CVI China Value Investment Limited

9 March 2010

China Value Investment Fund Monthly Report Feb 2010

Performance
YTD (3 mths) -3.39 -10.99 -5.21

2008 Performance (%) Sharpe Ratio MSCI China (%) Eurekahedge Greater China L/S Index (%)

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct -3.57 N/A -22.78 -8.09

Nov -0.72 -3.87 4.33 -0.46

Dec 0.91 -2.15 10.49 3.61

2009 Performance (%) Sharpe Ratio MSCI China (%) Eurekahedge Greater China L/S Index (%)

Jan Feb -1.28 -0.87 -2.69 -2.98 -8.30 -3.18 -0.30 0.19

Mar 6.52 -0.22 14.13 3.56

Apr 7.87 0.76 10.87 6.00

May 12.29 1.60 16.11 10.40

Jun -2.54 1.16 3.58 2.88

Jul 7.46 1.60 10.82 8.82

Aug -2.18 1.27 -7.04 -5.28

Sep 1.18 1.27 4.18 2.97

Oct 7.13 1.61 6.41 3.14

Nov 1.99 1.65 2.45 5.53

Dec 2.29 1.71 0.46 2.04

YTD 46.28 58.80 46.83 Since Inception Oct 08 44.99 31.97 33.20 *

2010 Performance (%) Sharpe Ratio MSCI China (%) Eurekahedge Greater China L/S Index (%)

Jan 1.27 1.70 -8.64 -4.87

Feb 1.31 1.69 2.19 0.60 *

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

YTD 2.60 -6.63 -4.29 *

* Based on 27.66% of the NAV for Feb-2010 as at 8-Mar-2010

CVI performance Vs. MSCI China Index

150
140

CVI NAV
MSCI China Index

130
120

135.46 138.15
121.98 108.63 127.75 124.96 126.44 118.88

141.32 143.12

144.99

110
100

90 100
80

96.43 95.74 96.61 95.37 94.54

100.7

70

Suite 838, 8th Floor, Silver Fortune Plaza. No. 1 Wellington Street, Central, HK Contact Person: Wang Hao, Tel: 852-2523-9936, Fax: 852-2523-3639 Email: investors@cvi.com.hk

CVI China Value Investment Limited

February Review CVI Funds NAV was up 1.31% in February. YTD, it was up 2.6% vs. MSCI China Index down 6.63%. The Funds NAV has been up 44.99% since inception on 1 October 2008 while MSCI China Index was up 31.97% during the same period. The Fund maintained its Sharpe ratio at 1.7X. We increased our net long level from 53.81% end January to 72.67% end February because we were able to find many attractively priced stocks after several weeks of correction. Despite PBOCs second hike of RRR in mid February, Feds first hike of Discount Rate in late February, and the Greeces debt crisis, Chinese bank and property stocks stabilized in the last week of February. It was a clear signal that the market has found its trading bottom last month, after discounting Chinas monetary tightening. In the meantime, global pressure on RMB appreciation has intensified. We also think that the forthcoming reporting season will bring more surprises on the upside. Therefore, we increased our net long ratio significantly in the last week of February. I bought a few new companies last month because it was relative easy to discover the attractive valuations after recent correction. The portfolio now has 19 long names which are more than our usual 12-15 names. With our Fund size increasing, we can invest in more companies in our portfolio. However, we will keep our portfolio relatively concentrated. We continue to focus our research efforts to spot under-valued companies through peer valuation comparisons to understand why such mal-valuations exist.

Comments Lonking (3339.HK) kept its sales momentum in early 2010. Brokers expect both of the wheel loader's sales and the excavator's strong penetration story to continue this year. We bought back the stock towards the end of January after its price had fallen sharply in January, and added more shares throughout February. It is now trading around 11XPE2010 with further fundamentals improvement. ICBC (Asia) (349.HK) traded up in February after other HK small banks reported good 2009 final results. The market was concerned about the liquidity outflow from the HK banking system. People are also concerned about the local mortgage price war. The HKMA announced mortgage pricing guidance in early March which would help to stabilize the situation. The stock is now trading around 1.3XP/B 2010 and 6% dividend yield. We are expecting a good 2009 final result in April. Uni-President China (220.HK) remained weak in February. The market worried about the margin pressure from higher raw material prices such as sugar. After the stock was sold off by 20% in late January, we bought shares back in February. The company will benefit from Chinese government policies which promote domestic consumptions. Longyuan (916.HK) traded slightly down in February. Despite the failure of Copenhagen Conference, China continues to speed up wind power development. According to the Director of the National Energy Bureau, China does not have over-investment in the wind power. On the contrary, it needs to speed up the investments. The Chinese Government will focus its efforts on clean energy in the next 5 years. Despite Longyuans rich valuation, it offers good exposure to the alternative energy sector. Kingsoft (3888.HK) recovered some lost grounds in February because of its cooperation with Dell and a potential spin-off of its software business. We are very disappointed at its new game performance but understand the management is increasing its game marketing and operation efforts. We will hold on to our position as the stock is now trading around 15XPE2010 with 30% growth rate.
Suite 838, 8th Floor, Silver Fortune Plaza. No. 1 Wellington Street, Central, HK Contact Person: Wang Hao, Tel: 852-2523-9936, Fax: 852-2523-3639 Email: investors@cvi.com.hk

