EX-99.1 3 b46788cfexv99w1.htm INSIGHT NEWSLETTER

Insight Newsletter

THE CHINA FUND, INC. (CHN)

IN BRIEF

Net asset value per share*		US$16.67
Market price*		US$15.95
Premium/discount*		-4.32%
Fund size*		US$167.89

* Source: State Street Corporation/Martin Currie Inc

At 30 April 2003

		China Fund				MSCI Golden
		NAV				Dragon
One month return*			-1.4	%			-1.1	%
One year return*			0.8	%			-27.5	%

MANAGER’S COMMENTARY

The spread of the SARS virus has hit China’s travel and entertainment industries hard. Planes, hotels and restaurants are now half-empty as conferences are cancelled and visits by foreign buyers and investors have been postponed. Now the damage is spreading to other parts of the economy. Inflows of foreign direct investment and exports are likely to slow. Growth in GDP is likely to decelerate from the 9.9% achieved in Q1; economists and analysts are revising down their forecasts for Q2. Stock markets in Hong Kong, Taipei and Shanghai have been affected by panic-selling. The selling was concentrated initially in stocks affected directly, such as airlines and hotels, but soon became indiscriminate.

The number of SARS infections and deaths is headline news locally. This number has been rising, due as much to increased honesty by chastened authorities as any spread of infection. There have been 170 deaths in China. But over 3,000 people are killed by lightning each year. Now that the Chinese authorities recognise the threat of SARS and have introduced draconian counter-measures, the disease could be contained within months. Such has been the speed of the decline in stock prices that the negative effect of SARS looks to have been priced into the stock market already. Given that prices were cheap before SARS, depressed by the Asian financial crisis, collapse of the tech bubble and war with Iraq, we believe that this presents a clear and unusual opportunity to make extraordinary returns.

The SARS scare will probably delay the date of RMB appreciation, postponed by the US’s need for China’s help with terrorists and North Korea. This makes us more willing to consider investing in exporters, rather than concentrate largely on domestic demand stocks. We expect a surge of pent-up activity once the virus is under control. But in the long term the scare is likely to make foreign buyers less willing to concentrate all their purchasing in China. Politically, it is to be hoped that the SARS debacle, which has already accounted for the resignations of the Minister for Health and the Mayor of Beijing, will encourage greater openness in government and enhance skills. As they say, what doesn’t kill you makes you stronger ...

INVESTMENT STRATEGY

LISTED INVESTMENTS
Your Fund is 98.7% invested with holdings in 58 companies. Of the Fund 6.3% is in unlisted securities.

During April we sold our holding in Beijing Capital Airport, which has been hit badly by the SARS epidemic. We took profits on Microlife, the thermometer maker, which has, with only limited justification, been viewed as a beneficiary of SARS. We have sold PetroChina in anticipation of weaker oil prices. We have also taken profits in Zhejiang Expressway and moved funds into the better valued Shenzhen Expressway and Anhui Expressway. We trimmed our holding in Sohu following excellent results for Q1.

The SARS panic has affected the share prices of small cap, growth companies particularly hard. We are taking advantage of this to buy shares at what we believe to be bargain prices, with price/earnings ratios as low as 3X and yields as high as 10%. We bought Chaoda Modern Agriculture, Proview, Golden Meditech, Wanyou Fire Safety and, in Taiwan, the leading ERP provider, Data Systems.

Chris Ruffle, Martin Currie Inc

DIRECT INVESTMENTS
The world’s attention has been captured by concern about the real situation of SARS in China and the changing attitude of the country’s political leadership towards containment of the disease. The government in China is now imposing extreme measures designed to control the disease. Although SARS is causing disruption and economic damage to service industries such as tourism in the short term, we believe the longer-term economic impact may be limited. Fears that China’s position in the global supply chain has been damaged appear to be misplaced to date. We regularly check with our investee companies to see if there is any impact by SARS on their businesses. So far, they have reported that the impact has been limited.

The Fund’s new direct investment, Tomoike, has continued to show strong growth. Tomoike’s backlight plant has reached capacity in less than 12 months of operation, and Tomoike is now planning to build an extension to meet strong customer orders.

During March and April, we took advantage of increased liquidity to sell a substantial part (75%) of the Fund’s investment in Kowloon Development. Including dividends received, we managed to realize a small return on the investment.

We continue to search for attractive new direct investments. Potential investments under review include a bottled LPG distributor, a high-end consumer goods distributor, a software and system integration company, and a plastic bottle recycling plant. These businesses are benefiting from fast urbanization and increasing domestic consumption in China.

