Tokyu Corp
TSE:9005
Earnings Call Analysis
Q2-2024 Analysis
Tokyu Corp
Under the leadership of President Horie, Tokyu Corporation has emerged from the challenges of the pandemic with a robust performance in the second quarter of FY2023. The company reported a substantial year-over-year increase in operating revenue to JPY 483.4 billion, operating profit to JPY 45.5 billion, and profit attributable to owners of JPY 35 billion, crediting a revival in demand across various segments, especially Transportation and Hotel & Resort, following the easing of COVID restrictions.
Tokyu's revitalization is evident across its core areas. Transportation witnessed a JPY 13.7 million revenue boost, fueled by more passengers and fare revisions. Real Estate displayed considerable strength with a JPY 4.7 billion profit increase, buoyed by sales and leasing. Hotels and Resorts too saw a robust JPY 4.1 billion increment thanks to higher demand and strategic reforms, while the Life Services segment enjoyed a JPY 1 billion profit uplift. It's worth noting, however, that the company faced a JPY 1.6 billion impact from higher energy costs year-over-year.
Looking ahead, Tokyu's full-year forecasts appear strong with anticipated operating revenue of JPY 1.0395 trillion, operating profit of JPY 85 billion, and profit attributable to owners of JPY 54 billion. This optimism reflects improved passenger numbers in rail operations, fare increase, and stabilized energy costs, marking a JPY 7 billion operating profit and a JPY 9 billion profit bump from earlier forecasts.
In recognition of the company's improved performance, Tokyu intends to reward its investors with a higher year-end dividend of JPY 10 per share, leading to an annual payout of JPY 17.5 per share. The management also demonstrated its confidence in capital efficiency strategies by repurchasing treasury stocks worth JPY 30 billion earlier this year.
The company's growth trajectory is complemented by several strategic ventures and expansions. Initiatives include the Tokyu Shin-Yokohama Line, aiming for enhanced commuter traction, and the successful opening of Tokyu Kabukicho Tower, which has quickly become an icon with over 3 million visitors. Moreover, Tokyu persists in its extensive development projects such as the Shibuya area and investments along Tokyu lines, hoping to synergize business segments including real estate, transport, and retail for a comprehensive value proposition.
In the hospitality segment, Tokyu is capitalizing on inbound demand, which has significantly increased the Average Daily Rate (ADR) to record levels, alongside a commitment to service enhancement through renovations. The company is also making commendable strides in its Environmental, Social, and Governance (ESG) initiatives, with a notable 38% CO2 emission reduction since FY2019, as it operates railway lines on 100% renewable energy. Such achievements place Tokyu as a progressive player not only in the eyes of investors but also in sustainable development.
Embracing two major ideas, Tokyu Corporation is positioned as a key driver of urban and community development. With sound financial results and strategic growth plans, the company is set to continue shaping the urban landscapes and enhancing community living while delivering shareholder value.
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This is Horie, President, Tokyu Corporation. I would like to thank you for your precious time despite your busy schedule to attend our financial results briefing.
Allow me to explain the second quarter results as well as the outlook for FY 2023. Please go to Page 4. This shows the main points of the second quarter FY '23 results; operating revenue was JPY 483.4 billion; operating profit was JPY 45.5 billion. Profit attributable to owners of parent was JPY 35 billion. As for year-on-year comparison due to the recovered demand in businesses, particularly in Transportation and Hotel and Resort due to the shift of the COVID infection to Category 5 and other factors, operating revenue was up JPY 48.7 billion; operating profit was up JPY 23.7 billion. Profit attributable to owners of parent was up JPY 16.5 billion thanks to the growth in operating profit and an increase in share of profit of entities accounted for using equity method.
