RNS Number:2712J
ARC Capital Holdings Limited
06 December 2007
ARC Capital Holdings Limited (the "Company")
Results for the period from 26 June, 2006 to 30 June, 2007
We are pleased to present the annual report for ARC Capital Holdings Limited
(AIM: ARCH) for the period from 26 June, 2006 to 30 June, 2007.
Chairman's Statement
On behalf of the Board of Directors, I am pleased to present the Annual Report
of ARC Capital Holdings Limited ("ARCH" or the "Company") for the period ended
30 June, 2007.
Review
The Company's shares were admitted to trading on the AIM market of the London
Stock Exchange plc on 26 June, 2006. In May 2007, the Company completed its
second round of fundraising through the sale of 275,735,294 new ordinary shares
at a price of US$1.36 per share. Strong demand from existing and new investors
resulted in the offering being approximately 2.5 times oversubscribed.
At the end of the period under review, the Company's net asset value per share
increased to US$1.32 per share, a 32% rise since inception. Net increase in net
assets from operations for the period was US$40.81 million.
The Company continued to focus on investments in the rapidly developing retail
and consumer sector in China. At the end of the reporting period, the Company's
major equity investments consisted of Goodbaby Group, a market leader in the
Chinese baby stroller market and a fast-developing retailer in the Chinese child
products sector, Ningxia Xiajin Dairy Group, the second largest dairy producer
in north west China, and K.P.I. Company Limited, a company listed on the Hong
Kong Stock Exchange that operates hypermarkets in China. The Company also held
convertible debt in New Focus Auto Tech Holdings Limited, a company listed on
the Hong Kong Stock Exchange that specializes in automobile beauty and
maintenance services, UCCAL Group, a leading retailer and wholesaler of branded
apparel in China, and International Restaurants Group, an operator of food
services outlets that includes the Cafe Deco chain.
Outlook
China's economy is forecast to continue its impressive growth. Supported by the
Central Government's implementation of a policy of pursuing economic growth
through domestic consumption and the increasing purchasing power of urban
consumers, total retail sales of consumer goods increased to RMB7,641 billion
(US$1,018 billion) in 2006, which represented an increase of 13.7% over that in
2005. This growth rate is expected to continue in the next few years as a result
of the rapid urbanization of the population and the growing affluence of
consumers.
The rapid growth of China's consumer sector will provide ample investment
opportunities for the Company. We will continue to optimize our investment
strategy and network to generate high returns for our shareholders.
On behalf of the Board of Directors, I would like to express my sincere
gratitude to the Investment Manager and our shareholders for their support,
without which our achievements would not have been possible. I would also like
to thank Mr. Horst Geicke, our inaugural Chairman, for his leadership.
Allan Liu
Chairman
6 December, 2007
Investment Manager's Report
The developments and progress made in ARCH's first year of operation have
surpassed our expectation. The Chinese economy has accommodated ARCH's
investment plans by remaining robust, while the retail market has flourished,
growing at an astonishing pace of more than 15% in nominal Renminbi terms.
ARCH's market capitalization reached a high of more than US$552 million during
the year. The fact that ARCH has a substantial pipeline of investments and ARCH
has managed to commit US$240 million to investments also gives us a strong case
for optimism going forward.
China's Macro Economy
GDP has grown at nearly 12% per annum, exceeding our projections of 9%, while
our projections of nominal domestic retail consumption growth of 15% were only
slightly lower than the actual figure of around 16%. Retail growth has been
driven by real consumption growth, rising incomes, a robust stock market and a
CPI of nearly 4%. However, some inflation is related to one-off factors (such as
rising poultry and pork prices as a result of an agricultural epidemic now
largely under control) which are expected to ease.
Retail and Consumer Sector
China's consumer expenditure continues to grow. However, the focus of high
growth (greater than 25% per year) has moved to second, third and even, fourth
tier cities in many retail categories such as mass retailing (hypermarkets and
supermarkets), electronics and digital products, do-it-yourself home decoration
products and building materials, among others. In these areas, the level of
competition is lower, and incomes are rising faster. In top tier cities, while
there is still significant growth (greater than 10% per year), fierce
competition in product and service offerings, as well as pricing, have forced
players with weak management to capitulate and stronger ones to raise funding
for consolidation. Notably, HomeWorld Hypermarkets was sold to China Resources
Group and China Paradise to Gome, an electronics retailing giant.
