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RNS Number : 3707F ARC Capital Holdings Limited 21 April 2011
21 April 2011
ARC Capital Holdings Limited ('ARCH' or the 'Company')
Full year results for the year ended 31 December 2010 ARC Capital Holdings Limited ('ARCH' or the 'Company') (AIM: ARCH), the AIM-traded, closed-end investment company focussed on investments in the retail and consumer good sectors principally in China, has today announced its full year financial results for the year ended 31 December 2010. ARCH is managed by PAG (formerly known as Pacific Alliance Group), one of the region's largest Asia-focussed alternative investment managers with funds under management across real estate, private equity and hedge funds and special situations. PAG has over 260 staff across offices in Hong Kong, Tokyo, Beijing, Hangzhou, Shanghai, and Tianjin, as well as a presence in Delhi and Seoul. Financial Highlights
· Net asset value as at 31 December 2010 was US$614.0 million, representing
US$1.43 per share, a 5 per cent increase on the prior year (US$584.9 million, representing US$1.36 per share).
· Discount to NAV has reduced from 28 per cent as at 31 December 2009 to 11 per cent as at 31 December 2010.
Portfolio and Company Developments · Throughout 2010, ARCH strengthened its cash position by realising a number of its
mature investments at attractive valuations.
· On 25 February 2010, ARCH realised US$45.3 million from the partial sale of its indirect interest in HNA Airport.
· ARCH realised a total consideration of RMB750.6 million (US$110.8 million) in cash following the full realisation of its stake in Department Store Holding in September 2010. The transaction, combined with past dividends, represented a 5.9x gross cash multiple and a gross IRR of 77.0 per cent.
· In October 2010, ARCH completed the sale of its entire stake in Shanghai Jiadeli Supermarket for a total consideration of RMB1.1 billion (US$164.8 million), which included a RMB100 million payment subject to the completion of a post-closing audit in 2011. The sale, including the holdback, represents a 1.9x gross cash multiple and a gross IRR of 25.7 per cent.
· In November 2010, the Company announced the initial public offering and listing of Goodbaby International Holdings on the Hong Kong Stock Exchange (1086 HK). The retail tranche of the offering was more than 1,450 times oversubscribed, ranking Goodbaby as the third most sought after IPO in the HKSE's history.
Subsequent Significant Events Tender offer in January 2011
In December 2010, the Company announced a tender offer of up to 10 per cent of ARCH's ordinary shares at US$1.45 per share. The tender offer closed on 4 January 2011, resulting in the tender of 39.8 million shares, representing 9.26 per cent of ordinary shares or approximately US$57.7 million. Privatisation of Funtalk in March 2011 In March 2011, Funtalk China Holdings Limited ("Funtalk"), one of ARCH's investee companies, released an announcement stating that its Board of Directors received a preliminary non-binding proposal from a consortium of Funtalk's majority shareholders (including the Company) to acquire all of its outstanding ordinary shares not already owned by the consortium in a "going-private" transaction for US$7.10 per ordinary share in cash, subject to certain conditions, including but not limited to, the successful completion of due diligence to the satisfaction of the consortium members. Partial realisation of HNA Airport in April 2011 In April 2011, ARCH completed the sale of its 8.6 per cent indirect interest in HNA Airport Holding (Group) Company Limited ("HNA Airport") for total consideration of US$50.7 million. Together with the previously announced partial realisation, ARCH received a total consideration of US$96.0 million for its investment in HNA Airport, which represents a 1.4x gross cash multiple to date. As a part of the transaction, the special purpose vehicle holding the investment in HNA Airport, of which ARCH has a significant minority stake, has been granted certain options to purchase shares in Hainan Meilan International Airport Company Limited (0357 HK). These options are exercisable subject to a number of conditions and may provide further upside to ARCH's initial investment. 2010 was an eventful year for the Company. "During the year, ARCH generated several strong realisations and a number of other investment activities, including the highly successful IPO of Goodbaby, one of the most sought after IPOs in the HKSE's history, and the strengthening of our balance sheet and cash position. For more information, please contact:
MANAGER: Allan Liu, Managing Partner c/o ARC Capital Partners Limited 15/F, AIA Central 1 Connaught Road Central, Hong Kong T: (852) 2918 0088 F: (852) 2918 0881 [email protected]
LEGAL COUNSEL: Jon Lewis, General Counsel PAG 15/F, AIA Central 1 Connaught Road Central, Hong Kong T: (852) 2918 0088 F: (852) 2918 0881 [email protected]
BROKER: Hiroshi Funaki LCF Edmond de Rothschild Securities T: (44) 20 7845 5960 F: (44) 20 7845 5961 [email protected]
NOMINATED ADVISER: Philip Secrett Grant Thornton Corporate Finance T: (44) 20 7383 5100 [email protected]
INVESTOR RELATIONS: Chong Min Yi PAG T: (852) 3719 3319 [email protected]
MEDIA RELATIONS: Stephanie Barry PAG T: (852) 3719 3375 [email protected]
Notes to Editors:
ARC Capital Holdings Limited ("ARCH") (AIM: ARCH) is a closed-end investment company with net assets of US$549.5 million as at 31 March 2011. ARCH was admitted to trading on the AIM Market of the London Stock Exchange in June 2006. ARCH makes and holds investments in the retail, consumer goods and consumer services sectors, principally in China but also in neighbouring Asian countries. Target investments include regional hypermarkets and supermarkets, dominant consumer brands, specialty retail chains, retail property assets and retail and consumer service providers.
