TIDMPACL
RNS Number : 1521D
Pacific Alliance China Land Limited
24 April 2013
24 April 2013
Pacific Alliance China Land Limited
Full year results for the period ended 31 December 2012
Pacific Alliance China Land Limited ('PACL' or the 'Company'),
an AIM-traded, closed end investment company with a portfolio of
investments including existing properties, new developments,
distressed projects and real estate companies in Greater China, has
today announced its full year audited financial results to 31
December 2012.
Financial Highlights
-- Net asset value as at 31 December 2012 was US$297.7 million,
representing US$2.25 per share, a 7% increase from 31 December 2011
(US$295 million, representing US$2.11 per share).
-- The Company's share price closed at US$1.58 on 31 December
2012. This represented a 23% increase year on year, and a 30%
discount to the audited net asset value per share.
-- PACL's net asset value and share price have continued to
consistently outperform major benchmark indices including the FTSE
350 Real Estate Index and the FTSE AIM All-Share index.
-- Since inception, the Company's net asset value per share has
grown from US$1.00 to US$2.25 per share (as at 31 December 2012),
equivalent to a compound annual growth rate of 17%.
Portfolio and Fund Developments
-- In the fourth quarter of 2012, the Company expanded the
portfolio by investing in Project Crystal, a listed company with a
quality portfolio of commercial properties comprising
income-producing and development assets across China that was
trading at a substantial discount to net asset value.
-- Project Diplomat, recognized as one of the most prestigious
serviced apartment developments in Beijing, continued to deliver
outstanding results with substantial increases in both net
operating income and property value. The property achieved an
average occupancy rate of 96.9% in 2012. The property's value
increased 10.3% year-on-year from RMB1.697 billion to RMB1.871
billion driven by the strong growth in the property's net operating
income.
-- Project Auspice, China's largest mixed-use developer,
continued to achieve strong double-digit growth in revenue and
profit with a number of shopping malls opened during the year.
Since acquisition, the NAV of the project has increased by more
than 3 times, driven by the investee company's solid growth in
terms of revenue (CAGR of 30.3%), far outperforming its peers
during the period. In the fourth quarter of 2012, the project
posted a solid quarterly increase of 14.0% in NAV, as a result of
the investee company's continued increase in revenue, and improving
market conditions in the A-share listed comparables.
-- Since the restructuring of the exchangeable notes of Project
Speed in 2011, the borrower began repaying the principal, with
bi-monthly payments to continue until April 2014. To-date, the
borrower has repaid to the consortium approximately 70% of the
principal in a combination of USD and RMB.
Patrick Boot, Managing Director, Pacific Alliance Real Estate
Limited, said the Company expects to see continuing growth in
China's commercial property sector in the year ahead, as well as a
potential slow return of demand in the residential sector as
business conditions stabilize.
"Retail property continued to be the highest performing sector
in China throughout 2012, driven largely by international retailers
and foreign and domestic investors interested in well-designed and
well-managed properties in prominent locations. The sheer volume of
retail sales in many tier one and tier two cities is driving
competition between new entrants and existing international
retailers for quality store locations, and we expect this
competition to intensify," he said.
"The office market is also continuing to experience significant
growth, particularly in those cities with a more domestic-driven
economy, as demand grows and supply remains low."
The Company will continue to focus on investments that exploit
the positive trends in the commercial sector throughout 2013, and
will closely monitor the residential property market for signs of
growth and emerging opportunity to ensure it capitalizes on all
opportunities to deliver solid returns to shareholders.
A full copy of the Annual Report will be distributed to all
registered shareholders and will be available on the Company's
website.
For further information please contact:
MANAGER: LEGAL COUNSEL:
Patrick Boot, Managing Partner Jon Lewis, Group General
Pacific Alliance Real Estate Counsel
Limited PAG
T: (852) 2918 0088 T: (852) 2918 0088
pboot@pagasia.com jlewis@pagasia.com
BROKER: NOMINATED ADVISER:
Hiroshi Funaki Philip Secrett
LCF Edmond de Rothschild Grant Thornton UK LLP
Securities Tel: (44) 20 7383 5100
Tel: (44) 20 7845 5960 Philip.J.Secrett@uk.gt.com
funds@lcfr.co.uk
MEDIA RELATIONS:
Stephanie Barry
PAG
T: (852) 3719 3375
sbarry@pagasia.com
Notes to Editors:
About Pacific Alliance China Land Limited
Pacific Alliance China Land Limited ("PACL") (AIM: PACL) is a
closed-end investment company with net assets of US$297.7 million
as at 31 December 2012. PACL 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 PAG (formerly
known as Pacific Alliance Group), the Asian alternative investment
fund management group. Founded in 2002, PAG is now one of the
region's largest Asia-focused alternative investment managers, with
funds under management across Private Equity, Real Estate and
Absolute Return strategies.
PAG has a presence across Asia with over 320 staff working in
the region.
For more information about PAG, please visit:
www.pagasia.com
Chairperson's Statement
Pacific Alliance China Land Limited continued its growth
momentum in 2012. The Company's net asset value ("NAV") as of 31
December 2012 was US$297.7 million, or US$2.2542 per share, which
represents a year-on-year increase of 7% from 2011, and a compound
annual growth rate of 17% since inception.
The Company's performance continues to benefit from growth
strategies which focus on the retail and commercial property
sectors. Growth in 2012 was driven by two strategic investments
made in 2009 -- Project Diplomat and Project Auspice. Project
Diplomat, recognized as one of the most prestigious serviced
apartment developments in Beijing, continued to deliver outstanding
results with substantial increases in both net operating income and
property value. The property's high quality construction and
operation, together with an effective and proactive sales and
marketing campaign, has established the property as a leading brand
within the capital's high-end serviced apartment segment. Project
Auspice, China's largest mixed-use developer, continued to achieve
strong double-digit growth in revenue and profit with a number of
shopping malls opened during the year.
In the fourth quarter of 2012, the Company expanded the
portfolio by investing in Project Crystal, a listed company with a
quality portfolio of commercial properties comprising
income-producing and development assets across China that was
trading at a substantial discount to net asset value. This
investment reinforces our focus on quality investment opportunities
in the commercial, retail and leisure property sectors to fuel
future NAV growth. These sectors continue to benefit from the
government's favorable pro-consumption policy, fast-growing
urbanization, rapidly rising income and wealth, and we expect
growth to continue in the near term.
