TIDMARCH
RNS Number : 2998C
ARC Capital Holdings Limited
14 October 2015
14 October 2015
For Immediate Release
ARC Capital Holdings Limited
Interim Accounts for the Period Ending 30 June 2015
ARC Capital Holdings Limited ("ARCH" or the "Company") has today
announced the publication of its interim accounts for the period
ending 30 June 2015. The interim report is reproduced below.
The Company's 2015 interim report will also be sent to
registered shareholders shortly and a copy will be available for
inspection on the Company's website
(http://www.arch-fund.com/).
ARCH's shares remain suspended from trading on AIM pending the
appointment of a new Nominated Adviser. A further announcement
relating to this matter will be released in due course.
Enquiries
For further information, please contact:
ARC Capital Holdings Limited
Alpay Ece / Sean Hurst
Tel: +44 (0)20 7845 5950
Edmond de Rothschild Securities (UK) Limited
William Marle
Tel: +44 (0)20 7845 5950
John Armstrong-Denby
Tel: +44 (0)20 7845 5950
Hiroshi Funaki
Tel: +44 (0)20 7845 5960
ARC Capital Holdings Limited
Board Report
(For the six months ended 30 June 2015)
The Board of Directors is pleased to present the interim
financial statements of ARC Capital Holdings Limited ("ARCH") and
its subsidiaries (collectively, the "Fund") for the six months
ended 30 June 2015.
On 23 September 2015, the Fund published its financial report
for the year ending 31 December 2014. Included below is an update
of the Fund's position since the year end which may include certain
events disclosed and discussed in the 31 December 2014 annual
report as post year end events but which are repeated here for
completeness.
In February 2015 shareholders voted in general meeting to remove
the then existing directors and replace them with a new board of
directors. Messrs Steven Feniger and Tian Cho Chu, and Ms Helen
Wong left the Board, and Messrs Alpay Ece, Cosimo Borrelli and Sean
Hurst were appointed as the new Board of ARCH.
Mr Cosimo Borrelli was removed from the Board on 30 March 2015.
Subsequent to this, Borrelli Walsh tendered its resignation as a
consultant to the Board, effective 15 April 2015. The Board has
decided not to appoint a replacement for the Investment Manager or
Borrelli Walsh at this time but to retain specialist consultants in
relation to individual assets when appropriate.
Investments
There have been no material changes to the Fund's investments
since the update that was provided to shareholders in the 2014
annual financial report, save for the following:
Claim against Investment Manager (Orient Home litigation in
England)
On 22 April 2015, the new directors announced that they had
commissioned an independent review of ARCH's litigation against the
Fund's former investment manager, ARC Capital Partners Limited (the
"Investment Manager"), in respect of the Orient Home investment and
had appointed leading international law firm Baker & McKenzie
LLP ("Baker & McKenzie") to undertake the review, and to
provide an opinion on the reasonableness of pursuing such
claim.
The Board announced on 24 September 2015 that, following the
completion of Baker & McKenzie's review and in light of its
advice, the Board had resolved to continue to pursue ARCH's claim
against the Investment Manager. The Fund's legal advisers on this
matter, Stephenson Harwood LLP ("Stephenson Harwood") shall
therefore continue to pursue the claim in the English High
Court.
Funtalk China Holdings (formerly Beijing Pypo)
As stated in the company's annual report, the Board commissioned
an investigation into the acquisition of Funtalk by Fortress in
2011, ARCH's investment in Fortress and the events concerning the
Fortress investment from 2011 to date from Stephenson Harwood, the
same legal adviser acting for ARCH on the claim against the
Investment Manager in respect of Orient Home in England.
The Board will update shareholders in due course.
NAV
ARCH's NAV has decreased by approximately 53.97% from US$0.1184
as at 31 December 2014 to US$0.0545 as at 30 June 2015. As
explained more fully in the Fund's 2014 annual financial reports,
this decrease is primarily due to the accounting treatment of ARCH
Digital Holdings Limited ("ARCH Digital") when producing ARCH's
consolidated balance sheet. Under ARCH's current accounting
policies, even though the investment in Fortress Group Limited
("Fortress") has been written down to nil, the exercise of the Put
Option by PAGAC Fortress Holding I Limited ("PAGAC"), a company
affiliated with the Company's former manager, means that ARCH
Digital's liabilities exceed its assets by approximately US$70.05
million as at 30 June 2015 ($57.8 million as at 31 December 2014).
This liability is growing at the rate of 18% per annum compounding
daily. On consolidation, this net liability has to be recognised in
ARCH's consolidated accounts. However, shareholders should note
that ARCH has not guaranteed ARCH Digital's obligations.
Excluding the net liability of ARCH Digital, the pro forma net
asset value of ARCH is as follows:
30 June 2015 31 December
2014
Total (US$) Per share Total Per share
(US$) (US$) (US$)
--------------------- ------------ ---------- ----------- ----------
Reported NAV 12,430,706 0.0545 27,017,413 0.1184
--------------------- ------------ ---------- ----------- ----------
Adjustment relating
to ARCH Digital 70,052,278 0.3071 57,757,715 0.2532
--------------------- ------------ ---------- ----------- ----------
Pro forma adjusted
NAV 82,482,984 0.3615 84,775,128 0.3716
--------------------- ------------ ---------- ----------- ----------
This pro forma adjusted NAV represents a decrease of
approximately 2.7% compared to the last reported adjusted NAV per
share at the close of business on 31 December 2014 (US$0.3716). It
should be noted that the reported NAV does not reflect the recent
falls in the value of the renminbi which occurred after the balance
sheet date.
Trading on AIM and Nominated Adviser appointment
On 15 September 2015, ARCH announced that its then Nominated
Adviser, Grant Thornton UK LLP, had resigned, following
notification received by the Fund on 14 August 2015. As a
replacement Nominated Adviser had not been appointed at that time,
pursuant to AIM Rule 1, ARCH shares remained suspended from trading
on AIM. The Board of Directors continues its efforts to appoint a
replacement Nominated Adviser and is currently in active
discussions with a party whom it hopes to appoint shortly, however,
if a replacement is not found, the admission of ARCH's ordinary
shares to trading on AIM will be cancelled at 7.00 a.m. on 16
October 2015. A further announcement will be made in due
course.
We sincerely thank the shareholders for their continued support
throughout this difficult period for the Fund.
