EUR 850.00 For Business Accounts Only

Morningstar | Strong Derivatives Volume Underpins Solid 3Q Result for Japan Exchange Group

Wide-moat-rated Japan Exchange Group delivered a strong third-quarter result with higher volatility in global capital markets underpinning solid derivatives turnover. Turnover was materially higher for both the TOPIX and Nikkei 225 futures contracts as market participants seek risk management tools over concerns on global trades. In contrast to the second quarter when the exchange made minor reduction to its cost guidance, a higher level of revenue allowed the exchange to spend a little more during period, in our view. Operating expense was higher against the same period last year, and similar level to the second quarter. Net income for the quarter was JPY 14.5 billion, at the same level as last year and higher than JPY 13.3 billion in the second quarter.

Our forecasts are adjusted slightly higher as we anticipate derivatives volume to remain buoyant in the fourth quarter, or the first calendar quarter of 2019. With the deadline to the U.S. and Chinese trade negotiation approaching, the U.K.'s impending exit from the European Union and concerns over slower global growth translating into weaker corporate earnings, we expect volatility in capital markets to remain elevated. As such, our net income forecasts are slightly ahead of the exchange’s unchanged guidance. Our fair value is increased 4% to JPY 1,940 and we believe the exchange is fairly valued. Our thesis for the exchange remains unchanged and we continue to see potential merger with Tokyo Commodity Exchange as the key positive strategy for the exchange. This could see the exchange diversify into commodities derivatives, providing a new growth driver and more balanced earnings. For the equities market, criteria for inclusion into equity indexes were revised and a consultation on market structure is also underway. In our view, the changes could improve market liquidity but the overall impact should be limited.