Item 4. Information on the Company.
History and Development of the Company
Overview
The Company is incorporated in Hong Kong with limited liability under the
Companies Ordinance of the laws of Hong Kong. The Financial Secretary
Incorporated holds approximately 76% of the shares of the Company in trust on
behalf of the Government. As at the end of May 2004, approximately 1.46% of the
shares of the Company were held on account of the Exchange Fund. The Exchange
Fund is a fund established under the Exchange Fund Ordinance (Cap. 66 of the
laws of Hong Kong) under the control of the Financial Secretary of Hong Kong. It
is used primarily for such purposes as the Financial Secretary thinks fit to
affect, either directly or indirectly, the exchange value of the currency of
Hong Kong and for other purposes incidental thereto. The Company's shares are
listed on the Hong Kong Stock Exchange. The Company's predecessor, Mass Transit
Railway Corporation ("MTRC"), was a statutory corporation wholly-owned by the
Government and was established in 1975 to construct and operate a mass transit
railway system in Hong Kong (the "MTR"). The MTR is comprised
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of the MTR Lines (consisting of the Kwun Tong Line, the Tsuen Wan Line, the
Island Line, the Tung Chung Line and the Tseung Kwan O Line) and the Airport
Express Line.
The Government announced in its budget speech on March 3, 1999 that it planned
to partially privatize MTRC through the sale of a minority interest of its
shares and a listing of its shares on the Hong Kong Stock Exchange. A key
element in the privatization process was the enactment on March 3, 2000 of the
new Mass Transit Railway Ordinance (the "MTR Ordinance"), which came into effect
on June 30, 2000. On the same day, the entire property, rights and liabilities
of MTRC were vested in the Company, which was incorporated on April 26, 2000. In
addition, under the MTR Ordinance, the Company was granted the franchise for an
initial period of 50 years (which may be extended) to operate and develop the
MTR, subject to the terms and conditions contained in the operating agreement,
dated June 30, 2000, between the Government and the Company (the "Operating
Agreement").
On October 5, 2000, The Financial Secretary Incorporated, on behalf of the
Government, completed its offer of 1,000,000,000 shares of the Company. As a
result of the offer, the Government's 100% shareholding in the Company was
reduced to 80%. On November 1, 2000, The Financial Secretary Incorporated, on
behalf of the Government, completed the sale of an additional 150,000,000 shares
pursuant to an over-allotment option granted to the underwriters of the share
offer. As a result, the Government's shareholding was further reduced to
approximately 77%. Following a series of issuances of scrip dividends, the
exercise of share options, loyalty bonus share transfers from the Government and
share grants to the Company's employees by the Government since the listing of
the Company's shares on the Hong Kong Stock Exchange, the Government's
shareholding was further reduced and was approximately 76% as of December 31,
2003.
Prior to July 1, 1997, Hong Kong was a Crown Colony of the United Kingdom. Since
July 1, 1997, the People's Republic of China (the "PRC") has exercised
sovereignty over Hong Kong, which has become a Special Administrative Region
("SAR") of the PRC. The basic policies of the PRC regarding Hong Kong are set
out in the Sino-British Joint Declaration between the Government of the United
Kingdom and the Government of the PRC signed on December 19, 1984 (the "Joint
Declaration"). These basic policies were adopted by the National People's
Congress of the PRC on April 4, 1990 and came into effect on July 1, 1997 (the
"Basic Law"). The Basic Law provides, among other things, that the Hong Kong SAR
will exercise a high degree of autonomy except in foreign and defense affairs,
that the previous capitalist system and way of life shall remain unchanged for
50 years and that the Government shall provide an appropriate economic and legal
environment for the maintenance of the status of Hong Kong as an international
financial center. Under the Basic Law, the Hong Kong SAR is vested with
executive, legislative and judicial power. Laws in existence as of June 30,
1997, as they may be amended by the Hong Kong SAR legislature, remain in force
except to the extent they contravene the Basic Law. In addition, the Basic Law
provides that the Hong Kong Dollar will remain fully convertible, and that Hong
Kong's current social freedoms, including freedom of speech, press, assembly,
travel and religion, are not to be affected.
The Company's registered office is located at MTR Tower, Telford Plaza, Kowloon
Bay, Hong Kong; telephone: 852-2993-2111. The Company's website address is
www.mtr.com.hk. The information on the Company's website is not a part of this
Annual Report. All references in this Annual Report to the Company are to MTRC
where appropriate.
Recent Developments
On January 15, 2004, the Company and the Shenzhen Municipal People's Government
entered into an agreement in principle, which sets out the principles upon which
the Company and the Shenzhen Municipal People's Government will negotiate an
authorized operating agreement under which a project
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company to be established by the Company in the PRC will have the right to
construct Phase 2 of Line 4 and operate Line 4, and to use the facilities of
Phase 1 of Line 4 for a term of 30 years. The agreement in principle also
provides that the project company will acquire property development rights along
Line 4 with an aggregate gross floor area of 31.2 million square feet. Line 4
will be a 13.1 mile double-track urban railway with 14 stations, and will
connect Huanggang, at the boundary between Hong Kong and Shenzhen, with Longhua
New Town in Shenzhen. Phase 1 of Line 4, which is an approximately 2.8 mile
section between Huanggang and Shouniangong, is currently under construction by
the Shenzhen Metro Company Ltd and will be operated by them initially. The
entire Line 4, which is expected to be operational by the end of 2008, will be
operated by the project company for a term of 30 years. The Company will
initially hold a 100% equity interest in the project company, and is committed
to holding directly or indirectly at least a 51% equity interest for the
duration of the project. The total investment for this project is expected to be
approximately Renminbi 6 billion (equivalent to HK$5.6 billion at an assumed
exchange rate of HK$0.938 to Renminbi 1.00 as of December 31, 2003).
Approximately 40% of the total project investment will be funded through an
equity investment by the Company in the project company, which will have a
registered capital of approximately Renminbi 2.4 billion (equivalent to HK$2.3
billion at an assumed exchange rate of HK$0.938 to Renminbi 1.00 as of December
31, 2003), and the balance of the project costs is expected to be funded through
non-recourse project financing denominated in Renminbi. The authorized operating
agreement is subject to approval by the National Development and Reform
Commission of the PRC.
On January 20, 2004, the Group, through the Company's wholly-owned subsidiary
MTR Corporation (C.I.) Limited, raised US$600 million through the offering
outside the United States of notes with a coupon rate of 4.75%, which are
unconditionally and irrevocably guaranteed by the Company and will mature in
January 2014. These notes are listed on the London Stock Exchange.
On February 24, 2004, the Government announced its invitation to the Company and
KCRC to commence discussions on the possible merger between the two companies,
with a view to concluding the discussions by August 31, 2004. The Company
intends to work closely with the Government and KCRC to structure and negotiate
this transaction as expeditiously as possible. However, there is no assurance
that the discussions between the Company, KCRC and the Government will result in
a merger. The Company believes that a merger implemented on acceptable terms
would be beneficial to all the shareholders and stakeholders of the Company as
it would provide an integrated regional and urban rail network for the people of
Hong Kong with greater efficiency, increased convenience and enhanced
connectivity and provide room for fare adjustments.
On February 26, 2004, the Government agreed to extend the scrip dividend
arrangement to each of the Company's three fiscal years ending December 31,
2006. Under the scrip dividend arrangement, the Government has undertaken to
elect to receive its entitlement to dividends in scrip form in such an amount as
to ensure that a maximum of 50% of the total dividend paid by the Company in
respect of the relevant fiscal year will be paid in the form of cash.
On April 19, 2004, the Company and two entities wholly owned by the Beijing
Municipal People's Government, Beijing Infrastructure Investment Co. Ltd. and
Beijing Capital Group, entered into a memorandum of understanding, which sets
out the intention of the parties to form a joint venture in the form of a
public-private partnership for the construction and operation of the proposed
Beijing Metro Line 4. The Beijing Metro Line 4 will be a 17.8 mile underground
metro line running from South Fourth Ring Road (Majialou Station) to north of
the Summer Xuan Sun Wu, Xi Cheng and Hai Diang districts of Beijing and will be
the main north-south traffic line of Beijing City. The Beijing Metro Line 4 is
also one of the major infrastructure projects for the 2008 Olympic Games to be
held in Beijing and is expected to open for services before the games commence.
The total investment for the Beijing Metro Line 4 project is expected to be
about Renminbi 16 billion (equivalent to HK$15 billion at an assumed exchange
rate of
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HK$0.938 to Renminbi 1.00 as of December 31, 2003). Under the contemplated
public-private partnership structure, subject to further assessment of the
project and negotiation of the terms of the final agreement, the Company's share
of the investment in the project is expected not to exceed Renminbi 2.4 billion
(equivalent to HK$2.3 billion at an assumed exchange rate of HK$0.938 to
Renminbi 1.00 as of December 31, 2003).
Capital Expenditures and Divestitures
Airport Railway
As part of the major infrastructure development strategy announced in 1994 known
as the Ports and Airport Development Strategy, a new international airport at
Chek Lap Kok (the "Hong Kong International Airport") and related new roads and
infrastructure, including the Tung Chung Line and the Airport Express Line, were
constructed. The Hong Kong International Airport, the Tung Chung Line and the
Airport Express Line began operations in mid-1998.
The Airport Railway Agreement was entered into between the Company and the
Government in July 1995 (the "Airport Railway Agreement"). Summaries of certain
provisions of the Airport Railway Agreement are set forth under the caption "The
Airport Railway - Airport Railway Agreement" in the Company's Annual Report on
Form 20-F for the fiscal year ended December 31, 1997. Such summaries do not
purport to be complete and are subject to, and qualified in their entirety by
reference to, the provisions of the Airport Railway Agreement, a copy of which
has been filed as an exhibit to the Company's Annual Report on Form 20-F for the
fiscal year ended December 31, 1995.
In 2003, the Company achieved a significant network enhancement of the Tung
Chung Line and the Airport Express Line through the completion of the
four-tracking of these lines between the Lai King and Olympic stations and the
opening of the new Nam Cheong station for the Tung Chung Line. The completion of
the four-tracking project allows trains of the Airport Express Line and the Tung
Chung Line to operate on separate tracks for 2.8 miles, which is expected to
increase efficiencies and enabled the successful opening of the new interchange
stations at Nam Cheong and Mei Foo with the KCRC West Rail.
In 2003, the Company substantially completed negotiations and the preliminary
design for a new end station of the Airport Express Line to be constructed at
the Hong Kong International Airport. This new station is designed to serve the
proposed AsiaWorld-Expo development and, subject to the conclusion of a final
agreement, is expected to be completed by the end of 2005.
