Half Yearly Results

RNS Number : 9570V

Edinburgh Dragon Trust plc

22 April 2016

 

22 April 2016

EDINBURGH DRAGON TRUST PLC

HALF YEARLY FINANCIAL REPORT

FOR THE SIX MONTHS ENDED 29 FEBRUARY 2016

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

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

·      The Company's net asset value fell by 0.5% in sterling terms on a total return basis, compared to a rise of 3.1% in the benchmark index.   

·      The underperformance was largely due to the Company's exposure to financial holdings, particularly HSBC and Standard Chartered.  The Manager believes that these companies will benefit from the changes in management and efforts to refocus their businesses and capitalize on a regional recovery. 

·      Against an uncertain global growth background, the Asian region is on solid ground financially with attractive valuation levels when compared to global markets. 

·      The Board has undertaken a review of the management fee arrangements and has agreed with the Manager that, with effect from 1 April 2016, the management fee will be calculated at 0.85% of net assets. 

For further information please contact:-

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

INTERIM BOARD REPORT - CHAIRMAN'S STATEMENT

Background

The six months to 29 February 2016 saw a period of dramatic global markets volatility, during which the Company's net asset value per share ("NAV") fell slightly, by 0.5%.  The relatively calm reaction of investors to the US Federal Reserve's well-telegraphed interest rate hike in December, was soon overtaken by increasing anxiety over the global economy, and, in particular that of China.  Risk appetite was further undermined by the prolonged slump in oil prices. Markets in the region saw vastly differing performances over the six months, being led by strong rises in Indonesia and Malaysia, but held back by falls in China and India.  Overall the MSCI AC Asia ex Japan Index rose by 3.1% in sterling terms. 

Overview

Mainland Chinese equities have remained under pressure since the stockmarket bubble burst in mid-2015. Poor growth data reinforced persistent misgivings over the health of the economy. Beijing's intervention in stock and currency markets failed to have a calming effect and resulted in amplified market gyrations that then rippled around the world. Recent policy measures suggest that the leadership in China is again prioritising short-term growth, rather than endure the pain of much-needed economic restructuring that would stretch over the longer term.

Global monetary policy divergence also cast a long shadow over regional markets. While the Federal Reserve of the United States pushed ahead with its first rate rise in a decade, low inflation and sluggish growth led the European Central Bank to remain firmly in loosening mode. Asia, too, focused on efforts to bolster growth; several Southeast Asian nations, such as Indonesia and Malaysia, unveiled multiple stimulus packages, while India, China and Taiwan trimmed interest rates.

Portfolio

Unlike last year, our sub-benchmark weighting to China proved beneficial to the Company's performance during the six months. Sentiment towards Chinese equities remained fragile. The central bank's recent moves to inject liquidity into the system underlined Beijing's concerns over the economy, and trade data for February provided further evidence of moderating growth. While your Manager believes that China is unlikely to suffer a steep slowdown, given its arsenal of monetary and fiscal tools, the transition to a more consumer-driven economy could be volatile and drawn out.

Our exposure to both India and Taiwan proved beneficial, in both cases due to the impact of stock selection, which more than outweighed the impact of asset allocation.  In India, Hero MotoCorp reported healthy results, reflecting better pricing and volumes, while lower costs drove an improvement in profitability and, among the financials, the Company's bank holdings benefited from more conservative loan books than their state-owned peers. In Taiwan, Taiwan Semiconductor Manufacturing Company's fourth-quarter earnings reached the higher end of management's forecast, supported by robust demand in the communications and computing sectors. The chip maker expects revenue growth of 5-10% and better profits this year, driven by growing demand and foreign exchange gains.

