Half-year Report

RNS Number : 3017D

Edinburgh Dragon Trust plc

26 April 2017

 

26 April 2017

EDINBURGH DRAGON TRUST PLC

HALF YEARLY FINANCIAL REPORT

FOR THE SIX MONTHS ENDED 28 FEBRUARY 2017

Edinburgh Dragon Trust's objective is long-term capital growth through investment in Asia, with the exception of Japan and Australasia.  Investments are made primarily in stock markets in the region, principally in large companies.  When appropriate, the Company will utilise gearing to maximise long term returns.

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

·      The Company's net asset value rose by 8.0% in sterling terms on a total return basis, compared to a rise of 10.1% in the benchmark index.   Against a background of market volatility, the improvement in the Company's performance was encouraging, despite the slight underperformance during the period.

·      The Asian region is still growing faster than the rest of the world. The region's large and growing middle class remain supportive of consumption and domestic demand, underpinning longer-term prospects for economic growth and corporate earnings.

·      Against a background of global macroeconomic and political uncertainties, the Manager remains focused on quality and value, with actions driven by what they see at the stock level.

For further information please contact:-

Adrian Lim, Senior Investment Manager, Aberdeen Asset Management Asia                              0065 6395 2700

 

INTERIM BOARD REPORT - CHAIRMAN'S STATEMENT

Background

In the six months under review, your Company's net asset value grew by 8.0% on a total return basis while the share price rose 8.5%, versus the benchmark MSCI AC Asia ex Japan Index's gain of 10.1%. The discount widened marginally from 13.4% to 13.6%.  Despite the slight underperformance during the period, it is heartening to note that your Company's performance is improving and in the 12 months to the time of writing the Company's NAV performance was ahead of our benchmark.  During the period the relatively light exposure to China and Taiwan detracted from performance, largely mitigated by positive contributions from the portfolio holdings in Hong Kong and Singapore.

Overview

Asian equities started the period on a promising note, benefiting from the continued influx of liquidity from the West towards higher-yielding emerging markets. This was largely due to expectations that US interest rates would stay lower for longer and lingering uncertainty over how the UK would handle its exit from Europe.

In November, the market advance was halted temporarily by Donald Trump's US presidential win, which caused initial consternation among investors, given his protectionist leanings and its potential impact on trade-dependent Asia. Further pressure came from the US Federal Reserve, which hinted at accelerating its tightening after raising rates in December, given the steady improvements in the US economy. This deepened concerns about the US dollar denominated debt servicing burden of some Asian borrowers and potential investment cutbacks by companies. Also destabilising markets was India's unprecedented demonetisation, which cancelled more than 80% of the country's currency notes in circulation and caused a severe cash crunch in the short term.

Subsequently, markets rebounded as investors favoured the narrative of faster US growth, underpinned by Trump's promises on tax cuts and fiscal spending despite the dearth of details. A stabilising Chinese economy and receding worries over the yuan also influenced sentiment, as Beijing prioritised growth support ahead of a key party congress in late 2017 to choose its future leaders. This spurred a rebound in oil prices, along with OPEC's deal to cut output upon Saudi Arabia's volte face following attempts to wipe out less efficient producers.

Portfolio

Your Company's holdings in both Hong Kong and Singapore contributed positively to returns. This was driven by financial stocks and expectations of better earnings, while the property sector in Singapore was also supported by reasonable valuations and brisk M&A activity. The Singapore banks, as well as HSBC and Standard Chartered in Hong Kong, rose on hopes of better loan spreads and an upswing in credit cycles. ST Engineering's share price bounced following impressive fourth-quarter results. Among the Company's Hong Kong holdings, Jardine Strategic was supported by expectations that it would be included in the MSCI Hong Kong Index. Dairy Farm benefited from analyst upgrades, while ASM Pacific Technology and Hang Lung Group also contributed positively.

Your Company's underweight exposure to China detracted from performance, as the mainland market rebounded on better economic data and receding fears of capital outflows. Not holding state lenders and insurers also proved costly. While your Manager remains circumspect about investing in the mainland, their concerns over quality and corporate governance have begun to recede. This reflects their recognition of the gradual corporate governance improvements by companies, which have also demonstrated their resilience amid soft domestic demand in recent years. Valuations are not cheap, however. As a result, your Manager has been discriminating and introduced a number of A-share holdings, including Hangzhou Hikvision, the biggest mainland maker of video surveillance products; Kweichow Moutai, a Chinese spirits producer that boasts a dominant brand and a cash-generative business; Shanghai International Airport, which operates Shanghai Pudong Airport, the hub of the Yangtze River Delta; Yum China, listed in the US was also added: this is  a restaurant group that runs the KFC and Pizza Hut chains in China  backed by a net-cash balance sheet. Against this, your Manager capitalised on the commodity rebound to exit PetroChina.

