Japan housing & real estate sector - First fall in inbound hotel demand in 43 months

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Some companies now cautious about hiking room rates

On 7 October the Japan Tourism Agency published data from its accommodation survey (second set of preliminary data for July, first set of preliminary data for August). According to these figures, the number of guests in accommodation facilities was down 0.4% y-y in July (with Japanese guests down 2% and foreign guests up 8.9%) and down 1% in August (Japanese guests down 0.9% and foreign guests down 1.8%). This was the first time in 43 months that the number of foreign guests had fallen y-y, which is a potential negative for hotel operators, which constitute an inbound tourism-related sector. The view among stock market participants has been that accommodation demand would rise despite the end of so-called bulk buying by tourists, which has cast a cloud over spending in Japan by foreigners. With demand from Japanese people weakening too, some hotel operators that had been focusing on hiking room rates through the previous fiscal year have started to rein in rate hikes as they factor in occupancy as well, and hiking room rates will become increasingly difficult if demand from inbound tourists pegs level or even falls. At this juncture it is not clear why the number of foreign guests fell in August, and as we only have the first set of preliminary data, we will be watching to see if the second set of preliminary figures, due for release on 31 October, will have any revisions.

NOMURA JAPAN DAILY SUMMARY & RESEARCH - REITS

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Near-term earnings likely to depend on real estate sales and condo business 
Tokyu Fudosan Holdings has no major projects under development for long-term holding and rental until the planned completion of the Shibuya Dogenzaka 1-chome and Shibuya Nanpeidai projects in 20/3 and the Takeshiba and Shibuya Station Sakuragaoka Exit projects in 21/3. We expect the company to sell Yokohama Minatomirai 21-32, which is being developed near condominiums and slated for completion in 18/3. After completion, we expect a stable contribution to profit growth from the sale of the Higashi Ikebukuro 1-chome Cinema Complex, a project in which the company disclosed its involvement on 9 August 2016, as well as retail stores, restaurants, and business hotels in Futako Tamagawa, Ginza 1-chome, Shimbashi 3-chome, and Osaka Shinsaibashi 2-chome. Our views are unchanged, and we maintain our forecasts, target price, and Buy rating. Our target price is based on NAV calculated from a cap rate of 4.3%, and the shares look undervalued considering the implied cap rate of 5.3% based on the 8 September closing price.

NOMURA: Japan REIT sector - Ongoing property sales by REITs

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Property sales constitute viable option even if pros and cons are not immediately apparent

On 31 August Sekisui House SI Residential Investment [8973] (Buy) announced the sale of b-town Minamiaoyama, an urban retail facility. It has been selling off commercial facilities since June 2014 in order to turn itself into a specialist residential REIT, and to date had sold six properties. It had hitherto decided not to sell b-town Minamiaoyama because it was carrying unrealized losses, with appraisal value of ¥1.17bn at end-16/3 versus book value of ¥1.49bn. However, it has now managed to sell it to a third party based in Japan that made an offer of ¥1.56bn, well above the property's appraisal value and also higher than its book value. Sekisui House SI Residential Investment said that it received an offer for the property in excess of its book value because the real estate market has been buoyant recently.

Japan REIT sector - REITs up despite ex-dividend date for 11 REITs

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Stocks should benefit from BOJ buying, REITs seem also to be in favor

TOPIX rose 2% on 29 August from the previous trading day. The main factor was likely the yen's retreat following the Fed chairwoman's lecture and comments by BOJ Governor Haruhiko Kuroda at the symposium at Jackson Hole, Wyoming, on 26 August. Amid these conditions the TSE REIT index rose 0.5% on 29 August despite it being the ex-dividend date for REITs with August-ending fiscal periods (ie, 11 of the 54 REITs). After nearly doubling its annual ETF buying target to roughly ¥6trn (from ¥3.3trn) at the 29 July Monetary Policy Meeting, the BOJ bought ¥71.9bn in ETFs on both 25 and 26 August, roughly double the daily amount of BOJ ETF buying up to 3 August. Even so, TOPIX continued to fall d-d on 25 and 26 August. On the other hand, the BOJ did not buy REITs on 25 or 26 August, but the TSE REIT index rose each day nonetheless. Judging from these market conditions, our view is that market participants feel safer in REITs than stocks.