Market sentiment for China's residential property sector appears
to have improved since the second half of 2012, as signaled by
steadily rising home sales volumes. However, as the current
government policy measures, notably purchase restrictions, are not
expected to be lifted in the near term, the Investment Manager will
continue to hold a cautious line on the residential property sector
and continue to closely monitor any shift in market conditions.
The Board of Directors would like to thank you for your
continued commitment and support in 2012. Our unique multi-strategy
approach has enabled us to achieve capital protection and asset
appreciation through the different phases of what have been
challenging market cycles. The Board and management team remain
committed to delivering attractive risk-adjusted returns to
shareholders and will work hard towards delivering positive results
in 2013.
Investment Manager's Report
Pacific Alliance China Land Limited continued its growth
momentum in 2012. The Company's net asset value ("NAV") as of 31
December 2012 was US$297.7 million, or US$2.2542 per share, which
represents a year-on-year increase of 7% from 2011, and a compound
annual growth rate of 17% since inception.
On 31 December 2012, the Company's share price closed at
US$1.58, a 23% increase year-on-year and a 30% discount to the
audited NAV per share. PACL's NAV and share price have both
outperformed major benchmark indices including the FTSE 350 Real
Estate Index and the FTSE AIM All-Share Index on a consistent basis
since inception.
31 December 31 December
2012 2011
US$ US$
Realized Gain
Investment income 13,183,918 86,349,238
Dividend income 1,497,780 1,658,868
Other income 1,007,451 4,550,860
Deposit interest 484,744 1,345,620
------------------ ------------------
16,173,893 93,904,586
Change in Unrealized Gain/(Losses)
Pre-IPO financing 18,646,424 (8,524,040)
Other real estate investments 17,700,423 13,946,594
Listed stock 399,104 -
Bridge financing (2,711,499) (4,120,913)
Co-development (10,267,011) (6,442,003)
Share of losses / (profits)
payable to PACL II (2,104,903) 2,383,238
Foreign exchange (33,222) 7,478,035
------------------ ------------------
21,629,316 4,720,911
------------------ ------------------
37,803,209 98,625,497
Portfolio Summary
As at 31 December 2012, the Company held cash of US$63 million
and investments with a cost of approximately US$125 million and
fair value of US$333 million. The Company's portfolio is
diversified across six strategies including Listed Stock, Bridge
Financing, Co-Development, Pre-IPO Financing, Platform Investment
and Asset Acquisition.
Attributable
to PACL
Fair value II Limited
Investments (gross) % of ("PACL
and Cash US$ Type total Location II")
Project
Crystal 14,154,659 Listed Stock 3.57% Singapore -
Project
Diplomat 90,067,677 Asset acquisition 22.75% China (Beijing) -
Project
Malls 80,943,700 Platform investment 20.44% China -
Project
Auspice 71,800,175 Pre-IPO Financing 18.13% China -
Project Bridge Financing
Speed 38,541,312 (1) 9.73% China (Guangdong) 19,399,615
Project
Winpoint 29,653,172 Co-Development 7.49% China (Jiangyin) -
Project Bridge Financing
Olympic 7,432,344 (1) 1.88% China (Beijing) 3,741,041
Pre-IPO Financing
HNA - Options 146,665 (1) 0.04% China 73,823
Cash 63,256,654 Cash (1) 15.97% 14,063,960
TOTAL 395,996,358 100% 37,278,439
Note
(1) The gross investment value includes an amount attributable
to the PACL II shareholders.
Investment Strategy
During the year, the Investment Manager has been actively
exploring opportunities in the commercial property sectors, which
continue to look attractive. In contrast, the residential sector
continues to feel the effects of Chinese government cooling
measures; however, the Investment Manager believes that demand for
residential properties will ultimately be restored by China's
steadily rising urbanization and growing average household income
over the longer term and will continue to watch for emerging
opportunities.
Over the past twelve months, the commercial property markets in
first-tier cities continued to experience strong growth. The office
market in cities with a more domestic driven economy outperformed
others as a result of solid demand from domestic occupiers against
a backdrop of low supply. Retail continued to be the best
performing sector, largely due to international retailers, and
foreign and domestic investor interest in well-designed and
well-managed properties in prominent locations. The sheer volume of
retail sales and the sustained growth rates have resulted in
increasing competition between new entrants and existing
international retailers for quality store locations in both first-
and second-tier cities. As retail density in most cities in China
remains low by Asia Pacific standards, the Investment Manager has a
positive outlook on the continued and future growth of the retail
property sector.
The Company continues to reap the benefits of a strategic shift
in the portfolio in 2009 towards commercial property and reduced
exposure to the residential market. With more than two thirds of
the portfolio invested in retail, office and leisure property, the
Company has substantially mitigated the policy risks that have been
directed at the residential property sector in the last three
years. Looking ahead, we will continue to focus on commercial
property while deploying multiple strategies where opportunity
exists.
Bridge Financing
Refinancing risk for larger and stronger developers is expected
to be manageable in the near term. On the other hand, weaker
developers who are still struggling to service their debt
obligations continue to rely on asset disposals and alternative
financing options as major sources of funding, and this continues
to create opportunities for our bridge financing strategy. When
evaluating potential investments, the Investment Manager will
target borrowers that have both solid underlying real estate
fundamentals and appropriate credit-worthiness with quality assets
as collateral.
Co-Developments with Preferred Returns
With improved market sentiment, we have observed that large
developers have continued to replenish their land banks,
particularly in the mixed-use property sector. With our experience
and track record we are well placed to evaluate and exploit
attractive commercial development opportunities in the first-tier
and major second-tier cities.
Growth Strategies
Value-Added Asset Acquisitions
The Investment Manager has been active in seeking investment
opportunities in first-tier cities and has focused on existing or
nearly completed retail/commercial properties that have substantial
value-added and/or repositioning potential. The Investment Manager
believes that good-quality and well-located properties with a
unique value proposition will have strong growth potential and a
high level of market liquidity, while the team's long-term
relationships with key industry players allow us to source
opportunities at deep discounts not available to the broader
market.
Listed Debt/Equities
Despite the improved market conditions in the equity markets,
many Chinese real estate development companies are trading at
substantial discounts to their net asset value, which presents
opportunities for pursuing investments in listed debt and/or
equities. As we explore opportunities, we will not only focus on
companies that own a high-quality property portfolio and a steady
development pipeline but also focus on reputation, proven
development track record and strong execution capability.
