Tokyu Corporation (9005) Earnings Call Transcript & Summary

Thank you very much for taking time out of your busy schedules to attend today's financial results briefing. I would like to sincerely apologize for the significant inconvenience and concern caused by the train collision accident that occurred on the Den-en-toshi Line on October 5. We apologize once again for the occurrence of this accident for the prolonged suspension of service that caused inconvenience to many of you and for the subsequent weak performance of our stock price. We are committed to preventing this from happening and restoring trust. While the impact of this accident on our financial results is not significant, I will be explaining the details around this later. Today, I will first explain the financial results for the second quarter of fiscal year 2025 and the full year earnings forecast for fiscal year 2025. I will then discuss topics for the current period. Please jump to Page 4. The main points of the second quarter results for fiscal year 2025. Operating revenue was JPY 518.9 billion. Operating profit was JPY 58.8 billion and interim net profit was JPY 56.2 billion. Compared to the previous fiscal year, the Hotel and Resort business performed well, the Real Estate business saw a decrease in operating revenue of JPY 6.2 billion and a decrease in operating profit of JPY 6.4 billion. This was due to a reactionary decline following the concentration of condominium sales in the first half of the previous period. Interim net profit increased by JPY 6.7 billion. This was primarily due to the recognition of negative goodwill following the additional acquisition of investment units in Tokyu REIT, which became an equity method affiliate from the second quarter. Compared to the earnings forecast announced in May, operating profit increased by JPY 3.5 billion in the Life Service and Hotel and Resort segments and interim net profit increased by JPY 2.6 billion. Please turn to Page 5. I will explain the key points of the segment results compared to the previous fiscal year. The Hotel and Resorts segment saw a JPY 1.5 billion increase in profit due to higher ADR by attracting inbound guests. The Life Services segment recorded a JPY 1.1 billion increase in profit. And within the Media segment, Tokyu Power Supply, the electricity retailer performed well. The Transportation business saw a JPY 2.7 billion decrease in profit, while Tokyu's passenger volume increased by 34%. Profit declined due to rising expenses, including personnel costs and maintenance fees. The real estate business recorded a JPY 6.4 billion decrease in profit. This reflects a reactionary effect from the concentrated delivery of large condominium projects in the first half of the previous fiscal year within the Real Estate sales segment. Next page. I will explain the comparison with the earnings forecast as of May. The Life Services business saw an increase of JPY 2.1 billion in profit. In the Retail business, Tokyu Stores and 109 Entertainment performed well and Tokyu Power Supply exceeded expectations. For the hotel and resort business, ADR exceeded expectations, resulting in an increase of JPY 1.1 billion in profit. The Real Estate business saw a total increase of JPY 600 million in profit driven by asset turnover type property sales in the Real Estate sales segment. The Transportation business recorded a JPY 300 million decrease in profit. While Tokyu Railways saw increased revenue due to higher-than-expected passenger numbers, operating profit remained in line with forecast due to factors such as increased personnel expenses. Please turn to Page 7. This page shows the trend in operating revenue and operating profit since 2019. The next page shows the segment-by-segment trends, so please refer to it afterwards. Please turn to Page 9. The slide shows the full year earnings forecast for FY '25. The first half saw favorable trends driven by increased mobility demand, capture of inbound demand and rising average sales price in the retail business. We expect this positive business environment to continue. However, we will remain vigilant regarding changes in the external environment such as advancing inflation, rising construction costs and increasing interest rates. The middle section provides an overview of each business segment. Regarding the train collision accident on the Den-en-toshi Line, a loss of approximately JPY 50 million occurred due to factors such as reduced fare revenue from service suspensions. Additionally, increased costs related to the accident and other factors have been factored into the second half of the fiscal year and reflected in the earnings forecast. Due to the heavy rain on September 11, Tokyu Stores, Jiyugaoka and Kamiikedai Stores suspended operations. The Jiyugaoka Store remains fully closed at this time. We anticipate a profit reduction of approximately JPY 500 million due to this impact. Tokyu Store as a whole is performing well, and we have revised our forecast upward from the May projection. Please turn to the next page. This slide shows the full year earnings forecast for fiscal year 2025. Based on the profit growth trend through the second quarter results, we are revising our May forecast upward. We project operating revenue of JPY 1.85 trillion and operating profit of JPY 104 billion compared to the May forecast, this represents an increase of JPY 13 billion in revenue and JPY 4 billion in profit. Furthermore, profit attributable to owners of parent is projected at JPY 84 billion, representing a JPY 4 billion increase. All figures are expected to exceed the previous fiscal year's results and reach record highs. Please turn to Page 11. This page shows the full year performance indicators. EPS earnings per share is JPY 146.32. ROE is 9.8%. ROA, which we refer to as business profit ROA is 3.8%, and we anticipate an improvement from the May forecast. Please turn to Page 13. Key points of the earnings forecast by segment. I will explain by comparing with the May forecast. The Real Estate segment is expected to see an increase of JPY 3 billion in segment