Japan Exchange Group (8697.T) Rating NEUTRAL* [V] INITIATION

23 April 2013 Asia Pacific/Japan Equity Research Brokerage (Brokerage & Asset Managers (Japan)) / OVERWEIGHT

Price (22 Apr 13, ¥) 11,850 Target price (¥) 11,500¹

Chg to TP (%) -3.0 Valuation reliant on market for now, expansion Market cap. (¥ bn) 650.65 (US$ 6.52) of exchange offerings over the medium term Enterprise value (¥ bn) 650.65 Number of shares (mn) 54.91 ■ Initiate at NEUTRAL: We initiate coverage of Japan Exchange Group (JPX) Free float (%) 54.8 with a NEUTRAL rating and ¥11,500 target price. The market rebound of 52-week price range 12,190 - 3,885

*Stock ratings are relative to the coverage universe in each late 2012 has led to increased trading of both cash equities and derivatives, analyst's or each team's respective sector. which has fuelled raised expectations of operating revenue growth that are ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix). currently driving the stock. Integration of the TSE and OSE platforms is proceeding, but we think the share price currently reflects trends in the Research Analysts markets. Valuations have not changed much since before the merger, and Takehito Yamanaka the stock presently trades at 18x prospective FY3/14 P/E. Equities trading 81 3 4550 9150 [email protected] value has recently topped ¥3tn on some days but, given that we view this as historically atypical, we see further upside as limited. ■ Investment case: We believe the stock could be positively re-rated over the medium term if JPX can boost the proportion of high-growth offerings in its line-up by strengthening alliances with overseas exchanges or expanding the range of instruments, such as derivatives, that it offers. In addition, expanding derivatives operations as a share of overall business could help stabilize earnings during periods of elevated market volatility. ■ Risks: Brisker trading of cash equities or derivatives would be positive for earnings and the share price, but the converse would also apply. ■ Valuation: Our ¥11,500 TP is based on 1Q FY3/14E annualized ROE of 27.85% and a discount rate of 6.5%, implying a P/B of 4.28x and P/E of 14x (annualized) 1Q projected EPS of ¥205.8. We think trading value for cash equities and derivatives are the key drivers of the stock at present. We would expect the persistence of these conditions to support the share price at current levels.

Share price performance Financial and valuation metrics

Year 3/12A 3/13E 3/14E 3/15E Price (LHS) Rebased Rel (RHS) Revenue (¥ bn) 75.5 81.4 121.1 112.9 12000 400 Operating profit (¥ bn) 17.5 23.4 60.7 57.3 300 7000 200 Recurring profit (¥ bn) 20.1 26.5 63.5 60.4 100 Net profit (¥ bn) 11.8 14.2 37.2 36.4 2000 0 EPS (¥) 214.6 258.6 677.5 662.9 1-13 Change from previous EPS (%) n.a. The price relative chart measures performance against the IBES Consensus EPS (¥) n.a. 314.5 334.9 414.1 TOPIX which closed at 1145.6 on 22/04/13 EPS growth (%) n.a. 20.5 162.0 -2.2 On 22/04/13 the spot exchange rate was ¥99.72/US$1 P/E (x) — 45.8 17.5 17.9

Dividend yield (%) — 0.7 1.7 1.7 Performance Over 1M 3M 12M BPS (¥) 2,470.1 2,476.6 3,145.0 3,808.0 Absolute (%) 45.9 119.4 — P/B (x) — 4.8 3.8 3.1

Relative (%) 35.6 90.4 — ROE(%) 6.5 9.0 24.1 19.1

Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates.

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access

23 April 2013 Table of contents

Investment case 3 Initiating coverage at NEUTRAL with ¥11,500 TP 3 Share price will likely depend on trading volume in the near term 4 Diversification offers potential route to additional underpinning of stock valuation 4 Valuation 7 Only three months of trading history as JPX 7 Valuation level could rise with more derivatives-rich revenue base 8 Earnings forecasts, merger effects 9 Earnings have rebounded sharply on rally in equities 9 Plan sets market assumption-based earnings targets 10 Domestic competition 13 A growing settlement business 13 Future issues 14 International comparisons 14 Company outline and establishment of JPX in 2012 16

Japan Exchange Group (8697.T) 2 23 April 2013 Investment case Initiating coverage at NEUTRAL with ¥11,500 TP The rally in Japanese equities since November 2012 has helped revive the performance of JPX and boost its share price. The stock wavered momentarily after the formal listing of JPX on 4 January as brokers that had owned stock in the TSE disposed of JPX shares (as evidenced by several listed securities firms disclosing gains on the disposal of securities in January). JPX stock has since risen sharply, however, buoyed by higher equities trading volumes and market expectations that the rally in Japanese shares is set to extend.

Figure 1: JPX outperformed TOPIX: Relative performance Figure 2: Both cash & derivative trading expanding vs. TOPIX recently 250 (¥tn) (Thousand trading unit) 6.0 2,500 Spot trading stocks (RHS) Jan 4, 2013=100 200 5.0 Nikkei 225 futures Nikkei 225 minii 2,000 4.0 Nikkei 225 options 150 Topix sector index futures 1,500 10-year JGB futures 3.0 100 1,000 2.0

500 50 1.0

0.0 0

11/30/2012 12/10/2012 03/10/2013 10/01/2012 10/11/2012 10/21/2012 10/31/2012 11/10/2012 11/20/2012 12/20/2012 12/30/2012 01/09/2013 01/19/2013 01/29/2013 02/08/2013 02/18/2013 02/28/2013 03/20/2013 03/30/2013 04/09/2013

