TIDMPACL
27 April 2010
Pacific Alliance China Land Limited
('PACL' or the 'Company')
Full year results for the period ended 31 December 2009
Pacific Alliance China Land Limited ('PACL' or the 'Company'), the closed-end
investment company admitted to trading on AIM and focused on investing in a
portfolio of existing properties, new developments, distressed projects and real
estate companies in Greater China, today announces its financial results for the
full year ended 31 December 2009.
Financial Highlights
* As at 31 December 2009, the Company's audited total net asset value (NAV)
was US$209.5 million, at US$1.38 per share, representing an increase of 30%
over the period.
* The Company's share price increased 30.9% over the period, closing at
US$0.8575 on 31 December 2009.
Portfolio and Fund Developments
* In October 2009, the Company invested US$56 million to acquire a large
minority interest in GCREF Acquisitions XIX Limited, a company that will
indirectly own 100% of a prestigious serviced apartment building located in
a prime area of Beijing's central business district.
* In August 2009, the Company invested US$22.4 million through a domestic
Chinese subsidiary for a minority stake in Wanda Commercial Property, one of
the largest developers of integrated mixed-use developments in China.
* In August 2009, the Company acquired a 30% interest in SZITIC Commercial
Property which owns one of China's largest retail portfolios.
* In March 2009, a tender offer was completed that allowed shareholders to
exchange all or part of their shares for shares in PACL II Limited ("PACL
II"), a newly organized Cayman Islands private vehicle that will distribute
free cash and proceeds from exited investments held by the Company.
Significant Subsequent Events
* On 21 April, the Company announced the rotation of the role of Chairperson
of the Board from Horst F. Geicke to Margaret Brooke, a current independent,
non-executive Director. Mr. Geicke shall remain a non-executive Director of
the Company.
Commenting on the results, Patrick Boot, Managing Director, Pacific Alliance
Real Estate Limited, said: "We produced a robust performance in 2009, resulting
in significant increases to our NAV and share price. Our multi-strategy approach
enabled us to capitalise on the growth in China's economy, by reinvesting
proceeds into recovery plays such as pre-IPO or distressed platform investments.
Our success in this was aided by our local investment teams, which meant we
could source and execute these projects more quickly and efficiently than our
competitors. We will continue to look to enhance the value of our investment
portfolio in 2010."
Enquiries:
For more information, please contact:
MANAGER: LEGAL COUNSEL:
Patrick Boot, Managing Director Jon Lewis, General Counsel
Pacific Alliance Real Estate Limited c/o Pacific Alliance Group
16/F, St. John's Building 16/F St. John's Building
33 Garden Road 33 Garden Road Central,
Central, Hong Kong Hong Kong
T: (86) 21 6288 3788 T: (852) 2918 0088
F: (86) 21 6288 9272 F: (852) 2918 0881
pboot@pacific-alliance.com.cn jlewis@pacific-alliance.com
<mailto:pboot@pacific-alliance.com.cn> <mailto:jlewis@pacific-alliance.com>
BROKER: NOMINATED ADVISER:
Hiroshi Funaki Philip Secrett
LCF Edmond de Rothschild Securities Grant Thornton Corporate Finance
T: (44) 20 7845 5960 T: (44) 20 7383 5100
F: (44) 20 7845 5961 Philip.J.Secrett@gtuk.com
funds@lcfr.co.uk <mailto:Philip.J.Secrett@gtuk.com>
<mailto:funds@lcfr.co.uk>
MEDIA RELATIONS:
Sophie Hoggarth
Pacific Alliance Group
T: (86) 21 6113 5818
shoggarth@pacific-alliance.com
<mailto:shoggarth@pacific-alliance.com>
Andrew Walton
Financial Dynamics, London
T: (44) 20 7269 7100
Christine Wood / Queenie Tsao
Financial Dynamics, Asia
T: (852) 3716 9800
Notes to Editors:
Pacific Alliance China Land Limited ("PACL") (AIM: PACL) is a closed-end
investment company that was admitted to trading on the AIM Market of the London
Stock Exchange in November 2007. PACL is focused on investing in a portfolio of
existing properties, new developments, distressed projects and real estate
companies in Greater China.
For more information about PACL, please visit: www.pacl-fund.com
Pacific Alliance China Land Limited is a member of Pacific Alliance Group, the
Asian alternative investment fund management group, founded in 2002. Pacific
Alliance Group and its affiliates manage assets in excess of US$4 billion across
three strategies covering private equity; real estate; and absolute return and
distressed. The Group has offices in Shanghai, Beijing, Hong Kong and Tokyo.
For more information about Pacific Alliance, please visit
www.pacific-alliance.com
Chairman's Statement
Pacific Alliance China Land produced a robust performance in 2009. The Company
generated a 30% increase in net asset value as at 31 December 2009. Since
inception, the Company's net asset value has grown from US$1 to US$1.38 per
share, equivalent to a compound annual growth rate of 16.7%, outperforming the
major comparable benchmark indices including the FTSE 350 Real Estate Index and
the FTSE AIM All-Share Index. The Company announced two cash distributions last
year in the form of a tender offer and these brought the total distribution for
the year to 12%.
2009 was a volatile year for China. We first witnessed a sharp decline in market
sentiment in the first quarter following the global economic crisis. The advent
of the Chinese government stimulus program led to China's economy showing signs
of recovery far earlier than elsewhere in the world. China closed 2009 with a
remarkable 10.7% growth in GDP for the last quarter.
The Company performed well last year across its different strategies, and all
eleven investments contributed to the Company's 2009 growth. The new investments
which were secured mid-year performed particularly well because they were priced
in the first half of the year, before prices picked up. Apart from the timing
advantage, we attribute the success of the Company to two main factors:
Firstly, our opportunistic multi-strategy approach allowed us to achieve capital
protection and asset appreciation in different phases of the market cycle. We
were able to benefit from market recovery by harvesting cash from our Bridge
Financing (fixed-return strategy) and Co-development Portfolios (steady-return
strategy) throughout 2009, and subsequently reinvested into Pre-IPO, Asset
Acquisition and Distressed Platform Investments (growth strategies).
Secondly, we enjoy a unique competitive advantage in the form of our local
investment teams in Beijing, Shanghai and Hong Kong. Their extensive networks on
the ground enabled us to source proprietary projects in a number of market
sectors and to execute them more quickly than our competitors.
There has been much speculation about whether China will either enter into an
asset bubble or continue to outperform in 2010. We view last year's price
increase in the residential market as driven primarily by insufficient supply
and pent-up demand from 2008 rather than as pure speculative activity. The
Chinese economy continues to enjoy solid growth. However, with more supply
coming on stream and with the government adopting a more credit tightening
approach, we may see some softening in prices in the short term, but expect a
sustainable upward cycle in the medium-term driven by strong long-term market
fundamentals.
In light of the changes in market mechanisms the Company will be very selective
when considering investments in 2010 and continue to focus on project quality.
We also look to further enhance the value of our current investment portfolio
through several asset management initiatives that we have planned for 2010,
paving the way for long-term benefits to the Company.
We thank you for your continuing support during a very volatile 2009, and we
look forward to working with you towards a profitable 2010.
Horst F. Geicke
Investment Manager's Report
Portfolio Performance
As at 31 December 2009, the Company's audited total net asset value ("NAV") was
US$209.5 million, at US$1.38 per share. This is a 30% increase from the 2008
Audited Financial Statements and an annualized increase of 16.7% since
inception. Independent valuations have been performed quarterly with bridge
financing collateral, co-development projects, and other assets and platform
investments valued by recognized international valuation firms and real estate
appraisers.
