Summary

(1) Business Overview

As a pure holding company, the Company is responsible for group-wide business management and strategic planning, while its consolidated subsidiaries provide a wide range of construction consulting services, mainly to public agencies. According to the company’s financial results and financial statements, the group’s sales have been growing steadily, driven by strong demand for public investment in infrastructure development, aging infrastructure, disaster prevention, and other areas. In particular, the company’s strength lies in its ability to meet a wide range of public works needs on a one-stop basis by combining its mainstay general construction consultant business with compensation consultant and survey services. Recently, the company has been acquiring regional companies through M&A strategies, aiming to increase orders in each region. In addition, the company has established local subsidiaries overseas, mainly in Asia, and is receiving orders for infrastructure projects such as roads, water supply, and sewage systems, clearly demonstrating its policy of expanding its business both domestically and internationally. While public investment is stable, the company’s profit margin growth is modest due to intensifying bidding competition and difficulties in securing human resources.

(2) Performance Trends

Consolidated net sales of the Group have increased from approximately 30,394 million yen to 37,207 million yen over the past several years, and have been growing steadily on a stable base centered on public works projects, while taking in disaster prevention projects for local governments and overseas projects. Recurring profit has generally hovered around 4.7 billion yen, with the latest figure at 4.597 billion yen. While the percentage of high-value-added services such as compensation consulting and surveying has been increasing, costs for recruiting human resources and upfront investment have become burdensome factors, limiting the improvement in profit margins. However, according to financial results and financial statements, the company’s capital structure is stable and its financial position remains solid, with the equity ratio rising to over 65%.

(3) Future Focus

The need for renovation of aging infrastructure and disaster prevention is expected to grow both in Japan and overseas, and expectations are high for the company to win larger and longer-term projects by leveraging its expertise as a general construction consultant. In addition to Japan, where national land resilience policies and regional development-related measures continue to be implemented, demand for infrastructure is rising overseas, particularly in Asia, and the Company will pursue a policy of using its local subsidiaries as bases for expanding orders. The Group is introducing new technologies using DX and AI, and is aiming to establish a system that can efficiently handle projects despite the labor shortage. The dividend payout ratio is stable at approximately 60%, but the company is moving to allocate funds to M&A and overseas investments, so how to maintain a balance with shareholder returns will be a matter of concern going forward.

Business Overview

(1) Overview of Business Model

As a pure holding company, MHI oversees its group companies, which provide a wide range of services, including survey, design, compensation consulting, and construction supervision, mainly in the field of public works. The division of roles within the group is clear, with consolidated subsidiaries such as Eight Japan Technology Development Co. Since public works projects by government agencies cover a wide range of areas, from planning, design, bidding, and construction to compensation and inspections, the Group offers one-stop solutions to the government agencies that place orders by establishing a system that can cover all stages of the project.

For example, in road and bridge rehabilitation projects, the company conducts preliminary surveying and geological investigations, prepares design plans interspersed with compensation negotiations and environmental assessments, and provides supervision and safety management support during the construction phase. Since we can also be involved in inspections and maintenance management after construction is completed, a model has been established in which consulting services continue throughout the project lifecycle. While such a comprehensive support system is characterized by large order values, it is also essential to secure personnel and continue to invest in technology. In fact, according to financial results and financial statements, personnel costs account for a large portion of the group’s overall expenses, and securing and training engineers is a major management theme.

Furthermore, disaster prevention and mitigation have become increasingly important in recent years as the demand for renewal of aging infrastructure increases. River improvement, seismic reinforcement, and countermeasures against aging tunnels are being actively discussed, and the government and local governments are steering the course toward strengthening periodic infrastructure inspections and repairs. In line with this trend, the MHI Group is increasingly required to provide one-stop services ranging from surveys to construction supervision. In particular, advanced expertise is essential for measurement and analysis of large-scale structures such as bridges, tunnels, and dams. In the area of compensation consulting, the risk of overall construction delays increases without a smooth response over land acquisition and negotiations, so the need for companies like our group that have a diverse range of specialists is expected to remain strong.

In overseas business, demand for infrastructure is growing remarkably, especially in Asia. Many emerging and developing countries want to accelerate the development of roads, water supply, sewage systems, ports, airports, etc., and have high confidence in Japanese consulting technology and quality control. Under these circumstances, MHI has established local subsidiaries and is developing a strategy of proposing Japanese-style disaster prevention technology and compensation know-how adapted to overseas markets. However, we are entering the market in stages, taking into account political risk, foreign exchange risk, and local laws and regulations, and at present the ratio of overseas sales to total sales is not yet large. In the future, the company has clarified its policy to strengthen its overseas expansion in order to build a profit structure that does not depend solely on the Japanese domestic market.

