MTR Earnings: Within Expectations; Cutting Valuation by 17% on Continued Net Tourist Outflow

Trends within MTR’s first-half results were within expectations. Net profit from underlying business jumped 83% against the same period last year, which was partially still under the impact of pandemic lockdowns. While the transport operation business continues to improve from pandemic lows, recovery was slowed by the net tourist outflow trend in Hong Kong, which affects both domestic transport operations' ridership and the performance of retail assets. As such, we have adjusted our assumptions to reflect a weaker outlook, and now expect the net tourist outflow to persist through 2025. We have also updated our assumptions for the development properties business to reflect lower transaction prices and the latest presale progress. Consequently, we have lowered our 2024-26 net income forecasts by 7%-12% and fair value estimate to HKD 32.00 from HKD 38.50. We have also marginally trimmed our 2024 dividend per share forecast to HKD 1.32 from HKD 1.34, implying a dividend yield of 5%, as we believe management would consider the higher capital expenditure requirements in 2024-26 when making capital allocation decisions.