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Aberdeen China Opportunities Fund Annual report to 30 September 2014

Performance Review The Aberdeen China Opportunities Fund fell by 0.06% in Singapore dollar terms for the year under review period, compared to its benchmark, the MSCI Zhong Hua Index’s total return of 6.75%.

Market Review Equity markets in China and Hong Kong were mixed during the review period. Initially, stocks were boosted byoptimismoverdetails about Beijing’sThird Plenum reforms,which included liberalisingthe financial sector. Towards the end of the first half, however, the contraction in China’s manufacturing activity dragged equity markets lower. Liquidity was tight in the mainland, prompting the central bank to pump funds into the financial system. Concerns over shadow banking persisted, exacerbated by a landmark bond default. Further uncertainty was fuelled by the yuan’s tumble. But confidence recovered following the reform of state-owned enterprises. Investors were also excited over pilot schemes for the China (Shanghai) Pilot Free-Trade Zone as well as mutual market connectivity between Hong Kong and Shanghai, as these were seen as significant steps towards cross-border capital market integration. On the economic front, China’s better-than-expected second-quarter GDP growth data also reassured markets, albeit this was driven by state-backed investment and lending. But signs that the US Federal Reserve might raise rates faster than expected as well as political jitters over the pro-democracy protests in Hong Kong pared gains.

Portfolio Review At the stock level, not holding Chinese banks such as Industrial & Commercial Bank of China (ICBC) and China Construction Bank (CCB) benefited the fund, as they were dogged by worries over asset quality, particularly focused on the banks’ off-balance sheet items, which could be de-facto liabilities due to implicit guarantees. The lack of transparency on shadow banking assets also makes it difficult for investors to quantify potential losses.Turning to our holdings, Swire Pacific contributed positively to relative return, thanks to solid residential sales from its subsidiary Swire Properties.

Conversely,the lackof exposuretoChinese internet companyTencent Holdings costthefund.Tencent rallied as investors expected mobile gaming revenues to boost its growth prospects. Sentiment towards the stock also strengthened after it bought a stake in a Chinese logistics operator to boost its e-commerce business, as well as following reports that it may invest in a restaurant and entertainment guide website. However, valuations have since become more stretched and we continue to be cautious on the sector given our concerns regarding the variable interest entity structure. Holdings that detracted included retailer Giordano, which was hurt by the challenging macroeconomic environment, as well as Standard Chartered, which posted interim results in line with the downgrade in its pre-close update. While the outlook is challenging due to weaker sentiment in emerging markets, this has been reflected in the bank’s valuation at less than one time book value. We remain optimistic about its longer-term prospects.

In portfolio activity, we introduced global logistics player Kerry Logistics. We like the company for its integrated capabilities, which are unique and hard to replicate. Additionally, the group continues to increase its substantial exposure to China, where it has the largest distribution network. Against this, we divested our position in Wing Hang Bank following its takeover by OCBC. We also exited the position in ChinaVanke’s H-shares, which rose substantially after being converted from the B-shares. We retain exposure to the company through its A-shares, which trade at a significant discount.

Source: Aberdeen Asset Management Asia Limited The performance returns are sourced from Lipper, based on percentage growth, calculated on a NAV-to-NAV basis with gross income reinvested.


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