11. Financial position and operating results

11.1 Financial Statements

(A) Summary of the Report of the Independent Auditor for 2007-2009.

The Company appointed Ms. Ratana Jala, Certified Public Accountant no.
3734 of Ernst & Young Office Limited, as auditor for the year 2007. In
2008 - 2009, the Company appointed Mrs. Nongluk Pumnoi, Certified Public
Accountant no. 4172 of Ernst & Young Office Limited, as auditor. The
auditors expressed opinions on the consolidated financial statements for
the year 2007-2009 as follows:.

-   Year 2007: The Auditor expressed an unqualified opinion, but drew
    attention to Note 4 of the financial statement whereby, effective 1
    January 2007, the Company changed its accounting policy for
    recording investments in subsidiaries in the separate financial
    statements from the equity method to the cost method. The Company
    has thus restated the separate financial statements as of 31
    December 2006 and for the year then ended to reflect this accounting
    change.

Change in Accounting Policy for recording investments in subsidiaries in
the separate financial statements

During the first quarter of the year 2007, the Company changed its
accounting policy for recording investments in subsidiaries in the
separate financial statements from the equity method to the cost method,
in compliance with Accounting Standard No. 44 (Revised 2007) regarding
“Consolidated Financial Statements and Separate Financial Statements”,
under which investments in subsidiaries are to be presented in the
separate financial statements under the cost method.

In this regard, the Company has restated the previous period’s separate
financial statements as though the investments in the subsidiaries had
originally been recorded using the cost method. The change has the
effect of increasing net income in the separate income statements for
the year ended 31 December 2007 and 2006 by Baht 10.8 million (Baht 0.01
per share) and Baht 315.7 million (Baht 0.16 per share), respectively.
The cumulative effect of the change in accounting policy has been
presented under the heading of “Cumulative effect of the change in
accounting policy for investments in subsidiaries” in the separate
statements of changes in shareholders’ equity.

Such change in accounting policy affects only the accounts related to
investments in subsidiaries in the Company’s separate financial
statements, with no effect to the consolidated financial statements.

-   Year 2008 - 2009 : The auditor’s report for 2008-2009 does not
    contain any qualified opinion.

  (B) Summary of financial statements for the Company and its subsidiary
  companies for the years ended 31 December 2007 - 2009.

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

BALANCE SHEETS

AS AT 31 DECEMBER 2009, 2008 AND 2007

(Unit : Baht)

[]

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

BALANCE SHEETS (Continued)

AS AT 31 DECEMBER 2009, 2008 AND 2007

(Unit : Baht)

[]

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

INCOME STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2009, 2008 AND 2007

(Unit : Baht)

  []

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

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED 31 DECEMBER 2009, 2008 AND 2007

(Unit : Baht)

[]

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

STATEMENTS OF CASH FLOWS (continued)

FOR THE YEARS ENDED 31 DECEMBER 2009, 2008 AND 2007

(Unit : Baht)

[] 

  (C) Ratios for years 2007 - 2009

  ------------------------------------ ----------- ----------- -----------
  Consolidated Basis                   2009        2008        2007

  Profitability Ratios                                         

  Gross profit margin (%)              87.89%      87.23%      90.42%

  Net profit margin (%)                18.78%      13.72%      21.91%

  Return on equity (%)                 5.41%       4.19%       7.56%

  Return on investment (%)             9.79%       14.52%      16.47%

  Efficiency Ratios                                            

  Return on assets (%)                 3.29%       2.51%       4.56%

  Assets turnover (times)              0.18        0.18        0.21

  Financial Ratios                                             

  Liquid assets to total liabilities   1.37        1.78        1.16
  (times)                                                      

  Earning assets to total liabilities  1.97        2.60        1.91
  (times)                                                      

  Liquid assets to total assets (%)    60.09%      58.75%      52.90%

  Earning assets to total assets (%)   86.64%      85.84%      87.27%

  Debt to equity (times)               0.79        0.49        0.84

  Dividend payment (%)                 80.65%      71.43%      70.59%

  Other ratios                                                 

  Securities investment to total       67.32%      41.60%      47.49%
  assets (%)                                                   

  NCR to net liquid assets (SEC        208.04%     425.64%     188.58%
  requirement) (%)                                             

  Per Share Information                                        

  Par Value per share (Baht)           1.00        1.00        1.00

  Book Value per share (Baht)          2.26        2.23        2.25

  Basic Earning per share (Baht)       0.12        0.09        0.17

  Dividend per share (Baht)            0.10        0.075       0.12

                                                               
  ------------------------------------ ----------- ----------- -----------

  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, 2009)

