EUR 850.00 For Business Accounts Only

Morningstar | No Surprise in Wide-Moat Japan Exchange Group's 2Q Result; Shares Fairly Valued. See Updated Analyst Note from 29 Oct 2018

There was no surprise in Japan Exchange Group, or JPX’s, second-quarter result and our view on the wide-moat-rated exchange is unchanged. There were minor tweaks to management guidance with weaker equity and derivative turnover expected in the second half translating into lower revenue for the full year. As such, the exchange will lower its operating expenditure and we suspect nonessential projects are most likely deferred, a normal practice for exchanges under our coverage as capital markets soften and trading volumes decline. The offsetting effect of the above leaves guidance for full-year net income unchanged at JPY 48 billion and our forecast of JPY 48.8 billion is slightly ahead. We leave our forecast unchanged as we anticipate capital markets will likely remain volatile, which should underpin derivatives volume. Securities turnover is also supported by the increase in the number of exchange traded funds and an increase in the underlying assets under management. The exchange is trading in line with our fair value of JPY 1,870 and is fair valued.

We reiterate investors should focus on the long-term fundamentals of the exchange, given the cyclical nature of the securities and derivatives turnover against previous quarters and comparable periods. We are relatively more excited that the exchange ended a nondisclosure agreement with Tokyo Commodity Exchange last week, to enter a formal discussion for a possible merger, after an earlier media report. As highlighted in our last note "A New Hope: Wide-Moat Japan Exchange Group and Tokyo Commodity Exchange Open to Merger Discussion," we believe it is a strategic positive if the deal goes ahead, broadening JPX’s derivatives portfolio into commodities and energy. Historically, these asset classes have negative correlation to equities and theoretically provide diversification to JPX’s revenue base. Please refer to our last note for further information.

Besides the above announcement, JPX will collaborate with London Stock Exchange on market infrastructure and more recently, have been exploring an ETF connective scheme with Shanghai Stock Exchange. The latter should benefit securities trading volume for ETFs, in our view. The latter was also supported by a market making scheme for the asset class.