CVI China Value Investment Limited

ChinaVTM (893.HK) reported an in-line 2009 results in late February and announced two small asset acquisitions. We sold the stock after the surprise RRR hike from PBOC in mid January. I was concerned that the commodity sector will under-perform during the early stage of monetary tightening. However, after the share price has lost more than 20% in 4 weeks, stock valuation became attractive. In addition, early indication shows that this years iron ore contract price would increase 40% YoY. Interestingly, at the end of February, Chinas iron ore spot price was up nearly 20% while China VTM share price was almost down 20% YTD. That does not make sense. Hence we bought back our position on China VTM at the end of February. We bought Harbin Power Equipment (1133.HK) in late December. Its stock price performed poorly in January and remained flat in February. However, Chinas electricity demand has increased strongly YTD. If the trend continues in 2010, power generators will increase their capital expenditures soon. The management already sees order recovery. It also receives 10% of its new orders for the nuclear power equipments. China will increase its nuclear power capex significantly in the next 3 years. The stock is trading around 10XPE2010 and at 0.9XP/B. The sector leader Dongfeng Electricity is trading around 25XPE2010. Harbin offers a better value for the long-term industry recovery exposure. However, recently, one of the companys top institutional shareholders kept selling the stock in the secondary market. This will continue to depress the share price for a while. China Communication Service (552.HK) was flat in February despite the telecom sector outperformed recently. The stock is trading around 11XPE2010 with a low teen growth rate. The company has a strong cash flow and a decent yield. I dont understand why the stock is so under-valued. Most people think that the Chinese telecom sectors capital expenditure peaked last year, therefore CCS has poor growth outlook. I am not too convinced by this argument. With improvement of 3G applications and usages, telecom network maintenance and enhancement capex will remain huge; thus CCS should have steady demands for its service. We bought BYD Electronic (285.HK) in mid-January, but suffered further book loss at the end of February. Chinese market is experiencing a mobile upgrading, namely from 2G to 3G, and this will promote a recovery of global demand for branded mobiles. There was a 30%YoY growth rate during Chinese New Year for mobile phone sales. BYD is trading around 15XPE2010 and it is at early stage of multi-years recovery. We bought Gome (493.HK) in early January. The stock was sold down sharply in February on concerns that the legal charges against the ex-Chairman may affect the companys business. The management team tried to re-assure the market that the operation was stable and improving. The company has shut down loss-making stores last year which may incur a one-off loss in the 2009 final results. Although the stock is not cheap, at around 20XPE2010, I am giving the management the benefit of doubt to prove its effort on business restructuring. We bought a leading ERP software company, Inspur (596.HK) in mid-January. The company focuses on providing IT software and service to banks, telecom operators and tax authorities. The stock was weak last month but there was little news flow. Trading at 12XPE2010 with 25% EPS growth rate, the stock is cheap. By providing more tax incentives, Chinese government is keen to develop this industry in China. The company has a similar business model and growth profile as Digital China, but its valuation is much cheaper. Therefore Inspur may be under-valued comparing its growth potential. China Green (904.HK) reported a strong interim result with 26.7%YoY increase in turnover and 25.5% YoY increase in net profit in mid January. The gross margin was at 51.2%. Its primary growth drivers are healthy beverage products, including mixed grain beverages, corn milk, fruit & vegetable juice; and processed vegetables for export markets. The stock rallied in early January but fell sharply in late January and February. The management indicates that the company would see strong export orders this year. The stock is trading at 11XPE2010 with a 25% growth rate. Comparing to its growth potential, it is cheap.
Suite 838, 8th Floor, Silver Fortune Plaza. No. 1 Wellington Street, Central, HK Contact Person: Wang Hao, Tel: 852-2523-9936, Fax: 852-2523-3639 Email: investors@cvi.com.hk