A key feature of our business model is that we integrate survey, design, compensation, and construction supervision within the group, while focusing on public investment. The Company’s strength lies in its ability to provide compensation consulting services and integrate multiple technical fields that general design and surveying firms cannot handle, and its structure makes it easy to target higher unit prices for orders while being supported by stable demand for public works projects. On the other hand, the company is a human resource-intensive business, which means that labor management and organizational operations are costly, and if bidding competition intensifies, profit margins will be squeezed. The synergistic effects of the expertise of each group company and the localized sales force represent the Company’s business model in that it seeks to combine a stable revenue base with room for growth.

(2) Main Business Segments

 The Group’s businesses can be broadly classified into three segments: (1) general construction consultant business, (2) compensation consultant business, and (3) survey business. The general construction consultant business is the core of the group’s sales, providing comprehensive services such as planning, design, construction supervision, and client support for public projects for government agencies. In many cases, the projects involve public infrastructure such as roads, bridges, rivers, water supply and sewage systems, and tunnels, and each project is ongoing over a long period of time, enabling the company to generate stable sales. Although there is bidding competition, the company’s strength lies in the fact that it is highly specialized and there are only a limited number of companies that can provide consistent services.

Compensation consultancy is a segment that assists in acquiring land for public works projects, negotiating with landowners, and calculating compensation amounts. This work is essential for the facilitation of public works projects, but experienced personnel play an extremely important role because of the legal knowledge and communication skills required. Because there is a risk that inadequate compensation negotiations will delay the progress of the entire project and increase costs unnecessarily, public agencies tend to want to entrust this work to a reliable company. Since the MHI Group has a dedicated team with many years of expertise, orders in this segment contribute not only to sales, but also to the enhancement of the Company’s reputation.

Survey work is an area that primarily includes surveying, geological investigation, and environmental impact assessment, and is the starting point for construction consultant services. The process of understanding the topography, geology, and river basin characteristics and reflecting this in design plans is essential. In recent years, the use of aerial photography by drones and 3D laser surveying has increased, and there are more and more situations where precise data acquisition and analysis are required. Demand for observation and survey for the purpose of disaster prevention and mitigation is also growing, and combined with the trend toward stricter legal regulations from the perspective of environmental preservation, steady demand is expected to continue. Another positive factor is that an increasing number of government and municipal offices are reducing risk by conducting thorough surveys from the planning stage.

Each segment is closely related to each other, and it is easy to create strong synergies within the group, for example, knowledge gained from compensation consulting and survey work can be used in the design phase of the general construction consulting business. There are only a few companies that can handle the entire process of survey, design, compensation, and construction supervision, and this is an important point that supports the Group’s superiority. According to the financial results presentation, a strategy to raise profit margins by increasing the ratio of compensation and surveys has been partially underway in recent years, and the company’s approach to providing high value-added proposals in combination with its general construction consulting business is evident.

In terms of sales, the general construction consulting business accounts for the majority, but compensation consulting and survey services function as key segments that are highly regarded by public agencies and demonstrate a high level of expertise, contributing to the enhancement of the company’s corporate brand. Furthermore, in the overseas business, the provision of services that combine survey, design, and compensation is considered attractive to local governments and clients, which may positively affect the earnings growth of the company’s overseas offices. The Group’s business model is to combine the strengths of each of these segments and aim to increase orders in Japan and overseas.

In addition, sales and profitability of each segment will fluctuate from year to year. Public works projects are easily influenced by budget execution and political decisions, and figures may vary significantly depending on the timing of large project orders. Unit prices for compensation consulting and survey services vary widely, but when large projects are put together, their contribution to overall profits is high. One of the characteristics of this business is that it aims for stable operations throughout the year by sharing know-how and coordinating order information within the group, and by undertaking projects not only in specific fields but also in a comprehensive manner.

(3) Market Position and Competitive Advantage

Among construction consultants engaged in public works projects, the company stands out for its well-balanced mix of compensation consulting and survey services. Compared to major general contractors and major consulting firms, the company is in the mid-tier class in terms of size, but it has improved its ability to respond nationwide through aggressive mergers and acquisitions and by becoming affiliated with regional firms. By incorporating companies that specialize not only in metropolitan areas such as Tokyo and Osaka, but also in regional areas such as Hokkaido, Tohoku, and Kyushu, the company is making it easier to win projects from local governments and increase orders in areas where it faces little competition.

