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RTNominal down40.350 -0.100 (-0.247%)
Research Report

15/07/2020 17:14

MTRC's (00066) recovery dented by spike in COVID-19 cases

[ET Net News Agency, 15 July 2020] S&P Global Ratings said today that the sudden
increase of COVID-19 cases in Hong Kong has led the government to re-introduce strict
social distancing measures that may reduce local transportation traffic.
This will pressure the stand-alone credit profile (SACP) of MTR Corp. Ltd.
(MTRC)(00066)(AA+/Stable/A-1+) and threaten the recovery of the metro system operator's
passenger traffic already battered by the COVID-19 outbreak and social unrest.
There were 212 local cases (including those epidemiologically linked with local cases)
reported between 8 July and 14 July, the highest number of local cases in Hong Kong within
a seven-day period since the outbreak of COVID-19 six months ago. The Hong Kong government
has tightened social distancing measures from 11 July.
The recurrence of the COVID-19 outbreak is likely to mean a higher level of uncertainty
regarding MTRC's traffic recovery over the next several months. MTRC's total passenger
traffic figures showed early signs of recovery in May and June 2020. June figures were
only 25% lower than the same period last year and significantly better than figures in
February through April.
However, this recovery could be short-lived if people decide to avoid public transport
and work remotely, as with March and April, following this latest outbreak.
On an aggregate basis, MTRC reported a total drop in passenger traffic of 37.7% year on
year for the first six months of 2020. S&P expects cross-border and Airport Express
services to remain virtually shut due to control measures.
Low passenger traffic and deferred fare increase will pressure MTRC's 2020 financial
performance and cash flow. Despite a 2.55% fare increase allowed under the approved fare
adjustment mechanism, the company announced in April that the hike is deferred based on
the affordable index condition.
In addition, MTRC has also offered a 20% discount to its passenger fare for the second
half of 2020, and the resulting revenue loss may be borne by both the government and MTRC.
The government's tightening measures will also affect MTRC's property rental and station
commercial segments, which contributed more than 20% of overall revenue last year, though
to a lesser degree.
Due to rental concessions and lower retail spending in the first half of the year, the
agency expects revenue from these segments to drop by 20% in 2020. Losses due to property
portfolio revaluation, as disclosed in the profit warning issued on 7 July, also reflect
the negative sentiment in this sector.
S&P thinks MTRC will continue to face a challenging environment in the next several
years. The social unrest and COVID-19 outbreak in Hong Kong are weighing on domestic
economic conditions amid a weakening global economy.
The agency forecast air passenger traffic at Hong Kong International Airport will not
return to pre-pandemic levels until 2023, meaning MTRC's Airport Express route is likely
to undergo a similar recovery pattern.
In addition, the company faces financial uncertainty due to cost overruns and project
quality claims associated with the Shatin-Central Link project.
Given these factors, MTRC's financial metrics may be weaker than S&P expects. The agency
believes the company's ratio of funds from operations to debt may drop below 18% in 2020,
which is S&P's downgrade threshold for the company's SACP, before recovering to above 20%
in 2021. In addition, S&P forecast the company's 2020 adjusted EBITDA to drop by nearly
50% year on year. (KL)

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