Sean Hurst & Alpay Ece
Directors
Consolidated Statement of Assets and Liabilities
as at 30 June 2015
30 June 31 December
2015 2014
US$ US$
Note (unaudited) (audited)
Assets
Investments, at fair value 3 7,360,639 7,354,143
(Cost: 30 June 2015: US$170,435,220
31 December 2014: US$170,435,220)
Investment deposits 7 52,284,105 52,248,017
Other assets 9 6,354,030 21,471,845
Cash and cash equivalents 10 42,888,150 31,680,494
Total assets 108,886,924 112,754,499
------------------- -------------------
Liabilities
Deferred tax 6 351,167 350,857
Tax payable 6 13,129,527 13,129,527
Other payables and accruals 11 82,975,524 72,256,702
Total liabilities 96,456,218 85,737,086
------------------- -------------------
Net assets 12,430,706 27,017,413
=========== ===========
Shareholders' equity
Share capital 12 2,281,416 2,281,416
Share premium 12 326,371,746 326,371,746
Accumulated losses (323,225,190) (308,578,458)
Foreign currency translation
reserve 7,002,734 6,942,709
Total shareholders' equity 12,430,706 27,017,413
=========== ===========
Net asset value per share 15(a) 0.05 0.12
=========== ===========
Approved by the Board of Directors on 14 October 2015.
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Sean Hurst Director
Consolidated Schedule of Investments
as at 30 June 2015
30 June 2015 31 December 2014
Fair % of Fair % of
Cost value net Cost value net
Investment Instrument US$ US$ assets US$ US$ assets
Mobile phone
retail, China
Fortress Common
Group Limited(1) stock 100,800,044 - - 100,800,044 - -
Home decoration
retail, China
Orient Home
Decoration
& Building
Materials
Company Limited
("Orient
Home Retail") Loan 23,245,008 - - 23,245,008 - -
Dairy, China
Ningxia Xiajin
Dairy Co., Common
Ltd. stock - - - - - -
Education,
China
Shaanxi Da Common
De Education(2) stock 30,533,602 - - 30,533,602 - -
Pharmaceutical,
China
Buchang Pharmaceutical Common
Group stock - - - - - -
Others
A domestic
Chinese strategic
investor
("DCSI")(3) Loan 15,856,566 7,360,639 59.21% 15,856,566 7,354,143 27.22%
Total 170,435,220 7,360,639 59.21% 170,435,220 7,354,143 27.22%
========= ========= ===== ========= ========== =====
Notes:
1. On 31 January 2013, the Fund received 388 common shares of
Fortress Group Limited ("Fortress"), the parent of Funtalk China
Holdings Limited ("Funtalk") to settle the outstanding receivable
from Funtalk's management, increasing ARCH's equity interest in
Funtalk from approximately 18.47% to 20.49%, on a fully diluted
basis. The shares received were valued at US$10.8 million which has
been included in the cost of investment as at 30 June 2015. Also
see note 3(i), 11(b) and 16(e).
2. As at 30 June 2015, it was decided by the Board to recognise
the initial deposit received as return of equity. Also see note
3(ii) , 11(a) and 16(d)
3. The name of the investee is not disclosed due to a
confidentiality arrangement. Also see note 3(iii) and 16(a).
Consolidated Statement of Operations
for the period ended 30 June 2015
6 months 6 months
ended ended
30 June 30 June
2015 2014
US$ US$
Note (unaudited) (unaudited)
Investment income
Bank interest and sundry income 43,747 121,866
Total investment income 43,747 121,866
------------------ ------------------
Expenses
Investment management fee 4 - 1,078,756
Consulting Fee 265,656 -
Administration, custodian and
registrar fees 116,081 145,225
Professional fees 1,677,424 1,111,424
Directors' remuneration and
expense reimbursement 5 106,944 99,805
Finance costs 4 -
Impairment loss 8 - 6,612,981
Provision for put option 11 12,294,563 -
Other expenses 236,303 493,590
Total expenses 14,696,975 9,541,781
-------------------- --------------------
Net investment loss (14,653,228) (9,419,915)
-------------------- --------------------
Net loss on investments and
foreign currencies
Net realised gain on investments
before tax - 13,727,143
Income tax expenses 6 - (1,372,714)
Net realised gain on investments - 12,354,429
-------------------- --------------------
Net unrealised gain/(loss) on
investments before tax 6,496 (109,553,657)
Deferred tax credit 6 - 1,519,800
Net unrealised gain/(loss) on
investments 6,496 (108,033,857)
-------------------- --------------------
Net gain/(loss) on investments
and foreign currencies 6,496 (95,679,428)
-------------------- --------------------
Net decrease in net assets from
operations (14,646,732) (105,099,343)
=========== ============
Consolidated Statement of Changes in Net Assets
for the period ended 30 June 2015
Retained Foreign
earnings/ currency
Share Share Tendered (accumulated translation
capital premium Shares losses) reserve Total
US$ US$ US$ US$ US$ US$
At 1 January
2014 2,610,827 354,042,331 - (146,376,886) 7,125,323 217,401,595
Share
repurchase (329,411) (27,670,585) - - - (27,999,996)
Net
investment
loss - - - (9,419,915) - (9,419,915)
Net realised
gain on
investments - - - 12,354,429 - 12,354,429
Net
unrealised
loss on
investments - - - (108,033,857) - (108,033,857)
Foreign
currencies
translation
difference - - - - (447,165) (447,165)
______________ ______________ ______________ ______________ ______________ _______________
At 30 June
2014 2,281,416 326,371,746 - (251,476,229) 6,678,158 83,855,091
=========== =========== =========== =========== =========== ===========
At 1 January
2015 2,281,416 326,371,746 - (308,578,458) 6,942,709 27,017,413
Share
repurchase - - - - - -
Net
investment
loss - - - (14,653,228) - (14,653,228)
Net
unrealised
gain on
investments - - - 6,496 - 6,496
Foreign
currencies
translation
difference - - - - 60,025 60,025
______________ ______________ ______________ ______________ ______________ _______________
At 30 June
2015 2,281,416 326,371,746 - (323,225,190) 7,002,734 12,430,706
=========== =========== =========== =========== =========== ===========
Consolidated Statement of Cash Flows
for the period ended 30 June 2015
6 months 6 months
ended ended
30 June 30 June
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2015 2014
US$ US$
Note (unaudited) (unaudited)
Cash flows from operating activities
Net decrease in net assets
from operations (14,646,732) (105,099,343)
Adjustments to reconcile net
increase
in net assets from operations
to net cash
provided by operating activities:
- Net realised gain on investments
before tax - (13,727,143)
- Net unrealised(gain)/ loss
on investments before tax (6,496) 109,553,657
- Proceeds from sale of investments - 44,857,143
- (Increase)/decrease in investment
deposits (36,088) 372,537
- Decrease in other assets 15,117,815 992,905
- Impairment loss 8 - 6,612,981
- Provision for put option 11 12,294,563 -
- Increase/(decrease) in deferred
tax liabilities 310 (1,522,999)
- Increase in tax payable - 510,559
- (Decrease)/increase in other
payables and accruals (1,575,741) 230,388
- Foreign currencies translation
difference 60,025 (447,165)
Net cash provided by operating
activities 11,207,656 42,333,520
------------------- --------------------
Cash flows from financing activities
Repurchase of shares 12 - (27,999,996)
Net cash used in financing
activities - (27,999,996)
------------------- -------------------
Net increase in cash and cash
equivalents 11,207,656 14,333,524
Cash and cash equivalents at
beginning of period 31,680,494 19,607,765
Cash and cash equivalents at
end of period 10 42,888,150 33,941,289
=========== ===========
Supplemental cash flow information
- Interest paid (4) -
=========== ===========
Supplemental cash flow information
- Tax paid - 862,154
=========== ===========
1 General
(a) Organisation
ARC Capital Holdings Limited (the "Company") was incorporated
with limited liability in the Cayman Islands as an exempted company
under the Companies Law on 27 July 2005. On 4 April 2006, the
Company changed its name from Asia Retail Consumer Holdings Limited
to ARC Capital Holdings Limited.
