JPX was established via the business combination between the Tokyo Stock Exchange Group and Osaka Securities Exchange on January 1, 2013, mainly operates financial instruments exchange markets to provide market participants with reliable venues for trading listed securities and derivatives instruments. The company also offers clearing and settlement services to its users.

The Group, with 1,236 employees, generates revenue primarily from the following segments – Trading services revenue, contributing 40% of FY23 operating revenue; Clearing services revenue, 22%; Information services revenue, 19%; Listing services revenue, 10%; and Other, 9%.

Upward revision of forecasts

The Group operates predominantly through three markets – the Tokyo Stock Exchange, which handled approximately 83% of the trading value for cash equities traded in Japan in FY23; the Osaka Exchange, which handled approximately 81% of the Nikkei 225 Futures trading volume worldwide, compared to 10.1% by Singapore Exchange and 8.5% by CME Group; and the Tokyo Commodity Exchange.

As of March 31, 2024, the market capitalization of companies listed on the TSE was USD 6.7tn, ranking fourth among global exchanges. In terms of trading value, the exchange witnessed significant participation from overseas investors in FY23, accounting for approximately 60% of cash equity trading and 75% of derivatives trading.

On the back of positive fundamental performance, the company has revised its earnings forecast for the full year FY24. The operating revenue is now anticipated to be JPY159bn, compared to the previous forecast of JPY158.5bn. The operating income has been upgraded to JPY86bn, from the prior forecast of JPY85bn; and net income has been revised upwards to JPY58bn, from JPY57.5bn.

Additionally, the Group has revised the guidance for the average trading volume and value of major products. The trading value of cash equities has been revised to JPY5.4tn in FY24, up from the previous forecast of JPY5.3tn, and the trading value of Nikkei 225 options has been revised to JPY25bn, from the prior forecast of JPY24.5bn.

Rise in daily average trading value

The company delivered a CAGR of 4.7% in revenues over the period FY18-FY23 to reach JPY153bn. The operating income demonstrated a similar CAGR of 5% during the same time to register JPY86bn in FY23, while the net income increased at a CAGR of 4.4% to reach JPY60.8bn.

JPX Group, increased its cash reserves at an impressive pace over the same period, registering 2x growth to JPY128bn as of March 31, 2024, from JPY63.9bn as of March 31, 2019. The rise in cash levels has been aided by the steady generation of free cash flow during the same time.

The group reported encouraging results in 1HFY24, growing its operating revenue by 11.5% YoY to JPY81.8bn, driven by an increase in trading in cash equities as evident from the robust 27% surge in daily average trading value in the segment to 5.74tn. Revenue growth was also aided by an increase in revenue from listing services and index licensing fees. The operating income increased 7.2% YoY to JPY47.7bn, aided by the surge in revenues and offset by an increase in system maintenance and operation expenses. Consequently, the net income grew at a modest 2.8% to reach JPY32.3bn.

Limited upside potential

The company is trading at a reasonable P/E valuation of 29.4x, based on the estimated FY24 EPS of JPY59, compared to a global P/E ratio of 34.2x. EV/EBITDA valuation approach also yields a lower valuation multiple of 15.3x for Japan Exchange Group, compared to a global peer average of 22.9x.

The company’s stock has delivered returns of over 11% in the past one year, but the six-month returns declined by over 13%. Four analysts have covered the stock, with one of them recommending a ‘Buy’ rating, and another having a ‘Hold’ suggestion for an average target of JPY1,755, indicating limited upside potential of over 5% from the current price levels. However, the recent correction and decline in prices provide a decent opportunity for investors to evaluate the stock.

Overall, Japan Exchange Group, Inc. makes a decent case for evaluation backed by upward revisions in FY24 forecasts, robust performance in cash equities, and strong cash reserves. However, the company is prone to a few inherent industry risks including diminishing trading volume, reduced supply of investment funds and muted economic activity during periods of economic downturns. Nevertheless, the company plays an important role in Japan’s capital market landscape, providing core infrastructure for listed companies with financing opportunities, investors with asset management opportunities, and the general public with price discovery functions.