ASANUMA CORPORATION Q4 FY2025 earnings call

Company Overview & Founding Philosophy

• Founded in 1892 in Nara Prefecture, Japan, the company is a 134-year-old general construction firm that expanded to Osaka in 1926 and now operates nationwide from Hokkaido to Okinawa.
• Core founding philosophy is built on founder Asanuma Kokichi's belief that 'work begets work', with guiding principles of 'spirit of harmony', 'sincerity, enthusiasm, and creativity'. The company focuses on disaster risk reduction, building safe and reliable social infrastructure, and creating comfortable living environments.
• Over the past five years, both sales and profit have grown steadily, with stable operating margin and ROE. The recent temporary drop in equity ratio is attributed to one-off factors including the introduction of interim dividends, and remains at a healthy level.

Strengthening Core Domestic Business: Selective Order-Taking

• The company implements strict checks on project conditions at the order intake stage to strategically select viable projects, which has driven steady improvement in profitability in recent years.
• The company sets a minimum required hurdle profit rate for sales teams every April, and has raised this hurdle rate consecutively over the past two years, resulting in rising order-stage profit rates each fiscal period.
• Additional checks include ensuring sufficient construction lead time to avoid rushed work that raises costs or increases accident risk, confirming sufficient personnel and subcontractor capacity to deliver the project given ongoing industry labor shortages, and maintaining a balanced project portfolio to avoid over-concentration in any single sector or work type.
• While many current factory and warehouse projects are steel-framed with good construction efficiency, the company intentionally also takes on higher difficulty projects to avoid stagnation of technical skills and knowledge transfer among employees.

Strengthening Renovation Business

• The company launched a dedicated Asanuma renovation brand four years ago and actively promotes this business line, based on three core rationales:
  • Lower environmental impact: Renovation retains the existing building frame, resulting in far lower carbon and environmental load compared to new construction.
  • Strong projected demand: Approximately 50% of all existing buildings in Japan were constructed before 1990, and are now 30-40 years old and due for renovation. Most of these are mid-sized buildings which align well with the company's scale, and long-term population decline and rising construction prices have further boosted near-term demand for renovation over new construction.
  • Higher profitability: Renovation projects often have unforeseen conditions (missing original drawings, unexpected structural issues when opening walls) that lead to additional work, resulting in higher overall margins.
• Competitive advantages vs peers: Renovation projects are on average one-fifth the size of new construction projects, which are too small for major general contractors to pursue, giving mid-sized firms like Asanuma better market access. The company also operates a technical research institute in Osaka, and leverages 134 years of new construction experience to build strong on-site judgement capabilities that exceed those of smaller specialized renovation contractors. Gross margins for renovation are 5-6% higher than for new construction projects.
• The company completed a full renovation of its own Nagoya branch building as a brand showcase, incorporating all of its eco-friendly technology, which has won 18 awards domestically and internationally and has hosted over 2,000 visitor group tours to date.
• The company has developed patented earth-based construction technologies including Kantsuchi Blocks and 3D Wood-Plane Earthen Walls, which have won design awards including the Good Design Award, allowing it to deliver high value-added renovation proposals.

Human Capital Acquisition, Retention, and Development

• Amid widespread industry labor shortages, Asanuma has the longest average employee tenure (22 years) among 23 major general contractors (including large industry leaders), indicating high employee satisfaction.
• Key factors for strong retention include an open, welcoming, homely corporate culture with good support for employees, plus a high rate of former employees returning to the firm after leaving. The company also offers competitive benefits matching large industry players, including a recent increase in starting salary to 300,000 yen per month and partial scholarship repayment support for new graduates, to attract new talent.

Shareholder Returns

• The company has planned 9 consecutive years of dividend increases, and has consistently paid out higher dividends than initially planned in every period over this period.

Asanuma Group reported total consolidated sales of 167 billion yen, with operating profit of 6.8 billion yen, and approximately 1,800 total employees. Segment breakdown is as follows:

1. Domestic Construction: Accounts for 86% of total revenue. It is split between over 80% new construction and under 20% renovation construction. By project type, factory and warehouse projects are the most common, followed by residential and office projects. Profitability declined slightly in recent years due to rising material and labor costs, but improved significantly last year after the company strengthened selective order-taking.
2. Domestic Civil Engineering: Accounts for the majority of the remaining 14% of total revenue (along with other small businesses). The company undertakes a range of projects including water and sewage works. Cumulative carried-over construction value as of the first half of fiscal 2025 is up 29.3% year-over-year, indicating strong performance.
3. Overseas Business: Currently generates approximately 10 billion yen in annual revenue, accounting for less than 10% of total group revenue. Operations are centered on two acquired renovation-focused subsidiaries in Singapore, with expansion into the ASEAN region. Singaporean subsidiaries have delivered very solid performance and contribute significantly to consolidated group results.

• The current 3-year medium-term management plan launched in fiscal 2024 (fiscal 2025 is the second year) has maintained its original targets with no revisions as of the first half of fiscal 2025, despite stronger than expected near-term performance. The original plan calls for increased sales and profit in fiscal 2025, followed by lower revenue but higher profit in the final fiscal 2026 year, reflecting the company's profit-over-sales priority and original expectations that demand for factory/warehouse projects would cool after the initial plan was drafted.
• The first half of fiscal 2025 is reporting significant year-over-year growth in both revenue and profit, with carried-over construction volume up 29.3% year-over-year, indicating very strong current performance. Management will disclose any plan revisions promptly if needed in the future.
• Management expects strong construction demand to continue through around 2030, with construction costs expected to rise 3-5% per year in real terms adjusted for price fluctuations. The company will continue to monitor business cycle impacts given construction's high sensitivity to macroeconomic conditions.
• The company targets reaching a 100 billion yen market capitalization (as of January 16, 2026, market cap is 89.9 billion yen) through continued growth and corporate value improvement.