KOH Kuek Chiang, Asian Direct Capital Management

FUND DETAILS*

Market cap		$171.75m
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

SECTOR ALLOCATION*

		% of				MSCI Golden
		net assets				Dragon %
Information technology			27.9				20.1
Industrials			16.5				14.2
Materials			12.8				6.6
Consumer discretionary			11.6				6.1
Consumer staples			7.9				0.5
Financials			6.7				29.2
Utilities			6.7				11.5
Health care			3.7				0.1
Energy			3.0				4.2
Telecommunications			1.9				7.5
Cash			1.3				—
Total			100.0				100.0

ASSET ALLOCATION*

PERFORMANCE* (IN US$ TERMS)

		NAV				Market price
		%				%
One month			-1.4				-4.7
Calendar year to date			5.6				16.0
3 years **			10.4				22.0

DIRECT INVESTMENTS* (6.7%)

A-S China Plumbing Products		Industrials			1.9	%
Captive Finance		Financials			1.8	%
Tomoike Industrial (H K) Ltd		Industrials			1.4	%
Moulin International (2004 CB)		Consumer discretionary			1.2	%
Kowloon Development (34 HK)		Real estate			0.4	%
15 LARGEST LISTED INVESTMENTS* (48.4%)
Sohu Com Inc		Information technology			9.9
Fountain Set Holdings		Materials			5.2
Chinadotcom Corporation		Information technology			4.1
TCL International		Information technology			3.6
Yanzhou Coal Mining		Energy			3.0
BYD Co		Industrials			3.0
Sinotrans Limited		Industrials			2.7
Shenzhen Expressway		Utilities			2.6
Anhui Expressway		Utilities			2.3
China Metal Products		Materials			2.2
Anhui Conch Cement		Materials			2.1
Ho Tung Chemical		Materials			2.1
Chunghwa Telecom		Telecommunications			1.9
Synnex Tech Intl		Consumer discretionary			1.9
Shanghai Friendship Group		Consumer staples			1.8

FUND PERFORMANCE

		One				Three				Year				One				Three**				Five**				Since#**
		month				months				to date				year				years				years				launch
The China Fund, Inc.			-1.4				-3.8				5.6				0.8				10.4				6.2				3.6
MSCI Golden Dragon			-1.1				-10.0				-5.0				-27.5				-20.5				-6.2				—
Hang Seng Chinese Enterprise Index			0.8				2.0				10.8				7.3				11.9				-4.2				—