The Company is a closed-end investment company trading on the
AIM Market of the London Stock Exchange. The Company's principal
investment objective is to provide its shareholders with capital
appreciation by investing in listed and unlisted companies in the
retail, consumer goods and consumer service sectors principally in
China and in neighbouring Asian countries. The Company finances
these companies for expansion through buy-outs, pre-IPO
opportunities and other equity and mezzanine securities.
The Company was managed by ARC Capital Partners Limited (the
"Investment Manager") until 7 August 2014. The Investment Manager
was responsible for the day-to-day management of the Company's
investment portfolio, including, subject to approval by the
Investment Committee which is appointed by the Investment Manager
and approved by the Company's Board of Directors, the day-to-day
acquisition and disposal of investments in accordance with the
Company's investment objective and policies. On 7 February 2014,
the Investment Manager provided written notice of its resignation,
and its investment management agreement with the Company ended on 7
August 2014, following the conclusion of its 6 month notice period.
As at the date of the report no replacement investment manager has
been appointed nor do the directors intend to make such an
appointment.
On 30 June 2015, the Company announced that it had requested the
suspension of its shares from trading on AIM, pending the
finalisation of its audited annual accounts for the financial year
ending 31 December 2014. Furthermore, on 14 August 2015, ARCH
announced that it had been notified by Grant Thornton UK LLP of its
resignation as Nominated Adviser effective 15 September 2015.
Pursuant to AIM Rule 1, ARCH shares will continue to be
suspended from trading on AIM until a new Nominated Adviser is
appointed. The Board of Directors continues its efforts to appoint
a replacement Nominated Adviser, however, if a replacement is not
found, the admission of ARCH's ordinary shares to trading on AIM
will be cancelled at 7.00 a.m. on 16 October 2015.
1 General (continued)
(b) Investment policy
(i) Change of investment policy
On 31 January 2012, Shareholders voted to change the Company
into a realisation vehicle. Accordingly, the Company's investment
policy has been changed permanently so that no new investments will
be made. The Company's ordinary shares, however, were to continue
to be admitted to trading on AIM.
(ii) Nature of returns to shareholders
All of the Company's existing investments will be realised in
the ordinary course of business. The net proceeds from realisations
will be returned to shareholders, after which the Company will be
wound up. The Company's realisation policy will not result in any
immediate or accelerated sales and investments will only be
realised when, in the opinion of the Board, an appropriate
opportunity presents itself.
(iii) Estimated time of divestment
The estimated time of divestment is between 2012 and 2015.
Prior to 31 January 2012, the Company's Investment Policy was as
follows:
(i) Geographical focus
At least 70% of the Company's gross assets will be invested in
China. Up to a maximum of 30% of the Company's gross assets may
also be invested in Greater China and other countries in Asia,
should the Board consider that such investments offer potentially
attractive returns. Any investment made in countries outside of
Greater China must be approved by the Board.
(ii) Target companies
The Company targets (i) late stage companies with growth, back
up or performance enhancement potential; and (ii) expansion stage
companies with proven management and significant growth
potential.
(iii) Sector focus
The Company invests primarily in listed and unlisted companies
engaged in retailing, providing services that support the retail
industry (such as consumer finance, distribution and logistics),
manufacturing or distributing consumer products or services,
developing or managing property with a focus on retailing, and
other retail and consumer-related firms.
1 General (continued)
(b) Investment policy (continued)
(iv) Types of investment
As a general principle, the Company can engage in all forms of
investment as allowed under the laws of each jurisdiction in which
it operates, utilising instruments and structures that may be
suitable to allow participation in selected investment
opportunities. The Company may invest in equity, quasi-equity or
debt instruments, which may or may not represent shareholding or
management control. Where the Board deems it appropriate, the
Company may also invest up to 20% of its net asset value in other
investment pools, which themselves invest in unlisted and listed
securities in the same target geographic regions and sectors as the
Company.
(v) Diversification limit
The Company aims to achieve a balance in its exposure to
different sectors. Furthermore, no single investment may at the
time of investment exceed 20% of the Company's net asset value.
2 Summary of significant accounting policies
These consolidated financial statements of the Company and its
subsidiaries (collectively "the Fund") are prepared in accordance
with accounting principles generally accepted in the United States
of America ("US GAAP"), which includes the application of the
provision of the AICPA Audit and Accounting Guide for Investment
Companies (the "Guide"). The following are the significant
accounting policies adopted in the preparation of these financial
statements.
(a) Use of estimates
The preparation of consolidated financial statements in
conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expense during the reporting period. Actual
results could differ from those estimates.
(b) Principles of consolidation
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These consolidated financial statements include the financial
statements of the Company and its special purpose vehicles. Special
purpose vehicles ("SPVs") are consolidated from the date on which
control is transferred to the Fund and are deconsolidated from the
date that control ceases. Investments held by the SPVs are not
subject to consolidation and equity accounting as they are
non-investment company investees with the purpose to realise a gain
upon disposal rather than provide services to the Company.
Inter-company transactions and balances have been eliminated on
consolidation.
2 Summary of significant accounting policies (continued)
(c) Investments
(i) Recognition, derecognition and measurement
Regular purchase and sale of investments are accounted for on
the trade day, which is the day the trade is executed. All
investment securities are initially recognised at cost. Costs used
in determining net realised gains or losses on the sale of
investment securities are based on average-cost method. Legal and
due diligence fees and other charges associated with acquiring the
investments are capitalised as part of the cost of the investment
securities.
Transfer of investments is accounted for as a sale when the Fund
has relinquished control over the transferred assets. Any realised
gains or losses from investments are recognised in the consolidated
statement of operations.
