9991.T

Financial Performance

• First half operating profit grew 35.6% YoY (1 billion yen increase) and beat the initial plan by 13.1% (400 million yen increase), with both operating and net profit exceeding forecasts significantly. The current PBR is 0.67x, up from below 0.5x one year ago, approaching the mid-term target of 0.8x by 2027.
• Consolidated total assets increased after FUCHI's consolidation, but the balance sheet remains healthy, with strong growth in free cash flow driven by higher profit.

Strategic Initiatives

• Capital and Business Alliance with Mizuho Leasing: Mizuho Leasing took a 49% stake in GECOS' rental subsidiary Renta System, maintaining GECOS' 51% controlling stake. This partnership leverages Mizuho Leasing's expertise to maximize the subsidiary's value.
• Pricing and Service Strategy Change: GECOS has shifted industry norms by charging separate design service fees for high-complexity underground construction projects, after historically providing design as a free add-on. This initiative has already delivered strong results, improving margins.
• Human Resource Strategy: GECOS is addressing industry-wide labor shortages via internal worker reallocation, in-house qualification training, new graduate hiring, mid-career hiring, and recruiting qualified foreign talent who speak Japanese. In the Tokyo metropolitan area, the number of workable sites per day increased from 52 to 58 year-over-year, showing progress in expanding capacity.
• Mid-term Investment Plan: GECOS plans to invest 22 billion yen in growth areas over 3 years, plus an additional 3 billion yen for DX, productivity improvement, R&D, and employee engagement. The emergency temporary bridge "Mobile Bridge" will have a working prototype displayed at an industry fair in November 2025. AI-powered automated steel inspection is in development to replace labor-intensive manual inspection, with clear development milestones achieved.

Shareholder Returns

• The dividend payout ratio was raised from ~30% to ~40% in advance of the mid-term plan, with a minimum 2.5% DOE target. The full-year dividend is increased from 57 yen to 59 yen, with the interim dividend raised from 23 yen to 25 yen.

• Full-year consolidated sales guidance is revised slightly downward, while operating profit is revised upward from 6.7 billion yen to 6.9 billion yen, and ordinary profit is revised upward from 7.0 billion yen to 7.4 billion yen. This 7.4 billion yen profit level matches the all-time high set in 2014 driven by post-earthquake reconstruction demand, and represents a record high profit for GECOS' core heavy temporary construction business.
• The full-year 6.7% ordinary profit margin target is maintained, which reflects a sustained structural improvement to GECOS' profitability, holding in the upper 6% range.
• 84% of the second half full-year plan is already covered by secured or highly likely orders, up 2 percentage points YoY, indicating a solid order backlog. Management notes there is upside potential to exceed the current conservative second half guidance if new order acquisition goes as planned.
• GECOS confirms the mid-term targets: ROE of 8%+, PBR of 0.8x+ by FY2027 (the final year of the mid-term plan), with a longer-term target of 1x+ PBR. Current progress is on track: ROE is 7.3% and PER is 9.3x as of the call, putting the 0.8x PBR target within reach.
• Management expects steel utilization that dropped 8% in the first half will recover to prior-year levels for the full year, as the returned material will be redeployed to second half large projects.

