PACL.L Regulatory News (PACL)

23 April 2015

Pacific Alliance China Land Limited

Full year results for the period ended 31 December 2014

Pacific Alliance China Land Limited ("PACL" or the "Company"), an AIM-traded, closed-end investment company with a portfolio of investments including existing properties, new developments, distressed projects and real estate companies in Greater China, has today announced its full year audited results to 31 December 2014.

Highlights

· Net asset value as at 31 December 2014 was US$295.30 million, representing US$2.60 per share, a 15% increase from 30 June 2014 (US$2.27 per share) and a 5.6% increase year-on-year (31 December 2013; US$2.46 per share).

· The Company's share price closed at US$1.81, a 6.5% increase year-on-year and a 30% discount to the audited NAV per share.

· PACL's NAV and share price have both consistently outperformed major benchmark indices including the FTSE 350 Real Estate Index and the FTSE AIM All-Share Index since inception.

Company Developments

· Following an affirmative vote at an EGM in July 2014, the Board announced that the Company would cease making new investments and focus instead on realising existing investments, maximising the IRR from its portfolio and returning realisation proceeds to shareholders.

· The Company repurchased US$30 million of PACL's ordinary shares in 2014 pursuant to Share Purchase programs in July and November.

Portfolio and Fund Developments

· Project Auspice: NAV for the Company's investment in Dalian Wanda Commercial Properties Co. Ltd, increased by 28% year on year driven by that company's IPO and listing on the Hong Kong Stock Exchange in December 2014. Dalian Wanda raised US$3.7 billion in Asia's largest IPO in 2014, issuing 600 million H shares at HKD48. The share price closed at HKD49.50 on 31 December 2014.

· Project Crystal: In November, the Company announced it had completed the sale of its 4.6% interest in Forterra Trust, a Singapore business trust listed on Singapore Stock Exchange. The Company received cash proceeds of SGD26.4 million (US$20.3 million), representing a gross IRR of 20.9% (or a 1.48x gross cash multiple) and a premium of US$5.7 million over the Company's valuation at that time.

· Project Speed: In January, the Company fully realized the bridge loan made to Times Property Holdings Limited, a residential developer in southern China. The Company received total consideration of US$35 million with a profit of US$13.9 million, representing a gross IRR of 10.2% and a cash multiple of 1.7x, respectively.

Patrick Boot, Managing Director, Pacific Alliance Real Estate Limited commented that:

"China's economic growth slowed to its lowest level in 24 years in the fourth quarter of 2014, prompting a shift in monetary policy and an easing of restrictions by the government to head off a sharper economic downturn. The easing of property purchase restrictions in late September saw the beginning of a gradual recovery in sales volumes and prices across China, and also contributed to a stock market rally in the property sector at the end of the year.

"Together with the People's Bank of China's decision to cut interest rates for the first time in two years and an expectation of further cuts in both interest rates and reserve ratio requirements in 2015, we expect to see the cost of borrowing decrease and further economic stimulus that might benefit the property sector in the year ahead."

A full copy of the Annual Report will be distributed to all registered shareholders and will be available on the Company's website www.pacl-fund.com.

For further information please contact:

Notes to Editors:

About Pacific Alliance China Land Limited

Pacific Alliance China Land Limited ("PACL") (AIM: PACL) is a closed-end investment company with net assets of US$295.30 million as at 31 December 2014. PACL was admitted to trading on the AIM Market of the London Stock Exchange in November 2007. PACL is focused on investing in a portfolio of existing properties, new developments, distressed projects and real estate companies in Greater China.

For more information about PACL, please visit: www.pacl-fund.com

Pacific Alliance China Land Limited is a member of PAG, the Asian alternative investment fund management group. Founded in 2002, PAG is now one of the region's largest Asia-focused alternative investment managers with funds under management across Private Equity, Real Estate and Absolute Return strategies.

For more information about PAG, please visit: www.pagasia.com

Chairperson's Statement

Pacific Alliance China Land Limited (the "Company" or "PACL")'s net asset value (NAV) as at 31 December 2014 was US$295.3 million or US$2.6017 per share which represented a 5.64% increase on a per share basis year-on-year, and the Company's share price increased 6.5% year on year.

While several years of government restrictions on the residential property sector led to a slowdown in the property market in the first three quarters of 2014, the easing of purchase restrictions in late September has seen a gradual recovery in sales volumes across China. In the last three months of the year, stronger sales figures were observed nationwide and price decreases were seen in fewer cities.

The easing of government restrictions also contributed to a stock market rally in the property sector at the end of the year. Project Auspice, our investment in Dalian Wanda Commercial Properties Ltd, one of China's leading developers, gained significantly in value when Dalian Wanda listed its shares on the Hong Kong Stock Exchange in December. This contributed substantially to an increase in the Company's overall NAV. We expect to see continual improvements in market sentiment in 2015 driven largely by rapidly-rising incomes, continued urbanization, and the further relaxation of government policies.

