MONEY SQUARE HOLDINGS, INC. (8728) Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an owner s manual to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at sr_inquiries@sharedresearch.jp or find us on Bloomberg.
Contents Executive summary... 3 Key financial data... 4 Recent updates... 5 Highlights... 5 Trends and outlook... 6 Quarterly trends and results... 6 Full-year outlook... 7 Outlook... 9 Business description... 11 Business model... 13 Business... 20 Strengths and weaknesses... 29 Market and value chain... 30 Strategy... 40 Income statement... 41 Balance sheet... 42 Cash flow statement... 44 Other information... 45 History... 45 Major shareholders... 47 Shareholder returns... 47 Management... 47 Asia s 200 Best Under a Billion... 47 Company profile... 48 http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 2/49
Executive summary Order system fuels high profitability and growth, investor education Money Square Holdings, Inc. has been in the forex margin trading business since 1998, and developed a system to help customers minimize losses. The company thinks fickle emotions are the enemy, and provides a system where customers do not need to constantly monitor market movements and churn accounts (transaction costs eat into returns). It offers forex margin trading services, including its own order management system and investor guidance program. This leads to customers accepting wider spreads, and bigger commissions for the company. At June 2015, its USD/JPY spreads were 4.0 pips and commissions were JPY300 for 10,000 currency units (see Business section). About 80% of customers place limit orders, not market orders, through its order management system. The share of profitable customer accounts was 69.7% in 2012, 49.0% in 2013, and 58.5% in 2014. This is a real achievement most forex traders all over the world lose money. Unit revenue (operating revenue divided by turnover, a performance indicator for forex margin trading) was around 20x that of industry peers in FY03/15. Its order management system and investor guidance program is fueling growth. Between FY03/10 and FY03/15, number of accounts grew by 4x, operating revenue grew by 4.5x, and a JPY200mn operating loss in FY03/10 turned to an operating profit of JPY2.5bn in FY03/15. Trends and outlook The company plans to expand asset management and overseas operations, in addition to beefing up its traditional forex margin trading business in Japan. If growth in customer account numbers continues at a pace similar to FY03/13 FY03/15, over the three years from FY03/16 the company estimates operating revenue could grow to JPY7 10bn (up 32 89% vs. FY03/15) in domestic forex margin trading, depending on forex volatility. Operating profit could reach JPY5 6bn (up 99 138% vs. FY03/15). Strengths and weaknesses Shared Research sees the company s strengths as its patented order management system, high trading costs, and a self-selecting customer base. Weaknesses include high vulnerability to forex market volatility, shallow reach toward new customers, and the existence of Imitation systems and services. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 3/49
Key financial data Income Statement FY03/07 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 (JPYmn) Par. Par. Par. Par. Par. Par. Par. Par. Con. Operating revenue 1,766 2,039 1,411 1,184 2,078 2,623 3,718 5,210 5,300 YoY - 15.5% -30.8% -16.1% 75.5% 26.3% 41.7% 40.1% 1.7% Operating Profit 950 953 49-200 417 432 1,316 2,407 2,518 YoY - 0.3% -94.9% - - 3.6% 204.7% 82.9% 4.6% OPM 53.8% 46.7% 3.5% - 20.1% 16.5% 35.4% 46.2% 47.5% Recurring Profit 947 932 61-245 363 423 1,312 2,405 2,512 YoY - -1.6% -93.4% - - 16.5% 210.3% 83.3% 4.5% RPM 53.6% 45.7% 4.3% - 17.5% 16.1% 35.3% 46.2% 47.4% Net Income 547 541 26-347 261 236 801 1,483 1,600 YoY - -1.1% -95.2% - - -9.6% 239.7% 85.1% 7.9% Net Margin 31.0% 26.5% 1.9% - 12.6% 9.0% 21.5% 28.5% 30.2% Per Share Data (JPY) Number of Shares ('000) 7,334 10,918 10,918 10,918 10,918 10,918 10,918 10,918 10,918 EPS 78.6 58.4 2.5-34.4 26.1 24.1 84.2 141.6 149.2 EPS (Fully Diluted) - 50.3 - - - 24.0 81.6 134.0 144.4 Dividend Per Share 11.0 12.5 2.5 2.5 9.0 9.0 22.5 38.5 40.0 Book Value Per Share 229.8 323.2 322.4 288.7 313.8 332.5 406.1 511.7 621.0 Balance Sheet (JPYmn) Cash and Equivalents 1,724 2,955 2,641 2,190 2,119 2,223 2,420 2,298 3,324 Total Current Assets 24,122 15,652 11,716 13,683 21,878 30,399 41,618 52,939 56,866 Tangible Fixed Assets, net 104 235 206 167 203 228 187 403 318 Other Fixed Assets 215 219 212 134 77 81 100 259 244 Intangible Assets 61 75 133 159 270 431 486 423 422 Total Assets 24,501 16,181 12,267 14,143 22,428 31,138 42,391 54,024 57,851 Accounts Payable 22,193 12,416 8,875 11,113 18,716 27,043 37,281 46,571 49,568 Short-Term Debt - - 300 20 475 250 Total Current Liabilities 22,662 12,652 8,983 11,230 19,058 27,743 38,235 48,265 51,031 Long-Term Debt 160 120 80 190 50 Total Fixed Liabilities 111-230 187 150 259 121 Total Liabilities 22,773 12,652 8,983 11,230 19,289 27,929 38,385 48,524 51,152 Net Assets 1,728 3,529 3,284 2,913 3,140 3,209 4,006 5,500 6,699 Interest-Bearing Debt - 200 460 140 805 440 Cash Flow Statement (JPYmn) Operating Cash Flow 780 402-48 -74 568 516 1,374 2,121 1,590 Investment Cash Flow -1,076-724 -108-126 -186-585 -529-681 -454 Financing Cash Flow 0 1,146-285 -39 161 74-337 677-765 Financial Ratios ROA 2.2% 2.7% 0.2% -2.6% 1.4% 0.9% 2.2% 3.1% 2.9% ROE 63.3% 20.6% 0.8% -11.2% 8.6% 7.4% 22.2% 31.2% 26.2% Equity Ratio 7.1% 21.8% 26.8% 20.6% 14.0% 10.3% 9.5% 10.2% 11.6% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 4/49
Recent updates Highlights Shared Research initiates coverage of Money Square Holdings, Inc. with this report. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 5/49
Trends and outlook Quarterly trends and results Quarterly Performance (cumulative) (JPYmn) Q1 FY03/14 1H Q3 FY Q1 FY03/15 1H Q3 FY Operating revenue 1,930 2,962 3,962 5,210 772 1,714 3,561 5,299 YoY 158.7% 123.5% 86.2% 40.2% -60.0% -42.1% -10.1% 1.7% SG&A Expenses 600 1,315 1,989 2,803 628 1,253 1,948 2,782 YoY 5.3% 16.9% 17.1% 16.7% 4.7% -4.7% -2.1% -0.7% SG&A / Operating revenue 31.1% 44.4% 50.2% 53.8% 81.3% 73.1% 54.7% 52.5% Operating profit 1,330 1,647 1,973 2,407 144 461 1,613 2,517 YoY 655.7% 723.5% 358.8% 82.9% -89.2% -72.0% -18.2% 4.6% OPM 68.9% 55.6% 49.8% 46.2% 18.7% 26.9% 45.3% 47.5% Recurring profit 1,328 1,645 1,970 2,404 141 458 1,608 2,512 YoY 663.2% 743.6% 363.5% 83.4% -89.4% -72.2% -18.4% 4.5% RPM 68.8% 55.5% 49.7% 46.1% 18.3% 26.7% 45.2% 47.4% Net income 845 1,018 1,214 1,482 87 290 1,025 1,600 YoY 720.4% 785.2% 376.1% 85.3% -89.7% -71.5% -15.6% 8.0% NPM 43.8% 34.4% 30.6% 28.4% 11.3% 16.9% 28.8% 30.2% Quarterly Performance (quarterly) FY03/14 FY03/15 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Operating revenue 1,930 1,032 1,000 1,248 772 942 1,847 1,738 YoY 158.7% 78.2% 24.5% -21.5% -60.0% -8.7% 84.7% 39.3% SG&A Expenses 600 715 674 814 628 625 695 834 YoY 5.3% 28.8% 17.6% 15.8% 4.7% -12.6% 3.1% 2.5% SG&A / Operating revenue 31.1% 69.3% 67.4% 65.2% 81.3% 66.3% 37.6% 48.0% Operating profit 1,330 317 326 434 144 317 1,152 904 YoY 655.7% 1220.8% 41.7% -51.0% -89.2% 0.0% 253.4% 108.3% OPM 68.9% 30.7% 32.6% 34.8% 18.7% 33.7% 62.4% 52.0% Recurring profit 1,328 317 325 434 141 317 1,150 904 YoY 663.2% 1409.5% 41.3% -51.0% -89.4% 0.0% 253.8% 108.3% RPM 68.8% 30.7% 32.5% 34.8% 18.3% 33.7% 62.3% 52.0% Net income 845 173 196 268 87 203 735 575 YoY 720.4% 1341.7% 40.0% - -89.7% 17.3% 275.0% 114.6% NPM 43.8% 16.8% 19.6% 21.5% 11.3% 21.5% 39.8% 33.1% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 6/49
Full-year outlook The company does not publish profit forecasts. Forecasting is difficult given the volatile market environment, including forex trends, market liquidity, and global economic growth. Every month, Money Square discloses number of accounts, customer balances, and operating revenue. And every quarter it releases a forecast range for operating expenses for the following quarter. Q1 FY03/16 expense range (depending on operating revenue and cost control): JPY700 750mn, on increased personnel costs due to seven new staff, better branding, improving customer service, and higher custodian fees accompanying increased customer balances. Operating revenue Operating revenue is a function of number of customer accounts multiplied by operating revenue per account. It is possible to make estimates looking at trends in the number of customer accounts and operating revenue per account. Operating revenue and number of customer accounts FY03/13 FY03/14 FY03/15 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Operating revenue (JPYmn) 746 579 803 1,589 1,930 1,032 1,000 1,248 772 942 1,847 1,738 YoY 12.7% -22.9% 47.1% 139.3% 158.7% 78.2% 24.5% -21.5% -60.0% -8.7% 84.7% 39.3% Customer accounts 44,746 47,459 50,900 55,754 58,821 61,332 63,728 67,718 71,196 74,670 79,303 83,351 YoY 2,418 2,713 3,441 4,854 3,067 2,511 2,396 3,990 3,478 3,474 4,633 4,048 Operating revenue per account (JPY'000) 17.1 12.6 16.3 29.8 33.7 17.2 16.0 19.0 11.1 12.9 24.0 21.4 USD/JPY volatility 4.6% 3.2% 3.2% 6.6% 8.2% 5.9% 3.5% 4.0% 2.4% 2.8% 5.8% 4.4% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. USD/JPY volatility calculated by Shared Research based on Tokyo interbank central rate Number of customer accounts From FY03/13 to FY03/15 (12 quarters), number of customer accounts has grown by 2,000 5,000 per quarter, averaging some 3,400 per quarter. Net increase in customer accounts (quarterly) (JPYmn) 6,000 5,000 4,000 3,000 2,000 1,000 0 Q1 FY03/13 Q2 FY03/13 Q3 FY03/13 Q4 FY03/13 Q1 FY03/14 Q2 FY03/14 Q3 FY03/14 Q4 FY03/14 Q1 FY03/15 Q2 FY03/15 Q3 FY03/15 Q4 FY03/15 Source: Shared Research based on company data http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 7/49
Operating revenue per account Operating revenue per account has ranged between JPY11,000 and JPY35,000 per quarter, with a 12 quarter average of JPY19,000. When forex markets are very volatile, operating revenue per account increases, and decline with low volatility. There is a strong correlation between operating revenue per account and USD/JPY volatility. Over the past three fiscal years (12 quarters) the correlation coefficient between the two was 0.92. Operating revenue per account and USD/JPY volatility 40.0 9.0% 35.0 8.0% 30.0 7.0% 25.0 20.0 15.0 6.0% 5.0% 4.0% 3.0% 10.0 2.0% 5.0 1.0% 0.0 Q1 FY03/13 Q2 FY03/13 Q3 FY03/13 Q4 FY03/13 Q1 FY03/14 Q2 FY03/14 Q3 FY03/14 Q4 FY03/14 Q1 FY03/15 Q2 FY03/15 Q3 FY03/15 Q4 FY03/15 0.0% Operating revenue per account USD/JPY volatility (right axis) Source: Shared Research based on company data http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 8/49
Outlook In October 2014 Money Square Holdings, Inc. became a pure holding company, with the following wholly owned subsidiaries under its umbrella. Money Square Japan, Inc. forex margin trading services to individual and corporate customers. M2 Investment Advisory, Inc. investment advisory and agency services. Money Square International, Inc. overseas subsidiary. M2GP 100% subsidiary of M2 Investment Advisory with limited liability. The holding company structure underpins a more flexible corporate strategy, and expansion of asset management and overseas operations without the constraints imposed on the forex margin trading business, in addition to its traditional forex margin trading business. Japan Forex margin trading If growth in number of customer accounts continues at a pace similar to FY03/13 FY03/15, operating revenue in the domestic forex margin trading business may hit JPY7 10bn (up 32 89% vs. FY03/15) over the three years from FY03/16 (hinging on forex volatility). Assuming operating revenue of JPY10bn for domestic forex margin trading, operating profit could be JPY5 6bn, excluding expected costs. Key operating statistics FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 Par. Par. Par. Par. Par. Con. Account numbers 20,638 33,331 42,328 55,754 67,718 83,351 YoY 54.1% 61.5% 27.0% 31.7% 21.5% 23.1% Operating revenue per account (JPYmn) 0.070 0.077 0.069 0.076 0.084 0.070 YoY -49.7% 10.7% -9.9% 9.3% 11.3% -16.9% USD/JPY historical volatility 8.2% 10.0% 8.9% 9.3% 11.5% 8.2% Operating revenue (JPYmn) 1,184 2,078 2,623 3,718 5,210 5,300 YoY -16.1% 75.5% 26.3% 41.7% 40.1% 1.7% Operating cost(jpymn) 1,384 1,661 2,191 2,401 2,803 2,782 YoY 1.6% 20.0% 31.9% 9.6% 16.7% -0.7% Operating profit(jpymn) -200 417 432 1,316 2,407 2,518 YoY - - 3.6% 204.7% 82.9% 4.6% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. The company thinks its overall differentiation strategy in the forex margin trading industry will be effective in the medium-term. Money Square does not encourage speculative trading, and provides the necessary infrastructure (order management system and investor education) assuming that customers will make profits. Over the past five to six years, its spreads in the forex margin trading services business were broadly the same, and will probably remain stable. It may discount transaction fees during marketing campaigns, but in this case transaction volumes should increase, canceling out the impact of the discounts. Revenue drivers for the business are customer balances, and the company expects earnings to grow in line with the past few fiscal years, assuming unchanged forex volatility. Operating expenses could tick up, mainly for personnel and advertising/promotion expenses, as the business grows and customer count rises. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 9/49
