Credit Rating Report of Driver China seven Trust

Transcription

1 Credit Rating Report of Driver China seven Trust Rating Details Rating Date July18, 2017 Name Issuance Amount (RMB 10K) Percentage of Total (%) Coupon Rate Credit Rating Class A Notes 351, Fixed AA+ sf Analysts: Tang Luyun Wang Erpeng Zhu Siyue Tel: tangluyun@chinaratings.com.cn Marketing Department Tel: Fax: cs@chinaratings.com.cn Address: 6F, No. 2 Building, Yingtai Center, No.28 Financial Street, Xicheng District, Beijing (100032) Website: Disclaimer: 1. This report is used for reference only, and is not conclusions or suggestions for any decisions; 2. All information used in this report is provided by the originator, the loan service provider, the trustee, and the lead underwriter, or public information disclosed by the above parties. CBR does not guarantee the authenticity and integrity of the information; 3. The rating symbol system used in this report only applies to CBR's credit rating business in China Mainland (excluding Hong Kong, Macao and Taiwan), and is not comparable with ratings that are not using the same rating symbol system. Class B Notes 15, Fixed AA sf Subordinated Notes 31, Fixed Unrated Amount Issued 397, Overcollateralization 2, Aggregate Cut-off Date 1 Discounted Receivables Balance 400, Transaction Summary Cut-off Date: August 31, 2017 Underlying Assets:68,331 retail auto loans originated by the Originator Credit Enhancement: Senior/subordinated structure, overcollateralization Originator/Servicer: Volkswagen Finance (China) Co., Ltd. Rating Opinions China Bond Rating Co., Ltd. (CBR) has rated the Driver China seven Trust transaction after considering factors such as the quality of the underlying assets, credit enhancement arrangements and transaction structure, and conducting quantitative analysis using the portfolio credit risk analysis model and the cash flow model. CBR believes that in terms of underlying assets, the asset pool of this ABS has a high degree of diversification, and the relatively high liquidation of collateral increases the recovery rate of default loans; in terms of credit enhancement, credit enhancement measures such as Senior/Subordinated structure and overcollateralization provide certain credit support for Senior Notes; in terms of Originator/Servicer, Volkswagen Finance 1 Discounted receivables balance refers to the cash flow of planned payable principal and interest discounted to designated date as per the discount rate in accordance with relevant contracts for each transaction of auto loan. The used discount rate is %/year, including interest rate of notes, fee of loan servicer, interest income tax and other expenses. Credit Rating Report

2 (China) Co., Ltd. (Volkswagen Finance) has relatively strong risk control ability, and thus there is relatively low risk caused by the Servicer's capability and willingness to fulfill its duties for this ABS; in terms of transaction structure risk, the trading parties have extensive experience and strong capability to fulfill their duties, with relatively low transaction structure risk in set-off, commingling, Servicer performance and relatively low legal risk. Based on the result of the rating models, CBR assigns the following ratings to this ABS transaction: Class A Notes are rated at AA+ sf, Class B Notes are rated at AA sf, and Subordinated Notes are unrated. Credit Rating Report

3 Strengths The credit quality of the underlying assets is good. The weighted-average age of the borrowers is years old. Borrowers at this age normally have stable income and are mostly in a rising period in terms of career development and income. Their family situation is relatively stable, willingness for repayment is strong, and repayment ability is stable. Meanwhile, the weight-average income-to-debt ratio of the borrowers of loans in the asset pool is 2.72, which implies relatively high-level guarantee to the loan repayment. The underlying assets are well diversified, so concentration risk is very low. There are a large number of loans in the underlying asset pool with a total number of 68,331 loans. The biggest outstanding principal balance of a single loan is 2,277, yuan, accounting for 0.05%. In this regard, the loan amount is highly diversified, which significantly reduces the risk of huge loss to the asset pool caused by a single defaulted loan. Borrowers are located in 31 provinces and cities with high degree of regional diversification. The collateral recovery rate of loan in the asset pool is relatively high, which reduces the loss level of loan. The weighted-average loan to value ratio at origination is 56.09%, which mitigates the expected level of loss to a certain extent; most of the collaterals involved in loans are new vehicles (outstanding principal balance accounts for 99.01%), and the liquidation of collateral plays a certain role in lifting the recovery rate; collaterals for underlying assets involves over 6 vehicle brands and over 70 vehicle types, correspondingly, the biggest outstanding principal balance among brands accounts for 70.72%, while the biggest outstanding principal balance among vehicle types accounts for 11.89%, with relatively high degree of diversification of collaterals, which can help improve the recovery rate of default assets. Senior/subordinated structure and overcollateralization provide certain credit support to Senior Notes. Upon issuance of securities, the credit support jointly provided by Class B Notes, Subordinated Notes and initial overcollateralization for Class A Notes is equal to 12.20%. The credit support provided by Subordinated Notes and initial overcollateralization for Class B Notes is equal to 8.45%. The credit support provided by overcollateralization for notes at various levels is equal to 0.54%. The transaction structure risk is relatively low. This ABS sets a trigger mechanism for foreclosure events, so as to provide guarantee for the repayment of Senior Notes. The Originator of this ABS states and guarantees that the borrowers involved in loans in the asset pool have no right to avail them of set-off for transferred loans. Meanwhile, this ABS also sets the cash collateral account used for mitigating the termination risk. In addition, the Originator has Credit Rating Report

