ACIC.L Regulatory News (ACIC)

of Covid restrictions in China to the point where the NAV Total Return of the Company in the first three months of the current financial year was almost 40%. This is, admittedly, following the heavily negative numbers, but it does highlight how much interest there is in China, interest that we believe is well-founded. The Board remains confident that any short-term headwinds that we may encounter in future will be strongly outweighed by long-term positive fundamentals and the compelling opportunities to invest in quality Chinese companies.

We consider that the actions that the Chinese government has taken in the last three months should not be seen as temporary and that, even if the uptick in domestic travel over Chinese New Year does lead to an increase in the number of people falling ill, there is little appetite for further draconian lockdowns such as we witnessed in late 2022, culminating in the tragic fire in Xinjiang. The return to the long-term trends of rising levels of urbanisation and the increase in the disposable incomes that the ever-expanding middle classes are able to deploy provides a ready market for high-quality goods and services.

The Board believes the portfolio is well positioned to capture China's long-term growth potential and is pleased to note the recent performance of the Chinese equities market since the end of the Financial Year. With a focus on these core themes, ACIC's Board believes that the portfolio comprises high-quality companies representing the finest structural growth opportunities in China, and arguably some of the most attractive areas of growth available anywhere to investors.

Helen Green

Chairman13 February 2023

Investment Manager's Report

Market Environment

At the start of the Financial Year, optimism towards Chinese stock markets was high. Facing rising inflation, Western economies were entering a tougher policy environment likely to hamper progress in their stock markets. Meanwhile, China stood out as a potential counter-cyclical recovery play, supported by the country's modest stock market valuations, low inflation rate and expansionary monetary policy.

Unfortunately, this optimism was not matched by the subsequent reality: the Company's Reference Index, the MSCI China All Shares Index, fell 31.5% in sterling terms over the Financial Year. Chinese stock markets endured an arduous period in what also proved to be a turbulent time for global financial markets and the world economy. However, unlike the major Western economies, buffeted by inflation and rising interest rates, China experienced a mixture of specific domestic and external challenges that caused its economy to stumble and its stock markets to fall heavily. These pressures were compounded by the difficult global economic backdrop.

Central to the country's domestic challenges was the Chinese government's zero-Covid policy. This strict approach to containment of the Covid-19 virus proved economically disruptive, as major cities were locked down to stop the spread of the virus. Recent months have seen an easing of restrictions and, crucially, increased efforts to boost vaccination rates and hospital capacity that should allow the country to start to reopen. At the time of writing, they have flocked to major airports, train stations and highways during the Lunar New Year holidays. We expect a multi-stage recovery in China where domestic consumption normalisation has a long runway ahead, supported by excess savings among households and depressed valuations.

Another domestic headwind came in the form of a slowdown in China's large and highly indebted property sector. The Chinese government's plans to reduce debt in the real estate sector should be positive in the long-term, resulting in a sector that is better regulated and less burdened by borrowing. The government is aware of the contagion risk from the real estate sector and has been providing liquidity to the property sector through targeted measures, while still having the overarching objective of reducing the sector's excessive leverage. Nevertheless, the short-term reaction - including the refusal of some citizens to pay their mortgages on properties they feared may never be built - was, at times, dramatic. The real estate crisis had a knock-on effect across sectors during the Financial Year, particularly affecting banks, which have a large proportion of mortgages on their books.

Some of the Company's bank holdings were among the worst detractors over the period. Furthermore, regulatory tightening in the technology and e-commerce sectors also hindered performance during the Financial Year.

Geopolitics also played a role in the country's weak stock market performance. Tensions with the US over key technologies and Taiwan, including a contentious visit by the US Speaker of the House of Representatives that saw China react with high-profile military drills, added to the list of issues facing Chinese investors.

Towards the end of the Financial Year, Chinese stock markets fell further after investors were disappointed by the outcome of October's 20th Communist Party Congress. Markets reacted warily to the strengthening of President Xi's position after his re-election, although they have since responded positively following the weakening of the previously announced continuation of the zero-Covid strategy.

Investment Themes

In constructing and managing the Company's portfolio, we employ a five-pronged thematic approach to identifying companies which we believe will deliver superior returns over the long-term. While this approach will not prevent us from buying into a position where we see fundamental value, we would expect most of the holdings to benefit from one of the themes below:

Aspiration: We expect consumer companies to fare well as China strives for a self-sufficient economic model.

Premiumisation - positioning goods and services as high-quality, in part to gain pricing power - is an ugly word but a powerful consumer trend. We believe urbanisation and rising middle-class wealth will drive demand for premium goods and services in the long-run.

Digital: This theme is aligned with the government's objectives of localisation, improving productivity, lowering costs, increasing innovation and helping to propel economic growth. Our holdings in this segment are primarily software-related names. Chinese companies have historically performed strongly given their knowledge of the domestic market and preference for localisation in areas such as cybersecurity and cloud services.

Green: This theme is set to benefit from government policy on decarbonisation and net-zero emissions by 2060. China dominates global manufacturing capacity for renewable energy and storage, accounting for 90% of solar and 75% of

battery capacity and is well positioned to benefit from the huge global investment required in renewable energy and electricity storage. Other industries also need to decarbonise, so we expect greater investment in upgrading machinery and increasing energy efficiency. Our holdings include solar wafer-producers, component-makers, battery and related component-makers and automation-related firms.

Health: This theme aligns with government policy objectives to make healthcare cheaper and more accessible. This is particularly relevant in view of China's rapidly ageing society. We are overweight in healthcare services, including companies providing innovative research and clinical trial services that seek to bring high-quality therapies to market.

Wealth: This theme aligns with the government's objective of China becoming a moderately prosperous society by 2035. The financial services sector plays a key role in creating and protecting wealth. Our holdings contribute to the creation of strong financial and capital markets, and also include software companies that support the development of capital markets, such as trading and portfolio management. The adoption of insurance services remains low in China relative to the rest of the world. We see a large potential market in terms of life and health insurance, especially given China's ageing population.

