Annual Financial Report

RNS Number : 1652S
Edinburgh Dragon Trust plc
05 November 2013
 



5 November 2013

 

 

EDINBURGH DRAGON TRUST plc

ANNUAL FINANCIAL REPORT FOR THE YEAR TO 31 AUGUST 2013

 

 

Edinburgh Dragon Trust's objective is long-term capital growth through investment in the Far East (excluding Japan and Australasia).  The Company's benchmark is the MSCI All Country Asia (ex Japan) Index.

 

•        For the year to 31 August 2013, the Company's net asset value rose 6.7% on a total return basis compared to a rise of 10.1%, in sterling terms, in the MSCI All Country Asia (ex Japan) Index.  The under-performance was primarily a consequence of the underweight position to China and Taiwan and overweights to Singapore and India resulting from the Manager's approach of investing in good quality companies with solid finances, proven management, sustainable business models and strong market positions

•        The Manager's stock-picking approach has served the Company well in the longer term, delivering outperformance of 6.2% and 25.8%, relative to the benchmark, over three and five years respectively. 

•        Despite some slowdown in growth, fundamentals in Asia remain sound with corporate sentiment still upbeat.  Valuations are reasonable and the portfolio continues to hold some of the best quality companies within the region.

 

 

For further information please contact:-

 

Andrew Gillan, Senior Investment Manager,

Aberdeen Asset Management Asia                                                                                  0065 6395 2700

 

Kenny Harper, Manager - Investment Trust Investor Relations,                                           0131 528 4000

Aberdeen Asset Management

 



CHAIRMAN'S STATEMENT

 

Highlights

•        Net Asset Value Total Return +6.7% compared to a benchmark return of 10.1%

•        Net Asset Value Total Return over 3 and 5 years has outperformed the benchmark index by 6.2% and 25.8% respectively

 

Background

Central Bank policy measures continued to drive global stockmarkets during the year under review as economies worldwide began a fragile recovery from the recent financial crisis. Asia was no exception, posting gains despite resurgent concerns over decelerating growth across the region, tenuous recovery in the US and the ongoing European debt crisis. Towards the period-end, uncertainty over when the Federal Reserve might scale back its quantitative easing (QE) programme buffeted markets but after the review period concluded, stocks rallied following the Fed's September decision to postpone trimming its asset purchases. Your Company's net asset value rose 6.7% on a total return basis compared to the benchmark MSCI AC Asia ex Japan Index's gain of 10.1%. The share price rose by 7.3% to 254.7p. 

 

Overview

External factors played their part in influencing the direction of Asian stockmarkets. Ultra-low interest rates and continued Central Bank support in Europe and the US ensured investor sentiment remained positive, with additional impetus provided by signs that suggested the US economy was improving and Europe's debt problems were under control. President Obama's re-election in November and the eleventh-hour deal to avert automatic tax increases and spending cuts also lifted sentiment, as did a smooth albeit highly orchestrated leadership transition in China. However, confidence wavered in the latter half of the year as new risks emerged in Europe and slowing growth became more apparent in Asia. The tipping point was the Federal Reserve's suggestion in May that it might reduce its QE programme sooner than expected. This precipitated a global sell-off that hurt emerging market assets disproportionately. Most Asian stockmarkets retained their gains achieved in the first half in local currency terms.  However, sterling returns were severely reduced by weakened currencies, most notably in India and Indonesia, despite more resilient stock prices.

 

On the economic front, once fast-expanding countries, such as China, India and Indonesia, slowed substantially although this has to be seen in the context of exceptional growth in previous years. Along with loss of momentum was mounting policy dilemma. In China, excessively high levels of investment had led to capital misallocation and the unsustainable rise in debt, fuelled by the shadow banking sector. While recognising the need to control money supply to maintain macroeconomic health and curb asset bubbles, Beijing has had to maintain stimulus to keep GDP from falling below the official target of 7%. Recent data appeared to point to a stabilisation. The local stockmarket responded positively in turn despite growing concerns about asset quality in the banking sector.

 

As for India, it continued to face high fiscal and current account deficits as well as elevated inflation. Growth fell to a decade low. The rupee did not help by testing new lows as investors fled to safer havens. The central bank cut interest rates thrice during the review period but did an about-turn at the time of writing, tightening policy amid nagging price pressures. India has struggled to speed up infrastructure investments given red tape and political gridlock, leading to frequent bottlenecks in the supply chain. Indonesia also witnessed a widening of its current account shortfall, weakening of its rupiah and a resurgence in inflation on the back of power tariff hikes and cuts in fuel subsidies, which compelled the central bank to hike rates despite anaemic growth.

 

Elsewhere, quarterly GDP data improved in the export-focused economies of Hong Kong, Singapore, Korea and Taiwan following a period of muted activity. Headwinds persisted, nevertheless. Hong Kong and Singapore continued to introduce new property-cooling measures. Korea faced increasing challenges relating to the weaker Japanese yen, which tends to erode the competitiveness of some of its exports. Meanwhile, the Philippine market, often relegated to the sidelines by investors, grew in favour as the economy expanded robustly, aided by record government spending. Prudent fiscal management also helped the country attain its first investment-grade scores during the year. 

 

As noted above, the gains in your Company's net asset value trailed the rise in the benchmark, primarily a result of the long-held underweights to China and Taiwan as well as overweights to Singapore and India. These allocations reflect where your Manager is able to find good quality companies with solid finances, proven management, sustainable business models and strong market positions. This stock-picking approach has served the Company well in the longer term. This may lead to short term underperformance against the benchmark in rising markets. The Manager intends to maintain its exposure to India and ASEAN and the underweight to North Asia despite some of the current macroeconomic headwinds. This stems from the confidence in the underlying companies in these markets and their ability to sustain growth in spite of these challenges.

 

Gearing

At the year end the Company had in issue £59.8 million nominal of 3.5% Convertible Unsecured Loan Stock 2018 (CULS), representing actual gearing of 9.6%.  The CULS provides the company with long-term structural gearing at an acceptable cost and is in line with the Manager's long-term investment philosophy.  The CULS provides holders with an attractive yield of 3.5% per annum, as well as capital protection (with the liability comfortably covered by the gross assets of the Company of £607 million).  Holders of CULS may convert part, or all, of their holdings into Ordinary shares on 31 January and 31 July each year up to January 2018 at a fixed price of 310.1528p nominal of CULS for one Ordinary share. 

 

Discount

The discount at which the Company's shares trade relative to their net asset value, as at 31 August 2013, was 9.1%.  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.  There were no buy-backs of shares during the financial year and there have been no buy-backs subsequent to the year end.  As at 31 October 2013 the Company's shares were trading at a discount of 9.3%.

