Tokyu Construction / 1720

R Tokyu Construction / 1720

COVERAGE INITIATED ON: 2020.05.21 LAST UPDATE: 2020.05.21

Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg.

Research Coverage Report by Shared Research Inc. Tokyu Construction / 1720 RCoverage LAST UPDATE: 2020.05.21 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

INDEX

How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report.

Executive summary ------3 Key financial data ------6 Recent updates ------7 Highlights ------7 Trends and outlook ------8 Quarterly trends and results ------8 Management strategy ------18 Business ------23 Business description ------23 Market and value chain ------34 Construction market in Japan ------34 Main competitors ------39 Strengths and weaknesses ------48 Notable projects ------50 Historical performance and financial statements ------56 Income statement ------56 Balance sheet ------57 Cash flow statement ------58 Historical performance ------59 Other information ------64 History ------64 News and topics ------68 Corporate governance and top management ------68 Dividend policy ------70 Major shareholders ------70 Employees ------70 Profile ------70

02/71 Tokyu Construction / 1720 RCoverage LAST UPDATE: 2020.05.21 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Executive summary

Business overview

Tokyu Construction is a second-tier general contractor (see paragraph below). A member of the Tokyu Group, Tokyu ◤ Construction is an equity-method affiliate of Tokyu Corporation (TSE1: 9005), which owns a 15.1% stake in the company. Most revenue comes from private-sector construction projects. In FY03/19, the Building Construction segment accounted for 78.1% of revenue. The Civil Engineering segment, which includes railway construction, accounted for 21.3%, and the Real Estate segment provided 0.6%. Nearly 20% of construction orders come from other companies in the Tokyu Group. Tokyu Construction focuses on areas along Tokyu train lines, from the southwestern part of Tokyo’s 23 wards to northern Yokohama.

A general contractor is a construction company that accepts all-in contracts for building construction and civil engineering ◤ work. After receiving such contracts from companies or government/municipal bodies, general contractors subcontract work to specialized construction companies (subcontractors), managing the overall process. The scale of business is large; revenues from individual projects may run from billions to tens of billions of JPY. Construction periods on office building, railway, or roadway projects typically last from one to three years. Private-sector construction tends to be vulnerable to fluctuations in the operating environment. Public-sector projects tend to be more stable, with government entities continuing to place orders even in economically difficult times. The Japanese construction industry has been growing in recent years, benefiting from increased investment in construction, notably for business related to the Tokyo Olympics. Once this private-sector demand has run its course, the company expects general contractors to prioritize relatively solid business involving public-sector and overseas projects, and expansion of non-building construction business.

Tokyu Construction’s revenue CAGR has been 7.9% over the past five years, buoyed by rapid growth in private-sector ◤ construction projects (including redevelopment in Tokyo’s Shibuya district). By comparison, CAGR for the top 17 general contractors was 3.9% over the same period. Tokyu Construction’s profitability is higher, as well. In FY03/19, the company’s adjusted ROE* was 12.0%, compared with an average of 9.0% for the top 18 general contractors. As orders have grown, higher asset efficiency has contributed to increased profitability.

*Adjusted ROE: Recurring profit x (1-30%**) / shareholders’ equity. **30% is a general figure used for the effective tax rate. Indicates ROE excluding the impact of temporary extraordinary gains or losses. ROE for Tokyu Construction was 18.1% in FY03/19.

The Building Construction segment accounted for 78.1% of revenue and 72.4% of operating profit (FY03/19). In this ◤ segment, the company constructs buildings throughout Japan, including office buildings, government offices, and schools. Operating in a buoyant construction market, recently the company has constructed a number of major office buildings near Shibuya Station. Notable projects include Shibuya Hikarie (completed in 2012), Shibuya Scramble Square (completed in 2019), Shibuya Stream (completed in 2018), and other high-rise office buildings that are part of a Shibuya Station redevelopment project. The company has a sales team that concentrates specifically on the Shibuya area. This team has been instrumental in such projects as Qfront (1999), which is a landmark near Shibuya’s Hachiko crossing, and Shibuya 109 (1979). The company has also handled projects for educational institutions, such as Tokyu-affiliated Asia and Tokyo City universities, as well as Nippon Sport Science University.

The Civil Engineering segment generated 21.3% of revenue and 28.7% of operating profit (FY03/19). In this segment, the ◤ company focuses on businesses characterized by stable demand and good profitability, such as railway and road construction. Tokyu Construction says it has industry-leading technological expertise in these areas. Recent railway construction projects include continuous elevated railway work near Keikyu Kamata Station (completed in 2016) and subway construction on the Tokyu Toyoko Line between Shibuya and Daikanyama (2014). The company explains that its railway construction technologies allow it to build complex multilevel crossings, and that it has earned a strong reputation for sophisticated technologies that enable new routes to be built at night without interfering in the operation of existing routes. Road construction projects include the Atsugi Minami Interchange on the Shin-Tomei Expressway (2018) and the Ohashi Junction on the Shinjuku Line of the Metropolitan Expressway Central Circular Route (2010).

03/71 Tokyu Construction / 1720 RCoverage LAST UPDATE: 2020.05.21 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Key overseas projects include the Jakarta Mass Rapid Transit Project (completed in 2019, Indonesia), the Bangkok MRT ◤ Purple Line (completed in 2014, Thailand), the Vo Nguyen Giap Road (2014, Vietnam), and the Causeway Point Shopping Center (2012, Singapore). Civil engineering work tends to be concentrated on ODA projects. In recent years, the company has focused on obtaining orders for high-rise buildings.

The Real Estate segment accounts for 0.6% of revenue (FY03/19). Most of this business involves income property, so ◤ profitability is higher than in the building construction business. In FY03/19, the Real Estate segment delivered a temporary loss, due to the company’s revision of revenues and costs on large-scale development business.

Earnings trends

In FY03/20, revenue was JPY322.2bn (-2.8% YoY), operating profit was JPY20.3bn (-7.6% YoY), recurring profit was ◤ JPY22.0bn (-4.2% YoY), and net income attributable to owners of the parent was JPY14.9bn (-3.9% YoY). The dividend was JPY31 per share, flat YoY.

Citing the difficulty of making a reasonable calculation of the impact on earnings from the COVID-19 outbreak at this time, ◤ Tokyu Construction has refrained from issuing FY03/21 forecast. The company indicated that it will announce its forecast as soon as it becomes possible to do so.

The company is currently following Shinka 2020, the medium-term management plan for 2018 2020 it announced in ◤ – March 2018. By FY03/21, this plan targets revenue of JPY312.0bn, operating profit of JPY19.5bn, recurring profit of JPY19.8bn, and net income attributable to owners of the parent of JPY13.9bn. The plan also calls for ROE of at least 13% and shareholders’ equity of JPY110.0bn or more. Having exceeded these targets in FY03/19 with revenue of JPY331.4bn and recurring profit of JPY22.9bn, the company expects performance to decelerate as demand for construction dips.

The company has also unveiled a long-term vision for FY03/26. Financial targets include shareholders’ equity of ◤ JPY150.0bn+, ROE of 10%+, revenue of JPY350.0bn+, and OPM of 7.0%+ (calculates to operating profit of JPY24.5bn). This revenue figure would equate to a 5.6% increase over FY03/19. The company will focus on expansion of renovation work on superannuated structures, the construction of medium-sized wooden structures using domestic materials, civil engineering work, overseas projects, and the real estate business, as well as new areas, such as the PPP/concession and bell pepper businesses.

The company expects previously solid demand for private-sector construction projects to ease somewhat, but thinks the ◤ long-term outlook is firm. First, it anticipates robust demand for business along the Tokyu lines, starting with Shibuya. Development around Shibuya Station is slated to continue, such as the Shibuya Scramble Square Central Tower and West Tower (construction scheduled for completion in FY03/28). Redevelopment work is also scheduled for Sangenjaya, Shin- Tsunashima, and other locations long the Tokyu lines. Second, the company expects demand for renovation work to increase, as buildings in Japan continue to age. A third area of focus is wooden construction and mixed-wooden construction. The company expects increased markets for medium- to high-rise offices, housing, and commercial facilities due to regulatory reforms and mixed reinforced concrete structures.

As strategic business areas, overseas projects are the company’s primary focus. It is pushing forward with construction ◤ projects in South and Southeast Asia (Thailand, Singapore, Indonesia, Myanmar, Vietnam, and Bangladesh). Tokyu Construction plans to reinforce its systems for obtaining private-sector building orders from prominent local developers and Japanese companies operating overseas. Stepping up its exposure to some extent, the company plans to expand leasing of office buildings and stores. The company also plans to renovate properties it acquires to boost yields. A third area of strategic business focus is PPPs/concessions (public private partnerships). The company plans to focus on its areas of – expertise: water and sewerage and airport concessions. With water and sewerage as its main target, the company has collaborated with the Tokyu Group on airport concessions. Fourth, the company plans to develop new businesses. One such development has been the bell pepper business. The company produces and sells bell peppers, using a greenhouse location it set up in Miho-mura, Inashiki, Ibaraki Prefecture in 2012. The company plans to expand this business further. It also plans to concentrate on new business cultivation and development.

04/71 Tokyu Construction / 1720 RCoverage LAST UPDATE: 2020.05.21 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Strengths and weaknesses

Shared Research identifies three strengths at Tokyu Construction: 1) nearly 20% of revenue due to business opportunities via the Tokyu Group, 2) a strong track record of projects completed in Shibuya and along the Tokyu lines, and 3) abundant experience with railway construction, which helps ensure stable earnings during economic doldrums. We also see three weaknesses: 1) outdone by super general contractors in its record for high-value-added construction work (such as large sports facilities, art museums, and long bridges), 2) a low percentage of revenue from public-sector civil engineering projects, which tend to be more profitable than private-sector construction and feature stable demand, and 3) despite a maturing domestic market, slow to build overseas and real estate businesses.

05/71 Tokyu Construction / 1720 RCoverage LAST UPDATE: 2020.05.21 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Key financial data

Income statement FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 FY03/20 FY03/21 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Revenue 244,974 227,843 228,570 226,164 262,815 296,393 243,618 320,711 331,437 322,170 TBD YoY 3.5% -7.0% 0.3% -1.1% 16.2% 12.8% -17.8% 31.6% 3.3% -2.8% Construction (completed work) 241,172 222,149 226,784 223,969 260,454 294,063 237,749 318,707 329,548 320,083 Real Estate 3,802 5,694 1,786 2,195 2,360 2,329 5,869 2,003 1,888 2,086 Gross profit 19,159 12,271 12,002 13,241 16,968 31,088 30,344 35,720 36,073 36,173 YoY 10.8% -36.0% -2.2% 10.3% 28.1% 83.2% -2.4% 17.7% 1.0% 0.3% Gross profit margin 7.8% 5.4% 5.3% 5.9% 6.5% 10.5% 12.5% 11.1% 10.9% 11.2% Construction (completed work) 18,208 11,678 11,406 12,480 17,049 30,511 28,648 35,126 35,900 35,885 Real Estate 950 592 595 760 -80 577 1,695 593 172 288 Operating profit 7,584 1,572 1,154 2,630 6,009 18,178 17,211 21,416 21,987 20,315 YoY 43.6% -79.3% -26.6% 127.9% 128.5% 202.5% -5.3% 24.4% 2.7% -7.6% Operating profit 3.1% 0.7% 0.5% 1.2% 2.3% 6.1% 7.1% 6.7% 6.6% 6.3% Recurring profit 7,811 1,884 2,301 3,559 8,024 19,768 18,839 22,128 22,932 21,969 YoY 59.0% -75.9% 22.1% 54.7% 125.5% 146.4% -4.7% 17.5% 3.6% -4.2% Recurring profit 3.2% 0.8% 1.0% 1.6% 3.1% 6.7% 7.7% 6.9% 6.9% 6.8% Ne t in c o me 4,087 1,799 -566 2,685 5,805 13,340 13,691 16,118 15,504 14,903 YoY 115.0% -56.0% - - 116.2% 129.8% 2.6% 17.7% -3.8% -3.9% Net margin 1.7% 0.8% - 1.2% 2.2% 4.5% 5.6% 5.0% 4.7% 4.6% Per share data (split-adjusted; JPY) Shares issued (year-end; '000) 106,761 106,761 106,761 106,761 106,761 106,761 106,761 106,761 106,761 106,761 Treasury shares ('000) 14 14 14 29 39 44 50 54 148 150 EPS 38.3 16.9 -5.3 25.2 54.4 125.0 128.3 151.1 145.4 139.8 - EPS (fully diluted) 35.4 12.2 ------Dividend per share 10.0 3.0 - 5.0 13.0 25.0 26.0 31.0 30.0 30.0 - Book value per share 283 293 304 329 419 506 620 740 869 949 Balance sheet (JPYmn) Cash and cash equivalents 24,663 17,881 23,097 18,215 18,318 50,674 22,582 28,865 49,145 29,549 Total current assets 115,384 120,738 118,854 131,556 146,079 171,041 155,983 197,473 204,971 171,125 Tangible fixed assets 13,947 14,180 14,174 17,145 18,228 17,756 19,204 21,634 26,163 32,033 Investments and other assets 17,108 19,196 20,849 20,670 27,558 25,311 28,933 29,790 33,017 31,760 Intangible fixed assets 341 327 316 313 359 416 692 858 844 976 Total assets 146,781 154,442 154,195 169,685 192,226 214,526 204,813 249,756 264,996 235,897 Short-term debt 209 8,243 232 7,182 4,131 115 3,130 170 178 25,179 Total current liabilities 107,585 116,340 114,100 127,784 136,838 150,799 130,624 165,688 165,955 127,578 Long-term debt 4,766 2,686 2,513 2,068 4,937 4,843 1,859 1,879 1,752 1,590 Total fixed liabilities 8,907 6,711 7,607 6,643 10,526 9,488 7,808 4,893 6,059 6,614 Total liabilities 116,493 123,052 121,707 134,427 147,364 160,288 138,433 170,581 172,014 134,193 Shareholders' equity 30,241 31,326 32,410 35,153 44,673 54,003 66,152 78,950 92,634 101,215 Total net assets 30,287 31,390 32,487 35,258 44,861 54,238 66,380 79,175 92,981 101,703 Total liabilities and net assets 146,780 154,442 154,194 169,685 192,225 214,526 204,813 249,756 264,995 235,896 Total interest-bearing debt 4,975 10,929 2,745 9,250 9,068 4,958 4,989 2,049 1,930 26,769 Cash flow statement (JPYmn) Cash flows from operating activities 20,540 -11,486 14,264 -9,302 2,111 39,003 -23,545 16,226 29,694 -33,439 Cash flows from investing activities 481 20 -619 -2,072 -1,525 -334 -1,717 -3,383 -5,786 -7,488 Cash flows from financing activities -9,813 4,704 -8,569 6,476 -675 -6,035 -2,788 -6,457 -3,575 21,604 Financial ratios ROA (RP-based) 5.0% 1.3% 1.5% 2.2% 4.4% 9.7% 9.0% 9.7% 8.9% 8.8% ROE 14.1% 5.8% -1.8% 7.9% 14.5% 27.0% 22.8% 22.2% 18.1% 15.4% Equity ratio 20.6% 20.3% 21.0% 20.7% 23.2% 25.2% 32.3% 31.6% 35.0% 42.9% Total asset turnover 158.2% 151.3% 148.1% 139.7% 145.2% 145.7% 116.2% 141.1% 128.8% 128.6% Net margin 1.7% 0.8% -0.2% 1.2% 2.2% 4.5% 5.6% 5.0% 4.7% 4.6% Source: Shared Research based on company data

06/71 Tokyu Construction / 1720 RCoverage LAST UPDATE: 2020.05.21 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Recent updates

Highlights

On May 21, 2020, Shared Research initiated coverage of Tokyu Construction Co., Ltd.

For previous releases and developments, please refer to the “News and topics” section.

07/71 Tokyu Construction / 1720 RCoverage LAST UPDATE: 2020.05.21 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Trends and outlook Quarterly trends and results Cumulative FY03/18 FY03/19 FY03/20 FY03/20 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 % of FY FY Es t . Revenue 55,004 125,938 209,076 320,711 61,131 154,697 229,816 331,437 78,722 183,415 248,190 322,170 100.7% 320,000 YoY -9.0% 21.7% 40.2% 31.6% 11.1% 22.8% 9.9% 3.3% 28.8% 18.6% 8.0% -2.8% -3.5% Gross profit 6,094 14,399 25,352 35,720 6,706 17,568 26,330 36,073 10,300 23,928 29,422 36,173 YoY -44.6% -6.9% 21.5% 17.7% 10.0% 22.0% 3.9% 1.0% 53.6% 36.2% 11.7% 0.3% GPM 11.1% 11.4% 12.1% 11.1% 11.0% 11.4% 11.5% 10.9% 13.1% 13.0% 11.9% 11.2% SG&A expenses 3,015 6,405 9,609 14,303 3,053 6,671 10,057 14,086 3,664 7,608 11,577 15,858 YoY 5.0% 7.9% 7.6% 8.9% 1.3% 4.2% 4.7% -1.5% 20.0% 14.0% 15.1% 12.6% SG&A ratio 5.5% 5.1% 4.6% 4.5% 5.0% 4.3% 4.4% 4.2% 4.7% 4.1% 4.7% 4.9% Operating profit 3,079 7,994 15,743 21,416 3,653 10,897 16,272 21,987 6,636 16,320 17,845 20,315 103.1% 19,700 YoY -62.1% -16.1% 32.0% 24.4% 18.6% 36.3% 3.4% 2.7% 81.7% 49.8% 9.7% -7.6% -10.4% OPM 5.6% 6.3% 7.5% 6.7% 6.0% 7.0% 7.1% 6.6% 8.4% 8.9% 7.2% 6.3% 6.2% Recurring profit 3,199 7,816 16,047 22,128 3,875 11,369 16,995 22,932 7,001 16,972 18,947 21,969 104.1% 21,100 YoY -61.6% -21.2% 24.6% 17.5% 21.1% 45.5% 5.9% 3.6% 80.7% 49.3% 11.5% -4.2% -8.0% RPM 5.8% 6.2% 7.7% 6.9% 6.3% 7.3% 7.4% 6.9% 8.9% 9.3% 7.6% 6.8% 6.6% Net income 2,316 5,505 11,330 16,118 2,490 7,659 11,517 15,504 4,838 11,516 12,662 14,903 105.7% 14,100 YoY -59.9% -24.1% 20.1% 17.7% 7.5% 39.1% 1.7% -3.8% 94.3% 50.4% 9.9% -3.9% -9.1% Net margin 4.2% 4.4% 5.4% 5.0% 4.1% 5.0% 5.0% 4.7% 6.1% 6.3% 5.1% 4.6% 4.4% Quarterly FY03/18 FY03/19 FY03/20 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Revenue 55,004 70,934 83,138 111,635 61,131 93,566 75,119 101,621 78,722 104,693 64,775 73,980 YoY -9.0% 65.0% 81.9% 18.2% 11.1% 31.9% -9.6% -9.0% 28.8% 11.9% -13.8% -27.2% Gross profit 6,094 8,305 10,953 10,368 6,706 10,862 8,762 9,743 10,300 13,628 5,494 6,751 YoY -44.6% 86.1% 103.0% 9.3% 10.0% 30.8% -20.0% -6.0% 53.6% 25.5% -37.3% -30.7% GPM 11.1% 11.7% 13.2% 9.3% 11.0% 11.6% 11.7% 9.6% 13.1% 13.0% 8.5% 9.1% SG&A expenses 3,015 3,390 3,204 4,694 3,053 3,618 3,386 4,029 3,664 3,944 3,969 4,281 YoY 5.0% 10.6% 7.0% 11.8% 1.3% 6.7% 5.7% -14.2% 20.0% 9.0% 17.2% 6.3% SG&A ratio 5.5% 4.8% 3.9% 4.2% 5.0% 3.9% 4.5% 4.0% 4.7% 3.8% 6.1% 5.8% Operating profit 3,079 4,915 7,749 5,673 3,653 7,244 5,375 5,715 6,636 9,684 1,525 2,470 YoY -62.1% 252.1% 222.9% 7.3% 18.6% 47.4% -30.6% 0.7% 81.7% 33.7% -71.6% -56.8% OPM 5.6% 6.9% 9.3% 5.1% 6.0% 7.7% 7.2% 5.6% 8.4% 9.2% 2.4% 3.3% Recurring profit 3,199 4,617 8,231 6,081 3,875 7,494 5,626 5,937 7,001 9,971 1,975 3,022 YoY -61.6% 189.5% 178.5% 2.0% 21.1% 62.3% -31.6% -2.4% 80.7% 33.1% -64.9% -49.1% RPM 5.8% 6.5% 9.9% 5.4% 6.3% 8.0% 7.5% 5.8% 8.9% 9.5% 3.0% 4.1% Net income 2,316 3,189 5,825 4,788 2,490 5,169 3,858 3,987 4,838 6,678 1,146 2,241 YoY -59.9% 115.5% 166.7% 12.5% 7.5% 62.1% -33.8% -16.7% 94.3% 29.2% -70.3% -43.8% Net margin 4.2% 4.5% 7.0% 4.3% 4.1% 5.5% 5.1% 3.9% 6.1% 6.4% 1.8% 3.0% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

08/71 Tokyu Construction / 1720 RCoverage LAST UPDATE: 2020.05.21 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Revenue and gross profit (parent)

Revenue FY03/18 FY03/19 FY03/20 Cumulative (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Total revenue 53,862 123,764 205,936 312,487 59,168 147,806 216,282 309,946 74,382 170,452 230,015 296,426 YoY -7.9% 23.5% 42.7% 32.2% 9.9% 19.4% 5.0% -0.8% 25.7% 15.3% 6.3% -4.4% Construction 53,384 122,936 204,717 310,761 58,877 147,247 215,296 308,623 74,057 169,777 228,997 295,034 YoY -7.8% 23.9% 43.1% 34.7% 10.3% 19.8% 5.2% -0.7% 25.8% 15.3% 6.4% -4.4% Domestic public 13,594 25,880 42,670 59,115 10,769 22,029 35,239 52,498 14,025 36,775 51,509 72,393 Domestic private 36,255 91,404 153,852 241,038 45,678 120,537 174,785 248,416 55,928 126,738 168,292 210,798 General 26,147 64,902 110,800 163,271 30,851 85,230 126,019 178,722 41,499 92,389 124,815 159,227 Tokyu Group 10,107 26,501 43,052 77,766 14,826 35,307 48,765 69,693 14,428 34,349 43,476 51,571 Overseas 3,535 5,652 8,194 10,608 2,428 4,680 5,271 7,708 4,103 6,263 9,195 11,840 Building Construction 38,492 94,198 157,141 236,898 45,833 119,141 171,067 238,241 56,587 126,551 167,577 206,956 YoY -10.8% 32.3% 56.8% 47.2% 19.1% 26.5% 8.9% 0.6% 23.5% 6.2% -2.0% -13.1% Domestic public 5,016 8,926 13,987 19,228 2,982 5,491 7,532 11,596 3,610 7,209 11,431 15,904 Domestic private 33,476 85,227 143,002 217,455 42,765 113,476 163,196 226,107 52,651 118,619 155,303 190,174 General 24,857 62,519 106,975 152,126 29,679 82,728 122,030 169,148 40,318 89,690 120,404 151,695 Tokyu Group 8,618 22,708 36,027 65,329 13,085 30,747 41,166 56,958 12,332 28,929 34,899 38,479 Overseas 0 44 151 213 85 173 337 537 325 722 842 876 Civil Engineering 14,892 28,737 47,575 73,863 13,044 28,105 44,229 70,381 17,470 43,226 61,420 88,078 YoY 1.1% 2.5% 11.1% 5.8% -12.4% -2.2% -7.0% -4.7% 33.9% 53.8% 38.9% 25.1% Domestic public 8,577 16,953 28,682 39,887 7,787 16,537 27,706 40,901 10,415 29,565 40,078 56,489 Domestic private 2,779 6,176 10,849 23,582 2,913 7,060 11,588 22,309 3,277 8,118 12,989 20,624 General 1,289 2,383 3,825 11,145 1,172 2,501 3,989 9,574 1,181 2,699 4,411 7,532 Tokyu Group 1,489 3,792 7,024 12,436 1,741 4,559 7,599 12,735 2,096 5,419 8,577 13,092 Overseas 3,535 5,607 8,043 10,394 2,343 4,507 4,933 7,170 3,777 5,541 8,353 10,964 Real Estate 477 828 1,218 1,725 290 558 986 1,323 324 674 1,017 1,391 YoY -17.0% -15.3% -9.0% -69.0% -39.2% -32.6% -19.0% -23.3% 11.7% 20.8% 3.1% 5.1%

Gross profit FY03/18 FY03/19 FY03/20 Cumulative (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Total gross profit 6,009 14,473 25,426 35,301 6,550 16,825 24,781 33,370 9,866 22,353 27,255 33,087 YoY -44.1% -4.5% 23.8% 18.4% 9.0% 16.3% -2.5% -5.5% 50.6% 32.9% 10.0% -0.8% 建Construction 5,841 14,214 25,067 34,767 6,412 16,609 24,380 33,316 9,681 21,976 27,056 32,935 Building Construction 4,415 11,609 20,146 27,568 5,239 13,062 18,820 23,423 8,168 17,862 21,293 24,717 Civil Engineering 1,426 2,604 4,921 7,198 1,172 3,546 5,560 9,892 1,513 4,113 5,763 8,218 不Real Estate 168 259 358 534 138 216 400 54 184 377 198 151

