HARVEST RMB FIXED INCOME FUND HARVEST CHINA A RESEARCH SELECT FUND HARVEST CHINA INCOME FUND

Transcription

1 HARVEST RMB FIXED INCOME FUND HARVEST CHINA A RESEARCH SELECT FUND HARVEST CHINA INCOME FUND (EACH A SUB-FUND OF HARVEST FUNDS (HONG KONG)) REPORTS AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER

2 REPORTS AND FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2017

3 Content Page Management and Administration 1 Report of the Manager 2-4 Report of the Trustee 5 Independent Auditor s Report 6-8 Statement of financial position 9-10 Statement of comprehensive income Statement of changes in net assets attributable to unitholders Statement of cash flows Notes to the financial statements Investment Portfolio (Unaudited) Statement of Movements in Investment Portfolio (Unaudited) Performance Table (Unaudited) 83-85

4 MANAGEMENT AND ADMINISTRATION Directors of the Manager ZHAO Xuejun WANG Wei LI Ming JING Lei (appointed on 16 April 2018) SUN Chen KWAN Chi Wang, Thomas CHOY Peng Wah (removed on 31 January 2017) Trustee and Registrar BOCI-Prudential Trustee Limited 12/F & 25/F, Citicorp Centre 18 Whitfield Road Causeway Bay Hong Kong Manager Harvest Global Investments Limited 31/F, One Exchange Square 8 Connaught Place Central Hong Kong Solicitor to the Manager Deacons 5/F, Alexandra House 18 Chater Road Central Hong Kong Custodian Bank of China (Hong Kong) Limited 14/F, Bank of China Tower 1 Garden Road Hong Kong RQFII Custodian Bank of China Limited No. 1, Fuxingmen Nei Dajie Beijing China Auditor PricewaterhouseCoopers 21/F, Edinburgh Tower 15 Queen s Road Central Hong Kong - 1 -

5 REPORT OF THE MANAGER Harvest RMB Fixed Income Fund In 2017 the overall economic growth showed weak stability and a slight downward trend. The economy grew at 6.9% during the first half of the year and slightly slowed down to 6.8% in the second half. Excluding the price factor, investment growth went down slightly and consumption growth remained generally stable. CPI (consumer price index) varied narrowly over the year with its average slightly rising in the second half of the year compared with that in the first half of the year. Due to base effect, PPI (producer price index) fell from relatively high levels. However, the year-on-year PPI growth remained high overall. Based on quarterly bond yields of major bond types, yields rose significantly. Yield of the 10-year China Government Bond rose from around 3.3% at the end of 2016 to around 3.9%, while yields of credit bonds went up even more. In terms of price movement, volatility of the bond market increased. Taking the 10- year China Government Bond as an example, the majority of the increase occurred in the 2 nd and the 4 th quarters with fluctuations of bps. The overall spread of credit bonds increased significantly from a historical low level, and those of most types of credit bonds have now returned to the historical average level. As a whole, we believe that the economy will stabilize with a bias towards the weak end in the first half of On one hand, infrastructure investment will remain stable in the first half of the year; on the other hand, manufacturing investment is expected to bottom, leading to the stabilization of the overall fixed assets investment at the initial level. In the second half of the year, the earlier financial control measures may impose a small amount of pressure on the real economy, and the economic growth may slow down slightly. We believe that the long-term government bond yields have already reached their peak range and are likely to remain volatile at those high levels. But they are not likely to retreat significantly over the next one to three months. The main reason is that the pressure imposed by the current levels of yields on the economy will gradually emerge, leading to stable economic growth with a gradually tightening monetary policy. As a result, the long-term government bond yields may remain volatile at high levels. In the second half of the year, as the marginal effect of a tightening policy weakens, the economic growth may slow down slightly, and the overall bond yields may decrease. From a historical perspective, the upward trend of credit spreads will continue, and investors should be more cautious about the continuous expansion of credit spreads of the mid-to-low graded bonds. Harvest China A Research Select Fund In 2017, as external demand improves and the global economy continues to recover, corporate profits have been significantly improved. Equity markets have been less affected by the Federal Reserve's rate hike and we see an overall outstanding performance. Reform was effective in the supply-side, real estate investment and sales exceeded expectations under the macro environment; despite the weaker A-share index the structural market was outstanding, strong performance of the traditional front-line leader and the White Horse led the overall market trend. The broad market trend could be divided into different stages as below: From January to February, excellent short term economic data, stable interest rates and friendly policies have led to a short-term upward trend in the stock market at the beginning of The Shanghai Composite Index rose from 3,103 to 3,261 in two months. In March, China s two sessions with the NPC and CPPCC held a steady stock market turmoil up slightly; the Shanghai Composite Index increased to 3,288 in early April. From late April to early May, the market ushered in "late spring cold". The frequent introduction of financial regulatory policies and de-leveraging policies led to a period of tense interest rate funds and the structural differences in valuations in various sectors that led to the decline of the stock market. The Shanghai Composite Index fell to 3,061 points

