TIDMARCH
RNS Number : 9175S
ARC Capital Holdings Limited
29 September 2014
ARC Capital Holdings Limited
Unaudited results for the six months ended 30 June 2014
ARC Capital Holdings Limited ("ARCH" or the "Company") (AIM:
ARCH), the AIM-traded closed end investment company focused on
realising its investments in the retail and consumer goods sectors
in China, has today announced its financial results for the six
months ended 30 June 2014.
Financial Highlights
-- Net asset value as at 30 June 2014 was US$83.86 million,
representing US$0.37 per share, a 55.4 percent decrease per share
from 31 December 2013 (Net asset value US$217.4 million,
representing US$0.83 per share).
Company and Portfolio Developments
-- On 3 June 2014, China International Economic and Trade
Arbitration Commission ("CIETAC") awarded and adjudged that HNA
Group shall pay ARCH RMB90 million (equivalent to adjusted amount
of the Jiadeli Supermarket sale proceeds holdback in full, RMB10
million less than the original holdback amount) together with
interest and arbitration fees.
-- On 20 June 2014, CIETAC extended the deadline for rendering
an arbitral award on the Orient Home Investment Deposit by a
further two months to 21 August 2014. On 12 August 2014, CIETAC
further extended the deadline for rendering the arbitral award by
another three months to 21 November 2014.
-- The sale of Fortress Group Limited ("Fortress") that was
approved at the extraordinary general meeting held on 16 May 2014
did not progress to completion. Subsequent to the Fortress Sale,
PAGAC Fortress Holding I Limited ("PAGAC"), an associated company
of PAG Capital, issued a notice to Fortress to exercise the put
option referred to in the shareholders agreement that was entered
into by ARCH Digital Holdings Limited ("ARCH Digital) at the time
of the privatisation of Funtalk China Holdings Limited. If Fortress
fails to perform its obligation under the Put Option, the
requirement to repurchase PAGAC's Preferred Shares and Convertible
Bonds falls to the shareholders of Fortress other than PAGAC
pro-rata, including ARCH Digital. On 3 September 2014, ARCH Digital
received a notice stating that PAGAC is exercising its right
pursuant to the Shareholders Agreement to require that ARCH Digital
purchase its pro rata portion of the put securities, as Fortress
has failed to pay the entire put price. Neither ARCH Digital nor
ARCH has the necessary cash or liquid assets to pay the unpaid put
price. If PAGAC enforces its security interest under the Share
Charge Agreement dated 25 August 2011, there is a high chance that
the value of ARCH Digital's interest in Fortress could be
fundamentally impaired notwithstanding that the value of the
interest in ARCH Digital has already been written down to zero.
-- On 15 August 2014, ARCH filed legal proceedings against ARC
Capital Partners Limited, the former Investment Manager of ARCH,
for negligence and/or breach of its investment management agreement
with ARCH. ARC Capital Partners ceased to be ARCH's investment
manager as of 7 August 2014.
Although the remaining portfolio consists mainly of receivables
and a number of litigation and arbitration claims, the Board of
Directors will continue to realise the remaining assets in the
coming year and remain committed to protect the shareholders
interests in an effective and efficient manner.
The Company's 2014 interim report will be sent to registered
shareholders shortly and a copy will be available on the Company's
website.
For more information please contact:
ARC CAPITAL HOLDINGS LIMITED:
Steve Feniger, Chairman of the Board
E: steve.feniger@gmail.com
NOMINATED ADVISER:
Philip Secrett, Grant Thornton UK LLP
T: (44) 20 7383 5100
E: Philip.J.Secrett@uk.gt.com
BROKER:
David Benda / Hugh Jonathan, Numis Securities Limited
T: (44) 20 7260 1000
F: (44) 20 7260 1001
E: d.benda@numiscorp.com
Chairman's Statement
On behalf of the Board of Directors, I am pleased to present the
interim financial statements of ARC Capital Holdings Limited
("ARCH") and its subsidiaries (collectively, the "Fund") for the
period ended 30 June 2014.
During the first half of 2014, ARCH's share price and NAV per
share declined by less than 1%. The Fund has continued with its
mandate to realise its entire investment portfolio as quickly as
practicably possible and to maximise value for the Fund's
shareholders from the portfolio. I am very pleased to announce that
the Fund's realisation plan has generated approximately US$142
million in proceeds from asset sales to date. Of these
realisations, US$113 million has been distributed to
shareholders.
On 30 April 2014, ARCH entered into a definitive agreement to
sell its entire stake in Buchang Pharmaceutical for a total
consideration of US$14.9 million. The transaction was completed and
full consideration was received by ARCH on 27 May 2014.
On 3 June 2014, the China International Economic and Trade
Arbitration Commission ("CIETAC") awarded and adjudged that HNA
Group shall pay ARCH RMB90 million (equivalent to adjusted amount
of the Jiadeli Holdback in full, RMB10 million less than the
original holdback amount) together with interest and arbitration
fees. Although this is a positive development, ARCH still needs to
take steps to enforce the award and recover the amount awarded.
On 20 June 2014, CIETAC extended the deadline for rendering an
arbitral award on the Orient Home Investment Deposit by a further
two months to 21 August 2014. On 12 August 2014, CIETAC further
extended the deadline for rendering the arbitral award by another
three months to 21 November 2014. Recovery of the RMB480 million
investment deposit is of utmost priority for the Board of Directors
who continue to exert much of their time and effort into the
process.
The sale of Fortress Group Limited ("Fortress") that was
approved at the EGM held on 16 May 2014 did not progress to
completion. Fortress subsequently entered into an agreement for the
sale of its 100% equity interest in Funtalk ("Fortress Sale").
Subsequent to the Fortress Sale, PAGAC Fortress Holding I Limited
("PAGAC"), an associated company of PAG Capital, exercised the put
option referred to in the shareholders agreement that ARCH Digital
Holdings Limited ("ARCH Digital"), a wholly owned subsidiary of
ARCH, entered into at the time of the privatisation of Funtalk.
