Tokyu Construction / 1720 COVERAGE INITIATED ON: 2020.05.21 LAST UPDATE: 2021.01.06 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: 2021.01.06 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 ----------------------------------------------------------------------------------------------------------------------------- 21 Business ------------------------------------------------------------------------------------------------------------------------------------------------ 28 Business description -------------------------------------------------------------------------------------------------------------------------------------------- 28 Segments ---------------------------------------------------------------------------------------------------------------------------------------------------------- 31 Market and value chain---------------------------------------------------------------------------------------------------------------------------- 39 Construction market in Japan ------------------------------------------------------------------------------------------------------------------------------- 39 Main competitors ----------------------------------------------------------------------------------------------------------------------------------------------- 44 Strengths and weaknesses ------------------------------------------------------------------------------------------------------------------------------------ 54 Notable projects ------------------------------------------------------------------------------------------------------------------------------------- 56 Historical performance and financial statements ------------------------------------------------------------------------------------------ 62 Income statement ----------------------------------------------------------------------------------------------------------------------------------------------- 62 Balance sheet ----------------------------------------------------------------------------------------------------------------------------------------------------- 63 Cash flow statement -------------------------------------------------------------------------------------------------------------------------------------------- 64 Historical performance ---------------------------------------------------------------------------------------------------------------------------------------- 65 Other information ---------------------------------------------------------------------------------------------------------------------------------- 71 History -------------------------------------------------------------------------------------------------------------------------------------------------------------- 71 News and topics ------------------------------------------------------------------------------------------------------------------------------------------------- 75 Corporate governance and top management --------------------------------------------------------------------------------------------------------- 76 Dividend policy -------------------------------------------------------------------------------------------------------------------------------------------------- 77 Major shareholders --------------------------------------------------------------------------------------------------------------------------------------------- 77 Employees --------------------------------------------------------------------------------------------------------------------------------------------------------- 78 Profile ---------------------------------------------------------------------------------------------------------------------------------------------------------------- 78 02/79 Tokyu Construction / 1720 RCoverage LAST UPDATE: 2021.01.06 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 FY03/20, the Building Construction segment accounted for 71.9% of revenue. The Civil Engineering segment, which includes railway construction, accounted for 27.5%, 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 slows down, the company expects general contractors to prioritize relatively solid demand involving public-sector and overseas projects, and expansion of non-building construction business. ◤ Tokyu Construction’s revenue CAGR has been 4.2% 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 18 general contractors was 3.6% on average over the same period. Tokyu Construction’s profitability is higher, as well. In FY03/20, the company’s adjusted ROE* was 14.5%, compared with an average of 11.1% for the top 18 general contractors. As orders have grown, rising 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 and tax expenses. ROE for Tokyu Construction was 15.4% in FY03/20. ◤ The Building Construction segment accounted for 71.9% of revenue and 75.2% of operating profit (FY03/20). 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 27.5% of revenue and 25.4% of operating profit (FY03/20).