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Rating Action:

Moody's assigns first-time Baa2 issuer ratings to Dongxing Securities; outlook stable

 The document has been translated in other languages

10 Jul 2019

Hong Kong, July 10, 2019 -- Moody's Investors Service has assigned Baa2/P-2 local currency and foreign currency issuer ratings to Dongxing Securities Co., Ltd.

The entity-level outlook on Dongxing Securities is stable.

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

RATINGS RATIONALE

Dongxing Securities' Baa2 long-term issuer rating incorporates its (1) standalone assessment of Ba2; (2) a one-notch uplift based on Moody's assumption of a high dependence on and a very high level of support from its parent, China Orient Asset Management Co. Ltd. (Orient AMC, A3 stable), 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 Ba2 standalone assessment takes into account Dongxing Securities' (1) good funding and liquidity positions; and (2) low leverage when compared with other rated securities firms.

Major constraints on the company's standalone assessment include (1) the elevated liquidity and credit risks associated with its proprietary corporate bond investment and stock pledged lending businesses; (2) the company's limited franchise when compared to other securities firms in China.

In addition, an expected increase in the linkages with its parent's distressed asset management business would increase operational challenges and raise asset quality risk.

Established by Orient AMC in 2008, Dongxing Securities is medium-sized securities company in China. Its brokerage business is mainly concentrated in Fujian Province. With the group's support, the company has gradually developed its investment banking and asset management business over the past five years. However, Moody's expects it will still take some time for the company to grow its franchise to a scale where it can effectively compete with other large securities firms in China.

Dongxing Securities' good liquidity and funding positions are supported by its access to long-term funding sources. Since 2015, the company has been shifting its short-term financing to long-term financing, including long-term bonds. It has also gradually diversified its funding sources to include subordinated debt, offshore bonds, syndicated loans, repos, corporate bonds and shareholders' loans.

Dongxing Securities' leverage is low by global standards. Its total assets decreased to RMB75 billion at the end of 2018, mainly because of a decline in its cash held on behalf of brokerage clients. As a result, its leverage — as measured by total assets/total equity — decreased to 3.8x at the end of 2018 from 4.0x at the end of 2017.

However, the company has large corporate bond investments to support its proprietary investment business, which could bring higher investment and liquidity risk. In addition, the company has also reported some asset quality issues in its stock pledged lending business in the past two years. The potential loss and loan loss provisions required for these businesses could affect the company's profitability and increase earnings volatility.

Moody's assumption of a very high level of parental support is based on Dongxing Securities' strategic importance to and linkages with Orient AMC.

Dongxing Securities is 52.74% owned by Orient AMC, and the company plays a key role in supporting the parent's distressed asset management business. In particular, Orient AMC leverages Dongxing Securities' investment banking business to provide advisory services on the restructuring of distressed assets. Moreover, Dongxing Securities also helps its parent manage investments via the company's asset management business. Such synergies between Dongxing Securities and Orient AMC have continued to increase over the past three years.

Dongxing Securities has also in the past received ongoing support from the parent, including management and business development support, as well as support to its funding facilities.

Moody's also assesses a high likelihood of support from the Chinese government, via Orient AMC. Moody's support assumption considers the Chinese government's majority ownership of the parent, the parent's systemic importance, and the company's importance to the parent's business strategy.

WHAT COULD CHANGE THE RATING -- UP

Dongxing Securities' ratings could be upgraded if Orient AMC's rating is upgraded, or if there is a more explicit support commitment from Orient AMC or the Chinese government.

The standalone assessment could be upgraded if Dongxing Securities (1) maintains its good funding and liquidity profiles; (2) maintains its profitability, despite intensifying competition and market fluctuations; (3) reduces the size of its proprietary investment business; and (4) ensures smooth operations and effective risk controls as it increases its exposure to its parent's distressed asset management business.

WHAT COULD CHANGE THE RATING -- DOWN

Dongxing Securities' ratings could be downgraded if Moody's assesses that the government's and parent's willingness and ability to support the company have weakened, or its ownership by Orient AMC is materially reduced.

Dongxing Securities' ratings could also be downgraded in case of (1) a material deterioration in its profitability; (2) a material weakening in its financial position, due to a substantial increase in its leverage or a deterioration in its liquidity and funding profiles; or (3) a material increase in its risk appetite and significant deterioration in its asset quality.

The principal methodology used in this rating was Securities Industry Market Makers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Beijing, Dongxing Securities Co., Ltd. reported total assets of RMB75 billion at the end of 2018.

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 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.

Sean Hung, CFA
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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