Investments are subsequently carried at fair value and changes
in fair value are presented in the consolidated statement of
operations.
(ii) Fair value measurement
The Fund is an investment company under the Guide. As a result,
the Fund records its investments in the consolidated statement of
assets and liabilities at their fair value, with unrealised gains
and losses resulting from changes in fair value recognised in the
consolidated statement of operations.
Fair value is the amount that would be received to sell the
investments in an orderly transaction between market participants
at the measurement date (i.e. the exit price). Fair value of
investments is determined by the Valuation Committee, which is
established by the Board of Directors.
The Valuation Committee uses its best judgement in estimating
fair value. In determining the fair value, the Valuation Committee
engages third party valuation agents to assist in the selection of
valuation techniques and models. However, there are inherent
limitations in any valuation technique due to the lack of
observable inputs. Estimated fair values may differ significantly
from the values that would have been used had a ready market
existed for the securities, and the differences could be material
to the financial statements. Additional information about the level
of market observability associated with investment carried at fair
value is disclosed in Note 3.
2 Summary of significant accounting policies (continued)
(d) Fair value hierarchy
Generally accepted accounting principles establish a fair value
hierarchy that prioritises inputs to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable input (Level
3 measurements).
The three levels of the fair value hierarchy are described
below:
Level 1: Inputs to measure fair values are unadjusted quoted
prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or liabilities;
Level 2: Inputs to measure fair values are quoted prices in
markets that are not active, quoted prices for similar assets or
liabilities in active markets, or prices or valuations for which
all significant inputs are observable, either directly or
indirectly;
Level 3: Inputs to measure fair values are both significant to
the fair value measurement and unobservable.
Inputs to measure fair values broadly refer to the assumptions
that market participants use to make valuation decisions, including
assumptions about risk. Inputs may include price information,
volatility statistics, specific and broad credit data, liquidity
statistics, and other factors. An asset or 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 categorisation of an asset or 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.
Securities traded on a securities exchange are stated at the
last reported sales price on the day of valuation. To the extent
these securities are actively traded and valuation adjustments are
not applied, they are categorised in Level 1 of the fair value
hierarchy. Preferred stock and other equities traded on inactive
markets or valued by reference to similar instruments are
categorised in Level 2.
Restricted securities for which quotations are not readily
available are valued at fair value as determined by the Valuation
Committee. Restricted securities issued by publicly traded
companies are generally valued at a discount to similar publicly
traded securities. Depending on the relative significance of
valuation inputs, these instruments may be classified in either
Level 2 or Level 3 of the fair value hierarchy.
2 Summary of significant accounting policies (continued)
(d) Fair value hierarchy (continued)
Investments 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 and liabilities include
unlisted equities and convertible bonds. Their fair values are
estimated with reference to the valuation techniques recommended by
the International Private Equity and Venture Capital Valuation
Guidelines. Valuation methodologies utilised by the Valuation
Committee include but are not limited to comparable transactions or
performance multiples, latest round of financing, discounted cash
flow, and are supported by independent valuations of underlying
assets. The selection of appropriate valuation techniques may be
affected by the availability of reliable inputs. In some cases, one
valuation technique may provide the best indication of fair value
while in other circumstances, multiple valuation techniques may be
appropriate. Once an appropriate valuation methodology is
determined for an asset or liability, it will continue to be used
until a more appropriate method is determined.
(e) Cash and cash equivalents
Cash and cash equivalents comprise cash at banks placed with
reputable banking institutions with an original maturity of less
than three months.
(f) Income and expenses
Dividend income is recognised on the ex-dividend date with the
corresponding foreign withholding taxes recorded as an expense.
Withholding taxes on dividends have been provided for in accordance
with the Fund's understanding of the applicable country's tax rules
and rates.
Interest income and all the expenses are accounted for on an
accruals basis. Offering costs are charged to the Company's share
premium account upon the issuance of shares.
(g) Foreign currency translation
Assets and liabilities denominated in foreign currencies are
translated into US$ at the rates of exchange ruling at the
reporting date. Income and expenses denominated in foreign
currencies during the year are translated into US$ at the rates of
exchange ruling at the transaction dates. All exchange differences
arising are included in the consolidated statement of
operations.
The Fund does not isolate that portion of the results of
operations resulting from changes in foreign currency exchange
rates on investments from the fluctuations arising from changes in
market prices of securities held. Such fluctuations are included
with the net realised and unrealised gain or loss from
investments.
2 Summary of significant accounting policies (continued)
(g) Foreign currency translation (continued)
Net realised foreign exchange gains or losses arise from sales
of foreign currencies, currency gains or losses realised between
the trade and settlement dates on securities transactions, and the
difference between the amounts of dividends, interest, and foreign
withholding taxes recorded on the Fund's books and the US$
equivalent of the amounts actually received or paid. Net unrealised
foreign exchange gains and losses arise from changes in the fair
values of assets and liabilities, other than investments in
securities at fiscal period end, resulting from changes in exchange
rates.
If a subsidiary's functional currency is a foreign currency,
translation adjustments result from the process of translating that
entity's financial statements into the reporting currency.
Translation adjustments shall not be included in determining net
income but shall be reported separately and accumulated in a
separate component of equity.
(h) Income taxes
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Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognised for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognised in
the consolidated statement of operations in the period that
includes the enactment date.
The Fund has adopted the authoritative guidance contained in
FASB ASC 740 on accounting for and disclosure of uncertainty in tax
positions, which requires management 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 recognised in the consolidated financial
statements is reduced by the largest benefit that has a greater
than 50% likelihood of being realised upon ultimate settlement with
the relevant tax authority. Prior to the adoption of Interpretation
48, the Fund recognised the effect of income tax positions only if
such positions were probable of being sustained.
2 Summary of significant accounting policies (continued)
(i) Share Capital
Ordinary shares are classified as equity. Where any group
company purchases the Company's equity share capital (tendered
shares), the consideration paid, including any directly
attributable incremental costs (net of income taxes) is deducted
from equity attributable to the Company's equity holders until the
shares are cancelled or reissued. Where such ordinary shares are
subsequently reissued, any consideration received, net of any
directly attributable incremental transaction costs and the related
income tax effects, is included in equity attributable to the
Company's equity holders. The holders of tendered shares have no
voting and participation rights.