Portfolio Performance

During the Financial Year, the Company's net asset value ("NAV") total return was -37.0%, underperforming the total return of the Reference Index. The Ordinary share price total return was -35.5%, as the discount to NAV at which the Company's shares trade narrowed to 12.5% from 14.5% at the start of the Financial Year. The Company's shares are trading at an 13.5% discount at the time of writing.

In terms of broad headwinds for the portfolio, it was a year when macroeconomic and geopolitical concerns trumped bottom-up stock fundamentals. The many positive developments at the individual company level within the portfolio were often largely ignored by investors who were more concerned about bigger economic themes or threats. A rotation in investment style factors, which saw value stocks favoured over growth stocks, also posed a challenge.

The Company's NAV underperformance during the Financial Year was largely driven by stock selection. Sector allocation effects were broadly neutral, although the portfolio's lack of exposure to the strong-performing energy sector was a detractor to performance. We find few quality stocks in a

sector dominated by state-owned enterprises that we do not view as long-term structural winners. We own many renewable energy-related companies in the portfolio, but these are classified within the industrials sector.

Stock picking within financials accounted for almost half of overall underperformance, with banks being a particular area of weakness. Stock selection was also negative in the healthcare, and materials sectors, although our stock choices in information technology and consumer staples contributed positively to overall returns.

China Merchants Bank (CMB) was the portfolio's worst performing stock which suffered due to its property exposure, soft consumer confidence and an unexpected change in senior management.

In the consumer discretionary sector, China MeiDong Auto, a vehicle dealer, struggled against a backdrop of subdued global demand for high-end cars. Elsewhere, CIFI Ever Sunshine, a property management company, was affected by the broader weakness in the property sector. We exited the stock during the Financial Year.

On a brighter note, Proya Cosmetics (see case study below) was a strong contributor to performance. It grew its business over the Financial Year, navigating lockdown effects and expanding in cities considered to be "lower-tier" in the unofficial hierarchical classification of Chinese cities. Owning medical equipment-maker Shenzhen Mindray was also helpful. China's difficulties in dealing with the Covid-19 pandemic have highlighted the need to invest in domestic healthcare. Shenzhen Mindray also benefited from expectations of easing Covid-19 restrictions. Lastly, China Tourism Group Duty Free, the travel retailer, recovered in line with the easing of the burdensome international travel requirements in China.

Portfolio Activity

Our commitment to rigour in our investment process assumed even greater importance given the volatile market conditions and an uncertain economic environment. We mitigated short-term volatility at the portfolio level by adding to defensive sectors such as consumer staples and lowering active exposure to the healthcare, technology and renewable energy sectors.

We initiated a position in Inner Mongolia Yili, the dairy products producer, for its defensive fundamental characteristics. We also established a holding in Anhui Conch Cement, the largest cement manufacturer in China, to increase the portfolio's

exposure to infrastructure. In August, we participated in the Hong Kong IPO of China Tourism Group Duty Free. Its shares were listed at an attractive discount and we believe the company's long-term outlook is positive. Elsewhere, we continued to increase our position in Aier Eye Hospital Group, the provider of ophthalmology medical services, to reflect our preference for medical services companies within the healthcare sector.

We exited China Conch Venture, the construction engineering company, and its spin-off entity, China Conch Environment Protection, companies principally engaged in the provision of environmental protection services due to worsening competition dynamics and concern over the companies' funding capability. In September, we sold out of our position in surgical robot company Shanghai Microport Medbot due to increased regulatory risks that did not align with our original expectations.

We calculate that the average top line revenue growth of the companies in the portfolio during the Financial Year was 18% year-on-year ("yoy"). This growth was mainly driven by our holdings in the "Green" theme, which are expected to register an average of 61% yoy growth due to favourable government policies and accelerated developments throughout the industry. The "Health & Wellness" theme also performed well, with revenue growth of 22% yoy.

Our "Aspiration", "Digital" and "Wealth" themes performed less well, being negatively affected by Covid, delivering 12%, 12% and 2% yoy revenue growth respectively.

Earnings growth for the portfolio is largely in-line with revenue growth.

Looking ahead, we expect top line revenue to recover. Growth of Green investments is predicted to normalise from a high base this year, while growth from companies representing Aspiration, Wealth and Digital themes should gradually pick up as Covid subsides and the Chinese economy recovers post reopening. Earnings growth for the portfolio is expected to rebound to 65% yoy next year. Three Year Earnings Compound Annual Growth Rate ("CAGR") for holdings in the portfolio remains solid at 35% on average.

Outlook

While it is still early for the Chinese economy to show strong signs of recovery, we are positive on the outlook in 2023 for several reasons. Firstly, stimulus measures have been working their way through the system since the start of the second half

of 2022. Furthermore, we believe macro policy is likely to remain largely accommodative, with more legroom to support growth due to relatively low levels of inflation pressures that remain well contained. Secondly, recent measures to ease Covid restrictions have come at an accelerated pace that has taken everyone by surprise and this is a positive development for markets. It reflects the Government's concerns over the state of the economy as a result of its zero-Covid strategy. While the pivot may not seem gradual by international standards at the time of writing, there are still restrictions such as the need for a PCR test before entering China and, more importantly, the mandate requiring everyone to continue to wear masks. Like other Asian countries, we think the reopening will be bumpy with infections peaking in different phases, starting with cities before moving to rural areas.

Additionally, the troubled property sector now appears to be well-supported, including a raft of liquidity support measures announced in recent months. This indicates that the central Government is well aware of the economic headwinds facing China and is prepared to intervene and protect the growth trajectory. Chinese companies have thus far demonstrated strong fundamentals, with earnings growth of around 20%, despite an extremely challenging environment in the Chinese equities markets for most of the Financial Year. Valuations also remain undemanding due to investor sentiment. We believe a combination of favourable earnings and supportive policies in 2023 will help improve international investor sentiment towards China.

