Templeton China A Shares Fund. Semi-Annual Report for the period ended 30 June 2016 (unaudited)

Transcription

1 Templeton China A Shares Fund Semi-Annual Report for the period ended 30 June 2016 (unaudited)

2 SEMI-ANNUAL REPORT FOR THE PERIOD ENDED 30 JUNE 2016 (UNAUDITED)

3 Contents Page(s) Report of the Manager 4 Statement of Financial Position 5 Statement of Comprehensive Income 6 Statement of Changes in Net Assets Attributable to Unitholders 7 Statement of Cash Flows 8 Notes to the Financial Statements 9 20 Investment Portfolio 21 Statement of Movement in Portfolio Holdings 22 Administration 23 Semi-annual report 3

4 Report of the Manager The Chinese domestic equity market experienced continued volatility during the first half of Stocks fell sharply in the early part of the year, on worries about slowing economic growth, uncertainty about the country s foreign-exchange policy and authorities intervention in equity markets over the last year. March saw a turnaround, however, with Chinese equities posting double-digit gains for the month, buoyed by easing concerns regarding growth, capital flows and currency devaluation. The rally was aided by monetary stimulus measures carried out by the People s Bank of China ( PBOC ) including efforts to support the renminbi and large injections into the financial system in early January and February, to support liquidity. In addition, on 29 February, the PBOC announced a 50 basis-point cut in the required reserve ratio for commercial banks. Even so, Chinese markets as a whole ended the quarter lower, as gains in March were insufficient to offset weakness in January and February. Over the remainder of the first half of the year, markets were somewhat less volatile, moving within established ranges. They declined through mid-may, before recovering again to end the second quarter just a few percent lower, but still appreciably weaker than the level seen at the start of the year. The recovery in June was supported by comments from the US Federal Reserve, signaling the reduced possibility of a mid-year interest rate hike, the dovish stance taken by other major central banks globally following the United Kingdom s decision to leave the European Union ( EU ), as well as a rebound in commodity prices, all played a role in the better performance of Chinese markets. Chinese economic growth remained strong in a global context but appeared to weaken during the first half of the year. The economy expanded 6.7% in the year to the first quarter of 2016, slightly slower than the 6.8% increase recorded in the final quarter of Annual consumer price inflation eased to 2.0% in May, largely due to lower food price rises. At the same time, the composition of gross domestic product data had some positive elements, notably stronger contributions from consumption and services activities, suggesting progress in the gradual rebalancing of the economy away from exports and investment. Templeton China Opportunities Fund declined 11.71% in the first half of the year, while the fund s benchmark index, the CSI 300 Index, dropped 16.67%, both in US dollars. The market decline was broad-based, with most sectors declining. The industrials sector dropped the most, declining by about a quarter, with the utilities and consumer discretionary sectors dropping by slightly less significant amounts. The telecommunication services, information technology and energy sectors fared better than the market generally, but still fell, posting single digit declines. The only sector to contribute positively to index returns was the consumer staples sector, and more specifically the beverage industry which recorded double digit gains. In late June, the United Kingdom voted to leave the European Union, leaving many investors surprised. The uncertainty of the situation and what came next affected all markets in the wake of the vote, and Chinese markets were not exempt. Markets, however, quickly rebounded. We believe that the longer-term impact on China could be positive since the center of gravity for capital markets activity could move east away from London towards Far Eastern cities such as Shanghai. Although Chinese markets have generally had a difficult start to the year, we still believe a number of factors make these equities attractive for long-term investors. First, China continues to experience stronger economic growth trends than developed markets and also many emerging markets. The country is still one of the fastest growing major economies in the world, and given its size, we believe annual growth of around 6% to 7% is substantial. Second, China is in the process of implementing a substantial shift of the economy away from export dependence and toward consumption-led growth. Although this shift is likely to lead to long-term sustainable economic growth, it could cause a degree of disruption in the short term. Third, in conjunction with the rebalancing of the economy, China has embarked on a significant reform program that includes tackling corruption and gradually moving toward a market-based economy rather than one guided by the central government. These changes are likely to be beneficial in the long term, but we may see temporary turmoil in the interim as the economy and its participants re-adjust to a new normal. The commentary, which is for informational purposes only, sets forth the manager s views as of 30 June The stock provided is for illustration purpose only. It is not a recommendation to purchase, sell or hold any particular security. Any stock identified is not necessarily indicative of a portfolio s holding at any one time. The underlying assumptions and these views are subject to change. There is no guarantee that any forecasts expressed will be realised. Franklin Templeton Investments accepts no liability whatsoever for any direct or indirect consequential loss arising from use of this report or any information, opinion or estimate herein. 4 Semi-annual report