China's 2014 full year GDP growth came in at 7.4%, slightly under the 7.5% official target. To head off a sharper economic downturn, the People's Bank of China (PBOC) cut interest rates in November for the first time in more than two years to lower borrowing costs and support growth. It is widely expected that more rate cuts will be seen in 2015, together with other measures such as reserve requirement ratio cuts. We believe that the property market should benefit from these stimulus measures.

The Board of Directors would like to thank you for your continued commitment and support in 2014. Our investment strategy has delivered compound annual NAV growth of 14.45% since the Company's inception in November 2007 and as we continue to realize the investments and return proceeds to investors, we will remain focused on maximizing value to shareholders.

Margaret Brooke

Chairperson

Investment Manager's Report

On 31 December 2014, the Company's share price closed at US$1.8125, a 6.5% increase year-on-year and a 30% discount to the audited NAV per share. PACL's NAV and share price have both outperformed major benchmark indices including the FTSE 350 Real Estate Index and the FTSE AIM All-Share Index on a consistent basis since inception.

Portfolio Summary

As at 31 December 2014, the Company held cash of US$79 million and investments with a cost of approximately US$54 million and fair value of US$286 million. The Company's portfolio is diversified across five strategies including Listed Stock, Bridge Financing, Pre-IPO Financing, Platform Investment and Asset Acquisition.

Breakdown of unlisted investments by strategy, listed investments and cash

Note

(1) The gross investment value includes an amount attributable to the PACL II shareholders.

(2) Of the total cash of US$79.25 million, US$45.7 million of which are held as RMB in PRC banks.

Realisation and return of capital

Following an affirmative vote at the EGM in July 2014, the Board announced that the Company will cease making new investments, realise the portfolio in an orderly manner and return proceeds to investors. 

The Company successfully exited two projects in 2014. In January, it exited Project Speed, a bridge loan to Times Property Holdings Limited, which is a developer focusing on residential developments in southern China. The Company received total consideration of US$35 million with a profit of US$13.9 million, representing a gross IRR of 10.2% and a cash multiple of 1.7 times. In November, the Company sold its interest of Project Crystal, a 4.6% holding in Forterra Trust, a Singapore business trust listed on Singapore Exchange. It received cash proceeds of SGD26.4 million (US$ equivalent of 20.3 million), representing a gross IRR of 20.9% (or a 1.48x gross cash multiple) and a premium of US$5.7 million over PACL's most recent valuation. With the proceeds of these two realizations the Company announced two share repurchases with a total amount of US$30 million. The Investment Manager will continue to actively manage our existing investments and seek the right exit opportunities as soon as possible that will maximize the Company's NAV.

Portfolio Summary

Project Malls

In August 2009, the Company acquired a 30% stake in Project Malls for US$12.5 million. At that time the core asset of Project Malls was a shopping mall developer that owned minority stakes in a portfolio of more than 60 shopping malls across China. The Investment Manager helped consolidate these minority stakes into 100% ownership of 16 different shopping malls. The Company's 30% stake in the resulting 16 mall portfolio was subsequently sold for US$58.6 million, or 4.7 times the entire initial investment. As part of the original transaction the Company also acquired a minority interest in Walmart China's retail joint venture business and a minority stake in a large parcel of residential land near the Shanghai Disneyland development. The Company is currently in discussions in respect of an exit of the residential land and any change in value would be reflected in the 31 March 2015 NAV. These two holdings were retained and are currently valued at US$87.3 million. The Company's partner in both the Walmart JV and the Shanghai Land is China Resources, a state-owned enterprise in China.

Project Diplomat

Project Diplomat is a luxury residential block in the Second Embassy district of Beijing. Built by an international developer, it has been operated as serviced apartments since 2002. The Company acquired a 40% equity stake for US$33 million in November 2009, which valued as at 31 December 2014 at US$94.97 million. By the end of November 2014, occupancy rates were high at 95%, which together with rising rents has resulted in an increase in operating income. We are working together with our investment partner for an en bloc sale of the property and expect the transaction to be closed in the second half of 2015.

Project Auspice

At the time of investment, Project Auspice was a private equity investment in Dalian Wanda Commercial Properties Ltd ("Wanda"), one of the largest unlisted property developers in China. The developer derives around 60% of its revenues from commercial real estate development. This focus has resulted in more stable revenues and profits which have grown by 64% and 44% per annum respectively over the past five years.

Wanda raised $3.7 billion on 23 December 2014 in its initial public offering in Hong Kong, making it the largest listing in Asia last year. It issued 600 million H shares at HKD48, the share price closed at HKD49.50 as at 31 December 2014. The Company's interest in Wanda is subject to a one-year lock-up period before the shares can be sold. Accordingly we are targeting the exit in the first quarter of 2016.

The project's NAV increased by 28% year on year which was driven by its IPO listing.

Beijing Olympic Park

The Company has a partial interest in three Beijing residential units which the Company is working to finalize the titles. We anticipate a sale in the second half of 2015.

Conclusion

In 2015, we expect to see China's economy grow at a slower but more sustainable pace. We also expect the property market to continue to improve supported by favourable government policy changes. The Investment Manager will continue its endeavour to find the best exit terms for its investments and to maximize the value of the Company for its shareholders.