Fortress failed to pay the put price under its put option in full
and PAGAC requested ARCH Digital to purchase its pro rata portion
of the put securities that were not purchased by Fortress. The
Board is considering its options available with its legal advisors.
On 22 August 2014, the Valuation Committee has written down the
value of its interest in Fortress to zero.
On 15 August 2014, ARCH filed legal proceedings against ARC
Capital Partners Limited, the former Investment Manager of ARCH,
for negligence and/or breach of its investment management agreement
with ARCH related to the Orient Home Deposit. ARC Capital Partners
ceased to be ARCH's investment manager as of 7 August 2014.
The remaining portfolio consists of receivables and a number of
litigation and arbitration claims. While there are further
challenges ahead, the Board has acted and will continue to act
diligently to extract value where possible and to protect
shareholders' interests.
The Board of Directors are currently reviewing the cash
requirements of ARCH to continue its operations and considering a
distribution of surplus cash to shareholders.
Throughout this turbulent period, we have had the support of our
shareholders. On behalf of the Board of Directors, I would like to
express my sincere gratitude to you all.
Steven Julien Feniger
Chairman
29 September 2014
Consolidated Statement of Assets and Liabilities as at 30 June
2014
30 June 31 December
2014 2013
US$ US$
Note (unaudited) (audited)
Assets
Investments, at fair value 3 24,689,909 165,373,566
(Cost: 30 June 2014: US$ 182,708,467;
31 December 2013: US$ 213,838,467)
Investment deposits 8 52,023,576 52,396,113
Other assets 10 6,275,326 13,881,212
Cash and cash equivalents 11 33,941,289 19,607,765
Total assets 116,930,100 251,258,656
------------------- -------------------
Liabilities
Deferred tax 7 348,929 1,871,928
Tax payable 7 7,865,779 7,355,220
Other payables and accruals 12 24,860,301 24,629,913
Total liabilities 33,075,009 33,857,061
------------------- -------------------
Net assets 83,855,091 217,401,595
========== ===========
Shareholders' equity
Share capital 13 2,281,416 2,610,827
Share premium 13 326,371,746 354,042,331
Accumulated losses (251,476,229) (146,376,886)
Foreign currency translation reserve 6,678,158 7,125,323
Total shareholders' equity 83,855,091 217,401,595
=========== ===========
Net asset value per share 16(a) 0.37 0.83
=========== ===========
Approved by the Board of Directors on 29 September 2014
The accompanying notes are an integral part of these
consolidated financial statements.
Consolidated Schedule of Investments as at 30 June 2014
30 June 2014 31 December 2013
% of % of
Cost Fair value net Cost Fair value net
Investment Instrument US$ US$ assets US$ US$ assets
Mobile
phone retail,
China
Fortress Common
Group Limited(1) stock 100,800,044 - 100,800,044 91,367,000 42.03%
Home decoration
retail,
China
Orient
Home Decoration
& Building
Materials
Company
Limited
("Orient
Home Retail")(2) Loan 23,245,008 - - 23,245,008 - -
Dairy,
China
Ningxia
Xiajin
Dairy Co., Common
Ltd. stock - - - 18,130,000 30,000,000 13.80%
Education,
China
Shaanxi Common
Da De Education stock 42,806,849 10,419,000 12.43% 42,806,849 11,822,000 5.44%
Pharmaceutical,
China
Buchang
Pharmaceutical Common
Group stock - - - 13,000,000 16,328,000 7.51%
Others
A domestic
Chinese
strategic
investor
("DCSI")(2) Loan 15,856,566 14,270,909 17.02% 15,856,566 15,856,566 7.29%
Total 182,708,467 24,689,909 29.45% 213,838,467 165,373,566 76.07%
========= ========== ===== ========= ========= =====
Notes:
1. Fortress Group Limited ("Fortress") is a holding company of
Funtalk China Holdings Limited ("Funtalk").
2. In December 2011, ARCH sold all its equity interests in
Orient Home Retail to DCSI. The name of the investee is not
disclosed due to a confidentiality arrangement.
3.
The accompanying notes are an integral part of these
consolidated financial statements.
Consolidated Statement of Operations for the period ended 30
June 2014
6 months 6 months
ended ended
30 June 2014 30 June 2013
US$ US$
Note (unaudited) (unaudited)
Investment income
Bank interest and sundry income 121,866 236,123
Total investment income 121,866 236,123
------------------- ------------------
Expenses
Investment management fee 4 1,078,756 1,607,810
Administration, custodian and registrar
fee 145,225 97,801
Professional fees 1,111,424 2,208,173
Directors' fees 5 99,805 112,500
Finance costs - 263,087
Impairment loss 9 6,612,981 3,581,489
Other expenses 493,590 582,433
Total expenses 9,541,781 8,453,293
-------------------- --------------------
Net investment loss (9,419,915) (8,217,170)
-------------------- --------------------
Net gain/(loss) on investments and
foreign currencies
Net realised gain on investments before
tax 13,727,143 16,109,247
Income tax expenses 7 (1,372,714) (956,563)
Net realised gain on investments 12,354,429 15,152,684
--------------------- --------------------
Net unrealised loss on investments
before tax (109,553,657) (26,386,295)
Deferred tax credit 7 1,519,800 1,982,249
Net unrealised loss on investments (108,033,857) (24,404,046)
-------------------- --------------------
Net unrealised gain on properties - 163,135
Net realised and unrealised gain on
foreign currencies - 387,810
Net loss on investments, properties
and foreign currencies (95,679,428) (8,700,417)
-------------------- --------------------
Net decrease in net assets from operations (105,099,343) (16,917,587)
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
Consolidated Statement of Changes in Net Assets for the period
ended 30 June 2014
Retained Foreign
earnings/ currency
Share Share (accumulated translation
capital premium losses) reserve Total
US$ US$ US$ US$ US$
At 1 January
2013 3,548,051 437,966,017 (122,536,243) 8,270,284 327,248,109
Repurchase of
shares (596,314) (54,264,599) - - (54,860,913)
Net
investment
loss - - (8,217,170) - (8,217,170)
Net realised
gain on
investments - - 15,152,684 - 15,152,684
Net
unrealised
loss on
investments - - (24,404,046) - (24,404,046)
Net realised
and
unrealised
gain on
foreign
currencies - - 387,810 - 387,810
Net realised
gain on
