NIKKO AM HONG KONG LIMITED STRATEGIC SERIES Nikko AM China Multi Access Opportunities Fund. Interim Report 30th April 2015

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1 Nikko AM Hong Kong Limited Strategic Series Interim Report 30th April 2015

2 Nikko AM China Multi Access Opportunities Fund Interim Report 30th April 2015

3 Nikko AM China Multi Access Opportunities Fund Contents Pages Management and Administration 1 Statement of Financial Position (Unaudited) 2 Investment Portfolio (Unaudited) 3 Statement of Movements in Portfolio Holdings (Unaudited) 4-5

4 Nikko AM China Multi Access Opportunities Fund MANAGEMENT AND ADMINISTRATION Directors of the Manager Trustee and Registrar Andrew Ross Long HSBC Trustee (Cayman) Limited Blair Chilton Pickerell P.O. Box 484 David Jonathan Semaya (appointed on 1st March 2015) HSBC House 68 West Bay Road Grand Cayman KY Cayman Islands Manager Service Provider to the Trustee Nikko Asset Management Hong Kong Limited HSBC Institutional Trust Services (Asia) Limited , 24/F, Man Yee Building 17/F, Tower 2&3, HSBC Center Des Voeux Road Central 1 Sham Mong Road, Kowloon, Hong Kong Hong Kong Investment Sub-Manager Legal Advisors Nikko Asset Management Asia Limited As to matters of Hong Kong law: 12 Marina View Deacons #18-02 Asia Square Tower 2 5/F Alexandra House Singapore Chater Road Central Auditor Hong Kong PricewaterhouseCoopers As to matters of Cayman Islands law: P.O. Box 258GT Campbells Strathvale House Scotia Centre George Town P.O. Box 884 Grand Cayman KY George Town, Grand Cayman Cayman Islands KY Cayman Islands - 1 -

5 Nikko AM China Multi Access Opportunities Fund STATEMENT OF FINANCIAL POSITION (UNAUDITED) AS AT 30TH APRIL 2015 (Unaudited) (Audited) 30th April st October 2014 US$ US$ Assets Financial assets at fair value through profit or loss 3,052,033 3,194,696 Other receivables - 1,315 Cash and cash equivalents 48,364 22,719 Total assets 3,100,397 3,218, Liabilities Amount payable on redemptions 20,588 - Accrued expenses and other liabilities 26,709 45,021 Total liabilities 47,297 45, Equity Net assets attributable to unitholders 3,053,100 3,173,709 Units in issue 2,978,492 3,805,107 Net asset attributable to unitholders per unit

6 Nikko AM China Multi Access Opportunities Fund INVESTMENT PORTFOLIO (UNAUDITED) AS AT 30TH APRIL 2015 Listed/Quoted investments Holdings Fair value % of NAV US$ Listed Equities Hong Kong Agricultural Bank of China Ltd - H Shares 224, , Anhui Conch Cement Co Ltd - H Shares 12,500 50, Bank of China Ltd - H Shares 207, , BYD Electronic (International) Co Ltd 114, , China Cinda Asset Management Co Ltd - H Shares 146,000 87, China Medical System Holdings Ltd 67, , China Merchants Bank Co Ltd - H Shares 54, , China Mobile Ltd 17, , China Pacific Insurance (Group) Co Ltd - H Shares 34, , China Taiping Insurance Holdings Co Ltd 54, , China Traditional Chinese Medicine Co Ltd 98,000 76, Chu Kong Petroleum and Natural Gas Steel Pipe Holdings Ltd 215,000 65, CSPC Pharmaceutical Group Ltd 120, , Haitong Securities Co Ltd - H Shares 67, , Huadian Fuxin Energy Corporation Ltd - H Shares 80,000 43, Industrial and Commercial Bank of China Ltd - H Shares 209, , PW Medtech Group Ltd 366, , Semiconductor Manufacturing International Corporation 1,113, , Shimao Property Holdings Ltd 34,000 80, Sinosoft Technology Group Ltd 184, , Tencent Holdings Ltd 10, , Tingyi (Cayman Islands) Holding Corporation 24,000 50, Wisdom Holdings Group 86,000 75, ,052, Total Investments At Cost 1,983,