Quarry Bay Congestion Relief Works
The Quarry Bay Congestion Relief Works (the "QBR") was completed in September
2001 within budget and at a cost to the Company of HK$2.8 billion. The QBR has
reduced the time and increased the convenience for interchanging between
previously the Kwun Tong Line and now the Tseung Kwan O Line and the Island
Line. The QBR involved extensive rock tunneling, laying new track and building
two additional platforms in the existing North Point station.
Tseung Kwan O Extension Project
The Tseung Kwan O Extension Project (the "TKE") was opened to the public on
August 18, 2002 at a cost to the Company of approximately HK$16 billion,
compared to the original estimate of HK$30.5 billion in 1997, and over four
months ahead of the original schedule.
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The Tseung Kwan O Line is 6.7 route miles in length and has seven stations and
runs between North Point and Po Lam. A new station, the Tseung Kwan O South
station, is expected to be added in the future. The Tseung Kwan O Line provides
two interchange stations at Yau Tong and Tiu Keng Leng to facilitate convenient
cross-platform interchange with the Kwun Tong Line. In addition, two interchange
stations at Quarry Bay and North Point help facilitate convenient cross-platform
interchange with the Island Line.
Disneyland Resort Line
On July 24, 2002, the Company entered into a project agreement with the
Government relating to the financing, design, construction, operation and
maintenance of the Disneyland Resort Line (previously named Penny's Bay Rail
Link). When completed, the Disneyland Resort Line will provide a rail-shuttle
service between the Tung Chung Line at Sunny Bay (previously named Yam O) and
the new Hong Kong Disneyland theme park, which is expected to open in 2005 or
early 2006. The project involves approximately 2.17 new route miles and two new
stations.
The Government has previously acknowledged that the Company will require an
appropriate commercial rate of return on its investment in any new railway
project, which the Government has previously recognized would ordinarily be
between 1% and 3% above the estimated weighted average cost of capital of the
Company, and that financial and other support from the Government may be
required with respect to any new railway project. In order to provide assistance
in respect of the Disneyland Resort Line project, the Government agreed to
ensure that any claim for or entitlement to (as against the Company) such amount
of dividends representing the Government's beneficial entitlement to cash
dividends in respect of the financial year ended December 31, 2002 and
thereafter as is equivalent to the "funding gap" will be waived as against the
Company. For this purpose, the "funding gap" means a net present value amount
(as at the end of 2001) of HK$798 million, calculated using a discount rate of
11.25% (being the expected rate of return on the project), as more particularly
defined in the project agreement for the Penny's Bay Rail Link (now known as the
Disneyland Resort Line). Together with the Government's assistance, the rate of
return on the Disneyland Resort Line project is expected to be approximately
11.25% per annum. The Government has waived HK$219 million and HK$675 million of
its entitlement to cash dividends declared and payable by the Company to the
Government in 2002 and 2003, respectively.
As of December 31, 2003, the Company had awarded all of the civil engineering
and electrical and mechanical contracts for the Disneyland Resort Line project.
Rather than purchase new rolling stock for the line, the Company has decided to
pursue the more cost-effective route of converting existing trains.
Work on the Disneyland Resort Line made substantial progress in 2003. Throughout
2003, all major civil and electrical and mechanical contracts were either
generally on or ahead of schedule for both the line itself and the two stations,
one at the Disneyland theme park and one at Sunny Bay in North East Lantau, the
interchange for the Tung Chung Line. The Company expects to complete this
project and have it ready for service by July 2005 and within the original
budget estimate of HK$2 billion. The Company had cumulative expenditures of
HK$285 million as of December 31, 2002 and HK$883 million as of December 31,
2003 on this project, and had authorized outstanding commitments on contracts
related to this project totaling HK$446 million as of December 31, 2003. After
taking into account the waiver by the Government of HK$219 million and HK$675
million of its entitlement to cash dividends declared and payable by the Company
to the Government in 2002 and 2003, respectively, the net balance of the railway
construction in progress relating to this project was zero as of December 31,
2003.
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Tung Chung Cable Car
In July 2002, the Government awarded to the Company, on a provisional basis, a
30-year franchise to construct and operate a cable car system to link Tung Chung
with Ngong Ping, site of the Po Lin Monastery and the statue of Buddha. The
approximately 17 minute cable car ride will rise 400 meters above sea level and
offer views over Tung Chung Valley, the Hong Kong International Airport and out
to sea as far as the Macau Special Administrative Region. The Tung Chung Cable
Car project is budgeted to cost HK$950 million and is expected to commence
operations in early 2006. In addition, the total costs of works ancillary to the
Tung Chung Cable Car project to be performed by the Company on behalf of the
Government under entrustment agreements are approximately HK$100 million and
will be funded by the Government. Following the enactment of the Tung Chung
Cable Car Ordinance in June 2003, the Company entered an intensive period of
consultation with the Government and other stakeholders. On November 19, 2003,
the Company entered into a formal project agreement with the Government to
develop, on a build, operate and transfer basis, the Tung Chung Cable Car system
under a franchise granted by the Government for a period of 30 years commencing
on December 24, 2003. In November 2003, the Government also signed the
entrustment agreements for related works at Ngong Ping that include a landscaped
piazza and a public transport interchange, together with a private treaty grant
for a period of 30 years for a theme village adjacent to the Ngong Ping
terminal. The environmental permits for the cable car and the stream diversion
were also granted in November 2003, and subsequently the contract for the
building and civil engineering works was awarded. Construction commenced in
December 2003.
The Company had cumulative expenditures of HK$17 million as of December 31, 2002
and HK$137 million as of December 31, 2003 on this project and had authorized
outstanding commitments on contracts related to this project totaling HK$495
million as of December 31, 2003.
Island Line Extensions
The West Island Line was initially proposed to extend the network beyond Sheung
Wan in two phases: first to University Station and Sai Ying Pun by 2012 and then
later to Kennedy Town, subject to the Government's decision on further
development in this area. The Company submitted financial proposals to the
Government on the West Island Line in April 2002.
The South Island Line is considered by the Company to be a further natural
extension of the network and a pre-feasibility proposal was submitted to the
Government in June 2002. The proposed South Island Line will run from South
Horizons on Ap Lei Chau via Lei Tung to Wong Chuk Hang then through Ocean Park
with a potential station at Happy Valley to interchange stations with the Island
Line at Wan Chai and Admiralty.
On January 21, 2003, the Government requested the Company to proceed with the
planning on the first phase of the West Island Line and the South Island Line.
The Company commenced a feasibility study of this project in mid-2003 and
submitted a project proposal to the Government at the end of March 2004. The
project proposal seeks to achieve a better integration of the West Island Line
and the South Island Line with the existing network. Pursuant to the project
proposal, the Island Line will be extended from Sheung Wan station to a new
interchange station at Sai Ying Pun with the West Island Line which will run via
5 intermediate stations (University, Kennedy Town, Cyberport, Wah Fu and
Aberdeen) to another interchange station with the South Island Line at Wong Chuk
Hang.
The maximum aggregate cost for both the West Island Line and South Island Line
is estimated to be approximately HK$16.5 billion at December 2003 prices. The
commercial feasibility of this project will require direct funding support from
the Government in an amount of approximately HK$7.2 billion. Subject to reaching
an agreement with the Government in 2004, the Company intends to commence
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construction in 2005 and to commence operations of both the West Island Line and
the South Island Line in 2009/2010.
Other Projects
On January 21, 2003, the Executive Council of the Hong Kong Special
Administrative Region (the "Executive Council") decided that completion of the
North Island Link will be postponed until after 2016. The North Island Link is
formed by the extension of the Tung Chung Line at Hong Kong station to connect
with the Island Line at Fortress Hill. The Company agrees with the Government's
decision to defer completion of the North Island Link, particularly in light of
the reduced population growth forecast for Hong Kong and the already adequate
capacity of our railway network for serving the northern part of Hong Kong
Island and our cross-harbor customers.
In February 2004, the Company submitted a proposal for an extension of the Kwun
Tong Line from Yau Ma Tei station to Whampoa as requested by the Government in
November 2003.
In addition to the projects described above, the Company has launched a number
of significant projects intended to enhance the services it provides, including
MTR station improvement and modification programs, installation of platform
screen doors, an integrated station management system and West Rail Interface
Works among others. See "- Business Overview - Capital Expenditures".
Financing of the projects is provided by funds generated from railway and
related operations, property development profits and debt financing, except that
the commercial feasibility of the West Island Line and South Island Line will
require direct funding support from the Government in an amount of approximately
HK$7.2 billion. In addition, the Government has agreed to provide financial
assistance in respect of the Disneyland Resort Line as described under "-Capital
Expenditures and Divestitures - Disneyland Resort Line" above.
Divestitures
The Company did not undertake any significant divestitures during the three-year
period ended December 31, 2003.
Business Overview
General
In 2003, the MTR Lines carried a total of 770 million passengers, or an average
of 2.24 million passengers per weekday, and the Airport Express Line carried 6.8
million passengers, or a daily average of 19,000 passengers. In conjunction with
its construction and operation of the MTR, the Company is also involved in the
development and sale of residential and commercial properties with various
third-party developers and manages, and in some cases owns certain developed
properties. The Company also leases advertising and retail space and provides
other services within the MTR network. In addition, the Company's subsidiary,
Octopus Cards Limited, operates the Octopus smart card system which the Company
uses to collect the majority of its fare revenue. In recent years, the Company
has also been undertaking consultancy services in railway operations, project
management and construction, property management and maintenance management.
More recently, the Company established TraxComm Limited, a wholly-owned
subsidiary through which the Company provides fixed-line telecommunication
network services.
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The Railway System
MTR Lines and the Airport Express Line
The MTR serves commuters and travelers to the Hong Kong International Airport
through a 54.5 route miles network with 50 stations, and is comprised of six
interconnecting lines: (1) the Kwun Tong Line, the Tsuen Wan Line, the Island
Line, the Tung Chung Line, and the Tseung Kwan O Line, which collectively form
the MTR Lines, and (2) the Airport Express Line.
The MTR Lines run along the north side of Hong Kong Island, under Victoria
Harbour, through Kowloon, into the New Territories, to Tsing Yi via the Rambler
Channel Bridge, through the Tsing Ma Bridge and Kap Shui Mun Bridge and along
the north side of Lantau Island to Tung Chung. The MTR Lines include a route
length of 50 miles, 49 stations and three cross-harbor tunnels (including the
rail element in the Eastern Harbour Crossing). There are five depots for train
stabling and maintenance (one of which is shared with the Airport Express Line).
