28 Nov 2008 07:00
CHINA GROWTH OPPORTUNITIES LIMITED
UNAUDITED HALF YEARLY RESULTS
FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2008
| Key points Net assets at 30 September 2008 £47.2 million (31 March 2008: £71.7 million), down 34.1% in the period; Net assets equal to 94.4 pence (31 March 2008: 143.3 pence) per share; Investments up 8% on cost at 30 September 2008 (31 March 2008: up 63% on cost); and Loss for the period of £24.5 million, equal to a loss of 48.9 pence per share (2007: earnings of 3.7 pence per share); Company name changed to China Growth Opportunities Limited; and Appointment of Richard Battey as a Non-Executive Director and Diana Chen (based in Beijing) as Chief Operating Officer. For further information please visit www.chinagrowthopportunities.com or contact: | ||
| Simon Littlewood China Growth Opportunities Limited Tel: +852 3558 2051 | John West / Andrew Dunn Tavistock Communications Tel: +44 20 7920 3150 | Hugh Field Collins Stewart Europe Limited Tel: +44 20 7523 8350 |
| CHAIRMAN'S STATEMENT | ||
| I am pleased to have the opportunity to present the unaudited condensed half yearly results of China Growth Opportunities Limited (the "Company") and its subsidiary (together the "Group") for the six months ended 30 September 2008. Results The current financial and economic crisis has affected the Group and in autumn 2008 the market deteriorated severely. The Group suffered a net loss for the period ended 30 September 2008 of £24.5 million (2007: profit of £1.8 million), representing a loss per Ordinary Share of 48.9 pence (2007: earnings of 3.7 pence), and resulted in a decrease in the net asset value to £47.2 million at 30 September 2008, equal to 94.4 pence per Ordinary Share. During the six months ended 30 September 2008, the fair value of investments decreased by 34% to £48.0 million but still showed an unrealised gain of 8% on cost. £4.6 million (10%) of the investments have been stated at original cost. Investments with an original cost of £39.8 million have been shown at a fair value of £43.4 million. Fair value was determined based on market price where the stock was quoted and there was deemed to be a liquid and active market, latest financing valuation where follow on financing was achieved, or a multiple of post tax profits for those investments illiquid, not quoted or re-financed. The multiples applied have been lowered from those used in the 31 March 2008 financial statements to reflect current market conditions. As at 30 September 2008, 42% (31 March 2008: 49%) of our investment portfolio (by fair value) was quoted on a combination of the Singapore Stock Exchange's Main Board and Catalist and PLUS. Disposal of Holding in Asia Wind In my statement in September, I mentioned that we would endeavour to achieve a few meaningful realisations or part-realisations in the next twelve months. On 20 October 2008 the Group sold its entire 11.11% holding in Asia Wind Group Limited for a cash consideration of £2.0 million. This was below the £3.0 million originally paid for the holding in November 2006 but Asia Wind had been severely affected by the credit crisis because of its heavy reliance on debt to finance its projects. With no expectation of being able to profit from the investment in Asia Wind in the short-term until financial markets stabilise, and in the light of the discount at which the Company's shares were trading, the Board decided to dispose of the holding at a loss, rather than wait for Asia Wind to be able to exploit its business model over the long-term, thereby freeing-up cash for other purposes. The proceeds from the sale of Asia Wind have now been received. Cash Resources The Board has decided that it is in the Group's best interest to retain the cash from the sale of Asia Wind to ensure ample working capital for the next eighteen months and have some modest ability to help any investee company if an otherwise sound company needs short term support. We have also taken steps to further diversify the holding of cash balances available to the Company and the Board continues to monitor the banking arrangements in light of current circumstances. Investment Environment Your Board recently met in Beijing and conducted a careful review of the investment portfolio in current circumstances. The three Non-Executive Directors met with a number of the investee companies' management. The overall