Annual report 2006 POSITIVE SIGNALS “The proposed merger of MTR Corporation and Kowloon-Canton Railway Corporation has moved closer following the signing by the Company in April of a Memorandum of Understanding with the Government of the Hong Kong SAR…” Dr. Raymond Ch’ien Kuo-fung, Chairman “The year also saw our growth strategy taking root with the signing of the Concession Agreement for the Beijing Metro Line 4 project after approval from the Central Government.” C K Chow, Chief Executive Officer Contents 2 Operating network with future extensions 3 MTR Corporation at a glance 4 Chairman’s letter 6 CEO’s review of operations and outlook 13 Key figures 14 Key events in 2006 16 Executive management’s report 16 – Railway operations 24 – Station commercial and other businesses 30 – Property business 38 – Hong Kong network expansion projects 42 – Overseas growth 46 – Human resources 49 Financial review 56 Ten-year statistics 58 Investor relations 60 Sustainability 61 Corporate governance report 68 Remuneration report 70 Board and Executive Directorate 75 Key corporate management 76 Report of the Members of the Board 85 Contents of accounts and notes 86 Independent auditor’s report 87 Consolidated profit and loss account 88 Consolidated balance sheet 89 Balance sheet 90 Consolidated statement of changes in equity 91 Consolidated cash flow statement 92 Notes to the accounts 164 Glossary Vision To be a world class enterprise, growing in Hong Kong and beyond, focusing on rail, property and related businesses Mission Provide excellent value to our customers, enhancing their quality of life, and contributing to development of the communities in which we operate Provide opportunities for employees to grow and prosper with the Company and reward our investors Develop the rail network as the backbone of public transport in Hong Kong Grow in Mainland China and capture opportunities in Europe by building on our core competencies Operating network with future extensions 2 MTR CORPORATION LIMITED 24 Cable Car Ngong Ping 360 Legend Station Station with Depot Interchange Station Proposed Station Proposed Interchange Station Proposed Property Developments along Tseung Kwan O Line Cable Car Ngong Ping 360 Existing network Airport Express Properties developed by the Company Disneyland Resort Line 01 Tung Chung Crescent / Citygate / Citygate Novotel / 12 World-wide House Island Line Seaview Crescent / Caribbean Coast / 13 Admiralty Centre / Fairmont House Kwun Tong Line Coastal Skyline 14 Southorn Garden Tseung Kwan O Line 02 Tierra Verde / Maritime Square 15 Park Towers Tsuen Wan Line 03 Luk Yeung Sun Chuen / Luk Yeung Galleria 16 Fortress Metro Tower Tung Chung Line 04 Sun Kwai Hing Gardens 17 Kornhill / Kornhill Gardens 05 New Kwai Fong Gardens Projects in progress 18 Felicity Garden 06 Telford Gardens / Telford Plaza I and II Tseung Kwan O South 19 Perfect Mount Gardens 07 Argyle Centre 20 Heng Fa Chuen / Heng Fa Villa / Future extensions 08 Central Park / Island Harbourview / Paradise Mall Park Avenue / Bank of China Centre / North Island Line 21 New Jade Garden HSBC Centre / Olympian City One / Tseung Kwan O Line Extension Olympian City Two / Harbour Green 22 Residence Oasis / The Lane 23 Central Heights / The Grandiose / Extensions under study 09 The Waterfront / Sorrento / The Harbourside / The Arch / Elements The Edge Kwun Tong Line Extension 10 Hongway Garden / Vicwood Plaza 24 No. 8 Clear Water Bay Road South Island Line (West) 11 One International Finance Centre / 25 Metro Town South Island Line (East) Two International Finance Centre / IFC Mall / West Island Line Four Seasons Hotel / Four Seasons Place MTR Corporation at a glance We adopt a “Rail and Property” business model whereby we work with developers to build key residential and ANNUAL REPORT 2006 commercial properties at stations and depots. We believe that an urban rail network creates a convenient living and commercial environment in which high quality communities can be developed, whose residents create patronage for the railway. This approach has been effective in developing and financing railways in Hong Kong and is now being emulated in other cities. Business description 2006 Highlights Railway operations We operate an urban rail network • Exceeded all Performance Requirements under the serving Hong Kong that stretches Operating Agreement and Customer Service Pledges 91 kilometres with 53 stations and • Completed platform screen door retrofit deploys over 1,000 rail cars. With Record customer satisfaction levels for service quality average weekday patronage over • and fares 2.5 million, MTR is one of the most intensively used systems in the • Independently ranked as the best value for money world, known for its reliability, and best customer service in public transport services safety and efficiency. Station commercial and We leverage our railway assets and • Ngong Ping 360 opened and well received other businesses expertise into additional businesses, • Retail zones of 11 stations renovated, and 32 new shops built including