Annual Financial Report

RNS Number : 3103I

Edinburgh Dragon Trust plc

17 November 2008

 



EDINBURGH DRAGON TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 AUGUST 2008

1. CHAIRMAN'S STATEMENT

Background 

In what were extremely difficult conditions for global financial markets, I am pleased to report that the Company performed well in the year ended 31 August 2008. The net asset value rose by 1.5% on a total return basis, compared with a fall of 8.8% in the benchmark, the MSCI All Country Asia (ex Japan) Index. It is also pleasing to note that our Manager's belief - that valuations in Asian markets and certain sectors were becoming overstretched - has paid off, and that rotation into the more defensive counters this year has resulted in significant outperformance by the Company's portfolio.

During the year under review, the share price rose by 1.2% to 146p, reflecting a marginal narrowing of the discount from 11.1% to 10.7%.

Overview 

For the past year, heightened concerns over a prolonged credit crunch, deteriorating economic prospects and rising inflation have continued to unnerve many investors. In August, September and October last year, Asian markets had ignored events unfolding in the US credit markets. Reality soon set in, however, and from November onwards they tracked the downward path of their Western counterparts.

Questions early this year centered on whether Asian economies and markets had decoupled from the developed world. The performance of equity markets suggested this was not the case. On the other hand, economic growth in Asia throughout the year remained robust, notwithstanding weaker export demand. While the importance of US and European exports has certainly declined in recent years, it is clear intra-Asian trade has to some degree compensated.

At a portfolio level, however, Asia is still very dependent on foreign capital, as evidenced by the strong outflows across markets. That movement, however, appeared more a response to policy failure internationally, since, despite a string of aggressive interest-rate reductions, tax cuts, special liquidity schemes and bank bailouts by the US authorities, any relief rallies quickly fizzled out. 

Inflationary fears have also surfaced, driven by booming commodity prices, and presented a dilemma for many Asian central banks. Most chose to let events take their course, hoping that some modest monetary tightening would suffice to cool prices without damaging growth. That calculation appears increasingly to have paid off, with prices of both hard and soft commodities now weakening, providing some relief for Asian central banks and governments alike.

For the most part, economic growth in the region held up well. While exports softened, domestic consumption, facilitated by relatively low levels of indebtedness, supported expansion. Recent downgrades to growth forecasts, notably from the trade-dependent economies such as Singapore and South Korea, suggest, however, that the economic downturn has indeed spread. 

Overall, South Korea and the Philippines were the main market laggards.  China, however, which had previously been the region's best performer, saw one of the most dramatic falls from its peak. That decline has been driven in part by the global sell-off, and partly by fears that the Chinese government's desire to crack down on an overheating economy could crimp growth.

While the gyrations in equity markets have led to a global re-pricing of risks, the fall in share prices this year has brought valuations back to more realistic levels. Cyclical sectors that were beneficiaries of rising commodity prices have also been sold off. Given the exceptional period preceding the turmoil - up to October last year, stocks had had an almost uninterrupted five-year rally- the pullback was long overdue.  With more irrational and indiscriminate selling now underway, opportunities to pick up quality investments at reasonable prices may become more prevalent.

Discount

The Board monitors closely the discount level of the Company's shares and has in place a buyback mechanism whereby the Manager is authorised to buy back shares within certain limits. The Company bought back 6,122,500 shares for cancellation, at a cost of £9.5 million, enhancing the NAV for continuing shareholders by 0.49p. A resolution to renew the authority to buy back shares for cancellation will be proposed at the Annual General Meeting.

Gearing 

As noted in the last interim report, cash levels have continued to be increased to ensure that there will be sufficient cash available to repay the $80 million loan notes by their redemption date at the end of 2008. Cash held (including cash equivalents) was £42.5 million at 31 August 2008. The Board intends to continue with a gearing facility in place and on 30 September 2008 a £40 million multi-currency loan facility with The Royal Bank of Scotland was put in place. To date, there have been no drawdowns on this facility.

Revenue Account

The revenue return per share was 2.35p, compared to 1.84p in the previous year. The Board recommends the payment of a final dividend of 1.6p per ordinary share which, if approved by shareholders at the Annual General Meeting, will be paid on 19 December 2008.

Stocklending

As shareholders are aware, in order to supplement its income, the Trust has for some time lent stock from its portfolio. Early in 2008, however, the Board became concerned about the outlook for this practice. In order to preserve the interests of the shareholders of the Trust, it was decided to withdraw from this activity. That decision has been fully vindicated by subsequent events in the stockmarkets.

Annual General Meeting

In accordance with the corporate governance procedures endorsed by the Board, all directors who have attained more than nine years' service or are aged over 70 years will retire from the Board and submit themselves for re-election on an annual basis. Messrs Cassidy, Frame, Gairns, Tyrie and Watt will retire and be proposed for re-election at the annual general meeting. Following an appraisal of each director, including the Chairman, the Board is satisfied that each director's performance continues to be effective, that the Board has the requisite range of expertise and experience and that it is compliant with the AIC guidelines on independence. The Board recommends that shareholders vote in favour of the re-election of directors at the Annual General Meeting.  

Outlook 

At the time of writing, equity and credit markets were in critical condition indicating rapidly deteriorating confidence.

Fears of a devastating collapse in demand and output resulting from the stalled credit markets were continuing to play havoc with emerging markets, particularly those that rely heavily on exports to developed nations.

The immediate prospects for Asian equities therefore remain muted. With demand slowing and still high input costs depressing margins, earnings are expected to remain under pressure. In this challenging environment, Dragon's portfolio is well diversified with quality stocks, and we remain optimistic that the companies we hold can strengthen their competitive positions as weaker firms struggle. On the political front, however, leaders in Thailand, Malaysia and South Korea have to varying extent lost their grip in the face of popular opposition, which could undermine sentiment further. 

With the current market turbulence, our Manager is looking to top-up preferred holdings and buy into those well run companies that were previously deemed too expensive. This should help Dragon's portfolio, comprising companies with responsible management and healthy balance sheets, to be positioned well for the long term. 

Tony Cassidy

Chairman

16 October 2008

2. MANAGER'S REVIEW

Overview

The year under review marked the end of the strong rise in Asian equities that had begun in 2003. After peaking in October 2007, all markets in the region saw sustained selling pressure throughout the rest of the review period, punctuated by the occasional relief rally. Although Asian markets had initially ignored the turmoil that erupted in the financial system in early August, for the most part they tracked the movements of Western markets, which themselves mirrored the fears surrounding the unwinding of the credit bubble. Indeed, falls in Asian markets from their peaks were greater that those of developed markets, reflecting in part the extent to which they had risen in the preceding five years, and also the extent to which they remain sensitive to foreign portfolio flows.

By the end of the review period, equities in Asia had fallen 8.8% in sterling terms (as measured by the MSCI All Country Asia (ex Japan) Index), with China and South Korea among the top losers. In comparison, Indonesia was the only market to post a gain, while Singapore proved resilient. 

During the period, inflation rates across the region rose to their highest levels in many years, driven by rising commodity prices. This rapid rise in prices was felt most in the developing economies in Asia, where food and fuel account for a major portion of household expenditure.

Meanwhile, the weakening of developed economies started to take its toll in the region. Economies dependent on exports to the West, such as South Korea and Singapore, saw the sharpest falls in their growth rates. In contrast, those with more diversified export markets, such as Indonesia, or those less reliant on exports, such as India, were better insulated against the global slowdown. However, growth prospects across the region have dimmed significantly, and downgrades in official forecasts became more frequent as the year progressed.

Governments and policymakers were thus caught in a conundrum: whether to tighten monetary policy to curb inflation or loosen to address falling growth. Responses were as varied as the situation was complex. At one end of the spectrum, India's highly independent central bank aggressively raised rates, while at the other end countries maintained accommodative stances, hoping that weaker growth globally would eventually cause inflation pressures to ease.  

