Japan Exchange Group Earnings: Rising Stock Markets Drive 47% Increase in Net Income

We increase our fair value estimate for wide-moat-rated Japan Exchange Group 8697 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.

The exchange benefited from Japan’s rising stock markets, with the Nikkei 225 index rising 18% during the quarter, which surpassed even the strong 15% rise in the Nasdaq-100 index during the period. As a result, the exchange, which derives revenue from both volume and value of underlying traded securities, saw trading services revenue and clearing services revenue increase by 12% and 10%, respectively. Within trading services revenue, transaction fees increased 15%, which was primarily driven by an 18% increase in cash equities revenue, resulting from a 13% increase in the trading value of cash equities.

Partially offsetting the exchange’s strong trading and clearing revenue was a 6% increase in operating expenses. Although personnel expenses were mostly flat and increased less than 1%, system maintenance and operating expenses increased 22% due to higher required maintenance of information systems, as well as external factors such as foreign exchange rates.