4 relatively low bankruptcy or insolvency risk during notes duration. In light of the factors above, the risks in set-off and Servicer performance are relatively low. This ABS stipulates that the transfer rate of receivables shall be determined in accordance with the credit rating of the Servicer, and sets monthly reserve account used for paying the expected receivables in advance, which effectively reduces the commingling risk. For the special transaction structure adopted by this ABS, Volkswagen Finance, the Service, has rich experience in operation at home and abroad with relatively mature issuance mode and relatively low risk. Credit Rating Report

5 Concerns The weighted average interest rate of loans in the asset pool is relatively low, and the spreads support is limited. The weighted average interest rate of this ABS is 1.85%, which is relatively low compared with the weighted average interest rate of other domestic retail auto loan ABS successfully issued. Though this ABS gains a certain initial period as the compensation for spread, the spread support gained by this ABS is still very limited in general. This amount issued of this ABS is the amount of principal and interest planned to be paid for loans in the asset pool in various remaining amortization periods, adopting the value discounted to the cut-off date and subtracted by overcollateralization as per a discount rate in consideration of the estimated issuance rate of securities, fee of loan servicer, interest income tax and other factors. However, its initial overcollateralization is relatively small comparing to the determined un-discounted bonds proceeds for the limited support of interest spread. The incomplete sequential cash flow payment mechanism reduces the credit support available to Senior Notes. With the increase of loan loss in the asset pool, Level 1 Credit Enhancement Increase Conditions and Level 2 Credit Enhancement Credit Conditions are triggered, which increases the proportion of overcollateralization of Class A Notes and Class B Notes, reduces the Class A Targeted Note Balance and Class B Targeted Note Balance in each period respectively, improves the payment rate of Senior Notes, and thus enhances the degree of credit protection of Senior Notes. However, in normal principal repayment of notes, Subordinated Notes principal are paid along with Senior Notes principal in the meantime. Compared with the notes paid in order, the credit support obtained by various Senior Notes is reduced correspondingly. This ABS security has not yet registered for the change in and transfer of security right. At the time of the Originator transfers the trust property, it shall not be registered for the change and transfer of security right as per usual practice, but the Originator shall be continually registered as the nominal title holder in supervisory authorities with the right of jurisdiction. There is a risk that neither party may challenge any third party with good faith. The static sample pool is inconsistent with the underlying asset pool in contract term, weighted-average loan to value ratio and duration, and estimation of the default distribution parameters includes some level of inaccuracy. CBR, based on relevant statistical information of static sample pool provided by the Originator, has constructed 65 static sample pools. In regard to the distribution of contract term, the proportion of loans with more than 1-2 year term in the securitized asset pool is higher than that of static sample pool, resulting in less Credit Rating Report

6 diversification of credit performance in securitized asset pool than that in static pool; in regard to the loan to value ratio at origination, there are 23.64% of loans of which the loan to value ratio at origination is between 50% and 60% (inclusive) in the securitized asset pool, while there are only 13.79% of loans meeting the condition above in static pool. In addition, the difference in macroeconomic situation faced by samples in the static pool and to-be-securitized asset pool may cause certain errors in the expected default distribution. CBR has taken the risk factor above into account in its credit risk models and has adjusted parameters of the default distribution for the underlying assets accordingly. The growth rate of macro-economy has been slowing down, which may have adverse effects on future credit performance of the underlying assets. The recovery of aggregate demand has been weak since 2016, and industrial production continues to slow down. While the United States, Japan and the European countries are expected to be recovering moderately, which helps the growth of external demand, the domestic demand faces greater downward pressure, investment is slowing down and the economic growth has continued to decline. In the middle to long run, the growth rate of China's economy might be lower than that of the pervious economic cycle. Economic fluctuations can cause a drop in household income, causing credit performance of the asset pools significantly different from the historical data, and thereby lead to errors in the ratings. With regard to sales volumes of the auto industry, sluggish macro-economy in the future, sales pressure is relatively heavy, and decline of sales growth will exert a downward pressure on car prices, thereby having negative impact on the collateral value of vehicles. Credit Rating Report

