Measuring the Creditworthiness of

Measuring the Creditworthiness of China’s Corporates Using a Global Rating Scale18th August 2021 (Wednesday)4:00-5:10pm (HKT)

ZOOMING INTO CHINA’S BOND MARKET

BOND CONNECT SERIES EVENT – MINI SEMINAR

STARTING SOON!

Housekeeping

1. All participants are on a listen only mode during the webinar.

2. After the presentation, there will be a Q&A session. For any questions for thespeaker, please type it in Q&A Box on the bottom right corner. The speaker willdiscuss in Q&A session at the end of the event.

3. The webinar is being recorded. The presentation playback and presentation slideswill be available on BCCL Website later in due course

4. If any participant requires assistance at any time, please send a message to thehost through the chat box in this webinar platform.

BOND CONNECT SERIES EVENT – MINI SEMINARZOOMING INTO CHINA’S BOND MARKET

Measuring the Creditworthiness of China’s Corporates Using a Global Rating Scale

18th August 2021 (Wednesday)4:00-5:10pm (HKT)

HOST: Ms. Tracy YEUNG

Assistant Vice President, Sales & MarketingBond Connect Company Ltd.




200

400

600

800

1000

1200

1400

1600

1800

2000

2200

2400

2600

2800

3000

Q1-18 Feb-19 May-19 Aug-19 Nov-19 Feb-20 May-20 Aug-20 Nov-20 Feb-21 May-21 Aug-21

CIBM Agent Model Bond Connect

International Investors Accounts Opened(Bond Connect vs CIBM Agent Model)

A Steady Growth in BC Filing in 2021Attracted 78 out of Top 100 Global AM Companies

4

In 4 years, 2812 Bond Connect Investors are onboarded across 713 Entities vs 487 Entities for CIBM Agent Model.

• Solid demand of RMB assets among international investors in current global rates environment during COVID-19

• Total investor count steadily increasing with ongoing RMB internationalization measures, accentuated by progressive benchmark index inclusion of CGB bonds

• Specific rising interest from pension funds, securities, private banks & family offices

Rising Impact of Bond Connect as Major Investment Channel

2812Now

Source: BCCL as of August 11th, 2021

0

5

10

15

20

25

30

35

40

45

50

0

500

1000

1500

2000

2500

3000

Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21

ADT (RMB billion) Approved Investors Traded Accounts

2018 RMB 3.6bn2019 RMB 10.7bn2020 RMB 19.8bn

Out of 2600+ accounts opened

+1500 have now traded (501 Entities)

Trading Volume1. RMB 49.61bn2. RMB 43.65bn3. RMB 42.97bn

(21 Apr)(26 May)(21 Jun)

Making History with Record Highs in June 2021

An Explosive Growth in Trading Activities

Momentum is on the rise

This is only the Beginning.

RMB 641.12bn 6407RMB 30.53bn

Total VolumeTotal TicketsADT

Source: BCCL as of August 11th, 2021 5

Accelerating Trading Activities via Bond Connect

League Lable

Yearly ADT

Number of Investor Accounts Opened

Est. 2022

NOWRMB 29.39bn

ADT (RMB bn)

(30 Jul)(30 Nov)(30 Oct)

Trade Tickets1. 7502. 7053. 656

Emerging interests are seen across Central Asia, Middle East, Africa and Latin America & the Caribbean.

Spanning Across 37 Global Jurisdictions

Hong Kong Taiwan SingaporeUnited States of America CaymanBritish Virgin Islands

Macau

United Kingdom AustraliaKorea Dubai Japan

Switzerland Germany

France Malaysia Ireland Bermuda

Luxembourg Canada Philippines

Denmark Belgium Austria

Thailand Netherlands Sweden New Zealand

Abu Dhabi Bahamas

Registration Jurisdictions Breakdown

By Onboarded Financial Institutions

By Financial Institutions/Asset Managers of Funds, Products & Asset Owners

Source: BCCL as of August 11th, 2021 6

A Changing & Expanding Investor Base— Jurisdictions

US; 34%

HK; 17%UK;…SG; 6%

JP; 5%

LU; 4%

CA; 3%

TW; 3%

GE; 2%

CH; 2% AU; 2% Others; 8%

HK, 33%

US, 15%UK, 9%

SG, 7%

TW, 6%

JP, 5%

AU, 3%

LU, 3%

CA, 3%KR, 2%

CH, 2%

Others, 13%

Italy

Finland RussiaSouth AfricaBrazilNorwayKazakhstan

Recent Trend

Russia, June 2020

Finland, April 2020

Italy, August 2019

Bahamas, July 2019

Abu Dhabi, June 2019

Japan, June 2017

South Africa November 2020

Brazil

July 2021

Norway,

July 2021

Kazakhstan,

August 2021

7

More Coming!Recent Developments

Additional Market Makers (56)