01/09/2007 05/29/2008 12/11/2004 08/21/2005 05/01/2006 09/19/2007 02/06/2009 10/17/2009 06/27/2010 03/07/2011 11/15/2011 07/25/2012 04/04/2013 04/02/2004 Source: Thomson Reuters Source: TSE, OSE, Bloomberg

We forecast RP of ¥26.5bn and NP of ¥14.2bn for JPX in FY3/13, based on assumptions JPX shares have already outlined below and calculating these earnings as simple aggregates for TSE and OSE. priced in elevated activity in According to the company’s disclosure based accounting, its RP was ¥22.8bn and NP cash equities and ¥12.2bn. For FY3/14, we forecast RP of ¥63.5bn and NP of ¥37.2bn. We calculate our derivatives markets ¥11,500 TP using a theoretical P/B and ROE annualized from quarterly data. Based on end-1Q FY3/14E BPS of ¥2,682.4, 1Q annualized ROE of 27.9% and a discount rate of 6.5% (using a risk-free rate of 1%, a 5.5% equity risk premium and beta of 1.0), our TP implies a P/B of 4.29x and a P/E of 14x projected 1Q annualized earnings. Average daily trading value for cash equities has recently exceeded ¥3tn. For trading volume to rise further, not only expectations of economic recovery but also solid evidence that the recovery is entrenched will likely be necessary. We initiate coverage with a NEUTRAL rating.

Japan Exchange Group (8697.T) 3 23 April 2013

Figure 3: Daily trading value of spot-trading stocks

(¥tn) 6.0

5.0

4.0

3.0

2.0

1.0

0.0

1/07 1/91 1/92 1/93 1/94 1/95 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/08 1/09 1/10 1/11 1/12 1/13 1/90 Note: Spot trading stocks trading value total = TSE 1st section, 2nd section + Mothers + OSE 1st section, 2nd section + JASDAQ Source: TSE, OSE, Bloomberg Share price will likely depend on trading volume in the near term JPX shares have continued to rally because the surge in trading value has transformed earnings prospects. Management released an outline of its latest medium-term business plan along with 3Q FY3/13 results. Since the LDP regained power, Japanese equities have rallied on hopes of economic recovery and an escape from deflation. The so-called “new dimension” in monetary easing by the BoJ has supplied a further boost. Such short- term market dynamics are guiding the shares of highly market-sensitive financials such as JPX and the brokerages. We see trading value, which are the principal variable affecting operating revenues, as the primary near-term share price driver. Diversification offers potential route to additional underpinning of stock valuation Exchanges that generate more earnings from derivatives trading typically command higher Valuation multiple could rise valuations. From its listing until December 2012, OSE shares traded in a P/E range of 9– with higher ratio of 40x, with an average multiple of 18.6x. JPX shares have traded on a P/E of about 20x derivative fees or expansion since the TSE merger in January. Derivatives generated around 40% of the trading fees of offerings earned by JPX in the December 2012 quarter. We expect the JPX valuation multiple to settle slightly below the 18.6x average achieved by the pre-merger OSE, although this could change if the proportion of trading-related income accounted for by derivatives were to increase.

Japan Exchange Group (8697.T) 4 23 April 2013

Figure 4: P/E trend for Hong Kong Exchange, Singapore Figure 5: Global exchange valuation (P/B and ROE) Exchange, JPX and global average 40.0x 8.0x Expensive PER = 30x PER = 18.6x HKEx 35.0x MarketAxess NZX HKEx 6.0x P P E 30.0x - = - / - E BV BV

25.0x Computershare 4.0x Bolsas Y Mercados ADP JPX

Bursa Malaysia MCX 20.0x PER = 10x SGX Intercon'l Exchange LSE 15.0x BV) / (P Value Book / Price 2.0x ASX Deutsche Boerse JPX Global average NYSE Euronext 10.0x Toronto Exchange

CME NASDAQ OMX Inexpensive

6/07 6/12 6/04 6/05 6/06 6/08 6/09 6/10 6/11

12/04 12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/12 12/03 0.0x 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0% SGX HKEx Global average JPX Return on Equity (% EPS / BV) Source: Company data, Thomson Reuters, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 6: Global exchange valuation (P/NTA and ROTE) 12.5x PER = 18.6x Expensive

10.0x CBOE P P E SGX - = - / - ASX 7.5x E NTA NTA ADP NZX Intercon'l Exchange MarketAxess

5.0x Deutsche Boerse JPX MCX Bolsas Y Mercados Bursa Malaysia 2.5x Toronto Exchange

0.0x

NYSE Euronext Price / Net Tangible Asset (P/NTA) Asset Tangible Net / Price -2.5x NASDAQ OMX CME Inexpensive -5.0x -40.0% -20.0% 0.0% 20.0% 40.0% 60.0% 80.0% Return on Tangible Equity (% EPS / TBV) Source: Company data, Credit Suisse estimates The merger of the TSE with the OSE has raised the proportion of derivatives-based fees Some way to go to create a compared with the TSE alone, but JPX-traded derivatives are mostly Nikkei 225 futures general exchange and related products, and the exchange will probably need to add to its derivatives offerings. The Financial Instrument and Exchange Law (FIEL) regulates how much foreign capital JPX can solicit from overseas partners. The principle of reciprocity seems to make the simple acquisition of an overseas exchange unrealistic. JPX has alliances with the National Stock Exchange (NSE) of India and the Istanbul Stock Exchange in Turkey. It plans to list more equity index futures and index-linked ETFs, and preparations having already begun to launch a futures contract linked to the S&P CNX Nifty index with the NSE. The 2012 amendments to the FIEL promoted the concept of an integrated exchange, altering the regulatory environment for Japanese exchanges. The revised law allows the FSA to be the single regulator and supervisor for an exchange if it satisfies certain conditions. Yet, to satisfy such conditions, JPX would need to integrate with existing commodities exchanges or negotiate an agreed transfer of these operations to JPX. These commodities exchanges generate poor margins, and we think management views this as a risk. For one thing, the integration of commodities trading would subject both the exchange and securities firms to costly additional regulation and supervision by government bodies other than the FSA such as METI and MAFF. Thus, there remain genuine hurdles to the creation of a fully integrated financial exchange in Japan.

