8th Aug 2007 07:24
MTR Corporation Ltd08 August 2007 MTR Corporation Limited (Incorporated in Hong Kong with limited liability) (Stock code: 66) ANNOUNCEMENT OF UNAUDITED RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2007 HIGHLIGHTS Financial • Revenue increased 6.3% to HK$4,852 million• EBITDA up 6.0% to HK$2,797 million• Property development profit of HK$1,664 million (2006 first half of HK$4,072 million), mainly from deferred income as well as surplus proceeds from Harbour Green and Tung Chung packages• Net profit attributable to equity shareholders, excluding investment properties revaluation and related deferred tax (profit from underlying businesses), of HK$2,050 million• Net profit attributable to equity shareholders, including investment properties revaluation and related deferred tax, of HK$4,071 million, 21.2% lower than last year• Debt / equity ratio at period-end improved to 31.4%• Interim dividend of HK$0.14 per share Operational • Patronage for MTR Lines and Airport Express increased 2.7% to 434 million• Tseung Kwan O Area 56 Development Package awarded in February 2007• Award of the new London Overground rail operating concession to the Company's UK joint venture, MTR Laing Metro Limited, in June 2007• Investment properties 100% let; Phase 1 of Elements at Kowloon Station, 100% pre-let, is expected to open in the 4th quarter of 2007• Recognition of profits from Le Point at Tiu Keng Leng expected in the 4th quarter of 2007 on issuance of Occupation Permit• Rail Merger Bill, By-Laws and Regulations passed by Legislative Council; preparation underway for Extraordinary General Meeting to seek independent shareholders' approval -------------------------------------------------------------------------------- The Directors of MTR Corporation Limited ("the Company") are pleased to announcethe unaudited interim results of the Company and its subsidiaries ("the Group")for the half-year ended 30 June 2007 as follows: CONSOLIDATED PROFIT AND LOSS ACCOUNT Half-year ended 30 June (HK$ Million) 2007 2006 (Unaudited) (Unaudited)Fare revenue 3,247 3,138 Station commercial and rail related revenue 735 735 Rental, management and other revenue 870 693 ------------- -------------Turnover 4,852 4,566 ------------- -------------Staff costs and related expenses (784) (777)Energy and utilities (251) (249)Operational rent and rates (45) (26)Stores and spares consumed (53) (52)Repairs and maintenance (233) (235)Railway support services (42) (39)Expenses relating to station commercial and rail related businesses (165) (183)Expenses relating to property ownership, management and other businesses (223) (132)Project study and business development expenses (112) (84)General and administration expenses (67) (82)Other expenses (80) (68) ------------- -------------Operating expenses before depreciation (2,055) (1,927) ------------- -------------Operating profit from railway and related businesses before depreciation 2,797 2,639 Profit on property developments 1,664 4,072 ------------- -------------Operating profit before depreciation 4,461 6,711 Depreciation (1,348) (1,315) ------------- -------------Operating profit before interest and finance charges 3,113 5,396 Interest and finance charges (654) (739)Change in fair value of investment properties 2,450 1,478 Share of profits less losses of non-controlled subsidiaries and associates 42 16 ------------- -------------Profit before taxation 4,951 6,151 Income tax (879) (984) ------------- -------------Profit for the period 4,072 5,167 ============= ============= Attributable to: - Equity shareholders of the Company 4,071 5,167 - Minority interests 1 - ------------- ------------- Profit for the period 4,072 5,167 ============= =============Dividend proposed to equity shareholders of the Company attributable to the period: - Interim dividend declared after the balance sheet date 782 774 ============= =============Earnings per share: - Basic HK$0.73 HK$0.94 - Diluted HK$0.73 HK$0.94 -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET (HK$ Million) As at As at 30 June 31 December 2007 2006 (Unaudited) (Audited)Assets Fixed assets - Investment properties 25,013 22,539 - Other property, plant and equipment 83,812 84,404 ------------- ------------- 108,825 106,943 Railway construction in progress 276 232 Property development in progress 3,200 3,297 Deferred expenditure 743 565 Prepaid land lease payments 587 594 Interests in non-controlled subsidiaries 213 171 Interests in associates 203 100 Deferred tax assets 1 1 Investments in securities 340 272 Staff housing loans 18 25 Properties held for sale 2,164 2,018 Derivative financial assets 192 195 Stores and spares 277 272 Debtors, deposits and payments in advance 1,957 1,894 Loan to a property developer 3,442 3,355 Amounts due from the Government and other related parties 183 177 Cash and cash equivalents 413 310 ------------- ------------- 123,034 120,421 ------------- -------------Liabilities Bank overdrafts 1 5 Short-term loans 24 1,114 Creditors, accrued charges and provisions 5,525 3,639 Current taxation 1 1 Contract retentions 160 193 Loans and obligations under finance leases 25,145 27,033 Derivative financial liabilities 281 515 Deferred income 1,226 1,682 Deferred tax liabilities 10,374 9,453 ------------- ------------- 42,737 43,635 ------------- -------------Net assets 80,297 76,786 ============= =============Capital and reserves Share capital, share premium and capital reserve 39,421 38,639 Other reserves 40,856 38,128 ------------- -------------Total equity attributable to equity shareholders of the Company 80,277 76,767 Minority interests 20 19 ------------- -------------Total equity 80,297 76,786 ============= ============= -------------------------------------------------------------------------------- Notes:- 1. INDEPENDENT REVIEW The interim results for the half-year ended 30 June 2007 are unaudited, but havebeen reviewed in accordance with Hong Kong Standard on Review Engagements 2410"Review of Interim Financial Information Performed by the Independent Auditor ofthe Entity", issued by the Hong Kong Institute of Certified Public Accountants,by KPMG whose unmodified review report is included in the interim report to besent to shareholders. The interim results have also been reviewed by the Group'sAudit Committee. 