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 capable management team with a proven track record, strong position in derivatives trading, sufficient liquidity and a stable source of revenue from fund management. 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 the uncertainty from regulatory risk regarding brokerage fee liberalization.
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, One Asset Management Co., Ltd. (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 provides brokerage, investment banking, and portfolio investment as well as trading. The company also renders fund management services through its 97%-owned subsidiary, ONEAM. In the brokerage business, KGI was ranked 13th amongst 35 brokerage houses for the first five months of 2010, moving down from ninth place in 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. Effective 2 November 2009, the Stock Exchange of Thailand (SET) revised its method for calculating securities brokerage market share by excluding proprietary trading from the calculation. Proprietary trading from securities firms accounted for 13% of total trading volume in 2009 and 14% for the first five months of 2010. Proprietary trading volume by KGI constituted a substantial percentage of total trading volume (around 25%-32% during 2007-2009). Excluding the proprietary trading volume, KGI’s brokerage market share, therefore, decreased from 3.88% in 2009 to 3.34% for the first five months of 2010.
Since the inception of Thailand Futures Exchange PLC (TFEX) in 2006, KGI has been one of the leaders in futures and options trading with a market share of 16.53% in 2006 and 13.55% in 2007. Despite the continuous growth in revenue generated from futures and options trading, KGI’s market share declined to 8.95% in 2008, 7.78% in 2009 and 5.42% for the first five months of 2010. After the successful launch of a gold futures product in February 2009, KGI, along with many securities firms, lost market position to Globex Securities Co., Ltd., which becomes the market leader in gold futures trading. Despite the drop in market share in 2009, brokerage fees from derivatives trading were Bt80 million in 2009 for KGI, on par with Bt82 million in 2008. The sustained market growth in derivatives will hinge on product innovation, market size, trading volume and growth in the number of educated investors.
Despite expanding the investment banking department in 2003, KGI has not yet generated a substantial amount of fees-based income from this area. However, the fund management subsidiary, ONEAM, has continued to generate a sizable and steady flow of revenue. Revenue from fund management fees had made a significant contribution to total revenues. Fund management business generated 14.89% of total revenues in 2008 and 14.18% in 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 risk.
TRIS Rating said, KGI is ranked second, in terms of asset size, among 35 brokerage firms. Total assets increased from Bt6,655 million in 2008, to Bt8,059 million as of December 2009 and to Bt10,272 million as of March 2010. The substantial growth in KGI’s investment portfolio was the main reason for the asset growth. Part of the company’s investments was utilized as hedging tools after selling derivative warrant products. However, almost 90% of KGI’s investment was highly liquid, including government bonds and listed equity securities.
TRIS Rating also said, KGI’s profitability remains pressured by the intense competition among brokers and volatile stock market movements. Net profit almost halved in 2008, falling from Bt335 million in 2007 to Bt189 million in 2008. The drop was due to decline in trading volume and substantial losses in margin loans. As the stock market recovered, KGI reported net profit of Bt243 million in 2009 and Bt32 million for the first three months of 2010. This was a sharp reversal from net losses of Bt60 million during the same period in 2009 when the company made losses from proprietary trading. Daily average trading volume on the SET gradually increased from Bt16,118 million in 2008 to Bt18,226 million in 2009 and Bt21,311 million during the first five months of 2010. The 17% increase in trading volume in 2010 was partially due to the implementation of sliding brokerage commission scales. Now commissions paid by retail investors can be freely negotiated when trading volume is over Bt20 million. Operating expenses remain under control. The ratio of operating expenses to total income was 58% in 2008 and 63% in 2009. These levels are below the industry average of 64% in 2008 and 67% in 2009 for 38 brokers. In terms of leverage, the ratio of total assets to equity remained strong at 1.78 times, compared with an industry average of 2.49 times as of December 2009. KGI also has sufficient bank credit lines available for any further expansion if required. -- End
Company Rating: Affirmed at BBB+ Rating Outlook: Stable
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