11. Financial position and operating results

11.1 Financial Statements

(A) Summary of the Report of the Independent Auditor for 2009-2011.

In 2009 - 2010, the Company appointed Mrs. Nongluk Pumnoi, Certified
Public Accountant no. 4172 and in 2011, appointed Miss Ratana jala,
Certified Public Account no. 3734 of Ernst & Young Office Limited, as
auditor. The auditor’s report does not contain any qualified opinion.
Based on the auditor’s opinion, the consolidated financial statements of
the Company and its subsidiaries for the year ended 31 December 2011 and
2010 and 2009, present fairly, in all material respects, in accordance
with generally accepted accounting principles.

  (B) Summary of financial statements for the Company and its subsidiary
  companies for the years ended 31^(st) December 2009 - 2011.

KGI SECURITIES (THAILAND) PUBLIC COMPANY LIMITED AND ITS SUBSIDIARY
COMPANIES

STATEMENTS OF FINANCIAL POSITION

AS AT 31 DECEMBER 2011, 2010 AND 2009

(Unit : Baht)

[]

KGI SECURITIES (THAILAND) PUBLIC COMPANY LIMITED AND ITS SUBSIDIARY
COMPANIES

STATEMENTS OF FINANCIAL POSITION (Continued)

AS AT 31 DECEMBER 2011, 2010 AND 2009

(Unit : Baht)

[]

KGI SECURITIES (THAILAND) PUBLIC COMPANY LIMITED AND ITS SUBSIDIARY
COMPANIES

STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2011, 2010 AND 2009

(Unit : Baht)

[]

KGI SECURITIES (THAILAND) PUBLIC COMPANY LIMITED AND ITS SUBSIDIARY
COMPANIES

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED 31 DECEMBER 2011, 2010 AND 2009

(Unit : Baht)

[]

KGI SECURITIES (THAILAND) PUBLIC COMPANY LIMITED AND ITS SUBSIDIARY
COMPANIES

STATEMENTS OF CASH FLOWS (continued)

FOR THE YEARS ENDED 31 DECEMBER 2011, 2010 AND 2009

(Unit : Baht)

[] 

(C) Ratios for years 2009-2011

  []

  11.2 Management discussion & analysis

  (For the purpose of section 11.2, “Company” refers to “Company
  together with its subsidiaries”)

  (Consolidated financial statements as of December 31^(st), 2011)

Analysis of Performance

  The Company’s performance remained satisfactory. The Company reported
  total income of Baht 2,333 million and net profit attributable to
  equity holders of the parent of baht 535 million which equivalent to
  earnings per share of Baht 0.27, to net profit margin 23%, to return
  on Equity 11%. Details of the Company’s performance are as follows:

    1. Diversify Income base

  To diversify its income base, the Company tried to expand its revenue
  from various businesses such as dealer business, fixed income
  business, futures business, securities borrowing and lending business,
  OTC equity derivatives business, and derivatives warrant business and
  Investment banking business.

  In 2011, the Company reported total income of Baht 2,333 million. The
  main elements of the Company’s income structure were; 41% from
  brokerage fees, 34% from gain on securities and derivatives, 11% from
  interest and dividends income, 10% from fee and service income, and 3%
  from interest on margin loans and 1% from other income.

  []

  (Unit : Baht)

  []

2. Changes in income and expenses

2.1 Change in securities business income

  2.1.1 Brokerage fee

  Brokerage fee from securities business

  The Company’s brokerage fee from securities business decreased from
  Baht 838 million in 2010 to 821 million in 2011 as the Company’s
  market share decrease from 4.65% in 2010 to 4.53% in 2011.

  Brokerage fee from derivatives business

  The Company’s brokerage fee from derivatives business increased from
  Baht 56 million in 2010 to Baht 120 million in 2011 due to trading
  volume in TFEX market in 2011 increased as well as the Company’s
  market share of SET50 index and Gold Futures increased.

