Half Yearly Report

RNS Number : 2246W

JPMorgan Japan Smaller Co Tst PLC

15 November 2010

 



LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN JAPAN SMALLER COMPANIES TRUST PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED

30TH SEPTEMBER 2010

CHAIRMAN'S STATEMENT

Performance

After a better year in the twelve months to 31st March 2010, it is extremely disappointing to report that the first half of the current financial year proved a very challenging period for the Japanese smaller companies market, as fears over political uncertainty, the strengthening yen and a slowdown in the Japanese domestic economy dampened investor sentiment. The Managers have not coped well with these tough conditions and the Company's undiluted net asset value fell 17.6% during the period, underperforming the benchmark, the S&P/Citigroup Japan Extended Market Index (total return net), which fell by 5.1%. The diluted total return on net assets, which assumes that all of the Subscription shares were exercised at the current rate of 147 pence per share and that all Treasury shares were issued in accordance with the Board's policy on reissuance of Treasury shares, decreased by 14.3%. Over the same period, the Company's Ordinary share price return and Subscription share price return fell by 15.7% and 20.0%, respectively. The Company's 'Unit' share price return, which comprises the total return from 5 Ordinary shares and 1 Subscription share (as issued to shareholders on 5th March 2009) decreased by 15.9%. All in all, this performance does not in any way present a satisfactory picture. The Board has made it known to the Managers its great concern at this deeply disappointing outcome.

Gearing

The Company has recently entered into a secured credit facility of two billion yen with Scotiabank Europe plc which gives the Investment Managers the ability to gear tactically. During the six months to 30th September 2010, the Company's gearing ranged from 90% to 117%, reflecting the volatile nature of investor sentiment and the Japanese smaller companies market during the period. At the time of writing, the Company was 96% invested.

Subscription Shares

On 1st April 2010, the exercise price of the Subscription shares increased from 135 pence per share to 147 pence per share. During the six months to 30th September 2010, the Company issued 508,737 new Ordinary shares following valid applications to exercise Subscription shares. At the time of writing, the Company's shares were trading at 132.5 pence per share, below the current exercise price. Further details of the Subscription shares can be found on the Company's website at www.jpmjapansmallercompanies.co.uk.

Outlook

Long term shareholders will recognise the dichotomy facing the investment management team. On the one hand the portfolio is invested in high quality Japanese companies that have good earnings progression, strong balance sheets and in many cases are exposed to faster growing Asian economies. On the other hand, the Japanese stock market is going through a period of deep depression and rates its constituent stocks far lower than other markets. Although the Board is disappointed that the performance has been poor in the period under review, it recognises the substantial inherent value in the underlying portfolio and continues to encourage the Managers to seek the shares of companies able to prosper in the current challenging environment.

Alan Clifton

Chairman

15th November 2010

INVESTMENT MANAGERS' REPORT

Review

The Company's financial year began with promise after the solid performance of the Japanese market in the early part of 2010. The first half, though, has seen the market retrace towards the lows seen at the time of the global financial crisis - just 10% below where we trade now. Many stocks that were performing well are now below where they were 18 months ago. Valuations which had never become expensive have once more become extremely depressed, with dozens of companies trading below cash and even strongly performing companies only able to command a single digit price/earnings multiples. In short, you can once again buy Japanese stocks at levels seen during the global financial crisis at a time when the crisis has passed and the global economy is recovering. What has caused this abrupt shift? The clearest explanations for the downturn come from the macroeconomic and political environment where domestic conditions have deteriorated, and the strong yen is having a negative impact on competitiveness and profitability. For these forces to push the market down to compelling, bear market valuation levels again despite the steady improvement in economies globally looks like an opportunity to acquire strongly managed, globally oriented companies at distressed prices. Over the past two months we have been increasing our positions in a number of existing holdings, and using the new opportunities presented by the market to initiate new positions. Primarily these are stocks exposed to Asia, on low valuations, and with strong market positions. For now, we must acknowledge that Japanese stocks remain in a bear market even if their valuations are low and their business performance is good.