2. BASIS OF PREPARATION These unaudited consolidated accounts should be read in conjunction with the2006 annual accounts. The accounting policies adopted in the preparation ofthese accounts are consistent with those used in the 2006 annual accounts exceptfor changes in accounting policies made thereafter in adopting the following newor revised Hong Kong Financial Reporting Standard ("HKFRS") and Hong KongAccounting Standard ("HKAS") in 2007, both of which will only have disclosureimpacts on the 2007 annual accounts: • HKFRS 7 "Financial Instrument: Disclosures"; and • Amendment to HKAS 1 "Presentation of Financial Statements" - Capital Disclosures The adoption of these accounting standards has no impact on the Group's resultsof operations. 3. RETAINED PROFITS The movements of the retained profits during the half-year ended 30 June 2007and the year ended 31 December 2006 were as follows: HK$ Million Balance as at 1 January 2007 37,148 Dividend approved (1,554) Profit for the period attributable to equity shareholders of the Company 4,071 ----------- Balance as at 30 June 2007 39,665 =========== HK$ Million Balance as at 1 January 2006 31,698 Dividends declared or approved (2,309) Profit for the year attributable to equity shareholders of the Company 7,759 ----------- Balance as at 31 December 2006 37,148 =========== 4. PROFIT ON PROPERTY DEVELOPMENTS Half-year ended 30 June HK$ Million 2007 2006 Profit on property developments comprises: Transfer from deferred income on -up-front payments 510 621 -sharing in kind 42 295 Share of surplus from development 1,100 3,137 Income recognised from sharing in kind 21 26 Other overhead costs (9) (7) --------------- --------------- 1,664 4,072 =============== =============== 5. INCOME TAX Half-year ended 30 June HK$ Million 2007 2006 Current tax - overseas - 1 --------------- ---------------Deferred tax expense relating to the origination and reversal of temporary differences on: - change in fair value of investment properties 429 259 - utilisation of tax losses 423 1,005 - others 27 (281) --------------- --------------- 879 983 --------------- ---------------Income tax in the consolidated profit and loss account 879 984 =============== ===============Share of income tax of non-controlled subsidiaries 8 8 =============== =============== No provision for current Hong Kong Profits Tax has been made in the consolidatedprofit and loss account in respect of the Company and its subsidiaries, as theCompany and its subsidiaries either have substantial accumulated tax lossesbrought forward which are available for set off against current period'sassessable profits or have sustained tax losses for the half-year ended 30 June2007. Taxation for overseas subsidiaries is charged at the appropriate currentrates of taxation ruling in the relevant countries. Provision for deferred tax on temporary differences arising in Hong Kong iscalculated at Hong Kong Profits Tax rate at 17.5% (2006: 17.5%). 6. DIVIDEND The Board has resolved to pay an interim dividend of HK$0.14 per share. TheCompany proposes that a scrip dividend option will be offered to allshareholders except shareholders with registered addresses in the United Statesof America or any of its territories or possessions. The interim dividend willbe distributed on or about 26 October 2007 to shareholders whose names appear onthe Register of Members of the Company as at the close of business on6 September 2007. The Company's majority shareholder, The Financial SecretaryIncorporated, has agreed to elect to receive all or part of its entitlement todividends in the form of scrip to the extent necessary to ensure that a maximumof 50% of the total dividend paid by the Company will be in the form of cash. 7. EARNINGS PER SHARE The calculation of basic earnings per share is based on the profit for thehalf-year ended 30 June 2007 attributable to equity shareholders of HK$4,071million (2006: HK$5,167 million) and the weighted average number of ordinaryshares of 5,550,144,410 in issue during the period (2006: 5,484,385,261). The calculation of diluted earnings per share is based on the profit for thehalf-year ended 30 June 2007 attributable to equity shareholders of HK$4,071million (2006: HK$5,167 million) and the weighted average number of ordinaryshares of 5,555,165,343 in issue during the period (2006: 5,490,717,070) afteradjusting for the number of dilutive potential ordinary shares under theemployee share option schemes. Both basic and diluted earnings per share would have been HK$0.37 (2006:HK$0.72) if the calculation is based on profit from underlying businessesattributable to equity shareholders, i.e. excluding increase in fair value ofinvestment properties net of related deferred tax. 8. SEGMENTAL INFORMATION Revenue Contribution to profit Half-year ended 30 June Half-year ended 30 June HK$ Million 2007 2006 2007 2006 Railway operations 3,247 3,138 576 522 Station commercial and 735 735 538 505 rail related businesses --------------- --------------- --------------- --------------- 3,982 3,873 1,114 1,027 Property ownership, 870 693 615 559 management and other businesses --------------- --------------- --------------- --------------- 4,852 4,566 1,729 1,586 =============== =============== Property developments 1,664 4,072 --------------- --------------- 3,393 5,658 Unallocated corporate (934) (1,001) expenses Change in fair value of 2,450 1,478 investment properties Share of profits less 42 16 losses of non-controlled subsidiaries and associates Income tax (879) (984) --------------- --------------- 4,072 5,167 =============== =============== As substantially all the principal operating activities of the Group werecarried out in Hong Kong throughout the reporting periods, no geographicalanalysis is provided. 