Revenue FY03/18 FY03/19 FY03/20 Quarterly (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Total revenue 53,862 69,902 82,172 106,551 59,168 88,638 68,476 93,664 74,382 96,070 59,563 66,411 YoY -7.9% 67.5% 86.1% 15.9% 9.9% 26.8% -16.7% -12.1% 25.7% 8.4% -13.0% -29.1% Construction 53,384 69,552 81,781 106,044 58,877 88,370 68,049 93,327 74,057 95,720 59,220 66,037 YoY -7.8% 68.2% 86.8% 20.9% 10.3% 27.1% -16.8% -12.0% 25.8% 8.3% -13.0% -29.2% Domestic public 13,594 12,286 16,790 16,445 10,769 11,260 13,210 17,259 14,025 22,750 14,734 20,884 Domestic private 36,255 55,149 62,448 87,186 45,678 74,859 54,248 73,631 55,928 70,810 41,554 42,506 General 26,147 38,755 45,898 52,471 30,851 54,379 40,789 52,703 41,499 50,890 32,426 34,412 Tokyu Group 10,107 16,394 16,551 34,714 14,826 20,481 13,458 20,928 14,428 19,921 9,127 8,095 Overseas 3,535 2,117 2,542 2,414 2,428 2,252 591 2,437 4,103 2,160 2,932 2,645 Building Construction 38,492 55,706 62,943 79,757 45,833 73,308 51,926 67,174 56,587 69,964 41,026 39,379 YoY -10.8% 98.8% 117.0% 31.4% 19.1% 31.6% -17.5% -15.8% 23.5% -4.6% -21.0% -41.4% Domestic public 5,016 3,910 5,061 5,241 2,982 2,509 2,041 4,064 3,610 3,599 4,222 4,473 Domestic private 33,476 51,751 57,775 74,453 42,765 70,711 49,720 62,911 52,651 65,968 36,684 34,871 General 24,857 37,662 44,456 45,151 29,679 53,049 39,302 47,118 40,318 49,372 30,714 31,291 Tokyu Group 8,618 14,090 13,319 29,302 13,085 17,662 10,419 15,792 12,332 16,597 5,970 3,580 Overseas 0 44 107 62 85 88 164 200 325 397 120 34 Civil Engineering 14,892 13,845 18,838 26,288 13,044 15,061 16,124 26,152 17,470 25,756 18,194 26,658 YoY 1.1% 4.0% 27.4% -2.7% -12.4% 8.8% -14.4% -0.5% 33.9% 71.0% 12.8% 1.9% Domestic public 8,577 8,376 11,729 11,205 7,787 8,750 11,169 13,195 10,415 19,150 10,513 16,411 Domestic private 2,779 3,397 4,673 12,733 2,913 4,147 4,528 10,721 3,277 4,841 4,871 7,635 General 1,289 1,094 1,442 7,320 1,172 1,329 1,488 5,585 1,181 1,518 1,712 3,121 Tokyu Group 1,489 2,303 3,232 5,412 1,741 2,818 3,040 5,136 2,096 3,323 3,158 4,515 Overseas 3,535 2,072 2,436 2,351 2,343 2,164 426 2,237 3,777 1,764 2,812 2,611 Real Estate 477 351 390 507 290 268 428 337 324 350 343 374 YoY -17.0% -12.9% 8.0% -88.0% -39.2% -23.6% 9.7% -33.5% 11.7% 30.6% -19.9% 11.0%

Gross profit FY03/18 FY03/19 FY03/20 Quarterly (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Total gross profit 6,009 8,464 10,953 9,875 6,550 10,275 7,956 8,589 9,866 12,487 4,902 5,832 YoY -44.1% 91.6% 103.9% 6.3% 9.0% 21.4% -27.4% -13.0% 50.6% 21.5% -38.4% -32.1% Construction 5,841 8,373 10,853 9,700 6,412 10,197 7,771 8,936 9,681 12,295 5,080 5,879 Building Construction 4,415 7,194 8,537 7,422 5,239 7,823 5,758 4,603 8,168 9,694 3,431 3,424 Civil Engineering 1,426 1,178 2,317 2,277 1,172 2,374 2,014 4,332 1,513 2,600 1,650 2,455 Real Estate 168 91 99 176 138 78 184 -346 184 193 -179 -47 Source: Shared Research based on company data

09/71 Tokyu Construction / 1720 RCoverage LAST UPDATE: 2020.05.21 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Orders and construction carried forward (parent)

FY03/18 FY03/19 FY03/20 Cumulative (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Construction 80,940 128,108 194,813 291,337 44,270 96,834 149,231 263,053 26,679 71,738 115,295 193,315 YoY 383.6% 55.0% 47.1% 2.3% -45.3% -24.4% -23.4% -9.7% -39.7% -25.9% -22.7% -26.5% Domestic public 12,225 18,624 41,453 59,698 10,698 15,202 31,727 50,410 3,892 9,741 19,652 40,818 Domestic private 68,515 107,306 145,948 224,685 33,391 60,880 97,224 189,638 21,285 60,477 93,024 144,924 General private 26,928 55,192 87,521 150,626 28,176 46,865 74,801 155,028 15,228 48,030 76,304 120,968 Tokyo Group 41,586 52,113 58,427 74,058 5,214 14,015 22,423 34,609 6,056 12,447 16,720 23,956 Overseas 199 2,177 7,410 6,952 180 20,751 20,279 23,003 1,501 1,518 2,618 7,571 Building construction 65,848 106,481 143,743 214,552 33,763 57,939 99,318 185,287 17,281 43,188 76,914 128,709 YoY 482.1% 66.9% 37.2% -2.1% -48.7% -45.6% -30.9% -13.6% -48.8% -25.5% -22.6% -30.5% Domestic public 4,235 9,279 13,269 13,744 4,791 7,054 18,624 22,225 373 4,203 8,968 9,994 Domestic private 61,598 95,529 128,776 199,171 28,975 50,854 80,690 163,046 16,928 39,013 67,972 113,772 General private 25,385 50,924 80,768 139,592 27,400 44,636 68,912 142,932 14,584 31,680 57,181 98,966 Tokyo Group 36,212 44,605 48,008 59,578 1,574 6,217 11,778 20,114 2,344 7,332 10,790 14,805 Overseas 15 1,671 1,698 1,636 -3 31 3 15 -19 -28 -26 4,942 Civil Engineering 15,091 21,627 51,069 76,784 10,507 38,895 49,913 77,766 9,397 28,550 38,381 64,605 YoY 178.3% 14.7% 84.4% 16.9% -30.4% 79.8% -2.3% 1.3% -10.6% -26.6% -23.1% -16.9% Domestic public 7,990 9,345 28,184 45,954 5,907 8,148 13,103 28,185 3,518 5,538 10,683 30,824 Domestic private 6,917 11,776 17,172 25,514 4,416 10,026 16,533 26,592 4,357 21,464 25,052 31,151 General private 1,542 4,268 6,753 11,033 776 2,228 5,889 12,096 644 16,349 19,122 22,001 Tokyo Group 5,374 7,508 10,418 14,480 3,640 7,797 10,644 14,495 3,712 5,114 5,929 9,150 Overseas 184 505 5,712 5,315 183 20,720 20,276 22,988 1,521 1,546 2,645 2,629

FY03/18 FY03/19 FY03/20 Quarterly (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Construction 80,940 47,168 66,705 96,524 44,270 52,564 52,397 113,822 26,679 45,059 43,557 78,020 YoY 383.6% -28.5% 34.0% -36.7% -45.3% 11.4% -21.4% 17.9% -39.7% -14.3% -16.9% -31.5% Domestic public 12,225 6,399 22,829 18,245 10,698 4,504 16,525 18,683 3,892 5,849 9,911 21,166 Domestic private 68,515 38,791 38,642 78,737 33,391 27,489 36,344 92,414 21,285 39,192 32,547 51,900 General private 26,928 28,264 32,329 63,105 28,176 18,689 27,936 80,227 15,228 32,802 28,274 44,664 Tokyo Group 41,586 10,527 6,314 15,631 5,214 8,801 8,408 12,186 6,056 6,391 4,273 7,236 Overseas 199 1,978 5,233 -458 180 20,571 -472 2,724 1,501 17 1,100 4,953 Building construction 65,848 40,633 37,262 70,809 33,763 24,176 41,379 85,969 17,281 25,907 33,726 51,795 YoY 482.1% -22.6% -9.0% -38.1% -48.7% -40.5% 11.0% 21.4% -48.8% 7.2% -18.5% -39.8% Domestic public 4,235 5,044 3,990 475 4,791 2,263 11,570 3,601 373 3,830 4,765 1,026 Domestic private 61,598 33,931 33,247 70,395 28,975 21,879 29,836 82,356 16,928 22,085 28,959 45,800 General private 25,385 25,539 29,844 58,824 27,400 17,236 24,276 74,020 14,584 17,096 25,501 41,785 Tokyo Group 36,212 8,393 3,403 11,570 1,574 4,643 5,561 8,336 2,344 4,988 3,458 4,015 Overseas 15 1,656 27 -62 -3 34 -28 12 -19 -9 2 4,968 Civil Engineering 15,091 6,536 29,442 25,715 10,507 28,388 11,018 27,853 9,397 19,153 9,831 26,224 YoY 178.3% -51.4% 233.0% -32.3% -30.4% 334.3% -62.6% 8.3% -10.6% -32.5% -10.8% -5.8% Domestic public 7,990 1,355 18,839 17,770 5,907 2,241 4,955 15,082 3,518 2,020 5,145 20,141 Domestic private 6,917 4,859 5,396 8,342 4,416 5,610 6,507 10,059 4,357 17,107 3,588 6,099 General private 1,542 2,726 2,485 4,280 776 1,452 3,661 6,207 644 15,705 2,773 2,879 Tokyo Group 5,374 2,134 2,910 4,062 3,640 4,157 2,847 3,851 3,712 1,402 815 3,221 Overseas 184 321 5,207 -397 183 20,537 -444 2,712 1,521 25 1,099 -16

FY03/18 FY03/19 FY03/20 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Total carried forward 445,807 423,424 408,348 398,827 384,220 348,414 332,763 353,258 305,879 255218 239,555 251,538 YoY 38.0% 21.8% 15.5% -4.6% -13.8% -17.7% -18.5% -11.4% -20.4% -26.7% -28.0% -28.8% Building construction 313,908 298,834 273,154 264,206 252,136 203,004 192,458 211,253 171,947 127,889 120,589 133,007 Civil Engineering 131,899 124,589 135,193 134,620 132,083 145,409 140,304 142,004 133,931 127,328 118,965 118,531 Source: Shared Research based on company data

10/71 Tokyu Construction / 1720 RCoverage LAST UPDATE: 2020.05.21 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Full-year FY03/20 results Summary In FY03/20 , revenue came to JPY322.2bn (-2.8% YoY) on lower revenue from completed construction. Operating profit came to JPY20.3bn (-7.6% YoY). Recurring profit was JPY22.0bn (-4.2% YoY), owing mainly to JPY1.5bn in equity-method investment gains. Net income attributable to owners of the parent, after tax expenses, was JPY14.9bn (-3.9% YoY).

Shareholders’ equity as of end-FY03/20 stood at JPY101.2bn, with the equity ratio improving 7.9pp YoY to 42.9%.

Segment earnings Building Construction Orders totaled JPY150.3bn (-27.5% YoY), with orders for overseas projects increasing, but orders for domestic private-sector projects and domestic public work projects decreasing. Revenue from completed construction was JPY231.6bn, with revenue increasing for domestic public work projects, but decreasing for domestic private-sector projects and overseas projects. Bolstered by enhanced project profitability, segment profit (operating profit basis) improved 1.5% YoY to JPY20.5bn.

Civil Engineering Orders were JPY64.9bn (-17.0% YoY) as orders for domestic public work projects and domestic private-sector projects improved but orders for overseas projects declined. Revenue from completed construction totaled JPY88.5bn (+25.3% YoY), with revenue increasing for domestic public work projects and overseas projects, but decreasing for domestic private-sector projects. Segment profit (operating profit basis) declined 13.5% YoY to JPY6.9bn.

Real Estate In the Real Estate segment, revenue was JPY2.1bn (+10.5% YoY) but operating loss came to JPY152mn (operating profit/loss basis, versus an operating loss of JPY304mn in FY03/19). Although the leasing business was profitable, the company posted an operating loss in the segment largely on provision for loss on real estate business in line with the company’s revision of revenue and costs in the large-scale development business.

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Construction work carried forward Principal construction work carried forward into FY03/20

Customer Project Harumi 5-chome West Category-1 Urban Area Redevelopment Business Mitsui Fudosan Residential, and nine other companies Construction and dismantling in line with Athletes’ Village specifications Fukuoka Jisho New construction on Hotel Forza Sapporo Ekimae Tokyu Upgrade construction of Ikegami Station on the Ikegami Line and station building Redevelopment construction (main building construction) City of Tamana Construction work on Tamana Community Hall Shibuya-ward Ebisu Nishi 2-chome building complex construction City of Kawanishi Refuse collection office improvement work Railway Technical Research Institute Construction work on new experimental wing Wakayama Medical University New construction at Wakayama Medical University The Tokyo Organising Committee of the Construction on the Athletes’ Village team processing center Construction Olympic and Paralympic Games Japan Freight Railway Tokyo Rail Gate West renovation project Hokkaido Isuzu Motors New office construction project Sanshin Warehouse Planning and construction of senior housing in Shibaura 4-chome East Japan Railway Development, planning, and construction of the main structure for a building complex at Sakuragicho Station Tokyu Land Planning and new construction at Sakurashinmachi 2-chome, Setagaya- ku Ministry of Land, Infrastructure, Transport Road construction in the Osanai Area, Road No. 45 and Tourism Ministry of Land, Infrastructure, Transport Construction of the Tsuchida Tunnel on the Misumi Masuda Road and Tourism Ministry of Transport, Socialist Republic of Extension of Hanoi City Ring Road No. 3 (Mai Dich – South Thang Long Viet Nam (Vietnam) Section): Second package Tobu Railway Civil engineering component of elevated construction Near Tokyo Sky Tree Station Tokyu Construction to connect Hiyoshi Station on the Tokyu Toyoko Line and Meguro Line with the Sotetsu-Tokyu Direct Line Ministry of Transport and Communications, Yangon-Mandalay Railway Improvement Project: Phase 1, Section Union of Myanmar CP103 Tokyu and others New Construction on a temporary walkway at the West Exit in the Shibuya Station Area Development Plan Tokyu Construction on moving platform doors at Kajigaya Station on the Den- en-toshi Line Civil Engineering Civil Japan Railway Construction, Transport and Chuo Alps Tunnel on the Chuo Shinkansen (Hagi no Hira, Hirose) Technology Agency Ministry of Construction, Union of Myanmar Bago River Bridge Construction Work: Section 3 Ministry of Land, Infrastructure, Transport FY2018 road construction on the right bank of Shitara Dam and Tourism Tokyo Metropolitan Government Seismic reinforcement work (43rd) on Nakagawa revetment City of Koriyama Construction of public sewerages on the No. 119 Rainwater Trunk Line: Section 1 Central Nippon Expressway Construction of Yubure Tunnel 1 on the Shin-Tomei Expressway Source: Annual Securities Report

For details on previous quarterly and annual results, please refer to the Historical financial statements section.

12/71 Tokyu Construction / 1720 RCoverage LAST UPDATE: 2020.05.21 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Full-year company forecasts

FY03/19 FY03/20 FY03/21 (JPYmn) 1H Act. 2H Act. FY A ct . 1H Act. 2H Act. FY A ct . FY Est . Revenue 154,697 176,740 331,437 183,415 138,755 322,170 TBD Cost of revenue 137,129 158,234 295,363 159,487 126,509 285,996 Gross profit 17,568 18,505 36,073 23,928 12,245 36,173 Gross proift margin 11.4% 10.5% 10.9% 13.0% 8.8% 11.2% SG&A expenses 6,671 7,415 14,086 7,608 8,250 15,858 SG&A rat io 4.3% 4.2% 4.2% 4.1% 5.9% 4.9% Operating profit 10,897 11,090 21,987 16,320 3,995 20,315 Operating profit margin 7.0% 6.3% 6.6% 8.9% 2.9% 6.3% Recurring profit 11,369 11,563 22,932 16,972 4,997 21,969 Recurring profit margin 7.3% 6.5% 6.9% 9.3% 3.6% 6.8% Net in co me 7,659 7,845 15,504 11,516 3,387 14,903 Net margin 5.0% 4.4% 4.7% 6.3% 2.4% 4.6% Source: Shared Research based on company data

Orders forecast (parent)

Parent FY03/19 FY03/20 FY03/21 (JPYmn) 1H A ct. 2H A ct. FY A c t . 1H A ct. 2H A ct. FY A c t . FY Es t . Total orders 96,834 166,219 263,053 71,738 121,577 193,315 TBD YoY -24.4% 1.8% -9.7% -25.9% -26.9% -26.5% Construction 57,939 127,348 185,287 43,188 85,521 128,709 YoY -45.6% 17.8% -13.6% -25.5% -32.8% -30.5% Civil Engineering 38,895 38,871 77,766 28,550 36,055 64,605 YoY 79.8% -29.5% 1.3% -26.6% -7.2% -16.9% Source: Shared Research based on company data Consolidated earnings forecast for FY03/21

The company is assessing the impact from the COVID-19 outbreak on customer capex and other areas, and given the difficulties ▷ in making reasonable calculations at this time, it has refrained from issuing FY03/21 forecasts for earnings and dividends. The company has indicated that it will announce its earnings forecast as soon as it becomes possible to make reasonable calculations.

In light of the government’s declaration of a state of emergency in the face of the COVID-19 outbreak, the company has moved, ▷ after consultation with the ordering parties, to suspend in principle work in progress in order to limit by as much as possible the spread of the virus and ensure the health of its employees and stakeholders.

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Medium-term outlook: 2018 2020 “Shinka 2020” – The company is currently following Shinka 2020, the medium-term management plan for 2018 2020 it announced in March – 2018. The plan positions 2020 as the culmination of its corporate vision set in 2011, of being a “general contractor that continues to embody ‘shinka’” (which translates roughly as “deepening and evolving in the pursuit of genuine value”). This year also marks the start of a new plan, Our Ideals for 2026.

External environment The company expects domestic investment in construction to remain high through FY03/21 due to the Tokyo Olympics. However, it thinks the unit cost of labor will gradually rise as the result of a shortage of skilled workers stemming from a shrinking and aging population. The company also expects materials prices to increase gradually. Meanwhile, Tokyu Construction believes a number of issues will surface, such as the need to shorten long working hours as work-style reforms progress. Furthermore, the company sees an urgent need to respond to the risk of a shrinking post-Olympics market.

Medium- to long-term risk factors The company has identified four medium- to long-term risk factors: 1) a policy change in the ruling party could cause Japanese government investment in construction to decrease, 2) rapid inflation or deflation could cause the domestic economy to stall and decrease, 3) long working hours and worker shortages are likely to persist, and 4) productivity at construction sites is unlikely to improve without progress in automation technology and the use of ICT.

Target income and expenses This plan sets performance targets for FY03/21: revenue of JPY312.0bn, operating profit of JPY19.5bn, recurring profit of JPY19.8bn, and profit attributable to owners of the parent of JPY13.9bn. The company also targets ROE of 13% or higher and shareholders’ equity of JPY110.0bn or more at end-FY03/21. In FY03/19, the company posted revenue of JPY331.4bn and recurring profit of JPY22.9bn, but its plans assume business will decelerate once currently favorable construction demand subsides.

Preparing for shrinking market by expanding fields of business, boosting efficiency to enhance the earnings structure Although revenue has been favorable to date, the company expects the operating environment surrounding the construction industry to worsen after the Tokyo Olympics, with investment in construction falling off. To address this situation, the company will concentrate on winning public-sector civil engineering and overseas projects, and expanding real estate leasing and new businesses. With worker shortages likely to boost labor costs and equipment and materials expenses forecast to rise, the company aims to utilize IT to boost efficiency and enhance profitability.

Fundamental policies

Transform human resources and organization to elicit employee motivation and capabilities: increase operating efficiency, ▷ reinforce employee training, make working styles more diverse, optimize the allocation of human resources, step up hiring to attract people with specialized skills.

Reinforce the domestic construction business with a customer-centered perspective and problem-solving skills: reorganize the ▷ network of branch offices in the Tokyo metro area and eastern Japan, enact sales strategies based on a customer-centered perspective, promote technology development to meet customer needs, build systems for priority clients and fields and conduct employee training, strengthen the renovation and medium-sized wooden construction businesses.

Promote the diversification of revenue sources by expanding strategic businesses: strengthen the international, real estate, and ▷ PPP/concession businesses.

Shore up management and financial foundations in support of heightened profitability: aim to further enhance the management ▷ and financial basis in response to risks and opportunities that emerge as a result of changes in the operating environment.

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Target indicators (for FY03/21) Financial KPIs

Consolidated OPM: 6.3% ▷ Consolidated revenue: JPY312bn ▷ ROE: 13% plus ▷ Consolidated shareholders’ equity: JPY110bn plus ▷

Non-financial KPIs

Employee Engagement Survey: BBB (“Motivation Cloud” engagement rating by Link and Motivation Inc. In FY03/19, the ▷ company scored BB, or fifth out of 11 levels. BBB is the next highest rating.)

Number of days work sites are closed: Closed for seven to eight days out of four weeks ▷ Customer satisfaction: 100% ▷ Safety index: 0.10 or lower ▷ Reduction in environmental impact: CO2 emissions of 23.2t per JPY100mn in construction revenue (down 22% from FY03/91) ▷

Revenue targets by segment (FY03/21)

Revenue: JPY319.0bn (FY03/18) JPY312.0bn (FY03/21) ▷ → Domestic civil engineering: JPY60.0bn (FY03/18) JPY65.0bn (FY03/21) ▷ → Domestic building construction: JPY245.0bn (FY03/18) JPY229.0bn (FY03/21) ▷ → Of which, renovation business: JPY38.0bn (FY03/18) JPY37.5bn (FY03/21) ▷ → Of which, wooden construction business: JPY6.9bn (FY03/18) JPY10.0bn (FY03/21) ▷ → Strategic business: JPY14.0bn (FY03/18) JPY18.0bn (FY03/21) ▷ → Of which, international business: JPY11.5bn (FY03/18) JPY15.0bn (FY03/21) ▷ → Of which, real estate business: JPY2.1bn (FY03/18) JPY2.5bn (FY03/21) ▷ →

Investment plans (FY03/19 FY03/21) – To meet its goals for 2026, the company is investing to reinforce the domestic construction business and expand strategic businesses. As a result, Tokyu Construction aims to grow following the Olympics. In general, the company plans to fund this investment itself. However, it says it will take optimal funding methods into account based on management/financial conditions and the market environment.

Total investment: JPY24.0bn ▷ Domestic construction business: JPY6.0bn (civil engineering, building construction, building renovation, and medium-sized ▷ wooden construction businesses)

New business domains: JPY16.5bn (real estate business, PPP/concession businesses, new businesses, bell pepper business) ▷ Management foundation, organizations, and human resources: JPY1.5bn (employee training, ICT) ▷

Company goals for 2026

Expectation of structural changes in the construction industry Although it currently has ample construction work on hand, the company understands it faces a shortage of workers who perform specialized functions and needs to allocate human resources strategically. The company also expects the Japanese market to undergo a qualitative shift of demand following the Tokyo Olympic and Paralympic Games, from one-time revenue

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projects (new construction) to recurring-revenue projects (maintenance and renovation work). Furthermore, Tokyu Construction expects senior workers to exit the work force in large numbers.

One of its goals for 2026 is to be “a corporate group that can cope with the changing environment and embodies true value through a vital corporate culture.” In March 2018, the company formulated financial targets to be achieved by FY03/27 across three medium-term management plans (three years each). Over the medium term, the company expects private-sector construction projects to fall off after the industry finishes digesting the current rush in construction, including Shibuya Station redevelopment work. However, the company expects revenue to remain firm over the long term.

Revenue and expense targets As part of its long-term vision, the company has set financial targets for FY03/27: shareholders’ equity of JPY150.0bn, ROE of 10%, revenue of JPY350.0bn, and OPM of 7.0% (with operating profit of JPY24.5bn). This revenue figure is 5.6% higher than the level in FY03/19. During this period, Tokyu Construction expects a rise in the number of superannuated structures to lead to expansion of the renovation business. It also intends to focus on the construction of medium-sized wooden structures that make extensive use of domestic materials, as well as civil engineering work, international business, real estate business, and new domains such as the PPP/concession businesses (public private partnerships) and the bell pepper business. –

Four basic policies (1) Bolster individual capabilities and make work more rewarding for each member of the Tokyu Construction Group (2) Hone problem-solving skills to ensure safety, enhance quality, reduce environmental impact, boost profitability, and lower cost of revenue (3) Take on challenges and amass achievements in new business domains (4) Learning from past mistakes, shore up management and financial foundations in preparation for changes in the operating environment. At the same time, meet shareholder expectations by steadily increasing corporate value.

Target indicators (FY03/27) Financial KPIs

Consolidated OPM: 7.0% or more ▷ Consolidated revenue: JPY350.0bn plus ▷ ROE: 10% or more ▷ Consolidated shareholders’ equity: JPY150.0bn or more ▷ Non-financial KPIs

Employee Engagement Survey: (“Motivation Cloud” engagement rating by Link and Motivation Inc. In FY03/19, the ▷ Ａ company scored BB, or fifth out of 11 levels. “A” is two rating levels higher.)

