TRIS Rating Co., Ltd. has affirmed 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, large market share in the brokerage business, and recurring income stream from its strategic investment in MFC Asset Management PLC (MFC). The rating is, however, constrained by the limited track record of the current management team and its ability to efficiently control operating expenses. The rating also reflects the increasingly competitive operating environment, the high volatility of the Thai stock market, and the uncertainty surrounding the full liberalization of brokerage fees. The market risk associated with the company’s proprietary trading also affects the risk profile of the company. The “stable” outlook takes into consideration the management team’s intent to maintain the current level of investment in MFC and to seek synergies between the two companies. The outlook also reflects the expectation that CGS will be able to retain the client base and marketing teams it acquired, cut its operating expenses, and maintain an adequate risk management system to oversee its proprietary trading, DW, and margin loan businesses.
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. CGS’s market share in securities brokerage significantly improved, jumping from below 3% in the first half of 2009 to above 6% for the rest of 2009. For the first half of 2012, CGS’s market share remained sizeable at 5.4% (ranked 5th in the industry), compared with 5.1% (3rd) in 2011 and 5.9% (2nd) in 2010.
TRIS Rating said, the improved market share and the favorable stock market conditions resulted in strong improvements in CGS’s top line. Revenues jumped to Bt1,611 million in 2010 and Bt1,547 million in 2011, compared with Bt898 million in 2009. However, CGS’s profitability has been impaired by its high operating expenses. The ratio of operating expenses to net revenues declined from 81% in 2010 to 77% in 2011 but this level is still considered high relative to peers. It remains a challenge for the management team to keep the operating expenses down and realize the full benefits of economies of scale.
The implementation of the sliding scale commission scheme in January 2010 caused the average commission rate of CGS to drop from 22 basis points in 2009 to 17 basis points in 2010 and 2011. After the full liberalization of brokerage fees in January 2012, the commission rate is expected to be driven down further by more intense competition. CGS’s average commission rate in the first quarter of 2012 declined slightly to 16 basis points. Although the liberalization has not yet caused a disruptive price war, such a risk remains a threat to the industry as a whole, and might put pressure on CGS’s future performance.
The share of profit from investment in MFC accounted for 24% and 19% of CGS’s pre-tax earnings in 2010 and 2011, respectively. 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 reached 24.9% in the second quarter of 2010. This strategic investment in MFC provides CGS with a relatively stable source of recurring income from fund management fees. In addition, MFC is one of the largest local institutional brokerage clients of CGS.
While proprietary trading has been profitable since the second half of 2009, it exposes CGS to some market risk. CGS’s proprietary trading consists of both speculative day trading and medium- to long-term investments. CGS has also issued several series of derivative warrants (DW) since September 2011. TRIS Rating expects the company to maintain an effective hedge and risk management system against its derivative liabilities. As for credit risk exposure, CGS’s margin loan portfolio stood at Bt1 billion at the end of March 2012, representing 35% of its own equity and 3.3% of industry-wide margin lending.
As of 31 March 2012, shareholders’ equity was quite large at Bt2.9 billion. The degree of financial leverage, as measured by the ratio of total assets to equity, was 1.4 times as of 31 March 2012, compared with 1.5 and 1.3 times at the end of 2010 and 2011, respectively. At this level, the ratio is considered to be low relative to peers. The net capital ratio (NCR) has been historically strong for CGS. It stood at 239% at the end of 2011, which was much higher than the regulatory requirement of 7%.
During its short tenure, the current management team has been successful at increasing CGS’s market share and increasing profits. Although profitability has improved in the three years since the current management team has been at the helm, the past three years have been relatively good years for the securities industry. The challenge for the management team will be to maintain CGS’s market position and continue improving profitability throughout the inevitable industry cycles, said TRIS Rating. — End
Company Rating: Affirmed at BBB- Rating Outlook: Stable
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