Final Results

RNS Number : 5521U

JPMorgan China Growth & Income PLC

03 December 2021

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN CHINA GROWTH & INCOME PLC

FINAL RESULTS FOR THE YEAR ENDED 30TH SEPTEMBER 2021

Legal Entity Identifier: 549300S8M91P5FYONY25

Information disclosed in accordance with DTR 4.2.2

The Directors announce the Company's results for the year ended 30th September 2021.

CHAIRMAN'S STATEMENT

I have great pleasure in presenting the Annual Report of JPMorgan China Growth and Income plc ('the Company') for the year ended 30th September 2021.

Despite volatile market conditions throughout the period, the Company's total return on net assets over the year was +4.1%. This represents the change in net asset value ('NAV') with dividends reinvested and compares favourably with an -11.2% fall in the MSCI China Index. The Company delivered a return to Ordinary shareholders of -2.9%, reflecting a widening in the discount at which the shares traded over the 12 month period, despite the shares having traded at a premium for much of the year.

These performance statistics mask what has been another significant year for the Company. Our share price, which began the year at 552.0p and ended the year at 518.0p, peaked at 860.0p on the 16th February 2021. This sharp increase followed a strong performance by the China market with the price of the Company's shares moving from a discount to NAV to a premium in early October 2020, which was sustained for the most part until July 2021. While trading at a premium, we were able to issue nearly 10.5 million shares, raising £77.9 million, which enabled our investment team to take advantage of investment opportunities in the volatile market conditions.

Through the last quarter of the 2021 financial year and into the current year there have been a series of regulatory changes in China affecting several market sectors, including those in which we have been invested. These have combined with some concerns about a slowing economy in China, worries about fragility in the property sector and geopolitical concerns to cause some negative sentiment towards investment in China in the short term.

Investment Approach and Performance

With the market rotating from growth to value stocks during the year, the importance of our Investment Managers' disciplined investment process and conviction in the structural growth opportunities in China has enabled them to deliver consistent outperformance. Reiterating the point that I made last year, underpinning the investment management process is the breadth and depth of the team of investment research analysts who, although unable to visit companies in China as regularly as usual, have maintained close contact with the companies and their management teams.

While the Board have been unable to visit Asia again this year, we have once again held a virtual Asia visit. This has enabled us to have detailed discussions with analysts in Shanghai, Hong Kong and Taiwan covering key sectors of our portfolio.

The Investment Managers' Review provides a good perspective on the drivers of investment performance in 2021 and their assessment of the investment outlook.

Environment, Social and Governance ('ESG') considerations

We provide a full description of how ESG is integrated into the investment management process later in this report. The investment managers' report describes the developments in the ESG process that have taken place during the year together with examples of how these are implemented in practice. There is also a separate ESG section under Documents on our website that provides a standalone, comprehensive report covering ESG metrics.

Distribution Policy

At the Annual General Meeting in February 2020, shareholders approved a resolution to change the Company's dividend policy (with effect from 1st April 2020) which now aims to pay, in the absence of unforeseen circumstances, a target annual dividend of 4% of the Company's NAV as at the end of the preceding financial year. This is paid by way of four equal interim dividends on the first business day in December, March, June, and September. Any shortfall on the dividend income received from the underlying investments of the portfolio is paid out of the capital growth of the portfolio. For the year ended 30th September 2021 dividends paid totalled 22.8 pence (2020: 7.4 pence).

Gearing

In July 2021, the Company extended its £50 million loan facility (with an option to increase to £60 million) with Scotiabank for a further two years.

During the year the Company's gearing ranged from 7.6% to 12.9% (based on daily data) and, at the time of writing, was 12.6%. The Investment Managers have the flexibility to manage the gearing facility within a range set by the Board of 10% net cash to 20% geared.

Share Issues and Repurchases

The Directors have authority to issue new Ordinary shares for cash and to repurchase shares in the market for cancellation or to hold in Treasury. The Board believes that its policy of share repurchase and share issuance helps to reduce the volatility in discounts and premiums. We are therefore seeking approval from shareholders to renew the share issuance and repurchase authorities at the AGM.

During the year, the Company did not repurchase any Ordinary shares into Treasury (2020: nil) or for cancellation. However, 5,211,777 shares were re-issued from Treasury at a premium to NAV and 5,287,500 new Ordinary shares were issued.

The Board

In November 2021, the Board, through its Nomination Committee, carried out a comprehensive evaluation of the Board, its Committees, the individual Directors and the Chairman. Topics evaluated included the size and composition of the Board, Board information and processes, shareholder engagement and training and accountability. The evaluation confirmed the efficacy of the Board.

Oscar Wong retired from the Board in July 2021. He joined the Board in August 2014 and made a significant contribution to the Board and the performance of the Company during his tenure. On behalf of the Board, I would like to thank Oscar for his valuable contribution to the Company over the years.

Coinciding with Oscar's retirement the Board decided to increase the size of the Board back to five directors; we believe this is an optimal number and appropriate for the growing size of the Company. As part of the succession programme, the Board appointed Joanne Wong and May Tan, both Hong Kong residents each with considerable years of experience in the investment industry. Aditya Sehgal was also appointed to the Board following the year-end; until recently, he was a senior executive with Reckitt Benckiser with extensive experience building and managing businesses for them in China. The new Directors have already started to make a strong contribution to the Board discussions, and I would urge shareholders to support their appointments at the forthcoming AGM.

In accordance with the UK Corporate Governance Code, David Graham and Alexandra Mackesy retire at the forthcoming AGM and, being eligible, will offer themselves for reappointment by shareholders.

I will be retiring from the board after the AGM in January 2022. The Board has agreed unanimously that my successor as Chairman of the Company should be Alexandra Mackesy.

Review of services provided by the Manager

During the year the Board, through its Management Engagement Committee, carried out a thorough review of the investment management, secretarial and marketing services provided to the Company by the Manager, as well as the Depositary and Registration services provided to the Company by the outsourced service providers. Following this review, the Board has concluded that the continued appointment of the Manager and the outsourced service providers on the terms agreed is in the interests of the shareholders as a whole.

