“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
“CMCIM”	China Merchants China Investment Management Limited, the investment manager of CMCDI
“CMG”	the China Merchants Group, a substantial shareholder of CMCDI and the major shareholder of CMCIM
“Director(s)”	the director(s) of CMCDI
“First Eastern”	First Eastern Investment Group, another shareholder of CMCIM
“IMA”	investment management agreement
“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, Mr. Victor CHU, the Chairman of First Eastern, suggested establishing the Company with CMG, and with the help of First Eastern’s fund management experience, jointly establishing CMCIM. Subsequently, the Company raised US$100 million through a stock offering in 1993 as initial capital for its investment activities.


• 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).

• The investment manager’s key responsibilities include identifying and evaluating investment opportunities, executing investment decisions, monitoring and enhancing investments of CMCDI, making decisions on investments and realizations for CMCDI, managing the corporate affairs of CMCDI and dealing with CMCDI’s day-to-day administration.


• CMCIM has been appointed by CMCDI as the investment manager since CMCDI’s inception.

• CMCIM was formed in 1992 by CMG, a large central state-owned enterprise headquartered in Hong Kong, and First Eastern, a renowned family office run by Mr. Victor CHU headquartered in Hong Kong. CMG is the major shareholder of CMCIM.


• CMCIM combines the backgrounds and expertise of CMG and First Eastern. Leveraging on the extensive corporate network and branding of CMG, CMCIM is well positioned in deal origination and investment execution. CMCIM actively seeks to create operating synergies between CMCDI’s investees and companies under CMG for value enhancement. Moreover, First Eastern is a pioneer in direct investment in China, having existed long before the establishment of CMCIM. First Eastern’s experienced senior management contributes to the training of managerial talents and risk management at CMCIM, as well as the ability to uphold CMCDI’s investment strategies, such as focusing on direct investment, supplemented by equity securities investment, in order to achieve sustainability of CMCDI.


• In addition, CMG and First Eastern have worked side by side to establish CMCDI’s core values and build CMCIM’s management and investment team. The principals of both parties, including Mr. Victor CHU, the Chairman of First Eastern, and Ms. Elizabeth KAN, also a Director of CMCDI, have been involved in various tasks since the establishment of both CMCIM and CMCDI, including the preparation for the listing of CMCDI, playing corporate governance / managerial support roles, etc. As a Hong Kong-based company, First Eastern represents a different managerial culture and plays a complementary role in the operation and growth of CMCIM. Over the past 30 years, CMCIM has always been dedicating and focusing on serving CMCDI in a spirit of teamwork.

• The IMA features a tiered management fee structure based on asset classes in CMCDI’s investment portfolio.


• Management fees are charged based on the asset value of the Company’s investment portfolio
  The Company believes the most fair and objective metric for evaluating the Company’s investment performance is the asset value of the Company’s investment portfolio. The asset value of the Company’s investment portfolio is determined through a rigorous valuation / appraisal methodology and done by an independent valuer to ensure its fairness and reasonableness, particularly given the Company’s investment objective and strategy is to principally invest in China’s unlisted enterprises.


• Tiered management fee structure based on asset classes in the Company’s investment portfolio
  The agreed mechanism is based on the scope of work relating to that asset class. For example, during the due diligence phase, listed companies’ financial information is usually easier to acquire since they are subject to certain disclosure requirements. In contrast, for unlisted companies, CMCIM needs to spend considerable time and efforts on acquiring their financial information by means of certain arrangements and even on-site work.


• A performance fee, also known as an incentive fee, is charged on NAV performance
  The Company shall pay CMCIM a performance fee conditional upon the NAV’s increment. The annual performance fee is equal to a certain percentage of the amount by which the NAV as at the end of the relevant financial year exceeds the High Watermark.