One reason behind the weak market performance is that the domestic economy has failed to regain a growth path and is experiencing an ongoing shifting of production and investment offshore, especially to emerging markets. Restructuring and capacity reduction in some industries like petrochemicals and cement, whilst necessary and positive for profits, is another ongoing negative factor. The government did have two 'cash for clunkers' style plans to encourage demand, however, overall almost no steps have been taken to stimulate the economy. The Bank of Japan likewise maintains an inactive policy stance in the face of ongoing deflation. Whilst expectations from Japanese policy are always low, the lack of any measures to stimulate the economy, combat deflation or stem the yen's rise is representative of the profound malaise that infects the political decision making process. The upper house elections in July 2010 saw the Prime Minister lose authority and since then policy has drifted without a clear direction on any of the major issues. Notably this includes foreign exchange intervention and anti-deflationary policy. The government has, for the first time in years, intervened to lower the level of the currency, but only to a limited extent and for a short period. Currency markets have shrugged off such intervention and the yen is now significantly higher. Those areas of the economy that have improved are rebounding due to demand from overseas, especially from Asia and other emerging economies. This year approximately 65% of Japanese exports are headed to these fast growing regions. Reflecting this weak domestic demand environment, an over-riding theme within the portfolio is investment in stocks that are strongly geared to emerging economies. Autoparts, consumer goods, retailers and machinery companies are all heavily exposed to these new demand sources. The constantly poor headline news items; the strong yen, policy inactivity and weak domestic economy are enough to deter all but the most value conscious and contrarian investors. In many cases the domestic economy has little to do with the company sales, profits or growth opportunities that we can see and there is clearly a significant perception gap between our view and that of investors generally.

The largest position in the portfolio has been, and remains, our position in automotive components (categorized as 'Transportation Equipment'). These companies supply key components for motorbikes and for construction machinery and generate most of their profits from their businesses in China, Indonesia and Brazil, selling to a newly affluent consumer. Valuations for these stocks remain below ten times earnings for companies with sales growth rates over 20%. Profit growth is even stronger and we expect this strong expansion to continue for many years. Valuations are at just one third to one half those of similar Asian quoted stocks.

The positions in long term growing domestic companies have also been maintained. Some of these are taking share from established modes of business benefiting from the outsourcing of non-core businesses by cost conscious Japanese companies. Others have merely been caught up in the de-rating of all domestic assets - leading companies can command only low valuations even where their own businesses are set for another year of record profitability. Honeys, a recent purchase, is rapidly growing its Chinese business (at almost 200 stores now) and is on track to eclipse its Japanese business within a few years. Being a Japanese stock means that it trades on only ten times earnings despite the profound shift the business is going through. We expect that as the Chinese business develops the company will be reappraised. Some of our domestic service companies trade on four times current year earnings and on less than three times the level management is indicating for next year. These low valuations have allowed Aeon Delight to complete a very attractive merger and acquisition deal that will recoup the purchase price of its acquisitions in only two years. For strongly positioned firms the downturn is offering an opportunity to acquire bargain priced assets.

The sharp falls in the market have thrown up numerous opportunities in previously highly rated stocks; one such is a new position amongst paint companies. Nippon Paint is Asia's largest paint company with the top share in China. Strong demand for housing is driving 30% growth for interior paint, whilst robust car production volumes are also aiding strong growth. Nippon Paint trades at eleven times earnings this year just as it is beginning a large scale expansion into India, which we anticipate will drive sales and earnings growth over the next few years. Paint faces a surprisingly high technological entry barrier which is allowing Nippon Paint to establish consumer brand awareness and strong local distribution channels to cement its early mover advantage.

The tough economy has also thrown up other possibilities caused by a realization that demand domestically will not recover and by the forced withdrawal by bankruptcy of competitors. The airline and consumer finance industries are two where the change has been most profound. The bankruptcy of the flag carrier JAL has seen domestic competition decline dramatically allowing discount operator Skymark to expand routes and enjoy a surge in customers. Years of low profitability has now given way to an opportunity to grow traffic and profits dramatically. Skymark trades at ten times earnings just as the structural expansion phase begins.

