Japan Exchange Group Inc
TSE:8697
Japan Exchange Group Inc
Japan Exchange Group Inc. (JPX) stands as the robust backbone of financial markets in Japan, formed from the merger of the Tokyo Stock Exchange and Osaka Securities Exchange in 2013. With a heritage linking back to the bedrock of Japan's financial history, JPX orchestrates the nation's securities markets, providing a platform where equities, bonds, derivatives, and other financial products converge. Through its bustling exchanges, JPX facilitates the trading of over 3,500 listed companies, enveloping investors from all corners of the globe. Engaging with technologies rooted in precision and efficiency, the group ensures seamless transactions, where billions shift daily with a stroke on the keyboard. This dynamic platform not only connects buyers and sellers but also crafts a meticulous environment that champions trust, transparency, and regulatory adherence.
Revenue for JPX flows in primarily through trading services, listing fees, and information services. The more transactions and listings that grace its floors, the more substantial its income stream. Trading services contribute through transaction fees from trades conducted on its platforms. The group's income is further bolstered by the listing fees firms must pay to have their stocks or bonds listed, with larger, recurring annual fees ensuring these securities maintain their presence within the exchanges. Additionally, JPX generates revenue through the dissemination of market information, selling data and insights to financial institutions, enhancing informed decision-making in trading activities. This confluence of revenue channels positions JPX as a crucial hub in not just Japan's financial ecosystem, but in the global financial landscape, handling the ebb and flow of capital with rigor and prowess.
Earnings Calls
In the recent earnings call, the company revealed a decline in cash equities trading value, adjusting its full-year revenue forecast down to JPY 117 billion from JPY 121 billion. Operating income is projected at JPY 60 billion, with net income at JPY 42 billion, reflecting a decrease of nearly 10% year-on-year. While the derivatives market showed a positive trend with an 8.9% increase in trading contracts, concerns linger about key products like the Nikkei 225 Options. The company continues to face rising operational expenses, now estimated at JPY 59.5 billion, largely due to costs from the TOCOM integration.
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Good morning, ladies and gentlemen. I'd like to thank you for taking time out of your busy schedules to attend today. Without further ado, I'd like to speak about the first half earnings for JPX.
First, on Page 4, the cash equities market trends are shown here. First half market trends, I would like to look back on very -- in a very broad-brush manner. What is surrounded in red lines is the first half cash equities average daily trading value. The blue dotted line -- what is surrounded in the blue dotted line is the previous year's first half cash equities average daily trading value.
Now if we are to break this down, the numbers for each of the markets are shown here. In a nutshell, year-on-year -- on a year-on-year basis, this term was minus 13% or so. And I'm sure you're well aware that stock prices were not bad, but the liquidity or the value has declined considerably. And as a result, the trading value has declined, and that is the actual situation.
In particular over here, June and July, the level here is such that stock prices are rising. But if we just focus on the liquidity aspect, it's the situation we found at the end of the Democratic Party era and compared to those times, the stock prices are high. So in terms of value, it's not bad, but a considerable decline is what we have seen. And as a result on a value basis, year-on-year minus or negative 13.5% is the situation.
After this performance forecast correction, I'll be referring to that in detail later, but let me talk about the future forecast preempting what I'm going to say later on. As I said before, stock prices are doing fine, but it's the liquidity that is not catching up and falling behind. As TSA equity section is inclusive of that. We've done interviews and so forth.
In terms of outlook, the situation, it's difficult and it will probably take time for us to find a -- find us in a situation that we saw 1 year or 2 years ago. But in the second half, we've corrected so that the performance outlook is pretty much the same as first half, but temporarily next year, there's the U.S. presidential elections and various events we expect will happen. But what we've seen here, 1 month on an average basis, the value exceeded JPY 4 trillion at that time. And it'll take some time before we see a similar situation, and that is how we feel at the moment.