CVI China Value Investment Limited

We bought China Coal (1898.HK) in mid-February as we felt a recent drop of 30% share price was over-done. Chinas demand for coal remains robust while industry consolidation continues to favor the big national SOEs. After the recent correction, the stock valuation became attractive vs. its long-term growth profile. The company also reported strong sales in the first two months. We bought Denway (203.HK) in mid-February as I thought the share price was over-sold during the Toyota recall fiasco recently. Denway produces Honda cars while its parent co produces Toyota cars. However, the Toyota recall problem appeared to be so serious that it affected Denway parent cos listing plan. Also, Toyotas trouble may affect Japanese car sales in China in general. The stock will suffer a period of under-performance until the parent co gives a definite offer for share swap. This might happen in late April when the company reports its 2009 final results. I bought a significant position in Comba (2342.HK) in mid-February after the stock corrected 25% from its recent peak in early January. Comba is the leading wireless coverage solution provider in China. I think that the market was over-concerned about the companys growth peaking last year. In fact, network coverage capex is usually backend loaded. It should rise steadily as a percentage of total capex with the progress of 3G rollout. Comba has 20% market share in the 3G network deployment in China. The structural changes in the Chinese telecom market will help drive demand for Combas wireless coverage systems. By partnering with Huawei and ZTE, Comba is also able to penetrate international markets easily. Despite its rally in the past two weeks since we bought the share, it is only trading at 13XPE2010 with a 30% growth rate. The company has potentials for margin improvement due to better product mix, higher efficiency and market share gains. The current share price is significantly under-valued as compared to the companys growth potentials. I bought Evergrande (3333.HK) in the last week of February as the stock fell 30% in the past two months. It is one of the largest property developers in China with nation-wide projects. The company reported strong 2009 sales as well as strong sales in the first two months of 2010, despite the fact that the government measures to cool down the property market. As a private developer, the company has the largest landbank in China. It issued a high yield bond of USD750mn in HK in early February. If RMB appreciates, it will benefit tremendously. The stock is trading around 7XPE2010 and 50% discount to NAV on brokers consensus forecast. We bought Ju Teng (3336.HK) in early February after the stock fell 20% from its recent peak. The company sells notebook casings and accounts for 30% of global market. In 2009, the demand for notebook computers continued to rise. This growth is attributed to strong demand of notebooks in emerging markets, such as the replacement of desktop computers by notebooks and the increasing popularity of low-cost notebooks in the market. Ju Teng benefited from this trend by its technological leadership in the application of in-mould decoration, which provides tailor-made casing surface treatment solutions for various notebook brands. The companys strong relationship with major notebook manufacturers also helps it to capture more market share. Trading at 10XPE2010 with 30% growth potential, the stock is very under-valued. We bought Wasion (3393.HK) in early February after the stock fell sharply in January. The plunge was more to do with a special situation of a major institutional shareholder rather than the companys fault. Wasion is a leading manufacturer of electricity data collection products in China. It sells three-phase power meters, single-phase power meters, data collection terminals and power management software. State Grid Corporation of China has centralized the procurement process which puts margin pressure on the company. However, the stock was heavily sold recently thus offered good buy-in opportunity. It is trading at 13XPE2010 with a 20% growth rate. I bought China High Speed Transmission (658.HK) at the end of February after the stock fell sharply in the last two months. There were concerns on negative earnings surprise from the complicated CB and swap
Suite 838, 8th Floor, Silver Fortune Plaza. No. 1 Wellington Street, Central, HK Contact Person: Wang Hao, Tel: 852-2523-9936, Fax: 852-2523-3639 Email: investors@cvi.com.hk

