November 16, 2012 / 7:16 AM / 5 years ago

TEXT-Fitch affirms Hong Kong's MTR Corp at 'AA+'/stable

(The following statement was released by the rating agency)

Nov 16 - Fitch Ratings has affirmed Hong Kong-based rail transit network MTR Corporation Ltd’s (MTRC) Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at ‘AA+', respectively. The Outlook is Stable. The agency has also affirmed MTRC’s Short-Term Foreign Currency IDR at ‘F1+’ and senior unsecured rating at ‘AA+'.

MTRC’s ratings are equalised with those of Hong Kong Special Administrative Region (HKSAR; ‘AA+'/Stable/‘F1+'), reflecting strong strategic and operational ties between the entities. The Stable Outlook reflects Fitch’s expectation that there would be no significant change in MTRC’s fundamentals and relationship with the government over the next 18 to 24 months.

HKSAR is the largest shareholder of MTRC with a 77% stake and has three senior government officials on the company’s board. Additionally, MTRC plays a key role in the government’s objective to promote a rail-based transit network as the backbone of the domestic transportation system. It is also the government’s transportation policy objective to maintain MTRC’s financial robustness.

To ensure new projects would not impair MTRC’s financial profile, the government provides financial support to MTRC in the form of property development rights, dividend waivers, or capital grants. Additionally, HKSAR government has alleviated the capex burden of MTRC by taking up the construction costs on Shatin-Central Link (scheduled completion of the first stage in 2018) and Express Rail Link (scheduled completion in 2015). HKSAR will likely invite MTRC to be the sole operator under the service concession model for these two new lines.

Other positive rating drivers include its monopolistic market position as the sole railway operator in Hong Kong and its strong credit metrics. Following the operational merger between MTRC and Kowloon-Canton Railway Corporation (KCRC, ‘AA+'/Stable/‘F1+'), MTRC’s network covers virtually all population and commercial centres in Hong Kong, with access to both the mainland Chinese border and the Hong Kong International Airport.

Fitch expects MTRC to increase its market share to around 50% in the Hong Kong public transport system from the current 45.8%, due to network expansion. Together with an inflation-linked tariff adjustment mechanism, a leasing portfolio of well-located commercial properties, and extensive commercial activities at rail stations, the company is expected to generate stable and strong operating cash flow. For H112, the company achieved an operating EBITDA of HKD6.5bn, which represented a year-on-year increase of 8.6%.

MTRC’s overseas rail projects provide limited cash flow. For H112, overseas railway projects contributed about 5% to the company’s EBITDA. However, Fitch does not expect its overseas operations to be a significant contributor of the company’s earnings or for MTRC to commit to material investments outside of Hong Kong.

What Could Trigger A Rating Action?

Negative: Future developments that may individually or collectively lead to negative rating action include:

- Negative rating action on the Hong Kong sovereign

- Evidence of diminishing support from/or weakening ties to the HKSAR government

Positive: Future developments that may individually or collectively lead to positive rating action include:

- Positive rating action on the Hong Kong sovereign

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