Final Results

RNS Number : 0511A

Pacific Horizon Investment Tst PLC

07 September 2018

 

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.

Unaudited Preliminary Results for the year to 31 July 2018

The following is the unaudited preliminary statement for the year to 31 July 2018 which was approved by the Board on 6 September 2018.

Chairman's Statement

Performance

I am pleased to report that in the year to 31 July 2018, the Company's net asset value per share (NAV) total return was 13.6%. During the same period the Company's comparative index, the MSCI All Country Asia ex Japan Index*, total return was 6.0% in sterling terms. The share price total return was 26.9%, and the shares ended the period at a 3.3% premium to NAV.

The relative and absolute performance over the course of the year was largely as a consequence of good stock selection, particularly in Korea, Hong Kong and China where exposure to certain Healthcare and Information Technology names proved beneficial.

Over the five years to 31 July 2018 the Company's NAV and share price have returned 96.5% and 136.4% respectively. Over the same period the Company's comparative index, the MSCI All Country Asia ex Japan Index, has returned 71.9% in sterling terms.

The Managers' Review below provides detail of the Company's performance along with commentary on the areas the Managers are finding of interest.

Tender

I reported in my 2016 statement that, following consultation with a number of shareholders, we agreed that a 25% tender would be triggered if the Company's NAV, calculated at fair value cum income, total return failed to exceed the total return of 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 remains 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 NAV less costs. This is subject to shareholders' approval of the tender authority being put to shareholders at this year's AGM. If the authority is obtained and, only if the tender is subsequently triggered, 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.

As at 31 July 2018, the Company's annualised NAV total return since 31 July 2016 was 25.4%, exceeding the annualised total return of 16.8% of the comparative index.

Issuance, Share Buy-backs and Treasury

As a consequence of the share price moving to a premium to NAV in late April 2018, the Board authorised the issuance of new shares at a premium to allow us to respond when demand exceeds supply in the market. A total of 4,065,000 shares, 7.5% of the issued share capital at the start of the financial year, were issued in this way, resulting in an 18 basis point uplift to the NAV. As in previous years, your Board is seeking shareholder approval at the forthcoming AGM to renew the 10% non pre-emptive issuance authority. Issuance would continue to be undertaken only at a premium to NAV, so avoiding dilution to existing investors. This authority, if utilised, enhances NAV per share, improves liquidity in the Company's shares and reduces the operating expenses as a percentage of the asset base. As at 31 July 2018 the Company's ongoing charges were 1.02% compared to 1.07% in 2017.

At the forthcoming AGM, the Board will also be asking shareholders to renew the authority to repurchase up to 14.99% of the outstanding shares on an ad hoc basis, either for cancellation or to be held in treasury, and also to permit the re-issuance of any shares held in treasury. The Board uses the buy-back 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 holding in treasury any shares that are bought back and the ability to re-issue these shares, which would only be done at a premium to NAV.

Earnings and Dividend

This year's revenue return per share were in deficit of 0.60p (0.38p deficit in 2017), and consequently no final dividend is being proposed. It is the Board's view that, as the objective of the Company is to achieve capital growth, investors should not consider investing in this Company if they require income from their investment.

Gearing

Gearing is achieved through the use of bank borrowings. At present the Company has a one year £30 million (one year £15 million in 2017) multi-currency revolving credit facility with The Royal Bank of Scotland plc, of which £20 million by value was drawn, split between GBP and US$ at 31 July 2018.

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 7.9%, having started the year at 7.1%.

Unlisted Investments and Investment Policy

The Company's investment policy states that 'Pacific Horizon aims to achieve capital growth principally through investment in companies listed on the stock markets of the Asia-Pacific region (excluding Japan) and the Indian Sub-continent… The portfolio is actively managed and will normally consist entirely of quoted equity securities although unlisted companies, fixed interest holdings or other non equity investments, may be held.'

Our Manager, Baillie Gifford, continues to increase the resources dedicated to both researching and managing unlisted equity investments (including legal and valuation work) and has established a dedicated investment team for this area. This team is responsible for approximately US$2 billion of unlisted investment across 45 companies in different geographic locations. At present, only six of these companies are from the Asia-Pacific region and Indian Sub-continent, with NIO, the Chinese electric vehicle developer and manufacturer, being the one common name within this portfolio. Our portfolio managers anticipate being shown an increasing number of interesting unlisted investment opportunities, particularly Chinese companies, over the coming years and we believe it is in the interest of shareholders for them to consider these opportunities for investment.