6 REPORT OF THE MANAGER (Continued) Harvest China A Research Select Fund (Continued) In the second half of the year, due to the announcement of inclusion of China A shares in the MSCI Emerging Markets Index and the successful convening of the 19th Congress and Trump's first visit to China, the market as a whole has been on an upward trend. The intraday high reached 3,450 in November and then started to be adjusted down. From a market perspective, we see outstanding behaviour in capital flows; resulting in a highly differentiated industry performance. Three major streams were: 1) The White Horse leader, which has a relatively high performance and a reasonable valuation represented by white spirits, home appliances and electronics, has continued to make money under the influence of active capital flows and the northbound investment of Shenzhen-Hong Kong Stock Connect; 2) The broad financial sector with undervaluation and low positions rebounded strongly with insurance and stateowned banks recorded absolute positive return; 3) The squatter settlement has influences on the supplyside reform and the strict enforcement of the restrictions on environmental-friendly production has led to the performance of cyclical products such as steel, nonferrous metals, cement continued to exceed expectations. From the industry perspective, the undervalued cyclical stocks in early 2017 has led to market growth for the whole year, in which food and beverages, household appliances, steel, non-bank financials, banks and real estate recorded the highest growth, while textile and garment, media, conglomerate, defence and military as well as machinery equipments recorded the largest drop. Harvest China Income Fund Global credit market performed well in 2017 given less hawkish central bank talk from the Federal Reserve (Fed) and the European Central Bank (ECB), higher commodity prices and stronger corporate earnings. The technical for the Emerging Markets (EM) bond funds remained supportive due to accommodative monetary policies in the Developed Markets (DM) and strong inflows, totalling US$60bn year to date (YTD). Asia credit lagged other EM regions and performed in line with US peers, reflecting its lower beta and it evolved more akin to DM market. Given its expanding local investor base and high credit rating, Asia credit had been and should remain less volatile. Within Asia, China credits have delivered decent cumulative total returns relative to other countries in Asia. CEMBI Broad Index returned 3% by end of Africa is delivering the higher returns among the CEMBI regions at around 5.68%, followed by Latin America (+5.49%) and Europe (+2.52%). The best performing sectors were Metals & Mining (+7.89%), Pulp & Paper (+4.63%) and Oil & Gas (+4.61%). The worst performing sectors were Consumer (+0.77%), Infrastructure (+1.62%) and Financial (+1.93%). In Asia, the JACI Index returned 1.89% by end of Asia sovereign performed well (+2.8%) as it benefited from strong inflow into EMBIG bond funds. Its relatively long duration also amplified the impact of flatter US Treasury (UST) yield curve. Overall performance of high yield (HY) corporate (+2.89%) was dragged down by outsized movements of a few idiosyncratic events, including Noble, Reliance Communication and GCX. Financials (+1.24%) was capped by its short-duration and heavy supply from China. Investment grade (IG) corporate (+1.39%) and quasi-sovereign (+1.52%) came in the middle. In CNH bond markets, the FTSE-BOCHK Offshore RMB Bond Index returned 2.08% in CNH terms by the end of CNH primary activity was still quiet. Gross issuance was up 17% to RMB95bn in the second half of the year from RMB81bn in the first half. Of the total, RMB73bn was CDs. The remaining 22bn was bond issuance. In 2017, RMB has appreciated by 3.93% against USD, in contrast to overall weak market expectation in Investors expectation of a weaker RMB has been fading, and concerns about currency depreciation are no longer the main factor discouraging CNH bond investment. Driven by improvements in earnings and financial metrics of issuer within Asia and China, we still see value in the region. The macro backdrop also remains supportive with above potential GDP growth expected. Steady fund inflow from both outside the region and within Asia continues to provide technical support to the bond market. The region also experienced lower volatility compared to other EM countries given the stable macro outlook

7 REPORT OF THE MANAGER (Continued) Harvest China Income Fund (Continued) In particular, we expect further central bank normalization in 2018 and remain constructive on the HY segment that buffers against interest rate increases. Defaults are expected to remain low and this will help support the overall market sentiment. The turn in the commodity market should also signal an improvement in supply and demand dynamics and help support earnings growth for many commodities related HY companies. Primary issuance will be expected to continue in the first half of the year, where gross supply is expected to reach USD 300 billion by the end of As such, we also remain selective on participation and prefer to invest in issuers with solid fundamentals that do not face near term liquidity problems