 

Shareholder authority is being sought to purchase the Company's shares to provide the Company with the flexibility to hold any shares that have been repurchased in treasury before either cancelling those shares or selling them back to the market at a later date.  Repurchased shares would only be resold at a price above the NAV at the relevant date.   The share buyback authority would only be exercised if to do so would increase the net asset value per Ordinary share for the remaining shareholders and would be in the best interests of shareholders generally.

 

Revenue Account and Dividend

The revenue return per share was 3.4p, compared to 3.3p in the previous year.  It remains the Board's policy to pay a final dividend marginally in excess of the minimum required to maintain investment trust status, which may, of course, lead to some volatility in the level of dividend paid.  The Board recommends the payment of a final dividend of 2.2p per Ordinary share (2012 - 2.2p) which, if approved by shareholders at the Annual General Meeting, will be paid on 20 December 2013.

 

The Board

Over the last few years the Board has implemented a succession planning strategy which resulted in three new Board appointments over the last three years.  David Gairns, who has been a Director of Edinburgh Dragon Trust for ten years and is currently Senior Independent Director, will step down at the forthcoming Annual General Meeting after many years of valuable service to the Board. The Board joins me in thanking David for his enormous contribution to the Company, particularly in his role as Audit Committee Chairman, and wish him all the very best for the future.  Iain McLaren took over the chairmanship in July of this year and Peter Maynard was appointed to the Audit Committee.  Tony Lowrie will assume the role of Senior Independent Director in December.

 

In accordance with the provisions of the UK Corporate Governance Code, the Board has endorsed corporate governance procedures whereby all Directors will retire from the Board and submit themselves for re-election on an annual basis. The Board recommends that shareholders vote in favour of the re-election of all Directors at the Annual General Meeting. 

 

Annual General Meeting

The Annual General Meeting will be held at Aberdeen's Edinburgh office on Tuesday 17 December 2013 at 12.00 noon followed by a lunch for shareholders.  This will give shareholders the opportunity to meet the Directors and Manager after the formal AGM business has concluded and we welcome all shareholders to attend. The AGM will continue to be rotated between Edinburgh and London in successive years.

 

Alternative Investment Fund Managers (AIFM) Directive

Although the legislation for the above Directive came into force in July 2013, there is a 12 month transitional period meaning that investment companies will have until July 2014 to complete the process of compliance and authorisation with the regulator.  The Board continues to review the impact, including changes to the investment management agreement and costs, of the Directive upon the Company but has agreed, in principle, to appoint a subsidiary of Aberdeen Asset Management PLC as the Company's AIFM.  We shall make further announcements on this subject in the coming months.

 

Retail Investors

The Company currently conducts its affairs so that the Ordinary shares issued by Edinburgh Dragon Trust plc can be recommended by Financial Advisers to ordinary retail investors in accordance with the FCA's rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future.

 

The Ordinary shares are excluded from the FCA's restrictions which apply to non-mainstream investment products because they are shares in an investment trust.

 

Outlook

At the time of writing global financial markets are reacting positively to an interim agreement on the political impasse in Washington on the budget deficit and the debt ceiling.  The issues have been pushed forward into early 2014 in the hope that an agreement can be reached. Failure to get agreement will have far reaching implications for global growth and investor sentiment.

 

Fed policy direction also remains a concern-somewhat tempered by the nomination of the dovish Janet Yellen as the successor to Ben Bernanke from January 2014. While a less accommodative stance on buying US Treasuries (to support economic growth) arguably has been factored into the price of global assets, the question remains one of timing and scale, and the impact on America's nascent economic recovery.  In Europe, Angela Merkel's re-election in Germany should ensure policy continuation. But structural problems persist throughout the Continent and high unemployment could restrain growth.

 

Within Asia, elections are looming in India and Indonesia, which may lead to stronger economic policies to tackle their recent challenges. That said, your Manager has never invested in India on hopes of improving domestic politics but on the breadth of well run businesses with growth potential it can find across a wide range of industries, in spite of persistent economic and political troubles. In China, sentiment has changed with expectations of higher non-performing loans in the banking system but that has yet to be reflected in share prices. Your Manager remains underweight here, finding more comfort with Hong Kong companies that provide exposure to the mainland but with better transparency and corporate governance standards.

 

Overall, fundamentals in Asia remain sound with corporate sentiment still upbeat and economies broadly in better shape than those in the West, even if there is some slowdown in growth. Valuations are reasonable and the portfolio continues to hold some of the best quality companies within the region.

 

 

For Edinburgh Dragon Trust plc

Allan McKenzie

Chairman

 

4 November 2013

 

MANAGER'S REVIEW

 

Background/Portfolio Review

Asian equities posted gains on strong capital inflows, as quantitative easing (QE) in the West compelled investors to look for better returns elsewhere. This liquidity trumped concerns over weakening regional growth, even as subdued inflation freed most central banks to cut interest rates and adopt measures to buttress economies. Regional markets rose steadily through to mid-May. Thereafter, concerns over a potential QE unwinding unsettled financial markets and currencies, with India and Indonesia bearing the brunt of the sell-off. Nonetheless, Asian markets held on to earlier gains and closed higher for the year.

 

The Company's net asset value (NAV) gained 6.7%, compared to the 10.1% rise in the MSCI All Country Asia ex Japan Index. Both asset allocation and stock selection detracted from relative performance.

 

It is worth remembering that our exposure to individual markets result from where we find the best companies. In China, we have long been apprehensive about the quality of domestic companies and, hence, remain underweight there. This position has hurt performance, as the Chinese stockmarket was one of the best performers, despite a slowing economy and banking-sector worries, while the yuan was Asia's strongest performing currency rising by about 6% against sterling over the period.

 

In seeking exposure to the Chinese economy we prefer to invest in well-established Hong Kong-domiciled companies, many of which operate in the mainland. Our overweight position in the territory contributed positively to performance, as the market rallied in tandem with its mainland Chinese counterpart. Some of our holdings, though, did not fare as well. An example is property developer Hang Lung Group, which grappled with rising costs and lower residential sales as a result of fewer property launches. But its core leasing business remained stable, while rental reviews were still positive in China, albeit slower than in the previous year. Jardine Strategic was weighed down by concerns over its ASEAN exposure. Among its underlying businesses, Astra in Indonesia was hampered by weakening consumer sentiment and rupiah weakness, while Dairy Farm, which is also a direct holding, suffered some margin erosion in its food businesses in Malaysia and Singapore. This was offset by good underlying profit growth in two other units - Hongkong Land and Mandarin Oriental. Our financial holdings were more resilient. HSBC continued to focus on expanding selectively across the region and divesting legacy businesses, while keeping tight cost discipline. AIA was bolstered by higher trading income and growth in new business. We have become increasingly comfortable with HSBC and AIA, which is reflected in our higher weightings in the two companies within the portfolio.