The portfolio is not oriented around a belief that the Japanese economy will recover strongly but rather a belief that for many firms business performance is diverging very sharply from that of the economy as a whole. Whether it is a dominant share in Chinese paint, fast growing retail products in Indonesia or an aggressive domestic merger and acquisition strategy, individual company performance is not being determined by the Japanese economy. The portfolio is invested in these individual opportunities where we can see a route towards much higher profits in a few years time, strong execution capability by management, and where valuations are currently cheap and do not reflect this bright medium term potential. Given that the market is trading at close to record low valuations we have been using the market sell off as an opportunity to acquire attractive investments. In particular we want to buy stocks where the valuation is already very low, where the underlying business is progressing strongly and where we can see the potential for a significant reappraisal if the business develops as we anticipate. When we contrast the global environment now against that when stocks last traded at these valuations, things are far better. So far, Japanese smaller companies do not reflect that improvement. We have used the downturn to position the portfolio to reflect that positive global world rather than the depressed domestic economy.

David Mitchinson

Nicholas Weindling

Investment Managers

15th November 2010

Interim Management Report

The Company is required to make the following disclosures in its Half Year Report.

Principal Risks and Uncertainties

The principal risks and uncertainties faced by the Company fall into nine broad categories: investment strategy; market; accounting, legal and regulatory; corporate governance and shareholder relations; operational; foreign currency; and financial (including credit risk). Information on each of these areas is given in the Business Review within the Annual Report and Accounts for the year ended 31st March 2010.

Related Party Transactions

During the first six months of the current financial year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company during the period.

Directors' Responsibilities

The Board of Directors confirms that, to the best of its knowledge:

(i)    the condensed set of financial statements contained within the half yearly financial report has been prepared in accordance with the Accounting Standards Board's Statement 'Half-Yearly Financial Reports'; and

(ii)   the interim management report includes a fair review of the information required by 4.2.7R and 4.2.8R of the UK Listing Authority Disclosure and Transparency Rules.

For and on behalf of the Board

Alan Clifton

Chairman

15th November 2010

For further information, please contact:

Christopher Legg

For and on behalf of

JPMorgan Asset Management (UK) Limited, Secretary

020 7742 6000

Please note that up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can be found at www.jpmjapansmallercompanies.co.uk

Income Statement

for the six months ended 30th September 2010

	(Unaudited) Six months ended 30th September 2010			(Unaudited) Six months ended 30th September 2009			(Audited) Year ended 31st March 2010
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments held at fair value through profit or loss	-	(11,697)	(11,697)	-	19,642	19,642	-	25.071	25.071
Net foreign currency losses	-	(1,014)	(1,014)	-	(628)	(628)	-	(862)	(862)
Income from investments	543	-	543	371	-	371	1,019	-	1,019
Other interest receivable and similar income	-	-	-	3	-	3	25	-	25
Gross return/(loss)	543	(12,711)	(12,168)	374	19,014	19,388	1,044	24,209	25,253
Management fee	(518)	-	(518)	(439)	-	(439)	(938)	-	(938)
Other administrative expenses	(209)	-	(209)	(174)	-	(174)	(301)	-	(301)
Net (loss)/return on ordinary activities before finance costs and taxation	(184)	(12,711)	(12,895)	(239)	19,014	18,775	(195)	24,209	24,014
Finance costs	(145)	-	(145)	(133)	-	(133)	(304)	-	(304)
Net (loss)/return on ordinary activities before taxation	(329)	(12,711)	(13,040)	(372)	19,014	18,642	(499)	24,209	23,710
Taxation	(34)	-	(34)	(22)	-	(22)	(67)	-	(67)
Net (loss)/return on ordinary activities after taxation	(363)	(12,711)	(13,074)	(394)	19,014	18,620	(566)	24,209	23,643
(Loss)/return per Ordinary share (note 3)
- undiluted	(0.92)p	(32.23)p	(33.15)p	(1.01)p	48.85p	47.84p	(1.45)p	62.19p	60.74p
- diluted	(0.93)p	(32.45)p	(33.38)p	(1.01)p	48.60p	47.59p	(1.45)p	62.01p	60.56p

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period.

