Shop rents awaiting structural recovery
MTR Corporation has frozen fares for two consecutive years in 2025/26 and 2026/27. Considering that median monthly household income declined 0.5% YoY in 6M26, a fare increase in 2027/28 will be difficult. On shop rents, newly agreed rents for the company's stations and shopping malls declined 6.7% and 5.5% in 1H26. Given that lease renewal cycles are typically three years, the company's average rent changes are broadly similar to Hong Kong overall. Hong Kong's retail sales value grew 8.3% YoY in 9M26, showing an accelerating upward trend (2H25: +5.4% YoY), with high-end retail recovery particularly evident. However, structurally, mid-to-low-end malls remain subject to structural diversion from Hong Kong residents' northbound consumption and e-commerce. When retail recovery will transmit to shop rent increases remains to be seen.
Earnings forecasts and valuation
MTR Corporation previously acted as agent for the construction of the Express Rail Link (Hong Kong section) and the Shatin to Central Link, both of which incurred cost overruns, requiring a settlement payment of HKD2.25bn to the government (dragging profit by HKD1.65bn). Accordingly, we lower our 2026 attributable NP forecast by 10% to HKD18.9bn, maintain our 2027 forecast at HKD11.6bn, and lower our 2028 forecast by 17% to HKD8.2bn, considering residential project progress. We maintain our SOTP-based valuation approach and lower our target price to HKD34.2 (previous: HKD35.1). For Hong Kong railway operations, we apply a DCF approach (WACC adjusted from 6.7% to 6.6%, terminal growth rate maintained at 3%); for investment properties, we use a capitalization approach (shops maintained at 4.1%); and for property development, our valuation is based on NAV. We maintain a 10% discount to the sum of these segment valuations.
Upside risks: better-than-we-expected patronage growth and fare hike, rent turn to growth, and better-than-we-expected property market turnover and prices. Downside risks: capex exceeding our expectations; sharper-than-we-expected rent declines; weaker-than-we-expected property market; taxation risks.