5 Statement of Financial Position as at 30 June June December 2015 Note USD USD ASSETS CURRENT ASSETS Investments 3 31,659,871 41,315,507 Due from brokers 377, ,277 Cash and cash equivalents 4 1,318, ,201 Total assets 33,356,102 42,848,985 LIABILITIES CURRENT LIABILITIES Amounts payable on redemption 300,000 Due to brokers 36, ,373 Accrued expenses 30,309 39,274 LIABILITIES (EXCLUDING NET ASSETS ATTRIBUTABLE TO UNITHOLDERS) 366, ,647 NET ASSETS ATTRIBUTABLE TO UNITHOLDERS 32,989,567 42,295,338 (BEFORE AMORTISATION OF PRELIMINARY EXPENSES) Adjustment for different basis adopted by the Fund in arriving at net assets attributable to unitholders 6 19,932 26,908 NET ASSETS ATTRIBUTABLE TO UNITHOLDERS (AFTER AMORTISATION OF PRELIMINARY EXPENSES) 6 33,009,499 42,322,246 The accompanying notes form an integral part of these financial statements. Semi-annual report 5

6 Statement of Comprehensive Income For the half year ended 30 June 2016 For the half year ended 30 June 2015 Note USD USD INCOME Dividend income 547, ,651 Interest income 2,629 8,693 Change in unrealised gain/loss on fair value of investments (2,235,567) (15,081,698) Realised (loss)/gain on sale of investments (3,252,614) 38,147,528 Net loss on foreign exchange (16,853) (108,025) TOTAL INVESTMENT (LOSS)/GAIN (4,954,422) 23,527,149 EXPENSES Trustee and custody fees 7(a) (26,948) (104,113) Auditor s fee (16,161) (16,404) Legal and professional fees (28,848) Transaction costs (45,950) (422,487) Other operating expenses (4,595) (3,232) TOTAL EXPENSES (93,654) (575,084) (LOSS)/PROFIT BEFORE TAX (5,048,076) 22,952,065 Withholding taxes 5 (57,695) (59,171) (LOSS)/PROFIT AFTER TAX (5,105,771) 22,892,894 Adjustment for different basis adopted by the Fund in arriving at net assets attributable to unitholders 6 (6,976) (6,938) (DECREASE)/INCREASE IN NET ASSETS ATTRIBUTABLE TO UNITHOLDERS FROM OPERATIONS (5,112,747) 22,885,956 The accompanying notes form an integral part of these financial statements. 6 Semi-annual report

7 Statement of Changes in Net Assets Attributable to Unitholders For the half year ended 30 June 2016 For the half year ended 30 June 2015 Note USD USD BALANCE AT THE BEGINNING OF THE PERIOD 42,322, ,482,537 Subscription of units 6 2,513,761 Redemption of units 6 (4,200,000) (64,874,584) (Decrease)/increase in net assets attributable to unitholders from operations (5,112,747) 22,885,956 BALANCE AT THE END OF THE PERIOD 33,009,499 81,007,670 The accompanying notes form an integral part of these financial statements. Semi-annual report 7

8 Statement of Cash Flows For the half year ended 30 June 2016 For the half year ended 30 June 2015 Note USD USD CASH FLOWS FROM OPERATING ACTIVITIES Purchase of investments (13,026,769) (85,070,423) Disposal of investments 16,938, ,932,110 Dividend income received 547, ,651 Interest income received 2,629 8,693 Trustee and custody fees paid (28,784) (70,802) Auditor s fee paid (23,291) Transaction costs paid (45,950) (422,487) Other operating expenses paid (4,595) (3,232) Withholding taxes paid (57,695) (59,171) NET CASH GENERATED FROM OPERATING ACTIVITIES 4,301,583 61,875,339 CASH FLOWS FROM FINANCING ACTIVITIES Subscription of units 2,513,761 Redemption of units (3,900,000) (62,204,740) NET CASH USED IN FINANCING ACTIVITIES (3,900,000) (59,690,979) Net increase in cash and cash equivalents 401,583 2,184,360 Cash and cash equivalents at the beginning of the period 934,201 2,960,646 Effect of foreign exchange rate changes (16,853) (108,025) CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 4 1,318,931 5,036,981 The accompanying notes form an integral part of these financial statements. 8 Semi-annual report

