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Stocks

Tokyo stock market's 1tn yen club welcoming back top builders

Healthy finances, strong domestic demand draw money to contractors

Japan's construction industry faces a deepening labor shortage. Here, prospective hires gawk at a tunnel-boring machine in Yokohama.

TOKYO -- Market capitalization is close to surpassing 1 trillion yen ($8.9 billion) at all four major Japanese general contractors for the first time in decades as investors reward their recovery from the excesses of the bubble years and price in improved earnings.

Taisei's market cap came to 1.22 trillion yen as of Wednesday, and Kajima's stood at 1.02 trillion yen. Obayashi is about 30 billion yen from the 1 trillion mark, while Shimizu is roughly 60 billion yen away. Not since 1990 have all four builders been worth more than 1 trillion yen each as of the March 31 fiscal year-end. Just 133 stocks on the first section of the Tokyo Stock Exchange had market caps exceeding 1 trillion yen as of Wednesday.

Private and public construction demand for fiscal 2017 is expected to total 55 trillion yen, just over 60% of the peak marked in fiscal 1992. The contractors and their partner companies have weathered the sharp drop in public works spending by cutting costs. But profitability has improved on the recent recovery in private demand, led by Tokyo-area redevelopment projects and the upcoming 2020 Olympics here.

Taisei posted a consolidated operating profit of 140.8 billion yen for fiscal 2016 -- a record high. Another healthy profit of 125 billion yen is expected this fiscal year. Taisei is making money despite a dearth of public works projects by focusing on margins rather than order volume. Amid the labor shortage in Japan, it is fetching higher prices per job.

The contractors are also in good financial health. By fiscal year-end, Shimizu is expected to be practically debt-free for the first time since fiscal 1986 on a consolidated basis. Interest-bearing debt at the quartet has dropped from more than 3.8 trillion yen in fiscal 1997 to one-third as much last fiscal year. General contractors have shed their reputation as poster children for excessive debt.

Long-term investor money is flowing into the sector. Foreign investors owned 37% of Obayashi as of last September, up 10 percentage points over five years. Foreign buying has absorbed an unwinding of cross-shareholding ties.

Each contractor is trading at 10 to 14 times projected earnings. While valuations look nowhere near as overheated as the 70 to 100 multiples seen during Japan's asset price bubble, the stocks have made sluggish headway of late. Whether investors can stomach richer multiples will depend on how long current construction demand lasts.

"Construction demand will remain vigorous, thanks to redevelopment and highway projects as well as the Tokyo Olympics," said Kentaro Maekawa of Nomura Securities. But worries about diminishing domestic demand linger as Japan's population shrinks. There is also no sign of momentum for consolidation among the largest contractors.

Overseas growth remains a challenge for the sector. Kajima moved to acquire an Australian construction company this March in an effort to boost foreign sales from 20% of the total to over 40% in the long term. Japanese general contractors have ventured abroad for years without turning up new profit sources. If they can succeed in developing overseas operations while their domestic profitability holds out, investors may look at them in a new light.

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