Number of days work sites are closed: Closed for eight days out of four weeks ▷ Customer satisfaction: 100% ▷ Safety index: 0.10 or lower ▷ Reduction in environmental impact: CO2 emissions of 20.0t per JPY100mn in construction revenue (down 32% from FY03/91) ▷

Revenue composition (target)

FY03/18 results: Building construction 63%, renovation 12%, wooden construction 2%, civil engineering 19%, new business ▷ domains 4%

FY03/27 targets: Building construction 52%, renovation 14%, wooden construction 4%, civil engineering 22%, new business ▷ domains 8%

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OPM (target)

FY03/18 result: 6.7% ▷ FY03/27 target: 7.0% or higher ▷

Consolidated GPM targets

Main scenario: Domestic construction business 88.9%, new business domains 11.1% (assumes a gradual decrease in domestic ▷ investment in construction)

Risk scenario: Domestic construction business 82.9%, new business domains 17.1% (assumes a decline in domestic investment in ▷ construction)

Investment plans (FY03/19 FY03/27) – To realize its goals for 2026, Tokyu Construction plans to spend around JPY90.0bn over nine years in domestic construction and new business areas, as well to strengthen management, the organization, and human resources. Mainly, the company intends to use core capital for this investment, considering optimal fund-raising methods based on such factors as the management and financial situation and the market environment.

Total investment: JPY90.0bn ▷ Domestic construction business: JPY17.0bn (civil engineering business, building construction business, building renovation ▷ business, medium-sized wooden construction business)

New business domains: JPY70.0bn (real estate business, PPP/concession businesses, new businesses, bell pepper business) ▷ Management foundation, organizations, and human resources: JPY3.0bn (employee training, ICT) ▷

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Management strategy Strategies in the building construction and civil engineering businesses Cultivate the core area around Shibuya The company plans to further cultivate demand around Shibuya* and along the Tokyu lines**. Shibuya Station redevelopment work specifically includes Shibuya Scramble Square Central Tower and West Tower (scheduled for completion in FY03/28). Taken in the broader sense (the communities around Shibuya Station), the company expects redevelopment demand to persist over the medium to long term because the area has a large stock of aging small and medium-sized buildings. Major building redevelopments are opportunities to attract tenants, and the company thinks the Shibuya area has a growing need to add value to existing buildings. Tokyu Construction has created an extensive track record of building construction in the Shibuya area over the past 60 years. The company explains that this history, plus a dedicated sales team that communicates closely with people in this area, have enabled it to build solid relationships with town councils and commercial organizations in the area. By leveraging these strengths, the company is playing a central role in urban development in Shibuya in the broader sense. Further in the future, the company expects to extend its redevelopment business to areas around other major stations on the Tokyu lines, such as Sangenjaya and Mizonokuchi.

*Shibuya: Shibuya is one of Tokyo’s three major sub-centers, along with Shinjuku and Ikebukuro, and is one of the busiest areas in Tokyo. Shibuya Station is also one of the Tokyo’s largest railway stations, allowing passengers to transfer among Tokyu’s Den-en-toshi and Toyoko lines, Tokyo Metro’s Fukutoshin and Ginza lines, JR East’s Yamanote Line, and Keio railway lines. Average daily traffic through Shibuya Station is around 3.3mn passengers, second in the world to Shinjuku Station (FY03/19). The Shibuya district is one of several popular areas for young people. Major shopping facilities include Tokyu Department Store, Shibuya 109, and Shibuya Parco. **Along the Tokyu lines: Tokyu Den-en-toshi Line (Shibuya, Ikejiri-Ohashi, Sangenjaya, Futako-Tamagawa, Mizonokuchi, Tama Plaza, Nagatsuta, Minami Machida Grandberry Mall Chuorinkan) ー Tokyu Toyoko Line (Shibuya, Daikanyama, Nakameguro, Jiyugaoka, Tamagawa, Musashi Kosugi, Hiyoshi, Tsunashima, Yokohama) Tokyu Meguro Line (Meguro, Fudo-mae, Musashi-Koyama, Ookayama, Den-en-chofu) Tokyu Oimachi Line (Futako-Tamagawa, Jiyugaoka, Ookayama, Hatanodai, Oimachi) Tokyu Ikegami Line (Gotanda, Hatanodai, Kamata) Tokyu Tamagawa Line (Tamagawa, Musashi-Nitta, Kamata)

Shibuya Scramble Square Central and West Towers Many small, older buildings around and the former Shibuya Station Shibuya Station

Source: Tokyu website (“Shibuya redevelopment”) Source: Nippon.com website (photo courtesy of Tokyu Corporation) Growing demand for renovation The company expects demand for renovation to rise as the number of aging buildings grows. Seismic reinforcement and environmental considerations are driving demand for renovation. The company believes this trend will persist, centered on non- residential buildings. Tokyu Construction plans to cultivate this market through Tokyu Renewal Co., Ltd., a subsidiary that handles this business. Tokyu Construction intends to build a new customer base for commercial facilities and hotels by highlighting its construction technology capable of handling projects that are large in scale and difficult, as well as by leveraging its capabilities in interior construction planning and design. As it expects the construction market to shrink and demand for renovation to expand, the company considers it will need to make a functional change in the way it receives orders to accommodate more recurring-revenue business.

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Building maintenance and renovation work Percentage of infrastructure 50-plus years old

(JPYtn) Non-residential Residential Aging rate (over 50 years) March March March 14 2013 2023F 2033F 12 Road bridges 18％ 43％ 67％ Tunnels 20％ 34％ 50％ 10 River management facilities 25％ 43％ 64％ 8 Sewer pipes 2％ 9％ 24％ Quay walls 8％ 32％ 58％ 6 Source: Company data 4

Source: Shared Research, based on MLIT’s “Statistics Survey on Execution of Construction Works”

Urban Solutions business In addition to enhancing cooperation with other companies in the Tokyu Group, the company says it plans to reinforce earnings by strengthening necessary solutions and building a comprehensive value chain through active personnel hiring, alliances, and M&A. In this area of business, the company collects information about the challenges and needs of local companies and landowners and proposes design, construction, and ways to utilize property, including leasing. Tokyu Construction works with partners on small-scale projects that are difficult for it to handle itself and forms alliances with top-tier general contractors in these areas. Tokyu Construction works with other companies in the Tokyu Group in such areas as tenant leasing and maintenance and management. By handling all aspects of the business, including renovation, the company aims to remain in contact with clients over the long term.

Infrastructure asset management In this business, the company supports the maintenance, management, and renewal of infrastructure such as railways and roads from a long-term perspective, promoting the social value of efficient maintenance and management technologies. The company uses iTOREL*, a system for inspecting and examining entire cross sections of tunnels using leading-edge robotics and AI technologies.

*iTOREL (a system for inspecting and examining full cross sections of tunnels): This new technology uses testing robots that straddle the roadway inside a tunnel to conduct tests without interfering with vehicle traffic. Autodetection units that check for cracks or bubbles in concrete linings, and hammer testing units can be used to check for quantitative changes over time. Testing results are examined using the company’s expert system. The company uses this information to suggest repair methods that are cost-optimized, taking the tunnel’s life cycle cost into account.

ZEB renovations A zero-energy building (ZEB) reduces energy consumption to nearly zero. The company carried out ZEB renovation on its Institute of Technology, which was completed 25 years ago, and whose energy efficiency was lower than for the most modern buildings. ZEB renovations were aimed at reducing building CO2 emissions during use. The company lowered the external heat load by employing a double-skin curtain wall, exterior thermal insulation, and multilayered glass. It also used energy sources other than fossil fuels (solar, geothermal, hydrogen) that it also used to generate power. In the process, Tokyu Construction became the first private-sector company in Japan to install a hydrogen production, storage, and power generation system. As a result of these efforts, energy consumption in this building was reduced by 76%, which the company says is one of the highest levels in Japan. Tokyu Construction intends to push forward further to improve technologies, aiming for a truly net zero (100%) energy reduction.

Reflecting growing calls to move to a carbon-free society, the company plans to market renovation on a growing number of aging buildings as part of its business model.

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iTOREL system for inspecting the full cross sections of tunnels Institute of Technology following ZEB renovations

Source: Company website Digital shift Tokyu Construction aims to accelerate business reforms through a greater uptake of IT, responding to the ongoing digitization of markets and customer needs. To do so, the company intends to forge alliances with the Tokyu Group and other partner companies, invest in startups, and actively pursue M&A.

Medium-sized wooden construction business The company is focusing on the business of building structures that give preference to the use of wood or that are of mixed wooden construction. In recent years, technologies mixing wooden and non-wooden methods (reinforced concrete and steel frame construction) have advanced, making the medium-sized wooden construction business more tenable. Amid regulatory reforms and increasing environmental demands, the company expects demand to increase for medium- to high-rise offices, residences, and commercial structures that mix reinforced concrete and wood. The company plans to pursue technological developments in this area from a medium- to long-term perspective, gradually addressing technical issues.

Rebuilding the roof over Togoshi Ginza Station on the Tokyu Ikegami Line (2016)

Source: Company website Strategic business Overseas projects The company is pursuing the construction business overseas, in South and Southeast Asia (Thailand, Singapore, Indonesia, Myanmar, Vietnam, and Bangladesh). Overseas development assistance (ODA) projects and private-sector building construction projects are its focus. For ODA projects centering on railways and roads, the company has expanded its region of business concentration from Thailand, Indonesia, and Myanmar to other South Asian countries including Bangladesh. As for private-sector building construction projects, Tokyu Construction has participated in high-rise building projects of strong local developers and factory construction for Japanese companies operating overseas, as well as hotel construction projects. The company strives to enhance governance for the expansion of business, seeking to make the processes of business and risk management visible.

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Jakarta Mass Rapid Transit Project (Indonesia, 2019) Takasago factory (Singapore, completed in 2013)

Source: Company website Source: Company website Real estate business In this business, the company acquires real estate to ensure stable future earnings. Taking on a certain degree of exposure, Tokyu Construction is reinforcing the real estate leasing business. Specifically, the company is focusing its leasing investments on office buildings and stores. The Tokyu Group is extensive, including such companies as Tokyu Corporation and Tokyu Land Corporation. By leveraging this groupwide information network, the company plans to concentrate on buying income properties that offer synergies with its small and medium-sized building construction in central Tokyo and along the Tokyu lines. The company intends to add value to the properties it purchases, renovating them to boost investment yields. To expand this business, the company is setting new investment standards and monitoring processes in the interest of managing risk. It plans to hire outside personnel to build up processes in terms of expertise, as well as on the organizational front.

Public–private partnerships In the PPP/concession business, Tokyu Construction intends to concentrate on the water and sewerage business (an area of strength) and on developing the airport concession business. The company sees water and sewerage as a field with growth potential and one that has strong ties to the civil engineering business. It participates in the airport concession business through cooperation with other members of the Tokyu Group. In 2018, Tokyu Construction and four others set up a special-purpose company to operate a sewage treatment plant for the Seien area of Hamamatsu for the next 20 years. This project represents the first sewerage system privatization in Japan. The company plans to participate actively in new bidding projects, collaborating with the SPC and the project operating company (Hamamatsu Water Symphony K.K.), acquiring expertise, and training employees.

Seien sewage treatment plant

Source: City of Hamamatsu data New business development In 2012, the company entered a new area of business: bell pepper cultivation. Plantaardig farm Co., Ltd., a subsidiary, grows the bell peppers at a greenhouse in Miho-mura, Inashiki, Ibaraki Prefecture (one of the largest bell pepper nutriculture facilities in Japan) and sells it. The company aims to expand this business. It also intends to concentrate on searching for and developing other new businesses.

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Plantaardig Farm’s Miho-mura plant (Miho-mura, Inashiki, Ibaraki Prefecture)

Source: Plantaardig Farm’s website

The “Shinka 2020” management vision

The company’s management philosophy is to be a “general contractor that continues to embody ‘shinka.’”

Declarations within the management vision

We strive to respond to diversifying customer needs and provide the best solutions. ▷ Developing better technology and services, we will pursue new business opportunities. ▷ Continuing a tradition of contributing to society in its role as a general contractor, we are dedicated to the pursuit of genuine ▷ value.

Implementation measures to achieve the vision’s objectives (1) Reinforcing core business and taking on challenges in new business domains: pursuit of “Town Value-up Management” (urban development spanning entire towns)

The company aims to help invigorate regions across Japan through mainstay business focused on urban areas, such as railway- ▷ related businesses. The company plans to build the Tokyu Construction brand, extending successes in Japan into overseas markets.

The company plans to continue creating value in Shibuya as a center of urban culture. ▷ The company aims to engage energetically in technological reforms valuable to global environmental protection, disaster ▷ mitigation, and the maintenance and upgrading of infrastructure.

In addition, Tokyu Construction plans to create new sources of earnings by providing new value in construction-related ▷ businesses.

(2) Continuing to evolve by reforming the corporate culture

Tokyu Construction says it wants to be a “general contractor offering true value.” To achieve this, the company targets mutual reinforcement between “employees of true value” and “an organization of true value” and is reforming its corporate culture with this aim in mind.

Employee of true value: “an employee who develops his or her career by proactively setting challenges with high aspirations and ▷ a spirit of independence”

Organization of true value: “an organization where employees with shared values respect each other and individual work ▷ satisfaction unifies the organization into one that is highly productive”

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Business Business description General contractor in the Tokyu Group Tokyu Construction is a second-tier general contractor. It accepts entire orders for building construction and civil engineering work and then managing those construction projects. A member of the Tokyu Group, Tokyu Construction is an equity-method affiliate of Tokyu Corporation, which owns a 15.1% stake in the company.

In FY03/19, the Building Construction segment accounted for 78.1% of revenue. The Civil Engineering segment, which includes railway construction, accounted for 21.3%, and the Real Estate segment provided 0.6%. Private-sector construction projects thus account for the majority of revenue. Nearly 20% of orders come from other companies in the Tokyu Group. Tokyu Construction focuses on areas along Tokyu train lines, from the southwestern part of Tokyo’s 23 wards to northern Yokohama.

On a parent-only basis, in FY03/19 private-sector construction projects accounted for 73.0% of revenue, private-sector civil engineering projects (including railway construction) for 7.2%, and public-sector projects (civil engineering and building construction) for 16.9%.

Tokyu Construction’s revenue CAGR has been 7.9% over the past five years, buoyed by rapid growth in private-sector construction projects (including redevelopment in Tokyo s Shibuya district). By comparison, CAGR for the top 17 general ’ contractors was 3.9% over this same period. Tokyu Construction’s profitability is higher, as well. In FY03/19, the company’s adjusted ROE* was 12.0%, compared with an average of 9.0% for the top 18 general contractors. As orders have grown, higher asset efficiency has contributed to increased profitability.

Definition of a general contractor A general contractor* is a main contractor that accepts orders to undertake entire building construction and civil engineering projects, according to a licensing system by the Ministry of Land, Infrastructure, Transport and Tourism. Other notable general contractors include Kajima, Taisei, and Obayashi.

General contractors accept entire orders from entities such as companies, governments, and municipal bodies, and then outsource specific types of work (interior construction, electrical contracting, equipment installation, reinforcement work) to specialized construction companies (subcontractors). General contractors manage the overall construction process to ensure that specified projects are completed within the allotted times. The scale of business they handle is large; revenue from individual projects may run from billions to tens of billions of JPY. Construction periods on office building, railway, or roadway projects typically last from one to three years. Private-sector construction tends to be vulnerable to economic fluctuations. Public- sector projects tend to be more stable, with government entities continuing to place orders even in economically difficult times. The Japanese construction industry has been growing in recent years, benefiting from increased investment in construction, notably for business related to the Tokyo Olympics. Once this private-sector demand has run its course, the company expects general contractors to prioritize relatively solid business involving public-sector and overseas projects, and expansion of non- building construction business.

*Licensing system in the construction business: Based on the Construction Business Act**, construction companies that perform work valued at JPY5mn or more must be licensed by the Minister of Land, Infrastructure and Transport according to their type of business. Main contractors (which engage in the construction of civil engineering structures and buildings by providing overall planning, direction, and coordination) perform “general civil engineering works” and “general building works.” General contractors, which perform integrated construction work, typically obtain both licenses. The role of a main contracting company is to ensure a building or other structure is delivered as and when requested by the party placing the order. To do so, the main contracting company handles the overall management of specialty contractors on processes, quality, costs, safety, and other factors. General contractors, which undertake whole projects from the parties placing the orders, and order subcontractors to conduct business totaling more than JPY40mn (JPY60mn for general building works) must obtain a “special construction business license.”

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**Construction Business Act: This act defines “construction business” as “a business that contracts to complete construction work, regardless of whether it is a main contractor, a subcontractor, or falls under any other designation.” “Contract” refers to one party entering into an agreement promising to complete a building, facility, roadway, or other structure in exchange for consideration paid by another party for this result.

Construction management Construction sites are fast-moving, with on-site people and materials changing on a daily basis as work progresses. On any given day, large-scale construction sites may see more than 1,000 workers. Such sites require overarching management. The general contractor’s role is to use their construction and management skills to smoothly manage the overall construction process, assigning specialty contractors and arranging for the purchase and delivery of necessary materials. Smooth construction management requires a high level of expertise and experience. The key is to balance on-site construction activities smoothly while ensuring profits. General contractors typically have sales, design, construction, costing (estimates, procurement), equipment, and R&D departments that enable them to take on and manage construction work.

Flow of construction work In a typical flow, a landowner, real estate company, national government, or municipal body produces a design drawing itself or asks a design office to do so. The party placing the order then submits the design drawing to the general contractor and requests an estimate of construction costs. As well as handling construction, in some cases a general contractor may be asked to produce design drawings as well. Once the party placing the order decides who it wishes to handle the construction, it signs construction services agreement with the general contractor. After receiving this contract, the general contractor draws up more detailed construction plans, obtains estimates from subcontractors, and places work orders.

Construction planning requires a general contractor to conduct field surveys, geological surveys, surveys of neighboring buildings, and surveys for buried objects before producing a work schedule. The general contractor dispatches a site foreman to the construction site to oversee construction work. When erecting a building, construction may include such specialized processes as foundation work (soil improvement, form work); rebar or steel frame structures; pillars, floors, and walls; exterior work (outside walls, plastering, painting); interior work (piping, air conditioning, wiring); and landscaping.

Main contractors and subcontractors In general, the main contractor (direct recipient of a construction order) is a general contractor, and specialized construction companies are subcontractors. Projects are single-item, built-to order structures built to meet certain specifications, construction periods, and quality levels. Construction business tends to be cyclical, with busy periods and slack periods. Maintaining a full staff capable of handling work during busy periods would lead to excessive fixed costs (personnel). By outsourcing to subcontractors during busy periods, general contractors can stabilize their fixed costs throughout the year. Subcontractors may also outsource work to sub-subcontractors for the same reason, so the construction industry has numerous subcontractors.

Another aspect of subcontracting is the existence of specialized construction companies (subcontractors). General contractors (main contractors) outsource work to numerous companies that specialize in specific areas, leading to the prevalence of subcontractors. This arrangement leads to decentralization when construction demand falls off significantly, resulting in oversupply (as general contractors seek to lower costs by spreading out work to subcontractors). In times like the present, though, when Japan’s working-age population is shrinking, leading to a shortage of workers, general contractors are working to increase the level of centralization through closer affiliation with high-quality, specialized construction companies.

Specialty contractors have specialized expertise and are covered under 27 work categories. These include carpentry; plastering; scaffolding and excavation; dismantling; masonry; roofing; electrical contracting; plumbing; tiling, brick and block; steel structure contracting; steel reinforcement; paving; dredging; sheet metal; glazing; painting; waterproofing; interior finishing; machinery, equipment and facility; heat insulation; telecommunication engineering; landscaping; well drilling; cabinetmaking; water supply facilities; firefighting facilities; and sanitation facilities.

A main contractor that outsources more than JPY40mn to subcontractors (or more than JPY60mn for general building works) requires a “special construction business” license.

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Impact of region and climate The construction business requires the movement of people, materials, equipment, and other resources. Even with the same type of building, construction parameters may differ depending on the type and quality of soil, climate, and other factors in each region. Climate could have a significant impact on construction period. In addition to making it difficult to accurately estimate costs ahead of time, construction companies bear the risk of low-profit projects.

Construction business expenses The main costs of construction work are net construction costs: materials, labor, outsourcing, and operating expenses. Materials expenses are the costs of consumables, such as steel, wood, and concrete. Labor expenses are the salaries paid to workers at specialized construction companies laboring on-site. Subcontractors’ materials and labor costs are included in outsourcing costs. Operating expenses include the cost of wear on tools, costs for the use of construction equipment*, costs of temporary materials and equipment**, as well as the costs of power, fuel, material transport and storage, transportation, insurance, and taxes and dues. Construction management expenses, which are not included in net construction costs, are defined as the expenses required to manage the overall construction process. Construction management expenses include the costs of managing technologies, processes, safety, labor, and administration.

*Construction equipment: Bulldozers, backhoes (power shovels), pile drivers, cranes, tower cranes, concrete pump trucks **Temporary materials and equipment: Scaffolding, forms, covering nets and sheeting, temporary enclosures, soundproofing panels, prefabricated houses, portable toilets

Capital expenditures Construction companies may make capital investments on construction equipment, but nowadays general construction equipment is typically leased or rented, so the amount of investment required for the actual building construction business is limited. Construction companies typically invest in leasing (office buildings and stores), development (commercial facilities, hotels, and resort facilities), and acquisitions.

Experience in receiving contracts Because construction contracts are signed before a building exists, from the customer standpoint is important to know that construction work has been performed to the required standard when a building passes into their hands. For customers, a construction company’s past performance is a key indicator of its ability to perform according to contract.

General contractors tend to have a more extensive project record than local small and medium-sized construction companies, so are in a better competitive position to receive orders. Albeit a second-tier general contractor, Tokyu Construction has experience in a wide range of areas. In addition to numerous ultra high-rise buildings, the company has extensive experience with office buildings, schools, government office buildings, condominiums, railways (notably tunnels and multilevel crossings), roadways, waterways and sewerages (notably tunnels and bridges). The five super general contractors, including Kajima, have more experience in large construction projects, including large-scale general hospitals, sports facilities, art museums, long bridges, and dams.

Profitability of building construction and civil engineering Civil engineering work tends to be high-profit; an analysis of segment OPM at general contractors shows that building construction typically generates margins of 7–9%, whereas OPM on civil engineering work is around 10–12%. Shared Research understands this difference exists because preliminary screening for civil engineering work, which usually means public-sector projects, usually limits bidding to construction companies that possess sophisticated construction technology and highly stable management.

Public-sector projects also tend to be more stable and less susceptible to economic downturns than private-sector construction. Tokyu Construction expects the market for private-sector construction to mature over the medium to long term. For that reason, the company’s medium-term management plan highlights civil engineering work as a growth field.

