TRIS Rating Co., Ltd. has assigned the company rating of Country Group Securities PLC (CGS) at “BBB-” with “stable” outlook. The rating takes into consideration the company’s strong capital base, improved market position in the brokerage business, and the benefits from its strategic investment in MFC Asset Management PLC (MFC). The rating is, however, constrained by the short track record of the current management in sustaining the business performance and the ability to efficiently control its operating expenses. The rating also reflects the increasingly competitive operating environment, the high volatility of the Thai stock market, and the uncertainty from the full liberalization of brokerage fees due to take effect in 2012.
The “stable” outlook takes into consideration the management’s intent to maintain the level of investment in MFC and to seek for synergy between the two companies. The outlook also reflects the expectation that CGS will be able to retain the retail client base and marketing teams it acquired in 2009, cut its operating expenses, and maintain an adequate risk management system to oversee its proprietary trading and margin loan business.
TRIS Rating reported that after years of operating losses, CGS turned a profit in 2009. The dramatic change in the operating performance started in the second half of 2009 after Mr. Prasit Srisuwan joined the company along with a large number of executives and marketing staff who followed him. Market share in securities brokerage business significantly improved from around 3% in the first half of 2009 to 5%-6% for the rest of 2009 and through 2010. This growth brought CGS to the second rank in the industry in 2010, up from fifth place in 2009 and 20th in 2008. Trading volume, however, softened in the first quarter of 2011, bringing CGS’s market share down to 4.6%. More time is needed to prove whether CGS will be able to maintain its high market share in the securities brokerage business, which accounted for 80% of total revenues in 2010.
Despite the 80% jump in total revenues from Bt898 million in 2009 to Bt1,612 million in 2010, the ratio of the operating expenses to total revenues remained very high at 80% in 2010, compared with the industry average of around 60%. Of particular concern is the personnel expenses plus directors’ remuneration and management benefit expenses. These expenses, the major components of operating expenses, increased from 51% of total revenues in 2009 to 59% in 2010. This rise is in sharp contrast to the industry trend, whereby this ratio dropped from 45% to 40% as the securities industry boomed in 2010. It remains a challenge for the management to control the operating expenses and to realize the full potential of its workforce to generate more income.
TRIS Rating said, following the implementation of the sliding scale commission scheme in January 2010, the average commission rate of CGS dropped to 0.16% in 2010 from 0.22% in 2009. When brokerage fees are fully liberalized in 2012, the commission rate is likely to be driven down further by intense competition. The large market share of CGS would be a competitive advantage in terms of economies of scale over smaller rivals. However, without effective cost management, profitability would be difficult to sustain.
The share of profit from investment in MFC accounted for 24% of CGS’s net profit in 2010. MFC was considered an associated company of CGS for financial reporting purposes after CGS raised its shareholding to 20.7% in February 2009. The shareholding continued to increase and reach 24.9% in the second quarter of 2010. This strategic investment in MFC provides CGS with a relatively stable source of income. MFC was also one of the largest local institutional clients of CGS.
With new investment strategy under the new management, CGS’s proprietary trading has yielded better results since the third quarter of 2009, incurring no major trading loss in each and every quarter through the first quarter of 2011. However, given the inherent volatility of the stock market, the track record is still too short to infer that proprietary trading will be a consistent source of profits. CGS’s credit risk exposure is rising. The margin loan balance almost doubled, year-on-year (y-o-y), to Bt940 million at the end of the first quarter of 2011. Although the amount of classified receivables were quite high at over Bt400 million, most of them originated in 2008 and were fully provisioned.
As of 31 December 2010, the shareholders’ equity was relatively large at almost Bt3 billion. The net capital ratio (NCR) was very strong at 175%, much higher than the regulatory requirement of 7%, said TRIS Rating. -- End
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