The underweight exposure to Taiwan, which performed well, largely on the back of a re-rating of the technology sector also detracted from performance.  The Company's core holding, Taiwan Mobile, underperformed as the prospect of higher interest rates led to a reallocation of assets away from yield plays.

Elsewhere, the overweight position in the Philippines proved costly. The market fell on profit taking after a prolonged rally and our holdings - Bank of the Philippine Islands (BIS) and Ayala Land - lagged the market. Despite that, your Manager is comfortable holding both companies. BIS is conservatively run with healthy net interest margins and a large diversified loan book, while Ayala Land has solid cash flow and is attractively valued, backed by a growing land bank and well-respected brand.

Your Company has a significant position in India, which was among the weaker regional markets. The swift demonetisation of all 500 and 1000 Rupee notes (in an effort to shrink the shadow economy) initially weighed on sentiment, notably hurting the consumer and cement sectors, given that transactions in those sectors are mostly cash-based. Our exposure to those sectors, via holdings such as motorcycle distributor Hero MotoCorp and mortgage lender HDFC, hindered performance. Despite the short-term impact, your Manager views demonetisation as a bold and positive move over the longer term, which should help to modernise tax collection and the financial system. In their recent engagement with domestic companies, your Manager has concluded that the worst appears to be over, even though corporate earnings could remain affected by sluggish demand for another quarter or two. Encouragingly, the latest results season showed that most of your Company's underlying holdings have held up during the transition. The Manager believes that India remains among the best markets in Asia in which to invest, in terms of quality. Underlining this conviction, they introduced Hindustan Unilever into the portfolio, which provides exposure to domestic consumption and has a well-established distribution network.

In other key portfolio transactions, your Manager exited small positions in Korean regional banks DGB and BNK, which are solidly run but have seen their growth prospects thwarted by challenging market conditions. They also pared Hong Kong-based apparel company Global Brands Group and Korean department store group Shinsegae, given the difficult retail operating environment.

On the engagement front, your Manager voted in favour of the resolution to remove Cyrus Mistry as chairman of Tata Consultancy Services (TCS), with a view towards allowing management to get on with business, and continues to engage the group on other governance issues. TCS has since posted upbeat growth, on the back of good performance in its Latin American and Indian businesses.

In Korea, regulatory scrutiny has been relentless on the Samsung Group, where heir apparent Lee Jae-yong is under arrest for bribery. Your Manager, however, believes that Samsung Electronics, which is held by the Company, is well placed to weather the uncertainty, given its efforts to become more accountable to minority shareholders. Apart from a potential restructuring, Samsung Electronics is forming a corporate governance committee, enhancing the international composition of its independent directors and looking at returning more cash to shareholders. As your Manager has long engaged with Samsung Electronics on this front, they view these moves as positive in raising overall governance standards. The way in which Samsung handled the Galaxy 7 product recall provided added comfort, in terms of its commitment to quality.

Gearing

The Company's gearing is provided by the 3.5% Convertible Unsecured Loan Stock 2018 ("CULS") of £59.1 million nominal at the period end, representing gearing of 6.1%.  The CULS provides the Company with long-term structural gearing at an acceptable cost, which is in line with the Manager's long-term investment philosophy.  The Board will undertake a review of the Company's gearing strategy prior to the expiry of the CULS in January 2018. 

Discounts and Share Buybacks

During the period discount volatility continued to feature within Dragon's peer group.  The discount at the end of February 2017 was 13.6% compared to 13.4% at the year end.  The Board has demonstrated its commitment to the buying back of shares.  During the six months ended 28 February 2017, 1.79 million shares were bought back into treasury at a cost of £5.6 million.  Since the period end, a further 765,200 shares have been bought back into treasury at a cost of £2.6 million. 

Revenue Account

For the six months to 28 February 2017, the revenue account recorded a deficit on ordinary activities after taxation of £665,000, representing (0.35p) per share compared with a deficit of £742,000 for the six months to 29 February 2016.  The majority of the Company's portfolio income, as is typical with Asian equities, is accounted for in the second half of the Company's financial year and the Company anticipates making a positive revenue return for its full financial year. 

Manager

The Board has noted the proposed recommended merger between the Manager's parent company, Aberdeen Asset Management PLC, and Standard Life PLC. Any deal will take some time to complete and will be subject to shareholder and regulatory approvals.

