Item 3. Key Information.

The following table presents selected financial information of the Company as of and for each of the years in the five-year period ended December 31, 2003. The following selected financial information should be read in conjunction with Item 5, “Operating and Financial Review and Prospects” and the Company’s audited consolidated financial statements and the related notes for the three-year period ended December 31, 2003 included elsewhere in this Annual Report (the “Financial Statements”).

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Historical Exchange Rates Information

The Hong Kong Dollar is freely convertible into other currencies (including the US Dollar). Since October 17, 1983, the Hong Kong Dollar has been linked to the US Dollar at the rate of HK$7.80 to US$1.00. The central element in the arrangements which give effect to the link is an agreement between the Government and the three Hong Kong banknote-issuing banks, The Hongkong and Shanghai Banking Corporation Limited, Standard Chartered Bank and Bank of China (Hong Kong) Limited. Under this agreement, the Government of the Hong Kong SAR Exchange Fund issues certificates of its indebtedness to the banknote-issuing banks against payment in US Dollars at the fixed exchange rate of HK$7.80 to US$1.00. The banknote-issuing banks hold the certificates of indebtedness to cover the issuances of banknotes. When the banknotes are withdrawn from circulation, the banknote-issuing banks surrender the certificates of indebtedness to the Government of the Hong Kong SAR Exchange Fund and are paid the equivalent US Dollars at the fixed rate.

The market exchange rate of the Hong Kong Dollar against the US Dollar continues to be influenced by the forces of supply and demand in the foreign exchange market. Exchange rates between the Hong Kong Dollar and other currencies are influenced by the rate between the US Dollar and the Hong Kong Dollar. The Noon Buying Rate has fluctuated between HK$7.70 to US$1.00 and HK$7.90 to US$1.00 from January 1, 1999 through December 31, 2003.

The translations of Hong Kong Dollars into US Dollars in this Annual Report have been made at the Noon Buying Rate on December 31, 2003 of HK$7.7640 to US$1.00. The Noon Buying Rate on June 10, 2004 was HK$7.7978 to US$1.00.

The following table sets forth the high and low exchange rates between the Hong Kong Dollar and the US Dollars (in Hong Kong Dollars per US Dollar) for each month during the previous six months.

The following table sets forth for the five most recent financial years the average exchange rates for each period between the Hong Kong Dollar and the US Dollar (in Hong Kong Dollars per US Dollar), calculating using the average of the exchange rates on the last day of each month during the period.

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Risk Factors

The disclosure set forth in this section was prepared pursuant to the Plain English Rules adopted by the U.S. Securities and Exchange Commission. References to “we”, “us”, “our” and “our company” in this section are to MTR Corporation Limited.

Risks relating to the Company and its business

Competition in Hong Kong from other transport providers may adversely affect us.

We compete with other transport providers, principally franchised bus and public light bus operators, as well as non-franchised bus, tram and ferry operators and taxis. Our competitive strengths of speed, reliability and comfort have been eroded in recent years with:

We are also facing competitive pressure as a result of the opening of new highways and expressways. The lower capital costs of our competitors and their greater inherent structural flexibility may enable them to respond to changing passenger demand more quickly than we can. In the Railway Development Strategy 2000 published in May 2000, the Government of the Hong Kong SAR confirmed that railways are essential to Hong Kong’s continued economic, social and land development and will be given priority in the Government’s plans for infrastructure development. Within this framework, the Government also recognized that franchised buses would continue to play an essential role in the public transport system in Hong Kong. As a result, we do not expect the Government to take any particular, direct measures which, in the short-term, would have the effect of reducing or containing patronage on franchised buses or public light buses for the purpose of increasing our patronage.

The growth of our railway and property businesses and increase in patronage depends, in part, on the award to our company of new railway projects, the implementation of those projects and on other factors that we may not be able to control.

