PACL.L Regulatory News (PACL)

24 April 2013

Pacific Alliance China Land Limited

Full year results for the period ended 31 December 2012

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 financial results to 31 December 2012.

Financial Highlights

·; Net asset value as at 31 December 2012 was US$297.7 million, representing US$2.25 per share, a 7% increase from 31 December 2011 (US$295 million, representing US$2.11 per share).

·; The Company's share price closed at US$1.58 on 31 December 2012. This represented a 23% increase year on year, and a 30% discount to the audited net asset value per share.

·; PACL's net asset value and share price have continued to consistently outperform major benchmark indices including the FTSE 350 Real Estate Index and the FTSE AIM All-Share index.

·; Since inception, the Company's net asset value per share has grown from US$1.00 to US$2.25 per share (as at 31 December 2012), equivalent to a compound annual growth rate of 17%.

Portfolio and Fund Developments

·; In the fourth quarter of 2012, the Company expanded the portfolio by investing in Project Crystal, a listed company with a quality portfolio of commercial properties comprising income-producing and development assets across China that was trading at a substantial discount to net asset value.

·; Project Diplomat, recognized as one of the most prestigious serviced apartment developments in Beijing, continued to deliver outstanding results with substantial increases in both net operating income and property value. The property achieved an average occupancy rate of 96.9% in 2012. The property's value increased 10.3% year-on-year from RMB1.697 billion to RMB1.871 billion driven by the strong growth in the property's net operating income.

·; Project Auspice, China's largest mixed-use developer, continued to achieve strong double-digit growth in revenue and profit with a number of shopping malls opened during the year. Since acquisition, the NAV of the project has increased by more than 3 times, driven by the investee company's solid growth in terms of revenue (CAGR of 30.3%), far outperforming its peers during the period. In the fourth quarter of 2012, the project posted a solid quarterly increase of 14.0% in NAV, as a result of the investee company's continued increase in revenue, and improving market conditions in the A-share listed comparables.

·; Since the restructuring of the exchangeable notes of Project Speed in 2011, the borrower began repaying the principal, with bi-monthly payments to continue until April 2014. To-date, the borrower has repaid to the consortium approximately 70% of the principal in a combination of USD and RMB.

Patrick Boot, Managing Director, Pacific Alliance Real Estate Limited, said the Company expects to see continuing growth in China's commercial property sector in the year ahead, as well as a potential slow return of demand in the residential sector as business conditions stabilize.

"Retail property continued to be the highest performing sector in China throughout 2012, driven largely by international retailers and foreign and domestic investors interested in well-designed and well-managed properties in prominent locations. The sheer volume of retail sales in many tier one and tier two cities is driving competition between new entrants and existing international retailers for quality store locations, and we expect this competition to intensify," he said.

"The office market is also continuing to experience significant growth, particularly in those cities with a more domestic-driven economy, as demand grows and supply remains low."

The Company will continue to focus on investments that exploit the positive trends in the commercial sector throughout 2013, and will closely monitor the residential property market for signs of growth and emerging opportunity to ensure it capitalizes on all opportunities to deliver solid returns to shareholders.

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

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$297.7 million as at 31 December 2012. 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 (formerly known as Pacific Alliance Group), the Asian alternative investment fund management group. Founded in 2002, PAG is now one of the region's largest Asia-focused alternative investment managers, with funds under management across Private Equity, Real Estate and Absolute Return strategies.

PAG has a presence across Asia with over 320 staff working in the region.

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

Chairperson's Statement

Pacific Alliance China Land Limited continued its growth momentum in 2012. The Company's net asset value ("NAV") as of 31 December 2012 was US$297.7 million, or US$2.2542 per share, which represents a year-on-year increase of 7% from 2011, and a compound annual growth rate of 17% since inception.

The Company's performance continues to benefit from growth strategies which focus on the retail and commercial property sectors. Growth in 2012 was driven by two strategic investments made in 2009 -- Project Diplomat and Project Auspice. Project Diplomat, recognized as one of the most prestigious serviced apartment developments in Beijing, continued to deliver outstanding results with substantial increases in both net operating income and property value. The property's high quality construction and operation, together with an effective and proactive sales and marketing campaign, has established the property as a leading brand within the capital's high-end serviced apartment segment. Project Auspice, China's largest mixed-use developer, continued to achieve strong double-digit growth in revenue and profit with a number of shopping malls opened during the year.

In the fourth quarter of 2012, the Company expanded the portfolio by investing in Project Crystal, a listed company with a quality portfolio of commercial properties comprising income-producing and development assets across China that was trading at a substantial discount to net asset value. This investment reinforces our focus on quality investment opportunities in the commercial, retail and leisure property sectors to fuel future NAV growth. These sectors continue to benefit from the government's favorable pro-consumption policy, fast-growing urbanization, rapidly rising income and wealth, and we expect growth to continue in the near term.