The NAV as per the December 2009 newsletter was US$1.3646, 1.13% lower than the
Audited NAV. The difference is a result of provisions for deal fees being
released as final negotiations led to lower fees. The announced NAV in February
and March 2010 incorporated all the adjustments. The Company's share price
increased 30.9% between 1 January and 31 December 2009, closing at US$0.8575.
This price represented a 37.9% discount to the audited NAV per share. The
Company has taken steps, including share buybacks and increased cash
distributions in the form of a tender offer, to assist in closing this discount.
The Company's share price at the end of the year had outperformed major
benchmark indices including the FTSE 350 Real Estate Index by 58% and the FTSE
AIM All-Share Index by 55% since inception.
Realized and unrealized income for the year ended 31 December 2009
31 December 2009 31 December 2008
US$ US$
Realized Gain
Investment interest income 16,620,660 2,074,363
Deposit Interest 373,203 6,013,942
Other Income 360,730 988,046
????????? ?????????
17,354,593 9,076,351
Change in Unrealized Gain
Pre-IPO Financing 5,866,667 -
Bridge Financing (6,584,785) 34,653,775
Co-Development 5,183,385 6,143,977
Other real estate investments 65,931,356 -
Share of profits payable to PACL II (6,601,116) -
Foreign exchange (254,760) 2,887,970
????????? ?????????
63,540,747 43,685,722
????????? ?????????
80,895,340 52,762,073
????????? ?????????
Portfolio Summary
As at 31 December 2009, the Company held investments with a cost of
approximately US$189 million and fair value of US$287 million. The Company's
portfolio is diversified across five strategies including Bridge Financing,
Co-Development, Pre-IPO Financing, Platform Investment and Asset Acquisition.
Breakdown of Investments by Strategy
Investments Fair Value US$ Type of investment % of Total
Project Malls 59,553,356 Platform Investment 16.17%
Project Diplomat 51,678,000 Asset Acquisitions 14.04%
Project Speed 44,976,526 Bridge Financing* 12.21%
Hainan Airport Group 25,866,667 Pre-IPO Financing 7.03%
Project Auspice 22,414,500 Pre-IPO Financing 6.09%
Project Shanghai Jingrui 20,706,779 Co-Development 5.62%
Project Silk 18,801,625 Bridge Financing* 5.11%
Project RMBox 17,179,846 Bridge Financing* 4.67%
Project Beijing Olympic 14,023,657 Bridge Financing* 3.81%
Project Blue Bird 11,391,905 Co-Development 3.09%
Cash 81,614,495 Cash 22.17%
TOTAL 368,207,357 100.00%
* The allocation by strategy as per the Investment Manager's report differs from
the Auditor report investment schedule. The cost of the loans receivable
disclosed in the Audit report schedule represents the cost of investments for
accounting purposes, which are higher than the respective cost of the loans
according to the terms under the loan agreements. Collection/Repayment of loans
receivable is calculated based upon the effective interest method in the audit
report schedule, whereas in the Investment Manager's report and newsletter, in
accordance with the legal agreements, the cost is reduced prior to a reduction
of interest.
Investment Strategy
The Chinese government has recently issued new administrative measures in an
effort to prevent the residential market in primary cities from accelerating too
rapidly. These include higher transaction taxes for individuals, higher down
payments for the purchase of second properties and the limiting of bank lending
capacity by raising the reserve ratio. The effects of these measures are not
clear yet, and the market is uncertain if additional measures will be introduced
should these existing ones prove to be ineffective. With this policy headwind,
there may be some softening in prices in 2010. As a result, we will be ready for
any buying opportunities that arise. Given the volatility in the market and
changing government policy, we will remain flexible and continue to follow a
multi-strategy approach.
Value-Added Asset Acquisition Strategy
In contrast to residential markets where prices have increased significantly,
existing or nearly completed retail properties with poor track records and/or
ineffective management teams can have high value-add potential. The Investment
Manager is actively looking for opportunities where it can recapitalize
repositioning and/or make operating efficiency improvements to restore value to
these properties.
Bridge Financing Strategy
In response to the government's credit-tightening measures for real estate,
there will likely be demand again for development financing from smaller players
in the market. Bridge financing was a defensive tactic for the Company during
the difficult market of 2008 that has delivered very attractive risk adjusted
returns. We are starting to see renewed interest from the market and we will
focus on projects that have sound real estate fundamentals, low loan-to-value
ratios and high credit quality.
Co-Development Strategy
The residential land prices in primary cities appreciated substantially in
2009, establishing new highs. This is mostly due to large nationwide developers
who are trying to compete for greater market share in their main markets. The
Investment Manager sees attractive opportunities in second and third tier
cities. These cities have experienced more moderate price growth in 2009 and on
average housing prices are much more affordable than in primary cities.
Currently, second tier cities are filled mostly with lower-grade products by
small developers, and as a result are less competitive and will likely
experience more potential for further appreciation.
The Chinese government has recently indicated its intention to accelerate
urbanization and to grant rural residents the right to become registered
residents as they migrate to cities. Being close to these populations, the
second and third tier cities will be the direct beneficiaries of this policy
shift, as they will see more government funding for infrastructure, increased
real estate demands and intensified business activities.
Platform and Pre-IPO Financing
Financing channels are becoming more limited in China. The government's
increasing efforts to tighten bank credit may force private developers to invite
strategic investment at the corporate level with attractive pricing sometime in
2010. This opens up the potential for IPO and M&A opportunities.
Distressed Opportunity
The real estate industry in China is still young and the market can present
distressed opportunities due to volatility in the market and generally poorer
levels of execution by local developers. The Company is able to identify and
respond to these situations rapidly and then rectify the issues that contributed
to the distressed situation in order to restore value to these assets. We will
continue to search for such opportunities in the market.
Conclusion
The nature of the market has changed substantially in 2009 and the Company is
faced with a very different set of challenges in 2010. With continued focus on
sourcing and execution using a multi-strategy approach, we believe we will
continue to deliver outstanding results
Investing Policy
Geographical and Sector Focus
The Investment Manager invests approximately 85 per cent. of the Company's gross
asset value in China's first, second and third tier cities. Approximately 15 per
cent. of gross asset value may be invested in Hong Kong, Macau and Taiwan should
the directors of the Company and the Investment Manager consider that such
investments offer potentially attractive returns. Whilst the Company's approach
is fundamentally opportunistic, the Investment Manager invests approximately 50
per cent. of gross asset value in residential properties, approximately 20 per
cent. in office real estate and the remaining 30 per cent. equally among retail,
hospitality and industrial real estate.
Type of Investments
Investments are funded by way of cash. Shares of the Company will not be used as
consideration for any investment. The Investment Manager makes investments
through investee companies, which are special purpose vehicles established
offshore to hold investments. Investments may also be made using a Chinese
domestic holding entity with a pre-approved level of registered capital which is
licensed to enable foreign entities to acquire real estate in the PRC.
Investment Size
The Company's individual investments range from $30 million to $60 million
although initial investments may be smaller if the Company anticipates follow-on
investments may be required. No single initial investment will exceed 20 per
cent. of gross asset value at the time of investment.
Control of Investments
The Company seeks to own a substantial interest in its investments or, where
necessary, secure adequate minority protection rights.
