager – XRL Terminus Human Resources Director General Manager – Mainland China Property Andrew Yim Kin-on Ray Ng Shan-ho Sammy Wong Kwan-wai Project Manager – XRL Terminus Building Services General Manager – Corporate Security General Manager – Shenzhen Line 4 Alison Wong Yuen-fan Property General Manager – Human Resources MTR Academy David Tang Chi-fai Vinnie Chi Man-yan Morris Cheung Siu-wa Property Director General Manager – Human Resources (International & Talent President of MTR Academy (up to 16 July 2018) Melissa Pang Mee-yuk Management) Operations Deputy Head of Property Development Doreen Siu Wai-man James Chow So-hung General Manager – Reward Management (w.e.f. 1 January 2018) Adi Lau Tin-shing Deputy Head of Property Project Operations Director Internal Audit Kenneth Lung Tze-ho Francis Li Shing-kee Head of Investment Property – East Region (w.e.f. 1 January 2018) Paul Chow Yuen-ming Chief of Operating Head of Internal Audit Theresa Leung Nga-yee Tony Lee Kar-yun Head of Investment Property – West Region Chief of Operations Engineering (up to 31 January 2018) Legal & Secretarial Philip Wong Wai-ming Gillian Meller James Hor Wai-hong Chief Signal Engineer (Operations) Head of Property Development Legal and European Business Director Alan Cheng Kwan-hing Cecilia Cheng Yuet-fong Kenny Chow Chun-ling Deputy Chief of Operating (w.e.f. 1 January 2018) Head of Property Management General Manager – Governance & Risk Management Allen Ding Ka-chun Brian Downie Wilfred Yeung Sze-wai Deputy General Manager – Planning & Development Head of Property Project General Manager – Legal (Operations & Growth Business) Manho John-william Linda Li Sau-lin Steve Yiu Chin Deputy General Manager – Train Services & Systems Engineering Principal Advisor – Property Planning General Manager – Legal (Property) Terry Wong Wing-kin General Manager – Infrastructure Maintenance
166 MTR Corporation required disclosuresundertheCompaniesOrdinanceissetoutbelowforeaseofreference. different sectionsofitsAnnualReports.AsummarytherelevantinCompany’sReport2017covering The CompanyhasalwaysbeencommittedtoprovidingcomprehensivereviewsoftheGroup’sbusinessandperformancein BUSINESS REVIEW the ConsolidatedAccounts. The principalbusinessesoftheCompany’ssubsidiariesandassociatesasat31December2017aresetoutinnotes2728to investment inOctopusHoldingsLimited;andprovisionofrailwaymanagement,engineeringtechnologytraining. leasing managementofinvestmentproperties(includingshoppingmallsandoffices)inHongKongtheMainlandChina; the railwaysysteminHongKong;propertybusinessincludingdevelopmentandinvestment,management of stationretailspace,leasingadvertisingspaceinsidetrainsandstationsenablingtelecommunicationserviceson and propertydevelopmentbusinessesinHongKongtheMainlandofChina;stationcommercialbusinessincludingleasing investment inHongKong,theMainlandofChinaandanumberoverseascities;projectmanagementrelationtorailway The Groupisprincipallyengagedinthefollowingcorebusinesses–railwaydesign,construction,operation,maintenanceand PRINCIPAL ACTIVITIESOFTHEGROUP financial yearended31December2017. The MembersoftheBoardhavepleasureinsubmittingtheirReportandauditedstatementConsolidatedAccountsfor REPORT OFTHEMEMBERSBOARD (6) (5) (4) (3) (2) (1) Required Disclosures Group’s environmentalpoliciesandperformance Description oftheGroup’srelationshipswithitskeystakeholdersand which haveasignificantimpactontheGroup Details regardingtheGroup’scompliancewithrelevantlawsandregulations Outlook fortheGroup’sbusiness Description ofthesignificantrisksanduncertaintiesfacingGroup since theendoffinancialyear2017 Particulars ofimportanteventsaffectingtheGroupthathaveoccurred the Group’sperformanceduringyearended31December2017 A fairreviewoftheGroup’sbusinessandadiscussionananalysis
• • • • • • • • • • • • • • • • • • • • • • Relevant Sections May 2018 Company’s 2017SustainabilityReporttobepublishedinlate Corporate GovernanceReport(pages115to134) Human Resources(pages110to113) Corporate Responsibility(pages104to109) Investor Relations(pages102to103) Business Review(pages38to87) CEO’s ReviewofOperationsandOutlook(pages18to37) Chairman’s Letter(pages14to17) Corporate GovernanceReport(pages115to134) Business Review(pages38to87) CEO’s ReviewofOperationsandOutlook(pages18to37) Chairman’s Letter(pages14to17) Risk Management(pages138to141) Business Review(pages38to87) CEO’s ReviewofOperationsandOutlook(pages18to37) Business Review(pages38to87) CEO’s ReviewofOperationsandOutlook(pages18to37) Chairman’s Letter(pages14to17) Financial Review(pages88to99) Business Review(pages38to87) CEO’s ReviewofOperationsandOutlook(pages18to37) Chairman’s Letter(pages14to17) Annual Report 2017 167
Financials and Other Information Corporate Governance Business Review and Analysis Overview REPORT OF THE MEMBERS OF THE BOARD
DIVIDENDS The Board has recommended to pay a final dividend of HK$0.87 per share (2016: HK$0.82 per share) and proposes that a scrip dividend option will be offered to all shareholders except for shareholders with registered addresses in New Zealand or the United States of America or any of its territories or possessions. Subject to the approval of the shareholders at the forthcoming annual general meeting (“AGM”), the proposed 2017 final dividend, with a scrip dividend option, is expected to be distributed on 11 July 2018 to shareholders whose names appear on the Register of Members of the Company as at the close of business on 28 May 2018.
ACCOUNTS The financial position of the Group as at 31 December 2017 and the Group’s financial performance and cash flows for the year are set out in the Consolidated Accounts on pages 201 to 294.
TEN-YEAR STATISTICS A summary of the results and of the assets and liabilities of the Group together with some major operational statistics for the last ten years are set out on pages 100 to 101.
MEMBERS OF THE BOARD Members of the Board during the year and up to the date of this Report (unless otherwise stated) were:
First Last To be elected/ Elected Re-elected re-elected Name at AGM at AGM at 2018 AGM Non-Executive Directors
Professor Frederick Ma Si-hang 2014 2017 (Chairman) James Henry Lau Jr (since 4 July 2017) (Secretary for Financial Services and the Treasury) Professor Chan Ka-keung, Ceajer Resigned on 4 July 2017 (Secretary for Financial Services and the Treasury) Secretary for Transport and Housing (Frank Chan Fan (since 1 July 2017) and Professor Not subject to retirement by rotation* Anthony Cheung Bing-leung (up to 30 June 2017)) Permanent Secretary for Development (Works) Not subject to retirement by rotation* (Hon Chi-keung) Commissioner for Transport (Mable Chan (since 11 October 2017) and Not subject to retirement by rotation* Ingrid Yeung Ho Poi-yan (up to 14 July 2017)) Independent Non-Executive Directors Andrew Clifford Winawer Brandler (since 17 May 2017) 2017
Dr Pamela Chan Wong Shui 2014 2017
Dr Dorothy Chan Yuen Tak-fai 2014 2017
Vincent Cheng Hoi-chuen 2010 2016
Anthony Chow Wing-kin 2016
Dr Eddy Fong Ching 2015
James Kwan Yuk-choi 2015
168 MTR Corporation The AlternateDirectorsinofficeduringtheyearanduptodateofthisReport(unlessotherwisestated)were: ALTERNATE DIRECTORS Biographical detailsofMemberstheBoardaresetoutonpages150to157. Company’s circularcontainingtheNoticeof2018AGMsenttogetherwiththisReport. In addition,aresolutionforelectingMsRoseLeeWai-munasnewDirectorwillbeproposedatthe2018AGM.Pleasereferto the Executive Officeruntil31March2020. In February2018,theCompanyannouncedthatMrLincolnLeongKwok-kuenhasbeenre-appointedasCompany’sChief D * MEMBERS OFTHEBOARD(CONTINUED) Deputy CommissionerforTransport/TransportServicesandManagement Deputy SecretaryforDevelopment(Works)2 Lau Ping-cheung,Kaizer Dr AllanWongChi-yun Alasdair GeorgeMorrison Name (iii) (ii) (i) Andrew LaiChi-wah(upto3July2017) Andrew LaiChi-wah(since10July2017) Name Lincoln LeongKwok-kuen Executive Director Benjamin TangKwok-bun Abraham ShekLai-him Ng Leung-sing Johannes ZhouYuan Lucia LiKa-lai 2018 AGMand2019respectively. As previouslydisclosed,MrAlasdairGeorgeMorrisonandAbrahamShekLai-himinformed the CompanythattheywouldretireafterconclusionofCompany’s rotation. Pursuant totheArticlesofAssociation,DirectorsappointedbyChiefExecutiveHKSAR pursuanttoSection8oftheMTROrdinancearenotrequiredretireby (Macella LeeSui-chun) (Mak Shing-cheung) (Chief ExecutiveOfficer) (since 17May2017) Kevin Choi(since11September2017)andAndyChanShui-fu(upto2August 2017)) Deputy SecretariesforTransportandHousing(Transport)(RebeccaPunTing-ting, Permanent SecretaryforTransportandHousing(Transport) (JosephLaiYee-tak) Yau Shing-mu(upto30June2017)) Under SecretaryforTransportandHousing(DrRaymondSoWai-man(since 25September2017)and D D 2015 2017 2016 2015 2008 2011 2015 2016 at AGM Elected First
Retired at2017AGMheldon17May Re-elected 2017 2017 at AGM Last Commissioner forTransport (Works) Permanent SecretaryforDevelopment Secretary forTransportandHousing Professor ChanKa-keung,Ceajer James HenryLauJr Alternate to To beelected/ at 2018AGM Annual Report 2017 re-elected re-elected
169
Financials and Other Information Corporate Governance Business Review and Analysis Overview REPORT OF THE MEMBERS OF THE BOARD
EXECUTIVE DIRECTORATE Members of the Executive Directorate during the year and up to the date of this Report (unless otherwise stated) were:
Name Position Held Lincoln Leong Kwok-kuen Chief Executive Officer and a Member of the Board Dr Jacob Kam Chak-pui Managing Director – Operations and Mainland Business Margaret Cheng Wai-ching Human Resources Director Morris Cheung Siu-wa* President of MTR Academy Dr Peter Ronald Ewen Engineering Director Herbert Hui Leung-wah Finance Director Adi Lau Tin-shing Operations Director Gillian Elizabeth Meller Legal and European Business Director Linda So Ka-pik Corporate Affairs Director David Tang Chi-fai Property Director Dr Philco Wong Nai-keung Projects Director Jeny Yeung Mei-chun Commercial Director
* Subsequent to the approval of this Report by the Board on 8 March 2018 and as announced by the Company on 15 March 2018, Mr Morris Cheung Siu-wa has notified the Company of his wish to retire from his position as President of the MTR Academy upon expiration of his current service contract.
Biographical details of Members of the Executive Directorate are set out on pages 158 to 163.
DIRECTORS OF SUBSIDIARIES The names of all the directors of the subsidiaries of the Company during the year and up to the date of this Report (unless otherwise stated) are listed on page 196.
DIRECTORS’ SERVICE CONTRACTS No Director proposed for election or re-election at the forthcoming AGM has a service contract which is not determinable by the Company or any of its subsidiaries within one year without payment of compensation, other than statutory compensation.
DIRECTORS’ MATERIAL INTERESTS IN TRANSACTIONS, ARRANGEMENTS OR CONTRACTS Except for, in respect of Professor Chan Ka-keung, Ceajer (up to 3 July 2017) and Mr James Henry Lau Jr (since 4 July 2017) (Secretary for Financial Services and the Treasury), Secretary for Transport and Housing (Professor Anthony Cheung Bing-leung (up to 30 June 2017) and Mr Frank Chan Fan (since 1 July 2017)), Permanent Secretary for Development (Works) (Mr Hon Chi- keung), and Commissioner for Transport (Mrs Ingrid Yeung Ho Poi-yan (up to 14 July 2017) and Ms Mable Chan (since 11 October 2017)), all of whom were officials of Government, those connected transactions and continuing connected transactions between the Company and Government (and/or its associates) which are described on pages 177 to 194, there was no transaction, arrangement or contract of significance in relation to the Group’s business, to which the Company or any of its subsidiaries was a party and in which a Member of the Board or a Member of the Executive Directorate or an entity connected with him/her had a material interest (whether direct or indirect), which was entered into during the year or subsisted at any time during the year.
170 MTR Corporation “Model Code”),wereasfollows: otherwise notifiedtotheCompanyandHKSEpursuantModelCodesetoutinAppendix10ofListingRules(the (Cap. 571oftheLawsHongKong)(“SFO”))asrecordedinregisterrequiredtobekeptundersection352SFOor underlying sharesanddebenturesoftheCompany(withinmeaningPartXVSecuritiesFuturesOrdinance As at31December2017,theinterestsorshortpositionsofMembersBoardandExecutiveDirectorateinshares, THE COMPANY DIRECTORS’ INTERESTSINSHARESANDUNDERLYINGOF the ExecutiveDirectorate Alternate Director/Memberof Member oftheBoard/ Professor FrederickMaSi-hang Lincoln LeongKwok-kuen Dr PamelaChanWongShui Vincent ChengHoi-chuen Lucia LiKa-lai Mak Shing-cheung (Note 7) Dr RaymondSoWai-man Dr JacobKamChak-pui Margaret ChengWai-ching Morris CheungSiu-wa Dr PeterRonaldEwen Herbert HuiLeung-wah Adi LauTin-shing Gillian ElizabethMeller Linda SoKa-pik David TangChi-fai Dr PhilcoWongNai-keung Jeny YeungMei-chun
1,221,748 Personal interests* 183,668 575,583 23,809 50,909 27,892 17,643 98,943 21,694 9,051 1,675 5,466 558 50 – – – – No. ofOrdinarySharesheld interests 270,000 (Note 1) (Note 3) (Note 4) (Note 5) (Note 6) (Note 7) (Note 8) Family Family 1,675 1,675 1,614 8,058 1,675 2,233 – – – – – – – – – – – † interests 270,000 (Note 1) (Note 5) Other Other 2,215 – – – – – – – – – – – – – – – – Corporate interests (Note 2) (Note 2) 23,000 – – – – – – – – – – – – – – – – – Personal interests* Options 26,000 55,000 No. of Share Share – – – – – – – – – – – – – – – – # Personal interests* 382,202 101,367 Awards 94,969 52,717 50,750 45,600 63,768 90,984 70,284 92,967 98,868 94,317 No. of Share Share – – – – – – # 1,626,950 interests 270,000 285,035 118,778 103,626 117,660 108,627 191,910 175,562 669,900 10,726 50,750 47,883 75,750 3,350 3,829 8,616 1,675 Total Total Annual Report 2017 interests to total interests tototal shares inissue
of aggregate of aggregate no. of voting no. ofvoting Percentage Percentage 0.00449 0.02708 0.00018 0.00006 0.00006 0.00014 0.00003 0.00474 0.00198 0.00172 0.00084 0.00080 0.00196 0.00181 0.00126 0.00319 0.00292 0.01115 D 171
Financials and Other Information Corporate Governance Business Review and Analysis Overview REPORT OF THE MEMBERS OF THE BOARD
Notes 1 The 270,000 shares were indirectly held by The Ma Family Trust established by Professor Frederick Ma Si-hang for himself and his family of which his spouse was also a beneficiary. 2 The 23,000 shares were held by Linsan Investment Ltd., a private limited company beneficially wholly owned by Mr Lincoln Leong Kwok-kuen. 3 The 1,675 shares were held by Dr Pamela Chan Wong Shui’s spouse. 4 The 1,675 shares were held by Mr Vincent Cheng Hoi-chuen’s spouse. 5 The 1,614 shares were held by Mrs Lucia Li Li Ka-lai’s spouse and the 2,215 shares were jointly held by Mrs Li and her spouse. 6 The 8,058 shares were held by Mr Mak Shing-cheung’s spouse. 7 The 1,675 shares were held by Dr Raymond So Wai-man’s spouse. 8 The 2,233 shares were held by Mr Herbert Hui Leung-wah’s spouse.
# Details of the Share Options and Share Awards are set out in the sections headed “2007 Share Option Scheme” and “Executive Share Incentive Scheme” respectively on pages 173 to 175 * Interests as beneficial owner † Interests of spouse or child under 18 as beneficial owner D The Company’s total number of voting shares in issue as at 31 December 2017 was 6,007,777,302
Save as disclosed above and in the sections headed “2007 Share Option Scheme” and “Executive Share Incentive Scheme”:
A as at 31 December 2017, no Member of the Board or the Executive Directorate of the Company had any interest or short position in the shares, underlying shares or debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO); and
B during the year ended 31 December 2017, no Member of the Board or the Executive Directorate nor any of their spouses or children under 18 years of age held any rights to subscribe for equity or debt securities of the Company nor had there been any exercises of any such rights by any of them,
as recorded in the register kept by the Company under section 352 of the SFO or otherwise notified to the Company and the HKSE pursuant to the Model Code.
SUBSTANTIAL SHAREHOLDERS’ INTERESTS Set out below is the name of the party which was interested in 5% or more of all the Company’s voting shares in issue and the number of shares in which it was interested as at 31 December 2017 as recorded in the register kept by the Company under section 336 of the SFO:
Percentage of Ordinary Shares to all Name No. of Ordinary Shares the voting shares in issueD The Financial Secretary Incorporated (“FSI”) 4,517,196,134 75.19% (in trust on behalf of Government)
D The Company’s total number of voting shares in issue as at 31 December 2017 was 6,007,777,302
The Company has been informed by the Hong Kong Monetary Authority that, as at 31 December 2017, approximately 0.42% of the Ordinary Shares in issue (not included in the FSI shareholding set out in the above table) were held for the account of the Exchange Fund. The Exchange Fund is a fund established under the Exchange Fund Ordinance (Cap. 66 of the Laws of Hong Kong) under the control of the Financial Secretary.
OTHER PERSONS’ INTERESTS Pursuant to section 337 of the SFO, the Company has maintained a register recording the shareholding information provided by persons in response to the Company’s requests pursuant to section 329 of the SFO.
Save as disclosed above and in the sections headed “Directors’ Interests in Shares and Underlying Shares of the Company” and “Substantial Shareholders’ Interests”, as at 31 December 2017, the Company has not been notified of any other persons who had any interests or short positions in the shares or underlying shares of the Company which would be required to be recorded in the register kept by the Company pursuant to section 336 of the SFO.
172 MTR Corporation 5 4 3 2 1 Notes during theyearended31December2017aresetoutbelow: Movements intheoutstandingshareoptionstosubscribeforOrdinarySharesgrantedunder2007ShareOptionScheme 2007 SHAREOPTIONSCHEME employees Other eligible Nai-keung Dr PhilcoWong Adi LauTin-shing employees and eligible Directorate Executive Other detailsofthe2007ShareOptionSchemearesetoutinnotes10Band45(i)to Consolidated Accounts. options. Pursuant tothetermsof2007ShareOptionScheme,eachgranteeundertakes payHK$1.00,ondemand,totheCompany,inconsiderationforgrantof (the “OfferAnniversary”)andbecamefullyvestedonthethirdOfferAnniversary. The shareoptionsgrantedweresubjecttoavestingscheduleintranchesofone-third each per annum startingfromthefirstanniversaryofdateofferoptions not exceed0.2%ofthesharesCompanyinissueatdateofferrespect suchoption underthe2007ShareOptionScheme. eligible employeeunderanyothershareoptionschemeoftheCompany(including,in eachcase, bothexercisedandoutstandingoptions)inany12-monthperiodmust any eligibleemployeeunderthe2007ShareOptionSchemetogetherwithtotalnumber of sharesissuedandissuableupontheexerciseofanyoptiongrantedtosuch Unless approvedbyshareholdersinthemannerasrequiredListingRules,total numberofsharesissuedandissuableuponexercisetheoptionsgrantedto Share OptionSchemeon7June2007.The2007expiredat5.00 p.m.on 6June2014,withnofurtheroptiongrantedsincethen. No optionmaybeexercisedlaterthansevenyearsafteritsdateofofferandno may beoffered tobegrantedmorethansevenyearsaftertheadoptionof2007 23/12/2010 22/12/2010 21/12/2010 20/12/2010 18/12/2010 17/12/2010 30/5/2014 1/11/2013 30/3/2012 21/7/2010 30/5/2014 30/5/2014 6/5/2013 6/5/2013 granted Date Date
19,812,500 20,331,500 15,868,500 3,020,000 4,789,500 4,907,000 Options Options granted 188,500 189,000 975,000 673,000 270,000 83,000 80,000 78,000 (Notes (Notes 1 to3)
25/10/2014 –25/10/2020 16/12/2011 –16/12/2017 16/12/2011 –16/12/2017 16/12/2011 –16/12/2017 16/12/2011 –16/12/2017 16/12/2011 –16/12/2017 16/12/2011 –16/12/2017 23/5/2015 –23/5/2021 26/4/2014 –26/4/2020 23/3/2013 –23/3/2019 28/6/2011 –28/6/2017 23/5/2015 –23/5/2021 23/5/2015 –23/5/2021 26/4/2014 –26/4/2020 Period duringwhich (day/month/year) rights exercisable rights exercisable
outstanding outstanding 12,658,500 7,104,000 3,362,000 1 January 1 January Options Options 308,000 485,000 552,500 225,500 594,000 24,500 33,000 45,000 55,000 80,000 78,000 2017 as at
during the 5,745,500 5,745,500 Options Options 27,000 27,000 26,000 26,000 vested year – – – – – – – – – – –
during the duringthe Options Options 96,500 96,500 29,500 29,500 25,000 25,000 lapsed year – – – – – – – – – – –
during the during the 4,657,000 4,657,000 3,060,000 3,060,000 1,568,500 1,568,500 exercised exercised 308,000 308,000 485,000 485,000 527,500 527,500 225,500 225,500 594,000 594,000 Options Options 24,500 24,500 33,000 33,000 45,000 45,000 54,000 54,000 78,000 78,000 year – price per price per Exercise Exercise share of share of options options (HK$) 28.65 28.65 29.87 29.87 31.40 31.40 27.48 27.48 28.84 28.84 28.84 28.84 28.84 28.84 28.84 28.84 28.84 28.84 28.84 28.84 27.73 27.73 28.65 28.65 28.65 28.65 31.40 31.40
31 December 31 December outstanding outstanding 7,905,000 7,905,000 4,014,500 4,014,500 1,793,500 1,793,500 Options Options 55,000 55,000 26,000 26,000 Annual Report 2017 2017 as at as at – – – – – – – – –
were exercised which options which options immediately immediately closing price closing price before the before the date(s) on date(s) on Weighted Weighted of shares of shares average average (HK$) 44.86 45.45 45.40 45.09 47.03 45.32 45.07 44.89 45.60 45.01 45.10 46.40 46.40 –
173
Financials and Other Information Corporate Governance Business Review and Analysis Overview REPORT OF THE MEMBERS OF THE BOARD
EQUITY-LINKED AGREEMENT As part of the overall governance of the Executive Share Incentive Scheme, the Company reviews scheme features on a Save as disclosed in the section headed “2007 Share Option regular basis to ensure continued relevance and effectiveness. Scheme” above, no equity-linked agreements were entered In 2017, the Company appointed an independent consultant to into during the year ended 31 December 2017 or subsisted at conduct a review of the Executive Share Incentive Scheme and the end of the year. obtained the Remuneration Committee’s approval on certain EXECUTIVE SHARE INCENTIVE refinements which have come into effect on 1 January 2018. Changes include the renaming of the 2014 Share Incentive SCHEME Scheme to become “Executive Share Incentive Scheme” and The Company adopted the Executive Share Incentive entitlement of award holders to cash dividends accrued in Scheme (formerly the “2014 Share Incentive Scheme”) on 15 respect of unvested Restricted Shares that are granted on August 2014. The purposes of the Executive Share Incentive or after 1 January 2018. Certain administrative provisions of Scheme are to retain management and key employees, to the scheme rules have also been updated to streamline the align participants’ interest with the long-term success of the administration of the Executive Share Incentive Scheme. Company and to drive the achievement of strategic objectives The maximum number of Award Shares that may at any time of the Company. be the subject of an outstanding award granted under the The Remuneration Committee may, from time to time, at its Executive Share Incentive Scheme shall not exceed 2.5% of absolute discretion, determine the criteria for any eligible the number of issued Ordinary Shares as at 1 January 2015, the employee to participate in the Executive Share Incentive effective date of the Executive Share Incentive Scheme (the Scheme as award holders in accordance with the rules of the “Effective Date”). Executive Share Incentive Scheme. An award holder may be For the year ended 31 December 2017, a total of 2,357,400 granted an award of Restricted Shares and/or Performance Award Shares (2016: 2,659,778 Award Shares) were awarded Shares (together, the “Award Shares”). The Award Shares to under the Executive Share Incentive Scheme. As at 31 be granted under the Executive Share Incentive Scheme are December 2017, a total of 6,142,188 Award Shares (2016: Ordinary Shares in the capital of the Company. 5,524,599 Award Shares) were neither vested, lapsed nor had In general, the Company will pay to the third party trustee been forfeited, representing 0.11% of the issued Ordinary (the “Trustee”) monies and may give directions or a Shares (2016: 0.09%) as at the Effective Date. recommendation to the Trustee to apply such amount of Further details of the Executive Share Incentive Scheme are monies and/or such other net amount of cash derived from set out in the section headed “Long-Term Incentives” under Ordinary Shares held as part of the funds of the trust to acquire the Remuneration Committee Report (pages 147 to 148) and existing Ordinary Shares from the market. Such Ordinary notes 10C and 45(ii) to the Consolidated Accounts. Shares will be held on trust by the Trustee for the relevant award holders. The Trustee shall not exercise any voting rights in respect of any Ordinary Shares held in the trust and no award holder is entitled to instruct the Trustee to exercise the voting rights in respect of any unvested Award Shares.
174 MTR Corporation The particularsoftheAwardSharesgrantedareasfollows: Other eligibleemployees Jeny YeungMei-chun Dr PhilcoWongNai-keung David TangChi-fai Linda SoKa-pik Gillian ElizabethMeller Adi LauTin-shing Herbert HuiLeung-wah Dr PeterRonaldEwen Morris CheungSiu-wa Margaret ChengWai-ching Dr JacobKamChak-pui eligible employees Executive Directorateand Lincoln LeongKwok-kuen 10/4/2017 27/4/2015 10/4/2017 27/4/2015 10/4/2017 27/4/2015 10/4/2017 27/4/2015 10/4/2017 10/4/2017 27/4/2015 10/4/2017 27/4/2015 10/4/2017 10/4/2017 10/4/2017 27/4/2015 10/4/2017 19/8/2016 10/4/2017 27/4/2015 10/4/2017 27/4/2015 8/4/2016 8/4/2016 8/4/2016 8/4/2016 8/4/2016 8/4/2016 8/4/2016 8/4/2016 8/4/2016 8/4/2016 8/4/2016 Date of award Restricted Restricted 1,994,050 2,199,700 2,172,750 17,700 18,850 19,350 19,900 21,200 21,700 17,250 17,950 18,450 15,300 16,400 16,200 17,300 16,950 17,700 15,200 15,050 13,950 14,950 16,950 71,428 22,050 21,550 22,050 63,900 64,850 60,200 Shares Types ofAward Shares granted 8,400 8,600 – – Performance Performance 1,051,650 107,450 255,000 26,350 57,600 57,600 57,600 44,050 57,600 25,050 12,550 30,400 35,700 28,800 30,400 57,600 Shares – – – – – – – – – – – – – – – – – – 1 January2017 outstanding 2,236,700 2,239,386 295,134 18,850 70,500 21,200 72,067 17,950 69,900 60,450 17,300 68,900 18,284 35,700 14,950 28,800 71,428 21,550 72,300 64,850 Shares Shares Award 8,400 as at as at – – – – – – – – – – – – –
the year 731,298 676,202 15,827 during 23,809 21,616 vested 20,066 Shares Award 6,283 6,450 7,066 7,233 5,983 6,150 5,466 5,766 5,650 5,650 2,800 2,866 4,983 7,183 7,350 – – – – – – – – – – – – – – during theyear lapsed and/or lapsed and/or Award Shares forfeited 45,823 84,985 38,956 Annual Report 2017 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Award Shares Award Shares 31 December 31 December outstanding 1,958,750 1,420,417 1,524,228 275,068 17,700 12,567 64,050 19,900 14,134 64,834 17,250 11,967 63,750 15,300 54,984 16,200 11,534 63,250 42,750 15,418 45,600 15,050 35,700 13,950 28,800 28,800 47,350 47,619 22,050 14,367 64,950 63,900 43,234 5,600 9,967 2017 as at 175
Financials and Other Information Corporate Governance Business Review and Analysis Overview REPORT OF THE MEMBERS OF THE BOARD
SHARES ISSUED
No. of Ordinary Shares issued Consideration/Value (HK$) As at 31 December 2016 5,905,290,065 N/A Shares issued under the 2007 Share Option Scheme 11,660,000 341 million (Further details can be found in note 45(i) to the Consolidated Accounts) (received by the Company) Scrip shares issued in respect of 2016 final dividend 87,794,562 3,863 million Scrip shares issued in respect of 2017 interim dividend 3,032,675 137 million As at 31 December 2017 6,007,777,302 N/A
Details of the movements in share capital of the Company during the year are set out in note 42 to the Consolidated Accounts.
PURCHASE, SALE OR REDEMPTION OF LISTED SECURITIES MTR Corporation (C.I.) Limited, the Company’s wholly owned subsidiary, redeemed its US$550 million bonds at par on 12 April 2017. The bonds were listed on the HKSE prior to the redemption. Save as disclosed above, the Group did not purchase, sell or redeem any of the Group’s listed securities during the year ended 31 December 2017. The Trustee of the Executive Share Incentive Scheme, did not purchase any Ordinary Shares on the HKSE during the year.
PUBLIC FLOAT The HKSE granted to the Company, at the time of its listing on the Main Board of the HKSE in 2000, a waiver from strict compliance with Rule 8.08(1) of the Listing Rules (“Public Float Waiver”). Pursuant to the Public Float Waiver, the Company’s prescribed minimum percentage of shares which must be in the hands of the public must not be less than 10% of the total number of issued shares of the Company. Based on the information that is publicly available to the Company and within the knowledge of the Directors, the Company has maintained the prescribed amount of public float during the year and up to the date of this Report as required by the Public Float Waiver.
MAJOR SUPPLIERS AND CUSTOMERS Information in respect of the Group’s major suppliers and major customers for the year ended 31 December 2017 is as follows:
As a percentage of the Group’s total supplies Total value of supplies (not of a capital nature) attributable to the Group’s five largest suppliers 18.01% As a percentage of the Group’s total revenue Total revenue attributable to the Group’s five largest customers 30.99% Total revenue attributable to the Group’s largest customer 12.22%
176 MTR Corporation expenditure andrefinancingofdebts. corporate fundingrequirements,includingfinancingofcapital Such noteswereissuedinordertomeettheGroup’sgeneral of whicharesetoutinnote36CtotheConsolidatedAccounts. 31 December2017(2016:HK$7,868millionequivalent),details to HK$7,655millionequivalentduringtheyearended The Groupissuednoteswithtotalfacevalueamounting BONDS ANDNOTESISSUED Consolidated Accounts. Particulars oftheborrowingsaresetoutinnote36to amounted toHK$42,043million(2016:HK$39,939million). The totalborrowingsoftheGroupasat31December2017 AND OTHERBORROWINGS BANK OVERDRAFTS,LOANS million) tocharitableandotherorganisations. approximately HK$21.8million(2016:HK$13.5 During theyear,Groupdonatedandsponsored DONATIONS largest customers. shares inissue)hadanybeneficialintereststheGroup’sfive Directorate, ownedmorethan5%ofalltheCompany’svoting the knowledgeofMembersBoardorExecutive their respectivecloseassociatesoranyShareholder(whichto Members oftheBoardorExecutiveDirectorateany Save asdisclosedaboveandat31December2017,noother officials ofGovernment. Directors, whosenamesarelistedonpages168and169,were the IndependentNon-executiveDirectors)andtheirAlternate Company (excludingProfessorFrederickMaSi-hangandall As at31December2017,theNon-executiveDirectorsof “Substantial Shareholders’Interests”aboveforfurtherdetails). the Company’svotingsharesinissue(seesectionheaded shareholder oftheCompany,heldapproximately75.19%all Group’s fivelargestcustomers,throughtheFSI,substantial As at31December2017,Government,beingoneofthe
62 and63. properties heldforsaleoftheCompanyareshownonpages Particulars oftheprincipalinvestmentpropertiesand PROPERTIES committed bankingfacilities. borrowings beingdemandedandcancellationoftheundrawn such conditionmayresultinimmediaterepaymentofthe of alltheCompany’svotingsharesinissue.Failuretosatisfy Company’s controllingshareholder,ownsmorethanhalf were subjecttotheconditionthatGovernment,being facilities ofHK$11,900million(2016:HK$14,000million),which ranging from2018to2055andundrawncommittedbanking HK$37,770 million(2016:HK$34,700million)withmaturities As at31December2017,theGrouphadborrowingsof CONTROLLING SHAREHOLDER SPECIFIC PERFORMANCEOFTHE COVENANT RELATINGTO LOAN AGREEMENTSWITH to certainconditions(the“Waiver”). transactions betweentheCompanyandGovernment,subject apply toconnectedtransactionsandcontinuing under Chapter14AoftheListingRuleswhichwouldotherwise the Companyfromstrictcompliancewithrequirements January 2005,theStockExchangehasgrantedawaiverto As disclosedintheannouncementofCompanydated13 Company undertheListingRules. transaction describedbelowisaconnectedforthe of theCompanyforpurposesListingRules,andeach Listing Rules).Governmentisthereforea“connectedperson” substantial shareholderoftheCompanyasdefinedin below wereenteredintowithGovernment(whichisa During theyearunderreview,transactionsdescribed CONNECTED TRANSACTIONS Annual Report 2017 177
Financials and Other Information Corporate Governance Business Review and Analysis Overview REPORT OF THE MEMBERS OF THE BOARD
Consequently, the Company makes the disclosures below CONTINUING CONNECTED in accordance with Rule 14A.71 of the Listing Rules and in TRANSACTIONS accordance with the conditions of the Waiver. During the year under review, the following transactions Land Agreements and arrangements described below involved the provision A On 4 January 2017, the Company accepted an offer of goods or services carried out on an ongoing or recurring dated 24 November 2016 from Government to allow the basis and are expected to extend over a period of time with Company to proceed with the proposed Ho Man Tin Property Government and/or KCRC, the Airport Authority (the “AA”), Development Package One at Site A of Kowloon Inland UGL Rail Services Pty Limited (“UGL”), Leighton Contractors Lot No. 11264 (the “Lot No. 11264”) at a land premium of (Asia) Limited (“LCAL”) and John Holland Pty Limited (“JHL”). HK$6,282,370,000 and on the terms and conditions of the land As noted above under the section headed “Connected grant by private treaty of the Lot No. 11264 to be entered into Transactions”, Government is a substantial shareholder of between the Company and Government (the “Land Grant”). the Company for the purposes of the Listing Rules. KCRC and The Land Grant was executed on 27 February 2017. the AA are both associates of the Company as defined in the B On 9 March 2017, the Company accepted an offer Listing Rules. dated 25 January 2017 from Government to proceed with Metro Trains Melbourne Pty. Ltd. (“MTM”) is a company the proposed land exchange involving a surrender by the incorporated in Australia, which is wholly-owned by Metro Company of Aberdeen Inland Lot No. 464 in exchange for Trains Australia Pty Ltd (“MTA”). The Company, UGL and the grant of Aberdeen Inland Lot No. 467 (the “Lot No. 467”) John Holland MTA Pty Ltd (“JHMTA”) own 60%, 20% and comprising the Wong Chuk Hang Station and the Wong Chuk 20% respectively of MTA and are, therefore, substantial Hang Depot to the Company and to allow the Company to shareholders of MTA. Accordingly, UGL and JHMTA are proceed with the proposed Wong Chuk Hang Station Property connected persons of the Company. In addition, as JHL is an Development Package One at Site A of the Lot No. 467 subject associate of JHMTA, JHL is also a connected person of the to payment of a land premium for Site A of the Lot No. 467 Company. at HK$4,684,540,000 and on the terms and conditions of the Since both UGL and LCAL are indirect wholly-owned relevant Conditions of Exchange which was subsequently subsidiaries of CIMIC Group Limited, LCAL is an associate of entered into between the Company and Government and UGL and is also a connected person of the Company. dated 12 June 2017 and registered at the Land Registry as Conditions of Exchange No. 20304. Therefore, each of Government, KCRC, the AA, UGL, LCAL, and JHL is a “connected person” of the Company for C On 14 December 2017, the Company accepted an the purposes of the Listing Rules and, during 2017, each offer dated 6 November 2017 from Government to allow transaction set out at paragraphs I, II and III below constituted the Company to proceed with the proposed Wong Chuk a continuing connected transaction for the Company under Hang Station Property Development Package Two at Site the Listing Rules. B of Aberdeen Inland Lot No. 467 subject to payment of a land premium of HK$5,213,810,000 and on the terms and In accordance with Guidance Letter GL 73-14 issued by the conditions of the relevant Conditions of Exchange No. 20304. Stock Exchange and taking into account the Stock Exchange’s recommendation issued in January 2016, the Company’s Internal Audit Department (“IAD”) has reviewed the
178 MTR Corporation • • including inrelationto: overall structureandcertainspecificaspectsoftheRailMerger, The MergerFrameworkAgreementcontainsprovisionsforthe Services andtheTreasuryforonbehalfofGovernment. for TransportandHousingtheSecretaryFinancial August 2007betweentheCompany,KCRCandSecretary The MergerFrameworkAgreementwasenteredintoon9 A certain conditions(the“Merger-relatedWaiver”). and/or KCRCarisingasaresultoftheRailMerger,subjectto connected transactionsbetweentheCompany,Government the ListingRuleswhichwouldotherwiseapplytocontinuing compliance withtherequirementsunderChapter14Aof Stock ExchangegrantedawaivertotheCompanyfromstrict September 2007inconnectionwiththeRailMerger, As disclosedinthecircularissuedbyCompanyon3 Information inrespectoftheRailMerger”. paragraphs containedinthesectionbelowheaded“Additional These paragraphsshouldbereadinconjunctionwiththe at anExtraordinaryGeneralMeetingheldon9October2007. approved bytheindependentshareholdersofCompany Transactions”) andwhichformedpartoftheRailMerger,was (together, the“Merger-relatedContinuingConnected Each ofthetransactionslistedinparagraphsAtoDbelow Transactions I Rules (asappropriate). related Waiver(asdefinedbelow),theandListing and confirmationrequiredtobegivenpursuanttheMerger- Independent Non-executiveDirectorsintheirannualreview Audit CommitteeoftheCompanytoassistCompany’s were adequateandeffectivereportedthesameto the internalcontrolproceduresputinplacebyCompany and therelatedinternalcontrolprocedures.IADfoundthat Company’s continuingconnectedtransactionssetoutbelow Merger FrameworkAgreement Merger-related ContinuingConnected corporate governanceoftheCompanyPost-RailMerger; a seamlessinterchangeprogramme; • Agreement, theCompanywasappointed: Subsidiaries”). PursuanttothetermsofWestRailAgency KCRC andcertainsubsidiarycompanies(the“WestRail were enteredintoon9August2007betweentheCompany, The WestRailAgencyAgreementandrelatedagreements B • • • • • • • • • • • West RailAgencyAgreement West Rail;and obligations relatingtospecifieddevelopmentsitesalong attorney, toexercisecertainrightsandperform to actasKCRC’sagent,anddoneeunderpowersof name to“香港鐵路有限公司”. to theRailMergerOrdinance)changeofitsChinese the Company’sretentionofitsEnglishnameand(pursuant Rail Mergerclaimsbythirdparties;and the allocationofliabilityforanyPre-RailMergerandPost- paragraph Dbelow); Package (asdescribedonpages180to182andin the paymentofHK$7.79billioninrespectProperty treatment ofKCRC’scrossborderleases; arrangements; KCRC’s continuingresponsibilityforitsexistingfinancial Link; arrangements inrelationtotheproposedShatinCentral the implementationofcertainfarereductions; integrating theoperationsofCompanyandKCRC; frontline staffforanyreasonthatrelatestotheprocessof Company fromterminatingtheemploymentofrelevant Company andKCRC,includingprovisionspreventingthe arrangements inrelationtotheemployeesof premium amounts; arrangements inrelationtotheassessmentofland tenders forrailwaypropertydevelopment; programme onthelevelofflatproductionarisingfrom arrangements relatingtotheestablishmentofarolling payments relatingtopropertyenablingworks; Annual Report 2017 179
Financials and Other Information Corporate Governance Business Review and Analysis Overview REPORT OF THE MEMBERS OF THE BOARD
• to act as agent for, and donee under powers of attorney KCRC and the Company (each of which is jointly and severally from, each of the West Rail Subsidiaries to exercise certain liable to specified CBL counterparties, as referred to in the rights and perform certain obligations relating to specified paragraph above headed “US CBL Assumption Agreements”). development sites along West Rail. Under the terms of the US CBL Allocation Agreement, as between the Company and KCRC, the Company is The Company will receive an agency fee of 0.75% of the responsible for specified obligations. The Company and KCRC gross sale proceeds in respect of the unawarded West Rail each made representations under the US CBL Allocation development sites and 10% of the net profits accrued to the Agreement, which include, in the case of those made by West Rail Subsidiaries under the development agreements KCRC, representations with respect to the status of the CBLs. in respect of the awarded West Rail development sites. The The Company and KCRC agreed to indemnify each other for Company will also recover from the West Rail Subsidiaries its certain losses in relation to the CBLs. costs (including internal costs) incurred in respect of the West Rail development sites plus 16.5% on-cost, together with D Property Package Agreements interest accrued thereon. Category 2A Properties C KCRC Cross Border Lease Agreements On 9 August 2007, Government entered into an undertaking that it would issue to KCRC an offer for the grant at nil US CBL Assumption Agreements premium of Government leases in respect of the land upon Separate US CBL Assumption Agreements were entered into which certain properties (the “Category 2A Properties”) on 30 November 2007 between the Company, KCRC and, are situated (the “said Government Leases”). The Category variously the following parties who remain counterparties, 2A Properties were held by KCRC as vested land under the Wilmington Trust Company, Landesbank Sachsen Kowloon-Canton Railway Corporation Ordinance (Cap. 372 Aktiengesellschaft, Bayerische Landesbank Girozentrale, Banc of the Laws of Hong Kong). On 9 August 2007, KCRC entered of America FSC Holdings Inc., Fluent Asset Limited, Anzef into an undertaking that it would, immediately after the grant Limited, Societe Generale, Australia and New Zealand Banking of the said Government Leases referred to in the preceding Group Limited, Statesman Asset Limited, State Street Bank sentence, enter into agreements for sale and purchase to and Trust Company and Bowman Asset Limited and became sell the Category 2A Properties to the Company (the “said effective on 3 December 2007, with respect to each of the US Agreements for Sale and Purchase”). Assignments of the cross border leases originally entered into between KCRC and Category 2A Properties to the Company shall then take place certain counterparties (each, a “CBL”). Pursuant to each US CBL pursuant to the said Agreements for Sale and Purchase (the Assumption Agreement, the Company undertakes to perform, “said Assignments”). on a joint and several basis with KCRC, the obligations of KCRC under the respective CBLs. As a result thereof, the Company is The said Government Leases were issued to KCRC respectively generally liable to the CBL counterparties in respect of KCRC’s on 27 March 2009 and 31 March 2009. The said Agreements obligations under the CBLs and has the right to exercise for Sale and Purchase were entered into between KCRC certain of KCRC’s rights under the CBLs. and the Company on 27 March 2009 and 31 March 2009 respectively and the said Assignments to the Company were US CBL Allocation Agreement executed on 27 March 2009 and 31 March 2009 respectively. The US CBL Allocation Agreement was entered into between Deeds of Mutual Grant were also entered into between the the Company, KCRC and the subsidiaries of KCRC (the “KCRC Company and KCRC on 27 March 2009 and 31 March 2009 Subsidiaries”) on 2 December 2007. Pursuant to the US CBL respectively setting out the easements, rights, entitlements, Allocation Agreement, rights, obligations and responsibility for privileges and liberties of the Company and KCRC in the land risks relating to the CBLs are delineated and allocated between on which the Category 2A Properties are situated.
