Interim Results

JPMorgan Fleming Japanese Smllr Cos 29 November 2007 LONDON STOCK EXCHANGE ANNOUNCEMENT JPMORGAN FLEMING JAPANESE SMALLER COMPANIES INVESTMENT TRUST PLC UNAUDITED INTERIM RESULTS FOR THE HALF YEAR ENDED 30TH SEPTEMBER 2007 INTERIM MANAGEMENT REPORT Chairman's Statement Performance The first half of the Company's financial year has seen a continuation of the difficult and volatile market conditions that have bedevilled the Japanese smaller companies sector for the last eighteen months. Over the six months to 30th September 2007, the Company's net asset value fell by 12.4% in total return terms, underperforming the total return of the benchmark index, which fell by 10.4%. However, whilst this continued underperformance is disappointing, there are signs that sentiment towards the sector, and to Japan itself, may be changing for the better, as our Manager, David Mitchinson, discusses in his review below. Gearing The Company has remained geared throughout the period with the level of gearing ranging between 110% and 116%, ending the period at 112%. Discount Management As at 30th September 2007, the Company's discount, calculated with liabilities valued at their fair value, was 8.8%, having widened, in line with all Japanese investment trusts, from 4.9% at the start of the year. On 27th June 2007, the Company repurchased 50,000 ordinary shares (0.1% of the shares in issue) for cancellation at a discount of 9.5%. Outlook In contrast to the Japanese equity markets, Corporate Japan has been performing well, posting its sixth straight year of earnings growth and enjoying the relatively benign economic environment. For these positives to be reflected by higher share prices a change in sentiment from both consumers and investors, is required. With deflationary pressures receding and property prices and real wages beginning to edge ahead, the prospects of this occurring are improving. Principal Risks and Uncertainties The principal risks and uncertainties faced by the Company fall into five broad categories: investment and strategy; accounting, legal and regulatory; corporate governance and shareholder relations; operational; and financial. Information on each of these areas is given in the Business Review within the Annual Report and Accounts for the year ended 31st March 2007. 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 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 29th November 2007 Investment Manager's Report The Japanese smaller companies market continued to struggle during the half year to 30th September 2007, declining 10%, and we modestly underperformed our benchmark. Against this negative market backdrop, defensive names outperformed growth companies. Growth indices were sharply lower than our more balanced benchmark. Our exposure to strongly growing businesses with good profitability hurt our performance. Japan as a whole remains distinctly out of favour, with a recent Merrill Lynch fund manager survey showing near record numbers of investors underweight, and happy to be so. Smaller companies are even more unpopular just now as investors have chased the hot Indian and Chinese markets. Typically, such a negative performance would have been associated with an economy in recession and sharply dropping company profits. Far from it, as corporate Japan has continued to grow earnings far above the rate of GDP growth. Our portfolio is expected to show 23% earnings growth this year. This has created a position where smaller company stocks, and the Japanese market, have de-rated to valuations similar to those witnessed at the bottom of the long bear market in 2003.Many companies trade on single digit or low double digit p/e multiples, or even below the level of cash on their balance sheet. In short, Japanese companies are cheap and unloved. The Japanese economy has delivered tepid growth over the last six months, impacted positively by strong overseas demand from Asia and negatively by some new government policies on consumer finance and more onerous planning regulations. Whilst the slow growth is a macro concern, many companies have de-linked their business and earnings from the overall economic cycle - either through new products or because they are benefiting from some structurally positive factors. The wider backdrop is also supportive, as the long term problem of declining land prices has been overcome with a gradual rippling out effect from central Tokyo of rising land prices. For banks and others this supports the collateral values for lending and should create a more positive backdrop for consumers. Wages have followed the economy and are not growing strongly - in 2002/3/4 wages and bonuses were dropping very sharply so this is a much better situation - but for many categories of workers wages are increasing. The inflation outlook is also more mixed with prices for food and energy rising whilst charges for mobile phones and appliances are declining. Japan also has relatively little exposure to sub-prime loans and CDOs so the financial system is in a strongly capitalised shape - unlike in 2002/3. In fact many of the excesses that are now weighing on the American economy have been avoided in Japan - no refinancing for consumption, no aggressively leveraged M&A and companies are maintaining extremely healthy balance sheets. This suggests that Japan as an economy should not be tremendously exposed to the US growth slowdown. Our basic assumption is that modest growth will continue. The fund has used the weakness over the past few months to broaden the portfolio, increasing exposure to areas as diverse as power grid maintenance, Liquid crystal display chemicals, sporting goods retailers and security companies. At the same time, some longer run themes such as games software and IT software