January 31, 2013

Taking MTR to the world

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MTR celebrated the start of operations on Hangzhou Metro Line 1 in November, its seventh project outside of Hong Kong. And as deputy CEO Lincoln Leong explains to Kevin Smith, the company is committed to strengthening its external presence over the next few years.

OPERATIONS outside of Hong Kong are a significant element of MTR Corporation's business strategy. And with the operator exploring further opportunities for overseas growth, MTR's deputy CEO, Mr Lincoln Leong believes this sector will become increasingly important.

Already external business interests account for 8-10% of MTR's overall profits of $HK 4.12bn ($US 531m) according to its financial results for the first half of 2012. However, these ventures were responsible for $HK 6.33bn, or 36.9% of overall revenues.

Lincoln-Leong"In our rail businesses outside of Hong Kong we carry 3.5 million passengers per day," Leong says. "In Hong Kong we carry 5 million passengers. These numbers alone indicate the importance of these ventures."

Hangzhou, China, became the latest city to join MTR's portfolio of ventures outside of Hong Kong when its first metro line, the 48km 31-station Line 1 opened on November 24 2012. The line has been implemented as a PPP project through Hangzhou MTR, a joint venture with Hangzhou Metro Group Company in which MTR holds a 49% stake.

The PPP project mirrors Beijing Metro Line 4, which opened in September 2009. MTR has a 49% stake in Beijing MTR, a three-way joint venture with Beijing Capital Group, which has a 49% share, and Beijing Infrastructure Investment Company which holds 2%. MTR similarly has a 49% stake in a 10-year operate and maintain (O&M) concession for Beijing Metro's Daxing Line which opened in December 2010, while in Shenzhen it is the sole concessionaire in a 30-year agreement for the Longlua Line. This was conducted as a build-operate-transfer (BOT) project and was completed in 2011.

Its latest project, Beijing Line 14, which is again being implemented as a PPP through Beijing MTR after it secured a 30-year O&M contract in November 2012, is set to open an initial 12.7km phase later this year. Leong says MTR is happy with the programme and the model of its PPP ventures and is willing to engage in similar financing structures in mainland China in the future. "Whether it is a PPP or a BOT we are willing to put capital at risk to invest in these cities," he says.

Inroads

While the majority of MTR's external interests are in mainland China, the company has made inroads in Europe and Australia.

In 2007, as part of a 50:50 joint venture with German Rail (DB), MTR secured an O&M concession for the London Overground network, while it won a 100%, seven-year O&M concession for the Stockholm Metro, and secured a 60% stake in an O&M concession for Metro Trains Melbourne (MTM) in 2009.

Leong says these operations are providing MTR with a foothold for further expansion in what he describes as "established markets in Britain, Australia, and Scandinavia."

Britain in particular is a major target for further expansion and the company is currently bidding for the Essex Thameside and Thameslink franchises. However, following the fiasco surrounding the award of the West Coast franchise, bidding for these franchises has been delayed.

"We have submitted our bid for Essex Thameside and Thameslink, and we are keeping up-to-date with what is going on with regard to the review," Leong says. "Of course there is a bit of uncertainty and we will follow whatever the results of the review are. However, this doesn't really compromise our position and we are enthusiastic to continue to follow opportunities in this market. As for other bids, there is nothing on the radar at the present time, but it is important for us to focus on what we have already identified and the markets that we already know. In all of these markets there are minimal prospects that can be pursued at any one time."

In addition to being a source of profits for MTR, Leong says that its external operations are also increasing global brand awareness as well as benefiting human resources.

He says MTR employees from Hong Kong are working in a variety of positions overseas - from CEOs and CFOs to project and asset management staff. Leong says MTR's objective for these operations is to achieve a "combination of good local talent which is supported by staff from Hong Kong."

And while exporting expertise is aiding these companies, ideas and different ways of working are also flowing back to Hong Kong.

"One example is the use of visualisation by MTM where they are using a prediction model to visualise problems and identify solutions to maintenance issues encountered at depots," Leong says. "We are now in the process of converting this idea and way of working back into our domestic operations."

While profits generated from external ventures are yet to match revenues as a proportion of the company's overall results, exporting MTR's property development business model, a major source of profits in Hong Kong, might be one way of bridging the gap.

Leong says a similar property development project is underway at a station in Shenzhen. And with encouraging early signs, he is optimistic that this model can be replicated elsewhere, thus providing another potential benefit from taking its business beyond Hong Kong.

"Our primary objective is to create value for our shareholders," he says. "If opportunities arise in the markets we are currently operating in to use the know-how we have acquired from our domestic activities, we will certainly do so."

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