 

We are overweight to India, which is home to companies that rank among the best in the region in terms of return on equity and earnings growth. Quality has always been evident at the company level in spite of the challenging macroeconomic and fiscal backdrop. This year, however, the performance of corporates was negated by a sliding rupee, which significantly diminished returns. Our holdings had a mixed showing. Cost pressures and oversupply affected the share prices of Grasim Industries and its subsidiary UltraTech Cement. Our financial holdings fared better. HDFC closed flat in local currency terms, as the company continued to post healthy results on the back of a stable core mortgage business and robust growth in its life and general insurance divisions. Private lender ICICI Bank's earnings were underpinned by resilient net interest margins, solid loan growth and quality assets. In other sectors, motorcycle maker Hero MotoCorp reported record sales for its latest quarter, bucking the sluggishness of the broader domestic market. Infosys's foreign currency-based revenues benefited from the depreciating rupee, as its customer base grew on good demand for software and platform products. Both Hero MotoCorp and Infosys's shares posted gains in rupee terms over the year. In short, corporate results were much firmer than the share price returns suggested.

 

In Singapore, we continue to find many well-run businesses, with high standards of corporate governance and scope to expand across Asia. Our overweight detracted from performance, as the market's moderate gain trailed the broader region. Among our holdings, City Developments' share price underperformed on the back of a slew of property cooling measures. The company posted sharply higher second-quarter earnings, driven by gains from non-core asset sales, although it was impacted by lower hotel contributions and the timing of profit recognition for residential projects. While Singapore Airlines continued to suffer from lower passenger and cargo yields, it has a robust balance sheet and is reasonably valued. Another laggard was Keppel Corp, which saw a contraction in profits year-on-year after significant property-related income last year. Importantly, margins were steady in its key offshore & marine division, whilst it maintains a healthy order book with deliveries extending through to 2019. On the positive side, ST Engineering was among the top contributors to overall performance. The company posted steady earnings growth and management expects a better second half, underpinned by a significant order book.

 

Our Korean holdings performed well. Samsung Electronics announced solid earnings, as it gained from the success of its Galaxy products and the strategy to provide cheap smartphones to consumers in developing countries. Samsung continues to hold key market positions in LCD, mobile phones and memory chips. We hold the preference shares, which reversed their prior underperformance relative to the ordinary shares during the review period. Regional banks BS Financial and DGB Financial also boosted performance. Both reported robust loan growth, particularly corporate lending, although there was some pressure on net interest margins.

 

Other positive stock contributors were PTTEP and Siam Cement in Thailand, TSMC in Taiwan as well as Bank of the Philippine Islands (BPI) and Ayala Land in the Philippines. PTTEP's profits benefited from higher volumes and selling prices, as well as lower exploration expenses. Siam Cement's earnings were lifted by solid demand and expectations that the profitability of its chemical business would improve. Both had underperformed in the previous year, as domestic-focused companies came to the fore.

 

In Taiwan, TSMC's recent results were supported by healthy demand for mobile-related applications. The company is the world's largest semiconductor foundry. Despite being in a commoditised industry, TSMC benefits from scale and technology advantage and has a good track record of managing its balance sheet and capital efficiently. It remains the leader in next-generation technology within its industry.

 

Elsewhere, good results from our Philippine holdings underpinned the strong performance of their share prices. BPI's higher profits were driven by good loan growth, higher non-interest income and lower provisions. Ayala Land reported record earnings for its 2012 financial year and continued its excellent profit growth in the first half of 2013. 

 

Portfolio Activity

During the period, we only made two significant portfolio changes - one initiation and a divestment. This reflects our conviction in the companies we hold and their business prospects, but it is also an indication of elevated valuations in other companies that we would consider owning. Within the portfolio, we have tried to be as disciplined as possible in taking profits from the more fully valued companies, although we also saw the market reward companies with a more defensive earnings profile, which in many cases began the period on rich multiples. Against that, we added to existing holdings on share price weakness, where the operating performance of the businesses has remained within our expectations.

 

In June, we introduced DBS Group, which is Singapore's largest bank in terms of assets. Like the two other Singapore lenders that we hold (UOB and OCBC), it has selective regional exposure and is well capitalised. The lender has posted consistently good results over the past few quarters. DBS has improved its profitability in Hong Kong and has good growth prospects, particularly in Southeast Asia, which complements its strong domestic position. However, it still had some setbacks. The most recent was in late July, when the lender dropped its bid to buy a controlling stake in Indonesia's Bank Danamon. This came after protracted negotiations, which were hindered by regulatory and political constraints.

 

As mentioned in the interim report, we were concerned over investigations involving the top executives of Hong Kong-listed Sun Hung Kai Properties, and sold our holding on these corporate governance concerns after a rebound in the share price.

 

We top-sliced Ayala Land, Unilever Indonesia and ST Engineering following strong relative performance. Against that, we added to Li & Fung on share price weakness and topped up China Mobile, John Keells, OCBC and Swire Pacific which continue to offer decent value.

 

Outlook

Asian stock markets had a good year despite external headwinds and slowing regional growth, but some caution is prudent, as May's sell-off gave us an insight into the potential impact of reduced US Federal Reserve buying of US Treasuries and thereby higher US interest rates, which could trigger capital outflows from Asia and renewed volatility. Your Chairman has also highlighted some crucial challenges within Asia. While the macroeconomic backdrop is mixed, the outlook remains bright enough from a corporate perspective. We expect positive earnings growth from Asian companies in the year ahead, while valuations remain reasonable.  

 

 

Aberdeen Asset Management Asia Limited*

4 November 2013

 

 

 

* on behalf of Aberdeen Asset Managers Limited

Both companies are subsidiaries of Aberdeen Asset Management PLC.

 

 

THE INVESTMENT PROCESS 

 

Philosophy and Style

Our 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.

 

AAM Asia is based in Singapore. Founded in 1992, the office is run by Hugh Young, the founding managing director who oversees a team of portfolio managers in Singapore who act as generalists, cross-covering the region. In addition, AAM Asia has offices in Kuala Lumpur, Hong Kong, Sydney, Taipei, Tokyo and Bangkok.