Market sentiment for China's residential property sector appears to have improved since the second half of 2012, as signaled by steadily rising home sales volumes. However, as the current government policy measures, notably purchase restrictions, are not expected to be lifted in the near term, the Investment Manager will continue to hold a cautious line on the residential property sector and continue to closely monitor any shift in market conditions.

The Board of Directors would like to thank you for your continued commitment and support in 2012. Our unique multi-strategy approach has enabled us to achieve capital protection and asset appreciation through the different phases of what have been challenging market cycles. The Board and management team remain committed to delivering attractive risk-adjusted returns to shareholders and will work hard towards delivering positive results in 2013.

Investment Manager's Report

Pacific Alliance China Land Limited continued its growth momentum in 2012. The Company's net asset value ("NAV") as of 31 December 2012 was US$297.7 million, or US$2.2542 per share, which represents a year-on-year increase of 7% from 2011, and a compound annual growth rate of 17% since inception.

On 31 December 2012, the Company's share price closed at US$1.58, a 23% 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 2012, the Company held cash of US$63 million and investments with a cost of approximately US$125 million and fair value of US$333 million. The Company's portfolio is diversified across six strategies including Listed Stock, Bridge Financing, Co-Development, Pre-IPO Financing, Platform Investment and Asset Acquisition.

Note

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

Investment Strategy

During the year, the Investment Manager has been actively exploring opportunities in the commercial property sectors, which continue to look attractive. In contrast, the residential sector continues to feel the effects of Chinese government cooling measures; however, the Investment Manager believes that demand for residential properties will ultimately be restored by China's steadily rising urbanization and growing average household income over the longer term and will continue to watch for emerging opportunities.

Over the past twelve months, the commercial property markets in first-tier cities continued to experience strong growth. The office market in cities with a more domestic driven economy outperformed others as a result of solid demand from domestic occupiers against a backdrop of low supply. Retail continued to be the best performing sector, largely due to international retailers, and foreign and domestic investor interest in well-designed and well-managed properties in prominent locations. The sheer volume of retail sales and the sustained growth rates have resulted in increasing competition between new entrants and existing international retailers for quality store locations in both first- and second-tier cities. As retail density in most cities in China remains low by Asia Pacific standards, the Investment Manager has a positive outlook on the continued and future growth of the retail property sector.

The Company continues to reap the benefits of a strategic shift in the portfolio in 2009 towards commercial property and reduced exposure to the residential market. With more than two thirds of the portfolio invested in retail, office and leisure property, the Company has substantially mitigated the policy risks that have been directed at the residential property sector in the last three years. Looking ahead, we will continue to focus on commercial property while deploying multiple strategies where opportunity exists.

Bridge Financing

Refinancing risk for larger and stronger developers is expected to be manageable in the near term. On the other hand, weaker developers who are still struggling to service their debt obligations continue to rely on asset disposals and alternative financing options as major sources of funding, and this continues to create opportunities for our bridge financing strategy. When evaluating potential investments, the Investment Manager will target borrowers that have both solid underlying real estate fundamentals and appropriate credit-worthiness with quality assets as collateral.

Co-Developments with Preferred Returns

With improved market sentiment, we have observed that large developers have continued to replenish their land banks, particularly in the mixed-use property sector. With our experience and track record we are well placed to evaluate and exploit attractive commercial development opportunities in the first-tier and major second-tier cities.

Growth Strategies

Value-Added Asset Acquisitions

The Investment Manager has been active in seeking investment opportunities in first-tier cities and has focused on existing or nearly completed retail/commercial properties that have substantial value-added and/or repositioning potential. The Investment Manager believes that good-quality and well-located properties with a unique value proposition will have strong growth potential and a high level of market liquidity, while the team's long-term relationships with key industry players allow us to source opportunities at deep discounts not available to the broader market.

Listed Debt/Equities

Despite the improved market conditions in the equity markets, many Chinese real estate development companies are trading at substantial discounts to their net asset value, which presents opportunities for pursuing investments in listed debt and/or equities. As we explore opportunities, we will not only focus on companies that own a high-quality property portfolio and a steady development pipeline but also focus on reputation, proven development track record and strong execution capability.

Platform and Pre-IPO Investments

Developers who had planned for IPOs may now be forced to consider strategic financing at a corporate and/or project level to secure additional funding. We expect this will present new platform opportunities. As with the listed debt/equities strategy, we will pursue opportunities with quality companies with good track records and high-quality land banks.

Shareholder Distribution

In 2012, PACL distributed a total of US$19.4 million to shareholders. The Company will continue its efforts to make further distributions after successful exits and cash repatriation.