180 MTR Corporation run a safe and efficient railway. In order to assist the Company run asafeandefficientrailway.In ordertoassisttheCompany maximise grossprofitsundertheCategory3Propertiesandto according toprudentcommercialprinciples,andaim In actingasKCRC’sagent,theCompanyisrequiredtoact result oftheCompany’sactions. payable fromKCRCwhichhavebeenincurredbyasa the Category3Properties,andshallpayallamountsdue restrictions andobligationsbindingonKCRCwhichrelateto The Companyisrequiredatalltimestocomplywithstatutory the relevantCategory3Property). Property (butexcludingtherightorobligationtodisposeof perform obligationsofKCRCwhichrelatetotheCategory3 donee underpowersofattorney,toexerciserightsand Company hasbeenappointedtoactasKCRC’sagent,and Pursuant tothetermsofeachCategory3Agreement, Agreement (asdefinedandsummarisedonpages192to193). are dealtwithunderthetermsofServiceConcession the concessionpropertysituateonanyCategory3Property property situateonanyCategory3Property.Mattersaffecting by theCompanyiftheyrelateexclusivelytoconcession the Category3Agreementsmaybeexercisedorperformed obligations grantedtoorundertakenbytheCompanyunder in respectofeachCategory3Property.Nonetherightsand KCRC haspreviouslyenteredintoadevelopmentagreement relates toacertainproperty(each“Category3Property”). powers ofattorneywithKCRC.EachCategory3Agreement agreements (the“Category3Agreements”)andrelated On 9August2007,theCompanyenteredintothree Category 3Properties of 50yearsfrom2December2007. Town LotNo.199dated29March2010wasissuedforaterm 31 December2009andGovernmentLeaseinrespectofTaiPo Trackside Villas)wasissuedandacceptedbytheCompanyon The basictermsofferfortheCategory2BProperty(i.e. Property”) ontermstobeagreed. a GovernmentLeaseofcertainproperty(the“Category2B that itwouldissuetotheCompanyanofferforgrantof On 9August2007,Governmententeredintoanundertaking Category 2BProperty (once developed). manager isappointedinrespectof,eachCategory3Property The Companyshallbethefirstmanager,orensurethata in respectofeachCategory3Property. The CompanyhasagreedtogivecertainindemnitiesKCRC relevant Category3Propertydeveloper). to specifieddeductionsofamountsduefromKCRCthe following receiptofrelevantfundsbyKCRC(butsubject Company’s feeshallbepayableininstalmentspromptly be paidbytherelevantdevelopertoKCRC).Generally, and consultantcontributioncosts,ineachcasepaidorto Property (afterdeductingcertaininitialandupfrontpayments the profitsmadebyKCRCinrespectofrelevantCategory3 be paidafeewhichisexpectedtosimilarinquantum As considerationforactingasKCRC’sagent,theCompanyshall 3 Agreement. otherwise inaccordancewiththetermsofCategory KCRC’s agent),oraccordingtotheCompany’sinstructions, Property whichisnotcarriedoutbytheCompany(actingas KCRC shallnottakeanyactioninrespectofaCategory3 and practices. treatment ispermittedunderlawandaccountingprinciples (rather underitsprofitandlossaccount),providedthatsuch of aCategory3Propertybywaybalancesheetmovement KCRC isrequiredtoaccountforrevenuereceivedinrespect those instructions. and undertherelevantGovernmentgrant,tocarryout those instructionsprovidedthatitispermittedunderlaw, agency powers. KCRCisrequiredtocomplypromptlywith unable totakebyreasonofthelimitationscopeits its relateddevelopmentagreement)whichtheCompanyis or matterrelatingtoeachCategory3Property(including has therighttogiveKCRCinstructionsinrespectofanyaction Agreement. AswellasactingKCRC’sagent,theCompany conferred orundertakenbyitundertherelevantCategory3 powers ofattorneytoexerciserightsandperformobligations of attorneytotheCompany.TheCompanymayonlyuse in performingitsagencyfunctions,KCRChasgrantedpowers Annual Report 2017
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Financials and Other Information Corporate Governance Business Review and Analysis Overview REPORT OF THE MEMBERS OF THE BOARD
The Company’s appointment as agent shall terminate when • the limitation of the Company’s liability to Government KCRC ceases to have any undivided share in the relevant under the First SCL Agreement, except in respect of Category 3 Property, other than concession property, and death or personal injury caused by the negligence of the neither KCRC nor the developer nor the guarantors have Company, to HK$600 million; and any further rights to exercise, or obligations to perform, • should the railway scheme for the Shatin to Central Link under the development agreement relating to the relevant be authorised under the Railways Ordinance (Cap. 519 Category 3 Property. of the Laws of Hong Kong), the execution of a further II Non Merger-related Continuing agreement by Government and the Company setting Connected Transactions out each of their rights, obligations, duties and powers with respect to the financing, construction, completion, The following disclosures, in paragraphs A1 to D below testing, commissioning and putting into service the works together with the Third XRL Agreement (as defined below) necessary for the construction and operation of the Shatin (together, the “Non Merger-related Continuing Connected to Central Link. Transactions”), are made in accordance with the conditions of the Waiver and Rule 14A.71 of the Listing Rules. A2 Entrustment Agreement for Advance Works Relating to the Shatin to Central Link A1 Entrustment Agreement for Design and Site Investigation in Relation to the Shatin to The Entrustment Agreement for Advance Works Relating to Central Link the Shatin to Central Link (the “Second SCL Agreement”) was entered into on 17 May 2011 between the Company and The Entrustment Agreement for Design and Site Investigation the Secretary for Transport and Housing for and on behalf of in Relation to the Shatin to Central Link (the “First SCL Government. Agreement”) was entered into on 24 November 2008 between the Company and the Secretary for Transport and Housing for The Second SCL Agreement contains the following provisions: and on behalf of Government. • in consideration of the Company executing or procuring The First SCL Agreement contains provisions for the design of the execution of certain entrustment activities as set and site investigation and procurement activities in relation to out in the Second SCL Agreement and carrying out its the proposed Shatin to Central Link, including in relation to: other obligations under the Second SCL Agreement, Government shall pay to the Company the Company’s • Government’s obligation to pay the Company up to project management cost. The amount of such project a maximum aggregate amount of HK$1,500 million management cost is to be agreed between the Company in respect of certain costs incurred by the Company and Government and prior to such agreement, the project pursuant to the First SCL Agreement, including the management cost shall be paid by Government to the Company’s in-house design costs and certain on-costs Company on a provisional basis calculated in accordance and preliminary costs; with the Second SCL Agreement; • Government’s obligation to bear and finance the total cost • the Company and Government may agree that the of the design and site investigation activities under the Company will carry out (or procure the carrying out First SCL Agreement (subject to the limit noted above in of) certain additional works for Government (such respect of payments to the Company) and arrangements for the payment of these costs directly by Government;
• the Company’s obligation to carry out or procure the carrying out of the design and site investigation activities in relation to the proposed Shatin to Central Link;
182 MTR Corporation • • • • • Second SCLAgreement; from GovernmentundertheFirst SCLAgreementandthe fees thathavebeenandwillbereceivedbytheCompany negligence oftheCompany,islimitedtoaggregate except inrespectofdeathorpersonalinjurycausedbythe First SCLAgreementandtheSecondAgreement, the Company’stotalliabilitytoGovernmentunder the SecondSCLAgreement; Hom toKowloonBayandotherworksasdescribedunder reprovisioning oftheInternationalMailCentrefromHung Station andthetobeconstructedHoManTinStation, of certainenablingworksontheexpandedAdmiralty the Companyshallcarryoutorprocurecarrying a totalinaggregateofapproximatelyHK$15,000million; limited toapproximatelyHK$3,000millionperannumand to theCompanyunderSecondSCLAgreementis the maximumaggregateamountpayablebyGovernment Central Linkproject; Lands DepartmentinconnectionwiththeShatinto related costsandthosewhichareincurredbythe Government shallbearlandacquisition,clearanceand is determined; adjustments whenthefinaloutturncostofWorksCost respect oftheWorksCostonaprovisionalbasis,subjectto Government willmakepaymentstotheCompanyin in theSecondSCLAgreement).Inthisconnection, Government shallbearallofthe“WorksCost”(asdefined and constructingsuchmiscellaneousworks; management feepayabletotheCompanyfordesigning the CompanyandGovernmentasbeingproject pay totheCompanyanamountbeagreedbetween to suchmiscellaneousworks(ifany),Governmentshall obligations undertheSecondSCLAgreementinrelation miscellaneous works(ifany)andcarryingoutitsother Company executingorprocuringtheexecutionofsuch the SecondSCLAgreementandinconsiderationof part oftheactivitiesspecifiedtobecarriedoutunder Company inthesamemannerasiftheyhadformed Miscellaneous works(ifany)aretobecarriedoutbythe agreed additionalworksbeing“miscellaneousworks”). • • • • – – – the Companywarrantsthat: contract; expiry ofanydefectsliabilityperiodundertherelevant defects insuchworkthatareidentifiedfollowingthe the Companyshallberesponsibleforrepairofany work carriedoutunderanycontractwiththirdparty, a certificateofcompletionbytheCompanyinrespect during theperiodoftwelveyearsfollowingissue to thehandoverofworks; outstanding worksand/ordefectiveidentifiedprior and forcompletingorprocuringthecompletionofany the dateofhandoverthoseworkstoGovernment project fromthecommencementofconstructionuntil works constructedundertheShatintoCentralLink the Companyshallberesponsibleforcareofall out undertheSecondSCLAgreement; works, afinalreportontheactivitiesrequiredtobecarried three monthsfollowingthecompletionofrelevant in theimmediatelyprecedingcalendarmonthand,within under theSecondSCLAgreementthatwerecarriedout each calendarmonth,aprogressreportontheactivities the CompanywillprovidetoGovernmentbyendof workmanlike constructioncontractor; and reasonably tobeexpectedfrom,acompetentand of, andbyutilisingsuchplant,goodsmaterials out withtheskillandcarereasonablytobeexpected construction activities,suchactivitiesshallbecarried SCL Agreementthatrelatetothecarryingoutof in thecaseofthoseactivitiesunderSecond and competentdesignengineer; and carereasonablytobeexpectedofaprofessional services, suchactivitiesshallbecarriedoutwiththeskill Agreement thatrelatetotheprovisionofdesign in thecaseofthoseactivitiesunderSecondSCL a professionalandcompetentprojectmanager; out withtheskillandcarereasonablytobeexpectedof management services,suchactivitiesshallbecarried Agreement thatrelatetotheprovisionofproject in thecaseofthoseactivitiesunderSecondSCL Annual Report 2017 183
Financials and Other Information Corporate Governance Business Review and Analysis Overview REPORT OF THE MEMBERS OF THE BOARD
• Government further undertakes to use reasonable • Government shall bear certain “Third Party Costs”, any endeavours to provide the Company with assistance of “Interface Works Costs” and any “Direct Costs” (each as a non-financial nature, including taking all reasonable defined in the Third SCL Agreement); steps to procure that all necessary licences and consents, • Government shall bear land acquisition, clearance and required in connection with the design, construction related costs and those costs which are incurred by the and operation of the Shatin to Central Link are given or Lands Department in connection with the Shatin to granted. Central Link project;
A3 Entrustment Agreement for Construction and • the maximum aggregate amount payable by Government Commissioning of the Shatin to Central Link to the Company under the Third SCL Agreement is limited The Entrustment Agreement for Construction and to HK$3,000 million per annum and a total in aggregate of Commissioning of the Shatin to Central Link (the “Third SCL HK$15,000 million; Agreement”) was entered into on 29 May 2012 between the • the maximum aggregate amount payable by the Company and the Secretary for Transport and Housing for and Company to Government under the Third SCL Agreement on behalf of Government. in relation to its contribution to certain railway works The Third SCL Agreement contains the following provisions: under the Third SCL Agreement is limited to HK$4,000 • in consideration of the Company executing or procuring million per annum and a total in aggregate of HK$15,000 the execution of certain entrustment activities as set out million; in the Third SCL Agreement and carrying out its other • the Company’s total liability to Government under the First obligations under the First SCL Agreement and the Second SCL Agreement, the Second SCL Agreement and the Third SCL Agreement, Government shall pay to the Company the SCL Agreement, except in respect of death or personal Company’s project management cost. The amount of the injury caused by the negligence of the Company, is limited project management cost is HK$7,893 million and will be to the aggregate fees that have been and will be received paid by Government to the Company on a quarterly basis; by the Company from Government under the First SCL • the Company and Government may agree that the Agreement, the Second SCL Agreement and the Third SCL Company will carry out (or procure the carrying out Agreement; of) certain additional works for Government (such • the Company will provide to Government by the end of agreed additional works being “miscellaneous works”). each calendar month, a progress report on the activities Miscellaneous works (if any) are to be carried out by the under the Third SCL Agreement that were carried out in Company in the same manner as if they had formed the immediately preceding calendar month and, within part of the activities specified to be carried out under three months following the handover of the Shatin to the Third SCL Agreement and in consideration of the Central Link project to Government, a final report on the Company executing or procuring the execution of such activities required to be carried out under the Third SCL miscellaneous works (if any) and carrying out its other Agreement; obligations under the Third SCL Agreement in relation • the Company shall be responsible for the care of all to such miscellaneous works (if any), Government shall works constructed under the Shatin to Central Link pay to the Company an amount to be agreed between project from the commencement of construction until the Company and Government as being the project the date of handover of those works to Government management fee payable to the Company for designing and for completing or procuring the completion of any and constructing such miscellaneous works; outstanding works and/or defective works identified prior to the handover of the works;
184 MTR Corporation on behalfofGovernment. Company andtheSecretaryforTransportHousing was enteredintoon24November2008betweenthe in RelationtotheExpressRailLink(the“FirstXRLAgreement”) The EntrustmentAgreementforDesignandSiteInvestigation Investigation inRelationtotheExpressRailLink B1 • • •
Entrustment AgreementforDesignandSite granted. and operationoftheShatintoCentralLinkaregivenor required inconnectionwiththedesign,construction steps toprocurethatallnecessarylicencesandconsents, a non-financialnature,includingtakingallreasonable endeavours toprovidetheCompanywithassistanceof Government furtherundertakestousereasonable – – – the Companywarrantsthat: relevant contract; expiry ofanydefectsliabilityperiodunderthe defects insuchworkthatareidentifiedfollowingthe the Companyshallberesponsibleforrepairofany work carriedoutunderanycontractwiththirdparty, a certificateofcompletionbytheCompanyinrespect during theperiodoftwelveyearsfollowingissue workmanlike constructioncontractor;and reasonably tobeexpectedfrom,acompetentand of, andbyutilisingsuchplant,goodsmaterials out withtheskillandcarereasonablytobeexpected construction activities,suchactivitiesshallbecarried SCL Agreementthatrelatetothecarryingoutof in thecaseofthoseactivitiesunderThird and competentdesignengineer; and carereasonablytobeexpectedofaprofessional services, suchactivitiesshallbecarriedoutwiththeskill Agreement thatrelatetotheprovisionofdesign in thecaseofthoseactivitiesunderThirdSCL a professionalandcompetentprojectmanager; out withtheskillandcarereasonablytobeexpectedof management services,suchactivitiesshallbecarried Agreement thatrelatetotheprovisionofproject in thecaseofthoseactivitiesunderThirdSCL
“Second XRLAgreement”). Transport andHousingforonbehalfofGovernment(the 26 January2010betweentheCompanyandSecretaryfor commissioning oftheExpressRailLinkwasenteredintoon The EntrustmentAgreementfortheconstructionand Testing andCommissioningoftheExpressRailLink B2 • • • • • the proposedExpressRailLink,includinginrelationto: and siteinvestigationprocurementactivitiesinrelationto The FirstXRLAgreementcontainsprovisionsforthedesignof Entrustment Agreement for Construction, Entrustment AgreementforConstruction, Express RailLink. works necessaryfortheconstructionandoperationof testing, commissioningandputtingintoservicethe with respecttothefinancing,construction,completion, out eachoftheirrights,obligations,dutiesandpowers agreement byGovernmentandtheCompanysetting of theLawsHongKong),executionafurther authorised undertheRailwaysOrdinance(Cap.519 should therailwayschemeforExpressRailLinkbe Company, toHK$700million;and death orpersonalinjurycausedbythenegligenceof under theFirstXRLAgreement,exceptinrespectof the limitationofCompany’sliabilitytoGovernment in relationtotheproposedExpressRailLink; carrying outofthedesignandsiteinvestigationactivities the Company’sobligationtocarryoutorprocure for thepaymentofthesecostsdirectlybyGovernment; respect ofpaymentstotheCompany)andarrangements First XRLAgreement(subjecttothelimitnotedabovein of thedesignandsiteinvestigationactivitiesunder Government’s obligationtobearandfinancethetotalcost and recruitedstaffcosts; house designcostsandcertainon-costs,preliminary to theFirstXRLAgreement,includingCompany’sin- respect ofcertaincostsincurredbytheCompanypursuant maximum aggregateamountofHK$1,500million,in Government’s obligationtopaytheCompany,upa Annual Report 2017 185
Financials and Other Information Corporate Governance Business Review and Analysis Overview REPORT OF THE MEMBERS OF THE BOARD
The scheme in respect of the Express Rail Link was first • the Company will provide to Government by the end of gazetted under the Railways Ordinance (Cap. 519 of the Laws each calendar month, a progress report on the activities of Hong Kong) on 28 November 2008, with amendments under the Second XRL Agreement that were carried out and corrections gazetted on 30 April 2009. The scheme, in the immediately preceding calendar month and, within as amended with such minor modifications as deemed three months following the earlier of handover of the necessary, was authorised by the Chief Executive in Council Express Rail Link project to Government or termination on 20 October 2009 and funding support approved by the of the Second XRL Agreement, a final report on the Finance Committee on 16 January 2010. activities required to be carried out under the Second XRL Agreement; The Second XRL Agreement contains the following provisions: • the Company shall be responsible for the care of all • in consideration of the Company executing or procuring works constructed under the Express Rail Link project the execution of certain entrustment activities as set from the commencement of construction until the date out in the Second XRL Agreement and carrying out its of handover of those works to Government (or to a third other obligations under the Second XRL Agreement and party directed by Government) and for completing or the First XRL Agreement, Government shall pay to the procuring the completion of any outstanding works and/ Company HK$4,590 million (further details relating to the or defective works identified prior to the handover of the amendments to this provision are set out in the section works; below headed “ The Third Agreement in Relation to the Express Rail Link”), to be paid in cash quarterly in advance on • during the period of twelve years following the issue of a scheduled basis as such sum may be varied in accordance a certificate of completion by the Company in respect of with the Second XRL Agreement, subject to the maximum work carried out under any contract with any third party, payment limits stated in the Second XRL Agreement (being the Company shall be responsible for the repair of any HK$2,000 million annually and HK$10,000 million in total) defects in such work that are identified following the (the “Maximum Payment Limits”); expiry of any defects liability period under the relevant contract; • the Company and Government may agree that the Company will carry out (or procure the carrying out • the Company warrants that: of) certain additional works for Government (such – in the case of those activities under the Second XRL agreed additional works being “miscellaneous works”). Agreement that relate to the provision of project Miscellaneous works (if any) are to be carried out by the management services, such activities shall be carried Company in the same manner as if they had formed part of out with the skill and care reasonably to be expected of the activities specified to be carried out under the Second a professional and competent project manager; XRL Agreement and in consideration of the Company executing or procuring the execution of the miscellaneous – in the case of those activities under the Second XRL works (if any) and carrying out its other obligations Agreement that relate to the provision of design under the Second XRL Agreement in relation to the services, such activities shall be carried out with the skill miscellaneous works (if any), Government shall pay to the and care reasonably to be expected of a professional Company an amount equal to an agreed fixed percentage and competent design engineer; and of third party costs attributable to the miscellaneous works from time to time subject to the Maximum Payment Limits;
186 MTR Corporation Express RailLinkundertheconcessionapproach. Company willbeinvitedtoundertaketheoperationof the SecondXRLAgreement)onunderstandingthat of theExpressRailLink(pursuanttoandonterms to proceedwiththeconstruction,testingandcommissioning Government hasagreedthattheCompanybeenasked • • operation oftheExpressRailLinkaregivenorgranted. required inconnectionwiththedesign,constructionand steps toprocurethatallnecessarylicencesandconsents, a non-financialnature,includingtakingallreasonable endeavours toprovidetheCompanywithassistanceof Government furtherundertakestousereasonable Third AgreementinRelationtotheExpressRailLink”);and this provisionaresetoutinthesectionbelowheaded“The Link project(furtherdetailsrelatingtotheamendments the LandsDepartmentinconnectionwithExpressRail by anythirdparty)andthosecostswhichareincurred amounts arisingasaresultofanyclaimforcompensation land acquisition,clearanceandrelatedcosts(includingall activities undertheSecondXRLAgreement;and(iv)all the Companyand/orathirdpartycontractorcarryingout KCRC ascompensationfordamagearisingaresultof XRL Agreement,(iii)anyandallamountspayabletothe relation totheactivitiesbecarriedoutunderSecond any Governmentdepartment,bureau,agencyorbodyin third parties,(ii)anycharges,costsoramountspayableto Government isrequiredtobear(i)anycostspayable – workmanlike constructioncontractor; reasonably tobeexpectedfrom,acompetentand of, andbyutilisingsuchplant,goodsmaterials out withtheskillandcarereasonablytobeexpected construction activities,suchactivitiesshallbecarried XRL Agreementthatrelatetothecarryingoutof in thecaseofthoseactivitiesunderSecond the arrangements contained in the Third XRL Agreement, the arrangementscontainedinThirdXRLAgreement, have beenmadetotheSecondXRLAgreementreflect Pursuant totheThirdXRLAgreement,certainamendments of HK$2.20pershare,wasdistributedon12July2017. was distributedon13July2016andthesecondtranche,also The firsttrancheofthespecialdividendHK$2.20pershare (vi) (v) (iv) (iii) (ii) (i) integrated packageoftermsandprovidesthat: “Third XRLAgreement”).TheThirdAgreementcontainsan funding andcompletionoftheExpressRailLinkProject(the entered intothedeedofagreementrelatingtofurther On 30November2015,GovernmentandtheCompany Rail Link The ThirdAgreementinRelationtotheExpress obtained on11March2016). Government’s additionalfundingobligations(whichwas obtaining ofapprovaltheLegislativeCouncilfor (which wasobtainedon1February2016)and(b)the of approvaltheCompany’sindependentshareholders the ThirdXRLAgreementwassubjectto(a)obtaining overrun (ifany);and the questionofCompany’sliabilityforcurrentcost commencement ofoperationsontheExpressRailLink, Government reservestherighttoreferarbitration,after billion; management feepayabletotheCompanyHK$6.34 to theExpressRailLink,includinganincreaseinproject entrustment arrangementsenteredintoin2010relating certain amendmentswillbemadetotheexisting share, incasheachtranche); aggregate pershareintwoequaltranches(ofHK$2.20 the CompanywillpayaspecialdividendofHK$4.40in (if any),exceptforcertainagreedexcludedcosts; will bearandfinancetheportionwhichexceedsthatsum if theprojectcostexceedsHK$84.42billion,Company HK$84.42 billion; Government willbearandfinancetheprojectcostupto Annual Report 2017 187
Financials and Other Information Corporate Governance Business Review and Analysis Overview REPORT OF THE MEMBERS OF THE BOARD
including (i) amendments to the arrangements for the bearing D Project Agreement for the Financing, Design, and financing of the project cost; and (ii) an increase in the Construction and Operation of the West Island project management cost payable to the Company to an Line aggregate of HK$6.34 billion (which reflects the estimate The Project Agreement for the Financing, Design, Construction of the Company’s expected internal costs in performing its and Operation of the West Island Line (the “WIL Project obligations in relation to the Express Rail Link project). Agreement”) was entered into on 13 July 2009 between the Company and the Secretary for Transport and Housing for and C Maintenance Agreement for the on behalf of Government. Automated People Mover System at the Hong Kong International Airport The WIL Project Agreement contains provisions for the On 5 July 2013, the Company entered into a Maintenance financing of and the carrying out, or procuring the carrying Contract with the AA for the renewal of the then expired out, of the design, construction, completion, testing and maintenance agreement for the maintenance of the commissioning by the Company of the railway works Automated People Mover system at the Hong Kong required in order to bring the West Island Line into operation International Airport (the “System”) for a seven year period in accordance with the MTR Ordinance, the Operating (the “Maintenance Contract”), effective from 6 July 2013. It is Agreement between the Company and the Secretary for expected that the highest amount per year receivable from Transport and Housing for and on behalf of Government the AA under the Maintenance Contract will be no more than dated 9 August 2007 and the WIL Project Agreement. The HK$85 million. West Island Line will be owned, operated and maintained by the Company for its own account for the period of the The Maintenance Contract contains provisions relating to the Company’s railway franchise. The WIL Project Agreement operation and maintenance by the Company of the System includes provisions in relation to: and the carrying out by the Company of certain specified services in respect of the System, they including the following: • payment by Government of HK$12,252 million to the Company in consideration of the Company’s obligations • provisions stating that the duration of the Maintenance under the WIL Project Agreement, such sum constituting Contract shall be seven years from 6 July 2013 up to and funding support from Government for the Company to including 5 July 2020; implement the West Island Line project; • provisions relating to the performance of scheduled • within 24 months of commercial operations commencing maintenance works and overhaul of the System by the on the West Island Line on a revenue earning basis and Company; providing scheduled transport for the public (which • provisions relating to monitoring the System for any period was extended to no later than 30 June 2018 by breakdown and the Company providing repair services a supplemental agreement between the Company and where necessary; Government dated 23 December 2016), payment by the
• provisions relating to the standards to which the Company Company to Government of any “Repayment Amounts” must operate the System; for any over-estimation of certain capital expenditure, price escalation costs, land costs and the amount of contingency • provisions relating to the carrying out by the Company (as in relation to the railway works and reprovisioning, additional services), in certain circumstances, of upgrade remedial and improvement works (together with interest); work on the System; and • the design, construction and completion of the associated • provisions relating to the operations of and maintenance reprovisioning, remedial and improvement works (the cost for the extension of the System to the Midfield Concourse. of which shall be the responsibility of the Company) and the associated essential public infrastructure works (the cost of which shall be the responsibility of Government);
188 MTR Corporation • • construction andcontainsthefollowingprovisions: Company’s standardconditionsofcontractfortargetcost Contract 903isinsubstantiallythesameformas the SouthIslandLine(East)(the“Contract903Works”). Wong ChukHangStationandOceanParkinrespectof of certainworksrelatingtotheAberdeenChannelBridge, 14 November2014)(the“Contract903”)fortheconstruction Contract 903(asamendedbyasupplementalagreementon On 17May2011,theCompanyandLCALenteredinto Rule 14A.31oftheListingRules. “continuing connectedtransaction”withinthemeaningof Listing Rules.Contract903(asdefinedbelow)isthereforea the CompanywithinmeaningofChapter14A As explainedabove,LCALisa“connectedperson”of the SouthIslandLine(East) LCAL relatingtocertainworkson A Listing Rules. Transactions”) aremadeinaccordancewithRule14A.71ofthe (together, the“Non-GovernmentalContinuingConnected The followingdisclosures,inparagraphsAandBbelow Connected Transactions III • • Contract 903betweentheCompanyand Non-Governmental Continuing and claims in respect of death or injuries or damage to and claimsinrespectofdeathor injuriesordamageto expense sustainedbytheCompany andagainstalllosses LCAL shallindemnifytheCompany againstanylossor construction oftheContract903Works; the principalobligationofLCALunderContract903is to theWestIslandLineon12January2009. permit issuedbyGovernmenttotheCompanyinrelation environmental impactassessmentandthe the Companycarryingoutmeasuresspecifiedin the implementationofWestIslandLineproject;and involvement oftheLandsDepartmentinconnectionwith incurred orpaidbytheLandsDepartmentpursuantto third parties)andallcosts,expensesotheramounts costs arisingfromcertainclaimsforcompensationby implementation oftheWestIslandLineproject(savefor acquisition, clearanceandrelatedcostsarisingfromthe the Company’sresponsibilityforcostsrelatingtoland • • • • •
Contract 903; exceed 10%ofthetargetcostplusfeesascalculatedunder (liquidated damagesandgeneral)fordelayshallnot The totalliabilityofLCALtotheCompanyforalldamages have contributedtotherelevantdeath,illness,ordamage. their respectiveagents,employeesorrepresentatives,may the CompanyinconnectionwithContract903Works, Company, theEngineeroranyotherpersonemployedby proportionally totheextentthatanyactorneglectof LCAL’s liabilitytoindemnifytheCompanyisreduced of LCALunderContract903; be providedtotheCompanyinrespectofobligations a bondissuedbyChartisInsuranceHongKongLimitedwill liabilities; not lessthanHK$200millioninrelationtocertainofits LCAL shalleffectandmaintaininsurancewithalimitof and inthecourseofsuchemployment; of LCALoritssub-contractorssuppliersarisingout illness toanyworkmanorotherpersonintheemployment in respectoforconsequenceanyaccident,injury respect ofanydamagesorcompensationpayableatlaw proceedings, costs,chargesandexpenseswhatsoeverin and compensationagainstallclaims,demands, LCAL shallindemnifytheCompanyagainstalldamages LCAL; servants orothercontractors,notbeingemployedby on accountofanynegligencebytheCompany,itsagents, execute theContract903Worksonanypartofland,or the Contract903Works,orrightofCompanyto related tothepermanentuseoroccupationoflandby in relationthereto,exceptforcompensationordamages costs, chargesandexpenseswhatsoeverinrespectofor 903 Worksandagainstallclaims,proceedings,damages, of orinconsequencetheexecutionContract any personorpropertywhatsoeverwhichmayariseout terms oftheContract; revise thefeespayabletoLCAL inaccordancewiththe Works mayvaryandtheCompany willbeobligedto LCAL. Fromtimetothescope oftheContract903 the targetcostforContract903Worksandfeesto under Contract903istheSum,whichincludes the totalamountpayablebyCompanytoLCAL Annual Report 2017 189
Financials and Other Information Corporate Governance Business Review and Analysis Overview REPORT OF THE MEMBERS OF THE BOARD
• the Company is obliged to pay the target cost for the Contract 904 is in substantially the same form as the Contract 903 Works to LCAL on a scheduled basis set Company’s standard conditions of contract for engineering out in Contract 903. If the final total cost of the Contract works and contains the following provisions: 903 Works exceeds or is less than the target cost for the • the principal obligation of the Contractors is the Works, the deficit or, as the case may be, the excess will construction of the Contract 904 Works. The obligations of be borne by or, as the case may be, distributed to the the Contractors under Contract 904 are joint and several; Company and LCAL on a basis calculated in accordance with Contract 903; • the Contractors shall indemnify the Company against any loss or expense sustained by the Company and against all • the maximum aggregate amount payable annually by the losses and claims in respect of death or injuries or damage Company under Contract 903 is approximately HK$1,400 to any person or property whatsoever which may arise million. As payments by the Company to LCAL are paid on out of or in consequence of the execution of the Contract a scheduled basis as set out in Contract 903, the maximum 904 Works and against all claims, proceedings, damages, aggregate annual amount is set by reference to the costs, charges and expenses whatsoever in respect of or highest amount payable by the Company in any given in relation thereto, except for compensation or damages year under such schedule; related to the permanent use or occupation of land by • the Company is obliged to effect “Contractor’s All Risks” the Contract 904 Works, or the right of the Company to and “Third Party Liability” insurance with a third party execute the Contract 904 Works on any part of the land, or liability limit of not less than HK$700 million. In addition, on account of any negligence by the Company, its agents, LCAL has agreed to separately purchase additional cover servants or other contractors, not being employed by for “Third Party Liability” insurance in the amount of the Contractors; HK$3,638 million; and • the Contractors shall indemnify the Company against • the Company may at any time, by giving 30 days’ notice all damages and compensation and against all claims, in writing to LCAL, terminate Contract 903 but without demands, proceedings, costs, charges and expenses prejudice to any claims by the Company for breach of whatsoever in respect of any damages or compensation contract. payable at law in respect of or in consequence of any accident, injury or illness to any workman or other B Contract 904 between the Company, LCAL person in the employment of the Contractors or their and JHL relating to certain works on the South Island Line (East) subcontractors or suppliers arising out of and in the course of such employment; As explained above, each of LCAL and JHL is a “connected person” of the Company within the meaning of Chapter 14A of • the Contractors shall effect and maintain insurance with a the Listing Rules. Contract 904 (as defined below) is therefore limit of not less than HK$200 million in relation to certain of a “continuing connected transaction” within the meaning of its liabilities;
Rule 14A.31 of the Listing Rules. • a bond issued by Chartis Insurance Hong Kong Limited will On 17 May 2011, the Company, LCAL and JHL (LCAL and be provided to the Company in respect of the obligations JHL being “the Contractors”) entered into Contract 904 (as of the Contractors under Contract 904;
amended by a supplemental agreement on 7 June 2013) (the • the Contractors’ liability to indemnify the Company is “Contract 904”) for the construction of certain works relating to reduced proportionally to the extent that any act or Lei Tung Station and South Horizons Station in respect of the neglect of the Company, the Engineer or any other South Island Line (East) (the “Contract 904 Works”).
190 MTR Corporation Continuing Connected Transactions, paragraph B(I)(iii)(a) of Continuing ConnectedTransactions,paragraphB(I)(iii)(a)of Merger-related Waiver; (ii) in the case of the Non Merger-related Continuing ConnectedTransactions,paragraphB(I)(i)ofthe in accordancewith(i)thecaseofMerger-related Connected Transactions(collectively“Transactions”)and Transactions andtheNon-GovernmentalContinuing Transactions, theNonMerger-relatedContinuingConnected In relationtotheMerger-relatedContinuingConnected • • • • • breach ofcontract. but withoutprejudicetoanyclaimsbytheCompanyfor in writingtotheContractors,terminateContract904 the Companymayatanytime,bygiving30days’notice amount ofAU$485million;and additional coverfor“ThirdPartyLiability”insuranceinthe the Contractorshaveagreedtoseparatelypurchase liability limitofnotlessthanHK$700million.Inaddition, and “ThirdPartyLiability”insurancewithathirdparty the Companyisobligedtoeffect“Contractor’sAllRisks” in anygivenyearundersuchschedule; reference tothehighestamountpayablebyCompany 904, themaximumaggregateannualamountissetby are paidonascheduledbasisassetoutinContract million. AspaymentsbytheCompanytoContractors Company underContract904isapproximatelyHK$1,400 the maximumaggregateamountpayableannuallyby accordance withthetermsofContract904; Company willbeobligedtorevisetheContractSumin From timetothescopeofWorksmayvaryand Contractors underContract904istheSum. the totalamountpayablebyCompanyto not exceed10%ofthecontractsumunderContract; damages (liquidatedandgeneral)fordelayshall the totalliabilityofContractorstoCompanyforall death, illness,ordamage; or representatives,mayhavecontributedtotherelevant Contract 904Works,theirrespectiveagents,employees person employedbytheCompanyinconnectionwith Transactions, inaddition,that: in thecaseofNon-GovernmentalContinuingConnected (b) (a) to theBoardconfirmingthat: 14A.56 oftheListingRules,auditorshaveprovidedaletter Governmental ContinuingConnectedTransactions,Rule B(I)(iii)(b) oftheWaiver;and(iii)incaseNon- related ContinuingConnectedTransactions,paragraph Merger-related Waiver;(ii)inthecaseofNonMerger- Continuing ConnectedTransactions,paragraphB(I)(ii)ofthe In accordancewith(i)inthecaseofMerger-related the HongKongInstituteofCertifiedPublicAccountants. Transactions undertheHongKongListingRules”issuedby Practice Note740“Auditor’sLetteronContinuingConnected of HistoricalFinancialInformation”andwithreferenceto “Assurance EngagementsOtherThanAuditsorReviews Kong StandardonAssuranceEngagements3000(Revised) carry outareviewoftheTransactionsinaccordancewithHong The Companyhasengagedtheauditorsofto (3) (2) (1) confirmed thateachoftheTransactionswasenteredinto: Non-executive DirectorsoftheCompanyhavereviewedand Listing Rules,theCompanyconfirmsthatIndependent Continuing ConnectedTransactions,Rule14A.55ofthe the Waiver;and(iii)incaseofNon-Governmental agreements governingsuchtransactions;and in allmaterialrespects,accordancewiththerelevant believe thatanyoftheTransactionswasnotenteredinto, nothing hascometotheirattentionthatcausesthem approved bytheBoard; to believethatanyoftheTransactionshasnotbeen nothing hascometotheirattentionthatcausesthem Company’s shareholdersasawhole. that arefairandreasonableintheinterestsof according totheagreementgoverningthemonterms of theListingRules);and on normalcommercialtermsorbetter(withinthemeaning meaning oftheListingRules)Group; in theordinaryandusualcourseofbusiness(within Annual Report 2017 191
Financials and Other Information Corporate Governance Business Review and Analysis Overview REPORT OF THE MEMBERS OF THE BOARD
(c) for transactions involving the provision of goods or Agreements (as described on pages 180 to 182 and in services by the Group, nothing has come to their attention paragraph E below) and the sale of the shares in the KCRC that causes them to believe that such transactions were Subsidiaries (as defined on page 180) that were transferred not, in all material respects, in accordance with the pricing to the Company under the Sale and Purchase Agreement policies of the Group; and which was entered into on 9 August 2007 between the Company and KCRC. (d) with respect to the aggregate amount of each of such transactions, nothing has come to their attention that In addition to the initial payments above, the Company is also causes them to believe that such transactions have required to make the following payments to KCRC exceeded the relevant annual caps as set by the Company going forward: in respect of each of such transactions. • fixed annual payments of HK$750 million payable under Additional Information in respect of the Service Concession Agreement, for the right to use the Rail Merger and operate the concession property for the operation of the service concession, in arrears on the day immediately The Rail Merger consisted of a number of separate preceding each anniversary of the Merger Date which agreements, each of which was detailed in the circular issued falls during the concession period in respect of the 12 by the Company on 3 September 2007 in connection with the month period up to and including the date on which such Rail Merger, and which together formed a complete package payment falls due; and deal which was approved by the independent shareholders of the Company at an Extraordinary General Meeting held on 9 • variable annual payments payable under the Service October 2007. The information set out at paragraph A below Concession Agreement, for the right to use and operate describes the payment framework adopted in respect of the the concession property for the operation of the service Rail Merger and paragraphs B to E below set out, summaries concession, in each case, calculated on a tiered basis by of the various agreements entered into by the Company in reference to the amount of revenue from the KCRC system respect of the Rail Merger in addition to those agreements (as determined in accordance with the Service Concession disclosed above under the heading “Merger-related Agreement) for each financial year of the Company. No Continuing Connected Transactions”. variable annual payment is payable in respect of the first 36 months following the Merger Date. A Payments in connection with Merger-related Agreements As a complete package deal, other than the payment elements In connection with the Rail Merger, the following initial described above and unless stated otherwise in the relevant payments were made by the Company to KCRC on paragraph below, no specific allocation was made between 2 December 2007 (being the Merger Date): the various elements of the Rail Merger.
• an upfront payment of HK$4.25 billion, payable under the B Service Concession Agreement Service Concession Agreement (as described in paragraph The Service Concession Agreement was entered into on B below), being the upfront fee for the right to operate the 9 August 2007 between the Company and KCRC. Service Concession (as defined in paragraph B below) and The Service Concession Agreement contains provisions in the consideration for the purchased rail assets; and relation to the grant and operation of a service concession • an upfront payment of HK$7.79 billion payable under the and licence granted by KCRC to the Company (the “Service Merger Framework Agreement (as described on page 179) Concession”), including in relation to: in consideration for the execution of the Property Package
192 MTR Corporation contracts (the“PurchasedRailAssets”)fromKCRC. pursuant towhichtheCompanyacquiredcertainassetsand The SaleandPurchaseAgreementprovidestheterms 9 August2007betweentheCompanyandKCRC. The SaleandPurchaseAgreementwasenteredintoon C • • • • • • • • Sale andPurchaseAgreement concession period. which anyoftheconcessionpropertyislocatedduring or arisingfromtheconcessionpropertyandlandon risks, liabilitiesand/orcostswhatsoeverassociatedwith subject tocertainconditions,theCompanybearingall relation totheconcessionproperty;and the rightsandrestrictionsofCompanyKCRCin KCRC attheendofconcessionperiod; Company ifAdditionalConcessionPropertyisreturnedto the regimeforcompensationpayablebyKCRCto Property”); future concessionproperty(the“AdditionalConcession Company beingthelegalandbeneficialownerofcertain concession propertyasattheMergerDateand KCRC remainingthelegalandbeneficialownerof (as describedinparagraphAabove); and fixedannualpaymentsvariable the paymentsofanupfrontpaymentHK$4.25billion revoked; the Company’sfranchiserelatingtoKCRCrailwayis concession period.TheServiceConcessionwillendif of theKCRCsystemuponexpiryortermination Merger Date)oftheServiceConcessionandredelivery the term(beinganinitialperiodof50yearsfrom railway land; the grantofalicencetoaccessandusecertainKCRC certain specifiedstandards; than KCRCrailwaylandreferredtoimmediatelybelow) access, useandoperatetheconcessionproperty(other the grantofServiceConcessiontoCompany
On 21 March 2017, the Company announced that it and On 21March2017,theCompanyannouncedthatitand on 16April2013toamendthefareadjustmentmechanism. conducted in2017.TheCompanyandGovernmentagreed such reviewswasundertakenin2013andthesecond mechanism issubjecttoreviewperiodically.Thefirstof Under theOperatingAgreement,fareadjustment • • • • • • includes termsrelatingto: MTRC railwayandKCRCrailway.TheOperatingAgreement provide for,amongstotherthings,thenatureofcombined Agreement differsfromthepreviousOperatingto Agreement whichwassignedon30June2000.TheOperating The OperatingAgreementisbasedontheprevious the MTROrdinance. Housing forandonbehalfofGovernmentascontemplatedin between theCompanyandSecretaryforTransport The OperatingAgreementwasenteredintoon9August2007 D paragraph AaboveandinEbelow). of HK$7.79billionforthepropertypackage(asdescribedin and actaspropertymanagers)formedpartofthepayment the Category1APropertiesreferredtoatparagraphEbelow for thesaleofsharesinKCRCSubsidiaries(whichown of theupfrontpaymentHK$4.25billion.Theconsideration (excluding thesharesinKCRCSubsidiaries)formedpart The considerationforthesaleofPurchasedRailAssets Operating Agreement expiry orterminationofthefranchise. Ordinance totheCompanyinrelationasuspension, compensation whichmaybepayableundertheMTR Company’s fares;and the adjustmentmechanismtobeappliedcertainof operation andownershipstructureofnewrailways; a frameworkfortheawardofnewprojectsand passenger services; the design,constructionandmaintenanceofrailway; Ordinance; the extensionofCompany’sfranchiseunderMTR Annual Report 2017 193
Financials and Other Information Corporate Governance Business Review and Analysis Overview REPORT OF THE MEMBERS OF THE BOARD
Government had agreed to maintain the fare adjustment Metropolis Equity Sub-participation Agreement mechanism formula and direct-drive nature of such formula, The Metropolis Equity Sub-participation Agreement save for certain consequential changes as a result of the review was entered into on 9 August 2007 between KCRC and of the formula having been advanced by one year. In addition, the Company. KCRC is obliged to act on the Company’s the wider terms of the Operating Agreement are subject to instructions, and pay to the Company any distributions, or review every five years and such a review was also undertaken proceeds of sale, relating to its shareholding in the property in 2013. As a result of such review, the Company and management company The Metropolis Management Government agreed measures in enhancing communication Company Limited (“Metropolis”). The issued share capital of and liaison on operational arrangements. Metropolis is 25,500 A shares (which are held by KCRC) and 24,500 B shares (which are held by Cheung Kong Property E Additional Property Package Agreements Management Limited). Metropolis’ business is Category 1A Properties property management. The Category 1A Properties are held by the KCRC Subsidiaries. Under the terms of the Sale and Purchase Agreement, F Application of Merger-related Waiver the Company acquired from KCRC the shares in the KCRC In relation to the Operating Agreement and the Service Subsidiaries (and thereby indirectly acquired the “Category 1A Concession Agreement, pursuant to paragraph A of the Properties”). Merger-related Waiver, the Stock Exchange granted a waiver to the Company from strict compliance with all the continuing Category 1B Properties connected transaction requirements of Chapter 14A of the On 9 August 2007, KCRC and the Company entered into an Listing Rules. agreement for sale and purchase under which KCRC agreed to assign certain properties (the “Category 1B Properties”) to the Company on the Merger Date. The relevant assignment was CAPITAL AND REVENUE executed between KCRC and the Company on 2 December 2007. EXPENDITURE There are defined procedures for the appraisal, review Category 4 Properties and approval of major capital and revenue expenditures. On 9 August 2007, Government entered into an undertaking All project expenditures over 0.2% of the net assets of the that it would, within periods to be agreed between the Company and the employment of consultancy services over Company and Government, offer to the Company a private 0.1% of the net assets of the Company require the approval of treaty grant in respect of certain development sites (the the Board. “Category 4 Properties”). The terms of each private treaty grant shall generally be determined by Government, and the premium for each private treaty grant shall be assessed on a REPORTING AND MONITORING full market value basis ignoring the presence of the railway There is a comprehensive budgeting system for all other than the Tin Shui Wai Terminus, Light Rail, Yuen Long, operational and business activities, with an annual budget New Territories. approved by the Board. Monthly results of the Company’s operations, businesses and projects are reported against the On 9 August 2007, the Company issued a letter to KCRC budget to the Board and updated forecasts for the year are confirming that, if there should be any railway premises on the prepared regularly. Category 4 Properties, the Company would assign the railway premises to KCRC.
194 MTR Corporation cyber-attacks. and arereviewedregularlytoprotect theCompanyfrom security. Varioussecuritycontrolshavebeenimplemented management andperformanceofallmattersrelatingtocyber to cybersecurityfortheCompany.Itsteersandoversees Committee setsthedirection,strategy,andpoliciesrelated of ITservicesoperation.TheCorporateCyberSecurity with therequiredstandardforcomprehensivescope Information SecurityManagementSystemthatcomplies the CompanyhasbeencertifiedwithISO27001:2013on critical applicationsisconductedannually.Forcybersecurity, certified underISO9001:2015.Disasterrecoveryrehearsalon also softwaredevelopmentandmaintenance,havebeen and support,helpdeskoperationsupportservices, of dataprocessing.TheCompany’scomputercentreoperation accuracy andcompletenessoffinancialrecordsefficiency reviews ontheoperationofcomputersystemstoensure There aredefinedprocedures,controlsandregularquality COMPUTER PROCESSING are approvedattheBoardlevel. transactions, includingthecreditriskmanagementframework, Major financingtransactionsandguidelinesforderivatives within theCompany’sTreasuryDepartment. Risk approach.Thereisalsoappropriatesegregationofduties monitoring counterpartycreditexposureusingtheValue-at- including acomprehensivecreditriskmanagementsystemfor are inplacetocontroltheCompany’sderivativesactivities, rate andcurrencyrisks.Prudentguidelinesprocedures as hedgingtoolstomanagetheGroup’sexposureinterest interest rateswapsandcrosscurrencyareusedonly environment. Derivativefinancialinstrumentssuchas in theCompany’sfinancingrequirementsandmarket model isreviewedandrefinedperiodicallytoreflectchanges rate risks,currencyexposureandfinancinghorizon.The instruments, fixedandfloatingratedebt,maturities,interest Financing Modelwhichdefinesthepreferredmixoffinancing Company’s debtportfoliowithreferencetothePreferred approved guidelinesfromtheBoard.Itmanages The Company’sTreasuryDepartmentoperateswithin TREASURY MANAGEMENT
GOING CONCERN the Group. Insurance Policyalsoindemnifiestheotherdirectorswithin in theinsurancemarketandotherrelevantfactors. TheD&O Company (the“D&OInsurancePolicy”)inlightofrecenttrends the Directors’andOfficers’liabilityinsurancepolicyof is provided,theCompanyundertakesanannualreviewof when thisReportwasapproved.Toensuresufficientcoverage the yearended31December2017andon8March2018 criminal proceedings. TherelevantArticlewasinforceduring her intheexecutionofhis/herofficedefendinganycivilor out ofitsownassetsagainstanyliabilityincurredbyhim/ the CompanywillindemnifyeveryDirectorof Pursuant totheArticlesofAssociation,subjectstatutes, PROVISION PERMITTED INDEMNITY Hong Kong,8March2018 Company Secretary Gillian ElizabethMeller For andonbehalfoftheBoard Directors tofixtheirremuneration. forthcoming AGMtoreappointthemandauthorisethe to continueinoffice.Aresolutionwillbeproposedatthe The retiringauditors,KPMG,havesignifiedtheirwillingness AUDITORS for theforeseeablefuture. Group hassufficientresourcestocontinueasagoingconcern forecast forthefollowingfiveyearsandissatisfiedthat the Group’sbudgetfor2018,togetherwithlonger-term prepared onagoingconcernbasis.TheBoardhasreviewed The ConsolidatedAccountsonpages201to294havebeen Annual Report 2017
195
Financials and Other Information Corporate Governance Business Review and Analysis Overview REPORT OF THE MEMBERS OF THE BOARD
DIRECTORS OF SUBSIDIARIES The names of all directors of the subsidiaries of the Company during the year and up to the date of this Report (unless otherwise stated) are listed below:
Alternate Alternate Name Director Director Name Director Director Beacham, Alan Edward* √(Resigned) Leung Nga-yee, Theresa* √(Resigned) Bellette, Irene Vera √(Resigned) Leung Ping-kin √ Chan Chi-kun √ Leung Yiu-fai, David √ Chan Hin-fu* √(Resigned) Lezala, Andrew Peter* √ Chan Wai-man, Raymond* √ Li Sau-lin, Linda* √(Ceased) √ Dr Chan Yuen Tak-fai, Dorothy √ Lo, Julian √ Cheng Kin-wai √(Resigned) Long, Jeremy Paul Warwick* √ Cheng Wai-ching, Margaret* √ Lundqvist, Curt Ove √(Resigned) Cheung Siu-wa, Morris* √ Lung Tze-ho* √ √ Choi Tak-tsan* √ Professor Ma Si-hang, Frederick √ Chow Chiu-wai √ McCusker, Andrew* √ Chow Chun-ling* √ McKenzie, Andrew Charles* √ Chu Fung-kuen, Margaret √ Meller, Gillian Elizabeth* √ Collis, Charles G. √ Meyer, Peter* √ √(Resigned) Damm, Bo Fredrik √ Mociak, Karl Heinz* √(Resigned) √(Ceased) Downie, Brian Francis* √ √ Moros, Tony Antonio √ Espinoza Ceballos, Natalia √ Murphy, Stephen John √ Dr Ewen, Peter Ronald √ Mylvaganam, Deva Rajan* √ Dr Fong Ching, Eddy √ Nelson, Michael John* √ Fung Wai-yee* √ Nilsson, Per Håkan Lennart* √ Hammarström, Stig Christer √(Resigned) Norris, Mark Frederick* √ Hellners, Karl Erik Hjalmar* √ Oscarsson, Karl Johan √ Ho Ka-wa* √ Pang Hoi-hing* √ Holmberg Wallberg, Lena Cecilia* √(Resigned) Pira, Tomas* √ Hor Wai-hong √ Qian Yu-hong √ Houghton, Michael David √ Seabury, Gary George* √ Hui Leung-wah, Herbert* √ Seto Siu-wah, Lisa* √ √ Inglis, Stuart Andrew* √(Resigned) Suen Yiu-tat √ Jerbi, Mohamed Moncef √(Resigned) Tang Chi-fai, David* √ Jim Kwok-wah* √ Tong Ying-fai √(Resigned) Johnson, Glenn H. √(Resigned) Viinapuu, Hans Peter* √(Resigned) Jones, Niel L. √ Wan Chi-wah √ Dr Kam Chak-pui, Jacob* √ Warren, Nicholas P. √(Resigned) Kee Wing-man, Denise √ Wennerberg, Matti Sigfrid Hasse √ Keefe, Richard Michael* √ Wong Chi-chung √ Kwan Mun-yee, Stella* √ Dr Wong Chi-yun, Allan √ Kwan Wai-hung √(Resigned) Wong Kwan-wai, Sammy* √ Kwok Lai-kay, Lena* √ √ Wong Ping-sau* √ Kwong Chung-hing* √ Wong Wing-kin √ Lai Ching-kai √ Woo Shui-wah* √(Resigned) Langridge, Neil Andrew* √(Resigned) Xia Jing √ Lau Ping-cheung, Kaizer √ Xu Muhan* √ Lau Tin-shing, Adi √ Yam Pak-nin* √ √ Lau Wai-ming √ Yeung Mei-chun, Jeny* √ Law Sui-wah* √ Young Ka-fan, Glen √ Lee Kar-yun* √ Yu Hon-kit, Henry √(Resigned) Lee Wai-ying* √ Yu Ka-yin* √(Resigned) √(Resigned) Lee Yuen-ling* √ Yuen Lai-ki* √ Leong Kwok-kuen, Lincoln* √ Yuen Lap-hang √ √(Resigned)
* Person who serves as a director and/or an alternate director in more than one subsidiary.
196 MTR Corporation CONTENTS OFCONSOLIDATEDACCOUNTSANDNOTES 244 241 241 240 239 235 234 233 230 229 229 228 227 226 226 221 219 219 218 218 218 217 217 206 206 205 204 203 202 201 198 Notes totheConsolidatedAccounts Consolidated Accounts 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Consolidated CashFlowStatement Consolidated StatementofChangesinEquity Consolidated StatementofFinancialPosition Consolidated StatementofComprehensiveIncome Consolidated ProfitandLossAccount Independent Auditor’sReport Property DevelopmentinProgress by theHKSARGovernment Other RailwayConstructioninProgressunderEntrustment Railway ConstructioninProgress Property ManagementRights Service ConcessionAssets Other Property,PlantandEquipment Investment Properties Other ComprehensiveIncome Segmental Information Earnings PerShare Dividends Income Tax Interest andFinanceCharges Depreciation andAmortisation Profit onHongKongPropertyDevelopment Directorate Remuneration ofMemberstheBoardandExecutive Operating Expenses Revenue fromOtherBusinesses International Subsidiaries Revenue andExpensesRelatingtoMainlandofChina Management Businesses Revenue fromHongKongPropertyRentaland Revenue fromHongKongStationCommercialBusinesses Revenue fromHongKongTransportOperations Rail MergerwithKowloon-CantonRailwayCorporation Principal AccountingPolicies Statement ofCompliance 294 294 292 291 287 284 283 280 278 275 272 271 268 266 266 265 265 264 260 259 259 257 257 253 252 252 250 246 246 54 53 52 51 50 49 48 47 46 45 44 43 42 41 40 39 38 37 36 35 34 33 32 31 30 29 28 27 26 Approval ofConsolidatedAccounts Accounting YearEnded31December2017 Interpretations IssuedbutNotYetEffectivefortheAnnual Possible ImpactofAmendments,NewStandardsand Accounting EstimatesandJudgements Company-level StatementofFinancialPosition Commitments Material RelatedPartyTransactions Property Development Interests inJointOperationsRespectofHongKong Defined BenefitRetirementScheme Retirement Schemes Share-based Payments Fair ValueMeasurement Other CashFlowInformation Capital Management Company-level MovementsinComponentsofEquityand Share Capital,SharesHeldforIncentiveScheme, Income TaxintheStatementsofFinancialPosition Loan fromHoldersofNon-controllingInterests Obligations underServiceConcession Amounts DuetoRelatedParties Creditors andOtherPayables Loans andOtherObligations Cash, BankBalancesandDeposits Amounts DuefromRelatedParties Debtors andOtherReceivables Stores andSpares Derivative FinancialAssetsandLiabilities Properties HeldforSale Investments inSecurities Interests inAssociatesandJointVenture Investments inSubsidiaries Deferred Expenditure Annual Report 2017 197
Financials and Other Information Corporate Governance Business Review and Analysis Overview INDEPENDENT AUDITOR’S REPORT
Independent Auditor’s Report to the Members of MTR Corporation Limited (incorporated in Hong Kong with limited liability)
Opinion We have audited the consolidated accounts of MTR Corporation Limited (“the Company”) and its subsidiaries (“the Group”) set out on pages 201 to 294, which comprise the consolidated statement of financial position as at 31 December 2017, the consolidated profit and loss account, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended and notes to the consolidated accounts, including a summary of significant accounting policies.
In our opinion, the consolidated accounts give a true and fair view of the consolidated financial position of the Group as at 31 December 2017 and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards (“HKFRSs”) issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”) and have been properly prepared in compliance with the Hong Kong Companies Ordinance.