Outlook

Asian markets have continued to strengthen, given the Fed's well-signaled rate hike in March and chairman Yellen's reassurances of a gradual pace of tightening even if inflation were to overshoot its 2% target. China, South Korea and Taiwan reported better news on exports indicative of more positive signs for global trade. Investors are also hopeful that the US economy will accelerate under Trump, boosting demand for goods and services from the rest of the world, including Asia, despite his protectionist stance. Your Manager is seeing signs of recovery in revenues at the corporate level.

That said, key risks cloud the outlook. In Europe, the potential for political disruption remains high with elections in France and Germany and a General Election in the United Kingdom later this year. In Asia, China's strained ties with South Korea over a US missile system and North Korea's provocative acts have ratcheted up geopolitical tensions. Meanwhile, regional central banks will be monitoring the impact of higher US interest rates and the direction of the US dollar on their currencies, as well as possible tightening if price pressures build up rapidly. Another concern would be China, as Beijing continues to face a delicate balancing act in sustaining moderate growth while averting systemic risk from swelling corporate debt.

Amid the macroeconomic and political noise, your Manager remains focused on quality and value, with actions driven by what they see at the stock level. They remain confident that your Company's holdings have solid fundamentals which will support them during challenging periods. On a broader level, the region is still growing faster than the rest of the world. Its large and growing middle class will be supportive of consumption and domestic demand, underpinning longer-term prospects for economic growth and corporate earnings.

For Edinburgh Dragon Trust plc

Allan McKenzie

Chairman

25 April 2017

INTERIM BOARD REPORT - OTHER

Principal Risks and Uncertainties

There are a number of risks which, if realised, could have a material adverse effect on the Company and its financial position, performance and prospects. The Board has identified the principal risks and uncertainties facing the Company which can be summarised under the following headings:

· Concentration Risk

· Resource

· Investment and Market

· Gearing

· Regulatory

· Discount volatility

· Reliance on Third Party Service Providers

Details of these risks and a description of the mitigating action which the Company has taken are provided in detail on page 9 of the 2016 Annual Report.  The principal risks have not changed nor are they expected to change in the second half of the financial year ended 31 August 2017.

There are also a large number of international political and economic uncertainties which could have an impact on the performance of Asian markets.

Going Concern

The financial statements have been prepared on a going concern basis. The Directors consider this is the appropriate basis as the Company has adequate resources to continue in operational existence for the foreseeable future. In considering this, the Directors took into account the portfolio of readily realisable securities and the ability of the Company to meet all its liabilities and ongoing expenses from its assets.

Responsibility Statement of the Directors in Respect of the Half Yearly Financial Report

The Directors are responsible for preparing the Half Yearly Financial Report in accordance with applicable laws and regulations. The Directors confirm that to the best of their knowledge:

· the condensed set of financial statements within the Half Yearly Financial Report has been prepared in accordance with the statement "Half Yearly Financial Reports" issued by the UK Accounting Standards Board;

· the Interim Board Report (constituting the interim management report) includes a fair review of the information required by rule 4.2.7R of the UK Listing Authority Disclosure and Transparency Rules (being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year) and 4.2.8R (being related party transactions that have taken place during the first six months of the financial year and that have materially affected the financial position of the Company during that period; and any changes in the related party transactions described in the last Annual Report that could so do).

The Half Yearly Financial Report for the six months to 28 February 2017 comprises the Interim Board Report, the Directors' Responsibility Statement and the condensed set of Financial Statements.

For Edinburgh Dragon Trust plc

Allan McKenzie

Chairman

25 April 2017

FINANCIAL HIGHLIGHTS

	28 February 2017	31 August 2016	% change
Equity shareholders' funds (£'000)	708,192	664,159	+6.6
Net asset value per share	375.2p	348.6p	+7.6
Share price (mid-market)	324.0p	302.0p	+7.3
MSCI AC Asia (ex Japan) Index (in sterling terms; capital return basis)	848.5	776.1	+9.3
Discount to net asset value	13.6%	13.4%
Net gearing A	6.1%	6.9%
A Calculated in accordance with AIC guidance "Gearing Disclosures post RDR".

Performance (total return^B)

	Six months ended 28 February 2017	Year ended 31 August 2016
Share price per share	+8.5%	+29.7%
Net asset value per share	+8.0%	+31.9%
MSCI All Country Asia (ex Japan) Index (in sterling terms)	+10.1%	+33.0%
B Capital return plus dividends reinvested.

