In 2000, the Hong Kong Government decided to privatize one of its train operating companies, the Mass Transit Railway Corp. (MTR Corp.), by selling a minority share of 20% of it via IPO. The Hong Kong government hopes that the privatization will bring several benefits, such as easier raising of capital for investment, increased market discipline, and increased efficiency and competitiveness. This case study seeks to answer the question of whether or not the privatization has been beneficial for MTR Corp?
Su Han Chan, Ko Wang, Mary Ho
Harvard Business Review (HKU139-PDF-ENG)
August 15, 2001
Case questions answered:
- Is it appropriate for the government to take the company public at this time? Examine the government’s motives, the company’s financial and operating performance, as well as the current market conditions as your test of the appropriateness of this action. Make sure to use the information in case exhibits 6, 7, 11 to 16 to support your arguments. Is the privatization method important in this context?
- Is the firm fairly valued at an IPO price of HK$9.38 (HK$8.88 for eligible investors)? Use only the information in the case and assume that HSBC’s WACC estimate is based on a cost of equity of 16% to 18%.
- Has the privatisation been beneficial for MTR Corp?
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Case answers for Privatisation of the MTR Corp.
This case solution includes an Excel file with calculations.
Executive Summary – Privatisation of the MTR Corp. Case Study
In 2000, the Hong Kong Government decided to go for the privatisation of one of its train operating companies, the Mass Transit Railway Corp. (MTR Corp.), by selling a minority share of 20% of it via IPO. The Hong Kong government hopes that the privatization will bring several benefits, such as easier raising of capital for investment, increased market discipline, and increased efficiency and competitiveness.
The lines of the MTR Corp. run along Hong Kong’s Northern island coastline, beneath the Victoria Harbour, while connecting Kowloon and Lantau Island. Moreover, it has an excellent connection to the Kowloon-Canton Railway for traveling to the border of mainland China.
Also, an expressway allows a seamless traveling from the city center to the airport, across the Tsing Ma Bridge. At this point, the MTR Corp. operated a railway network of 82.2 kilometers connected by 44 stations.
In contrast to the government of Singapore, which also privatized its railway company in 2000, the Singapore Mass Rapid Transit (SMTR), the government of Hong Kong, has decided to sell both the rail network and the operating company. The founded company, the Mass Transit Railway Corporation Limited (MTRCL), comes with solid assets, such as tracks, tunnels, stations, and properties.
Public opinion of the privatization was different at this point. To analyze ex-post if the privatization of the MTR was a good decision by the Hong Kong government, the following three questions will be answered:
- Is it appropriate to take the company public at this time?
- Is the firm fairly valued at an IPO price of HKD 9.38 and HKD 8.88 for eligible investors, respectively?
- Has the privatization been beneficial for MTR?
In this report, we analyze the effects of privatization for MTR Corp., qualitative, and quantitatively.
The following section gives an overview of MTR. Section 1 assesses the timing of the privatization of the MTR.
Section 2 explains the valuation of IPO Price. Our evaluation will include an analysis of the timing of the privatization and the IPO, respectively, a valuation of the MTRCL to answer the question of whether the offered price per share was appropriate, as well as an ex-post analysis to finally look back on the financial performance since MTRCL is privatized.
Section 3 gives a retrospective analysis of the benefits of MTR’s Privatization.
Finally, the conclusion provides an answer to whether the hoped-for benefits have materialized as expected.
About Mass Transit Railway Corporation Limited (MTRCL)
As already implied, the Mass Transit Railway Corporation Limited was founded to corporate the former state-owned business of owning and operating the MTR, which was founded in 1975 and commenced service in 1979. The MTR network comprises the four MTR lines and the Airport Express line. Together with an SMTR in Singapore, the MTR was rated first-class in Asia.
The railway industry in which the MTR is doing business has certain characteristics, high capital intensity, oligopolistic market structure, a large number of regulations, and stable demand. In Hong Kong, MTR is one of three railways. After 16 years of operation, the MTR recovered all losses incurred since the commencement of operation.
After a long period of growth, ending in 1997, the MTR Corp. lost passengers to other vehicles due to a decrease of cross-harbor patronage and the opening of the Western Harbour Crossing tunnel in the same year. That resulted in a decreasing market share.
Nevertheless, in 1999, one year before the privatization took place, the MTRCL was profitable for HKD 2.1 billion. But the profit came from its property development business and not from the operation of the railway network, which would have made a loss of HKD 0.5 billion.
In terms of financing, the MTR had a relatively conservative approach, combined with active management by different interest structures, maturities, and currencies. Besides the property and network operating business, the MTR Corp. also has various sources of income, such as advertising and rental of space in stations or consulting services for large projects, e.g., planning.
All business units, including all assets and liabilities, were transferred to the MTRCL before the privatization took place. Given the fact that the company can be run profitably, the Hong Kong government decided to privatize the MTR Corp. for…