Interim Results
Edinburgh Dragon Trust plc
25 April 2008
25 April 2008
EDINBURGH DRAGON TRUST PLC
HALF YEARLY FINANCIAL REPORT
FOR THE SIX MONTHS ENDED 29 FEBRUARY 2008
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).
• The Trust's net asset value rose by 6.3% on a total return basis
compared to a rise in the benchmark index, the MSCI All Country Asia (ex
Japan), of 4.7%.
• The Trust's share price rose by 5.5%.
• Stock markets in Asia are likely to remain volatile in the months ahead.
• Looking beyond the current turmoil in the global credit and stock
markets, we consider this may prove a time of opportunity for companies
that are well-managed and well-financed.
For further information please contact:-
Peter Hames, Head of Asian Equities,
Aberdeen Asset Management Asia 0065 6395 2700
Ian Massie, Head of Investment Trust Investor Relations, 0131 528 4000
Aberdeen Asset Management
INTERIM BOARD REPORT
Background
While the caution over Asian markets, expressed in my chairman's statement in
the last annual report, has been borne out by events during the six month
period, I am nonetheless pleased to report an improvement in Dragon's
performance in what was a volatile period for financial markets. Over the six
months to 29 February 2008, the net asset value per share ('NAV') outperformed
the Company's benchmark. It rose, on a total return basis, by 6.3%, compared
with the 4.7% gain by the benchmark MSCI All Country Asia ex Japan Index. In the
same period, the share price rose by 5.5%, with a slight widening of the
discount to 11.1%.
Overview
Asian equities, although shaken by increasing volatility, performed relatively
well in the first half. Sentiment swung between optimism because of still
favourable growth and corporate earnings in Asia, and concern over the weakening
US economy, the fallout from the intensifying sub-prime crisis, record commodity
prices, and heightened inflationary fears.
Early in the half-year, hopes that the region had effectively decoupled from the
US saw an influx of liquidity drive stock prices to new highs. Among the markets
that set fresh records were China, Hong Kong, India, Indonesia, Singapore and
South Korea. However, this soon gave way to a realisation that a global slowdown
was gathering pace. Aggressive interest rate cuts and a billion-dollar stimulus
package served only to highlight the US Federal Reserve's anxiousness to avoid a
recession and to shore up market sentiment. Former highflyers China and India
both succumbed to notable selling pressure towards the end of the period, by
which time, irrespective of local newsflow, all regional markets were tracking
Wall Street closely, as risks were re-priced globally.
Economic growth in the region remained buoyant through the fourth quarter of
2007, but leading indicators are now pointing towards tougher conditions,
particularly for exporters. By early this year, the deterioration in US economic
data, notably housing-led consumption, had had a knock-on effect across export
sectors. At the same time, oil and raw material prices continued to ratchet
upwards. This in turn has pushed up wage demands, squeezing corporate margins.
However, Asian policymakers have been reluctant to raise interest rates, to
avoid attracting speculative inflows that could disrupt their managed currency
appreciation.
Portfolio Review
Over the six-month period, total purchases amounted to £14.2 million while sales
amounted to £38.4 million. The net proceeds were partly used to build up the
cash position from £9.0m at the end of the financial year to £24.2m at 29
February 2008. Cash levels will continue to be increased as the year progresses
to ensure that there will be sufficient cash available to repay the $80m loan
notes on their redemption date at the end of 2008 and not be dependent on market
conditions at that time. The Board intends to continue with a gearing facility
in the longer term and is currently considering the gearing options available.
One new stock was introduced to the portfolio in the six months: Singapore-based
Fraser & Neave, whose core businesses are food and beverages as well as
property, with additional interests in publishing. Earnings are driven by the
property division, which is benefiting from healthy rental income and strong
sales in Singapore and the region. Its food and beverage unit, whose brands
include Tiger Beer, has also been growing strongly in regional markets.
Meanwhile, there were no outright divestments but your Manager took advantage of
the volatile market conditions to take partial profits from holdings that had
seen a strong run-up, including the portfolio's holdings in China and India,
such as China Mobile, CNOOC, PetroChina and Zhejiang Expressway; as well as HDFC
and ICICI Bank. Other holdings that were trimmed were South Korean discount
store operator Shinsegae, Thailand's PTT Exploration and Production and Sun Hung
Kai Properties in Hong Kong.
