Insights

MTR’s Dividend Has a Powerful Tailwind Thanks to This Business

MTR Corporation Limited’s (SEHK: 66) dividend could continue to grow for the years ahead thanks to growth in this division. – Train carriage of MTR system in Hong Kong protests impact on share price

Although Hong Kong is a leading global financial centre, it is already developed. The city already has a world-class subway and many shopping malls.

As a result, fast profit growth is hard for a subway operator/commercial property developer like MTR Corporation Limited (SEHK: 66) to achieve.

To compensate, MTR has sought to expand outside of Hong Kong and the company has realised some financial success as a result.

Given that, here’s more on MTR’s operations outside of Hong Kong and why MTR’s international business could help power its dividend growth for many years to come.

Current operations

In terms of where MTR currently has operations, outside of Hong Kong, the company wholly owns or substantially owns various subway lines in major cities in mainland China and elsewhere.

In Shenzhen, a subsidiary that’s 100%-owned by MTR operates Shenzhen Metro Line 4, which has a total route length of 20.5km.

Under an agreement, the MTR subsidiary was responsible for much of the metro line’s construction and has a license to operate the line until 2041.

In Beijing, a joint venture (JV) that’s 49%-owned by MTR operates Beijing Metro Line 4, Line 14, and Line 16, as well as the Daxing Line. The JV has various concession agreements that allow it to operate the lines for a number of years.

Outside of Greater China, a subsidiary 100%-owned by MTR was awarded a concession in 2014 to operate a new Elizabeth line train service.

Recurrent EBIT

Thanks to concession wins and momentum, MTR’s recurrent business outside of Hong Kong has grown substantially over the past ten years as the table below illustrates.

Recurrent EBIT for mainland of China and international railway, property rental and management subsidiaries (HK$ million)

2019

2018 2017 2016 2015 2014 2013 2012 2011 2010
1,089 722 814 490 640 782 704 520 381

259

Source: MTR’s website

Although MTR’s recurrent business outside of Hong Kong is still a small part of its overall business, the division’s fast growth rate makes it more important in terms of MTR’s overall growth rate.

In 2019, for instance, MTR estimated it earned a total recurrent EBIT of around HK$13 billion (US$1.67 billion) on a normalised basis, up around HK$1.6 billion from HK$11.4 billion in total recurrent EBIT in 2017.

In the same period, MTR’s recurrent EBIT from mainland of China and International Railway, Property Rental and Management Subsidiaries rose by HK$275 million, or around 17% of MTR’s total recurrent EBIT growth (assuming 2019 normalised numbers).

If MTR’s international business continues to grow quickly, the business could play a bigger part in the company’s overall recurrent EBIT growth in the future.

The business could also help MTR’s dividend increase if recurrent EBIT increases.

Growth potential

In terms of future growth, the good news is that MTR has a lot of growth potential outside of Hong Kong.

According to its interim 2020 presentation, MTR is in discussions with the Chinese government on potential opportunities.

These will come primarily in expanding in the Guangdong-Hong Kong-Macau Greater Bay Area by building transport infrastructure and property/community building projects.

Of all of China’s economic regions, the Greater Bay Area is one of the most developed with GDP per capita that is well above many other regions in China.

The Greater Bay Area is also a huge market, with a population of around 69.5 million people. By contrast, Hong Kong has a population of around 7.5 million people.

If MTR can win a big concession or two in the Greater Bay Area, there is reason to believe the company could continue its growth in mainland China.

With more growth could come more recurrent EBIT growth. With more recurrent EBIT growth could come more dividend growth.

Foolish conclusion

Although it doesn’t make up a big part of the company’s total recurrent business now, MTR’s business outside of Hong Kong is growing quickly and has lots of potential given the large addressable markets.

Overall, it’s an encouraging trend and one that could help MTR’s overall dividend grow over the next decade.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.

The Motley Fool Hong Kong Limited(www.fool.hk) 2020

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