INVESTMENT PORTFOLIO

As at 28 February 2017

				Total
			Valuation	assets
Company	Industry	Country	£'000	%
Samsung Electronics (Pref)	Technology Hardware Storage & Peripherals	South Korea	39,752	5.2
Taiwan Semiconductor Manufacturing Company	Semiconductors & Semiconductor Equipment	Taiwan	34,632	4.5
Jardine Strategic Holdings	Industrial Conglomerates	Hong Kong	34,168	4.5
Oversea-Chinese Banking Corporation	Banks	Singapore	30,228	3.9
Housing Development Finance Corp	Thrifts & Mortgage Finance	India	29,724	3.9
AIA Group	Insurance	Hong Kong	26,745	3.5
Singapore Telecommunications	Diversified Telecommunication Services	Singapore	23,155	3.0
City Developments	Real Estate Management & Development	Singapore	22,933	3.0
Siam Cement (Foreign)	Construction Materials	Thailand	22,500	2.9
China Mobile	Wireless Telecommunication Services	China	20,036	2.6
Ten largest investments			283,873	37.0
Swire Pacific 'B'	Real Estate Management & Development	Hong Kong	19,975	2.6
Grasim Industries	Construction Materials	India	18,209	2.4
Taiwan Mobile	Wireless Telecommunication Services	Taiwan	17,922	2.3
ITC	Tobacco	India	17,711	2.3
Bank Central Asia	Banks	Indonesia	16,714	2.2
Standard Chartered{A}	Banks	United Kingdom	16,320	2.1
Singapore Technologies Engineering	Aerospace & Defence	Singapore	15,910	2.1
HSBC Holdings	Banks	Hong Kong	15,751	2.0
Keppel Corp	Industrial Conglomerates	Singapore	15,474	2.0
United Overseas Bank	Banks	Singapore	15,201	2.0
Twenty largest investments			453,060	59.0
Ayala Land	Real Estate Management & Development	Philippines	14,978	2.0
Bank of Philippine Islands	Banks	Philippines	13,677	1.8
John Keells Holdings	Industrial Conglomerates	Sri Lanka	13,421	1.7
Naver Corp	Internet Software & Services	South Korea	13,051	1.7
Tata Consultancy Services	IT Services	India	12,202	1.6
Astra International	Automobiles	Indonesia	11,612	1.5
Dairy Farm International	Food & Staples Retailing	Hong Kong	11,559	1.5
Piramal Enterprises	Pharmaceuticals	India	11,376	1.5
DBS Group	Banks	Singapore	11,303	1.5
Hong Kong Exchanges & Clearing	Capital Markets	Hong Kong	11,241	1.5
Thirty largest investments			577,480	75.3
Hero Motocorp	Automobiles	India	10,981	1.4
Hang Lung Group	Real Estate Management & Development	Hong Kong	9,714	1.3
Hang Lung Properties	Real Estate Management & Development	Hong Kong	9,178	1.2
E-Mart Co	Food & Staples Retailing	South Korea	8,401	1.1
Kweichow Moutai 'A'	Beverages	China	7,698	1.0
Public Bank	Banks	Malaysia	7,669	1.0
Shanghai International Airport 'A'	Transportation Infrastructure	China	7,405	1.0
ASM Pacific Technology	Semiconductors & Semiconductor Equipment	Hong Kong	7,225	0.9
Unilever Indonesia	Household Products	Indonesia	7,177	0.9
Infosys Ltd	IT Services	India	6,751	0.9
Forty largest investments			659,679	86.0
CNOOC	Oil, Gas & Consumable Fuels	China	6,523	0.9
CIMB Group Holdings	Banks	Malaysia	6,466	0.8
Yum China Holdings	Hotels, Restaurants & Leisure	China	6,410	0.8
China Conch Venture	Machinery	China	6,141	0.8
Swire Properties	Real Estate Management & Development	Hong Kong	6,018	0.8
MTR Corp	Road & Rail	Hong Kong	5,669	0.7
Amorepacific Corp (Pref)	Personal Products	South Korea	5,656	0.7
Kerry Logistics Network	Air Freight & Logistics	Hong Kong	5,362	0.7
British American Tobacco Malaysia	Tobacco	Malaysia	5,078	0.7
Holcim Indonesia	Construction Materials	Indonesia	4,991	0.7
Fifty largest investments			717,993	93.6
Yoma Strategic Holdings	Real Estate Management & Development	Singapore	4,893	0.6
Oriental Holdings	Automobiles	Malaysia	4,287	0.6
HDFC Bank	Banks	Indonesia	4,186	0.5
Vietnam Dairy Products	Food Products	Vietnam	3,776	0.5
DFCC Bank	Banks	Sri Lanka	3,622	0.5
Ultratech Cement	Construction Materials	India	3,402	0.4
Hindustan Unilever	Personal Products	India	3,077	0.4
ICICI Bank	Banks	India	2,725	0.4
Batu Kawan	Chemicals	Malaysia	2,287	0.3
Amorepacific Group	Personal Products	South Korea	860	0.1
Kotak Mahindra Bank	Banks	India	450	0.1
Hangzhou Hikvision Digital 'A'	Electronic Equipment, Instruments & Components	China	1	-
Total investments			751,559	98.0
Net current assets{B}			15,744	2.0
Total assets less current liabilities{B}			767,303	100.0
{A} Valuation amalgamates both UK (£14,281,000) and Hong Kong (£2,039,000) listed equity holdings.
{B} Excluding 3.5% Convertible Unsecured Loan Stock 2018