Japan Exchange Group (8697.T) 5 23 April 2013

Yet JPX can still offer exposure to commodities through such vehicles as commodity- linked derivatives or ETFs. What it cannot do is settle trades via payment in kind such as is typical of large-lot trades by institutional clients. However, even if regulatory constraints limit JPX’s commodity-related offerings, we believe prospects for income diversification based on the development of original commodity derivatives would be positive for its valuation. Note that as the derivative trading systems are due to be integrated into the OSE system by end-March 2014, the launch of new products will likely take place after the integration.

Japan Exchange Group (8697.T) 6 23 April 2013 Valuation Only three months of trading history as JPX JPX began trading as Japan’s single exchange operator in January 2013. Reflecting the broader stock market rally that began last November, the shares have gained consistently since listing. While the valuation has not settled down yet, as the company has only been trading for three months, we estimate that the stock has been trading on 16–18.5x annualized 4Q FY3/13 earnings, or a FY3/14E P/E of around 18–19x (or a P/E of 14–15x excluding annual goodwill amortization expenses of some ¥3bn).

Figure 7: Valuation trend for OSE (by Dec 2012) and JPX (from Jan 2013) (X) (X) 40.0 7.0

35.0 6.0 P/E (LHS) 30.0 P/B (RHS) 5.0

25.0 4.0

20.0 3.0

15.0 2.0

10.0 1.0

5.0 -

09/22/2009 09/12/2006 02/17/2007 07/25/2007 12/30/2007 06/05/2008 11/10/2008 04/17/2009 02/27/2010 08/04/2010 01/09/2011 06/16/2011 11/21/2011 04/27/2012 10/02/2012 03/09/2013 04/07/2006 Source: Thomson Reuters

Note that OSE shares traded on a P/E of around 20x in 1H 2012 after the plan to merge the two exchanges was announced in mid-November 2011. The multiple stayed around this level even after the merger ratio was confirmed on 10 July 2012, but then fell to 10– 12x after the parties announced on 23 August that the deal would be structured as a takeover of the OSE by the TSE. This reflected the view that the merger would dilute the value of the OSE by more than had been previously expected, since the OSE derives a higher proportion of its revenues from derivatives trading. The share price has risen substantially since January on the expectation that an increase in trading volumes coupled with cash equities leverage would boost revenues, but we do not think the stock is trading on a significantly higher multiple. Management has announced increased guidance on two occasions (30 January and 18 March) in light of higher market trading volumes. We believe these upgrades have also supported the share price. Anticipated sales of JPX holdings by smaller brokers have not held back the stock.

Japan Exchange Group (8697.T) 7 23 April 2013

Valuation level could rise with more derivatives-rich revenue base There is a tendency for exchanges deriving greater proportions of revenues from trading in derivatives to attract high valuations, while exchanges dependent on cash equities trading tend to have lower valuations. We believe the valuation multiple for JPX could increase in average terms if the group can successfully diversify its product range. We plan to focus on JPX’s progress in developing new products and services. The market rally has sparked the surge in JPX shares. However, we would argue that this appreciation mainly reflects more vigorous actual and expected trading activity rather than a higher multiple. This implies that any signs of the market correcting or of trading volumes turning down constitute a potential risk. However, since derivatives trading would not be as badly affected as trading in cash equities, we believe the downside risk for JPX in earnings and share price terms is small compared with the online brokerages, whose shares have risen mainly due to the rebound in earnings from cash equities and margin trading.

Japan Exchange Group (8697.T) 8 23 April 2013 Earnings forecasts, merger effects Earnings have rebounded sharply on rally in equities Cash equities trading has picked up significantly since the market began to rally in Earnings forecasts reflect November 2012. The relaxation of rules governing collateral on margin trades has also current buoyant equity pushed up trading volume since January. market conditions JPX upgraded guidance and raised its dividend forecast for the second time on 18 March. The revised guidance was based on improvements in all key assumptions apart from 10-year JGB futures (Figure 8). At the same time, management announced the booking of ¥1.5bn in impairment losses for assets held by a subsidiary. Note that this guidance does not include 1H FY3/13 earnings for OSE. In other words, it is based on adding together the 1–3Q earnings for the TSE (which consolidated the OSE into its accounts from October 2012) and the 4Q earnings of the consolidated JPX grouping. We have compiled our earnings forecasts including the 1H figures for OSE to help simplify the comparison with FY3/14 and beyond. Note that, owing to intra-group elimination within the accounts after the OSE consolidation, all of the earnings figures for FY3/13 from OP onwards as derived from simple aggregates will be inconsistent with the actual result, with the exception of NP.

Figure 8: Earnings guidance assumptions for revisions on 30 January, 18 March and mid-term business plan at end-FY3/16 Revision Revision Midterm business plan's (¥mn, Unit) as of Jan 30 as of Mar 18 assumptions for FY3/16 Trading value for stocks (Daily average) 1,400,000 1,550,000 1,700,000 Trading value for JGB futures (Daily average) 40,000 40,000 53,000 Trading value for TOPIX futures (Daily average) 67,000 68,000 104,000 Trading value for Nikkei 225 futures (Daily average) 147,000 153,000 217,000 Trading value for Nikkei 225 options (Daily average) 22,000 23,000 47,000 Source: Company data The assumptions for our earnings forecasts are shown in the table below. They are based on current significantly elevated levels of trading in cash equities and derivatives. However, our forecasts link derivative trading with cash trading and premise trends in the former on those of the latter. Our forecasts do not yet factor in any expansion of the derivatives range offered by JPX as described in the medium-term business plan.