The Company's ongoing charges for the financial year, as a percentage of the average of the daily net assets during the year, were 0.99% (2020: 1.00%).

Shareholder Engagement

The Company has for many years had a high proportion of retail investors and over the last 18 months to the end of June 2021 this has increased by 50% to 91.30 % (31st December 2019: 60.42%). Retail investors hold their shares in different ways, direct, through wealth managers and on investment platforms and not all of these make it easy to participate through voting at the Annual General Meeting. I would urge you all to ensure your voice is heard by ensuring your holding is voted at the AGM.

Annual General Meeting

Unfortunately, COVID-19 restrictions prevented the holding of the Company's AGM in February 2021 in the usual format. The Directors were disappointed not to be able to have the usual interaction with shareholders at this forum. However, current indications are that a more traditional format for the AGM may be permissible in January 2022 and, to that end, the Company's twenty-seventh AGM is scheduled to be held on Friday, 28th January 2022 at 11.30 a.m. at 60 Victoria Embankment, London EC4Y 0JP. The Board hopes to welcome as many shareholders as possible.

We do of course strongly advise all shareholders to consider their own personal circumstances before attending the AGM in person. For shareholders wishing to follow the AGM proceedings but choosing not to attend, we will be able to welcome you through conferencing software. Details on how to register together with access details can be found on the Company's website: www.jpchinagrowthandincome.co.uk, or by contacting the Company Secretary at [e-mail].

As is normal practice, all voting on the resolutions will be conducted on a poll. Due to technological reasons, shareholders viewing the meeting via conferencing software will not be able to vote on the poll and we therefore encourage all shareholders, and particularly those who cannot attend physically, to exercise their votes in advance of the meeting by completing and submitting their form of proxy. Shareholders are encouraged to send any questions ahead of the AGM to the Board via the Company Secretary at the email address above. We will endeavour to answer relevant questions at the meeting or via the website depending on arrangements in place at the time.

If there are any changes to the above AGM arrangements, the Company will update shareholders through the Company's website and, as appropriate, through an announcement on the London Stock Exchange.

Conclusion

It has been an honour to serve as the Chairman and to have the opportunity to work with the investment team in Asia, all the many people at JPMorgan Asset Management who help support the Company and last, but not least, the current Board, as well as those that have retired. During my time as Chairman the NAV per share and the share price have grown by 152% and the Company (in terms of Shareholders' funds) has grown from £ 267  million to £473 million. We have refocused the investment objective and benchmark to invest into the A share market, have implemented a new dividend policy and seen the share price move back to a premium in the last year. It has been a privilege to witness the growth in the Company and the strong outperformance of the JPMorgan investment team. In JPMorgan we have an investment manager with the investment skills, disciplines and depth of resources to deliver consistent performance.

Outlook

The volatility we have experienced during the past year reminds us of the challenges of investing in China. This is a market where long-term capital growth is best achieved through sector allocation and bottom-up stock selection which our investment team have the experience to deliver. ESG continues to grow in importance in the investment process and by embedding these factors into their investment process I believe JPMorgan will be able to deliver sustainable growth in one of the world's most challenging markets. Investing in China continues to grow in importance and the Company is well placed to deliver long-term outperformance.

John Misselbrook

Chairman

3rd December 2021

INVESTMENT MANAGERS' REPORT

Over the year to 30th September 2021, the Company's return on net assets was +4.1%, significantly outperforming its benchmark, the MSCI China index, which declined by 11.2% GBP over the period. The Company's return to shareholders (including dividends) was -2.9%, which reflects the widening of the discount from 2.4% to 9.0%.

Setting the scene

There is never a dull moment in investing in China and the past financial year was a particularly eventful one. Market sentiment swung from exuberance at the beginning of the year, to caution, and even scepticism, towards the end of it.

In the first half of the year, the Chinese economy recovered strongly, thanks to prompt COVID containment measures, and Chinese manufacturers benefited from a surge in orders from other major economies whose manufacturing sectors were struggling to deal with the impact of the pandemic. As in all other major markets, news of the arrival of viable vaccines in late 2020 saw attention in the Chinese market rotate from growth to value stocks, as investors anticipated a recovery in more economically sensitive, cyclical sectors such as energy, utilities and financials. The MSCI China index (GBP) rose 23.8% between 30th September 2020 and its peak in February 2021, and then tumbled after the Chinese New Year on fears of a tightening in domestic liquidity and rising 10-year US Treasury yields.

China's Manufacturing PMI stood firmly in expansionary territory for most time of the year, thanks in large part to persistent export demand. The strength of the recovery, combined with China's restrained monetary stance, saw the Renminbi appreciate against USD over the year. It touched a three-year high in May 2021. The central bank (PBOC) raised the foreign exchange reserve requirement to dampen speculative activity and the exchange rate has since stabilised at a lower level. More recently, however, the index dropped below 50% in September 2021, signalling contracting activity, due to commodity price inflation, high shipping costs, power rationing and the shortage in tech components, especially semiconductors.

COVID remains a threat to the economic outlook. China approved its first domestic vaccine in December 2020 and well-organised vaccination programmes ensured that by September 2021, 78% of the population had been vaccinated. A few scattered outbreaks of the virus have been quickly contained. However, while China's success in controlling COVID is applaudable, it remains one of the few countries in the world still committed to a COVID-zero policy that has kept external borders closed. It is unclear when borders will re-open to tourists and business travellers and this has cast a shadow over the outlook for the domestic service sector.