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

AS AT 31 DECEMBER 2014

Approved by the Board of Directors on 23 April 2015

The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AS AT 31 DECEMBER 2014

(1) Certain equity investments of the Fund were in the form of share capital and shareholder's loan.

(2) The principal above represents the principal calculated according to the Fund's accounting policy, which is different from the loan principal calculated in accordance with the legal agreements whereby the cost is paid prior to the repayment of interest component.

The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED 31 DECEMBER 2014

The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

FOR THE YEAR ENDED 31 DECEMBER 2014

The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2014

Supplementary information to statement of cash flows

Non-cash transaction:

Part of the performance fee payable to the Investment Manager was settled by the Company's shares. Please refer to Note 5 and 7 for details.

The accompanying notes are an integral part of these consolidated financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2014

1 Organization

Pacific Alliance China Land Limited (the "Company") was incorporated on 5 September 2007 in the Cayman Islands. It is a closed-end Cayman Islands registered, exempted company. The address of its registered office is PO Box 472, 2nd Floor, Harbour Place, Grand Cayman KY1-1106, Cayman Islands.

The Company's ordinary shares are traded on the AIM market of the London Stock Exchange. The Company can raise additional capital up to the authorized share capital as described in Note 5.

The principal investment objective of the Company and its subsidiaries (collectively, the "Fund") is to provide shareholders with capital growth and a regular level of income from investments in existing properties, new developments, distressed projects and real estate companies in Greater China.

The Fund's investment activities are managed by Pacific Alliance Real Estate Limited ("PARE" or the "Investment Manager"). The Fund appointed Sanne Fiduciary Services Limited to act as the custodian of certain assets of the Fund, and as the administrator and registrar pursuant to the Administration Custodian and Registrar Agreement.

The consolidated financial statements were approved by the Board of Directors on 23 April 2015.

2 Summary of significant accounting policies

The following significant accounting policies are in conformity with accounting principles generally accepted in the United States of America ("US GAAP"). The Fund applies the provisions of Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("ASC") 946-10, Financial Services - Investment Companies (the "Guide"). The Fund is an investment company under the Guide. Such policies are consistently followed by the Fund in the preparation of its consolidated financial statements.

(a) Principles of consolidation

These consolidated financial statements include the financial statements of the Fund. Subsidiaries are fully consolidated from the date on which control is transferred to the Fund and deconsolidated from the date that control ceases. Inter-company transactions between group companies are eliminated upon consolidation.

The Fund uses wholly and partially owned special purpose vehicles ("SPVs") to hold and transact in certain investments. The Fund's policy is to consolidate, as appropriate, those SPVs in which the Fund has control over significant operating, financial or investing decisions of the entity.

Except when an operating company provides services to the Fund, investment in an operating company is carried at fair value (refer to Note 2(c) below for fair value measurement).

(b) Use of estimates

The preparation of consolidated financial statements in conformity with US GAAP requires the Fund's management to make estimates and assumptions that affect the reported value of assets and liabilities and disclosures of contingent assets and liabilities as at 31 December 2014 and the reported amounts of income and expenses for the year then ended. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 2(l).

(c) Investments

The Fund holds both listed securities and unlisted securities, which by nature have limited marketability. The Fund also engages in secured lending transactions consisting of repurchase agreements and other secured borrowings.

(i) Recognition and derecognition

Regular purchase and sale of investments are accounted for on the trade date, the date the trade is executed. Costs used in determining realized gains and losses on the disposal of investments are based on the specific identification method for unlisted or unquoted investments. Cost includes legal and due diligence fees associated with the acquisition of investments.

Transfer of investments is accounted for as a sale when the Fund has relinquished control over the transferred assets. Any realized gains and losses from investments are recognized in the consolidated statement of operations.

(ii) Fair value measurement

The Fund is an investment company under the Guide. As a result, the Fund records and re-measures its investments on the consolidated statement of assets and liabilities at fair value, with unrealized gains and losses resulting from changes in fair value recognized in the consolidated statement of operations.

Fair value is the amount that would be received to dispose of the investments in an orderly transaction between market participants at the measurement date, i.e. the exit price. Fair value of investments is determined by the Valuation Committee of the Fund, which is established by the Investment Manager and the Board of Directors.

Investments in securities traded on a recognized exchange are value at the traded price on the exchange in which such security was traded on the last business day of the period.

The fair values of unlisted or unquoted securities are based on the Fund's valuation models, including earnings multiples (based on the budgeted earnings or historical earnings of the issuer and earnings multiples of comparable listed companies) and discounted cash flows. The Valuation Committee also considers the relevant developments since acquisition of the investments, the original transaction price, recent transactions in the same or similar instruments, completed third-party transactions in comparable instruments, reliable indicative offers from potential buyers and rights in connection with realization. Judgement is used to adjust valuation as necessary for factors such as non-maintainable earnings, tax risk, growth stage, and cash traps. Cross-checks of primary techniques are made against other secondary valuation techniques.