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Segments

Segments FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPY mn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Revenue 236,655 244,974 227,843 228,570 226,164 262,815 296,393 243,618 320,711 331,437 YoY -8.8% 3.5% -7.0% 0.3% -1.1% 16.2% 12.8% -17.8% 31.6% 3.3% Construction: Building 183,703 196,738 179,407 186,814 171,682 197,883 228,062 167,558 244,618 258,896 YoY - 7.1% -8.8% 4.1% -8.1% 15.3% 15.3% -26.5% 46.0% 5.8% % of revenue 77.6% 80.3% 78.7% 81.7% 75.9% 75.3% 76.9% 68.8% 76.3% 78.1% Construction: Civil Engineering 47,583 44,433 42,742 39,970 52,286 62,570 66,000 70,190 74,089 70,652 YoY - -6.6% -3.8% -6.5% 30.8% 19.7% 5.5% 6.3% 5.6% -4.6% % of revenue 20.1% 18.1% 18.8% 17.5% 23.1% 23.8% 22.3% 28.8% 23.1% 21.3% Real Estate 5,368 3,802 5,694 1,786 2,195 2,360 2,329 5,869 2,003 1,888 YoY - -29.2% 49.8% -68.6% 22.9% 7.5% -1.3% 152.0% -65.9% -5.7% % of revenue 2.3% 1.6% 2.5% 0.8% 1.0% 0.9% 0.8% 2.4% 0.6% 0.6% Operating profit 5,282 7,584 1,572 1,154 2,630 6,009 18,178 17,211 21,416 21,987 YoY 7.8% 43.6% -79.3% -26.6% 127.9% 128.5% 202.5% -5.3% 24.4% 2.7% Operating profit margin 2.2% 3.1% 0.7% 0.5% 1.2% 2.3% 6.1% 7.1% 6.7% 6.6% Construction: Building 5,764 7,506 1,795 2,210 2,880 6,965 19,576 16,630 22,130 20,200 YoY - 30.2% -76.1% 23.1% 30.3% 141.8% 181.1% -15.0% 33.1% -8.7% OPM 3.1% 3.8% 1.0% 1.2% 1.7% 3.5% 8.6% 9.9% 9.0% 7.8% % of total OP 64.5% 68.0% 36.7% 54.0% 48.7% 71.1% 82.9% 73.1% 80.2% 72.4% Construction: Civil Engineering 2,697 2,730 2,677 1,462 2,536 3,227 3,773 4,729 5,214 7,993 YoY - 1.2% -1.9% -45.4% 73.5% 27.2% 16.9% 25.3% 10.3% 53.3% OPM 5.7% 6.1% 6.3% 3.7% 4.9% 5.2% 5.7% 6.7% 7.0% 11.3% % of total OP 30.2% 24.7% 54.7% 35.7% 42.9% 32.9% 16.0% 20.8% 18.9% 28.7% Real Estate 469 806 420 419 499 -390 257 1,387 245 -304 YoY - 71.9% -47.9% -0.2% 19.1% - - 439.7% -82.3% - OPM 8.7% 21.2% 7.4% 23.5% 22.7% - 11.0% 23.6% 12.2% - % of total OP 5.3% 7.3% 8.6% 10.2% 8.4% -4.0% 1.1% 6.1% 0.9% -1.1% Adjustments -3,648 -3,458 -3,321 -2,938 -3,285 -3,792 -5,429 -5,535 -6,173 -5,901 Source: Shared Research based on company data

Breakdown of parent-only revenue

Parent revenue FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPY mn) Act. Act. Act. Act. Act. Act. Act. Act. Act. Act. Building construction 179,082 190,822 174,460 179,514 166,128 190,082 221,870 160,890 236,898 238,241 % of parent revenue 77.4% 79.8% 78.3% 81.2% 75.5% 74.8% 76.9% 68.1% 75.8% 76.9% Domestic public 4,858 7,517 10,171 14,804 10,074 25,597 26,854 23,631 19,228 11,596 % of parent revenue 2.1% 3.1% 4.6% 6.7% 4.6% 10.1% 9.3% 10.0% 6.2% 3.7% Domestic private 135,852 143,214 123,127 126,987 129,794 144,194 173,008 112,351 152,126 169,148 % of parent revenue 58.7% 59.9% 55.3% 57.5% 59.0% 56.8% 60.0% 47.5% 48.7% 54.6% Tokyu Group 36,136 38,817 39,455 34,781 24,383 19,297 20,538 24,828 65,329 56,958 % of parent revenue 15.6% 16.2% 17.7% 15.7% 11.1% 7.6% 7.1% 10.5% 20.9% 18.4% Overseas 2,234 1,273 1,706 2,940 1,876 993 1,470 79 213 537 % of parent revenue 1.0% 0.5% 0.8% 1.3% 0.9% 0.4% 0.5% 0.0% 0.1% 0.2% Civil Engineering 47,583 44,445 42,597 39,737 51,932 61,864 64,626 69,845 73,863 70,381 % of parent revenue 20.6% 18.6% 19.1% 18.0% 23.6% 24.3% 22.4% 29.6% 23.6% 22.7% Domestic public 18,853 13,594 17,347 17,063 28,645 37,965 41,425 48,258 39,887 40,901 % of parent revenue 8.1% 5.7% 7.8% 7.7% 13.0% 14.9% 14.4% 20.4% 12.8% 13.2% Domestic private 13,477 10,456 7,974 6,789 8,017 11,480 11,344 8,887 11,145 9,574 % of parent revenue 5.8% 4.4% 3.6% 3.1% 3.6% 4.5% 3.9% 3.8% 3.6% 3.1% Tokyu Group 14,084 14,780 12,171 11,597 9,507 9,848 7,991 9,302 12,436 12,735 % of parent revenue 6.1% 6.2% 5.5% 5.2% 4.3% 3.9% 2.8% 3.9% 4.0% 4.1% Overseas 1,168 5,614 5,103 4,286 5,762 2,569 3,864 3,398 10,394 7,170 % of parent revenue 0.5% 2.3% 2.3% 1.9% 2.6% 1.0% 1.3% 1.4% 3.3% 2.3% Total construction 226,665 235,267 217,057 219,251 218,061 251,946 286,496 230,736 310,761 309,946 % of parent revenue 97.9% 98.4% 97.5% 99.2% 99.1% 99.2% 99.3% 97.6% 99.4% 100.0% Domestic public 23,712 21,112 27,519 31,868 38,719 63,563 68,279 71,889 59,115 52,498 % of parent revenue 10.2% 8.8% 12.4% 14.4% 17.6% 25.0% 23.7% 30.4% 18.9% 16.9% Domestic private 149,329 153,670 131,101 133,776 137,811 155,674 184,352 121,238 163,271 178,722 0 64.5% 64.3% 58.9% 60.5% 62.6% 61.3% 63.9% 51.3% 52.2% 57.7% Tokyu Group 50,220 53,597 51,626 46,379 33,890 29,146 28,530 34,130 77,766 69,693 % of parent revenue 21.7% 22.4% 23.2% 21.0% 15.4% 11.5% 9.9% 14.4% 24.9% 22.5% Overseas 3,403 6,887 6,810 7,227 7,639 3,563 5,334 3,477 10,608 7,708 % of parent revenue 1.5% 2.9% 3.1% 3.3% 3.5% 1.4% 1.8% 1.5% 3.4% 2.5% Real Estate 4,755 3,723 5,624 1,764 2,037 2,126 2,009 5,569 1,725 1,323 % of parent revenue 2.1% 1.6% 2.5% 0.8% 0.9% 0.8% 0.7% 2.4% 0.6% 0.4% Total parent revenue 231,420 238,991 222,682 221,015 220,098 254,073 288,505 236,305 312,487 309,946 Source: Shared Research based on company data

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Building Construction The Building Construction segment accounts for 78.1% of revenue and 72.4% of operating profit (FY03/19). In this business, the company builds office buildings, government offices, schools, hospitals, commercial facilities, logistics facilities, factories, and condominiums throughout Japan. Overseas, business centers on office buildings, factories, and commercial facilities in South and Southeast Asia.

Tokyu Construction’s emphasis is on work along Tokyu train lines, and in recent years construction business in Japan has been strong. For these reasons, recently the company has completed a number of office buildings near Shibuya Station. These include Shibuya Mark City (completed in 2000), Cerulean Tower (completed in 2001), Shibuya Hikarie (completed in 2012), Shibuya Stream (completed in 2018), Shibuya Scramble Square (completed in 2019), Ohashi Medical Center, Toho University (completed in 2018, Ikejiri-Ohashi), Futako-Tamagawa Rise (completed in 2011), and Nocty Plaza (completed in 1997, Mizonokuchi). The company has also built educational facilities for universities along Tokyu lines, such as Asia University and Tokyo City University, as well as Nippon Sport Science University and Teikyo University.

Mark City, the start of the Shibuya redevelopment project Shibuya Mark City, which was completed in 2000, required the building of a large structure (400m from east to west) in a tight space in a bustling shopping area directly above the Keio Inokashira Line. According to the company, the construction logistics, planning, and regional considerations it was required to handle on this project served as an important springboard that allowed it to obtain orders for further redevelopment projects.

A sales team with roots along the Tokyu lines, centered on Shibuya Tokyu Construction has a sales team dedicated to opportunities in the Shibuya area, which is the company’s base of operations. This team maintains close communications with members of this community, including shopping district promotional councils, landowners, building owners, and real estate companies, to gather information pertinent to construction orders. One aspect of these sales efforts is to support local festivals, such as the Shibuya Art Festival and an annual festival at the Miyamasumitake Shrine. These efforts have led to winning such redevelopment projects as Qfront, at the Shibuya Scramble pedestrian crossing (completed in 1999), Shibuya 109 (completed in 1979), and Sangenjaya Carrot Tower (completed in 1996).

Redevelopment work near Shibuya Station Since 2012, Tokyu Corporation and the East Japan Railway Company have been spearheading redevelopment work around Shibuya Station. Projects include Shibuya Hikarie (opened in 2012, built by Tokyu Construction), Shibuya Stream (opened in 2018, built by Tokyu Construction), Shibuya Scramble Square (opened in 2019, built by Tokyu Construction), Shibuya Cast (opened in 2017), Shibuya Fukuras (opened in 2019), and Shibuya Solasta (opened in 2019).

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Redevelopment work near Shibuya Station (includes work performed by other companies)

Shibuya Cast Opened: Apr. 2017

Shibuya Hikarie Opened: Apr. 2012

Shibuya 2-chome 17 Area To be opened: FY2024

Shibuya Scramble Square Opened: Nov. 2019, To be opened: FY2027

Shibuya Stream Opened: Sep. 2018

Shibuya Solasta Completed: Mar. 2019 Shibuya St. Sakuragaoka Area To be completed: Shibuya FY2023 Shibuya Fukuras Bridge Opened: Opened: Sep. 2018 Nov. 2019

Source: Shared Research, from the “Shibuya Redevelopment” section of Tokyu’s website Phase 1 of Shibuya Scramble Square (new construction work for the Shibuya Station District East Tower) This construction, which lasted from June 2014 to November 2019, took place above Shibuya Station—one of the busiest stations in Japan by passenger numbers. The construction environment was also subject to numerous limitations due to its nature as a traffic hub, where JR train lines, the Tokyo Metro Ginza Line, and Route 246 intersect. Underground are the Tokyo Metro Fukutoshin Line and the Tokyu Toyoko Line, as well as the Shibuya River. Construction had to take place in challenging circumstances, such as not interfering with operating train lines or the movement of people using Shibuya Station. The company was able to apply construction expertise it had gained at Shibuya Hikarie.

Materials and logistics had to be handled on a just-in-time basis. To do so, the company developed DandALL, a system for centrally managing in- and out-loading. This system enabled construction workers to share the status of in- and out-loading in real time using tablets and smartphones, substantially reducing waiting times for loading. The company notes that this use of ICT helped improve site productivity.

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Construction performed by the company as part of the Shibuya Station redevelopment

Construction

Civil Engineering New construction, East District, Shibuya Station New construction project, (opened: Nov. 2019) South District, Shibuya Station (opened: Sep. 2018) Pedestrian overpass replacement, East Exit, Shibuya Station

Roof and new station Pedestrian underpass building construction, construction and Shibuya Station, overpass replacement, Ginza Line Shibuya West Exit Improvement work, Shibuya Station, Ginza Line - East building section - Meiji-dori section - Pithead section

Infrastructure development, East Exit, Shibuya Station (Section I) （写真©東京急行電鉄株式会社）

Source: Company briefing materials Noteworthy projects

Shibuya Stream (2018) Shibuya Scramble Square (2019) Qfront (1999)

Source: Company website Source: Company website Source: Company website

Ohashi Medical Center, Toho University (2018) New No. 6 Hall, Tokyo City University (2017)

Source: Company website Source: Company website Civil Engineering Railway, road, and water and sewerage construction Civil Engineering accounts for 21.3% of revenue and 28.7% of operating profit (FY03/19). In this business, the company concentrates on railway and road construction, areas where it possesses some industry-leading technologies.

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Railway construction Tokyu Construction has completed a number of highly difficult railway construction projects. The company explains that it has construction planning and technology skills, as well as better expertise than peers, enabling it to meet difficult requests from railway operators. Orders for difficult construction projects are typically awarded to super general contractors rather than second-tier general contractors. However, the experience Tokyu Construction has acquired has helped it build strong ties with construction companies specializing in railway construction and respond smoothly to client requests.

One area of particular expertise in railway construction is technologies that allow the company to build complex multilevel crossings at night, without interfering with the operation of existing routes. Recent projects in this category include upgrade construction at Shibuya Station on the Tokyo Metro Ginza Line (scheduled for completion in 2022), continuous elevated railway work near Keikyu Kamata Station (completed in 2016), on underground construction between Shibuya and Daikanyama on the Tokyu Toyoko Line (completed in 2014), and construction of a multilevel crossing near Fudo-mae Station on the Tokyu Meguro (completed in 2008). As for overseas projects, the company took part in the Jakarta Mass Rapid Transit Project (Indonesia, completed in 2019).

For many projects, Tokyu Construction has used the STRUM method (“shifting track right upper/under method”) for putting in place a new track directly above or under existing tracks, which has helped on a number of projects involving continuous multilevel crossings. Although other second-tier general contractors also have experience with the construction of multilevel crossings, Tokyu Construction believes its standing as a general contractor affiliated with a railway group and its extensive experience give it an edge over peers. The company also handles routine maintenance and management of railway structures. This business gives Tokyu Construction access to a wealth of data and expertise in making proposals to railway operators. In April 2019, the company set up a new division to mark a full-fledged start in the infrastructure asset management business. With the new business, Tokyu Construction aims to provide clients with medium- to long-term infrastructure maintenance and management support on railway and roadway structures.

Road construction In the road construction category, the company specializes in the application of railway civil engineering technologies for tunnel excavation and building roadbeds and abutments. Noteworthy projects include the Atsugi Minami Interchange on the Shin- Tomei Expressway (completed in 2018), the Ohashi Junction on the Shinjuku Line of the Metropolitan Expressway Central Circular Route (completed in 2010), the Senpuku Tunnel on the Second Tomei Expressway (completed in 2008), road construction on the Miyako Kita-chiku Road on the National Route 45 (completed in 2018), and the Wakayama Misaki Line Hirai- Kita Area Road (completed in 2017). Overseas, the company built the Vo Nguyen Giap Road (Vietnam, completed in 2014).

Water and sewerage construction Water and sewerage construction makes use of tunnel excavation technology, an area of specialization for Tokyu Construction. Notable projects include the Sumida River Rain Water Trunk Line (completed in 2018), which was one of the largest projects in Japan to have been conducted using a freezing method, and the Toyokawa Irrigation Channel Tobu Line Waterway (completed in 2015).

Civil engineering: Demand typically stable and profitability high Civil engineering work tends to be high-profit; an analysis of segment OPM at general contractors shows that building construction typically generates margins of 7–9%, whereas OPM on civil engineering work is around 10–12%. Shared Research understands this difference exists because preliminary screening for civil engineering work, which usually means public-sector projects, usually limits bidding to construction companies that possess sophisticated construction technology and highly stable management. Public-sector projects also tend to be more stable and less susceptible to economic downturns than private-sector construction. Tokyu Construction expects the market for private-sector construction to mature over the medium to long term. For that reason, the company’s medium-term management plan highlights civil engineering work as a growth field.

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Notable projects

Underground construction on the Tokyu Toyoko Wakayama Misaki Line Hirai-Kita Area Road (2017) Line (between Daikanyama and Shibuya, 2014)

Source: Company website Source: Company website Overseas projects Overseas projects are one pillar of Tokyu Construction’s strategy for diversifying sources of earnings. The area of specific focus is the construction business in South and Southeast Asia, with the primary focus on overseas development assistance (ODA) projects and private-sector building construction projects. For ODA projects centering on railways and roads, the company has expanded its region of business concentration from Thailand, Indonesia, and Myanmar to other South Asian countries including Bangladesh. As for private-sector building construction projects, Tokyu Construction has participated in high-rise building projects of prominent local developers and factory construction for Japanese companies operating overseas, as well as hotel construction projects. The company has set up offices in target countries (Thailand, Singapore, Indonesia, Myanmar, Vietnam, and Bangladesh). It has also established subsidiaries in Thailand, Indonesia, and Myanmar. In addition to the experience and expertise it has built up in these markets to date, the company plans to step up efforts to recruit talented local personnel, effectively leveraging the few Japanese staff assigned to these locations.

ODA projects and civil engineering work The company’s first ODA projects were in Dhaka, the capital of Bangladesh, where it built a depot for a mass rapid transit system (MRTS), as well as an MRTS in Indonesia. The company says it received high marks from the governments of both countries. The company has also received an order to construct a road on a newly built bridge and carry out large-scale upgrades on railways (between major cities Yangon and Mandalay) in Yangon, Myanmar, as well as for overhead expressway construction in Hanoi, Vietnam. In Thailand, Tokyu Construction completed the Bangkok MRT Purple Line (completed in 2014) and the southern section construction of the Bangkok subway (completed in 2002).

The Mass Rapid Transit System in Jakarta (source: Tokyu Corporation’s Integrated Report 2019): The capital of Indonesia, Jakarta, is densely populated. The increasing volume of road traffic to the city center has resulted in severe congestion and pollution and development of a railway network poses an important challenge for the government. With assistance from Japan, construction on Indonesia’s first mass rapid transit system began in November 2013 and took about five and a half years. Services started operating in March 2019.

In this project, Tokyu Construction was in charge of the CP101 elevated span and the CP102 span (a total of 5.9 km), including three stations and the railcars depot with an area of 8 ha. The company adopted a construction method that suited the conditions whereby there was no free space beneath bridges and without blocking existing roads. In the construction of an elevated prestressed concrete box-girder bridge, it was technically difficult to build a steeply curved bridge, in particular with a bending radius of 180 m based on the balanced cantilever method. As the construction took place above expressways and major roads in operation, it exercised a high-level of safety control, including measures for preventing falling objects, etc.

Further, the company explains that the project involved a total workforce of around 1,800 people, including 350 managers.

Building construction Key projects to date in this category are the Takasago Singapore factory (completed in 2013), Causeway Point Shopping Center (completed in 2012, Singapore), Malaysia Airlines A380 heavy maintenance hangar (completed in 2007), Suntec Singapore Convention & Exhibition Centre (completed in 2006), and Ninoy Aquino International Airport Terminal 2 Project (completed in 1998, Philippines). The company has enhanced its bidding support system, actively leveraging local staff and collaborating with local leading construction partners. To date, Japanese companies’ factories have been the main focus of its overseas building construction business. Now, it is enhancing its efforts to receive orders for high-rise buildings from local prominent developers,

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beyond Japanese companies. Tokyu Construction also supports other Japanese companies, including developers, who intend to expand their business overseas, earning trust from these companies when they expand business overseas, which leads to orders from them .

Real Estate In the Real Estate segment, the company holds real estate assets for lease. It also conducts non-asset businesses, such as redevelopment and equivalent exchange*. In the past, the company has concentrated on the non-asset business. Revenue and profit volatility in this business is high, as revenue is typically booked when projects are complete.

*Equivalent exchange: A development method in which a landowner provides the land and a developer bears the construction costs. Once the project is complete, the individual parties are assigned a portion of the project equivalent to their investments. Structures are shared by the parties involved and land is jointly owned. Developers can recoup project costs by selling the portion they own.

In FY03/19, this segment delivered revenue of JPY1.9bn (-5.7% YoY) and an operating loss of JPY304mn (segment operating profit of JPY245mn in FY03/18). The Real Estate segment delivered a temporary loss, due to booking of provision for loss on real estate business following the company’s revision of revenues and costs on large-scale development business.

The company’s current medium-term management plan positions real estate leasing as a strategic business for diversifying earnings. The company acquires income properties including office buildings and other commercial facilities to hold over the medium to long term. In FY03/19, the company worked to put in place a structure for this purpose, bringing in experts from the Tokyu Group and hiring other experienced personnel. Tokyu Construction also aims to boost profitability by taking advantage of the information networks it can access as the Tokyu Group’s general contractor and its focus on business in metro Tokyo and along the Tokyu lines. The company explains that these capabilities enable it to take on projects that would be difficult for other companies.

Prior to renting out properties, the company increases their value by performing seismic reinforcement, conducting renovations to make them legally compliant, and converting buildings into small offices. The medium-term management plan targets new investments of JPY10.0bn over a three-year period. In FY03/19, the company acquired five income properties for JPY4.4bn. Tokyu Construction has also set up the internal Real Estate Transaction Review Board* to monitor real estate acquisitions and enhance governance.

*Real Estate Transaction Review Board (source: Tokyu Corporation’s Integrated Report 2019): Tokyu Corporation reviews each property after inviting staff from specialized departments, including the Corporate Planning Department, the Legal Department, and the Finance & Accounting Department, and real estate experts from outside the company. Properties are risky assets that could affect the company’s business performance according to market conditions. As the company will expand its acquisitions, it reviews them every quarter to check the conditions of each one and the outcomes of the real estate business.

In the real estate business, the company mainly leases the properties outlined below.

Main office buildings leased

Gotanda Brick Building (Shinagawa-ku, Tokyo), land: 642sqm, asset value: JPY2.5bn ▷ Higashi Kanda 1-chome Office (Chiyoda-ku, Tokyo), land: 317sqm, asset value: JPY1.5mn ▷ Shin Mizonokuchi Building (Takatsu-ku, Kawasaki), land: 1,686sqm, asset value: JPY1.3bn ▷ Chiyoda Dogenzaka Building (Shibuya-ku, Tokyo) ▷ MCC Kanda Iwamoto-cho Building (Chiyoda-ku, Tokyo) ▷ Ivy Works (Shibuya-ku, Tokyo) ▷

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Ivy Works The company acquired this office building and leveraged its strengths as a general contractor to conduct required seismic reinforcement in accordance with the Building Standards Act. Tokyu Construction then renovated the property into small offices, which it leases out over the medium to long term.

Main shopping facilities leased

Stores at 126 Udagawa-cho (Shibuya-ku, Tokyo), land: 778sqm, asset value: JPY1.6bn ▷ Provisional stores in the west of Udagawa (Shibuya-ku, Tokyo), land: 1,226sqm, asset value: JPY1.6bn ▷

Main parcel of land leased

Land in Nakahara-ku, Kawasaki, land: 7,893sqm, asset value: JPY2.3bn ▷

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Market and value chain Construction market in Japan Investment in construction Private- and public-sector construction investments In the private sector, construction investment includes residences, office buildings, factories, and warehouses. Public-sector investment centers on civil engineering work, such as roadways and water and sewerage. Private-sector construction investment tends to expand in buoyant economic times and contract when the business climate turns downward. Public-sector investment tends to be stable, and governments have a tendency to increase public works projects to boost employment during economic recessions.

Industry structure Numerous small-scale operators The Japanese construction industry is characterized by numerous small operators. As of end-March 2019, 468,311 entities held construction business licenses. Of this number, 96.3% had capital of less than JPY50mn, with 61.2% having capital of less than JPY10mn.

Number of construction workers According to statistics by the Ministry of Health, Labour and Welfare, construction workers in Japan numbered 5.0mn in 2019. This figure represents a 26.6% decline from the peak in 1997 (6.9mn). This number continued to increase through the mid- 1990s, as the construction industry employed workers who had lost their jobs after the bursting of Japan’s economic bubble. Since 1998, construction industry employment gradually dropped off until the Great East Japan Earthquake in 2011. The earthquake prompted an uptick in construction investment, halting the decline in employment, and the figure has since been around 5.0mn.

Domestic investment in construction High growth through the economic bubble period Nominal investment in construction (in both the private and public sectors) grew steadily during Japan’s era of high economic growth. However, in the early 1980s government spending on public works began to wane due to fiscal reform efforts, and private-sector building construction also began to slow. After that point, the nominal construction investment continued to expand during Japan’s economic bubble period. At its peak in FY03/93, investment in construction reached JPY60tn.

Sluggishness after the economic bubble burst, recovery following the Great East Japan Earthquake One area that was particularly affected by the bursting of Japan’s economic bubble was private-sector non-residential construction. Amid reforms to the fiscal structure, government investment in construction also fell off substantially, leading to approximately 20 years of sluggish domestic investment in construction spending. This structural decrease in construction investment prompted fierce competition in a construction industry that had until that point been divided up by corporate scale, type of construction, and region. To maintain business scale, main contractors took on low-profit projects. Subcontractors, which had to lower costs to retain business, also experienced lower profits.

Government investment in construction increased again in 2011, owing to demand for reconstruction and recovery in the aftermath of the Great East Japan Earthquake. Private-sector investment in non-residential construction also gradually increased following the 2008 global financial crisis. Benefiting from yen depreciation, corporate profits rebounded, and the economy entered a gradual recovery phase following the earthquake. After an extended period of low investment, nominal investment in non-residential construction and government investment in construction bottomed out at JPY27.2tn in FY03/13 and then began to rise.

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In FY03/17, the figure was JPY34.1tn (+4.7% YoY), rising in FY03/18 to JPY35.6tn (+4.3% YoY) to exceed JPY35tn for the first time in 15 years. The Research Institute of Construction and Industry forecasts that the figure will reach JPY37.4tn (+4.2% YoY) in FY03/20.

Medium- to long-term decline as the population dwindles Large-scale reconstruction projects are forecast for the Tokyo metro area, but the broad consensus sees domestic investment in construction declining over the medium term once this construction boom has passed. The Research Institute of Construction and Industry estimates domestic investment in construction at around JPY53tn in FY03/19, but Tokyu Construction expects it to fall to around JPY51tn by FY03/26.

Japanese construction spending (non-residential construction and civil Company forecast of Japanese construction spending (FY03/26) engineering)

(JPYbn) Civil engineering (public) Non-residential (public) 70,000 (JPYtn) Civil engineering (private) Non-residential (private) 60

60,000 50 50,000

40 40,000

30 30,000

20,000 20

10,000 10

0 0

Source: Shared Research based on MLIT’s “Construction Investment Statistics” Source: Shared Research based on company briefing materials Robust demand for offices (three major metro areas) and public works According to Mizuho Industry Focus, demand for office space will remain solid over the medium term in Japan’s three major metropolitan areas. Although large-scale projects are slated to begin opening in 2020, demand for office concentration and relocation will keep vacancies and leasing rates at firm levels. The Japanese government’s Plan for National Resilience, formulated in FY03/15, calls for the reinforcement and seismic enhancement of disaster preparedness centers, construction related to maintenance and renovation, and various other infrastructure-building projects. Tokyu Construction believes demand for public- sector projects will remain firm over the medium to long term. Construction has begun on the Chuo Shinkansen, a maglev line under construction between Shinagawa (Tokyo) and Nagoya that is scheduled to begin operating in 2027. With projects such as this, the company expects demand for private-sector civil engineering projects to remain solid as well.

Public works and the bidding system The Act on Promoting Quality Assurance in Public Works, which went into force in 2005, ranks construction companies undertaking public works according to total points, based on management criteria and a technology assessment. Points are based on assessments of construction experience, status of construction, and number and experience of engineers scheduled for deployment. The framework is designed to leverage companies’ technological capabilities. The Act on Promoting Quality Assurance in Public Works, revised in 2014, calls for competitive bids that 1) set expected prices at levels that ensure appropriate margins to contractors, allowing them to secure and train human resources, 2) reduce the burden of competitive bidding by introducing stepwise selection rather than requiring detailed technology proposals from all participants, and 3) the leveling off of timing for ordering and construction periods.

Plan for National Resilience Enhancing national resilience (disaster prevention and mitigation efforts) is a policy position formulated by the Japanese government (Cabinet Secretariat), aimed at increasing Japan’s risk management and resilience. The policy calls for more resilient national infrastructure in the face of extensive loss of human life due to frequent flooding and earthquakes, as well as damage to

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important infrastructure functions. The government policy, based on the Basic Act for National Resilience, was formulated into the 2014 Fundamental Plan for National Resilience, which was revised in 2018. The gist of the plan is to realize an independent, decentralized, and cooperative national land structure; reflect past disasters and knowledge of climate change; take appropriate measures combining tangible and intangible approaches; and utilize private funds through PPP/PFI.

