PACL.L Regulatory News (PACL)

19 April 2016

Pacific Alliance China Land Limited

Full year results for the period ended 31 December 2015

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 2015.

Highlights

· Net asset value as at 31 December 2015 was US$234.80 million, representing US$2.2601 per share, a 13.6% decrease from 30 June 2015 (US$2.6163 per share) and a 13.1% decrease year-on-year (31 December 2014; US$2.6017 per share).

· The Company's share price closed at US$1.925, a 6.2% increase year-on-year and a 14.8% 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

· The Company repurchased US$25 million of PACL's ordinary shares in 2015 pursuant to the Share Purchase programs announced in February 2015.

Portfolio and Fund Developments

· Project Malls: The Company has successfully completed the listing and auction process with the Shanghai United Asset and Equity Exchange in September 2015 to sell its minority stake in Shanghai Land with gross cash sale proceeds of RMB105 million. The Company also completed the listing and auction process for the Walmart shares, with gross cash proceeds of approximately RMB248 million.

· Project Diplomat: The Company has successfully executed a binding Sale and Purchase Agreement in December 2015 to sell its 40% stake in Project Diplomat. The Company is expected to receive gross RMB cash proceeds equal to US$100.8 million in 2016.

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

"Thanks to government stimulus measures, property sales and prices improved across the board in the second half of 2015 despite China recording its slowest GDP growth in six years. The company successfully made progress in realizing the portfolios of Project Malls and Project Diplomat and is on track to return the proceeds to our investors. Looking forward to 2016, we believe that we will continue to benefit from improving market sentiment in the China property sector." 

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 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 managed by a member of PAG, the Asian alternative investment fund management group. PAG is one of the region's largest Asia-focused alternative investment managers, with funds under management across private equity, real estate and absolute return strategies. Founded in 2002, PAG currently has US$15 billion in assets under management, with 380 staff across offices in Hong Kong, Shanghai, Tokyo, Beijing, Sydney, Singapore and Seoul.

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

Chairperson's Statement

As of 31 December 2015, Pacific Alliance China Land Limited (the "Company" or "PACL") reported a net asset value (NAV) of US$234.8 million or US$2.2601 per share. This represented a 13.1% decrease on a per share basis year-on-year, and the Company's share price increased 6.2% year on year.

China's 2015 full year GDP growth came in at 6.9%, slightly under the official target of seven percent. This marked the country's slowest rate of expansion since 2009, largely due to slowing momentum in the manufacturing, investment and export sectors. To stabilize the economy and boost growth, the Chinese government implemented a series of accommodative monetary and fiscal policies, as well as property stimulus measures. These government efforts included cuts in bank lending rates and a reduction in certain banks' deposit-reserve requirement ratios; easier access to housing loans; reduction of minimum down-payment requirements for both first- and second-time home buyers; loosening restrictions for second home purchases; promoting the urbanization of migrants and rural farmers; and switching to a two-child policy. As a result, the second half of 2015 saw property sales and prices improve across the country, particularly in tier-one and tier-two cities. It is widely expected that further government monetary and fiscal policy easing and more housing stimulus measures will be seen in 2016. We believe that the property market should benefit from these stimulus measures, making a gradual recovery and hopefully achieving steady growth in 2016.

Thanks to improving market sentiment in the second half of 2015, the Company successfully completed the listing and auction process for the sale of the remaining assets of Project Malls (Shanghai Land and Walmart shares) in Q4 2015. In addition, the Company also successfully executed a binding Sale and Purchase Agreement for the realization of its investment in Project Diplomat on 31 December 2015.

The Board of Directors would like to thank you for your continued commitment and support in 2015. Our investment strategy has delivered compound annual NAV growth of 10.61% since the Company's inception in November 2007. As we continue to realize 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 2015, the Company's share price closed at US$1.925, a 6.2% increase year-on-year and a 14.8% 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 2015, the Company held cash of US$56.3 million and investments with a cost of approximately US$46.8 million and fair value of US$222.9 million. The Company's portfolio is diversified across four strategies including Unlisted Stock, Platform Investment, Asset Acquisition and Derivatives.

Note

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

(2) Of the total cash of US$56.34 million, US$53 million of which is held as RMB in PRC banks.

Realization 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, realize the portfolio in an orderly manner and return proceeds to investors. 

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 ("Walmart JV") and a minority stake in a large parcel of residential land near the Shanghai Disneyland development ("Shanghai Land").

The Company has successfully completed the listing and auction process with the Shanghai United Asset and Equity Exchange in September 2015 to sell its minority stake in a large parcel of land in Shanghai ("Project Malls - Shanghai Land") which is near to the future Disneyland location. The Company has already received gross cash sale proceeds of RMB105 million (equivalent to US$16.4 million). The realization proceeds of the Shanghai Land exit will be repatriated and distributed to shareholders after the realization of the Walmart Shares.