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

THE PORTFOLIO — IN FULL AT 30 APRIL 2003

Sector		Company (BBG ticker)				Price				Holding				Value $				% of portfolio
Hong Kong 43.9%
Fountain Set (Holdings) Ltd		420 HK				HK$5.30					12,750,000				8,664,517				5.2	%
TCL International Holdings Ltd		1070 HK				HK$1.46					32,318,000				6,050,003				3.6	%
Yanzhou Coal Mining Co.		1171 HK				HK$2.85					13,786,000				5,037,806				3.0	%
BYD Co		1211 HK				HK$15.5					2,525,000				5,002,051				3.0	%
Sinotrans Limited-H		598 HK				HK$1.93					18,265,000				4,519,967				2.7	%
Shenzhen Expressway Co., Ltd		548 HK				HK$1.60					21,494,000				4,409,563				2.6	%
Anhui Expressway Co., Ltd		995 HK				HK$1.76					16,778,000				3,786,266				2.3	%
Anhui Conch Cement		914 HK				HK$3.60					7,726,000				3,566,280				2.1	%
Wah Sang Gas		8035 HK				HK$0.85					27,778,000				3,027,459				1.8	%
Xiano Gas Holdings Ltd		2688 HK				HK$1.96					11,376,000				2,858,933				1.7	%
Chaoda Modern Agriculture (Holdings) Ltd		682 HK				HK$0.69					31,042,000				2,746,357				1.6	%
Tack Fat Group International Ltd		928 HK				HK$0.57					37,296,000				2,725,809				1.6	%
TPV Technology, Ltd		903 HK				HK$1.96					9,968,000				2,505,085				1.5	%
Proview Intl Holdings Ltd		334 HK				HK$0.91					16,644,000				1,942,037				1.1	%
Brilliance China Automotive Holdings, Ltd		1114 HK				HK$1.82					8,000,000				1,863,769				1.1	%
Wanyou Fire Safety		8201 HK				HK$0.27					53,565,000				1,854,399				1.1	%
LifeTec Group, Ltd		1180 HK				HK$0.12					112,328,000				1,771,542				1.0	%
Golden Meditech Co Ltd		8180 HK				HK$1.22					10,538,000				1,648,452				1.0	%
Beijing Capital International Airport Co., Ltd		694 HK				HK$1.69					7,520,000				1,619,890				1.0	%
Sino Golf Holdings Ltd		361 HK				HK$0.95					10,691,000				1,302,268				0.8	%
Natural Beauty Bio-Technology Ltd		157 HK				HK$0.49					18,320,000				1,151,012				0.7	%
Mainland Headwear Holdings		1100 HK				HK$2.23					3,992,000				1,138,882				0.7	%
Asia Zirconium		395 HK				HK$0.97					8,632,000				1,084,665				0.6	%
Jingwei Textile Machinery Co., Ltd		350 HK				HK$1.65					4,852,000				1,026,510				0.6	%
China Rare Earth		769 HK				HK$0.50					15,284,000				979,863				0.6	%
Leefung-Asco Printers Holdings Ltd		623 HK				HK$1.66					3,602,000				766,673				0.5	%
Arcontech, Corp		8097 HK				HK$0.14					18,386,000				318,258				0.2	%
Essex Bio-Technology Ltd		8151 HK				HK$0.09					24,278,166				272,384				0.2	%
Taiwan 29.9%
China Metal Products		1532 TT				NT$27.0					4,686,000				3,636,735				2.2	%
Ho Tung Chemical, Corp		1714 TT				NT$14.1					8,620,904				3,481,566				2.1	%
Chunghwa Telecom Co., Ltd		2412 TT				NT$51.5					2,146,000				3,176,746				1.9	%
Synnex Technologies International, Corp		2347 TT				NT$41.0					2,682,400				3,161,207				1.8	%
Merry Electronics		2439 TT				NT$37.8					2,690,400				2,923,171				1.7	%
Taiwan Hon Chuan Enterprise		9939 TT				NT$46.4					2,136,000				2,848,819				1.7	%
Ability Enterprise Corp		2374 TT				NT$26.4					3,642,000				2,763,691				1.6	%
Polaris Securities Co., Ltd		6011 TT				NT$12.3					7,740,164				2,736,534				1.6	%
Chicony Electronics Co., Ltd		2385 TT				NT$44.0					2,156,000				2,726,760				1.6	%
Fubon Financial Holdings		2881 TT				NT$23.8					3,953,952				2,704,917				1.6	%
Advantech Co., Ltd		2395 TT				NT$61.5					1,529,920				2,704,515				1.6	%
Cheng Shin Rubber		2105 TT				NT$39.7					2,330,000				2,658,839				1.6	%
Data Systems Consulting Co		2477 TT				NT$21.8					3,498,000				2,191,906				1.3	%
Lite On Technology Corp		2346 TT				NT$31.0					2,450,000				2,183,099				1.3	%
Sinopac Holdings Co		2890 TT				NT$10.9					6,746,745				2,104,118				1.3	%
Taiwan Green Point Enterprises Co., Ltd		3007 TT				NT$46.3					1,435,000				1,909,758				1.1	%
Tainan Enterprises		1473 TT				NT$38.8					1,546,000				1,724,196				1.0	%
Eva Airways		2618 TT				NT$10.7					5,555,150				1,708,540				1.0	%
Microlife Corp		4103 TT				NT$66.5					758,000				1,448,894				0.9	%
Taiwan FamilyMart		5903 TT				NT$35.5					1,369,000				1,396,939				0.8	%
B shares 2.9%
Shanghai Friendship Group Co., Inc		900923 CH				US$0.77					4,003,437				3,090,653				1.8	%
Luthai Textile Co., Ltd		200726 CH				HK$5.65					2,599,829				1,883,439				1.1	%
New York 14.0%
Sohu.com Inc		Sohu US				US$15.4					1,071,586				16,556,004				9.9	%
Chinadotcom, Corp		China US				US$4.70					1,473,654				6,926,174				4.1	%
Singapore 1.3%
People’s Food Holding		PFH SP					S$0.88				4,400,000				2,182,577				1.3	%
Direct 6.7%
A-S China Plumbing Products, Ltd											450				3,199,999				1.9	%
Captive Finance Ltd											2,000,000				3,045,000				1.8	%
Tomoike Industrial (H.K.) Ltd											825,000				2,350,780				1.4	%
Moulin International Holdings, Ltd (2004 CB)											2,000,000				2,003,922				1.2	%
Kowloon Development		34 HK									1,530,000				662,100				0.4	%
Cash 1.3%

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.