NOMURA - Sanki Engineering (1961 JP) (Neutral) Effect of suspension not clear yet

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Real estate business also warrants attention

In Apr-Jun 2016, operating losses narrowed to ¥0.3bn, from ¥0.6bn the year earlier, although Apr-Jun results make only a small contribution to full-year results owing to seasonal factors. Losses narrowed owing to an increase in revenues in the machinery systems business, offsetting an increase in provisions against construction losses in the facilities construction business, which includes the HVAC systems for buildings business. As announced by the company on 23 June, the government suspended the company from participating in bids and contracts for 30 days, from 8 July to 6 August, in connection with antitrust law violations. We will be paying close attention to the effect of the suspension on earnings in Jul-Sep and beyond. Peers that were similarly suspended in 15/3 saw earnings adversely affected in cases where the companies also refrained from actively taking on work in the private sector. We make no change to our operating profit forecasts, but we lower our target price as we cut our target P/E to 11-12x, from 16-17x previously, to reflect trends in the benchmark P/E and other factors.

 

NOMURA - Maeda (1824 JP) (Buy) Focus on sales growth, concessions

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Pulling away from rivals by ending its dependence on contracting work

Maeda performed well in 17/3 Q1, generating a gross margin of 9.9% on building construction projects and overall operating profit growth of 26% y-y. We raise our profit forecasts, having lifted our outlook for the gross margin on building construction projects. While some investors may be concerned that the gross margin on building construction projects is high in historical terms and offers only limited scope for improvement from 18/3 onwards, we note that the order book has been rising and that sales growth from 18/3 onwards is likely to lend further impetus to profit growth. Maeda has also established a subsidiary to operate a toll road concession in Aichi Prefecture, and it will be interesting to see how it contributes to earnings. We have raised our target price to reflect upward revisions to our profit forecasts and a rise in the benchmark P/E.

NOMURA: Japan Hotel REIT Investment (8985 JP) (Buy) New guidance: RevPAR growth target is 8.7%

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With no pullback apparent in lodging demand, next portfolio target is ¥500bn

Japan Hotel REIT announced new 16/12 guidance on 24 August. Compared with February, rent income projections were raised for five of the six chains paying variable rent. The rent projection for the other is unchanged from February. The REIT's new overall projection for variable hotel rental income is ¥0.2bn higher than the most recent estimate (7 July). As of February, the RevPAR (average occupancy times average room rate) target for the three main chains (Hotel Management Japan, Accor, and The B) was +8.7% y-y. Concern about changing conditions in the hotel market has been rising in the stock market, but the business environment appears to be generally in line with what management expected at the start of 2016. Moreover, property acquisitions have been brisk. Since the start of 2016 the REIT has issued new shares twice and used the proceeds to acquire five properties (including Hilton Nagoya) for ¥61.1bn (5.1% weighted-average NOI yield). We use a fair-value dividend yield of 3.25% and fair-value cap rate of 4.0% to calculate our target price. Previously we valued Japan Hotel REIT 50bp lower than the weighted-average yield indicators of the 38 REITs we cover. We now change to 25bp lower based on the increased difficulty of forecasting conditions in the hotel market. 

7/3 Q1 results summary for Japanese general contractors - Watching orders as well as gross margins

Kajima stands out for gross margin improvement and order growth

Almost all Japanese general contractors, and majors and second-tier companies in particular, had announced their 17/3 Q1 results by 9 August. Many companies reported gross margins on building construction of over 10%, with rises in these gross margins the largest positive y-y factor for profits. Moreover, some companies also saw marked growth in building construction orders, and the share prices of those companies performed solidly following announcements. Companies with improved gross margins on building construction and growth in building construction orders included Kajima [1812] (Buy), Maeda [1824] (Buy), Penta-Ocean Construction [1893] (Buy), and Okumura [1833]. Stock market participants see growth in orders as well as higher gross margins on building construction as key future profit growth drivers, and we think attention could focus even more on orders. We think Kajima put in the most obviously strong set of results for 17/3 Q1 in terms of absolute operating profits, gross margin levels, and the extent of order growth.

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Daiwa House Industry (1925 JP) (Buy) 17/3 Q1 results

Sale of logistics facilities to private REIT in Q1

Daiwa House Industry released 17/3 Q1 results on 9 August. We had thought that its results might be hit by the disappearance of substantial gains on the sale of logistics and commercial facilities in 16/3 Q1 (¥24.5bn at the gross profit level), but in the event operating profits rose 4% y-y (and included gains on property sales of ¥12.9bn). This mainly reflected the housing business, where sales rose 13% and the gross margin improved from 19.4% to 20.5%. However, we had already expected this gross margin to improve in 17/3. Although progress with construction projects has been rapid, the amount of work at hand has not prompted us to change our outlook for housing operations in 17/3, or indeed our earnings forecasts. We retain our target price and reiterate our Buy rating amid favorable conditions.

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