Final Results
FIDELITY JAPANESE VALUES PLC
Preliminary Announcement of Unaudited Results
For the year ended 31 December 2002
Comment from the Chairman
Performance in 2002: NAV -10.3p per share
It is not an easy statement to write because for the third year running the net
asset value of the Company's shares has fallen in value. It is the most basic
of our objectives that we should make money for our shareholders and I am
afraid that we did not do so. For the record the net asset value of our
ordinary shares fell by 19.4% or by 10.3p from 53.1p to 42.8p. I should
emphasise that the decline stems largely from the continuing malaise of the
economy and its effect on the stock markets of Japan, as opposed to any
specific underlying problems in the companies in which we are invested and
which on the whole are faring relatively well (more of which later).
Our analysis of the principal features of the performance shows that the fall
in the market (as measured by our new benchmark index, of which more below)
accounted for 7½p of the decline in the net asset value per share and that the
borrowings caused it to decline another 2½p but that the stock selection by our
Manager offset the decline by adding ½p. It is a small but never-the-less
important consolation that Asako Kibe and her colleagues in Fidelity's Tokyo
office managed to outperform the market by at least a small amount; it is
important in the sense that it is not easy for any fund manager to outperform
the market in bear markets and gives us some source of confidence for the
future when the market recovers - as eventually it surely will.
Benchmark Index: The Russell/Nomura Midsize Small Capitalisation Index: -14.7%
We have wrestled with an appropriate benchmark index for the measurement of the
performance of the Company's portfolio. None of the established and broadly
recognised indices in Japan represents a pool of stocks and shares which match
our investment remit - namely investing in small and medium sized growth
companies. From previous annual reports you will have noticed that the
portfolio has been spread across the First and Second Sections of the Tokyo
stock market and the Over The Counter market; none of their indices truly
represented our investment remit. The Russell/Nomura Midsize Small
Capitalisation Index has been devised to provide a benchmark for portfolios
with an investment remit such as ours and as a consequence your Board of
Directors has decided to adopt it as our benchmark index. We continue to take
notice of the other indices of course but we no longer regard them as a proxy
for our portfolio.
Gearing: net borrowings 32.6% of shareholders' equity:
Your Company has somewhat higher borrowings in relation to shareholders' equity
than some other investment trusts. The main reason for the rise in the level of
gearing is the decline in the value of the gross assets, and thence
shareholders' equity, which of course makes the borrowings as a proportion of
equity higher. The Board's view is that over the longer term the progress of
the companies in which we are invested will result in higher share prices (more
of which later) and that therefore to reduce borrowings at a depressed level of
the market is not in the long-term interests of shareholders.
However while the Directors maintain a long term approach to the level of
gearing - in part because we have a long-term approach to investing and in part
because we do not believe that short-term management of the borrowings is
likely to add value to shareholders - we undertake a thorough review of the
borrowings once a year at the board meeting in Tokyo - normally held in October
each year. We do of course keep a permanent eye on our gearing and we also have
certain trigger points established, so that if they are hit the level of
borrowings is reassessed. At the board meeting in Tokyo in October 2002 we
reviewed the level of borrowings and concluded that they should be left at the
levels they were at.
Annual General Meeting: 15th May 2003
Your Board of Directors would like to encourage as many shareholders as
possible - whether individual or institutional - to join us at the Annual
General Meeting. It is the one occasion during the year when we account for
ourselves and for the performance of the Company to shareholders and when
shareholders can get together, ask questions, make recommendations and comments
and listen to what other shareholders have to say. It is helpful to both Board
and Management to hear what you have to say. Asako Kibe, our fund manager in
Tokyo, will be giving a presentation on the past year and the prospects for the
one that has already started.
Corporate Governance:
We have had reports from Messrs Cadbury, Greenbury, Hampel and Turnbull on
corporate governance during the last ten or so years and as a consequence
corporate governance practice has changed considerably during this period. Much
of what was suggested and the approach to its implementation were very sensible
and I believe that there has been enormous progress made in standards of
corporate governance in Britain.
During the last few months new reports on corporate governance have been
produced, including one from Mr Higgs and a consultation paper from the FSA
with proposals for yet more rules concerning the governance of investment trust
companies. The documents contain a range of new ideas for governance - some
sensible and some frankly not sensible; they raise two issues of concern for
your Company. The first important issue concerns the independence of your
non-management directors. The view is promoted by both these documents that
independence can be achieved through qualifications and rules. Nothing could be
further from the truth. Independence stems from an individual's ability to make
objective decisions that may be in conflict with the interests of management or
other interested parties and is in turn a function of confidence (born of
courage and experience); independence is not a qualification. I am pleased to
be able to report that on the basis of this fundamental definition (accepted by
both the AITC and FSA) that the non-management directors of your Company are
all independent.
