Half-year Report

RNS Number : 7921N

JPMorgan China Growth & Income PLC

22 May 2020

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

JPMORGAN CHINA GROWTH & INCOME PLC

UNAUDITED HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 31ST MARCH 2020

Legal Entity Identifier: 549300S8M91P5FYONY25

Information disclosed in accordance with DTR 4.2.2

The Directors announce the Company's results for the six months ended 31st March 2020.

CHAIRMAN'S STATEMENT

Performance

This has been one of the most exceptional investment periods any of us have witnessed, and despite the market volatility and economic uncertainty caused by the continuing Coronavirus epidemic, I am pleased to report that for the six months period ended 31st March 2020, the Company's total return on net assets of +8.2% (with net dividend reinvested) outperformed the benchmark, the MSCI China Index, which delivered +2.4% (in sterling terms). The total return to shareholders for this period was +14.5%.

The basis for this performance is explained in the Investment Managers' report which provides a detailed commentary on the portfolio positioning and the outlook for investing in China.

Loan Facility and Gearing

The Investment Managers have been given the flexibility by the Board to manage the gearing tactically within a range set by the Board of 10% net cash to 20% geared. During the period the Company's gearing ranged from 7.5% to 16.2%, ending the half year at 14.5% geared. As at 21st May 2020, the Company was 8.8% geared.

On 30th April 2020 the Company extended the £40 million loan facility with Scotiabank for a further three months at an increased margin of 100 bps. The Board will consider extending or renewing the facility in the coming months.

£38.7 million was drawn down on the Company's loan facility as at 31st March 2020. As at the date of this report, the facility was fully drawn (£40 million).

New Dividend Policy

At the Annual General Meeting in February 2020, shareholders approved an amendment to the Company's Articles of Association to allow the Company to distribute capital as income to enable the implementation of the revised dividend policy. The Company's name was also changed to reflect the change to the dividend policy.

On 1st April 2020, the Company announced that two quarterly distributions for the six-month period to 30th September 2020 would be paid on 1st June 2020 and 1st September 2020 based on the Company's NAV at close of business on 31st March 2020.

Going forward, shareholders are reminded that the target annual dividend of 4% of the Company's NAV on the last business day of the preceding financial year will be announced at the start of each financial year, to provide clarity to shareholders over the income stream they can expect during the following 12 months. This will be paid by way of four equal interim dividends on the first business day in March, June, September, and December.

Share Repurchases and Issues in the Period

At the time of writing, the Company's issued share capital consists of 72,703,188 Ordinary shares, excluding 5,211,777 shares held in Treasury. During the six months reporting period the Company did not repurchase or issue any shares.

Board of Directors

Following the appointment of Mrs Alexandra Mackesy in 2018, the Nomination Committee agreed that it was satisfied with this existing Board, which has four directors with a wealth of experience of investing in China and a wide and diverse skill set.

Outlook and Strategy

This half-year has demonstrated the volatility that is an inherent risk when investing in China, in large part driven by the continuing trade frictions between China and the U.S., overlaid with the Covid-19 pandemic. Our investment managers, supported by a well-resourced research team, continue to be able to find interesting companies to invest in that are consistent with the structural growth bias of the investment strategy. We remain confident that our investment strategy, combined with the depth of resources in our investment team, will enable us to deliver superior long-term capital growth.

John Misselbrook

Chairman     22nd May 2020

INVESTMENT MANAGERS' REPORT

Setting the scene

The investment landscape changed materially over the six months to 31st March 2020. A sluggish global economy and ongoing trade wrangles between China and the United States - the world's two economic powerhouses - challenged markets from the very start of the review period but nobody could have foreseen the devastating impact of the coronavirus (Covid-19) outbreak: this pandemic has dominated hearts and minds since the beginning of the year and remains an ongoing human and global health crisis at the time of writing.

The Company's review period began in similar fashion to the end of its previous financial year, with uncertainty surrounding the China-US trade negotiations still unnerving Chinese manufacturers and unsettling both domestic and global stock markets. There was a glimmer of hope towards the end of the year with seemingly positive steps forward, leading up to the signing of the Phase I trade deal in January. This bolstered sentiment, particularly as it coincided with a weaker US dollar and signs that Chinese government fiscal initiatives had started to stimulate domestic consumption. However, the escalation of the Covid-19 outbreak later in January crushed that optimism. Apart from the devastating human cost of this global pandemic, the economic repercussions of lockdowns and containment measures were stark and immediate, with share prices around the world tumbling into bear market territory. By March, investors were further spooked by the slump in the oil price, precipitated by the breakdown in OPEC and negotiations endeavouring to cut output. Interest rates fell further, and the U.S. dollar rose but with heightened volatility. The Chinese economy ended the period in turmoil, shrinking 6.8% in the first quarter of 2020, the first quarterly fall in more than four decades. Chinese stock markets slumped in February on the back of the developing crisis but went on to rally strongly in March, perhaps in anticipation that further Shanghai stimulative measures to boost liquidity would follow.

