Bullet Train Operator’s IPO Appeal Boosted by Japan Property

(Bloomberg) -- Japan’s bullet train operators are finding it also pays to run hotels, shops, restaurants and own real estate. 

A planned 392 billion-yen ($3.8 billion) sale of Kyushu Railway Co., also known as JR Kyushu, by the government in an initial public offering may draw investor interest for its property and other businesses more than its rail service, according to Mitsushige Akino, an executive officer at Ichiyoshi Investment Management Co.

JR Kyushu, a train operator in Japan’s third-largest island, gets most of its profit from its station and real-estate businesses that include hotels and shopping centers, while non-transportation services account for about half its sales. Record arrivals of tourists from abroad is spurring demand for the establishments run by the railway, based in Fukuoka City, about 890 kilometers (550 miles) southwest of Tokyo. The privatization is set to unshackle it from government controls.

“JR Kyushu is more like a regional real-estate company,” said Akino. “They’re benefiting from an increase in overseas tourists. They have that side that’s flourishing.” He said he is considering buying its shares.

The share sale will likely make it the world’s largest IPO this year after Postal Savings Bank of China Co.’s planned $8.1 billion offering in Hong Kong. State-owned Japan Railway Construction, Transport and Technology Agency, which fully owns JR Kyushu, is offering all its 160 million shares at an indicative price of 2,450 yen apiece, according to a filing Thursday.

JR Kyushu will become the fourth government-owned railway company created from the breakup of Japan Railways in 1987 to be privatized.

The government will set the price range on Oct. 6 and the final price on Oct. 17, according to the statement. Line Corp., Japan’s most popular mobile-messaging service, which announced an IPO in June, had set an indicative price of 2,800 yen initially, before selling the shares at 3,300 yen apiece.

Other former Japan Railway group companies have seen significant increases in price since their IPOs.

Shares of Central Japan Railway Co., which was privatized in 1997, have more than quadrupled, while those of East Japan Railway Co., which sold shares in 1993 in a $7.2 billion IPO, have more than doubled. West Japan Railway Co. shares have also gained since their IPO, advancing about 70 percent since their debut sale in 1996. Japan’s Nikkei 225 Stock Average has lost 19 percent since the first JR sale.

JR Central gained 1.3 percent to 17,320 yen as of 10:45 a.m. in Tokyo trading, JR East rose 0.6 percent to 8,873 yen, and JR West advanced 1.7 percent to 6,138 yen.

Dwindling Population

One of JR Kyushu’s drawbacks is that its population is dropping, along with the whole country. Six out of the island’s seven prefectures saw a drop in people living in the areas in the five years through 2015, according to figures from the government.

“Keeping trains crowded is not so easy,” said Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo. “The big negative is the population is shrinking.”

Still, JR Kyushu is forecasting higher sales for the current fiscal year. It expects net income of 38.2 billion yen in the year ending March 31, with sales forecast to increase 0.2 percent to 379 billion yen. The train operator had a net loss of 433 billion yen last fiscal year, as it booked a one-time 479 billion yen cost for depreciation of railway assets.

It earned 20.4 billion yen in operating profit from its station and real estate business last fiscal year, compared with total operating income of 20.8 billion yen, according to figures from the company. The company had an operating loss of 10.5 billion yen on its transportation business, while its retail business made 3.4 billion yen in operating profit. The firm has more than 9,000 employees and over 30 group companies.

“JR Kyushu looks like a good company,” said Masayuki Kubota, the Tokyo-based chief strategist for Rakuten Securities Economic Research Institute. “Hotels are a booming business now in Japan. The real estate business is a cash cow, the same as for the other JR companies.”

--With assistance from Lena Lee To contact the reporters on this story: Chris Cooper in Tokyo at ccooper1@bloomberg.net, Kiyotaka Matsuda in Tokyo at kmatsuda@bloomberg.net. To contact the editors responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net, Yusuke Miyazawa at ymiyazawa3@bloomberg.net, Sam Nagarajan