Risks

1.  Market Risk and Competition risk

  The trading volume of the stock market, and the Company’s market
  share, have a direct impact on KGI’s revenue. Factors that cause
  market price and volume volatility include political situation,
  economic outlook, and investor sentiment (both domestic and
  international). In addition, the securities business is highly
  competitive. If the Company is not able to maintain a high quality of
  service compared with other brokers, it may lose market share. In year
  2002, The Stock Exchange of Thailand imposed a minimum commission rate
  in order to encourage members to focus more on the service provided to
  clients especially research information and to encourage investors to
  invest in the stock market based on securities fundamentals. This
  helped the Company to increase its brokerage revenue. The Company has
  a policy of increasing marketing officers’ ability to provide good
  recommendations to clients and increase the value added to services
  provided to clients. In addition, the Company has a policy of
  diversifying its business by developing new products such as Stock
  Borrowing and Lending and Derivative Warrants.

2.  Credit balance risk and Default risk

  The Company has set up a Risk Management Committee. Its role includes
  reviewing and approving the Company’s policy on risk management in
  respect of credit balance accounts, the policy on credit line
  approval, guidelines for valuing and managing collateral, policy and
  strategy in managing risk. Therefore, the Company believes that it can
  minimize credit balance risk and default risk from cash accounts. As
  of 31 December 2002, the Company had securities business receivables
  from customer’s accounts totaling Baht 564mn and from credit balance
  totaling Baht 216mn.

3.  Interest rate risk

  As at December 31 2002, the Company had no significant borrowing.
  However, through a subsidiary the Company had foreign floating rate
  debts amounting to approximately US$13.00mn or Bt562mn. This liability
  was held by KGI Securities (Thailand) International Holdings Limited
  (HOLDCO), a wholly owned subsidiary. HOLDCO also held KGII’s Secured
  Convertible Notes and Secured Notes amounting to US$35mn and
  Bt1,575mn, respectively. These secured convertible notes and secured
  notes carried a fixed coupon of 6%. This combination of fixed interest
  rate assets and floating interest rate liabilities produced a
  potential interest rate risk for the company.

  However, the Extraordinary General Meeting of Shareholders held on 9
  January 2003 approved the Company’s capital restructuring plan and
  authorized HOLDCO to sell the bonds to KG Investments Holdings Limited
  (KGIH), a KGI Group company. The sale of the bonds was completed on 21
  March 2003 and on the same day HOLDCO also repaid all of its foreign
  loans, substantially reducing this type of risk.

4. Foreign exchange risk

  As of 31 December 2002, the Company has no significant financial
  instruments outstanding in foreign currencies, except through its
  investments in an overseas wholly-owned subsidiaries, KGI Securities
  (Thailand) International Holding Limited (HOLDCO), and in KGI
  (Thailand) Holdings Limited (KTHL). HOLDCO has investments of USD 71.3
  million in debentures for which the foreign exchange risk can be
  offset against HOLDCO's foreign currency liabilities of USD 13
  million. In addition, in December 2002 and January 2003 the Company
  entered into forward exchange contracts to sell USD 10 million (at
  forward rate of Baht 43.007/1 USD) and USD 48 million (at forward rate
  of Baht 42.7385 - 42.93/1 USD) to hedge the foreign exchange risk in
  relation to its planned borrowings from the subsidiary of Bt 2,483
  million. Foreign exchange risks arising from the Company’s USD
  denominated investment in its 2 overseas subsidiaries will be
  substantially eliminated once the Thai Baht loans from the 2
  subsidiaries to the Company are in place.

5.  Liquidity risk

  The Company has sufficient liquidity. As of December 31^(st) 2002,
  cash on hand and at banks was Bt1,298mn, and the Company’s net capital
  ratio (NCR) was 497.53%. The Company has an appropriate liquid asset
  management policy to match debt maturity.

6.  Securities investment risk and return risk

  The Company has formed a Proprietary Investment Committee which is
  responsible for setting guidelines and policies on asset allocation,
  approving portfolio limits, setting risk control policies and
  considering and approving investments. As of December 31^(st) 2002,
  the Company’s net investment in securities was Bt5,668mn (54% in
  securities held for sale, 25% in trading securities, 20% in debt
  securities due within one year and 1% in others). The Company has
  implemented stringent and prudent risk management controls to lessen
  the risk of loss due to market volatility. Fixed income and equity
  securities are marked-to-market and valuation changes are reflected in
  the Company’s portfolio performance and financial statements.