properties - - 163,135 - 163,135
Foreign
currencies
translation
difference - - - 1,488,588 1,488,588
______________ ______________ ______________ ______________ _______________
At 30 June
2013 2,951,737 383,701,418 (139,453,830) 9,758,872 256,958,197
At 1 January
2014 2,610,827 354,042,331 (146,376,886) 7,125,323 217,401,595
Repurchase of
shares (329,411) (27,670,585) - - (27,999,996)
Net
investment
loss - - (9,419,915) - (9,419,915)
Net realised
gain on
investments - - 12,354,429 - 12,354,429
Net
unrealised
loss on
investments - - (108,033,857) - (108,033,857)
Foreign
currencies
translation
difference _______- - - (447,165) _(447,165)
At 30 June
2014 2,281,416 326,371,746 (251,476,229) 6,678,158 83,855,091
=========== =========== ============ =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
Consolidated Statement of Cash Flows for the period ended 30
June 2014
6 months 6 months
ended ended
30 June 2014 30 June 2013
US$ US$
Note (unaudited) (unaudited)
Cash flows from operating activities
Net decrease in net assets from operations (105,099,343) (16,917,587)
Adjustments to reconcile net decrease
in net assets from operations to net
cash
provided by operating activities:
- Net realised gain on investments
before tax (13,727,143) (16,109,247)
- Net unrealised loss on investments
before tax 109,553,657 26,386,295
- Net unrealised gain on properties - (163,135)
- Proceeds from sale of investments 44,857,143 30,640,660
- Decrease/(increase) in investment
deposits 372,537 (924,004)
- Decrease in other assets 10 992,905 452,314
- Impairment loss for other assets 9 6,612,981 3,581,489
- Increase in restricted cash - (27,177,238)
- Decrease in deferred tax liabilities (1,522,999) (1,823,435)
- Increase in tax payable 510,559 842,063
- Increase/(decrease) in other payable
and accruals 230,388 (850,815)
- Foreign currencies translation difference (447,165) 1,488,588
Net cash used in operating activities 42,333,520 (574,052)
------------------- --------------------
Cash flows from financing activities
Proceeds from borrowings - 25,000,000
Repurchase of shares 13 (27,999,996) (54,860,913)
Net cash used in financing activities (27,999,996) (29,860,913)
-------------------- -------------------
Net increase/(decrease) in cash and
cash equivalents 14,333,524 (30,434,965)
Cash and cash equivalents at beginning
of period 19,607,765 63,194,339
Cash and cash equivalents at end of
period 11 33,941,289 32,759,374
=========== ===========
Supplemental cash flow information
- Interest paid - (71,930)
=========== ===========
Supplemental cash flow information
- Tax paid 862,154 -
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
1 General
(a) Organisation
ARC Capital Holdings Limited (the "Company") was incorporated
with limited liability in the Cayman Islands as an exempted company
under the Companies Law on 27 July 2005. On 4 April 2006, the
Company changed its name from Asia Retail Consumer Holdings Limited
to ARC Capital Holdings Limited.
The Company is a closed-end investment company trading on the
AIM Market of the London Stock Exchange. The Company's principal
investment objective was to provide its shareholders with capital
appreciation by investing in listed and unlisted companies in the
retail, consumer goods and consumer service sectors principally in
China and in neighbouring Asian countries. The Company is currently
in realisation mode.
The Company was managed by ARC Capital Partners Limited (the
"Investment Manager"). The Investment Manager was responsible for
the day-to-day management of the Company's investment portfolio,
including, subject to approval by the Investment Committee which
was appointed by the Investment Manager, the day-to-day acquisition
and disposal of investments in accordance with the Company's
investment objective and policies. ARC Capital Partners Limited
ceased to be the Investment Manager as of 7 August 2014.
(b) Investment policy
(i) Change of investment policy
On 31 January 2012, Shareholders voted to change the Company
into a realisation vehicle. Accordingly, the Company's investment
policy has been changed permanently so that no new investments will
be made.
(ii) Nature of returns to shareholders
All of the Company's existing investments will be realised in
the ordinary course of business. The net proceeds from realisations
will be returned to shareholders, after which the Company will be
wound up.
Prior to 31 January 2012, the Company's Investment Policy was as
follows:
(iii) Geographical focus
At least 70% of the Company's gross assets will be invested in
China. Up to a maximum of 30% of the Company's gross assets may
also be invested in Greater China and other countries in Asia,
should the Board consider that such investments offer potentially
attractive returns. Any investment made in countries outside of
Greater China must be approved by the Board.
(iv) Target companies
The Company targets (i) late stage companies with growth, back
up or performance enhancement potential; and (ii) expansion stage
companies with proven management and significant growth
potential.
(v) Sector focus
The Company invests primarily in listed and unlisted companies
engaged in retailing, providing services that support the retail
industry (such as consumer finance, distribution and logistics),
manufacturing or distributing consumer products or services,
developing or managing property with a focus on retailing, and
other retail and consumer-related firms.
(vi) Types of investment
As a general principle, the Company can engage in all forms of
investment as allowed under the laws of each jurisdiction in which
it operates, utilising instruments and structures that may be
suitable to allow participation in selected investment
opportunities. The Company may invest in equity, quasi-equity or
debt instruments, which may or may not represent shareholding or
management control. Where the Investment Manager and the Board deem
it appropriate, the Company may also invest up to 20% of its net
asset value in other investment pools, which themselves invest in
unlisted and listed securities in the same target geographic
regions and sectors as the Company.