8 REPORT OF THE TRUSTEE We hereby confirm that, in our opinion, the Manager, Harvest Global Investments Limited, has, in all material respects, managed Harvest RMB Fixed Income Fund, Harvest China A Research Select Fund and Harvest China Income Fund in accordance with the provisions of the Trust Deed dated 4 January 2012, as amended, for the year/period ended 31 December On behalf of BOCI-Prudential Trustee Limited, the Trustee - 5 -

9 Independent Auditor s Report To the Unitholders of Harvest Funds (Hong Kong) Report on the Audit of the Financial Statements Opinion What we have audited The financial statements of Harvest China A Research Selected Fund, Harvest RMB Fixed Income Fund and Harvest China Income Fund (the Sub-Funds ), sub-funds of Harvest Funds (Hong Kong) (the Trust ) set out on pages 9 to 57, which comprise: the statements of financial position as at 31 December 2017; the statements of comprehensive income for the year/period then ended; the statements of changes in net assets attributable to unitholders for the year/period then ended; the statements of cash flows for the year/period then ended; and the notes to the financial statements, which include a summary of significant accounting policies. Our opinion In our opinion, the financial statements give a true and fair view of the financial positions of each of the Sub-Funds as at 31 December 2017, and of each of their financial transactions and cash flows for the year/period then ended in accordance with International Financial Reporting Standards ( IFRSs ) issued by the International Accounting Standards Board (IASB). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing ( ISAs ) issued by the IASB. Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Sub-Funds in accordance with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (the IESBA Code ), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. Emphasis of Matter We draw attention to Note 3 to the financial statements which indicates the Manager considers that, as of the date of approval of these financial statements, there is uncertainty on the implementation of the VAT regime in the People s Republic of China on interest income arising from debt securities, and that the Manager has exercised significant judgement in determining the relevant tax provisioning policy of the Sub-Fund. Our opinion is not qualified in respect of this matter

10 Independent Auditor s Report (Continued) To the Unitholders of Harvest Funds (Hong Kong) Report on the Audit of the Financial Statements (Continued) Other Information The Manager and the Trustee (the Management ) of the Sub-Funds are responsible for the other information. The other information comprises all of the information included in the annual report other than the financial statements and our auditor s report thereon. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Management for the Financial Statements The Management of the Sub-Funds is responsible for the preparation of the financial statements that give a true and fair view in accordance with IFRSs issued by the IASB, and for such internal control as the Management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Management of the Sub-Funds is responsible for assessing the Sub-Funds ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Management either intends to liquidate the Sub-Funds or to cease operations, or have no realistic alternative but to do so. In addition, the Management of the Sub-Funds is required to ensure that the financial statements have been properly prepared in accordance with the relevant disclosure provisions of the Trust Deed dated 4 January 2012 ( Trust Deed ) and Appendix E of the Code on Unit Trusts and Mutual Funds issued by the Hong Kong Securities and Futures Commission (the SFC Code ). Auditor s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. We report our opinion solely to you, as a body, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. In addition, we are required to assess whether the financial statements of the Fund have been properly prepared, in all material respects, in accordance with the relevant disclosure provisions of the Trust Deed and the SFC Code

11 Independent Auditor s Report (Continued) To the Unitholders of Harvest Funds (Hong Kong) Report on the Audit of the Financial Statements (Continued) As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Management. Conclude on the appropriateness of the Management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Fund s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Fund to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with the Management regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Report on Matters under the Relevant Disclosure Provisions of the Trust Deed and the SFC Code In our opinion, the financial statements have been properly prepared, in all material respects, in accordance with the relevant disclosure provisions of the Trust Deed and the SFC Code. PricewaterhouseCoopers Certified Public Accountants Hong Kong, 26 April

12 STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2017 Harvest China A Research Select Fund Harvest RMB Fixed Income Fund Note RMB RMB RMB RMB Assets Current Assets Financial assets at fair value through profit or loss 4(a) 59,841,786 39,618,671 36,238,637 41,414,203 Interest receivable on deposits Interest receivable on bonds - - 1,325,566 1,412,076 Account receivable on subscription of units 3,060,000 49, Account receivable on sale of investment 1,471, ,158,683 Other deposit 7, Cash and cash equivalents 8(d) 10,655, ,441 4,131,164 8,794,945 Total assets 75,037,297 40,525,681 41,695,717 52,780, Liabilities Non-Current Liabilities Deferred tax liability , Current Liabilities Management fee payable 8(a) 64,939 41,870 42,088 51,656 Trustee fee payable 8(b) 35,000 35,000 35,000 35,000 Account payable on redemption of units 7,200, ,798 Account payable on purchase of investment 2,622, Other payables 160, , , ,972 Provision for taxation ,602 2,236,307 Total liabilities excluding net assets attributable to unitholders 10,083, , ,297* 2,769,486 * Net assets attributable to unitholders 64,953,442 40,242,530 41,318,420* 50,011,166 * * Net assets attributable to holders of redeemable shares are classified as equity as at 31 December 2017 and The notes on pages 17 to 57 form an integral part of these financial statements