Since recovering from the initial shock of the pandemic, China has maintained a neutral monetary policy aimed at stabilising credit expansion. The implementation of strict controls on borrowing by property developers, to curtail speculative activity, is a key part of this policy. These measures, together with restrictions on homebuyers, contributed to the de facto defaults of several developers in September 2021, including Evergrande, one of the country's largest private property companies. The government plans to deal with these problems at the individual project level, rather than via corporate level bailouts, in part to avoid encouraging reckless commercial behaviour by developers. In our view, and that of other local investors, this is not China's 'Lehman Brothers moment', and is unlikely to trigger systemic ructions. Most of the debt is backed by land and does not involve the kind of complex financial derivatives whose high contagion risks sparked the 2008 global financial crisis.

Chinese regulatory crackdowns on other sectors have also been creating headlines around the world. The emphasis of government policy seems to have shifted from growth-centred policies to regulatory crackdowns designed to achieve more balanced growth. The digital economy and other socially sensitive industries such as education and health care have been most impacted. The shift began in November last year with the high-profile suspension of the Ant Group initial public offering (IPO), due to concerns about its capital structure, its ballooning consumer finance business and conflict with regulators. Then, in July 2021, regulators announced a flurry of new restrictions, including on the private tutoring industry, whose business model was essentially destroyed by the crackdown.

Since then, Chinese regulators have announced tighter controls on anti-competitive behaviour, data security and companies employing gig workers, and non-compliance has been swiftly punished. In the health care sector, we have long championed structural trends such as import substitution and the increasing availability of advance therapeutics, and these are playing out nicely. However, certain sub-sectors such as medical devices and equipment are facing increasing pressure from government procurement policies to cut prices. This is in part intended to reduce corrupt pricing practices which benefit suppliers, distributors and hospital administrators, and should be welcomed by investors. Nonetheless, these regulatory shocks have triggered a selloff in stocks in the property, internet, education and healthcare sectors, all of which are popular with foreign investors.

The crackdowns may seem abrupt and severe, but in our view, controls on many sectors lagged regulations imposed by the EU and US authorities, and China is simply playing catch-up. Some restrictions have also been motivated by the government's recent promotion of 'common prosperity'. This has raised concerns among investors and observers that China is intent on 'soaking the rich', but we disagree with this assessment. On the contrary, China has one of the highest levels of income inequality among the world's major economies, and a more balanced distribution of wealth is critical to ensuring long-term growth.

Environmental regulations are also generating some public concern and criticism. In September 2020, President Xi committed China to achieving 'net zero' carbon emissions by 2060. However, a year on from this pledge, efforts to reduce carbon emissions are being blamed for contributing to recent widespread power shortages. High coal prices and an inflexible power pricing mechanism have also played a role in the shortages, which have been particularly damaging for energy intensive industries such as steelmaking and cement, adding to inflation in basic material prices. The power shortages caused a public outcry that alarmed officials, leading to some retuning of energy policy, although the government remains committed to its net zero target.

Elsewhere, the US Federal Reserve has become increasingly hawkish, due to higher-than-expected inflation, and this has put upward pressure on the US dollar. Trade tensions between China and the US have eased under the Biden administration. However, fundamental differences on trade and other issues persist between the two countries and taking a tough stance against China has bipartisan support in the US.

Performance Commentary

We are pleased that the Company outperformed its benchmark and delivered positive returns in a volatile year. Positive contributions to performance came from several sectors including Consumer Discretionary (+5.8%), Information Technology (+3.4%), Industrials (+2.3%) and Health Care (+1.8%). At the stock level, positions in new energy, electric vehicles (EVs), semiconductor production and internet companies contributed the most. In this section, we highlight some of the sector and stock stories that most impacted portfolio performance.

Within Consumer Discretionary , our internet stock selection was the largest contributor, thanks to our underweight in internet retailer Alibaba (which we had reduced over concerns of its profitability following the regulatory crackdown) , and overweights in its competitor Pinduoduo and in gaming and multimedia company Bilibili , which possess better growth prospects. Our investment in Xpeng , the EV manufacturer, also performed well. The collapse of the private tutoring companies had a limited impact on performance, as we had reduced exposure prior to the regulation and exited the remaining position upon the regulation announcement.

In Information Technology , outperformance was mainly due to our positions in Silergy and Starpower , two semiconductor component producers benefiting from import substitution and global shortages in this sector. Our position in LONGi Green Energy was another top 10 contributor to returns over the year. LONGi is the world's largest producer of solar panel wafers, supplying around half the market.

In Industrials , the largest positive contribution came from Contemporary Amperex Technology (CATL) . CATL is China's leading EV lithium battery maker, supplying about half the domestic market. Its share price rallied due to better-than-expected industry EV sales volumes and the company's deepening links with international vehicle component suppliers. Yunnan Energy New Material , a supplier of EV components, also performed well during the period. These gains helped offset the drag on performance from not owning EV makers Nio and BYD.

Despite widespread and deep price cuts imposed by government procurement policies, our overweight in Health Care made a positive return in the period, thanks mainly to our holdings of two contract research organisations (CROs), Wuxi Biologics and Hangzhou Tigermed , and service provider Aier Eye Hospital , which are not subject to government price cuts. Outperformance thanks to these positions was only partially offset by the adverse impact of Venus Medtech , a medical devices company specialising in heart valves. It delivered decent results, but investors are worried that the government will impose prices cuts on its products, while demand has been hit by pandemic-related delays to elective surgery.

Performance was also hurt by our underweight and stock selection in value sectors such as Energy, Financials and Utilities , as these sectors outperformed during the rotation from growth to value. We had zero weightings in oil, coal and shipping stocks, as investment in these sectors is not consistent with our long-term, growth-oriented strategy. One of our largest Financials holdings, Ping An Insurance , underperformed, as several factors weighed on the share price. Investors have been disappointed by delays to reforms intended to boost productivity of its sales force. In addition, recent events in the property sector pose risks to its property investments. These developments prompted us to sell this company. We also exited Ping An Bank due to concerns about potential capital constraints imposed by its parent company.