Analysis of Performance

    The Company reported total income of Baht 1,290.25 million and net
    profit (net income attributable to equity holders of the parent) of
    Baht 242.34 million (equivalent to earnings per share of Baht 0.12).
    Details of the Company’s performance are as follows:

    1. Revenue structure

  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 2009, the Company reported total income of Baht 1,290.25 million.
  The main elements of the Company’s securities income structure were;
  50% from brokerage fees from securities business and derivatives
  business, 23% from gain on trading in securities and derivatives, 16%
  from fee and service income, 8% from interest and dividends income,
  and 2% 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

  Brokerage fee increased from Baht 478.58 million in 2008 to Baht
  570.99 million in 2009. Accordingly, the daily average turnover
  increased and the Company’s market share increased from 3.75% in 2008
  to 3.88% in 2009.

  Brokerage fee from derivatives business

  The average daily total turnover of TFEX increased from Baht 3,810
  million in 2008 to Baht 5,589 million in 2009 due to growth in Gold
  Futures turnover which was launched in February 2009, the major
  investor base investing in Gold Futures was with Gold Futures Brokers,
  which caused the Company’s brokerage fee from derivatives business to
  decrease from Baht 82.38 million in 2008 to Baht 80.23 million in
  2009. With increased competition, the Company’s market share decreased
  and in 2009 the Company was ranked third with 7.78%.

  2.1.2 Fee and service income

  The Company’s fee and service income decreased from Baht 233.15
  million in 2008 to Baht 200.71 million in 2009. The main fee and
  service income was from mutual fund management fees and private fund
  management fees, which were Baht 153.82 million and Baht 18.85
  million, respectively. These income fees were from One Asset
  Management Limited (a 97% owned by the Company). The changes in fee
  and service income are as follows:

  ---------------------------------- ------------- --------- ------------- ---------
                                     2009                    2008           

  Fee and Service Income             Baht          %         Baht          %

  Mutual fund management fee         153,823,345   76.64%    165,029,021   70.78%

  Private fund management fee        18,846,187    9.40%     26,910,051    11.54%

  Provident fund management fee      1,246,320     0.62%     1,233,279     0.53%

  Management fee, registrar and      9,083,677     4.53%     9,886,152     4.24%
  custodian fees                                                           

  Underwriting fee                   905,431       0.45%     2,453,460     1.05%

  Financial advisory fee             3,440,514     1.71%     5,484,200     2.35%

  Securities borrowing and lending   9,355,736     4.66%     7,577,337     3.25%
  fee                                                                      

  Selling agent fee                  3,736,846     1.86%     13,564,479    5.83%

  Others                             269,127       0.13%     1,012,817     0.43%

  Total Fee and Service Income       200,707,183   100.00%   233,150,796   100.00%
  ---------------------------------- ------------- --------- ------------- ---------

  2.1.3 Gain on trading in securities and derivatives

  The Company recognized a gain on trading in securities and derivatives
  business of Baht 296.48 million in 2009 and the details are as
  follows.

  -------------------------------------------------- --------------- -------
  Unrealised gain on revaluation of investments held 4,176,233       Baht
  for trading                                                        

  Gain (loss) of securities borrowed under the       (495,524,910)   Baht
  securities borrowing and lending business                          

  Realised gain on trading of securities             160,200,742     Baht

  Unrealised gain on revaluation of derivatives      16,885,739      Baht

  Realised gain on derivatives                       610,738,301     Baht

  Total                                              296,476,105     Baht
  -------------------------------------------------- --------------- -------

  2.1.4 Interest and Dividend Income

  The Company’s interest and dividend income decreased from Baht 135.01
  million in 2008 to Baht 104.75 million in 2009. The main reasons were
  a decrease in interest on deposits at banks and financial institutions
  and a decrease in dividends from investments.

  2.1.5 Interest on Margin Loans

  The Company’s interest on margin loans decreased from Baht 77.24
  million in 2008 to Baht 28.09 million in 2009 as there was a decrease
  in credit balance accounts and the interest rate on margin loans
  decreased following the market rate.