profit, reflecting strong performance in the real estate sales business. Additionally, the Life Service segment and Hotel and Resorts segment is also incorporating profit growth, reflecting trends through the second quarter. The Transportation Business segment recorded a JPY 0.7 billion decrease in profit. This reflects growth in Tokyu Railways passenger volume and other metrics, offset by anticipated increases in personnel expenses and safety measures. On the next page, I have the information on shareholder return. There are no changes from what was announced in May. After the share buyback announced in May, we acquired 4.42 million shares worth JPY 7.4 billion as of the end of October. As previously communicated, share buyback is one of our investment vehicles. We will be purchasing shares at undervalued levels as we monitor the stock price. Recently, we have received questions asking whether we are satisfied with the current level of stock price, provided we are not purchasing treasury stock. This is absolutely not the case. Share buybacks are purely an investment activity. Therefore, the actual price at which we purchase shares differs from the price that we consider is reflecting our corporate value. We intend to purchase treasury stock only at low prices. It is a fact that the current stock price lags behind the overall stock market when compared to external benchmarks. To ensure excellent investment opportunities, future growth potential, stability and soundness, we will continue to vigorously conduct informative IR activities, both internally and externally to fully reflect our values in the stock price. Regarding dividends, we intend to maintain high levels of capital investment, steadily increase profits and raise the dividend level. Please turn to Page 15. I will explain the topics for the latter half of the current fiscal year. Next page, please. First is the Transportation business. While Tokyu Railways passenger volume continues to grow, profits have recently declined due to factors such as rising labor costs driven by inflation. We will increase revenue by actively creating transportation demand, building on the effects of the Shin-Yokohama Line opening. Furthermore, we will strengthen the business through cost control measures like single-person operation, aiming to secure medium- to long-term competitiveness and further growth. On the other hand, given the further progression of inflation, there are rising costs that are difficult to absorb through corporate efforts alone. The increase in natural disasters such as heavy rains and recent accidents are examples of such. Therefore, we will be making capital investment to enhance safety measures. We will continue to review the fair system structure in consultation with relevant parties. Please turn to the next page. Next is our real estate business. First, I will explain trends in rent adjustments for our leasing operations. On the left side, for office rents, we have continued to actively pursue upward adjustments since last fiscal year. In the first half of fiscal year 2025, over 75% of tenants renewing leases for properties in the Shibuya area saw upward rent adjustments. Moving to the upper right, for commercial and hotel rents, the performance is strong, and we anticipate increased revenue primarily from commission rent in fiscal year 2025 as well. The bottom right shows the office rent index and vacancy rate forecast for the 5 central Boards of Tokyo published by the Japan Real Estate Institute in May. The Japan Real Estate Institute's forecasts are based on newly announced supply at the time of when the forecast was created. We anticipate a significant reduction in total new supply due to delays and cancellations of redevelopment projects across various locations caused by soaring construction costs despite the robust demand. Of course, there are differences in location, but we believe vacancy rates will decline and rents will rise more than the Japan Real Estate Institute's forecast. We see these trends as an opportunity for increased rent income for our company since our properties are in prime locations, and we are steadily progressing with redevelopment. Please turn to the next page. I will explain the status of our properties for lease. The leasing and real estate defined in our company refer to properties and plots leased to third parties and do not include leases to subsidiaries within the scope of consolidation. The left side of the slide shows the market value and book value of our investment properties as disclosed in our securities report, illustrating the trend in unrealized gains. Unrealized gains have been trending upward due to the increase in disclosed properties following the opening of redevelopment projects, including Shibuya, rising rent levels and declining cap rates. As previously disclosed, unrealized gains at the end of fiscal year 2024 stood at JPY 777.7 billion. The breakdown of unrealized gains is shown in the lower right. By area, Shibuya accounts for 66%, while lines other than Shibuya account for 27%, indicating the concentration in properties along our lines, including Shibuya. Furthermore, properties directly connected to Tokyu Line stations account for a very large proportion at 77%, leveraging the strength of our train locations. As a result, adjusted book value per share at the end of fiscal year 2024 reached JPY 2,338, indicating a steady increase of our corporate value that incorporates the value of our real estate. Regarding unrealized gains, we have recently received opinions suggesting their realization through sales. However, simply realizing unrealized gains through sales involves external outflows such as corporate taxes, which negatively impacts corporate value. Maintaining unrealized gains is factored into credit ratings and is necessary for favorable debt financing in a rising interest rate environment. Holding appropriate unrealized gains ensures a stable financial foundation. We will leverage these unrealized gains to continuously make large-scale investments aiming for further enhancement of corporate value. Shibuya