9 Notes to the Financial Statements Note 1 General information Templeton China A Shares Fund (the Fund ) was constituted as a unit trust under a Trust Deed dated 1 November 2012, between Templeton Investment Counsel, LLC as the Manager (the Manager ) and Cititrust Limited (the Trustee ). The terms of the Trust Deed are governed by the laws of Hong Kong Special Administrative Region of the People s Republic of China ( Hong Kong ). The Fund is authorised by the Securities and Futures Commission of Hong Kong (the SFC ). The Fund was launched on 3 December 2012 and commenced operations on 4 December The investment objective of the Fund is to achieve long term capital appreciation by investing at least 70% of its total net assets in China A-Shares (i.e. shares denominated in RMB issued by companies incorporated in China and listed on the Shanghai Stock Exchange and/or the Shenzhen Stock Exchange). The Fund may invest up to 30% of its net assets in aggregate in listed securities and other permitted People s Republic of China ( PRC ) financial instruments, namely shares and bonds listed on the stock exchange(s) in the PRC, and in other liquid assets, such as cash, cash deposits, short term paper and money market instruments. In particular, the Fund may invest up to 5% of its net assets in cash deposits and up to 10% in bonds listed on the stock exchange(s) in the PRC. The Fund will seek to achieve its investment objective primarily through investments in China A-Shares directly using the USD Qualified Foreign Institutional Investor ( QFII ) quota of the QFII holder, Templeton Investment Counsel, LLC, approved by authorities in the PRC pursuant to the relevant regulations. The Fund will seek to invest primarily in equity securities of companies in different industry sectors with any ranges of market capitalisation which have substantial exposure to Mainland China market. Note 2 Summary of significant accounting policies The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. 2.1 Basis of presentation The financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards ( HKFRS ) issued by the Hong Kong Institute of Certified Public Accountants. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities at fair value through profit or loss. The preparation of financial statements in conformity with HKFRS requires the use of certain accounting estimates. It also requires the Trustee and Manager (collectively, the Management ) to exercise their judgement in the process of applying the Fund s accounting policies. (a) Standards and amendments to existing standards effective from the financial period beginning 1 January 2016 There are no standards, interpretations or amendments to existing standards that are effective for the first time for the financial period beginning on or after 1 January 2016 that would be expected to have a material impact on the Fund. (b) New Standards, amendments and interpretations effective after the financial period beginning 1 January 2016 and not early adopted HKFRS 9, Financial instruments, addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version of HKFRS 9 was issued in July It replaces the guidance in HKAS 39 that relates to the classification and measurement of financial instruments. HKFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through other comprehensive income and fair value through profit or loss. The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in other comprehensive income which cannot be recycled. There is now a new expected credit losses model that replaces the incurred loss impairment model used in HKAS 39. For financial liabilities there were no changes to classification and measurement, except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. HKFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the hedged ratio to be the same as the one management actually use for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under HKAS 39. The standard is effective for accounting periods beginning on or after 1 January Early adoption is permitted. The new standard is not expected to have a significant impact on the Fund s financial position or performance. There are no other standards, interpretations or amendments to existing standards that are not yet effective that would be expected to have a significant impact on the Fund. Semi-annual report 9

10 Notes to the Financial Statements (continued) Note 2 Summary of significant accounting policies (continued) 2.2 Foreign currency translation (a) Functional and presentation currency The Fund uses the QFII quota which is denominated in United States Dollars ( USD ) to invest primarily in the Mainland China A-Shares market. The Fund has to remit USD into the PRC and then convert into Renminbi ( RMB ) for investment in China A-Shares. The Management considers the USD to be the currency that most faithfully represents the economic effect of the underlying transactions, events and conditions. The USD is the currency in which the Fund measures its performance and reports its results. The financial statements are presented in USD which is the Fund s functional and presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign currency assets and liabilities are translated into the functional currency using the exchange rate prevailing at the period end date. Foreign exchange gains and losses arising from translation are included in the statement of comprehensive income. Foreign exchange gains and losses relating to cash and cash equivalents are presented in the statement of comprehensive income within net gain/(loss) on foreign exchange. Foreign exchange gains and losses relating to the financial assets carried at fair value through profit or loss are presented in the statement of comprehensive income within change in unrealised gain/loss on fair value of investments and realised gain/(loss) on sale of investments. 2.3 Financial assets Classification The financial assets are classified into the following categories: at fair value through profit or loss and loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. (a) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets. (b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the statement of financial position date. These are classified as non-current assets. The Fund s loans and receivables comprise due from brokers and cash and cash equivalents in the statement of financial position Recognition, derecognition and measurement Regular purchases and sales of investments are recognised on the trade date the date on which the Fund commits to purchase or sell the investment. Financial assets and financial liabilities at fair value through profit or loss are initially recognised at fair value. Transaction costs are expensed as incurred in the statement of comprehensive income. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or the Fund has transferred substantially all risks and rewards of ownership. Subsequent to initial recognition, all financial assets and financial liabilities at fair value through profit or loss are measured at fair value. Loans and receivables are carried at amortised cost using the effective interest method. These are short term and the carrying values approximate the fair values. Gains and losses arising from changes in the fair value of the financial assets or financial liabilities at fair value through profit or loss category are presented in the statement of comprehensive income within change in unrealised gain/loss on fair value of investments and realised gain/(loss) on sale of investments in the period in which they arise. The fair values of quoted investments are based on last traded prices. For unlisted securities or financial assets that are not traded in an active market, the Fund establishes fair value by using valuation techniques. These include the use of recent arm s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis and option pricing models, making maximum use of market inputs and relying as little as possible on entity-specific inputs. The Fund assesses at each period end date whether there is objective evidence that a financial asset or a group of financial assets is impaired. Impairment loss, if any, will be recognised in the statement of comprehensive income in the period in which they arise. 10 Semi-annual report

