TIDMPACL
RNS Number : 9702E
Pacific Alliance China Land Limited
16 April 2014
16 April 2014
Pacific Alliance China Land Limited
Full year results for the period ended 31 December 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 full year audited results to 31 December
2013.
Highlights
-- Net asset value as at 31 December 2013 was US$319.6 million,
representing US$2.46 per share, a 5.1% increase from 30 June 2013
(US$304 million) and a 9% increase year-on-year (31 December 2012;
US$297.7 million, representing US$2.25 per share).
-- The Company's share price closed at US$1.70, a 7.8% increase
year-on-year and a 30% discount to the audited NAV per share.
-- 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.
Portfolio and Fund Developments
-- Project Auspice, one of China's top commercial real estate
developers and operators, recorded 47% revenue growth in 2013,
which was its fifth consecutive year of annual double digit
growth.
-- In July 2013, the Company completed the sale of its 15%
equity interest in a Jiangyin residential development project of
Shanghai Aijia Investment Group (Project Winpoint). PACL received
net cash proceeds of RMB184 million (equivalent to US$29.9 million)
after tax, representing an IRR of 9.8%, 1.31x cash multiple and a
premium of RMB25.5 million (equivalent to US$4.2 million) over
PACL's most recent valuation, on a net after tax basis.
-- PACL received final repayments from the Project Speed
exchangeable notes during 2013 and the investment was fully
realized in January 2014. The Company received total consideration
of USD 35 million with a profit of USD$13.9 million, representing a
gross IRR of 10.2% and a cash multiple of 1.7x, respectively.
-- Project Malls appreciated in 2013 due to a steady dividend
from Wal-Mart's Joint Venture retail operating businesses.
-- The Company repurchased US$4.8 million of PACL's ordinary
shares in 2013 pursuant to the Share Purchase program announced in
November 2012 and June 2013.
-- The Company currently has approximately $13m of free cash
(approximately $10m is held in RMB). The balance of the December
2013 reported cash balance is retained to cover upcoming
liabilities being predominantly tax.
Patrick Boot, Managing Director, Pacific Alliance Real Estate
Limited commented that:
"After several years of solid expansion, 2013 saw more stable
growth for the commercial real estate sector with prime rents
continuing to increase, albeit at a slower rate than previous
years, and vacancy rates remaining low. We expect continued steady
growth in 2014 and remain convinced that the fund's heavy portfolio
weighting in the commercial sector is the right strategy."
"Despite the government's continued tightening policies, China's
residential property sector continues to recover, although there
will be some volatility in the short term. We believe this recovery
will be sustainable over the long term based on the key drivers of
the Chinese property market including continued urbanization,
increasing disposable income and land scarcity, and we see no signs
of a sharp nationwide downturn. While this market remains somewhat
volatile in the short term, we do believe the long-term prospects
are positive."
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$319.64 million
as at 31 December 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, 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
Chairperson's Statement
Pacific Alliance China Land Limited ("the Company" or "PACL")
continued to deliver outstanding results in 2013. The Company's net
asset value ("NAV") as of 31 December 2013 was US$319.64 million or
US$2.4628 per share, which represents a year-on-year increase of 9%
from 2012. Since inception the Company's NAV has achieved a
compound annual growth rate of 16%.
In 2013, the NAV growth of the Company was largely attributable
to the performance of its commercial assets. Project Diplomat,
Beijing's premier serviced apartment building, maintained its
strong performance despite less favorable market conditions. It
achieved higher rents while keeping vacancy at relatively low
levels, leading to an increase in net operating income and property
value.
Project Auspice, one of China's top commercial real estate
developers and operators, recorded 31% revenue growth in 2013,
which was its eighth consecutive year of annual growth above 30%.
Project Malls also appreciated in 2013, due to the steady dividend
from Wal-Mart's Joint Venture retail operating businesses. The
continued strong performance of these investments validates the
Company's strategies centering on high quality commercial assets,
unaffected by the government's residential tightening policies.
China's residential property sector continues to recover despite
the government's continued tightening policies. Although the
Investment Manager believes that the immediate term may present
some volatility, the long-term prospects for the market are
supported by China's relatively strong economic growth.