Basis for opinion We conducted our audit in accordance with Hong Kong Standards on Auditing (“HKSAs”) issued by the HKICPA. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated accounts section of our report. We are independent of the Group in accordance with the HKICPA’s Code of Ethics for Professional Accountants (“the Code”) and we have fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated accounts of the current period. These matters were addressed in the context of our audit of the consolidated accounts as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Railway construction in progress under entrustment by the HKSAR Government
Refer to note 24 to the consolidated accounts and the accounting policies in note 2Z
The Key Audit Matter How the matter was addressed in our audit
The Group and the Government of the Hong Kong Special Administrative Our audit procedures in relation to railway construction in progress under Region (“HKSAR Government”) have entered into certain entrustment entrustment by the HKSAR Government included the following: arrangements whereby the Group has been entrusted by the HKSAR Government to proceed with the planning, design, construction, testing • inspecting the minutes of the relevant committees of the Group and and commissioning of the Hong Kong Section of the Guangzhou- discussing with management the current status of the XRL and SCL Shenzhen-Hong Kong Express Rail Link (“the XRL”) and the Shatin to projects, including the costs incurred to date, the remaining critical Central Link (“the SCL”). milestones and estimated costs to complete including contract claims, and the assessment of the financial implications of these projects for the As the HKSAR Government is the owner of both the XRL and the SCL, the Group; financing of the development of these two railway lines is borne by the HKSAR Government, with the Group receiving project management fees. • assessing the design and implementation of management’s key internal controls over the determination of estimated costs to complete the XRL Pursuant to an agreement entered into with the HKSAR Government on 30 and the SCL and the allocation of costs to each of these projects; November 2015, the Group will bear and finance project costs for the XRL which exceed HK$84.42 billion and the HKSAR Government reserves the • evaluating the qualifications, experience, expertise, independence and right to refer to arbitration the question of the Group’s liability, if any, in objectivity of the independent civil engineering consultant engaged by respect of the project costs borne and financed by the HKSAR Government management for XRL; which exceed HK$65 billion up to HK$84.42 billion. In the event that • discussing with the independent civil engineering consultant the XRL the Group is found to be liable under the relevant XRL entrustment project status and the estimated costs to complete the project, including agreements, the Group’s liability for such costs is currently limited to the the forecast total project costs and the risk of these exceeding HK$84.42 amount of the project management fees and certain other additional fees billion; received by the Group under the agreements. • comparing, on a sample basis, the costs to complete the XRL and Management engaged an independent civil engineering consultant to SCL as assessed by management and, for the XRL, as assessed by the provide an independent assessment of the completion status of the XRL independent civil engineering consultant, with relevant underlying project and of management’s estimates of the remaining costs to complete documentation; the XRL project, project claims and the overall forecast total project costs. • comparing costs incurred during the current year in respect of the XRL In December 2017, the Group completed a detailed review of the and SCL with underlying contracts and interim certificates certifying the estimated costs to complete for the SCL under the entrustment agreement value of work performed; for the construction and commissioning of the SCL dated 29 May 2012 (“SCL Entrustment Agreement”). Following the review, the latest cost • holding discussions with management and the Group’s external legal estimate has been increased from HK$70.83 billion to HK$87.33 billion and advisors to assess the Company’s legal obligations and financial exposure was submitted to the HKSAR Government for review. In the event that the in connection with these projects; Group is found to be liable under the SCL Entrustment Agreement, the Group’s liability is currently limited to the aggregate fees received by the • inspecting the relevant entrustment agreements to ascertain project Group under the relevant SCL agreements. management fees receivable and comparing the receipt of such project management fees for the year with bank statements and other relevant We identified railway construction in progress under entrustment by the documentation; and HKSAR Government as a key audit matter because the arrangements in respect of these railway projects are highly complex and convey rights and • assessing the disclosures in the consolidated accounts in relation to the obligations on the Group which could potentially have significant financial XRL and SCL projects with reference to the requirements of the prevailing implications for the Group. accounting standards.
198 MTR Corporation fact. Wehavenothingtoreportinthis regard. If, basedontheworkwehaveperformed, weconcludethatthereisamaterialmisstatementofthisotherinformation, wearerequiredtoreportthat materially misstated. the otherinformationismateriallyinconsistent withtheconsolidatedaccountsorourknowledgeobtainedin auditorotherwiseappearstobe In connectionwithourauditoftheconsolidated accounts,ourresponsibilityistoreadtheotherinformationand, indoingso,considerwhether Our opinionontheconsolidatedaccountsdoesnotcoverotherinformation andwedonotexpressanyformofassuranceconclusionthereon. the consolidatedaccountsandourauditor’sreportthereon. The directorsareresponsiblefortheotherinformation.information comprisesalltheinformationincludedinannualreport,otherthan Information otherthantheconsolidatedaccounts andauditor’sreportthereon methodology, marketyieldsandrents. and estimation,particularlyinselectingtheappropriatevaluation the determinationoffairvaluesinvolvessignificantjudgement of thesignificanceIPtoconsolidatedaccountsandbecause We identifiedvaluationoftheGroup’sIPasakeyauditmatterbecause valuer basedonindependentvaluations. The fairvaluesoftheGroup’sIPwereassessedbyanexternalproperty shopping mallsandofficepremises. The Group’sIP,whicharelocatedinHongKong,principallycomprise recorded intheconsolidatedprofitandlossaccountofHK$6,314million. million, witharevaluationgainfortheyearended31December2017 The fairvalueoftheGroup’sIPasat31December2017wasHK$77,086 The KeyAuditMatter Refer tonote19theconsolidatedaccountsandaccountingpoliciesin2F(i) Valuation ofcompletedinvestmentproperties(“IP”) the keyassumptionssuchasexpectedrevenuelevels. can involveasignificantdegreeofmanagementjudgementindetermining carried atrevaluedamountsasakeyauditmatterbecausetheassessment We identifiedthepotentialimpairmentoffixedassetsotherthan the assets. which mayaffecttheexpectedremainingusefullivesandcarryingvalueof account, interalia,theimpactofrevenueassumptionsandtechnicalfactors exist, managementperformsdetailedimpairmentreviews,takinginto for potentialindicatorsofimpairment.Forassetswheresuch The carryingvaluesoftheseassetsarereviewedannuallybymanagement December 2017amountedtoHK$5,162million. the relateddepreciationandamortisationchargeforyearended31 revalued amountsasat31December2017totalledHK$128,938millionand The carryingvalueoftheGroup’sfixedassetsotherthancarriedat The KeyAuditMatter Refer tonotes20-21theconsolidatedaccountsandaccountingpoliciesinnote2H Assessing potentialimpairmentoffixedassetsotherthancarriedatrevaluedamounts How thematterwasaddressedinouraudit How thematterwasaddressedinouraudit • • • • • following: Our auditprocedurestoassessthevaluationofGroup’sIPincluded • • • • • other thanassetscarriedatrevaluedamountsincludedthefollowing: Our auditprocedurestoassessthepotentialimpairmentoffixedassets
underlying contractsanddocumentation,onasamplebasis. market rents,providedbytheGrouptoexternalpropertyvaluerwith comparing thetenancyinformation,includingoccupancyratesand statistics; and comparable availablemarketdataandgovernmentproduced by comparing,onasamplebasis,thekeyestimatesadoptedwith valuations, includingprevailingmarketrentsandyieldsapplied and challengingthekeyassumptionsestimatesadoptedin holding discussionswithmanagementandtheexternalpropertyvaluer applied byotherexternalpropertyvaluersforsimilartypes; evaluating thevaluationmethodologiesadoptedwithreferencetothose the externalpropertyvaluer; evaluating theindependence,qualifications,expertiseandobjectivityof property valuer; obtaining andinspectingtheIPvaluationreportpreparedbyexternal any indicatorsofmanagementbiasintheirselection. used toderivethemostsensitiveassumptionsandwhethertherewere assumptions forrevenuelevelsadoptedandconsideringtheinformation performing sensitivityanalysesforthediscountratesappliedand year’s impairmentassessments;and significant variancesidentifiedandconsideringtheimpactoncurrent assessments withactualresultsforthecurrentyear,investigating comparing theassumptionsadoptedinprioryear’simpairment premiums; similar companiestakingintoaccountregionalandindustryspecificrisk assessments bycomparisonwithavailablefinancialinformationofother assessing thediscountratesadoptedbymanagementinimpairment broader cityspecificdevelopments; revenue levelsachievedinthecurrentyear,futureoperatingplansand therein, includingrevenueassumptions,withreferencetotheactual management’s impairmentassessmentsandtheassumptionsadopted where potentialindicatorsofimpairmentwereidentified,evaluating impairment oftheseassets; assumptions underlyingmanagement’sassessmentofpotential obtaining, discussingwithmanagementandevaluatingthekey Annual Report 2017 199
Financials and Other Information Corporate Governance Business Review and Analysis Overview INDEPENDENT AUDITOR’S REPORT
Responsibilities of the directors for the consolidated accounts The directors are responsible for the preparation of the consolidated accounts that give a true and fair view in accordance with HKFRSs issued by the HKICPA and the Hong Kong Companies Ordinance, and for such internal control as the directors determine is necessary to enable the preparation of consolidated accounts that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated accounts, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.
The directors are assisted by the Audit Committee in discharging their responsibilities for overseeing the Group’s financial reporting process.
Auditor’s responsibilities for the audit of the consolidated accounts Our objectives are to obtain reasonable assurance about whether the consolidated accounts as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. This report is made solely to you, as a body, in accordance with section 405 of the Hong Kong Companies Ordinance, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with HKSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated accounts.
As part of an audit in accordance with HKSAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated accounts, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. • Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated accounts or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated accounts, including the disclosures, and whether the consolidated accounts represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated accounts. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with the Audit Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide the Audit Committee with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with the Audit Committee, we determine those matters that were of most significance in the audit of the consolidated accounts of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor’s report is Melissa M C Wu.
KPMG
Certified Public Accountants
8th Floor, Prince’s Building 10 Chater Road Central, Hong Kong 8 March 2018
200 MTR Corporation CONSOLIDATED PROFIT AND LOSS ACCOUNT
for the year ended 31 December in HK$ million Note 2017 2016 Revenue from Hong Kong transport operations 4 18,201 17,655 Revenue from Hong Kong station commercial businesses 5 5,975 5,544 Revenue from Hong Kong property rental and management businesses 6 4,900 4,741 Revenue from Mainland of China and international railway, property rental and management subsidiaries 7 16,990 13,478 Revenue from other businesses 8 2,378 2,423 Overview 48,444 43,841 Revenue from Mainland of China property development 7 6,996 1,348 55,440 45,189 Expenses relating to Hong Kong transport operations – Staff costs and related expenses 9A (5,748) (5,191) – Energy and utilities (1,543) (1,511) – Operational rent and rates (242) (149) – Stores and spares consumed (553) (538) – Maintenance and related works 9B (1,436) (1,379) – Railway support services (284) (277) – General and administration expenses (607) (659) – Other expenses (313) (318) (10,726) (10,022) Business Review and Analysis Expenses relating to Hong Kong station commercial businesses (501) (532) Expenses relating to Hong Kong property rental and management businesses (802) (811) Expenses relating to Mainland of China and international railway, property rental and management subsidiaries 7 (16,088) (12,890) Expenses relating to other businesses (2,318) (2,278) Project study and business development expenses 9C (332) (361) (30,767) (26,894) Expenses relating to Mainland of China property development 7 (4,682) (982) Operating expenses before depreciation, amortisation and variable annual payment 9D, E&F (35,449) (27,876) Operating profit before Hong Kong property development, Corporate Governance depreciation, amortisation and variable annual payment – Arising from recurrent businesses 17,677 16,947 – Arising from Mainland of China property development 2,314 366 19,991 17,313 Profit on Hong Kong property development 11 1,097 311 Operating profit before depreciation, amortisation and variable annual payment 21,088 17,624 Depreciation and amortisation 12 (4,855) (4,127) Variable annual payment (1,933) (1,787) Operating profit before interest and finance charges 14,300 11,710 Interest and finance charges 13 (905) (612)
Investment property revaluation 19 6,314 808 Financials and Other Information Share of profit or loss of associates and joint venture 28 494 535 Profit before taxation 20,203 12,441 Income tax 14A (3,318) (2,093) Profit for the year 16,885 10,348 Attributable to: – Shareholders of the Company 16,829 10,254 – Non-controlling interests 56 94 Profit for the year 16,885 10,348 Profit for the year attributable to shareholders of the Company: – Arising from recurrent businesses 8,580 8,916 – Arising from property development 1,935 530 – Arising from underlying businesses 10,515 9,446 – Arising from investment property revaluation 6,314 808 16,829 10,254 Earnings per share: 16 – Basic HK$2.83 HK$1.74 – Diluted HK$2.82 HK$1.74
The notes on pages 206 to 294 form part of the accounts.
Annual Report 2017 201 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 December in HK$ million Note 2017 2016 Profit for the year 16,885 10,348 Other comprehensive income for the year (after taxation and reclassification adjustments): 18 Items that will not be reclassified to profit or loss: – Surplus on revaluation of self-occupied land and buildings 253 131 – Remeasurement of net liability of defined benefit schemes 838 123 1,091 254 Items that may be reclassified subsequently to profit or loss: – Exchange differences on translation of: – financial statements of overseas subsidiaries, associates and joint venture 981 (856) – non-controlling interests 16 (7) – Cash flow hedges: net movement in hedging reserve (149) 375 848 (488) 1,939 (234) Total comprehensive income for the year 18,824 10,114 Attributable to: – Shareholders of the Company 18,752 10,027 – Non-controlling interests 72 87 Total comprehensive income for the year 18,824 10,114
The notes on pages 206 to 294 form part of the accounts.
202 MTR Corporation CONSOLIDATED STATEMENT OF FINANCIAL POSITION
At 31 December At 31 December in HK$ million Note 2017 2016 Assets Fixed assets – Investment properties 19 77,086 70,060
– Other property, plant and equipment 20 102,889 103,613 Overview – Service concession assets 21 29,797 28,269 209,772 201,942 Property management rights 22 26 27 Goodwill 63 57 Property development in progress 25A 14,810 17,484 Deferred expenditure 26 710 463 Interests in associates and joint venture 28 6,838 7,015 Deferred tax assets 41B 69 25 Investments in securities 29 443 370 Properties held for sale 30 1,347 1,394 Business Review and Analysis Derivative financial assets 31 168 183 Stores and spares 32 1,540 1,484 Debtors and other receivables 33 7,058 4,073 Amounts due from related parties 34 2,570 2,171 Tax recoverable 41A – 362 Cash, bank balances and deposits 35 18,354 20,290 263,768 257,340
Liabilities Corporate Governance Bank overdrafts 36A 4 – Short-term loans 36A 325 1,350 Creditors and other payables 37 28,166 32,629 Current taxation 41A 1,080 123 Amounts due to related parties 38 2,226 11,783 Loans and other obligations 36A 41,714 38,589 Obligations under service concession 39 10,470 10,507 Derivative financial liabilities 31 451 569 Loan from holders of non-controlling interests 40 146 109
Deferred tax liabilities 41B 12,760 12,125 Financials and Other Information 97,342 107,784 Net assets 166,426 149,556 Capital and reserves Share capital 42A 52,307 47,929 Shares held for Share Incentive Scheme 42 (173) (227) Other reserves 42 114,170 101,759 Total equity attributable to shareholders of the Company 166,304 149,461 Non-controlling interests 122 95 Total equity 166,426 149,556
Approved and authorised for issue by the Members of the Board on 8 March 2018
Frederick S H Ma Lincoln K K Leong Herbert L W Hui Chairman Chief Executive Officer Finance Director
The notes on pages 206 to 294 form part of the accounts.
Annual Report 2017 203 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Other reserves
Shares held Employee Total equity for Share Fixed assets share-based attributable to Non- for the year ended 31 December Share Incentive revaluation Hedging capital Exchange Retained shareholders of controlling Total in HK$ million Note capital Scheme reserve reserve reserve reserve profits the Company interests equity 2017 Balance as at 1 January 2017 47,929 (227) 3,043 150 182 (1,008) 99,392 149,461 95 149,556 Changes in equity for the year ended 31 December 2017: – Profit for the year – – – – – – 16,829 16,829 56 16,885 – Other comprehensive income for the year 18 – – 253 (149) – 981 838 1,923 16 1,939 – Total comprehensive income for the year – – 253 (149) – 981 17,667 18,752 72 18,824 – Special dividend 15 – – – – – – (20) (20) – (20) – 2016 final ordinary dividend 15 – – – – – – (4,844) (4,844) – (4,844) – Shares issued in respect of scrip dividend of 2016 final ordinary dividend 42A 3,863 (4) – – – – – 3,859 – 3,859 – 2017 interim ordinary dividend 15 – – – – – – (1,500) (1,500) – (1,500) – Shares issued in respect of scrip dividend of 2017 interim ordinary dividend 42A 137 (1) – – – – – 136 – 136 – Vesting and forfeiture of award shares of Share Incentive Scheme 2 59 – – (63) – 2 – – – – Ordinary dividends paid to holders of non-controlling interests – – – – – – – – (102) (102) – Increase in non-controlling interests arising from shares issued by a subsidiary – – – – – – – – 57 57 – Employee share-based payments – – – – 119 – – 119 – 119 – Employee share options exercised 42A 376 – – – (35) – – 341 – 341 Balance as at 31 December 2017 52,307 (173) 3,296 1 203 (27) 110,697 166,304 122 166,426 2016 Balance as at 1 January 2016 46,317 (151) 2,912 (225) 210 (152) 121,144 170,055 116 170,171 Changes in equity for the year ended 31 December 2016: – Profit for the year – – – – – – 10,254 10,254 94 10,348 – Other comprehensive income for the year 18 – – 131 375 – (856) 123 (227) (7) (234) – Total comprehensive income for the year – – 131 375 – (856) 10,377 10,027 87 10,114 – Special dividend 15 – – – – – – (25,902) (25,902) – (25,902) – 2015 final ordinary dividend 15 – – – – – – (4,758) (4,758) – (4,758) – Shares issued in respect of scrip dividend of 2015 final ordinary dividend 42A 566 (5) – – – – – 561 – 561 – 2016 interim ordinary dividend 15 – – – – – – (1,473) (1,473) – (1,473) – Shares issued in respect of scrip dividend of 2016 interim ordinary dividend 42A 101 (2) – – – – – 99 – 99 – Shares purchased for Share Incentive Scheme – (99) – – – – – (99) – (99) – Vesting and forfeiture of award shares of Share Incentive Scheme 1 30 – – (34) – 3 – – – – Ordinary dividends paid to holders of non-controlling interests – – – – – – – – (108) (108) – Employee share-based payments – – – – 106 – – 106 – 106 – Employee share options exercised 42A 944 – – – (99) – – 845 – 845 – Employee share options forfeited – – – – (1) – 1 – – – Balance as at 31 December 2016 47,929 (227) 3,043 150 182 (1,008) 99,392 149,461 95 149,556
The notes on pages 206 to 294 form part of the accounts.
204 MTR Corporation CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 December in HK$ million Note 2017 2016 Cash flows from operating activities Cash generated from operations 43 22,239 19,156 Receipt of government subsidy for Shenzhen Metro Longhua Line operation 588 625 Purchase of tax reserve certificates (1,816) (20) Overview Current tax paid – Hong Kong Profits Tax paid (240) (2,271) – Mainland of China and overseas tax paid (1,168) (355) Net cash generated from operating activities 19,603 17,135
Cash flows from investing activities Capital expenditure – Purchase of assets for Hong Kong transport and related operations (5,226) (4,615) – Shenzhen Metro Longhua Line Project and related operations (93) (220) – Hong Kong railway extension projects (1,342) (5,243) – Hong Kong and Shenzhen property development (1,040) (1,200) Business Review and Analysis – Investment property projects and fitting out work (713) (589) – Other capital projects (109) (72) Fixed annual payment (750) (750) Variable annual payment (1,787) (1,649) Receipts in respect of Hong Kong and Shenzhen property development 3,344 5,403 Decrease/(increase) in bank deposits with more than three months to maturity when placed or pledged 8,842 (7,212) Purchase of investments in securities (164) (143)
Proceeds from sale or redemption of investments in securities 93 109 Corporate Governance Proceeds from disposal of fixed assets 5 4 Acquisition of a subsidiary, net of cash acquired – 44 Investments in associates and joint venture (310) (1,273) Receipt of loan repayment from an associate – 93 Loan to an associate (92) (13) Shares issued to and loan from holders of non-controlling interests 84 – Dividends received from associates 158 208 Net cash generated from/(used in) investing activities 900 (17,118)
Cash flows from financing activities Financials and Other Information Proceeds from shares issued under share option schemes 341 845 Purchase of shares for Share Incentive Scheme – (99) Proceeds from loans and capital market instruments 25,424 41,759 Repayment of loans and capital market instruments (23,934) (22,278) Interest and finance charges paid (923) (789) Interest received 345 270 Dividends paid to shareholders of the Company (15,358) (18,508) Dividends paid to holders of non-controlling interests (102) (108) Net cash (used in)/generated from financing activities (14,207) 1,092
Net increase in cash and cash equivalents 6,296 1,109 Cash and cash equivalents at 1 January 7,037 6,227 Effect of exchange rate changes 606 (299) Cash and cash equivalents at 31 December 35 13,939 7,037
The notes on pages 206 to 294 form part of the accounts.
Annual Report 2017 205 NOTES TO THE CONSOLIDATED ACCOUNTS
1 Statement of Compliance These accounts have been prepared in compliance with the Hong Kong Companies Ordinance and the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”). These accounts have also been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (“HKFRSs”), which collective term includes all applicable individual Hong Kong Financial Reporting Standards, Hong Kong Accounting Standards (“HKASs”) and Interpretations issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”), and accounting principles generally accepted in Hong Kong. The HKFRSs are fully converged with International Financial Reporting Standards in all material respects. A summary of the principal accounting policies adopted by the Group is set out in note 2.
The HKICPA has issued certain new and revised HKFRSs that are first effective for accounting periods beginning on or after 1 January 2017. Changes in accounting policies resulting from the initial application of these developments to the extent that they are relevant to the Group for the current and prior accounting periods reflected in these accounts are disclosed in note 2A(iii).
2 Principal Accounting Policies A Basis of Preparation of the Accounts (i) The measurement basis used in the preparation of the accounts is the historical cost basis except that the following assets and liabilities are stated at their fair value as explained in the accounting policies set out below: • investment properties (note 2F(i)); • self-occupied land and buildings (note 2F(ii)); • financial instruments classified as investments in securities other than those intended to be held to maturity (note 2M); and • derivative financial instruments (note 2T). (ii) The preparation of the accounts in conformity with HKFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenditure. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements and estimations about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
Judgements made by management in the application of HKFRSs that have significant effect on the accounts and estimates are discussed in note 52.
(iii) The HKICPA has issued several amendments to HKFRSs that are first effective for the current accounting period of the Group. None of these impact on the accounting policies of the group. However, additional disclosure has been included in note 43B to satisfy the new disclosure requirements introduced by the amendments to HKAS 7, Statement of cash flows: Disclosure initiative, which require entities to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes.
The Group has not applied any new or revised standard or interpretation that is not yet effective for the current accounting period (note 53).
B Basis of Consolidation The consolidated accounts include the accounts of the Company and its subsidiaries (together referred to as the “Group”) and the Group’s interest in associates and joint venture (note 2D) made up to 31 December each year. The results of subsidiaries acquired or disposed of during the year are included in the consolidated profit and loss account from or to the date of their acquisition or disposal, as appropriate.
C Subsidiaries and Non-controlling Interests Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. When assessing whether the Group has power, only substantive rights (held by the Group or other parties) are considered.
An investment in a subsidiary is consolidated into the consolidated accounts from the date that control commences until the date that control ceases. Intra-group balances, transactions and cash flows and any unrealised profits arising from intra-group transactions are eliminated in full in preparing the consolidated accounts. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
206 MTR Corporation loss ondisposal. On disposalofacashgeneratingunit duringtheyear,anyattributableamountofpurchasedgoodwillisincluded inthecalculationofprofitor 2H(ii)). or groupsofcashgeneratingunits,that isexpectedtobenefitfromthesynergiesofcombinationand tested annuallyforimpairment(note Goodwill isstatedatcostlessaccumulated impairmentlosses.Goodwillarisingonabusinesscombinationis allocatedtoeachcash-generatingunit, When (ii)isgreaterthan(i),thenthisexcessrecognisedimmediatelyin profitorlossasagainonbargainpurchase. (ii) the Group’spreviouslyheldequityinterestinacquiree;over (i) Goodwill representstheexcessof: E In theCompany’sstatementoffinancialposition,investmentsinassociates andjointventurearestatedatcostlessimpairmentlosses(note2H(ii)). value oninitialrecognitionofafinancialasset. that formerinvesteeatthedatewhensignificantinfluenceorjointcontrolislostrecognisedfairvalueandthisamountregardedas disposal oftheentireinterestinthatinvestee,witharesultinggainorlossbeingrecognisedprofitandaccount.Anyretained In allothercases,whentheGroupceasestohavesignificantinfluenceoveranassociateorjointcontrolaventure,itisaccountedforas continues tobeaccountedforundertheequitymethod. If aninvestmentinassociatebecomesajointventureorviceversa,retainedinterestisnotremeasured.Instead,the recognised immediatelyintheprofitandlossaccount. Group’s interestintheinvestee,exceptwhereunrealisedlossesprovideevidenceofanimpairmentassettransferred,whichcasetheyare Unrealised profitsandlossesresultingfromtransactionsbetweentheGroupitsassociatesjointventureareeliminatedtoextentof together withtheGroup’slong-termintereststhatinsubstanceformpartofnetinvestmentassociateorjointventure. on behalfoftheinvestee.Forthispurpose,Group’sinterestininvesteeiscarryingamountinvestmentunderequitymethod recognition offurtherlossesisdiscontinuedexcepttotheextentthatGrouphasincurredlegalorconstructiveobligationsmadepayments When theGroup’sshareoflossesequalsorexceedsitsinterestinassociatejointventure,isreducedtoniland acquisition itemsoftheinvestees’othercomprehensiveincomeisrecognisedinconsolidatedstatementincome. post-acquisition resultsoftheinvesteesforyearisrecognisedinconsolidatedprofitandlossaccount,whereasGroup’ssharepost- recorded atcostandadjustedthereafterforthepostacquisitionchangeinGroup’sshareofinvestees’netassets.The An investmentinanassociateorajointventureisaccountedfortheconsolidatedaccountsofGroupusingequitymethodandinitially and haverightstothenetassetsofarrangement. A jointventureisanarrangementwherebytheGrouporCompanyandotherpartiescontractuallyagreetosharecontrolofthearrangement, including participationinthefinancialandoperatingpolicydecisions. An associateisanentityoverwhichtheGrouporCompanyhassignificantinfluence,butnotcontroljointcontrol,itsmanagement, D Investments insubsidiariesarecarriedtheCompany’sstatementoffinancialpositionatcostlessanyimpairmentlosses(note2H(ii)). investment inanassociateorajointventure(note2D). value andthisamountisregardedasthefaironinitialrecognitionofafinancialassetor,whenappropriate,costan being recognisedintheprofitandlossaccount.Anyinterestretainedthatformersubsidiaryatdatewhencontrolislostfair When theGrouplosescontrolofasubsidiary,itisaccountedforasdisposalentireinterestinthatwithresultinggainorloss liabilities intheconsolidatedstatementoffinancialpositiondependingonnatureliability. the Company.Loansfromholdersofnon-controllinginterestsandothercontractualobligationstowardsthesearepresentedasfinancial as anallocationofthetotalprofitorlossandcomprehensiveincomeforyearbetweennon-controllinginterestsshareholders results oftheGrouparepresentedonfaceconsolidatedprofitandlossaccountstatementcomprehensiveincome statement offinancialpositionwithinequity,separatelyfromequityattributabletoshareholderstheCompany.Non-controllinginterestsin obligation inrespectofthoseintereststhatmeetsthedefinitionafinancialliability.Non-controllingarepresentedconsolidated Group hasnotagreedanyadditionaltermswiththeholdersofthoseinterestswhichwouldresultinasawholehavingcontractual Non-controlling interestsrepresenttheequityinasubsidiarynotattributabledirectlyorindirectlytoCompany,andrespectofwhich C 2 Principal AccountingPolicies the netfairvalueofacquiree’sidentifiableassetsandliabilitiesmeasured asattheacquisitiondate. the aggregateoffairvalueconsiderationtransferred,amount ofanynon-controllinginterestintheacquireeandfairvalue Goodwill Associates andJointVentures Subsidiaries andNon-controllingInterests (continued) (continued) Annual Report 2017 207
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
2 Principal Accounting Policies (continued) F Fixed Assets (i) Investment properties are land and/or buildings which are owned or held under a leasehold interest to earn rental income and/or for capital appreciation. These include properties that are being constructed or developed for future use as investment properties.
Investment properties are stated on the statement of financial position at fair value as measured semi-annually by independent professionally qualified valuers. Gains or losses arising from changes in the fair value are recognised in the consolidated profit and loss account in the period in which they arise.
(ii) Leasehold land registered and located in the Hong Kong Special Administrative Region is accounted for as being held under a finance lease and is stated at cost less accumulated depreciation and impairment losses (note 2H(ii)). Land held for own use under operating leases and buildings thereon, where the fair value of the leasehold interest in the land and buildings cannot be measured separately at inception of the lease, are accounted for as being held under a finance lease, unless the buildings are also clearly held under an operating lease. For these purposes, inception of the lease is the time that the lease was first entered into by the Group, or taken over from the previous lessee, or at the date of construction of those buildings, if later. The self-occupied land and buildings are stated on the statement of financial position at their fair value at the date of revaluation less any subsequent accumulated depreciation. Revaluations are performed by independent qualified valuers semi-annually, with changes in the fair value arising on revaluations recorded as movements in the fixed assets revaluation reserve, except:
(a) where the balance of the fixed assets revaluation reserve relating to a self-occupied land and building is insufficient to cover a revaluation deficit of that property, the excess of the deficit is charged to the profit and loss account; and
(b) where a revaluation deficit had previously been charged to the profit and loss account and a revaluation surplus subsequently arises, this surplus is firstly credited to the profit and loss account to the extent of the deficit previously charged to the profit and loss account, and thereafter taken to the fixed assets revaluation reserve.
(iii) Civil works and plant and equipment are stated at cost less accumulated depreciation and impairment losses (note 2H(ii)).
(iv) Assets under construction are stated at cost less impairment losses (note 2H(ii)). Cost comprises direct costs of construction, such as materials, staff costs and overheads, together with interest expense capitalised during the period of construction or installation and testing. Capitalisation of these costs ceases and the asset concerned is transferred to the appropriate fixed assets category when substantially all the activities necessary to prepare the asset for its intended use are completed.
(v) Leased Assets (a) Leases of assets under which the lessee assumes substantially all the risks and rewards of ownership are classified as finance leases. Where the Group acquires the use of assets under finance leases, the amounts representing the fair value of the leased asset, or, if lower, the present value of the minimum lease payments (computed using the rate of interest implicit in the lease), of such assets are included in fixed assets and the corresponding liabilities, net of finance charges are recorded as obligations under finance leases. Depreciation and impairment losses are accounted for in accordance with the accounting policy as set out in notes 2I(iv) and 2H(ii) respectively. Finance charges implicit in the lease payments are charged to the profit and loss account over the period of the leases so as to produce an approximately constant periodic rate of charge on the remaining balance of the obligations for each accounting period.
(b) Leases of assets, other than that mentioned in note 2F(ii), under which the lessor has not transferred substantially all the risks and rewards of ownership are classified as operating leases. Where the Group leases out assets under operating leases, the assets are included in the statement of financial position according to their nature and, where applicable, are depreciated in accordance with the Group’s depreciation policies. Impairment losses are accounted for in accordance with the accounting policies on impairment of assets (note 2H(ii)). Revenue arising from operating leases is recognised in accordance with the Group’s revenue recognition policies as set out in note 2Z(ii).
(vi) Subsequent expenditure relating to the replacement of certain parts of an existing fixed asset is recognised in the carrying amount of the asset if it is probable that future economic benefit will flow to the Group and the cost of the item can be measured reliably. The carrying amount of those parts that are replaced is derecognised, with any gain or loss arising therefrom being dealt with in the profit and loss account.
Expenditure on repairs or maintenance of an existing fixed asset to restore or maintain the originally assessed standard of performance of that asset is charged as an expense in the profit and loss account when incurred.
Gains or losses arising from the retirement or disposal of a fixed asset or an investment property are determined as the difference between the net disposal proceeds and the carrying amount of the asset. Such gains or losses are recognised as income or expense in the profit and loss account on the date of retirement or disposal. Any related revaluation surplus is transferred from the fixed assets revaluation reserve to retained profits and is not re-classified to profit and loss account.
(vii) Service Concession Assets Where the Group enters into service concession arrangements under which the Group acquires the right to access, use and operate certain assets for the provision of public services, upfront payments and expenditure directly attributable to the acquisition of the service concession up to inception of the service concession are capitalised as service concession assets and amortised on a straight-line basis over the period of the service concession. Annual payments over the period of the service concession with the amounts fixed at inception are capitalised at their present value, calculated using the incremental long term borrowing rate determined at inception as the discount rate, as service concession assets and amortised on a straight-line basis over the period of the service concession, with a corresponding liability recognised as obligations under service concession. Annual payments for the service concession which are not fixed or determinable at inception and are contingent on future revenue are charged to the profit and loss account in the period when incurred.
208 MTR Corporation in prioryears.Reversalsofimpairment lossesarecreditedtotheprofitandlossaccountinyearwhich the reversalsarerecognised. A reversalofimpairmentlossesislimited totheasset’scarryingamountthatwouldhavebeendeterminedhad noimpairmentlossbeenrecognised recoverable amountoftheasset.An impairmentlossinrespectofgoodwillisnotreversed. In respectofassetsotherthangoodwill, animpairmentlossisreversediftherehasbeenafavourablechange intheestimatesusedtodetermine disposal (ifmeasurable)orvalueinuse (ifdeterminable). unit (orgroupofunits)onaproratabasis,exceptthatthecarryingvalue ofanassetwillnotbereducedbelowitsindividualfairvaluelesscosts amount ofanygoodwillallocatedtothecash-generatingunit(orgroup of units)andthen,toreducethecarryingamountotherassetsin belongs, exceedsitsrecoverableamount.Impairmentlossesrecognised inrespectofcash-generatingunitsareallocatedfirsttoreducethecarrying An impairmentlossisrecognisedintheprofitandaccountwhenever thecarryingamountofanasset,orcash-generatingunittowhichit amount isdeterminedforthesmallestgroupofassetsthatgeneratescash inflowsindependently(i.e.acash-generatingunit). and therisksspecifictoasset.Whereanassetdoesnotgeneratecash inflowslargelyindependentofthosefromotherassets,therecoverable future cashflowsarediscountedtotheirpresentvalueusingapre-taxdiscount ratethatreflectscurrentmarketassessmentsoftimevaluemoney The recoverableamountofanassetisthegreateritsfairvaluelesscosts ofdisposalandvalueinuse.Inassessinguse,theestimated whether ornotthereisanyindicationofimpairment. If anysuchindicationexists,theasset’srecoverableamountisestimated. Inaddition,therecoverableamountforgoodwillisestimatedannually • • • • • • • impaired or,exceptinthecaseofgoodwill,animpairmentlosspreviouslyrecognisednolongerexistsormayhavedecreased: Internal andexternalsourcesofinformationarereviewedattheendeachreportingperiodtoidentifyindicationsthatfollowingassetsmaybe (ii) If inasubsequentperiodtheamountofanimpairmentlossdecreases,isreversedthroughprofitandlossaccount. computed atinitialrecognitionoftheseassets)wheretheeffectdiscountingismaterial. the presentvalueofestimatedfuturecashflows,discountedatfinancialasset’soriginaleffectiveinterestrate(i.e.the evidence ofimpairment.Ifanysuchexists,theimpairmentlossismeasuredasdifferencebetweenasset’scarryingamountand Debtors andothercurrentnon-currentreceivablesarereviewedattheendofeachreportingperiodtodeterminewhetherreisobjective (i) H are amortisedtotheprofitandlossaccountonastraight-linebasisovertermsofmanagementrights. stated onthestatementoffinancialpositionatcostlessaccumulatedamortisationandimpairmentlosses(note2H(ii)).Propertymanagementrights Where theGroupmakespaymentsforacquisitionofpropertymanagementrights,amountspaidarecapitalisedasintangibleassetsand G Company’s profitandlossaccountsstatementsoffinancialposition. Income andexpenditureassetsliabilitiesinrelationtotheoperationofserviceconcessionsareaccountedforGroup’s impairment losses,ifany(note2H(ii)). Service concessionassetsarecarriedonthestatementoffinancialpositionasanintangibleassetatcostlessaccumulatedamortisationand the serviceconcession. rates sufficienttowriteofftheircostlessestimatedresidualvalue,ifany,overtheshorterofassets’usefullivesandremainingperiod Expenditure forthereplacementand/orupgradeofassetssubjecttoserviceconcessioniscapitalisedandamortisedonastraight-linebasisat to beavailableforusebytheGroup. and amortisedonastraight-linebasisovertheshorterofassets’usefullivesperiodinwhichserviceconcessionassetsareexpected reporting periodwhilethefairvalueofconstructionserviceiscapitalisedinitiallyasconcessionassetsinstatementfinancialposition of publicservices,constructionrevenueandcostsarerecognisedintheprofitlossaccountbyreferencetostagecompletionatend Where theGroupentersintoserviceconcessionarrangementsunderwhichconstructs,usesandoperatescertainassetsforprovision F 2 goodwill; Principal AccountingPolicies investments insubsidiaries,associatesandjointventure. deferred expenditure;and property developmentinprogress; railway constructioninprogress; property managementrights; fixed assets(includingserviceconcessionbutotherthancarriedatrevaluedamounts); Impairment ofOtherAssets Impairment ofDebtorsandOtherReceivables Impairment ofAssets Property ManagementRights Fixed Assets (continued) (continued) Annual Report 2017 209
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
2 Principal Accounting Policies (continued) I Depreciation and Amortisation (i) Investment properties are not depreciated.
(ii) Fixed assets other than investment properties, assets under construction and service concession assets which are amortised over the entire or remaining period of the service concession (note 2F(vii)) are depreciated or amortised on a straight-line basis at rates sufficient to write off their cost or valuation, less their estimated residual value, if any, over their estimated useful lives as follows:
Land and Buildings Self-occupied land and buildings ...... the shorter of 50 years and the unexpired term of the lease Leasehold land...... the unexpired term of the lease
Civil Works Excavation and boring...... Indefinite Tunnel linings, underground civil structures, overhead structures and immersed tubes...... 100 years Station building structures ...... 100 years Depot structures ...... 80 years Kiosk structures ...... 20 – 30 years Cableway station tower and theme village structures...... 27 – 30 years
Plant and Equipment Rolling stock and components...... 4 – 42 years Platform screen doors...... 10 – 35 years Rail track...... 7 – 50 years Environmental control systems, lifts and escalators, fire protection and drainage system...... 7 – 45 years Power supply systems...... 7 – 40 years Aerial ropeway and cabin...... 5 – 27 years Automatic fare collection systems, metal station kiosks, and other mechanical equipment...... 20 – 25 years Train control and signalling equipment, station announcement systems, telecommunication systems and advertising panels...... 5 – 28 years Station architectural finishes...... 8 – 30 years Fixtures and fittings ...... 4 – 25 years Maintenance equipment...... 4 – 40 years Office furniture and equipment...... 2 – 15 years Computer software licences and applications...... 2 – 10 years Computer equipment...... 3 – 5 years Cleaning equipment and tools...... 5 years Motor vehicles...... 4 – 8 years
Where parts of an item of property, plant and equipment have different useful lives, each part is depreciated or amortised separately. The useful lives of the various categories of fixed assets are reviewed annually in the light of actual asset condition, usage experience and the current asset replacement programme.
(iii) No depreciation or amortisation is provided on assets under construction until the construction is completed and the assets are ready for their intended use.
(iv) Depreciation on assets held under finance leases is provided at rates designed to write off the cost of the asset in equal annual amounts over the shorter of the lease term or the anticipated useful life of the asset as set out above, except in cases where title to the asset will be acquired by the Group at the end of the lease where depreciation is provided at rates designed to write off the cost of the asset in equal amounts over the anticipated useful life of the asset.
J Construction Costs (i) Costs incurred by the Group in respect of feasibility studies on proposed railway related construction projects (including consultancy fees, in- house staff costs and overheads) are dealt with as follows: • where the proposed projects are at a preliminary review stage with no certainty of materialising, the costs concerned are charged to the profit and loss account; and • where the proposed projects are at a detailed study stage, having been agreed based on a feasible financial plan, the costs concerned are recorded as deferred expenditure until such time as a project agreement is reached, whereupon the costs are transferred to railway construction in progress.
(ii) After entering into a project agreement, all costs incurred in the construction of the railway are dealt with as railway construction in progress until commissioning of the railway line, whereupon the relevant construction costs are transferred to fixed assets.
210 MTR Corporation properties atfairvalue.Furthercosts incurred intheconstructionofthoseassetsandrelatedfittingoutcosts arecapitalisedininvestmentproperties. (vi) When propertiesheldforsalearesold, thecarryingamountofthosepropertiesisrecognisedtoprofitand lossaccount. in theperiodwhichreversaloccurs. any reversalofwrite-downproperties arisingfromanincreaseinnetrealisablevalueisrecognisedas a reductioninthecostofpropertiessold The amountofanywrite-downpropertiestonetrealisablevalueisrecognised asanexpenseintheperiodwrite-downoccurs.Theamountof Net realisablevaluerepresentstheestimatedsellingpricelesscoststobe incurredinsellingtheproperties. For thosepropertiesinMainlandofChina,costisdeterminedbytheapportionment ofthedevelopmentcostsattributabletounsoldproperties. recognition ofprofitsarisingfromthedevelopmentassetoutinnote2L(iii). For thosepropertiesinHongKong,costrepresentsthefairvalue,asdetermined byreferencetoanindependentopenmarketvaluation,uponthe realisable value. (v) prior tothedateofrevenuerecognitionareincludedinconsolidated statementoffinancialpositionunder“Creditorsandotherpayables”. been deliveredtothepurchasersandcollectabilityofrelatedreceivables isreasonablyassured.Depositsandinstalmentsreceivedonpropertiessold properties aretransferredtothepurchasers,whichiswhenconstructionofrelevanthasbeencompletedandhave (iv) to theprofitandlossaccount,ascasemaybe. Upon recognitionofprofit,thebalancedeferredincomeorpropertydevelopmentinprogressrelatingtothatiscreditedcharged • • • profit andlossaccountasfollows: (iii) the Groupinrespectofthatdevelopmentarechargedagainstdeferredincome. progress aretransferredtodeferredincomewhichisincludedincreditorsandotherpayables.Inthesecases,furthercostssubsequentlyincurredby attributable tothatdevelopment.Anysurplusamountsofpaymentsreceivedfromdevelopersinexcessthebalancepropertydevelopment (ii) borrowing costscapitalised,provisionsandotherdirectexpensesaredealtwithaspropertydevelopmentinprogress. (i) L 2L(iii) afternettingoffanyrelatedbalanceinpropertydevelopmentprogressatthattime. development inprogress.TheGroup’sshareofincomeearnedfromsuchoperationsisrecognisedtheprofitandlossaccountonbasisnote income. ExpensesincurredbytheGrouponstaff,overheadandconsultancyfeesinrespectofthesedevelopmentsarealsocapitalisedasproperty In caseswherepaymentsreceivedfromdevelopersexceedtherelatedexpendituresincurredbyGroup,suchexcessisrecordedasdeferred (including anyinterestaccrued)andlandcostspremiums)paidnetofpaymentsreceivedaspropertydevelopmentinprogress. In respectofitsinterestsinsuchoperations,theGroupaccountsforpurchaseconsiderationdevelopmentrights,costsenablingworks other projectcostssuchaslandpremium(orremainingportionnotalreadypaidbytheGroup),constructioncosts,professionalfees,etc. responsible foritsowncosts,includingin-housestaffcostsandtheofenablingworks,developersnormallyundertaketopayall considered tobejointoperationsinaccordancewithHKFRS11,JointArrangements.Underthedevelopmentarrangements,Groupisnormally The arrangementsenteredintobytheGroupwithdevelopersforHongKongpropertydevelopmentwithoutestablishingseparateentitiesare like transactionsandeventsinsimilarcircumstances. assets, liabilities,revenuesandexpensesrelatingtoitsinterestwithsimilaritemsonalinebybasis.Consistentaccountingpoliciesareappliedfor to theassets,andobligationsforliabilities,relatingarrangement.TheGrouprecognisesitsinterestinjointoperationbycombining A jointoperationisanarrangementwherebytheGroupandotherpartiescontractuallyagreetosharecontrolof,haverights K 2
Principal AccountingPolicies investment Where propertiesunderconstruction arereceivedfromadevelopmentforinvestmentpurpose,theseproperties arerecognisedasinvestment Where propertiesareheldforsale,thosestatedinitiallyat theircostandsubsequentlycarriedatthelowerofnet Revenue arisingfromsalesofpropertiesinMainlandChinaisrecognisedwhentherisksandrewardsassociatedwithownership of receiptandaftertakingintoaccountanyoutstandingrisksobligationsretainedbytheGroupinconnectionwithdevelopment. where theGroupreceivesadistributionofassetsdevelopment,profitisrecognisedbasedonfairvaluesuchattime and includedwithinpropertiesheldforsale; reliably. TheGroup’sinterestinanyunsoldpropertiesissubsequentlyremeasuredonabasisconsistentwiththepolicysetoutnote2L(v) once theamountsofrevenue(includingfairvalueanyunsoldproperties)andcostsfordevelopmentasawholecanbeestimated where theGroupreceivesarighttoshareofnetsurplusfromdevelopment,Group’sprofitisinitiallyrecognised retained bytheGroupinconnectionwithdevelopment; enabling worksarecompleteandacceptablefordevelopment,aftertakingintoaccounttheoutstandingrisksobligations,ifany, where theGroupreceivespaymentsfromdevelopers,profitsarisingsucharerecognisedwhenfoundationandsite Profits arisingfromthedevelopmentofpropertiesinHongKongundertakenconjunctionwithpropertydevelopersarerecognised Payments receivedfromdevelopersinrespectofpropertydevelopmentsareoffsetagainsttheamountsdevelopmentprogress Costs incurredbytheGroupinrespectofsitepreparation,landcosts,acquisitiondevelopmentrights,aggregatecostdevelopment, Property Development Joint Operations (continued) Annual Report 2017 211
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
2 Principal Accounting Policies (continued) M Investments in Securities The Group’s policies for investments in securities (other than investments in its subsidiaries and associates) are as follows:
(i) Investments in securities held for trading purpose are initially stated at fair value. At the end of each reporting period, the fair value is remeasured with any resultant unrealised gain or loss being recognised in the profit and loss account.
(ii) Investments are recognised/derecognised on the date the Group commits to purchase/sell the investments.
(iii) Interest income in relation to investment in securities is recognised as it accrues using the effective interest method.
(iv) Profit or loss on disposal of investments in securities are determined as the difference between the net disposal proceeds and the carrying amount of the investments and are accounted for in the profit and loss account as they arise.
N Stores and Spares Stores and spares used for business operation are categorised as either revenue or capital. Revenue spares are stated in the statement of financial position at cost, using the weighted average cost method and are recognised as expenses in the period in which the consumption occurs. Provision is made for obsolescence where appropriate. Capital spares are included in fixed assets and stated at cost less accumulated depreciation and impairment losses (note 2H(ii)). Depreciation is charged at the rates applicable to the relevant fixed assets against which the capital spares are held in reserve.
O Long-term Contracts The accounting policy for contract revenue is set out in note 2Z(iii). When the outcome of a fixed-price long-term contract can be estimated reliably, contract costs are recognised as expenses by reference to the stage of completion of the contract activity at the end of reporting period. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. When the outcome of a long-term contract cannot be estimated reliably, contract costs are recognised as expenses in the period in which they are incurred.
Long-term contracts in progress at the end of reporting period are recorded in the statement of financial position at the net amount of costs incurred plus recognised profits less recognised losses and progress billings, and are presented in the statement of financial position as “Gross amount due from customers for contract work” (as an asset) or “Gross amount due to customers for contract work” (as a liability), as applicable. Progress billings not yet paid by the customer are included in the statement of financial position under “Debtors and other receivables”. Amounts received before the related work is performed are included in the statement of financial position as a liability under “Creditors and other payables”.
P Cash and Cash Equivalents Cash and cash equivalents comprise cash at banks and on hand, demand deposits with banks and other financial institutions, and short-term highly liquid investments that are readily convertible into known amounts of cash and subject to an insignificant risk of changes in value with a maturity at acquisition within three months. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are also included as a component of cash and cash equivalents for the purpose of the consolidated cash flow statement.
Q Debtors and Other Receivables Debtors and other receivables are initially recognised at fair value and thereafter stated at amortised cost using the effective interest method less impairment losses for bad and doubtful debts (note 2H(i)), except where the effect of discounting would be immaterial or the discount is not measurable as the receivables are interest-free loans made to related parties without any fixed repayment terms. In such cases, the receivables are stated at cost less impairment losses for bad and doubtful debts.
R Interest-bearing Borrowings Interest-bearing borrowings are recognised initially at fair value net of transaction costs incurred. The interest-bearing fixed rate borrowings not subject to fair value hedges are subsequently stated at amortised costs. Any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the profit and loss account over the period of the borrowings using the effective interest method.
Subsequent to initial recognition, the carrying amount of interest-bearing borrowings subject to fair value hedges is remeasured and the change in fair value attributable to the risk being hedged is recognised in the profit and loss account to offset the effect of the gain or loss on the related hedging instrument.
S Creditors and Other Payables Creditors and other payables are stated at amortised cost if the effect of discounting would be material, otherwise they are stated at cost.
T Derivative Financial Instruments and Hedging Activities The Group uses derivative financial instruments such as interest rate swaps and currency swaps to manage its interest rate and foreign exchange exposure. Based on the Group’s policies, these instruments are used solely for reducing or eliminating financial risks associated with the Group’s investments and liabilities and not for trading or speculation purposes.