The growth of our railway and property businesses depends, in part, on whether new railway projects are awarded to our company and whether we can implement them in a timely and effective manner in order to expand capacity and, thereby, accommodate more passengers, and develop more properties. Our plans for new railway projects are subject to a number of uncertainties, including:

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Although the Government has agreed to ensure that there is a level playing field and a clear framework for the award of new railway projects, we cannot assure you that new railway projects will be awarded to our company. In addition, although we have significant experience in the design and construction of railway projects with a track record in financing and completing projects on time and within budget spanning over 20 years, we cannot assure you that new railway projects undertaken by us will be completed on time and within budget. There also can be no certainty that any of the new railway projects proposed by the Government in the Railway Development Strategy 2000 will be implemented in the indicated time frame. For example, in January 2003, the Government decided to postpone the completion of the North Island Link, which is one of the new railway projects proposed in the Railway Development Strategy 2000, until after 2016.

Increase in patronage will also be affected by macro-economic factors, such as population and employment growth and distribution and changes in demographics and economic conditions. In addition, increase in patronage will be affected by the amount of road congestion and any expansion of the bus network. Furthermore, because of certain inherent capacity limitations and structural inflexibilities of the mass transit railway, we may not be able to respond quickly to increases in demand. For example, we cannot quickly change our routes to cater for new passenger demand in areas which we do not operate.

Operation of the Shatin to Central Link railway by the Kowloon-Canton Railway Corporation, or KCRC, is expected to result in a decrease in our revenues and may have a material adverse effect on our financial condition and results of operations.

One of the new railway projects announced by the Government in the Railway Development Strategy 2000 is the Shatin to Central Link, which is intended to be a new strategic rail corridor in the rail network. On June 25, 2002, the Government awarded this project to the KCRC after inviting our company, KCRC and other parties to bid for the project. The earliest possible completion date for the Shatin to Central Link is expected to be in 2011. Subject to a possible merger with KCRC, upon completion of the Shatin to Central Link, operation of the Shatin to Central Link by KCRC is expected to result in a decrease in our revenues and may have a material adverse effect on our financial condition and results of operations. In addition, the Kowloon-Canton Railway system will further extend into the urban areas of Hong Kong, and KCRC will become our direct competitor. This may have a material adverse effect on our long-term prospects.

Operation of the Kowloon Southern Link railway by KCRC is expected to result in a decrease in our revenues and may have a material adverse effect on our financial condition and results of operations.

Another of the new railway projects announced by the Government in the Railway Development Strategy 2000 is the Kowloon Southern Link, which is intended to be an extension of the KCRC West Rail line from Nam Cheong station to East Tsim Sha Tsui station. West Rail trains will therefore be able to operate a service continuing from Nam Cheong station all the way through to Hung Hom station, where an interchange with the KCRC East Rail and the Shatin to Central Link will be created.

No firm completion date for the Kowloon Southern Link has been given by KCRC as it is currently studying the scope and timing of the project. The earliest possible completion date is expected to be in 2009. The operation of the Kowloon Southern Link by KCRC is expected to result in a decrease in our revenues and may have a material adverse effect on our financial condition and results of operations as well as our long-term prospects.

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Our ability to raise fares to cover our operating costs could be limited by a number of factors and could be significantly affected by new governmental policies on public transport fares.

We cannot assure you that patronage on the mass transit railway will increase sufficiently or that we could charge a higher level of fares to defray any increase in operating costs. Although we have the power to determine our own fares, subject to our compliance with specified procedures, our ability to do so may be constrained by factors such as:

On July 28, 2003, the Government issued to the Legislative Council of the Hong Kong Special Administrative Region a consultative paper on public transport fares, which discusses proposals to introduce a fare adjustment formula, a trigger mechanism for fare adjustments and a cap on the maximum rate of fare adjustments. While we would maintain our fare autonomy under this proposal and the proposed fare adjustment formula would only serve as a guideline for us in adjusting our fares, we cannot assure you that our ability to set our own fares will not be materially and adversely affected by any final decision taken by the Government on public transport fares.