CVI China Value Investment Limited

structure in 2009 results. However, it is a large one-off non-cash loss which will not affect its operation. Recently, some government officials are talking about raising the 150GW wind power capacity target for 2020 further. IPPs are eager to get more wind farm resources which they regard as strategic assets in Chinas energy landscape. Chinese wind power capacities are forecasted to add 20GW and 26 GW respectively in 2010 & 2011. CHST is trading at 14XPE2010 which is under-valued, given its 30% CAGR in earnings during 2009-11. That is a cheap exposure to wind power capex growth. We reduced our HSCEI index future shorts in late February as we felt the market had stabilized. Conclusion As I mentioned in January report, after several weeks of delay and 20% budget overrun, we finally moved into new house in late January. We have a decent size garden where my wife started a small vegetable farm. My wife is a keen cook, so the idea of being able to grow ones own organic vegetables excites us. I have been assigned to water the garden twice a day and occasionally plant the seeds to the soil. Initially, my muscles ached a lot as the hard labor caught my under-exercised body off guard! Life is full of cycles. I thought our family quitted farming business for good when my grandparents moved from Zhejiang Province to Shanghai one hundred years ago. We are now picking up farming as a hobby to provide ourselves with healthy organic vegetables. The hard work paid off with initial success. After suffering from muscle pains and backaches, we had the first harvest of pea spouts last weekend. It was superbly fresh and delicious. Investing in small value companies is just like growing your own vegetables in your backyard. You have to plough to prepare the ground; you have to water the vegetables timely and fertilize them occasionally. Above all, you need a lot of patience to monitor their growth and harvest at their best. You should never stimulate the vegetables growth by pulling their seedlings. Some seeds may never make it to break out of the ground, but those ripe vegetables will bring the enjoyment beyond anything from the supermarkets.

Wang Hao

Suite 838, 8th Floor, Silver Fortune Plaza. No. 1 Wellington Street, Central, HK Contact Person: Wang Hao, Tel: 852-2523-9936, Fax: 852-2523-3639 Email: investors@cvi.com.hk

CVI
Summary

China Value Investment Limited

Sector Exposures (%)
20 19 1
Sector Financials Machinery Consumer Communications Energy Technology Property Auto Basic material Derivatives 88.29 Long 5.07 13.11 14.49 10.44 8.61 23.83 4.92 4.32 3.50 -15.62 -15.62 Short Net 5.07 13.11 14.49 10.44 8.61 23.83 4.92 4.32 3.50 -15.62 72.67

Portfolio Characteristics

No. of Portfolio Holdings Longs Shorts

AUM (USDM) NAV/ Class A share (US$) Estimated annualized standard deviation (%) Maximum drawdown (%)

16.64 144.99 15.34 -5.46

Country Exposures (%)

Sector China Hong Kong Total Long 88.29 88.29 Short -15.62 -15.62 Net 72.67 72.67

Market Capitalization Exposure

Market Capitalization USD Large Cap (>US$10bn) Mid Cap (US$1-10bn) Small Cap (<US$1bn) Long 4.55 64.38 19.36 % NAV Short

Details of the Fund

Subscription Redemption

Base Currency Minimum Investment Management Fee Performance Fee

Important Note: 1.

Monthly Monthly (30 days notice period, 3 months lock up, subject to a 20% gate) USD USD100,000 1.5% of the NAV 15% with high watermark

Prime Broker Administrator

Citigroup Global Markets Limited Citi Fund Services (Asia) Limited

Auditor Investment Manager Investment Advisor Contact

Ernst & Young (Cayman) China Value Investment Inc. China Value Investment Limited Wang Hao (investors@cvi.com.hk)

This report is neither an offer to sell, a recommendation nor solicitation of an offer to purchase any investment.

Any offering is made only pursuant to the relevant private placing memorandum, together with the

current financial statements of the relevant fund, if available, and the relevant subscription application, all of which must be read in their entirety. None of the information contained herein has been reviewed or approved by any regulatory authority in Hong Kong or in any jurisdiction. 2. Investment involves risks. The price of units or shares and the income from them may go down as well as up and any past performance figures shown are not indicative of future performance. Any forecasts or The Fund mentioned herein uses alternative investment strategies and the risks inherent in this Fund are not typically encountered in traditional funds. Therefore, investment in this Fund is only suitable

opinion expressed herein (if any) may be subject to change.

The Fund undertakes special risks which may lead to substantial or total loss of investment and is not suitable for investors who cannot afford to take on such risks.

for professional investors who can afford the risks. Investors should read the offering documents of the Fund for details and risk factors associated with the investment, in particular those associated with investments in emerging markets, before subscribing to the Fund. Investors are also advised to consider their own financial circumstances and the suitability of hedge funds as part of your investment portfolio. 3. This report is not an advertisement. The information contained herein is for information purposes only and is not intended to provide investment advice and should not be relied upon in that regard. advised to obtain appropriate professional advice where necessary. 4. This report is confidential and is not intended for public use or distribution. Investors are

Information sources herein are believed to be reliable but we make no representation and accept no responsibility as to its accuracy or completeness and shall not be held liable for damages arising out of any persons reliance upon this report.

Suite 838, 8th Floor, Silver Fortune Plaza. No. 1 Wellington Street, Central, HK Contact Person: Wang Hao, Tel: 852-2523-9936, Fax: 852-2523-3639 Email: investors@cvi.com.hk