Platform and Pre-IPO Investments
Developers who had planned for IPOs may now be forced to
consider strategic financing at a corporate and/or project level to
secure additional funding. We expect this will present new platform
opportunities. As with the listed debt/equities strategy, we will
pursue opportunities with quality companies with good track records
and high-quality land banks.
Shareholder Distribution
In 2012, PACL distributed a total of US$19.4 million to
shareholders. The Company will continue its efforts to make further
distributions after successful exits and cash repatriation.
Share Purchase Program
In November 2012, the Company announced a Share Purchase program
as part of its effort to reduce the current discount between the
share price and the net asset value per share. The Company has
committed up to US$10 million to purchase its ordinary shares at
market price.
Conclusion
While the market environment and fundamental business conditions
appear to have stabilized since the second half of 2012, the
current government policies are expected to remain unchanged, which
means China's residential property market is likely to continue its
slow recovery in 2013. The Investment Manager's multi-strategy
approach has proven to be successful in enabling the portfolio to
achieve healthy sustainable growth. Thus, the Investment Manager
will continue with its multi-strategy approach and work hard to
deliver positive growth in NAV and share price in 2013.
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
AS AT 31 DECEMBER 2012
Note 2012 2011
US$ US$
Assets
Investments, at fair value
(Cost: US$125,030,476; 2011:
US$128,798,042) 3,4 332,739,704 312,461,715
Other receivables 534,237 185,259
Restricted cash 5 - 43,330,560
Cash and bank balances 63,256,654 117,196,263
-------------------- --------------------
Total assets 396,530,595 473,173,797
------------------- -------------------
Liabilities
Provision for taxation 8 54,161,267 62,264,914
Amounts due to PACL II Limited 11(a) 35,328,424 55,890,197
Bank loan 5 - 38,121,000
Performance fee payable 9 4,867,149 12,542,028
Provision for investment
agency fees 10 4,049,438 7,841,354
Accrued expenses and other
payables 389,782 1,756,219
-------------------- --------------------
Total liabilities 98,796,060 178,415,712
------------------- -------------------
Net assets 297,734,535 294,758,085
Analysis of net assets
Share capital 6 1,898,339 1,898,339
Share premium 6 187,935,554 187,935,554
Capital surplus 6 1,816,917 1,816,917
Tendered shares 6 (65,785,456) (49,293,340)
Retained earnings 171,869,181 152,400,615
-------------------- --------------------
Net assets (equivalent to
US$2.2542 per share based
on 132,080,573 outstanding
shares; 2011: US$2.1073 per
share based on 139,876,717
outstanding shares) 297,734,535 294,758,085
Approved by the Board of Directors on 24 April 2013.
The accompanying notes are an integral part of these
consolidated financial statements.
CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS
AS AT 31 DECEMBER 2012
2012 2011
% of % of
effective effective
% of equity % of equity
Investments net interest Cost/ Fair net interest Cost/ Fair
- Assets assets held principal value assets held principal value
US$ US$ US$ US$
LISTED STOCKS -
Real Estate,
China 4.75%
Others 4.75% N/A 13,755,556 14,154,659 - - - -
UNLISTED EQUITY
Real Estate,
China 91.52% 85.98%
Beijing Hines
Jing Sheng Real
Estate Development
Co Ltd
* 20,000 shares and a shareholder loan of US$20,879,960
(1) 30.25% 40.00% 20,880,000 90,067,677 26.10% 40.00% 20,880,000 76,938,054
SZITIC Commercial
Property Co
Ltd
* Share capital of RMB6,000,000 27.19% 30.00% 5,548,341 80,943,700 25.91% 30.00% 5,548,341 76,372,900
Dalian Wanda
Commercial Real
Estate Co Ltd
* 18,000,000 shares 24.12% 0.50% 22,414,500 71,800,175 17.93% 0.50% 22,414,500 52,853,760
Jiangyin Aijia
Investment
* Share capital of RMB15,000,000 and shareholder loans
of RMB135,000,000 (1) 9.96% 15.00% 22,725,000 29,653,172 10.10% 15.00% 22,725,000 29,777,820
Huzhou Jingrui
Real Estate
Co. Ltd
* Share capital of RMB49,000,000 - - - - 5.94% 49.00% 7,423,167 17,495,501
LOANS RECEIVABLE
Real Estate,
China 2.50% 3.33%
Others (2) 2.50% N/A 9,807,034 7,432,344 3.33% N/A 9,807,034 9,807,034
OTHER DEBT INSTRUMENTS
Real Estate,
China 12.94% 16.61%
Times Property
Holdings Co.
Ltd
* Redeemable exchangeable note of US$29,900,045 12.94% N/A 29,900,045 38,541,312 16.61% N/A 40,000,000 48,957,746
DERIVATIVES
Aviation, China 0.05% 0.09%
Others 0.05% N/A - 146,665 0.09% N/A - 258,900
---------------- ---------------- ---------------- ----------------
125,030,476 332,739,704 128,798,042 312,461,715
========= ========== ========= =========
(1) Certain equity investments of the Fund were in form of share
capital and shareholder's loan.
(2) The principal above represents the principal calculated
according to the Fund's accounting purpose, which is different from
the loan principal calculated in accordance with the legal
agreements whereby the cost is paid prior to the repayment of
interest component.
