Annual Financial Report

RNS Number : 1632Q

Edinburgh Dragon Trust plc

14 October 2011

 



14 October 2011

EDINBURGH DRAGON TRUST plc

ANNUAL FINANCIAL REPORT FOR THE YEAR TO 31 AUGUST 2011

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.

•     Edinburgh Dragon delivered a satisfactory performance for the year to 31 August 2011, consolidating the strong performance in the previous year.  Thenet asset value rose 5.4% on a total return basis compared to a rise of 3.7%, in sterling terms, in the MSCI All Country Asia (ex Japan) Index.

•     The Company successful completed the issue of £60 million nominal of 3.5% Convertible Unsecured Loan Stock 2018 ("CULS") during the financial year.  

•     Despite the uncertain global growth outlook, opportunities are still abundant in Asia for long term investments in high quality companies which meet the Manager's well tried and tested long-term investment approach of placing emphasis on good quality companies with strong balance sheets, sound growth prospects, decent returns on capital and stable management teams.

For further information please contact:-

Andrew Gillan, Senior Investment Manager,

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

As has been widely reported, financial markets in 2011 have experienced great volatility, primarily due to concerns over growth and sovereign debt in the developed world.  Asian markets, on the other hand, were specifically impacted by worries over how monetary policy might be used to control inflation. Despite these concerns, I am pleased to report that your Company recorded a satisfactory performance in the 12 months to 31 August 2011, consolidating the strong performance in the previous year. The net asset value at the financial year-end was 251.4p per share (2010-240.1p), a rise of 5.4% on a total return basis compared to a 3.7% rise, in sterling terms, in the benchmark, the MSCI AC Asia ex Japan Index. The share price rose 5.0% to 230.0p during the year.

Overview

A few key themes dominated Asian markets during the year under review. At first, there was growing optimism about Asia's economic prospects.  In the middle of the period, inflationary concerns came to the fore, while, towards the period-end, external risks mounted on the back of concerns over the lack of firm political leadership in Europe and the US to address sovereign debt issues and avoidance of a double-dip recession in those economies.

In the first phase, lasting up to December 2010, Asian equity prices moved higher as the region's economies continued to lead the global recovery, with the economies of China and India growing by 10.3% and 8.9% respectively in 2010. Expectations of further monetary easing - which materialised in the form of a second round of asset purchases by the US Federal Reserve - accelerated capital inflows into emerging markets and Asia.

From January to July 2011, equity prices traded sideways as successive monetary tightening in order to curtail rising inflation - which ranged from 4% in Malaysia to 12% in India - dampened growth prospects. In China, Hong Kong and Singapore, specific measures were taken to dampen overheated property prices. Exacerbating the situation were sharply rising oil prices, primarily on the back of unrest in the Middle East and North Africa. The global supply chain disruptions caused by Japan's March earthquake also took their toll on markets.

Inflationary fears gave way to growth concerns in the third phase, sparking a widespread market retreat in August 2011. The simmering fears over Europe's ability to pay its debts, which I had noted in the interim report, intensified after a second bailout for Greece failed to allay fears of impending sovereign default. Across the Atlantic, the US suffered an unprecedented downgrade of its triple-A credit rating. Moderating economic data in the West also sparked fears of a double-dip recession. Against such a backdrop there was a global investor flight from equities with emerging markets seeing the greatest impact, despite their superior economic fundamentals. Regional equities shed more than 9% during August and erased most of the gains accumulated in the first half of the year under review.

Against this backdrop, your Manager's choice of stocks has remained largely unchanged, underlining its genuine long-term investment approach. Your Manager places great emphasis on the quality of companies it selects on your behalf. This typically means companies that have strong balance sheets, sound growth prospects, decent returns on capital and stable management teams. Notable successes include core holding Jardine Strategic, a Singapore-listed conglomerate, with interests in the fast-growing Indonesian auto sector via subsidiary Astra International. It was the top contributor to relative performance both this year and last. Similarly, Thailand's Siam Cement has remained in the list of top 10 performers for the past three years. The company has a dominant market position in the country's cement, chemicals and paper sectors, and is focusing on regional expansion over the next five years for better growth opportunities. Detailed information about your Company's performance and holdings can be found in the Manager's review.

Gearing

As previously reported, the Company issued £60 million nominal of 3.5% Convertible Unsecured Loan Stock 2018 (CULS) in January 2011.   The CULS provides the company with long-term structural gearing at an acceptable cost and is in line with the Manager's long-term investment philosophy.  The CULS provides holders with an attractive yield of 3.5% per annum, as well as capital protection (with the liability comfortably covered by the assets of the Company).  Holders of CULS may convert part, or all, of their holdings into Ordinary shares on 31 January and 31 July each year up to January 2018 at a fixed price of 310.1528p nominal of CULS for one Ordinary share.  At 31 August 2011 the Company had actual gearing of 9.9%.

Discount

The discount at which the Company's shares trade relative to their net asset value, as at 31 August 2011, was 8.5%.  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.  There were no buy-backs of shares during the financial year and there have been no buy-backs subsequent to the year end. 

The Board believes the authority to buy-back shares for cancellation should remain in place and, accordingly, a resolution to renew the authority to buy-back shares for cancellation will be proposed at this year's Annual General Meeting. 

Revenue Account

Due to the increased level of special dividends received in the year, the revenue return per share was 4.31p, compared to 2.62p in the previous year.  It remains the Board's policy to pay a final dividend marginally in excess of the minimum required to maintain investment trust status, which may, of course, lead to some volatility in the level of dividend paid.  The Board recommends the payment of a final dividend of 3.2p per Ordinary share (2010 - 1.9p) which, if approved by shareholders at the Annual General Meeting, will be paid on 9 December 2011.