Amid the turmoil in financial markets, the portfolio's performance was significantly better than that of its benchmark. The key reason for this lies in the portfolio's defensive qualities, which came to the fore during the downward correction. Our decisions to remain underweight in cyclical sectors such as commodities and Korean shipbuilders, as well as countries such as China, where we were very wary about inflated valuations and company quality, ultimately paid off. These 'high beta' areas had driven the last stage of the bull market, and we had taken the opportunity to further increase the portfolio's underweight positions. Once the correction began, it was these sectors that had led the market up which then led it down, and our portfolio outperformed significantly as a result.

The fund's largest country overweight, Singapore, was particularly resilient. Although it has an open economy that is exposed to growth in developed countries, it is home to many high-quality companies that are well managed and strongly capitalised. The strength of the Singapore dollar also boosted performance.

At the other end of the spectrum sat South Korea, which turned in a poor performance. This was largely a reflection of its deteriorating external balance and the resulting weak currency, and the cyclical nature of many of its largest companies.

Performance Attribution Analysis

Gross assets rose 4.1% on a total return basis during the twelve months to the end of August, while the benchmark MSCI All Country Asia (ex Japan) Index fell 8.8%. 6.8 percentage points of the outperformance came from asset allocation and 6.2 from stock selection, and (- 0.2) from currency.

The portfolio's overweight to Singapore was the largest asset allocation (including currency) contributor (1.7 percentage points) as the market weathered the sell-off better than others. The underweight to South Korea added a further 1.5 percentage points, aided by the weakness in the won.

On the stock selection front, the portfolio's holdings in Singapore added 1.6 points to relative performance. This comprised contributions from conglomerate Jardine Strategic Holdings, retailer Dairy Farm, which reported solid results and has a business spread across the region, Singapore Telecom, as well as our banking sector stocks, United Overseas Bank and Oversea-Chinese Banking Corporation, which are conservatively managed and have little exposure to the toxic assets that are afflicting many Western banks. Jardine's performance was itself aided by its holdings in Dairy Farm and Indonesia's Astra, while Singapore Telecom's stable cash flows in markets such as Australia as well as good growth prospects in emerging markets saw the counter outperform.

Our Chinese and Hong Kong holdings also contributed positively to relative performance. Notables included CNOOC, which benefited from record oil prices during the year under review, and Hong Kong utility CLP Holdings, which proved defensive during the period. The Chinese mainland markets, which we had been wary of for some time, saw very sharp corrections.

Our holdings in South Korea were the main detractors from relative performance. Regional lenders Daegu and Pusan banks came under pressure despite posting good results during the period. Although they are conservatively managed and have insignificant exposure to debt derivatives such as CDOs, their stock prices could not escape the poor sentiment that plagued the entire market.

Positive contributions to stock selection also came from not holding large index constituents such as POSCO, Hon Hai Precision and Shinhan Financial, which all posted sharp falls.

Portfolio Activity

During the review period, one new name was added to the portfolio: Singapore-based Fraser & Neave. The company's core businesses are food and beverages and property, and, with strong sales in Singapore, Malaysia and Indochina, it is considered a play on growth in the ASEAN region. Its food and beverage unit, whose brands include Tiger Beer, has been growing strongly in regional markets. 

On the sell side, we exited our holding in Maybank. Although this had been a fairly recent addition to the portfolio, meetings with the company's senior management left us unconvinced that purchases of stakes in banks in Indonesia, Pakistan and Vietnam were at decent prices, nor that the company had the resources to manage the acquisitions. We also sold a small position in Sinopac Holdings, on concerns of a deterioration in the quality of its assets.

The markets' volatility presented us with opportunities to take partial profits in the latter part of 2007 from holdings that had seen strong run-ups. Among these were Chinese holdings China Mobile, PetroChina, CNOOC and Zhejiang Expressway; Indian lenders HDFC and ICICI Bank; and Korean retailer Shinsegae. Later in the review period we took profits from defensive holdings which had held up during the turmoil, such as Malaysia's British American Tobacco and Hong Kong's CLP Holdings.

We added to existing positions whose valuations had fallen to more attractive levels, including Hong Kong-listed Standard Chartered Bank; Indian IT services companies Satyam Computer Services and Infosys; and Singapore's Venture Corp, Singapore Telecom, ST Engineering and Jardine Strategic.

Gearing

As highlighted in the Chairman's Statement, the Company's US$80 million Loan Notes are due to be repaid by the end of 2008. A £40 million multi-currency loan facility with The Royal Bank of Scotland was implemented on 30 September 2008, and to date there have been no drawdowns on this facility.

Outlook

The turmoil in the world's financial system and resulting economic slowdown appears to have gathered pace. With developed economies on the cusp of recession, Asia is unlikely to escape unscathed. That said, in recent years, intra-Asian trade and exports to other emerging markets have increased as a percentage of the total and this, combined with the recent easing of inflationary pressures, should provide some cushion for regional economies.

As for the upheaval in the world's financial system, there is no doubt that this will continue to cause distress to Asian markets. But it is important to note that Asia's banks are in better shape, having strengthened their capital ratios in the wake of the 1997 financial crisis. Loan-to-deposit ratios generally stand in the 70-80% range and asset quality is good, reflecting lower leverage among Asian corporates. Furthermore, government finances generally are in good shape, and there is wide scope to pump prime economies in the event that they weaken significantly.

We remain cautious, given the current backdrop. Our disciplined approach to investing in decent businesses, run by management teams that have demonstrated a commitment to shareholders is one which is more pertinent than ever. We expect corporate earnings to weaken in the year ahead, but the portfolio comprises quality businesses that are among the best at what they do. On a longer term basis, we remain optimistic about the prospects for Asia.

Aberdeen Asset Management Asia Limited*

16 October 2008

* on behalf of Edinburgh Fund Managers plc. 

Both companies are subsidiaries of Aberdeen Asset Management PLC.

INVESTMENT PROCESS

Philosophy and Style

The Manager's investment philosophy is that markets are not always efficient. We believe that superior investment returns are therefore attainable by identifying good companies which are cheap in terms of the fundamentals that in our opinion drive share prices over the long term. We undertake substantial due diligence before initiating any investment including company visits in order to assure ourselves of the quality of the prospective investment. We are then careful not to pay too high a price when making the investment. Subsequent to that investment we then keep in close touch with the company, aiming to meet management at least twice a year. Given our long-term fundamental investment philosophy, one would not expect much change in the companies in which we invest. We do, however, take opportunities offered to us by what we see as anomalous price movements within stock markets to either top up or top slice positions, which typically accounts for the bulk of the activity within the portfolio during the year under review.

Risk Controls

We seek to minimise risk by our in depth research. We do not view divergence from a benchmark as risk - we view investment in poorly run expensive companies that we do not understand as risk. In fact where risk parameters are expressed in benchmark relative terms, asset - including sector - allocation constitutes a significant constraint on stock selection. Hence diversification of stocks provides our main control.

Aberdeen's performance and investment risk unit independently monitors portfolio positions, and reports monthly. As well as attributing performance it also produces statistical analysis, which is used by the Manager primarily to check the portfolio is behaving as expected, not as a predictive tool.

