Annual Report 2019

INVESTMENT MANAGER’S DISCUSSION AND ANALYSIS (CONTINUED) China Merchants China Direct Investments Limited Annual Report 2019 26 REVIEW OF INVESTMENTS (CONTINUED) In 2019, Geesun Intelligent adhered to its business strategy, adopted the previous year, with a focus on customer restructuring. The company has been enhancing cooperation with top-tier lithium battery plants, while focusing on the research and development of next-generation thermal compound stacking machines. Presently, although Geesun Intelligent has not yet received large orders from testing customers as the customer testing period for its new products took longer than expected, the company has received preliminary orders for thermal compound stacking machines from certain sizable companies, and new orders and further cooperation are expected in the future. Due to an expected significant increase in orders, Geesun Intelligent is currently facing tight funding and has initiated a new round of equity financing. Geesun Intelligent recorded an unaudited net loss of RMB79.14 million for 2019, which was mainly attributable to the relatively long customer testing period for the new products. Jiangsu Huaer Quartz Materials Co., Ltd. (“Jiangsu Huaer”) was established in Yangzhou, Jiangsu and is principally engaged in the research and development, and production, of high purity silica crucibles. Jiangsu Huaer is a manufacturer producing silica crucibles with comprehensive specifications in China, and has the capability to produce 28-inch silica crucibles, or larger, on a vast scale. The silica crucible products are currently consumable auxiliary equipment required to produce single crystalline silicon ingots, which are used in turn to produce single crystalline silicon solar cells and semiconductor chips. The Fund invested RMB15 million (equivalent to US$2.23 million) in September 2010 for a 7.50% equity interest in Jiangsu Huaer. As of the end of 2019, the carrying value of the Fund’s interest in Jiangsu Huaer was US$0.25 million, representing an increase of 4.17% over US$0.24 million at the end of last year. Since a new photovoltaic policy was introduced on 31 May 2018, price subsidies for electricity have been reduced and the construction of photovoltaic power plants has slowed. As a result, the company’s customers have successively reduced production, which in turn has reduced demand for single crystalline silicon electric cells and silica crucibles. Meanwhile, due to past-due trade receivables, turnover of Jiangsu Huaer’s working capital has been slow and its financing costs have remained high, greatly affecting its normal business production and operations. The operations of Jiangsu Huaer did not experience a turnaround in 2019 and the company is now on the brink of liquidation or bankruptcy. Hwagain Group Co., Ltd. (“Hwagain”) was formed by the merger of two paper manufacturers located in Nanning, Guangxi in 1998. It is principally engaged in the research and development, production, and sale of high quality printing paper and tissue paper. The Fund invested RMB119.99 million (equivalent to US$19.00 million) in January 2012 for a 7.10% equity interest in Hwagain. As of the end of 2019, the carrying value of the Fund’s interest in Hwagain was US$7.88 million, representing a decrease of 37.41% from the value at the end of last year of US$12.59 million. Hwagain recorded an unaudited net profit of RMB64.67 million for 2019, down 51.20% year-over-year.