The accompanying notes are an integral part of these
consolidated financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED 31 DECEMBER 2012
Note 2012 2011
US$ US$
Income
Dividend income 1,497,780 1,658,868
Interest income 484,744 1,345,620
Consulting income 7 1,007,451 3,532,551
Recharge of loan related
income and expenses to PACL
II Limited 5 173,116 -
Other income - 1,018,309
-------------------- --------------------
Total income 3,163,091 7,555,348
------------------ ------------------
Expenses
Tax expense 8 (5,533,398) (17,933,562)
Performance fees 9 (4,867,149) (12,542,028)
Management fees 9 (5,931,529) (5,197,861)
Investment agency fees 10 (46,536) (7,841,354)
Legal and professional fees (727,879) (1,423,825)
Interest expense 5 (106,536) (882,841)
Loan arrangement and handling
fee expenses 5 (205,585) (469,599)
Recharge of loan related
income and expenses from
PACL II Limited 5 - (1,256,155)
Other expenses (1,089,147) (910,159)
-------------------- --------------------
Total expenses (18,507,759) (48,457,384)
------------------ ------------------
Net investment loss (15,344,668) (40,902,036)
------------------ ------------------
Realized and unrealized gain
from investments and foreign
currency
Net realized gain from investments
and foreign currency transactions 13,183,918 86,349,238
Net change in unrealized
gain from investments and
gain on translation of assets
and liabilities in foreign
currencies 4 23,734,219 2,337,673
Net (increase)/decrease in
payable to PACL II Limited
from gain/(loss) attributable
to PACL II Limited 11(a) (2,104,903) 2,383,238
-------------------- --------------------
Net realized and unrealized
gain from investments and
foreign currency 34,813,234 91,070,149
------------------ ------------------
Net increase in net assets
from operations 19,468,566 50,168,113
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 2012
Share
capital
and share Capital Tendered Retained
Note premium surplus shares earnings Total
US$ US$ US$ US$ US$
At 1
January
2011 189,833,893 1,816,917 (52,378,592) 102,232,502 241,504,720
Reissue of
tendered
shares 6 - - 3,085,252 - 3,085,252
Net
increase
in net
assets
from
operations - - - 50,168,113 50,168,113
------------------ ------------------ ------------------ ------------------ ------------------
At 31
December
2011 and
1 January
2012 189,833,893 1,816,917 (49,293,340) 152,400,615 294,758,085
Repurchase
of
tendered
shares 6 - - (19,627,623) - (19,627,623)
Reissue of
tendered
shares 6 - - 3,135,507 - 3,135,507
Net
increase
in net
assets
from
operations - - - 19,468,566 19,468,566
------------------ ------------------ ------------------ ------------------ ------------------
At 31
December
2012 189,833,893 1,816,917 (65,785,456) 171,869,181 297,734,535
The accompanying notes are an integral part of these
consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2012
Note 2012 2011
US$ US$
Net increase in net assets
from operations 19,468,566 50,168,113
Adjustments to reconcile
net increase in net assets
from operations to net cash
generated from operating
activities
Purchase of investments (13,755,556) -
Disposal of investments 30,707,040 109,052,998
Net (gain)/loss on loan related
income and expenses allocated
to PACL II Limited (173,116) 1,256,155
Net realized and unrealized
gain from investments (37,229,473) (85,763,527)
Net increase/(decrease) in
payable from (gain)/loss
attributable to PACL II Limited 2,104,903 (2,383,238)
(Increase)/decrease in other
receivables (348,978) 1,314,741
Decrease/(increase) restricted
cash 5 43,330,560 (43,330,560)
Decrease in amounts due to
PACL II Limited (22,493,560) (44,142,178)
(Decrease)/increase in performance 6,
fees payable 9 (4,539,372) 3,286,272
(Decrease)/increase in provision
for taxation (8,103,647) 15,558,387
(Decrease)/increase in provision
for investment agency fees (3,791,916) 7,841,354
(Decrease)/increase in accrued
expenses and other payables (1,366,437) 1,620,341
-------------------- --------------------
Net cash generated from operating
activities 3,809,014 14,478,858
------------------ ------------------
Cash flows from financing
activities
(Repayment)/borrowing of
bank loans 5 (38,121,000) 38,121,000
Repurchase of shares 6 (19,627,623) -
-------------------- --------------------
Net cash (used in)/generated from
financing activities (57,748,623) 38,121,000
------------------ ------------------
Net (decrease)/increase in
cash and cash equivalents (53,939,609) 52,599,858
Beginning balance 117,196,263 64,596,405
-------------------- --------------------
Ending balance, representing
cash and bank balances 63,256,654 117,196,263
Supplementary information
to statement of cash flows
Interest income received 585,766 1,160,361
Interest expenses paid 106,536 882,841
Dividend income received 1,497,780 1,658,868
Non-cash transaction:
Part of the performance fee payable to the Investment Manager
was settled by the Company's shares. Please refer to Note 6 and 9
for details.
The accompanying notes are an integral part of these
consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2012
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 472, 2nd Floor, Harbour Place,
Grand Cayman KY1-1106, Cayman Islands.
The Company's ordinary shares are traded on the Alternative
Investment Market ("AIM") of the London Stock Exchange. The Company
can raise additional capital up to the authorized share capital as
described in Note 6.
The principal investment objective of the Company and its
subsidiaries (collectively, the "Fund") 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 Fund's investment activities are managed by Pacific Alliance
Real Estate Limited ("PARE" or the "Investment Manager"). The Fund
appointed Sanne Trust Company Limited to act as the custodian of
certain assets of the Fund, and as the administrator and registrar
pursuant to the Administration Custodian and Registrar
Agreement.
The consolidated financial statements were approved by the Board
of Directors on 24 April 2013.
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 ("US GAAP"). The Fund applies the provisions of
Financial Accounting Standards Board ("FASB") Accounting Standard
Codification ("ASC") 946-10, Financial Services - Investment
Companies (the "Guide"). Such policies are consistently followed by
the Fund in the preparation of its consolidated financial
statements.
(a) Principles of consolidation
These consolidated financial statements include the financial
statements of 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 ("SPVs") 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 consolidated financial statements in
conformity with US GAAP requires the Fund's management to make
estimates and assumptions that affect the reported value of assets
and liabilities and disclosures of contingent assets and
liabilities as at 31 December 2012 and the reported amounts of
income and expenses for the year then ended. The areas involving a
higher degree of judgment or complexity, or areas where assumptions
and estimates are significant to the financial statements are
disclosed in Note 2(l).
(c) Investments
The Fund holds both listed securities and unlisted securities,
which by nature have limited marketability. The Fund also engages
in secured lending transactions consisting of repurchase agreements
and other secured borrowings.
(i) Recognition and derecognition
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 for
unlisted or unquoted investments. 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.
(ii) Fair value measurement
The Fund is an investment company under the Guide. As a result,
the Fund records and re-measures 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 of
the Fund, which is established by the Investment Manager and the
Board of Directors.
Investments in securities traded on a recognized exchange are
value at the traded price on the exchange in which such security
was traded on the last business day of the period.
The fair values 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. Judgement is used to adjust
valuation 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.
The Fund's secured loan transactions are recorded at fair value,
which is determined based on discounted cash flow analyses. Those
analyses consider the position size, liquidity, current financial
condition of the borrowers, the third-party financing environment,
reinvestment rates, recovery lags, discount rates, and default
forecasts.