212 MTR Corporation dates approximatingtheweightedaverage durationofthescheme’sobligations. defined benefitliability/asset.Thediscount rateistheyieldatendofreportingperiodonhighquality corporatebondsthathavematurity is determinedbyapplyingthediscount rateusedtomeasurethedefinedbenefitobligationatbeginning ofthereportingperiodtonet or curtailmentoccursandwhenrelated restructuringcostsorterminationbenefitsarerecognised.Netinterest expense/incomefortheperiod gain orlossoncurtailment,isrecognised asanexpenseintheprofitandlossaccountorcapitalisedatearlier ofwhentheschemeamendment benefits ofaschemearechanged,orwheniscurtailed,theportion ofthechangedbenefitrelatedtopastservicebyemployees,or is measuredastheincreaseinpresentvalueofdefinedbenefitobligation resultingfromemployeeserviceinthecurrentperiod.When capitalised aspartofthecostrelevantconstructionprojects,capital worksorpropertydevelopments,asthecasemaybe.Currentservicecost and netinterestexpense/incomeonthedefinedbenefitliability/asset arerecognisedeitherasanexpenseintheprofitdlossaccount,or economic benefitsavailableintheformofanyfuturerefundsfromscheme orreductionsinfuturecontributionstothescheme.Servicecost Projected UnitCreditMethod.Whenthecalculationresultsinabenefitto theGroup,recognisedassetislimitedtopresentvalueof determine thepresentvalue,andfairvalueofanyschemeassetsisdeducted. Thecalculationisperformedbyaqualifiedctuaryusingthe amount offuturebenefitthatemployeeshaveearnedinreturnfortheir service inthecurrentandprioryears;thatbenefitisdiscountedto (ii) other cases,theyarerecognisedasexpensesintheprofitandlossaccount asincurred. staff relatingtoconstructionprojects,capitalworksandpropertydevelopments, theyarecapitalisedaspartofthecostthequalifyingassets.In benefits areaccruedintheperiodwhichassociatedservicesrendered byemployeesoftheGroup.Wherethesebenefitsareincurredfor Provident Funds(“MPF”)asrequiredundertheHongKongMandatoryFundSchemesOrdinance,andothercostsofnon-monetary (i) U loss account. Changes inthefairvalueofanyderivativeinstrumentsthatdonotqualifyforhedgeaccountingarerecognisedimmediatelyprofitand (iv) reclassification adjustmentonthedisposalorpartialofforeignoperation. Amounts previouslyrecognisedinothercomprehensiveincomeandaccumulatedequityaretransferredtotheprofitlossaccountasa ineffective portionisrecognisedimmediatelyintheprofitandlossaccount. is recognisedinothercomprehensiveincomewhichaccumulatedseparatelyequitytheexchangereserve.Thegainorlossrelatingto The effectiveportionofchangesinthefairvaluederivativesthataredesignatedandqualifiedashedgesnetinvestmentsforeignoperations (iii) longer expectedtooccur,thegainorlossaccumulatedinequityisimmediatelytransferredprofitandaccount. the transactionoccursanditisrecognisedinaccordancewithabovepolicy.However,ifrespectofhedgeditemno transaction inrespectofthehedgeditemisstillexpectedtooccur,cumulativegainorlossexistingequityatthattimeremainsuntil When ahedginginstrumentexpiresorissold,terminatedexercised,theGrouprevokesdesignationofhedgerelationshipbut and accumulatedinequityaretransferredfromincludedtheinitialcostorcarryingamountofnon-financialassetliability. the recognitionofanon-financialassetorliability,associatedgainsandlossesthatwerepreviouslyrecognisedinothercomprehensiveincome periods whenthehedgeditemisrecognisedinprofitandlossaccount.However,transactionrespectofhedgedresults Amounts previouslyrecognisedinothercomprehensiveincomeandaccumulatedequityaretransferredtotheprofitlossaccount recognised immediatelyintheprofitandlossaccount. comprehensive incomewhichisaccumulatedseparatelyinequitythehedgingreserve.Thegainorlossrelatingtoineffectiveportion The effectiveportionofchangesinthefairvaluederivativesthataredesignatedandqualifiedascashflowhedgesisrecognisedother (ii) with anychangesinthefairvalueofhedgedassetsorliabilitiesthatareattributabletorisk. Changes inthefairvalueofderivativesthataredesignatedandqualifiedashedgesrecordedprofitlossaccount,together (i) the settlementformonetaryitemisneitherplannednorlikelytooccurinforeseeablefuture. a hedgeofnetinvestment:tothevariabilityincashflowsmonetaryitemthatisreceivablefromorpayableforeignoperationwhere liabilities; (2)acashflowhedge:tohedgethevariabilityinflowsofrecognisedliabilityorforeigncurrencyriskfirmcommitment;(3) Where hedgeaccountingapplies,theGroupdesignatesderivativesemployedaseither:(1)afairvaluehedge:toofrecognised item beinghedged. method ofrecognisingtheresultinggainorlossdependsonwhetherderivativeisdesignatedasahedginginstrumentandthenature Derivatives areinitiallyrecognisedatfairvalueandsubsequentlyremeasuredtheirtheendofeachreportingperiod.The T 2 Principal AccountingPolicies ing the The Group’snetobligationinrespectofdefinedbenefitretirementschemes iscalculatedseparatelyforeachschemebyestimatingthe Salaries, annualleave,otherallowances,contributionstodefinedcontributionretirementschemes,includingMandatory Derivatives ThatDoNotQualifyforHedgeAccounting Hedge ofaNetInvestment Cash FlowHedge Fair ValueHedge Employee Benefits Derivative FinancialInstrumentsandHedgingActivities (continued) (continued) Annual Report 2017 213
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
2 Principal Accounting Policies (continued) U Employee Benefits (continued) Remeasurements arising from defined benefit retirement schemes are recognised in other comprehensive income and reflected immediately in retained earnings. Remeasurements comprise of actuarial gains and losses, the return on scheme assets (excluding amounts included in net interest on the net defined benefit liability/asset) and any change in the effect of the asset ceiling (excluding amounts included in net interest on the net defined benefit liability/asset).
(iii) Equity-settled share-based payments are measured at fair value at the date of grant. • For share options, the fair value determined at the grant date is recognised as staff costs, unless the relevant employee expenses qualify for recognition as an asset, on a straight-line basis over the vesting period and taking into account the probability that the options will vest, with a corresponding increase in the employee share-based capital reserve within equity. Fair value is measured by use of the Black-Scholes model, taking into account the terms and conditions upon which the options are granted. The expected life used in the model is adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. During the vesting period, the number of share options that is expected to vest is reviewed. Any adjustment to the cumulative fair value recognised in prior years is charged/credited to the profit and loss account in the year of the review, unless the original employee expenses qualify for recognition as an asset, with a corresponding adjustment to the employee share-based capital reserve. On vesting date, the amount recognised as an expense is adjusted to reflect the actual number of share options that vest (with a corresponding adjustment to the employee share-based capital reserve). The equity amount is recognised in the employee share-based capital reserve until either the option is exercised which is transferred to the share capital account or the option is lapsed (on expiry of the share options)/forfeited (when the vesting conditions are not fulfilled) which is released directly to retained profits. • For award shares under the Executive Share Incentive Scheme (formerly the “2014 Share Incentive Scheme”), the amounts to be expensed as staff costs are determined by reference to the fair value of the award shares granted, taking into account all non-vesting conditions associated with the grants. The total expense is recognised over the relevant vesting periods, with a corresponding credit to the employee share-based capital reserve under equity. For those award shares which are amortised over the vesting periods, the Group reviews its estimates of the number of award shares that are expected to ultimately vest based on the vesting conditions at the end of each reporting period. Any resulting adjustment to the cumulative fair value recognised in prior years is charged/credited to profit and loss account in the year of the review, with a corresponding adjustment to the employee share-based capital reserve. Upon vesting of award shares, the related costs of the vested award shares purchased from the market (the “purchased shares”) and shares received in relation to scrip dividend and shares purchased from the proceeds of cash ordinary dividends received (the “ordinary dividend shares”) are credited to Shares held for Share Incentive Scheme, with a corresponding decrease in employee share-based compensation reserve for the purchased shares, and decrease in retained earnings for the ordinary dividend shares.
For cash-settled share-based payments, a liability equal to the portion of the services received is recognised at the fair value of the shares determined at the end of each reporting period.
(iv) Termination benefits are recognised at the earlier of when the Group can no longer withdraw the offer of those benefits and when it recognises restructuring costs involving the payment of termination benefits.
V Retirement Schemes The Group operates both defined contribution and defined benefit retirement schemes.
Employer’s contributions to defined contribution retirement schemes including MPF Schemes are recognised in the accounts in accordance with the policy set out in note 2U(i).
Employer’s contributions paid and payable in respect of employees of defined benefit retirement schemes are calculated annually by independent actuaries in accordance with the Retirement Scheme Rules and provisions of the Occupational Retirement Schemes Ordinance. The pension expenses recognised in the accounts are dealt with in accordance with note 2U(ii).
W Income Tax (i) Income tax for the year comprises current tax and movements in deferred tax assets and liabilities. Income tax is recognised in the profit and loss account except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is recognised in other comprehensive income or directly in equity respectively.
(ii) Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of reporting period, and any adjustment to tax payable in respect of previous years.
(iii) Deferred tax assets and liabilities arise from deductible and taxable temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.
214 MTR Corporation outflow ofeconomic benefitsisremote. be confirmedbytheoccurrenceornon-occurrence ofoneormorefutureevents,arealsodisclosedascontingent liabilitiesunlesstheprobabilityof disclosed asacontingentliability,unless theprobabilityofoutfloweconomicbenefitsisremote.Possible obligations, whoseexistencewillonly Where itisnotprobablethatanoutflow ofeconomicbenefitswillberequired,ortheamountcannotestimated reliably,theobligationis made. Wherethetimevalueofmoney ismaterial,provisionsarestatedatthepresentvalueofexpenditure expectedtosettletheobligation. a resultofpastevent,itisprobable thatanoutflowofeconomicbenefitswillberequiredtosettletheobligation andareliableestimatecanbe Provisions arerecognisedforliabilities ofuncertaintimingoramountwhentheCompanyGrouphasalegal orconstructiveobligationarisingas Y accumulated amortisation. to exceedtheamountcurrentlycarriedincreditorsandotherpayables in respectofthatguarantee,i.e.theamountinitiallyrecognisedless that theholderofguaranteewillcalluponGroupunderguarantee, and(ii)theamountofthatclaimonGroupisexpected income fromfinancialguaranteesissued.Inaddition,provisionsarerecognised inaccordancewithnote2Yifandwhen(i)itbecomesprobable The amountoftheguaranteeinitiallyrecognisedasdeferredincomeis amortised intheprofitandlossaccountovertermofguaranteeas been available,wherereliableestimatesofsuchinformationcanbemade. rates chargedbylenderswhentheguaranteeismadeavailablewith estimatedratesthatlenderswouldhavecharged,hadtheguaranteesnot similar services,whensuchinformationisobtainable,orotherwiseestimated byreferencetointerestratedifferentials,bycomparingtheactual The fairvalueoffinancialguaranteesissuedatthetimeissuanceisdetermined byreferencetofeeschargedinanarm’slengthtransactionfor or receivableatinception,isinitiallydebitedtotheprofitandlossaccountrecognisedasdeferredincomewithincreditorsotherpayables. When theGroupissuesafinancialguarantee,whereeffectismaterial,fairvalueofafternettingoffnyconsiderationreceived because aspecifieddebtorfailstomakepaymenttheholderwhendueinaccordancewithoriginalormodifiedtermsofdebtinstrument. Financial guaranteesarecontractsthatrequiretheissuertomakespecifiedpaymentsreimburseholderofguaranteeforalossitincurs X • • the legallyenforceablerighttosetoffcurrenttaxassetsagainstliabilitiesandfollowingadditionalconditionsaremet: tax assetsareoffsetagainstcurrentliabilities,anddeferredif,onlyif,theCompanyorGrouphas (iv) becomes probablethatsufficienttaxableprofitswillbeavailable. that sufficienttaxableprofitswillbeavailabletoallowtherelatedtaxbenefitutilised.Anysuchreductionisreversedextentit The carryingamountofadeferredtaxassetisreviewedattheendeachreportingperiodandreducedtoextentthatitnolongerprobable reporting period.Deferredtaxassetsandliabilitiesarenotdiscounted. manner ofrealisationorsettlementthecarryingamountassetsandliabilities,usingtaxratesenactedsubstantivelyatend in thepropertyovertime,ratherthanthroughsale.Inallothercases,amountofdeferredtaxrecognisedismeasuredbasedonexpected the propertyisdepreciableandheldwithinabusinessmodelwhoseobjectivetoconsumesubstantiallyallofeconomicbenefitsembodied tax recognisedismeasuredusingtheratesthatwouldapplyonsaleofthoseassetsattheircarryingvalueendreportingperiodunless Where investmentpropertiesarecarriedattheirfairvalueinaccordancewiththeaccountingpolicysetoutnote2F(i),amountofdeferred will notreverseintheforeseeablefuture,orcaseofdeductibledifferences,unlessitisprobablethattheyreversefuture. subsidiaries totheextentthat,incaseoftaxabledifferences,Groupcontrolstimingreversalanditisprobablethatdifferences of assetsorliabilitiesthataffectneitheraccountingnortaxableprofit(providedtheyarenotpartabusinesscombination)andinvestmentsin The limitedexceptionstotherecognitionofdeferredtaxassetsandliabilitiesarethosetemporarydifferencesarisingfromtheinitial authority andthesametaxableentity,areexpectedtoreverseinaperiod,orperiods,whichtaxlosscreditcanbeutilised. of deferredtaxassetsarisingfromunusedlossesandcredits,thatis,thosedifferencesaretakenintoaccountiftheyrelatetothesametaxation backward orforward.Thesamecriteriaareadoptedwhendeterminingwhetherexistingtaxabletemporarydifferencessupporttherecognition as theexpectedreversalofdeductibletemporarydifferenceorinperiodsintowhichataxlossarisingfromdeferredtaxassetcanbecarried provided thosedifferencesrelatetothesametaxationauthorityandtaxableentity,areexpectedreverseeitherinperiod tax assetsarisingfromdeductibletemporarydifferencesincludethosethatwillarisethereversalofexistingtaxabletemporarydifferences, be availableagainstwhichthedeferredtaxassetscanutilised,arerecognised.Futuretaxableprofitsthatmaysupportrecognitionof Apart fromcertainlimitedexceptions,alldeferredtaxliabilitiesandassets,totheextentthatitisprobablefuturetaxableprofitswill W 2
Principal AccountingPolicies – – in thecaseofdeferredtaxassetsandliabilities,iftheyrelatetoincometaxesleviedbysametaxationauthorityoneither: the liabilitysimultaneously;or in thecaseofcurrenttaxassetsandliabilities,CompanyorGroupintendseithertosettleonanetbasis,realiseasset Current taxbalancesanddeferredbalances,movementstherein,arepresentedseparatelyfromeachothernotoffset. Provisions andContingentLiabilities Financial GuaranteeContracts Income Tax simultaneously. be settledorrecovered,intendtorealisethecurrenttaxassetsandsettleliabilitiesonanetbasisrealise different taxableentities,which,ineachfutureperiodwhichsignificantamountsofdeferredtaxliabilitiesorassetsareexpectedto the sametaxableentity;or (continued) (continued) Annual Report 2017 215
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
2 Principal Accounting Policies (continued) Z Revenue Recognition Revenue is measured at the fair value of the consideration received or receivable. Provided it is probable that the economic benefits associated with the transactions will flow to the Group and the amount of revenue can be measured reliably, revenue is recognised in the profit and loss account as follows:
(i) Fare revenue is recognised when the journey is provided.
(ii) Rental income from investment properties, station kiosks and other railway premises under operating leases is accounted for in accordance with the terms of the leases. Lease incentives granted are recognised in the profit and loss account as an integral part of the aggregate net lease payments receivable. Contingent rentals are recognised as income in the accounting period in which they are earned.
(iii) Contract revenue is recognised when the outcome of a consultancy, construction or service contract can be estimated reliably. Contract revenue is recognised using the percentage of completion method, measured by reference to the percentage of contract costs incurred to date to the estimated total contract costs for the contract. When the outcome of a consultancy, construction or service contract cannot be estimated reliably, revenue is recognised only to the extent of contract costs incurred that it is probable will be recovered.
(iv) Incomes from other railway and station commercial businesses, property management, railway franchises and service concessions are recognised when the services are provided.
AA Operating Lease Charges Rentals payable under operating leases are charged on a straight-line basis over the period of the lease to the profit and loss account, except for rentals payable in respect of railway construction, property development in progress and proposed capital projects which are capitalised as part of railway construction in progress, property development in progress and deferred expenditure respectively.
BB Interest and Finance Charges Interest income and expense directly attributable to the financing of capital projects prior to their completion or commissioning are capitalised. Exchange differences arising from foreign currency borrowings relating to the acquisition of assets are capitalised to the extent that they are regarded as an adjustment to capitalised interest costs. Interest expense attributable to other purposes is charged to the profit and loss account.
Finance charges implicit in the lease payments on assets held under finance leases are charged to the profit and loss account over the period of the lease so as to produce an approximately constant periodic rate of charge on the remaining balance of the obligations for each accounting period.
CC Foreign Currency Translation Foreign currency transactions during the year are translated into Hong Kong dollars and recorded at exchange rates ruling at the transaction dates. Foreign currency monetary assets and liabilities are translated into Hong Kong dollars at the exchange rates ruling at the end of reporting period. Exchange gains and losses are recognised in the profit and loss account.
The results of foreign enterprises are translated into Hong Kong dollars at the average exchange rates for the year. Statement of financial position items are translated into Hong Kong dollars at the closing exchange rates at the end of reporting period. The resulting exchange differences are recognised in other comprehensive income and accumulated separately in equity in the exchange reserve.
DD Segment Reporting Operating segments, and the amounts of each segment item reported in the accounts, are identified from the financial information provided regularly to the Group’s most senior executive management for the purposes of allocating resources to, and assessing the performance of, the Group’s various lines of businesses and operations in different geographical locations.
Individually material operating segments are not aggregated for financial reporting purposes unless the segments have similar economic characteristics and are similar in respect of the nature of services and products, the type or class of customers, the methods used to provide the services or distribute the products, and the nature of the regulatory environment. Operating segments which are not individually material may be aggregated if they share a majority of these criteria.
EE Related Parties For the purposes of these accounts, a person, or a close member of that person’s family, is related to the Group if that person is a member of the key management personnel of the Group.
An entity is related to the Group if (i) the entity and the Group are members of the same group; (ii) the entity is an associate of the Group; (iii) the entity is a post-employment benefit schemes for the benefit of employees of the Group or of any entity that is a related party of the Group; (iv) an individual who is a related party of the Group has control, joint control, significant influence over that entity or is a member of the key management personnel of that entity; or (v) the entity, or any member of a group of which it is a part, provides key management personnel services to the Group or to the Group’s parent.
216 MTR Corporation Revenue fromHongKongtransportoperationscomprises: 4 • • • • • Agreement, PropertyPackageAgreementsandMergerFrameworkAgreement.KeyelementsoftheRailincludedfollowing: Government oftheHongKongSpecialAdministrativeRegion(the“HKSARGovernment”),KCRCandCompanyincludingServiceConcession Merger”). ThestructureandkeytermsoftheRailMergerweresetoutinaseriestransactionagreementsenteredintobetween,interalia, On 2December2007(the“AppointedDay”),theCompany’soperationsmergedwiththoseofKowloon-CantonRailwayCorporation(“KCRC”)(“Rail 3 off againstthefuturecostofassetorexpenseslosses. over thecostofassetorexpenseslossesatendreportingperiodarecarriedforwardasadvancereceiptsdeferredincometoset represent compensationforexpensesorlossesaredeductedfromtherelatedexpenses.Anyexcessofamountgrantreceivedreceivable carrying valuetotheextentofamountsreceivedandreceivableasatdatestatementfinancialposition.Governmentgrantswhich attached thereto.Governmentgrantswhichrepresentcompensationforthecostofanassetaredeductedfromassetinarrivingatits Government grantsareassistancebygovernmentsintheformoftransferresourcesreturnforGroup’scompliancetotheconditions FF 2 by-law infringementsurchargeand Octopus loadagentfees. Cross-boundary Service),WestRailand MaOnShanLines.Otherrail-relatedincomeincludesmainlyancillary serviceincomefromIntercityService, Domestic ServicecomprisestheKwunTong,TsuenWan,Island,South TungChung,TseungKwanO,DisneylandResort,EastRail(excluding
Other rail-relatedincome Fare revenue: in HK$million – IntercityService – LightRailandBus – AirportExpress – Cross-boundaryService – DomesticService Revenue fromHongKongTransportOperations Rail MergerwithKowloon-CantonRailwayCorporation Principal AccountingPolicies Fare AdjustmentMechanism. rights andpropertydevelopmentbytheCompanyaswellframeworkforRailMergerincludingimplementationof Property PackageAgreementsandMergerFrameworkAgreementsettingouttheacquisitionofcertainproperties,propertymanagement by theCompany.Onsuchextension,CapexThresholdmayalsobeadjusted;and In theeventthatConcessionPeriodisextended,fixedannualpaymentandvariablewillcontinuetobepayable Concession Periodwithsuchreimbursementtobeonthebasisofdepreciatedbookvalue; exceeds anagreedthreshold(“CapexThreshold”),theCompanywillbereimbursedforanyabove-thresholdexpenditureatendof of theKCRCsystem(withanynewassetsacquiredbeingclassifiedas“additionalconcessionproperty”).Toextentthatsuchexpenditure Under theSCA,Companyisresponsibleforexpenditureincurredinrelationtomaintenance,repair,replacementandupgrade KCRC systemabovecertainthresholds; Company isobligedtopayvariableannualpaymentsKCRC,calculatedonatieredbasisbyreferencetherevenuegeneratedfrom payment toKCRCforthedurationofConcessionPeriod.Additionally,commencingafterthreeyearsfromAppointedDay,the with thetermsofSCA,CompanypaidanupfrontlumpsumtoKCRConAppointedDayandisobligedpayannualfixed is extended.TheSCAalsosetsoutthebasisonwhichKCRCsystemwillbereturnedatendofConcessionPeriod.Inaccordance system foraninitialtermof50years(the“ConcessionPeriod”),whichwillbeextendediftheFranchisePeriod(asitrelatestoKCRCrailway) The ServiceConcessionAgreement(“SCA”)pursuanttowhichKCRCgrantedtheCompanyrightaccess,useandoperateKCRC Period”), extendablepursuanttotheprovisionsofMTROrdinance(note49C); operation andregulationofrailwaysinadditiontotheMTRCrailwayforaninitialperiod50yearsfromAppointedDay(“Franchise The expansionoftheCompany’sexistingfranchiseunderMassTransitRailwayOrdinance(“MTROrdinance”)tocoverconstruction, Government Grants (continued) 18,201 18,035 12,840 1,076 3,277 2017 166 135 707 Annual Report 2017 17,655 17,489 12,395 3,252 2016 166 137 707 998 217
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
5 Revenue from Hong Kong Station Commercial Businesses Revenue from Hong Kong station commercial businesses comprises:
in HK$ million 2017 2016 Duty free shops and kiosks rental 4,143 3,723 Advertising 1,071 1,090 Telecommunication income 635 561 Other station commercial income 126 170 5,975 5,544
6 Revenue from Hong Kong Property Rental and Management Businesses Revenue from Hong Kong property rental and management businesses comprises:
in HK$ million 2017 2016 Property rental income 4,608 4,451 Property management income 292 290 4,900 4,741
7 Revenue and Expenses Relating to Mainland of China and International Subsidiaries Revenue and expenses relating to Mainland of China and international subsidiaries comprise:
2017 2016
in HK$ million Revenue Expenses Revenue Expenses Railway-related subsidiaries outside of Hong Kong – Melbourne Train 8,673 8,459 7,944 7,639 – MTR Nordic* 4,982 4,748 2,952 2,887 – London Crossrail 1,173 1,114 1,071 1,005 – Shenzhen Metro Longhua Line 673 549 673 535 – Sydney Metro Northwest 1,351 1,100 697 712 16,852 15,970 13,337 12,778 Property rental and management businesses in Mainland of China 138 118 141 112 16,990 16,088 13,478 12,890 Property development in Mainland of China 6,996 4,682 1,348 982 Total Mainland of China and international subsidiaries 23,986 20,770 14,826 13,872
* MTR Nordic comprises the Stockholm Metro, MTR Tech, MTR Express and Stockholm Commuter Rail (“Stockholms pendeltåg”) operations in Sweden.
In September 2017, a new concession to operate and maintain the Melbourne train system for seven years was awarded to the Group’s 60% owned subsidiary, Metro Trains Melbourne Pty. Ltd.. The new franchise commenced from 30 November 2017 to 1 December 2024, with an option to extend for an additional three years.
218 MTR Corporation Revenue fromotherbusinessescomprisesincomesfrom: 8 A 9 related expensesaswellstoresandsparesconsumed. Other routinerepairsandmaintenanceworksareperformedbyin-house operationsandthecostsofwhichareincludedunderstaff B The followingexpendituresareincludedintotalstaffcosts: Amounts recoverablerelatetopropertymanagement,entrustmentworksandotheragreements.
Miscellaneous businesses Project managementforHKSARGovernment Consultancy business Ngong Ping360 in HK$million Total staffcosts Amounts recoverable Amounts capitalisedunder:
Amounts chargedtoprofitandlossaccountunder: in HK$million Amounts recognisedinrespectofdefinedbenefitretirementschemes Contributions todefinedcontributionretirementschemesandMandatory ProvidentFund Share-based payments in HK$million – serviceconcessionassets – assetsunderconstructionandotherprojects – propertydevelopmentinprogress – railwayconstructioninprogressbeforeoffsetbygovernmentgrant – profitonHongKongpropertydevelopment – projectstudyandbusinessdevelopmentexpenses – expensesrelatingtootherbusinesses – expensesrelatingtoMainlandofChinaandinternationalsubsidiaries – expensesrelatingtoHongKongpropertyrentalandmanagementbusinesses – expensesrelatingtoHongKongstationcommercialbusinesses – otherexpenselineitemsforHongKongtransportoperations – maintenanceandrelatedworksforHongKongtransportoperations – staffcostsandrelatedexpensesforHongKongtransportoperations Revenue fromOtherBusinesses Operating Expenses Total staffcostsinclude: ue works. The costsofmaintenanceandrelatedworksforHongKongtransportoperations relatemainlytocontractedmaintenanceandrevenueworks. 17,506 2,378 1,725 2,152 7,049 5,748 1,343 2017 2017 2017 356 263 551 411 657 123 363 136 111 454 770 119 34 23 94 88 – Annual Report 2017 15,615 2,423 1,790 2,053 5,825 5,191 1,236 2016 2016 2016 216 391 559 355 487 144 399 208 115 442 688 106 26 26 87 69 97 219
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
9 Operating Expenses (continued)
C Project study and business development expenses comprise:
in HK$ million 2017 2016 Business development expenses 303 333 Miscellaneous project study expenses 29 28 332 361
Business development expenses relate mainly to new business opportunities in the Mainland of China, Europe and Australia.
D Auditors’ remuneration charged to the consolidated profit and loss account include:
in HK$ million 2017 2016 Audit services 18 17 Tax services 2 1 Other audit related services 6 6 26 24
E The following charges are included in operating expenses:
in HK$ million 2017 2016 Loss on disposal of fixed assets 44 65 Derivative financial instruments – transferred from hedging reserve (note 18B) 2 12 Unrealised loss on revaluation of investments in securities 2 –
F Operating lease expenses charged to the consolidated profit and loss account comprise:
in HK$ million 2017 2016 Shopping centre, office building, staff quarters and bus depot 103 99 Rolling stock, stations, office buildings, depots, depot equipment and other minor assets for subsidiaries 1,556 995 1,659 1,094
220 MTR Corporation (i) A 10
Members oftheExecutiveDirectorate
Members oftheBoard 2017 in HK$million – JenyYeungMei-chun – PhilcoWongNai-keung – DavidTangChi-fai – LindaSoKa-pik – GillianElizabethMeller – AdiLauTin-shing – HerbertHuiLeung-wah – PeterRonaldEwen – MorrisCheungSiu-wa – MargaretChengWai-ching – JacobKamChak-pui – LincolnLeongKwok-kuen – CommissionerforTransport – PermanentSecretaryforDevelopment(Works) – SecretaryforTransportandHousing – JamesHenryLauJr(appointedon4July2017) – CeajerChanKa-keung(resignedon4July2017) – JohannesZhouYuan(appointedon17May2017)* – AllanWongChi-yun – BenjaminTangKwok-bun – AbrahamShekLai-him – NgLeung-sing(retiredon17May2017)** – AlasdairGeorgeMorrison – LuciaLiKa-lai – KaizerLauPing-cheung – JamesKwanYuk-choi – EddyFongChing – AnthonyChowWing-kin – VincentChengHoi-chuen – DorothyChanYuenTak-fai – PamelaChanWongShui – Andrew Clifford Winawer Brandler – AndrewCliffordWinawerBrandler – FrederickMaSi-hang Remuneration ofMemberstheBoardandExecutiveDirectorate The emolumentsofMemberstheBoardandExecutiveDirectorateCompanywereasfollows: Remuneration ofMemberstheBoardandExecutiveDirectorate
(appointed on17May2017)*
Fees 9.8 0.4 0.4 0.4 0.2 0.2 0.3 0.5 0.4 0.5 0.2 0.5 0.5 0.5 0.5 0.5 0.5 0.4 0.5 0.4 0.3 1.7 – – – – – – – – – – – – allowances and allowances and benefits inkind Base pay, Base pay, 61.0 4.5 5.6 4.5 3.7 4.2 4.7 4.7 4.0 4.6 4.6 6.6 9.3 – – – – – – – – – – – – – – – – – – – – – contribution Retirement Retirement scheme scheme 11.7 0.7 0.8 0.7 0.5 0.6 2.8 0.6 0.5 1.5 0.6 1.0 1.4 – – – – – – – – – – – – – – – – – – – – – remuneration remuneration performance related to related to Variable Variable Annual Report 2017 19.5 1.4 1.6 1.4 1.1 1.3 1.3 1.1 1.1 1.2 1.3 2.2 4.5 – – – – – – – – – – – – – – – – – – – – – 102.0 Total 15.2 6.6 8.0 6.6 5.3 6.1 8.8 6.4 5.6 7.3 6.5 9.8 0.4 0.4 0.4 0.2 0.2 0.3 0.5 0.4 0.5 0.2 0.5 0.5 0.5 0.5 0.5 0.5 0.4 0.5 0.4 0.3 1.7 221
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
10 Remuneration of Members of the Board and the Executive Directorate (continued)
A Remuneration of Members of the Board and the Executive Directorate (continued)
Variable Base pay, Retirement remuneration allowances and scheme related to in HK$ million Fees benefits in kind contribution performance Total 2016 Members of the Board – Frederick Ma Si-hang 1.2 – – – 1.2 – Pamela Chan Wong Shui 0.3 – – – 0.3 – Dorothy Chan Yuen Tak-fai 0.4 – – – 0.4 – Vincent Cheng Hoi-chuen 0.3 – – – 0.3 – Anthony Chow Wing-kin (appointed on 18 May 2016) 0.2 – – – 0.2 – Eddy Fong Ching 0.4 – – – 0.4 – Edward Ho Sing-tin (retired on 18 May 2016) 0.1 – – – 0.1 – James Kwan Yuk-choi 0.3 – – – 0.3 – Kaizer Lau Ping-cheung 0.3 – – – 0.3 – Lucia Li Li Ka-lai 0.3 – – – 0.3 – Alasdair George Morrison 0.4 – – – 0.4 – Ng Leung-sing 0.3 – – – 0.3 – Abraham Shek Lai-him 0.4 – – – 0.4 – Benjamin Tang Kwok-bun 0.3 – – – 0.3 – Allan Wong Chi-yun 0.3 – – – 0.3 – Ceajer Chan Ka-keung 0.3 – – – 0.3 – Secretary for Transport and Housing 0.3 – – – 0.3 – Permanent Secretary for Development (Works) 0.3 – – – 0.3 – Commissioner for Transport 0.3 – – – 0.3
Members of the Executive Directorate – Lincoln Leong Kwok-kuen – 8.8 1.4 4.6 14.8 – Jacob Kam Chak-pui – 6.1 0.9 2.2 9.2 – Margaret Cheng Wai-ching (appointed on 1 June 2016)*** – 2.6 0.3 0.6 3.5 – Morris Cheung Siu-wa – 4.3 1.3 1.2 6.8 – Peter Ronald Ewen (appointed on 22 February 2016)*** – 3.3 0.5 0.9 4.7 – Stephen Law Cheuk-kin (up to 1 July 2016) – 3.5 0.3 0.8 4.6 – Herbert Hui Leung-wah (appointed on 2 July 2016)*** – 2.3 0.3 0.5 3.1 – Adi Lau Tin-shing (appointed on 1 May 2016)*** – 3.1 1.5 1.0 5.6 – Gillian Elizabeth Meller – 4.0 0.6 1.3 5.9 – Linda So Ka-pik – 3.6 0.5 1.1 5.2 – David Tang Chi-fai – 4.3 0.6 1.5 6.4 – Philco Wong Nai-keung – 5.3 0.8 1.7 7.8 – Jeny Yeung Mei-chun – 4.5 0.6 1.5 6.6 6.7 55.7 9.6 18.9 90.9
* Andrew C W Brandler and Johannes Y Zhou were appointed as Members of the Board on the date shown in the above table. The amounts of their emoluments shown in the above table cover the period from the date of their appointment to 31 December 2017. ** L S Ng retired as a Member of the Board on the date shown in the above table. The amount of his emolument shown in the above table cover the period from 1 January 2017 to his resignation date. *** Margaret W C Cheng, Peter R Ewen, Herbert L W Hui and Adi T S Lau were appointed as Members of the Executive Directorate on the respective dates shown in the above table. The amounts of their emoluments shown in the above table cover the period from the date of their appointment to 31 December 2016.
222 MTR Corporation • under suchgrants,ingeneral,covered aperiodofthreeyearsfromthedategrant.Theentitlementseach oftheMembersareasfollows: Scheme on27April2015,82016, 19August2016and10April2017.PerformanceSharesofferedtoMembers oftheExecutiveDirectorate Restricted SharesandPerformanceweregrantedtoMembersof the ExecutiveDirectorateunderCompany’sShareIncentive • • • • • • • • • 25 October2013.TheentitlementsofeachtheMembersareasfollows: on 10December2007,82008,12June2009,282010,1623March2012,26April2013and Share optionsweregrantedtoMembersoftheExecutiveDirectorateunderCompany’s2007OptionScheme,whichofferedthem Alternate Directorswerenotentitledtodirector’sfees. respective periods,wasreceivedbytheHKSARGovernmentratherthanindividualspersonally. the periodfrom4July2017to31December2017),beingSecretaryforFinancialServicesandTreasuryofHKSARGovernment The director’sfeeinrespectofProfessorChanKa-keung,Ceajer(fortheperiodfrom1January2017to3July2017)andJamesHenryLauJr the HKSARGovernmentratherthanbyindividualsconcerned. Chief ExecutiveoftheHKSARpursuanttoSection8MassTransitRailwayOrdinance(Chapter556LawsHongKong),werereceivedby 2017 to15JulyandMableChanfortheperiodfrom11October31December2017),eachofwhomwasappointedDirectorby Development (Works)(HonChi-keung)andtheofficeofCommissionerforTransport(IngridYeungHoPoi-yanperiodfrom1January 1 January2017toJulyandFrankChanFanfortheperiodfrom31December2017),officeofPermanentSecretary The director’sfeesinrespectoftheofficeSecretaryforTransportandHousing(ProfessorAnthonyCheungBing-leungforperiodfrom under ExecutiveShareIncentiveScheme. The aboveemolumentsdonotincludethefairvalueofshareoptionsgrantedunder2007ShareOptionSchemeaswellAwardShares A 10
(continued) Remuneration ofMemberstheBoardandExecutiveDirectorate respective fairvalueoftheshare-based paymentsrecognisedfortheyearended31December2017wasHK$5.8 million(2016:HK$5.3million); 2016 and63,900RestrictedShareson 10April2017,ofwhichatotal41,682RestrictedShareswerevested in2017(2016:20,066),andthe Lincoln KLeongwasgranted60,200 RestrictedSharesand255,000Performanceon27April2015,64,850 RestrictedShareson8April fair valueoftheshare-basedpaymentsrecognisedforyearended31 December2016wasHK$53,727. Stephen CKLawwasgrantedoptionsinrespectof196,000shareson1November 2013,ofwhich65,000optionswerevestedin2016,andthe HK$nil (2016:HK$15,290);and vested in2017(2016:62,000),andtherespectivefairvalueofshare-based paymentsrecognisedfortheyearended31December2017was 10 December2009and172010,161,000shareson30March 2012and187,000shareson6May2013,ofwhichnooptionswere Jeny MCYeungwasgrantedoptionsinrespectof75,000shareson12December 2007and65,000shareseachon10December2008, recognised fortheyearended31December2017wasHK$7,381(2016:HK$37,240); 30 May2014,ofwhich27,000optionswerevestedin2017(2016:55,000), andtherespectivefairvalueofshare-basedpayments Philco NKWongwasgrantedoptionsinrespectof70,500shareson30March 2012,81,000shareson6May2013and83,000 31 December2017wasHK$nil(2016:HK$15,043); no optionswerevestedin2017(2016:61,000),andtherespectivefairvalueofshare-basedpaymentsrecognisedforyearended on 10December2009,90,000shares172010,158,50030March2012and184,0006May2013,ofwhich Gillian EMellerwasgrantedoptionsinrespectof55,000shareson12December2007,70,000112008,65,000 recognised fortheyearended31December2017wasHK$7,108(2016:HK$35,876); 30 May2014,ofwhich26,000optionswerevestedin2017(2016:53,000),andtherespectivefairvalueshare-basedpayments each on11December2009and212010,69,000shares30March2012,78,0006May201380,000 Adi TSLauwasgrantedoptionsinrespectof75,000shareson12December2007,65,000112008andshares 31 December2017wasHK$nil(2016:HK$14,673); which nooptionswerevestedin2017(2016:59,500),andtherespectivefairvalueofshare-basedpaymentsrecognisedfortheyearended 35,000 shareson21July2010,65,00020December122,00030March2012and180,5006May2013,of Morris SWCheungwasgrantedoptionsinrespectof65,000shareseachon12December2007,102008and112009, for theyearended31December2017wasHK$nil(2016:HK$16,646); on 6May2013,ofwhichnooptionswerevestedin2017(2016:67,500),andtherespectivefairvalueshare-basedpaymentsrecognised 14 December2009,50,000shareson21July2010,170,00017172,00030March2012and202,500 Jacob CPKamwasgrantedoptionsinrespectof75,000shareson13December2007,65,000each82008and and therespectivefairvalueofshare-basedpaymentsrecognisedfor yearended31December2017wasHK$nil(2016:HK$14,920); 17 December2010,163,500shareson30March2012and182,5006May2013,ofwhichnooptionswerevestedin2017(2016:60,500), David CFTangwasgrantedoptionsinrespectof65,000shareseachon13December2007,122008,152009and and therespectivefairvalueofshare-basedpaymentsrecognisedforyearended31December2017wasHK$nil(2016:HK$20,961); 17 December2010,201,000shareson30March2012and256,0006May2013,ofwhichnooptionswerevestedin2017(2016:85,000), Lincoln KLeongwasgrantedoptionsinrespectof170,000shareseachon12December2007,92008,102009and Remuneration ofMemberstheBoardandExecutiveDirectorate (continued) Annual Report 2017
223
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
10 Remuneration of Members of the Board and the Executive Directorate (continued)
A Remuneration of Members of the Board and the Executive Directorate (continued) • Jacob C P Kam was granted 22,050 Restricted Shares and 57,600 Performance Shares on 27 April 2015, 21,550 Restricted Shares on 8 April 2016 and 22,050 Restricted Shares on 10 April 2017, of which a total of 14,533 Restricted Shares were vested in 2017 (2016: 7,350), and the respective fair value of the share-based payments recognised for the year ended 31 December 2017 was HK$1.6 million (2016: HK$1.4 million); • Margaret W C Cheng was granted 71,428 Restricted Shares on 19 August 2016 and 16,950 Restricted Shares and 30,400 Performance Shares on 10 April 2017, of which a total of 23,809 Restricted Shares were vested in 2017 (2016: nil), and the respective fair value of the share-based payments recognised for the year ended 31 December 2017 was HK$2.8 million (2016: HK$0.7 million); • Morris S W Cheung was granted 28,800 Performance Shares on 27 April 2015, 14,950 Restricted Shares on 8 April 2016 and 13,950 Restricted Shares on 10 April 2017, of which a total of 4,983 Restricted Shares were vested in 2017 (2016: nil), and the respective fair value of the share- based payments recognised for the year ended 31 December 2017 was HK$0.9 million (2016: HK$0.6 million); • Peter Ronald Ewen was granted 35,700 Performance Shares on 8 April 2016 and 15,050 Restricted Shares on 10 April 2017, of which no Restricted Shares were vested in 2017 (2016: nil), and the respective fair value of the share-based payments recognised for the year ended 31 December 2017 was HK$1.0 million (2016: HK$0.4 million); • Herbert L W Hui was granted 15,200 Restricted Shares and 30,400 Performance Shares on 10 April 2017, of which no Restricted Shares were vested in 2017 (2016: nil), and the respective fair value of the share-based payments recognised for the year ended 31 December 2017 was HK$1.3 million (2016: HK$nil); • Adi T S Lau was granted 8,600 Restricted Shares and 12,550 Performance Shares on 27 April 2015, 8,400 Restricted Shares on 8 April 2016 and 17,700 Restricted Shares and 25,050 Performance Shares on 10 April 2017, of which a total of 5,666 Restricted Shares were vested in 2017 (2016: 2,866), and the respective fair value of the share-based payments recognised for the year ended 31 December 2017 was HK$1.5 million (2016: HK$0.4 million); • Gillian E Meller was granted 16,950 Restricted Shares and 57,600 Performance Shares on 27 April 2015, 17,300 Restricted Shares on 8 April 2016 and 16,200 Restricted Shares on 10 April 2017, of which a total of 11,416 Restricted Shares were vested in 2017 (2016: 5,650), and the respective fair value of the share-based payments recognised for the year ended 31 December 2017 was HK$1.4 million (2016: HK$1.3 million); • Linda K P So was granted 16,400 Restricted Shares and 44,050 Performance Shares on 8 April 2016 and 15,300 Restricted Shares on 10 April 2017, of which a total of 5,466 Restricted Shares were vested in 2017 (2016: nil), and the respective fair value of the share-based payments recognised for the year ended 31 December 2017 was HK$1.4 million (2016: HK$0.9 million); • David C F Tang was granted 18,450 Restricted Shares and 57,600 Performance Shares on 27 April 2015, 17,950 Restricted Shares on 8 April 2016 and 17,250 Restricted Shares on 10 April 2017, of which a total of 12,133 Restricted Shares were vested in 2017 (2016: 6,150), and the respective fair value of the share-based payments recognised for the year ended 31 December 2017 was HK$1.4 million (2016: HK$1.3 million); • Philco N K Wong was granted 21,700 Restricted Shares and 57,600 Performance Shares on 27 April 2015, 21,200 Restricted Shares on 8 April 2016 and 19,900 Restricted Shares on 10 April 2017, of which a total of 14,299 Restricted Shares were vested in 2017 (2016: 7,233), and the respective fair value of the share-based payments recognised for the year ended 31 December 2017 was HK$1.6 million (2016: HK$1.4 million); • Jeny M C Yeung was granted 19,350 Restricted Shares and 57,600 Performance Shares on 27 April 2015, 18,850 Restricted Shares on 8 April 2016 and 17,700 Restricted Shares on 10 April 2017, of which a total of 12,733 Restricted Shares were vested in 2017 (2016: 6,450), and the respective fair value of the share-based payments recognised for the year ended 31 December 2017 was HK$1.5 million (2016: HK$1.4 million); and • Stephen C K Law was granted 16,700 Restricted Shares and 57,600 Performance Shares on 27 April 2015, of which a total of 11,132 Restricted Shares were vested in 2016, and the respective fair value of the share-based payments recognised for the year ended 31 December 2016 was HK$0.2 million.
None of the Performance Shares awarded to the Members of the Executive Directorate were vested in 2017.
The details of Board Members’ and Executive Directorate’s interest in the Company’s shares are disclosed in the Report of the Members of the Board and note 45.
For the year ended 31 December 2017, three (2016: three) Members of the Executive Directorate of the Company, whose emoluments are shown above, were among the five individuals whose emoluments were the highest. The total remuneration of the five highest paid individuals for the year is shown below:
in HK$ million 2017 2016 Base pay, allowances and benefits in kind 29.7 31.7 Variable remuneration related to performance 16.6 10.2 Retirement scheme contributions 5.4 5.4 51.7 47.3
224 MTR Corporation conditions havebeenachieved. An awardofPerformanceShareswillvestuponcertificationbytheRemuneration Committeethattherelevantperformancemetricand An awardofRestrictedShareswillvestrateablyoverthreeyearsinequal tranches(unlessotherwisedeterminedbytheRemunerationCommittee). approved performancemetricandinrespectofsuchperiod andanyotherperformanceconditions. performance. PerformanceSharesareawardedwhichvestsubjecttothe performanceoftheCompany,assessedbyreferencetosuchBoard- Restricted Sharesand/orPerformance(collectivelyknownas“Award Shares”).RestrictedSharesareawardedonthebasisofindividual Under theExecutiveShareIncentiveSchemeasdescribedinnote45(ii),allMembersofDirectoratemaybegrantedanaward of theBoard. Award SharesoutstandinginrespectofeachMembertheExecutiveDirectorateasat31December2017aresetoutReportMembers C the dateofoffertograntsuchoptions. Under thevestingtermsofoptions,optionsgrantedwillbeevenlyvestedinrespecttheirunderlyingsharesoveraperiodthreeyearsfrom options toacquiresharesbetween2007and2014(note10A(i)). Under the2007ShareOptionScheme(the“2007Scheme”)asdescribedinnote45(i),allMembersofExecutiveDirectorateweregranted Members oftheBoard. Options exercisedandoutstandinginrespectofeachMembertheExecutiveDirectorateasat31December2017aresetoutReport B The emolumentsofthetop5highestpaidindividualsforyeararewithinfollowingbands: A 10 Company foratermofthreeyears,effective1January2016. of Associationwhenapplicable.ProfessorFrederickMaSi-hangwasappointedbytheHKSARgovernmentasnon-executiveChairman rotation andre-election/electionattheCompany’sannualgeneralmeetingsinaccordancewithArticles89,9192(a)of as anINED/aNEDandaMemberoftherelevantBoardCommittees,forperiodnotexceedingthreeyears.He/sheisalsosubjecttoretirementby Section 8oftheMassTransitRailwayOrdinance(Chapter556LawsHongKong))specifyingtermshis/hercontinuousappointments Ka-keung (upto3July2017)andMrJamesHenryLauJr.(appointedon4butexcludingthreeadditionaldirectorsappointedpursuant (including ProfessorFrederickMaSi-hang(appointedasnon-executiveChairmanfor3yearscommencingon1January2016),ProfessorCeajerChan (iii) million). (ii) HK$14,500,001 –HK$15,500,000 HK$9,500,001 –HK$10,000,000 HK$9,000,001 –HK$9,500,000 HK$8,500,001 –HK$9,000,000 HK$8,000,001 –HK$8,500,000 HK$7,500,001 –HK$8,000,000 (continued) Remuneration ofMemberstheBoardandExecutiveDirectorate ) The Companyhasaservicecontractwitheachoftheindependentnon-executiveDirectors(“INED”)/non-executive(“NED”) The aggregateemolumentsofMemberstheBoardandExecutiveDirectorateforyearwasHK$124.2million(2016:HK$106.4 Award Shares Share Options Remuneration ofMemberstheBoardandExecutiveDirectorate (continued) 2017 5 1 2 1 1 – – Annual Report 2017 2016 1 3 5 1 – – – 225
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
11 Profit on Hong Kong Property Development Profit on Hong Kong property development comprises:
in HK$ million 2017 2016 Share of surplus from property development 609 270 Income from receipt of properties for investment purpose – 83 Agency fee and other income from West Rail property development (note 25C) 535 48 Other overhead costs net of miscellaneous income (47) (90) 1,097 311
12 Depreciation and Amortisation Depreciation and amortisation comprise:
in HK$ million 2017 2016 Depreciation charge on assets relating to: – Hong Kong transport operations 3,617 3,042 – Hong Kong station commercial businesses 125 115 – Hong Kong property rental and management businesses 11 13 – Mainland of China and international subsidiaries 117 101 – Other businesses 65 65 3,935 3,336 Amortisation charge on: – Service concession assets relating to: – Rail Merger with KCRC 900 771 – Mainland of China and international subsidiaries 447 426 – Property management rights 1 1 1,348 1,198 – Utilisation of government subsidy for Shenzhen Metro Longhua Line operation (428) (407) 920 791 4,855 4,127
226 MTR Corporation 13 and crosscurrencyswapswasHK$109million(2016:HK$32ofloss),thusresultinginanetgainHK$6HK$2million). was HK$103million(2016:HK$34ofgain)whilethegainresultingfromfairvaluechangeshedginginstrumentscomprisinginterestrate During theyearended31December2017,lossresultingfromfairvaluechangesofunderlyingfinancialassetsandliabilitiesbeinghedged Longhua LinewereHK$126million(2016:HK$143million),whichwasfullyoffsetbythesubsidyreceivedfromShenzhenMunicipalGovernment. During theyearended31December2017,interestandfinancechargesnetofexpensescapitalisedinrelationtoShenzhenMetro borrowings and/ortherelevantgroupcompanies’borrowingcostwhichvariedfrom2.2%to2.5%perannum(2016:2.3%6.7%annum). During theyearended31December2017,interestexpensescapitalisedwerecalculatedonamonthlybasisatpre-determinedcostof Interest incomeinrespectofdepositswithbanks Interest expensescapitalised Derivative financialinstruments: Utilisation ofgovernmentsubsidyforShenzhenMetroLonghuaLineoperation Exchange loss Finance charges
Interest expensesinrespectof: in HK$million – Derivativesnotqualifiedforhedgeaccounting – Hedgeofnetinvestments: – Cashflowhedges: – Fairvaluehedges – Otherobligations(note20F) – Obligationsunderserviceconcession – Bankloans,overdraftsandcapitalmarketinstruments Interest andFinanceCharges –ineffectiveportion –transferredfromhedgingreservetooffsetexchangeloss –transferredfromhedgingreservetointerestexpenses (235) 191 707 986 61 21 (6) 1 4 – 2017 1,231 1,966 (326) (373) (236) (126) 905 710 739 (11) 75 74 20 20 (2) Annual Report 2017 5 – 2016 1,618 (243) (632) (143) 612 855 12 227
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
14 Income Tax
A Income tax in the consolidated profit and loss account represents:
in HK$ million 2017 2016 Current tax – Hong Kong Profits Tax 1,305 989 – Mainland of China and overseas tax 1,650 326 2,955 1,315 Less: Utilisation of government subsidy for Shenzhen Metro Longhua Line operation (47) (75) 2,908 1,240 Deferred tax – Origination and reversal of temporary differences on: – tax losses 4 49 – depreciation allowances in excess of related depreciation 361 771 – provisions and others 45 33 410 853 3,318 2,093
The provision for Hong Kong Profits Tax for the year ended 31 December 2017 is calculated at 16.5% (2016: 16.5%) on the estimated assessable profits for the year after deducting accumulated tax losses brought forward, if any. Current taxes for the Mainland of China and overseas subsidiaries are charged at the appropriate current rates of taxation ruling in the relevant countries.
