Annual Report 2019

INVESTMENT MANAGER’S DISCUSSION AND ANALYSIS (CONTINUED) China Merchants China Direct Investments Limited Annual Report 2019 20 REVIEW OF INVESTMENTS (CONTINUED) In 2019, Jinlanmei Travel continued to move forward with the sales and reception work for its 20/40-seat cruise ship, and with product promotions as well. At the same time, the company has continued to optimise and improve all aspects of its one-day tour products, encompassing the overall guest experience, the quality and breadth of services, and operating costs. In addition, it has actively expanded its product marketing and strengthened the promotion of its brand name. Rong Bao Zhai Culture Co., Ltd. (“Rong Bao Zhai Culture”) was established in Beijing in December 2015. Its main businesses include the sale of art supplies, handicrafts, calligraphy artwork, framed calligraphy artwork, and carving artwork, as well as the sponsorship of art exhibits and cultural/artistic exchange activities. In addition, Rong Bao Zhai Culture will be an important business development platform for its controlling shareholder, Rong Bao Zhai, in the future. The Fund agreed to advance cash of RMB300 million in total to Rong Bao Zhai Culture for a period of 5 years, with the right to convert the loan into an equity interest in Rong Bao Zhai Culture during the term of the loan, subject to the fulfillment of certain precedent conditions. In December 2016 and April 2017, the Fund disbursed RMB200 million (equivalent to US$28.86 million) and RMB100 million (equivalent to US$14.50 million), respectively, amounting to RMB300 million (equivalent to US$43.36 million) in aggregate. As of the end of 2019, the carrying value of the Fund’s debt in Rong Bao Zhai Culture was US$42.88 million, representing an increase of 3.52% over US$41.42 million at the end of last year. The Fund’s unrealised gain attributable to its investment in Rong Bao Zhai Culture for 2019 was US$2.15 million, down 41.28% year-over-year. In 2019, against the backdrop of sluggish domestic economic growth and continuing weakness in the artwork market, Rong Bao Zhai Culture took steps to reorganise its business and to substantially reduce the procurement of artwork, especially calligraphy and painting. By increasing efforts to expand into new markets, focusing on sales of the existing inventory of artwork, and cultivating its own group of calligraphers and painters based on its existing gallery business, while reducing various costs and expenses, seven branches achieved notable improvement in their financial performance compared to last year, including a full turnaround from loss to profit for some. At the same time, Rong Bao Zhai Culture continues to push forward with its corporate restructuring, as it further standardises its corporate management practices and reinforces its internal systems, established in an effort to lay the foundation for an eventual listing. Qinghai Provincial Qinghai Lake Tourism Group Co., Ltd. (“Qinghai Lake Tourism”) was established in Xining, Qinghai in 2008. It is a tourism operator with a focus on Qinghai Lake, a national 5A-class scenic spot, and is principally engaged in product development, business operations and provision of services related to tourism in Qinghai Lake and the surrounding regions. The Fund agreed to advance cash of RMB200 million in total to Qinghai Lake Tourism for a period of 3 years, with the right to convert the loan into an equity interest in Qinghai Lake Tourism during the term of the loan, subject to the fulfillment of certain precedent conditions. In August and September 2017, the Fund disbursed RMB50 million (equivalent to US$7.50 million) and RMB150 million (equivalent to US$22.93 million), respectively, amounting to RMB200 million (equivalent to US$30.43 million) in aggregate. Pursuant to a supplemental agreement dated 9 May 2019, Qinghai Lake Tourism undertook to repay a loan of RMB190 million in aggregate to the Fund by 30 June 2019, while the Fund retains the right to recover the outstanding loan of RMB10 million from Qinghai Lake Tourism, as well as to convert an amount up to RMB200 million into equity shares of Qinghai Lake Tourism during the joint-stock restructuring of Qinghai Lake Tourism. As of 31 December 2019, the Fund has received aggregate loan repayments of RMB195 million (including an additional loan repayment of RMB5 million) from Qinghai Lake Tourism.