The key detractor from performance was the weak performance of the Company's holdings in Standard Chartered and HSBC. Despite a string of increasingly upbeat announcements that included both management and board changes, as well as a rights issue that was well within expectations, Standard Chartered share price has continued to fall. However, your Manager remains convinced that the new management has taken the necessary steps to turn the business around.  Meanwhile, the exposure to HSBC has also been a drag on relative performance. Many of the lender's problems stem from overambitious expansion and lax oversight, legacies, once again, of the previous management. Your Manager is supportive of the efforts to refocus on the most productive businesses and regions. HSBC continues to be one of the strongest banks in Asia and once the benefits from this streamlining exercise start to flow through, the bank should be in good shape to capitalise on a regional recovery.

The Company's exposure to Singapore was another detractor.  An increase in domestic interest rates hampered the performance of sectors such as property and finance. The Company has exposure via property developer City Developments and the three local banks - DBS, OCBC and United Overseas Bank. While the banks should benefit from higher rates, investors have focused on rising credit costs and their exposure to commodities. Being part of an open and trade-reliant economy, the slowdown in China and the broader region also took a toll on the banks. Your Manager believes the lenders have been disproportionately punished: the quality of their loan books remains largely intact, as reflected in their better-than-expected results.

Elsewhere, the slump in oil prices hurt rig-builder Keppel Corp, especially amid the potential bankruptcy of one of its major customers, Sete Brazil. That said, Keppel's management believes its balance sheet and liquidity position remain robust. In addition, the conglomerate is made up of more than just the oil and gas business; it has two other main businesses, property and infrastructure, which accounted for the bulk of overall net profits in 2015.

Four new stocks were introduced over the half-year, as market volatility provided opportunities for your Manager to initiate positions at reasonable valuations.  Additions included Hong Kong Exchanges and Clearing (the operator of the Hong Kong stock exchange and the London Metal Exchange); AmorePacific Corp (a leading Korean local cosmetics player with a burgeoning Chinese business); Bank Central Asia (Indonesia's largest private bank) and Vietnam Dairy Products (a market leader in the Vietnamese beverage sector).The other notable transaction included taking profits from Samsung Electronics, after its stock surged from August lows following news of its multi-billion-dollar share buyback and cancellation plan.

In the very challenging markets noted above your Manager has held steadfast to its focus on investing in quality companies but for an extended period NAV performance has lagged the benchmark, a situation your Board continues to monitor closely.

Discounts and Share Buybacks

Share prices of investment trusts are primarily driven by NAV (net asset value) performance but also influenced by investor sentiment towards the particular sector as expressed in levels of discount. Over the period the share price declined by 2.5%, to 227p; this was largely attributable to a widening of the discount, from 11.8% to 13.6%.   In this the Company was not alone; investment trust discounts have widened generally.  The Board monitors closely the discount level of the Company's shares and has demonstrated its commitment to the buying back of shares.  During the six months ended 29 February 2016, 1.84 million shares were bought back into treasury at a cost of £4.4 million.  Since the period end, a further 502,400 shares have been bought back into treasury at a cost of £1.2 million. 

Revenue Account

For the six months to 29 February 2016, the revenue account recorded a deficit on ordinary activities after taxation of £742,000, representing (0.38p) per share compared with a deficit of £1,248,000 for the six months to 28 February 2015.  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. 

Events during the Period

At the Company's Annual General Meeting on 15 December 2015, all resolutions were passed, including the continuation vote resolution. A final dividend of 3.2p was paid to shareholders on 18 December 2015.  

The Board has undertaken a review of the management fee arrangements and has agreed with the Manager that, with effect from 1 April 2016, the management fee will be calculated at 0.85% of net assets.  Previously the management fee was calculated at 1.0% of net assets up to £600m; 0.9% from £600m to £1bn; and 0.8% above £1bn. 

The Board is pleased to report the appointment of Charlie Ricketts as a non-executive director on 19 April 2016.  Charlie has 30 years' experience within the investment funds arena and was the head of investment funds at Cenkos Securities, providing equity capital markets services to the fund management industry and to investment trust companies. 

