Overview

It is my pleasure to report to you for the first time as Chairman of the Board in what has been a hugely significant financial year to 31 October 2022 (the "Financial Year") for abrdn China Investment Company Limited ("the Company" or "ACIC").

October 2022 marked the first anniversary of our shareholders approving the Company's change of mandate, shifting from investing in a wide range of emerging market funds to concentrating on the compelling opportunities offered by Chinese equities. While this first Financial Year has seen some extremely challenging conditions, the Board believes that the long-term growth prospects for Chinese companies, which drove our proposal to change the Company's mandate, remain as compelling as ever. The performance of the portfolio and Chinese equity markets since the end of the Financial Year would appear to bear this out.

In his last report to shareholders, my predecessor, Mark Hadsley-Chaplin who retired on 1 August 2022, commented that investors in Chinese equities were largely ignoring company fundamentals, with share prices being heavily influenced by macroeconomic and geopolitical risks. This trend continued during the Financial Year and led to a general rotation from growth to value stocks, forcing share prices downwards. The Company's net asset value (NAV) total return for the Financial Year was -37.0%, while the share price total return was -35.5%. This compares with the total return of the MSCI China All Shares Index of -31.5% in Sterling terms. However, since the end of the Financial Year, the China re-opening trade has been positive and markets have rallied significantly.

There were a number of macro geopolitical and economic factors which had a significant negative influence on the performance of Chinese equities during the Financial Year- war in Ukraine, an energy crisis, soaring commodity prices and global inflation, which led to rising interest rates and fears of a worldwide recession. The ongoing tensions with the US, and the performance of the US dollar, compounded the challenges for Chinese equities. Markets continue to be extremely sensitive to any flare-ups between the two economic superpowers. Consequently, verbal sparring over Taiwan, the delisting of Chinese American Depositary Receipts (ADRs) and potential sanctions (such as the Biden administration's block on sales of American semiconductors to China announced in October) all added to volatility in Chinese stock markets.

Locally, three major domestic factors negatively affected share prices during the Financial Year: firstly, China's continued commitment to its zero-Covid policy, which limited the reopening of the local economy; secondly, the travails of the country's heavily indebted real estate sector; and, thirdly, reaction to General Secretary Xi Jinping securing an unprecedented third term as China's leader at the 20th Communist Party Congress.

The Company's underperformance during the Financial Year should be considered against the challenging market backdrop.

ACIC's lack of exposure to energy companies hindered performance. Energy was the only sector at a market level to rise during the Financial Year, led by the surge in oil and gas prices. However, with the Chinese energy sector dominated by state-owned oil and gas companies, ACIC's Investment Manager believes it is difficult to find quality companies in this sector that will perform well over the long-term.

Stock selection in the financial sector also weighed on returns, as a number of the Company's bank holdings underperformed.

On a brighter note, there was positive news from some of ACIC's consumer holdings, which benefited from increased consumption of domestic brands over imported goods.

ACIC's Investment Manager responded to the challenging conditions during the Financial Year to mitigate short-term volatility. One such step was to reduce the underweight gap in value stocks, as the market style rotated from growth to value, adding to our holdings in more defensive sectors, while still maintaining exposure to the portfolio's five core themes: aspiration, digitalisation, going green, health and wealth. These are set out in more detail in the Investment Manager's Report, along with additional commentary on portfolio performance and activity.

Dividends

During the Financial Year, the Board revised ACIC's dividend policy so that a sufficient proportion of income delivered by the portfolio is paid out in dividends to Shareholders, thus enabling the Company to maintain its investment trust status.

At the end of the Financial Year, the revenue and profitability of the Company was such that the Board is declaring an interim dividend in respect of the Financial Year ended 31 October 2022 of 3.2p per Ordinary share which will be payable to Shareholders on 17 March 2023 with an associated ex-dividend date of 23 February 2023.

Loan Facility and Gearing

On 13 April 2022, the Company signed an agreement with the Industrial and Commercial Bank of China (ICBC) for a new two year revolving credit facility. The facility provides ACIC with £15 million of borrowings, along with an option to increase the level of the commitment by a further £15 million, drawable in Sterling or Chinese Yuan.

At the Financial Year end the facility was unused. However, in December 2022 and late January 2023, the Investment Manager drew down CNH 106m (£12.7m) in two tranches. These funds provide the investment team with additional capacity to purchase quality, high conviction target companies and to fund investment in markets to which the Company gained access as part of its Qualified Foreign Investor licence.