3 Securities valuation
The following table summarises the changes in fair value of the
Fund's instruments by captions:
Investments Investments Investments
-common -loan -option Total
stock
US$ US$ US$ US$
As at 30 June
2015
Level 1 - - - -
Level 2 - - - -
Level 3 - 7,360,639 - 7,360,639
Total investments - 7,360,639 - 7,360,639
========== =========== =========== ===========
Investments Investments Investments
-common stock -loan -option Total
US$ US$ US$ US$
As at 31
December
2014
Level 1 - - - -
Level 2 - - - -
Level 3 - 7,354,143 - 7,354,143
Total investments - 7,354,143 - 7,354,143
=========== =========== =========== ===========
3 Securities valuation (continued)
The following is a reconciliation of investments for which Level
3 inputs were used in determining fair value:
Investments Investments Investments
-common -loan -option Total
stock
US$ US$ US$ US$
As at 1 January
2014 149,517,000 15,856,566 - 165,373,566
Proceeds from
sales (57,130,390) - - (57,130,390)
Net unrealised
loss on investments (106,113,753) (8,502,423) - (114,616,176)
Net realised
gain on sale
of investments 13,727,143 - - 13,727,143
As at 31 December
2014 - 7,354,143 - 7,354,143
=========== ========== ========== ==========
Net unrealised
gain on investments - 6,496 - 6,496
As at 30 June
2015 - 7,360,639 - 7,360,639
=========== ========== ========== ==========
The following table summarises the net unrealised loss on
investment before tax included in consolidated statement of
operations attributable to Level 3 instruments still held as at 30
June 2015 by caption:
30 June 31 December
2015 2014
Net unrealised gain/(loss) before US$ US$
tax
Investments - common stock - (90,915,753)
Investments - loan 6,496 (8,502,423)
6,496 (99,418,176)
Total ============ ============
3 Securities valuation (continued)
The following table summarises quantitative information about
the valuation techniques and the significant unobservable inputs
used for Level 3 investments:
Fair value
at Significant
30 June Valuation Unobservable
Industry/Type 2015 methodology inputs Inputs
US$
Mobile phone - Recent transaction Not applicable Not applicable
retail(i)
Education(ii) - Recent transaction Not applicable Not applicable
Cost less
Loan receivable(iii) 7,360,639 discount Discount 55%
7,360,639
===========
Fair value Significant
at 31 December Valuation Unobservable
Industry/Type 2014 methodology inputs Inputs
US$
Mobile phone - Recent transaction Not applicable Not applicable
retail(i)
Education(ii) - Recent transaction Not applicable Not applicable
Cost less
Loan receivable(iii) 7,354,143 discount Discount 55%
7,354,143
===========
Note:
(i) Fortress Group Limited
On 31 March 2014 ARCH announced that ARCH Digital Holdings
Limited ("ARCH Digital"), a wholly owned subsidiary of ARCH, had
entered into certain definitive agreements to sell, subject to
shareholder approval, its entire equity stake in Fortress Group
Limited ("Fortress") for a minimum cash consideration of US$137.3
million. Fortress was the 100% shareholder of Funtalk China
Holdings Limited ("Funtalk"). The proposed buyer was Sanpower Group
Co. Ltd. ("Sanpower"). The sale of Fortress was approved at the
ARCH extraordinary general meeting, held on 16 May 2014, but did
not progress to completion as the conditions precedent were not
satisfied. Fortress subsequently entered into an agreement for the
sale of its 100% equity interest in Funtalk ("Fortress Sale").
(i) Fortress Group Limited (continued)
On 27 August 2014, subsequent to the Fortress Sale, ARCH Digital
received a letter from Fortress, which enclosed a notice addressed
to Fortress dated 25 August 2014 (the "Put Option Notice") issued
by PAGAC Fortress Holding I Limited ("PAGAC"), a company affiliated
with PAG, of the exercise by PAGAC of the put option (the "Put
Option") referred to in the shareholder agreement, dated 25 August
2011, that ARCH Digital had entered into at the time of the
privatisation of Funtalk (the "Shareholder Agreement"). If Fortress
did not consummate an exit of Funtalk by 25 August 2014 then PAGAC
would have the right to require Fortress to repurchase PAGAC's
holding in the preferred shares and convertible bonds issued by
Fortress. If Fortress was unable to perform its obligation under
the Put Option, the requirement to repurchase PAGAC's preferred
shares and convertible bonds fell to the shareholders of Fortress,
other than PAGAC, pro-rata, including ARCH Digital.
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On 2 September 2014, the Fortress Board resolved to repurchase
all of the convertible bonds and 2,093 out of the 4,999 preferred
shares at a cost of approximately US$250 million. Subsequently, on
3 September 2014, ARCH Digital received a notice from PAGAC
notifying ARCH Digital that Fortress had failed to pay the entire
put price with respect to the Put Option and that PAGAC was
exercising its right pursuant to the Shareholder Agreement to
require that ARCH Digital purchase its pro rata portion of the put
securities that were not purchased by Fortress (the "ARCH Digital
Put Option"). The notice relating to the ARCH Digital Put Option
(the "ARCH Digital Put Option Notice") further stated that the
unpaid Put Option price attributable to ARCH Digital was
US$52,322,284, and that ARCH Digital was required to pay this
amount within 10 business days, i.e. no later than 17 September
2014.
ARCH Digital did not have the necessary cash or liquid assets to
pay the unpaid Put Option price attributable to ARCH Digital as
required in the ARCH Digital Put Option Notice. ARCH Digital had,
by a share charge agreement dated 25 August 2011 (the "Share Charge
Agreement"), conferred on PAGAC a security interest over ARCH
Digital's equity holding in Fortress (the "Charged Assets") to
secure, among other things, ARCH Digital's performance of its
obligations under the Shareholder Agreement. If ARCH Digital failed
to perform its obligations under the Shareholder Agreement,
including its obligation with respect to the ARCH Digital Put
Option, PAGAC could enforce its security under the Share Charge
Agreement, including, but not limited to, to receive and retain all
dividends, interest, distributions or assets accruing in respect of
the Charged Assets, and to sell, transfer, grant options over or
otherwise dispose of the Charged Assets. All money received by
PAGAC under the Share Charge Agreement was to be paid in accordance
with that agreement, including towards satisfaction of any amounts
in respect of ARCH Digital's obligations under the Shareholder
Agreement. Any surplus remaining following payment under the Share
Charge Agreement was to be repaid to ARCH Digital.
3 Securities valuation (continued)
(i) Fortress Group Limited (continued)
ARCH Digital did not pay the US$52,322,284 to PAGAC by 17
September 2014 and has not made any payments to PAGAC since the
ARCH Digital Put Option Notice was received from PAGAC on 3
September 2014.
As at 30 June 2015, the Board estimates the fair value of the
investment at nil due to the Put Option raised against ARCH
Digital.
(ii) Shaanxi Da De Education
On 23 November 2013, ARCH entered into a definitive agreement
(the "Framework Agreement") to sell its entire stake in Shannxi Da
De Education for RMB165.2 million (approximately US$27.1
million).