redevelopment project is an example of this. Through continuous reinvestment, we will enhance the appeal of the city, further invigorate economic activity along our railway lines and attract diverse populations. Such investments are indispensable for maintaining and enhancing corporate value, and we will pursue them by utilizing unrealized gains. On the other hand, during the downturn phase of the real estate market, a prime opportunity to acquire prime properties, possessing a certain level of financial soundness and investment capacity enables strategic acquisitions. Maintaining a certain level of unrealized gains even during market deterioration is crucial. Owning properties with excellent locations and high competitiveness allows for expectation of upside potential in rental income. Furthermore, leveraging our own commercial floor space enables the harvesting and further expansion of profits from diverse directly managed businesses. In fact, while rents are steadily trending upward, various KPIs from businesses outside the real estate leasing sector, such as station passenger numbers, commercial facility sales volume and hotel PER are also rising, driving an increase in accumulated profits and ROA. We will capture the increased value of the city through cyclical reinvestment through our own high-quality properties aiming for continuous enhancement of corporate value. Page 19. I will explain the future of Shibuya Redevelopment. At the May earnings call, we introduced 3 projects: the Shibuya Upper West project, Shibuya Scramble Square and the second phase of the Miyamasuzaka District type 1 Urban redevelopment. On the other hand, we have received feedback that due to delays in the opening dates of these projects, there are currently no redevelopment properties opening that could serve as catalysts. It is true that regarding our own redevelopment projects, there will be no properties opening until fiscal year 2029 when the Shibuya Upper West project opens. However, redevelopment projects by other companies are progressing in Shibuya. This signifies that Shibuya is an attractive area where redevelopment is progressing not only by the Tokyu Group, but also by other companies. The upper right table shows the planned development schedule for the Shibuya area. Before the completion of the Shibuya Upper West project, other companies' projects will open such as Mitaki Link Park adjacent to Shibuya Cast and the Dogenszaka Nichome Minami District first-class urban redevelopment area connecting to Shibuya Mark City. Our company holds a competitive advantage in Shibuya. As shown in the diagram on the left, we possess a large number of operational properties in the station vicinity, which is the center of Shibuya's pedestrian flow. Therefore, we can benefit from the increase in the working population and related population driven by other companies' developments. As you know, Shibuya has the lowest office supply among Tokyo's 5 central wards with a chronic shortage of office space. The office floor supply from other developers enhances Shibuya's appeal and competitiveness as an office location. We will further increase the value of our own office properties and lead to upside potential for rents. Additionally, the increase in related population driven by third-party projects creates expanded revenue opportunities across our diverse portfolio of businesses, including railways, buses, retail and hotels. This represents a competitive advantage unique to our company. It is a business model that incorporates and internalizes the results of our circular reinvestment and attraction of third-party developers. Since the opening of Shibuya Hikarie in 2012, the working population in the Shibuya area has been steadily increasing. This upward trend in the working population will continue from redevelopment and rebuilding projects by our company and third parties. Therefore, the opening of other companies' redevelopment projects also represents business opportunities for us. We will implement measures to further capture these effects and work to expand our business. Please turn to Page 20. This slide covers initiatives in the real estate sales business. We promote real estate sales domestically and internationally, not only securing sales profits through residential subdivisions, but also attracting population, promoting town development, community building and area growth. In Vietnam and Australia, we possess abundant land inventory for future development and subdivision. The progress of town development will also enhance the value of this inventory. Domestic housing sales remain robust and population attraction along our railway line is progressing. Furthermore, preparations for the next fiscal year and beyond are proceeding smoothly. Additionally, sales and acquisitions of income-generating properties such as those in our asset turnover building business are advancing beyond initial projections. During the first half, we sold properties totaling approximately JPY 8 billion, including those from the asset turnover building business. We will continue to steadily acquire properties, enhance their value through construction and execute sales. Overseas projects centered in Vietnam are progressing steadily and will contribute stable earnings going forward. While the number of units delivered, both domestically and internationally was lower than the May forecast, sales prices increased, resulting in higher-than-expected profits. Please turn to Page 21. This slide shows the business status for our Life Services segment. The left side covers the retail business. At Tokyu Store, existing store sales increased by 4.7% due to higher purchase unit prices, exceeding our ex-sales expectations. Additionally, at Shibuya 109 Entertainment, we are capturing inbound demand through facilities like the rooftop observation deck at MAGNET and pop-up stores are performing well. The restructuring of the commercial facility management business explained in May is progressing smoothly. In August, Tokyu Retail Management Company established to enhance competitiveness through