THIS ANNOUNCEMENT AND NOTICE IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION AND DOES NOT CONSTITUTE AN INVITATION OR OFFER TO ACQUIRE, PURCHASE OR SUBSCRIBE FOR UNITS OF THE EXCHANGE TRADED FUND NAMED BELOW If you are in any doubt about this Announcement and Notice or as to the action to be taken, you should consult your stockbroker, bank manager, solicitor, accountant or other financial adviser. If you have sold or transferred all your Units in the Da Cheng CSI China Mainland Consumer Tracker*, you should at once hand this Announcement and Notice to the purchaser or transferee or to the bank, stockbroker or other agent through whom the sale or transfer was effected for transmission to the purchaser or the transferee. IMPORTANT: The Stock Exchange of Hong Kong Limited (the SEHK ), the Hong Kong Exchange and Clearing Limited, the Securities and Futures Commission (the SFC ) and the Hong Kong Securities Clearing Company Limited (the HKSCC ) take no responsibility for the contents of this Announcement and Notice, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this Announcement and Notice. Da Cheng International Asset Management Company Limited (the Manager ) accepts full responsibility for the accuracy of the information contained in this Announcement and Notice as at the date of publication, and confirms, having made all reasonable enquiries, that to the best of its knowledge and belief, as at the date of publication, there are no other facts the omission of which would make any statement misleading. SFC authorisation is not a recommendation or endorsement of a scheme nor does it guarantee the commercial merits of a scheme or its performance. It does not mean the scheme is suitable for all investors nor is it an endorsement of its suitability for any particular investor or class of investors. DCI ETF TRUST* (the Trust ) (A Hong Kong umbrella unit trust authorised under Section 104 of the Securities and Futures Ordinance (Cap. 571) of the laws of Hong Kong) Da Cheng CSI China Mainland Consumer Tracker* (Stock Code: 3071) (the Sub-Fund ) (*This is a synthetic ETF) ANNOUNCEMENT AND NOTICE OF THE PROPOSED CESSATION OF TRADING, TERMINATION, VOLUNTARY DEAUTHORISATION AND DELISTING AND WAIVER FROM STRICT COMPLIANCE OF CERTAIN PROVISIONS OF THE CODE IMPORTANT: Investors are strongly advised to consider the contents of this Announcement and Notice. This Announcement and Notice is important and requires your immediate attention. It concerns the proposed cessation of trading, proposed termination proposed Deauthorisation of the Trust and the Sub-Fund, the proposed Delisting of the Sub-Fund, and the waivers from strict compliance of certain provisions of the Code for the period from 18 December 2015 (i.e. the Trading Cessation Date) to the Deauthorisation date. In particular, investors should note that: taking into account the relevant factors, including, in particular, the relatively small Net Asset Value of the Sub-Fund (including the aggregate value of all the outstanding ALPs) (see details of the factors in section 1 below), the Manager has, by means of a 1
resolution of the board of directors of the Manager dated 13 November 2015, decided to exercise its power under Clause 35.6(A) of the Trust Deed to propose to terminate the Trust and the Sub-Fund with effect from the Termination Date; a provision of approximately HK$618,010 (i.e. the Provision) will be set aside immediately after this Announcement and Notice has been published for discharging all Future Costs until the Termination Date. As a result of the setting aside of the Provision immediately after this Announcement and Notice has been published, the Net Asset Value of the Sub-Fund and the Net Asset Value per Unit will be reduced before the commencement of trading on the SEHK on 17 November 2015, as follows: before setting aside Provision after setting aside Provision NAV NAV per Unit NAV NAV per Unit HK$15,333,358.56 HK$10.22 HK$14,715,348.56 HK$9.81 the Last Trading Day of the Units in the Sub-Fund will be 17 December 2015, i.e. the last day on which investors may buy or sell Units on the SEHK and the last day for redemption of Units in accordance with the usual trading arrangements currently in place, but no creation of Units in the primary market through any Participating Dealers will be allowed from 17 November 2015; the Units of the Sub-Fund will cease trading as from 18 December 2015 (i.e. the Trading Cessation Date); that means no further buying or selling Units on the SEHK and no redemption of Units will be possible from the Trading Cessation Date onwards; all ALPs of the Sub-Fund will be liquidated effective on the Trading Cessation Date. Therefore from the Trading Cessation Date onwards, (i) there will be no further trading of Units of the Sub-Fund and no further redemption of Units of the Sub-Fund; (ii) the Manager will start to realise all the assets of the Sub-Fund and the Sub-Fund will therefore cease to track the Index and will not be able to meet its investment objective of tracking the performance of the Index; (iii) the Trust and the Sub-Fund will no longer be marketed to the public; and (iv) the Sub-Fund will mainly hold cash, and the Sub-Fund will only be operated in a limited manner; with a view to minimising further costs, fees and expenses in managing the Trust and the Sub-Fund following the Trading Cessation Date and in the best interest of investors, the Manager has applied to the SFC for, and has been granted, a waiver from strict compliance with the following provisions of the Code for the period commencing from the Trading Cessation Date to the Deauthorisation date: (i) Chapter 10.7 (with regard to publishing suspension announcements); (ii) paragraphs 4 and 17(a) and (b) of Appendix I (with regard to providing the estimated Net Asset Value or R.U.P.V. and last closing Net Asset Value on a real time or near-real time basis); and (iii) Chapters 6.1 and 11.1B (with regard to updating the Prospectus). The details and the conditions on which such waiver is granted are as described in section 6 below; the Manager confirms that, save for the particular provisions of the Code set out in sections 6.2 to 6.4 below, the Manager will continue to comply with all the other applicable provisions of the Code, the applicable provisions in the Trust Deed and other applicable laws and regulations until the Deauthorisation date; the Manager will, after the Sub-Fund s auditor has agreed to the calculation of the Final Distribution according to the Trustee s records, declare a Final Distribution (please 2
refer to section 3.2 below for further information) to the investors who remain so as at 8 January 2016, i.e. the Distribution Record Date, and the Final Distribution will be payable on or around 12 January 2016 (i.e. the Final Distribution Date); on or around 26 February 2016, the Manager will issue an announcement to confirm whether there will be any further distribution after the Final Distribution (please refer to section 3.2 below for further information) and, if so, such announcement will disclose the amount of further distribution (which may include any refund of excess Provision and, where applicable, Unforeseen Expenses Provision) which will be payable on or around 1 March 2016; by the date the Trustee and the Manager have formed an opinion that the Sub-Fund has no outstanding contingent or actual liabilities or assets, the Trustee and the Manager will commence the completion of the termination of the Trust and the Sub-Fund (i.e. the Termination Date); during the period from the Trading Cessation Date until, at least, the Termination Date, the Manager will maintain the Trust s and the Sub-Fund s SFC authorised status and the Sub-Fund s SEHK listed status, and, subject to the SEHK s approval, expects the Delisting to take effect at or around the same time as the Deauthorisation; the Manager expects that the Deauthorisation and the Delisting will take place either on the Termination Date or immediately after the Termination Date (please note that any product documentation for the Trust and the Sub-Fund previously issued to investors, including the Prospectus, should be retained for personal use only and not for public circulation); and investors should pay attention to the risk factors as set out in section 8.1 below (including liquidity risk, Units trading at a discount or premium and Market Maker s inefficiency risk, tracking errors during the period from the date of this Announcement and Notice to the Last Trading Day risk, possible provision for unforeseen expenses risk, Net Asset Value downward adjustment risk, failure to track the Index risk and delay in distribution risk). Investors should exercise caution and consult with their professional and financial advisers before dealing in the Units in the Sub-Fund or otherwise deciding on the course of actions to be taken in relation to their Units in the Sub-Fund. Stockbrokers and financial intermediaries are urged to: forward a copy of this Announcement and Notice to their clients holding Units in the Sub-Fund, and inform them of the contents of this Announcement and Notice as soon as possible; facilitate their clients who want to dispose of Units in the Sub-Fund on or before the Last Trading Day; and inform their clients as soon as possible if any earlier dealing deadline, additional fees or charges, and/or other terms and conditions will be applicable in respect of the provision of their services in connection with any disposal of Units in the Sub-Fund. If investors are in doubt about the contents of this Announcement and Notice, they should 3
contact their independent financial intermediaries or professional advisers to seek their professional advice, or direct their queries to the Manager (please refer to section 10 below for further information). The Manager will, until the Last Trading Day, issue reminder announcements on a weekly basis to investors informing and reminding them of the Last Trading Day, the Trading Cessation Date and the Distribution Record Date. Also, further announcements will be made in due course to inform the investors of the Final Distribution Date, the Termination Date, the dates for the Deauthorisation and the Delisting and whether there is any further distribution after the Final Distribution as and when appropriate in accordance with the applicable regulatory requirements. The Manager accepts full responsibility for the accuracy of the information contained in this Announcement and Notice, and confirms, having made all reasonable enquiries, that to the best of its knowledge and belief there are no other facts the omission of which would make any statement misleading. Unless otherwise defined herein, terms and expressions used in this Announcement and Notice have the same meanings as given to them in the Prospectus. Da Cheng International Asset Management Company Limited (the Manager ), the manager of the Trust and the Sub-Fund, reserves its right to terminate the Trust in its absolute discretion by notice in writing to the Trustee under Clause 35.6(A) of the Trust Deed if the aggregate Net Asset Value of all the Units outstanding is less than HK$100,000,000. As at 13 November 2015, the Net Asset Value of all the Units outstanding in the Sub-Fund was less than HK$100,000,000. The Manager therefore announces that it has, by means of a resolution of the board of directors of the Manager dated 13 November 2015, decided to terminate the Trust and the Sub-Fund and voluntarily seek Deauthorisation and Delisting. The proposed termination, Deauthorisation and Delisting (i.e. the Proposal) will be subject to the final approval of the SFC and the SEHK, and will only be completed after the Trustee and the Manager have formed an opinion that the Trust and the Sub-Fund have no outstanding contingent or actual liabilities or assets. Before the proposed termination, Deauthorisation and Delisting, the Units of the Sub-Fund will cease trading on the SEHK as from 18 December 2015, the Trading Cessation Date. Accordingly, the last day on which the Units of the Sub-Fund can be traded on the SEHK will be 17 December 2015, the Last Trading Day, and from the Trading Cessation Date onwards, no trading of Units on the SEHK will be allowed. Also, while investors may continue to trade Units on the SEHK on any trading day before the Trading Cessation Date, no creation of Units in the primary market through a Participating Dealer will be allowed from 17 November 2015 following the publication of this Announcement and Notice. The Manager by this Announcement and Notice notifies the investors of the proposed termination of the Trust and the Sub-Fund. Also, as required under Chapter 11.1A of the Code, no less than one month s notice is hereby given to the investors, notifying them that the Sub-Fund will cease to track the Index, and cease trading, from the Trading Cessation Date. A Provision will be set aside in respect of the Trust and the Sub-Fund for discharging all Future Costs of the Trust and the Sub-Fund from the date of this Announcement and Notice up to and including the Termination Date. A further Unforeseen Expenses Provision may also be set aside in respect of the Trust and the Sub-Fund to cover Unforeseen Expenses. In respect of the Trust and the Sub-Fund, where (i) the Provision is insufficient to cover Future Costs until the Termination Date; and/or (ii) if applicable, the Unforeseen Expenses Provision is insufficient to cover Unforeseen Expenses until the Termination Date, any shortfall will be borne by the Manager. 4
1. Proposed termination of the Trust and the Sub-Fund, cessation of trading and liquidation of ALP 1.1. Proposed termination of the Trust and the Sub-Fund According to Clause 35.6(A) of the Trust Deed, the Trust (or one or more sub-fund including the Sub-Fund) may be terminated by the Manager in its absolute discretion by notice in writing to the Trustee if the aggregate Net Asset Value of all the Units in the Sub-Fund outstanding shall be less than HK$100,000,000. The Trust Deed does not require investors approval for terminating the Trust and/or the Sub-Fund on the ground set out in Clause 35.6(A) of the Trust Deed. The Net Asset Value and the Net Asset Value per Unit of the Sub-Fund, as at 13 November 2015, was HK 15,292,498.90 and HK$ 10.19 respectively. The value of the outstanding ALPs with each ALP Issuer as at 13 November 2015 was as follows: ALP Issuer Value of the outstanding ALPs Citigroup Global Markets Holdings Inc. HK$12,283,361 Goldman Sachs International 0 Merrill Lynch International & Co. C.V. HK$1,718,372 Having taken into account the relevant factors including the interests of the investors as a whole, the currently relatively small Net Asset Value (including the aggregate value of all outstanding ALPs) and the relatively low trading volume of the Sub-Fund, the Manager is of the view that the proposed termination of the Trust and the Sub-Fund would be in the best interests of the investors in the Sub-Fund. Therefore, the Manager has decided to exercise its power under Clause 35.6(A) of the Trust Deed, and has provided written notice to the Trustee as required, to terminate the Trust and the Sub-Fund on the date on which the Trustee and the Manager form an opinion that the Trust and the Sub-Fund cease to have any contingent or actual assets or liabilities. 1.2. The proposed cessation of trading The Manager will apply to SEHK to have the Units of the Sub-Fund cease trading on the SEHK with effect from the Trading Cessation Date, i.e. 18 December 2015. The Manager will aim to realise all of the assets of the Sub-Fund effective from 18 December 2015 in exercise of its investment powers under Clause 9.5 of the Trust Deed. The Manager will then proceed with a final distribution (the Final Distribution ) of the Sub-Fund as soon as practicable (see details in section 2.2 below). As such, 17 December 2015 will be the Last Trading Day on which investors may buy or sell Units in the Sub-Fund on the SEHK in accordance with the usual trading arrangements currently in place. On or around 26 February 2016, the Manager will issue an announcement to confirm whether there will be any further distribution after the Final Distribution and, if so, such announcement will disclose the amount of further distribution (which may include any refund of excess Provision and, where applicable, Unforeseen Expenses Provision (see details in section 7 below)) which will be payable on or around 1 March 2016. If there is any change to the dates mentioned in this paragraph, the Manager will issue an announcement of the revised dates. Also, in view of the proposed cessation of trading, no further creation of Units through Participating Dealers will be allowed following the date of this Announcement and Notice. 5
For the avoidance of doubt redemption of Units in the Sub-Fund by Participating Dealers of the Sub-Fund will continue to be permitted until the Last Trading Day. Investors should note that they cannot redeem Units directly from the Sub-Fund. Only Participating Dealers may submit redemption applications to the Manager and the Participating Dealers may have their own application procedures for their clients and may set application cut-off times for their clients which are earlier than those set out in the Prospectus. Investors are advised to check with the Participating Dealers as to the relevant timing deadlines and the client acceptance procedures and requirements. 1.3. Impact on the proposed liquidation of the ALPs No additional costs will be incurred as a result of the early termination of the ALPs. After the liquidation of all the ALPs (as described in section 1.2 above), the Sub-Fund will mainly hold cash, primarily consisting of the proceeds from the liquidation of the ALPs. It therefore follows that, from the Trading Cessation Date, the Sub-Fund will cease to track the Index and will not be able to meet its investment objective of tracking the performance of the Index. 2. What will happen after the Trading Cessation Date? 2.1. Immediately from the Trading Cessation Date Effective from the Trading Cessation Date, the Units of the Sub-Fund will cease trading on the SEHK. This means that investors will only be allowed to buy or sell Units on the SEHK until (and including) the Last Trading Day which is 17 December 2015 and will not be allowed to do so from the Trading Cessation Date onwards. 2.2. During the period from the Trading Cessation Date until the Termination Date The Manager will, after the Sub-Fund s auditor has agreed to the calculation of the Final Distribution according to the Trustee s records, declare a Final Distribution for the Sub-Fund in respect of those investors who remain invested in the Sub-Fund as at the Distribution Record Date (the Relevant Investors ), i.e. those investors who do not sell their Units in the Sub-Fund on or before the Last Trading Day. Such Final Distribution will be made on or around 12 January 2016. Please refer to section 3.2 below for further details on the Final Distribution. On or around 26 February 2016, the Manager will issue an announcement to confirm whether there will be any further distribution after the Final Distribution and, if so, such announcement will disclose the amount of further distribution (which may include any refund of excess Provision and, where applicable, Unforeseen Expenses Provision (see details in section 7 below)) which will be payable on or around 1 March 2016. If there is any change to the dates mentioned in this paragraph, the Manager will issue an announcement of the revised dates. On the Termination Date (which is expected to be on or around 7 March 2016) which is the date on which the Trustee and the Manager form an opinion that the Trust and the Sub-Fund cease to have any contingent or actual assets or liabilities, the Manager and the Trustee will commence the completion of the termination of the Trust and the Sub-Fund. During the period from the Trading Cessation Date until, at least, the Termination Date, the Sub-Fund will continue to have listing status on the SEHK, and the Sub-Fund (as well as the Trust) will remain authorised by the SFC, although the Sub-Fund will be operated only in a limited manner (as described in section 4.2 below). The Manager has therefore applied to the SFC, and has been granted, waivers from strict compliance of certain provisions of 6
the Code for the period from the Trading Cessation Date to the date of Deauthorisation. The details and the conditions on which such waiver is granted are as described in section 6 below. The Deauthorisation and Delisting will take place either on the Termination Date or immediately after the Termination Date, subject to the SFC s and the SEHK s approvals respectively. The Manager expects, subject to the SEHK s approval, that the Delisting will only take place at or around the same time of the Deauthorisation. The proposed termination, Deauthorisation and Delisting will be subject to the payment of all outstanding fees and expenses (please refer to section 7 below for further information), the discharge of all outstanding liabilities of the Trust and the Sub-Fund, as well as the final approvals of the SFC and the SEHK. Following Termination and Deauthorisation, the Trust and the Sub-Fund will no longer be in existence and hence no longer subject to regulation by the SFC. Any product documentation for the Trust and the Sub-Fund previously issued to investors, including the Prospectus, should be retained for personal use only and not for public circulation. Further, stockbrokers, financial intermediaries and investors must not circulate any marketing or other product information relating to the Trust or the Sub-Fund to the public in Hong Kong as this may be in breach of the SFO. 2.3. Important dates Subject to the SFC s and the SEHK s respective approvals for the proposed arrangements set out in this Announcement and Notice, it is anticipated that the expected important dates in respect of the Sub-Fund will be as follows: Dispatch of this Announcement and Notice and the setting aside of the Provision 16 November 2015 (Monday) No further creation of Units in the Sub-Fund 17 November 2015 (Tuesday) Last day for setting aside any Unforeseen Expenses Provision. If the amount of Unforeseen Expenses Provision (if any) set aside is material, an announcement will be issued Last day for dealings in the Units in the Sub-Fund on the SEHK and last day for redemption of Units in the Sub-Fund by Participating Dealers (the Last Trading Day ) Dealings in the Units in the Sub-Fund on the SEHK cease (the Trading Cessation Date ) and no further redemption of Units of the Sub-Fund, i.e. same date on which all the ALPs of the Sub-Fund will be liquidated and the Sub-Fund will cease to be able to track the Index The date as at which an investor needs to be recorded by HKSCC as the beneficial owner of Units of the Sub-Fund which are registered in the name of HKSCC Nominees Limited and held in CCASS to be entitled to the Final Distribution and further distribution (if any) (which may include any refund of excess Provision and/or Unforeseen Expenses Provision (if any)) (the Distribution Record Date ) 15 December 2015 (Tuesday) 17 December 2015 (Thursday) 18 December 2015 (Friday) 8 January 2016 (Friday) 7
Final Distribution will be paid to the investors who are still holding Units as at the Distribution Record Date (the Final Distribution Date ) An announcement will be issued to confirm whether there will be any further distribution after the Final Distribution and, if so, such announcement will disclose the amount and the payment date of further distribution (which may include any refund of excess Provision and/or Unforeseen Expenses Provision (if any)). Further distribution (if any) (which may include any refund of excess Provision and/or Unforeseen Expenses Provision (if any)) will be paid to the investors who are still holding Units as at the Distribution Record Date Termination of the Trust and the Sub-Fund (the Termination Date ) Deauthorisation of the Trust and the Sub-Fund and Delisting of the Sub-Fund On or around 12 January 2016 (Tuesday) On or around 26 February 2016 (Friday) On or around 1 March 2016 (Tuesday) On or around 7 March 2016 (Monday), which is the date on which the Manager and the Trustee form an opinion that the Trust and the Sub-Fund cease to have any respective contingent or actual assets or liabilities On or around 7 March 2016 (Monday), which is the date on which the SFC and SEHK approve the Deauthorisation and Delisting respectively The Manager expects that the Deauthorisation and Delisting will take place either on the Termination Date or immediately after the Termination Date The Manager will, on a weekly basis from the date of this Announcement and Notice to the Last Trading Day, issue reminder announcements informing and reminding investors of the Last Trading Day, the Trading Cessation Date and the Distribution Record Date. In addition, the Manager will issue further announcements in due course to inform the investors of the Final Distribution Date, the dates for the Deauthorisation and Delisting, as well as the Termination Date, with regard to the Trust and the Sub-Fund, and whether there is any further distribution after the Final Distribution, as and when appropriate in accordance with the applicable regulatory requirements. All stockbrokers and financial intermediaries are urged to forward a copy of this Announcement and Notice, together with any further announcements, to their clients investing in the Units of the Sub-Fund, and inform them of the contents of this Announcement and Notice, and any further announcements, as soon as possible. 8
3. Potential actions to be taken by investors on or before the Last Trading Day 3.1. Trading on the SEHK on any trading day up to (and including) the Last Trading Day On any trading day up to (and including) the Last Trading Day, an investor may continue to buy or sell its Units in the Sub-Fund on the SEHK in accordance with the usual trading arrangements, during the trading hours of the SEHK and based on the prevailing market prices. China Merchants Securities (HK) Co., Limited, the sole Market Maker of the Sub-Fund will continue to perform its market making functions in accordance with the Trading Rules of the SEHK in respect of the Sub-Fund. Investors should note that stockbrokers or other financial intermediaries may impose brokerage fees on any sale of the Units of the Sub-Fund on the SEHK on investors, and a transaction levy (at 0.0027% of the price of the Units of the Sub-Fund or such other applicable rate) and a trading fee (at 0.005% of the price of the Units of the Sub-Fund) will be payable by each of the buyer and the seller of the Units. No charge to stamp duty will arise in Hong Kong in respect of sale or purchase of Units of the Sub-Fund on the SEHK. The trading price of Units may be below or above the Net Asset Value per Unit. 3.2. Holding Units after the Last Trading Day For Relevant Investors who are still holding Units after the Last Trading Day, the Manager will, after the Sub-Fund s auditor has agreed to the calculation of the Final Distribution according to the Trustee s records, declare a Final Distribution in respect of such Relevant Investors. Each Relevant Investor will be entitled to a Final Distribution of an amount equal to the Sub-Fund s then Net Asset Value in proportion to the Relevant Investor s interests in the Sub-Fund as at the Distribution Record Date ( Final Distribution ). The Sub-Fund s then Net Asset Value will be the total value of the net proceeds from the liquidation of the ALPs as described in section 1.3 above, less the Provision and the Unforeseen Expenses Provision (if any) (see section 7 below) as at the Distribution Record Date. The Final Distribution to each Relevant Investor is expected to be paid to the accounts of its financial intermediary or stockbroker maintained with CCASS on or around 12 January 2016. The Manager will issue a further announcement to inform the Relevant Investors of the exact day of payment of the Final Distribution in respect of the Sub-Fund, together with the amount of Final Distribution per Unit in respect of the Sub-Fund, in due course. On or around 26 February 2016, the Manager will issue an announcement to confirm whether there will be any further distribution after the Final Distribution and, if so, such announcement will disclose the amount of further distribution (which may include any refund of excess Provision and, where applicable, Unforeseen Expenses Provision (see details in section 7 below)) which will be payable on or around 1 March 2016. If there is any change to the dates mentioned in this paragraph, the Manager will issue an announcement of the revised dates. IMPORTANT NOTE: Investors should note and consider the risk factors as set out in section 8.1 below and consult with their professional and financial advisers before disposing of any Units in the Sub-Fund. If an investor disposes of its Units in the Sub-Fund at any time on or before the Last Trading Day, such investor will not, in any circumstances, be entitled to any portion of the Final Distribution or any further distribution (if any) for the Sub-Fund in respect of any Units of the Sub-Fund so disposed. Investors should therefore exercise caution and consult with their professional and financial advisers before dealing in their Units in the Sub-Fund or 9
otherwise deciding on any course of action to be taken in relation to their Units in the Sub-Fund. 4. Consequences of the commencement of the cessation of trading 4.1. Continued existence of the Trust and the Sub-Fund The Trust and the Sub-Fund will maintain their SFC authorisation status, and the Sub-Fund will maintain SEHK listing status, until the Deauthorisation and Delisting. Deauthorisation and Delisting will follow as soon as possible after the termination of the Trust and the Sub-Fund. By the time the Trustee and the Manager form an opinion that the Trust and the Sub-Fund cease to have any contingent or actual assets or liabilities, the Manager and the Trustee will complete the proposed termination process in accordance with the Trust Deed and the Manager will proceed with applying to the SFC for Deauthorisation, and to the SEHK to complete the Delisting respectively. 4.2. Limited operation of the Trust and the Sub-Fund During the period from the Trading Cessation Date until the Deauthorisation, the Trust and the Sub-Fund will only be operated in a limited manner as there will not be any trading of Units and the Trust and the Sub-Fund will have no investment activities from the Trading Cessation Date onwards. 5. PRC Capital Gain Tax arrangements 5.1. Background In November 2014, the Notice on the temporary exemption of Corporate Income Tax on capital gains derived from the transfer of PRC equity investment assets such as PRC stocks by QFII and RQFII (Caishui [2014] No.79) was promulgated by the Ministry of Finance, the State Administration of Taxation ( SAT ) and the China Securities Regulatory Commission on 14 November 2014 (the Notice No. 79 ), clarifying that (i) PRC corporate income tax will be imposed on capital gains obtained by Qualified Foreign Institutional Investors ( QFIIs ) and Renminbi Qualified Foreign Institutional Investors ( RQFIIs ) from the transfer of PRC equity investment assets (including PRC stocks) realised prior to 17 November 2014 in accordance with laws; and (ii) QFIIs and RQFIIs (without an establishment or place of business in the PRC or having an establishment in the PRC but the income so derived in China is not effectively connected with such establishment) will be temporarily exempt from PRC corporate income tax on gains derived from the transfer of PRC equity investment assets (including A-Shares) effective from 17 November 2014. Prior to 17 November 2014, under the terms of their respective ALPs: (A) (B) Each of Goldman Sachs International ( Goldman ) and Citigroup Global Markets Holdings Inc. ( Citigroup ) would retain amounts of withholding income tax on capital gains ( WIT ) withheld by it for a period of up to 5 years, pending further clarification of the tax rules and tax collection measures adopted by the PRC authorities, and the Sub-Fund would remain liable for any attributable tax. In the event that the amount withheld was greater than the actual capital gains tax liability, the excess withholding would be returned to the Sub-Fund. Merrill Lynch International & Co. C.V. ( Merrill ) would retain the amounts of WIT withheld regardless of whether, and the rate of which, PRC corporate income tax in respect of capital gains was chargeable (and the Sub-Fund would not be entitled to receive any return of the amounts so withheld). To the extent that any actual PRC 10
tax liability in respect of capital gains exceeded the amounts withheld by Merrill, such PRC tax liability would be borne by it (rather than the Sub-Fund). For accounting purposes, on the basis that the ALP Issuers had, prior to 17 November 2014, already withheld the 10% WIT as described above and in light of the temporary exemption for QFIIs described in Notice No. 79, the Manager has not made any provision for the account of the Sub-Fund in respect of WIT on capital gains. From 17 November 2014 onwards, in light of Notice No. 79, the ALP Issuers no longer withheld any amounts representing WIT. As at 17 November 2014, the total amount of provision for WIT withheld by Citigroup and Merrill was USD63,864. Goldman has informed the Manager that Goldman has not, to date, withheld any amounts as provisions for WIT payable in respect of capital gains realised from actual sales of A-Shares underlying the ALPs issued by it, despite clear contractual obligations as set out in the relevant ALP documentation on Goldman s part to do so. The Manager has confirmed that in the event that any payment by the Sub-Fund to Goldman in respect of WIT liability (for which Goldman should have provisioned but failed to so do) is claimed, such payment will not be paid out of the assets of the Sub-Fund but instead any claims will be borne by the Manager. 5.2. PRC Tax Assessment and actual tax liability Earlier this year, at the request of the SAT, each QFII (including each ALP Issuer) filed information and documents to the PRC tax authorities to facilitate the SAT s assessment (the Tax Assessment ) of WIT payable by such QFII in respect of its trading of PRC securities prior to 17 November 2014. The Manager has been liaising with each ALP Issuer with a view to determining whether there is, as at the date of this Announcement and Notice, any outstanding liability between such ALP Issuer and the Sub-Fund which may preclude the termination of the Sub-Fund as scheduled, and below is a summary in respect of each ALP Issuer: (A) Goldman As at the date of this Announcement and Notice, the Manager s understanding is that the Tax Assessment for Goldman has not been completed. Nevertheless, the Sub-Fund will not need to bear any WIT liability in respect of any claims made by Goldman but instead any claims will be borne by the Manager. (B) Citigroup As at the date of this Announcement and Notice, the Tax Assessment for Citigroup has been completed. The total amount of WIT which was attributable to Sub-Fund s trading of ALPs issued by Citigroup has already been paid by Citigroup to the SAT. Since the amount of the WIT withheld was greater than the amount of the actual WIT liability, the difference of USD8,882 was refunded by Citigroup to the Sub-Fund on 13 October 2015. Following the refund, as at the date of this Announcement and Notice, there is no outstanding liability between Citigroup and the Sub-Fund as to PRC capital gains tax. (C) Merrill As mentioned in section 5.1 above, the relevant terms of the ALPs issued by Merrill provide that Merrill would retain the WIT withheld regardless of the amount of the actual tax liability, with the result that any shortfall in withholding would be borne by 11
Merrill (and not the Sub-Fund) and, conversely, any excess withholding would not be returned to the Sub-Fund. As such, there is no outstanding liability between Merrill and the Sub-Fund as to PRC capital gains tax. As a result of the above, the Manager does not expect the Trust and the Sub-Fund to have any contingent assets or liabilities in respect of PRC capital gains tax following the proposed termination of the Trust and the Sub-Fund. 6. Waiver 6.1. Background As set out in section 2.2 above, while the Units in the Sub-Fund will cease trading effective from the Trading Cessation Date, because of certain outstanding actual or contingent assets or liabilities in relation to the Sub-Fund, the Trust and the Sub-Fund will remain in existence after the Trading Cessation Date until the Termination Date. During such period, the Trust and the Sub-Fund will maintain their SFC authorised status, and the Sub-Fund will maintain its SEHK listed status, until the completion of the proposed termination, Deauthorisation and Delisting. However, following the date of this Announcement and Notice, there will be no further creation of Units, and from the Trading Cessation Date onwards: (i) there will be no further trading of Units and no further redemption of Units in the Sub-Fund; (ii) the Manager will start to realise all the assets of the Sub-Fund and the Sub-Fund will therefore cease to track the Index and will not be able to meet it investment objective of tracking the performance of the Index; (iii) the Trust and the Sub-Fund will no longer be marketed to the public; and (iv) the Sub-Fund will mainly hold cash, and the Sub-Fund will only be operated in a limited manner. Accordingly, with a view to minimising further costs, fees and expenses in managing the Sub-Fund following the Trading Cessation Date and in the best interest of investors, the Manager has applied to the SFC for, and has been granted, a waiver from strict compliance with certain provisions of the Code for the period from the Trading Cessation Date to the date of Deauthorisation. The details of the waiver granted and the conditions on which such waiver was granted are set out in this section 6. 6.2. Publishing of the suspension of dealing Under Chapter 10.7 of the Code, the Manager is required to: (a) immediately notify the SFC if dealing in Units of the Sub-Fund ceases or is suspended; and (b) publish the fact that dealing is suspended immediately following the decision to suspend and at least once a month during the period of suspension in an appropriate manner (the requirements under (b) are referred to as the Investor Notification Requirements ). The Manager has applied to the SFC for, and has been granted, a waiver from strict compliance with the Investor Notification Requirements under Chapter 10.7 of the Code, subject to the conditions that (a) a statement shall be posted in a prominent position of the Manager s website from the Trading Cessation Date until the date of Deauthorisation to notify investors that the Units of the Sub-Fund have ceased trading on the SEHK from 18 December 2015, and draw investors attention to this Announcement and Notice and all other relevant announcements; and (b) the announcements in relation to the Trust and the Sub-Fund will remain published on the Manager s website for a period of one year after the date of Deauthorisation. 12
Because the Sub-Fund will retain its SEHK listing status after the Last Trading Day (17 December 2015) until the date of Deauthorisation, investors may continue to access further announcements in relation to the Trust and the Sub-Fund via the HKEx s website and the Manager s website during such period. In addition, as one of the conditions of this waiver, the announcements in relation to the Trust and the Sub-Fund will remain published on the Manager s website for a period of one year after the date of Deauthorisation. The Manager is of the view that the period of one year should be sufficient to cater for investors who may have questions about the Trust and/or Sub-Fund after Deauthorisation. Also, according to the current policy of the SEHK (which may change from time to time), all announcements in relation to the Sub-Fund will remain published on the HKEx s website for a period of at least five years after the date of Delisting. 6.3. Provision of the estimated Net Asset Value or R.U.P.V. 1 and last closing Net Asset Value on a real time or near real time basis Under Paragraphs 4 and 17(a) and (b) of Appendix I to the Code, the Manager is required to provide the estimated Net Asset Value or R.U.P.V. and last closing Net Asset Value of the Sub-Fund to the public on a real time or near-real time basis unless otherwise waived, via any suitable channels in paragraph 18 of Appendix I of the Code (which include the Sub-Fund s own website). As following the date of this Announcement and Notice, there will be no further creation of Units in the Sub-Fund, and from the Trading Cessation Date onwards, there will be no further trading of Units and no further redemption of Units, and the Sub-Fund will mainly hold cash and the Sub-Fund will only be operated in a limited manner, the Manager proposes and the Trustee consents that the Net Asset Value per Unit will be updated on the Manager s website only when there is any event which causes that Net Asset Value to change. The Manager and the Trustee expect that the events which will cause the Net Asset Value per Unit to change are: (i) the Final Distribution (please see further in section 3.2 above); (ii) further distribution (if any); and (iii) any change in the market value of any scrip dividend receivable by the Sub-Fund concerned. Accordingly, the Manager has applied to the SFC for, and has been granted, a waiver from strict compliance with the above-mentioned requirements under Paragraphs 4 and 17(a) and (b) of Appendix I to the Code, subject to the following conditions: (A) (B) the Net Asset Value per Unit of the Sub-Fund as of 17 December 2015 (i.e. the Last Trading Day), which will be the latest Net Asset Value per Unit of the Sub-Fund, will be published on the Manager s website; and the Manager shall update the latest available Net Asset Value per Unit of the Sub-Fund on the Manager s website as soon as practicable should there be any other change to the Net Asset Value of the Sub-Fund including but not limited to changes arising from (i) the Final Distribution (please see further in section 3.2 above); and (ii) further distribution (if any); and (iii) any change in the market value of any scrip dividend receivable by the Sub-Fund concerned. 6.4. Updating of the Prospectus Under Chapters 6.1 and 11.1B of the Code, the Prospectus must be up-to-date and must be updated to incorporate any relevant changes to the Trust or the Sub-Fund. In view of the cessation of trading of Units of the Sub-Fund from the Trading Cessation Date, and there being no further creation or redemption of Units of the Sub-Fund, the 1 R.U.P.V stands for Reference Underlying Portfolio Value which is updated at 15-second intervals during trading hours. 13
Manager considers that it is not necessary to update the Prospectus (which by their nature are offering documents) to reflect any future changes to the Trust or the Sub-Fund. As such, the Manager has applied to the SFC for, and has been granted, a waiver from strict compliance with the above-mentioned requirements under Chapters 6.1 and 11.1B of the Code so that the Prospectus need not be updated from the Trading Cessation Date. Without prejudice to the other obligations of the Manager under Chapter 11.1B of the Code, the Manager has undertaken and confirmed with the SFC that it shall: (A) (B) promptly notify investors of any changes to the Trust or the Sub-Fund or to the Prospectus by means of publishing the announcement(s) on its and the HKEx s websites (each, a Relevant Future Announcement ); and ensure that each Relevant Future Announcement shall include a statement to refer investors to read this Announcement and Notice together with the Prospectus, and any other Relevant Future Announcement(s). 7. Costs 6.5. Other related matter The Manager confirms that, save for the particular provisions of the Code set out in sections 6.2 to 6.4 above, the Manager will continue to comply with all the other applicable provisions of the Code, the applicable provisions in the Trust Deed and other applicable laws and regulations in respect of the Trust and the Sub-Fund. As indicated in section 3.1 above, investors stockbrokers or financial intermediaries may levy certain fees and charges for any orders to dispose of Units in the Sub-Fund on or before the Last Trading Day. All redemptions of Units in the Sub-Fund by the Participating Dealers will be subject to the fees and costs as set out in the Sub-Fund s Prospectus. The Participating Dealers may pass on to the relevant investors such fees and costs. The Participating Dealers may also impose fees and charges in handling any redemption request which would also increase the cost of redemption. Investors are advised to check with the Participating Dealers as to the relevant fees, costs and charges. The total expense ratio in respect of the Sub-Fund for the period from 1 January 2014 to 31 December 2014 was 6.538% per annum of the Sub-Fund s Net Asset Value. The total expense ratio was the sum of all types of ongoing expenses borne by the Sub-Fund (i.e. all annual charges and payments deducted from the assets of the Sub-Fund on a periodic basis) including management fee, Trustee s fees, registrar s fees, service agent s fees, fees payable to service providers, payments to any persons providing outsourced services to the key operations of the Sub-Fund and other operating expenses of the Sub-Fund expressed as a percentage of the Net Asset Value of the Sub-Fund. Cost/expenses are assessed on an all taxes included basis. Immediately after this Announcement and Notice has been published, a certain portion of the assets of the Sub-Fund, amounting to HK$618,010 (the Provision ), will be set aside. This Provision is to discharge any future costs, charges, expenses, claims and demands (including but not limited to any legal costs, auditors fees, regulatory maintenance costs, termination related expenses and the fees payable to any service provider to the Sub-Fund, including the Trustee) that the Trustee and the Manager may incur or make, during the period commencing immediately following publication of this Announcement and Notice up to and including the Termination Date, in connection with or arising out of the ongoing maintenance of the Trust and the Sub-Fund and the implementation of the Proposal 14
