Letter to Shareholders

 

A sequence of unexpected events had occurred throughout the world in 2016, from UK's departure from the European Union, the Italian constitutional referendum to Trump's victory in the U.S. presidential election. However, the market has become increasingly resilient towards surprises, and the impact of which has lessened with each occurrence. Trump's victory has raised the market's expectation towards inflation, and was followed by the FED's decision to increase interest rate by 0.25% later in December, which caused investors to pull capital from emerging markets and convert into USD assets at a faster rate. The OPEC reached an agreement in November to reduce output and caused oil price to rise. Meanwhile, many countries are seeing rising sentiment against globalization, which contributes uncertainty to a worldwide recovery.

 

In 2016, TAIEX gained 937 points overall, or 11.3%. During the year, JihSun Securities not only ranked third among top-10 securities firms in terms of pre-tax EPS, but won the 13th "Golden Torch Award - Innovative Design" organized by Outstanding Enterprise Manager Association and claimed the "Best Wealth Management Award" of Excellence magazine as well.

 

In 2017, the world's political and economic development will be largely affected by Trump's policies and political risks in Europe. While the United States continues to raise interest rates, the Eurozone and Japan have kept money supply loose while China adopts a neutral monetary policy. Overall, there is still abundant liquidity in the market. Trade protectionism, U.S. rate hike, and geopolitical risks will continue to affect the world's financial market in the upcoming year. The new year may have presented us with many challenges, but JihSun and its employees have the confidence to overcome these challenges and deliver multi-win results for the society, the shareholders and the employees.

I. 2016 Business results

(I) Changes in the domestic and overseas financial environment, and changes to the Company’s organizational structure

1. Changes in the overseas financial environment

Description of major economies:

(1) USA - expected to sustain growth with Trump's new policies presenting the highest risks: a moderate increase in salary level will drive domestic demands and corporate profitability. The real estate market is currently characterized as overpriced and low availability; a rise in mortgage rate will undermine home purchasing power and property investments. Trump's economic policy focuses more on fiscal means rather than monetary means, and an expansionary fiscal policy will significantly increase the nation's budget deficits. The increase in price level is expected to take place mainly in 2018, and given the rationale that the FED will raise interest at a faster rate only in periods of high economic growth, we maintain our forecast that 2 interest rate hikes will take place in 2017.
(2) Europe - lack of investment limits economic growth, while political instability presents the major risk: economic recovery in other parts of the world has driven growth in Europe, pushing leading indicators to the highest point in one year. However, political instability has deterred investments and limited Europe's growth potentials. Although there is still room for upward price adjustment, manufacturers are reluctant to do so given their abundant excess capacity, therefore it is unlikely for the price level to increase by more than 1.5%. In view of UK's departure, restructuring of Italian banks, and rising anti-EU sentiment exhibited in French and German elections, the ECB has opted to maintain an expansionary policy.
(3) Japan - steady recovery of domestic demands, with risks arising mostly from outside the country: by maintaining a weak currency, Japanese businesses were able to increase profits through gain on exchange of overseas income. Meanwhile, a weak currency improved price competitiveness of exported products, which in turn increased employment rate and private spending. The 7.5-trillion Yen spending proposed as part of Prime Minister Abe's 2nd economic stimulation policy has been approved by the parliament, and will be spent over two years to support the growth of the economy. According to previous experience, the JPY exchange rate moves approximately six months ahead of price level, therefore a significant rise of price level is expected to take place in the second half of 2017. Risks to Japan's economy are mainly attributed to external sources. If Trump's fiscal policy does not perform to expectation, the United States may experience a decline of domestic demand and weakened USD, which impact Japan's export trade. Meanwhile, political instability in Europe may cause investors to convert capital into JPY-denominated assets and increase the value of the JPY currency.
(4) China - lesser risk of a hard landing, while currency stability becomes important: China has seen several improvements in economic data, such as faster PMI expansion, producer price index turning positive, improved corporate profits, recovering imports/exports, and increasing core CPI. All of which suggest a significant reduction of downsize economic risk. In the absence of a real estate control policy, China is expected to maintain GDP growth at 6.5%~7.0% in 2017. The CNY exchange rate had been made flexible to maintain equilibrium, which resulted in the higher volatility seen in the last year. During the 19th National Congress, it was made clear that the Chinese government will be trying to stabilize the CNY exchange rate.

