Hong Kong, December 06, 2019 -- Moody's Investors Service ("Moody's") has affirmed
China Everbright Limited (CEL)'s Baa2 long-term issuer rating
and P-2 short-term issuer rating. The outlook is
stable.
In the meantime, Moody's has withdrawn the outlook on the issuer
ratings of CEL for its own business reasons. Please refer to the
Moody's Investors Service Policy for Withdrawal of Credit Ratings,
available on its website, www.moodys.com.
RATINGS RATIONALE
The affirmation of China Everbright Limited's Baa2/P-2 issuer
ratings with a stable outlook reflects CEL's Ba2 standalone assessment
and a three-notch uplift, based on Moody's assumption
that the company would receive a very high level of affiliate support
and indirect government support from China Everbright Bank Company Limited
(China Everbright Bank, Baa2 stable, BCA: ba2) via China
Everbright Group ("the group") in times of need.
The Ba2 standalone assessment reflects China Everbright Limited's (1)
growing franchise in cross-border alternative asset management
and competent fundraising ability; (2) strong principal investment
capability that supports the growth of its asset management business;
and (3) good profitability. These strengths are offset by the company's
high concentration risk in China, increasing investment risk associated
with its illiquid principal investments as well as elevated leverage,
which restrains the company's financial flexibility.
Moody's believes that CEL continues to be strategically important
to the China Everbright Group, due to: 1) the group's
49.7% indirect ownership in CEL and shared brand name which
could bring significant reputational risk to the group should CEL default
on its debt, 2) the group's strong track record of providing
financial support to its subsidiaries, and 3) the fact that CEL
acts as the key offshore investment holding company for the group.
China Everbright Limited has a growing franchise in the private equity
industry and is well positioned to benefit from the capital market reforms
in China. Because China Everbright Group is one of the largest
state-owned financial conglomerates, China Everbright Limited
has been benefiting from the group's existing franchise and relationships
in the country, which is evident in the rapid growth in CEL's AUM
to HKD143.5 billion as of the year-end 2018 from HKD49.0
billion as of the year-end 2015. The AUM growth slowed down
in 2019 and grew to HKD145.4 billion in the first half due to a
more challenging fundraising environment as well as the new asset management
regulations in China.
Over the past five years, China Everbright Limited has displayed
high AUM resilience because a large portion of its existing client funds
are locked in the long-dated funds or long-term investments.
While some of CEL's fund products have matured, the company
has raised additional funding to invest in new products, which keeps
its average investment vintage in primary market funds young and has led
to strong organic growth.
CEL has moderate product and geographic diversification with the majority
of AUM concentrated in primary market funds, a sizable portion of
which is in real estate sector-related assets. CEL's
AUM are also largely invested in mainland China. Such concentration
hampers the company's ability to withstand cyclicality in the regional
market or a particular sector. That said, CEL has maintained
strong profitability compared to its global peers with five-year
average pre-tax income margin at above 60% excluding the
share of profit from associates and joint ventures. The recent
restatement of Ying Li International Real Estate Ltd. (Ying Li)
-- in which CEL holds 72.04% of shares -- could
negatively affect CEL's profitability should the buffer between
CEL's average acquisition cost and Ying Li's net asset value
(NAV) further narrow.
As an alternative asset manager, CEL invests a large amount of own
capital in risky investments as general partner and in seed capital.
As of 30 June 2019, CEL's seed capital accounted for around
24.1% of the HKD145.4 billion in AUM, slightly
lower than the 25% at the year-end 2018. The large,
long-dated and illiquid nature of these investments brings high
risks to CEL because these investments are held on the balance sheet for
three to seven years until the company exits the underlying illiquid assets
in IPOs or a sale.
In the past few years, China Everbright Limited has also leveraged
via bank borrowings and debt issuance to support the growth of its principal
investment and asset management businesses. The company's total
debt rose to HKD26.7 billion as of 30 June 2019 from HKD13.5
billion as of the year-end 2015. The company's overall debt/EBITDA
ratio continued to climb up reaching the peak at 7.6x by Moody's
calculation as of the year-end 2018, weakening the company's
financial flexibility. That said, CEL maintains a stable
liquidity pool with HKD7.7 billion of cash, HKD8.4
billion of undrawn committed revolving credit facilities from various
banks along with HKD44 billion investments of which around 25%
are level 1 assets that can be readily converted to cash.
Corporate government is highly relevant to an asset managers' creditworthiness.
Moody's does not have elevated concern around CEL's corporate
governance although the recent Ying Li incident shows weaknesses in CEL's
due diligence into portfolio companies' internal governance and
control functions.
What Could Change the Rating -- Up
Because CEL's Baa2 long-term issuer rating already benefits
from a three-notch uplift based on Moody's expectation of
affiliate and indirect government support in times of need, and
is at the same level at the deposit rating of China Everbright Bank,
an improvement in CEL's standalone assessment is unlikely to lead to an
upgrade of the ratings unless the rating of China Everbright Bank's
ratings are upgraded.
China Everbright Limited's standalone assessment could be raised if the
company (1) reduces its leverage materially with total debt/EBITDA ratio
to below 5x, (2) sustains its AUM and revenue growth and at the
same time further diversifies its AUM to overseas and secondary market
funds, and (3) maintains its profitability at the current level,
with contained volatility during capital market fluctuations.
What Could Change the Rating -- Down
China Everbright Limited's ratings could be lowered if (1) a sizable acquisition
and/or deterioration in profitability lead to further increase in its
leverage, e.g. with its total debt/EBITDA sustaining
above 7.5x, (2) the company's AUM retention rate and replacement
rate fall to below 80% and 100%, respectively,
(3) profitability deteriorates as a result of investment losses and/or
higher volatility in investment performance, or (4) Moody's
reduces the level of support assumptions or the ratings of China Everbright
Bank are downgraded.
The principal methodology used in these ratings was Asset Managers Methodology
published in November 2019. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
Headquartered in Hong Kong, China Everbright Limited reported assets
of HKD85 billion as of the first half of 2019.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Moody's considers a rated entity or its agent(s) to be participating
when it maintains an overall relationship with Moody's. Unless
noted in the Regulatory Disclosures as a Non-Participating Entity,
the rated entity is participating and the rated entity or its agent(s)
generally provides Moody's with information for the purposes of
its ratings process. Please refer to www.moodys.com
for the Regulatory Disclosures for each credit rating action under the
ratings tab on the issuer/entity page and for details of Moody's
Policy for Designating Non-Participating Rated Entities.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Lan Wang, CFA
Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Yat Man Sally Yim, CFA
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
