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Rating Action:

Moody's affirms China Everbright Limited's issuer ratings at Baa2/P-2; outlook stable

06 Dec 2019

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In the meantime, Moody's has withdrawn the outlook on the issuer ratings of CEL for its own business reasons.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

No Related Data.
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