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MTR Corporation (66 HK)

Hong Kong public transport monopoly and property developer at 13x forward P/E

Disclaimer: Asian Century Stocks uses information sources believed to be reliable, but their accuracy cannot be guaranteed. The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. You are advised to discuss your investment options with your financial advisers, including whether any investment suits your specific needs. From time to time, I may have positions in the securities covered in the articles on this website. Full disclosure: I do not hold a position in MTR Corporation at the time of publishing this article. To reiterate, this post and the below presentation are for informational and educational purposes only - not a recommendation to buy or sell shares.

MTR Corporation (66 HK - US$21 billion) is the operator of Hong Kong’s world-famous MTR subway system.

It runs 99 MTR stations and 68 light rail stops, handling over 5 million passengers each day. And it’s a complete monopoly, with zero competition in the rail sector.

The company has been given a concession to run the MTR system for 50 years, from 2007 to 2057. Chances are high though that it will be extended for another 50 years at no extra cost. If so, MTR will retain its monopoly until 2107.

What makes MTR unique is that it only only operates Hong Kong’s MTR system, it also builds property in and around its stations. For example, it has retail shops in each station that it leases out to third parties. It builds shopping malls that cater that Hong Kong’s daily commuter. And it also teams up with property developers who build residential developments close to MTR’s station buildings. This is a fantastic arrangement, because MTR doesn’t take any development risk yet shares in the profits of those developments.

MTR’s subway system is known for being one of the best in the world. The punctuality rate is 99.9%. Trains arrive every 2 minutes during peak hours. Ticket prices are relatively affordable. While the company sometimes receives criticism in media, it’s clear that the subway system is superior to that of almost any other country on earth.

Its success in Hong Kong has enabled it to expand overseas. And it now operates similar public transport systems in Mainland China, Australia, Sweden and the United Kingdom. There should be the potential for further growth overseas.

In Hong Kong, ridership will probably grow around 2-3% per year as the MTR system continues to take market share from buses. On top of that, we should see ticket prices rise up to 3% per year. So a mid-single digit growth in public transport revenues seems reasonable to me. On top of profits from from MTR’s retail properties and development arm.

The stock price has dropped about 40% in the past year. That’s highly unusual for high-quality blue chips in Hong Kong. I’ve concluded that this drop in the share price is due to three separate factors:

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