• Industry-wide labor shortage: The decline in Japan's working age population is expected to continue the ongoing labor shortage that limits order intake capacity for the foreseeable future. The company addresses this through its selective order policy that only accepts projects where sufficient personnel capacity can be secured.
• Construction price volatility: Rising material and labor costs have historically pressured margins, though the company's selective order policy has helped recover profitability.
• Cyclical industry exposure: Construction is highly sensitive to macroeconomic conditions, so long-term growth will depend on ongoing monitoring of market conditions and adjustment of strategies.
• Longer lead times: New overtime regulations introduced in 2024 require 8 closed days every 4 weeks (4-shu 8-heijo), which has led to a slight trend toward longer construction lead times in the industry.

Q: Have clients become more accepting of the higher required margins associated with selective order-taking in recent years? Are there any notable changes in the market environment for this strategy?

A: Selective order-taking would not be possible without client understanding. Clients are now well aware of the current labor shortage facing general contractors, so they are understanding of the need for appropriate margins during contract negotiations.

Q: Is the current capacity constraint from labor shortage expected to continue going forward?

A: As widely reported, the working age population in Japan is expected to keep declining, so this situation is expected to continue. We will continue to strengthen our policy of only accepting projects where we can confirm sufficient personnel and subcontractor capacity.

Q: What are Asanuma's competitive advantages for the renovation business compared to peers, and is it true that renovation is more profitable than new construction?

A: First, renovation projects are much smaller than new construction (average one-fifth the size), which makes them unappealing to large general contractors, so it is easier for mid-sized firms like us to enter this market. Second, we have an in-house technical research institute and 133 years of new construction experience that gives us stronger on-site judgement capabilities than specialized renovation contractors. In terms of profitability, gross margin for renovation is roughly 5% to 6% higher than for new construction, driven by additional work that comes from unforeseen conditions on renovation projects.

Q: What factors contribute to Asanuma's very long average employee tenure of 22 years, and how do you plan to maintain this going forward?

A: The biggest factor is our corporate culture: employees describe the company as 'homely', 'open', 'supportive', with 'warm people'. We also see many former employees return to work at the company after leaving, which speaks to the positive culture. We also offer competitive benefits on par with large general contractors: we recently raised starting salary to 300,000 yen per month, and we partially cover student loan repayments for new graduates, which helps attract and retain talent. Human capital will remain a key priority going forward.

Q: Is the understanding that current-period construction work comes from orders received 1-2 years prior correct?

A: That understanding is correct, current work in progress is mostly from orders received 1 to 2 years ago.

Q: What is the current split of domestic vs overseas sales, and what is your future strategy for overseas business?

A: Overseas sales are currently around 10 billion yen per year, and total group sales are around 170 billion yen, so overseas accounts for just under 10% of total revenue. We do not disclose explicit numerical targets, but we plan to continue strengthening our overseas business going forward.

Q: How has the business environment changed since the medium-term plan was drafted in 2023?

A: When we drafted the current plan in 2023, the environment was less favorable, but we have seen significantly stronger inquiry and order volume than originally expected. This is due to economic recovery and ongoing labor supply constraints that have reduced competition for viable projects.

Q: Can we expect the current upward growth trajectory to continue over the next 5 years, given ongoing labor constraints?

A: Long-term forecasting is very difficult for our business. That said, real construction prices adjusted for inflation are currently growing 3-5% per year, and we expect construction costs to continue rising alongside general price increases. We also expect strong demand to continue through around 2030. However, construction is very sensitive to macroeconomic conditions, so we will continue to assess the environment and adjust our plans as needed.

Q: Has labor shortage increased lead times from order to completion compared to the past?

A: For construction projects, there is almost no gap between order receipt and commencement. Typical construction projects have a 1 to 1.5 year lead time from order to completion, which is much shorter than lead times for large general contractors. Because we already account for labor capacity when accepting orders, we do not see longer lead times from labor shortage directly, but new overtime regulations introduced in 2024 require 8 closed days per 4-week period, so this has pushed lead times slightly longer across the industry. Civil engineering projects (such as tunneling) naturally have longer lead times, typically around 5 years.

Q: How can the construction industry improve labor productivity, given its heavy reliance on manual labor?

A: It is true that construction is a labor-intensive industry, but digital transformation (DX) is becoming increasingly important. We are implementing many small DX initiatives: digital communication between site supervisors and subcontractors, automation of excavators for civil engineering works, use of robots for back-office work, and implementation of new digital management systems. We will continue to push DX to improve labor productivity, though the industry will still remain labor-intensive for the foreseeable future.

Q: What has driven the huge increase in order intake this period, especially the 300% year-over-year increase in civil engineering orders in the second quarter?

A: We have received a large number of large orders in the first and second quarters of this fiscal year, including large new construction and renovation projects in the construction segment, and very large projects in the civil engineering segment. The first driver is the overall market environment: demand has strengthened, and we have stepped up our proposal efforts to meet this increased demand. For civil engineering specifically, orders had been declining gradually over the longer term, and most civil engineering clients are government agencies, where technical proposals and accurate estimating are critical. We implemented fundamental reforms to our civil engineering order process, consolidating information nationwide to improve the quality of proposals and estimates, and this reform has now delivered results, leading to the sharp increase in order intake.