The Board of Directors would like to take this opportunity to
thank you for the important role you have played in the Company's
growth in 2013 and for your continuing support in 2014. Our
opportunistic multi-strategy investment approach has proven
successful in delivering attractive risk-adjusted returns in
volatile market conditions. Despite the uncertainties and
challenges in China's real estate market, we are confident the
Investment Manager will continue to enhance value for our
shareholders.
Margaret Brooke
Chairperson
Investment Manager's Report
On 31 December 2013, the Company's share price closed at
US$1.7025, a 7.8% increase year-on-year and a 30% discount to the
audited NAV per share. PACL's NAV and share price have both
outperformed major benchmark indices including the FTSE 350 Real
Estate Index and the FTSE AIM All-Share Index on a consistent basis
since inception.
31 December 31 December
2013 2012
US$ US$
Realized Gain
Investment income 14,516,276 13,183,918
Dividend income 3,301,007 1,497,780
Other income - 1,007,451
Deposit interest 620,143 484,744
------------------ ------------------
18,437,426 16,173,893
Change in Unrealized Gain/(Losses)
Pre-IPO financing 3,012,158 18,646,424
Other real estate investments 17,937,526 17,700,423
Listed stock 6,053,853 399,104
Bridge financing 7,843,958 (2,711,499)
Co-development (6,928,172) (10,267,011)
Share of losses/ (profits)
payable to PACL II (6,803,006) (2,104,903)
Foreign exchange 3,467,965 (33,222)
------------------ ------------------
24,584,282 21,629,316
------------------ ------------------
43,021,708 37,803,209
Portfolio Summary
As at 31 December 2013, the Company held cash of US$101 million
and investments with a cost of approximately US$68 million and fair
value of US$306 million. The Company's portfolio is diversified
across five strategies including Listed Stock, Bridge Financing,
Pre-IPO Financing, Platform Investment and Asset Acquisition.
Breakdown of unlisted investments by strategy, listed
investments and cash
Attributable
to PACL
Fair value II Limited
Investments (gross) % of ("PACL
and Cash US$ Type total Location II")
--------------- ------------ -------------------- -------- ------------------ -------------
Project
Crystal 20,208,512 Listed Stock 4.96% Singapore -
Project
Diplomat 94,457,603 Asset Acquisition 23.17% China (Beijing) -
Project
Malls 90,091,300 Platform investment 22.11% China -
Project
Auspice 76,465,089 Pre-IPO Financing 18.76% China -
Project Bridge Financing
Speed 16,901,903 (1) 4.15% China (Guangdong) 8,507,505
Project Bridge Financing
Olympic 7,235,644 (1) 1.78% China (Beijing) 3,642,032
Pre-IPO Financing
HNA - Options 670,959 (1) 0.16% China 337,725
Cash 101,498,401 Cash (1,2) 24.91% 11,263,663
--------------- ------------ -------------------- -------- ------------------ -------------
TOTAL 407,529,411 100.00% 23,750,925
-------------
Note
(1) The gross investment value includes an amount attributable
to the PACL II shareholders.
(2) Of the total cash of US$101.50 million, US$64.3 million of
which are held as RMB in PRC banks.
Investment Strategy
In 2013 the continued rise of most big cities' home prices
signaled strong pent-up demand in the residential sector, while at
the same time causing concerns that the market may have overheated.
The Investment Manager believes this overall upward trend is
underpinned by the long-term drivers of the Chinese property
markets, including continued urbanization, increasing disposable
income and scarcity of land. Therefore, with China's annual GDP
growth rate hovering at 7.5% or above, it is unlikely that a sharp
downturn of the residential market nationwide will occur in the
near future.
The commercial real estate sector has been the focus of our
investment strategy for the past few years and its performance in
2013 has once again reinforced our confidence in this sector. After
the solid expansion of previous years, the office market in
first-tier cities has shown a more stable picture in 2013. Prime
rents have increased but at a somewhat slower pace, while vacancy
rates have remained low.
The retail sector performed better across the board, supported
by the continued growth of per capita incomes. Prime locations
enjoyed increasing rents and low vacancy rates. With most cities'
retail stock low by international standards and strong demand from
consumers and retailers, we anticipate that there will be
sustainable growth in the foreseeable future.