We have not increased our fares since 1997. Although we had planned to increase fares by 2.3% in April 2002, we decided not to increase our fares in 2002 due to general economic conditions and competitive pressures. Moreover, our average fares decreased in 2003 due to fare promotions. We cannot assure you that we will be able to implement any fare increases in 2004.

The Government can exert significant influence on us, and could cause us to make decisions, modify the scope of our activities or impose new obligations on us that may not be in our best interest or that of our other shareholders.

The Government is able to appoint our entire Board of Directors without the concurrence of any of our other shareholders. Accordingly, the Government is in a position to influence significantly our major business decisions and strategies, including the scope of our activities and investment decisions and our dividend policy. Please see Item 7, “Major Shareholders and Related Party Transactions — Major Shareholder,” for a description of the Government’s beneficial ownership of our share capital. In addition, we compete, to a limited extent, with KCRC, which is 100% beneficially owned by the Government and has a board of directors that consists entirely of government appointees. We also compete with Kowloon Motor Bus, New World First Bus and Citybus, each of which has two board members who are appointed by the Government. Each of KCRC, Kowloon Motor Bus, New World First Bus, Citybus and other transport providers, such as taxi operators and minibus operators, are regulated by the Government. The Government may use its ability to influence our business and/or the businesses of our competitors (whether through its shareholding interest, board representation or through regulation) in a manner that may not be in our best interest or that of our other shareholders.

A number of provisions in the Operating Agreement (as defined in Item 4, “Information on the Company — History and Development of the Company — Overview”) are related to prevailing

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government policies, including the provisions relating to the amount of land premium payable by us for the grant of land. The Government may change its policies, intentions, preferences, views, expectations, projections, forecasts and opinions, including as a result of changes in the economic, political and social environment or its projections of population and employment growth. In addition, the MTR Ordinance (as defined in Item 4, “Information on the Company — History and Development of the Company — Overview”) and its subsidiary legislation may be amended, modified or repealed in accordance with the Hong Kong legislative process. Any amendment, modification or repeal could modify the existing regulatory regime and materially and adversely affect our financial condition and results of operations. The Government has agreed with our company under the Operating Agreement that it will not make any new regulations under the MTR Ordinance without first having consulted us and having taken account of all reasonable representations made by us.

The Government may also adopt new policies and enact new laws, including in relation to environmental matters, which may result in increased operating and construction costs for us or otherwise have a material adverse effect on our business, financial condition and results of operations.

We require significant capital for our business and are exposed to the impact of interest rate and foreign currency movements in respect of our borrowings. If we are unable to obtain additional capital on acceptable terms when needed, our growth prospects and future profitability may be adversely affected.

We incur substantial capital expenditures each year to maintain, renew and replace our operating assets and infrastructure. We also incur substantial capital expenditures when we undertake new railway projects.

Substantial portions of our operating cash flows are used to pay for these capital expenditures. If we are unable to fund capital expenditures from operating cash flows and external sources, we will be required to reduce our capital expenditures. This would restrict our ability to grow and, over time, could reduce the quality and reliability of the service we provide.

In addition, we have borrowed, and expect to continue to borrow, significant amounts at floating interest rates and in foreign currencies. In order to reduce our exposure to movements in interest rates and exchange rates, we have typically hedged a portion of such exposure. This helps to reduce, but does not eliminate, the impact of interest rate and foreign currency movements. An increase in interest rates, or fluctuations in exchange rates between the Hong Kong Dollar and other currencies, may limit the availability or increase the cost of such swaps or hedging instruments. This may increase our borrowing costs or reduce the availability of funding.

Our property business is subject to fluctuations in the Hong Kong property market as well as to general risks incidental to the ownership and management of rental properties.

Our property business has in recent years accounted for, and is expected to continue to account for, a substantial portion of our net profit. All of our completed investment properties and investment properties under development are located in Hong Kong. Historically, the Hong Kong property market has been cyclical with property values affected by the amount of new land made available by the Government, the rate of economic growth in Hong Kong and political and economic developments in Hong Kong and the Mainland of China.