7 Nikko AM China Multi Access Opportunities Fund STATEMENT OF MOVEMENTS IN PORTFOLIO HOLDINGS (UNAUDITED) FOR THE PERIOD FROM 1ST NOVEMBER 2014 TO 30TH APRIL 2015 Listed/Quoted investments Holdings 1st November 2014 Additions Disposals 30th April 2015 Listed Equities Hong Kong Agricultural Bank of China Ltd - H Shares 224, ,000 Anhui Conch Cement Co Ltd - H Shares 35,000-22,500 12,500 Bank of China Ltd - H Shares 482, , ,000 BYD Electronic (International) Co Ltd 114, ,000 China Cinda Asset Management Co Ltd - H Shares 146, ,000 China Hongqiao Group Ltd 52,500-52,500 - China Medical System Holdings Ltd 67, ,000 China Merchants Bank Co Ltd - H Shares 54, ,000 China Mobile Ltd 19,500-2,500 17,000 China Modern Dairy Holdings Ltd 100, ,000 - China Pacific Insurance (Group) Co Ltd - H Shares 34, ,600 China South City Holdings Ltd 90,000-90,000 - China Taiping Insurance Holdings Co Ltd 73,000 15,330 34,000 54,330 China Traditional Chinese Medicine Co Ltd 98, ,000 Chu Kong Petroleum and Natural Gas Steel Pipe Holdings Ltd 215, ,000 CIMC Enric Holdings Ltd 70,000-70,000 - CSPC Pharmaceutical Group Ltd 120, ,000 CRRC Corporation Ltd - H Shares 82,000-82,000 - GCL - Poly Energy Holdings Ltd 150, ,000 - Goodbaby International Holdings Ltd 110, ,000 - Haitong Securities Co Ltd - H Shares 67, ,600 Huadian Fuxin Energy Corporation Ltd - H Shares - 80,000-80,000 Huaneng Power International Inc - H Shares 78,000-78,000 - Industrial and Commercial Bank of China Ltd - H Shares 268,000-59, ,000 PW Medtech Group Ltd 153, , ,000 Semiconductor Manufacturing International Corporation 1,113, ,113,000 Shandong Weigao Group Medical Polymer Co Ltd - H Shares 76,000-76,000 - Shimao Property Holdings Ltd 34, ,000 Sinosoft Technology Group Ltd 226,000-42, ,000 Sunny Optical Technology (Group) Co Ltd 58,000-58,000 - Tencent Holdings Ltd 10, ,500 Tingyi (Cayman Islands) Holding Corporation 24, ,000 Trinity Ltd 108, ,000 - Wisdom Holdings Group - 86,000-86,

8 Nikko AM China Multi Access Opportunities Fund STATEMENT OF MOVEMENTS IN PORTFOLIO HOLDINGS (UNAUDITED) (CONTINUED) FOR THE PERIOD FROM 1ST NOVEMBER 2014 TO 30TH APRIL 2015 Listed/Quoted investments Holdings 1st November 2014 Additions Disposals 30th April 2015 Rights Hong Kong China Taiping Insurance Holdings Co Ltd RTS 15,330-15,

9 Nikko Asset Management Hong Kong Limited 24/F Man Yee Building Des Voeux Road Central, Hong Kong Tel Fax

10 Nikko AM Hong Kong Limited Strategic Series Annual Report 31 October 2014

11 REPORTS AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 OCTOBER 2014

12 REPORTS AND FINANCIAL STATEMENTS Contents Pages Management and Administration... 2 Report of the Manager... 3 Report of the Trustee... 4 Independent Auditor s Report Statement of Financial Position... 7 Statement of Comprehensive Income... 8 Statement of Changes in Equity... 9 Statement of Cash Flows Notes to the Financial Statements Investment Portfolio (Unaudited) Statement of Movements in Portfolio Holdings (Unaudited) Performance Table (Unaudited)... 32

13 MANAGEMENT AND ADMINISTRATION Directors of the Manager Andrew Ross Long Blair Chilton Pickerell Manager Nikko Asset Management Hong Kong Limited , 24/F, Man Yee Building Des Voeux Road Central Hong Kong Investment Sub-Manager Nikko Asset Management Asia Limited 12 Marina View #18-02 Asia Square Tower 2 Singapore Investment Advisor (Terminated on 30 June 2014) Changsheng Fund Management Company Limited 21/F, Block A Chengjian Plaza 18 Beitaipingzhuang Road Haidian District Beijing , PRC Trustee and Registrar HSBC Trustee (Cayman) Limited P.O. Box 484 HSBC House 68 West Bay Road Grand Cayman KY Cayman Islands Service Provider to the Trustee HSBC Institutional Trust Services (Asia) Limited 17/F, Tower 2&3, HSBC Center 1 Sham Mong Road, Kowloon, Hong Kong Legal Advisors As to matters of Hong Kong law: Deacons 5/F Alexandra House 18 Chater Road Central Hong Kong As to matters of Cayman Islands law: Campbells Scotia Centre P.O. Box 884 George Town, Grand Cayman KY Cayman Islands Auditor PricewaterhouseCoopers P.O. Box 258GT Strathvale House George Town Grand Cayman KY Cayman Islands - 2 -