Key measures

Perform seismic reinforcement on designated evacuation shelters and other disaster prevention bases, residences, schools, and ▷ cultural assets.

Encourage regional dispersion and expansion of corporate headquarters functions to ameliorate the trend toward centralization ▷ in Tokyo.

Enhance the resilience of the power grid, and otherwise build an energy supply system that is robust in the face of disaster. ▷ Increase the disaster resistance of airports, ports, Shinkansen, emergency routes, and other transport and logistics facilities; build ▷ road networks to provide alternative access; build snow removal systems; put in place riverside and coastal embankments to protect regions from large-scale tsunamis.

Establish a foundation for agricultural, forestry, and fishery production. ▷ Prepare and seismically reinforce government buildings and public facilities to serve as disaster prevention bases. ▷ Enact flood control measures to provide alternative river routes in the face of climate change. ▷ Increase the resilience of disaster waste treatment systems. ▷ Disseminate risk by alleviating population concentration in locations at high risk of disaster. ▷ Promote the formulation of plans to extend the life of infrastructure, including electrical facilities, water and sewerage, highway ▷ bridges, and other lifelines, as well as disaster prevention bases, schools, healthcare institutions, and agricultural irrigation facilities, and create maintenance cycles.

Promote R&D and the adoption and social implementation of measures to prevent and mitigate disaster and address the ▷ deterioration of infrastructure.

Urgent measures (2018–2020) The measures include expenditures of around JPY7tn (including around JPY0.6tn in business leveraging the Fiscal Investment and Loan Program, with national expenditure expected to provide around JPY3.5tn).

Matters relating to the building construction business

Prevent or minimize disaster due to large-scale flooding, landslides, earthquakes, and tsunamis (Approx. JPY2.8tn) ▷ Ensure disaster response, including rescue and emergency and medical activity (Approx. JPY0.5tn) ▷ Ensure supplies of electric power and other energy (Approx. JPY 0.3tn) ▷ Secure food supplies, lifelines, and supply chains (Approx. JPY1.1tn) ▷ Secure land, sea, and air transport networks (Approx. JPY2.0tn) ▷

The Plan for National Resilience comprises policies for promoting the national government’s medium- to long-term measures based on the Basic Act for National Resilience. Policies concerning a certain scale of budgetary measures are to be decided in or after FY03/22.

Structural changes in the construction industry Increasingly serious labor shortages The construction business is facing labor shortages, due to the aging of the population and as the baby boomer generation exits the work force in large numbers.

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Shortage of skilled workers: Even with enhanced productivity, the need for skilled workers is expected to reach 2.9–3.2mn ▷ people by 2025, according to the Ministry of Land, Infrastructure, Transport and Tourism. However, around 1.3mn baby boomers are expected to exit the workforce, resulting in a shortfall of 770,000–990,000 skilled workers. Aging of the population: The construction business is likely to be affected more severely by population aging than industry as a ▷ whole. Currently, more than 30% of workers in the construction industry are 55 or older, with around 10% aged 29 or younger.

Construction companies are striving to offset labor shortages and an aging population by stepping up hiring of foreign nationals ▷ and younger workers. Tokyu Construction thinks companies may engage in corporate restructuring efforts in an effort to retain personnel.

Growing demand for renovation

Although the construction business is slated to gradually shrink over the medium to long term, Tokyu Construction believes the ▷ growth in demand for renovation and maintenance will accelerate, buoyed by seismic reconstruction and environmental response measures. The company explains that the percentage of infrastructure built during Japan’s period of rapid economic growth that is now deteriorating is rising quickly. Accordingly, it expects demand for maintenance and upgrades to expand further.

Tokyu Construction believes this situation warrants a move toward more recurring-revenue business and more flexible methods ▷ for accepting orders.

Percentage of infrastructure built 50 or more years ago

Aging rate (over 50 years) March March March 2013 2023F 2033F Road bridges 18％ 43％ 67％ Tunnels 20％ 34％ 50％ River management facilities 25％ 43％ 64％ Sewer pipes 2％ 9％ 24％ Quay walls 8％ 32％ 58％ Source: Company materials

Growing need for productivity enhancement

Use of BIM and CIM systems: Centralizing three-dimensional information on building shapes and attributes facilitates consensus- ▷ building between construction-related players, helping to improve the efficiency of design and construction work.

Building information modeling (BIM) is a solution for utilizing information in a building database produced by adding data regarding attributes, such as cost, finishing details, and management information, to a three-dimensional digital model of a building constructed on a computer during various types of construction processes, including design, construction, maintenance, and management.

To front-load construction work and streamline on-site operations, Tokyu Construction has started distributing a structural model that supports BIM as a “first model” at the start of construction. The distributed model is utilized at the site as a construction BIM, and applied to an examination of the construction plan. Visualizing work procedures and sharing BIM information with employees and on-site skilled construction workers makes it possible to select the best procedures, and helps to improve the efficiency and safety of the operations. BIM can also help ensure consistency among multiple drawings, such as architectural design, structural, and equipment plans, and prevent losses due to operational rework. Furthermore, it is possible to check work in detail and build a consensus with the client and designers in three dimensions, improving the speed of decision-making. The company says it plans to utilize the information provided by BIM to reduce the burden of on-site quantitative calculations, to streamlining business operations further. (Source: Tokyu Corporation’s Integrated Report 2019)

i-Construction: MLIT encourages the utilization of ICT in construction production processes ranging from surveying and ▷ measurements to design, construction, and inspections. The company aims to improve productivity on construction sites by leveraging drones for measurements and ICT for construction.

Tokyu Construction uses ICT and BIM/CIM in Shibuya redevelopment work. Conventional methods, which employ only two-dimensional drawings to share construction plans and related information, are inadequate for the complex project of redeveloping Shibuya, in which the civil engineering division and building construction division must simultaneously engage in their respective construction operations in close proximity, while maintaining city functions in the area. Accordingly, since 2013, Tokyu Corporation has been working to integrate BIM from the building construction business and CIM from the civil engineering business. The company has rendered the entire city of Shibuya in three-dimensions based on the concept

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of urban information modeling/management (UiM), and has been using the framework to study the redevelopment of Shibuya. Especially in the projects involving the Tokyo Metro Ginza Line at the East Exit of Shibuya Station and Shibuya Stream, construction planning in 3D space and using the 4D-CIM model, in which a time axis is also added to the 3D model, has contributed to swifter consensus building with the parties involved. The company is preparing for a project at the West Exit of Shibuya Station, with the proactive use of UiM in mind. The company says it intends to steadily and reliably propel the project forward, maintaining the project schedule, by ascertaining potential construction risks as expeditiously as possible in cyberspace, reproducing real-world conditions and applying the identified risks to the real world. The company notes it has been involved in construction in the Shibuya area for many years and explains that the “digital twin” the UiM provides will help it pass on its experience to employees working 50 or 100 years in the future. (Source: Tokyu Corporation’s Integrated Report 2019)

Precast concrete construction method: This modular construction method involves the production of reinforced concrete ▷ construction parts in factories. The various parts are joined together at construction sites. This approach reduces the number of personnel required on-site, lowers costs, and facilitates a stable supply of high-quality concrete building parts.

By introducing such methods, the company expects consolidation within the construction business. It believes the industry will ▷ see more mergers and acquisitions, as companies strive to scale up their profits.

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Main competitors Revenue of general contractors Tokyu Construction a second-tier general contractor The figure below shows a ranking of the top 20 general contractors in Japan, by revenue in FYFY03/19. The top five “super general contractors” (Obayashi, Kajima, Shimizu, Taisei, and Takenaka) have revenue of more than JPY1tn each. Companies below that level are referred to as “second-tier general contractor.”

Super general contractors tend to earn orders for large construction projects based on their high level of technological expertise and extensive track records. While construction sales tend to be central, these companies also have a wide range of construction technology capabilities, with in-house design, engineering, and R&D departments.

Revenue of top-20 general contractors (FY03/19)

(JPYbn) 0 500 1,000 1,500 2,000 2,500

Obayashi Kajima Shimizu Taisei Takenaka Penta-Ocean Construction Toda Maeda Sumitomo Mitsui Construction Kumagai Gumi Hazama Ando Nishimatsu Construction Tokyu Construction Takamatsu Okumura Tekken Daiho Tobishima Totetsu Zenidaka

Note: Figures for Takenaka are for FY12/18 Source: Shared Research based on individual companies’ annual securities reports Revenue composition of individual general contractors High percentage of private-sector construction projects Shared Research conducted a comparison of 14 general contractors, including Tokyu Construction. In FY03/19, building construction accounted for 78.1% of revenue at Tokyu Construction and the civil engineering business for 21.3%. Compared with others in the industry, building construction made up a high percentage of revenue. This ratio reflects proactive efforts to obtain orders for construction work within the Tokyu Group and aggressive efforts to obtain orders for building construction in the Shibuya area and throughout Japan, for office buildings, warehouses and factories, schools, and government buildings.

Other general contractors with a high proportion of revenue from building construction include the super general contractors and Toda Corporation. Meanwhile, Tekken Corporation, Okumura Corporation, Hazama Ando, Maeda Corporation, and Kumagai Gumi are general contractors focused on civil engineering work.

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General contractors’ revenue compositions (consolidated basis, FY03/19)

Construction Civil engineering Development, other

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Tokyu Construction Toda Shimizu Obayashi Taisei Kajima Nishimatsu Construction Sumitomo Mitsui Construction Zenidaka Kumagai Gumi Maeda Hazama Ando Okumura Tekken

Source: Shared Research based on individual companies’ annual securities reports Financial analysis of individual general contractors We performed a financial analysis of 18 major general contractors. The resulting scatter plot is shown on the following page.

In FY03/19, Maeda Corporation, Okumura Corporation, and Nishimatsu Construction had a total asset turnover period of 15 months and a large scale of assets. General contractors with large-scale assets typically have large-scale real estate business assets and financial assets. By comparison, Tokyu Construction’s total asset turnover period was 9.6 months. This smaller scale of assets vis-à-vis revenue points to a more efficient financial balance. The relatively small figure stems from having few assets in the real estate business and solid building construction orders in recent years.

The super general contractors (Taisei, Kajima, Obayashi, and Shimizu) have the highest profit margins. In addition to benefiting from economies of scale on materials costs, we understand that these margins reflect a higher percentage of revenue from high- value-added construction, based on their extensive project track records. Tokyu Construction’s profit margin is 6.9%. Although lower than the 7.2% average for super general contractors, this margin is high compared with other second-tier general contractors. Shared Research understands this figure reflects improved profitability on private-sector construction work in a favorable operating environment.

Over the past five years, CAGR for revenue has been 7.9% for Tokyu Construction, putting it at the top of the industry. This growth reflects favorable orders for private-sector construction projects, including office buildings in Shibuya. Adjusted ROE, which indicates return on equity, is 12%, which exceeds that of the super general contractors and the average for the industry. Adjusted shareholders’ equity (that excludes accumulated other comprehensive Income) has increased over the past several years, as profit margins have led to the accumulation of internal reserves.

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Asset efficiency and profit margins Growth and profitability

Asset turnover (months) ROE

18 25% Maeda 17 Hazama Ando Okumura 16 Nishimatsu 20% Toda 15 Zenidaka Tekken 14 15% Sumitomo Tokyu Taisei Tekken Shimizu Mitsui Construction 13 Obayashi Constrcution Kajima Zenidaka 12 10% Taisei Okumura Hazama Ando Kajima Shimizu Kumagai-Gumi Obayashi 11 Kumagai-Gumi Maeda Takamatsu Toda 10 5% Nishimatsu Construction Sumitomo Tokyu Takamatsu Mitsui Construction 9 Construction Constrcution 8 0% 3% 4% 5% 6% 7% 8% 9% 10% -1% 1% 3% 5% 7% 9% Recurring profit margin Sales CAGR (latest five years) Source: Shared Research based on individual companies’ annual securities reports Source: Shared Research based on individual companies’ annual securities reports

Distinguishing features of various general contractors Tokyu Construction (TSE: 1720)

Tokyu Corporation established Tokyu Construction Industry Co., Ltd. in 1946 amid the rapid reconstruction of postwar Japan. ▷ The Tama Garden City development and construction of the Izu Kyuko railway line were among its first projects. In civil engineering, the company has focused on railway (Tokyu lines) and roadway (expressway) projects. Private-sector construction projects have centered on the Shibuya area.

Tokyu Construction is a second-tier general contractor. In FY03/19, revenue was JPY331.4bn, and recurring profit was JPY22.9bn. ▷ Breaking down consolidated revenue by segment, Building Construction accounted for 78.1%, Civil Engineering for 21.3%, and Real Estate for 0.6%.

Of consolidated operating profit, the Building Construction segment accounted for 72.4%, Civil Engineering for 28.7%, Real ▷ Estate for -1.1% (operating loss), and adjustments for -21.2%. OPM on a consolidated basis was 7.8% for Building Construction, 11.3% for Civil Engineering, and -16.1% for redevelopment projects.

Of parent-only revenue, public-sector projects accounted for 26.5%, private-sector construction projects for 67.0%, private- ▷ sector civil engineering projects for 6.8%, and overseas projects for 3.1%. Work for the Tokyu Group made up 18.1% of revenue.

Obayashi Corporation (TSE: 1802)

The predecessor of Obayashi was established in 1892 by Yoshigoro Obayashi to construct the Abe Paper Mill. In 1911, the ▷ company won a bid to handle the overall construction of Tokyo Station. In 1912, Obayashi received an order to construct an imperial mausoleum.

In FY03/19, revenue was JPY2.0tn, and recurring profit was JPY155.5bn. The building construction business accounted for 95.3% ▷ of revenue, and development for 2.4%. By consolidated segment, domestic building construction accounted for 55.2% of revenue, domestic civil engineering for 17.2%, overseas construction for 20.0%, overseas civil engineering for 2.9%, real estate for 2.4%, and other business for 2.2%.

Breaking down consolidated operating profit by segment, domestic building construction accounted for 60.4%, domestic civil ▷ engineering for 25.5%, overseas construction for 4.3%, overseas civil engineering for 1.3%, real estate for 6.8%, and other business for 1.7%. Consolidated segment OPM was 8.0% for domestic building construction, 10.8% for domestic civil engineering, 1.6% for overseas construction, 3.3% for overseas civil engineering, and 21.1% for real estate.

Parent-only revenue totaled JPY1.4tn, of which domestic projects accounted for JPY1.3tn. Of this amount, public-sector projects ▷ accounted for 17.2%, private-sector construction projects for 73.1%, and private-sector civil engineering projects for 7.3%.

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Overseas projects accounted for 2.2%. Compared with peers, public-sector projects account for a low percentage of Obayashi’s revenue and private-sector projects for a high proportion.

Kajima Corporation (TSE: 1812)

Iwakichi Kajima established a carpentry business in Edo (present-day Tokyo). In 1860, the company pioneered its first Western- ▷ style building, Ei-Ichiban Kan (English House No. 1) and A-Ichiban Kan (Asian House No.1) in Yokohama. The company began railway construction in 1880. The company began undertaking overseas projects in Taiwan, Korea, and Manchuria. In 1904, it began construction on a railway linking Seoul and Busan. The company began building dams and power generation facilities in 1909, beginning construction on the Shizugawa Power Station for Ujigawa Electric. In 1918, Kajima began working on the Tanna Tunnel, a difficult project.

In FY03/19, revenue was JPY2.0tn, and recurring profit was JPY162.9bn, making it one of the largest companies in the ▷ construction industry. On a consolidated basis, civil engineering accounted for 15.2% of revenue, construction for 46.9%, real estate development for 2.5%, domestic affiliates for 12.3%, and overseas affiliates for 23.1%.

Of consolidated segment operating profit, civil engineering accounted for 24.7%, construction for 55.8%, development for ▷ 3.8%, domestic affiliates for 11.6%, and overseas affiliates for 4.4%. Of consolidated segment OPM, civil engineering accounted for 11.7%, construction for 8.6%, real estate development for 11.2%, domestic affiliates for 6.8%, and overseas affiliates for 1.4%.

Kajima undertakes a relatively high proportion of development work, compared with others in the industry. Kajima (parent) owns ▷ an office building; Kajima Yaesu Kaihatsu Co., Ltd., a subsidiary, owns Gran Tokyo South Tower (an office building); and Kajima Overseas Asia owns office buildings and commercial facilities in Indonesia and other parts of Southeast Asia.

Of parent-only revenue, public-sector projects accounted for 21.8%, private-sector construction projects for 65.4%, private- ▷ sector civil engineering projects for 8.7%, overseas projects for 0.1%, and real estate development for 4.0%.

Shimizu Corporation (TSE: 1803)

Kisuke Shimizu founded the company in the Kanda Kajicho district of Edo (now Tokyo). The company began operations in ▷ Yokohama in 1859, before Japan opened its doors to the rest of the world. In 1868, the company completed construction and operated Japan’s first Western-style hotel (Tsukiji Hotel). In 1887, Shimizu took on Eiichi Shibusawa as an advisor. On his advice, Shimizu began concentrating on private-sector construction.

In FY03/19, revenue amounted to JPY1.7tn, and recurring profit was JPY133.9bn. ▷ By segment, operating profit in the building construction business accounted for 103.2%, the real estate development business ▷ for 6.8%, and other adjustments for -10.0%. Consolidated segment OPM was 10.0% in the building construction business and 34.8% in the real estate development business.

Of parent-only revenue of JPY1.4tn, building construction accounted for 77.7% and civil engineering for 22.3%. Parent-only GPM ▷ was 11.6% for building construction, and 16.7% for civil engineering. Of parent-only revenue, public-sector projects made up 22.7%, private-sector construction projects 65.7%, private-sector civil engineering projects 7.5%, and overseas projects 4.1%.

Taisei Corporation (TSE 1801)

The company was founded as the construction division of Okura Gumi Shokai. In 1887, the company was established as Nippon ▷ Doboku Co., Ltd., with investment by Eiichi Shibusawa, Kihachiro Okura, and Denzaburo Fujita. In 1893, the company reorganized and was established as Okura Doboku Gumi. In 1946, the company’s name changed to Taisei Corporation as part of the postwar break up of Japan’s zaibatsu conglomerates.

In FY03/19, revenue was JPY1.7tn, and recurring profit was JPY157.9bn, making it one of Japan’s largest construction companies. ▷ Of revenue, building construction accounts for 65.9%, civil engineering for 26.6%, real estate development for 7.0%, and other business for 0.6%. GPM was relatively high in real estate development, at 20.9%, with building construction at 13.0% and civil engineering at 17.0%. Of consolidated operating profit, building construction accounted for 57.2%, civil engineering for 34.6%,

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and real estate development for 8.4%. Consolidated OPM was 8.1% for building construction, 12.1% for civil engineering, and 11.2% for real estate development.

Compared with peers, civil engineering accounts for a relatively high proportion of business, and its real estate development is ▷ relatively extensive. Taisei-Yuraku Real Estate Co., Ltd., a consolidated subsidiary, contributes around JPY13.0bn per year to operating profit in the real estate development segment.

Of parent-only revenue, public-sector projects accounted for 26.4%, private-sector construction projects for 60.0%, private- ▷ sector civil engineering projects for 10.4%, and overseas projects for 1.6%. Compared with others in the industry, Taisei’s percentage of business from public-sector projects is high, and the percentage from overseas projects is low.

Takenaka Corporation (unlisted)

Tobei-Masataka Takenaka established the business in 1610 in Nagoya to engage in shrine and temple construction. As Japan ▷ entered the Meiji era (1868–1912), Takenaka began concentrating on Western-style construction, completing the Nagoya Garrison barracks in 1874.

In FY12/18, Takenaka had consolidated revenue of JPY1.4tn and recurring profit of JPY94.0bn. Shared Research understands that ▷ building construction accounts for a relatively high percentage of business. In FY12/18 group company Takenaka Civil Engineering & Construction Co., Ltd. generated revenue of JPY93.8bn and recurring profit of JPY4.9bn.

By segment, the building construction business accounted for 91.7% of revenue, while real estate development accounted for ▷ 4.4%. Overseas business accounted for 12.8% of revenue, which is relatively high compared with peers.

Penta-Ocean Construction Co., Ltd. (TSE: 1893)

The company was established as Mizuho-Gumi in the city of Kure, Hiroshima Prefecture in 1896. The company focused on ▷ marine construction, particularly civil engineering in harbors and bays. The company earned a reputation for marine civil engineering work through numerous projects in the Yokosuka and Sasebo areas. In 1937, the company build a dredger and entered the business of dredging and land reclamation.

In FY03/19, revenue was JPY541.9bn, and recurring profit was JPY26.6bn. Of consolidated sales, domestic civil engineering ▷ accounted for 34.4%, domestic building construction for 33.7%, and overseas building construction for 30.3%.

Of consolidated operating profit, domestic civil engineering accounted for 47.9%, domestic building construction for 26.3%, ▷ and overseas building construction for 23.2%. Compared with peers, domestic civil engineering and overseas building construction business account for a relatively high proportion of business.

Of parent-only revenue, public-sector projects accounted for 29.8%, private-sector construction projects for 21.9%, private- ▷ sector civil engineering projects for 4.8%, and overseas projects for 31.4%. Public-sector and overseas projects account for a relatively high percentage of business.

Toda Corporation (TSE: 1860)

The company was established in 1881 in Tokyo’s Akasaka district by Rihei Toda, a carpenter specializing in the construction of ▷ temples and shrines. Toda built a number of modern-era buildings, including a library to commemorate Keio University’s 50th anniversary of establishment, the Okuma Auditorium at Waseda University, and the Yokohama Customs Building. It also engaged in construction for the London International Exhibition on Industry and Art.

In FY03/19, revenue was JPY510.4bn, and recurring profit was JPY37.5bn. Domestic building construction accounted for 69.6% ▷ of consolidated revenue, domestic civil engineering for 19.4%, real estate development for 1.9%, group companies in Japan for 5.6%, new fields for 0.0%, and overseas business for 3.5%.

Of consolidated operating profit, domestic building construction accounted for 73.7%, domestic civil engineering for 32.5%, ▷ real estate development for 5.4%, group companies in Japan for 4.6%, new fields for -2.6% (loss), and overseas business for -

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11.7% (loss). Consolidated OPM was 7.2% for domestic building construction, 11.3% for domestic civil engineering, 19.1% for real estate development, 5.5% for group companies in Japan, and 1.2% for overseas business.

Of parent-only revenue, public-sector projects accounted for 24.1%, private-sector construction projects for 69.0%, private- ▷ sector civil engineering projects for 4.0%, and overseas projects for 1.0%.

Maeda Corporation (TSE: 1824)

The company was established 1919 as Maeda Jimusho as part of Tobishima Gumi by Matabee Maeda. ▷ In FY03/19, revenue was JPY492.1bn, and recurring profit was JPY38.4bn. Of consolidated revenue, building construction ▷ accounted for 58.4%, civil engineering for 30.3%, manufacturing for 7.4%, and infrastructure operation for 3.6%.

Of consolidated operating profit, building construction accounted for 40.2%, civil engineering for 44.6%, manufacturing for ▷ 5.7%, and infrastructure operation for 9.3%. Consolidated OPM was 5.0% in building construction, 10.7% in civil engineering, 5.6% in manufacturing, and 18.8% in infrastructure operation.

Of parent-only revenue, public-sector projects accounted for 30.5% (a relatively high proportion), private-sector construction ▷ projects for 55.2%, private-sector civil engineering projects for 12.3%, and overseas projects for 1.3%.

Sumitomo Mitsui Construction Co., Ltd. (TSE: 1821)

The company originated with the establishment of a civil engineering and construction division at the Sumitomo Besshi Copper ▷ Mine in 1876. In 1968, the company completed the Mitsui Kasumigaseki Building, Japan’s first ultra high-rise.

In FY03/19, revenue was JPY448.8bn, and recurring profit was JPY28.9bn. Of consolidated gross profit, the civil engineering ▷ business accounted for 46.2% and the building construction business for 53.3%.

Of parent-only revenue, public-sector projects accounted for 26.6%, private-sector construction projects for 60.6%, private- ▷ sector civil engineering projects for 5.1%, and overseas business for 7.7%. This overseas figure is relatively high, compared with peers.

Kumagai Gumi Co., Ltd. (TSE: 1861)

Kumagai Gumi got its start in 1898, when Santaro Kumagai, a stonemason from Fukui, received an order to construct the ▷ waterway for the Shukununo Power Plant, which would be Japan’s third power plant. In 1937, the company completed construction on the Sanshin Railway (currently the JR Iida Line). As part of the construction of the Kurobegawa No. 4 Power Plant for Kansai Electric Power, Kumagai Gumi built the Omachi Tunnel (which involved difficult construction work and is important in Japan’s civil engineering history).

In FY03/19, revenue was JPY389.1bn, and recurring profit was JPY26.6bn. The civil engineering business accounted for 28.7% of ▷ revenue, the building construction business for 50.2%, and subsidiaries for 21.1%.

Of consolidated operating profit, the civil engineering business accounted for 32.6%, the building construction business for ▷ 47.0%, and subsidiaries for 20.1%. The consolidated OMP was 7.7% for civil engineering, 6.4% for building construction, and 6.5% for subsidiaries.

Of parent-only revenue, public-sector projects accounted for 28.3%, private-sector construction projects for 55.6%, private- ▷ sector civil engineering projects for 16.0%, and overseas business for 0.1%. Public-sector projects and civil engineering work thus account for a relatively high percentage of performance.

Hazama Ando Corporation (TSE: 1719)

In 1873, Shotaro Ando founded Ando-Kata in Tokyo’s Kanda Ward. The company engaged in brick construction in the Ginza and ▷ Asakusa areas of Tokyo.