Other financial products The company said that its first foray into financial products other than forex margin trading would be contracts for difference (CFDs) scheduled for the second half of 2015. CFD: Customers make a margin deposit for this settlement-of-differences based derivative trade. CFDs are structured based on the prices of domestic and overseas listed stocks, stock price indices, stock price index futures, bond futures, and other products. Settlement takes placed based on the difference between prices at the open and close of the trade. Investment funds In January 2015 consolidated subsidiary M2 Investment Advisory created and began managing a private fund, Toraripi FX No. 1 Fund. The fund uses tools like the company s Trap Repeat if Done (Auto Repeat Trading, or ART) to manage forex margin trading investments. This pilot fund, limited to a few investors, is the first step toward establishing a future forex fund business. Overseas Consolidated subsidiary Money Square International, Inc. taps overseas markets and develops other businesses. Money Square is looking at several overseas markets, with forex leveraged trading the initial focus. Forex margin trading overseas is viewed as mainly for speculative rather than investment purposes. Money Square is considering what format to use for overseas expansion. It may enter alliances with or buy companies that have expressed interest in using its order management system, and is also considering co-investing with other companies or offering its software. Demand for funds The company believes expansion can be funded from internal sources (JPY3.3bn in cash at end FY03/15). Its dividend payout ratio is about 25%, and it intends to build up its reserves by retaining net income. IT system investments could require funds, but Money Square does not expect large demands for system investment in a particular time period, as it was smoothing its investments based on future investment and resource allocation plans. We note that average expenditure between FY03/11 and FY03/15 on the acquisition of intangible fixed assets was JPY169mn. A sudden demand for funds would likely be M&A related, and the company is building up its internal reserves to handle this. Also, cash lets it settle trades and trade with counterparties. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 10/49
Business description Money Square provides forex margin transaction services to individual and corporate customers. This involves placing a margin (deposit) with a broker and conducting buying and selling currency trades on a net settlement basis. The key business characteristics and profit trends for Money Square are shown below (details of services offered are covered later in this report). Different from the pack in forex margin transaction services Other companies in the industry provide forex margin transaction services at narrower spreads and lower commissions. (At June 2015, DMM.com Securities, the market leader in number of accounts, had USD/JPY spreads of 0.3 pips and no commissions.) Other companies drive revenue by increasing transaction value and volume. Money Square aims to distinguish itself by offering a set-up where customers limit losses, with wide spreads and high commissions. (At June 2015, its USD/JPY spreads were 4.0 pips and commissions were JPY300 for 10,000 currency units.) Its focus is the number of customer accounts and account balances. It does not encourage customers to make excessive trades. Offers unique order management system and investor education Through its order management system and investor education, Money Square has created a system where customers are less likely to lose money. Order management system includes Trap Trade (Auto Trading) can place multiple new orders of a set value at once, in a fixed price range Repeat if Done automatically generates another new order and settlement order by adding a repeat function to an if done order (where a new [first] order and a settlement [second] order are placed simultaneously) Trap Repeat if Done (Auto Repeat Trading, or ART) combines the above two. As of June 2015, the company had 17 registered patents on these and other order management functions in Japan and overseas. Through M2JFX Academia, the company holds investor seminars to teach customers about risk management and trading technology. The company recommends that investors do not leverage their positions excessively, place mainly limit orders, and not engage in short-term trading. Results of order management tools and investor education About 80% of its customers use its order management system. Share of profitable accounts was 69.7% in 2012, 49.0% in 2013, and 58.5% in 2014. Characteristics of operating revenue In forex margin trading, operating revenue depends on number of accounts, turnover per account, and unit revenues. Although the company has low turnover per account, it has high unit revenues. In FY03/15 Money Square had 1/7 of the turnover per account of its competitor Money Partners Group Co., Ltd. (TSE1: 8732). Nonetheless, because the company has high commissions and spreads, its unit revenue (operating revenue divided by turnover) was around 20x that of Money Partners. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 11/49
Earnings track record Through promotion of its order management function, Money Square has grown account numbers steadily since making a full entry into the forex margin trading business for individual investors in FY03/10. In FY03/15, account numbers were 4x the level of those in FY03/10. Unit revenues declined YoY in FY03/10, but as of FY03/15 they had not changed markedly. Money Square: account numbers and unit revenues (Accounts) 120,000 100,000 80,000 60,000 40,000 20,000 0 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 (JPY) 1,200 1,000 800 600 400 200 0 Account numbers (left axis) Unit revenues (right axis) Source: Shared Research based on company materials In FY03/15, operating revenue was 4.5x that of FY03/10, due to growth in account numbers. The company posted an operating loss of JPY200mn in FY03/10 and an operating profit of JPY2.5bn in FY03/15. Money Square: sales, operating revenue and earnings (JPYmn) 6,000 5,000 4,000 3,000 2,000 1,000 0 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 (JPYmn) 3,000 2,500 2,000 1,500 1,000 500 0-500 Operating revenue (left axis) OP (right axis) Source: Shared Research based on company materials http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 12/49
Business model Forex margin trading services A forex margin trade involves placing a margin (deposit) with a broker, and buying and selling currencies on a net settlement basis. Forex margin trading in Japan started in 1998 when the Foreign Exchange and Foreign Trade Act was revised. Daiwa Futures (currently Himawari Securities, Inc. and not related to Daiwa Securities) and others were the first to handle forex margin trading. In addition to futures commission merchants and securities firms, there are also specialist forex margin traders. As of June 2015, about 60 companies offered OTC forex margin trading services. Characteristics of forex margin trading: over-the-counter trades between customer and forex margin transaction broker wide variety in the type of currencies that may be traded, trading lots, trading commissions, and spreads (depending on broker) forex trade of up to 25x the size of the deposit of any given amount possible; the difference between the original trade and the settlement trade accounted for on a net settlement basis parties may freely roll over the settlement period and may freely buy and sell, as long as it takes place while the market is open possible to receive the interest rate differential between two currencies (known as swaps ) when rolling over a position, in addition to profits from currency price movements. A participant buying a high interest currency receives the interest differential; one selling a high interest currency pays the interest differential from January 2012 tax has been at uniform rate of 20% under separate self-assessed taxation; tax applies to aggregate profits and losses (rather than individual trades) and carry-forward deductions are applicable Forex markets: Trading does not take place in a specific place such as a stock exchange. The trading participants conduct over-the-counter trades via telephone or terminal. Depending on the participant and the amount traded, there is an interbank market and a retail market. Interbank market: Where financial institutions such as banks and securities firms trade with each other. Retail market: Where financial institutions that participate in the interbank market (such as banks) trade with trading companies, other companies, and individuals. In this market forex trading occurs based on the currency rates in the interbank market. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 13/49
How do forex margin trading brokers generate revenue? Forex margin trading brokers generate revenue from trading commissions, forex rate spreads, and the difference from swaps. Trading commissions Forex margin trading brokers charge a commission when an order is executed. Typically, commissions are based on volume e.g., at JPY30 for every 1,000 currency units. In this case, the broker s revenue = transaction size number of currency lots charged for times trading commission per lot. For example, assuming a trading commission of JPY30 for every lot of 1,000 currency units, a 100mn currency unit trade would give the broker 1,000,000 1,000 x 30 = JPY30,000. Amid intensifying competition, as of June 2015 many forex margin trading brokers were not charging commissions. Revenue from forex rate spreads The forex rates that the forex brokers show to clients are either the ask (buying price) or bid (selling price). The difference between the ask and bid prices is the spread. For example, in a USD/JPY trade, if the ask is JPY100.03 and the bid is JPY100.00, the difference of JPY0.03 is the spread. Trading revenue from cover trades Forex margin trades are over-the-counter trades between the broker and the customer. When a customer executes a trading order at the rate offered, the broker holds the opposite position to the customer s buy or sell position, leading to market volatility risk. The broker avoids this risk by placing an order opposite to the customer s position (cover trade) with a partner financial institution (a bank or interbank market participant which acts as the counterparty). In this case, the difference between the spread offered by the counterparty to the broker, and the spread the offered by the broker to its customer, generate cover trade transaction income. Cover trades with a counterparty can be conducted either automatically through a hedge system or manually by a dealer. Forex transaction case 1: revenue from cover trade Source: Shared Research based on company data http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 14/49