 

Risk Controls

We seek to minimise risk by our in-depth research which underpins the focused portfolio of the Company.  We do not view divergence from a benchmark as risk - we regard security price risk as investment in poorly run and/or expensive companies.  In fact where risk parameters are expressed in benchmark relative terms, asset allocation (including sector) constitutes a significant constraint on stock selection.

 

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.

 

Aberdeen Asset Management Asia Limited*

* on behalf of Aberdeen Asset Managers Limited

 

 

PERFORMANCE TABLES

 

 


31 August 2013

31 August 2012

%
change

Performance




Equity shareholders' funds (£'000)

550,346

519,765

+5.9

Net asset value per share (including net revenue) (p)

280.26

264.70

+5.9

Share price (p)

254.70

237.30

+7.3

MSCI AC Asia (ex Japan) Index (in sterling terms; capital return basis)

614.29

572.34

+7.3

Revenue return per share (p)

3.42

3.30


Total return per share (p)

17.76

16.53






Gearing




Net gearing (%){A}

9.6

10.3






Discount




Level of discount at which the shares traded (%)

9.1

10.4






Operating costs




Ongoing charges ratio{B}

1.23

1.25





{A}    Calculated in accordance with AIC guidance "Gearing Disclosures post RDR".

{B}    Ongoing charges ratio is calculated in accordance with guidance issued by the AIC as the total of the investment management fee and ongoing administrative expenses divided by the average undiluted net asset value in the year.

 

 

Performance (total return)









1 year return

3 year return

5 year return


%

%

%

Share price

+8.3

+19.9

+84.2

Net asset value

+6.7

+20.0

+80.0

MSCI AC Asia (ex Japan) Index (in sterling terms)

+10.1

+13.8

+54.2

 

 

Changes in Asset Distribution

 


Value at




Value at


31 August 2012


Purchases

Sales
proceeds

Gains/
(losses)

31 August 2013

Country

£'000

£'000

£'000

£'000

£'000

China

42,528

2,322

934

899

44,815

Hong Kong

159,062

9,087

11,918

8,715

164,946

India

73,909

1,521

449

(7,464)

67,517

Indonesia

10,744

-

4,082

(216)

6,446

Malaysia

23,019

232

1,114

(79)

22,058

Philippines

23,230

-

1,649

3,963

25,544

Singapore

120,845

14,337

2,761

2,381

134,802

South Korea

43,589

2,988

3,378

9,762

52,961

Sri Lanka

12,488

1,007

-

1,224

14,719

Taiwan

35,155

-

3,229

5,295

37,221

Thailand

29,033

1,441

1,882

3,784

32,376


_________

_________

_________

_________

_________

Total investments

573,602

32,935

31,396

28,264

603,405

Net current assets

2,529

-

-

1,402

3,931


_________

_________

_________

_________

_________

Total assets less current liabilities

576,131

32,935

31,396

29,666

607,336


_________

_________

_________

_________

_________

 

BUSINESS REVIEW

 

This Business Review, in conjunction with the rest of the Report and Accounts, 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 417 of the Companies Act 2006.

 

Principal Activity

The Company is registered as a public limited company in Scotland and is an investment company as defined by Section 833 of the Companies Act 2006. The Company's registration number is SC106049.

 

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 HM Revenue and Customs for accounting periods up to and including 31 August 2012.

 

The Company has been accepted as an approved investment trust company from 1 September 2012 subject to the Company continuing to satisfy the ongoing requirements of Chapter 4 of Part 24 of the Corporation Tax Act 2010 and the Investment Trust (Approved Company) (Tax) Regulations 2011.

 

The Company has conducted its affairs so that its Ordinary shares 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 Company's objective is to achieve long term capital growth through investment in the Far East. The Company's benchmark is the MSCI All Country Asia (ex Japan) Index.  Investments are made in stock markets in the region with the exception of Japan and Australasia, principally in large companies. 

 

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 for the region is 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 Aberdeen Asset Managers Limited ('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, including the 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, 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 18 to the financial statements. 

 

Concentration risk

Trading volumes in certain securities of emerging markets can be low.  The Manager may accumulate investment positions across all its managed funds that represent a significant multiple of the normal trading volumes of an investment which may result in lack of liquidity and price volatility.  Accordingly, the Company will not necessarily be able to realise, within a short period of time, an illiquid investment and any such realisation that may be achieved may be at considerably lower prices than the Company's valuation of that investment for the purpose of calculating the NAV per Ordinary Share.

 

Gearing risk

As at 31 August 2013 the Company had £59.8 million nominal of 3.5% Convertible Unsecured Loan Stock 2018 (CULS).  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 the tax rules for investment companies, 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

 

An analysis of these measures is disclosed above.  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. 

 

Social, Community, Employee Responsibilities and Environmental Policy

As an investment trust, the Company has no employees and has no direct social, community, employee or environmental responsibilities. Details of the Company's Socially Responsible Investment policy are set out in the Corporate Governance Report.

 

 

 

DIRECTOR'S RESPONSIBILITY STATEMENT

 

The Directors are responsible for preparing the annual report and accounts 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 and applicable law (UK Generally Accepted Accounting Practice).

 

Under company law the Directors must not approve the financial statements unless they are satisfied that they 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 adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. 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 complies 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

Allan McKenzie

Chairman

 

4 November 2013

 

 



INCOME STATEMENT

 

 



Year ended 31 August 2013

Year ended 31 August 2012



Revenue

Capital

Total

Revenue

Capital

Total


Notes

£'000

£'000

£'000

£'000

£'000

£'000

Gains on investments held at fair value through profit or loss

9

-

28,264

28,264

-

25,995

25,995

Currency losses


-

(111)

(111)

-

(14)

(14)

Income

2

16,546

-

16,546

16,054

-

16,054

Investment management fee

3

(5,889)

-

(5,889)

(5,009)

-

(5,009)

Administrative expenses

4

(1,273)

-

(1,273)

(1,233)

-

(1,233)



_______

_____

_____

_______

_____

_____

Net return before finance costs and taxation


9,384

28,153

37,537

9,812

25,981

35,793









Interest payable and similar charges

5

(2,742)

-

(2,742)

(2,752)

-

(2,752)



_______

_____

_____

_______

_____

_____

Return on ordinary activities before taxation


6,642

28,153

34,795

7,060

25,981

33,041









Taxation on ordinary activities

6

83

(2)

81

(588)

-

(588)



_______

_____

_____

_______

_____

_____

Return on ordinary activities after taxation


6,725

28,151

34,876

6,472

25,981

32,453



_______

_____

_____

_______

_____

_____









Return per share (pence)

