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Tokyo Metro tackles $87bn global market with IPO in mind

Subway operator seeks new growth engine as aging population cuts local business

Members of the Philippine Railway Institute observe the operations of a Marunouchi Line driver at Honancho station in Tokyo (Photo by Yuki Kohara).

TOKYO -- Tokyo Metro, a subway operator in the capital, has been lending a hand to Southeast Asian railway authorities and companies by offering staff training programs, as it looks beyond the domestic market and toward a long-awaited initial public offering in the near future. Demonstrating its future growth potential will be critical to attracting investor interest.

For Tokyo Metro, which has been running nine routes in and around Tokyo covering nearly 200 km of track, entering the overseas market will be an unprecedented challenge. The company is aiming to win railway operation contracts in cities in Europe, Australia and Asia on the back of its track record of safe and punctual operations.

"I believe Tokyo Metro can use our operational experience since our establishment in 1927 to help other countries," Akiyoshi Yamamura, president of Tokyo Metro, said at a news conference on Monday. "By sending our representatives, we can find out which cities want us and we can get ready to operate there and to manage our business there in the future."

According to a Japanese economy, trade industry ministry of report based on the World Rail Market study by the Association of the European Rail Industry (UNIFE), the global railway industry is expected to generate about 9.5 trillion yen ($87 billion) worth of business per year in operations and maintenance between 2019 and 2021.

Typically for a local railway company, Tokyo Metro has focused its business in its home market of Tokyo. Teaching its operations expertise to Southeast Asian trainees is its first step toward becoming a more globally-focused railway operator. The teaching process is set to be a two-way street, allowing the company to learn more about how to operate outside Japan.

During a training session in September, trainees from the Philippines were surprised to hear from Tokyo Metro staff that any delay to a train over two or three minutes usually results in an apology announcement to customers.

They were taught the Japanese methods of maintenance and operation. For example, platform conductors check that doors are properly shut, before confirming that trains are ready to move on.

"Why do you have candies here [in the conductor's room]?" one trainee asked. "Candies prevent operators from having heatstroke," was the reply.

A total of 11 trainees came to Tokyo from the Philippines department of transportation and communications for a one-week training session with Tokyo Metro. The trainees are expected to go on to be instructors at the Philippine Railway Institute, a training center that will be opening in 2021 in Manila, as the country needs to quintuple its drivers and engineers to 20,000 in the next 10 years. Trainees hope to introduce Japan's operational techniques back home.

Tokyo Metro will offer another training session in late 2020 after the Olympic Games, with about 30 trainees set to come for on-the-job training of about three months' duration. Additionally, the Tokyo subway operator is thinking about sending experienced staff to the Manila institute once it opens.

The subway operator began offering training courses for Southeast Asian operators in 2013. The Philippines is its second market after it started with Vietnamese trainees. Both projects came about partly due to the Japan International Cooperation Agency's external assistance program.

"The JICA project is not that profitable for us, but we should work on this as we are aware that growth in Tokyo will be limited, especially after the Olympic games in 2020," said Takahiro Tanisaka, a senior manager in the international relations department at Tokyo Metro. "This is a great opportunity for us to develop expertise and expand our network by doing overseas operations."

Operating training programs in emerging economies has long been viewed in Japan as a tool to promote the export of its train-related technologies, such as carriages and control systems, as it faces fierce competition, particularly on price, from Chinese train manufacturers. Human assistance, such as driver training, has often been viewed as an important accessory to selling the hardware.

However, the motivation for Tokyo Metro has evolved, with personnel support for Southeast Asia now forming a key part of its future strategy.

Tokyo's biggest metro company is a public enterprise. The Japanese government holds a 53.4% stake, with the Tokyo Metropolitan government owning the rest. The operator has 179 stations in the Tokyo region, carrying 7.58 million passengers per day as of 2018.

The company recorded a net profit of 61 billion yen ($560 million) for the year ended March, up 0.6% from the previous year thanks to external factors such as the increase in foreign visitors to the Japanese capital. It posted revenues of 435 billion yen.

Tokyo Metro has been keen to go public to raise money for expansion. "We would like to go public as soon as possible. I believe our IPO will contribute to the development of Tokyo," Yamamura said. But for now, the Tokyo metropolitan government is wary about an IPO and wants Tokyo Metro to present a convincing growth strategy.

Among Tokyo-listed railway operators, Osaka-based Hankyu Hanshin Holdings recorded annual revenues two times that of Tokyo Metro, although both companies made roughly the same net profit. This shows that Tokyo Metro has a higher profit margin than that of Hanshin Hankyu, which has a market capitalization of more than 1.16 trillion yen.

At the same time, the relatively high profit margin and stability of its local business has led to the company missing growth opportunities and failing to prioritize new revenue sources.

President Yamamura expects a negative impact on the business from the rapid decline in the population in central Tokyo, particularly people of working age, resulting in reduced passenger numbers as well as an insufficient supply of its own workers.

Tokyo Metro is looking for operating contracts in Western markets such as Europe and Oceania, where the business environment is more stable.

"Once we have gained experience in these developed economies, we aim to expand our operations and maintenance business in Asia where infrastructure and regulations are not yet developed," Tanisaka said.

The company feels the urgency of its need for a shift in focus.

"We need to expand our operations beyond Tokyo. Joining the JICA program is the preparatory stage for us to do business outside Japan," said Tanisaka.

Tokyo Metro is now hoping to extend its expertise to peers in the Burmese city of Yangon if JICA win a deal there, with results set to be announced by the beginning of 2020.

However, the global expansion plan will not necessarily guarantee the company's future success as several other train operators are vying for overseas opportunities.

Asia's big metro player, Hong Kong's MTR, is far ahead of Japanese rail operators, already running nine railway services in four countries, including Australia, Sweden and the U.K. as of 2018. On top of that, the company has railways service in Beijing, Shenzhen and Hangzhou in China. Its international business accounted for nearly 40% of its total revenue in 2018.

The company also has a property development business, including shopping mall operations, exporting Hong Kong's successful "rail plus property "development model to China.

The two companies were about the same size in terms of revenue in 2010, but MTR's top line grew 83% to reach $6.8 billion in the eight years since, making it 1.7 times larger than Tokyo Metro. During the same period, Tokyo Metro's revenue has increased by only 17%.

Another rival, East Japan Railway Co., one of the world's largest railway companies, started running the West Midlands railway network in the U.K. at the end of 2017, in its first rail operation outside Japan.

While Tokyo Metro's plan seems sound, its journey to find new growth engines overseas might not be a smooth ride.

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