Preliminary Announcement
Atlantis Japan Growth Fund Ld
25 August 2006
FOR IMMEDIATE RELEASE
RELEASED BY HSBC SECURITIES SERVICES (GUERNSEY) LIMITED
ATLANTIS JAPAN GROWTH FUND LIMITED
PRELIMINARY ANNOUNCEMENT
APPROVED BY THE BOARD OF DIRECTORS ON 23RD AUGUST, 2006.
THE BOARD OF DIRECTORS OF ATLANTIS JAPAN GROWTH FUND LIMITED ANNOUNCE AUDITED RESULTS FOR THE YEAR ENDED 30TH APRIL,
2006.
BALANCE SHEET
As at 30th April 2006
(Expressed in United States Dollars)
2006 2005
Restated
$'000 $'000
Non Current Assets
Investments held at fair value 659,024 463,747
Current Assets
Due from brokers 1,748 2,385
Dividends and interest receivable 3,150 2,630
Other receivables 2 36
Cash and cash equivalents 2,550 2,431
7,450 7,482
Current Liabilities
Due to brokers (1,828) (3,683)
Payables and accrued expenses (941) (704)
Loans payable (26,340) (14,315)
(29,109) (18,702)
Net Current Liabilities (21,659) (11,220)
Non Current Liabilities
Loans payable (30,730) (28,630)
Net Assets 606,635 423,897
Equity
Ordinary share capital 204 204
Share premium 192,650 192,650
Revenue reserve (18,178) (14,588)
Capital reserve 431,959 245,631
Net Assets Attributable to Equity Shareholders 606,635 423,897
Net Asset Value per Ordinary Share* $29.69 $20.74
*Based on the Net Asset Value of $606,634,813 (2005 - $463,746,530) divided by the number of ordinary shares in issue:
20,435,627 (2005 - 20,435,627).
INCOME STATEMENT
For the year ended 30th April 2006
(Expressed in United States Dollars)
2006 2005
(Restated)
Revenue Capital Total Revenue Capital Total
$'000 $'000 $'000 $'000 $'000 $'000
Income
Gains on investments held at fair value - 184,360 184,360 - 35,757 35,757
Exchange (loss)/gain (72) 3,081 3,009 95 (1,647) (1,552)
Investment income 5,984 - 5,984 5,254 - 5,254
Deposit interest - - - 15 - 15
5,912 187,441 193,353 5,364 34,110 39,474
Expenses
Investment management fee 7,536 - 7,536 5,830 - 5,830
Custodian fees 331 - 331 304 - 304
Administration fees 278 - 278 248 - 248
Registrar and transfer agent fees 45 - 45 35 - 35
Directors' fees and expenses 141 - 141 119 - 119
Interest expense and bank charges 566 - 566 436 - 436
Transaction costs - 1,113 1,113 - - -
Insurance fees 43 - 43 68 - 68
Audit fee 30 - 30 26 - 26
Printing and advertising fees 30 - 30 46 - 46
Legal and professional fees 43 - 43 12 - 12
Listing fees 33 - 33 41 - 41
Miscellaneous expenses 7 - 7 7 - 7
9,083 1,113 10,196 7,172 - 7,172
(Loss)/Profit before tax (3,171) 186,328 183,157 (1,808) 34,110 32,302
Taxation (419) - (419) (368) - (368)
(Loss)/Profit for the year (3,590) 186,328 182,738 (2,176) 34,110 31,934
Return per ordinary share* $8.941 $1.563
*Based on the weighted average of 20,435,627 Ordinary Shares and the profit for the year noted above.
