Fitch Ratings has affirmed Hong Kong-based China Everbright Limited's (CEL) Long-Term Issuer Default Rating (IDR) at 'BBB' and Short-Term IDR at 'F2'.

The Outlook on the Long-Term IDR is Stable. Fitch has also affirmed the Shareholder Support Rating at 'bbb'.

CEL, whose core business is alternative asset management, has been listed in Hong Kong since 1997. China Everbright Group (CEG) is CEL's largest shareholder, indirectly holding 49.7% at end-2022.

Key Rating Drivers

Shareholder Support: CEL's ratings are driven by Fitch's belief that extraordinary support from CEG would be forthcoming in the event of stress. Fitch regards CEL as a strategically important subsidiary of CEG and we believe there remains substantial reputational risk to the parent should CEL default, given the common branding, and high level of management and operational integration with the parent.

That said, we expect CEL's exclusive role in carrying out the group's offshore asset-management operations to face increasing competition and challenges in light of weakening market sentiments in onshore and offshore markets.

Closer Government Linkages: Fitch believes CEG's credit profile is underpinned by its strong linkage with the Chinese sovereign (A+/Stable), 100% state ownership and the group's social and political role in supporting China's goal in establishing a fully fledged financial conglomerate. We believe CEG's application for the establishment of a financial holding company (FHC) will reinforce its importance via increased collaboration among group entities and closer regulatory oversight of the group. The application is still pending approval.

Strategically Important Subsidiary: We regard CEL as a strategically important subsidiary of CEG given an established record in its core businesses of asset management, structured financing, investment, aircraft leasing and strategic investments in mainland China and Hong Kong. Still, we expect other CEG subsidiaries, such as China Everbright Bank Company Limited (CEB, BBB+/Stable), to play a bigger role given their larger operations in the mainland Chinese market, which will assist the group in supporting state initiatives and strengthen its relationship with the central government in the longer term.

Modest SCP: CEL's standalone credit profile (SCP) is multiple notches below its support-driven creditworthiness. Fitch assesses CEL's SCP under the investment company sub-sector of our Non-Bank Financial Institutions Rating Criteria. Our assessment reflects its moderate but expanding franchise, volatile profitability and leverage. Reported net profit recovered during 1H23, helped by lower unrealised marked-to-market investment losses. However, the reported gearing ratio, calculated as interest-bearing debt/total equity, continued to deteriorate to 94.7% from 86.9% in 2022.

Its Fitch-calculated gross debt/tangible equity rose to 0.96x by end-1H23 (2022: 0.89x), dampened by the distribution of dividends, exchange-rate differences from the translation of financial statements and the decline in the value of its strategic investment in CEB after converting to Hong Kong dollar. CEL's Short-Term IDR is mapped at 'F2' instead of 'F3' based on the Long-Term IDR, reflecting our expectation of extraordinary support from CEG, especially for short-term liquidity, should CEL have an unexpected cash flow need.

RATING SENSITIVITIES

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

A downward revision in Fitch's assessment of CEG's credit profile may affect CEL's ratings to the same extent, unless there is a material change in CEL's role to CEG. CEG's credit profile is sensitive to a negative change in the Chinese sovereign's rating;

A weakening of the linkage between the government and CEG, such as a significant dilution of state ownership, resulting in a material reduction in CEG's strategic role for the nation, could widen our assessment of CEG's credit profile relative to the sovereign rating;

Weaker linkages between CEL and CEG or a reduction in CEL's importance to CEG, which could result from a dilution of CEG's stake in CEL or a reduction of CEL's core role in the group, could lead to a rating downgrade;

The prospect of negative rating action would increase in the event of substantial and sustained losses arising from corporate governance mismanagement without mitigating actions, significant operational deficiencies, or a slippage in risk controls that impedes CEL's ability to fulfil its group role;

The removal of CEG's support for CEL would lead to a multi-notch downgrade of CEL's rating, although we do not expect this to occur in the short term.

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

An upward revision in Fitch's assessment of CEG's credit profile may affect CEL's ratings if there is no material change in CEL's role to the group. CEG's credit profile is sensitive to a positive change in the Chinese sovereign's rating;

CEG's credit profile may be assessed as being closer to the sovereign rating if there is a perceived strengthening of the linkage between the government and CEG.

Any potential changes in regulations that require more binding support from CEG to its major subsidiaries may result in a narrowing of the notching between the entities.

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.

ESG Considerations

CEL has an ESG Relevance Score of '4' for Financial Transparency due to the limited transparency of its investment portfolio, which has a negative impact on the 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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