14 REPORT OF THE MANAGER Performance For the year ended 31 October 2014, the net return of the Fund is 5.44% in USD terms. The China market staged a strong rally in the last quarter of the financial year due to interest rate cut by the PBOC which has not happened in the last 2 years. Property, insurers and Independent Power Producers (IPPs) were seen as beneficiaries of the rate cuts and rallied. Financial sector which are seen as direct beneficiaries of rate cuts also performed well. At the same time, the Hong Kong Shanghai Stock Connect injected more liquidity into the market boosting sentiments. Although the A-share market did better than the H-share market, investors were generally optimistic that the anti-corruption campaign and the long list of reforms that President Xi Jinping has implemented will be positive for China in the long run. Foreign investors generally are more cautious on the outlook relative to it s a-share counterparts. The economy continues to be challenging with PMI struggling at the 50 points neutral mode. However, the non-manufacturing PMI which tracks the services sector seem to be comfortably in expansion mode and we believe that that is the Index to follow going forward. Outlook We are positive on the outlook of China equities (including H-shares and Red Chips listed in Hong Kong) in the coming years. Despite several reforms being implemented by President Xi Jinping in less than 12 months since he gained absolute power, overseas investors are generally sceptical as evident by the lacklustre performance of MSCI China. Hence, the MSCI China Index is only up a mere 3.5% (till Nov in 2014) while the more widely followed CSI300 Index which tracks China stocks listed in Shanghai and Shenzhen Stock Exchange is up 18.8%. This demonstrates the local investors growing confidence while foreign investors are still sceptical after 5 years of delayed reforms in China. We are in the contrarian camp where we believe that eventually the results of the reforms from better returns will be reflected in the economy and as China switch from a more Fixed Asset Investment economic model to a more consumption based economic model, the growth will be of higher quality and investors will eventually appreciate it. China is entering a new normal where we should no longer expect 10% economic growth but with a focus on the higher quality growth that is being generate through a more consistent 5 to 6% growth that is far less credit driven. The focus should no longer be in the stimulus but on the more reforms oriented part of the economy to make China less volatile and more competitive. We are confident that President Xi Jinping is implementing the right measures and it will show in the economy going forward

15 REPORT OF THE TRUSTEE We hereby confirm that, in our opinion, the Manager has, in all material respects, managed the Nikko AM Hong Kong Limited Strategic Series - Nikko AM China Multi Access Opportunities Fund in accordance with the provisions of the Trust Deed dated 30 January 2004, as subsequently amended in the Supplemental Deed on 12 September 2007 and 27 October 2011, for the year ended 31 October On behalf of HSBC Trustee (Cayman) Limited, 12 February

16 INDEPENDENT AUDITOR S REPORT To HSBC Trustee (Cayman) Limited solely in its capacity as Trustee of Nikko AM China Multi Access Opportunities Fund (the Sub-Fund ), sub-fund of Nikko AM Hong Kong Limited Strategic Series Report on the Financial Statements We have audited the financial statements of the Nikko AM China Multi Access Opportunities Fund (the Sub-Fund ), a sub-fund of Nikko AM Hong Kong Limited Strategic Series (the Fund ), set out on pages 7 to 28, which comprise the statement of financial position as at 31 October 2014, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements The Trustee and the Manager (the Management ) of the Fund are responsible for the preparation of financial statements that give a true and fair view in accordance with Hong Kong Financial Reporting Standards issued by the Hong Kong Institute of Certified Public Accountants, and are responsible for ensuring that the financial statements have been properly prepared in accordance with the relevant disclosure provisions of the Trust Deed dated 30 January 2004, as subsequently amended in the Supplemental Deed on 12 September 2007 and 27 October 2011 (the Trust Deed ), and Appendix E of the Code on Unit Trusts and Mutual Funds issued by the Securities and Futures Commission of Hong Kong (the SFC Code ), and for such internal control as the Management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Hong Kong Standards on Auditing issued by the Hong Kong Institute of Certified Public Accountants. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. We are also required to assess whether the financial statements of the Fund have been properly prepared, in all material respects, in accordance with the relevant disclosure provisions of the Trust Deed and the SFC Code

17 INDEPENDENT AUDITOR S REPORT (CONTINUED) To HSBC Trustee (Cayman) Limited solely in its capacity as Trustee of Nikko AM China Multi Access Opportunities Fund (the Sub-Fund ), sub-fund of Nikko AM Hong Kong Limited Strategic Series Auditor s Responsibility (Continued) An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Sub-Fund s preparation of financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Sub-Fund s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements give a true and fair view of the financial position of the Sub-Fund as at 31 October 2014, and of its financial transactions and cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards. Report on Other Legal and Regulatory Requirements In our opinion, the financial statements have been properly prepared, in all material respects, in accordance with the relevant disclosure provisions of the Trust Deed and the SFC Code. PricewaterhouseCoopers Cayman Islands, 12 February

18 STATEMENT OF FINANCIAL POSITION AS AT 31 OCTOBER Note US$ US$ Assets Financial assets at fair value through profit or loss 3(a) 3,194,696 3,602,602 Other receivables 1, ,783 Cash and cash equivalents 22, ,664 Total assets 3,218,730 4,354, Liabilities Financial liabilities at fair value through profit or loss 3(a) - 50 Amount payable on redemptions - 49,612 Accrued expenses and other liabilities 45, ,551 Total liabilities 45, , Equity Net assets attributable to unitholders 7 3,173,709 3,772,836 Approved by the Trustee and the Manager on 12 February Trustee.. Manager The notes on pages 11 to 28 form an integral part of these financial statements