services remain very much intact. The new games software cycle is the fund's largest position encompassing both hardware manufacturers of the consoles themselves as well as games software design companies. This is an area where Japanese firms led by Nintendo and Sony have a strong competitive edge. A growing number of small engineering firms are being reassessed as their products are seeing increasing global adoption in areas such as valves for oil pipelines, radar equipment for ships, and headphones for Apple and Nokia as the quality of the product is gaining more attention. In each case, these companies have a high global market share, a clearly defined edge over competitors and have been traded at lowly valuation levels. We have also used the weakness to build up positions in a number of strongly growing companies. Currently these businesses are out of favour, but as they show healthy sales and profits growth we believe that investors will eventually return to them. In particular we are looking for firms where management has changed (restructuring), the market it is exposed to is attractive (structural support) or there is a new product cycle (secular growth) - and where the upside potential over several years is material. One example is Ai Holdings. This newly created company was formed through the merger of Dodwell BMS and Graphtec. Uncertainty over tax losses, the shape of the balance sheet and an irregular financial year caused investors to sell off this company. Previously Dodwell had commanded a high premium rating driven by its strong growth in card machines and other security devices. The newly formed company had a lower market cap even though sales and profits had both risen.We expect around 20% growth in profits over the next few years - a prediction underwritten by the withdrawal from the market and contracting its production to Ai of one of its major competitors. An example of another of our long standing holdings, Aeon Delight, is also performing very solidly. Aeon Delight is steadily taking over the building maintenance operations at Aeon malls and shopping centres throughout Japan (and China). The management is working to increase not just top line, but also margins, delivering substantial earnings growth over the next 3 years. The management has successfully completed several substantial M&A deals and is keen to expand. Finally, Nihon Kohden has launched its patient monitor in the US, Europe and South America and is seeing very strong sales and profits growth from this new product. A shortage of nurses is driving greater use of patient monitors in hospitals globally and Kohden's simple to use and competitively priced models are seeing widespread adoption. Valuations are also undemanding - reflecting the company's conservative forecasts - and provide plenty of upside potential in terms of earnings growth but also multiple re-rating. Notably, all of these companies carry substantial net cash - a common trait throughout the portfolio. Despite the tough conditions, we are sticking to our stance of buying good companies with growth potential. The whole market has de-rated and these companies have seen their p/e multiples contract and in many cases trade at levels below those companies with 'defensive' earnings streams despite their long track records of delivering growth. From here it would be very unusual to see further derating of these companies especially when their balance sheets are supportive, earnings are healthy and their valuations are reaching historically low levels. The corollary of this is that we are being extremely tough on stocks that are disappointing - implementing a tough sell discipline and striving to avoid earnings disappointments. Whilst the short term catalyst that will re-rate the smaller companies market is always difficult to see, we are expecting that ongoing solid execution of the business plans will draw investors' attention rather than any external catalyst. As it has for several months the smaller company markets offer plenty of value, alongside healthy growth in sales and earnings. What is lacking is an appetite amongst investors to pick up oversold Japanese businesses. With the markets beaten down and cheap, there are plenty of attractive opportunities to invest in. We have been trying to bolster the value and growth profile of the fund and exploit some of the short term panic amongst investors by acquiring good businesses at bargain prices. Once investors' appetites return these businesses will not be so cheap anymore. David Mitchinson Investment Manager 29th November 2007 For further information please contact: Andrew Norman JPMorgan Asset Management (UK) Limited - Telephone 0207 742 6000 JPMorgan Fleming Japanese Smaller Companies Investment Trust plc Unaudited figures for the six months ended 30th September 2007 Income Statement (Unaudited) (Unaudited) (Audited) Six months ended 30th September Six months ended 30th Year ended 31st March 2007 September 2006 2007 Revenue Capital Total Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Losses from investments held at fair value through profit or loss - (12,653) (12,653) - (42,168) (42,168) - (54,956) (54,956) Net foreign currency (losses)/gains - (32) (32) - 1,295 1,295 - 2,149 2,149 Income from investments 391 - 391 518 - 518 1,282 - 1,282 Other interest receivable and similar income 87 - 87 150 - 150 165 - 165 _______ ________ _______ _______ ________ _______ _______ _______ _______ Gross revenue and capital gains/(losses) 478 (12,685) (12,207) 668 (40,873) (40,205) 1,447 (52,807) (51,360) Management fee (721) - (721) (925) - (925) (1,714) - (1,714) Other administrative expenses (175) - (175) (171) - (171) (331) - (331) _______ _______ _______ _______ _______ _______ _______ _______ _______ Net loss before finance costs and taxation (418) (12,685) (13,103) (428) (40,873) (41,301) (598) (52,807) (53,405) Finance costs (97) - (97) (70) - (70) (154) - (154) _______ _______ _______ _______ _______ _______ _______ _______ _______ Net loss before taxation (515) (12,685) (13,200) (498) (40,873) (41,371) (752) (52,807) (53,559) Taxation (27) - (27) (36) - (36) (90) - (90) ______ _______ _______ ______ _______ _______ _______ _______ _______ Net loss after taxation (542) (12,685) (13,227) (534) (40,873) (41,407) (842) (52,807) (53,649) ===== ===== ===== ===== ===== ===== ===== ===== ===== Loss per share (note 3) (1.38)p (32.21)p (33.59)p (1.36)p (103.71)p (105.07)p (2.14)p (133.99)p (136.13)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. 