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Rating Action:

Moody's assigns Baa1/P-2 ratings to China Merchants Securities; outlook stable

 The document has been translated in other languages

16 Dec 2019

Hong Kong, December 16, 2019 -- Moody's Investors Service has assigned a Baa1 long-term issuer rating and a Prime-2 short-term issuer rating to China Merchants Securities Co., Ltd. (CMS).

The entity-level outlook on CMS is stable.

This is the first time that Moody's has assigned ratings to CMS.

RATINGS RATIONALE

CMS' Baa1 long-term issuer rating incorporates (1) its standalone assessment of Ba1; (2) a one-notch uplift, based on Moody's assumption of a very high level of support from and a high level of dependence on its parent, China Merchants Group Limited (CMG), in times of need; and (3) a two-notch uplift, based on Moody's assumption of a high level of support from the Chinese government (A1 stable) via its parent, in times of need.

The Ba1 standalone assessment reflects CMS' (1) long track record in China's securities industry; (2) ample liquidity on the balance sheet; (3) good profitability; and (4) low leverage when compared with global peers.

Offsetting these credit strengths are the risks arising from the rapid increase in its fixed-income securities investments and the company's rising leverage. CMS' standalone assessment also takes into account the challenging operating environment for securities companies in China.

Established in 1991, CMS has set up a national network and solid franchise in brokerage, investment banking and asset management.

CMS maintains abundant liquidity resources on its balance sheet. As of 30 June 2019, the company held RMB13.1 billion in cash and deposits of its own, accounting for 4.6% of its total assets, excluding segregated cash from brokerage clients. In addition, the company also had large amounts of investments in treasury bonds, policy bank bonds, money market funds and interbank certificates of deposit that showed good liquidity.

The company has also materially increased its long-term funding in recent years, through equity financing and bond issuance. As of 30 June 2019, long-term funding — including shareholders' equity, long-term bonds and borrowings — accounted for 52.7% of the company's total equity and liabilities, excluding segregated cash from clients; a level that was higher than that of most other Chinese securities companies.

CMS has maintained good profitability in recent years. Its return on average assets were 2.2%, 1.5% and 2.1% in 2017, 2018 and H1 2019, respectively. The company's net income attributable to shareholders of the company rebounded by 93.9% to RMB3.5 billion in H1 2019, mainly driven by investment gains due to the rebound of the capital markets, as well as lower funding cost and impairment charges.

The company's exposure to the stock-pledged lending business has been consistently lower than for most other securities companies. As of 30 June 2019, stock-pledged lending only accounted for 5.1% of its total assets, decreasing from 10.7% of its total assets at the end of 2017.

CMS' leverage, as measured by total assets divided by equity attributable to holders of ordinary shares, increased to 5.2x as of 30 June 2019 from 4.4x as of the end of 2017; a level that was higher than the sector average, but low from a global standard. The increase in leverage was mainly driven by its expansion in fixed income investments.

The company's financial investments, including financial assets at fair value through profit or loss, debt and equity instruments at fair value through other comprehensive income, and debt instruments at amortised cost, amounted to RMB174.7 billion as of 30 June 2019, accounting for 49.9% of total assets.

The company's expansion in fixed income investments exposes it to market and credit risks, although this is partly mitigated by the fact that a large proportion of its fixed income investments are into treasury bonds, policy bank bonds, local government bonds, interbank certificates of deposit issued by large banks, and money market funds.

The company has announced a plan to raise no more than RMB15 billion through a rights issue. Moody's estimates that the proposed rights issue could lower its leverage to around 4.3x from 5.2x, based on the financials as of 30 June 2019. The company is waiting for the regulator's approval for the rights issue.

Moody's does not have any particular concerns around the governance of CMS. The company shows an appropriate risk management framework commensurate with its risk appetite.

As of 30 June 2019, CMG, a core state-owned conglomerate, held a 44.09% share of CMS.

CMS is the sole securities company controlled by CMG, and is consolidated into CMG's financial statements. Moody's believes that if CMS were to fail, it would cause material reputational risk to CMG.

CMG has a track record of providing various forms of support to CMS. For example, CMG has participated in all of CMS' equity financing. CMG is committed to provide emergency liquidity support to CMS in times of need.

In addition, Moody's believes that there is a high probability that the Chinese government would support the company in times of need, considering (1) the strategic importance of CMG to China's economy; (2) the government ownership in CMG; (3) the importance of CMS to CMG; and (4) CMS' position as one of the major securities companies in China. At the end of 2018, the company ranked seventh among securities companies in China by total assets.

WHAT COULD CHANGE THE RATING -- UP

Moody's could upgrade CMS' ratings if Moody's assesses that there is a material enhancement in CMG's ability and willingness to provide support.

Moody's could upgrade CMS' standalone assessment if the company (1) improves its funding and liquidity ratios; (2) maintains its profitability, despite intensifying competition and market fluctuations; and (3) reduces the size of its proprietary investments.

Moody's could also upgrade CMS' standalone assessment if there is an improvement in the operating environment for securities companies in China, which would reflect a material improvement in the maturity of China's capital markets, including a more comprehensive regulatory framework, lower volatility and higher proportion of institutional investors; and industry consolidation that enhances the pricing power of leading players.

WHAT COULD CHANGE THE RATING -- DOWN

Moody's could downgrade CMS' ratings if Moody's assesses a weakening in the willingness and ability of its parent and the Chinese government to support the company.

Moody's could also downgrade CMS' ratings if the company (1) encounters a material deterioration in its profitability; (2) experiences a material weakening in its financial position, for example, because of a substantial increase in leverage or deterioration in its liquidity position; or (3) becomes subject to regulatory sanctions that impair the stability of its franchise and management.

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 Shenzhen, China, China Merchants Securities Co., Ltd. reported consolidated total assets of RMB350.3 billion as of 30 June 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.

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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.

David Yin
Vice President - Senior 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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