Hong Kong MTR Corp’s creditworthiness downgraded on soft property market, funding needs
S&P says MTR Corp’s operational and rental recovery from the pandemic could take longer than it previously expected
A rating agency has downgraded the creditworthiness of Hong Kong’s rail operator because of the city’s sluggish property market and the firm’s rising funding needs for future railway projects.
According to the US agency, the profile is a component of a rating and refers to its opinion of an issue’s or issuer’s creditworthiness, in the absence of extraordinary intervention from its parent or affiliate or related government.
The rating agency said it expected the MTR Corp’s capital expenditure would increase annually to HK$16 billion to HK$22 billion (US$2.1 billion to US$2.8 billion) between this year and 2026 for its new railway projects.
“We expect the MTR Corp’s capital expenditure needs to increase as its property development cash flow may stay muted,” S&P said.
“Its operational and rental recovery from the pandemic could take longer than we previously expected.”
The MTR Corp is in charge of extending the existing Tung Chung line and Tuen Ma line, as well as building railway stations at Oyster Bay in Tung Chung, and Kwu Tung and Hung Shui Kiu in the New Territories.
The rail firm also develops, manages and rents out residential and commercial projects along the transport network.
The government has a stake of about 75 per cent in the MTR Corp.
S&P noted that the forecast cash flow from recurring operations and property development would not be sufficient to cover the rail giant’s capital expenditure and dividend distribution over the next two to three years.
“Due to the softening property market in Hong Kong, the company’s property development cash flow will slide and likely stay low over the next two to three years,” the agency said.
S&P said it expected delays in tender awarding, noting the city had a record high number of unsold homes which was likely to deter land purchases by property developers and sales of existing projects.
Official figures show 14,200 private flats were under construction as of June, while developers have yet to sell about 19,000 completed homes.
The agency forecast the company’s gross cash inflow from property development to be HK$1.5 billion to HK$2 billion annually over the next two to three years, compared with a peak of more than HK$17 billion in 2021.
It also raised concerns about the corporation’s business model of using its own resources to build railways and seek returns from property development.
“This can lead to climbing debt levels during the development phase and uneven cash flow during a project cycle,” the agency said.
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The story behind Hong Kong's colourful MTR stations
Attributing to the dampened inbound tourism and the change in travel patterns, S&P also observed that the railway company had yet to recover its transport operations as its patronage remained below pre-pandemic levels.
It noted that the city’s weak retail sentiment also brought station commercial and property rentals under pressure.
Despite downgrading the credit rating, the agency said it expected the MTR Corp to have ample access to the capital market and be able to keep financing costs competitive.
But S&P said it could further lower the firm’s credit rating if the city’s rating was downgraded or there was weakened government support for the railway company.
The agency said it might upgrade the credit rating of the MTR Corp if it took the same actions as that of Hong Kong.
The MTR Corp posted a 44.7 per cent rise in net profit to HK$6.04 billion (US$769.2 million) for the first half of 2024.
The Post has approached the Financial Secretary’s Office and the MTR Corp for comment.
Additional reporting by Danny Mok