Sector allocation and trades

The sudden surge in regulatory restrictions imposed over the review period has not derailed our growth-oriented investment strategy. We have not made any major changes to our sector preferences - our largest overweights remain in Information Technology , Health Care and Consumer Staples , areas which we believe have the greatest growth potential. Our key holdings are also largely unchanged, and include Tencent , Wuxi Biologics , Meituan , Pinduoduo , and Alibaba . Our top 10 holdings include CATL , China Merchants Bank , Country Garden Services , the country's largest property management company, and two enterprise software companies Baosight Software and Kingdee International . We have, however, made adjustments to some of these sectoral and stock positions, which we discuss below.

While the portfolio structure and key holdings remained broadly unchanged during the past year, we continued our search for China's best long-term growth stories. The opportunities we see are being driven by several investment themes.

One major theme is the automation and digitalisation of Chinese enterprises. The government has implemented incentives to encourage the adoption of these technologies, as penetration has so far been low. Consequently, our exposures to Industrials and Information Technology - sectors likely to gain from the introduction of more advanced production methods - saw the largest increases over the past year. For example, we bought several companies focused on industrial automation, including Zhejiang Supcon , OPT Machine Vision , Shenzhen Inovance and Han's Laser . We also added positions in semiconductor manufacturers Starpower and Maxscend and in Baosight Software and two other IT infrastructure companies, Sangfor and Beijing Kingsoft Office . These additions were partially funded by reducing exposures to lower conviction IT names such as Venustech Group and Kingsoft Cloud .

The development of renewable energy sources is integral to the realisation of the government's 'net zero' carbon emissions target, and we expect this sector to experience strong growth as the transition to renewable energy gathers pace. New energy is thus another investment theme driving portfolio activity. We added to solar names, including Xinyi Solar and Tongwei , and also increased our holding in LONGi Green Energy Technology . Automation and software names, including our exposures to Zhejiang Supcon and Baosight Software , will also benefit from the pursuit of the net zero target, as their products enable energy intensive industries to increase energy efficiency and thus cut carbon emissions.

Two further and inter-related themes have motivated other acquisitions over the past year. Rising commodity and energy prices suggest that companies with strong pricing power will outperform as inflation pressures build. Many companies with this capacity will also benefit from the consumer upgrade trend. This is a recognised and significant feature of Chinese society, driven by households improving their homes, and upgrading cars and other possessions as their incomes rise. The market correction during the second half of 2021 provided us with the opportunity to add exposure to Consumer names we expect to benefit from both these trends. Purchases included home improvement companies Haier Smart Home and Oppein Home , and auto components suppliers Fuyao Glass and Changzhou Xinyu .

In addition to the sales of Ping An Insurance and Ping An Bank , within Internet , we reduced our weighting in Alibaba . Investor support has been dented by concerns related to a sexual harassment case, and its prospects appear to be deteriorating. However, we added to Pinduoduo , Alibaba's rival, which we believe has greater growth potential, and to Bilibili , due to its unique and varied content offering, catering to children and young adults. Towards the end of the review period, we began reducing our exposure in EV battery companies, taking profits on CATL and Yunnan Energy New Material . These companies have performed well, and we see limited further upside. Within Consumer , we exited the education sector prior to the crackdown on this sector. We also closed our position in Kweichow Moutai , an alcoholic beverages producer, due to our dissatisfaction with its corporate governance practices.

ESG engagement over the year

Our investment philosophy centres on identifying quality companies with sustainable growth potential. We strongly believe that Environmental, Social and Governance (ESG) considerations (particularly Governance) should be the foundation of any long-term investment process. In our view, corporate policies at odds with such considerations are not sustainable over time. We therefore believe that integrating ESG factors into the investment process is critical to its success.

In the past financial year, JPMAM has continued to strengthen its ESG research capability. Its dedicated Sustainable Investment (SI) team now consists of three sub-teams focused respectively on data and research, client solutions and stewardship. The stewardship team now includes three Hong Kong-based members, two of whom are Chinese speakers. This team's primary responsibilities include proxy voting oversight, pro-active company engagement and ESG reporting, and it works closely with JPMAM's investment managers. In addition, the Emerging Markets and Asia Pacific Equities (EMAP) team has appointed senior investment managers to lead ESG projects, in coordination with the SI team. JPMAM has also updated and expanded its risk profile and materiality questionnaire, which now provides a consistent ESG research framework for use by all JPM AM's equity analysts and investment managers globally. This should improve cross regional references and comparisons.

The following are a few examples of how we have worked with the SI team in the past year to address ESG issues in our portfolio companies:

• In August 2021 we engaged with Alibaba on several matters, including a recent high-profile accusation of a sexual assault within the company. Although the allegations were not supported by a police investigation, the company has implemented new anti-harassment guidelines and set up a working environment committee led by senior female employees, intended to provide employees with a more transparent and supportive complaints process. We also discussed Alibaba's intended response to China's forthcoming data privacy law. Alibaba appears to support the new law stating that in spirit, it is very similar to the general data protection regulations already in place in the UK and the European Union. We highlighted the importance of empowering users to opt-out of data collection. We also sought an update on the board's ESG oversight processes and its approach to ESG disclosures and were pleased to learn that Alibaba is looking to recruit a chief sustainability officer, and is also preparing its ESG report.

• Prior to NetEase's AGM, we met with the company's Chief Finance Officer to express our concerns about the lack of board refreshment, as all five of NetEase's independent directors have held their positions since the company went public more than two decades ago. At the AGM, we voted against the re-election of the nomination committee chair, to express our dissatisfaction with his failure to take steps to improve the board's independence.

• We met with representatives of Baosight Software , which is assisting domestic steelmakers reduce energy usage. The purpose of the meeting was to increase our understanding of the environmental impact of the company's work. We learned that the company is seeing new demand for its services and expanding its client base beyond its BaoSteel parent group, as steel producers strive to comply with the government's net zero carbon emissions target. Following the meeting, we increased our holding.