Given the rapid pace of reopening, inevitably, the number of deaths from Covid will rise, but it is a price the Government judges as not being high enough to offset the benefits of abandoning its zero-Covid strategy. However, the direction of travel for China is still one of reopening and economic recovery. To that end, we believe there is strong long-term potential in our five portfolio themes: aspiration, digital, green, health and wealth. That said, the long-term growth trajectory also faces some headwinds, including supply chain diversification away from China and restricted access to advanced US technologies. This is where we believe our bottom-up stock-picking approach, grounded in fundamental research and local expertise, provides an advantage in finding the best quality companies in which to invest.

Nicholas Yeo and Elizabeth Kwikabrdn Hong Kong Limited 13 February 2023

ESG Highlights for the Company

The Investment Manager has been actively integrating Environmental Social and Governance ("ESG") into its investment decision-making process for 30 years and believes that ESG factors are financially material, and can materially affect a company's performance.

• Our Investment Manager has ESG resources and expertise in China, Hong Kong and Singapore. This enables our Investment Manager to glean insights from company visits, have a deep understanding of the relevant government policy developments and obtain an ESG information advantage.

• The Company's portfolio is ESG BBB rated by MSCI. This is higher than the benchmark rating of BB.

• The Company's carbon footprint is 52.8% lower than its benchmark.

Our Approach to ESG

Although ESG factors are not the over-riding criteria in relation to the investment decisions taken by our Investment Manager, significant emphasis is placed on ESG and climate-related factors throughout the Company's investment process.

The Board believes that a full and thorough assessment of ESG factors will result in better investment decisions to be made. ESG factors are considered by our investment manager, alongside financial and other fundamental factors, in order to make the best possible investment decisions at a stock picking and at a portfolio construction level.

Our approach to due diligence and research, coupled with third party provided research (including MSCI and abrdn's in-house ESG rating tools), enables us to identify ESG leaders and laggards. Our Investment Manager has a close relationship with the ESG specialists within abrdn. The type of ESG research and analysis required in China is deeper and more nuanced than for many other markets. There are two components to this:.

1. At the macroeconomic level, our Investment Manager works closely with the abrdn Research Institute to understand and contextualise economic, political and regulatory developments. Government policy objectives in China focus on areas such as social, economic and financial stability, climate change and national security. However, within these broader policy objectives, more granular objectives have emerged. These include protecting

personal data, tackling monopolistic practices and ensuring basic labour rights. These policy initiatives translate into investment insights. Companies that do not adapt to the developing policy focus may face a challenged outlook. As investors, understanding policy direction is key to assessing investment opportunities.

2. At the stock level, our Investment Manager works closely with abrdn's Central ESG Investment Function - a team of more than 20 ESG experts - to identify and understand material ESG risks and opportunities. This process focuses on rigorous due diligence and ESG analysis, coupled with ongoing engagement and dialogue, which helps our Investment Manager to identify and invest in companies with strong ESG standards. This process is research-intensive and requires a strong on-the-ground presence. However, our Investment Manager also believes that this attention is an important contributor to alpha generation, encouraging and investing in positive change at companies. Progressive ESG policies should drive a company's financial performance and share prices over the long-term. (For more on the link between ESG and performance, see: https://www.abrdn.com/en/ capgemini/insights-thinking-aloud/article-page/esg-performance-evidence)

External research agencies primarily use backward looking data to create ESG ratings and in doing so form the market view of a company's ESG credentials. Through our Investment Manager's fundamental research, the team forms a forward-looking view of companies' ESG credentials.

ACIC does not exclude any sectors from its investment universe but all investments must pass a quality test and ESG issues are only part of the investment analysis. In addition, our Investment Manager undertakes engagement initiatives with, well-managed and well-capitalised companies which may not necessarily immediately be considered ESG leaders. Our Investment Manager seeks to effect change and develop best ESG practice through these engagement activities, which often run over several years. Progressive, well-managed companies are usually open to engagement and expert advice.

ESG Considerations in China

There is a growing appreciation from many Chinese companies of the value that attention to ESG factors can bring. Standards are evolving, disclosure is improving, and regulations (and enforcement of those regulations) around some social and environmental behaviours are stronger than

in the past. Importantly, dialogue between companies and investors has improved significantly over the last five to ten years.

More Chinese companies are outlining their thinking on sustainability, aspirations to reduce their carbon footprints, and the frameworks they have in place to negate ESG-related risks. There has been tangible progress, including improvements in corporate governance, formalised dividend payout policies, improved transparency in reporting, and much-improved shareholder engagement.

These improvements have, in many cases, come as a result of sustained engagement and dialogue between long-term investors and companies.

Set out below are some of the most pressing ESG issues we consider when investing in Chinese companies and how we respond to them:

1. State control and state-owned enterprises

One misconception often held about China is that its economy is dominated by state-owned enterprises (SOEs). The reality is more nuanced. In the early days of the Chinese economic growth story SOEs did indeed dominate the economy (and hence stock markets). They were typically involved in heavier industries, including iron and steel, oil and gas. However, over time the balance has tilted towards private/entrepreneur-owned companies.

SOE reform in the late 1990s and early 2000s saw a reduction in the number of SOEs coupled with a decline in their share of economic activity, and a formalisation of the governance structure of these SOEs. Many of the remaining SOEs underwent reform, putting in place governance structures and management processes more familiar to investors in listed companies

Not all SOES are the same

It's important to recognise that not all SOEs are the same in terms of market orientation. Our Investment Manager's deep due diligence focuses on the structure of SOE ownership (which government entity owns the SOE and whether it's a regional or central organisation); the degree to which an SOE's strategy might be influenced or driven by government policy; strategies considered by management and how they have been executed; and remuneration or incentive schemes that are in place.

Understanding the difference in quality of these companies requires deep due diligence and engagement with their boards and managers.

2. Related-party transactions

Share ownership in China can be concentrated. In addition, controlling shareholders often have multiple private and public interests.

