Established in 2001 and formerly known as Qilu Securities Co., Ltd, Zhongtai Securities has established an extensive network and strong brokerage franchise in Shandong province. Although its average brokerage commission rate has been declining due to intensified competition, the firm has maintained a stable market share. In 2019, the firm had a 33.8% brokerage market share in Shandong province and a 2.7% share in China in terms of stock and fund trading volumes.

Similar to other Chinese securities firms, Zhongtai Securities has maintained low leverage compared to its global peers. Its leverage -- as measured by total assets to equity attributable to holders of ordinary shares -- was 5.3x as of the end of 2019. Zhongtai Securities also raised RMB3 billion in new capital when it listed on the Shanghai Stock Exchange in June 2020, which will bring its pro forma 31 December 2019 leverage ratio down to 4.8x, based on Moody's calculations.

Zhongtai Securities' return on average assets increased to 1.6% in 2019 from 0.8% in 2018 and 1.5% in 2017, mainly driven by the rebound in the capital markets and lower impairment losses. However, its profitability is lower than that of leading Chinese securities companies, mainly due to the lower proportion of fee income as well as lower returns from its proprietary investments. Looking ahead, Moody's expects declining commission rates amid intense competitions will further weigh on profitability. In response, Zhongtai Securities has been actively expanding into other higher risk businesses which challenges its risk management.

One example is its proprietary securities investments which have been growing in recent years. The firm's investments into illiquid credit bonds increase its credit risk and also negatively affect its funding and liquidity profile. As of 31 December 2019, the firm's financial investments amounted to RMB61.7 billion, or 55% of total assets excluding payables to brokerage clients.

In addition, its stock-pledged lending business exposes the firm to elevated liquidity and credit risks due to changes in regulatory requirements and the broad economic slowdown. The risk is partially mitigated by the reduction in the firm's exposure to stock-pledged lending. As of year-end 2019, the firm's stock pledged-lending on its balance sheet amounted to RMB10.3 billion, or 9% of its total assets excluding payables to brokerage clients, down from 12% as of year-end 2018 and 19% as of year-end 2017.

The firm's good access to funding partially mitigates the liquidity risk from its proprietary investment and stock-pledged lending. It has diversified funding sources, such as short-term repo and long-term bond issuance. The firm also has sizeable credit lines with commercial banks which could mitigate refinancing risk in normal market conditions.

Moody's assumes a high level of support from the Chinese government, reflecting Zhongtai Securities' ownership structure and importance to Shandong province. The Shandong SASAC controls Zhongtai Securities indirectly through Laiwu Iron & Steel Group Co., Ltd and other provincial SOEs. Zhongtai Securities is the only securities firm that is owned by the Shandong provincial government. The Shandong government also has a track record of providing support to Zhongtai Securities and other financial institutions in the province. Moody's believes that a failure of Zhongtai Securities would cause material reputation risk to the Shandong government and increase the funding costs of other provincial SOEs.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Zhongtai Securities' ratings could be upgraded if the firm (1) further enhances its franchise in brokerage, investment banking and asset management businesses; (2) lowers its risk appetite by reducing its exposure to risky proprietary securities investments and stock-pledged lending; (3) improves its funding and liquidity ratios; (4) maintains its profitability, despite intensified competition and market fluctuations; and (5) strengthens its risk control capability and improves its asset quality.

Zhongtai Securities' ratings could also be upgraded if there is an improvement in the operating environment for securities companies in China, which would reflect a significant improvement in the maturity of China's capital markets -- this improvement could include a more comprehensive regulatory framework, lower volatility and a higher proportion of institutional investors; and industry consolidation that enhances the pricing power of leading companies.

Zhongtai Securities' ratings could be downgraded if Moody's assesses that the government's willingness and ability to support the firm have weakened.

Zhongtai Securities' ratings could also be downgraded if the firm (1) encounters a material deterioration in profitability; (2) experiences a material weakening in its financial position, in particular because of a substantial increase in leverage or a deterioration in its liquidity and funding profile; or (3) becomes subject to regulatory sanctions that impair its operation and management stability.

The principal methodology used in these ratings was Securities Industry Market Makers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187332. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Jinan, Zhongtai Securities Co., Ltd. reported consolidated total assets of RMB147 billion ($20.9 billion) as of 31 December 2019.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

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