TRIS Rating has affirmed the company rating of Country Group Securities PLC (CGS) at “BBB-” with “stable” outlook. The rating reflects CGS’s strong capital base and the recurring income stream from its strategic investment in MFC Asset Management PLC (MFC). These strengths are, however, offset by the transition risks and uncertainty surrounding the potential change in CGS’s key management positions, its high operating expenses, and the limited track record of the current management team. In addition, the rating is constrained by the cyclical and volatile nature of the securities industry, and the downward pressure on brokerage commission rates resulting from the full liberalization of brokerage fees in 2012. The market risk associated with the company’s proprietary trading also affects the credit profile of the company. The “stable” outlook is based on TRIS Rating’s expectation that CGS’s overall competitive position will not be severely impacted by the possible change in its management team at the end of 2013. The outlook is also based on the expectation that CGS will be able to deliver satisfactory financial results, despite some pressure on profitability from the potential loss in business volume.
Originally registered under the name Adkinson Enterprise Co., Ltd. in 1966, CGS is one of the oldest securities companies in Thailand. The most recent change in its shareholding structure occurred when the controlling shareholders changed from the “Kewkacha” family to the “Taechaubol” family in 2006. As of March 2013, the “Taechaubol” family held 17.5% of the company’s total outstanding shares.
In addition to providing securities-related services, CGS owns a 24.9% stake in MFC. The share of profit from investment in MFC accounted for 15% of CGS’s pre-tax earnings in 2012. The 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.
CGS’s market share in terms of securities brokerage volume was 5%-6% in 2010 through 2012, making it one of the top five firms in the industry. However, over the past few months, CGS’s market share has continually declined from a peak of 6.4% in March 2013 (ranked second in the industry) to 3.6% in August 2013 (ranked 13th). There are also transition risks and uncertainty surrounding the potential change in CGS’s key management positions. One of the company’s top executives has been in the process of acquiring an ownership interest in another securities company. This change could adversely affect CGS’s business profile and financial performance because a number of CGS’s employees and clients may leave CGS for the new company. The acquisition and subsequent change in the management team is expected to be complete in the fourth quarter of 2013.
A decline in CGS’s market share would not immediately trigger a rating action. The rating assigned to CGS earlier already incorporated the short track record of the current management team in terms of its ability to sustain CGS’s high market share. Under our base case assumption, the current rating is still commensurate with a weaker market share for CGS. Any future credit rating action would depend on the ability of the new management team to maintain the company’s overall competitive position and to deliver satisfactory financial results over the next one to two years.
CGS’s ratio of operating expenses to net revenues has been declining from 81% in 2010 to 75% in 2012. However, the ratios were still high compared with the industry average of around 60%. With a high level of operating expenses, CGS’s profitability might be more vulnerable to changes in the operating environment and competition.
CGS has some exposure to market risks from its proprietary trading activities. CGS engages in both speculative day trading and medium- to long-term equity investments. As for the credit risk exposure, CGS’s margin loan portfolio stood at Bt588 million at the end of June 2013, representing 17% of its equity base and 1.3% of industry-wide margin lending.
As of 30 June 2013, shareholders’ equity of CGS was Bt3.4 billion. The large capital base serves as cushion against the credit risk of the margin loan portfolio and the market risk of the proprietary investment portfolio. The net capital ratio (NCR) has been historically strong for CGS. It stood at 106% at the end of 2012, which was much higher than the regulatory requirement of 7%.
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