9. DEBTORS AND CREDITORS A The Group's debtors, deposits and payments in advance amounted to HK$1,957 million (2006: HK$1,894 million), out of which HK$985 million (2006: HK$825 million) relates to property development which are mainly due according to terms of the sales and purchases agreements; and HK$508 million (2006: HK$608 million) receivable from rentals, advertising and telecommunication activities with due dates ranging from 7 to 50 days, swap interest receivable from debt portfolio management activities due in accordance with the respective terms of the agreements, and amounts receivable from consultancy services income due within 30 days. As of 30 June 2007, HK$310 million (2006: HK$276 million) were overdue out of which HK$175 million (2006: HK$174 million) were overdue by more than 30 days. B Creditors, accrued charges and provisions amounted to HK$5,525 million (2006: HK$3,639 million), majority of which relate to capital project payments to be settled upon certification of work in progress, swap interest payable under the terms of respective swap agreements for debt portfolio management purposes, and forward sale deposit in respect of properties for which occupation permits have not been issued. The Group has no significant balances of trade creditors resulting from its provision of transportation and related services. As at 30 June 2007, HK$609 million (2006: HK$645 million) were amounts either due within 30 days or on demand, and the remaining were amounts not yet due. 10. PURCHASE, SALE OR REDEMPTION OF OWN SECURITIES During the half-year ended 30 June 2007, neither the Company nor any of itssubsidiaries has purchased, sold or redeemed any of its listed securities. 11. CHARGE ON GROUP ASSETS None of the Group's assets was charged or subject to any encumbrance as at30 June 2007. 12. CORPORATE GOVERNANCE The Company has complied throughout the half-year ended 30 June 2007 with theCode Provisions set out in the Code on Corporate Governance Practices containedin Appendix 14 of the Rules Governing the Listing of Securities on The StockExchange of Hong Kong Limited (the "Stock Exchange") except that, with respectto Code Provision A.4.1, non-executive Directors of the Company are notappointed for a specific term but are subject (save for those appointed pursuantto Section 8 of the Mass Transit Railway Ordinance (Cap. 556 of the Laws of HongKong)) to retirement by rotation and re-election at the Company's annual generalmeetings in accordance with Articles 87 and 88 of the Company's Articles ofAssociation. Dr. Raymond Ch'ien Kuo-fung, a Member of the Board, was first appointed as thenon-executive Chairman of the Company with effect from 21 July 2003 for a termof three years, which was renewed in 2006 for a further term up to 31 July 2007.In July 2007, Dr. Ch'ien was re-appointed as the non-executive Chairman of theCompany with effect from 1 August 2007 for a term up to 31 December 2007 or theday to be appointed by the Secretary for Transport and Housing by noticepublished in the Gazette under the Rail Merger Ordinance, whichever is theearlier. The Rail Merger Ordinance relates to the proposed rail merger betweenthe Company and Kowloon-Canton Railway Corporation, which is to take effect fromthe day designated pursuant to that Ordinance as the day on which the railmerger will be effective. Mr. Chow Chung-kong was appointed as the Chief Executive Officer of the Companywith effect from 1 December 2003 for a term of three years. He was alsoappointed as a Member of the Board on the same date. His contract as the ChiefExecutive Officer of the Company was renewed for a further term of three yearswith effect from 1 December 2006. 13. PUBLICATION OF THE INTERIM RESULTS ANNOUNCEMENT AND INTERIM REPORT This interim results announcement is published on the Company's website atwww.mtr.com.hk and the website of the Stock Exchange. The Interim Report willalso be available at the Company's and the Stock Exchange's websites inmid-September 2007 and will be despatched to shareholders of the Company inmid-September 2007. KEY STATISTICS Half-year ended 30 June 2007 2006 Total passenger boardings - MTR Lines (in millions) 429.3 418.4 - Airport Express (in thousands) 4,836 4,512 Average number of passengers (in thousands) - MTR Lines (weekday) 2,544 2,470 - Airport Express (daily) 26.7 24.9 Operating profit from railway and related businesses before 57.6% 57.8% depreciation as a percentage of turnover MANAGEMENT REVIEW AND OUTLOOK The first six months of 2007 saw continued progress for MTR Corporation.Firstly, and importantly, all legislation required to implement the proposedmerger with the Kowloon-Canton Railway Corporation (KCRC), except theCommencement Notice to establish a date to commence the Rail Merger Bill, hasnow been approved by the Legislative Council of Hong Kong (LegCo). The nextstage of the proposed merger is independent shareholders' approval by way of anExtraordinary General Meeting (EGM) of the Company, which is likely to be heldin October. Secondly, in our growth outside of Hong Kong, we together with ourpartner, Laing Rail, were awarded the London Overground concession in June. Thisis our first "asset light" train operating franchise in Europe. The Company's financial results for the first half of 2007 remained strong, withgood growth in revenue and operating profit before depreciation and propertydevelopment profit. However, property development profit was lower in the firsthalf of 2007 compared with the same period in 2006, as we had accounted forproperty development profit from a number of Tseung Kwan O projects, such as TheGrandiose and Metro Town, in the first half of last year, the magnitude of whichwas not repeated in the first six months of 2007. The recognition of propertydevelopment profit is dependent on completion of development projects which varyfrom year to year. As highlighted in our 2006 Annual Report, we will account forproperty development profits from Le Point at Tiu Keng Leng Station upon receiptof the Occupation Permit, which is