Tokyu Construction 1720
東急建設
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2021-11-09
2021-11-09
2021-09-24
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1-16-14, Shibuya, Shibuya-ku, Tokyo 150-8340, Japan
Summary
Tokyu Construction is a second-tier general contractor. A member of the Tokyu Group, Tokyu Construction focuses on areas along Tokyu train lines, from the southwestern part of Tokyo’s 23 wards to northern Yokohama.
Construction & Engineering
Key dates
2020-04-24
Coverage initiation
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 15.3% stake in the company (including indirect holdings). Most revenue comes from private-sector construction projects. In FY03/21, the Building Construction segment accounted for 66.2% of consolidated revenue. The Civil Engineering segment, which includes railway construction, accounted for 32.7%, and the Real Estate segment provided 1.1%. 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.
The Building Construction segment accounted for 66.2% of consolidated revenue (FY03/21). 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 32.7% of consolidated revenue (FY03/21). 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).
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.
In March 2021, the company formulated its corporate vision for 2030, “Vision 2030,” and in May 2021, it announced its 10-year long-term management plan, “To zero, from zero,” aimed at achieving Vision 2030. The company plans to invest JPY170bn in core and strategic businesses over the next ten years, aiming to achieve an operating profit of at least JPY22.0bn and ROE of 10% or higher in FY03/30. It also revised its shareholder returns policy. The company plans to pay dividends based on a dividend on equity (DOE) of at least 4.0%, which strikes a balance between the medium-term target of a minimum 10% ROE and consolidated dividend payout ratio of at least 40%. This is aimed at stabilizing the dividend amount and improving shareholder returns, taking into consideration capital efficiency. The company also plans to buy back shares flexibly, also taking into account capital efficiency.
Earnings trends
In FY03/21, revenue was JPY231.5bn (-28.1% YoY), operating profit was JPY3.6bn (-82.5% YoY), recurring profit was JPY4.9bn (-77.7% YoY), and net income attributable to owners of the parent was JPY2.7bn (-82.2% YoY). While public-sector construction investment remained strong, private-sector construction investment declined as companies further scaled back or changed their business plans in the wake of the COVID-19 pandemic.
The company’s FY03/22 forecast calls for revenue of JPY285.0bn (+23.1% YoY), operating profit of JPY7.0bn (+97.2% YoY), recurring profit of JPY7.3bn (+49.3% YoY), and net income of JPY4.8bn (+81.3% YoY). Based on its long-term management plan “To zero, from zero.” (announced on May 12, 2021), the company will position its domestic civil engineering, building construction, and building renovation businesses as its core businesses, and its international, real estate, and new businesses as its strategic businesses. Additionally, with human resources and digital technologies as sources of competitive advantage, the company will aim to sustainably improve both financial and nonfinancial corporate value by implementing five key strategies centered on delivering three values (decarbonization, zero waste, and disaster prevention and mitigation).
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.
Key financial data
Note: Figures may differ from company materials due to differences in rounding methods.
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Figures may differ from company materials due to differences in rounding methods.
Q1 FY03/22 results
Summary
* Net loss attributable to owners of the parent
The company noted that revenue should be entering an upward trend owing to accumulated orders in FY03/21, and Q1 results were generally in line with its forecast. As for irregularities, the company cited a slump in profit on a completed civil engineering work, namely the Sotetsu Ebina Station renovation project.
