PACL.L Regulatory News (PACL)

26 September 2014

Pacific Alliance China Land Limited

Unaudited results for the six months ended 30 June 2014

Pacific Alliance China Land Limited ("PACL" or the "Company"), an AIM-traded, closed-end investment company with a portfolio of investments including existing properties, new developments, distressed projects and real estate companies in Greater China, has today announced its financial results for the six months to 30 June 2014.

Highlights

· Net asset value as at 30 June 2014 was US$295.63 million or US$2.2657 per share, representing an 8.0% decrease from 31 December 2013 (US$319.64 million, or US$2.4628 per share) and a 2.1% decrease year-on-year (30 June 2013; US$304 million, or US$2.3145 per share).

· The Company's share price closed at US$1.715, a 1% increase year-on-year and a 32% discount to the unaudited NAV per share as at 30 June 2013.

· The decrease in NAV predominantly reflects the unrealized marked-to-market decline in the asset valuation of Project Auspice and Project Malls due largely to falling valuations of China property stocks and weaker stock market sentiment in the first half of 2014.

· 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 since inception.

· PACL was rated among Top 3 best performing China Real Estate Fund by Morningstar in April 2014.

Fund Developments

Following the unanimous vote of Shareholders at the Extraordinary General Meeting held in July 2014, PACL will cease making new investments and focus on realizing existing investments, maximizing the value of its portfolio and returning realization proceeds to Shareholders. PACL will continue to develop and invest additional funds to complete existing investments in the best interests of Shareholders.

The majority of PACL's investments are expected to be realized within two years from July 2014, with the remaining investments to be realized within three to five years.

Portfolio Developments

· PACL successfully exited Project Speed in the first half of 2014, and received total consideration of US$35 million with a profit of US$13.9 million, representing a gross IRR of 10.2% and a cash multiple of 1.7 times.

· Project Auspice has filed an application for its IPO on the Hong Kong Stock Exchange to raise funds to support the development of its commercial property business. As at 30 June, the company's assets included 89 shopping centers, 48 hotels and a land bank with an approximate gross floor area of 76.7 million square meters across China according to its prospectus. Auspice is expected to list in late 2014 or early 2015.

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

"Despite continued speculation on the direction of the China economy, GDP growth was 7.4% year-on-year in the first half of 2014. Many economists expect the economy to continue on a similar path in the second half of the year. The commercial property market is a more balanced sector and continues to enjoy positive growth and PACL's portfolio will be a beneficiary of this continued growth as its investments remain heavily weighted toward this sector.

Since its inception in November 2007, PACL has delivered compound annual NAV growth. As we begin realizing the portfolio and returning capital to shareholders, we will continue to seek profitable exit opportunities and maximize the value for 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$295.63 million as at 30 June 2014. PACL was admitted to trading on the AIM Market of the London Stock Exchange in November 2007. PACL holds 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 are part of PAG, 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 300 staff working in the region.

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

Chairperson's Statement

Pacific Alliance China Land Limited's ("the Company") net asset value (NAV) was US$295.63 million or US$2.2657 per share as of 30 June 2014, representing an 8.0% decrease from 31 December 2013 and a 2.1% decrease from 30 June 2013.

The decrease in NAV predominantly reflects the unrealized marked-to-market decline in the asset valuation of the platform investments due largely to falling valuations of China property stocks and weaker stock market sentiment in the first half of 2014. On a positive note, there are more recent signs of stabilization in both the physical residential property market and in stock market conditions, including a significant rebound in Chinese property stock valuations as at 31 July 2014, especially amongst top tier developers which we consider comparable to those involved in our investments.

China's GDP recorded 7.4% year-on-year growth in the first half of 2014, with second quarter growth at 7.5%, up from 7.4% in the first quarter and many economists expect this robust rate of growth to continue over the course of the year. We believe the continuing transition towards the consumption and service-led economic model that is driving this strong growth will also deliver significant benefits to the commercial property market, which is good news for our portfolio which remains heavily weighted toward this sector. Within the portfolio, the Company successfully exited Project Speed in the first half of 2014. The Company received total consideration of US$35 million with a profit of USD$13.9 million, representing a gross IRR of 10.2% and a cash multiple of 1.7 times.