The Kwun Tong Line, which commenced operations in 1979, extends from Yau Ma Tei
in mid-Kowloon, through east Kowloon to Tiu Keng Leng, while the East Harbour
Crossing to North Point on Hong Kong Island is now a part of the Tseung Kwan O
Line. There are interchange facilities with the Tsuen Wan Line at Yau Ma Tei
station, Mong Kok station and Prince Edward station, and with the Tseung Kwan O
Line at Yau Tong station and Tiu Keng Leng station. There is also an interchange
facility at Kowloon Tong station with the Kowloon-Canton Railway (the "KCR"), a
suburban railway wholly-owned by the Government through KCRC. The Kwun Tong Line
is 9.8 route miles in length, of which 8.0 miles are underground. There are 11
underground and four above-ground stations, including the interchange stations,
and a depot at Kowloon Bay.
The Tsuen Wan Line, which commenced operations in 1982, runs from the downtown
business district in Central on Hong Kong Island, under the harbor to Tsim Sha
Tsui in Kowloon, and then up the major commercial and residential Nathan Road
corridor to Tsuen Wan in the New Territories. There are interchange facilities
with the Kwun Tong Line at Yau Ma Tei station, Mong Kok station and Prince
Edward station, with the Island Line at Admiralty station and Central station,
with the Tung Chung Line at Lai King station and Central station and with the
Airport Express Line at Central station and with the West Rail of KCRC at Mei
Foo station. The Tsuen Wan Line is 10.5 route miles in length, of which 8.6
miles are underground, and has 12 underground and four above-ground stations and
a depot at Tsuen Wan.
The Island Line, which commenced operations in 1985, runs from Sheung Wan in
western Hong Kong Island through the central business district to the commercial
and residential areas of eastern Hong Kong Island ending at Chai Wan. There are
interchange facilities with the Tsuen Wan Line at Admiralty station and Central
station, with the Tseung Kwan O Line at North Point station and Quarry Bay
station and with the Tung Chung and Airport Express Lines at Central station.
The Island Line is 8.3 route miles in length, of which 7.0 miles are
underground, and has 12 underground and two above-ground stations, including the
interchange stations, and a depot at Chai Wan.
The Tung Chung Line, which commenced operations in 1998, runs from Central on
Hong Kong Island to Tung Chung on Lantau Island. The Tung Chung Line consists of
19.4 route miles, of which 5.6 miles are underground and 13.8 miles are above
ground. It has three underground, one partially underground and three above
ground stations with a depot at Siu Ho Wan (which is shared with the Airport
Express Line). With its parallel route along the Nathan Road corridor, the Tung
Chung Line provides relief to the heavily congested Tsuen Wan Line, and there
are interchange facilities with the Tsuen Wan Line at Lai King station and Hong
Kong station, with the Island Line at Hong Kong station,
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with the Airport Express Line at Hong Kong station, Kowloon station and Tsing Yi
station and with the West Rail of KCRC at the new Nam Cheong station. The Tung
Chung Line was constructed in conjunction with the infrastructure projects
associated with the Hong Kong International Airport, and for most of its length
it either shares its track with, or runs parallel to, the Airport Express Line.
In order to facilitate the growth of new communities on Northern Lantau Island
and west Kowloon, the Tung Chung Line is designed to permit interchange with
future railway lines to the northwest New Territories and other parts of
Kowloon.
The Airport Express Line, which commenced operations in 1998, connects the
Airport on Lantau Island with the Tsing Yi station, Kowloon station and Hong
Kong station. The Airport Express Line consists of 21.9 route miles (which
includes the track shared with the Tung Chung Line), of which 4.7 miles are
underground and 17.2 miles are above ground. It has two underground and two
above ground stations and a depot at Siu Ho Wan (which is shared with the Tung
Chung Line). There are interchange facilities with the Tung Chung Line at Hong
Kong station, Kowloon station and Tsing Yi station, and with the Island Line at
Hong Kong station. The passenger cars are specially designed for comfortable
travel with high quality business-class style seating and dedicated baggage
space. Train platforms are conveniently located with an integrated
transportation system adjacent to the passenger terminal building at the Hong
Kong International Airport. In addition, the Company provides at the Hong Kong
station and Kowloon station an in-town check-in service, enabling passengers to
check-in for flights, receive boarding passes and check-in baggage at any time
up to 90 minutes before their scheduled departure time on the same day of their
flight departure. This service is provided by nine airlines and baggage handling
agents under agreements with the Company.
The Tseung Kwan O Line, which commenced operations in 2002, runs from Po Lam in
Tseung Kwan O new town through the Eastern Harbour Crossing, connecting with the
existing Quarry Bay and North Point stations of the Island Line and includes a
branch to a depot and future Tseung Kwan O South station. There are interchange
facilities with the Kwun Tong Line at two new stations in Yau Tong and Tiu Keng
Leng, and with the Island Line at Quarry Bay and North Point. The Tseung Kwan O
Line is 7.8 underground route miles in length and has three partially
underground stations and two above ground stations, excluding the interchange
stations with the Island Line, and one depot at Tseung Kwan O (Area 86). It is
expected that a sixth station, the Tseung Kwan O South station, which is to be
located adjacent to the Tseung Kwan O (Area 86) depot, will be added in the
future.
From time to time, the Company studies possible extensions of its existing
system in light of the reasonable future public transportation requirements of
Hong Kong. The Company has the statutory authority to operate its own feeder bus
services to the MTR stations but does not currently do so. Independent
franchises and operators currently provide franchised bus and minibus feeder
service routes to MTR stations. The Company also provides free hotel shuttle bus
services to Airport Express Line passengers. Such services are operating from
designated MTR stations to designated hotels and vice versa. In addition, at
Hong Kong, Kowloon and Tsing Yi stations there are car parking facilities
available for certain users of the MTR.
Construction
The construction of the MTR posed significant challenges as the system had to be
built according to tight program schedules in one of the most densely populated
urban centers in the world and often under difficult environmental conditions.
As a result, a variety of complex construction techniques were employed,
including bored tunnels, diaphragm walling, top down construction, chemical
ground treatment, immersed tube, cut and cover tunnels and viaducts.
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The Modified Initial System (which consisted of the portion of the MTR from Kwun
Tong to Central) was constructed first and was fully completed in 1980. This was
followed by the completion of the Tsuen Wan Extension (the portion of the MTR
from Tsuen Wan to Prince Edward) in 1982, the Island Line (the portion of the
MTR from Chai Wan to Sheung Wan) in 1986, the Tung Chung and the Airport Express
Lines in 1998 and the Tseung Kwan O Line in 2002. The Eastern Harbor Crossing,
which was built by a third party and extended the Kwun Tong Line across Victoria
Harbor to interchange with the Island Line, commenced operations in 1989 and is
now part of the Tseung Kwan O Line.
The Company employed contractors from Hong Kong as well as Japan, United
Kingdom, France and other countries. Individual contracts for the design and
construction of the MTR were awarded based on competitive international bidding.
The construction of the Kwun Tong, Tsuen Wan, Island and Tseung Kwan O Lines
(the "Urban Lines") collectively cost approximately HK$42.0 billion, while the
construction of the Tung Chung and Airport Express Lines collectively cost
approximately HK$35.1 billion.
Operations
The MTR usually operates seven days a week from approximately 6:00 a.m. to 1:00
a.m. (increased service may be available by prior press notice during special
holidays). The Urban Lines trains run approximately two minutes apart during
peak hours and approximately four minutes apart during off-peak hours. During
peak hours, Tung Chung Line trains run approximately 8 minutes apart between the
Tsing Yi and Tung Chung stations and 4 minutes apart between the Hong Kong and
Tsing Yi stations. During non-peak hours, Tung Chung Line trains run
approximately 10 minutes apart between the Hong Kong and Tung Chung stations.
Starting from March 15, 2004 Airport Express Line trains run approximately 12
minutes apart during peak and non-peak hours. Trains run at an average speed of
approximately 21 miles per hour for the Urban Lines and approximately 50 miles
per hour for the Tung Chung Line and the Airport Express Line. The duration of
each stop at a station is approximately 30 seconds for trains on the MTR Lines
and approximately 90 seconds for trains on the Airport Express Line. Scheduled
travel time for the Kwun Tong Line from Tiu Keng Leng to Yau Ma Tei is
approximately 27 minutes, for the Tsuen Wan Line from Tsuen Wan to Central is
approximately 30 minutes, for the Island Line from Sheung Wan to Chai Wan is 24
minutes, and for the Tseung Kwan O Line from Po Lam to North Point is
approximately 15 minutes. Scheduled travel time for the Tung Chung Line from
Tung Chung to Central, and for the Airport Express Line from the Hong Kong
International Airport, Lantau Island to Central, is approximately 23 minutes.
All trains and underground stations are air-conditioned to provide comfortable
travel conditions during Hong Kong's hot and humid summers. Trains on the MTR
Lines consist of eight-car passenger trains and each car has a capacity for 48
seated and approximately 265 standing passengers. This gives the Urban Lines a
maximum one-direction loading capacity of approximately 75,000 passengers per
hour. Airport Express Line trains currently consist of six-car passenger trains
and one luggage car. Each Airport Express Line passenger car consists of 64
seats, each fitted with video screens providing news, information and tourist
highlights.
Railway Operations
Automation, Computerized Facilities and Octopus Technology
The MTR makes extensive use of automated and computerized facilities and
equipment. Instead of lineside traffic signals to control train movement, MTR
trains are controlled and regulated automatically by computerized signals
transmitted through electronic track circuits, loops and beacons which read
train positions and regulate train speed and braking. The handling of
single-journey tickets has
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also been automated by the use of ticket issuing and collecting machines.
Moreover, the Company introduced a contactless smart card, commonly referred to
as the "Octopus" card, in September 1997, which completely replaced the magnetic
Common Stored Value Tickets ("CSVTs") previously used for multiple journeys as
of January 2, 1999.
The contactless smart card system improves efficiency and convenience in the
payment of fares and enables travellers to use a common fare card for most
public transportation services in Hong Kong, including buses, ferries and the
KCR as well as the MTR. As was the case with the CSVTs, fares are automatically
deducted from the Octopus cards at computerized exit gates. A new company,
Octopus Cards Limited, was formed to develop and operate the new Octopus payment
system. The Company owns 57.4% of the issued share capital of Octopus Cards
Limited, with the remaining 42.6% of the issued share capital collectively owned
by KCRC, KMB Public Bus Services Holdings Limited, Citybus Limited, New World
First Bus Services Limited and New World First Ferry Services Limited. Although
the Company holds 57.4% of the issued shares of Octopus Cards Limited, the
Company's voting rights at board meetings of Octopus Cards Limited are limited
to 49%. See Note 18 of Notes to the Financial Statements.