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In FY03/19, revenue was JPY360.0bn, and recurring profit was JPY22.9bn. Of consolidated operating profit, civil engineering ▷ accounted for 76.3%, building construction for 38.5%, and intra-group business for 4.9%. Consolidated OPM was 15.2% for civil engineering , 4.4% for building construction, and 4.2% for intra-group business. Of parent-only revenue, public-sector projects accounted for 32.5%, private-sector construction for 49.3%, private-sector civil ▷ engineering for 12.4%, and overseas business for 8.7%. Public-sector projects and civil engineering thus account for a high percentage of business, as do overseas projects.

Nishimatsu Construction Co., Ltd. (TSE: 1820)

Keisuke Nishimatsu established the company in 1874 to handle civil engineering and building construction work. In the early ▷ Showa era (1926–1989), the company was undertaking construction in Gyeongseong (Seoul), Changchun (capital of Manchukuo), and Beijing and Taipei, and was involved in railroads, highways, rivers and harbors, and hydroelectric projects.

In FY03/19, revenue was JPY349.3bn, and recurring profit was JPY26.0bn. Of consolidated revenue, civil engineering accounted ▷ for 33.4%, building construction for 63.6%, and real estate and development for 2.7%.

Of consolidated operating profit, civil engineering accounted for 37.7%, building construction for 55.1%, and real estate and ▷ development for 7.3%. Consolidated OPM was 8.0% for civil engineering, 6.2% for building construction, and 19.4% for real estate and development.

Of parent-only revenue, public-sector projects accounted for 38.4%, private-sector construction projects for 52.5%, private- ▷ sector civil engineering projects for 6.0%, and overseas projects for 3.1%. Public-sector and overseas projects thus account for a high proportion of business.

Takamatsu Construction Group Co., Ltd. (TSE: 1762)

The company was founded in 1917 in Yodogawa-ku, Osaka. In 2002, Aoki Construction Co., Ltd., joined the Takamatsu ▷ Construction Group. In 2004, Asunaro Construction Co., Ltd. merged with Aoki Construction, and Kongo-Gumi Co., Ltd. joined the group in 2006.

In FY03/19, revenue was JPY249.7bn, and recurring profit was JPY12.4bn. Of consolidated revenue, public-sector projects ▷ accounted for 28.1%, private-sector civil engineering projects for 15.2%, building construction (non-residential) for 28.6%, residential building construction for 17.5%, and real estate for 10.5%. Public-sector and civil engineering projects (particularly marine civil engineering), residential building construction, and the real estate businesses account for a relatively high percentage of revenue.

Okumura Corporation (TSE: 1833)

The company was established in 1907 by Taihei Okumura. In 1955, the company handled the second construction of Tsutenkaku ▷ Tower (an Osaka landmark). In 1978, Okumura received a subway construction order from Hong Kong. In 1984, the company received an order to build the Washuzan Tunnel (Kodama–Sakaide route), connecting the islands of Honshu and Shikoku.

In FY03/19, revenue was JPY220.9bn, and recurring profit was JPY15.1bn. Of consolidated operating profit, civil engineering ▷ accounted for 45.2%, building construction for 30.2%, and real estate for 21.6%.

Of parent-only revenue, public-sector projects accounted for 43.2%, private-sector construction projects for 47.0%, private- ▷ sector civil engineering projects for 9.3%, and overseas business for 0.4%. Public-sector projects make up a higher percentage of business than the industry average.

Tekken Corporation (TSE: 1815)

Tekken was established in 1944 by the Japanese government to facilitate ground transportation during WWII. Seiichi Kajima was ▷ appointed the company’s first president. The company’s first project was to build a tunnel for the Third-Stage Works of the Shinanogawa Hydroelectric Power Plant for Japan’s national railway.

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In FY03/19, revenue was JPY174.7bn, and recurring profit was JPY6.9bn. Of consolidated operating profit, civil engineering ▷ accounted for 76.4%, building construction for 17.4%, real estate for 3.1%, and ancillary business for 1.8%.

Of parent revenue, public-sector projects accounted for 29.5%, private-sector construction projects for 38.6%, private-sector ▷ civil engineering projects for 28.7%, and overseas business for 3.2%. Compared with the industry average, private-sector building construction accounts for a relatively low share of business, while public-sector projects, private-sector civil engineering projects (including railway construction), and overseas projects account for a high proportion.

Daiho Corporation (TSE: 1822)

Established in 1949, the company has registered patents for the Daiho Caisson Method (1952), the Daiho Dolphin Dock Method ▷ (1971), the Earth-Pressure Shield Method (1984), the Eccentric Multi-Axis Shield Method (1992), and the Anchor Caisson Method (2010).

In FY03/19, revenue was JPY150.8bn, and recurring profit was JPY9.2bn. Of consolidated operating profit, civil engineering ▷ accounted for 69.2%, building construction for 28.0%, and other business for 3.5%.

Of parent-only revenue, public-sector projects accounted for 53.6% and private-sector construction for 46.4%. Relative to other ▷ companies in the industry, public-sector projects and private-sector civil engineering projects (including railway construction) account for a high proportion of business.

Tobishima Corporation (TSE: 1805)

In 1883, Bunjiro Tobishima founded Tobishima-gumi, which was contracted to demolish Fukui Castle. In 1905, the company was ▷ contracted to build Kyoto Electric’s Nakao power plant. In 1913, the company received a contract to build an electric railway between Fukui and Ono. In 1915, Tobishima received an order to undertake the Kinu River Improvement Project.

In FY03/19, Tobishima had revenue of JPY128.9bn and recurring profit of JPY7.0bn. As a percentage of consolidated segment ▷ operating profit, the civil engineering and construction business accounted for 86.2%, the architecture business for 38.2%, and the real estate development business for 3.3%.

Of parent-only revenue, public-sector projects accounted for 57.2%, private-sector construction projects for 30.2%, private- ▷ sector civil engineering projects for 8.3%, overseas projects for 3.6%, and development projects for 0.8%. Public-sector civil engineering projects account for a relatively high percentage of business.

Totetsu Kogyo Co., Ltd. (TSE: 1835)

Totetsu Kogyo was established in 1943 as the national Tokyo Tetsudo Kogyo Co., Ltd. at the request of Japan’s Ministry of ▷ Railways as a trust business for construction companies in the Kanto region. The company takes part in a broad range of railway- related construction, such as building tracks, performing renovations and repairs, and conducting track maintenance.

In FY03/19, revenue was JPY134.7bn, and recurring profit was JPY12.7bn. Of consolidated operating profit, civil engineering ▷ accounted for 60.5% and building construction for 33.8%.

Of consolidated revenue, public-sector projects accounted for 8.5%, while private-sector civil engineering projects made up ▷ 91.5%. The company performs most of its private-sector civil engineering work for railway companies, particularly those in the JR group.

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Peer company analysis

Comparison of profitability among peer companies

Revenue Revenue Recurring Completed Gross SG&A Recurring profit Total ROA Adjusted FY per profit construction profit ratio margin asset (RP-based) ROE Ticker end employee gross profit margin turnover FY2018 5yr CAGR 5yr CAGR 5yr Avg. 5yr Avg. 5yr Avg. 5yr Avg. FY2018 FY2018 FY2018 FY2018

Tokyu Construction 1720 Mar 115 7.9% 45.2% 10.2% 8.8% 10.8% 6.3% 6.9% 9.6 8.7% 12.0% Obayashi 1802 Mar 136 4.8% 32.4% 10.2% 11.0% 12.5% 6.6% 8.0% 13.0 7.4% 8.2% Kajima 1812 Mar 105 5.4% 43.2% 15.4% 9.9% 13.1% 7.1% 8.3% 12.7 7.8% 8.8% Shimizu 1803 Mar 101 2.1% 35.5% 11.5% 10.1% 12.2% 6.8% 8.0% 13.4 7.2% 9.0% T aisei 1801 Mar 112 1.5% 22.7% 13.0% 13.8% 14.6% 8.7% 9.6% 13.4 8.6% 11.9% Takenaka Unlist ed Dec 99 4.9% 34.1% 10.2% 11.6% 12.6% 6.7% 7.3% 11.6 7.5% 9.1% Penta-Ocean Construction 1893 Mar 156 7.3% 23.7% 13.4% 41.6% 8.6% 4.3% 4.9% 8.5 6.9% 10.7% Toda 1860 Mar 122 2.6% 41.6% 11.2% 11.6% 13.1% 6.0% 7.3% 15.7 5.6% 6.2% Maeda 1824 Mar 112 4.5% 27.7% 12.0% 9.5% 12.6% 6.3% 7.8% 17.5 5.3% 7.0% Sumitomo Mitsui Construction 1821 Mar 95 3.2% 29.3% 10.4% 9.0% 11.4% 5.7% 6.4% 9.1 8.5% 14.9% Kumagai-Gumi 1861 Mar 92 3.4% 31.4% 11.4% 9.2% 10.3% 6.4% 6.8% 10.9 7.5% 10.6% Hazama Ando 1719 Mar 89 -0.6% -42.6% 12.0% 12.8% 12.7% 7.1% 6.2% 11.7 6.4% 12.8% Nishimat su 1820 Mar 115 2.1% 33.6% 10.7% 9.8% 11.6% 6.3% 7.4% 16.0 5.6% 6.3% Takamatsu Construction 1762 Mar 57 7.0% 13.2% 13.4% 13.2% 8.2% 5.1% 5.0% 9.2 6.5% 6.3% Okumura 1833 Mar 103 2.7% -41.5% 11.2% 12.4% 14.3% 5.7% 6.8% 16.2 5.1% 4.5% Tekken 1815 Mar 87 4.9% -47.7% 11.4% 7.5% 9.7% 3.1% 3.9% 13.3 3.5% 5.3% Daiho 1822 Mar 90 3.6% -42.9% 11.4% 9.7% 9.8% 6.3% 6.1% 11.7 6.3% 9.2% T obishima 1805 Mar 90 3.4% -44.1% 11.2% 9.8% 11.2% 4.6% 5.4% 10.2 6.4% 9.5% Source: Shared Research based on annual securities reports and quarterly earnings announcements

Parent-only revenue

Parent revenue Obayashi Kajima Shimizu Taisei Penta-Ocean Toda Hazama Nishimatsu Tekken Tokyu FY03/19 (JPYmn) Construction Ando Construction Construction 1,085,242 928,095 1,047,964 987,937 229,736 355,064 208,858 210,157 74,589 238,241 % of total revenue 77.6% 72.5% 74.5% 74.4% 44.9% 75.9% 62.8% 62.4% 43.6% 76.9% Domestic public 68,791 90,324 120,705 187,278 28,659 32,300 26,931 37,612 8,770 11,596 % of total revenue 4.9% 7.1% 8.6% 14.1% 5.6% 6.9% 8.1% 11.2% 5.1% 3.7% Domestic private 1,007,606 837,770 885,643 796,809 149,545 322,763 161,429 172,003 65,818 226,107 % of total revenue 72.1% 65.4% 63.0% 60.0% 29.2% 69.0% 48.5% 51.1% 38.4% 73.0% Overseas 8,843 - 41,614 3,849 51,531 - 20,497 542 - 537 % of total revenue 0.6% - 3.0% 0.3% 10.1% - 6.2% 0.2% - 0.2% Civil Engineering 291,446 301,063 300,157 319,152 281,459 99,042 118,790 117,357 95,940 70,381 % of total revenue 20.8% 23.5% 21.3% 24.0% 55.0% 21.2% 35.7% 34.8% 56.0% 22.7% Domestic public 168,204 188,917 185,174 162,902 124,138 80,410 70,268 88,236 41,529 40,901 % of total revenue 12.0% 14.8% 13.2% 12.3% 24.2% 17.2% 21.1% 26.2% 24.3% 13.2% Domestic private 101,176 111,424 101,044 139,035 48,250 18,632 40,530 19,560 48,900 22,309 % of total revenue 7.2% 8.7% 7.2% 10.5% 9.4% 4.0% 12.2% 5.8% 28.6% 7.2% Overseas 22,055 721 13,939 17,214 109,070 - 7,991 9,560 5,510 7,170 % of total revenue 1.6% 0.1% 1.0% 1.3% 21.3% - 2.4% 2.8% 3.2% 2.3% Total construction 1,376,688 1,229,158 1,348,122 1,307,089 511,195 458,657 327,649 327,515 170,529 308,623 % of total revenue 98.5% 96.0% 95.8% 98.4% 99.8% 98.0% 98.5% 97.2% 99.6% 99.6% Domestic public 236,995 279,241 305,880 350,181 152,798 112,711 97,200 125,848 50,299 52,498 % of total revenue 16.9% 21.8% 21.7% 26.4% 29.8% 24.1% 29.2% 37.4% 29.4% 16.9% Domestic private 1,108,783 949,194 986,687 935,844 197,795 341,395 201,960 191,563 114,718 248,416 % of total revenue 79.3% 74.1% 70.1% 70.4% 38.6% 72.9% 60.7% 56.9% 67.0% 80.1% Overseas 30,909 721 55,553 21,063 160,601 4,550 28,488 10,103 5,510 7,708 % of total revenue 2.2% 0.1% 3.9% 1.6% 31.4% 1.0% 8.6% 3.0% 3.2% 2.5% Development, other - 51,207 58,607 21,335 997 9,427 5,050 - - 1,323 % of total revenue - 4.0% 4.2% 1.6% 0.2% 2.0% 1.5% - - 0.4% Total parent revenue 1,398,286 1,280,366 1,406,730 1,328,425 512,192 468,084 332,699 336,853 171,221 309,946 Source: Shared Research based on individual companies’ materials

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Strengths and weaknesses Strengths Nearly 20% of revenue due to business opportunities via the Tokyu Group: As an equity-method affiliate of Tokyu ◤ Corporation, Tokyu Construction is a member of the Tokyu Group. As such, it benefits from numerous business opportunities. These include station building redevelopment projects along the Tokyu lines (such as at Shibuya and Futako- Tamagawa stations), as well as railway construction projects. Tokyu Corporation derives nearly 20% of revenue from Tokyu Group companies. This business goes back to Tama Garden City development, an extensive project in the 1960s. More recent examples include ultra high-rise buildings such as Shibuya Stream (completed in 2018), Shibuya Scramble Square (completed in 2019), and other large-scale Shibuya Station redevelopment work. In recent years, the company has taken part in numerous complex projects on the Tokyu lines, and these are becoming larger in scale. In addition, Tokyu Construction constructs buildings for Tokyu-affiliated universities: Asia University and Tokyo City University.

A strong track record of projects completed in Shibuya and along the Tokyu lines: Tokyu Construction has a sales ◤ team dedicated to opportunities in the Shibuya area, which is the company’s base of operations. This team maintains close communications with members of this community, including shopping district promotional councils, landowners, building owners, and real estate companies, to gather information pertinent to construction orders. One aspect of these sales efforts is to support local festivals, such as the Shibuya Art Festival and an annual festival at the Miyamasumitake Shrine. This sort of communication has led to participation in redevelopment projects involving numerous landowners and leaseholders, such as Qfront, at the Shibuya Scramble pedestrian crossing (completed in 1999), Shibuya 109 (completed in 1979), and Sangenjaya Carrot Tower (completed in 1996).

Abundant experience with railway construction, which helps ensure stable earnings during economic ◤ doldrums: Demand for railway construction (civil engineering work), which makes up nearly 10% of revenue, is stable even in downbeat economic times. Such construction requires specialized expertise, and profitability tends to be high. Over the years, the company has accumulated leading-edge construction technology in this category, starting with the Izu Kyuko railway line (between Ito and Izukyu Shimoda), which was completed in 1961. In 1964, the company handled roadbed construction near the Chofu Minemachi area around the Tokaido Shinkansen, and in 1966, the company completed construction on an extension of the Tokyu Den-en-toshi Line (Mizonokuchi to Nagatsuta). One area of particular expertise is technology that allows it to build complex multilevel crossings at night, without interfering with the operation of existing routes. The company has used this technology on continuous elevated railway work near Keikyu Kamata Station (completed in 2016) to connect directly to the Keikyu Airport Line and on underground construction between Shibuya and Daikanyama on the Tokyu Toyoko Line (completed in 2014), allowing trains to pass directly to the Tokyo Metro Fukutoshin Line.

Weaknesses

Outdone by super general contractors in its record for high-value-added construction work: Tokyu Construction ◤ has built up a record of broad-ranging construction projects, including civil engineering work on railways, roads, and shield tunneling, which require sophisticated technical expertise. Still, the company lags behind such super general contractors as Kajima, Taisei, and Takenaka, which have completed numerous high-value-added construction projects, including large sports facilities, art museums, religious facilities, dams, long bridges, and marine civil engineering work. This situation is unlikely to change anytime soon as entities that place new orders tend to carefully scrutinize construction companies’ records of past performance.

Low percentage of revenue from public-sector civil engineering projects, which tend to be more profitable than ◤ private-sector construction and feature stable demand: To date, Tokyu Construction has energetically expanded its business in private-sector construction, a market that is slated to mature. The company’s medium-term management plan highlights civil engineering work as a growth field for that reason. Civil engineering work tends to be high-profit; an analysis of OPM at general contractors shows that building construction typically generates margins of 7–9%, whereas OPM on civil engineering work is around 10–12%. This difference exists because preliminary screening for civil engineering work, which usually means public-sector projects, usually limits bidding to construction companies that possess

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sophisticated construction technology and highly stable management. Also, price competition is fiercer on private-sector construction. Public-sector civil engineering projects account for 13.2% of parent-company revenue at Tokyu Construction (FY03/19), lower than the 24.7% average for 15 second-tier general contractors. The company needs to increase orders for such projects, which it sees as being a growth area and providing stable demand.

Despite a maturing domestic market, slow to build overseas and real estate businesses: Tokyu Construction went ◤ through a management crisis in 1998. Key reasons included numerous unprofitable overseas and real estate projects. As part of management restructuring efforts the following year, the company underwent a split, paring away unprofitable projects and going through corporate rehabilitation. As aftereffects, Tokyu Construction currently holds less business real estate and its overseas business is smaller in scale than its peers. With domestic demand expected to mature as private- sector demand declines, the company is working to diversify its business portfolio. However, the real estate business and overseas projects do entail a certain amount of business risk, so the company is unlikely to expand these businesses rapidly.

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Notable projects

Building Construction

Office buildings (Shibuya)

Cerulean Tower (2001) Shibuya Hikarie (2012) Shibuya Stream (2018) Shibuya Scramble Square (2019)

Source: Company website Office buildings and commercial facilities

PMO Hanzomon (2017) Nagaileben’s head office building (2014) Futako-Tamagawa Rise (2011)

Source: Company website

Qfront (1999) Carrot Tower (1996) Shibuya 109 (1979) Shibuya Mark City (2000)

Source: Company website

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Educational facilities New No. 1 Hall, Asia University (2018) New No. 6 Hall, Tokyo City University (2017)

Source: Company websiteSource: Company website

Hospitals

Ohashi Medical Center, Toho University (2018) Saitama Medical Center, Jichi Medical University (2008)

Source: Company website Government buildings

Amagasaki Magistrates Court of the Kobe District Court (2017) New No. 2 City Government Building, Ichikawa (2017)

Source: Company website Civil Engineering

Railway construction (private-sector civil engineering projects)

Subway construction on the Tokyu Toyoko Line (between Daikanyama and Shibuya, 2014)

Source: Company website

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Continuous elevated railway work near Keikyu Kamata Overhead reconstruction at Togoshi Ginza Station on the Station (Section 2, 2016) Tokyu Ikegami Line (2016)

Source: Company website Road construction (public-sector projects)

Pedestrian bridge, Shibuya Station East Exit, National Route 246 (2019) Atsugi-Minami Interchange, Shin-Tomei Expressway (2018)

Toyomane Tunnel (2017) Wakayama Misaki Line Hirai-Kita Area Road (2017)

Source: Company website Water and sewerage and revetment work (public-sector projects)

Yumenoshima Park West Area Embankment (2018) Sumida River construction (rainwater trunk line, 2012)

Source: Company website

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Overseas projects

Bangkok MRT Purple Line (Thailand, 2014) Vo Nguyen Giap Road (Vietnam, 2014)

Source: Company website

Causeway Point Shopping Center (Singapore, 2012) Rehabilitation of Bridges for the Java North Line (Indonesia, 2011)

Source: Company website

Suntec Singapore Convention & Exhibition Centre (Singapore, 2006) A380 Maintenance Hangar for Malaysia Airlines (Malaysia, 2007)

Source: Company website

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Overview of completed projects

Major projects completed (2017) Project Location Cus t omer Public civil eng. National Route 45 Toyomane Tunnel Iwate Ministry of Land, Infrastructure, Transport and Tourism Public civil eng. Wakayama Misaki Line Hirai-Kita Area Road Wakayama Ministry of Land, Infrastructure, Transport and Tourism Public civil eng. Asaka-Kamiigusa Road No.2, Vertical Shaft No. 1 Saitama Tokyo Metropolitan Government Railway constr. Renovation work at Yutenji Station, Tokyu Toyoko Tokyo Tokyu Railways Line Gov't facility Amagasaki Magistrates Court of the Kobe District Kobe, Hyogo Osaka High Court Court Gov't facility Tokyo Metropolitan Vocational Skills Development Tokyo Ministry of Land, Infrastructure, Transport and Tourism Center Gov't facility Wakayama Regional Common Building for Wakayama Ministry of Land, Infrastructure, Transport and Tourism Government Offices Gov't facility Rocker NCO Club, 621 Building, Kadena Okinawa Japan Engineer District, the U.S. Army Corps of Engineers Gov't facility Ofuna Disaster Preparedness and Cultural Center Iwate Urban Renaissance Agency Gov't facility Nihonbashi Tax Office Tokyo Ministry of Land, Infrastructure, Transport and Tourism Municipality New No. 2 Government Building, Ichikawa Ichikawa, Chiba City of Ichikawa Municipality Government Building, Koka Shiga City of Koka Municipality Funabashi Sports Park Pool Chiba City of Funabashi School Hoyu-Gakuin High School Tokyo Nakanobu-Gakuen (now Hoyu-Gakuin) High School School New No. 6 Hall, Tokyo City University Tokyo Gotoh Educational Corporation School New No. 8 Hall, Yokohama Kenshidai Campus, Kanagawa Nippon Sport Science University Nippon Sport Science University School Teikyo University Institute of Sports Science & Tokyo Teikyo University Medicine School Nippon Sport Science University Hokkaido Nippon Sport Science University Hospital Urayasu Central Hospital Chiba Urayasu Central Hospital Office building PMO Shibuya Tokyo Nomura Real Estate Development Office building PMO Hanzomon Tokyo Tokyo Metro, Nomura Real Estate Development (customer representative) Office building Kitami Kantec Building Kitami, Hokkaido Kantec Hotel TRUNK (HOTEL) Tokyo Take and Give Needs Hotel Gora Hot Spring Setsubetsuka Bettei Suiun Kanagawa Kyoritsu Estate Hotel Center Beach House Okinawa Unimat Precious Hotel Candeo Hotels Tokyo Roppongi Tokyo Tokyo Tatemono Commercial factility OKKA634 Kanagawa Taisei Kogyo, Musashi Bowl Commercial factility Kamome Terrace Iwate Saito Seika Logistics facility Kyushu Logistics Center Saga Mitsubishi Electric Logistics Logistics facility GLP Nagareyama Chia Nagareyama 1 SPC Condominium Dresser Meguro Ohashi Previ Tokyo Tokyu Construction Condominium Proud Roppongi Tokyo HKRJ Roppongi SPC, Nomura Real Estate Development Condominium The Parkhouse Chiyoda Kojimachi Tokyo Mitsubishi Estate Residence Elderly care facility Tsubame no Sato Tokyo Shibuya-ku Residence Grand Forum Setagaya Karasuyama Tokyo Cosmos Initia Residence The Parkhouse Stage Azamino Kanagawa Mitsubishi Estate Residence Production facility Carabao-1 New Factory (Thailand) Thailand CARABAO TAWANDANG Source: Shared Research based on company data

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Major projects completed (2018)

Project Location Cus t omer Public civil eng. Atsugi Minami Interchange, Shin-Tomei Kanagawa Central Nippon Expressway Expressway Public civil eng. Yumenoshima Park West Area Embankment Tokyo Tokyo Metropolitan Government Public civil eng. Narihirabashi Pump Station Tokyo Tokyo Metropolitan Government Railway constr. Kuyama Tunnel, Kyushu Shinkansen Nagasaki Japan Railway Construction, Transport and Technology Agency Gov't facility Miho Sub-Camp Building, Japan Ground Self- Tottori Ministry of Defense Defense Force Gov't facility Karatsu Bay Common Building for Government Nagasaki Ministry of Land, Infrastructure, Transport and Tourism Offices Gov't facility Flight of Dreams Aichi Central Japan International Airport Municipality Shibuya Ward Office Tokyo Mitsui Fudosan Residential School New No. 1 Hall, Asia University Tokyo Asia University School Benesse Itabashi 3-chome Nursery Tokyo Japan Post, Benesse Style Care Hospital Ohashi Medical Center, Toho University Tokyo Toho University Office buiding Building C, WOWO Tatsumi Broadcast Center Tokyo WOWOW Office buiding Shimbashi M-Square Bright Tokyo Zao Properties SPC Hotel Hotel Intergate Tokyo Kyobashi Tokyo The Sankei Building Hotel Richmond Hotel Himeji Hyogo Ushio Sport facility Aso Tokyu Golf Club Kumamoto TLC Golf Resort Sport facility Teine Olympia Center House Hokkaido Kamori Kanko Commercial facility Saegusa Building, Shibuya Tokyo Saegusa Trading, Tokyu Railways Commercial facility Olinas Kinshicho Tokyo Capitaland Mall Japan Prodution facility Sano Plant, Tokyu Linen Supply Tochigi Tokyu Linen Supply Prodution facility Headquarters and head office factory, Tokyo Katsuragawa Seira Katsuragawa Seiri Prodution facility Isesaki Plant, Nippon Cookery Gunma Nippon Cookery Condominium Park Homes Chiyoda Awajicho Tokyo Mitsui Fudosan Condominium Dresser Wise Tama Plaza Kanagawa Tokyu Railway, Mitsubishi Corp., Mitsubishi Estate Residence, other Elderly facility Center Minami Shinkan Kanagawa Platesia Residence Proud Season Inagi Minamiyama Tokyo Nomura Real Estate Development Overseas Railyard, No. 6 Depot, Dhaka Mass Rapid Transit Bangladesh Dhaka Mass Transit Company Limited System No. 6 Overseas Dawbon Bridge, Yangon Myanmar Ministry of Construction, Union of Myanmar