On derivatives, next. Nikkei 225mini is what I'd like to use representing the others. The changes in units are shown here, the line graph shows volatility, and this part is this terms, the contract numbers by product. And this is a year-on-year number of contracts. Derivatives are such that year-on-year, on the corresponding period of the previous year, it was stagnant. So on a year-on-year basis, if we compare in the first half, it was a positive 8.9%. So it's not too bad. We had the situation right before the Golden Week in Japan and Trump -- President Trump in relation to the U.S.-China trade friction has tweeted. And so because of this, we were able to do well in the derivatives. And JGB Futures -- 10-year JGB Futures, U.S. interest rates trends included resulted in trading ballooning and growing. Recently, JGB Futures are seeing a decent number of contracts.
So based on all of this first half operating revenue is what we'd like to look at. On the very left, the red biograph shows Q2 FY 2018, and we've shown the graphs on the right-hand side, as step in -- as if they were steps. The cash equities year-on-year declined over 10%, and cash equities trading value has gone down. Derivatives year-on-year has seen a growth in trading. So there's a positive figure here. The cash equities decline was big. So in net terms, negative JPY 1.7 billion is what we have. As for clearing services, it's basically the same as here. Why we have positive figures here is that OTC clearing is growing considerably and IRS interest rate swap clearing is positive. And OTC, JGB clearing we have seen pretty much positive figures there. So in net terms over JPY 200 million of positive figures is what we have on listing services minus negative JPY 200 million. Perhaps this warrants some explanation.
Firstly, the upper part initial and additional listing fees. And there are several factors, IPO in the first half compared to the previous year has seen somewhat of a decline. But for the entire year, we will probably end up the same -- pretty much on the same level as last year. So the first half was not very good, but we will catch up with you in the second half, and that's where we find ourselves.
On the other hand, changes in listing, for example, from Mothers to first section, movement in this way. From a move -- from the second section to the first section, and perhaps there'll be a discussion related to the review of market structure review. So some people are taking probably a wait and see attitude. On annual listing fees there's a trick here, and there's somewhat of a decline here. First half from listed companies we have annual listing calculation. On a market cap basis last year-end, end of December, we used the stock prices to calculate the first half figures. As of end of December last year that was when stock prices declined considerably, Nikkei average probably fell below 20,000 or so. We've used stock prices from there. That's why we're seeing a decline. In the second half this year we will be using this year's December end stock prices.
So if we proceed at the present level, we'll see some improvement. On information services revenue, there's a continuous rise here. And index licenses -- the fee income is the substance. BOJ buys ETF and TOPIX linked ETF, when BOJ buys this, the revenue will go up. And as for others that's mostly Co-Location and arrownet. The trading participants and information vendors are connected through this network and the usage fee is on the rise, in particular the network.
We have customers that are changing from narrow to wider lines and so there is a commensurate increase in revenue. As a result, all told, year-on-year, JPY 1.3 billion is the decline in terms of percentage minus or negative 2.2% and that's operating revenue.
Next is the situation regarding operating expenses. Here, the situation is similar where we are making comparison year-on-year using the step chart. And you can see that expenses have gone up for almost all items. And just a point of caution, we have done some reclassification on numbers to make it possible for comparison. And we have actually reclassified numbers to enable our continuous comparison and I think this is probably better for you to be able to make comparison with the previous numbers. So we have reclassified numbers a little bit to that respect. Personnel expenses and it's probably the same for other companies as well, but overall, this has been increasing. And also, the headcount has been increasing. And also based on the actual results from last fiscal year, we have paid out bonuses and that has picked up a little bit as well.
Next is related to real estate. This has also increased as well. And this has already been disclosed, which is to do with the rent for this building and from this fiscal year, the increase is JPY 300 million per annum and [ haywire ] real estate has already disclosed this. So they have referred to this number. So that's JPY 176 million of increase over the first half of the year. System maintenance and operational expenses, here we are currently moving the backup data center from Tokyo to the Kansai region. So there are some costs incurred in that respect. And also in November this year, the cash equity matching engine, which is arrowhead, we expect to renew this.
