Earnings Call: Q2 2020

Oct 31, 2019

1st on Page 4. The cash equities market trends are shown here. First half market trends, I would like to look back on very in a very broad brush manner. What is surrounded in red lines is the first half, cash equity's average daily trading value. The blue dotted line is surrounded in the blue dotted line is previous year's first half's cash equity's average daily trading value. Now if we are to break this down, the numbers for each of the markets are shown here. In a nutshell, year on year on an year on year basis, this term was minus 13% or so. And I'm sure you are well aware that stock prices were not bad, but the liquidity or the value has declined considerably. And as a result, the trading value has declined, and that is the actual situation. In particular, over here, June July, the level here is such that stock prices are rising. But if we just focus on the liquidity aspect, it's the situation we found at the end of the Democratic Party era. And compared to those times, the stock prices are high. So in terms of value, it's not bad. But a considerable decline is what we have seen. And as a result, on a value basis, year on year, minus or negative 13.5% is the situation. After this performance forecast correction, I'll be referring to that in detail later, but let me talk about the future forecast preempting what I'm going to say later on. As I said before, stock prices are doing fine, but it's the liquidity that is not catching up and falling behind. TSA Equity section, inclusive of that, we've done interviews and so forth. In terms of outlook, the situation, it's difficult, and it will probably take time for us to find us in a situation that we saw 1 year or 2 years ago. But in the second half, We've corrected so that the performance outlook is pretty much the same as first half. But temporarily, next year, there's the U. S. Presidential elections and various events we expect will happen. But what we've seen here, 1 month on an average basis, the value exceeded 4,000,000,000 yen at that time. And it will take some time before we see a similar situation. And that is how we feel at the moment. On derivatives, next, Nikkei225 Mini is what I'd like to use representing the others. The changes in units are shown here. The line graph shows volatility. And this part is this term's the contract numbers by product and this is a year on year number of contracts. Derivatives such that year on year on the corresponding period of the previous year, it was stagnant. So on a year on year basis, if we compare, in the first half, it was a positive 8.9%. So it's not too bad. We had a situation right before the Golden Week in Japan and Trump President Trump in relation to the U. S.-China trade friction has tweeted. And so because of this, we were able to do well in the derivatives. And JGB Futures 10 year JGB Futures, U. S. Interest rates trends included resulted in trading ballooning and growing. Recently, JGB Futures are seeing a decent number of contracts. So based on all of this, first half operating revenue is what we'd like to look at. On the very left, the red bar graph shows q2 FY2018, and we've shown the graphs on the right hand side as step in as if they were steps. The cash equities year on year declined over 10%, and cash equities trading value has gone down. Derivatives year on year has seen a growth in trading. So there's a positive figure here. The cash equities decline was big. So in net terms, negative 1,700,000,000 is what we have. As for clearing services, it's basically the same as here. Why we have positive figures here is that OTC clearing is growing considerably, and IRS interest rate swap clearing is positive. And OTC JGB clearing, we have seen pretty much positive figures there. So in that terms, over 200,000,000 of positive figures is what we have. On listing services, minus negative 200,000,000 yen perhaps this warrants some explanation. Firstly, the upper part, initial and additional listing fees, there are several factors. IPO in the first half compared to the previous year has seen somewhat of a decline. But for the entire year, we will probably end up the same pretty much on the same level as last year. So the first half was not very good, but we will catch up with you in the second half, and that's where we find ourselves. On the other hand, changes in listing, for example, from mothers to first section, movement in this way, from move from the second section to the first section. Perhaps there'll be a discussion related to the review of market structure review. So some people are taking probably a wait and see attitude. On annual listing fees, there's a trick here and there's somewhat of a decline here. First half, from listed companies, we have annual listing calculation. On a market cap basis, last year end, end of Last year end, end of December, we used stock prices to calculate the first half figures. As of end of December last year, that was when stock prices declined considerably. Nikkei average probably fell below 20,000 or so. We've used stock prices from there. That's why we're seeing a decline. In the second half this year, we will be using this year's December end stock prices. So as we proceed at the present level, we'll see some improvement. On Information Services revenue, there's a continuous rise here. And index license fee income is the substance. BoJ buys ETF and topics linked ETF, when BoJ buys this, the revenue will go up. And as for others, that's mostly colocation and ARO Net. The trading participants and information vendors are connected through this network, and the usage fee is on the rise, in particular, the network. We have customers that are changing from narrow to wider lines. And so there is a commensurate increase in revenue. As a result, all told, the year on year EUR 1,300,000,000 is a decline. In terms of percentage, minus or negative 2.2 percent, and that's operating revenue. Next is the situation regarding operating expenses. Here, the situation is similar, where we are making comparison year on year using the step chart. And you can see that expenses have gone up for almost all items. And just a point of caution. We have done some reclassification or numbers to make it possible for comparison. And we have actually reclassified numbers to enable continuous comparison. And I think this is probably better for you to be able to make comparison with the previous numbers. So we have reclassified numbers a little bit in that