Complex ownership structures present challenges for investors. Perhaps the most difficult of these involve related-party transactions. These are transactions between a listed company and another connected party such as shareholders, directors, sister companies, suppliers, or a range of other potential parties.

There are very clear conflicts of interest here, and a risk that value is 'tunnelled' out of the listed company. This could be through mispricing on transactions, the provision of financial guarantees (or broader financial services), or the deprivation of business opportunities.

However, related party transactions are also part of the normal course of business in China. As investors, we need to be aware of the risks, and how best to manage them. This can involve identifying which transactions are a normal course of business, and which have the potential to be abusive and potentially negative to the long-term prospects of that company.

How our Investment Manager's Due Diligence process helps

Our Investment Manager's due diligence process always starts with the controlling shareholder in order to ascertain how their interests align with ACIC's interests as a minority shareholder. Our Investment Manager checks the controlling shareholder's background to understand the alignment of interests, what connections they retain to privately held vehicles, and the way these interests may compete. Attention is also given to the board and management team and their competence, character, and commitment and, ultimately, whether the management team meets the quality hurdle.

Our Investment Manager also examines transactions in detail to understand rationale and pricing and whether a transaction is in the normal course of business, why a particular counter-party was sought, and how pricing was determined. This is laborious work, but absolutely critical to your Company's investment approach.

3. Climate and environmental impact

China is both the largest single emitter of carbon dioxide globally, and also - by some distance - the world's top investor in renewable energy.

China has steadily funded research into renewables over the past decades, with the aim of both decarbonising its own energy system, and establishing itself as the 'winner' as the world seeks to decarbonise. China has set ambitious targets for decarbonisation, including its peak carbon and net-zero pledges.

This presents compelling investment opportunities. Not just in the context of the domestic Chinese market, but because Chinese renewables companies are worldleaders and will be central to decarbonisation globally.

Chinese companies are also increasingly conscious of their own environmental impact and carbon footprint. When conducting research, ACIC looks for companies that are either maximising their energy efficiency, minimising their carbon footprint, or providing products or services that allow other companies to do the same. We are able to get reliable data from companies. This is the starting point for engagement in order to understand how companies are managing their carbon emissions, water or energy risk and other factors.

While many Chinese companies are willing to disclose snapshot statistics (current year water consumption, for example), they tend to bes less willing to disclose targets publicly for fear of not achieving targets. However, many companies are doing a lot more than they disclose publicly.

Engagement and disclosure

Our approach is to engage collaboratively with portfolio companies, with the aim of sharing expectations and disclosure of best practices, to help maintain and enhance the ESG standards of these companies. These meetings provide an opportunity to discuss various relevant ESG issues including board composition, remuneration, audit, climate change, labour issues, human rights, bribery and corruption. Companies are strongly encouraged to set clear targets or key performance indicators on all material ESG risks so as to enable performance monitoring. Discussions cover both risk and opportunities; our Investment Manager challenges management teams constructively on issues relating to strategy and execution, as well as capital allocation and return. These engagements are collaborative and usually long-term.

Please see below for some specific examples of our Investment Manager's engagement and its outcome.

ESG case study: Proya Cosmetics

Proya Cosmetics ("Proya") is China's fifth largest beauty and skincare company. Proya has five brands, focused on younger consumers and is enjoying rapid sales growth through its online channels and boutiques. The company has invested in product upgrades and innovation, expanding beyond its traditional skin-care related products into colour cosmetics.

Our Investment Manager has engaged with Proya on several issues, including its use of certain chemicals in products, animial testing and sustainable packaging. Proya now closely follows China's strict environmental protection laws and regulations. It has also eliminated all non-degradable raw materials such as microbeads from its products, replacing them with natural degradable materials.

Up until October 2022, Proya was rated CCC rating by MSCI, and was considered an ESG "laggard". However, based on on-the-ground engagement, it was clear that the company's management was more advanced in its thinking and ESG practices than its disclosures suggested. Therefore, we encouraged management to improve disclosures.

As a result, MSCI has now upgraded the Proya's rating to BBB, which is considered an "average" rating and our Investment Manager expects this to advance further over time with the company's understanding of its ESG obligations and opportunities for further improvements.

ESG case study: Kweichow Moutai

Kweichow Moutai is a high-end Chinese producer of baijiu, the world's biggest-selling spirit.

Our Investment Manager has invested in Kweichow Moutai for a number of years. The company's products are hugely popular in China's massive baijiu market. Male consumers, who account for most baijiu consumption, tend to drink premium baijiu such as Kweichow Moutai as they grow older and wealthier. Swelling numbers of high-net-worth individuals in China should therefore be a powerful long-term driver of demand. We have actively engaged with the company on a range of topics including climate change, environmental practices, labour management, human rights and stakeholder interests and corporate governance.

We reviewed the company's 2019 corporate and social responsibility (CSR) report and believe that its ESG practices, and disclosures, have been improving. Meanwhile, Kweichow Moutai sought specific feedback from investors on a range of ESG-related topics. In January 2022, we contacted the Board to encourage the company to establish energy efficiency targets and distribute its CSR report to a wider audience.

MSCI recently upgraded the company's ESG rating from CCC to B. Our Investment Manager believes that its engagement with the company has contributed to, and will continue to contribute to, a higher ESG rating and positive outcomes for stakeholders.

Information about the Manager, Investment Manager and Investment Management Team

Manager (abrdn Fund Managers Limited)

The Company's Alternative Investment Fund Manager is abrdn Fund Managers Limited (previously know as Aberdeen Standard Fund Managers Limited) ("AFML" or the "Manager"), which is a wholly owned subsidiary of abrdn plc and is authorised and regulated by the FCA. AFML has been appointed to provide investment management, risk management and promotional activities to the Company.

The abrdn Group's assets under management and administration were £508 billion as at 30 June 2022, managed for a range of clients including 22 UK-listed closed end investment companies.