Figure 9: Credit Suisse assumptions for earnings forecasts 6/2013 9/2013 12/2013 3/2014 3/2014 3/2015 3/2016 (¥mn, Unit) 1Q 2Q 3Q 4Q Trading value for stocks (Daily average) 3,300,000 3,000,000 2,500,000 2,500,000 2,832,377 2,500,000 2,500,000 Trading value for JGB futures (Daily average) 44,000 44,000 40,000 40,000 42,049 40,000 40,000 Trading value for TOPIX futures (Daily average) 94,200 85,636 71,364 71,364 80,851 71,364 71,364 Trading value for Nikkei 225 futures (Daily average) 250,000 227,273 189,394 189,394 214,574 189,394 189,394 Trading value for Nikkei 225 options (Daily average) 6,744 6,121 4,950 4,584 42,915 37,879 37,879 Source: Credit Suisse estimates

Japan Exchange Group (8697.T) 9 23 April 2013

Plan sets market assumption-based earnings targets On 26 March, JPX unveiled the performance targets and other details of the medium-term business plan to FY3/16 that it had outlined at end-3Q. Compared with FY3/13 guidance announced on 18 March (Figure 8), JPX aims to generate operating revenues of ¥90.5bn in FY3/16, with OP of ¥41.0bn and NP of ¥26.0bn. The company expects to achieve ROE of around 14% and has set a capex budget of ¥36bn for the three years to March 2016. The assumptions underlying this plan are shown in Figure 8. Whilst JPX expects derivatives trading to increase steadily over time, the assumption for cash equities trading volume is fairly conservative compared with current levels of activity. Actual operating revenues will depend considerably on the accuracy of this particular assumption. The charts below show the projected change factors for operating revenues and expenses as described in the medium-term business plan.

Figure 10: Breakdown of projected change in operating revenue from FY3/13 to FY3/16

(¥bn) 100

95 +5.1 -1.6 90.5 -1.1 90 +6.3 -0.2

85 82.0

70 FY3/13 CoE Trading Listing fees Income from Income from Other FY3/16 CoE participant information securities fees services settlement Source: Company data Within trading participation fees, the loss of around ¥1.2bn in base fees for cash equities due to the elimination of duplicate listings between the TSE and the OSE is offset by the projected increase in transaction fees of ¥6.3bn. These figures are sensitive to changes in market assumptions. The elimination of duplicate listings will also cut revenues from listing fees and information-related sources by ¥0.5bn and ¥0.8bn, respectively, but JPX expects to offset some of this lost revenue through growth in the number of listed companies and volume of data supplied. The item of interest is revenue from securities settlement. Under the plan, JPX expects to supplement current derivatives settlement with growth in the interest rate swaps (IRS) that it first offered in 2012. We see settlement of fixed income instruments growing faster than the business plan envisages.

Japan Exchange Group (8697.T) 10 23 April 2013

Figure 11: Breakdown of projected change in operating expenses from FY3/13 to FY3/16

(¥bn) 60 58.0 -7.0

-1.5 50 49.5

40 FY3/13 CoE System related expense Other expense FY3/16 CoE

Source: Company data

Based on earlier disclosures, integration of TSE and OSE trading systems had been projected to lower operating costs by about ¥7.0bn by end-FY3/16. In the 26 March release, however, JPX increased the targeted minimum projected savings to ¥8.5bn. The plan is to realize the additional ¥1.5bn in savings from the rationalization of operating sites, group-wide efficiency gains and an overhaul of trading execution systems. Information on the precise timetable for making these ¥8.5bn in savings is limited, however. Cash market functions are being integrated into the TSE system and derivatives functions into the OSE system. The accelerated depreciation charges associated with these projects will add roughly ¥1.2bn to costs in FY3/13 and ¥2.3bn in FY3/14. Completion deadlines for the various systems integration programs are July 2013 for cash markets, end-FY3/14 for derivatives, and end-FY3/15 for settlement systems. We infer that the initial cost savings of ¥7bn will mostly manifest from FY3/15. The remaining ¥1.5bn in savings depends on the progress made in the integration processes; some of it could be realized in FY3/14.

Figure 12: JPX (8697) – Consolidated earnings forecast summary Operating revenue Operating profit Recurring profit Net profit EPS DPS P/E ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥mn YoY (%) ¥ YoY (%) ¥ (x) Consolidated Mar-12 A 75,539 NM 17,533 NM 20,062 NM 11,781 NM 214.6 NM 70.0 55.2 Mar-13 CS E (new) 81,400 7.8 23,400 33.5 26,501 32.1 14,200 20.5 258.6 20.5 80.0 45.8 CoE 71,500 -5.3 19,500 11.2 21,500 7.2 11,000 -6.6 200.3 -6.6 80.0 59.1 IBES E - - 20,784 18.5 - - 12,103 2.7 314.5 46.6 94.0 37.7 Mar-14 CS E (new) 121,100 48.8 60,650 159.2 63,500 139.6 37,200 162.0 677.5 162.0 200.0 17.5 IBES E - - 33,574 61.5 - - 18,389 51.9 334.9 6.5 133.9 35.4 Mar-15 CS E (new) 112,900 -6.8 57,300 -5.5 60,400 -4.9 36,400 -2.2 662.9 -2.2 200.0 17.9 Note: Figures for FY3/12 are based on the simple sum of TSE and OSE Source: Company data, I/B/E/S, Credit Suisse estimates