Bribery and Corruption Act

The Bribery Act 2010 became effective on 1 July 2011.  The Company has a policy of conducting its business in an honest and ethical manner. The Company takes a zero tolerance approach to bribery and corruption and has procedures in place that are proportionate to the Company's circumstances to prevent them. The Manager also adopts a zero tolerance approach and has its own detailed policy and procedures in place to prevent bribery and corruption.

The Board

The Board welcomes greater transparency in the fulfilment of its responsibilities to shareholders. New appointments are now routinely facilitated by an external recruitment firm. While the Board is a supporter of diversity in the boardroom, in all new appointments the overriding priority is to appoint the person with the best set of skills and personality to complement the existing skills of the Board.

As part of a previously stated commitment to an orderly process of refreshment, the Board was pleased to appoint Peter Maynard as a non-executive Director of the Company on 12 October 2011.   After many years of valuable service to the Board of Edinburgh Dragon, Frank Frame will step down as a Director at the forthcoming Annual General Meeting. The Board joins me in thanking Frank for his considerable and wide-ranging contributions over the years, not least in his role of Senior Independent Director (SID).  David Gairns will take over the role of SID from the AGM.

In accordance with the provisions of the UK Corporate Governance Code, the Board has endorsed corporate governance procedures whereby all Directors will retire from the Board and submit themselves for re-election on an annual basis. The Board recommends that shareholders vote in favour of the re-election of all Directors at the Annual General Meeting. 

The Board has adopted the principle of external evaluation of its members and will report on the first such evaluation in the annual report for 2012. 

Annual General Meeting

The Annual General Meeting will be held at Aberdeen's Edinburgh office on Wednesday 7 December 2011 at 12.00 noon followed by a lunch for shareholders.  This will give shareholders the opportunity to meet the Directors and Manager after the formal AGM business has concluded and we welcome all shareholders to attend. The AGM will continue to be rotated between Edinburgh and London in successive years.

Outlook

The growth outlook in developed economies is uncertain for the foreseeable future. While Asian economies have increasingly decoupled from the West their stock markets are still subject to swings in global investor sentiment.

No doubt Asia's growth will moderate if the developed world enters another recession but the region should be buffered by robust fundamentals and an increasing reliance on intra-regional trade and domestic demand.

Importantly, Asian governments have been financially prudent, avoiding the chronic debt problems of their Western peers. Should the need arise, they are in a position to deploy a wide range of policy tools to sustain growth, especially in export-oriented countries like Korea, Taiwan and Singapore. More domestically driven economies such as Indonesia and India may be less vulnerable to a fall in Western export demand. Meanwhile, a modest growth slowdown might even take pressure off the prices of commodities that the large emerging countries of China and India compete for.

In the case of China, policymakers are still caught between containing inflation and supporting growth. The policy dilemma has been made worse by the predicament facing both the American and European economies, its two biggest export markets. For now, Beijing appears to be focused on quelling inflation; authorities have allowed the currency to strengthen and are curbing off-balance sheet lending. Clearly, however, priorities could change if the global economy deteriorates further.

Despite the uncertain global growth outlook, your Board and your Manager maintain a strong belief that opportunities are still abundant in Asia for long term investments in high quality companies which meet the Manager's well tried and tested criteria as set out above.

For Edinburgh Dragon Trust plc

Allan McKenzie

Chairman

13 October 2011

MANAGER'S REVIEW

Background/Portfolio Review

The year under review saw mixed performances from Asian equity markets. Thailand and Indonesia were the front-runners, rising by approximately 20% each in sterling terms. Most other stock markets showed at least single-digit gains, save for China and India, which ended lower.

Against this market backdrop, the Company out-performed its benchmark for the 12 months to 31 August, with the portfolio's net asset value rising by 5.4% on a total return basis, compared to the benchmark MSCI All Country Asia ex Japan Index, which returned 3.7% in sterling terms. By and large, corporate earnings were healthy and our holdings delivered good results through the year. 

Being underweight in China, which bucked the region's uptrend, was notably beneficial. Investors reacted negatively as uncomfortably high inflation and overheating concerns saw the central bank raise interest rates five times, in addition to nine hikes in bank reserve requirements. As tightening policies took effect, economic activity moderated, raising fears of a sharp downturn. Worries over the hidden liabilities of local governments, reportedly as high as 27% of GDP, further blunted risk appetite.

We remain generally wary of the quality of many of China's companies but, despite the challenging environment, our three Chinese holdings made good progress. The high oil price supported CNOOC and PetroChina, with both reporting robust production and earnings growth. China Mobile, meanwhile, expanded its customer base, particularly in 3G, as it continued to improve its network coverage and services.

India, where the portfolio is heavily invested, suffered the steepest market decline over the review period. The broad Indian benchmark fell 12% in sterling terms on the back of poor domestic news, ranging from corruption scandals to stubborn inflation and interest rate increases. Economic growth stuttered as a result and foreign inflows to the market dropped.

Our individual companies fared well compared to the overall market. Hero MotoCorp, previously known as Hero Honda, had underperformed following the termination of its partnership with Japan's Honda Motor. However, the motorcycle maker reversed prior losses after Hero's Munjal family bought Honda's 26% stake, which opened up the possibility of new business opportunities. Hindustan Unilever also saw sales grow steadily. The major exception was Infosys Technologies, given its exposure to fiscally troubled Europe and wage pressures at home. To its credit, however, Infosys continued to grow net profits by some 10%.  The Manager, on behalf of the Board, continues to pursue all avenues, including potential legal action, to recover the losses which were incurred from the investment in Satyam, following admission of fraudulent accounting there in 2009.

