TIDMPACL
RNS Number : 2110O
Pacific Alliance China Land Limited
17 September 2013
17 September 2013
Pacific Alliance China Land Limited
Unaudited results for the six months ended 30 June 2013
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 financial results for the six months to 30 June
2013.
Highlights
-- Net asset value as at 30 June 2013 was US$304 million,
representing US$2.31 per share, a 2.7% increase from 31 December
2012 (US$298 million) and a 7.4% increase year-on-year (30 June
2012; US$301.5 million, representing US$2.16 per share).
-- The Company's share price closed at US$1.70, a 24% increase
year-on-year and a 27% discount to the unaudited NAV per share as
at 30 June 2013.
-- PACL's NAV and share price have both consistently
outperformed major benchmark indices including the FTSE 350 Real
Estate Index and the FTSE AIM All-Share Index since inception.
-- PACL was rated the best performing China Real Estate Fund by
Morningstar in April 2013, in recognition of the Company's 16.2%
compound annual NAV growth.
Portfolio and Fund Developments
-- The share price of Project Crystal, PACL's most recent
addition to the portfolio, continued its upward trend in the first
quarter of 2013, with quarter-on-quarter increases of 7.2% in Q1
and 7.63% in Q2.
-- PACL received a total US$9.6 million repayment from the
Project Speed exchangeable notes in the first half of 2013. To
date, the borrower has repaid the Consortium 95% of the
principal.
-- Improved rental rates driven by a strong market for high
quality serviced apartment buildings in Beijing has resulted in an
approximate 1.8% increase in the property value of Project Diplomat
from RMB1.88 billion at Q1 to RMB1.914 billion.
Patrick Boot, Managing Director, Pacific Alliance Real Estate
Limited commented that:
"China's commercial property sector remains largely insulated
from the policy risks of a government focused on cooling
residential real estate, and as such continues to perform well.
Retail rents in major first tier cities continue to rise, office
rents remain high in prime/sub prime locations in Beijing and
Shanghai and investor appetite for quality commercial properties
remains strong."
"Despite slower economic growth in China, the Company remains
confident that its experience across previous market cycles, its
dedicated asset management capability and dynamic multi-strategy
approach will continue to identify new opportunities and deliver
long-term value to shareholders."
For further information please contact:
MANAGER: LEGAL COUNSEL:
Patrick Boot, Managing Jon Lewis, General Counsel
Partner PAG
Pacific Alliance Real T: (852) 2918 0088
Estate Limited jlewis@pagasia.com
T: (852) 2918 0088
pboot@pagasia.com
BROKER: NOMINATED ADVISER:
Hiroshi Funaki Philip Secrett
LCF Edmond de Rothschild Grant Thornton UK LLP
Securities T: (44) 20 7383 5100
T: (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$304 million as
at 30 June 2013. 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.
For more information about PAG, please visit:
www.pagasia.com
Chair's Statement
Pacific Alliance China Land Limited (the "Company") continued to
grow its net asset value ("NAV") during the first half of 2013 to
US$304 million, or US$2.3145 per share, a 2.7% increase from 31
December 2012 and a 7.4% increase from 30 June 2012. The increase
can be attributed to the Company's continued commitment to the
multi-strategy investment approach which has delivered significant
value to shareholders since the Company's inception in 2007.
China's GDP recorded 7.6% year-on-year growth in the first half
of 2013, with second quarter growth coming in at 7.5%, down from
7.7% in the first quarter and 7.9% in the final quarter of 2012.
Underlying the slowing pace is the new Chinese leadership's
commitment to restructuring the economy for more stable and
sustainable growth. Going forward, the Chinese government will
focus on shifting the economic growth driver from credit supported
investment to domestic consumption and value-added exports and in
June, it took action by clamping down on the shadow banking system,
causing a temporary liquidity squeeze. However, it appears that the
government is still confident of achieving its annual goal of 7.5%
GDP growth for 2013, a projection with which many economists
agree.
