Weak economic conditions see Hong Kong’s MTR downgraded

March 12, 2020

HONG KONG - Standard and Poors has lowered its stand-alone credit profile (SACP) for Hong Kong' s MTR Corporation to 'a' from 'a+' because it expects the metro operator to face an increasingly volatile operating environment amid the COVID-19 outbreak, Hong Kong's social unrest, and a generally weaker economic environment. S&P says it has also revised its assessment of MTRC's liquidity to adequate from strong to reflect its expectation of weaker cash flow in 2020.

"We continue to see an almost certain likelihood of timely and sufficient extraordinary support from the Hong Kong government in the event of financial distress," it says.

MTRC accounted for 47% of Hong Kong' s public transport market share in 2019, and the Hong Kong Government owns 75% of the company as of December 31, 2019.

S&P says: "We expect the metro operator to face a more challenging operating environment. In our view, MTRC's operating cash flow will suffer in 2020 due to Hong Kong's social unrest and the outbreak of COVID-19.

"Weaker economic conditions in Hong Kong will also increase the volatility of the company's operating cash flow. According to our latest forecast, revenue from its Hong Kong transport segment will decline 5%-10% in 2020.

"We also expect revenue from the company's commercial businesses and rental at stations to drop 20%-30% this year.

"MTRC has announced a tariff freeze in 2020, an indication of mounting public pressure on its existing Fare Adjustment Mechanism. We expect the company's operating cash flow to recover gradually from 2021, though this is subject to economic conditions in Hong Kong and globally.

"In our view, MTRC's property development profit may face long-term pressure if economic weakness persists.

"Historically, profit from this division has provided significant support for the company's heavy capital expenditure (capex). In 2019, MTRC booked a profit of HK$5.6 billion from its property development, compared with its capex of HK$9.3 billion."

www.standardandpoors.com (ATI).