Half Yearly Report

RNS Number : 6571S

JPMorgan Japan Smaller Co Tst PLC

23 November 2011

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN JAPAN SMALLER COMPANIES TRUST PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED
30TH SEPTEMBER 2011

Chairman's Statement

Performance

The first half of our current financial year proved another turbulent period for the Japanese smaller companies market, as concern for the global economy, political uncertainty, the strength of the yen and the repercussions from the earthquake and tsunami dampened investor sentiment. For a change, however, Japanese smaller companies have been one of the better performing markets and the Company's undiluted net asset value rose 5.8% during the period, outperforming the benchmark, the S&P/Citigroup Japan Extended Market Index (total return net), which rose 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, rose by 5.0%. Over the same period, the Company's Ordinary share price return fell by 4.1%, reflecting the widening of the discount from 11.2% to 18.9%. Subsequent to the period end, the discount has tightened somewhat and, as at the time of writing, stood at 16.2%.

Gearing

The Company has recently renewed its yen 2.0bn secured credit facility with Scotiabank Europe plc, which gives the Investment Managers the ability to gear tactically. During the six months to 30th September 2011, the Company's gearing ranged from 96% to 112%, 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

During the six months to 30th September 2011, the Company issued 4,362 new Ordinary shares following valid applications to exercise Subscription shares. At the time of writing, the Company's shares were trading at 136 pence per share, below the current exercise price of 147 pence per share. It should be noted that with effect from 1st April 2012 the exercise price of the Subscription shares increases from 147 pence per share to 174 pence per share. Further details of the Subscription shares can be found on the Company's website at www.jpmjapansmallercompanies.co.uk

Outlook

The portfolio remains focussed on high quality Japanese companies with good earnings progression, strong balance sheets and, in many cases, exposure to the faster growing economies of Asia. It is encouraging that these sound fundamentals have garnered steady returns over the six months under review and the Board looks forward to continued progress.

Alan Clifton

Chairman

22nd November 2011

Investment Managers' Report

The key focus of the Company's portfolio remains very much as last year - Japanese companies that have an opportunity to grow in Asia, those that are reorganising previously inefficient businesses and those that are in structural growth niches within the domestic economy. We performed in-line with the benchmark with exposure to game software, healthcare services and specialist retailers contributing positively. The strengthening yen was an increasingly negative factor for exporters such as car manufacturers, and industrial companies. We have maintained a substantial position in Asian-exposed motorcycle component companies and these positions detracted from performance. The underlying structural demand growth story has not changed however, and we continue to believe that these businesses are very attractively valued.

The Great East Japan Earthquake

The financial year opened overshadowed by the terrible tragedy of the March earthquake and tsunami. Any initial sense of optimism that the disaster could be a catalyst for change quickly gave way to further disillusionment and the market began a gradual sell-off that continued to the end of the period. The triple disaster in March led to a significant slowdown in the economy as factories shut, supply chains were damaged and power was rationed. Encouragingly, the recovery from this tragedy has been far quicker than many expected and production has now normalised for most companies. Disciplined power consumption during the summer months meant that further significant disruptions were avoided. One key long-term consequence will be a reappraisal of Japan's energy policy, a process that has already begun. A further implication is that companies will be even more likely to move their production facilities overseas.

The Economy

The speed of the global economic recovery following the 2008 Lehman failure has been a disappointment. Unemployment in the United States has remained at historically high levels. The Eurozone crisis has deepened as politicians have failed to deal with many of the key issues. Many countries are proceeding with austerity measures at the same time as economic growth falters. This does not bode well for future growth. By contrast, Asia has remained robust and Japan is fortunate that by geographic chance it is located in the heart of a region undergoing a transformation. Japanese exports to Asia are now larger than to the US and Europe combined and many of the products in demand in these areas are key sectors of Japanese competitive strength.