(together, the Future Costs ). The Trustee has confirmed that it has no objection to the amount of the Provision. As a result of the setting aside of the Provision immediately after this Announcement and Notice has been published, the Net Asset Value and Net Asset Value per Unit of the Sub-Fund will be reduced before the commencement of trading on the SEHK on 17 November 2015, as follows: before setting aside Provision after setting aside Provision NAV NAV per Unit NAV NAV per Unit HK$15,333,358.56 HK$10.22 HK$14,715,348.56 HK$9.81 Please refer to Net Asset Value downward adjustment risk in section 8.1 below. If after the setting aside of the Provision, certain types of expenses which are unforeseeable at the time of this Announcement and Notice, including but not limited to the full amount of all taxes, levies, duties or similar charges and professional fees in relation to agreeing and/or contesting any such liabilities or recoveries and all litigation expenses (the Unforeseen Expenses ) come to the attention of the Manager and/or the Trustee, then, subject to the approval from both the Trustee and the Manager, a further provision (the Unforeseen Expenses Provision ) may be set aside for such expenses in relation to the Trust and the Sub-Fund. The Manager envisages that the amount of such Unforeseen Expenses and therefore the amount of the Unforeseen Expenses Provision to be set aside (if any), should be immaterial. However, if the Unforeseen Expenses Provision to be set aside is, in the opinion of the Trustee and the Manager, a material amount, any setting aside of such Unforeseen Expenses Provision will be subject to the Trustee s approval and notification to the investors. The setting aside of any Unforeseen Expenses Provision will reduce the Net Asset Value and the Net Asset Value per Unit of the Sub-Fund. Please refer to Net Asset Value downward adjustment risk in section 8.1 below. Where (i) the Provision is insufficient to cover Future Costs until the Termination Date; and/or (ii) if applicable, the Unforeseen Expenses Provision is insufficient to cover Unforeseen Expenses until the Termination Date, any shortfall will be borne by the Manager. Conversely, where (i) the Provision is in excess of the actual amount of Future Costs until the Termination Date; and/or (ii) if applicable, the Unforeseen Expenses Provision is in excess of the actual amount of Unforeseen Expenses until the Termination Date, such excess will be refunded to the Relevant Investors as part of the Final Distribution and, if necessary, any further distribution of the Sub-Fund in proportion to the Relevant Investor s interests in the Sub-Fund as at the Distribution Record Date. The Trust and the Sub-Fund do not have any unamortised preliminary expense or contingent liabilities (such as outstanding litigation) as at the date of this Announcement and Notice. 8. Other matters 8.1. Other implications of the proposed cessation of trading, the proposed termination of the Trust and the Sub-Fund and the proposed Deauthorisation and Delisting In consequence of this Announcement and Notice and the proposed cessation of trading, the proposed termination of the Trust and the Sub-Fund and the proposed Deauthorisation and Delisting, investors should note and consider the following risks: Liquidity risk - Trading of Units in the Sub-Fund on the SEHK from the date of this 15
Announcement and Notice may become less liquid. Units trading at a discount or premium and Market Maker s inefficiency risk - Although up to (and including) the Last Trading Day, the Market Maker will continue to perform its market making functions in respect of the Sub-Fund in accordance with the Trading Rules of the SEHK, Units in the Sub-Fund may trade at a discount compared to their Net Asset Value in extreme market situations. This is because many investors may want to sell their Units in the Sub-Fund after the Proposal has been announced but there may not be many investors in the market who are willing to purchase such Units. On the other hand, it is also possible that the Units of the Sub-Fund may trade at a premium because there will be no creation of new Units from 17 November 2015 and consequently the divergence between the supply of and demand for such Units may be larger than usual. The Market Maker may not be able to effectively perform its market making activities to provide liquidity of the trading of Units in the Sub-Fund on the SEHK in these extreme market situations. As a result, the price volatility of the Units in the Sub-Fund may be higher than usual from the date of this Announcement and Notice up to (and including) the Last Trading Day. Tracking errors during the period from the date of this Announcement and Notice to the Last Trading Day risk - The setting aside of the Provision (immediately after this Announcement and Notice has been published) and (where applicable) the Unforeseen Expenses Provision, will adversely affect the Net Asset Value per Unit in the Sub-Fund. This reduction of Net Asset Value per Unit in the Sub-Fund may cause the Sub-Fund s returns to substantially deviate from the performance of the Index so that the Sub-Fund will not be able to properly track the performance of the Index during the period from the date of this Announcement and Notice to the Last Trading Day and thus triggering significant tracking error. Furthermore, it is possible that the size of the Sub-Fund may drop drastically before the Last Trading Day. This may impair the Manager s ability to fulfill the investment objective of the Sub-Fund and result in significant tracking error. In the extreme situation where the size of the Sub-Fund becomes so small that the Manager considers that it is not in the best interest of the Sub-Fund to continue to invest in the market, the Manager may decide to convert the whole or part of the investments of the Sub-Fund into cash or deposits in order to protect the interest of the investors of the Sub-Fund. Possible provision for unforeseen expenses risk - There may be certain expenses in relation to or arising out of the termination process together with the Delisting and Deauthorisation which are unforeseeable at the time of this Announcement and Notice. If the need for incurring any such expenses comes to the attention of the Manager and/or the Trustee during the period from the date of this Announcement and Notice to the Last Trading Day, a further provision (i.e. the Unforeseen Expenses Provision) may be set aside for such expenses. While the Manager envisages that the amount of such expenses should be immaterial, any such Unforeseen Expenses Provision will reduce the Net Asset Value per Unit of the Sub-Fund. Net Asset Value downward adjustment risk - Changes in economic environment, consumption pattern and investors expectations may have significant impact on the value of the investments and there may be significant drop in value of the ALPs. Also, the Net Asset Value of the Sub-Fund may be reduced as the Sub-Fund will set aside the Provision (in the amount of HK$618,010) immediately after publication of this Announcement and Notice. The Sub-Fund may, if applicable, also set aside an Unforeseen Expenses Provision which may result in substantial downward adjustment of the Net Asset Value per Unit before the Last Trading Day. Failure to track the Index risk - The Manager will aim to liquidate all the ALPs held by the Sub-Fund with effect from the Trading Cessation Date. Thereafter, the Sub-Fund s assets will mainly be in cash. The Sub-Fund will only be operated in a limited manner. It therefore follows that, from the Trading Cessation Date, the Sub-Fund will cease to track 16
the Index, and will not be able to meet its investment objective of tracking the performance of the Index. Delay in distribution risk - The Manager will aim to realise all of the assets of the Sub-Fund and then proceed with the Final Distribution as soon as practicable. However, the Manager may not be able to realise all the assets of the Sub-Fund in a timely manner during certain periods of time, for example, when the trading on the relevant stock exchanges is restricted or suspended or when the official clearing and settlement depositary of the relevant market is closed. In this case, the payment of the Final Distribution or further distribution (if any) to the Relevant Investors may be delayed. 8.2. Tax implications Based on the Manager s understanding of the law and practice in force at the date of this Announcement and Notice, as the Trust and the Sub-Fund are collective investment schemes authorised under Section 104 of the SFO, profits of the Trust and the Sub-Fund derived from realisation of its assets are exempt from Hong Kong profits tax. No Hong Kong profits tax shall generally be payable by investors in respect of the Final Distributions or further distributions (if any) to the extent of distribution of profits and/or capital of the Sub-Fund. For investors carrying on a trade, profession or business in Hong Kong, profits derived in redemption or disposal of Units may be subject to Hong Kong profits tax if the profits in question arise in or are derived from such trade, profession or business, sourced in Hong Kong, as well as the Units are revenue assets of the investors. Investors should consult their professional tax advisers as to their particular tax position. 8.3. Connected party transaction None of the connected persons of the Manager and/or the Trustee is involved in any transaction in relation to the Trust and the Sub-Fund, nor holds any interest in the Trust and the Sub-Fund. 9. Documents available for inspection Copies of the following documents are available for inspection free of charge at the offices of the Manager and copies thereof may be obtained from the Manager at a cost of HK$150 per set (except for the documents in (D) and (E) the copies of which are available from the Manager free of charge): (A) the Trust Deed; (B) the Participation Agreements; (C) the Service Agreements; (D) the audited accounts and the half-yearly unaudited reports of the Trust and the Sub-Fund; and (E) the Prospectus. 10. Enquiries If you have any queries concerning this Announcement and Notice, please direct them to your stockbrokers or financial intermediaries or contact the Manager at (852) 3765 6797 or (852) 3765 6766 during office hours which are from 9 a.m. to 5 p.m. Mondays to Fridays (except Hong Kong statutory holidays). 17
The Manager accepts full responsibility for the accuracy of the information contained in this Announcement and Notice and confirms, having made all reasonable enquiries, that to the best of its knowledge and belief, there are no other facts the omission of which would make any statement misleading. Da Cheng International Asset Management Company Limited as Manager of the Trust and the Sub-Fund 16 November 2015 As at the date of this Announcement and Notice, the Board of Directors of the Manager consists of LUO Dengpan, ZHOU Jiannan, ZHONG Mingyuan, QIU Jin, DENG Shaoyong, XIE Zhichun and PANG Hing Chung. 18
DEFINITIONS In this Announcement and Notice, unless the context otherwise requires, the following terms shall have the following meanings: ALP ALP Issuer CCASS Code Deauthorisation Delisting Distribution Record Date Final Distribution Final Distribution Date Future Costs HKSCC Index A Hong Kong dollar denominated Chinese A-Share linked product being a derivative instrument (such as a warrant, note or participation certificate) linked to (a) an A Share of a PRC company which is at the relevant time, or will in a foreseeable future become, a constituent company of the Index or (b) the Index. A substantial financial institution which has agreed to issue and repurchase ALPs to and from the Sub-Fund. The ALP Issuers are Merrill Lynch International & Co. C.V., Goldman Sachs International and Citigroup Global Markets Holdings Inc. The Central Clearing and Settlement System established and operated by HKSCC or any successor system operated by HKSCC or its successors The Code on Unit Trusts and Mutual Funds issued by the SFC (as amended or replaced from time to time) The deauthorisation of the Trust and the Sub-Fund and their offering documents by the SFC under section 106 of the SFO The delisting of the Sub-Fund from the SEHK 8 January 2016, being the date for the purpose of determining the beneficial owners of Units in the Sub-Fund who are entitled to the Final Distribution and further distribution (if any) (which may include any refund of excess Provision and/or Unforeseen Expenses Provision (if any)) Has the meaning given to that term in section 3.2 above On or around 12 January 2016, being the date on which the Final Distribution will take place Has the meaning given to that term in section 7 above Hong Kong Securities Clearing Company Limited or its successors The index against which the Sub-Fund is benchmarked 19
Investor Notification Requirements Has the meaning given to that term in section 6.2 above Last Trading Day Manager Market Maker Participating Dealers Proposal 17 December 2015, being the last day for dealings in the Units in the Sub-Fund on the SEHK and last day for redemption of Units in the Sub-Fund by Participating Dealer Da Cheng International Asset Management Company Limited or its successors China Merchants Securities (HK) Co., Limited or its successors Citigroup Global Markets Asia Limited, Goldman Sachs (Asia) Securities Limited and Merrill Lynch Far East Limited The proposal to terminate the Trust and the Sub-Fund, and to voluntarily seek the Deauthorisation and the Delisting Prospectus The Prospectus of the Trust and the Sub-Fund dated 9 May 2012, as amended Provision Registrar Relevant Future Announcement Has the meaning given to that term in section 7 above Computershare Hong Kong Investor Services Limited or its successors Has the meaning given to that term in section 6.4 above Relevant Investors SEHK SFC SFO Termination Date Has the meaning given to that term in section 2.2 above The Stock Exchange of Hong Kong Limited or its successors The Securities and Futures Commission of Hong Kong or its successors The Securities and Futures Ordinance (Cap.571 Laws of Hong Kong) The date on which the Trustee and the Manager form an opinion that the Trust and the Sub-Fund cease to have any contingent or actual assets or liabilities 20
Trading Cessation Date Trust Deed Trustee Unforeseen Expenses Unforeseen Expenses Provision 18 December 2015, being the date on which the dealings in the Units of the Sub-Fund on the SEHK cease The trust deed dated 24 June 2010 between the Manager and the Trustee constituting the Trust, as amended from time to time BOCI-Prudential Trustee Limited or its successors Has the meaning given to that term in section 7 above Has the meaning given to that term in section 7 above Units Unitholder In respect of the Sub-Fund, units representing undivided shares in the Sub-Fund A holder of Units in respect of the Sub-Fund 21
PRODUCT KEY FACTS Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) A sub-fund established under the DCI ETF Trust* (*This is a synthetic ETF) Issuer: Da Cheng International Asset Management Company Limited April 2015 This is an exchange traded fund. This statement provides you with key information about this product. This statement is a part of the Prospectus. You should not invest in this product based on this statement alone. Quick facts Stock code: 3071 Trading lot size: 500 units Fund Manager: Trustee: Da Cheng International Asset Management Company Limited BOCI-Prudential Trustee Limited Ongoing charges over a year # : 7.57% Underlying Index: CSI China Mainland Consumer Index Tracking difference of the last calendar year ## : -15% Dividend policy: Discretionary, if any Base currency: Hong Kong Dollars Financial year end of this fund: 31 December ETF website: # ## http://www.dcfund.com.hk/dczc/jjcp/sub_product_01.jsp?fd=3071 The ongoing charges figure is based on expenses for the year ended 31 December 2014. This figure may vary from year to year. This is the actual tracking difference of the last calendar year. Investors should refer to the ETF website for more up-to-date information on actual tracking difference. What is this product? The Da Cheng CSI China Mainland Consumer Tracker* (*This is a synthetic ETF) (the "Sub-Fund") is a sub-fund of DCI ETF Trust* (*This is a synthetic ETF), an umbrella unit trust established under Hong Kong law. The units of the Sub-Fund are listed on The Stock Exchange of Hong Kong Limited (the "SEHK"). These units are traded on SEHK like listed stocks. Objectives and Investment Strategy Objective The Sub-Fund seeks to track the performance of the CSI China Mainland Consumer Index (the Index ). 1
Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) Strategy The Sub-Fund primarily adopts a synthetic replication strategy, but may also, in certain limited circumstances, adopt a synthetic representative sampling strategy. Investors should note that the Sub- Fund does not invest in A Shares directly. A synthetic replication strategy involves investing in ALPs, which are derivative instruments, linked to (a) substantially all the A Shares comprising the Index in substantially the same weightings as they have in the Index; or (b) the Index. A synthetic representative sampling strategy involves investing in ALPs linked to a representative sample of the A Shares comprising the Index. Under both strategies the Sub-Fund will invest substantially all of the net proceeds of any issue of units of the Sub-Fund in the ALPs which are derivative instruments (such as structured warrants, notes or participating certificate) issued by the ALP Issuers. Under the terms of the ALPs, ALP Issuers will provide the Sub-Fund with an exposure to the economic gain/loss in the performance of the A Shares and/or the Index net of fees, charges and indirect costs. The Manager manages the Sub-Fund s counterparty risk exposure to each ALP Issuer. Where there is any uncollateralized exposure to an ALP Issuer by the end of a trading day, the relevant ALP Issuer or its affiliated collateral provider(s) has to procure collateral to be delivered to the Sub-Fund. Effected from 31 October 2011, Collateral held by the Sub-Fund must represent at least 100% of the Sub-Fund s gross total counterparty risk exposure to all ALP Issuers, and be maintained, marked to market on a daily basis with a view to ensuring that there is no uncollateralized counterparty risk exposure. Where collateral is taken in the nature of equity securities, the market value of such equity collateral should represent at least 120% of the related gross counterparty risk exposure. The collateral must meet the requirements in Chapter 8.8(e) of the Code on Unit Trusts and Mutual Funds, as supplemented by such other guidance from SFC from time to time. Where non-equity collateral is taken, a prudent hair-cut policy will be adopted by the Sub-Fund taking into account all relevant factors, including without limitation, the credit quality, liquidity, duration and other relevant terms of the collateral held. The Manager, as a fiduciary, will dynamically manage the collateral with due care and skill, and in the interest of the unitholders, having due regard to the market circumstances from time to time. Notwithstanding the Prospectus, the Sub-Fund will not invest in any structured products and financial derivative instruments other than the ALPs and except for the purpose of provision of collateral where securities lending arrangements may be used, the Sub-Fund will not enter into any repurchase agreements, stock lending transactions or any other similar over-the-counter transactions. How does it work? The investment strategy of the Sub-Fund is illustrated in the diagram below: ALPs Da Cheng CSI China Mainland Consumer Tracker*(*This is a synthetic ETF) 1 2 Net proceeds of issue of units Provides an exposure to the economic gain/loss in the performance of the A Shares and/or the Index (net of fees, charges and indirect costs) Multiple ALP Issuers Multiple ALP Issuers BOCI-Prudential Trustee Ltd (Trustee) Holds the collateral on behalf of the Sub-Fund 3 ALP Issuers or their affiliated collateral providers procure collateral to be delivered to the Sub-Fund to ensure there is no uncollateralized counterparty risk exposure to the ALP Issuers 2
Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) Collateral Either cash or stocks listed on the SEHK may be posted as collateral on a daily mark-to-market basis to ensure that there will be no uncollateralized counterparty risk exposure of the Sub-Fund to the ALP Issuers. Collateral will not consist of any structured products. Please refer to the website of the Sub-Fund for the composition of the collateral which will be updated on a monthly basis. The collateral management policy of the Sub-Fund, as amended from time to time, is also published on the website of the Sub-Fund. ALP Issuers The Manager selects ALP Issuers according to the following criteria: an ALP Issuer must be an institution with a minimum paid up capital of the equivalent of HK$150,000,000 and a minimum credit rating in respect of senior debt determined at the discretion of the Manager from time to time (taking into account factors such as prevailing market conditions, the credit ratings of other entities with comparable financial standing and the credit ratings of the holding company of the ALP issuer (if applicable)) and a member company of a group including a bank prudentially supervised in a jurisdiction reasonably acceptable to the Trustee and the Manager. In the event that the ALP Issuer s obligations to the Sub-Fund is guaranteed by a guarantor, then such guarantor (but not the ALP Issuer) must fulfil these requirements. As a general requirement, the Manager will expect that the relevant ALP issuer or the Guarantor of the relevant ALP (if any) should have a minimum credit rating equivalent to investment grade. The value of the ALPs and collateral is marked to market on a daily basis. The Manager will seek to ensure that there will be no uncollateralised counterparty risk exposure to the ALP Issuers on a daily basis. Please refer to the website of the Sub-Fund for the gross and net exposure to each ALP Issuer. Index The Index measures the performance of the 50 largest A Shares issuers which are constituents of the CSI 800 Index (the Parent Index ) from the consumer discretionary and consumer staple industries. The Parent Index is a free float market capitalisation-weighted index which measures the performance of A Shares traded on the Shanghai Stock Exchange or the Shenzhen Stock Exchange. The Parent Index consists of the 800 stocks with the largest market capitalisation and liquidity from the entire universe of listed A Share companies in the PRC. The Index sponsor is China Securities Index Co., Ltd. As at 23 April 2015, the following were the top 10 index constituents: Rank Constituent Name % of Index 1 Gree Electric Appliances,Inc. of Zhuhai 7.292 2 Kweichow Moutai Co Ltd 7.227 3 Inner Mongolia Yili Industrial Group Co Ltd 7.203 4 SAIC Motor Co Ltd 5.725 5 Midea Group CO., LTD 4.758 6 SUNING COMMERCE GROUP CO., LTD. 3.876 7 TCL Corporation 3.447 8 Kangmei Pharmaceutical Co Ltd 3.384 9 Wuliangye Yibin Co Ltd 3.262 10 Chongqing Changan Automobile Co Ltd 3.112 For details (including the latest index level and other important news), please refer to the index website at (http://www.csindex.com.cn). 3
Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) What are the key risks? Investment involves risks. Please refer to the Prospectus for details including the risk factors. 1. Synthetic replication, counterparty and liquidity risk The Sub-Fund does not invest in or hold A Shares directly. The Sub-Fund invests primarily in derivative instruments which do not have an active secondary market. These derivative instruments, collectively referred to as ALPs, are issued by ALP Issuers and are intended to provide the Sub-Fund an exposure to the economic gain/loss in the performance of the A Shares and/or the Index net of fees, charges and indirect costs. The Sub-Fund is subject to counterparty risk associated with each ALP Issuer and may suffer losses equal to the full value of the ALP issued by an ALP Issuer net of any collateral provided if such ALP Issuer fails to perform its obligations under the ALP. Any loss would result in a reduction in the net asset value of the Sub-Fund and impair the ability of the Sub-Fund to achieve its investment objective to track the Index. In the event of any default by ALP Issuers, dealing in the units of the Sub-Fund may be suspended and the units of the Sub-Fund may not continue to trade. The Sub-Fund may also ultimately be terminated. The ALP Issuers are predominantly financial institutions and this, in itself, may pose a concentration risk. Any adverse event affecting the performance of a particular ALP Issuer may also have a negative impact on the performance of other ALP Issuers due to the contagion effect. While the Sub-Fund holds, or has recourse to, collateral to mitigate its exposure to each ALP Issuer, this is subject to the risk of the ALP Issuer or collateral provider not fulfilling its obligations. Furthermore, the collateral may not comprise any constituents of the Index. Accordingly, if the Sub-Fund needs to exercise its rights over the collateral upon any default of the ALP Issuers, there is a risk that the value of the collateral may be substantially lower than the amount secured and so the Sub-Fund may suffer significant losses. 2. Emerging market risk 3. PRC tax risk Generally, investments in or linked to emerging markets, such as the PRC s A Share markets, are subject to a greater risk of loss than investments in developed markets due to greater political, economic, taxation and regulatory uncertainty and risks linked to volatility and market liquidity. Pursuant to Notice No. 79 (as defined in the Prospectus), corporate income tax ( CIT ) on capital gains derived by QFIIs (without an establishment or place of business in the PRC or having an establishment in the PRC but the income so derived in China is not effectively connected with such establishment) (such as ALP Issuers) from the trading of A-Shares (such as those underlying the ALPs) has been temporarily exempted effective from 17 November 2014. As such, neither the ALP Issuers nor the Sub-Fund makes any provision for potential tax liabilities in this respect effective from 17 November 2014. The ALP Issuers had already withheld the 10% withholding income tax on the realized gain derived from disposal of A-Share prior to 17 November 2014. It should be noted, however, that the actual applicable tax rates imposed by the SAT may be different and may change from time to time. The PRC tax rules and practices in relation to QFII are new and their implementation is not tested and is uncertain. In particular, the exemption on CIT derived from capital gains realised by QFIIs from the trading of A-Shares is given on a temporary basis, and, as such, as and when the PRC authorities announce the expiration of such exemption, the ALP Issuers may need to recommence provisioning for future potential tax liability, which would in turn adversely affect the net asset value of the Sub-Fund. There is a possibility of the rules being changed and taxes being applied retrospectively. As such, any provision for taxation made by the ALP Issuers may be excessive or inadequate to meet final PRC tax liabilities. Any tax liabilities will be passed by the ALP Issuers to the Sub-Fund. Consequently, Unitholders may be advantaged or disadvantaged depending upon the final tax liabilities, the level of provision made by the relevant ALP Issuer, the specific terms of the ALP and when they subscribed and/or redeemed their Units. 4
4. Concentration risk Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) The exposure of the Sub-Fund is concentrated in the consumer discretionary and consumer industries of the PRC and may be more volatile than funds adopting a more diversified strategy. 5. Risk related to Hong Kong regulatory policies The government or the regulators may intervene in the financial markets, such as imposing the full collateralization requirements on locally domiciled synthetic ETFs. These changes may be introduced suddenly and in accordance with market conditions. Such changes may have a negative impact on existing funds such as the Sub-Fund including without limitation, an adverse cost impact which may materially prejudice existing investors of the Sub-Fund. Further, any such change in policies may also negatively impact the incentive of the counterparties to participate in the Sub-Fund and thereby decreasing the liquidity of the Sub-Fund. In order to maintain its authorization status and to continue to list on the SEHK, the Sub-Fund will be required to comply with such rules and policies at all times. To the extent that any such change in rules or policies adversely impact the Sub-Fund, investors may suffer accordingly. 6. Risks related to QFII policy The QFII policy and rules are subject to change and any such change could adversely impact the Sub-Fund. In the worst case scenario, this could lead to ALPs not being able to be issued and the Sub-Fund having to be terminated. 7. Passive investment The Sub-Fund is not actively managed and will not adopt any temporary defensive position against any market downturn. Therefore when there is a decline in the Index, the Sub-Fund will also decrease in value. Investors may suffer significant losses accordingly. 8. Tracking error risk 9. Trading risk Changes in the net asset value of the Sub-Fund may deviate from the performance of the Index due to factors such as fees and expenses, liquidity of the Index constituents, as well as, changes to the Index. To ensure that there is no uncollateralized counterparty risk on a daily basis, the Sub-Fund bears substantial collateral costs. Such costs are variable and depend on the funding and capital costs of the collateral providers, which are further influenced by market conditions, resulting in an increased tracking error. Further, the tracking error risk will also increased in the event the Sub-Fund is holding more cash than normal. The Sub-Fund may hold a large amount of cash in circumstances including but not limited to the unwinding of ALPs, liquidation of collateral upon default of a counterparty or repayment of taxes previously withheld. The effect of this would be potentially to increase the tracking error because a cash holding will not track the economic performance of the Index. There is also no assurance that there will be availability of new ALPs in the market to enable the Manager to reduce the tracking error risk efficiently. Generally, retail investors can only buy or sell units on SEHK. The trading price of the units of the Sub-Fund on SEHK is subject to market forces and may trade at a substantial premium/discount to the net asset value. 5
Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) How has the fund performed? Past performance information is not indicative of future performance. Investors may not get back the full amount invested. The computation basis of the performance is based on the calendar year end, NAV-to-NAV, with dividend reinvested. These figures show by how much the fund increased or decreased in value during the calendar year being shown. Performance data has been calculated in HKD including ongoing charges and excluding your trading costs on SEHK. Where no past performance is shown there was insufficient data available in that year to provide performance. Fund launch date: 2010. Is there any guarantee? The Sub-Fund does not have any guarantees. You may not get back the amount of money you invest. What are the fees and charges? Charges incurred when trading the Sub-Fund on SEHK Fee Brokerage fee What you pay Transaction levy 0.0027% Trading fee 0.005% Stamp duty At each broker s discretion Nil Ongoing fees payable by the Sub-Fund The following expenses will be paid out of the Sub-Fund. They affect you because they reduce the net asset value of the Sub-Fund which may affect the trading price. 6
Fee Management fee 0.99%* Trustee fee Service fee Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) Annual rate (as a % of the Sub-Fund s value) Nil (included in the Management fee) Nil* * Please note that some fees may be increased up to a permitted maximum amount by providing 1 month's prior notice to Unitholders. Indirect costs borne by the Sub-Fund Apart from the ongoing fees payable by the Sub-Fund, there may be indirect costs (e.g. depositary charges, transaction or exercise charges) charged by an ALP Issuer which are not deducted directly from the assets of the Sub-Fund but reflected in the value of the ALP, which forms part of the assets of the Sub-Fund. These indirect costs may have a substantial adverse impact on the net asset value of the Sub-Fund and the performance of the Sub-Fund and may result in higher tracking error. Additional information You can find the following information of the Sub-Fund at the following website: http://www.dcfund.com.hk/dczc/jjcp/sub_product_01.jsp?fd=3071 The Sub-Fund s Prospectus Latest financial reports The last closing net asset value Estimated net asset value Collateral management policy of the Sub-Fund Gross and net exposure to each ALP Issuers Composition of collateral Last closing level of the Index Notices and announcements The latest list of the Participating Dealers and market makers Important If you are in doubt, you should seek professional advice. The SFC takes no responsibility for the contents of this statement and makes no representation as to its accuracy or completeness. 7
PRODUCT KEY FACTS Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) A sub-fund established under the DCI ETF Trust* (*This is a synthetic ETF) Issuer: Da Cheng International Asset Management Company Limited December 2014 This is an exchange traded fund. This statement provides you with key information about this product. This statement is a part of the Prospectus. You should not invest in this product based on this statement alone. Quick facts Stock code: 3071 Trading lot size: 500 units Fund Manager: Trustee: Da Cheng International Asset Management Company Limited BOCI-Prudential Trustee Limited Ongoing charges over a year # : 3.64% Underlying Index: CSI China Mainland Consumer Index Tracking difference of the last calendar year ## : -1.89% Dividend policy: Discretionary, if any Base currency: Hong Kong Dollars Financial year end of this fund: 31 December ETF website: http://www.dcfund.com.hk/dczc/jjcp/sub_product_01.jsp?fd=3071 # ## The ongoing charges figure is based on expenses for the year ended 31 December 2013. This figure may vary from year to year. This is the actual tracking difference of the last calendar year. Investors should refer to the ETF website for more up-to-date information on actual tracking difference. What is this product? The Da Cheng CSI China Mainland Consumer Tracker* (*This is a synthetic ETF) (the "Sub-Fund") is a sub-fund of DCI ETF Trust* (*This is a synthetic ETF), an umbrella unit trust established under Hong Kong law. The units of the Sub-Fund are listed on The Stock Exchange of Hong Kong Limited (the "SEHK"). These units are traded on SEHK like listed stocks. Objectives and Investment Strategy Objective The Sub-Fund seeks to track the performance of the CSI China Mainland Consumer Index (the Index ). 1
Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) Strategy The Sub-Fund primarily adopts a synthetic replication strategy, but may also, in certain limited circumstances, adopt a synthetic representative sampling strategy. Investors should note that the Sub- Fund does not invest in A Shares directly. A synthetic replication strategy involves investing in ALPs, which are derivative instruments, linked to (a) substantially all the A Shares comprising the Index in substantially the same weightings as they have in the Index; or (b) the Index. A synthetic representative sampling strategy involves investing in ALPs linked to a representative sample of the A Shares comprising the Index. Under both strategies the Sub-Fund will invest substantially all of the net proceeds of any issue of units of the Sub-Fund in the ALPs which are derivative instruments (such as structured warrants, notes or participating certificate) issued by the ALP Issuers. Under the terms of the ALPs, ALP Issuers will provide the Sub-Fund with an exposure to the economic gain/loss in the performance of the A Shares and/or the Index net of fees, charges and indirect costs. The Manager manages the Sub-Fund s counterparty risk exposure to each ALP Issuer. Where there is any uncollateralized exposure to an ALP Issuer by the end of a trading day, the relevant ALP Issuer or its affiliated collateral provider(s) has to procure collateral to be delivered to the Sub-Fund. Effected from 31 October 2011, Collateral held by the Sub-Fund must represent at least 100% of the Sub-Fund s gross total counterparty risk exposure to all ALP Issuers, and be maintained, marked to market on a daily basis with a view to ensuring that there is no uncollateralized counterparty risk exposure. Where collateral is taken in the nature of equity securities, the market value of such equity collateral should represent at least 120% of the related gross counterparty risk exposure. The collateral must meet the requirements in Chapter 8.8(e) of the Code on Unit Trusts and Mutual Funds, as supplemented by such other guidance from SFC from time to time. Where non-equity collateral is taken, a prudent hair-cut policy will be adopted by the Sub-Fund taking into account all relevant factors, including without limitation, the credit quality, liquidity, duration and other relevant terms of the collateral held. The Manager, as a fiduciary, will dynamically manage the collateral with due care and skill, and in the interest of the unitholders, having due regard to the market circumstances from time to time. Notwithstanding the Prospectus, the Sub-Fund will not invest in any structured products and financial derivative instruments other than the ALPs and except for the purpose of provision of collateral where securities lending arrangements may be used, the Sub-Fund will not enter into any repurchase agreements, stock lending transactions or any other similar over-the-counter transactions. How does it work? The investment strategy of the Sub-Fund is illustrated in the diagram below: ALPs Da Cheng CSI China Mainland Consumer Tracker*(*This is a synthetic ETF) 1 2 Net proceeds of issue of units Provides an exposure to the economic gain/loss in the performance of the A Shares and/or the Index (net of fees, charges and indirect costs) Multiple ALP Issuers Multiple ALP Issuers BOCI-Prudential Trustee Ltd (Trustee) Holds the collateral on behalf of the Sub-Fund 3 ALP Issuers or their affiliated collateral providers procure collateral to be delivered to the Sub-Fund to ensure there is no uncollateralized counterparty risk exposure to the ALP Issuers 2
Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) Collateral Either cash or stocks listed on the SEHK may be posted as collateral on a daily mark-to-market basis to ensure that there will be no uncollateralized counterparty risk exposure of the Sub-Fund to the ALP Issuers. Collateral will not consist of any structured products. Please refer to the website of the Sub-Fund for the composition of the collateral which will be updated on a monthly basis. The collateral management policy of the Sub-Fund, as amended from time to time, is also published on the website of the Sub-Fund. ALP Issuers The Manager selects ALP Issuers according to the following criteria: an ALP Issuer must be an institution with a minimum paid up capital of the equivalent of HK$150,000,000 and a minimum credit rating in respect of senior debt determined at the discretion of the Manager from time to time (taking into account factors such as prevailing market conditions, the credit ratings of other entities with comparable financial standing and the credit ratings of the holding company of the ALP issuer (if applicable)) and a member company of a group including a bank prudentially supervised in a jurisdiction reasonably acceptable to the Trustee and the Manager. In the event that the ALP Issuer s obligations to the Sub-Fund is guaranteed by a guarantor, then such guarantor (but not the ALP Issuer) must fulfil these requirements. As a general requirement, the Manager will expect that the relevant ALP issuer or the Guarantor of the relevant ALP (if any) should have a minimum credit rating equivalent to investment grade. The value of the ALPs and collateral is marked to market on a daily basis. The Manager will seek to ensure that there will be no uncollateralised counterparty risk exposure to the ALP Issuers on a daily basis. Please refer to the website of the Sub-Fund for the gross and net exposure to each ALP Issuer. Index The Index measures the performance of the 50 largest A Shares issuers which are constituents of the CSI 800 Index (the Parent Index ) from the consumer discretionary and consumer staple industries. The Parent Index is a free float market capitalisation-weighted index which measures the performance of A Shares traded on the Shanghai Stock Exchange or the Shenzhen Stock Exchange. The Parent Index consists of the 800 stocks with the largest market capitalisation and liquidity from the entire universe of listed A Share companies in the PRC. The Index sponsor is China Securities Index Co., Ltd. As at 18 December 2014, the following were the top 10 index constituents: Rank Constituent Name % of Index 1 Gree Electric Appliances,Inc. of Zhuhai 7.959 2 Inner Mongolia Yili Industrial Group Co Ltd 7.242 3 Kweichow Moutai Co Ltd 7.238 4 SAIC Motor Co Ltd 6.423 5 Midea Group CO., LTD 5.196 6 SUNING COMMERCE GROUP CO., LTD. 3.585 7 Chongqing Changan Automobile Co Ltd 3.349 8 Wuliangye Yibin Co Ltd 3.347 9 TCL Corporation 2.545 10 Qingdao Haier Co Ltd 2.534 For details (including the latest index level and other important news), please refer to the index website at (http://www.csindex.com.cn). What are the key risks? 3
Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) Investment involves risks. Please refer to the Prospectus for details including the risk factors. 1. Synthetic replication, counterparty and liquidity risk The Sub-Fund does not invest in or hold A Shares directly. The Sub-Fund invests primarily in derivative instruments which do not have an active secondary market. These derivative instruments, collectively referred to as ALPs, are issued by ALP Issuers and are intended to provide the Sub-Fund an exposure to the economic gain/loss in the performance of the A Shares and/or the Index net of fees, charges and indirect costs. The Sub-Fund is subject to counterparty risk associated with each ALP Issuer and may suffer losses equal to the full value of the ALP issued by an ALP Issuer net of any collateral provided if such ALP Issuer fails to perform its obligations under the ALP. Any loss would result in a reduction in the net asset value of the Sub-Fund and impair the ability of the Sub-Fund to achieve its investment objective to track the Index. In the event of any default by ALP Issuers, dealing in the units of the Sub-Fund may be suspended and the units of the Sub-Fund may not continue to trade. The Sub-Fund may also ultimately be terminated. The ALP Issuers are predominantly financial institutions and this, in itself, may pose a concentration risk. Any adverse event affecting the performance of a particular ALP Issuer may also have a negative impact on the performance of other ALP Issuers due to the contagion effect. While the Sub-Fund holds, or has recourse to, collateral to mitigate its exposure to each ALP Issuer, this is subject to the risk of the ALP Issuer or collateral provider not fulfilling its obligations. Furthermore, the collateral may not comprise any constituents of the Index. Accordingly, if the Sub-Fund needs to exercise its rights over the collateral upon any default of the ALP Issuers, there is a risk that the value of the collateral may be substantially lower than the amount secured and so the Sub-Fund may suffer significant losses. 2. Emerging market risk 3. PRC tax risk Generally, investments in or linked to emerging markets, such as the PRC s A Share markets, are subject to a greater risk of loss than investments in developed markets due to greater political, economic, taxation and regulatory uncertainty and risks linked to volatility and market liquidity. Pursuant to Notice No. 79 (as defined in the Prospectus), corporate income tax ( CIT ) on capital gains derived by QFIIs (without an establishment or place of business in the PRC or having an establishment in the PRC but the income so derived in China is not effectively connected with such establishment) (such as ALP Issuers) from the trading of A-Shares (such as those underlying the ALPs) has been temporarily exempted effective from 17 November 2014. As such, neither the ALP Issuers nor the Sub-Fund makes any provision for potential tax liabilities in this respect effective from 17 November 2014. The ALP Issuers had already withheld the 10% withholding income tax on the realized gain derived from disposal of A-Share prior to 17 November 2014. It should be noted, however, that the actual applicable tax rates imposed by the SAT may be different and may change from time to time. The PRC tax rules and practices in relation to QFII are new and their implementation is not tested and is uncertain. In particular, the exemption on CIT derived from capital gains realised by QFIIs from the trading of A-Shares is given on a temporary basis, and, as such, as and when the PRC authorities announce the expiration of such exemption, the ALP Issuers may need to recommence provisioning for future potential tax liability, which would in turn adversely affect the net asset value of the Sub-Fund. There is a possibility of the rules being changed and taxes being applied retrospectively. As such, any provision for taxation made by the ALP Issuers may be excessive or inadequate to meet final PRC tax liabilities. Any tax liabilities will be passed by the ALP Issuers to the Sub-Fund. Consequently, Unitholders may be advantaged or disadvantaged depending upon the final tax liabilities, the level of provision made by the relevant ALP Issuer, the specific terms of the ALP and when they subscribed and/or redeemed their Units. 4. Concentration risk The exposure of the Sub-Fund is concentrated in the consumer discretionary and consumer 4
Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) industries of the PRC and may be more volatile than funds adopting a more diversified strategy. 5. Risk related to Hong Kong regulatory policies The government or the regulators may intervene in the financial markets, such as imposing the full collateralization requirements on locally domiciled synthetic ETFs. These changes may be introduced suddenly and in accordance with market conditions. Such changes may have a negative impact on existing funds such as the Sub-Fund including without limitation, an adverse cost impact which may materially prejudice existing investors of the Sub-Fund. Further, any such change in policies may also negatively impact the incentive of the counterparties to participate in the Sub-Fund and thereby decreasing the liquidity of the Sub-Fund. In order to maintain its authorization status and to continue to list on the SEHK, the Sub-Fund will be required to comply with such rules and policies at all times. To the extent that any such change in rules or policies adversely impact the Sub-Fund, investors may suffer accordingly. 6. Risks related to QFII policy The QFII policy and rules are subject to change and any such change could adversely impact the Sub-Fund. In the worst case scenario, this could lead to ALPs not being able to be issued and the Sub-Fund having to be terminated. 7. Passive investment The Sub-Fund is not actively managed and will not adopt any temporary defensive position against any market downturn. Therefore when there is a decline in the Index, the Sub-Fund will also decrease in value. Investors may suffer significant losses accordingly. 8. Tracking error risk 9. Trading risk Changes in the net asset value of the Sub-Fund may deviate from the performance of the Index due to factors such as fees and expenses, liquidity of the Index constituents, as well as, changes to the Index. To ensure that there is no uncollateralized counterparty risk on a daily basis, the Sub-Fund bears substantial collateral costs. Such costs are variable and depend on the funding and capital costs of the collateral providers, which are further influenced by market conditions, resulting in an increased tracking error. Further, the tracking error risk will also increased in the event the Sub-Fund is holding more cash than normal. The Sub-Fund may hold a large amount of cash in circumstances including but not limited to the unwinding of ALPs, liquidation of collateral upon default of a counterparty or repayment of taxes previously withheld. The effect of this would be potentially to increase the tracking error because a cash holding will not track the economic performance of the Index. There is also no assurance that there will be availability of new ALPs in the market to enable the Manager to reduce the tracking error risk efficiently. Generally, retail investors can only buy or sell units on SEHK. The trading price of the units of the Sub-Fund on SEHK is subject to market forces and may trade at a substantial premium/discount to the net asset value. 5
Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) How has the fund performed? Past performance information is not indicative of future performance. Investors may not get back the full amount invested. The computation basis of the performance is based on the calendar year end, NAV-to-NAV, with dividend reinvested. These figures show by how much the fund increased or decreased in value during the calendar year being shown. Performance data has been calculated in HKD including ongoing charges and excluding your trading costs on SEHK. Where no past performance is shown there was insufficient data available in that year to provide performance. Fund launch date: 2010. Is there any guarantee? The Sub-Fund does not have any guarantees. You may not get back the amount of money you invest. What are the fees and charges? Charges incurred when trading the Sub-Fund on SEHK Fee Brokerage fee What you pay Transaction levy 0.0027% Trading fee 0.005% Stamp duty At each broker s discretion Nil Ongoing fees payable by the Sub-Fund The following expenses will be paid out of the Sub-Fund. They affect you because they reduce the net asset value of the Sub-Fund which may affect the trading price. 6
Fee Management fee 0.99%* Trustee fee Service fee Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) Annual rate (as a % of the Sub-Fund s value) Nil (included in the Management fee) Nil* * Please note that some fees may be increased up to a permitted maximum amount by providing 1 month's prior notice to Unitholders. Indirect costs borne by the Sub-Fund Apart from the ongoing fees payable by the Sub-Fund, there may be indirect costs (e.g. depositary charges, transaction or exercise charges) charged by an ALP Issuer which are not deducted directly from the assets of the Sub-Fund but reflected in the value of the ALP, which forms part of the assets of the Sub-Fund. These indirect costs may have a substantial adverse impact on the net asset value of the Sub-Fund and the performance of the Sub-Fund and may result in higher tracking error. Additional information You can find the following information of the Sub-Fund at the following website: http://www.dcfund.com.hk/dczc/jjcp/sub_product_01.jsp?fd=3071 The Sub-Fund s Prospectus Latest financial reports The last closing net asset value Estimated net asset value Collateral management policy of the Sub-Fund Gross and net exposure to each ALP Issuers Composition of collateral Last closing level of the Index Notices and announcements The latest list of the Participating Dealers and market makers Important If you are in doubt, you should seek professional advice. The SFC takes no responsibility for the contents of this statement and makes no representation as to its accuracy or completeness. 7
Important: If you are in any doubt about the contents of this Addendum, you should consult your stockbroker, bank manager, solicitor, accountant and other financial adviser for independent financial advice. This Addendum forms an integral part of and should be read in conjunction with the Prospectus of the Sub-Fund dated 9 May 2012, as amended by addenda dated 31 July 2013, 17 April 2014, 30 October 2014 and 12 November 2014 (the Prospectus ). The Manager accepts responsibility for the accuracy of the information contained in this Addendum as being accurate at the date hereof. DCI ETF TRUST (the Trust ) Da Cheng CSI China Mainland Consumer Tracker* (*This is a synthetic ETF) (the Sub-Fund ) (A Hong Kong unit trust authorised under Section 104 of the Securities and Futures Ordinance (Cap. 571) of the laws of Hong Kong) Stock Code: 3071 The Prospectus is hereby amended as follows: Directors of the Manager Addendum to the Prospectus 1. On page iii, the list under Directors of the Manager is revised by the deletion of CAO Xiongfei and CHEN Shangqian and the insertion of ZHONG Mingyuan and QIU Jin. 2. On page 40, the first sentence of the third paragraph under sub-heading The Manager in the section MANAGEMENT OF THE TRUST is deleted in its entirety and replaced with the following: The directors of the Manager are ZHONG Mingyuan, QIU Jin, DU Peng, DENG Shaoyong, LIU Caihui, XIAO Bing and YANG Chunming. 3. On pages 40 and 41, under the sub-heading The Manager in the section MANAGEMENT OF THE TRUST, the biographical details of the Directors are amended by the deletion of the biographies of CAO Xiongfei and CHEN Shangqian and the insertion of the following biographies: ZHONG Mingyuan Mr ZHONG Mingyuan obtained a Master s Degree in Economics from Fudan University, Shanghai. He has served as an employee of the cash planning department of the Shenzhen branch of China Development Bank, an investment manager in the fixed income department of Huatai United Securities, an analyst in the fixed income department of Taikang Life, a senior investment manager in the fixed income department of New China Asset Management Company Co., Ltd and the managing director of the fixed income department at the headquarters of E Fund Management Co., Ltd. He is currently the Assistant Managing Director and Fixed Income Investment Director of Dacheng Fund Management Company Limited. QIU Jin Ms QIU Jin obtained a bachelor s degree in corporate management from the Shenzhen University in China. Ms Qiu is a certified public accountant of the UK (ACCA) and a FM/068410-00016/RUH/MKSN mksn(hkg7w25474) 1 L_LIVE_APAC1:3908089v3
member of the Chinese Institute of Certified Public Accountant (CICPA). She joined the Manager in April 2012 as the Head of the Product and Marketing Department. Prior to joining the Manager, she served as Vice President of the sales and trading department of China International Capital Corporation Limited from 2007 to 2012 and chief representative of the Shenzhen and Shanghai representative offices of J.P. Morgan Securities (Far East) Co. Ltd. from 1993 to 2007, and worked at the Shenzhen branch of Citibank from 1992 to 1993. Total expense ratio 4. On page 5, in the table under the sub-heading Key information, the row relating to Total Expense Ratio* and the note under the table are deleted in their entirety. 5. On page 25, the sub-section headed Total expense ratio is deleted in its entirety. PRC withholding income tax provisioning by QFIIs 6. In the section RISK FACTORS, the risk factor Risk Associated with PRC Taxation beginning on page 36 is deleted in its entirety and replaced by the following: Risk Associated with PRC Taxation Please refer to the PRC tax risks and considerations set out in the sub-section entitled PRC Taxation under the section headed TAXATION in this Prospectus. 7. Under PRC Taxation in the section TAXATION, the second to the eighth paragraphs under the sub-heading The QFIIs on page 50 to 51 are deleted in their entirety and replaced by the following: CIT: Under the general taxing provisions of the PRC Corporate Income Tax Law ( CIT Law ), a foreign company such as a QFII should be subject to 10% PRC Withholding Income Tax ( WIT ) on interest income, dividends and capital gains from PRC listed securities unless reduced or exempted under current PRC tax laws and regulations or relevant tax treaties. This is on the basis that the QFII would be managed and operated such that it would not be considered a tax resident enterprise in China and it would not be considered to have a permanent establishment in the PRC to which the aforesaid income is attached. A tax treaty (if any) between the PRC and the country in which the QFII is a tax resident may further reduce the 10% WIT rate depending on the QFII s ability to meet the relevant requirements under the relevant tax treaty. A notice by the PRC s tax authority confirmed that WIT is applicable on dividends paid by A-Share companies to QFIIs. In addition, the Notice on the temporary exemption of Corporate Income Tax on capital gains derived from the transfer of PRC equity investment assets such as PRC stocks by QFII and RQFII (Caishui [2014] No.79) promulgated by the Ministry of Finance (the MoF ), the State Administration of Taxation (the SAT ) and the CSRC on 14 November 2014 (the Notice No. 79 ) states that (i) PRC CIT will be imposed on capital gains obtained by QFIIs and Renminbi Qualified Foreign Institutional Investors ( RQFIIs ) from the transfer of PRC equity investment assets (including PRC stocks) realised prior to 17 November 2014 in accordance with laws; and (ii) QFIIs and RQFIIs (without an establishment or place of business in the PRC or having an establishment in the PRC but the income so derived in China is not effectively connected with such establishment) will be temporarily exempt from PRC CIT on gains derived from the transfer of PRC equity investment assets (including A-Shares) effective from 17 November 2014. FM/068410-00016/RUH/MKSN mksn(hkg7w25474) 2 L_LIVE_APAC1:3908089v3
Prior to the issuance of Notice No. 79, the ALP Issuers withheld an amount representing the CIT in respect of any capital gains which would be payable on an actual sale of the underlying A-Share of each ALP. Prior to 17 November 2014, under the terms of their respective ALPs: (i) (ii) Each of Goldman Sachs International and Citigroup Global Markets Holdings Inc. would retain amounts withheld by it for a period of up to 5 years, pending further clarification of the tax rules and tax collection measures adopted by the PRC authorities. In the event that, at the end of the 5-year period, such CIT on capital gains had not been enforced against it (or its affiliate), or the amount withheld was greater than the actual capital gains tax liability, the amount withheld (or the excess withholding) would be returned to the Sub-Fund, although the Sub-Fund would remain liable for any attributable tax. Accrued interest was payable on the amounts withheld and was paid to the Sub-Fund on a periodic basis. Merrill Lynch International & Co. C.V. would retain the amounts withheld regardless of whether, and the rate of which, PRC CIT in respect of capital gains was chargeable (and the Sub-Fund would not be entitled to receive any return of the amounts so withheld). To the extent that any actual PRC tax liability in respect of capital gains exceeded the amounts withheld by Merrill Lynch International & Co. C.V., such PRC tax liability would be borne by it (rather than the Sub-Fund). In light of Notice No. 79, the ALP Issuers have agreed not to withhold any amounts representing the WIT in respect of capital gains which would be payable on an actual sale of the underlying A-Share of each ALP from 17 November 2014 onwards. Investors should refer to the latest financial report of the Sub-Fund for details of the amounts withheld by ALP Issuers on account of capital gains crystallised prior to 17 November 2014, as well as the amount of any crystallised and uncrystallised gains. For accounting purposes, on the basis that the ALP Issuers had, prior to 17 November 2014, already withheld the 10% WIT as described above and in light of the temporary exemption for QFIIs described in Notice No. 79, the Manager does not presently make any provision for the account of the Sub-Fund in respect of WIT on capital gains but is keeping the matter under review. Business Tax and stamp duty: Under PRC laws and regulations, QFIIs are specifically exempt from PRC Business Tax on gains arising from trading of marketable securities (including A Shares). There is no PRC Business Tax on dividend income or profit distributions on equity investment in the PRC. Stamp duty under the PRC laws generally applies to the execution and receipt of all taxable documents listed in the PRC s Provisional Rules on Stamp Duty. Stamp duty is levied on the execution or receipt in China of certain documents, including contracts for the sale of China A-Shares traded on the PRC stock exchanges, at the rate of 0.1%. In the case of contracts for sale of China A-Shares, such stamp duty is currently imposed on the seller but not on the purchaser. General: It should be noted, however, that the actual applicable tax imposed by the SAT may be different and may change from time to time. The PRC tax rules and practices in relation to QFII are new and their implementation is not tested and is uncertain. In particular, Notice No. 79 states that the exemption on CIT derived from capital gains realised by QFIIs and RQFIIs from trading A-Shares given on a temporary basis, and, as such, as and when the PRC authorities announce the expiration FM/068410-00016/RUH/MKSN mksn(hkg7w25474) 3 L_LIVE_APAC1:3908089v3
FATCA of such exemption, the ALP Issuers may need to recommence provisioning for future potential tax liability, which would in turn adversely affect the Net Asset Value of the Sub- Fund. There is a possibility of the rules being changed and taxes being applied retrospectively. As such, any provision for taxation made by the ALP Issuers may be excessive or inadequate to meet final PRC tax liabilities. Any tax liabilities will be passed by the ALP Issuers to the Sub-Fund. Consequently, Unitholders may be advantaged or disadvantaged depending upon the final tax liabilities, the level of provision made by the relevant ALP Issuer, the specific terms of the ALP and when they subscribed and/or redeemed their Units. The Trustee and the Manager may also, in their discretion from time to time, establish a reserve for potential tax liabilities if in their opinion such a reserve is warranted. Any such reserve would have the effect of reducing the Net Asset Value per Unit by the pro rata amount of estimated tax liability. In the event that the Sub-Fund is required to make payments reflecting tax liabilities for which no reserves have been taken, the Net Asset Value per Unit may decrease substantially, without notice, by the pro rata amount of the unreserved tax exposure. If the actual applicable tax levied by SAT is higher than that provided for by an ALP Issuer or the Sub-Fund so that there is a shortfall in the tax provision amount, the Sub-Fund will ultimately have to bear the additional tax liability. In this case, the then existing and new Unitholders will be disadvantaged. On the other hand, if the actual applicable tax levied by SAT is lower than that provided for by an ALP Issuer or the Sub-Fund so that there is an excess in the tax provision amount, then the excess provision may be passed back to the Sub-Fund. In this case, Unitholders who have redeemed their Units before SAT s ruling, decision or guidance in this respect will be disadvantaged as they would have borne the loss from the ALP Issuer s or the Sub-Fund s overprovision. The then existing and new Unitholders may benefit if the difference between the tax provision and the actual taxation liability under that lower tax can be returned to the account of the Sub-Fund as assets thereof, and Unitholders who have already redeemed their Units in the Sub-Fund before the return of any overprovision to the account of the Sub-Fund will not be entitled or have any right to claim any part of such overprovision. Unitholders should seek their own tax advice on their tax position with regard to their investment in the Sub-Fund. 8. The following sub-section is inserted at the end of the current disclosure under the heading TAXATION on page 52 of the Prospectus: FATCA and compliance with US withholding requirements The US Hiring Incentives to Restore Employment Act (the HIRE Act ) was signed into US law in March 2010 and includes provisions commonly referred to as the Foreign Account Tax Compliance Act or FATCA. Broadly, the FATCA provisions are set out in sections 1471 to 1474 of the US Internal Revenue Code of 1986, as amended (the Revenue Code ), which impose a new reporting regime with respect to certain payments to foreign financial institutions (each an FFI ), such as the Sub-Fund, including interests and dividends from securities of US issuers and gross proceeds from the sale of such securities. All such payments may be subject to withholding at a rate of 30%, unless the recipient of the payment satisfies certain requirements intended to enable the US Internal Revenue Service (the IRS ) to identify United States persons (within the meaning of the FM/068410-00016/RUH/MKSN mksn(hkg7w25474) 4 L_LIVE_APAC1:3908089v3
Revenue Code) ( US persons ) with interests in such FFIs. To avoid such withholding on payments made to it, FFIs (including banks, brokers, custodians and investment funds) located in jurisdictions that have not signed an intergovernmental agreement ( IGA ) for implementation of FATCA, will be required to enter into an agreement (a FFI Agreement ) with the IRS to be treated as a participating FFI ( Participating FFI ). Participating FFIs are required to identify all investors that are US persons and report certain information concerning such US persons to the IRS. The FFI Agreement will also generally require that a Participating FFI deduct and withhold 30% from US source withholdable payments made by the Participating FFI to investors who fail to cooperate with certain information requests made by the Participating FFI. Moreover, Participating FFIs are required to deduct and withhold on such US source withholdable payments made to investors that are themselves FFIs but that have not entered into an FFI Agreement with the IRS or that are not otherwise deemed compliant with FATCA (i.e. a non-compliant FFI ). FATCA withholding generally applies to (i) payments of US source income, including US source dividends and interest, made after 30 June 2014; and (ii) payments of gross proceeds of sale or other disposal of property that can produce US source income after 31 December 2016. The 30% withholding could also apply to payments otherwise attributable to US source income (also known as foreign passthru payments ) starting no earlier than 1 January 2017, though the US tax rules on foreign passthru payments are currently pending. Withholding agents (which may include Participating FFIs) will generally be required to begin withholding on US source withholdable payments made after 30 June 2014. The first reporting deadline for FFIs that have entered into the FFI Agreement is 31 March 2015 with respect to information relating to the 2014 calendar year. The United States and a number of other jurisdictions have entered into IGAs. The United States Department of the Treasury and Hong Kong have on 13 November 2014 entered into an IGA based on the Model 2 agreement (the HK IGA ). Under the HK IGA, FFIs in Hong Kong (such as the Sub-Fund) would register with the IRS to be subject to the terms of a FFI Agreement with the IRS and comply with the terms of such FFI Agreement. Otherwise they will be subject to a 30% withholding tax on relevant US source payments to them. Under the HK IGA, FFIs in Hong Kong (such as the Sub-Fund) complying with an FFI Agreement will generally not be required to withhold tax on US source withholdable payments to recalcitrant accounts (i.e. certain accounts of which the holders do not consent to FATCA reporting and disclosure to the IRS) or close such recalcitrant accounts (provided that information regarding the recalcitrant accounts is reported to the IRS according to the terms of the HK IGA), but may be required to withhold tax on US source payments made to non-compliant FFIs. Even though the HK IGA has now been signed between Hong Kong and the United States, withholding may apply to US source withholdable payments covered by FATCA if the Sub- Fund cannot fully satisfy the applicable requirements and is determined to be non-fatca compliant or if the Hong Kong government is found in breach of the terms of the HK IGA. The Manager has registered with the IRS as a sponsoring entity for funds under its management, and has agreed to perform, on behalf of the sponsored investment entities, all due diligence, reporting and other relevant FATCA requirements. The Manager has been assigned the Global Intermediary Identification Number of 4B7FTK.00000.SP.344. The Sub-Fund is a registered deemed compliant FFI sponsored by the Manager. In order to protect Unitholders and avoid being subject to withholding under FATCA, it is the Manager s intention to endeavour to satisfy the requirements imposed under FATCA. Hence it is possible that this may require the Sub-Fund (through its agents or service providers) as far as legally permitted, to report information on the holdings or investment FM/068410-00016/RUH/MKSN mksn(hkg7w25474) 5 L_LIVE_APAC1:3908089v3
returns of any Unitholder to the IRS or the local authorities pursuant to the terms of the HK IGA. It is also possible that the Sub-Fund may be required to compulsorily redeem and/or apply withholdings to certain US source payments to Unitholders who fail to provide the information and documents required to identify their status, or who are non-compliant FFIs or who fall within other categories specified in the FATCA provisions and regulations. Any such compulsory redemption and/or withholding will be done in accordance with applicable laws and regulations and in accordance with the Trust Deed, and the discretion to do so will be exercised by the Manager or the Trustee acting in good faith and on reasonable grounds. As at the date of this Prospectus, all Units in the Sub-Fund are registered in the name of HKSCC Nominees Limited. It is the Manager s understanding that HKSCC Nominees Limited is registered as a reporting FFI. Although the Sub-Fund will attempt to satisfy any obligations imposed on them to avoid the imposition of FATCA withholding tax, no assurance can be given that the Sub-Fund will be able to fully satisfy these obligations. If the Sub-Fund becomes subject to a withholding tax as a result of FATCA, the Net Asset Value of the Sub-Fund may be adversely affected and the Sub-Fund and the Unitholders may suffer material loss. Index methodology 9. In SCHEDULE 2 INDEX AND DISCLAIMER, the sub-section headed Index Selection Universe on page 57 is deleted in its entirety and replaced by the following: Index Selection Universe The selection universe of the Parent Index (the Selection Universe ) includes all the A Shares (each a Stock ) listed on the Shanghai Stock Exchange (the Main Board) or the Shenzhen Stock Exchange (the Main Board, the SME Board (Small and Medium Enterprise Board) and the ChiNext (the board mainly for hi-tech companies)) satisfying the following conditions: (a) (i) (ii) a Stock listed on the Main Board of the Shanghai Stock Exchange or the Main Board or SME Board of the Shenzhen Stock Exchange (a Non- ChiNext Stock ) must have a listing history of more than three months unless the daily average total market value of such Stock since its initial listing is ranked within the top 30 of all Non-ChiNext Stocks; or a Stock listed on the ChiNext of the Shenzhen Stock Exchange must have a listing history of more than three years; and (b) the Stock is not designated for special treatment or potential delisting by any of the CSRC, the Shanghai Stock Exchange or the Shenzhen Stock Exchange as a result of continuous financial losses. The Index includes the 50 top ranked constituents by average daily market capitalisation of the Parent Index which belong to the consumer discretionary sector or consumer staple sector (each an Index Constituent ), as determined in accordance with the industry classification used by CSI. 10. In SCHEDULE 2 INDEX AND DISCLAIMER, the first and second paragraphs under the sub-heading Index Periodical Review on page 59 are deleted in their entirety and replaced with the following: FM/068410-00016/RUH/MKSN mksn(hkg7w25474) 6 L_LIVE_APAC1:3908089v3
The Index Constituents are reviewed when the constituents of the Parent Index are reviewed. The constituents of the Parent Index are reviewed every 6 months by the Index Advisory Committee, which usually meets in the end of May and November every year. The Index Constituents are adjusted according to the periodical review and any changes to the composition of the Index are implemented on the next trading day after market close of the second Friday of June and December each year. Index market capitalisation and top 10 constituents 11. In SCHEDULE 2 INDEX AND DISCLAIMER, the fifth paragraph under the section entitled Index on page 56 of the Prospectus is deleted in its entirety and replaced with the following: As of 18 December 2014, the Index had a total free-float market capitalisation of RMB 1,131.89 billion and 50 constituents, with "consumer staple" industries representing approximately 32.822% and "consumer discretionary" industries representing approximately 67.178% of the Index. 12. In SCHEDULE 2 INDEX AND DISCLAIMER, the first paragraph and the table in the subsection entitled Further Information under the section entitled Index on page 58 and 59 of the Prospectus is deleted in its entirety and replaced with the following: As at 18 December 2014, the 10 largest constituents of the Index represented approximately 49.418% of the total market capitalisation, based on total shares in issue, of the Index, and were as follows: Rank Constituent Name % of Index 1 Gree Electric Appliances,Inc. of Zhuhai 7.959 2 Inner Mongolia Yili Industrial Group Co Ltd 7.242 3 Kweichow Moutai Co Ltd 7.238 4 SAIC Motor Co Ltd 6.423 5 Midea Group CO., LTD 5.196 6 SUNING COMMERCE GROUP CO., LTD. 3.585 7 Chongqing Changan Automobile Co Ltd 3.349 8 Wuliangye Yibin Co Ltd 3.347 9 TCL Corporation 2.545 10 Qingdao Haier Co Ltd 2.534 13. In SCHEDULE 2 INDEX AND DISCLAIMER, the pie chart in the sub-section entitled Further Information under the section entitled Index on page 59 of the Prospectus is deleted in its entirety and replaced with the following: FM/068410-00016/RUH/MKSN mksn(hkg7w25474) 7 L_LIVE_APAC1:3908089v3
The Prospectus may only be distributed if accompanied by this Addendum. Da Cheng International Asset Management Company Limited as the Manager of the Sub-Fund Date: 31 December 2014 FM/068410-00016/RUH/MKSN mksn(hkg7w25474) 8 L_LIVE_APAC1:3908089v3
PRODUCT KEY FACTS Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) A sub-fund established under the DCI ETF Trust* (*This is a synthetic ETF) Issuer: Da Cheng International Asset Management Company Limited November 2014 This is an exchange traded fund. This statement provides you with key information about this product. This statement is a part of the Prospectus. You should not invest in this product based on this statement alone. Quick facts Stock code: 3071 Trading lot size: 500 units Fund Manager: Trustee: Da Cheng International Asset Management Company Limited BOCI-Prudential Trustee Limited Total expense ratio: 2.786% of net asset value of the Sub-Fund for the period from 1 January 2013 to 31 December 2013 # Underlying Index: CSI China Mainland Consumer Index Base currency: Hong Kong Dollars Dividend: Discretionary, if any Financial year end of this fund: ETF website: 31 December http://www.dcfund.com.hk/dczc/jjcp/sub_product_01.jsp?fd=3071 What is this product? The Da Cheng CSI China Mainland Consumer Tracker* (*This is a synthetic ETF) (the "Sub-Fund") is a sub-fund of DCI ETF Trust* (*This is a synthetic ETF), an umbrella unit trust established under Hong Kong law. The units of the Sub-Fund are listed on The Stock Exchange of Hong Kong Limited (the "SEHK"). These units are traded on SEHK like listed stocks. Objectives and Investment Strategy Objective The Sub-Fund seeks to track the performance of the CSI China Mainland Consumer Index (the Index ). # The total expense ratio does not represent the tracking error and does not include any indirect costs (such as costs associated with collateral arrangements) may be borne by the Sub-Fund and reflected in the value of the Chinese A Share linked products ( ALPs ). Please refer to the section headed Indirect costs borne by the fund below for details. 1
Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) Strategy The Sub-Fund primarily adopts a synthetic replication strategy, but may also, in certain limited circumstances, adopt a synthetic representative sampling strategy. Investors should note that the Sub- Fund does not invest in A Shares directly. A synthetic replication strategy involves investing in ALPs, which are derivative instruments, linked to (a) substantially all the A Shares comprising the Index in substantially the same weightings as they have in the Index; or (b) the Index. A synthetic representative sampling strategy involves investing in ALPs linked to a representative sample of the A Shares comprising the Index. Under both strategies the Sub-Fund will invest substantially all of the net proceeds of any issue of units of the Sub-Fund in the ALPs which are derivative instruments (such as structured warrants, notes or participating certificate) issued by the ALP Issuers. Under the terms of the ALPs, ALP Issuers will provide the Sub-Fund with an exposure to the economic gain/loss in the performance of the A Shares and/or the Index net of fees, charges and indirect costs. The Manager manages the Sub-Fund s counterparty risk exposure to each ALP Issuer. Where there is any uncollateralized exposure to an ALP Issuer by the end of a trading day, the relevant ALP Issuer or its affiliated collateral provider(s) has to procure collateral to be delivered to the Sub-Fund. Effected from 31 October 2011, Collateral held by the Sub-Fund must represent at least 100% of the Sub-Fund s gross total counterparty risk exposure to all ALP Issuers, and be maintained, marked to market on a daily basis with a view to ensuring that there is no uncollateralized counterparty risk exposure. Where collateral is taken in the nature of equity securities, the market value of such equity collateral should represent at least 120% of the related gross counterparty risk exposure. The collateral must meet the requirements in Chapter 8.8(e) of the Code on Unit Trusts and Mutual Funds, as supplemented by such other guidance from SFC from time to time. Where non-equity collateral is taken, a prudent hair-cut policy will be adopted by the Sub-Fund taking into account all relevant factors, including without limitation, the credit quality, liquidity, duration and other relevant terms of the collateral held. The Manager, as a fiduciary, will dynamically manage the collateral with due care and skill, and in the interest of the unitholders, having due regard to the market circumstances from time to time. Notwithstanding the Prospectus, the Sub-Fund will not invest in any structured products and financial derivative instruments other than the ALPs and except for the purpose of provision of collateral where securities lending arrangements may be used, the Sub-Fund will not enter into any repurchase agreements, stock lending transactions or any other similar over-the-counter transactions. How does it work? The investment strategy of the Sub-Fund is illustrated in the diagram below: ALPs Da Cheng CSI China Mainland Consumer Tracker*(*This is a synthetic ETF) 1 2 Net proceeds of issue of units Provides an exposure to the economic gain/loss in the performance of the A Shares and/or the Index (net of fees, charges and indirect costs) Multiple ALP Issuers Multiple ALP Issuers BOCI-Prudential Trustee Ltd (Trustee) Holds the collateral on behalf of the Sub-Fund 3 ALP Issuers or their affiliated collateral providers procure collateral to be delivered to the Sub-Fund to ensure there is no uncollateralized counterparty risk exposure to the ALP Issuers 2
Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) Collateral Either cash or stocks listed on the SEHK may be posted as collateral on a daily mark-to-market basis to ensure that there will be no uncollateralized counterparty risk exposure of the Sub-Fund to the ALP Issuers. Collateral will not consist of any structured products. Please refer to the website of the Sub-Fund for the composition of the collateral which will be updated on a monthly basis. The collateral management policy of the Sub-Fund, as amended from time to time, is also published on the website of the Sub-Fund. ALP Issuers The Manager selects ALP Issuers according to the following criteria: an ALP Issuer must be an institution with a minimum paid up capital of the equivalent of HK$150,000,000 and a minimum credit rating in respect of senior debt determined at the discretion of the Manager from time to time (taking into account factors such as prevailing market conditions, the credit ratings of other entities with comparable financial standing and the credit ratings of the holding company of the ALP issuer (if applicable)) and a member company of a group including a bank prudentially supervised in a jurisdiction reasonably acceptable to the Trustee and the Manager. In the event that the ALP Issuer s obligations to the Sub-Fund is guaranteed by a guarantor, then such guarantor (but not the ALP Issuer) must fulfil these requirements. As a general requirement, the Manager will expect that the relevant ALP issuer or the Guarantor of the relevant ALP (if any) should have a minimum credit rating equivalent to investment grade. The value of the ALPs and collateral is marked to market on a daily basis. The Manager will seek to ensure that there will be no uncollateralised counterparty risk exposure to the ALP Issuers on a daily basis. Please refer to the website of the Sub-Fund for the gross and net exposure to each ALP Issuer. Index The Index measures the performance of the 50 largest A Shares issuers which are constituents of the CSI 800 Index (the Parent Index ) from the consumer discretionary and consumer staple industries. The Parent Index is a free float market capitalisation-weighted index which measures the performance of A Shares traded on the Shanghai Stock Exchange or the Shenzhen Stock Exchange. The Parent Index consists of the 800 stocks with the largest market capitalisation and liquidity from the entire universe of listed A Share companies in the PRC. The Index sponsor is China Securities Index Co., Ltd. As at 27 October 2014, the following were the top 10 index constituents: Rank Constituent Name % of Index 1 Kweichow Moutai Co Ltd 7.986 2 Gree Electric Appliances,Inc. of Zhuhai 7.078 3 Inner Mongolia Yili Industrial Group Co Ltd 6.449 4 SAIC Motor Co Ltd 6.227 5 SUNING COMMERCE GROUP CO., LTD. 3.826 6 Midea Group CO., LTD 3.661 7 Wuliangye Yibin Co Ltd 3.596 8 Chongqing Changan Automobile Co Ltd 3.073 9 Kangmei Pharmaceutical Co Ltd 2.67 3
Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) 10 Qingdao Haier Co Ltd 2.613 For details (including the latest index level and other important news), please refer to the index website at (http://www.csindex.com.cn). What are the key risks? Investment involves risks. Please refer to the Prospectus for details including the risk factors. 1. Synthetic replication, counterparty and liquidity risk The Sub-Fund does not invest in or hold A Shares directly. The Sub-Fund invests primarily in derivative instruments which do not have an active secondary market. These derivative instruments, collectively referred to as ALPs, are issued by ALP Issuers and are intended to provide the Sub-Fund an exposure to the economic gain/loss in the performance of the A Shares and/or the Index net of fees, charges and indirect costs. The Sub-Fund is subject to counterparty risk associated with each ALP Issuer and may suffer losses equal to the full value of the ALP issued by an ALP Issuer net of any collateral provided if such ALP Issuer fails to perform its obligations under the ALP. Any loss would result in a reduction in the net asset value of the Sub-Fund and impair the ability of the Sub-Fund to achieve its investment objective to track the Index. In the event of any default by ALP Issuers, dealing in the units of the Sub-Fund may be suspended and the units of the Sub-Fund may not continue to trade. The Sub-Fund may also ultimately be terminated. The ALP Issuers are predominantly financial institutions and this, in itself, may pose a concentration risk. Any adverse event affecting the performance of a particular ALP Issuer may also have a negative impact on the performance of other ALP Issuers due to the contagion effect. While the Sub-Fund holds, or has recourse to, collateral to mitigate its exposure to each ALP Issuer, this is subject to the risk of the ALP Issuer or collateral provider not fulfilling its obligations. Furthermore, the collateral may not comprise any constituents of the Index. Accordingly, if the Sub-Fund needs to exercise its rights over the collateral upon any default of the ALP Issuers, there is a risk that the value of the collateral may be substantially lower than the amount secured and so the Sub-Fund may suffer significant losses. 2. Emerging market risk Generally, investments in or linked to emerging markets, such as the PRC s A Share markets, are subject to a greater risk of loss than investments in developed markets due to greater political, economic, taxation and regulatory uncertainty and risks linked to volatility and market liquidity. 3. PRC tax risk PRC withholding tax is not currently enforced on capital gains realised by qualified foreign institutional investors ( QFIIs ) on the sale of A Shares. There is a risk the PRC tax authorities may seek to collect tax on capital gains ( CGT ) (currently equal to 10% of any gain) without giving any prior warning, and possibly, on a retrospective basis. Any CGT levied on and payable by a QFII may be passed on to the Sub-Fund to the extent that the tax is attributable to the QFII s trading gains on A Shares held in respect of ALPs purchased by the Sub-Fund. The current ALP Issuers have decided to withhold an amount equal to 10% of any gains on the sale of ALPs on account of CGT, and tax provision is not made at the Sub-Fund level. Accordingly, depending on the terms of the ALP, if the amount withheld by the ALP Issuer is insufficient to settle any actual retrospective tax liability, the shortfall may be payable by the Sub- Fund which would adversely affect the Sub-Fund s net asset value. 4. Concentration risk The exposure of the Sub-Fund is concentrated in the consumer discretionary and consumer 4
Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) industries of the PRC and may be more volatile than funds adopting a more diversified strategy. 5. Risk related to Hong Kong regulatory policies The government or the regulators may intervene in the financial markets, such as imposing the full collateralization requirements on locally domiciled synthetic ETFs. These changes may be introduced suddenly and in accordance with market conditions. Such changes may have a negative impact on existing funds such as the Sub-Fund including without limitation, an adverse cost impact which may materially prejudice existing investors of the Sub-Fund. Further, any such change in policies may also negatively impact the incentive of the counterparties to participate in the Sub-Fund and thereby decreasing the liquidity of the Sub-Fund. In order to maintain its authorization status and to continue to list on the SEHK, the Sub-Fund will be required to comply with such rules and policies at all times. To the extent that any such change in rules or policies adversely impact the Sub-Fund, investors may suffer accordingly. 6. Risks related to QFII policy The QFII policy and rules are subject to change and any such change could adversely impact the Sub-Fund. In the worst case scenario, this could lead to ALPs not being able to be issued and the Sub-Fund having to be terminated. 7. Passive investment The Sub-Fund is not actively managed and will not adopt any temporary defensive position against any market downturn. Therefore when there is a decline in the Index, the Sub-Fund will also decrease in value. Investors may suffer significant losses accordingly. 8. Tracking error risk Changes in the net asset value of the Sub-Fund may deviate from the performance of the Index due to factors such as fees and expenses, liquidity of the Index constituents, as well as, changes to the Index. To ensure that there is no uncollateralized counterparty risk on a daily basis, the Sub-Fund bears substantial collateral costs. Such costs are variable and depend on the funding and capital costs of the collateral providers, which are further influenced by market conditions, resulting in an increased tracking error. Further, the tracking error risk will also increased in the event the Sub-Fund is holding more cash than normal. The Sub-Fund may hold a large amount of cash in circumstances including but not limited to the unwinding of ALPs, liquidation of collateral upon default of a counterparty or repayment of taxes previously withheld. The effect of this would be potentially to increase the tracking error because a cash holding will not track the economic performance of the Index. There is also no assurance that there will be availability of new ALPs in the market to enable the Manager to reduce the tracking error risk efficiently. 9. Deviation of total expense ratio risk The total expense ratio (the TER ) provides a measure of the costs associated with managing and operating the Sub-Fund expressed as a percentage of the net asset value of the Sub-Fund. Such costs representing all types of ongoing expenses borne by the Sub-Fund (i.e. all annual charges and payments) including manager s fees, ALP commission, ALP maintenance charge, trustee s fees, registrar fees, service agent s fees, fees payable to service providers, payments to any persons providing outsourced services to the key operations of the Sub-Fund and other operating expenses of the Sub-Fund, will be deducted from the assets of the Sub-Fund. A greater TER will lead to an increase in the Sub-Fund s tracking error to the Index. Accordingly any increase in the TER will reduce investors returns directly. 10. Trading risk Generally, retail investors can only buy or sell units on SEHK. The trading price of the units of the Sub-Fund on SEHK is subject to market forces and may trade at a substantial premium/discount to the net asset value. 5
Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) Is there any guarantee? The Sub-Fund does not have any guarantees. You may not get back the amount of money you invest. What are the fees and charges? Charges incurred when trading the Sub-Fund on SEHK Fee Brokerage fee What you pay Transaction levy 0.0027% Trading fee 0.005% Stamp duty At each broker s discretion Nil Ongoing fees payable by the Sub-Fund The following expenses will be paid out of the Sub-Fund. They affect you because they reduce the net asset value of the Sub-Fund which may affect the trading price. Fee Management fee 0.99%* Trustee fee Service fee Annual rate (as a % of the Sub-Fund s value) Nil (included in the Management fee) Nil* * Please note that some fees may be increased up to a permitted maximum amount by providing 1 month's prior notice to Unitholders. Indirect costs borne by the Sub-Fund Apart from the ongoing fees payable by the Sub-Fund, there may be indirect costs (e.g. depositary charges, transaction or exercise charges) charged by an ALP Issuer which are not deducted directly from the assets of the Sub-Fund but reflected in the value of the ALP, which forms part of the assets of the Sub-Fund. These indirect costs may have a substantial adverse impact on the net asset value of the Sub-Fund and the performance of the Sub-Fund and may result in higher tracking error. Additional information You can find the following information of the Sub-Fund at the following website: http://www.dcfund.com.hk/dczc/jjcp/sub_product_01.jsp?fd=3071 The Sub-Fund s Prospectus Latest financial reports The last closing net asset value Estimated net asset value Collateral management policy of the Sub-Fund Gross and net exposure to each ALP Issuers Composition of collateral Last closing level of the Index Notices and announcements The latest list of the Participating Dealers and market makers Important If you are in doubt, you should seek professional advice. The SFC takes no responsibility for the contents of this statement and makes no representation as to its 6
Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) accuracy or completeness. 7
Important: If you are in any doubt about the contents of this Addendum, you should consult your stockbroker, bank manager, solicitor, accountant and other financial adviser for independent financial advice. This Addendum forms an integral part of and should be read in conjunction with the Prospectus of the Sub-Fund dated 9 May 2012, as amended by addenda dated 31 July 2013, 17 April 2014 and 30 October 2014 (the Prospectus ). The Manager accepts responsibility for the accuracy of the information contained in this Addendum as being accurate at the date hereof. DCI ETF TRUST* (*This is a synthetic ETF) (the Trust ) Da Cheng CSI China Mainland Consumer Tracker* (*This is a synthetic ETF) (the Sub-Fund ) (A Hong Kong unit trust authorised under Section 104 of the Securities and Futures Ordinance (Cap. 571) of the laws of Hong Kong) Stock Code: 3071 The Prospectus is hereby amended as follows: Addendum to the Prospectus 1. On the front cover, in the first paragraph on page i and to the right of the words Trust means the) on page 4, the words DCI ETF Trust is in each case replaced entirely by the following: DCI ETF Trust* (*This is a synthetic ETF) 2. On page 23, all references to the amount of Transaction Levy (in the last line of that page and in Footnote 6 in the footer of that page) are changed from 0.003% to 0.0027% : The Prospectus may only be distributed if accompanied by this Addendum. Da Cheng International Asset Management Company Limited as the Manager of the Sub-Fund Date: 12 November 2014
Important: If you are in any doubt about the contents of this Addendum, you should consult your stockbroker, bank manager, solicitor, accountant and other financial adviser for independent financial advice. This Addendum forms an integral part of and should be read in conjunction with the Prospectus of the Sub-Fund dated 9 May 2012, as amended by addenda dated 31 July 2013 and 17 April 2014 (the Prospectus ). The Manager accepts responsibility for the accuracy of the information contained in this Addendum as being accurate at the date hereof. DCI ETF TRUST (the Trust ) Da Cheng CSI China Mainland Consumer Tracker* (*This is a synthetic ETF) (the Sub-Fund ) (A Hong Kong unit trust authorised under Section 104 of the Securities and Futures Ordinance (Cap. 571) of the laws of Hong Kong) Stock Code: 3071 Addendum to the Prospectus The Prospectus is hereby supplemented as follows with effect from 30 October 2014: 1. The definition of Participation Dealer on page 2 is deleted in its entirety and replaced with the following: Participating Dealer means any licensed broker or dealer who is (or who has appointed an agent or delegate who is) admitted by the Hong Kong Securities and Clearing Company Limited as either a Direct Clearing Participant or a General Clearing Participant (as defined in the General Rules of CCASS) in CCASS and who has entered into a Participation Agreement in form and substance acceptable to the Manager and the Trustee, and any reference in this Prospectus to Participating Dealer shall include a reference to any agent or delegate so appointed by the Participating Dealer. 2. The definition of Participation Agreement on page 3 is deleted in its entirety and replaced with the following: Participation Agreement means an agreement entered into between, amongst others, the Trustee, the Registrar, the Manager and a Participating Dealer setting out, (amongst other things), the arrangements in respect of the issue of Units and the redemption and cancellation of Units. 3. The following sentence is added after the last sentence in the risk factor Creation/Redemption through Participating Dealer only Risk on page 29: Where a Participating Dealer appoints an agent or delegate (who is a CCASS participant) to perform certain CCASS-related functions, if the appointment is terminated and the Participating Dealer fails to appoint an alternative agent or delegate, or if the agent or delegate ceases to be a CCASS participant, the creation or redemption of Units by such Participating Dealer may also be affected. 4. In SCHEDULE 2 INDEX AND DISCLAIMER, the fifth paragraph under the section entitled Index on page 56 of the Prospectus is deleted in its entirety and replaced with the following: As of 27 October 2014, the Index had a total free-float market capitalisation of Rmb 900.882 billion and 50 constituents, with "consumer staple" industries representing approximately 35.68% and "consumer discretionary" industries representing approximately 64.32% of the Index.