Negotiation skills and knowledge of laws and regulations in the field of compensation consulting are key to gaining the trust of government agencies, and we are able to handle complex negotiation projects with our long track record and expert human resources. This has enabled us to develop a system that can handle total pre-negotiations for large-scale projects such as road, bridge, and sewer maintenance. In survey work, the company has also introduced drones and 3D measurement technology, and is beginning to excel in disaster prevention proposals based on analysis of topographical and meteorological data. By securing the human resources and facilities to back up these advanced technologies , the company is differentiating itself as a comprehensive consultant that is more than just a civil engineering design firm.

In addition, the company is in a position to accumulate stable projects in line with long-term plans for public investment, which will easily strengthen its financial position. The fact that the capital adequacy ratio is at a high level also stabilizes the market position. Furthermore, being listed on the prime market makes it easier for the company to raise funds from investors, giving it the leeway to take on major capital investments and M&As. Overseas, Japan’s advanced civil engineering technology and quality control are highly regarded, especially in Asia, and the Group has the advantage of differentiating itself from local companies by offering an all-in-one service that includes compensation and survey work, thereby targeting additional earnings.

The current trend toward greater awareness of disaster prevention and mitigation is also working in our favor. In Japan, where earthquakes, floods, landslides, and other disasters occur frequently, there is an urgent need to renew aging infrastructure and develop disaster-prevention infrastructure, and only a few companies have the systems in place to respond to these needs in a comprehensive manner. Our ability to provide integrated compensation, survey, design, and construction supervision services is likely to be highly valued by clients, as it reduces the time and effort required for project management. Against this backdrop, the Company’s strengths will become more apparent when demand for public investment is firm, providing a driving force to solidify its competitive advantage.

On the other hand, in a bidding situation where competition with the industry’s largest firms and general contractors is intensifying, the company may struggle on the price front. However, by focusing on highly specialized areas such as specific regions and disaster prevention-related projects, MHI aims to win orders without relying solely on price competition. A virtuous cycle is beginning to emerge in which evaluation points at the time of bidding rise as the company accumulates a track record, making it easier to participate in larger, more complex projects. The company’s strategy of trying to gain room for growth through overseas expansion while enhancing its position in the domestic market through this policy may lead to a development that will further strengthen the company’s market position.

(4) Market Background

Japan’s construction consultant market is experiencing strong demand for renovation of aging infrastructure and disaster prevention measures, despite the country’s declining birthrate, aging population, and fiscal constraints. With the promotion of the Basic Plan for Strengthening the National Land Infrastructure and the Infrastructure Longevity Plan, the number of projects to renew bridges, tunnels, port facilities, and water supply and sewage systems is expected to increase. In particular, bridges and tunnels were built intensively during the high-growth period, and it is estimated that demand for renewal and repair will peak in the next 10 to 20 years. In addition, river bank improvement and retaining wall construction to prevent landslides are also prioritized as natural disaster countermeasures, and budgetary measures in the disaster prevention field continue to be expanded.

Looking at overseas markets, rapid urbanization and economic growth in the Asian region have created a need for a variety of infrastructure improvements, including roads, bridges, railroads, ports, and airports. In emerging economies, there are high expectations for Japanese technology and expertise, and there are opportunities for ODA projects and projects ordered by international organizations. However, there are also many challenges, including political risk, compliance with local legal systems, and exchange rate fluctuations, and some companies remain cautious. Against this backdrop, we are adopting a strategy of building up our business bases in stages and accumulating orders in cooperation with local firms.

On the other hand, the challenges facing the industry as a whole include a shortage of human resources and intensifying competition. Veteran engineers are retiring in large numbers, and the hiring of young engineers is not keeping pace. In addition, bidding competition is becoming increasingly severe, especially for design and construction management services, where there are many competitors and the risk of low-cost competition cannot be denied. Although the national and local governments have introduced a comprehensive evaluation system from the perspective of ensuring quality, there is an aspect that tends to lead to de facto price competition, and the ability to provide high value-added services is essential for business stability.

Growing environmental awareness is also changing the market. As the need to reduce greenhouse gas emissions, protect ecosystems, and introduce renewable energy sources increases, construction consultants are expected to adopt more sustainable design and technologies that reduce the environmental burden. Investment in new technologies, such as BIM/CIM to save labor in the design process and AI to analyze large amounts of data to help assess disaster risks, is also becoming a major trend. Construction consulting firms are increasingly collaborating with IT firms and research institutions to propose smart cities and advanced infrastructure management, and DX promotion is becoming a factor that determines competitiveness.

