Far East Horizon Additional Discussion Report: QA-Based Research Agenda

• Report date: 2026-05-18
• Issuer / Theme: Far East Horizon Limited
• Report type: additional_discussion
• Discussion scope: Summary of credit issues requiring further research, identified through a QA session with the portfolio manager
• Reference context: issuer_summary dated 2026-05-12 and the PM/analyst QA session held on 2026-05-18

1. Purpose and Treatment

This report is a supplementary note that organises additional research issues for Far East Horizon Limited (“FEH”) that emerged from a QA session after reviewing the existing issuer_summary. Its purpose is not to reach a final investment view on FEH, but to define a more specific research agenda.

The discussion focused on FEH’s core financial leasing business, spillover risk from Horizon Construction Development Limited (“HCD”), inclusive finance, special mention assets, funding, the Sinochem Group background, dividend policy, individual bond terms, and rating gaps. This report distinguishes between matters confirmed in the existing report or analyst responses and hypotheses that remain unverified.

This report is not a revised version of the existing issuer_summary. The existing report body, issuer_notes.md, knowledge_snapshot.md, and source_registry.md have not been updated. The additional research issues set out here are not conclusions on FEH’s credit quality; they are a structured list of hypotheses and data points to be checked next.

2. Discussion Takeaway

The most important read-through from this QA session is that it is insufficient to view FEH simply as “a major Chinese financial leasing company, with the HCD issue now largely settled after S&P removed the rating from CreditWatch.” For HCD, no explicit guarantee by FEH or large financing exposure from FEH was immediately confirmed in public materials. At the same time, if HCD is a consolidated subsidiary of FEH, has a short-term liquidity gap, and may qualify as a Principal Subsidiary under the MTN terms, HCD risk needs to be analysed in two separate dimensions: discretionary support risk and bond event risk.

On the FEH standalone side, the low NPA ratio and strong provision coverage are credit supports. However, when special mention assets, the rapid expansion of inclusive finance, and the local government finance and policy risks shared across urban public utilities, healthcare, culture and tourism, and construction are considered together, headline NPA is unlikely to capture early deterioration in asset quality. Inclusive finance is particularly important: period-end NPA appears low, but the policy of immediately writing off loans overdue by more than 30 days means losses flow into the income statement relatively quickly. The relevant indicators are therefore not the NPA ratio, but the NPL formation rate, credit cost ratio, post-write-off recovery rate, and vintage-by-vintage losses.

On liquidity, the RMB201bn of unused bank and non-bank financial institution facilities confirmed by JCR is a substantial support. However, it remains unverified whether this headline amount can be treated as reliable liquidity under stress. Until the committed nature of the unused facilities, bank concentration, drawdown conditions, liquidity available at the parent-company level, and treatment of cash trapped in onshore subsidiaries are confirmed, FEH’s liquidity assessment should retain caveats.

The Sinochem Group shareholder background is also different from an explicit guarantee or government guarantee. JCR is understood to focus primarily on FEH’s standalone credit strength, and there is limited basis for treating the Sinochem background as a strong support uplift. At the same time, it may provide some reputational benefit for access to banks and the domestic capital market. The effectiveness of support expectations therefore needs to be tested through domestic rating reports, onshore bond offering documents, bank facility breakdowns, and Sinochem-side disclosures.

Overall, further research on FEH should proceed in three layers. First, confirm the legal and contractual channels through which risk could migrate from HCD to FEH. Second, test whether FEH’s standalone asset quality, liquidity, and capital retention capacity can withstand a deterioration scenario. Third, organise the gap between domestic AAA, JCR A-, and S&P BBB- in a way that avoids investor misperception, rather than treating it as a relative-value argument for foreign-currency bond investors.

3. Integrated Discussion Note

Combining the QA session with the subsequent additional cross-check answers clarifies the FEH case considerably. The QA session was useful in setting the issues, decomposing unverified points, and prioritising the contracts and data to be checked next. The additional cross-check answers, by contrast, used company-disclosed figures to explain HCD’s 2025 deterioration, dividend payout ratio, funding mix, and Sinochem background, giving the responses a more practical analyst feel. This note therefore integrates the research design from the former with the specificity of the latter.

First, HCD risk is not a simple case of “FEH is immediately legally liable for HCD’s debt.” Public materials do not confirm that FEH provides a comprehensive guarantee for HCD’s debt, or that FEH has made large loans or provided collateral to HCD. Related-party balances are also small: HCD’s other payables to FEH were RMB23 thousand, and trade and bills payables to International Far Eastern Leasing were RMB580 thousand. At the same time, HCD’s own borrowings are substantial. At end-2025, interest-bearing bank and other borrowings were approximately RMB20.3bn, of which approximately RMB7.29bn was due within one year. The core hypothesis at this stage is therefore that legal contagion appears limited, but HCD’s refinancing difficulty or deterioration in market confidence could spill over into FEH through discretionary support, bank coordination, and funding costs.