The 'Total' column of this statement is the profit and loss account of the Company and the 'Revenue' and 'Capital' columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Total column represents all the information that is required to be disclosed in a Statement of Total Recognised Gains and Losses ('STRGL'). For this reason a STRGL has not been presented.

Reconciliation of Movements in Shareholders' Funds

	Called up			Capital
Six months ended	share	Share	Other	redemption	Capital	Revenue
30th September 2010	capital	premium	reserve	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31st March 2010	4,012	65	314,823	1,794	(234,045)	(11,665)	74,984
Exercise of Subscription shares into Ordinary shares	(5)	5	-	-	-	-	-
Issue of Ordinary shares on exercise of Subscription shares	51	637	-	-	-	-	688
Net loss on ordinary activities	-	-	-	-	(12,711)	(363)	(13,074)
At 30th September 2010	4,058	707	314,823	1,794	(246,756)	(12,028)	62,598
Six months ended	Called up			Capital
30th September 2009	share	Share	Other	redemption	Capital	Revenue
(Unaudited)	capital	premium	reserve	reserve	reserves	reserve	Total
At 31st March 2009	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Issue of Ordinary shares on exercise of Subscription shares	2	25	-	-	-	-	27
Net return/(loss) on ordinary activities	-	-	-	-	19,014	(394)	18,620
At 30th September 2009	4,010	25	314,857	1,794	(239,240)	(11,493)	69,953
	Called up			Capital
Year ended	share	Share	Other	redemption	Capital	Revenue
31st March 2010	capital	premium	reserve	reserve	reserves	reserve	Total
(Audited)	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31st March 2009	4,008	-	314,857	1,794	(258,254)	(11,099)	51,306
Repurchase of shares into Treasury	-	-	(34)	-	-	-	(34)
Exercise of Subscription shares into Ordinary shares	(1)	1	-	-	-	-	-
Issue of Ordinary shares on exercise of Subscription shares	5	64	-	-	-	-	69
Net return/(loss) on ordinary activities	-	-	-	-	24,209	(566)	23,643
At 31st March 2010	4,012	65	314,823	1,794	(234,045)	(11,665)	74,984

Balance Sheet

at 30th September 2010

	(Unaudited)	(Unaudited)	(Audited)
	30th September 2010	30th September 2009	31st March 2010
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	61,950	82,573	87,948
Current assets
Debtors	648	2,050	1,442
Cash and short term deposits	109	2,230	2,385
	757	4,280	3,827
Creditors: amounts falling due within one year	(109)	(16,900)	(16,791)
Net current assets/(liabilities)	648	(12,620)	(12,964)
Total assets less current liabilities	62,598	69,953	74,984
Total net assets	62,598	69,953	74,984
Capital and reserves
Called up share capital	4,058	4,010	4,012
Share premium	707	25	65
Other reserve	314,823	314,857	314,823
Capital redemption reserve	1,794	1,794	1,794
Capital reserves	(246,756)	(239,240)	(234,045)
Revenue reserve	(12,028)	(11,493)	(11,665)
Shareholders' funds	62,598	69,953	74,984
Net asset value per Ordinary share (note 4)
- undiluted	158.7p	179.7p	192.6p
- diluted	156.7p	172.1p	182.8p

Cash Flow Statement

for the six months ended 30th September 2010

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2010	30th September 2009	31st March 2010
	£'000	£'000	£'000
Net cash outflow from operating activities (note 5)	(2)	(135)	(371)
Net cash outflow from return on investments and servicing of finance	(175)	(117)	(289)
Net cash inflow/(outflow) from capital expenditure and financial investment	12,337	(12,268)	(11,621)
Net cash (outflow)/inflow from financing	(14,721)	3,055	3,062
Decrease in cash in the period	(2,561)	(9,465)	(9,219)
Reconciliation of net cash flow to movement in net funds/debt
Net cash movement	(2,561)	(9,465)	(9,219)
Net loans repaid/(drawndown)	15,409	(3,091)	(3,091)
Exchange movements	(1,014)	(628)	(862)
Movement in net funds/debt in the period	11,834	(13,184)	(13,172)
Net (debt)/funds at the beginning of the period	(11,725)	1,447	1,447
Net funds/(debt) at the end of the period	109	(11,737)	(11,725)
Represented by:
Cash and short term deposits	109	2,230	2,385
Debt falling due within one year	-	(13,967)	(14,110)
Net funds/(debt) at the end of the period	109	(11,737)	(11,725)