13 STATEMENT OF FINANCIAL POSITION (CONTINUED) AS AT 31 DECEMBER 2017 Harvest China Income Fund Note USD USD Assets Current Assets Financial assets at fair value through profit or loss 4(a) 29,314,037 19,739,619 Interest receivable on bonds 314, ,994 Dividend Receivable 2,426 - Account receivable on redemption of investment 77, ,311 Cash and cash equivalents 8(d) 2,197, ,726 Total assets 31,905,398 20,523, Liabilities Current Liabilities Financial liabilities at fair value through profit or loss Management fee payable 8(a) 10,730 5,410 Trustee fee payable 8(b) 6,000 3,000 Other payables 21,375 21,135 Total liabilities excluding net assets attributable to unitholders 38,386 29, Net assets attributable to unitholders 31,867,012 20,494,105 The financial statements were approved by the Trustee and the Manager on signed on their behalf. and were.. Trustee.. Manager The notes on pages 17 to 57 form an integral part of these financial statements

14 STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2017 Harvest China A Research Select Fund Harvest RMB Fixed Income Fund Note RMB RMB RMB RMB Income Dividend income 835, ,026 13,773 15,381 Interest on bonds - - 1,977,253 2,784,145 Interest on bank deposits 6,155 4,824 15,405 22,466 Other income - 232, Net changes in fair value on financial assets at fair value through profit or loss 6 17,958,488 (1,587,724) (756,264) (3,356,717) Net foreign exchange loss (224,049) (358,549) 16,181 (10,213) Total investment income 18,576,507 (1,035,474) 1,266,348 (544,938) Expenses Management fee 8(a) (608,230) (607,728) (534,438) (729,709) Trustee fee 8(b) (420,000) (419,908) (420,000) (420,000) Custodian fee 8(c) (177,283) (310,373) (69,469) (197,379) Auditors' remuneration (124,556) (70,518) (184,665) (210,401) Investment transaction costs (332,977) (469,938) (35,471) (185,978) Legal and other professional fee (131,102) (227,611) (115,502) (214,583) Other operating expenses (24,814) (121,299) (24,159) (149,991) Total expenses (1,818,962) (2,227,375) (1,383,704) (2,108,041) (Loss)/profit before taxation 16,757,545 (3,262,849) (117,356) (2,652,979) Finance cost Distributions to unitholders * 2(g) (Loss)/profit after distribution and before tax 16,757,545 (3,262,849) (117,356) (2,652,979) Taxation 9 (85,705) 2,589,801 (194,994) 3,754,739 Increase/(decrease)/ in net assets attributable to unitholders 16,671,840 (673,048) (312,350) 1,101,760 * Under the liability treatment distributions are recognised as a finance cost in the statement of comprehensive income however, under equity treatment distributions are recognised as dividends in the statement of changes in equity. The notes on pages 17 to 57 form an integral part of these financial statements

15 STATEMENT OF COMPREHENSIVE INCOME (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2017 Note Harvest China Income Fund For the period from 11 January 2016 (date of For the year ended establishment) 31 December 2017 to 31 December 2016 USD USD Income Dividend income 15,015 19,225 Interest on bonds 1,300, ,511 Interest on bank deposits Other income 131,889 3,778 Net changes in fair value on financial assets at fair value through profit or loss 6 777,171 (7,797) Net foreign exchange loss 1,900 (40,588) Total investment income 2,226, , Expenses Management fee 8(a) (86,312) (41,937) Trustee fee 8(b) (69,000) (35,032) Custodian fee 8(c) (20,637) (8,176) Preliminary expenses (3,578) (86,359) Auditors' remuneration (20,470) (21,000) Investment transaction costs (10,950) (4,771) Legal and other professional fee (16,355) - Impairment on account receivable on redemption of investment (29,290) - Other operating expenses (7,408) (1,153) Total expenses (264,000) (198,428) Profit before taxation 1,962, ,944 Taxation 9 (4,042) (839) Increase in net assets attributable to unitholders 1,958, ,105 The notes on pages 17 to 57 form an integral part of these financial statements