Second, HCD’s 2025 deterioration is difficult to dismiss as a mere short-term demand slowdown. HCD’s 2025 revenue was RMB9.359bn and net profit was RMB147mn, with net profit down 83.6% year on year. Domestic regional profit fell sharply from RMB817mn to RMB12mn, making the decline in domestic earnings power clear. By business line, operating lease revenue increased year on year, while engineering and technical services and asset management and other services declined substantially, and the overall gross margin fell from 32.6% to 26.4%. This suggests that demand, pricing, utilisation, business mix, and collection periods may have deteriorated at the same time. Overseas revenue rose 260.3% year on year to RMB1.402bn, and overseas expansion, including the acquisition of Tong Heng Machinery, could form part of the recovery story. However, it is not yet large enough to fully replace the deterioration in the domestic business.

Third, for HCD, business recovery capacity and contractual spillover channels need to be checked separately. On the business side, early-warning indicators include the short-term liquidity gap, operating cash flow, domestic gross margin, receivables collection, and the profitability and cash flow of overseas operations. On the contractual side, the most important questions are whether HCD qualifies as a Principal Subsidiary under FEH’s MTN terms and whether a default under HCD’s borrowings connects to a cross-default under FEH’s foreign-currency bonds. HCD is likely to exceed 10% under the revenue test, but the final conclusion requires confirmation of the FEH MTN definition, whether any equity-interest adjustment applies, and the relevant company certificate.

Fourth, inclusive finance should not be viewed in binary terms as either “high-quality growth” or “hidden credit risk.” At end-2025, inclusive finance interest-earning assets were RMB28.18bn and the average yield was 15.71%, making the segment clearly positive for revenue. At the same time, an NPL formation rate of 6.05%, a credit cost ratio of 5.19%, and write-off losses of RMB1.044bn show that this is a high-yield, high-credit-cost model. If loans overdue by more than 30 days are immediately classified as NPA and written off 100% at period-end, risk is unlikely to remain in the NPA balance. The more accurate interpretation is not that risk is hidden, but that the NPA ratio is not a useful risk indicator. The actual risk profile cannot be understood without looking at credit costs in the income statement, post-write-off recovery rates, and vintage-by-vintage losses.

Fifth, asset quality requires a careful re-check of special mention assets. In the QA session, special mention assets were identified at approximately RMB15bn, around five times the NPA balance, with urban public utilities, culture and tourism, healthcare, and construction highlighted as key areas to check. The additional cross-check answer, however, stated that a clear industry-by-industry table for special mention assets had not yet been confirmed, and that industry-level NPA, 30+ day delinquencies, write-offs, and recoveries should be used as alternative indicators. This difference matters. Before asserting industry-level special mention concentration in the final report, the relevant table in FEH’s annual report needs to be rechecked. At a minimum, urban public utilities are a major concentration in impaired assets, while healthcare and culture and tourism also carry policy and collection risks and should remain under monitoring.

Sixth, liquidity is strong, but nominal unused facilities should not be treated as cash equivalents. The RMB201bn of unused financial institution facilities confirmed by JCR is a substantial support, but the committed nature, cancellability, collateral conditions, rating or MAC clauses, and bank concentration are unverified. At end-2025, interest-bearing debt was RMB266.9bn, of which direct financing was RMB75.5bn and indirect financing was RMB191.4bn. Net interest-earning assets recoverable within one year were also substantial at RMB154.49bn, but this should not be assumed to convert fully into cash on schedule. In practice, liquidity should be assessed through a waterfall: cash, one-year asset collections, unused facilities, and access to direct financing markets. If realised collections fall to 70-80%, reliance on bank facilities and refinancing should be expected to increase.

Seventh, the Sinochem background is a “present but not to be over-relied-on” credit factor. Sinochem-related shareholders hold approximately 19% of FEH’s voting rights, and the state-owned-enterprise background and board representation may provide some comfort to banks and onshore bond investors. However, JCR evaluates FEH’s rating primarily on FEH’s standalone credit strength and does not place an explicit Sinochem or government guarantee at the core of the rating. Until domestic rating reports and onshore bond offering documents clarify how “external support,” “guarantee,” “keepwell,” “deed of support,” or “funding support commitment” are treated, the Sinochem background should be viewed only as a supplement to market access.

Eighth, a 61% payout ratio may be sustainable in normal conditions, but it is high from a creditor perspective. Profit attributable to ordinary shareholders in 2025 was RMB3.889bn, and dividends represented approximately 61% of profit. Equity attributable to ordinary shareholders increased, but part of that increase was supported by conversion into equity of the convertible bonds issued in 2020, so it is difficult to say that capital has been built up strongly from retained earnings alone. If HCD support, higher credit costs in inclusive finance, and weaker collections in urban public utilities and healthcare occur simultaneously, a high payout ratio would weaken the view on capital retention capacity. Conversely, if management’s willingness to reduce the payout ratio to the 30-40% range under stress can be confirmed, that would be positive for capital discipline.

Ninth, the rating gap can easily create risk misperception. S&P’s BBB- takes a cautious view of foreign-currency FEH parent-level bonds, non-bank liquidity, HCD spillover, offshore market access, and structural subordination. JCR’s A- gives more weight to FEH’s business franchise, earnings, capital, and bank facilities. Domestic AAA mainly indicates the relative strength of core onshore subsidiaries or onshore bonds in the domestic market; it does not mean that FEH Ltd’s foreign-currency bonds are equivalent to AAA credit risk. Domestic AAA can therefore be used as a supporting factor for funding access, but it does not eliminate cross-default, structural subordination, or HCD spillover risk in the foreign-currency bonds.