  2.1.2 Fee and service income

  The Company’s fee and service income increased from Baht 214 million
  in 2010 to Baht 238 million in 2011. The main fee and service income
  was from mutual fund management fees and private fund management fees,
  which were Baht 162 million and Baht 25 million, respectively. These
  income fees were from One Asset Management Limited (a 98% owned by the
  Company). The changes in fee and service income are as follows:

  []

  2.1.3 Gain on investment and derivatives

  For the year 2011, the Company had total gain on investment and
  derivatives of Baht 798 million, which consists of loss on investments
  of Baht 795 million and gain on derivatives of Baht 1,593 million. The
  Company will consider on operation result from total gain on
  derivatives and on investment which come from the Proprietary Trading
  business and Derivatives Warrant business as follows.

  Proprietary Trading Business: The Company will invest both equities in
  SET and derivatives in TFEX which will consider the economy, industry
  fundamentals, financial statements, technical analysis. The Company
  has an investment strategy of opening long or short derivatives
  positions in TFEX at the same time as opening long or short positions
  or borrowing equities to short in SET to make gain on investment on
  acceptable risks. This is a low risk investment strategy called
  Arbitrage which makes profits from the difference between the price in
  the equity market and the derivatives market. During the year, the
  Company has long position in equities and short position in
  derivatives in TFEX, therefore, the Company had loss on investment
  when the stock price decreased but the Company had gain on derivatives
  in TFEX. The Company still had gain when offset between gain and loss
  of the two markets which was the difference of the prices between the
  two markets from the Arbitrage strategy.

  Derivative Warrant Business: The Company has a hedging strategy to
  protect against potential risks as follows.

  a) In case of issuing Call Warrant, the Company will have risk when
  the underlying stock price increases that would make the Company have
  loss from issuing DWs. Therefore, the Company has a strategy to hedge
  such risk by buying underlying stocks in appropriate proportion
  calculated from Net Delta Value. The occurred risk from loss from
  issuing Call DWs will be offset by gain on underlying stock which the
  Company bought to hedge before.

  b) In case of issuing Put Warrant, the Company will have risk when the
  underlying stock price decreases that would make the Company have loss
  from issuing DWs. Therefore, the Company has a strategy to hedge such
  risk by short selling underlying stocks in appropriate proportion
  calculated from Net Delta Value. The occurred risk from issuing Put
  DWs will be offset by gain on underlying stock which the Company did
  the short selling to hedge before.

  To protect against risk from stock price fluctuations that impact gain
  and loss of underlying stock and derivatives positions; the Company
  will hedge risk by opening underlying stock position. Therefore, the
  Company will record gain and loss of underlying stock position and
  derivatives position in the opposite way.

  2.1.4 Interest and Dividend Income

  The Company’s interest and dividend income increased from Baht 171
  million in 2010 to Baht 251 million in 2011. The main reasons were an
  increase in interest income from bank deposits and dividend income
  from investment in SET.

  2.1.5 Interest on Margin Loans

  The Company’s interest on margin loans increased from Baht 40 million
  in 2010 to Baht 80 million in 2011 as there were increases in credit
  balance accounts and interest rate charged.

  2.2 Change in Expenses

  The Company’s total expenses increased from 55% of total income in
  2010 to 63% of total income in 2011, details are as follows:

  []

2.2.1 Financial Cost

  The Company’s financial costs increased from Baht 62 million in 2010
  to Baht 119 million in 2011. The main reason was the increase in
  interest paid on borrowing and interest paid on securities sold under
  repurchased agreement.

2.2.2 Fee and Service Expenses

The Company’s fee and services expenses increased from Baht 118 million
in 2010 to Baht 205 million in 2011. The increase was mainly due to
increase in fees on securities borrowing and lending business, futures
business and derivatives warrant business.

2.2.3 Operating Expenses

The Company’s operating expenses increased from 47% of total income in
2010 to 49% of total income in 2011.

In 2011, the operating expenses comprised personnel expenses of Baht 733
million, premises and equipment expenses of Baht 167 million, directors’
remuneration of Baht 17 million, and other expenses of Baht 218 million.