Outlook

Against a background of continuing uncertainty on global growth we expect stockmarket volatility to remain a key feature for the foreseeable future and the region will not be immune from further setbacks. A key concern is that major central banks run the risk of losing control of domestic financial conditions. Recoveries have been feeble despite repeated easing initiatives. Negative interest rates in Europe and Japan have also led to worries over deteriorating profitability in the banking sector, hurting lenders' share prices in turn. In China, sentiment is still fragile as currency and stockmarket volatility remains elevated. The worry is that Beijing will put on hold market reforms in pursuit of short term growth and stability. Increasingly, too, the leadership's ability to manage the slowdown is under greater scrutiny. This is not helped by heightened geopolitical tension, notably the mainland's protracted row with its neighbours and the US over a group of disputed islands in the South China Sea, along with the potential escalation of tension between the two Koreas. 

Financially, the region is on fairly solid ground. Reserves are ample, trade balances are in surplus and deficits manageable. External balances are generally healthy, and exposure to overseas borrowing is far below 1997 levels. At the corporate level, the Company's holdings have been disciplined in managing costs and conserving capital amid the current slowdown, which positions them well for an upturn. Earnings growth this year is likely to be in single digits, reflecting the challenging operating environment faced by Asian companies but also the improved profitability of those companies with dollar-based revenues. In terms of valuations, the sell-off since the turn of the year has left Asian shares trading at attractive levels. The MSCI Asia ex-Japan Index is currently trading at an estimated 13 times price-to-earnings ratio for 2016, a discount to the MSCI World Index, which trades at around 16 times. The Company's portfolio stands at close to 12x current year earnings with a dividend yield of close to 4%. The average holding delivers a return on equity of 19% on less gearing than the benchmark average. These factors encourage a positive view about Asia's longer-term prospects, regardless of the uncertainties that many are currently focusing upon.

For Edinburgh Dragon Trust plc

Allan McKenzie

Chairman

21 April 2016

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 and the appropriate mitigating action. The principal risks associated with an investment in the Company's shares are published monthly on the Company's factsheet or they can be found in the pre-investment disclosure document published by the Manager, both of which are on the Company's website.

Concentration Risk

Trading volumes in certain securities of emerging markets can be low. The Investment Manager may accumulate investment positions across all its managed funds that represent a significant multiple of the normal trading volumes of an investment which may result in a lack of liquidity and price volatility. Accordingly, the Company will not necessarily be able to realise, within a short period of time, an investment and any such realisation that may be achieved may be at considerably lower prices than the Company's valuation of that investment for the purpose of calculating the net asset value ("NAV") per Ordinary share. The Board monitors, on a regular basis, the Manager's total holdings for each stock within the Company's portfolio and the liquidity of these stocks.

Resource Risk

The Company is an investment trust and has no employees. The responsibility for the provision of investment management, marketing and administration services for the Company has been delegated to the AIFM, Aberdeen Fund Managers Limited under the management agreement. The terms of the management agreement cover the necessary duties and conditions expected of the Manager. As a result, the Company is dependent on the performance of the AIFM. The Board reviews the performance of the Manager on a regular basis and their compliance with the management contract formally on an annual basis. As part of that review, the Board assesses the Manager's succession plans, risk management framework and marketing activities. In addition, the Board visits the Manager's Singapore office, where the day-to-day investment management is undertaken, when they are in the region.

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, including the 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, 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 18 to the financial statements in the 2015 Annual Report.

Gearing Risk

As at 29 February 2016 the Company had £59.8 million nominal of 3.5% Convertible Unsecured Loan Stock 2018 (CULS) in issue. 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% of net assets and receives regular updates on the actual gearing levels the Company has reached from the Manager together with the assets and liabilities of the Company and reviews these at each Board meeting.

Regulatory Risk

The Company operates in a complex regulatory environment and faces a number of regulatory risks. Serious breaches of regulations, such as the tax rules for investment companies, 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.