Against this extreme macro backdrop, our focus on higher-quality businesses in sectors where we see structural growth opportunities has proven to be a robust strategy and one that has, once again, delivered outperformance. Over the six months to 31st March 2020, the Company's return on net assets was +8.2%, outperforming its benchmark, the MSCI China Index which rose by a lesser 2.4% (on a total return, net basis, in sterling terms). The value of the Company's shares (including dividends) rose by +14.5% over the period.

Spotlight on stocks and sectors

Over the review period, both stock selection and sector allocation contributed to the Company's outperformance. In this section we highlight specific factors and stock stories of note.

Our overweight position in the Health Care and Information Technology (IT) sectors were the top contributing factors. At a stock level, Health Care names were among the top performers. Wuxi Biologics, Autobio Diagnostics and Shenzhen Mindray all performed well, as markets were optimistic about Covid-19-related potential business opportunities including antibody development, medical diagnostics, and medical equipment capital expenditure. Venus MedTech, a leading cardiovascular-focused medtech company, added to performance due to its strong growth outlook. In Technology, our software picks benefitted from surging data traffic and change in human behaviours with people moving their professional and educational workloads online. Kingdee, a leading enterprise management software company, and Glodon, the largest construction management software vendor in China, outperformed on strong corporate software and data centre demand outlook. In addition, electronic component manufacturer Luxshare Precision continued its strong momentum, thanks to an encouraging Apple product cycle and positive earnings surprise.

Elsewhere, some of our online business holdings, such as technology driven tutoring platform GSX Techedu, gaming company Netease and social e-commerce platform Pinduoduo aided performance as their businesses benefitted from increased online needs, including education, shopping and entertainment, amid Covid-19 containment measures in China. China Mobile, on the other hand, is a stock that we do not own and whose absence from our portfolio was beneficial as its share price was held back by question marks over its short-term outlook.

Property management companies Country Garden Services and Poly Property Development both performed strongly on their defensive business nature and solid results. Meanwhile we were underweight in the Energy sector, and energy giant CNOOC specifically, which helped relative performance.

In contrast, our selected investments in Consumer stocks, especially those exposed to global supply chains and travel, suffered from supply and demand disruptions caused by the outbreak. However, we remain confident in our favoured names as we believe that their structural growth trends should remain intact, in spite of the obvious short-term setbacks. We believe they will come back stronger as the economy slowly recovers and industry consolidation takes place.

We are underweight in Financials and this helped performance. Even our core positions in high quality names such as Ping An Bank and Ping An Insurance declined over the period due to the changed interest rate environment in the fallout of Covid-19.

The Company has a risk management policy in place that limits exposure to each individual company to 10% of the Company's assets, at time of investment. This resulted in forced underweight positions in both Tencent and Alibaba that detracted from overall performance relative to the benchmark; both businesses proved resilient during the outbreak and remain preferred stocks.

Positioning the portfolio for future gains

The portfolio continues to seek out higher-quality businesses in sectors where we see structural growth opportunities, namely in the Consumer, Health Care and IT sectors; we remain confident that secular growth trends here will not be derailed by the Covid-19 pandemic. Short-term disruptions were inevitable in both domestic and global demand and supply. As we write, domestic supply is gradually coming back online, with shops and factories running at close to full capacity, although it will still take time for consumer confidence and demand to recover. However, more importantly, the crisis has accelerated some long-term structural trends, such as increased spending on software and cloud computing as well as on health care, which reinforces the investment thesis behind a broad range of our existing investments.

Notable Health Care positions include Wuxi Biologics and Jiangsu Hengrui Medicine. During the review period, we initiated positions in a few medical diagnostic and vaccine related companies, namely Shenzhen Mindray, Guangzhou Kingmed Diagnostics, and Chongqing Zhifei; we believe that they should all be well-placed as China expands testing, diagnostics and preventive treatments. On the other hand, we exited CSPC Pharma due to its less competitive drug pipeline.

Within the Technology arena, we have Software as a Service (SaaS) providers Kingdee International Software and Glodon amongst our preferred software names, adding to both over the review period. Sunny Optical remains our preferred hardware name. We initiated holdings in cloud service provider Kingsoft and cloud-centric semiconductor provider Aspeed. These purchases were partly funded by profit taking from IT and services business Beijing Thunisoft, network security provider Venustech, and smartphone supplier Luxshare Precision.