Japan Exchange Group (8697.T) 11 23 April 2013

Figure 13: JPX (8697) – Consolidated income statement FY12 E FY11 YoY FY12予 YoY FY13 E YoY FY14 E YoY (¥mn) 1Q 2Q 3Q 4Q E Trading participant fees 30,102 - 7,628 6,862 8,212 9,071 31,773 5.6 52,963 66.7 48,227 -8.9 Basic fees 9,149 - 371 365 362 363 1,461 -84.0 1,200 -17.9 1,200 0.0 Transaction fees 18,850 - 5,742 5,052 6,110 6,868 23,772 26.1 44,403 86.8 39,667 -10.7 Cash equities 0 - 3,323 2,936 3,651 3,978 0 - 29,235 - 26,015 -11.0 Derivatives 0 - 2,419 2,116 2,458 2,890 0 - 15,168 - 13,652 -10.0 Access fees 2,845 - 1,099 1,032 1,089 0 3,220 13.2 4,400 36.6 4,400 0.0 Trading system facilities usage fees 1,339 - 771 780 624 0 2,175 62.4 2,600 19.5 2,600 0.0 Other -2,081 - -355 -367 27 1,840 126 - 360 185.7 360 0.0 Listing fees 9,066 - 2,147 2,526 2,620 2,700 9,993 10.2 10,300 3.1 10,300 0.0 Income from information services 15,049 - 3,692 3,636 3,680 4,650 15,658 4.0 17,800 13.7 17,800 0.0 Income from securities settlement 9,603 - 2,538 2,184 3,046 6,000 13,768 43.4 31,359 127.8 27,752 -11.5 Other 11,719 - 3,173 2,571 2,215 2,249 10,208 -12.9 8,678 -15.0 8,821 1.6 Total operating revenue 75,539 - 19,178 17,779 19,773 24,670 81,400 7.8 121,100 48.8 112,900 -6.8 Personal expenses 14,138 - 3,509 3,216 3,551 3,550 13,826 -2.2 14,200 2.7 14,200 0.0 Rent expenses on real estates 5,338 - 1,329 1,328 1,593 1,600 5,850 9.6 6,400 9.4 6,400 0.0 System maintenance & operation costs 9,790 - 2,523 2,411 2,904 2,900 10,738 9.7 11,600 8.0 10,400 -10.3 Depreciation 13,419 - 2,719 2,855 2,939 2,940 11,453 -14.7 11,310 -1.2 7,800 -31.0 Other 15,321 - 3,875 3,705 4,254 4,299 16,133 5.3 16,940 5.0 16,800 -0.8 Operating income 17,533 - 5,223 4,264 4,532 9,381 23,400 33.5 60,650 159.2 57,300 -5.5 Non-operating income 2,623 - 616 543 1,296 784 3,239 23.5 2,970 -8.3 3,220 8.4 Non-operating expenses 94 - 25 48 35 30 138 46.8 120 -13.0 120 0.0 Recurring profit 20,062 - 5,814 4,759 5,792 10,135 26,500 32.1 63,500 139.6 60,400 -4.9 Extraordinary income 50 - 0 10 0 0 10 -80.0 0 - 0 - Extraordinary loss 6 - 0 726 361 1,800 2,887 48,016.7 2,300 -20.3 400 -82.6 Profit before taxes 20,106 - 5,814 4,043 5,432 8,335 23,624 17.5 61,200 159.1 60,000 -2.0 Income taxes 8,391 - 2,286 924 2,263 3,051 17,207 105.1 38,649 124.6 79,241 105.0 Minority interests in income -66 - 27 46 415 412 900 - 1,601 77.9 1,640 2.4 Net profit 11,781 - 3,501 3,073 2,754 4,872 14,200 20.5 37,200 162.0 36,400 -2.2

EPS（円） - 258.6 677.5 662.9 ROE - 9.0 9.0 19.1 Note: Figures for FY3/12 are based on the simple sum of TSE and OSE Source: Company data, Credit Suisse estimates

Figure 14: JPX (8697) – Consolidated balance sheet FY12 E FY11 YoY FY12予 YoY FY13 E YoY FY14 E YoY (¥mn) 1Q 2Q 3Q 4Q E Cash and deposits 88,585 - 106,678 103,799 107,072 107,000 107,000 20.8 107,000 0.0 107,000 0.0 Margin funds for derivatives and when 624,980 - 452,297 437,701 539,087 650,000 650,000 4.0 600,000 -7.7 600,000 0.0 issued transactions Deposits for clearing funds 130,749 - 106,028 95,386 88,426 88,000 88,000 -32.7 88,000 0.0 88,000 0.0 Deposits as collateral for facilitating 20,510 - 14,600 14,100 10,000 10,000 10,000 -51.2 10,000 0.0 10,000 0.0 settlement Property, plant and equipment 11,265 - 10,743 10,804 10,441 10,441 10,441 -7.3 10,441 0.0 10,441 0.0 Intangible assets 29,291 - 25,815 75,140 73,755 72,990 72,990 149.2 69,936 -4.2 66,882 -4.4 Investments and other assets 88,840 - 76,401 87,151 88,802 88,069 88,069 -0.9 88,123 0.1 88,077 -0.1 Total assets 994,220 - 792,562 824,081 917,583 1,026,500 1,026,500 3.2 973,500 -5.2 970,400 -0.3 Short-term loans payable 17,570 - 17,570 17,570 18,870 18,870 18,870 7.4 18,870 0.0 18,870 0.0 Current portion of long-term loans payable 0 - 0 86,399 86,399 86,399 86,399 - 0 - 0 - Margin funds received for derivatives and 625,155 - 452,513 437,701 539,087 641,896 641,896 2.7 571,994 -10.9 530,854 -7.2 when-issued transactions Deposits received for clearing funds 130,749 - 106,028 95,386 88,426 88,426 88,426 -32.4 88,426 0.0 88,426 0.0 Deposits received as collateral for 20,510 - 14,600 14,100 10,000 10,000 10,000 -51.2 10,000 0.0 10,000 0.0 facilitating settlement Long-term loans payable 1 - 0 0 0 0 0 - 65,000 - 65,000 0.0 Others 24,700 - 22,068 24,465 22,477 22,883 22,883 -7.4 22,883 0.0 22,883 0.0 Total liabilities 818,685 - 612,779 675,621 765,259 868,474 868,474 6.1 777,173 -10.5 736,033 -5.3 Shareholders' equity 167,486 - 174,756 122,358 125,112 129,984 129,984 -22.4 167,184 28.6 203,584 21.8 Accumulated other comprehensive income 5,179 - 2,482 4,480 5,580 6,000 6,000 15.9 5,500 -8.3 5,500 0.0 Minority interests 2,868 - 2,542 21,620 21,630 22,042 22,042 668.5 23,643 7.3 25,283 6.9 Total net assets 175,535 - 179,783 148,459 152,324 158,026 158,026 -10.0 196,327 24.2 234,367 19.4