Source: Shared Research based on company data

Major projects completed (2019)

Project Location Customer Public civil eng. Pedestrian overpass, Shibuya Station East Exit, Tokyo Ministry of Land, Infrastructure, Transport and Tourism Nat ional Rout e 246 Public civil eng. Ibii Shiokaze Tunnel, National Route 220 Miyazaki Ministry of Land, Infrastructure, Transport and Tourism Public civil eng. Miyako Kita-ku Road, Sanriku Expressway Iw ate Ministry of Land, Infrastructure, Transport and Tourism Public civil eng. Sumida River Rain Water Trunk Line No. 3 Tokyo Tokyo Metropolitan Government Railw ay const r. Kanazawa-Hakkei Station, Seaside Line Kanagawa Yokohama Seaside Line School International students’ dormitory, Tokyo City Tokyo Tokyo City University Universit y School Kyoto Municipal Mukajima Shuren Junior High School Kyoto City of Kyoto School Shinkan, Daisho Gakuen High School Osaka Daisho Gakuen High School Hotel V essel Inn Chiba-Ekimae Chiba NTT East Properties Hotel Shigira T urt le Bay Okinaw a Unimat Precious Logist ics facilit y Kanto Logistics Center, Prima Meat Packers Ibaraki Prima Meat Packers Product ion facilit y Kosai Plant, Tadano Kagawa Tadano Product ion facilit y Tanmi New Plant, Prima Meat Packers Ibaraki Prima Meat Packers Overseas Jakarta Mass Rapid Transit Project Indonesia Jakarta Mass Rapid Transit

Source: Shared Research based on company data

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Historical performance and financial statements Income statement Income statement FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Revenue 236,655 244,974 227,843 228,570 226,164 262,815 296,393 243,618 320,711 331,437 YoY -8.8% 3.5% -7.0% 0.3% -1.1% 16.2% 12.8% -17.8% 31.6% 3.3% Completed construction 231,287 241,172 222,149 226,784 223,969 260,454 294,063 237,749 318,707 329,548 Real estate business 5,368 3,802 5,694 1,786 2,195 2,360 2,329 5,869 2,003 1,888 Cost of revenue 219,355 225,815 215,572 216,568 212,923 245,847 265,304 213,274 284,991 295,363 Completed construction 214,687 222,963 210,470 215,377 211,488 243,405 263,552 209,100 283,581 293,648 Real estate business 4,667 2,852 5,101 1,190 1,435 2,441 1,752 4,173 1,409 1,715 Gross profit 17,299 19,159 12,271 12,002 13,241 16,968 31,088 30,344 35,720 36,073 Gross profit margin 7.3% 7.8% 5.4% 5.3% 5.9% 6.5% 10.5% 12.5% 11.1% 10.9% Completed construction 16,599 18,208 11,678 11,406 12,480 17,049 30,511 28,648 35,126 35,900 Real estate business 700 950 592 595 760 -80 577 1,695 593 172 SG&A expenses 12,016 11,574 10,698 10,848 10,611 10,958 12,910 13,133 14,303 14,086 SG&A ratio 5.1% 4.7% 4.7% 4.7% 4.7% 4.2% 4.4% 5.4% 4.5% 4.2% Operating profit 5,282 7,584 1,572 1,154 2,630 6,009 18,178 17,211 21,416 21,987 YoY 7.8% 43.6% -79.3% -26.6% 127.9% 128.5% 202.5% -5.3% 24.4% 2.7% Operating profit margin 2.2% 3.1% 0.7% 0.5% 1.2% 2.3% 6.1% 7.1% 6.7% 6.6% Non-operating income 404 635 669 1,533 1,372 2,278 1,946 1,870 987 1,180 Non-operating expenses 774 408 357 386 443 263 355 241 274 235 Recurring profit 4,912 7,811 1,884 2,301 3,559 8,024 19,768 18,839 22,128 22,932 YoY 6.6% 59.0% -75.9% 22.1% 54.7% 125.5% 146.4% -4.7% 17.5% 3.6% Recurring profit margin 2.1% 3.2% 0.8% 1.0% 1.6% 3.1% 6.7% 7.7% 6.9% 6.9% Extraordinary gains 619 1,123 464 56 360 100 19 187 337 Extraordinary losses 373 3,651 2,617 24 19 542 97 111 Income taxes 3,247 1,186 543 291 1,201 2,269 5,860 5,233 6,231 7,294 Implied tax rate 63.0% 22.4% 23.1% -111.9% 30.8% 28.0% 30.4% 27.6% 27.9% 31.8% Net income attributable to non-controlling interests 8 9 5 15 7 30 45 4 4 134 Net income attributable to owners of the parent 1,901 4,087 1,799 -566 2,685 5,805 13,340 13,691 16,118 15,504 YoY - 115.0% -56.0% - - 116.2% 129.8% 2.6% 17.7% -3.8% Net margin 0.8% 1.7% 0.8% - 1.2% 2.2% 4.5% 5.6% 5.0% 4.7% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

56/71 Tokyu Construction / 1720 RCoverage LAST UPDATE: 2020.05.21 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Balance sheet

Balance sheet FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. ASSETS Cash and deposits 13,526 24,663 17,881 23,097 18,215 18,318 50,674 22,582 28,865 49,145 Notes and accounts receivable 86,455 66,118 79,044 73,319 88,147 100,707 87,640 96,995 130,651 115,174 Costs on uncompleted construction contracts 14,586 11,621 12,113 13,745 18,157 13,120 19,130 22,144 18,933 24,137 Costs on real estate business 2,209 1,389 734 380 210 320 1,052 138 8 1 Real estate for sales 3,004 2,980 526 577 564 624 291 21 163 21 Materials and supplies 84 80 95 84 82 57 59 67 40 20 Advances paid 13,650 13,906 Deferred tax assets 3,002 2,518 882 938 938 927 2,686 2,720 Other 7,773 6,997 9,693 6,804 5,280 12,036 9,557 11,370 5,325 2,695 Allowance for doubtful assets -1,329 -986 -233 -94 -38 -32 -50 -57 -164 -131 Total current assets 129,312 115,384 120,738 118,854 131,556 146,079 171,041 155,983 197,473 204,971 Buildings and structures 3,767 3,893 4,039 4,115 5,041 5,888 6,098 6,621 7,626 9,691 Machinery, equipment, and vehicles 1,617 1,729 1,955 2,124 1,967 2,092 2,451 2,789 3,127 3,588 Land 11,253 10,969 11,053 10,834 13,098 13,634 13,001 13,829 15,302 17,914 Lease assets 132 281 449 420 417 254 162 206 356 407 Construction in progress 349 0 39 42 83 Accumulated depreciation -2,640 -2,926 -3,317 -3,669 -3,379 -3,641 -3,956 -4,282 -4,820 -5,521 Total tangible fixed assets 14,131 13,947 14,180 14,174 17,145 18,228 17,756 19,204 21,634 26,163 Total intangible assets 351 341 327 316 313 359 416 692 858 844 Investment securities 14,182 12,928 13,536 16,537 16,805 24,207 22,150 24,473 25,016 28,411 Long-term loans receivable 1,048 302 280 279 267 67 67 60 52 51 Retirement benefit asset 176 1,155 1,453 1,423 Deferred tax assets 717 617 1,887 972 344 63 68 70 289 196 Other 3,756 3,417 3,678 3,222 3,417 3,344 2,849 3,173 2,978 2,934 Allowance for doubtful assets -608 -157 -186 -162 -164 -124 -0 -0 -0 -0 Investments and other assets 19,097 17,108 19,196 20,849 20,670 27,558 25,311 28,933 29,790 33,017 Total fixed assets 33,580 31,397 33,704 35,340 38,128 46,147 43,484 48,829 52,283 60,025 Total assets 162,893 146,781 154,442 154,195 169,685 192,226 214,526 204,813 249,756 264,996

LIA BILITIES Accounts and notes payable 84,296 75,948 83,067 82,679 83,778 97,154 84,751 53,583 75,687 74,233 Electronically recorded liabilities 23,242 29,602 49,392 50,486 Short-term debt 9,169 209 8,243 232 7,182 4,131 115 3,130 170 178 Corporate taxes payable 261 371 208 215 660 2,038 5,593 1,319 4,777 3,909 Advances received on uncompleted construction contracts 23,748 18,148 11,776 16,676 19,081 17,903 16,789 20,179 14,540 14,623 Advances received on real estate business 280 551 15 0 0 0 300 12 0 1 Provision for warranties for completed construction 1,395 1,193 1,064 1,254 1,160 1,891 2,857 2,027 2,335 2,821 Provision for loss on construction contracts 462 847 4,139 3,130 3,982 1,691 987 1,050 628 2,095 Provision for bonuses 1,231 2,048 1,330 1,273 1,411 2,172 3,198 3,486 4,268 3,405 Provision for loss on litigations 384 384 130 Deposits received 5,936 5,297 4,993 6,949 7,838 7,685 8,899 9,172 9,755 11,425 Other 1,963 2,586 1,116 1,557 2,686 2,169 4,061 7,057 4,130 2,772 Total current liabilities 128,747 107,585 116,340 114,100 127,784 136,838 150,799 130,624 165,688 165,955 Long-term debt 4,824 4,766 2,686 2,513 2,068 4,937 4,843 1,859 1,879 1,752 Deferred tax liabilities 18 1,214 1,440 2,893 12 791 Provision for share-based remuneration for directors 0 16 Provision for loss on real estate business 1,470 1,470 2,150 2,150 1,978 1,878 2,266 Retirement benefit liability 2,470 1,387 193 211 226 235 Asset retirement obligations 139 142 145 217 221 226 230 235 240 Provision for retirement benefits 1,195 3,796 3,674 3,270 Long-term guarantee deposits 187 204 207 206 Other 398 615 634 634 661 756 Total fixed liabilities 6,209 8,907 6,711 7,607 6,643 10,526 9,488 7,808 4,893 6,059 Total liabilities 134,956 116,493 123,052 121,707 134,427 147,364 160,288 138,433 170,581 172,014 NET A SSETS Capital stock 16,354 16,354 16,354 16,354 16,354 16,354 16,354 16,354 16,354 16,354 Capital surplus 3,893 3,893 3,893 3,893 3,893 3,893 3,893 3,893 3,893 3,893 Retained earnings 7,203 10,650 11,382 10,495 13,179 17,679 29,098 40,122 52,932 65,128 Treasury stock -37 -38 -38 -38 -44 -49 -53 -59 -62 -158 Accumulated other comprehensive income 485 -618 -265 1,705 1,769 6,792 4,708 5,839 5,830 7,415 Non-controlling interests 37 46 64 77 105 188 235 228 225 347 Total net assets 27,936 30,287 31,390 32,487 35,258 44,861 54,238 66,380 79,175 92,981 Total liabilities and net assets 162,892 146,780 154,442 154,194 169,685 192,225 214,526 204,813 249,756 264,995 Working capital 2,159 -9,830 -4,023 -9,360 4,369 3,553 2,889 43,412 54,964 40,941 Total interest-bearing debt 13,993 4,975 10,929 2,745 9,250 9,068 4,958 4,989 2,049 1,930 Net debt 467 -19,688 -6,952 -20,352 -8,965 -9,250 -45,716 -17,593 -26,816 -47,215 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods.

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Cash flow statement

Cash flow statement FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cash flows from operating activities (1) 28,301 20,540 -11,486 14,264 -9,302 2,111 39,003 -23,545 16,226 29,694 Pre-tax profit 5,158 5,283 2,348 -260 3,895 8,105 19,246 18,929 22,353 22,932 Depreciation 502 492 560 617 564 576 563 680 867 1,077 Impairment losses 230 533 40 Change in working capital 2,760 12,835 -2,713 5,654 -13,728 792 23,529 -32,982 8,253 15,272 Cash flows from investing activities (2) -2,395 481 20 -619 -2,072 -1,525 -334 -1,717 -3,383 -5,786 Purchase of tangible/intangible fixed assets -2,611 -383 -3,795 -1,748 -798 -2,324 -3,402 -5,644 Proceeds from sale of tangible/intangible fixed assets 315 181 136 150 Free cash flow (1+2) 25,906 21,021 -11,466 13,645 -11,374 586 38,669 -25,262 12,843 23,908 Cash flows from financing activities -25,107 -9,813 4,704 -8,569 6,476 -675 -6,035 -2,788 -6,457 -3,575 Net increase in short-term borrowings -27,465 -9,000 6,000 -6,000 7,000 -3,000 -4,000 Net increase in long-term borrowings 2,426 -92 -93 -2,095 -396 2,920 -81 -81 -3,082 -83 Increase (decrease) in cash and cash equivalents 720 11,137 -6,782 5,216 -4,882 102 32,356 -28,091 6,283 20,279 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Cash flows from operating activities Over the past 10 years, operating activities have generally provided cash of JPY15–30bn per year. Since FY03/16, a solid expansion in revenue from completed construction and improved profitability on construction have led to operating cash inflow of around JPY30bn per year. In FY03/12, operating activities used JPY11.5bn in cash. This figure reflects difficulty in obtaining orders and deteriorating profitability as tight supply of skilled workers led to soaring labor costs. In FY03/14, operating activities used JPY9.3bn in cash, due to high labor costs and equipment and materials expenses. This increase in construction costs caused construction profits to worsen.

Cash flows from investing activities Over the past decade, investing activities have typically used JPY1.5bn to JPY5.0bn per year. The JPY2.1bn outflow in FY03/14 was the result of acquiring the Gotanda Brick Building and investment in construction of the Miura bell pepper plant. Net cash used in investing activities came to JPY3.4bn in FY03/18, due to increase R&D investment and the purchase of office buildings for leasing. In FY03/19 investing activities used JPY5.8bn. This was because of the purchase of Higashi Kanda 1-chome Office and other office buildings for leasing.

Free cash flow Free cash flow has recently been positive, mainly because of an upbeat operating environment and increased cash flows from operating activities. Free cash flow amounted to JPY23.9bn in FY03/19. The company plans to allocate these funds toward R&D investments, investment in new businesses, M&A, and shareholder returns.

58/71 Tokyu Construction / 1720 RCoverage LAST UPDATE: 2020.05.21 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp

Historical performance Cumulative Q3 FY03/20 results Summary In cumulative Q3 FY03/20, completed construction increased steadily, leading to revenue of JPY248.2bn (+8.0% YoY). Profitability improved as the rise in construction costs levelled off, bringing operating profit to JPY17.8bn (+9.7% YoY). Recurring profit was JPY18.9bn (+11.5% YoY), owing to higher operating profit and an uptick in profitability at Seikitokyu Kogyo, an equity- method affiliate.

Profit attributable to owners of the parent was JPY12.7bn (+9.9% YoY). Seven key factors affected profit. First, gross profit on completed construction increased (+JPY3.3bn YoY). Second, equity-method profit/losses improved (+JPY397mn YoY). Third, SG&A expenses rose (JPY1.5bn negative impact YoY). Fourth, tax expenses increased (JPY705mn negative impact YoY). Fifth, gross profit on real estate fell (JPY257mn negative impact YoY). Sixth, extraordinary losses expanded (JPY100mn negative impact YoY). Seventh, non-operating expenses increased (JPY18mn negative impact YoY).

1H FY03/20 results Overview

Operating environment

The business environment was weak in some areas, centering on exports, but the economy was in a gradual recovery phase, ▷ underpinned by high corporate earnings and ongoing improvements in employment and income levels.

The construction market was positive, with firm private-sector capital expenditure and public-sector investment stemming from ▷ improved corporate earnings.

Although labor costs rose, equipment and materials costs declined, and construction costs were generally in line with the ▷ company’s expectations.

1H FY03/20 (consolidated) In 1H FY03/20, revenue was JPY183.4bn (+18.6% YoY), reaching a historic high. Operating profit was JPY16.3bn (+49.8% YoY), and recurring profit was JPY17.0bn (+49.3% YoY). Net income attributable to owners of the parent also reached a record high of JPY11.5bn (+50.4% YoY).

Reasons for YoY changes in consolidated net income (JPY7.7bn JPY11.5bn) → Higher gross profit on completed construction: JPY6.2bn positive impact YoY ▷ Increase in equity-method investment gains: JPY363mn positive impact YoY ▷ Increase in real estate income: JPY162mn positive impact YoY ▷ Increase in tax expenses: JPY1.7bn negative impact YoY ▷ Increase in SG&A expenses: JPY936mn negative impact YoY ▷ Decrease in non-operating income: JPY183mn negative impact YoY ▷ Increase in net income: JPY42mn positive impact YoY ▷

Parent-only revenue and gross profit On a parent-only basis, in 1H FY03/20 revenue rose 15.3% YoY, to JPY170.5bn. Revenue from completed construction in Building Construction rose 6.2% YoY, to JPY126.6bn, due to the contribution of large construction projects such as those in Shibuya. Revenue from completed construction in Civil Engineering grew 53.8% YoY, to JPY43.2bn, due to progress in large-scale joint venture subcontracting work. In the Real Estate segment, revenue rose 20.8% YoY, to JPY674mn.

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Gross profit on completed construction projects expanded 32.8% YoY, to JPY22.4bn. In Building Construction, gross profit on completed construction projects grew 36.7% YoY, to JPY17.9bn due to higher revenue from completed construction and improved profitability, particularly on large construction projects. In Civil Engineering, gross profit on completed construction projects increased 16.0% YoY, to JPY4.1bn.

In Building Construction, GPM on completed construction projects increased 3.1pp YoY, to 14.1%, due mainly to an increase in completed construction projects and improved profitability on large-scale projects. In Civil Engineering, GPM on completed construction projects fell 3.1pp YoY, to 9.5%, due to a high proportion of relatively low-margin joint venture subcontracting work and an unexpectedly high number of design change/addition projects received in the previous year.

Gross profit in the Real Estate segment rose 73.9% YoY, to JPY377mn, due to progress in the acquisition of income property.

Orders (parent-only basis) In 1H FY03/20, parent only orders dropped 25.9% YoY, to JPY71.7bn, due to a large overseas order received in 1H FY03/19. In Building Construction, orders decreased 26.6% YoY, to JPY28.6bn, due to a decline in domestic private-sector construction and no major project orders.

Overall, construction carried forward in 1H FY03/20 was down 26.7% YoY, to JPY255.2bn. In Building Construction, this figure decreased 37.0% YoY, to JPY127.9bn. For Civil Engineering, the figure was down 12.4% YoY, to JPY127.3bn.

Financial condition Total assets came to JPY253.9bn as of end-1H FY03/20, down JPY11.1bn (-4.2%) from end-FY03/19. Notes and accounts receivable for trade and completed construction work were up JPY23.2bn, whereas cash and deposits fell JPY33.0bn, and costs on construction contracts in progress declined JPY2.9bn.

Total liabilities were JPY152.8bn, down JPY19.2bn (-11.2%) from end-FY03/19. Short-term debt rose JPY18.0bn, while electronically recorded obligations fell JPY24.9bn, and construction notes and accounts payable decreased JPY12.4bn.

In net assets, dividends paid amounted to JPY2.1bn, and net income attributable to owners of the parent was JPY11.5bn. Retained earnings increased as a result, prompting an increase in adjusted shareholders’ equity of JPY9.4bn. Affected by stock market prices, the valuation difference on available-for-sale securities increased JPY390mn. Accumulated other comprehensive income decreased JPY1.3bn, as a revision of the retirement benefit system prompted a JPY1.6bn decline in the accumulated adjustment for retirement benefits. As a result of these factors, net assets at end-1H FY03/20 were JPY101.1bn, up JPY8.1bn (+8.7%) from end-FY03/19. Shareholders’ equity was JPY100.7bn, and the equity ratio came to 39.7%, up 4.7%pp.

Cash flows Net cash used in operating activities amounted to JPY46.1bn (compared with JPY18.8bn in net cash provided by these activities in 1H FY03/19). Net income before taxes and other adjustments provided JPY17.0bn, and a decrease in costs on construction contracts in progress provided cash. However, cash was used by a decrease in accounts payable and an increase in accounts receivable.

Net cash used in investing activities was JPY2.5bn (JPY1.5bn in net cash used by these activities in 1H FY03/19), mainly because of payments to acquire tangible and intangible fixed assets, which used JPY2.5bn.

Net cash provided by financing activities was JPY15.8bn (JPY2.2bn in net cash used by these activities in 1H FY03/19), despite dividend payments and due mainly to an increase in short-term debt.

As a result, cash and cash equivalents at end-1H FY03/20 were JPY16.1bn (JPY44.0bn at end-1H FY03/19), down JPY33.0bn from end-FY03/19.

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Q1 FY03/20 results Overview

In Q1 FY03/20 , revenue was JPY78.7bn (+28.8% YoY). Operating profit came to JPY6.6bn (+81.7% YoY), and recurring profit was JPY7.0bn (+80.6% YoY). After accounting for tax expenses, net income attributable to owners of the parent was JPY4.8bn (+94.3% YoY)

Financial condition As of end-Q1 FY03/20, total assets were JPY263.3bn, down JPY1.7bn (-0.6%) from end-FY03/19. Cash and deposits rose JPY6.3bn, and costs on construction contracts in progress were up JPY2.1bn, while notes and accounts receivable for trade and completed construction work decreased JPY8.6bn, due to the collection of receivables.

Total liabilities were JPY167.6bn, down JPY4.4bn (-2.6%) from end-FY03/19. Electronically recorded obligations rose JPY4.6bn, while construction notes and accounts payable fell JPY8.8bn, and deposits received declined JPY1.6bn.

In net assets, dividends paid amounted to JPY2.1bn, and net income attributable to owners of the parent was JPY4.8bn. Retained earnings increased as a result, prompting an increase in adjusted shareholders’ equity of JPY2.7bn. Affected by currency market, foreign currency translation adjustments decreased JPY23mn, and accumulated other comprehensive income decreased JPY40mn. As a result, net assets at end-Q1 FY03/20 were JPY95.7bn, up JPY2.7bn (+2.9%) from end-FY03/19. Shareholders’ equity was JPY95.3bn, and the equity ratio came to 36.2%, up 1.2%pp.

FY03/19 results Overview

In FY03/19, revenue on a consolidated basis amounted to JPY331.4bn (+3.3% YoY), reaching a record high as a result of a rise in completed construction revenue. Operating profit also hit a historic high, of JPY22.0bn (+2.7% YoY). Also reaching a record high, recurring profit came to JPY22.9bn (+3.6% YoY), due to the recording of JPY790mn in investment income under the equity method. Meanwhile, tax expenses increased, leading to net income attributable to owners of the parent of JPY15.5bn (-3.8% YoY).

Operating environment

The business environment was weak in some areas, centering on exports and some areas of manufacturing, but the economy was ▷ in a gradual recovery phase, underpinned by improvements in corporate earnings and employment and income levels.

The construction market was positive, with firm investment in construction stemming from improved corporate earnings. ▷ Although equipment and materials costs rose, as did labor costs, overall construction costs were generally in line with the ▷ company’s expectations.

Reasons for YoY changes in consolidated net income (JPY16.1bn JPY15.5bn) → Higher gross profit on completed construction: JPY774mn positive impact YoY ▷ Lower SG&A expenses: JPY217mn positive impact YoY ▷ Increase in equity-method investment gains: JPY135mn positive impact YoY ▷ Decrease in extraordinary losses: JPY111mn positive impact YoY ▷ Improvement in non-operating income: JPY97mn positive impact YoY ▷ Increase in tax expenses: JPY1.1bn negative impact YoY ▷ Decline in real estate income: JPY420mn negative impact YoY ▷ Decline in extraordinary gains: JPY337mn negative impact YoY ▷

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Increase in net income attributable to non-controlling interests: JPY130mn negative impact YoY ▷

Income and expenditures, by segment Building Construction Orders totaled JPY207.3bn (-6.8% YoY). Although orders for domestic public works projects increased, orders decreased for domestic private-sector construction and overseas projects. Revenue from completed construction was JPY258.9bn (+5.8% YoY), as the revenue increased for domestic public works projects, but decreased for domestic private-sector construction and overseas projects. Segment profit was JPY20.2bn (-8.7% YoY).

Civil Engineering Orders were JPY78.2bn (+1.7% YoY). Although orders for domestic public works projects fell, orders increased for domestic private-sector construction and overseas projects. Revenue from completed construction totaled JPY70.7bn (-4.6% YoY), increasing for domestic public works projects but decreasing for overseas projects and domestic private-sector construction. However, segment profit amounted to JPY8.0bn (+53.3% YoY), due to improved construction profitability.

Real Estate In the Real Estate segment, revenue was JPY1.9bn (-5.8% YoY). Although the leasing business was profitable, the company posted a loss of JPY304mn in this segment (operating profit of JPY245mn in FY03/18), stemming from a provision for loss on real estate business due to the company’s revision of revenues and costs on large-scale development business.

Parent-only revenue and gross profit Parent-only revenue fell 0.8% YoY, to JPY309.9bn, a result of shifting all building renovation business in the Tokyo metro area to a subsidiary, Tokyu Renewal. In Building Construction, revenue from completed construction rose 0.6% YoY, to JPY238.2bn, as demand for large-scale construction remained strong. In Civil Engineering, revenue from completed construction amounted to JPY70.4bn, down 4.7% YoY.