In determining fair valuation of certain unlisted securities,
the Valuation Committee uses as reference valuations made by
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 independent valuers
also assist in the selection of valuation techniques and models.
Loans receivable are recorded at fair value in accordance with the
guidance set forth in Note 4, and the valuation techniques applied
usually takes into account the estimated future cash flows,
liquidity, credit, market and interest rate factors. However, there
are inherent limitations in any valuation technique due to the lack
of observable inputs.
The Fund buys exchange-traded and OTC put and call options. The
buyer of an option has the right to purchase (in the case of a call
option) or sell (in the case of a put option) a specified quantity
of a specific financial instrument at a specified price prior to or
on a specified expiration date. The maximum loss exposure of a buy
put and call option is the premium paid by the buyer.
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.
(d) Other receivables and payables
Other receivables and payables are initially measured at fair
value and subsequently measured at amortized cost.
(e) 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 short-term, highly liquid
investments which mature within three months or less of the date of
purchase.
(f) Restricted cash
The Fund classifies cash that is restricted for specific
purposes and is unavailable for general use as restricted cash.
(g) 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.
(h) Share capital
Ordinary shares are classified as equity. Where the fund
purchases the Company's equity share capital, the consideration
paid is deducted from equity until the shares are cancelled or
reissued. Where such ordinary shares are subsequently reissued, any
consideration received is included in equity.
(i) Foreign currency translation
The books and records of the Fund are maintained in United
States Dollars ("US$"), which is also the functional currency.
Assets and liabilities, both monetary and non-monetary, denominated
in foreign currencies are translated into US$ by using prevailing
exchange rates as at financial reporting date, while income and
expenses are translated at the exchange rates in effect during the
year.
Gains and losses attributed to changes in the value of foreign
currencies for investments, cash balances and other assets and
liabilities are reported as foreign exchange gain and loss in the
consolidated statement of operations.
(j) Taxation
The Fund may be subject to taxes imposed in jurisdictions in
which it invests and operates. 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 in accordance with the
authoritative guidance contained in ASC 740 Income Taxes described
in Note 8.
The Fund files tax returns as prescribed by the tax laws of the
jurisdictions in which it operates. The Fund uses the asset and
liability method to provide income taxes on all transactions
recorded in the consolidated financial statements. This method
requires that income taxes reflect the expected future tax
consequences of temporary differences between carrying amounts of
assets or liabilities for book and tax purposes. Accordingly, a
deferred tax asset or liability for each temporary difference is
determined based on the tax rates that the Fund expects to be in
effect when the underlying items of income and expense are
realized.
(k) Recognition of income and expenses
Interest income on bank balances is accrued as earned using the
effective interest method.
Dividend income is recognized on the ex-dividend date and is
recorded net of withholding taxes where applicable.
Consulting income is recognized in accounting period in which
the services are rendered.
Expenses are recorded on an accrual basis. Provision of deferred
expenses is made as if the investments are liquidated and realized
at value stated as the year-end.
(l) Critical accounting estimates and assumptions
Estimates and judgements are continually evaluated and are based
on historical experience and other factors, including expectations
of future events that are believed to be reasonable under the
circumstances. The resulting accounting estimates will, by
definition, seldom equal the related actual results. The estimates
and assumptions that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within
the next financial year are addressed below.
(i) Fair value of investments
The fair value of unlisted or unquoted securities and loans
receivable is determined by using valuation techniques. Judgement
is used to select a variety of methods and make assumptions that
are mainly based on market conditions existing at the end of each
reporting period.
Although best judgment is used 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 consolidated
statement of assets, liabilities and partners' capital. Additional
information about the level of market observability associated with
investments carried at fair value is disclosed in Note 4 below.
(ii) Taxation
The Fund may be subject to income taxes in jurisdictions it
invests and operates. Significant judgement is required in
determining the worldwide provision for income taxes. There are
many transactions and calculations for which the ultimate tax
determination is uncertain. The Fund recognizes liabilities for
anticipated tax audit issues based on estimates of whether
additional taxes will be due. Where the final tax outcome of these
matters is different from the amounts that were initially recorded,
such differences will impact the current and deferred income tax
assets and liabilities in the period in which such determination is
made.
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
concentration of investments in a particular industry or sector is
presented on the consolidated condensed schedule of
investments.
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.
Please refer to 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 deposits, 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.
(c) Currency risk
The Fund has assets and liabilities denominated in currencies
other than the US$, the functional currency. The Fund is therefore
exposed to currency risk as the value of assets and liabilities
denominated in other currencies may fluctuate due to changes in
exchange rates. The net assets of the Fund are denominated/ traded
in the following currencies:
2012 2011
US$ US$
Renminbi 215,823,959 204,446,700
United States Dollars 81,950,710 90,337,204
Pounds Sterling (11,686) (11,657)
Hong Kong Dollars (28,448) (14,162)
-------------------- --------------------
297,734,535 294,758,085
(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 when a 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.
As at 31 December 2012, investments in loans receivable and
bonds of US$45,973,656 (2011: US$58,764,780) were borrowed/issued
by counterparties which are currently unrated by any rating agency.
The Fund managed credit risk through reviewing loan repayment and
collateral values of loans on an on-going basis.
(e) Liquidity risk
The Fund is exposed to liquidity risk as the majority of the
investments of the Fund are illiquid while some of the Fund's
liabilities are with short maturity. Details of the maturity
analysis on loans receivable are set out in Note 4 below. 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 when necessary to meet liquidity
requirements. The liquidity risk and the liability level of the
Fund are closely monitored by the Investment Manager.
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. Please refer its Note 3(c) above for
the Fund's exposure to Renminbi.
The Fund has the ability to borrow in the short term but 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. As at 31 December 2011, all bank
loans are fully collateralized with restricted cash of
US$43,330,560. During the year ended 31 December 2012, the Fund's
bank loans were fully repaid and the restricted cash was released
in February 2012.
The Company is closed-end and, thus, not exposed to redemptions
of shares by its shareholders.
4. Investments
The Fund discloses the fair value of its investment in a
hierarchy that prioritizes the inputs to valuation techniques used
to measure the fair value. The hierarchy gives the highest priority
to valuations based upon unadjusted quoted prices in active markets
for identical assets or liabilities (Level 1 measurements) and the
lowest priority to valuations based upon unobservable inputs that
are significant to the valuation (Level 3 measurements). Three
levels of the fair value hierarchy are as follows:
Level 1
Inputs that reflect unadjusted quoted prices in active markets
for identical assets or liabilities that the Fund has the ability
to access at the measurement date.
