EX-99.1 3 b45948cfexv99w1.htm INSIGHT NEWSLETTER

INSIGHT NEWSLETTER

IN BRIEF

Net Asset Value per share*		US$17.32
Market Price*		US$16.09
Premium/Discount*			-7.10	%
Fund size*		US$174.46

* Source: State Street Corporation/Martin Currie Inc

At February 28 2003

		China Fund				MSCI Golden
		NAV				Dragon
One month return*			0.00	%			-5.60	%
One year return*			12.75	%			-16.63	%

MANAGER’S COMMENTARY

The pile-driver across the road is making concentric ripples in my cup of Oolong tea. Last week I watched the ground-breaking ceremony for what will be the world’s tallest building. One thousand multi-colored balloons were released and floated by existing, unoccupied towers.

Recently, Chinese stockmarkets have performed fairly well (your Fund is up 9.76% year-to-date) so such events merit caution, and we are selling the textile company which has decided to invest in the Mori building — see below. But we have yet to see any big shift of global portfolio assets to China. We do not see widespread signs of undue exuberance (the odd landmark building aside) and are still able to find growth companies at low prices and decent yields. So, with uncertainty in international politics and low growth in developed economies, investing in China remains attractive. One result of this uncertainty is that appreciation of the undervalued Chinese currency will probably be delayed. It is difficult for the U.S. to support actively Japanese calls for renminbi revaluation when it needs Chinese help with Iraq and North Korea.

We have a new theory regarding investment in China — the ‘hope curve’. It applies to industries and specific stocks. Enthusiasm for China’s automotive industry is at a high. Spurred by the effect of falling import tariffs and prices, year-over-year sales of sedans grew by a startling 120% in January. However every car maker we meet plans huge capacity increases, so overcapacity and disappointment seem likely in 2004. We have taken profits on assembler Brilliance Auto but kept leading tire maker Cheng Shin.

Last year cellular phones were in favour. In 2003, if the expansion plans of all local handset assemblers are combined, total capacity will increase to about 100 million sets, excluding imports. This compares to local demand of around 70 million sets. Other sectors popular in recent years have included telecom services, the power industry, roads and property. The problem is that many Chinese companies are quick to enter any ‘hot’ sector. Often these are state-owned companies unworried by Internal Return Rate calculations. With competing central and provincial power bases in China, even apparent monopolies can prove only temporary.

The high point of the ‘hope curve’ for individual Chinese companies often occurs at, or just after, IPO. Hope for the new industry runs high, brokerage coverage increases and the price-to-earnings ratio rises. Then comes hubris. Occasionally this is fraud (as with agri-business Euro-Asia) or an inappropriate investment (such as a maker of cell phone batteries buying a manufacturer of mini-cars). Sometimes it is ill-considered share placement (if you can borrow from a bank at 5% per year, why issue stock at five times earnings?). Or it could be government action (a new license is issued, a guarantee cancelled). Sometimes it is just that later market entrants catch up and force deep price cuts (in rural China, ‘cheap and nasty’ is still a sellable proposition). Many companies avert disaster by changing their management team or strategy, or by restructuring the balance sheet. Then the curve begins again.

MARKET STRATEGY

Your Fund is 94.4% invested with holdings in 59 companies. In February - following the ‘hope curve’ theory — your managers sold shares of Brilliance Auto, Matsuoka (textiles, security printing and the world’s tallest building), Zhejiang Expressway and Chen Hsong (injection mouldings). We added the newly listed Sinotrans, and bought electronics companies TCL and BYD, when pessimism as to their future prospects became overdone.

Chris Ruffle

Source: Martin Currie Inc

In February your fund invested $2.3 million for 20% of Tomoike Industrial. Tomoike has manufacturing operations in Shanghai, Suzhou and Dongguan. The company has expanded into manufacturing backlight units for mobile phones and other, larger LCDs. So the investment will be used to increase manufacturing facilities. The company has been supplying major Japanese brands with parts and accessories for office and consumer equipment for over a decade.