Overall, the priority areas for further FEH research are HCD’s contractual spillover, HCD’s standalone recovery capacity, the loss curve in inclusive finance, rechecking special mention assets, the effectiveness of unused facilities, dividend adjustment discipline, and confirming the rated entity behind each rating category. Integrating the two sets of answers, the most prudent treatment is to view FEH as a BBB- category non-bank where the key issues have been identified, but final judgement still requires further confirmation of contracts, cash flows, and industry-level asset quality.

4. Additional Research Agenda

4.1 Spillover Channels from HCD to FEH

HCD is not merely a non-core subsidiary for FEH; it was the actual risk that led to S&P’s CreditWatch Negative placement. The analyst response found no public disclosure confirming that, at end-2025, FEH had provided a large explicit guarantee for HCD’s external debt, made large loans to HCD, or provided collateral. At the same time, HCD is a consolidated subsidiary of FEH, and HCD’s short-term debt net cash shortfall is estimated at approximately RMB6bn. S&P believes FEH has cash reserves that could absorb HCD’s short-term liquidity shortfall, but this should be read not as “support risk has disappeared,” but rather as “the risk appears absorbable at this stage.”

The hypothesis to test here is that HCD’s legal debt remains in principle at HCD, while the risk remains that FEH may provide discretionary support to protect its reputation or preserve funding access. The next documents to check are HCD’s major bank loan agreements, leaseback agreements, collateral and guarantee conditions, the presence or absence of keepwells or letters of comfort, and cross-default provisions in FEH’s MTN documentation.

The most important point is whether HCD qualifies as a Principal Subsidiary under FEH’s MTN terms. The analyst response estimated, using 2025 figures, that HCD is likely to exceed 10% under the revenue test. If HCD qualifies as a Principal Subsidiary and a borrowing default or acceleration event of US$60mn or more occurs, HCD risk could become bond-level event risk for FEH bond investors, rather than merely a market sentiment issue.

4.2 HCD’s Standalone Recovery Capacity

The support risk from HCD to FEH depends not only on HCD’s liquidity, but also on whether HCD can recover on its own. The QA discussion concluded that HCD’s 2025 earnings deterioration is difficult to explain solely as a temporary construction-demand cycle. It appears to reflect a combination of weak domestic construction and property-related demand, falling rental prices, lower utilisation, structural adjustment in materials-related assets, and a transition toward overseas expansion.

According to the analyst response, HCD’s 2025 revenue was RMB9.36bn, down 19.2% year on year, and net profit was RMB147mn, down 83.6% year on year. Domestic revenue declined sharply, while overseas revenue grew rapidly. However, overseas operations still account for only part of revenue and gross profit and are not yet large enough to fully replace the weakness in the domestic business. Overseas expansion is therefore a possible recovery story, but should still be viewed as a growth-investment phase that carries local operations, M&A, maintenance cost, and country-level collection risks.

Early-warning indicators for this theme include HCD’s short-term liquidity gap, operating cash flow, domestic rental prices, utilisation and gross margin, receivables collection, and the profit and cash flow of overseas operations. In particular, a combination of a short-term net debt gap widening from RMB6bn, operating cash flow failing to absorb capex and repayments, further lengthening of receivable turnover days, and overseas revenue growth not translating into profit and cash would increase FEH support risk.

4.3 Inclusive Finance Growth and Credit Costs

FEH’s inclusive finance business is the fastest-growing part of the core financial leasing business and, at the same time, the area most likely to amplify earnings volatility. At end-2025, inclusive finance interest-earning assets were RMB28.18bn, up significantly from RMB17.25bn at the previous year-end. The average yield was high at 15.71%, contributing to earnings diversification. At the same time, the 2025 NPL formation rate was high at 6.05%, and the credit cost ratio was 5.19%.

The important point is not to interpret low period-end NPA as low risk. In inclusive finance, loans overdue by more than 30 days are classified as NPA and written off 100% at period-end under the stated management policy. As a result, the NPA balance is unlikely to represent the stock of risk. The indicators to monitor are the NPL formation rate, credit cost ratio, write-off amount, post-write-off recovery rate, and vintage-by-vintage delinquency and loss.

The analyst response’s simple sensitivity analysis indicated that if the credit cost ratio in inclusive finance rises from the current 5.19% to the 8% range, the impact on FEH’s overall earnings would start to become visible, while a sustained level above 10-12% would become a research issue that could affect the credit view. Red flags are a credit cost ratio above 8%, an NPL formation rate above 10%, an increase in the special mention ratio, weak post-write-off recovery rates, and the share of inclusive finance in interest-earning assets approaching 15%.

4.4 Special Mention Assets and Future Migration to NPA

FEH’s headline NPA ratio is low, but the size of special mention assets matters for assessing future losses. At end-2025, the special mention balance was RMB14.96bn, or 5.50% of interest-earning assets, equivalent to approximately 5.4 times the NPA balance of RMB2.79bn. Although the special mention ratio has been declining, it should be monitored as a leading indicator of future NPA migration.

