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Dalton Kizuna Fund September 2017 Newsletter

Fund Description

The Dalton Kizuna Fund is an equity fund that invests opportunistically in Japan. The Fund strives to

buy shares in companies with good businesses run by management with a strong alignment of interest

with shareholders, at prices that reflect a significant margin of safety to intrinsic value. The Fund is ex-

pected to be a highly concentrated portfolio (no more than 20 companies) of strong conviction ideas. In

addition to performing onsite due diligence and rigorous fundamental analysis, the investment team

engages in active collaboration with managements and directors of portfolio companies in order to en-

courage actions that will lead to revaluation in the equity market.

“Kizuna” is a traditional Japanese word meaning the strong bonds between people; we use the word to

reflect our aspiration of pursuing greater good for all stakeholders through our investment practice.

Private and Confidential — Not for Public Distribution

FUNDS AT A GLANCE AS OF

SEPTEMBER 2017

Lead Portfolio Manager …... James B. Rosenwald III

Investment Style……………….…...Concentrated Equity

Index.. …………………..………...MSCI Daily TR Net Japan

Inception Date ….……...................................……..Mar ‘17

Fund Assets (September 30)….………….....……….$28 mil

Asian Equity Assets (September 30)…...………$3.2 bil**

Firm Assets (September 30)…………………..….……$3.5 bil

Net Asset Value/Share (September 30).........$1,042.06

Minimum Investment ….……….……………....…..…...$1 mil

High Watermark …………..……………………..……………...Yes

Structure……… ...................................... Master-Feeder

Administrator…………..….………………….Northern Trust

Custodian…………….………………………….Northern Trust

Auditor …………………..…......PricewaterhouseCoopers

Liquidity .. ………………………..Annual (1-yr Lock-up)***

Management Fee………………………………….….....…..…1.0%

Incentive Fee…………………………………….….….....…..…20%

CONTACT INFORMATION

Telephone……………….…..…………….…………..424.231.9100

Email .............................. info@daltoninvestments.com

1601 Cloverfield Boulevard – Suite 5050 N

Santa Monica, California 90404

www.daltoninvestments.com

*Past performance is no guarantee of future results.

All investments involve risk including the loss of

principal. Please see final pages for performance

disclosures.

**Asian equity assets include all assets managed by

James B. Rosenwald III, which include the assets

from the Dalton Kizuna Fund, several other Pan-Asia

and Japanese separate accounts and other products.

***Liquidity terms are more restricted for hard-to-

value or illiquid “special securities.” The manager has

the authority to designate up to 10% of the fund in

special securities, and these investments must be

held to realization of investment. Please see fund

documents for more information.

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Year MSCI

Japan

2017 -0.44% 1.28% -2.06% 0.87% 1.47% 2.12% 0.95% 4.21% 8.97%

MONTHLY PERFORMANCE (%) NET OF FEES*

TOP 5 LONG POSITIONS SECTOR BREAKDOWN

Fund Performance (Net of Fees)*

Company Sectors % Equity

Shinsei Bank Ltd Financials 9.3%

Kadokawa Dwango Corp Consumer Discretionary 4.5%

Mitsubishi Heavy Industries Ltd Industrials 4.4%

Toa Corp/Hyogo Consumer Discretionary 2.6%

Plathome Co Ltd Information Technology 1.3%

Company % Equity Sectors

Shinsei Bank Ltd Financials 8.6%

Plathome Co Ltd Information Technology 8.4%

Kadokawa Dwango Corp Consumer Discretionary 7.8%

Macnica Fuji Electronics Information Technology 6.9%

Mitsubishi Heavy Industries Ltd Industrials 6.7%

0.9%

4.2%

2.0%

9.0%

0%1%2%3%4%5%6%7%8%9%

10%

Latest Month Since Inception

Dalton Kizuna

Fund

MSCI Daily TR Net

Japan

21.8%

21.0%

15.3%

14.2%

12.5%

15.2%

0% 10% 20% 30%

Industrials

Consumer

Discretionary

Information

Technology

Materials

Financials

Cash

Sector Exposure

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Commentary

Performance Update

The Dalton Kizuna Fund (“the Fund”) returned

+0.9% net of fees this month compared to +2.0% for the

MSCI AC Daily TR Net Japan Index (the “the Index”). In

the third quarter of 2017, the Fund increased by +4.61%

while the Index increased by +3.97%.