1. Jūkasetsu (Heavy Temporary Construction) Segment: This is GECOS' core segment, accounting for the vast majority of consolidated revenue. Full-year ordinary income is revised upward from 6.9 billion yen to 7.4 billion yen, driven by strong growth in temporary construction work. It is subdivided into:
   • Temporary Steel Material Sub-segment: Reported a 15% YoY increase in profit for the first half, despite an 8% temporary drop in steel utilization from early delivery of large projects. Rental rates have improved 15% for steel sheet piles and over 10% for steel plates since 2022, but have not fully covered earlier steel price increases.
   • Temporary Construction Sub-segment: Delivered 24.1% YoY profit growth in the first half, the strongest result from GECOS' profit-focused strategy. A robust pipeline of large redevelopment projects in the Tokyo metropolitan area is secured for the second half.
   • Steel Structure Processing & Bridges Sub-segment: Experienced lower revenue in the first half due to a project lull, but achieved 13% YoY profit growth. Demand from infrastructure renewal and railway projects is solid.
   • Retaining Wall Perimeter Sub-segment: A new focused growth area, expanding into adjacent, high-synergy work including groundwater treatment, measurement management, and ground improvement, with a dedicated new department established.
   • Overseas Sub-segment: FUCHI (Singapore) was consolidated into the group in August after an additional 3 billion yen investment, becoming a majority-owned subsidiary. FUCHI currently generates 3 billion to 4 billion yen in annual revenue and turned profitable in the second half of the last fiscal year. Jekos Vietnam operates as an overseas design hub, and the two entities cover the Southeast Asian heavy temporary construction market.
2. Construction Machinery Segment: Outperformed both YoY and initial forecasts in the first half, with rental utilization exceeding 50% (the common industry benchmark) for the first time after a prolonged period below this level. Profit is improving gradually due to aggressive legacy asset replacement, and the segment is updating its product mix to meet customer demand.

• Widespread project delays could negatively impact performance, and industry-wide labor/skilled worker shortages are becoming more severe, creating capacity constraints that have forced GECOS to turn away some orders historically.
• A slowdown in the Japanese economy could reduce overall corporate construction investment, leading to lower demand for GECOS' services. Long-term demographic decline is projected to reduce total domestic construction investment by approximately 11% by 2035 compared to current levels.
• Weakening steel prices have created uncertainty over whether rental rate improvements will continue as projected. Even after recent improvements, rental rates have not fully covered earlier sharp increases in steel material costs.
• While a potential U.S. recession would have little direct impact (over 95% of GECOS' revenue is domestic), indirect impacts through reduced Japanese corporate construction investment could create downside risk, though management views this risk as limited currently.

Q: Why does the second half guidance look conservative relative to the strong first half outperformance, even after the upward full-year revision? / A: Roughly half of the first half profit upside came from projects pulled forward from the second half, and half came from structural margin improvements from past initiatives. Management kept the pulled-forward portion neutral for the full year, and only added the structural improvement to the full year guidance, resulting in a seemingly conservative second half plan. Early completion of first half projects also eased resource constraints for the second half, allowing GECOS to pursue more previously delayed orders, leaving meaningful upside to the current guidance if execution goes well.

Q: What is GECOS' strategic plan for FUCHI and the overseas business long-term? How large can the overseas business scale? / A: FUCHI operates the same heavy temporary construction business in Singapore, where there is strong, stable demand from subway and airport construction. GECOS will focus on building out the Singapore business directly, but will not stock large volumes of material across every Southeast Asian country to avoid excessive risk. Instead, it will use FUCHI and the Vietnamese design hub to serve surrounding markets, focusing on growing design service revenue from Japanese general contractors headquartered in Singapore. FUCHI only generates 3-4 billion yen in revenue currently, so rapid scaling to 10-20 billion yen is not expected; growth will be gradual to offset long-term domestic demand decline.

Q: Is GECOS' current 0.8x PBR mid-term target still valid, or could it be raised given current progress? / A: The target remains 0.8x or higher, and management still views raising PBR as challenging, as GECOS' PER is still well below the Japanese market average and requires more investor education and awareness to improve. With 2.5 years remaining in the mid-term plan and PBR already near 0.7x, management will aim to exceed the original 0.8x target.

Q: What are the negative factors that led to the earnings gap versus the initial first half forecast, beyond the positive upside factors? / A: There are no major material negative factors impacting performance currently, as 84% of the second half plan is already covered by secured orders. The only potential risks to note are potential broad project delays, worsening labor shortages, and a broader economic slowdown reducing construction investment, but none of these are material threats to the current full-year plan.