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Due to the social unrest in Hong Kong, MTR Corporation Limited (SEHK: 66) shares have fallen around 8.5% from when the protests really gained momentum in June. Not only have many MTR stations and facilities been defaced, but also the protests have caused disruptions to subway services.
Although MTR stock no longer looks like a “safety stock” amid the stock’s decline, I believe there are three good reasons to be bullish on Hong Kong’s subway operator.
1. Market may have priced in the negatives
MTR recently provided a market update on the effect of the protests of its operations. As expected, MTR experienced a sharp drop in patronage as the social protests have continued.
Whereas MTR’s patronage fell by only 0.7% in July, the company’s numbers fell by 27.4% in October. Overall, MTR’s July to November (inclusive) patronage fell by 14.2% year-on-year.
In addition to decreased patronage, the subway operator suffered from vandalism and the need to spend more money on staffing and security. In total, MTR estimates that losses due to the protests have amounted to around HK$1.6 billion (US$205.3 million).
While HK$1.6 billion is a lot of money and the damage to MTR has worsened over time, MTR’s market cap has fallen by almost 10 times the provisioned amount – or around HK$23 billion since the beginning of June. Unless the protests last a long time or the social unrest gets considerably worse, the bad news may have already been priced into the stock.
2. Strong financials
According to the market update on the effect of the protests, MTR’s board believes the subway operator’s financial position is sound. The company’s board has also proposed to maintain MTR’s present progressive ordinary dividend policy. Currently (as of the time of writing), shares yield around 2.7%.
MTR’s strong financials are important to the company if things get worse. If property values fall further, MTR even has an opportunity to expand commercially if the right opportunity arises.
Due to the price decline, MTR is trading at a discount from a historical perspective. MTR has a forward price-to-earnings (PE) ratio of around 19.4, versus its five-year average price to forward earnings ratio of almost 23.
Even better, MTR stock could rebound quickly if the protests end. According to Goldman Sachs, MTR has already locked in profits from various property sales. As a result, MTR doesn’t need the property market to rebound as much in order for its stock to rise.
Because the company doesn’t depend that much on tourism for its subway traffic either, the company’s financials could rebound faster than the businesses of many other Hong Kong firms.
Although MTR shares are well off from their yearly highs and the protests remain ongoing, much of the bad news has been priced in. The company’s financials are strong, the stock trades at a discount to its five-year average, and shares could rebound quickly if the protests end.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.