By industry, urban public utilities, culture and tourism, healthcare, and construction are important. Urban public utilities have a large special mention amount and also account for a large share of NPA. Healthcare is relatively smaller in absolute size, but the special mention ratio within the industry is high, possibly reflecting pressure from medical insurance reimbursement cycles and centralised procurement.

On provisioning, it is important not to equate Stage II assets mechanically with special mention assets. The analyst response noted that part of special mention remains in Stage I, and Stage II provisions alone do not fully explain the loss-absorption capacity for the entire special mention book. If the migration rate from SM to NPA returns to the 2024 level of above 17-18%, NPA coverage clearly falls below 200%, the Stage II provision ratio declines, or recovery rates weaken, the current narrative of low NPA and high coverage would need to be discounted.

4.5 Local Government Finance and Policy Risks Common to Key Industries

FEH’s financial leasing assets are diversified across multiple industries, but the QA discussion confirmed that this diversification is not complete risk diversification. Urban public utilities, construction, culture and tourism, and healthcare look like different industries on the surface, but they may all be exposed to common drivers such as local government finance, public investment, land finance, medical insurance payments, and policy pricing.

The analyst response stated that the four key industries account for approximately 62.8% of interest-earning assets, 81.4% of NPA, 66.7% of special mention assets, and 76.8% of 30+ day delinquencies. Urban public utilities are notable not only for their large share of interest-earning assets but also for the concentration of NPA and 30+ day delinquencies. For healthcare, the key issues to confirm are medical insurance collection cycles, DRG/DIP, centralised procurement, and declining profitability among hospitals and healthcare-related customers.

Company disclosures to check include industry-level special mention, NPA, 30+ day delinquencies, restructurings and repayment deferrals, industry-level provisions, credit costs, and recovery rates. External indicators to monitor include local government fund revenue, land transfer revenue, local government bond refinancing, infrastructure investment, property investment, medical insurance fund income and expenditure, and medical insurance payment reform.

4.6 Liquidity, Unused Facilities, and Short-Term Debt

FEH’s liquidity appears strong based on normal-period disclosures. At end-2025, interest-bearing liabilities due within one year were RMB134.11bn, cash and cash equivalents were RMB21.38bn, and interest-earning asset recoveries due within one year were RMB154.49bn. JCR confirmed RMB201bn of unused bank and non-bank financial institution facilities as of end-June 2025.

However, unused facilities should not be assessed on headline amount alone. The committed nature of the facilities, bank concentration, onshore/offshore split, collateral requirements, suspension clauses triggered by rating downgrades or HCD events, and the distinction between liquidity available at the parent company and liquidity held inside subsidiaries are unverified.

The analyst response’s simple liquidity waterfall indicated that cash and 75% of one-year interest-earning asset recoveries would roughly cover short-term interest-bearing debt, while a recovery assumption reduced to 50% would create reliance on unused facilities. Red flags are an effective available amount of one-year asset recoveries below 70-75%, most unused facilities being found to be uncommitted, a RMB5-6bn cash outflow for HCD support, closure of direct financing markets, and an increase in secured borrowings or restricted deposits.

4.7 Effectiveness of the Sinochem Background

The Sinochem Group background is an easily misunderstood credit factor for FEH. Sinochem-related shareholders hold approximately 19% of FEH’s voting rights, giving FEH a state-owned-enterprise background. However, what has been confirmed so far is a shareholder and governance relationship and a supplementary market-recognition effect, not an explicit Sinochem or government guarantee for FEH’s debt.

Parent support, government support, explicit guarantees, and market recognition need to be treated separately. JCR mentions the Sinochem background, but is understood to focus its rating primarily on FEH’s standalone credit strength. FEH bonds should therefore not be treated as direct obligations of Sinochem or the Chinese government.

At the same time, the possibility remains that the Sinochem background provides some reputational benefit for bank and domestic capital market access. Evidence to be checked includes external-support wording in domestic rating reports, credit-enhancement language in onshore bond offering documents, the stress-period evolution of bank facilities and funding costs, shareholder and board composition, related-party transactions, and Sinochem-side disclosures. If support language remains weak, FEH should be analysed conservatively as a standalone non-bank.

4.8 Dividend Payout Ratio and Capital Accumulation Capacity

The 2025 dividend payout ratio of approximately 61% indicates the company’s commitment to shareholder returns as a listed company, but it is a monitoring point from a creditor perspective. The analyst response noted that, of the RMB2.95bn increase in equity attributable to ordinary shareholders in 2025, approximately RMB2.08bn was a non-recurring increase from conversion of convertible bonds into shares. Looking only at retained earnings after dividends, capital accumulation does not appear strong.

A payout ratio above 60% does not in itself indicate credit deterioration. However, if combined with flat or declining earnings, higher credit costs in inclusive finance, HCD support, increased migration from special mention to NPA, shrinking unused facilities, or higher funding costs, it could be assessed as a weak capital-retention stance.

The next issue to confirm is whether FEH has a clear willingness to adjust dividends under stress. The dividend policy states that financial performance, debt/equity, ROE, financial covenants, and economic and business cycles are taken into account, suggesting adjustment capacity. However, the 2024-2025 track record appears to show an increase in the payout ratio despite weaker earnings. The next earnings briefing, IR Q&A, AGM materials, borrowing and MTN covenants, and rating agency comments should be reviewed to identify the conditions under which capital retention would be prioritised.