Share Purchase Program

In November 2012, the Company announced a Share Purchase program as part of its effort to reduce the current discount between the share price and the net asset value per share. The Company has committed up to US$10 million to purchase its ordinary shares at market price.

Conclusion

While the market environment and fundamental business conditions appear to have stabilized since the second half of 2012, the current government policies are expected to remain unchanged, which means China's residential property market is likely to continue its slow recovery in 2013. The Investment Manager's multi-strategy approach has proven to be successful in enabling the portfolio to achieve healthy sustainable growth. Thus, the Investment Manager will continue with its multi-strategy approach and work hard to deliver positive growth in NAV and share price in 2013.

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

AS AT 31 DECEMBER 2012

Approved by the Board of Directors on 24 April 2013.

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

CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AS AT 31 DECEMBER 2012

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

(2) The principal above represents the principal calculated according to the Fund's accounting purpose, 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 2012

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 2012

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

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2012

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 9 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 2012

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 Alternative Investment Market ("AIM") 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 Trust Company 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 24 April 2013.

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"). 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 2012 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 8.

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 net assets of the Fund are denominated/ traded in the following currencies:

(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 2012, investments in loans receivable and bonds of US$45,973,656 (2011: US$58,764,780) 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. As at 31 December 2011, all bank loans are fully collateralized with restricted cash of US$43,330,560. During the year ended 31 December 2012, the Fund's bank loans were fully repaid and the restricted cash was released in February 2012.

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:

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 significant unobservable input used in the fair value measurement is the discount rate applicable for underlying issuer. A significant increase/(decrease) in the discount rate would result in a significantly lower /(higher) fair value measurement.

Note (4) 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 (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 2012, investments of US$286,619,383 (2011: US$253,438,035) were held directly by the Fund, investments of US$45,973,656 (2011: US$58,764,780) were held by an entity owned by Pacific Alliance Asia Opportunity Fund L.P. ("PAX L.P."), an investment fund managed by Pacific Alliance Investment Management Limited, an affiliate of the Investment Manager, through sub-participation agreement, and investments of US$146,665 (2011: US$258,900) were held through jointly owned entities with PAX L.P.

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 with an interest rate of 15% per annum from unaffiliated parties carried at US$7,432,344 (2011: US$9,807,034) with original maturity date in June 2012. During the year ended 31 December 2012, the maturity date of the borrowing was extended to October 2012. The Directors considered the collateral value at 31 December 2012 in assessing the fair value of the loan receivable as at 31 December 2012.

For the year ended 31 December 2012, net realized gain and change in unrealized gain recognized for the loans receivable amounted to US$Nil (2011: US$Nil) and US$(2,374,690) (2011: US$4,120,913), respectively.

As at 31 December 2012, the Fund had a debt investment of US$38,541,312 (2011: US$48,957,746) that will mature within the next 16 months (2011: 28 months). 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. For the year ended 31 December 2012, net realized gains and change in unrealized gain recognized on the debt instrument amounted to US$8,938,925 (2011: US$Nil) and US$(316,479) (2011: US$ Nil), respectively.

The Fund holds an OTC call option on equity securities. 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.

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 and net change in unrealized gains/(losses) from investments in the consolidated statement of operations. The Fund does not designate derivatives as hedging instruments under FASB ASC 815.

As at 31 December 2012, the Fund held a call option of US$146,665 (2011: US$258,900) with notional amount of US$ 2,961,490 (2011: US$2,982,975). During the year ended 31 December 2012, the Fund recognized change in unrealized gain of the option amounted to US$(112,235) (2011: US$258,900).

5. Bank loan and restricted cash

In order to finance the investment projects in different currencies, the Fund may from time to time enter into loan agreements with banks which are fully secured by deposits in currencies other than the denomination of the funds borrowed by the Fund. In the event that any loan amounts are due but not paid, the banks are entitled to foreclose the portion of restricted cash equal to the unpaid amount.

On 25 February 2011, the Fund borrowed a bank loan of US$38,121,000 ("the Loan") from a bank based in Hong Kong, due on 1 February 2012, to facilitate a cash distribution to PACL II which was subsequently distributed by PACL II to its shareholders. The interest charged on the Loan is LIBOR plus 2.5% per annum and the Loan was pledged with cash allocated from the realization proceeds of the Tender Offer Portfolio of US$43,330,560 or RMB273,000,000 kept by the Fund as a fixed deposit (the "Pledged Deposit"). Please refer to Note 11(a) for the details of the Tender Offer Portfolio.

As part of the arrangement, all interest income earned from the Pledged Deposit, loan related arrangement and handling fee expenses, interest expenses incurred on the Loan, and foreign exchange gains/(losses) arising from the Loan will be allocated to PACL II.