The Fund's secured loan transactions are recorded at fair value, which is determined based on discounted cash flow analyses. Those analyses consider the position size, liquidity, current financial condition of the borrowers, the third-party financing environment, reinvestment rates, recovery lags, discount rates, and default forecasts.

In determining fair valuation of certain unlisted securities, the Valuation Committee uses as reference valuations made by independent valuers which rely on the financial data of investees and on estimates made by the management of the investee companies as to the effect of future developments. The independent valuers also assist in the selection of valuation techniques and models. Loans receivable are recorded at fair value in accordance with the guidance set forth in Note 4, and the valuation techniques applied usually takes into account the estimated future cash flows, liquidity, credit, market and interest rate factors. However, there are inherent limitations in any valuation technique due to the lack of observable inputs.

The Fund buys exchange-traded and OTC put and call options. The buyer of an option has the right to purchase (in the case of a call option) or sell (in the case of a put option) a specified quantity of a specific financial instrument at a specified price prior to or on a specified expiration date. The maximum loss exposure of a buy put and call option is the premium paid by the buyer.

Estimated fair value may differ significantly from the value that would have been used had a readily available market for such investments existed and these differences could be material to the financial statements. Additional information about the level of market observability associated with investments carried at fair value is disclosed in Note 4.

(d) Other receivables and payables

Other receivables and payables are initially measured at fair value and subsequently measured at amortized cost.

(e) Cash and cash equivalents

Cash represents cash at banks and does not include restricted cash such as fixed deposits pledged as security for the bank loans. Cash equivalents are defined as short-term, highly liquid investments which mature within three months or less of the date of purchase.

(f) Restricted cash

The Fund classifies cash that is restricted for specific purposes and is unavailable for general use as restricted cash.

(g) Bank loans

Bank loans are initially recognized at fair value, net of transaction costs incurred and subsequently stated at amortized cost. Any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the consolidated statement of operations over the period of the borrowing using the effective interest method.

(h) Share capital

Ordinary shares are classified as equity. Where the Fund purchases the Company's equity share capital, the consideration paid is deducted from equity until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received is included in equity.

(i) Foreign currency translation

The books and records of the Fund are maintained in United States Dollars ("US$"), which is also the functional currency. Assets and liabilities, both monetary and non-monetary, denominated in foreign currencies are translated into US$ by using prevailing exchange rates as at financial reporting date, while income and expenses are translated at the exchange rates in effect during the year.

Gains and losses attributed to changes in the value of foreign currencies for investments, cash balances and other assets and liabilities are reported as foreign exchange gain and loss in the consolidated statement of operations.

(j) Taxation

The Fund may be subject to taxes imposed in jurisdictions in which it invests and operates. Such taxes are generally based on income and gains earned. Taxes are accrued on investment income, realized gains, and unrealized gains, as appropriate, when the income and gains are earned. The Fund accrues for liabilities relating to uncertain tax positions only when such liabilities are probable and can be reasonably estimated in accordance with the authoritative guidance contained in ASC 740 Income Taxes described in Note 6.

The Fund files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Fund uses the asset and liability method to provide income taxes on all transactions recorded in the consolidated financial statements. This method requires that income taxes reflect the expected future tax consequences of temporary differences between carrying amounts of assets or liabilities for book and tax purposes. Accordingly, a deferred tax asset or liability for each temporary difference is determined based on the tax rates that the Fund expects to be in effect when the underlying items of income and expense are realized.

(k) Recognition of income and expenses

Interest income on bank balances is accrued as earned using the effective interest method.

Dividend income is recognized on the ex-dividend date and is recorded net of withholding taxes where applicable.

Consulting income is recognized in accounting period in which the services are rendered.

Expenses are recorded on an accrual basis. Provision of deferred expenses is made as if the investments are liquidated and realized at value stated as the year-end.

(l) Critical accounting estimates and assumptions

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.

(i) Fair value of investments

The fair value of unlisted or unquoted securities and loans receivable is determined by using valuation techniques. Judgement is used to select a variety of methods and make assumptions that are mainly based on market conditions existing at the end of each reporting period.

Although best judgment is used in estimating fair value, there are inherent limitations in any valuation technique. Estimated fair value may differ significantly from the value that would have been used had a readily available market for such investments existed and these differences could be material to the consolidated statement of assets, liabilities and partners' capital. Additional information about the level of market observability associated with investments carried at fair value is disclosed in Note 4 below.

(ii) Taxation

The Fund may be subject to income taxes in jurisdictions it invests and operates. Significant judgement is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Fund recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made.

3 Concentration of risks

(a) Market risk

Market risk represents the potential loss in value of financial instruments caused by movements in market variables, such as equity prices.

Investments are made with a focus on the Greater China. Political or economic conditions and the possible imposition of adverse laws or currency exchange restrictions in that region could cause the Fund's investments and the respective markets to become less liquid and also the prices to become more volatile.

The Fund's investments may have concentration in a particular industry or sector and performance of that particular industry or sector may have a significant impact on the Fund. The Fund's concentration of investments in a particular industry or sector is presented on the consolidated condensed schedule of investments.