7 I. Security Overview The total amount of ABS issued in this transaction (ABS) is 397, (10k) yuan, which is equal to the amount after the cumulative balance of principal and interest of loans in the asset pool discounted to the cut-off date as per the discount rate of %/year (400, (10k) yuan) is subtracted from the overcollateralization (2, (10k) yuan). The total amounts of Class A and Class B Notes issued respectively account for % and 3.75% of discounted receivables balance on the cut-off date, and the total amount of Subordinated Notes accounts for 7.91% of the discounted receivables balance on the cut-off date. In regard to the repayment mode of notes, Senior Notes adopt the fixed rate and all belong to pass-through securities of which principal and interest are paid once a month. In normal principal repayment of notes, allocable amount is firstly used for paying Senior Notes principal (Class A Notes superior to Class B Notes) until the target amount of this level is reached, and the rest is used for paying Subordinated Notes principal, i.e. Subordinated Notes principal are paid along with Senior Notes principal. Table 1: Overview of the ABS ABS Repayment Method Issuance Amount (RMB 10K) Percentage of Total (%) Coupon Rate Expected Maturity Date Class A Notes Pass through 351, Fixed September Class B Notes Pass through 15, Fixed September Subordinated Notes Pass through 31, Fixed September Amount Issued - 397, Overcollateralization - 2, Discounted Reveivables Balance on Cut-off - 400, Date The credit enhancement measures for this transaction mainly include a Senior/Subordinated structure, and overcollateralization. With regard to Senior/Subordinated internal credit enhancement measures, for this ABS, the level of credit support provided by Senior B Notes, Subordinated Notes and initial overcollateralization for Senior A Notes is 12.20%; the level of credit support provided by Subordinated Notes and initial overcollateralization for Senior B Notes is 8.45%. However, due to the characteristic of payment structure of this ABS, if Subordinated Notes are paid along with Senior Notes in the later notes duration, the credit enhancement obtained by Senior Notes will decrease. Since overcollateralization is the difference between the discounted receivables balance on the cut-off date and the total amount issued, this 1 Credit Rating Report

8 part provides certain internal credit support for Senior Notes. In the situation of normal repayment, this credit enhancement measure provides credit enhancement amounted to 2, (10k) yuan (equal to 0.54% of the discounted receivables balance on the cut-off date) for Senior Notes, which is used for absorbing possible loss for securities at various levels. The interest losses caused by loan default and prepayment have certain impact on this credit enhancement. II. Analysis of the Transaction Structure This ABS sets up the monthly collateral account related to the credit rating of the Servicer, and considers the relatively low default risk of the Servicer, relatively low commingling risk and absence risk of the Servicer of this ABS. Fund commingling risk occurs when participating parties' finance situation or credit situation deteriorates or even defaults, trust property receivables commingle with participating parties' other funds, causing loss to trust property. Volkswagen Finance (China) Co., Ltd., the Originator/Servicer, has low bankruptcy or insolvency risk during notes duration. Thus, the commingling risk is relatively low. Other transaction structure risks of this ABS and corresponding mitigation measures are listed in the table below: Table 2: Transaction Structure Risks of This ABS and Mitigation Measures Risk Type Set-off risk Commingling risk Absence risk of the Servicer Legal risk Mitigation Measures The Purchased Receivables are free of defences, whether peremptory or otherwise, for the agreed term of the Loan Contracts as well as free of rights of third parties and that the Borrowers in particular have no set-off claim thereto or thereunder or the status and enforceability of the Purchased Receivables is not impaired by set-off rights. This ABS sets the monthly collateral account. The commingling reserve event is triggered when the Servicer cannot meet any mandatory rating grade. Every monthly period shall be divided into two parts by the 15th work day. The Servicer shall transfer each part of the predicted receivables into the monthly collateral account on the next day of the beginning date, and transfer each part of the actual receivables into the monthly account on the next day of the ending date. When each part of the receivables is paid, the monthly collateral amount will be giving back to the Servicer. This mechanism uses the predicted receivable in the monthly collateral account as the enhancement of the normal repayment, which decreases the commingling risk when the Servicer cannot meet any mandatory rating grade. This ABS hasn t defined the Successor Servicer. When the Servicer is being replaced, the dismissed Servicer shall transfer all the then existing vested rights and assets held by it to the replacement Servicer within thirty (30) calendar days, and the cash collateral amount shall be used to enhance the normal repayment under this circumstances. The set-up of the cash collateral account can mitigate the absence risk of the Servicer effectively. This ABS hasn t change the registration of the mortgage, if the rights of the Issuer cannot defend an innocent third party, the Originator will be obliged to pay a repurchase price. 2 Credit Rating Report

9 Main transaction parties of this ABS do not have issues which make them unsuitable to be the Servicer. They all have adequate capabilities to perform their required duties. Table 3: Main Transaction Participants' Ability to Fulfill Duties Transaction Participants Name Servicing capabilities Servicer Volkswagen Finance (China) Co., Ltd. Confirmed Trustee/Issuer CITIC Trust Co., Ltd. Confirmed Fund Depository Institution Beijing Branch of China Construction Bank Co., Ltd Confirmed Volkswagen Finance (China) Co., Ltd., the ABS Servicer, has certain business experience, strong risk control capabilities and, servicing capabilities; CITIC Trust Co., Ltd. (herein after referred to as CITIC Trust ), the trustee, has experience as a securitization trustee, business management and internal control mechanisms are quite well established, and has servicing capabilities; Beijing Branch of China Construction Bank Co., Ltd (herein after referred to as China Construction Bank ), the Fund Depository Institution, has extensive experience in the area of fund depository, risk control capabilities is very strong, and has servicing capabilities. Transaction documents stipulate the obligations and liability for breach of contract of various intermediaries. As specified in the transaction documents of this ABS: The trustee has the right to ask the trustor, with no strings attached, to make timely repurchase of ineligible asset caused by its negligence of duty during the effective period of the trust; the trustee should compensate for trust property if the trustee manages or disposes trust property against trust purpose or causes damage to trust property due to aggravated negligence of managing or disposing trust property, and the trustor may make litigation or has the power to prosecute if the trustee fails to fulfill other obligations of the contract; the Fund Depository Institution should compensate direct economic loss of the trust property if it fails to execute trustee s payment instruction or fails to make timely fund transfer. In terms of transaction structure, this ABS has great innovation compared with other products, which is mainly reflected in the determination of amount issued as per discounted receivables balance, the concept introduction of overcollateralization target level in the sequence of repayment, and the conversion mode between red pool and black pool. First, the amount of this ABS issued is determined as per the discounted receivables balance. The amount issued of this ABS products is the amount of principal and interest planned to be paid for loans in the asset pool in various remaining amortization periods, which is discounted to the cut-off date as per a specific discount rate and subtracted by initial overcollateralization. The used discount rate includes the estimated issuance interest rate, fee of loan servicer, interest income tax, etc. Therefore, if the issuance interest rate of notes and relevant fees are higher than the weighted average interest rate of loans in the 3 Credit Rating Report