The Pacific Horizon portfolio currently has four unlisted investments accounting for 1.6% of total assets: Philtown Properties (0.0%), a holding inherited following its spin-out from RFM Corp of the Philippines in 2009; JHL Biotech (0.3%), a Taiwanese biotech which was taken private with a view to listing in Hong Kong; JHL Biotech Convertible Bond (0.5%) issued as part of the de-listing; and NIO (0.8%).

Given the increasing quantum of potentially attractive unlisted investment opportunities that Baillie Gifford is beginning to see, in particular some very interesting Chinese names, the Board believes that the portfolio managers should have the opportunity to invest up to a maximum of 10% of total assets, at the time of initial investment, in unlisted equity opportunities in the Asia-Pacific region and Indian Sub-continent. The Board is therefore seeking shareholder authority to permit this increase in their investment remit at the AGM.

Changes to the Board

Elisabeth Scott will not be standing for re-election at the coming AGM as a consequence of increased responsibilities and time commitments elsewhere. I should like to thank Elisabeth for her service to the Company and contribution to Board discussions. I am pleased to welcome Angela Lane who will be appointed to the Board on 1 October 2018. Angela is a qualified accountant and has held several non-executive and advisory roles for small and medium capitalised companies across a range of industries. She is the non-executive chairman of Huntswood CTC, a non-executive director of Asbury Marsden, Sherborne School Worldwide and Dunedin Enterprise Investment Trust PLC where she is also chairman of its audit committee. Shareholders will be asked to confirm her appointment at the AGM.

Outlook

We started 2018 in a positive fashion for equities across the Asia-Pacific region and Indian Sub-continent following a combination of a pickup in global growth and China's resurgence, allied with a weak US dollar, which all pointed to a potential uptick in earnings and share prices. More recently, concerns over a possible global trade war have increased, initiated by the policies of the Trump administration, which could result in reduced growth of company earnings across the region, in part due to a strengthening US dollar. Whilst always cognisant of macro developments, including the uncertain outcome of the North Korea situation, the portfolio managers continue to see strong earnings growth from portfolio holdings, allied to significant earnings potential from businesses in a broad range of countries and sectors. The potential opportunities for investment have started to broaden and the Board remains confident that the region offers attractive investments for generating capital growth for the patient investor.

Annual General Meeting

This year's AGM will take place on 6 November 2018 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.

Jean Matterson

Chairman

6 September 2018

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

In this period of unprecedented technological change it behoves us as professional investors to look for those companies whose focus is on long term growth; those companies where the founders have a specific goal, even if it is at the expense of near-term profitability. If we do not accept the risk and uncertainty that arises from investments such as these, we will miss out on great opportunities. Hence our continued willingness to embrace asymmetric returns (unlimited upside returns and a maximum loss of 100% on the downside) and to look for outstanding individual company return opportunities, whilst readily acknowledging that many of our investments will inevitably be less successful. Over our latest financial year, the market rewarded many of the companies we selected. In the short term, however, current fears over trade and financial contagion are focusing investor attention again on potentially negative outcomes. We expect our holdings to outperform in the longer term whilst continuously searching for stocks which could potentially deliver a return significantly greater than the original investment over a multi-year period.

In the year to 31 July 2018 the Company's NAV increased by 13.6% and the share price appreciated by 26.9%. This represents a favourable equivalent comparison to the Company's comparative index, the MSCI All Country Asia ex Japan Index* (in sterling terms), which rose by 6.0% (all total returns).

The year really was one of two halves with the comparative index rallying strongly, up 9.3%, in the first half of the Company's financial year, and then consistently giving back its gains as the year end approached. The end of January was also the point when the US dollar stopped falling and began a consistently strong rally. This is probably attributable to investors seeking safe-havens following rising political risk, driven by the Trump administration. In our view, this apparent focus on geopolitics and capital flows misses the bigger picture, that of a global increase in digital penetration and the disruption that technology is bringing to society, combined with the strength of the US economy, and the relative economic resilience of the Asia-Pacific region.

Philosophy

Our investment philosophy is focused on finding and investing in some of the most attractive growth companies within the Asia-Pacific ex Japan region and the Indian Sub-continent. We believe that investing for the long term in companies that can deliver significantly faster growth than the market as a whole will reward investors over time. When thinking about growth, we look for companies that have the potential to increase their revenue and earnings at around 15% per annum for the next five years or longer, and where we feel this potential has not been fully recognised by the market. Depending upon the outlook for different countries and sectors, this strategy may lead to significant concentration in certain areas of the market. In addition to growth potential, the corporate characteristics we look for include sustainable competitive advantages, attractive financials and sensible management. We also target stocks where a wider range of positive potential outcomes may not be recognised by the market at present and which have, in our opinion, very significant long term opportunities for enhanced future profitability. This means that we are excited by the future. We are growth investors looking for rapidly growing companies. We believe that time and patience is on our side. We are looking for companies whose business models and management team have a high probability of fulfilling their ambitions. We are looking for areas where our ideas give us an edge versus the market over a longer timeframe.