Lower unit costs, higher productivity and quality standards drive Tomoike’s competitive position in the marketplace. The company is experiencing strong growth as a result of robust demand for its products as its customers continue to move their manufacturing bases into China. The entry valuation multiple is approximately half that at which similar listed companies trade. Tomoike expects to go public in 2004.

KOH Kuek Chiang
Asian Direct Capital Management

FUND DETAILS*

Market cap		$158m
Shares outstanding		10,073,173 shares
Exchange listed		NYSE
Listing date		July 10, 1992
Investment manager		Martin Currie Inc
Direct investment manager		Asian Direct Capital Management

ASSET ALLOCATION*

SECTOR ALLOCATION*

		%of				MSCI Golden
		net assets				Dragon %
Information technology			24.6				19.0
Industrials			13.6				14.8
Materials			13.4				6.8
Financials			11.0				30.6
Consumer discretionary			11.7				6.1
Consumer staples			7.2				0.6
Utilities			3.0				10.7
Energy			4.3				3.8
Health care			3.7				0.1
Telecommunications			1.9				7.5
Cash			5.6				—
Total			100.0				100.0

PERFORMANCE* (IN US$ TERMS)

		NAV				Market price
		%				%
One month			0.00				5.37
Calendar year to date			9.76				17.02
3 years**			9.90				18.37

DIRECT INVESTMENTS* (7.8%)

A-S China Plumbing Products		Consumer discretionary					1.83	%
Captive Finance		Financials					1.75	%
Kowloon Development (34 HK)		Real estate					1.70	%
Tomoike Industrial (H K) Ltd		Industrials					1.32	%
Moulin International (2004 CB)		Manufacturing					1.15	%

15 LARGEST LISTED INVESTMENTS* (45.38%)

Sohu Com Inc		Information technology					6.68	%
Fountain Set Holdings		Materials					5.34	%
TCL International		Information technology					4.81	%
Fubon Financial Holdings		Financials					3.58	%
Yanzhou Coal Mining		Energy					3.15	%
BYD Co		Industrials					2.93	%
Chinadotcom Corporation		Information technology					2.65	%
Sinotrans Limited		Industrials					2.19	%
Synnex Tech Intl		Consumer discretionary					2.15	%
Sinopac Holdings		Financials					2.14	%
Ho Tung Chemical		Materials					2.07	%
Anhui Expressway		Utilities					1.98	%
China Metal Products		Materials					1.93	%
Wah Sang Gas Holdings		Consumer discretionary					1.90	%
Xinao Gas Holdings		Consumer discretionary					1.88	%

FUND PERFORMANCE

		One				Three				Year				One				Three**				Five**				Since#**
		month				months				to date				year				years				years				launch
The China Fund, Inc.			0.00				10.83				9.76				12.75				9.90				4.63				4.04
MSCI Golden Dragon			-5.60				-6.66				-0.39				-16.63				-21.16				-7.93				—
Hang Seng Chinese Enterprise Index			1.67				15.16				10.39				9.44				14.67				-6.93				—

* Source: State Street Corporation/Martin Currie Inc. #The fund was launched on July 10, 1992. ** Annualised return