view was that there is encouraging evidence of the professional approach of individual managements. Currently cash is 'king' in China so we were pleased to observe the careful steps being taken by management to conserve financial resources to help survive in this difficult period. Your Company's Executive Directors are working closely with investee companies to guide them through this difficult time. The Chinese Government has expressed strong determination to pump-prime the economy and has announced a range of economic moves to stimulate the domestic market. This should be good news for many companies in our portfolio as the focus of the Chinese Government's easing is on areas where our investee companies are active. In particular I believe that the programme for Land Reform will have a major effect on the domestic market. For the first time since the Revolution, China's 800 million peasant farmers will have control over their major asset which is land. This will encourage modernisation and greater efficiency in an area currently operating in a manner not dissimilar to the Middle Ages. Your Company is little exposed to China's export businesses so our future success relies on the prosperity of the domestic market and the Chinese Government's commitment to tackling green issues. Change of Company Name At the annual general meeting of the Company held on 27 October 2008, a resolution was passed to change the Company's name from London Asia Chinese Private Equity Fund Limited to China Growth Opportunities Limited, which better describes the Company's operations and structure. Consistent with the change of name, the Company now has new EPIC/TIDM codes of "CGOP" for the Ordinary Shares and "CGOW" for the Warrants and its website address has changed to www.chinagrowthopportunities.com. Operational Update I am delighted to welcome Richard Battey to the Board. His accounting and financial services experience, as well as his connections within the closed-ended investment funds sector, have brought valued experience and strengthened the Board of the Company as a whole. In June 2008, the Group appointed Diana Chen, based in Beijing, China, as Chief Operating Officer, with specific responsibility to ensure that adequate financial information is available from our portfolio companies to improve our own financial reporting. Outlook I am confident that the current price at which the shares in your company trade on the AIM market in no way reflects the Group's true value and, although the next two years may prove to be difficult, I am hopeful that the Group's performance will recover in the long-term. I believe that China will recover faster than many western economies and that the domestic stimulus package will provide opportunities for wisely positioned companies to prosper when we emerge from the current turmoil. | ||
| R Leighton 27 November 2008 | ||
| INVESTMENT CONSULTANT'S REPORT | ||||||
| INVESTMENT PORTFOLIO | ||||||
| as at 30 September 2008 | ||||||
| Fair value | ||||||
| Company | Activity/Sector | Listing | Holding | 30 September 2008 | 31 March 2008 | |
| % | £m | £m | ||||
| Asia Clean Energy Pte Limited | Clean energy | - | 24 | 4.5 | 4.0 | |
| Asia Water Technology Limited | Water | Catalist Singapore | 21 | 1.9 | 6.3 | |
| Asia Wind Group Limited | Clean energy | - | 11 | 2.0 | 3.0 | |
| China Biofoods Limited | Agriculture | PLUS | 31 | 1.7 | 3.0 | |
| China CDM Exchange Centre Limited | Carbon credit brokerage | PLUS | 8 | 9.9 | 9.9 | |
| China Metal Packaging Group Company Limited | Consumer | - | 15 | 9.2 | 7.1 | |
| China New Energy Limited | Clean technology | PLUS | 25 | 2.2 | 12.6 | |
| China Real Estate Services Limited | Property services | - | 25 | 1.3 | 4.9 | |
| China Solar Energy Company Limited | Clean technology | - | 11 | 3.0 | 3.0 | |
| Dalian Business Institute Limited | Education | PLUS | 20 | 1.6 | 3.2 | |
| Hainan Zhengye Zhongnong High Tech. Co. Limited | Agriculture | - | 23 | 2.5 | 2.5 | |
| United Envirotech Limited | Water | Mainboard Singapore | 15 | 3.0 | 3.4 | |
| Wan Wei Oil & Gas Technology Group | Energy | - | 24 | 5.3 | 9.5 | |
| ------ | ------ | |||||
| 48.0 | 72.3 | |||||
| ------ | ------ | |||||