Realization of Investments
The Company intends to exit individual investments when the Investment Manager
and the Investment Committee believe realisation would be in the best interests
of the Company and consistent with its investment objective. The Company
anticipates the average holding period of investments will be between 12 and 36
months.
Borrowings
There is no limit in the articles of the Company as to the amount of debt the
Company may incur. As is typical with property development and investment,
Investee Companies may use leverage for individual developments. The level of
debt incurred may vary depending on the laws and regulations pertaining to the
debt market with regard to any specific investment and the ability of the
relevant Investee Company to service the debt. The Investment Manager has the
authority under the investment management agreement between the Company and the
Investment Manager to arrange recourse borrowings on behalf of the Company up to
an aggregate maximum of 50 per cent. of the Company net asset value from time to
time, calculated at the time such borrowings are undertaken. All recourse debt
incurred on behalf of the Company above this level will require majority Board
approval.
Collective Investment Schemes and Cross-Holdings
The Company may not invest more than an aggregate maximum of 10 per cent. of the
gross asset value of the Company in units or shares in collective investment
schemes or in other listed closed-end investment funds.
Uninvested Funds
Cash pending investment, reinvestment or distribution is placed in bank
deposits, bonds or US government-issued treasury securities, or in
capital-guaranteed schemes offered by major global financial institutions, in
order to protect the capital value of the Company's cash assets. In order to
hedge against interest rate risks or currency risk, the Company may, where
appropriate, also enter into forward interest rate agreements, forward currency
agreements, interest rate and bond futures contracts and interest rate swaps and
purchase and write (sell) put or call options on interest rates and put or call
options on futures on interest rates.
Distribution Policy
Subject to the availability of cash and reserves, the Company will seek, where
circumstances allow, to provide a regular level of income in the form of a
dividend up to an annual dividend yield of 12 per cent.
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
AS AT 31 DECEMBER 2009
Note 2009 2008
US$ US$
Assets
Investments, at fair value (Cost:
US$189,143,890; 3(a),4,5 286,592,862 257,047,676
2008: US$216,136,442)
Amounts due from related parties - 7,542
Other receivables 3,648,352 86,515
Other assets 895,509 1,587,041
Restricted cash 3(e),6 12,000,000 -
Cash and bank balances 3(d) 81,614,495 112,694,832
?????????? ??????????
Total assets 384,751,218 371,423,606
------------------ ------------------
Liabilities
Amounts due to PACL II Limited 11(a) 115,042,310 -
Performance fee payable 11(b) 14,424,994 -
Bank loans 6 12,000,000 -
Provision for taxation 9 30,119,037 10,293,093
Advanced receipt on disposal of 2,586,020 -
investments
Accrued expenses and other 1,036,990 302,232
payables
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Total liabilities 175,209,351 10,595,325
------------------ ------------------
Net assets 209,541,867 360,828,281
?????????? ??????????
Analysis of net assets
Share capital 7 1,898,339 3,700,000
Share premium 7 187,935,554 366,300,000
Capital surplus 7 1,816,917 3,910,000
Treasury shares 7 (34,969,715) (26,215,000)
Retained earnings 52,860,772 13,133,281
?????????? ??????????
Net assets (equivalent to
US$1.3800 (2008: US$1.0611) per
share based on 151,842,044 (2008: 209,541,867 360,828,281
340,040,000) issued and
outstanding shares)
?????????? ??????????
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED SCHEDULE OF INVESTMENTS AS AT 31 DECEMBER 2009
2009 2008
% of % of
% of effective Cost/ % of effective Cost/
net equity Principal Fair value net equity Principal Fair value
Investments assets interest US$ US$ assets interest US$ US$
held held
COMMON 91.44% 20.16%
STOCKS
Aviation, 12.34% 5.54%
China
Hainan
Airport
Group 12.34% 4.90% 20,000,000 25,866,667 5.54% 4.90% 20,000,000 20,000,000
Limited
Real estate
development,
China 79.10% 14.62%
China
Beijing
Hines Jing
Sheng
Real Estate 24.66% 40.00% 32,800,000 51,678,000 - - - -
Development
Co. Ltd.(1)
Dalian Wanda
Commercial
Real Estate 10.70% 0.50% 22,414,500 22,414,500 - - - -
Co. Ltd.
Huzhou
Jingrui Real
Estate 9.88% 49.00% 14,915,165 20,706,779 6.22% 49.00% 20,817,650 22,440,344
Co. Ltd.( 1)
Qingdao
Vanke Real
Estate 5.44% 40.00% 5,860,000 11,391,905 8.40% 40.00% 25,784,000 30,305,283
Co. Ltd.(1)
SZITIC
Commercial
Property Co. 28.42% 30.00% 12,500,000 59,553,357 - - - -
Ltd.
BONDS 21.46% 11.09%
Real
estates, 21.46% 11.09%
China
Times
Property
Holdings 21.46% 40,000,000 44,976,526 11.09% 40,000,000 40,000,000
Co. Ltd.
LOANS 23.86% 40.00%
RECEIVABLE
Real
estates, 23.86% 40.00%
China
Glorious
Property
(Holdings) - - - 5.16% 15,000,000 18,612,329
Co. Ltd.
Spirit
Charter
Investment 6.69% 13,607,260 14,023,657 15.04% 30,000,000 54,256,886
Limited(3)
Zhonghong
Xingye Real
Estate 8.20% 12,910,405 17,179,846 8.76% 27,908,250 31,594,195
Development
Co.( 2)
Zhongjiang
Holding Co. 8.97% 14,136,560 18,801,625 11.04% 36,626,542 39,838,639
Ltd.( 2)
?????????? ?????????? ?????????? ??????????
189,143,890 286,592,862 216,136,442 257,047,676
?????????? ?????????? ?????????? ??????????
(1) The cost as at 31 December 2008 and 2009 included 2 components: common stock
and loans receivable.
(2 )The principal above represents the principal calculated according to the
Fund's accounting purpose, which is different from the loan principal calculated
in accordance with the legal agreements whereby the cost is paid prior to the
repayment of interest component.
(3 )The balance included an option instrument with the fair value of unrealized
gain amounted to US$16,563,735 as at 31 December 2008. The option was not
exercised and expired during the year ended 31 December 2009, and thus a
reversal of the unrealized gain amounting to US$16,563,735 was recorded in the
consolidated statement of operations.
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED 31 DECEMBER 2009
Period from
Note 5 September 2007
Year ended (date of incorporation) to
31 December 2009 31 December 2008
US$ US$
Income
Loan origination income 8 - 750,000
Interest income 733,933 6,251,988
????????? ?????????
Total income 733,933 7,001,988
---------------- ----------------
Expenses
Local taxes 9 20,007,210 10,374,841
Management fees 10,11(b) 4,253,345 8,897,615
Performance fees 10,11(b) 14,424,994 -
Legal and professional 738,021 1,660,545
fees
Placement fees 11(c) - 12,000,000
Other listing fees - 1,466,470
Investment structuring 625,586 2,440,304
costs
Interest expenses 6 85,569 -
Other expenses 1,033,123 2,789,017
????????? ?????????
Total expenses 41,167,848 39,628,792
---------------- ----------------
Net investment loss (40,433,915) (32,626,804)
---------------- ----------------
Realized and change in
unrealized gains from
investments
Net realized gains from 16,620,660 2,074,363
investments
Net change in unrealized 70,396,622 40,797,752
gains from investments
Net change in unrealized
gains from investments 11(a) (6,601,116) -
attributable to PACL II
Net foreign exchange (254,760) 2,887,970
(losses)/gains
????????? ?????????
