Troubled by delays and cost overruns in new railway construction, MTR Corp (MTRC), which is majority owned by the government, posted a sharp decline in profit for the 2016 first-half, compared with the same period a year ago.

The company explained that its income from property development had almost dried up, predicting there'll be no new revenue generating projects coming on stream in the second half of the year.

The interim results have disappointed many minority shareholders who had bought the company's shares as defensive stocks amid market uncertainties. Before Wednesday's sell-off, MTRC shares had outperformed the benchmark index by gaining more than 13 percent since early this year.

Without income from property development, it's doubtful if MTRC can maintain future dividend payouts that can live up to the company's status as one that offers one of Hong Kong's most trusted, defensive stocks by relying just on revenue from fares. As a government-controlled monopoly, raising fares is not simply a commercial decision.

MTRC's fare structure has already drawn public outrage. Although railway fares in the SAR are still lower than those of many cities in other developed economies, they are seen by an increasingly agitated public as rising faster than inflation.

The corporation has defended its pricing policy by insisting it's in compliance with the fare setting mechanism agreed with the government. But the explanation has only brought discredit to the mechanism which is widely criticized for allowing only fare increases without accounting for the company's profitability.

MTRC Chairman Frederick Ma Si-hang is reported to have said that any attempt to cap the company's earnings or link fares to its profit level would result in a profit squeeze that would hurt the majority shareholder, the government, the most. Slipping property income has left MTRC with no other option but to raise fares to maintain profit levels, unless the government is willing to subsidize the company by plowing back its share of the dividend payout, as suggested by Ma.

This way, the government can benefit, at least on paper, from the expected rise in MTRC's share prices, while keeping the public happy. In fact, public transport is subsidized in many other cities.

(HK Edition 08/11/2016 page1)