5. In SCHEDULE 2 INDEX AND DISCLAIMER, the first paragraph and the table in the sub-section entitled Further Information under the section entitled Index on page 58 and 59 of the Prospectus is deleted in its entirety and replaced with the following: As at 27 October 2014, the 10 largest constituents of the Index represented approximately 47.179% of the total market capitalisation, based on total shares in issue, of the Index, and were as follows: Rank Constituent Name % of Index 1 Kweichow Moutai Co Ltd 7.986 2 Gree Electric Appliances,Inc. of Zhuhai 7.078 3 Inner Mongolia Yili Industrial Group Co Ltd 6.449 4 SAIC Motor Co Ltd 6.227 5 SUNING COMMERCE GROUP CO., LTD. 3.826 6 Midea Group CO., LTD 3.661 7 Wuliangye Yibin Co Ltd 3.596 8 Chongqing Changan Automobile Co Ltd 3.073 9 Kangmei Pharmaceutical Co Ltd 2.67 10 Qingdao Haier Co Ltd 2.613 6. In SCHEDULE 2 INDEX AND DISCLAIMER, the pie chart in the sub-section entitled Further Information under the section entitled Index on page 59 of the Prospectus is deleted in its entirety and replaced with the following: 2
The Prospectus may only be distributed if accompanied by this Addendum. Da Cheng International Asset Management Company Limited as the Manager of the Sub-Fund Date: 30 October 2014 3
Important: If you are in any doubt about the contents of this Addendum, you should consult your stockbroker, bank manager, solicitor, accountant and other financial adviser for independent financial advice. This Addendum forms an integral part of and should be read in conjunction with the Prospectus of the Sub-Fund dated 9 May 2012 as amended by an addendum dated 31 July 2013 (the Prospectus ). The Manager accepts responsibility for the accuracy of the information contained in this Addendum as being accurate at the date hereof. DCI ETF TRUST (the Trust ) Da Cheng CSI China Mainland Consumer Tracker* (*This is a synthetic ETF) (the Sub-Fund ) (A Hong Kong unit trust authorised under Section 104 of the Securities and Futures Ordinance (Cap. 571) of the laws of Hong Kong) Stock Code: 3071 Addendum to the Prospectus The Prospectus is hereby supplemented as follows: 1. In SUMMARY, the table under the section entitled Key information on page 6 of the Prospectus is deleted in its entirety and replaced with the following: Exchange Listing SEHK Main Board Stock Code 3071 Trading Board Lot Size 500 Units Base Currency Hong Kong dollars (HK$) Trading Currency Hong Kong dollars (HK$) Dividend Policy Application Unit size (only by or through Participating Dealers) Parties Manager Trustee Service Agent Registrar ALP Issuers Guarantor of Respective ALP Issuers (as applicable) Total Expense Ratio* Financial Year End Website Annually (if any) subject to PRC withholding tax provisioning Minimum 500,000 Units (or multiples thereof) Da Cheng International Asset Management Company Limited BOCI-Prudential Trustee Limited HK Conversion Agency Services Limited Computershare Hong Kong Investor Services Limited (a) Merrill Lynch International & Co. C.V. (b) Goldman Sachs International (c) Citigroup Global Markets Holdings Inc. (a) The Goldman Sachs Group, Inc. (b) Bank of America Corporation 2.786% of Net Asset Value for the period from 1 January 2013 to 31 December 2013 31-Dec www.dcfund.com.hk/dczc/jjcp/sub_product_01.jsp?fd=3 071 * The TER does not represent the tracking error and does not include indirect costs that may be borne by the Sub-Fund or charged by the relevant ALP Issuer(s) (such as costs associated with collateral arrangements) in respect of the ALPs held by the Sub-Fund. Such costs may reduce the value of the ALPs which may have a substantial adverse impact on the Net Asset Value and performance of the Sub-Fund and may result in a greater tracking error.
2. In FEES AND EXPENSES, the paragraph in the section entitled Total Expense Ratio on page 25 of the Prospectus is deleted in its entirety and replaced with the following: The total expense ratio (the TER ) of the Sub-Fund was 2.786% for the period from 1 January 2013 to 31 December 2013. TER is the sum of all types of ongoing expenses borne by the Sub-Fund (i.e. all annual charges and payments deducted from the assets of the Sub-Fund on a periodic basis) including Management Fee, ALP Commission, ALP Maintenance Charge, Trustee s fees, Registrar s fees, Service Agent s fees, fees payable to service providers, payments to any persons providing outsourced services to the key operations of the Sub-Fund and other operating expenses of the Sub-Fund expressed as a percentage of the Net Asset Value of the Sub-Fund. Cost/expenses should be assessed as an all taxes included basis. The TER does not represent the tracking error and does not include indirect costs that may be borne by the Sub-Fund or charged by the relevant ALP Issuer(s) (such as costs associated with collateral arrangements) in respect of the ALPs held by the Sub-Fund. Such costs may reduce the value of the ALPs which may have a substantial adverse impact on the Net Asset Value and performance of the Sub-Fund and may result in a greater tracking error. Tracking error is the return difference between an ETF and its benchmark / index over a certain period of time. For the period from 1 January 2013 to 31 December 2013, the tracking error of the Sub-Fund was 2.25%. 3. In RISK FACTORS, a new risk factor Deviation of TER Risk as follows is inserted after the risk factor of Termination of the Sub-Fund Risk on page 30 of the Prospectus: Deviation of TER Risk: The TER provides a measure of the costs associated with managing and operating the Sub-Fund expressed as a percentage of the Net Asset Value of the Sub-Fund. Such costs, representing all types of ongoing expenses borne by the Sub-Fund (i.e. all annual charges and payments including Management Fee, ALP Commission, ALP Maintenance Charge, Trustee s fees, Registrar s fees, Service Agent s fees, fees payable to service providers, payments to any persons providing outsourced services to the key operations of the Sub-Fund and other operating expenses of the Sub-Fund will be deducted from the assets of the Sub-Fund. The size of the TER is important to investors because a greater TER will lead to an increase in the Sub-Fund s tracking error to the Index. Accordingly any increase in the TER will reduce investors returns directly. 4. In SCHEDULE 2 INDEX AND DISCLAIMER, the fifth paragraph under the section entitled Index on page 56 of the Prospectus is deleted in its entirety and replaced with the following: As of 15 April 2014, the Index had a total free-float market capitalisation of Rmb 861.8 billion and 50 constituents, with "consumer staple" industries representing approximately 39.08% and "consumer discretionary" industries representing approximately 60.92% of the Index. 5. In SCHEDULE 2 INDEX AND DISCLAIMER, the first paragraph and the table in the sub-section entitled Further Information under the section entitled Index on page 58 and 59 of the Prospectus is deleted in its entirety and replaced with the following: As at 15 April 2014, the 10 largest constituents of the Index represented approximately 49.243% of the total market capitalisation, based on total shares in issue, of the Index, and were as follows: FM/068410-00016/RUH/BJ4 bj4(hkg7w11965) 2 L_LIVE_APAC1:2962007v3
Rank Constituent Name % of Index 1 Gree Electric Appliances Inc of Zhuahai 8.527 2 Kweichow Moutai Co Ltd 8.251 3 Inner Mongolia Yili Industrial Group Co Ltd 6.479 4 SAIC Motor Co Ltd 5.616 5 Wuliangye Yibin Co Ltd 3.886 6 SUNING COMMERCE GROUP CO., LTD. 3.826 7 Midea Group CO., LTD 3.639 8 Qingdao Haier Co Ltd 3.220 9 Henan Shuanghui Investment & Development Co Ltd 3.047 10 BesTV New Media Co., Ltd. 2.752 6. In SCHEDULE 2 INDEX AND DISCLAIMER, the pie chart in the sub-section entitled Further Information under the section entitled Index on page 59 of the Prospectus is deleted in its entirety and replaced with the following: The Prospectus may only be distributed if accompanied by this Addendum. Da Cheng International Asset Management Company Limited as the Manager of the Sub-Fund Date: 17 April 2014 FM/068410-00016/RUH/BJ4 bj4(hkg7w11965) 3 L_LIVE_APAC1:2962007v3
Important: If you are in any doubt about the contents of this Addendum, you should consult your stockbroker, bank manager, solicitor, accountant and other financial adviser for independent financial advice. This Addendum forms an integral part of and should be read in conjunction with the Prospectus of the Sub-Fund dated 9 May 2012 (the Prospectus ). The Manager accepts responsibility for the accuracy of the information contained in this Addendum as being accurate at the date hereof. DCI ETF TRUST (the Trust ) Da Cheng CSI China Mainland Consumer Tracker* (*This is a synthetic ETF) (the Sub-Fund ) (A Hong Kong unit trust authorised under Section 104 of the Securities and Futures Ordinance (Cap. 571) of the laws of Hong Kong) Stock Code: 3071 Addendum to the Prospectus The Prospectus is hereby supplemented as follows: 1. In SCHEDULE 2 INDEX AND DISCLAIMER, the fifth paragraph under the section entitled Index on page 56 of the Prospectus is deleted in its entirety and replaced with the following: As of 30 July 2013, the Index had a total free-float market capitalisation of Rmb 747.1 billion and 50 constituents, with "consumer staple" industries representing approximately 44.20% and "consumer discretionary" industries representing approximately 55.80% of the Index. 2. In SCHEDULE 2 INDEX AND DISCLAIMER, the sub-section entitled Weight Cap Factor under the section entitled Index on page 57 of the Prospectus is deleted in its entirety and replaced with the following: Weight Cap Factor The weight cap factor is adjusted semi-annually together with constituents periodical review. The adjustment will be implemented on the next trading day after market close of the second Friday of June and December. The adjusted market cap of the last trading day before the review is the basis for the calculation of the weight cap factor. The weight cap factor will also be adjusted when constituents are temporarily adjusted. If the share structure of a constituent changes dramatically or its weight changes notable, CSI will submit the changes to the committee to decide whether to adjust the weight cap factor. 3. In SCHEDULE 2 INDEX AND DISCLAIMER, the first paragraph in the sub-section entitled Index Periodical Review under the section entitled Index on page 58 of the Prospectus is deleted in its entirety and replaced with the following: The Index Constituents are reviewed when the constituents of the Parent Index are reviewed. The constituents of the Parent Index are reviewed every 6 months by the Index Advisory Committee. The Index Constituents are adjusted according to the periodical review and any changes to the composition of the Index are implemented on the next trading day after market close of the second Friday of June and December in each year. 4. In SCHEDULE 2 INDEX AND DISCLAIMER, the second paragraph in the sub-section entitled Index Adjustments under the section entitled Index on page 58 of the Prospectus is deleted in its entirety and replaced with the following: Necessary adjustments are made by CSI when some corporate events happen so as to maintain the representativeness and investability of the Index. Such events include
without limitation the bankruptcy, restructuring, merger, acquisition and spin-off, of an Index Constituent issuer and the delisting, temporary suspension from trading and reissuance, of an Index Constituent. If the adjustment is due to stock dividends, rights issues, stock split or stock consolidation, the adjustment will be implemented on the ex-right day. If the adjustment is due to other corporate events, such as second offering and exercise of warrants, then if the cumulative change of constituent shares is more than 5%, the adjustment will be implemented immediately; if the cumulative change of constituent shares is less than 5%, the adjustment will be implemented in the next regular review. If an Index Constituent is removed from or included in the Parent Index due to a corporate action, it will be removed from the CSI China Mainland Consumer index simultaneously. 5. In SCHEDULE 2 INDEX AND DISCLAIMER, the first paragraph and the table in the sub-section entitled Further Information under the section entitled Index on page 58 and 59 of the Prospectus is deleted in its entirety and replaced with the following: As at 30 July 2013, the 10 largest constituents of the Index represented approximately 50.817% of the total market capitalisation, based on total shares in issue, of the Index, and were as follows: Rank Constituent Name % of Index 1 2 3 4 5 6 7 8 9 10 Kweichow Moutai Co Ltd 9.362 Gree Electric Appliances Inc of Zhuahai 8.129 Inner Mongolia Yili Industrial Group Co Ltd 6.778 SAIC Motor Co Ltd 5.326 Wuliangye Yibin Co Ltd 4.837 Guangdong Midea Electric Appliances Co Ltd 3.623 Henan Shuanghui Investment & Development Co Ltd 3.566 SUNING COMMERCE GROUP CO., LTD. 3.309 Shanghai Jahwa United Co Ltd 3.094 Shenzhen Overseas Chinese Town Co Ltd 2.793 6. In SCHEDULE 2 INDEX AND DISCLAIMER, the pie chart in the sub-section entitled Further Information under the section entitled Index on page 59 of the Prospectus is deleted in its entirety and replaced with the following: 016/068410-00010/RUH/BJ4 bj4(hkg7w11965) 2 L_LIVE_APAC1:2735872v2
The change in paragraph 2 and 3 above will take effect from the next index regular review in the second half of 2013. The change in paragraph 4 above will take effect from 16 December 2013. The Prospectus may only be distributed if accompanied by this Addendum. Da Cheng International Asset Management Company Limited as the Manager of the Sub-Fund Date: 31 July 2013 016/068410-00010/RUH/BJ4 bj4(hkg7w11965) 3 L_LIVE_APAC1:2735872v2
Investments involve risks, including the loss of principal. If you are in any doubt about the contents of this Prospectus, you should consult your stockbroker, bank manager, solicitor, accountant or other financial adviser. DCI ETF Trust PROSPECTUS Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) Stock Code : 3071 MANAGER Da Cheng International Asset Management Company Limited 9 May 2012 The Stock Exchange of Hong Kong Limited, Hong Kong Exchanges and Clearing Limited, Hong Kong Securities Clearing Company Limited and the Hong Kong Securities and Futures Commission take no responsibility for the contents of this Prospectus, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this Prospectus. The Trust and the Sub-Fund have each been authorized as collective investment schemes by the Hong Kong Securities and Futures Commission. SFC authorization is not a recommendation or endorsement of a scheme nor does it guarantee the commercial merits of a scheme or its performance. It does not mean the scheme is suitable for all investors nor is it an endorsement of its suitability for any particular investor or class of investors.
IMPORTANT INFORMATION This Prospectus relates to the offer in Hong Kong of units (the Units ) in the Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF) (the Sub-Fund ), a sub-fund of DCI ETF Trust (the Trust ), an open ended umbrella unit trust established under Hong Kong law by a trust deed dated 24 June 2010 (the Trust Deed ) between Da Cheng International Asset Management Company Limited (the Manager ) and BOCI-Prudential Trustee Limited (the Trustee ). The information contained in this Prospectus has been prepared to assist potential investors in making an informed decision in relation to investing in the Sub-Fund. It contains important facts about the Units offered in accordance with this Prospectus. A product key facts statement which contains the key features and risks of the Sub-Fund is also issued by the Manager and such product key facts statement shall form part of the Prospectus, and shall be read, in conjunction with, the Prospectus. The Manager accepts full responsibility for the information contained in this Prospectus and for the accuracy and fairness of the opinions expressed (at the date of its publication), and confirm that this Prospectus includes particulars given in compliance with the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited and the Code on Unit Trusts and Mutual Funds (the Code ) and the Overarching Principles of the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products for the purposes of giving information with regard to the Units of the Sub-Fund and that having made all reasonable enquiries, the Manager and the directors confirm that, to the best of their knowledge and belief, the information contained in this Prospectus is true, accurate and complete in all material respects and not misleading; there are no other matters the omission of which would make any statement in this Prospectus misleading, whether of fact or opinion; any inferences that might reasonably be drawn from any statement in the Prospectus are true and are not misleading; and all opinions and intents expressed in this Prospectus have been arrived at after due and careful consideration and are founded on bases and assumptions that are fair and reasonable. The Trustee is not responsible for the preparation of this Prospectus and shall not be held liable to any person for any information disclosed in this Prospectus, except for the information regarding the Trustee itself under the paragraph headed The Trustee in the section headed Management of the Trust. The Trust and the Sub-Fund are authorized by the Securities and Futures Commission (the SFC ) in Hong Kong under Section 104 of the Securities and Futures Ordinance. The SFC takes no responsibility for the financial soundness of the Trust, the Sub-Fund or for the correctness of any statements made or opinions expressed in this Prospectus. SFC authorization is not a recommendation or endorsement of a scheme nor does it guarantee the commercial merits of a scheme or its performance. It does not mean the scheme is suitable for all investors nor is it an endorsement of its suitability for any particular investor or class of investors. You should consult your financial adviser, consult your tax advisers and take legal advice as appropriate as to whether any governmental or other consents are required, or other formalities need to be observed, to enable you to acquire Units as to whether any taxation effects, foreign exchange restrictions or exchange control requirements are applicable and to determine whether any investment in the Sub-Fund is appropriate for you. Application has been made to the Listing Committee of The Stock Exchange of Hong Kong Limited (the SEHK ) for the listing of, and permission to deal in the Units of the Sub-Fund on the SEHK. Subject to compliance with the admission requirements of Hong Kong Securities Clearing Company Limited ( HKSCC ) and the granting of listing of, and permission to deal in, the Units on the SEHK, the Units will be accepted as eligible securities by HKSCC for deposit, clearing and settlement in the Central Clearing and Settlement System ( CCASS ) with effect from the date of commencement of dealings in the Units on the SEHK or such other date as may be determined by HKSCC. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time. No action has been taken to permit an offering of Units or the distribution of this Prospectus in any jurisdiction other than Hong Kong and, accordingly, the Prospectus does not constitute an offer or solicitation to anyone in any jurisdiction in which such offer is not authorized or to any person to whom it is unlawful to make such offer or solicitation. Furthermore, distribution of this Prospectus shall not be permitted unless it is accompanied by a copy of the latest annual report and accounts of the Sub-Fund (where existing) and, if later, its most recent interim report, which form a part of this Prospectus. Neither the Trust nor the Sub-Fund is registered as an investment company with the United States Securities and Exchange Commission. Units have not been, and will not be, registered under the United States Securities Act of 1933 or any other United States Federal or State law and accordingly Units are not offered to, and may not be transferred to or acquired by, US persons (including without limitation US citizens and residents as well as business entities organized under United States law). i
You should note that any amendment or addendum to this Prospectus will only be posted on the Manager s website (www.dcfund.com.hk/dczc/jjcp/sub_product_01.jsp?fd=3071). This Prospectus may refer to information and materials included in websites. Such information and materials do not form part of the Prospectus and they have not been reviewed by the SFC or any regulatory body. Investors should note that the information provided in websites may be updated and changed periodically without any notice to any person. ii
DIRECTORY Directors of the Manager CAO Xiongfei CHEN Shangqian DU Peng DENG Shaoyong LIU Caihui XIAO Bing YANG Chunming Manager Da Cheng International Asset Management Company Limited Room 5811 Two International Finance Centre 8 Finance Street Central Hong Kong Trustee BOCI-Prudential Trustee Limited 12/F & 25/F, Citicorp Centre 18 Whitfield Road Causeway Bay Hong Kong Service Agent HK Conversion Agency Services Limited 2/F, Infinitus Plaza 199, Des Vœux Road Central Hong Kong Registrar Computershare Hong Kong Investor Services Limited 46/F, Hopewell Centre 183 Queen s Road East Wan Chai Hong Kong Auditors PricewaterhouseCoopers 31/F, Edinburg Tower 15 Queen s Road Central Hong Kong Legal Counsel to the Manager Simmons & Simmons 13/F, One Pacific Place 88 Queensway Hong Kong iii
CONTENTS DEFINITIONS...1 SUMMARY...5 THE OFFERING PHASES...10 CREATIONS AND REDEMPTIONS (PRIMARY MARKET)...13 EXCHANGE LISTING AND TRADING (SECONDARY MARKET)...19 DETERMINATION OF NET ASSET VALUE...20 FEES AND EXPENSES...23 RISK FACTORS...27 MANAGEMENT OF THE TRUST...40 STATUTORY AND GENERAL INFORMATION...45 TAXATION...50 SCHEDULE 1 INVESTMENT RESTRICTIONS, SECURITY LENDING AND BORROWING...53 SCHEDULE 2 INDEX AND DISCLAIMER...56 SCHEDULE 3 INFORMATION ABOUT THE ALPS...60 iv
DEFINITIONS In this Prospectus, unless the context requires otherwise, the following expressions have the meanings set out below. Other capitalised terms used, but not defined, have the meaning given to those terms in the Trust Deed. A Share means domestic shares issued by companies and listed on either the Shanghai Stock Exchange or the Shenzhen Stock Exchange in the PRC, which are available to domestic investors and QFII. ALP means a Hong Kong dollar denominated Chinese A Share linked product being a derivative instrument (such as a warrant, note or participation certificate) linked to (a) an A Share of a PRC company which is at the relevant time, or will in a foreseeable future become, a constituent company of the Index or (b) the Index. ALP Commission means the commission payable by the Sub-Fund as commission for purchasing or unwinding an ALP. ALP Issuer means a substantial financial institution which has agreed to issue and repurchase ALPs to and from the Sub-Fund. The ALP Issuers at the date of this Prospectus are Merrill Lynch International & Co. C.V., Goldman Sachs International and Citigroup Global Markets Holdings Inc.. Application Unit means such number of Units or whole multiples thereof as specified in this Prospectus or such other multiple of Units determined by the Manager, approved by the Trustee and notified to the Participating Dealers. Business Day means a day (other than a Saturday) on which the SEHK is open for normal trading and on which banks in Hong Kong are open for general business provided that, where as a result of a Typhoon Number 8 Signal, Black Rainstorm warning or other similar event, the period during which banks in Hong Kong are open on any day is reduced, such day shall not be a Business Day unless the Manager with the consent of the Trustee otherwise determines. CCASS means the Central Clearing and Settlement System established and operated by HKSCC or any successor system operated by HKSCC or its successors. Code means the Code on Unit Trusts and Mutual Funds issued by the SFC (as amended, or replaced, from time to time). Connected Person has the meaning as set out in the Code which at the date of the Prospectus means in relation to a company: (a) (b) (c) (d) any person or company beneficially owning, directly or indirectly, 20% or more of the ordinary share capital of that company or able to exercise directly or indirectly, 20% or more of the total votes in that company; or any person or company controlled by a person who or which meets one or both of the descriptions given in (a); or any member of the group of which that company forms part; or any director or officer of that company or of any of its connected persons as defined in (a), (b) or (c). Creation Application means an application by a Participating Dealer for the creation and issue of Units in an Application Unit size (or whole multiples thereof) in accordance with the Operating Guidelines and the Trust Deed. 1
CSI means China Securities Index Co., Ltd, a company established by the Shenzhen Stock Exchange and Shanghai Stock Exchange to provide services relating to securities indices. Dealing Day means each Business Day and/or such other day or days as the Manager may from time to time determine with the approval of the Trustee. C7 Dealing Deadline in relation to any particular place and any particular Dealing Day, means the time on each Dealing Day specified in the The Offering Phases section of this Prospectus. Duties and Charges means, in relation to any particular transaction or dealing, all stamp and other duties, taxes, government charges, brokerage, bank charges, transfer fees, registration fees, transaction levies and other duties and charges or the creation, issue, transfer, cancellation or redemption of Units or otherwise which may have become or may be payable in respect of, and whether prior to, upon or after the occasion of, such transaction or dealing. Extension Fee means the fee payable to the Trustee on each occasion the Manager grants the Participation Dealer s request for extended settlement in respect of a Creation Application or Redemption Application. HKFE means the Hong Kong Futures Exchange. Hong Kong means the Hong Kong Special Administrative Region of the People s Republic of China. Index Provider means, in respect of the Sub-Fund, CSI being the person responsible for compiling the Index against which the Sub-Fund benchmarks its investments and who holds the right to licence the use of the Index to the Sub-Fund. Index means the CSI China Mainland Consumer Index. Issue Price means the price at which Units may be issued, determined in accordance with the Trust Deed. Manager means Da Cheng International Asset Management Company Limited. Market means in any part of the world: (a) (b) in relation to any security: the SEHK or a Recognised Stock Exchange; and in relation to any futures contract: the HKFE or any international futures exchange approved by the Manager. Market Maker means a broker or dealer permitted by the SEHK to act as such by making a market for the Units in the secondary market on the SEHK. Net Asset Value means the net asset value of the Sub-Fund or, as the context may require, the net asset value of a Unit calculated under the Trust Deed. Operating Guidelines means the guidelines for the creation and redemption of Units as set out in the Schedule to the Participation Agreement as amended from time to time by the Manager with the approval of the Trustee and following consultation, to the extent reasonably practicable, with the Participating Dealers, and as notified in writing to the Participating Dealers. Unless otherwise specified, references to the Operating Guidelines shall be to the Operating Guidelines for the Sub-Fund applicable at the time of the relevant application for Units. "Partial Delivery Request Fee" means the fee payable to the Trustee on each occasion the Manager grants the Participating Dealer's request for partial delivery in respect of a Creation Application or a Redemption Application. Participating Dealer means any licensed broker or dealer and who has entered into a 2
Participation Agreement in form and substance acceptable to the Manager and the Trustee. Participation Agreement means an agreement entered into between the Trustee, the Registrar, the Manager and a Participating Dealer setting out, (amongst other things), the arrangements in respect of the issue of Units and the redemption and cancellation of Units. PRC means The People s Republic of China excluding, for the purposes of interpretation of this Prospectus, Hong Kong. QFII means a qualified foreign institutional investor approved under the Regulations on Domestic Securities Investments by Qualified Foreign Institutional Investors issued by the China Securities Regulatory Commission, the People s Bank of China and the State Administration of Foreign Exchange and effective from 1 September 2006. Recognised Stock Exchange means an international stock exchange which is recognised by the SFC or which is approved by the Manager. Redemption Application means an application by a Participating Dealer for the redemption of Units in Application Unit size (or whole multiples thereof) in accordance with the Operating Guidelines and the Trust Deed. Redemption Value means, in respect of a Unit, the price per Unit at which such Unit is redeemed, calculated in accordance with the Trust Deed. Registrar means Computershare Hong Kong Investor Services Limited or such other person appointed under the Trust Deed and the Registrar Agreement as registrar of the Trust. "Registrar Agreement" means an agreement entered into between the Trustee, the Registrar and the Manager on or about the date of the Trust Deed setting out, among things, the appointment of the Registrar. Rmb means Renminbi Yuan, the lawful currency for the time being and from time to time of the PRC. Security means any shares, stocks, debentures, loan stocks, bonds, securities, commercial paper, acceptances, trade bills, treasury bills, warrants, participation notes, certificates, structured products, instruments or notes of, or issued by or under the guarantee of, any body, whether incorporated or unincorporated, and whether listed or unlisted, or of any government or local government authority or supranational body, whether paying interest or dividends or not and whether fully-paid, partly paid or nil paid and includes (without prejudice to the generality of the foregoing): (a) (b) (c) (d) (e) any right, option or interest (howsoever described) in or in respect of any of the foregoing, including units in any Unit Trust (as defined in the Trust Deed); any certificate of interest or participation in, or temporary or interim certificate for, receipt for or warrant to subscribe or purchase, any of the foregoing; any instrument commonly known or recognised as a security; any receipt or other certificate or document evidencing the deposit of a sum of money, or any rights or interests arising under any such receipt, certificate or document; and any bill of exchange and any promissory note. Securities and Futures Ordinance means the Securities and Futures Ordinance (Cap. 571) of Hong Kong. SEHK means The Stock Exchange of Hong Kong Limited or its successors. 3
Settlement Day means the Business Day which is two Business Days after the relevant Dealing Day (or such later Business Day as is permitted in relation to such Dealing Day pursuant to the Operating Guidelines) or such other number of Business Days after the relevant Dealing Day as determined by the Manager in consultation with the Trustee from time to time and notify to the relevant Participating Dealers. SFC means the Securities and Futures Commission of Hong Kong or its successors. SFC Collateral Conditions means the conditions or requirements on collateral as amended from time to time by SFC. This includes, as at the date of the Prospectus, the conditions that: (a) collateral held by the Sub-Fund must represent at least 100% of the Sub-Fund s gross total counterparty risk exposure and be maintained, marked to market on a daily basis with a view to ensuring that there is no uncollateralized counterparty risk exposure, where collateral is taken in the nature of equity securities, the market value of such equity collateral shall represent at least 120% of the related gross counterparty risk exposure; (b) the collateral must meet the requirements in 8.8(e) of the Code, as supplemented by such other guidance from the SFC from time to time. The Manager as fiduciary and with due care and skill, shall adopt a prudent hair-cut policy on any non-equity collateral held by the Sub-Fund taking into account all relevant factors, including without limitation, the credit quality, liquidity, duration and other relevant terms of the collateral held; (c) the Manager as a fiduciary is also required to dynamically manage the collateral with due care and skill, and in the interest of the Unitholders, having due regard to the market circumstances from time to time. The collateral management policy of the Sub-Fund, as amended from time to time, will be published on the website of the Sub-Fund. Sub-Fund means the Da Cheng CSI China Mainland Consumer Tracker ( This is a synthetic ETF). Transaction Fee means the fee which may at the Manager s discretion be charged for the benefit of the Trustee to each Participating Dealer on each Dealing Day upon which a Creation Application or Redemption Application has been made by the relevant Participating Dealer. Trust means the DCI ETF Trust. Trust Deed means the trust deed dated 24 June 2010 between the Manager and the Trustee constituting the Trust. Trust Fund means all the property held by the Trust, including all Deposited Property and Income Property (as defined in the Trust Deed), except for amounts to be distributed, in each case in accordance with the Trust Deed. Trustee means BOCI-Prudential Trustee Limited. Unit means a unit representing an undivided share in the Sub-Fund. Unitholder means a person entered on the register of holders as the holder of Units including, where the context so admits, persons jointly registered and the beneficial owner of Units which are registered in the name of HKSCC Nominees Limited and held in CCASS. Valuation Point means the official close of trading on the Market on which the basket of Securities constituting the Index are listed on each Dealing Day and if more than one, the official close of trading on the last relevant Market to close or such other time or times as determined by the Manager in consultation with the Trustee from time to time provided that there shall always be a Valuation Point on each Dealing Day other than where there is a suspension of the creation and redemption of Units. 4
SUMMARY Key information Set out below is a summary of key information in respect of the Sub-Fund which should be read together with the full text of this Prospectus. Exchange Listing SEHK Main Board Stock Code 3071 Trading Board Lot Size 500 Units Base Currency Hong Kong dollars (HK$) Trading Currency Hong Kong dollars (HK$) Dividend Policy Application Unit size (only by or through Participating Dealers) Parties Manager Trustee Service Agent Registrar ALP Issuers Guarantor of Respective ALP Issuers (as applicable) Annually (if any) subject to PRC withholding tax provisioning Minimum 500,000 Units (or multiples thereof) Da Cheng International Asset Management Company Limited BOCI-Prudential Trustee Limited HK Conversion Agency Services Limited Computershare Hong Kong Investor Services Limited (a) Merrill Lynch International & Co. C.V. (b) Goldman Sachs International (c) Citigroup Global Markets Holdings Inc. (a) The Goldman Sachs Group, Inc. (b) Bank of America Corporation Participating Dealers Total Expense Ratio* Financial Year End Website Merrill Lynch Far East Limited, Goldman Sachs (Asia) Securities Limited and Citigroup Global Markets Asia Limited Estimated 1.49% per year of Net Asset Value 31-Dec www.dcfund.com.hk/dczc/jjcp/sub_product_01.jsp?fd=3 071 * The estimated TER does not represent the estimated tracking error and does not include indirect costs that may be borne by the Sub-Fund or charged by the relevant ALP Issuer(s) (such as costs associated with collateral arrangements) in respect of the ALPs held by the Sub-Fund. Such costs may reduce the value of the ALPs which may have a substantial adverse impact on the Net Asset Value and performance of the Sub-Fund and may result in a greater tracking error. 5
Investment Objective The investment objective of the Sub-Fund is to provide investment results that, before fees and expenses, closely correspond to the performance of the Index. There can be no assurance that the Sub-Fund will achieve its investment objective. Investment Strategy The Manager utilises a synthetic replication strategy through investment in derivatives to achieve the Sub-Fund s investment objective. The Securities comprised in the Index may not be directly acquired by non PRC persons, such as the Sub-Fund, unless the person is a QFII. Neither the Manager nor the Sub-Fund is presently a QFII, meaning that in order to meet the investment objective, the Manager on behalf of the Sub-Fund, invests in ALPs issued by one or more ALP Issuers. An ALP is a derivative instrument linked to either (a) an A Share of a PRC company which is at the relevant time, or will in a foreseeable future become, a constituent company of the Index or (b) the Index. An ALP represents only an obligation of the ALP Issuer to provide the Sub-Fund the economic performance equivalent to holding the underlying A Shares. An ALP does not provide any beneficial or equitable entitlement or interest in the relevant A Shares to which the ALP is linked. In other words, the A Shares are not in any way owned by the Sub-Fund. However each ALP synthetically replicates the economic benefit of the relevant A Share or the Index in so far as possible. Because an ALP represents an obligation of the ALP Issuer, rather than a direct investment in A Shares, the Sub-Fund may suffer losses potentially equal to the full value of the ALP if the ALP Issuer fails to perform its obligations under the ALP. The Manager seeks to reduce the Sub-Fund s counterparty risk by appointing multiple ALP Issuers and, in consultation with the Trustee, implementing measures to mitigate the counterparty risk exposure to each ALP Issuer. Such measures include requiring the provision of collateral (such as cash and Securities meeting certain criteria, but in any case, excluding any derivatives or structured products) from the ALP Issuer (or an affiliate). The value of any Security provided as collateral will also be subject to the single issuer limit of 10% of Net Asset Value. For details, please refer Collateral under this section. The Manager adopts a synthetic replication strategy to enable the Sub-Fund to track the Index performance. It is intended that this will be achieved by the investment of the Sub-Fund in ALPs linked to the Index or ALPs linked to substantially all the constituent stocks constituting the Index in substantially the same weightings as these constituent stocks have in the Index. However, if in future the Manager is able to invest the Sub-Fund in A Shares directly, then the Manager may at its discretion, to the extent possible and practicable, invest the Sub-Fund directly in the constituent A Shares comprising the Index. In that case, the synthetic replication strategy may be changed to a replication strategy or to the extent necessary, a representative sampling strategy by direct holding in A Shares. The Manager will give no less than three months notice to the Unitholders in the case where the Manager decides to change in the investment strategy of the Sub-Fund from synthetic replication to representative sampling, subject to the prior approval of the SFC. Notwithstanding the foregoing, in certain limited circumstances, the Manager may be required to adopt a representative sampling strategy, for example, if a constituent A Shares stock comprising the Index cannot be traded or if the Manager considers this would be more efficient or effective means of tracking the performance of the Index. Where a representative sampling strategy is adopted by the Manager, the Sub-Fund will hold a representative sample of Securities in the Index (either directly or by ALPs) as selected by the Manager using quantitative analytical models so as to achieve the same performance as that of the Index. The ALP Issuers are Merrill Lynch International & Co. C.V., Goldman Sachs International and Citigroup Global Markets Holdings Inc.. The guarantors in respect of the ALPs issued by Merrill Lynch International & Co. C.V. and Goldman Sachs International are Bank of America Corporation and The Goldman Sachs Group, Inc. respectively. Information about ALPs and ALP Issuers including eligibility, exposure levels, duration, and valuation is set out in Schedule 3. 6
The Sub-Fund may also invest in other investments including funds, futures contracts, options on futures contracts, options and swaps related to the Index, local currency and forward currency exchange contracts, and cash and cash equivalents which the Manager believes will help the Sub-Fund achieve its investment objective. The investment strategy of the Sub-Fund is subject to the investment and borrowing restrictions set out in Schedule 1. Collateral The Manager may in consultation with the Trustee put in place collateral arrangements in respect of the Sub-Fund s holding of ALPs and in certain circumstances affecting an ALP Issuer such as a credit downgrade below the minimum credit rating requirement acceptable to the Manager as specified in Schedule 3 (Information about the ALPs). The provision of collateral by an ALP Issuer will be by way of a securities lending and borrowing arrangement or in such other manner as the Manager considers appropriate in the prevailing circumstances. Where the collateral arrangement is by way of a securities lending and borrowing arrangement, whenever the Sub-Fund has any uncollateralized counterparty risk exposure to an ALP Issuer by the end of a trading day, then the ALP Issuer will borrow ALPs and post collateral to the Sub-Fund. The market value of the ALPs borrowed and the collateral posted will be adjusted on a daily mark-to-market basis. Collateral held by the Sub-Fund must represent at least 100% of the Sub-Fund s gross total counterparty risk exposure to all ALP Issuers, and be maintained, marked to market on a daily basis with a view to ensuring that there is no uncollateralized counterparty risk exposure. In the event of an insolvency or an event of default with respect to the ALP Issuer, the payment and delivery obligations of the parties under the securities and borrowing arrangement will be accelerated and netted off, and replaced by an obligation of one party to pay a single sum to the other. In such circumstances, the insolvent ALP Issuer will keep the ALPs that they borrowed (which will not be valuable due to the insolvency of the ALP Issuer) and the Trustee will keep the collateral for the account of the Sub-Fund, and the parties will calculate whether any cash payments is required to be made after netting off. Either cash or Securities may be posted as collateral on a daily mark-to-market basis to cover the exposure of the Sub-Fund to an ALP Issuer. Cash taken as collateral may be denominated in United States dollars or Hong Kong dollars or such other currency accepted by the Manager. Securities taken as collateral will be transferred to the Trustee. Such Securities may only comprise at least 15 different stocks listed on SEHK that are then components of either the Hang Seng Index or the Hang Seng China Enterprises Index, with no single stock provided as collateral representing more than 10% of the Net Asset Value of the Sub-Fund. In addition, the Manager has the sole discretion to accept shares of any other stocks primarily listed in Hong Kong (but components of the S&P 500 Index of the United States, the Straits Times Index of Singapore, the TOPIX Index of Japan and the Nikkei 225 Index of Japan may also be acceptable if appropriate) as collateral, having regard to any relevant considerations. Where collateral taken is in the nature of equity securities, such collateral shall be subject to an additional requirement such that the market value of such equity collateral represents at least 120% of the related gross counterparty risk exposure. According to the SFC Collateral Conditions, collateral shall comply with the requirements of Chapter 8.8(e) of the Code, as supplemented by such other guidance from the SFC from time to time, as follows: Liquidity sufficiently liquid in order that it can be sold quickly at a robust price that is close to pre-sale valuation. Collateral should normally trade in a deep and liquid marketplace with transparent pricing; Valuation mark to market daily; Issuer credit quality of high credit quality; collateral on assets that exhibit high price volatility may be accepted only if suitably conservative haircuts are in place (the market value of equity securities taken as collateral must represent at least 120% of the related gross counterparty risk exposure, and the Manager, as fiduciary and with due care and 7