Investment Environment and the ARCH Strategy
The competition between private equity funds, strategic investors and domestic
corporate investors for attractive investment opportunities has increased
significantly in the past year, many hoping for lucrative exits on the A-share
market, whose key Shanghai index has risen more than 500% in the past 24 months.
In this arena, the key to securing transactions at a reasonable valuation has
narrowed down to being able to differentiate clearly a fund's positioning and
value-added. To this end, ARCH has developed significant competitive advantages
through communicating a clear industry focus and bringing on board a strong
in-house retail operations team with proven China retailing expertise. Our team
has an in-depth understanding of industry issues which enables ARCH to deploy
relatively more flexible and creative investment structures without compromising
on investment risk. ARCH has also shown, in two separate investment cases, that
it can secure senior level personnel resources to successfully implement their
ambitious expansion plans. These have proved to be significant competitive
advantages in securing transactions on better terms than those offered to
generic investment funds.
Portfolio
During the past four months, ARCH has committed to several significant
transactions. ARCH has invested US$17.8 million in a dominant department store
chain in Hunan province which is both profitable and qualifies for a very timely
listing on the A-share market. ARCH co-led an investment of US$200 million into
a Chinese airports owner and operator together with the Pacific Alliance Group,
a shareholder of the Investment Manager, and with other co-investors. ARCH also
committed to an investment of US$90 million in October 2007 in a nationwide
mobile phone distributor, which is seeking to consolidate downstream partners in
the mobile retailing space in a mobile phone market that sells more than 150
million units a year. To maximize the productivity and effectiveness of efforts
invested in deals, ARCH has successfully secured transactions of increasing size
and market impact.
ARCH has been exploring options to exit its investment in Goodbaby, which
recently secured a joint venture to expand its China retailing network with
Mothercare, a leading U.K. baby and maternity products company. ARCH has secured
an investment in Shanghai Jiadeli, a leading supermarket chain in Shanghai, and
its team is now assisting the management to improve operations and realize
margin and cost reduction opportunities. Interest from strategic investors in
Xiajin Dairy has increased due to the dramatic rise in global milk product
prices, including milk powder, which is a major expansion project for the
company. Lastly, New Focus Auto's margin in battery-backed auto accessories was
eroded by rapidly increasing lead prices. Significantly, ARCH's investment
structure of a 3-year convertible bond has provided adequate cushion.
Conclusion
We remain confident that ARCH's existing and pipeline investments will provide a
representative and profitable exposure to the retail and consumer sectors in
China.
ARC Capital Partners Limited
Investment Manager
6 December, 2007
Portfolio Summary
As of 30 June 2007, the Company's total assets amounted to US$533 million. US$80
million had been invested into 7 companies.
The following table summarizes the status of the Company's portfolio at 30 June
2007:
Description Industry and Form of Time of Purchase As of 30 June, 2007
location investment investment cost
Fair value Change on Effective
cost interest held
US$ US$
Goodbaby Group Child products/ Equity June 2006 23.88M 66.72 M 42.84 M 25.3%
China
K.P.I. Company Hypermarket/ Equity June 2006 14.00M 20.08 M 6.08M 19.4%
Limited China
Secrets Fashion Equity August 2006 2.50M 1.00M (1.50 M) 20.0%
International jewellery/ Hong
Limited Kong
UCCAL (S) Pte. Fashion retail/ Term loan December 2006 4.84 M 4.84M - -
Ltd. China
Ningxia Xiajin Dairy/ China Equity December 2006 18.13M 18.13 M - 34.7%
Dairy Co. Ltd.