Reliance on Third Party Service Providers

The Company has entered into a number of contracts with third party providers including share registrar and depositary services. Failure by any service provider to carry out its contractual obligations could have a detrimental impact on the Company operations. The performance of third party providers is reviewed on an annual basis.

The Company has established a comprehensive framework for managing these risks which is evolving continually as the Company's investment activities change in response to market developments.

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 29 February 2016 comprises the Interim Board Report, the Directors' Responsibility Statement and a condensed set of Financial Statements.

For Edinburgh Dragon Trust plc

Allan McKenzie

Chairman

21 April 2016

FINANCIAL HIGHLIGHTS

	29 February 2016	31 August 2015	% change
Equity shareholders' funds (£'000)	505,122	518,635	-2.6
Net asset value per share	262.8p	267.2p	-1.6
Share price (mid-market)	227.0p	235.8p	-3.7
MSCI All Country Asia (ex Japan) Index (in sterling terms)	613.6	600.0	+2.3
Discount to net asset value	13.6%	11.8%
Net gearing{A}	10.4%	9.4%
{A} Calculated in accordance with AIC guidance "Gearing Disclosures post RDR".

PERFORMANCE (TOTAL RETURN {B})

	Six months ended 29 February 2016	Year ended 31 August 2015
Share price per share	-2.5%	-13.5%
Net asset value per share	-0.5%	-13.0%
MSCI All Country Asia (ex Japan) Index (in sterling terms)	+3.1%	-14.7%
{B} Capital return plus dividends reinvested.

