London Asia Chinese Private Equity Fund

Strong interims -

I am pleased to report on a very successful period for the Fund. The Fund was launched in March this year, raising £48 million, net of listing and fund raising costs. In the period to 30 September the Fund invested £24.1 million in seven transactions, with a further £8.4 million invested in four transactions since then, bringing the total invested to date to £32.5 million invested in 11 transactions.

The Board has given conditional approval for a number of additional investments, which, should they be completed, will mean that the Fund will have insufficient cash available. We shall be discussing with shareholders in the New Year options available for financing the opportunities, which cannot be covered by existing resources.

Of the seven investments completed at the period end, one was already listed in Singapore at the time we invested, and three have subsequently listed on the UK's PLUS market. The market value of these investments based on the price at which they were listed or the last available trade price exceeds cost by £10.4 million. The net asset value of the Fund, using these values, as at 30 September 2006 was £58.5 million, equal to 117.0p per share.

The interim results show assets at fair value in accordance with International Accounting Standards. In most cases this is cost, except for Asia Water Technology, where trading volumes on Singapore's SESDAQ warrant disclosure at market value. No account has been taken of the remaining £10.0 million uplift in value in the Income Statement.

Investment Environment

Two of our investments were in businesses which were already listed at the time we invested. This is partially as a result of our belief that the market price of these businesses did not reflect their true potential, and partially as a result of recent changes in the regulatory and investment environment in China.

In September the Chinese Government brought in revised regulations governing the transfer of Chinese assets outside China ('Ordinance 10'). The main impact of the rules is to require central government approval for the transfer of assets and listing of businesses outside China. This adds an additional level of approval before investments can be made, slowing down the investment process considerably. Ordinance 10 is part of a broader change in the attitude of the Chinese Government to investment in China from overseas, with the Chinese Government attempting to slow down excessive investment and stamp out abuse, as well as create a more level playing field to enable the development of its own financial services sector.

Much of the fall-out is likely to be for the larger, more high profile transactions - in the SME sector where the Fund operates, investments are more likely to be approved given the continued difficulty listing locally caused by the backlog of applications for listing within China and shortage of finance to the sector.

The Chinese Government has indicated the areas of its economy where it favours foreign investment, which broadly speaking equates to energy, environment, education and where there is genuine technology transfer. These are areas in which the Fund Adviser, London Asia Capital plc ('LAC') is strong, and LAC has expanded its office network to 32 offices in China, covering 20 of China's provinces, giving it even greater access to investment opportunities.

The latest Five Year Plan for China's economy emphasizes China's need to protect its environment, reduce pollution, switch from fossil fuel to other energy sources and address the problems with its water supply and quality. We are investing heavily in these areas.

We see the new rules and investment environment as being beneficial to our business. They will reduce competition for deals, bring down prices and the longer time period for listings will mean more companies will require pre IPO finance. One side-effect of the new regulations is that those businesses already listed outside China or restructured under the old regulations are likely to have increased in value, as there will be fewer opportunities for foreign investors to invest in new Chinese deals outside China.
The new regulations also introduce the ability to do share swaps to acquire Chinese assets, which was previously heavily restricted, enabling our existing investments to acquire Chinese businesses using shares rather than cash. They may also mean that the Fund could invest alongside other lead investors, including LAC, rather than investing as sole or lead investor, as stated in the Admission Document.

Outlook

With the Fund now fully committed, our focus has shifted to realising the value of the portfolio through trade sales, IPO's and follow on financings, made easier by the new possibilities opened up by the re-opening of the Chinese Stock Markets to new listings, and the surplus capital available for investment in Chinese businesses as a result of the new regulations in China.

P.S. Maybe the new investments include LDC's portfolio? That could explain the delay in restructuring LDC.