19 STATEMENT OF COMPREHENSIVE INCOME Note US$ US$ Income Dividend income 89, ,031 Net foreign currency losses on cash and cash equivalents (1,456) (2,000) Net changes in fair value on financial assets and liabilities at fair value through profit or loss 4 287, ,925 Total investment income 375, , Expenses Management fee 5(a) 50,280 62,429 Trustee fee 5(b) 57,749 37,611 Auditor s fee 37,401 37,551 Legal and professional fee 2,811 - Transaction costs 29,162 40,268 Administration fee 7,117 6,426 Other operating expenses 14,471 11,245 Total operating expenses 198, , Profits before tax 176, ,426 Less: Withholding tax on dividend income 7,492 10,108 Total comprehensive income 169, ,318 The notes on pages 11 to 28 form an integral part of these financial statements

20 STATEMENT OF CHANGES IN EQUITY Note US$ US$ Balance at the beginning of the year 3,772,836 4,887, Redemption of units (768,565) (1,343,613) Net decrease from unit transactions (768,565) (1,343,613) Total comprehensive income 169, , Balance at the end of the year 7 3,173,709 3,772,836 The notes on pages 11 to 28 form an integral part of these financial statements

21 STATEMENT OF CASH FLOWS US$ US$ Cash flows from operating activities Total comprehensive income 169, ,318 Adjustments to reconcile total comprehensive income to cash generated from operating activities Dividend income (89,579) (122,031) Withholding tax on dividend income 7,492 10,108 Net decrease in financial assets and liabilities at fair value through profit or loss 407,856 1,230,827 Decrease/ (increase) in other receivables 308,783 (260,298) (Decrease)/ increase in accrued expenses and other liabilities (486,530) 437,707 Net foreign currency losses on cash and cash equivalents (1,456) (2,000) Cash generated from operating activities 316,004 1,523,631 Dividend received 88, ,031 Withholding tax paid (7,492) (10,108) Net cash generated from operating activities 396,776 1,635, Financing activities Payments on units redeemed (818,177) (1,371,657) Net cash used in financing activities (818,177) (1,371,657) Net (decrease)/ increase in cash and cash equivalents (421,401) 263,897 Cash and cash equivalents at the beginning of the year 442, ,767 Net foreign currency losses on cash and cash equivalents 1,456 2,000 Cash and cash equivalents at the end of the year 22, ,664 Representing Cash at banks 22, ,664 The notes on pages 11 to 28 form an integral part of these financial statements

22 NOTES TO THE FINANCIAL STATEMENTS 1 General Nikko AM Hong Kong Limited Strategic Series (the Fund ) is an umbrella unit trust governed by its Trust Deed dated 30 January 2004, as subsequently amended in the Supplemental Deed on 12 September 2007 and 27 October 2011 (the Trust Deed ). The Fund has only one sub-fund, Nikko AM China Multi Access Opportunities Fund (the Sub-Fund ), in respect of which a separate class of units was issued. The Sub-Fund was established on 25 October 2007 and its units were first issued on 4 December The Fund is registered as an Exempted Trust under Section 74 of the Cayman Islands Trust Law 6 of 1967 (2003 Revision) and is regulated by the Cayman Islands Monetary Authority under the Cayman Islands Mutual Funds Law. The Fund is authorised by the Securities and Futures Commission of Hong Kong (the SFC ) under Section 104(1) of the Hong Kong Securities and Futures Ordinance and is required to comply with the Code on Unit Trusts and Mutual Funds established by the SFC. The investment objective of the Sub-Fund is to achieve long-term capital appreciation and seek to deliver absolute returns. The investment focus of the Sub-Fund is to invest directly and/or indirectly in securities issued by: (a) (b) companies/entities domiciled in or listed on the stock exchange in the People s Republic of China (the PRC ); and companies/entities domiciled in or listed on a stock exchange outside the PRC whose: (i) (ii) (iii) operations or assets are based mainly in the PRC; management or ownership is mainly controlled by an entity that is established or incorporated in the PRC; or revenues or profits are mainly derived from the PRC, including, but not limited to H-Shares, Red-Chips, S-Chips, P-Chips, interests in exchange traded funds and real estate investment trusts. Nikko Asset Management Hong Kong Limited, a company incorporated under the laws of Hong Kong, is the manager of the Fund (the Manager ). The Manager is responsible for, among other things, providing investment management services, investment advice and administrative services to the Fund and arranging for the execution of the Fund s securities transactions