16 STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO UNITHOLDERS FOR THE YEAR ENDED 31 DECEMBER 2017 Harvest China A Research Select Fund Harvest RMB Fixed Income Fund RMB RMB RMB RMB Net assets attributable to unitholders at the beginning of the year 40,242,530 62,887,828 50,011,166 82,313,296 Proceeds on issue of units 57,113,035 17,122, , ,894 Payments on redemption of units (49,073,963) (39,094,895) (7,241,977) (31,754,264) Net increase/(decrease from unit transactions 8,039,072 (21,972,250) (6,995,284) (31,399,370) Increase/(decrease) in net assets attributable to unitholders 16,671,840 (673,048) (312,350) 1,101,760 Dividend paid to unitholders (Note 1) - - (1,385,112) (2,004,520) Net assets attributable to unitholders at the end of the year 64,953,442 40,242,530 41,318,420 50,011,166 Note: 1. Under the liability treatment distributions are recognised as a finance cost in the statement of comprehensive income however, under equity treatment distributions are recognised as dividends in the statement of changes in equity. The notes on pages 17 to 57 form an integral part of these financial statements

17 STATEMENT OF CHANGES IN NET ASSETS ATTRIBUTABLE TO UNITHOLDERS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2017 Harvest China Income Fund For the period from 11 January 2016 (date of establishment) 2017 to 31 December 2016 USD USD Net assets attributable to unitholders at the beginning of the year/period 20,494,105 - Proceeds on issue of units 9,414,361 29,997,216 Redemption of units - (9,997,216) Net increase from unit transactions 9,414,361 20,000,000 Increase in net assets attributable to unitholders 1,958, ,105 Net assets attributable to unitholders at the end of the year/period 31,867,012 20,494,105 The notes on pages 17 to 57 form an integral part of these financial statements

18 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2017 Harvest China A Research Select Fund Harvest RMB Fixed Income Fund RMB RMB RMB RMB Cash flows from operating activities Increase/(decrease) in net assets attributable to unitholders 16,671,840 (673,048) (312,350) 1,101,760 Adjustments for: Interest on bank deposits (6,155) (4,824) (15,405) (22,466) Interest on bonds - - (1,977,253) (2,784,145) Taxation 85,705 (2,589,801) 194,994 (3,754,739) Operating profit/(loss) before working capital changes 16,751,390 (3,267,673) (2,110,014) (5,459,590) (Increase)/decrease in financial assets at fair value through profit or loss (20,223,115) 26,967,643 5,175,566 40,459,800 (Increase)/decrease in other deposit (7,902) - - 5,045 (Increase)/decrease in other receivables (1,471,525) 1,036,118 1,158,683 1,183,416 Increase/(decrease) in other payables 2,600,448 (1,078,653) (108,933) (8,383) Cash (used in)/generated from operations (2,350,704) 23,657,435 4,115,302 36,180,288 Interest received on bank deposits 6,069 5,052 15,800 22,137 Interest received on bonds - - 2,063,763 3,826,702 Tax paid (86,063) (790,399) (2,326,452) (2,520,033) Net cash (used in)/ generated from operating activities (2,430,698) 22,872,088 3,868,413 37,509, Cash flows from financing activities Proceeds on issue of units 54,102,535 17,073, , ,894 Payments on redemption of units (41,873,349) (44,600,884) (7,393,775) (31,674,319) Distribution paid to unitholders - - (1,385,112) (2,004,520) Net cash generated from/(used in) from financing activities 12,229,186 (27,527,739) (8,532,194) (33,323,945) Net increase/(decrease) in cash and cash equivalents 9,798,488 (4,655,651) (4,663,781) 4,185,149 Cash and cash equivalents at the beginning of the year 857,441 5,513,092 8,794,945 4,609,796 Cash and cash equivalents at the end of the year 10,655, ,441 4,131,164 8,794,945 Analysis of balances of cash and cash equivalents Cash at banks 10,655, ,441 4,131,164 8,794,945 The notes on pages 17 to 57 form an integral part of these financial statements

19 STATEMENT OF CASH FLOWS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2017 Harvest China Income Fund For the period from 11 January 2016 (date of establishment) 2017 To 31 December 2016 USD USD Cash flows from operating activities Increase in net assets attributable to unitholders 1,958, ,105 Adjustments for: Interest on bank deposits (402) (243) Interest on bonds (1,300,211) (718,511) Dividend income (15,015) (19,225) Withholding tax 4, Impairment on account receivable on redemption of investment 29,290 - Operating gain/(loss) before working capital changes 676,250 (243,035) Increase in financial assets at fair value through profit or loss (9,574,418) (19,739,619) Increase in financial liabilities at fair value through profit or loss Decrease/(increase) in account receivable on redemption of investment 35,650 (142,311) Increase in other payables 8,560 29,545 Cash used in operations (8,853,677) (20,095,420) Interest received on bank deposits Interest received on bonds 1,252, ,517 Dividend received 8,547 18,386 Net cash used in operating activities (7,591,938) (19,625,274) Cash flows from financing activities Proceeds on issue of units 9,414,361 29,997,216 Payments on redemption of units - (9,997,216) Net cash generated from financing activities 9,414,361 20,000, Net increase in cash and cash equivalents 1,822, ,726 Cash and cash equivalents at the beginning of the year/period 374,726 - Cash and cash equivalents at the end of the year/period 2,197, ,726 Analysis of balances of cash and cash equivalents Cash at banks 2,197, ,726 The notes on pages 17 to 57 form an integral part of these financial statements

