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Rating Action:

Moody's changes Everbright Securities' outlook to positive, affirms Everbright Sun Hung Kai's, China Everbright Limited's ratings with a stable outlook

 The document has been translated in other languages

30 May 2018

Hong Kong, May 30, 2018 -- Moody's Investors Service has affirmed Everbright Securities Company Limited's Baa3/P-3 issuer ratings. The outlook has been changed to positive from stable.

Moody's has also affirmed Everbright Sun Hung Kai Company Limited's and China Everbright Limited's issuer ratings at Baa3/P-3 and Baa2/P-2, respectively. The outlooks are stable.

At the same time, Moody's has decided to withdraw the outlooks on Everbright Securities' and Everbright Sun Hung Kai's long-term issuer ratings for business reasons.

RATINGS RATIONALE

Moody's rating actions follow the change of outlook to positive from stable and the affirmation of the Baa2 deposit rating of the three companies' affiliate, China Everbright Bank Company Limited (Baa2 positive, Baseline Credit Assessment (BCA): ba2) on 30 May 2018. For full details of the rating actions on China Everbright Bank, please refer to the press release below.

http://www.moodys.com/viewresearchdoc.aspx?docid=PR_384254

China Everbright Bank is the largest subsidiary of China Everbright Group Limited which is the ultimate parent of the three companies above.

Everbright Securities

The change of outlook to positive from stable for Everbright Securities and the affirmation of its Baa3/P-3 issuer ratings reflect: 1) the company's improved risk management and liquidity profile, and less volatile pretax earnings over the past few years; and 2) the improvement of the standalone BCA of China Everbright Bank, which could enhance the affiliate support to Everbright Securities in times of stress.

However, the positive developments have been slightly offset by the company's rapid business expansion and increasing risk appetite.

Everbright Securities' Baa3 long-term issuer rating incorporates its standalone assessment of ba2 and a two-notch uplift, based on Moody's joint default analysis assumption of: 1) a very high level of affiliate support from China Everbright Bank to Everbright Securities in times of need; and 2) a high level of support from the Chinese government (A1 stable) to Everbright Securities in times of stress through China Everbright Group Limited.

Since experiencing a trading error in 2013, the company has improved its risk management. In the past few years, Everbright Securities has not suffered any regulatory penalties or sanctions and Moody's believes that the company is no longer exposed to residual negative consequences from the trading error.

In addition, the company has improved its liquidity management by increasing its long-term funding sources, including long-term debt and equity, to support its business growth in the past few years. It has also gradually diversified its income mix to wealth management, investment banking, margin financing and securities lending and stock pledged repo operations; all of which help stabilize its profitability.

However, the company's rapid asset and business growth in the past two years have increased its risk appetite. In particular, the significant increases in Everbright Securities' bond investments and stock pledged lending businesses in 2017 have challenged its market, credit and liquidity risk management. If the company can control these risks while expanding without any significant negative impact on its overall financial profile, its standalone assessment and issuer rating could potentially be upgraded.

The positive outlook on Everbright Securities' ratings also reflects the improvement of the standalone ba2 BCA of China Everbright Bank, which could enhance the group's ability to provide support to Everbright Securities in times of stress. Consequently, any positive rating action on China Everbright Bank in the future could lead to a similar rating action on Everbright Securities.

At the same time, given Everbright Securities' position as a medium-sized securities firm in China by total assets and China Everbright Group's position as a key state-owned financial conglomerate, Moody's believes that there is a high probability that the Chinese government would provide support to Everbright Securities via the group in times of need to maintain stability in China's financial system.

Everbright Sun Hung Kai

The affirmation of Everbright Sun Hung Kai's Baa3/P-3 issuer ratings and the company's stable ratings outlook reflects its standalone assessment of ba1 and a one-notch uplift, based on Moody's joint default analysis assumption of a moderate level of support from the Chinese government via its parent, Everbright Securities, and the ultimate parent, China Everbright Group, in times of stress.

The ba1 standalone assessment takes into account Everbright Sun Hung Kai's: (1) long-established franchise in Hong Kong's (Aa2 stable) retail brokerage business; (2) diversifying funding sources; and (3) low leverage. However, the assessment is also constrained by the company's: (1) rapid asset and business growth; (2) increasing investment and credit risk; and (3) volatile profitability.

The one notch uplift reflects the importance of China Everbright Group and its subsidiaries to the Chinese government, and the fact that Everbright Sun Hung Kai is the international arm of Everbright Securities. As such, any default at Everbright Securities or Everbright Sun Hung Kai would raise material reputation risks for the group and its subsidiaries.