Case 1: When a customer places a buy order for JPY100.04 with USD quoted at 100.00.04, the customer is sold the dollar at JPY100.04. If the broker has placed a buy order with its counterparty bank at JPY100.02/USD in a cover trade, it earns JPY0.02. If the transaction volume is USD10,000, the broker receives JPY200 in revenue. Trading revenue from in-house cross trades A forex margin trading broker responds to trade orders for currency pairs (buying and selling orders) from customers through an online trading screen in real time. When there are many simultaneous buying and selling orders from customers, they offset each other. As the offsetting portion is neutral with respect to market movements, there is no need to make a cover trade; that is only necessary for the portion that has not been offset. In this case, the bid and ask spreads shown to the broker s customers generate the broker s trading revenue. Forex transaction case 2: revenue from in-house cross trades Source: Shared Research based on company data Case 2: When customers place orders when the USD is quoted at 100.00-.04, the purchase is at JPY100.00 and the sale is at JPY100.04, generating revenue of JPY0.04. If each transaction is for USD10,000, the broker receives JPY400 in revenue. Revenue from differences accompanying forex swaps In forex margin trading, because of an interest rate differential between the two currencies, when a position is rolled over to the next day these interest rate differentials generate interest payments and receipts (swap points). When someone buys a high-interest currency, they receive the interest rate differential; when they sell a high interest currency they pay the interest rate differential. Forex margin trading brokers have cover trades with counterparties as needed when trades with their customers create a foreign currency position. This eliminates the forex volatility risk in their own position, as well as the risk of having to pay or receive swap points. Swap points can be counted as revenue if there are differences between points received from the counterparty (or paid to the counterparty) and those paid to the customer, as well as differences when swap points are received from the customer. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 15/49
Swap point payments and receipts: schematic diagram Source: Company materials http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 16/49
Earnings structure Operating revenue Money Square primarily provides its personal and corporate customers with forex margin trading services. It receives trading commissions, revenue from cover trades, revenue from in-house cross trades, and revenue from swap points. Sources of revenue: dealing income, commissions, and swap point spreads Sources of revenue include dealing income (trading income from cover trades and in-house cross trades; about half of revenue), commissions (a quarter of revenue), and swap point spreads (a quarter of revenue). Money Square uses the dealing desk method, which accounts for trading income from cover trades and in-house cross trades as dealing income. No dealing desk method: The broker places cover trades for individual customer orders. The difference between the spread offered by the counterparty to the broker and that offered by the broker to the customer becomes revenue for the broker. Dealing desk method: Brokers draw up an agreement with customers, and offset various buy and sell orders, only conducting cover trades for the portion that was not offset. The spread shown to customers becomes the broker s a main revenue source. Operating revenue = number of accounts x operating revenue per account Operating revenue is number of accounts multiplied by operating revenue per account. Over the past five fiscal years, operating revenue per account has been JPY70,000 85,000. Key operating revenue and account data FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 Par. Par. Par. Par. Par. Par. Par. Con. Operating revenue (JPYmn) 2,039 1,411 1,184 2,078 2,623 3,718 5,210 5,300 YoY 15.5% -30.8% -16.1% 75.5% 26.3% 41.7% 40.1% 1.7% Account numbers 7,026 13,392 20,638 33,331 42,328 55,754 67,718 83,351 YoY 46.1% 90.6% 54.1% 61.5% 27.0% 31.7% 21.5% 23.1% Operating revenue per account (JPYmn) 0.34 0.14 0.07 0.08 0.07 0.08 0.08 0.07 YoY -59.9% -49.7% 10.7% -9.9% 9.3% 11.3% -16.9% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. Operating revenue per account = transaction value per account x unit revenues Operating revenue per account is the transaction value per account times unit revenues (operating revenue transaction value). Transaction value per account is heavily influenced by forex market volatility, and tends to increase when volatility is high. Because 80% of the company s customer orders are limit orders, higher volatility on the forex markets means customers trade more. Over the past five fiscal years, turnover per account has been 0.8 1.2mn currency units. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 17/49
Volatility and turnover 19.0% 17.0% 15.0% 13.0% 11.0% 9.0% 7.0% 5.0% FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 0.5 USD/JPY historical volatility Transaction value per account (per mn currency units) FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 USD/JPY historical volatility 16.8% 11.9% 10.0% 8.9% 9.3% 11.5% 8.2% Transaction value per account (per mn currency units) 1.3 0.9 1.0 0.8 1.0 1.2 0.8 Source: Shared Research based on company data Unit revenues: trading commissions, dealing income, and revenue from differences in swap exchanges. Trading commissions are JPY300 per 10,000 currency units, but may decline temporarily during marketing campaigns. Dealing income varies according to the share of cover trades and in-house cross trades. As of June 2015, Money Square s USD/JPY spreads were 0.03 (JPY300 per 10,000 currency units). Income due to the differences on swap exchanges depends on how long the customer holds the position. As of June 2015, the difference on USD/JPY swaps was JPY20 per 10,000 currency units per day. Over the five years from FY03/11 to FY03/15, the company s unit revenues have been JPY700 900 per 10,000 currency units. Operating revenue, turnover and unit revenues FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 Operating revenue(jpymn) 2,039 1,411 1,184 2,078 2,623 3,718 5,210 5,300 YoY 15.5% -30.8% -16.1% 75.5% 26.3% 41.7% 40.1% 1.7% Turnover (per 10,000 currency units) 20,428 13,311 14,498 25,890 31,243 50,840 73,147 63,732 YoY 39.8% -34.8% 8.9% 78.6% 20.7% 62.7% 43.9% -12.9% Unit revenues (JPY) 998 1,060 817 803 840 731 712 832 YoY -17.4% 6.2% -23.0% -1.7% 4.6% -12.9% -2.6% 16.7% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods Note: Unit revenues are operating revenue per 10,000 currency units According to the company, competitors offer narrower spreads to their customers than those that counterparties offer brokers, and many rely on in-house cross trades for their revenue. Money Square displays wider spreads to its customers than those its counterparties show it. Even if it covers a customer order immediately, it can earn revenue. It stated that its unit revenues were around 30x the size of its competitors as of July 2015. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 18/49
Operating expenses Operating expenses come mainly from fixed expenses such as personnel and advertising/promotion expenses. Because there are no variable costs, virtually all operating revenue in excess of operating expenses flows through to operating profit. Breakdown of operating costs Breakdown of operating costs FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 (JPYmn) Par. Par. Par. Par. Par. Par. Par. Con. Operationg cost 1,087 1,362 1,384 1,661 2,191 2,401 2,803 2,782 YoY - 25.4% 1.6% 20.0% 31.9% 9.6% 16.7% -0.7% % of operating revenue 53.3% 96.5% 116.9% 79.9% 83.5% 64.6% 53.8% 52.5% Personnel expenses 713 813 873 Advertising and promotion expenses 704 573 617 Equipment costs 206 272 226 Real estate costs 107 237 235 Depreciation 194 347 231 Commissions paid 281 306 309 Other 193 251 289 Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods Capital spending and depreciation Capital spending and depreciation FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 (JPYmn) Par. Par. Par. Par. Par. Par. Par. Con. Capital spending 202 168 212 205 374 217 446 161 Depreciation 57 89 93 100 182 194 347 231 Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods Personnel expenses: Fixed expenses not directly affected by fluctuations in operating income, increasing over time due to more back office and sales personnel costs that accompany business growth. No excess personnel means that when new businesses are launched the company needs to boost hiring. Advertising and promotion expenses: Semi-variable expenses, with elements indirectly linked with operating revenue. Tends to increase with new customer account growth through affiliate advertising. When joining fees are received following a new account opening, the affiliate advertiser receives a payment of several JPY10,000. It opens roughly 1,000 new accounts monthly, and according to the company, with a higher proportion of active accounts than competitors, the cost-benefit equation is unrivalled. Equipment costs: Fixed expenses including IT systems and computers. There was a one-off increase in FY03/14 for relocating headquarters, but no plan for further increases. Real estate costs: Fixed expenses for office and company accommodation rent. Depreciation: Software is the main depreciated asset, over five years. Excluding FY03/12 and FY03/14, capital spending was around JPY200mn per year, and since FY03/12 depreciation has been in line with capital spending. In FY03/12, there was the M2JFX launch, a change in the trust bank which was the custodian for customer accounts, and a major overhaul of systems accompanying changes and additions to the financial institutions used for counterparties. In FY03/14 capital spending increased temporarily due to the HQ relocation. Commissions paid: Variable expenses that move with assets under custody payments such as to trust banks for letters of guarantee and fees for quick deposits/withdrawals. As customer deposits increase, so do cover transactions, leading to higher cost of commissions to issue letters of guarantee. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 19/49
Business Money Square provides forex margin trading services to individual and corporate clients. It provides a proprietary order management system and customer education to help customers avoid losses, which enables it to earn higher commissions with wider spreads and higher unit revenues (operating revenues turnover) compared with industry peers. Services Currency trading pairs and margin requirements Money Square offers forex margin trading on the 11 currency pairs (listed below) to individual and corporate customers. Its trading rules: trading lots are 1,000 currency units (10,000 units in the case of ZAR/JPY); an upper limit of 20,000 currency units per trade; minimum price range, JPY0.01 (USD0.0001 in USD trades). The deposit is uniformly set at 4% minimum (25x maximum leverage). At 3PM every trading day, the margin maintenance ratio is calculated (market value of balance necessary margin x 100). If it is less than 100%, offsetting trades are conducted for the entire position ( 3 PM Tokyo loss cut ). Every 10 minutes during the trading day the positions are marked to market, and if the margin maintenance ratio is less than 50% there is a forced settlement of the entire position, and losses are crystallized to prevent them from expanding further ( automatic loss cut ). Currency trading pairs and trading rules Currency trading pairs Minimum price range Trading lots Upper limit per trade USD/JPY JPY0.01 USD1,000 USD2,000,000 EUR/JPY JPY0.0 EUR1,000 EUR2,000,000 EUR/USD USD0.0001 EUR1,000 EUR2,000,000 AUD/JPY JPY0.01 AUD1,000 AUD2,000,000 AUD/USD USD0.0001 AUD1,000 AUD2,000,000 NZD/JPY JPY0.01 NZD1,000 NZD2,000,000 NZD/USD USD0.0001 NZD1,000 NZD2,000,000 CAD/JPY JPY0.01 CAD1,000 CAD2,000,000 GBP/JPY JPY0.01 GBP1,000 GBP2,000,000 TRY/JPY JPY0.01 TRY1,000 TRY2,000,000 ZAR/JPY JPY0.01 ZAR10,000 ZAR2,000,000 Source: Shared Research based on company materials Trading commissions and spreads The company s commissions for trades of over 10,000 currency units: JPY30 for every 1,000 currency units (USD0.30 for USD currency trades). For trades of less than 10,000 currency units: JPY50 for every 1,000 currency units (USD0.50 for USD currency trades). For Semawari (see below) trades: JPY10 for every 1,000 currency units (USD0.10 for USD currency trades). Commissions are nil for almost all other forex brokers. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 20/49
