Fitch Ratings has affirmed Hong Kong-based rail transit network operator MTR Corporation Ltd's (MTRC) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'AA-'.

The Outlook is Stable.

Fitch has also affirmed MTRC's Short-Term Foreign-Currency IDR at 'F1+' and senior unsecured rating at 'AA-'.

MTRC's ratings are equalised with those of Hong Kong (AA-/Stable) due to the company's significant linkage and strategic importance to the government. There is a high likelihood MTRC would receive extraordinary government support, if needed.

KEY RATING DRIVERS

Status, Ownership and Control: 'Very Strong'

The government is MTRC's largest and controlling shareholder, with a 74.82% stake at end-June 2022. The Mass Transit Railway Ordinance grants MTRC an exclusive franchise until 2057 to operate the integrated railway and to construct and operate any extensions. The ordinance reinforces MTRC's government ownership and scrutiny, and empowers the Hong Kong Special Administrative Region Chief Executive to appoint up to three directors without requiring shareholder approval. Overall management of MTRC is vested in the board and government involvement in MTRC's management is high.

Support Track Record: 'Very Strong'

We expect the government to maintain a robust willingness to support MTRC in the medium term, in light of its significant strategic importance. MTRC operates under a supportive framework, including profit sharing from property development rights and fare setting rights, which are based on a fare-adjustment mechanism agreed with government to ensure reliable railway services, while maintaining MTRC's profitability. EBITDA generated from the Hong Kong property development business reached HKD11.1 billion in 2021, accounting for 57.6% of MTRC's total EBITDA.

Socio-Political Implications of Default: 'Strong'

We believe a default by MTRC would disrupt Hong Kong's entire railway services network and, hence, the operation of the city, due to the lack of a substitute. MTRC provides a reliable rail-based transit network and is the only operator entrusted by the government to operate high-speed rail that links Hong Kong to mainland China. MTRC maintained a strong market share of 47.3% in Hong Kong's franchised public-transport market in 2021. Network coverage ranges from the city's key commercial and metropolitan locations to rural areas to provide universal basic mobility to the mass population.

Financial Implications of Default: 'Very Strong'

MTRC's monopoly status results in the company being a primary investor and financing vehicle for the needs of the railway network, including maintenance, upgrades and expansion. We expect the company to invest in metro development according to government plans. We also believe that the government has high incentives to avoid MTRC's default, as this would weaken the city's reputation and impair the availability and cost of financing options.

Standalone Credit Profile

The revenue defensibility and operating risk assessment, together with MTRC's strong financial profile, leads to a Standalone Credit Profile of 'a'.

Revenue Defensibility 'Midrange'

MTRC operates Hong Kong's metro network with a monopoly status, leading to low volatility in user-based demand. The government allows MTRC to adjust fare prices to factor in higher costs. However, its other business sectors are more susceptible to changes in the economy, government policies and market sentiment. These include its high-speed rail operation, commercial business at stations, property development as well as mainland and international operations. Price setting powers for these sectors are lower, as they are operated in highly competitive markets.

Operating Risk 'Midrange'

MTRC has well identified cost drivers with moderate volatility. We expect the necessary resources and labour for its operation and expansion to be in adequate supply. MTRC has large capital expenditure plans, mostly less-adjustable maintenance expenditure. MTRC's total capex is also exposed to the uncertainty of investment expenditures for the Hong Kong network expansion, which is mitigated by its long planning period and extensive experience in project design, construction and management.

Financial Profile 'Stronger'

We expect MTRC's monopoly status, along with its expanding system network and resilient property business, to keep its leverage profile reasonable, despite large capex needs. MTRC's net debt/Fitch-calculated EBITDA, excluding restricted cash, remained favorable, at 1.7x at end-2021. We expect leverage to remain below 4.0x through to 2026, even under a stressed rating case forecast.

Derivation Summary

MTRC's IDR was derived from the four factors under our Government-Related Entities Rating Criteria. We believe the Hong Kong government has high incentives to provide extraordinary support to the company, if needed. We also factor in MTRC's public-service function as a sole operator of the Hong Kong mass transit rail network, as well as the impact of a default on the government.

The Standalone Credit Profile is derived from our assessment of the company's revenue defensibility, operating risk and financial profile under the Public Sector, Revenue-Supported Entities Rating Criteria.

Issuer Profile

The MTRC is a public listed company on the Stock Exchange of Hong Kong and is majority owned and controlled by the Hong Kong government. It is the sole operator of Hong Kong's mass transit rail network, comprising the domestic network, cross boundary services, high-speed airport express railway and light-rail system.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Negative rating action on the Hong Kong sovereign rating

Significant changes that lead to a dilution of government links or control, a weaker government support record and expectations, or weaker socio-political and financial implications of a default

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Positive rating action on the Hong Kong sovereign rating, in conjunction with continued strong government linkage and support incentive

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

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