We are exposed to the general risks inherent in relation to property development, including that construction may not be completed on schedule or within budget, that development may be affected by governmental regulations, that developed properties may not be leased or sold on profitable terms and that

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purchasers may default. The terms on which property developers are prepared to bid for our development packages will also be affected by the state of the property market at the time of tender.

In relation to properties held by us as investments, since leases of Hong Kong properties are often for a short duration (typically two to six years, depending on the type of property) or contain provisions requiring periodic adjustments of rent within a short period of time (typically three years), our income from these properties may be subject to more frequent adjustments than would be the case in other real estate markets. We are also subject to the general risks incidental to the ownership of properties including, among other things, competition for tenants, changes in market rental levels, inability to collect rent from tenants, and the need to renovate, repair and relet space periodically.

In certain circumstances, the Government has the power to suspend and revoke our franchise under the MTR Ordinance.

Although the power of the Chief Executive in Council (which refers to the Chief Executive of Hong Kong acting after consultation with the Executive Council of Hong Kong) under the MTR Ordinance to suspend or revoke our franchise is exercisable only in certain circumstances, we cannot assure you that such power will not be exercised. If our franchise were to be suspended or revoked, we would not be able to operate our railway business and, accordingly, could not generate revenues from that business.

Accidents and natural disasters could lead to decreased revenues and increased expenditure and reduce our operating flexibility.

Our operations could be affected by accidents, including major equipment and power failures, collisions, derailments and natural disasters. Accidents and natural disasters could interrupt or prevent the operation of the mass transit railway and lead to:

Although we believe that the insurance we have put in place is adequate and consistent with industry practice, we cannot assure you that such insurance will be sufficient to cover losses or that such insurance will continue to be available on the same terms.

Any future outbreak of severe acute respiratory syndrome or other new or unusual diseases may materially and adversely affect our business and operations, as well as our financial condition and results of operations.

Hong Kong, together with the Mainland of China, Singapore, Taiwan, Canada and certain other areas experienced in early 2003 an outbreak of severe acute respiratory syndrome, or SARS, a new and highly contagious form of atypical pneumonia. According to the World Health Organization, over 8,400

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cases of SARS and more than 900 deaths had been reported in over 30 countries as of August 7, 2003. In addition, although there have not been any new cases of SARS in Hong Kong in the second half of 2003, the World Health Organization reported several new cases of the disease in the Mainland of China in December 2003 and early 2004. At the height of the outbreak of SARS, our average weekday patronage on the MTR Lines decreased, and the Airport Express Line recorded a significant reduction in its average daily patronage due to a steep decline in the number of airport passengers. Although this outbreak occurred in early 2003, many aspects of SARS, including its cause, means of transmission and ability to survive in different environments, are still not well understood by the international medical community. Although our average MTR Lines weekday average patronage recovered to over 2.1 million in June 2003 and to over 2.4 million in December 2003 from a low point of 1.8 million in April 2003, and daily patronage on the Airport Express Line increased to 12,700 in June 2003 and to 22,200 in December 2003 from a low point of 9,200 in May 2003, we cannot assure you that there will not be any future outbreak of SARS, or an outbreak of another contagious disease for which there is no known cure or vaccine. Any future outbreak of SARS or any other contagious disease may cause patronage on our railway to again materially decrease. Furthermore, our ability to adequately staff and maintain our operations may be significantly disrupted in such circumstances. In addition, any future outbreak of SARS or any other contagious disease may severely restrict the general level of economic activity in Hong Kong, which may also adversely affect our business and prospects. As a result, we cannot assure you that any future outbreak of SARS or any other contagious disease would not have a material adverse effect on our financial condition and results of operations.

Risks relating to Hong Kong

Economic, political and legal developments in Hong Kong could affect our business.

