TOKYO -- 2015 appears to have been a pretty good year for general contractors on the Tokyo bourse, with shares in major construction companies gaining significant momentum compared to other stocks and even registering the biggest momentum since the country's economic bubble burst 25 years ago.
Obayashi and Kajima are in a virtual dead heat on the stock exchange. Until last Friday, shares in Kajima had risen 43% from the start of the year on a closing-price basis, beating Obayashi's 40% rise. However, Kajima is also the only company in the top four that saw profits decline in the last fiscal year, meaning it likely became a buying target in light of the belief that it was undervalued. As of last Monday, Obayashi was up 46%, beating Kajima's 45% growth.
The question on everyone's lips is: "Just what is making Obayashi so attractive?"
Lessons for its rivals
One answer lies in the speed of improvements to the company's profitability.
Obayashi expects its parent-only gross profit margin for completed construction projects to be 9.3% for the year ending March 2016, up 3.9 percentage points from a year earlier. The number is significantly higher than the expected improvement of 1.8 percentage points at Taisei and 2.2 percentage points at Shimizu, though the two firms' net profits for fiscal 2015 are still expected to be higher than those of Obayashi.
The growth has been driven by its persistent sales efforts in the Tokyo metropolitan area.
For more than 100 years after its foundation in 1892, Obayashi was based in Osaka, about two and a half hours away from Tokyo by bullet train. Despite the geographical disadvantage, the company has been behind several major projects in the capital, including the Roppongi Hills complex in 2003, and the Tokyo Skytree tower in 2012.
In 2010 however, the decision was taken to relocate the company's headquarters to Tokyo in order to capitalize on rising demand for infrastructure ahead of the 2020 Olympics and other urban redevelopment projects.
At Obayashi, orders won by the company in Tokyo and the region surrounding stood at 48% of the total for the April-September period, up 8 percentage points from five years ago.
Successful projects in the city center have led to a stronger presence in the greater metropolitan area, said Toshiya Mizutani, senior analyst at Mitsubishi UFJ Morgan Stanley Securities. Mizutani also said that, in terms of earnings, the company is now not far behind the top two, Taisei and Shimizu.
Stealing a march in corporate governance
Market players have also praised Obayashi's stance on corporate governance.
Like many general contractors, Obayashi held shares in potential client companies, making it easier to win contracts.
However, after Japan's Corporate Governance Code took effect in June, listed companies are urged to unwind their cross-held shares or provide adequate reasons for not doing so.
By market value, Obayashi held 360 billion yen ($2.97 billion) worth of cross-shareholdings in roughly 300 companies at the end of September. According to its corporate governance report, submitted to the Tokyo Stock Exchange in December, the company intends to sell its cross-shareholdings, excluding those it deemed necessary for business purposes, in accordance with the new code.
Additionally, Obayashi announced it plans to use the money raised to buy real estate and invest in its renewable energy business, which includes wind and geothermal power generation.
In this respect, Obayashi is one step ahead of its competitors, most of which have only gone as far as stating an intention to review their cross-shareholdings.
Obayashi already has a reputation for putting its money where its mouth is, having sold 100 billion yen worth of its cross-shareholdings in the past 10 years. Such a proven track record appears to have struck a chord with investors.