Fee Reduction:0.2bp for 0-1Y, 0.4bp for

beyond

Entity-level Onboarding Dealer Pay Model

Primary Market Information Platform &

NCD Subscription

API Datafeed Service to distribute real-time

transaction data

Trading Hour Extension to 8pm

ePrime underwriter functionality established

Transfer in Defaulted Bond on maturity

Extended Settlement Cycles &

Settlement Amendment

Additional FX Settlement Banks (28)

• ePrime – Investor Functionality

• FX Execution Flexibility; enhancements to

FX monitoring and reporting

• Offshore access to Exchange traded

products (ETP) and derivatives such as

IRS, repo, etc.

• Expand E-trading platforms

• Develop China Credit Market– index,

securitization, tax netting for securitized

products

• Southbound facilitation

• More to come………

3rd Party FX

Source: BCCL

Bond Connect Developments — Constantly Evolving Scheme

8

• A Dedicated Website for Bond Connect

https://www.chinabondconnect.com

• Rules and regulations

• Filing procedures for overseas investors

• Reference materials for trading & settlement of Bond Connect

• List of participating entities of Bond Connect

• Latest updates of Bond Connect scheme

• Contact Us

BCCL Sales & Marketing

Unit 4701, 47/F., Two Exchange Square, 8 Connaught Place, Central. Hong Kong

Tel: (+852) 2327 0033

Email: [email protected]

• Follow Us

For more Information

Admission Handbook

https://www.chinabondconnect.com/

mailto:[email protected]

SPEAKER: Dr. Ke CHEN

Chief Analytics Officer Pengyuan International




Measuring the Creditworthiness of China’s Corporates

Using a Global Rating Scale

AGENDA Comparisons between the global and domestic rating scale

Distribution of Chinese corporates’ creditworthiness on the global rating scale

Chinese corporates’ key credit matrix by industries

Q&As

Higher Yields and Low Correlation with Developed Bond Markets

13

China

Treasury

China

Corporate

Global

Treasuries

Global IG

Corporate

Global HY

CorporateUS Treasury

US IG

Corporate

US HY

CorporateMSCI World S&P500

China Treasury 1.00 0.49 0.16 0.06 -0.07 0.17 0.07 -0.09 -0.11 -0.10

China Corporate 1.00 0.06 0.02 -0.11 0.11 0.02 -0.07 -0.12 -0.11

Global Treasuries 1.00 0.53 0.30 0.63 0.55 0.09 0.06 -0.04

Global IG Corporate 1.00 0.60 0.60 0.98 0.51 0.20 0.14

Global HY Corporate 1.00 -0.12 0.58 0.97 0.71 0.64

US Treasury 1.00 0.63 -0.18 -0.34 -0.37

US IG Corporate 1.00 0.50 0.19 0.14

US HY Corporate 1.00 0.72 0.68

MSCI World 1.00 0.96

S&P500 1.00Source: Bloomberg

• China has overtaken Japan as the world's second largest bond market

• Very attractive risk-adjusted returns and a very low correlation with other asset classes globally

China Onshore Bond Market is Rapidly Opening Up to Foreign Investors

14

2002

QFII

2011

RQFII

2016

RMB inclusion into SDR

CIBM Direct

2017

Bond Connect

2019

Inclusion in Bloomberg

Barclays Index

2020

Inclusion in

JP Morgan

GBI-EM

2021

Inclusion in FTSE WGBI

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21

Tri

llio

n C

NY

Foreign Holding of CN onshore

Foreign Holding of CN Govt. onshore

Foreign Holding of CN Policy Bank onshore

Foreign Holding of CN Corp. onshore

Foreign Ownership of CN onshore (%)

Source: Shanghai Clearing, China Central Depository & Clearing， Pengyuan International Source: Shanghai Clearing, China Central Depository & Clearing， Pengyuan International

