China A- Shares and How to Make Profit From Them

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ASIAN MASTERS FUND | QU AR TERL Y INVESTMENT UPD A TE | MARCH 2015 0 1

ASIAN MASTERS FUND

QUARTERLY INVESTMENT UPDATE (MARCH 2015)

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HIGHLIGHTS

• Net tangible assets (NTA) backing per share returned +13.9% in the March quarter • One cent per share dividend paid during the quarter

• China A-Shares continued to rally

MARKET PERSPECTIVES

The Asian Masters Fund has performed well again this quarter, driven by a strong performance from China A-Shares (see Appendix for an explanation of China A-Share market). The fund’s exposure to A-Shares has been a major driver behind its excellent performance over the past year. But with the A-Share market up 137% over the past 12 months, it’s natural to question what has driven such significant returns, and whether the market is now overvalued.

There have been a number of factors driving the amazing rally in China A-Shares, including;

Valuations – Prior to the rally, China A-Shares were trading at valuations significantly lower than their

historical averages, offshore China H-Shares, and other global stock markets. However, a market can only remain undervalued for so long before investors start to take note.

Expectations of continued market opening – China’s domestic stock market was closed to foreign investors

until 2002. Since then, it has gradually opened up to qualified foreign institutional investors. November 2014 saw the opening of the Shanghai-Hong Kong Stock Connect programme, which allowed those with a Hong Kong brokerage account to buy shares in a large number of Shanghai listed stocks, and vice versa. This has the potential for significant foreign investment in China’s domestic stock market (as well as Chinese investment in Hong Kong listed stocks).

MSCI has also indicated that it will include China A-Shares in its MSCI China Index and its correspondent composite indices (including MSCI Emerging Markets Index and MSCI Asia ex Japan Index) once certain accessibility criteria are reached (these are qualitative factors, so very hard to measure). It is expected that this will occur in the next couple of years, resulting in increased investment from foreign investors.

Interest rate cuts – When China cut interest rates in late November, for the first time since 2012, it was taken

as a sign that the People’s Bank of China (PBoC) would use monetary policy levers to manage China’s economic slowdown. This spurred a significant release of domestic liquidity into the local share market which, following a further rate cut in February, has continued through to the end of March.

Lack of investment alternatives – The investment options available to Chinese retail investors are limited.

With the property market slowing down in 2014 and the government cracking down on wealth management products, Chinese retail investors have poured back into the share market.

Given the scale of the rally, it would be no surprise to see a short-term correction at some stage this year. However, A-Shares now trade at around their 10 year average on a price to earnings basis, so A-Shares are certainly not expensive on the whole. While there have undoubtedly been pockets of the market which are trading at very high valuations, the managers with which we invest are stock-pickers, and are able to rotate their portfolios to companies trading at cheaper valuations. Anecdotally, our China A managers have noted that their portfolio turnover has increased, as they have taken profits on companies whose share prices have run ahead of fundamentals.

While we are aware of the risks of a correction after such a significant short-term rally, we believe that China’s domestic stock market continues to provide attractive long-term opportunities. The A-Share market remains inefficient, and by investing with disciplined managers we expect to benefit from the long-term growth of the Chinese domestic economy.

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ASIAN MASTERS FUND | QU AR TERL Y INVESTMENT UPD A TE |

EQUITY MARKET REVIEW

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Asia ex Japan equity markets performed well in the first quarter (Q1) of 2015, rising 12.4% in AUD terms (+4.9% in USD terms). The good performance was broad based with all markets posting positive returns. Accommodative monetary policy implemented by central banks around the world, including Asia, provided support to equity markets.

For a third consecutive quarter, China was the best performing market in the region with domestic-listed China A-Shares gaining 23.0% (+14.7% in local currency terms). Hong Kong listed China H-Shares also performed well, rising 10.4% (+3.0% in local currency terms). Although China’s economy continued to slow, sentiment was boosted by an interest rate cut in late February and expectations of renewed monetary and fiscal stimulus measures to address the slowdown in the economy. China also lowered its bank reserve requirement ratio for the first time in over two years. Still, the government lowered the economic growth target from 7.5% in 2014 to around 7.0% in 2015.

The Philippines was the second best performing market in the region, posting positive returns in all three months of the quarter to finish up 18.4%. Markets rallied to all-time high levels on the back of strengthening economic fundamentals and easing inflation amid lower commodity prices. The economy grew 6.1% year-on-year (YOY) in 2014.