3. PERFORMANCE TABLES

	31 August 2008	31 August 2007	% change
Performance
Equity shareholders' funds (£'000)	377,787	384,521	-1.8
MSCI AC Asia (ex Japan) Index total return (%)	454.40	511.82	-11.2
Net asset value per share (including net revenue) (p)	163.58	162.18	+0.9
Adjusted NAV per share with debt at market value (p)	163.09	161.64	+0.9
Share price (p)	146.00	144.25	+1.2
Revenue return per share (p)	2.35	1.84
Total return per share (p)	2.28	35.21
Gearing
Actual gearing ratio (%)	0.1	8.2
Maximum potential gearing (%)	11.6	10.3
Discount
Level of discount at which the shares trade:
- to adjusted NAV	10.7	11.1
- to the adjusted NAV with debt at market value	10.5	10.8
Expense ratio
- as % of average total assets less current liabilities	1.2	1.2
- as % of average shareholders' funds	1.3	1.3

Performance (total return)

	1 year return	3 year return	5 year return
	%	%	%
Share price	+1.9	+45.0	+103.7
Net asset value	+1.5	+51.5	+93.6
MSCI AC Asia (ex Japan) Index (currency adjusted)	-8.8	+51.8	+97.3

Changes in Asset Distribution

	Value at				Value at
	31 August 2007	Purchases	Sales proceeds	Appreciation /(depreciation)	31 August 2008
Country	£'000	£'000	£'000	£'000	£'000
China	38,083	-	16,481	4,003	25,605
Hong Kong	83,058	3,089	4,870	3,759	85,036
India	54,362	2,628	11,322	3,220	48,888
Indonesia	7,352	-	-	1,424	8,776
Malaysia	30,674	986	7,390	217	24,487
Philippines	9,156	-	-	(738)	8,418
Singapore	80,542	10,254	2,506	(849)	87,441
South Korea	58,670	-	3,464	(13,561)	41,645
Sri Lanka	3,807	-	-	(814)	2,993
Taiwan	29,459	10	5,589	3,321	27,201
Thailand	20,926	-	4,066	823	17,683
	_________	_________	_________	_________	_________
Total investments	416,089	16,967	55,688	805	378,173
Net current assets/(liabilities)	8,063	50,948	25,933	(33,464)	(386)
	_________	_________	_________	_________	_________
Total assets less current liabilities	424,152	67,915	81,621	(32,659)	377,787

Investment Portfolio - Ten Largest Investments

As at 31 August 2008

			Valuation	Total	Valuation
			2008	assets	2007
Company	Sector	Country	£'000	%	£'000
Oversea-Chinese Banking Corporation			17,563	4.7	15,487
A well-run Singaporean bank with an insurance business, and which has an established operation in Malaysia and growing into Indonesia, Vietnam and China.	Commercial Banks	Singapore
Samsung Electronics Pref			15,805	4.2	21,923
Asia's leading electronics firm that makes consumer electronics, semiconductors, telecom equipment and TFT LCD screens.	Semiconductors & Semiconductor Equipment	South Korea
Swire Pacific 'B'			14,680	3.9	14,731
Hong Kong listed conglomerate, with interests in aviation (via Cathay Pacific), property, beverages, marine services and industrial activities.	Real Estate Management & Development	Hong Kong
United Overseas Bank			13,995	3.7	14,480
Singapore's second largest bank, primarily focused on SMEs and consumers, with its core market in Singapore and the balance predominantly in southeast Asia.	Commercial Banks	Singapore
Singapore Telecommunications			13,001	3.4	10,066
The largest telecommunications services provider in the Asia Pacific region outside of China, with significant operations in Singapore and Australia. Services provided include mobile phone, fixed-line phone, broadband internet as well as other IT and communications solutions. Singtel also holds stakes in several telecommunications companies across the region, including Telkomsel in Indonesia. Bharti Airtel in India and AIS in Thailand.	Diversified Telecommunication Services	Singapore
Taiwan Semiconductor Manufacturing Company			12,928	3.4	11,815
The world's largest dedicated semiconductor foundry.	Semiconductors & Semiconductor Equipment	Taiwan
Jardine Strategic Holdings			12,405	3.3	8,786
A Singapore-listed conglomerate with interests across the region spanning property, hotels and consumer products.	Industrial Conglomerates	Hong Kong
Public Bank Berhad			11,479	3.0	10,704
The third largest domestic banking group in Malaysia by assets, with a domestic distribution network of 250 branches. The group has overseas operations primarily in Hong Kong via 73.5% owned subsidiary Public Financial Holdings, as well as wholly-owned banking operations in Indo-China.	Commercial Banks	Malaysia
CNOOC			10,995	2.9	10,291
The dominant producer of crude oil and natural gas in offshore China, and is the only company permitted to conduct E&P activities with international oil & gas companies in offshore China. The Company has healthy reserves and a good track record of finds.	Oil, Gas & Consumable Fuels	China
China Mobile			10,669	2.8	18,486
The mainland's largest mobile telephone operator, which is poised to benefit from growing consumer demand.	Wireless Telecommunication Services	China
Top ten investments			133,520	35.3

Investment Portfolio - Other Investments

As at 31 August 2008

			Valuation	Total	Valuation
			2008	assets	2007
Company	Sector	Country	£'000	%	£'000
Singapore Technologies Engineering	Aerospace & Defence	Singapore	10,386	2.7	10,776
City Developments	Real Estate Management & Development	Singapore	10,079	2.7	11,957
PTT Exploration & Production	Oil, Gas & Consumable Fuels	Thailand	9,835	2.6	10,366
Singapore Airlines	Airlines	Singapore	9,637	2.6	10,761
HDFC	Thrifts & Mortgage Finance	India	9,595	2.5	12,685
Sun Hung Kai Properties	Real Estate Management & Development	Hong Kong	9,448	2.5	9,093
Shinsegae Company	Food & Staples Retailing	South Korea	8,954	2.4	11,919
Unilever Indonesia	Household Products	Indonesia	8,776	2.3	7,352
Standard Chartered	Commercial Banks	Hong Kong	8,373	2.2	6,786
Satyam Computer Services	IT Services	India	8,249	2.2	7,602
Top twenty investments			226,852	60.0
Siam Cement	Construction Materials	Thailand	7,848	2.1	10,560
Hero Honda	Automobiles	India	7,721	2.0	5,896
Taiwan Mobile	Wireless Telecommunication Services	Taiwan	7,514	2.0	6,875
Wing Hang Bank	Commercial Banks	Hong Kong	7,511	2.0	7,142
Fraser & Neave	Industrial Conglomerates	Singapore	6,777	1.8	-
Fubon Financial	Diversified Financial Services	Taiwan	6,759	1.8	7,253
Hang Lung Properties	Real Estate Management & Development	Hong Kong	6,734	1.8	6,989
Grasim Industries	Construction Materials	India	6,402	1.7	9,472
Venture Corp	Electronic Equipment & Instruments	Singapore	6,003	1.6	7,015
Infosys Technologies	IT Services	India	6,002	1.6	4,499
Top thirty investments			296,123	78.4
Dairy Farm International	Food & Staples Retailing	Hong Kong	5,971	1.6	4,287
Gail (India)	Gas Utilities	India	5,900	1.6	4,510
ASM Pacific Technologies	Semiconductors & Semiconductor Equipment	Hong Kong	5,738	1.5	6,801
British American Tobacco	Tobacco	Malaysia	5,105	1.4	5,911
Bumiputra Commerce	Commercial Banks	Malaysia	5,094	1.3	5,880
ICICI Bank	Commercial Banks	India	5,019	1.3	9,698
Bank of Philippine Islands	Commercial Banks	Philippines	4,746	1.3	4,602
Daegu Bank	Commercial Banks	South Korea	4,588	1.2	6,915
Kookmin Bank	Commercial Banks	South Korea	4,516	1.2	6,000
Pusan Bank	Commercial Banks	South Korea	4,265	1.1	6,454
Top forty investments			347,065	91.9
CLP Holdings	Electric Utilities	Hong Kong	4,012	1.1	6,146
Dah Sing Banking	Commercial Banks	Hong Kong	3,857	1.0	5,354
Ayala Land	Real Estate Management & Development	Philippines	3,672	1.0	4,554
Hang Lung Group	Real Estate Management & Development	Hong Kong	3,524	0.9	3,596
Hyundai Motor Pref	Automobiles	South Korea	3,517	0.9	5,459
PetroChina	Oil, Gas & Consumable Fuels	China	2,893	0.8	4,704
POS Malaysia Berhad	Air Freight & Logistics	Malaysia	2,809	0.7	3,252
Giordano International	Speciality Retail	Hong Kong	2,783	0.7	3,347
DFCC Bank	Commercial Banks	Sri Lanka	1,332	0.4	1,392
Zhejiang Expressway	Transportation Infrastructure	China	1,048	0.3	4,602
Top fifty investments			376,512	99.7
John Keells Holdings	Industrial Conglomerates	Sri Lanka	837	0.2	993
Dialog Telecom	Wireless Telecommunication Services	Sri Lanka	824	0.2	1,422
Total investments			378,173	100.1
Net current liabilities			(386)	(0.1)
Total assets			377,787	100.0
Note: Unless otherwise stated, foreign stock is held and all investments are equity holdings.