8







Basic


3.42

14.34

17.76

3.30

13.23

16.53



_______

_____

_____

_______

_____

_____

Diluted


n/a

13.05

17.29

n/a

12.05

16.15



_______

_____

_____

_______

_____

_____









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 are recognised 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 2013

31 August 2012


Notes

£'000

£'000

Non-current assets




Investments at fair value through profit or loss

9

603,405

573,602



____________

____________





Current assets




Debtors and prepayments

10

2,438

1,598

Cash and short term deposits


4,224

2,651



____________

____________



6,662

4,249



____________

____________





Creditors: amounts falling due within one year




Other creditors

11

(2,731)

(1,720)



____________

____________

Net current assets


3,931

2,529



____________

____________

Total assets less current liabilities


607,336

576,131





Non-current liabilities




3.5% Convertible Unsecured Loan Stock 2018

12

(56,990)

(56,366)



____________

____________

Net assets


550,346

519,765



____________

____________





Share capital and reserves




Called-up share capital

13

39,274

39,272

Share premium account


4,452

4,427

Special reserve


6,726

6,726

Equity component of 3.5% Convertible Unsecured Loan Stock 2018

12

2,572

3,163

Capital redemption reserve


16,945

16,945

Capital reserve


460,820

432,669

Revenue reserve


19,557

16,563



____________

____________

Equity shareholders' funds

14

550,346

519,765



____________

____________





Net asset value per Ordinary share (pence)

14

280.26

264.70



____________

____________



RECONCILIATION OF MOVEMENT IN SHAREHOLDERS FUNDS (audited)

 

 

For the year ended 31 August 2013











Share


Equity

Capital





Share

premium

Special

component

redemption

Capital

Revenue



capital

account

reserve

CULS 2018

reserve

reserve

reserve

Total


£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 31 August 2012

39,272

4,427

6,726

3,163

16,945

432,669

16,563

519,765

Return on ordinary activities after taxation

-

-

-

-

-

28,151

6,725

34,876

Issue of new Ordinary shares from conversion of 3.5% Convertible Unsecured Loan Stock 2018

2

25

-

(2)

-

-

-

25

Dividend paid

-

-

-

-

-

-

(4,320)

(4,320)

Transfer of notional interest element on 3.5% Convertible Unsecured Loan Stock 2018

-

-

-

(589)

-

-

589

-


______

______

______

______

______

______

______

______

Balance at 31 August 2013

39,274

4,452

6,726

2,572

16,945

460,820

19,557

550,346


______

______

______

______

______

______

______

______










For the year ended 31 August 2012











Share


Equity

Capital





Share

premium

Special

component

redemption

Capital

Revenue



capital

account

reserve

CULS 2018

reserve

reserve

reserve

Total


£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 31 August 2011

39,269

4,387

6,726

4,126

16,945

406,688

15,414

493,555

Return on ordinary activities after taxation

-

-

-

-

-

25,981

6,472

32,453

Issue of new Ordinary shares from conversion of 3.5% Convertible Unsecured Loan Stock 2018

3

40

-

(3)

-

-

-

40

Dividend paid

-

-

-

-

-

-

(6,283)

(6,283)

Transfer of notional interest element on 3.5% Convertible Unsecured Loan Stock 2018

-

-

-

(960)

-

-

960

-


______

______

______

______

______

______

______

______

Balance at 31 August 2012

39,272

4,427

6,726

3,163

16,945

432,669

16,563

519,765


______

______

______

______

______

______

______

______







The capital reserve includes investment holding gains amounting to £243,428,000 (2012 - £232,881,000), as disclosed in note 9.

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 2013

  31 August 2012


Notes

£'000

£'000

£'000

£'000

Net cash inflow from operating activities

15


9,593


9,819







Servicing of finance






Bank and CULS interest paid



(2,094)


(2,096)







Taxation






Net tax paid



(414)


(579)







Financial investment






Purchases of investments


(32,028)


(33,721)


Sales of investments


30,947


28,595




_______


_______


Net cash outflow from financial investment



(1,081)


(5,126)







Equity dividend paid



(4,320)


(6,283)




_______


_______

Increase/(decrease) in cash

16


1,684


(4,265)




_______


_______







Reconciliation of net cash flow to movements in net debt






Increase/(decrease) in cash as above



1,684


(4,265)

Other non-cash movements



(624)


(616)

Exchange movements



(111)


(14)




_______


_______

Movement in net debt in the year



949


(4,895)

Net debt at 1 September



(53,715)


(48,820)




_______


_______

Net debt at 31 August



(52,766)


(53,715)




_______


_______



NOTES TO THE ACCOUNTS (audited)

 

 

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 investments and in accordance with the applicable UK Accounting Standards and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts'. They have also been prepared on the assumption that approval as an investment trust will continue to be granted.






The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements.






The financial statements, and the net asset value per share figures, have been prepared in accordance with UK Generally Accepted Accounting Practice ('UK GAAP').





(b)

Investments



Listed investments have been designated upon initial recognition as fair value through profit or loss. Investments are recognised and de-recognised on the trade date at fair value, which is generally deemed to be the cost of the investment at that point. Subsequent to initial recognition, investments are valued at fair value, which for listed investments is deemed to be bid market prices or closing prices for SETS (London Stock Exchange's electronic trading service) stocks sourced from the London Stock Exchange. 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.





(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 shares 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 foregone cash dividend is recognised as income. Any excess in the value of the shares received over the amount of cash dividend foregone 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 with the exception of 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 and are separately identified and disclosed in note 9.





(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.





(f)

Capital reserves



Gains and losses on investments and changes in fair values of investments which are readily convertible to cash, without accepting adverse terms, are transferred to the capital reserve.





(g)

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 capital reserve.





(h)

Dividends payable



Final dividends are dealt with in the period in which they are paid.





(i)

3.5% Convertible Unsecured Loan Stock 2018



Convertible Unsecured Loan Stock ("CULS") issued by the Company is regarded as a compound instrument, comprising of a liability component and an equity component. At the date of issue, the fair value of the liability component was estimated by assuming that an equivalent non-convertible obligation of the Company would have a coupon rate of 4.662%. The fair value of the equity component, representing the option to convert liability into equity, is derived from the difference between the issue proceeds of the CULS and the fair value assigned to the liability. The liability component is subsequently measured at amortised cost using the effective interest rate.






Direct expenses associated with the CULS issue are allocated to the liability and equity components in proportion to the split of the proceeds of the issue. Expenses allocated to the liability component are amortised over the life of the instrument.