Thus, while public investment in Japan is expected to decline over the long term, demand in specific fields such as disaster prevention and response to aging society will continue, leaving a certain amount of room for growth, including overseas. At a turning point where digital technology and construction technology are converging, we believe that opportunities for new business creation are latent in our company, which has diverse areas of expertise within the group. As the sustainable maintenance of social infrastructure becomes an issue, our role as a general consultant will continue to grow in importance.

Performance Trends

(1) Summary of Recent Business Results

The Group’s consolidated net sales for the most recent three years expanded from the mid 30,000 million yen range to 37,207 million yen. According to the financial results presentation, this is due to an increase in orders for large-scale projects and in the area of compensation consulting, supported by stable demand for public investment, mainly from government and other public agencies. The company has been aggressively acquiring projects for repair of roads and bridges and strengthening of river levees, driven by the promotion of national land resilience and heightened awareness of disaster prevention, enabling the company to post stable sales throughout the year.

The effects of M&A have also contributed to sales growth. The company has acquired regional consulting firms with infrastructure expertise in heavy snowfall and cold regions, such as Hokkaido and the Tohoku region, and is spreading the expertise it has developed there throughout the group, leading to an increase in orders from local governments. In its overseas business, the company has begun to receive orders for basic infrastructure projects such as roads, water, and sewage systems, mainly in Asian countries, and business matching and bidding participation by local subsidiaries are gradually yielding positive results. However, the percentage of overseas sales is not yet that large, and further expansion is expected in the medium to long term.

On the profit side, recurring profit has been hovering around 4.7 billion yen. While an increase in projects in high-value-added services such as compensation and surveys has contributed to earnings, costs associated with recruiting human resources and DX investments have also been incurred, and the improvement in profit margin has not been as significant as expected. Although labor costs tend to increase structurally, public projects for government agencies are budgeted with a relatively high degree of certainty, making it easier to generate stable cash flow over the long term. In recent years, in particular, there has been an increase in large-scale projects related to the strengthening of national land infrastructure, and these projects have boosted consolidated sales. However, there is also a risk that competition for some of the construction supervision and design work will be intense and bidding prices will be lower than expected, which could squeeze profit margins.

On a non-consolidated basis, sales of our direct business reached 1,903 million yen and ordinary income expanded to 1,439 million yen. This is due not only to our function as a manager and coordinator of group companies, but also to the fact that we directly undertake some consulting projects. In some cases, the Company takes the lead in making investments, especially when establishing overseas bases or introducing new technologies, so sales in new markets are expected to grow in the future. It is suggested that the company aims to pursue stable growth and new business development at the same time through both the domestic business that the subsidiary will be responsible for and the overseas business that the Company will lead.

Looking at the past three years, the profit margin has been close to flat compared to sales growth, and increases in labor and outsourcing costs have put pressure on profits. The company’s challenge will be how to maintain or raise profit margins while promoting reforms in work styles and addressing the shortage of engineers. On the other hand, the company’s equity ratio has reached over 65%, giving it a remarkable sense of financial stability. The company’s business model, which is centered on public works projects, is less susceptible to major economic fluctuations, and there is room to expand its geographic coverage and areas of expertise through mergers and acquisitions. Overall, while the company’s sales continue to expand, the focus will be on how to manage profit and investment costs.

(2) Analysis of Income Statement

Looking at the Group’s income statement, cost of sales and SG&A expenses account for a large percentage of net sales. This structure is unique to the construction consulting business, which incurs high personnel and subcontracting costs, and as the number of projects and the size of projects increase, the corresponding number of engineers and the cost of dispatching specialists are likely to increase. Although public works projects can expect a certain degree of profitability at the bidding stage, bidding prices tend to fall in areas where there are many competitors, and the Company is seeking to secure profits by increasing orders mainly in high-value-added areas.

Although there were some cases where the operating profit margin was temporarily boosted by the active activities of the national land reform and compensation consulting business, the overall improvement was limited. It is undeniable that costs associated with the introduction of cutting-edge technology and ICT investments are recorded as SG&A expenses, and this is a factor that is hindering the improvement of the profit margin. However, these investments are likely to lead to operational efficiency and cost reductions in the long run, and the development of new services is expected to increase orders, so the short-term pressure on profits can be considered strategic.

Recurring profit is calculated by adding or subtracting financial income and expenses to or from operating income. In the case of the Group, the burden of interest on borrowings is relatively small due to its stable financial condition, and the recurring profit margin does not differ significantly from the operating profit margin. The Company’s policy is to raise the overall profit margin by expanding compensation consulting and survey services, and if the shift is successful, profits on the income statement have the potential to accumulate further. However, since the Company already has multiple revenue streams, a risk diversification effect can be expected.