For more information about ARC Capital Holdings Limited, please visit: www.arch-fund.com
ARC Capital Holdings Limited is managed by PAG (formerly known as Pacific Alliance Group), the Asian alternative investment fund management group. Founded in 2002, PAG is now one of the region's largest Asia-focussed alternative investment managers, with funds under management across Private Equity, Real Estate and Hedge Funds and Special Situations.
PAG has over 260 staff across offices in Hong Kong, Tokyo, Beijing, Hangzhou, Shanghai, and Tianjin, as well as a presence in Delhi and Seoul.
For more information about PAG, please visit: www.pacific-alliance.com
Chairman's Statement
On behalf of the Board of Directors, I am pleased to present the annual financial statements of ARC
Capital Holdings Limited ("ARCH" or the "Company") and its subsidiaries (collectively, the "Fund") for the
year ended 31 December 2010.
NAV and Discount
Consistent with the April 2009 announcement detailing ARCH's "Discount Reduction, Reinvestment
Policy and Performance Initiatives", the Investment Manager continued to focus its efforts on narrowing
the share price discount to NAV per share in 2010 by ceasing new investments, realising its mature
holdings and strengthening its balance sheet. As a direct result, by 31 December 2010, ARCH's holdings
reduced from fifteen to nine original investments, three of which are publicly listed and another two are
partially realised. In 2010, ARCH's NAV per share increased by 5 per cent from US$1.36 to US$1.43
from 31 December 2009 to 31 December 2010. During the same period, ARCH's share price increased
by 29 per cent from US$0.99 to US$1.27, narrowing the discount to NAV per share from 28 per cent to 11
per cent.
In the early part of 2011, adverse market conditions have increased the gap between NAV per share and
share price, signalling the continuing challenge faced by the Investment Manager to minimise this
discount. The Board and the Investment Manager remain committed to managing the share price
discount to NAV per share in a determined manner.
Key Liquidity Events
Throughout 2010, ARCH strengthened its cash position by realising a number of its mature investments
at attractive exit valuations.
In February 2010, ARCH realised US$45.3 million from the partial sale of its interest in HNA Airport, the
domestic airport affiliate of Hainan Airlines (600221 CH) and Hainan Meilan Airport Group (0357 HK).
The following month, Huiyin Household Appliances, a leading electrical appliance retailer in the eastern
China region that focuses on third and fourth tier cities and rural markets, successfully completed its initial
public offering on the Hong Kong Stock Exchange under the stock code 1280.
In September 2010, ARCH realised a total consideration of RMB750.6 million (equivalent to US$110.8
million) in cash following the sale of its entire stake in Department Store Holding. Combined with past
dividend payments, the transaction represented a 5.9x gross cash multiple and a gross IRR of 77.0 per
cent.
In October 2010, ARCH completed the sale of its entire stake in Shanghai Jiadeli Supermarket for a total
consideration of RMB1.1 billion (equivalent to US$164.8 million), which includes a RMB100 million
payment subject to the completion of a post closing audit in 2011. The sale, including the holdback,
represents a 1.9x gross cash multiple and a gross IRR of 25.7 per cent.
Finally, in November 2010, ARCH announced the initial public offering and listing of Goodbaby
International Holdings on the Hong Kong Stock Exchange under the stock code 1086. The retail tranche
of the offering was more than 1,450 times oversubscribed, ranking Goodbaby as the third most sought
after IPO in the HKSE's history.
Distribution In December 2010, ARCH announced the details of its distribution and reinvestment policy. The first distribution to shareholders was a tender offer for up to 10 per cent of ARCH's ordinary shares at US$1.45 per share which was the price equal to the unaudited NAV as of 30 November 2010. The tender offer closed on 4 January 2011, which resulted in the tender of 39.8 million shares, representing 9.26 per cent of ordinary shares or approximately US$57.7 million. To support the Investment Manager's objective to generate capital appreciation through its investments and provide liquidity to shareholders while managing any share price discount to NAV, the Board of Directors introduced a new policy which stated that profits from future realisations will be distributed to shareholders while reserving the returned principal for new investment opportunities, subject to retaining sufficient cash to meet operating costs, liabilities and contractual follow-on commitments. Valuation Valuations of investments are reviewed and approved by the Valuation Committee following consideration of quarterly independent valuation reports produced by one of the "Big Four" international accountancy firms. The valuations are prepared in accordance with US GAAP and US private equity valuation guidelines and are based on the 31 December 2010 financials of the investee companies held in the portfolio. Unlisted portfolio investments, where appropriate, are valued using the median of earnings multiples of listed comparables, while applying liquidity discounts for listed holdings. The selected comparables include both Chinese and non-Chinese listed companies. As a result, recent movements in the public markets were factored into the valuations of the individual investments and are therefore reflected in the NAV. In determining the fair value of a portfolio investment, other events which may provide a reasonable indication of the value, such as the price of recent transactions involving the investee company or similar assets, are also taken into account. Closing Remarks The Investment Manager's experience and success in China is demonstrated by its ability to secure attractive investment opportunities while upholding its discipline for capital preservation. ARCH remains one of the few China consumer focused managers which allows international investors to participate in growth capital by combining global best practices with local knowledge and expertise. The Investment Manager has constructed a robust pipeline of attractive investment opportunities and together with a strategy for strengthening its fund management capabilities, the Board is optimistic of ARCH's future and looks forward to supporting its efforts. On behalf of the Board, I would like to express my heartfelt gratitude to our shareholders for their continued support and to the Investment Manager's team for their dedication and tireless efforts. I would also like to extend my appreciation to Horst Geicke, William Ng and Martin Adams for their contribution during their time as members of the Board, and also to Allan Liu for the direction he gave to the Board during his time as Chairman. The Board is currently evaluating candidates to appoint as additional independent non-executive Directors and will announce its decision once confirmed.