For the year ended 31 December 2012, a recharge of loan related income and expenses to PACL II of US$173,116 was recognized (2011: recharge of US$1,256,155 from PACL II was incurred). The Fund recognized and incurred interest income, interest expense, foreign exchange gain and arrangement and handling fee expenses with amounts of US$139,005 (2011: US$637,479), US$106,536 (2011: US$882,841), US$NIL (2011: US$1,971,116) and US$205,585 (2011: US$469,499), respectively.

The Loan was repaid and the Pledged Deposit was released in February 2012.

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

As at 31 December 2012, the total number of authorized ordinary shares was 10,000,000,000 (2011: 10,000,000,000) with par value of US$0.01 (2011: US$0.01) per share. The Company had 189,833,893 (2011: 189,833,893) ordinary shares in issue, of which 57,753,320 (2011: 49,957,176) were held as tendered shares.

Movement of tendered shares is as follows:

The Company also reissued 1,454,789 tendered shares at US$ 2.1553 per share (net asset value per share as at 30 June 2012) to the Investment Manager to settle its obligation in respect of the share portion of the 2011 performance fees. See Note 9 below for details.

7. Consulting income

Consulting income is derived mainly from the provision of consulting services to a buyer of an investment sold. 

8. 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 corporate income tax 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.

Investment via 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 2012, provision for current tax, deferred tax and uncertain tax amounted to US$3,984,553 (2011: US$17,741,470), US$42,514,614 (2011: US$38,174,629) and US$7,662,100 (2011: US$6,348,815) respectively. The Investment Manger has reviewed the structure of the Fund's investment portfolio and considered the Fund's exposure to uncertain tax positions have been properly reflected in the Fund's consolidated financial statements. However, given the uncertainty of 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 2012 will not be payable and may be released. The Investment Manager is regularly monitoring the position.

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.

9. 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 2012, total management fees amounted to US$5,931,529 (2011: US$5,197,861). As at 31 December 2012, management fees payable amounted to US$ nil (2011: US$1,490,191).

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 2012, total performance fees amounted to US$4,867,149 (2011: US$12,542,028). As at 31 December 2012, performance fees payable amounted to US$4,867,149 (2011: US$12,542,028).

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 2012, the Investment Manager agreed to receive 1,454,789 tendered shares at US$ 2.1553 per share, which is the Fund's NAV per share as at 30 June 2012, from the Fund to settle its obligation in respect of the share portion of the 2011 performance fees of US$3,135,507.

10. Investment agency fees

During the year ended 31 December 2011, 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 2012, investment agency fee of US$46,536 (2011: US$7,841,354) was incurred based on the realized and unrealized gain on the investment net of certain expenses and tax attributable to the investment. The Fund settled investment agency fees of approximately US$3.8 million during the year 2012.

11. Related party transactions

Apart from the related party transactions disclosed in Note 5 and 9, 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 has been extended by 1 year to 2 March 2013 with 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.

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 director annual fees of US$30,000 (2011: US$30,000). If a director is a member of the Valuation Committee or Audit Committee, the director also receives an additional fee of US$10,000, and the Chairman of either Committee receives an additional US$5,000. During the year 2012, Horst Geicke and Jon-Paul Toppino (2011: Chris Gradel, Horst Geicke and Jon-Paul Toppino) agreed to waive their directors' fees and committee fees.

12. 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 2012, the average net assets amounted to US$294,530,670 (2011: US$262,492,897).

13. 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.

14. Subsequent events

Management has performed a subsequent events review from 1 January 2013 through to 24 April 2013, being the date that the financial statements were available to be issued.

In April 2013, approximately US$9.3 million (representing 15% of the cash balance as at year-end) has been converted from Renminbi to United States Dollars and repatriated out of China.

The cash portion of the 2012 performance fee payable in the amount of US$3,650,362 was fully paid as at March 2013.

15. New accounting pronouncements

In December 2011, the FASB issued an update to requirements related to providing enhanced disclosures about financial instruments and derivative instruments that are either presented on a net basis in the statement of net assets or subject to an enforceable master netting arrangement or similar agreement including a description of the rights of off-set associated with relevant agreements and (ii) both net and gross information, including amounts of financial collateral, for relevant assets and liabilities. The purpose of the update is to enhance comparability between those entities that prepare their financial statements on the basis of US GAAP and those that prepare their financial statements in accordance with International Financial Reporting Standards and enables users of the financial statements to understand the effect or potential effect of the offsetting arrangements on the balance sheet. The update is effective for fiscal years beginning on or after January 1, 2013. The Fund does not believe the adoption of this update will have a material impact on the Fund's consolidated financial statements.