• Fees structure and highlights for 2022-2024 (Duly approved by the independent shareholders of the Company on 29 November 2021)
  The fees structure for 2022-2024 be as follows:
  
  Management fee
  
  The Company pays an annual management fee equal to the aggregate of:

  (a)	on the Invested Portion of the Assets of the Company represented by unlisted securities or interests: 2.00% of the book value (net of taxes); and
  (b)	on the Invested Portion of the Assets of the Company represented by securities listed on a recognized stock exchange: (i) during the lockup period following listing: 2.00% of the book value (net of taxes); (ii) for the one year after the lockup period lapses: 1.75% of the book value (net of taxes); (iii) thereafter: 1.50% of the book value (net of taxes); and (iv) in respect of listed securities purchased from the secondary securities market: 1.50% of the book value (net of taxes); and
  (c)	on the Un-invested Portion of the Assets of the Company: zero.

  Performance fee
  
  The Company pays an annual performance fee equal to 8% of the amount by which the NAV as at the end of the relevant financial year exceeds the High Watermark.



• The IMA is in a 3-year term and the rationale behind
  The Company’s investment objective is to acquire quality investments, principally in unlisted enterprises, in China. For unlisted investments, it normally takes longer time to go through the investment process including origination, due diligence, negotiation, decision-making, execution and closing. Moreover, the investment horizon for unlisted investments can even last longer as investees need time to realize their growth potentials and the Company needs to capture the desirable window to conduct divestments. To meet the demand under these practices, CMCIM needs sufficient time to carry out the investment management functions more effectively and responsibly. Therefore, for all practical operational purposes and as a generally accepted market practice, the Company believes a 3-year term of the IMA better suits the nature of the Company’s business operations as well as in compliance with the requirements under Chapter 14A of the Listing Rule.

• CMCDI’s overall pre-fee IRR: 12.69% (since inception to the end of 2024), cumulative distributions to shareholders amounted to over US$279 million (Since inception to the end of 2024).

• 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.

• CMCIM is a fund management company and registered under the Securities and Futures Ordinance of Hong Kong, and its only investment management mandate is from CMCDI.


• According to our internal control policy and procedures, for business transactions in which CMG and / or First Eastern 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 Board noticed that prior to and at CMCDI’s annual general meeting convened on 20 June 2024, some shareholders raised such questions and expressed concerns. Ms. KAN did have submitted her written responses to the Board and an extract of such responses are hereby made public with her consent:
  

  “ I refer to the E-mail of 27th May addressed to the Board of CMCDI from Brian Liu of ASM. The E-mail raised a number of misconceived questions which I am pleased to respond as follows:

  1. Any conflict between my role at First Eastern and my board membership at CMCDI?

     As you know, CMCDI is an investment company listed on the HK Stock Exchange under Chapter 21 of the Listing Rules. As such its investment portfolio and day to day administration are managed by its investment manager, CMCIM, under an investment management agreement. CMCIM has its own team of investment professionals (separate from First Eastern) responsible for deal sourcing, evaluation, execution and ongoing monitoring of CMCDI’s investments. The main responsibility of CMCDI’s board, therefore, is to formulate the company’s overall investment strategy and implement its corporate governance duties.

     I do not consider my role at First Eastern conflicts with my board responsibilities at CMCDI. In any event potential competing interests of board members associated with China Merchants and First Eastern have been fully disclosed and any conflict can be dealt with pursuant to established procedures.

  2. FE Securities and trading in China Merchants Bank shares

     FE Securities is a licensed stockbroker in Hong Kong whose business is dealing in shares on behalf of clients. Contrary to what has been suggested, FE Securities’ execution of client orders on CMB shares for the past 10 years was very modest and totaled only 124,103 shares with a gross value of HK$3.62 million. None of these transactions involved Mr. Victor Chu, myself or our related entities.

  3. CMCDI shareholding

     I have no beneficial interest in any CMCDI shares.

  4. High Tech investments

     CMCDI has a diversified portfolio of investments which includes technology projects. I believe CMCDI board members collectively provide a diversified set of professional skills and China investment experience appropriate for our fund.

  5. Other directorships

     Under the Listing Rules, board memberships on listed companies are required to be disclosed, which have been fully complied with. My other directorships have of course been reported to the SFC in the normal way. ”



• On 14 October 2024, CMCDI received a letter dated 9 October 2024 issued by various company and entities which purport to hold shares in CMCDI representing over 5 per cent of total voting rights of all the shareholders of CMCDI having a right to vote at general meeting, to request the Board to call an extraordinary general meeting to be held for considering and, if thought fit, among other things, passing an ordinary resolution to remove Ms. KAN from her position as an Executive Director and a member of the investment committee of CMCDI with immediate effect upon the passing of the resolution. CMCDI announced on 15 October 2024 that it is verifying the requisition and considering such request and the appropriate course of action.