11 Notes to the Financial Statements (continued) Note 2 Summary of significant accounting policies (continued) 2.3 Financial assets (continued) Transfers between levels of the fair value hierarchy Transfers between levels of the fair value hierarchy have occurred at the date of the event or change in circumstances that caused the transfer. 2.4 Income and expenses (a) Dividend income Dividend income is recognised in the statement of comprehensive income when the right to receive payment is established. (b) Interest income Interest income is recognised in the statement of comprehensive income on a time-proportion basis using the effective interest method. (c) Other income Other income is recognised in the statement of comprehensive income on an accrual basis. (d) Expenses Expenses are recognised in the statement of comprehensive income on an accrual basis. (e) Preliminary expenses Preliminary expenses are recognised as an expense in the period in which they are incurred. 2.5 Taxation No provision for Hong Kong profits tax has been made as the Fund was authorised as a collective investment scheme under Section 104 of the Hong Kong Securities and Futures Ordinance and hence its profits are excluded from the charge to profits tax under Section 26A of the Inland Revenue Ordinance. The Fund incurs withholding taxes on certain investment income. Such income is recorded gross of taxes in the statement of comprehensive income. Withholding tax is shown as a separate item in the statement of comprehensive income. Tax is recognised in the statement of comprehensive income, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In such cases, the tax will be recognised in other comprehensive income or directly in equity, respectively. 2.6 Proceeds and payments on subscription and redemption of units The net asset values of the Fund are computed for each dealing day. Prices for subscriptions and redemptions of units are calculated by reference to the net asset value per unit as at the close of business on the relevant dealing day. Units in the Fund are classified as liabilities in the statement of financial position. This represents the price at which the unitholders can redeem the units. 2.7 Dividends and other receivables Dividends and other receivables are initially recorded at fair value, and subsequently carried at amortised cost using the effective interest method. These are short term in nature and the carrying amounts approximate the fair values. 2.8 Cash and cash equivalents Cash and cash equivalents includes deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less and bank overdrafts. 2.9 Due from and due to brokers Amounts due from and due to brokers represent receivables for securities sold and payables for securities purchased that have been contracted for but not yet settled or delivered on the period end date respectively. These amounts are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment for amounts due from brokers. A provision for impairment of amounts due from brokers is established when there is objective evidence that the Fund will not be able to collect all amounts due from the relevant broker. Significant financial difficulties of the broker, probability that the broker will enter bankruptcy or financial reorganisation and default in payments are considered indicators that the amount due from brokers is impaired. The amounts due from and due to brokers are short term in nature and the carrying amounts approximate the fair values Accrued expenses Accrued expenses are recognised initially at fair value, and subsequently stated at amortised cost using the effective interest method. These are short term in nature and the carrying amounts approximate the fair values. Semi-annual report 11

12 Notes to the Financial Statements (continued) Note 2 Summary of significant accounting policies (continued) 2.11 Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the assets and settle the liabilities simultaneously Changes to presentation of the table showing transfers between levels under Note 3.5 Fair value estimation Due to changes in presentation of table showing transfers between levels, certain comparative information have been updated to conform with the current year s presentation. Note 3 Financial risk management The Fund s activities expose it to a variety of financial risks; market risk (including market price risk, currency risk and interest rate risk), credit risk and liquidity risk. The risks and the risk management policies employed by the Fund to manage these risks are discussed below. Risks arising from holding financial instruments are inherent in the Fund s activities and are managed through a process of ongoing identification, measurement and monitoring. The risks are measured using a method that reflects the expected impact on the results and net assets attributable to unitholders of the Fund from reasonably possible changes in the relevant risk variables. Information about these risk exposures at the reporting date and risk management policies employed are disclosed in Notes 3.1 to Market risk Information on the total fair value of financial instruments exposed to risk, as well as compliance with the established investment guidelines as defined in the Fund s explanatory memorandum, is monitored by the Manager. These investment guidelines reflect the strategy and market environment of the Fund, as well as the acceptable risk levels. In order to avoid excessive concentration of risk, the Manager monitors the exposure to ensure concentration of risk remains within acceptable levels. (a) Market price risk Market price risk arises mainly from uncertainty about future prices of financial instruments held. It represents the potential loss the Fund might suffer through holding market positions in the face of price movements. The Fund s market positions are being monitored by the Manager on a daily basis. The risk is minimised through a selection of securities in accordance with the investment guidelines and investment strategies. Value-at-risk ( VaR ) One of the principal tools used to monitor market risk exposure is VaR; which estimates the probability of portfolio losses based on the statistical analysis of historical price trends and volatilities, taking into account inter-relationships between different markets and rates, for example between interest rates and foreign exchange rates. The Fund tracks VaR as a percentage of net asset value ( NAV ), taking into account its portfolio, cash and outstanding trade positions, on 12-month holding period at 99% confidence level. The VaR model is conducted by Monte Carlo stimulation based on Barra risk factor model outputs to forecast the ex-ante VaR in the next 12-month at 99% confidence. The Manager recognises that while VaR is a valuable guide to risk, it has its limitations. The use of historical data as a proxy for estimating future events may not encompass all potential events, particularly those which are extreme in future. In addition, the use of 12-month holding period assumes that all positions can be liquidated within 12 months. This may not fully reflect the market risk arising at times of severe illiquidity, in which a 12-month holding period may be insufficient to liquidate positions fully. Using VaR, the market risk of the Fund has been computed using a 12-month holding period at 99% as follows: 30 June 31 December VaR (%) 37.42% 44.70% VaR (USD) 12,352,155 18,918,044 As at period end, the overall market exposures for the Fund were as follows: Investments 30 June December 2015 Fair value % of net Fair value % of net USD assets USD assets China 31,659, ,315, There were no individual investments with market value exceeding 10% of the Fund s net asset value at 30 June 2016 and 31 December The table below is a summary of sector allocation with concentrations exceeding 10% of the Fund s net asset value at 30 June 2016 and/or 31 December Semi-annual report

