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October 2020 China: Too Big to Ignore China’s transformation and rise into an economic power has been one of the most important developments in recent history. Ranked as the world’s most populous nation, China represents nearly 19% of the world’s population1 with almost 1.4 billion people2. Over the last four decades, the Chinese economy has averaged 9.4% in annual GDP growth3, transforming the country into the world’s second largest economy and the single largest contributor to world growth since 2008. This spectacular growth has helped raise over 850 million people out of poverty4, making China an upper- middle-income country and the fastest growing consumer market in the world. It has also grown to be the largest manufacturing base as well as the top exporting country in the world.

Figure 1: Growing Share of World GDP (1980 – 2019, based on PPP) 100% 25% 42% 42% 36% 30% 17% 15% 50% 22% 22% 20% 40% 40% 35% 32% 36% 19% 0% 2% 4% 7% 14% 1980 1990 2000 2010 2019 China Other Emerging Markets United States Other Developed Markets Source: IMF as of Oct 2019

Figure 2: 10 Largest World Stock Exchanges by Market Capitalization

8. London 4. $2.4 T Stock Stock 9. TMX Group $3.5 T Exchange Exchange 3. Japan $20.4 T Exchange 6. Euronext $4.6T $6.0 T Group 1. New York Stock $6.3 T Exchange $2.4 T $17.2 T $4.8 T $5.5 T 2. NASDAQ 9. Saudi Stock 7. 5. Exchange Stock Stock Exchange Exchange

The three Chinese Exchanges together $16.6T represent $16.6T in market capitalization

Source: World Federation of Exchanges as of August 2020

The Chinese stock market has matched the pace of the country’s economic growth. Today, China’s three stock exchanges together represent $16.6 trillion in market capitalization and are second in size only to the United States5. In addition, China is home to second largest unicorn6 market in the world. As these companies go public, the Chinese market capitalization will continue to rise. However, despite the size of China’s population, its role in global growth and size of equity markets, China continues to be underrepresented in global indices and investor portfolios.33% While China represents 17% of the market cap of world exchanges7, it only represents 6% of the MSCI AC World Index8.

Figure 3: Global Indices Are Underweight Chinese Equities

20% 7% 34% 67% 41% Share of Share of Percent of 6% 19% 19% Share of 17% World World GDP Global MSCI AC Population (based on World33% Index PPP) 63% Market Cap 40% 87% 14% China Other Emerging Markets Developed Markets

Source: World Federation of Exchanges Source: IMF as of Oct 2019 Source: IMF as of Oct 2019 Source: MSCI as of August 2020 as of August 2020 1

Accessing China: Making Sense of the Alphabet Soup Accessing the Chinese equity market can seem complex to investors faced with its numerous available investment routes: A-shares, B-Shares, H-shares, Red Chips, P-Shares and US listed ADRs. These investment options vary greatly by stock exchange membership, currency, liquidity and access as shown in figure 4.

Figure 4: Understanding the Alphabet Soup: China’s Various Share Classes

Chinese stocks listed in Mainland Chinese stocks listed in Hong Kong Chinese stocks China listed in the US

A-shares B-Shares H-shares Red-Chips P-Chips US ADRs

Definition Chinese Chinese Chinese Chinese securities Nonstate-owned Shares of securities securities securities incorporated Chinese Chinese incorporated in incorporated in incorporated in outside of China, securities companies that Mainland China, Mainland China, Mainland China, listed in Hong Kong, incorporated are listed in the listed in China listed in China listed in Hong but whose primary outside the US (legacy market) Kong (excluding business interests mainland and dual-listed stocks are in mainland traded in Hong like Alibaba) China. Usually Kong controlled by the state or a province or municipality

Stock Shanghai and Shanghai & Hong Kong Stock Hong Kong Stock Hong Kong Stock NYSE/NASDAQ Exchange Shenzhen Stock Shenzhen Stock Exchange Exchange (HKD) Exchange (HKD) (USD) Exchange Exchange

Currency Quoted in Quoted in foreign Quoted and Quoted and traded Quoted and Quoted and renminbi currencies traded in Hong in Hong Kong dollar traded in Hong traded in US (Shanghai in Kong dollar Kong dollar dollar USD and Shenzhen in HKD)

Market 10,187 18 724 601 1,534 1,279 Capitalization (USD B)

Number of 3,858 94 287 177 706 247 Stocks

Access QFII or Stock No restrictions No restrictions No restrictions No restrictions No restrictions Connect

Main Sectors / Financials, Industrials, real Financials, SOEs – utilities, Consumer, real Internet, & Industries consumer, TMT, estate, consumer energy, telecom, real estate estate, IT healthcare, healthcare industrials, TMT consumer disc.

