Japan Exchange Group, Inc. (8697) Earnings Call Transcript & Summary

Well, then let me explain using the slides that I am sharing with you on the screen. Please turn over to Page 4. As usual, we will start with the market trends. First is cash equities. Cash equity average daily trading value for FY 2021. If you could look at the table below and the bottom line, it was JPY 3.76 trillion. This exceeds last year's record high. So we have renewed our past record. Year-on-year, this is plus 7.9%. So we had a very active year. Next is market trends for derivatives, which is on next page, Page 5. Please again look at the table below. In the middle, you will see our column total trading volume for financial derivatives. For FY 2021, annual average was JPY 335 million contracts. You will see the breakdown up above. With regards to JGB Futures, as you know, interest rate was quite volatile with speculations. So JGB Futures did well relatively, but others, as for stock price index was negative year-on-year. Currently, February and March because of the Ukrainian situation, volatility increased. Therefore, we had a relatively good result. But on a full year basis, total trading volume for financial derivatives was $335 million contracts, which is minus 7.6%. Below, you will see the total trading volume for commodity derivatives. It was JPY 16.92 million, which is minus 13% year-on-year. In particular, crude oil futures was minus 40.7%. Compared to 2 years ago, so in FY 2020, as you may recall, U.S. WTI futures was priced negatively and that was the year, so there was a substantial market turmoil. So FY 2020 increased. So you can say this is a reactionary decline. So based on this market trend, I would like to explain about the actual operating revenue or earnings result. That's Page 6. So as usual, you will see the breakdown with a waterfall chart below. We have summarized the main points at the top with 3 bullet points. Number one, despite the decrease in derivatives trading volume, revenue from trading services increased due to an increase in cash equities trading. So if you look at trading services, it's plus JPY 25 million, so impact was nearly plus/minus 0. But if you look at the comprehensive breakdown, as I mentioned in the market condition, cash equities was plus JPY 800 million. Meanwhile, financial derivatives, commodity derivatives, were negative, so they offset each other. The second characteristic is the revenue from listing services decreased due to a decline in the fundraising by listed companies that had happened on a large scale in the previous year. So revenue from listing services was down by JPY 900 million year-on-year. With regards to the previous year, as I said earlier, there was a particular company that did a very large fund raising, which amounted to approximately JPY 1 billion in revenue for us. So this was the major impact. However, with regards to listing services, the ETF continues to be on increasing trend. So this portion, we expect to continue to see increase. So I will be able to explain about this later on. And the third highlight is the revenue from information services and increased due to an increase in revenue from index licensing fees on topics and other indices and market data usage fees. So that's plus JPY 3 billion in Information Services revenue. As you can see, this is the greatest contributor, and it continues to grow. As a result, for FY 2021, operating revenue was JPY 135.4 billion. This was record high. Next is Page 7 on operating expenses. We have prepared a waterfall chart here as well. So first characteristic is that we have seen a slight decrease in personnel expenses about -- by minus JPY 200 billion. This is because in the previous year, we had HR support, which we issued several times in order to deal with COVID-19. So this is a reactionary decline. And the second point is that ETF RFQ platform. And when we say various systems it is just systems in general, but we have seen increase in maintenance and operational expenses by plus JPY 1.4 billion. In particular, with regards to various systems. There's been a slight increase in IT staff cost. It is on an increasing trend. So it's not that any one particular system costs stood out, but I would say, it's an overall increase in system cost accompanied by IT personnel cost. So overall, we are now beginning to see increasing IT costs here. And the third point is the depreciation and amortization increase due mainly to renewals of information systems. This is plus JPY 700 million. As a result, operating expense increased by JPY 1.8 billion to JPY 63.2 billion. Next is Page 8, highlights of our earnings. This is the summary of FY 2021 earnings results. Operating revenue, and I repeat again, increased by approximately JPY 2 billion. Operating expense also increased by JPY 1.8 billion. If you do a simple calculation, operating profit should have been plus JPY 200 million, but it's actually minus JPY 1.1 billion. And the reason for this is that you can see from the bullet point, it is due to a decrease in share of income of investments accounted for using the equity method. So this impact is reflected here. Perhaps many of