Annual Financial Report

RNS Number : 0359C

Edinburgh Dragon Trust plc

05 November 2009

 



5 November 2009

EDINBURGH DRAGON TRUST plc

ANNUAL FINANCIAL REPORT FOR THE YEAR TO 31 AUGUST 2009

Edinburgh Dragon Trust's objective is long-term capital growth through investment in the Far East (excluding Japan and Australasia). The Company's benchmark is the MSCI All Country Asia (ex Japan) Index.

• In difficult financial markets, the Company performed well for the financial year to 31 August 2009.

• The Company's net asset value rose 11.1% on a total return basis compared to a rise of 9.0% in the MSCI All Country Asia (ex Japan) Index.

• Dragon's portfolio is invested in quality stocks with strong financial positions and opportunities to grow and expand which are expected to be stronger performers in the long run.

• Following consultation with a number of the Company's larger shareholders, the Board will propose a tender offer for up to 15 per cent. of the issued share capital at a discount of 3 per cent. to formula asset value. The tender offer is expected to be conducted in early 2010.  

For further information please contact:-

Peter Hames, Investment Director, Aberdeen Asset Management Asia    0065 6395 2700

Ian Massie, Head of Investment Trust Investor Relations,                       0131 528 4000

Aberdeen Asset Management 

 CHAIRMAN'S STATEMENT

Background

During an uncertain twelve-month period to 31 August 2009, your Company performed well. The net asset value at the financial year end was 179.3p, a rise of 11.1% on a total return basis, compared with a gain in the benchmark, the MSCI All Country Asia (ex Japan) Index, of 9.0%. The share price rose by 16.4% to 167.4p, reflecting a contraction in the discount from 10.5% to 6.6%.

The outperformance of the Company is pleasing in what were very difficult conditions, and follows the previous financial year when the net asset value held up relatively well as markets corrected. 

It is unclear whether the recent strong rally can be sustained in the short term given the doubts over the ongoing tough economic conditions. However, the long-term prospects for Asian economies are positive, unlike those of their Western counterparts, which are likely to continue to struggle for some time with debt constraints.

Overview

Global markets were characterised by two distinct phases during the review period. The first few months saw many investors gripped by panic, most notably when Lehman Brothers collapsed on 14 September 2008. In the first few days of October 2008, fears of a meltdown of the global financial system caused the Dow Jones Industrial Average Index to plunge by nearly 30%, before authorities were able to step in with financial guarantees, enabling markets to stabilise. That quarter also saw economic growth plunge around the world, as the banking crisis caused global trade to slow down. By the end of 2008, the US and Europe, together with trade-dependent Asian economies, had slipped into recession. 

The latter half of the period saw markets rebound almost as quickly as they had collapsed. Thanks to unprecedented monetary and fiscal stimulus, it became apparent that an extended global depression would be avoided, for the time being at least. Equity markets started to rise in March 2009, and momentum was maintained throughout the rest of the reporting period. Economic data appeared to improve, but as a result of the immense stimulation effort and restocking, rather than a recovery of private demand. A number of Asian economies posted quarter-on-quarter growth in the three months to June 2009, following previous contractions. 

It is worth noting that the holdings that contributed most to Dragon's outperformance were those able to benefit from growing domestic demand, such as India's Hero Honda and Grasim Industries, Unilever Indonesia and Thailand's Siam Cement. These companies typify the long-term growth potential of Asia, serving markets with large populations and low consumer penetration rates. They are also companies with strong financial positions which have been able to strengthen their competitive positions during the downturn, as rivals struggled. It is also worth noting that many of the top performers were in India. Indeed, our overweight to India was a major contributor to relative return, and reflects your Manager's conviction that the country, despite having a number of key macroeconomic challenges, is home to many well-run companies with a well-established culture.

Conversely, Dragon remains underweight to China, where markets, in addition to being subject to the forces driving all markets globally, were the beneficiaries of bank credit growth exceeding 30% in the first half of 2009. That said, the sharp fall in the Shanghai and Shenzhen markets in August 2009 supported the view that excess liquidity had created a bubble and a correction was to be expected. Notwithstanding the current speculative nature of this market, your Manager remains very cautious about Chinese companies generally.

The past year's events, though concerning, have seen Asia rise in stature, in contrast to its somewhat blemished reputation following the 1997 financial crisis. On this occasion, Asian banks had minimal exposure to toxic assets in the West and debt levels remain generally low at a government, corporate and personal level. Also, while the performance of Asian markets in 2008 suggested that the region was still heavily dependent on the West, in 2009 it appears that the dependency flow is starting to reverse.

Discount

The Board monitors closely the discount level of the Company's shares and has in place a buyback mechanism whereby the Manager is authorised to buy back shares within certain limits. During the financial year to 31 August 2009 there were no buybacks of the Company's shares. However, the Board believes the authority to buy back shares for cancellation should remain in place.  A resolution to renew the authority to buy back shares for cancellation will be proposed at this year's Annual General Meeting as an ordinary resolution. The Board is proposing the resolution in this way to ensure that the Company has the ability to use share buy backs to manage its discount during the coming 12 months.

Gearing

The Company repaid the $80 million Loan Notes on 30 December 2008, the final repayment date. The Board has continued to have a gearing facility in place via a £40 million multi-currency loan facility with the Royal Bank of Scotland. To date the Company has not drawn on this facility.  

Revenue Account

The revenue return per share was 2.31p, compared to 2.35p in the previous year. The Board recommends the payment of a final dividend of 1.61p per ordinary share which, if approved by shareholders at the Annual General Meeting, will be paid on 11 December 2009.

The Board

Having been delighted to serve as a Director of Dragon since its launch, I have now decided to step down from the Board after this year's Annual General Meeting. I am happy to report that Allan McKenzie, who has been a Director of the Company since 2006 and a member of the Audit Committee, will become Chairman of the Company.  

Shareholders will also be interested to know that, in line with Dragon's strong commitment to its corporate governance responsibilities, the Board regularly reviews its performance and structure to ensure it has the correct mix of relevant skills and experience for the good conduct of the Company's business. As part of this process the Board has now agreed a programme of refreshment, which will see its membership change as current Directors retire in an orderly manner, and new directors are recruited.

Continuation Vote

Edinburgh Dragon Trust is the largest investment trust specialising in the Asian (ex Japan) sector. The Dragon Board believes that the Trust offers investors a broad and marketable exposure to Asian equity markets, many of which continue to provide attractive long-term investment opportunities in the region. As shareholders will be aware, they are given the opportunity to vote on the continuation of the Company every three years. The Directors believe that the prospects for Asian markets remain positive, and your Company is managed by one of the leading Asian fund managers. Your Board thus strongly recommends that shareholders vote in favour of the resolution.

The Board has an ongoing programme of contact with shareholders. From recent contact, it has become clear that one of the Company's larger shareholders wished the Board to present a tender offer in conjunction with this year's Annual General Meeting at which the three yearly continuation vote will be considered.

The Board and the Company's advisers have consulted a number of the other larger shareholders of Dragon and, as a result, the Board will propose a tender offer for up to 15 per cent. of the Company's issued shares at a discount of 3 per cent. to formula asset value (being net asset value less the costs of the tender offer) on the calculation date, which will be at the end of the tender offer process. 

The record date for the tender offer will be the close of business on 10 November 2009. The tender offer is expected to be conducted, following the necessary shareholder approval, in early 2010. A document setting out the terms of the tender offer will be sent to shareholders shortly.

In these circumstances, the Board believes that this proposal is in the interests of shareholders. It ensures that shareholders who do not tender any shares are protected against the costs of the tender offer and receive benefit from a modest uplift in their net asset value. It also provides an exit mechanism for the shareholders who have asked for one.