INVESTMENT PORTFOLIO

As at 29 February 2016

				Total
			Valuation	assets
Company	Industry	Country	£'000	%
Samsung Electronics Pref	Technology Hardware Storage & Peripherals	South Korea	28,888	5.1
Jardine Strategic Holdings	Industrial Conglomerates	Hong Kong	27,064	4.8
Oversea-Chinese Banking Corporation	Banks	Singapore	26,474	4.7
Taiwan Semiconductor Manufacturing Company	Semiconductors & Semiconductor Equipment	Taiwan	22,463	4.0
AIA Group	Insurance	Hong Kong	20,343	3.6
Housing Development Finance Corp	Thrifts & Mortgage Finance	India	20,030	3.6
Singapore Telecommunications	Diversified Telecommunication Services	Singapore	19,411	3.4
HSBC Holdings	Banks	Hong Kong	18,544	3.3
United Overseas Bank	Banks	Singapore	18,322	3.3
Swire Pacific 'B'	Real Estate Management & Development	Hong Kong	17,605	3.1
Ten largest investments			219,144	38.9
China Mobile	Wireless Telecommunication Services	China	17,150	3.0
Siam Cement (Alien)	Construction Materials	Thailand	16,860	3.0
City Developments	Real Estate Management & Development	Singapore	15,595	2.8
Singapore Technologies Engineering	Aerospace & Defence	Singapore	15,584	2.8
Taiwan Mobile	Wireless Telecommunication Services	Taiwan	13,973	2.5
Infosys Ltd	IT Services	India	13,956	2.5
Standard Chartered{A}	Banks	United Kingdom	12,950	2.3
Ayala Land	Real Estate Management & Development	Philippines	12,023	2.1
John Keells Holdings{B}	Industrial Conglomerates	Sri Lanka	11,924	2.1
Bank of Philippine Islands	Banks	Philippines	11,491	2.0
Twenty largest investments			360,650	64.0
Grasim Industries	Construction Materials	India	11,048	2.0
ITC	Tobacco	India	10,481	1.9
Dairy Farm International	Food & Staples Retailing	Hong Kong	9,103	1.6
Hero Motocorp	Automobiles	India	8,524	1.5
Keppel Corp	Industrial Conglomerates	Singapore	7,578	1.3
ICICI Bank	Banks	India	7,029	1.2
DBS Group	Banks	Singapore	6,986	1.2
Unilever Indonesia	Household Products	Indonesia	6,747	1.2
Public Bank	Banks	Malaysia	6,666	1.2
E-Mart Co	Food & Staples Retailing	South Korea	6,379	1.1
Thirty largest investments			441,191	78.2
Astra International	Automobiles	Indonesia	5,817	1.0
British American Tobacco Malaysia	Tobacco	Malaysia	5,711	1.0
Hang Lung Properties	Real Estate Management & Development	Hong Kong	5,683	1.0
CNOOC	Oil, Gas & Consumable Fuels	China	5,576	1.0
PetroChina 'H'	Oil, Gas & Consumable Fuels	China	5,563	1.0
Piramal Enterprises	Pharmaceuticals	India	5,537	1.0
Hong Kong Exchanges & Clearing	Diversified Financial Services	Hong Kong	5,447	1.0
Hang Lung Group	Real Estate Management & Development	Hong Kong	5,392	1.0
Kerry Logistics Network	Air Freight & Logistics	Hong Kong	5,349	0.9
CIMB Group Holdings	Banks	Malaysia	5,296	0.9
Forty largest investments			496,562	88.0
Bank Central Asia	Banks	Indonesia	5,230	0.9
Holcim Indonesia	Construction Materials	Indonesia	4,568	0.9
Swire Properties	Real Estate Management & Development	Hong Kong	4,558	0.8
MTR Corp	Road & Rail	Hong Kong	4,322	0.8
Oriental Holdings	Automobiles	Malaysia	4,153	0.7
ASM Pacific Technology	Semiconductors & Semiconductor Equipment	Hong Kong	4,145	0.7
DFCC Bank	Banks	Sri Lanka	4,051	0.7
Li & Fung	Textiles, Apparel & Luxury Goods	Hong Kong	3,673	0.7
Yoma Strategic Holdings	Real Estate Management & Development	Singapore	3,367	0.6
Amorepacific Corp	Personal Products	South Korea	2,821	0.5
Fifty largest investments			537,450	95.3
Vietnam Dairy Products	Food Products	Vietnam	2,801	0.5
Tata Consultancy	IT Services	India	2,733	0.5
Shinsegae Company	Multiline Retail	South Korea	2,618	0.5
BNK Financial Group	Banks	South Korea	2,568	0.5
DGB Financial Group	Banks	South Korea	2,468	0.4
China Conch Venture	Machinery	China	2,364	0.4
Global Brands Group	Textiles, Apparel & Luxury Goods	Hong Kong	2,183	0.4
Ultratech Cement	Construction Materials	India	2,179	0.4
Batu Kawan	Chemicals	Malaysia	1,970	0.3
Total investments			559,334	99.2
Net current assets			4,353	0.8
Total assets less current liabilities			563,687	100.0
{A} Valuation amalgamates both UK (£10,834,000) and Hong Kong (£2,116,000) listed equity holdings.
{B} Valuation amalgamates both equity (£11,888,000) and warrant (£36,000) holdings.

CONDENSED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

	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.

	Six months ended
	28 February 2015
	Revenue	Capital	Total
	£'000	£'000	£'000
(Losses)/gains on investments	-	23,470	23,470
Net currency losses	-	(32)	(32)
Income (note 2)	3,863	-	3,863
Investment management fee	(3,079)	-	(3,079)
Administrative expenses	(514)	-	(514)
	_________	_________	_________
Net return before finance costs and taxation	270	23,438	23,708
Interest payable and other charges	(1,350)	-	(1,350)
	_________	_________	_________
Return on ordinary activities before taxation	(1,080)	23,438	22,358
Taxation (note 3)	(168)	-	(168)
	_________	_________	_________
Return on ordinary activities after taxation	(1,248)	23,438	22,190
	_________	_________	_________
Return per Ordinary share (pence)(note 4)
Basic	(0.64)	11.94	11.30
	_________	_________	_________
Diluted	n/a	10.87	10.82
	_________	_________	_________