Portfolio Overview

Seven months have passed since the launch of the

fund. We have continued to carefully deploy capital

over the latest quarter and are happy to report that

approximately 85% of capital is now allocated to 16

portfolio companies as of the end of September. We

added to existing positions in C Uyemura, Kadokawa,

and Macnica Fuji, and established new positions in

Aizawa Securities and Mitani Corporation.

Aizawa Securities is a family-run brokerage firm

with broad coverage in Asia and US equities, and also

makes direct investments primarily in public securities.

The key features of the company that make it a

compelling investment in our view are (1) triple-net

valuation, meaning that the market capitalization is

below net-liquid asset value, (2) significant

strengthening of its core businesses via the recent

merger, and (3) farsighted and focused owner-

operators. We have met several times with the owner-

operators of Aizawa in order to build mutual trust and

will continue to exchange ideas on the long-term

strategies of Aizawa including the deployment of

capital.

Mitani Corp. started as a simple domestic

wholesaler of concrete and petroleum and remains

competitive in its core business. Meanwhile, it has been

transforming itself into an investment house over the

past 15 years, generating a quarter of the company’s

profit today through its investments. The company’s

relentless pursuit for return on invested capital is

evidenced in its average 20% ROIC for the past five

years, steadily improving from a 2% ROIC 15 years ago,

demonstrating the success and foresight of

management led by the current president Mr. Mitani.

Although the company’s dividend and repurchase yield

have been 3.3% for the past three years, net financial

assets have been accumulating over the past decade,

amounting for approximately two thirds of the market

cap today. Mr. Mitani has remarked that he has been

embarrassed not to find enough business investment

opportunities and instead has chosen to return capital

to shareholders, which he emphasises is the result of

their disciplined approach to making investments. The

illiquidity of this company’s stock has caused some

price volatility recently, and we have taken the

opportunity to establish a position in company when it

trades at below one times price-to-book.

Major contributors for the quarter included Plat’

Home and Macnica Fuji Electronics Holdings. Plat’

Home, a leading supplier of the IoT gateway,

announced 65.8% year-on-year sales growth in core

products in its latest quarterly earnings. Since 2017, the

company has benefited from more IoT projects heading

towards full implementation from its previous

demonstration/experiment phase. Continued progress

in the second half of this year through next year is

expected. Macnica Fuji, the leading distributor of

semiconductor products and cyber security solutions in

Japan, announced better than expected year-on-year

earnings which helped to boost the stock price during

the quarter. Strong results were driven by a recovery in

its semiconductor business. Macnica is discussed in

detail below in the “Stock Highlight” section.

Detractors for the quarter included Shinsei Bank

and Mitsubishi Heavy. While there was nothing

fundamentally negative in the quarterly results of

Shinsei Bank, the stock price, like that of many other

Japanese banks, is heavily influenced by US interest

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Commentary

rates. Additionally, the company failed to announce a

share buyback during the quarter even as the CEO

continued to communicate his desire to improve

company policies related to shareholder returns.

Underperformance of Mitsubishi Heavy, the largest

producer of heavy machinery in Japan, was due

primarily to uncertainty around the contingent

liabilities of legacy projects, such as 1) an escalating

dispute with Hitachi over the loss generating power

plant project in South Africa, and 2) additional delays in

the development of a regional jet aircraft. While these

legacy projects have discouraged investors, we maintain

our confidence in the leadership and capital allocation

discipline of current management and felt reassured by

recent meetings with management. We believe that the

company remains well-positioned to benefit from the

global growth in demand for electricity and in the

aerospace and defense industries.

TOPIC: Behavioral Economics

On October 3rd, US private equity firm Bain Capital

announced that it would acquire Asatsu DK (an ex-

portfolio company) through a tender offer. While we

are not involved in the stock at this time, it may be

worthwhile to review the behavioral economics that led

up to the deal. The ROE of Asatsu had been historically

disappointing to investors as the capital efficiency of

the company was compromised by cross-shareholdings

with the WPP Group in the UK. We addressed that

issue with top management a couple of years ago and

sold our stakes to lock in profits after the

announcement of a special dividend, partly because we

lacked confidence that management would address the

capital efficiency issues. The board continued not to

take action to improve ROE and resolve the cross-

shareholding issue, and Group CEO Mr. Ueno’s

approval rating suffered a shocking decline from 89.1%

to 59.5%. We strongly suspect that that decline was a

significant catalyst behind Bain Capital’s bid to take

Asatsu DK private. Asatsu has since announced their

intention to end its capital and business alliance with

WPP.

