Asia Tea Time - Cup 79 ☕

Author

Tim Phillips
October 25, 2024 • Estimated Reading Time: 5 minutes

This week I talk Tokyo Metro’s blockbuster IPO debut and why the safety blanket of cash-like instruments isn’t always the right option when investing.

Macro in Asia

Tokyo Metro shares pop 45% in blockbuster Japan IPO

Tokyo Metro, a subway operator of 195km of train lines in Japan’s capital, saw its shares surge 45% on the first day of trading in its IPO on Wednesday (23 October).

The offering saw strong public interest and was Japan’s biggest IPO since SoftBank first floated stock of its mobile business in 2018.

Why it’s happening

  • Japan’s central government and the Tokyo metropolitan government jointly own Tokyo Metro and this IPO comes after legislation required to government to sell shares in the rail operator by March 2028.

  • The share offering raised ¥349 billion (US$2.3 billion) and was hugely oversubscribed by retail investors, who were keen to nab shares in a recognisable (and reliable) transport provider. 

  • Despite a wobble in recent months, Japan’s stock markets are close to all-time highs – making it an ideal time to raise money from investors.

Why it matters

  • Being the biggest IPO in Japan in nearly six years – since SoftBank Group raised US$4.9 billion in an IPO of its local mobile unit – means that Tokyo Metro is finding favour with investors.

  • Tokyo Metro’s reliable nature, serving 6.5 million passengers a day, has resulted in the company being touted as a “dividend stock” given it offered investors a yield of 3.3% at its IPO price.

  • The 45% first-day pop in its share price outperformed the first-day average performance of a 34% gain for other Japanese companies that have gone public so far in 2024.   

What’s next?

  • The direction of travel for Tokyo Metro shares will likely depend more on the ability of the company to pay dividends so investors will be watching for signs of growth on this front.

Tim’s Take 

Tokyo Metro is a public transport provider and, for investors, its appeal lies in the investment parallels it draws with Japan’s own train system, i.e. reliability. 

Most professional investors have acknowledged that Tokyo Metro shares aren’t exactly going to be next Nvidia, given the stodgy nature of the business and its limited ability to raise prices given the remaining government ownership.

That’s because even after the Tokyo Metro IPO, Japan’s central government and Tokyo Metropolitan government will still own a combined 50% of the company. 

Despite that, the company is offering investors a decent dividend yield, although that’s admittedly been cut to 2.3% after the first-day surge in Tokyo Metro shares. Even at 2.3% though, that dividend yield is significantly higher than the Bank of Japan’s benchmark interest rate of 0.25%.

With further doubts on the pace of interest rate hikes in Japan, dividend stocks that have decent and sustainable payouts are certainly appealing for income-focused, older investors. Furthermore, with Tokyo Metro serving a very urban demographic, there are fewer concerns longer term surrounding reduced ridership from an ageing population. 

While Tokyo Metro isn’t likely to light up investors’ portfolios in Japan, its strong first-day showing could perhaps be a sign that “slow and steady” dividend stocks are having their day in the limelight. 

Tim’s Money Tip of the Week

With interest rates starting to come down, the impetus to put our money somewhere else to earn a return becomes stronger. That’s because there’s never a “guaranteed return” when we invest in something, be it stocks or bonds.

Yet, leaving money in safe or guaranteed assets, like T-bills or savings bonds, also means accepting a lower return given how interest rates are coming down. Sitting in those assets for anything longer than a year is not a good idea. So, if we have long-term capital that we want to grow then it should be working in the hardest way possible. That means putting it into stocks.

The only problem, or I’d say “feature”, of investing into stocks is that there is volatility involved. Yes, stock markets can fall 3% or 4% in a day and that’s not pretty. But if we have the luxury of time, then we can ride out those downs because, over the long term, we all know the market goes up and to the right.

Sorting out our savings and investments into various buckets will allow us to understand what we can leave in short-term, safe assets (like an emergency fund or money to pay for our next holiday) and what can be put into the market for the longer term (like retirement savings).

While there are always reasons to be “out of the market”, we should remember that stocks give us the best return over the long term. With that in mind, we should aim to be disciplined, know our investing time horizons for our money, and invest accordingly.