The business of public transport, like owning buses and train lines, is rarely seen as an exciting one. However, there are opportunities for companies operating in this space to be more profitable than you’d expect.
One such example is Hong Kong-based MTR Corporation Limited (HKEX: 66), which runs Hong Kong’s Mass Transit Railway (MTR) system – in other words, its subway or underground train lines. MTR Corp is also a constituent member of the Hong Kong Stock Exchange’s benchmark index – the Hang Seng Index.
The railway firm pioneered the use of a “rail + property” business model that has seen it capitalise on property prices in one of the world’s most expensive cities for real estate.
Government-Owned Subway Train Operator
The company has a storied history and has been a majority government-owned entity since it was first established in 1975 to construct and operate Hong Kong’s urban metro system.
At the time, MTR’s sole shareholder was the Hong Kong government. However, that changed when the company listed its shares on the Hong Kong Stock Exchange in 2000 – with the government selling 23% of its stake to the public. The operations of another government-owned railway operator – the Kowloon-Canton Railway Corporation (KCRC) – were merged with MTR to create a unified railway operator in the city.
At the time of listing (in 2000), MTR shares were offered to the public at HK$9.38 apiece and today they’re trading at around HK$31.
The company has come to be known as a reliable dividend payer in the city, given its recurrent streams of income.
Understanding MTR’s Profitable Business Model
Generally, urban train operators are viewed as stodgy investments given the amount of capital expenditure involved (to maintain and grow the network) as well as the likely price limits imposed by regulators in regard to ticket prices. However, MTR has built a robust business model that has put property at the centre of its business.
After going public at the turn of this century, MTR started to pivot towards its “Rail + Property” business model where MTR would develop and sell residential projects that are located above or around its new MTR stations. The business logic of this was that the revenue generated from the property sales could then finance further investment into its rail network, both for maintenance and expansion.
As time went on, MTR also built out streams of income that were not as reliant on one-off property gains from development sales. These included property rental and management services as well as advertising throughout its network and rental income from shops located within its stations.
Indeed, as of 2023, MTR owns and operates 13 shopping malls across Hong Kong, many of them within the immediate vicinity of MTR stations.
As seen below, the company’s business model is focused more on generating higher recurrent earnings before interest and tax (EBIT) – which it does quite successfully. Indeed, in the latest half-year report, its recurrent income swung back to a HK$2.42 billion profit from a HK$678 million loss in H1 2022.
Source: MTR Corp’s H1 2023 earnings presentation
Recovering From Covid-19 Slump
As the company was hit hard by both the protests in Hong Kong in 2019, as well as the Covid-19 restrictions in Hong Kong, the reopening of the city has boosted the company and its profits. MTR also owns and runs the city’s Airport Express line, helping take passengers between the CBD and the airport in less than 25 minutes.
The company’s “Station Commercial” business is rebounding fast as advertising and rentals are starting to reappear after a deep slump. Given the company’s vast operational experience, it also runs concessions for railway operations in overseas markets like Australia and Sweden.
MTR: The Company That Keeps Hong Kong Running
Overall, MTR is a company that continues to grow its network (including high-speed rail connections to China) and invest in profitable property developments.
With the reopening of the border between Hong Kong and China, the company is benefitting from the influx of people who will use the firm’s railway network and visit one of its shopping centres.
MTR shares also give dividend investors something to smile about as the company is currently offering a dividend yield of 4.2%. For investors interested in gaining exposure to Hong Kong’s transport and/or property sector, then MTR Corp is certainly one company to keep on your radar.
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