The provision of Land Appreciation Tax is estimated according to the requirements set forth in the relevant Mainland of China tax laws and regulations. Land Appreciation Tax has been provided at ranges of progressive rates of the appreciation value, with certain allowable deductions. During the year ended 31 December 2017, Land Appreciation Tax of HK$735 million (2016: HK$84 million) was charged to profit or loss.
Provision for deferred tax on temporary differences arising in Hong Kong is calculated at the Hong Kong Profits Tax rate at 16.5% (2016: 16.5%), while that arising in the Mainland of China and overseas is calculated at the appropriate current rates of taxation ruling in the relevant countries.
The Company purchased tax reserve certificates during the year. Please refer to note 33 to the consolidated accounts for details.
B Reconciliation between tax expense and accounting profit at applicable tax rates:
2017 2016
HK$ million % HK$ million % Profit before taxation 20,203 12,441 Notional tax on profit before taxation, calculated at the rates applicable to profits in the tax jurisdictions concerned 3,615 17.9 2,089 16.8 Land Appreciation Tax (net of tax effect on deduction of Enterprise Income Tax) 551 2.7 63 0.5 Tax effect of non-deductible expenses 685 3.4 386 3.1 Tax effect of non-taxable revenue (1,441) (7.1) (415) (3.3) Tax effect of unused tax losses not recognised (45) (0.2) 45 0.3 Utilisation of government subsidy for Shenzhen Metro Longhua Line operation (47) (0.2) (75) (0.6) Actual tax expenses 3,318 16.5 2,093 16.8
228 MTR Corporation During theyear,ordinarydividendspaidandproposedtoshareholdersofCompanycomprise: 15 Dividends million) andtheweightedaveragenumberofordinarysharesinissuelessheldforShareIncentiveScheme,whichiscalculatedasfollows: The calculationofbasicearningspershareisbasedontheprofitforyearattributabletoshareholdersHK$16,829milli(2016:HK$10,254 A 16 Details ofordinarydividendsandspecialdividendpaidtotheFinancialSecretaryIncorporatedaredisclosedinnote49O. alternative forthespecialdividend.Detailsaresetoutinnote24A. been satisfied.Thefirsttrancheofspecialdividendwaspaidon13July2016andthesecond122017.Therenoscrip Legislative CouncilinrespectoftheHKSARGovernment’sadditionalfundingobligationswasobtainedon11March2016,Conditionshave Given theCompany’sindependentshareholdersgavetheirapprovalatGeneralMeetingheldon1February2016andapprovalfromHKSAR to thatdate). being grantedpriortotheBackStopDate(being30September2016orearlier,ifaterminationofXRLEntrustmentAgreementiscommenced (ii) (i) on satisfactionofthefollowingconditionsspecifiedinXRLAgreement(the“Conditions”): Company willpayaspecialdividendofHK$4.40inaggregatepersharetwoequaltranches(HK$2.20casheachtranche)conditional Pursuant totheagreemententeredintobetweenHKSARGovernmentandCompanydated30November2015(the“XRLAgreement”), addresses inNewZealandortheUnitedStatesofAmericaanyitsterritoriespossessions. For 2017interimandfinalordinarydividends,scripdividendelectionswereofferedtoallshareholdersexceptshareholderswithregistered The finalordinarydividendproposedaftertheendofreportingperiodhasnotbeenrecognisedasaliabilityatreportingperiod. Ordinary dividendspaidattributabletothepreviousyear Ordinary dividendspayableattributabletotheyear in HK$million Weighted averagenumberofordinaryshareslessheldforShareIncentive Scheme Less: SharesheldforShareIncentiveScheme Effect ofshareoptionsexercised Effect ofscripdividendissued Issued ordinarysharesat1January – Final ordinary dividend of HK$0.82 (2015: HK$0.81) per share approved and – FinalordinarydividendofHK$0.82(2015:HK$0.81)pershareapprovedand – Final ordinary dividend proposed after the end of reporting period of – Finalordinarydividendproposedaftertheendofreportingperiod – InterimordinarydividenddeclaredHK$0.25(2016:HK$0.25)pershare at 31December Earnings PerShare HKSAR LegislativeCouncilapprovalinrespectoftheGovernment’sadditionalfundingobligations, independent shareholderapproval;and Basic EarningsPerShare
payable/paid duringtheyear HK$0.87 (2016:HK$0.82)pershare
5,949,116,555 5,905,290,065 42,276,913 (4,968,141) 6,517,718 4,848 6,728 5,227 1,501 2017 2017 Annual Report 2017 5,878,480,682 5,858,228,236 17,603,974 (5,242,719) 7,891,191 4,763 6,317 4,842 1,475 2016 2016 229
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
16 Earnings Per Share (continued) B Diluted Earnings Per Share The calculation of diluted earnings per share is based on the profit for the year attributable to shareholders of HK$16,829 million (2016: HK$10,254 million) and the weighted average number of ordinary shares in issue less shares held for Share Incentive Scheme after adjusting for the dilutive effect of the Company’s share option scheme and Share Incentive Scheme, which is calculated as follows:
2017 2016 Weighted average number of ordinary shares less shares held for Share Incentive Scheme at 31 December 5,949,116,555 5,878,480,682 Effect of dilutive potential shares under the share option scheme 6,358,526 9,498,438 Effect of shares awarded under Share Incentive Scheme 5,836,521 4,961,616 Weighted average number of shares (diluted) at 31 December 5,961,311,602 5,892,940,736
C Basic and diluted earnings per share would have been HK$1.77 (2016: HK$1.61) and HK$1.76 (2016: HK$1.60) respectively, if the calculation is based on profit attributable to shareholders of the Company arising from underlying businesses of HK$10,515 million (2016: HK$9,446 million).
17 Segmental Information The Group’s businesses consist of (i) recurrent businesses (comprising Hong Kong transport operations, Hong Kong station commercial businesses, Hong Kong property rental and management businesses, Mainland of China and international railway, property rental and management businesses and other businesses) and (ii) property development businesses (together with recurrent businesses referred to as underlying businesses).
The Group manages its businesses by the various business executive committees. In a manner consistent with the way in which information is reported internally to the Group’s most senior executive management for the purposes of resource allocation and performance assessment, the Group has identified the following reportable segments:
(i) Hong Kong transport operations: The provision of passenger operation and related services on the urban mass transit railway system in Hong Kong, the Airport Express serving both the Hong Kong International Airport and the AsiaWorld-Expo at Chek Lap Kok, cross-boundary railway connection with the border of Mainland of China at Lo Wu and Lok Ma Chau, light rail and bus feeder with railway system in the north-west New Territories and intercity railway transport with certain cities in the Mainland of China.
(ii) Hong Kong station commercial businesses: Commercial activities including the letting of advertising, retail and car parking space at railway stations, the provision of telecommunication and bandwidth services in railway premises and other commercial activities within the Hong Kong transport operations network.
(iii) Hong Kong property rental and management businesses: The letting of retail, office and car parking space and the provision of estate management services in Hong Kong.
(iv) Hong Kong property development: Property development activities at locations near the railway systems in Hong Kong.
(v) Mainland of China and international railway, property rental and management businesses: The construction, operation and maintenance of mass transit railway systems including station commercial activities outside of Hong Kong and the letting of retail spaces and provision of estate management services in the Mainland of China.
(vi) Mainland of China property development: Property development activities in the Mainland of China.
(vii) Other businesses: Businesses not directly relating to transport operations or properties such as Ngong Ping 360, which comprises cable car operation in Tung Chung and related businesses at the Ngong Ping Theme Village, railway consultancy business and the provision of project management services to the HKSAR Government.
230 MTR Corporation * The resultsofthereportablesegmentsandreconciliationtocorrespondingconsolidatedtotalsinaccountsareshownbelow: 17 Other segmentassets mainlyincludedebtors,storesandspares, cashandequivalentsotherassets employedintheoperationsofindividualbusiness segments. Profit fortheyearended Income tax Share ofprofitorloss Total assets Investment propertyrevaluation Interests inassociatesand Interest andfinancecharges Properties heldforsale Operating profitbeforeinterest Investments insecurities Variable annualpayment Deferred taxassets Depreciation andamortisation Deferred expenditure Operating profitbefore Property development development Profit onHongKongproperty Goodwill
Operating profitbefore Non-cash expensesotherthan Property managementrights Total liabilities Project studyandbusiness in progress Other segmentassets* concession Obligations underservice Operating expenses in HK$million Capital expenditureon: Other Information Segment liabilities Liabilities Fixed assets Assets Revenue 2017 31 December2017 associates andjointventure joint venture and financecharges and variableannualpayment depreciation, amortisation in progress annual payment amortisation andvariable development, depreciation, development, depreciation, Hong Kong property Hong Kongproperty depreciation andamortisation development expenses Property development Property development Fixed assets Segmental Information
Hong Kong Hong Kong operations transport transport 124,218 121,904 (10,726) 19,711 10,292 18,201 (1,340) (4,479) 1,656 1,656 7,475 7,475 2,256 4,708 9,419 58 38 – – – – – – – – – – – – – – commercial commercial Hong Kong Hong Kong businesses (continued) station station 4,722 2,412 4,722 5,474 5,474 3,242 3,242 2,171 5,975 (589) (163) (501) 239 315 2 3 – – – – – – – – – – – – – – – Hong Kong Hong Kong businesses rental and rental and manage- property property 10,396 77,536 77,148 6,314 4,082 4,098 4,098 2,091 2,091 4,900 ment ment (802) 343 726 (12) 19 26 (4) – – – – – – – – – – – – – – Hong Kong Hong Kong develop- property property 16,403 14,810 1,097 1,097 1,097 8,433 8,433 ment (181) 916 876 483 716 1 1 – – – – – – – – – – – – – – – – – management management international international Mainland of Mainland of Mainland of China and Mainland ofChinaand international affiliates businesses rental and rental and China and China and property property (16,088) railway, railway, 19,330 16,990 5,926 7,853 5,517 7,760 7,675 (139) (136) 935 321 766 902 902 178 190 (13) 64 63 1 – – – – – – – – – – Mainland develop- property property of China of China (1,441) (4,682) 1,019 5,921 2,314 2,314 2,314 1,217 5,380 1,217 6,996 ment 146 471 272 70 70 – – – – – – – – – – – – – – – businesses (2,318) 4,607 2,201 1,898 2,201 2,378 Other Other 168 173 912 443 633 718 (65) 60 60 98 (5) 3 2 – – – – – – – – – – – – allocated allocated amount Annual Report 2017 13,341 52,594 13,341 52,594 (2,927) (1,557) (1,038) (332) (332) (332) (332) Un- – – – – – – – – – – – – – – – – – – – – 263,768 209,772 (35,117) 16,885 14,300 21,088 14,810 19,991 97,342 29,690 10,470 86,872 55,440 (3,318) (1,933) (4,855) 6,314 6,838 1,347 1,097 6,108 Total (905) (332) 494 443 710 755 69 63 44 26 231
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
17 Segmental Information (continued)
Mainland of China and international affiliates
Mainland of China and Hong Kong international property railway, Mainland Hong Kong rental and Hong Kong property of China Hong Kong station manage- property rental and property Un- transport commercial ment develop- management develop- Other allocated in HK$ million operations businesses businesses ment businesses ment businesses amount Total
2016 Revenue 17,655 5,544 4,741 – 13,478 1,348 2,423 – 45,189 Operating expenses (10,022) (532) (811) – (12,890) (982) (2,278) – (27,515) Project study and business development expenses – – – – – – – (361) (361) Operating profit before Hong Kong property development, depreciation, amortisation and variable annual payment 7,633 5,012 3,930 – 588 366 145 (361) 17,313 Profit on Hong Kong property development – – – 311 – – – – 311 Operating profit before depreciation, amortisation and variable annual payment 7,633 5,012 3,930 311 588 366 145 (361) 17,624 Depreciation and amortisation (3,780) (148) (14) – (120) – (65) – (4,127) Variable annual payment (1,281) (502) (4) – – – – – (1,787) Operating profit before interest and finance charges 2,572 4,362 3,912 311 468 366 80 (361) 11,710 Interest and finance charges – – – – (16) 90 – (686) (612) Investment property revaluation – – 808 – – – – – 808 Share of profit or loss of associates – – – – 288 (2) 249 – 535 Income tax – – – (44) (130) (191) – (1,728) (2,093) Profit for the year ended 31 December 2016 2,572 4,362 4,720 267 610 263 329 (2,775) 10,348 Assets Fixed assets 121,418 2,059 70,116 – 7,659 – 690 – 201,942 Other segment assets * 2,291 297 332 623 3,902 5,915 1,781 13,422 28,563 Property management rights – – 27 – – – – – 27 Goodwill – – – – 57 – – – 57 Property development in progress – – – 14,479 – 3,005 – – 17,484 Deferred expenditure 30 – 12 – – – 421 – 463 Deferred tax assets – 2 – – 12 11 – – 25 Investments in securities – – – – – – 370 – 370 Properties held for sale – – – 985 – 409 – – 1,394 Interests in associates – – – – 4,915 1,230 870 – 7,015 Total assets 123,739 2,358 70,487 16,087 16,545 10,570 4,132 13,422 257,340 Liabilities Segment liabilities 24,361 2,989 2,005 2,339 7,226 7,267 2,019 49,071 97,277 Obligations under service concession 10,344 – – – 163 – – – 10,507 Total liabilities 34,705 2,989 2,005 2,339 7,389 7,267 2,019 49,071 107,784 Other Information Capital expenditure on: Fixed assets 4,968 285 679 – 183 – 15 – 6,130 Railway construction in progress 5,376 – – – – – – – 5,376 Property development in progress – – – 435 – 525 – – 960 Non-cash expenses other than depreciation and amortisation 57 5 – – 3 – – – 65
* Other segment assets mainly include debtors, stores and spares, cash and cash equivalents and other assets employed in the operations of individual business segments.
232 MTR Corporation A 18 assets, propertymanagementrightsandgoodwill,thelocationofoperationincaseinterestsassociatesjointventure. proposed capitalprojectinthecaseofdeferredexpenditure,locationoperationtowhichtheyarerelatedcaseserviceconcession of theassetincaseproperty,plantandequipment,railwayconstructionprogresspropertydevelopmentprogress,location the serviceswereprovidedorgoodsdelivered.Thegeographicallocationofspecifiednon-currentassetsisbasedonthephysical interests inassociatesandjointventure(“specifiednon-currentassets”).Thegeographicallocationofcustomersisbasedontheatwhich assets, propertymanagementrights,goodwill,railwayconstructioninprogress,developmentdeferredexpenditureand The followingtablesetsoutinformationaboutthegeographicallocationofGroup’srevenuefromexternalcustomersandfixed exceeded 10%oftheGroup’srevenue. Approximately12.22%(2016:14.38%)totalrevenuewasattributabletothiscustomer. For theyearended31December2017,revenuefromone(2016:one)customerofMainlandChinaandinternationalaffiliatessegmenthas interest-bearing loansandborrowings,currenttaxationaswelldeferredtaxliabilities. Unallocated assetsandliabilitiesmainlycomprisecash,bankbalancesdeposits,taxreservecertificates,derivativefinancialliabilities, 17
in HK$million Other comprehensiveincome Cash flowhedges:netmovementinhedging Remeasurement ofnetliabilitydefined Surplus onrevaluationofself-occupiedland in HK$million Exchange differencesontranslationof: Hong Kong(placeofdomicile) Australia Mainland ofChina Sweden United Kingdom Other countries reserve (note18B) benefit schemes and buildings – Non-controllinginterests – Financialstatementsofoverseassubsidiaries, Other ComprehensiveIncome Segmental Information Tax effectsrelatingtoeachcomponentofothercomprehensiveincometheGroupareshownbelow:
associates andjointventure
(continued)
Before-tax Before-tax amount 2,122 1,004 (181) 302 997 981 Revenue fromexternalcustomers 16 31,194 10,024 24,246 55,440 7,846 4,982 1,184 2017 210 (expense)/ (expense)/ benefit 2017 (183) (166) Tax (49) 32 – – – Net-of-tax Net-of-tax amount 1,939 30,246 14,943 45,189 (149) 838 253 997 981 8,641 2,176 2,952 1,086 2016 16 88 Before-tax Before-tax amount (108) (863) (856) 450 149 156 Specified non-currentassets (7) 218,401 232,219 12,525 13,818 2017 376 807 110 expense – 2016 (126) Tax (75) (26) (25) Annual Report 2017 – – – Net-of-tax Net-of-tax amount 210,120 226,988 15,702 16,868 2016 (234) (863) (856) 375 123 131 355 719 92 (7) – 233
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
18 Other Comprehensive Income (continued)
B The components of other comprehensive income of the Group relating to cash flow hedges are as follows:
in HK$ million 2017 2016 Cash flow hedges: Effective portion of changes in fair value of hedging instruments recognised during the year 50 427 Amounts transferred to initial carrying amount of hedged items (2) 2 Amounts transferred to profit or loss: – Interest and finance charges (note 13) (231) 9 – Other expenses (note 9E) 2 12 (181) 450 Tax effect resulting from: – Changes in fair value of hedging instruments recognised during the year (7) (71) – Amounts transferred to profit or loss 39 (4) (149) 375
19 Investment Properties Movements and analysis of the Group’s and the Company’s investment properties, all of which being held in Hong Kong and carried at fair value, are as follows:
The Group The Company
in HK$ million 2017 2016 2017 2016 At 1 January 70,060 68,388 68,517 66,900 Additions 712 672 699 646 Transfer from other property, plant and equipment (note 20) – 192 – 192 Change in fair value 6,314 808 6,136 779 At 31 December 77,086 70,060 75,352 68,517 Long leases 17 18 17 18 Medium-term leases 77,069 70,042 75,335 68,499 77,086 70,060 75,352 68,517
All investment properties of the Group were revalued at 31 December 2017 and 2016. Details of the fair value measurement are disclosed in note 44. The net increase in fair value of HK$6,314 million (2016: HK$808 million) arising from the revaluation has been credited to the consolidated profit and loss account. Investment properties are revalued semi-annually by Jones Lang LaSalle Limited and future market condition changes may result in further gains or losses to be recognised through profit and loss account in subsequent periods. The amount as at 31 December 2016 include investment properties under development of HK$2,585 million.
The Group’s future minimum lease receipts in respect of investment properties under non-cancellable operating leases are disclosed together with those in respect of other properties under note 20D.
234 MTR Corporation The Group 20 Net bookvalueat 31 December2016 Aggregate depreciation At 31December2016Valuation At Cost
Disposals/write-offs Additions Cost orValuation 2016 Net bookvalueat31December2017
Aggregate depreciation At 31December2017Valuation At Cost Disposals/write-offs Additions Cost orValuation 2017 in HK$million At 31December2016 Exchange differences Written backonrevaluation Written backondisposals Charge fortheyear At 1January2016 At 31December2016 Exchange differences Other assetscommissioned Transfer fromrailwayconstruction Transfer toadditionalconcession Transfer toinvestmentproperties(note19) Reclassification withinotherproperty, Surplus onrevaluation At 1January2016 At 31December2017 Exchange differences Written backonrevaluation Written backondisposals Charge fortheyear At 1January2017 At 31December2017 Exchange differences Other assetscommissioned Transfer toadditionalconcession Reclassification withinotherproperty, Surplus onrevaluation At 1January2017 Other Property,PlantandEquipment in progress(note23) property (note21) plant andequipment property (note21) plant andequipment
Leasehold Leasehold 1,451 1,757 1,757 1,757 1,757 1,025 1,485 1,757 land 306 272 272 258 732 34 14 – – – – – – – – – – – – – – – – – – – – – – – buildings occupied occupied land and land and 3,748 3,748 3,748 3,566 3,566 3,566 3,566 3,721 (120) Self- (119) (192) 120 182 119 37 – – – – – – – – – – – – – – – – – – – – – – – Civil works 53,635 61,981 61,981 61,508 61,508 13,822 53,684 61,508 47,408 8,346 7,824 7,824 7,414 526 127 350 410 281 (4) (4) (2) (1) – – – – – – – – – – – – – – – – equipment Plant and Plant and 40,269 45,448 42,565 85,717 85,717 84,146 42,565 40,250 84,146 41,581 84,146 73,670 3,255 2,010 9,313 2,793 1,480 (418) (348) (461) (459) (523) 132 244 285 (19) (74) 46 (6) (7) 2 – – – – – – – construction (2,137) Assets Assets (1,761) under under 3,786 3,786 3,786 3,297 2,630 3,297 3,297 3,297 2,841 1,967 280 (11) (10) (19) (2) (1) 4 5 Annual Report 2017 – – – – – – – – – – – – – – – – – – 102,889 156,989 153,241 154,274 154,274 103,613 150,708 127,498 54,100 50,661 50,661 47,922 24,440 3,935 3,748 2,874 3,336 3,566 3,126 Total (120) (422) (476) (119) (459) (192) (543) 136 182 (19) (75) (17) 46 37 (1) – – – – 235
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
20 Other Property, Plant and Equipment (continued) The Company
Self- occupied Assets Leasehold land and Plant and under in HK$ million land buildings Civil works equipment construction Total 2017 Cost or Valuation At 1 January 2017 1,757 3,566 61,508 81,848 3,218 151,897 Additions – – – 64 2,543 2,607 Disposals/write-offs – – (4) (457) (11) (472) Surplus on revaluation – 182 – – – 182 Reclassification within other property, plant and equipment – – 350 (350) – – Transfer to additional concession property (note 21) – – – (6) 5 (1) Other assets commissioned – – 128 1,929 (2,057) – At 31 December 2017 1,757 3,748 61,982 83,028 3,698 154,213
At Cost 1,757 – 61,982 83,028 3,698 150,465 At 31 December 2017 Valuation – 3,748 – – – 3,748
Aggregate depreciation At 1 January 2017 272 – 7,824 41,473 – 49,569 Charge for the year 34 120 526 3,098 – 3,778 Written back on disposals – – (4) (415) – (419) Written back on revaluation – (120) – – – (120) At 31 December 2017 306 – 8,346 44,156 – 52,808 Net book value at 31 December 2017 1,451 3,748 53,636 38,872 3,698 101,405 2016 Cost or Valuation At 1 January 2016 732 3,721 47,408 71,424 1,933 125,218 Additions – – – 174 2,775 2,949 Disposals/write-offs – – (1) (518) (19) (538) Surplus on revaluation – 37 – – – 37 Reclassification within other property, plant and equipment – – (2) 2 – – Transfer to investment properties (note 19) – (192) – – – (192) Transfer to additional concession property (note 21) – – – (7) (10) (17) Transfer from railway construction in progress (note 23) 1,025 – 13,822 9,313 280 24,440 Other assets commissioned – – 281 1,460 (1,741) – At 31 December 2016 1,757 3,566 61,508 81,848 3,218 151,897
At Cost 1,757 – 61,508 81,848 3,218 148,331 At 31 December 2016 Valuation – 3,566 – – – 3,566
Aggregate depreciation At 1 January 2016 258 – 7,414 39,282 – 46,954 Charge for the year 14 119 410 2,649 – 3,192 Written back on disposals – – – (458) – (458) Written back on revaluation – (119) – – – (119) At 31 December 2016 272 – 7,824 41,473 – 49,569 Net book value at 31 December 2016 1,485 3,566 53,684 40,375 3,218 102,328
236 MTR Corporation Total futureminimumleasereceiptsundernon-cancellableoperatingleasesarereceivableasfollows: HK$377 million). use inoperatingleaseswereHK$733million(2016:HK$686million)andtherelatedaccumulateddepreciationchargesHK$415 HK$67,475 million)andHK$75,352million(2016:HK$65,932respectively.ThecostsofstationkioskstheGrouptheCompanyheldfor The grosscarryingamountsofinvestmentpropertiestheGroupandCompanyheldforuseinoperatingleaseswereHK$77,086million(2016: receivable. to thresholds.Leaseincentivesgrantedareamortisedintheconsolidatedprofitandlossaccountasanintegralpartofnetleasepayment are adjustedperiodicallytoreflectmarketrentals.Certainleasescarryadditionalrentalbasedonturnover,someofwhicharewithreference an initialperiodofonetotenyears,withoptionrenewtheleaseafterthatdate,atwhichtimealltermswillberenegotiated.Leasepayments The GroupandCompany (2016: HK$770million)hadthelandandbuildingsbeenstatedatcostlessaccumulateddepreciation. revaluation reserve(note42F).Thecarryingamountoftheself-occupiedlandandbuildingsat31December2017wouldhavebeenHK$744million tax expensesofHK$49million(2016:HK$25million)hasbeenrecognisedinothercomprehensiveincomeandaccumulatedthefixedassets the fairvaluemeasurementaredisclosedinnote44.TherevaluationsurplusofHK$302million(2016:HK$156million)andrelateddeferred A 20 D C B with asexpensesrelatingtoHongKongtransportoperationsintheconsolidatedprofitandlossaccount. Company’s obligationformaintenanceislimitedtotherailwayonly.Allcostsincurredundertermsofleasehavebeendealt its owncost.Withrespecttopartsoftherailwaysituatedinstructureswhereaccessissharedwithotherusers,suchasLantauFixedCrossing, Under thetermsoflease,Companyundertakestokeepandmaintainallleasedareas,includingundergroundoverheadstructures,at Agreement (notes49A,49Band49C). Company underarunninglineleasewhichiscoterminouswiththeCompany’sfranchisetooperatemasstransitrailwayOperating The leaseofthelandonwhichcivilworksaswellplantandequipmentaresituatedforHongKongtransportoperationswasgrantedto
in HK$million At netbookvalue in HK$million Within 1year After 1yearbutwithin5years Later than5years – medium-termleases – longleases Other Property,PlantandEquipment pically run for The Groupleasesoutinvestmentpropertiesandstationkiosks,includingdutyfreeshops,underoperatingleases.typicallyrunfor Assets underconstructionincludecapitalworksonoperatingrailway. The leasetermoftheGroup’sandCompany’sleaseholdlandisanalysedasfollows: details of All self-occupiedlandandbuildingsoftheGroupareheldinHongKongundermedium-termleasescarriedatfairvalue.Thedetails 15,663 24,163 7,852 2017 648 (continued) The Group 15,412 25,000 7,262 2,326 2016 14,566 22,083 1,451 1,326 7,393 2017 2017 125 124 The Company Annual Report 2017 14,819 23,784 1,485 1,357 6,934 2,031 2016 2016 128 237
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
20 Other Property, Plant and Equipment (continued)
E In addition to the leasehold land classified as being held under a finance lease in note 20A above, the Group leases plant and equipment under finance leases expiring in 2024. At the end of the lease term the Group has the option to purchase the leased equipment at a price deemed to be a bargain purchase option. The lease does not include contingent rental.
At the end of the reporting period, the net book value of plant and equipment under finance lease of the Group was HK$484 million (2016: HK$437 million).
F In March 2003, the Group entered into a series of structured transactions with unrelated third parties to lease out and lease back certain of its passenger cars (“Lease Transaction”) involving a total original cost of HK$2,562 million and a total net book value of HK$1,674 million as at 31 March 2003. Under the Lease Transaction, the Group has leased the assets to institutional investors in the United States (the “Investors”), who have prepaid all the rentals in relation to the lease agreement. Simultaneously, the Group has leased the assets back from the Investors based on terms ranging from 21 to 29 years with an obligation to pay rentals in accordance with a pre-determined payment schedule. The Group has an option to purchase the Investors’ leasehold interest in the assets at the expiry of the lease term for fixed amounts. Part of the rental prepayments received from the Investors has been invested in debt securities to meet the Group’s rental obligations and the amount payable for exercising the purchase option under the Lease Transaction. The Group has an obligation to replace these debt securities with other debt securities in the event those securities do not meet certain credit ratings requirements. In addition, the Group has provided standby letters of credit to the Investors to cover additional amounts payable by the Group in the event the transactions are terminated prior to the expiry of the lease terms.
The Group retains legal title to the assets and there are no restrictions on the Group’s ability to utilise these assets in the operation of the railway business.
As a result of the Lease Transaction, an amount of approximately HK$3,688 million was received in an investment account and was used to purchase debt securities (“Defeasance Securities”) to be used to settle the long-term lease payments with an estimated net present value of approximately HK$3,533 million in March 2003. This resulted in the Group having received in 2003 an amount of HK$141 million net of costs. As the Group is not able to control the investment account in pursuit of its own objectives and its obligations to pay the lease payments are funded by the proceeds of the above investments, those obligations and investments in the Defeasance Securities were not recognised in March 2003 as liabilities and assets of the Group. The net amount of cash received was accounted for as deferred income by the Group and amortised to the consolidated profit and loss account over the lease period until 2008, when credit ratings of some of these Defeasance Securities were downgraded and subsequently replaced by standby letters of credit, the charge on which had fully offset the remaining balance of the deferred income.
238 MTR Corporation The Group Movements andanalysisoftheGroupCompany’sserviceconcessionassetsareasfollows: 21 Net bookvalueat31December2016
Accumulated amortisation
entrustment works
Disposals Cost 2016 Net bookvalueat31December2017
Accumulated amortisation
Disposals in HK$million
Cost 2017 At 31December2016 Exchange differences Written-off ondisposals Charge fortheyear At 1January2016 At 31December2016 Exchange differences Recoveries from Government for Recoveries fromGovernmentfor Transfer to other property, plant and Transfer tootherproperty,plantand Net additionsduringtheyear At 1January2016 At 31December2017 Exchange differences Written-off ondisposals Charge fortheyear At 1January2017 At 31December2017 Exchange differences Capitalisation adjustments Transfer from other property, plant and Transfer fromotherproperty,plantand Net additionsduringtheyear At 1January2017 Service ConcessionAssets equipment (note20) equipment (note20)
concession concession property 12,156 15,226 15,226 KCRC RailMerger 12,460 15,226 15,226 3,070 2,766 Initial Initial 2,766 2,461 304 305 – – – – – – – – – – – – – – concession concession Additional Additional property 10,872 13,114 10,747 10,747 2,242 1,697 2,440 9,050 1,697 1,294 2,252 8,569 596 466 (51) (74) (63) (91) 17 1 – – – – – – Shenzhen Shenzhen Longhua Longhua Metro Metro 6,710 2,290 1,723 9,000 8,430 6,707 1,723 1,428 8,430 9,070 (112) (582) (125) Line 148 431 642 411 (12) (90) (34) 52 75 (4) (8) – – Nordic MTR MTR 22 62 54 84 18 65 11 54 51 65 65 (4) (5) 8 1 7 5 – – – – – – – – – Crossrail London London (11) Annual Report 2017 37 22 12 59 53 41 12 53 64 (1) 2 8 6 5 8 – – – – – – – – – – 29,797 37,483 34,521 28,269 34,521 32,994 7,686 1,347 6,252 2,510 6,252 5,239 1,197 2,332 Total (108) (117) (598) (125) 150 649 (63) (90) (67) (99) 17 1 239
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
21 Service Concession Assets (continued) The Company
KCRC Rail Merger
Initial Additional concession concession in HK$ million property property Total 2017 Cost At 1 January 2017 15,226 10,715 25,941 Net additions during the year – 2,440 2,440 Disposals – (74) (74) Transfer from other property, plant and equipment (note 20) – 1 1 At 31 December 2017 15,226 13,082 28,308 Accumulated amortisation At 1 January 2017 2,766 1,697 4,463 Charge for the year 304 596 900 Written-off on disposals – (51) (51) At 31 December 2017 3,070 2,242 5,312 Net book value at 31 December 2017 12,156 10,840 22,996 2016 Cost At 1 January 2016 15,226 8,569 23,795 Net additions during the year – 2,220 2,220 Disposals – (91) (91) Transfer to other property, plant and equipment (note 20) – 17 17 At 31 December 2016 15,226 10,715 25,941 Accumulated amortisation At 1 January 2016 2,461 1,294 3,755 Charge for the year 305 466 771 Written-off on disposals – (63) (63) At 31 December 2016 2,766 1,697 4,463 Net book value at 31 December 2016 12,460 9,018 21,478
Initial concession property relates to the payments recognised at inception of the Rail Merger with KCRC while additional concession property relates to the expenditures for the replacement and/or upgrade of the initial concession property after inception of the Rail Merger.
22 Property Management Rights Property management rights relate to the rights acquired by the Company from KCRC in the Rail Merger in respect of existing and future managed properties on the Appointed Day.
The Group and The Company
in HK$ million 2017 2016 Cost at 1 January and 31 December 40 40
Accumulated amortisation At 1 January 13 12 Charge for the year 1 1 At 31 December 14 13 Net book value at 31 December 26 27
240 MTR Corporation for passengerservicerevisedtothe end of2017. In April2014,theCompanyannounced thattheconstructionperiodforXRLprojectneededtobeextended, withthetargetopeningofline from theHKSARGovernment. Company undertheXRLPreliminaryEntrustmentAgreement(the“Liability Cap”).Uptothedateofthisannualreport,noclaimhasbeenreceived the ProjectManagementFeeandanyotherfeesthatCompanyreceives undertheXRLEntrustmentAgreementandcertainfeesreceivedby XRL PreliminaryEntrustmentAgreementandthe (otherthanfordeathorpersonalinjury)issubjecttoacapequal Under theXRLEntrustmentAgreement,Company’stotalaggregate liability totheHKSARGovernmentarisingoutoforinconnectionwith the CompanyinperformingitsobligationsunderXRLEntrustmentAgreement orbreachbytheCompanyofXRLEntrustmentAgreement. Entrustment Agreement,tobeindemnifiedbytheCompanyinrelation to lossessufferedbytheHKSARGovernmentasaresultofnynegligence The HKSARGovernmenthastherighttoclaimagainstCompanyif CompanybreachestheXRLEntrustmentAgreementand,under annual report,theCompanyhasreceivedpaymentsfromHKSARGovernment inaccordancewiththeoriginallyagreedpaymentschedule. Management Fee”)(subsequentamendmentstothesearrangementsare describedbelow).Asat31December2017anduptothedateofthis cost ofsuchactivities(the“EntrustmentCost”)andforpayingtotheCompany afeeinaccordancewithanagreedpaymentschedule(the“Project and commissioningoftheXRLHKSARGovernment,asowner XRL,isresponsibleforbearingandfinancingthefullamountoftotal the Companyisresponsibleforcarryingoutorprocuringofagreedactivitiesplanning,design,construction,testing agreement fortheconstruction,andcommissioningofXRL(the“XRLEntrustmentAgreement”).PursuanttoAgreement, XRL undertheserviceconcessionapproach.On26January2010,HKSARGovernmentandCompanyenteredintoanotherentrustment testing andcommissioningoftheXRLonunderstandingthatCompanywouldsubsequentlybeinvitedtoundertakeoperation (b) costs andcertainon-costs,preliminarystaffcosts. Pursuant totheXRLPreliminaryEntrustmentAgreement,HKSARGovernmentisobligatedpayCompanyCompany’sin-housedesign agreement forthedesignofandsiteinvestigationprocurementactivitiesinrelationtoXRL(the“XRLPreliminaryEntrustmentAgreement”). (a) A 24 and EquipmentupontheopeningofKwunTongLineExtensionon23October2016. During theyearended31December2016,HK$6.8billionhasbeentransferredoutfromRailwayConstructioninProgresstoOtherProperty,Plant of theKTE. On 17May2011,theCompanyenteredintoaProjectAgreementwithHKSARGovernmentforfinancing,design,constructionandoperation C and EquipmentupontheopeningofSouthIslandLineon28December2016. During theyearended31December2016,HK$17.6billionhasbeentransferredoutfromRailwayConstructioninProgresstoOtherProperty,Plant of theSIL. On 17May2011,theCompanyenteredintoaProjectAgreementwithHKSARGovernmentforfinancing,design,constructionandoperation B and interestofHK$18million). 2017, nopaymenthasbeenmadebytheCompanytoHKSARGovernmentunderrepaymentmechanism(2016:principalofHK$48million Government agreedtoextendthetimeframeforrepaymentmechanismnotlaterthan30June2018.Duringyearended31December the railwayandrelatedworks(togetherwithinterest).UnderasupplementalagreementsignedinDecember2016,CompanyHKSAR estimation overactualcostsincurredoncertaincapitalexpenditure,priceescalationcosts,landandtheamountofcontingencyinrelationto of commercialoperationon28December2014),theCompanyhastopayHKSARGovernmentamountsreflectexcesstheoriginal within 24monthsofcommercialoperationstheextensionIslandLinetoWesternDistricti.e.December2016(basedoncommencement HK$0.4 billionavailableinFebruary2008underapreliminaryprojectagreement).Thisgrantissubjecttorepaymentmechanismwhereby, Pursuant totheagreement,HKSARGovernmentprovidedagrantofHK$12.3billionCompanyinMarch2010(havingalreadymade of theextensionIslandLinetoWesternDistrictandrelatedservicesfacilities. On 13July2009,theCompanyenteredintoaProjectAgreementwithHKSARGovernmentforfinancing,design,constructionandoperation A 23 Government Other RailwayConstructioninProgressunderEntrustmentbytheHKSAR Railway ConstructioninProgress ion, XRL EntrustmentAgreement:In2009,theHKSARGovernmentdecidedthatCompanyshouldbeaskedtoproceedwithconstruction, XRL PreliminaryEntrustmentAgreement:On24November2008,theHKSARGovernmentandCompanyenteredintoanentrustment Hong KongSectionoftheGuangzhou-Shenzhen-HongExpressRailLink(“XRL”)Project Kwun TongLineExtension(“KTE”)Project South IslandLine(“SIL”)Project Island LineExtensionProject Annual Report 2017 241
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
24 Other Railway Construction in Progress under Entrustment by the HKSAR Government (continued) A Hong Kong Section of the Guangzhou-Shenzhen-Hong Kong Express Rail Link (“XRL”) Project (continued) On 30 June 2015, the Company reported to the HKSAR Government that the Company estimated: • the XRL being completed in the third quarter of 2018 (including programme contingency of six months) (the “XRL Revised Programme”); and • the total project cost of HK$85.3 billion (including contingency), based on the XRL Revised Programme. As a result of adjustments being made to certain elements of the Company’s estimated project cost of 30 June 2015, the HKSAR Government and the Company reached agreement that the estimated project cost be reduced to HK$84.42 billion (the “Revised Cost Estimate”).
(c) XRL Agreement: On 30 November 2015, the HKSAR Government and the Company entered into an agreement (the “XRL Agreement”) relating to the further funding and completion of the XRL. The XRL Agreement contains an integrated package of terms (subject to conditions as set out in note 24A(c)(vi) below) and provides that:
(i) The HKSAR Government will bear and finance the project cost up to HK$84.42 billion (which includes the original budgeted cost of HK$65 billion plus the agreed increase in the estimated project cost of HK$19.42 billion (the portion of the entrustment cost (up to HK$84.42 billion) that exceeds HK$65 billion being the “Current Cost Overrun”));
(ii) The Company will, if the project exceeds HK$84.42 billion, bear and finance the portion of the project cost which exceeds that sum (if any) (the “Further Cost Overrun”) except for certain agreed excluded costs (namely, additional costs arising from changes in law, force majeure events or any suspension of construction contracts specified in the XRL Agreement);
(iii) The Company will pay a Special Dividend in cash of HK$4.40 in aggregate per share in two equal tranches (of HK$2.20 per share in cash in each tranche). The first tranche was paid on 13 July 2016 and the second tranche was paid on 12 July 2017;
(iv) The HKSAR Government reserves the right to refer to arbitration the question of the Company’s liability for the Current Cost Overrun (if any) under the XRL Preliminary Entrustment Agreement and XRL Entrustment Agreement (“Entrustment Agreements”) (including any question the HKSAR Government may have regarding the validity of the Liability Cap). The Entrustment Agreements contain dispute resolution mechanisms which include the right to refer a dispute to arbitration. Under the XRL Entrustment Agreement, the Liability Cap is equal to the Project Management Cost and any other fees that the Company receives under XRL Entrustment Agreement and certain fees received by the Company under the Preliminary Entrustment Agreement. Accordingly, the Liability Cap increases from up to HK$4.94 billion to up to HK$6.69 billion as the Project Management Cost is increased in accordance with the XRL Agreement (as it will be equal to the increased Project Management Cost under the XRL Entrustment Agreement of HK$6.34 billion plus the additional fees referred to above). If the arbitrator does not determine that the Liability Cap is invalid and determines that, but for the Liability Cap, the Company’s liability under the Entrustment Agreements for the Current Cost Overrun would exceed the Liability Cap, the Company shall: • bear such amount as is awarded to the HKSAR Government up to the Liability Cap; • seek the approval of its independent shareholders, at another General Meeting (at which the FSI, the HKSAR Government and their Close Associates and Associates and the Exchange Fund will be required to abstain from voting), for the Company to bear the excess liability; and • if the approval of the independent shareholders (referred to immediately above) is obtained, pay the excess liability to the HKSAR Government. If such approval is not obtained, the Company will not make such payment to the HKSAR Government; (v) Certain amendments are made to the XRL Entrustment Agreement to reflect the arrangements contained in the XRL Agreement, including an increase in Project Management Fee payable to the Company under XRL Entrustment Agreement to an aggregate of HK$6.34 billion (which reflects the estimate of the Company’s expected internal costs in performing its obligations under XRL Entrustment Agreement in relation to XRL project) and to reflect the XRL Revised Programme;
(vi) The arrangements under the XRL Agreement (including the payment of the Special Dividend) were conditional on: • independent shareholder approval (which was sought at the General Meeting held on 1 February 2016); and • HKSAR Legislative Council approval in respect of the HKSAR Government’s additional funding obligations. The XRL Agreement (and the Special Dividend) was approved by the Company’s independent shareholders at the General Meeting held on 1 February 2016 and became unconditional upon approval by the Legislative Council on 11 March 2016 of the HKSAR Government’s additional funding obligations.
242 MTR Corporation accordance withtheoriginalagreedpaymentschedule. 2017 anduptothedateofthisannualreport,Companyhasreceived paymentsoftheprojectmanagementfeefromHKSARGovernmentin and theSCLEntrustmentAgreement(together,“SCLAgreements”)for atotalprojectmanagementfeeofHK$7,893million.Ast31December or procurethecarryingoutofworksspecifiedinSCLPreliminary EntrustmentAgreement,theSCLAdvanceWorksEntrustmentAgreement reduction infuturemaintenancecapitalexpenditurewhichtheCompany wouldhaveotherwiseincurred.TheCompanyisresponsibletocarryout contribute anamountinrespectofthecostsrelatingtosuchmodifications, upgradesorexpansions.Thiswillpredominantlybecoveredbythe and maincontrolsystems)forwhichtheCompanyisresponsibleunder the existingserviceconcessionagreementwithKCRC.TheCompanywill (“Interface WorksCosts”)exceptforcertaincostsofmodification,upgrade orexpansionsofcertainassets(includingrollingstock,signalling,radio is responsibletobearalltheworkcostsspecifiedinSCLEntrustment AgreementincludingcoststocontractorsandtotheCompany construction andcommissioningoftheSCL(“SCLEntrustmentAgreement”). PursuanttotheSCLEntrustmentAgreement,HKSARGovernment (c) original funding.TheadditionalfundingofHK$848millionwasapprovedbyLegislativeCouncilFinanceCommitteeinJune2017. Council PublicWorksSubcommitteetheapplicationforadditionalfundingneededinexcessofamountsretainedbyHKSARGovernmentfrom revised estimatefortheentrustmentcostsuchworksofHK$8,617.1million.InJanuary2017,HKSARGovernmentsubmittedtoLegislative for theprojectcostestimateofworksunderSCLAdvanceWorksEntrustmentAgreementandnotifiedHKSARGovernmentCompany’s Government thattheestimatedexceedancewouldbeHK$1,267million(includingcontingency).InDecember2016,Companycompleteditsreview Advance WorksEntrustmentAgreementwillexceedtheoriginalestimateofHK$7,350million.InFebruary2016,CompanynotifiedHKSAR In August2015,theCompanynotifiedHKSARGovernmentthatestimatedcostforworkscarriedoutunderSCL Company alltheworkcosts(“SCLAdvanceWorksCosts”). is responsibletocarryoutorprocurethecarryingofagreedworkswhileHKSARGovernmentbearandpay relation totheSCL(“SCLAdvanceWorksEntrustmentAgreement”).PursuantAgreement,Company Government forthefinancing,construction,procurementofservicesandequipmentothermattersassociatedwithcertainenablingworksin (b) investigation andprocurementactivitieswhiletheHKSARGovernmentisresponsibletofunddirectlytotalcostofsuchactivities. Pursuant totheSCLPreliminaryEntrustmentAgreement,Companyisresponsiblecarryoutorprocurecarryingofthedesign,site agreement forthedesignofandsiteinvestigationprocurementactivitiesinrelationtoSCL(“SCLPreliminaryEntrustmentAgreement”). (a) B consolidated profitandlossaccount. (e) and, whereapplicable,becausetheCompanyisnotabletomeasurewithsufficientreliabilityamountofCompany’sobligationorliability(ifany). should besufficienttocoversuchcosts(basedoncurrentknowncircumstances), its obligationsinrelationtotheXRLproject,giventhatCompanyestimatesincreasedProjectManagementFeeunderAgreement (iii) Government inexcessoftheLiabilityCappursuanttoadeterminationarbitratorwithoutapprovalitsindependentshareholders;and the CompanyhasbenefitofLiabilityCap;andc)asaresultXRLAgreement,willnotmakeanypaymenttoHKSAR take placeuntilaftercommencementofcommercialoperationsontheXRL)(as31December2017anduptodatethisannualreport);b) HKSAR GovernmentagainsttheCompanyorofanyreferralbytoarbitration(which,asaresultXRLAgreement,cannot described innote24A(c)(iv)above),giventhata)theCompanyhasnotreceivedanynotificationfromHKSARGovernmentofanyclaimby (ii) revise furthertheXRLRevisedProgrammeorCostEstimateofHK$84.42billion; (i) (d) A 24 Government Other RailwayConstructioninProgressunderEntrustmentbytheHKSAR SCL Entrustment Agreement: On 29 May 2012, the Company and the HKSAR Government entered into an entrustment agreement for the SCL EntrustmentAgreement:On29May2012,theCompanyandHKSAR Governmententeredintoanentrustmentagreementforthe SCL AdvanceWorksEntrustmentAgreement:On17May2011,theCompanyenteredintoanotherentrustmentagreementwithHKSAR SCL PreliminaryEntrustmentAgreement:On24November2008,theHKSARGovernmentandCompanyenteredintoanentrustment During theyearended31December2017,projectmanagementfeeofHK$733million(2016:HK$811million)wasrecognisedin any possibleinsufficiencyoftheProjectManagementFeetoenableCompanyrecoverfullyitsinternalcostsincurredinperforming any possibleliabilityoftheCompanythatmaybedeterminedinaccordancewitharbitrationtakeplace,(asmoreparticularly any possibleliabilityoftheCompanyforFurtherCostOverrun(ifany),givendoesnotcurrentlybelievethereisneedto The Companyhasnotmadeanyprovisioninitsaccountsrespectof: (continued) Shatin toCentralLink(“SCL”)Project Hong KongSectionoftheGuangzhou-Shenzhen-HongExpressRailLink(“XRL”)Project (continued) Annual Report 2017 243
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
24 Other Railway Construction in Progress under Entrustment by the HKSAR Government (continued) B Shatin to Central Link (“SCL”) Project (continued) The sum entrusted to the Company by the HKSAR Government for the main construction works under the SCL Entrustment Agreement is $70,827 million. The Company has previously announced that, due to the continuing challenges posed by external factors, the SCL Cost to Complete (“CTC”) would need to be revised upwards significantly.
The Company completed a detailed review of the estimated CTC for the main construction works under the SCL Entrustment Agreement and the latest estimate was submitted to the HKSAR Government for review on 5 December 2017. Taking into account a number of factors, including issues such as archaeological finds, the HKSAR Government requests for additional scope and late or incomplete handover of construction sites, the Company has increased the latest estimate of the main construction works of the SCL by HK$16,501 million from HK$70,827 million to HK$87,328 million.
The HKSAR Government has the right to claim against the Company if the Company breaches the SCL Agreements and, under each SCL Agreement, to be indemnified by the Company in relation to losses suffered by the HKSAR Government as a result of any negligence of the Company in performing its obligations under the relevant SCL Agreement. Under the SCL Entrustment Agreement, the Company’s total aggregate liability to the HKSAR Government arising out of or in connection with the SCL Agreements (other than for death or personal injury) is subject to a cap equal to the fees that the Company receives under the SCL Agreements. Up to the date of this annual report, no claim has been received from the HKSAR Government.
(d) Given (i) the SCL Agreements provide that the HKSAR Government shall bear and finance the full amount of the relevant costs to the extent described above; and (ii) the Company has not received any notification from the HKSAR Government of any claim by the HKSAR Government against the Company in relation to any SCL Agreement (as of 31 December 2017 and up to the date of this annual report), where applicable, the Company is not able to measure with sufficient reliability the amount of the Company’s obligation or liability (if any) arising from the matters described above.
(e) During the year ended 31 December 2017, project management fee of HK$992 million (2016: HK$979 million) was recognised in the consolidated profit and loss account.
Additionally, during the year ended 31 December 2017, the SCL Advance Works Costs and the Interface Works Costs, both of which are payable by the HKSAR Government to the Company, were HK$1,268 million (2016: HK$1,597 million). As at 31 December 2017, the amount of the SCL Advance Works Costs and the Interface Works Costs which remained to be paid to the Company by the HKSAR Government was HK$1,318 million (2016: HK$1,359 million).
25 Property Development in Progress Pursuant to the project agreements in respect of the construction of railway extensions and the Property Package Agreements in respect of the Rail Merger, the HKSAR Government has granted the Company with development rights on the land over the stations along railway lines.
As at 31 December 2017, the outstanding Hong Kong Property Development Projects of the Company include the Tseung Kwan O Extension Property Projects at the depot sites in Tseung Kwan O Area 86 (LOHAS Park) and at the ventilation building in Yau Tong, South Island Line Property Project at sites in Wong Chuk Hang, Kwun Tong Line Extension Property Project at a site in Ho Man Tin and the East Rail Line/Light Rail Property Projects at sites along the related railway lines.
In 2011, the Company’s two wholly owned subsidiaries, MTR Corporation (Shenzhen) Limited and MTR Property (Shenzhen) Company Limited, won the bid for Lot 1 of the Shenzhen Metro Longhua Line Depot Site. On 3 May 2012, the two subsidiaries established a project company in the Mainland of China, MTR Property Development (Shenzhen) Company Limited, to undertake residential and commercial development of the site (“Shenzhen Property Development Project”). Part of the net profits generated from this property development will be shared with the Shenzhen Municipal Government.