So arrownet, this is expected to start operation from next week. And we have some increases in expenses associated with that too. And with regards to depreciation, we are continuing to make investment on the systems. And so the -- and also related to the backup for Kansai as well has led to some increases here and where [ since the ] last business integration with TOCOM in the area of systems, we may require some new investment. And there is an element of accelerated depreciation here. And in the case of TOCOM, they really provide the front -- the trading system, so that's okay. But in terms of clearing, as we go into the future, the TOCOM's, the clearing house is JCCH and this will be merged together with our clearing the institution, which is JSCC. And so as a result of that integration, there is some requirement for system investment. And in the area of others, this is purely FA expenses or lawyers' expenses and related to the integration with Stockholm. So in terms of the expense structure on a year-on-year basis, we've seen an increase of about JPY 1.3 billion, and that is about 4.9% in terms of increase year-on-year.
So as a result, and I apologize for the slide being somewhat busy, but the operating income and net income on a year-on-year basis in terms of operating income about 70% -- 7% and for net income, a little bit more, almost 10% decreases on a year-on-year basis. And as I said previously as well, EBITDA, because of our system investment, we are seeing increase in depreciation. And so as for cash flow, this has not come down all that significantly. So roughly speaking, that is the overview of the earnings for the first half of the fiscal year.
And I would now like to talk about -- explain about the forecast, the change or revision used in this slide. And the cash equities and derivatives are the trading volume and value. Right at the top is the cash equities like cash equities. And like I've explained before, in the first half of fiscal 2019, we have results from there. And there is a forecast that was announced at the beginning of the fiscal year for the full year, which is JPY 3.3 trillion per day that's more or less at the similar level to 2018. That was an initial assumption. By the end of the first half of the year, we ended up with JPY 2.8 trillion, which has come down quite significantly. So frankly speaking, the current expectation for the stock, the trading value to make that -- the forecasting is quite difficult. And we have been doing this recently, but we more or less use the number from the first half of the year for the forecast for the second half of the year as well. So say, for example, President Trump in the New Year, he would do various things trying to be reelected, and that may lead to increase in the trading value, then that could potentially change. But we have used the actual numbers from the first half of the year for the forecast for the second half of the year. And the consequence that the full year trading value has come down. So that is the situation with regards to cash equities. And for derivatives as well, we have reflected the actual from the first half of the year and reviewed the number for the second half of the year. But for the derivatives, we're expecting only a slight decline and not a significant decline.
A little bit of a concern is the Nikkei 225 Options. And this is one of the biggest earners, are amongst the derivatives products. So if this comes down that will tend to lower revenue more so than others. And so this year is the operating revenue numbers here. And in terms of operating revenue, at the beginning of the year, we had anticipated JPY 121 billion, but we have the downward, the adjusted market assumptions. And as a consequence, we are now assuming JPY 117 billion. And here, the second half of the year consolidated PO of TOCOM is included, though the number is very small. So the impact is very limited, but there is some of that and those numbers are reflected into this forecast.
Now with regards to the operating expenses. At the beginning of the fiscal year, we said that we are expecting JPY 58 billion. That was the expense that we had assumed, but we have revised this up to JPY 59.5 billion. And let me break this down in some more detail. Now every year when the trade of the first half of the year comes below our assumption then we implement cost control, and we have been suppressing expenses previously. Now we are doing this, this year as well but at the same time, there are expenses related to TOCOM integration, and there is certain amount being generated there. And as a consequence, we have not been able to decrease this very much. And added to that, TOCOM's the second half of the year has also been consolidated, and that's the reason we have come to this number, which is JPY 59.5 billion. So as a consequence, the operating income will be JPY 60 billion, and net income would be JPY 42 billion, and that is the revised forecast.
Now when you change the market, the assumptions then it will have impact on changing the revenues and also profit. So there could be the possibility of some overachieving this forecast or in fact, coming under the forecast level as well. But if we see the situation continue to the second half of the year as we observed in the first half of the year, then we may or we are likely to end up at the forecast that we have revised to you. So that is a comment regarding the earnings forecast.
So this completes my explanation of the overview, and I would like to receive any questions that you may have.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]