(3) Balance Sheet Analysis

The company’s balance sheet shows a high degree of financial stability, with an equity ratio of approximately 65%. This is likely due to the company’s stable cash flow from its business model, which is centered on public works projects, and its high creditworthiness as a prime market listed company. While the company has a certain amount of interest-bearing debt to fund M&A and capital expenditures, it is not excessively leveraged. In terms of assets, there are many accounts linked to the progress of public works projects, such as accounts receivable and costs on uncompleted construction contracts, but it appears that adjustments are being made within the group so that there is not a large bias at the end of the fiscal year.

In particular, the high capital adequacy ratio is a major strength for accelerating additional investments and overseas expansion. The company can easily raise funds from financial institutions smoothly, and even if large-scale M&A projects arise in the future, it is likely to be able to execute them while minimizing financial risk. The company maintains a sufficient liquidity ratio, so the risk of cash flow drying up in the event of unexpected expenditures is considered low. According to the financial results presentation, the company expects to continue to receive stable orders for public works projects in the future, and there is a strong likelihood that the company will maintain a healthy balance sheet.

(4) Analysis of Cash Flow Statement

The cash flow statement shows that operating cash flow has been stable and positive due to start-up and interim payments from public works projects. Although the collection of funds may be delayed during the term for projects with longer construction periods, the overall cash inflow is stable because of the leveling off of payments from multiple projects at a stage when the number of projects is increasing. The fact that many projects, such as compensation and surveys, require results in a relatively short period of time is also thought to contribute to the stabilization of cash flow.

Investment cash flow has seen increased investment in research equipment such as drones and 3D scanners, software development, and system integration, as well as cash outflows from mergers and acquisitions in recent years. Although these investments are not immediately reflected in profits, they are positioned as essential for improving operational efficiency and increasing the added value of services over the medium to long term. The company’s financial cash flow is balanced between dividend payments, repayment of debt, and new financing, but it is not heavily dependent on borrowing due to its high level of equity capital.

Free cash flow has remained stable in positive territory, indicating that the Company has room to both invest in growth and return profits to shareholders. The fact that we can easily forecast future cash flows to some extent by securing public projects is also a favorable factor in our risk management. Even if the company decides to expand overseas or engage in large-scale M&A in the future, it can use a certain amount of cash buffer, and thus, the company’s financial flexibility is considered to be high enough.

(5) Analysis of Performance Indicators

ROA (return on assets) is around 1.5%, which is a little low compared to major companies in terms of the degree of effective utilization of total assets, but it is within the acceptable range for the industry, backed by stable earnings from public works projects and asset expansion through M&A. EBITDA has been gradually increasing over the past few years, and the company’s ability to generate cash while making upfront investments is commendable.

With the dividend payout ratio hovering around 60%, the company is allocating a majority of its profits to shareholder returns, but has clarified its policy of actively retaining the remaining profits to allocate funds to business expansion and M&A. According to the company’s financial results presentation, the ratio of capital investment to sales is gradually increasing as the company introduces new technologies and strengthens its overseas business, and it is systematically implementing planned increases in system costs related to DX promotion and human resource development costs. Looking at these indicators comprehensively, the company’s management stance of seeking a growth path while maintaining a sense of stability is evident, and there is no indication of extreme deterioration in any specific indicator.

Medium-Term Management Plan and Growth Strategies

(1) Overview of the Medium-Term Management Plan

In its medium-term management plan, the MHI Group has positioned the capture of domestic demand for the renewal of aging infrastructure and the gradual expansion into overseas markets as its main growth drivers. The plan calls for stabilizing earnings based on long-term demand in Japan, such as for projects related to national land resilience and disaster prevention and mitigation, while participating in infrastructure development projects in Asia. Specifically, the three pillars of the plan are (1) expansion of high-value-added services centered on compensation consulting and survey services, (2) improvement of operational efficiency through DX investment and the use of new technologies as services, and (3) integration with regional and overseas companies through M&A and business alliances.

Infrastructure renewal plans promoted by the Ministry of Land, Infrastructure, Transport and Tourism and local governments include many long-term projects such as large-scale repair of bridges and tunnels, and river and coastal disaster prevention work, which can easily become a stable source of orders. In addition, as awareness of disaster prevention increases, the importance of compensation consulting and advanced survey work will grow, and a solid track record in this area will make it easier to secure highly profitable projects. Although there are many uncertainties overseas, including political and economic factors, there are also opportunities for Japanese firms to work on ODA and local government projects, and we have announced that we will step up our strategy to export the technology and knowledge we have cultivated in Japan.