10 asset pool, the discounted receivables balance will be less than the outstanding principal; on the contrary, if the discounted receivables balance is more than the outstanding principal, though this issuance way can reduce the interest margin risk caused by indeterminate issuance rate, its initial overcollateralization is less than that of bonds of which the determined issued amount is not discounted. Second, the concept of overcollateralization target level is introduced in the sequence of repayment. In normal principal repayment of notes in terms of transaction structure of this ABS, Subordinated Notes principal are paid along with Senior Notes principal in the meantime. Compared with the notes paid in the sequence of full transfer payment, the credit support obtained by various Senior Notes is reduced correspondingly. With the continuous increase of loan loss in the asset pool, Level 1 Credit Enhancement Increase Conditions and Level 2 Credit Enhancement Increase Conditions are triggered, which increases the proportion of overcollateralization of Class A Notes and Class B Notes, further reduces the target guarantee balance of Class A Notes and Class B Notes in each period respectively, improves the repayment rate of Senior Notes, and thus enhances the degree of credit protection of Senior Notes. Third, it adopts the conversion mode between red pool and black pool. The assets in the pool of this ABS adopt the mode of red pool and black pool. As a whole, the two asset pools have large consistency in overall characteristics such as diversification, remaining term and entry standards, almost the same attributes, highly similar historical performance in loan issuance of originators, and basic consistency in the ratings of both asset pools. III. Analysis of the Underlying Assets 1. Characteristics of the Underlying Assets The underlying assets of this ABS has very low single-transaction concentration risk and regional concentration risk; most of the borrowers have stable occupations and incomes, relatively strong repayment will and capacity; collaterals for mortgage loans in the pool have relatively high diversification in types and are in favorable ; the underlying assets have very low risk in balance repayment, and relatively low weighted-average loan to value ratio at origination. From the overall perspective, the underlying assets have relatively good credit quality. The underlying assets of this Transaction are an amount of 68,331 loans of retail auto mortgages issued by the Originator. The total discounted outstanding balance of principal and interest is 400, (10k yuan).there are 98.96% new cars in the asset pool with a discounted outstanding principal balance totaling approximately 395, (10k yuan). Table 4: Statistical Analysis of the Underlying Assets Cut-off Date August 31, 2017 No. of loans 68,331 Total discounted outstanding balance of principal and interest (RMB 10K) 400, Credit Rating Report

11 Contract value of the asset pool (RMB 10K) 581, Total outstanding balance of principal (RMB 10K) 417, Max outstanding principal balance of a single loan (RMB 10K) Average outstanding principal balance of a single loan (RMB 10K) 6.11 Proportion of top 10 borrowers loan amount (%) 0.31 Proportion of top 20 borrowers loan amount (%) 0.42 Weighted-average loan interest rate (%) 1.85 Weighted-average Loan Contract term (months) Weighted-average seasoning (months) 6.88 Weighted-average remaining loan term (months) Weighted-average loan to value ratio at origination (%) Weighted-average age of borrowers (years old) Borrowers come from 31 provinces and cities, indicating the relatively decentralized regional distribution. Single-transaction loans in the pool are well diversified, and the overall concentration risk of the asset pool is very low. Table 5: Distribution of Outstanding Principal Balance Outstanding Balance of Loans (RMB 10K) No. of loans Proportion of No. of Loans (%) Outstanding Balance of Loans (RMB 10K) Proportion of Outstanding Balance of Loans (%) (0,5] 34, , (5,10] 25, , (10,15] 5, , (15,20] 1, , (20,25] , (25,30] , (30,35] , (35,40] , > , Total 68, , Table 6: Geographical Distribution of the borrowers Location No. of Proportion of No. Outstanding Balance of Loans Proportion of Outstanding Balance loans of Loans (%) (RMB 10K) of Loans (%) Shandong 6, , Guangdong 4, , Hebei 4, , Sichuan 4, , Jiangsu 4, , Zhejiang 4, , Henan 3, , Hubei 3, , Credit Rating Report

