At a time when artificial intelligence has been driving market rallies, Japan’s biggest listing in six years is an old-school affair. Shares of Tokyo Metro, the country’s underground railway network, soared as much as 47 per cent in its trading debut on Wednesday giving it a market value of $6.7bn. But investors should not count on the pop turning into a long-term rally.
More than 6.5mn riders take the Tokyo Metro every day, almost double the number of people using the New York City subway. The company operates nine lines and 180 stations. That makes the subway systems company one of Japan’s biggest household names, which helped the deal — oversubscribed more than 15 times — price at the top of an indicative range. Local retail investor interest has been especially high.
A high dividend yield makes Tokyo Metro shares attractive to this investor group. Tokyo Metro’s yield was 3.3 per cent, about a third higher than local peers. Other perks for shareholders holding over a certain number of shares helped too, such as train tickets, toppings at its noodle restaurants and entry to the company’s golf range and museum.
Japan’s tourist arrivals hit a record high in September, with this year’s visitors already surpassing 2023’s full-year numbers. That has boosted subway passenger figures. Tokyo Metro forecasts that net profit will rise 13 per cent in the fiscal year to March thanks to the increase in passengers, with operating income for the transportation business expected to rise 18 per cent to ¥75.3bn ($493mn).
But longer-run growth prospects remain limited. For the current earnings trend to continue, tourist growth would have to increase at rates similar to this year, which for September were about a third higher than last year. The railway business in Japan is highly regulated, requiring companies to obtain approval for fare increases for passengers. It is difficult for companies to raise fares rapidly to improve profitability.
Moreover, demographic challenges remain a significant issue. While the decline in the population of the Tokyo metropolitan area has been slower than for the rest of the country, it has still been falling for three straight years. Fewer people on trains and stations would have a direct impact on non-railway businesses such as property and retail.
Even after Wednesday’s pop shares trade at 15 times trailing earnings, at a discount of about a fifth to local peers. That leaves room for some upside and more interest from retail investors looking for a safe, stable name. But those looking for a more exciting ride should look elsewhere.
june.yoon@ft.com
