Fitch Ratings has affirmed AVIC Industry-Finance Holdings Co., Ltd.'s (AVIC Industry-Finance) Long-Term Issuer Default Rating (IDR) at 'A-' and Short-Term IDR at 'F1'.

The Outlook is Stable. The Shareholder Support Rating (SSR) is also affirmed at 'a-'.

AVIC Industry-Finance is a non-bank holding company under Aviation Industry Corporation of China (AVIC), a state-owned military and civilian aviation manufacturer in China. The company oversees AVIC's financial service subsidiaries and provides treasury, financing and investment services to support the group's business and facilitate the development of China's aviation industry. AVIC controls about 51% of AVIC Industry-Finance's shares directly and indirectly.

Key Rating Drivers

Support-Driven Ratings: AVIC Industry-Finance's rating reflects the strong shareholder support from its parent, AVIC. Fitch's internal assessment of AVIC's credit profile is based on support from the China sovereign (A+/Stable). We expect sovereign support to flow to AVIC Industry-Finance through AVIC because of the subsidiary's strategic role in providing comprehensive financial services in the group and to the group's supply chain, as well as the potential reputational damage from a default by AVIC Industry-Finance. The Outlook is aligned with our view on AVIC's credit profile and the sovereign rating.

Large Non-Group-Related Business: The rating of AVIC Industry-Finance is lower than that of AVIC as it is constrained by the large size of financial services unrelated to the group, including commercialised leasing, trust and securities services. The complex nature of these financial services could expose the group to risks outside of AVIC's expertise in aviation manufacturing, and weigh on the parent's propensity and ability to provide timely support. AVIC Industry-Finance's consolidated assets accounted for 33% of that of AVIC at end-1H23.

Focus on Group's Core Business: AVIC Industry-Finance has been tasked with raising the efficiency of China's aviation industry by re-focusing on the group's core business and enhancing industrial-finance integration and synergies in the group. This is part of a broader three-year reform of state-owned enterprises launched in late 2020 by the State-owned Assets Supervision and Administration Commission. It has raised the company's strategic role in the group and will enhance the operating efficiency of the group's core business, if well-executed. The synergies are modest and yet to develop.

High Integration: AVIC Industry-Finance is listed on the Shanghai Stock Exchange. AVIC is its largest shareholder and the influence of minority shareholders is limited. AVIC has committed to remaining the largest shareholder and exercises strong managerial and operational control over the subsidiary. AVIC Industry-Finance shares the parent's brand name and benefits from the group's franchise for business expansion and funding access. However, AVIC Industry-Finance's business model and commercial orientation give it moderate management independence from AVIC, whose core business is different.

Moderate Standalone Credit Profile: We assess AVIC Industry-Finance's standalone credit profile as sub-investment grade, lower than its support-driven IDR, due to its moderate franchise and risk profile. Its credit profile reflects the exposure to some financial service segments that Fitch views as being high risk and less transparent, and not core to the group's aviation manufacturing activities.

Its consolidated profitability in 2022 and 1H23 weakened from 2021 due to lower earnings from its trust and securities subsidiaries amid an unfavourable capital market, while earnings from its leasing business have remained stable. Consolidated debt to tangible equity was moderate at 3x at end-1H23 (end-2022: 2.9x) and its unsecured liabilities are well-covered by sufficient unencumbered assets.

Very High Probability of Parent's Support: The SSR reflects our view of a 'Very High' probability that AVIC Industry-Finance will receive extraordinary support from AVIC to prevent it from defaulting in times of stress, and indicates the minimum level to which AVIC Industry-Finance's IDR could fall if we do not change our view on potential support.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Any negative change in Fitch's internal view of AVIC, which could reflect a shift in the perceived willingness or ability of the China sovereign to support AVIC in a full and timely manner, or a downgrade of China's sovereign rating, would affect AVIC Industry-Finance's IDRs and SSR to the same magnitude.

AVIC Industry-Finance's ratings would be downgraded upon a weakening in the linkage with AVIC, which could arise from significant ownership dilution or a reduction in AVIC Industry-Finance's strategic role in the group. This could be evident from an expansion of activities outside of AVIC's core business and persistent underperformance against the parent's assigned targets. A large increase in the potential size of required support relative to AVIC's balance sheet could also widen notching.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

An upgrade is less probable in the near term, but could occur if AVIC Industry-Finance significantly increases the financial services portion of its business in support of the group's core manufacturing business or the aviation industry.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

AVIC Industry-Finance's ratings are directly linked to Fitch's internal credit view on AVIC.

ESG Considerations

AVIC Industry-Finance has an ESG Relevance Score of '4' for Financial Transparency due to the generally limited transparency around asset quality in China's leasing sector and its off-balance-sheet trust portfolio. This has a negative impact on the assessment of the company's standalone credit profile and is relevant to the ratings in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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