(vii) Diversification limit
The Investment Manager aims to achieve a balance in the
Company's exposure to different sectors. Furthermore, no single
investment may at the time of investment exceed 20% of the
Company's net asset value.
2 Summary of significant accounting policies
These consolidated financial statements of the Company and its
subsidiaries (collectively "the Fund") are prepared in accordance
with accounting principles generally accepted in the United States
of America ("US GAAP"), which includes the application of the
provision of the AICPA Audit and Accounting Guide for Investment
Companies (the "Guide"). The following are the significant
accounting policies adopted in the preparation of these financial
statements.
(a) Use of estimates
The preparation of consolidated financial statements in
conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expense during the reporting period. Actual
results could differ from those estimates.
(b) Principles of consolidation
These consolidated financial statements include the financial
statements of the Company and its special purpose vehicles.Special
purpose vehicles ("SPVs") are consolidated from the date on which
control is transferred to the Fund and are deconsolidated from the
date that control ceases. Investments held by the SPVs are not
subject to consolidation and equity accounting as they are
non-investment company investees with the purpose to realise a gain
upon disposal rather than provide services to the Company.
Inter-company transactions and balances have been eliminated on
consolidation.
(c) Investments
(i) Recognition, derecognition and measurement
Regular purchase and sale of investments are accounted for on
the trade day, which is the day the trade is executed. All
investment securities are initially recognised at cost. Costs used
in determining net realised gains or losses on the sale of
investment securities are based on average-cost method. Legal and
due diligence fees and other charges associated with acquiring the
investments are capitalised as part of the cost of the investment
securities.
Transfer of investments is accounted for as a sale when the Fund
has relinquished control over the transferred assets. Any realised
gains or losses from investments are recognised in the consolidated
statement of operations.
Investments are subsequently carried at fair value and changes
in fair value are presented 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 its investments in the consolidated statement of
assets and liabilities at their fair value, with unrealised gains
and losses resulting from changes in fair value recognised in the
consolidated statement of operations.
Fair value is the amount that would be received to sell 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, which is
established by the Board of Directors.
The Valuation Committee uses its best judgement in estimating
fair value. In determining the fair value, the Valuation Committee
engages third party valuation agents to assist in the selection of
valuation techniques and models. However, there are inherent
limitations in any valuation technique due to the lack of
observable inputs. Estimated fair values may differ significantly
from the values that would have been used had a ready market
existed for the securities, and the differences could be material
to the financial statements. Additional information about the level
of market observability associated with investment carried at fair
value is disclosed in Note 3.
(d) Fair value hierarchy
Generally accepted accounting principles establish a fair value
hierarchy that prioritises inputs to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable input (Level
3 measurements).
The three levels of the fair value hierarchy are described
below:
Level 1: Inputs to measure fair values are unadjusted quoted
prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or liabilities;
Level 2: Inputs to measure fair values are quoted prices in
markets that are not active, quoted prices for similar assets or
liabilities in active markets, or prices or valuations for which
all significant inputs are observable, either directly or
indirectly;
Level 3: Inputs to measure fair values are both significant to
the fair value measurement and unobservable.
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 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
judgement. 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 categorisation of an asset or 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.
Securities traded on a securities exchange are stated at the
last reported sales price on the day of valuation. To the extent
these securities are actively traded and valuation adjustments are
not applied, they are categorised in Level 1 of the fair value
hierarchy. Preferred stock and other equities traded on inactive
markets or valued by reference to similar instruments are
categorised in Level 2.
Restricted securities for which quotations are not readily
available are valued at fair value as determined by the Valuation
Committee. Restricted securities issued by publicly traded
companies are generally valued at a discount to similar publicly
traded securities. Depending on the relative significance of
valuation inputs, these instruments may be classified in either
Level 2 or Level 3 of the fair value hierarchy.
Investments 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 and liabilities include
unlisted equities and convertible bonds.Their fair values are
estimated with reference to the valuation techniques recommended by
the International Private Equity and Venture Capital Valuation
Guidelines.Valuation methodologies utilised by the Valuation
Committee include but are not limited to comparable transactions or
performance multiples, latest round of financing, discounted cash
flow, and are supported by independent valuations of underlying
assets. The selection of appropriate valuation techniques may be
affected by the availability of reliable inputs. In some cases, one
valuation technique may provide the best indication of fair value
while in other circumstances, multiple valuation techniques may be
appropriate. Once an appropriate valuation methodology is
determined for an asset or liability, it will continue to be used
until a more appropriate method is determined.
(e) Cash and cash equivalents
Cash and cash equivalents comprise cash at banks placed with
reputable banking institutions with an original maturity of less
than three months.
The Fund classifies cash that is restricted for specific
purposes and is unavailable for general use as restricted cash.
(f) Income and expenses
Dividend income is recognised on the ex-dividend date with the
corresponding foreign withholding taxes recorded as an expense.
Withholding taxes on dividends have been provided for in accordance
with the Fund's understanding of the applicable country's tax rules
and rates.
Interest income and all the expenses are accounted for on an
accruals basis. Offering costs are charged to the Company's share
premium account upon the issuance of shares.
(g) Foreign currency translation
Assets and liabilities denominated in foreign currencies are
translated into US$ at the rates of exchange ruling at the
reporting date. Income and expenses denominated in foreign
currencies during the year are translated into US$ at the rates of
exchange ruling at the transaction dates. All exchange differences
arising are included in the consolidated statement of
operations.
The Fund does not isolate that portion of the results of
operations resulting from changes in foreign currency exchange
rates on investments from the fluctuations arising from changes in
market prices of securities held. Such fluctuations are included
with the net realised and unrealised gain or loss from
investments.
Net realised foreign exchange gains or losses arise from sales
of foreign currencies, currency gains or losses realised between
the trade and settlement dates on securities transactions, and the
difference between the amounts of dividends, interest, and foreign
withholding taxes recorded on the Fund's books and the US$
equivalent of the amounts actually received or paid. Net unrealised
foreign exchange gains and losses arise from changes in the fair
values of assets and liabilities, other than investments in
securities at fiscal period end, resulting from changes in exchange
rates.