Net realized and change
in unrealized gains 80,161,406 45,760,085
from investments
---------------- ----------------
Net increase in net 39,727,491 13,133,281
assets from operations
????????? ?????????
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS FOR THE YEAR ENDED 31 DECEMBER
2009
Share capital Capital Treasury Retained
Note and share surplus shares earnings Total
premium
US$ US$ US$ US$ US$
At 5 September
2007 - - - -
(date of -
incorporation)
Issue of 7 400,000,000 - - - 400,000,000
shares
Repurchase and
cancellation 7 (30,000,000) 3,910,000 - - (26,090,000)
of shares
Repurchase of 7 - - (26,215,000) - (26,215,000)
shares
Net increase
in net assets - - - 13,133,281 13,133,281
from
operations
?????????? ???????? ?????????? ????????? ??????????
At 31 December 370,000,000 3,910,000 (26,215,000) 13,133,281 360,828,281
2008
Repurchase and
cancellation 7,11(a) (180,166,107) (2,093,083) - - (182,259,190)
of shares
Repurchase of 7 - - (8,754,715) - (8,754,715)
shares
Net increase
in net assets - - - 39,727,491 39,727,491
from
operations
?????????? ???????? ?????????? ?????????? ??????????
At 31 December 189,833,893 1,816,917 (34,969,715) 52,860,772 209,541,867
2009
?????????? ???????? ?????????? ????????? ??????????
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2009
Period from
Year ended 5 September 2007
31 December 2009 (date of incorporation) to
31 December 2008
US$ US$
Net increase in net assets from 39,727,491 13,133,281
operations
Adjustments
(Increase)/decrease in operating
assets
Purchase of investments (67,714,500) (216,136,442)
Disposal of investments 127,757,981 -
Net realized and unrealized gains (87,002,647) (40,911,234)
from investments
Amounts due from related parties 7,542 (7,542)
Other receivables (3,561,837) (86,515)
Other assets 691,532 (1,587,041)
Restricted cash (12,000,000) -
Increase/(decrease) in operating
liabilities
Amounts due to PACL II Limited 115,042,310 -
Performance fee payable 14,424,994 -
Provision for taxation 19,825,944 10,293,093
Accrued expenses and other 734,758 302,232
payables
?????????? ??????????
Net cash generated from/(used in) 147,933,568 (235,000,168)
operating activities
------------------ ------------------
Bank loans obtained 12,000,000 -
Issue of shares - 400,000,000
Repurchase of shares (191,013,905) (52,305,000)
?????????? ??????????
Net cash (used in)/generated from (179,013,905) 347,695,000
financing activities
------------------ ------------------
Net (decrease)/increase in cash (31,080,337) 112,694,832
and cash equivalents
Beginning balance 112,694,832 -
?????????? ??????????
Ending balance, representing cash 81,614,495 112,694,832
and bank balances
?????????? ??????????
Non-cash transactions
See Note 11(a) for the restructuring of the Company.
The accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER
2009
1 Organization
Pacific Alliance China Land Limited (the "Company") was incorporated on 5
September 2007 in the Cayman Islands. It is a closed-end Cayman Islands
registered, exempted company. The address of its registered office is PO Box
309GT, Ugland House, South Church Street, George Town, Grand Cayman, Cayman
Islands. The Company can raise additional capital up to the authorized share
capital as described in Note 7 below.
On 7 March 2009, the Company voluntarily delisted its ordinary shares from the
Channel Islands Stock Exchange. The Company's ordinary shares continue to trade
on the AIM Market of the London Stock Exchange.
The principal investment objective of the Company is to provide shareholders
with capital growth and a regular level of income from investments in existing
properties, new developments, distressed projects and real estate companies in
Greater China.
The Company's investment activities are managed by the Investment Manager,
Pacific Alliance Real Estate Limited. The Company has appointed Sanne Trust
Company Limited to act as the Custodian of certain assets of the Company and the
Company's Administrator and Registrar pursuant to the custodian agreement and
fund administration services agreement respectively.
The consolidated financial statements were approved by the Board of Directors on
23 April 2010.
2 Summary of significant accounting policies
The following significant accounting policies are in conformity with accounting
principles generally accepted in the United States of America. The Company
applies the provisions of FASB ASC 946-10, Financial Services - Investment
Companies (formerly the AICPA Audit and Accounting Guide for Investment
Companies) (the "Guide"). Such policies are consistently followed by the Company
in the preparation of its consolidated financial statements.
(a) Principles of consolidation
These consolidated financial statements include the financial statements of the
Company and its subsidiaries (collectively the "Fund"). Subsidiaries are fully
consolidated from the date on which control is transferred to the Fund and
deconsolidated from the date that control ceases. Inter-company transactions
between group companies are eliminated upon consolidation.
The Fund uses wholly and partially owned special purpose vehicles ("SPV") to
hold and transact in certain investments. The Fund's policy is to consolidate,
as appropriate, those SPVs in which the Fund has control over significant
operating, financial or investing decisions of the entity.
Except when an operating company provides services to the Fund, investment in an
operating company is carried at fair value (refer to Note 2(c) below for fair
value measurement).
(b) Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the directors to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements and accompanying notes. The directors believe that
the estimates utilized in preparing the financial statements are reasonable;
however, actual results could differ from these estimates.
(c) Investments
The Fund holds investment securities which are unlisted and have limited
marketability. The Fund engages in secured lending transactions consisting of
repurchase agreements and other secured borrowings.
(i) Recognition, derecognition and measurement
Regular purchase and sale of investments are accounted for on the trade date,
the date the trade is executed. Costs used in determining realized gains and
losses on the disposal of investments are based on the specific identification
method. Cost includes legal and due diligence fees associated with the
acquisition of investments.
Transfer of investments is accounted for as a sale when the Fund has
relinquished control over the transferred assets. Any realized gains and losses
from investments are recognized in the consolidated statement of operations.
Investments are subsequently carried at fair value and changes in fair value are
presented in the consolidated statement of operations.
(ii) Fair value measurement
The Fund is an investment company under the Guide. As a result, the Fund records
its investments on the consolidated statement of assets and liabilities at fair
value, with unrealized gains and losses resulting from changes in fair value
recognized in the consolidated statement of operations.
Fair value is the amount that would be received to dispose of the investments in
an orderly transaction between market participants at the measurement date, i.e.
the exit price. Fair value of investments is determined by the Valuation
Committee, which is established by the Investment Manager and the Board of
Directors.
The fair value of unlisted or unquoted securities are based on the Fund's
valuation models, including earnings multiples (based on the budgeted earnings
or historical earnings of the issuer and earnings multiples of comparable listed
companies) and discounted cash flows. The Valuation Committee also considers the
relevant developments since acquisition of the investments, the original
transaction price, recent transactions in the same or similar instruments,
completed third-party transactions in comparable instruments, reliable
indicative offers from potential buyers and rights in connection with
realization. It adjusts the model as necessary for factors such as
non-maintainable earnings, tax risk, growth stage, and cash traps. Cross-checks
of primary techniques are made against other secondary valuation techniques.
In determining fair valuation of certain unlisted securities, the Valuation
Committee engages independent valuers which rely on the financial data of
investees and on estimates made by the management of the investee companies as
to the effect of future developments.
