Company Reports

Japan Exchange Group’s strategy has long focused on various attempts to help revitalize the Japanese economy and financial markets. Over the past decade, this strategy took shape through various mergers and acquisitions, such as the merger between predecessor companies Tokyo Stock Exchange and Osaka Securities Exchange in 2013 and the acquisition of Tokyo Commodity Exchange in 2019. Through these mergers and acquisitions, the Japan Exchange Group has become a vertically integrated securities exchange business, with offerings across the full breadth and depth of exchanges and a dominant market share in listing, trading and clearing in Japan. JPX’s current strategy continues in a similar vein, with its medium-term management plan aiming to reinvigorate the Japanese economy and financial markets, primarily by focusing on supporting fundraising and asset formation.

We raise our fair value estimate for wide-moat Japan Exchange Group by 4% to JPY 2,620 per share, following its full-year results and the continued weakening of the Japanese yen. JPX reported a net income of JPY 62 billion for the year, an increase of 31% over the prior year.

Japan Exchange Group’s strategy has long focused on various attempts to help revitalize the Japanese economy and financial markets. Over the past decade, this strategy took shape through various mergers and acquisitions, such as the merger between predecessor companies Tokyo Stock Exchange and Osaka Securities Exchange in 2013 and the acquisition of Tokyo Commodity Exchange in 2019. Through these mergers and acquisitions, the Japan Exchange Group has become a vertically integrated securities exchange business, with offerings across the full breadth and depth of exchanges and a dominant market share in listing, trading and clearing in Japan. JPX’s current strategy continues in a similar vein, with its medium-term management plan aiming to reinvigorate the Japanese economy and financial markets, primarily by focusing on supporting fundraising and asset formation.

We increased our fair value estimate by 4% to JPY 2,520 per share after wide-moat-rated Japan Exchange Group, or JPX, posted positive third-quarter results. In the first nine months of fiscal 2023, operating revenue totaled JPY 112 billion, and operating income reached JPY 66 billion, 11%, and 28%, respectively, increases compared with the previous corresponding period. While the cumulative three-quarter results are tracking ahead, the company maintained its full-year earnings guidance.

We raise the fair value estimate for wide-moat-rated Japan Exchange Group, or JPX, by 5% to JPY 2,420 per share, to reflect the upward revision of earnings guidance released on Sept. 25, 2023. Given the continuing strength in Japan’s stock market and trading activity through to the second quarter of fiscal 2023, JPX has upgraded the assumptions for average daily trading values and volumes for fiscal 2023 ending March 2024. Revenue is forecast to grow by 6% to JPY 143 billion and underlying EBIT is forecast to lift 12% to JPY 77 billion, equating to a 300-basis-point improvement in operating margin to 54%.

Japan Exchange Group’s strategy has long focused on various attempts to help revitalize the Japanese economy and financial markets. Over the past decade, this strategy took shape through various mergers and acquisitions, such as the merger between predecessor companies Tokyo Stock Exchange and Osaka Securities Exchange in 2013 and the acquisition of Tokyo Commodity Exchange in 2019. Through these mergers and acquisitions, the Japan Exchange Group has become a vertically integrated securities exchange business, with offerings across the full breadth and depth of exchanges and a dominant market share in listing, trading and clearing in Japan. JPX’s current strategy continues in a similar vein, with its medium-term management plan aiming to reinvigorate the Japanese economy and financial markets, primarily by focusing on supporting fundraising and asset formation.

Japan Exchange Group’s strategy has long focused on various attempts to help revitalize the Japanese economy and financial markets. Over the past decade, this strategy took shape through various mergers and acquisitions, such as the merger between predecessor companies Tokyo Stock Exchange and Osaka Securities Exchange in 2013 and the acquisition of Tokyo Commodity Exchange in 2019. Through these mergers and acquisitions, the Japan Exchange Group has become a vertically integrated securities exchange business, with offerings across the full breadth and depth of exchanges and a dominant market share in listing, trading and clearing in Japan. JPX’s current strategy continues in a similar vein, with its medium-term management plan aiming to reinvigorate the Japanese economy and financial markets, primarily by focusing on supporting fundraising and asset formation.