2.2.4 Bad debt and doubtful accounts

The Company has provided an allowance for doubtful debts based on a
review of debtor's ability to make repayment, taking into consideration
recovery risk and the value of the collateral. Such debt classifications
and provisions are made in accordance with the guidelines laid down in
the Notification No. Kor.Thor. 5/2544 dated 15 February 2001 of the
Office of the Securities and Exchange Commission, and consideration of
other relevant factors.

  In 2011, the Company reported debt and doubtful accounts of Baht 3.8
  million, which was from the Company recorded doubtful accounts of Baht
  9.5 million and had transferred-back such doubtful accounts from
  settlement of Baht 5.7 million.

Analysis of Financial Status 

  1. Assets

  As of 31^(st) December 2011, the Company has stable financial status
  with total assets of Baht 7,357 million. The significant details as
  follows.

1.1 Cash and cash equivalents

  Cash and cash equivalents include cash on hand, all bank accounts
  maturing within 3 months and call notes receivable and term notes
  receivable issued by financial institutions with an ordinary maturity
  of 3 months or less from the date of acquisition and not subject to
  withdrawal restrictions.

  As of 31^(st) December 2011, the Company had cash and cash equivalents
  of Baht 1,122 million, consisted of cash on hand and deposit at bank
  of Baht 323 million, promissory notes of Baht 1,350 million, bills of
  exchange of Baht 849 million, and less cash deposits held for
  customers of Baht 1,400 million.

  1.2 Deposits at financial institutions

  As of 31^(st) December 2011, the Company had deposits at financial
  institutions of Baht 202 million, consisted of promissory notes of
  Baht 300 million and Bills of exchange of Baht 378 million and less
  deposits held for customers of Baht 476 million. The maturity of all
  of the Company’s deposits at financial institutions will be over 3
  months, but not over 1 year.

  1.3 Receivable from Clearing House

  Receivable from Clearing House comprises the net balance receivable
  from Clearing House in respect of securities trades settled and
  derivative business. These also include amounts pledged with Thailand
  Clearing House as security for derivatives trading. As of 31^(st)
  December 2011, the Company had Receivable from Clearing House of Baht
  970 million.

  1.4 Securities and derivatives business receivables

  Securities and derivatives business receivables comprise the net
  securities and derivatives business receivables, after deducting
  allowance for doubtful accounts, and include related accrued interest
  receivables.

  In addition, securities business receivables include the net
  receivable balances of cash accounts, credit balance accounts,
  securities borrowings receivable and guarantee deposit receivables
  (which comprise cash placed as security with securities lenders or
  securities depositories) and other receivables such as overdue cash
  customer accounts and securities receivables which are subject to
  legal proceedings, are undergoing restructuring or are settling in
  installments.

  As of 31^(st) December 2011, the Company had securities and
  derivatives business receivables of Baht 2,387 million, consist of
  cash account of Baht 744 million, credit balance accounts of Baht
  1,032 million, receivables under securities borrowing and lending
  business of Baht 604 million, other receivables of Baht 441 million,
  accrued interest receivables of Baht 11 million and allowance for
  doubtful accounts of Baht 445 million.

  The Company has provided an allowance for doubtful debts based on a
  review of debtor's ability to make repayment, taking into
  consideration recovery risk and the value of the collateral. Such debt
  classifications and provisions are made in accordance with the
  guidelines laid down in the Notification No. Kor. Thor. 5/2544 dated
  15 February 2001 of the Office of the Securities and Exchange
  Commission, and consideration of other relevant factors.

  The Company has classified securities business receivables, including
  related accrued interest receivables, in accordance with the relevant
  notification issued by SEC. As of 31^(st) December 2011, the Company
  had Sub-standard Dept of Baht 30 million, Doubtful Dept of Baht 421
  million. The Company had set aside full provision for doubtful debt.

  1.5 Investments

  As of 31^(st) December 2011, the Company had net investments of Baht
  2,298 million, details as follows:

  1. Trading securities of Baht 2,200 million, consist of equity
  securities of Baht 1,266 million and debt securities of Baht 938
  million and less allowance for revaluation of Baht 5 million.