If a subsidiary's functional currency is a foreign currency,
translation adjustments result from the process of translating that
entity's financial statements into the reporting currency.
Translation adjustments shall not be included in determining net
income but shall be reported separately and accumulated in a
separate component of equity.
(h) Income taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognised for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognised in
the consolidated statement of operations in the period that
includes the enactment date.
The Fund has adopted the authoritative guidance contained in
FASB ASC 740 on accounting for and disclosure of uncertainty in tax
positions, which requires management 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 recognised in the consolidated financial
statements is reduced by the largest benefit that has a greater
than 50% likelihood of being realised upon ultimate settlement with
the relevant tax authority. Prior to the adoption of Interpretation
48, the Fund recognised the effect of income tax positions only if
such positions were probable of being sustained.
(i) Share Capital
Ordinary shares are classified as equity. Where any group
company purchases the Company's equity share capital (tendered
shares), the consideration paid, including any directly
attributable incremental costs (net of income taxes) is deducted
from equity attributable to the Company's equity holders until the
shares are cancelled or reissued. Where such ordinary shares are
subsequently reissued, any consideration received, net of any
directly attributable incremental transaction costs and the related
income tax effects, is included in equity attributable to the
Company's equity holders. The holders of tendered shares have no
voting and participation rights.
3 Securities valuation
The following table summarises the changes in fair value of the
Fund's instruments by captions:
Investments - Investments -
common stock loan Total
US$ US$ US$
As at 30 June 2014
Level 1 - - -
Level 2 - - -
Level 3 10,419,000 14,270,909 24,689,909
Total Investments 10,419,000 14,270,909 24,689,909
========= ========= =========
Investments - Investments -
common stock loan Total
US$ US$ US$
As at 31 December
2013
Level 1 - - -
Level 2 - - -
Level 3 149,517,000 15,856,566 165,373,566
Total Investments 149,517,000 15,856,566 165,373,566
========= ========= =========
The following is a reconciliation of investments for which Level
3 inputs were used in determining fair value:
Investments Investments Investments
-common stock -loan -option Total
US$ US$ US$ US$
As at 1 January 2013 151,300,000 15,856,566 513,325 167,669,891
Cost of purchases 10,800,000 - - 10,800,000
Proceeds from sales (6,764,400) (542,130) - (7,306,530)
Net unrealised loss
on investments (12,583,000) - (513,325) (13,096,325)
Net realised gain
on sale of investments 6,764,400 542,130 - 7,306,530
As at 31 December
2013 149,517,000 15,856,566 - 165,373,566
========== ========== ========== =========
Proceeds from sales (44,857,143) - - (44,857,143)
Net unrealised loss
on investments (107,968,000) (1,585,657) - (109,553,657)
Net realised gain
on sale of investments 13,727,143 - - 13,727,143
As at 30 June 2014 10,419,000 14,270,909 - 24,689,909
========== =========== ========== =========
The following table summarises the net unrealised loss on
investment before tax included in consolidated statement of
operations attributable to Level 3 instruments still held as at 30
June 2013 by caption:
30 June 31 December
2014 2013
Net unrealised loss before tax US$ US$
Investments - common stock (107,968,000) (9,883,000)
Investments - loan (1,585,657) -
Investments - option - (513,325)
(109,553,657) (10,396,325)
Total ============ ============
The following table summarises quantitative information about
the valuation techniques and the significant unobservable inputs
used for Level 3 investments:
Fair value
at 30 June Valuation Significant Unobservable
Industry/Type 2014 methodology inputs Inputs
US$
EV/EBITDA multiple 6.2x
Education 10,419,000 Market approach(1) Marketability discount 30%
Loan receivable 14,270,909 Cost approach Not applicable Not applicable
24,689,909
==========
Fair value
at 31 December Valuation Significant Unobservable
Industry/Type 2013 methodology inputs Inputs
US$
Mobile phone EV/EBITDA multiple 9.6x
retail 91,367,000 Market approach(1) Marketability discount 30%
Dairy 30,000,000 Recent transaction Not applicable Not applicable
EV/EBITDA multiple 5.9x
Education 11,822,000 Market approach(1) Marketability discount 30%
EV/EBITDA multiple 27.9x
Pharmaceutical 16,328,000 Market approach(1) Marketability discount 30%
Loan receivable 15,856,566 Cost approach Not applicable Not applicable
165,373,566
==========
Note:
(1) Earnings multiples are based on comparable public companies
and transactions with comparable companies.
(2) A significant increase/(decrease) in EV/EBITA multiple would
result in a significant higher/(lower) fair value measurement.
(3) A significant increase/(decrease) in marketability discount
would result in a significant (lower)/higher fairvalue
measurement.
4 Investment management fee and realisation fee
The Investment Manager was previously entitled to receive an
investment management fee of 2% per annum of the Fund's net asset
value ("NAV") calculated at the beginning of each quarter based on
the average month end NAV of the Fund of the previous quarter and
payable in advance.
Since 31 January 2012, the investment management fee was reduced
from 2% to 1% per annum of the Fund's NAV.
For the period ended 30 June 2014, the Fund incurred an
investment management fee of US$1,078,756 (for the period ended 30
June 2013: US$1,607,810).
With effect from 31 January 2012, as an incentive to realise the
best possible exit value for the Fund's assets, the Investment
Manager was entitled to receive a realisation fee equal to a
percentage of the net proceeds received by the Fund on the
realisation of each asset (the "Fee Percentage"), to be paid once
the "Company Realisation Value" (being the aggregate net proceeds
received by the Fund on the disposal of the assets) exceeds the
Fund's audited NAV at 31 December 2011. For assets realised in
2012, the Fee Percentage was 2.8%, and this reduced to 2.52% for
assets realised in 2013 and reduced to 2.268% for assets realised
in 2014.