Our investment philosophy has very much worked in our favour over the last twelve months. The growth characteristics of the current portfolio remain strong, with historic earnings growth at 22.3% and one-year forecast earnings growth of 31.1%, both double the respective rates for the comparative index. The portfolio's estimated price to earnings ratio for the current year is 20.1x versus 12.9x 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 has a slightly lower proportion of larger capitalised stocks compared to last year with 19.5% of the portfolio invested in companies capitalised below £1 billion and a further 31.9% in companies with a market capitalisation of less than £5 billion, compared with 0.2% and 14.1%, respectively, in the comparative index. Active share is 84% and turnover for the year was 33.2%.

Our starting premise begins with how we think the world, and within it individual countries, may change over the next three, five and ten years plus, in every area of life - economically, socially and politically - and the impact that technology has on these trends. When we look at a company and think about what the potential market size could be for the company's industry in the future, we ask ourselves what the current rate of growth is, how this industry could change, and whether there are adjacent markets that the company could enter. This gives us a rough estimate of the potential total addressable market for a company and its products in the future. We examine the current competitive dynamics of the industry and attempt to understand how these are likely to change in the future. We ask whether the industry is improving and whether the likely position of the company within it is also improving. Lastly, we look for a management team that we believe has the ability, ambition and integrity to deliver on its promise; ideally, a management team with a definite vision of the future and how, in their own small space, they aim to create it.

The background to this construct, however, is one of uncertainty. Both error and chance play a huge role in any eventual outcome; hence the portfolio is diversified by country, sector and industry. More importantly, we understand that not all the companies we choose to invest in will generate the potential value that we believe is possible. We will run and back our winners both from an operational and a stock price view and tend to reduce and sell our losers. Ideally, we will end up with a small group of stocks which, due to compounding growth and profit, generate and will generate significant returns over a longer period of time; counterbalanced by potentially a larger group which have not reached this level of potential. Due to smaller holdings sizes in this latter group and the benefits of enhanced returns from our successful investments, we aim to deliver outperformance over time.

We continue to 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. The number of sectors and industries that are becoming digitalised and connected is increasing rapidly; there is a globally growing awareness of these changes. Artificial Intelligence (AI) is now taken for granted and the concept of electric rather than gasoline powered cars is an inevitable commercial development rather than a vision of the future.

Review

Technology companies now account for 48.7% of the portfolio†, down slightly from 48.9% a year ago as we reduced some of our holdings when the market was strong. Over the year, Technology was our largest sector exposure from both an absolute and a relative weight perspective, and the top contributor to returns, with an average return of 24.5% significantly outperforming the broader comparative index return of 6.0% and the sector return of 8.7%. We reduced our holding in Tencent, reflecting our enthusiasm for other holdings. We sold Baidu and Ctrip.com as we believe that the future growth potential may be lower than our prior expectations. We sold Advanced Semiconductor Engineering, Advantech and Hon Hai Precision Instruments in Taiwan and bought Global Wafers, Accton Technology and Kingpak Technology.

The Financial sector is the second largest sector weight in the portfolio at 16.3%, down from 17.2%. We took a new holding in HDBank, a well-run and rapidly growing private bank in Vietnam that is attractively valued.

The Consumer Discretionary sector is our third largest sector exposure at 14.1%, down from 19.8%. As economic growth within the region recovers, the focus on the Asian consumer, and the consequent growth opportunities, should generate increased investor interest. We established a new position in Li Ning, a domestic footwear brand, which we believe is undergoing a significant restructuring and moving its business online, where it will have new growth opportunities. JD.com and Geely Automobile are our two top holdings in this sector.

In the Technology sector, Kingdee International Software and Sunny Optical Technology were the two best contributing stocks. Koh Young Technology, a small South Korean manufacturer of 3D optical inspection equipment, rose 72% and is now among our top 10 holdings. It is the world leader in 3D solder paste inspection equipment and is currently growing its market share rapidly in the 3D automated optical inspection market. As global automation rises and the size of components shrinks, greater precision is necessary. We believe this will lead to more companies seeking Koh Young's solutions and this company, now capitalised at US$1.3 billion, has the potential for rapid expansion as its takes its key technology from one niche market to another.

