1885.T

Company Overview

• Toa Construction is a general construction company (marine contractor) with core strength in port and marine civil engineering, tracing its origin to the reclamation project of Tokyo Bay, and has expanded into domestic construction after a 1973 merger.
• It ranks 2nd in marine civil engineering, 6th in overall civil engineering, and 15th among all general contractors in Japan, having grown from around 30th place thanks to the expansion of the construction segment.

Summary of the Current Mid-Term Management Plan (2023-2025)

• All key performance indicators far exceeded the original plan: connected employment is projected to reach 2,160 in 2025, compared to the original target of 2,000; total revenue is projected to reach 345 billion yen, compared to the original target of 267 billion yen; net income is projected to reach 17.8 billion yen, compared to the original target of 8 billion yen.
• Total shareholder return is projected to reach approximately 28 billion yen, nearly double the original plan of 15 billion yen, with a total payout ratio of approximately 70%.
• Total planned investment was 20 billion yen: investment in human resource development was expanded from 3 billion yen to 7 billion yen, while M&A and business expansion investment only reached 1.7 billion yen due to risk considerations, overall investment progress aligned with the original plan.

External Market Environment

• Public investment continues to grow: the 5-year national resilience plan from 2026 to 2030 is expected to have a budget exceeding 20 trillion yen, up from the previous 5-year plan of 15 trillion yen; the Japanese Ministry of Defense's facility resilience budget has grown rapidly from approximately 200 billion yen annually in 2021-2022 to 878.4 billion yen projected for next fiscal year, bringing demand to both domestic civil engineering and domestic construction segments.
• Private investment is strong: domestic civil engineering sees robust demand in coastal facility renewal, carbon neutrality and energy-related projects; demand for large multi-tenant warehouses has grown sharply, with Toa securing 5 large construction projects exceeding 1 billion yen each from 2023 to 2025 with an average order size of 19.8 billion yen, pushing the average annual domestic construction revenue from 53.1 billion yen (2022) to over 95 billion yen in 2023-2025.
• Overseas market is strong: Toa secured multiple large port projects, including three hundred-billion-yen scale projects in Singapore last year, and the favorable market environment is expected to continue in the medium term.

Human Resource Strategy

• Hiring has grown significantly, with a projected 144 new graduate hires for general positions this fiscal year, driven by the company's reputation for specialization in marine construction, social contribution through infrastructure development, competitive compensation and benefits, and opportunities for young employees to work overseas.
• The company prioritizes early talent development: the number of employees under 35 serving as site managers has gradually increased, reaching 20 as of January this year, to support business expansion.

Financial Strategy

• Key financial targets for 2026-2028: maintain ROE of 10% or higher, maintain a payout ratio of 40% or higher, target an equity ratio of approximately 35%, target a D/E ratio of 0.7 or lower, and continue to reduce holdings of policy-held stocks to below 10% of connected net assets.
• Cash allocation: the next mid-term plan expands total investment to 50 billion yen (up from 30 billion yen in the current plan): 25 billion yen is allocated to strengthening the management base (8 billion yen for human capital investment and organizational reform, 17 billion yen for equipment investment including work vessels and new headquarters smart office transformation), and 25 billion yen for growth investment (real estate development, digital transformation, R&D, sustainability-related strategic investment). M&A will be evaluated on a case-by-case basis and processed as a separate budget outside the 50 billion yen plan.
• Shareholder return policy: after successfully increasing EPS through prior treasury stock purchases, the company will prioritize returning to long-term shareholders via dividends, but will still conduct flexible treasury stock purchases based on business environment, financial conditions and stock price levels.

• 10-year target by fiscal 2035: achieve total revenue of 500 billion yen, operating profit of 30 billion yen, and total connected employment of 2,800. The revenue breakdown target is: 200 billion yen from domestic civil engineering, 200 billion yen from domestic construction (more than doubled from the current ~92 billion yen), and 80 billion yen from overseas business, maintaining its current high level.
• Milestone target by fiscal 2028 (end of the next mid-term plan): achieve total revenue of 365 billion yen, with a breakdown of 160 billion yen from domestic civil engineering, 130 billion yen from domestic construction, and 75 billion yen from overseas business, supported by headcount growth, early young talent development, and DX-driven productivity improvement.
• Domestic civil engineering long-term outlook: besides defense-related demand, there will be steady large-scale projects in airport and transportation infrastructure development, including ongoing projects such as the Hanshin Expressway Bayshore Line extension, and planned projects such as the connection of Keiyo Road to Bayshore Road in Chiba, a new highway bridge between Shimonoseki and Kitakyushu, and a potential new runway at Haneda Airport.
• Domestic construction long-term outlook: defense-related facility resilience will drive significant growth in construction demand; the replacement demand for aging cold storage warehouses will continue, offsetting potential weakness in multi-tenant warehouse demand.
• Overseas long-term outlook: Singapore will continue to generate hundreds of billions of yen in annual large port infrastructure projects over the next 20 years, forming a stable core business. The company will expand the construction segment in Southeast Asia, centered on Singapore, and has already established a local subsidiary in Indonesia, with plans to consider additional local subsidiaries in other countries to drive expansion.
• The current favorable market environment for all three business segments is expected to continue in the medium term.

