LI, Tao @ Hong Kong

A man walks past the MTR Corp logo at Hong Kong Station. The rail operator will develop a 7-hectare site in Wong Chuk Hang on Hong Kong Island and a 2.6-hectare site in Ho Man Tin with third parties. David Paul Morris / Bloomberg

Govt awards two plots of land as compensation for rail operations

MTR Corp is likely to see a boost to its profitability once the HK$17.7 billion new rail link projects – the South Island Line (East) and the Kwun Tong Line Extension – are completed, analysts believe.

Secretary for Transport and Housing Eva Cheng on Wednesday announced that the Hong Kong government has given its approval to award two plots of land to MTR Corp as compensation for having to bear the cost of designing, building and running the two lines.

The rail operator will develop with third parties a 7-hectare site in Wong Chuk Hang on the south side of Hong Kong Island and a 2.6-hectare site in the former Valley Road Estate in Ho Man Tin, Kowloon.

However, Cheng said that the construction of a third line, the Shatin to Central link, could be delayed because of an ongoing court case over the way past environmental impact assessment reports were carried out. Cheng said it is still unclear how the project would be affected if environmental assessments have to be performed.

Capital costs for the projected South Island Line and Kwun Tong Line Extension were estimated at HK$12.43 billion and HK$5.35 billion respectively based on 2009 prices, and the company will have to bear and finance construction costs totaling HK$17.78 billion, according to a filing by MTR to the Hong Kong Stock Exchange on Wednesday.

Cheng said the government hired an independent body to conduct a financial assessment, which shows a HK$9.9 billion funding gap for the South Island Line and HK$3.3 billion for the Kwun Tong Line in relation to their construction and operation.

Although the gaps are expected to be met through residential development – about 4,700 units on the Wong Chuk Hang site and 1,800 units on the Valley Road Estate site, Cheng added that MTR will also have to take risks in its exposure to the ups and downs of the property market.

As the two rail links are expected to start operations in 2015 and railway property construction would only be able to commence from then, Cheng also estimated that MTR will not be able to sell the completed apartments until 2024, which is still 13 years away.

However, Wong Leung-sing, associate director of research at Centaline Property Agency Limited, described the projects as almost a “sure-win” deal for the subway operator.

“According to past experience, we’ve never seen any losing proposition on railway property, no matter what the whole market was like. The construction period for railway properties could also be shortened within three years since the completed stations have laid solid foundations for any future development,” said Wong.

MTR has been actively participating in the development of residential and commercial projects above existing stations and along new line extensions.

Boosted by rising commercial property prices and improvements in its core rail operations, MTR Corp said in March that net profit for the past rose 25.1 percent to HK$12.06 billion in 2010.

Net income from its property rental and management rose 13.7 percent to HK$2.29 billion, and property development generated a net profit of HK$4.03 billion, up 13.5 percent from HK$3.55 billion, according to the group.

Some analysts think that MTR is going to win out from the deal in the long term though.

“MTR may encounter some financial headwinds temporarily because of the construction on two new railways, but its profit gain from the property development on the two land sites would be almost insured, as properties above or near the MTR stations are always hot catches,” Jaseper Tsang, research director at CSC Securities (HK), told China Daily.

“Land supply in Hong Kong, particularly on (HK) Island has been scarce. Even from a long-run perspective, the strong demand could guarantee MTR to take little risk on their property developments,” said Tsang.

Centaline Surveyors director James Cheung agrees that returns from the two plots will be plentiful.

He even estimates that by selling the two sites, MTR could make as much as HK$50 billion.

Shares of the blue-chip company, which is 77 percent-owned by the city’s government, climbed HK$0.1 or 0.36 percent to close at HK$28.05, compared with a 0.48 percent gain in the city’s benchmark Hang Seng Index.

China Daily

(HK Edition 05/19/2011 page2)

http://www.chinadaily.com.cn/hkedition/2011-05/19/content_12536424.htm