In September 1999, Octopus Cards Limited was reorganized into a separate
operating entity with its own organizational and manpower structure to allow it
to focus on expanding the use and applications of the technologies offered by
the Octopus cards. On April 20, 2000, Octopus Cards Limited received
authorization from the Hong Kong Monetary Authority to act as a deposit-taking
company for the principal purpose of issuing multi-purpose Octopus cards. The
authorization allows the Octopus cards to be used for a wider range of purposes,
including some that are non-transport related, with a view to enhancing
convenience for cardholders. On January 17, 2001, the shareholders of Octopus
Cards Limited agreed to operate under a new shareholders' agreement, which
maintained the existing voting arrangements, but changed the shareholding
arrangements and converted Octopus Cards Limited from a non-profit making entity
into a profit making entity. The new agreement offers Octopus Cards Limited
significant opportunities for expanding its business beyond transportation.
Octopus Cards Limited will, however, continue to have as its primary objective
the fulfillment of the ticketing requirements of all present and future
transport operators.
The Octopus cards have been widely accepted by customers, and as of December 31,
2003, approximately 10.4 million Octopus cards were in circulation. Passengers
using Octopus cards accounted for approximately 90% and 50% of average daily
patronage on the MTR Lines and the Airport Express Line, respectively, during
2003. The Company currently offers its customers additional Octopus-related
services, including allowing customers to add value to the Octopus card through
electronic funds transfer facilities located in all stations or autopay services
provided by customers' banks. The Octopus automatic add value services using
bank accounts or credit cards also expanded in 2003, with the number of these
automatic add value accounts growing by approximately 8% to over 411,500 as of
December 31, 2003.
In recent years, a large number of non-transportation applications have been
added to the Octopus system, including photocopiers at universities, various
kinds of vending machines and self-service kiosks, public swimming pools and
tennis courts, as well as retail chains like 7-Eleven convenience stores, Park'n
Shop stores, Watson's chemist stores, Pricerite stores, Circle K convenience
stores, the Caf de Coral restaurant chain, Daily Stop stores, Wellcome stores
and Ocean Empire stores. In addition, the use of Octopus cards for gate entry at
the Hong Kong Jockey Club racecourses at Happy Valley and Shatin has also been
successful. The Company has also extended the use of the Octopus cards to serve
as an identification card for access control in the Company's depots, stations
and residential projects, including Tierra Verde, The Waterfront, Island
Harbourview and Tung Chung Crescent. Octopus cards are also being used in school
campuses for attendance taking, as library cards, in making payments at tuck
shops and for school fees.
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In 2003, the Company and Octopus Cards Limited diversified their business into
international automatic fare collection consultancy services, when they were
awarded a series of contracts with Thales e-Transactions CGA ("Thales") to
create an automatic fare collection system on a national scale in the
Netherlands. The new automatic fare collection system in the Netherlands will
cover all modes of public transport, including train, bus, tram, metro and
ferries. The Company and Octopus Cards Limited will work with the East-West
e-Ticketing BV, consisting of Thales, Accenture and Vialis Verkeer & Mobiliteit
BV, to provide software and expertise in the operation of the new automatic fare
collection system.
Octopus Cards Limited continued to win a number of awards in 2003. These
include:
the Brand Leader Award in the Business Equipment and Services
Category Award in Superbrands Hong Kong 2003, awarded by
Superbrands,
the Best Practice Award for Simplicity 2003 awarded by Best
Practice Management,
the Enterprise Award in the DHL/SCMP Hong Kong Business Awards 2003, and
the Hong Kong Top Ten Brandnames Award 2003 awarded by The
Chinese Manufacturers' Association of Hong Kong.
In 2003, there were an average of 7.5 million Octopus transactions per day and
the average daily transaction value grew from HK$50 million in 2002 to HK$51
million in 2003. Further expansion of the use of the Octopus technology for
other modes of transportation and services in Hong Kong are constantly being
explored.
Maintenance
The Company has a program of regular repairs and maintenance of its plant and
equipment, as well as its civil structural assets, including tunnels, viaducts,
immersed tubes, bridges, stations and depot structures. The Company intends to
ensure and maintain a high standard of safety and reliability through this
program.
When not in use, passenger trains are stationed at maintenance depots for
cleaning and periodic inspections and maintenance. Every three years or after
trains running on the Urban Lines have traveled approximately 200,000 miles,
trains are overhauled at the Kowloon Bay depot. Trains running on the Tung Chung
and Airport Express Lines are overhauled only after they have traveled
approximately 310,000 miles, due to fewer station stops being made by these
trains and the more advanced technology installed on them. Preventive
maintenance and condition monitoring techniques are applied to achieve cost
efficiency.
Civil structural assets are visually inspected annually to ensure safe train
service. In-depth inspections are carried out at scheduled intervals, depending
on the category of the asset. In 1998, the Company commenced the adoption of the
laser scanning inspection system. This system provides high quality records for
engineering assessment and maintenance of tunnel structures. Repair works are
prioritized according to the engineering assessment and hazards posed to safety.
Routine maintenance and quick recovery actions to eliminate potential hazards
are carried out by special repair teams. Less critical problems are treated
according to planned project schedules.
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Insurance
The Company maintains insurance coverage at a level it considers to be adequate
and appropriate for the business it operates. In particular, the Company insures
against a variety of risks, including railway asset and property damage,
business interruption, third party liability, construction damage and employees'
compensation.
Until November 1997, all of the Company's insurance risks were placed in the
Hong Kong and international insurance markets. Since that time, the Company's
railway asset damage and business interruption ("MD & BI") risks have been
placed through Fasttrack Insurance Ltd. ("Fasttrack Insurance"), a wholly-owned
subsidiary incorporated in Bermuda as a captive insurance company.
Following several years in which Fasttrack Insurance retained the primary level
of cover with respect to the MD&BI risks and obtained reinsurance in excess of
the retention for up to a certain limit for each and every loss, starting from
May 31, 2003 the cover has been placed with Fasttrack Insurance without
Fasttrack Insurance obtaining any reinsurance. The decision for this insurance
arrangement has been taken based on the very low loss ratios for this category
of risks over many years and the existence of the Company's comprehensive and
well developed risk management and safety procedures. A recent risk management
survey by Willis Limited has demonstrated that the cover limit under the
insurance policy with Fasttrack Insurance of HK$500 million for each and every
loss is sufficient for MD&BI risks. The Company will pay Fasttrack Insurance
premiums with respect to such insurance cover. In addition, the Company has
renewed the separate cover for losses from terrorist attacks with Fasttrack
Insurance for another one-year period from May 31, 2004 to May 30, 2005, with
the same cover limit of an aggregate amount of HK$100 million. Having carried
out an analysis of the Company's claims history and the potential risks
associated with increased risk retention, the Company decided also to place its
third party liability insurance with Fasttrack with effect from December 1, 2003
to November 30, 2004. Fasttrack retained the primary level of cover in an amount
of HK$50 million with respect to the third party liability insurance and
obtained reinsurance in excess of the retention for up to a certain limit for
each and every loss in the international insurance markets.
Using Fasttrack Insurance as a captive insurance company has several advantages
over the approach adopted by the Company prior to November 1997. For example,
Fasttrack Insurance is able to retain profitable premium income that would
otherwise be paid to other insurers. Furthermore, by demonstrating within the
Company that, through Fasttrack Insurance, a significant level of risk is being
retained, it is possible to emphasize the importance of sound and effective
safety management standards.
Since its commencement of business in November 1997, Fasttrack Insurance has
generated a cumulative surplus resulting from underwriting profits and
investment income. As of December 31, 2003; this cumulative surplus together
with paid up capital amounted to HK$150 million.
Passengers and Seasonality of Patronage
From the Company's first full year of operation in 1980 up to and including
1996, there had been a continuous growth in the number of passengers using the
MTR. As a result of the Asian economic crisis in the second half of 1997 and the
resulting downturn in Hong Kong's economy, the MTR experienced a 0.6% decrease
in the number of passengers carried on the Urban Lines in 1997. This downward
trend in patronage on the MTR Lines continued over the next four years, when the
MTR experienced a 2.3% decrease to 794 million passengers carried in 1998, a
1.8% decrease to 779 million passengers carried in 1999, a 1.5% decrease to 767
million passengers carried in 2000 and a 1.2% decrease to 758 million passengers
carried in 2001. The downward trend was reversed in 2002, when total patronage
increased to 777 million passengers carried. The decrease in patronage through
2001 was mainly due to adverse
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economic conditions in Hong Kong, increased competition from bus operators, the
impact of the opening of the Western Harbor Crossing and road improvements in
West Kowloon, and the dramatic fall in tourists visiting Hong Kong, but was
partially offset by the commencement of operations of the Tung Chung Line in
mid-1998. The increase in patronage on the MTR Lines in 2002 was primarily due
to the opening of the Tseung Kwan O Line.
During the same period, patronage on the Airport Express Line increased from 4
million passengers in 1998 to approximately 10 million passengers in 1999 and
2000, but decreased to 9 million passengers in 2001 and 8.5 million passengers
in 2002. Patronage figures for the Airport Express Line were significantly lower
in 1998 because the Airport Express Line did not commence operations until July
6, 1998. The decreases in patronage on the Airport Express Line in 2001 and 2002
were primarily due to the elimination of the 10% fare discount and the tragic
events of September 11, 2001 in the United States, which continued to affect
overall air passenger traffic in 2002, and a weak economic environment. The
MTR's market share of all franchised public transportation boardings in Hong
Kong was 25.7% in 1998, 25.2% in 1999, 24.1% in 2000 and 23.5% in 2001 and 2002,
and its market share of cross-harbor boardings (excluding taxis, public light
buses and private cars) was 61.9% in 1998, 60.3% in 1999, 57.9% in 2000, 57.4%
in 2001 and 58.2% in 2002. Average MTR Lines weekday patronage was 2.33 million
in 1998, 2.28 million in 1999, 2.24 million in 2000, 2.23 million in 2001, and
2.26 million in 2002, and average Airport Express Line daily patronage was
21,900 in 1998, 28,500 in 1999, 28,300 in 2000, 24,700 in 2001 and 23,200 in
2002.
In 2003, the MTR carried a total of 770 million passengers on the MTR Lines and
6.8 million passengers on the Airport Express Line. The combined result
represented a 24.3% market share of all franchised public transportation
boardings in Hong Kong and a 58.7% market share of cross-harbor boardings
(excluding in each case taxis, public light buses and private cars). These
decreases in patronage were primarily due to the effects of the outbreak of
severe acute respiratory syndrome ("SARS") that commenced in early 2003 and
reached its peak in Hong Kong in March 2003. The SARS outbreak severely
decreased economic activity and adversely affected economic growth in Hong Kong
by, among other things, disrupting consumer spending and adversely affecting
tourist arrivals primarily in the first half of 2003. In particular, patronage
on the MTR Lines during the SARS outbreak was lower despite the additional
patronage attributable to the Tseung Kwan O Line, and patronage on the Airport
Express Line during the SARS outbreak was significantly lower compared to the
corresponding period in 2002. In the second half of 2003, patronage on both the
MTR Lines and Airport Express Line recovered substantially to the levels prior
to the SARS outbreak. In particular, after reaching a low of 1.8 million in
April 2003, average weekday patronage on the MTR Lines recovered to over 2.1
million in June 2003 and over 2.4 million in December 2003. Moreover, average
Airport Express Line daily patronage, after reaching a low of 9,200 in May 2003,
increased to 12,700 in June 2003 and 22,200 in December 2003. Patronage on the
Airport Express Line, however, continued to be adversely affected by the reduced
air passenger traffic resulting from the weak economic environment. Our market
share of the important cross-harbor trips increased from 58.2% to 58.7%,
primarily as a result of the Tseung Kwan O Line commencing operations in August
2002 and despite continued growth in competition from bus services. Average MTR
Lines weekday patronage in 2003 was 2.24 million, which was a decrease of 0.9%
from 2002. Average Airport Express Line daily patronage in 2003 was 18,700,
which was a decrease of 19.4% from 2002.