The interest expense on the CULS is calculated according to the effective interest rate method by applying the assumed rate of 4.662% at initial recognition to the liability component of the instrument. The difference between this amount and the interest paid is added to the carrying liability of the CULS.






On conversion of CULS, equity is issued and the liability component is derecognised. The original equity component recognised at inception remains in equity. No gain or loss is recognised on conversion.






When CULS is repurchased for cancellation, the fair value of the liability at the redemption date is compared to its carrying amount, giving rise to a gain or loss on redemption that is recognised through profit or loss. The amount of consideration allocated to equity is recognised in equity with no gain or loss being recognised.






In the event of a winding-up of the Company the rights and claims of the Trustee and CULS holders would be subordinate to the claims of all creditors in respect of the Company's secured and unsecured borrowings, under the terms of the Trust Deed.

 



2013

2012

2.

Income

£'000

£'000


Income from investments




UK dividend income

1,812

1,460


Overseas dividend income

14,361

14,390


Scrip dividends

367

195



_______

_______



16,540

16,045



_______

_______







2013

2012


Other income

£'000

£'000


Deposit interest

6

8


Interest from UK Treasury Bills

-

1



_______

_______



6

9



_______


Total income

16,546



_______

_______







2013

2012


Income from investments

£'000

£'000


Listed UK

712

626


Listed overseas

15,828

15,419



_______



16,540



_______

 



2013

2012



Revenue

Capital

Total

Revenue

Capital

Total

3.

Investment management fee

£'000

£'000

£'000

£'000

£'000

£'000


Investment management fee

5,889

5,889

5,009

5,009



_______

_____

_____

_______

_____

_____










The management fee paid to Aberdeen Asset Managers Limited ('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 management agreement is terminable by the Company on three months' notice or in the event of a change of control in the ownership of the Manager. The notice period required by the Manager is six months.

 



2013

2012

4.

Administrative expenses

£'000

£'000


Share Plan marketing contribution

192

205


Directors' fees

165

152


Safe custody fees

447

395


Auditor's remuneration:




Fees payable to the Company's auditor for the audit of the Company's annual accounts

16

16


Fees payable to the Company's auditor for the review of the Company's half yearly accounts

5

5


Secretarial fee

107

103


Other expenses

341

357



_______



1,273



_______

_______






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.




No pension contributions were made in respect of any of the Directors.




The Company does not have any employees.

 



2013

2012

5.

Interest payable and similar charges

£'000

£'000


Interest on 3.5% Convertible Unsecured Loan Stock 2018

2,094

2,096


Notional interest on 3.5% Convertible Unsecured Loan Stock 2018

589

596


Amortisation of 3.5% Convertible Unsecured Loan Stock 2018 issue expenses

59

60



_______

_______



2,742

2,752



_______

_______

 



2013

2012



Revenue

Capital

Total

Revenue

Capital

Total

6.

Taxation

£'000

£'000

£'000

£'000

£'000

£'000


(a)

Analysis of charge for the year









Overseas tax suffered

605

2

607

588

-

588



Overseas tax reclaimable

(688)

-

(688)

-

-

-



Taxation on ordinary activities

(83)

2

(81)

588

-

588











(b)

Factors affecting the tax charge for the year



The tax assessed for the year is lower than the effective rate of corporation tax in the UK.







2013

2012




Revenue

Capital

Total

Revenue

Capital

Total




£'000

£'000

£'000

£'000

£'000

£'000



Return on ordinary activities before taxation

6,642

28,153

34,795

7,060

25,981

33,041












Effective rate of corporation tax at 23.58% (2012 - 25.17%)

1,566

6,639

8,205

1,777

6,539

8,316



Effects of:









UK dividend income

(427)

-

(427)

(367)

-

(367)



Gains on investments not taxable

-

(6,665)

(6,665)

-

(6,543)

(6,543)



Currency losses not taxable

-

26

26

-

4

4



Other non-taxable income

(3,473)

-

(3,473)

(3,671)

-

(3,671)



Increase in excess expenses and loan relationship deficit

2,334

-

2,334

2,261

-

2,261



Net overseas tax suffered

(83)

2

(81)

588

-

588




_______

______

_____

_______

______

_____



Current tax charge for year

(83)

2

(81)

588

-

588




_______

______

_____

_______

______

_____











(c)

Provision for deferred taxation

 



No provision for deferred taxation has been made in the current year or in the prior year.






The Company has not provided for deferred tax on capital gains or losses arising on the revaluation or disposal of investments as it is exempt from tax on these items because of its status as an investment trust company.





(d)

Factors that may affect future tax charges



The Company has not recognised a deferred tax asset £6,887,000 (2012 - £5,495,000) arising as a result of excess management expenses and non-trading loan relationship deficits (CULS interest). These expenses will only be utilised if the Company has profits chargeable to corporation tax in the future.

 

7.

Dividends


In order to comply with the requirements of Sections 1158 -1159 of the Corporation Tax Act 2010 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 Sections 1158 - 1159 are considered. The revenue available for distribution by way of dividend for the year is £6,725,000 (2012 - £6,472,000).



2013

2012



£'000

£'000


Proposed final dividend for 2013 - 2.20p per Ordinary share (2012 - 2.20p)

4,320



_______

______






The amounts reflected above for the cost of the proposed final dividend for 2013 is based on 196,368,689 Ordinary shares in issue, being the number of Ordinary shares in issue at the date of this Report.




The final dividend will be paid on 20 December 2013 to shareholders on the register at the close of business on 22 November 2013.

 



2013

2012

8.

Return per Ordinary share

£'000

pence

£'000

pence


Basic






Revenue return

6,725

3.42

6,472

3.30


Capital return

28,151

14.34

25,981

13.23



_______

_____

_______


Total return

34,876

32,453

16.53



_______

______

_____

_______








Weighted average Ordinary shares in issue



196,349,420




________


________









2013

2012


Diluted

£'000

pence

£'000

pence


Revenue return

9,148

n/a

8,846

n/a


Capital return

28,151

13.05

25,981

12.05



_______

_____

_______


Total return

37,299

34,827

16.15



_______

______

_____

_______


Weighted average Ordinary shares in issue{A}



215,656,512





________







{A} The calculation of the diluted total, revenue and capital returns per Ordinary share are carried out in accordance with Financial Reporting Standard 22, "Earnings per Share". For the purpose of calculating total, revenue and capital returns per Ordinary share, the number of Ordinary shares used is the weighted average number used in the basic calculation plus the number of Ordinary shares deemed to be issued for no consideration on exercise of all 3.5% Convertible Unsecured Loan Stock 2018 (CULS). The calculations indicate that the exercise of CULS would result in an increase in the weighted average number of Ordinary shares of 19,293,362 (2012 - 19,307,092) to 215,656,504 (2012 - 215,656,512) Ordinary shares.