| There has been a considerable worsening in the economic conditions in the Group's area of operation, China, since we released our annual results to 31 March 2008. This has impacted on the value of the Group's investment portfolio and led to a £24.3 million write-down in the carrying value of our investments in the 30 September 2008 half yearly financial statements. The carrying value of the Group's investments has been hit by three primary factors: The general sell-off in capital markets, which has impacted the value of our Singapore listed investments, United Envirotech ("UE") and Asia Water, which have seen a reduction in value in the six month period of £4.8 million. The Singapore Straits Times index is down over 50% in the last 12 months, and down nearly 30% since 30 September 2008, with Asia Water down a third and UE halving in value, for further losses of over £2 million since the period end. Asia Water has been particularly badly hit by the credit crunch, as its business model relies on debt finance being available. We are working very closely with its management team and its bond holders to address its funding needs. UE's business model is less dependent on debt finance, as a greater part of its income is engineering, procurement and construction related, and it is considerably less geared, with cash balances accounting for a significant part of its current market capitalisation. The Group's valuation policy takes the Asian stock markets as a reference point for determining the fair value of some of the Group's unlisted investments. These markets declined considerably in the period and in the last 12 months, with the Shanghai Composite index down over 60% in the year to 30 September 2008. The Company's Board has therefore taken the decision to revise downwards the PE multiples used for calculating fair values from those used in the calculation of fair values as at 31 March 2008. These lower multiples better reflect the reduced valuations in the current market. The lower PE multiples have resulted in a combined reduction of £2.9 million in the fair values of Dalian Business Institute and China Biofoods. In line with the current economic climate, several of our investments have been hit by customers failing to pay on time, projects failing to secure project finance or having existing credit facilities revoked, declining sales and rising costs. This has hit their profits, and their ability to raise finance or meet existing finance obligations. The fall off in performance of the companies has resulted in write downs of £18.2 million in the fair values of three of our investments: China Real Estate; China New Energy Limited ("CNE"); and Wan Wei Oil & Gas. We have reduced CNE's fair value, which was previously based on a third party transaction, by £10.4 million due to uncertainty as to its future profitability and financial position following breach of the terms of its convertible loan notes, and partial repayment and renegotiation of the terms thereof. CNE remains suspended from trading on PLUS pending publication of its annual results for the year ended 31 December 2007. | ||||||
| It should be noted that the £25.9 million of reductions in value above are accounting, rather than real, losses and, in several cases, such as CNE (which saw the largest fall in value), reflect a reduction in the previous increase in value. Overall the portfolio is still being carried at a value above original purchase cost. The fair value of two investments, Asia Clean Energy and China Metal Packaging ("CMP"), increased in the period, in the case of CMP on the back of new investment by an Asian private equity group received in the period at a higher valuation than its 31 March 2008 fair value. In addition to the above accounting loss, there was a real loss of £1.0 million on the sale of Asia Wind Group, announced in October. Market Environment China's recent rapid economic growth has been partly driven by consumers in developed economies, particularly the US and Europe, purchasing increasing quantities of Chinese manufactured goods, which created jobs and increasing wealth for rising numbers of people in China. With those consumers reigning back purchases, this engine of growth has stalled, resulting in Chinese manufacturers cutting back on staff, or disappearing altogether, reducing consumer spending within China and having a knock-on effect on liquidity within the economy. This year has also witnessed a number of natural disasters which have caused great economic cost, disruption and diversion of resources, including the worst snow