The Company expects the following factors to positively influence patronage and
market share:
the opening of the Tseung Kwan O Line in 2002 and
related new service areas for the MTR system;
the increase in the number of tourists from the Mainland of China;
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the "ride 10 get 1 free" promotion that has been extended to
October 3, 2004;
a number of marketing initiatives that were launched during
the first half of 2003, including the "ride 5 get cash
coupons" and "HK$2 holiday ride" promotions, as part of the
Company's SARS recovery program;
the promotion of the MTR network overseas, particularly in the
Mainland of China, establishing distribution channels to sell
MTR and Airport Express Line tickets in places which are among
the main sources of inbound tourism to Hong Kong;
the promotion of the Airport Express Line by Asia Miles upon the
purchase of a "2 Trips" Airport Express Line ticket, thereby
encouraging more usage of the Airport Express Line from frequent
travelers and raising brand awareness among international
travelers;
the improved linkage with the KCRC's West Rail following the
opening of the new interchange station at Nam Cheong and the
pedestrian link at Mei Foo station in December 2003; and
other improvements of linkages with other modes of transport,
intermodal fare discount schemes and fare savers.
Future passenger growth on the MTR Lines and the Airport Express Line will
depend on a variety of factors affecting consumer preferences among
transportation modes and frequency of travel, including the Hong Kong economy,
competition from alternative modes of public and private transportation as well
as demographic factors. Moreover, any future outbreak of SARS or any other
contagious disease for which there is no known cure or vaccine may adversely
affect our patronage. Patronage on the MTR has historically not been affected by
seasonality in any material respect. The Company continues to expect patronage
of the Airport Express Line to be affected by competition from franchised
airport buses, taxis, hotel shuttle buses, hotel guest cars and private cars.
Passengers traveling on the MTR Lines may interchange freely among the Kwun
Tong, Tsuen Wan, Island, Tung Chung and Tseung Kwan O Lines. As a result,
ridership numbers for these five lines are by necessity reported as a single
operating unit for the Company's internal reporting purposes.
The following table sets forth passenger growth and other operating data since
1999:
Year Ended December 31,
1999 2000 2001 2002(6) 2003(7)
Total number of passengers (in thousands)
- MTR Lines (1) 779,309 767,416 758,421 777,210 770,419
- Airport Express Line 10,396 10,349 9,022 8,457 6,849
Average number of passengers (in thousands)
- MTR Lines (1)(2) 2,284 2,240 2,231 2,261 2,240
- Airport Express Line (3) 29 28 25 23 19
Average passenger miles traveled (per
journey)
- MTR Lines (1) 4.6 4.5 4.6 4.7 4.8
- Airport Express Line 18.5 18.4 18.5 18.6 18.5
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Year Ended December 31,
1999 2000 2001 2002(6) 2003(7)
Average car occupancy
- MTR Lines (1) 61 61 58 57 53
- Airport Express Line 16 16 14 13 13
Market share
All movements (4) 25.2 % 24.1 % 23.5 % 23.5 % 24.3 %
Cross-harbor movements (4) 60.3 % 57.9 % 57.4 % 58.2 % 58.7 %
To/from the Hong Kong International Airport (5) 32.0 % 28.0 % 27.0 % 25.0 % 23.0 %
(1) MTR Lines are comprised of the Tsuen Wan Line, the Kwun
Tong Line, the Island Line and, since June 22, 1998,
the Tung Chung Line and, since August 18, 2002, the
Tseung Kwan O Line.
(2) Weekday average.
(3) Daily average.
(4) Market share represents the percentage of franchised public
transportation boardings in Hong Kong, which is comprised of
boardings on the MTR, franchised buses, trams, ferries, green
minibuses and the KCR throughout the territory (including
areas that the MTR does not serve), but excludes boardings on
taxis, public light buses and private cars for which no
reliable data are available.
(5) Market share represents the percentage of franchised public
transportation boardings in Hong Kong to and from the Hong
Kong International Airport.
(6) Includes results from the operation of the Tseung Kwan
O Line since August 18, 2002.
(7) Includes results from the full year operation of the Tseung Kwan O Line.
Fares
The Company establishes its own fares. While the Company's fares are currently
not subject to governmental approval, the Company must comply under the
Operating Agreement with a specified procedure before changing the level of any
fare, which requires the Company to: (1) consider the level of public acceptance
of any proposed change (based on passenger surveys), (2) consult the Transport
Advisory Committee (a body established to advise the Chief Executive of the Hong
Kong SAR (previously the Governor of Hong Kong) on transport policy in Hong
Kong) and the Legislative Council Panel on Transport, (3) notify the Transport
Advisory Committee and the Legislative Council Panel on Transport within a
reasonable period prior to the implementation of a new fare and (4) make a
public announcement of the new fares.
Historically, the Company has reviewed its fares annually with the objective of
making regular increases roughly in line with inflation, so that revenues are
sufficient to cover operating costs, debt servicing and depreciation of capital
expenditure and to provide an appropriate shareholder return. Prior to
increasing its fares, the Company first studies the prevailing competitive
position of the MTR and other public transportation alternatives and identifies
the segments of the public transportation market in which it is relatively more
or less competitive. The Company then evaluates various possible fare increases
for different market segments taking into account inflation, projected growth of
the Hong Kong economy and assumptions as to consumer price sensitivity. The
effects of alternative fare increases on patronage and fare revenue are then
assessed using data derived from previous fare changes. In addition, the Company
surveys customers and considers their views on possible fare increases.
The MTR's average annual fare increase from 1980 until the end of 2003 has been
5.6%, which is approximately the average annual increase in the Consumer Price
Index (A) for the same period but lower than the average Hong Kong payroll index
increase of 10.1% for the same period. In light of the unfavorable economic
conditions prevailing in Hong Kong during 1998, the Company decided to forgo a
fare increase for the Kwun Tong, Tsuen Wan, and Island Lines. Due to the
continued economic downturn and the general deflationary environment in Hong
Kong, the Company maintained the same general fare throughout 1999, 2000, 2001,
2002, and 2003 for the MTR Lines. The introductory promotional discount
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for the Airport Express Line was, however, reduced from 30% to 10% on July 3,
2000 and then discontinued entirely on July 1, 2001. The Company also decided to
withdraw the 30% staggered hours fare discount on July 2, 1999 and to collect
HK$0.10 per journey from each passenger using an Octopus card on the MTR
commencing July 3, 2000, to contribute towards the costs of installing platform
screen doors in 30 underground stations on the Urban Lines. Due to the continued
poor economic environment in Hong Kong, the Company decided not to implement the
2.3% fare increase, initially planned for April 2002. The Company did not
increase fares in 2003.
The basic MTR fare structure consists of thirteen different fare zones for the
MTR Lines and three different fare zones for the Airport Express Line. The fare
for any station-to-station movement depends on the distance between the zones
containing such stations and whether the journey involves crossing the Victoria
Harbour. The Company offers concessionary fares to senior citizens, students and
children. In addition, fare discounts are offered on certain feeder bus routes
and at selected stations on a trial basis.
Passengers using the Airport Express Line enjoy half fares for children, free
MTR connection (Octopus card users), free hotel shuttle bus services, round trip
discounts, free in-town check-in services and discounted car park rates. In
addition, passengers making same day return journeys on the Airport Express Line
travel free of charge on the return journey.
The Company is currently studying the details of the consultative paper on
public transport fares (the "Public Transport Fare Consultative Paper"), which
was issued by the Government on July 28, 2003. The Public Transport Fare
Consultative Paper discusses proposals to introduce a fare adjustment formula, a
trigger mechanism for fare adjustments and a cap on the maximum rate of fare
adjustments. Under these proposals, the Company would maintain its fare autonomy
and the fare adjustment formula would only serve as a guideline for the Company
in adjusting its fares. The Public Transport Fare Consultative Paper stresses
that any merger between the Company and KCRC would have a critical impact on the
proposed fare adjustment mechanism. The Company expects to continue discussions
with the Government on the Government's plan to develop a more objective and
transparent process for public transport fare adjustment, and the Company is
itself considering various fare adjustment mechanism alternatives in the best
interest of all the shareholders and stakeholders of the Company as part of the
merger study.
The following table sets forth the average fare paid per passenger trip on the
MTR Lines, and compares the percentage increase in the average fare with the
Consumer Price Index (A) for the periods indicated:
Year Ended December 31,
1999 2000 2001 2002 2003
Average fare(1) HK$ 6.67 HK$ 6.73 HK$ 6.81 HK$ 6.65 HK$ 6.57
Percentage increase (decrease) in
average fare 1.2 % 0.9 % 1.2 % (2.3 )% (1.2 )%
Consumer price index (A) (3.3 )% (3.0 )% (1.7 )% (3.2 )% (2.1 )%
(1) The average fare does not include the average fare for the
Airport Express Line, which was HK$43, HK$53, HK$63, HK$65,
HK$62 in 1999, 2000, 2001, 2002 and 2003, respectively. The
higher average fare for 1999 is mainly due to the longer
average journey traveled on the Tung Chung Line and the
elimination of the staggered hours discount. The higher
average fare for 2000 is mainly due to the additional HK$0.10
per ride charged since July 2000 for the platform screen
doors project. The higher average fare for 2001 is mainly due
to the full year effect of the additional HK$0.10 per ride
charged for the platform screen doors project. The decrease
of the average fare in 2002 and 2003 was mainly the result of
the "ride 10 get 1 free" promotional campaign on the MTR
Lines.
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Advertising, Kiosk Rental and Other Income
The Company derives revenue from the leasing of advertising media, kiosks and
bank outlets in MTR stations, and from the use of mobile telephones, pagers and
payphones within the MTR network. From time to time, the Company also derives
income from other passenger services, such as the sale of souvenir MTR tickets.
In addition, the opening of the Tung Chung and Airport Express Lines introduced
new businesses, such as car park operations.