In relation to DX, the company is developing measures to simultaneously increase productivity and quality by reducing paper and traditional manual processes through the introduction of BIM/CIM technology and the enhancement of cloud-based project management systems. In conjunction with these measures, the company has announced a policy to hasten the development of human resources who can respond to new technologies by establishing training programs and internal infrastructure. In the medium term, the company expects these DX investments to lead to significant improvements in operational efficiency, and it aims to further increase orders by strengthening its ability to respond to projects. In public works bidding, proposals for ICT utilization and cost reductions will be evaluated, and DX promotion is also seen as an important differentiation strategy.

(2) Investment Plan and Priority Measures

In order to achieve the goals outlined in its medium-term management plan, the Group has positioned human and technological investment as key priorities. In terms of human resources investment, the company intends to actively hire personnel with strong expertise in areas such as disaster prevention, compensation, and the environment, and to focus on training existing employees.  For engineers, the company will promote support for qualification acquisition and enhancement of training programs, while investing in the creation of a comfortable working environment to prevent young employees from leaving the company. Sharing know-how when incorporating AI and cloud technologies into business operations is also an important theme, and the company aims to improve the quality and profitability of its operations by raising the level of its human resources over the medium to long term.

Regarding technological investment, the company is introducing equipment for high-speed, high-precision surveys using drones and 3D scanners, upgrading its BIM/CIM and geographic information systems, and developing its own analysis software. Companies that can respond to i-Construction promoted by the Ministry of Land, Infrastructure, Transport and Tourism are likely to have an advantage in bidding competition, and we are trying to increase our competitiveness in acquiring projects through DX investments. In addition, through M&A and business alliances, the company has a policy of supplementing its lacking technological areas and local client base, and aims to build a system that enables it to receive orders for highly difficult projects such as compensation negotiations and environmental surveys through collaboration with local companies.

At the same time, the company appears to be paying attention to the financial risks associated with excessive investment expansion, and has indicated plans to execute investments in stages while maintaining the capital adequacy ratio at a certain level. The results of the investments may not only increase sales and profit margins, but may also spread to growth in overseas business and acquisition of projects in new fields, indicating the company’s intention to further enhance its presence as a general construction consultant.

(3) New Businesses and Business-Specific Growth Strategies

Our new businesses include consulting services combining advanced fields such as disaster risk assessment and environmental monitoring. The Company plans to expand its system for using AI to analyze topographical, meteorological, and geological data to predict disasters and propose disaster prevention measures, and may expand into a wide range of areas beyond the framework of construction consulting. In overseas projects, the company is recognized for its integrated provision of compensation and disaster prevention expertise, an advantage that few of its competitors have, and it aims to offer a total package of proposals together with bridge construction and water supply and sewerage maintenance.

By business segment, in the general construction consulting business, the company plans to further expand orders for construction supervision and design support for large-scale projects, and in the compensation consulting business, it plans to strengthen its system for undertaking site negotiations and right-of-way adjustments. In the surveying business, the company is expected to strengthen its proposal-based marketing to local governments and private companies in anticipation of growing demand for precision surveying and environmental assessment services using advanced technology. In addition to upgrading these three existing pillars, the Company’s strategy of entering emerging markets and developing unique services in the combined domain of disaster prevention and IT is positioned as a growth engine for the Company.

News & Topics

(1) Latest Corporate News

In recent years, major developments in the MHI Group have been reported in the acquisition of regional consulting firms and the expansion of orders for overseas projects. In the case of acquiring a company with cold-weather design know-how, such as Hokkaido Modern Design Co. According to the company’s financial results presentation material, these M&As have not only resulted in sales, but also in the improvement of engineers’ skills, and the utilization of human resources across the group is progressing.

In relation to disaster prevention, Eight Japan Technology Development Co., Ltd. has concluded an agreement to undertake comprehensive consulting for municipalities on emergency surveys and recovery plans in the event of a disaster, and has produced results in the form of damage estimation and review of evacuation center plans in the event of large-scale flooding. Such efforts to enhance local disaster preparedness in cooperation with local governments have been highly evaluated, and there has been a noticeable trend toward additional commissioned work and new projects. As budget allocations related to national land resilience are being expanded, the Group’s disaster prevention solutions are attracting attention in many fields.

In overseas news, we are beginning to receive orders for consulting work in the form of participation in road, water, sewer, and urban infrastructure development plans in emerging Asian countries, and are increasingly cooperating with local governments and government agencies through our local subsidiaries. In many cases, especially in regions where social infrastructure is not yet well-developed, the process of negotiating compensation and explaining the situation to local residents is unclear, and companies with Japanese-style careful negotiation know-how tend to be welcomed. Our group has focused on this strength and is presenting an all-in-one model of survey, design, and compensation. It is reported that some pilot orders have been received successfully, and the company plans to further expand its services in the future.