Annual General Meeting

In accordance with the corporate governance procedures endorsed by the Board, all Directors who have attained more than nine years' service or are aged over 70 years will retire from the Board and submit themselves for re-election on an annual basis. Messrs Frame, Gairns, Tyrie and Watt will retire and be proposed for re-election at the Annual General Meeting.  In accordance with the Company's articles, Mr McKenzie will retire from the Board and will offer himself for re-election of the Annual General Meeting.  The Board recommends that shareholders vote in favour of the re-election of these Directors at the Annual General Meeting.  

The Directors are proposing at this year's Annual General Meeting to make amendments to the Company's Articles of Association to take account of changes to company law, principally, as a result of the implementation of the Companies Act 2006 and the EU Shareholders' Rights Directive. The proposed changes are detailed in the Appendix to the Notice of Meeting.

Outlook

Tentative signs have emerged that the worst of the recession may be over, but a clear view of a strong, sustainable recovery remains elusive, even in Asia. There may be as yet unseen consequences of the extraordinary stimulatory measures taken to prop up economies and financial systems. While in the near term deflation remains a major threat, inflation and its damaging side-effects may return at some point. Economies may experience a double-dip recession as governments are forced to withdraw stimulus spending, perhaps late next year, leaving what may be a still weak private sector to drive growth.

Asia is better prepared to face this uncertainty than the West. However, what is required is more effort to create a concerted shift from export reliance to domestic consumption - a more sustainable growth model for the region in the long term. Stockmarkets, meanwhile, may stay volatile, and fears of destabilising asset bubbles remain amid the surfeit of liquidity.

In this environment, well-run Asian companies with strong financial positions have the opportunity to grow and expand their market reach, at the expense of competitors. Dragon will continue to invest in and search out such companies, expected to be stronger performers in the long run.

Tony Cassidy

Chairman

5 November 2009

MANAGER'S REVIEW

Overview

Without doubt, the review period was one of the most volatile twelve months for financial markets and economies in living memory. Stocks fell sharply during the latter half of 2008 as one financial sector rescue followed another but it took the failure of Lehman Brothers to wake politicians up to the grave reality that a total collapse of the financial system was possible. Markets stabilised in October as various stimulus packages were hammered out, but uncertainty persisted until March, when fears of a repeat of the Great Depression began to ease somewhat. Having been sold off heavily, markets then rebounded strongly, and the momentum of the rally was maintained throughout the rest of the review period. In Asia, most markets ended the period above where they had started it, at least in sterling terms.

In such an environment, the most important response for us as fund managers was to remain calm and avoid being overly reactive. Late in 2008, the inclination for many investors was to increase cash weightings, a decision which they may subsequently have regretted. Our investment philosophy has always been to think long term and to avoid making short-term market predictions and so we stayed focused on the long-term outlook for our companies, maintaining close-to-fully-invested portfolios throughout the period. 

To a large segment of market participants and policymakers, the realisation that the free market system, and financial markets in particular, could be deeply flawed meant that many all of a sudden assumed crisis management roles. Government intervention, the apostasy of the free market, was suddenly the order of the day as a number of companies deemed too large or, rather, too interconnected, to fail collapsed in rapid succession. At first, politicians, either fearing reprisal or not appreciating the severity of the situation, were reluctant to step in to help, but soon appeared to relish the role of saviour.

During the twelve months to October 2008, Asian markets had significantly underperformed their developed counterparts. This underperformance was driven by the belief that Asian economies, still very dependent upon demand from the West, would come off worse in a global economic downturn. The problem was compounded by the fact that regional stockmarkets saw large outflows of foreign portfolio capital.

Paradoxically, however, serious problems with the global economic system seemed to give Asia a newfound confidence. Despite earlier fears, it became clear that companies, governments and individuals in Asia had entered the downturn in sound financial health, having learned many lessons following the Asian financial crisis of the late 1990s. While much has been written in recent years about the 21st century belonging to the region, the fact that Asia appears to have weathered the crisis relatively well thus far, particularly with regards to its financial system, has only served to strengthen this thesis.

In March, cash unleashed from expansionary monetary and fiscal policies began to drive equity markets. The rally in share prices was also supported by a belief that this massive economic stimulus would avert a repeat of a 1930s-style depression. Together, these factors combined to provide the perfect conditions for a market rebound that was as violent as its previous collapse.

The more share prices rose, the more investors, flush with cash, worried that they had been left behind. Thus the rally became self-perpetuating as corrections, perceived as opportunities to reduce cash positions, were brief. Top performing markets in the region were the more peripheral, such as Malaysia, the Philippines and Indonesia.

Towards the end of the review period, it was observed by many that perhaps, markets had risen too quickly and had "got ahead of fundamentals". While this may prove to be true, it has been impossible, given the extent of artificial stimulus, to know exactly what the "fundamentals" look like. The term can mean many things, but in the context of equity investing, it is broadly understood to refer to corporate earnings. Certainly, economies everywhere have been given a boost by increased government spending, low borrowing rates and other forms of cost cutting. However, it is far from clear what will happen when the effects of these wear off. In other words, whether currently-weak final private demand will have recovered by then.

Performance Attribution Analysis

The portfolio's net asset value rose 11.1% in the twelve months to the end of August, outperforming its benchmark by 2.1 percentage points.

The portfolio's heavy position in India boosted relative performance. Also being light in Taiwan was beneficial as the technology-laden market lagged its peers. Although warming relations between mainland China and Taiwan are expected to be positive for the island's economy, the effects of this rapprochement will take time to flow through. Meanwhile, we will retain our small exposure, given the narrowness of the market and the fact that it is dominated by large, complex entities with poor transparency and corporate governance. As well, many of them operate in highly cyclical sectors. That said, the portfolio's holding in Taiwan Semiconductor Manufacturing Company added to absolute returns. We like the chip foundry because it is a global leader, both in terms of size, as well as research and development, not only enabling it to remain profitable during the downturn, but also to gain market share at the expense of its rivals. It has a strong balance sheet while its management, which is both proven and transparent, has a consistent dividend policy, and continues to seek new growth areas, the latest being alternative energy.

In India, the Congress Party's victory at the general elections was received positively by the market. The party's enlarged mandate will lessen the need for reliance on coalition partners and, hopefully, enable it to push through key reforms. In addition to the strong performance of the stockmarket, the portfolio's Indian holdings themselves mostly outperformed their country index, the notable exception being fraud-hit Satyam Computer. Of note was Hero Honda. The motorcycle maker posted healthy earnings growth that exceeded expectations. Its exposure to the rural sector underpinned its resilience, as demand for its two-wheelers outside the urban centres held up well, helping the company gain market share in spite of the presence of comparable rivals. 

The revelation of fraud at Satyam Computer Services (see Portfolio Activity) came as a great shock. However, although the tumble of its share price on 7 January 2009 hurt performance, it should be noted that the portfolio's Indian holdings as a whole, added significantly to relative performance during the period. In contrast, China subtracted from performance, largely because of stock selection. Our mainland holdings, CNOOC, PetroChina and China Mobile, underperformed a local market driven by mainland banks and property companies, of which we remain cautious. Indeed the market rally was to some extent the result of bank credit growth in the first half of 2009 that exceeded 30%. While such growth naturally boosts economic activity in the short term, we think that it was at the expense of credit quality, as indeed the country's industry regulator recently conceded. The impact of this will likely only be felt in years to come.

Indeed this issue highlights why we are more comfortable investing in India than in China, where we continue to maintain an underweight position. In the mainland's command economy, the state often interferes with business decisions. India, by contrast, leaves such choices primarily to the marketplace and the companies themselves. Another concern is the lack of transparency. For example, it is hard to understand exactly where shareholders of Chinese companies stand, in terms of priority, relative to other stakeholders such as employees, suppliers, major shareholders or the government. In addition, many of the large listed companies are state owned, while many of the private sector companies have limited track records.

