(The following statement was released by the rating agency)
May 30 -
Summary analysis -- East Japan Railway Co. ------------------------ 30-May-2012
CREDIT RATING: AA-/Negative/-- Country: Japan
Primary SIC: Railroads
Credit Rating History:
Local currency Foreign currency
17-Mar-1998 AA-/-- AA-/--
18-Jun-1993 AA/-- AA/--
The ratings on East Japan Railway Co. (JR East; AA-/Negative/--) reflect excellent stability in the earnings of its mainstay railroad business. The competitiveness of its nontransportation businesses and its gradually improving capital structure also support the ratings. Meanwhile, constraints on the ratings are weak measures of the company's credit quality and vulnerability to the economic downturn in Japan, and the prospect that an aging population and low birthrate will reduce passenger demand.
JR East is one of the world's largest railway operators and has a service area covering the eastern half of Japan's main island of Honshu, including the Tokyo metropolitan area. Japan's stagnant domestic economy affects JR East less than its peers because a growing population in central Tokyo has produced stable commuter numbers. Indeed, the company derives about 68% of its total transportation revenues from the greater Tokyo area. Standard & Poor's Ratings Services expects extensions to JR East's railway network and ongoing improvements to its services to help it maintain its strong commuter numbers.
JR East's medium and long routes are susceptible to the economic downturn because customers use them mostly for business trips and sightseeing. In addition, long routes face fierce competition from airlines and buses. However, we believe continued improvement in the quality of its bullet train (shinkansen) services, including extending shinkansen routes, and enhanced sales promotions will likely help the company maintain its competitive edge. Although Japan's aging population and low birthrate will likely cause demand among rail passengers, including those on conventional lines in the Tokyo metropolitan area, to decline in the medium to long term, we expect JR East to continue to benefit from the cost-plus pricing scheme. As such, we believe the transportation business will likely continue to generate stable profits and cash flow.
In its nontransportation businesses, such as real estate, retailing (restaurants and shopping centers), and distribution, JR East employs abundant existing assets, such as station space and facilities, under a policy to avoid high business risk. The company's nontransportation businesses have demonstrated relatively solid performance despite sluggish consumer spending and natural disasters in recent years. We expect JR East to remain highly competitive in each business, reflecting steps it has taken to make the most of its strengths--such as very attractive locations, including inside and around large station facilities--and to actively upgrade its commercial facilities.
Since fiscal 1999 (ended March 31, 2000), JR East has reduced more than JPY1.4 trillion in debt. The company intends to cut more debt while making necessary investments for growth. The company's management plan shows it will make JPY1.4 trillion in capital expenditures in the three years from fiscal 2012 while generating JPY1.65 trillion in cash flow from operations in the same period. Although the company's ratio of total debt to capital (unadjusted) as of March 31, 2012, remained high at 64.2%, compared with 65.1% a year earlier, we expect the ratio to continue to improve gradually because stable earnings and an accumulation of net profit will likely increase its equity.