Tokyo 2020 and Beyond
Credit Suisse expects the construction boom in Japan to continue beyond the 2020 Olympic Games in Tokyo. However, just like in the Olympics, there will be winners and losers among the companies hoping to win big.
Construction-related companies are gearing up for a busy few years as Japan prepares to host the 2020 Olympic Games in Tokyo. Credit Suisse expects the construction boom to continue beyond 2020, however, thanks to public infrastructure projects and a rise in property prices that has reinvigorated private-sector activity. While construction companies and cement makers are already raking in record profits, profit growth will likely slow over the next few years, and capital allocation strategies will become increasingly critical to valuations. Just like in the Olympics, there will be winners and losers among the stocks of companies hoping to win big.
Japan's Infrastructure Projects Set to Reach New Heights
Analysts on Credit Suisse's Global Markets team forecast annual construction investment rising from ¥50 trillion in 2015 to ¥55 trillion by 2025. Over the next three years, the Bank expects ¥270 billion in spending on the Olympic Village and other athletic facilities, including construction of the National Olympic Stadium which started in December 2016.
A host of public infrastructure projects will also bolster investment. The government is funding ongoing work to shore up earthquake-prone structures, and Japanese politicians approved a supplemental budget for further earthquake reconstruction earlier this year. Public dollars are also funding the construction of two major highways, the Tokyo Metropolitan Expressway and Tokyo Gaikan Expressway. The Ministry of Land, Infrastructure, Transport and Tourism is forecasting that spending on infrastructure maintenance will rise from ¥3.6 trillion in 2013 to as much as ¥5.5 trillion in 2033, by which time 50 percent of the country's bridges, tunnel, flood-control barriers, and coastal structures will be at least 50 years old.
The Linear Chuo Shinkansen Line, a high-speed maglev (magnetic levitation) train line that will connect Nagoya and Osaka when it opens in 2045, is a collaboration of the government and a host of private railroad companies. While the first leg, between Tokyo and Osaka, isn't slated to open until 2027, the East Japan Railway intends to redevelop the area around Tokyo's Shinagawa station before then, funding the construction of seven towers containing office, commercial and residential facilities.
Credit Suisse believes private investment will rise 2 percent over the next few years, only half as fast as public investment. But even that's an improvement: Private nonresidential construction starts declined in the fiscal years ending in March 2015 and 2016, but moving averages show construction starts are starting to trend higher. Meanwhile, new construction prices have been climbing since 2011.
What Does It All Mean for Investors?
Having declined over the previous three months, the prospects for construction stocks look more promising than those of cement or steel manufacturers over the next six months. Construction companies are raking in record profits, which is allowing them to continue shoring up their balance sheets. Though the Bank expects solid profits in the industry over the next three years, profit growth is likely to slow in the middle of 2017, at which point share buybacks will likely determine relative stock performance. Construction company Taisei announced a buyback of up to ¥20 billion in May, and Credit Suisse believes the three other largest construction companies will feel pressure to follow suit or see their stocks suffer.
Credit Suisse believes investor attention will turn to cement makers when construction company profit growth starts to slow. Cement demand is expected to rise in early 2017 as Olympics construction gets underway and highway projects move forward, and higher sales have historically resulted in higher share prices, both in absolute terms and relative to construction companies. One company seems particularly likely to return cash to shareholders: Sumitomo Osaka Cement bought back ¥4.5 billion of its own shares in early 2016, and Credit Suisse believes it could buy more in the future.
The investment outlook is weakest for the steel industry. Blast furnace steelmakers, which account for the bulk of Japanese steel sales and market capitalization, rely heavily on exports to other Asian countries, which have been hit hard by sluggish Chinese demand. And even with Asian steel prices rising recently, a strong yen has kept blast furnace steelmakers from competing on the regional front. Electric furnace steelmakers cater to the domestic market, however, and should benefit from the increase in construction investment over the next decade. As with construction and steel, Credit Suisse sees the potential for higher shareholder returns among those companies that return money to shareholders most efficiently. Several steel companies have already announced higher dividend payout ratios and share buybacks since 2015.