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Rating Action:

Moody's affirms Orient Securities' Baa3/P-3 ratings; outlook stable

 The document has been translated in other languages

28 Nov 2019

Hong Kong, November 28, 2019 -- Moody's Investors Service ("Moody's") has affirmed Orient Securities Company Limited (Orient Securities)'s Baa3 long-term issuer rating, Baa3 senior unsecured rating and P-3 short-term issuer rating. Moody's has also affirmed Orient Securities' (P)Baa3 senior unsecured rating and (P)P-3 short-term rating for the MTN program. At the same time, Moody's has affirmed the Baa3 rating on Orient HuiZhi Limited (Orient HuiZhi)'s senior unsecured long-term notes guaranteed by Orient Securities.

The outlooks on both Orient Securities and Orient HuiZhi are stable.

RATINGS RATIONALE

The affirmation of Orient Securities' Baa3/P-3 issuer ratings reflects Orient Securities' standalone assessment at Ba2 and Moody's continued expectation for a high level of affiliate support from Shenergy (Group) Co., Ltd. (Shenergy, A1 Stable, baa1 baseline credit assessment) as well as a high level of support from the Government of China (A1 Stable) in times of stress.

The Ba2 standalone assessment reflects Orient Securities' solid liquidity and funding positions, low leverage, a stable and experienced management team, as well as a reputable asset management franchise. Offsetting these credit strengths are Orient Securities' continued reliance on proprietary trading, high exposure to the stock-pledged lending business along with the resulting volatile profitability. The company has also been actively expanding the FICC business especially commodity trading which could raise operational and market risks.

Orient Securities has retained high levels of liquidity and funding in the past years and proactively diversified its funding channels through issuing debt in various forms -- including senior unsecured, subordinated, domestic and foreign currencies -- in the both onshore and offshore markets. The diversification in funding channels has helped the company to reduce its borrowing costs. Orient Securities also benefits from the wider access to liquidity after the central bank in China granted permission to a group of first-tier securities companies to issue financial bonds and raised the issuance limit for short-term financing bills.

Similar to other Chinese securities companies, Orient Securities has maintained low leverage compared to its global peers and reported a leverage ratio (including client deposits) at 4.7x as of the first half of 2019.

Orient Securities also has a reputable asset management franchise with majority of its assets under management in active strategies -- which is unique compared to its mainland China-based securities companies peers -- allowing the company to charge higher management fees and efficiently adapt to the new asset management regulations.

On the other hand, Orient Securities manages a large proprietary trading portfolio investing in both equity and fixed income securities with most of the holdings in the latter category. The high exposure has led to elevated earnings volatility in the past years including a net investment loss in 2018.

Orient Securities also has a high exposure to the stock-pledged lending business which grew rapidly during 2014-2016. Although Orient Securities has proactively curtailed the growth since 2017 and suspended any new business since mid-2018, risk in the existing portfolio has been materializing in the past year or so with the company recognizing sizable impairments which could further increase given that 17.8% of net loan balance was categorized in stage three as of the first half of 2019.

In addition, the company's rapid growth in the new and adjacent business areas -- including FICC especially in commodity trading as well as structured product trading and distribution through the Hong Kong subsidiary -- could raise operational and market risks.

The assumption of a high level of affiliate support is based on Orient Securities' strategic importance to Shenergy, which is in turn wholly owned by the Shanghai municipal government. Shenergy has long been the largest shareholder of Orient Securities and also participated in the private placement in 2017 through which it increased its stake from 24.74% to 25.27%. In the past, Shenergy also provided liquidity support to Orient Securities' by subscribing to the company's subordinated debt issuance and lending credit facilities.

The assumption of a high level of government support reflects that Orient Securities is one of the major securities companies in China by total assets and a group of state-owned enterprises together own 43.3% of Orient Securities as of July 2019.

What Could Change the Rating -- Up

Orient Securities' ratings could be upgraded if the company (1) diversifies its business mix away from the proprietary trading business, (2) maintains its adjusted funding and liquidity ratios above 100%, (3) stabilizes the pretax earnings volatility, and (4) keeps its leverage ratio below 4.5x.

Orient Securities' ratings could also be upgraded if (1) the operating environment score for the market makers in mainland China improves as China's capital markets continue to deepen, without episodes of high volatility, and industry consolidation improves the pricing power of leading companies, or (2) Moody's assesses that the support from Shenergy to the company will increase.

What Could Change the Rating -- Down

Orient Securities' ratings could be downgraded if Moody's assesses that the Chinese government or Shenergy's willingness and ability to support the firm has weakened.

Orient Securities' ratings could also be downgraded if the company (1) encounters a material deterioration in its profitability, (2) experiences a material weakening in its financial profile, for example, because of a substantial increase in its leverage to above 6x or a deterioration in liquidity and funding, or (3) becomes subject to regulatory sanctions that impair its franchise and management stability.

The principal methodology used in these ratings was Securities Industry Market Makers Methodology published in November 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Shanghai, China, Orient Securities Company Limited reported assets of RMB247 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 entities are participating and the rated entities or their agents generally provide 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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