The Fund enters into secured lending transactions which are reported as
operating activities in these consolidated financial statements. Loans
receivable are recorded at the amount of cash advanced and the related interest
receivable under the loan agreements. Interest income is accrued using the rates
associated with the related loans. The valuation techniques applied usually
consist of discounted cash flow analysis which is the net present value of the
estimated future cash flows adjusted as appropriate for liquidity, credit,
market and other risk factors. The changes in fair value of loans receivable are
included in realized and unrealized gains and losses from investments.
Although the Valuation Committee uses its best judgment in estimating fair
value, there are inherent limitations in any valuation technique. Estimated fair
value may differ significantly from the value that would have been used had a
readily available market for such investments existed and these differences
could be material to the financial statements. Additional information about the
level of market observability associated with investments carried at fair value
is disclosed in Note 4 below.
(d) Cash and cash equivalents
Cash represents cash at banks and does not include restricted cash such as fixed
deposits pledged as security for the bank loans. Cash equivalents are defined as
those instruments which mature within 3 months of the date of purchase.
(e) Bank loans
Bank loans are initially recognized at fair value, net of transaction costs
incurred and subsequently stated at amortized cost. Any difference between the
proceeds (net of transaction costs) and the redemption value is recognized in
the consolidated statement of operations over the period of the borrowing using
the effective interest method.
(f) Foreign currency translation
The books and records of the Fund are maintained in United States Dollars
("US$"), which is also the functional currency. Assets and liabilities, both
monetary and non-monetary, denominated in foreign currencies are translated into
US$ at year-end exchange rates, while income and expenses are translated at the
exchange rates in effect during the year.
The net realized and unrealized gains or losses from investments denominated in
currencies other than the functional currency include the fluctuations arising
from changes in exchange rates and the fluctuations arising from changes in the
market prices of securities held or sold short during the year.
(g) Income taxes
The Fund may be subject to taxes imposed in other countries in which it invests.
Such taxes are generally based on income and gains earned. Taxes are accrued on
investment income, realized gains, and unrealized gains, as appropriate, when
the income and gains are earned. The Fund accrues for liabilities relating to
uncertain tax positions only when such liabilities are probable and can be
reasonably estimated. Such income and gains are recorded gross of taxes in the
consolidated statement of operations and taxes are shown as a separate item in
the consolidated statement of operations.
(h) Recognition of income and expenses
Interest income on bank balances is accrued as earned using the effective
interest method.
Loan origination income is recognized when the relevant services are rendered.
Expenses are recorded on an accrual basis.
3 Concentration of risks
(a) Market risk
Market risk represents the potential loss in value of financial instruments
caused by movements in market variables, such as equity prices.
Investments are made with a focus on the Greater China. Political or economic
conditions and the possible imposition of adverse laws or currency exchange
restrictions in that region could cause the Fund's investments and the
respective markets to become less liquid and also the prices to become more
volatile.
The Fund's investments may have concentration in a particular industry or sector
and performance of that particular industry or sector may have a significant
impact on the Fund.
The Fund's investments may also be subject to the risk associated with investing
in private equity securities. Investments in private equity securities may be
illiquid and subject to various restrictions on resale and there can be no
assurance that the Fund will be able to realize the value of such investments in
a timely manner.
See Note 4 below for a discussion on the inputs in fair value measurement of the
Fund's investments.
(b) Interest rate risk
Interest rate risk arises from the fluctuations in the prevailing levels of
market interest rates which affect the fair value of financial assets and
liabilities and future cash flows. The Fund has bank accounts, restricted cash,
loans receivable and bank loans that expose the Fund to interest rate risk. The
Fund has direct exposure to interest rate changes in respect of the valuation
and cash flows of its interest bearing assets and liabilities. The Fund may also
be indirectly affected by interest rate changes in respect of the earnings of
certain companies in which it invests.
(c) Currency risk
The Fund has assets and liabilities denominated in currencies other than the
US$, the functional currency. The Fund is therefore exposed to currency risk as
the value of assets and liabilities denominated in other currencies may
fluctuate due to changes in exchange rates.
The net assets of the Fund are denominated in the following currencies:
2009 2008
US$ US$
Renminbi 146,624,339 152,451,757
United States Dollar 62,917,528 208,370,976
Others - 5,548
?????????? ??????????
209,541,867 360,828,281
?????????? ??????????
(d) Credit risk
The Fund is exposed to default risk by the counterparties of the loans
receivable. Whilst the loans receivable are structured to provide the Fund with
adequate collateral in the event of default, enforcement may be subject to the
legal system of the countries where the relevant agreements are entered. Even
where the contract is enforced, the collateral may not be sufficient to fully
compensate the Fund for default losses. In an attempt to mitigate the losses,
the Fund, where possible, obtains independent valuations of the collateral on a
regular basis and monitors the fair value of collateral relative to the loan
amounts plus accrued interest and where necessary, requires additional cash or
collateral from the borrower to manage its exposure. However, these valuations
do not guarantee the ultimate realizable value of the collateral.
The legal system of the countries in which the Fund invests vary widely in their
development, degree of sophistication, attitude, and policies towards
bankruptcy, insolvency, liquidation, receivership, default and treatment of
creditors and debtors. Furthermore, the effectiveness of the judicial system of
the countries in which the Fund invests varies, thus the Fund (or any entity in
which the Fund holds a direct or secondary interest) may have difficulty in
successfully pursuing claims in the courts of such countries. To the extent that
the Fund or an entity in which the Fund holds a direct or secondary interest has
obtained a judgement but is required to seek its enforcement in the courts of
the countries in which the Fund invests, there can be no assurance that the
court will enforce such judgement.
The Fund is also exposed to credit risk in respect of its investments in debt
securities, bank balances and amounts due from trade counterparties. The bank
balances are kept in a number of banks including UBS AG, China Minsheng Bank,
Shenzhen Ping An Bank and Standard Chartered Bank.
(e) Liquidity risk
As the Company is closed-end, it is not exposed to redemptions of shares by its
shareholders.
The Fund is exposed to liquidity risk as some of the investments of the Fund are
illiquid while some of the Fund's liabilities are with short maturity. The
Fund's bank loans are fully collateralized with cash. Illiquid investments
include any securities or instruments which are not actively traded on any major
securities market or for which no established secondary market exists where the
investments can be readily converted into cash. Reduced liquidity resulting from
the absence of an established secondary market may have an adverse effect on the
prices of the Fund's investments and the Fund's ability to dispose of them where
necessary to meet liquidity requirements. As a result, the Fund may be exposed
to significant liquidity risk. Details of the maturity analysis on loans
receivable are set out in Note 5 below.
China currently has foreign exchange restrictions, especially in relation to the
repatriation of foreign funds. Any unexpected foreign exchange control in China
may cause difficulties in the repatriation of funds. The Fund invests in China
and is therefore exposed to the risk of repatriating funds out of China on a
timely basis to meet its obligations. See Note 3(c) above for exposures to
Renminbi.
The Fund has the ability to borrow in the short term and this is subject to
certain limitations, including the total amount of all borrowings outstanding at
any time shall not exceed 50% of the Fund's total assets at such time.
4 Investments
The fair value hierarchy prioritizes inputs to measure fair value and gives the
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 measurements) and the lowest priority to
unobservable inputs (level 3 measurements).
The three levels of the fair value hierarchy are described below:
Level 1 Inputs to measure fair values are unadjusted quoted prices in active
markets that are accessible at the measurement date for identical unrestricted
assets or liabilities.
Level 2 Inputs to measure fair values are quoted prices in markets that are not
active, quoted prices for similar assets in active markets or prices or
valuations for which all significant inputs are observable, either directly or
indirectly.
