On 31 December 2011, the Company's share price closed at US$1.28, a 2.6% increase year-on-year and a 39% discount to the audited NAV per share. PACL's NAV and share price have both outperformed major benchmark indices including the FTSE 350 Real Estate Index and the FTSE AIM All-Share Index on a consistent basis since inception.

 
                                                  31 December          31 December 
                                                         2011                 2010 
                                                          US$                  US$ 
 Realized Gain 
 Investment interest income                        86,349,238           15,441,136 
 Dividend income                                    1,658,868              332,100 
 Deposit interest                                   1,345,620              581,868 
 Other income                                       4,550,860            1,209,875 
                                           ------------------   ------------------ 
                                                   93,904,586           17,564,979 
 Change in Unrealized Gain/(Losses) 
 Pre-IPO financing                                (8,524,040)           29,829,626 
 Bridge financing                                 (4,120,913)          (5,129,675) 
 Co-development                                   (6,442,003)            9,466,229 
 Other real estate investments                     13,946,594           46,636,232 
 Share of losses / (profits) payable to 
  PACL II                                           2,383,238          (9,403,257) 
 Foreign exchange                                   7,478,035            4,479,011 
                                           ------------------   ------------------ 
                                                    4,720,911           75,878,166 
                                           ------------------   ------------------ 
                                                   98,625,497           93,443,145 
 
 

Portfolio Summary

As at 31 December 2011, the Company held investments with a cost of approximately US$129 million and fair value of US$312 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

 
                                                                               Attributable 
                       Fair value                           % of                    to PACL 
 Investment           (gross) US$    Type of investment    total    Location             II 
 Project Diplomat      76,938,054     Asset acquisition   16.27%     Beijing              - 
                                                                    Mainland 
 Project Malls         76,372,900   Platform investment   16.15%       China              - 
                                                                    Mainland 
 Project Auspice       52,853,760     Pre-IPO Financing   11.17%       China              - 
                                       Bridge Financing 
 Project Speed         48,957,746                   (1)   10.35%   Guangdong     24,642,686 
 Project Winpoint      29,777,820        Co-Development    6.30%    Jiangyin              - 
                                         Co-Development 
 Project Jingrui       17,495,501                   (1)    3.70%      Huzhou      8,806,290 
                                       Bridge Financing 
 Project Olympic        9,807,034                   (1)    2.07%     Beijing      4,936,332 
                                      Pre-IPO Financing             Mainland 
 HNA - Options            258,900                   (1)    0.05%       China        130,316 
 Cash                 160,526,823              Cash (1)   33.94%                 16,516,760 
 TOTAL                472,988,538                           100%                 55,032,384 
 

Note

(1) The gross investment value includes an amount attributable to the PACL II shareholders.

Investment Strategy

During the year, the investment manager has continued to search for investment opportunities in the commercial property sector, which presents a positive investment outlook, while continuing to minimize its direct exposure to the residential sector, which is negatively impacted by the policies of the central and local governments to curb price inflation in the residential market.

Over the last twelve months, we have witnessed solid growth in both rentals and occupancies in Grade A office and retail properties in major cities such as Beijing and Shanghai, as business demand from companies and retail brands continues to increase. This is also due to the more limited supply of office and retail properties in these first tier locations. We expect the positive trend in the retail sector will continue in 2012, but the upward rental growth trend in the office sector will likely slow due to a more negative global economic outlook.

Investments in commercial properties appear to represent the best opportunity to hedge inflation in Asia, as retail rents are correlated with retail sales which have been growing at double digits for several years.

As a result of the major strategic shift of the Company in 2009 to focus on opportunities in the retail, office and leisure property sectors, our portfolio has less exposure to the current price corrections in the residential market. Fortunately the residential sector represents only 38% of the portfolio and the retail, office and leisure sectors represents the majority of the portfolio at around 62%.

Looking ahead, we will focus on two key areas in 2012. First, to improve the operation of our existing investments in order to maximize the Net Asset Value of each investment. Second, to seek investment opportunities in this negative market sentiment where we can acquire properties at deep discounts as developers and owners struggle to obtain financing in the current tight credit environment. We do not expect any easing in credit policy towards the property sector for at least six to twelve months, which should present us with attractive acquisition opportunities.

Co-Developments with Preferred Returns

As a result of credit-tightening and transaction volumes dropping, highly leveraged local developers with cash constraints will continue to turn to alternative financing sources for funding solutions, and we expect to see new co-development opportunities with preferred returns.

As monetary policy is likely to remain tight for the foreseeable future we anticipate developers will become more flexible. Previously, it was difficult to find medium-size developers with quality projects in a good location who were willing to provide partners with a preferred return. But with continued tightening it is likely there will be opportunity to secure guaranteed return structures that provide downside protection without capping returns.

Growth Strategies

Value-Added Asset Acquisitions

The Chinese government's strict residential property cooling measures implemented in 2011 have caused home sales volumes to fall by half in major cities year-on-year, hurting developers' profits and cash flows and prompting some to cut prices of new homes by up to 20%. According to the "Seventy Large-and-medium-size Cities New Housing Price Index" produced by the Statistics Bureau of China, the number of cities reporting negative month-on-month housing price change increased from 17 in September to 34 in October, 49 in November and finally 52 in December. In fact, the severe liquidity tightening has led some developers to sell their existing or nearly-completed properties which represent great value-added acquisition targets for the Company. The investment manager will aggressively pursue these opportunities in 2012.

Platform and Pre-IPO Investments

Financing channels for developments are becoming increasingly restricted due to the government's various cooling measures. As a result, some developers that were planning to IPO may now be forced to consider strategic investments at the corporate and/or project level to secure necessary funds. We expect this will create a new platform and/or Pre-IPO investment opportunities for the Company. The investment manager will seek opportunities with quality companies that have proven track records and high-quality land banks.

Distribution Policy

On 7 February 2011, the Company's distribution policy was modified to match distributions to shareholders with ordinary course realizations to maximize returns, instead of liquidating an investment primarily to fund distributions. The modified policy will also require that each distribution represent 50% of the Company's net realized profit of the fully realized investment, with the returned principal plus the balance of the net realized profit available for reinvestment

Conclusion

2011 was an exciting year as we saw strong results from growth strategies implemented in late 2009 to chart a new retail/commercial focus for the Company. The Company has achieved significant NAV appreciation from these key investments that were made when market sentiment was poor and prices were distressed. With the current tight monetary policy at arguably the most severe in the past decade, we expect to see distress in developers which should create more demand for bridge financing and co-development offering preferred returns. We also expect these conditions to present opportunities to acquire existing assets and to make equity investments in platform companies at deep discounts.

As at 30 March 2012, approximately US$31 million has been converted from Renminbi to United States Dollars and repatriated out of China. With the remaining US$26 million to be repatriated in April 2012, the Fund totally received US$57 million (representing 49% of the cash balance as at year-end).

Investing Policy

Geographical and Sector Focus

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