We are committed to keeping our shareholders updated with important information and announcements. The Directors and I welcome your suggestions regarding ways in which we can improve our shareholder communications to complement the existing flow of information from the Investment Manager.
Michael Guy Hilliard Heald
Chairman
20 April, 2011
Investment Manager's Report 2010 was an eventful year for ARCH, highlighted by several successful realisations and noteworthy events for our portfolio investments, and for the Fund itself. The Investment Manager completed four full exits and three partial exits during the year; with Huiyin and Goodbaby celebrating their respective listings on the Hong Kong Stock Exchange. With the strengthening of ARCH's balance sheet and cash position, ARCH fully repaid its US$75 million external loan and offered its first distribution to shareholders by way of a tender offer in December 2010 (completed in January 2011). China's Macro Economy In 2010, the Chinese government successfully put the economy on the road to recovery through a series of economic restructuring and stimulus policies and measures. As a result, China's GDP increased by 10.3 per cent in 2010 to RMB39.8 trillion (approximately US$5.88 trillion) to become the world's second largest economy, surpassing Japan in terms of nominal GDP. The Chinese government's strategy of expanding domestic consumption via minimum wage increases and continuing job-creation has been largely effective, with total retail sales of consumer goods rising by 18.4 per cent in 2010. However, strong consumer demand has in turn put substantial inflationary pressure on the Chinese economy. The CPI and PPI rose 3.3 per cent and 5.5 per cent respectively in 2010, which suggests the higher cost of raw materials to the manufacturing sector is being passed on to consumers. In response, policymakers have stepped up efforts to stabilise the prices of both consumer goods and raw materials through price control and monetary measures. Containing inflation has moved to the top of the government's agenda for 2011, while labour costs, asset prices and RMB appreciation will continue to be closely monitored. Income distribution reforms and economic development policies targeting urban areas announced in March 2011 by China's Premier Wen Jiabao under the Twelfth Five-Year Programme for National Economic and Social Development suggest that future economic conditions will most favour low and middle income earners. The Programme also stated that China's government will target GDP growth of 8 per cent in 2011, and an average 7 per cent growth from 2011 to 2015. We believe that such an outcome will stimulate retail sector growth and create further growth opportunities for ARCH's portfolio companies. Investment Environment and the ARCH Strategy The Investment Manager remains cautiously optimistic and believes that China's economy will continue to experience significant growth from domestic demand and consumption. As reflected in the events of 2010, the Investment Manager will continue its efforts to harvest ARCH's mature investments and enhance the value of its remaining portfolio. The Investment Manager will also seek new and attractive investment opportunities to provide further capital appreciation to ARCH's shareholders. In December 2010, ARCH announced the details of its distribution and reinvestment policy. The first distribution to shareholders was a tender offer for up to 10 per cent of ARCH's ordinary shares at US$1.45 per share which was the price equal to the unaudited NAV per share as of 30 November 2010. The tender offer closed on 4 January 2011 with the tender of 39.8 million shares, representing 9.26 per cent of ordinary shares or approximately US$57.7 million. As outlined in the Chairman's Report, profits from future realisations will be distributed to shareholders while the returned principal will be reserved for new investment opportunities, subject to retaining sufficient cash to meet operating costs, liabilities and contractual follow-on commitments. Portfolio Activities Throughout 2010, ARCH focused on realising its mature investments and enhancing the value of its remaining portfolio. As a result, ARCH completed a number of noteworthy events, including several successful realisations at attractive valuations:
On 25 February 2010, ARCH announced the partial sale of its 8.6% indirect interest in HNA Airport from which it received US$45.3 million. Following the transaction, in April 2011, ARCH announced another partial sale of its remaining 8.6% indirect interest in HNA Airport, which resulted in the receipt of US$50.7 million in cash proceeds. Through these two separate transactions, ARCH has fully realised its indirect interest in HNA Airport and received a total consideration of US$96.0 million in cash, which represents a 1.4x gross cash multiple to date. As a part of the transaction, the special purpose vehicle holding the investment in HNA Airport, of which ARCH has a significant minority stake, was granted certain options to purchase shares of Hainan Meilan International Airport Company Limited (0357 HK). These options are exercisable subject to a number of conditions and may provide further upside for ARCH's initial investment. On 25 March 2010, Huiyin successfully raised US$48.4 million from an initial public offering and commenced trading on the Hong Kong Stock Exchange under the stock code 1280. The retail tranche of the offering was nearly 600 times oversubscribed. On 17 June 2010, ARCH completed the sale of its entire equity investment in UCCAL for US$6.9 million, representing a slight premium to cost. ARCH will continue to provide an