The Fund's investments may also be subject to the risk associated with investing in private equity securities. Investments in private equity securities may be illiquid and subject to various restrictions on resale and there can be no assurance that the Fund will be able to realize the value of such investments in a timely manner.

Please refer to Note 4 below for a discussion on the inputs in fair value measurement of the Fund's investments.

(b) Interest rate risk

Interest rate risk arises from the fluctuations in the prevailing levels of market interest rates which affect the fair value of financial assets and liabilities and future cash flows. The Fund has bank deposits, restricted cash, loans receivable and bank loans that expose the Fund to interest rate risk. The Fund has direct exposure to interest rate changes in respect of the valuation and cash flows of its interest bearing assets and liabilities.

(c) Currency risk

The Fund has assets and liabilities denominated in currencies other than the US$, the functional currency. The Fund is therefore exposed to currency risk as the value of assets and liabilities denominated in other currencies may fluctuate due to changes in exchange rates. The Fund has the following net currency exposures:

(d) Credit risk

The Fund is exposed to default risk by the counterparties of the loans receivable. Whilst the loans receivable are structured to provide the Fund with adequate collateral in the event of default, enforcement may be subject to the legal system of the countries where the relevant agreements are entered. Even when a contract is enforced, the collateral may not be sufficient to fully compensate the Fund for default losses. In an attempt to mitigate the losses, the Fund, where possible, obtains independent valuations of the collateral on a regular basis and monitors the fair value of collateral relative to the loan amounts plus accrued interest and where necessary, requires additional cash or collateral from the borrower to manage its exposure. However, these valuations do not guarantee the ultimate realizable value of the collateral.

The legal system of the countries in which the Fund invests vary widely in their development, degree of sophistication, attitude, and policies towards bankruptcy, insolvency, liquidation, receivership, default and treatment of creditors and debtors. Furthermore, the effectiveness of the judicial system of the countries in which the Fund invests varies, thus the Fund (or any entity in which the Fund holds a direct or secondary interest) may have difficulty in successfully pursuing claims in the courts of such countries. To the extent that the Fund or an entity in which the Fund holds a direct or secondary interest has obtained a judgement but is required to seek its enforcement in the courts of the countries in which the Fund invests, there can be no assurance that the court will enforce such judgement.

As at 31 December 2014, investments in loans receivable and bonds of US$6,145,759 (2013: US$24,137,547) were borrowed/issued by counterparties which are currently unrated by any rating agency. The Fund managed credit risk through reviewing loan repayment and collateral values of loans on an on-going basis.

(e) Liquidity risk

The Fund is exposed to liquidity risk as the majority of the investments of the Fund are illiquid while some of the Fund's liabilities are with short maturity. Details of the maturity analysis on loans receivable are set out in Note 4 below. Illiquid investments include any securities or instruments which are not actively traded on any major securities market or for which no established secondary market exists where the investments can be readily converted into cash. Reduced liquidity resulting from the absence of an established secondary market may have an adverse effect on the prices of the Fund's investments and the Fund's ability to dispose of them when necessary to meet liquidity requirements. The liquidity risk and the liability level of the Fund are closely monitored by the Investment Manager.

China currently has foreign exchange restrictions, especially in relation to the repatriation of foreign funds. Any unexpected foreign exchange control in China may cause difficulties in the repatriation of funds. The Fund invests in China and is therefore exposed to the risk of repatriating funds out of China on a timely basis to meet its obligations. Please refer its Note 3(c) above for the Fund's exposure to Renminbi.

The Fund has the ability to borrow in the short term but subject to certain limitations, including the total amount of all borrowings outstanding at any time shall not exceed 50% of the Fund's total assets at such time. The Fund has no outstanding borrowings as at 31 December 2014.

The Company is closed-end and, thus, not exposed to redemptions of shares by its shareholders.

4 Investments

The Fund discloses the fair value of its investment in a hierarchy that prioritizes the inputs to valuation techniques used to measure the fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). Three levels of the fair value hierarchy are as follows:

Level 1

Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access at the measurement date.

Level 2

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not considered to be active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3

Unobservable inputs based on the best information available in the circumstances, to the extent observable inputs are not available (including the Fund's own assumptions used in determining the fair value of investments).

Inputs to measure fair values broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics and other factors. An asset or a liability's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes "observable" requires significant judgment. The Valuation Committee considers observable data to be such market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary and provided by multiple, independent sources that are actively involved in the relevant market. The categorization of an asset or a liability within the hierarchy is based upon the pricing transparency of the asset or liability and does not necessarily correspond to the Valuation Committee's perceived risk of that asset or liability.

In determining an instrument's placement within the hierarchy, the Valuation Committee follows the following:

Level 1

Investments in listed stocks and derivatives that are valued using quoted prices in active markets and are therefore classified within Level 1 of the fair value hierarchy.

Level 2

Investments in illiquid listed stocks are valued using the last traded prices of the listed stocks after factoring in discounts for liquidity. Such investments are generally classified within Level 2 of the fair value hierarchy.

