PACL.L Regulatory News (PACL)

17 September 2013

Pacific Alliance China Land Limited

Unaudited results for the six months ended 30 June 2013

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 financial results for the six months to 30 June 2013.

Highlights

· Net asset value as at 30 June 2013 was US$304 million, representing US$2.31 per share, a 2.7% increase from 31 December 2012 (US$298 million) and a 7.4% increase year-on-year (30 June 2012; US$301.5 million, representing US$2.16 per share).

· The Company's share price closed at US$1.70, a 24% increase year-on-year and a 27% discount to the unaudited NAV per share as at 30 June 2013.

· 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.

· PACL was rated the best performing China Real Estate Fund by Morningstar in April 2013, in recognition of the Company's 16.2% compound annual NAV growth.

Portfolio and Fund Developments

· The share price of Project Crystal, PACL's most recent addition to the portfolio, continued its upward trend in the first quarter of 2013, with quarter-on-quarter increases of 7.2% in Q1 and 7.63% in Q2.

· PACL received a total US$9.6 million repayment from the Project Speed exchangeable notes in the first half of 2013. To date, the borrower has repaid the Consortium 95% of the principal.

· Improved rental rates driven by a strong market for high quality serviced apartment buildings in Beijing has resulted in an approximate 1.8% increase in the property value of Project Diplomat from RMB1.88 billion at Q1 to RMB1.914 billion.

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

"China's commercial property sector remains largely insulated from the policy risks of a government focused on cooling residential real estate, and as such continues to perform well. Retail rents in major first tier cities continue to rise, office rents remain high in prime/sub prime locations in Beijing and Shanghai and investor appetite for quality commercial properties remains strong."

"Despite slower economic growth in China, the Company remains confident that its experience across previous market cycles, its dedicated asset management capability and dynamic multi-strategy approach will continue to identify new opportunities and deliver long-term value to shareholders."

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$304 million as at 30 June 2013. 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.

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

Chair's Statement

Pacific Alliance China Land Limited (the "Company") continued to grow its net asset value ("NAV") during the first half of 2013 to US$304 million, or US$2.3145 per share, a 2.7% increase from 31 December 2012 and a 7.4% increase from 30 June 2012. The increase can be attributed to the Company's continued commitment to the multi-strategy investment approach which has delivered significant value to shareholders since the Company's inception in 2007.

China's GDP recorded 7.6% year-on-year growth in the first half of 2013, with second quarter growth coming in at 7.5%, down from 7.7% in the first quarter and 7.9% in the final quarter of 2012. Underlying the slowing pace is the new Chinese leadership's commitment to restructuring the economy for more stable and sustainable growth. Going forward, the Chinese government will focus on shifting the economic growth driver from credit supported investment to domestic consumption and value-added exports and in June, it took action by clamping down on the shadow banking system, causing a temporary liquidity squeeze. However, it appears that the government is still confident of achieving its annual goal of 7.5% GDP growth for 2013, a projection with which many economists agree.

There have been few signs that China's property sector continues to feel the impact of the current policy-tightening measures so far. Despite their continued and re-enforced imposition on the residential real estate sector, most big cities in China still recorded increasing property prices in the first six months of 2013 and year-on-year price growth is still expected but at a slower pace. The major drivers of recent property price appreciation, (i.e. pent up demand which should taper off and scarcity of suitable land for development which is likely to continue) are expected to have offsetting effects and lead to more price stability in the residential sector in the medium to long term.

While a slower economy does not support an overall positive outlook, attractive investment opportunities are still available with developers who are financially distressed. The Manager will continue to focus on the commercial real estate sector, which has experienced solid growth, and has been the biggest beneficiary under the tighter residential policy controls. At the same time, the Manager will continue to monitor the market closely for individual opportunities and to make necessary adjustments to its investment policies to maximize risk-adjusted returns for the Company's shareholders.

The Company's investment strategy has proven effective and rewarding over the past five years. Its successful implementation of investment strategy has allowed the Company achieve compound annual growth in NAV of 16.2%, making it the best performing 'China Real Estate Fund' over the last five years as rated by Morningstar in April 2013. We believe that our dynamic multi-strategy investment approach and strong commitment to asset management will continue to deliver long-term value for the Company's shareholders, and on behalf of the Board and the Manager, I would like to extend my thanks for your continued support.

Margaret Brooke

Chair

Investment Manager's Report

Pacific Alliance China Land Limited ("the Company" or "PACL") continued its growth momentum in 2013. The Company's net asset value ("NAV") as of 30 June 2013 was US$304 million or US$2.3145 per share which represents a year-on-year increase of 2.7% from 31 December 2012, and a compound annual growth rate of 16.2% since inception.

