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Rating Action:

Moody's assigns first-time Baa3/P-3 ratings to Orient Securities; outlook stable

 The document has been translated in other languages

02 May 2017

Hong Kong, May 02, 2017 -- Moody's Investors Service has assigned a Baa3 long-term issuer rating and a Prime-3 short-term issuer rating to Orient Securities Company Limited (Orient Securities).

The ratings outlook is stable.

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

RATINGS RATIONALE

The Baa3 long-term issuer rating reflects Orient Securities' standalone assessment of ba2 and a two-notch uplift based on our assumption of a high level of support from Shenergy (Group) Co Ltd (unrated) and the Chinese government (Aa3 negative) in times of stress.

STANDALONE ASSESSMENT

The ba2 standalone assessment reflects Orient Securities' (1) stable and experienced management, (2) improved liquidity and funding position, and (3) relatively robust internal controls.

However, it also reflects the company's (1) relatively large proprietary business, resulting in a relatively high level of investment risk, (2) relatively volatile profitability, and (3) rapid asset growth which is faster than the industry average.

Established in 1997, Orient Securities is a medium-sized securities company ranked tenth in terms of total assets at end-2015 in China with various business lines, including brokerage, securities underwriting, principal financial investment, financial advisory, equity investment, asset management, futures trading, margin financing and securities lending. In addition, it has a national distribution network.

When compared to other rated securities companies in China, Orient Securities has a more stable management. Most of its senior management have worked in the company for more than 15 years. It has also developed its good franchise on asset management via its actively managed asset management products and its affiliate, China Universal Asset Management Co Ltd (unrated), which was the 12th largest fund manager in China in terms of assets under management (AUM) at end-2016.

The company has also improved its liquidity and funding positions in the past few years. It materially increased its long-term funding following its issuance of different long-term debt, its A-share listing in March 2015, and its H-share listing in July 2016. At end-2016, the company's total long-term funding, including long-term liabilities and total equity, accounted for 42% of its total assets, up from 30% at end-2014. As it had raised an additional RMB6.3 billion in net new capital from its H-share listing in July 2016, its leverage ratio ((tangible assets + off-balance-sheets exposures)/tangible common equity) reduced to 5.3x at end-2016 from 6.0x at end-2015. Excluding customers' deposits from calculation, the company's leverage reduced to 4.3x at end-2016 from 4.7x at end-2015. The company is also working on its A-share private placement now.

Orient Securities is one of a few securities companies in China which has not encountered major regulatory issues in the past few years. Its regulatory score has remained at AA over this time, which could indicate that it has relatively robust internal controls.

However, the company's relatively high exposure to proprietary trading business offsets its credit strengths. Its financial securities investments accounted for around 47% of its total assets at end-2016, higher than most of its rated peers, indicating that it has a greater level of investment risk. The high exposure to proprietary trading business partly results in a relatively high level of pretax profit volatility. Most of the company's proprietary trading exposure is in fixed income instruments.

Orient Securities' return on average assets (ROAA) was around 4.7% in 2015 due to a flourishing stock market in 1H2015, but then fell to around 1.2% in 2016. The A-share market index trended down in 2016 with significant decline in trading volume.

Since the firm has gradually diversified its business to also include wealth management, asset management, investment banking and securities lending businesses, its relatively high earnings volatility is expected to moderate.

Moody's also believes the firm's rapid asset growth will increase its market, credit and operational risks. In 2014 and 2015, total asset growth year on year were 77% and 93% respectively, faster than the industry average.

SUPPORT ASSESSMENT

Moody's high level of affiliate support assumption is based on Moody's assessment of Orient Securities' strategic importance to Shenergy Group, which is in turn wholly owned by the Shanghai Municipal Government. Shenergy Group is primarily engaged in gas sales, coal-fired power generation and financial investment, mainly in Shanghai. Shenergy Group has long been the largest shareholder of Orient Securities, holding a 24.7% shareholding at end-2016.

Moody's also believes that the comfort letter provided by Shenergy Group, which states that it will support the company's debt services and provide lending and capital support, could reflect the group's strong willingness of support to Orient Securities, in times of stress. In the past, Shenergy had supported Orient Securities' liquidity by subscribing to the company's subordinated debt issuance and providing credit facilities.

At the same time, given Orient Securities' position as a medium-sized securities firm in China by total assets and its 47.6% combined ownership by Shanghai state-owned enterprises (SOEs), including Shenergy Group and other SOEs, at end-September 2016, Moody's sees a high probability that the Chinese government would support it -- in times of need -- to maintain stability in China's financial system.

What Could Change the Rating -- Up

Orient Securities' ratings could be upgraded if the firm (1) maintains the adjusted funding and liquidity ratios at above 100%; (2) stabilizes pre-tax earnings volatility to below 80%; (3) further diversifies its business mix away from proprietary trading business; and (4) lowers its leverage ratio to below 4.5x.

Orient Securities' ratings could also be upgraded if (1) China's capital markets continue to deepen without episodes of high volatility, and industry consolidation improves the pricing power of leading players; or (2) Moody's assesses that the support from Shenergy Group to Orient Securities will increase.

What Could Change the Rating -- Down

Orient Securities' ratings could be downgraded if we assesses that the government or Shenergy Group's willingness and ability to support the firm weaken.

Orient Securities' ratings could also be downgraded if the firm (1) encounters a material deterioration in profitability; (2) experiences a material weakening in its financial position, for example, due to a substantial increase in leverage to above 6x, and/or deterioration of its liquidity position; and/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 published in February 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Orient Securities Company Limited is headquartered in Shanghai. It reported assets of RMB212.4 billion at end-2016.

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.

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.

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
Client Service: 852 3551 3077

Minyan Liu
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.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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