| “ADM” | active discount management |
| “Board” | the board of directors of CMCDI |
| “Chapter 21 Companies” | the investment companies listed under Chapter 21 of the Listing Rules |
| “CMCDI” or “the Company” | China Merchants China Direct Investments Limited |
| “CMG” | the China Merchants Group, a substantial shareholder of CMCDI |
| “Director(s)” | the director(s) of CMCDI |
| “IMD&A” | investment manager’s discussion and analysis |
| “IRR” | internal rate of return |
| “Listing Rules” | the Rules Governing the Listing of Securities on the SEHK |
| “NAV” | net asset value |
| “Prospectus” | the prospectus dated 15 July 1993 issued by CMCDI |
| “SEHK” | The Stock Exchange of Hong Kong Limited |
- Investment companies such as CMCDI can list their securities on the SEHK under Chapter 21 of the Listing Rules. They are commonly referred to as Chapter 21 Companies.
- An investment company is one whose principal business is investment and its investment instruments include securities (listed or unlisted), warrants, money market instruments, bank deposits, currency investments, commodities, options, futures contracts and precious metals and other collective investment schemes.
- A Chapter 21 Company must adhere to certain restrictions and disclosure obligations, such as not holding more than 30% stake in any investees, a reasonable spread of investments, and periodically disclosing the NAV and top ten investments.
- In the late 1980s, in order to meet the capital needs of domestic economic construction and development, and to take advantage of Hong Kong's financing advantages, the Company was created to provide Hong Kong and international investors access to the “untapped” China market for private equity investments. As an investment company supported by CMG, a large central state-owned enterprise that contributed significantly to the China’s modernization, the Company has a comparative advantage in sourcing and managing private equity investments in China.
- The investment objective since CMCDI inception is to focus on investing in China aiming to acquire quality investments, principally in unlisted enterprises.
- The Company’s strategy is adjusted to adapt the changing Chinese economy. The Company develops and has acquired a number of diversified interests in the sectors of financial services; culture, media and consumption; information technology; manufacturing; energy and resources; medical; etc. And the Company’s future investment focus is on the financial industry with an emphasis on digital finance, on emerging technology industries featuring AI, on great cultural industry with an emphasis on culture and tourism, and on great healthcare industry with an emphasis on medicine and healthcare. The Company continues to explore the means for proper participation in investments in potential listed companies, as guided by our direct investment concepts.
- As an investment strategy, the Company may invest no more than 10% of its NAV in China-concept shares through the secondary securities market (such limit does not apply to participation in initial public offerings in the capacity as cornerstone investors and investments in unlisted interests which are subsequently converted into listed securities).
- CMCDI values all its investees’ interests using the fair value approach, with the fair value through profit or loss.
- For listed interests / securities, the fair value is determined by referencing market bid prices and may include a liquidity discount if trading restrictions apply.
- For unlisted interests / securities, an independent valuation / appraisal will be conducted using various techniques, including comparable transactions and comparable listed peers.
- CMCDI’s auditor will review the valuation results and provides their review / audit opinion to the Board.
- According to our internal control policy and procedures, for business transactions in which CMG has interests, approval procedures set out in the Prospectus under the section of “Potential Conflicts of Interest” shall be followed.
- In addition, CMCDI is listed on the SEHK, and governed by the Listing Rules in respect of any transactions among connected persons.
- The Company aims to provide shareholders and potential investors with clear and transparent disclosures, including:
(a) Monthly NAV per share; (b) Quarterly total assets breakdown; (c) Annual / interim financial results; (d) Annual / interim reports, including IMD&A on each investment; and (e) Voluntary announcements on new unlisted investments / full exit of unlisted investments. - It is worth noting that disclosure of financial information of CMCDI’s investees do subject to possible time lag and disclosure constrains, particularly for unlisted investments as we require their consent for disclosures. As such, we try our best efforts to provide qualitative information in the IMD&A regarding the business operations of each investee for the best possible transparent disclosure.
