HONG KONG, 10 February 2020. Pengyuan International has affirmed the ‘BB’ global-scale long-term issuer credit rating (LTICR) on GoHo Financial Asset Management Co Ltd (GoHo). The rating is concurrently withdrawn at the issuer’s request.
The rating affirmation reflects GoHo’s duopoly status in Anhui Province’s local distressed asset management company (AMC) industry, adequate capitalization, and sufficient liquidity in the next 6 to 12 months. However, we note that the company’s near-term growth prospects may continue to be affected by a more challenging regulatory environment post-Circular 153, which imposes stricter rules on the nature of transactions AMCs are allowed to participate in. In addition, we believe the firm’s continued diversification into non-core business lines may result in a riskier business profile and exacerbate our concerns over the firm’s risk management capability.
Duopoly status. Established in 2014, GoHo was among the first group of five companies to be granted a local AMC license in China (and the only privately-owned in the group). Between 2014 and 2017, GoHo operated as a monopoly in the local AMC market in Anhui. In 2018, a second local AMC was licensed in the province, creating a duopolistic competitive structure. While the national AMCs and potential foreign competition in the future may present challenges, we believe GoHo’s local business networks could be a significant advantage in the longer term.
Adequate capitalization / liquidity. Following two rounds of equity injections in 2016 and 2017, GoHo is adequately capitalized relative to its risk exposures. We expect the firm’s capital adequacy ratio to remain above 20% in 2020. We believe this is a much needed buffer for a company with a limited track record. We also note that the company liquidity profile has seen a marginal improvement, with short-term debt now accounting for around 40% of funding, from less than 30% in 2017. We expect the company to maintain an interest coverage ratio of over 1.5x for the year.
Near-term Growth Challenges. GoHo’s operating performance was weaker than our original expectations for 2019 and may continue to be under pressure in the near term. It is particularly noteworthy that the China Banking and Insurance Regulatory Commission (CBIRC) published Circular 153 in July 2019, which emphasized the regulator’s priority to strengthen the risk management practices of the local AMC industry. In our opinion, this increasingly challenging regulatory landscape may continue to negatively impact GoHo’s business growth before the company further develops its competencies in its core distressed asset business.
Increasing Risk Appetite. We believe management has an increasing risk appetite, as evidenced by its recent investment in Chang An Insurance, a small-to-mid sized non-life insurer. As per public disclosures, we estimate that GoHo’s investment was about RMB1.03bn, in exchange for a 31.68% stake. We note that this investment is about 6% of its assets and 22% of total equity, based on our 2019 estimates. These non-core peripheral business lines may remain a concern, given the firm’s limited track record.
Credit Loss Provisioning. We had previously highlighted the firm’s lack of forward-looking provisioning practices as a credit concern. We note that the firm booked a credit cost of RMB167mn in 2018, but we remain cautious about its ability to accurately pre-provision for counterparty credit risks as it grows its business portfolio.
Stanley Tsai, CFA
+852 3615 8340
Ke Chen, PhD
+852 3615 8316
+852 3615 8278
Date of Relevant Rating Committee: 30 January 2020
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