Since its inception in November 2007, our investment strategy has delivered compound annual NAV growth of 13.2%. We will continue to seek to maximize the value to shareholders as we work to realize the investments and, on behalf of the Board of Directors, I would like to thank you for your continued commitment and support in our endeavours.

Margaret Brooke

Chairperson

Investment Manager's Report

On 30 June 2014, the Company's share price closed at US$1.715, representing a 1% increase year-on-year and a 32% 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 2014, the Company held cash of US$99 million and investments with a cost of approximately US$68 million and fair value of US$258 million. The Company's portfolio is diversified across five strategies including Listed Stock, Bridge Financing, Pre-IPO Financing, Platform Investment and Asset Acquisition.

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

(2) Of the total cash of US$99.15 million, US$59.79 million of which are held as RMB in PRC banks.

Realisation and return of capital

With the affirmative vote at the recent EGM in July, 2014, the Board announced that the Company will cease making new investments, realise the portfolio and return proceeds to investors.  The Investment Manager will continue to actively manage our existing investments to improve performance and seek the right exit opportunities to maximize the Company's NAV.

The Investment Manager anticipates that the majority of the assets will be realised within two years from July 2014, with the realisation of the Company's remaining portfolio within three to five years.

Project Malls

In August 2009, the Company acquired a 30% stake in Project Malls for US$12.5 million. At that time, Project Malls consisted of a number of minority stakes in shopping malls across China. The Investment Manager consolidated these minority stakes into 100% ownership of 16 different shopping malls. The Company's 30% stake in the resulting 16 mall portfolio was subsequently sold for US$58.6 million, or 4.7 times the entire initial investment. As part of the original transaction, the Company also acquired an interest in Walmart China and a minority stake in a large parcel of residential land near the Shanghai Disneyland development, which is scheduled to open in late 2015. These two holdings were retained and are currently valued at US$85.6 million.

Walmart China

Walmart China is a minority stake in one of Walmart's Chinese joint venture partners that controls approximately 25% of all Walmart stores in China. The Company's partner in both Project Malls and Walmart China is the state-owned enterprise, China Resources.

Shanghai Land

This refers to an undeveloped plot of land close to Shanghai Disneyland, which is scheduled to open in late 2015.

The owners are close to completing terms for restructuring the ownership of the land titles and once complete, the Investment Manager plans to partner with a leading local developer to develop the land.

Project Diplomat

Project Diplomat is a luxury residential block in the Second Embassy district of Beijing. Built by an international developer, it has been operated as serviced apartments since 2002. The Company acquired a 40% equity stake for US$33 million in November 2009, which is currently valued at US$94.7 million. Occupancy rates are high at 94% (February 2014), which together with rising rents has resulted in an increase in operating income.

Project Auspice

Project Auspice is a private equity investment in one of the largest unlisted property developers in China, with over US$2 billion in annual net profits. The Company acquired a 0.5% stake for US$24 million in August 2009.

Unlike many of its listed residential-focused peers, the developer derives around 60% of its revenues from commercial real estate development. This focus has resulted in more stable revenues and profits which have grown by 64% and 44% per annum, respectively, over the past five years.

The position is valued at a 20% discount to its listed comparable peers. These fell sharply in the first half of this year, and as a result the valuation of Project Auspice fell 27.5% in Q2 2014 to US$55.4 million. This values Auspice at approximately 6.1 times last year's earnings.

Project Crystal

Project Crystal is a Singapore listed closed-end Chinese property fund. The Company invested in Crystal in 2012 at a 75% discount to published NAV when it was going through a bankruptcy and transfer of management. Crystal is currently trading at a 57% discount.

Crystal owns three buildings in Shanghai, the largest of which is currently being renovated and expanded. Once this renovation is complete (expected Q1 2015), the Investment Manager believes cash flows should improve, enabling Crystal to distribute the resulting income. This should lead to a better rating / narrower discount on Crystal.

Beijing Olympic Park

The Company has a residual holding in three Beijing residential units on which the Company is working towards receiving the titles.

Conclusion

With China's economy developing at a sustainable and healthy pace, the property sector is expected to make a soft landing. The Investment Manager is primarily focused on realizing the maximum value of the investments held by the Company.

