Tokyo Metro’s debut on the stock market on October 23rd represents a significant milestone for both the company and the Asian IPO market. Following a period of high volatility characterized by the unwinding of carry trade positions, delistings, and management buyouts, this ‘old-school affair’ signifies a recovery in investor confidence. Raising 2.3 billion US dollars, it stands as the largest IPO in the last six years and the fifth biggest listing in the past decade. This article examines Tokyo Metro’s history, financial performance, industry trends, IPO objectives, strategic implications, and the investor value proposition, providing a comprehensive overview of the company’s current position and outlook.

Tokyo Metro’s History and Business Outlook
Tokyo Metro has been a cornerstone of Japan’s transportation network since 1927 when the first subway line from Asakusa to Ueno was inaugurated. The network expanded significantly from 1941 with the establishment of the Teito Rapid Transit Authority (TRTA). In 2004, the entity underwent privatization, transforming into a joint-stock company. Prior to the IPO, the company was owned 53.4% by the central government and 46.6% by the Tokyo Metropolitan Government, both of which sold half of their holdings during the IPO. Operating nine lines and 180 stations, Tokyo Metro serves around 6.5 million passengers daily. The company is globally renowned for its punctuality and cleanliness. Beyond its core subway services, which account for 90% of its business, Tokyo Metro operates through its subsidiaries in secondary operations, including retail management (Metro Properties Co., Ltd.), real estate (Metro Development Co., Ltd.), advertising, and infrastructure maintenance. Internationally, on November 20th, Tokyo Metro secured a contract to jointly operate London’s Elizabeth Line, aiming to bring its reliability and punctuality to the UK’s capital’s underground system. This move marks a significant step in Tokyo Metro’s international expansion efforts.
 
During the COVID-19 pandemic, the company faced challenges due to a collapse in the number of passengers, resulting from quarantine measures and restrictions. Ridership on major lines saw a reduction of 30% to 45%. However, with the national reopening and a strong influx of tourists, the company reported a 175% rise in operating income, amounting to 76 billion yen as of March 2024. Tourist arrivals hit a record in September, surpassing 2023’s full-year numbers, contributing to a 13% rise in net profit and an 18% rise in operating income.
 
The IPO was heavily oversubscribed, mainly due to its attractiveness to retail investors, who subscribed ten times the available shares. Investors were captivated by the company’s strong recovery and the attractive dividend yield of 3.3%, which is about one-third higher than that of local rivals such as Kyushu Railway and East Japan Railway Company. However, some fund managers, like Shingo Ide, Chief Equity Strategist at NLI Research Institute, have criticized the investment, suggesting that Tokyo Metro may offer stable profits but lacks long-term growth prospects. They point to demographic shrinkage, an aging population, potential slowdowns in tourism growth rates, and strict regulations on the railway business as factors that may hinder a long-term rally.
 
Overall, investors have been drawn in by the company’s dividend yield and enticed by several perks, such as passes to museums and golf driving ranges, resulting in Japan’s biggest IPO since 2018. Nonetheless, various experts acknowledge that Tokyo Metro’s core transport business may not allow room for significant growth in the long term.

Tokyo Metro’s Financials, Industry Trends, and Investor Appeal

​Tokyo Metro has delivered strong financial results in recent years, supporting the rationale behind its recent IPO. As of September 2024, the company’s Enterprise Value (EV) stood at $12.5 billion, significantly higher than its peers in similar sectors. The company reported an EBITDA of $1.055 billion, nearly double its EBIT of $572 million, reflecting an EBITDA margin of approximately 40%. The EV/EBITDA multiple was 11.55, while the market capitalization was $6.807 billion.
The company’s total debt amounted to $7.726 billion, with a debt-to-equity ratio of 167.51% as of March 2024. Additionally, the EV/Revenue multiple was 4.59 as of September 2024. Tokyo Metro also achieved notable growth in net income, increasing by more than $120 million from March 2023 to March 2024.