interest-bearing loan to UCCAL to support its ongoing growth. On 16 September 2010, ARCH completed the final sale of its equity in Department Store Holding, fully realising its entire stake at a total consideration of RMB750.6 million (equivalent to US$110.8 million) in cash. The sale, in combination with past dividend payments, represents a 5.9x gross cash multiple and a gross IRR of 77.0 per cent. On 11 October 2010, ARCH completed the sale of its entire stake in Shanghai Jiadeli Supermarket for a total consideration of RMB1.1 billion (equivalent to US$164.8 million) including a RMB100 million payment subject to completion of a post closing audit in 2011. The sale, including the holdback, represents a 1.9x gross cash multiple and a gross IRR of 25.7 per cent. On 20 October 2010, ARCH completed the sale of its entire stake in KPI Company Limited. The proceeds received from the investment totalled US$10.9 million, which represents a 0.8x gross cash multiple of its initial investment amount of US$14.0 million. On 29 October 2010, Funtalk China Holdings completed a public offering of 7 million ordinary shares and received proceeds before expenses of approximately US$46.6 million. On 24 November 2010, ARCH announced the initial public offering and listing of Goodbaby International Holdings on the Hong Kong Stock Exchange under the stock code 1086. The retail tranche of the offering was more than 1,450 times oversubscribed, which made Goodbaby the third most sought after IPO in the history of the Hong Kong Stock Exchange. On 10 December 2010, ARCH announced a follow-on investment of RMB480 million (equivalent to US$72.1 million) in its portfolio company Orient Home. The investment, when completed, will give ARCH 65 per cent control over a portfolio of Orient Home real estate assets on terms agreed at the time of the initial investment in August 2008. As a result of the acquisition, the portfolio company is expected to benefit from favourable rental rates, future upside on appreciated real estate value and the opportunity to further develop under-utilised sites. On 16 December 2010, ARCH was able to recover US$3.5 million from its investment in International Restaurants Holdings Limited (Café Deco). The realisation represents a 0.7x gross cash multiple of its initial investment amount of US$5.0 million. The investment was previously fully provided for.
Conclusion Following the global financial crisis, China emerged as the world's second largest economy with continued growth driven by the country's expanding domestic market and ever-present government policies. Aggressive plans for urbanisation and social benefits should help support further growth in the consumer and retail sectors, which have been at the core of ARCH's strategy since its inception. The Investment Manager is determined to provide value to its investee companies and most importantly its shareholders through another phase in China's growth. ARC Capital Partners Limited
Investment Manager
20 April, 2011
Consolidated Statement of Assets and Liabilities as at 31 December 2010
31 December 2010 31 December 2009 Note US$ US$ Assets Investments, at fair value (Cost: 31 December 2010: $375,747,550;
31 December 2009: $539,483,220) 3 433,606,189 696,473,188 Investment deposits 8 86,302,540 13,582,980 Other assets 9 24,723,051 14,271,367 Cash and cash equivalents 10 116,523,731 5,817,051 Fixed deposit - pledged 10 21,664,369 - ___________ ___________ Total assets 682,819,880 730,144,586 ------------------- ------------------- Liabilities Investment management fee payable 4 - 6,546,401 Performance fee payable 5 - 10,406,850 Borrowings 11 20,000,000 74,703,384 Deferred tax 7 12,225,952 33,590,910 Tax payable 7 19,584,845 - Other payables and accruals __17,054,563 ___19,973,430 Total liabilities 68,865,360 145,220,975 ------------------- ------------------- Net assets 613,954,520 584,923,611 =========== =========== Shareholders' equity Share capital 12(a) 4,295,334 4,295,334 Share premium 12(b) 529,989,036 529,989,036 Retained earnings 77,717,123 49,410,990 Foreign currency translation reserve ___1,953,027 ___1,228,251
613,954,520 584,923,611 =========== =========== Net asset value per share 16(a) 1.43 1.36 =========== ===========
Approved by the Board of Directors on 20 April 2011 _________________________ Director
Consolidated Schedule of Investments as at 31 December 2010
31 December 2010 31 December 2009
Cost Fair value % of net Cost Fair value % of net
Investment (Note 3) Instrument US$ US$ assets US$ US$ assets
Mobile phone retail, China
Funtalk China Holdings Ltd
Common Stocks and Warrants 90,000,044 101,051,037 16.46% 90,000,044 97,000,000 16.58%
Child products, China
Goodbaby Group Common Stocks 17,559,932 99,865,960 16.27% 23,880,000 42,500,000 7.27%
Goodbaby Group Loan 4,500,000 6,787,250 1.11% 4,500,000 5,962,250 1.02% Fashion retail, China
UCCAL Holdings Ltd.
Common Stocks and Loans 4,335,162 4,785,537 0.78% 10,837,906 11,000,000 1.88%
Airport, China HNA Airport Holding (Group) Company Limited
Common Stocks and Options # 35,494,368 50,750,000 8.27% 70,988,735 90,500,000 15.47%
Home appliance retail, China
Yangzhou Huiyin Household Appliance Co., Ltd.
Common Stocks 42,302,055 51,278,928 8.35% 42,302,055 44,600,000 7.63%
Home decoration retail, China
Orient Home Decoration & Common Building Materials Co., Ltd
Common Stocks 91,382,477 41,900,000 6.82% 74,264,151 51,900,000 8.87%
Orient Home Decoration & Common Building Materials Co., Ltd Loan 7,373,000 3,787,477 0.62% 13,182,950 13,182,950
2.25%
Department store, China
Department Store A* Common Stocks - - 0.00% 19,066,352 85,900,000 14.69%
Super/hypermarket, China Shanghai Jiadeli Supermarket Co., Ltd.
