Final Results

RNS Number : 1633Q

Pacific Horizon Investment Tst PLC

08 September 2017

 

RNS Announcement: Preliminary Results

Pacific Horizon Investment Trust PLC

Legal Entity Identifier: VLGEI9B8R0REWKB0LN95

Regulated Information Classification: Additional regulated information required to be disclosed under the laws of a Member State of the European Union.

Results for the year to 31 July 2017

The following is the unaudited preliminary statement for the year to 31 July 2017 which was approved by the Board on 7 September 2017.

Chairman's Statement

Performance

In the year to 31 July 2017, the Company's net asset value per share ('NAV') total return was 38.5%. During the same period, the total return of the Company's comparative index, the MSCI All Country Asia ex Japan Index*, was 28.6% in sterling terms. The share price total return was 42.5%, and the discount narrowed from 10.1% to 7.5%. The Board is encouraged by the performance of the invested portfolio.

The strong relative and absolute performance over the course of the year was largely a consequence of good stock selection, particularly in Hong Kong and China where exposure to certain Consumer Discretionary and Information Technology names proved beneficial. Three of the Company's holdings more than doubled their share price over the period: Sunny Optical Technology, which specialises in optical lenses and has a leading market share in the fast growing car camera market; Geely Automobile, whose parent owns Volvo, a Chinese car manufacturer targeting the mass-market sedan and Sports Utility Vehicle markets; and JD.com, one of the leading e-commerce companies in China. The shares of a further ten holdings appreciated by more than 50%. The use of gearing also helped performance.

Over the five years to 31 July 2017 the Company's NAV and share price have returned 84.6% and 97.2% respectively; over the same period the Company's comparative index, the MSCI All Country Asia ex Japan Index, has returned 81.5% in sterling terms. The Managers' Review below provides a more detailed review of the Company's performance along with thoughts on the outlook and areas the Managers are finding of interest.

Earnings and Dividend

The Company's objective is to invest for capital growth rather than income, and all expenses, including borrowing costs, are charged to revenue. As highlighted in my report last year, any dividend payable in future would be determined as being the minimum permissible in order to maintain investment trust status. This year, earnings per share were in deficit of 0.38p (0.30p in 2016) as a result of costs exceeding the income received. As a consequence, no final dividend is being proposed. The Board recommends that investors should not consider investing in this Company if they require income.

Gearing

The Board sets the gearing parameters within which the portfolio managers are permitted to operate and these are reviewed at each Board meeting. At present, the agreed range of equity gearing is minus 15% (i.e. holding net cash) to plus 10%. At the year end, equity gearing was 7.1%, having started the year at 2.9%; it varied between a positive of 1.0% and 8.1% over the year. Gearing is achieved through the use of bank borrowings. At present the Company has a Royal Bank of Scotland £15 million multi-currency revolving credit facility, of which £15 million by value had been drawn in GBP and USD at 31 July 2017.

Management Fee

During the year an amendment was made to the management agreement with the introduction of a reduced third tier of charges of 0.55% at £250m of net assets. The annual management fee payable by the Company is now charged at a rate of 0.95% on the first £50m of net assets, at 0.65% on the next £200m of net assets and at 0.55% on the remaining net assets. The fee will continue to be calculated and paid on a quarterly basis. Although not having an immediate impact on costs, the Board welcomes the Managers' aspirations to grow the Company and to share the benefits of scale with investors.

Annual General Meeting

This year's AGM will take place on 15 November 2017 at the offices of Baillie Gifford & Co in Edinburgh at 11.00am. I would encourage shareholders to arrive by 10.50am to allow time to register. The Managers will make a presentation and, along with the Directors, will answer any questions from shareholders. I hope to see as many of you as possible there.

Tender Mechanism

As highlighted in my report last year, should the Company's NAV total return performance fail to beat the Company's comparative index by at least 1% per annum over a three year period to 31 July 2019 on a cumulative basis, the Board will propose a 25% tender of the Company's issued share capital at the time of calculation. The tender would be at a 2% discount to NAV less costs and subject to receiving shareholder authority. At present the Company is 8.9 percentage points ahead of the required hurdle. If the tender is triggered, and authority is obtained, a separate circular and tender form will be sent to shareholders which will set out the full terms and conditions of the tender offer and the procedure for tendering shares.

Any future tender offer will remain subject to the discretion of the Board. The Board intends to consult as many shareholders as is practical in advance of any action; a tender will only be carried out where the Board considers the tender offer to be in the best interests of the Company and shareholders as a whole.

Share Buy-backs and Issuance from Treasury

At the forthcoming AGM, the Board will be asking shareholders to renew the mandate to repurchase up to 14.99% of the outstanding shares on an ad hoc basis and to also permit the re-issuance of any shares held in Treasury. The Board uses the buyback authority opportunistically, taking into account not only the level of the discount but also the underlying liquidity and trading volumes in the Company's shares. This approach allows the Board to seek to address any imbalance between the supply and demand for the Company's shares that results in a large discount to NAV whilst being cognisant that current and potential shareholders require continuing liquidity.

The Board also believes that the Company would benefit from the flexibility of being able to re-issue any shares that might be held in Treasury. In order to avoid dilution to existing investors, shares held in Treasury would only be re-issued at a premium to net asset value and after associated costs. Any re-issuance would therefore be asset enhancing and help dilute the Company's costs across a larger asset base, reducing the ongoing charges.

Changes to the Board

Douglas McDougall will be retiring from the Board at the conclusion of this year's AGM. On behalf of myself and his fellow Directors, I would like to thank him for his long service and wise counsel to the Company as Director and former Chairman.