We saw a similarly dramatic change at Panasonic

after a sharp decline of the CEO’s approval rating to

66.7% in 2016. The board agreed to the abolition of a

takeover defense plan, the nomination of a high profile

turnaround manager as an Independent Director, and

the nomination of the former head of Microsoft Japan

to become a representative director. The approval rate

showed a dramatic improvement to 95.8% in 2017 as a

result of those initiatives.

While we frequently encounter skepticism related

to corporate governance reform in Japan – that it’s too

slow, too superficial, the current culture is too

ingrained, etc., – we have no doubt that the more

aggressive voting behavior of Japanese investors is

having a big impact on CEOs. In response, we have

made two adjustments to our investment process – (1)

we have started to use the list of “Poor score” CEOs as a

screening tool and have already identified a couple of

companies for further analysis, and (2) we may use our

own voting rights more strategically going forward

including collective engagement with other

shareholders.

Source: CLSA

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Commentary

Stock Highlight:

This quarter, we would like to introduce Macnica

Fuji Electronics Holdings, the leading distributor of

semiconductor products and cyber security solutions in

Japan and one of our core positions. We will

review "Alignment of Interest", "Good Business", and

"Margin of Safety" as our raison d'etre lies in our

disciplined application of those criteria.

Alignment of Interest: Each of the heritage

companies, Macnica and Fuji Electronics, were among

our favorite owner operator companies. In 2015,

they formed a holding company to become the largest

Japanese distributor of semiconductors with 20%

market share in Japan. It is unusual for owner

companies with big egos to make a decision to

completely integrate with another company when they

are profitable and growing. When these two owner

families decided to merge together, it was clear that

their laser focus on growing shareholder capital led to a

conclusion that faster growth could be achieved by

combining the two companies. Today, the businesses

are operated by a group of professional managers with

international backgrounds under the oversight of the

Chairman from the Kamiya Family (Macnica, 35%

ownership) and a Vice Chairman from the Ikisu family

(Fuji, 5.2%).

Good Business: For decades, the company has

shown a track record of consistent growth in its top line

and bottom line despite the saturation of the domestic

semiconductor market. This success can be attributed

to three factors, the first being the company’s

engineering support capabilities in helping clients to

implement complicated products, such as FPGA (Field

Programmable Gate Array). As a result, the company

survived the intense consolidation that swept the

industry. Secondly, Macnica has successfully grown its

Asian business through both organic and non-organic

ways. Overseas sales have been growing at 23% p.a. in

the past 5yrs to a whopping 49% of total sales today

(compared to merely 16% in 2008). Thirdly, the

company has become a leading distributor of cyber

security solutions in Japan.

The last factor is the most important to the

company’s future as the network/security segment is far

more profitable, faster growing, and less working-

capital intensive than the company’s other businesses.

Last year, the contribution of the cyber security

segment exceeded that of its semiconductor business

for the first time in the company’s history. The business

model of Macnica is to have a group of cognoscenti

looking for new technologies based in US, and then

obtaining exclusive distribution contracts several years

before those technologies become well known and

widespread. Macnica is the dominant or sole distributor

of rapidly growing global vendors such as Fire Eyes,

Symantec/Blue Coat, Splunk and McAfee thanks to that

business model. That business advantage is still alive

today as Macnica continues to receive “unofficial offers”

from start-up companies, desiring to grow their

businesses in Japan.

Margin of Safety: Until recently, the company was

traded at a "Triple-net" valuation, meaning that the

market capitalization was below net-liquid asset value.

Even after the stock price increased last quarter

(making Macnica the best contributor for the quarter),

the stock still trades at a very small premium to book

value. We believe the valuation is attributable to the

historically poor capital efficiency of semiconductor

businesses (i.e. heavy working capital burden of

receivables and inventories). However, that working

capital is mostly in the form of credit issued to blue

chip companies with little to no credit/inventory risk.

In assessing the margin of safety, we see the working

capital as "less liquid cash."

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Commentary

Also, we believe that the security & network

business has the potential to completely change the

valuation metrics of the company. It generates double

digit operating profit margin and ROA, and average top

line growth in the past 5yrs has been around 20%.