International Food services/ Convertible March 2007 5.00 M 5.00 M - -
Restaurants Hong Kong notes
Holdings Limited
New Focus Auto Auto accessories Convertible April 2007 12.00 M 12.00 M - -
Tech Holdings and maintenance/ bonds
Limited China
Total 80.35M 127.77 M 47.42 M
Statement of Assets, Liabilities and Shareholders' Equity
At 30 June, 2007
Note 2007
US$
Assets
Investments in securities, at fair value
(cost: $80,350,000) 127,768,362
Short-term loan receivable 12,500,000
Interest receivables 1,657,266
Other assets 8 7,788,578
Cash and cash equivalents 9 383,378,636
Total assets 533,092,842
Liabilities
Investment management fee payable 1,435,694
Performance fee payable 7,802,400
Other payables and accruals 2,373,191
Total liabilities 11,611,285
Net assets 521,481,557
Shareholders' equity
Share capital 10 3,957,353
Share premium 10 476,710,660
Retained earnings 40,813,544
521,481,557
Net asset value per share
- based on net assets of $521,481,557 and 395,735,294
ordinary shares outstanding 1.32
The accompanying notes are an integral part of these financial statements.
Schedule of Investments
At 30 June, 2007
Investment Industry Location of Instrument Cost Fair value % of net
date operation assets
US$ US$
Goodbaby Group June 2006 Child China Ordinary 23,880,000 66,720,000 12.79%
products shares
K.P.I. Company Limited June 2006 Hypermarket China Ordinary 14,000,000 20,078,362 3.85%
shares
Secrets International Limited August 2006 Fashion Hong Kong Ordinary 0.19%
jewellery shares 2,500,000 1,000,000
UCCAL (S) Pte. Ltd. December Fashion China Term loan 0.93%
2006 retail 4,840,000 4,840,000
Ningxia Xiajin Dairy Co. Ltd. December Dairy China Ordinary 18,130,000 18,130,000 3.48%
2006 shares
International Restaurants March 2007 Food services Hong Kong Convertible 0.96%
Holdings Limited notes 5,000,000 5,000,000
New Focus Auto Tech Holdings April 2007 Auto China Convertible 12,000,000 12,000,000 2.30%
Limited accessories bonds
and
maintenance
services
Total 80,350,000 127,768,362 24.50%
The accompanying notes are an integral part of these financial statements.
Statement of Operations
For the period from 27 July, 2005 (date of incorporation) to 30 June, 2007
Note 2007
US$
Income
Interest income from investments 224,389
Other interest income 5,846,234
Total income 6,070,623
Expenses
Investment management fee 4 3,853,676
Performance fee 5 7,802,400
Administration fee 239,826
Professional fees 163,985
Directors' fee 6 88,219
Custodian fee 32,800
Other expenses 494,535
Total expenses 12,675,441
Net operating loss (6,604,818)
Net unrealized appreciation of investments 47,418,362
Net increase in net assets resulting
from operations 40,813,544
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Shareholders' Equity
For the period from 27 July, 2005 (date of incorporation) to 30 June, 2007
Note 2007
US$
Issuance of shares 10 495,000,000
Less: offering costs 10 (14,331,987)
480,668,013
Net operating loss (6,604,818)
Net unrealized appreciation of investments 47,418,362
Shareholders' equity at 30 June, 2007 521,481,557
The accompanying notes are an integral part of these financial statements.
Statement of Cash Flows
For the period from 27 July, 2005 (date of incorporation) to 30 June, 2007
2007
US$
Cash flows from operating activities
Net increase in net assets resulting
from operations 40,813,544
Adjustments to reconcile net increase from operations
to net cash used in operating activities
- net unrealized appreciation on investments (47,418,362)
- interest income from investments (224,389)
- increase in interest receivables (1,432,877)
- increase in other assets (7,788,578)
- increase in investment management fee payable 1,435,694
- increase in performance fee payable 7,802,400
- increase in other payables and accruals 2,373,191
Purchase of investments (42,470,000)
Short-term loan made (12,500,000)
Net cash used in operating activities (59,409,377)
Cash flows from financing activities
Proceeds from issue of shares 457,120,000
Offering cost paid (14,331,987)
Net cash provided by financing activities 442,788,013
Cash and cash equivalents at the end of the period 383,378,636
Supplemental disclosure of cash flow information:
On 26 June, 2006, the Company entered into a share purchase agreement with an
affiliate of the Investment Manager to purchase the equity interest in G-Baby
Holdings Limited and K.P.I. (BVI) Retail Management Company Limited (which was
subsequently converted into ordinary shares in K.P.I. Company Limited) for
US$37,880,000. The transaction was settled by the issuance of 37,880,000
ordinary shares of US$1 each by the Company.