12 Location No. of Proportion of No. Outstanding Balance of Loans Proportion of Outstanding Balance loans of Loans (%) (RMB 10K) of Loans (%) Jilin 3, , Beijing 2, , Hunan 2, , Fujian 2, , Yunnan 2, , Liaoning 2, , Neimenggu 1, , Anhui 2, , Shaanxi 1, , Shanxi 2, , Xinjiang 1, , Heilongjiang 1, , Jiangxi 1, , Guizhou 1, , Tianjin 1, , Chongqing , Guangxi , Gansu , Ningxia , Shanghai , Qinghai , Hunan Xizang Total 68, , Borrowers' ages are mainly distributed in the range of 20~40 years old, with the weighted-average age of The borrowers are in favorable occupation and income, and the average income-to-debt ratio 2 is 2.72 indicating a certain guarantee to the loan repayment. Table 7: Distribution of the Borrowers' Age 3 Age (Years Old) No. of loans Proportion of No. of Loans (%) Outstanding Balance of Loans (RMB 10K) Proportion of Outstanding Balance of Loans (%) (18,20] , (20,30] 26, , (30,40] 22, , (40,50] 12, , >50 4, , Annual income of borrower Income to debt ratio = Discounted outstanding balance of principal and interest 3 Only individual borrowers are included. 6 Credit Rating Report

13 Total 66, , Table 8: Distribution of the Borrowers Annual Income 4 Proportion of Annual Income Proportion of No. of Outstanding Balance Outstanding No. of loans (RMB 10K) Loans (%) of Loans (RMB 10K) Balance of Loans (%) [0,1] (1,20] 54, , (20,30] 7, , (30,40] , (40,50] 1, , >50 1, , Total 66, , The weighted-average term of contract is months, which is relatively long; weighted-average remaining term is months, and weighted-average seasoning 6.88months with certain historical credit data. Table 9: Distribution of Terms of Contract of Asset pool Proportion of Total Term Proportion of No. of Outstanding Balance of No. of loans Outstanding Balance (months) Loans (%) Loans (RMB 10K) of Loans (%) (0,12] , (12,24] 40, , (24,36] 27, , (36,48] , (48,60] Total 68, , Table 10: Distribution of Asset Pooled Loan Seasoning Proportion of Seasoning Proportion of No. of Outstanding Balance No. of loans Outstanding Balance of (months) Loans (%) of Loans (RMB 10K) Loans (%) (0,12] 56, , (12,24] 10, , (24,36] , (36,48] (48,60] Only individual borrowers are included. 7 Credit Rating Report

14 Total 68, , Table 11: Distribution of Remaining Term of Asset pool Remaining Term (months) No. of loans Proportion of No. of Loans (%) Outstanding Balance of Loans (RMB 10K) Proportion of Outstanding Balance of Loans (%) (0,12] 8, , (12,24] 39, , (24,36] 20, , (36,48] (48,60] Total 68, , The weighted-average interest rate of this transaction is 1.85% which provides limited support for excessive interest spread target. Table 12: Distribution of Current Interest Rates of Asset pool Current Interest Rates (%) No. of loans Proportion of No. of Loans (%) Outstanding Balance of Loans (RMB 10K) Proportion of Outstanding Balance of Loans (%) [0,5] 61, , (5,10] 5, , (10,15] 1, , > Total 68, , The weighted-average loan to value ratio at origination is 56.09%, which mitigates the expected level of loss to a certain extent; collateral of loans are mainly comprised of new cars, and liquidation of the collateral plays a certain role in lifting the recovery rate. 8 Credit Rating Report

15 Table 13: Distribution of Loan to Value Ratio at Origination Outstanding Proportion of Loan to value ratio at Proportion of No. of No. of loans Balance of Loans Outstanding Balance origination (%) Loans (%) (RMB 10K) of Loans (%) [10,20) % [20,30) % [30,40) % 1, [40,50) 3, % 16, [50,60) 16, % 88, [60,70) 25, % 142, [70,80) 9, % 66, [80,90) 12, % 100, Total % 1, Analysis on the risk management capability of Originator/Servicer Volkswagen Finance, the Originator/Servicer, has strong capabilities in risk control and after-loan management, and can effectively reduce the default risk of underlying assets. Volkswagen Finance, the Servicer, is responsible for management and service of the daily cash collection of underlying assets, namely matters related to loan, borrowers and assurer, collection of loan principal and commission charges, disposal of defaulted loan, safekeeping of documents, reporting loan service to trustee periodically according to Service Contract. The Service Contract stipulates the Servicer must compensate the all losses of other parties or trust property if the Servicer fails to fulfill its responsibilities or obligations required by contract; this Service Contract stipulates the rights, obligations, breach and compensation, duty fulfillment of the Servicer. Volkswagen Finance, the Servicer, has strong willingness to fulfill its duties, growing scale of operation year by year, relatively low ratio of non-performing loan, favorable asset quality, steadily improving profitability, strong support in operation and finance from shareholders, and strong risk control capacity. Thus, there is relatively low risk caused by the Servicer's capability and willingness to fulfill its duties for this ABS. 3. Macro and industrial factor analysis The slowdown of macro economy growth may have adverse impact on the credit performance of underlying assets. The recovery of aggregate demand has been weak since 2016, characterized by continued industrial production, downward pressure on domestic demand, slowing of investment growth and continued economic growth. In the mid to long run, the growth rate of China's economy might be lower than that of 9 Credit Rating Report