STATEMENT OF CHANGES IN EQUITY
For the year ended 30th April 2006
(Expressed in United States Dollars)
For the year ended 30th April 2006
Ordinary Share Share Revenue Capital
Capital Premium Reserve Reserve Total
$'000 $'000 $'000 $'000 $'000
Balance at 1st May 2005 (Restated) 204 192,650 (14,588) 245,631 423,897
Profit for the year - - 182,738 - 182,738
Transfer to capital reserve - - (186,328) 186,328 -
Balance at 30th April 2006 204 192,650 (18,178) 431,959 606,635
For the year ended 30th April 2005
(Restated)
Ordinary Share Share Revenue Capital
Capital Premium Reserve Reserve Total
$'000 $'000 $'000 $'000 $'000
Balance at 1st May 2004 204 192,650 (12,412) 211,521 391,963
Profit for the year - - 31,934 - 31,934
Transfer to capital reserve - - (34,110) 34,110 -
Balance at 30th April 2005 204 192,650 (14,588) 245,631 423,897
CASH FLOW STATEMENT
For the year ended 30th April 2006
(Expressed in United States Dollars)
2006 2005
$'000 $'000
Profit before tax (4,317) (2,575)
Investing Activities
Purchase of investments (260,435) (224,933)
Sale of investments 248,300 221,538
Net cash outflow from investing activities (12,135) (3,395)
Net cash outflow before financing (16,452) (5,970)
Cash Flows from financing activities
Interest paid (563) (434)
Net loans drawn-down 17,425 2,149
Net cash inflow from financing activities 16,862 1,715
Net decrease in cash and cash equivalents 410 (4,255)
Exchange movements (291) (1,552)
Movement in cash and cash equivalents in the year 119 (5,807)
Cash and cash equivalents at beginning of year 2,431 8,238
Cash and cash equivalents at end of year 2,550 2,431
Reconciliation of profit for year to net cash outflow
from operating activities
Net profit before taxation 183,157 32,302
Gains on investments held at fair value (184,360) (35,757)
Exchange (gain)/loss (3,009) 1,552
Interest expense 566 436
Increase in debtors and accrued income (486) (698)
Increase/(decrease) in creditors 234 (42)
Taxation (419) (368)
(4,317) (2,575)
ATLANTIS JAPAN GROWTH FUND LIMITED
CHAIRMAN'S STATEMENT
For the year ended 30th April 2006
OVERVIEW
The year to April 2006 saw the Japanese stock markets and the Company's Net
Asset Value (the 'NAV') again move higher. Following an initial period of
consolidation, the Japanese stock market entered a bullish uptrend from the
latter half of 2005 before running into turbulence soon after the start of 2006
and giving back some of its earlier gains. However, signs on the macroeconomic
and corporate earnings fronts remain encouraging. This served to bolster
investor confidence and push the market higher again from March.
Against this background, your Company has made quite a satisfactory yearly
return of 42.17% in US Dollar terms, the published NAV closing at $29.87 per
share on a mid market basis*, very near the all-time high and up 201.11% since
inception in May 1996. Performance during the year under review was above that
of the Tokyo First Section Index ('TOPIX') and returns were much above most
other major indices including the Tokyo Second Market and the Nikkei OTC.
The Company remains heavily weighted in small and medium-sized stocks,
reflecting our Adviser, Ed Merner's view that most of the best investment
opportunities are still found in this area of the market. Whilst this approach
can result in periodic underperformance, especially when larger or lower quality
stocks are performing well, we believe the Company's emphasis on individual
stock picking based on value and long-term earnings growth potential will
continue to provide better than average performance over the longer term.
*For accounting purposes, the NAV is now measured on a bid basis.
ATLANTIS JAPAN GROWTH FUND LIMITED
CHAIRMAN'S STATEMENT (continued)
For the year ended 30th April 2006
SHARE PRICE DISCOUNT
The discount or premium on the Company's shares represents the share price
relative to its NAV. When the Japanese market is doing well and overseas
investors are enthusiastic about Japan, better performing closed-end investment
trusts including the Atlantis Japan Growth Fund are bid up to a premium over
NAV. Conversely, when the stock prices are falling and the investors are
negative on the Japanese market outlook, it is not unusual to find most and
sometimes even all closed-ended investment trusts trading at a discount to NAV.
At the end of the year under review, the premium on the Company's shares stood
at 3.2%.
We are pleased to report that the Company shares have been trading at a premium
to Net Asset Value, and it has not been necessary to consider buying back shares
from the market. If the Company were to trade at a large discount to NAV, which
has occurred at times over the past 10 years, the Board would consider
repurchasing shares if the discount were to move out of line with other funds in
its peer group. As always, the Board will continue to monitor the situation and
take action as needed.