expected in the fourth quarter of 2007. Thedevelopment costs relating to Le Point had already been accounted for in 2006. The Company's revenue for the period rose 6.3% to HK$4,852 million as comparedwith the first six months of 2006. Operating profit from railway and relatedbusinesses before depreciation increased by 6.0% to HK$2,797 million. Propertydevelopment profit realised in the period was HK$1,664 million, compared withHK$4,072 million in the same period of 2006. As a result, profit attributable toequity shareholders, excluding gain from revaluation of investment propertiesnet of tax, was HK$2,050 million. Gain from investment properties revaluationbefore tax was HK$2,450 million (HK$2,021 million post-tax), resulting inreported net profit of HK$4,071 million, a decline of 21.2 % over the first sixmonths of 2006. Reported earnings per share were HK$0.73, and the Board hasdeclared an interim dividend of HK$0.14 per share. Railway Operations Total fare revenue for the first half of 2007 increased by 3.5% to HK$3,247million when compared with the same period last year. Revenue growth was drivenby rising patronage and a slight increase in average fare. For the first six months, total patronage on the MTR Lines reached anotherrecord of 429.3 million, a 2.6% increase over the same period in 2006. Averageweekday patronage increased by 3.0% to 2.5 million. Despite strong competition,the Company's share of the total franchised public transport market increased to25.0% from 24.7%, with the share of cross-harbour traffic rising from 60.4% to61.2%. Average fare on the MTR Lines increased by 0.6% to HK$6.84 when comparedwith the first six months of 2006 due to changes in promotion program, longerjourney distance travelled by passengers and higher growth in cross-harbourmovements. As a result, fare revenue on the MTR Lines rose 3.1% to HK$2,935million. Passenger volume on Airport Express rose 7.2% from 4.5 million to 4.8 million,as the number of air travellers using Hong Kong International Airport continuedto rise, and the number of exhibitions and other events at the AsiaWorld-Expoincreased. Fare revenue on Airport Express increased by 6.8% to HK$312 million. We once again exceeded both the minimum performance levels required by theGovernment under the Operating Agreement, and our own more stringent CustomerService Pledges. Service promotions on the MTR Lines continued to support patronage growth, withevents such as "red packet" promotions and the first ever wedding in an MTRstation. There was also a successful trial initiative to encourage people totravel earlier so as to relieve morning peak congestion. Airport Express launched a "Children travel free" promotion from the end of 2006to February 2007, and beginning in April, discounts on Airport Express ticketswere offered to MTR shareholders, accompanied by dining offers at SkyPlazarestaurants. The "Ride to Rewards" programme was enhanced with new rewards forregistered enrollees having accumulated four journeys on Airport Express. To encourage use of MTR by travellers further away from MTR stations, the numberof fare saver machines offering discounts to Octopus card holders increased bytwo to 21 in total. Also, the number of feeder bus routes offering intermodalfare discount was maintained at 32, helping to promote patronage throughenhancing the connection between the MTR system and other modes of transport. Technology improvements included completion of the programme to replace motoralternators with static inverters on 78 trains on the MTR Lines, which improvedreliability and energy efficiency. Access to stations was enhanced through a third platform at the Airport Stationto serve passengers using the new Airport Passenger Terminal 2, while the ThreePacific Place pedestrian link to Admiralty Station was opened in February. Investments in facilities for the disabled continued across the network.Installation of a new internal passenger lift at Admiralty Station began in Juneand self operated stair lifts came into operation in three stations. Train door and escalator safety were a focus of passenger education. To minimisetrain door incidents, we extended the door-closing chimes and deployed traindoor safety ambassadors. Desirable passenger behaviour was further promotedthrough in-station games and sponsored school tours organised by metro show bizof Metro Broadcast Radio. Escalator safety ambassadors were also deployed atselected stations. We were honoured to have received a number of awards for our services, includingthe Sing Tao Excellent Services Brand Award 2006 - Public Transportationpresented by Sing Tao Daily, Hong Kong Service Awards - Public TransportationCategory presented by East Week Magazine, Q-Mark Service Scheme Award, HKGCCEnvironmental Performance Award, Next Magazine's Top Service Awards 2007 -Public Transportation Category, and Eco-Service Enterprise Award. Furthermore,international recognition for our asset management came with the Gold AssetManagement Excellence Award, and the Steve Maxwell Leadership Award for ourOperations Director, awarded jointly by the Asset Management Council and theMaintenance Engineering Society of Australia. Station Commercial and Rail Related Businesses An expanding economy and rising patronage supported our advertising and stationcommercial businesses but decreases in telecommunication and consultancy incomeled to revenue for the six months being unchanged from the same period in 2006at HK$735 million. Advertising revenue rose by 3.8% to HK$248 million, sustained by higherpassenger volumes and more innovative advertising formats. The advertisingbusiness also benefited from the replacement of seatback TV with the newmultimedia system in Airport Express carriages, which was completed in May. Station retail revenue increased 9.5% to HK$208 million as both rental rates andretail sales volumes trended higher. New layouts and refurbishments werecompleted at five stations during the six months, bringing an additional 10.4%or 1,760 square metres of retail floor space