storms in years in the spring, the Sichuan earthquake, drought in the north and a record number of typhoons and floods in the south. Man-made disruptions, such as the rising costs of energy and commodities, massive currency fluctuations, changes to labour laws implemented in January which significantly increased the cost of running a business in China, changes to tax laws, the Olympics, the collapse of the stock market, the credit crisis, a declining property market, and the recent melamine food scandal, have added to the problem. Whilst several of these factors are one-off, short-term events, the result has been lengthening payment terms taken by customers, lower sales and margins, limited project and debt finance across a range of industries, and a general lack of liquidity within the economy. China has recently announced two major measures that will impact both our portfolio and the economy as a whole. In early November the Government announced an RMB4 trillion (£328 billion) stimulus package, primarily aimed at the rural economy and infrastructure. The measures include a relaxation of some of the restrictions imposed on bank lending in the last few years, which were designed to slow down the economy. An increase in bank lending, particularly project finance, will benefit a number of our investments that have been severely hit by the tight credit conditions, including UE, Asia Water, Asia Clean Energy, China Solar, CNE, and China Real Estate Services. Our view is that the stimulus package, much of which is re-packaging of existing projects and exhortations on private companies and banks to spend more, will not be sufficient in the short term to counter the negative impact of the decline in export markets and slowdown within China itself, and that China's economic growth will decline considerably from current levels to around 7%, before beginning to pick up in the second half of 2009. The second measure, reform of the agricultural sector, is potentially of more significance and creates a number of opportunities for our existing portfolio and the Group going forward. Broadly, the proposed reforms aim to give farmers more rights over the land they occupy. This should ultimately lead to consolidation of smallholdings, increased production, capital investment and use of technology, and free up low-earning labour to create the next wave of economic growth and urbanisation. Investee companies such as Hainan Zhengye, China Biofoods, Asia Water, UE, China Solar, China Real Estate, Asia Clean Energy, China CDM, and CMP should all stand to benefit from these measures going forward. Outlook In the year to 30 September 2008, whilst the 29% decline in the carrying value of the portfolio (excluding disposals) is extremely disappointing, this is against a 36% fall in the Hong Kong stock exchange and a 61% fall in the Shanghai stock exchange. We anticipate very difficult conditions in which to realise investments and raise further finance, particularly in the short term. We are working very closely with the investee companies to identify what measures need to be put in place at each of them to ride out the current difficulties, and ensure that they are able to take advantage of the upturn, expected in the second half of next year. Given the make-up of our investment portfolio, which is heavily weighted towards infrastructure and clean technology, going forward it should benefit disproportionately from the recent stimulus package and reforms in China. | ||||||
| S Littlewood V Ng 27 November 2008 | ||||||
| CONDENSED CONSOLIDATED HALF YEARLY INCOME STATEMENT | ||
| for the six months ended 30 September 2008 | ||
| 1 April 2008 to 30 September 2008 | 1 April 2007 to 30 September 2007 | |
| (unaudited) | (unaudited) | |
| £'000 | £'000 | |
| Income | ||
| Other income | 724 | 457 |
| ------------ | ------------ | |
| Total income | 724 | 457 |
| Expenses | ||
| Investment Consultant's fee | (709) | (666) |
| Introductory fees | - | (78) |
| Administration fees | (63) | (88) |
| Directors' fees | (36) | (33) |
| Audit fees | (58) | (60) |
| Other expenses | (59) | (68) |
| ------------ | ------------ | |
| Expenses before performance fees and movement on foreign exchange | (925) | (993) |
| Performance fee | - | (458) |
| Gain/(loss) on foreign currency exchange | 54 | (47) |
| ------------ | ------------ | |