There have been few signs that China's property sector continues
to feel the impact of the current policy-tightening measures so
far. Despite their continued and re-enforced imposition on the
residential real estate sector, most big cities in China still
recorded increasing property prices in the first six months of 2013
and year-on-year price growth is still expected but at a slower
pace. The major drivers of recent property price appreciation,
(i.e. pent up demand which should taper off and scarcity of
suitable land for development which is likely to continue) are
expected to have offsetting effects and lead to more price
stability in the residential sector in the medium to long term.
While a slower economy does not support an overall positive
outlook, attractive investment opportunities are still available
with developers who are financially distressed. The Manager will
continue to focus on the commercial real estate sector, which has
experienced solid growth, and has been the biggest beneficiary
under the tighter residential policy controls. At the same time,
the Manager will continue to monitor the market closely for
individual opportunities and to make necessary adjustments to its
investment policies to maximize risk-adjusted returns for the
Company's shareholders.
The Company's investment strategy has proven effective and
rewarding over the past five years. Its successful implementation
of investment strategy has allowed the Company achieve compound
annual growth in NAV of 16.2%, making it the best performing 'China
Real Estate Fund' over the last five years as rated by Morningstar
in April 2013. We believe that our dynamic multi-strategy
investment approach and strong commitment to asset management will
continue to deliver long-term value for the Company's shareholders,
and on behalf of the Board and the Manager, I would like to extend
my thanks for your continued support.
Margaret Brooke
Chair
Investment Manager's Report
Pacific Alliance China Land Limited ("the Company" or "PACL")
continued its growth momentum in 2013. The Company's net asset
value ("NAV") as of 30 June 2013 was US$304 million or US$2.3145
per share which represents a year-on-year increase of 2.7% from 31
December 2012, and a compound annual growth rate of 16.2% since
inception.
On 30 June 2013, the Company's share price closed at US$1.6975,
a 24% increase year-on-year and a 27% discount to the unaudited NAV
per share. PACL's NAV and share price have both outperformed major
benchmark indices including the FTSE 350 Real Estate Index and the
FTSE AIM All-Share Index on a consistent basis since inception.
30 June 31 December
2013 2012
US$ US$
Realized Gain
Investment income - 13,183,918
Dividend income 1,548,032 1,497,780
Deposit interest 188,321 484,744
Other income - 1,007,451
------------------ ------------------
1,736,353 16,173,893
Change in Unrealized Gain/(Loss)
Listed stock 2,171,493 399,104
Pre-IPO financing 24,110 18,646,424
Bridge financing 1,490,962 (2,711,499)
Co-development (3,010,262) (10,267,011)
Other real estate investments 8,925,247 17,700,423
Share of profits payable to
PACL II (1,524,501) (2,104,903)
Foreign exchange 2,236,783 (33,222)
------------------ ------------------
10,313,832 21,629,316
------------------ ------------------
12,050,185 37,803,209
Portfolio Summary
As at 30 June 2013, the Company held cash of US$68 million and
investments with a cost of approximately US$101 million and fair
value of US$320 million. The Company's portfolio is diversified
across six strategies including Listed Stock, Bridge Financing,
Co-Development, Pre-IPO Investment, Platform Investment and Asset
Acquisition.
Attributable
to PACL
Fair value II Limited
Investment (gross) % of ("PACL
and cash US$ Type total Location II")
Forterra
Trust (formerly
known as
Treasury
China Trust) 16,326,152 Listed Stock 4.20% Singapore -
Project
Diplomat 90,779,124 Asset Acquisition 23.34% China (Beijing) -
Project Platform
Malls 84,757,500 Investment 21.80% China -
Project Pre-IPO
Auspice 72,490,977 Financing 18.65% China -
Project Bridge Financing
Speed 21,225,405 (1) 5.46% China (Guangdong) 10,683,723
Project
Winpoint 27,131,695 Co-Development 6.98% China (Jiangyin) -
Project Bridge Financing
Olympic 7,077,945 (1) 1.82% China (Beijing) 3,562,655
Pre-IPO
Financing
HNA - Options 732,696 (1) 0.19% China 368,800
Cash 68,252,713 Cash (1) 17.56% 12,246,829
TOTAL 388,774,207 100% 26,862,007
(1) The gross investment value includes an amount attributable
to the PACL II shareholders.