CONDENSED STATEMENT OF FINANCIAL POSITION (UNAUDITED)

		As at	As at
		29 February 2016	31 August 2015
	Notes	£'000	£'000
Non-current assets
Investments at fair value through profit or loss		559,334	566,434
Current assets
Debtors and prepayments	9	5,630	3,163
Money market funds		1,000	4,800
Cash and short term deposits		5,207	4,376
		_________	_________
		11,837	12,339
		_________	_________
Creditors: amounts falling due within one year
Other creditors		(7,484)	(1,886)
		_________	_________
Net current assets		4,353	10,453
		_________	_________
Total assets less current liabilities		563,687	576,887
Creditors: amounts falling due after more than one year
3.5% Convertible Unsecured Loan Stock 2018	10	(58,565)	(58,252)
		_________	_________
Net assets		505,122	518,635
		_________	_________
Capital and reserves
Called-up share capital		39,206	39,206
Share premium account		4,491	4,484
Special reserve		-	351
Equity component of 3.5% Convertible Unsecured Loan Stock 2018	10	1,099	1,392
Capital redemption reserve		17,015	17,015
Capital reserve	6	422,627	429,266
Revenue reserve		20,684	26,921
		_________	_________
Equity shareholders' funds		505,122	518,635
		_________	_________
Net asset value per Ordinary share (pence)	7	262.82	267.22
		_________	_________

CONDENSED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

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
	_____	_____	_____	_____	_____	_____	_____	_____
Six months ended 28 February 2015
		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 2014	39,275	4,475	6,726	1,981	16,945	511,112	22,563	603,077
Return on ordinary activities after taxation	-	-	-	-	-	23,438	(1,248)	22,190
Dividend paid	-	-	-	-	-	-	(4,320)	(4,320)
Share Buybacks	(15)	-	(215)	-	15	-	-	(215)
Issue of new Ordinary shares from conversion of 3.5% Convertible Unsecured Loan Stock 2018	-	3	-	-	-	-	-	3
Transfer of notional interest element on 3.5% Convertible Unsecured Loan Stock 2018	-	-	-	(292)	-	-	292	-
	_____	_____	_____	_____	_____	_____	_____	_____
Balance at 28 February 2015	39,260	4,478	6,511	1,689	16,960	534,550	17,287	620,735
	_____	_____	_____	_____	_____	_____	_____	_____

CONDENSED STATEMENT OF CASHFLOWS (UNAUDITED) 

	Six months ended	Six months ended
	29 February 2016	28 February 2015
	£'000	£'000
Operating activities
Net return on ordinary activities before finance costs and taxation	(1,704)	23,708
Adjustments for:
Losses/(gains) on investments	2,481	(23,470)
Decrease in accrued income	1,045	473
(Increase)/decrease in other debtors	(70)	47
Increase/(decrease) in accrued expenses	17	(58)
Overseas withholding tax	32	(60)
Stock dividends included in investment income	(9)	-
	_________	_________
Net cash flow from operating activities	1,792	640
Investing activities
Purchases of investments	(40,533)	(44,845)
Sales of investments	50,845	45,339
Purchases of money market funds	10,800	16,700
Sales of money market funds	(14,600)	(9,500)
	_________	_________
Net cash flow from investing activities	6,512	7,694
Financing activities
Interest paid	(1,046)	(1,047)
Dividends paid	(5,788)	(4,320)
Buyback of own shares to treasury	(4,439)	(215)
	_________	_________
Net cash outflow used in financing activities	(11,273)	(5,582)
	_________	_________
(Decrease)/increase in cash and cash equivalents	(2,969)	2,752
	_________	_________
Analysis of changes in cash during the period
Opening balance	9,176	13,209
(Decrease)/increase in cash as above	(2,969)	2,752
	_________	_________
Closing balance	6,207	15,961
	_________	_________