Outlook

The world is recovering from COVID disruptions and major economies are returning to normal, although some bottlenecks have emerged in global supply chains. A year ago, it was difficult to imagine the world would soon be confronted with supply shortages of an array of products, from semiconductors to clothing, and widespread inflation pressures. We expect inflation to persist in the short term, until pandemic-related obstacles within supply chains are removed and pent-up demand for basic materials and manufactured goods dissipates. Major central banks will gradually wind back the extremely generous monetary stimulus implemented to support activity during the pandemic, but they are still faced with the difficult task of timing future interest rate increases to dampen inflation pressures, without unduly damaging activity.

In China, we believe the recent regulatory crackdowns are ultimately designed to achieve more sustainable and equitable growth. In our view, they do not represent any wavering in the government's commitment to improving living standards, opening the economy and delivering the benefits of technological innovation to consumers and businesses. For example, the government's efforts to limit property prices have wide public support and are essential to achieving a more balanced economy. The drive for common prosperity, if executed well, may lead to greater domestic consumption in the long run.

However, although we agree with the thrust of the regulatory changes, we are not complacent about the associated investment risks. These policies will continue to adversely impact certain companies and industries in the near term and alter the competitive dynamics of some sectors. We will therefore continue to assess regulatory risks on a company-by-company and sector-by-sector basis and review our investment thesis accordingly.

In relation to other aspects of government policy, China has sufficient fiscal and monetary policy head room to support growth if needed, and the recent weakening in manufacturing activity and consumption, if it persists, has increased the chances that some stimulatory measures will be announced in coming quarters. Looking further ahead, the Central Committee of the Communist Party met at the end of 2020 to discuss China's medium and long-term economic strategies. In response to ongoing tensions between China and the US and its western allies, over trade policy and territorial issues, the committee emphasised the need to foster economic self-sufficiency and technological innovation. It also endorsed efforts to boost consumer demand and continuing 'supply-side' structural reforms. We will continue to seek investment opportunities in those sectors best placed to benefit from the government's long-term economic strategies. 

The good news for investors in China is that we believe the sharp share price correction seen in the second half of the review period now reflects most of the risks and uncertainties surrounding Chinese equity markets. And despite some near-term concerns, we remain positive about China's prospects. We expect growth to remain underpinned by the drive to digitalise and implement other technological innovations, by the rising aspirations of the expanding middle class, and increasingly, by the need to reduce carbon emissions.

We are also optimistic about the outlook for Chinese equities. We forecast expected annualised returns over a five-year period, as we believe this figure provides a reliable indicator of potential market performance. Over the next five years, we expect annualised returns to approach 20%. This is very close to an all-time high. Five-year return projections last touched this level in late 2018, following the sharp market sell-off sparked by Sino/US trade tensions and slower domestic growth. Equity markets subsequently experienced a rebound that continued virtually unabated until early 2021 and took indices to all-time highs.

If our analysis proves correct, we can look forward to a strong recovery in Chinese equities over the next few years. We are confident that our long-term investment philosophy, combined with our strong research capabilities and our presence 'on the ground' in mainland China, should help us to navigate any near-term market turbulence and continue to deliver positive returns for our shareholders over the longer term.

Rebecca Jiang
Howard Wang

Shumin Huang

Investment Managers

3rd December 2021

PRINCIPAL AND EMERGING RISKS

The Directors confirm that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. With the assistance of JPMF, the Audit Committee has drawn up a risk matrix, which identifies the key risks to the Company. These are reviewed and noted by the Board. The risks identified and the broad categories in which they fall, and the ways in which they are managed or mitigated are summarised below. The AIC Code of Corporate Governance requires the Audit Committee to put in place procedures to identify emerging risks. The key emerging risks identified are also summarised below.