20 NOTES TO THE FINANCIAL STATEMENTS 1 General information Harvest Funds (Hong Kong) (the Trust ) is an umbrella unit trust governed by its Trust Deed dated 4 January 2012 (the Trust Deed ) made between Harvest Global Investments Limited as Manager (the Manager ) and BOCI-Prudential Trustee Limited as Trustee (the Trustee ). The terms of the Trust Deed are governed by the law of Hong Kong. The Trust is authorised by the Securities and Futures Commission of Hong Kong (the SFC ) under 104(1) of the Hong Kong Securities and Futures Ordinance. As at 31 December 2017, the Trust has three sub-funds, Harvest RMB Fixed Income Fund, Harvest China A Research Select Fund and Harvest China Income Fund (collectively the Sub-Funds ), in respect of which separate classes of units were issued. Dates of inception of the Sub-Funds were 21 February 2012, 28 January 2014 and 11 January 2016 for Harvest RMB Fixed Income Fund, Harvest China A Research Select Fund and Harvest China Income Fund respectively. The reporting period for the Sub-Funds is 1 January 2017 to 31 December 2017 (the Year ). Harvest RMB Fixed Income Fund Harvest RMB Fixed Income Fund (the Sub-Fund ) seeks to provide investors with long-term capital growth in Renminbi ( RMB ) terms by investing primarily in a managed portfolio of debt securities and money market instruments denominated and settled in RMB issued or listed in the People s Republic of China ( PRC ), including but not limited to fixed rate or floating rate debt securities, convertible bonds, commercial papers and certificates of deposit. These instruments may be traded or dealt in the mainland exchange market or interbank bond market. These instruments may be issued by the Chinese governments (including municipal bonds issued by local governments), quasi-government organisations, banks, financial institutions and other corporate entities. The Sub-Fund may invest in urban investment bonds (i.e. debt instruments issued by local government financing vehicles ( LGFVs ) and traded in the PRC exchange-traded bond markets and inter-bank bond market). These LGFVs are separate legal entities established by local governments and/or their affiliates to raise financing for local development, public welfare investment and infrastructure projects. The exposure to urban investment bonds may be up to 70% of the Sub-Fund s Net Asset Value. The Sub-Fund may also invest in collective investment schemes which primarily invest in fixed income securities, including exchange traded funds. Investment in debt securities, money market instruments and the abovementioned collective investment schemes shall be no less than 80% of the net asset value of the Sub-Fund. The Sub-Fund may also invest up to 20% of its net asset value in China A-Shares listed on the Shanghai and Shenzhen Stock Exchanges (including initial public offerings) and collective investment schemes which primarily invest in equity securities, including exchange traded funds, issued or listed in the PRC. The Sub-Fund will only invest in collective investment schemes that have been authorised by the China Securities Regulatory Commission ( CSRC ) for investment by the retail public, and such investment will not in aggregate exceed 10% of the net asset value