Level 2
Inputs other than quoted prices included within Level 1 that are
observable for the asset
or liability either directly or indirectly, including quoted
prices for similar assets or liabilities in active markets, quoted
prices for identical or similar assets or liabilities in markets
that are not considered to be active, inputs other than quoted
prices that are observable for the asset or liability, and inputs
that are derived principally from or corroborated by observable
market data by correlation or other means.
Level 3
Unobservable inputs based on the best information available in
the circumstances, to the extent observable inputs are not
available (including the Fund's own assumptions used in determining
the fair value of investments).
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.
In determining an instrument's placement within the hierarchy,
the Valuation Committee follows the following:
Level 1
Investments in listed stocks and derivatives that are valued
using quoted prices in active markets and are therefore classified
within Level 1 of the fair value hierarchy.
Level 2
Investments in illiquid listed stocks 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.
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, bonds, derivatives and loans receivable. Investments
classified within Level 3 have significant unobservable inputs, as
they trade infrequently or not at all. When observable prices are
not available for these securities, the Valuation Committee uses
one or more valuation techniques (e.g., the market approach or the
income approach) for which sufficient and reliable data is
available. Within Level 3, the use of the market approach generally
consists of using comparable market transactions, while the income
approach generally consists of the net present value of estimated
future cash flows, adjusted as appropriate for liquidity, credit,
market and/or other risk factors.
The inputs used by the Valuation Committee in estimating the
value of Level 3 investments include the original transaction
price, recent transactions in the same or similar instruments,
completed or pending third-party transactions in the underlying
investment or comparable issuers, subsequent rounds of financing,
recapitalizations and other transactions across the capital
structure, offerings in the equity or debt capital markets, and
changes in financial ratios or cash flows. Valuation of Level 3
investments may also be adjusted to reflect illiquidity and/or
non-transferability with the amount of such discount estimated by
the Valuation Committee in the absence of market information.
The following table summarizes quantitative information about
the valuation techniques and the significant unobservable inputs
used for Level 3 investments:
Significant
Investment Valuation unobservable
assets Fair value technique(s) inputs Inputs/range
US$
Income
approach Average monthly
Unlisted Equity 90,067,677 (1) rent per sq.m. RMB 214
Capitalization
rate 6%
Market Average sales
comparables price RMB 8,108
182,397,047 (2) per sq.m. - 11,548
9.1x -
P/E multiple 14x
Marketability 25% -
discount 40%
Market Average sales
comparables price
Loans receivable 7,432,344 (4) per sq.m. RMB 92,715
Marketability
discount 15%
Discounted
Other debt cash flow
instruments 38,541,312 (3) Discount rate 30%
Option
pricing
model
Option 146,665 (5) Volatility 30%
----------------
318,585,045
Note (1) The significant unobservable inputs used in the fair
value measurement included the average monthly rent and
capitalization rate of the underlying properties.
Note (2) Market comparables included average sales price of
properties and land as well as P/E multiples of comparable
companies or recent transaction of investee.
Note (3) The significant unobservable input used in the fair
value measurement is the discount rate applicable for underlying
issuer. A significant increase/(decrease) in the discount rate
would result in a significantly lower /(higher) fair value
measurement.
Note (4) The valuation is determined by considering the value of
the loan's collateral, which is real estate property. The
significant unobservable inputs used in the fair value measurement
include sales price per square meter of those real estate
properties directly or indirectly held by investees.
Note (5) The significant unobservable inputs used in the option
pricing model include the volatility of the underlying asset of the
option.
The following table summarizes the fair value of all instruments
within the fair value hierarchy:
Level Level Level
1 2 3 Total
US$ US$ US$ US$
As at 31 December
2012
Investments - stocks 14,154,659 - 272,464,724 286,619,383
Investments - other
debt instruments - - 38,541,312 38,541,312
Investments - loans
receivable - - 7,432,344 7,432,344
Investments - derivatives - - 146,665 146,665
-------------------- -------------------- -------------------- --------------------
14,154,659 - 318,585,045 332,739,704
As at 31 December
2011
Investments - stocks - - 253,438,035 253,438,035
Investments - other
debt instruments - - 48,957,746 48,957,746
Investments - loans
receivable - - 9,807,034 9,807,034
Investments - derivatives - - 258,900 258,900
-------------------- -------------------- -------------------- --------------------
- - 312,461,715 312,461,715
As at 31 December 2012, investments of US$286,619,383 (2011:
US$253,438,035) were held directly by the Fund, investments of
US$45,973,656 (2011: US$58,764,780) were held by an entity owned by
Pacific Alliance Asia Opportunity Fund L.P. ("PAX L.P."), an
investment fund managed by Pacific Alliance Investment Management
Limited, an affiliate of the Investment Manager, through
sub-participation agreement, and investments of US$146,665 (2011:
US$258,900) were held through jointly owned entities with PAX
L.P.
The following table summarizes the movements in fair value of
the Fund's Level 3 instruments.
Investments Investments Investments
- unlisted - loans - other Investments
equity receivable debt instruments - derivative Total
US$ US$ US$ US$ US$
At 1 January
2011 272,865,493 13,927,947 48,957,746 - 335,751,186
Proceeds
from
sale of
investments (109,052,998) - - - (109,052,998)
Net realized
gain 86,349,238 - - - 86,349,238
Net change
in
unrealized 3,276,302 (4,120,913) - 258,900 (585,711)
Gain/(loss) -------------------- ------------------ ------------------ -------------------- --------------------
At 31
December
2011 and 1
January
2012 253,438,035 9,807,034 48,957,746 258,900 312,461,715
Proceeds
from
sale of
investments (11,668,160) - (19,038,880) - (30,707,040)
Net realized
gain 4,244,993 - 8,938,925 - 13,183,918
Net change
in
unrealized 26,449,856 (2,374,690) (316,479) (112,235) 23,646,452
Gain/(loss) -------------------- ------------------ ------------------ -------------------- --------------------
At 31
December
2012 272,464,724 7,432,344 38,541,312 146,665 318,585,045
Total net change in unrealized gain on Level 3 instruments as
shown above are presented in the consolidated statement of
operations.
The Fund had a secured loan receivable with an interest rate of
15% per annum from unaffiliated parties carried at US$7,432,344
(2011: US$9,807,034) with original maturity date in June 2012.
