TRIS Rating has affirmed the company rating of KGI Securities (Thailand) PLC (KGI) at “BBB+” with “stable” outlook. The rating reflects KGI’s strong capital position, its sizable market share in securities brokerage, the strength and diversity of its lines of business and revenue base, and its 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 inherently cyclical nature of the securities industry and the downward pressure on brokerage commission rates resulting from the entry of three new competitors in 2013. The market risk associated with KGI’s proprietary trading activities also affects the risk profile of the company. The “stable” outlook for KGI is based on the expectation that the company will maintain its market position in the brokerage segment and continue to earn a stable stream of income from its asset management subsidiary, ONE Asset Management Co., Ltd. (ONEAM), despite the volatile conditions in the Thai stock market. In addition, KGI is expected to maintain an adequate risk management system to oversee its margin lending, proprietary trading, and other financial products.
KGI’s sources of revenue are diverse and not concentrated in brokerage fees. Over the last five years, the fees earned from KGI’s securities and derivatives brokerage businesses accounted for no more than 50% of its total revenues, compared with an industry average of over 70%. By diversifying, KGI has lessened its reliance on securities brokerage fees. KGI can handle the intensified competition better after the full liberalization of brokerage fees in 2012 and after the entry of three newcomers in this industry. KGI’s gains on trading in securities and derivatives comprised 23%-41% of total revenues over the last five years. KGI’s gains on trading were derived from a variety of business activities, including bond dealing, private repos, derivative warrants, over-the-counter (OTC) derivatives, and investments in debt and equity securities under the company’s account. KGI also has a recurring source of revenue from fund management, through its 99% ownership of ONEAM. ONEAM’s revenue comprised 8%-14% of KGI’s total revenues. Revenue from fund management is a revenue stream which is less volatile than other sources of revenue.
KGI is considered one of the industry leaders in terms of product innovation. KGI can utilize KGI Taiwan’s financial engineering know-how and experience in the more-developed Taiwanese financial market. This secures KGI 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.
KGI’s market share in terms of securities brokerage trading volume for the first five months of 2014, was 3.95% and ranked 9th in the industry. This is close to KGI’s 2013 level but higher than its share of 3.48% (12th place) in 2012. KGI’s brokerage client base is concentrated in internet trading accounts, which were charged with low commission rates. KGI’s average commission rates, therefore, declined from 15 basis points in 2011 and 2012 to 13 basis points in 2013. Over the last few years, the securities brokerage trading volume from KGI’s 20 largest clients made up over 40% of its total trading volume, excluding proprietary trading. KGI’s relatively high reliance on large accounts, which have higher bargaining power over commissions, may make KGI’s market share more vulnerable to competition.
KGI’s proprietary trading activity exposes the company to market risk. Its investment portfolio includes both fixed income and equity securities. KGI’s investment portfolio is one of the largest in the industry. KGI’s exposure to credit risk from margin lending is comparable to peers. The size of its margin loan portfolio as of March 2014 dropped to Bt1.5 billion, compared with Bt1.7 billion at the end of 2013. However, during 2013, KGI’s margin loan portfolio ranged between Bt1.2 billion to Bt1.8 billion, which was higher than the past several years. As of March 2014, KGI’s margin loan portfolio comprised almost 4% of total industry-wide margin lending and around 29% of the value of KGI’s equity .
KGI’s net profit in 2013 improved to Bt784 million, compared with Bt443 million in 2012 and Bt594 million in 2011. The improvement in net profit was mainly attributable to three reasons, 1) trading value increased, 2) gains on trading increased, and 3) fees and services income doubled because KGI was the lead underwriter for three initial public offerings (IPOs). Gains on securities and derivatives trading improved from Bt467 million in 2012 to Bt712 million in 2013, rebounding to near its 2011 level. The ratio of operating expenses to net revenues decreased to 51% in 2013, compared with 57% in 2012. The ratio was lower than the industry average.
At the end of 2013, the level of financial leverage, as measured by the ratio of total assets to equity, dropped to 1.6 times, compared with 2.6 times at the end of 2012. KGI temporarily reduced the size of its investment portfolio to reduce its risk exposure during the market downturn in the second half of 2013. Its investment portfolio resumed growing in the first quarter of 2014. The net capital ratio (NCR) has been historically strong for KGI. It stood at 211% at the end of 2013, much higher than the regulatory minimum of 7%.
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