CONDENSED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

	Six months ended
	28 February 2017
	Revenue	Capital	Total
	£'000	£'000	£'000
Gains/(losses) on investments	-	56,530	56,530
Net currency losses	-	(269)	(269)
Income (note 2)	4,436	-	4,436
Investment management fee	(2,891)	-	(2,891)
Administrative expenses	(626)	-	(626)
	_________	_________	_________
Net return/(loss) before finance costs and taxation	919	56,261	57,180
Interest payable and other charges	(1,350)	-	(1,350)
	_________	_________	_________
(Loss)/return on ordinary activities before taxation	(431)	56,261	55,830
Taxation (note 3)	(234)	-	(234)
	_________	_________	_________
(Loss)/return on ordinary activities after taxation	(665)	56,261	55,596
	_________	_________	_________
Return per Ordinary share (pence)(note 4)
Basic	(0.35)	29.65	29.30
	_________	_________	_________
Diluted	n/a	26.92	27.21
	_________	_________	_________
The total columns of this statement represent the profit and loss account of the Company.
All revenue and capital items in the above statement derive from continuing operations.

	Six months ended
	29 February 2016
	Revenue	Capital	Total
	£'000	£'000	£'000
(Losses)/gains on investments	-	(2,481)	(2,481)
Net currency losses	-	(70)	(70)
Income (note 2)	3,906	-	3,906
Investment management fee	(2,556)	-	(2,556)
Administrative expenses	(503)	-	(503)
	_________	_________	_________
Net return before finance costs and taxation	847	(2,551)	(1,704)
Interest payable and other charges	(1,358)	-	(1,358)
	_________	_________	_________
Return on ordinary activities before taxation	(511)	(2,551)	(3,062)
Taxation (note 3)	(231)	-	(231)
	_________	_________	_________
Return on ordinary activities after taxation	(742)	(2,551)	(3,293)
	_________	_________	_________
Return per Ordinary share (pence)(note 4)
Basic	(0.38)	(1.32)	(1.70)
	_________	_________	_________
Diluted	n/a	n/a	n/a
	_________	_________	_________
The total columns of this statement represent the profit and loss account of the Company.
All revenue and capital items in the above statement derive from continuing operations.

CONDENSED STATEMENT OF FINANCIAL POSITION

		As at	As at
		28 February 2017	31 August 2016
	Notes	£'000	£'000
Non-current assets
Investments at fair value through profit or loss		751,559	710,134
		_________	_________
Current assets
Debtors and prepayments		2,681	2,610
Money market funds		11,800	7,700
Cash and short term deposits		4,042	4,603
		_________	_________
		18,523	14,913
		_________	_________
Creditors: amounts falling due within one year
Other creditors		(2,779)	(2,006)
3.5% Convertible Unsecured Loan Stock 2018	10	(59,111)	-
		_________	_________
		(61,890)	(2,006)
		_________	_________
Net current (liabilities)/assets		(43,367)	12,907
		_________	_________
Total assets less net current liabilities		708,192	723,041
		_________	_________
Creditors: amounts falling due after more than one year
3.5% Convertible Unsecured Loan Stock 2018		-	(58,882)
		_________	_________
Net assets		708,192	664,159
		_________	_________
Capital and reserves
Called-up share capital		39,207	39,207
Share premium account		4,584	4,492
Equity component of 3.5% Convertible Unsecured Loan Stock 2018	10	520	812
Capital redemption reserve		17,015	17,015
Capital reserve	6	622,949	572,266
Revenue reserve		23,917	30,367
		_________	________
Equity shareholders' funds		708,192	664,159
		_________	________
Net asset value per Ordinary share (pence)
Basic	7	375.21	348.62
		_________	________
Diluted	7	368.88	344.66
		_____________	_________