1. Domestic Civil Engineering: 148.5 billion yen in revenue, accounting for approximately 45% of total prior period revenue of 330.4 billion yen; it is the company's core strength in offshore and marine construction, ranking 2nd in Japan's marine civil engineering field. 2. Domestic Construction: Approximately 99.12 billion yen in recent average revenue, accounting for approximately 30% of total prior period revenue; it has grown from small-scale to large-scale projects in recent years, with top-tier construction experience in refrigerated warehouses. 3. Overseas Business: Approximately 66.08 billion yen in revenue, accounting for approximately 20% of total prior period revenue, centered on Singapore with a stable project volume and projects across 54 countries. Total prior period overall revenue is 330.4 billion yen.

• If interest rate rises continue, the development of large multi-tenant warehouses (which rely on funder/fund financing with a business model dependent on favorable capital market conditions) faces medium and long-term uncertainty, which may lead to a slowdown in new project volume.
• Human resource recruitment is the current bottleneck for business expansion, as the company needs to grow headcount steadily to support revenue growth targets.
• Commercialization of seabed rare earth resource development is still far in the future, with unclear near-term revenue contribution.
• The ongoing Iran-US conflict has caused some downward impact on the company's stock price, though policy-held stock holdings remain on track to meet the reduction target due to overall favorable stock market levels.

Q: Your company ranks 2nd in the marine civil engineering sector and is attracting significant attention amid the rally in construction-related stocks. If orders increase, will you have enough work vessels and construction capacity?

A: Existing large specialized work vessels held by major domestic marine civil engineering players including Toa can already meet current domestic demand. The real bottleneck is talent, not equipment. Toa has many experienced managers that can address the unique challenges of marine construction such as wave conditions, and will continue to expand business scale by strengthening talent recruitment and development to maintain competitive strength.

Q: What is the overall market growth outlook going forward?

A: For domestic civil engineering, besides the sectors already mentioned, there will be a steady pipeline of large-scale projects in transportation and airport infrastructure development. For domestic construction, facility resilience work related to defense will drive significant growth going forward. For Singapore, large investments in port development will continue, and will remain the core of the overseas business.

Q: Large warehouse projects have very large individual contract sizes. Can the company adapt to changes in market environment including rising interest rates?

A: Large multi-tenant warehouse projects for the 2026-2028 mid-term plan are already nearly fully secured. For projects after that, there is uncertainty if interest rate rises continue, because the business model relies on financing from developers and funds. However, demand for rebuilding aging cold storage warehouses from specialized logistics operators will continue, and defense-related demand will also remain strong, so the company can offset any uncertainty from multi-tenant warehouses. Even if the multi-tenant warehouse segment underperforms, it will not have a material impact on the entire company, as the diversified business model can adapt to environmental changes.

Q: Besides the increased use of fund financing structures, what are the other drivers behind the trend of larger warehouses from a logistics efficiency perspective?

A: During the high growth period, developers held many small and medium-sized warehouses per tenant. Now many of these warehouses are reaching the end of their lifecycle, and market participants generally view larger new warehouses as more efficient and cost-effective from a running cost perspective, which is the core underlying driver of the large warehouse trend.

Q: Can you talk about the business scale and future expansion outlook for your Singapore operations?

A: Over the next 20 years, projects like the Tuas Port development will generate hundreds of billions of yen in annual project opportunities in Singapore, and winning multiple such projects will become a core pillar for Toa's overseas business. Currently, overseas business is heavily weighted toward civil engineering, but Singapore provides a good base to expand the construction segment, which can serve as a foundation to expand construction projects across Southeast Asia. Toa has already established a local subsidiary in Indonesia, and is considering establishing additional local subsidiaries in other countries to expand the construction segment, with Singapore as the core hub.

Q: You mentioned that talent recruitment may be a bottleneck. What is your overall human resource strategy?

A: The top priority is to increase corporate awareness through enhanced PR activities, to attract more candidates who recognize the company's value, and ensure that new hires join the company with a clear understanding of Toa's strengths and culture. This is the core basic strategy for recruitment.

Q: Do many new hires join Toa specifically because they want to work in marine civil engineering?

A: Yes, some candidates are attracted by our specialization in marine construction. But for candidates interested in the construction segment and other divisions, we can also become an attractive option if they understand our strengths including social contribution opportunities, competitive compensation and comprehensive benefits.

Q: Can you talk about the overall direction of your growth investment?

A: The largest share of growth investment is equipment investment, especially for new work vessels, which are core competitive assets for the company, and Toa plans to deliver several new tens-of-billions-yen class work vessels to maintain market advantage. Additionally, Toa will strengthen upstream real estate development capabilities for the construction segment to expand profit sources, and accelerate digital transformation to improve construction productivity.

Q: What is the outlook for demand related to seabed rare earth development?

A: Commercial production of seabed rare earth resources is still far in the future, but extensive R&D is progressing before commercialization. Toa is steadily refining the required technologies to ensure competitiveness when the market matures, and does not disclose specific business strategies for competitive reasons.

Q: (Unanswered questions pre-listed that were not fully transcribed in the provided transcript: the improvement in order-stage gross margin and its sustainability, impact of the Iran conflict and countermeasures, the most promising business segment, long-term outlook for the port sector, port sector demand, current status and outlook for port infrastructure related to shipbuilding, resistance to business cycle fluctuations from public investment, and barriers to entry for port construction) are not addressed in the provided transcript content.