We believe that the global transportation market is currently undergoing rapid change, which in ten to twenty years is likely to make it a fundamentally different industry. China is likely to have a scale advantage in the new global electric vehicle industry due to the need to address environmental issues. It currently is the leading producer of electric vehicles (EV) globally. We own two Chinese automotive companies, Geely and NIO, both of which are investing heavily in EVs.  If even some of the more pessimistic EV penetration rates are to be reached by the mid 2020s, then the world needs significantly more batteries and their respective components. We therefore own Samsung SDI, currently one of the top five global makers of electric batteries. The stock rose 37% as a result of rising demand and margins from its energy storage solutions business. We also initiated a new holding in PT Vale Indonesia, a nickel producer. Nickel is a key component in electric batteries and, as technology improves, is likely to become increasingly so. The world is not currently producing enough nickel to meet current global demand. In due course, total demand for nickel from EV could equal the whole of the global nickel market today. To this end, it appears that there should be a significant and sustained rise in the price of nickel to meet the additional supply that the market will demand and we believe that Vale Indonesia has the ability to increase production to meet this need.

On the negative side, JD.com, was our biggest detractor, falling 20% over the year. The company's revenue growth slowed and margins disappointed as competition from Alibaba increased and the company focused on investments in its logistics arm. We feel the shares are materially undervalued and will re-rate when the current investment phase starts to produce tangible results. China Rapid Finance (CRF), a peer-to-peer (P2P) credit lender in China, fell 75% hurt by tightening regulatory standards and a dramatic consumer credit crunch orchestrated by the authorities. We think that CRF has a strong history of credit scoring, an innovative management team and a model which has the potential for scale. We continue to hold the company, despite these short term significant losses, as we think it may emerge from this episode significantly stronger with less competition.

Sunny Optical is up almost 800% over the last five years and up another 40% over the last year, making it the best performer and highest contributor to our performance over five years and the second largest contributor over the year. Looking back, Sunny Optical was bought in April 2015 for a number of reasons. First and foremost, we believe that the importance of vision in the way that humans interact with their devices and how computers interact with the world will increase. This is evidenced by the rise of smartphone photography and the need for cameras on cars and other machines. At the time of investment, Sunny was a distant seventh in the smartphone camera lense market. However, we believed that not only would the market grow rapidly, but that Sunny had a distinct competitive advantage, allowing it to take market share. It had acquired significant technological know-how and patents from Konica Minolta, it was the leading domestic player in China, and had the potential to be a cost leader when the company scaled up to meet demand. It also had a 30% share of the auto camera market; at 0.8 cameras per car, we believed this market could reach 10+ cameras per car over a 10-year period. The company was privately founded and the founder had, via a share trust, given a significant portion of the equity to his employees, demonstrating vision, ability and integrity. We hoped to make two to three times our money if our thesis proved to be correct. We still believe that Sunny has significant upside to come and it remains one of our top 10 holdings, despite expectations for future performance being much higher today, with the stock trading on a forward multiple of 24.8x versus 18.5x when we first purchased it.

Geely Automobile is the second best performing stock over the last five years, up 558%, and is also our second highest contributor to performance. Both Japan and South Korea developed a significant and dominant domestic car industry which then become world leading: Toyota, Honda, Nissan and others from Japan, together with Hyundai from Korea are now deeply respected global brands. China five years ago was dominated by foreign brands via joint ventures with thousands of very poor quality local manufacturers. We believed that one or two of these local companies would eventually become the domestic (and then a global) champion in what is the world's largest automotive market. Geely's founder demonstrated the vision to take Geely to being a leading brand within China, and potentially globally when the company acquired Volvo in 2009, giving it the technology to leapfrog its domestic peers. In 2015, its first car based on Volvo's design was released. In the long run, we believe Geely will improve its domestic market share from 5% today towards 20% and eventually sell cars overseas. At year-end, it represented 3.1% of the portfolio.

Although Kingdee International Software has risen 177% over the last five years, the majority of this gain has been very recent, returning 168% over the last year, making it the best performer over the year. We purchased Kingdee in April 2015; it is one of China's leading developers of enterprise resource planning (ERP) software for small and medium-sized businesses (SMEs). As the world digitalises, the competitive nature of many industries change, and there are significant network effects and economies of scale to the online digitalised industry compared to the offline world. Our view was that the market share gained by the online winner in SME Enterprise Resource Planning would be significantly higher than in the offline world. Kingdee was the leader in moving towards a cloud-based solution for its offline customers and at the same time attempting to win larger companies via its new data processing solutions. Management here definitely has a strong vision and ambition to grow. As a result of frequent changes to the company's business model, the stock has fallen more than 50% from its 2015 high. We believe, however, that Kingdee has a good chance of being the leading provider of software for ERP in China and we anticipate significantly improving cash flow and profit generation in the coming years.

In terms of the countries where we invest, our China weighting increased from 35.9% to 39.8%, driven mostly by outperformance from our holdings. It is now the largest country weighting in the portfolio, followed by South Korea at 21.2%.

