Judo Master Helms One-Time ‘Hopeless’ Railway to $4 Billion IPO

(Bloomberg) -- When Kyushu Railway Co. was formed almost thirty years ago, it was “hopeless” to think the company might one day go public, Chairman Koji Karaike says.

Now the company, which loses money on its railway lines and generates profit from real estate, is on the verge of completing a 416 billion-yen ($4 billion) IPO in what will be the world’s third-biggest listing this year. The shares are set to start trading in Tokyo Tuesday.

Karaike, a 63-year-old judo black belt and published author, has spent almost three decades helping turn JR Kyushu into a profitable, diversified enterprise, which gets more than half its revenue from operations other than trains.

“No one, including ourselves, thought we’d ever be able to list our shares” when the company was formed from the breakup of Japan’s nationalized railway behemoth in 1987, Karaike said in an Oct. 11 interview at its Fukuoka headquarters. “Our losses were the equivalent of almost 30 percent of sales.”

Karaike says the company “faced a sense of crisis that we would fade away,” which spurred the lifelong railway man to help diversify JR Kyushu’s revenue. He built up its non-rail operations from real estate to restaurants, and now has eyes on investments in Southeast Asia.

No Goldmine

JR Kyushu, based in Fukuoka City, almost 890 kilometers (550 miles) from Tokyo, serves a population of about 13 million on the nation’s third-largest island. Most of its profit came from its station and real estate business last fiscal year, while its transportation business, including railways, posted a 10.5 billion yen operating loss.

Japan’s other major listed railways have enviable profit margins, with the two largest operators, East Japan Railway Co. and Central Japan Railway Co. boasting operating margins that top even Apple Inc. in recent quarters. JR Kyushu has had to work harder, Karaike says.

“We don’t have goldmines like JR East’s Yamanote line or JR Central’s bullet train,” he says. This drove the company to diversify faster than its other railway cousins. “We had to as our level of commitment was different.”

Challenges Signaled

While the listing looks to be a success, with gray market shares trading above the IPO price, it faces challenges ranging from the country’s population decline to the threat of natural disasters.

“The biggest problems facing the company are the declining population and money-losing routes,” said Kazumi Tanaka, a Tokyo-based analyst specializing in IPOs at DZH Financial Research. “They should take the listing as a chance to change the structure of the company. It’s natural for a private company to view the continuation of loss-making lines as a risk to management.”

Dwindling population makes it harder to justify maintaining 2,273 kilometers of track and more than 500 stations. More than half of its 30 busiest stations serve fewer than 10,000 customers a day. The Kyushu region has also been beset with disasters, from the looming threat of volcanoes to the typhoons that pummel the island each summer.

In April, the strongest earthquake to hit Japan since 2011 devastated the Kumamoto region, derailing JR Kyushu’s bullet train and halting lines across the island. The quake cost JR Kyushu 17.5 billion yen in lost sales and repairs. While airlines resumed service to Kumamoto airport within a week of the earthquake, JR Kyushu took almost two weeks to restore service.

‘Do It!’

Sales have recovered from the earthquake and people are starting to come to Kyushu again, Karaike said. Foreign visitors to the region more than doubled from 2 years earlier to top 2.8 million last year.

Now, tourists don’t have to travel by train to boost JR Kyushu’s profits. Karaike helped turn around a loss-making bus business and oversaw the launch of a high-speed ferry service to South Korea. As head of the company’s food unit, he built a restaurant chain that opened outlets across Japan and expanded to Shanghai in 2012, where it now has five eateries.

Promoted to president of the company in 2009, he oversaw the completion of the bullet train line across Kyushu and the opening of the flagship Hakata station building, which houses a department store and dozens of shops and restaurants, two years later.

“After a year we knew both of these were successes,” he said. “That’s when we first felt that an IPO was possible.”

Karaike has published several books, including a 2014 management book titled “Do It! Koji Karaike’s Ability to Dream Creates Power” and a text published in June on the company’s struggles and new businesses, which emphasizes the importance of customer service and how to motivate employees. The book’s a top seller in the business section, local bookstore Maruzen says.

To contact the reporters on this story: Chris Cooper in Tokyo at ccooper1@bloomberg.net, Kiyotaka Matsuda in Tokyo at kmatsuda@bloomberg.net. To contact the editors responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net, Yusuke Miyazawa at ymiyazawa3@bloomberg.net, Gearoid Reidy, Sam Nagarajan

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