​Japan’s railway system has recently experienced a new wave of tourism, driven by a record increase in tourist arrivals. In 2024, global passenger demand increased by 7.1% compared to September 2023, marking an all-time high for that month. However, the industry is not without challenges. Stringent regulations on fare increases and demographic shifts, such as Japan’s declining population in both the Tokyo metropolitan area and rural regions, make it difficult for public transportation operators like Tokyo Metro to sustain revenue growth and long-term profitability. Another major trend in Japan’s railway industry is the integration of artificial intelligence (AI) to enhance operational efficiency, safety, and customer experience. Additionally, there have been significant moves toward adopting sustainable energy measures. East Japan Railway Company, for example, has invested in alternative energy sources, as demonstrated by the FV-E991 series—a hydrogen fuel cell electric multiple unit train designed to reduce carbon emissions.
Tokyo Metro’s financial performance, market share, and reputation make it an attractive option for investors seeking steady returns. In its IPO, shares rose 45%, highlighting strong market confidence in the company. Additionally, Tokyo Metro operates in the real estate and retail sectors, both of which contribute significantly to the company’s overall earnings.

IPO Objectives and Strategic Implications

​The Tokyo Metro IPO is particularly noteworthy because the company was previously jointly owned by both the Tokyo Metropolitan Government and the central Japanese government. The central government’s primary motivation for the IPO is to use the proceeds to cover the redemption costs of bonds issued for reconstruction after the Great East Japan Earthquake and Tsunami, in accordance with the Reconstruction Finance Securing Act. Following the devastating earthquake, tsunami, and nuclear disaster in 2011, the government had to incur new debt to fund the country’s extensive reconstruction efforts. Then Japanese Economy Minister Kaoru Yosano estimated that rebuilding Japan would cost approximately $247 billion and take more than a decade. On the other hand, the Tokyo Metropolitan Government is considering using the funds for infrastructure development. Before the IPO, the central government and Tokyo Metropolitan Government owned 53.4% and 46.6% of Tokyo Metro shares, respectively. During the IPO, they sold 50% of their shares (26.7% by the national government and 23.3% by the Tokyo Metropolitan Government), retaining ownership of the remaining 50%. The public offering price was 1,200 yen per share, and the total value of the 290.5 million shares sold amounted to approximately 348.6 billion yen. After accounting for securities commission fees, the government and Tokyo Metropolitan Government expected to raise over 300 billion yen.

Regarding the future of management, although the company is technically private, it will continue to be jointly run by the prefectural and central governments. At a press conference following its IPO, Tokyo Metro President Akiyoshi Yamamura announced plans to strengthen the company’s real estate and distribution businesses. Currently, the company’s business structure relies heavily on transportation, with 90% of sales coming from subway operations. Operating in Tokyo, a densely populated area, allows Tokyo Metro to be profitable despite shorter line distances compared to other railway companies operating in the area. However, the COVID-19 pandemic demonstrated the vulnerability of this business model. In the fiscal year ending March 2021, the company experienced significant financial setbacks, with operating revenue dropping 137.4 billion yen to 295.7 billion yen and ordinary income falling into a deficit of 47.6 billion yen. To diversify and mitigate these risks, Tokyo Metro is pivoting towards new real estate and distribution businesses. The company has already begun expanding by entering the hotel industry and acquiring a food sales company, aiming to reduce its dependence on transportation revenues. Going public comes with several strategic advantages for Tokyo Metro. The IPO allows for significant management reforms; President Yamamura has called this move the foundation to enter a “new stage” of operation. As a listed company, Tokyo Metro is expected to be more accountable and efficient in its operations to meet investor expectations. Furthermore, the IPO contributes to Japan’s broader privatisation efforts.