On 1 December 2013, ARCH received an initial payment of RMB75.1
million (approximately US$12.3 million), and was expecting to
receive a final payment of RMB90.1 million (US$14.8 million) no
later than 10 December 2014 to complete the sale. The final payment
has not been received. As a result of the default, pursuant to the
agreement, ARCH Education has the right to: a) Request that the
buyers continue to fulfil their obligations under the Framework
Agreement, or b) Unilaterally terminate the Framework Agreement,
request that the buyers pay contractual overdue penalty of RMB55m
(US$8.9m) and, amongst other parties, ARCH and buyer shall to be
bound by the original investment agreement (the "Original
Investment Agreement") signed on 28 May 2008.
ARCH has commenced legal action in China to pursue recovery of
the amount outstanding and, based upon legal advice received, has
treated the initial payment of RMB 75.1 million (approximately
US$12.3 million) as a payment under the Original Investment
Agreement.
As at 30 June 2015, it was decided by the Board to recognise the
initial deposit received as return of equity and the Board
estimated the fair value of the investment at nil due to the
uncertainty of the recoverability of any future amounts, the timing
of any future receipts even if the outcome of the legal action is
favourable.
3 Securities valuation (continued)
(iii) Loan to DCSI
On 26 August 2013, DCSI negotiated and signed a loan extension
agreement with ARCH that the repayment date is extended to 30 June
2014. The condition for the extension is that DCSI needs to pay
RMB$1M first (part of interest expense). The interest rate is at
8%.
On 30 June 2014, the date that DCSI was granted the extension
to, DCSI has failed to repay the loan. In November 2014, the Board
decided to commence legal action against DCSI in respect of the
overdue loan. On 4 November 2014, a demand letter was sent by the
Company's lawyer but no response has been received from DCSI to
date.
As at 30 June 2015, it was decided by the Board for the write
down of 55% on the investment due to the uncertainty of the
recoverability of the loan, the timing of the repayment and timing
of the outcome of the legal action to remain unchanged.
4 Investment management fee and realisation fee
The Investment Manager was previously entitled to receive an
investment management fee of 2% per annum of the Fund's net asset
value ("NAV") calculated at the beginning of each quarter based on
the average month end NAV of the Fund of the previous quarter and
payable in advance.
From 31 January 2012, the investment management fee was reduced
from 2% to 1% per annum of the Fund's NAV. On 7 February 2014, the
Investment Manager provided written notice of its resignation, and
its investment management agreement ended on 7 August 2014,
following the conclusion of its 6 month notice period.
For the period ended 30 June 2015, the Fund incurred an
investment management fee of US$nil(2014: US$1,078,756), US$606,355
was payable as at 30 June 2015 (2014: US$606,355).
With effect from 31 January 2012, as an incentive to realise the
best possible exit value for the Fund's assets, the Investment
Manager became entitled to receive a realisation fee equal to a
percentage of the net proceeds received by the Fund on the
realisation of each asset (the "Fee Percentage"), to be paid once
the "Company Realisation Value" (being the aggregate net proceeds
received by the Fund on the disposal of the assets) exceeds the
Fund's audited NAV at 31 December 2011. For assets realised in
2013, the Fee Percentage shall be 2.52%, and this will reduce to
2.268% for assets realised in 2014. Thereafter, the Fee Percentage
shall continue to reduce by 10% per annum until the Fund's last
asset is realised. Following its resignation, the Investment
Manager is no longer entitled to any realisation fees.
4 Investment management fee and realisation fee (continued)
On 20 March 2014, Borrelli Walsh Limited ("Borrelli Walsh") was
appointed as a consultant to the Board, with a mandate of providing
independent oversight of the Fund's portfolio and guidance to the
Fund's directors. Borrelli Walsh resigned, effective 15 April
2015.
For the period ended 30 June 2015, the Fund has not accrued a
realisation fee (Nil for the period ended 30 June 2014).
5 Directors' remuneration and expense reimbursement
The Company pays each of its directors an annual fee of
US$29,999, and an additional US$10,000 per annum for chairing any
committee of the Board and an additional US$5,000 per annum for
serving as a regular member of any committee of the Board.
In February 2015, the Company entered into separate 1-year
consulting service agreements with Sean Hurst and Alpay Ece.
Consulting fees are subject to a maximum of US$40,000 each per
annum.
6 Current and deferred income taxes
(a) No provision for Cayman Islands taxes are provided as the
Fund is not currently subject to income tax in the Cayman Islands.
The Fund has obtained an undertaking from the Governor in Cabinet
of the Cayman Islands that for a period of 20 years from 9 August
2005 that:
- no law which is thereafter enacted in the Cayman Islands
imposing any tax to be levied on profits, income, capital gains or
appreciations shall apply to the Fund or its operations; and
- no aforesaid tax or withholding tax, nor estate duty or
inheritance tax shall be payable on or in respect of the share
debentures or other obligations of the Fund.
(b) The Fund may be subject to taxes imposed in other countries
in which it invests. Such taxes are generally based on income
and/or gains generated. Dividend and interest income received by
the Fund may be subject to withholding tax imposed in the country
of origin. This income is recorded gross of such taxes and the
withholding tax, if any, is recognised separately in the
consolidated statement of operations.
The Board has reviewed the structure of the Fund's investment
portfolio and considered the Fund's exposure to Hong Kong and China
profits tax has been properly reflected in the Fund's consolidated
financial statements.
7 Investment deposits
In December 2007, the Fund transferred US$13.6 million to Orient
Group Industrial Co. Ltd. ("Orient Group") as an investment
deposit. In December 2011, the Fund recognised an impairment of
US$2.2 million for the deposit resulting from the intention to
offset the US$11.4 million payable balance included in other
payables.
In December 2010, the Fund transferred US$76.2 million (or
RMB480 million) to Orient Home Company Ltd ("Orient Home"), a
controlled affiliate of Orient Group to invest in Orient Home's
real estate portfolio under the Equity Purchase Agreement dated 10
December 2010 (the "Agreement"). Orient Home failed to fulfil the
terms of the Agreement, and the Fund has not received any repayment
from Orient Home as of the date of this announcement. The Board had
recognised an impairment of US$22.9 million for this investment
deposit in December 2012, representing approximately 30% of the
investment deposit.
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In May 2013, the Fund's PRC investment vehicle filed a Request
for Arbitration with the China International Economic and Trade
Arbitration Commission ("CIETAC") with respect to the investment
deposit, and in July 2013 was granted an asset preservation order
against Orient Home by the Beijing First Immediate People's Court.