We removed a tail of smaller holdings where we no longer have confidence in the management, business model or the potential upside. These included: HTC (management concerns); Advantech (growth concerns); and Samsung Fire and Marine (lack of growth).  

Our holdings in South Korea performed very well, contributing significantly to performance over the year, rising on average 24.3% versus the country index which was down 0.4%. Our notable country overweight position also helped these returns. Some of our South Korean biotech stocks did very well: Genexine was up 89% - it is a leader in innovative technology for long-acting therapeutics; Bioneer rose 107% after it undertook a discounted rights issue to fund research and development; and Theragen Etex rose 106% on expectations of a licensing out deal. Our worst performing stock was Finetex EnE, the maker of nanofiber material for the garment industry. The stock was suspended after the auditor resigned. We subsequently wrote down our holding. The company has seemingly been unable to scale its technology profitably, but we remain confident that it has a unique product which serves a new unmet need.

Our Vietnamese exposure contributed meaningfully to the overall performance of the portfolio. Our Vietnam holdings rose 25% on average during the year. Vingroup, the leading real estate developer in the country, was the standout performer, rising 183% as the company realised significant value by listing its two subsidiaries, property malls and real estate development. We continue to see the Vietnamese economy as a whole as an underappreciated growth story.

We made two unlisted equity investments during the year. NIO is one of China's leading new energy vehicle start-ups, which aims at the upper end EV market in China and claims the world's first in-car AI system and the world's fastest electric car among its products. We expect the stock to list in 2018. Our second unlisted investment was comprised of two components. We helped JHL Biotech to delist from the stock market in Taiwan with the intention of relisting on another exchange which would give the company access to a larger pool of more sophisticated investors. As part of the delisting process, we participated in a convertible bond which gives extra security and return over the pure equity holding. We expect the stock to relist by the end of 2019. The investment trust structure lends itself well to having some unlisted exposure where we believe there to be the potential for significant returns.

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 of 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 many of 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 on record.

Lastly, the interests of minority shareholders must be upheld; we look for alignment between ourselves as investors and the majority shareholders and owners of the companies in which we invest.

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 7.9%. In the near term, recent market noise over trade wars, slowing global growth and a rising US dollar are eclipsing the underlying reality. When the market returns to looking at fundamentals in Asia, it is our expectation that other investors will see what we already see: very healthy, growing economies, with cheap companies and undervalued currencies, creating significant opportunities for long term financial benefit for our shareholders.

*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 2018			For the year ended 31 July 2017 (audited)
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains on investments	-	22,492	22,492	-	47,480	47,480
Currency (losses)/gains	-	(49)	(49)	-	192	192
Income (note 2)	2,032	-	2,032	1,559	-	1,559
Investment management fee (note 3)	(1,396)	-	(1,396)	(1,095)	-	(1,095)
Other administrative expenses	(534)	-	(534)	(425)	-	(425)
Net return before finance costs and taxation	102	22,443	22,545	39	47,672	47,711
Finance costs of borrowings	(275)	-	(275)	(119)	-	(119)
Net return on ordinary activities before taxation	(173)	22,443	22,270	(80)	47,672	47,592
Tax on ordinary activities	(155)	-	(155)	(131)	-	(131)
Net return on ordinary activities after taxation	(328)	22,443	22,115	(211)	47,672	47,461
Net return per ordinary share (note 4)	(0.60p)	40.90p	40.30p	(0.38p)	86.74p	86.36p

The total column of this statement represents 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 the Company does not have any other comprehensive income and the net return on ordinary activities after taxation is both the profit and comprehensive income for the year.
 

Balance Sheet (unaudited)

	At 31 July 2018		At 31 July 2017 (audited)
	£'000	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		221,074		179,523
Current assets
Debtors	1,065		508
Cash and cash equivalents	3,491		2,882
	4,556		3,390
Creditors
Amounts falling due within one year (note 6)	(20,750)		(15,163)
Net current liabilities		(16,194)		(11,773)
Net assets		204,880		167,750
Capital and reserves
Share capital		5,833		5,426
Share premium account		17,774		3,166
Capital redemption reserve		20,367		20,367
Capital reserve		157,279		134,836
Revenue reserve		3,627		3,955
Shareholders' funds		204,880		167,750
Net asset value per ordinary share		351.26p		309.15p
Ordinary shares in issue (note 7)	58,327,282		54,262,282

 

Statement of Changes in Equity (unaudited)

For the year ended 31 July 2018

	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 2017	5,426	3,166	20,367	134,836	3,955	167,750
Net return on ordinary activities after taxation	-	-	-	22,443	(328)	22,115
Ordinary shares issued (note 7)	407	14,608	-	-	-	15,015
Dividends paid during the year (note 5)	-	-	-	-	-	-
Shareholders' funds at 31 July 2018	5,833	17,774	20,367	157,279	3,627	204,880

For the year ended 31 July 2017 (audited)

	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	(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

†      The Capital Reserve balance at 31 July 2018 includes investment holding gains on fixed asset investments of £70,358,000 (31 July 2017 - gains of £76,512,000).