Another positive contributor to performance has been Unilever Indonesia, a unit of the giant Anglo-Dutch consumer goods group. Despite the tough operating environment, the company has continued to do well, benefiting from its wide array of products and a well-established distribution network. Indeed, investing in the local offshoots of Multi National Companies can be one of the most fruitful ways to get exposure to emerging markets because they generally enjoy the backing of a well-established parent, are managed by teams that have a proven track record, and provide exposure to incipient consumer markets where penetration rates are low and working populations young. 

Singapore, where the portfolio has been heavily invested, performed poorly in the early part of the review period, as it was seen as an economy that was particularly dependent on trade. This perception was not helped by the sharp contraction in GDP between September and March. However, the Singapore market bounced back strongly during the rally, led by banks and property companies, and ended the period as a positive contributor to relative performance. 

Other holdings that performed well over the period were generally those with an exposure to domestic consumption in their respective markets. These include Grasim Industries in India, Siam Cement in Thailand and Standard Chartered in Hong Kong. Grasim and Siam Cement have done relatively well, supported by rural demand and on expectations that they will be beneficiaries of increased government spending on infrastructure projects. Standard Chartered, meanwhile, has weathered the crisis better than its counterparts in the West because it has a diversified exposure to Asia and minimal exposure to the US and Europe. The lender was also helped by simply remaining open for business at a time when struggling rivals were pulling out of Asia.

Portfolio Activity

During the year, we introduced India's Hindustan Unilever, part of the Unilever family of companies. The reasons for liking the company are similar to those for Unilever Indonesia: huge growth potential in rural areas thanks to rising disposable incomes and low penetration levels for fast moving consumer goods. As with its Indonesian counterpart, the company has well-established channels of distribution for its broad mix of products that range from personal and health care, to household consumables, as well as food and beverages. The other introduction, made in the first half of the review period, was ABB India, the local subsidiary of one of the world's leading power and automation engineering companies, both areas offering huge growth potential in India. 

Against this, we sold Hong Kong Exchanges and Clearing, having held the position for only a couple of months. This was uncharacteristic of our usual buy-and-hold approach but, after a rapid rise in the share price, we felt the stock price had become overvalued. The company has a well-run business, deriving the bulk of its turnover from China share trading, and we would consider repurchasing shares if valuations returned to reasonable levels. Other divestments that occurred in the first half include Korea's Hyundai Motor and Taiwan's Fubon Financial and China's Zhejiang Expressway, because of concerns over their business prospects amid tougher economic conditions. In India, we exited Satyam Computer Services, after founder-chairman Ramalinga Raju admitted to fraud. We also sold Pos Malaysia, which had outperformed the broader market, along with Korea's Kookmin Bank, whose repurchase offer we accepted. Finally, the share price of Hong Kong-listed utility CLP had held up well when markets were falling and we took profits. 

Gearing

As highlighted in the Chairman's statement, the Company has a £40 million multi-currency loan facility in place. To date, there have been no drawdowns on this facility.  

Outlook

Stockmarkets are back at "pre-Lehman" levels and economies appear to have stabilised. This suggests that the worst of the crisis is behind us but it is still unclear what any recovery will look like. The optimists argue that the unprecedented monetary and fiscal responses will allow a sustainable economic recovery, aided by naturally high growth in emerging countries such as China and India. The pessimists, on the other hand, argue that the stimulus is simply creating artificial growth and that when its effects wear off it will be apparent that economies remain, fundamentally, in a very weak state.

Where do we stand? In short, somewhere between the two, though tending towards the view of the pessimists. 

That said, Asia is in a relatively strong position, given its prudent government finances, stable banking systems and generally low levels of debt among corporates and consumers alike. We, thus, remain optimistic about the long-term prospects for the region but near term caution may well be warranted. 

As always, our investment process focuses on businesses with strong, clear competitive advantages run by proven management teams. Hence, we believe that the companies that make up the portfolio will continue to deliver positive results for shareholders over the long term.  

Aberdeen Asset Management Asia Limited*

5 November 2009

* on behalf of Aberdeen Asset Managers Limited

Both companies are subsidiaries of Aberdeen Asset Management PLC.

INVESTMENT PROCESS

Philosophy and Style

The Manager's investment philosophy is that markets are not always efficient. We believe that superior investment returns are therefore attainable by identifying good companies which are cheap in terms of the fundamentals that in our opinion drive share prices over the long term. We undertake substantial due diligence before initiating any investment including company visits in order to assure ourselves of the quality of the prospective investment. We are then careful not to pay too high a price when making the investment. Subsequent to that investment we then keep in close touch with the company, aiming to meet management at least twice a year. Given our long-term fundamental investment philosophy, one would not expect much change in the companies in which we invest. We do, however, take opportunities offered to us by what we see as anomalous price movements within stock markets to either top up or top slice positions, which typically accounts for the bulk of the activity within the portfolio during the year under review.

AAM Asia is based in Singapore. Founded in 1992, the office is run by Hugh Young and Peter Hames, the founding managing and investment director, respectively. They oversee a team of nine portfolio managers in Singapore who act as generalists, cross-covering the region. In addition, AAM Asia has offices in Kuala Lumpur, Hong Kong, Sydney and Bangkok.

Risk Controls

We seek to minimise risk by our in depth research. We do not view divergence from a benchmark as risk - we view investment in poorly run expensive companies that we do not understand as risk. In fact where risk parameters are expressed in benchmark relative terms, asset - including sector - allocation constitutes a significant constraint on stock selection. Hence diversification of stocks provides our main control.

Aberdeen's performance and investment risk unit independently monitors portfolio positions, and reports monthly. As well as attributing performance it also produces statistical analysis, which is used by the Manager primarily to check the portfolio is behaving as expected, not as a predictive tool.

PERFORMANCE TABLES

	31 August 2009	31 August 2008	% change
Performance
Equity shareholders' funds (£'000)	414,074	377,787	+9.6
MSCI AC Asia (ex Japan) Index (capital return basis)	481.71	454.40	+6.0
Net asset value per share (including net revenue) (p)	179.29	163.58	+9.6
Adjusted NAV per share with debt at market value (p)	n/a	163.09
Share price (p)	167.40	146.00	+14.7
Revenue return per share (p)	2.31	2.35
Total return per share (p)	17.31	2.28
Gearing
Actual gearing ratio (%)	-	0.1
Maximum potential gearing (%)	9.7{A}	11.6
Discount
Level of discount at which the shares trade:
- to adjusted NAV	6.6	10.5{B}
Expense ratio
- as % of average total assets less current liabilities	1.31	1.18
- as % of average shareholders' funds	1.36	1.29
{A} based on £40 million facility available
{B} adjusted to reflect the deduction of loan notes at par

Performance (total return)

	1 year	3 year	5 year
	% return	% return	% return
Share Price	16.4%	45.4%	144.7%
Net Asset Value	11.1%	44.0%	118.1%
MSCI AC Asia ex Japan Index	9.0%	39.5%	112.9%

Changes in Asset Distribution

	Value at		Sales	Appreciation	Value at
	31 August 2008	Purchases	proceeds	/(depreciation)	31 August 2009
Country	£'000	£'000	£'000	£'000	£'000
China	25,605	7,252	2,792	744	30,809
Hong Kong	85,036	9,732	8,514	11,889	98,143
India	48,888	15,298	5,103	9,602	68,685
Indonesia	8,776	-	3,221	3,009	8,564
Malaysia	24,487	-	8,598	3,393	19,282
Philippines	8,418	1,168	-	966	10,552
Singapore	87,441	7,080	4,513	1,312	91,320
South Korea	41,645	374	9,573	2,162	34,608
Sri Lanka	2,993	3,220	813	(22)	5,378
Taiwan	27,201	2,053	8,946	(619)	19,689
Thailand	17,683	2,349	-	3,711	23,743
	__________	__________	__________	__________	__________
Total investments	378,173	48,526	52,073	36,147	410,773
Net current (liabilities)/assets	(386)	31,735	64,806	36,758	3,301
	__________	__________	__________	__________	__________
Net assets	377,787	80,261	116,879	72,905	414,074
	__________	__________	__________	__________	__________

BUSINESS REVIEW

With the rest of the Report and Accounts, this review is intended to provide shareholders with the information and measures that the Directors use to assess, direct and oversee the Manager in the management of the Company's portfolio. The Business Review is prepared in accordance with the requirements of Section 417 of the Companies Act 2006.

