Fitch Ratings has affirmed CSSC (Hong Kong) Shipping Company Limited's (CSSC HK Shipping) Long-Term Issuer Default Rating (IDR) of 'A' and Shareholder Support Rating (SSR) of 'a'.

Fitch has also affirmed the rating on the senior unsecured note issued by CSSC Capital 2015 Limited at 'A'. The Outlook on the Long-Term IDR is Stable.

CSSC HK Shipping is the only leasing subsidiary of China Shipbuilding Group Corporation (CSG), the world's largest shipbuilding conglomerate and which controls 75% of CSSC HK Shipping. The company has a diversified ship leasing portfolio and focuses strategically on liquefied natural gas (LNG)/liquefied petroleum gas (LPG) carriers, which represented 41% of its portfolio at end-1H23. CSSC Capital 2015 is CSSC HK Shipping's wholly owned offshore special-purpose vehicle, registered in the British Virgin Islands.

Key Rating Drivers

Support-Driven IDR: CSSC HK Shipping's ratings reflect Fitch's expectation of strong support from CSG, whose credit profile is based on China sovereign (A+/Stable) support. Fitch views CSSC HK Shipping as CSG'S strategically important subsidiary, servicing the group's core shipbuilding business. We expect sovereign support to flow through CSG to CSSC HK Shipping when needed, based on the strong linkage and synergies, and potential reputational risk. Fitch believes any required support would be immaterial relative to CSG's ability to provide support.

The Stable Outlook reflects our expectation that CSSC HK Shipping's role in the group and close linkage with CSG will not change substantially. The Outlook is consistent with Fitch's view on the credit profile of CSG and the Chinese sovereign rating, and reflects our view that the relationship between CSG and China sovereign will remain unchanged.

Strategically Important Subsidiary: CSSC HK Shipping provides financing solutions to group clients, and facilitates the group's sales of ships, with most of its managed vessels built by the group. Its own fleet-rental business benefits the group's shipbuilding business by providing new orders, particularly during cyclical downturns. It also supports CSG in showcasing the group's shipbuilding capability to global clients via providing financing to high-end vessels that align with national strategy aimed at moving up the shipbuilding value chain and promoting green shipping.

High Integration: CSSC HK Shipping's management and operation are highly integrated with those of CSG, which exercises strong influence over the leasing subsidiary's business and financial planning. CSSC HK Shipping shares the same brand as CSG, and also benefits from the group's strong franchise for business development and funding access. We believe CSG would provide extraordinary support when needed to protect its reputation and vessel sales.

Modest Standalone Credit Profile: Fitch assesses CSSC HK Shipping's standalone credit profile as sub-investment grade, lower than its support-driven IDR because of its moderate franchise, business cyclicality, and developing underwriting standards yet to be well tested through various cycles due to its relatively short operating history. CSSC HK Shipping's asset growth was muted in 2022 following a strong 2021 that was underpinned by a tight global shipping market during the Covid-19 pandemic disruption.

The debt to tangible equity ratio decreased to 2.2x by end-1H23 from 3x at end-2021, thanks to a slowdown in asset growth and improved profitability. Annualised pre-tax return on average assets increased to 5.4% in 1H23 from 3.9% in 2021, driven by higher lease rates and healthy asset quality. The impaired-loan ratio has remained stable, at the 1% level.

Very High Probability of Parent's Support: CSSC HK Shipping's Shareholder Support Rating (SSR) is aligned with its IDR, indicating the minimum level to which its IDR could fall if Fitch does not change our view on potential support from the parent. The 'a' SSR indicates a 'Very High' probability of support being forthcoming, as CSSC HK Shipping is considered a strategically important subsidiary.

RATING SENSITIVITIES

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

The IDR and SSR of CSSC HK Shipping are underpinned by shareholder support. Thus, any change in our internal view on CSG's credit profile, which could reflect a shift in the perceived willingness or ability of the China sovereign to support CSG in a full and timely manner, could lead to negative rating action. A downgrade of China's sovereign rating would affect CSSC HK Shipping's ratings by at least the same magnitude.

CSSC HK Shipping's IDR would be downgraded if there is any sign of weakening in the linkage between CSSC HK Shipping and CSG, which could arise from significant ownership dilution, or a reduction in CSSC HK Shipping's strategic role in the group - as evident from a notable expansion in other leasing businesses not linked to the parent's core business.

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

CSSC HK Shipping's IDR could be upgraded if its linkage with CSG strengthens, such that the company becomes exclusively captive and a wholly owned subsidiary, or a significant increase in the portion of ships built by the group being sold and financed by CSSC HK Shipping.

Any positive change in Fitch's view on CSG and, ultimately, China's sovereign rating would affect CSSC HK Shipping's ratings as well.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

The rating on the senior unsecured notes issued by CSSC Capital 2015 is in line with CSSC HK Shipping's IDR, as the notes are unconditionally and irrevocably guaranteed by CSSC HK Shipping and will at all times rank pari passu with all CSSC HK Shipping's other direct, unsubordinated, unconditional and unsecured obligations.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

The rating on the senior unsecured notes is equalised with CSSC HK Shipping's IDR, and will move in tandem with any change to CSSC HK Shipping's rating. The notes' ratings could also be downgraded if there is a significant adverse change in China's capital-account regulations that restrain CSG from providing timely cross-border support for CSSC HK Shipping to service its debt obligation.

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

The ratings of CSSC HK Shipping are linked to Fitch's internal credit view on CSG.

ESG Considerations

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, visithttps://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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