I am pleased to welcome one new Director to the Board. Angus Macpherson, who is Chief Executive of Noble and Company (UK) Limited, an independent Scottish corporate finance business, joined us in February. His addition strengthens the breadth and depth of the Board and he has already contributed to our deliberations. I invite shareholders to ratify his appointment at the AGM.

Outlook

Over the year, the markets of Hong Kong, Korea, Taiwan and India were amongst the strongest in local currency and sterling adjusted terms. These markets are where the majority of our holdings are listed or have economic exposure. It should also be noted that, as evidenced in particular by our US listed Chinese holdings, the jurisdiction of listing is becoming less relevant when assessing a company's underlying economic exposure. We have a number of high conviction, high growth companies in the portfolio which are exhibiting new ways of doing business, many of these being internet related. These companies are setting the trend for disrupting existing business models, wherever they may be in the world, and generating good earnings growth through their momentum. Many of the businesses are 'capital light' and 'ideas rich' and their recent performance has demonstrated the credibility of the Managers' investment strategy. The Managers continue to find new substantial investment opportunities. The Board is confident that there remains encouraging scope for the Company to grow in capital terms over the coming years, both on a comparative and an overall basis.

Jean Matterson

Chairman

7 September 2017

For a definition of terms see Glossary of Terms, note 11.

*See disclaimer at the end of this announcement.

Past performance is not a guide to future performance.

 

Managers' Review

Overview

There was a significant improvement in the Company's performance during the year to 31 July 2017 with the share price appreciating 42.5% and the NAV increasing by 38.5%, representing a favourable comparison to the Company's comparative index, the MSCI AC Asia ex Japan index* (in sterling terms), which rose by 28.6% (all total returns).

Two factors in particular underpinned this improvement. First, the increased penetration and disruption that technology is bringing to society and the consequent increased focus by investors on the growing technology companies; second, the fall in the US Dollar ('USD'), particularly in the latter half of the Company's financial year, which provided focus to the improving economic fundamentals across the Asia Pacific region, especially in China. The Company's entire relative returns, and most of its absolute gains, occurred from December 2016, when the USD peaked and the market gradually realised that China's economy was recovering rather than being exposed to the threat of a hard landing, as many commentators, especially those in the USA, were predicting.

We believe that the rapid development of technology is creating a tectonic shift in society, with digitalisation driving profound changes in economic and political systems, businesses, consumer habits and behaviours. Many winners and losers are emerging and there is a growing awareness of these changes. Artificial Intelligence ('AI') is now taken for granted and the concept of electric rather than gasoline powered cars is considered to be an inevitable commercial development rather than a vision of the future.

Nevertheless, the cascade of these potential ground-breaking changes into broader society is only just being felt and negativity still abounds: Brexit, Trump, low productivity concerns, anti-globalisation, anti-capitalist sentiments, environmental risks, to name but a few. It is our belief, however, that the underlying global economy is improving and societies in aggregate are getting richer at a much greater pace than people realise. In retrospect, this era may well be seen as generating the largest improvement in living standards for the greatest number of people in history. The majority of those people live in the Asia Ex-Japan region.

The number of sectors and industries that are becoming digitalised and connected is increasing rapidly. Previously, when a customer went into a shop to buy an item and paid with cash, there would have been no digital imprint of this purchase; the data inherent in this transaction would only have been available to the shopkeeper. Today, every transaction online and its place in the entire supply chain leaves a data imprint which can be used to improve customer service and efficiency. In the retail industry, e-commerce continues to grow rapidly and has led to an explosion of data which captures what people buy and when, and how choices change over time. This results in both better targeted sales and an improvement in logistics, in products and in customer service; as well as an overall fall in cost for the consumer. In the US, this trend is leading to the rapid closure of shopping malls and offline businesses. In China, it is fuelling the growth of two large retail platforms, Alibaba and JD.com, with a resulting fall in more traditional offline activity.

When an industry moves towards a digital model, the resultant explosion in the quantum of data leads to a profound change to that industry's dynamics: traditional competition theory breaks down. Rather than encouraging the involvement of many firms and a form of perfect competition, digitalisation tends to produce increasing, rather than decreasing, returns for scale. We have witnessed this in the chip and software industries for two decades, with the dominance of Intel and Microsoft, and now Samsung Electronics and Taiwan Semiconductor Manufacturing ('TSMC'). As a more immediate example, JD.com is today the largest retailer in China, with no offline stores; a marginal cost of every additional order through its platform that is close to zero, no shops, no salesmen and fixed overheads. JD.com has recently announced its first 100% automated sorting warehouse and is testing the use of drones to deliver parcels, replacing delivery workers with machines and software. Scale leads to marginal cost being below average cost and thus, importantly for shareholders, to significant financial returns. In a world of digitalisation and increasing returns based on scale, we may expect more oligopolies and monopolies to be sustainable in the longer term. The competitive threats to these new monopolies are not to be found within their industries but without, from adjacent sectors, or from totally new disruptive technologies.

In China, the use of mobile phones and the acceptance of new technology are leading to a faster rate of adoption of online shopping than in the developed world. An example of this is online grocery shopping. This is a market worth more than $1 trillion and ripe for disruption by the likes of JD.com and Alibaba. These two companies account for 12.3% of our portfolio† and were significant contributors to returns last year. JD.com rose 109% and Alibaba 88%, as the market took note of the longevity of their growth profiles. We believe that both stocks remain significantly undervalued.