244 MTR Corporation The Group A 25 reimbursable costsincurredbytheCompanyincludingon-costandinterest accruedwereHK$102million(2016:HK$95million). agency feeandotherincomeinrespectofWestRailpropertydevelopment wasrecognised(note11).Duringtheyearended31December2017, sites plus16.5%on-cost,togetherwithinterestaccruedthereon.Duringthe yearended31December2017,HK$535million(2016:HK$48million) development agreement.TheCompanycanalsorecoverfromtheWestRail SubsidiariesallthecostsincurredinrespectofWestRaildevelopment in respectofthedevelopmentsexceptforTuenMundevelopmenton whichtheCompanycanreceive10%ofnetprofitsaccruedunder in thedevelopmentofspecifiedsitesalongWestRail.The Companycanreceiveanagencyfeeof0.75%thegrosssaleproceeds As partoftheRailMerger,Companywasappointedtoactasagent ofKCRCandcertainsubsidiarycompanies(“WestRailSubsidiaries”) C statements offinancialposition.Asat31December2017,thebalance the stakeholdingfundswasHK$3,950million(2016:HK$5,414million). Accordingly, thebalancesofstakeholdingfundsandcorrespondingbankhavenotbeenincludedinGroup’sandCompany’s agreements. Anybalanceremainingistobereleasedfordistributiononlyafterallobligationsrelatingthedevelopmentshavebeenmet. costs oftherespectivedevelopmentsinaccordancewithtermsandconditionsHKSARGovernmentConsentSchemesdevelopment placed inseparatedesignatedbankaccountsand,togetherwithanyinterestearned,aretobereleasedthedevelopersforthereimbursementof Company receivesandmanagesdepositmoniessalesproceedsinrespectofpropertiesunderthosedevelopments.Theseare Being thestakeholderundercertainAirportRailway,TseungKwanOExtensionandEastRailLine/KowloonSouthernLinkPropertyProjects, B Leasehold landinHongKongincludedunderpropertydevelopmentprogressareheldmedium-termleases. The Company Hong KongPropertyDevelopmentProjects 2017 in HK$million Hong KongPropertyDevelopmentProjects 2016 Hong KongProperty 2017 in HK$million Shenzhen Property Hong KongProperty 2016 Shenzhen Property Development Projects Development Project Development Projects Development Project Property DevelopmentinProgress Property DevelopmentinProgress West RailPropertyDevelopment Stakeholding Funds
Balance at 1 January 14,479 17,484 14,046 17,983 3,005 3,937 Expenditure 483 755 272 435 960 525 Balance at 1 January 14,479 received from received from Offset against Offset against 14,046 (continued) developers payments payments (152) (152) (2) (2) – – to properties to properties Expenditure held forsale Transfer out Transfer out (178) (178) (409) (409) 483 435 – – payments received payments received Transfer out Transfer out from developers to profit to profit Offset against Offset against (3,194) (3,194) or loss (791) (791) – – (152) differences (2) Exchange Exchange (257) (257) Annual Report 2017 95 95 – – 31 December 31 December Balance at Balance at 14,810 14,479 14,810 14,810 14,479 17,484 3,005 – 245
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
26 Deferred Expenditure The Group and The Company
in HK$ million 2017 2016 Balance at 1 January 463 288 Expenditure during the year 247 175 Balance at 31 December 710 463
27 Investments in Subsidiaries The Company
in HK$ million 2017 2016 Unlisted shares, at cost 1,455 1,402
The following list contains details of subsidiaries as at 31 December 2017 which have been consolidated into the Group’s accounts.
Proportion of ownership interest
Issued and Place of paid up ordinary Group’s Held incorporation/ share capital/ effective by the Held by establishment Name of company registered capital interest Company subsidiary and operation Principal activities Subsidiaries held throughout 2017 Glory Goal Limited HK$10,000 100% 100% – Hong Kong Investment holding Hanford Garden Property HK$10,000 100% 100% – Hong Kong Property investment Management Company Limited and management MTR (Estates Management) Limited HK$1,000 100% 100% – Hong Kong Investment holding and property management MTR Academy Investment HK$1 100% 100% – Hong Kong Investment holding Holdings (HK) Limited MTR Academy (HK) Company Limited HK$10,000 100% – 100% Hong Kong Administering the operation of MTR Academy MTR Australia Investment HK$1 100% 100% – Hong Kong Investment holding Holdings (Hong Kong) Limited MTR Beijing Line 4 Investment HK$1 100% 100% – Hong Kong Investment holding Company Limited MTR Building Works Company Limited HK$2 100% 100% – Hong Kong General building, maintenance and engineering works MTR China Commercial Management HK$1,000 100% 100% – Hong Kong Investment holding No. 1 Holdings Limited MTR China Consultancy HK$1,000 100% 100% – Hong Kong Railway consultancy Company Limited services MTR China Property Holdings Limited HK$1 100% 100% – Hong Kong Investment holding MTR China Property Limited HK$1,000 100% 100% – Hong Kong Consultancy services in connection with property management MTR China Services Holding HK$10,000 100% 100% – Hong Kong Investment holding (Hong Kong) Limited
MTR Engineering Services Limited^ HK$1,000 100% 100% – Hong Kong Engineering and other consultancy services MTR Hangzhou Line 1 Investment HK$1,000 100% 100% – Hong Kong Investment holding Company Limited MTR Hangzhou Line 5 Investment HK$1,000 100% 100% – Hong Kong Investment holding Holdings (Hong Kong) Limited
246 MTR Corporation 27 TraxComm Limited Metro TrainsAustraliaPtyLtd* 360 HolidaysLimited V-Connect Limited Sun TuenMunCentreManagement Royal AscotManagement Pierhead GardenManagement Ngong Ping360Limited MTR TravelLimited MTR QatarTransit(HongKong) MTR Property(Tianjin)No.1 MTR Property(Shenzhen) MTR Property(Beijing)No.1 MTR PropertyAgencyCo.Limited MTR NorthwestRapidTransit MTR MacauInvestmentHoldings MTR InformationSolutions Name ofcompany MTR Telecommunication MTR ShenzhenLine6Investment MTR ShenzhenInvestment Company Limited Company Limited Company Limited Company Limited Company Limited Company Limited Company Limited (Sydney) CompanyLimited (Hong Kong)Limited Company Limited Company Limited Holding (HongKong)Limited Holding Limited Investments inSubsidiaries ^
registered capital paid up ordinary paid upordinary HK$100,000,000 HK$100,000,000 AUD23,750,005 HK$15,000,000 HK$15,000,000 HK$2,500,000 HK$2,500,000 share capital/ share capital/ HK$500,000 HK$400,000 HK$400,000 HK$50,000 HK$50,000 HK$50,000 HK$50,000 HK$10,000 Issued and Issued and HK$1,000 HK$1,000 HK$1,000 HK$1,000 HK$2 HK$2 HK$1 HK$1 HK$1 HK$2 HK$1 HK$1 HK$1 (continued) Proportion ofownershipinterest effective effective ordinary Group’s Group’s interest 30% on 60% on Class A Class A shares; shares 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Company by the by the 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Held Held – – – – subsidiary ordinary Held by Held by 30% on 60% on Class A Class A shares; shares shares 100% 100% 100% – – – – – – – – – – – – – – – – incorporation/ incorporation/ establishment establishment and operation Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Australia Place of Place of Operate the Tung Chung Operate theTungChung Property development, Property management car system and Theme car systemandTheme License MTR software License MTRsoftware Village inNgongPing to MTR’s subsidiaries to MTR’ssubsidiaries Property investment Property investment Property investment Guided tourservices to Ngong Ping cable to NgongPingcable Investment holding Investment holding Investment holding Investment holding Investment holding Investment holding Investment holding Investment holding Investment holding telecommunication telecommunication telecommunication telecommunication telecommunication and administrative and administrative and management Principal activities Property broking Annual Report 2017 investmentand related services Tourist services and associates management network and network and services services services Mobile Mobile Mobile Fixed Fixed
247
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
27 Investments in Subsidiaries (continued)
Proportion of ownership interest
Issued and Place of paid up ordinary Group’s Held incorporation/ share capital/ effective by the Held by establishment Name of company registered capital interest Company subsidiary and operation Principal activities Metro Trains Melbourne Pty. Ltd.* AUD39,999,900 60% on – 100% on Australia Railway operations ordinary ordinary and maintenance shares; shares; 30% on 100% on Class A Class A shares shares Metro Trains Sydney Pty Ltd* AUD100 60% – 60% Australia Pre-operation mobilisation activities, including design approvals and transition planning for the operation and maintenance of the Sydney Metro North West MTR Corporation (Australia) AUD2 100% 100% – Australia Railway related Pty Limited* consultancies and business MTR Corporation (Sydney) NRT AUD2 100% – 100% Australia Design and delivery of Pty Limited railway related systems MTR Corporation (Sydney) SMCSW AUD1 100% – 100% Australia Consultancy services for Pty Limited the Sydney Metro City & South West Project Fasttrack Insurance Ltd. HK$77,500,000 100% 100% – Bermuda Insurance business Candiman Limited* US$1 100% 100% – British Virgin Investment holding Islands MTR Corporation (C.I.) Limited US$1,000 100% 100% – Cayman Islands/ Financing Hong Kong MTR Finance Lease (001) Limited US$1 100% 100% – Cayman Islands/ Financing Hong Kong MTR Consultadoria (Macau) Sociedade MOP25,000 100% – 100% Macau Railway consultancy Unipessoal Lda.* services MTR Express (Sweden) AB SEK10,050,000 100% – 100% Sweden Railway operation and maintenance, property investment and management MTR Nordic AB SEK40,050,000 100% – 100% Sweden Railway operations and maintenance through one or more subsidiaries, property investment and management MTR Pendeltågen AB SEK10,050,000 100% – 100% Sweden Railway operations, maintenance and station management MTR Tech AB SEK30,000,000 100% – 100% Sweden Railway maintenance MTR Tunnelbanan AB SEK40,000,000 100% – 100% Sweden Railway operations and maintenance MTR Zeta AB SEK50,000 100% – 100% Sweden Project bidding MTR (Beijing) Commercial Facilities HK$93,000,000 100% – 100% The People’s Property leasing Management Co., Ltd. Republic of China and management
248 MTR Corporation * 27 and MTRProperty(Tianjin)No.2Company LimitedwasderegisteredinApril2017. A.C.N. 164058002PtyLtd,MTR(Shanghai ProjectManagement)LimitedandMTRCorporation(Scotrail) werederegisteredinMarch2017 ^
Subsidiaries notauditedbyKPMG Deregistration inprogress MTR Corporation(UK)NRTLimited MTR Corporation(UK)Limited MTR Corporation(Cymru)Limited MTR Corporation(Silverlink)Limited Limited* MTR Corporation(LondonOverground) MTR Corporation(Crossrail)Limited MTR PropertyDevelopment MTR EnterpriseManagement MTR Corporation(Shenzhen) MTR CommercialConsultancy(Beijing) MTR OperaçõesFerroviárias(Macau) MTR PropertyConsultancy MTR MPDManagement MTR MPDCompanyLimited Subsidiaries establishedduring2017 MTR Corporation (Shenzhen) Limited MTR Corporation(Shenzhen)Limited MTR Consulting(Shenzhen)Co.Ltd. MTR Consultancy(Beijing)Co.Limited MTR CommercialManagement MTR (Beijing)PropertyServices Name ofcompany (Shenzhen) CompanyLimited (Shenzhen) CorporationLimited Training Centre* Company Limited* Sociedade UnipessoalLda.* (Hong Kong)CompanyLimited Company Limited (Beijing) Co.Ltd. Company Limited* Investments inSubsidiaries
HK$2,180,000,000 HK$2,636,000,000 HK$2,636,000,000 registered capital paid up ordinary paid upordinary RMB32,000,000 HK$18,200,000 HK$18,200,000 RMB2,000,000 RMB8,000,000 RMB3,000,000 GBP1,000,000 HK$1,000,000 HK$1,000,000 HK$2,000,000 share capital/ share capital/ MOP25,000 Issued and Issued and HK$1,000 HK$1,000 GBP29 GBP1 GBP1 GBP1 GBP1 HK$1 (continued) Proportion ofownershipinterest effective effective Group’s Group’s interest 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Company by the by the 100% 100% 100% 100% 100% 100% 100% Held Held – – – – – – – – – – – – subsidiary Held by Held by 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% – – – – – – – Republic ofChina Republic ofChina Republic ofChina Republic ofChina Republic ofChina Republic ofChina Republic ofChina Republic ofChina Republic ofChina United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom incorporation/ incorporation/ establishment establishment and operation The People’s The People’s The People’s The People’s The People’s The People’s The People’s The People’s The People’s The People’s The People’s The People’s The People’s The People’s Hong Kong Hong Kong Hong Kong Place of Place of Macau Commercial consultancy Property development, Business management, Property management businessconsultancy, Provision ofoperation training management Railway construction, Railway construction, consultancy services, consultancy services, consultancy services commercial facilities commercial facilities Railway consultancy Railway consultancy Railway consultancy Investment holding Investment holding Investment holding Investment holding Investment holding Railway operations, Railway operations, Provision of railway Provision ofrailway services, marketing services, marketing Railway operations Railway operations operation,leasing, managementand management and management and Principal activities transport training and maintenance technical support technical support Annual Report 2017 support services support services Project bidding Project bidding Provision ofrail and promotion operations and operations and and corporate and corporate management strategy and strategy and services services
249
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
28 Interests in Associates and Joint Venture
The Group The Company
in HK$ million 2017 2016 2017 2016 Unlisted shares, at cost – – 24 24 Share of net assets 6,838 7,015 – – 6,838 7,015 24 24
The Group and the Company had interests in the following major associates and joint venture as at 31 December 2017:
Proportion of ownership interest
Issued and Place of paid up ordinary Group’s Held incorporation/ share capital/ effective by the Held by establishment Name of company registered capital interest Company subsidiary and operation Principal activities Associates held throughout 2017 Octopus Holdings Limited HK$42,000,000 57.4% 57.4% – Hong Kong Investment holding NRT Holdings 2 Pty Ltd* AUD10 20% – 20% Australia Financing, construction, railway operations and maintenance NRT Holdings Pty Ltd* AUD10 20% – 20% Australia Financing, construction, railway operations and maintenance NRT Pty Ltd* AUD10 20% – 20% Australia Financing, construction, railway operations and maintenance Emtrain AB SEK1,000,000 50% – 50% Sweden Railway maintenance Beijing MTR Corporation Limited RMB6,380,000,000 49% – 49% The People’s Metro investment, Republic of China construction, operations and passenger services Beijing MTR L16 Corporation Limited RMB5,000,000,000 49% – 49% The People’s Metro investment, Republic of China construction and operations Hangzhou MTR Corporation Limited* RMB4,540,000,000 49% – 49% The People’s Railway operations Republic of China and management First MTR South Western Trains Limited GBP100 30% – 30% United Kingdom Railway operations and management London Overground Rail Operations Ltd* GBP2 50% – 50% United Kingdom Railway operations and management Joint venture established during 2017 Hangzhou MTR Line 5 Corporation RMB4,360,000,000 60% – 60% The People’s Railway operations Limited Republic of China and management
* Companies not audited by KPMG
All the associates and joint venture are accounted for using the equity method in the consolidated accounts and considered to be not individually material.
250 MTR Corporation The summaryfinancialinformationoftheGroup’seffectiveinterestsinassociatesandjointventureisasfollows: 28 discretion oftheDepartmentforTransport. for aseven-yearfranchiseperiodby the UnitedKingdom’sDepartmentforTransport.Thefranchiseincludes anoptionfor11-monthextensionat In March2017,FirstMTRSouthWestern TrainsLimitedwasawardedafranchisetooperateandmaintainthe SouthWesternrailfrom20August2017 maintenance concessionofHZL1foraperiod25years. HZL1 extension,nowhas34stationscovering54km.HangzhouMTR CorporationLimited(“HangzhouMTR”)wasgrantedtheoperationand In November2015,a5.7-kilometre3-stationextensionofHangzhouMetro Line1(“HZL1”)commencedpassengerservice.Aftertheopeningof approximately AUD34.8million. NRT Holdings2PtyLtdisexpectedtorepresentequitycontributionofapproximately AUD27.8millionandloanstoNRTHoldings2PtyLtdof of theSydneyMetroNorthwesttoTrainsPty.Limited,a60%-owned subsidiaryoftheGroup.TheGroup’sshareinvestment Limited, awhollyownedsubsidiaryoftheGroup,has60%interest. Inaddition,NRTPty.Limitedsub-contractedoperationsandmaintenance the designanddeliveryofelectricalmechanicalsystemsrolling stocktoajointoperationinwhichMTRCorporation(Sydney)NRTPty. of theSydneyMetroNorthwestaswelloperationsandmaintenance ofthenewlineforaperiod15years. NRTPty.Limitedsub-contracted (“OTS”) contractoftheSydneyMetroNorthwest. TheOTSisaPPPprojectcoveringmajorpartsdesign,construction andfinancing In September2014,NRTPty.LimitedenteredintoacontractwithNewSouth WalesGovernmentinAustraliafortheOperations,TrainsandSystems licensed bankhasbeenprovidedbyTJXJREtoMTRTJNo.1guaranteeitsobligationsundertheFrameworkAgreement. is recognisedontheconsolidatedstatementoffinancialposition.AperformancebondinamountRMB1.6billionissuedbyaHongKong RMB1.3 billionsubjecttotheagreementofTianjinTJ–MetroMTR.Thedisposalwascompletedon10July2017andconsequentlyaprepayment of RMB1.3billion;andMTRTJNo.1’sconditionalfutureacquisitionashoppingcentretobedevelopedonthesamesiteatconsideration disposal ofMTRTJNo.1’s49%equityinterestinTianjin–MetroConstructionCompanyLimited(“TianjinMTR”)ataconsideration Share TransferAgreement,withTianjinXingtaiJihongRealEstateCo.,Ltd.(“TJXJRE”),awholly-ownedsubsidiaryofBeijingCapitalLandLtd.,forthe On 23March2017,MTRProperty(Tianjin)No.1CompanyLimited(“MTRTJNo.1”)enteredintoaFrameworkAgreementcomprising,interalia, Line 16openedinDecember2016,whilefulllineoperationistargetedafter2018. Agreement, BeijingMTRL16CorporationLimitedwillundertaketheoperationsandmaintenanceofLine16foraterm30years.Thefirstphase systems aswellrollingstock.PartBtakesupabout30%orapproximatelyRMB15billionoftheproject’scapitalcost.UnderConcession Limited. UnderthePPParrangement,BeijingMTRL16CorporationLimitedwillberesponsibleforPartBwhichcoverselectricalandmechanical divided intoPartsAandB.Partisfortheline’scivilconstructionworkbeingundertakenbyBeijingInfrastructureInvestmentCorporation Beijing L16PPPprojectwiththeMunicipalGovernment.TheLine16hasatotalcapitalcostofaboutRMB47.4billion.is 16 withtheregisteredcapitalofRMB5billion.InNovember2015,BeijingMTRL16CorporationLimitedsignedConcessionAgreementfor In July2015,BeijingMTRhasestablishedawhollyownedsubsidiary,L16CorporationLimitedfortheinvestmentofMetroLine would alsoundertaketheoperationsandmaintenanceofBeijingMetroLine14foraterm30yearseffective31December2015. MTR isassignedtherightstooperateBeijingMetroLine14fromMay201330December2015.Aspartofconcessionagreement, opened inMay2013,December2014and2015respectively.InaccordancewiththeOperation&MaintenanceServiceAgreement,Beijing MTR inrespectofBeijingMetroLine14June2015,January2016andFebruaryrespectively.ThefirstthreephasesBeijing in respectofBeijingMetroLine14isRMB2.45billion.TheGroupcontributedequityRMB49million,RMB740millionandRMB240to well asrollingstockwithaninvestmentofapproximatelyRMB15billionor30%thetotalcapitalcost.TheGroup’sequitycontributiontoBeijingMTR project’s civilconstruction,whichrepresentsabout70%ofthetotalcapitalcost.BeijingMTRisresponsibleforelectricalandmechanicalsystemsas Line 14isapproximatelyRMB50billion.BeijingInfrastructureInvestmentCorporationLimited,theotherinvestorofMTR,undertakes public-private-partnership (“PPP”)projectfortheinvestment,constructionandoperationsofBeijingMetroLine14.Totalcapitalcost In November2014,BeijingMTRCorporationLimited(“BeijingMTR”)signedaconcessionagreementwiththeMunicipalGovernmentfor Total comprehensiveincome Other comprehensiveincome Net profit Income tax Profit beforetaxation Expenses andothers Income Net assets Liabilities Assets in HK$million Interests inAssociatesandJointVenture (continued) (15,911) 22,749 (5,983) 6,691 6,838 2017 (214) 888 394 494 708 Annual Report 2017 (14,667) 21,682 (4,575) 5,251 7,015 2016 (508) (141) 535 676 27 251
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
28 Interests in Associates and Joint Venture (continued) In October 2017, Hangzhou MTR Line 5 Corporation Limited (“Hangzhou L5 Ltd.”) signed a concession agreement with the Hangzhou Municipal Government and Hangzhou Metro Group for the PPP project for the investment, construction and operations of Hangzhou Metro Line 5 (“HZL5”). The construction portion of the project is divided into Parts A and B. Part A is for the line’s civil construction and the work is being undertaken by Hangzhou Metro Group. Under the PPP arrangement, Hangzhou L5 Ltd. will take part in the investment and construction for Part B which covers electrical and mechanical systems as well as the operations and maintenance of the HZL5 for 25 years after commencement of passenger services. The new line is expected to go into operation by the end of 2019. The Group is responsible to contribute up to RMB2,616 million. The Group contributed equity of RMB262 million to Hangzhou L5 Ltd. in October 2017.
During the year ended 31 December 2017, the Group provided staff secondment and other support services to Beijing MTR at a total amount of HK$20 million (2016: HK$48 million). MTR Corporation (Sydney) NRT Pty. Limited, through its joint operation, provided services in respect of the design and delivery of electrical and mechanical systems and rolling stock to NRT Pty. Limited at a total amount of AUD220 million (HK$1,307 million) (2016: AUD114 million or HK$657 million). Metro Trains Sydney Pty. Limited also provided mobilisation services in respect of Sydney Metro Northwest to NRT Pty. Limited at a total amount of AUD7 million (HK$44 million) (2016: AUD7 million or HK$40 million). London Overground Rail Operations Ltd (“LOROL”) distributed GBP2.5 million (HK$26 million) (2016: GBP5 million or HK$47 million) of dividends to the Group and the Group provided management services to LOROL at a total amount of HK$8 million (2016: HK$15 million).
During the year ended 31 December 2017, the Group incurred HK$150 million (2016: HK$147 million) of expenses for the central clearing services provided by Octopus Cards Limited (“OCL”), a wholly owned subsidiary of Octopus Holdings Limited (“OHL”). OCL incurred HK$43.4 million (2016: HK$41 million) of expenses for the load agent and Octopus card issuance and refund services, computer equipment and relating services as well as warehouse storage space provided by the Group. During the year, OHL distributed HK$132 million (2016: HK$161 million) of dividends to the Group.
29 Investments in Securities Investments in securities represented trading securities held by the overseas insurance underwriting subsidiary. As at 31 December 2017, all trading securities were expected to mature within one year except for HK$361 million (2016: HK$292 million) which were expected to mature after one year.
30 Properties Held for Sale The Group
in HK$ million 2017 2016 Properties held for sale – at cost 1,099 1,068 – at net realisable value 248 326 1,347 1,394 Representing: Hong Kong property development 876 985 Mainland of China property development 471 409 1,347 1,394
The Company
in HK$ million 2017 2016 Properties held for sale – at cost 628 659 – at net realisable value 248 326 876 985
Properties held for sale of the Group at 31 December 2017 comprise properties from property development in Hong Kong and Mainland of China.
For Hong Kong property development, they comprise mainly residential units and/or car parking spaces at The Riverpark at Che Kung Temple Station, Lake Silver at Wu Kai Sha Station, The Palazzo at Ho Tung Lau and Hemera at LOHAS Park Station. They represent either the Group’s interest in unsold properties or properties received by the Group as sharing in kind (notes 2L(iii) and (v)). The net realisable values as at 31 December 2017 and 2016 were determined by reference to an open market valuation of the properties as at those dates, undertaken by an independent firm of surveyors, Jones Lang LaSalle Limited, who have among their staff Members of the Hong Kong Institute of Surveyors.
For Mainland of China property development, they relate to properties at the Shenzhen Longhua Line Depot property development.
Properties held for sale at net realisable value of the Group and the Company are stated net of provision of HK$38 million (2016: HK$47 million) made in order to state these properties at the lower of their cost and estimated net realisable value. Leasehold land in Hong Kong included under properties held for sale are held under medium-term leases.
252 MTR Corporation The GroupandCompany outstanding areasfollows: The contractednotionalamounts,fairvaluesandmaturitiesbasedoncontractualundiscountedcashflowsofderivativefinancialinstruments A 31
Net settled: – outflow – inflow
– outflow Net settled: – inflow – outflow – outflow – inflow – inflow – outflow – outflow – inflow – inflow
– outflow – outflow – inflow – inflow – outflow – outflow in HK$million Total – inflow Gross settled: Derivative FinancialLiabilities – inflow Gross settled: Derivative FinancialAssets 2017 Interest rateswaps Interest rateswaps Cross currencyswaps Cross currencyswaps Foreign exchangeforwards Foreign exchangeforwards Derivative FinancialAssetsandLiabilities Fair Value – cashflowhedges – fairvaluehedges – hedgesofnetinvestments: – cashflowhedges – fairvaluehedges – cashflowhedges: – cashflowhedges: – fairvaluehedges: – notqualifiedforhedgeaccounting: – fairvaluehedges: – hedgesofnetinvestments: – notqualifiedforhedgeaccounting: – cashflowhedges: – cashflowhedges: Notional Notional amount 15,970 21,741 1,550 5,771 1,350 8,601 2,612 1,520 2,140 1,107 600 600 388 775 209 225 64 Fair value 451 168 367 28 37 10 98 15 22 13 3 9 3 3 7 4 Less than Less than (1,535) (2,104) (1,096) 1 year 1,520 2,082 1,093 (247) (465) (173) (112) 238 469 178 119 (50) (72) 64 24 93 (8) (2) Contractual undiscountedcashflowsmaturingin 5 3 3 1 – 1-2 years (247) 240 (10) (72) (57) 35 12 93 58 (5) (2) (3) 3 1 1 3 – – – – – – – – – – 2-5 years (740) (217) 718 276 (57) (24) (79) (36) (56) 92 67 23 39 61 (6) 2 2 5 – – – – – – – – 5 years (9,725) (3,215) 9,487 3,251 Over Over Annual Report 2017 (248) (388) (310) 381 307 34 (3) (5) 1 5 – – – – – – – – – – – – (10,959) 10,683 (3,576) (1,535) (2,104) (1,110) 3,713 1,520 2,082 1,106 Total (365) (388) (775) (209) (225) 225 385 779 217 238 (27) (83) 73 39 24 (8) 253
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
31 Derivative Financial Assets and Liabilities (continued) A Fair Value (continued)
The Group and The Company
Notional amount Fair value Contractual undiscounted cash flows maturing in
Less than Over in HK$ million 1 year 1-2 years 2-5 years 5 years Total 2016 Derivative Financial Assets Gross settled: Foreign exchange forwards – fair value hedges: 1,317 1 – inflow 1,318 – – – 1,318 – outflow (1,317) – – – (1,317) Cross currency swaps – fair value hedges: 2,326 17 – inflow 16 471 4 705 1,196 – outflow (6) (465) – (698) (1,169) – cash flow hedges: 4,699 81 – inflow 128 130 391 5,402 6,051 – outflow (118) (119) (356) (5,344) (5,937) Net settled: Interest rate swaps – fair value hedges 600 27 20 22 – – 42 – cash flow hedges 1,350 57 – 9 47 5 61 10,292 183 41 48 86 70 245 Derivative Financial Liabilities Gross settled: Foreign exchange forwards – fair value hedges: 2,174 3 – inflow 2,171 – – – 2,171 – outflow (2,174) – – – (2,174) – cash flow hedges: 324 15 – inflow 158 53 76 22 309 – outflow (167) (55) (79) (23) (324) – not qualified for hedge accounting : 197 11 – inflow 152 – 35 – 187 – outflow (161) – (36) – (197) Cross currency swaps – fair value hedges: 1,194 137 – inflow 1,069 – – – 1,069 – outflow (1,200) – – – (1,200) – cash flow hedges: 2,670 366 – inflow 75 75 227 3,017 3,394 – outflow (100) (100) (300) (3,282) (3,782) Net settled: Interest rate swaps – fair value hedges 2,701 32 5 (4) (23) (7) (29) – cash flow hedges 600 5 (5) (6) – – (11) 9,860 569 (177) (37) (100) (273) (587) Total 20,152
The Group’s derivative financial instruments consist predominantly of interest rate and cross currency swaps entered into exclusively by the Company, and the relevant interest rate swap curves as of 31 December 2017 and 2016 were used to discount the cash flows of financial instruments. Interest rates used ranged from 1.191% to 2.470% (2016: 0.619% to 2.790%) for Hong Kong dollars, 1.480% to 2.490% (2016: 0.723% to 2.496%) for US dollars, 1.710% to 3.003% (2016: 1.640% to 3.215%) for Australian dollars and -0.034% to 0.475% (2016: -0.085% to 0.444%) for Japanese yen.
The table above details the remaining contractual maturities at the end of reporting period of the Company’s derivative financial assets and liabilities, which are based on contractual undiscounted cash flows (including interest payments computed using contractual rates or, if floating, based on rates current at the end of reporting period) and the earliest date the Company can be required to pay. The details of the fair value measurement are disclosed in note 44.
254 MTR Corporation The Group floating, basedonratescurrentattheendofreportingperiod)andearliestdateGroupCompanycanberequiredtopay: financial liabilities,whicharebasedoncontractualundiscountedcashflows(includinginterestpaymentscomputedusingcontractualratesor,if The followingtabledetailstheremainingcontractualmaturitiesatendofreportingperiodGroup’sandCompany’snon-derivative facilities ordebtissuanceotherwisetakeappropriateactionsifsuchstresstestsrevealsignificantriskofmaterialcashflowshortfall. in theModel.TheCompanyalsoconductsstresstestingofitsprojectedcashflowtoanalyseliquidityrisk,andwouldarrangeadditionalbanking banking facilitiestoprovideforwardcoverageofatleast1224monthsprojectedcashrequirementstheparentcompanylevelasspecified banking facilitiestoensuretheserequirementsaremet.Itadoptsaprudentapproachandwillmaintainsufficientcashbalancecommitted repayments, dividendpayments,capitalexpendituresandnewinvestments,bymaintainingsufficientcashbalanceand/orundrawncommitted The Groupemploysprojectedcashflowanalysistomanageliquidityriskbyforecastingtheamountofrequired,includingworkingcapital,debt cash inflowandoutflow. Liquidity riskreferstothethatfundsarenotavailablemeetliabilitiesastheyfalldue,anditmayresultfromtimingamountmismatchesof (i) principally interestrateswaps,crosscurrencyswapsandforeignexchangeforwardcontracts. and cannotbeusedforspeculationpurposes.AllofthederivativeinstrumentsbyCompanyareover-the-counterderivativescomprising Group’s riskmanagementstrategy.InaccordancewithBoardpolicy,theseinstrumentsshallonlybeusedforcontrollingorhedgingexposures, The useofderivativefinancialinstrumentstocontrolandhedgeagainstinterestrateforeignexchangeriskexposuresisanintegralpartthe authorises changesifnecessarytotheModelinaccordancewithmarketconditionsandpracticalrequirements. based onoperatingandmarketconditionsotherrelevantfactors.TheBoardalsoreviewsanannualbasisaspartofthebudgetingprocess risk exposuresaremeasured,monitoredandcontrolled.TheBoardregularlyreviewsitsmanagementpoliciesauthoriseschangesifnecessary of financinghorizonforcoverageforwardfundingrequirements,againstwhichtheCompany’srelatedliquidity,interestrateandcurrency specifies, amongstotherthings,thepreferredmixoffixedandfloatingratedebts,permittedlevelforeigncurrencydebtsanadequatelength of excessliquidity.TheGroup’sPreferredFinancingModel(the“Model”)fortheCompanyisanintegralpartitsriskmanagementpolicies. risk, foreignexchangecreditconcentrationuseofderivativefinancialinstrumentsandnon-derivativefinancialinstruments,investment The BoardofDirectorsprovidesprinciplesforoverallriskmanagementandapprovespoliciescoveringspecificareas,suchasliquidityrisk,interestrate potential adverseeffectsofthesefinancialrisksontheGroup’sperformance. exchange riskandcreditrisk.TheGroup’soverallmanagementpolicyfocusesontheunpredictabilityoffinancialmarketsseekstominimise The Group’soperatingactivitiesandfinancingexposeittofourmaintypesoffinancialrisks,namelyliquidityrisk,interestraterisk,foreign B 31 in HK$million Amounts repayablewithin1year Amounts repayablewithinaperiod Amounts repayablewithinaperiod Amounts repayablebeyond5years Loans andotherobligations of between1and2years of between2and5years Derivative FinancialAssetsandLiabilities Liquidity Risk Financial Risks
instruments 26,902 34,955 market market Capital Capital 1,946 5,136 971 overdrafts loans and loans and 11,475 18,360 4,440 1,495 Bank Bank 950 2017 Others 1,053 1,313 162 49 49 (continued) 12,495 29,450 54,628 2,945 9,738 Total instruments market market Capital Capital 18,617 28,809 5,619 1,725 2,848 overdrafts loans and loans and 14,361 18,758 1,803 1,043 1,551 Bank Bank 2016 Annual Report 2017 Others 1,088 1,315 142 40 45 17,351 21,256 48,882 7,462 2,813 Total 255
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
31 Derivative Financial Assets and Liabilities (continued) B Financial Risks (continued) The Company
2017 2016
Capital Bank Capital Bank market loans and market loans and in HK$ million instruments overdrafts Others Total instruments overdrafts Others Total Loans and other obligations Amounts repayable beyond 5 years 5,985 – 610 6,595 2,743 – 625 3,368 Amounts repayable within a period of between 2 and 5 years 323 3,710 – 4,033 144 13,705 – 13,849 Amounts repayable within a period of between 1 and 2 years 108 11,223 – 11,331 553 816 3 1,372 Amounts repayable within 1 year 613 600 3 1,216 86 1,568 – 1,654 7,029 15,533 613 23,175 3,526 16,089 628 20,243
Others represent obligations under lease out/lease back transaction (note 20F).
(ii) Interest Rate Risk The Group’s interest rate risk arises principally from its borrowing activities at the parent company level (including its financing vehicles). Borrowings based on fixed and floating rates expose the Group to fair value and cash flow interest rate risk respectively due to fluctuations in market interest rates. The Group manages and controls its interest rate risk exposure at the parent company level by maintaining a level of fixed rate debt between 40% and 70% (2016: 40% and 70%) of total debt outstanding as specified by the Model. Should the actual fixed rate debt level deviate substantially from the Model, derivative financial instruments such as interest rate swaps would be procured to align the fixed and floating mix with the Model. As at 31 December 2017, 61% (2016: 48%) of the Company’s (including financing vehicles) total debt outstanding was denominated either in or converted to fixed interest rate after taking into account outstanding cross currency and interest rate swaps. Interest rate risk at subsidiary, associate and joint venture companies are managed separately based on their own borrowing requirement, circumstances and market practice.
As at 31 December 2017, it is estimated that a 100 basis points increase / 100 basis points decrease in interest rates, with all other variables held constant, would increase/decrease the Group’s profit after tax and retained profits by approximately HK$113 million/HK$98 million. Other components of consolidated equity would increase/decrease by approximately HK$43 million/HK$42 million.
The sensitivity analysis above has been determined assuming that the change in interest rates had occurred at the end of reporting period and had been applied to the exposure to interest rate risk for both derivative and non-derivative financial instruments in existence at that date. The interest rate assumptions represent management’s assessment of a reasonable possible change in interest rates over the period until the next annual financial period.
In 2016, a similar analysis was performed based on the assumption of a 100 basis points increase / 100 basis points decrease in interest rates, which would increase/decrease the Group’s profit after tax and retained profits by approximately HK$89 million/HK$82 million. Other components of consolidated equity would increase/decrease by approximately HK$56 million/HK$57 million.
(iii) Foreign Exchange Risk Foreign exchange risk arises when recognised assets and liabilities are denominated in a currency other than the functional currency of the Group’s companies to which they relate. For the Group, it arises principally from its borrowing as well as overseas investment and procurement activities.
The Group manages and controls its foreign exchange risk exposure by maintaining a modest level of unhedged non-Hong Kong dollar debt at the parent company level as specified by the Model, and minimal foreign exchange open positions created by its investments and procurements overseas. Where the currency of a borrowing is not matched with that of the expected cash flows for servicing the debt, the Company would convert its foreign currency exposure resulting from the borrowing to Hong Kong dollar exposure through cross currency swaps. For investment and procurement in foreign currencies, the Group would purchase the foreign currencies in advance or enter into foreign exchange forward contracts to secure the necessary foreign currencies at pre-determined exchange rates for settlement.
The Company’s exposure to US dollars due to its foreign currency borrowings is also offset by the amount of US dollar cash balances, bank deposits and investments that it maintains.
As most of the Group’s receivables and payables are denominated in the respective Group companies’ functional currencies (Hong Kong dollars, Renminbi, Australian dollars, British Pound or Swedish Krona) or United States dollars (with which Hong Kong dollars are pegged) and most of its payment commitments denominated in foreign currencies are covered by foreign exchange forward contracts, management does not expect that there will be any significant currency risk associated with them.
256 MTR Corporation 32 In addition,theCompanyalsomanagesandcontrolsitsexposuretocreditrisksinrespectofreceivablesasstatednote33. position. Asattheendofreportingperiod,therewasnosignificantconcentrationrisktoasinglecounterparty. represented respectivelybythecarryingamountofderivativefinancialassetsandaggregatedepositsonitsstatement As attheendofreportingperiod,maximumexposuretocreditriskGroupwithrespectderivativefinancialassetsandbankdepositsis considerations adjustitsexposureand/ormaximumcounterparty/issuerlimittotherelevantcounterparty. monitors thecreditdefaultswaplevelsofcounterparties/issuersandtheirdailychanges,mayonbasisobservedother profile aremonitoredregularlytoensuretheywithinthelimitsestablishedforcounterparties/issuers.Inaddition,theGroupactively a counterpartyorinvestmentfromanissuerbaseduponthecounterparty/issuer’screditratings.Deposit/investmentoutstandingandmaturity credit ratingsand/orstatusasHongKong’snote-issuingbanks.ThereisalsoalimitonthelengthoftimethatGroupcanmaintaindepositwith All depositsandinvestmentsaresimilarlysubjecttoaseparatemaximumcounterparty/issuerlimitbasedontherespectivecounterparty/issuer’s financial transactionswiththesamecounterparty. reduce counterpartyriskexposure,theGroupalsoappliesset-offandnettingarrangementsacrossallderivativefinancialinstrumentsother instruments basedonthe“value-at-risk”conceptismeasured,monitoredandcontrolledagainsttheirrespectivecounterpartylimits.Tofurther with policyapprovedbytheBoard.Creditexposureintermsofestimatedfairmarketvalueandlargestpotentiallossarisingfromthese All derivativefinancialinstrumentsaresubjecttoamaximumcounterpartylimitbasedontherespectivecounterparty’screditratingsinaccordance diversifying itsexposuretovariouscounterparties. transacting derivativefinancialinstrumentsonlywithinstitutionsacceptableinvestmentgradecreditratingsorguarantee,and Securities itprocuredundertheleaseout/leasebacktransaction(note20F).TheGrouplimitsitsexposuretocreditriskbyplacingdepositsand it maintainsandthederivativefinancialinstrumentsthathasenteredintowithvariousbankscounterpartiesaswellfromDefeasance Credit riskreferstothethatacounterpartywillbeunablepayamountsinfullwhendue.ForGroup,thisarisesmainlyfromdeposits (iv) B 31 of theGroup’sinvestmentproperties andstationkiosksarerequiredtopaythreemonths’rentaldepositupon thesigningofleaseagreements. (iv) for MTRCrossrailiscollectedonceevery 4weeks. from operationsinStockholmiscollected inthetransactionmonthwithremainderbeingcollected followingmonth.Concessionrevenue (iii) days andsalesthroughpre-saleagentsaresettledinthefollowingmonth. day orincashforothertickettypes.FarerevenuefromMTRExpressiscollected throughathirdpartyfinancialinstitutionwithsettlementwithin14 (ii) working dayorincashforothertickettypes.Asmallportionofitiscollected throughpre-saleagentswhichsettletheamountsduewithin21days. (i) The Group’screditpoliciesinrespectofreceivablesarisingfromitsprincipal activitiesareasfollows: 33 requirements. Stores andsparesexpectedtobeconsumedafter1yearcomprisemainlycontingencystockskeptmeetcyclicalmaintenance in HK$million Stores andsparesexpectedtobeconsumed:
Less: Provisionforobsoletestock – within1year – after1year Stores andSpares Derivative FinancialAssetsandLiabilities Debtors andOtherReceivables Credit Risk ays. Tenants Rentals, advertisingandtelecommunications servicefeesarebilledmonthlywithduedatesrangingfromimmediately dueto50days.Tenants Franchise revenueinMelbourneiscollectedeitherdailyormonthlydepending ontherevenuenature.Themajorityoffranchise Fare revenuefromShenzhenMetroLonghuaLineiscollectedeitherthrough ShenzhenTongCardswithdailysettlementonthenextworking The majorityoffarerevenuefromHongKongtransportoperationiscollected eitherthroughOctopusCardswithdailysettlementonthenext Financial Risks (continued) 1,039 1,550 1,540 2017 511 (10) The Group (continued) 1,012 1,490 1,484 2016 478 (6) 1,129 1,119 2017 708 421 The Company (10) Annual Report 2017 1,140 1,134 2016 742 398 (6) 257
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
33 Debtors and Other Receivables (continued) (v) Amounts receivable under interest rate and currency swap agreements with financial institutions are due in accordance with the terms of the respective agreements.
(vi) Consultancy service incomes are billed monthly for settlement within 30 days upon work completion or on other basis stipulated in the consultancy contracts.
(vii) Debtors in relation to contracts and capital works entrusted to the Group, subject to any agreed retentions, are due within 30 days upon the certification of work in progress.
(viii) Amounts receivable in respect of property development are due in accordance with the terms of relevant development agreements or sale and purchase agreements.
The ageing of debtors is analysed as follows:
The Group The Company
in HK$ million 2017 2016 2017 2016 Amounts not yet due 2,703 2,362 1,165 1,291 Overdue by 30 days 359 430 237 322 Overdue by 60 days 47 52 11 11 Overdue by 90 days 62 16 45 6 Overdue by more than 90 days 16 42 3 19 Total debtors 3,187 2,902 1,461 1,649 Other receivables 3,871 1,171 1,999 123 7,058 4,073 3,460 1,772
Included in amounts not yet due as at 31 December 2017 was HK$387 million (2016: HK$588 million) in respect of property development, comprising receivable on profits distributable based on the terms of the development agreements and sales and purchase agreements, receivable from certain stakeholding funds (note 25B) awaiting finalisation of the respective development accounts as well as other receivables on miscellaneous recoverable expenses.
During the year, the Inland Revenue Department of Hong Kong (“IRD”) issued notices of assessment/additional assessment for the years of assessment 2010/2011 to 2016/2017 following queries in connection with the tax deductibility of certain payments relating to the Rail Merger.
Based on the strength of advice from external senior counsel and tax advisor, the directors of the Company have determined to strongly contest the assessments raised by the IRD. The Company has lodged objections against these tax assessments and has applied to hold over the additional tax demanded. The IRD has agreed to the holdover of the additional tax demanded subject to the purchase of tax reserve certificates (“TRCs”) amounting to HK$1,816 million during the year. The purchase of TRCs does not prejudice the Company’s tax position and the purchased TRCs were included in debtors and other receivables in the Group’s consolidated statement of financial position. No additional tax provision has been made during the year in respect of the above notices of assessment/additional assessment.
As at 31 December 2017, all debtors and other receivables were expected to be recovered within one year except for amounts relating to deposits and other receivables of HK$1,978 million (2016: HK$247 million) and of HK$1,888 million (2016: HK$93 million) respectively in the Group and the Company which were expected to be recovered after more than one year. The nominal values less impairment losses for bad and doubtful debts are not discounted as it is considered that the effect of discounting would not be significant.
Included in debtors and other receivables in advance are the following amounts denominated in a currency other than the functional currency of the entity to which they relate:
The Group The Company
in million 2017 2016 2017 2016 Macau Pataca 208 87 208 87 United States dollars 8 10 8 10
258 MTR Corporation 34 35 other relatedpartiesareconsiderednotsignificantlydifferentfromtheirfairvalues. and otherrelatedpartieswereexpectedtobereceivedwithin24months.ThenominalvaluesofamountsduefromtheHKSARGovernment All contractretentionsontheentrustedworksmentionedaboveweredueforreleasewithinoneyear.amountsfromHKSARGovernment amounting toGBP9million(HK$95million)(2016:nil)whichbearsaninterestrateof5.5%perannumwithrepaymentdueby31March2023. The amountsduefromassociatesasat31December2017includedtheoutstandingbalanceofloantoFirstMTRSouthWesternTrainsLimited Rail Merger. The amountduefromKCRCmainlyrelatedtotherecoverablecostforcertaincapitalworksinaccordancewithagreementsrelation receivables andretentionforotherentrustmentmaintenanceworks. Eligible PersonswithDisabilities,agencyfeereceivablesandreimbursablecostsinrespectofWestRailpropertydevelopment(note25C),aswell Extension projects,reimbursementofthefarerevenuedifferenceinrelationtoPublicTransportFareConcessionSchemeforElderlyand the ShatintoCentralLink,reimbursablecostsforessentialpublicinfrastructureworksinrespectofSouthIslandLineandKwunTongLine As at31December2017,theamountduefromHKSARGovernmentmainlyrelatedtorecoverablecostforadvancedworksinrelation in HK$million in HK$million Amounts duefrom: Deposits withbanksandotherfinancialinstitutions
Cash atbanksandonhand
Cash, bankbalancesanddeposits
Less: Bank deposits with more than three months to Less: Bankdepositswithmorethanthreemonthsto Less: Bankoverdrafts(note36A) Cash andcashequivalentsintheflowstatement – HKSARGovernment – KCRC – associates – subsidiaries(netofimpairmentlosses) Amounts DuefromRelatedParties Cash, BankBalancesandDeposits
maturity whenplacedorpledged(note36E)
12,095 18,354 13,939 (4,411) 2,378 6,259 2,570 2017 2017 186 The Group The Group (4) 6 – (13,253) 14,265 20,290 2,092 6,025 2,171 7,037 2016 2016 15 64 – – 10,897 11,299 12,612 15,145 (3,625) 2,378 7,670 2017 2017 402 149 The Company The Company (4) 6 Annual Report 2017 (11,896) 12,475 12,835 11,878 14,028 2,092 2016 2016 360 939 15 43 – 259
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
35 Cash, Bank Balances and Deposits (continued)
Included in cash, bank balance and deposits in the statement of financial position are the following amounts denominated in a currency other than the functional currency of the entity to which they relate:
The Group The Company
in million 2017 2016 2017 2016 Australian dollars 68 65 68 62 Canadian dollars – 1 – 1 Euros 100 12 99 8 Japanese yen 68 58 68 58 New Taiwan dollars 17 17 17 17 Pound sterling 56 6 56 6 Renminbi 1 – – – Swedish krona 3 – 3 – Swiss franc 23 1 23 1 United States dollars 145 1,205 139 1,199
36 Loans and Other Obligations A By Type The Group
2017 2016
Carrying Fair Repayable Carrying Fair Repayable in HK$ million amount value amount amount value amount Capital market instruments Listed or publicly traded: Debt issuance programme notes due during 2026 to 2047 (2016: due during 2017 to 2046) 8,769 9,649 8,891 10,988 11,519 11,125 Unlisted: Debt issuance programme notes due during 2018 to 2055 (2016: due during 2017 to 2055) 14,682 16,232 14,979 9,689 10,675 10,274 Total capital market instruments 23,451 25,881 23,870 20,677 22,194 21,399 Bank loans 17,313 17,313 17,376 17,018 17,018 17,051 Finance leases 492 635 492 460 603 460 Others 458 537 458 434 524 434 Loans and others 41,714 44,366 42,196 38,589 40,339 39,344 Bank overdrafts 4 4 4 – – – Short-term loans 325 325 325 1,350 1,350 1,350 Total 42,043 44,695 42,525 39,939 41,689 40,694
260 MTR Corporation The Company A 36 The Group currency hedgingactivitiesareasfollows: The amountsofborrowings,denominatedinacurrencyotherthanthefunctionalentitytowhichtheyrelate,beforeandafter approximated theirfairvalues.Detailsofthevaluemeasurementaredisclosedinnote44. foreign exchangeratesthatisavailabletotheGroupforsimilarfinancialinstruments.Thecarryingamountsofshort-termloansandbankoverdrafts The fairvaluesarebasedonthediscountedcashflowsmethodwhichdiscountsfuturecontractualatcurrentmarketinterestand Others includenon-defeasedobligationsunderleaseout/leasebacktransaction(note20F). The Company in million in million Total Short-term loans Bank overdrafts Loans andothers Others Bank loans Total capitalmarketinstruments Unlisted: Listed orpubliclytraded: Capital marketinstruments in HK$million Australian dollars Japanese yen Japanese yen United Statesdollars United Statesdollars Debt issuance programme notes due during Debt issuanceprogrammenotesdueduring Debt issuanceprogrammenotesdueduring Loans andOtherObligations By Type 2018 to2028(2016:dueduring2028) 2043 to2047(2016:dueduring2046) (continued)
Carrying Carrying amount (continued) 19,132 18,803 14,537 3,808 2,996 458 325 812 4 Before hedgingactivities Before hedgingactivities 15,000 5,000 1,090 2017 2017 431 410 19,902 19,573 14,537 2017 4,499 3,593 value 537 325 906 Fair Fair 4 Repayable Repayable amount 19,276 18,947 14,600 3,889 3,073 15,000 458 325 816 5,000 1,450 2016 2016 280 220 4 Carrying Carrying amount 17,742 16,392 13,967 1,991 1,350 1,195 434 796 – After hedgingactivities After hedgingactivities 2017 2017 – – – – – 2016 18,184 16,834 13,967 2,343 1,350 1,446 value 524 897 Fair Fair Annual Report 2017 – Repayable Repayable amount 17,882 16,532 14,000 2,098 1,350 1,241 2016 2016 434 857 – – – – – – 261
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
36 Loans and Other Obligations (continued) B By Repayment Terms The Group
2017 2016
Capital Bank Capital Bank market loans and Finance market loans and Finance in HK$ million instruments overdrafts leases Others Total instruments overdrafts leases Others Total Long-term loans and others Amounts repayable beyond 5 years 19,055 1,517 344 455 21,371 13,400 1,831 335 431 15,997 Amounts repayable within a period of between 2 and 5 years 3,300 4,300 81 – 7,681 1,600 14,232 68 – 15,900 Amounts repayable within a period of between 1 and 2 years 300 11,234 46 – 11,580 1,215 744 39 3 2,001 Amounts repayable within 1 year 1,215 325 21 3 1,564 5,184 244 18 – 5,446 23,870 17,376 492 458 42,196 21,399 17,051 460 434 39,344 Bank overdrafts – 4 – – 4 – – – – – Short-term loans – 325 – – 325 – 1,350 – – 1,350 23,870 17,705 492 458 42,525 21,399 18,401 460 434 40,694 Less: Unamortised discount/ premium/finance charges outstanding (160) (63) – – (223) (125) (33) – – (158) Adjustment due to fair value change of financial instruments (259) – – – (259) (597) – – – (597) Total carrying amount of debt 23,451 17,642 492 458 42,043 20,677 18,368 460 434 39,939
The Company
2017 2016
Capital Bank Capital Bank market loans and market loans and in HK$ million instruments overdrafts Others Total instruments overdrafts Others Total Long-term loans and others Amounts repayable beyond 5 years 3,454 – 455 3,909 1,633 – 431 2,064 Amounts repayable within a period of between 2 and 5 years – 3,600 – 3,600 – 13,500 – 13,500 Amounts repayable within a period of between 1 and 2 years – 11,000 – 11,000 465 500 3 968 Amounts repayable within 1 year 465 – 3 468 – – – – 3,919 14,600 458 18,977 2,098 14,000 434 16,532 Bank overdrafts – 4 – 4 – – – – Short-term loans – 325 – 325 – 1,350 – 1,350 3,919 14,929 458 19,306 2,098 15,350 434 17,882 Less: Unamortised discount/premium/ finance charges outstanding (54) (63) – (117) (40) (33) – (73) Adjustment due to fair value change of financial instruments (57) – – (57) (67) – – (67) Total carrying amount of debt 3,808 14,866 458 19,132 1,991 15,317 434 17,742
The amounts repayable within 1 year in respect of capital market instruments and bank loans are included in long-term loans as these amounts are intended to be refinanced on a long-term basis.