• On 18 October 2024, Ms. KAN submitted another written reply to the Board. With her approval, the reply is hereby made public as follows:
  
  “ I refer to my E-mail of 31st May 2024 to you, addressing the questions raised by Argyle Street Management Limited (“ASM”) about myself. Since then, we have seen more actions taken by ASM, the latest being the requisition for an EGM. As such, I would like to reiterate my response so that all shareholders of CMCDI may have a fully informed picture of myself in relation to those misconceived questions.
1. Any conflict between my role at First Eastern and my board membership at CMCDI?

   As you know, CMCDI is an investment company listed on the HK Stock Exchange under Chapter 21 of the Listing Rules. As such, its investment portfolio and day-to-day administration are managed by its investment manager, CMCIM, under an investment management agreement. CMCIM has its own team of investment professionals (separate from First Eastern) responsible for deal sourcing, evaluation, execution and ongoing monitoring of CMCDI’s investments. The main responsibility of CMCDI’s board, therefore, is to formulate the Company’s overall investment strategy and implement its corporate governance duties.

   I do not consider that my role at First Eastern conflicts with my board responsibilities at CMCDI. In any event, potential competing interests of board members associated with China Merchants and First Eastern have been fully disclosed and any conflict are dealt with pursuant to established procedures

2. FE Securities and trading in China Merchants Bank shares?

   FE Securities is a licensed stockbroker in Hong Kong whose business is dealing in shares on behalf of clients. Contrary to what has been suggested, FE Securities’ execution of client orders on China Merchants Bank shares for the past 10 years was very modest and totaled only 124,103 shares with a gross value of HK$3.62 million. None of these transactions involved Mr. Victor Chu, myself or our related entities.

3. CMCDI shareholding

   I have never held any CMCDI shares.

4. High Tech investments

   CMCDI has a diversified portfolio of investments which includes technology projects. I believe that CMCDI board members collectively provide a diversified set of professional skills as well as China investment experience that are appropriate for our fund.

   By background, I am a Fellow Member of the HK Institute of Certified Public Accountants, and a Member of the HK Securities and Investment Institute. I began my professional career with the Hong Kong office of Arthur Andersen & Co., an international accounting firm, in the area of audit and business advisory services. I have been involved in the direct investment and investment advisory activities of First Eastern since 1988. Since the inception of CMCDI and CMCIM, I have been a director of CMCIM, for most of the time, playing an important role in the management of CMCIM and CMCDI, including the investment strategies over the years, which has led to its success today. Given my involvement with CMCDI and CMCIM since its inception, I believe that my historical institutional knowledge, international experience and my professional qualification can supplement the knowledge and perspective brought by other members of the Board – strengthening and supporting the diversity of expertise of the Board.

5. Other directorships

   I have complied fully with the relevant Listing Rules to disclose my board memberships at listed companies. My other directorships, which ASM has alluded to, are primarily holding companies that are related to my roles at First Eastern Group. All of these external directorship roles have been reported to the SFC as required and in the normal way. ”

• 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)	Abandoned auto-renewal of IMA in 2009, to let independent shareholders assess CMCIM’s performance every 3 years, as mandated under the Listing Rules.
  (b)	Introduced quarterly total assets breakdown for greater transparency.
  (c)	Made voluntary announcements on new unlisted investments / full exit of unlisted investments.
  (d)	Continued dividend distributions: yearly distribution since the financial year 2009 and introduced first special dividend in the same year as well.
  (e)	Discount management: conducted a tender offer in 2013 as part of discount management.
  (f)	Held meetings with institutional investors, to increase market visibility and dialogue with shareholders / investors.
  (g)	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: A share buy-back general offer may be conducted in 2025 by CMCDI, contingent on the availability of proceeds from divestments and compliance with all applicable laws, rules and regulations. 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.