The Zhitong Finance App learned that UBS released a research report stating that it downgraded the MTR Corporation (00066) rating from “neutral” to “sale and sale” by 33% and 56%, respectively, to reflect delays in the recording of profits from development projects, lower rental income and increased interest expenses. The target price was drastically lowered from HK$38.1 to HK$21.4.

The bank believes that although MTR's stock price performance has been weak in the past two years, the pressure on its dividend growth has been underestimated. It believes that the current stock price still does not reflect these challenges; moreover, compared with Hong Kong developers, its dividends are relatively unattractive.

The bank estimates that the MTR Corporation's annual free cash flow after deducting dividends will be $8 billion from 2024 to 2028, and the compound annual growth rate of dividends per share from 2022 to 2025 is only 0.8%, which is lower than market expectations of 2.3%. The bank believes that the key problem is that the capital expenditure burden on railway projects has increased, and it is estimated that under basic circumstances, the capital expenditure of railway projects will reach 26 billion yuan per year over the next five years, three times that of 2018 to 2022.

The report points out that in an environment where residential properties are weak, the MTR's “rail+property” financing model may face challenges, and there is uncertainty about obtaining sufficient returns on the project. At the same time, the MTR's balance sheet is cautious. By 2028, the MTR's net balance ratio is expected to rise from 22% to 44%.