integrated operational functions commenced operations. Also in August, Tokyu Department Store transferred its facility management functions to a newly established company with the remaining functions absorbed by our company through a merger. On the right, Tokyu Power Supply under the ICT & Media business recorded an operating profit of JPY 2.8 billion in the first half exceeding expectations. It has grown to become a top runner among new electricity retailers. The company will also play a central role in advancing our solar power plant and energy storage facility initiatives, which are part of our decarbonization efforts. Tokyu Power Supplies, Tokyu Denki service leverages customer bases of Tokyu Royal Club and its communications to offer benefits based on usage of Tokyu Group services with points. Many subscribers also use other Tokyu Group services. Tokyu Power Supply's strong performance is seen as an example of creating conglomerate premium by leveraging the group customer base and inter-business synergies. Additionally, on the business side, we strive for stable power procurement and optimization of procurement costs. Furthermore, we are actively engaged in sustainable energy supply. Please turn to the next page. I will now explain our hotel business initiatives. While hotels benefit from a favorable business environment, we are steadily advancing the structural reforms we began some time ago to build a more robust profit structure. Regarding our store network, we are pursuing profitability improvements and renewal to add freshness to stores as well as assortments. New store openings under different contract formats like management contracts and franchise contracts are being considered while closing some leased closed stores that have aged. We are also investing in renovations to enhance product appeal. For stores in continuously leased properties, we are either converting leases to variable rent to reduce rent risk or acquiring leased assets to lower rent burdens. On the revenue side, we are thoroughly implementing revenue management such as refining volume and pricing based on demand forecasts. This aims to generate profits exceeding inflation-driven cost increase and improve profit margins. Regionally, we are reliably capturing inbound demand in core areas for our hotel business, such as Shibuya in Central Tokyo. This fiscal year, we fully capitalize on the exposition effect in the Kansai area, driving an increase in PER and raising the overall level. Please turn to Page 23. I will now explain our ESG initiatives. In September, we formulated Environmental Vision 2040 to realize a decarbonized circular society. The progress exceeds the targets set in Environmental Vision 2030 formulated in March 2022. While maintaining the core concept of connecting everyday life to a sustainable tomorrow, we have updated and established new environmental goals. We will continue to provide opportunities for residents along our lines to adopt environmentally beneficial behavioral changes, encouraging many people to feel environmental contribution is accessible and to participate. Through these efforts, we will advance sustainable community development in harmony with the environment together with everybody. Additionally, regarding coexistence with nature under Environmental Vision 2040, we disclosed our initiatives based on the TNFD recommendations in September. Please review them when you have the time. Furthermore, we launched the Tokyu's from project to support families raising children and students along the Tokyu Railway line. The entire Tokyu Group is united in supporting the families raising children and students along our railway lines, working to strengthen and coordinate the childcare-related facilities and services the group operates. As a symbolic initiative, starting in March, we reduced commuter passes for Tokyu Line students by an average of approximately 30% for households with children, taking into account the financial burden on student households. We are committed to supporting children from newborns to university students, families with children and students in various aspects of life, commuting, learning, outings, daily life and cultural experiences to create a railway line where people want to live for a long period. Next page, please. Finally, some of you may be concerned that railway and real estate industries are vulnerable to inflation and rising interest rates. Provided it is not hyperinflation, we intend to dispel these concerns by achieving organic growth that outpaces inflation and interest rate increases. Indeed, in our November forecast, while interest payments increased by JPY 1.4 billion compared to last year's actual results, operating profit, excluding real estate sales increased by JPY 4.2 billion. As a result, we have accumulated profits exceeding the interest increase by JPY 2.9 billion. This is exactly the result of organic growth, achieving increased profits while covering the rise in operating expenses due to inflation and the increase in interest payments. Alongside external growth, we will continue to focus on internal growth, striving for management that overcomes inflation and rising interest rates. To achieve this, we will further strengthen our business model that captures Tokyu's growth. Tokyu's growth stands out even within Japan, attracting all resources for growth, talent, capital, technology and creativity from both within and outside the country. We are a regional conglomerate operating in Tokyo and Kanagawa, Japan's most affluent market. In the B2B sector, we captured the growth of Japanese companies through office and commercial facility rents as well as commuter revenue from railway and bus services. Furthermore, in the B2C sector, we captured growth in personal consumption and inbound demand in Tokyo and Kanagawa, including Shibuya through our railway and bus operations, real estate sales, life services and hotel and resort businesses, delivering the results of our regional conglomerate management. That concludes my explanation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]