into operation, resulting in atotal retail footage in our stations of 18,627 square metres. In all, 39 newshops and 12 new trades were added, resulting in a total of 582 shops. Revenue from telecommunications services declined by 20.3% to HK$110 million,partly due to a one-off recognition of income from a mobile operator networkupgrade in 2006 which was not repeated in 2007. Revenue shared with 2G mobileoperators was affected by further cuts in tariffs and cannibalization of callminutes to 3G mobile services. Our fixed network services provider TraxCommLimited recorded higher revenue, and by the end of June had provided over180Gbps of bandwidth services to carrier customers. Revenue from consultancy was HK$82 million during the six months, a decrease of16.3% compared to the same period in 2006 mainly due to the deferredinstallation work for Phase 2 of the Automated People Mover project at the HongKong International Airport. In the Mainland of China, we secured a design reviewconsultancy for Chengdu Metro and a study funded by the Asian Development Bank,while new contracts were also secured in Europe and India. Overseas Expansion Our expansion overseas saw a step forward with the award of the LondonOverground concession to our joint venture MTR Laing Metro Limited (MTRLaing),whilst work progressed on the Beijing Metro Line 4 (BJL4) project as well as onthe approval for the Shenzhen Metro Line 4 (SZL4) project. Mainland of China In the Mainland of China, the Public-Private Partnership (PPP) companycomprising MTR Corporation, Beijing Infrastructure Investment Co. Ltd. andBeijing Capital Group made good progress on the BJL4 project. By the end of June, tendering for the Electrical & Mechanical (E&M) WorksContracts was nearly complete. Design work for E&M equipment including rollingstock, power supply, communications, platform screen doors and automatic farecollection was making substantial progress. A mock-up of the rail cars to beused on the new line has been completed and the quality management system of thePPP company was successfully granted ISO9001 certification in April. The senioroperations team is now in place and around 250 train drivers and stationcontrollers have been recruited to join the one-and-a-half year trainingprogramme that will start in September. About 70% of the tunneling works havebeen completed. The first batch of eight stations is to be handed over to thePPP company for E&M installation in September. We anticipate that this line willbegin operations in 2009. In Shenzhen, the Company is still liaising with Shenzhen Municipal Governmentand the National Development and Reform Commission on the final approval of theSZL4 project. Preparatory work continues, whilst expanded trial section work hasbegun. We continue to pursue other projects in the Mainland of China, such as the BJL4Extension, or Daxing Line and the development of new lines in Wuhan, Hangzhouand Suzhou. Europe In Europe, where we are committed to an "asset light" strategy of bidding forrail operating service contracts, our 50:50 joint venture with the UK's LaingRail was awarded the London Overground concession on 19 June. MTRLaing wasselected out of four companies short-listed to bid for the franchise. Under this concession, MTRLaing will operate five existing lines in GreaterLondon for seven years from 11 November 2007, with an option for a two-yearextension at the discretion of Transport for London (TfL). The cost basedoperating concession, which will be overseen by TfL, will receive an amount ofaround £700 million over the lifetime of the contract, which includes anexpected profit margin for MTRLaing. London Overground is an important franchise in the UK capital. It is asemi-orbital route serving West, North and East London and will be a cruciallink for the 2012 Olympic Games. The total route network measures 107.2kilometres and under the franchise, MTRLaing will eventually manage 55 of the 78stations on the network. Among the five lines, the East London Line is currentlyundergoing an extensive extension and upgrade programme and is scheduled tore-open in 2010. Some of the service improvements already planned for London Overground includethe introduction of a more comprehensive ticketing system, a phased programme ofstation upgrades to improve comfort and security for passengers, as well as theintroduction of a fleet of new trains from 2009. Our earlier bid with our joint venture partner Swedish railway company SJ forthe Oresundstag concessions in Sweden and Denmark was unsuccessful. Property and Other Businesses The property market saw broad based strength in the first half of 2007. TheGrade A office market saw strong demand, as capital markets activity led toexpansion by financial services firms. The retail market was supported by localspending and inbound tourism. Prices in the luxury residential market enjoyedstrong upward momentum, while demand in the mass residential market remainedstrong. Property Development For the six months, profit on property developments was HK$1,664 million, mainlyderived from developments along the Airport Railway. The contributors to property development profit from Airport Railway projectswere deferred income recognition in line with construction and / or salesprogress at Elements in Kowloon Station, and at Coastal Skyline and CaribbeanCoast in Tung Chung, as well as surplus proceeds from Harbour Green at OlympicStation and from Caribbean Coast. Pre-sales were launched at Crystal Cove in Tung Chung and sales were relaunchedat Harbour Green with good response, whilst occupation permits were obtained forthe two towers of The Cullinan and The HarbourView Place at Kowloon Station. Following approval by the Town Planning Board, the land application procedurehas begun for the conversion of part of the lorry park and transport interchangeadjacent to Tsing Yi Station to commercial use. On the Tseung Kwan O Line, sales were relaunched for Le Point at Tiu Keng LengStation, with positive response from the market. Construction of thesuperstructure