Principal Activity

The Company is registered as a public limited company and is an investment company as defined by Section 833 of the Companies Act 2006.

The Company carries on business as an investment trust and the Directors do not envisage any change in this activity in the foreseeable future. The Company has received requisite approval of investment trust status from the Inland Revenue for accounting periods up to and including 31 August 2008. 

The Directors are of the opinion, under advice, that the Company has conducted its affairs for the year ended 31 August 2009 so as to be able to obtain approval as an investment trust under Section 842 of the Income and Corporation Taxes Act 1988 for that year, although approval for the period would be subject to review were there to be any enquiry under the Corporate Tax Self Assessment regime.

The Company has conducted its affairs so as to satisfy the requirements as a qualifying security for Individual Savings Accounts. The Directors intend that the Company will continue to conduct its affairs in this manner.

Investment Objective and Policy

The investment objective of the Company is to achieve long-term capital growth through investment in the Far East. Investments are made in stock markets in the region, with the exception of Japan and Australasia, principally in large companies. When appropriate, the Company will utilise gearing to maximise long term returns.

Benchmark

The Company's benchmark index is the MSCI All Country Asia (ex Japan) Index.  

Investment Policy

The Company's assets are invested in a diversified portfolio of securities in quoted companies spread across a range of industries and economies in the Asia Pacific region excluding Japan. The shares that make up the portfolio are selected from companies that have quality management and whose shares are considered to be under-priced. The Company invests in a diversified range of sectors and countries. Investments are not limited as to market capitalisation, sector or country weightings within the region.

The Company's policy is to invest no more than 15% of gross assets in other listed investment companies (including listed investment trusts).  

The Company complies with section 842 of ICTA and does not invest more than 15% of its assets in the shares of any one company.

When appropriate the Company will utilise gearing to maximise long term returns which is subject to a maximum gearing level of 20% imposed by the Board.  

The Company does not currently utilise derivatives but keeps this under review.

Achieving the Investment Policy

The Directors are responsible for determining the investment policy and the investment objective of the Company. Day to day management of the Company's assets has been delegated to the Manager who invests in a diversified range of companies throughout the Asia Pacific investment region in accordance with the investment policy. The Manager follows a bottom-up investment process based on a disciplined evaluation of companies through direct visits by its fund managers. Stock selection is the major source of added value. No stock is bought without the fund managers having first met management. The Manager estimates a company's worth in two stages, quality then price. Quality is defined by reference to management, business focus, the balance sheet and corporate governance. Price is calculated by reference to key financial ratios, the market, the peer group and business prospects. Top-down investment factors are secondary in the Manager's portfolio construction, with diversification rather than formal controls guiding stock and sector weights. The Manager is authorised to invest up to 15% of the Company's gross assets in any single stock, calculated at the time an investment is made.

A detailed description of the investment process and risk controls employed by the Manager is disclosed above. At 31 August 2009, the Company's portfolio consisted of 47 holdings.  

The Board is responsible for determining the gearing policy for the Company and has set a maximum gearing limit of 20%. Gearing is used selectively to leverage the Company's portfolio in order to enhance returns where and to the extent this is considered appropriate to do so. At 31 August 2009, the Company's actual gearing was nil. 

As at 31 August 2009, the Company had no holdings in other listed investment companies (including listed investment trusts).

Review of Performance

An outline of the performance, market background, investment activity and portfolio strategy during the year under review, as well as the investment outlook, is provided in the Chairman's Statement and Manager's Review.

Future Trends

The region's economies have high rates of growth, strong trade and fiscal surpluses and rapidly developing capital markets. Nevertheless the past has demonstrated regional risks and the outlook of the region is provided in the Chairman's Statement and Manager's Review.

Risk Management

The major risks associated with the Company are detailed below:

-    Resource risk: The Company is an investment trust and has no employees. The responsibility for the management of the Company has been delegated to Aberdeen Asset Managers Limited ('the Manager') under the management agreement. The terms of the management agreement cover the necessary duties and conditions expected of the Manager. The Board reviews the performance of the Manager on a regular basis and their compliance with the management contract formally on an annual basis.

-    Investment and market risk: The Company is exposed to the effect of variations in share prices due to the nature of its business. Investment in Asian equities involves a greater degree of risk than that usually associated with investment in the major securities markets. These include a greater risk of social, political and economic instability including changes in government which may restrict investment opportunities and have an adverse effect on economic reform. Changes in legal, regulatory and accounting policies can also affect the value of the Company's investments. The lower volumes of trading in certain securities of emerging markets may result in lack of liquidity and price volatility. In addition, currency fluctuations and high interest rates may affect the value of the Company's investments and the income derived therefrom.  

-    The Board continually monitors the investment policy of the Company, taking account of stockmarket factors, and reviews the Company's performance compared to its benchmark index and peer group. Further details on other risks relating to the Company's investment activities, including market price, liquidity and foreign currency risks, are provided in note 19 to the financial statements.  

-    Gearing risk: The Company has in place a £40 million multi-currency loan facility. As at 31 August 2009 no drawdowns had been made on this facility. Gearing has the effect of exacerbating market falls and gains. In order to manage the level of gearing, the Board has set a maximum gearing ratio of 20%.  

-    Regulatory risk: The Company operates in a complex regulatory environment and faces a number of regulatory risks. Serious breaches of regulations, such as section 842 of the Income and Corporation Taxes Act 1988, the UKLA Listing Rules and the Companies Act, could lead to a number of detrimental outcomes and reputational damage. The Audit Committee monitors compliance with regulations by reviewing internal control reports from the Manager.

-    Discount volatility: The Company's share price can trade at a discount to its underlying net asset value. The Board monitors the discount level of the Company's shares and has in place a buyback mechanism whereby the Manager is authorised to buy back shares within certain limits.

Monitoring Performance - Key Performance Indicators

At each Board meeting, the Directors consider a number of performance measures to assess the Company's success in achieving its objectives. The key performance indicators (KPIs) are established industry measures, and are as follows:

-    Net asset value (total return)

-    Share price (total return)

-    Performance attribution

-    Discount to net asset value

Performance is measured against the Company's benchmark, the MSCI All Country Asia (ex Japan) Index and the Board also considers peer group comparative performance.  

Social, Community, Employee Responsibilities and Environmental Policy

As an investment trust, the Company has no direct social, community, employee or environmental responsibilities. Details of the Company's Socially Responsible Investment policy are set out in the Corporate Governance Report.

DIRECTOR'S RESPONSIBILITY STATEMENT

The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.  

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK Accounting Standards.  

The financial statements are required by law to give a true and fair view of the state of affairs of the company and of the profit or loss of the Company for that period.  

In preparing these financial statements, the Directors are required to:  

-    select suitable accounting policies and then apply them consistently;  

-    make judgments and estimates that are reasonable and prudent;  

-    state whether applicable UK Accounting Standards have been followed, subject to any material 
     departures disclosed and explained in the financial statements; and  

-    prepare the financial statements on the going concern basis unless it is inappropriate to presume that 
     the company will continue in business.  