PERFORMANCE IN PERSPECTIVE

THE CHINA FUND INC. PREMIUM/DISCOUNT

DIVIDEND HISTORY CHART*

All charts as of December 31, 2002. *Source: State Street Corporation

THE PORTFOLIO — IN FULL AT FEBRUARY 28, 2003

Sector		Company (BBG ticker)				Price				Holding				Value $				% of portfolio
Hong Kong 42.0%
Fountain Set (Holdings) Ltd		420HK				HK$5.70					12,750,000				9,318,502				5.3	%
TCL International Holdings Ltd		1070HK				HK$2.05					32,318,000				8,391,326				4.8	%
Yanzhou Coal Mining Co.		1171HK				HK$3.37					12,786,000				5,492,127				3.2	%
BYD Co		1211HK				HK$15.8					2,525,000				5,115,399				2.9	%
Sinotrans Limited-H		598HK				HK$2.25					13,265,000				3,826,933				2.2	%
Xiano Gas Holdings Ltd		8201HK				HK$2.35					11,376,000				3,281,959				1.9	%
Anhui Expressway Co Ltd		955HK				HK$2.02					13,278,000				3,447,615				1.9	%
Wah Sang Gas		8035HK				HK$0.92					27,778,000				3,312,417				1.9	%
Anhui Conch Cement		914HK				HK$3.10					7,726,000				3,070,983				1.8	%
TPV Technology, Ltd		903HK				HK$2.27					9,968,000				2,875,753				1.7	%
Tack Fat Group International Ltd		928HK				HK$0.63					32,296,000				3,012,756				1.7	%
China Rare Earth		0769HK				HK$1.13					17,588,000				2,570,884				1.5	%
Wanyou Fire Safety		8201HK				HK$0.28					48,565,000				2,459,697				1.4	%
LifeTec Group, Ltd		1180HK				HK$0.14					112,328,000				2,045,208				1.2	%
Petrochina Co., Ltd		857HK				HK$1.63					10,000,000				2,090,012				1.2	%
Zhejiang Expressway Co., Ltd		576HK				HK$3.42					4,044,000				1,775,959				1.0	%
Natural Beauty Bio-Technology Ltd		157HK				HK$0.68					18,320,000				1,597,333				1.0	%
Golden Meditech Co Ltd		8180HK				HK$1.58					6,446,000				1,314,160				0.8	%
Sino Golf Holdings Ltd		361HK				HK$1.08					10,274,000				1,422,736				0.8	%
Tingyi (Cayman Islands) Holding Co.		322HK				HK$1.88					6,000,000				1,446,339				0.8	%
Asia Zirconium		395HK				HK$1.23					8,800,000				1,387,870				0.8	%
Mainland Headwear Holdings		1100HK				HK$2.52					3,992,000				1,292,448				0.7	%
Leefung-Asco Printers Holdings Ltd		623HK				HK$1.62					3,602,000				748,204				0.4	%
Essex Bio-Technology Ltd		8151HK				HK$0.15					25,418,166				514,947				0.3	%
Proview Intl Holdings Ltd		334HK				HK$0.87					4,752,000				530,099				0.3	%
Chen Hsong Holding, Ltd		57HK				HK$2.27					1,402,000				408,969				0.2	%
Arcontech, Corp		8097HK				HK$0.17					18,386,000				412,599				0.2	%
Asia Satellite Telecommunications Holdings		1135HK				HK$9.95					96,000				121,862				0.1	%
Taiwan 30.9%
Fubon Financial Holdings		2881TT				NT$27.3					7,953,952				6,248,716				3.6	%
Synnex Technologies International, Corp		2347TT				NT$12.4					2,682,400				3,751,500				2.2	%
Sinopac Holdings Co		2890TT				NT$13.3					9,746,754				3,730,412				2.1	%
Ho Tung Chemical, Corp		1714TT				NT$14.5					8,660,904				3,613,903				2.1	%
Chunghwa Telecom Co., Ltd		2412TT				NT$52.5					2,146,000				3,242,159				1.9	%
China Metal Products		1532TT				NT$29.9					3,913,000				3,366,869				1.9	%
Polaris Securities Co., Ltd		6011TT				NT$14.4					7,740,164				3,207,435				1.8	%
Ability Enterprise Corp		2374TT				NT$28.5					3,642,000				2,986,964				1.7	%
Cheng Shin Rubber		2105TT				NT$43.7					2,330,000				2,930,101				1.7	%
Advantech Co., Ltd		2395TT				NT$67.0					1,529,920				2,949,774				1.7	%
Chicony Electronics Co., Ltd		2385TT				NT$45.5					2,156,000				2,822,964				1.6	%
Lite On Technology Corp		2346TT				NT$40.7					2,540,000				2,869,496				1.6	%
Merry Electronics		2439TT				NT$40.7					2,231,400				2,613,467				1.5	%
Tainan Enterprises		1473TT				NT$41.0					1,546,000				1,824,058				1.1	%
Taiwan Hon Chuan Enterprise		9939TT				NT$49.0					1,200,000				1,692,086				1.0	%
Data Systems Consulting Co		2477TT				NT$27.4					1,971,000				1,554,112				0.9	%
Phoenixtec Power Co., Ltd		2411TT				NT$22.3					1,831,000				1,175,002				0.7	%
Eva Airways		2618TT				NT$13.0					3,375,150				1,262,646				0.7	%
Taiwan FamilyMart		5903TT				NT$34.0					1,119,000				1,094,849				0.6	%
Microlife Corp		4103TT				NT$59.5					525,000				898,921				0.5	%
B shares 3.1%
Shanghai Friendship Group Co., Inc		900923 CH				US$0.78					4,003,437				3,154,708				1.8	%
Luthai Textile Co., Ltd		200726 CH				HK$5.11					2,599,829				1,703,440				1.0	%
Shanghai Matsuoka, Co		900955 CH				US$1.10					526,350				578,985				0.3	%
New York 9.3%
Sohu.com Inc		Sohu US				US$37.2					1,320,386				11,645,804				6.7	%
Chinadotcom, Corp		China US				US$3.14					1,473,654				4,627,274				2.6	%
Singapore 1.3%
People’s Food Holding		PFH SP					S$0.89				4,400,000				2,266,801				1.3	%
Direct 7.8%
A-S China Plumbing Products, Ltd											450				3,199,999				1.8	%
Captive Finance Ltd											2,000,000				3,045,000				1.8	%
Kowloon Development		34HK									6,520,000				2,967,817				1.7	%
Tomoike Industrial (H.K.) Ltd											825,000				2,308,181				1.3	%
Moulin International Holdings, Ltd (2004 CB)											2,000,000				2,003,922				1.2	%
Cash 5.6%