262 MTR Corporation At 31December2017and2016,theGrouphadobligationsunderfinanceleasesrepayableasfollows: D The Group Notes issuedduringtheyearsended31December2017and2016comprise: C 36 encumbrance asat31December2017. Save asdisclosedaboveandthoseelsewhereintheaccounts, none oftheotherassetsGroupwaschargedorsubjecttoany pledged abankdepositofAUD1.2millionascollateralforguarantee ofAUD1.2million. (iii) for theRMB2,236million(2016:RMB2,734million)bankloanfacilitygranted toit. has pledgedthefareandnon-farerevenuebenefitsofinsurance contractsinrelationtoPhase2ofShenzhenMetroLonghuaLineassecurity (ii) (i) E (2016: HK$1,200million)andredeemedUSD550million(orHK$4,268ofitslisteddebtsecuritiesnil). During theyearended31December2017,GroupredeemedHK$500millionandAUD50(orHK$417million)ofitsunlisteddebtsecurities unconditional, andunsubordinatedtootherunsecuredobligationsoftheCompany. and unsubordinatedobligationsofMTRCorporation(C.I.)Limited.ThetheCompanyunderguaranteearedirect,unsecured, are unconditionallyandirrevocablyguaranteedbytheCompany,direct,unsecured,unconditionalunsubordinatedtootherunsecured USD190 million(orHK$1,482million)wereissuedbytheCompany(2016:USD70HK$543million)).Thenotessubsidiary USD680 million(orHK$5,275million))wereissuedinHongKongbyasubsidiary,MTRCorporation(C.I.)Limited,whilenotesofHK$338and During theyearended31December2017,notesofHK$4,637millionandAUD201(orHK$1,198million)(2016:HK$2,050million in HK$million in HK$million Debt issuanceprogrammenotes Within 1year After 1yearbutwithin2years After 2yearsbutwithin5 After 5years Present valueofleaseobligations Less: Totalfutureinterestexpenses Loans andOtherObligations ia, has As at31December2017,MTRCorporation(Sydney)NRTPtyLimited,an indirectwhollyownedsubsidiaryoftheCompanyinAustralia,has As at31December2017,MTRCorporation(Shenzhen)Limited,anindirect whollyownedsubsidiaryoftheCompanyinMainlandChina, There werenoguaranteesgivenbytheHKSARGovernmentinrespectof theloanfacilitiesofGroupasat31December2017and2016. Obligations UnderFinanceLeases Bonds andNotesIssuedRedeemed Guarantees andPledges (continued) Present value of Present valueof lease payments the minimum the minimum Principal Principal amount 7,655 344 471 492 21 46 81 2017 2017 lease payments Total minimum Total minimum consideration consideration received 7,600 (157) 155 350 492 601 649 Net Net 48 96 Present value of Present valueof lease payments the minimum the minimum Principal Principal amount 7,868 335 442 460 18 39 68 2016 2016 Annual Report 2017 lease payments Total minimum Total minimum consideration consideration received 7,809 (161) 135 460 362 581 621 Net Net 40 84 263
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
37 Creditors and Other Payables
The Group The Company
in HK$ million 2017 2016 2017 2016 Creditors and accrued charges 24,687 30,896 19,726 20,503 Other payables 3,479 1,733 2,625 753 28,166 32,629 22,351 21,256
A Creditors and accrued charges The analysis of creditors by due dates is as follows:
The Group The Company
in HK$ million 2017 2016 2017 2016 Due within 30 days or on demand 11,274 5,000 8,747 2,491 Due after 30 days but within 60 days 1,290 4,147 1,216 4,101 Due after 60 days but within 90 days 1,332 1,272 546 811 Due after 90 days 4,766 10,494 3,539 3,376 18,662 20,913 14,048 10,779 Rental and other refundable deposits 3,946 3,779 3,866 3,712 Accrued employee benefits 2,079 2,982 1,812 2,790 Dividends payable to other shareholders (note 15) – 3,222 – 3,222 24,687 30,896 19,726 20,503
The nominal values of creditors and accrued charges are not significantly different from their fair values.
Included in creditors and accrued charges are the following amounts denominated in a currency other than the functional currency of the entity to which they relate:
The Group The Company
in million 2017 2016 2017 2016 Australian dollars 10 7 3 2 Euros 10 11 10 11 Japanese yen 102 101 78 78 Pound sterling 5 2 5 2 Renminbi 2 1 2 1 Swedish krona 1 – 1 – Swiss franc 3 1 3 1 United States dollars 18 12 5 3
B Other payables Other payables comprised contract retentions and deferred income. Deferred income related to the surplus amounts of payments received from property developers in excess of the balance in property development in progress, the residual balance of deferred income on transfer of assets from customers, as well as the unutilised government subsidy for Shenzhen Metro Longhua Line operation.
As at 31 December 2017, all of the creditors and other payables were expected to be settled or recognised as income within one year except for HK$8,327 million (2016: HK$6,601 million) in the Group and HK$7,713 million (2016: HK$6,031 million) in the Company which were expected to be settled after one year. The amounts due after one year for the Group as at 31 December 2017 mainly relate to rental deposits received from investment property and station kiosk tenants and advance income received, majority of which are due to be repaid within three years. The Group considers the effect of discounting would be immaterial.
264 MTR Corporation 38 Movements oftheGroup’sandCompany’sobligationsunderserviceconcessionsareasfollows: 39 as at31December2017,HK$19,041million(2016:HK$13,744million)isexpectedtobesettledafteroneyear. bearing andhasnotbeendiscountedasitdoeshaveanyfixedrepaymenttermsismaterial.Outofthetotalamountduetosubsidiaries purposes withspecifiedrepaymentdatesandinterestrates(note36C).Theremainingbalanceoftheamountduetosubsidiariesisnon-interest respect oftheproceedsfromandaccruedinterestonbondsnotesissuedbysubsidiaryon-lenttoCompanyforitsgeneralcorporate The amountduetotheCompany’ssubsidiariesincludedHK$19,778million(2016:HK$18,802million)MTRCorporation(C.I.)Limitedin The amountduetoassociatesmainlyrelatedthepayableforequitycontributionNRTHoldings2PtyLtd.. that isexpectedtobesettledwithin12months. The amountduetoKCRCasat31December2017mainlyrelatestheaccruedportionoffixedannualpaymentandvariableannual The amountduetotheHKSARGovernmentasat31December2017relateslandadministrativefeesinrelationrailwayextensions. The Group The outstandingbalancesasat31December2017and2016arerepayablefollows: Amounts repayablewithin1year in HK$million Amounts repayablewithinaperiodofbetween in HK$million Amounts dueto: Amounts repayablewithinaperiodofbetween Amounts repayablebeyond5years in HK$million Balance asat1January
Add: Netincreaseininterestpayable
Less: Amountrepaidduringtheyear
Exchange difference Balance asat31December 1 and2years – HKSARGovernment 2 and5years – KCRC – associates – subsidiaries Amounts DuetoRelatedParties Obligations underServiceConcession
obligations payment payment value of value of Present Present 10,470 10,154 202 55 59 10,507 10,470 1,997 2,226 2017 2017 151 (51) relating to relating to 78 11 The Group The Group 2017 expense expense 3 – Interest Interest periods 19,805 16,323 future future 2,084 701 697 obligations payment payment 30,275 26,477 2,286 Total Total 10,564 11,783 10,507 756 756 9,798 1,852 2016 2016 133 (49) (11) 3 – obligations payment payment value of value of Present Present 10,507 10,210 190 52 55 10,343 20,252 22,327 10,292 1,997 2017 2017 The Company The Company (51) 78 relating to relating to – – – 2016 expense expense Interest Interest periods 20,500 17,019 future future 2,077 704 700 Annual Report 2017 obligations payment payment 31,007 27,229 10,392 19,234 30,884 10,343 2,267 9,798 1,852 Total Total 2016 2016 756 755 (49) – – – 265
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
39 Obligations under Service Concession (continued) The Company
2017 2016
Interest Interest Present expense Present expense value of relating to Total value of relating to Total payment future payment payment future payment in HK$ million obligations periods obligations obligations periods obligations Amounts repayable beyond 5 years 9,976 16,212 26,188 10,047 16,890 26,937 Amounts repayable within a period of between 2 and 5 years 202 2,048 2,250 189 2,061 2,250 Amounts repayable within a period of between 1 and 2 years 59 691 750 55 695 750 Amounts repayable within 1 year 55 695 750 52 698 750 10,292 19,646 29,938 10,343 20,344 30,687
40 Loan from Holders of Non-controlling Interests Loan from holders of non-controlling interests as at 31 December 2017 represents the portion of total shareholder loan of AUD60 million (HK$366 million) granted to Metro Trains Australia Pty. Ltd. (“MTA”) by the holders of its non-controlling interests. The loan carries an interest rate of 6.2% per annum and is repayable at the discretion of MTA or on 1 December 2024, whichever is earlier.
Loan from holders of non-controlling interests as at 31 December 2016 represents the portion of total shareholder loan of AUD48.75 million (HK$273 million) granted to Metro Trains Melbourne Pty. Ltd. (“MTM”) by the holders of its non-controlling interests. The loan carried an interest rate of 7.5% per annum. The balance was settled during the year ended 31 December 2017.
41 Income Tax in the Statements of Financial Position
A Current taxation in the consolidated statement of financial position comprises provision for Hong Kong Profits Tax for the Company and certain subsidiaries for the year ended 31 December 2017, chargeable at Hong Kong Profits Tax Rate at 16.5% (2016: 16.5%) and after netting off provisional tax paid, and Mainland of China and overseas tax chargeable at the appropriate current rates of taxation ruling in the relevant countries.
The Group The Company
in HK$ million 2017 2016 2017 2016 Provision for Hong Kong Profits Tax for the year (note 14) 1,305 989 1,256 940 Hong Kong Provisional Profits Tax paid (596) (1,345) (563) (1,303) 709 (356) 693 (363) Balance relating to Mainland of China and overseas tax 371 117 2 1 1,080 (239) 695 (362) Representing: Tax recoverable – (362) – (362) Current Taxation 1,080 123 695 - 1,080 (239) 695 (362)
266 MTR Corporation The Company C The Group as follows: The componentsofdeferredtaxassetsandliabilitiesrecognisedinthestatementsfinancialpositionmovementsduringyearare B 41 jurisdictions andentities. HK$270 million)as itisnotprobablethatfuturetaxable profitsagainstwhichthelossescan beutilisedwillavailableintherelevanttax
Balance asat31December2016 Charged toreserves Balance asat31December2016 Charged toprofitandlossaccount Balance asat1January2016 2016 Exchange difference Balance asat31December2017 Charged toreserves Charged toconsolidatedprofitandlossaccount Balance asat1January2016 2016 Balance asat31December2017 Charged/(credited) toreserves Exchange difference Charged toprofitandlossaccount Charged/(credited) toreserves in HK$million in HK$million in HK$million Balance asat1January2017 2017 Charged toconsolidatedprofitandlossaccount Balance asat1January2017 2017 Net deferredtaxassets Net deferredtaxliabilities Income TaxintheStatementsofFinancialPosition n (2016: The Grouphasnotrecogniseddeferred taxassetsinrespectofsomeitssubsidiaries’cumulativelosses ofHK$113million(2016: Deferred TaxAssetsandLiabilitiesRecognised Depreciation Depreciation depreciation allowances allowances of related of related in excess in excess 12,158 11,795 11,795 11,024 361 771 2 – – – 12,760 12,691 Depreciation Depreciation of properties depreciation 2017 Revaluation Revaluation allowances allowances (69) of related of related The Group in excess in excess 12,097 11,730 11,730 10,960 648 367 599 599 770 574 49 25 – – – – – – of properties Revaluation Revaluation differences Deferred taxarisingfrom temporary temporary and other and other Provision Provision 12,125 12,100 2016 (107) (314) (314) (372) 648 166 599 599 574 (25) Deferred taxarisingfrom 49 45 25 26 33 (4) (1) – – (continued) differences temporary temporary and other and other Cash flow Cash flow Provision Provision hedges (316) (316) (347) 163 (96) (32) (43) 57 32 24 32 75 7 – – – – – 12,649 12,649 2017 The Company – Tax losses Cash flow Cash flow hedges (32) (12) (12) (43) (65) Annual Report 2017 32 32 75 49 (8) 4 4 – – – – – – 12,649 12,691 12,045 12,100 12,045 12,100 11,144 11,118 12,045 12,045 Total Total 2016 180 424 183 410 124 777 126 853 (2)
3 – 267
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
42 Share Capital, Shares Held for Share Incentive Scheme, Company-level Movements in Components of Equity and Capital Management A Share Capital
2017 2016
Number Number of shares HK$ million of shares HK$ million Ordinary shares, issued and fully paid: At 1 January 5,905,290,065 47,929 5,858,228,236 46,317 Shares issued in respect of scrip dividend of 2016/2015 final ordinary dividend 87,794,562 3,863 15,683,803 566 Shares issued in respect of scrip dividend of 2017/2016 interim ordinary dividend 3,032,675 137 2,382,026 101 Vesting of shares of Share Incentive Scheme – 2 – 1 Shares issued under share option schemes 11,660,000 376 28,996,000 944 At 31 December 6,007,777,302 52,307 5,905,290,065 47,929
In accordance with section 135 of the Hong Kong Companies Ordinance (Cap. 622), the ordinary shares of the Company do not have a par value.
B Shares Held for Share Incentive Scheme During the year ended 31 December 2017, the Company awarded Performance Shares and Restricted Shares under the Company’s Executive Share Incentive Scheme to certain eligible employees of the Company (note 45 (ii)). In this regard, a total of 112,200 Performance Shares (2016: 187,200 Performance Shares) and 2,245,200 Restricted Shares (2016: 2,472,578 Restricted Shares) were awarded and accepted by the grantees on 10 April 2017 (2016: 8 April 2016 and 19 August 2016). The fair values of these Award Shares were HK$44.45 per share in 2017 (2016: HK$38.65 and HK$42.50).
During the year ended 31 December 2017, the Trustee of the Executive Share Incentive Scheme, pursuant to the terms of the rules and the trust deed of the Executive Share Incentive Scheme, did not purchase any Ordinary Shares of the Company on Hong Kong Stock Exchange (2016: 2,588,350 Ordinary Shares for a total consideration of approximately HK$99 million). During the year ended 31 December 2017, 110,053 Ordinary Shares of the Company (2016: 167,743 Ordinary Shares) were issued to Executive Share Incentive Scheme in relation to scrip dividend issued amounting to HK$5 million (2016: HK$7 million).
During the year ended 31 December 2017, 1,570,047 shares (2016: 795,860 shares) were transferred to the awardees under Executive Share Incentive Scheme upon vesting. The total cost of the vested shares was HK$59 million (2016: HK$30 million). During the year ended 31 December 2017, HK$2 million (2016: HK$1 million) was credited to share capital in respect of vesting of shares whose fair values at the grant date were higher than the costs of the vested shares. During the year ended 31 December 2017, 169,764 award shares (2016: 270,919 award shares) were forfeited.
C New shares issued and fully paid up during the year comprise:
Number Weighted average of shares exercise price HK$ Employee share options exercised: – 2007 Share Option Scheme 11,660,000 29.27
An analysis of the Company’s outstanding share options as at 31 December 2017 is disclosed in note 45.
268 MTR Corporation profits attributabletotheassociatesandjointventure. Included intheGroup’sretainedprofitsasat31December2017isanamountofHK$1,536million(2016:HK$1,205million),being total amountofreservesavailablefordistributiontoshareholdersamountedHK$50,378million(2016:HK$47,448million). included inretainedprofitsarenon-distributableastheydonotconstituterealisedprofits.Asat31December2017,theCompanyconsidersthat addition, theCompanyconsiderscumulativesurplusesonrevaluationofinvestmentpropertiesHK$54,938million(2016:HK$48,803million) Apart fromretainedprofits,theotherreservesarenotavailablefordistributiontoshareholdersbecausetheydoconstituterealisedprofits.In dealt withinaccordancetheaccountingpolicysetoutnote2CC. The exchangereservecomprisesallforeigndifferencesarisingfromthetranslationofaccountsenterprises.is directly toretainedprofitsiftheoptionislapsedorforfeited. accounting policyundernote2U(iii).Theamountwilleitherbetransferredtothesharecapitalaccountwhenoptionisexercised,orreleased The employeeshare-basedcapitalreservecomprisesthefairvalueofshareoptionsgrantedwhichareyettobeexercised,asexplainedin note 2T(ii). pending subsequentrecognitionofthehedgedcashflowinaccordancewithaccountingpolicyadoptedforhedgesasexplained The hedgingreservecomprisestheeffectiveportionofcumulativenetchangeinfairvalueinstrumentsusedcashflowhedges buildings (note2F(ii)). these, neithertheCompanynoranyofitsothersubsidiariesaresubjectto externallyimposedcapitalrequirements. to maintainmembershipoftheTravelIndustryCouncilHongKong.As at31December2017,allthesecapitalrequirementsweremet.Apartfrom registered sharecapitalbasedontheSwedishCompaniesAct.MTRTravelLimitedisrequiredtomaintainacertainlevelofpaid-upinorder AB, MTRTechTunnelbananABandZetaarerequiredtomaintaintotalshareholders’fundatorabove50%oftheirrespective shareholders’ fundsataspecifiedamountinaccordancewiththefranchiseagreement.MTRExpress(Sweden)AB,NordicMTRPendeltågen capital atorabove33%ofthetotalinvestmentbasedonJianfang[2015]No.122.MetroTrainsMelbournePty.Ltd.isrequiredtomaintain in accordancewiththeconcessionagreement.MTRPropertyDevelopment(Shenzhen)CompanyLimitedisrequiredtomaintainaregistered (Shenzhen) Limitedisrequiredtomaintainaregisteredcapitalatorabove40%ofthetotalinvestmentforShenzhenMetroLonghuaLineproject Fasttrack InsuranceLtd.isrequiredtomaintainaminimumlevelofshareholders’fundbasedontheBermudaAct.MTRCorporation increased to20.6%at31December2017. ratios overthepastyearshadbeentrendingdownwardsinceRailMergerfrom46.5%at31December2007to20.2%December2016and and loanfromholdersofnon-controllinginterestsnetcashequivalentsbankmediumtermnotes.TheGroup’sdebt-to-equity where netborrowingsarerepresentedbytheaggregateofloansandotherobligations,bankoverdrafts,obligationsunderserviceconcession The Groupmonitorscapitalonthebasisofnetdebt-to-equityratio,whichiscalculatedborrowingsasapercentagetotalequity, at 31December2017,representing75.2%oftotalequityinterestintheCompany. The FinancialSecretaryIncorporatedoftheHKSARGovernmentismajorityshareholderCompanyholding4,517,196,134sharesas payment toshareholders,issuanceofscripandnewshares,managingitsdebtportfolioinconjunctionwithprojectedfinancingrequirement. The Groupmanagestheamountofcapitalinproportiontorisk,andmakesadjustmentsitsstructurethroughamountdividend maintain growthandprovideanadequatereturntoitsshareholders. The Group’sprimaryobjectivesinmanagingcapitalaretosafeguarditsabilitycontinueasagoingconcern,andgeneratesufficientprofit E D 42
Movements inComponentsofEquityandCapitalManagement Share Capital,SharesHeldforIncentiveScheme,Company-level ed land and The fixedassetsrevaluationreserveisusedtodealwiththesurplusesordeficitsarisingfromofself-occupiedlandand Capital Management (continued) Annual Report 2017 269
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
42 Share Capital, Shares Held for Share Incentive Scheme, Company-level Movements in Components of Equity and Capital Management (continued) F Company-level Movements in Components of Equity The reconciliation between the opening and closing balances of each component of the Group’s consolidated equity is set out in the consolidated statement of changes in equity. Details of the changes in the Company’s individual components of equity between the beginning and the end of the year are set out below:
Other reserves
Shares held Fixed Employee for Share assets share-based Share Incentive revaluation Hedging capital Retained Total in HK$ million Note capital Scheme reserve reserve reserve profits equity 2017 Balance as at 1 January 2017 51 47,929 (227) 3,043 150 182 96,101 147,178 Profit for the year – – – – – 14,892 14,892 Other comprehensive income for the year – – 253 (293) – 827 787 Total comprehensive income for the year – – 253 (293) – 15,719 15,679 Special Dividend – – – – – (20) (20) 2016 final ordinary dividend – – – – – (4,844) (4,844) Shares issued in respect of scrip dividend of 2016 final ordinary dividend 3,863 (4) – – – – 3,859 2017 interim ordinary dividend – – – – – (1,500) (1,500) Shares issued in respect of scrip dividend of 2017 interim ordinary dividend 137 (1) – – – – 136 Vesting and forfeiture of award shares of Share Incentive Scheme 2 59 – – (63) 2 – Employee share-based payments – – – – 119 – 119 Employee share options exercised 376 – – – (35) – 341 Balance as at 31 December 2017 51 52,307 (173) 3,296 (143) 203 105,458 160,948 2016 Balance as at 1 January 2016 46,317 (151) 2,912 (225) 210 118,726 167,789 Profit for the year – – – – – 9,379 9,379 Other comprehensive income for the year – – 131 375 – 125 631 Total comprehensive income for the year – – 131 375 – 9,504 10,010 Special Dividend – – – – – (25,902) (25,902) 2015 final ordinary dividend – – – – – (4,758) (4,758) Shares issued in respect of scrip dividend of 2015 final ordinary dividend 566 (5) – – – – 561 2016 interim ordinary dividend – – – – – (1,473) (1,473) Shares issued in respect of scrip dividend of 2016 interim ordinary dividend 101 (2) – – – – 99 Shares purchased for Share Incentive Scheme – (99) – – – – (99) Vesting and forfeiture of award shares of Share Incentive Scheme 1 30 – – (34) 3 – Employee share-based payments – – – – 106 – 106 Employee share options exercised 944 – – – (99) – 845 Employee share options forfeited – – – – (1) 1 – Balance as at 31 December 2016 51 47,929 (227) 3,043 150 182 96,101 147,178
270 MTR Corporation payment tocashgeneratedfromoperationsisasfollows: A 43 B
Cash generatedfromoperations Increase increditorsandotherpayables Increase instoresandspares Increase indebtorsandotherreceivables Operating profitbeforeworkingcapitalchanges
Adjustments for: Operating profitbeforeHongKongpropertydevelopment,depreciation,amortisationand in HK$million At 1January2017 2017 in HK$million Changes fromfinancingcashflows:
Exchange difference Other changes:
At 31December2017 – Exchangeloss – Employeeshare-basedpaymentexpenses – Unrealisedgainonrevaluationofinvestmentinsecurities – Decrease/(increase)infairvalueofderivativeinstruments – Amortisationofdeferredincomefromtransfersassetscustomers – Lossondisposaloffixedassets variable annualpaymentfromrecurrentbusinesses – Proceeds from loans and – Proceedsfromloansand – Repayment of loans and – Repaymentofloansand – Interestandfinancecharges Other CashFlowInformation nnual Reconciliation oftheGroup’soperatingprofitbeforeHongKongpropertydevelopment,depreciation,amortisationandvariableannual Reconciliation oftheGroup’sliabilitiesarisingfromfinancingactivitiesisasfollows: – Unamortiseddiscount/premium/ – Adjustment due to fair value – Adjustmentduetofairvalue – Interestandfinancecharges – Discount on issurance of – Discountonissuranceof
capital marketinstruments capital marketinstruments finance chargesoutstanding change offinancialinstruments capital marketinstruments
instruments 23,451 23,451 20,677 (5,185) market Capital Capital 7,601 7,601 2,416 2,416 338 338 357 357 (35) 54 54 1 – –
(17,705) 17,823 17,823 17,313 17,313 17,018 loans Bank 118 118 207 207 (30) (30) – – – –
Finance leases 492 492 460 (19) (19) 51 51 – – – – – – –
Others 458 458 434 21 21 21 21 3 – – – – – – –
Short-term (1,025) (1,025) 1,350 loans 325 325 22,239 17,892 17,677 – – – – – – – –
5,145 2017 (767) 119 (31) (21) 25 46 44 Interest and Interest and 2
payables charges charges finance finance 1,047 1,047 (923) (923) 993 993 123 123 101 Annual Report 2017 (48) (54) – – – –
(23,934) 25,424 25,424 42,162 42,162 40,040 19,156 17,109 16,947 1,068 1,068 1,341 1,341 2,787 (923) Total 2016 567 567 214 214 338 338 (625) (115) (65) 106 (38) (24) 53 65 – –
271
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
44 Fair Value Measurement In accordance with HKFRS 13, Fair Value Measurement, the level into which a fair value measurement is classified is determined with reference to the observability and significance of the inputs used in the valuation technique as follows:
Level 1: Fair value measured using only Level 1 inputs, i.e. unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date
Level 2: Fair value measured using Level 2 inputs, i.e. observable inputs which fail to meet Level 1, and not using significant unobservable inputs. Unobservable inputs are inputs for which market data are not available
Level 3: Fair value measured using significant unobservable inputs
A Fair Value Measurements of Fixed Assets All of the Group’s investment properties and self-occupied land and buildings measured at fair value on a recurring basis are categorised as Level 3 of the fair value hierarchy.
During the year ended 31 December 2017, there were no transfers between Level 1 and Level 2, or transfers into or out of Level 3 in respect of the Group’s investment properties and self-occupied land and buildings. The Group’s policy is to recognise transfers between levels of fair value hierarchy as at the end of the reporting period in which they occur.
All the Group’s investment properties and self-occupied land and buildings were revalued as at 31 December 2017 and 2016 by an independent firm of surveyors, Jones Lang LaSalle Limited, who have among their staff Members of the Hong Kong Institute of Surveyors. The Group’s senior management have discussion with the surveyors on the valuation assumptions and valuation results when the valuation is performed at each interim and annual reporting date.
The fair value of all the Group’s self-occupied land and buildings is determined on a recurring basis using primarily the direct comparison approach assuming sale of properties in their existing state with vacant possession.
The property interests of all the shopping malls and office accommodation held by the Group as investment properties have been valued using the income capitalisation approach. Under this approach, the market value is derived from the capitalisation of the rental revenue to be received under existing tenancies and the estimated full market rental value to be received upon expiry of the existing tenancies with reference to the market rental levels prevailing as at the date of valuation by an appropriate single market yield rate. The range of market yield rate adopted for the valuation of major investment properties as at 31 December 2017 was 3.50% – 6.00% (2016: 3.90% – 7.00%) with a weighted average of 4.9% (2016: 5.3%). The fair value measurement is negatively correlated to the market yield rate.
The movements of investment properties during the year ended 31 December 2017 are shown in note 19. All the fair value adjustment related to investment properties held as at 31 December 2017 and was recognised under investment property revaluation in the consolidated profit and loss account.
272 MTR Corporation The Group The leveloffairvaluehierarchywithinwhichtherecurringmeasurementsarecategorisedisanalysedbelow: (i) B 44
Derivative financialliabilities Financial Liabilities Investments insecurities
Derivative financialassets Financial Assets in HK$million
Derivative financialliabilities Financial Liabilities Financial Assets Investments insecurities Derivative financialassets in HK$million – Interestrateswaps – Crosscurrencyswaps – Foreignexchangeforwards – Interestrateswaps – Crosscurrencyswaps – Foreignexchangeforwards – Interestrateswaps – Crosscurrencyswaps – Foreignexchangeforwards – Interestrateswaps – Crosscurrencyswaps – Foreignexchangeforwards Fair ValueMeasurement Financial AssetsandLiabilitiesCarriedatFairValue Fair ValueMeasurementsofFinancialInstruments (continued) 31 December2017 31 December2016 Fair value at Fair valueat Fair value at Fair valueat 451 379 611 443 168 101 569 503 553 370 183 31 41 47 20 37 29 84 98 1
Fair value measurements as at Fair valuemeasurementsasat Fair value measurements as at Fair valuemeasurementsasat Level 1 Level 1 31 December2017 31 December2016 443 443 370 370 – – – – – – – – – – – – – – – –
Annual Report 2017 Level 2 Level 2 451 379 168 168 101 569 503 183 183
31 41 47 20
37 29 84 98 1 – –
273
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
44 Fair Value Measurement (continued) B Fair Value Measurements of Financial Instruments (continued) The Company
Fair value at Fair value measurements as at 31 December 2017 31 December 2017
in HK$ million Level 1 Level 2 Financial Assets Derivative financial assets – Foreign exchange forwards 20 – 20 – Cross currency swaps 101 – 101 – Interest rate swaps 47 – 47 168 – 168 Financial Liabilities Derivative financial liabilities – Foreign exchange forwards 41 – 41 – Cross currency swaps 379 – 379 – Interest rate swaps 31 – 31 451 – 451
Fair value at Fair value measurements as at 31 December 2016 31 December 2016
in HK$ million Level 1 Level 2 Financial Assets Derivative financial assets – Foreign exchange forwards 1 – 1 – Cross currency swaps 98 – 98 – Interest rate swaps 84 – 84 183 – 183 Financial Liabilities Derivative financial liabilities – Foreign exchange forwards 29 – 29 – Cross currency swaps 503 – 503 – Interest rate swaps 37 – 37 569 – 569
There are no Level 3 measurements of financial instruments. During the years ended 31 December 2017 and 2016, there were no transfers between Level 1 and Level 2, or transfers into or out of Level 3. The Group’s policy is to recognise transfers between levels of fair value hierarchy as at the end of the reporting period in which they occur.
The discounted cash flow method, which discounts the future contractual cash flows at the current market interest rates, is the main valuation technique used to determine the fair value of the Group’s borrowings and derivative financial instruments. For interest rate swaps, cross currency swaps and foreign exchange forward contracts, the discount rates used were derived from the swap curves of the respective currencies and the cross currency basis curves of the respective currency pairs at the end of reporting period. Closing exchange rates at the end of reporting period were used to convert value in foreign currency to local currency.
274 MTR Corporation The Group values aredisclosedbelow: fair valuesasat31December2017and2016exceptforcapitalmarketinstrumentsotherobligations,whichtheircarryingamounts The carryingamountsoftheGroup’sandCompany’sfinancialassetsliabilitiesnotcarriedatfairvaluearemateriallydifferentfromtheir (ii) B 44 grant theoption.The2007OptionSchemeexpiredinJune2014. eligible employeesatitsabsolutediscretion.Underthe2007OptionScheme, thedateofgrantisdefinedasacceptanceofferto Subject totherulesof2007OptionScheme,Companymay,from timetoduringtheschemeperiod,offergrantshareoptionsany (iii) thenominalvalueofanMTRshare. preceding thedayofoffersuchoption;(ii)closingpriceanMTR shareonthedayofoffersuchoption,whichmustbeabusinessday;and and theexercisepriceshouldnotbelessthangreatestof(i)average closingpriceofanMTRshareforthefivebusinessdaysimmediately exercise priceofanyoptiongrantedunderthe2007OptionSchemeisto bedeterminedbytheCompanyuponofferofgrantoption Options grantedwillbevestedinrespectoftheirunderlyingsharesnot less than1yearfromthedateonwhichrelevantoptionisoffered.The pursuant totheexerciseofoptionsgrantedafter7June2007underallshare optionschemesoftheCompanyincluding2007OptionScheme. with fairandmarketcompetitiveremuneration.UndertheRulesof2007OptionScheme,amaximum277,461,072shares,maybeissued personnel, toretainandmotivatecriticalkeyemployees,aligntheirinterestthelong-termsuccessofCompanyandprovidethem Option Scheme”)wassubmittedandapprovedatthe2007AnnualGeneralMeetingtoenhanceCompany’sabilityattractbestavailable Following theexpiryofNewJoinersShareOptionScheme(the“NewScheme”)inMay2007,2007“2007 (i) Incentive Scheme(formerlythe“2014ShareScheme”).Detailsofschemesareasfollows: Directorate andcertainemployees.Asat31December2017,theCompanymaintained2007ShareOptionSchemeExecutive The GroupgrantedshareoptionsunderoptionschemeandawardsincentivetoitsMembersoftheExecutive Equity-settled Share-basedPayments 45 The Company exchange ratesattheendofreportingperiodwereusedtoconvertvalueinforeigncurrencylocalcurrency. other obligations.Thediscountratesusedwerederivedfromtheswapcurvesofrespectivecurrenciesatendreportingperiod.Closing at thecurrentmarketinterestrates,ismainvaluationtechniqueusedtodeterminefairvalueofGroup’scapitalmarketinstrumentsand The abovefairvaluemeasurementiscategorisedasLevel2.discountedcashflowmethod,whichdiscountsthefuturecontractualflows in HK$million in HK$million Capital marketinstruments Capital marketinstruments Other obligations Other obligations Fair ValueMeasurement Share-based Payments Financial AssetsandLiabilitiesNotCarriedatFairValue 2007 ShareOptionScheme Fair ValueMeasurementsofFinancialInstruments (continued) Carrying Carrying Carrying Carrying At 31December2017 At 31December2017 amount amount 23,451 3,808 950 458 (continued) 25,881 4,499 1,172 value value 537 Fair Fair Fair Fair Carrying Carrying Carrying Carrying amount amount At 31December2016 At 31December2016 20,677 1,991 894 434 Annual Report 2017 22,194 2,343 1,127 value value 524 Fair Fair Fair Fair 275
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
45 Share-based Payments (continued) Equity-settled Share-based Payments (continued) As at 31 December 2017, the following awards of share options were offered to Members of the Executive Directorate and selected employees of the Company under the 2007 Option Scheme:
Number of share options Awards of share options Date of offer offered and accepted Date of acceptance 2008 Award 10 December 2007 8,273,000 11 December 2007 to 7 January 2008 26 March 2008 2,749,000 28 March 2008 to 23 April 2008 2009 Award 8 December 2008 12,712,000 8 December 2008 to 30 December 2008 12 June 2009 345,000 18 June 2009 to 9 July 2009 2010 Award 8 December 2009 15,718,000 9 December 2009 to 22 December 2009 28 June 2010 355,000 21 July 2010 2011 Award 16 December 2010 15,546,500 16 December 2010 to 23 December 2010 27 June 2011 215,000 7 July 2011 2012 Award 23 March 2012 16,917,000 30 March 2012 2013 Award 26 April 2013 21,605,000 6 May 2013 25 October 2013 384,500 1 November 2013 2014 Award 23 May 2014 19,895,500 30 May 2014
The following table summarises the outstanding share options as at 31 December 2017 granted under the 2007 Option Scheme since inception:
Date of grant Number of share options Exercise price Exercisable period HK$ 2012 Award 30 March 2012 1,793,500 27.48 on or prior to 23 March 2019 2013 Award 6 May 2013 4,014,500 31.40 on or prior to 26 April 2020 2014 Award 30 May 2014 7,986,000 28.65 on or prior to 23 May 2021
Movements in the number of share options outstanding and their related weighted average exercise prices were as follows:
2017 2016
Number of Weighted average Number of Weighted average share options exercise price share options exercise price HK$ HK$ Outstanding at 1 January 25,605,000 29.284 55,034,500 29.200 Exercised during the year (11,660,000) 29.267 (28,996,000) 29.131 Forfeited during the year (151,000) 29.219 (388,500) 29.110 Lapsed during the year – – (45,000) 26.850 Outstanding at 31 December 13,794,000 29.298 25,605,000 29.284 Exercisable at 31 December 13,794,000 29.298 19,755,500 29.471
The weighted average closing price in respect of the share options exercised during the year was HK$45.264 (2016: HK$38.883).
276 MTR Corporation Share optionsoutstandingat31December2017hadthefollowingexercisepricesandremainingcontractuallives: Equity-settled Share-basedPayments 45 Restricted Shares Company undertheExecutiveShareIncentiveScheme: As at31December2017,thefollowingawardsofshareswereofferedtoMembersExecutiveDirectorateandselectedemployees with effectfrom1January2018. On 15November2017,theRemunerationCommitteeapprovedtorename2014ShareIncentiveSchemeasExecutive Trustee untiltheendofeachvestingperiod. The numberofAwardShareswillbeacquiredinthemarketatcostCompanybyTrustee.heldontrust in accordancewiththeSchemeRulesandCompanyhasenteredintoaTrustdeedTrusteeforpurposeofimplementingScheme. performance metricandconditionshavebeenachieved.TheExecutiveShareIncentiveSchemewillbeadministeredbytheCompany by theRemunerationCommittee).AnawardofPerformanceShareswillvestuponcertificationCommitteethatrelevant the AwardSharestobevested.AnawardofRestrictedwillvestrateablyoverthreeyearsinequaltranches(unlessotherwisedetermined Subject totheSchemeRules,RemunerationCommitteeshalldeterminefromtimevestingcriteriaandconditionsorperiodsfor approved performancemetricandinrespectofsuchperiodanyotherconditions. performance. PerformanceSharesareawardedwhichvestsubjecttotheperformanceofCompany,assessedbyreferencesuchBoard- of RestrictedSharesand/orPerformance(collectivelyknownas“AwardShares”).areawardedonthebasisindividual Executive ShareIncentiveSchemetookeffecton1January2015foratermof10years,underwhichanawardholdermaybegranted align participants’interestwiththelong-termsuccessofCompanyandtodriveachievementstrategicobjectivesCompany.The 2007 OptionSchemeon6June2014.ThepurposesoftheExecutiveShareIncentivearetoretainmanagementandkeyemployees, On 15August2014,theBoardofCompanyapprovedadoptionExecutiveShareIncentiveScheme,followingexpiry (ii) expense amountedtoHK$2million(2016:HK$9million). During theyearended31December2017,equity-settledshare-basedpaymentsrelatingto2007ShareOptionSchemerecognisedasan Exercise price HK$27.73 HK$29.87 HK$31.40 HK$27.48 HK$28.84 HK$28.65 Date ofaward 10 April2017 19 August2016 8 April2016 27 April2015 Share-based Payments Executive ShareIncentiveScheme (continued) (continued) Award Shares share options Number of Number of 2,245,200 2,401,150 2,401,150 2,348,150 13,794,000 Number of Number of 4,014,500 1,793,500 7,986,000 granted 71,428 71,428 – – – 2017 contractual life per share fair value Average Remaining Remaining 44.45 38.65 38.65 38.60 42.50 42.50 HK$ years 2 1 3 – – –
share options 15 August2016to2019 25,605,000 12,793,500 Number of Number of 2,198,000 7,182,000 3,362,000 20 April2015to2018 45,000 24,500 3 April2017to2020 1 April2016to2019 2016 Annual Report 2017 contractual life Vesting period Remaining Remaining years 1 3 2 1 4 4 277
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
45 Share-based Payments (continued) Equity-settled Share-based Payments (continued) Performance Shares
Number of Average Award Shares fair value Date of award granted per share Vesting period HK$ 27 April 2015 1,681,050 38.60 20 April 2015 to 20 April 2018 8 April 2016 187,200 38.65 1 April 2016 to 20 April 2018 10 April 2017 112,200 44.45 3 April 2017 to 20 April 2018
Movement in the number of Award Shares outstanding was as follows:
2017 2016
Number of Award Shares Number of Award Shares Outstanding at 1 January 5,524,599 3,931,600 Awarded during the year 2,357,400 2,659,778 Vested during the year (1,570,047) (795,860) Forfeited during the year (169,764) (270,919) Outstanding at 31 December 6,142,188 5,524,599
Award Shares outstanding at 31 December 2017 had the following remaining vesting periods:
Award Shares Remaining vesting period Number of Award Shares years Restricted Shares 27 April 2015 0.30 640,598 8 April 2016 1.25 1,447,271 19 August 2016 1.62 47,619 10 April 2017 2.25 2,183,550 Performance Shares 27 April 2015 0.30 1,523,750 8 April 2016 0.30 187,200 10 April 2017 0.30 112,200
The details of the Executive Share Incentive Scheme are also disclosed in the Remuneration Report.
During the year ended 31 December 2017, the equity-settled share-based payments relating to the Executive Share Incentive Scheme recognised as an expense amounted to HK$117 million (2016: HK$97 million).
46 Retirement Schemes The Group operates a number of retirement schemes in Hong Kong, the Mainland of China, United Kingdom, Sweden and Australia. The assets of these schemes are held under the terms of separate trust arrangements so that the assets are kept separate from those of the Group. The majority of the Group’s employees are covered by the retirement schemes operated by the Company.
A Retirement Schemes Operated by the Company in Hong Kong The Company operated four retirement schemes under trust in Hong Kong during the year ended 31 December 2017, including the MTR Corporation Limited Retirement Scheme (the “MTR Retirement Scheme”), the MTR Corporation Limited Provident Fund Scheme (the “MTR Provident Fund Scheme”) and two Mandatory Provident Fund (“MPF”) Schemes, the “MTR MPF Scheme” and the “KCRC MPF Scheme”.
Currently, new eligible employees can choose between the MTR Provident Fund Scheme and the MTR MPF Scheme while the MTR MPF Scheme covers employees who did not opt for or who are not eligible to join the MTR Provident Fund Scheme.
278 MTR Corporation contributions wereHK$6million(2016:million)andtotalcontribution fromtheCompanywereHK$6million(2016:HK$7million). As at31December2017,thetotalnumberofemployeesparticipatingin theKCRCMPFSchemewas515(2016:582).In2017,totalmembers’ KCRC MPFScheme.BothmembersandtheCompanyeachcontributeto theKCRCMPFSchemeatmandatorylevelsasrequiredbyMPFSO. employees whowerepreviouslymembersoftheKCRCMPFSchemeand areeligibletojointheMTRProvidentFundSchemebutoptre-join The KCRCMPFSchemeisadefinedcontributionschemecoveredunder anMPFmastertrustregisteredwiththeMPFA.ItcoversthoseformerKCRC (iv) contributions wereHK$53million(2016:million)andtotalcontribution fromtheCompanywereHK$58million(2016:million). As at31December2017,thetotalnumberofemployeesparticipatingin theMTRMPFSchemewas6,109(2016:6,400).In2017,totalmembers’ Scheme before1April2008,subjecttoindividualtermsofemployment. (Cap. 485)(the“MPFSO”).TheCompanymakesadditionalcontributionsabovethemandatorylevelforeligiblememberswhojoinedMTRMPF Company eachcontributetotheMTRMPFSchemeatmandatorylevelsasrequiredbyMandatoryProvidentFundSchemesOrdinance who didnotoptfororareeligibletojointheMTRRetirementSchemeProvidentFundScheme.Bothmembersand The MTRMPFSchemeisadefinedcontributionschemecoveredunderanmastertrustregisteredwiththeMPFA.Itcoversthoseemployees (iii) million). Thenetassetvalueasat31December2017wasHK$6,247million(2016:HK$5,252 members’ contributionswereHK$125million(2016:HK$114million)andtotalfromtheCompanyHK$312HK$292 As at31December2017,thetotalnumberofemployeesparticipatinginMTRProvidentFundSchemewas9,662(2016:9,309).In fixed percentagesofmembers’basesalary. Company’s contributions,togetherwithinvestmentreturnsonthesecontributions.Bothmembers’andthecontributionsarebased by theMPFA.AllbenefitspayableunderMTRProvidentFundSchemearecalculatedreferencetomembers’owncontributionsand The MTRProvidentFundSchemeisadefinedcontributionschemeregisteredundertheORSOandhasbeengrantedanMPFExemptionCertificate (ii) past serviceliability,withafundinglevelof107.5%(2016:92.6%). (b) members lefttheMTRRetirementScheme;and (a) mortality, turnoverandretirement.WillisTowersWatsonconfirmedthat,asatthevaluationdateof31December2017: rate ofinvestmentreturnnetsalaryincreases1.0%(2016:0.6%)perannum,togetherwithappropriateallowancesforexpectedrates Watson usingtheAttainedAgeMethod.Theprincipalactuarialassumptionsusedforvaluationasat31December2017includedalong-term The actuarialvaluationsasat31December2016and2017todeterminethecashfundingrequirementswerealsocarriedoutbyWillisTowers valuation areshowninnote47. were carriedoutbyanindependentactuarialconsultingfirm,WillisTowersWatson,usingtheProjectedUnitCreditMethod.Theresultsof The actuarialvaluationsasat31December2016and2017todeterminetheaccountingobligationsinaccordancewithHKAS19,Employeebenefits, contributions asat31December2017wasHK$9,903million(2016:HK$8,413million). to theMTRRetirementScheme.ThenetassetvalueofSchemeexcludingportionattributablemembers’voluntary 4,094). In2017,memberscontributedHK$74million(2016:HK$75million)andtheCompanyHK$662HK$480 annual actuarialvaluationcarriedoutbyanindependentconsultingfirm.Asat31December2017,thetotalmembershipwas3,858(2016: returns. Members’contributionsarebasedonfixedpercentagesofbasesalary.TheCompany’sdeterminedbyreferencetoan benefits basedonthegreaterofamultiplefinalsalarytimesserviceandfactoraccumulatedmembercontributionswithinvestment and RulesbytheBoardofTrustees,comprisingmanagement,employeerepresentativesindependentnon-employertrustees.Itprovides The MTRRetirementSchemehasbeenclosedtonewemployeesfrom1April1999onwards.ItisadministratedinaccordancewiththeTrustDeed and hasbeengrantedwithanMPFExemptionCertificatebytheMandatoryProvidentFundSchemesAuthority(the“MPFA”). The MTRRetirementSchemeisadefinedbenefitschemeregisteredundertheOccupationalSchemesOrdinance(Cap.426)(the“ORSO”) (i) A 46 Retirement Schemes KCRC MPFScheme MTR MPFScheme MTR ProvidentFundScheme on theassumptionthatMTRRetirementSchemecontinuedinforce,valueofassetswasmorethansufficienttocoveraggregate the MTRRetirementSchemewassolvent,withassetsmorethanadequatetocoveraggregatevalueofmembers’vestedbenefitshadall MTR RetirementScheme Retirement SchemesOperatedbytheCompanyinHongKong (continued) (continued) Annual Report 2017 279
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
46 Retirement Schemes (continued) B Retirement Schemes for Employees of Mainland of China and Overseas Offices and Subsidiaries Employees not eligible for joining the retirement schemes operated by the Company in Hong Kong are covered by the retirement schemes established by their respective subsidiary companies or in accordance with respective applicable labour regulations.
Certain employees of the Group’s Australian subsidiary are entitled to receive retirement benefits from the Emergency Services Superannuation Scheme operated in Australia. The benefit amounts are calculated based on the member’s years of service and final average salary. The Group does not recognise any defined benefit liability in respect of this scheme because the Group has no legal or constructive obligation to pay future benefits relating to its employees; its only obligation is to pay contributions as they fall due. As at 31 December 2017, total number of the Group’s employees participating in this scheme was 611 (2016: 662). In 2017, total members’ contributions were HK$25 million (2016: HK$27 million) and total contribution from the Group was HK$46 million (2016: HK$36 million).
Certain employees of the Group’s Swedish subsidiary are entitled to receive retirement benefits from the ITP 2 Retirement Scheme operated in Sweden. The benefit amounts are calculated based on the member’s years of service and annual salary. The Group does not recognise any defined benefit liability in respect of this scheme because the Group has no legal or constructive obligation to pay future benefits relating to its employees; its only obligation is to pay contributions as they fall due. As at 31 December 2017, total number of the Group’s employees participating in this scheme was 670 (2016: 631). In 2017, total contribution from the Group was HK$20 million (2016: HK$3 million).
Certain employees of the Group’s MTR Crossrail subsidiary are entitled to join the MTR Corporation (Crossrail) section of the Railway Pension Scheme in the United Kingdom. The scheme is a shared cost arrangement whereby the Group is only responsible for a share of the cost. The benefit amounts are calculated based on the member’s years of service and final average salary. The Group does not recognise any net defined benefit liability in respect of this scheme because the Group has no legal or constructive obligation for any deficit in the value of the scheme. Its only obligation is to pay contributions as they fall due. As at 31 December 2017, total number of the Group’s employees participating in this scheme was 394 (2016: 261). In 2017, total members’ contributions were HK$10 million (2016: HK$8 million) and total contribution from the Group was HK$15 million (2016: HK$12 million). Pension expense of HK$29 million (2016: HK$10 million) was recognised in profit and loss and actuarial gain of HK$11 million (2016: actuarial loss of HK$2 million) was recognised in the statement of other comprehensive income.