Government63%

Policy bank30%

Corporates4%

Others3%

Foreign Holdings breakdown, as of June 2021

Challenges on Assessing the Creditworthiness of China’s Corporates

15

Globally comparable credit ratings are essential to the internationalization of China’s bond markets

• Credit analysis on China’s credits requires local expertise and language skills

• China’s domestic rating agencies assign credit ratings for China’s corporates under the national rating scale

• The majority of China’s domestic ratings fall into the rating categories of AAA to AA

• International rating agency’s onshore subsidiary also assigns ratings under a national rating scale that cannot be

mapped to its global ratings

Onshore Credit Bond market by Issuer Credit Rating

0

500

1,000

1,500

2,000

2,500

Source: Wind, Pengyuan International

1218

23

4234 38

22 18

7

18

6 5 4

160

71

14

220

40

60

80

100

120

140

160

180 Global Ratings Domestic Ratings

Offshore Credit Bond market by Issuer Credit Rating

Source: DMI, Pengyuan International

n=247

Comparisons Between the Global and National Rating Scale

Note: the 3 ratings displayed above are of unsolicited nature. For more information, please visit https://www.pyrating.com/rating-actions.html16

Global scale ratings (GSRs)

• Widely used and familiarized for investment and risk management

purposes by global investors

• Have matured over time, with ratings are largely converged

• Comparable across regions, sectors and over time

• Pengyuan International adopted global scale ratings in its business

operation

National scale ratings (NSRs)

• Mainly used across China’s domestic credit ecosystem

• Only provide opinions on the relative creditworthiness within a specific

country

• Country risks were not fully considered and accounted for

• No direct relationship with historical default probabilities

• The investment grade and speculative grade nomenclature is not

appliable

Pengyuan GSR

BBB+NSR (China)

AAA

Pengyuan GSR

ANSR (China)

AAA

Pengyuan GSR

BBNSR (China)

AA+

https://www.pyrating.com/rating-actions.html

Analytical Framework: Global Corporate Rating Criteria

Source: https://www.pyrating.com/pengyuancms/methodology/in-use-criteria/corporates/General-Corporate-Rating-Criteria/Criteria-GeneralCorporateRatingCriteria.pdf 17

Operation Profile

Indicative Credit Score (ICS)

Standalone Credit Profile (SACP)

Issuer Credit Rating (ICR)

Business Profile

Industry & Operation Risk Macroenvironment

Industry Risk Profile

Financial Profile

Leverage Profile Profitability

Adjustment Factors

External Support

Adjustment Factors

• Management & governance

• Liquidity

• Supplementary analysis

External Support

• Support from a parent group

• Support from a government

entity

https://www.pyrating.com/pengyuancms/methodology/in-use-criteria/corporates/General-Corporate-Rating-Criteria/Criteria-GeneralCorporateRatingCriteria.pdf

Analytical Framework: Potential Extraordinary Support or Intervention

Source: https://www.pyrating.com/pengyuancms/methodology/in-use-criteria/general/Government-Related/Criteria-Government-RelatedEntitiesRatingCriteria-updated.pdf 18

Ownership

Ties with the Government

Government’s

Willingness to Support

Board and Management

Policy and Support Record

Business Connections

Developments and

Expectations

Products and Services

Replaceability

Status within Political,

Social and Legal System

Contribution to the Gov’t

Financial and Social

Impacts of Default

Importance to the Gov’t

GRE’s Standalone

Credit Profile

Government’s

Capability to Support

GRE’s Issuer Credit

Rating

https://www.pyrating.com/pengyuancms/methodology/in-use-criteria/general/Government-Related/Criteria-Government-RelatedEntitiesRatingCriteria-updated.pdf

Government’s Capability to Support

Source: https://www.pyrating.com/rating-actions/issuer/Peoples-Republic-of-China.htmlhttps://www.pyrating.com/rating-actions.html?issuerP=1&practiceArea=publicFinance 19

• Pengyuan International uses their issuer credit ratings to assess governments’ capability to provide

“extraordinary support” to GREs

• Since 2018, Pengyuan International has assigned the global-scale long-term foreign-currency issuer credit rating

of ‘AA’ to the People’s Republic of China

• Pengyuan International has assigned global scale ratings to 20 provincial governments of China

