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1. KCRC chief attacks MTRC's business model

1. KCRC chief attacks MTRC's business model
DENISE TSANG, SCMP 9 June 2003

Kowloon-Canton Railway Corp (KCRC) chief executive Michael Tien Puk-sun has questioned the property-based business model for rail operators, saying it does not provide sustainable profits.

He argued that property development was higher risk, which would keep shareholders' expected returns and train fares high, and was in turn unfavourable to Hong Kong.

He has in effect criticised MTR Corp's (MTRC) established business model which relies heavily on profits from granting land development rights along its rail lines to fund hefty railway construction costs.

The semi-privatised firm's business model is different from the government-owned KCRC, with KCRC's funding coming largely from the public and only a small part of its profits from property development and rental income.

"I don't agree with a business model relying on property development profits," Mr Tien told the South China Morning Post.

"I prefer a pure transport company with high and stable dividend payout. In this case, the company doesn't need to earn a lot of profits, but it still has a stable profit stream.

"I think KCRC and MTRC can achieve this in the long run. It will be good for their shareholders and passengers."

Key to the sustainability of KCRC and MTRC's profits was population growth, rather than property development, Mr Tien argued.

"People living above train stations are fans of railways. With the population expected to grow to eight million, the influx of immigrants and new town development, the prospect of railways is bright."

Although the government is pushing through a rail-led transportation policy, analysts said rail firms faced punishing competition from other modes of transport, in particular buses.

Last year, MTRC derived 91 per cent of its net profit from property development and the rest from its railway operations, while KCRC earned 62.6 per cent from railway and the rest from investment income and property.

Analysts said the viability of MTRC's business model was called into question as deflation deepened, the property market slumped and the government shifted its land and housing policies. Last year the government signalled it would tighten the granting of land for rail-related housing developments in an effort to reduce the negative impact of an oversupply of flats on the property market. Chief Secretary Donald Tsang Yam-kuen said: "We should not merely consider the granting of land purely from the perspective of transport, but also from the perspective of the property market."

Mr Tien said property would continue to be MTRC's profit growth locomotive in the next seven or eight years, but he doubted its prospects beyond that period. "In the longer term, there is a concern over MTRC's prospects as existing property projects will be finished and it will be left with a few rail lines. As it hasn't got new, large-scale rail projects, it doesn't have as many growth stories as we do."

In the next six years, KCRC will invest $57 billion in rail projects such as East Rail extensions in Ma On Shan and Tsim Sha Tsui, the Lok Ma Chau spur line and Sha Tin-Central rail link. This meant a period of tight cash flow and higher debts at KCRC, Mr Tien said.

The time lag between MTRC and KCRC's growth prospects provided a case to merge the two companies, he said. "I look at the interests of both and personally I think they should be merged so that they can complement each other."