Common Stocks - - 0.00% 89,142,235 143,900,000 24.60%
K.P.I Company Limited
Common Stocks - - 0.00% 13,518,280 13,752,491 2.35%
31 December 2010 31 December 2009
Cost Fair value % of net Cost Fair value
% of net
Investment (Note 3) Instrument US$ US$ assets US$ US$ assets Dairy, China Ningxia Xiajin Dairy Co., Ltd.
Common Stocks 18,130,000 22,800,000 3.71% 18,130,000 31,000,000 5.30%
Education, China Beijing Science Technology Management College
Common Stocks 21,863,663 12,400,000 2.02% 21,863,663 22,589,943 3.86%
Shaanxi Da De Education
Common Stocks 42,806,849 38,200,000 6.22% 42,806,849 42,685,554 7.30%
Food services, Hong Kong International Restaurants Holdings Limited
Convertible Notes
_ -
- _0.00% __5,000,000
_________- __0.00%
Total 375,747,550 433,606,189 70.63% 539,483,220 696,473,188 119.07%
========= ========= ===== ======== ======== ====== # The SPV holding the investment in HNA Airport, of which the Fund has a significant minority stake, was granted certain options to purchase shares of Hainan Meilan International Airport Company Limited (0357 HK), as part of the consideration for the sale of HNA Airport. The options were exercisable subject to a number of conditions. As these conditions were not satisfied as at 31 December 2010, no value was attributed to these options. * Name of investee is not disclosed due to confidentiality arrangement
Consolidated Statement of Operations for the year ended 31 December 2010
Year ended Year ended 31 December 31 December Note 2010 2009 US$ US$ Investment income Interest income 443,640 291,027 Dividend income ___2,384,682 ___2,433,584 Total investment income 2,828,322 2,724,611 ----------------- ----------------- Expenses Investment management fee 4 11,660,522 11,046,401 Administration, custodian and registrar fees
389,432 509,109
Professional fees 8,974,831 4,055,590 Directors' fees 6 125,809 121,096 Finance costs 11(b) 10,370,012 17,218,885 Impairment loss for other assets 735,344 1,189,343 Other expenses 1,380,466 ___2,151,684 Total expenses 33,636,416 36,292,108 ----------------- ----------------- Net investment loss (30,808,094) (33,567,497) ----------------- ----------------- Net gain on investments and foreign currencies Net realised gain/(loss) on investments before tax Income tax expense Net realised gain/(loss) on investments
7
176,422,844 (40,650,501) --------------------135,772,343
(1,318,405) - ------------------- (1,318,405)
------------------- -------------------- Net unrealised (loss)/gain
on investments before tax (99,131,329) 129,048,098 Deferred income taxincome/(expense) 7 21,364,958 __(31,341,166) Net unrealised (loss)/gain
on investments (77,766,371) 97,706,932 ------------------- ------------------- Net unrealised gain on properties 1,025,649 - ------------------- ------------------- Net realised and unrealised gain/(loss) on foreign currencies 82,606 (346,802) ------------------- ------------------- Net gain on investments and foreign currencies 59,114,227 96,041,725 ------------------- ------------------- Net increase in net assets from operations 28,306,133 62,474,228 =========== ===========
Consolidated Statement of Changes in Net Assets for the year ended 31 December 2010
Retained Foreign earnings/ currency Share Share (accumulated translation capital premium losses) reserve Total US$ US$ US$ US$ US$ At 1 January 2009 4,295,334 529,989,036 (13,063,238) 1,175,316 522,396,448
Net investment loss - - (33,567,497) - (33,567,497) Net realised loss on
investments - - (1,318,405) - (1,318,405)
Net unrealised gain
on investments - - 97,706,932 - 97,706,932
Net realised and unrealised
loss on foreign currencies - - (346,802) - (346,802)
Foreign currencies
translation difference ___________- ___________- ___________- ______52,935 ______52,935
At 31 December 2009 4,295,334 529,989,036 49,410,990 1,228,251 584,923,611
=========== =========== =========== =========== ===========
At 1 January 2010 4,295,334 529,989,036 49,410,990 1,228,251 584,923,611
Net investment loss - - (30,808,094) - (30,808,094)
Net realised gain on
investments - - 135,772,343 - 135,772,343
Net unrealised loss
on investments - - (77,766,371) - (77,766,371)
Net realised and unrealised
gain on foreign currencies - - 82,606 - 82,606
Net unrealised gain
on properties - - 1,025,649 - 1,025,649
Foreign currencies
translation difference ___________- ___________- ___________- _____724,776 _____724,776
At 31 December 2010 4,295,334 529,989,036 77,717,123 1,953,027 613,954,520
=========== =========== =========== =========== ===========
Consolidated Statement of Cash Flows for the year ended 31 December 2010
Year ended Year ended 31 December 31 December Note 2010 2009 US$ US$ Cash flows from operating activities Net increase in net assets from
operations 28,306,133 62,474,228 Adjustments to reconcile net increase in net assets from operations to net cash provided by operating activities: - Net realised (gain)/ loss on investments before tax (176,422,844) 1,318,405 - Net unrealised loss/(gain) on investments before tax 99,131,329 (129,048,098) - Net unrealised gain on properties (1,025,649) - - Purchase of investments (5,727,000) (36,400,000) - Proceeds from sale of investments 342,126,932 48,407,013 - Decrease in loans receivable - 7,328,155 - Decrease in interest receivable - 992,164 - Increase in investment deposits (72,719,560) - - Decrease/(increase) in other assets 4,988,529 (868,734) - Impairment loss for other assets 735,344 1,189,343 - (Increase)/decrease in fixed deposits - pledged (21,664,369) 68,307,755 - (Decrease)/increase in investment management
fee payable (6,546,401) 3,493,567