Semawari: Semawari 20 is a product which offers fixed commissions of one point (per currency, one way) when the profit trigger is set within 20 points for orders such as Trap Trade, Repeat if Done, and Trap Repeat if Done. Semawari 5 applies to ZAR/JPY and HKD/JPY currency pairs. Similarly, when the profit trigger is within a maximum of five points the fixed commissions is one point (per currency, one way). The spreads that the company offers to its customers average four pips. According to the company, others in the industry offer spreads of 0.4 0.8 pips. As of June 2015, Money Square offered spreads of 0.04 on its USD/JPY trades versus 0.003 for GMO Click Securities, number one in forex margin trading transaction volume in the world. Major forex firms: spreads, swap points and commissions Currency Spread Swap point Commissions Buy Sell Diff. DMM FX USD/JPY 0.003 1-1 0 0 EUR/JPY 0.006 4-4 0 AUD/JPY 0.008 45-45 0 GMOFX USD/JPY 0.003 4-6 -2 0 EUR/JPY 0.006-4 1-3 AUD/JPY 0.007 50-53 -3 YJFX! USD/JPY 0.003 5-6 -1 0 EUR/JPY 0.007 0-1 -1 AUD/JPY 0.008 56-57 -1 Money Partners USD/JPY 0.003 6-7 -1 0 EUR/JPY 0.007 0-1 -1 AUD/JPY 0.009 57-60 -3 Money Square Japan USD/JPY 0.04 4-24 -20 300 EUR/JPY 0.05-21 1-20 AUD/JPY 0.06 50-70 -20 Source: Shared Research based on company materials Note: Spreads and swap points are as of June 2015. Note: Spreads are for one currency; swap points and commissions are for 10,000 currency units. Note: Data for Money Partners is for their Partners FX nano product. Order management systems, seminars The company sees the main enemy against customers success in forex margin trading as fickle emotions. If investors trade while monitoring forex market movements and are on a winning streak they get excited and trade excessively; when they are losing they are unable to make rational decisions due to fear of making losses. Money Square says that other companies set transaction costs low, leading to high-volume trading by customers and increasing the chance of losses. According to the company, other firms in the industry focus on providing a low-cost service, and are indifferent to their customers trading profits. Money Square has high trading costs, and pays attention to its customers trading profits. Seeing the need for a system where customers did not have to constantly monitor market movements and turn over their accounts rapidly, the company offers order management systems and seminars to educate its customers. As of June 2015, the company had 17 patents in Japan and overseas for its original order management systems including: Trap Trade, Repeat if Done, Trap Repeat if Done, and RakuRaku Toraripi. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 21/49
Trap Trade (Auto Trading) Trap Trade (Auto Trading; patent received in March 2009) enables customers to place multiple new orders of a set value in a fixed price range, at once. A typical limit order can miss profit opportunities by not following market fluctuations or due to a trade not being executed. Trap Trade, however, aims at a number of profit opportunities by setting a trap in the forex market. It is possible to place an order for as many as 25 limit trades at specified price intervals and specified volumes for each price at once using this function. By enabling an order to be divided into multiple portions and standardizing transaction rates, risk may be diversified. Trap Trade (Auto Trading) Source: Company materials Repeat if Done Repeat if Done (patented in January 2010) combines the Repeat function with an If Done order (where a new [first] order and a settlement [second] order are placed simultaneously); another new order and settlement order are automatically generated with this order. When forex rates are trading within a certain range, this enables more opportunities to make profits by automatically generating repeated trade orders. If Done Repeat if Done Source: Company materials Trap Repeat if Done (Auto Repeat Trading, or ART) Trap Repeat if Done (Auto Repeat Trading, or ART) combines the above-mentioned Trap Trade and http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 22/49
Repeat if Done orders. According to the company, as long as the market is range trading for an extended period of time, this enables repeated placing of If Done orders. This avoids the hassle of the traditional systems where each order had to be set up anew. This order makes it possible to place repeated automatic Trap Trade orders. Also, once an Trap Repeat if Done order has been placed, as long as range trading continues within a certain price band, it is possible to make mechanical trades without emotions or market views coming into play. This enables clients to get the full use and convenience of online forex trading. In January 2010, Trap Repeat if Done (Auto Repeat Trading, or ART) received financial product transaction management device and program patents. Trap Repeat if Done (Auto Repeat Trading, or ART) Source: Company materials Litigation regarding Trap Trade In November 2009, Money Square applied to the Tokyo District Court to order a temporary injunction against another forex margin trading broker (Company A), for an order-placing system Company A was operating and offering to its general customers. Money Square argued that this was similar to its Trap Trade product, and that its patent rights were being infringed. In June 2010, Money Square and Company A reached an agreement to the effect that Company A would not use the order placing methodology subject to the temporary injunction petition. Litigation regarding GaitameOnline s cycle order and i cycle order In February 2015, Money Square filed a complaint to the Tokyo District Court saying that GaitameOnline s cycle order and i cycle order launched in October 2014 infringed its patents (number 5525082 and 5650776) and demanded that GaitameOnline cease offering these products. Kessai Trail (domestic and international patents pending) This is a special function for Toraripi trades to maximize profits by allowing the settlement price to follow currency rate trends. The service was launched in January 2015. According to the company, by adding the Kessai Trail function to the Trap Repeat if Done order predicated on a range trading market, it has also become possible to target profits when there is a trend trading market. The traditional Trap Repeat if Done strategy entails repeated trades when exchange rates are repeatedly moving up and down in a range. Under this strategy, if the exchange rate continues climbing after the buy position has been closed out, investors miss an opportunity to make profits they would have received if they had maintained their position. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 23/49
In the Kessai Trail strategy, even if the exchange rate reaches the selling price set when making the initial order, the position is not sold to crystallize profits. (The order to sell the position takes effect only after the currency rate has passed an initial trigger price and has started falling.) Subsequently every time the rate reaches the trigger price, the settlement price moves by a fixed increment. When the exchange rate falls below the settlement price an automatic market order is generated and the trade settled, locking in profits. The trigger price is automatically set in increments of JPY0.2 above the settlement price with some exceptions (ZAR/JPY0.10 and TRY/JPY0.10, as well as USD0.0020 for any USD straight currency pairs). Kessai Trail Source: Company materials M2JFX Academia Launched in July 2011, M2JFX Academia is Money Square s original program offering investment education to customers. The head of the school is international financial analyst Hisashi Yoshida. With the aim of training investors to avoid losses, the curriculum has three sections: forecasting, positioning, and risk management. From July 2011 through May 2015, 262 seminars were held, with 7,644 students (9% of 83,351 accounts outstanding at end FY03/15). Customer success rate The table below shows the success rate (according to Money Square) of its customers from 2012 2014. Apart from 2013, the share of accounts making money was greater than those losing money. Customer success rate by fiscal year % of accounts making money % of accounts losing money 2012 69.7% 30.3% 2013 49.0% 51.0% 2014 58.5% 41.5% Source: Shared Research based on company materials According to the company, from February 2014 through October 2014, more customers made money than lost money for 36 consecutive weeks. From October 2014 through December 2014, 72.3% of the company s customers made profits and 27.7% made losses. In contrast, at a leading US forex firm, 35.3% of customers made money and 64.7% lost money. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 24/49
Customer characteristics Age At Q4 FY03/15, the average age of its customers was 42.5 years. This is slightly higher than that of others in the industry. Most forex margin trading investors are in their 30s. This demographic prefers high-frequency screen-based trading, and tends to choose other companies in the industry that offer low-cost trading services. The company said that many of its forex margin trading customers are beginners. Typically, investors first use comparison websites to search for forex margin trading brokers and open accounts at other companies, lured by the lack of commissions and USD/JPY spreads of 0.3 pips. Subsequently, their investment performance deteriorates, and frustrated at not knowing how to invest, they search online and find Money Square. Many customers have accounts at several forex brokers and spread their transactions around. Even if they usually use Money Square, when they are confident about making short-term profits (e.g., when US labor force data are released), they use low-cost competitors. Acquisition method Money Square said it acquired customers through seminars, magazine and radio advertising, and from affiliates. A representative of M2J Academia conducts one regional seminar per month; apparently there has been a reasonable turnout due to ongoing needs to invest funds. The major reason that customers choose Money Square is that they can use the Trap Repeat if Done function, followed by its information provision, educational program, and seminars. Active account ratio The industry average for the active account ratio (number of active trading accounts [those that make at least one trade per quarter] total account numbers) is 10 20%, versus over 40% for Money Square. Shared Research believes that this is because a smaller percentage of Money Square s customers quit trading due to losses in the forex markets than other firms. Active account ratios Forex margin trading average Money Square End of Mar. 2012 15.5% 42.9% End of Mar. 2013 12.7% 43.0% End of Mar. 2014 12.7% 39.1% Source: Shared Research based on Financial Futures Association of Japan and company materials Deposits per account Money Square averages JPY700,000 800,000 in deposits per account versus the industry average of around JPY200,000. Shared Research thinks that this is because their active account ratio is high. Deposits per account (JPY'000) Forex margin trading average Money Square End of Mar. 2012 JPY208 JPY739 End of Mar. 2013 JPY215 JPY743 End of Mar. 2014 JPY217 JPY776 End of Mar. 2015 JPY228 JPY735 Source: Shared Research based on Financial Futures Association of Japan and company materials http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 25/49