Top Moutai, ICBC, Gujing Distillery, China China Mobile, Tencent, Alibaba, JD, Companies Agricultural Baosight Construction CNOOC, China Meituan, Xiaomi Pingduoduo Bank Software, Bank, Ping An Resources Land Luijiazui Fin & Insurance, ICBC Trade

Source: CICC, HK Stock Exchange, Shanghai Stock Exchange, MSCI. As of Sep 30, 2020

For Hong Kong-listed stocks and US-listed Chinese ADRs, investors are free to trade with little restrictions. However, quota systems and capital controls in mainland China historically created challenges for foreigners to access stocks listed in Shanghai and Shenzhen stock exchanges. Many of these hurdles have been minimized over recent years. Today, foreigners seeking to access A-shares may do so via Qualified Foreign Institutional Investors (QFII) program or

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Stock Connect (via HK Stock Exchange). Further changes to allow foreign investors easier application of QFII licenses are expected in the near future and should augment the access to China securities.

Figure 5: How to Access A-Shares

Qualified Foreign Institutional Investors (QFII) Stock Connect (via HK Stock Exchange)

Description Program that allows specified licensed international Schemes that allow access to mainland listed stocks investors to participate in mainland China's stock through the Hong Kong stock exchange (Shanghai-HK exchanges. Created in 2002. and Shenzhen-HK Stock Connect). First created in 2014. Qualification Fund managers, pensions, insurance companies with All foreign investors including individuals $500m AUM + 2 years of operating history

Quota All quota abolished in Sep 2019 No total quota. Daily quota CNY52B

Approval agencies CSRC for investment license and SAFE for foreign None exchange license Investment universe All listed securities 579 stocks as of Aug 2020

Limits on repatriation No restriction but subject to regulatory approval None including audit, tax and FX

Source: HK Stock Exchange and CICC.

Why An All China Approach Makes Sense Although there are many ways to access the Chinese equity markets, the size, dynamics and composition of Chinese investment options vary greatly. The universe of stocks outside mainland China is just a small part of the universe. More specifically, A-shares represent a $10.1 trillion market compared to $2.8 trillion in the Hong Kong market and $1.3 trillion in the ADR market. Investors focused exclusively on H-shares and ADRs limit their universe to 1,417 stocks and exclude the additional 3,800+ stocks within in the A-share universe.

Unlike the H-share and ADR markets, participation is relatively low in the A-share market with the retail investors having a large influence both on the free float and trading volume. This retail focus is accompanied by higher trading volume which in turn has resulted in Chinese mainland markets ranking among the most liquid in the world. Share turnover velocity in Shenzen and Shanghai stock exchanges are 465% and 266% respectively, while the Hong Kong stock exchange’s turnover velocity is closer to 60%9.

Looking through to the underlying listed companies, the A-share market tends to be more diverse than the H-share and ADR market. H-shares have traditionally been dominated by the largest state-owned companies such as banks, energy and telecom companies while ADRs have tended to focus on new economy companies such as Alibaba and Baidu. Examples of sectors that are typically unavailable outside the A-share market include consumer goods and services, health care, and media. Expanding the investment universe to include a wider array of investment options across China’s various share classes allows investors the flexibility to take advantage of opportunities across the different industries, sectors and market capitalization.

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Figure 6: The A-Share Market is More diverse than the H-share and ADR Market

Utilities, 2.6% Utilities, 3.2% Real Estate, 5.9% Real Estate, 3.0% Real Estate, 10.3% Materials, 9.7% Materials, 1.7% Info. Tech., 1.7% Info. Tech., 3.8% Industrials, 1.7% Industrials, 6.0% Health Care, 2.4% Info. Tech., 17.5% Health Care, 5.9% Financials, 1.5% Financials, 16.6% Energy, 3.4% Industrials, 16.7% Energy, 1.6% Cons. Staples, 4.9% Health Care, 11.4%