Principal Risk	Description	Mitigating Activities
Geopolitical	Geopolitical risk arises from uncertainty about the future prices of the Company's investments, the ability to trade in those investments, and the imposition of restrictions on the free movement of capital. Changes in economic or political conditions or other factors can substantially and potentially adversely affect the value of investments. Geopolitical risks could arise from trade and political tensions between China and the United States and, for instance, interference in Hong Kong and Cross Taiwan Straits tension. All may impact the ability of the Manager and other service providers to carry on business as usual in the management of the portfolio in Hong Kong.	The Board meets advisers and gathers insights from both JP Morgan and independent sources on a regular and ongoing basis and takes advice from the Manager and its professional advisers.
Investment Underperformance	An inappropriate investment decision may lead to sustained underperformance against the Company's benchmark index and peer companies, resulting in the Company's shares trading on a wider discount.	The Board manages this risk by diversification of investments through its investment restrictions and guidelines which are monitored and reported on by the Manager. The Manager provides the Directors with timely and accurate management information, including performance data and attribution analyses, revenue estimates and transaction reports. The Board monitors the implementation and results of the investment process with the investment managers, who attend all Board meetings, and reviews data which show statistical measures of the Company's risk profile. The investment managers employ the Company's gearing within a strategic range set by the Board.
Strategy and Business Management	An ill-advised corporate initiative, for example an inappropriate takeover of another company or an ill-timed issue of new capital; misuse of the investment trust structure, for example inappropriate gearing; or if the Company's business strategy is no longer appropriate, may lead to a lack of investor demand.	The Board discusses this on a regular and ongoing basis with the Manager and corporate advisers based on information provided both at and between Board meetings (see above risk regarding Investment Underperformance).
Loss of Investment Team or Investment Manager	A sudden departure of several members of the investment management team could result in a deterioration in investment performance.	The Board seeks assurance that the Manager takes steps to reduce the likelihood of such an event by ensuring appropriate succession planning and the adoption of a team-based approach, as well as special efforts to retain key personnel. The Board engages with the senior management of the Manager in order to mitigate this risk.
Share Price Discount	A disproportionate widening of the discount relative to the Company's peers could result in a loss of value for shareholders.	In order to manage the Company's discount, which can be volatile, the Company operates a share repurchase programme. The Board regularly discusses discount policy and has set parameters for the Manager and the Company's broker to follow. The Board receives regular reports and is actively involved in the discount management process.
Governance	Changes in financial, regulatory or tax legislation, including in the European Union, may adversely affect the Company.	The Manager makes recommendations to the Board on accounting, dividend and tax policies and the Board seeks external advice where appropriate. The Board receives regular reports from its broker, depositary, registrar and Manager as well as its legal advisers and the Association of Investment Companies on changes to governance and regulations which could impact the Company and its industry. The Company monitors events and relies on the Manager and its other key third party providers to manage this risk by preparing for any changes.
Corporate Governance and Shareholder Relations	Details of the Company's compliance with Corporate Governance best practice, including information on relations with shareholders, are set out in the Corporate Governance Statement in the Annual Report.	The Board receives regular reports from the Manager and the Company's broker about shareholder communications, their views and their activity. It also receives updates from its advisors on corporate governance issues and reviews its related policies regularly.
Financial	The financial risks faced by the Company include market price risk, interest rate risk, liquidity risk and credit risk.	Counterparties are subject to daily credit analysis by the Manager. In addition the Board receives reports on the Manager's monitoring and mitigation of credit risks on share transactions carried out by the Company. Further details are disclosed in note 21 in the Annual Report.
Operational Risk and Cyber Crime	Disruption to, or failure of, the Manager's accounting, dealing or payments systems or the depositary's or custodian's records may prevent accurate reporting and monitoring of the Company's financial position. In addition to threatening the Company's operations, such an attack is likely to raise reputational issues which may damage the Company's share price and reduce demand for its shares.	Details of how the Board monitors the services provided by the Manager, its associates and depositary and the key elements designed to provide effective internal control are included within the Risk Management and Internal Control section of the Directors' Report in the Annual Report.. The threat of cyber attack, in all its guises, is regarded as at least as important as more traditional physical threats to business continuity and security. The Company benefits directly or indirectly from all elements of JPMorgan's Cyber Security programme. The information technology controls around the physical security of JPMorgan's data centres, security of its networks and security of its trading applications are tested independently. The risk of fraud or other control failures or weaknesses within the Manager or other service providers could result in losses to the Company. The Audit Committee receives independently audited reports on the Manager's and other service providers' internal controls, as well as a report from the Manager's Compliance function. The Company's management agreement obliges the Manager to report on the detection of fraud relating to the Company's investments and the Company is afforded protection through its various contracts with suppliers, of which one of the key protections is the Depositary's indemnification for loss or misappropriation of the Company's assets held in custody.
Legal and Regulatory	In order to qualify as an investment trust, the Company must comply with Section 1158 of the Corporation Tax Act 2010 ('Section 1158'). Details of the Company's approval are given under 'Structure of the Company' in the Annual Report.. Were the Company to breach Section 1158, it may lose investment trust status and, as a consequence, gains within the Company's portfolio would be subject to Capital Gains Tax.	The Section 1158 qualification criteria are continually monitored by the Manager and the results reported to the Board each month. The Company must also comply with the provisions of the Companies Act 2006 and, since its shares are listed on the London Stock Exchange, the UKLA Listing Rules, Disclosure Guidance and Transparency Rules ('DTRs') and, as an Investment Trust, the Alternative Investment Fund Managers Directive ('AIFMD'). A breach of the Companies Act 2006 could result in the Company and/or the Directors being fined or the subject of criminal proceedings. Breach of the UKLA Listing Rules or DTRs could result in the Company's shares being suspended from listing which in turn would breach Section 1158. The Board relies on the services of its Company Secretary, JPMorgan Funds Limited and its professional advisers to ensure compliance with the Companies Act 2006, the UKLA Listing Rules, DTRs and AIFMD.
Global pandemics	The emergence and spread of coronavirus (COVID-19) is a global pandemic risk that poses a significant risk to the Company's portfolio. COVID-19 has highlighted the speed and extent of economic damage that can arise from a pandemic. While current vaccination programme results are hopeful, the risk remains that new variants may not respond to existing vaccines, may be more lethal and may spread as global travel opens up again.	Time after time, markets have recovered, albeit over varying and sometimes extended time periods, and so the Board does have an expectation that the portfolio's holdings will not suffer a material long-term impact and should recover. The Board receives reports on the business continuity plans of the Manager and other key service providers. The effectiveness of these measures have been assessed throughout the course of the COVID-19 pandemic and the Board will continue to monitor developments as they occur and seek to learn lessons which may be of use in the event of future pandemics. Should the virus become more virulent than is currently the case, it may present risks to the operations of the Company, its Manager and other major service providers. Should efforts to control a pandemic prove ineffectual or meet with substantial levels of public opposition, there is the risk of social disorder arising at a local, national or international level. Even limited or localised societal breakdown may threaten both the ability of the Company to operate, the ability of investors to transact in the Company's securities and ultimately the ability of the Company to pursue its investment objective and purpose.

Emerging Risk	Description	Mitigating Activities
Climate change	Climate change, which barely registered with investors a decade ago, has today become one of the most critical issues confronting asset managers and their investors. Investors can no longer ignore the impact that the world's changing climate will have on their portfolios, with the impact of climate change on returns now inevitable.	The Board is also considering the threat posed by the direct impact on climate change on the operations of the Manager and other major service providers. As extreme weather events become more common, the resiliency, business continuity planning and the location strategies of our services providers will come under greater scrutiny. The Board also receives ESG reports from the Manager on the portfolio and the way ESG considerations are integrated into the investment decision-making.

TRANSACTIONS WITH THE MANAGER AND RELATED PARTIES

Details of the management contract are set out in the Directors' Report in the Annual Report.. The management fee payable to the Manager for the year was £4,572,000 (2020: £2,733,000).

Safe custody fees amounting to £81,000 (2020: £65,000) were payable to JPMorgan Chase Bank N.A. during the year of which £41,000 (2020: £14,000) was outstanding at the year end.

The Manager may carry out some of its dealing transactions through group subsidiaries. These transactions are carried out at arm's length. The commission payable to JPMorgan Securities Limited for the year was £28,000 (2020: £15,000).