On 30 June 2013, the Company's share price closed at US$1.6975, a 24% increase year-on-year and a 27% discount to the unaudited 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 30 June 2013, the Company held cash of US$68 million and investments with a cost of approximately US$101 million and fair value of US$320 million. The Company's portfolio is diversified across six strategies including Listed Stock, Bridge Financing, Co-Development, Pre-IPO Investment, Platform Investment and Asset Acquisition.

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

Investment Strategy

The Manager believes the Chinese government's residential policy restrictions are unlikely to be lifted in the near term. The growth momentum of the residential property market is likely to continue in the future, but not as strongly as in the past decade, driven by China's continuing urbanization, an inflationary economic environment, and scarcity of land. As such, the Manager will continue identifying and evaluating select residential opportunities.

During the first half of 2013, the growth momentum of the commercial sector in first tier cities moderated to a more stabilized level following the previous two years of faster - paced expansion. The primary office markets in the Beijing and Shanghai CBDs continue to see high rental rates and low vacancy, while decentralized offices are performing better in terms of rental growth and take-up. Retail rents in major first tier cities continued to increase while vacancies remained low. We believe that ongoing demand from domestic occupiers and buyers will support the continued strong performance of the commercial property market, underpinned by GDP growth of 7.6% which is still much higher than in most of the world's major markets.

With the majority of its weighting in the commercial property sector, the Company's existing portfolio reflects our view of the market trends, and our strategy has proven successful as demonstrated by the Company's outstanding performance compared to its peers. We will continue to pursue value-add commercial asset deals that have both limited downside and good value appreciation potential. We will also consider special situation opportunities in the residential sector. In the mean time, we will actively manage our existing investments for improved performance and seek optimum exit opportunities that maximize NAV.

Defensive Strategies

Bridge Financing

The government is expected to continue with its tightening-policies, including more stringent regulation on the cash management of development projects. As such, many medium size developers that do not have access to the capital markets may face challenges in finding bridge financing resources before bank loans and pre-sale proceeds become available, thereby creating attractive investment opportunities for the Company. We will continue to pursue projects that have sound real estate fundamentals from credit-worthy counterparties.

Co-Developments with Preferred Returns

With the tightening measures of the last three years and land prices rising faster than selling prices, development margins have been squeezed compared with the last decade. As such our target projects will be primarily commercial projects in first tier or strong second tier cities in good locations, with existing or planned metro line connections, appropriately sized, well designed and with experienced developers who have good track records.

Growth Strategies

Value-Added Asset Acquisitions

Given the relatively strong GDP growth in China, the Manager believes that value-add commercial property opportunities will continue to be a key focus of the Company. As well, this sector is beyond the scope of government's policy restrictions and it should continue to perform well in an inflationary environment. We will be concentrating on off-market opportunities and those arising from special situations in good locations in major first and second tier cities.

Platform Investment

China's stock market remains stagnant and is not expected to see strong recovery given the government's cooling measures. With unfavourable prospects for public-listing, developers are more likely to meet their capital needs via debt and private equity. We are careful in selecting qualified partners, who have a strong track record, solid financial fundamentals, and high-quality land banks.

Conclusion

China's real estate market presents a mixed picture for 2013: the residential sector is experiencing additional policy restrictions yet prices are still advancing; the shadow banking sector remains a concern; and the commercial property sector continues with its stable growth. With experience gained in previous market cycles, the Manager remains cautiously optimistic and confident that our dynamic multi-strategy approach, combined with our dedicated asset management capability, will continue to deliver long-term value to the Company's shareholders.

UNAUDITED CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

AS AT 30 JUNE 2013

Approved by the Board of Directors on 17 September 2013

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

UNAUDITED CONSOLIDATED SCHEDULE OF INVESTMENTS

AS AT 30 JUNE 2013

(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.

UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE PERIOD ENDED 30 JUNE 2013

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

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

FOR THE PERIOD ENDED 30 JUNE 2013

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

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE PERIOD ENDED 30 JUNE 2013

Non-cash transaction:

Part of the performance fee payable to the Investment Manager was settled by the Company's shares. Please refer to Note 5 and 8 for details.

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

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED 30 JUNE 2013

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 Trust Company Limited to act as the custodian of certain assets of the Fund, the administrator and registrar pursuant to the Administration Custodian and Registrar Agreement.

The unaudited consolidated financial statements were approved by the Board of Directors on 17 September 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 30 June 2013 and the reported amounts of income and expenses for the period 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 30 June 2013, investments in loans receivable and bonds of US$28,303,350 (31 December 2012: US$45,973,656) were borrowed/issued by counterparties which are currently unrated by any rating agency. The Fund managed the 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 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 30 June 2013.