Please refer to Page 5. This shows the key points by segment. Allow me here to expand on the comparison year-on-year. In Transportation, with the increased number of passengers transported by the Tokyu Railways driven by the recovery demand as well as the fair revision, and also thanks to recovery in Tokyu Bus and other businesses, operating revenue was up by JPY 13.7 million. Real Estate business, Tokyu Hotels and our mixed-use development building enjoyed a firm business. Although both Real Estate sales and Real Estate leasing grew over the previous year, resulting in a growth in profit by JPY 4.7 billion. Hotel and Resort business was up by JPY 4.1 billion thanks to the increased ADR driven by the recovered demand as well as the structural reform carried out. In Life Services business, profit went up JPY 1 billion, mainly driven by ICT and media business. For your reference, the impact from the electricity and other energy cost increase was JPY 1.6 billion year-on-year.
Now Page 6, please. This shows the change in operating revenue and operating profit since FY 2019 as of the second quarter. On top of the recovered demand in each business thanks to the effect from the structural reforms during the COVID-19, the latest Q2 shows a recovery exceeding the pre-COVID levels.
The next page shows changes by segment. Please refer to it at your leisure time.
Now please go to Page 8. Here now I'd like to explain our forecast for the full year. First, assumptions for the full year FY 2023. At a high level, since COVID-19 was downgraded to Type 5 in May, we had a higher recovery above our assumption, and we still have this assumption. As for the energy price, it has stabilized more than we had assumed back in August, and we are assuming it will come to a level almost the same as the last year. Please refer to the information described in the middle section for details of each business with major KPIs.
Tokyu Railways raised its August forecast due to a stronger recovery in the number of passengers carried and the revenue from fares based on the trend we had up until the first half. As for power costs, which we had expected a big increase, we will rise it down to the same level of the last year. I appreciate if you could refer to the information for other businesses at your leisure time.
Now Page 9, please. This shows the main point in forecast for FY 2023. As of November, full year forecast shows operating revenue, JPY 1.0395 trillion; operating profit, JPY 85 billion; profit attributable to owners of parent, JPY 54 billion. Compared to the August forecast, reflecting the recovered demand for Tokyu Railways and other transportation operations as well as the decline in energy costs, operating profit is forecasted to be JPY 85 billion, up JPY 7 billion. Profit attributable to owners of the parent is now JPY 54 billion, up JPY 9 billion.
Now Page 11, please. Major points for the forecast by segment. Here, allow me to make a comparison to the forecast we made back in August. Transportation business, taking into account the increased fares driven by the recovered demand in Tokyu Railways as well as the declined power cost, we revised operating profit up to JPY 7 billion from the August forecast. As for other businesses, in light of the trend we had up until the end of the first half, we made the revision. Energy costs helped us to push our focus by JPY 3.5 billion from the August number.
Now please go to Page 12. Here now I'd like to explain the changes in the main indicators for 3-year medium-term management plan. As I have explained earlier, for FY '23, we have revised up our initial guideline and we do expect all the indicators are to be improved.
Now Page 13. Next use of funds and financial strategy, and there are no changes from the past explanation.
Page 14, please. Next about shareholder returns. Reflecting the upward revision of the performance, the year-end dividend will be JPY 10, up JPY 2.5 per share. We plan to have annual dividend of JPY 17.5 per share. And in June this year, we repurchased treasury stocks together with the issuance of convertible bonds, about JPY 30 billion, for 16.5 million stocks. Believing that it is important to consider the number of shares issued going forward, we will take into account funds trends and the profit level and we intend to be flexible in considering the treasury stock buybacks so that we can improve our capital efficiency.
Please go to Page 17. Here, I will explain the situations in each business. First, Railway business. As for the status of Tokyu Shin-Yokohama Line, which opened in March this year, as shown in the middle, in regard to the number of passengers carried has reached about 70% vis-a-vis the plan. The number of noncommuter passengers is high due to the route switch of Shinkansen users and demand for events near Shin-Yokohama Station. This is right on the plan, but the number of the commuters has not reached the plan yet. We believe it will take some time to improve the public awareness and enjoy a stable demand. Along with the proposition to improve convenience, such as timetable revisions, we continue our efforts to generate demand for commuter train passes.