skill, shall adopt a prudent hair-cut policy on any non-equity collateral taking into account all relevant factors including, without limitation, the credit quality, liquidity, duration and other relevant terms of the collateral held); Diversification must be appropriately diversified so as to avoid concentrated exposure to any single issuer. Collateral shall at any time be comprised of no fewer than 15 different stocks, and the counterparty or other investment limit/exposure of the collateral as a percentage of the Sub-Fund s Net Asset Value must not contravene the investment restrictions or limitations set out in Chapter 7 of the Code; Correlation correlation between the collateral received and the collateral provider, the ALP Issuer and their respective affiliates must be avoided; Management of operational and legal risks there must be in existence appropriate systems, operational capabilities and legal expertise for proper collateral management; Independent custody must be held by or to the order of the Trustee; Enforceability must be readily accessible/enforceable by the Trustee without further recourse to the counterparty; and Not available for secondary recourse collateral cannot be applied for any purpose except for the purpose of being used as collateral. Further, the Manager as a fiduciary shall dynamically manage the collateral with due care and skill, and in the interest of the Unitholders, having due regard to the market circumstances from time to time. In no circumstances shall collateral include derivatives and structured products. Collateral received by the Trustee will be held in a segregated account opened in the name of the Trustee. Any additional fees, charges and expenses incurred as a result of such measures will be borne by the Sub-Fund. The Manager shall dynamically manage the Sub-Fund s holdings of collateral with due care and skill and in the interests of Unitholders, having due regard to the market circumstances from time to time. A list of ALP Issuers together with the gross and net exposure to each ALP Issuer and any information of collateral is available at www.dcfund.com.hk/dczc/jjcp/sub_product_01.jsp?fd=3071. The collateral management policy of the Sub-Fund, as amended from time to time, is also published on the website of the Sub-Fund. Collateral arrangements may involve risks including risks that the settlement, valuation, operational and realisation risks, and risk of the collateral provider not fulfilling its obligations. Please refer to the risk factor Risk relating to Collateral Arrangements. Future Changes Should it become possible under PRC law and practicable for the Sub-Fund to hold the underlying A Shares comprised in the Index directly, the Manager may (but is not obliged to), take such steps as would enable the Sub-Fund to hold or have an equitable interest directly in A Shares constituting the Index instead of, or in addition to ALPs. The Manager will notify Unitholders of any such development and will give no less than three months notice to the Unitholders in the case where the Manager decides a change in the investment strategy of the Sub-Fund by a direct holding in A Shares, subject to the prior approval of the SFC. 8
Fund Structure The diagram below summarizes the structure of the Sub-Fund: Notes 1. The Manager and the Trustee may require an ALP Issuer to provide collateral in respect of the Sub-Fund s holding of ALPs and in certain other circumstances. 2. Where the collateral arrangement is by way of a securities lending and borrowing arrangement, then the ALPs will be transferred from the Trustee to the collateral provider. What are the Index s Characteristics? The Index is maintained and published by CSI. It is an investible index whose constituents are companies listed in the PRC, selected from constituents of the CSI 800 Index within the consumer staple (approximately 34.95%) and consumer discretionary (approximately 65.05%) sectors. The Index is a capped index, meaning that no single constituent issuer s weighting may exceed 15% of the Index at rebalancing. The Index is denominated in Rmb and was launched on 28 October 2009. Please see Schedule 2 for information regarding the Index and the Index Provider s disclaimer. Index Licence Agreement The Manager has been granted an exclusive licence by CSI to use the Index to create funds listed on SEHK based on the Index and to use certain trade marks and any copyright in the Index. The initial term of the exclusive licence is 3 years from 1 January 2010. Upon expiry of the initial 3 years term, the Manager will need to agree with CSI to renew the exclusive licence. In the absence of such agreement, the exclusive licence will automatically be renewed as a non-exclusive licence for an additional 2 years, provided that no termination events has occurred and either CSI and the Manager is not in material breach of the licence agreement. Investors attention is drawn to Risks relating to the Index under the section headed Risk Factor. 9
THE OFFERING General All investors may buy and sell Units in the secondary market on the SEHK through any designated brokers. The Participating Dealers (acting for themselves or for you as their clients) may apply for creation in ALPs and/or cash and redemption in ALPs and/or cash in a minimum number of 500,000 Units (or multiples thereof) continually from 9:15 a.m. (Hong Kong time) to 3:00 p.m. (Hong Kong time) on each Dealing Day. Buying and selling of Units on the SEHK All investors can buy and sell Units in board lots of 500 Units (or multiples thereof) like ordinary listed stocks through an intermediary such as a stockbroker or through any of the share dealing services offered by banks or other financial advisers at any time the SEHK is open. However, please note that transactions in the secondary market on the SEHK will occur at market prices which may vary throughout the day and may differ from Net Asset Value per Unit due to market demand and supply, liquidity and scale of trading spread for the Units in the secondary market. As a result, the market price of the Units in the secondary market may be higher or lower than Net Asset Value per Unit. Please refer to the section on Exchange Listing and Trading (Secondary Market) for further information in respect of purchase and sale of Units on the SEHK. Creations and redemptions Units will continue to be created and redeemed by creation and redemption at the Issue Price and Redemption Value respectively through the Participating Dealers in a minimum number of 500,000 Units (and multiples thereof). The Participating Dealers may apply for Units on each Dealing Day for themselves and for their clients. The Manager shall reject any Creation Applications and/or Redemption Applications made after the Dealing Deadline. Subject to normal market conditions, agreement as to fees and the Participating Dealer s client acceptance procedures, Participating Dealers will generally create or redeem for itself or for their clients (although the Manager and the Trustee are not empowered to compel the Participating Dealer to create or redeem) and may charge their clients such fee or fees as such Participating Dealers determine. The current Dealing Deadline is at 3:00 p.m. (Hong Kong time) if it is a full trading day on the SEHK or 11:00 a.m. (Hong Kong time) if the SEHK is not open for normal trading in the afternoon of the relevant Dealing Day. The current dealing period for the creation and redemption of Units is 9:15 a.m. (Hong Kong time) until such Dealing Deadline. Settlement for subscribing or redeeming of Units are due two Business Days after the Dealing Day, unless the Manager agrees with the relevant Participating Dealer to accept later settlement generally or in any particular case. All Units will be registered in the name of HKSCC Nominees Limited on the register of the Sub-Fund. The register of the Sub-Fund is the evidence of ownership of Units. As clients of the Participating Dealers, your beneficial interests in Units shall be established through your accounts with any Participating Dealers or with any other CCASS participants if you are buying from the secondary market. The diagrams below illustrate (a) the issue and buying of Units through the Participating Dealers, (b) the redeeming and selling, of Units through the Participating Dealers, and (c) the buying and selling of the Units by investors on the SEHK: 10
(a) Issue and buying of Units CLIENTS OF PARTICIPATING DEALERS Cash Units bought PARTICIPATING DEALERS ALPs and/or cash Units issued SUB-FUND (b) Redemption and sale of Units CLIENTS OF PARTICIPATING DEALERS Cash Units sold PARTICIPATING DEALERS ALPs and/or cash Units redeemed SUB-FUND (c) Buying or selling of Units in the secondary market on the SEHK Units (in board lots of 500 Units) INVESTOR BUYER INVESTOR SELLER Cash 11
Summary of Methods of Acquiring or Disposing Units and Related Fees Method of Acquisition or Disposal of Units Minimum Number of Units (or multiple thereof) Channel Available to Consideration, Fees and Charges 1 Purchase and sale in cash through brokers on the SEHK (secondary market) Board lot of 500 Units On the SEHK Any investor Market price of Units on SEHK Brokerage fees and duties and charges Creation and redemption 500,000 (Application Unit) Through Participating Dealers Any person acceptable to a Participating Dealer as its client ALPs and Cash Transaction Fee Any fees and charges imposed by the Participating Dealer (payable to the Participating Dealer) 12
Investment in the Trust CREATIONS AND REDEMPTIONS (PRIMARY MARKET) There are two types of investors in the Sub-Fund, with two corresponding methods of investment in Units and realisation of an investment in Units: (a) (b) the first type of investor is a Participating Dealer, being a licensed dealer that has entered into a Participation Agreement in respect of the Sub-Fund. Only a Participating Dealer can create and redeem Units directly with the Sub-Fund, either on their respective own accounts or for the accounts of investors which are their respective clients; and the second type of investor is any third party investor who buys and sells the Units on the SEHK. The section entitled Exchange Listing and Trading (Secondary Market) relates to the second type of investor. The following describes the mechanism for creation by Participating Dealers which is governed by the Trust Deed, the relevant Participation Agreement and the Operating Guidelines. Creation by Participating Dealers Units are continuously offered to the Participating Dealers who may apply for them on any Dealing Day on their own account or for the account of their clients, in the minimum Application Unit size in accordance with the Operating Guidelines. The Participating Dealers may apply for Units for themselves or for you as their clients. Please note that the relevant Participating Dealer may set the creation application or payment cut-off times for its clients that are earlier than those set out in this Prospectus. The relevant Participating Dealer may charge fees and expenses not set out in this Prospectus for providing its services. You should contact the relevant Participating Dealer for further details before submitting a creation application to the relevant Participating Dealer. There are no preliminary charges payable to the Sub-Fund on the creation of Units by a Participating Dealer. However, you (as a client of a Participating Dealer) may need to pay certain fees and charges imposed by the relevant Participating Dealer for its handling of the creation applications for you. You should check with the relevant Participating Dealer what fees and charges it imposes. The Application Unit size for the Sub-Fund is set out in the Key Information section of the Summary. Only applications in Application Unit size or whole multiples thereof will be accepted. The minimum holding of the Sub-Fund is one Application Unit. The Manager shall instruct the Trustee to effect, for the account of the Sub-Fund, the creation of Units in Application Unit(s) in exchange for a transfer of ALPs and/or cash (including Duties and Charges) in accordance with the Operating Guidelines and the Trust Deed. Units will be issued at the Issue Price prevailing on the relevant Dealing Day, provided that the Manager may add to such Issue Price such sum (if any) as represents an appropriate provision for Duties and Charges. The Manager shall have the right to reject or suspend a Creation Application, including, but not limited to, if (i) the Manager reasonably believes that the acceptance of any ALPs included in an application would be unlawful; (ii) the acceptance of any ALPs included in an application would otherwise, in the opinion of the Manager, have a material adverse effect on the relevant Sub-Fund; (iii) circumstances outside control of the Manager make it for all practicable purposes impossible to process the Creation Application; (iv) the Manager has suspended the rights of Participating Dealers to redeem Units pursuant to the provisions of the Trust Deed; (v) an insolvency event occurs in respect of a Participating Dealer; (vi) any period where an Index or any replacement index is not compiled or published; (vii) any circumstance where there is a suspension of the 13
determination of the Net Asset Value pursuant to the provisions of the Trust Deed; or (viii) any period when trading on the SEHK or HKFE is restricted or suspended. For the list of circumstances where the Manager may suspend the rights of Participating Dealers to redeem Units, see the section on Suspension of Creations and Redemptions. Units are denominated in Hong Kong dollars (unless otherwise determined by the Manager) and no fractions of a Unit shall be created or issued by the Trustee. Once the Units are created, the Manager shall instruct the Trustee to effect, for the account of the Sub-Fund, the issue of Units to a Participating Dealer in accordance with the Operating Guidelines. The creation and issue of Units by a Creation Application shall be effected on the Dealing Day on which the Creation Application is received and accepted in accordance with the Operating Guidelines. For valuation purposes only, Units shall be deemed created and issued after the Valuation Point on the Dealing Day on which the relevant Creation Application was received and the register will be updated on Settlement Day or the Dealing Day immediately following Settlement Day if the settlement period is extended. An Extension Fee may be payable in relation to such an extension. See the section on Fees and Charges for further details. If a Creation Application is received by the Manager on a day which is not a Dealing Day, that Creation Application shall be rejected by the Manager. If a Creation Application is received by the Manager after the Dealing Deadline (see the section on The Offering Phases ) on a Dealing Day, that Creation Application shall be rejected by the Manager. The current dealing period for the creation of Units is 9:15 a.m. (Hong Kong time) to 3:00 p.m. (Hong Kong time) on each Dealing Day which is a full trading day on the SEHK or 9:15 a.m. (Hong Kong time) to 11:00 a.m. (Hong Kong time) on each Dealing Day which is a half trading day on the SEHK. No Units shall be issued to any Participating Dealer unless the Creation Application is satisfactory to, and accompanied by such documents as may be required by, the Trustee and the Manager in accordance with the Operating Guidelines. The Manager may charge a Transaction Fee for the account of the Trustee in respect of Creation Applications. The Transaction Fee shall be paid by or on behalf of the Participating Dealer applying for such Units. See the section on Fees and Charges for further details. Any commission, remuneration or other sum payable by the Manager to any agent or other person in respect of the issue or sale of any Unit shall not be included in the Issue Price of such Unit and may not be paid from the assets of the Trust or the Sub-Fund. The Trustee shall be entitled to refuse to enter (or allow to be entered) Units in the register if at any time the Trustee is of the opinion that the provisions, in regard to the issue of Units, are being infringed. The Participating Dealers have indicated (and each future Participating Dealer will be required to indicate) to the Manager that they will generally accept requests received from third parties, subject to normal market conditions, agreement as to fees and completion of client acceptance procedures, to create Units on behalf of such clients. The Participating Dealer reserves the right to reject a request received from third parties to submit a Creation Application under exceptional circumstances, which may include, but not limited to, suspension of dealing or determination of Net Asset Value of the Sub-Fund, regulatory restrictions and requirements (such as insufficient QFII quota) or certain market and operational restraints (such as the occurrence of a market disruption event, or suspension of dealing of the Index or the relevant A Shares to which the ALPs are tracking their performance), or the non-compliance with client acceptances procedures. You should contact the relevant Participating Dealer for further details before submitting an application to the relevant Participating Dealer for it to create. You should note although the 14
Manager has a duty to closely monitor the operations of the Trust, neither the Manager nor the Trustee is empowered to compel any Participating Dealer to disclose its fees agreed with specific clients or other proprietary or confidential information to the Manager, or to accept any such application requests received from third parties. In addition, neither the Trustee nor the Manager can ensure effective arbitrage by the Participating Dealers. Evidence of Unitholding Units will be deposited, cleared and settled by the CCASS. Units will only be held in registered entry form and no Unit certificates will be issued. HKSCC Nominees Limited is the registered owner (i.e. the sole holder of record) of all outstanding Units deposited with the CCASS and is holding such Units for the participants in accordance with the General Rules of CCASS. Furthermore, the Trustee and the Manager acknowledge that under the General Rules of CCASS, neither HKSCC Nominees Limited nor HKSCC has any proprietary interest in the Units. Investors owning Units in CCASS are beneficial owners as shown on the records of the CCASS participants or the relevant Participating Dealer(s) (as the case may be). Restrictions on Unitholders The Manager has power to impose such restrictions as it may think necessary for the purpose of ensuring that no Units are acquired or held which would result in such holding being: (a) (b) (c) a breach of the law or requirements of any country or governmental authority or any stock exchange on which the Units are listed in circumstances which, in the Manager's opinion, might result in the Trust or the Sub-Fund being adversely affected which the Trust or the Sub-Fund might not otherwise have suffered; or in the circumstances which, in the Manager s opinion, may result in the Trust or the Sub-Fund incurring any tax liability or suffering any other pecuniary disadvantage which the Trust or the Sub-Fund might not otherwise have incurred or suffered; or held by a US person. Upon notice that any Units are so held, the Manager may require a Unitholder to redeem or transfer such Units in accordance with the Trust Deed. A person who becomes aware that he is holding or owning Units in breach of any of the above restrictions is required either to redeem his Units in accordance with the Trust Deed or to transfer his Units to a person whose holding would be permissible under this Prospectus and the Trust Deed in a manner that would result in there no longer being any breach of the restrictions above. Cancellation of Creation orders The Trustee shall cancel Units created and issued in respect of a Creation Application if it has not received all cash (including Duties and Charges) relating to the Creation Application by the Settlement Day, provided that the Manager may at its discretion (a) extend the settlement period such extension to be on such terms and conditions the Manager may determine (including as to the payment of collateral and an Extension Fee to the Trustee) or (b) partially settle the Creation Application to the extent to which the ALPs and/or cash has been vested in the Trustee, on such terms and conditions the Manager may determine (including terms as to any extension of the settlement period for the outstanding cash amount (if any) and the payment of the Partial Delivery Request Fee to the Trustee). Upon the cancellation of any Units as provided for above or if a Participating Dealer otherwise withdraws a Creation Application other than in certain circumstances contemplated in the Trust Deed, any ALPs and/or cash received by or on behalf of the Trustee in connection with a Creation Application shall be redelivered to the relevant Participating Dealer (without interest) and the relevant Units shall be deemed for all purposes never to have been created and the applicant therefore shall have no right or claim against the Manager or the Trustee in respect of such cancellation provided that: 15
(a) (b) (c) the Manager may charge the Participating Dealer for the account of the Registrar an application cancellation fee and a Cancellation Compensation; see the section on Fees and Charges for further details; the Trustee shall be entitled to the Transaction Fee payable in respect of a Creation Application; see the section on Fees and Charges for further details; and no previous valuations of the Trust Fund shall be re-opened or invalidated as a result of the cancellation of such Units. Redemption of Units A Participating Dealer may redeem Units on any Dealing Day in accordance with the Trust Deed, the Participation Agreement and the Operating Guidelines. Redemption Applications may only be made by a Participating Dealer in respect of an Application Unit size or whole multiples thereof. The Manager may charge a Transaction Fee in respect of Redemption Applications. The Transaction Fee shall be paid by or on behalf of the Participating Dealer submitting the Redemption Application(s) (and may be set off and deducted against any amount due to the Participating Dealer in respect of such Redemption Application(s)) for the benefit of the Trustee. See the section on Fees and Charges for further details. If a Redemption Application is received by the Manager on a day which is not a Dealing Day, the Redemption Application shall be rejected by the Manager. If a Redemption Application is received by the Manager after the Dealing Deadline (see the section on The Offering Phases) on a Dealing Day, the Redemption Application shall be rejected by the Manager. The current dealing period for the redemption of Units is 9:15 a.m. (Hong Kong time) to 3:00 p.m. (Hong Kong time) on each Dealing Day which is a full trading day on the SEHK or 9:15 a.m. (Hong Kong time) to 11:00 a.m. (Hong Kong time) on each Dealing Day which is a half trading day on the SEHK. The Manager shall, on receipt of an effective Redemption Application from a Participating Dealer, instruct the Trustee to effect the redemption of the relevant Application Unit(s) and shall require the Trustee to transfer to the Participating Dealer the appropriate number of ALPs in connection with the Redemption Application for the relevant Units to be redeemed and/or a cash amount in accordance with the Operating Guidelines and the Trust Deed. To be effective, a Redemption Application must: (a) (b) (c) be given by a Participating Dealer in accordance with the Participating Agreement; specify the number of Units which is the subject of the Redemption Application; and include the certifications required in the Operating Guidelines (if any) in respect of redemptions of Units, together with such certifications and opinions of counsel (if any) as the Trustee and the Manager may consider necessary to ensure compliance with applicable securities and other laws in relation to the redemption of Units which are the subject of the Redemption Application. A Redemption Application once given cannot be revoked or withdrawn without the Manager s consent. The Manager may charge the Participating Dealer for the account of the Registrar an application cancellation fee in connection with each accepted Redemption Application. For valuation purposes only, Units shall be deemed to have been redeemed and cancelled after the Valuation Point as at the Dealing Day on which the Redemption Application was received. The Redemption Value of Units tendered for redemption and cancellation shall be the Net Asset Value per Unit rounded up to 2 decimal places. 16
The Manager may deduct from and/set off against the redemption proceeds (if any) such sum (if any) which represents an appropriate provision for Duties and Charges and the Transaction Fee. Any accepted Redemption Application will be effected by the transfer of ALPs and/or the payment of the cash amount in accordance with the Operating Guidelines and the Trust Deed, on the Settlement Day provided that where any amount is to be paid by telegraphic transfer to a bank account in Hong Kong verified in such manner as may be required by, and to the satisfaction of, the Trustee has been received and provided further that the Manager shall have received the full amount of any amount payable by the Participating Dealer including any Duties and Charges and the Transaction Fee have been either deducted or otherwise paid in full. The Manager may at its discretion extend the settlement period on such terms and conditions (including as to the payment of any fees to the Manager or the Trustee or their Connected Persons or otherwise as it may determine) as the Manager may determine but, in any event, not later than one month from the receipt of an effective Redemption Application. Please note that the relevant Participating Dealer may set the redemption application cut-off times for its clients that are earlier than those set out in this Prospectus. The relevant Participating Dealer may charge fees and expenses not set out in this Prospectus for providing its services, apply its own restrictions in respect of effecting redemptions for its clients in addition to those set out in this Prospectus, accept or reject any redemption applications or impose different holding requirements. You should contact the relevant Participating Dealer for further details before submitting a redemption application to the relevant Participating Dealer. There are no redemption charges payable to the Sub-Fund on the redemption of Units by a Participating Dealer. However, you (as a client of a Participating Dealer) may need to pay certain fees and charges imposed by the relevant Participating Dealer for its making of any Redemption Application on your behalf. You should check with the relevant Participating Dealer what fees and charges it imposes. The Participating Dealers have indicated (and each future Participating Dealer will be required to indicate) to the Manager that they will generally accept requests received from third parties, subject to normal market conditions, agreement as to fees and completion of client acceptance procedures, to redeem Units on behalf of such clients. The Participating Dealer reserves the right to reject a request received from third parties to submit a Redemption Application under exceptional circumstances, which may include, but not limited to, suspension of dealing or determination of Net Asset Value of the Sub-Fund, regulatory restrictions and requirements or certain market and operational restraints (such as the occurrence of a market disruption event, or suspension of dealing of the Index or the relevant A Shares to which the ALPs are tracking their performance), or the non-compliance with client acceptances procedures. You should contact the relevant Participating Dealer for further details before submitting an application to the relevant Participating Dealer for it to redeem. You should note although the Manager has a duty to closely monitor the operations of the Trust, neither the Manager nor the Trustee is empowered to compel any Participating Dealer to disclose its fees agreed with specific clients or other proprietary or confidential information to the Manager, or to accept any such application requests received from third parties. In addition, neither the Trustee nor the Manager can ensure effective arbitrage by the Participating Dealers. Suspension of Creations and Redemptions Units may not be created during any period when the right to redeem is suspended by the Manager. The Manager may, at its discretion, at any time after giving notice to the Trustee (and where practicable, after consultation with Participating Dealers) suspend the right of Participating Dealers to redeem Units and/or delay the payment of any moneys in respect of any Redemption Application during: 17
(a) (b) (c) (d) (e) (f) any period when a market on which a Security (being a component of the Index) has its primary listing, or the official clearing and settlement depositary (if any) of such market, is closed; or any period when dealings on a market on which a Security (being a component of the Index) has its primary listing is restricted or suspended; or any period when, in the opinion of the Manager, settlement or clearing of Securities in the official clearing and settlement depositary (if any) of such market is disrupted; or the existence of any state of affairs as a result of which delivery or purchase of Securities or disposal of investments for the time being comprised in the Sub-Fund cannot, in the opinion of the Manager, be effected normally or without prejudicing the interests of Unitholders; or any period when the Index is not compiled or published; or any breakdown in the means normally employed in determining the Net Asset Value or when for any other reason the value of any Securities or other property for the time being comprised in the Sub-Fund cannot in the opinion of the Manager, reasonably, promptly and fairly be ascertained. The Manager will, after giving notice to the Trustee, suspend the right of the Participating Dealers to subscribe for or redeem Units or delay the payment of any monies or transfer of any securities when dealings in the Units on the SEHK are restricted or suspended. A suspension shall remain in force until the earlier of (i) declaration by the Manager that the suspension is at an end; or (ii) the Business Day following the first Business Day on which (1) the condition giving rise to the suspension shall have ceased to exist and (2) no other condition under which suspension is authorised shall exist. The Manager shall consider any Redemption Application or any Creation Application received during the period of suspension (that has not been otherwise withdrawn) as having been received immediately following the termination of the suspension. A Participating Dealer may, at any time after a suspension has been declared and before termination of such suspension, withdraw any Creation Application or Redemption Application by giving notice in writing to the Manager and the Trustee shall cause the return of ALPs, the Units or the cash amount (as the case may be) received by it in respect of the Application (without interest). Transfer of Units Units may be transferred using the standard transfer form issued by SEHK or by an instrument in writing in common form signed by (or, in the case of a body corporate, signed on behalf of or sealed by) the transferor and the transferee. The transferor will be deemed to remain the Unitholders of the Units transferred until the name of the transferee is entered in the register of Unitholders in respect of the Units being transferred. HKSCC Nominees Limited will be the sole Unitholder of all Units deposited in CCASS. HKSCC Nominees Limited will hold such Units for the persons admitted by HKSCC as a participant of CCASS and to whose account any Units are for the time being allocated in accordance with the General Rules of CCASS. Distribution Policy The Manager may in its absolute discretion distribute income to Unitholders annually as the Manager considers appropriate having regard to the Sub-Fund s net income. Distributions are not guaranteed and the Manager may in its sole and absolute discretion decide not to make any distribution annually or otherwise. 18
EXCHANGE LISTING AND TRADING (SECONDARY MARKET) Dealings on the SEHK in Units commenced on 15 July 2010. Units are neither listed nor dealt on any other stock exchange and no application for such listing or permission to deal is being sought as at the date of this Prospectus. Application may be made in the future for a listing of Units on one or more other stock exchanges. Units trade on the SEHK in board lots of 500 Units. The purpose of the listing of the Units on the SEHK is to enable investors to buy and sell Units on the secondary market, normally via a broker or dealer in smaller quantities than would be possible if they were to subscribe and/or redeem Units directly with the Sub-Fund. The market price of a Unit listed or traded on the SEHK may not reflect the Net Asset Value per Unit. Any transactions in the Units on the SEHK will be subject to the customary brokerage commissions and/or transfer taxes associated with the trading and settlement through the SEHK. There can be no guarantee that once the Units are listed on the SEHK they will remain listed. It is the Manager s expectation that at least one Market Maker will at all times maintain a market for the Units. Broadly, the obligations of a Market Maker include quoting bid and offer prices on the SEHK with the intention of providing liquidity. Units may be purchased from and sold through the Market Maker. However, there is no guarantee or assurance as to the price at which a market will be made. In maintaining a market for Units, the Market Makers may make or lose money based on the differences between the prices at which they buy and sell Units. Market Markers may retain any profits made by them for their own benefit and they are not liable to account to the Sub-Fund in respect of their profits. If any investors wish to buy or sell Units on the secondary market, they should contact their brokers. The Units have been accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the date of commencement of dealings in the Units on the SEHK. Settlement of transactions between participants of the SEHK is required to take place in CCASS on a settlement day (within the meaning of CCASS). All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time. If trading of the Units on the SEHK is suspended or trading generally on the SEHK is suspended, then there will be no secondary market dealing for the Units. 19
Calculation of Net Asset Value DETERMINATION OF NET ASSET VALUE The Net Asset Value of the Sub-Fund is determined by the Trustee as at each Valuation Point applicable to the Sub-Fund by valuing the assets of the Sub-Fund and deducting the liabilities of the Sub-Fund, in accordance with the terms of the Trust Deed. Set out below is a summary of how various Securities held by the Sub-Fund are valued under the Trust Deed: (a) Securities that are quoted, listed, traded or dealt in on any Market shall unless the Manager (with the consent of the Trustee) determines that some other method is more appropriate, be valued by reference to the price appearing to the Manager to be the official closing price, or if unavailable, the last traded price on the Market as the Manager may consider in the circumstances to provide fair criterion, and in the case of any Security which consists of a warrant or purchase option, by reference to the official closing price (or if unavailable, the last traded price) on the Market on which the underlying Security that which warrant or option relates to, is quoted, traded or dealt in, provided that: (i) (ii) if a Security is quoted or listed on more than one Market, the Manager shall adopt the price quoted on the Market which in its opinion provides the principal market for such Security; if prices on that Market are for any reason not available at the relevant time, the value of the Securities shall be certified by such firm or institution making a market in such investment as may be appointed for such purpose by the Manager or, if the Trustee so requires, by the Manager after consultation with the Trustee; (iii) interest accrued on any interest-bearing Securities up to (and including) the date as at which the valuation is made shall be taken into account, unless such interest is included in the quoted or listed price; (iv) the Manager and the Trustee shall be entitled to use and rely on price data and/or other information provided through electronic price feeds, mechanised and/or electronic systems of price/valuation dissemination from such source or sources as they may from time to time determine, notwithstanding that the prices so used are not the official closing prices or last traded prices as the case may be; (v) the Manager and the Trustee may accept as sufficient evidence of the value of any asset of the Sub-Fund or the cost price or sale price thereof, any market quotation or certification by a calculation agent, broker, any professional person, firm or association qualified in the opinion of the Trustee or the Manager to provide such a quotation but the Manager and the Trustee are not obliged to obtain such quotation or certification; and (vi) the Manager and the Trustee may rely upon the established practice and rulings of any market and any committees and officials thereof on which any dealing in any assets of the Sub-Fund or other property is from time to time effected in determining what shall constitute a good delivery and any similar matters and such practice and rulings shall be conclusive and binding upon all Unitholders; (b) (c) the value of each interest in any unlisted mutual fund corporation or unit trust shall be the latest available Net Asset Value per share or unit in such mutual fund corporation or unit trust or if not available or appropriate, the average of the latest available bid and offer prices for the share or unit, unless the Manager considers the latest available bid price is more appropriate; futures contracts will be valued based on the formulae set out in the Trust Deed, which will be calculated by reference to the contract value of the relevant futures contract, the amount 20
determined by the Manager to be the contract value of an future contract which the Manager would need to enter into in order to close the open futures contract (and such determination will be by reference to the latest available price or latest available middle market quotation as at the date the valuation is made) and the commission, costs and expenses paid out of the Trust for entering into such futures contracts; (d) (e) (f) except as provided for in paragraph (b), the value of any investment which is not listed, quoted or ordinarily dealt in on a Market shall be the initial value thereof equal to the amount expended on behalf of the Sub-Fund in the acquisition of such investment (including, in each case the amount of stamp duties, commissions and other acquisition expenses) provided that the Manager may with the approval of the Trustee and shall at the request of the Trustee cause a revaluation to be made by a professional person approved by the Trustee as qualified to value such investments (which may, if the Trustee agrees, be the Manager); cash, deposits and similar investments shall be valued at their face value (together with accrued interest) unless, in the opinion of the Manager, any adjustment should be made to reflect the value thereof; and notwithstanding the foregoing, the Manager may adjust the value of any investment if, having regard to relevant circumstances, the Manager considers that such adjustment is required to fairly reflect the value of the investment. The ALPs invested by the Sub-Fund are valued based on the above valuation rules (in particular, paragraph (a)) as more specifically set out under the Trust Deed. Please refer to the sub-section headed Valuation under Schedule 3 (Information about ALPs) for further details on the valuation of ALPs. The Trustee will perform any currency conversion at rates it determines appropriate. The above is a summary and is therefore limited by its nature. Investors are encouraged to review the specific provisions of the Trust Deed in relation to valuation of assets. Suspension of Determination of Net Asset Value The Manager may, after giving notice to the Trustee, declare a suspension of the determination of the Net Asset Value of the Sub-Fund for the whole or any part of any period during which: (a) (b) (c) (d) (e) there exists any state of affairs prohibiting the normal disposal of the Sub-Fund s investments; circumstances exist as a result of which, in the opinion of the Manager, it is not reasonably practicable to realize any Securities held or contracted for the account that Sub-Fund or it is not possible to do so without seriously prejudicing the interest of Unitholders of that Sub-Fund; for any other reason the prices of investments of the Sub-Fund cannot, in the opinion of the Manager, reasonably, promptly and fairly be ascertained; there is any breakdown in the means normally employed in determining the Net Asset Value of the relevant Sub-Fund or the Net Asset Value per Unit or when for any other reason the value of any Securities or other property for the time being comprised in the Trust cannot, in the opinion of the Manager, reasonably, promptly and fairly be ascertained; the remittance or repatriation of funds which will or may be involved in the realisation of, or in the payment for, the Securities of that Sub-Fund or the subscription or realisation of Units is delayed or cannot, in the opinion of the Manager, be carried out promptly or at normal rates of exchange; 21
(f) (g) the business operations of the Manager, the Trustee or the Registrar in respect of the Sub-Fund are substantially interrupted or closed as a result of or arising from pestilence, acts of war, terrorism, insurrection, revolution, civil unrest, riot, strikes, or acts of God; or the right to redeem Units of the relevant class is suspended. Any suspension shall take effect upon its declaration and thereafter there shall be no determination of the Net Asset Value of the Sub-Fund and the Manager shall be under no obligation to rebalance the Sub-Fund until the suspension is terminated on the earlier of (i) the Manager declaring the suspension at an end and (ii) the first Dealing Day on which (1) the condition giving rise to the suspension shall have ceased to exist and (2) no other condition under which suspension is authorised exists. The Manager shall notify the SFC and publish a notice of suspension following the suspension, and at least once a month during the suspension, on its website at www.dcfund.com.hk/dczc/jjcp/sub_product_01.jsp?fd=3071 or in such publications as the Manager decides. No Units will be issued or redeemed during any period of suspension of the Net Asset Value. Issue Price and Redemption Value of Units The Issue Price of Units created and issued by a Creation Application, will be the Net Asset Value of the Sub-Fund divided by the total number of Units in issue rounded to the nearest 2 decimal places. The Redemption Value on a Dealing Day shall be the Net Asset Value of the Sub-Fund divided by the total number of Units in issue rounded to the nearest 2 decimal places. The Issue Price and the Redemption Value (or the latest Net Asset Value of the Units) are available on the Manager s website at www.dcfund.com.hk/dczc/jjcp/sub_product_01.jsp?fd=3071 or published in such publications as the Manager decides. Neither the Issue Price nor the Redemption Value takes into account Duties and Charges, Transaction Fees or fees payable by the Participating Dealer. 22
FEES AND EXPENSES There are different levels of fees and expenses applicable to investing in the Sub-Fund as set out below, current as at the date of the Prospectus. (a) Fees and expenses payable by Participating Dealers on creations and redemptions of Units Amount Transaction Fee HK$10,000 per Application 1 Service Agent fee HK$1,000 per Application 2 Application Cancellation Fee Extension Fee or Partial Delivery Request Fee Stamp duty All other Duties and Charges incurred by the Trustee or the Manager in connection with the creation or redemption (b) Fees and expenses payable by investors HK$10,000 3 per Application HK$10,000 4 per Application Nil As applicable Amount (i) Fees payable by clients of the Participating Dealers in respect of creations and redemptions via the Participating Dealer Fees and charges imposed by the Participating Dealer Such amounts as determined by the relevant Participating Dealer 5 (ii) Fees payable by all investors in respect of dealings in the Units on SEHK Brokerage Market rates Transaction levy 0.003% 6 1 2 3 4 5 6 A transaction fee is payable to the Trustee per Application, which will be payable monthly in arrears. A service agent fee is payable to the Service Agent per book-entry deposit or book-entry withdrawal transaction. An application cancellation fee is payable to the Trustee in respect of either a withdrawn or failed Creation Application or Redemption Application. An extension or partial delivery request fee is payable to the Trustee on each occasion the Manager grants the Participation Dealer s request for extended settlement or partial delivery in respect of a Creation Application or Redemption Application. The Participating Dealer may increase or waive the level of its fees in its discretion. Information regarding these fees and charges is available upon request to the relevant Participating Dealer. Transaction levy of 0.003% of the price of the Units, payable by the buyer and the seller. 23