Investment Strategy
The Manager believes the Chinese government's residential policy
restrictions are unlikely to be lifted in the near term. The growth
momentum of the residential property market is likely to continue
in the future, but not as strongly as in the past decade, driven by
China's continuing urbanization, an inflationary economic
environment, and scarcity of land. As such, the Manager will
continue identifying and evaluating select residential
opportunities.
During the first half of 2013, the growth momentum of the
commercial sector in first tier cities moderated to a more
stabilized level following the previous two years of faster - paced
expansion. The primary office markets in the Beijing and Shanghai
CBDs continue to see high rental rates and low vacancy, while
decentralized offices are performing better in terms of rental
growth and take-up. Retail rents in major first tier cities
continued to increase while vacancies remained low. We believe that
ongoing demand from domestic occupiers and buyers will support the
continued strong performance of the commercial property market,
underpinned by GDP growth of 7.6% which is still much higher than
in most of the world's major markets.
With the majority of its weighting in the commercial property
sector, the Company's existing portfolio reflects our view of the
market trends, and our strategy has proven successful as
demonstrated by the Company's outstanding performance compared to
its peers. We will continue to pursue value-add commercial asset
deals that have both limited downside and good value appreciation
potential. We will also consider special situation opportunities in
the residential sector. In the mean time, we will actively manage
our existing investments for improved performance and seek optimum
exit opportunities that maximize NAV.
Defensive Strategies
Bridge Financing
The government is expected to continue with its
tightening-policies, including more stringent regulation on the
cash management of development projects. As such, many medium size
developers that do not have access to the capital markets may face
challenges in finding bridge financing resources before bank loans
and pre-sale proceeds become available, thereby creating attractive
investment opportunities for the Company. We will continue to
pursue projects that have sound real estate fundamentals from
credit-worthy counterparties.
Co-Developments with Preferred Returns
With the tightening measures of the last three years and land
prices rising faster than selling prices, development margins have
been squeezed compared with the last decade. As such our target
projects will be primarily commercial projects in first tier or
strong second tier cities in good locations, with existing or
planned metro line connections, appropriately sized, well designed
and with experienced developers who have good track records.
Growth Strategies
Value-Added Asset Acquisitions
Given the relatively strong GDP growth in China, the Manager
believes that value-add commercial property opportunities will
continue to be a key focus of the Company. As well, this sector is
beyond the scope of government's policy restrictions and it should
continue to perform well in an inflationary environment. We will be
concentrating on off-market opportunities and those arising from
special situations in good locations in major first and second tier
cities.
Platform Investment
China's stock market remains stagnant and is not expected to see
strong recovery given the government's cooling measures. With
unfavourable prospects for public-listing, developers are more
likely to meet their capital needs via debt and private equity. We
are careful in selecting qualified partners, who have a strong
track record, solid financial fundamentals, and high-quality land
banks.
Conclusion
China's real estate market presents a mixed picture for 2013:
the residential sector is experiencing additional policy
restrictions yet prices are still advancing; the shadow banking
sector remains a concern; and the commercial property sector
continues with its stable growth. With experience gained in
previous market cycles, the Manager remains cautiously optimistic
and confident that our dynamic multi-strategy approach, combined
with our dedicated asset management capability, will continue to
deliver long-term value to the Company's shareholders.