Particular mention must be made of conglomerate Jardine Strategic. Continued economic growth in Indonesia bolstered its Indonesian unit Astra International, while retail arm Dairy Farm enjoyed good results in its principal markets across Asia. The performance of Swire Pacific, which reported solid revenue growth, was equally pleasing. The conglomerate declared a special dividend to return excess cash to shareholders following the sale of the Festival Walk mall. In addition, recent introduction AIA Group contributed positively by posting higher profits and announcing its first dividend since its listing in Hong Kong. 

The portfolio benefited, too, from the overweight position in Thailand, where political uncertainty prevailed for much of the year. Yet the stock market held up remarkably well, partly on resilient economic data. Investors were also relieved to see a peaceful transition of power after elections in July, which the opposition Puea Thai party led by Yingluck Shinawatra, sister of ousted Prime Minister Thaksin, won decisively.

In the same vein, our two Thai holdings, PTT Exploration and Production (PTTEP) and Siam Cement, recorded healthy performances. Both turned in solid results, while continuing their expansion plans. PTTEP acquired a 40% interest in Statoil's Canadian oil sands project. Siam Cement bought stakes in two Indonesian companies, broadening its presence in Southeast Asia.

Alongside Thailand, our holdings in Taiwan also staged strong advances. Taiwan Semiconductor Manufacturing expects to double its annual output over the next five years as it boosts capacity. Taiwan Mobile also had a positive run, lifted by firm results. 

The main detractor over the year was the underweight position to Korea as the market outperformed the broader region. Our holdings in Korea which include Samsung Electronics, E-mart and regional banks, DGB Financial and BS Financial (formerly Daegu and Busan) broadly kept pace with the market's gain. The Korean auto sector to which we have no exposure benefited both from the short-term impact of production cuts in Japan following the earthquake and tsunami there whilst there has also been a structural benefit from the continued relative strength of the Japanese yen which makes the Korean companies more competitive abroad. Non-holdings, Hyundai Motor, Kia Motors and Hyundai Mobis all performed relatively well. Structurally, we remain underweight to Korea on corporate governance concerns and whilst a relatively cheap market, shareholder returns and dividend yields remain less attractive than we can find elsewhere in the region. The market also remains more cyclical and export driven in nature.

In addition, our holding in the UK-listed lender Standard Chartered, which fared poorly despite posting record results, proved negative. We, however, remain upbeat on its outlook. The emerging market-focused lender complements our other bank holdings given the strong performance of its wholesale division. Asia represents over 70% of group profits and the lender has seen sound underlying growth in both its loan book and deposit base. Its genuinely pan-Asian footprint fits nicely with the largely single country exposure of many of our other bank holdings.

Also hindering performance was our underweight exposure to large, domestically driven Indonesia. Our sole holding there, Unilever Indonesia, lagged the domestic market but the company's operating margins remain relatively stable and its balance sheet robust. Here, it should be noted that apart from Unilever Indonesia, the portfolio has substantial indirect exposure to Indonesia via Jardine Strategic, which owns Astra International. Our other Singapore holdings such as Singapore Telecommunications, Oversea-Chinese Banking Corp and United Overseas Bank, along with Malaysia's CIMB Group, also have operations in Indonesia.

Portfolio Activity

Three new purchases were made over the year: leading trading company Li & Fung based in Hong Kong; life insurer AIA Group, American International Group's Asian arm; and Hong Kong-listed lender HSBC Holdings. Li & Fung, which boasts a top-tier client base, has a proven track record of growing both organically and via acquisitions. AIA's addition provides a broad exposure to the under-developed life insurance industry in Asia. The company has dominant positions in most of its markets and offers good long-term prospects. HSBC has a strong Asian franchise, a robust capital position and is now refocusing on its traditional strengths in Asia having withstood the financial crisis in the West.

As was noted in the interim report, your Manager invested the proceeds from the Convertible Unsecured Loan Stock across several existing positions. Against this, we divested power plant equipment provider ABB India after its parent made an attractive tender offer.

Outlook

Since the year end, stock markets worldwide have faced increasing volatility. While the backdrop for Asia remains relatively benign, global factors have become more unsettling. Europe's sovereign debt stress, for instance, remains a major issue and developed economies could see a more severe downturn ahead. It would, therefore, be prudent to view the future with caution.

Within a troubled world, Asia offers huge attractions. The region's economies, increasingly driven by intra-regional trade and domestic demand, still show considerable momentum. Government and household balance sheets are healthy almost everywhere. True, earnings growth is expected to be lower compared to last year. Already, there are signs of margin compression as cost pressures rise. But valuations are still reasonable and companies continue to be fundamentally sound. In terms of strategy, we will stay focused on well-run companies with sustainable business models and strong finances, in what appears likely to be a challenging period ahead.

Aberdeen Asset Management Asia Limited*

13 October 2011

* on behalf of Aberdeen Asset Managers Limited

Both companies are subsidiaries of Aberdeen Asset Management PLC.

THE INVESTMENT PROCESS 

Philosophy and Style

Our 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, the founding managing director who oversees a team of portfolio managers in Singapore who act as generalists, cross-covering the region. In addition, AAM Asia has offices in Kuala Lumpur, Hong Kong, Sydney, Taipei, Tokyo 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.