SEHK trading fee 0.005% 7 Stamp duty Nil 8 (c) Fees and expenses payable by the Sub-Fund (See further disclosure below) No money should be paid to any intermediary in Hong Kong which is not licensed or registered to carry on Type 1 regulated activity under Part V of the Securities and Futures Ordinance. Fees and Expenses Payable by the Sub-Fund Management Fee The Sub-Fund adopts a single fee structure which means that the Sub-Fund pays the Manager a single flat fee (the Management Fee ) which includes a manager s fee and a service fee (if any). It is intended that the Management Fee will cover all of the Sub-Fund s fees, costs and expenses (except for those fees and expenses listed under the sections on Other Expenses and Fees and Charges Relating to ALPs below). The amount of Management Fee to be paid by the Sub-Fund to the Manager will depend on, amongst other things, the manager s fee and the service fee (if any), the Trustee s fee, the Registrar s fee and the costs associated with the licensing of the Index. Under the Trust Deed, the Manager is entitled to receive a manager s fee of up to 2% per year, and a service fee of up to 1% per year. For the Sub-Fund, the current Management Fee is 0.99% per year of the Net Asset Value of the Sub-Fund with no service fee currently payable. Each of the manager s fee and the service fee (if any) is accrued daily and calculated as at each Dealing Day and payable monthly in arrears. The Management Fee is payable out of the Trust Fund attributable to the Sub-Fund. Promotional Expenses The Sub-Fund is not responsible for any promotional expenses including those incurred by any marketing agents and any fees imposed by such marketing agents on their customers investing in the Sub-Fund will not be paid (either in whole or in part) out of the Trust Fund of the Trust or attributable to the Sub-Fund. Other Expenses The Sub-Fund bears all operating costs relating to the administration of the Sub-Fund including but not limited to stamp and other duties, governmental charges, brokerages, commissions, exchange costs and commissions, bank charges and other costs and expenses payable in respect of the acquisition, holding and realization of any investment or any monies, deposit or loan, charges and expenses of its legal counsel, auditors and other professionals, the costs in connection with maintaining a listing of the Units on the SEHK and maintaining the Trust s and the Sub-Fund s authorisation under the Securities and Futures Ordinance, any disbursements or out-of-pocket expenses properly incurred on behalf of the Sub-Fund by the Trustee, the Manager or the Registrar or any of its service providers, the expenses incurred in convening meetings of Unitholders, printing and distributing annual and half-yearly reports, accounts and other circulars relating to the Sub-Fund and the expenses of publishing Unit prices. Fees and Charges Relating to ALPs 7 8 Trading fee of 0.005% of the price of the Units, payable by the buyer and the seller. Generally, stamp duty of 0.1% of the price of the Units is payable by both the buyer and seller (i.e. 0.2% in total), except in respect of qualifying market maker transactions. Approval has been given by the Financial Services and the Treasury Bureau for remission or refund in full of stamp duty payable or paid in respect of any contract notes or instrument of transfer relating to transactions in Units in the Sub-Fund. Therefore, seller and buyer of the Units shall not be liable for Hong Kong stamp duty upon such transfer. However nominal stamp duty may still be payable on any instrument of transfer relating to transactions in Units in the Sub-Fund. 24
ALP Commission The ALP Issuer charges a 0.30% commission (excluding stamp duty) on each purchase and sale of each ALP acquired for the account of the Sub-Fund. The ALP Commission is an expense borne by the Sub-Fund. The ALP Commission will be adjusted for any stamp duty on the sale and purchase of A Shares, currently 0.10% per cent on the sale of A Shares. The ALP Commission may be increased generally or in respect of specific ALP Issuers or transaction. ALP Maintenance Charge In addition to the ALP Commission, each ALP Issuer shall also be entitled to deduct an ALP maintenance charge out of distributions payable under the ALPs equal to 0.40% per annum of the daily mark to market value of the ALPs issued by the relevant ALP issuer held by the Sub-Fund, payable at the end of each quarter based on the period s number of actual days. Other Expenses Where the Manager believes it is in the best interests of Unitholders, the Manager may, in consultation with the Trustee, require ALP Issuers to provide collateral in respect of the Sub-Fund s holding of ALPs and in certain circumstances affecting the ALP Issuers such as a credit downgrade below the minimum rating as specified in Schedule 3 (Information about the ALPs). The Sub-Fund may incur additional fees, charges and expenses as a result of such measures. Pursuant to the SFC Collateral Conditions with effect from 31 October 2011, all locally domiciled synthetic ETFs including the Sub-Fund must ensure that there is no uncollateralized counterparty risk exposure. As a result, the Sub-Fund will incur additional expenses representing the additional capital and funding costs associated with full collateralization by the ALP Issuers. Indirect Costs Relating to ALPs The Sub-Fund is generally required to bear all taxes and expenses including depositary charges transaction or exercise charges which may be or would be (i) incurred in connection with the exercise or redemption of the ALPs and/or any payment and/or delivery in respect thereof, (ii) incurred by the ALP Issuer or its affiliate had such entity established, unwound or varied any underlying related hedging arrangements in respect of the ALP; (iii) withheld by the PRC (or any political subdivision of taxing authority thereof or therein); or (iv) payable in the PRC by or on behalf of a foreign investor or its agent. Any such amounts are ordinarily built into and reflected in the price of the ALPs. Total Expense Ratio The total expense ratio ( TER ) of the Sub-Fund is estimated to be 1.49%. TER is the sum of anticipated fees and charges to the Sub-Fund (including the Management Fee, the ALP Commission and the ALP Maintenance Charge) expressed as a percentage of the Net Asset Value of the Sub-Fund. The estimated TER does not represent the estimated tracking error and does not include indirect costs that may be borne by the Sub-Fund or charged by the relevant ALP Issuer(s) (such as costs associated with collateral arrangements) in respect of the ALPs held by the Sub-Fund. Such costs may reduce the value of the ALPs which may have a substantial adverse impact on the Net Asset Value and performance of the Sub-Fund and may result in a greater tracking error. Establishment Costs The Sub-Fund bears the costs set out in the Trust Deed which are directly attributable to it. Where such costs are attributable to the Sub-Fund and other sub-funds of the Trust, the Sub-Fund will bear such costs in proportion to its respective Net Asset Value or in such other manner as the Manager shall consider appropriate. Such costs include but are not limited to the costs incurred in the establishment, structuring, management and administration of the Trust and its sub-funds, 25
the costs of investing and realizing the investments of the Sub-Fund, the fees and expenses of Registrar, Service Agent, custodians and sub-custodians of the assets of the Trust, the fees and expenses of auditors, valuation costs, legal fees, the costs incurred in connection with any listing or regulatory approval, the costs of holding meetings of Unitholders and the costs incurred in the preparation and printing of any prospectus, any audited accounts or interim reports which are sent to the Unitholders. In addition, the Sub-Fund shall bear a due proportion of the costs and expenses incurred by the Manager and the Trustee in establishing the Trust. These costs and expenses were approximately HK$2,000,000 and were allocated to the Sub-Fund and any other sub-funds of the Trust on equal basis and are being amortized over the first five accounting periods of the Trust (or such other period as determined by the Manager after consultation with the auditors of the Trust. In the event that any sub-fund is terminated prior to the expiry of the amortization period, the balance of unamortized expenses will be apportioned amongst any other sub-funds of the Trust on equal basis unless the Trustee and the Manager agree otherwise after consultation with the auditors of the Trust. The accounting periods of the Sub-Fund are from 1 January to 31 December of each year. Increase in Fees The fees payable to the Manager and the Trustee may be increased on one month s notice to Unitholders (or such shorter period as approved by the SFC), subject to the maximum rates set out in the Trust Deed. 26
RISK FACTORS The nature of the Sub-Fund s investments involves certain risks and uncertainties, including those inherent in any investment. There can be no assurance that the investment objective of the Sub-Fund will be achieved. The risks factors set forth below are intended to be those material risks which are believed by the Manager and its directors to be presently applicable to the Sub-Fund. The risk factors below do not offer advice on the suitability of investing in the Sub-Fund. Prospective investors should carefully evaluate the merits and risks of an investment in the Sub-Fund in the context of their overall financial circumstances, knowledge and experience as an investor and should consult their independent professional or financial advisers before making any investment in the Sub-Fund. Investment Risk Investment Objective Risk: There is no assurance that the investment objective of the Sub-Fund will be achieved. Whilst it is the intention of the Manager to implement strategies which are designed to achieve the investment objective, there can be no assurance that these strategies will be successful. It is possible that an investor may lose a substantial proportion or all of its investment in the Sub-Fund where the Index value declines. Accordingly, there is a risk that investors may not recoup the original amount invested in the Sub-Fund or may lose a substantial part or all of their initial investment. Market Risk: The Net Asset Value of the Sub-Fund will change with changes in the market value of the ALPs. The price of Units, the ALPs and the underlying A Shares of the Index may go down as well as up. Asset Class Risk: Different types of securities tend to go through different performance cycles. The returns from the types of Securities in the Index may underperform or outperform returns from other Securities markets or from investment in other assets. Possible Business Failure Risk: In the current economic environment, global markets are experiencing very high level of volatility. The insolvency or other corporate failures of any one or more of the constituent Securities of the Index may have an adverse effect on the Sub-Fund s performance. Equity Risk: Although the Sub-Fund will not directly be investing in A Shares, it will be exposed to the risks associated with investments in A Shares by virtue of the Index. The investment performance of equity securities depends upon factors which are difficult to predict. Such factors include the possibility of sudden or prolonged market declines and risks associated with individual companies. The fundamental risk associated with the ALPs and the Index is the risk that the value of the A Shares in the Index suddenly and substantially decrease in value. Trading Risk: While the creation/redemption feature of the Sub-Fund is designed to make it likely that Units will trade close to their Net Asset Value, disruptions to creations and redemptions may result in trading prices that differ significantly from the Net Asset Value. While the secondary market prices of Units will fluctuate in accordance with changes in the Net Asset Value, they may also fluctuate continuously throughout the trading hours of SEHK based on supply and demand rather than the Net Asset Value. The Manager cannot predict whether Units will trade below, at, or above their Net 27
Asset Value. Various factors may lead to the Units of the Sub-Fund trading at a premium or discount to the Net Asset Value. On the basis that Units can only be created and redeemed in Application Units size at Net Asset Value, the Manager believes that large discounts or premiums to Net Asset Value are not likely to be sustained over the long-term. While the creation/redemption feature is designed to make it likely that the Units will normally trade at prices close to the Sub-Fund s next calculated Net Asset Value, trading prices are not expected to correlate exactly with the Sub-Fund s Net Asset Value due to reasons relating to timing as well as market supply and demand factors. In addition, disruptions to creations and redemptions or the existence of extreme market volatility may result in trading prices that differ significantly from Net Asset Value. In particular, if an investor purchases Units at a time when the market price is at a premium to Net Asset Value or sells when the market price is at a discount to Net Asset Value, then the investor may sustain losses. In the case of the Sub-Fund, since the supply and demand imbalance can only be addressed by the Participating Dealer(s) creating and redeeming additional Units, the liquidity of the underlying A Share market and the nature of the QFII regime will likely result in the Sub-Fund trading at a higher premium or discount to the Net Asset Value per Unit than may normally be the case for an ETF. Suspension of Trading Risk: Investors and potential investors will not be able to buy, nor will investors be able to sell, Units on the SEHK during any period in which trading of the Units is suspended. The SEHK may suspend the trading of Units whenever the SEHK determines that it is appropriate in the interests of a fair and orderly market to protect investors. The subscription and redemption of Units may also be suspended if the trading of Units is suspended. Passive Investments Risk: The Sub-Fund is not actively managed. Accordingly, the Sub-Fund may be affected by a decline in the consumer market segments. The Sub-Fund invests (either directly or indirectly) in the Securities included in or representative of its Index regardless of their investment merit. The Manager does not attempt to select stocks individually or to take defensive positions in declining markets. Investors should note that due to the inherent investment nature of the Sub-Fund, the Manager does not have the discretion to adapt to market changes and this will mean that falls in the relevant Index are expected to result in corresponding falls in the value of the Sub-Fund. Liquidity Risk: Following listing on the SEHK, it is unlikely that the Units will initially be widely held. Accordingly, any investor buying Units in small numbers may not necessarily be able to find other buyers should that investor wish to sell. To address this risk, however, one or more Market Makers will be appointed. There can be no assurance that an active trading market for such Units will develop or be maintained. In addition, if the Securities in the Index themselves have limited trading markets, or if the spreads are wide, this may adversely affect the valuation of the ALPs and accordingly the price of the Units and the ability of an investor to dispose of its Units at the desired price. If a Unitholder needs to sell its Units at a time when no active market for them exists, the price it receives for its Units, assuming it is able to sell them, is likely to be lower than the price received if an active market did exist. Investors should note that liquidity in the market for the Units may be adversely affected if there is no Market Maker for the Sub-Fund. It is, however, the Manager s intention that there will always be at least one Market Maker for the Units. Currency Risk: There are different currency risks involved in an investment in the Sub-Fund. 28
First, investors whose assets and liabilities are predominantly in currencies other than Hong Kong dollars (being the currency in which the Units are denominated) should take into account the potential risk of loss arising from fluctuations in value between the different currencies. Second, the Sub-Fund may hold investments in a currency different from the denomination of the Sub-Fund (which is in Hong Kong dollars). Further, the underlying A Shares represented by the ALPs are denominated in Rmb and while the ALPs that the Sub-Fund will hold will be denominated in Hong Kong dollars. This means the Sub-Fund is exposed to foreign exchange risk and fluctuations. For more details, see the risk factor on PRC Foreign Exchange Restrictions Risk below. Cost of Trading Risk: Buying or selling Units involves various types of costs that apply to all securities transactions on the SEHK, for example, brokerage commission and cost of trading spread. Frequent trading may detract significantly from investment results and an investment in Units may not be advisable particularly for investors who anticipate regularly making small investments. Secondary Market Trading Risk: Units may trade on the SEHK when the Sub-Fund does not accept orders to create or redeem Units. On such days, Units may trade in the secondary market with more significant premiums or discounts than might be experienced on days when the Sub-Fund accepts creation and redemption orders. Further, differences in trading hours between foreign stock exchanges (e.g. Shanghai Stock Exchange and Shenzhen Stock Exchange) and the SEHK may increase the level of premium/discount of the Unit price to its Net Asset Value because if a foreign stock exchange is closed while the SEHK is open, the Index level may not be available. The prices quoted by the SEHK Market Maker would therefore be adjusted to take into account any accrued market risk that arises from such unavailability of the Index level and as a result, the level of premium or discount of the Unit price of the Sub-Fund to its Net Asset Value may be higher. Risk inherent in the Sub-Fund s structure Credit Risk: The Sub-Fund will be exposed to credit risk of various parties, including: (a) (b) any custodian, banks, depository or other financial institutions - where cash or other assets of the Sub-Fund is held by such entities and in the event of their insolvency, the Sub-Fund will be treated as a general creditor and may encounter delays of some years and difficulties with respect to court procedures in seeking recovery of the Sub-Fund s assets; the ALP Issuers and the guarantors to the ALPs (if any) - that the ALP Issuers may not settle the ALPs in accordance with market practice due to a credit or liquidity problem of the ALP, or due to the insolvency, fraud or regulatory sanction of the ALP Issuer, thus causing the Sub-Fund to potentially suffer a loss. See risk factor on ALP Issuers Counterparty Risk below. Creation/Redemption through Participating Dealer only Risk: The creation and redemption of Units may only be effected through Participating Dealers, who may charge a fee for providing this service. The Participating Dealers will not be able to issue or redeem Units if some other event occurs that impedes the calculation of the Net Asset Value of the Sub-Fund. Since the number of Participating Dealers at any given time will be limited (there may be only one Participating Dealer at any given time) and in certain exceptional circumstances (as referred to on page 16), the Participating Dealers may not be able to or will not create or redeem Units for third party investors, there is a risk that investors may not be able to create or redeem Units freely. 29
Indemnity Risk: Under the Trust Deed, the Trustee and the Manager have the right to be indemnified for any liability or expense incurred by them in performing their respective duties except as a result of their own negligence, default or breach of duty. Any reliance by the Trustee or the Manager on the right of indemnity would reduce the assets of the Sub-Fund and the value of the Units. Control the Sub-Fund s Operation Risk: Investors will have no right to control the daily operations, including investment and suspension decisions, of the Sub-Fund. Termination of the Sub-Fund Risk: There are certain circumstances that the Trustee or the Manager may terminate the Sub-Fund. A number of risks highlighted in this Prospectus may trigger such circumstances. There include, without limitation, a termination of the licence agreement, the unavailability of ALPs for the Sub-Fund to invest and the occurrence of any events that render the Manager unable to implement its investment strategy. See Termination under the section Statutory and General Information for further details. Regulatory Risks Withdrawal of SFC Authorisation Risk: The Trust and the Sub-Fund have been authorised as a collective investment scheme under the Code by the SFC under Section 104 of the Securities and Futures Ordinance. Authorisation by the SFC of the Trust and the Sub-Fund does not imply recommendation. The SFC reserves the right to withdraw the authorisation of the Trust or the Sub-Fund or impose such conditions as it considers appropriate. If the Manager does not wish the Trust or the Sub-Fund to continue to be authorised by the SFC, the Manager will give Unitholders at least three months notice of the intention to seek SFC s withdrawal of such authorisation. In addition, any authorisation granted by the SFC may be subject to certain waivers which may be withdrawn or varied by the SFC. If as a result of such withdrawal or variation of waivers it becomes illegal, impractical or inadvisable to continue the Trust or the Sub-Fund, the Trust or the Sub-Fund (as applicable) will be terminated. Hong Kong Regulatory Policies Risk: The government or the regulators may intervene in the financial markets, such as by the imposition of the full collateralization requirements on locally domiciled synthetic ETFs. These changes may be introduced suddenly and in accordance with market conditions. Such changes may have a negative impact on existing funds such as the Sub-Fund including without limitation, an adverse cost impact which may materially prejudice existing investors of the Sub-Fund. Further, any such change in policies may also negatively impact the incentive of the counterparties to participate in the Sub-Fund and thereby decreasing its liquidity. In order to maintain its authorization status and to continue to list on the SEHK, the Sub-Fund will be required to comply with such rules and policies at all times. To the extent that any such change in rules or policies adversely impact the Sub-Fund, investors may suffer accordingly. Legal and Regulatory Risk: The Sub-Fund must comply with regulatory constraints or changes in the laws affecting it or its investment restrictions which might require a change in the investment policy and objectives followed by the Sub-Fund. Furthermore, such change in the laws may have an impact on the market sentiment which may in turn affect the performance of the Index and as a result the performance of the Sub-Fund. It is impossible to predict whether such an impact caused by any change of law will be positive or negative for the Sub-Fund. In the worst case scenario, a Unitholder may lose a material part of its investments in the Sub-Fund. 30
Delisting from the SEHK Risk: The SEHK imposes certain requirements for the continued listing of securities, including the Units, on the SEHK. Investors cannot be assured that the Sub-Fund will continue to meet the requirements necessary to maintain the listing of Units on the SEHK or that the SEHK will not change the listing requirements. If the Units of the Sub-Fund are delisted from the SEHK, Unitholders will have the option to redeem their Units by reference to the Net Asset Value of the Sub-Fund. Where the Sub-Fund remains authorised by the SFC, such procedures required by the Code will be observed by the Manager including as to notices to Unitholders, withdrawal of authorisation and termination, as may be applicable. Should the SFC de-authorise the Sub-Fund for any reason it is likely that Units may be required to be delisted from the SEHK. Taxation Risk: Investing in the Sub-Fund may have tax implications for a Unitholder depending on the particular circumstances of each Unitholder. Prospective investors are strongly urged to consult their own tax advisers and counsel with respect to the possible tax consequences to them of an investment in the Units. Such tax consequences may differ in respect of different investors. Valuation and Accounting Risk: The Manager intends to adopt IFRS in drawing up the annual accounts of the Sub-Fund. However, investors should note that the calculation of the Net Asset Value in the manner described under the section headed Determination of Net Asset Value will not necessarily be in compliance with generally accepted accounting principles, that is, IFRS. Under IFRS, (i) investments should be valued at fair value (bid and offer pricings are considered to be representative of fair value for listed investments) rather than last traded price and (ii) establishment costs should be expensed as incurred rather than amortised over the period of time. Accordingly, investors should note that the Net Asset Value as described in this Prospectus will not necessarily be the same as the Net Asset Value to be reported in the annual accounts as the Manager will make necessary adjustments in the annual accounts to comply with IFRS. Any such adjustments will be disclosed in the annual accounts, including a reconciliation. Risks relating to the Index Index is Subject to Fluctuations Risk: The performance of the Units ideally should, prior to the deduction of expenses, correspond closely with the performance of the Index. If the Index experiences volatility or declines, the price of the Units will vary or decline accordingly. Composition of and Weightings in the Index may Change Risk: The Index Provider is entitled to change the companies which comprise the Index from time to time. The price of the Units may rise or fall as a result of such changes. The composition of the Index may also change if one of the constituent companies were to delist its shares or if a new eligible company were to list its shares and be added to the Index. If this happens, the weighting or composition of the Securities owned by the Sub-Fund would be changed as considered appropriate by the Manager to achieve the investment objective. Thus, an investment in Units will generally reflect the Index as its constituents change from time to time, and not necessarily the way it is comprised at the time of an investment in the Units. There can be no guarantee that the Sub-Fund will, at any given time accurately reflect the composition of the Index. Licence to use Index may be Terminated or not Renewed Risk: The Index Provider has granted the Manager a fixed term exclusive licence to use the Index to create the Sub-Fund based on the Index and to use certain trade marks and any copyright in the Index. The Sub-Fund may not be able to fulfill its objective and may be terminated if the relevant licence agreement is terminated. The Sub-Fund may also be terminated if the Index ceases to be 31
compiled or published and there is no replacement index using the same or substantially similar formula for the method of calculation as used in calculating the Index. Upon the expiry of the fixed term of the exclusive licence, there is no assurance that the Manager will be granted a renewal of an exclusive licence. In those circumstances, the Manager will have a non-exclusive licence to use the Index in respect of the Sub-Fund and there is no assurance that there is no other exchange traded funds available in the market that correspond to the performance of the same Index. The Index Provider and the Manager (and its Connected Persons) are independent of one another. Compilation of the Index may be Inaccurate Risk: The Securities of the Index are determined and composed by the Index Provider without regard to the performance of the Sub-Fund. No Sub-Fund is sponsored, endorsed, sold or promoted by the Index Provider. The Index Provider does not make any representation or warranty, express or implied, to investors in the Sub-Fund or other persons regarding the advisability of investing in securities generally or in the Sub-Fund particularly. No Index Provider has any obligation to take the needs of the Manager or investors in the Sub-Fund into consideration in determining, composing or calculating the Index. There is no assurance that the Index Provider will compile the Index accurately, or that the Index will be determined, composed or calculated accurately. In addition, the process and the basis of computing and compiling the Index and any of its related formulae, constituent companies and factors may at any time be changed or altered by the Index Provider without notice. Consequently there can be no guarantee that the actions of the Index Provider will not prejudice the interests of the Sub-Fund, the Manager or investors. Concentration Risk: The Index comprise companies from the consumer discretionary and consumer staple industries, and is concentrated in A-shares issued by the companies in a particular market, industry, group of industries, sector or asset class. Accordingly, the Sub-Fund may be adversely affected by the performance of those A-shares, and may be subject to increased price volatility and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, sector or asset class. See Consumer Sector Risk in this section. Risk inherent in an investment in ALPs Not the Same as Direct Investment in A Shares Risk: A Shares may not be directly invested by non PRC persons unless the person is a QFII. Accordingly, in order to meet its investment objective, the Trustee will acquire, hold and dispose of ALPs on behalf of the Sub-Fund as if these were the relevant A Shares. The ALPs do not provide any beneficial or equitable entitlement or interest in the relevant A Shares to which each ALP is linked. Investors should therefore note that an investment in Sub-Fund is not the same as owning the constituent A Shares of the Index. Unitholders will not have any proprietary or beneficial interest in such A Shares. Because an Index ALP represents an obligation of the ALP Issuer, rather than a direct investment in A Shares, the Sub-Fund may suffer losses potentially equal to the full value of the Index ALP if the ALP Issuer fails to perform its obligations under the Index ALPs. ALP Issuers Counterparty Risk: The ALPs constitute direct, general and unsecured contractual obligations of the issuer of the ALPs. The value of the Sub-Fund s assets will, and may always, therefore depend entirely on the credit risk (including insolvency of, or default by the ALP Issuers) of the ALP Issuers of all the ALPs held by the Sub-Fund. Any Insolvency Event in relation to, or other failure to perform obligations under an ALP or related agreement of, any of the ALP Issuers will have an adverse impact on the Net Asset Value of the Sub-Fund. The Sub-Fund may suffer losses potentially up to the full value of the ALPs issued by an ALP Issuer if such ALP Issuer fails to perform its obligations under the ALPs. Any loss would result in a reduction in the Net Asset Value and impair the ability of the Sub-Fund to achieve its investment objective to track the Index. In the 32
event of any default by an ALP Issuer, dealing may be suspended and the Sub-Fund may ultimately be terminated. The Manager will seek to mitigate the counterparty risk by seeking to ensure that there is no uncollateralized exposure to the ALP Issuers on a daily basis and by diversifying the number of ALP Issuers. To achieve this, the Manager may implement measures such requiring provision of collateral from each ALP Issuer (or an affiliate) such that collateral held by the Sub-Fund represents at least 100% of the Sub-Fund s gross total counterparty risk exposure to all ALP Issuers on a daily marked to market basis and/or the orderly disposal of relevant ALPs. Investors should note that such measures may involve risks of their own such as settlement, operational and realisation risks arising out of credit support. The Sub-Fund may also incur additional fees, charges and expenses as a result of the employment of such measures. In any event, there can be no assurance that the Manager can always implement measures to ensure that there is no uncollateralized counterparty risk exposure to each ALP Issuer in an orderly and timely way. At various times, full collateralisation of the counterparty risk exposure related to one or more ALP Issuers may not be achievable. In these circumstances the Manager may, in consultation with the Trustee, take such other action (if any) as it considers appropriate and reasonably available. Collateral Arrangements Risk: Collateral arrangements may involve risks including settlement, valuation, operational and realisation risks. For example, collateral is subject to fluctuations in market value and the prices of subject Securities may go down as well as up. The value of the collateral Securities may be lower upon realisation of the Securities. In case of collateral Securities which are listed securities, the listing of such Securities may be suspended or revoked or the trading of such Securities on the stock exchanges may be suspended, and during the period of suspension or upon revocation, it may not be possible to realise the relevant collateral Securities. In such circumstances the Manager may seek to obtain additional collateral. While the Manager will endeavour to use a tax efficient arrangement in respect of any collateral, there is no guarantee that such arrangement will not be challenged by the tax authorities. If such arrangement is successfully challenged, the Sub-Fund may be required to pay the requisite tax (such as stamp duties) and other penalties. Accordingly, the value of the collateral realised may not be sufficient to cover the value of the ALPs secured by such collateral. Furthermore, there can be no assurance that collateral arrangements for the mitigation of counterparty risk to the ALP Issuers will be always available or effective. In the event that the Manager is unable to obtain collateral or dispose the ALPs, the Sub-Fund may suffer losses. There is also no assurance that the collateral provider will perform its obligations under the collateral arrangements. In connection with the implementation and maintenance of such measures, there may be additional charges, fees and expenses, stamp duties or other taxes which would be borne by the Sub-Fund. Tracking Error due to ALP Structure Risk: Certain costs such as commissions, taxes, spread, foreign exchange costs are embedded as part of the overall costs of maintaining the ALPs. As a result of such costs, the value of the ALPs may differ from the price of the A Shares to which such ALPs are linked, leading to an increased tracking error, although the Manager does not believe that this will be significant. Further, when the Sub-Fund adopts a synthetic replication strategy, the terms of the ALPs may provide that the value of the ALPs may be adjusted downwards by the ALP Issuer to cover its hedging and other costs and/or tax provisions. This may also lead to an increased tracking error. To ensure that there is no uncollateralized counterparty risk exposure on a daily basis, the 33
Sub-Fund bears substantial collateral costs. Such costs are variable and depending on the funding and capital costs of the collateral provider, which are further influenced by market conditions, resulting in an increased tracking error. Further, the tracking error risk will also be increased when the Sub-Fund is holding more cash than normal. The Sub-Fund may hold a large amount of cash in circumstances including but not limited to the unwinding of ALPs, liquidation of collateral upon default of a counterparty or repayment of taxes previously withheld. The effect of this would be potentially to increase the tracking error because a cash holding will not track the economic performance of the Index. There is also no assurance that there will be availability of new ALPs in the market to enable the Manager to reduce the tracking error risk efficiently. Possible Limited Duration of the ALPs Risk: The ALPs are of limited duration and those ALPs issued at the launch of the Sub-Fund may settle automatically in the fifth year following their issue. Although the ALP Issuers have indicated that the ALPs may be rolled over for such period to be agreed with the Manager, there is no assurance that each of the ALP Issuers will agree to do so indefinitely and that such renewal will be economical for the Sub-Fund. Accordingly, the ability of the Sub-Fund to renew ALPs with a sufficient number of ALP Issuers will have an impact on the Sub-Fund. Other ALPs Risks: The Manager s ability to manage the Sub-Fund depends upon the continuing availability of ALPs. An ALP Issuer may no longer be willing or able to issue ALPs to the Sub-Fund and the Sub-Fund may no longer be willing or able to hold the relevant ALPs, in various circumstances including (i) any limit imposed by the Manager on the issue of ALPs, (ii) material changes to the rules relating to PRC Securities such that ALPs may no longer be sold, (ii) where it is no longer economically viable to issue ALPs or to sell ALPs, (iv) where an ALP Issuer incurs a materially increased cost to perform its duties, or (v) an ALP Issuer or the Guarantor (as the case may be) ceasing to possess a satisfactory credit rating. Where there is a lack of ALPs available to be invested by the Sub-Fund for whatever reasons, the performance of the Sub-Fund will be adversely affected. In the worst case scenario the Sub-Fund may be terminated. The Sub-Fund may face practical limitations that effectively limit it delivering to a Participating Dealer in respect of a Redemption Application ALPs other than those that have been either issued by an affiliate of the Participating Dealer or are otherwise acceptable to the Participating Dealer. This may from time to time limit the flexibility of the Manager in responding to Redemption Applications and prevent the Manager from maintaining the Sub-Fund s credit exposure to ALP Issuers at desired levels. Although the ALPs to be held by the Sub-Fund may be listed, the ALPs have no active secondary market. The ALPs may be cleared and settled in Euroclear and Clearstream. In order to match the HKSCC settlement cycle in Hong Kong, Participating Dealers will need to achieve fast settlement on a T+2 basis in Euroclear and Clearstream (which is normally achieved on a T+3 basis). Although small, there is a risk that the ALP Issuers may not always be able to do this for all new issues to the Sub-Fund of the ALPs when the Manager needs to rebalance the Sub-Fund s holding of ALPs. QFII System Risk: The QFII system was introduced in 2002. Although the China Securities Regulatory Commission (the CSRC ) may in due course relax QFII eligibility requirements, making investment in A Shares easier and more widespread, this cannot be guaranteed. It is not possible to predict the future development of the QFII system and the CSRC may even impose restrictions on QFII s operations. Such restrictions may adversely affect the issuance of ALPs and/or cause Units to trade at a discount on the SEHK. 34
QFII Investment Quota Risk: Under the QFII system, a QFII must obtain the State Administration of Foreign Exchange ( SAFE ) approval to increase its investment quota. In the event that any QFII wishes to increase its respective investment quota from time to time, such increase may take time to obtain SAFE approval. Where insufficient investment quota is available, additional ALPs may not be available in which case, because the Sub-Fund cannot buy more ALPs, further Units in the Sub-Fund cannot be created. Although the continued operation of the Sub-Fund should not be affected, where further increases in QFII investment quota is restricted, suspended or halted, the supply of ALPs will be affected and this may cause Units to trade at a premium to Net Asset Value. QFII Investment Restrictions Risk: Although the Manager does not anticipate that QFII investment restrictions will impact on the ability of the Sub-Fund to achieve its investment objective, investors should note that the relevant PRC laws and regulations may limit the ability of the QFII to acquire A Shares in certain PRC issuers from time to time and, in addition, a QFII may not be able to acquire A Shares to hedge the ALPs. In such case, this may accordingly restrict the issuance, and therefore the purchase, of ALPs linked to these A Shares by the Sub-Fund. This may occur in a number of circumstances, such as (i) where the QFII holds in aggregate 10% of the total share capital of a listed PRC issuer (regardless of the fact that the QFII may hold its interest on behalf of a number of different ultimate clients), and (ii) where the aggregated holdings in A Shares of all QFIIs (whether or not connected in any way to the Sub-Fund) already equal 20% of the total share capital of a listed PRC issuer. In the event that these limits are exceeded the relevant QFIIs will be required to dispose of the A Shares in order to comply with the relevant requirements and, in respect of (ii), each QFII will dispose of the relevant A Shares on a last in first out basis. As a consequence, in such circumstances, the Manager may need to adopt a representative sampling strategy in order to achieve the Sub-Fund s investment objective. This may cause increased tracking error in general. QFII Regulation Risk: The QFII policy and rules are subject to change and any such change could adversely impact the Sub-Fund. In particular, revised regulations relating to QFII was released by SAFE in October 2009 which provides a penalty would be imposed on a QFII if it were found to be, among other things, selling or transferring its QFII quota. It is not absolutely clear whether the issuance of the ALPs would fall within this provision. In the worst case scenario, this could lead to ALPs not being able to be issued and the Sub-Fund having to be terminated. Should it be necessary to terminate the Sub-Fund, the Manager anticipates an orderly unwind, with the net cash proceeds to be distributed to the existing Unitholders. Dependence upon Trading Market for A Shares Risk: The price at which the ALPs may be purchased or sold by the Sub-Fund upon any rebalancing activities or otherwise and the Net Asset Value of the Sub-Fund may be adversely affected if trading markets for the A Shares are limited or absent. Investors should note that the Shanghai Stock Exchange and Shenzhen Stock Exchange on which A Shares are traded are undergoing development and the market capitalisation of, and trading volumes on, those exchanges are lower than those in more developed financial markets. Market volatility and settlement difficulties in the A Share markets may result in significant fluctuations in the prices of Securities traded on such markets and thereby changes in the value of the Sub-Fund. Disruption of Creation and Redemption Risk: ALPs may only be bought from, or sold to, the Sub-Fund from time to time where the corresponding A Shares may be sold or purchased on the Shanghai Stock Exchange or the Shenzhen Stock Exchange, as appropriate. Given that the A Share market is considered volatile and unstable (with the risk of suspension of a particular stock or government intervention), the creation and redemption of Units may also be disrupted. A Participating Dealer is unlikely to redeem or create Units if it considers that the underlying A Shares or ALPs may not be available. 35