During the year ended 31 December 2012, the maturity date of the
borrowing was extended to October 2012. The Directors considered
the collateral value at 31 December 2012 in assessing the fair
value of the loan receivable as at 31 December 2012.
For the year ended 31 December 2012, net realized gain and
change in unrealized gain recognized for the loans receivable
amounted to US$Nil (2011: US$Nil) and US$(2,374,690) (2011:
US$4,120,913), respectively.
As at 31 December 2012, the Fund had a debt investment of
US$38,541,312 (2011: US$48,957,746) that will mature within the
next 16 months (2011: 28 months). The Fund held collateral in the
form of assets of the borrower and its subsidiaries. The fair value
of the investment is determined by the Valuation Committee. For the
year ended 31 December 2012, net realized gains and change in
unrealized gain recognized on the debt instrument amounted to
US$8,938,925 (2011: US$Nil) and US$(316,479) (2011: US$ Nil),
respectively.
The Fund holds an OTC call option on equity securities. The
buyer of an option has the right to purchase (in the case of a call
option) or sell (in the case of a put option) a specified quantity
of a specific financial instrument at a specified price prior to or
on a specified expiration date. The maximum loss exposure of a buy
put and call option is the premium paid by the buyer.
The fair value of these derivative instruments is included
within the investments line item with changes in fair value
reflected as net realized gains/(losses) from investments and net
change in unrealized gains/(losses) from investments in the
consolidated statement of operations. The Fund does not designate
derivatives as hedging instruments under FASB ASC 815.
As at 31 December 2012, the Fund held a call option of
US$146,665 (2011: US$258,900) with notional amount of US$ 2,961,490
(2011: US$2,982,975). During the year ended 31 December 2012, the
Fund recognized change in unrealized gain of the option amounted to
US$(112,235) (2011: US$258,900).
5. Bank loan and restricted cash
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 funds borrowed by the
Fund. In the event that any loan amounts are due but not paid, the
banks are entitled to foreclose the portion of restricted cash
equal to the unpaid amount.
On 25 February 2011, the Fund borrowed a bank loan of
US$38,121,000 ("the Loan") from a bank based in Hong Kong, due on 1
February 2012, to facilitate a cash distribution to PACL II which
was subsequently distributed by PACL II to its shareholders. The
interest charged on the Loan is LIBOR plus 2.5% per annum and the
Loan was pledged with cash allocated from the realization proceeds
of the Tender Offer Portfolio of US$43,330,560 or RMB273,000,000
kept by the Fund as a fixed deposit (the "Pledged Deposit"). Please
refer to Note 11(a) for the details of the Tender Offer
Portfolio.
As part of the arrangement, all interest income earned from the
Pledged Deposit, loan related arrangement and handling fee
expenses, interest expenses incurred on the Loan, and foreign
exchange gains/(losses) arising from the Loan will be allocated to
PACL II.
For the year ended 31 December 2012, a recharge of loan related
income and expenses to PACL II of US$173,116 was recognized (2011:
recharge of US$1,256,155 from PACL II was incurred). The Fund
recognized and incurred interest income, interest expense, foreign
exchange gain and arrangement and handling fee expenses with
amounts of US$139,005 (2011: US$637,479), US$106,536 (2011:
US$882,841), US$NIL (2011: US$1,971,116) and US$205,585 (2011:
US$469,499), respectively.
The Loan was repaid and the Pledged Deposit was released in
February 2012.
6. Share capital, share premium, capital surplus and tendered
shares
Number
of
shares Share Share Capital Tendered
outstanding capital premium surplus shares Total
US$ US$ US$ US$ US$
As at 1
January
2011 138,156,860 1,898,339 187,935,554 1,816,917 (52,378,592) 139,272,218
Re-issue of
tendered
shares 1,719,857 - - - 3,085,252 3,085,252
------------------ ---------------- ------------------ ---------------- ------------------ ------------------
As at 31
December
2011 and
1 January
2012 139,876,717 1,898,339 187,935,554 1,816,917 (49,293,340) 142,357,470
Re-purchase
of tendered
shares (9,250,933) (19,627,623) (19,627,623)
Re-issue of
tendered
shares 1,454,789 - - - 3,135,507 3,135,507
------------------ ---------------- ------------------ ---------------- ------------------ ------------------
As at 31
December
2012 132,080,573 1,898,339 187,935,554 1,816,917 (65,785,456) 125,865,354
As at 31 December 2012, the total number of authorized ordinary
shares was 10,000,000,000 (2011: 10,000,000,000) with par value of
US$0.01 (2011: US$0.01) per share. The Company had 189,833,893
(2011: 189,833,893) ordinary shares in issue, of which 57,753,320
(2011: 49,957,176) were held as tendered shares.
Movement of tendered shares is as follows:
Number
of
shares Repurchase/
repurchased/ reissue
(reissued) price Total
US$ US$
At 1 January 2011 51,677,033 52,378,592
Reissued in June 2011 (1,719,857) 1.7939 (3,085,252)
------------------ ------------------
At 31 December 2011
and 1 January 2012 49,957,176 49,293,340
Repurchased in July
2012 5,399,241 2.1100 11,392,399
Reissued in July 2012 (1,454,789) 2.1553 (3,135,507)
Repurchased in November
2012 3,710,951 2.1600 8,015,654
Repurchased in December
2012 140,741 1.5601 219,570
------------------ ------------------
At 31 December 2012 57,753,320 65,785,456
The Company also reissued 1,454,789 tendered shares at US$
2.1553 per share (net asset value per share as at 30 June 2012) to
the Investment Manager to settle its obligation in respect of the
share portion of the 2011 performance fees. See Note 9 below for
details.
7. Consulting income
Consulting income is derived mainly from the provision of
consulting services to a buyer of an investment sold.
8. 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
CIT 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.
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 an investment holding structure
and investment exit via indirect transfer do not have a 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 2012, provision for current tax, deferred tax
and uncertain tax amounted to US$3,984,553 (2011: US$17,741,470),
US$42,514,614 (2011: US$38,174,629) and US$7,662,100 (2011:
US$6,348,815) respectively. The Investment Manger has reviewed the
structure of the Fund's investment portfolio and considered the
Fund's exposure to uncertain tax positions have been properly
reflected in the Fund's consolidated financial statements. However,
given the uncertainty of tax, the Investment Manager would like to
highlight that there is a possibility that some or all of the tax
provided as at 31 December 2012 will not be payable and may be
released. The Investment Manager is regularly monitoring the
position.