The second issue concerns the proposal by the FSA that there should not be a
member of the management represented on the board. We make it quite clear in
our statement on corporate governance that we believe it is important that,
through a senior Fidelity representative, the Management is bound into the same
structure of responsibility, authority and accountability that the other
directors are; your directors do not believe that this (as is suggested) can be
achieved either as well or as effectively just through the management contract.
Shareholders invest in Fidelity Japanese Values in part because of the Manager
and its capability to fulfil the investment remit and it is right therefore
that the Manager should be party to the accountability to shareholders for the
performance of the Company. We have found it enormously helpful to have Simon
Fraser, Fidelity International's Chief Investment Officer, on the board and he
has contributed to the governance process in a way that the rest of us could
not. At this AGM he will be standing for re-election as a director of the
Company. That important point of principle apart, Simon Fraser is a good and
conscientious director with several years of firsthand experience of investing
in Japan and his contribution to the governance of the Company is considerable.
We, the independent directors, recommend that shareholders vote for his
re-election.
General Prospects:
It is very difficult to add anything new to those comments that have been made
in the last few annual reports about the prospects for Japan, its economy, its
financial system and its stock market. Japan needs certain changes to the
structure of its economy and financial system and has done so ever since the
1980s stock market and property bubble burst 13 years ago but, being a country
with a consensus based culture, it finds change difficult to accomplish, for
there are always those interested in the status quo. Until some of the issues
are addressed, particularly that of dealing with the banking system's bad
debts, it is difficult to be overly optimistic about the general prospects in
the short-term, although it is reasonable to say that they will be addressed
one day, simply because they cannot be avoided in the long-term.
Portfolio Prospects:
While the companies in which we invest are all Japanese, it is important to
remember that it is in these companies that our real prospects lie - rather
than in the general performance of the Japanese economy. We have emphasised
many times that, while there is not as much change at the macro level in Japan
as is needed, at the micro level - amongst many of Japan's companies,
particularly its smaller companies - there has been quite a lot of change in
the last few years. In part this is because there has been little alternative
to change if they are to survive in a competitive world, particularly one in
which Japan's neighbour, China, is playing an increasingly important part; in
part it is because there is a recognition that profits are vital to the
survival of any company and that the shareholder value culture is key to that.
Whatever the reasons for change however, Asako Kibe and her colleagues seek out
those companies that are well run, that are competitive, that are shareholder
conscious and that have good growth prospects.
It is part of the governance process that your Directors monitor the
performance and the prospects of the underlying portfolio. In a year when the
net asset value has declined - again - it is worth noting that many of the
companies in our portfolio have made progress and that we expect them to do so
in the current year. In order to illustrate this I have included a table
showing the estimates (it is important to note that they are only estimates)
for profits growth of our top 20 investments. Against a background of next to
no growth in the Japanese economy as a whole, this list shows that there are
companies that are prospering in these times and the underlying value - if not
the short-term stock market value - of these companies is improving. It is fair
to say that the companies in the rest of the portfolio, taken as a whole, are
also progressing.
The figures show an unweighted arithmetic average growth of earnings per share
for the top twenty investments in our portfolio of 35% for the year ending in
March 2003 and 15% for March 2004 and (not shown individually) an unweighted
average price earnings ratio of 18 times, a not unreasonable valuation for such
growth. Given the outlook for corporate profits growth generally in the world,
these numbers seem really quite encouraging to your Board and Management.
It is not possible for us to say that such profits performance is going to be
reflected in higher share prices in the near future because the larger macro
issues weigh heavily on the value of all shares. But our job is to identify
companies whose profits we believe will grow and that I believe our Manager is
doing. One day for sure it will be reflected in higher share prices and thence
a higher net asset value for our ordinary shares.
Alex Hammond-Chambers
3 March 2003
Estimates of earnings per share of top twenty investments
Company Estimated Estimated Company Estimated Estimated
EPS Growth EPS Growth EPS Growth EPS Growth
31 March 31 March 31 March 31 March
2003 2004 2003 2004
1. Toyada Gosei +52% +6% 11. FCC +49% +5%
2. Mandom +30% +7% 12. Misumi +19% +6%
3. Don Quijote* +28% +22% 13. Yamada Denki +28% +7%
4. Tsumura +28% +14% 14. Tosei -18% +56%
Engineering
5. Cosel +90% +12% 15. Nitto Kohki +8% +6%
6. Takara +32% +16% 16. Funai Electric +25% +11%
7. Fancl +3% +8% 17. Fuji Seal +20% +31%
8. Nichii Gakkan +280% +42% 18. Plenus +12% +7%
9. Kuroda +3% +13% 19. Advan -6% +3%
Electric
10. Nidec Copal +17% +23% 20. Hogy Medical -1% +1%
* Don Quijote has a year-end of 30 June.
Source: These forecasts are based on the wealth of data accumulated by Toyo
Keizai and that company's analytical expertise, from whom we have taken the
information (they are not the estimates of Fidelity or the Board of Directors).