Next page, please. This is about Tokyu Kabukicho Tower we opened in April this year. We are operating the hotels and opening with 2 brands. We are having a smooth start with the hotel group at Shinjuku. The number of visitors to the tower has surpassed 3 million, creating a lot of buzz and it has become a new symbol for Kabukicho. We continue our efforts to increase the value of the facilities and the community while leveraging attractive entertainment.
Page 19, please. Here now I'd like to explain our ongoing development projects. First, Shibuya area. As for the projects underway described in the top layer, have no change since the last time and we are progressing according to the plan. The bottom describes the status and the time line for the new projects. Though I cannot share specific details, but together with the ongoing projects, the total investment we are considering now is at the level of JPY 500 billion with a total floor area being about 800,000 square meters.
Page 20, please. This shows the major development projects in the areas served by the Tokyu lines. We are making a steady progress in the redevelopment project in Shin-tsunashima Square. Besides it, we are planning to develop several buildings in the areas along the Tokyu lines. We expect to invest about JPY 200 billion. We expect to realize a higher usage of the Real Estate assets which will increase the number of residents along the line, which will help to increase revenue not only from real estate, but from railways, buses or retail operations, lifestyle services. We'd like to maximize the best possible effect from our cyclical reinvestments. We continue to be engaged in our initiatives to further increase the value of the Shibuya line area.
Page 21, please. Here now I'd like to explain our hotel initiatives. In September, the percentage of foreign guests at the hotels in the Shibuya area reached 74.5%. We made steady efforts to increase our inbound demand. As a result, ADR has risen up greatly, reaching the record high level. Under such circumstances, we are now engaged in hotel renovations so that we could improve customer satisfaction by offering better services fit for the price. Going forward, we intend to further improve our service quality and continue to improve our profitability firmly.
Page 22, please. I would like to update on our latest ESG initiatives. On the environment, we finished calculating our CO2 emissions during FY '22. We achieved 38% reduction compared with FY 2019. All Tokyu Railways lines are now using power that is 100% derived from renewable energy. And this contributed to the result. Going forward, we expect to see recoveries of economic activities in the post-COVID-19, and we do expect energy usage would further increase together with the business growth. So in order to achieve our target for FY '30, we will continue to advance our efforts for energy conservation and advance our usage of renewable energy.
Now please go up to Page 24. Here now I'd like to expand on our 2 big ideas. Tokyu Corporation engages in urban and community development and keeps urban communities running. We have a unique business model combining relays, buses, real estates and urban infrastructure, retail and live services. And we will work on the following 3 themes to further advance our unique Tokyu-style urban development efforts.
First, we aim at increasing the population and income along the Tokyu lines. This population, besides the residents, we'll also aim at nonresidents and related population. We will seek to expand and improve the facilities and services in the areas served by Tokyu lines. And we'll add value to these areas, realizing the best cities in Japan and if I may say, in the world. People wish to live in, work in and visit. Not only to attract population, but we also would like to create employment opportunities in the areas served by our lines. And income generated there would be consumed inside the areas served by our lines. We'd like to develop such a mechanism.
The second point is our large-scale redevelopment projects. The recent sharp rise in construction costs posted a risk to the profitability of our projects. But if competing projects are canceled or delayed, it will be a tailwind for our existing leasing portfolio. We'll be conscious of controlling development costs and schedules to secure development profits and turn a crisis into an opportunity. We'll also promote a cyclical reinvestment and increase the competitiveness of the areas served by the Tokyu lines and realize contrarian investment. Though I will explain this later, but cyclical reinvestment is not just limited to the simply accelerating the collection of the funds. But also, it involves on and off, on upgrading of real estate and various services along the Tokyu lines since the rail lines are in a target of reinvestment. This will make us more competitive compared with other lines and other areas.
The third is to improve the profitability of the existing businesses. This can be referred to as internal growth. Here I would like to increase the value of each business through additional investment from customers' perspectives. We will then achieve returns above the average through growth in each business and collaboration between businesses. Of course, it goes without saying that we'll grow our fee business based on the existing businesses so that without increasing investment burden, we can improve business returns.