4. BUSINESS REVIEW

With the rest of the Report and Accounts, this review is intended to provide shareholders with the information and measures that the directors use to assess, direct and oversee the Manager in the management of the Company's portfolio. The Business Review is prepared in accordance with the requirements of Section 234ZZB of the Companies Act 1985.

Principal Activity

The Company is registered as a public limited company and is an investment company as defined by Section 833 of the Companies Act 2006.

The Company carries on business as an investment trust and the directors do not envisage any change in this activity in the foreseeable future. The Company has received requisite approval of investment trust status from the Inland Revenue for accounting periods up to and including 31 August 2007. 

The directors are of the opinion, under advice, that the Company has conducted its affairs for the year ended 31 August 2008 so as to be able to obtain approval as an investment trust under Section 842 of the Income and Corporation Taxes Act 1988 for that year, although approval for the period would be subject to review were there to be any enquiry under the Corporate Tax Self Assessment regime.

The Company has conducted its affairs so as to satisfy the requirements as a qualifying security for Individual Savings Accounts. The directors intend that the Company will continue to conduct its affairs in this manner.

Investment Objective and Policy

The investment objective of the Company is to achieve long-term capital growth through investment in the Far East. Investments are made in stock markets in the region, with the exception of Japan and Australasia, principally in large companies. When appropriate, the Company will utilise gearing to maximise long term returns.

Benchmark

The Company's benchmark index is the MSCI All Country Asia (ex Japan) Index.  

Investment Policy

The Company's assets are invested in a diversified portfolio of securities in quoted companies spread across a range of industries and economies in the Asia Pacific region excluding Japan. The shares that make up the portfolio are selected from companies that have quality management and whose shares are considered to be under-priced. The Company invests in a diversified range of sectors and countries. Investments are not limited as to market capitalisation, sector or country weightings within the region.

The Company's policy is to invest no more than 15% of gross assets in other listed investment companies (including listed investment trusts).  

The Company complies with section 842 of ICTA and does not invest more than 15% of its assets in the shares of any one company.

When appropriate the Company will utilise gearing to maximise long term returns which is subject to a maximum gearing level of 20% imposed by the Board.  

The Company does not currently utilise derivatives but keeps this under review.

Achieving the Investment Policy

The Directors are responsible for determining the investment policy and the investment objective of the Company. Day to day management of the Company's assets has been delegated to the Manager who invests in a diversified range of companies throughout the Asia Pacific investment region in accordance with the investment policy. The Manager follows a bottom-up investment process based on a disciplined evaluation of companies through direct visits by its fund managers. Stock selection is the major source of added value. No stock is bought without the fund managers having first met management. The Manager estimates a company's worth in two stages, quality then price. Quality is defined by reference to management, business focus, the balance sheet and corporate governance. Price is calculated by reference to key financial ratios, the market, the peer group and business prospects. Top-down investment factors are secondary in the Manager's portfolio construction, with diversification rather than formal controls guiding stock and sector weights. The Manager is authorised to invest up to 15% of the Company's gross assets in any single stock, calculated at the time an investment is made.

A detailed description of the investment process and risk controls employed by the Manager is disclosed above.  

The Board is responsible for determining the gearing strategy for the Company and has set a maximum gearing limit of 20%. Gearing is used selectively to leverage the Company's portfolio in order to enhance returns where and to the extent this is considered appropriate to do so. At 31 August 2008, the Company's actual gearing was 0.1%. 

In addition, it is the investment policy of the Company to invest no more than 15% of its gross assets in other listed investment companies (including listed investment trusts). As at 31 August 2008, the Company had no such holdings.

Review of Performance

An outline of the performance, market background, investment activity and portfolio strategy during the year under review, as well as the investment outlook, is provided in the Chairman's Statement and Manager's Review.

Future Trends

The region's economies have high rates of growth, strong trade and fiscal surpluses and rapidly developing capital markets. Nevertheless the past has demonstrated regional risks and the outlook of the region are provided in the Chairman's Statement and Manager's Review.

Risk Management

The major risks associated with the Company are detailed below:

-     Resource risk: The Company is an investment trust and has no employees. The responsibility for the management of the Company has been delegated to Edinburgh Fund Managers plc (‘the Manager’) under the management agreement. The terms of the management agreement cover the necessary duties and conditions expected of the Manager. The Board reviews the performance of the Manager on a regular basis and their compliance with the management contract formally on an annual basis.

 

-     Investment and market risk: The Company is exposed to the effect of variations in share prices due to the nature of its business. Investment in Asian equities involves a greater degree of risk than that usually associated with investment in the major securities markets. These include a greater risk of social, political and economic instability including changes in government which may restrict investment opportunities and have an adverse effect on economic reform. Changes in legal, regulatory and accounting policies can also affect the value of the Company’s investments. The lower volumes of trading in certain securities of emerging markets may result in lack of liquidity and price volatility. In addition, currency fluctuations and high interest rates may affect the value of the Company’s investments and the income derived therefrom. 

 

The Board continually monitors the investment policy of the Company, taking account of stockmarket factors, and reviews the Company’s performance compared to its benchmark index and peer group. Further details on other risks relating to the Company’s investment activities, including market price, liquidity and foreign currency risks, are provided in note 20 to the financial statements. 

 

-     Gearing risk: The Company currently utilises gearing in the form of US$80 million Loan Notes (see note 11 to the financial statements). Gearing has the effect of exacerbating market falls and gains. In order to manage the level of gearing, the Board has set a maximum gearing ratio of 20%. 

 

-     Regulatory risk: The Company operates in a complex regulatory environment and faces a number of regulatory risks. Serious breaches of regulations, such as section 842 of the Income and Corporation Taxes Act 1988, the UKLA Listing Rules and the Companies Act, could lead to a number of detrimental outcomes and reputational damage. The Audit Committee monitors compliance with regulations by reviewing internal control reports from the Manager.

 

 

-     Discount volatility: The Company’s share price can trade at a discount to its underlying net asset value. The Board monitors the discount level of the Company’s shares and has in place a buyback mechanism whereby the Manager is authorised to buy back shares within certain limits.

Monitoring Performance - Key Performance Indicators

At each Board meeting, the directors consider a number of performance measures to assess the Company's success in achieving its objectives. The key performance indicators (KPIs) are established industry measures, and are as follows:

-    Net asset value (total return)

-    Share price (total return)

-    Performance attribution

-    Discount to net asset value

Performance is measured against the Company's benchmark, the MSCI All Country Asia (ex Japan) Index and the Board also considers peer group comparative performance.  

5.     DIRECTOR'S RESPONSIBILITY STATEMENT

The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.  

Company law requires the directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK Accounting Standards.  

The financial statements are required by law to give a true and fair view of the state of affairs of the company and of the profit or loss of the Company for that period.  

In preparing these financial statements, the directors are required to:  

• select suitable accounting policies and then apply them consistently;  

• make judgments and estimates that are reasonable and prudent;  

• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and  

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.  

The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.  

Under applicable law and regulations, the directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.  

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The directors confirm that to the best of their knowledge that:

-    the financial statements, prepared in accordance with the applicable accounting standards, give a true and fair view
     of the assets, liabilities, financial position and profit or loss of the Company; and

-    the Directors' Report includes a fair review of the development and performance of the business and the position
     of the Company, together with a description of the principal risks and uncertainties that the Company faces.

