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 strong capital position, the strength and diversity of its business operations and revenue base, and its innovativeness. The rating also takes into consideration KGI’s ability to leverage the extensive experience and know-how of its major shareholder, KGI Group in Taiwan (KGI Taiwan). The rating is, however, constrained by the increasingly competitive operating environment, the high volatility in the Thai stock market, and the uncertain outcomes which may arise once brokerage fees were fully liberalized in January 2012. The market risk associated with the company’s proprietary trading also affects the risk profile of the company.
The “stable” outlook for KGI is based on the expectation that the company will regain its market position in the brokerage business, and continue to earn a stable stream of income from its asset management subsidiary, ONEAM, despite the 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 to be able to expand without substantially weakening its capital base or liquidity. The “stable” outlook is also based on the 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’s sources of revenue are well-diversified and not concentrated in brokerage fees. Over the last four years, the fees earned from KGI’s securities and derivatives brokerage businesses accounted for no more than 50% of its total revenues, compared with over 70% industry-wide. KGI also has a recurring source of revenue from fund management, through its 98% ownership of ONE Asset Management Co., Ltd. (ONEAM). Gains on trading in securities and derivatives, which represented 23%-41% of total revenues over the last four years, were derived from a variety of business activities, including bond dealing, private repos, derivative warrants, over-the-counter (OTC) derivatives, and investments under the company’s account.
TRIS Rating said, KGI is considered one of the industry leaders in terms of product innovation. It has the advantage of being able to utilize KGI Taiwan’s financial engineering know-how and experience in the more-developed Taiwanese financial market to secure its competitive edge in product development in Thailand. By offering a wide range of products, KGI can attract different groups of investors to become its clients. KGI strives to stay ahead of its competitors by launching innovative financial products. KGI can then enjoy higher profit margins on the new products before competition crowds the market. For example, KGI was the first securities company to provide securities borrowing and lending (SBL) services for investors who wanted to short sell, either for hedging or for speculative purposes. It was also the first securities company to issue derivative warrants (DW). In June 2009, KGI issued its first DW product, around eight months before these products were offered by any of its competitors. The DW business was very successful for KGI, generating huge profits in 2010 and 2011.
However, in securities brokerage, KGI’s market share declined in the first five months of 2012, sinking to 3.8% (ranked 12th in the industry), from 4.5% (9th) in 2011, and from 4.7% (4th) in 2010. In addition, KGI’s average commission rate was lower than peers, at 14-15 basis points in 2010 and in 2011, compared with an industry average of 17-18 basis points. KGI’s relatively heavy reliance on large accounts, which have higher bargaining power, may make KGI more vulnerable to price competition and marketing staff turnover. It remains a challenge for KGI to recover its competitive edge and maintain its market position in the securities brokerage business.
KGI reported a net profit of Bt535 million in 2011, compared with Bt753 million in 2010. Operating expenses remain under control. The ratio of operating expenses to net revenues rose to 51% in 2011, up from 48% in 2010. Despite the rise, the ratio remains lower than peers. The decline in net profit in 2011 was mainly attributable to lower gains on trading in securities and derivatives, which dropped to Bt798 million in 2011 from Bt948 million in 2010. While KGI’s proprietary trading has been very profitable, it exposes the company to market risk. As for the credit risk exposure, KGI’s margin loan portfolio was worth Bt1.1 billion at the end of March 2012.
As of 31 March 2012, shareholders’ equity stood at almost Bt5 billion, ranking KGI among the top five brokers in terms of equity base. The level of financial leverage as measured by the ratio of total assets to equity at the end of 2011 dropped to 1.5 times, from 2.2 times a year earlier. The drop was mainly due to smaller investment portfolio following the market downturn during the second half of 2011. The total assets to equity ratio rose to 2.2 times at the end of March 2012. KGI has sufficient bank credit lines available for any further expansion if required. The company ended 2011 with a net capital ratio (NCR) of 328%, which was far above the regulatory requirement of 7%. — End
Company Rating: Affirmed at BBB+ Rating Outlook: Stable
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