OBJECTIVE

The investment objective of the Fund is to achieve long term capital appreciation through investment in companies and other entities with significant assets, investments, production activities, trading or other business interests in China or which derive a significant part of their revenue from China.

The Board of Directors of the Fund has adopted an operating policy of the Fund, effective June 30, 2001, that the Fund will invest at least 80% of its assets in China companies. For this purpose, “China companies” are (i) companies for which the principal securities trading market is in China; (ii) companies for which the principal securities trading market is outside of China or in companies organised outside of China, that in both cases derive at least 50% of their revenues from goods or services sold or produced, or have a least 50% of their assets in China; and (iii) companies organized in China. Under the policy, China will mean the People’s Republic of China, including Hong Kong, and Taiwan. The Fund will provide its stockholders with at least 60 days’ prior notice of any change to the policy described above.

The fundamental policy, which applies to not less than 65% of the Fund’s assets as set out in the Fund’s prospectus dated July 10, 1992, remains in place. The fundamental policy is the same as the operating policy set out above, except that China only includes the People’s Republic of China.

CONTACTS

The China Fund, Inc.
c/o State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Tel: (1) 888 CHN-CALL (246 2255)
www.chinafundinc.com

Important information: This newsletter is issued by Martin Currie Inc, Saltire Court, 20 Castle Terrace, Edinburgh, Scotland. Martin Currie Inc is regulated by the FSA and registered with the Securities Exchange Commission as an investment adviser. Information herein is believed to be reliable but has not been verified by Martin Currie Inc. Martin Currie Inc makes no representation or warranty and does not accept any responsibility in relation to such information or for opinion or conclusion which the reader may draw from the newsletter. This newsletter does not constitute an offer of shares. Martin Currie Inc, its ultimate and intermediate holding companies, subsidiaries, affiliates, clients, directors or staff may, at any time, have a position in the market referred to herein, and may buy or sell securities, currencies, or any other financial instruments in such markets. The information or opinion expressed in this newsletter should not be construed to be a recommendation to buy or sell the securities, commodities, currencies, or financial instruments referred to herein. Investors are advised that they will not generally benefit from the rules and regulations of the United Kingdom Financial Services and Markets Act 2000 and the Financial Services Authority for the protection of investors nor benefit from the United Kingdom Financial Services Compensation Scheme, nor have access to the Financial Services Ombudsman in the event of a dispute. Investors will also have no rights of cancellation under the FSA’s Conduct of Business Sourcebook of the United Kingdom. Please remember that past performance is not necessarily a guide to the future. Market and currency movements may cause the value of the shares and the income from them to fluctuate and you may get back less than you invested when you decide to sell your shares.