Notes to the Accounts

for the six months ended 30th September 2010

1.    Financial statements

      The information contained within the Financial Statements in this half year report has not been audited or reviewed by the Company's auditors.

      The figures and financial information for the year ended 31st March 2010 are extracted from the latest published accounts of the Company and do not constitute statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and included the report of the auditors which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

2.   Accounting policies

      The accounts have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued in January 2009.

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

      The accounting policies applied in these half year accounts are consistent with those applied in the accounts for the year ended 31st March 2010.

3.   (Loss)/return per Ordinary share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2010	30th September 2009	31st March 2010
	£'000	£'000	£'000
(Loss)/return per Ordinary share is based on the following:
Revenue loss	(363)	(394)	(566)
Capital (loss)/return	(12,711)	19,014	24,209
Total (loss)/return	(13,074)	18,620	23,643
Weighted average number of Ordinary shares in issue during the period used for the purpose of the basic (undiluted) calculation	39,443,759	38,924,543	38,928,451
Weighted average number of Ordinary shares in issue during the period used for the purpose of the diluted calculation	39,166,842	39,123,442	39,040,383
Basic (undiluted)
Revenue loss per Ordinary share	(0.92)p	(1.01)p	(1.45)p
Capital (loss)/return per Ordinary share	(32.23)p	48.85p	62.19p
Total (loss)/return per Ordinary share	(33.15)p	47.84p	60.74p
Diluted
Revenue loss per Ordinary share	(0.93)p	(1.01)p	(1.45)p
Capital (loss)/return per Ordinary share	(32.45)p	48.60p	62.01p
Total (loss)/return per Ordinary share	(33.38)p	47.59p	60.56p

The diluted (loss)/return per Ordinary share represents the (loss)/return on ordinary activities after taxation divided by the weighted average number of Ordinary shares in issue during the period as adjusted in accordance with the requirements of Financial reporting Standard 22 'Earnings per Share'.

4.   Net asset value per Ordinary share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2010	30th September 2009	31st March 2010
Undiluted
Ordinary shareholders' funds (£'000)	62,598	69,953	74,984
Number of Ordinary shares in issue	39,450,619	38,933,986	38,941,882
Net asset value per Ordinary share	158.7p	179.7p	192.6p
Diluted
Ordinary shareholders' funds assuming exercise of dilutive Subscription shares and reissuance of Treasury shares (£'000)	73,802	81,073	86,126
Number of potential Ordinary shares in issue	47,108,296	47,108,296	47,108,296
Net asset value per Ordinary share	156.7p	172.1p	182.8p

      The diluted net asset value per Ordinary share assumes that all outstanding dilutive Subscription shares were converted into Ordinary shares at the period end and all shares held in Treasury at the period end were reissued in accordance with the Board's policy on the reissuance of Treasury shares.

5.   Reconciliation of net (loss)/return on ordinary activities before finance costs and taxation to net cash outflow from operating activities

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2010	30th September 2009	31st March 2010
	£'000	£'000	£'000
Total (loss)/return on ordinary activities before finance costs and taxation	(12,895)	18,775	24,014
Less capital loss/(return) before finance costs and taxation	12,711	(19,014)	(24,209)
Decrease/(increase) in accrued income	155	168	(27)
Decrease in other debtors	19	45	19
Increase/(decrease) in other creditors	42	(87)	(101)
Overseas withholding tax	(34)	(22)	(67)
Net cash outflow from operating activities	(2)	(135)	(371)

 

END

 

 

IR GGGCPGUPUGRA