The Investment Management Team

Nicholas Yeo

Nicholas Yeo is the Head of China/Hong Kong Equities team at abrdn. Nicholas joined abrdn in 2000 via the acquisition of Murray Johnstone. He was seconded to the London Global Emerging Market team for two years where he covered EMEA and Latin American companies, before returning to the Asian Equities team in Singapore in March 2004. In March 2007, he transferred to Hong Kong to lead Chinese equity research.

Nicholas holds a BA (Hons) in Accounting and Finance from The University of Manchester and an MSc in Financial Mathematics from Warwick Business School. He is a CFA charterholder.

Investment Manager (abrdn Hong Kong Limited)

The Company's portfolio is managed by abrdn Hong Kong Limited ("aHKL") by way of a group delegation agreement in place between AFML and aHKL. aHKL is authorised and regulated by the Securities and Futures Commission of Hong Kong.

Elizabeth Kwik

Elizabeth Kwik is an Investment Manager on the China/Hong Kong Equities Team at abrdn where she is responsible for researching the Consumer Discretionary, Automobiles & Components and Banking sectors. Elizabeth sits on the China A share and All China equity fund portfolio construction groups. She joined abrdn in 2013.

Elizabeth holds a Bachelor of Science in Economics from the London School of Economics. She is a CFA charterholder.

Tencent (7.0%) An innovative leader in China's internet sector with a strong presence in fintech and cloud segments, backed by an entrenched social media and payment ecosystem.

Contemporary Amperex Technology (3.2%) The largest lithium battery maker in the world with leading technology and supply chain advantage, set to benefit from rise of electric vehicle and energy storage.

Kweichow Moutai (4.9%) The largest maker of Chinese alcohol spirit Baijiu, positioned in the ultrapremium space where there are few competitors. The company is well placed to capture rising domestic consumption trends in China.

China Tourism Group Duty Free (3.2%) China's largest duty-free operator that is well placed to benefit from supportive government policy and rising demand for duty-free cosmetics on the mainland.

Meituan (4.3%) A diversified online services platform with over 400 million users, offering services including food delivery, travel bookings and wedding planning. It is optimally placed to capture rising consumption in mainland China.

Bank of Ningbo (3.1%) A city bank focused on lending to small and medium enterprises in the affluent Ningbo-Zhejiang region. The bank has shown superior returns and asset quality over the years.

China Merchants Bank (3.9%) A best-in-class retail bank in China, offering diversified financial services with a solid track record and sound risk management practices in place.

JD.com (3.0%) An online retailer with an edge in its strong logistics network. The company has shown improving corporate governance and management quality over the years.

Alibaba Group (3.6%) The Chinese internet group is a leading global e-commerce company with leading platforms including Taobao and T-mall in the mainland. The company also has interests in logistics and media as well as cloud computing platforms and payments.

Ping An Bank (2.6%) One of the three main pillars of the Ping An Group, a reputable retail bank offering services in retail and corporate banking, including investment banking services with solid management track record.

Portfolio listing as at 31 October 2022

Company

Industry (Sub-Sector)

Value (£'000)

Percentage of net assets (%)

Tencent Holdings Ltd

Interactive Media & Services

16,323

7.0

Kweichow Moutai Co Ltd

Beverages

11,435

4.9

Meituan

Internet & Direct Marketing Retail

9,882

4.3

China Merchants Bank Co Ltd

Banks

9,007

3.9

Alibaba Group Holding Ltd

Internet & Direct Marketing Retail

8,244

3.6

Contemporary Amperex Technology Co Ltd

Electrical Equipment

7,364

3.2

China Tourism Group Duty Free Corp Ltd

Banks

7,326

3.2

Bank of Ningbo Co Ltd

Banks

7,125

3.1

JD.com Inc

Internet & Direct Marketing Retail

6,918

3.0

Ping An Bank Co Ltd

Banks

6,035

2.6

Top ten investments

89,659

38.8

AIA Group Ltd

Insurance

6,027

2.6

Glodon Co Ltd

Software

5,134

2.2

Proya Cosmetics Co Ltd

Personal Products

5,106

2.2

Wanhua Chemical Group Co Ltd

Chemicals

5,044

2.2

LONGi Green Energy Technology Co Ltd

Semiconductors & Semiconductor Equipment

4,731

2.0

Shenzhen Mindray Bio-Medical Electronics Co Ltd

Textiles, Apparel & Luxury Goods

4,584

2.0

Sungrow Power Supply Co Ltd

Electrical Equipment

4,533

1.9

Nari Technology Co Ltd

Electrical Equipment

4,033

1.7

Yunnan Energy New Material Co, Ltd.

Containers and Packaging

3,873

1.7

Hundsun Technologies Inc

Software

3,871

1.7

Top twenty investments

136,595

59.0

Chacha Food Co Ltd

Food Products

3,771

1.6

Fuyao Glass Industry Group Co Ltd

Auto Components

3,714

1.6

NetEase Inc

Interactive Media & Services

3,607

1.6

Midea Group Co., Ltd.

Electrical Equipment

3,599

1.5

Hefei Meiya Optoelectronic Technology Inc

Machinery

3,584

1.5

Li Ning Co Ltd

Textiles, Apparel & Luxury Goods

3,531

1.5

Hong Kong Exchanges & Clearing Ltd

Capital Markets

3,415

1.5

Sinoma Science & Technology Co Ltd

Chemicals

3,414

1.5

Aier Eye Hospital Group Co Ltd

Health Care Providers & Services

3,319

1.4

Shanghai M&G Stationery Inc

Commercial Services & Supplies

3,241

1.4

Top thirty investments

171,790

74.1

Foshan Haitian Flavouring & Food Co Ltd

Food Products

3,159

1.4

Venustech Group Inc

Software

3,112

1.3

StarPower Semiconductor Ltd.