To improve attractiveness to advertisers, the Company is actively introducing
new forms of advertising, including sticker advertising on train bodies and
station walls, as well as tunnel advertising launched in April 2004. A program
to convert 4-sheet advertising panels into larger 12-sheet advertising panels in
station concourses increased the number of concourse 12-sheet advertising panels
to 657 by May 2004.
During the second half of 2003, the Company introduced trackside plasma panels
to increase advertising revenue. A total of 68 plasma panels had been installed
in 15 stations in early 2004 and the Company has also started extending the
network of concourse plasma panels from 23 to 51 units. The Company also
enhanced customer service and raised advertising revenues by providing free
internet access at several stations. In particular, MTR internet access centres,
with advertising sponsorship, were erected in Central and Prince Edward
stations, with more MTR internet access centres planned for installation in
2004.
The Company has also entered into agreements with mobile telephone operators and
paging operators that provide telephone and paging coverage within the MTR
network. Currently, there are twelve mobile telephone networks operated by six
operators and 28 paging channels operated by five operators providing coverage
within the MTR network. In 2003, approximately 740 million minutes mobile phone
calls were made within the MTR system. Rental income from external mobile base
stations also provided a new source of income, with fifteen new sites completed
in 2003. In addition, the Company began installing in 2003 a local area network
to enable wireless broadband services which was launched on the Airport Express
Line in March 2004. The Company is also in the process of upgrading the existing
integrated radio system for mobile services to offer third generation mobile
telecommunications services within the MTR network by 2005. Revenue in 2003 from
the provision of telecommunication services within the MTR network amounted to
approximately HK$198 million.
In 2002, the Company formed TraxComm Limited, a wholly-owned subsidiary, to
develop a wholesale fixed-line telecommunications business based on the
Company's existing fiber-optic infrastructure. On June 2, 2003, the Office of
the Telecommunications Authority issued a fixed-line telecommunications license
to TraxComm Limited. In 2003, TraxComm Limited built and began to operate an
enhanced network, which runs alongside the existing fiber-optic network. Due to
the recent liberalization of the Hong Kong fixed-line telecommunications market,
TraxComm Limited has been able to attract a number of customers, despite its
relatively short operating history. For example, a major telecommunications
service provider that was recently granted a fixed-line network license by the
Office of the Telecommunications Authority has entered into a long-term contract
with TraxComm Limited, under which that telecommunications provider will use
TraxComm Limited's enhanced fiber-optic network as its backbone. Moreover, one
of the largest international direct dialing wholesale service providers in Hong
Kong, has begun migrating over 400 circuits of bandwidth to TraxComm Limited's
recently launched data network.
As of May 31, 2004, the Company owned approximately 190,547 square feet of
retail space within the MTR, comprising approximately 493 kiosks and mini-banks
that provide a wide range of goods and services, as well as the 62,205 square
feet Dickson Cyber Express, a large retail center at
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Kowloon station. There are also self-service concessions and vending machines
which provide a wide range of goods and services. As of May 31, 2004, the
occupancy rate for the Company's retail space was approximately 95%.
The Company, through its wholly-owned subsidiary MTR Travel Limited, operates a
travel service center located at Admiralty station that sells local and overseas
traveling tours and tickets. The travel service center also acts as a customer
service outlet, providing information on the MTR and selling MTR souvenirs.
The Company has provided consultancy services to a wide range of clients, such
as routing planners, operators, manufacturers, contractors and consultants as
well as to clients involved in the promotion and management of major capital
works projects. Assignments have been undertaken in Australia, the Mainland of
China, Hong Kong, India, Taiwan, Thailand, Philippines, Singapore, the United
Kingdom and the Netherlands. In 2000, the Company decided to extend its
consultancy services to include railway specific project management and
technical services.
In 2003, the Company's consultancy services continued to experience a
significant increase in revenue, as the Company continued to capitalize on
growing demand for its design, operations, maintenance, project management and
training services. In addition to winning contracts in major cities in the
Mainland of China, such as Shanghai, Tianjin, Nanjing, Shenzhen, Hangzhou,
Guangzhou, Chengdu and Beijing, the Company has also been awarded contracts in
Australia, India, Korea, Macau, New York, Singapore, Taiwan, Thailand, the
United Kingdom and the Netherlands. In Hong Kong, the Company provided services
to the Airport Authority under a three-year contract awarded in 2002 to maintain
the automated people mover used in the Hong Kong International Airport. In the
Netherlands, the Company and Octopus Cards Limited were awarded a series of
contracts with Thales to create an automatic fare collection system, which will
cover all modes of public transport, including train, bus, tram, metro and
ferries. The Company and Octopus Cards Limited are working with the East-West
e-Ticketing BV, consisting of Thales, Accenture and Vialis Verkeer & Mobiliteit
BV, to provide software and expertise in the operation of the new automatic fare
collection system. In India, the Company was awarded its first rail consultancy
contract to be funded by the International Bank for Reconstruction and
Development.
In February 2003, after an international competitive tender, the Company was
selected for the review of the feasibility study for Hangzhou Metro Line One, an
approximately 32.3 route miles urban metro serving the city center of Hangzhou,
one of the most scenic tourist attractions in China. The feasibility study on
Hangzhou Metro Line One was conducted by the Beijing Urban Engineering Design &
Research Institute and the review was completed by the Company in July 2003.
In May 2003, the Company signed a memorandum of cooperation with the Shenzhen
Municipal Development Planning Bureau under which the Company will provide
consultancy services with respect to the planning, implementation, construction,
operation, financing and maintenance of new metro lines in Shenzhen. On January
15, 2004, the Company and the Shenzhen Municipal People's Government entered
into an agreement in principle in relation to the construction of Phase 2 of
Line 4 of the proposed Shenzhen metro system and the operation of Line 4 for a
term of 30 years. See "Item 4. Information on the Company - History and
Development of the Company - Recent Developments" for further details relating
to this project.
In March 2003, the Company continued the expansion of its consultancy business
in the Mainland of China through the establishment of a representative office in
Shanghai. The Company's joint venture subsidiary, Shanghai Hong Kong Metro
Construction Management Co. Ltd., was appointed in June 2002 as the owner's
representative by Shanghai MRT Shen-Song Line Development Co. Ltd., an
enterprise owned by the Shanghai Municipal People's Government, to undertake
project management
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services for the design and construction of a 21.6 mile metro line, the Shensong
Railway Line, in Shanghai between Songjiang new city in the west and Xujiahui in
the city center. The Company has entered into a joint venture agreement with the
Shanghai Investment Consulting Corporation Limited to provide project management
services in connection with this project and other Shanghai project
opportunities, but is currently negotiating the assignment of the joint venture
agreement from Shanghai Investment Consulting Corporation Limited to the
enterprise owned by the Shanghai Municipal People's Government, Shanghai
International Group Corporation Limited. The Shensong Railway Line will have a
total of 12 underground stations and one depot and the expected commencement of
operations has been re-scheduled for mid-2007. The Company will not bear any of
the design or construction costs in connection with this project. The design and
construction works are proceeding on schedule.
The Company is also pursuing investment opportunities in the United Kingdom's
light rail sector, together with Mitsubishi Corporation of Japan. Specifically,
projects in the Portsmouth area and in Liverpool, involving the South Hampshire
Rapid Transit and Merseytram, respectively, are being considered. Further
development of the South Hampshire Rapid Transit project is subject to a
resolution by the government of the United Kingdom with respect to the funding
for this light rail project. A consortium of the Company, Mitsubishi Corporation
and Serco Integrated Transport has been short-listed as one of two candidates
invited to submit "best and final" offers based on an information memorandum
containing specifications and conditions for a design, build, operate and
maintain franchise for the proposed Merseytram system.
The following table sets forth information relating to station commercial and
other income for the periods indicated:
Year Ended December 31,(1)
1999 2000 2001 2002 2003
(in millions)
Station commercial and other income(2) HK$ 823 HK$ 991 HK$ 973 HK$ 979 HK$ 1,117
(1) The information set forth in this table includes the results
of operations for the Company only, except in 2001, 2002, and
2003, which include the results of the Company and its
subsidiaries, other than Octopus Cards Limited.
(2) For 2002, includes income derived in connection with the
operation of the Tseung Kwan O Line since August 18,
2002. For 2003, includes income derived in connection
with the first full year of operations of the Tseung Kwan
O Line.
Operating Cost Structure
The Company has a program of monitoring and controlling railway operating costs.
The following table sets forth the components of operating expenses for railway
and related operations, and the percentages they represent of revenue from
railway and related operations, for the periods indicated.
Year Ended December 31,(1)
1999 2000 2001 2002(2) 2003(3)
(in millions, except percentages)
Railway and related operations
Staff costs and related
expenses HK$ 1,851 26 % HK$ 1,688 22 % HK$ 1,647 22 % HK$ 1,579 21 % HK$ 1,643 21 %
Energy and utilities 501 7 500 7 501 6 502 7 546 7
Stores and spares consumed 136 2 127 2 119 2 121 2 128 2
Operational rent and rates(4) 63 1 65 1 78 1 87 1 21 -
Contracted repairs and
maintenance(5) 325 4 337 4 388 5 384 5 414 5
Expenses relating to station
commercial and other
businesses 150 2 173 2 197 2 185 2 351 5
Property ownership and
management expenses 155 2 142 2 159 2 167 2 198 3
Other expenses(6) 578 8 629 8 450 6 647 8 546 7
HK$ 3,759 52 % HK$ 3,661 48 % HK$ 3,539 46 % HK$ 3,672 48 % HK$ 3,847 50 %
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Year Ended December 31,(1)
1999 2000 2001 2002(2) 2003(3)
(in millions, except percentages)
Depreciation 2,039 28 2,091 28 2,178 29 2,470 32 2,402 32
Total operating expenses of
railway and related
operations HK$ 5,798 80 % HK$ 5,752 76 % HK$ 5,717 75 % HK$ 6,142 80 % HK$ 6,249 82 %
(1) The information set forth in this table includes the results
of operations for the Company only, except in 2001, 2002, and
2003, which include the results of the Company and its
subsidiaries, other than Octopus Cards Limited
(2) Includes operating costs derived from the operation of
the Tseung Kwan O Line since August 18, 2002.
(3) Includes operating costs derived from the first full
year operation of the Tseung Kwan O Line.
(4) Similar to property taxes in respect of the Company's
occupation of the land on which the MTR is situated.
Reduction in charges for 2003 was primarily due to rate
refunds in respect of 2001 and 2002 following an agreed
revision of rateable value.
(5) Includes only repairs and maintenance costs paid to outside contractors.