 

Cash Flow Statement (unaudited)

	For the year ended 31 July 2018		For the year ended 31 July 2017 (audited)
	£'000	£'000	£'000	£'000
Cash flows from operating activities
Net return on ordinary activities before taxation‡		22,270		47,592
Net gains on investments		(22,492)		(47,480)
Currency losses/(gains)		49		(192)
Finance costs of borrowings		275		119
Overseas withholding tax incurred		(152)		(114)
Changes in debtors and creditors		111		(105)
Cash from operations		61		(180)
Interest paid		(247)		(104)
Net cash outflow from operating activities		(186)		(284)
Cash flows from investing activities
Acquisitions of investments	(85,500)		(43,667)
Disposals of investments	66,468		42,958
Net cash outflow from investing activities		(19,032)		(709)
Cash flows from financing activities
Equity dividends paid (note 5)	-		(200)
Shares issued (note 7)	14,465		-
Shares purchased for cancellation (note 7)	-		(7,213)
Borrowings drawn down	70,000		45,000
Borrowings repaid	(64,678)		(35,099)
Net cash inflow from financing activities		19,787		2,488
Increase in cash and cash equivalents		569		1,495
Exchange movements		40		64
Cash and cash equivalents at 1 August		2,882		1,323
Cash and cash equivalents at 31 July		3,491		2,882

‡   Cash from operations includes dividends received of £1,998,000 (2017 - £1,390,000) and interest received of £30,000 (2017 - £3,000).
 

List of Investments as at 31 July 2018 (unaudited)

Name	Country	Business		Value £'000	% of total assets ‡
Alibaba Group ADR	HK/China	Online and mobile commerce		14,194	6.3
Tencent Holdings	HK/China	Online gaming and social networking		11,833	5.2
Sunny Optical Technology	HK/China	Small optical lenses manufacturer		11,679	5.2
JD.com ADR	HK/China	Online mobile commerce		7,932	3.5
Samsung SDI	Korea	Lithium-ion batteries manufacturer		6,977	3.1
Ping An Insurance H Shares	HK/China	Life insurance provider		6,930	3.1
Geely Automobile	HK/China	Automobile manufacturer		6,895	3.1
SEA Limited ADR	Singapore	Internet gaming and e-commerce		6,891	3.1
Koh Young Technology	Korea	3D inspection machine manufactuer		6,759	3.0
Macronix	Taiwan	NOR/ROM memory semiconductor manufacturer		6,451	2.9
SK Hynix	Korea	Electronic component and device manufacturer		6,422	2.8
Dragon Capital Vietnam Enterprise   Investments	Vietnam	Vietnam investment fund		5,855	2.6
Accton Technology	Taiwan	Server network equipment manufacturer		5,844	2.6
Kingdee International Software	HK/China	Enterprise management software distributor		5,790	2.6
PT Vale Indonesia	Indonesia	Nickel mining		4,857	2.1
IndusInd Bank	India	Commercial bank focusing on consumer lending		4,431	2.0
CNOOC Ltd	HK/China	Oil and gas producer		4,307	1.9
Pinduoduo Inc ADR	HK/China	Chinese e-commerce		3,930	1.7
Li Ning	HK/China	Sportswear apparel supplier		3,752	1.7
HDBank	Vietnam	Consumer bank		3,342	1.5
Cafe24	Korea	South Korean web service provider		3,235	1.4
GlobalWafers	Taiwan	Semiconductor wafers manufacturer		3,128	1.4
ICICI Bank	India	Retail and corporate bank		2,744	1.2
AviChina Industry & Technology H Shares	HK/China	Aircraft and aircraft parts manufacturer		2,710	1.2
Douzone Bizon	Korea	Enterprise resource planning software developer		2,445	1.1
Vincom	Vietnam	Property developer		2,431	1.1
Military Commercial Joint Stock Bank	Vietnam	Retail and corporate bank		2,428	1.1
Medy-Tox	Korea	Global pharmaceutical company		2,419	1.1
Genexine	Korea	Therapeutic vaccine researcher and developer		2,405	1.1
Bioneer	Korea	Drug researcher and developer		2,302	1.0
Hoa Phat Group	Vietnam	Multi-disciplinary manufacturer of steel and   related products		2,287	1.0
Ping An Bank A Shares	HK/China	Consumer bank		2,242	1.0
Info Edge	India	Jobseekers, housing sales and restaurant online  review provider		2,036	0.9
Basso Industries	Taiwan	Powerdrills manufacturer		2,011	0.9
Enzychem Lifesciences Corp	Korea	Manufacturer and distributor of pharmaceuticals		2,006	0.9
Kingpak Technology	Taiwan	Semiconductor packaging		1,976	0.9
Saigon Securities	Vietnam	Brokerage and securities		1,954	0.9
AU Small Finance Bank	India	Small consumer finance bank		1,868	0.8
Samsung Electronics	Korea	Memory, phones and electronic components   manufacturer		1,865	0.8
List of Investments as at 31 July 2018 (unaudited) (ctd)