Level 3 Inputs to measure fair values are both significant to the fair value
measurement and unobservable.
Inputs to measure fair values broadly refer to the assumptions that market
participants use to make valuation decisions, including assumptions about risk.
Inputs may include price information, volatility statistics, specific and broad
credit data, liquidity statistics and other factors. An asset or a liability's
level within the fair value hierarchy is based on the lowest level of any input
that is significant to the fair value measurement. However, the determination of
what constitutes "observable" requires significant judgment. The Valuation
Committee considers observable data to be such market data which is readily
available, regularly distributed or updated, reliable and verifiable, not
proprietary and provided by multiple, independent sources that are actively
involved in the relevant market. The categorization of an asset or a liability
within the hierarchy is based upon the pricing transparency of the asset or
liability and does not necessarily correspond to the Valuation Committee's
perceived risk of that asset or liability.
Level 1
Investments in listed stocks and derivatives that are valued using quoted prices
are generally classified within level 1 of the fair value hierarchy.
As at 31 December 2009, the Fund did not have any investments that were
categorized as level 1 within the fair value hierarchy (2008: Nil).
Level 2
Investments in listed stocks for which trading is restricted for a certain
period of time and for which the restriction is applicable to market
participants in general (for example, legal person shares containing lock-up
periods) are valued using the last traded prices of the listed stocks after
factoring in discounts for liquidity. Such investments are generally classified
within level 2 of the fair value hierarchy. The discounts for restrictions are
estimated by the Valuation Committee by analyzing the length of the restriction
period and are as follows:
Discount for restrictions Length of restriction period
5% 1 to 6 months
10%, reducing over the period 7 to 12 months
25%, reducing over the period More than 12 months
As at 31 December 2009, the Fund did not have any investments that were
categorized as level 2 within the fair value hierarchy (2008: Nil).
Level 3
Assets are classified within level 3 of the fair value hierarchy if they are
traded infrequently and therefore have little or no price transparency. Such
assets include investments in unlisted stocks and bonds and loans receivable.
Valuation methodologies utilized by the Valuation Committee include comparable
transactions or performance multiples, latest round of financing, and are
supported by independent valuation of underlying assets. The selection of
appropriate valuation techniques may be affected by the availability of reliable
inputs, including management accounts or locally audited financial statements of
the underlying investee companies. In some cases, one valuation technique may
provide an appropriate estimation of fair value while in other circumstances,
multiple valuation techniques may be used. Once used, the methodology will
continue to be used until a new, more appropriate method is determined.
The fair value of loans receivable is determined using multiple inputs,
including terms of maturity, estimated cash flows under the loans, valuation of
the underlying collateral and credit assessment of the borrowers. The Valuation
Committee considers the cost of the loans receivable generally approximate their
fair values since the loans have relatively short maturity and the interest
rates charged reflect market rates.
The following table summarizes the assets which are carried at fair value on the
consolidated statement of assets and liabilities by captions and by levels
within the fair value hierarchy.
Assets at fair value as at 31 December
2009
Level 1 Level 2 Level 3 Total
US$ US$ US$ US$
Investments - stocks - - 191,611,208 191,611,208
Investments - bonds - - 44,976,526 44,976,526
Investments - loans receivable (Note - - 50,005,128 50,005,128
5)
?????? ?????? ?????????? ??????????
- - 286,592,862 286,592,862
?????? ?????? ?????????? ??????????
Assets at fair value as at 31 December 2008
Level 1 Level 2 Level 3 Total
US$ US$ US$ US$
Investments - stocks - - 72,745,627 72,745,627
Investments - bonds - - 40,000,000 40,000,000
Investments - loans
receivable (Note 5) - - 144,302,049 144,302,049
?????? ?????? ?????????? ??????????
- - 257,047,676 257,047,676
?????? ?????? ?????????? ??????????
As at 31 December 2009, investments of US$184,546,166 (2008: US$92,584,266) were
held directly by the Fund, and investments of US$102,046,696 (2008:
US$164,463,410) were held through jointly controlled entities with Pacific
Alliance Asia Opportunity Fund L.P.
The following table summarizes the changes in fair value of the Fund's level 3
instruments.
Investments Investments Investments -
- stocks - bonds loans
receivable Total
US$ US$ US$ US$
At 5 September 2007
(date of - - - -
incorporation)
Purchase of investments 66,601,650 40,000,000 109,534,792 216,136,442
Net realized gains - - 2,074,363 2,074,363
Net change in 6,143,977 - 32,692,894 38,836,871
unrealized gains
????????? ????????? ?????????? ??????????
At 31 December 2008 72,745,627 40,000,000 144,302,049 257,047,676
Purchase of investments 67,714,500 - - 67,714,500
Sale/repayment of (25,826,485) - (85,501,227) (111,327,712)
investments
Net realized gains - - 16,620,660 16,620,660
Net change in
unrealized gains/ 76,977,566 4,976,526 (25,416,354) 56,537,738
(losses)
????????? ????????? ?????????? ??????????
At 31 December 2009 191,611,208 44,976,526 50,005,128 286,592,862
????????? ????????? ?????????? ??????????
Total net change in unrealized gains on level 3 instruments as shown above are
presented in the consolidated statement of operations.
5 Investments - loans receivable and bonds
As at 31 December 2009, the Fund had loans receivable from unaffiliated parties
amounting to US$50,005,128 (2008: US$144,302,049). The loans will mature in the
next 6 months. The Fund held collateral on these loans receivable, including
land, shares of the borrowers, other listed or unlisted equity investments or
key assets of the borrowers. The interest rates charged in accordance with loan
agreements generally range from 10% to 35% per annum (2008: 27.5% to 33% per
annum). During the year ended 31 December 2009, the Fund made an early exit of a
pre-IPO loan at a 12% per annum return. For the year ended 31 December 2009,
total realized gains recognized on these loans amounted to US$16,620,660 (period
from 5 September 2007 (date of incorporation) to 31 December 2008: realized
gains of US$2,074,363), which is calculated based on the apportionment of the
repayment amount based on the effective interest rate.
The loans are categorized into the following types by structure:
2009 2008
US$ US$
Repurchase agreements 50,005,128 125,689,720
Other secured borrowings - 18,612,329
?????????? ??????????
50,005,128 144,302,049
?????????? ??????????
As at 31 December 2009, the Fund had a bond investment from an unaffiliated
party amounting to US$44,976,526 (2008: US$40,000,000) which will mature in the
next 12 months. The Fund held collateral on the bond investment in the form of
assets of the bond issuer and its subsidiaries. The fair value of the investment
is determined by the Valuation Committee. For the year ended 31 December 2009,
total unrealized gains recognized on the bond amounted to US$4,976,526 (2008:
Nil).
6 Bank loans
In order to finance the investment projects in different currencies, the Fund
may from time to time enter into loan agreements with banks which are fully
secured by deposits in currencies other than the denomination of the loans held
directly by the Fund or related entities. In the event that amounts under the
loan agreements are due and not paid, the banks are entitled to receive an
amount of the deposits equal to the unpaid amount.
As at 31 December 2009, one (2008: Nil) bank loan was drawn from a bank which
amounted to US$12,000,000 and the loan matured and was repaid on 4 January
2010. The interest rate charged on the loan was LIBOR plus 1% per annum with
fixed deposits of US$12,000,000 pledged to the bank.