For the period ended 30 June 2014, the Fund has not accrued a
realisation fee (nil for the period ended 30 June 2013).
5 Directors' fees and remuneration
The Company pays each of its directors an annual fee of
US$30,000, and an additional US$10,000 per annum for chairing any
committee of the Board and an additional US$5,000 per annum for
serving as a regular member of any committee of the Board. During
the period, Christopher Marcus Gradel agreed to waive his annual
fee for so long as he had an equity interest in the Investment
Manager.
In January 2012, the Company entered into separate 3-year
consulting service agreements with Helen Wong and Steven Feniger.
Consulting fees are subject to a maximum of US$40,000 each per
annum. During the period ended 30 June 2014, consulting fees
totalling US$80,000 were paid to Helen Wong (US$40,000) and Steven
Feniger (US$40,000).
6 Remuneration for Consultant to the Board
Borrelli Walsh Limited was appointed as Consultant to the Board
on 21 March 2014. For the first 90 days of its appointment,
Borrelli Walsh Limited was paid a set up fee of US$50,000 and,
starting from 20 June 2014, charges a fixed fee of US$175,000 per
quarter.
7 Current and deferred income taxes
(a) No provision for Cayman Islands taxes are provided as the
Fund is not currently subject to income tax in the Cayman Islands.
The Fund has obtained an undertaking from the Governor in Cabinet
of the Cayman Islands that for a period of 20 years from 9 August
2005:
- no law which is thereafter enacted in the Cayman Islands
imposing any tax to be levied on profits, income, capital gains or
appreciations shall apply to the Fund or its operations; and
- no aforesaid tax or withholding tax, nor estate duty or
inheritance tax shall be payable on or in respect of the share
debentures or other obligations of the Fund.
(b) The Fund may be subject to taxes imposed in other countries
in which it invests. Such taxes are generally based on income
and/or gains generated. Dividend and interest income received by
the Fund may be subject to withholding tax imposed in the country
of origin. This income is recorded gross of such taxes and the
withholding tax, if any, is recognised separately in the
consolidated statement of operations.
The directors have reviewed the structure of the Fund's
investment portfolio and considered that the Fund's exposure to
Hong Kong and China profits tax has been properly reflected in the
Fund's consolidated financial statements.
8 Investment deposits
In December 2007, the Fund transferred US$13.6 million to Orient
Group Industrial Co. Ltd. ("Orient Group") as an investment
deposit. In December 2011, the Fund recognised an impairment of
US$2.2 million for the deposit resulting from the intention to
offset the US$11.4 million payable balance (Refer to Note 12). No
further impairment has been recognised as at 30 June 2014.
In December 2010, the Fund transferred US$76.2 million (or
RMB480 million) to Orient Home Company Ltd ("Orient Home"), a
controlled affiliate of Orient Group, under an Equity Purchase
Agreement dated 10 December 2010 (the "Agreement"). Orient Home
failed to fulfil the terms of the Agreement, and the Fund has not
received any repayment from Orient Home as of the date of this
report. In view of this, the Directors had recognised an impairment
of US$22.9 million for investment deposit in December 2012,
representing approximately 30% of the investment deposit.
In May 2013, the Fund's PRC investment vehicle filed a Request
for Arbitration with the China International Economic and Trade
Arbitration Commission ("CIETAC") with respect to the investment
deposit and in July 2013 was granted an asset preservation order
against Orient Home by the Beijing First Immediate People's Court.
The order has legally preserved a 14% equity interest in Beijing
Taiyanghuo Culture Industry Investment Co., Ltd, which is an equity
investment of Orient Home. A 14% equity interest is deemed
equivalent to RMB280 million of registered capital. The Fund was
able to obtain the preservation order for RMB280 million with a
guarantee obtained from a guaranteeing company, including pledging
certain assets of the Company amounting to RMB16.8 million (or
US$2.8 million) to the guaranteeing company (see Note 10(b)).
It has been deemed appropriate by the Valuation Committee to
further reduce the value of the investment deposit from RMB280m to
RMB250m for the period ended 30 June 2014.
9 Impairment loss
30 June 30 June
2014 2013
US$ US$
Provision on loan interest receivable 2,401,566 -
(Note 17)
Provision on Jiadeli sale proceeds
and dividends (Note 10 (a)) 4,211,415 3,581,489
Total impairment loss 6,612,981 3,581,489
=========== ===========
10 Other assets
At 30 June 2014 and 31 December 2013, other assets were as
follows:
30 June 31 December
2014 2013
US$ US$
Jiadeli sale proceeds and dividends
(Note 10 (a)) - 4,560,271
Properties(Note 10 (b)) 2,454,167 2,476,668
Loan interest receivable (Note 17 (c)) - 2,416,451
Goodbaby private tax escrow (Note 10
(c)) 1,879,000 1,879,000
Others 1,942,159 2,548,822
Total other assets 6,275,326 13,881,212
========== ===========
(a) The Fund sold its entire interest in Shanghai Jiadeli
Supermarket Co., Ltd ("Jiadeli") for RMB1.1 billion, with RMB100
million of the consideration withheld by the purchaser for any
post-closing adjustment to the purchase price. Adjustments to the
total purchase price, if any, shall not exceed RMB100 million and
can only be claimed from the withheld amount.
As part of the sale of Jiadeli, it was agreed that the holdback
of RMB100 million would be paid to the Fund 12 months after
closing, subject to adjustments based on the result of a
post-closing audit by the purchaser. The Fund and the purchaser
could not agree on the result of the closing audit. In accordance
with the sale and purchase agreement an independent third-party
mediator was appointed by both parties to resolve the dispute.
In May 2013, the Fund's PRC investment vehicle filed a Request
for Arbitration with CIETAC. On 3 June 2014, CIETAC awarded and
adjudged that HNA Group shall pay ARCH RMB90 million (equivalent to
adjusted amount of the sale proceeds holdback in full, RMB10
million less than the original holdback amount) together with
interest and arbitration fees. Although this is a positive
development, it will be necessary to enforce the award and recover
the amount awarded.