The Company also completed the listing and auction process for the remaining asset of Project Malls ("Project Malls - Walmart shares") and signed an agreement with Walmart China Holdings through its JV partner, China Resources in November 2015. It is expected to receive gross cash proceeds of approximately RMB248 million (equivalent to US$ 38.9 million). The sale proceeds will be repatriated through a dividend distribution and return of share capital, pending statutory audit and tax clearance which takes approximately six to twelve months to be finalized.

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. Its value at 31 December 2015 was US$99.55 million.

The Company has successfully executed a binding Sale and Purchase Agreement in December 2015 for the realization of its investment in Project Diplomat. The Company has agreed to sell its 40% in Project Diplomat, together with its co-investor, to a local fund managed by CITIC Private Equity Fund Management Co., Ltd., one of the top private equity firms in China. The Company is expected to receive gross RMB cash proceeds equal to US$100.8 million in the first quarter of 2016.

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 listed 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 35% and 18% per annum respectively over the past five years.

Wanda has a plan to raise up to RMB 12 billion (equivalent USD 1.9 billion) within the year 2016 in an offering of shares in China. According to a statement that Wanda made to the Hong Kong Stock Exchange, Wanda expects to sell up to 250 million RMB denominated A-shares, which would then be listed in Shanghai Stock Exchange. This should provide an exit opportunity for PACL's domestic shares in Wanda subject to certain lock-up provisions.

Project Beijing Olympic

The Company recorded a full write-down of Beijing Olympic in Q4 2015 after a third party valuer's determination that any recovery from a title transfer of apartment units was highly unlikely due to a lack of cooperation from the counterparty.

Conclusion

In 2016, 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 favorable government policy. The Investment Manager will focus on repatriating cash from its 2015 exits and look to make distributions as soon as possible. The Investment Manager will also focus on making an optimal exit of its last remaining asset Project Auspice (domestic shares of Dalian Wanda).

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

AS AT 31 DECEMBER 2015

Approved by the Board of Directors

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

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AS AT 31 DECEMBER 2015

Note

(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.

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED 31 DECEMBER 2015

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

FOR THE YEAR ENDED 31 DECEMBER 2015

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2015

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 6 and 8 for details.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2015

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 6.

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 15 April 2016.

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 2015 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(k).

(c) Investments

The Fund may hold both listed securities and unlisted securities, which by nature have limited marketability. The Fund also engages in secured lending transactions.

(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. Judgment 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 the fair value 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 take 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.

Currency options are valued by the Investment Manager using observable inputs, such as quotations received from the counterparty, dealers or brokers, whenever available and considered reliable.

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 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) 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.

(g) 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.

(h) 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 7.

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.

(i) 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.

(j) Critical accounting estimates and assumptions

Estimates and judgments 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.

(k) Critical accounting estimates and assumptions (Continued)

(i) Fair value of investments

The fair value of unlisted or unquoted securities and loans receivable is determined by using valuation techniques. Judgment 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 judgment 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 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, and loans receivable 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:

The Investment Manager manages the Fund's currency exposure through use of currency options.

(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 judgment 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 judgment.

As at 31 December 2015, investments in loans receivable and bonds of US$Nil (2014: US$6,145,759) were borrowed/issued by counterparties which are currently unrated by any rating agency.

(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 2015 and 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:

2015

2014

Note

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

(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.

(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.

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

As at 31 December 2015, investments of US$222,885,043 (2014: US$279,934,635) were held directly by the Fund and investments of US$Nil (2014: US$6,145,759) were held through jointly owned entities with Pacific Alliance Asia Opportunity Fund L.P. ("PAX LP"), an open-end fund organized in the Cayman Islands managed by fellow subsidiary of the Investment Manager.

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

Investments classified within Level 3 have significant unobservable inputs. Level 2 instruments in 2014 included Project Auspice.

As at 1 January 2014, the Fund's investment in Project Auspice was classified within Level 3 of the fair value hierarchy. The investment was reclassified from Level 3 to Level 2 of the fair value hierarchy during the year ended 31 December 2014 following the listing of the investee's common shares in Hong Kong. Following the listing, the fair value of this investment, which is in the unlisted domestic shares of the investee, was assessed by the Fund based on a marketability discount applied to the price of investee's common share listed in Hong Kong. The price of investee's common share listed in Hong Kong represents an observable input.

The marketability discount applied by the Fund within the valuation of this investment is considered to be an unobservable input, as disclosed in Note 4. Although there are no changes to the terms of the investment in Project Auspice, the Fund has reassessed the classification of this investment and concluded that it should be classified within Level 3 given the significance of this unobservable input. As such, during the year ended 31 December 2015, Project Auspice has been reclassified from Level 2 to Level 3. For the purpose of preparing the above reconciliation, these transfers are deemed to have occurred at the end of the reporting period.

Apart from as noted above in relation to Project Auspice there were no transfers between the different levels within the fair value hierarchy during the years ended 31 December 2015 and 2014.

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

As at 31 December 2015, the Fund had received part of the sales proceeds from its investment projects and had realized a net gain of US$10,442,185. The net change in unrealized loss on unlisted equity investments amounted to US$40,906,895 (2014: US$2,282,124).