The order has legally preserved a 14% equity interest in Beijing
Taiyanghuo Culture Industry Investment Co., Ltd, which is an equity
investment of Orient Home. The 14% equity interest was believed at
the time to be equivalent to RMB280 million of registered capital.
The Fund was able to obtain the preservation order for RMB280
million with a guarantee obtained from a guaranteeing company,
including pledging certain assets of the Company amounting to
RMB16.8 million (or US$2.8 million) to the guaranteeing company
(see note 9(c)).
Taking account of the face value of the asset preservation order
and the development of the arbitration, further impairment
provision of RMB86 million (US$14.1 million) was made in 2013 to
write down the carrying amount of the investment deposits to RMB250
million (US$41.0 million).
On 16 June 2015, CIETAC ruled that the Orient Home Group shall
be required to refund Shanghai C.P. Jing Cheng Enterprise
Development Co. Ltd. ("Shanghai CP JC") (a subsidiary of ARCH) the
entire RMB480 million deposit (equivalent to approximately US$77.3
million) relating to the acquisition of a majority stake in Orient
Home Industrial Co., Ltd ("Orient Home Property") in December 2010.
CIETAC also ruled that the Orient Home Group shall pay Shanghai CP
JC late payment interest calculated from 5 March 2011 to the actual
payment date, applying the lending interest over the same period as
published by the People's Bank of China, as well as the arbitration
fee of approximately RMB4.4 million (equivalent to approximately
US$0.7 million).
The carrying value of the investment included within ARCH's NAV
as at 31 December 2014 was RMB 250 million (approximately US$41
million), and the Board has resolved to keep this unchanged as at
30 June 2015. See note 17(b) for subsequent events on the
investment deposit with Orient Home.
8 Impairment loss
30 June 30 June
2015 2014
US$ US$
Provision on loan interest receivable
(Note 16(a)) - 2,401,566
Provision on Jiadeli sale proceeds
and dividends (Note 9(a)) _______- 4,211,415
Total impairment loss - 6,612,981
= ========== ===========
9 Other assets
At 30 June 2015 and 31 December 2014, other assets were as
follows:
30 June 31 December
2015 2014
US$ US$
Jiadeli sale proceeds and
dividends (Note 9(a)) - 15,198,562
Properties (Note 9(c)) 2,469,903 2,467,723
Goodbaby private tax escrow
(Note 9(b)) 1,879,000 1,879,000
Others 2,005,127 1,926,560
Total other assets 6,354,030 21,471,845
========== ===========
(a) The Fund sold its entire interest in Shanghai Jiadeli
Supermarket Co., Ltd ("Jiadeli") for RMB1.1billion, with RMB100
million of the consideration withheld by the purchaser for any
post-closing adjustment to the purchase price. Adjustments to the
total purchase price, if any, shall not exceed RMB100 million and
can only be claimed from the withheld amount.
As part of the sale of Jiadeli, it was agreed that a holdback of
RMB100 million would be paid to the Fund 12 months after closing,
subject to adjustments based on the result of a post-closing audit
by the purchaser. The Fund and the purchaser could not agree on the
result of the closing audit. In accordance with the sale and
purchase agreement an independent third-party mediator was
appointed by both parties to resolve the dispute.
In May 2013, the Fund's PRC investment vehicle filed a Request
for Arbitration with CIETAC. A total of 75% impairment was made
against the holdback payment amount as at 31 December 2013, and a
further 25% impairment was made against the holdback payment amount
in March 2014.
9 Other assets (continued)
On 20 April 2015, it was announced that Beijing Second
Intermediate Court had rejected the HNA Group's claim to set aside
the arbitral award in respect of the Jiadeli holdback and a net
RMB81.8 million (equivalent to approximately US$13 million) has
been paid by HNA Group on 12 June 2015. As a consequence of the
receipt, it was decided by the Board to adjust the carrying value
of the Fund as at 31 December 2014. As a result, the total
impairment loss of RMB93 million (equivalent to approximately
US$15.2 million) made previously was written back as of 31 December
2014.
The Board has reached agreement with HNA Group whereby HNA Group
has paid the full amount of the claim (approximately RMB 90
million) plus costs of RMB 3 million. In return, the Company has
waived the interest due under the CIETAC award of 3 June 2014. RMB
93 million was paid by HNA Group to ARCH in China on 12 June 2015
and, after settlement of outstanding fees and expenses (including a
contingency fee of approximately RMB11 million payable to Fund's
Chinese legal counsel under an agreement entered into on 10
December 2013), has resulted in the Fund receiving a net amount of
RMB 81.8 million (equivalent to approximately US$ 13 million),
before any taxes payable in China.
(b) On 11 December 2013, the Fund completed the sale of its
entire holding in Goodbaby Private, a total of approximately US$6.8
million was realised of which approximately US$1.9 million was
deposited as the tax escrow based on the escrow agreement signed on
9 December 2013.
(c) The properties are pledged as part of the guarantee required
to secure the preservation order of RMB280 million as described in
Note 7.
10 Cash and cash equivalents
Cash and cash equivalents at 30 June 31 December
30 June 2015 consisted of: 2015 2014
US$ US$
US$ 16,992,109 18,840,179
RMB 25,895,667 12,839,809
HK$ 374 506
Total cash and cash equivalents 42,888,150 31,680,494
=========== ===========
11 Other payables
At 30 June 2015, other payables and accruals were as
follows:
30 June 31 December
2015 2014
US$ US$
Payable for an investment
(Note 7) 11,391,326 11,391,326
Fortress put option liability
(Note 11(b)) 70,052,278 57,757,715
Other creditors 1,531,920 3,107,661
Total other payables and
accruals 82,975,524 72,256,702
========== ==========
a) On 23 November 2013, the Fund entered into a definitive
agreement to sell its entire stake in Shaanxi Da De Education. The
Fund has received an initial deposit of RMB75.1 million
(approximately US$12.3 million) as at 31 December 2013. The Fund
expected to receive a final payment of RMB90.1 million (US$14.8
million) no later than 10 December 2014 to complete the sale. As at
31 December 2014, it was decided by the Board to recognise the
initial deposit received as return of equity and the Board
estimated the fair value of the investment at nil. The final
payment has not been received by the fund as at 30 June 2015.
b) In August 2011, ARCH Digital Holdings Limited ("ARCH
Digital"), a wholly owned subsidiary of the Fund entered into a
shareholder agreement with Fortress Group Limited ("FGL") at the
time of the privatisation of Funtalk China Holdings Limited
("Funtalk"). In accordance with the shareholder agreement, PAGAC
Fortress Holding I Limited ("PAGAC") issued a notice on 25 August
2014 to exercise its right and option to require FGL as a
purchasing shareholder to repurchase PAGAC's holding in the
preferred shares and convertible bonds issued by FGL. If FGL was
unable to perform its obligation under the put option, the
requirement to repurchase PAGAC's preferred shares and convertible
bonds fell to the shareholders of FGL, other than PAGAC, pro-rata,
including ARCH Digital.