Except for the retirement schemes described above, all other retirement schemes to cover employees in overseas offices or in subsidiaries in Hong Kong, the Mainland of China or overseas are defined contribution schemes. For Hong Kong employees, these schemes are registered under the MPFSO in Hong Kong. For the Mainland of China or overseas employees, these schemes are operated in accordance with the respective local laws and regulations. As at 31 December 2017, the total number of employees of the Group participating in these schemes was 11,655 (2016: 10,965). In 2017, total members’ contributions were HK$99 million (2016: HK$96 million) and total contribution from the Group was HK$394 million (2016: HK$336 million).
47 Defined Benefit Retirement Scheme During the year ended 31 December 2017, the Company makes contributions to and recognises defined benefit liabilities in respect of MTR Retirement Scheme which provides employees with benefits upon retirement or termination of services for other reasons (note 46). This defined benefit scheme exposes the Group to actuarial risks, such as interest rate, salary increase and investment risks. The information about the MTR Retirement Scheme is summarised as below:
A The amounts recognised in the consolidated statement of financial position are as follows:
The Group and The Company
in HK$ million 2017 2016 Present value of defined benefit obligations (10,672) (10,455) Fair value of scheme assets 9,903 8,413 Net liabilities (769) (2,042)
A portion of the above liabilities is expected to be paid after more than one year. However, it is not practicable to segregate this amount from the amounts to be paid in the next twelve months, as future contributions will also relate to future services rendered and future changes in actuarial assumptions and market conditions. The Company expects to pay HK$184 million in contribution to the MTR Retirement Scheme in 2018.
280 MTR Corporation The GroupandCompany B 47 The GroupandCompany C 2017 (2016:52.5%inequitiesand47.5%bondscash). the lateststudy,strategicassetallocationofMTRRetirementSchemeis52.5%inequitiesand47.5%bondscashasat31December An asset-liabilitymodellingreviewisperformedperiodicallytoanalysethestrategicinvestmentpoliciesofMTRRetirementScheme.Basedon bonds havequotedpricesinactivemarkets. this, therewerenoinvestmentinothersharesanddebtsecuritiesoftheCompanyasat31December20172016.Allequity The schemeassetsincludenoamountinvestedintheordinarysharesofCompanyasat31December2017(2016:HK$6million).Otherthan The weightedaveragedurationofthepresentvaluedefinedbenefit obligationsis6.6years(2016:6.8years).
Voluntary units Cash Bonds Equity securities in HK$million At 31December Interest cost Current servicecost Benefits paidbythescheme Members’ contributionspaidtothescheme Remeasurements: At 1January in HK$million – Non-government – Government – Non-financialinstitutions – Financialinstitutions – Actuariallosses/(gains)arisingfromchangesinfinancialassumptions – Actuariallossesarisingfromchangesindemographicassumptions – Actuariallosses/(gains)arisingfromchangesinliabilityexperience Defined BenefitRetirementScheme Scheme assetsconsistofthefollowing: Movements inthePresentValueofDefinedBenefitObligations (continued) 10,078 10,672 10,455 4,033 2,212 1,821 5,679 4,778 9,903 2017 2017 (175) (853) 366 901 267 328 401 168 232 74 1 Annual Report 2017 10,455 10,408 3,665 2,129 1,536 4,430 3,598 8,557 8,413 2016 2016 (144) (131) (499) 462 832 263 339 (79) (53) 75 1 281
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
47 Defined Benefit Retirement Scheme (continued) D Movements in Scheme Assets The Group and The Company
in HK$ million 2017 2016 At 1 January 8,413 8,131 Company’s contributions paid to the scheme 662 480 Members’ contributions paid to the scheme 74 75 Benefits paid by the scheme (853) (499) Administrative expenses paid from scheme assets (6) (5) Interest income 222 211 Return on scheme assets, excluding interest income 1,391 20 At 31 December 9,903 8,413
E Expenses recognised in the profit and loss and other comprehensive income are as follows:
in HK$ million 2017 2016 Current service cost 328 339 Net interest on net defined benefit liability 45 52 Administrative expenses paid from scheme assets 6 5 379 396 Less: Amount capitalised (47) (60) Net amount recognised in profit or loss 332 336 Actuarial losses/(gains) 401 (131) Return on scheme assets, excluding interest income (1,391) (20) Amount recognised in other comprehensive income (990) (151)
The retirement scheme expense is recognised under staff costs and related expenses in the consolidated profit and loss account.
F The significant actuarial assumptions (expressed as weighted average) and sensitivity analysis are as follows:
2017 2016 Discount rate 2.3% 2.7% Future salary increases 4.0% 4.4% Unit value increase 5.0% 5.0%
The below analysis shows how the present value of the defined benefit obligations as at 31 December 2017 would have increased/(decreased) as a result of 0.25% change in the significant actuarial assumptions:
2017 2016
Increase in 0.25% Decrease in 0.25% Increase in 0.25% Decrease in 0.25% HK$ million HK$ million HK$ million HK$ million Discount rate (171) 176 (174) 180 Future salary increases 129 (121) 161 (153) Unit value increase 48 (42) 19 (15)
The above sensitivity analysis is based on the assumption that changes in actuarial assumptions are not correlated and therefore it does not take into account the correlations between the actuarial assumptions.
282 MTR Corporation * The GrouphasthefollowingjointoperationsinrespectofitsawardedpropertydevelopmentprojectsHongKongasat31December2017: 48 Completion basedon issuanceofoccupationpermit Package One Ho ManTinStation Tin WingStop Tai WaiStation Sites C&D Austin Station Che KungTempleStation Choi HungPark-and-Ride Package One Tseung KwanOArea86 Area 55b Tseung KwanOStation Tiu KengLengStation Hang HauStation Package One Tung ChungStation Tsing YiStation Package One Olympic Station Package Three Kowloon Station Hong KongStation Location/development package Package Two Package One Wong ChukHangStation Package Two Package Two Area 56 Package Two Package Four Package Three Package Three Package Three Package Five,SixandSeven Package Ten Package Nine Package Eight Package Seven Package Six Package Five Package Four Interests inJointOperationsRespectofHongKongPropertyDevelopment (LOHAS Park)
Residential/Retail Residential/Retail/Bicycle Park Residential/Retail/Kindergarten Residential/Retail Residential/Retail Residential/Retail Residential/Retail/Kindergarten Office/Retail/Hotel Residential Residential Residential/Retail/Residential CareHome Residential/Retail Kindergarten Residential/Office/Retail/Hotel/ Residential/Office/Retail/ Residential/Cross BorderBusTerminus Land use Residential Residential Residential/Retail/Kindergarten Residential/Kindergarten Residential/Hotel/Retail/Office Residential/Retail/Market Residential Residential/Kindergarten Kindergarten Residential/Retail/Wet Market/ Residential/Kindergarten Residential/Office/Retail/Hotel/ Residential Residential/Kindergarten Residential Residential/Retail/Kindergarten Residential Residential Residential for theElderly Indoor SportsHall Service Apartment/Kindergarten
Total gross floor Total grossfloor area (sq.m.) 252,480 253,765 142,152 292,795 415,894 119,116 139,840 361,531 309,069 105,113 255,949 255,949 310,496 310,496 163,130 268,650 128,845 129,544 413,154 104,452 104,452 504,345 104,920 115,920 136,970 102,336 122,302 91,256 90,655 21,574 69,000 69,000 96,797 45,800 45,800 53,600 75,400 97,000 Completed byphasesfrom2006–2007 Completed byphasesfrom1998–2005 Completed byphasesfrom1999–2005 Completed byphasesfrom2002–2008 Completed byphasesfrom2010–2012 Completed byphasesfrom2011–2012 Completed byphasesfrom2002–2008 Completed byphasesfrom2006–2010 Actual or expected date of completion Actual orexpecteddateofcompletion of constructionworks* Completed in2012 Completed in2005 Completed in2004 Completed in1999 Completed in2014 Completed in2008 Completed in2006 Completed in2000 Completed in2005 Completed in2001 Completed in2003 Completed in2014 Completed in2006 Annual Report 2017 2021 2022 2022 2023 2022 2022 2022 2021 2022 2020 2019 2019 283
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
48 Interests in Joint Operations in Respect of Hong Kong Property Development (continued) The Group’s assets held in relation to these joint operations include various site foundation works and related staff and overhead costs, land costs, acquisition cost of development rights and interest expense. These are set off against any payments received from developers in relation to that development package, and the balance is shown on the statement of financial position either as property development in progress or deferred income included in creditors and other payables as the case may be.
During the year ended 31 December 2017, profits attributable to joint operations of HK$609 million (2016: HK$353 million) were recognised (note 11).
In connection with the Rail Merger, the Company entered into agreements with KCRC relating to the property development projects on the following three awarded sites:
Total gross floor Actual or expected date of completion Location/development package Land use area (sq.m.) of construction works * Ho Tung Lau Residential/Retail 122,900 Completed in 2008 Wu Kai Sha Station Residential/Retail/Kindergarten 172,650 Completed in 2009 Tai Wai Maintenance Centre Residential 313,955 Completed by phases from 2010–2011
* Completion based on issuance of occupation permit
Under these agreements, the Company was appointed as KCRC’s agent to exercise the rights and to perform the obligations of KCRC as stipulated in the agreements. The Company received a right to share the net surplus from the sale of these property development projects.
49 Material Related Party Transactions The Financial Secretary Incorporated, which holds approximately 75.2% of the Company’s issued share capital on trust for the HKSAR Government, is the majority shareholder of the Company. Transactions between the Group and the HKSAR Government departments or agencies, or entities controlled by the HKSAR Government, other than those transactions such as the payment of fees, taxes, leases and rates, etc. that arise in the normal dealings between the HKSAR Government and the Group, are considered to be related party transactions pursuant to HKAS 24 (revised), Related party disclosures, and are identified separately in these accounts.
Members of the Board and Members of the Executive Directorate and parties related to them, including their close family members, are also considered to be related parties of the Group. Transactions with these parties, except for those involving a Member of the Board or his/her related parties where the relevant Member abstains from voting, are separately disclosed in the accounts.
Major related party transactions entered into by the Group which are relevant for the current year include:
A On 30 June 2000, the Company was granted by the HKSAR Government a franchise, for an initial period of 50 years, to operate the then existing mass transit railway, and to operate and construct any extension to the railway. On the same day, the Company and the HKSAR Government entered into an Operating Agreement (“OA”) which laid down the detailed provisions for the design, construction, maintenance and operation of the railway under the franchise. With the Rail Merger, the OA was replaced with effect from 2 December 2007 by a new operating agreement, details of which are set out in note 49C below.
B On 14 July 2000, the Company received a comfort letter from the HKSAR Government pursuant to which the HKSAR Government agreed to extend the period of certain of the Company’s land interests so that they are coterminous with the Company’s franchise period. To prepare for the Rail Merger, on 3 August 2007, the HKSAR Government wrote to KCRC confirming that, subject to all necessary approvals being obtained, the period of certain of KCRC’s land interests (which are the subject of the service concession under the Rail Merger) will be extended so that they are coterminous with the concession period of the Rail Merger.
284 MTR Corporation Kong Limitedon21December2004 (asamendedfromtimetotime);and exempt fromthedisclosurerequirements underChapter14AoftheListingRulespursuanttowaivergranted byTheStockExchangeofHong in WongChukHang(note23B).The transaction constitutesacontinuingconnectedasdefinedunder theListingRules. Howeveritis (iii) Connected Transactions”oftheReport oftheMembersBoard; transactions asdefinedundertheListing Rules.Adetaileddescriptionoftheaboveagreementiscontained under theparagraph“Continuing to arepaymentmechanism(note23A).Suchtransactionsareconsidered toberelatedpartytransactionsandalsoconstitutecontinuingconnected agreements, theCompanyhasreceivedfromHKSARGovernmenta total ofHK$12,652milliongovernmentgrantasfundingsupportsubject amended byasupplementalagreementdated23December2016)inrespect oftheIslandLineExtensiontoWesternDistrict.Pursuant (ii) property developmentrightsatfoursitesalongtheextension; (i) been completedinthecurrentyearinclude: extensions. Projectagreementsonrailwayextensionsthatarestillunder constructionorthepropertydevelopmentsinrespectofwhichhavenot new railwayextensionsand,whereapplicable,thegrantingoflandforcommercial andresidentialpropertydevelopmentsalongtheserailway of theMembersBoard. Rules. Adetaileddescriptionofeachtheaboveagreementsiscontainedunderparagraph“ContinuingConnectedTransactions”Report The abovetransactionsareconsideredtoberelatedpartyandalsoconstituteconnectedasdefinedundertheListing specified innote50E. obligations andresponsibilityforrisksrelatingtotheCBLs.DetailsofcommitmentCompanyinconnectionwiththeseagreementsare undertaken toperform,onajointandseveralbasiswithKCRC,theobligationsofKCRCunderrespectiveCBLs,delineateallocate Agreement, whichwasenteredintowithKCRCandKCRC’ssubsidiarieson2December2007,setoutthetermsCompanyhas (vi) property package;and (v) KCRC’s agenttoexercisecertainrightsandperformobligationsrelatingspecifieddevelopmentsitesalongtheWestRail; (iv) assets andcontractsfromKCRC; (iii) service concessionandlicencegrantedbyKCRCtotheCompany; (ii) aspects oftheRailMerger; (i) HKSAR GovernmentinconnectionwiththeRailMerger: transaction asdefinedundertheListingRules. convened toapprovetheRailMerger.Suchtransactionisconsideredbearelatedpartyandalsoconstitutecontinuingconnected periodically. AdetaileddescriptionofthenewOAiscontainedincirculartoshareholdersrespectExtraordinaryGeneralMeeting sets outaframeworkfortheawardofnewrailwayprojectsinHongKongandintroducesfareadjustmentmechanismwhichissubjecttoreview and (ii)inthecaseofsuchpropertywhichisconcessionproperty,anamountequaltoreimbursementdescribednote3.ThenewOAalso compensate theCompany:(i)incaseofsuchpropertywhichisnotconcessionproperty,athigherfairvalueanddepreciatedbookvalue, take possessionofanyotherpropertywhichtheHKSARGovernmentwasentitledtoof,butdidnotpossessionof),must Government hastakenpossessionofanysuchpropertywhichisnotconcessionproperty,theCompanymayrequireHKSARGovernmentto on 1December2057.Followingsuchexpiry,theHKSARGovernmenthasrighttotakepossessionofrailwayproperty(and,where has satisfiedsuchcapitalexpenditurerequirements,atnoadditionalpaymentforanyextension.Ifthefranchiseisnotextended,itwillexpire the franchiseshouldbeextendedforafurtherperiodof50years(fromdaterelatingtocertaincapitalexpenditurerequirements)ifCompany the franchiseandSecretaryforTransportHousingshall,subjecttocertainprovisions,recommendChiefExecutiveinCouncilthat railways undertheexpandedfranchise.PursuanttotermsofnewOAandMTROrdinance,Companymayapplyforextensions of 50yearsfromtheAppointedDay(“expandedfranchise”).ThenewOAdetaileddesign,construction,maintenanceandoperation franchise undertheMassTransitRailwayOrdinancewasexpandedtocoverrailwaysotherthanthenexistingMTRrailwayforaninitialperiod agreement (“newOA”),whichisbasedonthethenexistingOAreferredtoinnote49Aabove.OnAppointedDay,Company’s E D C 49
Material RelatedPartyTransactions ts at a site Project Agreementinrespectofthe SIL, whichwassignedon17May2011andincludesthegrantingofproperty developmentrightsatasite Preliminary ProjectAgreement,whichwassignedon6February2008,and ProjectAgreement,whichwassignedon13July2009(as TKE ProjectAgreementinrespectoftheTseungKwanOExtension,which wassignedon4November1998andincludesthegrantingof The CompanyenteredintoprojectagreementswiththeHKSARGovernment forthedesign,construction,financingandoperationof US CrossBorderLease(“CBL”)AssumptionAgreements,whichwereenteredintowithKCRCon30November2007,andCBLAllocati Property PackageAgreements,whichwereenteredintoon9August2007,setoutthearrangementsinrespectofacquisitionof West RailAgencyAgreement,whichwasenteredintoon9August2007,setsoutthetermsCompanyappointedtoactas Sale andPurchaseAgreement,whichwasenteredintoon9August2007,setsoutthetermspursuanttoCompanyacquiredcertain Service ConcessionAgreement,whichwasenteredintoon9August2007,containsprovisionsinrelationtothegrantandoperatiofa Merger FrameworkAgreement,whichwasenteredintoon9August2007,containsprovisionsfortheoverallstructureandcertainspecific Other thanthenewOAdescribedinnote49Cabove,CompanyalsoenteredintofollowingprincipalagreementswithKCRCand In connectionwiththeRailMerger(note3),on9August2007,CompanyandHKSARGovernmententeredintoanewoperating (continued) Annual Report 2017 285
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
49 Material Related Party Transactions (continued) (iv) Project Agreement in respect of the KTE, which was signed on 17 May 2011 and includes the granting of property development rights at a site in Ho Man Tin (note 23C). The transaction constitutes a continuing connected transaction as defined under the Listing Rules. However it is exempt from the disclosure requirements under Chapter 14A of the Listing Rules pursuant to the waiver granted by The Stock Exchange of Hong Kong Limited on 21 December 2004 (as amended from time to time).
F The Company entered into entrustment agreements with the HKSAR Government for the design, site investigation, procurement activities, construction, testing and commissioning of new railway extensions, pursuant to which the HKSAR Government funds the costs of such activities while the Company is paid a fee for its project management service. Entrustment agreements on railway extensions that are still under construction in the year ended 31 December 2017 include:
(i) The XRL Preliminary Entrustment Agreement, which was signed on 24 November 2008, and the XRL Entrustment Agreement, which was signed on 26 January 2010, in respect of the Guangzhou-Shenzhen-Hong Kong Express Rail Link (“XRL”). The two agreements together entrust the Company with the project management of activities leading to the completion of XRL. Detailed description of the agreements and the amount of project management fees recognised for the year ended 31 December 2017 are provided in note 24A; and
(ii) The SCL Preliminary Entrustment Agreement, which was signed on 24 November 2008, the SCL Advance Works Entrustment Agreement, which was signed on 17 May 2011, and the SCL Entrustment Agreement, which was signed on 29 May 2012, in respect of the Shatin to Central Link (“SCL”). The three agreements together entrust the Company with the project management of activities leading to the completion of SCL. Detailed description of the agreements and the amount of project management fees recognised for the year ended 31 December 2017 are provided in note 24B.
On 30 November 2015, the HKSAR Government and the Company entered into the deed of agreement relating to the further funding and completion of XRL project. Detailed description of the agreement is provided in note 24A.
The above transactions are considered to be related party transactions and also constitute continuing connected transactions as defined under the Listing Rules. A detailed description of each of the above agreements is contained under the paragraph “Continuing Connected Transactions” of the Report of the Members of the Board.
G On 19 November 2003, the Company entered into a project agreement with the HKSAR Government to develop the Tung Chung Cable Car system together with a Theme Village at Ngong Ping on the Lantau Island under a franchise granted by the HKSAR Government for a period of 30 years commencing 24 December 2003. The project was completed with operation commencement on 18 September 2006.
H In connection with the construction of various railway projects, certain essential project works are embedded within the infrastructure works to be undertaken by the HKSAR Government or certain of its related parties. These works have been entrusted to the HKSAR Government and its related parties and are payable on an actual cost basis according to architectural certifications. The HKSAR Government and certain of its related parties, on the other hand, have entered into entrustment agreements with the Company for the construction of various other infrastructure works that are also reimbursable according to actual costs certified. Details of the amounts receivable and the amounts paid and payable as at 31 December 2017 are provided in notes 34 and 38 respectively.
I On 6 December 2016, the Company accepted an offer dated 7 November 2016 from the HKSAR Government for the purpose of the development of the Wong Chuk Hang Station and the Wong Chuk Hang Depot at Aberdeen Inland Lot No. 464 (which forms part of the South Island Line) subject to payment of a land premium of HK$1,025 million and on the terms and conditions of the land grant by private treaty to be entered into between the Company and the HKSAR Government. The land grant was executed on 22 December 2016.
J In connection with certain property developments along the railway system, the Company has been granted land lots by the HKSAR Government in respect of the following sites during the year:
Land grant/ land premium offer Total Land premium Property development site acceptance date land premium settlement date in HK$ million Kowloon Inland Lot No. 11264 4 January 2017 6,282 22 February 2017 Site A of Aberdeen Inland Lot No. 467 9 March 2017 4,685 8 June 2017 Site B of Aberdeen Inland Lot No. 467 14 December 2017 5,214 17 January 2018
K On 16 November 2011, the Company and KCRC entered into an Outsourcing Agreement pursuant to which the Company will provide certain administrative and financial activities to KCRC. The Agreement has no specific term but can be terminated by either party giving notice period specified in the Agreement. The fee payable pursuant to the Agreement and the scope of services are to be reviewed on an annual basis and amended upon the mutual agreement of the parties.
286 MTR Corporation loss accountissummarisedasfollows: terms oftheseoptionsaredisclosedinnote10BandtheReportMembersBoard.Theirgrossremunerationchargedtoprofit 10A. Inaddition,MembersoftheExecutiveDirectorateweregrantedshareoptionsunderCompany’s2007ShareOptionScheme.Details involved forthereportingperiodaredisclosedinnotes28,34and38. HKSAR GovernmentandtheCompany’sassociatesinnormalcourseofbusinessoperations.Detailstransactionsamounts connected transactionsasdefinedundertheListingRules. ended 31December2017(2016:HK$78million).Suchtransactionsareconsideredtoberelatedpartyandalsoconstitutecontinuing commissioning worksfortrackpossession.Inrespectoftheservicesprovided,HK$70millionwasrecognisedasconsultancyincomeduringyear supplemental agreementtotheNewMaintenanceContractwithHKAAforcarryingoutautomatedpeoplemoverservicethetestingand agreement coversaperiodofsevenyearseffectivefrom6July2013(“NewMaintenanceContract”).On5March2015,theCompanyenteredinto automatic peoplemoversystemservingtheHongKongInternationalAirportuponexpiryofpreviousfive-yearagreement.Therenewed O N M L 49 The Group (i) A 50 Commitments The aboveremunerationisincludedinstaffcostsandrelatedexpensesdisclosednote9A.
Special dividendpaidincash Ordinary dividends in HK$million Equity compensationbenefits Post-employment benefits Short-term employeebenefits in HK$million in HK$million Authorised butnotyetcontractedfor At 31December2017 Authorised andcontractedfor Authorised butnotyetcontractedfor At 31December2016 Authorised andcontractedfor – Sharesallottedinrespectofscripdividends – Cashdividendspaid Material RelatedPartyTransactions bed in note The GrouphaspaidremunerationtoMembersoftheBoardandExecutiveDirectorate.Detailsthesetransactionsaredescribedinnote Other thanthosestatedinnotes49Ato49L,theCompanyhasbusinesstransactionswithHKSARGovernment,entitiesrelated On 5July2013,theCompanyrenewedmaintenanceagreementwithHongKongAirportAuthority(“HKAA”)inrespectof Outstanding capitalcommitmentsasat31December2017notprovided forintheaccountswereasfollows: During theyear,followingdividendswerepaidtoFinancialSecretaryIncorporatedofHKSARGovernment: Capital Commitments commercial commercial Hong Kong Hong Kong businesses and other and other transport, transport, 13,758 20,004 station station 14,339 21,993 6,246 7,654 (continued) Hong Kong Hong Kong extension extension projects railway railway 298 298 370 370 – – development Hong Kong Hong Kong rental and rental and property property 1,868 5,497 7,365 2,323 6,198 8,521 14,521 4,765 3,636 1,129 124.2 9,756 2017 2017 Mainland of Mainland of 22.2 11.7 90.3 operations China and China and overseas overseas 22 30 52 10 74 84 Annual Report 2017 19,583 27,719 14,457 20,981 30,968 8,136 4,701 4,701 106.4 9,756 9,987 Total 2016 2016 15.5 81.3 9.6 – 287
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
50 Commitments (continued) A Capital Commitments (continued) The Company
Hong Kong transport, station Hong Kong Hong Kong commercial railway property and other extension rental and in HK$ million businesses projects development Total At 31 December 2017 Authorised but not yet contracted for 6,214 – 1,821 8,035 Authorised and contracted for 13,758 298 5,482 19,538 19,972 298 7,303 27,573 At 31 December 2016 Authorised but not yet contracted for 7,617 – 2,274 9,891 Authorised and contracted for 14,269 370 6,194 20,833 21,886 370 8,468 30,724
(ii) The commitments under Hong Kong transport, station commercial and other businesses comprise the following:
The Group
Improvement, Acquisition enhancement of property, Additional and replacement plant and concession in HK$ million works equipment property Total At 31 December 2017 Authorised but not yet contracted for 3,081 614 2,551 6,246 Authorised and contracted for 9,767 79 3,912 13,758 12,848 693 6,463 20,004 At 31 December 2016 Authorised but not yet contracted for 3,543 659 3,452 7,654 Authorised and contracted for 9,958 71 4,310 14,339 13,501 730 7,762 21,993
The Company
Improvement, Acquisition enhancement of property, Additional and replacement plant and concession in HK$ million works equipment property Total At 31 December 2017 Authorised but not yet contracted for 3,049 614 2,551 6,214 Authorised and contracted for 9,767 79 3,912 13,758 12,816 693 6,463 19,972 At 31 December 2016 Authorised but not yet contracted for 3,506 659 3,452 7,617 Authorised and contracted for 9,888 71 4,310 14,269 13,394 730 7,762 21,886
288 MTR Corporation of theGrouptoundertakefranchise. (HK$948 million),whichcanbecalled ifthefranchiseisterminatedearlyasaresultofdefaultbyMTRPendeltågen AB,thewhollyownedsubsidiary In respectoftheStockholmspendeltåg franchise,theGrouphasprovidedtoStockholmtransportauthorities aguaranteeofSEK1,000million Group toundertakethefranchise. million), whichcanbecalledifthefranchiseisterminatedearlyasaresult ofdefaultbyMTRTunnelbananAB,thewhollyownedsubsidiary In respectoftheStockholmmetrofranchise,Grouphasprovidedto the StockholmtransportauthorityaguaranteeofSEK1,000million(HK$948 project activities,MTMhasprovidedabankguaranteeofAUD0.1million (HK$0.4million)tothecontractorforcontractpayments. premises, MTMhasprovidedbankguaranteesofAUD4.4million(HK$27 million)forthemonthlyrentalpaymentstolandlords.Inrespectof agreement, witheachshareholderbearingitsshareofliabilitybasedon its shareholdingsinMTM.Inrespectoftheoperatingleaseonoffice (HK$530 million)andaperformancebondofAUD55.1million(HK$336 forMTM’sperformanceandotherobligationsunderthefranchise Melbourne Pty.Ltd.(“MTM”),haveprovidedtothePublicTransportVictoria ajointandseveralparentcompanyguaranteeofAUD87.0million In respectoftheMelbournetrainsystemfranchise,Groupandother shareholdersoftheGroup’s60%ownedsubsidiary,MetroTrains rental guaranteeofAUD0.1million(HK$0.5million)tothelandlord. In respectoftheleaseforpremisesandanystoragelicence,carparkinglicence orotherrightsancillarytotheleaseinSydney,Groupprovideda parent companyguaranteeofRMB52.5million(HK$63million)inrespectthequarterlyrentalpaymentstolandlord. In respectoftheoperatingleaseonshoppingcentreinBeijing,GroupprovidedabankguaranteeRMB12.5million(HK$15million)and 31 December2017. lease paymentsasaresultofcreditratingdowngradesthesesecurities,andsuchstandbyLC’samountedtoUS$53million(HK$417million)at of theInvestorsunderLeaseTransactiontoreplacesomeDefeasanceSecuritiespreviouslyusedsupportcorrespondinglong-term and suchstandbyLC’samountedtoUS$94million(HK$737million)asat31December2017.TheGrouphasalsoprovidedLC’scertain to theInvestorscoveradditionalamountspayablebyGroupineventtransactionsareterminatedpriorexpiryofleaseterms, In respectoftheleaseout/leasebacktransaction(“LeaseTransaction”)(note20F),Grouphasprovidedstandbyletterscredit(“standbyLC’s”) such, theprimaryliabilitieshavebeenrecordedinCompany’sstatementoffinancialposition. approximately HK$23,870million(innotionalamount)asat31December2017.TheproceedsfromthedebtsissuedareonlenttoCompany.As In respectofthedebtsecuritiesissuedbyMTRCorporation(C.I.)Limited(note36C),Companyhasprovidedguaranteestotheinvestors D provided. management servicechargesfromthemanagedpropertiesareheldbyGrouponbehalfofthoseforsettlementworksandservices in respectoftheseworksandservices.CashfundstotallingHK$2,232million(2016:HK$2,060million)obtainedthroughmonthlypayments As at31December2017,theGrouphadtotaloutstandingliabilitiesandcontractualcommitmentsofHK$2,565million(2016:HK$2,544million) reimbursed bytheownersandtenantsofmanagedpropertiesfrommanagementfundsassoontheyarepaid. other servicesonbehalfofthemanagedproperties.TheGroupisprimarilyresponsibleforthesecontracts,butanycontractcostsincurredwillbe as manageroftheseproperties,entersintoservicecontractswithoutsidecontractorsfortheprovisionsecurity,cleaning,maintenanceand stations. Undermostofthedevelopmentagreements,Groupretainedrighttomanagethesepropertiesaftertheircompletion.TheGroup, The Grouphas,overtheyears,jointlydevelopedwithoutsidepropertydeveloperscertainpropertiesaboveoradjacenttorailwaydepotsand C total futureminimumleasepaymentsundernon-cancellableoperatingleasesarepayableasfollows: The Grouphadoperatingleasesonofficebuildings,staffquarters,busdepotaswellashoppingcentreinBeijingat31December2017. B 50 Commitments payable overfiveyears.Theserailway-relatedsubsidiariesgeneratefranchiserevenuetotheGroup. within oneyear,HK$5,949million(2016:HK$5,465million)ispayableafterbutfiveyearsandHK$2,993(2016:HK$4,440 related subsidiariesoutsideofHongKongovertherespectivefranchiseperiods,whichHK$1,615million(2016:HK$1,454million)ispayable In additiontotheabove,GrouphasfutureoperatingleasecommitmentsofHK$10,557million(2016:HK$11,359million)inrespectrailway- in HK$million Payable withinoneyear Payable afteronebutwithinfiveyears Material FinancialandPerformanceGuarantees Liabilities andCommitmentsinrespectofPropertyManagementContracts Operating LeaseCommitments (continued) 2017 148 161 13 The Group 2016 139 166 27 2017 The Company 24 32 8 Annual Report 2017 2016 25 26 51 289
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
50 Commitments (continued) D Material Financial and Performance Guarantees (continued) In respect of the London Crossrail Franchise, the Group has provided to the Rail for London Limited a parent company guarantee of GBP80 million (HK$842 million) and a performance bond of GBP15 million (HK$158 million) for MTR Corporation (Crossrail) Limited’s performance and other obligations under the franchise agreement.
In respect of the Sydney Metro Northwest Franchise, the Group has provided to NRT Pty. Limited, an associate of the Group, several parent company guarantees of AUD109.2 million (HK$665 million) for the design and construction contract as well as the operations and maintenance contract and a performance bond of AUD53.5 million (HK$326 million) for the performance and other obligations under the design and construction sub-contract. The Group has also provided standby letters of credit (“standby LC’s”) amounting to AUD50.1 million (HK$306 million) as at 31 December 2017 to cover the equity and preferred equity to be invested in the Sydney Metro Northwest project.
In respect of the South Western Trains Franchise, the Group has provided to the Secretary of State for Transport several parent company guarantees of GBP26.2 million (HK$276 million), a performance bond of GBP4.5 million (HK$47 million) and a season ticket bond amounting to GBP23.1 million (HK$243 million) as at 31 December 2017 for the performance and other obligations under the franchise agreement.
E US Cross Border Lease (“CBL”) Agreements In connection with the Rail Merger, the Company entered into a number of agreements (“US CBL Assumption Agreements”) with respect to the CBLs that KCRC had entered into with its CBL counterparties in relation to certain of its property and equipment (“CBL Property”) between 1998 and 2003. Pursuant to the US CBL Assumption Agreements, the Company has undertaken to perform, on a joint and several basis with KCRC, the obligations of KCRC under the respective CBLs.
In addition, the Company has entered into a US CBL Allocation Agreement with KCRC, whereby the rights, obligations and responsibility for risks relating to the CBLs are delineated and allocated between the Company and KCRC. Generally, the Company is responsible for operational matters, such as repair, maintenance and insurance of the CBL Property, and KCRC is responsible for all other obligations, including payment of periodic rents and collateral related obligations. Despite this allocation of obligations, the Company is prima facie jointly and severally liable to the CBL counterparties for any failure of KCRC to perform its obligations under the CBLs.
KCRC and the HKSAR Government have agreed to indemnify the Company for its reasonable costs incurred as a result of the due and proper performance by the Company of its obligations under the CBLs (unless such costs would have been incurred in any event). In addition, KCRC has agreed to indemnify the Company for losses and reasonable costs incurred arising from KCRC not complying with its obligations under the CBLs or from any breach of KCRC’s representations, covenants and agreements provided for in relation to the CBLs.
The Company has agreed to indemnify each of the HKSAR Government and KCRC for losses and reasonable costs incurred arising from any breach of the Company’s representations, covenants and agreements provided for in relation to the CBLs.
F Service Concession in respect of the Rail Merger Pursuant to the Rail Merger, the Company is obliged under the Service Concession Agreement (“SCA”) to pay an annual fixed payment of HK$750 million to KCRC over the period of the service concession. Additionally, commencing after three years from the Appointed Day, the Company is obliged to pay a variable annual payment to KCRC based on the revenue generated from the KCRC system above certain thresholds. Furthermore, under the SCA, the Company is obliged to maintain, repair, replace and/or upgrade the KCRC system over the period of the service concession which is to be returned at the expiry of the service concession.
290 MTR Corporation Frederick SHMa Approved andauthorisedforissuebytheMembersofBoardon8March 2018 51 Chairman Cash, bankbalancesanddeposits Tax recoverable Amounts duefromrelatedparties Debtors andotherreceivables Stores andspares Derivative financialassets Deferred taxliabilities Properties heldforsale Derivative financialliabilities Interests inassociates Obligations underserviceconcession Investments insubsidiaries Loans andotherobligations Deferred expenditure Amounts duetorelatedparties Property developmentinprogress Current taxation Property managementrights Other reserves Creditors andotherpayables
Shares heldforShareIncentiveScheme Short-term loans
Total equity Share capital Capital andreserves Net assets Bank overdrafts Liabilities Fixed assets Assets in HK$million – Serviceconcessionassets – Otherproperty,plantandequipment – Investmentproperties Company-level StatementofFinancialPosition Lincoln KLeong Chief ExecutiveOfficer Herbert LWHui Finance Director Note 41A 36A 25A 41A 36A 42A 36A 41B 35 35 34 34 33 33 32 32 31 31 30 30 31 31 28 28 39 39 27 27 26 26 38 38 22 22 42 42 37 21 21 42 42 20 20 19 19 At 31 December At 31December 248,845 108,814 199,753 101,405 160,948 160,948 11,299 15,145 87,897 12,649 10,292 18,803 22,327 14,810 22,351 22,996 52,307 75,352 3,460 1,119 1,455 2017 (173) 168 876 451 710 695 325 24 26 4 – Annual Report 2017 At 31 December At 31December 240,017 192,323 102,328 147,178 147,178 12,835 14,028 92,839 12,045 10,343 16,392 30,884 14,479 21,256 99,476 21,478 47,929 68,517 1,772 1,134 1,402 1,350 2016 (227) 362 183 985 569 463 24 27 – – 291
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
52 Accounting Estimates and Judgements
A Key sources of accounting estimates and estimation uncertainty include the following:
(i) Estimated Useful Life and Depreciation and Amortisation of Property, Plant and Equipment and Service Concession Assets The Group estimates the useful lives of the various categories of property, plant and equipment and service concession assets on the basis of their design lives, planned asset maintenance programme and actual usage experience. Depreciation is calculated using the straight-line method at rates sufficient to write off their cost or valuation over their estimated useful lives (note 2I).
(ii) Impairment of Long-lived Assets The Group reviews its long-lived assets for indications of impairment at the end of each reporting period according to accounting policies set out in note 2H(ii). Long-lived assets are reviewed for impairment at each reporting date or whenever events or changes in circumstances indicate that the carrying amount of the assets exceeds its recoverable amount. The recoverable amount of an asset is the greater of the fair value less costs to sell and value in use. In estimating the value in use, the Group uses projections of future cash flows from the assets based on management’s assignment of a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
(iii) Pension Costs The Group employs independent valuation professionals to conduct annual assessment of the actuarial position of the MTR Retirement Scheme. The determination of the Group’s obligation and expense for the defined benefit element of the scheme is dependent on certain assumptions and factors provided by the Company, which are disclosed in notes 46A(i) and 47F.
(iv) Profit Recognition on Hong Kong Property Development Recognition of Hong Kong property development profits requires management’s estimation of the final project costs upon completion, assessment of outstanding transactions and market values of unsold units and, in the case of sharing-in-kind properties, the properties’ fair value upon recognition. The Group takes into account independent qualified surveyors’ reports, past experience on sales and marketing costs when estimating final project costs on completion and makes reference to professionally qualified valuers’ reports in determining the estimated fair value of sharing- in-kind properties.
(v) Properties Held for Sale The Group values unsold properties at the lower of their costs and net realisable values (note 30) at the end of each reporting period. In ascertaining the properties’ net realisable values, which are represented by the estimated selling prices less costs to be incurred in relation to the sales, the Group employs independent valuation professionals to assess the properties’ estimated selling prices and makes estimations on further selling and property holding costs to be incurred based on past experience and with reference to general market practice.
(vi) Valuation of Investment Properties The valuation of investment properties requires management’s input of various assumptions and factors relevant to the valuation. The Group conducts semi-annual revaluation of its investment properties by independent professionally qualified valuers based on these assumptions agreed with the valuers prior to adoption.
(vii) Franchise in Hong Kong The current franchise under which the Group is operating in Hong Kong allows the Group to run the mass transit railway system in Hong Kong until 1 December 2057. As set out in note 49C, pursuant to the terms stipulated in the new Operating Agreement with the HKSAR Government, the Company may apply for extensions of the franchise for further periods of 50 years. If the franchise is not extended, the HKSAR Government has the right to take possession of railway property (and, where the HKSAR Government has taken possession of any such property which is not concession property, the Company may require the HKSAR Government to take possession of any other property which the HKSAR Government was entitled to take possession of, but did not take possession of), but must compensate the Company, in the case of such property which is not concession property, at the higher of fair value and depreciated book value. The Group’s depreciation policies (note 2I) for such property which is not concession property with assets’ lives which extend beyond 2057 reflect the above.
292 MTR Corporation in materialoutflowofeconomicbenefitsfromtheGroup. had nodisclosablecontingentliabilitiesastherewereneitherpendinglitigationsnoreventswithpotentialobligationwhichprobabletoresult or theamountcannotbeestimatedreliably,obligationisdisclosedascontingentliability.Asat31December2017,Groupconsideredthatit required tosettletheobligationandareliableestimatecanbemade.Whereitisnotprobablethatanoutflowofeconomicbenefitswillrequired, of apastevent(includinginrelationtothoseunderentrustmentarrangements),anditisprobablethatanoutfloweconomicbenefitswillbe The Grouprecognisesprovisionsforliabilitiesofuncertaintimingoramountwhenthehasalegalconstructiveobligationarisingasresult Provisions andContingentLiabilities borrowing cost, futureinterestrateandinflationtrends. estimated long-termincrementalcostofborrowingatinceptionafterdueconsiderationtherelevantGroupcompany’sexistingfixedrate In determiningthepresentvalueofobligationsunderserviceconcession,discountrateadoptedwasrelevantGroupcompany’s (xii) foreign exchangerates,asapplicable,forsimilarfinancialinstrumentsthatwereavailabletotheGroupattime. fair valueswerederivedusingthediscountedcashflowsmethodwhichdiscountsfuturecontractualatcurrentmarketinterestor mainly basedonmarketconditionsexistingattheendofeachreportingperiod.Forfinancialinstrumentsthatarenottradedinactivemarkets, In determiningthefairvalueoffinancialinstruments,Groupusesitsjudgementtoselectavarietymethodsandmakeassumptionsthatare (xi) outcome oftheproposedproject. are atadetailedstudystageandhavingbeenagreedbasedonfeasiblefinancialplan.SuchdecisioninvolvestheBoard’sjudgement As disclosedinnote2J(i),theGroupcapitalisesproposedrailwayandpropertydevelopmentprojectcostsdeferredexpenditurewhenprojects (x) liabilities undereachcontractbyprofessionallyqualifiedpersonnel,whichmaydifferfromtheactualclaimssettlement. unforeseen circumstancescommontomajorconstructioncontracts.TheclaimsprovisionsareestimatedbasedonanassessmentoftheGroup’s The Groupestablishesprojectprovisionsforthesettlementofestimatedclaimsthatmayariseduetotimedelays,additionalcostsorother (ix) initially recorded,suchdifferencewillimpacttheincometaxexpensesinperiodwhendeterminationismade. estimates ofwhetheradditionaltaxeswilleventuallybedue.Wherethefinaltaxoutcomethesemattersisdifferentfromtheamountsthatwere ultimate taxdeterminationisuncertainuptothedateofthisannualreport.TheGrouprecognisesprovisionforthesemattersbasedon As detailedinnote33,therearetaxqueriesfromtheIRDwithCompanyondeductibilityofcertainexpensesandpaymentsforwhich the taxtreatmentsithasadoptedinthesereturns,whichmaybedifferentfromfinaloutcomeduecourse. Revenue Department.InassessingtheGroup’sincometaxanddeferredtaxationin2017accounts,Companyhaspredominantlyfollowed Certain treatmentsadoptedbytheGroupinitsHongKongProfitsTaxreturnspastyearsareyettobefinalisedwithInland (viii) B A 52
Accounting EstimatesandJudgements Critical accountingjudgementsinapplyingtheGroup’spoliciesincludefollowing: Obligations underServiceConcession Fair ValueofDerivativesandOtherFinancialInstruments Deferred Expenditure Project Provisions Income Tax Key sourcesofaccountingestimatesandestimationuncertaintyincludethefollowing:(continued) (continued) Annual Report 2017 293
Financials and Other Information Corporate Governance Business Review and Analysis Overview NOTES TO THE CONSOLIDATED ACCOUNTS
53 Possible Impact of Amendments, New Standards and Interpretations Issued but Not Yet Effective for the Annual Accounting Year Ended 31 December 2017 Up to the date of issue of these accounts, the HKICPA has issued a few amendments and new standards which are not yet effective for the year ended 31 December 2017 and have not been adopted in these accounts. These include the following which may be relevant to the Group:
Effective for accounting periods beginning on or after Amendments to HKFRS 2, Classification and Measurement of Shared-based Payment Transactions 1 January 2018 HKFRS 15, Revenue from Contracts with Customers 1 January 2018 HKFRS 9, Financial Instruments 1 January 2018 Amendments to HKAS 40, Investment Property: Transfers of Investment Properties 1 January 2018 HK(IFRIC) 22, Foreign Currency Transactions and Advance Consideration 1 January 2018 HKFRS 16, Leases 1 January 2019 HK(IFRIC) 23, Uncertainty over Income Tax Treatments 1 January 2019 Amendments to HKFRS 10 and HKAS 28, Sale or Contribution of Assets between an Investor and A date to be determined Its Associate or Joint Venture
So far, the Group considers that the adoption of them is unlikely to have a significant impact on the Group’s accounts, except for HKFRS 16, Leases.
The application of HKFRS 16, Leases, is expected to lead to an increase in both assets and liabilities and to impact on the timing of the expense recognition in the profit and loss account over the period of the lease.
The Group’s operating lease commitments are disclosed in note 50B, some of these amounts may therefore need to be recognised as lease liabilities, with corresponding right-of-use assets, once HKFRS 16, Leases is adopted.
HKFRS 16, Leases is not expected to impact significantly on the way that the Group accounts for its rights and obligations under a lease when it is the lessor under the lease.
54 Approval of Consolidated Accounts The consolidated accounts were approved by the Board on 8 March 2018.
294 MTR Corporation GLOSSARY Hong KongorSAR Director orMemberoftheBoard Appointed DayorMergerDate Company orMTRCorporation Cross-boundary Serviceor Customer ServicePledge HKSE orStockExchange Companies Ordinance Articles ofAssociation Domestic Service Express RailLink Airport Expresss Cross-boundary Computershare Interest Cover Government Fare Index Heavy Rail Intercity HKSAR Group Board Bus FSI
Train ServiceprovidedbetweenAsiaWorld-ExpoStationandHongKong Line operationandaccretedinterest onloantoapropertydeveloper and finance charges before capitalisation, utilisation of government subsidy for Shenzhen Metro Longhua Operating profitbeforedepreciation,amortisationandvariableannual payment dividedbygrossinterest as Beijing,ShanghaiandGuangzhou Intercity passengerservices operated between HongKongandmajorcitiesintheMainlandofChinasuch The HongKongSpecialAdministrativeRegionofthePeople’sRepublic China Collective nameforDomesticService,Cross-boundaryServiceandAirport Express The StockExchangeofHongKongLimited The Companyanditssubsidiaries The GovernmentoftheHongKongSAR Incorporation Ordinance(Chapter1015oftheLawsHongKong) The FinancialSecretaryIncorporated,acorporationsolelyestablishedunderthe corresponding importanceratingfromthecustomerresearch Airport Express, Light Rail and Bus based on satisfaction scoresfordifferent fare attributes weightedby the A measure of customer satisfaction for the fares charged for Domestic and Cross-boundary services, Hong KongSectionoftheGuangzhou-Shenzhen-HongExpressRailLink Resort, EastRail(excludingCross-boundaryService),WestandMaOnShanlines Collective nameforKwunTong,TsuenWan,Island,SouthTungChung,TseungKwanO,Disneyland A memberoftheBoard Feeder busservicesoperatedinsupportofWestRailLine,EastLineandLight The boardofdirectorstheCompany The articlesofassociationtheCompany 2 December2007whentheRailMergerwascompleted Annually publishedperformancetargetsinaccordancewiththeOperatingAgreement Journeys withthedestinationto/commencingfromLoWuandLokMaChaustations Computershare HongKongInvestorServicesLimited,theshareregistrarofCompany Ordinance Chapter32oftheLawsHongKong(ascasemaybe)) The CompaniesOrdinance(Chapter622oftheLawsHongKongorpredecessor the CompaniesOrdinanceon26April2000 MTR CorporationLimited香港鐵路有限公司,acompanywhichwasincorporated in HongKongunder Annual Report 2017 295
Financials and Other Information Corporate Governance Business Review and Analysis Overview GLOSSARY
KCRC Kowloon-Canton Railway Corporation
Kowloon Southern Link Project for extension of the West Rail Line from Nam Cheong Station to East Tsim Sha Tsui Station via Austin Station, providing direct access between the East Rail Line and West Rail Line after the completion of the project
Light Rail Light rail system serving North West New Territories
Listing Rules The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited
MTR Ordinance The Mass Transit Railway Ordinance (Chapter 556 of the Laws of Hong Kong)
Net Debt-to-equity Ratio Loans and other obligations, bank overdrafts, short-term loans, obligations under service concession and loan from holders of non-controlling interests net of cash, bank balances and deposits, and investment in bank medium term notes in the consolidated statement of financial position as a percentage of the total equity
Operating Agreement The agreement entered into by the Company and the Government on 30 June 2000 for the operation of our rail services before the Rail Merger and a new agreement entered on 9 August 2007 for the operation of all of our rail and bus passenger services after the Rail Merger
Operating Margin Operating profit before Hong Kong property development, depreciation, amortisation and variable annual payment as a percentage of total revenue
Ordinary Shares Ordinary shares in the capital of the Company
Rail Merger or Merger The merger of the rail operations of MTR Corporation and KCRC and the acquisition of certain property interests by MTR Corporation from KCRC, full details of which are set out in the circular dated 3 September 2007. The Rail Merger was completed on 2 December 2007
Rail Merger Ordinance The Rail Merger Ordinance (Ordinance No.11 of 2007)
Return on Average Equity Profit attributable to shareholders of the Company as a percentage of the average of the beginning and Attributable to Shareholders of closing total equity attributable to shareholders of the Company of the period the Company
Service Concession A contract to provide services for a particular period which is awarded by a public sector entity to an operator; in the context of concession projects in Hong Kong, service concession refers to the concession granted or to be granted by KCRC and/or Government to the Company to operate, maintain and renew certain railway lines under the Service Concession Agreement or a Supplemental Service Concession Agreement, as more particularly described in the circular dated 3 September 2007; in the context of concession projects in the Mainland of China and Overseas, service concession refers to the concession granted by the government or relevant public sector entity to a subsidiary or associate of the Company to provide certain specified services for a specified period under a negotiated concession agreement
Service Quality Index A measure of customer satisfaction for the services provided by Domestic and Cross-boundary services, Airport Express, Light Rail and Bus based on satisfaction scores for different service attributes (excluding fares) weighted by the corresponding importance rating from the customer research
296 MTR Corporation VISION We aim to be a leading multinational company that connects and grows communities with caring service. Printed by C & SECURITY PRINTING Co., LTD
CORPORATE STRATEGY Enhancing our corporate reputation • Deepen engagement with customers • Become the pride of Hong Kong Concept & Design: YELLOW CREATIVE (HK) LIMITED • Build global brand
Strengthening and growing the Hong Kong business • Expand the network • Grow non-fare businesses • Modernise MTR
Accelerating Mainland China and International Business growth • Deepen presence in existing hubs • Develop new hubs • Explore property development opportunities in hubs
VALUES SHAREHOLDER SERVICES • Excellent Service • Value Creation Any matters relating to your shareholding, such as transfer of shares, change of name or address, and loss of share certificates should be • Mutual Respect • Enterprising Spirit addressed in writing to the Registrar: Computershare Hong Kong Investor Services Limited 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong Telephone: (852) 2862 8628 Facsimile: (852) 2529 6087 2017 Stock Code: 66 Hong Kong Property andHong Kong Other Businesses ANNUAL REPORT CONNECTING FORWARD Hong Kong Station Commercial Businesses Station Commercial Hong Kong
Hong Kong Network Expansion Hong Kong Transport Operations Hong Kong Mainland of China and International Businesses
MTR Corporation Limited | Annual Report 2017 : (852) 2993 2111 : (852) 2798 8822 www.mtr.com.hk MTR Corporation Limited MTR Headquarters Building, Telford Plaza Kowloon Bay, Kowloon, Hong Kong GPO Box 9916, Hong Kong Telephone Facsimile