4.9 Individual Bond Terms and Structural Subordination

Investors in FEH’s foreign-currency bonds need to distinguish issuer-level credit strength from bond-level risk. Under the 2025 updated MTN programme, the issuer is FEH itself, and ordinary Notes are direct, unsecured, and unsubordinated obligations of FEH. However, there are no subsidiary guarantees, and structural subordination may arise with respect to assets held in onshore financial leasing subsidiaries, HCD, and other subsidiaries.

The cross-default clause is relevant if borrowings, guarantee obligations, or similar obligations of FEH or a Principal Subsidiary run into problems above a specified threshold. The analyst response stated that HCD is likely to qualify as a Principal Subsidiary under the revenue test. This is important in confirming whether an HCD credit event could contractually spill over to FEH bond investors.

The next practical document to prepare is a covenant checklist by outstanding bond. At a minimum, ISIN, issuer, currency, amount outstanding, maturity, guarantee and collateral, ranking, cross-default, Principal Subsidiary definition, negative pledge, change of control, financial covenants, and the relationship with HCD borrowings need to be organised across all outstanding bonds.

4.10 Reading the Rating Gap

S&P’s BBB-/Stable, JCR’s A-/Stable, and China domestic AAA are not measures of the same risk on the same scale. S&P takes a view closer to FEH Ltd parent-level and foreign-currency senior unsecured bonds, and is cautious on non-bank market funding dependence, HCD spillover, structural subordination, and China macro stress. JCR gives stronger weight to FEH’s industry position, funding base, asset quality, and earnings, but does not treat a Sinochem guarantee as a core rating driver.

Domestic AAA should be understood primarily as indicating the credit strength and funding access of core financial leasing subsidiaries in China or onshore bonds in the domestic market. It does not mean that FEH Ltd’s foreign-currency bonds are AAA-equivalent. Domestic AAA can therefore be used as supporting evidence for onshore market access, but it does not eliminate structural subordination, Principal Subsidiary cross-default, or HCD event risk in the foreign-currency bonds.

Items to confirm include which legal entity or bond the domestic AAA rating applies to, how domestic rating agencies treat external support and the Sinochem background, whether S&P keeps the support score at zero, and how JCR treats HCD support risk in its next review. If the rating gap widens, there is a risk of misperception: foreign-currency bond-specific risks may be crystallising while domestic AAA is maintained on the basis of the onshore core subsidiary’s funding capacity.

5. QA Session Record

This section organises the main questions and answers from the QA session held on 2026-05-18 in a form that can be used for future research. It is not a verbatim transcript. It summarises the PM’s question intent, the points confirmed in the analyst response, and the next items refined through follow-up questions.

5.1 HCD Support Risk and Spillover Channels to FEH

PM question: For HCD, how much can we confirm regarding guarantees, loans, collateral provision, related-party transactions, receivables, and future capital injection obligations that FEH may have? In particular, please organise the channels through which HCD’s external debt and short-term liquidity shortfall could spill over to FEH itself.

Question type: Hypothesis-testing question.

Analyst answer: Based on public materials, no fact was confirmed that FEH explicitly guaranteed HCD’s external debt at end-2025 or provided large loans or collateral to HCD. The 2025 amount under the financial leasing agreement between HCD and FEH was also zero, and related-party balances were small. At the same time, HCD is a consolidated subsidiary of FEH. HCD had interest-bearing borrowings of approximately RMB20.33bn, of which approximately RMB7.29bn was due within one year, and cash equivalents of approximately RMB1.52bn. This is consistent with the approximately RMB6bn short-term net liquidity shortfall indicated by S&P, so even if legal claims are limited, discretionary support by FEH and the need to preserve market confidence remain possible channels.

Follow-up and refined agenda: The follow-up discussion prioritised the documents that must be checked next: FEH’s foreign-currency bond and MTN terms, HCD-side borrowing contracts, continuing disclosures on related-party transactions, and the next comments from S&P and JCR. The most likely factor to move the credit view is whether FEH’s MTN cross-default reaches HCD. If HCD qualifies as a Principal Subsidiary and an HCD debt default connects to an FEH bond event, HCD becomes bond-level event risk rather than merely non-core subsidiary risk.

5.2 Is HCD’s Earnings Deterioration Cyclical or Structural?

PM question: Is HCD’s 2025 earnings deterioration a temporary cyclical decline in domestic construction machinery demand, or is it a structural deterioration in the business model or asset values? Please decompose it by domestic business, overseas business, rental assets, utilisation, pricing, impairment, and disposal losses.

Question type: Hypothesis-testing question.

Analyst answer: HCD’s 2025 deterioration is difficult to view as only a temporary cyclical decline. Domestic revenue, domestic gross profit, rental pricing, and utilisation were all weak at the same time, with lower utilisation and falling prices confirmed particularly in formwork and shoring. Overseas operations are growing, but are not yet large enough to replace the overall business. As of 2025, the main concern appears to be lower earnings power and longer collection periods in the domestic business, rather than a large-scale PPE impairment or collapse in asset values.

