Idea of the Week: Mirae Asset Securities Yields Attractive Return

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Highlights:

• Mirae Asset’s revenue saw a 45% slump in 2022 due to the bearish global stock markets. Given that this round of interest rate hike cycles is coming to an end, we believe the performance is expected to recover this year.

• Mirae Asset’s net capital ratio for 2022 stood at 1871.1%, which is well above regulatory requirements, and overall credit quality remains robust.

• Mirae Asset’s bond due in 2026 is currently yielding about 6.7%, coupled with its credit rating of BBB, the investment value is rather decent.

The bond due in 2026 issued by Mirae Asset Securities is yielding around 6.7%, which is quite attractive among BBB-rated bonds, let us learn more about this company.

Company Background

Founded in 1998 and headquartered in Seoul, Mirae Asset Securities merged with Daewoo Securities, a subsidiary of Korea Development Bank, in 2016. The company is listed on Korea Stock Exchange with stock number 006800.KRX, with a market capitalisation of approximately KRW 3.7 trillion.

Mirae Asset Securities has a presence in financial services including asset management, wealth management, investment banking, and life insurance. As of 31 December 2022, the company owns 78 branches across Korea and 10 overseas subsidiaries, with a combined AUM of KRW 351.9 trillion, making it the largest financial company in Korea.

It is worth noting that the Global X ETFs, which are well-known by investors, are managed by Mirae Asset Financial Group, the parent company of Mirae Asset Securities. At the end of 2022, Mirae Asset Financial Group owned approximately 27.5% of Mirae Asset Securities.

Both Revenue and Profit Tumble in 2022 Owing to Bearish Stock Markets

Following the merger with Daewoo Securities, Mirae Asset Securities maintained rather good track records, with revenue of KRW 2.2 trillion in 2020 and KRW 2.8 trillion in 2021 (Chart 1), rising by 37.5% and 27.3%, respectively. However, the company delivered disappointing results with revenue slumping by 46.4% YoY to KRW 1.5 trillion, and both operating profit and net profit saw a plummet of 50%.

Chart 1: Revenue and Profit of Mirae Asset Securities

The main driver of Mirae Asset Securities's poor performance was due to the global interest rate hike cycles which put pressure on the stock market. We note that the central bank of Korea started its rate hiking cycle as early as August 2021 and followed the Fed's lead with seven consecutive rate hikes in 2022 (Chart 2), pushing the terminal rate to a high of 3.25%. Apart from the aggressive rate hikes. the downturn of the global semiconductor industry undoubtedly adds woes to the semiconductor- centric Korean economy. As a result, Korea's stock market remained depressed, with KOSPI falling by 24.9% YoY in 2022, underperforming most developed markets. 

Chart 2: Korea’s Rate Hikes and Stock Market Movement 

From the perspective of the revenue breakdown of Mirae Asset Securities, securities brokerage and trading fees are the major sources of revenue, accounting for 64.6% of the total revenue in 2022. Given that these two segments are highly susceptible to stock market sentiments. Specifically, investors usually curtail the trading volume and margin loan when the market moves in a downturn. As can be seen from Chart 4, Mirae Asset Securities' average daily trading volume trended downward in 2022, with the trading volume in 4Q2022 dropping by roughly 34% compared to 1Q2022. Meanwhile, margin loan balance went down from KRW 6.6 trillion in 1Q2022 to KRW 5.4 trillion in 4Q2022, resulting in brokerage revenue and trading fee revenue plunging by 37.3% and 58.8% from a year ago, respectively, thus weighing on the overall performance.