  2. Held-to-maturity debt securities which was Government bond
  (maturity 1-5 years) of Baht 8 million.

  3. Other investments of Baht 90 million, consist of foreign unit
  trusts of Baht 77 million, other securities of Baht 28 million and
  less allowance for implement of Baht 15 million.

  1.6 Land, Premises and Equipment

  Land is stated at cost. Premises and equipment are stated at cost less
  accumulated depreciation. Depreciation is calculated by reference to
  their cost on a straight-line basis over the estimated useful lives.

  As of 31^(st) December 2011, the Company had Land, Premises and
  Equipment net of Baht 124 million which included land of Suphanburi
  Branch of Baht 1.82 million, building and building improvement of Baht
  1.31 million, equipment of Baht 70 million, furniture and fixtures of
  Baht 32 million, vehicles of Baht 0.39 million, and installation in
  progress of Baht 19 million.

  1.7 Intangible assets

  Intangible assets are initially recorded at cost. Following initial
  recognition, intangible assets are carried at cost less any
  accumulated amortisation and any accumulated impairment losses (if
  any).

  Intangible assets with finite lives are amortised on a systematic
  basis over the economic useful life and tested for impairment whenever
  there is an indication that the intangible asset may be impaired. The
  amortisation period and the amortisation method of such intangible
  assets are reviewed at least at each financial year end. The
  amortisation expense is charged to profit or loss.

  As of 31^(st) December 2011, the Company had intangible assets-net of
  Baht 46 million, consisting of computer software of Baht 21 million
  and computer software under development of Baht 25 million.

  1.8 Property foreclosed

  As of 31^(st) December 2011, the Company had property foreclosed of
  Baht 52 million. The property foreclosed represents land received in
  settlement of the debts of the Company’s receivables. They are stated
  net of allowance for impairment, based on each property’s appraised
  value.

  1.9 Other assets

  As of 31^(st) December 2011, the Company had other assets of Baht 123
  million, consisting of asset for protecting the clearing system of
  Baht 16 million, payments of compensation fund for clearing and
  settlement of Baht 26 million, deposits of Baht 28 million, fees and
  services income receivables of Baht 23 million, accrued interest
  receivables Baht 14 million and others of Baht 16 million.

  2. Liquidity

As of 31 December 2011, the Company’s net liquid capital rule was Baht
328%. The Company has policy to reserve Net Capital Rule and Net Capital
Ratio (NCR) higher than SEC’s regulation which specified that the Net
Capital Rule and Ratio must not be lower than Baht 25 million and 7% of
liabilities and guarantees. The Company’s NCR in past 3 year are as
follows.

  --------------------------------- ------------ ------------ ------------
  Capital Fund                      31 Dec 2011  31 Dec 2010  31 Dec 2009

  Net Liquid Capital Rule (Million  4,059        3,324        2,842
  Baht)                                                       

  Net Liquid Capital Rule (NCR)     328%         109%         208%
  ratio (%)                                                   
  --------------------------------- ------------ ------------ ------------

3. Appropriateness of capital structure

  The Company has an appropriate capital structure. As of 31 December
  2011, the Company has total liabilities of Baht 2,521 million and
  total equity attributable to holder of the parent of Baht 4,833
  million,; debt to equity ratio was only 0.52 times.

  Research and Development

  In 2012, the Company has had plans to launch new products as follows.

  Currency Future

  In 2012, the Company is now preparing staff and system for new product
  that will be launched by TFEX. In Quarter2 of 2012, TFEX plans to
  launch Currency Futures.

  Derivative Warrants (DW)

  In 2012, The Company plans to launch 100 more DWs linked to many
  leading stocks. The new DW may be based on new underlying securities,
  such as SET50 Index, SET100 Index, ETF and a component of SET100
  Index, as approved by regulators. In addition to new underlying
  securities, new DWs may be physical settled.

