Tokyu Corp
TSE:9005
Tokyu Corp
In the bustling metropolis of Tokyo, where pulsating neon lights juxtapose centuries-old traditions, Tokyu Corporation stands as a quiet yet influential powerhouse. Founded in 1922, Tokyu is more than just a transportation company; it represents a lifeline connecting the sprawling expanse of the Tokyo metropolitan area. The company operates an extensive network of railway and bus systems, strategically facilitating the daily commute of millions. Its railway division, the lifeblood of the company, weaves through dense urban areas and tranquil suburbs, garnering passenger fees that form the backbone of its revenue stream. However, Tokyu’s vision extends beyond mere transit. By integrating real estate development with its transportation services, Tokyu transforms areas surrounding its rail lines into thriving commercial and residential zones—an endeavor that not only spurs land value but also boosts passenger numbers.
The symbiotic relationship between transportation and real estate forms the core of Tokyu's business model, creating a self-reinforcing cycle of urban development. The company possesses a significant land bank, acting as a catalyst for commercial growth by developing retail complexes, hotels, and office buildings. Properties like Shibuya Hikarie, an iconic skyscraper in Tokyo, highlight Tokyu's ability to blend functionality with architectural flair. This diverse portfolio, along with ventures in hospitality, merchandising, and lifestyle services, allows Tokyu to mitigate risks tied to any single revenue source, ensuring a stable yet dynamic financial performance. Through its innovative approach, Tokyu Corporation is not just moving people from point A to B; it’s crafting ecosystems that enhance the living and working experiences of Tokyo’s population.
Earnings Calls
In the second quarter of FY 2024, the company reported operating revenue of JPY 525.2 billion, a JPY 41.7 billion increase year-over-year, attributed to a revival in transportation and real estate sectors. Full-year forecasts now predict operating revenue of JPY 1.065 trillion and operating profit of JPY 101 billion, with profit attributable to parent owners reaching JPY 74 billion. Shareholder returns are bolstered by a JPY 40 billion treasury stock acquisition and a dividend hike to JPY 23 per share. Furthermore, the firm anticipates further profit increases of JPY 10 billion annually through FY 2026, affirming robust growth prospects despite inflationary pressures.
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All right, thank you for your precious time despite your busy schedule.
First, I will explain the second quarter financial results as well as the full year financial forecasts for FY 2024. Then I will explain updates on the numerical plan for the 3-year medium-term management plan, our approach to the business environment and the topics for the current fiscal year.
Please turn to Page 4. These are the key points for the second quarter results FY 2024. Operating revenue was JPY 525.2 billion. Operating profit was JPY 65.3 billion, and profit attributable to owners of parent was JPY 49.4 billion.
Compared to the previous fiscal year, thanks to a recovery in the number of users in railway business and Hotel and Resort business as well as an increase in condominium sales, the operating revenue increased by JPY 41.7 billion and operating profit increased by JPY 19.8 billion. In addition, profit attributable to owners of parent was up JPY 14.4 billion. Compared with the forecasts announced in May, operating profit was up by 25%. Profit attributable to owners of parent was up by around 40%.
Please turn to Page 5. The key points of the financial results by segment are as follows. I will explain them in comparison with the previous fiscal year.
Real Estate Business, up JPY 10.1 billion in profits. As of the second quarter, the number of condominiums delivered increased; and the real estate sales business saw a large increase in profits. In addition, the real estate leasing business also performed well due to an increase in percentage rate rents for commercial facilities and hotels.
Life Service Business, up JPY 4.7 billion in profits. In the retail business, Tokyu Store Chain performed well, increasing profits by JPY 1.5 billion. And in the ICT and media business, profits grew by JPY 3.2 billion due to improvements in the electricity procurement environment at electricity retailer Tokyu Power Supply.
Transportation Business, up JPY 2.9 billion in profits. In addition to an increase in passenger numbers at Tokyu Railways, there was also the effect of fare revisions for Tokyu Bus.
In the hotel and the resort business, ADR, price per room, increased significantly due to the inbound tourists, resulted in increase of JPY 1.8 billion in profit. In addition, the Real Estate Business also contributed to the percentage rate rents.
Please turn to Page 8. I would like to explain our performance forecasts for the full year of FY 2024. First, the assumptions as of November: We believe that overall business environment continues to be favorable with a continued recovery in travel demand and an increase in inbound demand. In terms of labor costs, in addition to implementing wage increases that exceeded the budgeted number, we are now working to expand our recruiting in response to the recovery in demand. In light of the good performance in the first half of the year, we expect a further wage increase. And in anticipation of future growth scenarios, we expect an increase of JPY 2 billion from the forecast in May. On the other hand, we are in a situation where we need to be careful about rising construction costs and rising interest rates; and I will explain our approach later.