BPS（円） - 2,476.6 3,145.0 3,808.0 Note: Figures for FY3/12 are based on the simple sum of TSE and OSE Source: Company data, Credit Suisse estimates

Japan Exchange Group (8697.T) 12 23 April 2013

Domestic competition The TSE–OSE merger has granted JPX a clear domestic monopoly by integrating the No current threat to the cash equities to TSE and derivatives markets to OSE platforms. Whilst the easing of rules competitive position of JPX governing takeover bids has since October 2012 helped boost the trading volumes on rival in Japan proprietary trading systems (Chi-X Japan and SBI Japannext), the competing PTS venues would still require an exchange license to enable total off-market transaction volumes in PTS-tradable stocks to exceed 10% of aggregate volumes in such stocks. In our view, this regulatory limitation means these PTS venues are unlikely to pose a threat to JPX in Japan while this rule exists. Kabu.com Securities ceased operating a proprietary trading platform in 2011 after the TSE launched a new trading system that was quicker than expected. Given the low exchange fees in Japan relative to other countries, Kabu.com decided that its room to compete as a PTS venue was too limited. SBI, the parent company of SBI Japannext, also appears to be considering whether to divest of its PTS operations in Japan. Execution costs for investors are competitive on JPX exchanges relative to alternative platforms. Single-trade commissions are 0.2bp on Chi-X Japan and SBI Japannext (but this doubles to 0.4bp for after-hours trades). Whilst JASDAQ commissions are very high at 2.4bp, these fees average 0.29bp on the TSE and 0.23bp on the OSE.

Figure 15: PTS trading value and PTS out of volume (¥bn) 3,000 7.0%

PTS trading value 2,500 6.0% PTS out of total volume 5.0% 2,000 4.0% 1,500 3.0% 1,000 2.0%

500 1.0%

0 0.0%

07/1 08/7 10/1 11/7 04/7 05/1 05/7 06/1 06/7 07/7 08/1 09/1 09/7 10/7 11/1 12/1 12/7 13/1 04/1 Source: PTS Information Network The new medium-term business plan also calls for JPX to start testing in FY3/14 whether to move to a system of smaller tick sizes. The company is making preparations as well to start accommodating after-hours trading. Tick size changes are planned for FY3/16 that would further boost the competitiveness of JPX relative to the PTS venues. We see no serious threats at the moment to the current market share in Japan. A growing settlement business Subsidiary Japan Securities Clearing Corporation (JSCC) handles the settlement business. Clearing operations are Global regulatory changes are causing migration of OTC derivatives trading to exchanges. expanding In Japan, JSCC is the beneficiary of this trend as the settlement arm of JPX. Besides the settlement of trades in cash equities, futures, and options, JSCC offers trade settlement for credit-default and interest-rate swaps. IRS settlement is one of the drivers of the growing settlement business in fixed-income instruments. Although CDS settlement is reportedly not a high-margin business, the earnings from IRS settlement are expected to begin contributing meaningfully to the JPX bottom line. Having only started in October 2012, IRS trading is growing steadily and has now expanded to the point where JPX is second only to UK-based LCH. Clearnet in terms of operating scale.

Japan Exchange Group (8697.T) 13 23 April 2013

Figure 16: Clearing operations continue to increase (¥bn) 45,000 LIBOR vs TIBOR 6M TIBOR-3M TIBOR 6MLIBOR-3MLIBOR 40,000 vs Fixed TIBOR vs Fixed LIBOR 35,000

30,000

25,000

20,000

15,000

10,000

5,000

0 10/2012 11/2012 12/2012 1/2013 2/2013 3/2013

Source: Japan Securities Clearing Corporation

JSCC users currently comprise 21 firms that are also JPX shareholders. Since the annual commissions to shareholders are capped at ¥100mn, JSCC can generate up to ¥2.1bn in such fees per year. Firms can participate in clearance as a non-shareholder, but to date every participant has invested in equity to gain a say in decisions relating to the settlement framework. An increase in non-shareholder participants could also help JPX to grow the revenue base from commissions since the ¥100mn annual cap would not apply. However, higher transaction volumes could also boost demand for increased discounts. Yen-LIBOR swaps have been the mainstay to date, but settlement of TIBOR swaps began in February 2013. Since commissions are determined separately by product, widening the range of products boosts the potential for the clearing business to contribute to earnings. Future issues To sum up, diversification into new service offerings can increase the potential to grow the Long regulatory reform road operating revenue base while also raising the stock’s valuation multiple. More regulatory to a general exchange change will probably be required for JPX to evolve into a general financial exchange and capture the broadening range of institutional commodity trading. The new structure is in its infancy, and we think further regulatory change will probably require strong political leadership. International comparisons The market capitalization of JPX is still small when compared with its much higher global ranking in terms of cash equities trading volumes or the total market capitalization of listed companies. This reflects the relatively small scale of the exchange’s derivatives trading, the activity that stock markets consider valuable. The TSE–OSE merger has increased the share of cash equities trading in Japan, but has also reduced the proportion of revenues generated by derivatives trading compared to the OSE alone. The challenge for JPX is to create growth by broadening the product and service offering and attracting more listings.