For Edinburgh Dragon Trust plc

Tony Cassidy

Chairman

16 October 2008

 FINANCIAL STATEMENTS AND NOTES TO THE ACCOUNTS

INCOME STATEMENT (audited)

	2008			2007
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments	-	805	805	-	76,931	76,931
Currency (losses)/gains	-	(980)	(980)	-	2,240	2,240
Income	14,316	-	14,316	12,585	-	12,585
Investment management fee	(4,025)	-	(4,025)	(3,614)	-	(3,614)
Administration expenses	(1,162)	-	(1,162)	(1,065)	-	(1,065)
	_______	_______	______	_______	_______	______
Net return before finance costs and taxation	9,129	(175)	8,954	7,906	79,171	87,077
Interest payable and similar charges	(2,985)	-	(2,985)	(2,936)	-	(2,936)
	_______	_______	______	_______	_______	______
Return on ordinary activities before taxation	6,144	(175)	5,969	4,970	79,171	84,141
Taxation on ordinary activities	(642)	-	(642)	(604)	-	(604)
	_______	_______	______	_______	_______	______
Return on ordinary activities after taxation	5,502	(175)	5,327	4,366	79,171	83,537
	_______	_______	______	_______	_______	______
Return per share (pence):	2.35	(0.07)	2.28	1.84	33.37	35.21
	_______	_______	______	_______	_______	______
The total column of this statement represents the profit and loss account of the Company. A Statement of Total Recognised Gains and Losses has not been prepared as all gains and losses have been reflected in the Income Statement. All revenue and capital items in the above statement derive from continuing operations. The accompanying notes are an integral part of the financial statements.

  BALANCE SHEET (audited)

	As at	As at
	31 August 2008	31 August 2007
	£'000	£'000
Non-current assets
Investments at fair value through profit or loss	378,173	416,089
Current Assets
Loans and receivables	2,614	1,056
Certificates of deposit	27,419	-
Cash and short term deposits	15,069	8,990
	_________	_________
	45,102	10,046
	_________	_________
Creditors: amounts falling due within one year
Foreign currency loans	(43,861)	-
Other creditors	(1,627)	(1,983)
	_________	_________
	(45,488)	(1,983)
	_________	_________
Net current (liabilities)/assets	(386)	8,063
	_________	_________
Total assets less current liabilities	377,787	424,152
Creditors: amounts falling due after more than one year
Foreign currency loans	-	(39,631)
	_________	_________
Net assets	377,787	384,521
	_________	_________
Share capital and reserves
Called-up share capital	46,190	47,415
Share premium account	4,285	4,285
Special reserve	75,770	85,242
Capital redemption reserve	10,017	8,792
Capital reserve	234,246	234,421
Revenue reserve	7,279	4,366
	_________	_________
Equity Shareholders' funds	377,787	384,521
	_________	_________
Adjusted net asset value per Ordinary share (pence)	163.58	162.18
	_________	_________

           RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS (audited)

For the year ended 31 August 2008
		Share		Capital
	Share	premium	Special	redemption	Capital	Revenue
	capital	account	reserve	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 August 2007 (restated)	47,415	4,285	85,242	8,792	234,421	4,366	384,521
Return on ordinary activities after taxation	-	-	-	-	(175)	5,502	5,327
Dividends paid	-	-	-	-	-	(2,589)	(2,589)
Purchase of Ordinary shares for cancellation	(1,225)	-	(9,472)	1,225	-	-	(9,472)
	_____	_____	_____	_____	_____	_____	_____
Balance at 31 August 2008	46,190	4,285	75,770	10,017	234,246	7,279	377,787
	_____	_____	_____	_____	_____	_____	_____
For the year ended 31 August 2007
		Share		Capital
	Share	premium	Special	redemption	Capital	Revenue
	capital	account	reserve	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 August 2006	47,455	4,285	85,520	8,752	155,250	291	301,553
Return on ordinary activities after taxation	-	-	-	-	79,171	4,366	83,537
Dividends paid	-	-	-	-	-	(291)	(291)
Purchase of Ordinary shares for cancellation	(40)	-	(278)	40	-	-	(278)
	_____	_____	_____	_____	_____	_____	_____
Balance at 31 August 2007 (restated)	47,415	4,285	85,242	8,792	234,421	4,366	384,521
	_____	_____	_____	_____	_____	_____	_____
The revenue reserve represents the amount of the Company's reserves distributable by way of dividend. The accompanying notes are an integral part of the financial statements.

CASHFLOW STATEMENT (audited)

	Year ended		Year ended
	31 August 2008		31 August 2007
	£'000	£'000	£'000	£'000
Net cash inflow from operating activities		8,835		8,077
Servicing of finance
Bank and loan interest paid		(2,915)		(2,968)
Taxation
Overseas tax paid		(601)		(685)
Financial investment
Purchases of investments	(17,306)		(44,727)
Sales of investments	54,327		37,824
	_______		_______
Net cash inflow from financial investment		37,021		(6,903)
Equity dividend paid		(2,589)		(291)
		_______		_______
Net cash inflow before use of liquid resources and financing		39,751		(2,770)
Net cash outflow from management of liquid resources		-		-
		_______		_______
Net cash inflow before financing		39,751		(2,770)
Financing
Buy back of Ordinary shares (including expenses)		(9,472)		(278)
		_______		_______
Increase/(decrease) in cash		30,279		(3,048)
		_______		_______
Reconciliation of net cash inflow to movements in net debt
Increase/(decrease) in cash as above		30,279		(3,048)
Amortised Loan Note expenses		(31)		(31)
Exchange movements		(980)		2,240
		_______		_______
Movement in net debt in the year		29,268		(839)
Net debt at 1 September 2007		(30,641)		(29,802)
		_______		_______
Net debt at 31 August 2008		(1,373)		(30,641)
		_______		_______

  NOTES:

1.	Accounting policies
	(a)	Basis of accounting
		The financial statements have been prepared under the historical cost convention as modified to include the revaluation of fixed asset investments, and in accordance with applicable United Kingdom Accounting Standards and with the Statement of Recommended Practice for 'Financial Statements of Investment Trust Companies' (December 2005) ('the SORP'). They have also been prepared on the assumption that approval as an investment trust will continue to be granted.
		The financial statements, and the net asset value per share figures, have been prepared in accordance with UK Generally Accepted Accounting Practice ('UK GAAP').
		During the year the Company adopted FRS 29 ' Financial Instruments: Disclosures'. This standard primarily concerns the disclosure of financial instruments and risks.
	(b)	Investments
		Listed investments have been designated upon initial recognition as fair value through profit and loss. Investments are recognised and de-recognised on the trade date at cost. Subsequent to initial recognition, investments are valued at fair value, which for listed investments is deemed to be bid market prices. Gains and losses arising from changes in fair value are included as a capital item in the Income Statement and are ultimately recognised in the capital reserve - unrealised except to the extent where it is readily convertible to cash.
	(c)	Income
		Dividends (other than special dividends), including taxes deducted at source, are included in revenue by reference to the date on which the investment is quoted ex-dividend. Special dividends are reviewed on a case-by-case basis and may be credited to capital, if circumstances dictate. Dividends receivable on equity shares where no ex-dividend date is quoted are brought into account when the Company's right to receive payment is established. Fixed returns on non-equity shares are recognised on a time-apportioned basis so as to reflect the effective yield on shares. Other returns on non-equity are recognised when the right to return is established. The fixed return on a debt security, if material, is recognised on a time apportioned basis so as to reflect the effective yield on each security. Where the Company has elected to receive its dividends in the form of additional shares rather than cash, the amount of the cash dividend is recognised as income. Any excess in the value of the shares received over the amount of cash dividend is recognised in capital reserves. Interest receivable on bank balances is dealt with on an accruals basis.
	(d)	Expenses
		All expenses are accounted for on an accruals basis. Expenses are charged through the revenue column of the Income Statement except as follows:
		- expenses directly relating to the acquisition or disposal of an investment, in which case, they are added to the cost of the investment or deducted from the sale proceeds. Such transaction costs are disclosed in accordance with the SORP. These expenses are charged to the capital column of the Income Statement.
	(e)	Deferred taxation
		Deferred taxation is provided on all timing differences, that have originated but not reversed at the Balance Sheet date, where transactions or events that result in an obligation to pay more or a right to pay less tax in future have occurred at the Balance Sheet date, measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. Timing differences are differences arising between the Company's taxable profits and its results as stated in the accounts which are capable of reversal in one or more subsequent periods. Due to the Company's status as an investment trust company, and the intention to continue to meet the conditions required to obtain approval for the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.
	(g)	Capital reserves
		Gains and losses on realisation of investments and changes in fair values of investments which are readily convertible to cash, without accepting adverse terms, are transferred to the capital reserve - realised.
	(h)	Foreign currency
		Assets and liabilities in foreign currencies are translated at the rates of exchange ruling on the Balance Sheet date. Transactions involving foreign currencies are converted at the rate ruling on the date of the transaction. Gains and losses on the realisation of foreign currencies are recognised in the Income Statement and are then transferred to the realised capital reserve.
	(i)	Dividends payable
		Final dividends are dealt with in the period in which they are paid.
	(j)	Certain comparative amounts have been reclassified to conform to the current year's presentation.