Name	Country	Business	Value £'000	% of total assets ‡
Haier Electronics Group	HK/China	Washing machine and water heater manufacturer	1,789	0.8
NIO Inc Series D Preffered*	HK/China	Electric vehicle original equipment manufacturer	1,749	0.8
Mitac Holdings	Taiwan	Distributor of GPS and server products	1,747	0.8
Bank Tabungan Negara	Indonesia	Mortgage lender	1,583	0.7
Petro Matad	Mongolia	Oil exploration and production	1,546	0.7
Eugene Technology	Korea	Semiconductor equipment manufacturer	1,514	0.7
NCSOFT	Korea	Online games developer	1,502	0.7
Mahindra CIE Automotive	India	Truck parts manufacturer	1,486	0.7
Kansai Nerolac Paints	India	Paint manufacturer	1,358	0.6
Perusahaan Perseroan/PT Aneka Tambang	Indonesia	Nickel mining	1,270	0.6
Cox & Kings India	India	Travel agent	1,247	0.5
3SBIO	HK/China	Biologics innovator	1,170	0.5
ST Pharm	Korea	Manufacturer of specialist pharmaceutical   ingredients	1,155	0.5
JHL Biotech Convertible Bond*	Taiwan	Biologics manufacturer	1,143	0.5
ICICI Prudential Life Insurance	India	Life insurance provider	1,135	0.5
CrystalGenomics	Korea	Proteomic drug discovery investigator	1,083	0.5
BitAuto Holdings Ltd ADR	HK/China	Automobile pricing website	1,077	0.5
SDI Corporation	Taiwan	Manufacturer of stationery and lead frames for   semiconductors	1,070	0.5
Netmarble Games	Korea	Mobile computer games designer	1,023	0.5
Techtronic Industries	HK/China	Power tool manufacturer	1,007	0.4
Intron Biotechnology	Korea	Antibiotics drug researcher	971	0.4
Aslan Pharmaceuticals	Singapore	Biosimilar drug developer	961	0.4
Aslan Pharmaceuticals ADR	Singapore	Biosimilar drug developer	947	0.4
RBL Bank	India	Consumer finance	933	0.4
EO Technics	Korea	Laser equipment manufacturer and distributor	882	0.4
Max Financial Services	India	Life insurance provider	856	0.4
LG Innotek	Korea	Mobile phone component manufacturer	832	0.4
Hoa Sen Group	Vietnam	Manufacturer of steel and plastic building   products	831	0.4
Taiwan Semiconductor Manufacturing	Taiwan	Semiconductor foundry	804	0.3
Mecaro	Korea	Semiconductor equipment	793	0.3
Finetex EnE	Korea	Nano-technology material manufacturer	787	0.3
ZTE H Shares	HK/China	Mobile network equipment	747	0.3
Binh Minh Plastics Joint Stock Company	Vietnam	Plastic piping manufacturer	720	0.3
JHL Biotech*	Taiwan	Biologics manufacturer	601	0.3
Bharat Electronics	India	Indian defence	581	0.3
TTY Biopharm	Taiwan	Manufacturer of specialist genetics	576	0.2
Theregen Etex	Korea	Genetics researcher and developer	529	0.2
Sarine Technologies	Singapore	Diamond grading measurement systems   developer	435	0.2

Name	Country	Business	Value £'000	% of total assets ‡
China Shineway Pharmaceuticals	HK/China	Manufacturer and seller of Chinese and Western   medicines	424	0.2
China Rapid Finance ADR	HK/China	P2P consumer lending platform	400	0.2
Dilip Buildcon	India	Indian construction company	247	0.1
Philtown Properties*	Philippines	Property developer	0	0
Total Investments			221,074	98.2
Net Current Assets			3,989	1.8
Total Assets			225,063	100.0

HK/China denotes Hong Kong and China.

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

* Denotes unlisted investment.