• Pengyuan International has assessed the creditworthiness of 327 China’s prefecture-level governments

Global Scale Ratings for Provincial-level Governments

0

30

60

90

120

150

{AA} {AA-} {A+} {A} {A-} {BBB+} {BBB} {BBB-} {BB+} {BB}

Num

ber

of Local G

overn

ments

Stand-Alone Credit Profile Indicative Credit Estimate n=327

Indicative Credit Estimate Distribution of Prefecture-level Governments

Source: Pengyuan International Indicative credit estimate expressed are Pengyuan International’s view of credit quality derived

from desktop analysis based on public information. Please see the research report for details.

https://www.pyrating.com/rating-actions/issuer/Peoples-Republic-of-China.html

https://www.pyrating.com/rating-actions.html?issuerP=1&practiceArea=publicFinance

Financial Ratio Adjustments to Ensure Global Consistency and Comparability

Source: https://www.pyrating.com/pengyuancms/methodology/in-use-criteria/corporates/Financial-Adjustments-and-Ratio-Definitions_20210315102627122/Criteria-CorporateFinancialAdjustmentsandRatioDefinitions.pdf 20

Given the gaps in accounting and disclosure standard of Chinese credits, making consistent financial

adjustments are important for obtaining globally comparable financial data

• Total debt is adjusted by the following items: accrued interests and dividends, debt issuance cost, hybrid capital

instruments, financial guarantees, litigation exposures, asset retirement obligations, operating and financial

leases, underfunded pension liabilities, factoring and securitized liabilities, etc

• Interest expenses is adjusted by interest from the adjustment of fair value to amortized cost, capitalized interest

cost, interest cost from extra asset retirement obligations, imputed interest costs from capitalizing operating

leases, interest from underfunded pension liabilities, and imputed interest from receivable factoring and

securitization, etc

• Hybrid capital instruments are adjusted according to the assessment of how much equity characteristics these

instruments actually have

• Excess cash is adjusted for restricted cash and a certain level of operating cash, etc

• Capitalized development cost is adjusted to be an expense item on the income statement, if the companies

have not done so

https://www.pyrating.com/pengyuancms/methodology/in-use-criteria/corporates/Financial-Adjustments-and-Ratio-Definitions_20210315102627122/Criteria-CorporateFinancialAdjustmentsandRatioDefinitions.pdf

Consistency and Comparability Across Sectors, Regions and Over Time

Source: https://www.pyrating.com/pengyuancms/methodology/in-use-criteria/corporates/General-Corporate-Rating-Criteria/Criteria-GeneralCorporateRatingCriteria.pdf 21

Industry Risk Profile Assessment

• To ensure comparability of ratings across sectors, industry risk is assessed by evaluating concentration risk,

entry barriers, growth prospects, profitability, substitution risk, cyclicality risk

Assess a Company's Creditworthiness by its Business Profile and Financial Profile using a Matrix

• Financial risks have different effects on the creditworthiness of companies that have different business risks and

opportunities

FINANCIAL

PROFILE

BUSINESS PROFILE

7 Excellent 6 Very Strong 5 Strong 4 Moderate 3 Weak 2 Fairly Weak 1 Vulnerable

aaa aaa aa a+ a- bbb bb+ bb-

aa+ aa+ aa a bbb+ bbb bb+ bb-

aa aa+ aa- a- bbb+ bbb- bb+ bb-

aa- aa a+ bbb+ bbb bbb- bb+ bb-

a+ aa a bbb+ bbb bbb- bb+ bb-

a aa- a bbb bbb- bb+ bb bb-

a- a+ a- bbb bbb- bb+ bb bb-

bbb+ a bbb+ bbb- bbb- bb+ bb b+

bbb a- bbb+ bbb- bb+ bb bb- b+

bbb- a- bbb bbb- bb+ bb bb- b+

bb+ bbb+ bbb bbb- bb+ bb bb- b+

bb bbb+ bbb- bb+ bb bb- b+ b

bb- bbb bbb- bb+ bb bb- b+ b

b+ bbb- bb+ bb bb- b+ b+ b

b bbb- bb+ bb bb- b+ b b-

b- bb+ bb bb- b+ b b b-

ccc+ bb+ bb bb- b+ b b- ccc+

ccc/ccc- bb bb- b+ b b- ccc+ ccc/ccc-

https://www.pyrating.com/pengyuancms/methodology/in-use-criteria/corporates/General-Corporate-Rating-Criteria/Criteria-GeneralCorporateRatingCriteria.pdf

