MARC Ratings has affirmed its non-bank financial institution rating of AA/Stable on CGS International Securities Malaysia Sdn Bhd (CGS MY) and the MARC-1 rating on CGS MY’s Commercial Papers Programme of up to RM1.0 billion in nominal value.

The ratings reflect CGS MY’s growing business profile in the domestic stockbroking industry. CGS MY has been able to maintain its strong position in the local stockbroking industry, with a leading market share of 12% by trading value as at end-1H2024. The rating agency notes that CGS MY’s market share has not been impacted following the full exit of CIMB Group Holdings Berhad with the sale of the remaining 25% stake in December 2023 to China Galaxy Securities Co., Ltd. (CGS), via subsidiary CGS International Holdings Limited. The CGS group is currently undergoing an internal restructuring exercise to streamline its shareholding structure and strengthen operational efficiencies.

While CGS MY as a foreign-owned outfit may potentially face some challenges to attract businesses, particularly government-related entities (GREs) that may have limitations on dealing with foreign entities, MARC Ratings views this risk as manageable given that CGS MY is predominantly a retail-based stockbroker (79% of revenue in 2023), and GREs accounted for only a small percentage of its institutional portfolio. Furthermore, CGS MY would also benefit from cross-border trading services, corporate finance, structured products and asset management for growth by leveraging the CGS group’s strong regional franchise.

Over the near term, CGS MY will expand its revenue and profit base through its go-forward strategy by expanding into the wealth management segment and investment banking. MARC Ratings believes this will support CGS MY’s earnings stability over the longer term, as earnings performance from the stockbroking business is variable and sensitive to market sentiment. The rating agency also notes that the expertise of CGS MY’s management team and within the larger group would help mitigate the execution risk related to CGS MY’s business plan, particularly in light of heightened competition in the stockbroking industry with the advancement of digital transformation and the entrance of technology-backed apps. MARC Ratings views the company’s strategic alignment with the ultimate parent, CGS, as strong, and therefore expects high probability of support from the parent based on its full ownership of CGS MY, the common branding of the two entities and reputational considerations.

In terms of financial performance, revenue and profitability improved in 1H2024, with revenue increasing 33.7% y-o-y to RM221.7 million and pre-tax profit improving to RM51.8 million (1H2023: RM35.1 million). Concurrently, annualised return on assets and return on equity stood higher at 1.71% and 4.62% (2023: 1.50% and 3.63%). CGS MY has also maintained a healthy capital profile, with a capital adequacy ratio of 15.0x as at end-June 2024 that could support business growth.