At the briefing held for investors after the transition to the prime market, the latest results of DX promotion and the progress of M&A were reported, and the company clarified its policy of emphasizing shareholders and investing in growth. Specifically, the company expressed its strategy to establish a leading position as a construction consulting company by channeling cash flow into technological investment and overseas expansion while maintaining dividend levels. As a result, the company’s financial results presentation also indicated that public works orders are expected to be strong this year and in the next fiscal year, and that overseas projects are expected to increase gradually.

In addition, the Ministry of Land, Infrastructure, Transport and Tourism has been promoting policies to increase the use of ICT in compensation consulting and survey work, and the Group is further differentiating itself from its peers by taking advantage of its early introduction of drones and AI analysis in practice. Such moves are likely to make it easier to improve overall evaluation points in bidding for new projects, which could further expand the scale of orders in the long run. There have also been some functional enhancements and reorganizations of subsidiaries, and it is noteworthy that the group as a whole is gradually expanding its business and improving its efficiency at the same time.

Company Profile

(1) Basic Information (Company Profile, Location, etc.)

The Company is a pure holding company listed on the Prime Market of the Tokyo Stock Exchange, with its head office located in Tokyo. Capitalized at 2,803 million yen, the company has 21 consolidated subsidiaries. The company’s core business is consulting projects for public agencies, uniting general construction consultant companies, compensation consultants, and companies with strengths in survey services, such as Eight Japan Technology Development Co. In addition to public works projects for government agencies, the company has established local subsidiaries overseas, mainly in Asia, to handle infrastructure projects such as roads, water supply, and sewage systems.

The group as a whole covers a wide range of services including surveying, geology, environment, compensation, design, and construction supervision, and has established a comprehensive service system that is involved in the entire lifecycle of public works projects. Having been listed on the prime market, the company is further improving its governance and disclosure systems, and is focusing on providing regular information and investor relations through financial results presentation materials. The company is unique in that its numerous offices are located throughout Japan and provide community-based sales and technical support.

(2) History and Important Milestones

The Company’s origins date back to 2007, when it was jointly established by Eight Consultants Co., Ltd. and Japan Technology Development Corporation through a share transfer, and was listed on the Tokyo Stock Exchange in the same year. Ltd. was established in 2008 through the split-off of the measurement business and the transfer of shares, and in 2009, the construction consultant business of Nippon Engineering Consultants Co. In 2015, Eight Japan Technology Development Corporation merged with EJ Business Partners Co.

Since 2017, the company has made several companies its subsidiaries, including Hokkaido Modern Sekkei Inc., Arc Consultants Inc. and i-Develop Consultants Inc. to strengthen its cold region design, compensation field and environmental survey field. The Company shifted to the prime market following the reorganization of the Tokyo Stock Exchange’s market segmentation, creating a financing environment that facilitates M&A and new investments in Japan and overseas. Through this series of history, the Company has formed a broad service line as a general construction consultant and built a structure that enables it to win projects on a nationwide scale while involving companies that specialize in local markets.

(3) Organizational Structure and Key Management Team

As a pure holding company, MHI oversees its group companies and has a governance structure with the Board of Directors at the top. The president and board members are mainly veterans with many years of experience in the public works and consulting industries, and the management is supported by personnel with expertise in various fields such as disaster prevention, environment, and overseas business. The consolidated subsidiaries are divided according to their areas of expertise, such as general construction consultants, compensation consultants, and survey services, with the presidents and directors of each company making decisions close to the field, while establishing a system to promote business according to the group’s overall policies.

The company has also established check functions such as auditors and a compliance committee, and is strengthening its governance as a listed company on the prime market. However, the company is implementing measures to reduce duplication of work and waste by ensuring information sharing between the head office and each subsidiary. The company’s key management team includes many engineers with experience in public works projects and academic knowledge, which enables the company to make decisions with a thorough understanding of both the technical and business aspects of its business.

shareholder return

(1) Dividend Policy and History

The Company’s basic policy is to provide stable shareholder returns and maintain a dividend payout ratio of approximately 60%. The dividend per share was increased from 503 yen in the 13th fiscal year to 555 yen in the 17th fiscal year, and the company has also indicated in its financial results presentation that it intends to continue and increase dividends over the medium to long term. The company’s earnings results are less subject to extreme fluctuations due to the large number of public works projects and its high capital adequacy ratio, and it has made clear that it will use the funds to return profits to shareholders if it is able to secure a certain level of profit.