UNAUDITED CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
AS AT 30 JUNE 2013
As at As at
30 June 31 December
Note 2013 2012
US$ US$
Assets
Investments, at fair value
(Cost: US$101,344,658; 31
December 2012: US$125,030,476) 3,4 320,521,494 332,739,704
Other receivables 634,297 534,237
Cash and bank balances 68,252,713 63,256,654
-------------------- --------------------
Total assets 389,408,504 396,530,595
------------------- -------------------
Liabilities
Provision for taxation 7 51,574,915 54,161,267
Amounts due to PACL II Limited 10(a) 26,181,990 35,328,424
Performance fee payable 8 1,793,893 4,867,149
Provision for investment
agency fees 9 4,049,438 4,049,438
Accrued expenses and other
payables 1,848,474 389,782
-------------------- --------------------
Total liabilities 85,448,710 98,796,060
------------------- -------------------
Net assets 303,959,794 297,734,535
Analysis of net assets
Share capital 5 1,898,339 1,898,339
Share premium 5 187,935,554 187,935,554
Capital surplus 5 1,816,917 1,816,917
Tendered shares 5 (66,735,768) (65,785,456)
Retained earnings 179,044,752 171,869,181
-------------------- --------------------
Net assets (equivalent to
US$2.3145 per share based
on 131,328,780 outstanding
shares; 31 December 2012:
US$2.2542 per share based
on 132,080,573 outstanding
shares) 303,959,794 297,734,535
Approved by the Board of Directors on 17 September 2013
The accompanying notes are an integral part of these
consolidated financial statements.
UNAUDITED CONSOLIDATED SCHEDULE OF INVESTMENTS
AS AT 30 JUNE 2013
As at 30 June 2013 As at 31 December 2012
% of % of
effective effective
% of equity % of equity
Investments net interest Fair net interest Fair
- Assets assets held Cost/principal value assets held Cost/principal value
US$ US$ US$ US$
------------------- ------- ---------- --------------- ------------ ------- ---------- --------------- ------------
LISTED STOCKS
Real Estate,
China 5.37% 4.75%
Others 5.37% N/A 13,755,556 16,326,152 4.75% N/A 13,755,556 14,154,659
------------------- ------- ---------- --------------- ------------ ------- ---------- --------------- ------------
UNLISTED EQUITY
Real Estate,
China 90.53% 91.52%
Beijing Hines
Jing Sheng Real
Estate
Development
Co Ltd
-Share capital
of RMB110,324,259
shareholder
loan of
US$16,479,960(1) 29.87% 40.00% 16,480,000 90,779,124 30.25% 40.00% 20,880,000 90,067,677
Shenzhen
Yuanshengli
Management Co
Ltd. -Share
capital of
RMB104,866,320 27.88% 30.00% 5,548,341 84,757,500 27.19% 30.00% 5,548,341 80,943,700
Dalian Wanda
Commercial Real
Estate Co Ltd
- 18,000,000
shares 23.85% 0.50% 22,414,500 72,490,977 24.12% 0.50% 22,414,500 71,800,175
Jiangyin Aijia
Investment
- Share capital
of RMB15,000,000
and shareholder
loans of
RMB135,000,000(1) 8.93% 15.00% 22,725,000 27,131,695 9.96% 15.00% 22,725,000 29,653,172
------------------- ------- ---------- --------------- ------------ ------- ---------- --------------- ------------
LOANS RECEIVABLE
Real Estate,
China 2.33% 2.50%
Others(2) 2.33% N/A 9,807,034 7,077,945 2.50% N/A 9,807,034 7,432,344
------------------- ------- ---------- --------------- ------------ ------- ---------- --------------- ------------
OTHER DEBT
INSTRUMENTS
Real Estate,
China 6.98% 12.94%
Times Property
Holdings Co.
Ltd- Redeemable
exchangeable
note of
US$10,614,227 6.98% N/A 10,614,227 21,225,405 12.94% N/A 29,900,045 38,541,312
------------------- ------- ---------- --------------- ------------ ------- ---------- --------------- ------------
Aviation, China 0.24% 0.05%
Others 0.24% N/A - 732,696 0.05% N/A - 146,665
------------------- ------- ---------- --------------- ------------ ------- ---------- --------------- ------------
101,344,658 320,521,494 125,030,476 332,739,704
=================== ======= ========== =============== ============ ======= ========== =============== ============
(1) Certain equity investments of the Fund were in form of share
capital and shareholder's loan.