For the year ended 31 December 2009, total interest expense incurred on bank
loans amounted to US$85,569 (period from 5 September 2007 (date of
incorporation) to 31 December 2008: Nil).
7 Share capital, share premium, capital surplus and treasury shares
Number of Share Share Capital Treasury
shares capital premium surplus shares Total
US$ US$ US$ US$ US$
As at 5
September - - - - - -
2007 (date of
incorporation)
Issue of
shares 400,000,000 4,000,000 396,000,000 - - 400,000,000
Repurchase and
cancellation
of
shares (30,000,000) (300,000) (29,700,000) 3,910,000 - (26,090,000)
Repurchase of
shares as
treasury
shares (29,960,000) - - - (26,215,000) (26,215,000)
----------- ----------- ----------- ----------- ----------- -----------
As at 31
December 2008 340,040,000 3,700,000 366,300,000 3,910,000 (26,215,000) 347,695,000
Repurchase and
cancellation
of
shares (180,166,107) (1,801,661) (178,364,446) (2,093,083) - (182,259,190)
Repurchase of
shares as
treasury
shares (8,031,849) - - - (8,754,715) (8,754,715)
----------- -----------
As at 31
December 2009 151,842,044 1,898,339 187,935,554 1,816,917 (34,969,715) 156,681,095
========= ======== ======== ======== ======== ========
During the period from June 2008 to October 2008, the Company repurchased and
cancelled 30,000,000 shares at an average price of US$0.870 per share (the
highest price was US$0.890 and the lowest price was US$0.845). Upon cancellation
of the shares, the Company recognized a capital surplus of US$3,910,000. In
addition, the Company repurchased 29,960,000 shares at a price of US$0.875 in
October 2008 which were then held as treasury shares.
In March 2009, the Company repurchased 180,166,107 shares at 5% discount off the
Company's net asset value per share for February 2009 of US$1.0649 and cancelled
these shares as part of the restructuring of the Company. Upon cancellation of
the shares, the Company recognized a net capital loss of US$2,093,083. See Note
11(a) below for details.
As at 1 January 2009, the number of treasury shares was 29,960,000. In July
2009, the Company further repurchased 8,031,849 shares at US$1.09 per share
through its wholly-owned subsidiary, PACL Trading Limited, and held these shares
as treasury shares. As at 31 December 2009, the number of treasury shares grew
to 37,991,849 shares.
Refer to Note 14 below for details on additional share repurchase subsequent to
year end.
8 Loan origination income
This balance consists of consultancy and arrangement fees received from
borrowers in relation to loans granted by the Fund. No such fees were earned for
the year ended 31 December 2009.
9 Taxation
The Fund adopted the authoritative guidance contained in FASB ASC 740 on
accounting for and disclosure of uncertainty in tax positions, which required
the directors to determine whether a tax position of the Fund is more likely
than not to be sustained upon examination, including resolution of any related
appeals or litigation processes, based on the technical merits of the position.
For tax positions meeting the more likely than not threshold, the tax amount
recognized in the financial statements is reduced by the largest benefit that
has a greater than 50 percent likelihood of being realized upon ultimate
settlement with the relevant taxing authority.
The uncertain tax positions identified by the directors mainly include:
a. Whether any of the Fund and its offshore SPVs would be deemed as a China Tax
Resident Enterprise ("TRE") under the China Corporate Income Tax ("CIT")
Law. If an offshore entity is deemed as a China TRE, its income would be
subject to China corporate income tax at 25%.
b. Whether any of the Fund and its offshore SPVs that may derive income would
be deemed as having an establishment or place in China. If an offshore
entity has an establishment or place in China, income derived by the
offshore entity that is derived from China by the establishment or place or
income that is effectively connected to the establishment or place would be
subject to China corporate income tax at 25%.
c. Whether any of the Fund and its offshore SPVs is subject to Hong Kong
profits tax. An entity would be subject to Hong Kong profits tax if (i) the
entity carries on a trade, profession or business in Hong Kong; (ii) profits
are derived from that trade, profession or business carried on in Hong Kong
(excluding gains of a capital nature); and (iii) the profits arise in or are
derived from Hong Kong, i.e. have a Hong Kong source.
The directors assessed that the Fund and its offshore SPVs are not TREs in China
and do not have any establishment or place in China. As such, provision for
China tax has been made only on the Fund's China sourced income and realized and
unrealized gains from investments and not on global income had the Fund and its
offshore SPVs been considered TREs in China.
Gains from disposal of investments in China by the Fund or its SPVs may be
subject to China withholding tax at 10% without considering the potential relief
that may be available under any tax treaty between the tax jurisdiction of the
transferor and China. In addition, where Chinese equity investment is held via
an offshore intermediate holding company, exit of the Chinese equity investment
via disposal of shares in the offshore intermediate holding company could be
regarded as an indirect transfer of the Chinese equity investment. According to
the General Anti Avoidance Rules under the China CIT Law, if arrangement of
adopting the above investment holding structure and exiting via indirect
transfer do not have reasonable commercial purpose, the Chinese tax authority is
empowered to disregard such arrangement and impose withholding tax on the gains
from such an indirect transfer. The directors have reviewed the structure of the
investment portfolio and assessed the potential withholding tax implications and
considered adequate provision to China tax has been made on the Fund's financial
statements. As at 31 December 2009, provision for current tax and deferred tax
amounted to US$69,982 (period from 5 September 2007 (date of incorporation) to
31 December 2008: US$124,145) and US$30,049,355 (period from 5 September 2007
(date of incorporation) to 31 December 2008: US$10,168,948) respectively.
The directors have reviewed the structure of the investment portfolio and
considered the Fund's exposure to Hong Kong profits tax has been properly
reflected in the Fund's consolidated financial statements.
Under current Cayman Islands legislation applicable to an exempted company,
there is no income tax, capital gains or withholding tax, estate duty, or
inheritance tax payable by the Fund.
10 Management fees and performance fees
Pursuant to the Investment Management Agreement dated 20 November 2007, the
Investment Manager was appointed to manage the investments of the Fund. The
Investment Manager will receive an aggregate management fee of 2% per annum of
the quarterly Net Asset Value ("NAV"). The management fee is paid quarterly in
advance based on the NAV at the first day of each fiscal quarter. For the year
ended 31 December 2009, total management fees amounted to US$4,253,345 (period
from 5 September 2007 (date of incorporation) to 31 December 2008:
US$8,897,615).
The Investment Manager is also entitled to receive a performance fee in the
event that the year-end NAV is greater than (a) the year-end NAV for the last
year in which a performance fee was payable ("High Water Mark") and (b) the
year-end NAV for the last year in which a performance fee was payable increased
by an annual hurdle rate of 8% ("Hurdle").
The performance fee will be calculated as follows:
* 0% of the relevant increase in the year-end NAV if the year-end NAV is at or
below the Hurdle;
* 100% of the relevant increase in the year-end NAV above the Hurdle up to
10% (the "Catch-up"); and
* 20% of the relevant increase in the year-end NAV above the Catch-up.
For the year ended 31 December 2009, total performance fees amounted to
US$14,424,994 (period from 5 September 2007 (date of incorporation) to 31
December 2008: Nil).
11 Related-party transactions
The Fund had the following significant related-party transactions.