However, the company also has a policy of emphasizing investment in M&A and overseas business, and does not place the highest priority on dividends. The company’s approach is to expand dividend resources through sustainable profit growth, and it has adopted a balanced strategy of building up retained earnings while paying an appropriate level of dividends as needed. There is room for further increases in the dividend per share if the company continues to expand its business both domestically and internationally and profits increase steadily, but at the same time, management has also mentioned its policy of maintaining financial soundness.

(2) Share buybacks and their impact

Although the Company has announced that it will make flexible and prudent decisions regarding share buybacks, has not conducted any large-scale share buybacks in the recent past. The company’s emphasis on securing liquidity in the prime market and preserving M&A funds is evident, and at present it has not shown any plans to aggressively buy back its own shares. Even though the company has a large surplus in its financial statements, investments directly related to growth, such as DX investments, expansion of overseas bases, and acquisitions of regional companies, appear to be a priority for the company.

While share buybacks are a means directly linked to shareholder returns and improvement in per-share indicators, opinions are divided as to whether companies in a growth phase should give priority to share buybacks. The management is taking the position that share buybacks are an option when necessary after taking a multifaceted view of future investment opportunities, so it can be read as a policy of flexibly making decisions depending on stock price trends and progress in business development, while focusing on dividend-oriented return policies at present. Currently, the company maintains a high capital adequacy ratio, leaving room for the company to consider share buybacks in the future after its major investments have run their course.

investment risk

(1) Factors Affecting Business Performance

Since the Company’s performance is heavily dependent on public works projects, the scale of orders received may be affected by the budgeting of the government and local governments. During recessions or when fiscal reconstruction is emphasized, public investment is likely to be reduced, and there is a risk that this will directly lead to a drop in new projects. Conversely, if the government expands its budget for national land resilience and disaster prevention, it will be easier to win multiple orders for large-scale projects, which should boost earnings. In addition, while local government projects have been won by group companies with close ties to the local community, there is a concern that a slowdown in the local economy or population decline could slow tax revenue growth and restrain infrastructure investment by local governments.

Lower bid prices due to bidding competition are another risk factor. If large general contractors and major consultants bid low, profit margins may become tighter. Especially for projects that require long-term construction periods, costs will increase each time design changes or additional measures are required, but depending on the terms of the contract, there may be cases where costs cannot be fully passed on to the client. Furthermore, as the shortage of human resources worsens within the group, outsourcing costs increase, which can easily lead to higher labor costs and lower service quality. The combination of these factors could put temporary pressure on the Company’s performance.

(2) Industry-specific risks

A risk common to the construction consulting industry in general is the aging of human resources and the growing shortage of younger workers. The practical work of engineers and compensation consultants requires experience and know-how, and as veteran employees continue to retire, an increasing number of companies are unable to secure enough young people to lead the next generation.  In addition, while reform of working hours and working styles is progressing, projects themselves tend to involve long working hours, creating a situation where younger workers tend to shy away.

In addition, there are always policy risks, such as changes in the bidding system and shifts in public investment focus areas. There are periods when large budgets are allocated to disaster prevention and environment-related projects, and other times when roads, sewers, and urban redevelopment are prioritized as part of economic stimulus measures. While companies need to respond to changes by offering a wide range of technologies in a variety of fields, expanding too broadly into specialized areas risks a decline in profitability due to the expansion of human resources and capital investment. Failure to strike a balance between the two could lead to a weakening of the company’s overall profit structure.

(3) Financial and Operational Risks

Although the Group has been aggressively pursuing its M&A strategy, an increase in goodwill and interest-bearing debt is inevitable in the event of a large-scale acquisition. If the acquired company fails to generate earnings as expected, impairment risk may materialize. In addition, expanding overseas operations will expose the company to foreign exchange and political risks, as well as the burden of strengthening governance while complying with local laws, regulations, and taxation systems. There is also concern that inadequate management of overseas subsidiaries could lead to accounting irregularities and compliance violations, resulting in damage to the credibility of the entire group.

While public works projects are highly stable, cash flow may be skewed depending on the type of project contract and payment terms. In particular, a combination of extended construction periods and bidding delays for large-scale projects could push back the posting of sales, while at the same time affecting cash flow as payments for engineers and subcontractor expenses are made ahead of schedule. Furthermore, if upfront investments in DX, AI, and other areas do not turn profitable as quickly as expected, the increase in SG&A expenses could put pressure on management. To manage these risks comprehensively, project selection and investment recovery planning are essential.