The main KPIs are also listed in the middle section, and we have updated them for each business. Next, I will explain our full year performance forecasts for FY 2024.
In the second quarter, all segments showed increased profits compared to our forecasts in May. And given the favorable performance, we revised upward our full year forecasts. Operating revenue is expected to be JPY 1.065 trillion and operating profit is expected to be JPY 101 billion, up JPY 10 billion in revenue and JPY 13 billion in profit compared to the forecasts announced in May; profit attributable to owners of parent being JPY 74 billion, up JPY 14 billion.
Page 10, please. This shows the performance indicators for the full fiscal year. We expect EPS, earnings per share, to be JPY 129.30, ROE to be 9.3% and ROA or business profit ROA to be 3.8%, which are improvements from the forecasts made in May.
Please turn to Page 13. Here I would like to explain our shareholder returns and capital policies. In conjunction with the announcement of our second quarter financial results, we have decided to acquire treasury stock for a total amount of JPY 40 billion, up to a maximum of 24 million shares. This will improve capital efficiency, including ROE. And by reducing the number of shares, we will further increase EPS and improve share value per share. In addition, we'll use a portion of the proceeds from this share acquisition to fund sales of our shares by financial institutions and us. We'll reduce our cross-shareholdings while appropriately addressing concerns about the worsening supply and demand of shares.
The annual dividend for FY 2024 will be JPY 23 per share, up JPY 1 from the previous forecast announced in May, based on the upward revision of the earnings forecast. This is an increase of JPY 2 from the time of the announcement of the medium-term management plan. And it will be the highest level ever along with FY 2019 which included a commemorative dividend of JPY 2. As a result, we expect the total return ratio to be about 70%.
Next, I will update the management indices and the numerical targets in the 3-year medium-term management plan. Please go to Page 15. Due to then upward revision of FY 2024 earnings forecasts, we expect to achieve target profit level of the 3-year medium-term management plan ahead of the original schedule, so we will upgrade the management indices and the numerical targets from the levels announced in March 2024.
The operating profit is -- shown in the middle section, is expected to be JPY 95 billion in FY '25 and JPY 105 billion in FY '26, up JPY 10 billion from the medium-term management plan each year. In addition, profit attributable to owners of parent, as shown one line below, is also expected to increase by JPY 7 billion each year. As a result, we expect improvements in management indices such as EPS, ROE and ROA.
As for the details on [ the staged ] profit and each segment, please refer to the information on Page 16 and 17. Please turn to Page 18. From here, I will explain our approach to the business environment.
Page 19. I will explain impact of inflation and rising interest rates and our responses. We believe that the share prices of railways and real estate stocks are currently being weighed down by rising costs due to inflation and concerns about rising interest rates. We feel that the railway business, our main business, is generally viewed as a sector that is vulnerable to rising interest rates and inflation because fares are subject to approvals and real estate rents increase lag behind the economy.
On the other hand, our company's portfolio is made of business groups with different economic sensitivity. This provides a certain amount of stabilizing effect. And we believe that we can expect increased profits even in times of inflation and rising interest rates. Furthermore, we are now taking appropriate measures to mitigate the impact of rising interest rates through financial strategies such as long-term tax interest rates on borrowings on corporate bonds.
The left shows the summary of economic sensitivity of our businesses. As mentioned earlier, railroad and bus fares are subject to approvals and take time to revise the fares. In addition, office rents also now take a certain amount of time to revise, so they lag behind the economy. On the other hand, demand volumes such as railroad and bus passenger numbers are in line with the economy.
In the real estate rental industry, the percentage-based rent of commercial facilities and hotels are also linked to the economy. The retail and hotel businesses themselves are highly in line with the economy and are currently performing well. In addition, we are -- also operate some businesses such as advertising that lead the economy, although their proportion is not large. As such, our company operates a variety of businesses with different economic sensitivities. And we have a unique business portfolio that can increase earnings on a consolidated basis even in times of inflation and rising interest rates. And we believe that we have a certain degree of resistance to inflation and rising interest rates.