Parent-only revenue
On a parent-only basis, the company posted Q1 revenue of JPY52.7bn, up JPY13.1bn YoY (+33.2% YoY). While Building Construction revenue was up JPY13.6bn YoY (+52.3% YoY) to JPY39.6bn, Civil Engineering revenue was down JPY485mn YoY (-3.7% YoY) to JPY12.7bn. The JPY13.6bn increase in Building Construction revenue was due to a JPY15.5bn rise in revenue from private-sector projects (general private-sector: +JPY11.8bn YoY, Tokyu Group: +JPY3.8bn), which offset a JPY2.0bn decline in revenue from domestic public works
Gross profit rose JPY63mn YoY (+1.9% YoY) to JPY3.3bn, reflecting an increase of JPY1.2bn YoY (+8.2% YoY) in Building Construction, a decrease of JPY1.0bn in Civil Engineering (resulting in a gross loss of JPY132mn), and a decrease of JPY26mn in the real estate and other businesses (a gross profit of JPY191mn). GPM was 6.3%, down1.9pp from 8.2% in Q1 FY03/21. By segment, GPM in Building Construction rose 0.2pp YoY to 8.2%, while GPM in Civil Engineering fell 8.2pp YoY to -1.0%. The cut in GPM in Civil Engineering was due to the impact of the Sotetsu Ebina Station renovation project, which had been suspended due to a defect found in a part of the erected steel frame.
Status of orders
In Q1 FY03/22, total orders increased JPY34.1bn (+123.0%) YoY to JPY61.9bn, comprised of an increase of JPY28.6bn in domestic private-sector orders and JPY5.8bn in public works orders, and a decline of JPY278mn in overseas orders. By segment, Building Construction was up JPY31.0bn YoY while Civil Engineering was up JPY3.1bn YoY. Orders for Building Construction are on a good trend.
The growth of JPY31.0bn YoY in Building Construction is due to an increase of JPY2.9bn YoY in domestic public works and the JPY28.6bn YoY rise in the domestic private sector (general private sectors: + JPY14.4bn, Tokyu Group: +JPY14.2bn). The JPY14.4bn increase in general private sectors is due to orders for the construction of large scale distribution warehouses. The company has been focusing on logistics warehouses since around 2015, and has been enhancing its knowledge in the field. Although large scale construction had previously focused on redevelopment of areas, such as Shibuya, orders for logistics warehouse projects are on the rise. In addition, the growth in orders from the Tokyu Group is for condominium projects related to the Minami Machida project. The company expects new construction and repair work on university campuses and capital investments in manufacturing.
The growth of JPY3.1bn in Civil Engineering YoY is due to an increase of JPY2.9bn YoY in domestic public works and a JPY8mn YoY rise in the domestic private sector. The JPY2.9bn increase in domestic public works is largely due to the company receiving an order for a one-time large scale project of over JPY2.0bn. The amount of orders received usually accelerates in the latter half of the fiscal year. The company also noted that the relatively small revenue of JPY938mn in Q1 FY03/21 also affected the YoY comparison.
As for the overseas business, the company noted that revenue may not be posted for the time being due to the unstable political climate in Myanmar, which accounts for a large portion of its overseas construction business.
Balance carried forward
Total construction carried over increased JPY98.9bn YoY (+41.2% YoY) to JPY339.1bn with Building Construction up JPY119.9bn YoY to JPY251.0bn and Civil Engineering down JPY21.0bn YoY to JPY88.1bn.
For details on previous quarterly and annual results, please refer to the Historical financial statements section.
FY03/22 full-year company forecast
Numerical plan
Note: Figures may differ from company materials due to differences in rounding methods.
The company’s FY03/22 forecast calls for revenue of JPY285.0bn (+23.1% YoY), operating profit of JPY7.0bn (+97.2% YoY), recurring profit of JPY7.3bn (+49.3% YoY), and net income of JPY4.8bn (+81.3% YoY).
The company expects earnings to turn around after bottoming in FY03/21. Orders have risen due to several factors since 2013, including Abenomics, the Tohoku earthquake, and Tokyo Olympics. These settled down, and FY03/21 was a kind of lean period for orders. Despite a solid recovery in orders, the company is aware that the OPM will not rebound to the levels of 6–7% that prevailed until FY03/20.
The company sees FY03/22 as the first year of structural reform under the long-term plan it announced on May 12, 2021, dubbed “To zero, from zero”(discussed later.) The company said that it would embark on structural reform as outlined below to deal with issues remaining following the previous medium-term plan.
