Interim Results

Atlantis Japan Growth Fund Ld 18 December 2006 -------------------------------------------------------------------------------- FOR IMMEDIATE RELEASE RELEASED BY HSBC SECURITIES SERVICES (GUERNSEY) LIMITED ATLANTIS JAPAN GROWTH FUND LIMITED PRELIMINARY ANNOUNCEMENT APPROVED BY THE BOARD OF DIRECTORS ON 15TH DECEMBER, 2006 THE BOARD OF DIRECTORS OF ATLANTIS JAPAN GROWTH FUND LIMITED ANNOUNCE UNAUDITED RESULTS FOR THE SIX MONTHS ENDED 31ST OCTOBER, 2006. BALANCE SHEET AS AT 31ST OCTOBER 2006 2006 2005 $'000 $'000 Non Current Assets Investments held at fair value 539,831 535,198 Current Assets Due from brokers 1,796 1,546 Dividends and interest receivable 1,874 1,295 Other receivables 59 31 Cash and cash equivalents 1,685 3,444 5,414 6,316 Current Liabilities Due to brokers (2,010) (4,233) Payables and accrued expenses (946) (807) Loans payable - (25,782) (2,956) (30,822) Net Current Assets/(Liabilities) 2,458 (24,506) Non Current Liabilities Loans payable (55,679) (30,079) Net Assets 486,610 480,613 Equity Ordinary share capital 204 204 Share premium 192,650 192,650 Revenue reserve (20,559) (16,905) Capital reserve 314,315 304,664 Net Assets Attributable to Equity Shareholders 486,610 480,613 Net Asset Value per Ordinary Share* $23.81 $23.52 *Based on the Net Asset Value at the period end divided by the number of shares in issue: 20,435,627 (31st October 2005 - 20,435,627) INCOME STATEMENT FOR THE SIX MONTHS ENDED 31ST OCTOBER 2006 2006 2005 Revenue Capital Total Revenue Capital Total $'000 $'000 $'000 $'000 $'000 $'000 Income (Losses)/gains on investments held at fair value - (118,388) (118,388) - 55,374 55,374 Exchange (loss)/gain (35) 1,219 1,184 (153) 4,204 4,051 Investment income 2,716 - 2,716 2,024 - 2,024 2,681 (117,169) (114,488) 1,871 59,578 61,449 Expenses Investment management fee 3,960 - 3,960 3,334 - 3,334 Custodian fees 139 - 139 177 - 177 Administration fees 143 - 143 134 - 134 Registrar and transfer agent fees 10 - 10 28 - 28 Directors' fees and expenses 113 - 113 57 - 57 Interest expense and bank charges 394 - 394 210 - 210 Transaction costs - 475 475 - 545 545 Insurance fees 37 - 37 22 - 22 Audit fee 11 - 11 10 - 10 Printing and advertising fees 21 - 21 26 - 26 Legal and professional fees 18 - 18 15 - 15 Listing fees 23 - 23 23 - 23 Miscellaneous expenses 3 - 3 10 - 10 4,872 475 5,347 4,046 545 4,591 (Loss)/Profit before tax (2,191) (117,644) (119,835) (2,175) 59,033 56,858 Taxation (190) - (190) (142) - (142) (Loss)/Profit for the period (2,381) (117,644) (120,025) (2,317) 59,033 56,716 (Deficit)/Return per ordinary share $(5.874) $2.775 STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHS ENDED 31ST OCTOBER 2006 For the six months ended 31st October 2006 OrdinaryShare Share Revenue Capital Capital Premium Reserve Reserve Total $'000 $'000 $'000 $'000 $'000 Balance at 1st May 2006 204 192,650 (18,178) 431,959 606,635 Loss for the period - - (120,025) - (120,025) Transfer from capital reserve - - 117,644 (117,644) - Balance at 31st October 2006 204 192,650 (20,559) 314,315 486,610 For the six months ended 31st October 2005 OrdinaryShare Share Revenue Capital Capital Premium Reserve Reserve Total $'000 $'000 $'000 $'000 $'000 Balance at 1st May 2005 (Restated) 204 192,650 (14,588) 245,631 423,897 Profit for the period - - 56,716 - 56,716 Transfer to capital reserve - - (59,033) 59,033 - Balance at 31st October 2005 204 192,650 (16,905) 304,664 480,613 CASH FLOW STATEMENT FOR THE SIX MONTHS ENDED 31ST OCTOBER 2006 2006 2005 $'000 $'000 Loss before tax (1,247) (1,046) Investing Activities Purchase of investments (103,174) (125,007) Sale of investments 104,112 110,319 Net cash inflow/(outflow) from investing activities 938 (14,688) Net cash outflow before financing (309) (15,734) Cash flows from financing activities Interest paid (349) (220) Net loans drawn-down - 12,916 Net cash (outflow)/inflow from financing activities (349) 12,696 Net decrease in cash and cash equivalents (658) (3,038) Exchange movements (207) 4,051 Movement in cash and cash equivalents in the period (865) 1,013 Cash and cash equivalents at beginning of period 2,550 2,431 Cash and cash equivalents at end of period 1,685 3,444 Reconciliation of (loss)/profit for period to net cash outflow from operating activities Net (loss)/profit before taxation (119,835) 56,858 Loss/(gain) on investments held at fair value 118,388 (55,374) Exchange gain (1,184) (4,051) Interest expense 394 210 Decrease in debtors and accrued income 1,219 1,340 (Decrease)/increase in creditors (39) 113 Taxation (190) (142) (1,247) (1,046) ATLANTIS JAPAN GROWTH FUND LIMITED INVESTMENT MANAGER'S REPORT FOR THE SIX MONTHS ENDED 31ST OCTOBER 2006 PERFORMANCE The Company ran into difficult market conditions during the six months ended 31st October 2006. While the large cap dominated Tokyo Stock Exchange First Section Index ('TOPIX') was down only 8.15% during the period, the indices for small and medium cap stocks saw much larger declines, with the Tokyo Second Market index falling 18.15%, the Nikkei OTC dropping 19.40%, and the Mothers index down 31.55% (all expressed in US dollar terms). In comparison, the Company's