Aberdeen Asset Management Asia Limited*

* on behalf of Aberdeen Asset Managers Limited

PERFORMANCE TABLES

	31 August 2011	31 August 2010	% change
Performance
Equity shareholders' funds (£'000)	493,555	471,324	+4.7
MSCI AC Asia (ex Japan) Index (in sterling terms; capital return basis)	590.17	583.85	+1.1
Net asset value per share (including net revenue) (p)	251.37	240.09	+4.7
Share price (p)	230.00	219.00	+5.0
Revenue return per share (p)	4.31	2.62
Total return per share (p)	11.07	62.11
Gearing
Maximum potential gearing (%) {A}	11.3	8.5
Actual gearing (%) {B}	9.9	nil
Discount
Level of discount at which the shares trade (%)	8.5	8.8
Total expense ratio (TER)
- as % of average total assets less current liabilities	1.13	1.28
- as % of average shareholders' funds	1.21	1.28
{A}   Maximum potential gearing ratio is calculated as the total of the liability component of £55.8m of the Convertible Unsecured Loan Stock (2010 - maximum bank loan facility of £40m) divided by net assets.
{B}    Actual gearing ratio calculated as the total of the liability component of £55.8m of the Convertible Unsecured Loan Stock (2010 - nil) less the cash and short term deposits, divided by net assets.

Performance (total return)

	1 year return	3 year return	5 year return
	%	%	%
Share Price	5.8%	62.5%	103.1%
Net Asset Value	5.4%	58.1%	105.0%
MSCI AC Asia ex Japan Index	3.7%	40.4%	79.6%
Performance (capital return)
	1 year return	3 year return	5 year return
	%	%	%
Share Price	5.0%	57.5%	95.3%
Net Asset Value	4.7%	53.7%	97.8%
MSCI AC Asia ex Japan Index	1.1%	29.9%	57.6%
Source: Aberdeen Asset Management, Morningstar & Factset

Changes in Asset Distribution

	Value at 31 August 2010	Purchases	Sales proceeds	Appreciation/ (depreciation)	Value at 31 August 2011
Country	£'000	£'000	£'000	£'000	£'000
China	35,933	3,780	2,149	1,766	39,330
Hong Kong	112,511	42,479	2,989	(33,019)	118,982
India	68,687	19,202	6,624	(1,552)	79,713
Indonesia	9,758	-	1,014	506	9,250
Malaysia	24,719	2,248	5,581	(890)	20,496
Philippines	15,244	368	-	1,165	16,777
Singapore	92,776	15,869	2,832	28,398	134,211
South Korea	36,676	855	-	4,000	41,531
Sri Lanka	15,874	-	-	(645)	15,229
Taiwan	25,288	1,284	-	6,721	33,293
Thailand	30,410	4,078	8,420	6,359	32,427
	_________	_________	_________	_________	_________
Total investments	467,876	90,163	29,609	12,809	541,239
Net current assets	3,448	-	-	4,618	8,066
	_________	_________	_________	_________	_________
Total assets less current liabilities	471,324	90,163	29,609	17,427	549,305
	_________	_________	_________	_________	_________

BUSINESS REVIEW

This Business Review, in conjunction with the rest of the Report and Accounts, 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 in Scotland and is an investment company as defined by Section 833 of the Companies Act 2006.  The Company's registration number is SC106049.

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 HM Revenue and Customs for accounting periods up to and including 31 August 2010.

The Directors are of the opinion, under advice, that the Company has conducted its affairs for the year ended 31 August 2011 so as to be able to obtain approval as an investment trust under Sections 1158-1159 of the Corporation Tax Act 2010 for that year, although approval for the period would be subject to review were there to be any enquiry under the Corporation 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 Company's objective is to achieve long term capital growth through investment in the Far East. The Company's benchmark is the MSCI All Country Asia (ex Japan) Index.  Investments are made in stock markets in the region with the exception of Japan and Australasia, principally in large companies. 

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 for 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: During the year to 31 August 2011 the Company issued £60 million nominal of 3.5% Convertible Unsecured Loan Stock 2018 (CULS).  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 Sections 1158-1159 of the Corporation Tax Act 2010, 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

A record of these measures is disclosed above.  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 employees and 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 accounts 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 and applicable law (UK Generally Accepted Accounting Practice).

Under company law the Directors must not approve the financial statements unless they are satisfied that they 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 adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the 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 complies 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

Allan McKenzie

Chairman

13 October 2011

FINANCIAL STATEMENTS AND NOTES TO THE ACCOUNTS

INCOME STATEMENT (audited)

		Year ended 31 August 2011			Year ended 31 August 2010
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments	9	-	12,809	12,809	-	124,323	124,323
Currency gains		-	460	460	-	205	205
Income	2	17,075	-	17,075	12,067	-	12,067
VAT recovered on investment management fees	3	7	-	7	-	-	-
Investment management fee	3	(5,058)	-	(5,058)	(4,476)	-	(4,476)
Administration expenses	4	(1,185)	-	(1,185)	(1,279)	-	(1,279)
		_______	______	_____	_______	______	_____
Net return before finance costs and taxation		10,839	13,269	24,108	6,312	124,528	130,840
Interest payable and similar charges	5	(1,808)	-	(1,808)	(130)	-	(130)
		_______	______	_____	_______	______	_____
Return on ordinary activities before taxation		9,031	13,269	22,300	6,182	124,528	130,710
Taxation on ordinary activities	6	(574)	-	(574)	(698)	-	(698)
		_______	______	_____	_______	______	_____
Return on ordinary activities after taxation		8,457	13,269	21,726	5,484	124,528	130,012
		_______	______	_____	_______	______	_____
Return per share (pence):	8	4.31	6.76	11.07	2.62	59.49	62.11
		_______	______	_____	_______	______	_____
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 2011	31 August 2010
	Notes	£'000	£'000
Non-current assets
Investments at fair value through profit or loss	9	541,239	467,876
		_____________	_____________
Current assets
Debtors and prepayments	10	2,795	910
Cash and short term deposits		6,930	4,525
		_____________	_____________
		9,725	5,435
		_____________	_____________
Creditors: amounts falling due within one year
Other creditors	11	(1,659)	(1,987)
		_____________	_____________
Net current assets		8,066	3,448
		_____________	_____________
Total assets less current liabilities		549,305	471,324
Non-current liabilities
3.5% Convertible Unsecured Loan Stock 2018	12	(55,750)	-
		_____________	_____________
Net assets		493,555	471,324
		_____________	_____________
Share capital and reserves
Called-up share capital	13	39,269	39,262
Share premium account		4,387	4,285
Special reserve		6,726	6,726
Equity component of 3.5% Convertible Unsecured Loan Stock 2018	12	4,126	-
Capital redemption reserve		16,945	16,945
Capital reserve	14	406,688	393,419
Revenue reserve		15,414	10,687
		_____________	_____________
Equity shareholders' funds	15	493,555	471,324
		_____________	_____________
Net asset value per Ordinary share (pence)	15	251.37	240.09
		_____________	_____________