Using Stress Scenarios to Ensure Ratings are Consistent

Examples of Economic and Financial Crises in Accordance with Pengyuan's Stress Scenarios

Name Period Real GDP

Decline

Unemployment

Peak

Stock Market

Decline

Stress Scenarios

Great Depression of USA 1929 - 1933 26.7% 24.9% 89% AAA

World War Ⅱ(France) 1939 - 1944 41.4% n.a. n.a. >AAA

World War Ⅱ(Japan) 1940 - 1944 50.3% n.a. n.a. >AAA

Sino-Japan War (China) 1931 - 1945 n.a. n.a. n.a. >AAA

Chinese Civil War 1945 - 1949 n.a. n.a. n.a. >AAA

USA Early 1980s Recession 1980 - 1982 2.6% 10.8% 29% BBB

Japanese Bubble Burst 1989 - 2009 n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

BBB (Japan)

BB (Global)

Asian Financial Crisis 1997 - 1998 12.5%

7.4%

7.0%

n.a.

n.a.

7.4%

5.9%

n.a.

70%

64%

60%

n.a.

AA (Thailand)

A / BBB (South Korea)

BBB (Hong Kong)

BB (Global)

Russian Financial Crisis 1998 - 1999 9.1%

n.a.

12.2%

n.a.

89%

n.a.

AA / A (Russia)

BB (Global)

Great Recession 2007 - 2009 4.1%

5.5%

n.a.

10%

10.1%

n.a.

52%

58%

n.a.

BBB (USA)

A / BBB (Euro Zone)

BB (Global)

Greek Sovereign Debt Crisis 2008 - 2014 27.3% 27.9% 92% AAA

Source: OECD, IMF, National Bureau of Economic Research, Stock Exchanges

22

Valuable Visibility of Chinese Credits in the Offshore Bond Market

Source: https://www.pyrating.com/publications/publicationsDetail/Research-Publication-Measuring-the-Creditworthiness-of-Chinas-Corporates-Using-a-Global-Rating-Scale.html 23

Monthly Issued Principal (in millions)

• A total of 2,863 offshore Chinese corporate bonds are issued from September 1993 to January 2021

• Among those 2,863 bonds, 703 unique issuers are identified, 30 of them have defaulted

• Our research sample includes 534 of these 703 issuers, representing 84% of the issued principal

• The sampling considers data transparency and the fact that some of them have received ratings from other

global rating agencies

-200%

-100%

0%

100%

200%

300%

400%

500%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1-Jan-2018 1-Jul-2018 1-Jan-2019 1-Jul-2019 1-Jan-2020 1-Jul-2020

Principal, translated to US$ YoY

Source: DMI, Pengyuan International

https://www.pyrating.com/publications/publicationsDetail/Research-Publication-Measuring-the-Creditworthiness-of-Chinas-Corporates-Using-a-Global-Rating-Scale.html

Characteristics of the China’s Offshore Bond Market


-40%

-20%

0%

20%

40%

60%

80%

100%

120%

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

2016 2017 2018 2019 2020

An

nu

al G

row

th R

ate

Issu

an

ce

Vo

lum

e (

US

D B

illio

n)

Issuance Volume of Chinese Offshore USD Bonds

Corporate Bond Issuance Total Bond Issuance Total % change Corporate % change

<1 year0.1% 1 year

11%

2-5 years71%

6-10 years15%

>10 years3%

Standard60%

Callable28%

Puttable2%

Callable and Puttable1%

Perpetual bond6%

Convertible3%

Secured; 8%

Senior Unsecured; 83%

Unsecured; 1%

Senior Subordinated;

0.05%

Subordinated; 2%

Junior Subordinated; 0.1%

First Priority Lien; 6%

Second Priority Lien; 0.1%

Bond Term, Issued since 2015 Bond Seniority, Issued since 2015Bond Features, Issued since 2015


Characteristics of the China’s Offshore Bond Market (Continued)