In addition, the right side shows our financial strategy response. Since our company has a high proportion of businesses that require a long period of time to recover investments, we are extending the maturity of our procurement and promoting borrowing at fixed interest rates. The average maturity is about 7 years. And 70% of the total is fixed interest, making it an appropriate debt portfolio that will not have an immediate significant impact on interest payments even in the event of rising interest rates.
Please turn to Page 20. Next, I would like to explain the impact of rising construction costs on real estate development. Construction costs have risen significantly due to labor shortages and rising material costs, and we expect this upward trend to continue in the future. As a result, we expect the project -- balance of development projects to deteriorate. And generally it will be difficult to decide to proceed with development, except in the areas where rents level is high. Even in this environment, we would like to continue to promote major projects by taking advantage of our business areas and the strength of our business structure. The reason for this is that we own many highly competitive properties, mainly in the Shibuya area. And vacancy rates are low and rents are at high levels. Even in a harsh environment of rising construction costs, we're in a position where it is relatively easy for us to proceed with large-scale development.
In addition, we believe that some redevelopment plans currently being considered in various regions will be postponed or canceled going forward. In fact, several redevelopment projects have already been postponed in Tokyo. We believe that this situation will be an opportunity for our company. If [ competing ] redevelopment projects are delayed or canceled, new supply will not progress. Vacancy rates will fall more than expected, and rent levels are expected to rise.
In addition, our existing properties will become more competitive. In addition to an increase in cash flow due to rising rents, we can expect low and stable cap rates due to growth expectations. And the scenario in which property values would rise is also possible. In addition, we believe that properties that proceed with projects and open, even with rising construction costs, will give us competitive advantage. In addition, our company is a developer rooted in the community and focusing its investments on the Shibuya and Tokyu line areas, which gives us an advantage in advancing redevelopment activities.
One of our major features is that we are able to increase the value of not only new properties but also existing properties in the area by concentrating investments in the Shibuya and train line areas and providing attractive facilities and services that are popular with workers and visitors, thereby increasing the value of the entire area. In fact, Shibuya Hikarie has created a concentration effect and synergy effect such as rising rents following the opening of the subsequent redevelopment projects such as Shibuya Stream and Shibuya Scramble Square.
Another major feature of our company is that we are not limited to real estate business, but we are also developing a wide variety of businesses that provide added value to the area. With the increase in Shibuya's working population, visiting population and related population, the profits of existing businesses such as railways and buses, commercial, retail and entertainment and hotels will also increase, making it possible to obtain excess returns in addition to real estate rental income. This is the strength of our business model.
Please turn to Page 21. I will explain the topics for this fiscal year.
Page 22. First, about the Transportation Business. Demand recovery is clear, especially for railways and buses. The graphs on the left and the middle show trend in fares and transportation revenues. In addition to the recovery in the number of users, there is also the effect of fare revisions. And revenues are expected to be at the same level as before COVID-19 or slightly higher, which is driving our performance. In addition, as shown in the bottom left, the number of the passengers at airports involved in our company is also exceeding pre-COVID-19 levels, mainly for international flights.
The right side shows topics for the Real Estate Business. On July 8, the office building in Shibuya AXSH opened; and then office tenants started the business with full occupancy. The bottom right shows trends in rents and vacancy rates for our office buildings. We have highly competitive properties, mainly in the Shibuya area; and rent levels are on the rise.
Page 23, please, about Life Service Business. Tokyu Store Chain is performing well due to an increase in customer numbers and an increase in average purchase price per person. In addition, rather than providing all services ourselves, we are promoting the creation of sales floors that utilize franchises among daily necessities for pharmaceuticals and other items that we cannot provide at competitive prices and with a wide range of products ourselves. We have introduced Matsumoto Kiyoshi franchise stores and are working to create optimal sales floors from the customers' perspectives. The graph on the bottom left shows the transaction volume of shopping centers in the Shibuya area. We are now steadily growing by capturing demand from visitors, including inbound tourists.
The right side shows our hotel and the resort business. We have [ certainly ] captured inbound demand. And the rise in ADR and room rate is driving our performance. In particular, the ratio of foreign guests in Shibuya and the Shinjuku areas exceeds 80%. And our strength is in having many hotels in areas that are popular with foreign tourists. By the way, we operate a total of 1,851 rooms and 18 restaurants in Shibuya and Shinjuku.
Now Page 24, please. I will explain our ESG initiatives. In addition to Tokyu Railways which already operates on 100% renewable energy, in our Real Estate Business, we are working to switch the electricity used in our leasing properties to 100% renewable energy by FY 2025. We also aim to obtain environmental certification for our major properties by FY 2026, and we will work to make our properties even more popular than ever before.