RECONCILIATION OF MOVEMENT IN SHAREHOLDERS FUNDS (audited)

For the year ended 31 August 2011
		Share		Equity	Capital
	Share	premium	Special	component	redemption	Capital	Revenue
	capital	account	reserve	CULS 2018	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 August 2010	39,262	4,285	6,726	-	16,945	393,419	10,687	471,324
Return on ordinary activities after taxation	-	-	-	-	-	13,269	8,457	21,726
Dividends paid	-	-	-	-	-	-	(3,730)	(3,730)
Issue of 3.5% Convertible Unsecured Loan Stock 2018	-	-	-	4,133	-	-	-	4,133
Issue of new Ordinary shares from conversion of 3.5% Convertible Unsecured Loan Stock 2018	7	102	-	(7)	-	-	-	102
	______	______	______	______	______	______	______	______
Balance at 31 August 2011	39,269	4,387	6,726	4,126	16,945	406,688	15,414	493,555
	______	______	______	______	______	______	______	______
For the year ended 31 August 2010
			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 2009		46,190	4,285	75,770	10,017	268,891	8,921	414,074
Return on ordinary activities after taxation		-	-	-	-	124,528	5,484	130,012
Dividends paid		-	-	-	-	-	(3,718)	(3,718)
Tender offer of own shares		(6,928)	-	(69,044)	6,928	-	-	(69,044)
		______	______	______	______	______	______	______
Balance at 31 August 2010		39,262	4,285	6,726	16,945	393,419	10,687	471,324
		______	______	______	______	______	______	______
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 2011		31 August 2010
	Notes	£'000	£'000	£'000	£'000
Net cash inflow from operating activities	16		10,225		7,036
Servicing of finance
Bank and loan interest paid			(1,191)		(130)
Taxation
Net tax paid			(583)		(867)
Financial investment
Purchases of investments		(90,751)		(32,516)
Sales of investments		28,451		100,251
		_______		_______
Net cash (outflow)/inflow from financial investment			(62,300)		67,735
Equity dividend paid			(3,730)		(3,718)
			_______		_______
Net cash (outflow)/inflow before financing			(57,579)		70,056
Financing
Tender offer of own shares (including expenses)			-		(69,044)
Issue of 3.5% Convertible Unsecured Loan Stock 2018			60,400		-
Expenses re the issue of 3.5% Convertible Unsecured Loan Stock 2018			(876)		-
			_______		_______
Net cash inflow/(outflow) from financing			59,524		(69,044)
			_______		_______
Increase in cash	17		1,945		1,012
			_______		_______
Reconciliation of net cash inflow to movements in net funds
Increase in cash as above			1,945		1,012
Exchange movements			460		205
			_______		_______
Movement in net funds in the year			2,405		1,217
Net funds at 1 September			4,525		3,308
			_______		_______
Net funds at 31 August			6,930		4,525
			_______		_______

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). 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.
	(f)	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.
	(g)	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.
	(h)	Dividends payable
		Final dividends are dealt with in the period in which they are paid.
	(i)	3.5% Convertible Unsecured Loan Stock 2018
		Convertible Unsecured Loan Stock ("CULS") issued by the Company is regarded as a compound instrument, comprising of a liability component and an equity component. At the date of issue, the fair value of the liability component was estimated by assuming that an equivalent non-convertible obligation of the Company would have a coupon rate of 4.662%. The fair value of the equity component, representing the option to convert liability into equity, is derived from the difference between the issue proceeds of the CULS and the fair value assigned to the liability.  The liability component is subsequently measured at amortised cost using the effective cost interest rate.
		Direct expenses associated with the CULS issue are allocated to the liability and equity components in proportion to the split of the proceeds of the issue. Expenses allocated to the liability component are amortised over the life of the instrument.
		The interest expense on the CULS is calculated according to the effective interest rate method by applying the assumed rate of 4.662% at initial recognition to the liability component of the instrument. The difference between this amount and the interest paid is added to the carrying liability of the CULS.
		On conversion of CULS, equity is issued and the liability component is derecognised. The original equity component recognised at inception remains in equity. No gain or loss is recognised on conversion.
		When CULS is repurchased for cancellation, the fair value of the liability at the redemption date is compared to its carrying amount, giving rise to a gain or loss on redemption that is recognised through the revenue column of the Income Statement. The amount of consideration allocated to equity is recognised in equity with no gain or loss being recognised.
		In the event of a winding-up of the Company the rights and claims of the Trustee and CULS holders would be subordinate to the claims of all creditors in respect of the Company's secured and unsecured borrowings, under the terms of the Trust Deed.