Japan Exchange Group (8697.T) 14 23 April 2013

Figure 17: Market cap of listed stocks Figure 18: Stock trading value (USD bn) (USD bn) 16000 16000 14000 14000 12000 12000 10000 10000 8000 8000 6000 6000 4000 4000 2000 2000

0 0

JPX

Korea

Group

Exchange

(US)

Singapore

London SE London

Exchanges

Hong Kong Hong

Shanghai SE Shanghai

Australian SE Australian

NASDAQ OMX NASDAQ

NYSE Euronext NYSE

Deutsche Börse Deutsche Deutsche Börse Deutsche Exchange Korea Source: World Federation of Exchanges Source: World Federation of Exchanges

Figure 19: Options and futures (in millions) 2000 1800 1600 1400 1200 1000 800 600 400 200

JPX

Exchange

(US)

Singapore

Exchanges

Hong Kong Hong

Shanghai SE Shanghai

Australian SE Australian

NASDAQ OMX NASDAQ NYSE Euronext NYSE Korea Exchange Korea Source: World Federation of Exchanges

Figure 20: Comparison with global exchanges

NYSE Euronext London SE Hong Kong Korea Singapore NASDAQ OMX Deutsche Börse JPX Shanghai SE Australian SE as of Dec 2012 (US) Group TSE OSE Exchanges Exchange Exchange

Number of listed companies 2,339 2,577 2,767 747 3,481 2,304 1,177 1,547 954 2,056 1,784 776

of which foreign co's 524 290 588 82 11 10 1 88 NA 97 17 304

Market cap of listed stocks USD bn 14,085.9 4,582.4 3,396.5 1,486.3 3,681 3,478.8 202.2 2,831.9 2,547.2 1,386.9 1,179.4 765.1

Number of new companies 79 75 74 11 43 29 14 60 25 57 33 22 listed through an IPO

Value of share trading USD bn 13,442.7 9,784.2 2,194.3 1,275.9 3,606 3,463.1 142.5 1,106.1 2,598.8 936.0 1,517.9 256.1

Share turnover velocity % NA NA 42.5% 58.3% NA 108.9% NA 38.1% 129.9% 49.3% 97.3% 39.4%

Options and futures in millions 992 996 NA NA 232 27 205 120 283 259 1,836 80

Number of ETFs 1,370 96 1,828 1,015 141 123 18 100 29 68 135 91 Total turnover of ETFs USD bn 3,189.8 2,889.5 262.0 175.3 55 24.3 30.6 67.3 48.1 5.8 120.4 4.2 Source: World Federation of Exchanges, Credit Suisse

Japan Exchange Group (8697.T) 15 23 April 2013

Figure 21: Valuation comparison Price MktCap BPS (¥) EPS (¥) PBR (X) PER (X) ROE (%) Ticker Company Currency Rating 22-Apr-13 Local mn USD mn FY13 E FY14E FY13 E FY14E FY13 E FY14E FY13 E FY14E FY13 E FY14E

NYX.N NYSE Euronext USD 37.6 9,121 9,121 NEUTRAL 27.2 28.5 2.18 2.50 1.38 1.32 17.22 15.03 8.0% 8.8% NDAQ.OQ NASDAQ OMX Group Inc. USD 28.2 4,666 4,666 NEUTRAL 33.3 35.6 2.65 2.90 0.84 0.79 10.64 9.72 7.9% 8.1% ICE.N IntercontinentalExchange, Inc. USD 155.3 11,298 11,298 OUTPERFORM 57.7 66.9 8.30 9.15 2.69 2.32 18.70 16.97 14.4% 13.7%

LSE.L London Stock Exchange GBP 1,295.0 3,511 5,367 OUTPERFORM 5.0 5.6 0.91 0.83 2.59 2.33 14.19 15.63 18.5% 15.1% DB1Gn.F Deutsche Boerse EUR 45.4 8,770 11,447 NEUTRAL 23.9 28.4 4.00 4.31 1.90 1.60 11.37 10.54 16.7% 15.2%

0388.HK Hong Kong Exchanges and Clearing HKD 128.3 147,522 19,001 NEUTRAL 17.7 19.6 4.90 5.71 7.23 6.54 26.21 22.47 27.7% 29.2% SGXL.SI Singapore Exchange SGD 7.6 8,091 6,522 OUTPERFORM 0.8 0.9 0.32 0.41 9.02 8.42 23.66 18.39 38.5% 46.7% BMYS.KL Bursa Malaysia MYR 7.3 3,859 1,266 OUTPERFORM 2.0 2.3 0.33 0.41 3.71 3.09 21.74 17.63 17.1% 17.5% ASX.AX ASX AUD 36.8 6,447 6,621 UNDERPERFORM 17.5 17.8 1.99 2.17 2.10 2.07 18.48 16.94 11.4% 12.2%