  Exchange Traded Fund (ETF)

  The Company, as one of consortium members of TDEX and 1DIV, and as
  Participating Dealer (PD) of CHINA, GLD, BCHAY and GOLD99, sees
  opportunities in other ETFs. Moreover The Company continuously
  exchanges knowledge with Asset Management companies in many countries
  in order to improve The Company’s system. With its extensive
  experience, infrastructure and staff, The Company is ready to launch
  new ETFs. The Company is confident that with its extensive experience
  and technology it will play a major role in other ETFs such as Silver
  ETF, Oil ETF, Sector ETF, and Thailand’s ETF listed in a foreign
  country.

  Structured Note (SN)

  The Company is now developing and preparing to issue Structured Notes,
  a debt security with one or more special features, such as making
  payments based on an underlying. The Company as an issuer can design
  the features of the Structured Note to match a client’s risk and
  return.

  Thai Depositary Receipt (TDR)

  The Company is currently studying the process of issuing TDR in order
  to facilitate an investment in foreign securities through SET. In
  comparison to foreign direct investment, TDR eases investment to be
  less complicated due to the fact that TDR is a foreign securities and
  is automatically regarded as a listed securities by SET and settled in
  Thai Baht. The settlement method is similar to any other securities on
  SET.

  The risk management department will strengthen its systems to better
  protect The Company and to support the new businesses.

  11.3 Audit fees

  A) Audit fees

  For 2011, the Company and its subsidiaries paid audit fees to auditor
  (Ernst & Young Office Limited) and any persons or companies related to
  auditor as follows:

+-----------------------+-----------------+------------+-------------+
| Company and its       | Auditor         | Audit Fee  | Audit Fee   |
| subsidiary            |                 |            |             |
|                       |                 | (Baht)     | (HK Dollar) |
+-----------------------+-----------------+------------+-------------+
| KGI Securities        | Ernst & Young   | 1,580,000  | -           |
| (Thailand) Plc.       | Office Limited  |            |             |
+-----------------------+-----------------+------------+-------------+
| One Asset Management  | Ernst & Young   | 400,000    | -           |
| Limited               | Office Limited  |            |             |
+-----------------------+-----------------+------------+-------------+
| KGI Securities        | Ernst &Young    | -          | 32,000      |
| (Thailand)            | Hong Kong       |            |             |
|                       |                 |            |             |
| International         |                 |            |             |
| Holdings Limited      |                 |            |             |
+-----------------------+-----------------+------------+-------------+
| KGI (Thailand)        | Ernst &Young    | -          | 60,000      |
| Holdings Limited      | Hong Kong       |            |             |
+-----------------------+-----------------+------------+-------------+
| Total Audit Fee       |                 | 1,980,000  | 92,000      |
+-----------------------+-----------------+------------+-------------+

  Note : The above fees are exclusive of out-of-pocket expenses such as
  traveling , fax and photocopying charges which will be charged to the
  Company at actual cost.

  B) Non-audit fees

  For 2011, the Company and its subsidiaries paid non-audit fees to
  auditor (Ernst & Young Office Limited) and any persons or companies
  related to auditor as follows:

+------------------------+--------------+--------------+--------------+
| Company and its        | Non-audit    | The          | Non-audit    |
| subsidiary             | service      | auditor’s    | fees         |
|                        |              | firm,        |              |
|                        |              | persons and  |              |
|                        |              | companies    |              |
|                        |              | related to   |              |
|                        |              | the auditor  |              |
+------------------------+--------------+--------------+--------------+
|                        |              |              | Year         |
|                        |              |              |              |
|                        |              |              | (HK Dollar)  |
+------------------------+--------------+--------------+--------------+
| KGI Securities         | Tax Service  | Ernst &      | 8,500        |
| (Thailand)             |              | Young Tax    |              |
|                        |              | Services     |              |
| International Holdings |              | Limited      |              |
| Limited                |              |              |              |
+------------------------+--------------+--------------+--------------+
| Total Non-Audit Fee    |              |              | 8,500        |
+------------------------+--------------+--------------+--------------+

  There is no further expense for services not yet completed which will
  become payable in the near future.