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.  

Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.  

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors confirm that to the best of their knowledge that:

-    the financial statements, prepared in accordance with the applicable accounting standards, give a true 
     and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

-    the Directors' Report includes a fair review of the development and performance of the business and 
     the position of the Company, together with a description of the principal risks and uncertainties that the 
     Company faces.

For Edinburgh Dragon Trust plc

Tony Cassidy

Chairman

5 November 2009

FINANCIAL STATEMENTS AND NOTES TO THE ACCOUNTS

INCOME STATEMENT (audited)

		Year ended 31 August 2009			Year ended 31 August 2008
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments	9	-	36,147	36,147	-	805	805
Currency losses		-	(1,502)	(1,502)	-	(980)	(980)
Income	2	12,028	-	12,028	14,316	-	14,316
Investment management fee	3	(3,393)	-	(3,393)	(4,025)	-	(4,025)
Administration expenses	4	(1,152)	-	(1,152)	(1,162)	-	(1,162)
		_______	______	_____	_______	______	_____
Net return before finance costs and taxation		7,483	34,645	42,128	9,129	(175)	8,954
Interest payable and similar charges	5	(1,513)	-	(1,513)	(2,985)	-	(2,985)
		_______	______	_____	_______	______	_____
Return on ordinary activities before taxation		5,970	34,645	40,615	6,144	(175)	5,969
Taxation on ordinary activities	6	(633)	-	(633)	(642)	-	(642)
		_______	______	_____	_______	______	_____
Return on ordinary activities after taxation		5,337	34,645	39,982	5,502	(175)	5,327
		_______	______	_____	_______	______	_____
Return per share (pence):	8	2.31	15.00	17.31	2.35	(0.07)	2.28
		_______	______	_____	_______	______	_____

The total column of this statement represents the profit and loss account of the Company.

A Statement of Total Recognised Gains and Losses has not been prepared as all gains and losses are recognised in the Income Statement.

All revenue and capital items in the above statement derive from continuing operations.

The accompanying notes are an integral part of the financial statements.

BALANCE SHEET (audited)

		As at	As at
		31 August 2009	31 August 2008
	Notes	£'000	£'000
Non-current assets
Investments at fair value through profit or loss	9	410,773	378,173
Current assets
Debtors and prepayments	10	1,371	2,614
Certificates of deposit		-	27,419
Cash and short term deposits		3,308	15,069
		_____________	_____________
		4,679	45,102
		_____________	_____________
Creditors: amounts falling due within one year	11
Foreign currency loans		-	(43,861)
Other creditors		(1,378)	(1,627)
		_____________	_____________
		(1,378)	(45,488)
		_____________	_____________
Net current assets/(liabilities)		3,301	(386)
		_____________	_____________
Net assets		414,074	377,787
		_____________	_____________
Share capital and reserves
Called-up share capital	12	46,190	46,190
Share premium account		4,285	4,285
Special reserve		75,770	75,770
Capital redemption reserve		10,017	10,017
Capital reserve	13	268,891	234,246
Revenue reserve		8,921	7,279
		_____________	_____________
Equity shareholders' funds	14	414,074	377,787
		_____________	_____________
Net asset value per Ordinary share (pence)	14	179.29	163.58
		_____________	_____________

RECONCILIATION OF MOVEMENT IN SHAREHOLDERS FUNDS (audited)

For the year ended 31 August 2009
		Share		Capital
	Share	premium	Special	redemption	Capital	Revenue
	capital	account	reserve	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 August 2008	46,190	4,285	75,770	10,017	234,246	7,279	377,787
Return on ordinary activities after taxation	-	-	-	-	34,645	5,337	39,982
Dividends paid	-	-	-	-	-	(3,695)	(3,695)
	______	_______	_______	_______	_______	_______	_______
Balance at 31 August 2009	46,190	4,285	75,770	10,017	268,891	8,921	414,074
	______	_______	_______	_______	_______	_______	_______
For the year ended 31 August 2008
		Share		Capital
	Share	premium	Special	redemption	Capital	Revenue
	capital	account	reserve	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 August 2007 (restated)	47,415	4,285	85,242	8,792	234,421	4,366	384,521
Return on ordinary activities after taxation	-	-	-	-	(175)	5,502	5,327
Dividends paid	-	-	-	-	-	(2,589)	(2,589)
Purchase of Ordinary shares for cancellation	(1,225)	-	(9,472)	1,225	-	-	(9,472)
	______	_______	_______	_______	_______	_______	_______
Balance at 31 August 2008	46,190	4,285	75,770	10,017	234,246	7,279	377,787
	______	_______	_______	_______	_______	_______	_______
The revenue reserve represents the amount of the Company's reserves distributable by way of dividend.
The accompanying notes are an integral part of the financial statements.

CASHFLOW STATEMENT (audited)

		Year ended		Year ended
		31 August 2009		31 August 2008
	Notes	£'000	£'000	£'000	£'000
Net cash inflow from operating activities	15		7,505		8,835
Servicing of finance
Bank and loan interest paid			(2,030)		(2,915)
Taxation
Overseas tax paid			(505)		(601)
Financial investment
Purchases of investments		(48,526)		(17,306)
Sales of investments		53,434		54,327
		_______		_______
Net cash inflow from financial investment			4,908		37,021
Equity dividend paid			(3,695)		(2,589)
			_______		_______
Net cash inflow before financing			6,183		39,751
Financing
Buy back of Ordinary shares (including expenses)			-		(9,472)
Sale/(purchase) of Certificates of Deposit			33,071		(25,015)
Repayment of Loan Notes			(55,446)		-
			_______		_______
Net cash outflow from financing			(22,375)		(34,487)
			_______		_______
(Decrease)/increase in cash	16		(16,192)		5,264
			_______		_______
Reconciliation of net cash inflow to movements in net funds/(debt)
(Decrease)/increase in cash as above			(16,192)		5,264
Amortised Loan Note expenses			-		(31)
(Sale)/purchase of Certificates of Deposit			(33,071)		25,015
Repayment of Loan Notes			55,446		-
Exchange movements			(1,502)		(980)
			_______		_______
Movement in net funds in the year			4,681		29,268
Net debt at 1 September			(1,373)		(30,641)
			_______		_______
Net funds/(debt) at 31 August			3,308		(1,373)
			_______		_______

NOTES TO THE ACCOUNTS (audited)