Repatriation of Funds from the PRC Risk: Restrictions on the repatriation of HK or US dollars might result in the Participating Dealers choosing not to create or redeem Units. Where the ALP Issuer is also a QFII, the inability to repatriate HK or US dollars may give rise to liquidity problems for that ALP Issuer, and this may in turn affect the ability of that ALP Issuer to perform its obligations under the ALPs. Any further restrictions on or suspension of the ability of QFIIs in general to repatriate HK or US dollars from the PRC, insofar as they affect the ALP Issuers, may cause Units in the Sub-Fund to trade at a discount on the SEHK. Notwithstanding that, the ALPs are issued outside the PRC and restrictions on or suspension of the ability of QFIIs in general to repatriate HK or US dollars should not affect the operation of Sub-Fund. Synthetic Dividends paid on ALPs Risk: Whether the Sub-Fund will pay distributions on Units is subject to the Manager s distribution policy. There is no assurance that the Sub-Fund will declare to pay dividends or distributions. In particular, the ability of the Sub-Fund to pay distributions also depends on dividends declared and paid by the relevant PRC companies of the A Shares underlying the ALPs net of any PRC dividend withholding tax or provision of 10% for withholding tax and the level of fees and expenses payable by the Sub-Fund. Dividend payment rates of companies which issue the underlying A Shares are based on numerous factors, including their current financial condition, general economic conditions and their dividend policies. There can be no assurance that such companies will declare dividends or make other distributions without which no distribution is payable on the ALPs. In addition, changes to the composition of the Index (for example, the substitution of one constituent stock in the Index with another paying higher or lower dividends) will affect the level of synthetic dividends received by the Sub-Fund under the ALPs. To the extent possible, the Sub-Fund s fees and expenses will be paid out of the synthetic dividends it receives. To the extent such dividends received by the Sub-Fund are insufficient to meet its fees and expenses, the excess will be met out of the assets of the Sub-Fund or by borrowing, which may cause the Net Asset Value to fall, and may adversely affect the trading price of the Units. Investors may not therefore receive any distributions. Investors will not receive any dividends or other distributions directly from ALPs or the PRC companies to whose A Shares the ALPs relate. Risk Associated with PRC Taxation A 10% PRC Corporate Income Tax ( CIT ) has been enforced on payment of dividends and interest to foreign investors from PRC listed companies. However, the PRC tax authorities have not been reported to have sought to collect such withholding tax to date on capital gains realised by QFIIs on the selling of A Shares. Notwithstanding that PRC CIT is legally applicable to such capital gains from a technical perspective under the Corporate Income Tax Law ( CIT Law ). There is a risk the PRC tax authorities would seek to collect this tax on capital gains realised by QFIIs on sale of PRC A Shares without giving any prior warning, and possibly, on a retrospective basis in the worst case. If such tax is collected, the tax liability will be payable by the QFII. In such an event, under the terms of the ALPs or as otherwise agreed between the Manager and an ALP Issuer, any tax levied on and payable by the QFII in the PRC may be passed on to and borne by the Sub-Fund to the extent such tax is indirectly attributable to the Sub-Fund through its holdings of ALPs. In addition, when the Manager sells an ALP, the sale price may be reduced on account of the QFII s tax liability. Per the relevant PRC tax regulations, CIT applicable to the QFII generally arises when the QFII earns the passive income. However, in practice, CIT would only be withheld when the QFII repatriates funds overseas from the PRC; hence, where it is that the incidence of CIT liability may not have been crystallised, the QFII may not deduct the necessary CIT from the trades to the extent that no foreign exchange remittance is made. In such circumstance, the Net Asset Value per Unit and the value of ALPs held by the Sub-Fund may be reduced against the value of the underlying A Shares to which the ALPs are linked, if and to the extent that any PRC tax liability will ultimately be recharged to and be borne by the Sub-Fund. 36
The ALP Issuers have decided to withhold an amount equal to 10% of any gains representing the PRC CIT in respect of any capital gains which would be payable on an actual sale of the underlying A Share of each ALP issued to the Sub-Fund. Currently, Goldman Sachs International and Citigroup Global Markets Holdings Inc. each has indicated that the amounts withheld by it will be retained for a period of up to 5 years, pending further clarification of the tax rules and tax collection measures adopted by the PRC authorities. In the event that, at the end of the 5 year period, such capital gains CIT has not been enforced against it (or its affiliate), or the amount withheld is greater than the actual capital gains tax liability, the amount withheld (or the excess withholding) will be returned to the Sub-Fund, although the Sub-Fund will remain liable for any attributable tax. Accrued interest is payable on the amounts withheld and is payable to the Sub-Fund on a periodic basis. Merrill Lynch International & Co. C.V. has confirmed that it will retain the amounts withheld regardless of whether, and the rate of which, PRC CIT in respect of capital gains is chargeable (and the Sub-Fund will not be entitled to receive any return of the amounts so withheld). To the extent that any actual PRC tax liability in respect of capital gains exceeds the amounts withheld by Merrill Lynch International & Co. C.V., such PRC tax liability will be borne by it (rather than the Sub-Fund). Investors should refer to the latest financial report of the Sub-Fund for details of the amounts withheld by ALP Issuers on account of capital gains, as well as the amount of any crystallised and uncrystallised gains. For accounting purposes, on the basis that the ALP Issuer already withhold 10% CIT, the Manager does not presently propose to further accrue for an additional 10% CIT referred to above to avoid double deduction but is keeping the matter under review (and which position may be subject to change depending on the position adopted by ALP Issuers and the extent to which the QFII may seek to economically recover any PRC CIT imposed through contractual arrangements). The Trustee and the Manager may, in their discretion from time to time, establish a reserve for potential tax liabilities if in their opinion such a reserve is warranted. Any such reserve would have the effect of reducing the Net Asset Value per Unit by the pro rata amount of estimated tax liability. In the event that the Sub-Fund is required to make payments reflecting tax liabilities for which no reserves have been taken, the Net Asset Value per Unit may decrease substantially, without notice, by the pro rata amount of the unreserved tax exposure. There can be no guarantee that new tax laws, regulations and practice in the PRC specifically relating to the QFII regime may be promulgated in the future. The promulgation of such new laws, regulations and practice may operate to the advantage or disadvantage of the Unitholders. Various tax reform policies have been implemented by the PRC government in recent years, and existing tax laws and regulations may be revised or amended in the future. There is a possibility that the current tax laws, regulations and practice in the PRC will be changed with retrospective effect in the future. Moreover, there is no assurance that tax incentives currently offered to foreign companies, if any, will not be abolished and the existing tax laws and regulations will not be revised or amended in the future. Any changes in tax policies may reduce the after-tax profits of the companies in the PRC which the Sub-Fund invests in, thereby reducing the income from, and/or value of the Units. Risk factors relating to the PRC World Trade Organisation (the WTO ) Risk: China s accession to the WTO occurred on 11 December 2001. As a member of the WTO, China is required to significantly reduce the trade barriers for imports that have historically existed and that currently exist in China, such as: reducing restrictions on trading for certain kinds of products on foreign companies; lifting prohibitions, quantitative restrictions or other measures maintained against imports over time and significantly reducing tariffs. Any present or future increase in foreign competition may have a material adverse effect on PRC companies and their business operations. 37
Economic, Political and Social Risk: The economy of China, which has been in a state of transition from a planned economy to a more market oriented economy, differs from the economies of most developed countries in many respects, including the level of government involvement, its state of development, its growth rate, control of foreign exchange, and allocation of resources. Although the majority of productive assets in China are still owned by the PRC government at various levels, in recent years, the PRC government has implemented economic reform measures emphasising utilisation of market forces in the development of the economy of China and a high level of management autonomy. The economy of China has experienced significant growth in the past 20 years, but growth has been uneven both geographically and among various sectors of the economy. Economic growth has also been accompanied by periods of high inflation. The PRC government has implemented various measures from time to time to control inflation and restrain the rate of economic growth. For more than 20 years, the PRC government has carried out economic reforms to achieve decentralisation and utilisation of market forces to develop the economy of the PRC. These reforms have resulted in significant economic growth and social progress. There can, however, be no assurance that the PRC government will continue to pursue such economic policies or, if it does, that those policies will continue to be successful. Any such adjustment and modification of those economic policies may have an adverse impact on the securities market in the PRC as well as the underlying Securities of the Sub-Fund. Further, the PRC government may from time to time adopt corrective measures to control the growth of the PRC economy which may also have an adverse impact on the capital growth and performance of the Sub-Fund. Political changes, social instability and adverse diplomatic developments in the PRC could result in the imposition of additional government restrictions including expropriation of assets, confiscatory taxes or nationalisation of some or all of the property held by the underlying issuers of the A Shares in the Index. PRC Foreign Exchange Restrictions Risk: Distributions made under the ALPs will reflect the dividends and distributions received by the QFII in Rmb and are converted at the prevailing foreign exchange rate. Various PRC companies derive their revenues in Rmb but have requirements for foreign currency, including for the import of materials, debt service on foreign currency denominated debt; purchases of imported equipment and payment of any cash dividends declared in respect of e.g. H shares and N shares. The existing PRC foreign exchange regulations have significantly reduced government foreign exchange controls for transactions under the current account, including trade and service related foreign exchange transactions and payment of dividends. However, the Manager cannot predict whether the PRC government will continue its existing foreign exchange policy or when the PRC government will allow free conversion of the Rmb to foreign currency. Foreign exchange transactions under the capital account, including principal payments in respect of foreign currency-denominated obligations, currently continue to be subject to significant foreign exchange controls and require the approval of the State Administration for Foreign Exchange. Since 1994, the conversion of Rmb into Hong Kong dollars has been based on rates set by the People s Bank of China, which are set daily based on the previous day s PRC interbank foreign exchange market rate. The Manager cannot predict nor give any assurance of any future stability of the Rmb to Hong Kong dollar exchange rate. Fluctuations in exchange rates may adversely affect the Sub-Fund s Net Asset Value and any declared dividends. PRC Laws and Regulations Risk: The PRC legal system is based on written statutes and their interpretation by the Supreme People s Court. Prior court decisions may be cited for reference but have no precedent value. 38
Since 1979, the PRC government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organisation and governance, commerce taxation and trade. Two examples are the promulgation of the Contract Law of the PRC to unify the various economic contract laws into a single code, which went into effect on 1 October 1999, and the Securities Law of the PRC, which went into effect on 1 July 1999. However, because these laws and regulations affecting securities markets are relatively new and evolving, and because of the limited volume of published cases and judicial interpretation and their non-binding nature, interpretation and enforcement of these regulations involve significant uncertainties. In addition, as the PRC legal system develops, no assurance can be given that changes in such laws and regulations, their interpretation or their enforcement will not have a material adverse effect on their business operations. Accounting and Reporting Standards Risk: Accounting, auditing and financial reporting standards and practices applicable to PRC companies may be different to those standards and practices applicable to countries that have more developed financial markets. For example, there are differences in the valuation methods of properties and assets and in the requirements for disclosure of information to investors. Taxation in the PRC Risk: The PRC Government has implemented a number of tax reform policies in recent years. The current tax laws and regulations may be revised or amended in the future. Any revision or amendment in tax laws and regulations may affect the after-taxation profit of PRC companies and foreign investors in such companies. In particular, please refer to PRC Tax Risk above. Consumer Sector Risk: The performance of PRC companies active in the consumer sector are correlated to the growth rate of the PRC consumer market, individual income levels and their impact on levels of domestic consumer spending in the PRC, which in turn depend on the worldwide economic conditions, which have recently deteriorated significantly in many countries and regions and may remain depressed for the foreseeable future. There are many factors affecting the level of consumer spending, including but not limited to interest rates, currency exchange rates, economic growth rate, inflation, deflation, political uncertainty, taxation, stock market performance, unemployment level and general consumer confidence. There can be no assurance that historical growth rates of the PRC economy and the PRC consumer market will continue. Any future slowdowns or declines in the PRC economy or consumer spending may materially and adversely affect the business of the companies in the consumer discretionary sector and as a result the performance of the Sub-Fund. 39
MANAGEMENT OF THE TRUST The Manager Da Cheng International Asset Management Company Limited (the Manager ) is a corporation incorporated in Hong Kong which is licensed by the SFC for Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities under the Securities and Futures Ordinance with CE number ATE045. The Manager is a wholly owned subsidiary of Dacheng Fund Management Company Limited of Shenzhen in the PRC which has assets under management in excess of Rmb 100 billion. Under the Trust Deed, the Manager is responsible for managing the investments and affairs of the Sub-Fund, with full power to delegate the whole or any part of its functions to any person, firm or company. The directors of the Manager are CAO Xiongfei, CHEN Shangqian, DU Peng, DENG Shaoyong, LIU Caihui, XIAO Bing and YANG Chunming. Their biographical details are as follows: CAO Xiongfei Mr CAO Xiongfei has been the Head of Research and a Portfolio Manager at Da Cheng Fund Management Co., Ltd since 2008, and a director of the Manager since March 2009. He is a responsible officer of the Manager for Types 1, 4 and 9 regulated activities. Between 2007 and 2008, Mr Cao was a Fund Manager at CCB Principal Asset Management Co., Ltd. From 2004 to 2007, he served as a macro-economic and investment strategist, Financial Industry Analyst, Assistant Head of Investment and a Portfolio Manager at Da Cheng Fund Management Co., Ltd. Between 1999 and 2004, Mr Cao served as an Analyst at the Beijing Headquarter of China Merchants Securities Co., Ltd, Analyst for Penghua Fund Management Co., Ltd and Senior Manager of Marketing for Invesco Great Wall Fund Management Co., Ltd. CHEN Shangqian Mr CHEN Shangqian has been the Head of Fixed Income and a Portfolio Manager at Da Cheng Fund Management Co., Ltd since 2002, and a director of the Manager since March 2009. He is a responsible officer of the Manager for Types 1, 4 and 9 regulated activities. Between 2000 and 2002, Mr Chen was the Strategy Manager of the Research and Development Centre of China Merchants Securities Co., Ltd. From 1998 to 2000, Mr Chen served as the Head of Bond Investments for the Investment Management Centre under China Ping An Insurance Co., Ltd. DU Peng Miss DU Peng has been the Chief Compliance Officer and the Head of Internal Audit at Da Cheng Fund Management Co., Ltd since March 1999, and a director of the Manager since March 2009. She participated in the founding of Da Cheng Fund Management Co., Ltd in September 1998. From 1994 to 1998, Mr Du served as a Deputy Manager of Investment Management for Guangdong South Financial Service Corporation. Between 1992 and 1994, she acted as a Representative of the former Bank of China, Shaanxi Province, Trust and Advisory Company at the Shanghai Stock Exchange and the Branch Manager of the Shanghai Branch. Deng Shaoyong Mr Deng Shaoyoung has extensive financial industry experience. He joined the Marketing Department of Da Cheng Fund Management Company Limited in 2005 and was promoted to Deputy General Manager of the Marketing Department in 2006. He was further promoted to Head of Transaction Management Department and served as a member of the Investment Committee in 2008. Between 1996 and 2005, Mr Deng worked for China Merchant Securities Company Limited. LIU Caihui 40
Miss LIU Caihui has been the Deputy General Manager of Da Cheng Fund Management Co., Ltd since May 2008 and a director of the Manager since March 2009. Between August 2006 and May 2008, she was the Assistant General Manager of Da Cheng Fund Management Co., Ltd. From January 2006 to July 2008, Miss Liu served as the Deputy General Manager of Human Resources for Shenzhen CATIC Group. From 2002 to 2006, she served as Assistant to the President, General Manager of the Investment Banking Division and General Manager of Corporate Management for Jiangnan Securities Company Limited, during which she also acted as Deputy Head of the Preparatory Group of Jiangnan AGF Fund Management Company Limited. Between 1999 and 2002, Mr Liu managed the Investment Banking Division as the Deputy General Manager, and General Manager of Jiangnan Securities Company Limited. XIAO Bing Mr XIAO Bing has been the Board Secretary and Head of Administration of Da Cheng Fund Management Co., Ltd since 2004, and a director of the Manager since March 2009. During 2003 and 2004, Mr Xiao served as the Head of Marketing Planning for Invesco Great Wall Fund Management Co., Ltd. From 2002 to 2003, he served as the Head of Marketing for ABN Amro Teda Fund Management Co., Ltd. Between 2000 and 2002, Mr Xiao served as the Head of Marketing for Penghua Fund Management Co., Ltd. From 1998 to 2000, he served as Assistant General Manager of the International Department for United Securities Corporation. Between 1997 and 1998, Mr Xiao served as a broker for Integrity Securities Inc. YANG Chunming Mr YANG Chunming has been the Assistant General Manager of Da Cheng Fund Management Co., Ltd since 2008, and a director of the Manager since March 2009. Since 2005, he served as Head of Operations and has been serving as General Manager of Marketing of Da Cheng Fund Management Co., Ltd. From 1997 to 2005, Mr Yang served as the General Manager of Business Department for the Sungang Road Branch of China Merchants Securities Co., Ltd. Between 1994 and 1997, he acted as Assistant to the General Manager of Shenzhen Business Department of Jilin International Trust and Investment Corporation. The Trustee The Trustee of the Sub-Fund is BOCI-Prudential Trustee Limited, which is a joint venture of BOC Group Trustee Company Limited (owned by BOC International Holdings Limited and Bank of China (Hong Kong) Limited) and Prudential Corporation Holdings Limited. The Trustee is a registered trust company under the Trustee Ordinance. The Trustee also acts as trustee of other ETFs listed on the SEHK. Under the Trust Deed, the Trustee is responsible for the safekeeping of the assets of the Sub-Fund. The Trustee may, however, appoint any person or persons (including a Connected Person) to be custodian of the assets of the Sub-Fund or to otherwise act as its agent. The Trustee is required to exercise reasonable skill, care and diligence in the selection, appointment and monitoring of such persons and, during the term of their appointment, must satisfy itself as to the ongoing suitability of such persons to provide custodial services to the Sub-Fund. The Trustee will remain responsible for the acts or omissions of such persons in the same manner as if such acts or omissions were those of the Trustee. Indemnities of the Trustee and Manager The Trustee and the Manager benefit from various indemnities in the Trust Deed. Except as provided under the Trust Deed, the Trustee and the Manager shall be entitled to be indemnified out of, and have recourse to, the Trust Fund attributable to the Sub-Fund, in respect of any liabilities, costs, claims or demands arising directly or indirectly from the proper performance of the Sub-Fund. Nothing in any of the provisions of the Trust Deed shall exempt either the Trustee or the Manager (as the case may be) from or indemnify them against any liability for breach of trust or any liability which by virtue of any rule of law would otherwise attach to them in respect of any negligence, fraud, default, breach of duty or trust of which they may be guilty in relation to their duties. 41
The Registrar The Manager has appointed Computershare Hong Kong Investor Services Limited to act as the registrar of the Sub-Fund (the Registrar ). The Registrar is independent of the Manager and the Trustee. The Auditor The Manager has appointed PricewaterhouseCoopers to act as the auditor of the Trust and the Sub-Fund (the Auditor ). The Auditor is independent of the Manager and the Trustee. The Participating Dealer(s) A Participating Dealer may act for its own account or for the account of its clients in making creation and redemption applications. Each Participating Dealer must usually (i) be licensed or registered for Type 1 (dealing in securities) regulated activity under the Securities and Futures Ordinance, (ii) be a participant of the SEHK, (iii) be acceptable to the Trustee, and (iv) must be a QFII or belong to a financial group a member of which is a QFII. The Participating Dealers are Merrill Lynch Far East Limited, Goldman Sachs (Asia) Securities Limited and Citigroup Global Markets Asia Limited. The latest list of the Participating Dealers is available at www.dcfund.com.hk/dczc/jjcp/sub_product_01.jsp?fd=3071. Service Agent HK Conversion Agency Services Limited will act as service agent under the terms of the Service Agreement entered into among the Manager, the Trustee, HK Conversion Agency Services Limited, HKSCC, the Registrar and the relevant Participating Dealer. The Service Agent will perform, through HKSCC, certain of its services in connection with the creation and redemption of Units in the Sub-Fund by the Participating Dealers. The Market Maker(s) A Market Maker is a broker or dealer permitted by the SEHK to make a market for the Units in the secondary market and whose obligations include quoting bid prices to potential sellers and offer prices to potential buyers when there is a wide spread between the prevailing bid prices and offer prices for the Units on the SEHK. Market Makers facilitate the efficient trading of Units by providing liquidity in the secondary market when it is required, in accordance with the market making requirements of the SEHK. Subject to applicable regulatory requirements, the Manager intends to ensure that there is at least one Market Maker for the Sub-Fund on the SEHK. If the SEHK withdraws its permit to the existing market maker(s), the Manager will endeavour to ensure that there is at least one other market maker to facilitate the efficient trading of Units. The latest list of Market Makers is available at www.hkex.com.hk and www.dcfund.com.hk/dczc/jjcp/sub_product_01.jsp?fd=3071. Please refer to the section headed References to Websites for the warning and the disclaimer regarding information contained in such website. Conflicts of Interest and Soft Dollars The Manager and the Trustee may, from time to time, act as manager, investment adviser, trustee or as custodian or in such other capacity in connection with any collective investment scheme separate and distinct from the Trust and the Sub-Fund and retain any profit or benefit made in connection therewith. In addition: (a) (b) The Manager or any Connected Person may purchase and sell investments for the account of the Sub-Fund as agent for the Trustee. The Trustee, the Manager and any of their Connected Persons may contract or enter into 42
any financial, banking or other transaction with one another or with any Unitholder or any company or body any of whose shares or Securities form part of the Sub-Fund s assets or the Index. (c) (d) (e) (f) The Trustee or the Manager or any Connected Person may become the owner of Units and hold, dispose or otherwise deal with them with the same rights which it would have had if it had not been the Trustee or the Manager or the Connected Person. The Trustee, the Manager and any of their Connected Persons may buy, hold and deal in any securities, commodities or other property for their own account or for the account of their other customers notwithstanding that similar Securities, commodities or other property may be held by the Sub-Fund. Any arrangements for the borrowing or deposit of any monies for the account of the Sub-Fund may be made with any of the Trustee, the Manager, any investment adviser or any Connected Person of any of them being a banker or other financial institution provided that such person shall charge or pay (as the case may be) interest or fees at a rate or amount no higher (in the case of a borrowing) or lower (in the case of a deposit) than the prevailing rates or amounts for transactions of a similar size and duration, in the same currency and with institutions of similar standing. Neither the Trustee nor the Manager nor any Connected Person shall be liable to account to each other or to the Sub-Fund or to the Unitholders for any profits or benefits made or derived from or in connection with any such transaction mentioned in paragraphs (b), (c) and (d) above. It is, therefore, possible that any of the Trustee, the Manager or their Connected Persons may, in the course of business, have potential conflicts of interest with the Sub-Fund. Each will, at all times, have regard in such event to its obligations to the Sub-Fund and the Unitholders and will endeavour to ensure that such conflicts are resolved fairly. The Manager, its delegates or any Connected Person of the Manager may enter into portfolio transactions for or with the Sub-Fund as agent in accordance with normal market practice, provided that commissions charged to the Sub-Fund in these circumstances do not exceed customary full service brokerage rates. If a broker does not provide research or other lawful services in addition to brokerage execution, such broker will generally charge a brokerage commission that is discounted from customary full service brokerage rates. Where the Manager invests the Sub-Fund in shares or units of a collective investment scheme managed by the Manager, its delegates or any Connected Persons, the manager of the scheme in which the investment is being made by the Sub-Fund must waive any preliminary or initial charge which it is entitled to charge for its own account in relation to the acquisition of shares or units and there must be no increase in the overall total of annual management fees (or other costs and charges payable to the Manager or any Connected Person of the Manager) borne by the Sub-Fund. None of the Manager, their delegates nor any Connected Person of any of them shall, retain any cash commission rebates or other payment or benefit (except as otherwise provided for in this Prospectus or in the Trust Deed) received from a third party (either directly or indirectly) arising out of the sale or purchase or loan of investments for the Sub-Fund and any such rebates or payments or benefits which are received shall be credited to the account of the Sub-Fund. The Manager, their delegates or Connected Person of the Manager may receive, and are entitled to retain, research products and services (known as soft dollar benefits) which are of demonstrable benefit to the Sub-Fund (as may be permitted under the Code, applicable rules and regulations) from brokers and other persons through whom investment transactions are carried out ( brokers ) provided that the quality of transaction execution is consistent with best execution standards. The services of the Trustee provided to the Sub-Fund are not deemed to be exclusive and the Trustee shall be free to render similar services to others so long as its services hereunder are not impaired thereby and to retain for its own use and benefit all fees and other moneys payable thereby and the Trustee shall not be deemed to be affected with notice of or to be under any duty 43
to disclose to the Sub-Fund any fact or thing which comes to the notice of the Trustee in the course of the Trustee rendering similar services to others or in the course of its business in any other capacity or in any manner whatsoever otherwise than in the course of carrying out its duties under the Trust Deed. Conflicts of interest may also arise due to the widespread business operations of the Trustee, the Manager, the Registrar and their respective holding companies, subsidiaries and affiliates. The foregoing parties may effect transactions where those conflicts arise and shall not, subject to the terms of the Trust Deed, be liable to account for any profit, commission or other remuneration arising. However, all transactions carried out by or on behalf of the Sub-Fund will be on arm s length terms. For so long as the Sub-Fund is authorised by the SFC, no more than 50% in aggregate of the Sub-Fund s transactions in any one financial period shall be carried out with or through a broker or dealer connected to the Manager or any Connected Person of the Manager. 44
STATUTORY AND GENERAL INFORMATION Reports and Accounts The financial year-end of the Trust and of the Sub-Fund is 31 December every year. Audited accounts are prepared (according to International Financial Reporting Standards) and will be available within four months of each financial year-end. Half-yearly unaudited reorts are also prepared up to the last Dealing Day in June of each year and are available within 2 months of such date. The financial reports, which will be published in both English and Chinese, provide details of the assets of the Sub-Fund and the Manager s statement on transactions during the period under review (including a list of any constituent Securities and futures contracts held by the Sub-Fund). Once published, financial reports will be posted on the Manager s website (www.dcfund.com.hk/dczc/jjcp/sub_product_01.jsp?fd=3071) and available free of charge to Unitholders at the Manager s office. On or before the publication of financial reports within the relevant timeframe, notice will be given to Unitholders to notify them where the financial reports (in printed form or in electronic form) can be obtained. Trust Deed The Trust was established under Hong Kong law by the Trust Deed made between the Manager and the Trustee. All Unitholders are entitled to the benefit of, are bound by and are deemed to have notice of, the provisions of the Trust Deed. The Trust Deed contains provisions for the indemnification of the Trustee and the Manager out of the assets of the Trust and their relief from liability in certain circumstances (summarised above in Indemnities of the Trustee and Manager ). Unitholders and intending applicants are advised to consult the terms of the Trust Deed. Modification of Trust Deed The Trustee and the Manager may agree to modify the Trust Deed by supplemental deed provided that in the opinion of the Trustee and the Manager such modification (i) does not materially prejudice to the interests of Unitholders, does not operate to release to any material extent the Trustee or the Manager from any responsibility to the Unitholders and (with the exception of the costs incurred in connection with the relevant supplemental deed) does not increase the costs and charges payable out of the assets of the Sub-Fund or (ii) is necessary in order to make possible compliance with any fiscal, statutory or official requirement (whether or not having the force of law) or (iii) is made to correct a manifest error. In all other cases, modifications, alterations and additions require the sanction of an extraordinary resolution of the Unitholders affected. Any amendments to the Trust Deed will require prior approval from the SFC. Notice of any amendments or modifications will be given by the Manager unless such amendments or modifications are not of material significance. Voting Rights Unitholders meetings may be convened by the Manager, by the Trustee or by Unitholders representing one-tenth or more of the current Units in issue at any time. These meetings may be used to modify the terms of the Trust Deed, including increasing the maximum fees payable to the service providers, removing the Trustee or terminating the Trust. Such amendments to the Trust Deed would require an extraordinary resolution being passed, which must be considered by Unitholders of at least 25% of the Units in issue and passed by a 75% majority of the votes cast. Other matters that require an ordinary resolution being passed would be considered by Unitholders of at least 10% of the Units in issue and passed by a simple majority of 50% of the votes cast. Unitholders will be given not less than 21 days notice of such meeting. Termination The Trust and the Sub-Fund may be terminated by the Trustee if: (i) the Manager goes into liquidation or a receiver is appointed and not discharged within 60 days or (ii) in the opinion of the 45
Trustee, the Manager is incapable of performing its duties satisfactorily or (iii) the Manager has failed to perform its duties satisfactorily or has, in the opinion of the Trustee, done something calculated to bring the Trust into disrepute or that is harmful to the interests of Unitholders or (iv) a law is passed that renders it illegal, or in the opinion of the Trustee, impracticable or inadvisable to continue the Trust or (v) the Trustee is unable to find an acceptable person to replace the Manager within 30 days after the removal of the Manager, or the person nominated shall fail to be approved by Extraordinary Resolution or (vi) 30 days after the Trustee notifies the Manager of its intention to retire, no new person willing to act as trustee has been identified. The Manager may terminate the Trust and the Sub-Fund if: (i) the aggregate net asset value of all the units of each Sub-Fund of the Trust (including the Sub-Fund) is less than HK$100 million; or (ii) any law is passed or amended or regulatory directive or order is imposed which renders it illegal or in the opinion of the Manager, impracticable or inadvisable to continue the Trust; or (iii) if any law or regulation shall be passed or amended or any regulatory directive or order is imposed that affects a Sub-Fund and which renders the Sub-Fund illegal or in good faith opinion of the Manager makes it impracticable or inadvisable to continue the Sub-Fund; or (iv) within a reasonable time and using commercially reasonable endeavours, the Manager is unable to find a person acceptable to act as the new trustee after deciding to remove the Trustee in accordance with the Trust Deed; or (v) if the Index is no longer available for benchmarking or if the units of the Trust (including the Sub-Fund) are no longer listed on the SEHK or any other Recognised Stock Exchange; or (vi) if at any time, the Trust ceases to have any Participating Dealer or (vii) if the Manager is unable to implement its investment strategy. Further, the Unitholders may at any time authorise termination of the Trust by extraordinary resolution. Unless previously terminated as described above or under another provision in the Trust Deed, the Trust shall in any event terminate at the expiry of 80 years from the date of the Trust Deed. Notice of the termination of the Trust or the Sub-Fund will be given to the Unitholders. The notice will contain the reasons for the termination, the consequences to Unitholders of terminating the Trust or the Sub-Fund and the alternatives available to them, and any other information required by the Code. Retirement of the Trustee Subject to the prior written approval of the SFC, the Trustee may retire from office by giving not less than 90 days written notice (or such shorter period of notice as the SFC may approve) to the Unitholders provided that adequate arrangements have been made for another trustee approved by the SFC to assume responsibility for the administration of the Trust and for the Trustee s interest in the Trust Fund to be transferred to that trustee. The Manager shall as soon as practicable thereafter give notice to the Unitholders of such change specifying the name and the address of the office of the new Trustee. If any of the following shall occur, namely:- (a) (b) the Trustee shall go into liquidation (except a voluntary liquidation for the purpose of reconstruction or amalgamation upon terms previously approved in writing by the Trustee) or a receiver shall be appointed over any of its assets and shall not be discharged within 60 days; or the SFC withdraws its approval of the Trustee as trustee of the Trust, the Manager may by notice in writing to the Trustee remove the Trustee from office. The removal will be effective on and from the date on which the appointment of a suitably qualified corporation as new trustee is to take effect by supplemental deed, subject to the approval of the SFC. Subject to the prior written approval of the SFC, the Manager may also, by giving not less than 90 days prior notice (or such shorter period of notice as the SFC may approve) in writing to the Trustee, remove the Trustee from the trusteeship of the Trust and appoint any other company qualified to act as trustee under the proper law of the Trust in its place by deed entered 46
into by the Manager and the new trustee. The removal of the Trustee and the appointment of its successor shall take effect simultaneously. The retiring Trustee shall execute such deeds and documents as shall be necessary to effect the transfer of the Trust Fund to the new trustee but without prejudice to the retiring Trustee s rights of indemnity (if any) under the proper law of the Trust. Removal of the Manager If any of the following events shall occur, namely:- (a) (b) (c) (d) the Manager shall go into liquidation (except a voluntary liquidation for the purpose of reconstruction or amalgamation upon terms previously approved in writing by the Trustee) or a receiver shall be appointed over any of its assets and shall not be discharged within 60 days; or the Trustee shall form the opinion for good and sufficient reason and shall so state in writing to the Manager that a change of Manager is desirable in the interests of the Unitholders; or the Unitholders of not less than 50% in value of the Units for the time being outstanding (for which purpose Units held or deemed to be held by the Manager or the Participating Dealer shall not be regarded as being outstanding) shall deliver to the Trustee in writing a request that the Manager should retire; or the SFC withdraws its approval of the Manager as manager of the Trust. the Trustee may, in the case of (a), by notice in writing and, in the case of (b) and (c), by not less than 3 months notice in writing to the Manager remove the Manager from office and upon service of such notice or expiry of the notice period, as the case may be, the Manager shall cease to be the Manager. If the authorisation of the Manager to act as the investment manager of the Trust is withdrawn by the SFC, the Manager s appointment under the Trust Deed shall be terminated as at the date on which the SFC s withdrawal of authorisation becomes effective. In the event that the Manager is removed by the Trustee, the Trustee shall appoint a new manager with the approval of the SFC. Inspection of Documents Copies of the following documents are available for inspection free of charge at the offices of the Manager and copies thereof may be obtained from the Manager at a cost of HK$150 per set of copy documents: (a) (b) (c) Trust Deed; Participation Agreement(s); and The most recent annual report and accounts of the Sub-Fund (if any) and the most recent interim report of the Sub-Fund (if any). Part XV of the Securities and Futures Ordinance Part XV of the Securities and Futures Ordinance sets out the Hong Kong disclosure of interests regime applicable to Hong Kong listed companies. The regime does not apply to unit trusts that are listed on the SEHK like the Trust. Consequently, Unitholders are not obliged to disclose their interests in the Sub-Fund. Anti-Money Laundering Regulations As part of the Manager s, the Trustee s and the Participating Dealer s responsibility for the 47
prevention of money laundering and to comply with all applicable laws to which the Manager, the Trustee, the Sub-Fund or the relevant Participating Dealer is subject, the Manager, the Registrar, the Trustee or the relevant Participating Dealer may require a detailed verification of an investor s identity and the source of payment of any applications for Units. Depending on the circumstances of each application, a detailed verification might not be required where: (a) (b) the investor makes the payment from an account held in the investor s name at a recognised financial institution; or the application is made through a recognised intermediary. These exceptions apply only if the financial institution or intermediary is within a country recognised by the Trustee and the Manager as having sufficient anti-money laundering regulations. Information available on the Internet The Manager will publish the estimated Net Asset Value per Unit on its website (www.dcfund.com.hk/dczc/jjcp/sub_product_01.jsp?fd=3071) each Dealing Day at no longer than fifteen (15) seconds interval from 9:30 a.m. (Hong Kong time) to 4:00 p.m. (Hong Kong time) (or during such other period(s) as the Manager may determine as appropriate). The Manager will also publish important news and information with respect to the Sub-Fund, both in the English and in the Chinese languages, on the Manager s website including: (a) (b) (c) (d) (e) (f) (g) (h) this Prospectus (as revised from time to time); the latest annual and semi-annual financial reports; any notices for material alterations or additions to the Prospectus or the Sub-Fund s constitutive documents; any public announcements made by the Sub-Fund, including information with regard to the Index, any notices of the suspension of the calculation of the Net Asset Value, any changes in fees and the suspension and resumption of trading; the identity of the Participating Dealers; the identity of each ALP Issuer and the Sub-Fund s percentage gross and net counterparty exposure to each ALP Issuer; the collateral management policy of the Sub-Fund; and information about the collateral, if any (updated on each Dealing Day). Information on the bid/ask price and the previous day s closing Net Asset Value in respect of Units will be disclosed on a real time basis on the information pages of the SEHK website. Notices All notices and communications to the Manager and Trustee should be made in writing and sent to the following addresses: Manager Da Cheng International Asset Management Company Limited Room 5811 Two International Finance Centre 8 Finance Street Central Hong Kong Trustee BOCI-Prudential Trustee Limited 12/F & 25/F, Citicorp Centre 18 Whitfield Road Causeway Bay Hong Kong 48