Those proceeds that were re-invested went into additions to existing holdings
whose valuations had fallen to more attractive levels. Among these were
Malaysian postal services operator, Pos Malaysia; Hong Kong-listed Standard
Chartered Bank; Singapore companies, Venture Corp and Singapore Telecom; as well
as Indian IT companies, Satyam Computer Services and Infosys.
Events during the period
At the Company's AGM on 12 December 2007, all resolutions were passed. A final
dividend of 1.1p was paid to shareholders on 14 December 2007.
Discount
The Board monitors closely the discount level of the Company's shares, and
during the six month period to 29 February 2009 the Company bought back
3,076,500 shares for cancellation, at a cost of £4.8 million, enhancing the NAV
for continuing shareholders by 0.28p.
Revenue account
For the six months to 29 February 2008 the revenue account recorded a return of
£221,000, representing 0.09p per share compared with a deficit of 0.25p for the
six months to 28 February 2007. The majority of the Company's portfolio income,
in common with the majority of Asian dividend income, is accounted for in the
second half of the Company's financial year.
Outlook
Stock markets in Asia are likely to remain volatile in the months ahead.
Sentiment remains fragile and is closely linked to developments in the US
economy and credit markets, where predictions are poor.
Economically, however, it is important to remember that Asia is on a very strong
footing, with well-funded governments (as we have seen with recent sovereign
wealth fund activity), solid company balance sheets (ex banks and insurers, our
portfolio's average debt/equity ratio is under 15%) and a cash-rich consumer
(gross savings ratios average about 40% of GDP). However we should not forget
that Asian markets have had a very strong five-year rally and valuations in some
markets, such as China, have run far ahead of fundamentals. While the recent
sell-off has given rise to far better value, valuations overall are still not
cheap, but, in your Manager's opinion, are reasonable, and we consider there are
few worries about the fundamentals of the underlying companies making up the
portfolio.
Looking ahead, therefore, 2008 is likely to be challenging from a macro-economic
perspective, with slower growth and a credit/liquidity crunch emanating from the
West, and inflationary pressure globally. Overall, your Manager is expecting
much lower earnings growth from the portfolio. We do believe, however, looking
beyond the current turmoil in the global credit and stock markets, that this
will prove a time of opportunity for companies that are well-managed and
well-financed.
Principal Risks and Uncertainties
The Board has adopted a matrix of the key risks that affect the company's
business. The principal risks are as follows:
• Resource risk: The Company is an investment trust and has no
employees. The responsibility for the management of the Company has been
delegated to Edinburgh Fund Managers plc ('the Manager'), a subsidiary of
Aberdeen Asset Management PLC, 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 issuers 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 keeps under review the investment policy of the Company,
taking account of stockmarket factors, and compares the Company's performance to
the MSCI All Country Asia (ex-Japan) 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
the annual report.
• Gearing risk: The Company currently utilises gearing in the form of
US$80 million loan notes. Gearing has the effect of exacerbating market falls
and enhancing gains. In order to manage the level of gearing, the Board has set
a maximum gearing ratio of 20%.
• Regulatory risk: The Company operates in a complex regulatory
environment and faces a number of regulatory risks. Serious breaches of
regulations, such as section 842 of the Income and Corporation Taxes Act 1988,
the UKLA Listing Rules and the Companies Act, could lead to a number of
detrimental outcomes and reputational damage. The Audit Committee monitors
compliance with regulations by reviewing internal control reports from the
Manager.
• Discount volatility: The Company's share price can trade at a
discount to its underlying net asset value. The Board monitors the discount
level of the Company's shares and has in place a buyback mechanism whereby the
Manager is authorised to buyback shares within certain limits.
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.
Directors' Responsibility Statement
The Directors are responsible for preparing the half yearly financial report, in
accordance with applicable law 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 Accounting Standards
Board's Statement 'Half Yearly Financial Reports'; and
• the Interim Board Report includes a fair view of the information
required by 4.2.7R and 4.2.8R of the FSA's Disclosure and Transparency Rules.