Humans are intensely visual. Sight is the leading sense by which we analyse and interact with the world. Our contention is that machines, as they increasingly take over human tasks, will initially use reproduction of the visual 'sense' to help them understand the world. Sunny Optical Technology is China's leading camera module maker, the second largest producer of camera lenses for mobile phones globally and the largest producer of lenses for the automotive market. The stock rose over 200% in the year, making it the second best performing holding in the portfolio. It is set to deliver an estimated 80% increase in earnings per share ('EPS') for 2017 after a 60% increase in 2016. With the company's leading position and technological research and development ('R&D') in module assembly and design, it is gaining increased traction in the nascent camera market for cars. Whereas a new car used to have on average less than one camera, a modern advanced driver assistance system ('ADAS') enabled car has 8 to 12 cameras; and, in future, a fully autonomous car may need up to 20 cameras or more. Sunny Optical has an approximate 40% market share in this rapidly evolving market. It also has emerging businesses in camera production for drones, optical instruments and robots. Given its products are at the forefront of delivering digitalisation to a large portion of the world's economy, we believe the company is still at an early stage in its growth cycle. It currently represents 5.4% of the portfolio.

The global automobile sector is an area where we see significant disruption occurring in the medium term. We believe that the end of the gasoline engine is in sight and that electric vehicles will increasingly dominate new car sales of the future; especially in China as the government tackles the problem of pollution, which has become the most pressing social issue for the emerging middle class. Samsung SDI, in South Korea, up 60% year-on-year, is one of the world's leading makers of electric vehicle ('EV') batteries, a business where we believe that volumes could grow five to ten fold over the next decade. In China, our investment in Geely Automobile, a company that we have held for many years on the basis that we thought its investments in R&D would eventually propel it from a low-end domestic car manufacturer to a global original equipment manufacturer ('OEM'), has started to pay off. The stock rose 250% in the year, after delivering a 78% increase in sales in 2016 and consequent 112% EPS growth. It also expects 62% revenue growth and 73% profit growth in 2017. Through improvement in products, brand image and scale, Geely is positioning itself to become a leading domestic brand OEM, in the first instance in China and then globally. The management team, led by a visionary founder, is launching the new Lynck and Co brand later this year in a tie-up with Volvo. We believe that Geely has the potential to become one of the leading EV manufacturing OEMs globally in the next decade.

The growth in the amount of data being produced by social media, commerce, gaming and machines requires a significant jump in both computing power and the associated hardware capabilities in order to run, manipulate and take full advantage of the data generated. This is leading to a rise in technology prices and what we would characterise as the largest technology hardware cycle since the 1990s boom. Companies such as SK Hynix and Samsung Electronics, which produce the majority of the world's memory chips in South Korea, and TSMC (which has the largest global foundry) and Hon Hai Precision Industries (the largest global technology manufacturer) have all benefited from this trend. We believe that these stocks are still under-priced and do not fully reflect the potential growth opportunities ahead.

In the first half of the year, markets worried over Brexit, Trump and a potential reduction in world trade. This supported the USD and hid the nascent recovery in Chinese economic growth which, having slowed sequentially since 2011, reached its nadir in 2015; since then, it has been recovering. It is likely that 2016 will prove to be the second year of a Chinese cyclical economic expansion; we are seeing this in the rising Chinese Producer Price Index ('PPI'), increasing imports, rising commodity prices and a stabilisation in the exchange rate. Over the 12 months to 31 July 2017, the Chinese MSCI Index rose 38% in sterling terms and our Chinese holdings appreciated 72%, in aggregate. Free cash flow, the money left after costs and capital expenditure, is, on average, increasing for Chinese companies, and we would therefore expect growth and probably earnings to continue to surprise on the upside.

Outside China, Vietnam was a strong contributor to the portfolio's performance. Dragon Capital Vietnam Enterprise Investments rose 43% during the year. In addition, our first direct holding in Vietnam, Military Commercial Joint Stock Bank, rose 59%, as the company's turnaround from a sleepy corporate bank to a retail lender gradually continues. We still see the Vietnamese economy as a whole as an underappreciated growth story.

On the negative side, stock selection in South Korea was the largest detractor to the portfolio's relative performance. Not owning enough of Samsung Electronics had a negative impact as the stock rose 57% over the year. Our holding in SK Hynix, also a manufacturer of memory chips, was up 92% and mitigated some of the negative attribution. A number of our smaller companies fell, including some of the biotech holdings, although there was a significant divergence in returns. For example, Medy-Tox, the leading Botox innovator, rose 36%, whilst Bioneer, a biotech company, fell 62%. In this specialist sector, it is our intention to continue with our overall philosophy of supporting our winners and being circumspect about adding to our losers.

Philosophy

Pacific Horizon's portfolio is focused on finding and investing in some of the most attractive growth companies within the Asia ex-Japan region. We believe that investing for the long term in companies that can deliver significantly faster growth than the market will, over time, deliver rewards. When thinking about growth, we are looking for companies that can potentially increase their revenue and earnings at around 15% per year for the next five years or longer, and where we feel this growth has not been fully recognised by the market. Depending upon the macro outlook for different countries and sectors, this strategy may lead to significant concentration in certain areas of the market.

We invest in companies where we believe that there are good long term growth prospects. The corporate characteristics we look for include strong growth potential, sustainable competitive advantages, attractive financials and sensible management. In addition, we target stocks with what we consider to be very significant long term opportunities for enhanced future profitability, where a wider range of positive potential outcomes may not be recognised by the market at present.