Level 3

Assets are classified within Level 3 of the fair value hierarchy if they are traded infrequently and therefore have little or no price transparency. Such assets include investments in unlisted stocks, bonds, derivatives and loans receivable. Investments classified within Level 3 have significant unobservable inputs, as they trade infrequently or not at all. When observable prices are not available for these securities, the Valuation Committee uses one or more valuation techniques (e.g., the market approach or the income approach) for which sufficient and reliable data is available. Within Level 3, the use of the market approach generally consists of using comparable market transactions, while the income approach generally consists of the net present value of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors.

The inputs used by the Valuation Committee in estimating the value of Level 3 investments include the original transaction price, recent transactions in the same or similar instruments, completed or pending third-party transactions in the underlying investment or comparable issuers, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt capital markets, and changes in financial ratios or cash flows. Valuation of Level 3 investments may also be adjusted to reflect illiquidity and/or non-transferability with the amount of such discount estimated by the Valuation Committee in the absence of market information.

The following table summarizes quantitative information about the valuation techniques and the significant unobservable inputs used for Level 3 investments:

2014

2013

Note 1 The significant unobservable inputs used in the fair value measurement included the average monthly rent and capitalization rate of the underlying properties.

Note 2 Market comparables included average sales price of properties and land as well as P/E multiples of comparable companies or recent transaction of investee.

Note 3 The valuation is determined by considering the value of the loan's collateral, which is real estate property. The significant unobservable inputs used in the fair value measurement include sales price per square meter of those real estate properties directly or indirectly held by investees.

Note 4 The valuation of other debt instruments is based on the expected proceeds as at 31 December 2013, which was subsequently settled on 6 January 2014.

Note 5 The significant unobservable inputs used in the option pricing model include the volatility of the underlying asset of the option.

The following table summarizes the fair value of all instruments within the fair value hierarchy:

As at 31 December 2014, investments of US$279,934,635 (2013: US$298,124,407) were held directly by the Fund and investments of US$6,145,759 (2013: US$7,906,603) were held through jointly owned entities with Pacific Alliance Asia Opportunity Fund L.P.

During the year ended 31 December 2014, one investment in unlisted equity has been transferred out from Level 3 to Level 2 as a result of listing of securities which subject to a lockup period of 12 months since 23 December 2014.

The following table summarizes the movements in fair value of the Fund's Level 3 instruments.

Total net change in unrealized gain on Level 3 instruments as shown above are presented in the consolidated statement of operations.

The Fund had a secured loan receivable carried at US$6,145,759 (2013: US$7,235,644). The borrower will transfer the title deed of three residential units to the investor consortium as payment-in-kind, in which the Fund is entitled to 30% of the value of these three residential units.

For the year ended 31 December 2014, net realized gain and change in unrealized gain/(loss) recognized for the loans receivable amounted to US$ Nil (2013: US$ Nil) and US$(1,089,885) (2013: US$(196,700)) respectively.

As at 31 December 2014, the Fund had a debt investment of US$ Nil (2013: US$16,901,903). The Fund held collateral in the form of assets of the borrower and its subsidiaries. The fair value of the investment is determined by the Valuation Committee. In January 2014, the investment was fully realised resulting in a net realized gain/ (loss) and change in unrealized gain/ (loss) on the debt instrument amounted to US$16,901,903 (2013: US$4,680,092) and US$(16,901,903) (2013: US$8,260,636), respectively.

As at 31 December 2014, the Fund held a call option that was not exercised before the expired date due to the share price of investment being close to exercise price. During the year ended 31 December 2014, the Fund's recognized change in unrealized gain/(loss) of the option amounted to US$(670,959) (2013: US$524,294)

5 Share capital, share premium, capital surplus and tendered shares

As at 31 December 2014, the total number of authorized ordinary shares was 10,000,000,000 (2013: 10,000,000,000) with par value of US$0.01 (2013: US$0.01) per share. The Company had 189,833,893 (2013: 189,833,893) ordinary shares in issue, of which 76,331,127 (2013: 60,045,945) were held as tendered shares.

Movement of tendered shares is as follows:

In August 2014 and November 2014, the Company repurchased 11,363,636 shares and 5,617,977 shares at US$1.76 and US$1.78 per share respectively from the AIM market. In May 2014, the Company reissued 696,431 tendered shares at US$ 2.2856 per share (net asset value per share as at 30 April 2014) to a wholly owned subsidiary of the Investment Manager to settle its obligation in respect of the share portion of the 2013 performance fees. See Note 7 below for details.

6 Taxation

The Fund adopted the authoritative guidance contained in FASB ASC 740 on accounting for and disclosure of uncertainty in tax positions, which required the directors to determine whether a tax position of the Fund is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant taxing authority.

The uncertain tax positions identified by the directors mainly include:

(a) Whether any of the Fund and its offshore SPVs would be deemed as a China Tax Resident Enterprise ("TRE") under the China Corporate Income Tax ("CIT") Law. If an offshore entity is deemed as a China TRE, its income would be subject to China CIT at 25%.