Customer leverage Versus industry peers, whose customers average leverage is around 10x, the average Money Square customer has leverage of 2 3x, according to the company. It also mentioned that the maximum leverage was in line with other companies in the industry at 25x, but most customers have constrained their leverage because the company has talked about risk management at seminars. Turnover ratios Turnover ratio is defined as trading value average value of period-beginning and period-end positions. From FY03/12-FY03/15, quarterly turnover for OTC forex margin trading overall was 80 300x, but just 5 20x for Money Square. According to the company, customers of competitors are day traders or have a very short-term focus; its customers trade over long time frames and sometimes hold positions for as long as a year. Shared Research estimates that Money Square s customers holding their positions for a long time is the source of revenue from swap exchanges, and a factor in increasing the company s unit revenues. Number of customer accounts, trading turnover Number of customer accounts From its establishment through 2008, Money Square targeted the high net worth demographic. The company provided a 24-hour telephone-based forex margin trading service with limited leverage, and offered consulting and asset management advice. In June 2008 the company launched its M2J Direct offering, specializing in providing internet trading to general individual investors with a minimum deposit of JPY500,000. The company rebranded its legacy product as M2J Premium. In April 2011, accompanying new leverage limit regulations, it merged the two under the name M2JFX. At end FY03/15, the company s share of trading accounts was just 1.4%. The company has been continuously growing its trading accounts since launching its forex trading service aimed at general individual investors in 2008 (with the exception of August 2011), and its share of trading accounts is similarly increasing. Money Square s number of trading accounts and trading account share 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% Number of customer accounts(left axis) Share of trading accounts(right axis) Source: Shared Research based on Financial Futures Association of Japan and company materials http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 26/49
Trading account numbers Trading accounts FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 Total 7,026 13,392 20,638 33,331 42,328 55,754 67,718 83,351 YoY 46.1% 90.6% 54.1% 61.5% 27.0% 31.7% 21.5% 23.1% FX trading account numbers (individual) 6,635 12,943 20,131 32,703 41,604 54,922 66,791 82,316 FX trading account numbers (corporate) 391 449 507 628 724 832 927 1,035 Source: Shared Research based on company materials Figures may differ from company materials due to differences in rounding methods. Customer assets In FY03/09, customer assets declined due to customer losses following the global financial crisis. From January 2010 however, they have grown continuously in line with growth in customer account numbers. The company said it has been recommending that its customers implement rigorous risk controls in the wake of the global financial crisis. Customer assets per account were over JPY2mn through 1H FY03/09 when the company specialized in the affluent demographic. Following the launch of M2J Direct, since FY03/10 they have been trending at around JPY700,000 900,000. The company s share of customer assets has been climbing along with its share of trading accounts. It has been on an uptrend since FY03/10. In FY03/15 its share customer account numbers was just 1.4% but its share of customer assets was 4.6% reflecting its high number of active accounts. Value and share of customer deposits 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Customer assets(left axis) Share of customer assets(right axis) Source: Shared Research based on Financial Futures Association of Japan and company materials Turnover Turnover depends on the value of customer deposits, but is largely affected by forex market volatility. The company does not recommend high leverage or frequent short-term turnover. It suggests that they use its order management system and trade setting traps using limit orders. As a result, there is not much turnover when the forex market is stable. There is a tendency for turnover to decline when volatility in the forex markets is low and for turnover to increase when volatility is high. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 27/49
Money Square: value and share of turnover (mn currency units) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 0.25% 0.20% 0.15% 0.10% 0.05% 0.00% Turnover (per mn currency units) (left axis) Share of turnover(right axis) Source: Shared Research based on company materials and Financial Futures Association of Japan Note: Turnover share calculated using standardized exchange rates Money Square: turnover Turnover 7 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 (mn currency units). Par. Par. Par. Par. Par. Par. Par. Con. Turnover total 20,428 13,311 14,498 25,890 31,243 50,840 73,147 63,732 YoY 39.8% -34.8% 8.9% 78.6% 20.7% 62.7% 43.9% -12.9% Source: Shared Research based on company materials Note: Figures may differ from company materials due to differences in rounding methods. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 28/49
Strengths and weaknesses Strengths Proprietary, patented system underpins economic moat and high revenues: The company s order management system is difficult to directly emulate. On top of that, its investor education system helps customers use the order management system and get positive results. Of its customers who use the company s order management system, more make profits than losses.,, High trading costs: The company offers spreads that are 10x higher than industry peers, and charges commission fees. Yet customers accept the higher commission fees and wide spreads to benefit from the order management system. As a result, unit revenue was around 20x that of its industry peers (see Competition section for details). Self-selecting customer base: A majority of the company s customers have made profitable investments using the order management system, enabling it to outpace competitors in customer acquisitions. Conventional forex companies may struggle to copy the company, given that many of their customers were initially attracted by low commissions and not system trading. Money Square does not prioritize low costs but rather control leverage. This attracts customers who do not churn, meaning it can avoid price competition. Weaknesses Vulnerable to forex market volatility: Money Square s order management system automatically splits up orders within certain price ranges, and places limit orders when the forex market is volatile. When the forex market is quiet, the order management system does not generate orders and turnover tends to decline. As a result, the company s short-term performance is vulnerable to the forex market. Shallow reach toward new customers: Investors typically want low trading costs (refer to Strategy section), yet Money Square has deliberately high trading costs. Many of the company s customers are investors who experienced deteriorating investment performance while they were customers of other firms, suggesting that the company has limited appeal to new investors. At end FY03/15 its share of account numbers was 1.4%. Imitation systems and services: Despite the company holding patents for its order management system, there are similar Trap Trade (Auto Trade) tools and services that infringe its patent rights. The existence of such imitations could hurt the company s competitiveness, as investors may misunderstand the originality and effectiveness of Money Square s system. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 29/49
Market and value chain Comparison of forex margin trading market and securities markets Forex margin trading services were born in 1998 with the new Foreign Exchange Act, and the legislative and tax system was set up around 2010. As of March 2015, the number of accounts and customer assets in forex margin trading was vastly outstripped by securities trading accounts. Shared Research thinks that there is ample scope for medium-term growth in the forex trading market. Number of accounts As of end FY03/15, there were 18.7mn internet securities trading accounts, but just 5.8mn forex margin trading accounts, or one third as many. From end FY03/09 to end FY03/15 the number of internet securities trading accounts grew by 50%, and the number of forex margin trading accounts grew by 170%. Growth in the number of forex margin trading accounts has outstripped that of securities trading accounts in each of these years. Internet securities trading accounts and forex margin trading accounts (mn accounts) 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 End FY03/09 End FY03/10 End FY03/11 End FY03/12 End FY03/13 End FY03/14 End FY03/15 70% 60% 50% 40% 30% 20% 10% 0% Internet securities transaction accounts Internet securities transaction account YoY Forex margin trading accounts Forex margin trading accounts YoY Customer accounts (mn accounts) End FY03/09 End FY03/10 End FY03/11 End FY03/12 End FY03/13 End FY03/14 End FY03/15 Internet securities transaction accounts 12.9 13.7 14.3 15.2 16.2 17.6 18.7 Internet securities transaction account YoY 33.4% 6.4% 4.2% 6.3% 6.5% 8.7% 6.5% Forex margin trading accounts 2.2 3.1 3.5 3.9 4.4 5.2 5.8 Forex margin trading accounts YoY 62.4% 40.3% 13.6% 11.6% 14.0% 17.2% 11.9% Source: Shared Research based on Japan Securities Dealers Association and Financial Futures Association of Japan data Customer assets As of end FY03/15, internet securities trading accounts had customer assets of JPY93.8tn versus just JPY1.3tn for forex margin trading accounts, or a ratio of roughly 70:1. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 30/49
Internet securities trading accounts and forex margin trading accounts (JPYmn) 100,000,000 90,000,000 80,000,000 70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0 End FY03/09 End FY03/10 End FY03/11 End FY03/12 End FY03/13 End FY03/14 End FY03/15 Internet securities transactions assets held Forex margin trading assets held 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% Internet securities transactions assets held YoY Forex margin trading assets held YoY Assets held (JPYmn) End FY03/09 End FY03/10 End FY03/11 End FY03/12 End FY03/13 End FY03/14 End FY03/15 Internet securities transactions assets held 42,275,182 53,436,637 53,159,811 56,712,960 71,116,021 79,964,212 93,894,419 Internet securities transactions assets held Y - 26.4% -0.5% 6.7% 25.4% 12.4% 17.4% Forex margin trading assets held 471,790 580,771 667,118 811,919 956,232 1,130,671 1,325,752 Forex margin trading assets held YoY -9.7% 23.1% 14.9% 21.7% 17.8% 18.2% 17.3% Source: Shared Research based on Japan Securities Dealers Association and Financial Futures Association of Japan data Changing forex margin trading landscape Number of forex trading accounts (accounts) 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 FY03/02 FY03/03 FY03/04 FY03/05 FY03/06 FY03/07 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 Value of deposits 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 FY03/02 FY03/03 FY03/04 FY03/05 FY03/06 FY03/07 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 Source: Shared Research based on Financial Futures Association of Japan data http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 31/49
