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Rating Action:

Moody's assigns Baa2/Prime-2 issuer ratings to China Everbright Limited; outlook stable

 The document has been translated in other languages

08 Dec 2015

Hong Kong, December 08, 2015 -- Moody's Investors Service has assigned Baa2 long-term and Prime-2 short-term issuer ratings to China Everbright Limited.

The ratings outlook is stable.

This is the first time that Moody's has assigned ratings to China Everbright Limited.

RATINGS RATIONALE

The Baa2 long-term issuer rating reflects the company's (1) growing but still limited position in the fragmented investment management sectors in China (Aa3 stable) and Hong Kong (Aa1 stable); (2) historically strong assets under management (AUM) resilience; and (3) good profitability levels with steady revenues growth. These factors are partly offset by the company's (1) concentration into the China-focused market funds; (2) a higher level of investment risk compared to global peers and (3) increasing leverage ratio.

The Baa2 long-term issuer rating also incorporates a three-notch uplift reflecting Moody's assessment of a high probability of support from its parent, China Everbright Group Limited (unrated), if needed.

STANDALONE CREDIT ASSESSMENT

Established in Hong Kong in 1997, China Everbright Limited has been growing its franchise at a rapid pace but it remains a relatively small industry player. Moody's considers the company to be well positioned to benefit from capital market reforms in China and increasing demand for cross-border investment and fund management products. The rating agency also believes that China Everbright Limited benefits from the group's existing franchise and relationships to source businesses from large state-owned enterprises and local governments in China. This is evidenced by the rapid increase in its AUM to HKD 58 billion at end-June 2015, from HKD 23 billion at end-2012.

Over the past five years, China Everbright Limited has exhibited high client retention and replacement rates because a large portion of its existing client funds are locked-in in long-dated funds or long-term investments. In addition, most of its primary market investment funds are still young and in the fund raising stage. Moody's believes that the company's track record of strong investment performance has also supported its fundraising ability and high AUM resilience.

China Everbright Limited has maintained good profitability levels over the last five years, as evidenced by an average annual pre-tax margin -- excluding the share of profits from associates and joint ventures -- of above 60%. Moreover, its revenues have continued to growth at a steady pace, although investment gains dependent on buoyant capital markets have been at the core of these gains.

In Moody's view, the company's standalone credit strength is constrained by its concentration to China-focused market funds, which make it more sensitive to changes in China's economic environment and capital market performance in China compared to its global peers. In addition, while the company is making progress toward establishing its fixed-income products and secondary market franchises, these are still at the developing stage and it will take some time for these franchises to bring tangible benefits to its credit profile.

China Everbright Limited also carries high investment risk because it invests significant balance-sheet capital in deals related to funds that it already participates in, thereby posing a higher level of investment risk than traditional asset management companies. At end-June 2015, the company had HKD42 billion in investments on its balance sheet.

Moreover, the company has increased its bank borrowings to support the growth of its principal investment business, thereby raising its leverage and reducing its financial flexibility. The company's bank loans increased to HKD10.2 billion at end-June 2015 from HKD3.1 billion at end-2013; its overall financial leverage -- measured by total debt/EBITDA according to Moody's calculations -- was up to around 3.6x from 1.9x, over the same period.

SUPPORT ASSESSMENT

Moody's considers China Everbright Limited to be strategically important to the broader China Everbright Group, as indicated by its 49.7% indirect ownership and shared name which could bring significant reputational risk to the group, should China Everbright Limited fails. In addition, the group has a strong track record of providing financial support to its subsidiaries.

China Everbright Limited has long acted as a key offshore investment holding company for the group. Moody's believes that the company will continue to perform that important role for the group, as it targets to develop its overseas and international business.

Furthermore, China Everbright Limited benefits from a 'keepwell' agreement from the group. Although this does not represent a formal guarantee, it demonstrates the group's commitment to (1) hold at least 40% of the company's outstanding shares; (2) maintain the company as the group's primary overseas subsidiary for investment holdings and as a fundraising platform; and (3) provide financial support, if necessary.

China Everbright Group is in turn wholly owned by the Chinese government through a 44.33% stake held by the Ministry of Finance and a remaining 55.67% share held by Central Huijin Investment Limited, which is the domestic investment arm of China's sovereign wealth fund, China Investment Corp. Moody's believes that China Everbright Group is important to the Chinese government, given that it is a pioneer state-owned financial conglomerate comprising a fully-licensed bank, an insurance company, a securities firm, and other financial assets.

These factors underpin the three notches of uplift included in China Everbright Limited's Baa2 rating.

What Could Change the Rating -- Up

The company's standalone credit assessment could experience upward pressure if the company (1) continues to increase its assets under management (AUM)/revenue to more than USD10 billion/USD 500m and diversifies its AUM mix to include overseas and secondary market funds; (2) reduces and keeps total debt/EBITDA below 2.5x; and (3) maintains its profitability at the current level, with less volatility during capital-market fluctuations. However, since the issuer rating already benefits from a three-notch uplift for expected support, an improvement in the company's standalone credit profile may not necessarily translate into an upgrade of the rating.

The ratings could also be upgraded if Moody's increases its assessment of the China Everbright Group's credit profile, which could result in a higher uplift for support.

What Could Change the Rating -- down

The company's ratings could experience downward pressure if (1) its client retention rate and replacement rate fall to below 80% and 100% respectively; (2) it reports significant falls in its pre-tax margin due to an increasing level of investment risks; (3) total debt/EBITDA rises to above 5x; and/or (4) Moody's reduces its support assumptions.

The principal methodology used in these ratings was Asset Managers: Traditional and Alternative published in February 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

China Everbright Limited is headquartered in Hong Kong. It reported assets of HKD61.6 billion at end-June 2015.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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.

Sean Hung
Asst Vice President - 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
SUBSCRIBERS: (852) 3551-3077

Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077

Moody's assigns Baa2/Prime-2 issuer ratings to China Everbright Limited; outlook stable
No Related Data.
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