Follow-up and refined agenda: The follow-up narrowed the early-warning indicators that could move the FEH credit view from HCD to five items. The highest-priority indicators are HCD’s short-term liquidity gap, operating cash flow and cash generation after capex, domestic rental pricing, utilisation and gross margin, collection delays in receivables and contract assets, and whether overseas operations are growing with profit and cash flow. If HCD can no longer manage refinancing, collections, and investment restraint on its own, FEH’s discretionary support risk will rise.

5.3 Rapid Growth in Inclusive Finance and Credit Costs

PM question: FEH’s inclusive finance business is expanding rapidly. Is this growth that supports risk diversification and higher earnings, or is it a risk that defers or obscures credit costs behind a low NPA ratio? Please check borrower characteristics, product nature, yields, write-off policy, delinquency and default experience, and the availability of vintage data.

Question type: Hypothesis-testing question.

Analyst answer: Inclusive finance contributes to earnings diversification and higher yields. At end-2025, inclusive finance interest-earning assets were RMB28.18bn and the average yield was 15.71%, far above the overall yield. At the same time, the NPL formation rate was 6.05% and the credit cost ratio was high at 5.19%. Because loans overdue by more than 30 days are classified as NPA and written off 100% at period-end, the period-end NPA balance is unlikely to represent the risk. The indicators to monitor are not the NPA ratio, but the NPL formation rate, credit cost ratio, write-off amount, post-write-off recovery, and vintage-by-vintage losses.

Follow-up and refined agenda: The follow-up used a simple sensitivity framework and concluded that if the credit cost ratio rises to the 8% range, the impact on FEH’s overall earnings would start to become visible, while a sustained level above 10-12% would become a research issue that could affect the credit view. Red flags are a credit cost ratio above 8%, an NPL formation rate above 10%, an increase in the special mention ratio, weak post-write-off recovery, and the share of inclusive finance in interest-earning assets approaching 15%.

5.4 Breakdown and Provisioning of Special Mention Assets

PM question: In which segments, industries, regions, and customer groups is the 5.50% special mention ratio at end-2025 concentrated? To what extent does the gap with the 1.03% NPA ratio indicate future NPA migration risk? Please check this together with historical trends, migration rates, and provisioning levels.

Question type: Confirmation question / hypothesis-testing question.

Analyst answer: The special mention balance at end-2025 was RMB14.96bn, approximately 5.4 times the NPA balance of RMB2.79bn. In amount terms, urban public utilities, culture and tourism, healthcare, and construction are large. Urban public utilities also account for a large share of NPA, indicating that part of the risk has already materialised. Healthcare has a high industry-level special mention ratio of 14.03%, possibly reflecting pressure from medical insurance collection cycles and centralised procurement. Inclusive finance is unlikely to remain in period-end NPA, so it needs to be assessed through NPL formation and credit costs.

Follow-up and refined agenda: The follow-up organised the relationship among Stage II assets, provisions for pass plus special mention assets, and NPA coverage. Special mention does not fully overlap with Stage II, and part of it remains in Stage I. If the migration rate from SM to NPA returns to the 2024 level of above 17-18%, the Stage II provision ratio declines, NPA coverage clearly falls below 200%, or recovery rates weaken, the current view of low NPA and high coverage will need to be discounted.

5.5 Unused Bank Facilities and Liquidity Waterfall

PM question: How much can we confirm regarding FEH’s unused bank and non-bank financial institution facilities, the direct/indirect financing mix, short-term maturities, committed nature, and bank concentration? In particular, is the RMB201bn of unused facilities confirmed by JCR truly available liquidity under stress?

Question type: Confirmation question / hypothesis-testing question.

Analyst answer: FEH’s liquidity appears strong based on normal-period disclosures. At end-2025, interest-bearing liabilities were RMB266.92bn, of which RMB134.11bn was due within one year. Direct financing was RMB75.49bn and indirect financing was RMB191.43bn, indicating significant reliance on banks and indirect financing. JCR confirmed RMB201bn of unused bank and non-bank financial institution facilities as of end-June 2025. However, the committed nature of these facilities, bank concentration, drawdown conditions, and suspension clauses triggered by rating downgrades or HCD events remain unverified.

Follow-up and refined agenda: The follow-up created a simple waterfall against RMB134.11bn of interest-bearing liabilities due within one year. Cash and equivalents were RMB21.38bn, only 16% of short-term debt, but if approximately 75% of one-year interest-earning asset recoveries can be assumed, short-term debt is broadly covered. If recoveries fall to 50%, dependence on unused facilities emerges. Conditions that would weaken the liquidity assessment by one notch include effective available one-year asset recoveries falling below 70-75%, most unused facilities being found to be uncommitted, cash outflow of RMB5-6bn for HCD support, and closure of direct financing markets.

5.6 Effectiveness of the Sinochem Background

PM question: To what extent does Sinochem Group’s 19.3% voting stake provide effective support expectations for FEH’s credit quality? Please distinguish explicit guarantees, parent support, government support, and market-recognition-based funding support.

Question type: Confirmation question / discovery question.

Analyst answer: The Sinochem/SASAC background is not an explicit guarantee for FEH’s debt. What can be confirmed is an approximately 19% stake held by Sinochem-related shareholders, board representation, and a supplementary market-recognition effect from the state-owned-enterprise background. JCR mentions the Sinochem background but is understood to view the rating primarily on FEH’s standalone credit strength. FEH bonds should therefore not be treated as direct obligations of Sinochem or the Chinese government.