The accompanying notes are an integral part of these financial statements.
Notes to the Financial Statements
1 Organization
ARC Capital Holdings Limited (the "Company") was incorporated with limited
liability and registered in the Cayman Islands as an exempted company under the
Companies Law on 27 July, 2005 with the name Asia Retail Consumer Holdings
Limited. On 4 April, 2006, it changed its name to ARC Capital Holdings Limited.
The Company commenced its operation on 26 June, 2006 and its reported results of
operations covered the period from 26 June, 2006 to 30 June, 2007.
The Company is a closed-ended investment company trading on AIM, a market
operated by the London Stock Exchange plc. The Company's principal investment
objective is to provide its shareholders with capital appreciation by investing
in listed and unlisted companies in the retail, consumer goods and consumer
service sectors principally in China and in neighboring Asian countries. The
Company finances these companies for expansion through buy-outs, pre-IPO
opportunities and other equity and mezzanine securities.
The Company is managed by ARC Capital Partners Limited (the "Investment Manager
"). The Investment Manager is responsible for the day-to-day management of the
Company's investment portfolio, including, subject to the approval by the
Investment Committee who are appointed by the Investment Manager and approved by
the Company's Board, the day-to-day acquisition and disposal of investments in
accordance with the Company's investment objective and policies.
2 Significant Accounting Policies
The following significant accounting policies are in conformity with generally
accepted accounting principles in the United States of America ("US GAAP").
(a) Security
The cost of investment securities and the net realized gains or losses thereon
are determined, for financial accounting purposes, on average-cost method. Cost
includes commissions and other charges that are a part of the securities
purchase transaction.
Securities listed on a stock exchange or traded on any other regulated market
are valued at the last closing sales price on such exchange or market or, if no
such price is available, at the mean of the bid and offer price on such day.
In the event that a listed security has no such price or the market price is not
representative of the fair market value, the security has limited marketability,
or the security is unlisted, its fair value is determined by the Investment
Manager, taking into account the financial conditions, operating results, value
of additional equity or equity-related offerings of the issuer, comparable
company transactions, performance multiples, or other valuation methodology that
the Investment Manager in good faith considers appropriate. A revaluation of
these securities is accepted by the Company only upon majority approval of the
independent directors of the Company.
Short-term term loans are stated at amortized cost, which approximates fair
value.
Because of the inherent uncertainty of valuations, those estimated values may
differ significantly from the values that would have been used had a ready
market for the securities existed, and the difference could be material.
(b) Foreign currency
Investment securities and other assets and liabilities denominated in foreign
currencies are translated into United States dollar amounts at each reporting
date. Purchases and sales of investment securities and income and expenses item
denominated in foreign currencies are translated into United States dollar
amounts on the respective dates of such transactions.
Currency translation gains and losses are reflected in net unrealized
appreciation on investments.
(c) Use of estimates
The preparation of financial statements in conformity with US GAAP requires the
directors to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
(d) Others
Dividend income is recognized on the ex-dividend date, and interest income is
recognized on an accrual basis. Organizational costs of the Company are expensed
as incurred. Offering costs are charged to the share premium of the Company upon
sale of its shares.
3 Recent Accounting Pronouncement
In September 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 157, Fair Value Measurements ("SFAS 157"), which defines fair
value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. SFAS 157 applies to financial statements that are
issued for fiscal years beginning after 15 November, 2007. The directors are
currently assessing the impact of SFAS 157 on its investment valuation policy
and financial statement disclosures.
4 Investment Management Fee
The Investment Manager is entitled to receive an aggregate investment management
fee of 2 per cent per annum of the Company's net asset value determined based on
the valuation policy of the Company, to be paid quarterly in advance based on
the average month end net asset value of the Company over the previous quarter.
5 Performance Fee
In the event that the year end net asset value of the Company is greater than
(i) the year end net asset value for the last year in which a performance fee
was payable ("High Water Mark"), and (ii) the net asset value on admission of
the Company to trading on AIM ("NAV on Admission") increased by a compounded
annual hurdle rate of eight per cent ("Hurdle"), the Investment Manager shall be
entitled to a performance fee based on the increase in the year end net asset
value above the High Water Mark. The performance fee shall be calculated as
follows:
- If the Company's year end net asset value is at or below the Hurdle,
the Investment Manager should not be entitled to any performance fee;
- 100 per cent of the relevant increase in the Company's year end net
asset value above the Hurdle but below the NAV on Admission increased by a
compounded annual rate of 10 per cent (the "Catch-up"); and
- 20 per cent of the relevant increase in the Company's year end net
asset value above the Catch-up.
