Strong Shinkansen Momentum to Take a Breather in the Near Term; FVE Maintained at JPY 24,000

We maintain our fair value estimate for narrow-moat Central Japan Railway, or JRC, at JPY 24,000. For the company’s fiscal year ending March 2019, revenue and operating income came in above our forecasts, driven by strong commuter volume growth on the Tokaido-Shinkansen line, and the solid results of its real estate and merchandise businesses. We remain optimistic over the long-term outlook of the its core transportation segment, which is primarily led by the Tokaido-Shinkansen line connecting Tokyo, Osaka and Nagoya, and drives 94% of JRC’s operating profit. However, we forecast a slowdown in revenue growth during fiscal 2020 given management expectations that demand will slow, and we think this will be driven partly by the consumption tax hike slated for October 2019. This is in line with what happened after the previous consumption tax hike in April 2014. In addition, gross margins may pull back on the back of increased depreciation. This nonetheless has a limited effect on our fair value estimate, with little change to our free cash flow projections. We think JRC is fairly valued, given its current risk versus rewards potential.