They will change in time as the year proceeds. Reference to the companies above
is for illustrative purposes only and should not be construed as a
recommendation to the investor to buy or sell the same. The portfolio may
change over time and neither the Manager nor the board of directors make any
commitment to continue to hold any of the above companies.
Dividend: The Company is not proposing to pay a dividend.
Enquiries: Barbara Powley
Fidelity Investments International
01737 836883
FIDELITY JAPANESE VALUES PLC
Statement of Total Return (incorporating the revenue account1) of the Company -
unaudited
For the year ended 31 December 2002
2002 2001
revenue capital total revenue capital total
notes £'000 £'000 £'000 £'000 £'000 £'000
Losses on - (9,805) (9,805) - (17,823) (17,823)
investments
Income - 677 - 677 735 - 735
dividends
- interest 6 6 17 - 17
Investment (657) - (657) (894) - (894)
management fee
Other expenses (204) - (204) (436) - (436)
Exchange losses - (61) (61) - (290) (290)
Net loss before (178) (9,866) (10,044) (578) (18,113) (18,691)
finance costs and
taxation
Exchange gains on - 150 150 - 2,013 2,013
loans
Interest payable (384) - (384) (564) - (564)
Loss on ordinary (562) (9,716) (10,278) (1,142) (16,100) (17,242)
activities before
tax
Tax on ordinary (119) - (119) (109) - (109)
activities
Loss on ordinary (681) (9,716) (10,397) (1,251) (16,100) (17,351)
activities after
tax for the year
attributable to
equity
shareholders
Loss per ordinary 2
share
Basic (0.69p) (9.83p) (10.52p) (1.22p) (15.70p) (16.92p)
1 The revenue column on this statement represents the profit and loss account
of the Company.
2 Returns per ordinary share are based on the net revenue loss on ordinary
activities after taxation of £681,000 (2001: loss £1,251,000), and the capital
depreciation in the year of £9,716,000 (2001: depreciation of £16,100,000) and
on 98,825,157 ordinary shares (2001: 102,561,395) being the weighted average
number of ordinary shares in issue during the year.
As the basic and fully-diluted returns, calculated according to the provisions
of FRS 14, are identical, the fully-diluted return has not been disclosed.
Since the effect of the warrants outstanding on the first day of the accounting
period is not dilutive, they have not been included in the calculation of the
fully-diluted return.
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the year.
FIDELITY JAPANESE VALUES PLC
Balance Sheet - unaudited as at 31 December 2002
2002 2001
£'000 £'000
Fixed assets
Investments 55,492 69,570
Current assets
Debtors 548 61
Cash at bank 2,921 1,480
3,469 1,541
Creditors - amounts (288) (8,368)
falling due within one
year
Net current assets/ 3,181 (6,827)
(liabilities)
Total assets less 58,673 62,743
current liabilities
Creditors - amounts (16,620) (8,823)
falling due after more
than one year
Total net assets 42,053 53,920
Capital and reserves
Called up share capital 24,551 25,376
Share premium account 40 40
Capital redemption 1,780 955
reserve
Other reserves
Other reserve 60,369 61,839
Warrant exercise reserve 2 2
Warrant reserve 10,198 10,198
Capital reserve - (7,193) 790
realised
Capital reserve - (39,003) (37,270)
unrealised
Revenue reserve (8,691) (8,010)
Total equity 42,053 53,920
shareholders' funds
Net asset value per
ordinary share:
Basic 42.82p 53.12p
FIDELITY JAPANESE VALUES PLC
Cash Flow Statement - unaudited
For the year ended 31 December 2002
2001
2002
£'000 £'000
Operating activities
Investment income 557 633
received
Deposit interest received 6 17
Investment management fee (712) (971)
paid
Directors' fees paid (54) (55)
Other cash payments (237) (364)
Net cash outflow from (440) (740)
operating activities
Returns on investments
and servicing of finance
Interest paid (389) (608)
Net cash outflow from (389) (608)
returns on investments
and servicing of finance
Financial Investment
Purchase of investments (16,682) (31,837)
Exchange (losses)/gains (377) 99
Disposal of investments 20,409 38,030
Net cash inflow from 3,350 6,292
financial investment
Net cash inflow before 2,521 4,944
financing
Financing
Repurchase of ordinary (1,470) (1,286)
shares
Exercise of warrants - 4
1.05% fixed rate 8,300 9,106
unsecured loan drawn down
1.05% fixed rate - (9,084)
unsecured loan repaid
3.38% fixed rate - (9,183)
unsecured loan repaid
2.16% fixed rate (8,226) -
unsecured loan repaid
Net cash outflow from (1,396) (10,443)
financing
Decrease/(Increase) in 1,125 (5,499)
cash
The above statements have been prepared on the basis of the accounting policies
as set out in the recently published set of annual financial statements. The
figures for the year to 31.12.01 have been extracted from the accounts for the
year ended 31.12.01 which have been delivered to the Registrar of Companies and
on which the Auditors gave an unqualified report.
The annual report and accounts will be posted to shareholders as soon as is
practicable.
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