(a) Restructuring with PACL II Limited
On 2 March 2009, the Company held an extraordinary general meeting to approve a
tender offer that allowed shareholders to exchange all or part of their shares
for shares in PACL II Limited ("PACL II"), a Cayman Islands private vehicle that
will be used to realize and distribute cash from exited investments based on the
investment, asset and liability positions held by the Fund as at 31 December
2008 ("Tender Offer Portfolio"). PACL II is also managed by the Investment
Manager. It will, without any further action on the part of its shareholders,
automatically wind up and dissolve in 3 years upon when its ordinary shares were
first issued. The duration of PACL II may be extended by 1 year upon written
election by the Investment Manager.
As part of this restructuring, the Company repurchased 180,166,107 shares at 5%
discount off the Company's net asset value per share for February 2009 of
US$1.0649 in exchange for holders of these shares receiving the same number of
shares in PACL II. Under the terms of the tender offer, PACL II is entitled to
receive 50.33% of the proceeds from the Tender Offer Portfolio, which reflects a
5% discount of its proportionate share of the Tender Offer Portfolio.
The total amount due to PACL II is recorded as a payable by the Fund, adjusted
at each period end based on the movement in the fair value of the underlying
assets in the Tender Offer Portfolio.
In addition, the Fund has paid the management fees of PACL II on its behalf.
This amounted to US$2,142,195 and has been deducted from the Fund's payable to
PACL II.
During the year ended 31 December 2009, the Fund distributed US$71,675,801 of
realization proceeds from the Tender Offer Portfolio to shareholders of PACL II.
As at 31 December 2009, the amount due to PACL II was US$115,042,310.
(b) Management fees and performance fees to the Investment Manager
The Fund pays management fees and performance fees to the Investment Manager.
See Note 10 above for details.
(c) Placement fees to Pacific Alliance Investment Management Limited
The Company entered into a private placing agreement with Pacific Alliance
Investment Management Limited ("PAIM") dated 20 November 2007 and agreed to pay
placement fees in the amount of 3% of the total funds raised. For the year ended
31 December 2009, there were no placement fees as there were no additional share
offerings. For the period from 5 September 2007 (date of incorporation) to 31
December 2008, US$5,522,700 out of the total US$12,000,000 placement fees was
paid to PAIM.
12 Financial highlights
Net asset value per share at the end of the year/period is as follows:
Period from
Year ended 5 September 2007
31 December 2009 (date of incorporation) to
31 December 2008
Per share data
(for a share outstanding
throughout the year/period)
Net asset value at beginning of 1.0611 1.0000
year/period
Net investment loss (0.2663) (0.0959)
Net realized and unrealized 0.5852 0.1570
gains from investments
???????? ????????
Net asset value at end of 1.3800 1.0611
year/period
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The following represents the ratios to average net assets and other supplemental
information:
2009 2008
Total return before performance fees (1) 39.00% 6.17%
Performance fees 8.95% -
Total return after performance fees (1) 30.05% 6.17%
Ratios to average net assets (2)
Total expenses (19.84%) (10.06%)
Net investment loss (19.48%) (8.28%)
(1) Total return represents the change in NAV (before and after performance
fees), adjusted for cash flows in relation to capital transactions for the
year/period.
(2) Average net assets is derived from the beginning and ending NAV, adjusted
for cash flows in relation to capital transactions for the year/period. For the
year ended 31 December 2009, the average net assets amounted to US$207,531,974
(period from 5 September 2007 (date of incorporation) to 31 December 2008:
US$393,841,170).
13 Commitment and contingency
In the normal course of business, the Fund may enter into arrangements that
contain a variety of representations and warranties and which provide general
indemnification. The Fund's maximum exposure under these arrangements is
unknown, as this involves future claims that may be made against the Fund and
which have not yet occurred. However, based on experience, the directors expect
the risk of loss to be remote.
14 Subsequent events
Management has performed a subsequent events review from 1 January 2010 through
to 26 March 2010, being the date that the financial statements were available to
be issued.
Management concluded that the only material subsequent event which required
additional disclosure in these consolidated financial statements is the
repurchase of 6,970,762 shares, representing 4.60% of the issued share capital,
at US$1.12 per share through its wholly-owned subsidiary, PACL Trading Limited,
and the holding of these shares as treasury shares.
15 Recent accounting pronouncements
Effective 1 January 2009, the Fund adopted the authoritative guidance included
in FASB ASC 860-10, Transfers and Servicing, on accounting for transfers of
financial assets and repurchase financing transactions (formerly FSP FAS
140-3). This guidance applies to a repurchase financing, which is a reverse
repurchase agreement that relates to a previously transferred financial asset
between the same counterparties (or consolidated affiliates of either
counterparty), that is entered into contemporaneously with or in contemplation
of the initial transfer. The directors do not believe that the adoption of such
guidance has a material impact on the Fund's financial statements.
Effective 1 January 2009, the Fund adopted the authoritative guidance included
in FASB ASC 820-10, Fair Value Measurements and Disclosures, on determining fair
value when the volume and level of activity for the asset or liability have
significantly decreased and on identifying transactions that are not orderly
(formerly FSP FAS 157-4). FASB ASC 820-10-35-51A to 51H indicates that if an
entity determines that either the volume and/or level of activity for an asset
or a liability has significantly decreased (from normal conditions for that
asset or liability) or price quotations or observable inputs are not associated
with orderly transactions, increased analysis and management judgment will be
required to estimate fair value. Valuation techniques such as an income approach
might be appropriate to supplement or replace a market approach in those
circumstances. It provides a list of factors to determine whether there has been
a significant decrease in relation to normal market activity. Regardless of the
valuation techniques and inputs used, the objective for fair value measurement
in those circumstances is unchanged from what it would be if markets were
operating at normal activity levels and/or transactions were orderly, that is,
to determine the current exit price as promulgated by FASB ASC 820-10. The
guidance also requires additional disclosures regarding inputs and valuation
techniques used, change in valuation techniques and related inputs, if any, and
more disaggregated information relating to debt and equity securities. The
adoption of this guidance did not materially impact the Fund's financial
statements.
In June 2009, the FASB issued SFAS 167, Amendments to FASB Interpretation No.
46(R) ("SFAS 167"), which amends the consolidation guidance for variable
interest entities under FIN 46(R). Although SFAS 167 is effective for the
beginning of an entity's first annual reporting period that begins after 15
November 2009, it has been deferred indefinitely for investment companies that
are currently accounting for their investments in accordance with the
specialized accounting guidance in FASB ASC 946-10, Financial Services -
Investment Companies (formerly, the AICPA Audit and Accounting Guide, Investment
Companies). The Fund has accounted for its investments in accordance with the
current provisions of FASB ASC 946-10 and is carrying them at fair value in the
consolidated statement of assets and liabilities.
In June 2009, the FASB issued FASB ASC 105-10, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
(formerly SFAS 168). FASB ASC 105-10 replaces SFAS 162, The Hierarchy of
Generally Accepted Accounting Principles, and establishes the FASB Accounting
Standards Codification ("Codification") as the source of authoritative
accounting principles recognized by the FASB to be applied by non-governmental
entities in the preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America. The
Codification became the exclusive authoritative reference at 30 September 2009.
Updates to the Codification Standards are issued as Accounting Standard Updates
by the FASB. The adoption of the Codification does not impact the Fund's
financial statements except for references made to authoritative accounting
literature in the notes.
On 31 December 2009, the Fund adopted the FASB amendments to general standards
included in FASB ASC 855-10, Subsequent Events, on accounting for and
disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued (formerly
SFAS 165). FASB ASC 855-10 is effective for interim or fiscal periods ending
after 15 June 2009. The adoption of this guidance did not materially impact the
Fund's financial statements.
[HUG#1408776]
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