Fitch Ratings has affirmed China-based Guangzhou Asset Management Co., Ltd.'s (GZAMC) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of 'BBB'.

The Outlook is Stable.

GZAMC is the larger of two local asset-management companies (AMCs) in Guangdong province by asset size as of end-2021.

GZAMC is 67.4%-owned by Guangzhou Yuexiu Capital Holdings Group Co., Ltd. (GYCH), which is ultimately 47%-owned by Guangzhou Yuexiu Holdings Limited (GYH). The Guangzhou municipal government majority-owns GYH, one of the largest municipal-owned enterprises by total assets in the city. GYH has four core businesses - financial services, real estate, transportation infrastructure and food. GZAMC is one of the major subsidiaries of GYH's financial-service segment.

Fitch believes the overall linkage between GZAMC and GYH is strong in light of the parent-subsidiary relationship, the subsidiary's weaker credit quality, the 'High' strategic incentive and 'Medium' operational incentive for GYH to support GZAMC. However, GZAMC's rating is not equalised with our internal assessment of GYH due to the 'Low' legal incentive to support the subsidiary.

KEY RATING DRIVERS

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Parent-Subsidiary Relationship

Fitch regards GYH as the parent entity with considerable control over GZAMC's management and strategic goal setting. GZAMC is controlled by GYH via GZAMC's intermediate holding company GYCH, despite the latter appointing GZAMC's board members and periodically reviewing its performance. GYCH on a parent company level has non-material operations, hence we apply a look-through approach.

Relative Credit Quality

Fitch believes that GYH's standalone credit profile is stronger than GZAMC's because of a larger business scale, greater diversification of business and wider access to financing resources. GZAMC contributed around 7% of GYH's consolidated net profit in 2021, and accounted for 5% of the parent's consolidated total assets.

Linkage Strength

'Low' Legal Incentives: GYH has not extended a formal legal guarantee nor other types of support that cover most of the subsidiary's total debt. There are no cross-default clauses between the two among their existing debt.

'High' Strategic Incentive: We believe GYH's strategic incentive to support GZAMC is ' High', considering the material competitive advantage provided by the subsidiary and its rapid growth.

Competitive Advantage: GZAMC is the only operating platform for distressed-asset management in the group and has a large market share in distressed-asset disposals in the province because of its better understanding of the local market. GZAMC is one of the only two regional AMC licensed by the China Banking and Insurance Regulatory Commission in the city. Licensing of regional AMC is strictly regulated, with the other one fully owned by the provincial government. So it would be hard for GYH to find a substitution for GZAMC in the same business area.

GZAMC is also key in supporting GYH's strategic importance to the municipal government because of its function of dissolving financial risk in the local market. In addition, GZAMC's total revenue rose by 22% in 2020 and 30% in 2021, and the subsidiary's share of GYH's revenue and profit is increasing.

'Medium' Operational Incentive: GYH and GZAMC have a moderate level of operational integration with reasonable avoidance costs from the subsidiary's operational benefits to the parent. The group's five-year plan for 2021-2025 shows the financial sector as a main driver of GYH's assets and profit. We consider GZAMC as integral to the group's financial services business, as it is the group's only operating platform for distressed-asset management.

There is no senior management overlap between GYH and GZAMC. GZAMC has its own treasury team and external funding sources. GZAMC is required to report its business performance to GYCH and GYH periodically. GYH and GYCH have provided shareholder loans and a liquidity support mechanism to GZAMC. GZAMC and GYH have jointly invested in a key project and have potential for further operational integration.

Asset Composition: GZAMC's total assets amounted to CNY41 billion as of end-2021. Around 80% of GZAMC's total assets are non-performing assets purchased from financial institutions and loans extended directly to non-financial companies with short-term liquidity issues.

Derivation Summary

The ratings on GZAMC are based on its strong linkage with GYH, which is assessed under our Parent and Subsidiary Linkage Rating Criteria.

Fitch's internal assessment of the credit profile of GYH is derived from the four factors under the agency's Government-Related Entities Rating Criteria with the Guangzhou municipality as the sponsoring government. Its standalone credit profile is derived under our Corporate Rating Criteria.

Debt Ratings

GZAMC does not have debt ratings.

Issuer Profile

GZAMC, established in April 2017, is licensed by the China Banking and Insurance Regulatory Commission for the bulk purchase and disposal of financial non-performing assets. The majority of GZAMC's total revenue comes from its main business of distressed-asset disposal and restructuring. It also has other businesses, including consulting services and investments.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downward revision in our internal assessment of the credit profile of GYH would lead to negative changes in GZAMC's ratings;

Weakening of GYH's strategic or operational incentives to support GZAMC, or dilution in the parent's shareholding, could lead to a wider gap between GZAMC's IDRs and our internal assessment of GYH's credit profile.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upward revision in our internal assessment of the credit profile of GYH would lead to positive changes in the ratings of GZAMC;

Further strengthening of the operational integration between the parent and subsidiary, and/or improvement in legal linkage with its parent could lead to a narrower gap between GZAMC's IDRs and our internal assessment of the credit profile of GYH.

ESG Considerations

Fitch is withdrawing the ESG scores for GZAMC because the agency does not provide separate ESG scores for the entity as its ratings and ESG profile are derived from those its parent, which are not publicly disclosed.

Public Ratings with Credit Linkage to other ratings

The ratings on GZAMC are derived from the internal assessment of the credit profile of GYH.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

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