for Area 86 Package One continued on schedule and the foundationworks for Package Two are substantially complete. The tender for Area 56 in Tseung Kwan O was awarded in February to Lansmart Ltd,a subsidiary of Sun Hung Kai Properties Ltd, with the plan to develop a hotel,residential, office and retail complex in Tseung Kwan O Town Centre. In Shenzhen, the master development plan for SZL4 property projects has beencompleted. We are now awaiting approval for the overall SZL4 project. Property Rental, Management and Other Businesses Total revenue from property rental, property management and other businessesincreased by 25.5% to HK$870 million during the six months compared to the sameperiod of 2006. Demand for both office and retail space was robust and rental income increasedby 13.8% over the comparable period in 2006 to HK$710 million. The increase wasdriven by favourable rental renewals and new lettings, as well as contributionfrom The Edge, which opened in November 2006 and Ginza Mall in Beijing. The strong demand from retailers enabled us to maintain 100% occupancy at all ofour shopping centres, except for areas under renovation at Telford Plaza and LukYeung Galleria. Our office premises at Two IFC also maintained full occupancy.Elements, our new shopping centre at Kowloon Station, is now 100% pre-let andhand over to tenants had begun. The tenant mix of our retail portfolio wasenhanced further by the addition of new trades at Telford Plaza and MaritimeSquare. Our property management business saw revenue increase 19.4% to HK$80 million.During the six months, 2,338 residential units were added to the portfolio,bringing the total number of residential units managed by the Company to 61,214at the end of June, together with 583,372 square metres of commercial space. In the Mainland of China, following refurbishment and rebranding, the Ginza Mallshopping centre in Beijing opened in January and by the end of June had been 99%let. Memoranda of Understanding were signed for property management contractsfor two more office and commercial developments in the capital, with SOHO ChinaLtd for a project at Guanghua Lu and with Nan Fung China Holdings Ltd for one atXidan. The Ngong Ping 360 cable car and associated theme village on Lantau Island whichopened in September 2006 contributed revenue of HK$80 million during the firstsix months of 2007. Since opening, the tourist attraction has carried some1.5 million passengers, which exceeded our projections for the first 12 monthsof operations. In June, during the annual testing outside of operation hours,one of the gondolas detached from the cable. There were no injuries andoperations immediately ceased, followed by detailed investigations. We will onlyresume passenger operations of the cable car system once we are completelysatisfied with all safety aspects of the system. Octopus continued to extend its operations to new areas within and beyond thetransport sector, helped by the launch of the "Portable Octopus Processor" thatenables smaller retailers to join the system. Cards in circulation rose to15.4 million and average daily transaction volume and value rose to 9.9 millionand HK$78.4 million respectively. The number of service providers increased by20% to 456. MTR Corporation's share of earnings from Octopus Holdings Limitedrose by 50% to HK$42 million for the six-month period. Hong Kong Network Expansion Projects MTR Corporation's projects to expand and enhance the network in Hong Kongcontinued throughout the first half of 2007. The construction of Tseung Kwan O South Station is on track, with all civil,building services and system-wide contracts progressing satisfactorily. By theend of June, some 90% of the station concrete had been placed and track layinghad begun. Construction of the Government entrusted works for one of the accessroads is also progressing on programme. This station is expected to open inApril 2009. Following the Government's announcement of proposals for the rejuvenation ofAberdeen and Ap Lei Chau, centred on a new Fisherman's Wharf, we submitted arevised proposal for the South Island Line (East) in June. Negotiations with the Government on the proposed West Island Line continued.Drafting of the gazette documents has proceeded and preparatory work for thenext design stage is underway. Work has begun on a new pedestrian subway for Lai Chi Kok Station and design ofa new subway at Prince Edward Station is under review. The Government accepted the proposal for construction of entrances linking TsimSha Tsui Station with the redevelopment of No. 63 Nathan Road, while ourproposal for an underground link at Causeway Bay Station remains under review.The design of a further subway at the north end of Tsim Sha Tsui Station to linkwith adjoining developments has begun. Merger with KCRC The Rail Merger Bill was passed in LegCo on 8 June and By-Laws and Regulationson 11 July. Hence all legislation except the final Commencement Notice is nowapproved. We are now in the final stages of agreeing legal documents with theGovernment and KCRC, after which the proposed merger will be submitted toindependent shareholders for approval at an EGM, which is likely to be held inOctober. A circular containing details of the transaction, as well as recommendationsfrom the Independent Board Committee, which is advised by the IndependentFinancial Adviser, Merrill Lynch, will be dispatched to shareholders after thesigning of the legal agreements. Shareholders should make their own decisions onthe merger and are advised to read the EGM Circular carefully. If independentshareholders approve the merger, Government would then need to introduce theCommencement Notice in LegCo for approval by LegCo for the Rail Merger Bill tocome into effect. We would then proceed to Day One of the merger, which couldtake place by the end of the year. The Joint Integration Group and Merger Integration Office have continued to leadthe work to prepare for the proposed merger and all of the integration issueshave now been substantially resolved to