Hong Kong and Korea also performed strongly, rising 13.6% and 13.2% respectively. Hong Kong stocks became attractive to investors after they lagged their Chinese counterparts, offering cheaper valuations. Korean equities gained momentum after the Bank of Korea announced an interest rate cut of 25 basis points (bps) in March. Taiwan (+11.7%) performed broadly in line with the Index.

Indian equities rose 10.8% in Q1 aided by supportive central bank policy, with two interest rate cuts during the quarter. The Narendra Modi-led government delivered its first full year fiscal budget in February, which emphasised infrastructure spending and disinvestments, but lacked the wide-scale subsidy reforms expected by the market.

Thailand (+10.1%) and Vietnam (+8.0%) posted positive returns, but underperformed the broader Index. Thailand’s gross domestic product growth eased to +0.7% YOY in 2014, the slowest growth in three years, forcing the central bank to cut its benchmark interest rate by 25 bps in March. The Thai military government is struggling to revive economic growth as political unrest curbs domestic demand and weak global demand hurts exports. Indonesian equities gained 7.9% during the period, buoyed by a 25 bps interest rate cut in February. Singapore gained 6.3% during the quarter. Singapore’s government announced a so-called ‘Robin Hood’ budget for 2015-16 that raised the marginal tax rates on top income earners, but increased support for elderly people and low income workers.

Malaysia (+5.9%) was the worst performing market in the region, largely due to a depreciating currency and tumbling crude oil prices.

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PERFORMANCE OF ASIAN SHARE MARKETS IN THE MARCH QUARTER

Index Local currency Australian dollars

CSI 300 Index (China A-Shares) 14.7% 23.0%

PSEi (Philippines) 10.7% 18.4%

Hang Seng (Hong Kong) 6.0% 13.6%

Kospi (Korea) 6.5% 13.2%

MSCI Asia ex Japan 4.9% 12.4%

Taiex (Taiwan) 3.0% 11.7%

Sensex (India) 1.9% 10.8%

Hang Seng China Enterprises (China H-Shares) 3.0% 10.4%

SET (Thailand) 1.6% 10.1%

Ho Chi Minh (Vietnam) 1.2% 8.0%

JCI (Indonesia) 5.9% 7.9%

Straits Times (Singapore) 2.8% 6.3%

KLCI (Malaysia) 4.6% 5.9%

Source: Bloomberg, Walsh & Company Asset Management Pty Limited

PERFORMANCE OF THE SECTORS WITHIN THE MSCI ASIA EX JAPAN INDEX OVER THE MARCH QUARTER (IN AUD) Te le communication servic es Real estate In fo rmation technol og y Consumer stap le s Consumer disc re tionary 15% 0% 20% 25% 5% Health ca re Financials Utilities Ener gy Industrials Materials 10% 21.5% 16.5% 13.9% 13.8% _13.3% 12.7% 11.0% _10.6% 7.5% 6.8% 6.7%

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CURRENCY MARKET REVIEW

PERFORMANCE OF THE AUSTRALIAN DOLLAR AGAINST VARIOUS CURRENCIES OVER THE MARCH QUARTER

Indian rupee Singapore dollar Taiwan dollar HK dollar Chinese yuan Korean won 0.0% US dollar -7.0% -6.0% -9.0% -8.0% -5.0% -4.0% -3.0% -2.0% -1.0% -8.1% -3.7% -5.6% -6.9% -7.0% -7.0% -7.9%

During the March quarter, the Australian dollar depreciated against all Asia ex Japan currencies. The decline was most significant against the Indian rupee (-8.1%), Taiwan dollar (-7.9%), Hong Kong dollar (-7.0%) and Chinese yuan (-7.0%). This weakening of the AUD had a positive impact on the value of the Fund’s foreign investments. The AUD continued to weaken in Q1 due to lower commodity prices, speculation of a sooner-than-expected interest rate hike in the US and further interest rate cuts in Australia.

ASIAN MASTERS FUND (ASX: AUF) OVERVIEW

AUF listing date December 2007

Total assets ($m) $175.8

NTA per share (March 2015) $1.40

Number of securities held by underlying funds 599

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AUF PERFORMANCE

From 31 December 2014 to 31 March 2015, AUF’s net tangible asset (NTA) backing per share returned +13.9% (including dividends). This represents an outperformance of 1.5% relative to the MSCI Asia ex Japan Index. AUF has performed very strongly since inception, outperforming the index by 37.5%.