		2011	2010
2.	Income	£'000	£'000
	Income from investments{A}
	UK dividend income	653	436
	Overseas dividends	14,791	11,043
	Scrip dividends	1,623	579
		_______	______
		17,067	12,058
		_______	______
	Other income{B}
	Deposit interest	8	9
		_______	______
	Total income	17,075	12,067
		_______	______
	{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.
		2011	2010
	Income from investments	£'000	£'000
	Listed UK	314	436
	Listed overseas	16,753	11,622
		_______	______
		17,067	12,058
		_______	______

		2011			2010
		Revenue	Capital	Total	Revenue	Capital	Total
3.	Investment management fee	£'000	£'000	£'000	£'000	£'000	£'000
	Investment management fee	5,058	-	5,058	4,476	-	4,476
		______	______	______	______	______	_____
	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 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.
	On 5 November 2007, the European Court of Justice ruled that management fees should be exempt from VAT. HMRC announced its intention not to appeal against this case to the UK VAT Tribunal and therefore protective claims which have been made in relation to the Company have now been processed by HMRC.
	The Manager has refunded £7,000 to the Company for VAT charged on investment management fees for the period 1 January 2001 to 31 December 2003 and this has been included in the financial statements for the year ended 31 August 2011. This repayment has been allocated to revenue in line with the accounting policy of the Company for the period in which the VAT was charged.

			2011	2010
4.	Administrative expenses		£'000	£'000
	Share Plan marketing contribution		187	187
	Directors' fees		125	125
	Safe custody fees		406	516
	Auditors' remuneration:
	-	Fees payable to the Company's auditor for the audit of the Company's annual accounts	20	16
	-	Fees payable to the Company's auditor for the review of the Company's half yearly accounts	4	4
	Secretarial fee		93	76
	Other expenses		350	355
			_______	______
			1,185	1,279
			_______	______
	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 ended 31 August 2011 £4,000 (2010 - £4,000) was paid to the auditor for non-audit services which related to further assurance work regarding the interim and regulatory reporting. During the year ended 31 August 2010 an amount of £10,000 was paid to KPMG for services relating to the tender offer and this was reflected within the tender offer of own shares in the Reconciliation of Movements in Shareholders' Funds. ​​​
	The audit fee of £20,000 includes an amount of £5,000 paid to KPMG for additional audit work related to the issue of Convertible Unsecured Loan Stock 2018. ​​​
	No pension contributions were made in respect of any of the Directors.
	The Company does not have any employees.

		2011	2010
5.	Interest payable and similar charges	£'000	£'000
	Loans repayable in less than 1 year	10	130
	Interest on 3.5% Convertible Unsecured Loan Stock 2018	1,337	-
	Notional interest on 3.5% Convertible Unsecured Loan Stock 2018	364	-
	Amortisation of 3.5% Convertible Unsecured Loan Stock 2018 issue expenses	97	-
		_______	______
		1,808	130
		_______	______

			2011			2010
			Revenue	Capital	Total	Revenue	Capital	Total
6.	Taxation		£'000	£'000	£'000	£'000	£'000	£'000
	(a)	Analysis of charge for the year
		Irrecoverable overseas withholding tax	574	-	574	698	-	698
			______	______	____	______	______	____
		Taxation on ordinary activities	574	-	574	698	-	698
			______	______	____	______	______	____
	(b)	Factors affecting the tax charge for the year
		The tax assessed for the year is lower than the effective rate of corporation tax in the UK.
			2011			2010
			Revenue	Capital	Total	Revenue	Capital	Total
			£'000	£'000	£'000	£'000	£'000	£'000
		Return on ordinary activities before taxation	9,031	13,269	22,300	6,182	124,528	130,710
			______	______	____	______	______	____
		Effective rate of corporation tax at 27.17% (2010 - 28%)	2,454	3,605	6,059	1,731	34,868	36,599
		Deduct effect of capital:
		UK dividend income	(178)	-	(178)	(122)	-	(122)
		Gains on investments not taxable	-	(3,480)	(3,480)	-	(34,810)	(34,810)
		Currency gains not taxable	-	(125)	(125)	-	(58)	(58)
		Other non-taxable income	(4,459)	-	(4,459)	(3,254)	-	(3,254)
		Increase in excess expenses and loan relationship deficit	2,183	-	2,183	1,645	-	1,645
		Irrecoverable overseas withholding tax	574	-	574	698	-	698
			______	______	____	______	______	____
		Current tax charge for year	574	-	574	698	-	698
			______	______	____	______	______	____
	(c)	Provision for deferred taxation
		No provision for deferred taxation has been made due to the fact that the Company has approximately £13,912,000 (2010 - £5,875,000) of excess management expenses and loan interest deficits. This is because the Company is not expected to generate taxable income in the future in excess of deductible expenses of that future period, and accordingly, it is unlikely that the Company will be able to reduce future tax liabilities through the use of existing surplus expenses.

7.	Dividends
	In order to comply with the requirements of Sections 1158 -1159 of the Corporation Tax Act 2010 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 Sections 1158 - 1159 are considered. The revenue available for distribution by way of dividend for the year is £8,457,000 (2010 - £5,484,000).
		2011	2010
		£'000	£'000
	Proposed final dividend for 2011 - 3.20p per Ordinary share (2010 - 1.90p)	6,283	3,730
		_______	______
	The final dividend will be paid on 9 December 2011 to shareholders on the register at the close of business on 11 November 2011.  The ex-date is 9 November 2011.