		2008	2007
2.	Income	£'000	£'000
	Income from investments
	UK dividend income	218	158
	Overseas dividends	13,209	12,071
	Scrip dividends	10	81
		_______	_______
		13,437	12,310
		_______	_______
	Other income
	Deposit interest	844	235
	Stock lending income	35	40
		_______	_______
		879	275
		_______	_______
	Total income	14,316	12,585
		_______	_______
	Income from investments
	Listed UK	218	158
	Listed overseas	13,219	12,152
		_______	_______
		13,437	12,310

		2008			2007
		Revenue	Capital	Total	Revenue	Capital	Total
3.	Investment management fee	£'000	£'000	£'000	£'000	£'000	£'000
	Investment management fee	4,025	-	4,025	3,614	-	3,614
		_______	______	_______	_______	______	______
	The management fee paid to Edinburgh Fund Managers plc ('the Manager') is 0.25% per quarter of the total net assets less (i) the value of any investment funds managed by the Manager and (ii) 50% of the value of any investment funds managed or advised by investment managers other than the Manager. The fee is subject to VAT at the appropriate rate. The management agreement between the Company and the Manager is terminable by either party on 3 months' notice or in the event of a change of control in the ownership of the manager.

		2008	2007
4.	Administrative expenses	£'000	£'000
	Share Plan marketing contribution	195	173
	Directors' fees	115	115
	Safe custody fees	453	429
	Auditors' remuneration:
	-    Fees payable to the Company's auditor for the audit      of the Company's annual accounts	14	12
	-    Fees payable to the Company's auditor for the review      of the Company's interim accounts	4	3
	Secretarial fee	72	70
	Other expenses	309	263
		_______	_______
		1,162	1,065
		_______	_______
The secretarial fee is paid to the Manager and adjusted annually in line with the Retail Prices Index. The contribution to Share Plan Marketing was paid to the Manager in respect of marketing and promotion of the Company. During the year £3,500 (2007 - £3,000) was paid to the Auditors' for non-audit services. This related to further assurance work regarding the interim and regulatory reporting. No pension contributions were made in respect of any of the Directors The Company does not have any employees.

		2008	2007
5.	Interest payable and similar charges	£'000	£'000
	Loans repayable in less than 1 year	2,985	-
	Loans repayable in more than 1 year but not more than 2 years	-	2,936
		_______	_______
		2,985	2,936
		_______	_______

			2008			2007
			Revenue	Capital	Total	Revenue	Capital	Total
6.	Taxation		£'000	£'000	£'000	£'000	£'000	£'000
	(a)	Analysis of charge for the year
		Credit relief	(1,256)	-	(1,256)	(478)	-	(478)
		Corporation tax	1,256	-	1,256	478	-	478
		Overseas tax	642	-	642	604	-	604
			_______	_______	______	_______	_______	_____
		Taxation on ordinary activities	642	-	642	604	-	604
			_______	_______	______	_______	_______	_____
	(b)	Factors affecting the tax charge for the year
		The tax assessed for the year is lower than the standard rate of corporation tax in the UK.
							2008	2007
							£'000	£'000
		Revenue return on ordinary activities before taxation					6,144	4,970
		Return on ordinary activities multiplied by effective rate of corporation tax in the UK of 29.17% (2007 - 30%)					1,792	1,491
		Effects of:
		UK dividend income					(63)	(48)
		Other non-taxable income					(3)	(24)
		Decrease in excess expenses and loan relationship deficit					(439)	(901)
		Double tax relief taken					(1,256)	(478)
		Movement in taxable accrued income					(31)	(40)
		Overseas tax suffered					642	604
							_______	_____
		Current tax charge for year					642	604
							_______	_____
		At 31 August 2008, the Company had unutilised loan relationship losses of £460,000 (2007 - £2.1 million) and eligible unrelieved foreign tax of £23,000 (2007 - £760,000). No deferred tax asset has been recognised on the unutilised loan relationship losses and eligible unrelieved foreign tax, as it is unlikely that there will be suitable taxable profits from which the future reversal of the deferred asset could be deducted.

7.	Dividends In order to comply with the requirements of Section 842 ICTA 1988 ('Section 842') and with company law, the Company is required to make a final dividend distribution. The proposed final dividend is subject to approval by shareholders at the annual general meeting and has not been included as a liability in these financial statements. The table below sets out the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of Section 842 are considered. The revenue available for distribution by way of dividend for the year is £5,502,000 (2007 - £4,366,000).
		2008	2007
		£'000	£'000
	Proposed final dividend for 2008 - 1.6p per ordinary share (2007 - 1.1p)	3,695	2,589
		_______	_______
	The final dividend will be paid on 19 December 2008 to shareholders on the register at the close of business on 21 November 2008.

		2008		2007
8.	Return per Ordinary share	£'000	p	£'000	p
	Revenue return	5,502	2.35	4,366	1.84
	Capital return	(175)	(0.07)	79,171	33.37
		_______	_______	_______	_______
	Total Return	5,327	2.28	83,537	35.21
		_______	_______	_______	_______
	Weighted average Ordinary shares in issue		233,807,053		237,266,382

				Listed	Listed
				overseas	in UK	Total
9.	Investments			£'000	£'000	£'000
	Fair value through profit or loss:
	Opening book cost			284,990	4,939	289,929
	Opening unrealised appreciation			126,050	110	126,160
				_______	_______	_______
	Opening fair value			411,040	5,049	416,089
	Movements in year:
	Purchases at cost			15,993	974	16,967
	Sales	-	proceeds	(55,688)	-	(55,688)
		-	realised gains on sales	26,186	-	26,186
	Decrease in unrealised depreciation/appreciation			(25,247)	(134)	(25,381)
				_______	_______	_______
	Closing fair value			372,284	5,889	378,173
				_______	_______	_______
	Closing book cost			271,481	5,913	277,394
	Closing unrealised (depreciation)/appreciation			100,803	(24)	100,779
				_______	_______	_______
	Closing fair value			372,284	5,889	378,173
				_______	_______	_______
					2008	2007
					£'000	£'000
	Listed on overseas stock exchanges				5,889	5,049
	Listed on The Stock Exchange in the UK				372,284	411,040
					_______	_______
					378,173	416,089
					_______	_______
	Transaction costs
	During the year expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within gains on investments in the Income Statement. The total costs were as follows:
					2008	2007
					£'000	£'000
	Purchases				57	139
	Sales				146	138
					_______	_______
					203	277
					_______	_______
					2008	2007
	Stock lending details				£'000	£'000
	Aggregate value of securities on loan at the year end				-	10,168
	Maximum aggregate value of securities on loan during the year				19,203	20,309
	Fee income (gross) from stock lending during the year				35	40
					_______	_______
	All stocks lent under these arrangements are fully secured against collateral. As at 31 August 2008, the amount of stock on loan was £nil.