CONDENSED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

Six months ended 29 February 2017

			Share	Equity	Capital
		Share	premium	component	redemption	Capital	Revenue
		capital	account	CULS 2018	reserve	reserve	reserve	Total
		£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 August 2016		39,207	4,492	812	17,015	572,266	30,367	664,159
Return on ordinary activities after taxation		-	-	-	-	56,261	(665)	55,596
Dividend paid		-	-	-	-	-	(6,077)	(6,077)
Issue of new Ordinary shares from conversion of 3.5% Convertible Unsecured Loan Stock 2018		-	92	-	-	-	-	92
Buyback of Ordinary shares for treasury		-	-	-	-	(5,578)	-	(5,578)
Transfer of notional interest element on 3.5% Convertible Unsecured Loan Stock 2018		-	-	(292)	-	-	292	-
		_____	_____	_____	_____	_____	_____	_____
Balance at 28 February 2017		39,207	4,584	520	17,015	622,949	23,917	708,192
		_____	_____	_____	_____	_____	_____	_____
Six months ended 29 February 2016
		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 2015	39,206	4,484	351	1,392	17,015	429,266	26,921	518,635
Return on ordinary activities after taxation	-	-	-	-	-	(2,551)	(742)	(3,293)
Dividend paid	-	-	-	-	-	-	(5,788)	(5,788)
Issue of new Ordinary shares from conversion of 3.5% Convertible Unsecured Loan Stock 2018	-	7	-	-	-	-	-	7
Buyback of Ordinary shares for treasury	-	-	(351)	-	-	(4,088)	-	(4,439)
Transfer of notional interest element on 3.5% Convertible Unsecured Loan Stock 2018	-	-	-	(293)	-	-	293	-
	_____	_____	_____	_____	_____	_____	_____	_____
Balance at 29 February 2016	39,206	4,491	-	1,099	17,015	422,627	20,684	505,122
	_____	_____	_____	_____	_____	_____	_____	_____

CONDENSED STATEMENT OF CASH FLOWS

	Six months ended	Six months ended
	28 February 2017	29 February 2016
	£'000	£'000
Operating activities
Net return/(loss) on ordinary activities before finance costs and taxation	57,180	(1,704)
Adjustments for:
(Gains)/losses on investments	(56,530)	2,481
Currency losses	269	70
(Increase)/decrease in accrued dividend income	(59)	1,045
Decrease/(increase) in other debtors	57	(70)
Increase in other creditors	55	17
Overseas withholding tax	(75)	32
Stock dividends included in investment income	(1,079)	(9)
	_________	_________
Net cash (outflow)/inflow from operating activities	(182)	1,862
Investing activities
Purchases of investments	(84,144)	(40,533)
Sales of investments	96,735	50,845
Purchases of money market funds	26,800	10,800
Sales of money market funds	(22,700)	(14,600)
	_________	_________
Net cash flow from investing activities	16,691	6,512
Financing activities
Interest paid	(1,046)	(1,046)
Dividends paid	(6,077)	(5,788)
Buyback of own shares to treasury	(5,578)	(4,439)
	_________	_________
Net cash outflow used in financing activities	(12,701)	(11,273)
	_________	_________
Increase/(decrease) in cash and cash equivalents	3,808	(2,899)
	_________	_________
Analysis of changes in cash and cash equivalents during the period
Opening balance	12,303	9,176
Effect of exchange rate fluctuations on cash held	(269)	(70)
Increase/(decrease) in cash as above	3,808	(2,899)
	_________	_________
Closing balance	15,842	6,207
	_________	_________

NOTES TO THE FINANCIAL STATEMENTS

1.	Accounting policies
	Basis of preparation
	The condensed financial statements have been prepared in accordance with Financial Reporting Standard 104 (Interim Financial Reporting) and with the Statement of Recommended Practice for 'Financial Statements of Investment Trust Companies and Venture Capital Trusts'. They have also been prepared on a going concern basis and on the assumption that approval as an investment trust will continue to be granted.
	The interim financial statements have been prepared using the same accounting policies as the preceding annual financial statements.

		Six months ended	Six months ended
		28 February 2017	29 February 2016
2.	Income	£'000	£'000
	Income from investments
	UK dividend income	713	266
	Overseas dividends	3,709	3,629
		_________	_________
		4,422	3,895
	Other income
	Deposit interest	1	2
	Interest from money market funds	13	9
		14	11
		_________	_________
	Total income	4,436	3,906

3.	The taxation for the period represents withholding tax suffered on overseas dividend income. An amount of £234,000 of withholding tax was recognised in the six months to 28 February 2017 (29 February 2016 - £231,000).