For Edinburgh Dragon Trust plc
Tony Cassidy
Chairman
INCOME STATEMENT
Six months ended 29 February 2008
(unaudited)
Revenue Capital Total
£'000 £'000 £'000
Net gains on investments - 24,594 24,594
Net currency (losses)/gains - (833) (833)
Income 4,572 - 4,572
Investment management fee (2,047) - (2,047)
Administrative expenses (617) - (617)
_________ _________ _________
Net return before finance costs and taxation 1,908 23,761 25,669
Finance costs (1,444) - (1,444)
_________ _________ _________
Net return on ordinary activities before taxation 464 23,761 24,225
Taxation (243) - (243)
_________ _________ _________
Return on ordinary activities after taxation 221 23,761 23,982
_________ _________ _________
Return per Ordinary share (pence) 0.09 10.10 10.19
_________ _________ _________
Six months ended 28 February 2007
(unaudited)
Revenue Capital Total
£'000 £'000 £'000
Net gains on investments - 41,670 41,670
Net currency (losses)/gains - 1,136 1,136
Income 3,358 - 3,358
Investment management fee (1,699) - (1,699)
Administrative expenses (565) - (565)
_________ _________ _________
Net return before finance costs and taxation 1,094 42,806 43,900
Finance costs (1,448) - (1,448)
_________ _________ _________
Net return on ordinary activities before taxation (354) 42,806 42,452
Taxation (236) - (236)
_________ _________ _________
Return on ordinary activities after taxation (590) 42,806 42,216
_________ _________ _________
Return per Ordinary share (pence) (0.25) 18.04 17.79
_________ _________ _________
Year ended 31 August 2007
(audited)
Revenue Capital Total
£'000 £'000 £'000
Net gains on investments - 76,931 76,931
Net currency (losses)/gains - 2,240 2,240
Income 12,585 - 12,585
Investment management fee (3,614) - (3,614)
Administrative expenses (1,065) - (1,065)
_________ _________ _________
Net return before finance costs and taxation 7,906 79,171 87,077
Finance costs (2,936) - (2,936)
_________ _________ _________
Net return on ordinary activities before taxation 4,970 79,171 84,141
Taxation (604) - (604)
_________ _________ _________
Return on ordinary activities after taxation 4,366 79,171 83,537
_________ _________ _________
Return per Ordinary share (pence) 1.84 33.37 35.21
_________ _________ _________
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 presented as all
gains and losses are recognised in the Income Statement.
All revenue and capital items in the above statement derive from continuing
operations.
BALANCE SHEET
As at As at As at
29 February 2008 28 February 2007 31 August 2007
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Non-current assets
Investments at fair value 416,446 381,630 416,089
_________ _________ _________
Current assets
Loans and receivables 2,381 1,177 1,056
Cash and short term deposits 24,240 3,023 8,990
_________ _________ _________
26,621 4,200 10,046
_________ _________ _________
Creditors: amounts falling due within one year
Loan Notes (40,202) - -
Other creditors (1,740) (1,577) (1,983)
_________ _________ _________
(41,942) (1,577) (1,983)
_________ _________ _________
Net current (liabilities)/assets (15,321) 2,623 8,063
_________ _________ _________
Total assets less current liabilities 401,125 384,253 424,152
Creditors: amounts falling due after more than one year
Loan Notes - (40,775) (39,631)
_________ _________ _________
Net assets 401,125 343,478 384,521
_________ _________ _________
Capital and reserves
Called-up share capital 46,800 47,455 47,415
Capital reserve - unrealised 37,660 112,605 140,674
Capital reserve - realised 220,522 85,451 93,747
Special reserve 80,453 85,520 85,242
Capital redemption reserve 9,407 8,752 8,792
Share premium account 4,285 4,285 4,285
Revenue reserve 1,998 (590) 4,366
_________ _________ _________
Equity Shareholders' funds 401,125 343,478 384,521
_________ _________ _________
Adjusted net asset value per Ordinary share (pence) 171.41 144.74 162.18
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
Six months ended 29 February 2008
(unaudited)
Capital Capital Capital Share
Share reserve - reserve - Special redemption premium Revenue
capital unrealised realised reserve reserve account reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance at 31 August 2007 47,415 140,674 93,747 85,242 8,792 4,285 4,366 384,521
(restated)
Reclassification of reserves - (98,791) 98,791 - - - - -
(A)
Return on ordinary - (4,223) 27,984 - - - 221 23,982
activities after taxation
Dividend paid - - - - - - (2,589) (2,589)
Purchase of ordinary shares (615) - - (4,789) 615 - - (4,789)
for cancellation (see note
1)
______ _______ _______ ______ _______ _______ _______ _______
Balance at 29 February 2008 46,800 37,660 220,522 80,453 9,407 4,285 1,998 401,125
______ _______ _______ ______ _______ _______ _______ _______
(A) With effect from 1 September 2007, changes in the fair value of investments which are readily convertible to
cash, without accepting adverse terms, are recognised within capital reserve - realised rather than capital
reserve - unrealised. This change has been enacted through a transfer between the reserves as at 1 September
2007.