Semiconductors & Semiconductor Equipment

3,067

1.3

By-health Co Ltd

Personal Products

3,034

1.3

China Vanke Co Ltd

Banks

3,026

1.3

Shenzhou International Group Holdings Ltd

Textiles, Apparel & Luxury Goods

2,987

1.3

China Resources Land Limited

Real Estate Management & Development

2,934

1.3

Amoy Diagnostics Co Ltd

Biotechnology

2,830

1.2

Estun Automation Co., Ltd

Machinery

2,724

1.2

Hangzhou Tigermed Consulting Co Ltd

Life Sciences Tools & Services

2,606

1.1

Top forty investments

201,269

86.8

Wuxi Biologics Cayman Inc

Life Sciences Tools & Services

2,545

1.1

China Meidong Auto Holdings Ltd

Banks

2,449

1.1

Luxshare Precision Industry Co Ltd

Electronic Eqpt Instruments & Components

2,259

1.0

Inner Mongolia Yili Industrial Group Co Ltd

Beverages

2,231

1.0

Jiangsu Hengrui Medicine Co Ltd

Pharmaceuticals

2,211

0.9

Zhejiang Weixing New Building Materials Co., Ltd.

Plumbing Fixtures & Fittings

2,122

0.9

Anhui Conch Cement Company Limited

Construction and Materials

2,057

0.9

Maxscend Microelectronics Co Ltd

Electronic Eqpt Instruments & Components

1,835

0.8

Komodo Fund

Unit Trusts

1,319

0.6

Yantai China Pet Foods Co Ltd

Food Products

1,291

0.5

Top fifty investments

221,588

95.6

GDS Holdings Ltd

IT Services

1,056

0.4

Zai Lab Ltd

Biotechnology

961

0.4

Wuliangye Yibin Co Ltd

Beverages

459

0.2

Total investments

224,064

96.6

Cash plus other net current assets and liabilities

7,779

3.4

Net assets

231,843

100.0

Sector breakdown

%

Consumer Discretionary

21.4

Financials

14.4

Consumer Staples

13.6

Industrials

12.3

Information Technology

11.2

Communication Services

8.9

Health Care

8.5

Materials

6.4

Real Estate

2.7

Unit Trusts

0.6

The Directors of abrdn China Investment Company Limited ("the Company") present the report and financial statements for the Financial Year ended 31 October 2022.

Investment Objective and Investment Policy

A change of investment objective and investment policy was approved by shareholders on 26 October 2021. The new investment objective and investment policy is set out below:

Investment Objective

The Company's investment objective is to produce long-term capital growth by investing predominantly in Chinese equities.

Investment Policy

The Company invests in companies listed, incorporated or domiciled in the People's Republic of China ("China"), or companies that derive a significant proportion of their revenues or profits from China operations or have a significant proportion of their assets there. In furtherance of the investment policy, the portfolio will normally consist principally of quoted equity securities and depositary receipts although unlisted companies, fixed interest holdings or other non-equity investments may be held. Investments in unquoted companies will be made where the Investment Manager has a reasonable expectation that the company will seek a listing in the near future. The portfolio is actively managed and may be invested in companies of any size and in any sector.

The Company is expected to have an ESG rating equal to, or better than, the MSCI China All Shares Index and have meaningfully lower carbon intensity than the Index.

The portfolio is actively managed and the Company aims to outperform the MSCI China All Shares Index (in sterling terms). This index is used as a reference point for portfolio construction and as a basis for setting risk constraints, but does not incorporate any sustainability criteria. In order to achieve its objective, the Company will take positions whose weightings diverge from the index or invest in securities which are not included in the index. Investments may deviate significantly from the components of, and their respective weightings in, the MSCI China All Shares Index. Due to the active nature of the management process, the Company's performance profile may deviate significantly from that of the index.

The portfolio is expected normally to comprise between 30 and 60 securities (including any unlisted securities held) but may hold up to 100. No individual issuer will represent a greater weight in the portfolio than the lower of (i) 10% or (ii) its weight in the MSCI China All Shares Index (in sterling

terms) plus 5%, as measured at the time of investment. The maximum permitted exposure to a single group is 20% of the Company's total assets, as measured at the time of investment.

The Company may continue to hold certain illiquid assets which were acquired prior to adoption of this policy pending their orderly disposal. These assets are not expected to represent a significant proportion of the portfolio.

Risk Management

The Company will at all times be invested in several sectors. While there are no specific limits placed on exposure to any one particular sector, the Company will at all times invest and ensure that the portfolio is managed in a manner consistent with spreading investment risk.

The Company may invest in unquoted securities and/or securities with lock-up periods provided that such investments, in aggregate, are limited to 10% of the Company's net assets at the time any such investment is made.

With prior approval of the Board, the Company may use derivatives for the purposes of efficient portfolio management in order to reduce, transfer or eliminate investment risk in the Company's portfolio. Derivative instruments in which the Company may invest may include foreign exchange forwards, exchange-listed and over-the-counter options, futures, options on futures, swaps and similar instruments. The Company does not intend to enter into derivative or hedging transactions to mitigate against wholesale general currency or interest rate risk.

The Company may invest no more than 10% in aggregate of its gross asset value at the time of acquisition in other listed closed-ended investment funds, but this restriction will not apply to investments in such funds which themselves have stated investment policies to invest no more than 15% of their gross asset value in other closed-ended investment funds.

Gearing

The Company may employ gearing and may in aggregate, borrow amounts equalling up to 20% of gross asset value, although the Board expects that borrowings will typically not exceed 15% of gross asset value at the time of drawdown.

While it is intended that the Company will be fully invested in normal market conditions, the Company may hold cash on deposit or invest on a temporary basis in a range of cash equivalent instruments. There is no restriction on the amount of cash or cash-equivalent instruments that the Company may hold.

Principal Risks, Emerging Risks and Uncertainties

Together with the issues discussed in the Chairman's Statement and the Investment Manager's Report, the Board considers that the main risks and uncertainties faced by the Company fall into the following categories:

(i) Risks relating to the Company

The Company has no employees and the Directors have been appointed on a non-executive basis. The Company is therefore reliant upon the performance of third-party service providers for its executive functions and is exposed to the risk that misconduct by employees of those service providers, any failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment, or the termination of those appointments could have an adverse effect on the portfolio and the Company's financial condition, results of operations and prospects, with a consequential adverse effect on the market value of its Ordinary shares.