  2.2 Change in Expenses

  The Company’s total expenses decreased from Baht 1,109.90 million in
  2008 to Baht 961.56 million in 2009, details are as follows:

+------------------------------+--------+--------+----------+---+--------+
|                              | 2009   |        | 2008     |   |        |
+------------------------------+--------+--------+----------+---+--------+
| Unit: Million Baht           | Ex     | % of   | Expenses | % |        |
|                              | penses | total  |          | o |        |
|                              |        | income |          | f |        |
|                              |        |        |          | t |        |
|                              |        |        |          | o |        |
|                              |        |        |          | t |        |
|                              |        |        |          | a |        |
|                              |        |        |          | l |        |
|                              |        |        |          | i |        |
|                              |        |        |          | n |        |
|                              |        |        |          | c |        |
|                              |        |        |          | o |        |
|                              |        |        |          | m |        |
|                              |        |        |          | e |        |
+------------------------------+--------+--------+----------+---+--------+
| Expenses on borrowings       | 32.93  | 3%     | 77.75    |   | 6%     |
+------------------------------+--------+--------+----------+---+--------+
| Fee and Service Expenses     | 122.18 | 9%     | 96.65    |   | 7%     |
+------------------------------+--------+--------+----------+---+--------+
| Bad debt and doubtful        | (0.98) | -      | 150.50   |   | 11%    |
| accounts (Reversal)          |        |        |          |   |        |
+------------------------------+--------+--------+----------+---+--------+
| Operating Expenses           | 807.43 | 63%    | 784.99   |   | 57%    |
+------------------------------+--------+--------+----------+---+--------+
| personnel expenses           | 414.27 | 32%    | 395.04   |   | 29%    |
+------------------------------+--------+--------+----------+---+--------+
| pre                          | 160.34 | 13%    | 138.63   |   | 10%    |
| mises and equipment expenses |        |        |          |   |        |
+------------------------------+--------+--------+----------+---+--------+
| taxes and duties             | 2.37   | -      | 5.18     |   | -      |
+------------------------------+--------+--------+----------+---+--------+
| directors a                  | 113.27 | 9%     | 112.36   |   | 8%     |
| nd management’s remuneration |        |        |          |   |        |
+------------------------------+--------+--------+----------+---+--------+
| other expenses               | 117.18 | 9%     | 133.79   |   | 10%    |
+------------------------------+--------+--------+----------+---+--------+
| Total expenses               | 961.56 | 75%    | 1,109.90 |   | 81%    |
+------------------------------+--------+--------+----------+---+--------+

2.2.1 Expenses on borrowings

Expenses on borrowings decreased from Baht 77.75 million in 2008 to Baht
32.93 million in 2009. The decrease was from decrease of interest paid
on securities sold under repurchased agreement, interest paid to credit
balance accounts and interest paid to borrowing from financial
institutional, interest paid to cash balance accounts, interest paid to
derivatives business receivables.

Expenses on borrowings of Baht 32.93 million in 2009, comprising
interest paid on securities sold under repurchased agreement of Baht
18.19 million, interest paid to credit balance account of Baht 2.27
million, interest paid to financial institution of Baht 0.18 million,
interest paid to cash balance accounts of Baht 4.02 million, and
interest paid to derivatives business receivables of Baht 8.27 million.

2.2.2 Fee and Service Expenses

Fee and service expenses increased from Baht 96.65 million in 2008 to
Baht 122.18 million in 2009. The increase was from increase of fees from
brokerage business and fee from derivatives business, fees from
securities borrowing and lending business, and others fees and service
expenses. Those fees increased which varied with the Company’s
transactions.

2.2.3 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 2009, the Company transferred-back bad debt and doubtful accounts
  of Baht (0.98) million, which was from the Company recorded doubtful
  accounts of Baht 7.60 million and had transferred-back such doubtful
  accounts from settlement of Baht (8.58) million.

2.2.4 Operating Expenses

The Company’s operating expenses increased from Baht 784.99 million in
2008 to Baht 807.43 million in 2009. The operating expenses comprised
personnel expenses of Baht 414.27 million, premises and equipment
expenses of Baht 160.34 million, taxes and duties of Baht 2.37 million,
directors and management’s remuneration of Baht 113.27 million, and
other expenses of Baht 117.18 million.

3. Performance

In year 2009, the Company reported net profit (net income attributable
to equity holders of the parent) of Baht 242.34 million and earnings per
share of Baht 0.12, a gross profit margin of 87.89%, net profit margin
of 18.78%, and return on equity of 5.41%.

Analysis of Financial Status

  As of 31 December 2009, the Company had total assets of Baht 8,059.34
  million, total liabilities of Baht 3,542.99 million and total
  shareholders’ equity (equity attributable to Company’s shareholders)
  of Baht 4,511.02 million. Analysis of financial status is as follows:

  1 . Assets

  a) Investments in debt and equity securities

  As of 31 December 2009, the Company had total investments in debt and
  equity securities of Baht 5,425.58 million comprised of net
  investments of short-term investments of Baht 4,666.71 million and
  long term investment of Baht 758.87 million. (See details in note of
  financial statements No 8: Investments in debt and equity securities.)

b) Net securities and derivatives business receivables and accrued
interest receivables

  As of 31 December 2009, the Company had net securities and derivatives
  business receivables totaling Baht 1,539.25 million, details as
  follows:

  ------------------------------------------------------ ----------------
  Unit :Baht                                             2009

  Securities business receivables                        

  Cash accounts                                          666,278,320

  Credit balance loans                                   407,323,842

  Receivables under securities borrowing and lending     
  business :-                                            

  - Guarantee deposit receivables                        270,055,489

  - Securities borrowing receivables                     171,169,785

  Other receivables :-                                   

  - Installment receivables                              448,849,302

  - Overdue customers’ accounts                          534,095

  Total securities business receivables                  1,964,210,833

  Add : Accrued interest receivables                     13,198,185

  Less : Allowance for doubtful accounts                 (438,157,077)

  Securities business receivables - net                  1,539,251,941

  Total securities and derivatives business receivable - 1,539,251,941
  net                                                    
  ------------------------------------------------------ ----------------

  The Company had classified its securities business receivables in
  accordance with the relevant guidelines issued by the SEC governing
  accounting for the doubtful debts of securities companies. As of 31
  December 2009, Baht 30 million were classified as substandard debt and
  Baht 432 million were classified as doubtful debt. The Company had set
  aside full provision for doubtful debt.

2. Liquidity

As of 31 December 2009, the value of the Company’s liquid assets was
Baht 4,842.73 million (equivalent to 60% of total assets). These liquid
assets consisted of Baht 208.92 million in cash and cash equivalents,
Baht 2,501.38 million in government securities and Baht 2,132.43 million
of listed securities.

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 2009  31 Dec 2008  31 Dec 2007

  Net Liquid Capital Rule (Million  2,842        2,910        2,944
  Baht)                                                       

  Net Liquid Capital Rule (NCR)     208%         426%         189%
  ratio (%)                                                   
  --------------------------------- ------------ ------------ ------------

3. Appropriateness of capital structure

  As of 31 December 2009, the Company has an appropriate capital
  structure; debt to equity ratio was only 0.79 times.

  4. Research and Development

  In 2010, the Company has had plans to launch new products as follows.

  Gold Futures Mini Contracts, Interest Rate Futures & Bond Futures

  In 2010, the Company is now preparing staff and system for new product
  that will be launched by TFEX. TFEX plans to launch Gold Futures mini
  contract with 10 baht of multiplier, interest rate futures and bond
  futures. These futures will increase the alternatives for investors.

  Derivative Warrants (DW)

  In 2010, the Company plans to launch 10 more DWs linked to many
  leading stocks. This number is subject to market sentiment and the
  local political atmosphere which directly affect the launch of DWs.

  Equity Exchange Traded Fund (Equity ETF)

  Thailand’s first equity ETF (TDEX) and TFTSE have been great
  successes. The Company, as one of consortium members of TDEX and
  TFTSE, sees opportunities in other equity 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 equity
  ETFs such as equity ETF on SET Bank Sector, equity ETF linked to
  Foreign Index and Gold ETF.

  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.

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

3.  Audit fees

  A) Audit fees

  In 2009, 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 | 1,500,000      | -              |
| (Thailand) Plc.    | Office        |                |                |
|                    | Limited       |                |                |
+--------------------+---------------+----------------+----------------+
| One Asset          | Ernst & Young | 380,000        | -              |
| Management 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    |               | 1,880,000      | 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

  In 2009, 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    |           |
| subsidiary          | service    | auditor’s   | -audit |           |
|                     |            | firm,       | fees   |           |
|                     |            | persons and |        |           |
|                     |            | companies   |        |           |
|                     |            | related to  |        |           |
|                     |            | the auditor |        |           |
+---------------------+------------+-------------+--------+-----------+
|                     |            |             | Year   | Year 2009 |
|                     |            |             | 2009   |           |
|                     |            |             |        | (HK       |
|                     |            |             | (Baht) | Dollar)   |
+---------------------+------------+-------------+--------+-----------+
| KGI Securities      | Tax        | Ernst &     | 1      | -         |
| (Thailand) Plc.     | Service    | Young       | 20,000 |           |
|                     |            | Corporate   |        |           |
|                     |            | Services    |        |           |
|                     |            | Limited     |        |           |
+---------------------+------------+-------------+--------+-----------+
| KGI Securities      | Tax        | Ernst &     | -      | 8,500     |
| (Thailand)          | Service    | Young Tax   |        |           |
|                     |            | Services    |        |           |
| International       |            | Limited     |        |           |
| Holdings Limited    |            |             |        |           |
+---------------------+------------+-------------+--------+-----------+
| Total Non-Audit Fee |            |             | 1      | 8,500     |
|                     |            |             | 20,000 |           |
+---------------------+------------+-------------+--------+-----------+

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