Financials, 13.3% Energy, 1.1% Cons. Discr., 29.3% Cons. Discr., 64.7% Cons. Staples, 12.9% Cons. Discr., 8.9% Comm. Srvs., 3.0% Comm. Srvs., 16.8% Comm. Srvs., 18.5% China A-Shares Hong Kong Exchange Chinese ADRs Source: Bloomberg as of September 2020

As access to mainland stocks improved, index providers such as MSCI and FTSE have included A-shares into its major indices, however with restrictions that artificially limit their representation within the indices. For example, in the case of MSCI indices, A-shares were first added in October 2018 with a 5% inclusion factor. As of September 2020, inclusion has increased to 20% and is limited to 472 large- and mid-cap stocks out of a universe of over 3800 A-shares10. A comparison of the MSCI China Index and MSCI China All Shares Index demonstrate the differences between artificially limiting exposure to China share classes.

Figure 7: MSCI China vs MSCI China All Shares vs Chinese Market 27% 34% 20% 22% 9% Mainland China A- Shares 12% 12% MSCI MSCI China HK Listed Chinese 37% China Total Companies China All Shares Market Cap US Listed hinese Index 41% Index Companies 61% 54% 71%

Source: MSCI and Bloomberg as of September 2020

China Opportunity for Active Managers Despite their size and growing importance, Chinese equity markets remain relatively inefficient and offer fertile opportunities for active managers with local insights to add value.

Under-owned Although investor interest in Chinese equities have increased materially over the last few years as restrictions for investments in A-shares have been relaxed, foreign ownership levels are still significantly below levels seen in developed and emerging markets. With global indices expected to continue to relax artificial limitations on Chinese equities, it is reasonable to expect large scale foreign inflows into A-shares in the coming years.

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Figure 8: Foreign Ownership of Domestic Stock Market 40% 35% 30% 25% 20% 15% 10% 5% 0% Hong Kong Korea Japan Taiwan Average EM Brazil US Mainland China (A-Shares) Source: Wind, Bloomberg and HSBC Qianhai Securities of 12/09/2019

Figure 9: 2019 Household Asset Structure (China vs US) 100% Real Estate

80% Bond

60% Stocks

40% Inv Funds, Insurance, Pensions and Private equity 20% Cash and deposits

0% Other China US

Source: CEIC, CICC Research

Domestic inflows to A-shares is also expected to increase. As of 2019, 66% of Chinese household assets are allocated to real estate with less than 10% allocation to equities compared to 29% in the US11. With homeownership in China reaching 90% and the government increasing restrictions on real estate as an investment tool (and thus limiting its return potential) Chinese households are left with little choice but to increase allocation to equities in the future.

Inefficient & Volatile Despite relatively low allocation to equities, the A-share market is dominated by retail investors who own 55% of the free float of the market and account for over 85% of trading volume12. These retail investors tend to have short investment horizons and be more focused on recent price action than company fundamentals. The hyperactive nature of domestic investors and the resulting volatility often generate opportunities for patient skilled active investors that are better positioned to generate alpha.

Figure 10: Retail Investors Dominate the A-Share Market: Turnover Contribution by Investor Type

100%

80%

60%

40%

20%

0% China A-Shares China H-Shares US UK

Retail Investors Institutional Investors Source: As of May 1, 2018. and South China Morning Post. https://www.scmp.com/business/ money/markets-investing/article/2144194/global-investors-take-their- positions-ahead-chinas

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Under- Researched Sell-side analyst coverage of A-shares tends to be relatively low creating pricing inefficiencies to be exploited by active managers. Over 50% of the A-share market is not covered by third-party analyst.

Figure 11: China A-Shares are Under-Researched

60% 53% 50%

40%

Shares - 30% 23% 24%

20% China A

Analyst Analyst Coverage of 10% 0% No analyst coverage 1-5 analysts 6 or more analysts

Source: Factset Research Systems as of December 31, 2019. Total size of universe included in the analysis is 4,925 companies

High Dispersion Finally, the A-share market offers relatively high levels of dispersion which mean that skillful active managers have a better opportunity to add value thru bottom-up stock selection.