NOTES

1.	Accounting policies
	Basis of preparation
	The condensed financial statements have been prepared in accordance with Financial Reporting Standard104 (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.
	These condensed financial statements are the first since FRS 102 (The Financial Reporting Standard applicable in the UK and Republic of Ireland) came into effect for accounting periods beginning on or after 1 January 2015. An assessment of the impact of adopting FRS 102 has been carried out and found that no restatement of balances as at the transition date, 1 January 2014, or comparative figures in the Condensed Statement of Financial Position or the Condensed Statement of Comprehensive Income is considered necessary. The Company has early adopted Amendments to FRS 102 - Fair value hierarchy disclosures issued by issued by the Financial Reporting Council in March 2016.
	The interim financial statements have been prepared using the same accounting policies as the preceding annual financial statements.

		Six months ended	Six months ended
		29 February 2016	28 February 2015
2.	Income	£'000	£'000
	Income from investments
	UK dividend income	266	267
	Overseas dividends	3,629	3,580
		_________	_________
		3,895	3,847
	Other income	_________	_________
	Deposit interest	2	1
	Interest from money market funds	9	15
		_________	_________
		11	16
		_________	_________
	Total income	3,906	3,863
		_________	_________

3.	The taxation for the period represents withholding tax suffered on overseas dividend income. An amount of £231,000 of withholding tax was recognised in the six months to 29 February 2016 (28 February 2015 - £168,000).

		Six months ended	Six months ended
		29 February 2016	28 February 2015
4.	Return per Ordinary share	p	p
	Basic
	Revenue return	(0.38)	(0.64)
	Capital return	(1.32)	11.94
		_________	_________
	Total return	(1.70)	11.30
		_________	_________
	The figures above are based on the following:
		Six months ended	Six months ended
		29 February 2016	28 February 2015
		£'000	£'000
	Revenue return	(742)	(1,248)
	Capital return	(2,551)	23,438
		_________	_________
	Total return	(3,293)	22,190
		_________	_________
	Weighted average number of Ordinary shares in issue	193,074,343	196,364,973
		_________	_________
	Return per Ordinary share	p	p
	Diluted
	Revenue return	n/a	n/a
	Capital return	n/a	10.87
		_________	_________
	Total return	n/a	10.82
		_________	_________
	The figures above are based on the following:
		£'000	£'000
	Revenue return	473	(99)
	Capital return	(2,551)	23,438
		_________	_________
	Total return	(2,078)	23,339
		_________	_________
	Number of dilutive shares	19,274,390	19,279,638
		_________	_________
	Diluted shares in issue	212,348,733	215,644,611
		_________	_________
	The calculation of the diluted revenue and capital returns per Ordinary share is carried out in accordance with FRS 102. For the purpose of calculating diluted 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").
	As at 29 February 2016, the CULS conversion has a positive impact on the revenue and capital return per ordinary share, therefore there is no dilution.

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 Income Statement. The total costs were as follows:
		Six months ended	Six months ended
		29 February 2016	28 February 2015
		£'000	£'000
	Purchases	56	65
	Sales	82	136
		_________	_________
		138	201
		_________	_________