With the Company's investments weighted heavily in the
commercial sector, we have successfully realized asset appreciation
while minimizing the risks associated with the frequent
fluctuations in the residential sector caused by government policy
changes. We continue to manage the portfolio to achieve solid
risk-adjusted returns for our shareholders.
Defensive Strategies
Bridge Financing
Borrowers have typically been small and medium-sized developers
who have limited options to meet their financial needs,
particularly those with a project in a preliminary stage that does
not meet the lending standards of a bank or trust company.
Underwriting focuses heavily on risk management projects with solid
fundamentals, sufficient collateral, credit-worthy borrowers and
sound legal structures.
Growth Strategies
Value-Added Asset Acquisitions
Commercial assets in good locations have proven to be the most
desirable investment holdings in China's current market, because
they are not subject to government restrictions, are cash
generating, inflation-protected, and have long-term appreciation
potential with good liquidity. In this regard, the Investment
Manger will continue to focus on maximizing the value of Project
Diplomat.
Listed Debt/Equities
With our rich experience and established network in the property
sector, we have been able to identify investment opportunities in
public-listed debt and/or equities that are trading at deep
discounts to their NAV. Project Crystal has strong financial
fundamentals, improved operating capabilities and a quality
development pipeline. We are confident in the company's ability to
complete its transformation and restore its dividend in the
future.
Platform and Pre-IPO Investments
In late 2013, the Chinese regulators lifted the ban of A-share
IPOs, signaling a softening of the policy environment. Although
this has yet to result in a real estate company IPOs, market
sentiment has gradually improved. We will continue working with the
management of Project Auspice to enhance the company's performance
while monitoring the market closely for the opportune time to seek
a public listing. Our other significant platform investment is
Project Malls and we continue to work with our partners to maximize
the value of both the Walmart Joint Venture and the Shanghai
Land.
Share Purchase Program
The Company repurchased US$4.8 million of PACL's ordinary shares
in 2013 pursuant to the Share Purchase program announced in
November 2012 and June 2013.
Conclusion
The Chinese leadership released its new round of reforms in the
latter part of 2013, aiming to shift the country's growth to a more
sustainable model. Accordingly, its reforms in the real estate
sector also focus on long-term systematic changes instead of
short-term administrative measures. Therefore the Investment
Manager believes that in the short term the possibility of a
disastrous market downturn is limited, and in the longer term, the
real estate market will continue to develop at a somewhat less
aggressive yet sustainable pace.
Summary of the 3rd Plenary Session of the 18th CPC Central
Committee
The 3rd Plenary Session of the 18th CPC Central Committee was
held in November 2013, where reform highlights were issued for
China going forward. The key focus was economic reform and
emphasizing the relationship between the government and the market,
leaving the market to play a decisive role in the allocation of
resources. Main policies relevant to the real estate sector
include: (1) To accelerate the property tax legislation and related
reform at appropriate time; (2) A unified database of properties
and credit history will be setup and information sharing is
encouraged; (3) Reform on rural property systems will be carried
out; and (4) Land collection should be regulated and farmers'
rights are protected.
Other important reform measures include: (1) To enhance the
vitality of the state-owned sector and its capacity to leverage and
influence the economy, while stimulate the vitality and creativity
of the private sector; (2) To establish an open and competitive
economy; setup a market pricing mechanism and avoid government
intervention; (3) To establish a law-based and service-oriented
government; (4) To deepen the reform of the fiscal and taxation
system, establish a standard and reasonable debt control system for
central and local governments and a risk-alert system; (5) Reform
of the hukou (or household registration) system will be accelerated
to help farmers become urban residents. The government will relax
the overall control for farmers to settle in towns and small
cities, include transferred rural populations in the urban social
security network and connect the rural pension and medical
insurance with urban social insurance system; (6) To establish an
open and competitive economy, relax investment restrictions and
accelerate construction of free trade zones (FTZ) such as the
Shanghai FTZ; (7) To develop grassroots democracy; (8) To ensure
independence and fairness in prosecuting bodies and courts; (9) To
enhance anti-corruption through both prevention and punishment;
(10) To accelerate the reform and innovation in cultural and social
sectors; (11) To innovate a system that can effectively prevent and
solve social contradiction, establish the State Security Committee;
(12) To establish a system of compensation for the use of natural
resources and control the subsequent impact on the ecosystem; and
(13) A Central Reform Leading Team is commissioned to design and
coordinate the reforms.
CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES
AS AT 31 DECEMBER 2013
Note 2013 2012
US$ US$
Assets
Investments, at fair value
(Cost: US$68,005,431; 2012:
US$125,030,476) 3,4 306,031,010 332,739,704
Other receivables 479,149 534,237
Cash and bank balances 101,498,401 63,256,654
-------------------- --------------------
Total assets 408,008,560 396,530,595
------------------- -------------------
Liabilities
Provision for taxation 7 54,820,034 54,161,267
Amounts due to PACL II Limited 10(a) 22,702,274 35,328,424
Performance fee payable 8 6,367,049 4,867,149
Provision for investment
agency fees 9 4,293,990 4,049,438
Accrued expenses and other
payables 184,194 389,782
-------------------- --------------------
Total liabilities 88,367,541 98,796,060
------------------- -------------------
Net assets 319,641,019 297,734,535
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 (69,347,170) (65,785,456)
Retained earnings 197,337,379 171,869,181
-------------------- --------------------
Net assets (equivalent to
US$2.4628 per share based
on 129,787,948 outstanding
shares; 2012: US$2.2542 per
share based on 132,080,573
outstanding shares) 319,641,019 297,734,535
Approved by the Board of Directors on 16 April 2014
The accompanying notes are an integral part of these
consolidated financial statements.
PACIFIC ALLIANCE CHINA LAND LIMITED
(Incorporated in the Cayman Islands with limited liability)
CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS
AS AT 31 DECEMBER 2013
2013 2012
% of % of
effective effective
% of equity % of equity
Investments net interest Cost/ Fair net interest Cost/ Fair
- Assets assets held principal value assets held principal value
US$ US$ US$ US$
LISTED STOCKS
Real Estate,
China 6.32% 4.75%
Forterra Trust 6.32% N/A 13,755,556 20,208,512 4.75% N/A 13,755,556 14,154,659
UNLISTED EQUITY
Real Estate,
China 81.66% 91.52%
Beijing Hines
Jing Sheng Real
Estate Development
Co Ltd
* 110,324,259 shares and a shareholder loan of
US$16,479,960 (1) 29.55% 40.00% 16,480,000 94,457,603 30.25% 40.00% 20,880,000 90,067,677
SCP Management
Co Ltd
* Share capital of RMB 6,000,000 28.19% 30.00% 5,548,341 90,091,300 27.19% 30.00% 5,548,341 80,943,700
Dalian Wanda
Commercial Real
Estate Co Ltd
* 18,000,000 shares 23.92% 0.48% 22,414,500 76,465,089 24.12% 0.48% 22,414,500 71,800,175
Jiangyin Aijia
Investment
* Share capital of RMB15,000,000 and shareholder loans
of RMB135,000,000 (1) 0.00% 0.00% - - 9.96% 15.00% 22,725,000 29,653,172
LOANS RECEIVABLE
Real Estate,
China 2.26% 2.50%
Others (2) 2.26% N/A 9,807,034 7,235,644 2.50% N/A 9,807,034 7,432,344
OTHER DEBT INSTRUMENTS
Real Estate,
China 5.29% 12.94%
Times Property
Holdings Co.
Ltd 5.29% N/A - 16,901,903 12.94% N/A 29,900,045 38,541,312
(Note 13)
DERIVATIVES
Aviation, China 0.21% 0.05%
Others 0.21% N/A - 670,959 0.05% N/A - 146,665
-------------------- -------------------- -------------------- --------------------
68,005,431 306,031,010 125,030,476 332,739,704
(1) Certain equity investments of the Fund were in the form of
share capital and shareholder's loan.
(2) The principal above represents the principal calculated
according to the Fund's accounting policy, which is different from
the loan principal calculated in accordance with the legal
agreements whereby the cost is paid prior to the repayment of
interest component.