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 the valuation techniques and the significant unobservable inputs used for Level 3 investments as at 30 June 2013:

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

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

Note (3) The 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 collaterals, which are real estate properties. 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 30 June 2013, investments of US$291,485,448 (31 December 2012: US$286,619,383) were held directly by the Fund, investments of US$28,303,350 (31 December 2012: US$45,973,656) 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, a fellow subsidiary of the Investment Manager, through sub-participation agreement, and investments of US$732,696 (31 December 2012: US$146,665) 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 carried at US$7,077,945 (31 December 2012: US$7,432,344). The borrower will transfer the title deed of three residential units to the investor consortium as payment-in-kind, in which the fund is entitled to 30% of the value of these three residential units.

For the period ended 30 June 2013, net realized gain/ (loss) and change in unrealized gain/(loss) recognized for the loans receivable amounted to US$ nil (31 December 2012: US$ nil) and US$(354,399) (31 December 2012: US$(2,374,690)), respectively.

As at 30 June 2013, the Fund had a debt investment of US$21,225,405 (31 December 2012: US$38,541,312) which will mature within the next 10 months (31 December 2012: 16 months). The Fund held collateral in the form of assets of the borrower and its subsidiaries. The fair value of the investment is determined by the Valuation Committee. For the period ended 30 June 2013, net realized gain/ (loss) and change in unrealized gain/ (loss) recognized on the bond amounted to US$ nil (31 December 2012: US$8,938,925) and US$1,969,911(31 December 2012: US$(316,479)), 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 30 June 2013, the Fund held a call option of US$732,696 (31 December 2012: US$146,665) with notional amount of US$4,255,274 (31 December 2012: US$2,961,490). During the period ended 30 June 2013, the Fund recognized change in unrealized gain of the option amounted to US$586,031 (31 December 2012: US$(112,235)).

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

As at 30 June 2013, the total number of authorized ordinary shares was 10,000,000,000 (31 December 2012: 10,000,000,000) with par value of US$0.01 (31 December 2012: US$0.01) per share. The Company had 189,833,893 (31 December 2012: 189,833,893) ordinary shares in issue, of which 58,505,113 (31 December 2012: 57,753,320) were held as tendered shares.

Movement of tendered shares is as follows:

The Company also reissued 530,514 tendered shares at US$ 2.2936 per share (net asset value per share as at 31 May 2013) to the Investment Manager to settle its obligation in respect of the share option of the 2012 performance fees. See Note 9 below for details.

6. Consulting income

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

7. 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 above 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 30 June 2013, provision for current tax, deferred tax and uncertain tax amounted to US$1,474,832 (31 December 2012: US$3,984,553), US$41,926,838 (31 December 2012: US$42,514,614) and US$8,173,245 (31 December 2012: US$7,662,100) 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 the tax provided as at 30 June 2013 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.

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 period ended 30 June 2013, total management fees amounted to US$2,981,720 (period ended 30 June 2012: US$3,050,430). As at 30 June 2013, management fees payable amounted to US$ nil (31 December 2012: 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 period ended 30 June 2013, total performance fees amounted to US$1,793,893 (period ended 30 June 2012: US$1,680,476). As at 30 June 2013, performance fees payable amounted to US$1,793,893 (31 December 2012: US$4,867,149).

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

9. 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 period ended 30 June 2013, investment agency fee of US$ nil (31 December 2012: US$46,536) was incurred based on the realized and 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 will be used to realize and distribute cash from exited investments based on the investment and asset positions held by the Fund as at 31 December 2008 ("Tender Offer Portfolio"). PACL II is also managed by the Investment Manager. It will, without any further action on the part of its shareholders, automatically wind up and dissolve in 3 years upon when its ordinary shares were first issued. On 5 January 2012, the duration of PACL II was extended by 1 year to 2 March 2013 upon the written election by the Investment Manager. On 28 February 2013, the duration of PACL II was further extended by 2 years to 4 March 2015 upon the written election by the Investment Manager and a majority of the shareholders.

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 Company, 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 (31 December 2012: 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; Chairman of either Committee will receive additional US$5,000. During the period ended 30 June 2013, Jon-Paul Toppino agreed to waive his director's fees and committee fees.

11. Financial highlights

Net asset value per share at the end of the period 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 period ended 30 June 2013, the average net assets amounted to US$300,589,159 (from 1 January 2012 to 30 June 2012: US$295,649,286).

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.

13. Subsequent events

Management has performed a subsequent events review from 1 July 2013 through to 17 September 2013, being the date that the financial statements were available to be issued. The Company has completed the sale of its fifteen percent (15%) equity interest in Project Winpoint and has received net cash proceeds of RMB184M (equivalent to US$29.9M) after tax.