- CMCDI is actively managed, and no benchmark is used for determining or constraining the composition of the investment portfolio.
- As stated in the annual report, CMCDI faces various risks and uncertainties in its operations. Taking into account the operations, the key risks and uncertainties considered to be faced by CMCDI are listed below (for details, please refer to the annual report). Please note that in addition to those listed below, CMCDI may also be exposed to other risks and uncertainties:
(a) Economic risk (b) Market competition risk (c) Operation risk (d) Stock market risk (e) Legal uncertainty (f) Policy and regulatory risk (g) Exchange rate fluctuation risk (h) Foreign exchange control risk
- CMCDI’s share price is affected by the interaction of supply and demand and based on ever-changing investor sentiment and risk appetite, as well as the performance of CMCDI’s investment portfolio.
- The Board has recognized the concerns of share price discount among shareholders. Though it is not uncommon for such discount to exist in listed closed-end funds / investment companies on the major exchanges, the Board did have taken certain actions in the past in the interests of shareholders:
(a) Introduced quarterly total assets breakdown for greater transparency. (b) Made voluntary announcements on new unlisted investments / full exit of unlisted investments. (c) Continued dividend distributions: yearly distribution since the financial year 2009 and introduced first special dividend in the same year as well. (d) Discount management: conducted a tender offer in 2013 as part of discount management. (e) Held meetings with institutional investors, to increase market visibility and dialogue with shareholders / investors. (f) Introduced projects news on the website, to let shareholders / investors know the latest development of investees. - More recently, the Board has commissioned an external financial adviser to analyze and evaluate an array of measures in order to enhance shareholders’ value. Since then, the Board received a number of recommendations. After much discussion and consideration, the Board sees the following actions that could be taken in order to narrow the gap between the share price and NAV:
(a) Dividend distribution stability and visibility: The Board will continue to actively manage CMCDI’s cash allocation to meet the distribution requirements and the distribution frequencies effectively, pending the availability of realization proceeds from future divestments and subject to relevant laws, rules and regulations in relation to cash remittance back to Hong Kong. (b) Share buy-backs / Special dividends: Beyond 2025, CMCDI may consider return of realization profits to its shareholders through either special dividends or on-market share buy-backs.
- The Board notices some listed closed-end funds / investment companies implement ADM. However, compared to those companies, the Company faces a number of operational limitations when implementing ADM:
(a) It is difficult to determine the “reasonable” level of share price discount, given the Company’s mix in the investment portfolio. As mentioned above, the Company principally invests in unlisted enterprises. The valuation of shares / equity interests of unlisted enterprises is somewhat restricted. Though the best efforts have been made by the Company to ensure fairness and reasonableness of the NAV, the Board is hard to control market perception towards the NAV. Hence, the “reasonable” discount level is unknown. (b) The Company’s cash position is not always predictable as the implementation of ADM normally requires readily deployed cash. The Company carefully manages its cash position to meet daily operations, investments and dividend distributions. The Company’s sources of cash are mainly from dividend payments from investees and the proceeds of divestments. The Company invests a considerable portion in unlisted high growth enterprises such as emerging technologies and medical. Those investees tend not to pay cash dividends. In addition, the size of proceeds from divestments is difficult to predict given the illiquid nature of shares / equity interests of unlisted enterprises. (c) The Company may sell investments prematurely to raise required cash for ADM. But the Company tends to seek long-term capital gains on its investees and any exit decision should be carefully evaluated and well considered. To sell undervalued assets may not be in the best interests of the Company and its shareholders as a whole. (d) The Company’s readily distributable cash faces relevant laws, rules and regulations in relation to remittance back to Hong Kong. The Company has investment entities in both Mainland China and Hong Kong, cash being remitted from / to both sides face applicable laws, rules and regulations and it could be time-consuming for the legal clearance. (e) By implementing an ADM on a routine basis, it will in fact be reducing the scale of the Company which may not be in the interests of the Company and its shareholders as a whole.