UNAUDITED CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

AS AT 30 JUNE 2014

Approved by the Board of Directors on 26 September 2014

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

UNAUDITED CONSOLIDATED CONDENSED SCHEDULE OF INVESTMENTS

AS AT 30 JUNE 2014

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

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

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

UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE PERIOD ENDED 30 JUNE 2014

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 2014

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

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE PERIOD ENDED 30 JUNE 2014

Supplementary information to statement of cash flows

Non-cash transaction:

Part of the performance fee payable to the Investment Manager was settled by the Company's shares.

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 2014

1. Organization

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

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

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

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

The consolidated financial statements were approved by the Board of Directors on 26 September 2014.

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 2014 and the reported amounts of income and expenses for the year then ended. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 2(l).

(c) Investments

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

(i) Recognition and derecognition

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

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

(ii) Fair value measurement

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

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

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

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

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

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

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

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

(d) Other receivables and payables

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

(e) Cash and cash equivalents

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

(f) Restricted cash

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

(g) Bank loans

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

(h) Share capital

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

(i) Foreign currency translation

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

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

(j) Taxation

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

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

(k) Recognition of income and expenses

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

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

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

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

(l) Critical accounting estimates and assumptions

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

(i) Fair value of investments

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

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

(ii) Taxation

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

3. Concentration of risks

(a) Market risk

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

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

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

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

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

(b) Interest rate risk

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

(c) Currency risk

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

(d) Credit risk

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

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

As at 30 June 2014, investments in loans receivable and bonds of US$6,271,535 (31 December 2013: US$24,137,547) were borrowed/issued by counterparties which are currently unrated by any rating agency. The Fund managed credit risk through reviewing loan repayment and collateral values of loans on an on-going basis.

(e) Liquidity risk

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

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

The Fund has the ability to borrow in the short term but subject to certain limitations, including the total amount of all borrowings outstanding at any time shall not exceed 50% of the Fund's total assets at such time. The Fund has no outstanding borrowings as at 30 June 2014.

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

4. Investments

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

Level 1

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

Level 2

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

Level 3

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

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

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

Level 1

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

Level 2

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

Level 3

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

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

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

2014

2013

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

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

Note (3) The valuation is determined by considering the value of the loan's collateral, which is real estate property.

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

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

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

As at 30 June 2014, investments of US$251,352,123 (2013: US$298,124,407) were held directly by the Fund and investments of US$6,271,535 (2013: US$7,906,603) were held through jointly owned entities with Pacific Alliance Asia Opportunity Fund 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$6,271,535 (2013: US$7,235,644). The borrower will transfer the title deed of three residential units to the investor consortium as payment-in-kind, in which the Fund is entitled to 30% of the value of these three residential units.

For the period ended 30 June 2014, net realized gain/ (loss) and change in unrealized gain/(loss) recognized for the loan receivable amounted to US$ Nil (2013: US$ Nil) and US$(964,109) (2013: US$(196,700)), respectively.

During the period ended 30 June 2014, the Fund received US$16,901,903 from the realization of a debt instrument. Net realized gain/ (loss) and change in unrealized gain/ (loss) of US$ 16,901,903 and US$ (16,901,903) amounted respectively.

The Fund held a call option that was not exercised before the expired date due to the share price of investment is close to exercise price. During the period ended 30 June 2014, the Fund's recognized change in unrealized gain/(loss) of the option amounted to US$(670,959) (2013: US$524,294)

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

As at 30 June 2014, the total number of authorized ordinary shares was 10,000,000,000 (2013: 10,000,000,000) with par value of US$0.01 (2013: US$0.01) per share. The Company had 189,833,893 (2013: 189,833,893) ordinary shares in issue, of which 59,349,514 (2013: 60,045,945) were held as tendered shares.

Movement of tendered shares is as follows:

In May 2014, the Company reissued 696,431 tendered shares at US$ 2.2856 per share (net asset value per share as at 30 April 2014) to a wholly owned subsidiary of the Investment Manager to settle its obligation in respect of the share portion of the 2013 performance fees. See Note 7 below for details.