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. JPMorgan Fleming Japanese Smaller Companies Investment Trust plc Unaudited figures for the six months ended 30th September 2007 Reconciliation of Movements in Shareholders' Funds (Unaudited) Called up Capital Share Other redemption Capital Revenue capital reserve reserve reserve reserve Total £'000 £'000 £'000 £'000 £'000 £'000 Six months ended 30th September 2007 (unaudited) At 31st March 2007 3,940 315,620 1,784 (204,835) (10,206) 106,303 Shares bought back and cancelled (5) (113) 5 - - (113) Capital loss from ordinary activities - - - (12,685) - (12,685) Revenue loss from ordinary activities - - - - (542) (542) _______ ________ ________ _______ _______ ________ At 30th September 2007 3,935 315,507 1,789 (217,520) (10,748) 92,963 Called up Capital Share Other redemption Capital Revenue capital reserve reserve reserve reserve Total £'000 £'000 £'000 £'000 £'000 £'000 Six months ended 30th September 2006 (unaudited) At 31st March 2006 3,940 315,620 1,784 (152,028) (9,364) 159,952 Capital loss from ordinary activities - - - (40,873) - (40,873) Revenue loss from ordinary activities - - - - (534) (534) _______ ________ ________ _______ _______ ________ At 30th September 2006 3,940 315,620 1,784 (192,901) (9,898) 118,545 Called up Capital Share Other redemption Capital Revenue capital reserve reserve reserve reserve Total £'000 £'000 £'000 £'000 £'000 £'000 Year ended 31st March 2007 (audited) At 31st March 2006 3,940 315,620 1,784 (152,028) (9,364) 159,952 Capital loss from ordinary activities - - - (52,807) - (52,807) Revenue loss from ordinary activities - - - - (842) (842) _______ ________ ________ _______ _______ ________ At 31st March 2007 3,940 315,620 1,784 (204,835) (10,206) 106,303 JPMorgan Fleming Japanese Smaller Companies Investment Trust plc Unaudited figures for the six months ended 30th September 2007 Balance Sheet (Unaudited) (Unaudited) (Audited) 30th September 2007 30th September 2006 31st March 2007 £'000 £'000 £'000 Fixed assets Investments at fair value through profit or 103,842 134,380 122,977 loss Current assets Debtors 2,172 994 676 Cash and short term deposits 1,429 2,637 1,789 ______ ______ ______ 3,601 3,631 2,465 Creditors: amounts falling due within one year (14,480) (19,466) (19,139) ______ ______ ______ Net current liabilities (10,879) (15,835) (16,674) Total assets less current liabilities 92,963 118,545 106,303 ______ ______ ______ Total net assets 92,963 118,545 106,303 ______ ______ ______ Capital and reserves Called up share capital 3,935 3,940 3,940 Other reserve 315,507 315,620 315,620 Capital redemption reserve 1,789 1,784 1,784 Capital reserve (217,520) (192,901) (204,835) Revenue reserve (10,748) (9,898) (10,206) ______ ______ ______ Shareholders' funds 92,963 118,545 106,303 ===== ===== ===== Net asset value per share (note 4) 236.2p 300.8p 269.7p Cash Flow Statement (Unaudited) (Unaudited) (Audited) Six months ended Six months ended Year ended 30th September 2007 30th September 31st March 2007 2006 £'000 £'000 £'000 Net cash outflow from operating activities (153) (253) (797) Net cash outflow from return on investments and servicing of finance (106) (59) (138) Net cash inflow from capital expenditure and financial investment 4,474 9,165 8,952 Net cash outflow from financing (4,543) (6,028) (6,029) _______ _______ _______ (Decrease)/increase in cash for the period (328) 2,825 1,988 _______ _______ _______ Notes to the Accounts 1. Financial Statements The information contained within the financial statements in this half-yearly report has not been audited or reviewed by the Company's auditors. The figures and financial information for the year ended 31st March 2007 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 237(2) or 237 (3) of the Companies Act 1985. 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' dated 31st December 2005. All of the Company's operations are of a continuing nature. The accounting policies applied in these interim accounts are consistent with those applied in the accounts for the year ended 31st March 2007. 3. Loss per share (Unaudited) (Unaudited) (Audited) Six months ended 30th Six months ended Year ended September 2007 30th September 2006 31st March 2007 £'000 £'000 £'000 Loss per share is based on the following: Revenue loss (542) (534) (842) Capital loss (12,685) (40,873) (52,807) Total loss (13,227) (41,407) (53,649) Weighted average number of shares in issue 39,359,423 39,409,423 39,409,423 Revenue loss per share (1.38)p (1.36)p (2.14)p Capital loss per share (32.21)p (103.71)p (133.99)p Total loss per share (33.59)p (105.07)p (136.13)p 4. Net asset value per share Net asset value per ordinary share is calculated by dividing shareholders' funds by the number of shares in issue at 30th September 2007 of 39,359,423 (30th September 2006 and 31st March 2007: 39,409,423) JPMORGAN ASSET MANAGEMENT (UK) LIMITED This information is provided by RNS The company news service from the London Stock Exchange

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