(b) Whether any of the Fund and its offshore SPVs that may derive income would be deemed as having an establishment or place in China. If an offshore entity has an establishment or place in China, income derived by the offshore entity that is derived from China by the establishment or place or income that is effectively connected to the establishment or place would be subject to China CIT at 25%.

(c) Whether any of the Fund and its offshore SPVs is subject to Hong Kong profits tax. An entity would be subject to Hong Kong profits tax if (i) the entity carries on a trade, profession or business in Hong Kong; (ii) profits are derived from that trade, profession or business carried on in Hong Kong (excluding gains of a capital nature); and (iii) the profits arise in or are derived from Hong Kong, i.e. have a Hong Kong source.

The Investment Manager has assessed that the Fund and its offshore SPVs are not TREs in China and do not have any establishment or place of business in China. Gains from the disposal of investments in China by the Fund or its SPVs may be subject to China withholding tax at 10% without considering the potential relief that may be available under any tax treaty between the tax jurisdiction of the transferor and China. In addition, where Chinese equity investments are held via an offshore intermediate holding company, exit of the Chinese equity investment disposal of shares in the offshore intermediate holding company could be regarded as an indirect transfer of the Chinese equity investment. According to the General Anti Avoidance Rules under the China CIT Law, if an investment holding structure and investment exit via indirect transfer do not have a reasonable commercial purpose, the Chinese tax authority is empowered to disregard such arrangement and impose withholding tax on the gains from such an indirect transfer. The directors have reviewed the structure of the investment portfolio and assessed the potential withholding tax implications and considered adequate provision to China tax has been made on the Fund's financial statements.

As at 31 December 2014, the Investment Manager has analyzed the open tax years of all jurisdictions subject to tax examination and had the provision for current tax, deferred tax and uncertain tax amounted to US$Nil (2013: US$1,992,245), US$52,187,005 (2013: US$45,918,700) and US$6,960,071 (2013: US$6,909,089) respectively. The Investment Manager has reviewed the structure of the investment portfolio and assessed the potential withholding tax implications and considered adequate provision to China tax has been made on the Fund's consolidated financial statements.

However, given the uncertainty of China tax, the Investment Manager would like to highlight that there is a possibility that some or all of the tax provided as at 31 December 2014 will not be payable and may be released. The Investment Manager is regularly monitoring the position.

The Investment Manager has reviewed the structure of the Fund's investment portfolio and considered the Fund's exposure to countries in which it invests to be properly reflected in the Fund's consolidated financial statements.

Under current Cayman Islands legislation applicable to an exempted company, there is no income tax, capital gains or withholding tax, estate duty, or inheritance tax payable by the Fund in the Cayman Islands.

7 Management fees and performance fees

Pursuant to the Investment Management Agreement dated 20 November 2007, the Investment Manager was appointed to manage the investments of the Fund. The Investment Manager will receive an aggregate management fee of 2% per annum of the quarterly Net Asset Value ("NAV"). The management fee is paid quarterly in advance based on the NAV at the first day of each fiscal quarter. For the year ended 31 December 2014, total management fees amounted to US$5,851,236 (2013: US$ US$6,126,735). There was no management fee payable as at 31 December 2013 and 2014.

The Investment Manager is also entitled to receive performance fees from the Fund in the event that the year-end NAV is greater than the higher of (a) the year-end NAV for the last year in which a performance fee was payable ("High Water Mark"); and (b) the NAV on Admission increased by a non-compound annual hurdle rate of 8% ("Hurdle").

The performance fees will be calculated as follows:

· 0% of the relevant increase in the year-end NAV if the year-end NAV is at or below the Hurdle;

· 100% of the relevant increase in the year-end NAV above the Hurdle up to a non-compound annual rate of 10% (the "Catch-up"); and

· 20% of the relevant increase in the year-end NAV above the Catch-up.

For the year ended 31 December 2014, total performance fees amounted to US$1,016,628 (2013: US$6,367,049). As at 31 December 2014, performance fees payable amounted to US$1,016,628 (2013: US$6,367,049).

Under the Investment Management Agreement, the performance fees earned by the Investment Manager shall be paid 75% in cash and 25% in the Company's ordinary shares ("share portion"). The Company may elect to meet its share obligation either by issuing new shares at NAV or purchasing the equivalent number of shares in the market.

During the year ended 31 December 2014, the Investment Manager agreed to receive 696,431 tendered shares valued at US$ 2.2856 per share, the Fund's NAV per share as at 30 April 2014, from the Fund to settle its obligation in respect of the share portion of the 2013 performance fees of US$1,591,762.

During the year ended 31 December 2013, the Investment Manager agreed to receive 530,514 tendered shares valued at US$ 2.2936 per share, the Fund's NAV per share as at 30 April 2013, from the Fund to settle its obligation in respect of the share portion of the 2012 performance fees of US$1,216,787.

8 Investment agency fees

During the year ended 31 December 2011, to facilitate the disposal of Project Malls, the Fund entered into a consulting agreement with an unrelated third party (the "Consultant"). Under the agreement, the Fund is obligated to pay an investment agency fee to the Consultant based on a percentage of the net realized gain of the investment earned by the Fund upon realization.

