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1. Terms for a marriage 'will put MTR on right lines'

2. Rail merger will take 50 years to complete

3. Cartoon

4. Chinese Estates eyes $8.2b from property sales

1. Terms for a marriage 'will put MTR on right lines'
DENISE TSANG , SCMP 12 April 2006

Credit rating agencies and financial analysts say the terms of the $12 billion partial merger between the two rail companies are broadly reasonable for the MTR Corporation.

Based on limited information available on the merger terms, they see more positives in the deal, especially the removal of the uncertainty that has plagued the MTR Corp's share performance for more than two years.

The merger option, which will see the semi-privatised MTR Corp operate and maintain the Kowloon-Canton Railway Corporation's rail networks and buy the KCRC's property assets, effectively frees the MTR Corp from bearing any liabilities and debts of the KCRC's fledgling and loss-making rail lines.

In a submission to the Legislative Council outlining the deal, the government said the KCRC would retain $19.7 billion of debt, as well as certain other assets, such as cash and a shareholding in Octopus.

A source familiar with the talks said it was important for the deal to provide adequate cash flow for the KCRC's debt repayment. Another source believed the deal would add to the value of the MTR Corp's shares, saying that the KCRC's pretax earnings were on the rise.

Funding for the deal would come from a combination of debts and the MTR Corp's internal resources, the source said.

"Even if the MTR settles the $12 billion payment by borrowing, its debt to equity ratio won't exceed 60 per cent on the back of its healthy and stable financial health."

Standard & Poor's investor services director Mary Ellen Olson said: "We have seen some positive points, such as the long-term arrangement of the lease concession and the continuation of the rail-plus-property development business model."

She said Standard & Poor's was reviewing the credit ratings of the rail firms - among Asia's biggest and most frequent corporate debt issuers - pending a review on details of the deal and impending legislative changes to their operating agreements.

The MTR Corp and KCRC, owned 76 per cent and 100 per cent respectively by the government, enjoy the most favourable credit rating, equivalent to the city's sovereign credit rating.

Reaffirming the pair's A-plus rating on foreign currency and AA-minus on local currency, Ms Olson said a downgrading of their ratings would depend on various factors, such as whether the deal would raise the risk profile of the firms and how the MTR financed the deal.

The MTR Corp will spend $7.79 billion buying the KCRC's property assets, a portfolio of property development rights, investment properties and management contracts of investment properties.

"The property elements will allow the MTR to earn profits to offset the forgone revenue in fare cuts and subsidise start-up rail lines, which sounds a viable and reasonable arrangement," an analyst said.

SK Pang Surveyors managing director Pang Shiu-kee said it was difficult to value the portfolio.

"For example, the valuation of a shopping mall depends not just on floor area but also on terms of lease, such as duration of contract and share of profits."

2. Rail merger will take 50 years to complete
DENISE HUNG , SCMP 12 April 2006

The merger between the city's two rail operators will take a half-century to complete under an agreement signed yesterday by the MTR Corporation and the government.

Under the terms of the memorandum of understanding announced yesterday after two years of talks, the Kowloon-Canton Railway Corporation will keep ownership of the rail system for 50 years and lease it to the MTR Corp, which will operate the system.

The government will gain more than $40 billion from the merger, while passengers will benefit from fare cuts of up to 10 per cent.

The deal, aimed at creating a single, strong rail company while sweeping aside the KCRC's chronic management problems, could take effect next summer, provided the needed legislation passes smoothly.

The move is expected to enhance cross-border co-operation and enable the railway company to leverage on its existing operations in Beijing and Guangdong.

Chief Executive Donald Tsang Yam-kuen said the merger would "bring tremendous benefits to the community".

"The travelling public will get immediate benefit from the fare reduction on day one of the merger. The integration of the two rail systems will also bring more convenience to passengers through better interchange arrangements."

Equally glowing was transport minister Sarah Liao Sau-tung, who said the merger would "create a world-class rail company with enhanced potential for expansion into the mainland and overseas market".