16 the previous economic cycle. The macro economy is faced with a slowing trend in the growth rate, which may cause a drop in household income and relatively large difference between future credit performance and historical data of the asset pools, and thereby lead to errors in the ratings. According to the macro analysis, China is still at the later stage of rapid popularization of passenger vehicles. However, with the weak macro economy and great fluctuations in the capital market since the second half of 2015, residents have been poorly willing to purchase vehicles. Besides, with the gradually slowing and declining growth rate in disposable incomes of residents since 2011, residents' consumption demands will and abilities have been limited, which further causes pressure to sales volume of passenger vehicles and leads to impact on the recovery value of pledged vehicles. In addition, under the pressure of slowing growth rate in sales volume of passenger vehicles, the profitability of automotive finance companies is squeezed to some extent, which may lead to changes in policies related to credit authorization and credit management of the Originator. Therefore, there may be certain difference between historical data and actual credit performance of assets in the pool. During the quantitative analysis on credit quality of underlying assets, CBR has considered the macro-economic cycle and the industrial trend of this ABS transaction. Figure 1: Disposable Incomes of Chinese Residents Resident s disposable income per capita (RMB 10K) Grow rate of disposable income (right axis, in %) 10 Credit Rating Report

17 Figure 2: Sales Volume of Passenger Vehicles Annual sales volume of passenger Increment in annual sales volume vehicles 乘用车年销量 (10K vehicles) ( 万辆 ) 乘用车年销量增量 of passenger vehicles (%) (%) 60% 50% 40% 30% 20% 10% 0% IV. Quantitative Analysis 1. Quantitative Credit Risk Analysis on the Underlying Asset Portfolio The underlying assets of this transaction are characterized by large number of loans, high degree of diversification, and high degree of homogeneity. The asset s default distribution displays relatively stable statistical properties. Therefore, by the actuarial approach, CBR works out the portfolio credit risk level of the underlying asset pool through selecting the static sample pool 5 having similar characteristics with the underlying asset pool, taking track record of credit performance of the static sample pool as the basis, comprehensively considering factors may affect the credit performance of the underlying assets, including the difference between the static sample pool and the underlying asset pool, changes in future economic condition, the Servicer's ability to fulfill its duties, and characteristics of the underlying asset pool. 1) Analysis on Static Sample Pool Sample Selection Based on relevant statistical information of static sample pools provided by the Originator, CBR has constructed 65 static sample pools. For each static sample pool, the sampling standard is to select new loans issued in the current month. However, it shall be noticed that certain characteristics of the static sample pool are inconsistent with those of the underlying asset pool, and estimation of the default distribution parameters will include some level of inaccuracy. 5 The static pool normally requires that there should be no assets added or removed from the cut-off date until the end of the term, with the exceptions of normal repayment or default of assets. Static pools related to the securitization of personal auto loans normally require a large number of loans, the proportion of each loan to be very low, and the statistical properties of the pool to be stable. 11 Credit Rating Report

18 Cumulative Default Rate of the static asset pool Based on the 65 static sample pool, CBR has respectively computed the growth in average default rates in each term, followed by the calculation of average cumulative default rates for each term during the life of the securitized asset pool, and then obtained the expected cumulative default rates during the life of the securitized asset pool. After that, CBR has mapped out the default time distribution by computing the projected default rate of each term in percentage of the projected cumulative default rates during its effective terms (see the Stress Testing for details). Figure 3: Cumulative Default Rates of Static Sample Pool 6% 5% 4% 3% 2% 1% 0% 月 Based on the 65 static sample pool, CBR has respectively computed the growth in average default rates in each term, followed by the calculation of average cumulative default rates for each term (58 terms) during the life of the securitized asset pool, and then obtained the expected cumulative default rates during the life of the securitized asset pool. After that, CBR has mapped out the distribution of the distribution of default timing through computing the projected default rate of each term in percentage of the projected cumulative default rates during its effective terms. (Please see Figure 4). 12 Credit Rating Report

19 期间违约额在违约总额占比 Credit Rating of ABS Figure 4: Mapping Distribution of the Default Timing 6% 5% 4% 3% 2% 1% 0% 月 Alternatively, because the statistics period of each sample is different, one could divide the cumulative default rates of each static sample pool at the end of respective statistical period by its corresponding projected default rate of each period as a percentage of the projected cumulative default rates during its lifetime, which in turn could map out the expected cumulative default rates of a static sample pool during the lifetime of the securitized asset pool. The average cumulative default rate provided for the static sample pools of this transaction is 2.18%. Table 13: Mapping Cumulative Default Rates Sample Sample Sample Static Pool Sample 1 Sample 5 Sample 6 Sample 7 Sample Cumulative Default 2.38% 2.03% 1.92% 1.94% 2.26% 2.74% 3.09% 3.79% Rate Sample Sample Sample Sample Sample Sample Sample Static Pool Sample Cumulative Default 5.39% 2.52% 3.53% 2.24% 2.56% 3.31% 3.65% 3.21% Rate Static Pool Cumulative Default Rate Static Pool Sample 17 Sample 18 Sample 19 Sample 20 Sample 21 Sample 22 Sample 23 Sample % 3.36% 3.71% 3.44% 3.54% 3.06% 3.10% 3.45% Sample Sample Sample Sample Sample Sample Sample Sample Credit Rating Report