Discount and buy backs

During the Financial Year, the Board closely monitored the Company's share price discount to NAV. The Board's intention is that ACIC's shares should not trade at a price which, on average, represents a discount that is out of line with its direct peer group over the long-term.

The Board seeks authority from Shareholders annually to buy back shares to assist the management of the discount.

Shares may be repurchased when, in the opinion of the Board, and taking into account factors such as market conditions and the discounts of comparable companies, the Company's discount is out of line with ACIC's direct peers and shares are available to purchase in the market. The Board believes that the principal purpose of share repurchases is to enhance the NAV for remaining shareholders, although it may also assist in addressing the imbalance between the supply of and demand ACIC's shares and thereby reduce the scale and volatility of the discount at which the shares trade in relation to the underlying NAV.

At the beginning of the Financial Year, and as part of the merger with Aberdeen New Thai Investment Trust plc (New Thai), the Company invited all shareholders to participate in a tender offer pursuant to which the Company would buy back up to 15% of the Ordinary shares in issue at a 2% discount to NAV. Shareholders tendered 6,894,773 Ordinary shares in response to the offer and the Company bought back those shares into treasury at a price of 801.92p per share. Simultaneously, the Company issued 7,554,440 new Ordinary shares to the shareholders of New Thai who had elected to roll their shareholding into ACIC. Following the completion of the Scheme of Arrangement on 9 November 2021, the number of Ordinary shares in issue was 46,624,826.

Between 9 November 2021 and 31 October 2022, ACIC bought back 1,341,251 shares or 2.9% of the share capital in issue at a cost of £7.55 million and a weighted average discount of 12.6%. This enhanced the Company's NAV by 0.35%. Since the Financial Year end, the Company has bought back a further 1,268,709 shares or 2.8% of the share capital in issue at the Financial Year end at a cost of £7.0 million and a weighted average discount of 14.4%. This enhanced the Company's NAV by 0.4%.

Investment Trust status

Following the merger with New Thai, the Board was pleased to announce that ACIC had been granted approval by HMRC to be classified as an investment trust under Chapter 4 of Part 24 CTA 2010 and Chapter 1 of Part 2 of The Investment Trust Tax Regulations. As a result, the Company became an investment trust with effect from 9 November 2021 and is registered in the United Kingdom for tax purposes. This means that, in respect of each accounting period for which ACIC is approved by HMRC as an investment trust, ACIC will be exempt from UK taxation on its chargeable gains. Income arising from overseas investments is subject to foreign withholding taxes at varying rates, however, like other investment trusts, the Company seeks to make use of double taxation relief where available. The Company is still liable to pay UK corporation tax on its net income in the normal way but should, in practice, be exempt from UK corporation tax on dividend income received, provided that such dividends (whether from UK or non-UK companies) fall within one of the "exempt classes" in Part 9A of the Corporation Tax Act 2009.

Qualified Foreign Investor approval

On 19 December 2022, ACIC announced that it had completed the process and had received regulatory approval for a Qualified Foreign Investor ("QFI") licence. The QFI scheme provides the Company with access to a broader investible universe of Chinese equities, including access to stocks listed on the Shanghai Stock Exchange STAR Market ("STAR"), and at the same time grants the Company more flexibility to trade onshore equities approaching Foreign Ownership Limits under the Stock Connect programme.

Management Team

Following the change of the Company's investment mandate, Nicholas Yeo and Elizabeth Kwik were appointed to lead ACIC's Investment Management Team on 26 October 2021. They manage ACIC's portfolio from Hong Kong and Shanghai, where the 13 strong Chinese equities team is based. The Board met members of the team, virtually, prior to appointment and was impressed by them and their track record.

On the change of the Company's investment mandate, Bernard Moody and Andrew Lister ceased to be involved in the day-to-day running of the portfolio. On behalf of the Board, I would like to thank Bernard, Andrew and the abrdn Closed End Fund Strategies team who have done an excellent job of managing the Company's portfolio.

The change of mandate and management team was not in any way a reflection of the service that they provided, and the Board and I wish them the very best.

Change of Company Secretary, Administrator, Depositary and Custodian

Following the end of the Financial Year, ACIC has signed agreements with abrdn plc and various entities within BNP Paribas S.A. ("BNPP") to take on various functions in due course. BNPP will become ACIC's administrator and provide custody and depositary services. abrdn will take on Company Secretarial responsibilities. An announcement will be made when the transfer process has been completed.

Board Composition

There have been some significant changes to the Board during the Financial Year.