LGFV38%

GRE24%

General Corporate

38%

Information Technology, 7%

Utilities, 5%

Healthcare, 6%Industrials,

9%

Real Estate,

48%

Consumer Stables, 3%Materials,

4%Communication

Services, 2%

Energy, 1%

Consumer Discretionary,

15%


Utilities, 11%

Industrials, 39%

Real Estate, 11%Consumer

Stables, 2%

Materials, 17%

Energy, 7%

Financials, 6%

Consumer Discretionary, 4%

LGFV18%

GRE48%

General Corporate

34%Information

Technology, 8%

Utilities, 1%

Healthcare, 1%Industrials, 10%

Real Estate,

65%

Consumer Stables, 1% Materials, 2%

Communication Services, 0.5%

Energy, 0.1%

Consumer Discretionary, 11%


Utilities, 20%

Industrials, 40%

Real Estate, 9%Consumer Stables, 1%

Materials, 10%

Energy, 15%

Financials, 2%

Consumer Discretionary,

2%

Issuer Number Breakdown by Issuer Type

Aggregate Asset Breakdown by Issuer Type


Indicative Credit Estimate Distribution under Global Rating Scale


10

20

30

40

50

60

70

80

n=534GRE

LGFV

General Corporate

Indicative Credit Estimate Distribution by Issuer Type


• The majority of the assessed issuers fall somewhere between investment grade and high-yield grade. The

median of the distribution is “{BBB-}”

• The distribution is slightly positively skewed

• the lower tail consisting primarily of general corporates

• the upper tail consisting primarily of GREs (Government Related Entities) and LGFVs (Local Government

Financing Vehicles)

• Indicative credit estimate expressed are Pengyuan International’s view of credit quality derived from desktop analysis based on public information. Please see the research report for details.


Comparison of the Indicative Credit Estimates with Other Rating Agencies’


Comparison of Pengyuan International’s Distribution of Indicative Credit Estimates versus Other Global

Rating Agencies

• The distribution of 338 issuers’ ratings assigned by either S&P, Moody’s or Fitch is shown along with Pengyuan

International’s indicative credit estimate distribution

• Our indicative credit estimate distribution is highly comparable to global market consensus

0

10

20

30

40

50

60

n=338Moody's; S&P; Fitch Rating Median

PY's Indicative Credit Estimate




5

10

15

20

25GRE Indicative Credit Estimate

GRE Indicative SACP

LGFVs and GREs Have High Reliance on Government Support


• Local Government Financial Vehicles (LGFVs) and Government Related Entities (GREs) issuers’ indicative credit

estimate distribution and Indicative standalone credit profile (SACP) distribution are significantly different

• These companies, especially LGFVs, are mostly very weak on a stand-alone basis and derive the majority of

their credit strength from external supports

10

20

30

40

50

60 LGFV Indicative Credit Estimate

LGFV Indicative SACP

LGFV’s Indicative Credit Estimate and Indicative SACP Distribution

GRE’s Indicative Credit Estimate and Indicative SACP Distribution



LGFVs’ Indicative Credit Estimates Differ Across Administrative Levels and Regions


• In terms of administrative levels, provincial-level LGFVs have higher indicative credit estimates than prefecture-

level LGFVs, and similarly, prefecture-level LGFVs have higher indicative credit estimates than county-level

LGFVs

• Despite the fact that the western region’s economy is weaker than those in the eastern and the central region,

the LGFVs from the western region do not necessarily have lower indicative credit estimates

LGFV’s Indicative Credit Estimate Distribution by Administrative Level And Geographic Locations

Indicative Credit Estimate LGFV LGFV LGFV LGFV LGFV LGFV LGFV

Province Prefecture County Eastern Central Western Northeast

{AAA}

{AA+}

{AA}

{AA-} 1 1 2

{A+} 1 1 2

{A} 10 3 1 5 5 4

{A-} 4 12 2 6 3 9

{BBB+} 2 22 7 13 10 7 1

{BBB} 2 18 14 21 3 9 1

{BBB-} 1 26 19 21 10 15

{BB+} 1 15 14 16 3 12

{BB} 8 6 10 1 2 1

{BB-} 5 4 4 3 1

{B+}

{B}

{B-}

{CCC+}

{CCC/CCC-}

Total 22 111 67 100 38 59 3



Average of Indicative Credit Estimates and Indicative SACP by Industry


• The difference between indicative SACP and indicative credit estimate for LGFVs and GREs is significant

• For general corporates, the difference between indicative SACP and indicative credit estimate is much smaller,

and only a few companies receive meaningful and accountable support from their parents