Enhanced corporate governance
Further improvement in separation of oversight and execution functions and effectiveness of board of directors
Personnel systems reform
Progress on diversity, inclusion, and innovation
Personnel mobility policy
Structural reform of organization
Reform aimed at slimmer, flatter organization
Enhanced capabilities
Comprehensive review of QCDSE and salesforce and restoration of earnings power
Capital efficiency inculcation
Manage balance sheet with eye on profit down to the workplace level
Outlook in revenue and gross profit from completed construction
All construction at parent
The company forecasts JPY265.3bn (+23.6% YoY) in revenue from completed construction.
It projects JPY20.8bn (+16.5% YoY) in gross profit from completed construction.
It expects a 7.8% margin on construction (GPM), versus 8.3% in FY03/21.
The company had an ample initial order backlog of JPY343.6bn (+36.6% YoY) at the parent level.
Civil Engineering at parent
The company forecasts JPY69.8bn (-7.6%, -JPY5.8bn YoY) in revenue from completed construction. This breaks down to domestic public works -JPY6.0bn YoY, general private-sector +JPY2.0bn YoY, Tokyu Group +JPY2.1bn YoY, and overseas -JPY3.8bn YoY. The company expects declines in revenue from completed construction for domestic public works and general private-sector, but growth from the Tokyu Group.
It projects JPY6.9bn (+14.4% YoY) in gross profit from completed construction.
It expects a 9.9% margin on construction (GPM) versus 8.0% in FY03/21.
Building Construction at parent
The company forecasts JPY195.0bn (+40.7%, +JPY56.5bn YoY) in revenue from completed construction. This breaks down to domestic public works -JPY5.4bn YoY, general private-sector +JPY38.7bn YoY, Tokyu Group +JPY22.7bn YoY, and overseas +JPY550mn YoY. The business overall had an ample initial order backlog of JPY236.9bn (78.1% YoY) at the parent level.
It projects JPY13.9bn (+17.6% YoY) in gross profit from completed construction due.
It expects a 7.1% margin on construction (GPM) versus 8.5% in FY03/21 amid stiffer competition and higher construction costs.
Order outlook at parent
Note: Figures may differ from company materials due to differences in rounding methods.
Civil engineering: The company forecasts 125.6% YoY growth in orders from the Tokyu Group, but falls of 13.7% YoY from the public sector and 37.4% YoY from the general private sector.
Building construction: The company forecasts YoY growth in orders from the Tokyu Group and the public sector, but a drop-off from the general private sector following significant order growth in FY03/21.
Orders to be carried forward to FY03/23
The company also expects orders carried forward to FY03/23 of JPY335.3bn, in line with the previous year. It expects ample orders heading into FY03/23.
Civil Engineering orders carried forward: JPY93.9bn (-12.0% YoY)
Building Construction orders carried forward: JPY241.4bn (+1.9% YoY)
Long-term management plan
Review of medium-term plan: 2018–2020 “Shinka 2020”
The company made solid progress toward its FY03/21 targets through FY03/20, but earnings deteriorated suddenly in FY03/21 due to the coronavirus pandemic.
Note: Figures may differ from company materials due to differences in rounding methods.
Achievements
The company completed large and difficult projects where it did not have previous experience in Japan and overseas, including redevelopment around Shibuya station
The company built up shareholders' equity, improving balance sheet health, which had been an issue since the company’s restructuring and rehabilitation
Issues
Changes to the order portfolio due to the tapering off of large projects such as the Shibuya redevelopment
Significant decline in OPM
Decline in ROE due to profit slump
Insufficient earnings growth outside domestic building construction business
Changes to employee attitudes and work styles due to COVID-19
Fostering sense of crisis in response to changing conditions
Review
The company said that the sudden downturn in earnings in FY03/21 engendered a strong sense of crisis, and it recognizes the need to embark on structural reform to restore earnings as an urgent priority. The company sees April 2021–March 2023 as a structural reform phase, and April 2023 onward as a transformation phase. It said that long-term strategy execution will enable steady progress on initiatives aimed at transformation.