Currency

The strength of the Japanese yen has been a feature of the last four years. The yen now trades at a multi-year high against many currencies including the US Dollar, the British Pound and the Euro. Against the Pound the exchange rate has moved from Y250 in the middle of 2007 to around Y125 currently. The strength of the yen is important because many of Japan's key competitor nations have very weak currencies. It is remarkable that Japanese manufacturers have dealt so well with their rapidly appreciating currency.

Politics

At the end of August, Yoshihiko Noda was elected Japan's sixth prime minister in five years. He succeeded Naoto Kan, who stepped down under the pressure of his handling of the March earthquake and subsequent nuclear crisis. Furthermore, there have now been eight finance ministers in the last three years. Clearly, this level of turnover of senior politicians is not helpful. However, Japan's bureaucracy is strong and these changes have close to no impact on individual companies.

Portfolio Strategy and Performance

There are many long-term trends in Japan that we analyse to establish a strong framework to identify those companies that will prosper in the long-term. In some cases these trends are unavoidably negative; for example, that the population will fall; deflation is entrenched; and in some areas Japanese companies have lost competitiveness to lower cost, more aggressive rivals in the rest of the Asian region. On the more positive side, we expect trade with Asia to continue to expand and even within the domestic market there are structural shifts, such as the increased shopping online, health care services expansion to meet an ageing population, the rise of mobile gaming and the continued outsourcing of non-core business activities that are very supportive of growth.

The investments in the portfolio can be broadly divided into three different groups:

1) Companies that will grow sales and profits by taking advantage of rapidly expanding markets across the Asian region. There is rapid growth of the middle class across the developing world and this has two main consequences for companies in the portfolio. First, disposable incomes are rising, which means increased demand for many products - rapidly growing penetration of motorcycles in India and Indonesia is driving demand expansion for our auto part companies who supply market leaders Honda, Bajaj and Hero, whilst soaring car production in India continues to bolster Kansai Paint. Secondly, as wages rise there is a greater necessity to automate production and Japan has many globally leading companies in the fields of robotics and factory automation.

2) Companies that are exposed to structurally growing sectors domestically and globally. The percentage of online shopping in Japan is some way behind the level we see in other developed markets. We expect that this will change over time and that the environment will become tougher for some traditional retailers, such as department stores, as a result. Kakaku.com and Start Today are key beneficiaries of this trend.

We also anticipate major change in the world of computer games. We no longer expect the majority of people to buy consoles such as the Nintendo Wii or Microsoft Xbox. Rather we think games will be downloaded directly to smart phones, tablet computers and, eventually, televisions. The providers of this content will be key beneficiaries. Companies such as Konami, Namco Bandai and Capcom, amongst others, should benefit.

3) Company specific opportunities. We are fortunate to have a large team based on the ground in Tokyo. We conduct many company visits each year - over 2500 company meetings in the last financial year alone - to try to identify significant changes in sectors and companies. One such example of significant change arising is at Daido Metal. This company is the leading global manufacturer of bi-metallic bearings and it has restructured after an overly aggressive expansion into the US market. It is now taking market share at many auto manufacturers, not just those based in Japan. Its gains are derived from its superior technology which has helped bring about dominant positions in large size marine bearings.

It is pleasing to see some of these themes and companies as our main contributors to performance over the last six months. Game software names were notably positive contributors, as were healthcare service names such as Ship Healthcare, and M3. Discount airline operator, Skymark, also continued to benefit from JAL's demise and has posted very strong performance, whilst the position in Trancom, which we have held for some years, continues to make steady progress. On the other hand, cyclical holdings, such as Musashi Seimitsu, Yamato Kogyo and Disco, performed less well due to heightened concerns over the global growth outlook. We do not believe that their long term earnings powers have been in any way diminished and thus we have been adding to some of these positions as and when their valuations have become sufficiently compelling.

Outlook

There are many long-term trends in Japan, both positive and negative. We believe that the differences between those companies that will succeed and those that will not are set to become ever starker. Although there are many domestic and global macro-economic headwinds, which explain the current ungeared position, there are also tailwinds that are boosting many of our holdings - Asian consumer growth, technological revolution, or transforming business models. In a period of weak economic activity these structural shifts become even more important for finding attractive investment opportunities and this is where both our research efforts and our portfolio are concentrated.