(6) Includes railway support services, general and administrative
expenses, project study costs and deferred expenditures
written off and other expenses. For 2000, includes the
write-off of certain capital assets and the higher production
and distribution costs of the 2000 annual report following the
listing of the Company's shares on the Hong Kong Stock
Exchange. For 2001, the substantial reduction was due to lower
production and distribution costs of the 2001 annual report
and the capitalization of certain new project costs. For 2002,
includes the write-off of project study costs and deferred
expenditures in respect of the Shatin to Central Link and the
North Island Link together with its related improvement works
totaling HK$218 million. For 2003, includes a HK$69 million
revaluation deficit relating to the Company's head office
premises and write-off of project study costs and deferred
expenditure totaling HK$49 million, which was primarily
related to the West Island Line (see Note 4C of Notes to
Financial Statements).
Staff Costs. Staff costs consist of staff salaries and benefits. Since 1998, the
Company adopted various measures to reduce operating costs and increase overall
efficiency, including pay freezes, benefit reductions, hiring freezes, the
implementation of voluntary separation schemes and limited redundancies. In
particular, a voluntary separation scheme was implemented in early 2003 for
selected groups of employees as the Company identified approximately 100 surplus
positions due to reduced headcount requirements resulting from a decline of
project-related work. Employees of the selected groups who voluntarily chose to
leave the Company received enhanced severance packages. This scheme helped the
Company to manage the decline of project-related work and alleviate the surplus
situation. All these measures resulted in a continued reduction in staff costs
from HK$1,851 million in 1999 to HK$1,643 million in 2003. The reduction
reflected significant gains in productivity and efficiency achieved through the
continued efforts in human resources management, organizational restructuring
and streamlining, staff redeployment and outsourcing.
During the last several years, the Company has established various programs to
increase employee productivity. One such program is the use of predictive
maintenance, which includes an increase in the number of inspections of railway
plant and equipment to enable early detection of needed repairs and maintenance,
and an increase in the frequency of railway repairs and maintenance. At the same
time, the Company has increased the size and reliability of its fleet and
decreased the time during which equipment is taken out of service for needed
repairs and maintenance. In addition, the Company has automated operations where
appropriate. Moreover, the Company is continuing with the gradual merger of
operations and maintenance activities at stations and depots. This has enabled
staff members to be trained with a wider array of skills, resulting in higher
productivity, greater flexibility and faster response time.
The following table sets forth the number of operations staff (i.e., employees
directly related to the day-to-day operations and maintenance of the railway)
and the Company's record of productivity for the periods indicated.
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Year Ended December 31,
1999 2000 2001 2002(1) 2003(2)
Total operations staff(3) 5,026 (5) 4,767 (5) 4,529 4,615 4,528
Productivity per operations staff
Revenue car miles (in thousands) 14 15 16 17 18
Passengers carried (in thousands) 157 163 170 170 172
Railway operating profit (in thousands of HK$)(4) 119 153 182 (8) 125 (6)(8) 76 (7)(8)
(1) Includes results derived from the operation of the
Tseung Kwan O Line since August 18, 2002.
(2) Includes results derived from the full-year operation
of the Tseung Kwan O Line.
(3) Excludes staff engaged in works relating to operations
planning and development, operations consultancy services
and staff hired for the short term.
(4) Excludes corporate overhead, project study costs and
deferred expenditures written off and depreciation charges
on unallocated assets at the corporate level.
(5) Decrease in number of staff members was primarily due to
the voluntary separation scheme introduced in 1999 to
reduce operating costs.
(6) Includes increased depreciation charges primarily on fixed
assets of the Tseung Kwan O Line since August 18, 2002.
(7) Includes full year increased depreciation charges primarily
on fixed assets of the Tseung Kwan O Line.
(8) For 1999 and 2000, includes results of the Company
only. For 2001, 2002 and 2003, includes results of
the Group.
The increase in revenue car miles per operations staff in 2003 was primarily a
result of the full-year operation of the Tseung Kwan O Line.
The decrease in railway operating profit per operations staff in 2003 was
primarily the combined result of the lower fare revenue recorded in the first
half of 2003 due to the SARS outbreak and higher operating costs associated with
the full-year operation of the Tseung Kwan O Line since August 2002.
Depreciation. The Company's depreciable assets include the railway tunnel lining
and other underground and overhead structures, rolling stock and leasehold land.
The initial cost of rails is not depreciated. The cost of replacements is
charged to profit and loss account as and when incurred.
Energy and Utilities Costs. The Company's energy costs consist primarily of
electricity costs which depend on consumption and electricity tariffs.
Electricity tariffs are affected principally by international fuel prices for
gas, coal and, to a lesser extent, for oil. Electricity tariffs charged by power
companies to consumers are regulated by the Government. The Company benefits
from its substantial use of energy during off-peak hours at lower rates. As the
largest consumer of electricity in Hong Kong, the Company would normally have an
opportunity to discuss in advance with the power companies any proposed increase
in the electricity tariff.
Over the past five years, electricity tariffs have increased. During this
period, the Company adopted various energy saving measures to mitigate the
impact of the increase. In 2003, the Company's traction energy consumption
measured in megawatt hours increased by approximately 1.2% due to the opening of
the Tseung Kwan O Line. The Company's traction energy consumption increased by
an average of approximately 50% from 1998 to 2003 as a result of the opening of
the Tung Chung and Airport Express Lines in mid-1998 and the Tseung Kwan O Line
in August 2002.
Material Costs. Material costs consist mainly of certain spare parts and other
items used primarily for repairs and maintenance. The Company uses inventory
management and purchasing economies to control material costs as a percentage of
railway operations revenue.
Contracted Repairs and Maintenance. Contracted repairs and maintenance costs
include only amounts paid to outside contractors. The Company uses outside
contractors for, among other things, its
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ongoing program of repairs to tunnel linings, certain repairs and maintenance of
escalators and elevators and certain station cleaning. In recent years, the
Company has increased the level of both in-house and contracted repairs and
maintenance to improve passenger service and reliability. The Company undertakes
most of its repairs and maintenance with its own personnel.
Operational Rates. Operational rates are payments by the Company to the
Government, similar to property taxes, in respect of its occupation of the land
on which the MTR is situated. Operational rates payments totaled approximately
HK$67 million for the year ended December 2003. After a refund on payments made
to the Government totaling HK$46 million due to a successful reassessment review
of the rateable value for the fiscal years of 2002 and 2003, the net balance
paid to the Government was HK$21 million for the year ended December 31, 2003.
Other Operating Costs. Other operating costs include advertising costs,
consultants' fees, conference and training expenses and insurance and uninsured
claims.
Equipment
The Company owned 1,050 passenger cars and 59 locomotives and other rolling
stock as of December 31, 2003. The following table sets forth certain
information regarding the Company's rolling stock as of December 31, 2003:
Average
Number of Units Net Book Value Useful Life Age
(in millions) (in years)
Passenger cars(1) 762 HK$ 3,320 (5) 40 (7) 19.6
Passenger cars(2) 184 (4) 2,528 40 (8) 5.5
Passenger cars(3) 104 1,296 40 1.5
Locomotives 59 238 (6) 16 13.5
Total rolling stock 1,109 HK$ 7,382
(1) Figures for the Urban Lines, excluding the Tseung Kwan O
Line, including 27 originally leased cars acquired during
1999.
(2) Figures for the Tung Chung and Airport Express Lines.
(3) Figures for the Tseung Kwan O Line.
(4) Including passenger cars for the Airport Express Line held in stock.
(5) Including value of rolling stock modernized as of December 31, 2003.
(6) Including value of other rolling stock used for
maintenance purposes as of December 31, 2003.
(7) The useful life figure was revised from 25 years in 1997 to
40 years in 1998, after taking into account the asset
condition, usage experience and rolling stock modernization
program.
(8) The useful life figure was revised from 35 years in 2002
to 40 years in 2003, after taking into account the asset
condition and usage experience.
On March 23, 2003, the Company entered into a cross-border leasing transaction
with respect to a portion of its rolling stock that is described in more detail
under Item 5, "Operating and Financial Review and Prospects - Liquidity and
Capital Resources - Capital Resources".
Property Development
General
Property is a significant part of the Company's business, providing an important
source of income to support the cost of construction of railway projects as well
as contributing to future rail patronage from the immediate catchment areas
created by property developments. In conjunction with its railway
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construction, the Company plays an important role in the development of
residential and commercial properties above and adjacent to stations and depots.
The Government has granted the Company the development right over the land used
for these property developments based on a land premium assessed at full market
value without regard to the presence of the railway on the sites being valued.
The Company's practice in property development has been to arrange for various
third-party developers to carry out the actual development works according to
the Company's specifications. Typically, the developers are responsible for all
development costs (including Government land premium, construction and enabling
work costs, marketing and sales expenses, professional fees, finance charges and
other expenses), and have to bear all development risks. The Company derives
benefit from property developments through the sharing of cash profits with
developers in agreed proportions from the sale or lease of the properties after
deducting the development costs, the sharing of assets in kind, or through
up-front payments from the developers.
Eighteen property developments associated with the construction of the Tsuen
Wan, Kwun Tong and Island Lines have been completed. Developed properties
comprise an aggregate of approximately 2.5 million square feet of commercial
office space, 3.2 million square feet of shops, 1.7 million square feet of
community and Government facilities and 31,366 residential units. All
residential units and offices have been sold. Almost all shops have either been
sold or leased. In addition, several property developments associated with the
construction of the Tung Chung and Airport Express Lines have been completed.
These properties comprise an aggregate of approximately 4,092,000 square feet of
office space (of which approximately 1,493,000 square feet has been sold),
20,554 residential units and approximately 2,533,000 square feet of retail and
other space. The majority of the retail space has been leased. Cumulative
property development profit realized by the Company up to the end of 2003 was
approximately HK$23.5 billion.
In November 2002, the Government announced its new housing policy in support of
the property prices that have dropped by almost two-thirds from their 1997 peak.
Under the new housing policy, the Government, the largest owner of land in Hong
Kong, suspended land sales in 2003. The Company supported this policy and agreed
in consultation with the Government to postpone property development tenders
until after 2003. The outbreak of SARS in early 2003 also resulted in slower
sales of property developments and in a decrease in property prices. However,
with the containment of the outbreak, there was no further worsening effect on
the property market. The property market improved towards the end of 2003,
particularly due to foreign direct investment in the sector. The Company plans
to resume property development tenders at the end of 2004.
Tung Chung Line and Airport Express Line Property Developments
Under the terms of the Airport Railway Agreement, the Company was granted the
right to undertake residential and commercial development on approximately 154
acres of land at five sites above or around the Tung Chung Line and Airport
Express Line stations at Hong Kong, Kowloon, Olympic, Tsing Yi and Tung Chung.
These developments comprise 15 development packages totaling approximately
29,000 residential flats and approximately 13.3 million square feet of office,
hotel/service apartment and retail space. All of the packages have been awarded
to developers under a competitive tendering process. There was continued
construction activity and staged development completions from earlier packages,
notably in the Tung Chung and Kowloon stations, during 2003.