(2) The principal above represents the principal calculated
according to the Fund's accounting purpose, which is different from
the loan principal calculated in accordance with the legal
agreements whereby the cost is paid prior to the repayment of
interest component.
The accompanying notes are an integral part of these
consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED 30 JUNE 2013
Period Period
from 1 from 1
January January
to 30 June to 30 June
Note 2013 2012
US$ US$
Income
Dividend income 1,548,032 1,497,780
Interest income 188,321 348,528
Consulting income 6 - 1,007,451
-------------------- --------------------
Total income 1,736,353 2,853,759
------------------ ------------------
Expenses
Tax expense 7 708,938 (767,909)
Performance fees 8 (1,793,893) (1,680,476)
Management fees 8 (2,981,720) (3,050,430)
Legal and professional fees (431,502) (183,312)
Interest expense - (106,536)
Loan arrangement and handling
fee expenses - (205,585)
Recharge of loan related
income and expenses from
PACL II Limited - 228,173
Other expenses (376,437) (379,552)
-------------------- --------------------
Total expenses (4,874,614) (6,145,627)
------------------ ------------------
Net investment loss (3,138,261) (3,291,868)
------------------ ------------------
Realized and unrealized gain
from investments and foreign
currency
Net realized gain from investments
and foreign currency transactions - 8,957,746
Net change in unrealized
gain/(loss) from investments
and translation of assets
and liabilities in foreign
currencies 4 11,838,333 (340,278)
Net (increase)/decrease in
payable to PACL II Limited
from gain/(loss) attributable
to PACL II Limited 10(a) (1,524,501) 1,396,274
-------------------- --------------------
Net realized and unrealized
gain from investments and
foreign currency 10,313,832 10,013,742
------------------ ------------------
Net increase in net assets
from operations 7,175,571 6,721,874
The accompanying notes are an integral part of these
consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED 30 JUNE 2013
Share
capital
and share Capital Tendered Retained
Note premium surplus shares earnings Total
US$ US$ US$ US$ US$
At 1
January
2012 189,833,893 1,816,917 (49,293,340) 152,400,615 294,758,085
Repurchase
of
tendered
shares 5 - - (19,627,623) - (19,627,623)
Reissue of
tendered
shares 5 - - 3,135,507 - 3,135,507
Net
increase
in net
assets
from
operations - - - 19,468,566 19,468,566
------------------ ------------------ ------------------ ------------------ ------------------
At 31
December
2012 and
1 January
2013 189,833,893 1,816,917 (65,785,456) 171,869,181 297,734,535
Repurchase
of
tendered
shares 5 - - (2,167,099) - (2,167,099)
Reissue of
tendered
shares 5 - - 1,216,787 - 1,216,787
Net
increase
in net
assets
from
operations - - - 7,175,571 7,175,571
------------------ ------------------ ------------------ ------------------ ------------------
At 30 June
2013 189,833,893 1,816,917 (66,735,768) 179,044,752 303,959,794
The accompanying notes are an integral part of these
consolidated financial statements.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD ENDED 30 JUNE 2013
Period Period
from from
1 January 1 January
to to
30 June 31 December
Note 2013 2012
US$ US$
Net increase in net assets
from operations 7,175,571 19,468,566
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 23,685,818 30,707,040
Net gain on loan related
income allocated to PACL
II Limited - (173,116)
Net realized and unrealized
gain from investments (11,467,608) (37,229,473)
Net increase in payable from
profits payable to PACL II
Limited 1,524,501 2,104,903
Increase in other receivables (100,060) (348,978)
Decrease in restricted cash - 43,330,560
Decrease in amounts due to
PACL II Limited (10,670,935) (22,493,560)
Decrease in performance fees 5,
payable 8 (1,856,469) (4,539,372)
Decrease in provision for
taxation (2,586,352) (8,103,647)
Decrease in provision for
investment agency fees - (3,791,916)
Increase/(decrease) in accrued
expenses and other payables 1,458,692 (1,366,437)
-------------------- --------------------
Net cash generated from operating
activities 7,163,158 3,809,014
------------------ ------------------
Cash flows from financing
activities
Repayment of bank loans - (38,121,000)
Repurchase of shares 5 (2,167,099) (19,627,623)
-------------------- --------------------
Net cash used in financing activities (2,167,099) (57,748,623)
------------------ ------------------
Net increase/(decrease) in
cash and cash equivalents 4,996,059 (53,939,609)
Beginning balance 63,256,654 117,196,263
-------------------- --------------------
Ending balance, representing
cash and bank balances 68,252,713 63,256,654
Supplementary information to statement
of cash flows
Interest income received 188,321 585,766
Interest expenses paid - 106,536
Dividend income received 1,548,032 1,497,780
Non-cash transaction:
Part of the performance fee payable to the Investment Manager
was settled by the Company's shares. Please refer to Note 5 and 8
for details.