In the Consumer space, e-commerce platforms Alibaba and Pinduoduo are our top holdings, along with social and online entertainment names Tencent, Netease, and iQiyi. We added to all but Alibaba and Tencent over the period. We also topped up online dating app Momo, as well as selected offline retail and travel-related names, such as sportswear retailer ANTA Sports and budget hotel chain operator Huazhu, whose share prices corrected meaningfully amid the pandemic concerns yet where the long term outlook remain solid. Elsewhere, we exited Spring Airlines due to the deteriorating outlook for its overseas routes even prior to the virus outbreak. We also exited outdoor advertising media operator Focus Media due to competitiveness concerns and a slowdown in its marketplace.

We increased gearing over the review period, in order to take on investment opportunities created by market correction and volatility.

Our approach to ESG engagement

Our investment philosophy centres on identifying quality companies with sustainable growth potential. We believe strongly that Environmental, Social and Governance (ESG) considerations (particularly Governance) need to be a foundation of any investment process supporting long-term investing and that corporate policies at odds with ESG criteria are not sustainable in the long run. We believe that integration of these factors is critical to successful investing across our markets; they are a fundamental part of our research process.

Outlook - our focus on delivering the Company's long-term strategic goals

The Covid-19 crisis remains fluid and its repercussions present an enormous challenge: short-term disruption to both domestic consumption and the global supply chain is unavoidable. However, we take comfort in the Chinese government's strong measures to contain the outbreak as well as its proactive countercyclical economic policies to mitigate the negative impact on consumption and employment. At the time of writing, the outbreak seems more contained domestically, but the main concerns are how long the virus will persist, how long the inevitable global recession will last and what that will do for end demand.

With 'phase two' trade talks grinding on, and policymakers looking to provide further support, we expect this backdrop will ultimately provide support for Chinese equities. At the time of writing, domestic markets have rallied from their February lows, but we believe they remain at a reasonable level for long-term investors.

Whilst mindful of the short-term challenges and economic worries we face, we remain focused on delivering the Company's long-term strategic goals. We continue to seek out 'New China' companies and sectors that are capitalising on the transition of the country to a more consumer-driven economy. That means identifying quality businesses in sectors where we see structural growth opportunities, namely Health Care (especially services, outsourcing and diagnostics), Technology (especially secular areas in software and semiconductors) and certain investments in the Consumer Staples/Discretionary sectors (on a long-term view). Our strong focus on research capabilities and being on the ground in mainland China is a significant advantage for us in identifying suitable higher-quality businesses.

Over the review period, we have once again demonstrated our ability to deliver positive returns in the most challenging of circumstances. The remainder of the Company's financial year will inevitably throw up further short-term uncertainties and roadblocks but the long-term case for investing in China remains intact, and we will continue with our proven and disciplined approach.

Howard Wang

Rebecca Jiang

Shumin Huang

Investment Team   22nd May 2020

INTERIM MANAGEMENT REPORT

The Company is required to make the following disclosures in its half year report:

Principal and Emerging Risks and Uncertainties

During 2020, the emergence of the virus COVID-19 (coronavirus) has created significant uncertainty for markets, and therefore risk to the value of investments and volatility. Other than this, the principal risks and uncertainties faced by the Company fall into the following broad categories: geopolitical; investment underperformance; strategy and business management; loss of Investment Team or Investment Manager; share price discount; governance; legal and regulatory; corporate governance and shareholder relations; operational risk and cybercrime; and financial. Information on each of these areas is given in the Business Review within the Annual Report and Financial Statements for the year ended 30th September 2019.

Related Parties Transactions

During the first six months of the current financial year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company during the period.

Going Concern

The Directors believe, having considered the Company's investment objectives, risk management policies, capital management policies and procedures, nature of the portfolio and expenditure projections, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future and, more specifically, that there are no material uncertainties pertaining to the Company that would prevent its ability to continue in such operational existence for at least twelve months from the date of the approval of this half yearly financial report. For these reasons, they consider there is reasonable evidence to continue to adopt the going concern basis in preparing the accounts.

Directors' Responsibilities

The Board of Directors confirms that, to the best of its knowledge:

(i)  the condensed set of financial statements contained within the half yearly financial report has been prepared in accordance with FRS 104 'Interim Financial Reporting' and gives a true and fair view of the state of affairs of the Company and of the assets, liabilities, financial position and net return of the Company, as at 31st March 2020, as required by the UK Listing Authority Disclosure and Transparency Rule ('DTR') 4.2.4R; and

(ii)  the interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R of the UK Listing Authority Disclosure and Transparency Rules.