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The exercise of the put option by PAGAC means that ARCH
Digital's liabilities exceed its assets even though the Fortress
investment has been written down to nil. While the final terms and
consideration for Fortress's sale of Funtalk, and the payment
covered by Fortress to PAGAC for the put option, are not known to
the Board, the Board has decided to recognise the liability of
approximately US$70.1 million under the current accounting
policies. See note 3(i) for details of put option liabilities in
relation to Fortress Group Limited investment.
12 Share capital, share premium and tendered shares
Number Share Share Tendered
of shares capital Premium Shares Total
outstanding US$ US$ US$ US$
As at 1 January
2014 261,082,738 2,610,827 354,042,331 - 356,653,158
Share repurchase
and cancellation (32,941,172) (329,411) (27,670,585) - (27,999,996)
As at 31 December
2014 228,141,566 2,281,416 326,371,746 - 328,653,162
========= ========== ========== ========== ==========
As at 30 June
2015 228,141,566 2,281,416 326,371,746 - 328,653,162
========= ========== ========== ========== ==========
On 31 January 2014, 32,941,172 ordinary shares were repurchased
and cancelled by the Company at a price of US$0.85 per share,
representing approximately 12.6% of the Company's ordinary shares
in issue. The shares were repurchased for a total consideration of
approximately US$28 million.
Following the repurchase and cancellation, the Company has a
total of 228,141,566 ordinary shares in issue as at 30 June
2015.
At 30 June 2015, the total authorised number of ordinary shares
was 500,000,000 (31 December 2014: 500,000,000) with par value of
US$0.01 (31 December 2014: US$0.01) per share.
13 Concentration of market, industry, credit, foreign exchange and liquidity risks
The Fund's activities (including both investments and loans) may
expose it to a variety of risks: mainly market risk, industry risk,
credit risk, foreign exchange risk and liquidity risk.
(a) Market risk
Market risk is the risk that the value of a financial instrument
will fluctuate as a result of changes in market variables such as
interest, foreign exchange rates and equity prices, whether those
changes are caused by factors specific to the particular security
or factors that affect all securities in the markets. Investments
are typically made with a specific focus on Greater China and thus
are concentrated in that region. Political or economic conditions
and the possible imposition of adverse governmental laws or
currency exchange restrictions in that region could cause any of
the Fund's investments and their markets to be less liquid and
prices more volatile. The Fund is exposed to market risk on all of
its investments.
13 Concentration of market, industry, credit, foreign exchange
and liquidity risks (continued)
(b) Industry risk
The Fund's investments may be concentrated in a particular
industry or sector and performance of the particular industry or
sector may have a significant impact on the Fund.
The Fund's investments may also be subject to the risk
associated with investing in private equity securities. Investments
in private equity securities may be illiquid, can be subject to
various restrictions on resale and there can be no assurance that
the Fund will be able to realise the value of such investments in a
timely manner.
(c) Credit risk
Credit risk is the risk that an issuer/counterparty will be
unable or unwilling to meet its commitments to the Fund. Financial
assets that are potentially subject to significant credit risk
consist of cash and cash equivalents, investments in convertible
bonds, investment deposits and receivables.
The maximum credit risk exposure of these items is their
carrying value.
(d) 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 will fluctuate due to changes in
exchange rates.
The table below summarises the Fund's net exposure to each
currency as at 30 June 2015 and 31 December 2014.
30 June 31 December
2015 2014
US$ US$
US$ (71,904,084) (57,006,052)
RMB 84,334,416 84,022,959
HK$ 374 506
Total 12,430,706 27,017,413
========== ==========
13 Concentration of market, industry, credit, foreign exchange
and liquidity risks (continued)
(e) Liquidity risk
The Fund is exposed to liquidity risk as the Fund's investments
are largely illiquid while the majority of the Fund's liabilities
are of short maturity. Illiquid investments include any securities
or instruments which are not actively traded on any major
securities market or for which no established secondary market
exists where the investments can be readily converted into cash.
Reduced liquidity resulting from the absence of an established
secondary market may have an adverse effect on the prices of the
Fund's investments and the Fund's ability to dispose of them where
necessary to meet liquidity requirements. As a result, the Fund may
be exposed to significant liquidity risk.
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 exposed to
the risk of repatriating funds out of China to meet its obligations
on a timely basis.
14 Related party transactions
(a) During the period, certain directors of the Company were
shareholders and directors of the former Investment Manager, which
provided investment management services to the Company and earned
an investment management fee and a realisation fee (Note 4).
(b) As at 30 June 2015, the former Investment Manager together
with its associated PAG Group entities held 114,272,413 ordinary
shares of the Company (2014: 114,272,413).
15 Financial highlights
(a) Per share operating performance
6 months 6 months ended
ended 30 June 2014
30 June 2015
US$ US$
Net asset value per share,
start of period 0.12 0.83
--------- ---------
Income from investment operations:
- net investment loss (0.07) (0.04)
- net realised and unrealised
loss on
investments and foreign currencies - (0.42)
Total from investment operations (0.07) (0.46)
--------- ---------
Net asset value per share,
end of period 0.05 0.37
===== =====
The net asset value per share is calculated based on the total
number of shares issued and outstanding excluding tendered shares
(Note 12).
(b) Ratios to average net assets and other supplemental information
6 months 6 months
ended ended
30 June 30 June 2014
2015
US$ US$
Ratio of net investment loss
to average net assets (71.3%) (4.6%)
====== ======
Ratio of expenses to average
net assets
Operating expenses before
incentive fees(1) (71.5%) (4.6%)
Incentive fees (2) 0.0% 0.0%
Total expenses (71.5%) (4.6%)
====== ======
Cumulative internal rate of return ("IRR")
since
inception through the year
end (2) (14.5%) (9.7%)
====== ======
Note:
1. The operating expenses before incentive fees include put
option provision of US$12,294,563. If the put option provision is
excluded, the ratio of expenses to average net assets is
(11.69%).
2. The IRR is computed net of all incentive fees (being
performance fees and realisation fees as defined in the Investment
Management Agreement entered into between the Company and the
Investment Manager dated 20 June 2006, as amended on 1 April 2009
and 31 January 2012) based on the Fund's actual dates of the cash
inflows (capital contributions), outflows (cash and stock
distributions) and the ending NAV at the end of the year (residual
value) as of each measurement date.
16 Investment Update
(a) Loan with a Domestic China Strategic Investor (DCSI)
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