Follow-up and refined agenda: The follow-up prioritised evidence to check the effectiveness of the Sinochem background: bond issuance materials and contractual credit enhancement, domestic rating reports, stress-period trends in bank facilities and funding costs, shareholder and board composition, related-party transactions, and Sinochem-side disclosures. The most important point is whether there is any guarantee, keepwell, liquidity support, or capital maintenance clause from Sinochem or SASAC. The current hypothesis remains that the Sinochem background is not legal support, but may help through market recognition and bank access.

5.7 Dividend Payout Ratio and Capital Accumulation Capacity

PM question: Is the 2025 dividend payout ratio of approximately 61% consistent with FEH’s capital accumulation capacity, leverage, capacity to support HCD, and expansion in inclusive finance? Please check the dividend policy, historical trend, conversion of convertible bonds into equity, and the quality of the equity increase.

Question type: Hypothesis-testing question.

Analyst answer: The 2025 payout ratio of 61% is consistent with the company’s stable dividend policy, but is somewhat aggressive from a creditor perspective. Equity attributable to ordinary shareholders increased from RMB48.99bn to RMB51.94bn in 2025, but approximately RMB2.08bn of that was a non-recurring increase from the conversion of convertible bonds into equity. Looking only at retained earnings after dividends, capital accumulation is not substantial.

Follow-up and refined agenda: The follow-up organised how to confirm whether FEH has the willingness and ability to adjust dividends under stress. The dividend policy states that financial performance, debt/equity, ROE, financial covenants, and economic and business cycles are considered, so there is adjustment capacity. At the same time, 2024-2025 behaviour appears to show a rising payout ratio even when earnings were weak. Red flags are a payout ratio remaining above 60% while earnings decline, inclusive finance credit costs rise, HCD support occurs, NPA coverage declines, and unused facilities shrink.

5.8 Macro and Policy Factors Common to Key Industries

PM question: To what extent are FEH’s main customer industries — urban public utilities, healthcare, culture and tourism, and construction — linked to China macro conditions, local government finance, property and infrastructure investment, and healthcare policy? Please organise industry-level exposure, NPA, special mention, profitability, and policy risk.

Question type: Discovery question.

Analyst answer: FEH’s industry diversification appears broad on the surface, but the four key industries account for a large share of interest-earning assets, NPA, special mention, and 30+ day delinquencies. Urban public utilities are sensitive to local government finance, subsidies and construction payments, infrastructure investment, and tariff regulation. Construction depends on property and infrastructure investment and long payment chains. Culture and tourism depends on consumer appetite, regional tourism recovery, and local support. Healthcare is mainly exposed to medical insurance collections, centralised procurement, policy pricing, and working capital at hospitals and healthcare-related companies.

Follow-up and refined agenda: The follow-up concluded that company disclosures and external macro/policy indicators should be monitored separately. On the company side, industry-level special mention, NPA, 30+ day delinquencies, restructurings, industry-level provisions, and recovery rates should be checked. Externally, local government fund revenue, land transfer revenue, local government bond refinancing, infrastructure investment, property investment, medical insurance fund income and expenditure, DRG/DIP, centralised procurement, and real-time medical insurance settlement reform should be monitored. For urban public utilities, land finance and payment delays can be leading indicators; for healthcare, medical insurance collections and policy pricing can be leading indicators.

5.9 Individual Bond and MTN Terms

PM question: We need to check issuer, guarantee, collateral, subordination, cross-default, negative pledge, change of control, and financial covenants for FEH’s individual foreign-currency bonds and MTN programme. What is known and what remains unverified? Please focus on how defaults by HCD or key subsidiaries could spill over to FEH bond investors.

Question type: Confirmation question / discovery question.

Analyst answer: Under FEH’s 2025 updated MTN programme, the issuer is FEH itself, and ordinary Notes are direct, unsecured, and unsubordinated obligations of FEH. There are no subsidiary guarantees, and structural subordination may arise with respect to onshore financial leasing subsidiaries, HCD, and other subsidiary assets. Cross-default applies to borrowings, guarantee obligations, and similar obligations of FEH or a Principal Subsidiary, and is relevant where the related amount is US$60mn or more. The most important confirmation point is whether HCD qualifies as a Principal Subsidiary.

Follow-up and refined agenda: The follow-up estimated whether HCD qualifies as a Principal Subsidiary under the revenue, pre-tax profit, and total asset tests. HCD is likely to exceed 10% under the revenue test, falls below 10% under the pre-tax profit test, is around 10% under the total asset test on a gross basis, and below 10% on an equity-attributable basis. The next document to prepare is a terms table by outstanding bond covering ISIN, issuer, currency, amount outstanding, maturity, guarantee and collateral, ranking, cross-default, Principal Subsidiary definition, negative pledge, change of control, financial covenants, and the relationship with HCD borrowings.

5.10 Reading the Rating Gap

PM question: What does the gap between S&P’s BBB-/Stable, JCR’s A-/Stable, and China domestic AAA reflect? Please separate FEH standalone credit strength, domestic capital market access, HCD risk, the Sinochem background, and differences in bond currency and jurisdiction.

Question type: Confirmation question / discovery question.