Handling charges on dealing transactions amounting to £42,000 (2020: £55,000) were payable to JPMorgan Chase Bank N.A. during the year of which £20,000 (2020: £7,000) was outstanding at the year end.

The Company also held cash during the year in the JPMorgan US Dollar Liquidity Fund, which is managed by JPMorgan. At the year end this was valued at £nil (2020: £nil). Interest amounting to £8,000 (2020: £18,000) was receivable during the year.

Fees amounting to £638,000 (2020: £202,000) were receivable from stock lending transactions during the year. JPMorgan Investor Services Limited commissions in respect of such transactions amounted to £71,000 (2020: £22,000).

At the year end, total cash of £36,000 (2020: £343,000) was held with JPMorgan Chase Bank, N.A. in a non interest bearing current account.

Full details of Directors' remuneration and shareholdings can be found in the Directors' Remuneration Report and in note 6 in the Annual Report.

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Financial Statements for each financial year. Under that law the Directors have elected to prepare the Financial Statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and applicable law). Under company law the Directors must not approve the Financial Statements unless they are satisfied that, taken as a whole, the Annual Report and Financial Statements are fair, balanced and understandable; provide the information necessary for shareholders to assess the Company's position, business model and strategy; and that they give a true and fair view of the state of affairs of the Company and of the total return or loss of the Company for that period. In preparing these Financial Statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;

• state whether applicable UK Accounting Standards comprising FRS 102, have been followed, subject to any material departures disclosed and explained in the Financial Statements;

• make judgments and accounting estimates that are reasonable and prudent; and

• prepare the Financial Statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business.

and the Directors confirm that they have done so.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The accounts are published on the www.jpmchinagrowthandincome.co.uk website, which is maintained by the Company's Manager. The maintenance and integrity of the website maintained by the Manager is, so far as it relates to the Company, the responsibility of the Manager. The work carried out by the auditor does not involve consideration of the maintenance and integrity of this website and, accordingly, the auditor accepts no responsibility for any changes that have occurred to the accounts since they were initially presented on the website. The accounts are prepared in accordance with UK legislation, which may differ from legislation in other jurisdictions.

Under applicable law and regulations the Directors are also responsible for preparing a Strategic Report, a Directors' Report and a Directors' Remuneration Report that comply with that law and those regulations.

Each of the Directors, whose names and functions are listed in Directors' Report confirm that, to the best of their knowledge:

• the Company's Financial Statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

• the Directors' Report and the Strategic Report include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

The Directors consider that the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.

For and on behalf of the Board
John Misselbrook
Chairman

3rd December 2021

FINANCIAL STATEMENTS

STATEMENT OF COMPREHENSIVE INCOME

for the year ended 30th September 2021

	2021			2020
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Net gains on investments held at fair value through profit or loss	-	3,485	3,485	-	164,024	164,024
Net foreign currency gains1	-	1,364	1,364	-	1,492	1,492
Income from investments	2,966	-	2,966	3,401	-	3,401
Other income	646	-	646	220	-	220
Gross return	3,612	4,849	8,461	3,621	165,516	169,137
Management fee	(1,143)	(3,429)	(4,572)	(683)	(2,050)	(2,733)
Other administrative expenses	(540)	-	(540)	(438)	-	(438)
Net return before finance costs and taxation	1,929	1,420	3,349	2,500	163,466	165,966
Finance costs	(195)	(580)	(775)	(188)	(564)	(752)
Net return before taxation	1,734	840	2,574	2,312	162,902	165,214
Taxation charges	(171)	-	(171)	(166)	-	(166)
Net return after taxation	1,563	840	2,403	2,146	162,902	165,048
Return per share	1.97p	1.06p	3.03p	2.95p	224.06p	227.01p

¹   £2,057,000 due to an exchange gain on the loan which is denominated in US dollars. £693,000 due to net exchange loss on cash and cash equivalents (2020: £1,430,000 due to an exchange gain on the loan which is denominated in US dollars. £62,000 due to net exchange gains on cash and cash equivalents).

statement of changes in equity

for the year ended 30th September 2021

	Called up		Exercised	Capital
	share	Share	warrant	redemption	Other	Capital	Revenue
	capital	premium	reserve	reserve	reserve1,2	reserves2	reserve2	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 30th September 2019	19,481	13,321	3	581	37,392	179,059	3,276	253,113
Net return	-	-	-	-	-	162,902	2,146	165,048
Dividend paid in the year (note 3)	-	-	-	-	-	(1,776)	(5,422)	(7,198)
At 30th September 2020	19,481	13,321	3	581	37,392	340,185	-	410,963
Issue of Ordinary shares	1,322	39,111	-	-	-	-	-	40,433
Issue of shares from Treasury	-	28,613	-	-	-	9,007	-	37,620
Project costs - in relation to issue of new shares	-	(94)	-	-	-	-	-	(94)
Net return	-	-	-	-	-	840	1,563	2,403
Dividend paid in the year (note 3)	-	-	-	-	-	(16,360)	(1,563)	(17,923)
At 30th September 2021	20,803	80,951	3	581	37,392	333,672	-	473,402

¹ Created during the year ended 30th September 1999, following a cancellation of the share premium account.