21 NOTES TO THE FINANCIAL STATEMENTS 1 General information (Continued) Harvest RMB Fixed Income Fund (Continued) Exposure to securities issued within mainland China will be through the RQFII quotas of the Manager. The Sub-Fund will not invest in any securities issued outside mainland China. The Sub-Fund will not invest in any structured deposits, structured products or derivative instruments for hedging or non-hedging purposes. The Sub-Fund will not invest in asset backed securities (including asset backed commercial papers). The Manager currently does not intend to enter into any securities lending, repurchase or reverse repurchase transactions or similar over-the-counter transactions in respect of the Sub-Fund. Prior approval will be sought from the SFC and at least one month s prior notice will be given to Unitholders should there be a change in such intention. Harvest China A Research Select Fund Harvest China A Research Select Fund (the Sub-Fund ) seeks to achieve long-term capital growth by investing primarily in China A-Shares listed on the Shanghai Stock Exchange or the Shenzhen Stock Exchange. The Sub-Fund invests primarily in China A-Shares (including initial public offerings) listed on the Shanghai Stock Exchange or the Shenzhen Stock Exchange through the RQFII quotas of the Manager. The Sub-Fund may invest in equity of companies of any capital size, including small and midcap companies. It does not have an investment focus on any particular sector or industry. Not more than 10% of the Sub-Fund s assets may be held in cash and cash based instruments and money market instruments and/or, to the extent permitted by applicable regulations and investment restrictions, in other types of investments including, but not limited to, warrants traded or transferred on a stock exchange in the PRC, securities investment funds (including exchange traded funds) and other instruments from time to time approved by the China Securities Regulatory Commission ( CSRC ) for investment by a RQFII. The Sub-Fund may use deliverable or non-deliverable forwards, currency options and currency futures (which are traded offshore outside the PRC) for the purpose of currency hedging only. The Sub-Fund may also acquire stock index futures traded in the PRC or in offshore markets for equity market hedging only. The Manager currently does not intend to invest in other derivatives (save for the aforementioned derivatives). The Sub-Fund s total exposure to investments issued or traded offshore outside the PRC (such as equities, collective investment schemes, ETFs and real estate investment trusts ( REITs )) will in aggregate be up to 30% of its net asset value. The Manager currently does not intend to: (i) (ii) (iii) invest in debt securities including urban investment bonds issued in the PRC (i.e. bonds issued by PRC local government financing vehicles); invest in structured deposits or products (including asset backed securities, mortgage backed securities and asset backed commercial papers or similar structured products); enter into any securities lending, repurchase or reverse repurchase transactions or similar over-the-counter transactions in respect of the Sub-Fund, and prior approval will be sought from the SFC and at least one month s prior notice will be given to unitholders should there be a change in such intention

22 NOTES TO THE FINANCIAL STATEMENTS 1 General information (Continued) Harvest China Income Fund Harvest China Income Fund (the Sub-Fund ) seeks to maximise long term total return in terms of both income and capital by investing primarily in a portfolio of fixed income and debt instruments denominated in the United States Dollars (the USD ), Renminbi (the RMB ) or any other currencies. The Sub-Fund seeks exposure to fixed income and debt instruments issued or guaranteed by issuers domiciled in China or Hong Kong or those domiciled outside of China but whose predominant business will benefit from or is related to the economic growth in China for at least 70% of the Net Asset Value of the Sub-Fund. In addition, the Sub-Fund may have exposure to fixed income and debt instruments issued or guaranteed by issuers domiciled in or exercising the predominant part of their economic activities in the Asian region (including but not limited to Indonesia, India, Malaysia, the Philippines, Thailand, Singapore, South Korea and Vietnam) or a member country of the Organisation for Economic Cooperation and Development ( OECD ). Such exposure will be less than 30% of the Net Asset Value of the Sub-Fund. Exposure to fixed income and debt instruments may be through direct investments or investments in other collective investment schemes (including exchange traded funds). The Sub-Fund may invest in: (1) RMB denominated fixed income and debt instruments issued or distributed in mainland China ( Onshore RMB Bonds ) through direct investment via the Manager s RQFII quota, China Interbank Bond Market and/or other means as may be permitted by the relevant regulations from time to time, and indirectly through investment in other collective investment schemes (including exchange traded funds); and (2) RMB denominated fixed income and debt instruments issued or distributed outside mainland China ( Offshore RMB Bonds ) through direct investment. Direct and indirect exposure to Onshore RMB Bonds will be less than 20% of the Sub- Fund s Net Asset Value. The Sub-Fund s investments may include, but are not limited to, bonds, convertible bonds, commercial paper, medium term notes, floating rate notes, money market instruments, certificates of deposits, bank deposits and negotiated term deposits. The Sub-Fund may seek exposure to other assets that may generate additional income (which includes but is not limited to dividend income, interest income and/or expected potential capital appreciation) for the Sub-Fund, including but not limited to real estate investment trusts (REITs) and China A-Shares (via the Shanghai-Hong Kong Stock Connect or similar schemes which may be approved by the relevant authorities) (which will not in aggregate exceed 10% of the Sub- Fund s Net Asset Value) and may also hold cash and cash based instruments and money market instruments as considered appropriate by the Manager. The aggregate direct and indirect exposure to Onshore RMB Bonds and China A-Shares will be less than 20% of the Sub-Fund s Net Asset Value