We increase our fair value estimate for wide-moat-rated Japan Exchange Group by 3% to JPY 2,300 per share from JPY 2,230 following a stronger-than-expected first-quarter result. Rising stock markets in Japan helped boost the exchange’s net income by 47% on the previous corresponding period. Our fair value increase is driven by an upgrade to our near-term estimated revenue from higher trading activity, partially offset by higher operating expenses. The exchange’s limited increase in operating expenses compared with its increase in trading revenue, we believe, reflects the inherent operating leverage and positive volatility exposure within exchange businesses like Japan Exchange Group, as increased volumes and values require small incremental costs. Nevertheless, at current prices, the exchange’s shares screen as slightly overvalued.

Japan Exchange Group’s strategy has long focused on various attempts to help revitalize the Japanese economy and financial markets. Over the past decade, this strategy took shape through various mergers and acquisitions, such as the merger between predecessor companies Tokyo Stock Exchange and Osaka Securities Exchange in 2013 and the acquisition of Tokyo Commodity Exchange in 2019. Through these mergers and acquisitions, the Japan Exchange Group has become a vertically integrated securities exchange business, with offerings across the full breadth and depth of exchanges and a dominant market share in listing, trading and clearing in Japan. JPX’s current strategy continues in a similar vein, with its medium-term management plan aiming to reinvigorate the Japanese economy and financial markets, primarily by focusing on supporting fundraising and asset formation.

We are placing Japan Exchange Group under review pending a change in analyst. We will provide further updates on coverage resumption in January 2023.

Japan Exchange Group’s second-quarter result was weaker on higher operating expense as the wide-moat-rated exchange maintained its investments in its technology platform. Operating expense increase of 10.2% to JPY 33.2 billion against the same period last year outpaced revenue growth of 1.5% in the second quarter, resulting in a 5.6% decline in net income. There is no change to operating expense guidance of JPY 68 billion for the full year, but the exchange did lift its trading volume assumption for its derivatives division. However, this is subject to market conditions and we leave our forecast unchanged, which is 3% above guidance and is flat against last year.

The merger of Tokyo Stock Exchange and Osaka Securities Exchange into Japan Exchange Group has seen the combined group becoming a dominant trading venue for cash equities and futures in Japan. Its majority ownership of 90% in Japan Securities Clearing Corp. is core to the group's vertically integrated business model and helps fend off competition from new entrants in the Japanese market. Similar to most exchanges in the region, JPX faces competition in equity and futures trading and clearing domestically. The two proprietary trading systems and other dark pools hold limited market share at close to 10%, up slightly from 5% in 2014. While the trading occurs in the dark pools, the platforms use JSCC to clear their equity trades, meaning JPX captures part of the revenue in the execution value chain.

We lower our fair value estimate for Japan Exchange Group by 3% to JPY 2,240 after a weaker-than-expected first-quarter result. The wide-moat-rated exchange’s share price rallied 18% off its year-to-date low in May and we would wait for a better risk buffer before buying the shares. First- quarter fiscal 2022 net income fell 1.6% year over year to JPY 12.1 billion, mainly due to a 13% year-on-year increase in operating expense. The increase was due to higher level of investment, in line with its fourth medium-term management plan announced earlier this year. Increased maintenance and operational expense and depreciation and amortization from the launch of the JGB clearing system also contributed to higher costs in the first quarter. Operating expense guidance increased by 7.6% to JPY 68 billion. While this is slightly ahead of our current forecast of JPY 66 billion, we believe there is some flexibility for the exchange to defer nonessential projects if trading volume is lower than anticipated as the year progresses.

The merger of Tokyo Stock Exchange and Osaka Securities Exchange into Japan Exchange Group has seen the combined group becoming a dominant trading venue for cash equities and futures in Japan. Its majority ownership of 90% in Japan Securities Clearing Corp. is core to the group's vertically integrated business model and helps fend off competition from new entrants in the Japanese market. Similar to most exchanges in the region, JPX faces competition in equity and futures trading and clearing domestically. The two proprietary trading systems and other dark pools hold limited market share at close to 10%, up slightly from 5% in 2014. While the trading occurs in the dark pools, the platforms use JSCC to clear their equity trades, meaning JPX captures part of the revenue in the execution value chain.