rental of station retail units, New advertising products such as Real Time Projection advertising in trains and stations, • Zone, advertising train and 6-sheet scrolling advertising telecommunication income, rail panels strengthened market positioning consulting and the Ngong Ping Cable Car and related facilities. We have also • Expansion of plasma network with new content developed the Octopus card in which we retain a majority shareholding. Property business We develop mainly residential • Tender of Package Two of Tseung Kwan O Area 86 awarded properties, in conjunction with to a subsidiary of Cheung Kong (Holdings) Ltd property developers. We own • The Edge, our 70% owned and our sixth shopping centre, investment properties, mainly completed and opened for business shopping centres and offices, and Tender of Area 56 of Tseung Kwan O awarded in February manage our properties and others. • 2007 to a subsidiary of Sun Hung Kai Properties Ltd Our investment portfolio includes six shopping centres and 18 floors • Ginza Mall in Beijing opened in January 2007 of the Two IFC office tower. Overseas growth We continue our strategy to grow • Concession, lease and financing agreements for Beijing overseas by investing in urban rail Metro Line 4 signed, and construction programme on target networks in the Mainland of China, • Preparation works for Shenzhen Metro Line 4 in progress and pursuing “asset-light” operating Our partnership with Laing Rail for the London Rail contracts in European markets that • Concession entered the Best and Final Offer bidding stage are deregulated or opening to new entrants. • Our joint venture bid with Swedish railway company SJ for the Öresundståg concessions in Sweden and Denmark submitted Turnover Operating profit before Total assets depreciation (after property development profit) in HK$ billion 9.54 in HK$ billion in HK$ billion 9.15 120.4 11.25 113.7 8.35 11.02 106.7 102.4 7.69 7.59 101.1 9.12 9.10 7.77 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 Chairman’s letter MTR CORPORATION LIMITED Dear Stakeholders, I am pleased to present to you the annual results of MTR Corporation for 2006, which continue the growth momentum of recent years. For the year, the sound economy and our ability to leverage this through our proven “Rail and Property” model combined to increase our total revenue to HK$9,51 million, .2% higher than 2005, leading to an increase of 2.0% in operating profit before property development profit and depreciation. However, underlying profit, excluding revaluation gain on investment properties, decreased marginally by 2.9% to HK$5,962 million due to very strong property development profit recognised in 2005, the magnitude of which was not repeated in 2006. Including investment property revaluation, our net profit attributable to equity shareholders was HK$7,759 million and earnings per share were HK$1.1. Your Board of Directors has recommended a final dividend of HK$0.28, the same as in 2005. “We and our counterparts at KCRC For the year, three issues stand out which I would like to discuss: the proposed merger, our growth strategy and our continuing have been working together to efforts towards ensuring sustainable growth. ensure as smooth an integration as Proposed merger possible on Day One of the merger. The proposed merger of MTR Corporation and Kowloon-Canton The merger is expected to yield Railway Corporation (KCRC) has moved closer following the signing by the Company in April of a Memorandum of synergies, while the travelling Understanding (MOU) with the Government of the Hong Kong public will experience benefits” SAR (Government) setting out the terms of the merger of the rail operations, together with the acquisition of a property package. The Rail Merger Bill was submitted to the Legislative Council (LegCo) in July, shortly followed by the first meeting of the LegCo Bills Committee on the bill. Should LegCo pass the bill, independent shareholders will then be invited to vote on the merger. In the meantime, we and our counterparts at KCRC have been working together to ensure as smooth an integration as possible on Day One of the merger. The merger is expected to yield synergies, while the travelling public will experience benefits including lower fares and improved integration of the networks. To achieve these goals, we recognise the need to take account of the needs of staff and of the two different corporate cultures, and have worked assiduously not only to put in place the right structures, but to keep staff informed of progress throughout. Growth strategy Our efforts in sustainability have garnered increasing recognition 5 ANNUAL REPORT 2006 The merger clearly forms a part of our strategy for growth, which internationally and during the year, we were ranked seventh covers both Hong Kong and overseas markets, where we will amongst the 100 global corporate leaders in sustainability not only leverage the assets and skills we have, but invest in reporting in a Global Reporters 2006 survey undertaken by further expansion.