For the year ended 31 December 2014, certain expenses relating to realization of investments were netted in the proceeds received. As a result, the Partnership reversed investment agency fees of US$137,935. For the year ended 31 December 2013, investment agency fee of US$244,552 was incurred based on the realized and unrealized gain on the investment net of certain expenses and tax attributable to the investment.

9 Related party transactions

Apart from the related party transactions disclosed in Note 7, the Fund also had the following significant related-party transactions.

(a) Restructuring with PACL II Limited

On 2 March 2009, the Company held an extraordinary general meeting to approve a tender offer that allowed shareholders to exchange all or part of their shares for shares in PACL II Limited ("PACL II"), a Cayman Islands private vehicle that will be used to realize and distribute cash from exited investments based on the investment and asset positions held by the Fund as at 31 December 2008 ("Tender Offer Portfolio"). PACL II is also managed by the Investment Manager. It will, without any further action on the part of its shareholders, automatically wind up and dissolve in 3 years upon when its ordinary shares were first issued. On 5 January 2012, the duration of PACL II was extended by 1 year to 2 March 2013 upon the written election by the Investment Manager. On 28 February 2013, the duration of PACL II was further extended by 2 years to 4 March 2015 upon the written election by the Investment Manager and a major of the shareholders. On 30 January 2015, the Investment Manager made an election to extend the duration of PACL II by 1 year to 4 March 2016.

As part of this restructuring, the Company repurchased 180,166,107 shares at a tender price of US$1.01 per share in exchange for holders of these shares receiving the same number of shares in PACL II.

Under the terms of the tender offer, PACL II is entitled to receive 50.33% of the proceeds from the Tender Offer Portfolio, which reflects a 5% discount of its proportionate share of the Tender Offer Portfolio. As such, the amount due to PACL II is recorded as a payable by the Fund, adjusted at each period end based on the movement in the fair value of the underlying assets and the income and expense attributable to the Tender Offer Portfolio. The amount is unsecured, non-interest bearing. The following table summarizes the movements in payable to PACL II.

(b) Directors' remuneration

The Company pays each of its directors an annual fee of US$30,000 (2013: US$30,000). If a director is a member of the Valuation Committee or Audit Committee, the director also receives an additional annual fee of US$10,000, and the Chairman of either Committee receives an additional annual fee of US$5,000. During the year 2014, Jon-Paul Toppino agreed to waive his directors' fees and committee fees.

(c) Share capital held by funds managed by fellow subsidiaries of the Investment Manager

In November 2014, Pacific Alliance Asia Opportunity Fund L.P. ("PAX LP"), an open-end fund organized in the Cayman Islands, purchased 5,037,298 (2013: 1,678,634) ordinary shares of the Company, increasing PAX LP's interest to 13.5%. As at 31 December 2014, PAX LP held 15,323,217 (2013: 10,285,919) shares of the Company, representing 13.5% (2013: 7.9%) of total outstanding shares of the Company.

During the year ended 31 December 2014, Pacific Alliance Asia Special Situations Fund L.P. ("PASS"), a closed-end fund incorporated in the Cayman Islands purchased nil (2013: Nil) and sold 6,879,629 (2013: 300,000) ordinary shares of the Company in January 2014. As at 31 December 2014, PASS did not hold any shares of the Company. As at 31 December 2013, PASS held 6,879,629 shares of the Company, representing 5.3% of total outstanding shares of the Company.

PAX LP and PASS are managed by fellow subsidiaries of the Investment Manager.

10 Financial highlights

Net asset value per share at the end of the year is as follows:

The following represents the ratios to average net assets and other supplemental information:

(1) Total return represents the change in NAV (before and after performance fees), adjusted for cash flows in relation to capital transactions for the year.

(2) Average net assets is derived from the beginning and ending NAV, adjusted for cash flows in relation to capital transactions for the year. For the year ended 31 December 2014, the average net assets amounted to US$293,492,626 (2013: US$306,547,213).

11 Commitment and contingency

In the normal course of business, the Fund may enter into arrangements that contain a variety of representations and warranties that provide general indemnification under certain circumstances. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund and which have not yet occurred. However, based on experience, the directors expect the risk of loss to be remote, and, therefore, no provision has been recorded.

12 Subsequent events

Management has performed a subsequent events review from 1 January 2015 through to 23 April 2015 being the date that the financial statements were available to be issued.

(a) Cancellation of treasury shares and repurchase of ordinary shares

On 11 February 2015, 76,331,127 tendered shares were cancelled for no consideration, upon surrender by PACL Trading Limited, a wholly-owned subsidiary of the Company. 

On 13 February 2015, a further 9,615,382 of the Company's ordinary shares were repurchased and cancelled for a consideration of US$25,000,000. Following these cancellations, the Company no longer holds any shares in treasury and has 103,887,384 ordinary shares issued and outstanding.

(b) Payment of 2014 performance fee

In February 2015, the cash portion of the 2014 performance fee payable in the amount of US$762,471 was fully paid.