facilitate a smooth start from Day Oneof the merger. Financial Review The Group's financial performance in the first half of 2007 continued to benefitfrom the economic growth of Hong Kong with total revenue increasing by 6.3% toHK$4,852 million as compared with the same period last year. Fare revenue grewby 3.5% to HK$3,247 million, mainly attributable to patronage increases of 2.6%for the MTR Lines and 7.2% for Airport Express. Average fare for the MTR Linesalso increased from HK$6.80 to HK$6.84, whilst average fare for Airport Expressdeclined slightly from HK$64.80 to HK$64.40 due to the larger proportion ofpassengers traveling to and from the AsiaWorld-Expo Station paying lower fares.Non-fare revenues rose by 12.4% to HK$1,605 million as the strong retail markethelped increase revenue from advertising and station commercial facilities aswell as rentals from our properties while additional income streams weregenerated from the new Ngong Ping 360 and the expanded property rental andmanagement portfolio in Hong Kong and Beijing. Operating costs before depreciation for the first half of 2007 increased by 6.6%to HK$2,055 million as compared with the same period last year. The increase wasmainly attributable to business expansion in property rental, management andother businesses, increased business development in Europe and China as well asa non-recurring refund of operational rent and rates in 2006. As a result,operating profit from railway and related businesses before depreciation wasHK$2,797 million, a 6.0% increase from the same period last year, with theoperating profit margin at 57.6% in 2007. Property development profit for the first half of 2007 amounted to HK$1,664million, mainly comprising surplus proceeds from Harbour Green and CaribbeanCoast along the Airport Railway as well as deferred income recognition fromCoastal Skyline, Caribbean Coast and Elements, also along the Airport Railway.Operating profit before depreciation amounted to HK$4,461 million, a decrease of33.5% from the same period last year due to a decrease in property developmentprofits where in the first half of 2006 substantial surplus proceeds wererecognised from The Grandiose and Metro Town along the Tseung Kwan O Line . Depreciation charge for the first half of 2007 increased by 2.5% to HK$1,348million mainly due to the addition of depreciation charge for Ngong Ping 360.With strong cash flow and reduction in total borrowings, net interest expensedecreased by 11.5% to HK$654 million as compared with the same period last year.The increase in fair value of investment properties since the end of 2006amounted to HK$2,450 million pre-tax and HK$2,021 million post-tax. Including the share of profit from Octopus of HK$42 million, profit beforetaxation decreased by 19.5% to HK$4,951 million when compared with the sameperiod last year. Income tax correspondingly decreased by 10.7% to HK$879million, which was wholly non-cash deferred income tax. Net profit attributableto shareholders of the Company for the first half of 2007 therefore amounted toHK$4,071 million, with reported earnings per share of HK$0.73. Excludinginvestment property revaluation gain and related deferred tax, underlying netprofit was HK$2,050 million, while earnings per share were HK$0.37. The Directors have declared an interim dividend of HK$0.14 per share, which isthe same as last year. As with previous dividend payments, a scrip dividendoption will be offered to all shareholders except those with registeredaddresses in the United States of America or any of its territories orpossessions. The Company's majority shareholder, the Financial SecretaryIncorporated (FSI), has agreed to receive its entitlement to dividends in theform of shares to the extent necessary to ensure that a maximum of 50% of theCompany's total dividend will be paid in cash. The Group's balance sheet remains strong. During the first half of 2007,shareholders' equity increased by 4.6% to HK$80,277 million as of 30 June, fromretained profit as well as the re-investment of scrip dividends by Governmentand other shareholders. Total assets increased by 2.2% to HK$123,034 million largely due to propertyrevaluation gains of HK$2,595 million mainly from the office space at Two IFCand from retail space at Telford Plaza, Maritime Square and Luk Yeung Galleria.There were also increases in fitting out project works of HK$213 million atElements and property held for sale of HK$146 million from unsold units mainlyat Harbour Green. Other increases in assets include capital expenditure incurredon the SkyPlaza Platform project and other capital improvement projects. During the period, the Group's total borrowings decreased from HK$28,152 millionto HK$25,170 million due mainly to loan repayments. As a result, thedebt-to-equity ratio decreased from 36.7% at 31 December 2006 to 31.4% atperiod-end. The Group's net cash inflow from railway and related activities increased toHK$2,981 million in the first half of 2007 compared to HK$2,728 million for thesame period in 2006, while cash receipts from property development projectsincreased to HK$3,136 million from HK$584 million in the first half of 2006,mainly due to receipt of forward sale deposits from Le Point at Tiu Keng LengStation development. Total cash outflow before dividend and loan repaymentdecreased to HK$2,057 million as compared to HK$6,293 million in 2006 when aninterest-free loan of HK$4,000 million was provided to the property developer ofTseung Kwan O Area 86 Package Two. Major outflows included capital projectpayments of HK$1,062 million, interest expenses of HK$791 million, investment inour associate Beijing MTR Corporation Limited, of HK$103 million and other minoritems. After dividend payments of HK$777 million and net loan repayment ofHK$3,176 million, there was a net cash inflow of HK$107 million. Financing Activities With our strong positive cash flows and the availability of a sizeable pool ofundrawn committed banking facilities, we did not raise any new debt financingsduring the period. As at the