Investment Strategy

The Directors and the Investment Manager believe that Greater China is an especially attractive market for investment by the Companies. Not only does Greater China have a large pool of potential targets with strong investment fundamentals, but it also suffers from an under-developed local capital market which makes the Companies an attractive funding source for companies.

China’s expanding economy has created a large number of small to medium sized, fast growing, profitable companies across numerous sectors. According to financialweek.com, as at 10 September 2007 there are more than 19,000 privately-owned companies whose key financial statistics would categorise them as being within the Companies investment criteria.

Many industries that are mature in the developed world are fast-growing in Greater China. Basic industries, which are seeing little expansion in the developed world are fast-growing in Greater China due to the development of the local market and the demand that causes. For example fire safety businesses are expanding as the number of businesses which require their services is growing and standards of fire safety within Greater China are increasing. At the same time, Greater China is a fragmented market place which is attractive for a roll-up strategy of combining businesses and consolidating market share.

The Directors believe that Capital in Greater China is more difficult to access than in the developed world. The Chinese equity market is still controlled by the government of the Peoples Republic of China. Access to it for non-state owned companies is very limited and the process of gaining access to equity markets presents much uncertainty. Similarly, project financing is not widely available to small non-state owned companies. If companies’ only access to capital is through one-year revolving loans, clearly it becomes difficult for them to commit to capital expenditure. An equity investment by the Companies with an investment timeline similar to the expenditure the Investee Company is looking to make therefore has certain innate attractions.

The Directors and the Investment Manager believe that China’s robust economic growth and its underdeveloped capital market present significant investment opportunities upon which to execute The Companies’ strategy. NASDAQ alone boasts more that 46 listed Chinese companies, with more than $40 billion in collective market capitalisation.