1.	Accounting policies
	(a)	Basis of accounting
		The financial statements have been prepared under the historical cost convention, as modified to include the revaluation of investments and in accordance with the applicable UK Accounting Standards and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (issued in January 2009 and adopted early). The early adoption of the January 2009 SORP had no effect on the financial statements of the Company, other than the requirement to separately disclose capital reserves that relate to the revaluation of investments held at the reporting date. These are disclosed in note 13. This new requirement replaces the previous requirement to disclose the value of the capital reserve that was unrealised. They have also been prepared on the assumption that approval as an investment trust will continue to be granted. The financial statements have been prepared on a going concern basis.
		The financial statements, and the net asset value per share figures, have been prepared in accordance with UK Generally Accepted Accounting Practice ('UK GAAP').
	(b)	Investments
		Listed investments have been designated upon initial recognition as fair value through profit and loss. Investments are recognised and de-recognised on the trade date at cost. Subsequent to initial recognition, investments are valued at fair value, which for listed investments is deemed to be bid market prices. Gains and losses arising from changes in fair value are included as a capital item in the Income Statement and are ultimately recognised in the capital reserve except to the extent where they are readily convertible to cash.
	(c)	Income
		Dividends (other than special dividends), including taxes deducted at source, are included in revenue by reference to the date on which the investment is quoted ex-dividend. Special dividends are reviewed on a case-by-case basis and may be credited to capital, if circumstances dictate. Dividends receivable on equity shares where no ex-dividend date is quoted are brought into account when the Company's right to receive payment is established. Fixed returns on non-equity shares are recognised on a time-apportioned basis so as to reflect the effective yield on shares. Other returns on non-equity are recognised when the right to return is established. The fixed return on a debt security, if material, is recognised on a time apportioned basis so as to reflect the effective yield on each security. Where the Company has elected to receive its dividends in the form of additional shares rather than cash, the amount of the cash dividend is recognised as income. Any excess in the value of the shares received over the amount of cash dividend is recognised in capital reserves. Interest receivable on bank balances is dealt with on an accruals basis.
	(d)	Expenses
		All expenses are accounted for on an accruals basis. Expenses are charged through the revenue column of the Income Statement with the exception of expenses directly relating to the acquisition or disposal of an investment, in which case, they are added to the cost of the investment or deducted from the sale proceeds. Such transaction costs are disclosed in accordance with the SORP. These expenses are charged to the capital column of the Income Statement and are separately identified and disclosed in note 9.
	(e)	Deferred taxation
		Deferred taxation is provided on all timing differences, that have originated but not reversed at the Balance Sheet date, where transactions or events that result in an obligation to pay more or a right to pay less tax in future have occurred at the Balance Sheet date, measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. Timing differences are differences arising between the Company's taxable profits and its results as stated in the accounts which are capable of reversal in one or more subsequent periods. Due to the Company's status as an investment trust company, and the intention to continue to meet the conditions required to obtain approval for the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.
	(g)	Capital reserves
		Gains and losses on investments and changes in fair values of investments which are readily convertible to cash, without accepting adverse terms, are transferred to the capital reserve.
	(h)	Foreign currency
		Assets and liabilities in foreign currencies are translated at the rates of exchange ruling on the Balance Sheet date. Transactions involving foreign currencies are converted at the rate ruling on the date of the transaction. Gains and losses on the realisation of foreign currencies are recognised in the Income Statement and are then transferred to the capital reserve.
	(i)	Dividends payable
		Final dividends are dealt with in the period in which they are paid.

		2009	2008
2.	Income	£'000	£'000
	Income from investments{A}
	UK dividend income	364	218
	Overseas dividends	11,252	13,209
	Scrip dividends	10	10
		________	________
		11,626	13,437
		________	________
	Other income{B}
	Deposit interest	402	844
	Stock lending income	-	35
		________	________
		402	879
		________	________
	Total income	12,028	14,316
		________	________
	{A} Derived from financial assets at fair value through profit and loss.
	{B} Derived from financial assets not at fair value through profit and loss.
	Income from investments
	Listed UK	364	218
	Listed overseas	11,262	13,219
		________	________
		11,626	13,437
		________	________

		2009			2008
		Revenue	Capital	Total	Revenue	Capital	Total
3.	Investment management fee	£'000	£'000	£'000	£'000	£'000	£'000
	Investment management fee	3,393	-	3,393	4,025	-	4,025
		______	______	______	______	______	______
	The management fee paid to Aberdeen Asset Managers Limited ('the Manager') is 0.25% per quarter of the total net assets less (i) the value of any investment funds managed by the Manager and (ii) 50% of the value of any investment funds managed or advised by investment managers other than the Manager. The fee is subject to VAT at the appropriate rate.
	The management agreement is terminable by the Company on 3 months' notice or in the event of a change of control in the ownership of the Manager. The notice period required by the Manager is 6 months.

			2009	2008
4.	Administrative expenses		£'000	£'000
	Share Plan marketing contribution		212	195
	Directors' fees		127	115
	Safe custody fees		366	453
	Auditors' remuneration:
	-	Fees payable to the Company's auditors for the audit of the Company's annual accounts	14	14
	-	Fees payable to the Company's auditors for the review of the Company's half yearly accounts	4	4
	Secretarial fee		75	72
	Other expenses		354	309
			______	______
			1,152	1,162
			______	______
	The secretarial fee is paid to the Manager and adjusted annually in line with the Retail Prices Index. The contribution to Share Plan Marketing was paid to the Manager in respect of marketing and promotion of the Company.
	During the year £4,000 (2008 - £3,500) was paid to the auditors' for non-audit services. This related to further assurance work regarding the interim and regulatory reporting.
	No pension contributions were made in respect of any of the Directors.
	The Company does not have any employees.

		2009	2008
5.	Interest payable and similar charges	£'000	£'000
	Loans repayable in less than 1 year{A}	1,513	2,985
		______	______
	{A} Derived from liabilities not at fair value through profit and loss.

			2009			2008
			Revenue	Capital	Total	Revenue	Capital	Total
6.	Taxation		£'000	£'000	£'000	£'000	£'000	£'000
	(a)	Analysis of charge for the year
		Corporation tax	347	-	347	1,256	-	1,256
		Credit relief	(202)	-	(202)	(1,256)	-	(1,256)
		Overseas tax	488	-	488	642	-	642
			______	______	______	______	______	______
		Taxation on ordinary activities	633	-	633	642	-	642
			______	______	______	______	______	______
	(b)	Factors affecting the tax charge for the year
		The tax assessed for the year is lower than the standard rate of corporation tax in the UK.
							2009	2008
							£'000	£'000
		Return on ordinary activities before taxation					40,615	5,969
							2009	2008
							£'000	£'000
		Return on ordinary activities multiplied by standard rate of corporation tax in the UK of 28% (2008 - effective rate at 29.17%)					11,372	1,741
		Deduct effect of capital:
		UK dividend income					(102)	(63)
		Gains on investments not taxable					(10,121)	(235)
		Currency losses not taxable					421	286
		Other non-taxable income					(1,104)	(3)
		Decrease in excess expenses and loan relationship deficit					(357)	(439)
		Double tax relief taken					(202)	(1,256)
		Movement in taxable accrued income					238	(31)
		Overseas tax suffered					488	642
							______	______
		Current tax charge for year					633	642
							______	______

7.	Dividends
	In order to comply with the requirements of Section 842 ICTA 1988 ('Section 842') and with company law, the Company is required to make a final dividend distribution.
	The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.
	The table below sets out the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of Section 842 are considered. The revenue available for distribution by way of dividend for the year is £5,337,000 (2008 - £5,502,000).
		2009	2008
		£'000	£'000
	Proposed final dividend for 2009 - 1.61p per Ordinary share (2008 - 1.6p)	3,718	3,695
		______	______
	The final dividend will be paid on 11 December 2009 to shareholders on the register at the close of business on 13 November 2009.  The ex-dividend date is 11 November 2009.