² These reserves form the distributable reserves of the Company and may be used to fund distributions to investors.

statement of FINANCIAL POSITION

as at 30th September 2021

	2021	2020
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	521,634	454,645
Current assets
Debtors	4,264	819
Cash and cash equivalents	36	343
	4,300	1,162
Current liabilities
Creditors: amounts falling due within one year	(4,206)	(44,844)
Net current assets/(liabilities)	94	(43,682)
Total assets less current liabilities	521,728	410,963
Creditors: amounts falling due after one year	(48,326)	-
Net assets	473,402	410,963
Capital and reserves
Called up share capital	20,803	19,481
Share premium	80,951	13,321
Exercised warrant reserve	3	3
Capital redemption reserve	581	581
Other reserve	37,392	37,392
Capital reserves	333,672	340,185
Total shareholders' funds	473,402	410,963
Net asset value per share	569.0p	565.3p

STATEMENT OF CASH FLOWs

for the year ended 30th September 2021

	2021	2020
	£'000	£'000
Net cash outflow from operations before dividends and interest	(5,140)	(2,885)
Dividends received	2,966	3,248
Interest received	8	18
Overseas tax recovered	-	1
Interest paid	(801)	(700)
Net cash outflow from operating activities	(2,967)	(318)
Purchases of investments	(385,098)	(174,168)
Proceeds from sale of investments	320,797	161,070
Settlement of foreign currency contracts	51	33
Net cash outflow from investing activities	(64,250)	(13,065)
Dividends paid	(17,923)	(7,198)
Issue of Ordinary shares	40,433	-
Reissue of shares from Treasury	37,620	-
Project costs - in relation to issue of new shares	(94)	-
Repayment of bank loans	-	(67)
Drawdown of bank loans	6,800	17,895
Utilisation of bank overdraft	124	-
Net cash inflow from financing activities	66,960	10,630
Decrease in cash and cash equivalents	(257)	(2,753)
Cash and cash equivalents at start of year	343	3,134
Unrealised losses on foreign currency cash and cash equivalents	(50)	(38)
Cash and cash equivalents at end of year	36	343
Decrease in cash and cash equivalents	(257)	(2,753)
Cash and cash equivalents consist of:
Cash at bank	36	343
	36	343

Notes to the financial statements

for the year ended 30th September 2021

1.  Accounting policies

  Basis of accounting

The Financial Statements are prepared under the historical cost convention, modified to include fixed asset investments at fair value, and in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ('UK GAAP'), including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the Association of Investment Companies in October 2019.

All of the Company's operations are of a continuing nature.

The Financial Statements have been prepared on a going concern basis. In forming this opinion, the directors have considered any potential impact of COVID-19 pandemic on the going concern and viability of the Company. They have considered the potential impact of COVID-19 and the mitigation measures which key service providers, including the Manager, have in place to maintain operational resilience particularly in light of COVID-19. The Directors have reviewed income and expense projections and the liquidity of the investment portfolio in making their assessment.

The policies applied in these Financial Statements are consistent with those applied in the preceding year.

2.  Return per share

		2021	2020
		£'000	£'000
	Revenue return	1,563	2,146
	Capital return	840	162,902
	Total return	2,403	165,048
	Weighted average number of shares in issue during the year	79,481,601	72,703,188
	Revenue return per share	1.97p	2.95p
	Capital return per share	1.06p	224.06p
	Total return per share	3.03p	227.01p

3.  Dividends

(a)  Dividends paid and proposed

		2021	2020
		£'000	£'000
	Dividends paid
	2019 final dividend of 2.5p per share	-	1,818
	2021 first quarterly interim dividend of 5.7p (2020: 3.7p)	4,144	2,690
	2021 second quarterly interim dividend of 5.7p (2020: 3.7p)	4,366	2,690
	2021 third quarterly interim dividend of 5.7p (2020: nil)	4,671	-
	2021 fourth quarterly interim dividend of 5.7p (2020: nil)	4,742	-
	Total dividends paid in the period	17,923	7,198
	Dividends proposed
	2022 first quarterly interim dividend of 5.7p (2021: 5.7p) per share1	4,743	4,144

¹   First quarterly payment of 4% of 569.0p per share, being the NAV per share at 30th September 2021.

The first quarterly interim dividend has been declared in respect of the year ended 30th September 2022. In accordance with the accounting policy of the Company, this dividend will be reflected in the financial statements for the year ending 30th September 2022.

(b) Dividend for the purposes of Section 1158 of the Corporation Tax Act 2010 ('Section 1158')

The requirements of Section 1158 are considered on the basis of the dividend proposed in respect of the financial year, shown below.

The aggregate of the distributable reserves is £371,064,000 (2020: £377,577,000). Please note that at the Annual General Meeting ('AGM') in February 2020, shareholders approved an amendment to the Company's Articles of Association to allow the Company to distribute capital as income to enable the implementation of the Company's revised dividend policy). Please see the Chairman's Statement in the Annual Report and Financial Statements for further details.

	2020	2019
	£'000	£'000
2021 first quarterly interim dividend of 5.7p (2020: 3.7p) 2021 second quarterly interim dividend of 5.7p (2020: 3.7p)	4,144 4,366	2,690 2,690
2021 third quarterly interim dividend of 5.7p (2020: nil)	4,671	-
2021 fourth quarterly interim dividend of 5.7p (2020: nil)	4,742	-
	17,923	5,380

The aggregate of the distributable reserves after the payment of the first quarterly dividend will amount to £366,321,000 (2020: 373,433,000). Please see the Chairman's Statement in the Annual Report and Financial Statements for further details.

4.  Net asset value per share

		2021	2020
	Net assets (£'000)	473,402	410,963
	Number of shares in issue	83,202,465	72,703,188
	Net asset value per share	569.0p	565.3p

5.  Status of results announcement

  2020 Financial Information

The figures and financial information for 2020 are extracted from the Annual Report and Financial Statements for the year ended 30th September 2020 and do not constitute the statutory accounts for that year.  The Annual Report and Financial Statements has been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

  2021 Financial Information

The figures and financial information for 2021 are extracted from the Annual Report and Financial Statements for the year ended 30th September 2021 and do not constitute the statutory accounts for that year.  The Annual Report and Financial Statements includes the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Financial Statements will be delivered to the Registrar of Companies in due course.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

3rd December 2021

For further information:

Lucy Dina,

JPMorgan Funds Limited

020 7742 4000

ENDS

A copy of the 2021 Annual Report and Financial Statements will shortly be submitted to the FCA's National Storage Mechanism and will be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism

The 2021 Annual Report and Financial Statements will also shortly be available on the Company's website at www.jpmchinagrowthandincome.co.uk where up-to-date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.

JPMORGAN FUNDS LIMITED

 

END

 

 

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