Post-IPO Outlook and Investor Value Proposition

Tokyo Metro has outlined specific investment plans aimed at enhancing its infrastructure and expanding services to support growth. The company is focusing on the acquisition and development of real estate, as well as expanding its retail business within stations. A sizable portion of the revenues derived from the IPO will be dedicated to modernizing infrastructure and renovating systems. To increase efficiency and preserve safety, the company is modernizing current stations and enhancing track systems. It is also replacing outdated equipment with sustainable solutions to reduce costs. Tokyo Metro is investing in the expansion of its railway network, with plans to construct new routes and extend existing lines to underserved regions of Tokyo. Key projects include the extension of the Yurakucho Line by 4.8 kilometers, estimated to cost approximately 269 billion yen ($1.8 billion). This project aims to enhance connectivity in Tokyo’s eastern and northern regions, as well as connecting the neighboring city of Chiba. Additionally, the Namboku Line will be extended 2.5 kilometers south from Shinagawa to Shirokane-Takanawa to improve access to Haneda Airport, which is close to Shinagawa Station. The total cost of this operation amounts to approximately 131 billion yen ($870 million). These extensions are projected to be completed in the mid-2030s.

For investors, Tokyo Metro offers a stable revenue stream driven by consistent commuter demand and the company’s dominant position in Tokyo’s transportation network. The investment potential is further enhanced by the city’s demographic conditions: Tokyo is one of the most densely populated metropolises in the world, with the population and tourism heavily relying on the public transportation system. Furthermore, the metro benefits from the constant economic activity centered around the capital. Even in periods of economic downturn, transportation remains an essential service, offering investors a reliable and defensive asset against volatile market conditions.

​As previously highlighted, the company serves over 6.5 million passengers daily, guaranteeing reliable income from ticket sales and other services like retail spaces within stations. The company’s business has been performing exceptionally well, with operating income rising 175% to 76 billion yen in the financial year that ended in March.
Tokyo Metro’s growth strategy prioritizes investment in high-potential projects expected to deliver long-term shareholder value. Its corporate vision focuses on sustainability, aligning with the growing trend of ESG-focused (Environmental, Social, and Governance) investing. In addition to the intrinsic value of the business, retail investors are attracted by the company’s 3.3% dividend yield, based on its forecast dividend of 40 yen per share for the financial year ending March 2025. This yield surpasses that of competitors like Kyushu Railway (2.2%) and East Japan Railway Company (1.86%). These factors solidify Tokyo Metro as a golden standard in the industry, showcasing its commitment to delivering value to shareholders.

Future Growth Plans and Challenges

​Tokyo Metro is proactively addressing potential challenges such as demographic changes and regulatory constraints. Japan’s aging and declining population could impact long-term ridership and revenue. However, Tokyo continues to attract domestic migration and international tourism, potentially offsetting these effects. The company is also exploring technological advancements to enhance operational efficiency. Integration of AI technologies is being considered to improve safety and customer experience. Sustainable energy initiatives are part of Tokyo Metro’s commitment to ESG principles, with investments in environmentally friendly infrastructure. Competition from other transportation modes, such as ride-sharing services and emerging mobility technologies, poses challenges. Tokyo Metro’s focus on reliability, extensive coverage, and integration with other transportation networks helps maintain its competitive edge.

Conclusion

​Tokyo Metro’s successful IPO reflects strong market confidence in a company that combines historical significance with forward-looking strategies. While challenges such as demographic shifts and stringent regulations exist, Tokyo Metro’s diversification efforts and infrastructure investments position it for sustainable growth. For investors seeking stable returns with the potential for long-term value creation, Tokyo Metro represents a significant opportunity in Japan’s transportation sector. The company’s commitment to modernisation, expansion, and delivering shareholder value underscores its role as a vital component of Tokyo’s infrastructure and an attractive investment prospect.

By Francesca Dini, Annaelle Pater, Giacomo Ferrante, Jacopo Bianchini

SOURCES

• Reuters
• Financial Times
• Investing.com
• Tokyo Metro
• International Railway Journal
• The Ashai Shimbun
• The Week
• McKinsey