Japan Exchange Group’s fourth-quarter result was largely in line with March guidance and our expectation. We reaffirm our JPY 2,300 fair value estimate and believe the exchange is slightly undervalued after the recent decline in its share price. There is no change in our long-term view on the wide-moat-rated exchange though our forecasts are adjusted to factor in higher capital expenditure in the next three years. The latter was guided for in the exchange’s fourth medium-term management plan, which covers its strategy over the next three years. A higher level of investment was expected, given Tokyo Stock Exchange’s outage in 2019 and trading and clearing platforms being the core operational infrastructure for the exchange. The investments are expected to support fundraising by companies, and the exchange is targeting a 30% increase in average daily trading value and net assets held in exchange-traded funds. The increase expected excludes holdings by the Bank of Japan. The exchange is also targeting 20 listings by foreign companies and an extension of trading hours by developing a new cash equity trading system. In our view, the latter should directly increase trading volume and income for the exchange. An extension of trading hours for the derivatives market would lead to increased activity in the aftermarket night session, which covers the European and U.S. time zones. Attracting foreign companies to list on the exchange may be more difficult to achieve, in our view, as the majority of its equity listings are domestic companies. The considerations on which exchange to list on varies depending on the individual company, but companies in the same sector or geography tend to list on the same exchange.

The merger of Tokyo Stock Exchange and Osaka Securities Exchange into Japan Exchange Group has seen the combined group becoming a dominant trading venue for cash equities and futures in Japan. Its majority ownership of 90% in Japan Securities Clearing Corp. is core to the group's vertically integrated business model and helps fend off competition from new entrants in the Japanese market. Similar to most exchanges in the region, JPX faces competition in equity and futures trading and clearing domestically. The two proprietary trading systems and other dark pools hold limited market share at close to 10%, up slightly from 5% in 2014. While the trading occurs in the dark pools, the platforms use JSCC to clear their equity trades, meaning JPX captures part of the revenue in the execution value chain.

With a week remaining before the close of fiscal 2022 at the end of March for Japan Exchange Group, the wide-moat exchange lifted its earnings and dividend guidance on higher market trading volume in the fourth quarter. Operating revenue guidance was increased to JPY 135.5 billion from JPY 131 billion while net income is expected to come in at JPY 50.7 billion, compared with JPY 46.7 billion previously. Our more bullish forecasts of JPY 134.8 billion in revenue and JPY 50.1 billion in net income already assumed higher transaction volume for the year, and our fair value estimate of JPY 2,300 is unchanged.

While Japan Exchange Group’s third-quarter result was in line with our expectations, we lower our revenue forecasts to factor in more subdued derivatives volume for the remainder of fiscal 2022. Otherwise, there is no change to our view on the wide moat rated exchange and recent share price weakness sees the exchange trading close to our fair value estimate of JPY 2,300.

The merger of Tokyo Stock Exchange and Osaka Securities Exchange into Japan Exchange Group, or JPX, has seen the combined group becoming a dominant trading venue for cash equities and futures in Japan. Its majority ownership of 90% in Japan Securities Clearing Corporation, or JSCC, is core to the group's vertically integrated business model and helps fend off competition from new entrants in the Japanese market. Similar to most exchanges in the region, JPX faces competition in equity and futures trading and clearing domestically. The two proprietary trading systems and other dark pools hold limited market share at close to 10%, only up slightly from 5% in 2014. While the trading occurs in the dark pools, the platforms use JSCC to clear their equity trades, meaning JPX captures part of the revenue in the execution value chain.

It was a stronger quarter for Japan Exchange Group, with earnings per share of JPY 23.21 close to 6% ahead of the same period last year. This was due to higher trading turnover in the cash market, offsetting lower derivatives volume. Cash market turnover was materially higher at JPY 4.6 trillion in September, compared with JPY 3.2 trillion in the previous two months, as the equity market was anticipating further stimulus from the new incoming administration. Both Nikkei and TOPIX rose sharply during the month. The strong performance did see management increase its profit guidance, but we reiterate this is dependent on market conditions. Our fiscal 2022 forecast remains above management guidance and represents an 1% increase on last year, compared with 4.5% thereafter as fiscal 2021 was a comparatively strong year. Our fair value estimate of JPY 2,300 is unchanged and we believe the exchange is overvalued despite a slight pullback in its share price.