The accompanying notes are an integral part of these
consolidated financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED 31 DECEMBER 2013
Note 2013 2012
US$ US$
Income
Dividend income 3,301,007 1,497,780
Interest income 620,143 484,744
Consulting income 6 - 1,007,451
Recharge of loan related
income and expenses to PACL
II Limited - 173,116
------------------ ------------------
Total income 3,921,150 3,163,091
----------------- -----------------
Expenses
Tax expense 7 (3,016,036) (5,533,398)
Performance fees 8 (6,367,049) (4,867,149)
Management fees 8 (6,126,735) (5,931,529)
Investment agency fees 9 (244,552) (46,536)
Legal and professional fees (883,663) (727,879)
Interest expense - (106,536)
Loan arrangement and handling
fee expenses - (205,585)
Other expenses (915,475) (1,089,147)
------------------ ------------------
Total expenses (17,553,510) (18,507,759)
----------------- -----------------
Net investment loss (13,632,360) (15,344,668)
----------------- -----------------
Realized and unrealized gain
from investments and foreign
currency
Net realized gain from investments
and foreign currency transactions 14,516,276 13,183,918
Net change in unrealized
gain from investments and
gain on translation of assets
and liabilities in foreign
currencies 4 31,387,288 23,734,219
Net increase in payable to
PACL II Limited from gain
attributable to PACL II Limited 10(a) (6,803,006) (2,104,903)
------------------ ------------------
Net realized and unrealized
gain from investments and
foreign currency 39,100,558 34,813,234
----------------- -----------------
Net increase in net assets
from operations 25,468,198 19,468,566
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 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 - - (4,778,501) - (4,778,501)
Reissue of
tendered
shares 5 - - 1,216,787 - 1,216,787
Net
increase
in net
assets
from
operations - - - 25,468,198 25,468,198
------------------ ------------------ ------------------ ------------------ ------------------
At 31
December
2013 189,833,893 1,816,917 (69,347,170) 197,337,379 319,641,019
The accompanying notes are an integral part of these
consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2013
Note 2013 2012
US$ US$
Net increase in net assets
from operations 25,468,198 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 71,541,321 30,707,040
Net gain on loan related
income and expenses allocated
to PACL II Limited - (173,116)
Net realized and unrealized
gain from investments (44,832,627) (37,229,473)
Net increase in payable from
gain attributable to PACL
II Limited 6,803,006 2,104,903
Decrease/(Increase) in other
receivables 55,088 (348,978)
Decrease in restricted cash - 43,330,560
Decrease in amounts due to
PACL II Limited (19,429,156) (22,493,560)
Increase/(Decrease) in performance 5,
fees payable 8 2,716,687 (4,539,372)
Increase/(Decrease) in provision
for taxation 658,767 (8,103,647)
Increase/(Decrease) in provision
for investment agency fees 244,552 (3,791,916)
Decrease in accrued expenses
and other payables (205,588) (1,366,437)
-------------------- --------------------
Net cash generated from operating
activities 43,020,248 3,809,014
------------------ ------------------
Cash flows from financing
activities
Repayment of bank loans - (38,121,000)
Repurchase of shares 5 (4,778,501) (19,627,623)
-------------------- --------------------
Net cash used in financing
activities (4,778,501) (57,748,623)
------------------ ------------------
Net increase/(decrease) in
cash and cash equivalents 38,241,747 (53,939,609)
Beginning balance 63,256,654 117,196,263
-------------------- --------------------
Ending balance, representing
cash and bank balances 101,498,401 63,256,654
Supplementary information to statement of cash flows
Interest income received 675,231 585,766
Interest expenses paid - 106,536
Dividend income received 3,301,007 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 CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 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 5.
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 16 April 2014.
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 2013 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 7.