		2011		2010
8.	Return per Ordinary share	£'000	pence	£'000	pence
	Revenue return	8,457	4.31	5,484	2.62
	Capital return	13,269	6.76	124,528	59.49
		_______	______	_______	______
	Total return	21,726	11.07	130,012	62.11
		_______	______	_______	______
	Weighted average Ordinary shares in issue		196,313,144		209,314,267
			_________		_________
	The impact of the 3.5% Convertible Unsecured Loan Stock 2018 issued in January 2011 on both the revenue return per Ordinary share and total return per Ordinary share was anti-dilutive for the year ended 31 August 2011.

		Listed	Listed
		overseas	in UK	Total
9.	Investments	£'000	£'000	£'000
	Fair value through profit or loss:
	Opening book cost	239,964	7,410	247,374
	Opening fair value gains on investments held	217,332	3,170	220,502
		_______	______	_______
	Opening fair value	457,296	10,580	467,876
	Movements in year:
	Purchases at cost	81,684	8,479	90,163
	Sales - proceeds	(29,609)	-	(29,609)
	Sales - gains on sales	16,031	-	16,031
	Current year fair value gains/(losses) on investments held	287	(3,509)	(3,222)
		_______	______	_______
	Closing fair value	525,689	15,550	541,239
		_______	______	_______
		Listed	Listed
		overseas	in UK	Total
		£'000	£'000	£'000
	Closing book cost	308,070	15,889	323,959
	Closing fair value gains/(losses) on investments held	217,619	(339)	217,280
		_______	______	_______
	Closing fair value	525,689	15,550	541,239
		_______	______	_______
			2011	2010
			£'000	£'000
	Listed on a recognised overseas investment exchange		525,689	457,296
	Listed in the UK		15,550	10,580
			_______	______
			541,239	467,876
			_______	______
			2011	2010
	Gains on investments held at fair value through profit or loss		£'000	£'000
	Realised gains on sales		16,031	40,630
	(Decrease)/increase in fair value gains on investments held		(3,222)	83,693
			_______	______
			12,809	124,323
			_______	______
	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:
			2011	2010
			£'000	£'000
	Purchases		209	111
	Sales		70	268
			_______	______
			279	379
			_______	______

		2011	2010
10.	Debtors and prepayments	£'000	£'000
	Accrued income	1,497	769
	Amounts due from brokers	1,231	73
	Overseas withholding tax recoverable	9	-
	Other debtors and prepayments	58	68
		_______	______
		2,795	910
		_______	______

		2011	2010
11.	Creditors: amounts falling due within one year	£'000	£'000
	Amounts due to brokers	-	588
	Other creditors	1,659	1,399
		_______	______
		1,659	1,987
		_______	______
	A 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 facility commenced on 30 September 2008 and ended on 29 September 2010.

12.	Non-current liabilities
		Number	Liability	Equity
		of units	component	component
	3.5% Convertible Unsecured Loan Stock 2018	£'000	£'000	£'000
	Balance at beginning of year	-	-	-
	Issue of 3.5% Convertible Unsecured Loan Stock 2018	60,000	55,894	4,106
	Premium on issue	-	373	27
	Expenses of the Issue	-	(816)	-
	Conversion of 3.5% Convertible Unsecured Loan Stock 2018 into Ordinary shares	(109)	(102)	(7)
	Amortisation of discounts and issue expenses (see note 1(i))	-	401	-
		_______	______	______
	Balance at end of year	59,891	55,750	4,126
		_______	______	______
	On 12, 26 and 27 January 2011, the Company issued a total of £60,000,000 nominal amount of 3.5% Convertible Unsecured Loan Stock 2018. The loan stock can be converted at the election of holders into Ordinary Shares during the months of January and July each year throughout their life, commencing 31 July 2011 to January 2018 at a rate of 1 Ordinary Share for every 310.1528p nominal of 3.5% Convertible Unsecured Loan Stock 2018. Once 80% of the CULS issued have been converted the Company is allowed to request that holders redeem or convert the remainder. Interest is paid on the 3.5% Convertible Unsecured Loan Stock 2018 on 31 January and 31 July each year, commencing 31 July 2011. 100% of the interest is charged to revenue in line with the Board's expected long-term split of returns from the investment portfolio of the Company. ​​​
	On 11 August 2011 the Company converted £108,987 nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 into 35,131 Ordinary shares.
	As at 31 August 2011, there was £59,891,013 nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 in issue.

		2011	2010
13.	Called up share capital	£'000	£'000
	Authorised
	325,000,000 (2010 - 325,000,000) Ordinary shares of 20p	65,000	65,000
	Called-up, allotted and fully paid:
	Ordinary shares of 20p
	Opening balance of 196,311,219 (2010 - 230,954,375) shares	39,262	46,190
	Buyback of 34,643,156 shares on tender offer of own shares	-	(6,928)
	Issue of 35,131 shares on Conversion of 3.5% Convertible Unsecured Loan Stock 11 August 2011	7	-
		______	______
	Closing balance of 196,346,350 (2010 - 196,311,219) shares	39,269	39,262
		______	______

		2011	2010
14.	Capital reserve	£'000	£'000
	At 1 September	393,419	268,891
	Movement in fair value gains	12,809	124,323
	Foreign exchange movement	460	205
		______	______
	At 31 August	406,688	393,419
		______	______
	The capital reserve includes investment holding gains amounting to £217,280,000 (2010 - £220,502,000), as disclosed in note 9.

15.	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:
		2011	2010
	Net assets attributable (£'000)	493,555	471,324
	Number of Ordinary shares in issue	196,346,350	196,311,219
	Net asset value per share (p)	251.37	240.09
	The impact of the 3.5% Convertible Unsecured Loan Stock 2018 issued in January 2011 on the net asset value per share was anti-dilutive for the year ended 31 August 2011.