23 NOTES TO THE FINANCIAL STATEMENTS 1 General information (Continued) Harvest China Income Fund (Continued) The Sub-Fund may use deliverable or non-deliverable forwards, currency options and currency futures for the purpose of currency hedging only (against the Sub-Fund s Base Currency or the class currency of the relevant class of Units); credit default swaps for the purpose of credit hedging only; and bond futures, US treasury futures and interest rate swaps for the purpose of interest rate hedging only. The Manager currently does not intend to invest in structured deposits or products or financial derivative instruments (other than those set out above for hedging only), or enter into any securities lending, repurchase or reverse repurchase transactions or similar over-the-counter transactions in respect of the Sub-Fund. Prior approval will be sought from the SFC and at least one month s prior notice will be given to Unitholders should there be a change in such intention. 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. (a) Basis of preparation The financial statements of the Sub-Funds have been prepared in accordance with International Financial Reporting Standards ( IFRSs ) issued by the International Accounting Standards Board ( IASB ). The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities held at fair value through profit or loss. The preparation of financial statements in conformity with IFRSs requires the use of certain critical accounting estimates. It also requires the Trustee and Manager (together the Management ) to exercise their judgment in the process of applying the Sub-Funds accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 3 and Note 4(f). Standards and amendments to existing standards effective 1 January 2017 There are no standards, interpretations or amendments to existing standards that are effective for the first time for the financial year beginning 1 January 2017 that would be expected to have a material impact on the Sub-Funds

24 NOTES TO THE FINANCIAL STATEMENTS 2 Summary of significant accounting policies (Continued) (a) Basis of preparation (Continued) New standards, amendments and interpretations issued but not effective for the financial year beginning 1 January 2017 and have not been early adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2017, and have not been applied in preparing these financial statements. None of these are expected to have a significant effect on the financial statements of the Sub-Funds except the following set out below: IFRS 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and liabilities. It replaces the multiple classification and measurement models in IAS 39 and is effective for reporting periods beginning on or after 1 January Classification and measurement of debt assets will be driven by the entity s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. A debt instrument is measured at amortised cost if the objective of the business model is to hold the financial asset for the collection of the contractual cash flows and the contractual cash flows under the instrument solely represent payments of principal and interest (SPPI). A debt instrument is measured at fair value through other comprehensive income if the objective of the business model is to hold the financial asset both to collect contractual cash flows from SPPI and to sell. All other debt instruments must be recognised at fair value through profit or loss. An entity may however, at initial recognition, irrevocably designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency. Derivative and equity instruments are measured at fair value through profit or loss unless, for equity instruments not held for trading, an irrevocable option is taken to measure at fair value through other comprehensive income. IFRS 9 also introduces a new expected credit loss (ECL) impairment model. On adoption of IFRS 9 the Sub-Fund s investment portfolio will continue to be classified as fair value through profit or loss. Other financial assets which are held for collection will continue to be measured at amortised cost with no material impact expected from application of the new impairment model. As a result, the adoption of IFRS 9 is not expected to have a material impact on the Sub-Fund s financial statements. There will be no impact on the Sub-Fund s accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Sub-Fund does not have any such liabilities. (b) Financial assets at fair value through profit or loss (i) Classification The Sub-Funds classify their investments as financial assets at fair value through profit or loss. These financial assets are designated by the Management at fair value through profit or loss at inception. Financial assets designated at fair value through profit or loss at inception are those that are managed and their performance evaluated on a fair value basis in accordance with the Sub-Funds documented investment strategies. The Sub- Funds policies require the Management to evaluate the information about these financial assets on a fair value basis together with other related financial information

25 NOTES TO THE FINANCIAL STATEMENTS 2 Summary of significant accounting policies (Continued) (b) Financial assets at fair value through profit or loss (Continued) (ii) Recognition/derecognition Purchases and sales of investments are accounted for on the trade date basis. Investments are derecognised when the rights to receive cash flows from the investments have expired or the Sub-Funds have transferred substantially all risks and rewards of ownership. (iii) Measurement Investments are initially recognised at fair value. Transaction costs are expensed in the statement of comprehensive income. Subsequent to initial recognition, all investments are measured at fair value. Realised and unrealised gains and losses on investments are recognised in the statement of comprehensive income in the period in which they arise. (iv) Fair value estimation The Sub-Funds adopted IFRS 13 Fair value measurement since date of inception. The fair value of investments that are listed or traded on an exchange is based on quoted market prices at close of trading on reporting date. The fair value of financial assets that are traded in interbank markets (for example, unlisted debt securities) is determined by using the valuation provided by China Central Depository & Clearing Co., Ltd., a company jointly established by People s Bank of China and Ministry of Finance to undertake the function of centralised depository and settlement for the inter-bank bond market. (v) Transfer between levels of fair value hierarchy Transfers between levels of the fair value hierarchy are deemed to have occurred at the end of the reporting period. (vi) 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 asset and settle the liability simultaneously. (c) Income and expenses Interest income is recognised on a time-proportionate basis using the effective interest method. The effective interest method is a method of calculating the amortised cost of an interest bearing asset and of allocating the interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts throughout the expected life of the financial instrument, or a shorter period where appropriate, to the net carrying amount of the financial instrument. When calculating the effective interest rate, the Sub-Funds estimate cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts