Asset-Based Wealth Management Shift Will Drive Powerful Long-Term Upside Potential

Catalysts

About Daiwa Securities Group

Daiwa Securities Group is a diversified Japanese financial services group providing wealth management, asset management, investment banking and global markets solutions.

What are the underlying business or industry changes driving this perspective?

• Acceleration of asset-based, recurring revenues as wrap accounts, fund wraps and total asset consulting steadily gain net inflows. This supports more stable top line growth and smoother expansion of earnings over time.
• Growing demand for professional asset building in a world with interest rates and higher inflation, where clients increasingly shift cash and deposits into diversified portfolios. This lifts Wealth Management revenues and improves overall net margins.
• Structural expansion of fee income in Asset Management and Real Estate Asset Management as AUM in public investment trusts, ETFs, REITs and private real estate funds reaches record highs. This provides strong visibility for future revenue and profit growth.
• Rising opportunities in FICC and credit businesses as a broader, more diverse investor base replaces traditional domestic demand for long term bonds. This increases transaction flows, supports spread income and enhances profitability in Global Markets.
• Scaling alternative and infrastructure investments, including renewable energy and thematic projects. These areas are expected to generate higher equity method income and capital gains over the medium term, driving growth in earnings and return on equity.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Daiwa Securities Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Daiwa Securities Group's revenue will grow by 22.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 20.9% today to 14.7% in 3 years time.
• The bullish analysts expect earnings to reach ¥259.1 billion (and earnings per share of ¥181.44) by about September 2029, up from ¥200.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥175.5 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 13.6x on those 2029 earnings, up from 12.4x today. This future PE is greater than the current PE for the JP Capital Markets industry at 12.7x.
• The bullish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.08%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Heavy reliance on primary deals, equity underwriting and M&A advisory means revenues can fall sharply during periods of tariff driven uncertainty, rate volatility or weaker global risk appetite. This has already been seen in the substantial declines in underwriting and M&A commissions, which could structurally pressure revenue and ordinary income if deal cycles remain longer and more irregular.
• While Daiwa is shifting toward asset based and wrap account revenues, client caution during sharp equity market drawdowns and a world with higher interest rates may slow new inflows and depress average balances. This would restrain growth in wealth management fees and compress net margins if personnel and platform costs continue to rise.
• Overseas operations, particularly in Europe, are still loss making and highly sensitive to global M&A and capital market cycles. Prolonged weakness in cross border activity or further cost overruns could drag on group profitability and limit improvements in consolidated ROE and earnings.
• Alternative and real estate asset management income depends on cyclical capital gains and exit timing. A less favorable macro backdrop, slower transaction activity or impaired portfolio companies such as large projects and theme parks could reduce equity method income and capital gains, leading to more volatile earnings and lower base income.
• Rising competition for deposits and higher policy rates in Japan could increase funding costs at Daiwa Next Bank faster than asset yields reprice. Ongoing spending on systems, cybersecurity and digitalization to prevent unauthorized access incidents may keep SG&A elevated, which together could erode net interest margins and group net margins over time.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Daiwa Securities Group is ¥1850.0, which represents up to two standard deviations above the consensus price target of ¥1695.71. This valuation is based on what can be assumed as the expectations of Daiwa Securities Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥1850.0, and the most bearish reporting a price target of just ¥1430.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be ¥1768.1 billion, earnings will come to ¥259.1 billion, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 11.1%.
• Given the current share price of ¥1797.0, the analyst price target of ¥1850.0 is 2.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.