A total of 75% impairment was made against the holdback payment
amount as at 31 December 2013, and having reviewed the current
status of the holdback and arbitration process, the Board has
deemed it appropriate to recognise a 100% provision against the
holdback payment amount of RMB100 million for the period ended 30
June 2014.
(b) The properties are pledged as part of the guarantee required
to secure the asset preservation order of RMB280 million as
described In Note 8.
(c) On 11 December 2013, the Fund completed the sale of its
entire holding in Goodbaby Private and realised a total of
approximately US$6.8 million of which approximately US$1.9 million
was deposited as the tax escrow based on the escrow agreement
signed on 9 December 2013.
11 Cash and cash equivalents
Cash and cash equivalents as at 30 June 2014 and 31 December
2013 consisted of:
30 June 31 December
2014 2013
US$ US$
US$ 21,037,063 6,978,166
RMB 12,903,720 12,627,576
HK$ 506 2,023
Total cash and cash equivalents 33,941,289 19,607,765
=========== ===========
12 Other payables
At 30 June 2014, other payables and accruals were as
follows:
30 June 31 December
2014 2013
US$ US$
Payable for an investment 11,391,668 11,391,326
Deposit received - Xian Edu sales proceeds 12,205,825 -
Deposit received from Shaanxi Da De's
buyer - 12,317,735
Other creditors 1,262,808 920,852
Total other payables 24,860,301 24,629,913
========== ==========
On 23 November 2013, the Fund entered into a definitive
agreement to sell its entire stake in Shaanxi Da De Education. The
Fund has received an initial deposit of RMB75.1 million
(approximately US$12.3 million) as at 31 December 2013. The fund
will receive a final payment of RMB90.1 million (US$14.8 million)
no later than 10 December 2014 to complete the sale. The fund will
retain the rights to its current equity holding in Shaanxi Da De
Education until such time as the final payment has been
received.
13 Share capital, share premium and tendered shares
Number of Share Share
shares outstanding capital Premium Total
US$ US$ US$
As at 1 January
2013 354,805,070 3,548,051 437,966,017 441,514,068
Share repurchase
and cancellation (93,722,332) (937,224) (83,923,686) (84,860,910)
As at 30 December
2013 261,082,738 2,610,827 354,042,331 356,653,158
Share repurchase
and cancellation (32,941,172) (329,411) (27,670,585) (27,999,996)
As at 30 June 2014 228,141,566 2,281,416 326,371,746 328,653,162
========== ========== ========== ==========
On 31 January 2014, 32,941,172 ordinary shares were repurchased
and cancelled by the Company at a price of US$0.88 per share,
representing approximately 12.6% of the Company's ordinary shares
in issue. The shares were repurchased for a total consideration of
approximately US$28 million.
Following the repurchase and cancellation, the Company has a
total of 228,141,566 ordinary shares in issue as at 30 June
2014.
At 30 June 2014, the total authorised number of ordinary shares
was 500,000,000 (31 December 2013: 500,000,000) with par value of
US$0.01 (31 December 2013: US$0.01) per share.
14 Concentration of market, industry, credit, currency and liquidity risks
The Fund's activities (including both investments and loans) may
expose it to a variety of risks: mainly market risk, industry risk,
credit risk, currency risk and liquidity risk.
(a) Market risk
Market risk is the risk that the value of a financial instrument
will fluctuate as a result of changes in market variables such as
interest, foreign exchange rates and equity prices, whether those
changes are caused by factors specific to the particular security
or factors that affect all securities in the markets. Investments
are typically made with a specific focus on Greater China and thus
are concentrated in that region. Political or economic conditions
and the possible imposition of adverse governmental laws or
currency exchange restrictions in that region could cause any of
the Fund's investments and their markets to be less liquid and
prices more volatile. The Fund is exposed to market risk on all of
its investments.
(b) Industry risk
The Fund's investments may be concentrated in a particular
industry or sector and performance of the particular industry or
sector may have a significant impact on the Fund.
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, can be subject to
various restrictions on resale and there can be no assurance that
the Fund will be able to realise the value of such investments in a
timely manner.
(c) Credit risk
Credit risk is the risk that an issuer/counterparty will be
unable or unwilling to meet its commitments to the Fund. Financial
assets that are potentially subject to significant credit risk
consist of cash and cash equivalents, investments in convertible
bonds, investment deposits and receivables.
The maximum credit risk exposure of these items is their
carrying value.
(d) 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 will fluctuate due to changes in
exchange rates.
The table below summarises the Fund's net exposure to each
currency as at 30 June 2014 and 31 December 2013.
30 June 31 December
2014 2013
US$ US$
US$ 1,945,321 136,126,201
RMB 81,909,264 81,273,371
HK$ 506 2,023
Total 83,855,091 217,401,595
=========== ==========
(e) Liquidity risk
The Fund is exposed to liquidity risk as the Fund's investments
are largely illiquid while the majority of the Fund's liabilities
are with short maturity. 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 where necessary to meet liquidity requirements. As a
result, the Fund may be exposed to significant liquidity risk.
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 exposed to
the risk of repatriating funds out of China to meet its obligations
on a timely basis.
15 Related party transactions
(a) Certain directors of the Company were, during the reporting
period, shareholders and directors of the Investment Manager, which
provided investment management services to the Company and earned
an investment management fee. In addition the Investment Manager
was entitled to a realisation fee if certain conditions are met
(Note 4).
(b) As at 30 June 2014, the former Investment Manager and its
subsidiary held 2,380,783 ordinary shares of the Company (2013:
2,380,783).
16 Financial highlights
(a) Per share operating performance
6 months ended 6 months ended
30 June 2014 30 June 2013
US$ US$
Net asset value per share, start
of period 0.83 0.92
--------- ---------
Income from investment operations:
- net investment loss (0.04) (0.03)
- net realised and unrealised loss
on
investments and foreign currencies (0.42) (0.02)
Total from investment operations (0.46) (0.05)
--------- ---------
Net asset value per share, end of
period 0.37 0.87
===== =====
The net asset value per share is calculated based on the total
number of shares issued and outstanding excluding tendered shares
(Note 13).