Chart 3: Revenue Breakdown of Mirae Asset Securities

Chart 4: Trading Volume and Margin Loan of Mirae Asset Securities

Strong Rebound This Year with Ample Upside Potential

The central bank of Korea suspended the rate hike three consecutive times after a 25 bps hike in January this year, making the market believe that the rate hiking cycle has come to an end. Consequently, the Korean stock market records a marked recovery, with KOSPI rebounding over 16% from the beginning of this year. Along with the improvement in market sentiment, the trading volume also resumes, as the company's average daily trading volume picked up to KRW 21.2 trillion in 2Q2023, and the margin loan balance gained to KRW 6.3 trillion during the same period. Therefore, the operation performance is seeing an improvement in 1H2023, with revenue amounting to KWR 945.5 billion, roughly unchanged from last year, and operating profit slightly rose by 0.1% to KWR 444.6 trillion, which was a notable performance.

Table 1: Operation Performance in 1H2023

Looking ahead, we are pretty bullish on the company’s future development. One reason is that the company is proactively expanding its business. For example, Mirae Asset has gained a lot from the pension business in recent years, with total pension assets reaching KRW 26.8 trillion by the end of 2022, making it one of the largest pension fund institutions in Korea, and is expected to provide strong support for the further sale performance. On the other hand, the company is exploring overseas markets. Currently, Mirae Asset Securities's business reaches several emerging markets such as India, Indonesia, and Vietnam, and plans to enter more countries, which are expected to be the new growth driver.

Decent Credit Quality with Large Net Capital

Liquidity-wise, as of 31 December 2022, the bearish market sentiment resulted in a huge asset write-down for the high-liquid asset of Mirae Asset securities, which totaled KWR 98.8 trillion and was enough to cover its self-owned indebtedness. The liquidity coverage ratio of 162.5% suggests that the liquidity is at a sound level.

Chart 5: Liquidity Coverage Ratio

Similar to the banking sector, capital adequacy is also crucial for securities firms. Generally speaking, net capital, an overarching indicator of capital adequacy and liquidity for a securities firm, is defined as the net assets excluding risk adjustments and is a direct reflection of the amount of funds readily available for liquidity.

We note that Mirae Asset Securities' net capital risk coverage ratio (net capital/ sum of risk provisions) remains at very solid levels, with the ratios for 2020 to 2022 standing at 2034.1%, 2133.4%, and 1871.1%, respectively. These ratios are well above the regulatory requirement of 100%, hinting that the company is well-capitalised and has a decent capability to withstand risks.

All in all, we favour the current credit quality of Mirae Asset Securities, which is in line with its credit rating of BBB, particularly in light of the improved operation track records this year, and we expect the credit profile to be strengthened accordingly. 

Chart 6: Net Capital Risk Coverage Ratio

Bond Yield Reaches 6.7% for Bond Due in 2026

One USD bond issued by Mirae Asset Securities is available on our platform. Details of the bond are set out below:

The 2026 USD bond is trading at an ask price of $100.4 with a  yield to maturity of 6.7%. From the absolute return perspective, the bond is one of few investment-grade corporate bonds in Korea that could proffer a return of more than 6%. Given the recovery in operation and sound credit metrics, we believe the potential investment risk is at a very low level and investors interested in Korean corporate bonds could consider it. It is also worth mentioning that in contrast to some banking bonds, there are no complex clauses embedded in this bond, like the loss absorption feature.

Corporate Risk

Investors should be mindful of the following risks. First, although the Central Bank of Korea suspended the rate hikes, the outlook of the Korean economy is pretty bleak due to the depressed semiconductor industry and exports. If the economy stepped into recession, it would adversely impact the sales of Mirae Asset Securities, which in turn may affect the credit quality.

Secondly, Mirae Asset Securities engaged in large-scale investments in emerging markets, which may affect the cash flow and operation stability if the investment is conducted in an overly aggressive manner.

Conclusion

The company's revenue saw a 45% slump in 2022 due to the bearish global stock markets. Given that this round of interest rate hike cycles is coming to an end, we believe the performance is expected to recover this year. The net capital ratio for 2022 stood at 1871.1%, which is well above regulatory requirements, and overall credit quality remains robust. Bond due in 2026 is currently yielding about 6.7%, coupled with its credit rating of BBB, the investment value is rather decent.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.

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