For the years ended 31 August 2013 and 31 August 2012 there was no dilution to the revenue return per Ordinary share. Where dilution occurs, the net returns are adjusted for items relating to the CULS. Total earnings for the period are tested for dilution. Once dilution has been determined individual revenue and capital earnings are adjusted. Accrued CULS finance costs for the period and unamortised issues expenses are reversed.

 



Listed

Listed




overseas

 in UK

Total

9.

Investments

£'000

£'000

£'000


Fair value through profit or loss:





Opening book cost

322,194

18,527

340,721


Opening fair value gains/(losses) on investments held

233,280

(399)

232,881



_______

______

_____


Opening fair value

555,474

18,128

573,602


Movements in year:





Purchases at cost

32,935

-

32,935


Sales - proceeds

(31,396)

-

(31,396)


Sales - gains on sales

17,717

-

17,717


Current year fair value gains on investments held

9,902

645

10,547



_______

______

_____


Closing fair value

584,632

18,773

603,405



_______

______

_____








Listed

Listed




overseas

 in UK

Total



£'000

£'000

£'000


Closing book cost

341,450

18,527

359,977


Closing fair value gains on investments held

243,182

246

243,428



_______

______

_____


Closing fair value

584,632

18,773

603,405



_______

______

_____









2013

2012




£'000

£'000


Listed on a recognised overseas investment exchange


584,632

555,474


Listed in the UK


18,773

18,128




_______

______




603,405

573,602




_______

______









2013

2012


Gains on investments held at fair value through profit or loss


£'000

 £'000


Realised gains on sales


17,717

10,394


Increase in fair value gains on investments held


10,547

15,601




_______

______




28,264

25,995




_______

______







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:




2013

2012




£'000

£'000


Purchases


68

106


Sales


103

84




_______

______




171

190




_______

______

 



2013

2012

10.

Debtors and prepayments

£'000

£'000


Accrued income

1,447

1,528


Overseas withholding tax recoverable

496

 -


Other debtors and prepayments

495

70



_______

______



2,438

1,598



_______

______






Included in other debtors and prepayments is an amount of USD696,000, equivalent to £449,000 (2012 - nil), being the estimated recovery of funds following the settlement between Aberdeen Asset Managers Limited and Satyam Computer Services in relation to a claim made following the discovery of a financial fraud, which led to the sale of the stock at a weakened price.

 



2013

2012

11.

Creditors: amounts falling due within one year

£'000

£'000


Amounts due to brokers

918

11


Other creditors

1,813

1,709



_______

______



2,731

1,720



_______

______

 

12.

Non-current liabilities - 3.5% Convertible Unsecured Loan Stock 2018 








Number

Liability

Equity



of units

component

component


Year ended 31 August 2013

£'000

£'000

£'000


Balance at 31 August 2012

59,848

56,366

3,163


Conversion of 3.5% Convertible Unsecured Loan Stock 2018 into Ordinary shares

(26)

(24)

(2)


Notional interest on 3.5% Convertible Unsecured Loan Stock 2018

-

589

-


Notional interest on 3.5% Convertible Unsecured Loan Stock 2018 transferred to revenue reserve

-

-

(589)


Amortisation of issue expenses (see note 1(i))

-

59

-



_______

______

_____


Balance at 31 August 2013

59,822

56,990

2,572



_______

______

_____








Number

Liability

Equity



of units

component

component


Year ended 31 August 2012

£'000

£'000

£'000


Balance at 31 August 2011

59,891

55,750

4,126


Conversion of 3.5% Convertible Unsecured Loan Stock 2018 into Ordinary shares

(43)

(40)

(3)


Notional interest on 3.5% Convertible Unsecured Loan Stock 2018

-

596

-


Notional interest on 3.5% Convertible Unsecured Loan Stock 2018 transferred to revenue reserve

-

-

(960)


Amortisation of issue expenses (see note 1(i))

-

60

-



_______

______

_____


Balance at 31 August 2012

59,848

56,366

3,163



_______

______

_____







On 12, 26 and 27 January 2011, the Company issued a total of £60,000,000 nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 ("CULS"). The CULS can be converted at the election of holders into Ordinary Shares during the months of January and July each year throughout their life, to January 2018 at a rate of 1 Ordinary share for every 310.1528p nominal of CULS. Once 80% of the CULS issued have been converted the Company is allowed to request that holders redeem or convert the remainder. Interest is paid on the CULS on 31 January and 31 July each year, of which 100% is charged to revenue in line with the Board's expected long-term split of returns from the investment portfolio of the Company.




The Company has decided to make an annual transfer between the equity component of the CULS and the revenue reserve so that the revenue reserve reflects distributable reserves as defined by company law.




During the year ended 31 August 2013 the Company converted £26,173 (2012 - £43,160) nominal amount of CULS into 8,430 (2012 - 13,909) Ordinary shares.




As at 31 August 2013, there was £59,821,680 (2012 - £59,847,853) nominal amount of CULS in issue.

 



2013

2012

13.

Called-up share capital

£'000

£'000


Allotted, called-up and fully paid:




Ordinary shares of 20p




Opening balance of 196,360,259 (2012 - 196,346,350) shares

39,272

39,269


Issue of 8,430 (2012 - 13,909) Ordinary shares on conversion of £26,173 (2012 - £43,160) nominal 3.5% Convertible Unsecured Loan Stock 2018

2

3



_______

______


Closing balance of 196,368,689 (2012 - 196,360,259) shares

39,274

39,272



_______

______

 

14.

Net asset value per share




The net asset value per share and the net asset values attributable to the Ordinary shareholders at the year end calculated in accordance with the Articles of Association were as follows:







2013

2012


Net assets attributable (£'000)

550,346

519,765


Number of Ordinary shares in issue

196,368,689

196,360,259


Net asset value per share (p)

280.26

264.70



__________

_________






The impact of the 3.5% Convertible Unsecured Loan Stock 2018 on the net asset value per share was anti-dilutive for the year ended 31 August 2013 and 31 August 2012.

 

15.