 

Distribution of Total Assets‡ (unaudited)

Geographical Analysis

		At 31 July 2018 %	At 31 July 2017 %
Equities:	Hong Kong and China	40.2	38.1
	Korea	21.2	24.9
	Taiwan	11.3	11.6
	Vietnam	8.9	7.0
	India	8.4	16.3
	Singapore	4.1	0.5
	Indonesia	3.4	-
	Mongolia	0.7	-
Total equities		98.2	98.4
Net current assets		1.8	1.6
Total assets		100.0	100.0

Sectoral Analysis

		At 31 July 2018 %	At 31 July 2017 %
Equities:	Consumer Discretionary	14.1	19.8
	Consumer Staples	-	1.2
	Energy	2.6	-
	Financials	16.3	17.2
	Health Care	8.3	5.0
	Industrials	2.4	2.8
	Information Technology	48.7	48.9
	Materials	4.7	2.7
	Real Estate	1.1	0.8
Total equities		98.2	98.4
Net current assets		1.8	1.6
Total assets		100.0	100.0

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

 

Notes to the Condensed Financial Statements (unaudited)

There are no dilutive or potentially dilutive shares in issue.

1.	The unaudited Financial Statements for the year to 31 July 2018 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. 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 2018 £'000			31 July 2017                      (audited) £'000
2.	Income from financial assets designated at fair value through profit or loss
	Listed overseas dividends	2,002			1,556
		2,002			1,556
	Other income
	Deposit interest	30			3
	Total income	2,032			1,559
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 2018 £'000	31 July 2017 (audited) £'000
	Net return per ordinary share
	Revenue return on ordinary activities after taxation		(328)	(211)
	Capital return on ordinary activities after taxation		22,443	47,672
	Total return		22,115	47,461
	Weighted average number of ordinary shares in issue		54,868,308	54,958,654
	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 2018	31 July 2017 (audited)	31 July 2018 £'000	31 July 2017 (audited) £'000
	Amounts recognised as distributions in the year:   Previous year's final (paid 11 November 2016)	Nil	0.35p	Nil	200
	There are no dividends paid and proposed in respect of the financial year. There is no revenue available for distribution by way of dividend for the year (2018 - revenue loss of £328,000; 2017 - revenue loss of £211,000).
6.	The Company has a one year multi-currency revolving credit facility of up to £30 million with The Royal Bank of Scotland plc (31 July 2017 - one year £15 million multi-currency revolving credit facility with The Royal Bank of Scotland plc). At 31 July 2018 there were outstanding drawings of £10,000,000 and US$13,358,000 at interest rates of 1.08075% and 2.79063% respectively (31 July 2017 - £7,500,000 and US$9,588,750 at interest rates of 0.74318% and 1.69586% respectively). 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. None of the above creditors at 31 July 2018 and 31 July 2017 are financial liabilities designated at fair value through profit or loss.
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 a tender offer in October. The nominal value of these shares was £286,000 and represented 5.0% of the issued share capital at 31 July 2016. No shares were bought back in the year to 31 July 2018. At 31 July 2018 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 for the existing bi-annual 5% tenders to be continued for a period of at least the next three years. 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 being put to shareholders at the forthcoming 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 year to 31 July 2018 the Company issued a total of 4,065,000 shares on a non pre-emptive basis (nominal value £407,000, representing 7.5% of the issued share capital at 31 July 2017) at a premium to net asset value (on the basis of debt valued at par value) raising net proceeds of £15,015,000 (2017 - Nil).
8.	The Company incurred transaction costs on purchases of £110,000 (2017 - £69,000) and on sales of £336,000 (2017 - £102,000), being £446,000 (2017 - £171,000) 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 2018. The financial information for 2017 is derived from the financial statements for 2017 which have been delivered to the Registrar of Companies. The Auditors have reported on the 2017 accounts; their report was unqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report and did not contain a statement under sections 498 (2) or 498(3) of the Companies Act 2006. The statutory accounts for 2018 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. The Auditors have advised the Company that they do not expect their report on the 2018 statutory accounts to include any modification or emphasis of matter statements.
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 4 October 2018.
11.	Glossary of Terms Total Assets Total assets less current liabilities, before deduction of all borrowings. Net Asset Value and Shareholders' Funds Also described as shareholders' funds, 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 stock markets 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. Compound Annual Return The compound annual return converts the return over a period of longer than one year to a constant annual rate of return applied to the compound value at the start of each year.

‡      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 £225.1 million (before deduction of loans of £20.2 million) at 31 July 2018.

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.

7 September 2018

For further information please contact:

Anzelm Cydzik, Baillie Gifford & Co

Tel: [phone]

Roland Cross, Account Director, Four Broadgate

Tel: [phone] or 07831 401309

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