end of June 2007, the Group had total undrawncommitted facilities of HK$6.3 billion. Apart from additional funding that maybe required for the proposed merger with KCRC, these undrawn committedfacilities, together with cash on hand and projected positive operating cashflow, are expected to cover all of our estimated funding needs until the end of2007. During the period, we continued to manage our debt portfolio in a prudent mannerin accordance with our Preferred Financing Model to achieve adequate riskdiversification. As at the end of June 2007, the Company's debt maturity profilewas well balanced, with 30% of total outstanding repayable within 2 years, 30%between 2 and 5 years, and 40% beyond 5 years. In terms of exposure to foreigncurrency risk, only 0.2% of the debt portfolio was denominated in US dollarswith the remainder either hedged into or denominated in HK dollars. In terms ofinterest rate risk, about 33% of our debt carried interest based on floatinginterest rates with the balance either based on or hedged into fixed interestrates. This prudent level of fixed rate debt enabled us to maintain our averageborrowing cost at 5.7%, roughly the same level as the 5.5% experienced duringthe same period last year, despite generally higher interest rates in 2007. Human Resources Maintaining harmonious staff relations and attracting and retaining high calibrepeople remain key elements in supporting rapid business growth. During the merger integration discussions, extensive communication andconsultation with staff and staff bodies of both companies ensured acceptance ofthe salary protection principles, as well as major terms and conditions ofemployment post merger. A series of cultural integration workshops were arrangedtogether with KCRC, for managers and senior supervisors from areas of bothcompanies. These workshops helped keep staff up to date on the latest developments in themerger integration process, to prepare them for the coming challenges and toreceive their feedback. The workshops were attended by some 1,200 managers andsupervisors and a total of 107 Integration Ambassadors were identified as changeagents to champion merger-related changes. MTR Corporation's numerous training and development programmes, designed toenhance skills and maintain motivation, continued throughout the first half of2007, with courses covering topics ranging from railway safety rules toempowerment and empathetic listening. Resourcing and developing our staff for our overseas business continue to be afocus and we also implemented programmes designed to build an MTR culture atoperations outside Hong Kong. Outlook Barring any external shocks, we continue to hold a cautiously positive view forthe economy in Hong Kong. Our rail businesses, as well as most of our non-fare and rail relatedbusinesses, will continue to benefit from Hong Kong's economic growth. However,our telecommunications business will face continuing headwinds from the furthercannibalisation of 2G users by 3G. In our property rental business, we plan to open Phase 1 of Elements, ourmajority owned shopping centre in Kowloon Station in the fourth quarter of 2007.We continue to see positive rental reversions across our portfolio which willalso benefit from the full year effect of the opening of The Edge and GinzaMall. In our property development business we expect to receive Occupation Permit forLe Point at Tiu Keng Leng Station in the fourth quarter of 2007. As I have notedin the past, in accordance with the Development Agreement and our accountingpolicy, costs relating to Le Point were already accounted for when we accountedfor profits for Metro Town in the first half of 2006. Given current marketconditions, pre-sales and the issuance of the Occupation Permit for Area 86Package One may allow for profit recognition for that development in 2008. Finally, I take this opportunity to thank all of my colleagues for theircontinued commitment to making our business a success. By Order of the BoardC K ChowChief Executive Officer Hong Kong, 7 August 2007 The interim financial information set out above does not constitute the Group'sinterim consolidated accounts for the half-year ended 30 June 2007, but isderived and represents an extract from those interim consolidated accounts. Certain statements contained in this Announcement may be viewed asforward-looking statements. Such forward-looking statements involve known andunknown risks, uncertainties and other factors, which may cause the actualperformance, financial condition or results of operations of the Company to bematerially different from any future performance, financial condition or resultsof operations implied by such forward-looking statements. CLOSURE OF REGISTER OF MEMBERS The Register of Members of the Company will be closed from 31 August 2007 to6 September 2007 (both dates inclusive). In order to qualify for the interimdividend, all transfers, accompanied by the relevant share certificates, must belodged with the Company's Registrar, Computershare Hong Kong Investor ServicesLimited at Shops 1712-1716, 17th Floor, Hopewell Centre, 183 Queen's Road East,Wanchai, Hong Kong for registration not later than 4:30 p.m. on 30 August 2007.It is expected that the interim dividend will be paid on or about 26 October2007. Members of the Board: Dr. Raymond Ch'ien Kuo-fung (Chairman) **, Chow Chung-kong(Chief Executive Officer), Professor Cheung Yau-kai*, David Gordon Eldon*,Christine Fang Meng-sang*, Edward Ho Sing-tin*, Lo Chung-hing*, T. BrianStevenson*, Professor Chan Ka-keung, Ceajer (Secretary for Financial Servicesand the Treasury)**, Secretary for Transport and Housing (Eva Cheng) ** andCommissioner for Transport (Alan Wong Chi-kong)** Members of the Executive Directorate: Chow Chung-kong, Russell John Black,William Chan Fu-keung, Thomas Ho Hang-kwong, Lincoln Leong Kwok-kuen, FrancoisLung Ka-kui, Andrew McCusker and Leonard Bryan Turk * independent non-executive Directors ** non-executive Directors This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
MTR.L