Since AUF listing March quarter

AUF 64.7% 13.9%

MSCI Asia ex Japan Index 27.2% 12.4%

Outperformance* 37.5% 1.5%

*Figures may not reconcile due to rounding.

UNDERLYING MANAGERS

AUF currently has investments in 14 leading funds that provide exposure across a number of Asian markets.

Manager Mandate _31/12/2014Weight at _31/03/2015Weight at

Arisaig Asia Consumer Fund Asian consumer specialist 14.2% 14.1%

APS China A-Share Fund Country specialist – China 9.1% 10.8%

JPMorgan China Pioneer A-Share Fund Country specialist – China 19.9% 9.7%

Aberdeen Asian Opportunities Fund Asian region 9.1% 8.8%

CK Absolute Return Fund Country specialist – Korea 9.0% 8.7%

Steadview Capital Fund Country specialist – India 7.6% 7.8%

JPMorgan Taiwan Fund Country specialist – Taiwan 7.6% 7.5%

Prusik Asia Fund Asian region 6.1% 5.9%

Prusik Asia Smaller Companies Fund Asian small cap specialist 5.6% 5.1%

NCC China A-Share Fund Country specialist – China - 3.6%

Cephei QFII China Absolute Return Fund Country specialist – China - 3.4%

Macquarie Asia New Stars No.1 Fund Asian small cap specialist 3.0% 3.1%

Asian Opportunities Absolute Return Fund Asian region 3.1% 3.0%

Aberdeen India Opportunities Fund Country specialist – India 1.5% 1.4%

Cash* 4.2% 6.9%

Total** 100.0% 100.0%

*Excludes any cash held by underlying investment managers, and includes 5.1% of prefunded investments as at 31 March 2015 **Figures may not reconcile due to rounding

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COUNTRY ALLOCATION

Indicative look-through country allocation mix at 31 March 2015:

Country AUF weight MSCI Asia ex Japan _{Index weight} Active weight**

China 33.7% 27.6% 6.1% India 19.1% 8.9% 10.1% Korea 11.8% 17.9% -6.1% Taiwan 9.7% 15.3% -5.6% Hong Kong 5.9% 12.5% -6.6% Singapore 3.5% 5.8% -2.2% Philippines 3.2% 1.7% 1.6% Vietnam 1.6% - 1.6% Indonesia 1.5% 3.3% -1.8% Thailand 1.4% 2.9% -1.4% Pakistan 0.7% - 0.7% Malaysia 0.5% 4.2% -3.7% Other 0.2% - 0.2% Sri Lanka 0.1% - 0.1% Cash* 6.9% - 6.9% Total** 100.0% 100.0%

-*Excludes any cash held by underlying investment managers, and includes 5.1% of prefunded investments **Figures may not reconcile due to rounding

Source: MSCI, Walsh & Company Asset Management Pty Limited

SECTOR ALLOCATION

Sector AUF weight MSCI Asia ex Japan _{Index weight} Active weight**

Consumer staples 18.2% 5.3% 12.9% Consumer discretionary 17.9% 8.3% 9.5% Information technology 16.7% 22.5% -5.7% Financials 16.4% 32.4% -16.0% Industrials 10.4% 9.4% 1.0% Health care 4.6% 2.0% 2.5% Materials 3.1% 4.6% -1.5% Telecommunication services 2.9% 6.7% -3.8% Utilities 1.9% 4.1% -2.2% Energy 1.0% 4.8% -3.8%

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TOP 50 HOLDINGS

An indicative look-through stock exposure derived from portfolio of underlying funds:

Company Country Weights (%)