(ii)  Risks relating to the investment policy

• There can be no guarantee that the Company will achieve its investment objective or that investors will get back the full value of their investment.

• The investments of the Company are subject to the risk of changes in market prices or macroeconomic factors. Any such changes could have an adverse effect on the value of the portfolio, the Company's financial condition, results of operations and prospects, with a consequential adverse effect on returns to shareholders and the market value of its Ordinary shares.

• The Company's NAV is inherently sensitive to the performance of Chinese equity markets which could result in the Company's Ordinary shares trading at a discount or being less liquid.

• The portfolio will be concentrated in a single country and will therefore be exposed to risks associated with geographical concentration, including being exposed to the fluctuations of a more limited geographical market and fewer currencies than a less concentrated portfolio.

• The Company is exposed to particular economic, regulatory, political, geopolitical, environmental and taxation risks associated with investments in the People's Republic of China, which could have an adverse effect on the portfolio, the Company's financial condition, results of operations and prospects were they to materialise, with a consequential adverse effect on the market value of its Ordinary shares.

• The Company is exposed to currency and foreign exchange risk as a result of holding investments denominated in currencies other than sterling which could have an adverse effect on the portfolio and the Company's financial condition, results of operations and prospects, with a consequential adverse effect on the market value of its Ordinary shares.

(iii) Risks relating to the Manager/Investment Manager

• The success of the Company is dependent on the Alternative Investment Fund Manager ("AIFM") and the Investment Manager and their expertise, key personnel, and ability to source and advise appropriately on investments. As a result of this, the Company's portfolio, financial condition, results of operations, prospects and the value of the shares could be adversely affected by: competitive pressures on the AIFM or the Investment Manager's ability to source and make successful investments; any failure by the AIFM or the Investment Manager to carry out due diligence and obtain relevant information on prospective investments; or any loss of key personnel of the AIFM or the Investment Manager and any inability to recruit appropriate replacements in a timely fashion.

(iv) Risks relating to regulation, taxation and the Company's operating environment

• The Covid-19 pandemic may adversely affect the performance of investee companies due to ongoing macroeconomic and market uncertainty, which may in turn adversely impact the Company's financial performance and prospects and the value of its portfolio.

• Changes in the laws or regulations in Guernsey or the UK which govern the Company's and the Investment Manager's operations may have an adverse effect on the ability of the Company and the Manager / Investment Manager to carry on their respective businesses and any such changes could have an adverse effect on the portfolio and on the Company's financial condition, results of operations and prospects, with a consequential adverse effect on the market value of the Shares.

Management or mitigation of the above risks

The Company has a risk management process in place. This mechanism enables the Board to monitor the Company's spread of investments across several sectors. The Board receives and monitors reports from the Manager and the Administrator on a quarterly basis at the minimum.

(v)  Internal Risks

Poor allocation of the Company's assets by the Investment Manager, poor governance, compliance or administration, including poor controls over cyber security, could result in shareholders not making acceptable returns on their investment in the Company.

Management or mitigation of internal risks

The Board monitors the performance of the Manager and the other key service providers at regular Board meetings. The Manager provides reports to the Board on compliance matters and the Administrator provides reports to the Board on compliance and other administrative matters. The Board has established various committees to ensure that relevant governance matters are addressed by the Board.

The management or mitigation of internal risks is described in detail in the Corporate Governance Statement in the Annual Report for the Financial Year ended 31 October 2022.

(vi) Emerging Risks

Emerging risks are slow moving trends, innovations and shifts with potential consequence to a specific industry or sector in the long-term. They can include movements in: demographics, economics, society, technological innovations, national policy and governance. Long-term shifts in temperatures and weather patterns caused by human activity, primarily due to the burning of fossil fuels, or by natural phenomena may have a negative effect on ecological and socioeconomic wellbeing.

Management or mitigation of emerging risks

A risk management register and associated risk heat map, providing a visual reflection of the Company's identified and emerging risks have been established to monitor and mitigate risks to the Company, with both a risk pre mitigation and risk post mitigation score determined, depending on the impact of the risk combined with the probability of the risk occurring.

(vii) Failure to manage premium and/or discount

The Board's discount control policy is that the Company's shares should not trade at a price which, on average, represents a discount that is out of line with the Company's direct peer group. To assist the Board in taking action to deal with a material and sustained deviation in the Company's discount from its peer group, it seeks authority from Shareholders annually to buy back shares. Shares may be repurchased when, in the opinion of the Board and taking into account factors such as market conditions and the discounts of comparable companies, the Company's discount is higher than desired and shares are available to purchase in the market. The Board is of the view that the principal purpose of share repurchases is to enhance the net asset value ("NAV") for remaining shareholders, although it may also assist in addressing the imbalance between the supply of and demand for the Company's shares and thereby reduce the scale and volatility of the discount at which the shares trade in relation to the underlying NAV.

Statement of Directors' Responsibilities

In Respect of the Annual Report and Accounts

The Directors are responsible for preparing the Annual Report and Accounts in accordance with applicable law and regulations.

Guernsey company law requires the Directors to prepare financial statements for each financial year. The Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards as issued by the IASB and applicable law.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing these financial statements, the directors are required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable, relevant and reliable;

• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements;

• assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

• use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations or have no realistic alternative but to do so.