The growth characteristics of the portfolio remain strong, with historic earnings growth at 17% and one year forecast earnings growth of 33%, both double the respective rates for the comparative index. The portfolio's estimated price to earnings ratio ('P/E') for the current year is 31x versus 17x for the comparative index. Over the longer-term, we believe the higher growth potential of our holdings more than justifies this additional multiple. The portfolio now includes a slightly greater proportion of larger capitalised stocks compared to last year, due mostly to their outperformance compared with the more subdued performance of mid to smaller companies. This still leaves the portfolio with 20% of its investments in companies capitalised below £1 billion and a further 17% in companies with a market capitalisation of less than £5 billion, compared with 0.1% and 12.7%, respectively, in the comparative index. Active share is 79% and turnover for the year was 27.6%.

Portfolio Review

Technology companies now account for 48.9% of the portfolio, down from 50.9% a year ago. We reduced our holding in Tencent, reflecting our enthusiasm for other holdings. Elsewhere, performance from JD.com and Sunny Optical significantly increased these stocks' comparative weightings. Samsung SDI was bought and is now among the top 10 holdings in the portfolio; we believe that the organic light emitting diode ('OLED') and battery businesses are the fastest growing parts of the Samsung Electronics empire. We initiated a position in Macronix, the world's leading designer and manufacturer of NOR memory processors as we are of the view that many electronic functions in ADAS enabled cars will need a NOR chip, which is bringing life back to what was considered an ex-growth market. Our holdings in Infosys and Mindtree were sold as we believe the trend to outsource technological development is slowing globally.

The consumer discretionary sector is our second largest sector exposure at 19.8%, up from 16.9%. As economic growth within the region recovers, the focus on the Asian consumer and the consequent growth opportunities should generate increased investor interest. JD.com and Geely are our two top holdings in this sector.

The financial sector weighting in the portfolio has increased from 11.0% to 17.2%. We have made a number of new additions, especially in India, where we see domestic banking and insurance as potentially highly attractive and rapidly growing business sectors. We took stakes in AU Small Finance Bank, a newly licenced bank, growing at a compound annual growth rate of 40%; ICICI Prudential Life Insurance and Max Financial Services, life insurance companies; and LIC Housing Finance, the leading housing finance company in India.

Our healthcare weighting has almost halved to 5.0%. This was a function of poor performance and also the sale of Viromed and Seegene. On a fundamental basis, the remaining healthcare companies in the portfolio continue to deliver good performance and we believe that the market will refocus on the longer term outlook rather than short term price movements.

Our China weighting increased from 28.1% to 35.1%, driven mostly by outperformance by our holdings. It is now the largest country weighting in the portfolio, followed by South Korea at 24.9%. The reduction in the South Korean exposure from 29.9% was mostly on the back of reductions in our biotech holdings. Elsewhere, in Taiwan, we sold a number of our smaller positions, Himax Technologies, MediaTek, Phison Electronics, Eclat Textile, Delta Electronics and Hermes Micro Vision, mostly to fund purchases in China and Vietnam.

Vietnamese investments have grown from 4.8% to 7.0% of the portfolio. During the year, we purchased two steel companies, Hoa Phat and Hao Sen, both of which have high returns on capital and strong growth prospects as a result of the rising domestic economy. We continue to have a zero weighting in ASEAN outside of Vietnam and believe that the Vietnam market is far more attractive than the others in this geographical region. 

Environmental, social and governance

As growth investors, we are looking for companies whose products will benefit from strong future demand. These companies not only have to produce better and cheaper products and services than their competitors, but also have to be alert to the changing nature and views of the societies in which they are part. Companies which do not change within and alongside the societies they serve tend to fail, either due to falling demand for their product or as a result of government intervention. When we invest, we take into account the potential positive and negative impact these companies have on the world today and how their commercial activities will be perceived in the future.

For our long term investments to be successful, the companies in which we invest must add value to society. We see this being achieved in a variety of ways: our regenerative biotech companies, whose products may allow many people to gain otherwise unachievable medical benefits, our internet companies which provide goods and services to people at prices and in quantities previously unobtainable, and our technology holdings that are helping to enable the greatest and most rapid increase in human connectivity and information availability in human history.

Lastly, the interests of minority shareholders must be upheld; we remain careful to make sure our investments are aligned with those of majority shareholders and owners.

Outlook

It is our view that there is significant potential for positive returns from the region over the coming years. Our focus remains on investment in individual stocks which will benefit from the economic, social and technological changes in evidence across the region. The portfolio is fully invested, with gearing of 7%. We believe that our philosophy, process and investment style should reward the Company's shareholders over the medium to long term.

*See disclaimer at the end of this announcement.

†the portfolio figures throughout the report are based on total assets.

For a definition of terms see Glossary of Terms, note 11.

 

Income Statement (unaudited)

	For the year ended 31 July 2017			For the year ended 31 July 2016 (audited)
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains on investments	-	47,480	47,480	-	13,414	13,414
Currency gains	-	192	192	-	1,140	1,140
Income (note 2)	1,559	-	1,559	1,331	-	1,331
Investment management fee (note 3)	(1,095)	-	(1,095)	(899)	-	(899)
Other administrative expenses	(425)	-	(425)	(389)	-	(389)
Net return before finance costs and taxation	39	47,672	47,711	43	14,554	14,597
Finance costs of borrowings	(119)	-	(119)	(127)	-	(127)
Net return on ordinary activities before taxation	(80)	47,672	47,592	(84)	14,554	14,470
Tax on ordinary activities	(131)	-	(131)	(98)	-	(98)
Net return on ordinary activities after taxation	(211)	47,672	47,461	(182)	14,554	14,372
Net return per ordinary share (note 4)	(0.38p)	86.74p	86.36p	(0.30p)	24.25p	23.95p

The total column of this statement is the profit and loss account of the Company. The supplementary revenue and capital columns are prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in this statement derive from continuing operations.