Cyber security companies tend to be far more richly

traded in the market compared to the valuation of

Manica Fuji, which trades at a small premium to its

liquidation value.

Charts: Profit Contribution by Network (Security)

Surpassed Trading Business for the First Time Last Year

Charts: OPM & ROA – Macnica and Macnica Networks

Are Totally Different Animals

Source: Company Report

Outlook (Politics)

While politics does not make a fundamental impact

on our investment activities, we think it might be

worthwhile sharing our views on the recent dynamics

within Japanese politics. Below are our closing thoughts

for this quarterly letter.

On September 28th, Prime Minister Shinzo Abe

made a widely anticipated announcement for snap

elections to be held on the 22nd of October. At the

time, the Nikkei polls showed the Liberal Democratic

Party (LDP) with a commanding lead of 44% vs. a mere

8% for the opposition Democratic Party of Japan (DPJ).

The rising tensions related to North Korea, twice

launching missiles over Japan, also seemed to lend

support in favor of the conservative LDP.

However, out of the blue, popular Tokyo Governor

Yuriko Koike announced the establishment of a new

political party, the "Party of Hope", presenting a

challenge to the Prime Minister Abe’s LDP-Komeito

ruling bloc and an alternative to the failed DPJ. In a

stunning move, DPJ leader Maehara made a formal

decision to ask all DPJ members in the Lower House to

join the Party of Hope, go independent, or retire.

Strengthened by defectors from the DPJ, Koike is the

biggest wild card in Japanese politics today. Her new

party’s goals to “reset” Japanese politics “in order to

fully protect our (Japan’s) international competitiveness

and national security” support the amendment of the

constitution and collective reform.

Today, the LDP and the coalition partner Komeito

have a super-majority (322 seats out of 475) in the

Lower House. We expect they will most likely end up

securing the majority in the elections slated for October

22nd because Koike lacks the time and funding to field

enough candidates to have a chance of capturing

enough seats to break the majority. Nonetheless, the

emergence of a new conservative party has the potential

to deeply impact Japanese politics in the future as the

political scenario may change to encompass two major

conservative parties (LDP, Party of Hope), and a smaller

wing of Liberals (part of DPJ, Social Democratic Party,

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Commentary

and Communist Party).

While most political observers are focused on the

potential loss of seats that may be suffered by Abe and

the LDP-Komeito ruling bloc in the October 22nd

elections, we would put forward the possibility that Abe

could end up as a beneficiary of political realignment

because of the opportunity to collaborate more closely

with Koike in pursuing structural reform. It's clear

that Abe and Koike have almost identical beliefs and

policies – specifically, amendment of the constitution,

and collective reform – and both are aggressive

reformers. As Koike’s party is being formed from

scratch, she has the huge advantage of not suffering

from any "Shigarami" (longstanding fetters of the past),

vested interests and superficial obedience. Given that it

is exactly that type of resistance within the LDP that is

acting as the bottleneck in effecting structural reforms,

the emergence of the Party of Hope in the elections

could act as the tailwind for Abe and his structural

reforms, especially if the new party obtains meaningful

numbers of seats in the election.

Hope our wishful thinking turns out to be real.

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Disclosure This document has been prepared for qualified investors, is provided for informational purposes only, and does not constitute a solicitation of any shares in any

investment vehicle managed by Dalton Investments LLC. Such solicitations can only be made to qualified investors by means of the private placement

memorandums, which describe, among other things, the risks of making an investment. Additionally, this presentation does not constitute investment advice of

any kind.

All of the information in this document relating to Dalton Investments LLC or its affiliates (collectively, “Dalton” or the “Firm”) is communicated solely by Dalton,

1601 Cloverfield Boulevard, Suite 5050 N, Santa Monica, CA 90404, regulated by the U.S. Securities and Exchange Commission (SEC). SEC registration does not

imply SEC endorsement. No representation or warranty can be given with respect to the accuracy or completeness of the information, or with respect to the terms

of any future offer of transactions conforming to the terms hereof. Certain assumptions may have been made in the analysis which resulted in any information and

returns/results detailed herein. No representation is made that any results/returns indicated will be achieved or that all assumptions in achieving these returns

have been considered or stated. Additional information is available on request. Opinions and estimates offered constitute our judgment and are subject to change

without notice, as are statements of financial market trends, which are based on market conditions. Unless otherwise indicated, figures presented are preliminary,

unaudited, subject to change and do not constitute Dalton’s standard books and records.