published Net Asset Value (the 'NAV') per share at the period-end was $23.89, representing a decline of 20.02%. Company performance was hurt especially by the pronounced weakness in the medium and small cap segments of the market, where the portfolio remains overweight. The weakening of the Yen also pulled down the value of the Company as it is denominated in US dollars. Since inception in May 1996, the published NAV per share is up 140.8%, even after the setback during the latest six month period. In contrast, over the same timeframe, the TOPIX is down 14.6% while the Tokyo Second Market index is up 65.1% (all figures in US dollars). At the end of October 2006, the published Net Asset Value of the Company was $488,238,814 in US dollar terms or Y56,997 million. The Company has borrowings of Y6.5 billion ($55.7 million), cash of Y170 million ($1.7 million) and is about 11% leveraged on a net basis. The Investment Manager had no currency hedges at the period end, meaning the Company's value in US dollar terms will benefit from a stronger Japanese Yen and, conversely, will be hurt by a weaker Yen. During the six month period under review, the Yen weakened by 2.2% against the US dollar, moving from Y114.20 at the end of April 2006, to Y116.74 at the end of October 2006. There are no outstanding warrants. The number of outstanding shares is unchanged at 20,435,627. MARKET OUTLOOK After a sharp run-up in late 2005, the Japanese market hit a pocket of turbulence in early 2006 as news broke about a major accounting scandal at high-flying Internet business operator, Livedoor. This set off a prolonged period of consolidation characterized by high market volatility, particularly among smaller cap issues. Trading volume has remained relatively high, but the overall mood in the market is still very cautious, with local investors showing heightened sensitivity to bad news while largely ignoring good news. Due in part to limited liquidity, small cap stocks have continued to under-perform despite the favorable outlook for earnings and low valuations in many cases. For instance, the Mothers index is down more than 50% from its yearly high. On the economic front, we find the domestic economy showing somewhat mixed signals. Exports and private capital investment are still relatively strong, but consumer spending, which accounts for well over half of GDP, has been somewhat slower than expected, though still in positive growth territory. Corporate earnings have been running ahead of expectations and, thus, we continue to look for growth of around 13-15% in the current fiscal year to March 2007, followed by positive earnings growth again for the next fiscal year. In the stock market itself, an examination of supply-demand dynamics shows banks continuing to liquidate their cross-shareholdings during the period under review, though at a slower pace than in previous years as their remaining holdings have dwindled. Local pension funds also seem to have stayed on the sell side, though they were much less aggressive sellers than in the past and will hopefully become a neutral force in the market in the near future. In contrast, corporations continued as steady net buyers; in addition to buying back their own shares, corporate purchases were also reflected in M&A and MBOs, as more corporations sought to extend alliances through cross-shareholdings to protect themselves from hostile takeovers. Local investment trusts also remained steady net buyers. Local individual investors, who often account for as much as 40% of daily trading volume, were mostly sellers during the six-month period under review. This represents a turnabout from their previous stance, which put them on the buy side many weeks late last year and earlier this year. Similarly, we find overseas investors pulling back from aggressive buying in 2005 to a less aggressive stance in 2006, including a pronounced bout of net selling in May and June, as well as net selling in some recent weeks. For our part, we see the underlying economic fundamentals in Japan as still mostly favourable, though we are somewhat concerned about technical conditions in the market, especially in recent months. Some local investors are already worrying about domestic monetary policy even though interest rates are up only slightly and remain at low levels amid modest inflation. Overall, we would expect external factors to continue to hold sway over the Japanese market in the near term, as investors remain sensitive to trends outside Japan, including the world economy and China, US interest rates, commodity prices and major overseas stock markets, particularly New York and London. In this regard, we note that the recent weakness in the yen appears to have been a slight negative for Japanese stocks. That said, we think the downside risk for the overall market is limited considering current valuation levels and the still-positive outlook for the Japanese economy and corporate earnings. Going forward, we expect signs confirming solid growth to ultimately bring about an improvement in market sentiment and, along with this, higher stock prices. However, if earnings disappoint or the economy