A Statement of Comprehensive Income is not required as there is no other comprehensive income.
 

Balance Sheet (unaudited)

	At 31 July 2017		At 31 July 2016 (audited)
	£'000	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		179,523		131,417
Current assets
Debtors	508		359
Cash and cash equivalents	2,882		1,323
	3,390		1,682
Creditors
Amounts falling due within one year (note 6)	(15,163)		(5,397)
Net current liabilities		(11,773)		(3,715)
Net assets		167,750		127,702
Capital and reserves
Called up share capital		5,426		5,712
Share premium account		3,166		3,166
Capital redemption reserve		20,367		20,081
Capital reserve		134,836		94,377
Revenue reserve		3,955		4,366
Shareholders' funds		167,750		127,702
Net asset value per ordinary share		309.15p		223.58p
Ordinary shares in issue (note 7)	54,262,282		57,118,191

 

Statement of Changes in Equity (unaudited)

For the year ended 31 July 2017

	Called up share capital £'000	Share premium account £'000	Capital redemption reserve £'000	Capital reserve† £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 August 2016	5,712	3,166	20,081	94,377	4,366	127,702
Net return on ordinary activities after taxation	-	-	-	47,672	(211)	47,461
Shares purchased for cancellation (note 7)	(286)	-	286	(7,213)	-	(7,213)
Dividends paid during the year (note 5)	-	-	-	-	(200)	(200)
Shareholders' funds at 31 July 2017	5,426	3,166	20,367	134,836	3,955	167,750

For the year ended 31 July 2016 (audited)

	Called up share capital £'000	Share premium account £'000	Capital redemption reserve £'000	Capital reserve† £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 August 2015	6,329	3,166	19,464	91,441	4,770	125,170
Net return on ordinary activities after taxation	-	-	-	14,554	(182)	14,372
Shares purchased for cancellation (note 7)	(617)	-	617	(11,618)	-	(11,618)
Dividends paid during the year (note 5)	-	-	-	-	(222)	(222)
Shareholders' funds at 31 July 2016	5,712	3,166	20,081	94,377	4,366	127,702

†      The Capital Reserve balance at 31 July 2017 includes investment holding gains on fixed asset investments of £76,512,000 (31 July 2016 - gains of £38,808,000).

 

Cash Flow Statement (unaudited)

	For the year ended 31 July 2017		For the year ended 31 July 2016 (audited)
	£'000	£'000	£'000	£'000
Cash flows from operating activities
Net return on ordinary activities before taxation‡		47,592		14,470
Net gains on investments		(47,480)		(13,414)
Currency gains		(192)		(1,140)
Finance costs of borrowings		119		127
Overseas tax incurred		(114)		(84)
Changes in debtors and creditors		(105)		(86)
Cash from operations		(180)		(127)
Interest paid		(104)		(134)
Net cash outflow from operating activities		(284)		(261)
Cash flows from investing activities
Acquisitions of investments	(43,667)		(29,853)
Disposals of investments	42,958		47,072
Net cash (outflow)/inflow from investing activities		(709)		17,219
Cash flows from financing activities
Equity dividends paid (note 5)	(200)		(222)
Shares purchased for cancellation (note 7)	(7,213)		(11,618)
Borrowings drawn down/(repaid)	9,901		(9,369)
Net cash inflow/(outflow) from financing activities		2,488		(21,209)
Increase/(decrease) in cash and cash equivalents		1,495		(4,251)
Exchange movements		64		1,513
Cash and cash equivalents at 1 August		1,323		4,061
Cash and cash equivalents at 31 July		2,882		1,323

‡   Dividends received in the year amounted to £1,390,000 (2016 - £1,220,000). 
 

List of Investments as at 31 July 2017 (unaudited)

Name	Country	Business		Value £'000	% of total assets ‡
Tencent Holdings	HK/China	Online gaming and social networking		12,824	7.0
Alibaba Group ADR	HK/China	Online and mobile commerce		12,571	6.9
JD.com ADR	HK/China	Online mobile commerce		9,941	5.4
Sunny Optical Technology	HK/China	Small optical lenses manufacturer		9,818	5.4
Geely Automobile	HK/China	Automobile manufacturer		6,955	3.8
NAVER	Korea	Online search and messaging		5,976	3.3
Hon Hai Precision Industries	Taiwan	Electronic manufacturer		5,809	3.2
Dragon Capital Vietnam Enterprise   Investments	Vietnam	Vietnam investment fund		5,121	2.8
SK Hynix	Korea	Electronic component and device manufacturer		4,884	2.7
Samsung SDI	Korea	Lithium-ion batteries manufacturer		4,278	2.3
Koh Young Technology	Korea	3D inspection machine manufacturer		3,941	2.2
Baidu ADR	HK/China	Internet search engine		3,922	2.2
IndusInd Bank	India	Commercial bank focusing on consumer lending		3,888	2.1
AU Small Finance Bank	India	Small consumer finance bank		3,779	2.1
China Life Insurance (Taiwan)	Taiwan	Life insurance provider		3,456	1.9
Ctrip.com International ADR	HK/China	Chinese online travel agency		3,110	1.7
Taiwan Semiconductor Manufacturing	Taiwan	Semiconductor foundry		3,046	1.7
Samsung Electronics	Korea	Memory, phones and electronic components   manufacturer		2,996	1.6
ICICI Bank	India	Retail and corporate bank		2,917	1.6
Advantech	Taiwan	Computer manufacturer		2,743	1.5
Cox & Kings India	India	Travel agent		2,419	1.3
Medy-Tox	Korea	Global pharmaceutical company		2,259	1.2
WH Group	HK/China	Pork processor and distributor		2,169	1.2
Kingdee International Software	HK/China	Enterprise management software distributor		2,151	1.2
Mahindra & Mahindra	India	Tractor and SUV manufacturer		2,132	1.2
Samsung Fire & Marine Insurance	Korea	Non-life insurance provider		2,128	1.2
CJ E&M	Korea	Media and entertainment creator and supplier		2,041	1.1
NCSOFT	Korea	Online games developer		2,031	1.1
Military Commercial Joint Stock Bank	Vietnam	Retail and corporate bank		2,015	1.1
Hoa Sen Group	Vietnam	Manufacturer of steel and plastic building   products		1,917	1.1
Arvind	India	Consumer textile brand owner and manufacturer		1,913	1.1
Mitac Holdings	Taiwan	Distributor of GPS and server products		1,885	1.0
Macronix	Taiwan	NOR/ROM memory semiconductor manufacturer		1,815	1.0
Duzonbizon	Korea	Enterprise resource planning software developer		1,778	1.0
Kansai Nerolac Paints	India	Paint manufacturer		1,594	0.9
China Rapid Finance ADR	HK/China	P2P consumer lending platform		1,579	0.9
Info Edge	India	Jobseekers, housing sales and restaurant online   review provider		1,575	0.9
Haier Electronics Group	HK/China	Washing machine and water heater manufacturer		1,573	0.9
List of Investments as at 31 July 2017 (unaudited) (ctd)