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.
9. 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 2012, total management fees amounted to
US$5,931,529 (2011: US$5,197,861). As at 31 December 2012,
management fees payable amounted to US$ nil (2011:
US$1,490,191).
The Investment Manager is also entitled to receive performance
fees from the Fund in the event that the year-end NAV is greater
than the higher of (a) the year-end NAV for the last year in which
a performance fee was payable ("High Water Mark"); and (b) the NAV
on Admission increased by a non-compound annual hurdle rate of 8%
("Hurdle").
The performance fees 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 a non-compound annual rate of 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 2012, total performance fees
amounted to US$4,867,149 (2011: US$12,542,028). As at 31 December
2012, performance fees payable amounted to US$4,867,149 (2011:
US$12,542,028).
Under the Investment Management Agreement, the performance fees
earned by the Investment Manager shall be paid 75% in cash and 25%
in the Company's ordinary shares ("share portion"). The Company may
elect to meet its share obligation either by issuing new shares at
NAV or purchasing the equivalent number of shares in the
market.
During the year ended 31 December 2012, the Investment Manager
agreed to receive 1,454,789 tendered shares at US$ 2.1553 per
share, which is the Fund's NAV per share as at 30 June 2012, from
the Fund to settle its obligation in respect of the share portion
of the 2011 performance fees of US$3,135,507.
10. Investment agency fees
During the year ended 31 December 2011, to facilitate the
disposal of an investment, the Fund entered into a consulting
agreement with an unrelated third party (the "Consultant"). Under
the agreement, the Fund is obligated to pay an investment agency
fee to the Consultant based on a percentage of the net realized
gain of the investment earned by the Fund upon realization.
For the year ended 31 December 2012, investment agency fee of
US$46,536 (2011: US$7,841,354) was incurred based on the realized
and unrealized gain on the investment net of certain expenses and
tax attributable to the investment. The Fund settled investment
agency fees of approximately US$3.8 million during the year
2012.
11. Related party transactions
Apart from the related party transactions disclosed in Note 5
and 9, the Fund also 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 and asset 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. On 5 January 2012,
the duration of PACL II has been extended by 1 year to 2 March 2013
with written election by the Investment Manager. On 28 February
2013, the duration of PACL II was further extended by 2 years to 4
March 2015.
As part of this restructuring, the Company repurchased
180,166,107 shares at a tender price of US$1.01 per share in
exchange for holders of these shares receiving the same number of
shares in PACL II.
Under the terms of the tender offer, PACL II is entitled to
receive 50.33% of the proceeds from the Tender Offer Portfolio,
which reflects a 5% discount of its proportionate share of the
Tender Offer Portfolio. As such, the amount due to PACL II is
recorded as a payable by the Fund, adjusted at each period end
based on the movement in the fair value of the underlying assets
and the income and expense attributable to the Tender Offer
Portfolio. The amount is unsecured, non-interest bearing. The
following table summarizes the movements in payable to PACL II.
2012 2011
US$ US$
At 1 January 55,890,197 101,159,458
Distributions to PACL II (22,493,560) (44,142,178)
Recharge of loan related expense
allocated (to)/from PACL II (173,116) 1,256,155
Net increase/(decrease) in
payable from (gain)/loss attributable
to PACL II 2,104,903 (2,383,238)
-------------------- --------------------
At 31 December 35,328,424 55,890,197
(b) Directors' remuneration
The Company pays each of its director annual fees of US$30,000
(2011: US$30,000). If a director is a member of the Valuation
Committee or Audit Committee, the director also receives an
additional fee of US$10,000, and the Chairman of either Committee
receives an additional US$5,000. During the year 2012, Horst Geicke
and Jon-Paul Toppino (2011: Chris Gradel, Horst Geicke and Jon-Paul
Toppino) agreed to waive their directors' fees and committee
fees.
12. Financial highlights
Net asset value per share at the end of the year is as
follows:
2012 2011
US$ US$
Per share data (for a share
outstanding throughout the
year)
Net asset value at 1 January 2.1073 1.7480
Net investment loss (0.1162) (0.2924)
Net realized and unrealized
gains from investments 0.2631 0.6517
-------------- --------------
Net asset value at 31 December 2.2542 2.1073
The following represents the ratios to average net assets and
other supplemental information:
2012 2011
Total return before performance
fees (1) 8.72% 25.68%
Performance fees 1.75% 5.13%
Total return after performance
fees (1) 6.97% 20.55%
Ratios to average net assets
(2)
Total expenses (6.28%) (18.46%)
Net investment loss (5.21%) (15.58%)
(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.
(2) Average net assets is derived from the beginning and ending
NAV, adjusted for cash flows in relation to capital transactions
for the year. For the year ended 31 December 2012, the average net
assets amounted to US$294,530,670 (2011: US$262,492,897).
13. Commitment and contingency
In the normal course of business, the Fund may enter into
arrangements that contain a variety of representations and
warranties that provide general indemnification under certain
circumstances. The Fund's maximum exposure under these arrangements
is unknown, as this would involve 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,
and, therefore, no provision has been recorded.
14. Subsequent events
Management has performed a subsequent events review from 1
January 2013 through to 24 April 2013, being the date that the
financial statements were available to be issued.
In April 2013, approximately US$9.3 million (representing 15% of
the cash balance as at year-end) has been converted from Renminbi
to United States Dollars and repatriated out of China.
The cash portion of the 2012 performance fee payable in the
amount of US$3,650,362 was fully paid as at March 2013.
15. New accounting pronouncements
In December 2011, the FASB issued an update to requirements
related to providing enhanced disclosures about financial
instruments and derivative instruments that are either presented on
a net basis in the statement of net assets or subject to an
enforceable master netting arrangement or similar agreement
including a description of the rights of off-set associated with
relevant agreements and (ii) both net and gross information,
including amounts of financial collateral, for relevant assets and
liabilities. The purpose of the update is to enhance comparability
between those entities that prepare their financial statements on
the basis of US GAAP and those that prepare their financial
statements in accordance with International Financial Reporting
Standards and enables users of the financial statements to
understand the effect or potential effect of the offsetting
arrangements on the balance sheet. The update is effective for
fiscal years beginning on or after January 1, 2013. The Fund does
not believe the adoption of this update will have a material impact
on the Fund's consolidated financial statements.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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