Profits also fell, for the reasons outlined above. Gross profit was JPY33.4bn, down 5.5% YoY. In Building Construction, gross profit on completed construction projects decreased 15.0% YoY, to JPY23.4bn. In Civil Engineering, gross profit on completed construction amounted to JPY9.9bn, down 37.4% YoY. Operating profit fell 7.7% YoY, to JPY19.8bn. Recurring profit fell 6.6% YoY, to JPY20.1bn. Net income was JPY14.0bn, down 9.8% YoY.

In Building Construction, GPM on completed construction projects decreased 1.8pp YoY, to 9.8%. GPM on completed construction projects in Civil Engineering rose 4.4pp YoY, to 14.1%, as the company received an unexpectedly high number of design change and addition projects in Japan. Also, margins on completed overseas projects rose.

Orders (parent-only basis) In FY03/19, orders on a parent-only basis came to JPY263.1bn, down 9.7% YoY. Although large overseas ODA projects contributed, orders were down YoY due to comparison with FY03/18, when the company recorded large orders from the Tokyu Group. In Building Construction, orders were down 13.6% YoY, to JPY185.3bn, as the company pared back volume to take construction capacity into account. Although the overall figure was down as a result of large orders from the Tokyu Group in FY03/18, orders rose for domestic government offices, particularly from regional government bodies.

Civil Engineering orders on a parent-only bases were JPY77.8bn, up 1.3% YoY, due to a large ODA order in Myanmar.

In FY03/19, construction carried forward was JPY353.3bn, down 11.4% YoY. This breaks down as JPY211.3bn (-20.0% YoY) in the Building Construction segment and JPY142.0bn (+5.5% YoY) for Civil Engineering.

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Financial condition At end-FY03/19, total assets were JPY265.0bn, up JPY15.2bn (+6.1%) YoY. Notes and accounts receivable for trade and completed construction work fell JPY15.5bn YoY, while cash and deposits rose JPY20.3bn YoY, and costs on construction contracts in progress increased JPY5.2bn YoY.

Total liabilities amounted to JPY172.0bn, up JPY1.4bn (+0.8%) YoY. Construction notes and accounts payable decreased JPY1.5bn YoY, and corporate taxes payable fell JPY868mn YoY. Conversely, the company recorded YoY increases of JPY1.7bn in deposits received, JPY1.5bn in provision for loss on construction contracts, and JPY1.1bn in electronically recorded obligations.

Net assets rose JPY13.8bn (17.4% YoY), to JPY93.0bn. The company paid JPY3.3bn in dividends and recorded net income attributable to owners of the parent of JPY15.5bn, leading to a rise in retained earnings, so adjusted shareholders’ equity increased JPY12.1bn. Due to stock price fluctuations, the valuation difference on available-for-sale securities rose JPY1.9bn, leading to a JPY1.6bn YoY increase in accumulated other comprehensive income.

At end-FY03/19, shareholders’ equity was JPY92.6bn, and the equity ratio was 35.0%, up 3.4pp YoY.

Cash flows Operating activities provided JPY29.7bn in FY03/19 (provided JPY16.2bn in FY03/18). Pre-tax profit provided JPY22.9bn, while increases in income taxes paid and costs on construction contracts in progress used cash.

Investing activities used JPY5.8bn (used JPY3.4bn in FY03/18). Uses of cash included payments to acquire tangible and intangible fixed assets and the purchase of shares of subsidiaries and associates.

Financing activities used JPY3.6bn (used JPY6.5bn in FY03/18), due mainly to dividend payments.

As a result, cash and cash equivalents at end-FY03/19 were JPY49.1bn, up JPY20.3bn from JPY28.9bn at end-FY03/18.

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Other information

History

Sep 1945 Tokyu Corporation set up an in-house temporary post-war reconstruction committee to consider establishing a construction company in the Tokyu Group Mar 1946 Tokyu Construction Industry Co., Ltd. was established Aug 1954 Merged with Tokyu Land Corporation (later the company’s Construction Industry Department) Nov 1959 Separating the department, Tokyu Construction Co., Ltd. was established Sep 1963 Listed shares on the Second Section of the Tokyo Stock Exchange Jan 1967 Separating Road Construction Unit, Tokyu Road KK (now Seikitokyu Kogyo Co., Ltd.) Aug Listed shares on the First Section of the Tokyo Stock Exchange Jun 1971 Established Institute of Technology May 1976 Est ablished Overseas Division (now Int ernat ional Division) Aug 1977 Set up Housing and Resident ial Division Jul 2000 Introduced a Corporate Executive Officer System Apr 2003 Established TC Holdings Co., Ltd. Oct Succeeding the construction unit from the former Tokyu Construction, and renamed as the (new) Tokyu Construction Listed shares of the new Tokyu Construction in the First Section of the Tokyo Stock Exchange Renamed the Real Estate unit to TC Properties Co., Ltd. Apr 2012 Set up Shibuya Development Promotion Office Apr 2013 Conducted reorganization, moving from a general headquarters system to a divisional organization system; integrated and reorganized Tokyo Branch, Yokohama Branch and Railway Construction Division to Civil Project Metropolitan Branch and Building Project Metropolitan Branch Apr 2018 Reorganized the divisions and metropolitan branches Source: Shared Research based on company data Established in 1946 to lead the postwar construction of Tokyu Group facilities

Tokyu Construction Industry was established in 1946 at the behest of Tokyu Group founder Keita Goto. The Tokyu Group’s structures had been damaged significantly in World War II, which had concluded in the previous year. Goto thought the group needed a construction company to give its own group priority in rapid reconstruction efforts.

Merger with Tokyu Land Corporation To shore up the foundations of Tokyu Land Corporation, which it had established the preceding year, in 1954 the Tokyu Group disbanded Tokyo Construction Industry and relaunched it as the construction industry department. At this point, the company began accepting construction orders from outside the Tokyu Group.

Independence from Tokyu Land Corporation, relaunch, and appointment of Noboru Goto as president In 1959, Keita Goto passed away. The same year, Noboru Goto was appointed president, and Tokyu Construction became independent from Tokyu Land Corporation.

Promotion of the Tama Garden City development (Joseinan area development) business The company began construction in 1960 on a land readjustment project at Nogawa First District (Nogawa, Miyame-ku, Kawasaki), authorized in 1959 on the basis of the Land Readjustment Act. Construction was completed in 1962. The formation of land readjustment councils for other districts gained momentum. As of 1965, 15 councils had been authorized, and the company started full-scale development of Tama Garden City. The company undertook all site preparation work, beginning construction with the Nogawa First District and continuing with work on four blocks. By the time work was completed in 1988, the company had prepared a site extending over 3,000ha.

Construction of the Izu Kyuko railway line The company took part in civil engineering work surrounding construction of the Izu Kyuko railway line (between Ito and Shimoda). The project provided Tokyu Construction with the opportunity to work alongside large construction companies and gain technical and operational expertise. In 1959, the Tokyu Group obtained the license for facilities on the Izu Kyuko railway line, and construction commenced in 1960. Tokyu Construction joined in this work, rush construction work was completed in 1961, and the line began operating between Ito and Shimoda.

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Increasing orders for private-sector construction projects The building construction division received an order from Nippon Kokan K. K. (NKK, its largest private-sector client) to build a plant within NKK’s Kawasaki factory for making electric resistance-welded tubes. This was followed by other private-sector orders, such as new construction of the Koyasu factory and the Tsurumi shipyard. Along with a growing track record, the projects boosted the expertise of the company’s young engineers.

Increase in orders for civil engineering work leading up to the 1964 Tokyo Olympics The company received an order for its first large-scale public-sector civil engineering project from the Metropolitan Expressway Public Corporation, for the construction of Highway No. 4. Public sector orders then increased. The company received an order for roadbed construction near the Minemachi Chofu area around the Tokaido Shinkansen, as well as an order from the Japan Highway Public Corporation for road construction on the Setagaya section of the Daisan Keihin Road. Most of these large projects were related to the 1964 Tokyo Olympics.

In private-sector civil engineering projects, in 1966 the company completed construction on an extension of the Tokyu Den-en- toshi Line (Mizonokuchi to Nagatsuta).

Listing on the TSE (Second, and then First section) Tokyu Construction listed its shares on the Second Section of the Tokyo Stock Exchange in 1963. This listing moved to the First Section in 1967, following several rounds of capital increases.

Developing new construction methods In the field of civil engineering, the company developed the shield method. In 1965, it performed experimental construction using a hand-mined shield machine with an outside diameter of 3.3m, mainly for backfilling and emphasizing ground movements. Seeing the results of this test, the Yokohama Waterworks Bureau placed an order with the company to construct the Sueyoshi branch line sewerage tunnel. The company also received an order from the Tokyo Metropolitan Government Bureau of Sewerage for construction on the Tamagawa main line. These projects were Japan’s first full-fledged “bent bolt” shield construction projects using flat reinforced concrete segments.

The civil engineering department proposed the Tokyu Traveler Construction Method, which was used in the construction of a multilevel crossing between Nakameguro and Toritsudaigaku on the Tokyu Toyoko Line, which commenced in 1966. This development was groundbreaking in the sense that it took place above a 2.5km segment of track that had 16 level crossings (some of them on major streets such as Komazawa-dori), a dense residential area, and trains that were running on packed schedules.

In the area of construction technology, the company developed the Tokyu SM method and the PH prefabrication methods to mass-produce residential housing. The Tokyu PH Method, which required no beams, allowed homes to be built with a larger usable space in a living room than standard public housing. The use of this method grew, becoming a mainstay product category for the company.

Focus on orders for public works projects Tokyu Construction was a relative latecomer to the construction industry, and private-sector construction projects (particularly from within the Tokyu Group) accounted for a high percentage of revenue. The company believed expanding its public works projects was a pressing concern. Specifically, it aimed to gain large-scale orders for the public works projects. Leveraging its technology for civil engineering work on railways and background in construction for Japan, the company focused on obtaining construction orders from Japan Highway Public Corporation, which was stepping up construction of a nationwide expressway network.

The company received orders from Japan Railway to build the Sugita Tunnel on the Negishi Line and for tunnel construction on the Ban-etsu West Line Tunnel. Based on its record on these projects, the company obtained an order to build the Ikuta Tunnel on the Musashino Minami Line. Thereafter, it received an order to build a viaduct near Fukuyama Station on the Sanyo

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Shinkansen line. As a result of these projects, by 1969 Japan Railway had upgraded its ranking of Tokyu Construction from C (in 1966) to A. The company’s ranking was also upgraded by Japan Highway Public Corporation as a result of its accumulated track record.

Growing private-sector construction projects In postwar Japan, high levels of economic led to a surge in domestic investment in construction. Domestic investment in construction continued to rise from JPY2.5tn in 1960 to JPY50.2bn in 1981, following the second oil crisis. In the early 1980s, fiscal austerity measures in Japan led to a decrease in public-sector projects, and domestic investment in construction slumped. However, measures to stimulate an economy affected by yen appreciation after 1984 and bubble economy expansion caused domestic investment in construction to surge, peaking at JPY84.0tn in 1992. Tokyu Construction’s revenue rose in tandem, and profit increased.

Sharp rise in orders and performance during Japan’s bubble economy In FY03/88, revenue and profit turned upward, with performance continuing to grow through FY03/92. In FY03/88, orders reached JPY371.4bn, and revenue from completed construction hit JPY317.8bn, both of which were historic highs.

In FY03/89, orders exceeded JPY400.0bn for the first time, including JPY100.0bn from companies in the Tokyu Group. Despite such issues a shortage of construction foremen, a tight supply of skilled workers, and soaring materials prices, the company maintained a recurring profit margin of 2.4%.

As the bubble economy continued to expand, in FY03/92 consolidated revenue came to JPY649.3bn, and recurring profit reached JPY23.7bn, hitting new highs.

Increase in overseas projects Tokyu Corporation established overseas subsidiaries in an effort to localize overseas operations. Major projects included interior construction on a Tokyu Department Store (Thailand), site preparation for the Mauna Lani Racquet Club (Hawaii), an aviation fuel storage facility (Thailand), construction of the Dao Kanong Bridge (Thailand), the Pacific Star Hotel (Republic of Nauru), construction work on Mauna Lani (Hawaii), the Waianae wastewater treatment plant (Hawaii), construction to expand and remodel the Hotel Le Lagon (Vanuatu), construction to expand the Bangkok International Airport (Thailand), and refurbishment on the Moana Hotel (Hawaii).

Bursting of Japan’s economic bubble and an ensuing drop in orders In FY03/93, orders fell 25.7% YoY, to JPY529.7bn, as domestic private-sector construction business fell off. The company ranked 10th among general contractors by revenue from completed construction. However, it ranked 15th in orders, reflecting a relative lack of competitiveness in the public works projects.

In FY03/94, orders rose YoY, exceeding JPY540.0bn. Revenue from completed construction was JY603.8bn and total revenue (including the Real Estate segment) came to JPY620.8bn, reaching new levels. Reflecting the company’s efforts to boost profitability on construction and curtail costs companywide, recurring profit grew 46.6% YoY, to JPY20.2bn. However, net income was approximately JPY0.9bn, due to a JPY19.9bn extraordinary loss in a provision of allowance for doubtful accounts. This figure stemmed from a total of JPY39.8bn in loan guarantees the company had made to financial institutions for the acquisition of land by Roppongi Kaihatsu, an Azabu Tatemono subsidiary conducting development work in the Roppongi area. The guarantee was made to help Tokyu Construction gain an order for this business.

As Roppongi Kaihatsu’s cashflow situation deteriorated, financial obligations called on Tokyu Construction to perform its guarantee obligation of subrogation, based on the agreement. The company took over the acquired land and buildings as payment in kind and booked an extraordinary loss of JPY19.9bn as the difference between fair value and the subrogated amount of JPY39.8bn.

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Crisis of business failure From 1996, as Japan’s economic bubble burst the company booked substantial losses and reached a state of management crisis. In FY03/98 , orders reached JPY481.1bn (-5.3% YoY), and revenue from completed construction was JPY530.3bn (+3.5% YoY). However, GPM on completed construction projects deteriorated YoY, to 7.3%. In the Real Estate segment, revenue rose 0.3% YoY, to JPY614.3bn, owing to the sale of its hotel business to Numazu Tokyu Hotel and the sale of a leased building, Mizonokuchi Nocty Plaza, as well as to JPY11.8bn from the sale of land in the Shibuya 3-chome area. Due to falling stock prices, the company also posted a loss on the valuation of available-for-sale securities. Interest-bearing debt increased, and the company’s financial balance deteriorated. The recurring loss expanded JPY4.1bn YoY, to JPY11.5bn. Extraordinary losses came to JPY11.8bn, including a loss on valuation of investment securities and a provision of allowance for doubtful accounts for long-overdue accounts receivable. The net loss came to JPY22.8bn. On a consolidated basis, interest-bearing debt totaled JPY379.7bn, with shareholders’ equity of JPY37.7bn, and the debt/equity ratio rose to 10.1x.

Medium-term business plan and sharp downturn in the operating environment As the company was getting its accounts in order for FY03/98, in February 1998 it announced a medium-term business plan that outlined dramatic management reform. This plan, for the three-year period from FY03/99 to FY03/01, had five main pillars: 1) maintain orders and revenue from completed construction of JPY500.0bn during the period, 2) generate gross profit of JPY42.0bn and GPM of 8.4% by the plan’s final year, 3) raise funds by selling real estate and marketable securities and reduce interest-bearing debt by JPY70.0bn, 4) write off JPY18.0bn in bad debt from subsidiaries, overseas business, and construction costs, and 5) reduce personnel numbers by 800, including early retirement for 300 people, and cut operating costs to result in an SG&A expense ratio of 5.7% by the final year of the plan. As a result of these measures, the plan called for reducing the number of employees from 4,794 at the start of FY03/99 to 3,997 at the end of FY03/01.

However, the enactment of nine financial revitalization laws in 1998 led financial institutions to close off access to new loans for working capital in 2H of FY03/99. Tokyu Construction’s financial institutions called on the company to pledge additional collateral and increased loan interest rates. In response, the company issued commercial paper and secured funding from within the Tokyu Group. At the same time, it underwrote capital increases and expanded the financing of working capital at affiliated companies.

Despite these measures, private-sector construction investment fell further than the company had expected, and orders for construction work continued to decrease. At the same time, falling stock prices led to additional losses on the valuation of securities. The operating environment continued to deteriorate after the launch of the medium-term management plan, and the company was unable to progress with management reform measures as it had expected. With its corporate fundamentals worsening, credit with financial institutions decreased. Some financial institutions went above the heads of Tokyu Construction’s management team to directly discuss loan collections with Tokyu Corporation’s finance department.

Formulation of a management restructuring plan Amid this crisis situation, in December 1998, the company formulated a new management restructuring plan, having seven focuses: 1) shrink orders from the historical level of JPY500bn to JPY300bn, 2) further reduce personnel numbers, from nearly 5,000 to 2,800, 3) improve gross profit margin on new construction and lower SG&A expenses, 4) liquidate and withdraw from domestic subsidiaries and overseas business, 5) sell off owned real estate and otherwise revamp the real estate business, 6) reduce interest-bearing debt, and 7) expand capital through a third-party allotment.

The announcement of this plan coincided with the resignation of three executives, including President Tetsu Goto, who were executive directors, along with Yuhei Yagi, a director and company advisor. Kuniyoshi Ihara, the vice president of Tokyu Corporation (who had been serving as part-time director of Tokyu Construction since the previous June), was appointed as Tokyu Construction’s president and representative director, and management restructuring commenced.

Regeneration: Progress on improving the management structure In FY03/00, revenue fell to JPY433.7, while recurring profit turned positive, to JPY5.0bn. As revenue from completed construction decreased, the cost of revenue also fell. As a result, GPM on completed construction projects improved YoY, from 7.3% to 8.4%.

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The SG&A expense ratio also fell from 7.3% to 5.0%, as the company cut SG&A expenses. These costs reductions helped the company return to profitability.

In FY03/04, the company began reinforcing its management structure under a new medium-term business plan, dubbed the “new profit plan.” In April 2003, the company split off its building construction business and transferred it to a new company, TC Holdings Co., Ltd., established for this purpose. The former Tokyu Construction delisted and concentrated on liquidating the real estate business. In October 2003, TC Holdings changed its name to Tokyu Corporation, maintaining its TSE First Section listing, and relaunched with a focus on the building reconstruction business.

Bid rigging In the early 2000s, a number of collusive bidding issues came to light, becoming a major problem. The bidding system was revised, and the five super general contractors issued a “declaration of non-collusion,” and the construction industry body pledged compliance. In 2006, the management of Obayashi Corporation was implicated in allegations of collusion in relation to construction on the Nagoya Municipal Subway. A participant in a joint venture with Obayashi, Tokyu Construction was also subjected to a compulsory investigation by the Nagoya District Public Prosecutors Office. The company was also subjected to a compulsory investigation by the Osaka District Public Prosecutors Office in relation to the obstruction of competitive bidding on a project awarded by Wakayama Prefecture. The company also received business suspension orders and other administrative dispositions from MLIT in relation to construction orders placed by Fukushima Prefecture and the Defense Facilities Administration Agency. These incidents prompted Tokyu Construction and other construction companies to enhance their compliance systems.

Revival: Continuing to evolve as a general contractor Private-sector construction demand continued to be low throughout the 2008 global financial crisis, the election to power of the Democratic Party of Japan in 2009, and the Great East Japan Earthquake of 2011. However, after the earthquake the government launched reconstruction efforts, and the Liberal Democratic Party (LDP) returned to power. As a result, in 2012 domestic investment in construction began to recover.

In 2011, the company formulated its corporate vision for 2020, of being a “general contractor that continues to embody ‘shinka,’” (which translates roughly as “deepening and evolving in the pursuit of genuine value”), and it moved toward a new phase of growth. The Japanese economy entered a period of long-term recovery, and reconstruction and recovery demand emerged following the Great East Japan Earthquake. Domestic investment in construction surged in anticipation of the 2020 Tokyo Olympics.

After completing two medium-term management plans (FY03/13 to FY03/15, FY03/16 to FY03/18), in FY03/19 the company posted record-level operating profit of JPY22.0bn. Shareholders’ equity amounted to JPY92.6bn, and the equity ratio reached 35%.

News and topics

Corporate governance and top management Top management Tsuneo Iizuka, representative director, chairman Born August 5, 1948. From Kanagawa Prefecture. Joined the company in 1971, following graduation from Waseda University’s Faculty of Science and Engineering. Appointed executive officer (October 2003), senior executive officer (June 2004), director and senior executive officer (June 2006), general manager of the Civil Engineering Division (April 2008), representative director and senior managing executive officer (June 2009), and representative director and president (April 2010). Appointed representative director and chairman (current post) in June 2018.

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Mitsuhiro Terada, representative director, president Born March 1, 1957. From Shizuoka Prefecture. Graduated from the Faculty of Engineering at Tokushima University in March 1979 and joined the company in April that year. Appointed executive officer (June 2010), senior executive officer (April 2012), director and senior executive officer (June 2012), general manager of the Civil Engineering Division (April 2013), director and senior managing executive officer (April 2016), representative director and senior executive vice president (April 2018). Appointed representative director and president (current post) in June 2019.

Corporate governance The company employs a system of auditors. The Board of Directors includes outside directors, and the Board of Corporate Auditors includes outside auditors to supervise and audit the execution of business.

Board of Directors The Board of Directors has 11 members (four of whom are outside directors, and three of whom are independent officers). The term of office for directors is one year. The company welcomes management executives and attorneys as outside directors.

Executive officers The Board of Directors appoints 31 full-time executive officers, who serve one-year term.

Management council The management council (seven directors, one representative director, and one executive officer) meets to discuss and decide on important management policies and issues. The council met 51 times in FY03/19.

Audit Committee and corporate auditors The Audit Committee comprises five corporate auditors (including three outside auditors), all of whom are independent officers. Outside auditors have expertise as lawyers, certified public accountants, and former employees of government agencies.

Appointments and Compensations Committee This committee is made up mainly of independent outside directors

Governance Committee The Governance Committee is composed mostly of outside directors and outside auditors.

Form of organization and capital structure Company with Form of organization Audit & Supervisory Board Controlling shareholder and parent company None Directors and Audit & Supervisory Board members Number of directors under Articles of Incorporation 12 Number of directors 11 Directors' terms under Articles of Incorporation 1 Chairman of the Board of Directors President Number of outside directors 4 Number of independent outside directors 3 Number of members of Audit & Supervisory Board under Articles of Incorporation 5 Number of members of Audit & Supervisory Board 5 Number of outside members of Audit & Supervisory Board 3 Number of independent outside members of Audit & Supervisory Board 3 Other Participation in electronic voting platform None Providing convocation notice in English Yes Implementation of measures regarding director incentives Other Disclosure of individual director's compensation None Policy on determining amount of compensation and calculation methodology In place Corporate takeover defenses None Source: Shared Research based on company data

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Dividend policy

Maintain stable dividends; consider expeditious shareholder returns based on performance The company aims to enhance internal reserves to invest toward enhancing corporate value and improve its financial structure by preparing for medium- to long-term risks. Tokyu Corporation’s policy is to target a consolidated dividend payout ratio of 20% or more. The company aims to return profits expeditiously to shareholders, including through stable, ongoing dividends and the acquisition of treasury stock.

Major shareholders

Shares held Shareholding Top shareholders ('000) ratio Tokyu Corporation 15,362 14.40% The Master Trust Bank of Japan, Ltd. (Trust account) 4,732 4.44% Mizuho Trust & Banking Co., Ltd. Taisei Corporation retirement benefits 4,000 3.75% trust account re-trust trustee Trust & Custody Services Bank, Ltd. Japan Trustee Services Bank, Ltd. (Sumitomo Mitsui Trust Bank, Ltd. Re- 3,520 3.30% trust - Tokyo Corporation retirement benefits trust account) Japan Trustee Services Bank, Ltd. (Trust account) 3,177 2.98% Shimizu Corporation 3,000 2.81% Sumitomo Mitsui Trust Bank, Limited 2,945 2.76% MUFG Bank, Ltd. 2,550 2.39% Japan Trustee Services Bank, Ltd. (Trust account 9) 2,200 2.06% Kinden Corporation 1,924 1.80% SUM 43,412 40.69% Source: Shared Research based on company data As of March 31, 2019

Employees

(no. of employees) FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 FY03/16 FY03/17 FY03/18 FY03/19 Consolidated 2,563 2,582 2,573 2,527 2,439 2,482 2,571 2,622 2,735 2,784 Construction 2,411 2,409 2,398 2,369 2,294 2,331 2,410 2,457 2,560 2,589 Real Estate 28 32 37 40 43 45 47 44 47 49 Company-wide 124 141 138 118 102 106 114 121 128 146 Parent 2,453 2,460 2,446 2,403 2,313 2,340 2,412 2,464 2,537 2,523 Average age 45.1 45.2 45.3 45.5 45.3 45.5 45.7 45.8 45.8 45.8 Avg. years of service 20.7 20.9 21.0 21.0 20.7 21.0 21.0 21.0 20.9 20.7 Avg. annual salary (JPY'000) 6,880 7,016 7,261 6,592 6,836 7,354 8,210 9,098 9,446 9,359 Source: Shared Research based on company data

Profile

Company Name Head Office 1-16-14, Shibuya, Shibuya-ku, Tokyo Tokyu Construction Co., Ltd. 150-8340, Japan

Phone Listed On +81-3-5466-5061 the First Section of the Tokyo Stock Exchange Established Exchange Listing April 10, 2003 October 2003 Website Fiscal Year-End

https://www.tokyu-cnst.co.jp/en/ March IR Contact IR Web https://www.tokyu-cnst.co.jp/en/contact/ https://www.tokyu-cnst.co.jp/en/ir/

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