you know this already, but equity method company I'm referring to here is JASTEC. So likewise, with JSCC, they have lowered their fees, which is impacted and reflected here. As a result, net income was down 2.8% year-on-year to JPY 49.955 billion. So this is the overview of FY 2021 earnings results. So let's move on to the forecast for FY 2022. Please look at the table at the bottom first. As usual, we look at the market condition as an underlying assumption, and what we're trying to do is explain that assumption. So average trading value for cash equities remains unchanged from the previous year 2020. There's been a slight increase, but I would say it's basically the same as the previous year. Meanwhile, as for derivatives, our assumptions are slightly different from the previous year. So let me explain. As you know, with regards to derivatives trading, due to market volatility, trading activities fluctuate. So where does volatility come from? Well, basically, when unexpected events occur, volatility increases. But then what is the unexpected event? And what unexpected is unexpected. So it's difficult to project what they are. But a year ago, we assumed relatively positive on a year-on-year basis with regards to derivatives, but this year, up until before the Ukrainian conflict more precisely, up until January this year, we were projecting the number of contracts based on that market condition prior to Ukrainian crisis. So in February, March, we had a lot of activities in derivatives, so we did not price that in this forecast in this guidance. As a result if you look at the derivatives with the underlying market condition, it's actually negative year-on-year. In that sense, if there's more unexpected events, derivatives will have more upside. So based on the situation, operating revenue is, as you can see from the bar graphs, it will be JPY 132 billion. This is minus JPY 3 billion from the actual. Let me give you the breakdown. This is just very roughly, but approximately we expect minus JPY 2 billion from the revenue from clearing services and minus JPY 1 billion in revenue from listing services. With regards to listing services. In FY 2021, so up until FY 2021, just for example, like [indiscernible], who raised additional capital, there were companies who raised capital in order to weather the COVID-19 impact for the future management. So that impact has been eliminated when we built this plan. So this forecast is slightly conservative. And as for clearing fees, the rates -- the decreasing rates have been reflected on a full year basis. Last year, only half year was reflected. But this year, it's full year. And also in the previous year, interest rate swap there was migration trading as a result of cessation of LIBOR. So that impact has also been excluded to fill this plan. So roughly, that's minus JPY 2 billion. Next is operating expenses. This is JPY 68 billion, so that's plus JPY 4.8 billion. It has increased. But if you look at the breakdown, we have system cost, system-related cost. And since FY 2022 is year 1 of our midterm plan, so we have allocated more budget for midterm plan matters. As a result, operating profit is JPY 65.5 billion, net income is JPY 45 billion. So that's our forecast. And lastly, I want to provide you with information on the current market situation. We're almost at the end of April. Compared to a year ago, April and today, April 2022, how is it? And I'm looking at the trading numbers. If you look at average daily trading value of cash equities, a year ago, April, it was JPY 3.25 trillion per day. And this year, so today, I guess this April, and in fact, as of yesterday, it was JPY 3.4 trillion. So compared to a year ago, we see more trading activities. And with regards to topics floating stocks allocation, Investors are rebalancing their passive investment. So we can expect more trading volume today. So in any case, if you compare April from a year ago, we are seeing increase in terms of ADV. And with regards to derivatives let me explain the situation compared to a year ago and this month, so current situation -- since the prices are different, depending on the product, so if I speak in terms of number of contracts, it is increasing. So derivatives is positive. You can't do a simple comparison, but just in terms of number of contracts, we expect increase. So we have given off to a better start than last year. So going back to the presentation material, let's move to Page 10 on the dividends. So for FY 2021, our payout ratio is 60%. And if you multiply that with our net interest, I'm sorry, net income, you will get JPY 57 per share, and you can add JPY 15 in special dividends, so we will pay a total of JPY 72 per share. This JPY 72 per share is record high. And in FY 2021, in addition to this dividend, we did a JPY 20 billion in buyback. So the total return ratio is above 110%. And for FY 2022, this fiscal year, our guidance for dividend, we based it on JPY 45 billion in net income, we multiply that by 60%. So that is our guidance for this fiscal year. So that is all for the explanation on the presentation. Thank you for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]