Vision 2030 and Long-term management plan “To zero, from zero”
Formulation of Vision 2030
The company has formulated a vision every 10 years since 2000 with the aim of realizing its corporate philosophy. The company’s Vision 2020 of being “a general contractor that continues to embody ‘shinka’” (which translates roughly as “deepening and evolving in the pursuit of genuine value”) ended in FY03/21, so the company formulated “Vision 2030,” its new vision looking toward 2030.
Tokyu Construction formulated Vision 2030 with a keen awareness of the company’s purpose, derived from its founding spirit, the shared values (corporate philosophy and principles of conduct) in the organization and its behavior, achievements and challenges of Vision 2020, and solving of social issues, which is the company’s identity. The company set forth the Vision 2030 theme as “To zero, from zero, The environment and the excitement of the future.”
“To zero” means striving for zero carbon and waste emissions, and “from zero” expresses the company’s ambition to enter new fields. “To zero” encompasses the concept of a safe and comfortable environment, and “from zero” expresses the company’s desire to offer excitement and contribute to a sustainable society and to continue to strive to improve corporate value.
Long-term management plan “To zero, from zero”
In May 2021, the company disclosed its long-term management plan “To zero, from zero” which it will use to achieve goals in its Vision 2030.
Fundamental policies
The company positions its domestic civil engineering, building construction, and building renovation businesses as core businesses, and its international, real estate, and new businesses as strategic businesses.
Through the practice of “deepening knowledge” and “searching for knowledge,” and with human resources and digital technologies as sources of competitive advantage, the company aims to implement five key strategies centered on delivering three values (decarbonization, zero waste, and disaster prevention and mitigation).
The company aims to sustainably improve both financial and nonfinancial corporate value.
Five key strategies
Numerical targets
Note: Figures may differ from company materials due to differences in rounding methods.
Note: ROIC = (NOPAT + non-operating income) / (shareholders’ equity + interest-bearing liabilities)
Note: Employee engagement rating by Link and Motivation Inc.'s “Motivation Cloud.” The rating is for all group employees, including subsidiaries. There are 11 ratings, and the current BBB rating is the fourth highest, after AAA, AA, and A.
Shareholder return policy
The company recognizes the importance of having ample retained earnings to invest with a view to improving corporate value and further improvements in its financial position so it can withstand medium- to long-term risks. Meanwhile, as an important measure to provide shareholders with stable, ongoing returns of profits, the company’s previous dividend policy targeted a consolidated dividend payout ratio of at least 20% and a flexible shareholder returns element including share buybacks that took into account earnings performance. However, the company said that dividends based on past earnings led to instability in the dividend amount which was influenced by individual fiscal year earnings.
In its long-term plan, the company revised its previous shareholder return policy and disclosed a new one. It will target a dividend on equity ratio (DOE) of at least 4.0%, while striking a balance between its medium- to long-term performance target of ROE of 10% or more and consolidated dividend payout ratio of at least 40%. This is aimed at stabilizing the dividend amount and improving shareholder returns, taking into consideration capital efficiency. The company also plans to buy back shares flexibly, also taking into account capital efficiency.
Investment plans
The company plans to spend JPY170bn over 10 years on VISION 2030.
Delivering three values
With a primary focus on mitigating climate change risk, the company has set forth the delivery of three values: decarbonization, zero waste, and disaster prevention and mitigation, in the context of the UN’s SDGs as a starting point for solving social issues. The company aims to achieve decarbonization not just in the construction process itself but in the entire construction value chain and new business areas. It aims to contribute to a circular economy by curtailing CO2 emissions generated from waste incineration. The company also intends to contribute to the provision of infrastructure in addition to suppressing CO2 emissions which are a factor in major natural disasters.
