TRIS Rating has affirmed the company rating of KGI Securities (Thailand) PLC (KGI) at “BBB+” with “stable” outlook. The rating reflects KGI’s capable management team with a proven track record, strong market position in derivatives trading, as well as sufficient liquidity and stable revenue contribution from fund management business. However, these strengths are partially offset by intense competition in the brokerage business, the volatility of the Thai stock market, and market risk associated with the company’s proprietary trading. The rating also takes into account uncertainty from regulatory risk regarding the brokerage fee liberalization policy.
The “stable” outlook is based on the expectation that KGI will retain its market position in the brokerage business, and continue to earn a stream of stable income from its asset management subsidiary, ONEAM, despite 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 will be able to expand without substantially weakening its capital base or liquidity.
TRIS Rating reported that KGI had total assets of Bt6,655 million as of December 2008, ranked second among the 38 brokerage firms in Thailand. The company engages in brokerage services, investment banking, portfolio investment and trading. KGI also renders fund management services through its 97%-owned subsidiary, One Asset Management Co., Ltd. (ONEAM). In the brokerage business, KGI ranked 11th amongst 38 brokerage houses in 2008, moving up to the eighth rank for the first five months of 2009. KGI’s brokerage market share slid from 4.18% in 2007 to 3.75% in 2008, as a result of a decrease in proprietary trading and less trading volume from both retail customers and foreign investors. However, brokerage market share slightly improved to 3.97% for the first five months of 2009. The company is one of the leaders in futures and options trading on the Thailand Futures Exchange PLC (TFEX), with a market share of 8.95% in 2008 and 8.90% for the first five months of 2009. Even though KGI’s market share in TFEX products decreased from 13.55% in 2007 and 16.53% in 2006, revenue generated from this business has grown continuously. The sustained growth in derivatives will hinge on product innovations, market size, trading volume and the growing number of educated investors.
TRIS Rating said, despite expanding the investment banking department in 2003, KGI has not yet generated a substantial amount of fees in terms of fee-based income. However, the fund management subsidiary, ONEAM, has continued to generate a sizable and steady flow of revenue. ONEAM has made a significant contribution to total income of 15.76% in 2008 and 28.10% for the first three months of 2009. In addition, KGI has also been active in proprietary investments. In addition to generating capital gains and interest/dividend income from its securities investments, KGI can utilize these securities to structure derivatives products and enlarge the client base. However, the proprietary investments expose the company to market risks.
KGI’s profitability remains pressured by the intense competition among brokers and volatile stock market movements. Net profit fell almost half of Bt335 million in 2007 to Bt189 million in 2008, due to the decline in trading volume and substantial losses in margin loans. KGI reported net losses of Bt60 million during the first three months of 2009 due mainly to a significant decline in brokerage income and losses from proprietary trading of Bt24 million. However, the daily average trading volume on the Stock Exchange of Thailand (SET) substantially increased from Bt8,660 million during the first three months of 2009 to Bt19,946 million during April and May 2009. Income from the brokerage business is expected to turn around in the second quarter of 2009. The company booked brokerage fees from derivatives trading of Bt82 million in 2008, up from Bt56 million in 2007 and Bt11 million in 2006. Operating expenses remained under control. The ratio of operating expenses to total income remained at around 58% in 2007-2008, which was below the average of 64% in 2008 across 38 brokers. The ratio sharply increased, in line with the industry, to 113% during the first three months of 2009, due to the unfavorable market situation. However, the ratio was still below the industry average of 128% for the first three months of 2009.
In terms of leverage, the ratio of total assets to equity remained strong at 1.83 times compared with and industry average of 2.21 times as of March 2009. KGI also has sufficient bank credit lines available for any further expansion if required, said TRIS Rating. -- End
Company Rating: Affirmed at BBB+ Rating Outlook: Stable
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