20 Cumulative Default Rate Static Pool Cumulative Default Rate Static Pool Cumulative Default Rate Static Pool Cumulative Default Rate Static Pool Cumulative Default Rate Static Pool Cumulative Default Rate 4.67% 2.76% 2.36% 2.12% 2.23% 2.06% 2.99% 2.73% Sample Sample Sample Sample Sample Sample Sample Sample % 2.59% 2.69% 2.33% 2.42% 1.97% 1.75% 1.65% Sample Sample Sample Sample Sample Sample Sample Sample % 1.33% 1.48% 1.44% 1.75% 1.54% 1.54% 1.20% Sample 49 Sample 50 Sample 51 Sample 52 Sample 53 Sample 54 Sample 55 Sample % 1.22% 1.22% 1.22% 1.30% 0.95% 1.23% 0.72% Sample Sample Sample Sample Sample Sample Sample Sample % 0.83% 0.94% 1.00% 0.93% 1.10% 0.87% 0.70% Sample 65 Average 0.57% 2.18% 2) Estimation and Adjustments of Parameters of Underlying Assets Default Distribution CBR assumes the cumulative default rates of the securitized asset pool have a log normal distribution. CBR adopts the maximum likelihood estimation approach, and estimates the parameters (, ) of the underlying assets' default distribution in light of the cumulative default rates of the static sample pool. On this basis, CBR adjusts the parameters by fully considering factors such as the macroeconomic environment, the difference in statistical properties between the static pool and the underlying asset pool and credit quality of the underlying assets. Static sample pool is inconsistent with underlying asset pool in terms of characteristics such as the distribution of original contract term and the loan to value ratio at origin CBR has compared the statistical characteristics of the static sample pool with that of the underlying asset pool (See Table 15). In regard to the loan to value ratio at origination, the loan to value ratio lower than 40% (inclusive), between 40% to 60% (inclusive), and between 60% to 80% (inclusive) are 14.99%, 47.92% and 37.09% respectively, while the loan to value of the static pool are 22.08%,32.30% and 45.62% respectively. In regard to the original contract term, the original contract term of the securitized asset pool in the ranges of less than 12 months (inclusive), (inclusive) months is also different with the static 14 Credit Rating Report

21 pool. It is revealed that the asset pool to be securitized and the static pool have certain differences in the distribution of original contract term and the loan to value ratio at origin. Compared with historical credit data of the static pool, there is no great difference in the risk control level, credit policy and other aspects of the Originator/Service on the cut-off date of the asset pool. CBR will continually track the follow-up change situation of participants' ability to fulfill duties in the notes duration. In addition, the underlying assets are more prone to the slowdown of macro-economic situation than static pool, which means possible adverse impact on the credit performance of underlying assets in the future. In general, as the characteristics of loans in the static pool are inconsistent with that of the securitized asset pool, CBR has made adjustment in the credit risk model with regard to underlying assets default distribution parameters. See the following for default distribution estimation of underlying assets Pool (See Table 15). Table 15: Comparison of Statistical Information on Underlying Asset Pool and Static Sample Pool Underlying Assets Static Pool Average Cut-off Date August 31, Balance (RMB 10K) 417, , No. of loans 68,331 18,636 Outstanding Balance of a Single Loan (RMB 10K) Contract Term (months) Proportion of Amount Proportion of Amount (0.12] 0.83% 25.75% (12.24] 51.45% 26.96% (24.36] 47.31% 45.57% (36.48] 0.25% 0.64% (48.60] 0.16% 1.08% Loan To Value (%) Proportion of Amount Proportion of Amount (0,40] 14.99% 22.08% (40,50] 24.29% 18.52% (50,60] 23.64% 13.79% (60,70] 35.99% 45.51% (70,80] 1.10% 0.11% D Table 16: Adjusted Parameters Estimation Result Default Distribution Parameters D Credit Rating Report