The performance fee shall be calculated in United States dollars and paid 25 per
cent in the Company's ordinary shares, and the remaining 75 per cent in cash.
6 Directors' Fee and Expenses
The Company pays each of its directors an annual fee of US$20,000 plus
out-of-pocket expenses. Three directors of the Company have agreed to waive
their Director's fees for so long as they have an equity interest in the
Investment Manager.
7 Taxation
There are no taxes on income or gains in the Cayman Islands and the Company has
received an undertaking from the Governor in Cabinet of the Cayman Islands
exempting it from all local income, profits and capital taxes until August 2025.
The Company conducts its affairs such that it does not generate any income which
is sourced in China or Hong Kong. Therefore no income tax provision is made for
China or Hong Kong taxation.
Dividend and interest income received by the Company maybe subject to
withholding tax imposed in the country of origin. This income is recorded gross
of such taxes and the withholding tax, if any, is recognized separately in the
income statement.
8 Other Assets
At 30 June, 2007, the Company held properties and other financial assets of
US$7,780,000, which were acquired incidentally in the ordinary course of the
Company's investment activities. The properties were carried at their fair
value, while the other financial assets, being receivables and promissory notes
in nature, were carried at their net realizable value.
9 Cash and Cash Equivalents
2007
US$
Cash on hand and demand deposits 183,378,636
Fixed deposits maturing within 3 months 200,000,000
383,378,636
10 Share Capital and Share Premium
Authorized share capital:
2007
US$
500,000,000 ordinary shares at US$0.01 each 5,000,000
Issued and fully paid:
Number Share Share
of shares capital premium Total
US$ US$ US$
Issue of shares 395,735,294 3,957,353 491,042,647 495,000,000
Less: offering cost - - (14,331,987) (14,331,987)
At the end of
the year 395,735,294 3,957,353 476,710,660 480,668,013
11 Material Transactions with Related Parties
In addition to those amounts and balances disclosed elsewhere in these financial
statements, the Company has a short-term loan receivable of US$12,500,000 as of
30 June, 2007 due from a group company of the Investment Manager. Interest of
10% per annum was charged on the outstanding principal balance.
12 Subsequent Events
In July 2007, the Company agreed to acquire 12.5% of equity interest in a
provincial department store chain in the PRC for RMB135 million (approximately
US$17.8 million). The transaction was completed in August 2007.
In September 2007, the Company and a co-investor agreed to co-lead a US$200
million investment to acquire a 49% equity stake in a commercial airport owner
and operator in the PRC.
In October 2007, the Company agreed, subject to final documentation, to invest
US$90 million into a PRC-nationwide mobile phone distributor for an equity
interest of approximately 33%.
Financial Highlights
These financial highlights consist of the operating expenses and net operation
loss ratios for the period from 27 July, 2005 (date of incorporation) to 30
June, 2007 and the internal rate of return ("IRR") since the Company's admission
to trading on AIM, net of all expenses, including performance fee to the
Investment Manager, incurred by the Company:
Net operating loss (3.4% )
Operating expenses excluding performance fee (2.5% )
Performance fee (4.1% )
Operating expenses (6.6% )
Cumulative IRR through 30 June, 2007 15.6%
The net operating loss and operating expenses ratios are computed as a
percentage of average net asset value of the Company.
The IRR is computed based on the monthly cash flows (capital contributions) and
the year end net asset value (residual value) of The Company.
The financial information set out in this announcement does not constitute the
Group's statutory accounts for the period ended 30 June 2007 but is derived from
those accounts. The full audited accounts of ARC Capital Holdings Limited for
the year ended 30 June 2007 will be posted to shareholders shortly and will be
available to the public for one month from ARC Capital Partners Limited, c/o ARC
Advisors (HK) Limited, 13/F., St John's Building, 33 Garden Road, Central, Hong
Kong.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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