Individual portfolio account returns and holdings within a referenced Dalton composite may vary substantially for such factors including, among others, account

specific restrictions – e.g. whether currency investments are permitted, timing of transactions, contributions, withdrawals, and market conditions at the time of

investment.

PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE PERFORMANCE. THE VALUE OF THE INVESTMENTS AND THE INCOME FROM THEM CAN

GO DOWN AS WELL AS UP AND AN INVESTOR MAY NOT GET BACK THE AMOUNT INVESTED. THESE INVESTMENTS ARE DESIGNED FOR

INVESTORS WHO UNDERSTAND AND ARE WILLING TO ACCEPT THESE RISKS. PERFORMANCE MAY BE VOLATILE, AND AN INVESTOR COULD LOSE

ALL OR A SUBSTANTIAL PORTION OF ITS INVESTMENT.

Please note that neither the Funds/Composites nor the Investment Manager/Investment Advisor complies with the requirements of the Alternative Investment

Fund Managers Directive (“AIFMD”) of the European Union. No direct or indirect offering or placement of shares by or on behalf of the Funds/Composites or the

Investment Manager may be made to or with investors in member states of the European Union in breach of either the applicable requirements under the AIFMD

or the private placement regime in each relevant member state. You are receiving this presentation either because (a) you are an existing investor and we are

sending you an update to discharge our obligation, or (b) you have previously requested for submission of such information. If neither of these apply to you, please

kindly ignore this presentation and reply to InvestorRelations@daltoninvestments.com with the subject “AIFMD distribution list review” as soon as possible so that

we can remove you from our relevant distribution list in the future.

Any specific securities referenced herein are holdings as of the date identified in the document and any performance information relates only to the period covered

by this document. No inferences should be made as to the profitability of specific positions overall.

Returns present hypothetical performance (the “Hypothetical Returns”) for a hypothetical $1,500,000.00 investment (the “Initial Investment”) made at the inception

of the Fund (the “Hypothetical Investor”). The Gross-of-Fees Hypothetical Returns are calculated by applying the Fund’s actual cumulative gross-of-fee returns

which include all trading expenses, withholding taxes, custodial fees (if applicable) and other administrative fees but exclude accruals and payments of all

management and performance fees to the Hypothetical Investor’s Initial Investment. The Hypothetical Investor’s Returns assume no subscription or redemption

and reinvestment of all dividend income. Net-of-Fees Hypothetical Returns are calculated, in reference to any applicable high water mark, by deducting a model

1% management and 20% performance fees (the “Model Fees”) from the Gross-of-Fees Hypothetical Returns. The Model Fees represent the current highest

management and performance fee schedule of the Fund. Information regarding year to date and annual Performance Results is compounded. The Hypothetical

Results shown do not represent the results of any actual investor in the Fund. Investment results for each investor will vary from the Hypothetical Results shown

herein due to, among other factors, differing investment dates and additional contributions or withdrawals. Actual fees may differ due to various factors including,

but not limited to, account size. Additional information regarding the Firm’s fees is available upon request and may also be found in Dalton Investments LLC’s

Form ADV Part 2. Performance is expressed in US Dollars. To compute currency exchange rates, the Fund uses Bloomberg at 4PM EST close while the Benchmark

uses WM Reuters at 4PM GMT close, which may result in differing exchange rates.

The Fund’s benchmark is the MSCI Daily Total Return Net Japan Index (MSCI Japan (USD), symbol: NDDUJN) (the “Benchmark”) and is compiled by Morgan

Stanley Capital International, Inc. It is a total return, free float-adjusted, capitalization-weighted index that is designed to track the performance of Japanese

securities listed on the Tokyo Stock Exchange, Osaka Stock Exchange, JASDAQ and Nagoya Stock Exchange. Net total return indices reinvest dividends after the

deduction of withholding taxes, using (for international indices) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation

treaties. For comparison purposes, Benchmark returns do not reflect transaction costs, investment management fees or other fees and expenses that would reduce

performance in the Fund. It is not possible to invest in the Benchmark. The Fund has held and is expected to continue to hold securities that are not included in the

Benchmark and the Firm makes no representations that the Fund is comparable to the Benchmark in composition or element of risk involved.