		2008	2007
10.	Loans and receivables	£'000	£'000
	Prepayments and receivables	1,180	1,036
	Amounts due from brokers	1,361	-
	Other debtors	73	20
		_______	_______
		2,614	1,056

			2008		2007
11.	Creditors: amounts falling due within one year		£'000		£'000
	(a)	Foreign currency loan notes	43,861		-
			_______		_______
		At the year end, the Company's Loan Notes of US$80,000,000 (2007 - US$80,000,000), equivalent to £43,861,000 (2007 - £39,631,000), was drawn down at an interest rate of 7.26% and are repayable on 30 December 2008.
		Interest on the Loan Notes is payable in half-yearly instalments in June and December. The Loan Notes are secured by a floating charge over the Company's assets. The estimated repayment value of the Loan Notes, which are unquoted, was £45.0 million as at 31 August 2008 (2007 - £41.0 million). Under the Loan Notes covenants net assets must exceed £100 million and actual gearing should not exceed 33% of net assets.
		Since the period end a new multi-currency revolving advance facility of £40.0 million has been agreed with The Royal Bank of Scotland. The commitment period of the new facility commenced on 30 September 2008 and ends on 29 September 2010. Interest will be charged at the margin above the rate at which Sterling/foreign currency deposits of comparable amount to the relevant advance are offered by LIBOR on the date on which the advance is required.
				2008		2007
	(b)	Other		£'000		£'000
		Amounts due to brokers		-		329
		Other creditors		1,627		1,654
				1,627		1,983

		2008	2007
12.	Creditors: amounts falling due after more than one year	£'000	£'000
	US$80,000,000 7.26% Loan Notes repayable 30 December 2008:
	Repayable in more than 1 year but not more than 2 years	-	39,631

		2008	2007
13.	Called up share capital	£'000	£'000
	Authorised
	325,000,000 (2007 - 325,000,000) Ordinary shares of 20p	65,000	65,000
		_______	_______
	Called-up, allotted and fully paid
	230,954,375 (2007 - 237,076,875) Ordinary shares of 20p	46,190	47,415
		_______	_______
	During the year 6,122,500 Ordinary shares of 20p each (2007 - 200,000) (representing 2.65% of the issued Ordinary share capital at 31 August 2008) were bought back at a total cost of £9,472,000 including expenses (2007 - £278,000).
	Further details of the share repurchases are contained in the Directors' Report.

		Capital	Capital	Total
		reserve -	reserve -	capital
		realised	unrealised	reserve
14.	Capital reserve	£'000	£'000	£'000
	Year ended 31 August 2008
	At 31 August 2007	93,747	140,674	234,421
	Reclassification of reserves	98,791	(98,791)	-
	Movement in fair value gains	7,808	(7,003)	805
	Foreign exchange movement	(980)	-	(980)
		_______	_______	_______
	At 31 August 2008	199,366	34,880	234,246
		_______	_______	_______
	Year ended 30 August 2007
	At 31 August 2006	79,200	76,050	155,250
	Movement in fair value gains	12,307	64,624	76,931
	Foreign exchange movement	2,240	-	2,240
		_______	_______	_______
	At 31 August 2007	93,747	140,674	234,421
		_______	_______	_______
	With effect from 1 September 2007, changes in fair value of investments which are readily convertible to cash, without accepting adverse terms, at the Balance Sheet date are included in realised, rather that unrealised, capital reserves. The balances on both reserves at 1 September 2007 have been amended by a reserve transfer to reflect this change which is in accordance with the provisions of the SORP.

15.	Net asset value per equity share
	The net asset value per share and the net assets attributable to the Ordinary Shareholders at the year end, adjusted to reflect the deduction of the Loan Notes at par, were as follows:
		2008	2007	2008	2007
		p	p	£'000	£'000
	Net asset value per equity share	163.58	162.19	377,787	384,521
	Deduct: Loan Note issue expenses	-	(0.01)	-	(30)
		_______	_______	_______	_______
	Adjusted net asset value per equity share	163.58	162.18	377,787	384,491
		_______	_______	_______	_______
	The net asset value per Ordinary share is based on net assets (adjusted to reflect the deduction of Loan Notes at par) and on 230,954,375 (2007 - 237,076,875) Ordinary shares, being the number of Ordinary shares in issue at the year end.
	The net asset value per share, adjusted to include the Loan Notes at the estimated repayment value rather than par, is 163.09p (2007 - 161.64p)

16.	Reconciliation of net revenue before finance costs and	2008	2007
	taxation to net cash inflow from operating activities	£'000	£'000
	Net revenue before finance costs and taxation	8,954	87,077
	Adjusted for:
	Gains on investments	(805)	(76,931)
	Currency losses/(gains)	980	(2,240)
	Increase in accrued income	(351)	(59)
	Decrease/(increase) in other debtors	154	(59)
	(Decrease)/increase in sundry creditors including management fee due	(97)	289
		_______	_______
	Net cash inflow from operating activities	8,835	8,077

		1 September	Cash	Currency	Other	31 August
		2007	flow	movements	movements	2008
17.	Analysis of changes in net debt	£'000	£'000	£'000	£'000	£'000
	Cash and short term deposits	8,990	5,264	815	-	15,069
	Certificates of deposit	-	25,015	2,404	-	27,419
	Debt due in less than one year	-	-	-	(43,861)	(43,861)
	Debt due after more than one year	(39,631)	-	(4,199)	43,830	-
		_______	_______	_______	_______	_______
	Net debt	(30,641)	30,279	(980)	(31)	(1,373)

18.

Contingent assets and liabilities

On 5 November 2007, the European Court of Justice ruled that management fees should be exempt from VAT. HMRC has announced its intention not to appeal against this case to the UK VAT Tribunal and therefore the recovery of VAT which is due in relation to the Company, will be processed in due course. The amount of any repayment of VAT for the Company is immaterial and the Company has made no provision in these financial statements for any such repayment.

19.

Capital management policies and procedures

The Company's capital management objectives are: -    to ensure that the Company will be able to continue as a going concern; and -    to maximise the capital return to its equity shareholders through an appropriate balance of      equity capital and debt. The board normally seeks to limit gearing to 20% of net assets. The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes the nature and planned level of gearing, which takes account of the Manager's views on the market and the extent to which revenue in excess of that which is required to be distributed should be retained.

20.    Financial instruments Risk management The Company's financial instruments comprise securities and other investments, cash balances, loans and debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income.  The Manager has a dedicated investment management process, which ensures that the investment policy is followed. Stock selection procedures are in place based on the active portfolio management and identification of stocks. The portfolio is reviewed on a periodic basis by a Senior Investment Manager and also by the Manager's Investment Committee. The Company's Manager has an independent Investment Risk department for reviewing the investment risk parameters of the Company's portfolio on a regular basis. The department reports to the Manager's Performance Review Committee which is chaired by the Manager's Chief Investment Officer. The department's responsibility is to review and monitor ex-ante (predicted) portfolio risk and style characteristics using best practice, industry standard multi-factor models. Additionally, the Manager's Compliance department continually monitors the trust's investment and borrowing powers and reports to the Manager's Risk Management Committee. The main financial risks that the Company faces from its financial instruments are market price risk (comprising interest rate risk, currency risk and other price risk), liquidity risk and credit risk. The Board regularly reviews and agrees policies for managing each of these risks. The Manager's policies for managing these risks are summarised below and have been applied throughout the year. The numerical disclosures exclude short-term debtors and creditors. Market price risk The fair value of or future cash flows from a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - interest rate risk, currency risk and other price risk.   Interest rate risk Interest rate movements may affect: -the level of income receivable on cash deposits; -interest payable on the Company's variable rate borrowings. The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions. Interest risk profile The interest rate risk profile of the portfolio of the Company's financial assets and liabilities, excluding equity holdings which are all non-interest bearing, at the Balance Sheet date was as follows:

		Weighted average period for which rate is fixed	Weighted average interest rate	Fixed rate	Floating rate
	At 31 August 2008	Years	%	£'000	£'000
	Assets
	UK Sterling	-	4.75	-	2,369
	Taiwanese Dollar	-	-	-	10
	US Dollar	-	2.18	-	12,690
	Certificates of deposit - US Dollar	0.29	2.81	27,419	-
		_______	_______	_______	_______
		n/a	n/a	27,419	15,069
		_______	_______	_______	_______
	Liabilities
	Bank loan - US Dollar	0.33	7.26	(43,861)	-
		_______	_______	_______	_______
		Weighted average period for which rate is fixed	Weighted  average interest rate	Fixed rate	Floating rate
	At 31 August 2007	Years	%	£'000	£'000
	Assets
	Korean Won	-	-	-	20
	Malaysian Ringgit	-	-	-	1,748
	UK Sterling	-	5.50	-	3,002
	Taiwanese Dollar	-	-	-	101
	Thailand Baht	-	-	-	137
	US Dollar	-	5.00	-	3,982
		_______	_______	_______	_______
		n/a	n/a	-	8,990
		_______	_______	_______	_______
	Liabilities
	Bank loan - US Dollar	1.33	7.26	(39,631)	-
		_______	_______	_______	_______
	The weighted average interest rate is based on the current yield of each asset, weighted by its market value. The weighted average interest rate on bank loans is based on the interest rate payable, weighted by the total value of the loans. The maturity date of the Company's loan is shown in note 11. The floating rate assets consist of cash deposits on call earning interest at prevailing market rates. The Company's equity portfolio and short-term debtors and creditors (excluding bank loans) have been excluded from the above tables. Interest rate sensitivity Movements in interest rates would not significantly affect net assets attributable to the Company's Shareholders and total profit.