Six months ended 28 February 2007
(unaudited)
Capital Capital Capital Share
Share reserve - reserve - Special redemption premium Revenue
capital unrealised realised reserve reserve account reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance at 31 August 2006 47,455 76,050 79,200 85,520 8,752 4,285 291 301,553
Return on ordinary - 36,555 6,251 - - - (590) 42,216
activities after taxation
Dividend paid - - - - - - (291) (291)
______ _______ _______ ______ _______ _______ _______ ______
Balance at 28 February 2007 47,455 112,605 85,451 85,520 8,752 4,285 (590) 343,478
______ _______ _______ ______ _______ _______ _______ ______
Year ended 31 August 2007
(audited)
Capital Capital Capital Share
Share reserve - reserve - Special redemption premium Revenue
capital unrealised realised reserve reserve account reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance at 31 August 2006 47,455 76,050 79,200 85,520 8,752 4,285 291 301,553
Return on ordinary - 64,624 14,547 - - - 4,366 83,537
activities after taxation
Dividend paid - - - - - - (291) (291)
Purchase of ordinary shares (40) - - (278) 40 - - (278)
for cancellation (see note 1)
______ _______ _______ ______ _______ _______ _______ ______
Balance at 31 August 2007 47,415 140,674 93,747 85,242 8,792 4,285 4,366 384,521
______ _______ _______ ______ _______ _______ _______ ______
CASHFLOW STATEMENT
Six months ended Six months ended Year
ended
29 February 2008 28 February 2007 31 August 2007
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Net return on ordinary activities before finance costs and 25,669 43,900 87,077
taxation
Adjustments for:
Net gains on investments (24,594) (41,670) (76,931)
Effects of foreign exchange rate movements 833 (1,136) (2,240)
Increase in accrued income (945) (376) (59)
Decrease/(increase) in other debtors 139 (35) (59)
Increase in creditors 80 212 289
_________ _________ _________
Net cash inflow from operating activities 1,182 895 8,077
Net cash outflow from servicing of finance (1,422) (1,495) (2,968)
Total tax paid (59) (64) (685)
Net cash inflow/(outflow) from financial investment 23,204 (8,115) (6,903)
Equity dividend paid (2,589) (291) (291)
_________ _________ _________
Net cash inflow/(outflow) before financing 20,316 (9,070) (2,770)
Buy back of ordinary shares (including expenses) (4,789) - (278)
_________ _________ _________
Increase/(decrease) in cash 15,527 (9,070) (3,048)
_________ _________ _________
Reconciliation of net cash flow to movements in net debt
Increase/(decrease) in cash 15,527 (9,070) (3,048)
Amortised Loan Note expenses (15) (16) (31)
Effects of foreign exchange rate movements (833) 1,136 2,240
_________ _________ _________
Movement in net debt in the period 14,679 (7,950) (839)
Opening net debt (30,641) (29,802) (29,802)
_________ _________ _________
Closing net debt (15,962) (37,752) (30,641)
_________ _________ _________
Represented by:
Cash and short term deposits 24,240 3,023 8,990
Debt falling due in less than one year (40,202) - -
Debt falling due after more than one year - (40,775) (39,631)
_________ _________ _________
(15,962) (37,752) (30,641)
_________ _________ _________
NOTES:
1. Accounting Policies
The accounts have been prepared in accordance with applicable UK
Accounting Standards and with the Statement of Recommended Practice for
'Financial Statements of Investment Trust Companies' (December 2005). They have
also been prepared on the assumption that approval as an investment trust will
continue to be granted.