As part of its decarbonization efforts, the company has been working to reduce emissions generated from electricity use in order to meet the greenhouse gas emission reduction targets certified by the Science Based Targets initiative (SBTi). In March 2021, the company joined the RE100 initiative, and targets a switch to renewable energy sources for all of the electricity used in its business activities, including construction sites and offices, by 2030. Since April 2021, the company resolved to use 100% renewable energy derived electricity in all of its new construction projects in principle. It also plans to accelerate the switch to renewable energy in its existing projects. Two large logistics warehouses the company started building in March 2021 (ESR Higashi Ogishima Distribution Center and ESR Kawasaki Ukishima Distribution Center) received electricity from renewable energy resources in April 2021, and all of the electricity used in construction work and offices comes from clean, CO2 emissions free sources.
Business strategy
Vision 2030, the company’s long-term management plan: What it may look like in practice
Tokyu Construction plans to review its earnings structure based on Vision 2030 and its long-term management plan. From FY03/22 onward it has positioned the domestic civil engineering, building construction, and building renovation businesses as core businesses, and its international, real estate, and new businesses as strategic businesses. The company wants to revamp its earnings structure from a core/strategic business split of 94:6 in FY03/20 to 75:25 in FY03/31.
In its core businesses, it plans to use building information modeling (BIM) and construction information modeling (CIM) as platforms and create a variety of added value through the value chain with personnel and digital technologies, and transform the building construction business model. It plans to transform its business portfolio through innovation in its international, real estate, and construction businesses and growth in new businesses that help solve social issues.
The company said it aimed to strengthen its capabilities by strengthening problem-solving skills, construction and production system innovation, and strategic alliances.
IPD (integrated product delivery): A project where various related parties including the client, designer, construction companies, and specialist construction companies work under a single contract.
Deepening domestic civil engineering business
Deepening domestic building construction and building renovation 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 JR Shibuya Station is around 366,000 passengers (FY03/20: JR East survey).
Many small, older buildings around Shibuya Station(Right)
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.
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.
Net zero-energy building (ZEB)
A net 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 carried out starting in 2016 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, multilayered glass, and other measures. 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. The company intends to push forward further to improve technologies, aiming for a truly net zero (100%) energy reduction. In FY03/20, it achieved 78% energy reduction, the highest level in Japan.
Reflecting growing calls to move to a carbon-free society, the company plans to market itself as a ZEB planner.
Tokyo City University Building A
The company has designed a new building that will be one of the largest university buildings in Japan, with total floor area of more than 100,000sqm, using multiple elemental technologies it has developed. Construction began in June 2020.
Seikitokyu Kogyo head office
The company is working on a ZEB design for this urban office building, even though it is supposed a ZEB format will be difficult due to the limited space available. Construction is scheduled to begin in spring 2021.
Application of environmentally friendly concrete (CELBIC)
Tokyu Construction is one of 13 companies jointly developing environmentally friendly concrete. CELBIC stands for “Consideration for Environmental Load using Blast furnace slag In Concrete.” The low-carbon concrete uses powdered slag from steel manufacturers to reduce carbon dioxide emissions, and this is expected to reduce the amount of CO2 generated by concrete production by 40% in the case of the Ginza 5-chome Project (tentative name) where it will be used.
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 is forging alliances with the Tokyu Group and other partner companies, investing in startups, and actively pursuing M&A. A concrete example is innovation of construction and production systems originating with building information modeling (BIM) and construction information modeling (CIM). To that end, the company made Singapore-based BIM equipment design company Indochine Engineering a wholly owned subsidiary in October 2020 and acquired shares in Kawamura Sekisan, an estimating company, and made it a subsidiary. The company established Iwase Precast, a joint venture, to manufacture and sell precast concrete, which improves construction efficiency, and is working on end-to-end digital transformation in construction. In order to promote the use of BIM in construction across the entire company, the company is deploying the BIM first model, a BIM version of design documents, to worksites in Japan before construction begins.