| Expenses after performance fees and movement on foreign exchange | (871) | (1,498) |
| ------------ | ------------ | |
| Loss before investment gains and losses | (147) | (1,041) |
| Investment gains and losses | ||
| Net unrealised change in fair value of investments | (24,320) | 1,267 |
| Realised gain from sale of investments | - | 1,606 |
| ------------ | ------------ | |
| Total investment (loss)/gain | (24,320) | 2,873 |
| ------------ | ------------ | |
| (Loss)/profit for the period | (24,467) | 1,832 |
| ------------ | ------------ | |
| (Loss)/earnings per share - basic and fully-diluted | (48.93)p | 3.66p |
| CONDENSED CONSOLIDATED HALF YEARLY BALANCE SHEET | |||
| as at 30 September 2008 | |||
| 30 September 2008 | 31 March 2008 | ||
| (unaudited) | (audited) | ||
| £'000 | £'000 | ||
| Non-current assets | |||
| Investments at fair value through profit or loss | 47,998 | 72,319 | |
| ---------- | ---------- | ||
| Current assets | |||
| Other receivables | 877 | 513 | |
| Cash and cash equivalents | 3,667 | 3,402 | |
| ---------- | ---------- | ||
| 4,544 | 3,915 | ||
| ---------- | ---------- | ||
| Total assets | 52,542 | 76,234 | |
| ---------- | ---------- | ||
| Current liabilities | |||
| Payables and accruals | (5,348) | (4,572) | |
| ---------- | ---------- | ||
| Net assets | 47,194 | 71,662 | |
| ---------- | ---------- | ||
| Capital and reserves attributable to equity holders of the Company | |||
| Share capital | 500 | 500 | |
| Other reserve | 2,293 | 2,293 | |
| Distributable reserves | 44,402 | 68,869 | |
| Foreign exchange translation reserve | (1) | - | |
| ---------- | ---------- | ||
| Total equity shareholders' funds | 47,194 | 71,662 | |
| ---------- | ---------- | ||
| Net Asset Value per Ordinary Share | - basic | 94.39p | 143.32p |
| - fully diluted | 94.39p | 143.32p | |
| CONDENSED CONSOLIDATED HALF YEARLY STATEMENT OF CHANGES IN EQUITY | |||||||||
| for the six months ended 30 September 2008 (unaudited) | |||||||||
| Share capital | Other reserve | Distributable reserves | Foreign exchange translation reserve | Total | |||||
| £'000 | £'000 | £'000 | £'000 | £'000 | |||||
| Balance at 31 March 2008 | 500 | 2,293 | 68,869 | - | 71,662 | ||||
| Loss for the period | - | - | (24,467) | - | (24,467) | ||||
| Foreign exchange movement | - | - | - | (1) | (1) | ||||
| ---------- | ---------- | ---------- | ---------- | ---------- | |||||
| Balance at 30 September 2008 | 500 | 2,293 | 44,402 | (1) | 47,194 | ||||
| ---------- | ---------- | ---------- | ---------- | ---------- | |||||
| for the six months ended 30 September 2007 (unaudited) | |||||||||
| Share capital | Other reserve | Distributable reserves | Total | ||||||
| £'000 | £'000 | £'000 | £'000 | ||||||
| Balance at 31 March 2007 | 500 | 2,293 | 63,730 | 66,523 | |||||
| Profit for the period | - | - | 1,832 | 1,832 | |||||
| ---------- | ---------- | ---------- | ---------- | ||||||
| Balance at 30 September 2007 | 500 | 2,293 | 65,562 | 68,355 | |||||
| ---------- | ---------- | ---------- | ---------- | ||||||
| CONDENSED CONSOLIDATED HALF YEARLY CASH FLOW STATEMENT for the six months ended 30 September 2008 | ||
| 1 April 2008 to 30 September 2008 | 1 April 2007 to 30 September 2007 | |
| (unaudited) | (unaudited) | |
| £'000 | £'000 | |
| Cash flows from operating activities | ||
| Other income received | 358 | 363 |
| Investment Consultant's fees paid | - | (765) |
| Introductory fees paid | - | (171) |
| Administration fees paid | (62) | (31) |
| Directors' fees paid | (29) | (49) |
| Audit fees paid | (8) | - |
| Other expenses paid | (48) | (61) |
| ---------- | ---------- | |
| Net cash inflow/(outflow) from operating activities | 211 | (714) |
| Cash flows from investing activities | ||
| Purchase of fair value through profit or loss investments | - | (10,324) |
| Sale of fair value through profit or loss investments | - | 3,032 |
| ---------- | ---------- | |
| Net cash outflow from investing activities | - | (7,292) |
| ---------- | ---------- | |
| ---------- | ---------- | |
| Increase/(decrease) in cash and cash equivalents | 211 | (8,006) |
| ---------- | ---------- | |
| Cash and cash equivalents brought forward | 3,402 | 12,321 |
| Increase/(decrease) in cash and cash equivalents | 211 | (8,006) |
| Foreign exchange movement | 54 | - |
| ---------- | ---------- | |
| Cash and cash equivalents carried forward | 3,667 | 4,315 |
| ---------- | ---------- | |