1998 2005 In April 1998, the new Foreign Exchange Act, part of Japan s financial Big Bang, came into force. This was a key factor in the liberalization of forex trading and marked the start of forex margin trading in Japan. In addition to commodity futures traders and securities companies, specialist firms entered the market and offered trading to general investors such as individuals. Under the revised Act, trading was deregulated and a number of businesses not covered by the regulation and guidance of the supervisory authorities entered the market; approximately 200 forex margin trading firms were operating in 2005. Some investors entered into large transactions at odds with their economic means, in many cases followed by problems and damaged finances. According to the National Consumer Affairs Center of Japan, in 2000 there were 41 inquiries and complaints about forex margin trading, rising to 1,182 in 2003. In July 2005 the Revised Financial Futures Trading Act came into force. Under this, businesses involved in forex margin trading were regulated as financial futures traders and required to register. From July through December 2005 more than 50 forex margin trading operators were ordered to cease operations for six months by the relevant finance bureaus. In 2006 the number of forex margin trading brokers halved from 2005, to around 100 firms. Of the firms that launched forex margin trading between 1998 and 2005, the top 10 in terms of customer accounts as of June 2015: Gaitame.com (began services in August 1999); Money Partners (December 1999); FX Prime (February 2000); Central Tanshi FX (April 2002) and Money Square (May 2003). According to a survey on forex trends by Yano Research Institute, as of March 2005 customer deposits were JPY291.8bn (JPY1.160tn in March 2014), and there were 181,240 accounts (4,788,978 in March 2014). 2006 2008 In September 2007, the Financial Instruments and Exchange Law came into effect and forex margin trading firms came under the jurisdiction of the Financial Services Agency, the same as securities firms, with increased transparency and stricter internal control regimes. In the absence of leverage regulations, forex margin trading firms aimed to distinguish themselves by differences in leverage allowed, commissions, and spreads. In 2008, Gaitame.com ascended to the number one position with market shares of over 18% of account numbers and deposits. Himawari Securities, Central Tanshi, and Money Partners followed with shares of around 5%. GMO Click Securities, the market leader in the customer deposits as of FY03/15, had a market share of 1% in 2008. Meanwhile DMM.com Securities, which had the largest number of customer accounts as of FY03/15, had not yet begun operations. During this period, numerous companies entered the forex margin trading industry including major securities firms such as Daiwa Securities (February 2006), Joinvest Securities (February 2007), kabu.com Securities (May 2007) and internet companies including GMO Click Securities (October 2006), CyberAgent (October 2006), and Excite (became a subsidiary of Click Securities in October 2008). Due to the spread of the internet and accommodative legislature, forex margin trading became more widespread. In March 2008 the value of margin deposits was JPY696.4bn (2.4x the level of March 2005) and there were 1.24mn accounts (6.8x). 2009 onward Post crisis, the yen appreciated and forex margin trading investors assets declined, with customer http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 32/49
deposits falling to JPY595.1bn in FY03/09 (-14.5% YoY). Meanwhile, the number of accounts increased to 1.92mn (+55.3% YoY; source: survey on foreign-exchange trends by Yano Research Institute). Several new investors entered the market, thinking that the appreciation of the yen provided a good entry point. Also spurring account growth were account opening campaigns by the forex margin trading brokers and moves to cut trading costs. Following a revised Cabinet Office Ordinance on Financial Instruments Business in August 2009, placing customer assets in custody and the hitherto voluntary loss cut transactions became compulsory. Further, to prevent the encouragement of excessive speculation, from August 2010 it was decided that the maximum amount of leverage allowed would be reduced in stages. Also, from January 2012, there were further improvements in the legislative and taxation regimes, with a shift from taxing aggregate income (maximum tax rate: 50%) to a uniform 20% rate (self-assessed separate taxation, aggregating profits and losses, with deductions for loss carryforwards). From August 2010 forex margin trading brokers were no longer able to use high leverage to distinguish themselves. The result was intensified competition to lower spreads in an attempt to improve their product appeal from 2009. GMO Click Securities and DMM.com Securities used low spreads to acquire new customer accounts and expand market share. In July 2009, DMM.com Securities launched its forex margin trading services, and in September 2009 it set USD/JPY spreads at 0-0.8 pips. In September 2009 GMO Click Securities introduced fixed USD/JPY spreads at 0.8 pips. Subsequently, in January 2012, GMO Click Securities reduced its USD/JPY spread from 0.8 to 0.5 pips, and DMM.com Securities shifted its USD/JPY spreads from a 0.5 pip campaign special offer to a permanent offer. In the following February, GMO Click Securities lowered its USD/JPY spread from 0.5 to 0.4 pips, and DMM.com Securities followed suit with a 0.4 pip offer. In August 2012, GMO Click Securities lowered its USD/JPY spread from 0.4 to 0.3 pips, and DMM.com Securities followed suit in October 2012. In addition, starting in 2011 companies offered cash back to investors who opened accounts and started trading. Both companies have been working to boost their profiles using celebrities in TV ads. As a result of the spread lowering war from 2009 onwards, Gaitame.com s share fell and those for GMO Click Securities and DMM.com Securities rose. From FY03/9 through FY03/15 Gaitame.com s share of customer deposits fell from 18.5% to 8.1%, while that for GMO Click Securities rose from 2.6% to 9.2% and that for DMM.com Securities rose from nil to 7.3%. Over this time Gaitame.com s share of customer accounts fell from 17.2% to 6.7%, while that for GMO Click Securities rose from 2.5% to 6.8% and that for DMM.com Securities rose from nil to 7.6%. The narrowing of spreads and lowering of minimum trading parcel sizes continued to boost the number of investors. From FY03/09 through FY03/14, customer margin deposits doubled to JPY1.16tn and the number of accounts rose to 4.79mn (2.5x FY03/09 levels). Competition As of March 2015, about 60 companies were offering forex margin trading services. DMM.com Securities was the leading specialist forex margin trading house with a 7.6% share of customer accounts, followed by GMO Click Securities with 6.8%. In terms of customer deposits, GMO Click Securities was the leader with a 9.2% share. GMO Click Securities had the highest annual turnover in FY03/15, a share of 19.3% followed by DMM.com Securities with a 17.4% share. GMO Click Securities and DMM.com Securities had a combined share of 14.4% of accounts but a 36.7% share of turnover. As previously mentioned, both firms have been growing their share since 2009 by offering narrow spreads. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 33/49
As of March 2015, the results of the spread-lowering war since 2009 was that a strategy of earning revenue through offering low spreads and encouraging short-term high volume turnover was predominant in the forex margin trading industry. In contrast, Money Square has a different customer acquisition strategy: it has achieved profit growth without lowering spreads. In FY03/15, its share of accounts was 1% implying scope for growth. Account numbers Account numbers FY03/12 FY03/13 FY03/14 FY03/15 (Accounts) DMM.com Securities 145,067 310,062 380,031 442,801 YoY 113.7% 22.6% 16.5% Share 3.7% 7.0% 7.3% 7.6% GMO Click Securities 224,164 282,424 333,944 394,072 YoY 39.1% 26.0% 18.2% 18.0% Share 5.8% 6.4% 6.4% 6.8% Gaitame.com 343,236 357,883 378,664 390,356 YoY 5.3% 4.3% 5.8% 3.1% Share 8.8% 8.1% 7.3% 6.7% Money Partners 189,570 213,850 235,807 256,494 YoY 17.2% 12.8% 10.3% 8.8% Share 4.9% 4.8% 4.5% 4.4% Money Square 42,328 55,754 67,718 83,351 YoY 27.0% 31.7% 21.5% 23.1% Share 1.1% 1.3% 1.3% 1.4% Total 3,898,189 4,442,501 5,207,735 5,825,821 YoY 11.6% 14.0% 17.2% 11.9% Source: Shared Research based on data from each company, Yano Research Institute materials, and Financial Futures Association of Japan materials Customer deposits Customer deposits FY03/12 FY03/13 FY03/14 FY03/15 (JPYmn) DMM.com Securities 35,663 60,246 80,490 96,844 YoY 46.2% 68.9% 33.6% 20.3% Share 4.4% 6.3% 7.1% 7.3% GMO Click Securities 54,744 74,277 96,242 121,343 YoY 35.7% 29.6% 26.1% Share 6.7% 7.8% 8.5% 9.2% Gaitame.com 103,200 106,856 101,797 106,925 YoY 9.3% 3.5% -4.7% 5.0% Share 12.7% 11.2% 9.0% 8.1% Money Partners 39,034 39,325 44,348 47,961 YoY 21.4% 0.7% 12.8% 8.1% Share 4.8% 4.1% 3.9% 3.6% Money Square 31,279 41,401 52,524 61,236 YoY 37.9% 32.4% 26.9% 16.6% Share 3.9% 4.3% 4.6% 4.6% Total 811,919 956,232 1,130,671 1,325,752 YoY 21.7% 17.8% 18.2% 17.3% Source: Shared Research based on data from each company, Yano Research Institute materials, and Financial Futures Association of Japan materials http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 34/49
Turnover Turnover FY03/12 FY03/13 FY03/14 FY03/15 (per mn currency units) DMM.com Securities 2,427,695 3,622,637 7,698,523 8,301,057 YoY -23.5% 49.2% 112.5% 7.8% Share 14.1% 16.1% 18.3% 17.4% GMO Click Securities 2,457,331 4,565,023 8,797,102 9,212,526 YoY 0.4% 85.8% 92.7% 4.7% Share 14.3% 20.3% 20.9% 19.3% Gaitame.com 2,744,629 YoY Share 5.7% Money Partners 928,563 1,415,328 1,616,794 1,281,747 YoY -6.1% 52.4% 14.2% -20.7% Share 5.4% 6.3% 3.8% 2.7% Money Square 31,243 50,840 73,147 63,732 YoY 20.7% 62.7% 43.9% -12.9% Share 0.2% 0.2% 0.2% 0.1% Total 17,228,613 22,497,934 42,176,029 47,750,445 YoY -9.0% 30.6% 87.5% 13.2% Source: Shared Research based on data from each company, Yano Research Institute materials, and Financial Futures Association of Japan materials As a specialist forex margin trading firm, Money Partners Group is a listed company which discloses ample data on its operations and finances, and offers a good benchmark for comparison. Money Partners Group Co., Ltd. (TSE1: 8732) Money Partners was established in 2005 to provide forex margin trading services to general investors via the internet. The group includes Money Partners, which is involved in forex margin trading, and Money Partners Solutions, which is involved in systems development, design, maintenance, and operations. As of March 2015 Money Partners had 256,494 customer accounts (market share: 4.4%), customer deposits of JPY48bn (3.6% share), and turnover of JPY94.0bn (2.7% share). On each of the measures, it ranked in the top five 10 firms that specialize in forex margin trading. Money Partners offers two forex margin trading product suites: Partners FX nano for beginners and Partners FX for experienced traders. Partners FX nano is aimed at beginners and offers trading from lots of 100 currency units. Its sales propositions are the narrowest spreads in the industry (maintained even during important releases, such as US labor force figures) and high swap points. Partners FX has a minimum trading lot of 10,000 currency units and is aimed at experienced traders and experts. It offers a wide variety of services in terms of size and frequency: no slippage or trade rejections, advanced trading tools, no limit on number of trades per day, and large trading positions of up to JPY10bn. Number of accounts While the number of Money Partners accounts is increasing, the company s share of accounts has been gradually declining since FY03/13. Perhaps Money Partners services in terms of commissions and spreads lack a point of difference with other firms. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 35/49