Waivers from the SFC The Sub-Fund has obtained from the SFC a waiver from compliance with the Code with respect to overweighting of investments in a constituent Security comprised in the Index. Details relating to the possibility of overweighting are set out in the section headed Investment Restrictions under Schedule 1 to the Prospectus. References to website The offer of the Units is made solely on the basis of information contained in this Prospectus. All references in this Prospectus to other websites and sources where further information may be obtained are merely intended to assist you to access further information relating to the subject matter indicated and such information does not form part of this Prospectus. None of the Manager, the Trustee or any of the Participating Dealers accepts any responsibility for ensuring that the information contained in such other websites and sources, if available, is accurate, complete and/or up-to-date, and no liability is accepted by the Manager, the Trustee and the Participating Dealers in relation to any person s use of or reliance on the information contained in these other websites and sources save, in respect of the Manager, its website www.dcfund.com.hk/dczc/jjcp/sub_product_01.jsp?fd=3071. You should exercise an appropriate degree of caution when assessing the value of such information. Enquiries or complaints Any investor enquiries or complaints should be submitted in writing to the Manager s office (at Room 5811, Two International Finance Centre, 8 Finance Street, Central, Hong Kong) and the Manager will respond to any enquiry or compliant in writing as soon as practicable. 49
TAXATION Hong Kong Taxation The following summary of Hong Kong taxation is of a general nature, for information purposes only, and is not intended to be an exhaustive list of all of the tax considerations that may be relevant to a decision to purchase, own, redeem or otherwise dispose of Units. This summary does not constitute legal or tax advice and does not purport to deal with the tax consequences applicable to all categories of investors. Prospective investors should consult their own professional advisers as to the implications of their subscribing for, purchasing, holding, redeeming or disposing of Units both under the laws and practice of Hong Kong and the laws and practice of their respective jurisdictions. The information below is based on the law and practice in force in Hong Kong at the date of this Prospectus. The relevant laws, rules and practice relating to tax are subject to change and amendment (and such changes may be made on a retrospective basis). As such, there can be no guarantee that the summary provided below will continue to be applicable after the date of this Prospectus. The Trust Profits Tax: As the Trust and the Sub-Fund have been authorised as a collective investment scheme by the SFC under Section 104 of the Securities and Futures Ordinance, the Trust and the Sub-Fund are exempt from Hong Kong profits tax. Stamp Duty: No Hong Kong stamp duty is payable by the Trust on an issue or redemption of Units if the redemption does not involve any sale or purchase for Hong Kong stamp duty purpose. Hong Kong stamp duty is ordinarily payable on the transfer of Hong Kong stock. Hong Kong stock is defined as stock the transfer of which is required to be registered in Hong Kong. As at the date of this Prospectus, the Sub-Fund does not buy or sell Hong Kong stock (the holdings of the Sub-Fund being ALPs) and it is not the Manager s intention to do so. The Unitholders Profits Tax: Unitholders who are Hong Kong resident will not be subject to any Hong Kong profits tax on distributions by the Trust in accordance with the practice of the Inland Revenue Department of Hong Kong (as at the date of this Prospectus) or any gains or profits made on the sale, redemption or other disposal of the Units which are capital in nature. Where the Hong Kong Unitholder is carrying on a trade, profession or business in Hong Kong, and derives gain on disposal of Units, such gain will be subject to profits tax in Hong Kong if it is of revenue and onshore nature. Stamp Duty: Approval was given by Financial Services and the Treasury Bureau upon listing of the Sub-Fund for remission or refund in full of stamp duty payable or paid in respect of any contract notes or instruments of transfer relating to transactions (including sale and purchase) in Units in the Sub-Fund. Investors pay no Hong Kong ad valorem stamp duty when the Sub-Fund issues or redeems Units. PRC Taxation The Sub-Fund Corporate Income Tax ( CIT ): The Manager and the Trustee intend to manage and operate the Trust in such a manner that the Trust should not be treated as a tax resident enterprise of the PRC or a non-tax resident enterprise with an establishment or place of business in the PRC for CIT purposes although no guarantee in this regard can be given. As such, it is expected that the Trust would only be subject to CIT on a withholding basis to the extent the Trust directly derives passive income with PRC source (e.g. dividend, interest or capital gains). As the Sub-Fund will hold ALPs (an offshore instrument) rather than the legal interest in A Shares, any distribution from or gains 50
realised on settlement of ALPs should also not be considered to be PRC sourced income. As such, PRC CIT should also not apply to the Sub-Fund, on income derived from disposition of ALPs. The Unitholders Individual Income Tax ( IIT ): Non-PRC national individual Unitholders should not be subject to IIT as a result of their investment in the Sub-Fund. There should be no PRC withholding taxes applicable to investment distributions from or gains realised on disposal of Units as such distributions and gains should not be considered to be PRC-sourced (because it is expected that the Trust will not be a tax resident enterprise of the PRC). Individual Unitholders who are domiciled in the PRC or non-prc national individual Unitholders who have resided in the PRC for five consecutive full years and stayed in the PRC for a full year in the sixth year will be subject to IIT on investment distributions derived from the Sub-Fund on a receipt basis. CIT: Corporate Unitholders who are considered to be non-tax resident enterprises without an establishment or place of business in the PRC should not be subject to CIT as a result of their investment in the Sub-Fund. There should also be no PRC withholding taxes applicable to investment distributions from the Trust to such Unitholders as such distributions would not be considered to be PRC-sourced (because it is expected that the Trust will not be a tax resident enterprise of the PRC). Corporate Unitholders who are considered to be: (i) tax resident enterprises of the PRC; or (ii) non-prc tax resident enterprises who have an establishment or place of business in the PRC (and where such establishment holds the Units as part of its business) would likely be subject to CIT (generally at 25%) on investment distributions derived from the Sub-Fund on an accrual basis. The QFIIs The Sub-Fund will obtain an economic exposure to the A Shares through the Manager acquiring or disposing the ALPs as if these were the relevant A Shares. The ALP Issuers may implement hedge arrangements on the ALPs through QFIIs, which would acquire or dispose of the underlying A Share to which the ALPs are linked. As the QFIIs are the legal owners of the A Shares under PRC law, any PRC taxes arising from the QFIIs investments in such securities would be legally borne by the QFII directly. Given that any PRC tax liabilities accruing to the QFII in respect of the securities to which the ALPs are linked arise because of the trading activities of the Sub-Fund, such tax liabilities may ultimately be recharged to and borne by the Sub-Fund and would likely have an economic effect on the value of the Sub-Fund. CIT: Under current PRC tax law, there are no specific rules or regulations governing the taxation of gains realised by a QFII on the disposal of A Shares, although a recent notice by the PRC s tax authority however confirmed that CIT is applicable on dividends paid by A Share companies to QFIIs. With no specific rules relating to QFIIs (other than the recent notice about dividends), the tax treatment for a QFII investing in A Shares is governed by the general taxing provisions of the CIT Law. Under the general taxing provision of the CIT Law, a foreign company such as a QFII holder should be subject to 10% PRC CIT on interest income, dividends and capital gains from PRC listed securities. This is on the basis that the QFII would be managed and operated such that it would not be considered a tax resident enterprise in China and it would not be considered to have a permanent establishment in the PRC to which the aforesaid income is attached. A tax treaty (if any) between the PRC and the country in which the QFII is a tax resident may further reduce the 10% CIT rate depending on the QFII s ability to meet the relevant requirements under the relevant tax treaty. To date, PRC CIT has been enforced on dividend and interest payments from PRC listed securities to QFIIs. However, as a matter of practice PRC CIT has not been strictly enforced on capital gains realised by QFIIs from sale of A Shares; this is notwithstanding that such gains are technically subject to the 10% CIT under the CIT law. 51
The ALP Issuers have however decided to withhold an amount representing the PRC CIT in respect of any capital gains which would be payable on an actual sale of the underlying A share of each ALP. Currently, Goldman Sachs International and Citigroup Global Markets Holdings Inc. each has indicated that the amounts withheld will be retained by it for a period of up to 5 years, pending further clarification of the tax rules and tax collection measures adopted by the PRC authorities. In the event that, at the end of the 5-year period, such CIT on capital gains has not been enforced against it (or its affiliate), or the amount withheld is greater than the actual capital gains tax liability, the amount withheld (or the excess withholding) will be returned to the Sub-Fund, although the Sub-Fund will remain liable for any attributable tax. Accrued interest is payable on the amounts withheld and is payable to the Sub-Fund on a periodic basis. Merrill Lynch International & Co. C.V. has confirmed that it will retain the amounts withheld regardless of whether, and the rate of which, PRC CIT in respect of capital gains is chargeable (and the Sub-Fund will not be entitled to receive any return of the amounts so withheld). To the extent that any actual PRC tax liability in respect of capital gains exceeds the amounts withheld by Merrill Lynch International & Co. C.V., such PRC tax liability will be borne by it (rather than the Sub-Fund). Investors should refer to the latest financial report of the Sub-Fund for details of the amounts withheld by ALP Issuers on account of capital gains, as well as the amount of any crystallised and uncrystallised gains. For accounting purposes, on the basis that the ALP Issuers will already be withholding the 10% CIT as described above, the Manager does not presently propose to further accrue for an additional 10% CIT referred to above to avoid any double deduction but is keeping the matter under review. Business Tax and stamp duty: Under PRC laws and regulations, QFIIs are specifically exempt from PRC Business Tax on gains arising from trading in A Shares. There is no PRC Business Tax on dividend income or profit distributions on equity investment in the PRC. From 19 September 2008 onwards, only the seller is taxable to stamp duty at the rate of 0.1% on the sale of PRC listed shares and the buyer is not liable to any stamp duty. 52
SCHEDULE 1 INVESTMENT RESTRICTIONS, SECURITY LENDING AND BORROWING Investment Restrictions If any of the restrictions or limitations set out in this Schedule 1 is breached, the Manager will make it a priority objective to take all necessary steps within a reasonable period to remedy such breach, taking into account the interests of the Unitholders. The Trustee will take reasonable care to ensure compliance with the investment and borrowing limitations set out in the constitutive documents and the conditions under which the Trust was authorised. The investment restrictions applicable to the Sub-Fund (unless expressly waived by the SFC) that are included in the Trust Deed are summarised below: (a) (b) (c) (d) (e) (f) (g) no more than 10% of the latest available Net Asset Value of the Sub-Fund and the Trust may be invested in Securities issued by any single issuer save as permitted by Chapter 8.6(h) and as varied by Appendix I of the Code (see the Note below); the Sub-Fund may not collectively hold more than 10% of any ordinary shares issued by any single issuer); no more than 15% of the latest available Net Asset Value of the Sub-Fund may be invested in Securities which are neither quoted nor listed on a Market; except as permitted by Chapter 8.6(i) of the Code (see the Note below), no more than 30% of the latest available Net Asset Value of the Sub-Fund may be invested in government and other public Securities of the same issue. Subject to the foregoing, the Sub-Fund may invest all of its assets in government and other public Securities in at least six different issues; the Sub-Fund may not hold options and warrants in terms of the total amount of premium paid at more than 15% of its latest available Net Asset Value, except that this 15% limit will not apply to options and warrants acquired for hedging purposes; no more than 20% of the latest available Net Asset Value of the Sub-Fund may be invested in (i) commodities including physical commodities, and other commodity-based investments and excluding, for this purpose, Securities of companies engaged in the production, processing or trading of commodities) and (ii) futures contracts on an unhedged basis (but without prejudice to the Manager s right to take positions in Futures Contracts in order to protect the assets of the Sub-Fund against adverse and unusual currency or market fluctuations); no more than 10% of the latest available Net Asset Value of the Sub-Fund may be invested in units or shares in other collective investment schemes. In addition, the Trust is subject to the following additional restrictions. The Manager shall not for the account of the Trust or the Sub-Fund: (a) (b) invest in any type of real estate (including buildings) or interests in real estate (including options or rights but excluding shares in real estate companies and interests in real estate investment trusts (REITs) that are listed on stock exchanges); make short sales unless (i) the Sub-Fund s liability to deliver Securities does not exceed 10 % of its latest available Net Asset Value; and (ii) the Security which is to be sold short is actively traded on a market where short selling activity is permitted; 53
(c) (d) (e) (f) (g) (h) write uncovered options; write a call option over investments held by the Trust for a Sub-Fund, the total value of which, in terms of the prices at which all such options may be exercised, exceeds 25% of the Sub-Fund s Net Asset Value; invest in any Security or other property which involves the assumption of any liability by the Trust which is unlimited; assume, guarantee, endorse or otherwise become directly or contingently liable for or in connection with any obligation or indebtedness of any person without the prior written consent of the Trustee; invest in any Security of any class in any company or body if any director or officer of the Manager individually owns more than 0.5%, or collectively they own more than 5%, of the total nominal amount of all the issued Securities of that class; and invest in any Security where a call is to be made, unless the call could be met in full out of cash or near cash from the Trust. Note: The investment restrictions set out above apply to the Sub-Fund, subject to the following: A collective investment scheme authorised by the SFC under the Code is usually restricted from making investments which would result in the value of that collective investment scheme s holdings of the Securities of any single issuer exceeding 10% of the collective investment scheme s total net asset value. Given the investment objective of the Sub-Fund and nature of the Index, the Sub-Fund is allowed under Chapter 8.6(h) of the Code to hold investments in Securities of any single issuer exceeding 10% of the Sub-Fund s latest available Net Asset Value if any constituent Securities account for more than 10% of the weighting of the Index and the Sub-Fund s holding of any such constituent Securities does not exceed their respective weightings in the Index, except where the weightings are exceeded as a result of changes in the composition of the Index and the excess is only transitional and temporary in nature, or otherwise approved by the SFC. (Subject to Chapter 8.6(h) of the Code, more than 30% of the latest available Net Asset Value of the Trust may also be invested in government and other Securities of the same issue). However, the Manager may cause the Sub-Fund to deviate from the index weighting (in pursuing a representative sampling strategy) under Appendix I of the Code (the ETF Guidelines ) on condition that the maximum deviation from the index weighting of any constituent will not exceed 4% or such other percentage as determined by the Manager after consultation with the SFC. Under the ETF Guidelines, the Manager shall report to the SFC on a timely basis if there is any non-compliance with this limit. The annual and semi-annual reports of the Sub-Fund shall also disclose whether or not such limit has been complied with during such period and account for any non-compliance in those reports. Security Lending The Trustee may, at the request of the Manager, engage in Security lending, in respect of any Securities of the Sub-Fund on such terms as may be acceptable to the Manager through the agency of or directly with any person acceptable to the Manager (including the Manager or the Trustee or any Connected Person of either of them), and such person shall be entitled to retain for its own use and benefit any fee it receives on a commercial basis in connection with such arrangement provided always that: (a) any Security lending agreement is entered into only if (i) the relevant Securities lent are fully paid-up Securities listed on any stock exchange, over-the-counter market or other organised Securities market that is open to the international public and on which such Securities are regularly traded; (ii) the amount of the consideration (including the value of any collateral security) given for the relevant Securities exceeds the value of such securities at any one time based on daily marked to market values; (iii) any incremental income earned from such an agreement will be accrued to the Sub-Fund (after fee split between the Sub-Fund and the security lending agent, if applicable); (iv) the 54
counterparts' financial standings are equivalent to at least A2(Standard & Poor s)/p2 (Moody s)/f2 (Fitch) (either based upon reputable credit rating agencies or in the reasonable opinion of the Manager); and (v) the Manager is entitled at any time to terminate the agreement and demand the immediate return of all securities lent; (b) (c) any Security lending agreement is entered into only if collateral in such amount and in such form as prescribed by the Manager from time to time has been provided. Unless otherwise determined by the Manager, collateral for Securities lent may take the form of government stock, government treasury bills, banker's acceptances, certificates of deposit, bonds, equities, letters of credit or cash collateral; and the value of the Securities to be loaned, together with the value of all other Securities which are the subject of a loan by the Sub-Fund does not exceed 90% (or such other percentages as the Manager may determine) of the latest available Net Asset Value of the Sub-Fund. The Trustee may on behalf of the Sub-Fund pay such fees out of the Trust Fund to third parties for services in arranging such loans as may be permitted by applicable law. Any such fees paid to the Manager, Trustee or any Connected Person will be disclosed in the annual reports of the Trust. Borrowing Policy Borrowing against the assets of the Sub-Fund is allowed up to a maximum of 25% of its latest available Net Asset Value. The Trustee may at the request of the Manager borrow for the account of the Trust any currency, and charge or pledge assets of the Trust, for the following purposes: (a) (b) (c) facilitating the creation or redemption of Units or defraying operating expenses; enabling the Manager to acquire Securities for the account of the Sub-Fund; or for any other proper purpose as may be agreed by the Manager and the Trustee. 55
SCHEDULE 2 INDEX AND DISCLAIMER Index This section is a brief overview of the Index. It contains a summary of the principal features of the Index and is not a complete description of the Index. In case of inconsistency between the summary of the Index in this section and the complete description of the Index, the complete description of the Index prevails. As of the date of this Prospectus, the summary of the Index in this section is consistent with the complete description of the Index. Information on the Index appears in the website identified below in "Further Information". Such information may change from time to time and details of the changes will appear on that website. The Index measures the performance of the 50 largest A Shares issuers which are constituents of the CSI 800 Index (the Parent Index ) from the consumer discretionary and consumer staple industries. The Parent Index is a free float market capitalisation-weighted index which measures the performance of A Shares traded on the Shanghai Stock Exchange or the Shenzhen Stock Exchange. The Parent Index consists of the 800 stocks with the largest market capitalisation and liquidity from the entire universe of listed A Share companies in the PRC. The Index and the Parent Index are quoted in Rmb. Generally, consumer discretionary sector refers to a category of industries that has the characteristics of an obvious cyclical nature on the degree of spending and amount of consumption of the products and services in such industries. It is made up of companies which deal with products or services that are not necessities. The main industries that are classified as consumer discretionary include consumer durables and apparel such as automobiles and components, white goods, recreation equipment, high-end clothing, luxury goods, media, wholesale and retail trade, hotels and restaurants. Consumer staple sector refers to a category of consumer industries that do not fall within the consumer discretionary sector, and those industries have a consumer spending cycle that is not apparent. These include food and beverages, food and staples retailing, prescription drugs and household and personal products. The classifications between consumer discretionary and consumer staple industries by CSI are substantially similar to The Global Industry Classification Standard adopted by Standard & Poor's, other than some minor differences in the approach taken by CSI in respect of the classification of listed companies. As of 30 March 2012, the Index had a total free-float market capitalisation of Rmb 732.68 billion and 50 constituents, with "consumer staple" industries representing approximately 49.55% and "consumer discretionary" industries representing approximately 50.45% of the Index. Index Calculation The Index is calculated and disseminated in Rmb on a real-time basis and is maintained by China Securities Index Co., Ltd ( CSI or the Index Provider ), a joint-venture established on 25 August 2005 between the Shanghai Stock Exchange and the Shenzhen Stock Exchange, which specializes in the management of securities indices and the provision of related services. The Manager (and each of its Connected Persons) is independent of CSI. The Index was launched on 28 October 2009 and had a base level of 1,000 on 31 December 2004. The Index is calculated using a Paasche weighted composite price index formula. The formula is: Current Index = Current Adjusted Market Cap of Constituent 56 divisor x 1000
Here, Adjusted Market Cap = (Price x Adjusted No. of Shares x Weight Cap Factor). The calculation of Adjusted No. of Shares is the same with that of the CSI 800 Index. Weight Cap Factor is between 0 and 1. The weight of individual constituent is capped at 15%. The divisor is a figure that represents the total issued share capital of the Index at the base date. The divisor can be adjusted to allow changes in the issued share capital of individual constituents share capital after the base date (such as additions and deletions to the index, rights issues, share buybacks and issuance's, and spin-offs) to be made without distorting the index. Weight Cap Factor The weight cap factor is adjusted semi-annually together with constituents periodical review. The adjustment will be implemented on the first trading day of January and July. The adjusted market cap of the last trading day before the review is the basis for the calculation of the weight cap factor. The weight cap factor will also be adjusted when constituents are temporarily adjusted. If the share structure of a constituent changes dramatically or its weight changes notable, CSI will submit the changes to the committee to decide whether to adjust the weight cap factor. Index Advisory Committee CSI has established an index advisory committee (the Index Advisory Committee ), which is responsible for the evaluation, consulting and examination of CSI index methodologies. Index Selection Universe The selection universe of the Parent Index (the Selection Universe ) includes all the A Shares (each a Stock ) listed on the Shanghai Stock Exchange or the Shenzhen Stock Exchange satisfying the following conditions: - The Stock has been listed for more than three months at the time it is considered for inclusion in the Parent Index. If it has been listed for less than three months, it will be considered for inclusion in the Selection Universe if its daily average total market value since its initial listing has ranked within the top 30 companies in all the A Shares; - The Stock is not designated for special treatment or potential delisting by any of the CSRC, the Shanghai Stock Exchange or the Shenzhen Stock Exchange as a result of continuous financial losses; - The company issuing the Stock has good performance without serious financial problems or any history of breach of laws and/or regulations in the most recent year; - The Stock price does not show strong evidence of price manipulation, e.g. a large price volatility; - The Stock is not considered as inappropriate for inclusion in the Parent Index by the Index Advisory Committee. The Index includes all the top 50 constituents of the Parent Index which belong to the consumer discretionary sector or consumer staple sector (each an Index Constituent ), as determined in accordance with the industry classification used by CSI. Index Periodical Review The Index Constituents are reviewed when the constituents of the Parent Index are reviewed. 57
The constituents of the Parent Index are reviewed every 6 months by the Index Advisory Committee, which usually meets in early June and December every year. The Index Constituents are adjusted according to the periodical review and any changes to the composition of the Index are implemented on the first trading day of January and July in each year. The number of constituents of the Parent Index adjusted at each periodical review will not exceed 10% and CSI has adopted buffer zone rules in order to minimize the Parent Index turnover. Index Adjustments The constituents of the Index is adjusted in accordance with the constituent adjustment of the CSI 800 Index. Necessary adjustments are made by CSI when some corporate events happen so as to maintain the representativeness and investability of the Index. Such events include without limitation the bankruptcy, restructuring, merger, acquisition and spin-off, of an Index Constituent issuer and the delisting, temporary suspension from trading and re-issuance, of an Index Constituent. If an Index Constituent is removed from or included in the Parent Index due to a corporate action, it will be removed from the CSI China Mainland Consumer index simultaneously. CSI maintains the industry classification of listed companies on an ongoing basis. CSI reviews the industry classification of listed companies in May each year and will publish the latest classification before constituents periodic review. If the main business structure of a listed company changes due to a major corporate action, CSI will review and adjust the industry classification of the company accordingly. In general, CSI will publicise Index Constituent and industry classification adjustments lists as soon as practicable after the adjustment are decided and before their implementation. Further Information As at 30 April 2012, the 10 largest constituents of the Index represented approximately 55.997% of the total market capitalisation, based on total shares in issue, of the Index, and were as follows: 58
Rank Constituent Name % of Index 1 Kweichow Moutai Co Ltd 贵 州 茅 台 11.340% 2 Wuliangye Yibin Co Ltd 五 粮 液 8.192% 3 Jiangsu Yanghe Brewery Joint-stock Co Ltd 江 苏 洋 河 酒 厂 股 份 有 限 公 司 5.690% 4 Gree Electric Appliances Inc of Zhuhai 格 力 电 器 5.377% 5 Suning Appliance Co Ltd 苏 宁 电 器 5.235% 6 Inner Mongolia Yili Industrial Group Co Ltd 内 蒙 古 伊 利 实 业 集 团 股 份 有 限 公 司 4.450% 7 SAIC Motor Co Ltd 上 海 汽 车 4.288% 8 Luzhou Lao Jiao Co Ltd 泸 州 老 窖 3.852% 9 Guangdong Midea Electric Appliances Co Ltd 美 的 电 器 3.459% 10 Shenzhen Overseas Chinese Town Co Ltd 華 僑 城 A 2.682% The present mix of industries represented in the Index are as follows: The Bloomberg ticker is SH000942 whereas the Reuters Code is CSIMCI. 59
Further information on the Index can be found on the CSI website (http://www.csindex.com.cn), the Shanghai Stock Exchange website (http://www.sse.com.cn) and the Shenzhen Stock Exchange website (http://www.szse.cn). Disclaimer IMPORTANT CSI INDICES ARE COMPILED AND CALCULATED BY CHINA SECURITIES INDEX CO., LTD ( CSI ). CSI WILL APPLY ALL NECESSARY MEANS TO ENSURE THE ACCURACY OF THE CSI CHINA MAINLAND CONSUMER INDEX (THE INDEX ). HOWEVER, NEITHER CSI NOR THE SHANGHAI STOCK EXCHANGE NOR THE SHENZHEN STOCK EXCHANGE SHALL BE LIABLE (WHETHER IN NEGLIGENCE OR OTHERWISE) TO ANY PERSON FOR ANY ERROR IN THE INDEX AND NEITHER CSI NOR THE SHANGHAI STOCK EXCHANGE NOR THE SHENZHEN STOCK EXCHANGE SHALL BE UNDER ANY OBLIGATION TO ADVISE ANY PERSON OF ANY ERROR THEREIN. ALL COPYRIGHT IN THE INDEX VALUES AND CONSTITUENTS LIST VESTS IN CSI. EITHER CSI OR THE SHANGHAI STOCK EXCHANGE OR THE SHENZHEN STOCK EXCHANGE WILL APPLY ALL NECESSARY MEANS TO ENSURE THE ACCURACY OF THE INDEX. HOWEVER, NEITHER CSI NOR THE SHANGHAI STOCK EXCHANGE NOR THE SHENZHEN STOCK EXCHANGE WILL GUARANTEE TO INSTANTANEITY, COMPLETENESS AND ACCURACY OF THE CONTENT OF THE INDEX, AND SHALL NOT BE LIABLE FOR ANY FAULT OR LOSS SUFFERED BY THE DA CHENG CSI CHINA MAINLAND CONSUMER TRACKER ( THIS IS A SYNTHETIC ETF) AS A RESULT OF ANY DELAY, OMISSION, ERROR OR OTHER FAULTS IN THE CONTENT OF THE INDEX. 60
SCHEDULE 3 INFORMATION ABOUT ALPS ALP Issuer The role of the ALP Issuer is to issue the ALPs to be held by the Sub-Fund. The ALP Issuer must be an institution with a minimum paid up capital of the equivalent of HK$150,000,000 and a minimum credit rating in respect of senior debt determined at the discretion of the Manager from time to time (taking into account factors such as prevailing market conditions, the credit ratings of other entities with comparable financial standing and the credit ratings of the holding company of the ALP issuer (if applicable)) and a member company of a group including a bank prudentially supervised in a jurisdiction reasonably acceptable to the Trustee and the Manager. In the event that the ALP Issuer s obligations to the Sub-Fund is guaranteed by a guarantor (the Guarantor ), then the Guarantor (but not the ALP Issuer) must fulfill these requirements. As a general requirement, the Manager will expect that the relevant ALP issuer or the Guarantor of the relevant ALP (if any) should have a minimum credit rating equivalent to investment grade. In the event that the credit rating of the ALP Issuer or the Guarantor (as the case may be) in respect of senior debt is no longer acceptable to the Manager, then the Manager will notify Unitholders (and the SFC) and will no longer accept ALPs from that ALP Issuer, unless additional collateral is provided as the Manager considers appropriate, until such time as the credit rating returns to the minimum credit rating acceptable to the Manager. The Manager may take any other action reasonably and practicably available to it in the event of a credit event affecting the ALP Issuer or its Guarantor potentially including but not limited to, suspending dealing in the primary and/or secondary markets, managing down the exposure to an ALP Issuer through redemptions and creations, liquidating ALPs for cash and revaluing the ALPs. The Manager may ultimately decide to terminate the Sub-Fund. There can be no assurance that any action by the Manager will avert any loss to the Sub-Fund. A list of ALP Issuers together with the relative exposure to each ALP Issuer and information on collateral is available at www.dcfund.com.hk/dczc/jjcp/sub_product_01.jsp?fd=3071. As at the date of this Prospectus, the ALP issuers are: ALP Issuer Place of incorporation Guarantor Standard & Poor s credit ratings of the ALP Issuer or the Guarantor (as appropriate) Merrill Lynch International & Co. C.V. Netherlands Bank of America Corporation A- 1 Goldman Sachs International England and Wales The Goldman Sachs Group, Inc. A- 2 Citigroup Global Markets Holdings Inc. The United States of America None A- 3 1 Standard & Poor s credit rating of the Guarantor as at 30 April 2012 2 Standard & Poor s credit rating of the Guarantor as at 30 April 2012 3 Standard & Poor s credit rating of the ALP Issuer as at 30 April 2012 61
Information about Goldman Sachs International The principal objects of Goldman Sachs International ( GSI ) include carrying on the business of stock brokers or dealers in securities, investment banking and investment management and advising, subscribing for securities or investments, underwriting, or investing the money of GSI. GSI is regulated by the Financial Services Authority in the United Kingdom, and is an authorised person under the Financial Services and Markets Act 2000 of the United Kingdom. GSI has a paid-up capital in excess of the equivalent of HK$150,000,000. Further information on GSI can be found at www.gs.com. Information about The Goldman Sachs Group, Inc. The Goldman Sachs Group, Inc. ( GS Group ) is an investment banking, securities and investment management firm that provides a range of services to a client base that includes corporations, financial institutions, governments and high net worth individuals. GS Group is a bank holding company and a financial holding company regulated by the Board of Governors of the United States Federal Reserve System (Federal Reserve Board) under the U.S. Bank Holding Company Act of 1956. It has a paid-up capital in excess of the equivalent of HK$150,000,000 and a long-term debt credit rating of A by Standard & Poor s at 29 June 2010. GS Group is a corporation established under the laws of the State of Delaware and its principal executive offices are located at 200 West Street, New York, New York 10282. Further information on GS Group can be found at www.gs.com. Information about Merrill Lynch International & Co. C.V. Merrill Lynch International & Co. C.V. engages primarily in the issuance of warrants and related financial instruments and the distribution of managed fund products. Bank of America Corporation is the ultimate parent of Merrill Lynch International & Co. C.V.. Merrill Lynch International & Co. C.V. s registered office and business address is at Kaya W.F.G. (Jombi) Mensing 36, Curaçao, Netherlands Antilles. Information about Bank of America Corporation Bank of America Corporation ( BAC ) is a Delaware corporation, a bank holding company and a financial holding company. BAC provides a range of banking and non-banking financial services and products. As a registered bank holding company and financial holding company, BAC is subject to the supervision of, and regular inspection by, the Board of Governors of the United States Federal Reserve System (Federal Reserve Board). BAC has a minimum paid-up capital in excess of the equivalent of HK$150,000,000 and has a Standard & Poor s credit rating of A as at 29 June 2010. BAC s registered office in Delaware is at the Corporation Trust Company, Corporate Trust Center, 1209 Orange Street, Wilington, Delaware 19801. BAC s headquarters and principal place of business are located at 100 North Tryon Street, Charlotte, North Carolina 28255, United States. Further information on BAC can be found at www.bankofamerica.com. Information about Citigroup Global Markets Holdings Inc. Citigroup Global Markets Holdings Inc. ( CGMHI ) has a minimum paid-up capital of the equivalent of HK$150,000,000 and a credit rating in respect of senior debt of A- by Standard & Poor s as at 11 April 2012. CGMHI is a wholly-owned subsidiary of Citigroup Inc. As a registered bank holding company and financial holding company, Citigroup Inc. is regulated and supervised by the Board of Governors of the Federal Reserve System (FRB) in the United States. Citigroup Inc. s nationally chartered subsidiary banks, including Citibank, N.A., are regulated and supervised by the Office of the Comptroller of the Currency (OCC) and its state-chartered depository institution by the relevant State s banking department and the Federal Deposit Insurance Corporation (FDIC). Further information on Citi can be found at www.citigroup.com. 62
Exposure to ALP Issuers The Manager manages the Sub-Fund s counterparty risk exposure to each ALP Issuer. The Manager will from time to time, in consultation with the Trustee, seek to implement measures to mitigate the exposure to an ALP Issuer. Such measures include seeking to obtain collateral (such as Securities and cash) from the ALP Issuer (or an affiliate) with a view to ensuring that there is no uncollateralized counterparty risk exposure to the ALP Issuers on a daily marked to market basis and/or the orderly disposal of relevant ALPs. The value of any Security provided as collateral will also be subject to the single issuer limit of 10% of Net Asset Value. For details, please see Collateral under the section headed Summary in this Prospectus. Investors should note that such measures may involve risks of their own including settlement, operational and realisation risks. The Sub-Fund may incur additional fees, charges and expenses as a result of the employment of such measures. There can be no assurance that the Manager can always implement measures to ensure that there is no uncollateralized counterparty risk exposure to each ALP Issuer in an orderly and timely way. At various times, full collateralisation of the counterparty risk exposure related to one or more ALP Issuers may not be achievable. In these circumstances the Manager may, in consultation with the Trustee, take such other action (if any) as it considers appropriate and reasonably practicable. Issuance So long as the ALP Issuers honour their obligations under the ALPs held by the Sub-Fund, the commercial terms of the ALPs should deliver substantially the same economic performance to the Sub-Fund as holding the relevant underlying A Share or Index, before deduction of costs and expenses charged by the relevant ALP Issuer. Actual performance may vary, in practice, because the valuation of each ALP will be determined by a calculation agent appointed by the ALP Issuer. There can be no guarantee that one calculation agent, valuing an ALP issued by a particular ALP Issuer, will arrive at the same valuation as another calculation agent valuing an ALP issued by a different ALP Issuer notwithstanding that both ALPs are referenced against the same underlying A Share. The ALPs are Hong Kong dollar (HK$) denominated which may be unlisted or, listed on the Luxembourg Stock Exchange and cleared and settled through Euroclear and Clearstream. Each ALP Issuer or any of its Connected Person(s) may, but is not obliged, to hedge its exposure arising from ALPs it has issued. Where an ALP is hedged the Sub-Fund has no proprietary or security interest over any assets underlying such hedge and the cost of unwinding the hedge is charged to the Sub-Fund. Duration The duration of each of the ALPs is agreed with the ALP Issuer. The issuers of the ALPs have agreed to use their best efforts to extend the duration of the ALPs for an additional term. Notwithstanding the above, the obligations of an ALP Issuer to sell ALPs or to extend the duration of the ALPs or to issue further ALPs from time to time are subject to certain qualifications, including (a) normal market conditions, (b) limits imposed on QFIIs in relation to the holding of A Shares, (c) any limit imposed by the Manager on the issue of ALPs by the ALP Issuer, (d) any material changes to PRC laws and regulations relating to investment in PRC securities such that the ALP Issuer is unable or unwilling to offer or issue further ALPs, (e) it ceases to be economically viable for the relevant ALP Issuer to issue ALPs or to offer ALPs, or (f) the relevant ALP Issuer will incur materially increased costs in order to perform its obligations. If as a consequence the Manager is unable to implement its investment strategy or implement any other feasible strategy, the Manager may terminate the Sub-Fund. 63
Valuation The ALPs will usually be valued by a Connected Person of the relevant ALP Issuer or the ALP Issuer itself. The calculation agent is appointed under the terms governing the ALPs. Under the terms of each ALP, the calculation agent determines the cash settlement amount of the ALP. The calculation agent will determine the value of the ALP in HK dollars (no later than 5.00 pm) at the end of each Business Day provided normal market conditions exist. Indicative prices for the ALPs are quoted continuously by the calculation agent during the PRC market hours on a designated Bloomberg page provided normal market conditions exist. These prices allow a holder of an ALP to determine an indicative price in Hong Kong dollars of that ALP. The issue and settlement price of each ALP is calculated by reference to the Rmb price of the relevant underlying Index (or the relevant underlying A Share or basket of A Shares) (converted to Hong Kong dollars) plus fees. The value of each ALP represents the Hong Kong dollar equivalent of the official closing price of the Index or the relevant A Shares, adjusted for transactions costs. A Hong Kong dollar amount equal to any cash dividend paid on the underlying A Shares of the Index will be paid to the Sub-Fund as the holder of the relevant ALPs. In the event of a stock dividend on the underlying A Shares, either additional ALPs will be distributed to the Sub-Fund for zero consideration or a cash value will be paid. In the event of a rights issue on the underlying A Shares, the Sub-Fund may be required to pay the equivalent of the subscription price and will receive additional ALPs or in certain circumstances a cash payment. The Sub-Fund is generally required to bear all taxes and expenses including depositary charges transaction or exercise charges which may be or would be (i) incurred in connection with the exercise or redemption of the ALPs and/or any payment and/or delivery in respect thereof, (ii) incurred by the ALP Issuer or its affiliate had such entity established unwound or varied any underlying related hedging arrangements in respect of the ALP; (iii) withheld by the PRC (or any political subdivision of taxing authority thereof or therein); or (iv) payable in the PRC by or on behalf of a foreign investor or its agent. Any such amounts are ordinarily built into the price of the ALPs. In order to ensure that the Net Asset Value of the Sub-Fund reflects the proper value of the ALPs, the Trustee has agreed to conduct daily tolerance checks of selected ALPs following the methodology set out in the ALPs. In the event of any discrepancy as between the price of the ALP quoted by the calculation agent and the determination by the Trustee of the same, the Trustee will report such discrepancy to the Manager who will seek to reconcile the difference with the assistance of the relevant ALP Issuer. Settlement ALPs provide for settlement upon expiry or redemption and certain ALPs provide for their settlement at any time before their expiry or redemption date. Settlement may presently only be made in cash although certain ALPs provide for the possibility of physical settlement (in addition to cash settlement) in the event that the PRC restrictions on foreigners owning A Shares are changed to permit this. The amount payable by the ALP Issuer at settlement is usually determined on the valuation date or in certain circumstances during the valuation period. In relation to certain ALPs, a notional exercise price per ALP is payable by the holder when exercised. In addition to redemption described above, each Participating Dealer and/or ALP Issuer has agreed to repurchase ALPs at the request of the Manager from time to time. Prospective investors attention is drawn to Risk inherent in an investment in ALPs. 64