23 NOTES TO THE FINANCIAL STATEMENTS 2 Summary of significant accounting policies The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. (a) Basis of preparation The financial statements of the Sub-Fund have been prepared in accordance with Hong Kong Financial Reporting Standards ( HKFRS ). The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and liabilities (including derivatives) held at fair value through profit or loss. The preparation of financial statements in conformity with HKFRS requires the use of accounting estimates. It also requires the Manager and HSBC Trustee (Cayman) Limited (the Trustee ) (collectively known as the Management ) to exercise their judgment in the process of applying the Sub-Fund s accounting policies. As at 31 October 2014, there were no significant judgments or estimates involved in the determination of the values of assets and liabilities reported in the financial statements. All references to Net Asset Value ( NAV ) throughout these financial statements refer to net assets attributable to unitholders unless otherwise stated. (i) Standards and amendments to existing standards effective 1 November 2013 Amendments to HKFRS 7, Disclosures Offsetting financial assets and financial liabilities require additional disclosures to enable users of financial statements to evaluate the effect or the potential effects of netting arrangements, including rights of set-off associated with an entity s recognised financial assets and recognised financial liabilities, on the entity s financial position. The amendments have not had any impact on the Sub- Fund s financial position or performance. HKFRS 13, Fair value measurement, effective for annual periods beginning on or after 1 November 2013, has been adopted. The standard improves consistency and reduces complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across HKFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within HKFRS. If an asset or a liability measured at fair value has a bid price and an ask price, the standard requires valuation to be based on a price within the bid-ask spread that is most representative of fair value and allows the use of mid-market pricing or other pricing conventions that are used by market participants as a practical expedient for fair value measurement within a bid-ask spread. On adoption of the standard, the Sub-Fund changed its valuation inputs for listed financial assets and liabilities to last traded prices to be consistent with the inputs prescribed in the Sub-Fund s offering document for the calculation of its per unit trading value for subscriptions and redemptions. The use of last traded prices is recognised as a standard pricing convention within the industry. In the prior year, the Sub-Fund utilised bid and ask prices for its listed financial assets and liabilities in accordance with HKAS 39. The change in valuation inputs is considered to be a change in estimate in accordance with HKAS

24 NOTES TO THE FINANCIAL STATEMENTS 2 Summary of significant accounting policies (Continued) (a) Basis of preparation (Continued) (ii) Standards and amendments to standards that are relevant to the Sub-Fund but are not yet effective and have not been early adopted by the Sub-Fund HKFRS 9 Financial instruments addresses the classification, measurement and recognition of financial assets and financial liabilities, is effective for annual periods on or after 1 November It replaces the parts of HKAS 39 that relate to the classification and measurement of financial instruments. HKFRS 9 requires financial assets to be classified into two measurement categories: those measured at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the HKAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. The new standard is not expected to have a significant impact on the financial statement of the Sub- Fund. (b) Financial assets and liabilities at fair value through profit or loss (i) Classification The Sub-Fund currently classifies all of its investments in equity securities, and derivatives, as financial assets or liabilities at fair value through profit or loss. These financial assets and liabilities are classified as held for trading. All derivatives are carried in assets when fair value is positive and in liabilities when fair value is negative. The Sub-Fund does not classify any derivatives as hedges in a hedging relationship. (ii) Recognition/derecognition Regular purchases and sales of investments are recognised on the trade date - the date on which the Sub-Fund commits to purchase or sell the investment. Investments are derecognised when the rights to receive cash flows from the investments have expired or the Sub-Fund has transferred substantially all risks and rewards of ownership. (iii) Measurement Financial assets and liabilities at fair value through profit or loss are initially recognised at fair value. Subsequent to initial recognition, all financial assets and liabilities at fair value through profit or loss are measured at fair value. Gains and losses arising from changes in the fair value of financial assets or liabilities at fair value through profit or loss are presented in the statement of comprehensive income in the year in which they arise

25 NOTES TO THE FINANCIAL STATEMENTS 2 Summary of significant accounting policies (Continued) (b) Financial assets and liabilities at fair value through profit or loss (Continued) (iv) Fair value estimation Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of financial assets and liabilities traded in active markets (such as publicly traded derivatives and trading securities) are based on quoted market prices at the close of trading on the reporting date. Prior to 1 November 2013, the quoted market price used for financial assets held by the Sub-Fund was the current bid price; the quoted market price for financial liabilities was the current asking price. The Sub-Fund adopted IFRS 13, Fair value measurement, from 1 November 2013; it changed its fair valuation input to utilise the last traded market price for both listed financial assets and liabilities where the last traded price falls within the bid-ask spread. In circumstances where the last traded price is not within the bid-ask spread, management will determine the point within the bid-ask spread that is most representative of fair value. The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using valuation techniques commonly used by market participants. Such valuation techniques include, but not limited to, the following: (i) (ii) Securities which are not listed on a securities exchange or are thinly traded are valued by using quotes from brokers. In the absence of quoted values or brokers representative prices, securities are valued using appropriate valuation techniques as reasonably determined by the Manager. (c) Income and expenses Dividend income from financial assets at fair value through profit or loss is recognised in the statement of comprehensive income when the Sub-Fund s right to receive payment is established and is stated gross of withholding tax. Expenses are accounted for on an accruals basis in the statement of comprehensive income. (d) Translation of foreign currencies (i) Functional and presentation currency Items included in the financial statements of the Sub-Fund are measured using the currency of the primary economic environment in which it operates (the functional currency ). The Management of the Sub-Fund which operates in the Cayman Islands considers the United States dollar as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions. The financial statements are presented in United States dollars, the Sub-Fund s functional and presentation currency