Money Partners number of trading accounts and share 300,000 250,000 200,000 150,000 100,000 50,000 0 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Accounts (left axis) Share of accounts (right axis) Source: Shared Research based on company materials and Financial Futures Association of Japan Money Partners earnings Money Partners sales declined from FY03/10 through FY03/14. Account numbers grew, but unit revenues shrank continuously. The main reason being that Money Partners followed the competitive lowering of spreads in forex margin trading. In FY03/09, Money Partners offered USD/JPY spreads of 2.0 pips, but as of June 2015 these had declined to 0.3 pips. Accompanying the downtrend in revenues, operating profit declined for four consecutive years from FY03/10 to FY03/13. In FY03/14, Money Partners posted an increase in operating profit despite declining revenues due to lowered trading costs. Money Partners income statement Income Statement FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 (JPYmn) Par. Par. Par. Par. Par. Par. Con. Operating Revenue 10,772 9,738 8,981 7,671 5,885 5,257 5,324 YoY - -9.6% -7.8% -14.6% -23.3% -10.7% 1.3% SG&A Expenses 6,396 7,947 7,914 6,963 5,458 4,090 4,055 SG&A / Sales 59.4% 81.6% 88.1% 90.8% 92.7% 77.8% 76.2% Operating Profit 4,332 1,749 1,015 549 323 1,098 1,192 YoY - -59.6% -42.0% -45.9% -41.2% 239.9% 8.6% OPM 40.2% 18.0% 11.3% 7.2% 5.5% 20.9% 22.4% Net Income 2,801 1,147 515 337 95 663 780 YoY - -59.1% -55.1% -34.6% -71.8% 597.9% 17.6% Net Margin 26.0% 11.8% 5.7% 4.4% 1.6% 12.6% 14.7% FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 Operating revenue(jpymn) 10,772 9,738 8,981 7,671 5,885 5,257 5,324 YoY - -9.6% -7.8% -14.6% -23.3% -10.7% 1.3% Turnover (per mn currency units) 664,154 800,261 988,537 928,563 1,415,328 1,616,794 1,281,747 YoY 78.6% 20.5% 23.5% -6.1% 52.4% 14.2% -20.7% Unit revenues (JPY) 162 122 91 83 42 33 42 YoY - -25.0% -25.3% -9.1% -49.7% -21.8% 27.7% Source: Shared Research based on Money Partners materials Money Square s earnings versus Money Partners In FY03/15 Money Partners had 3x as many accounts as Money Square, and its turnover was roughly 20x. Yet operating revenue for the two firms was largely equal. There is a large difference in unit revenues: Money Partners unit revenues were around 1/20 of those for Money Square, driven by differences in spreads and trading commissions. As of June 2015, Money Partners offered spreads of 0.3 pips at no commissions for USD/JPY trades, vis-a-vis spreads of 4.0 pips and commissions of JPY300 for Money Square. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 36/49
From FY03/10 to FY03/15 Money Partners operating revenue fell by 45.3%, compared with a 347% increase for Money Square. Money Square grew account numbers, deposits, and transactions turnover faster than Money Partners, and while unit revenues for Money Partners fell by 65.9%, those for Money Square were stable. Key earnings data: Money Partners versus Money Square Money Partners Money Square FY03/10 FY03/15 Rate of change FY03/10 FY03/15 Rate of change Operating revenue(jpymn) 9,738 5,324-45.3% 1,184 5,300 347.6% Operating profit(jpymn) 1,749 1,192-31.8% -200 2,518 Acount numbers 133,213 256,494 92.5% 20,638 83,351 303.9% Deposits(JPYmn) 26,375 47,961 81.8% 14,595 61,236 319.6% Turnover (per mn currency units) 800,261 1,281,747 60.2% 14,498 63,732 339.6% Turnover per acount(per mn currency units) 7.1 5.2-26.8% 0.9 0.8-11.1% Unit revenues(jpymn/per 10,000 currency units) 122 42-65.9% 817 832 1.8% Spreads(JPY) 0.003 0.040 Commissions(JPY) 0 300 Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. Operating revenue: Money Partners versus Money Square (based to 100 in FY03/10) 500 400 300 200 100 0 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 Money Partners Money Square Source: Shared Research based on company data Account numbers: Money Partners versus Money Square (based to 100 in FY03/10) 500 400 300 200 100 0 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 Money Partners Money Square Source: Shared Research based on company data http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 37/49
Turnover: Money Partners versus Money Square (based to 100 in FY03/10) 600 500 400 300 200 100 0 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 Money Partners Money Square Source: Shared Research based on company data Unit revenues: Money Partners versus Money Square (based to 100 in FY03/10) 200 100 0 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 Money Partners Money Square Source: Shared Research based on company data http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 38/49
Historical performance FY03/15 full-year results In FY03/15, operating revenue was JPY5.3bn, operating profit was JPY2.5bn, recurring profit was JPY2.5bn, and net income was JPY1.6bn. While the number of accounts rose, trading turnover per account declined, so overall trading turnover fell. It had 83,351 forex margin trading accounts (+23.1% YoY). The company bolstered its education programs, through a nationwide seminar and M2JFX Academia. It also promoted its new currency pair of the Turkish lira (TRY/JPY), introduced new function Kessai Trail, and held virtual events through its asset management portal site. The company was thus able to get new customers, especially those with strong asset management needs. Turnover was 63.7bn currency units (-12.9% YoY). In 1H the yen appreciated against the US dollar and euro, and forex markets remained stable, but as the difference in monetary policy stances in the US and Japan became clearer in 2H, volatility started increasing. Unit revenues were JPY832 (+16.7% YoY). Customer assets were JPY61.2bn (+16.6% YoY). The increase was the result of inflows of deposits from new customers relative to the increase in customer count, and additional deposits by existing customers and increment rises due to their buildup of profits. At fiscal year end, customer assets had grown for 63 consecutive months. Operating expenses were JPY2.8bn. The main factors in YoY expense growth were more hiring; expenses for the transition to the pure holding company structure and increased recurring expenses following the changeover; the launch of new currency pairs; and increased promotional expenses accompanying the addition of new features in the order management products. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 39/49
Strategy Investors typically choose brokers with low commissions and narrow spreads. According to a survey by MyVoice Communications Inc. regarding forex trading via the internet, conducted June 1 5, 2014, the main reasons for choosing a financial institution for forex trading was commissions are low/free (58.0%) and spreads are narrow and fixed (34.1%). In forex margin trading, competition to fulfill such investor needs was natural. Starting in 2009, spread competition intensified and the market shares of GMO Click Securities and DMM.com Securities rose. Yet many players in the forex margin trading business saw unit revenues decline as they adopted a low-margin/high-volume strategy. This encouraged high-frequency trading and more chances to lose money. In contrast, by satisfying customers underlying needs, Money Square has commanded high service prices and customer growth. Management has been involved in forex margin trading since its early days, and policies are based on the premise of minimizing customer loses. Rather than seeing internet trading as a simple cost-cutting mechanism, the company uses the convenience of the internet to provide an environment and order management functions to reduce trading risk. The company did not cut spreads and so enjoyed high unit revenues. In addition to growth in its existing forex margin trading business, the company aims to grow profits through use of its order management system and apply it to other things with volatile prices, plus expand overseas. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 40/49
Income statement Income Statement FY03/07 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 (JPYmn) Par. Par. Par. Par. Par. Par. Par. Par. Con. Operationg revenue 1,766 2,039 1,411 1,184 2,078 2,623 3,718 5,210 5,300 YoY - 15.5% -30.8% -16.1% 75.5% 26.3% 41.7% 40.1% 1.7% SG&A Expenses 816 1,087 1,362 1,384 1,661 2,191 2,401 2,803 2,782 SG&A / Sales 46.2% 53.3% 96.5% 116.9% 79.9% 83.5% 64.6% 53.8% 52.5% Operating Profit 950 953 49-200 417 432 1,316 2,407 2,518 YoY - 0.3% -94.9% - - 3.6% 204.7% 82.9% 4.6% OPM 53.8% 46.7% 3.5% - 20.1% 16.5% 35.4% 46.2% 47.5% Non-operating Income 2 12 16 10 5 3 5 4 3 Non-operating Expenses 6 33 3 55 59 12 9 7 8 Recurring Profit 947 932 61-245 363 423 1,312 2,405 2,512 YoY - -1.6% -93.4% - - 16.5% 210.3% 83.3% 4.5% RPM 53.6% 45.7% 4.3% - 17.5% 16.1% 35.3% 46.2% 47.4% Extraordinary Gains - - - - - - - - - Extraordinary Losses - 11 6 105 17 7 5 6 10 Tax Charges 399 379 29-3 89 180 506 916 902 Implied Tax Rate 42.2% 41.2% 52.4% - 25.7% 43.3% 38.7% 38.2% 36.1% Net Income 547 541 26-347 261 236 801 1,483 1,600 YoY - -1.1% -95.2% - - -9.6% 239.7% 85.1% 7.9% Net Margin 31.0% 26.5% 1.9% - 12.6% 9.0% 21.5% 28.5% 30.2% Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. See the Business section for reasons for changes in operating revenue, SG&A expenses, and operating profit. Non-operating income and expenses have a limited effect on recurring profit. For FY03/15 they accounted for just 0.2% of operating profit. Previous performance trends show that taxes on extraordinary income have only a minimal impact on net income before adjustments. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 41/49
Balance sheet Balance Sheet FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 (JPYmn) Par. Par. Par. Par. Par. Par. Par. Con. Assets Cash and Equivalents 2,955 2,641 2,190 2,119 2,223 2,420 2,298 3,324 Segregated Trust Asset 12,662 8,996 11,447 19,678 28,040 39,103 49,809 52,370 Forex Valuation Account - - - - 72-692 787 Prepaid Expenses 18 21 30 12 38 38 66 71 Deferred Tax Assets 15-13 26 23 49 68 61 Other Current Assets 1 58 3 43 3 8 6 253 Total Current Assets 15,652 11,716 13,683 21,878 30,399 41,618 52,939 56,866 Buildings 152 133 102 134 118 111 206 188 Machinery and Equipment 83 73 65 70 109 77 197 130 Total Tangible Fixed Assets 235 206 167 203 228 187 403 318 Software 41 114 159 174 350 406 394 350 Software in progress 33 18-95 80 79 28 72 Total Intangible Assets 75 133 159 270 431 486 423 422 Investments in securities 126 126 125 121 121 121 0 - Stocks of subsidiaries - - - 8 8 16 21 - Long-term Prepaid Expenses 1 1 0-1 0 - - Guarantee Deposits 79 78 68 68 70 80 234 239 Allowance for investment loss - -8-62 -121-121 -121 - - Other 13 15 3 1 2 3 4 6 Total Other Fixed Assets 219 212 134 77 81 100 259 244 Total Fixed Assets 529 551 460 551 740 773 1,085 985 Total Assets 16,181 12,267 14,143 22,428 31,138 42,391 54,024 57,851 Liabilities Deposit assets 12,416 8,875 11,113 18,716 27,043 37,281 46,571 49,568 Forex Valuation Account - - 140 - - Short-term Debt - - - - 300 20 475 250 Current Portion of Long-term Loans Payable - - - 40 40 40 140 140 Accounts payable-other 56 93 86 167 173 255 312 320 Consumption tax payable 175 4 4 97 142 452 705 698 Point Reserves - - 21 33 33 31 49 25 Other Current Liabilities 5 11 7 6 12 14 13 29 Total Current Liabilities 12,652 8,983 11,230 19,058 27,743 38,235 48,265 51,031 Long-term Loans Payable - - - 160 120 80 190 50 Asset Retirement Obligations - - - 61 62 67 68 69 Bond with warrant attached - - - - - - - - Total Long-term Liabilities - - - 230 187 150 259 121 Total Liabilities 12,652 8,983 11,230 19,289 27,929 38,385 48,524 51,152 Shareholder Equity (Net Assets) Issued Capital 1,224 1,224 1,224 1,224 1,224 1,224 1,224 1,224 Reserves 1,129 1,129 1,129 1,129 1,129 1,165 1,239 1,247 Retained Earnings 1,181 1,071 698 934 1,081 1,796 3,059 4,238 Treasury Shares - -148-161 -175-272 -225-39 -29 Total Shareholder's Equity 3,534 3,277 2,891 3,112 3,162 3,960 5,483 6,681 Share Warrant - 9 22 28 47 47 18 11 Total Net Assets 3,529 3,284 2,913 3,140 3,209 4,006 5,500 6,699 Interest-Bearing Debt - - - 200 460 140 805 440 Net Debt (Net Cash) -2,955-2,641-2,190-1,919-1,763-2,280-1,493-2,884 Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. Assets Most assets are liquid, over 90% of which are segregated trust assets. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 42/49