22 3)The analysis of underlying asset characteristics The auto financial market of China relatively started late, which has not experienced a complete economic cycle, the risk exposure is not sufficient yet, and the static sample pool provided by the originator may not be able to fully reflect the risk characteristics of the asset pool. Therefore, CBR considers the credit quality of the underlying assets as well as the historical data provided by the originator, and the expected cumulative default rate is calculated by comparing the characteristics of the similar asset pools. CBR scores 6 each factor which could affect the credit risk of the asset pool, and calculates a total score to reflect the credit performance of the asset pool in the future. Meanwhile, CBR considers the time distribution of the industry benchmark s cumulative default rate, and calculates the cumulative default rate of the asset pool by establishing the mapping relationship of the expected cumulative default rate of the asset pool, the longest term of the asset pool and the scorecard model. Based on the credit quality of the asset pool, CBR choose the pressure multiplier within a certain range for each target rating level, and determines the Target Default Rate(TDR) by multiplying the cumulative default rate of the asset pool and the multiplier. 4) Estimation Result of Credit Risk Analysis Model Based on the adjusted parameters, CBR utilizes the log normal distribution function to compute default rates of the asset pool that shall be borne by the rated notes under different target rating levels (See Table 17) Table 17: Target Default Rate of Rated ABS Note Credit Rating Target Default Rates (TDR) AAA sf 17.36% AAA- sf 15.97% AA+ sf 14.40% AA sf 13.51% AA- sf 12.51% A+ sf 10.95% A sf 10.09% A- sf 9.13% Note: TDR is, with target credit rating, the proportion of the default amount of asset pool shall be borne by the rated securities. 6 The scorecard model decomposes the factors that affect the expected cumulative default rate of the underlying assets, and constructs a tree system. The system mainly examines the credit qualities of the borrowers of the underlying asset pool, the characteristics of the loans and the due diligence of the transaction participants. The pairwise comparison matrix is used to determine the weights of the factors. CBR sets the standards of scores for each factor, and then the integrated score of the credit performance of the asset pool in the future is calculated by the liner factor model. 16 Credit Rating Report

23 2. Cash Flow Stress Testing CBR has developed a cash flow analysis and stress test model specifically for ABS, according to the characteristics of transaction structure such as the set-up of transaction accounts, cash flow payment mechanism, credit trigger events, credit enhancement arrangements, and characteristics of the underlying assets. Cash inflow of models mainly comes from principal receivables and interest receivables. Cash outflow mainly includes taxes, service fees for participating parties, interest on senior notes, senior notes principal, and income and principal of subordinate securities. The main function of stress testing is to assess the coverage of interest and principal by cash flows that the underlying assets generate under stressed scenarios, so as to test the robustness of the transaction structure, as well as whether the level of credit enhancement available to the rated notes is sufficient to meet the target rating level. Table 18: Base Date of Cash Flow Analysis Indicator Date Cut-off Date August 31, 2017 Expected Settlement Date September 21, 2017 Expected Maturity Date of Class A Notes September 26, 2019 Expected Maturity Date of Class B Notes September 26, 2019 Legal Maturity Date July 26, 2024 Based on its analyses of economic climate and credit risk of the asset pool, CBR has set the following major stress : earlier default, spread narrowing, prepayment rate rises, and lower recovery rate on default loans. The Set-up of Recovery Rate CBR figures out the weighted-average recovery rate of loans overdue by more than 30 days according to the migration rate of default loans, and regards it as the baseline recovery rate combining the characteristics such as the loan to value ratio of the asset pool (initial LTV is 56.09%) and the proportion of seasoning to original term (23.18%) etc, with consideration of the industry average recovery situation finally sets the recovery rate of loans overdue by more than 30 days at 50.00%, which is used as the baseline condition for the recovery rate. Setting of Time of Default Distribution Based on the historical default time distribution of static sample pool, and combining the characteristics of underlying assets cash flow distribution, CBR has set the baseline condition of default time distribution as [45% for the first year, 35% for the second year, 20% for the third year]. 17 Credit Rating Report

24 Time Table 19: Setting of Default Time Distribution Historical Default Time Distribution of Static Sample Pool Distribution of Cash Flow of Underlying Assets (RMB 10K) Proportion of Cash Flow 1st Year 33.82% 241, nd Year 44.86% 139, rd Year 18.69% 36, th Year 2.16% th Year 0.47% Total % 417, Setting of Expected Interest Rate of Notes Backed the issuance rates of the red pool, CBR has set the baseline rates at 4.95%/year for Class A Notes, and 5.20%/year for Class B Notes. The Set-up of Prepayment Rate With the 3.00%/year historical prepayment rate of static sample pool, CBR has set the baseline prepayment rate at 3.00%/year. Table 21: Baseline Conditions and Stress Scenarios of Stress Testing Stress Conditions Baseline Conditions Stress Scenarios Recovery Rate 50% 0 recovery Recovery Term (months) 6 - Distribution of Time of Default Senior A Notes Coupon Rate Senior B Notes Coupon Rate 1st year 45%, 2nd year 35%, and 3rd year 20% Move forward properly; upper limit after adjustment is 65% for 1st year, 35% for 2nd year 4.95% Reduce spread by 50bps 5.20% Reduce spread by 50bps Prepayment Rate 3.00% The upper limit of pressure is decrease to 0 Table 22: Stress Testing Results I of Senior A Notes Senior A Notes Senior A Notes Main Stress Testing Scenarios Critical Default TDR under Protective Rates of Senior AAA- sf rating Distance of Notes Senior Notes Baseline Conditions 24.15% 15.97% 8.18% Recovery rate is 0, and others are baseline 12.33% 15.97% -3.65% Recovery rate drops by 10%, and others are baseline Recovery rate drops by 20%, and others are baseline 22.00% 15.97% 6.03% 20.20% 15.97% 4.22% 18 Credit Rating Report