Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) and Shareholder Support Ratings (SSRs) of China Galaxy Securities Co., Ltd. (CGS) and its subsidiary, CGS International Holdings Limited (CGI) formerly known as China Galaxy International Financial Holdings Limited, at 'BBB+' and 'bbb+' respectively.

The Outlook is Stable.

CGS is a China-based leading securities company undertaking brokerage, investment banking, proprietary trading, asset management and international businesses. It enjoys extensive client coverage across China, and is 50% owned by China Galaxy Financial Holdings Company Limited, which is 69% owned by Central Huijin Investment Co., Ltd. Central Huijin is authorised by the State Council to make equity investments in major state-owned financial enterprises and has control of CGS.

CGI is a wholly owned subsidiary of CGS and serves as the sole offshore integrated platform of the group's international business.

Key Rating Drivers

Support-Driven Ratings: CGS's ratings are underpinned by our view that extraordinary support would be forthcoming from its actual controller, Central Huijin, in case of need. The support-driven ratings also reflect CGS's strategic role in supporting the government's financial reform and overseas expansion objectives. Furthermore, major shareholder's legal obligation to provide capital support is stated in CGS's articles of association and is required by the China Securities Regulatory Commission.

Support is bolstered by Central Huijin's controlling ownership and strong board oversight of CGS and the reputational implications for the shareholder if CGS were to default. We expect Central Huijin to remain as CGS's largest shareholder, given its role in assisting China's financial market development. The Stable Outlook reflects our belief that the potential for extraordinary parental support will remain unchanged.

Stable SROE: The sector risk operating environment (SROE) score remains at 'bbb-'/stable. China's evolving capital market exposes participants to high business volatility on top of economic challenges and ongoing uncertainty. However, the country's continued financial reforms are positive for the development of the securities sector, with increasing capital market depth and breadth bolstering long-term growth potential. We also expect continued enhancement of the regulatory framework to instill financial discipline and control systemic risk.

The OE score is above the implied 'bb' category score, as we believe China's robust external finances and a record of stable economic performance, which are incorporated in the Chinese sovereign rating (A+/Stable), will provide greater financial and economic stability than the implied OE score indicates.

Strong Policy Alignment: CGS, as one of China's top securities companies, has a successful record in supporting capital market development and allowing the Chinese authorities to promote direct financing activities. It also serves an important window for Central Huijin to pursue the Association of Southeast Asian Nations market in alignment with government reforms to expand overseas.

Above-Sector Return: CGS's profitability has been stronger than the sector level, underpinned by its scale benefits. Profitability, measured by operating income/average equity, reached 9.9% in 1Q23, up from 7.9% in 2022, due to fair value gains from the company's proprietary trading positions, as capital market sentiment and the economy improved after Covid-19 pandemic-related restrictions were lifted. We expect profitability to be susceptible to unexpected market movements and adverse changes in market sentiment in light of CGS's reliance on more volatile business activities.

Sound Capital Position: CGS has maintained sound leverage relative to its business risk and earnings volatility, with an adequate capital buffer against asset impairments arising from severe market shocks. Its net adjusted leverage stood at 4.9x at end-1Q23.

Wholesale Funded: CGS relies on wholesale funding, especially repos for short-term funding, in line with the operations of sector peers. However, the risk is lowered by its sufficient liquidity coverage buffers and adequate underlying collateral against repo transactions, which have suitable credit quality. Its funding and liquidity profile also reflects the contingency funding plan in place and the potential for ordinary support from its parent, Central Huijin.

Subsidiary Rating: The ratings on CGI is aligned with that of CGS, reflecting our assessment of an extremely high propensity of support from CGS. CGI is CGS's sole overseas subsidiary, carrying out all of its offshore business, which is one of CGS's five key business segments and is aligned with Central Huijin's strategy to internationalise China's securities industry. CGI is highly integrated into CGS's operations and is a core subsidiary.

RATING SENSITIVITIES

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

Any change to China's sovereign rating that would affect Fitch's assessment of Central Huijin's credit profile is likely to affect the ratings on CGS and its offshore subsidiary to the same magnitude.

A downgrade would also be triggered by a significant weakening in CGS's role in facilitating the development and stability of China's capital market and helping Central Huijin tap the overseas market. Negative rating action could also be caused by a reduced propensity to provide support by Central Huijin, possibly reflected in weaker linkage between Central Huijin and CGS through meaningfully diluted ownership. Persistently weak performance could also lead to a reassessment of support.

CGI could be downgraded if CGS shows signs of a reduced propensity and ability to support the subsidiary.

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

CGS's rating could be upgraded if Fitch believes it has become more systemically important to the Chinese government - although this possibility seems remote against the importance of large state-owned banks - or if the entity undertakes more significant policy roles.

A rating upgrade on CGI will follow similar rating action on CGS's rating.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond 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 four 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

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

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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