proves weaker than expected, we could see further pressure on stock prices. OUR STRATEGY AND THE PORTFOLIO As described above, the expansion in the Japanese economy appears to be on course, with no real signs of overheating. As inflation remains subdued, we would expect interest rates to rise only slowly, thus having little, if any, impact on economic growth. Corporate earnings are also rising, and prospects appear good for solid earnings growth again next fiscal year. On the domestic political front, we are starting to hear talk about hiking the consumption tax. Any hike before 2008 or 2009 is highly unlikely, in our view, and we may not see any hike at all. Thus, we do not consider this something to worry about at this time. TOPIX stocks are currently trading at an average Price Earnings Ratio (PER) of about 20x estimated earnings for the current year to March 2007, and Second Section stocks are trading around 17x. Based on our outlook for continued earnings growth next fiscal year, overall market valuations are even more attractive as we look further ahead. At the individual stock level, we are also finding many attractive issues, some even trading at less than 10x projected earnings 2-3 years ahead. As always, we continue to emphasize value and long-term earnings growth potential. In particular, we like companies with solid top-line growth, rising profit margins, positive free cash flow, improving balance sheets and solid prospects for earnings growth over the medium to longer term. At this time, we are generally finding the best value and growth among medium and small cap stocks. Since many of the stocks in the portfolio are quite small, we usually limit our investments in individual issues to less than 1% of total portfolio value, and often limit our initial investment to 0.25% when we are establishing a new position. Even in the case of our larger cap holdings we usually limit our exposure to around 1% of portfolio value, with this restriction serving as a measure of risk control. While strictly limiting our exposure to individual stocks, we often invest in more than one company in the same general business when the industry is attractive. For instance, the Company has invested in a number of local discount drug store chains, several different generic drug manufacturers and several software companies. We also have exposure to several semiconductor test equipment manufacturers, including probe card maker Micronics Japan, and several manufacturers of quartz components, including Nihon Dempa. This strategy of investing in multiple companies in the same general business area has worked well for us in the past and will hopefully continue to provide superior returns going forward. As Japanese interest rates remain very low, we have leveraged the Company by borrowing Y6.5 billion ($55.7 million). We have used part of these borrowings to invest in high-yielding stocks that we also judge to be attractive based on their fundamentals, including several Japanese REITs with above-average yields. At this time, we have a good flow of new ideas and are uncovering a number of attractive investment candidates with good long-term growth potential and attractive valuations. As we have discussed in the past, one of the cornerstones of our investment research process is our extensive company-visiting program. Every year our team visits around 1,000 companies, including those already in the portfolio, as well as new buy candidates. In addition to these face-to-face visits, we also contact companies for periodic updates, ascertaining monthly sales or order figures where such disclosures are available. In the case of the many retail companies in the portfolio, we are particularly interested in monthly sales trends at existing stores, new store openings and trends in inventories. In addition to giving us valuable information on specific companies, these contacts can also shed an early light on trends within an entire sector or the larger economy. At times such as these, we understand that there is a natural tendency for investors to become impatient or anxious. We too would like to see all of our stocks consistently moving higher. However, we know from long years of experience that there are inevitable periods of little or no movement in the market, as well as the unavoidable times when stock prices decline, even when the economy and corporate earnings are growing. At this point in particular, we remain encouraged by the fact that many stocks are now looking cheap and the earnings outlook is still quite positive. Going forward, we will continue to follow our time-tested strategy focused on value and long-term growth. We plan to remain patient during this period of market consolidation, positioning the portfolio for out-performance in the longer term while avoiding the risk of chasing short-term market trends. We would like to thank our fellow shareholders for their ongoing support, especially during the last six months. Atlantis Fund Management (Guernsey) Limited This information is provided by RNS The company news service from the London Stock Exchange

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