The accompanying notes are an integral part of these
consolidated financial statements.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED 30 JUNE 2013
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 AIM market 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, the administrator and registrar
pursuant to the Administration Custodian and Registrar
Agreement.
The unaudited consolidated financial statements were approved by
the Board of Directors on 17 September 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 30 June 2013 and the reported amounts of income
and expenses for the period 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$, the functional currency. The Fund is therefore
exposed to currency risk as the value of assets and liabilities
denominated in other currencies may fluctuate due to changes in
exchange rates. The net assets of the Fund are denominated/ traded
in the following currencies:
As at As at
30 June 31 December
2013 2012
US$ US$
Renminbi 217,214,923 215,823,959
United States Dollars 86,785,073 81,950,710
Pounds Sterling (11,686) (11,686)
Hong Kong Dollars (28,516) (28,448)
-------------------- --------------------
303,959,794 297,734,535
(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 30 June 2013, investments in loans receivable and bonds of
US$28,303,350 (31 December 2012: US$45,973,656) were
borrowed/issued by counterparties which are currently unrated by
any rating agency. The Fund managed the 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 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. The Fund has no outstanding borrowings as at
30 June 2013.
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 the valuation techniques and the
significant unobservable inputs used for Level 3 investments as at
30 June 2013:
Investment assets Fair value Valuation technique(s)
US$
Income approach
Unlisted Equity 90,779,124 (1)
Market comparables
184,380,172 (2)
Market comparables
Loans receivable 7,077,945 (4)
Discounted cash
Other debt instruments 21,225,405 flow (3)
Option pricing
Option 732,696 model (5)
--------------
304,195,342
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 collaterals, which are real estate properties. 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 30 June 2013
Investments - stocks 16,326,152 - 275,159,296 291,485,448
Investments - other
debt instruments - - 21,225,405 21,225,405
Investments - loans
receivable - - 7,077,945 7,077,945
Investments - derivatives - - 732,696 732,696
-------------------- -------------------- -------------------- --------------------
16,326,152 - 304,195,342 320,521,494
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 30 June 2013, investments of US$291,485,448 (31 December
2012: US$286,619,383) were held directly by the Fund, investments
of US$28,303,350 (31 December 2012: US$45,973,656) 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, a fellow subsidiary of the Investment Manager,
through sub-participation agreement, and investments of US$732,696
(31 December 2012: US$146,665) were held through jointly owned
entities with PAX L.P.
The following table summarizes the movements in fair value of
the Fund's Level 3 instruments.
Investments Investments Investments
- unlisted - loans - other Investments
equity receivable debt instruments - derivative Total
US$ US$ US$ US$ US$
At 1 January
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 and
1 January
2013 272,464,724 7,432,344 38,541,312 146,665 318,585,045
Proceeds
from
sale of
investments (4,400,000) - (19,285,818) - (23,685,818)
Net change
in
unrealized 7,094,572 (354,399) 1,969,911 586,031 9,296,115
gain/(loss) -------------------- ------------------ ------------------ -------------------- --------------------
At 30 June
2013 275,159,296 7,077,945 21,225,405 732,696 304,195,342
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 carried at US$7,077,945
(31 December 2012: US$7,432,344). The borrower will transfer the
title deed of three residential units to the investor consortium as
payment-in-kind, in which the fund is entitled to 30% of the value
of these three residential units.