- Decrease in performance fee payable (10,406,850) - - (Decrease)/increase in deferred tax liabilities (21,364,958) 31,341,166 - Increase in tax payable 19,584,845 - - Decrease in other payables and accruals (14,310,193) (240,012) - Foreign currencies translation difference _____724,776 _____52,935 Net cash provided by operating activities 165,410,064 58,347,887 ------------------ ----------------- Cash flows from financing activities Proceeds from borrowings 11(a) 20,000,000 74,703,384 Repayment of borrowings 11(a) __(74,703,384) (135,823,685) Net cash used in financing activities (54,703,384) (61,120,301) ----------------- ----------------- Net increase/(decrease) in cash and cash
equivalents 110,706,680 (2,772,414) Cash and cash equivalents at beginning
of year 5,817,051 ____8,589,465 Cash and cash equivalents at end
of year 10 116,523,731 5,817,051 Supplemental cash flow information
========== ==========
- Interest paid (10,370,012) (17,218,885) ========== ========== - Tax paid (21,065,656) - ========== ==========
Notes to the Consolidated Financial Statements
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 close-ended investment company trading on the alternative market of the London Stock Exchange plc. 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 is managed by ARC Capital Partners Limited (the "Investment Manager"). The Investment
Manager is 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.
(b) Investment policy
(i) Geographical focus
At least 70 per cent of the Company's gross assets will be invested in China. Up to a maximum of 30 per cent 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) Company focus
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.
(iv) Investment vehicle
The Company makes its investments either directly or through investee companies which are special
purpose vehicles established specifically for each investment or by way of co-investment with other
reputable investors. The Company may also invest in other funds which themselves invest in the same
target regions and sectors as the Company.
(v) Control of investments
The Company seeks to own a controlling interest in its investments by owning a direct or indirect
controlling participating interest in the investments. In the event the Company holds a minority interest in
an investee company, it seeks to secure structured exit alternative and adequate minority protection
rights.
(vi) Realisation of investments
The Company aims to realise individual investments within 2 to 5 years of investment when the Board,
with the advice of the Investment Manager and the Investment Committee, believes the realisation would
be in the best interests of the Company and fulfil its investment objective. The Company intends to affect
exits through disposals of its interests in investee companies through trade sales to institutional and
private investors, recapitalisations and initial public offerings.
(vii) Investment size
The Investment Manager aims to achieve a balance in the Company's exposure to different sectors.
Furthermore, no single investment may at the time of investment exceed 20 per cent of the Company's
net asset value.
(viii) Collective investment schemes and cross-holdings
The Company may invest not more than 20 per cent of the gross asset value of the Company in units or
shares in collective investment schemes, in other listed close-ended investment funds or in other
managed investment companies, including ones managed, operated or advised by the Investment
Manager or an associate.
(ix) Leverage
The Investment Manager may use leverage to enhance returns on individual investments provided any
leverage or guarantee at the Company level is approved by the Board in advance and provided further
that such leverage is on a non-recourse basis to the Company.
(x) Distribution policy
Pursuant to the announcement made on 1 December 2010, the Board has authorised the Investment
Manager to utilise the undistributed cash corresponding to returned principal of each investment (or in the
case of realisation at less than cost, the proceeds received) for reinvestment. Subject to retaining
sufficient cash to meet operating costs, liabilities and contractual follow-on investment commitments, the
Board intends to direct the Company to distribute substantially all income and net profits generated from
the realisations of each investment in an effort to continue to minimise any share price discount to
NAV. Such distributions may be effected through additional tender offers, share buy-backs or other
methods of returning capital, as determined by the Board from time to time.
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 data 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
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 in consolidation.
The Fund uses SPVs to hold and transact in certain investments. The Fund's policy is to consolidate, as
appropriate, those entities in which the Group has control over significant operating, financial or investing
decisions of the entity.
(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 on
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.
(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. 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 and the U.S. Private Equity 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 dividend 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.
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 realised 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
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 carryforwards. 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 provisions of FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes ("Interpretation 48"), included in Financial Accounting Standards Board Accounting
Standards Codification Subtopic 740-10, Income Taxes - Overall on 1 January 2009, 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 fifty percent 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.
3 Securities valuation
The following table summarises the inputs used to value the Fund's investments as of 31 December 2010
and 2009.
2010 2009 US$ US$ Level 1 - 13,752,491 Level 2 246,402,241 182,900,000 Level 3 187,203,948 499,820,697 Total investments 433,606,189 696,473,188 =========== ===========
The following is a reconciliation of investments for which Level 3 inputs were used in determining fair
value:
Year ended Year ended 31 December 31 December 2010 2009 US$ US$ Balance as at beginning of year 499,820,697 569,500,798 Cost of purchases 17,118,326 36,400,000 Proceeds from sales (236,382,917) (47,974,200) Net unrealised (loss)/gain on investments (100,685,779) 70,463,597
Net realised gain/(loss) on sale of investments 88,113,553 (1,269,498) Transfer out of Level 3 (80,779,932) (127,300,000) Balance as at end of year 187,203,948 499,820,697 ========== ========== Net unrealised (loss)/gain on investment before tax included in consolidated statement of operations attributable to Level 3 investments still held as at 31 December (50,928,014) 67,963,597 ========== ==========
During the year, investments with an aggregate carrying amount of US$80,779,932 were transferred from
Level 3 to Level 2 as they were listed on stock exchanges. They were valued based on their quoted
prices from the stock exchanges as at 31 December 2010, with discounts to reflect their lock-up
conditions.
Investments presented in the consolidated schedule of investments were held directly or indirectly by the
Fund and represented the most recognisable names of the underlying investments.
4 Investment management fee
The Investment Manager is entitled to receive an investment management fee at two per cent 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 arrears.
For the year ended 31 December 2010, the Fund incurred an investment management fee of
US$11,660,522 (2009: US$11,046,401), of which none (2009: US$6,546,401) was payable as at 31
December 2010.
5 Performance fee
In accordance with paragraph 4.1 of Part 3 of the Investment Management Agreement entered into
between the Company and the Investment Manager dated 20 June 2006 amended by Addendum dated 2
January 2008 and 1 April 2009 (collectively the "Investment Management Agreement"), the Investment
Manager shall be entitled to a performance fee provided that the NAV of the Fund as at year end is
greater than (i) the NAV of the Fund as at latest year end on which a performance fee was charged ("High
Water Mark"), and (ii) the NAV on admission of the Company to trading on AIM ("NAV on Admission")
increased by a compounded annual hurdle rate of eight per cent ("the Hurdle").
Paragraph 4.2 of Part 3 of the Investment Management Agreement states that the performance fee shall
be calculated and paid as follows:
- zero per cent if the NAV as at year end is at or below the Hurdle;
- 100 per cent of the relevant increase in the NAV as at year end above the Hurdle but
below the NAV on Admission increased by a compounded annual rate of 10 per
cent (the "Catch-up"); and
- 20 per cent of the relevant increase in the NAV as at year end above the Catch-up.
The performance fee shall be calculated in US$ and paid (i) 50 per cent in the Company's ordinary shares,
and (ii) 50 per cent in cash. For the year ended 31 December 2010, the Fund incurred no performance
fees (2009: US$ Nil).
The outstanding performance fee payable of US$10,406,850 at 31 December 2009 was settled during the
year.
In addition, any performance fee earned by the Investment Manager could only be paid from realised
profits on sale of investments. The Investment Manager shall forfeit unconditionally any accrued
performance fee that cannot be paid due to the lack of sufficient realised profits following the realisation of
the last remaining investment.
6 Directors' fees and remuneration
The Company pays each of its directors an annual fee of US$35,000. In September 2010, the Board
agreed to increase the annual fee to each of its directors to US$50,000 with effect from 7 September
2010. During the year, three directors of the Company, including Horst Joachim Franz Geicke, Allan Hui
Liu and Christopher Marcus Gradel, agreed to waive their annual fees for so long as they have an equity
interest in the Investment Manager.
7 Current and deferred income taxes
(a) No provision for Cayman Islands taxes are provided as the Company is not currently subject to
income taxes in the Cayman Islands in which it operates. The Company 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 Company
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
Company.
(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 Group
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 directors have 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.
8 Investment deposits The Fund placed investment deposits of US$86,302,540 (2009: US$13,582,980) to secure its exclusivity to the right of investments in the ordinary course of the Fund's investment activities. During the year, the Fund placed a deposit of RMB480 million (equivalent to US$72,719,560) as a follow-on investment to acquire a portfolio of 17 Orient Home real estate assets.
9 Other assets
At 31 December 2010, the Fund held properties and other financial assets of US$6,652,550 (2009:
US$10,545,220), which were acquired in the ordinary course of the Fund's investment activities. The
properties were carried at their fair value, while the other financial assets, being receivables and
prepayments in nature, were carried at their net realisable value.
10 Cash and cash equivalents and fixed deposit - pledged
Cash and cash equivalents at 31 December 2010 consisted of: 2010 2009 US$ US$ Cash at bank - US$ 91,125,087 3,499,872 - RMB 25,392,304 2,286,330 - HK$ _ 6,340 _______30,849 116,523,731 5,817,051 ========== =========== Fixed deposit - pledged at 31 December 2010 consisted of:
2010 2009 US$ US$ - RMB (note 11) _ 21,664,369 - 21,664,369 - =========== ===========
11 Borrowings and finance costs
(a) Borrowings
At 31 December 2010 and 2009, borrowings were repayable as follows:
2010 2009 US$ US$ Within one year 20,000,000 29,295,445 After one year but within two years ___________- ___45,407,939 20,000,000 74,703,384 ========== ==========
Under a loan agreement dated 6 November 2009 between the Fund and two financial institutions in
China, the Fund obtained a funding of RMB510 million (equivalent to US$74.7 million), of which RMB200
million (equivalent to US$29.3 million) was due in the fourth quarter of 2010 and RMB310 million
(equivalent to US$45.4 million) was due in the fourth quarter of 2011. The loan was secured by Fund
investments with a carrying value of US$229.8 million as at 31 December 2009. The loan was fully repaid
during 2010.