Foreign currency risk
All of the Company's investment portfolio is invested in overseas securities and the Balance Sheet, therefore, can be significantly affected by movements in foreign exchange rates. It is not the Company's policy to hedge this risk on a continuing basis but the Company may, from time to time, match specific overseas investment with foreign currency borrowings. The Company's borrowings, as detailed in note 11, are also in foreign currency.
The revenue account is subject to currency fluctuation arising on dividends paid in foreign currencies. The Company does not hedge this currency risk.
Foreign currency risk exposure by currency of denomination:
	31 August 2008			31 August 2007
		Net	Total		Net	Total
	Overseas	monetary	currency	Overseas	monetary	currency
	investments	assets	exposure	investments	assets	exposure
	£'000	£'000	£'000	£'000	£'000	£'000
Hong Kong Dollar	104,752	-	104,752	103,018	-	103,018
Indian Rupee	48,888	-	48,888	54,362	-	54,362
Indonesian Rupiah	8,776	-	8,776	7,352	-	7,352
Korean Won	41,645	-	41,645	58,670	20	58,690
Malaysian Ringgit	24,487	-	24,487	30,674	1,748	32,422
Philippine Peso	8,418	-	8,418	9,156	-	9,156
Singapore Dollar	87,441	-	87,441	80,542	-	80,542
Sri Lankan Rupee	2,993	-	2,993	3,807	-	3,807
Sterling	5,889	2,369	8,258	5,049	3,002	8,051
Taiwanese Dollar	27,201	10	27,211	29,459	101	29,560
Thailand Baht	17,683	-	17,683	20,926	137	21,063
US Dollar	-	(3,752)	(3,752)	13,074	(35,649)	(22,575)
	_______	_______	_______	_______	_______	_______
Total	378,173	(1,373)	376,800	416,089	(30,641)	385,448
	_______	_______	_______	_______	_______	_______
Foreign currency sensitivity
There is no sensitivity analysis included as the Company's significant foreign currency financial instruments are in the form of equity investments, which have been included within the other price risk sensitivity analysis so as to show the overall level of exposure.
Other price risk
Other price risks (ie changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments.
It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular country or sector. Both the allocation of assets and the stock selection process, as detailed in the investment process, act to reduce market risk. The Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy. The investments held by the Company are listed on various stock exchanges worldwide.
Other price risk sensitivity
If market prices at the Balance Sheet date had been 10% higher or lower while all other variables remained constant, the return attributable to Ordinary Shareholders for the year ended 31 August 2008 would have increased/(decreased) by £37,817,000 (2007 increased/(decreased) by £41,609,000) and equity reserves would have increased/(decreased) by the same amount.
Liquidity risk
This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is not considered to be significant as the Company's assets mainly comprise readily realisable securities which can be sold to meet funding requirements if necessary.
The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. Borrowings comprise a revolving multi-currency credit facility. The Board has imposed a maximum gearing level, measured on the most stringent basis of calculation after netting off cash equivalents, of 11.6%. Details of borrowings at the 31 August 2008 are shown in note 11.
Liquidity risk is not considered to be significant as the Company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary. Short-term flexibility is achieved through the use of loan and overdraft facilities, details of which can be found in note 11. Under the terms of the loan facility, the Investment Manager provides the lender with loan covenant reports on a monthly basis, to provide the lender with assurance that the terms of the facility are not being breached. The Investment Manager will also review the credit rating of a lender on a regular basis. Details of the Board's policy on gearing are shown in the interest rate risk section of this note.
Liquidity risk exposure
At 31 August 2008 the Company's loan note, amounting to £43,861,000 (2007 - £39,631,000) was due for repayment on 30 December 2008.
Credit risk
This is the risk of failure of the counterparty to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss.
The risk is not significant, and is managed as follows:
-     investment transactions are carried out with a large number of brokers, whose credit-standing is reviewed periodically by the investment manager, and limits are set on the amount that may be due from any one broker;
-     the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the review of failed trade reports on a monthly basis. In addition, the Custodian carries out a stock reconciliation to third party administrators' records on a monthly basis to ensure discrepancies are picked up on a timely basis. The Manager's Compliance department carries out periodic reviews of the Custodian's operations and reports its finding to the Manager's Risk Management Committee. This review will also include checks on the maintenance and security of investments held;
-     cash is held only with reputable banks with high quality external credit enhancements.
None of the Company's financial assets is secured by collateral or other credit enhancements.
Credit risk exposure
In summary, compared to the amounts in the Balance Sheet, the maximum exposure to credit risk at 31 August was as follows:

	2008		2007
	Balance	Maximum	Balance	Maximum
	Sheet	exposure	Sheet	exposure
Current assets	£'000	£'000	£'000	£'000
Loans and receivables	2,614	2,614	1,056	1,056
Cash at bank and in hand	15,069	15,069	8,990	8,990
Certificates of deposit	27,419	27,419	-	-
	__________	_________	__________	_________
	45,102	45,102	10,046	10,046
	__________	_________	__________	_________
None of the Company's financial assets is past due or impaired.
Fair values of financial assets and financial liabilities
For the US Dollar Loan Notes, the fair value of borrowings has been calculated at £44,984,000 as at 31 August 2008 (2007 - £40,979,000) compared to an accounts value in the financial statements of £43,861,000 (2007 - £39,631,000) (note 11). The fair value of each loan is determined by aggregating the expected future cash flows for that loan discounted at a rate comprising the borrower's margin plus an average of market rates applicable to loans of a similar period of time and currency. All other assets and liabilities of the Company are included in the Balance Sheet at fair value.

Maturity of financial liabilities
The maturity profile of the Company's financial liabilities at 31 August was as follows:
	2008	2007
	£'000	£'000
In less than one year	43,861	-
In more than one year but not more than two years	-	39,631
	_______	_______
	43,861	39,631

21.    The Annual General Meeting will be held 17 December 2008 at 40 Princes Street, Edinburgh.

22.    The Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 31 July 2008 have been agreed with the auditors and are an abridged version of the Company's full accounts, which have been approved and audited with an unqualified report. The 2007 and 2008 statutory accounts received unqualified reports from the Company's auditors and did not include any reference to matters to which the auditors drew attention by way of emphasis without qualifying the reports, and did not contain a statement under s.237(2) or (3) of the Companies Act 1985. The financial information for 2007 is derived from the statutory accounts for 2007 which have been delivered to the Registrar of Companies. The 2008 accounts will be filed with the Registrar of Companies in due course.

The annual results are circulated to shareholders in the form of an Annual Report, copies of which will be available at the Company's registered office, 40 Princes Street, Edinburgh EH2 2BY and which will be filed with the Registrar of Companies.

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise and may be affected by exchange rate movements. Investors may not get back the amount they originally invested.

By Order of the Board

Edinburgh Fund Managers plc

Secretary

Copies of this announcement will be available to the public from the Company Secretary, Aberdeen Asset Management PLC, 40 Princes Street, Edinburgh EH2 2BY and from the company's website, www.edinburghdragon.co.uk.

 

END

 

 

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