OUTLOOK
At this time the biggest threats to the Japanese markets still appear to be
external, including the possible knock-on effects from a slowing world economy,
rising world interest rates, and rising prices for oil and other commodities. In
Japan, we find overall conditions continuing to improve over the past year as
the economy has picked up support on a growing number of fronts. Especially
encouraging is the strength evident in private consumption spending after many
years of weakness. The Japanese corporate earnings picture has also remained
strong, exceeding consensus expectations in most cases, and this in turn has led
to expanded capital spending and hiring, thus providing further support for
economic growth.
We note that Japan's central bank judged the economy to be sufficiently strong
to end its long-standing quantitative easing this past March. This shift
provides a clear signal that even Japan's cautious policymakers are now
confident that economic conditions are returning to normal, with deflation and
the financial system crisis firmly behind. Whilst monetary policy can be
expected to tighten going forward, the central bank has indicated that it will
continue to move slowly, so domestic interest rates are likely to remain
relatively low. On the domestic political front, we find long-serving Prime
Minister Junichiro Koizumi preparing to step down this coming September.
However, in view of the continued high levels of public support for Koizumi and
his policies, it is doubtful that the incoming government will stray very far
from the current course.
Despite the gains in the stock market seen over the last year and since the low
of April 2003, the TOPIX is still 40% below its peak in December 1989 in Yen
terms. Your Board believes the improvements we are witnessing in the Japanese
economy and at Japanese corporations have not yet been fully reflected in share
prices, and we are confident that your Company is well positioned to take
advantage of investment opportunities over the coming years.
Timothy Guinness
Chairman
August 2006
ATLANTIS JAPAN GROWTH FUND LIMITED
INVESTMENT MANAGER'S REPORT
For the year ended 30th April 2006
PERFORMANCE
The Company had a good year, with most of its gains coming during the first nine
months, followed by a period of consolidation during the last three months. The
Japanese stock market was showing signs of being overbought by late 2005 and
this, along with the Live Door scandal in January, led to a major sell-off in
early 2006. Selling pressure was felt across the entire market but smaller
stocks were hit hardest, especially Internet and high PE stocks. However, by the
end of April the market was firmly off its February and March lows amid signs of
improving investor confidence.
For the year ended April 2006, the Company was up 42.17% compared with gains of
39.56% for the TOPIX, 29.90% for the Tokyo Second Market and 22.17% for the
Nikkei OTC index (all figures in US dollars). The Company beat the TOPIX, the
Tokyo Second Market and OTC market indices. Since inception in May 1996, the
Company is up 201.11%.
At the end of the year under review the Company had borrowings of Y6.5 billion
($57 million), an increase of Y2 billion since April 2005, and cash of Y290
million ($2.55 million), making the Company 9.4% leveraged on a net basis. The
Company has no foreign exchange hedges at this time and none are planned. Since
nearly all assets are in Yen, a strong Yen has a positive impact on the NAV in
US dollar terms and vice versa. At the end of the year under review, the Yen-
dollar rate stood at Y114.20 versus Y104.785 one year earlier, representing a
loss of 8.98%.
MARKET COMMENT
The Japanese economy continues to expand. The fiscal year ended March 2006 saw
rising industrial production, an increase in retail sales for the first time in
nine years, and a decline in the jobless rate to a seven-year low of 4.3%. The
current expansion is broad-based, with support from consumer spending, capital
investments, exports and housing.
There are of course some negatives, including the recent policy shift by Japan's
central bank, higher prices for oil and other commodities, mild inflation, a
possible slowdown in the world economy, and worries about rising worldwide
interest rates. We view the Bank of Japan's decision to end its quantitative
easing and allow interest rates to rise slowly as a sign that the Japanese
economy is now firmly on the recovery track and the banking crisis is behind us.
Despite higher oil prices, inflationary pressures remain subdued with consumer
prices up only slightly. The world economy still looks strong and we see steady
growth ahead as we do not think higher interest rates will pose a real problem
at this time. With China and most other Asian economies continuing to expand,
prospects for Japanese exports remain favourable. As for potential risks, our
concerns include a possible spike in oil prices, an avian flu pandemic or some
type of major terrorist event.
We see the Japanese economic outlook remaining favourable, with steady growth in
GDP and corporate earnings continuing over the next few years. With this
fostering a favourable investment climate, we thus look for stock prices to
continue moving slowly higher.