respect. Personal expenses and it's probably the same for other companies as well. But overall, this has been increasing and also the headcount has been increasing. And also based on the actual result from last fiscal year, we have paid out bonuses and that has picked up a little bit as well. Next is related to real estate. This has also increased as well. And this has already been disclosed, which is to do with the rent for this building. And from this fiscal year, the increase is 300,000,000 yen per annum. And Heywa Real Estate has already disclosed this. So they have referred to this number. So that's £76,000,000 of increase over the first half of the year. System maintenance and on operation expenses. Here, we are currently Moving the backup data center from Toko to the Kansai region, So there are some costs incurred in that respect. And also in November this year, the cash equity matching engine, which is Arrowhead, we expect to renew this. So ArrowNet, this is expected to start operation from next week. And we have some increases in expenses associated with that too. And with regards to depreciation, we are continuing to make investment on the systems. And so the and also related to the backup for Kansai as well has led to some increases here. And with regards to business integration with Stockholm in the area of systems, we may require some new investment. And there is an element of accelerated depreciation here. And in the case of Tokom, they also really provide the front the trading system, so that's okay. But in terms of clearing, as we are going to the future, the Tokomoz, the clearing house is JC the JCCH, and this will be merged together with our clearing, the institution, which is JSCC. And so as a result of that integration, there is some requirement for system investment. And in the area of others, this is purely FA expenses or lawyers' expense related to the integration with Stockholm. So in terms of the expense structure on a year on year basis, we've seen an increase of about 1,300,000,000 yen and that is about 4.9% in terms of increase year on year. So as a result and I apologize for the slide being somewhat busy, But the operating income and net income and on a year on year basis, in terms of operating income, about 70% 7% and for net income, a little bit more, almost 10% decreases on a year on year basis. And as I said previously as well, EBITDA, because of our system investment, we are seeing increase in depreciation. And so as for cash flow, this has not come down all that significantly. So roughly speaking, that is the overview of the earnings for the first half of the fiscal year. And I would now like to talk about explain about the forecast change or revision using this slide. And the cash flow generation derivatives are the trading, both their volume and value. Right at the top is the cash equities like cash equities. And like I have explained before, In the first half of fiscal twenty nineteen, we have results from there. And there is a forecast that was announced at the beginning of the fiscal year for the full year, which is 3,300,000,000,000 yen per day. That's more or less the similar level to 2018. That was our initial assumption. But at the end of the first half of the year, we ended up with JPY 2,800,000,000,000 which has come down quite significantly. So frankly speaking, and the current expectation for the stock trading value, to make that the forecasting is quite difficult. And we have been doing this recently, but we more or less use the number from the first half of the year for the forecast for the second half of the year as well. So say, for example, President Trump in the New Year, he will do various things, trying to be reelected, and that may lead to increase in the trading value, then that could potentially change. But we have used the actual numbers from the first half of the year for the forecast for the second half of the year. And as a consequence, the full year trading value has come down. So that is the situation with regards to cash equities. And for derivatives as well, we have reflected the actual from the first half of the year and reviewed the number for the second half of the year. But for the derivatives, we're expecting only a slight decline and not a significant decline. A little bit of a concern is the Nikkei235 options. And this is one of the biggest owners amongst the derivatives products. So if this comes down, that will tend to lower revenue more so than others. And so this is the operating revenue numbers here. And in terms of operating revenue, at the beginning of the year, we had anticipated 121,000,000,000 but we have the downwardly adjusted market assumptions. And as a consequence, we are now assuming 117,000,000,000 And here, the second half of the PO of TOKOM is included, though the number is very small, so the impact is very limited. But there is some of that those numbers are reflected into this forecast. Now with regards to the operating expenses, at the beginning of the fiscal year, we said that we are expecting 58,000,000,000 yen That was the expense that we had assumed, but we have revised this up to 59,500,000,000 yen And let me break this down in some more detail. Now every year, when the trade of the first half of the year comes below assumption, then we implement cost control and we have been suppressing expenses previously. Now we are doing this year as well, but at the same time, there are expenses related to Atokom integration, and there is certain amount being generated there. And as a consequence, we have not been able to decrease this very much. And added to that, Tokomo's the second half of the year has also been consolidated, And that's the reason we have come to this number, which is €59,500,000,000 So as a consequence, the operating income will be 60,000,000,000 yen and net income will be 42,000,000,000 yen and that is the revised forecast. Now when you change the market, the assumptions, then it will have impact on changing the revenues and also profit. So there could be the possibility of some overachieving this forecast or coming under the forecast level as well. But if we see the situation continue into the second half of the year, as we observed in the first half of the year, then we may or we are likely to end up at the forecast that we have revised you. So that is a core message regarding the earnings forecast. So this completes my explanation of the overview, and I would like to receive any questions that you