David Mitchinson

Nicholas Weindling

Investment Managers

22nd November 2011

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 the following broad categories: investment and 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 2011.

Related Parties 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 DTR 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-

22nd November 2011

For further information, please contact:

Andrew Norman

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 2011

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	30th September 2011			30th September 2010			31st March 2011
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair value through profit or loss	-	4,495	4,495	-	(11,697)	(11,697)	-	(8,787)	(8,787)
Net foreign currency losses	-	(441)	(441)	-	(1,014)	(1,014)	-	(896)	(896)
Income from investments	555	-	555	543	-	543	1,223	-	1,223
Other interest receivable and similar income	-	-	-	-	-	-	-	-	-
Gross return/(loss)	555	4,054	4,609	543	(12,711)	(12,168)	1,223	(9,683)	(8,460)
Management fee	(494)	-	(494)	(518)	-	(518)	(945)	-	(945)
Other administrative expenses	(188)	-	(188)	(209)	-	(209)	(395)	-	(395)
Net (loss)/return on ordinary activities before finance costs and taxation	(127)	4,054	3,927	(184)	(12,711)	(12,895)	(117)	(9,683)	(9,800)
Finance costs	(97)	-	(97)	(145)	-	(145)	(235)	-	(235)
Net (loss)/return on ordinary activities before taxation	(224)	4,054	3,830	(329)	(12,711)	(13,040)	(352)	(9,683)	(10,035)
Taxation	(39)	-	(39)	(34)	-	(34)	(82)	-	(82)
Net (loss)/return on ordinary activities after taxation	(263)	4,054	3,791	(363)	(12,711)	(13,074)	(434)	(9,683)	(10,117)
(Loss)/return per Ordinary share (note 3)
- undiluted	(0.67)p	10.27p	9.60p	(0.92)p	(32.23)p	(33.15)p	(1.10)p	(24.55)p	(25.65)p
- diluted	(0.67)p	10.32p	9.65p	(0.93)p	(32.45)p	(33.38)p	(1.11)p	(24.70)p	(25.81)p

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 2011	capital	premium	reserve	reserve	reserves	reserve	Total
(Unaudited)	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31st March 2011	4,058	710	314,823	1,794	(243,728)	(12,099)	65,558
Cancellation of shares held in Treasury	(42)	-	-	42	-	-	-
Issue of Ordinary shares on exercise of Subscription shares	-	6	-	-	-	-	6
Net return/(loss) on ordinary activities	-	-	-	-	4,054	(263)	3,791
At 30th September 2011	4,016	716	314,823	1,836	(239,674)	(12,362)	69,355

	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

	Called up			Capital
Year ended	share	Share	Other	redemption	Capital	Revenue
31st March 2011	capital	premium	reserve	reserve	reserves	reserve	Total
(Audited)	£'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	640	-	-	-	-	691
Net loss on ordinary activities	-	-	-	-	(9,683)	(434)	(10,117)
At 31st March 2011	4,058	710	314,823	1,794	(243,728)	(12,099)	65,558

Balance Sheet

at 30th September 2011

	(Unaudited)	(Unaudited)	(Audited)
	30th September 2011	30th September 2010	31st March 2011
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	66,263	61,950	66,513
Current assets
Debtors	1,432	648	5,520
Cash and short term deposits	10,305	109	5,593
	11,737	757	11,113
Creditors: amounts falling due within one year	(8,645)	(109)	(12,068)
Net current assets/(liabilities)	3,092	648	(955)
Total assets less current liabilities	69,355	62,598	65,558
Net assets	69,355	62,598	65,558
Capital and reserves
Called up share capital	4,016	4,058	4,058
Share premium	716	707	710
Other reserve	314,823	314,823	314,823
Capital redemption reserve	1,836	1,794	1,794
Capital reserves	(239,674)	(246,756)	(243,728)
Revenue reserve	(12,362)	(12,028)	(12,099)
Total equity shareholders' funds	69,355	62,598	65,558
Net asset value per Ordinary share (note 4)
- undiluted	175.8p	158.7p	166.2p
- diluted	171.3p	156.7p	163.2p