13 Notes to the Financial Statements (continued) Note 3 Financial risk management (continued) 3.1 Market risk (continued) 30 June 31 December % of net % of net Sector Allocation assets assets Consumer Discretionary Financials Health Care Industrials (b) Currency risk The Fund holds assets and liabilities denominated in currencies other than the USD, the functional currency. The Fund is therefore exposed to currency risk, as the values of the assets and liabilities denominated in other currencies will fluctuate due to changes in exchange rates. Except for monetary assets amounting to USD1,600,516 (31 December 2015: USD902,795) denominated in RMB, the Fund s monetary assets and liabilities are denominated in Hong Kong dollar and US dollar which are currently pegged within a narrow range and therefore are not subject to significant volatility in exchange rates. The sensitivity analysis of currency risk is covered under VaR analysis in Note 3.1(a). (c) Interest rate risk The Fund does not hold interest-bearing securities other than cash and cash equivalents. However, the exposure to interest rate risk is considered minimal as the cash and cash equivalents are short term in nature. 3.2 Liquidity risk Liquidity risk is the risk that Fund will encounter difficulty in meeting obligations associated with financial liabilities. The Fund is exposed to daily cash redemption of units. Therefore, assets of the Fund are mainly invested in securities which are traded in active markets and can be readily disposed of. The Manager is entitled to limit the number of units redeemed on each dealing day to 10% of the total value of units in issue. In addition, sufficient cash and cash equivalents are maintained to meet normal operating requirements. The following table analyses the financial assets and liabilities for the Fund into relevant maturity groupings based on the remaining period at the period end date to the contractual maturity date. The amounts in the table are the contractual undiscounted cash flow. Balances due within 12 months approximate their carrying balances, as the impact of discounting is not significant. Less than 1 month 1-12 months Total USD USD USD 30 June 2016 Assets Current Assets Investments 30,462,773 1,197,098 31,659,871 Due from brokers 377, ,300 Cash and cash equivalents 1,318,931 1,318,931 Total assets 32,159,004 1,197,098 33,356,102 Liabilities Current Liabilities Amounts payable on redemption 300, ,000 Due to brokers 36,226 36,226 Accrued expenses 5,400 24,909 30,309 Net assets attributable to unitholders (after amortisation of preliminary expenses) 33,009,499 33,009,499 Total liabilities 33,351,125 24,909 33,376,034 Less than 1 month 1-12 months Total USD USD USD 31 December 2015 Assets Current Assets Investments 41,315,507 41,315,507 Due from brokers 599, ,277 Cash and cash equivalents 934, ,201 Total assets 42,848,985 42,848,985 Semi-annual report 13

