JP Morgan: MTR Corporation (00066) met expectations for last year's performance. Low visibility on capital expenditure for the second phase of the Northern Link. Rated "neutral".

JPMorgan released a research report stating that MTR Corporation (00066) announced its annual performance up to the end of December last year, with a 4% decrease in profit compared to the previous year, in line with market expectations. The recurring profit decreased by 22% last year, impacted by one-off expenses and perpetual bond interest payments. Excluding one-off projects, the management indicated that the recurring profit decline last year was only in single digits, with the 22% decrease in recurring profit partially offset by an 8% increase in revenue from development projects. Overall, the performance met expectations, with JP Morgan setting a target price of 29 Hong Kong dollars for MTR and a "neutral" rating. The bank noted that the profit recovery in MTR's transportation business is slower than expected; the commercial and property sectors are still under pressure. Rental income at rail stations fell by 8.5% last year, but the decline narrowed compared to 9.8% in 2024. Profit contribution from joint ventures declined, and related capital expenditure remained high. The capital expenditure for the second phase of the Northern Link is still unclear. The management guided that the capital expenditure for 2026 to 2028 is about 82.6 billion Hong Kong dollars, with approximately 50% for maintenance of Hong Kong railways, 37% for new railway projects in Hong Kong, 11% for Hong Kong properties, and the remaining 2% for investments in mainland China and overseas. However, the capital expenditure guidance for the next three years does not clarify the expenditure for the second phase of the Northern Link, which may not be included in the current financial planning and could increase towards the end of the 2020s. After the results, JPMorgan expects revisions to market forecasts for MTR to be relatively moderate, but the stock price reaction is expected to be slightly negative. At the current level, the company's risk/return is considered balanced, and the market has already digested the recovery of the local railway business post-pandemic. However, the upside potential is limited by factors such as the recent or upcoming expiration of major overseas franchises, continued weakness in the New Territories leasing business, an anticipated slowdown in property development profits from 2027 onwards, and the high capital expenditure required for the development of the Northern Link. Taking all these factors into account, the compound annual growth rate of earnings for the years 2025 to 2027 is expected to decrease by 16%, which could limit the potential for significant revaluation, but dividends are expected to remain stable.