Substantially all of our assets are located in Hong Kong and substantially all of our revenue is derived from Hong Kong. Accordingly, our financial condition, results of operations and prospects are subject to a significant degree to the economic, political and legal developments in Hong Kong. Hong Kong became a Special Administrative Region of the People’s Republic of China, or PRC, on July 1, 1997 when the PRC resumed the exercise of sovereignty over Hong Kong. The basic policies of the PRC regarding Hong Kong are embodied in the Basic Law of Hong Kong, which was adopted by the National People’s Congress of the PRC on April 4, 1990 and came into effect on July 1, 1997. We cannot assure you that economic, political and legal developments in Hong Kong will not materially and adversely affect our business and operations.

Adverse economic developments in Hong Kong or elsewhere could have a material adverse effect on our financial condition and results of operations.

Most of our revenues are derived from our business activities in Hong Kong, which are directly affected by the performance of Hong Kong’s economy. Hong Kong’s economy is in turn affected, directly and indirectly, by the performance of the economies of neighboring Asian countries. As a result, adverse economic developments in Hong Kong or elsewhere in the Asian region could have a material adverse effect on our financial condition and results of operations.

For example, the 1997 Asian financial crisis and the subsequent economic downturn in the region adversely affected our financial results. Although the Hong Kong economy improved from the second half of 1999 through 2000, general economic conditions deteriorated significantly in 2001 and remained weak during 2002 and 2003. Moreover, the outbreak of SARS in early 2003 severely decreased the level of economic activity and adversely affected economic growth in Hong Kong by, among other things, disrupting consumer spending and adversely affecting tourist arrivals. Any decrease in economic activity in Hong Kong may, among other things, reduce patronage on our railway, lower our station advertising

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and kiosk rental income, and decrease our property rental and management income as well as profits from our property development activities. For instance, the outbreak of SARS in early 2003 had an adverse impact on all of our businesses. In particular, it severely affected our average weekday patronage on the MTR Lines and our daily patronage on the Airport Express Line. The SARS outbreak also severely curtailed our property development activities, reduced our other non-fare revenues and even constrained our ability to pursue our external consultancy services overseas. Although economic conditions improved in the second half of 2003, we cannot assure you that economic conditions in Hong Kong will continue to improve in the future or that our operations would not be materially and adversely affected by a sustained downturn in the Hong Kong economy.

The Hong Kong economy is also affected to a significant extent by economies of the United States, the European Union and the Mainland of China. The economies of the United States and the European Union have been experiencing significantly slower growth in recent years. Moreover, any new outbreak of SARS or any other contagious disease for which there is no known cure or vaccine might also adversely affect economic growth in the United States and the European Union, as well as the Mainland of China. We expect a recovery in the Hong Kong economy to depend in part on the performance of the economies of the United States, the European Union and the Mainland of China. Any deterioration in economic conditions in the United States, the European Union or the Mainland of China may materially and adversely affect our financial condition and results of operations.

A devaluation of the Hong Kong Dollar may increase costs associated with our capital expansion and will increase the Hong Kong Dollar cost of repaying our indebtedness.

The Hong Kong Dollar has been linked to the US Dollar at the rate of approximately HK$7.80 to US$1.00 since October 17, 1983. The Government has repeatedly reaffirmed its commitment to this linked exchange rate system. However, in the event this policy were to be changed and there were to be a devaluation of the Hong Kong Dollar, this would increase the Hong Kong Dollar cost of our foreign currency capital expenditures. In addition, the Hong Kong Dollar cost of our current and future liabilities denominated in foreign currencies would increase. As substantially all of our revenues are denominated in Hong Kong Dollars, a devaluation of the Hong Kong Dollar may increase capital costs and the related depreciation costs to us and increase our Hong Kong Dollar interest expense on US Dollar denominated indebtedness. This would in turn reduce our operating and net income, and make it more difficult for us to repay our US Dollar denominated debt obligations in a timely manner.