		2009		2008
8.	Return per Ordinary share	£'000	pence	£'000	pence
	Revenue return	5,337	2.31	5,502	2.35
	Capital return	34,645	15.00	(175)	(0.07)
		______	______	______	______
	Total return	39,982	17.31	5,327	2.28
		______	______	______	______
	Weighted average Ordinary shares in issue		230,954,375		233,807,053

				Listed	Listed
				overseas	in UK	Total
9.	Investments			£'000	£'000	£'000
	Fair value through profit or loss:
	Opening book cost			271,481	5,913	277,394
	Opening fair value gains/(losses) on investments held			100,803	(24)	100,779
				________	________	________
	Opening fair value			372,284	5,889	378,173
	Movements in year:
	Purchases at cost			47,666	860	48,526
	Sales	-	proceeds	(52,073)	-	(52,073)
		-	gains on sales	117	-	117
	Current year fair value gains on investments held			34,890	1,140	36,030
				________	________	________
	Closing fair value			402,884	7,889	410,773
				________	________	________
	Closing book cost			267,191	6,773	273,964
	Closing fair value gains on investments held			135,693	1,116	136,809
				________	________	________
	Closing fair value			402,884	7,889	410,773
				________	________	________
					2009	2008
					£'000	£'000
	Listed on a recognised overseas investment exchange				402,884	372,284
	Listed in the UK				7,889	5,889
					________	________
					410,773	378,173
					________	________
					2009	2008
	Gains on investments held at fair value through profit or loss				£'000	£'000
	Realised gains on sales				117	26,186
	Increase/(decrease) in fair value gains on investments held				36,030	(25,381)
					________	________
					36,147	805
					________	________
	Transaction costs
	During the year expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within gains on investments in the Income Statement. The total costs were as follows:
					2009	2008
					£'000	£'000
	Purchases				88	57
	Sales				194	146
					________	________
					282	203
					________	________
					2009	2008
	Stock lending details				£'000	£'000
	Aggregate value of securities on loan at the year end				-	-
	Maximum aggregate value of securities on loan during the year				-	19,203
	Fee income (gross) from stock lending during the year				-	35
					________	________
	All stocks lent under these arrangements are fully secured against collateral. As at 31 August 2009, the amount of stock on loan was £nil (2008 - £nil). Stock lending arrangements were suspended during the year due to the severe dislocation in the market and inherent counterparty risks.

		2009	2008
10.	Debtors and prepayments	£'000	£'000
	Accrued income	1,306	1,180
	Amounts due from brokers	-	1,361
	Other debtors and prepayments	65	73
		________	________
		1,371	2,614
		________	________

			2009	2008
11.	Creditors: amounts falling due within one year		£'000	£'000
	(a)	Foreign currency loan notes	-	43,861
			________	________
		The Company's US$80 million of Loan Notes were repaid on 30 December 2008.
		A new multi-currency revolving advance facility of £40 million was implemented with The Royal Bank of Scotland on 30 September 2008. The commitment period of the new facility commenced on 30 September 2008 and ends on 29 September 2010. Interest will be charged at the margin above the rate at which Sterling/foreign currency deposits of comparable amount to the relevant advance are offered by LIBOR on the date on which the advance is required. A covenant has been imposed by The Royal Bank of Scotland that the gearing ratio, being gross borrowings divided by adjusted assets shall not exceed 25%.
			2009	2008
	(b)	Other	£'000	£'000
		Other creditors	1,378	1,627
			________	________

		2009	2008
12.	Called up share capital	£'000	£'000
	Authorised
	325,000,000 (2008 - 325,000,000) Ordinary shares of 20p	65,000	65,000
		________	________
	Called-up, allotted and fully paid
	230,954,375 (2007 - 230,954,375) Ordinary shares of 20p	46,190	46,190
		________	________
	During the year, no Ordinary shares of 20p each (2008 - 6,122,000) (representing 0.00% of the issued Ordinary share capital at 31 August 2009) were bought back at a total cost of £nil, including expenses (2008 - £9,472,000).

		2009	2008
13.	Capital reserve	£'000	£'000
	At 1 September	234,246	234,421
	Movement in fair value gains	36,147	805
	Foreign exchange movement	(1,502)	(980)
		________	________
	At 31 August	268,891	234,246
		________	________
	The capital reserve includes investment holding gains amounting to £136,809,000 (2008 - £100,779,000), as disclosed in note 9.

14.	Net asset value per share
	The net asset value per share and the net asset values attributable to the Ordinary shareholders at the year end calculated in accordance with the Articles of Association were as follows:
		2009	2008
	Net assets attributable (£'000)	414,074	377,787
	Number of Ordinary shares in issue (excluding shares held in treasury)	230,954,375	230,954,375
	Net asset value per share (p)	179.29	163.58

15.	Reconciliation of net return before finance costs and	2009	2008
	taxation to net cash inflow from operating activities	£'000	£'000
	Net return before finance costs and taxation	42,128	8,954
	Adjusted for:
	Gains on investments	(36,147)	(805)
	Currency losses	1,502	980
	Increase in accrued income	(109)	(351)
	Decrease in other debtors	7	154
	Increase/(decrease) in sundry creditors including management fee due	124	(97)
		________	________
	Net cash inflow from operating activities	7,505	8,835
		________	________

		1 September	Cash	Currency	31 August
		2008	flow	movements	2009
16.	Analysis of changes in net (debt)/funds	£'000	£'000	£'000	£'000
	Cash and short term deposits	15,069	(16,192)	4,431	3,308
	Certificates of deposit	27,419	(33,071)	5,652	-
	Debt due in less than one year	(43,861)	55,446	(11,585)	-
		________	______	________	______
	Net (debt)/funds	(1,373)	6,183	(1,502)	3,308
		________	______	________	______

17.

Contingent assets and liabilities

On 5 November 2007, the European Court of Justice ruled that management fees should be exempt from VAT. HMRC has announced its intention not to appeal against this case to the UK VAT Tribunal and, therefore, the recovery of VAT which is due in relation to the Company, will be processed in due course. The amount of any repayment of VAT for the Company is immaterial, and the Company has made no provision in these financial statements for any such repayment.

18.	Capital management policies and procedures
	The Company's capital management objectives are:
	-	to ensure that the Company will be able to continue as a going concern; and
	-	to maximise the capital return to its equity shareholders through an appropriate balance of equity capital and debt. The Board normally seeks to limit gearing to 20% of net assets.
	The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes the nature and planned level of gearing, which takes account of the Manager's views on the market, and the extent to which revenue in excess of that which is required to be distributed should be retained. The Company has no externally imposed capital requirements

19.	Financial instruments
	Risk management
	The Company's financial instruments comprise securities and other investments, cash balances, loans and debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income.
	The Manager has a dedicated investment management process, which ensures that the investment policy explained above is followed. Stock selection procedures are in place based on the active portfolio management and identification of stocks. The portfolio is reviewed on a periodic basis by a Senior Investment Manager and also by the Manager's Investment Committee.
	The Company's Manager has an independent Investment Risk department for reviewing the investment risk parameters of the Company's portfolio on a regular basis. The department reports to the Manager's Performance Review Committee which is chaired by the Manager's Chief Investment Officer. The department's responsibility is to review and monitor ex-ante (predicted) portfolio risk and style characteristics using best practice, industry standard multi-factor models.
	Additionally, the Manager's Compliance department continually monitors the trust's investment and borrowing powers and reports to the Manager's Risk Management Committee.
	The main financial risks that the Company faces from its financial instruments are market price risk (comprising interest rate risk, currency risk and other price risk), liquidity risk and credit risk.
	The Board regularly reviews and agrees policies for managing each of these risks. The Manager's policies for managing these risks are summarised below and have been applied throughout the year. The numerical disclosures exclude short-term debtors and creditors.
	Market price risk
	The fair value of or future cash flows from a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - interest rate risk, currency risk and other price risk.
	Interest rate risk
	Interest rate movements may affect :
	- the level of income receivable on cash deposits;
	- interest payable on the Company's variable rate borrowings.
	The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions.
	Interest risk profile
	The interest rate risk profile of the portfolio of the Company's financial assets and liabilities, excluding equity holdings which are all non-interest bearing, at the Balance Sheet date was as follows:
		Weighted average	Weighted
		period for which	average	Fixed	Floating
		rate is fixed	interest rate	rate	rate
	At 31 August 2009	Years	%	£'000	£'000
	Assets
	Hong Kong Dollar	-	-	-	1,227
	UK Sterling	-	0.25	-	235
	Taiwanese Dollar	-	-	-	64
	US Dollar	-	-	-	1,782
		________	________	_______	______
		n/a	n/a	-	3,308
		________	________	_______	______
		Weighted average	Weighted
		period for which	average	Fixed	Floating
		rate is fixed	interest rate	rate	rate
	At 31 August 2008	Years	%	£'000	£'000
	Assets
	UK Sterling	-	4.75	-	2,369
	Taiwanese Dollar	-	-	-	10
	US Dollar	-	2.18	-	12,690
	Certificates of deposit - US Dollar	0.29	2.81	27,419	-
		________	________	_______	______
		n/a	n/a	27,419	15,069
		________	________	_______	______
	Liabilities
	Bank loan - US Dollar	0.33	7.26	(43,861)	-
		________	________	_______	______
	The weighted average interest rate is based on the current yield of each asset, weighted by its market value. The weighted average interest rate on bank loans is based on the interest rate payable, weighted by the total value of the loans. The Company's Loan Notes were repaid on 30 December 2008.
	The floating rate assets consist of cash deposits on call earning interest at prevailing market rates.
	The Company's equity portfolio and short-term debtors and creditors (excluding bank loans) have been excluded from the above tables.
	Interest rate sensitivity
	Movements in interest rates would not significantly affect net assets attributable to the Company's shareholders and total profit.