• General corporates, on average have much lower credit quality than LGFVs and GREs, with an average score of

6.7, which is equivalent to “{BB}”. The median indicative credit estimate is “{BB-}”, three notches lower than the

overall average

Average of Indicative Credit Estimates and Indicative SACP by Industry

10.9

9.7

6.7

9.79.2

7.77.4

7.1 7.1 7.1

6.0 5.8

4.5

5.9

3.0

9.3

6.7

n=534*translated using {AAA}=18 and minus 1 point for each notch

transparent colored includes general corporates only

Indicative credit estimates

Indicative SACP Mean



General Corporates’ Indicative Credit Estimate Distribution by Industry


• There is only a handful of general corporate issuers whose indicative credit estimates score higher than or equal

to “{A}”, and only about 25% of corporates have investment grade indicative credit estimates

• Only information technology issuers have a median score above investment grade

General Corporates’ Indicative Credit Estimate Distribution by Industry

Indicative

Credit

Estimate

Information

TechnologyUtilities Healthcare Industrials Real Estate

Consumer

StaplesMaterials

Communication

ServicesEnergy

Consumer

DiscretionaryTotal

{AAA}

{AA+}

{AA} 1 1 2

{AA-} 1 1

{A+}

{A} 1 1 2

{A-} 1 2 3 2 1 1 1 11

{BBB+} 2 1 2 4 1 1 3 14

{BBB} 1 1 2 3 2 1 3 13

{BBB-} 2 3 1 4 2 12

{BB+} 1 2 2 8 2 2 17

{BB} 3 13 1 1 4 22

{BB-} 1 2 6 19 1 1 4 34

{B+} 2 3 13 1 1 1 6 27

{B} 1 1 1 12 1 1 1 18

{B-} 2 4 12 1 1 20

{CCC+} 5 1 6

{CCC/CCC-} 3 1 1 5

Total 15 10 11 19 98 6 8 4 2 31 204



Business and Financial Profile Analysis by Industry


(7) Excellent1%

(6) Very Strong10%

(5) Strong14%

(4) Moderate17%

(3) Weak22%

(2) Fairly Weak22%

(1) Vulnerable

14%

(16-18) Minimal

6%

(13-15) Modest

4%

(10-12) Intermediate

8%

(7-9) Significant

11%

(4-6) Aggressive

23%

(1-3) Highly Leveraged

48%

Business Profile Score Distribution Financial Profile Score Distribution

• The business profiles were evaluated on a seven-point scale ranging from “vulnerable” to “very strong”. The

financial profiles were evaluated on an eighteen-point scale ranging from “highly leveraged” to “minimal”

• In the sample, the business profile of these samples is generally weak, with about 58% issuers falling below

“moderate” business profile category, and that the majority of these companies have high leverage level, with

approximately 48% being “highly leveraged”


Business and Financial Profile Risks by Sector


Business and Financial Profile Scores by Sector

• LGFVs have very weak financial profile

• Energy sector has the worst combined profile, as the majority of energy companies that have issued offshore

bonds are exploration and production (E&P) related equipment manufacturers, which are highly volatile, cyclical

and have the risk of falling off

• Healthcare companies generally have a strong niche and a track record of stable cash flow generation

• GREs typically have very strong business profiles owing to the fact that they are backed by administrative

policies and enjoy a sizable market share

LGFV

GRE

All general corporatesInformation Technology

Utilities

Health Care

Industrials

Real Estate

Consumer Stables

Materials

Communication Services

Energy

Consumer Discretionary

Universe

1.0

3.0

5.0

7.0

9.0

11.0

13.0

15.0

2.0 2.5 3.0 3.5 4.0 4.5 5.0

Fin

an

cia

l P

rofi

le

Business Profile Very StrongVery Weak

Ve

ry S

tro

ng

Ve

ry W

ea

k

Bubble size indicates the aggregate asset size of the industry


Leverage Profile and Profitability by Sector


Leverage Profile and Profitability by Sector

• Consumer staples have the best leverage profile because of their strong and stable cash generation ability and

modest financial leverage

• LGFVs have some of the worst leverage profiles due to their weak cashflow generation and extremely high

leverage

• Issuers of consumer discretionary and information technology businesses, have a net cash position on average