14 Notes to the Financial Statements (continued) Note 3 Financial risk management (continued) 3.2 Liquidity risk (continued) Liabilities Current Liabilities Due to brokers 514, ,373 Accrued expenses 7,235 32,039 39,274 Net assets attributable to unitholders (after amortisation of preliminary expenses) 42,322,246 42,322,246 Total liabilities 42,843,854 32,039 42,875,893 Units are redeemed on demand at unitholder s option. However, the Management does not envisage that contractual maturity disclosed in the table above will be representative of the actual cash outflows, as the unitholders typically retain their units for the medium term. As at 30 June 2016, 2 unitholders (31 December 2015: 2 unitholders) held 100% of the Fund s net assets attributable to unitholders. 3.3 Credit risk This relates to the risk that an issuer or counterparty is unable or unwilling to meet a commitment or obligation it has entered into with the Fund. The Fund is exposed to credit risk on its balances with banks and brokers. Impairment provisions are made for losses that have been incurred by the reporting date, if any. All transactions in listed/quoted securities are settled on a delivery versus payment basis using approved brokers. The risk of default is considered minimal, as delivery of securities sold is only made when the Fund s custodian banks have received payments. For a purchase, payments are made once the securities have been received by the Fund s custodian banks. The trade will fail if either party fails to meet its obligation. The Fund restricts its exposure to credit loss on securities by not investing more than 10% of the latest official net asset value in any single security. The Fund only buys and sells securities through brokers who have been approved as an acceptable counterparty according to the Manager internal counterparty credit review procedures. At 30 June 2016, all investments, amounts due from brokers, cash and short term deposits are held with parties with a Moody s credit rating of Baa1 (31 December 2015: Baa1) or higher. The Fund s financial assets are neither past due nor impaired and the maximum exposure to credit risk at the period end date is the carrying amount of the financial assets. 3.4 Capital risk management The capital of the Fund is represented by the net assets attributable to unitholders which is presented in the statement of financial position. The amount of net assets attributable to unitholders can change significantly on a daily basis as the Fund is subject to daily subscriptions and redemptions at the discretion of unitholders. The Fund s objectives when managing capital are to safeguard the Fund s ability to continue as a going concern in order to provide returns for unitholders and benefits for other stakeholders; and to maintain a strong capital base to support the development of the investment activities of the Fund. The Manager monitors capital on the basis of the net asset value and the subscriptions and redemptions of the Fund. 3.5 Fair value estimation The fair value of financial assets and financial liabilities traded in active markets (such as trading securities) are based on quoted market prices at the close of trading on the period end date. The Fund used the last traded market price as its fair valuation inputs for both financial assets and financial liabilities. An active market is a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker and industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm s length basis. The carrying value less impairment provision of other receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Fund for similar financial instruments. HKFRS 13 requires the Fund to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date (Level 1). Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2). Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3). 14 Semi-annual report

15 Notes to the Financial Statements (continued) Note 3 Financial risk management (continued) 3.5 Fair value estimation (continued) The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgement, considering factors specific to the asset or liability. The determination of what constitutes observable requires significant judgement by the Fund. The Fund considers observable data to be that market data that are readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. The following table analyses, within the fair value hierarchy, the Fund s investments measured at fair value as at the period end: Level 1 Level 2 Level 3 Total USD USD USD USD 30 June 2016 Assets Investments Equity Securities 30,361,385 1,298,486 31,659,871 30,361,385 1,298,486 31,659,871 Level 1 Level 2 Level 3 Total USD USD USD USD 31 December 2015 Assets Investments Equity Securities 39,359, ,779 1,201,031 41,315,507 39,359, ,779 1,201,031 41,315,507 Investments whose values are based on quoted market prices in active markets, and therefore classified within Level 1, include active listed equities. The Fund does not adjust the quoted price for these instruments. Financial instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within Level 2. As Level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information. Investments classified within Level 3 have significant unobservable inputs, as they trade infrequently. As observable prices are not available for these securities, these securities use valuation techniques to derive the fair value. As at 30 June 2016 the Fund held 3 investments classified under Level 3 (31 December 2015: 2). For the period ended 30 June 2016 and year ended 31 December 2015, there were no transfers of financial instruments between levels respectively except as disclosed in the tables below. The following table presents the transfers between levels for the period ended 30 June Level 1 Level 2 Level 3 Transfers between Levels 1 and 3: Equities Securities Consumer Discretionary 519,253 (519,253) Consumer Discretionary (523,112) 523,112 Information Technology 934,930 (934,930) Information Technology (617,172) 617,172 Transfers between Levels 2 and 3: Equity Securities Information Technology (754,779) 754,779 The equity securities transferred out of Level 3 to Level 1 relate to positions which significant trading activities resumed on the date of transfer during the period ended 30 June Semi-annual report 15