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$, the functional currency. The Fund is therefore
exposed to currency risk as the value of assets and liabilities
denominated in other currencies may fluctuate due to changes in
exchange rates. The Fund has the following net currency
exposures:
2013 2012
US$ US$
Renminbi 227,910,544 215,823,959
United States Dollars 91,799,050 81,950,710
Pounds Sterling (11,686) (11,686)
Hong Kong Dollars (56,889) (28,448)
-------------------- --------------------
319,641,019 297,734,535
(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 31 December 2013, investments in loans receivable and
bonds of US$24,137,547 (2012: US$45,973,656) 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. The Fund has no outstanding
borrowings as at 31 December 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 quantitative information about
the valuation techniques and the significant unobservable inputs
used for Level 3 investments:
2013
Significant
Investment Valuation unobservable
assets Fair value technique(s) inputs Inputs/range
US$
Average
Income monthly
Unlisted approach rent per
Equity 94,457,603 (1) sq.m. RMB 217
Capitalization
rate 6%
Market Average
comparables sales price
166,556,389 (2) per sq.m. RMB 12,682
P/E multiple 9X - 15X
Marketability
discount 20% - 25%
Discounted
cash flow Discount
Loans receivable 7,235,644 (4) rate 38.8%
Expected
Other debt proceeds
instruments 16,901,903 (5) N/A N/A
Option
pricing
Derivatives 670,959 model (6) Volatility 30%
----------------
285,822,498
2012
Significant
Investment Valuation unobservable
assets Fair value technique(s) inputs Inputs/range
US$
Average
Income monthly
Unlisted approach rent per
Equity 90,067,677 (1) sq.m. RMB 214
Capitalization
rate 6%
Market Average
comparables sales price RMB 8,108
182,397,047 (2) per sq.m. - 11,548
P/E multiple 9x - 14x
Marketability
discount 25% - 40%
Discounted
cash flow Discount
Loans receivable 7,432,344 (4) rate 38.8%
Discounted
Other debt cash flow Discount
instruments 38,541,312 (3) rate 30%
Option
pricing
Derivatives 146,665 model (6) 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 valuation of other debt instruments is based on the
expected proceeds as at 31 December 2013, which was subsequently
settled on 6 January 2014.
Note 6 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
2013
Investments - equity 20,208,512 - 261,013,992 281,222,504
Investments - other
debt instruments - - 16,901,903 16,901,903
Investments - loans
receivable - - 7,235,644 7,235,644
Investments - derivatives - - 670,959 670,959
-------------------- -------------------- -------------------- --------------------
20,208,512 - 285,822,498 306,031,010
As at 31 December
2012
Investments - equity 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 2013, investments of US$298,124,407 (2012:
US$325,160,695) were held directly by the Fund and investments of
US$7,906,603 (2012: US$7,579,009) were held through jointly owned
entities with Pacific Alliance Asia Opportunity Fund L.P.
The following table summarizes the movements in fair value of
the Fund's Level 3 instruments.
Investments Investments Investments
- unlisted - loans - other Investments
equity receivable debt instruments - derivatives Total
US$ 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
gain/(loss) 26,449,856 (2,374,690) (316,479) (112,235) 23,646,452
-------------------- ------------------ ------------------ ------------------ --------------------
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 (36,961,184) - (34,580,137) - (71,541,321)
Net realized
gain 9,836,184 - 4,680,092 - 14,516,276
Net change
in
unrealized
gain/(loss) 15,674,268 (196,700) 8,260,636 524,294 24,262,498
-------------------- ------------------ ------------------ ------------------ --------------------
At 31
December
2013 261,013,992 7,235,644 16,901,903 670,959 285,822,498
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$7,235,644
(2012: US$7,432,344). The borrower will transfer the title deed of
three residential units to the investor consortium as
payment-in-kind, in which the Fund is entitled to 30% of the value
of these three residential units.
For the year ended 31 December 2013, net realized gain and
change in unrealized gain/ (loss) recognized for the loans
receivable amounted to US$ Nil (2012: US$ Nil) and US$(196,700)
(2012: US$(2,374,690)), respectively.