But critics questioned the length of the transition period.

Lawmaker Andrew Cheng Kar-foo said 50 years was too long when franchises usually lasted for 20-30 years. "I will ask the government to explain that today."

Under the financial terms, the MTR Corp will make an up-front payment of $12.04 billion to buy the KCRC's properties and for the rail lease and will pay an annual rent of $750 million for the 50 years.

The government will enjoy a revenue share from the fourth year of the transition period.

MTR Corp chairman Raymond Chien Kuo-fung said 650 to 700 non-frontline jobs would be cut, but 1,300 extra jobs would become available with the introduction of new projects including the planned Sha Tin-Central line.

He said "synergies" from the merger would save $400 to $500 million a year from the third year.

Passengers will enjoy fare cuts of 5 per cent on medium-distance routes and 10 per cent on longer routes, while all Octopus card users will save 20 cents a trip. Extra charges now paid by passengers switching between railways will cease the day the deal takes effect.

Analysts said it was a good deal for the MTR Corp, which would increase its land reserve with low risk as it would not have to pay a land premium for the acquired property - which would be paid by the developers. They also said there seemed to be no evidence the government was selling its assets too cheaply.

Dr Liao said it was a fair and balanced package and the strengths of the MTR Corp and KCRC would complement each other.

If there is general support for the package, the government will table amendment bills to the two railway ordinances this summer and hopes they can be passed by legislators early next year. The deal will then go to the MTR Corp board and shareholders for approval.

KCRC chairman Michael Tien Puk-sun - fresh from a management crisis that saw him offer to resign - said it seemed KCRC staff would be affected "and of course I am very concerned about that".

ut he said frontline workers should not be worried. "The number of jobs created is almost double that of the number of job losses."

3. Cartoon
SCMP, 12 April 2006

4. Chinese Estates eyes $8.2b from property sales
FOSTER WONG , SCMP 12 April 2006

Chinese Estates Holdings expects to make as much as $8.2 billion from the sale of two key residential projects to be launched this year as it looks to step up property sales to fuel earnings growth.

The medium-sized developer aims to launch the 652-unit phase one of the Tai Yuen Street redevelopment in Wan Chai in the third quarter, with the management hoping to book between $2.7 billion and $3.2 billion revenue in its accounts this year from the project.

It will also receive between $4.2 billion and $5 billion in sales revenue from the 754-unit phase one of the Avenida Wai Long project on Taipa in Macau, which will be launched in the third quarter as well. However, this revenue will not be booked into its accounts until 2008.

"Property sales will only be one of the earnings drivers this year, while we also see a brisker outlook for our retail properties," Chinese Estates chief executive and executive director Joseph Lau Luen-hung said.

Chinese Estates owns 1.05 million square feet of prime retail space, mainly in Causeway Bay and Tsim Sha Tsui. It expects the repackaging and subdividing of space in its flagship shopping centres - Silvercord in Tsim Sha Tsui and Windsor House and Excelsior Plaza in Causeway Bay - into smaller outlets will boost rental revenue of the three properties five times when work is completed by 2007.

The developer's bullish outlook for this year came after it posted a 16.6 per cent drop in its core earnings to $1.11 billion for last year. The core earnings excluded all the non-cash gains, including a $4.98 billion revaluation surplus on investment properties.

Including those gains, earnings soared 280 per cent to $6.15 billion.

Property sales plunged 66.2 per cent to $130 million because the firm could not book the sale of the Indihome residential project in Tsuen Wan until this year.

Rental income grew just 3.5 per cent to $688 million, leading to a 56.7 per cent slump in turnover to $2.27 billion.

The company's gearing climbed to 47 per cent by the end of last year from 32.3 per cent in 2004, but the management said it was under no immediate pressure to raise funds from the market.

A final dividend of 12 cents per share was declared, up from 11 cents a year earlier.

Shares of Chinese Estates rose 3.39 per cent to $10.65 yesterday. The stock has climbed 40.13 per cent this year.