		Six months ended	Six months ended
		28 February 2017	29 February 2016
4.	Return per Ordinary share	p	p
	Basic
	Revenue return	(0.35)	(0.38)
	Capital return	29.65	(1.32)
		_________	_________
	Total return	29.30	(1.70)
		_________	_________
	The figures above are based on the following:
		£'000	£'000
	Revenue return	(665)	(742)
	Capital return	56,261	(2,551)
		_________	_________
	Total return	55,596	(3,293)
		_________	_________
	Weighted average number of Ordinary shares in issue	189,741,358	193,074,343
		Six months ended	Six months ended
		28 February 2017	29 February 2016
	Return per Ordinary share	p	p
	Diluted
	Revenue return	n/a	n/a
	Capital return	26.92	n/a
	Total return	27.21	n/a
	The figures above are based on the following:
		£'000	£'000
	Revenue return	602	473
	Capital return	56,261	(2,551)
		_________	_________
	Total return	56,863	(2,078)
		_________	_________
	Number of dilutive shares	19,272,972	19,274,390
		_________	_________
	Diluted shares in issue	209,014,330	212,348,733
	The calculation of the diluted total, revenue and capital returns per Ordinary share are carried out in accordance with IAS 33, "Earnings per Share". For the purpose of calculating total, revenue and capital returns per Ordinary share, the number of Ordinary shares used is the weighted average number used in the basic calculation plus the number of Ordinary shares deemed to be issued for no consideration on exercise of all 3.5% Convertible Unsecured Loan Stock 2018 (CULS). The calculations indicate that the exercise of CULS would result in an increase in the weighted average number of Ordinary shares of 19,272,972 (2016 - 19,274,390) to 209,014,330 (2016 - 212,348,733) Ordinary shares.
	For the periods ended 28 February 2017 and 29 February 2016 there was no dilution to the revenue return per Ordinary share due to a loss being incurred. Additionally, for the period ended 29 February 2016 there was no dilution to the capital return per Ordinary share due to a loss being reported. Where dilution does occur, the net returns are adjusted for items relating to the CULS. Total earnings for the period are tested for dilution. Once dilution has been determined individual revenue and capital earnings are adjusted. Accrued CULS finance costs for the period and unamortised issues expenses are reversed.

5.	Transaction costs
	During the period 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/(losses) on investments in the Statement of Comprehensive Income. The total costs were as follows:
		Six months ended	Six months ended
		28 February 2017	29 February 2016
		£'000	£'000
	Purchases	85	56
	Sales	142	82
		_________	_________
		227	138
6.	Capital reserves
	The capital reserve reflected in the Statement of Financial Position at 28 February 2017 includes gains of £323,057,000 (31 August 2016 - £288,730,000) which relate to the revaluation of investments held at the reporting date.

7.	Net asset value
	The net asset value per share and the net assets attributable to the Ordinary shareholders at the period end were as follows:
		As at	As at
		28 February 2017	31 August 2016
	Basic
	Net assets attributable (£'000)	708,192	664,159
	Number of Ordinary shares in issue{A}	188,745,495	190,509,202
	Net asset value per share (pence)	375.21	348.62
	Diluted
	Net assets attributable (£'000)	767,303	723,040
	Number of Ordinary shares in issue{AB}	208,009,869	209,783,182
	Net asset value per share (pence)	368.88	344.66
	{A} Excluding shares held in treasury.
	{B}The calculations indicate that the exercise of CULS would result in an increase in the number of Ordinary shares of 19,264,374 (31 August 2016 - 19,273,980) to 208,009,869 (31 August 2016 - 209,783,182) Ordinary shares based on the assumption that £59,748,995 (31 August 2016 - £59,778,788) nominal amount of 3.5% Convertible Unsecured Loan Sock 2018 ("CULS") are converted at a rate of 1 Ordinary share for every 310.1528p nominal of CULS at the period end.

		Six months ended	Six months ended
		28 February 2017	29 February 2016
8.	Dividends	£'000	£'000
	2015 final dividend -3.0p	-	5,788
	2016 final dividend - 3.2p	6,077	-
		_________	_________
		6,077	5,788
		_________	_________
	There will be no interim dividend for the year to 31 August 2017 (2016 - nil) as the objective of the Company is long-term capital appreciation.

9	Fair value hierarchy
	FRS 102 requires 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 has the following classifications:
	Level 1: unadjusted quoted prices in an active market for identical assets or liabilities that the entity can access at the measurement date.
	Level 2: inputs other than quoted prices included within Level 1 that are observable (ie developed using market data) for the asset or liability, either directly or indirectly.
	Level 3: inputs are unobservable (ie for which market data is unavailable) for the asset or liability.
	All of the Company's investments are in quoted equities (31 August 2016 - same) actively traded on recognised stock exchanges, with their fair value being determined by reference to their quoted bid prices at the reporting date. The total value of the investments (28 February 2017 - £751,559,000; 31 August 2016 - £710,134,000) have therefore been deemed as Level 1.