Figure 12: The China A- Shares Market Offers Dispersion of Returns for Active Investors

10%

8%

Sectional 6%

-

Dec 2018) -

4% Dispersion

2%

(Oct 2014 (Oct Average Average Cross 0% MSCI China A CSI 300 FTSE 250 Nikkei 225 HSCEI S&P 500 FTSE 100 International

Source: Pinebridge, Source: Bloomberg, as of 31 December 2018. MSCI China A International Index was launched in October 2014, thus the coverage period is from 31 October 2014 to 31 December 2018. https://www.pinebridge.com/insights/investing/2019/03/alpha-in-china-a-shares

Accessing Local Specialists in China The Chinese asset management industry has experienced unprecedented growth over the past ten years, reaching $16 trillion by the end of 201913. The pace of growth is expected to accelerate further with the recent liberalization of the investment banking and money management industries. According to Oliver Wyman Consulting, the A-share asset management industry is expected to grow to as much as $30 trillion by 2023 driven by domestic and foreign inflows14.

While the current industry is already large, it is also very fragmented with over 24,000 privately managed funds spread across 36+ provinces and cities, with an average AUM of $114M15. As a result, searching for local specialists requires a strong network and experienced research team to select the right managers.

While the Chinese equity market offers great opportunities for , experienced locally based managers typically have a better chance of transforming those opportunities into alpha for their investors. Deep local knowledge is critical in understanding the changing local macro and micro economic undercurrents as well as changes to the equity market dynamics such as new issues, investor flows and index changes. In addition, a fluent understanding of the local

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Figure 13: Very Large but Highly Fragmented Asset Management Universe

Large & Diverse Universe Highly Fragmented Geographically Dispersed

24,000+ $114M 36 Number of privately managed funds Average size of privately managed Number of provinces/cities where funds privately managed funds are located 9,000 Number of pure equity privately 2% 56% managed funds Percentage of privately managed Percent of privately managed funds funds managing more than $750M based in Shanghai, Shenzhen and

Source: The Asset Management Association of China, May 2020

Conclusion China is a large, growing economy with a deep, diverse and liquid market that is growing in global importance. Despite these promising attributes, China still has relatively low institutional ownership and coverage, which create inefficiencies in its equity market. The opportunity to add value and generate alpha is significant for skilled active managers with deep knowledge of the universe and a local presence. While there are few dedicated players offshore, locally the asset management industry is large, fragmented, and often comes accompanied with travel and language challenges. As such, the importance of experience in finding trusted local partners in the region is essential and will determine investors’ success in taking advantage of the extraordinary opportunity that China offers.

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Important Notes & Disclosures

This presentation shall not constitute an offer to sell or the solicitation of any offer to buy which may only be made at the time a qualified investor receives a final confidential private offering memorandum (the “Fund Documents”) describing an opportunity to invest with ABS (a “Fund”). In the event of any inconsistency between this presentation and the Fund Documents, the Fund Documents will govern. This presentation being provided to a prospective investor does not guarantee an investor’s qualification for an investment in the Fund or the Fund’s capacity for its investment. Such criteria may only be determined upon completion of the Subscription Material for the Fund. Investments in any Fund will be suitable only for certain financially sophisticated investors who have no need for immediate liquidity in their investment and can bear the risk of an investment in the Funds for an extended period of time. There is no secondary market for interests or shares in the Funds and none is expected to develop. There are also restrictions on transferring interests or shares and withdrawing or redeeming interests or shares from the Funds. The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations. You should make an independent investigation of the investment described herein, including consulting your tax, legal, accounting, or other advisors about the matters discussed herein. Information pertaining to our processes is subject to change at any time without notice.

Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied upon as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as if” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.msci.com)

1 Source: IMF as of October 2019 2 Source: National Bureau of Statistics of China. As of 2019 3 Source: World Bank. Data from 1978-2019 4 Source: World Bank. Data accessed as of 2020 5 Source: World Federation of Exchanges as of August 2020 6 Footnote: Unicorn is the term used in the venture capital industry to describe a startup company with a value of over $1 billion. According to CB insights, China unicorns are valued at $504 B second only to US ones ($684 B). 7 Source: ABS and World Federation of Exchanges as of August 2020 8 Source: MSCI as of August 2020 9 Source: World Federation of Exchanges as of August 2020 10 Source: MSCI as of 2019 11 Source: CEIC, CICC Research 12 Source: Stock Exchange 13 Source: Oliver Wyman Consulting and the World Economic Forum. Report: China Asset Management at an Inflection Point. As of July 2020 14 Ibid 15 Source: The Asset Management Association of China, May 2020

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