6. Taxation

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

The uncertain tax positions identified by the directors mainly include:

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

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

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

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

As at 30 June 2014, the Investment Manager has analyzed the open tax years of all jurisdictions subject to tax examination and had the provision for current tax, deferred tax and uncertain tax amounted to US$Nil (2013: US$1,992,245), US$37,828,100 (2013: US$45,918,700) and US$6,935,980(2013: US$6,909,089) respectively. The Investment Manager has reviewed the structure of the investment portfolio and assessed the potential withholding tax implications and considered adequate provision to China tax has been made on the Fund's consolidated financial statements. However, given the uncertainty of China tax, the Investment Manager would like to highlight that there is a possibility that some or all of the tax provided as at 30 June 2014 will not be payable and may be released. The Investment Manager is regularly monitoring the position.

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

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

7. Management fees and performance fees

Pursuant to the Investment Management Agreement dated 20 November 2007, the Investment Manager was appointed to manage the investments of the Fund. The Investment Manager will receive an aggregate management fee of 2% per annum of the quarterly Net Asset Value ("NAV"). The management fee is paid quarterly in advance based on the NAV at the first day of each fiscal quarter. For the period ended 30 June 2014, total management fees amounted to US$3,036,472 (2013: US$6,126,735) payable amounted to US$ Nil (2013: 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 2014, total performance fees amounted to US$Nil (2013: US$6,367,049). As at 30 June 2014, performance fees payable amounted to US$Nil (2013: US$6,367,049).

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

During the period ended 30 June 2014, the Investment Manager agreed to receive 696,431 tendered shares valued at US$ 2.2856 per share, the Fund's NAV per share as at 30 April 2014, from the Fund to settle its obligation in respect of the share portion of the 2013 performance fees of US$1,591,763.

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

8. Investment agency fees

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

For the period ended 30 June 2014, investment agency fee of US$Nil (2013: US$244,552) was incurred based on the realized and unrealized gain on the investment net of certain expenses and tax attributable to the investment.

9. Related party transactions

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

(a) Restructuring with PACL II Limited

On 2 March 2009, the Company held an extraordinary general meeting to approve a tender offer that allowed shareholders to exchange all or part of their shares for shares in PACL II Limited ("PACL II"), a Cayman Islands private vehicle that will be used to realize and distribute cash from exited investments based on the investment and asset positions held by the Fund as at 31 December 2008 ("Tender Offer Portfolio"). PACL II is also managed by the Investment Manager. It will, without any further action on the part of its shareholders, automatically wind up and dissolve 3 years after the date on which 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. By EGM held 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 directors an annual fee of US$30,000 (2013: US$30,000). If a director is a member of the Valuation Committee or Audit Committee, the director also receives an additional annual fee of US$10,000, and the Chairman of either Committee receives an additional annual fee of US$5,000. During the period 30 June 2014, Jon-Paul Toppino agreed to waive his directors' fees and committee fees.

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

During the period ended 30 June 2014, Pacific Alliance Asia Opportunity Fund L.P. ("PAX LP"), an open-end fund organized in the Cayman Islands, purchased Nil (2013: 1,678,634) ordinary shares of the Company. As at 30 June 2014, PAX LP held 10,285,919 (2013:10,285,919) shares of the Company, representing 7.9% (2013: 7.9%) of total outstanding shares of the Company.

During the period ended 30 June 2014, Pacific Alliance Asia Special Situations Fund L.P. ("PASS"), a close-end fund incorporated in the Cayman Islands purchased Nil (2013: Nil) and sold 6,879,629 (2013: 300,000) ordinary shares of the Company. As at 30 June 2014, PASS held Nil (2013: 6,879,629) shares of the Company, representing 0.0% (2013: 5.3%) of total outstanding shares of the Company.

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

10. Financial highlights

Net asset value per share at the end of the 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 period.

(2) Average net assets is derived from the beginning and ending NAV, adjusted for cash flows in relation to capital transactions for the period. For the period ended 30 June 2014, the average net assets amounted to US$302,935,057 (from 1 January 2013 to 30 June 2013: US$300,589,159).

11. Commitment and contingency

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

12. Subsequent events

Management has performed a subsequent events review from 1 July 2014 to 26 September, 2014, being the date that the financial statementswere available to be issued.

On 15 August 2014, the Company purchased 11,363,636 shares at a price of $1.76 per share for a total of US$20 million.