Name	Country	Business	Value £'000	% of total assets ‡
Samsung C&T	Korea	Korean conglomerate	1,565	0.9
Container Corporation of India	India	Transportation services provider	1,543	0.8
Mahindra CIE Automotive	India	Truck parts manufacturer	1,537	0.8
Vingroup	Vietnam	Property developer	1,502	0.8
Hoa Phat Group	Vietnam	Multi-disciplinary manufacturer of steel and   related products	1,429	0.8
Bosch	India	Manufacturer of automotive parts	1,348	0.7
LIC Housing Finance	India	Provider of mortgage finance	1,339	0.7
ICICI Prudential Life Insurance	India	Life insurance provider	1,324	0.7
Genexine	Korea	Therapeutic vaccine researcher and developer	1,273	0.7
Persistent Systems	India	Outsourced software product developer	1,247	0.7
Finetex EnE	Korea	Nano-technology material manufacturer	1,175	0.6
Ping An Insurance	HK/China	Life insurance provider	1,163	0.6
EO Technics	Korea	Laser equipment manufacturer and distributor	1,151	0.6
Max Financial Services	India	Life insurance provider	1,117	0.6
Netmarble Games	Korea	Mobile computer games designer	1,110	0.6
Hansol Technics	Korea	Electrical components manufacturer	1,058	0.6
Bioneer	Korea	Drug researcher and development	942	0.5
Intron Biotechnology	Korea	Antibiotics drug researcher	919	0.5
Global Brands Group	HK/China	Owner and licensor of consumer brands	917	0.5
Saigon Securities	Vietnam	Brokerage and securities	849	0.5
Techtronic Industries	HK/China	Power tool manufacturer	802	0.4
Interpark	Korea	Internet-based shopping mall	798	0.4
Hyundai Marine and Fire Insurance	Korea	Non-life insurance provider	749	0.4
Sarine Technologies	Singapore	Diamond grading measurement systems   developer	748	0.4
HTC	Taiwan	Smartphone and virtual reality manufacturer	666	0.4
Crystalgenomics	Korea	Proteomic drug discovery investigator	657	0.4
ST Pharm	Korea	Manufacturer of specialist pharmaceutical   ingredients	656	0.4
TTY Biopharm	Taiwan	Manufacturer of specialist genetics	621	0.3
Basso Industries	Taiwan	Powerdrills manufacturer	617	0.3
Qurient	Korea	Antibiotics and cancer drug researcher	559	0.3
JHL Biotech	Taiwan	Biologics manufacturer	532	0.3
Theragen Etex	Korea	Genetics researcher and developer	519	0.3
Asian Pharmaceuticals	Taiwan	Biosimilar drug developer	142	0.1
Philtown Properties*	Philippines	Property developer	0	0.0
Total Investments			179,523	98.4
Net Liquid Assets			3,000	1.6
Total Assets			182,523	100.0

HK/China denotes Hong Kong and China.

‡ Total assets less current liabilities, before deduction of borrowings.

* Denotes unlisted security.

Distribution of Total Assets‡ (unaudited)

Geographical Analysis

		At 31 July 2017 %	At 31 July 2016 %
Equities:	Hong Kong and China	38.1	32.9
	Korea	24.9	29.9
	India	16.3	14.3
	Taiwan	11.7	16.4
	Vietnam	7.0	4.8
	Singapore	0.4	0.7
Total equities		98.4	99.0
Net liquid assets		1.6	1.0
Total assets		100.0	100.0

Sectoral Analysis

		At 31 July 2017 %	At 31 July 2016 %
Equities:	Consumer Discretionary	19.8	16.9
	Consumer Staples	1.2	2.3
	Energy	-	2.0
	Financials	17.2	11.0
	Health Care	5.0	9.2
	Industrials	2.8	4.8
	Information Technology	48.9	50.9
	Materials	2.7	-
	Telecommunication Services	-	0.9
	Real Estate	0.8	1.0
Total equities		98.4	99.0
Net liquid assets		1.6	1.0
Total assets		100.0	100.0

‡      Total assets less current liabilities, before deduction of borrowings.