Anne Gilding and Sarah MacAulay joined the Board as Directors in November 2021, both of whom had previously been directors of New Thai.

William Collins retired as a Director of the Company on 12 April 2022, having served on the Board for ten years, and Mark Hadsley-Chaplin retired as Chairman and a Director on 1 August 2022, having served for more than nine years. On behalf of the Board, I would like to record my thanks to them both, and particularly Mark for his efforts in steering the Company through its change of mandate.

I was honoured to be asked by my other Board colleagues to assume the role of Chairman on 1 August 2022 when the Board also appointed Sarah MacAulay as Senior Independent Director.

Lastly, the Board welcomed Mark Bridgeman to the Board on 1 August 2022 and as my successor as Chairman of the Audit Committee. Mark brings a wealth of experience in the investment sector. He will stand for election to the Board at the AGM in April 2023.

ACIC's Board takes its responsibilities very seriously, and regularly considers succession planning, and I am delighted to be working with the refreshed Board and look forward to building upon our successes.

The Board is developing plans to visit China, and the investment team in 2023, and I hope to be able to report on a successful trip in the next Annual Report.

Online Investor Presentation

In order to encourage as much interaction as possible with our shareholders, I will be hosting an Online Investor Presentation at 11:00am on Thursday, 30 March 2023. At this event, there will also be an update from Elizabeth Kwik, Portfolio Manager, followed by an opportunity to ask live questions of Elizabeth and me. The online presentation is being held ahead of the AGM to allow shareholder sufficient time to submit their proxy votes after the presentation but prior to the AGM should they so wish. You can register now for the online event by clicking here.

Annual General Meeting ("AGM")

The Company's AGM will be held at 12 noon on 13 April 2023 at Wallacespace Spitalfields, 15-25 Artillery Lane, London, E1 7HA. The Board is delighted that Elizabeth Kwik will be travelling from Hong Kong to present an update on ACIC and meet with shareholders in person at the AGM and we encourage shareholders to attend.

In advance of the AGM, we would request that you complete and return the proxy form enclosed with the Annual Report so as to ensure that your votes are represented at the meeting. If you hold your shares in the Company via a share plan or a platform and would like to attend and/or vote at the AGM, you will need to make arrangements with the administrator of your share plan or platform. For this purpose, investors who hold their shares in the Company via the abrdn Investments Plan for Children, Share Plan or ISA will find a Letter of Direction enclosed. Shareholders are encouraged to complete and return the Letter of Direction in accordance with the instructions. The Notice of the Meeting is contained in the Annual Report for the Financial Year ended 31 October 2022.

Outlook

The last 12 months have been particularly challenging for investors in Chinese equities. We saw the Hang Seng Index in Hong Kong bottom out below 15,000, touching levels not seen since the aftermath of the Global Financial Crisis in 2008. Markets reacted positively to the announcements of the easing of Covid restrictions in China to the point where the NAV Total Return of the Company in the first three months of the current financial year was almost 40%. This is, admittedly, following the heavily negative numbers, but it does highlight how much interest there is in China, interest that we believe is well-founded. The Board remains confident that any short-term headwinds that we may encounter in future will be strongly outweighed by long-term positive fundamentals and the compelling opportunities to invest in quality Chinese companies.

We consider that the actions that the Chinese government has taken in the last three months should not be seen as temporary and that, even if the uptick in domestic travel over Chinese New Year does lead to an increase in the number of people falling ill, there is little appetite for further draconian lockdowns such as we witnessed in late 2022, culminating in the tragic fire in Xinjiang. The return to the long-term trends of rising levels of urbanisation and the increase in the disposable incomes that the ever-expanding middle classes are able to deploy provides a ready market for high-quality goods and services.

The Board believes the portfolio is well positioned to capture China's long-term growth potential and is pleased to note the recent performance of the Chinese equities market since the end of the Financial Year. With a focus on these core themes, ACIC's Board believes that the portfolio comprises high-quality companies representing the finest structural growth opportunities in China, and arguably some of the most attractive areas of growth available anywhere to investors.

Helen Green

Chairman

13 February 2023

Discrete performance (%)

Important information

Risk factors you should consider prior to investing:

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. This may mean your money is at greater risk.
• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
• The Company invests into other funds which themselves invest in assets such as bonds, company shares, cash and currencies. The objectives and risk profiles of these underlying funds may not be fully in line with those of this Company

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.

Find out more at www.abrdnchina.co.uk or by registering for updates. You can also follow us on social media: Twitter and LinkedIn.