16.	Reconciliation of net return before finance costs and	2011	2010
	taxation to net cash inflow from operating activities	£'000	£'000
	Net return before finance costs and taxation	24,108	130,840
	Adjusted for:
	Gains on investments	(12,809)	(124,323)
	Currency gains	(460)	(205)
	(Increase)/decrease in accrued income	(728)	561
	Decrease/(increase) in other debtors	10	(3)
	Increase in sundry creditors including management fee due	104	166
		______	______
	Net cash inflow from operating activities	10,225	7,036
		______	______

		1 September	Cash	Currency	31 August
		2010	flow	movements	2011
17.	Analysis of changes in net funds	£'000	£'000	£'000	£'000
	Cash and short term deposits	4,525	1,945	460	6,930
		______	______	______	______
	Net funds	4,525	1,945	460	6,930
		______	______	______	______

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, Convertible Unsecured Loan Stock, 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 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 2011			Years			%	£'000	£'000
	Assets
	Indian Rupee			-			-	-	48
	Taiwanese Dollar			-			-	-	13
	UK Sterling			-			0.44	-	6,682
	US Dollar			-			0.10	-	187
				______			______	______	______
	Total assets			n/a			n/a	-	6,930
				______			______	______	______
	Liabilities
	3.5% Convertible Unsecured Loan Stock 2018			6.33			3.50	55,750	-
				______			______	______	______
	Total liabilities			n/a			n/a	55,750	-
				______			______	______	______
				Weighted average			Weighted
				period for which			average	Fixed	Floating
				rate is fixed			interest rate	rate	rate
	At 31 August 2010			Years			%	£'000	£'000
	Assets
	Indian Rupee			-			-	-	50
	UK Sterling			-			0.25	-	902
	US Dollar			-			-	-	3,573
				______			______	______	______
				n/a			n/a	-	4,525
				______			______	______	______
	The weighted average interest rate is based on the current yield of each asset, weighted by its market value.
	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 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 2011					31 August 2010
			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	142,762	-		142,762		137,864	-	137,864
	Indian Rupee	79,713	48		79,761		68,687	50	68,737
	Indonesian Rupiah	9,250	-		9,250		9,758	-	9,758
	Korean Won	41,531	-		41,531		36,676	-	36,676
	Malaysian Ringgit	20,496	-		20,496		24,719	-	24,719
	Philippine Peso	16,777	-		16,777		15,244	-	15,244
	Singapore Dollar	134,211	-		134,211		92,776	-	92,776
	Sri Lankan Rupee	15,229	-		15,229		15,874	-	15,874
	Sterling	15,550	6,682		22,232		10,580	902	11,482
	Taiwanese Dollar	33,293	13		33,306		25,288	-	25,288
	Thailand Baht	32,427	-		32,427		30,410	-	30,410
	US Dollar	-	187		187		-	3,573	3,573
		______	______		______		______	______	______
	Total	541,239	6,930		548,169		467,876	4,525	472,401
		______	______		______		______	______	______
	{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 2011 would have increased/decreased by £54,124,000 (2010 - increased/decreased by £46,788,000) 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. 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 2011 are shown in note 11.
	Short-term flexibility can be achieved through the use of loan and overdraft facilities, details of which can be found in note 11. Details of the Board's policy on gearing are shown in the interest rate risk section of this note.
	Liquidity risk exposure
	At 31 August 2011 the Company had borrowings in the form of the £59,891,013 nominal of 3.5% Convertible Unsecured Loan Stock 2018 (2010 - £nil borrowings).
	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:
					2011			2010
					Balance	Maximum		Balance	Maximum
					Sheet	exposure		Sheet	exposure
	Current assets				£'000	£'000		£'000	£'000
	Loans and receivables				2,795	2,795		910	910
	Cash at bank and in hand				6,930	6,930		4,525	4,525
					______	______		______	______
					9,725	9,725		5,435	5,435
					______	______		______	______
	None of the Company's financial assets is past due or impaired.
	Maturity of financial liabilities
	The maturity profile of the Company's financial liabilities at 31 August was as follows:
								2011	2010
								£'000	£'000
	In less than one year							-	-
	In more than one year							55,750	-
								______	______
								55,750	-
								______	______

20.	Fair value hierarchy
	The Company adopted the amendments to FRS 29 'Financial Instruments: Disclosures' effective from 1 January 2009. These amendments require an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy shall have the following levels:
	-        Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
	-        Level 2: inputs other than quoted prices included within Level 1 that are observable for the assets or liability, either directly (ie as prices) or indirectly (ie derived from prices); and
	-        Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
	The financial assets and liabilities measured at fair value in the Balance Sheet are grouped into the fair value hierarchy at the Balance Sheet date as follows:
	As at 31 August 2011		Level 1	Level 2	Level 3	Total
		Note	£'000	£'000	£'000	£'000
	Financial assets at fair value through profit or loss
	Quoted equities	a)	541,239	-	-	541,239
			______	______	______	______
	As at 31 August 2010		Level 1	Level 2	Level 3	Total
		Note	£'000	£'000	£'000	£'000
	Financial assets at fair value through profit or loss
	Quoted equities	a)	467,876	-	-	467,876
			______	______	______	______
	a) Quoted equities
	The fair value of the Company's investments in quoted equities have been determined by reference to their quoted bid prices at the reporting date. Quoted equities included in Fair Value Level 1 are actively traded on recognised stock exchanges.

21.     The Annual General Meeting will be held on 7 December 2011 at 40 Princes Street, Edinburgh.

22.     The Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 31 August 2011 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 2011 and 2010 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 2010 is derived from the statutory accounts for 2010 which have been delivered to the Registrar of Companies. The 2011 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

 

 

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