6.	Capital reserves
	The capital reserve reflected in the Balance Sheet at 29 February 2016 includes gains of £137,610,000 (31 August 2015 - £157,395,000) 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
		29 February 2016	31 August 2015
	Basic
	Net assets attributable (£'000)	505,122	518,635
	Number of Ordinary shares in issue	192,192,392	194,084,344
	Net asset value per share (pence)	262.82	267.22
	Diluted
	Net assets attributable assuming conversion of CULS (£'000)	563,634	678,667
	Number of potential Ordinary shares in issue	211,466,782	215,052,963
	Net asset value per share (pence)	n/a	n/a
	The diluted net asset value per Ordinary share has been calculated in accordance with guidelines issued by the Association of Investment Companies ("AIC") on the assumption that the £59,780,061 nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 ("CULS") are converted at a rate of 1 Ordinary share for every 310.1528p nominal of CULS at the period end, resulting in 19,274,390 additional Ordinary shares. Where dilution occurs, the net assets are adjusted for items relating to the CULS.
	Net asset value per share - debt converted
	In accordance with AIC guidance, convertible bond instruments are deemed to be 'in the money' if the cum income (debt at fair value) net asset value ("NAV") exceeds the conversion price per share (310.1528p).  In such circumstances a NAV is produced and disclosed assuming the convertible debt is fully converted. At 29 February 2016 the cum income (debt at fair value) NAV was 262.82p and thus the CULS were not 'in the money' (31 August 2015: 267.22p 'not in the money').

		Six months ended	Six months ended
		29 February 2016	28 February 2015
8.	Dividends	£'000	£'000
	2014 final dividend - 2.2p	-	4,320
	2015 final dividend - 3.0p	5,788	-
		_________	_________
		5,788	4,320
		_________	_________
	There will be no interim dividend for the year to 31 August 2016 (2015 - 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 Company has early adopted Amendments to FRS 102 - Fair value hierarchy disclosures issued by issued by the Financial Reporting Council in March 2016. The fair value hierarchy shall have 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 2015 - 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 (29 February 2016 - £559,334,000; 31 August 2015 - £566,434,000) have therefore been deemed as Level 1.

10.	Creditors: amounts falling due after more than 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	59,787	58,252	1,392
	Conversion of CULS into Ordinary shares	(7)	(7)	-
	Notional interest element on CULS	-	293	-
	Notional interest element on CULS transferred to revenue reserve	-	-	(293)
	Amortisation of issue expenses	-	27	-
		_________	_________	_________
	Balance at end of period	59,780	58,565	1,099
		_________	_________	_________
	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 10 February 2016 the Company converted £6,981 nominal amount of CULS into 2,248 Ordinary shares. As at 29 February 2016, there was £59,780,061 nominal amount of CULS in issue.

11.	Called-up share capital
	As at 29 February 2016 there were 192,192,392 (31 August 2015 - 196,027,844) Ordinary shares in issue. Following the period end a further 502,400 Ordinary shares have been bought back for treasury resulting in there being 191,689,992 Ordinary shares in issue and 4,340,100 Ordinary shares held for treasury at the date this Report was approved.

12.	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 29 February 2016 is calculated, on a quarterly basis, at 1.00% on the first £600 million, 0.90% on the next £400 million and 0.80% 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 chargeable 100% to revenue. During the period £2,556,000 (28 February 2015 - £3,079,000) of investment management fees were earned by the Manager, with a balance of £1,265,000 (28 February 2015 - £1,550,000) being payable to AFML at the period end.
	With effect from 1 April 2016, the management fee will be calculated at 0.85% of net assets.
	No fees are charged in the case of investment managed or advised by the Aberdeen Asset Management Group. The management agreement may be terminated by either party on the expiry of 3 months written notice. On termination the Manager would be entitled to receive fees which would otherwise have been due up to that date.

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 29 February 2016 and 28 February 2015 has not been audited.
	The information for the year ended 31 August 2015 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 29 February 2016 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 21 April 2016.

  16.      The Half-Yearly Financial Report is available on the Company's website, www.edinburghdragon.co.uk and the Half-Yearly Report will be posted to shareholders in May 2016 and copies will be available from the Manager.

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. Where investment is made in emerging markets, their potential volatility may increase the risk to the value of the investment.

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 29 February 2016 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 29 February 2016 is not prepared, in all material respects, in accordance with FRS 104 'Interim Financial Information' and the DTR of the UK FCA. 

Philip Merchant

for and on behalf of KPMG LLP, Statutory Auditor

Chartered Accountants

Edinburgh

21 April 2016

 

END

 

 

IR EADLFAEDKEFF