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Rating Action:

Moody's changes CITIC Group and CITIC Limited's A3 ratings outlook to stable from negative

 The document has been translated in other languages

04 Jun 2018

Hong Kong, June 04, 2018 -- Moody's Investors Service, has changed to stable from negative the outlook on CITIC Group Corporation's (CITIC Group) and CITIC Limited's A3 issuer rating. At the same time, Moody's has affirmed CITIC Group Corporation's (CITIC Group) and CITIC Limited's A3 issuer rating, as well as on the A3 senior unsecured ratings on CITIC Limited's bonds and CITIC Group's Japanese yen bonds, and the (P)A3 rating on CITIC Limited's Medium Term Notes (MTN) program.

RATINGS RATIONALE

"The change of outlook to stable reflects the expected improvement in the credit profile of CITIC Group's non-financial service businesses, such as resource and energy, manufacturing, engineering and contracting, and real estate. " says Gloria Tsuen, a Moody's Vice President and Senior Analyst, and also the International Lead Analyst for CITIC Limited.

Such improvement is driven by: (1) the restructuring of CITIC Group's businesses, such as the spin-off of its property portfolio and the disposals of other assets; (2) improvement in operating performance, which has benefited from the recovery of the market, especially for cyclical businesses, such as oil & gas and steel, and (3) the diversification into less cyclical businesses, such as fast food restaurant chains, environmental service and modern agriculture.

The change of outlook also reflects our expectation that CITIC Limited's adjusted debt/EBITDA will trend below 6.0x in the next 1-2 years from around 6.3x in 2017 due to management's plan to reduce leverage under the deleveraging initiative of state-owned enterprises (SOEs), and our expectation of a moderate increase in EBITDA from newly acquired businesses, and flat capex spending and debt levels.

The stable outlook also recognizes the positive and rapid shift in China CITIC Bank Corporation Limited's (CITICB, Baa2 positive) balance sheet away from its reliance on market funding and shadow banking activities. China CITIC Bank Corporation Limited is 65.97% owned by CITIC Limited as of end 2017.

Nevertheless, the bank has a relatively modest capital position and is seeing further pressure on capital as risk-weighted assets rise more rapidly than assets.

While affirming CITICB's ratings for long-term deposits, senior unsecured debt and the baseline credit assessment (BCA) on May 30, Moody's has revised the rating outlook to positive from stable to reflect the bank's improving asset quality and liquidity.

CITIC Group's A3 rating incorporates a BCA of ba1 and four notches of uplift from the Chinese government (A1 stable), based on our assessment of a high support level.

CITIC Group's BCA is underpinned by the standalone credit strength of CITIC Limited, which is equivalent to a Ba1 rating level. The A3 rating of CITIC Limited incorporates four notches of parental uplift from CITIC Group.

Since CITIC Limited accounts for over 90% of CITIC Group's total assets, revenue, and profits, we consider the credit profiles of the two entities and their ratings as closely linked.

CITIC Limited's standalone credit quality in turn is underpinned by its broad lines of business, which provide diversification benefits, and its sound access to the capital and bank markets, due to its position as a key listed subsidiary of a high profile central SOE. Such credit strength are partially offset by its complex group structure and its relatively high leverage.

Upward rating pressure could emerge if: (1) CITICB's fundamental credit profile improves, and (2) the businesses profile and financial leverage of CITIC Limited's non-bank businesses strengthens. Credit metrics indicating upward rating pressure include CITIC Limited's adjusted debt/EBITDA declining below 4.5x on a sustained basis.

Downward rating pressure could emerge if: (1) CITICB's credit profile materially deteriorates, or (2) evidence of a weakened credit profile for its non-bank businesses emerges, and (3) there is a large rise in debt due to aggressive debt-funded acquisitions.

The credit metrics that Moody's would consider for a downgrade include CITIC Limited's adjusted debt/EBITDA staying above 6.0x-6.5x over a prolonged period.

A weakening of support from the Chinese government to CITIC Group and CITIC Limited could also trigger negative rating pressure.

The methodologies used in these ratings were Buinsess anand Consumer Service Industry published in October 2016, and Government-Related Issuers published in August 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

CITIC Group Corporation is a large conglomerate with a portfolio of financial and non-financial businesses. It is wholly owned by China's State Council. By the end of 2017, CITIC Group owned 58.13% of CITIC Limited (A3 stable). CITIC Limited — formerly CITIC Pacific — is listed on the Hong Kong Stock Exchange.

CITIC Limited's business portfolio is highly diversified, with operations in industries including financial services, resources and energy, manufacturing, engineering and contracting and real estate. By the end of December 2017, its consolidated assets totaled HKD7.5 trillion, and its consolidated revenue totaled HKD450.5 billion for the full year of 2017.

The Local Market analyst for these ratings is Kai Hu, +86 (21) 2057 4012.

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.

Gloria Tsuen, CFA
Vice President - Senior Analyst
Corporate Finance 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

Gary Lau
MD - Corporate Finance
Corporate Finance 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

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