As at 31 December 2013, the Fund had a debt investment of
US$16,901,903 (2012: US$38,541,312) that will be repaid in January
2014 (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 year
ended 31 December 2013, net realized gain/ (loss) and change in
unrealized gain/ (loss) recognized on the debt instrument amounted
to US$4,680,092 (2012: US$8,938,925) and US$8,260,636 (2012:
US$(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 gain/(loss) from investments and net
change in unrealized gain/(loss) 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 2013, the Fund held a call option of
US$670,959 (2012: US$146,665) with notional amount of US$4,330,222
(2012: US$2,961,490). During the year ended 31 December 2013, the
Fund's recognized change in unrealized gain/(loss) of the option
amounted to US$524,294 (2012: US$(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 (2,823,139) (4,778,501) (4,778,501)
Re-issue of
tendered
shares 530,514 - - - 1,216,787 1,216,787
-------------------- ---------------- ------------------ ---------------- -------------------- --------------------
As at 31
December
2013 129,787,948 1,898,339 187,935,554 1,816,917 (69,347,170) 122,303,640
As at 31 December 2013, the total number of authorized ordinary
shares was 10,000,000,000 (2012: 10,000,000,000) with par value of
US$0.01 (2012: US$0.01) per share. The Company had 189,833,893
(2012: 189,833,893) ordinary shares in issue, of which 60,045,945
(2012: 57,753,320) were held as tendered shares.
Movement of tendered shares is as follows:
Number
of
shares Repurchase/
repurchased/ reissue
(reissued) price Total
US$ 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
(Note 8) (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
(Note 8) (530,514) 2.2936 (1,216,787)
Repurchased in October
2013 1,540,832 1.6948 2,611,402
------------------ ------------------
At 31 December 2013 60,045,945 69,347,170
In May 2013 and October 2013, the Company repurchased 1,282,307
shares and 1,540,832 shares at US$1.69 and US$1.6948 per share
respectively from the AIM market. In May 2013, the Company reissued
530,514 tendered shares at US$ 2.2936 per share (net asset value
per share as at 30 April 2013) to a wholly owned subsidiary of the
Investment Manager to settle its obligation in respect of the share
portion of the 2012 performance fees. See Note 8 below for
details.
6 Consulting income
In 2013, consulting income amounted to US$ Nil (2012:
US$1,007,451). 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 CIT 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.
The Investment Manager has assessed that the Fund and its
offshore SPVs are not TREs in China and do not have any
establishment or place of business in China. Gains from the
disposal of investments in China by the Fund or its SPVs may be
subject to China withholding tax at 10% without considering the
potential relief that may be available under any tax treaty between
the tax jurisdiction of the transferor and China. In addition,
where Chinese equity investments are held via an offshore
intermediate holding company, exit of the Chinese equity investment
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 2013, the Investment Manager has analyzed the
open tax years of all jurisdictions subject to tax examination and
had the provision for current tax, deferred tax and uncertain tax
amounted to US$1,992,245 (2012: US$3,984,553), US$45,918,700 (2012:
US$42,514,614) and US$6,909,089 (2012: US$7,662,100) respectively.
The Investment Manager has 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 consolidated financial statements. However, given the
uncertainty of China 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 2013 will not be payable and may be
released. The Investment Manager is regularly monitoring the
position.
The Investment Manager has reviewed the structure of the Fund's
investment portfolio and considered the Fund's exposure to
countries in which it invests to be properly reflected in the
Fund's consolidated financial statements.
Under current Cayman Islands legislation applicable to an
exempted company, there is no income tax, capital gains or
withholding tax, estate duty, or inheritance tax payable by the
Fund in the Cayman Islands.
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
year ended 31 December 2013, total management fees amounted to
US$6,126,735 (2012: US$5,931,529) payable amounted to US$ Nil
(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 year ended 31 December 2013, total performance fees
amounted to US$6,367,049 (2012: US$4,867,149). As at 31 December
2013, performance fees payable amounted to US$6,367,049 (2012:
US$4,867,149).
Under the Investment Management Agreement, the performance fees
earned by the Investment Manager shall be paid 75% in cash and 25%
in the Company's ordinary shares ("share portion"). The Company may
elect to meet its share obligation either by issuing new shares at
NAV or purchasing the equivalent number of shares in the
market.
During the year ended 31 December 2013, the Investment Manager
agreed to receive 530,514 tendered shares valued at US$ 2.2936 per
share, the Fund's NAV per share as at 30 April 2013, from the Fund
to settle its obligation in respect of the share portion of the
2012 performance fees of US$1,216,787.
During the year ended 31 December 2012, the Investment Manager
agreed to receive 1,454,789 tendered shares at US$ 2.1553 per
share, 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.