For the period ended 30 June 2013, net realized gain/ (loss) and
change in unrealized gain/(loss) recognized for the loans
receivable amounted to US$ nil (31 December 2012: US$ nil) and
US$(354,399) (31 December 2012: US$(2,374,690)), respectively.
As at 30 June 2013, the Fund had a debt investment of
US$21,225,405 (31 December 2012: US$38,541,312) which will mature
within the next 10 months (31 December 2012: 16 months). The Fund
held collateral in the form of assets of the borrower and its
subsidiaries. The fair value of the investment is determined by the
Valuation Committee. For the period ended 30 June 2013, net
realized gain/ (loss) and change in unrealized gain/ (loss)
recognized on the bond amounted to US$ nil (31 December 2012:
US$8,938,925) and US$1,969,911(31 December 2012: US$(316,479)),
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 30 June 2013, the Fund held a call option of US$732,696
(31 December 2012: US$146,665) with notional amount of US$4,255,274
(31 December 2012: US$2,961,490). During the period ended 30 June
2013, the Fund recognized change in unrealized gain of the option
amounted to US$586,031 (31 December 2012: US$(112,235)).
5. 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
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 and 1
January
2013 132,080,573 1,898,339 187,935,554 1,816,917 (65,785,456) 125,865,354
Re-purchase
of tendered
shares (1,282,307) (2,167,099) (2,167,099)
Re-issue of
tendered
shares 530,514 - - - 1,216,787 1,216,787
-------------------- ---------------- ------------------ ---------------- -------------------- --------------------
As at 30
June
2013 131,328,780 1,898,339 187,935,554 1,816,917 (66,735,768) 124,915,042
As at 30 June 2013, the total number of authorized ordinary
shares was 10,000,000,000 (31 December 2012: 10,000,000,000) with
par value of US$0.01 (31 December 2012: US$0.01) per share. The
Company had 189,833,893 (31 December 2012: 189,833,893) ordinary
shares in issue, of which 58,505,113 (31 December 2012: 57,753,320)
were held as tendered shares.
Movement of tendered shares is as follows:
Number
of
shares Repurchase/
repurchased/ reissue
(reissued) price Total
US$ US$
At 1 January 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
and 1 January 2013 57,753,320 65,785,456
Repurchased in May 2013 1,282,307 1.6900 2,167,099
Reissued in May 2013 (530,514) 2.2936 (1,216,787)
------------------ ------------------
At 30 June 2013 58,505,113 66,735,768
The Company also reissued 530,514 tendered shares at US$ 2.2936
per share (net asset value per share as at 31 May 2013) to the
Investment Manager to settle its obligation in respect of the share
option of the 2012 performance fees. See Note 9 below for
details.
6. Consulting income
Consulting income is derived mainly from the provision of
consulting services to a buyer of an investment sold.
7. 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 above 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 30 June 2013, provision for current tax, deferred tax and
uncertain tax amounted to US$1,474,832 (31 December 2012:
US$3,984,553), US$41,926,838 (31 December 2012: US$42,514,614) and
US$8,173,245 (31 December 2012: US$7,662,100) 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 the tax provided as at 30 June 2013 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.
8. 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
period ended 30 June 2013, total management fees amounted to
US$2,981,720 (period ended 30 June 2012: US$3,050,430). As at 30
June 2013, management fees payable amounted to US$ nil (31 December
2012: US$ nil).
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 period ended 30 June 2013, total performance fees
amounted to US$1,793,893 (period ended 30 June 2012: US$1,680,476).