1 SAMSUNG ELECTRONICS CO LTD Korea 1.9%

2 PING AN INSURANCE (GROUP) CO OF CHINA LTD China 1.3%

3 TAIWAN SEMICONDUCTOR MANUFACTURING CO LTD Taiwan 1.2%

4 TASLY PHARMACEUTICAL GROUP CO LTD China 1.2%

5 PAGE INDUSTRIES LTD India 1.1%

6 CHINA VANKE CO LTD China 1.1%

7 SAIC MOTOR CORP LTD China 1.1%

8 NESTLE INDIA LTD India 1.1%

9 BRITANNIA INDUSTRIES LTD India 1.0%

10 MARICO LTD India 1.0%

11 FLIPKART ONLINE SERVICES PVT LTD India 0.9%

12 YONGHUI SUPERSTORES CO LTD China 0.9%

13 INNER MONGOLIA YI LI INDUSTRY CO LTD China 0.9%

14 UNIVERSAL ROBINA CORPORATION Philippines 0.9%

15 FOSHAN HAITIAN FLAVOURING AND FOOD CO LTD China 0.9%

16 GRG BANKING EQUIPMENT CO LTD China 0.9%

17 EICHER MOTORS LTD India 0.9%

18 FUYAO GLASS INDUSTRY GROUP CO LTD China 0.8%

19 GODREJ CONSUMER PRODUCTS LTD India 0.8%

20 SHRIRAM CITY UNION FINANCE LTD India 0.8%

21 SHANGHAI PUDONG DEVELOPMENT BANK CO LTD China 0.7%

22 JOLLIBEE FOODS CORPORATION Philippines 0.7%

23 KWEICHOW MOUTAI CO LTD China 0.7%

24 GLAXOSMITHKLINE CONSUMER HEALTHCARE LTD India 0.7%

25 GREE ELECTRIC APPLIANCES INC OF ZHUHAI China 0.7%

26 COLGATE-PALMOLIVE (INDIA) LTD India 0.7%

27 ORION CORPORATION Korea 0.7%

28 HUAYU AUTOMOTIVE SYSTEMS CO LTD China 0.7%

29 JIANGSU KANGDE XIN COMPOSITE MATERIAL CO LTD China 0.7%

30 MOTHERSON SUMI SYSTEMS LTD India 0.7%

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Company Country Weights (%)

32 ANI TECHNOLOGIES PVT LTD India 0.6%

33 PHILIPPINE SEVEN CORPORATION Philippines 0.6%

34 INDUSTRIAL BANK CO LTD China 0.6%

35 MIDEA GROUP CO LTD China 0.6%

36 AIA GROUP LTD Hong Kong 0.6%

37 HYUNDAI MOBIS Korea 0.6%

38 CAFE DE CORAL HOLDINGS LTD Hong Kong 0.6%

39 CHONGQING CHANGAN AUTOMOBILE CO LTD China 0.6%

40 CITIC SECURITIES CO LTD China 0.5%

41 HYUNDAI MOTOR CO LTD Korea 0.5%

42 NESTLE PAKISTAN LTD Pakistan 0.5%

43 HUANENG POWER INTERNATIONAL INC China 0.5%

44 BEIJING VENUSTECH INC China 0.5%

45 UNILEVER INDONESIA TBK PT Indonesia 0.5%

46 ZHENGZHOU YUTONG BUS CO LTD China 0.5%

47 JARDINE STRATEGIC HOLDINGS LTD Hong Kong 0.5%

48 VITASOY INTERNATIONAL HOLDINGS LTD Hong Kong 0.4%

49 WANT WANT CHINA HOLDINGS LTD China 0.4%

50 JIANGSU YANGHE BREWERY JOINT STOCK CO LTD China 0.4%

Total 38.3%

Source: Style Research, Walsh & Company Asset Management Pty Limited

APPENDIX – CHINA A-SHARES

Chinese companies may be listed on various different stock exchanges, including Hong Kong, Shanghai or Shenzhen. Stocks listed on the Hong Kong stock exchange are commonly known as H-Shares, are typically traded in Hong Kong dollar denominated share prices, and are easily investible by international investors. Companies listed on the domestic Chinese stock-exchanges of Shanghai or Shenzhen are known as A-Shares. A-Shares are traded in Chinese renminbi, and historically have only been accessible to domestic investors in China, or Qualified Foreign Institutional Investors (QFII), through a licence and quota scheme. The A-Share market remains heavily dominated by domestic investors, but China has been rapidly opening up its market. This has been done by increasing the amount of quota available, as well as introducing the Shanghai-Hong

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ASIAN MASTERS FUND | QU AR TERL Y INVESTMENT UPD A TE | MARCH 2015 0 9 Alex MacLachlan

John Holland Stuart Nisbett Chris Lee

AUF BOARD OF DIRECTORS

Max Walsh

Sources: Walsh & Company Asset Management Pty Limited. Note some figures may not reconcile due to rounding. The historical performance of the Manager is not a guarantee of the future performance of the Portfolio or the Company.

MSCI Asia ex Japan Index source: MSCI. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.