 

2.Changes in the domestic financial environment

Performance and prospect of the domestic economy:

(1) The 1-month moving average of TAIEX exhibits a pattern similar to the second half of 2011, showing a correction after the index had breached the 1-year moving average with KD indicators moving into the over-buy zone. Overall, the index should continue its upward trend over the medium term along the 1-year moving average. Future corrections may find support at the 1-year moving average.
(2) Real salary growth turned positive while both investment and export activities recovered. Currently year's GDP growth has been estimated at +1.80%. The moderate economic recovery and uprise of trade protectionism around the world present balanced risks and opportunities in this year's economic outlook. Given the limited level of inflationary pressure, the Central Bank is expected to maintain interest rate unchanged. Economic risks: if the United States decides to adopt a trade protectionist policy, it may directly impact Taiwan's growth by 7.8% given the percentage of goods exported to USA, and cause a 1 percentage point drop in China's growth that indirectly affects Taiwan's economy by 0.7 percentage point. 3. Changes in the Company's organizational structure By the end of 2016, the Company held control over four subsidiaries, namely JihSun Futures Co., Ltd., JihSun Securities Investment Consulting Co., Ltd., Jih Sun International Investment Holding Co., Ltd., and JihSun Venture Capital Co., Ltd. These subsidiaries were unchanged from 2015.
(3) Changes in the Company's organizational structure By the end of 2016, the Company held control over four subsidiaries, namely JihSun Futures Co., Ltd., JihSun Securities Investment Consulting Co., Ltd., Jih Sun International Investment Holding Co., Ltd., and JihSun Venture Capital Co., Ltd. These subsidiaries were unchanged from 2015.

 
(II) Business plans, strategies and performance results

The Company’s performance results are described below:

1. Net income of the Company amounted to NT$711 million in 2016, with EPS ranking 3rd among peers.
2. In the brokerage segment: the Company secured a 3.20% market share in stock brokerage; wealth management revenues grew by 3.69% from 2016 and delivered a target accomplishment rate of 114.32%; 10,835 trust accounts were opened in 2016, with total assets under management amounting to NT$4.3 billion.
3. In the proprietary trading segment: trade performance had fallen below expectation in 2016. After a series of reviews and adjustments, the Company will adopt a more balanced and consistent trade pattern towards accomplishing its planned objectives.
4. In the underwriting segment: the Company lead-arranged 38 cases in 2016, ranking fourth in the market in terms of case count. In the future, the Company will being expand its IPO efforts in terms of case count and amount, and aim to secure the role of lead arranger in SPO cases.
5. In the derivatives segment: the Company issued 943 warrants during the year, which represented a 3.83% market share of new warrants issued.
6. In the fixed income segment: bond transactions amounted to NT$352.7 billion, representing a market share of 2.90%.

 

(III) Accomplishments of major business targets

The Company’s performance results are described below:

Performance indicator 2016 - actual
ROE after tax 3.28%
EPS before tax ranking among peers Ranked third
 
(IV) Revenues, expenses, and profitability analysis

Consolidated net revenue of the Company and subsidiaries amounted to NT$3.462 billion in 2016; after deducting operating expenses NT$2.612 billion, minority interest NT$1 million and income tax expense NT$138 million, consolidated net income attributable to parent company shareholders totaled NT$711 million, which was equivalent to an after-tax earnings per share of NT$0.61, down 17.57% from the previous year. Consolidated return on assets of the Company and subsidiaries was calculated at 1.38%, while return on shareholders’ equity was calculated at 3.28%. Revenues, expenses, and profitability of the Company and each of its subsidiaries are listed in the following table:

 

Unit: NTD

Company name Pre-tax profit
(NTD thousand)
Net income
(NTD thousand)
EPS after tax
(NTD)
ROA% ROE%
JihSun Securities 830,560 710,911 0.61 1.64% 3.28%
JihSun Futures 86,582 72,582 1.04 0.84% 4.92%
JihSun Securities Investment Consulting 4,242 3,501 0.35 2.72% 3.03%
JihSun Venture Capital 27,532 24,284 0.81 7.79% 7.84%
JihSun International Investment Holdings (20,350) (20,350) (0.37) -1.47% -1.47%

 