16 Notes to the Financial Statements (continued) Note 3 Financial risk management (continued) 3.5 Fair value estimation (continued) The equity securities transferred out of Level 1 and Level 2 to Level 3 relate to positions whose fair values were adjusted following suspension from trading during the period ended 30 June The carrying amounts of the Level 3 securities have been adjusted to their fair values using the valuation technique described in the sensitivity analysis below. Description Fair value at 30 June 2016 USD Valuation technique Unobservable inputs DHC Software Co. Ltd., A 101,388 Index beta model Average beta value Gree Electric Appliances Inc., A Guangzhou Haige Communications Group Inc. Co., A 558,680 Index beta model Average beta value 638,418 Index beta model Average beta value Weighted average input Reasonable possible shift +/- (absolute value) Change in valuation +/- USD / USD13,679/ -USD11, / USD11,795/ -USD11, / USD32,183/ -USD16,451 The following table presents the movement in level 3 instruments for the period ended 30 June June 2016 USD Opening balance 1,201,031 Transfers from level 3 to level 1 (1,454,183) Transfers from level 1 to level 3 1,140,284 Transfers from level 2 to level 3 754,779 Losses recognized in statement of comprehensive income (343,425) Closing balance 1,298,486 Total losses for the period included in statement of comprehensive income for investments held at the end of the period (343,425) The following table presents the transfers between levels for the year ended 31 December Level 1 Level 2 Level 3 Transfers between Levels 1 and 2: Equities securities Consumer Discretionary 3,394,234 (3,394,234) Information Technology (754,779) 754,779 Transfers between Levels 1 and 3: Equities securities Consumer Discretionary (732,648) 732,648 Information Technology (404,462) 404,462 The equity securities transferred out of Level 2 to Level 1 relate to a position for which significant trading activities resumed on the date of transfer during the year ended 31 December The equity securities transferred out of Level 1 to Level 2 relate to positions whose trading were inactive as at date of transfer and up to 31 December The equity securities transferred out of Level 1 to Level 3 relate to positions whose fair values were adjusted following suspension from trading during the year ended 31 December The carrying amounts of the Level 3 securities have been adjusted to their fair values using the valuation technique described in the sensitivity analysis below. 16 Semi-annual report

17 Notes to the Financial Statements (continued) Note 3 Financial risk management (continued) 3.5 Fair value estimation (continued) Description Aisino Company Limited Fair value at 31 December 2015 USD Valuation technique 441,315 Comparable trading multiples Qingdao Haier Co. Ltd 759,716 Comparable trading multiples Unobservable inputs Average beta value Average beta value Weighted average input Reasonable possible shift +/- (absolute value) Change in valuation +/- USD / USD23,258/ -USD19, / USD4,933/ -USD35,016 The following table presents the movement in level 3 instruments for the year ended 31 December December 2015 USD Opening balance Transfers from level 1 to level 3 1,137,110 Gains recognized in statement of comprehensive income 63,921 Closing balance 1,201,031 Total gains for the year included in statement of comprehensive income for investments held at the end of the year 63,921 As at 30 June 2016 and 31 December 2015, the assets and liabilities, except investments, included in the statement of financial position are carried at amortised cost; their carrying values are a reasonable approximation of fair value. Note 4 Cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents comprise the following balances with original maturity of less than 3 months: 30 June 31 December USD USD Cash at bank 1,318, ,201 Note 5 Taxation Under current PRC tax law and regulations, the Fund is not directly subject to PRC tax unless it is considered to have established a permanent establishment in the PRC or being regarded as a tax resident enterprise in the PRC. If the QFII holder, Templeton Investment Counsel, LLC, is subject to PRC tax in respect of the assets held through the quota granted to them (the Quota ), the Fund will be responsible to pay for all PRC taxes and duties of any kind attributable to the assets held through the Quota. On 14 November 2014, the Ministry of Finance, China Securities Regulatory Commission and the State Administration of Taxation ( SAT ) in the PRC, acting with State Council s approval, jointly released Caishui [2014] No. 79 ( Circular 79 ) to temporarily exempt QFIIs, which do not have an establishment or a place in the PRC or have an establishment or a place in the PRC but the income derived in the PRC is not effectively connected with their establishment or place, from corporate income tax on gains derived from the trading of A-Shares effective from 17 November As such, for the period of these financial statements, no Chinese tax on gains was paid or is payable, nor is any provision for Chinese taxes on gains maintained. As the Circular 79 exemption is temporary, in the future if further developments arise, the Chinese tax position of the investments of the Fund may change prospectively and/or retrospectively. Withholding tax of 10% is charged on PRC sourced dividends and interest income. Semi-annual report 17

