TRIS Rating Co., Ltd. has affirmed the company rating of KGI Securities (Thailand) PLC (KGI) at “BBB+” with “stable” outlook. The rating reflects KGI’s capable management team with a proven track record, a continual improvement of its market position in stock brokerage businesses, sufficient liquidity, and a stable source of revenue from fund management business. The rating is also supported by an improvement in financial profile in 2010, due to stronger brokerage fee income and gains from trading in securities. However, these strengths are partially offset by intense competition in the brokerage businesses, the volatility of the Thai stock market, and market risk associated with the company’s proprietary trading. The rating also takes into account the uncertainty from regulatory risk regarding the full scheme brokerage fee liberalization in 2012.
The “stable” outlook for KGI is based on the expectation that the company will retain its market position in the brokerage business and continue to earn a stream of stable income from its asset management subsidiary, ONEAM, despite volatile conditions in the Thai stock market. In addition, KGI is expected to be able to control the embedded risks arising from its investment portfolio, margin loans, and new products, and will be able to expand without substantially weakening its capital base or liquidity. The “stable” outlook is also based on expectation that the full liberalization of securities brokerage fee in 2012 will not have a severe and immediate negative impact on the overall securities brokerage business.
TRIS Rating reported that KGI was ranked first in 2010, in terms of asset size, among 34 brokerage firms. Total assets increased from Bt8,059 million as of December 2009 to Bt11,172 million as of December 2010 and to Bt13,434 million as of March 2011. The substantial growth in KGI’s investment portfolio and margin loans were main reasons for the asset growth. Part of the company’s investments has been utilized as hedging tools after selling derivative warrant products. However, almost 90% of KGI’s investment was highly liquid, including government bonds and listed equity securities.
TRIS Rating said, KGI provides brokerage, investment banking, and portfolio investment as well as trading. The company also renders fund management services through its 98%-owned subsidiary, One Asset Management Co., Ltd. (ONEAM). In the brokerage business, KGI’s market position improved significantly during 2008-April 2011. The company’s average brokerage market share rose from 3.8% in 2008 (11th place) to 4.7% in 2010 (4th place) and 5.2% for the first four months of 2011 (2nd place). In addition, KGI has been one of the leaders in futures and options trading with a market share of 5.6% in 2010.
Regarding the investment banking business, KGI has not yet generated a substantial amount of fees-based income from this area. However, the fund management subsidiary, ONEAM, has continued to generate a sizable and steady flow of revenue. Revenue from fund management fees had made a significant contribution to total revenues of 14% in 2009 and 8% in 2010.
KGI has also been active in proprietary investments. Proprietary trading volume by KGI constituted a substantial percentage of total trading volume (17% in 2010, down from 32% in 2007). In addition to generate capital gains and interest/dividend income from its securities investments, KGI can utilize these securities to structure derivatives products and enlarge the client base. However, the proprietary investments expose the company to market risk.
KGI is the leader in creating innovative products to the capital markets. In June 2009, KGI launched Thailand’s first derivative warrant products, enlarging its trading volume and market position. The company was active in issuing several series of derivative warrants during the second half of 2009 and 2010. As of December 2010, registered derivative warrants outstanding totaled Bt2,112 million, of which 37% was contributed by KGI.
TRIS Rating said, as the stock market recovered, daily average trading volume on the Stock Exchange of Thailand (SET) and Market for Alternative Investment (MAI) continuously increased from Bt16,118 million in 2008 to Bt18,226 million in 2009 and Bt29,066 million in 2010. The significant increase in trading volume in 2010 was partially due to the implementation of sliding brokerage commission scales. Commissions paid by retail investors can be freely negotiated when trading volume is over Bt20 million daily. In 2010, KGI’s average commission rate was 0.146%, down from 0.228% in 2009. Despite an intense competition among brokers and an implementation of sliding scale brokerage fee in 2010, KGI’s stock brokerage fee income significantly improved to Bt839 million in 2010 from Bt571 million in 2009.
KGI reported a net profit of Bt752 million in 2010, three times up from Bt242 million in 2009. The net profit for the first three months of 2011 was Bt112 million. Operating expenses remain under control. The ratio of operating expenses to total income was 47% in 2010, down from 63% in 2009. In terms of leverage, the ratio of total assets to equity was 2.23 times in 2010, up from 1.78 times in 2009, due to a strong asset growth in 2010. KGI also has sufficient bank credit lines available for any further expansion if required, said TRIS Rating. -- End
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