Despite weak property market conditions in Hong Kong, several major residential
developments along the Airport Express Line were launched and reasonable sales
of flats were recorded from Airport Railway development sites, which totaled
18,790 units at the end of 2003. Construction of the various packages at Union
Square in Kowloon station and at Tung Chung station progressed according to
plan. A total of 1,976 flats were completed during 2003, all of which are in
Union Square. In particular, the
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Company obtained occupation permits in July and October 2003, respectively, for
the Harbourside and Sorrento Phase 2 developments at Kowloon station. Sale of
apartments at The Harbourside commenced in February 2004. The Company launched
the sale of Phase Two of the Seaview Crescent property development and Phase Two
of the Caribbean Coast property development, with a total of 1,627 residential
units at Tung Chung station in June 2003. In response to changing market
conditions and demand forecasts, further adjustments were made to several
development schemes to improve marketability and add value. The land use at
Olympic Station Site D, for example, was successfully changed from hotel to
residential. The development is now planned to provide 1,484 residential units.
Work on this project is in progress and on schedule, with completion expected in
late 2005 or early 2006.
Two International Finance Centre was completed on schedule, and the practical
completion certificate was issued on July 15, 2003. Marketing of the 18 floors
totaling 500,000 square feet gross owned by the Company, located on floors 33 to
52 and branded as "Central 18 Zone at Two IFC", began during 2002. With the
issuance of the occupation permit in May 2003, the Company has successfully
launched the leasing of Central 18 Zone at Two IFC. In particular, the Company
has entered into lease agreements with leading financial institutions, including
a lease agreement with UBS AG for the lease of seven floors with a total floor
area of approximately 170,226 square feet for a period of ten years. As of March
31, 2004, approximately 76% of Central 18 Zone at Two IFC had been leased, and
the Company is currently in discussions with additional potential office
tenants. The IFC Mall and more than 1,200 parking spaces were also completed in
mid-2003, while work continues on two adjacent hotel towers, which are expected
to be completed in early 2005. As a result of the issuance of the practical
completion certificate with respect to Two International Finance Centre on July
15, 2003, the Company recognized a net profit of approximately HK$3 billion in
respect of this property development in 2003.
The 15 property development packages awarded by the Company as described above
have been, or are expected to be, completed between 1998 and 2008. The amount of
actual profit realized by the Company will depend on the development costs, the
ability to sell or lease the completed properties, the timing of the completion
of competing development projects, general economic conditions and other
factors.
As of December 31, 2003, the Company had received HK$4.9 billion from
participating developers in excess of related expenditures incurred as well as
profits recognized to date in connection with Tung Chung Line and Airport
Express Line property developments. The Company's accounting policy under Hong
Kong GAAP requires that such payments not be recognized as profit until the
foundation and site enabling works for a development are complete and acceptable
for development, and after taking into account any outstanding risks and
obligations retained by the Company in connection with such development.
Tseung Kwan O Line Property Developments
The TKE project agreement with the Government provides that the Company shall
have the right to undertake property developments at four locations within the
project. These developments are located at the Tiu Keng Leng, Tseung Kwan O and
Hang Hau stations and the depot and adjacent future station site in Area 86. The
development projects include up to 20 development packages, offering a total
gross floor area of approximately 25 million square feet, which includes
approximately 22.6 million square feet of residential flats, 1.5 million square
feet of retail space, 1.1 million square feet of offices and 6,800 carpark
spaces.
In November 2003, the Company's joint venture developer, Sino Land, successfully
launched the pre-sale of Residence Oasis, a 2,130 unit residential property
development above the Hang Hau station. The Company also began preparation of
pre-lease marketing for the 38,000 square feet retail shopping
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center at Hang Hau station, which will be known as "The Link". Apartment layouts
have also been finalized at Site A of the Tiu Keng Leng station developments,
enabling the Company to begin pre-sales in 2004.
The planned Area 86 development scheme on the Clearwater Bay peninsula, which
comprises up to 14 of the said 20 planned TKE development packages and
approximately 17.8 million square feet of floor area, is one of the largest
single development schemes in Hong Kong to date. The "dream city" complex
represents a new model for high-density community living with segregated areas
for automotive and pedestrian movement and large open spaces for leisure
activities. The development will include schools, clubhouses, shops and
community centers.
The expected total investment cost is approximately HK$61 billion at 2003
prices. To date, four development packages have been awarded. However, in view
of the then-current market conditions and the Company's support of the housing
policy of the Government at the time, the Company agreed in consultation with
the Government to postpone property development tenders until after 2003.
Accordingly, the Company did not award any of the remaining property development
packages in 2003. The Company expects to commence the launching of the remaining
development packages, subject to prevailing market conditions, during 2004, with
completion of the final development package expected in 2013. In preparation for
the forthcoming property development tenders, the Company has revised the master
layout plan for the dream city complex to offer improved breezeways and more
open space. The Company currently anticipates launching the first property
development package based on this improved plan in late 2004.
Other Development Projects
In 1999, the Company received town planning approval from the Government to
develop the site above and near Choi Hung station on the Kwun Tong Line to
include "park and ride" facilities for commuters living in the Southeast New
Territories as well as some commercial and residential areas. The Company
awarded this development in July 2001 and the Government granted the land at the
site to the Company in November 2001 upon payment of the land premium. During
2002, the Government approved a further 12,185 gross square feet of residential
space to be constructed at Choi Hung station, as part of the "park and ride"
development. This is in addition to 22,841 gross square feet of bonus floor area
previously approved for the mixed-use development. The scheme currently
comprises 206,500 square feet of residential space, 25,834 square feet of
commercial/retail space, 504 car parking spaces (450 of which is for park and
ride), 10 motorcycle parking spaces and a two-storey public transport
interchange. In 2003, flat layouts for the Choi Hung station development were
finalized, enabling the Company to begin pre-sales in 2004.
Planning continues for the site adjacent to Tsing Yi station, currently occupied
by a transport interchange and lorry park. The Company had intended to proceed
with a mixed-use scheme, but the development concept is now being reviewed,
taking into account the community's feedback.
Property Ownership and Management
The Company owns or manages certain developed properties adjacent to railway
structures and facilities in order to protect such railway structures and
facilities and to provide a source of income. The Company currently wholly owns
four shopping centers located above four of its stations - Telford Plaza I at
Kowloon Bay (427,019 square feet of leasable floor space), Luk Yeung Galleria at
Tsuen Wan (129,878 square feet of leasable floor space), Paradise Mall
(previously Heng Fa Chuen Shopping Centre) at Chai Wan (198,790 square feet of
leasable floor space) and Maritime Square at Tsing Yi (311,198 square feet of
leasable floor space) - and certain other smaller properties. Upon completion of
"The
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Link" at Hang Hau station and the shopping center at Union Square, completion of
which is expected by 2005 and 2006/2007, respectively, the Company will own six
shopping centers. The completion of Two International Finance Centre increased
the Company's property ownership by 500,000 square feet. In addition, the
Company also owns properties jointly with other parties, including Telford Plaza
II and the carpark at One International Finance Centre at Hong Kong station. The
Company holds these properties under long-term leases from the Government that
will expire in 2047 and rents them to tenants for commercial use. The Company
has no present intention to sell any of these shopping centers. During the SARS
outbreak in early 2003, these shopping centers recorded a steep decline in
visitors. With the containment of the SARS outbreak, special promotions in these
shopping centers and the relaxation of travel restrictions for tourists from the
Mainland of China, the number of visitors now surpasses previous levels.
The Company also manages certain residential properties. Growth in the property
management portfolio from property developments relating to the Airport Railway
Project as well as at Tseung Kwan O is expected to continue over the next few
years, adding some further 40,000 residential units to the Company's portfolio.
The Company is one of the largest property management companies in Hong Kong.
During 2003, the Company has continued to expand and diversify its property
management business. In particular, Coastal Skyline, Caribbean Coast and Seaview
Crescent Phase Two at Tung Chung Station and Sorrento Phase One at Union Square
added a further 4,841 residential units to the Company's management portfolio.
Moreover, the completion of Two International Finance Centre increased the total
area of commercial and office space managed by the Company to approximately 6
million square feet in 2003, from 3.9 million square feet in 2002. The Company
managed 46,915 residential units (of which 18,186 units are Airport Railway
developments). Income from property management increased by 10.6% to HK$94
million in 2003 from HK$85 million in 2002.
The Company has also established the "Premier Management Services" brand as part
of its property management services. This branded service is aimed at the
high-end residential, serviced apartments and high quality office accommodations
at Hong Kong and Kowloon stations. Designed to provide a higher quality level of
service to these property developments, the new service has been separately
branded to distinguish it from the property management of mass residential
properties. With leading international financial institutions as tenants, Two
International Finance Centre is managed by the Company under the Premier
Management Services.
The Company also engages in property management related services in the Mainland
of China where it sees significant growth opportunities. In 2003, the Company
acquired a pre-management contract for the Tulip Gardens residential development
in Shenzhen, as well as a pre-management contract for Chongqing Palm Springs
International Apartments, a large-scale residential development in Chongqing. In
Beijing, the Company formed a strategic partnership with Beijing Century Sun
Real Estate Development Company Limited to provide multi-disciplinary property
management services and to manage the Palm Springs International Apartments
developments.
The Company was awarded its first property development consultancy contract in
Singapore in July 2002. The Company was selected by the Land Transport Authority
of Singapore to provide consultancy services for the packaging and marketing of
a 268,883 square feet site situated above a proposed Singapore Mass Rail Transit
station in a residential area located north of the city center.
MTR Property Agency Company Limited, a wholly-owned subsidiary formed by the
Company in January 2001 to provide real estate agency services to the residents
of some of its managed properties, contributed a total of HK$6 million in
revenue in 2003.
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The following table sets forth the Company's property rental and property
management revenue since 1999:
Year Ended December 31,(1)
1999 2000 2001 2002 2003
(in millions)
Property rental(2)(3) HK$ 740 HK$ 807 HK$ 817 HK$ 897 HK$ 888
Property management income 50 60 73 85 94
Property agency income(4) - - 1 5 6
Total HK$ 790 HK$ 867 HK$ 891 HK$ 987 HK$ 988
(1) The information set forth in this table includes the results
of operations for the Company only, except in 2001, 2002 and
2003, which includes the results of the Company and its
subsidiaries, other than Octopus Cards Limited.
(2) Property rental revenues include revenue from properties
wholly owned by the Company and revenue from properties
which the Company owns jointly with other parties.
(3) Property rental revenues include service income relating to
the provision of air conditioning services. .
(4) Property agency income was contributed by MTR Property
Agency Company Limited, a wholly-owned subsidiary of the
Company established in 2001
Capital |