LGFV

GRE

All general corporates

Information Technology

Utilities

Health Care

Industrials

Real EstateConsumer StablesMaterialsCommunication Services

EnergyConsumer Discretionary

Universe

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0

Pro

fita

bil

ity

Leverage ProfileVery Weak Very Strong

Ve

ry W

ea

kV

ery

Str

on

g

Bubble size indicates the aggregate asset size of the industry


Key Financials of Different Sectors


• GREs and information technology companies are, on average, significantly larger than the rest, while energy and

healthcare companies are the smallest

• Information technology, healthcare, consumer staples, materials and consumer discretionary have significant

cash holdings and short-term investments, and thus have a low net debt to EBITDA ratio, although some of

which have a relatively high gross debt to capitalization ratio

Key Financials based on latest FY information

Per Company LGFV GRE General IT UtilitiesHealth-

careIndustrial

Real

EstateStaples Materials Comm. Energy Discret. Total

Revenue 11.9 206.1 61.2 147.7 15.8 12.0 60.7 50.9 54.8 47.1 19.4 4.0 98.7 78.0

EBITDA 1.4 23.1 10.1 21.3 3.8 2.7 10.7 10.3 7.2 7.5 6.6 0.8 10.8 10.0

Assets 106.2 433.1 190.5 209.7 54.9 30.8 214.3 258.4 47.5 80.9 53.3 10.6 137.8 218.0

Selected Ratios (Latest FY information)

EBITDA Margin 12.2% 11.2% 16.5% 14.4% 24.0% 22.1% 17.6% 20.2% 13.1% 16.0% 34.1% 19.1% 10.9% 12.9%

Net

Debt/EBITDA25.7x 3.2x 2.4x -0.8x 3.7x 1.6x 2.9x 4.1x 0.3x 2.6x 3.7x 3.4x -0.3x 4.1x

Gross

Debt/Capita.50.7% 44.5% 42.3% 27.5% 41.1% 33.7% 41.0% 47.6% 23.1% 44.4% 63.9% 46.2% 30.6% 45.2%


Conclusion

36

• China's onshore and offshore bond markets have grown rapidly over the last decade

• Foreign participation in China's bond market remains extremely limited

• While foreign investors' access to China's onshore bond market has significantly improved, foreign investors

continue to primarily hold sovereign and quasi-sovereign bonds

• Among other things, the absence of globally comparable credit ratings creates a barrier for many international

investors who rely on global scale ratings to guide their investment and risk management decisions

• Pengyuan International has adopted a global rating system in order to facilitate international investors'

understanding of the Chinese bond markets and to make it easier for them to compare debt securities from

different countries

• Utilizing a globally recognized rating system enables greater segregation of credit scores for distinct companies

than China’s domestic rating system, which appears to have limited credit differentiation

How Can Pengyuan International Help You Accessing China?

Pengyuan International reserves the ultimate right of interpretation of the products&services provided37

0

20

40

60n=338Moody's; S&P; Fitch

Rating Median

PY's Indicative CreditEstimate

Public Global Scale Ratings (issuer-paid)

Meetings with Pengyuan International’s analysts (non-fee basis)

Private Credit Assessment (investor-paid)

Original Chinese Credit Research in English (non-fee basis)

38

Ke Chen, is the Chief Analytics Officer of Pengyuan International and serves as a member of the company’s Board

of Directors He is also a Responsible Officer of Pengyuan International within the meaning of the SFO licensed to

carry out Type 10 regulated activity under the SFO

Before joining Pengyuan International, he worked as a Lead Quantitative Analyst at S&P Global Ratings He joined

S&P Global Ratings New York office in 2011 and was later transferred to the Hong Kong office He conducted

academic research at the University of Illinois at Urbana Champaign on econometrics models for forecasting

corporate default rates prior to joining S&P Global Ratings

Ke holds an MA in Economics from the University of British Columbia, an MS in Statistics and a PhD in Economics

from the University of Illinois at Urbana-Champaign

Ke Chen, PhD

Chief Analytics Officer

Direct: +852 3615 8316

Mobile: +852 9136 2671


Analytical Contact

Terry Zhang

Head of Global Strategy and

Business Management

Direct: +852 3615 8343

Mobile: +852 6895 5763


Commercial Contact

Allen Wei

Vice President, Business

Development, GSBM

Direct: +852 3615 8343

Mobile: +852 6895 5763


39

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