18 Notes to the Financial Statements (continued) Note 5 Taxation (continued) The amount of taxation charged to the statement of comprehensive income represents: For the half For the half year ended year ended 30 June June 2015 USD USD Withholding taxes Withholding tax on interest income Withholding tax on dividend income 57,432 58,302 Note 6 Number of units in issue and net assets attributable to unitholders 57,695 59,171 The Fund has no regulatory imposed restrictions or specific capital requirements on the subscriptions and redemptions of units. The Manager is entitled to limit the daily redemptions to 10% of the total units in issue. The relevant movements are shown in the statement of changes in net assets attributable to unitholders. In accordance with the objectives outlined in Note 1 and the financial risk management policies in Note 3, the Manager endeavours to invest the subscriptions received in appropriate investments while maintaining sufficient liquidity to meet redemptions, such liquidity being augmented by short term borrowings of up to 25% of the latest available net asset value of the Fund or disposal of securities where necessary. The movements of units during the period are as follows: 30 June 30 June Class X Class X Class X Class X (acc) (acc) (acc) (acc) HKD USD HKD USD Number of units in issue at the beginning of the period 13, ,337, , ,971, Subscription of units 1, Redemption of units (364, ) (17, ) (2,243, ) Number of units in issue at the end of period 13, , , ,727, The following table details the net asset value per unit of each class of units at the reporting date: As of 30 June As of 31 December Net assets Net asset Net assets Net asset per class value per per class value per USD Unit USD Unit As at period/year end Class X (acc) HKD 21,339,054 HKD12, ,163,206 HKD13, Class X (acc) USD 11,670,445 USD ,159,040 USD13.58 Net assets attributable to unitholders (after amortisation of preliminary expenses) 33,009,499 42,322,246 In accordance with the explanatory memorandum, the preliminary expenses incurred in the establishment of the Fund are borne by the Fund. Such expenses will be paid out of the assets of the Fund and amortised over 5 years or as determined by the Manager for the purpose of calculating net asset value for subscription or redemption purposes. However, as stated in Note 2.4(e), the accounting policy of the Fund for the purpose of compliance with HKAS 38, Intangible Assets and for reporting purpose is to charge the expenses incurred in the establishment of the Fund in the reporting period in which they arose. As at 30 June 2016, the unamortised preliminary expenses of the Fund were USD19,932 (31 December 2015: USD26,908) and recognised as Adjustment for different basis adopted by the Fund in arriving at net assets attributable to unitholders in the statement of financial position. Net assets attributable to unitholders represent a liability in the statement of financial position, carried at the redemption amount that would be payable at the statement of financial position date if the unitholders exercised the right to redeem the units. Consequently, for the period ended 30 June 2016, the difference described above of USD6,976 (31 December 2015: USD13,990) is recognised in the statement of comprehensive income. 18 Semi-annual report

19 Notes to the Financial Statements (continued) Note 7 Transactions with related parties including the Trustee, the Manager and its connected persons The following is a summary of significant related party transactions/transactions entered into during the period between the Fund, the Trustee, the Manager and its connected persons. Connected persons of the Manager are those as defined in the Code on Unit Trusts and Mutual Funds issued by the Securities and Futures Commission of Hong Kong (the SFC Code ). All transactions during the period were carried out in the normal course of business and on normal commercial terms. To the best of the Manager s knowledge, the Fund does not have any other transactions with connected persons except for those disclosed below. (a) Trustee and custody fees The Trustee, Cititrust Limited, is entitled to receive a trustee fee calculated at a rate of 0.04% per annum of the net asset value. The Fund utilises the custodian and banking services of the Trustee and its associates. The following table details the related-party transactions for the period and as at period/year end: Expenses Payable 30 June 30 June 30 June 30 December USD USD USD USD (i) Trustee fees 6,659 19,564 1,072 1,463 (ii) Custody fees 20,289 84,549 4,328 5,773 Total expenses 26, ,113 5,400 7,236 (b) Unitholders As at 30 June 2016, all units of the Fund were held by 2 (31 December 2015: 2) investment funds which are managed by related companies of the Manager. The following table details the subscriptions and redemptions made by the investment funds during the period ended 30 June 2016 and year ended 31 December 2015: Class X (acc) USD 30 June December 2015 USD USD Templeton China Opportunities Fund Subscriptions Redemptions (4,200,000) (51,500,000) Class X (acc) HKD 30 June December 2015 HKD HKD Templeton China Fund Subscriptions 19,500,000 Redemptions (305,600,000) (c) Cash and cash equivalents All bank balances of the Fund are held with Citibank, N.A. (Hong Kong Branch) and are earning interest on normal commercial terms and conditions. Note 8 Soft commission arrangement The Manager and its connected persons may effect transactions for the account of the Fund through the agency of another person with whom the Manager and its connected persons have an arrangement under which such other person agrees to pay in whole or in part for the provision of goods to and/or the supply of services to the Manager or its connected persons in consideration of the Manager or its connected persons procuring that such other person (or person connected thereto) executes transactions to be entered into for the account of the Fund. The Manager shall procure that no such contractual arrangements are entered into unless the goods and services to be provided pursuant thereto are of demonstrable benefit to unitholders whether by assisting the Manager in its ability to manage the Fund or otherwise. Research and advisory services, economic and political analysis, portfolio analysis (including valuation and performance measurement), market analysis, data and quotation services, computer hardware and software incidental to the above goods and services, clearing and custodian services and investment related publications may be considered as beneficial to unitholders. During the period ended 30 June 2016 and year ended 31 December 2015, the Manager and its connected persons entered into soft commission arrangements with brokers relating to dealing in the assets of the Funds, consistent with the above. Semi-annual report 19