10.	Creditors: amounts falling due within one year
		Number	Liability	Equity
		of units	component	component
	3.5% Convertible Unsecured Loan Stock 2018 ("CULS")	£000	£000	£000
	Balance at beginning of period	59,779	58,882	812
	Conversion of CULS into Ordinary shares	(92)	(92)	-
	Notional interest element on CULS	-	292	-
	Notional interest element on CULS transferred to revenue reserve	-	-	(292)
	Amortisation of issue expenses	-	29	-
		_________	_________	_________
	Balance at end of period	59,687	59,111	520
	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 ("CULS"). The CULS can be converted at the election of holders into Ordinary Shares during the months of January and July each year throughout their life, to January 2018 at a rate of 1 Ordinary share for every 310.1528p nominal of CULS. 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 CULS on 31 January and 31 July each year, of which 100% is charged to revenue in line with the Board's expected long-term split of returns from the investment portfolio of the Company.
	The Company has decided to make an annual transfer between the equity component of the CULS and the revenue reserve so that the revenue reserve reflects distributable reserves as defined by company law.
	Following the receipt of election instructions from CULS holders, on 9 February 2017 the Company converted £92,425 nominal amount of CULS into 29,793 Ordinary shares. As at 28 February 2017, there was £59,748,995 nominal amount of CULS in issue.

11.	Called-up share capital
	As at 28 February 2017 there were 188,745,495 (31 August 2016 - 190,509,202) Ordinary shares in issue. Following the period end a further 765,200 Ordinary shares have been bought back for treasury resulting in there being 187,980,295 Ordinary shares in issue and 8,080,000 Ordinary shares held for treasury at the date this Report was approved.

12.	Related party transactions and transactions with the Manager
	The Company has agreements with Aberdeen Fund Managers Limited ("AFML" or the "Manager") for the provision of investment management, secretarial, accounting and administration and promotional services.
	The management fee for the six months ended 28 February 2017 is calculated, on a quarterly basis, at a rate of 0.85% per annum of net assets.  In the period to 29 February 2016 management fees were calculated at a rate of 1.00% per annum on the first £600 million, 0.90% per annum on the next £400 million and 0.80% per annum on amounts over £1,000 million per annum of the net assets of the Company, with debt at par and excluding commonly managed funds. The management fee is allocated 100% to revenue. During the period £2,891,000 (29 February 2016 - £2,556,000) of investment management fees were payable to the Manager, with a balance of £1,505,000 (29 February 2016 - £1,265,000) being due at the period end. The management agreement is terminable by the Company on three 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 six months.
	At the period end the Company had £11,800,000 (29 February 2016 - £1,000,000) invested in Aberdeen Liquidity Fund (Lux) - Sterling Fund which is managed and administered by the Aberdeen Asset Management Group. The Company pays a management fee of 0.85% per annum on the value of these holdings but no fee is chargeable at the underlying fund level.

13.	Segmental information
	The Company is engaged in a single segment of business, which is to invest in equity securities. All of the Company's activities are interrelated, and each activity is dependent on the others. Accordingly, all significant operating decisions are based on the Company as one segment.

14.	Half-Yearly Financial Report
	The financial information contained in this Half-Yearly Financial Report does not constitute statutory accounts as defined in Sections 434 - 436 of the Companies Act 2006. The financial information for the six months ended 28 February 2017 and 29 February 2016 has not been audited.
	The information for the year ended 31 August 2016 has been extracted from the latest published audited financial statements which have been filed with the Registrar of Companies. The report of the auditor on those accounts contained no qualification or statement under Section 498 of the Companies Act 2006.
	The auditor has reviewed the financial information for the six months ended 28 February 2017 pursuant to the Auditing Practices Board guidance on Review of Interim Financial Information. The report of the auditor is below.

15.	This Half-Yearly Financial Report was approved by the Board on 25 April 2017.

INDEPENDENT REVIEW REPORT TO THE AUDITORS

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the Half-Yearly Financial Report for the six months ended 28 February 2017 which comprises the Condensed Statement of Comprehensive Income, Condensed Statement of Financial Position, Condensed Statement of Changes in Equity, Condensed Statement of Cash Flows and the related explanatory notes. We have read the other information contained in the Half-Yearly Financial Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA"). Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.

Directors' Responsibilities

The Half-Yearly Financial Report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Half-Yearly Financial Report in accordance with the DTR of the UK FCA. 

As disclosed in note 1, the annual financial statements of the Company are prepared in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice), including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland'. The condensed set of financial statements included in this Half-Yearly Financial Report have been prepared in accordance with FRS 104 'Interim Financial Information'.

Our Responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the Half-Yearly Financial Report based on our review. 

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the Half-Yearly Financial Report for the six months ended 28 February 2017 is not prepared, in all material respects, in accordance with FRS 104 'Interim Financial Information' and the DTR of the UK FCA. 

John Waterson

for and on behalf of KPMG LLP, Statutory Auditor

Chartered Accountants

Edinburgh

25 April 2017

 

 

END

 

 

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