The Zhitong Finance App learned that UBS released a research report stating that it gave MTR Corporation (00066) a “sell” rating, with a target price of HK$25, based on an estimate of HK$35.8 per share in net asset value (NAV), and a 30% discount. The bank is cautious about the MTR company's prospects. It believes that the huge capital expenditure on the North Ring Road may cause investors to pay attention to financing arrangements. At the same time, there is a risk that the company's leverage ratio will rise during the interest rate hike period, and the return of cash from land tenders may be further delayed.
The total capital expenditure of the Northern Ring Road could reach HK$111 billion
UBS indicated that the MTR Corporation has signed a project agreement with the Hong Kong Special Administrative Region Government for the second phase of the North Ring Road project. If the first and second phases of the project are calculated together and estimated at the July 2025 price level, the total capital expenditure is expected to reach HK$90 billion. However, the MTR Corporation has raised the capital expenditure for the first phase of the project by 25%, from HK$31 billion calculated at the July 2025 price level to HK$39 billion calculated at the price level for the first half of 2026.
Based on this, UBS predicts that based on the price level for the first half of 2026, the total capital expenditure of the Northern Ring Road may reach HK$111 billion, which is basically in line with the bank's previous forecast of HK$106 billion.
The government will grant 8 plots of land involving a total construction area of approximately 25 million square feet
Under the agreement, the HKSAR Government will grant 8 plots of land covering a total area of 46 hectares. If calculated at 5 times the land area ratio, it is equivalent to a total floor area of about 25 million square feet.
UBS pointed out that under the current “rail+property” model, MTR companies need to pay the government the land supplement price. The amount is calculated based on the full market value of the plot after the railway is completed. The deduction amount for the second phase of the project was HK$86.443 billion, equivalent to HK$3,500 per square foot, while the first phase was HK$3,000 per square foot. However, the price is still higher than the recent agricultural land conversion cost of HK$1,200 to HK$1,500 per square foot in the Kwu Tung and Hung Shui Kiu areas.
Land disposal may begin in 2028, and there is uncertainty about the cash return period
UBS anticipates that due to lack of farmland reserves, mainland developers may show strong interest in acquiring relevant land in the northern metropolitan area. The total floor area of these plots is equivalent to about 4 times the total floor area of land obtained by the developer from 2025 to 2026 so far.
The bank anticipates that the MTR Corporation may start disposing of these plots from 2028. Assuming a development cycle of 6 years, related projects are expected to be completed around the opening of the Northern Ring Road in 2034. UBS expects that the market's stock price reaction to this news will be basically the same, but investors may begin to pay attention to how the MTR company can raise funds for huge capital expenses.
UBS believes that the supply of land in the northern metropolitan area is abundant, and developers may prefer to use the “profit sharing” model to pay land prices in order to reduce development risks, causing the time for MTR companies to recover cash through land tenders further delayed. Coupled with the possibility that the company's leverage ratio will rise during the interest rate hike period, the bank remains cautious about the MTR company's prospects.