As at 30 June 2013, performance fees payable amounted to
US$1,793,893 (31 December 2012: US$4,867,149).
Under the Investment Management Agreement, the performance fees
earned by the Investment Manager shall be paid 75% in cash and 25%
in the Company's ordinary shares ("share portion"). The Company may
elect to meet its share obligation either by issuing new shares at
NAV or purchasing the equivalent number of shares in the
market.
During the period ended 30 June 2013, the Investment Manager
agreed to receive 530,514 tendered shares at US$ 2.2936 per share,
which is the Fund's NAV per share as at 31 May 2013, from the Fund
to settle its obligation in respect of the share portion of the
2012 performance fees of US$1,216,787.
9. Investment agency fees
During the year ended 31 December 2011, to facilitate the
disposal of an investment, the Fund entered into a consulting
agreement with an unrelated third party (the "Consultant"). Under
the agreement, the Fund is obligated to pay an investment agency
fee to the Consultant based on a percentage of the net realized
gain of the investment earned by the Fund upon realization.
For the period ended 30 June 2013, investment agency fee of US$
nil (31 December 2012: US$46,536) was incurred based on the
realized and unrealized gain on the investment net of certain
expenses and tax attributable to the investment.
10. Related party transactions
Apart from the related party transactions disclosed in Note 8,
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 was extended by 1 year to 2 March 2013 upon
the 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 upon the written election by the Investment Manager and
a majority of the shareholders.
As part of this restructuring, the Company repurchased
180,166,107 shares at a tender price of US$1.01 per share in
exchange for holders of these shares receiving the same number of
shares in PACL II.
Under the terms of the tender offer, PACL II is entitled to
receive 50.33% of the proceeds from the Tender Offer Portfolio,
which reflects a 5% discount of its proportionate share of the
Tender Offer Portfolio. As such, the amount due to PACL II is
recorded as a payable by the Company, adjusted at each period end
based on the movement in the fair value of the underlying assets
and the income and expense attributable to the Tender Offer
Portfolio. The amount is unsecured, non-interest bearing. The
following table summarizes the movements in payable to PACL II.
2013 2012
US$ US$
At 1 January 35,328,424 55,890,197
Distributions to PACL II (10,670,935) (22,493,560)
Recharge of loan related expense
allocated (to)/from PACL II - (173,116)
Net increase in payable from
gain attributable to PACL II 1,524,501 2,104,903
------------------ --------------------
At 30 June 26,181,990 35,328,424
(b) Directors' remuneration
The Company pays each of its director annual fees of US$30,000
(31 December 2012: 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; Chairman of either Committee will
receive additional US$5,000. During the period ended 30 June 2013,
Jon-Paul Toppino agreed to waive his director's fees and committee
fees.
11. Financial highlights
Net asset value per share at the end of the period is as
follows:
2013 2012
US$ US$
Per share data (for a share
outstanding throughout the
year)
Net asset value at 1 January 2.2542 2.1073
Net investment loss (0.0239) (0.0235)
Net realized and unrealized
gains from investments 0.0842 0.0715
-------------- --------------
Net asset value at 30 June 2.3145 2.1553
The following represents the ratios to average net assets and
other supplemental information:
From 1
From 1 January January
to 30 June to 30 June
2013 2012
Total return before performance
fees (1) 3.28% 2.85%
Performance fees 0.61% 0.57%
Total return after performance
fees (1) 2.68% 2.28%
Ratios to average net assets
(2)
Total expenses (1.62%) (2.08%)
Net investment loss (1.04%) (1.11%)
(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 period ended 30 June 2013, the average net
assets amounted to US$300,589,159 (from 1 January 2012 to 30 June
2012: US$295,649,286).
12. 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.
13. Subsequent events
Management has performed a subsequent events review from 1 July
2013 through to 17 September 2013, being the date that the
financial statements were available to be issued. The Company has
completed the sale of its fifteen percent (15%) equity interest in
Project Winpoint and has received net cash proceeds of RMB184M
(equivalent to US$29.9M) after tax.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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