Now please move on to Page 25. Finally, I would like to explain our regional conglomerate business model. Page 26: On this page, we will explain regional conglomerates using the opening of Shibuya Scramble Square as an example. With the opening of Shibuya Scramble Square, the number of office workers and visitors are actually increasing. And the number of inbound tourists visiting the rooftop observation deck Shibuya Sky is also increasing significantly in the Shibuya area's related population. And as the number of workers and visitors increases, we can expect an increase in the use of our facilities in the surrounding area, such as shopping and dining at Shibuya Hikarie or going to see musicals.
In addition, we have those hotels managed and operated by our company in Shibuya Stream and Cerulean Tower, which will increase the number of overnight stays by tourists and visitors to Shibuya's offices. Companies in the surrounding offices will likely make frequent use of the food and beverage facilities and banquet space. Furthermore, if there are executives or employees of the companies that occupy our offices who live along the Tokyu line, we believe that they will be able to use our trains, buses, supermarkets and others. In addition, the opening of the Shibuya AXSH office building in July of this year has increased the number of employees by approximately 2,500 people.
Page 27, please. This is modeled on the regional conglomerate ideas that I explained earlier. By using real estate development as a hook, we aim to expand additional returns by attracting the working population, visiting population, [ passing ] population and lodging population to the area; and spreading this to other businesses.
In addition, our major strength is that we can continuously make additional investments to improve the appeal of the same area. For example, a typical developer would take then funds recovered from a project in Shibuya and then invest them in another location such as another project in Hakata. They do not necessarily reinvest into Shibuya. However, we take the funds recovered from Shibuya and the areas along the lines and reinvest them in Shibuya and the areas along the lines. This is called our regional cyclical reinvestment model.
By constantly making additional investments in the city and the area, the value of the area will increase. And as a result, the cash flow and value of the existing properties owned by us will increase. In addition, we can earn multiple profits from other businesses other than the Real Estate Business. This is our unique regional conglomerate business model. In this way, our goal is to further increase the value of Shibuya and the towns along the line, making them rich, beautiful and fun. As a result, we would like to further increase the value of real estate in Shibuya, rents and cash flows from other existing businesses. Currently, the area with highest rent in Japan for office rents is the Otemachi and the Marunouchi area. We will strive to obtain office rents that surpass those of Marunouchi and Otemachi by providing facilities, services and bustle that are not available around the Tokyo stations, such as entertainment.
Please turn to Page 28. This is the material we shared back in May. This shows our properties and services and customer base that make up the regional conglomerates in the Shibuya area. In this way, we provide a wide variety of services in Shibuya, and through these, we will achieve growth in the area and increase our corporate value.
Now Page 29. Finally, let me talk about attracting people to our areas. In the business model of our regional conglomerate, the key is how to attract people to the area. And this population include not only residential population but also working population and the people who visit the city and stay overnight.
The left side shows the current trend. The graph above shows the working population and residential population in the Shibuya area. And the working population has grown significantly due to the promotion of redevelopment and a significant increase in the supply of office space. However, Shibuya has the smallest office supply among the major 5 central wards of Tokyo. And it continues to be unable to meet the entire demand.
The bottom shows inbound data. According to a survey by the Tokyo Metropolitan Government, Shibuya is the city most visited by the tourists visiting Japan. Not only Shibuya symbols such as the Shibuya Scramble Crossing, Hachiko Square and SHIBUYA109, also the undergoing development, including development of tourist attractions such as Shibuya Sky, are also helping to boost inbound tourism. In addition, we are supporting a renovation project for Taro Okamoto's work Myth of Tomorrow at the Shibuya Mark City access road; and also working with the Yamatane Museum of Art and the Toguri Museum of Art, 2 well-known art museums in Shibuya ward, to help promote cultural appeals of Shibuya.
On the right side, it shows our future efforts to attract more people. In an environment where the population is declining across Japan, we will continue to work in order to increase the population in Shibuya and along the Tokyu line. We'll be working on various measures for the residential population, working population and visiting [ and staying ] population. And we will be actively promoting measures to attract more residents in order to further expand the residential population along the Tokyu line, which is expected to peak in 2040.
In addition, we have also published a 2024 fact book on our website today. This includes materials on the progress of our business portfolio, Tokyu Group reorganization and the process of strengthening group governance. We have been receiving more and more questions about our business portfolio and relationship with equity-method affiliates, so we hope you will also refer to this document.
That's all from me.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]