 

Notes to the Condensed Financial Statements (unaudited)

1.	The unaudited financial statements for the year to 31 July 2017 have been prepared in accordance with FRS102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' The accounting policies adopted are consistent with those of the previous financial year. The Company has already adopted the amendments to Section 34 of FRS 102 regarding fair value hierarchy disclosures. In accordance with the Financial Reporting Council's guidance on going concern and liquidity risk, the Directors have undertaken a rigorous review of the Company's ability to continue as a going concern. The Company's principal risks are market related and include market risk, liquidity risk and credit risk. An explanation of these risks and how they are managed is contained in note 16 to the Financial Statements. The Directors consider the Company's functional currency to be sterling as the Company's shareholders are predominantly based in the UK and the Company is subject to the UK's regulatory environment.
		31 July 2017 £'000			31 July 2016                      (audited) £'000
2.	Income from financial assets designated at fair value through profit or loss
	Listed overseas dividends	1,556			1,331
		1,556			1,331
	Other income
	Deposit interest	3			-
	Total income	1,559			1,331
3.	The Company has appointed Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, as its Alternative Investment Fund Manager (AIFM) and Company Secretaries. Baillie Gifford & Co Limited has delegated portfolio management services to Baillie Gifford & Co. The Managers may terminate the Management Agreement on six months' notice and the Company may terminate on three months' notice. With effect from 1 January 2017 the annual management fee is 0.95% on the first £50m of net assets, 0.65% on the next £200m of net assets and 0.55% on the remaining net assets. Prior to 1 January 2017 the fee was 0.95% on the first £50m of net assets and 0.65% on the remaining net asset. Management fees are calculated and payable quarterly.
4.			31 July 2017 £'000	31 July 2016 (audited) £'000
	Net return per ordinary share
	Revenue return on ordinary activities after taxation		(211)	(182)
	Capital return on ordinary activities after taxation		47,672	14,554
	Total return		47,461	14,372
	Weighted average number of ordinary shares in issue		54,958,654	60,007,258
	The figures for net return per ordinary share are based on the above totals for revenue and capital and the weighted average number of ordinary shares in issue during the year.

 

Notes to the Condensed Financial Statements (unaudited) (ctd)

5.	Ordinary Dividends	31 July 2017	31 July 2016 (audited)	31 July 2017 £'000	31 July 2016 (audited) £'000
	Amounts recognised as distributions in the year: Previous year's final (paid 11 November 2016)	0.35p	0.35p	200	222
	Also set out below are the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of section 1158 of the Corporation Tax Act 2010 are considered. There is no revenue available for distribution by way of dividend for the year (2017 - revenue loss of £211,000; 2016 - revenue loss of £182,000).
	Ordinary Dividends	31 July 2017	31 July 2016 (audited)	31 July 2017 £'000	31 July 2016 (audited) £'000
	Amounts paid and proposed in respect of the financial year: Proposed final dividend per ordinary share	Nil	0.35p	Nil	200
6.	The Company has a one year £15 million multi-currency revolving credit facility with The Royal Bank of Scotland plc (31 July 2016 - one year £10 million multi-currency revolving credit facility with The Royal Bank of Scotland plc and a £10 million one year uncommitted, unsecured floating rate revolving credit facility with The Bank of New York Mellon). At 31 July 2017 there were outstanding drawings of £7,500,000 and US$9,588,750 at interest rates of 0.74318% and 1.69586% under The Royal Bank of Scotland facility (31 July 2016 - £5,000,000 at an interest rate of 1.02906% and there were no drawings under The Bank of New York Mellon facility). The main covenant relating to the loan is that borrowings should not exceed 20% of the Company's net asset value. There were no breaches in the loan covenants during the year.
7.	The Company has authority to buy back up to 14.99% of its shares on an ad hoc basis and previously had authority to implement, at the Board's discretion, bi-annual tender offers for up to 5% of its shares at a 2% discount to net asset value, less costs, in the event that the discount averaged more than 9% during the six month periods to 31 January and 31 July in the years 2014, 2015 and 2016. In the year to 31 July 2017 the Company bought back a total of 2,855,909 ordinary shares at a total cost of £7,213,000 through the exercise of the last tender offer in October 2016 (31 July 2016 - 6,170,662 ordinary shares at a total cost of £11,618,000). The nominal value of these shares was £286,000 and represented 5.0% of the issued share capital at 31 July 2016. At 31 January 2017 the Company had authority to buy back a further 8,133,916 ordinary shares. Following consultation with a number of shareholders, the Board did not seek authority at the Annual General Meeting on 9 November 2016 to renew the bi-annual 5% tenders. Instead, the Board proposed a tender that will be triggered if the Company's net asset value (calculated at fair value cum income) total return fails to exceed the Company's comparative index by at least 1% per annum over a three year period to 31 July 2019 on a cumulative basis. If this performance target is not met, it is the intention that the Directors will propose a 25% tender of the Company's issued share capital at the time of calculation. The tender would be at a 2% discount to net asset value less costs. This would be subject to shareholders' approval of the tender authority that will be put to shareholders at the 2018 Annual General Meeting. The Company also has authority to allot shares under section 551 of the Companies Act 2006. The Board has authorised use of this authority to issue new shares at a premium to net asset value in order to enhance the net asset value per share for existing shareholders and improve the liquidity of the Company's shares. In the years to 31 July 2016 and 31 July 2017 no shares were issued.
8.	The Company incurred transaction costs on purchases of £69,000 (2016 - £46,000) and on sales of £102,000 (2016 - £133,000), being £171,000 (2016 - £179,000) in total.