The financial statements and the net asset value per share figures have been
prepared in accordance with UK Generally Accepted Accounting Practice ('UK
GAAP').
The interim accounts have been prepared using the same accounting policies as
the preceding annual accounts.
The purchase of shares for cancellation is shown as a transfer through the
special reserve. Previously, the transfer was reflected through capital reserve
realised. The financial statements for the year ended 31 August 2007 have been
restated to reflect the transfer through the special reserve.
Six months ended Six months ended Year ended
29 February 2008 28 February 2007 31 August 2007
2. Income £'000 £'000 £'000
Income from investments
Franked investment income - - 158
Overseas dividends 4,193 3,145 12,071
Stock dividends - 36 81
_________ _________ _________
4,193 3,181 12,310
_________ _________ _________
Other income
Interest receivable 366 151 235
Income from stock lending 13 26 40
_________ _________ _________
379 177 275
_________ _________ _________
Total income 4,572 3,358 12,585
_________ _________ _________
Six months ended Six months ended Year ended
29 February 2008 28 February 2007 31 August 2007
3. Return per share p p p
Revenue return 0.09 (0.25) 1.84
Capital return 10.10 18.04 33.37
_________ _________ _________
Total return 10.19 17.79 35.21
_________ _________ _________
The figures above are based on
the following:
£'000 £'000 £'000
Revenue return 221 (590) 4,366
Capital return 23,761 42,806 79,171
_________ _________ _________
Total return 23,982 42,216 83,537
_________ _________ _________
Weighted average number of 235,300,776 237,276,875 237,266,382
Ordinary shares in issue
4. Transaction costs
During the period expenses were incurred in acquiring or disposing of
investments classified as fair value. These have been expensed through capital
and are included within gains on investments in the Income Statement. The total
costs were as follows:
Six months ended Six months ended Year ended
29 February 2008 28 February 2007 31 August 2007
£'000 £'000 £'000
Purchases 39 104 139
Sales 99 78 138
_________ _________ _________
138 182 277
5. There will be no interim dividend for the year to 31 August 2008; the
objective of the Company is long term capital appreciation.
6. As at 29 February 2008 there were 234,000,375 (28 February 2007 -
237,276,875; 31 August 2007 - 237,076,875) Ordinary shares in issue. During the
six months to 29 February 2008 3,076,500 (six months ended 28 February 2007 -
nil; year ended 31 August 2007 - 200,000) Ordinary shares of 20p each
(representing 1.31% of the issued Ordinary share capital at 29 February 2008)
were bought back at a cost of £4,789,000 (six months ended 28 February 2007 -
£nil; year ended 31 August 2007 - £278,000) including expenses.
7. The financial information for the six months ended 29 February 2008 and 28
February 2007 comprises non-statutory accounts within the meaning of Section 240
of the Companies Act 1985. The financial information for the year ended 31
August 2007 has been extracted from published accounts that have been delivered
to the Registrar of Companies and on which the report of the auditors was
unqualified and did not contain a Statement under either Section 237(2) or 237
(3) of the Companies Act 1985.
The auditors have reviewed the financial information for the six months
ended 29 February 2008 pursuant to the Auditing Practices Board guidance on
Review of Financial Information.
8. Post Balance Sheet event
Since the period end, a further 465,000 Ordinary shares of 20p each have been
bought back for cancellation at a cost of £698,000.
9. The half yearly financial report is available on the Company's website,
www.edinburghdragon.co.uk and the interim report will be posted to shareholders
in May 2008 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.
For Edinburgh Dragon Trust plc
Edinburgh Fund Managers plc, Secretary
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