Use of BIM and CIM systems
In January 2019, Tokyu Construction started developing the “BIM first model” and adopting BIM with the aim of innovation in construction and production systems. The BIM first model is data obtained by converting design documents into BIM, and can be used in day-to-day management starting with examination of a construction plan before work begins, evolving to construction plans actually used on-site. Initially, the system only handled structural BIM models, but from FY03/22 the company plans to roll out models for BIM data covering greater data volume, encompassing exteriors and some interiors, external structures, and facilities to all sites above a certain size. By deploying BIM throughout the entire value chain, the company plans to revamp its construction and production systems, and aims at improvements in construction productivity of 30% or more.
Moving from individual VR to shared VR
Using virtual reality (VR), the company is conducting a proof-of-concept experiment to speed up information sharing and consensus-building at construction sites by using a virtual space where several people can gather at the same time. This is facilitated by the Ricoh Virtual Workplace solution from Ricoh Co., Ltd. (TSE1: 7752), which uses a range of features to enable natural, free communication between people separated by physical distance. Tokyu Construction will verify the effectiveness of the solution for possible commercialization in the future.
Using MR in building confirmation
The company is conducting simulated screening in a joint trial with a confirmation inspection institution using a mixed reality (MR) device from Microsoft and BIM. It aims to boost inspection efficiency and accuracy by centrally comparing and confirming the actual structure against blueprint data.
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.
Daito Trust Construction Co., Ltd.’s (TSE1: 1878) “ROOFLAG Rental Housing Future Exhibition Hall” (in Tokyo’s Koto Ward) was completed in March 2020. This major wooden construction project features a lattice work roof with a span of up to 60 meters, one of the largest in Japan. The roof is made up of 128 pieces of cross laminated timber (CLT)* material and uses no stanchions, resulting in an unprecedentedly spacious interior. Digital technologies including building information modeling (BIM) are used for the construction.
Right: ROOFLAG Rental Housing Future Exhibition Hall (2020)
Strategic business growth
International business
The company plans to step up its efforts in railway and transportation infrastructure and transit oriented development (TOD) under official development assistance (ODA) programs primarily in Southeast and South Asia, leveraging the strengths it has cultivated in Japan in railway construction and urban development along the Tokyu railway lines
In private-sector construction, it aims to establish a high-margin business model tailored to individual countries’ market environment through partnerships with local companies and local human resources
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.
Takasago factory (Singapore, completed in 2013)(Right)
Real estate business
The company plans to grow the real estate business to exploit synergies with the construction business and ensure stable earnings
Based on the three values it provides (decarbonization, zero waste, and disaster prevention and mitigation), the company aims to target eco-conscious customers and develop real estate development/value adding businesses by leveraging synergies with the construction 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.
New businesses
The company plans to establish a “new business continuity creation function” and aggressively develop a succession of new business in areas that can contribute to growth in the three values the company provides, including renewable energy, and areas that use digital technologies
To that end, it plans to invest up to JPY5.0bn in venture businesses in Japan and overseas
The company plans to step up its efforts (through group collaboration) on concession projects for sewerage systems, airports, etc., and PPP initiatives such as smart cities
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.
In May 2021, the company earmarked up to JPY5.0bn to invest in venture businesses in Japan and overseas with a view to creating growth opportunities. The company aims to develop new businesses that have synergies with the construction business, targeting areas that contribute to growth in the three values (decarbonization, zero waste, and disaster prevention and mitigation) and its sources of competitive advantage (human resources and digital technology).
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 14.7% stake in the company (end-March 2021).
In FY03/21, the Building Construction segment accounted for 66.2% of consolidated revenue. The Civil Engineering segment, which includes railway construction, accounted for 32.7%, and the Real Estate segment provided 1.1%. 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 FY03/21 private-sector construction projects accounted for 58.0% of revenue, private-sector civil engineering projects (including railway construction) for 10.6%, and public-sector projects (civil engineering and building construction) for 26.6%.
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.
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 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.
A main contractor that outsources more than JPY40mn to subcontractors (or more than JPY60mn for general building works) requires a “special construction business” license.
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.
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 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.
Segments