Hong Kong MTR credit profile threatened as ridership tumbles: S&P

March 4, 2020

HONG KONG -- S&P -Global Rating said today that MTR Corp. Ltd.'s (MTRC; AA+/Stable/A-1+) stand-alone credit profile (SACP) faces immense strain in 2020 due to the COVID-19 outbreak and the aftershocks of Hong Kong's protest movement. Both events have hit transit numbers and retail sentiment in Hong Kong in 2019-2020.

"We estimate the company's ratio of funds from operations to debt will likely drop to 15%-20% in 2020 from our forecast 30%-32% level for calendar year 2019, breaching the 20% downgrade trigger for the entity's SACP," S&P says.

"We expect the ratio to improve to around 20% in 2021."

S&P says the metro operator will likely face a significant decrease in recurring cash flow.

"We expect a near 10% drop in total revenue in 2020 in Hong Kong, compared with 2019. The firm's transport and commercial segments are mainly driving the revenue drop," it says.

"This decline is based on our updated assumptions that domestic transport passenger volumes may face a 10%-15% year-on-year decline in 2020, while Airport Express volumes may shrink even more in the period.

"In January 2020, MTRC's domestic ridership fell nearly 20% on-year, partially reflecting the impact.

On February 24, the company announced a reduction in train frequency during non-peak hours, citing a 50% drop in patronage in the first two weeks of February. S&P says it anticipates a recovery in passenger volumes once the virus outbreak is contained in Hong Kong.

"MTRC's operating cash flow from non-transport sectors will likely drop by a material amount in 2020. S&P Global Ratings expects Hong Kong's GDP to contract by 1% in 2020," the report says.

"We now estimate a 20%-30% drop in the company's station commercial and property management revenues in 2020 compared with 2019, due to sustained weakness in Hong Kong's retail segment.

"The company has offered a 50% rent reduction for February and March to its small-to-medium tenants at its train stations and shopping malls, to give relief to businesses hit by the outbreak.

"We have not factored in any cost savings in 2020, as we expect MTRC's cost base to be largely inelastic.

"The company will need to carry out repairs on its damaged stations should vandalism stemming from Hong Kong's protest movement flare up.

"We note that the protests have faded while the city deals with the coronavirus outbreak, with the public avoiding large gatherings of any form.

"Uncertainty around the company's role in substandard work at the new Hung Hom station also creates questions about the company's financial strength.

"If MTRC is found to have breached its warranty under the entrustment agreement for the construction and commissioning of the Shatin-Central Link, the Hong Kong Government can claw back up to HK$7.9 billion of management fees from the firm.

"In our view, any substantial clawback of this management fee, or any other penalty, may further weaken the company's credit metrics, beyond our updated estimate.

"The company has booked a HK$2 billion loss provision in the first half of 2019 to allow for a phased opening of the Tuen Ma line."

S&P says it believes MTRC will likely continue its capital expenditure, predominantly for its Hong Kong property rental segment, as it relies on rental cash flow to support the maintenance and upgrade of its railways.

"We estimate the company's 2020 capital expenditure to be HK$14 billion-HK$15 billion, with HK$5 billion-HK$6 billion spent on investment properties."

On February 26, 2020, the company announced that it would acquire interests in Telford Plaza II and PopCorn 2 shopping centres for a HK$3 billion consideration, further reflecting its commitment to this business segment.

"In our view,," S&P says, "any escalating dispute between the Hong Kong Government and MTRC over the construction of the Shatin-Central Link may weaken Government support for MTRC.

"That said, we continue to view MTRC as an important platform for implementing social relief programmes on behalf of the Government, especially in challenging economic conditions.

"In addition, the government remains the majority shareholder of the company, with about 75% ownership as of June 30, 2019."

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