In order to provide these confirmations, and in preparing these financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;

•   make judgements and accounting 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;

and the Directors confirm that they have done so.

For and on behalf of the Board

John Misselbrook

Chairman     22nd May 2020

STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 31ST MARCH 2020

	(Unaudited)			(Unaudited)			(Audited)
	Six months ended			Six months ended			Year ended
	31st March 2020			31st March 2019			30th September 2019
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held
at fair value through
profit or loss	-	22,325	22,325	-	19,410	19,410	-	36,566	36,566
Net foreign currency losses	-	(221)	(221)	-	(76)	(76)	-	(1,128)	(1,128)
Income from investments	355	-	355	93	-	93	2,836	-	2,836
Interest receivable and similar
income	90	-	90	324	-	324	469	-	469
Gross return	445	22,104	22,549	417	19,334	19,751	3,305	35,438	38,743
Management fee	(299)	(897)	(1,196)	(306)	(918)	(1,224)	(575)	(1,726)	(2,301)
Other administrative expenses	(224)	-	(224)	(266)	-	(266)	(507)	-	(507)
Net (loss)/return before
finance costs and taxation	(78)	21,207	21,129	(155)	18,416	18,261	2,223	33,712	35,935
Finance costs	(99)	(293)	(392)	(164)	(492)	(656)	(268)	(804)	(1,072)
Net (loss)/return before
taxation	(177)	20,914	20,737	(319)	17,924	17,605	1,955	32,908	34,863
Taxation	-	-	-	(1)	-	(1)	(167)	-	(167)
Net (loss)/return after
taxation	(177)	20,914	20,737	(320)	17,924	17,604	1,788	32,908	34,696
(Loss)/return
per share (note 3)	(0.24)p	28.77p	28.53p	(0.44)p	24.65p	24.21p	2.46p	45.26p	47.72p

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued

in the period.

The 'Total' column of this statement is the profit and loss account of the Company and the 'Revenue' and 'Capital' columns represent

supplementary information prepared under guidance issued by the Association of Investment Companies.

The net (loss)/return after taxation represents the (loss)/return for the period and also the total comprehensive income.

STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 31ST MARCH 2020

	Called up		Exercised	Capital
	share	Share	warrant	redemption	Other	Capital	Revenue
	capital	premium	reserve	reserve	reserve	reserves	reserve 1	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Six months ended 31st March 2020 (Unaudited)
At 30th September 2019	19,481	13,321	3	581	37,392	179,059	3,276	253,113
Net return/(loss)	-	-	-	-	-	20,914	(177)	20,737
Dividend paid in the period (note 4)	-	-	-	-	-	-	(1,818)	(1,818)
At 31st March 2020	19,481	13,321	3	581	37,392	199,973	1,281	272,032
Six months ended 31st March 2019 (Unaudited)
At 30th September 2018	19,481	13,321	3	581	37,392	146,151	4,033	220,962
Net return/(loss)	-	-	-	-	-	17,924	(320)	17,604
Dividend paid in the period (note 4)	-	-	-	-	-	-	(2,545)	(2,545)
At 31st March 2019	19,481	13,321	3	581	37,392	164,075	1,168	236,021
Year ended 30th September 2019 (Audited)
At 30th September 2018	19,481	13,321	3	581	37,392	146,151	4,033	220,962
Net return	-	-	-	-	-	32,908	1,788	34,696
Dividends paid in the year (note 4)	-	-	-	-	-	-	(2,545)	(2,545)
At 30th September 2019	19,481	13,321	3	581	37,392	179,059	3,276	253,113

¹ This reserve forms the distributable reserves of the Company and may be used to fund distribution to investors.

STATEMENT OF FINANCIAL POSITION

AT 31ST MARCH 2020

	(Unaudited)	(Unaudited)	(Audited)
	31st March 2020	31st March 2019	30th September 2019
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	311,495	258,540	278,020
Current assets
Debtors	54	2,729	363
Cash and cash equivalents	-	10,716	3,134
	54	13,445	3,497
Current liabilities
Creditors: amounts falling due within one year1	(39,517)	(35,964)	(28,404)
Net current liabilities	(39,463)	(22,519)	(24,907)
Total assets less current liabilities	272,032	236,021	253,113
Net assets	272,032	236,021	253,113
Capital and reserves
Called up share capital	19,481	19,481	19,481
Share premium	13,321	13,321	13,321
Exercised warrant reserve	3	3	3
Capital redemption reserve	581	581	581
Other reserve	37,392	37,392	37,392
Capital reserves	199,973	164,075	179,059
Revenue reserve	1,281	1,168	3,276
Total shareholders' funds	272,032	236,021	253,113
Net asset value per share (note 5)	374.2p	324.6p	348.1p

¹ As at 31st March 2020, £38.7 million (31st March 2019: £34.5 million; 30th September 2019: £27.2 million) was drawn down from the loan facility.

STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED 31ST MARCH 2020

	(Unaudited)	(Unaudited)	(Audited)
	31st March 2020	31st March 2019	30th September 2019
	£'000	£'000	£'000
Net cash outflow from operations before dividends
and interest	(1,309)	(1,282)	(2,176)
Dividends received	569	421	2,695
Interest received	11	45	100
Interest paid	(382)	(685)	(1,127)
Net cash outflow from operating activities	(1,111)	(1,501)	(508)
Purchases of investments	(65,936)	(36,404)	(101,831)
Sales of investments	53,917	56,294	121,821
Settlement of foreign currency contracts	30	(25)	(54)
Net cash (outflow)/inflow from investing activities	(11,989)	19,865	19,936
Dividends paid	(1,818)	(2,545)	(2,545)
Drawdown of bank loan	11,186	-	4,121
Repayment of bank loan	-	(12,289)	(25,058)
Net cash inflow/(outflow) from financing activities	9,368	(14,834)	(23,482)
(Decrease)/increase in cash and cash equivalents	(3,732)	3,530	(4,054)
Cash and cash equivalents at start of period	3,134	7,174	7,174
Exchange movements	32	12	14
Cash and cash equivalents at end of period	(566)	10,716	3,134
(Decrease)/increase in cash and cash equivalents	(3,732)	3,530	(4,054)
Cash and cash equivalents consist of:
Cash and short term deposits	(566)	2,121	3,134
Cash held in JPMorgan US Dollar Liquidity Fund	-	8,595	-
Total	(566)	10,716	3,134

NOTES TO THE FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 31ST MARCH 2020

1.  Financial statements

The information contained within the financial statements in this half year report has not been audited or reviewed by the Company's auditors.

The figures and financial information for the year ended 30th September 2019 are extracted from the latest published financial statements of the Company and do not constitute statutory accounts for that year. Those financial statements have been delivered to the Registrar of Companies and included the report of the auditors which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

2.  Accounting policies

The financial statements are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ('UK GAAP') including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the Association of Investment Companies in October 2019.

FRS 104, 'Interim Financial Reporting', issued by the Financial Reporting Council ('FRC') in March 2015, has been applied in preparing this condensed set of financial statements for the six months ended 31st March 2020.

All of the Company's operations are of a continuing nature.

The accounting policies applied to this condensed set of financial statements are consistent with those applied in the financial statements for the year ended 30th September 2019.

3.  (Loss)/return per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st March 2020	31st March 2019	30th September 2019
	£'000	£'000	£'000
(Loss)/Return per share is based on the following:
Revenue (loss)/return	(177)	(320)	1,788
Capital return	20,914	17,924	32,908
Total return	20,737	17,604	34,696
Weighted average number of shares
in issue during the period/year	72,703,188	72,703,188	72,703,188
Revenue (loss)/return per share	(0.24)p	(0.44)p	2.46p
Capital return per share	28.77p	24.65p	45.26p
Total return per share	28.53p	24.21p	47.72p

4.   Dividend paid

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st March 2020	31st March 2019	30th September 2019
	£'000	£'000	£'000
2019 final dividend of 2.5p (2018: 3.5p)	1,818	2,545	2,545

A first quarterly dividend of 3.5p has been declared for payment on 1st June 2020 for the financial year ending 30th September 2020.

Dividend payments in excess of the revenue amount will be paid out of the Company's distributable capital reserve.

5.  Net asset value per share

	(Unaudited)	(Unaudited)	(Audited)
	Six months ended	Six months ended	Year ended
	31st March 2020	31st March 2019	30th September 2019
Net assets (£'000)	272,032	236,021	253,113
Number of shares in issue	72,703,188	72,703,188	72,703,188
Net asset value per share	374.2p	324.6p	348.1p

JPMORGAN FUNDS LIMITED

22 May 2020

For further information, please contact:

Lucy Dina

For and on behalf of

JPMorgan Funds Limited

020 7742 4000

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

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

ENDS

A copy of the half year will be submitted to the National Storage Mechanism and will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism

The half year will also shortly be available on the Company's website at www.jpmchinagrowthandincome.co.uk where up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.

 

END

 

 

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