26 NOTES TO THE FINANCIAL STATEMENTS 2 Summary of significant accounting policies (Continued) (d) Translation of foreign currencies (Continued) (ii) Transactions and balances Monetary assets and liabilities denominated in foreign currencies are translated into United States dollars at exchange rates at the year end date. Realised and unrealised gains and losses on foreign currency transactions are charged or credited to the statement of comprehensive income as foreign currency gains and losses except where they relate to equity investments where such amounts are included within realised and unrealised gains and losses on investments. The cost of investments, and income and expenses are translated into United States dollars using the exchange rates prevailing at the dates of the transactions. (e) Cash and cash equivalents Cash and cash equivalents include cash in hand, demand deposits, other short-term highly liquid investments with original maturities of three months or less from the date of placement net of bank overdrafts, if any. (f) Proceeds and payments on issue and redemption of units All proceeds and payments for units issued and redeemed are shown as movements in the statement of changes in equity. The NAV of the Sub-Fund is computed daily. Prices for issues and redemptions are based on the latest available preceding valuation. The Sub-Fund issues units, which are redeemable at the holder s option and are classified as equity. Units can be put back to the Sub-Fund at any time for cash equal to a proportionate share of the Sub-Fund s NAV. Units are issued and redeemed at the holder s option at prices based on the Sub-Fund s NAV per unit at the time of issue or redemption. The Sub-Fund s NAV per unit is calculated by dividing the net assets attributable to unitholders with the total number of outstanding units. In accordance with the provisions of the Sub-Fund s explanatory memorandum, investment positions are valued based on the last traded market price for the purpose of determining the NAV per unit for subscriptions and redemptions. (g) Offsetting financial instruments Financial assets and liabilities are offset and the net amount is reported in the statement of financial position when there is a legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. (h) Accrued expenses and other liabilities Accrued expenses and other liabilities are recognised initially at fair value and subsequently stated at amortised cost using the effective interest method

27 NOTES TO THE FINANCIAL STATEMENTS 2 Summary of significant accounting policies (Continued) (i) Transaction costs Transaction costs are costs incurred to acquire financial assets or liabilities at fair value through profit or loss. They include the bid-ask spread, fees and commissions paid to agents, advisers, brokers and dealers. Transaction costs are expensed as incurred in the statement of comprehensive income. 3 Financial risk management The Sub-Fund s activities expose it to a variety of financial risks: market risk (including market price risk, currency risk and interest rate risk), credit/custody risk and liquidity risk. The Sub-Fund s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Sub-Fund s financial performance. The risk management polices employed by the Manager to manage these risks are discussed below: (a) Market price risk At the year end date, the Sub-Fund s overall market positions by securities types were as follows: US$ US$ Hong Kong - Listed equities 3,185,306 3,602,602 - Rights 9,390 - Total financial assets at fair value through profit or loss 3,194,696 3,602,602 Forward foreign exchange contracts - 50 Total financial liabilities at fair value through profit or loss - 50 Market price risk is the risk of loss to the value of a financial instrument resulting from movements in market prices, whether those changes are caused by factors specific to the individual instrument or factors affecting all instruments in the market. All securities investments present a risk of loss of capital. The Manager moderates this risk through a careful selection of securities and other financial instruments within specified limits. The Sub-Fund s equity securities are susceptible to market price risk arising from uncertainties about future prices of the instruments. The Sub-Fund s overall market positions are monitored on a daily basis and reviewed formally on a regular basis by the Manager. The Sub-Fund s market price risk is managed through diversification of the investment portfolio ratios by exposures to different industries. The equity securities are selected mainly from the Hong Kong Stock Exchange. The Manager considers that the MSCI China is the most relevant market index to benchmark the market price risk.