Segregated trust assets Segregated trust assets refer to an accounting category for customer assets under custody, managed in custody accounts. In order to manage customer assets separately from the forex margin trading broker s own assets, the broker enters into a trust contract with a trust bank. Money Square s custodian is Sumitomo Mitsui Banking Corporation. Of course assets in this accounting category should be thought of as separate from the finances of Money Square itself. Forex valuation account The forex valuation account is a special account peculiar to forex margin trading companies. This is an item in current assets and current liabilities, and reflects valuation gains and losses from the difference between contract amounts for cover trades with counterparties and their market value as of the end of the fiscal year. Valuation gains and losses in customer positions are included in the customer deposits accounts as unrealized gains and losses. Software In addition to segregated trust assets and the forex valuation account, another account particular to Money Square is its software. This includes software related to order management functions. As of FY03/15 it was JPY318mn, or 0.5% of total assets. After subtracting segregated trust assets from total assets, software accounted for 5.8% of the company s true total assets. The company stated that it would not have large demands for system investment in a determined time period as it was smoothing its investments based on future investment and resource allocation plans. Liabilities As with assets, almost all of the company s liabilities are liquid. Over 90% of liquid liabilities are in the customer deposits account. The customer deposits account classifies customer deposits including any customer gains or losses as Money Square s liabilities. In a reciprocal fashion, segregated trust assets are accounted for in the assets category. Breakdown of customer deposits Breakdown of customer deposits FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 (JPYmn) Par. Par. Par. Par. Par. Par. Par. Con. Customer deposits account 12,416 8,875 11,113 18,716 27,043 37,281 46,571 49,568 Margin deposits 20,930 13,236 14,592 22,681 31,279 41,401 52,525 61,136 Realized gains and losses -26 26 25 59 32 14 79 18 Valuation gains and losses of positions outstanding -8,488-4,386-3,505-4,024-4,269-4,134-6,032-11,585 Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. Net assets Net assets are rising due to retained net income. Dividend payout ratio is hovering at 25%. Since FY03/13, ROE has been above 20% every year, and net assets more than doubled from FY03/12 FY 03/15. Total assets appear to be larger than they are due to customer deposits. From an accounting perspective the equity ratio appears to be low; in FY03/15 its stated equity ratio was 11.6%. Yet using equity capital as the numerator and total assets excluding the customer deposits account as the denominator gives an equity ratio of 80.9%. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 43/49
Cash flow statement Cash Flow Statement FY03/07 FY03/08 FY03/09 FY03/10 FY03/11 FY03/12 FY03/13 FY03/14 FY03/15 (JPYmn) Par. Par. Par. Par. Par. Par. Par. Par. Con. Operating Cash Flow (1) 780 402-48 -74 568 516 1,374 2,121 1,590 Investment Cash Flow (2) -1,076-724 -108-126 -186-585 -529-681 -454 Free Cash Flow (1+2) -296-322 -156-201 382-69 845 1,441 1,136 Financial Cash Flow -0 1,146-285 -39 161 74-337 677-765 Source: Shared Research based on company data Figures may differ from company materials due to differences in rounding methods. Cash flows from operating activities The main items in cash flows from operating activities are net income, depreciation, changes in separately managed trust assets, and changes in the customer deposits account. As the last two offset each other, net income and depreciation are the major influences on operating cash flows. Cash flows from investing activities The main items in cash flows from investing activities are outflows to buy tangible and intangible fixed assets. The main items in outflows to purchase tangible fixed assets: headquarter-related investments. In FY03/14 the company relocated headquarters, so there were expenditures of JPY345mn on tangible fixed assets. The main item in outflows related to purchases of intangible fixed assets: investments in software for new trading systems. Over the past five fiscal years, it has been largely stable at JPY1 3mn. Cash flows from financing activities The main items in cash flows from financing activities are inflows (outflows) from short- and long-term borrowings and dividend payments. If there are no inflows from borrowings, financing cash flows are negative. In FY03/14, cash flows from financing activities were positive due to inflows of JPY1.0bn (JPY700mn in short-term borrowings and JPY300mn in long-term borrowings). http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 44/49
Other information History Before founding Money Square s President and CEO Hitoshi Aiba was involved in forex trading starting in the 1990s at Mitsubishi Bank (currently Bank of Tokyo-Mitsubishi UFJ). However, as Japanese corporations began increasingly conducting transactions denominated in yen and reinvesting their foreign currency, they reduced the use of banks for forex transactions. This gave Aiba the idea of targeting individual customers with forex trading services. In 1998, the authorized forex banking system was abolished, making it was possible to trade forex without being a specified forex bank. Daiwa Futures (currently Himawari Securities, no connection with Daiwa Securities) was the first in Japan to launch forex margin trading services. Aiba went to work at Daiwa Futures in the retail forex business. At that time, Daiwa Futures took orders for forex margin over phone. Aiba and several other volunteers joined a company being spun out from Daiwa Futures to offer forex margin trading services to general investors; the internet was suitable for conducting forex trades. Thus Traders Securities was established in 1999. According to Aiba, he noticed that as Traders Securities built its forex margin trading business, lower spreads stimulated customer trading, which became speculative. When individual investors started speculating in forex, they sometimes made profits by accident, but tended to lose money and consequently quit trading. He thus founded Money Square Japan in 2002 to help customers limit losses, and to provide an environment and tools so that individual investors would not engage in speculative trading. Before 2008 financial crisis From the time of its founding until 2008, Money Square targeted the high net wealth demographic, offering 24-hour forex margin trading services with limited leverage, and consulting and asset management advice by phone. Over this period it developed Trap Trade orders (Auto Trade; launched in 2006) and Trap Repeat if Done (Auto Repeat Trading, or ART; launched in 2007) orders, fleshing out its order management functions lineup. Post financial crisis The impact of the financial crisis saw customer assets fall 37% YoY in FY03/09 and transaction turnover drop by 35%. Operating income declined 31% and operating profit fell 95%. According to the company, around half of its customers lost money and quit trading. The Financial Instruments and Exchange L was not adequately equipped to deal with forex margin trading, and regulation was lax compared with conditions in 2015 so there were large customer loss cut trades. In June 2008, before the financial crisis, Money Square launched M2J Direct, a specialist internet trading platform for general individual investors, with a minimum deposit of JPY500,000. Post 2008, the company revised its policy to increase the number of individual investors and abolished its minimum trading deposit system in February 2009. In January 2010 the company acquired patents for Repeat If Done and Trap http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 45/49
Repeat if Done. It developed its business by recommending winning trades using its order management functions and without entering spread-lowering competitions with other forex firms. From FY03/10 when it abolished its minimum margin trading deposit system in M2J Direct through FY03/15, the number of accounts, deposits, and transactions roughly quadrupled; operating revenue grew to 4.5x its previous level; and operating profit grew from a JPY200mn loss to operating profit of JPY2.5bn. In October 2014, the company moved to a holding company structure to enter asset management and overseas businesses, in addition to its traditional forex margin trading business. Timeline 2002 Established with aim of providing forex margin trading services Begins forex margin trading brokerage services 2007 Company lists on Osaka Stock Exchange Nippon New Market-Hercules (currently JASDAQ) 2008 Launches M2J Premium and M2J Direct offerings 2009 Abolishes minimum deposit requirement for M2J Direct customers Receives Trap Trade patent 2010 Receives Repeat If Done and Trap Repeat if Done patents Lists on Osaka Stock Exchange JASDAQ standard section 2011 Establishes US subsidiary Money Square International, Inc. M2JFX Academia opens Launches new M2JFX courses 2013 Lists on Tokyo Stock Exchange Second Section M2 Midsquare (seminar space) established 2014 Listing transferred to TSE First Section Subsidiaries Money Square Japan Successor Preparatory Company and M2 Investment Advisory established Trading name changed to Money Square Holdings. Through absorption-type company split all forex margin trading related businesses transferred to Money Square Japan (formerly Money Square Japan Successor Preparatory Company; trading name changed on October 1, 2014). http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 46/49
Major shareholders Top Shareholders Amount Held Hisatoshi Yamamoto 19.19% Japan Trustee Services Bank, Ltd. (Trust account) 11.09% Hitoshi Aiba 9.38% Satoru Watanabe 3.96% STATE STREET BANK AND TRUST COMPANY 505025 (standing proxy: Mizuho Bank Ltd., Settlement Sales Department) 2.52% The Master Trust Bank of Japan, Ltd. (Trust account) 2.10% SBI Securities Co., Ltd. 1.91% INTEC, Inc. 1.83% BNYML-NON TREATY ACCOUNT (standing proxy: The Bank of Tokyo-Mitsubishi UFJ, Ltd.) 1.66% Trust & Custody Services Bank, Ltd. TCSB 1.55% Source: Shared Research based on company data (As of end March 2015) Shareholder returns Money Square decides dividend amounts each fiscal year. It considers profit trends, and targets an annual payout ratio of around 25%. In FY03/15, the company paid an ordinary dividend of JPY40 per share (payout ratio of 26.8%) considering its 25% payout ratio target and striking a balance between earnings, returning profits to shareholders, and building internal reserves. Management President and CEO: Hitoshi Aiba Joined Mitsubishi Bank (currently Tokyo Mitsubishi-UFJ Bank) in 1987; Banco Santander Central in 1997; Daiwa Futures (currently Himawari Holdings, no connection with Daiwa Securities) in 1999; Traders Securities (currently Traders Holdings) in 1999; appointed vice president of Money Square in 2002 and president and CEO in 2011. Asia s 200 Best Under a Billion Every year Forbes Asia, the Asian edition of US business publication Forbes Magazine, has a feature on Asia s 200 Best Under a Billion. Forbes chooses 200 listed companies in the Asia-Pacific region with revenues under USD1bn that have a three-year tracking record of robust profits and growth potential. Of approximately 17,000 such companies in the Asia-Pacific, Forbes selected 15 Japanese companies, one of which was Money Square. http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 47/49
Company profile Company Name Head Office Money Square Holdings, Inc. 40F Midtown Tower 9-7-1, Akasaka, Minato-ku Tokyo, Japan 107-6240 Phone Listed On +81-3-3470-5077 Tokyo Stock Exchange 1st Section Established Exchange Listing October 10, 2002 October 25, 2007 Website Fiscal Year-End March IR Contact IR Web Kazuo Kitazawa IR Mail IR Phone ir@m2hd.co.jp +81-(0)3-3470-5077 http://www.sharedresearch.jp/ Copyright (C) Shared Research Inc. All Rights Reserved 48/49
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