Reconciliation of net return before finance costs and

2013

2012


taxation to net cash inflow from operating activities

£'000

£'000


Net return before finance costs and taxation

37,537

35,793


Adjustments for:




Gains on investments held at fair value through profit or loss

(28,264)

(25,995)


Exchange losses charged to capital

111

14


Decrease/(increase) in accrued income

81

(31)


Decrease/(increase) in other debtors

24

(12)


Increase in sundry creditors including management fee due

104

50



_______

______


Net cash inflow from operating activities

9,593

9,819



_______

______

 



1 September


Cash


Currency

Other non-cash

31
August



2012

flow

movements

movements

2013

16.

Analysis of changes in net debt

£'000

£'000

£'000

£'000

£'000


Cash and short term deposits

2,651

1,684

(111)

-

4,224


Debt falling due in more than one year

(56,366)

-

-

(624)

(56,990)



______

______

_______


Net debt

1,684

(111)

(624)



______

______

_______

 

17.

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 has imposed a maximum gearing level of 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.




The Company has no externally imposed capital requirements.

 

18.

Financial instruments


Risk management


The Company's financial instruments comprise securities and other investments, cash balances, Convertible Unsecured Loan Stock 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 aims to ensure 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 Company'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 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 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.




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

Weighted





period for which

average

Fixed

Floating



rate is fixed

interest rate

rate

rate


At 31 August 2013

Years

%

£'000

£'000


Assets






Hong Kong Dollar

-

-

-

809


Indian Rupee

-

-

-

113


Singapore Dollar

-

-

-

19


Sterling

-

0.13

-

3,251


Taiwanese Dollar

-

-

-

6


Thailand Baht

-

-

-

20


US Dollar

-

-

-

6



_______

______

______

_______


Total assets

n/a

n/a

-

4,224



_______

______

______

_______








Liabilities






3.5% Convertible Unsecured Loan Stock 2018

4.42

3.50

56,990

-



_______

______

______

_______









Weighted average

 Weighted





period for which

average

Fixed

Floating



rate is fixed

interest rate

rate

rate


At 31 August 2012

Years

%

£'000

£'000


Assets






Indian Rupee

-

-

-

21


Sterling

-

0.23

-

2,617


Taiwanese Dollar

-

-

-

13



_______

______

______

_______


Total assets

n/a

n/a

-

2,651



_______

______

______

_______








Liabilities






3.5% Convertible Unsecured Loan Stock 2018

5.42

3.50

56,366

-



_______

______

______

_______






The weighted average interest rate is based on the current yield of each asset, weighted by its market value.


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 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


The majority 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 investments with foreign currency borrowings.




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 2013

 31 August 2012




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

153,223

809

154,032

144,656

-

144,656


Indian Rupee

67,518

113

67,631

73,908

21

73,929


Indonesian Rupiah

6,446

-

6,446

10,744

-

10,744


Korean Won

52,961

-

52,961

43,589

-

43,589


Malaysian Ringgit

22,058

-

22,058

23,019

-

23,019


Philippine Peso

25,544

-

25,544

23,231

-

23,231


Singapore Dollar

134,802

19

134,821

120,847

-

120,847


Sri Lankan Rupee

14,719

-

14,719

12,488

-

12,488


Taiwanese Dollar

37,221

6

37,227

35,154

13

35,167


Thailand Baht

32,376

20

32,396

29,032

-

29,032


US Dollar

37,764

6

37,770

38,806

-

38,806



_______

______

______

_______

______

______



584,632

973

585,605

555,474

34

555,508


Sterling

18,773

3,251

22,024

18,128

2,617

20,745



_______

______

______

_______

______

______


Total

603,405

4,224

607,629

573,602

2,651

576,253



_______

______

______

_______

______

______










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 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 2013 would have increased/decreased by £60,341,000 (2012 - increased/decreased by £57,360,000) 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. In order to monitor the concentration of Dragon's investee companies with Aberdeen, the total percentage holdings of those securities owned by Aberdeen-managed funds is reviewed by the Board.




The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions, and reviews these on a regular basis. The Board has imposed a maximum gearing level, measured on the most stringent basis of calculation after netting off cash equivalents, of 20%.




Short-term flexibility can be achieved through the use of loan and overdraft facilities. At 31 August 2012 and 2013 the Company had no loan or overdraft facility in place. 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 2013 the Company had borrowings in the form of the £59,821,680 (2012 - £59,847,853) nominal of 3.5% Convertible Unsecured Loan Stock 2018.




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 considered to be significant, and is actively managed as follows:


investment transactions are carried out with a large number of brokers, whose credit-standing is reviewed periodically by the Manager, and limits are set on the amount that may be due from any one broker;


the risk of counterparty, including the custodian, exposure due to failed trades causing a loss to the Company is mitigated by the review of failed trade reports on a daily basis. In addition, the third party administrators' carries out a stock reconciliation to the Custodian's records on a daily 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 are 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:





2013

2012



Balance

Maximum

Balance

Maximum



Sheet

exposure

Sheet

exposure


Current assets

£'000

£'000

£'000

£'000


Loans and receivables

2,438

2,438

1,598

1,598


Cash at bank and in hand

4,224

4,224

2,651

2,651



_______

______

______

_______



6,662

6,662

4,249

4,249



_______

______

______

_______








None of the Company's financial assets is past due or impaired.




Maturity of financial liabilities


The maturity profile of the Company's financial liabilities at 31 August was as follows:







2013

2012



£'000

£'000


In more than one year

56,990

56,366



_______

______






At 31 August 2013 the full contractual liability for the CULS assuming no further conversions was £69,076,000 (2012 - £71,201,000).

 

19.

Fair value hierarchy


FRS 29 'Financial Instruments: Disclosures' requires an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:





Level 1:

quoted prices (unadjusted) in active markets for identical assets or liabilities;


Level 2:

inputs other than quoted prices included within Level 1 that are observable for the assets or liability, either directly (ie as prices) or indirectly (ie derived from prices); and


Level 3:

inputs for the asset or liability that are not based on observable market data (unobservable inputs).





All of the Company's investments are in quoted equities (2012 - same) actively traded on recognised stock exchanges, with their fair value being determined by reference to their quoted bid prices at the reporting date. The total value of the investments (2013 - £603,405,000; 2012 - £573,602,000) have therefore been deemed as Level 1.

 

20.     The Annual General Meeting will be held on 17 December 2013 at 40 Princes Street, Edinburgh.

21.     The Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 31 August 2013 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 2013 and 2012 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 either section 498(2) or 498(3) of the Companies Act 2006. The financial information for 2012 is derived from the statutory accounts for 2011 which have been delivered to the Registrar of Companies. The 2013 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 or on the Company's website www.edinburghdragon.co.uk.

          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

Aberdeen Asset Managers Limited, Secretary


This information is provided by RNS
The company news service from the London Stock Exchange
 
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