28 NOTES TO THE FINANCIAL STATEMENTS 3 Financial risk management (Continued) (a) Market price risk (Continued) At the year end date, a 10% (2013: 10%) fall or rise in the MSCI China, with all other variables held constant, would have decreased or increased the net assets attributable to unitholders by US$279,286 (2013: US$330,974). There is no exposure to individual investments/issuers representing over 10% of the Sub-Fund s NAV at the year end date. The Sub-Fund holds the following derivative instruments: Forward foreign exchange contracts Forward foreign exchange contracts represent commitments to purchase foreign and domestic currencies, including undelivered spot transactions. The notional amounts of certain types of financial instruments provide a basis for comparison with amounts recognised on the statement of financial position, but they do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and do not therefore indicate the Sub-Fund s exposure to credit or market price risks. The derivatives become favourable (assets) or unfavourable (liabilities) as a result of fluctuations in market interest rates or foreign exchange rates relative to their terms. The aggregate contractual or notional amount of derivatives on hand, the extent to which instruments are favourable or unfavourable and, thus the aggregate fair value of derivatives can fluctuate significantly from time to time. At 31 October 2014, the Sub-Fund did not hold any open forward foreign exchange contracts. Open forward foreign exchange contracts as at 31 October 2013 are detailed below: Amount Amount Unrealised bought sold losses US$ HK$ US$ Buy USD / Sell HKD 1 Nov ,909 1,790,684 (50) Total unrealised losses on forward foreign exchange contracts (50)

29 NOTES TO THE FINANCIAL STATEMENTS 3 Financial risk management (Continued) (a) Market price risk (Continued) The following table discloses the financial assets at fair value through profit or loss of the Sub- Fund by industrial sectors: US$ % of NAV US$ % of NAV Advertising , Airlines , Application Software 77, Auto Manufacturing , Banking 611, , Building material 114, , Computers , Conglomerate , Diversified Financial 185, , Electrical & Electronics 95, , Energy-Alternative 50, Environmental Control , Equity fund , Food 103, , Healthcare & Personal 296, Home Furnishing , Household Products 44, Insurance 295, , Internet 167, , Iron/steel , Lodging , Metal Fabricate 64, Mining 40, Miscellaneous Manufacturing 93, , Oil and gas , Oil and gas service 70, , Pharmaceuticals 165, Real Estate 113, , Retail 26, Semiconductor 114, Technology , Telecommunication 378, , Transportation 83, , ,194, ,602,

30 NOTES TO THE FINANCIAL STATEMENTS 3 Financial risk management (Continued) (b) Currency risk Currency risk is the risk that the value of a financial instrument will fluctuate because of changes in foreign exchange rates. The Sub-Fund may invest in assets denominated in currencies other than its functional currency, the United States dollar. Consequently, the Sub-Fund is exposed to risks that the exchange rate of the United States dollar relative to other currencies may change in a manner which has an adverse effect on the reported value of that portion of the Sub-Fund s assets which are denominated in currencies other than the United States dollars. To minimise currency risk, the Sub-Fund holds its excess cash mainly in its functional currency and execute foreign exchange contracts to facilitate trade settlements. For hedging purposes, the Sub-Fund may enter into forward foreign exchange contracts. The table below summarises the Sub-Fund s net foreign monetary and non-monetary currency risk exposures (excluding foreign exchange contracts). All exposures are stated in United States dollar equivalents. At 31 October 2014 Assets Monetary 1,315 Non-monetary 3,194,696 Liabilities Monetary - Non-monetary - At 31 October 2013 Assets Monetary 308,783 Non-monetary 3,602,602 Liabilities Monetary 482,967 Non-monetary - As the majority of the Sub-Fund s transactions are denominated in Hong Kong dollar which is currently pegged to the United States dollar within a narrow range, the Manager does not consider the Sub-Fund s exposure to foreign currency to be significant and no sensitivity analysis is prepared. In accordance with the Sub-Fund s policy, the Manager monitors the Sub-Fund s currency position on a daily basis and reviews it formally on a regular basis. HK$

31 NOTES TO THE FINANCIAL STATEMENTS 3 Financial risk management (Continued) (c) Interest rate risk Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. The majority of the Sub-Fund s financial assets and liabilities are non-interest bearing except for the cash and cash equivalents. As a result, the Manager considers that the Sub-Fund is not currently subject to significant amounts of risk due to fluctuations in the prevailing levels of market interest rates. Any temporary excess cash and cash equivalents are invested at short-term market interest rates where appropriate. At 31 October 2014, the Sub-Fund s net cash balance was US$22,719 (2013: US$442,664). A change in interest rate levels within the range foreseen by the Manager for the next 12 months is considered not to have a material impact on the Sub-Fund. (d) Credit/custody risk Credit/custody risk is the risk a counterparty to a financial instrument will cause the Sub-Fund financial loss by failing to discharge its obligations. The Sub-Fund seeks to minimise this risk of loss by careful choice of counterparties and by minimising the reliance placed on individual counterparties. All trade settlements with approved counterparties are on delivery versus payment and/or receipt versus payment basis, with exceptions of IPOs, new issues and placement transactions. Hence, the risk of default is minimized, as delivery of securities sold is only made when the broker has received payment. Payment is made on a purchase when the securities have been received by the broker. The trade will fail if either party fails to meet its obligation. The counterparty risk is minimised as all the investments and cash are held with institutions that the Manager considers as reputable. In accordance with the Sub-Fund s policy, the Manager has put in place limits and controls to identify and assess the creditworthiness of counterparties and reviews this risk management formally on a semi-annual basis. Credit/custody risk arises from cash and cash equivalents, and credit exposures to brokers arising from outstanding and committed transactions. The Sub-Fund is also exposed to the risk that its assets held with the custodian may not be recoverable in the event of default by the custodian. The table below summarizes the credit rating of banks and custodians in which the Sub-Fund s assets are held: US$ Credit rating US$ Credit rating Custodian and broker The Hongkong and Shanghai Banking Corporation Limited 3,194,696 Aa2 3,602,602 Aa3 Bank The Hongkong and Shanghai Banking Corporation Limited 22,719 Aa2 442,664 Aa3-20 -