Tokyu's DNA, supporting the Tokyu-style urban and community, which has been nurtured by our constant efforts to provide creative values since our founding. We will continue to provide our solutions to social issues and everyday life issues from creative perspectives of ours.
Please go to Page 25. Here, I will expand on the positioning and characteristics of our businesses. Businesses like transportation, railways and buses and real estate and urban development will be used to develop comfortable urban areas and communities to create stable population base. This is our core businesses. In contrast, we have life services and hotels and resorts businesses. They are our added value creation business to our real estate and transportation infrastructure. This will further expand the businesses by increasing the population involved with the areas. Transportation and Real Estate businesses have heavy capital invested, giving us stable returns. In contrast, Life Services and Hotel and Resort, though capital invested being somewhat limited, volatility tends to be somewhat higher compared with Transportation. So we believe we should aim at higher returns in this business.
Page 26, please. Based on the way we view our businesses, and as I explained earlier, I would like to explain our approach to descale our assets or return that we should aim at. The diagram in the middle shows ROA and asset size for each business. The vertical axis represents the level of ROA for each business, and the horizontal axis represents invested capital. Transportation and Real Estate leasing and management have large assets and are expected to generate stable returns. But in return, their ROA is relatively low.
On the other hand, Hotel and Resort and Life Services businesses are superior in terms of ROA because they operate with fewer assets and require less investment. These businesses have a much lower return on sales than the core businesses, but their asset efficiency is rather good. In particular, in many cases, Life Services and the Hotel and Resort are operated within the properties we have developed. And inter-business collaboration enables us to maximize earnings from the properties we developed. In addition to this, we can expect to improve ROA on a consolidated basis by combining asset-efficient real asset sales, such as the sale of interest and development businesses. Based on the characteristics of our businesses, we hope to increase in asset efficiency and ROA on a consolidated basis by growing each business and accumulate additional cash flow through inter-business collaboration.
Now Page 27, please. As shown on the previous page, we are developing multiple businesses in various areas through a collaboration among businesses. This is how we create business value in each area. So going forward, besides the business segment we are currently showing to you, we need to add another perspective of area segment. We need to pay more attention to asset scale as well as income expenditure and efficiency in each area segment. We'd like to acquire an even better business opportunities by digging deeper into each area.
Page 28, please. Lastly, now I'd like to explain what we would like to achieve by promoting cyclical reinvestment. Until now, our development projects have mainly focused on recovering investment through leasing income. But in the future, we will also strengthen the recovery of funds through the sale of a portion on of our equity, thereby accelerating reinvestment by speeding up the turnover of funds.
We intend to further promote cyclical reinvestment. Of course, we will also secure opportunities for fee business by retaining a certain amount of equity. The main feature of our company is to invest the recovered funds into Shibuya and the areas along the Tokyu lines, again, in a cumulative manner. With still concentrated reinvestment in Shibuya the areas along Tokyu lines, we'll renew real estate and facilities, thereby improving the convenience of the town while pursuing safety and security against the disaster risks and others.
This will increase attractiveness and the competitiveness of the areas along our Tokyu lines as towns where people want to live visit and work. This will create a virtuous cycle of area growth by attracting more people and creative businesses and facilities to the areas along our Tokyu lines. Another feature of this in a virtuous cycle is that it maximizes the return on each of our businesses along the Tokyu lines.
As the population increases and the value of the areas along the Tokyu lines, the number of users of our transportation system will increase. And the return of funds from our retail, entertainment and hotel business in the real estate will have developed and also accelerate. Of course, we can also expect a decrease in the vacancy rate of the office floors. This will further accelerate investment in the Shibuya area along our Tokyu lines.
In this way, our cyclical reinvestment is our unique and highly leveraged business model that creates a sustainable competitive advantage in the areas along the Tokyu lines. It enhances the value of our portfolio, and it generates additional cash flow through a wide range of business linkages to further accelerate the pace of growth. This is our unique and highly leveraged business model. We intend to further refine this model to further enhance the value of the areas along Tokyu lines and link this to our corporate value. This concludes my explanation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]