 

Notes to the Condensed Financial Statements (unaudited) (ctd)

9.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 July 2017. The financial information for 2016 is derived from the statutory accounts for 2016. Those accounts have been delivered to the Registrar of Companies. The Auditors have reported on the 2016 accounts, their report was unqualified and did not contain a statement under section 495, 496 and 497 of the Companies Act 2006. The statutory accounts for 2017 will be finalised on the basis of the financial information presented in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting.
10.	The Annual Report and Financial Statements will be available on the Company's page on the Managers' website www.pacifichorizon.co.uk‡ on or around 5 October 2017.
11.	Glossary of Terms Total Assets Total assets less current liabilities, before deduction of all borrowings. Net Asset Value Net Asset Value (NAV) is the value of total assets less liabilities (including borrowings). The NAV per share is calculated by dividing this amount by the number of ordinary shares in issue. Net Liquid Assets Net liquid assets comprise current assets less current liabilities, excluding borrowings. Discount/Premium As stockmarkets and share prices vary, an investment trust's share price is rarely the same as its NAV. When the share price is lower than the NAV per share it is said to be trading at a discount. The size of the discount is calculated by subtracting the share price from the NAV per share and is usually expressed as a percentage of the NAV per share. If the share price is higher than the NAV per share, this situation is called a premium. Total Return The total return is the return to shareholders after reinvesting the net dividend on the date that the share price goes ex-dividend. Ongoing Charges The total expenses (excluding borrowing costs) incurred by the Company as a percentage of the average net asset value (with debt at fair value). Gearing At its simplest, gearing is borrowing. Just like any other public company, an investment trust can borrow money to invest in additional investments for its portfolio. The effect of the borrowing on the shareholders' assets is called 'gearing'. If the Company's assets grow, the shareholders' assets grow proportionately more because the debt remains the same. But if the value of the Company's assets falls, the situation is reversed. Gearing can therefore enhance performance in rising markets but can adversely impact performance in falling markets. Gearing represents borrowings at par less cash and cash equivalents expressed as a percentage of shareholders' funds. Potential gearing is the Company's borrowings expressed as a percentage of shareholders' funds. Equity gearing is the Company's borrowings adjusted for cash and bonds expressed as a percentage of shareholders' funds. Leverage For the purposes of the Alternative Investment Fund Managers Directive, leverage is any method which increases the Company's exposure, including the borrowing of cash and the use of derivatives. It is expressed as a ratio between the Company's exposure and its net asset value and can be calculated on a gross and a commitment method. Under the gross method, exposure represents the sum of the Company's positions after the deduction of sterling cash balances, without taking into account any hedging and netting arrangements. Under the commitment method, exposure is calculated without the deduction of sterling cash balances and after certain hedging and netting positions are offset against each other.
	Active Share Active share, a measure of how actively a portfolio is managed, is the percentage of the portfolio that differs from its comparative index. It is calculated by deducting from 100 the percentage of the portfolio that overlaps with the comparative index. An active share of 100 indicates no overlap with the index and an active share of zero indicates a portfolio that tracks the index.

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

None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

Third Party Data Provider Disclaimer No third party data provider ('Provider') makes any warranty, express or implied, as to the accuracy, completeness or timeliness of the data contained herewith nor as to the results to be obtained by recipients of the data. No Provider shall in any way be liable to any recipient of the data for any inaccuracies, errors or omissions in the index data included in this document, regardless of cause, or for any damages (whether direct or indirect) resulting therefrom. No Provider has any obligation to update, modify or amend the data or to otherwise notify a recipient thereof in the event that any matter stated herein changes or subsequently becomes inaccurate. Without limiting the foregoing, no Provider shall have any liability whatsoever to you, whether in contract (including under an indemnity), in tort (including negligence), under a warranty, under statute or otherwise, in respect of any loss or damage suffered by you as a result of or in connection with any opinions, recommendations, forecasts, judgments, or any other conclusions, or any course of action determined, by you or any third party, whether or not based on the content, information or materials contained herein. MSCI Index Data Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an 'as is' basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the 'MSCI Parties') expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.msci.com).

Pacific Horizon Investment Trust PLC (Pacific Horizon) aims to achieve capital growth through investment in the Asia-Pacific region (excluding Japan) and in the Indian Sub-continent. The Company has total assets of £182.5million (before deduction of loans of £14.8 million) at 31 July 2017.

Pacific Horizon is managed by Baillie Gifford & Co Limited, the Edinburgh based fund management group.

Past performance is not a guide to future performance. Pacific Horizon is a public listed company and is not authorised or regulated by the Financial Conduct Authority. The value of its shares and any income from those shares can fall as well as rise and you may not get back the amount invested. Pacific Horizon invests in overseas securities, changes in the rates of exchange may also cause the value of your investment (and any income it may pay) to go down or up. Pacific Horizon invests in emerging markets where difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment. Shareholders in Pacific Horizon have the right to vote every five years, on whether to continue Pacific Horizon, or wind it up. If the shareholders decide to wind the Company up, the assets will be sold and you will receive a cash sum in relation to your shareholding. The next vote will be held at the Annual General Meeting in 2021. You can find up to date performance information about Pacific Horizon on the Pacific Horizon page of the Managers' website at www.pacifichorizon.co.uk.†

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

8 September 2017

For further information please contact:

Anzelm Cydzik, Baillie Gifford & Co                                                        0131 275 2000

Roland Cross, Account Director, Four Broadgate                                     020 3697 4200 

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