9 Investment agency fees
During the year ended 31 December 2011, to facilitate the
disposal of Project Malls, 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 2013, investment agency fee of
US$244,552 (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 has been 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 major of the shareholders.
As part of this restructuring, the Company repurchased
180,166,107 shares at a tender price of US$1.01 per share in
exchange for holders of these shares receiving the same number of
shares in PACL II.
Under the terms of the tender offer, PACL II is entitled to
receive 50.33% of the proceeds from the Tender Offer Portfolio,
which reflects a 5% discount of its proportionate share of the
Tender Offer Portfolio. As such, the amount due to PACL II is
recorded as a payable by the Fund, adjusted at each period end
based on the movement in the fair value of the underlying assets
and the income and expense attributable to the Tender Offer
Portfolio. The amount is unsecured, non-interest bearing. The
following table summarizes the movements in payable to PACL II.
2013 2012
US$ US$
At 1 January 35,328,424 55,890,197
Distributions to PACL II (19,429,156) (22,493,560)
Recharge of loan related expense
allocated to PACL II - (173,116)
Net increase in payable from
gain attributable to
PACL II 6,803,006 2,104,903
------------------ ------------------
At 31 December 22,702,274 35,328,424
In January 2014, the Company made a distribution of US$8,556,882
to PACL II.
(b) Directors' remuneration
The Company pays each of its directors an annual fee of
US$30,000 (2012: US$30,000). If a director is a member of the
Valuation Committee or Audit Committee, the director also receives
an additional annual fee of US$10,000, and the Chairman of either
Committee receives an additional annual fee of US$5,000. During the
year 2013, Jon-Paul Toppino agreed to waive his directors' fees and
committee fees.
(c) Share capital held by funds managed by fellow subsidiaries
of the Investment Manager
During the year ended 31 December 2013, Pacific Alliance Asia
Opportunity Fund L.P. ("PAX LP"), an open-end fund organized in the
Cayman Islands, purchased 1,678,634 (2012: 5,054,292) ordinary
shares of the Company. As at 31 December 2013, PAX LP held
10,285,919 (2012: 8,607,285) shares of the Company, representing
7.9% (2012: 6.5%) of total outstanding shares of the Company.
During the year ended 31 December 2013, Pacific Alliance Asia
Special Situations Fund L.P. ("PASS"), a close-end fund
incorporated in the Cayman Islands purchased Nil (2012: 7,179,629)
and sold 300,000 (2012: Nil) ordinary shares of the Company. As at
31 December 2013, PASS held 6,879,629 (2012: 7,179,629) shares of
the Company, representing 5.3% (2012: 5.4%) of total outstanding
shares of the Company.
PAX LP and PASS are managed by fellow subsidiaries of the
Investment Manager.
11 Financial highlights
Net asset value per share at the end of the year is as
follows:
2013 2012
US$ US$
Per share data (for a share
outstanding throughout the
year)
Net asset value at 1 January 2.2542 2.1073
Net investment loss (0.1050) (0.1162)
Net realized and unrealized
gains from investments 0.3136 0.2631
-------------- --------------
Net asset value at 31 December 2.4628 2.2542
The following represents the ratios to average net assets and
other supplemental information:
2013 2012
Total return before performance
fees (1) 11.43% 8.72%
Performance fees 2.18% 1.75%
Total return after performance
fees (1) 9.25% 6.97%
Ratios to average net assets
(2)
Total expenses (5.73%) (6.28%)
Net investment loss (4.45%) (5.21%)
(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 2013, the average net
assets amounted to US$306,547,213 (2012: US$294,530,670).
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
January 2014 to 16 April 2014, being the date that the financial
statementswere available to be issued.
In January 2014, Mr. Horst Geicke, a director of the company,
purchased 100,000 ordinary shares of the Company at an average
price of US$1.73 per share from the AIM market.
Furthermore, in January 2014, the Company received the final
repayment of US$16,901,903 from Times Property Holdings Limited and
distributed US$8,556,882 to PACL II Limited.
In February 2014, the cash portion of the 2013 performance fee
payable in the amount of US$4,775,287 was fully paid.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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