(b) Ratios to average net assets and other supplemental information
6 months ended 6 months ended
30 June 2014 30 June 2013
US$ US$
Ratio of net investment loss to average
net assets (4.6%) (2.7%)
====== ======
Ratio of expenses to average net
assets
Operating expenses before incentive
fees (4.6%) (2.8%)
Incentive fees (1) - -
Total expenses (4.6%) (2.8%)
====== ======
Cumulative internal rate of return ("IRR") since
inception through the period end
(1) (9.7%) (4.7%)
====== ======
Note:
1. The operating expenses before incentive fees include an
impairment loss of US$6,612,981 (Note 9). If the impairment loss is
excluded, the ratio of expenses to average net assets is 1.4%.
2. The IRR is computed net of all incentive fees (being
performance fees and realisation fees as defined in the Investment
Management Agreement entered into between the Company and the
Investment Manager dated 20 June 2006, as amended on 1 April 2009
and 31 January 2012) based on the Fund's actual dates of the cash
inflows (capital contributions), outflows (cash and stock
distributions) and the ending NAV at the end of the period
(residual value) as of each measurement date.
17 Investment update
(a) Disposal of Xiajin Diary
On 27 January 2014, ARCH completed the sale of its entire stake
in Ningxia Xiajin Dairy Co., Ltd. to Prospect Link Limited, an
investment holding company controlled by a trade buyer, for a total
cash consideration of US$30 million.
(b) Disposal of Fortress
On 31 March 2014, the Company entered into certain definitive
agreements to sell its entire equity stake in Fortress for a
minimum cash consideration of US$137.3 million to Sanpower Group
Co. Ltd ("the Purchaser"). The transaction was subject to a number
of conditions precedent, including (but not limited to):
-- shareholder approval;
-- closing occurring under a separate agreement between PAG Asia
I LP and the Purchaser under which the Purchaser would indirectly
acquire certain securities of Funtalk ("PAG Closing");
-- receipt by the Company of a legal opinion/memorandum issued
by the Purchaser's PRC legal counsel; and
-- parties' representations and warranties remaining true and
parties' continued compliance with the agreements.
The total consideration to be paid by the Purchaser comprised of
three tranches of which:
First Tranche: US$12.5 million payable at PAG Closing;
Second Tranche: US$25 million payable on the 20(th) business day
following the First Tranche of payment;
Third Tranche: US$99.8 million payable on demand 12 months after Second Tranche payment.
The sale of Fortress was approved by the shareholders of ARCH's
EGM held on 16 May 2014. ARCH was informed in June 2014 that the
PAG Closing had not occurred. See further details in Subsequent
Event Section (Note 18).
(c) Loan extension with a Domestic China Strategic Investor (DCSI)
On 29 December 2011, as part of the sale of the Fund's equity
interest in Orient Home Retail to DCSI, the Fund also provided the
DCSI with a RMB100 million (or US$15.9 million) bridge loan, which
was to be used by the DCSI to meet Orient Home Retail's short term
working capital needs during the transition of ownership. The loan
carries interest rate at 8% per annum and has a term of 12 months.
On 26 August 2013, the loan was extended to 30 June 2014 with the
same interest rate at 8% per annum. On 10 September 2013, ARCH
received a RMB1 million interest payment from the DCSI.
(c) Loan extension with a Domestic China Strategic Investor (DCSI)
In April 2014, the Valuation Committee had agreed to reduce the
value of the loan by 10% and has fully written off the remaining
outstanding interests. Total impairment amount is approximately
US$4.2 million as at 30 June 2014. The loan was overdue on 30 June
2014.
(d) Disposal of Buchang
On 30 April 2014, the Company entered into a sales and purchase
agreement to sell the entire stake of ARCH Media Development Ltd,
an investment holding vehicle majority-owned by the Company, for a
total consideration of US$14,857,143. On 27 May 2014, the
transaction had completed and full consideration was received by
the fund.
17 Subsequent Events
(a) Resignation of Investment Manager
On 7 February 2014, the Investment Manager announced that it had
given notice of its resignation as investment manager of the
Company. The Investment Management Agreement terminated on 7 August
2014.
(b) Disposal of Fortress
In July 2014, ARCH was informed that the Purchaser and Fortress
had entered into an agreement to sell Fortress's 100% equity
interest in Funtalk to the purchaser ("Fortress Sale").
Subsequent to the Fortress Sale, PAGAC Fortress Holding I
Limited ("PAGAC"), an associated company of PAG Capital, issued a
notice to Fortress to exercise the put option referred to in the
shareholders agreement that was entered into by ARCH Digital at the
time of the privatisation of Funtalk. If Fortress fails to perform
its obligation under the Put Option, the requirement to repurchase
PAGAC's Preferred Shares and Convertible Bonds falls to the
shareholders of Fortress other than PAGAC pro-rata, including ARCH
Digital. On 3 September 2014, ARCH Digital received a notice
stating that PAGAC is exercising its right pursuant to the
Shareholders Agreement to require that ARCH Digital purchase its
pro rata portion of the put securities, as Fortress has failed to
pay the entire put price. Neither ARCH Digital nor ARCH has the
necessary cash or liquid assets to pay the unpaid put price. If
PAGAC enforces its security interest under the Share Charge
Agreement dated 25 August 2011, there is a high chance that the
value of ARCH Digital's interest in Fortress could be fundamentally
impaired notwithstanding that the value of the interest in ARCH
Digital has already been written down to zero.
(c) Claim against the Investment Manager
On 15 August 2014, ARCH filed legal proceedings against ARC
Capital Partners Limited, the former Investment Manager of ARCH,
for negligence and/or breach of its investment management agreement
with ARCH related to the Orient Home Deposit.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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