Cash Flow Statement

for the six months ended 30th September 2011

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2011	30th September 2010	31st March 2011
	£'000	£'000	£'000
Net cash outflow from operating activities (note 5)	(1)	(2)	(239)
Net cash outflow from returns on investments and servicing of finance	(101)	(175)	(260)
Net cash inflow from capital expenditure and financial investment	10,294	12,337	6,731
Net cash outflow from financing	(6,233)	(14,721)	(3,434)
Increase/(decrease) in cash in the period	3,959	(2,561)	2,798
Reconciliation of net cash flow to movement in net funds/debt
Net cash movement	3,959	(2,561)	2,798
Net loans repaid	6,239	15,409	4,125
Exchange movements	(441)	(1,014)	(896)
Movement in net funds/debt in the period	9,757	11,834	6,027
Net debt at the beginning of the period	(5,698)	(11,725)	(11,725)
Net funds/(debt) at the end of the period	4,059	109	(5,698)
Represented by:
Cash and short term deposits	10,305	109	5,593
Debt falling due within one year	(6,246)	-	(11,291)
Net funds/(debt) at the end of the period	4,059	109	(5.698)

Notes to the Accounts

for the six months ended 30th September 2011

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 2011 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 2011.

3. (Loss)/return per Ordinary share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	30th September 2011	30th September 2010	31st March 2011
	£'000	£'000	£'000
(Loss)/return per Ordinary share is based on the following:
Revenue loss	(263)	(363)	(434)
Capital return/(loss)	4,054	(12,711)	(9,683)
Total return/(loss)	3,791	(13,074)	(10,117)
Weighted average number of Ordinary shares in issue during the period used for the purpose of the basic (undiluted) calculation	39,455,653	39,443,759	39,447,831
Weighted average number of Ordinary shares in issue during the period used for the purpose of the diluted calculation	39,267,442	39,166,842	39,203,987
Basic (undiluted)
Revenue loss per Ordinary share	(0.67)p	(0.92)p	(1.10)p
Capital return/(loss) per Ordinary share	10.27p	(32.23)p	(24.55)p
Total return/(loss) per Ordinary share	9.60p	(33.15)p	(25.65)p
Diluted
Revenue loss per Ordinary share	(0.67)p	(0.93)p	(1.11)p
Capital return/(loss) per Ordinary share	10.32p	(32.45)p	(24.70)p
Total return/(loss) per Ordinary share	9.65p	(33.38)p	(25.81)p

The diluted (loss)/return per Ordinary share represents the (loss)/return on ordinary activities after taxation for the period 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 2011	30th September 2010	31st March 2011
Undiluted
Ordinary shareholders' funds (£'000)	69,355	62,598	65,558
Number of Ordinary shares in issue	39,456,287	39,450,619	39,451,925
Net asset value per Ordinary share	175.8p	158.7p	166.2p
Diluted
Ordinary shareholders' funds assuming exercise of dilutive Subscription shares and reissuance of any Treasury shares (£'000)	79,987	73,802	76,893
Number of potential Ordinary shares in issue	46,688,796	47,108,296	47,108,296
Net asset value per Ordinary share	171.3p	156.7p	163.2p

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 any 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 return/(loss) 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 2011	30th September 2010	31st March 2011
	£'000	£'000	£'000
Total return/(loss) on ordinary activities before finance costs and taxation	3,927	(12,895)	(9,800)
Less capital (return)/loss before finance costs and taxation	(4,054)	12,711	9,683
Decrease/(increase) in accrued income	182	155	(33)
Decrease/(increase) in other debtors	20	19	(1)
(Decrease)/increase in other creditors	(37)	42	(6)
Overseas withholding tax	(39)	(34)	(82)
Net cash outflow from operating activities	(1)	(2)	(239)