7.  Risk from investment in subsidiaries and associated companies

This type of risk may arise if the subsidiaries and associated companies
incur losses. The Company fully recognizes losses by the equity method.

8.  Risk from expanding branch network

  As of 31 December 2002, the Company operated a total of 16 branches
  nationwide. In order to increase market share, the Company has opened
  new branches. Some branches, which were not profitable, have been
  closed down so as to reduce operating cost. The opening of new branch
  offices involves risk, primarily by increasing the company’s fixed and
  variable costs. However, the Company has a thorough review process for
  establishing new branches. A feasibility analysis is first conducted,
  in which the population, economic position and prospects, and number
  of financial institutions operating in such areas are considered. A
  profit-loss projection is made together with a study on the impact of
  the establishment of the new branch on the maintenance of net capital
  adequacy of the Company.

9.  Risk from operating underwriting and financial advisory businesses

  In operating investment banking business, including underwriting
  business, there is a risk of losses from unsubscribed securities which
  must be transferred to the Company’s portfolio. Inappropriate size or
  pricing of issues, unexpected fluctuation of the stock market,
  interest rates or foreign exchange rates can cause the investors not
  to subscribe for such securities. To reduce such risk, the Company has
  studied and analyzed information regarding the issuer and the interest
  of clients or investors. In the financial advisory business, the
  Company will study preliminary client information and conduct
  appropriate due diligence before accepting any clients.

10. Risk from having a major shareholder

  As of 17 March 2003, the KGI Group owned approximately 40% of the
  Company. Major shareholders can often exercise significant influence
  over a company’s management and business policies. However, in order
  for KGI Group to hold more than 50% of the Company, KGI Group would
  have to seek for approval from related government agencies.

11. Risk from establishing Thai Trust Fund (TTF)

  Following the resolution of KGI Securities (Thailand) Public Company
  Limited Extraordinary Shareholders Meeting No. 1/2001 dated March
  8^(th) 2001, the Company joined the Thai Trust Fund program (TTF). The
  objective was to stimulate investment from foreign investors and to
  increase the liquidity of the Company’s shares. The fund is permitted
  to hold no more than 25% of the total shares of the Company, and
  foreign investors in the TTF have no voting rights. This effectively
  leads to a decrease in the number of voting shares. As a result, major
  shareholders may have an increased level of control in the company.
  However, as of 31 December 2002, there were no shares held in the TTF.

  In anticipation of the ministerial regulations relating to the Alien
  Business Act B.E. 2542, the Company’s Annual General Shareholders
  Meeting No. 1/2001 dated April 25^(th) 2001 approved the amendment of
  the Company’s Articles of Association, so that shares of the Company
  shall be freely transferable without restriction (No foreign limit).
  Such ministerial regulations are currently under the examination of
  the Office of a Royal Decree Committee. The Company may reconsider its
  participation in the TTF program after such ministerial regulations
  have been approved.

12. Risk related to number of warrants

  As at December 31^(st) 2002, the Company has 943,556,564 units of
  Warrant No. 4 outstanding. (maturity: April 30^(th) 2004) at the ratio
  of 0.10 share : 1 warrant and exercise price of Bt5.00. In March 2003,
  there was an adjustment of terms and conditions of Warrants No. 4.
  Following the capital reduction and capital return. The new exercise
  ratio is 0.27806 share : 1 warrant and the new exercise price is
  Bt1.79816 per share.

  The Company has to reserve 262,365,338 shares (equivalent to
  approximately 15% of total paid-up shares) to accommodate the exercise
  of the outstanding Warrants No. 4. In the past, the Company’s adjusted
  share price was lower than the exercise prices of Warrant No. 4. If
  this situation continues, it is expected that few warrants will be
  exercised. If so there will be little or no dilution effect either on
  the earnings per share (EPS) or voting rights. If all outstanding
  warrants were exercised, the Company would receive Bt470mn. The
  Company plans to invest any such proceeds in projects, which should
  provide sufficient return to maintain the return on equity.