32 NOTES TO THE FINANCIAL STATEMENTS 3 Financial risk management (Continued) (e) Liquidity risk Liquidity risk is the risk that an entity will encounter difficulty in settling a liability, including a redemption request. The Sub-Fund is exposed to daily cash redemption from unitholders. Under the Sub-Fund s rules, the Manager with the approval of the Trustee may restrict redemptions to 10% of the Sub-Fund s NAV on any dealing day. The Sub-Fund has the ability to borrow up to 25% of its NAV to enhance its liquidity in meeting redemptions. The Manager manages liquidity risk by maintaining sufficient cash and marketable securities to meet the normal operating commitments. Cash and cash equivalents have maturity of less than three months and the majority of the Sub-Fund s investments are traded in active markets and can be readily disposed of. Notwithstanding, certain types of assets or securities may be difficult to buy or sell, particularly during adverse market conditions. This may affect the ability to obtain prices for the components of the underlying assets of the Sub-Fund and may therefore affect the value of those assets and the ability of unitholders to realize their units. The Sub-Fund invests the majority of its assets in investments that are traded in an active market and can be readily disposed of. Investments which are neither listed nor quoted are restricted to a maximum of 10% of the Sub-Fund s NAV. In accordance with the Sub-Fund s policy, the Manager monitors the Sub-Fund s liquidity position on a daily basis and reviews it formally on a regular basis. To manage the liquidity risk, a cash buffer is maintained in the Sub-Fund and monitored for minimum cash balances so as to guard against any extensive disposition of assets which may occur at lower prices and for overdraft situations to meet trade settlements and obligations. The table below analyses the Sub-Fund s non-derivative financial liabilities into relevant maturity groupings based on the remaining period at the year end date to the contractual maturity date. The amounts in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant. At 31 October 2014 More than 1 Less than 1 month month and less than 1 year Total US$ US$ US$ Accrued expenses and other liabilities 7,569 37,452 45,021 7,569 37,452 45,021 At 31 October 2013 Amount payable on redemptions 49,612-49,612 Accrued expenses and other liabilities 493,514 38, , ,126 38, ,

33 NOTES TO THE FINANCIAL STATEMENTS 3 Financial risk management (Continued) (e) Liquidity risk (Continued) The table below analyses the Sub-Fund s derivative financial instruments in a loss position that will be settled on a gross basis into relevant maturity groupings based on the remaining period at the year-end date to the contractual maturity date. The amounts in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant. Less than 1 month US$ US$ Forward foreign exchange contracts - Outflow - (230,959) - Inflow - 230,909 Net outflow - (50) The Sub-Fund manages its liquidity risk by investing in securities that it expects to be able to realise within one month or less. The following table illustrates the expected liquidity of assets held: At 31 October 2014 Less than 1 More than 1 month and less Total month than 1 year US$ US$ US$ Financial assets at fair value through profit or loss 3,111,271 83,425 3,194,696 Other receivables 1,315-1,315 Cash and cash equivalents 22,719-22,719 3,135,305 83,425 3,218,730 At 31 October 2013 Financial assets at fair value through profit or loss 3,602,602-3,602,602 Other receivables 308, ,783 Cash and cash equivalents 442, ,664 4,354,049-4,354,

34 NOTES TO THE FINANCIAL STATEMENTS 3 Financial risk management (Continued) (f) Fair value estimation The carrying values of assets and liabilities are reasonable approximations of their fair values. The fair value of financial assets and liabilities traded in active markets (such as publicly traded derivatives and trading securities) are based on quoted market prices at the close of trading on the year end date. Prior to 1 November 2013, the quoted market price used for financial assets held by the Sub-Fund was the current bid price; while the quoted market price used for financial liabilities was the current ask price. The Sub-Fund adopted HKFRS 13, Fair value measurements, from 1 November 2013 and changed its fair valuation inputs to utilize the last traded market price for both financial assets and financial liabilities. An active market is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm s length basis. The Sub-Fund classifies fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1). Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2). Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3). The level in the fair value hierarchy within which the fair value measurement is categorized in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability. The determination of what constitutes observable requires significant judgement by the Manager of the Sub-Fund. The Manager considers observable data to be such market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market