The stable outlook on the company's ratings also reflects the fact that the improvement in Everbright Securities' standalone assessment does not affect Everbright Sun Hung Kai's ratings, due to Everbright Sun Hung Kai's higher standalone assessment when compared with its Everbright Securities.

China Everbright Limited

The affirmation of China Everbright Limited's Baa2/P-2 issuer ratings with a stable outlook reflects the company's standalone assessment of ba2 and a three-notch uplift, based on Moody's assumption that the company would receive very high affiliate and government support via China Everbright Group and the group's subsidiaries, in times of stress.

China Everbright Limited's ba2 standalone assessment reflects the company's: 1) increasing franchise in alternative asset management and fund raising ability; 2) strong principal investment to support the growth of its asset management business; and 3) good profitability. However, these positive factors are offset by the company's: 1) high concentration risk; 2) increasing investment risk associated with its principal investments; and 3) increasing leverage, which reduces its financial flexibility.

Moody's believes that China Everbright Limited continues to prove strategically important to the China Everbright Group, due to: 1) its 49.7% indirect ownership by China Everbright Group and shared brand name, which could bring significant reputational risk to the group should China Everbright default on its debt; 2) the group's strong track record of providing financial support to its subsidiaries; and 3) the fact that China Everbright Limited represents the key offshore investment holding company for the group.

The stable outlook on the company's ratings also takes into account the already very high three-notch uplift on China Everbright Limited's issuer ratings. Consequently, any improvement in China Everbright Bank's BCA and deposit ratings would not trigger a positive rating action on China Everbright Limited's issuer ratings.

EVERBRIGHT SECURITIES: WHAT COULD MOVE THE RATINGS UP/DOWN

Everbright Securities' ratings could be upgraded if the company can: (1) control the risks associated with business expansion without any material impact on its overall financial profile; and (2) slow liability growth to a level in line with the sector average.

Everbright Securities' ratings could also be upgraded if China Everbright Bank's BCA and deposit ratings are upgraded.

Everbright Securities' ratings could be downgraded if Moody's assesses that the government and China Everbright Group and its affiliates' willingness and ability to support the company has weakened.

Everbright Securities' ratings could also be downgraded if the firm: (1) encounters a material deterioration in its profitability; (2) experiences a material weakening in its financial position, for example due to a substantial increase in leverage and/or deterioration of its liquidity position; and/or (3) becomes subject to regulatory sanctions that impair its franchise and management stability.

EVERBRIGHT SUN HUNG KAI: WHAT COULD MOVE THE RATINGS UP/DOWN

Everbright Sun Hung Kai's ratings could be upgraded if it: (1) continues to improve its funding and liquidity ratios; (2) reduces the concentration risk in its margin lending business; and (3) reports stable business growth.

Everbright Sun Hung Kai's ratings could be downgraded, if Moody's assesses a weakening in the willingness and ability of its parent company or the group to provide support.

Everbright Sun Hung Kai's ratings could also be downgraded if the company: (1) encounters a material deterioration in its profitability; (2) experiences a material increase in risky investment securities, which raises its risk appetite or worsens its liquidity position; or (3) experiences significantly higher risk and losses in its margin lending business.

CHINA EVERBRIGHT LIMITED: WHAT COULD MOVE THE RATINGS UP/DOWN

China Everbright Limited's standalone assessment could experience upward pressure if the company: (1) sustains its assets under management (AUM)/revenue growth and further diversifies its AUM to include overseas and secondary market funds; (2) reduces total debt/EBITDA to below 3x; 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 based on Moody's expectation of support for the company in times of need, an improvement in China Everbright Limited's standalone credit profile would unlikely lead to an upgrade of the rating.

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 further increase, and/or (4) Moody's reduces its support assumptions.

The principal methodology used in rating Everbright Securities Company Limited and Everbright Sun Hung Kai Company Limited was Securities Industry Market Makers published in September 2017. The principal methodology used in rating China Everbright Limited was Asset Managers: Traditional and Alternative published in December 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Headquartered in Shanghai, Everbright Securities Company Limited reported assets — including client deposits — of RMB206 billion at the end of 2017.

Headquartered in Hong Kong, Everbright Sun Hung Kai Company Limited reported assets — including client deposits — of HKD23.1 billion at the end of 2017.

China Everbright Limited is headquartered in Hong Kong. It reported assets of HKD73 billion at the end of 2017.

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
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
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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