	Foreign currency risk
	All of the Company's investment portfolio is invested in overseas securities and the Balance Sheet, therefore, can be significantly affected by movements in foreign exchange rates. It is not the Company's policy to hedge this risk on a continuing basis but the Company may, from time to time, match specific overseas investments with foreign currency borrowings. The Company's borrowings, as detailed in note 11, are also in foreign currency.
	The revenue account is subject to currency fluctuation arising on dividends paid in foreign currencies. The Company does not hedge this currency risk.
	Foreign currency risk exposure by currency of denomination:
			31 August 2009					31 August 2008
				Net		Total					Net			Total
			Overseas	monetary		currency		Overseas			monetary			currency
			investments{A}	assets		exposure		investments{A}			assets			exposure
			£'000	£'000		£'000		£'000			£'000			£'000
	Hong Kong Dollar		121,063	1,227		122,290		104,752			-			104,752
	Indian Rupee		68,685	-		68,685		48,888			-			48,888
	Indonesian Rupiah		8,564	-		8,564		8,776			-			8,776
	Korean Won		34,608	-		34,608		41,645			-			41,645
	Malaysian Ringgit		19,282	-		19,282		24,487			-			24,487
	Philippine Peso		10,552	-		10,552		8,418			-			8,418
	Singapore Dollar		91,320	-		91,320		87,441			-			87,441
	Sri Lankan Rupee		5,378	-		5,378		2,993			-			2,993
	Sterling		7,889	235		8,124		5,889			2,369			8,258
	Taiwanese Dollar		19,689	64		19,753		27,201			10			27,211
	Thailand Baht		23,743	-		23,743		17,683			-			17,683
	US Dollar		-	1,782		1,782		-			(3,752)			(3,752)
			________	_______		_______		________			_______			______
	Total		410,773	3,308		414,081		378,173			(1,373)			376,800
			________	_______		_______		________			_______			______
	{A} By country of listing.
	Foreign currency sensitivity
	There is no sensitivity analysis included, as the Company's significant foreign currency financial instruments are in the form of equity investments, which have been included within the other price risk sensitivity analysis, so as to show the overall level of exposure.
	Other price risk
	Other price risks (ie changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments.
	It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular country or sector. Both the allocation of assets and the stock selection process act to reduce market risk. The Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy. The investments held by the Company are listed on various stock exchanges worldwide.
	Other price risk sensitivity
	If market prices at the Balance Sheet date had been 10% higher or lower while all other variables remained constant, the return attributable to Ordinary shareholders for the year ended 31 August 2009 would have increased/decreased by £41,077,000 (2008 - increased/decreased by £37,817,000) and equity reserves would have increased/decreased by the same amount.
	Liquidity risk
	This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is not considered to be significant, as the Company's assets mainly comprise readily realisable securities which can be sold to meet funding requirements if necessary.
	The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions, and reviews these on a regular basis. Borrowings comprise a revolving multi-currency credit facility. The Board has imposed a maximum gearing level, measured on the most stringent basis of calculation after netting off cash equivalents, of 20%. Details of borrowings at 31 August 2009 are shown in note 11.
	Liquidity risk is not considered to be significant as the Company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary. Short-term flexibility is achieved through the use of loan and overdraft facilities, details of which can be found in note 11. Under the terms of the loan facility, the Investment Manager provides the lender with loan covenant reports on a monthly basis, to provide the lender with assurance that the terms of the facility are not being breached. The Investment Manager will also review the credit rating of a lender on a regular basis. Details of the Board's policy on gearing are shown in the interest rate risk section of this note.
	Liquidity risk exposure
	The Company's US$80 million of Loan Notes was repaid on 30 December 2008. At 31 August 2009 the Company had no borrowings (2008 - £43,861,000).
	Credit risk
	This is the risk of failure of the counterparty to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss.
	The risk is not considered to be significant, and is actively managed as follows:
	-	investment transactions are carried out with a large number of brokers, whose credit-standing is reviewed periodically by the Manager, and limits are set on the amount that may be due from any one broker;
	-	the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the review of failed trade reports on a monthly basis. In addition, the Custodian carries out a stock reconciliation to third party administrators' records on a monthly basis to ensure discrepancies are picked up on a timely basis. The Manager's Compliance department carries out periodic reviews of the Custodian's operations and reports its finding to the Manager's Risk Management Committee. This review will also include checks on the maintenance and security of investments held;
	-	cash is held only with reputable banks with high quality external credit enhancements.
	None of the Company's financial assets are secured by collateral or other credit enhancements.
	Credit risk exposure
	In summary, compared to the amounts in the Balance Sheet, the maximum exposure to credit risk at 31 August was as follows:
					2009					2008
					Balance		Maximum			Balance			Maximum
					Sheet		exposure			Sheet			exposure
	Current assets				£'000		£'000			£'000			£'000
	Loans and receivables				1,371		1,371			2,614			2,614
	Cash at bank and in hand				3,308		3,308			15,069			15,069
	Certificates of deposit				-		-			27,419			27,419
					________		_______			_______			________
					4,679		4,679			45,102			45,102
					________		_______			_______			________
	None of the Company's financial assets is past due or impaired.
	Fair values of financial assets and financial liabilities
	The Company's Loan Notes were repaid on 30 December 2008. For the prior year the fair value of borrowings (US$80,000,000) had been calculated at £44,984,000 as at 31 August 2008 compared to an accounts value in the financial statements of £43,861,000 (note 11).
	Maturity of financial liabilities
	The maturity profile of the Company's financial liabilities at 31 August was as follows:
									2009			2008
									£'000			£'000
	In less than one year								-			43,861

20.    The Annual General Meeting will be held 9 December 2009 at 40 Princes Street, Edinburgh.

21.    The Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 31 August 2009 have been agreed with the auditors and are an abridged version of the Company's full accounts, which have been approved and audited with an unqualified report. The 2008 and 2009 statutory accounts received unqualified reports from the Company's auditors and did not include any reference to matters to which the auditors drew attention by way of emphasis without qualifying the reports, and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006. The financial information for 2008 is derived from the statutory accounts for 2008 which have been delivered to the Registrar of Companies. The 2009 accounts will be filed with the Registrar of Companies in due course.

The annual results are circulated to shareholders in the form of an Annual Report, copies of which will be available at the Company's registered office, 40 Princes Street, Edinburgh EH2 2BY or on the Company's website www.edinburghdragon.co.uk.

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise and may be affected by exchange rate movements. Investors may not get back the amount they originally invested.

By Order of the Board

Aberdeen Asset Managers Limited, Secretary

 

END

 

 

FR FSWFEISUSESF