The Fund wrote down the remaining value of the secured loan receivable to US$Nil (2014: US$6,145,759) due to the failure of the transfer of the title for three luxury apartments. There have been no other significant developments of the Fund's investment as of 31 December 2015.

5. Derivative instruments

The Fund transacts in derivative instruments including options with each instrument's primary risk exposure being equity, credit and foreign exchange. The Fund enters into currency options to hedge itself against foreign currency exchange rate risk for its foreign currency denominated assets and liabilities due to adverse foreign currency fluctuations against the US dollar.

The fair value of these derivative instruments is included within the investments line item with changes in fair value reflected as net realized gains/(losses) from investments or net change in unrealized gains/(losses) from investments within the consolidated statement of operations. The Fund does not designate derivatives as hedging instruments under FASB ASC 815.

The Partnership held Level 2 derivative contracts as follows:

The following table indicates the gains and losses on derivatives, by contract type, as included in the consolidated statement of operations.

The above gains/losses on derivatives are included in realized/change in unrealized gains from investments in the consolidated statement of operations.

6. Share capital, share premium, capital surplus and tendered shares

As at 31 December 2015, the total number of authorized ordinary shares was 10,000,000,000 (2014: 10,000,000,000) with par value of US$0.01 (2014: US$0.01) per share. The Company had 103,887,384 (2014: 189,833,893) ordinary shares, 85,946,509 of tendered shares were cancelled in February 2015.

Movement of tendered shares is as follows:

In February 2015 the Company repurchased 9,615,382 of the Company's ordinary shares and cancelled the 85,946,509 ordinary shares of the Company's capital that were held by its wholly-owned subsidiary, PACL Trading Limited, to replicate a treasury share facility. As the Company is now in realization mode, there was no longer a need for a treasury share facility and as such, the Treasury shares have been cancelled for no consideration.

7. Taxation

The Fund adopted the authoritative guidance contained in FASB ASC 740 on accounting for and disclosure of uncertainty in tax positions, which require 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 2015, the Investment Manager has analyzed the open tax years of all jurisdictions subject to tax examination and the provision for deferred tax and uncertain tax amounted to US$33,838,744 (2014: US$52,187,005) and US$9,297,416 (2014: US$6,960,071) respectively. The Investment Manager has reviewed the structure of the investment portfolio and assessed the potential withholding tax implications and considered adequate provision for 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 2015 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.

8. 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 2015, total management fees amounted to US$ 5,261,227 (2014: US$5,851,236). There was management fee payable of US$49,889 as at 31 December 2015 (2014: US$Nil).

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 2015, total (reversal of)/performance fees amounted to US$(45,927) (2014: US$1,016,628). As at 31 December 2015, performance fees payable amounted to US$Nil (2014: US$1,016,628).

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 2015, the Company purchased a total of 96,403 of company's ordinary shares, for a total of US$208,230 at a price per share of US$2.16 on 20 May 2015. The purchased shares were transferred to the Investment Manager for the settlement of 25% of performance fees payable incurred as at 31 December 2014 amounting to US$254,157 and a gain of US$45,927 is recognised as other gains for the year ended 31 December 2015 in the consolidated statement of operations.

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.

9. Investment agency fees

To facilitate the disposal of an investment, 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 2015, investment agency fees of US$2,040,470 (2014: US$137,935) were reversed based on the reduction of the unrealized gain on the investment net of certain expenses and tax attributable to the investment.

10. Related party transactions

Apart from the related party transactions disclosed in Note 8, 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 would 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 was due to, without any further action on the part of its shareholders, automatically wind up and dissolve 3 years after 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 of 31 December 2015, the amount due to PACL II is recorded as a receivable 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 amount due from/(to) to PACL II.

(b) Directors' remuneration

The Company pays each of its directors an annual fee and the total fees incurred amounts to US$30,000 (2014: 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 2015, 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

On 13 February 2015, PAX LP sold 1,298,106 (2014: purchase 5,037,298) ordinary shares of the Company as part of the Company's share repurchase transaction (see Note 6) which closed on the same date. PAX LP's interest in the Company remains unchanged at 13.5%. As at 31 December 2015, PAX LP held 14,025,111 (2014: 15,323,217) shares of the Company, representing 13.5% (2014: 13.5%) of total outstanding shares of the Company.

PAX LP is managed by a fellow subsidiary of the Investment Manager.

11. 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 2015, the average net assets amounted to US$261,922,782 (2014: US$293,492,626).

12. 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.

For the years ended 31 December 2014 and 2015, there is no unfunded commitment in investments.

13. Subsequent events

Management has performed a subsequent events review from 1 January 2016 through to 15 April 2016, being the date that the financial statements were available to be issued.

(a) Realization of Project Diplomat

The Fund announced that on 4 January 2016 it executed a binding Sale and Purchase Agreement for the realization of its investment in Project Diplomat. The Fund has agreed to sell its entire interest in Project Diplomat to an unrelated third party. The Fund is expected to receive gross RMB cash proceeds equal to US$100.8 million in the first half of 2016.