ATLANTIS JAPAN GROWTH FUND LIMITED
INVESTMENT MANAGER'S REPORT (continued)
For the year ended 30th April 2006
Major buyers of Japanese equities include overseas investors, local investment
trusts and domestic corporations, which are mainly buying back their own shares.
Individuals comprise a growing portion of daily trading and have been net buyers
from time to time, though during the past year were more often net sellers.
Among institutions, net sellers during the last year included banks, which were
mainly reducing cross-shareholdings and pension accounts. Buying by overseas
investors, local investment trusts and corporations will hopefully remain
positive during the year ahead. Individuals and pension accounts are difficult
to predict, but hopefully will be net buyers in at least some months. We look
for banks to remain net sellers as they continue to unwind cross-shareholdings.
Additions to supply from new listings will hopefully be offset to some extent by
buying related to corporate takeovers and mergers.
THE COMPANY
Our investment strategy remains unchanged and continues to form the basis of our
stock selection. As mentioned in previous reports, we stress value and long-term
earnings growth. Our value measures include projected Price Earnings Ratio
(PER), book value, profit margin trends, Return on Equity (ROE), balance sheet,
management, long-term record and free cash flow. We naturally consider prospects
for sales growth, but pay more attention to long-term earnings growth and
usually try to project out earnings over the next 3-5 years.
We aim to buy good companies at low projected PERs. As mentioned in previous
reports, we also are willing to have some exposure to cyclical growth companies
and recovery situations, especially when we are positive on the economy and
stock market. However, our primary focus remains on value and long-term earnings
growth.
At this time we are still finding the most value and growth potential among
medium-sized and smaller stocks, which in many cases are not yet followed by
brokers or major investment managers. Our strategy is to buy good companies at
good prices, especially considering projected earnings growth over the next
several years and then hold for the longer term. We have no interest in chasing
the latest market fads, nor are we much concerned about sector allocation or
short-term performance. We believe value and growth will win out over the longer
term.
How do we find attractive stocks? Screening is naturally important, but the key
is our active company-visiting program that includes revisiting companies
already in the portfolio. We are willing to visit any listed company in Japan,
from Hokkaido to Okinawa, as meeting with management is a critical part of our
evaluation process.
We do not limit ourselves to any particular size or type of company, and thus no
stock is too big or too small for us to consider. However, since we find many
attractive medium-sized and smaller stocks, we usually limit our exposure so as
not to account for too much of the market float of any one company and so no
single company accounts for a large portion of the portfolio. We know that some
companies will run into trouble and we want to be able to sell our position
should things go wrong. Such diversification is a risk control measure that has
worked well for us over the last ten years.
ATLANTIS JAPAN GROWTH FUND LIMITED
INVESTMENT MANAGER'S REPORT (continued)
For the year ended 30th April 2006
Our approach is perhaps 75-80% bottom-up, meaning we focus mainly on individual
stocks. However, we also take into consideration trends in the economy,
corporate earnings and the capital markets, i.e. top-down factors, as we know
well that the economy, interest rates, commodity prices and other macro-level
factors can also impact the businesses of the companies in the portfolio.
The portfolio currently contains 250 stocks, with the largest holdings usually
each accounting for 2-3% of the portfolio. (See list of top ten holdings on page
18 for details.) While we do not select companies by sector, we often find many
interesting companies in certain sub-sectors and thus may at times have heavy
exposure to areas we find especially attractive. For example, we have visited
and invested in a number of drugstore chains and continue to hold several
discount drugstore chain operators that we think can continue to grow earnings
over the years ahead.
We have little or no exposure to some sectors, which means there may be periods
when the Company underperforms. Thus, our strategy of focusing on long-term
growth can at times result in a high tracking error versus the major Japanese
stock indices.
As in past years, the Company remains fully invested. With Y6.5 billion in
borrowings and only Y290 million in cash, the Company is currently 9.4%
leveraged on a net basis. Being leveraged naturally helps performance when the
market and our stocks are going up, but has the opposite effect when the market
and our stocks are going down.
The Company has no exposure to warrants and currently holds no convertible
bonds, though we are always on the look out for attractive convertibles.
The Company's Investment Manager will continue to focus on value and growth,
that is, growth at a reasonable price.
Atlantis Fund Management (Guernsey) Limited
23rd May 2006
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