(V) Research and development progress

1. E-Commerce:

(1) Best e-financial partner: In response to the rapid development of e-commerce, JihSun has taken the initiative to enhance the quality of financial services delivered over mobile devices (phones, tablets, etc) and offer a broader variety of products to choose from. New system functions including overseas futures, sub-brokerage, transaction certificate instant download, and electronic trade activation have been introduced to satisfy customer’s needs for immediate and diverse mobile financial service.
(2) Website function and service enhancement: JihSun Securities Exchange website new technical analysis and market information service with the cross-browser feature covers the commodity information service of the domestic Listed, OTC, Emerging, and futures market; also, offers the value-added service on the Group’s shares, stocks, industrial stocks, trading rankings, and listed index to provide customers with diversified and convenient transaction introducing information; moreover, optimizes the customer movement route, simplify web services operational processes, and improves customer usage.
(3) "HTS2" enhancement: HTS2 is JihSun's proprietary next-generation stock quotation and trading system designed for professional investors. Featuring a user-friendly interface and a browser-like page toggle design, the system is being introduced with value-adding information (such as thematic stocks, news database, industry supply chain, and search functions) since first launch to help customers capitalize on market trends and refine investment decisions. Its presence has improved the depth and breadth of the Company's services.
(4) Considerate mobile service: "JihSun Online" and "JihSun Smart," the two proprietary APPs developed by JihSun Securities, have been designed to serve as investors' all-in-one financial assistant, offering a broad variety of push messages from personal investment, transaction result, public offering, treasury stock, to dividends. The APPs also enable investors to trade, subscribe and place conditional orders online, and provide online analysis as well as desktop quotation to keep customers informed on the go.
(5) Expand customer reach: In an attempt to explore new investors, the Company has upgraded its "JihSun Campus" website with new user interface and contents that enables JihSun customers to learn financial knowledge at greater ease; meanwhile, the website has been optimized for search engine, so that potential investors have a greater chance of being directed towards JihSun Securities website when searching for keywords.
(6) Online account opening: JihSun Securities is one of the country's first securities firms that allows customers to open accounts without being physically present. Incorporating advanced features such as video conferencing, online signature and an user-friendly interface, "JihSun Online Account Opening" enables customers to open accounts without leaving home, which is a giant step towards realizing "Digital Banking 3.0."

 

II. Summary of 2017 Business Plan

(I) Operational guidelines

1. Seek steady profit growth to create maximum value for shareholders.
2. Grasp the opportunity of an open policy to improve the competitiveness of enterprises.
3. Adopt flexible proprietary trading strategies and aim to improve profitability.
4. Enhance mobile securities services.
5. To ensure information security and protection of customers’ personal information.

 

(II) Project business goals

The Company has set its goals to achieve continuous profit growth in 2017. The Company’s business objectives are illustrated as follows:

Business targets Item Annual target
To increase revenues and profitability Market share of brokerage Top 6
To increase revenues and profitability Market share of e-trading Top 6

 

(III) Major operational policies

1. Search for suitable M&A targets; utilize M&A as a means to expand market size.
2. Continue to recruit talents and nurture successors in response to the needs of personnel for domestic and international business expansion.
3. Make procedural innovations and increase the percentage of transactions processed electronically for higher service quality.
4. To enhance the multi-platform e-commerce and increase the use rate of smart devices.
5. To establish the well-rounded information security protection.

 

III. The Company’s future development strategies

(I) Apply channel management and aim to raise operating efficiency per branch.

(II) Execute segment marketing and grow services particularly for institutional customers and in the wealth management segment.

(III) Adjust service portfolio and income structure for enhanced operating efficiency.

(IV) Recruit top talents and young sales personnel to support business expansion.

(V) Develop digital banking services; engage in mobile commerce and social network management.

(VI) Raise the percentage of digital processes for reduced operating costs and improved business performance.

 

IV. Impacts of the external competitive environment, regulatory environment, and the overall business environment

The global economy should remain strong in the first half 2017 as the new U.S. President announces his new policies. From March onwards, however, the market will start reacting to factors such as UK's departure from Europe, the French presidential election, financial statement announcements, and the addition of A-shares in MSCI. TAIEX may rise to somewhere around 9,700 points in the first half, but investors are likely to withdraw and observe after Q2. Launch of Apple's new product in the second half of the year may push TAIEX to new heights. Overall, TAIEX is expected move between 9,000 ~ 10,300 points, with TWSE and TPEx combining to a daily average trade volume of NT$100.8 billion. This narrow range combined with reduced trade volume will make proprietary trading and brokerage businesses more difficult. Apart from global factors, the Company's will also be observing new policies of FSC's new commissioner this year.

 

V. Credit ratings

The Company’s latest credit rating was assessed by Fitch Ratings, which concluded the following result:

Rated entity Fitch Ratings Taiwan (Publishes on 22 July 2016)
Long-term credit rating Short-term credit rating Prospect
JihSun Securities A- (twn) F2(twn) Stable

 

 

 
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