8697.T Japan Exchange Group JPY 11,850.0 650,647 6,525 NEUTRAL 2367.4 3044.9 258.62 677.51 5.01 3.89 45.82 17.49 10.9% 22.3% Source: Company data, Credit Suisse estimates Company outline and establishment of JPX in 2012 Japan Exchange Group (JPX) was formed in January 2013 from the merger of the Tokyo Stock Exchange, which has a virtual monopoly on cash equities trading in Japan and has developed TOPIX futures and JGB futures, with the Osaka Securities Exchange, Japan’s leading exchange for trading derivatives, led by Nikkei 225 index futures and options. The OSE also operates the JASDAQ market. The merger of the TSE with the OSE has drawn domestic support from many who value the importance of boosting the international competitiveness of Japanese exchanges at a time of global consolidation within the sector. The chart below shows the timetable for the merger and planned post-merger integration of trading systems. The merger was implemented as a takeover of the listed OSE by the non-listed TSE, after which the OSE was preserved as the surviving umbrella organization for the combined entity. The earnings for JPX in FY3/13 will consist of the full-FY3/13 results for the TSE added to the 2H FY3/13 results for the OSE.

Figure 22: Schedule

2011/11/22 TSE Group and OSE agreed to conduct a business combination

2012/08/29 TSE Group conducted a tender offer for OSE shares and acquired 66.67% shareholding

2012/10/29 TSE Group and OSE concluded the merger agreement

2013/01/01 JPX was established

7/2013 Consolidated cash equities markets and trading systems (arrowhead, ToSTNeT) Consolidated self-regulatory functions Consolidated clearing functions and margin deposits

3/2014 Consolidated derivatives markets and trading system (J- GATE)

Source: Company data, Credit Suisse

Japan Exchange Group (8697.T) 16 23 April 2013

The organizational structure of JPX is shown in the chart below. Please refer to the earlier section on international comparisons for related analysis of overseas trading. FIEL regulates any foreign-owned equity stake in JPX, broadly placing a 20% cap on such investments.

Figure 23: JPX organization chart

Japan Exchange Group

2014/3

Tokyo Stock Tokyo Stock Osaka Stock Japan Securities Exchange Exchange Exchange Clearing Corp Regulation

Source: Company data, Credit Suisse

Japan Exchange Group (8697.T) 17 23 April 2013

Companies Mentioned (Price as of 22-Apr-2013) ASX (ASX.AX, A$36.81) Chi-X Japan (Unlisted) Deutsche Boerse (DB1Gn.F, €45.44) Hong Kong Exchanges and Clearing (0388.HK, HK$128.3) IntercontinentalExchange, Inc. (ICE.N, $155.27) Istanbul Stock Exchange (Unlisted) Japan Exchange Group (8697.T, ¥11,850, NEUTRAL[V], TP ¥11,500) Japan Securities Clearing Corporation (Unlisted) LCH.Clearnet Group (Unlisted) London Stock Exchange (LSE.L, 1295.0p) NASDAQ OMX Group Inc. (NDAQ.OQ, $28.15) NYSE Euronext (NYX.N, $37.58) National Stock Exchange (Unlisted) Osaka Stock Exchange (Unlisted) SBI Japannext (Unlisted) Singapore Exchange (SGXL.SI, S$7.55) Tokyo Stock Exchange (Unlisted) kabu.com Securities (8703.T, ¥726)

Disclosure Appendix

Important Global Disclosures I, Takehito Yamanaka, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

Price and Rating History for Japan Exchange Group (8697.T)

8697.T Closing Price Target Price Date (¥) (¥) Rating 10-Jun-11 328,000 430,000 O 12-Aug-11 NR 21-Feb-12 500,000 O 22-Feb-12 * 04-Apr-12 500,000 O 01-Oct-12 470,000 18-Oct-12 436,000 16-Nov-12 NR * Asterisk signifies initiation or assumption of coverage. OUTPERFORM N O T RAT ED

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Austr alia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Japan Exchange Group (8697.T) 18 23 April 2013

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 43% (53% banking clients) Neutral/Hold* 39% (47% banking clients) Underperform/Sell* 15% (40% banking clients) Restricted 3% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for Japan Exchange Group (8697.T) Method: Our ¥11,500 TP for Japan Exchange Group is based on 1Q FY3/14E annualized ROE of 27.85% and a discount rate of 6.5% (using a risk-free rate of 1%, a 5.5% equity risk premium and beta of 1.0), implying a P/B of 4.28x and P/E of 14x 1Q projected EPS of ¥205.8. Risk: Risks to our ¥11,500 TP for Japan Exchange Group include: Upside - (1) Higher trading volumes for cash equities or derivatives and (2) Realization of offering diversity of products such as ETF and commodity derivatives. Downside - (1) Lower trading volumes for cash equities or derivatives and (2) Delay in consolidation of the systems between TSE and OSE.

Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (8697.T) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

Japan Exchange Group (8697.T) 19 23 April 2013

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse Securities (Japan) Limited ...... Takehito Yamanaka

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit- suisse.com/researchdisclosures or call +1 (877) 291-2683.

Japan Exchange Group (8697.T) 20 23 April 2013

References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/.This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. CS may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. CS may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment. Additional information is, subject to duties of confidentiality, available on request. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is regulated in the United Kingdom by The Financial Services Authority ("FSA"). This report is being distributed in Germany by Credit Suisse Securities (Europe) This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, having registered address at 990 Abdulrahim Place, 27 Floor, Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, Tel. +66 2614 6000, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited regulated by the Securities and Exchange Board of India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This report has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor, expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, in respect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA or in respect of which the protections of the FSA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. Copyright © 2013 CREDIT SUISSE AG and/or its affiliates. All rights reserved. Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

8697_042313_JPX_E.doc Japan Exchange Group (8697.T) 21