In December 2010, the Fund obtained a bank loan of US$20 million, which is due in December 2011 and
secured by a pledged deposit of RMB143 million (equivalent to US$21.7 million) (note 10). The interest
rate for the loan is London Interbank Offered Rate ("LIBOR") plus 2.5 per cent per annum.
(b) Finance costs
The finance costs include interest expenses, loan arrangement fees and refinancing costs.
12 Share capital and share premium
(a) Share capital
2010 2009 No. of No. of shares Amount shares Amount US$ US$ Authorised: Ordinary shares at US$0.01each 500,000,000 5,000,000 500,000,000 5,000,000 ========== ========== ========== ========== Issued and fully paid: Ordinary shares at US$0.01each 429,533,424 4,295,334 429,533,424 4,295,334 ========== ========== ========== ==========
(b) Share premium
2010 2009 No. of No. of shares Amount shares Amount US$ US$ Issued shares 429,533,424 545,918,933 429,533,424 545,918,933 Less: Offering cost __________- (15,929,897) __________- (15,929,897) At end of year 429,533,424 529,989,036 429,533,424 529,989,036 ========== ========== ========== ==========
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.
(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$, the functional
currency. The Fund is therefore exposed to currency risk as the value of assets and liabilities
denominated in other currencies will fluctuate due to changes in exchange rates.
The table below summarises the Fund's net exposure to each currency as at 31 December 2010 and
2009.
2010 2009 US$ US$ US$ 312,397,736 346,570,958 RMB 156,199,241 224,600,162 HK$ _ 145,357,544 ___13,752,491 613,954,521 584,923,611 =========== ===========
(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 with short maturity. The Fund's borrowings are secured by fixed deposits. 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) Certain directors of the Company are shareholders and directors of the Investment Manager, which
provides investment management service to the Company and earns investment management fee (see
note 4) and performance fee (see note 5).
(b) On 23 December 2010, ACP Trading Limited, a wholly-owned subsidiary of ARC Capital Partners
Limited, the Company's Investment Manager, purchased a total of 2,027,046 of the Company's Ordinary
Shares of US$0.01 each, at an average price of US$1.2775 per Company's ordinary share. The shares
were purchased to settle the performance fees payable in accordance with the Investment Management
Agreement.
As a result of this transaction, the Investment Manager and its subsidiary held 3,504,080 ordinary shares of the Company as at 31 December 2010 (2009: 1,477,034).
15 Commitment and contingency
As at 31 December 2010, the Fund is committed, subject to the meeting of all funding conditions by the
investees, to fund additional capital to existing investees detailed as follows:
2010 2009 US$ US$ Orient Home Decoration & Building Material Co., Ltd. 49,130,000 66,257,000 Beijing Science Technology Management College ___________- ___22,717,000 49,130,000 88,974,000 =========== ===========
16 Financial highlights
(a) Per share operating performance
Year ended Year ended 31 December 31 December 2010 2009 US$ US$ Net asset value per share, start of year 1.36 1.22 --------- --------- Income from investment operations: - net investment loss (0.07) (0.08) - net realised and unrealised gain on investments and foreign currencies __0.14 __0.22 Total from investment operations 0.07 0.14 --------- --------- Net asset value per share, end of year 1.43 1.36 ===== =====
(b) Ratios to average net assets and other supplemental information
Year ended Year ended 31 December 31 December 2010 2009 Ratio of net investment loss to average net assets-
(1) (5.2%) (6.1%)
====== ====== Ratio of expenses to average net assets
(1)
Operating expenses before performance fee (5.7%) (6.6%) Performance fee - - Total expenses (5.7%) (6.6%) ====== ====== Cumulative internal rate of return ("IRR") since inception through the year end
(2) 3.8% 3.4%
====== =====
(1) Both ratios are presented on an annualised basis with the exception of one-time costs.
(2) The IRR is computed net of all incentives 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.
17 Subsequent events
(a) Tender offer in January 2011
In January 2011, ARCH Share Trading Limited, a wholly-owned subsidiary of the Company, purchased
39,776,261 shares, representing approximately 9.26 per cent of the Company's issued ordinary shares
pursuant to the tender offer, at US$1.45 per share. The shares purchased are held to replicate a treasury
share facility by the Company.
(b) Proposed Privatisation of Funtalk in March 2011
In March 2011, Funtalk China Holdings Limited ("Funtalk"), one of the Company's investee company,
released an announcement stating that its Board of Directors received a preliminary non-binding proposal
from a consortium of Funtalk's majority shareholders (including the Company) to acquire all of its
outstanding ordinary shares not already owned by the consortium in a "going-private" transaction for
US$7.10 per ordinary share in cash, subject to certain conditions, including but not limited to, the
successful completion of due diligence to the satisfaction of the consortium members.
(c) Partial realisation of HNA Airport in April 2011
In April 2011, the Fund received US$50.7 million proceeds as a result of the sale of its 8.6% indirect
interest in HNA Airport Holding (Group) Company Limited ("HNA Airport"). As a part of the transaction,
the special purpose vehicle holding the investment in HNA Airport, of which ARCH has a significant
minority stake, has been granted certain options to purchase listed shares of Hainan Meilan International
Airport Company Limited (0357 HK). These options are exercisable subject to a number of conditions and
may provide further upside to the Fund's initial investment.
This information is provided by RNS
The company news service from the London Stock Exchange
END