The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies (Guernsey) Law, 2008. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website (but not for the content of any information included on the website that has been prepared or issued by third parties). Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Disclosure of Information to the Auditor

The Directors who held office at the date of approval of the Directors' Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company's auditor is unaware; and each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

Responsibility Statement of the Directors in Respect of the Annual Report

We confirm that to the best of our knowledge:

• the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

• the Management Report (comprising the Chairman's Statement, the Investment Manager's Report and the Governance reports including the Directors' Report) includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

The Board considers that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

Helen Green

Chairman

13 February 2023

Year ended 31 October 2022

Year ended 31 October 2021

Note

Revenue £'000

Capital £'000

Total £'000

Revenue £'000

Capital £'000

Total £'000

(Losses)/gains on investments at fair value through profit or loss

4

-

(143,283)

(143,283)

-

64,051

64,051

Transaction costs

8

-

832

832

-

387

387

Losses on currency movements

-

(354)

(354)

-

-

-

Net investment (losses)/gains

-

(142,805)

(142,805)

-

64,438

64,438

Investment income

5

4,108

-

4,108

3,667

-

3,667

Investment management fees

6

(1,020)

-

(1,020)

(2,753)

-

(2,753)

Other expenses

6

(913)

-

(913)

(882)

-

(882)

Operating (loss)/profit before finance costs and taxation

2,175

(142,805)

(140,630)

32

64,438

64,470

Finance costs

9

(109)

-

(109)

(176)

-

(176)

Operating (loss)/profit before taxation

2,066

(142,805)

(140,739)

(144)

64,438

64,294

Withholding tax expense

(215)

-

(215)

(138)

-

(138)

Total (loss)/profit and comprehensive income for the year

1,851

(142,805)

(140,954)

(282)

64,438

64,156

Basic earnings and diluted earnings per Ordinary share

10

4.00p

(308.70p)

(304.70p)

(0.61p)

140.19p

139.58p

Note

As at 31 October 2022 £'000

As at 31 October 2021 £'000

Non-current assets

Investments at fair value through profit or loss

4

224,064

112,905

Current assets

Cash and bank

8,534

201,795

Sales for future settlement

-

59,838

Other receivables

56

119

8,590

261,752

Total assets

232,654

374,657

Current liabilities

Purchases for future settlement

(222)

-

Other payables

(564)

(835)

Finance costs payable

9

(25)

(34)

Total liabilities

(811)

(869)

Net assets

231,843

373,788

Equity

Share capital

12

147,744

148,735

Capital reserve

13

87,739

230,544

Revenue reserve

(3,640)

(5,491)

Total equity

231,843

373,788

Net assets per Ordinary share

14

511.98p

813.20p

For the year ended 31 October 2022

Note

Share capital £'000

Capital reserve £'000

Revenue reserve £'000

Total £'000

Balance at 1 November 2021

148,735

230,544

(5,491)

373,788

Loss for the year

-

(142,805)

1,851

(140,954)

Scheme of reconstruction:

Ordinary shares issued

62,037

-

-

62,037

Ordinary shares repurchased

(55,291)

-

-

(55,291)

Tender offer and share issue costs

12

(177)

-

-

(177)

Share buybacks

12

(7,560)

-

-

(7,560)

Balance at 31 October 2022

147,744

87,739

(3,640)

231,843

For the year ended 31 October 2021

Note

Share capital £'000

Capital reserve £'000

Revenue reserve £'000

Total £'000

Balance at 1 November 2020

149,616

176,563

(5,209)

320,970

Profit for the year

-

64,438

(282)

64,156

Dividends paid

11

-

(10,457)

-

(10,457)

Tender offer and share issue costs(Scheme of Reconstruction)

12

(881)

-

-

(881)

Balance at 31 October 2021

148,735

230,544

(5,491)

373,788

Note

Year ended 31 October 2022 £'000

Year ended 31 October 2021 £'000

Operating activities

Cash inflow from investment income

4,187

3,885

Cash outflow from management expenses

(2,009)

(4,093)

Cash inflow from disposal of investments1

311,504

401,220

Cash outflow from purchase of investments1

(446,496)

(183,626)

Cash outflow from withholding tax

(215)

(138)

Net cash flow (used in)/from operating activities

15

(133,029)

217,248

Financing activities

Repayment of bank borrowings

9

-

(25,000)

Proceeds from bank borrowings

9

-

12,500

Borrowing commitment fee and interest charges

9

(118)

(142)

Dividends paid

11

-

(10,457)

Scheme of reconstruction2

Ordinary shares issued

3,257

-

Ordinary shares repurchased

(55,291)

-

Tender offer and share issue costs paid

(388)

(669)

Share buybacks

20

(7,338)

-

Net cash flow used in financing activities

(59,878)

(23,768)

Net (decrease) / increase in cash and cash equivalents

(192,907)

193,480

Effect of foreign exchange

(354)

-

Cash and cash equivalents at start of the year

201,795

8,315

Cash and cash equivalents at end of the year

8,534

201,795

Notes to the Financial Statements

2022 £'000

2021 £'000

Quoted and listed closed end fund investments

222,745

39,890

Open ended fund and limited liability partnership investments

1,319

73,015

Total fair value investments at 31 October

224,064

112,905

Investments held at fair value through profit or loss

Opening book cost

65,600

234,136

Opening investment holding gains

47,305

90,839

Opening fair value

112,905

324,975

Analysis of transactions made during the year

Purchases at cost

446,496

183,626

Sales proceeds received

(193,446)

(460,134)

Gains on investments

25,119

107,972

Movement in investment holding losses

(167,010)

(43,534)

Closing fair value

224,064

112,905

Closing book cost

343,770

65,600

Closing investment holding (losses)/gains

(119,706)

47,305

Closing fair value

224,064

112,905

Financial assets measured at fair value £'000

Financial assets measured at amortised cost £'000

Financial liabilities measured at fair value £'000

Financial liabilities measured at amortised cost £'000

Total £'000

Investments at fair value through profit or loss

224,064

-

-

-

224,064

Cash and cash equivalents

-

8,534

-

-

8,534

Sales for future settlement and other receivables

-

56

-

-

56

Purchases for future settlement and other payables

-

-

(811)

-

(811)

Total

224,064

8,590

(811)

-

231,843

Financial assets measured at fair value £'000