Analyst answer: The rating gap is not a simple difference in credit quality. It reflects differences in rated object, jurisdiction, currency, rating scale, view of support, and treatment of HCD. S&P looks at FEH Ltd issuer and senior unsecured bonds on a global scale and assigns zero to support, GRE support, group support, and sovereign support. JCR evaluates FEH’s industry position, profitability, capital, liquidity, and bank facilities, but does not base the rating on a Sinochem guarantee. Domestic AAA mainly indicates the domestic market assessment of a core onshore subsidiary or onshore bond, and does not mean that FEH Ltd’s foreign-currency bonds are AAA-equivalent.

Follow-up and refined agenda: The follow-up organised triggers that could narrow or widen the rating gap. For S&P to upgrade FEH, capital would need to strengthen clearly, HCD support risk would need to disappear, and asset quality would need to remain stable, but S&P itself sees an upgrade as unlikely. Rather, the gap could widen if foreign-currency-bond-specific risks such as HCD support or deterioration in foreign-currency funding crystallise while domestic AAA is maintained on the basis of the onshore core subsidiary’s funding capacity. Foreign-currency bond investors should use domestic AAA as a supporting factor for funding access, but should not reinterpret foreign-currency FEH bonds as AAA-like risk.

6. Monitoring / Next Check

The appropriate order for future priorities is to first organise contractual and structural risks, then asset quality and liquidity, and finally the rating gap and market perception.

The most important near-term actions are to confirm whether HCD qualifies as a Principal Subsidiary, prepare a full terms table for all outstanding FEH foreign-currency bonds and MTNs, and confirm the breakdown of the RMB201bn unused facilities. For FEH’s foreign-currency bond investors, these three items influence event risk and liquidity assessment more than simple financial ratios.

7. Unverified / Pending Items

For HCD, the major borrowing contracts, FEH guarantees, keepwells, letters of comfort, formal Principal Subsidiary determination under FEH’s MTN, and the connection between an HCD borrowing default and cross-default remain unverified. Public annual reports alone cannot rule out private bank contracts or side letters.

For inclusive finance, vintage-by-vintage loss rates, post-write-off recovery rates, regional and industry-level delinquencies, product-level yields, and operating cost ratios are insufficient. At this stage, the hypothesis that the business is absorbing high credit costs with high yields can be used, but the mature-stage loss curve has not been confirmed.

For special mention assets, industry-level Stage I/Stage II breakdowns, industry-level provision ratios, migration rates from SM to NPA, recovery rates, and collateral values are insufficient. These supplementary data are necessary before treating the low NPA ratio as a sufficient condition for safety.

On liquidity, the committed nature, bank concentration, parent-level availability, and stress-period drawdown conditions of the RMB201bn unused facilities confirmed by JCR remain unverified. The headline amount of unused facilities should not be treated directly as liquidity.

For the Sinochem background, no explicit guarantee has been confirmed, but the extent to which banks and the domestic capital market incorporate the Sinochem background remains unverified. Domestic rating texts, onshore bond offering circulars, bank facility breakdowns, and Sinochem-side disclosures need to be checked.

For the rating gap, the legal entities and specific bonds to which domestic AAA applies need to be organised across the group. Domestic AAA should not be read as the credit quality of FEH Ltd foreign-currency bonds themselves.

8. Reference Context

This report is a supplementary report organising the PM/analyst QA session held on 2026-05-18. The PM’s questions were prepared by referring only to the existing Far East Horizon issuer_summary. The analyst responses additionally checked materials in the folder and public information.

The main reference context is as follows.

• Existing issuer summary: issuer_summary/issuers/far_east_horizon/current/far_east_horizon_issuer_summary_20260512.md
• Far East Horizon Limited, 2025 Annual Report / HKEX filing, published 2026-04-21: https://www1.hkexnews.hk/listedco/listconews/sehk/2026/0421/2026042100841.pdf
• Far East Horizon Limited, 2025 Annual Results Presentation Material, March 2026: https://en.fehorizon.com/u/cms/hxen/202603/Far%20East%20Horizon%202025%20Annual%20Results%20Presentation%20Material.pdf
• Horizon Construction Development Limited, 2025 Annual Report / HKEX filing, published 2026-03-10: https://www.hkexnews.hk/listedco/listconews/sehk/2026/0310/2026031000185.pdf
• Far East Horizon Limited, 2025 MTN Offering Circular, 2025-06-20: https://www.hkexnews.hk/listedco/listconews/sehk/2025/0623/2025062300279.pdf
• S&P Global Ratings, Far East Horizon BBB- Ratings Affirmed; Removed From CreditWatch Negative; Outlook Stable, 2026-05-07: https://www.spglobal.com/ratings/en/regulatory/article/-/view/type/HTML/id/3558219
• S&P Global Ratings, Far East Horizon Placed On CreditWatch Negative Following Subsidiary's Profit Warning, 2026-02-03: https://www.spglobal.com/ratings/en/regulatory/article/-/view/type/HTML/id/3511603
• JCR, JCR Affirmed A-/Stable FC Long-term Issuer Rating on Far East Horizon Limited, 2026-02-13: https://www.jcr.co.jp/download/77cbaf08c00e95c7c3e4c96696990c98636a6029ae5ceb9b1e/25i0126_f.pdf

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