Company Announcements

ASIA DRAGON TRUST PLC

LEI: 549300W4KB0D75D1N730

Capturing growth from world-class Asian companies

21 April 2022

HALF YEARLY FINANCIAL REPORT FOR THE SIX MONTHS ENDED 28 FEBRUARY 2022

Highlights

-     An uncertain economic backdrop resulted in a turbulent six month period for Asian markets.

-     Over the six month period, the Company delivered a net asset value ("NAV") total return of -7.7% in sterling terms, outperforming the -8.1% fall in the benchmark, the MSCI AC Asia Pacific (ex Japan) Index (sterling adjusted) total return (the "Index").

-     Longer-term performance is competitive. The Company's NAV has continued to outperform the Index over 3 and 5 years.  Over five years to 28 February 2022, on a total return basis, the NAV increased by 54.5% compared a return of 38.5% from the Index.

-     The portfolio holdings performed well due to their high-quality franchises and solid balance sheets. Many of them are beneficiaries of long-term structural trends that have been reinforced and hastened by the pandemic.

-     Over the long term, the region continued to offer good opportunities. Asia remains the world's fastest growing region, underpinned by powerful structural trends such as increasing affluence, rising urbanisation and growing technology adoption.

-     Quality companies that can harness these structural trends, such as those held by the Company, are well positioned to reap sustainable returns.

Investment Objective

Asia Dragon Trust plc's objective is to achieve long-term capital growth through investment in Asia, with the exception of Japan and Australasia.   Investments are made primarily in stock markets in the region, principally in large companies.  When appropriate, the Company will utilise gearing to maximise long term returns.

For further information please contact:-

Adrian Lim

Investment Director

abrdn Asia Limited                                                                                                                   0065 6395 2700

Pruksa Iamthongthong

Investment Director

abrdn Asia Limited                                                                                                                   0065 6395 2700

Performance Highlights
 

Financial Calendar and Highlights

Financial Calendar

Financial Highlights

^B Total return numbers shown under Performance Highlights.

Chairman's Statement

Results

The six months under review was a turbulent period for Asian, indeed global, stock markets with the dominant themes being the US Federal Reserve's ("Fed") increase in interest rates, China's regulatory crackdown across a broad swathe of sectors, the Russian invasion of Ukraine and the continuing impact of Covid-19. Against this uncertain backdrop, the Company's net asset value ("NAV") fell by 7.7%, outperforming the Company's benchmark, the MSCI All-Country Asia ex Japan Index (the "Benchmark"), which fell by 8.1% (both in total return terms).  The share price decreased by 6.3% to 28 February 2022, as the discount to NAV per share narrowed to 8.4%.

Overview

Most Asian markets closed lower over the six months as a resurgence of Covid-19 infections, triggered by the outbreak of the Omicron variant, led to the re-imposition of lockdown measures that restricted mobility and weighed on economies across Asia. 

There was also mounting concern over rising interest rates as the Fed started to tighten its monetary policy amid signs of rising inflation domestically. Investors worried that this would have implications elsewhere, including in Asia, as rising rates would result in higher borrowing costs for companies and consumers, and in turn dampen corporate investment and consumer spending. However, most Asian policymakers have monetary and fiscal room for manoeuvre to combat any serious growth slowdown as a result of prudent policies.

Meanwhile, tensions escalated on Ukraine's borders, culminating in the Russian invasion. Concerns that the hostilities would disrupt global oil supplies drove the Brent crude oil price above US$100 per barrel for the first time in eight years. Sharp rises in commodity prices, ranging from metals to food, led to commodity-exporting nations, such as Indonesia and Malaysia, broadly outperforming. Conversely, net importers of oil such as India, lagged the benchmark.

China was the worst performing market over the period, as companies faced a raft of challenges, including a broadening regulatory crackdown and disruptions to economic activity due to the zero-Covid policy and emergence of the Omicron variant. In addition, government efforts to curb excessive debt in the real estate sector led to default stress, shelved projects and a major property market slowdown. However, in contrast to the trend that saw major central banks around the world raise interest rates, the People's Bank of China cut several key lending rates to support the economy's return to healthier and more stable growth, the top priority for central government in 2022.

Performance and Portfolio Activity

Our positioning in China  was the main source of outperformance against the Benchmark during the period. The Chinese companies to which the Company has exposure have in general shown resilience despite the challenging operating environment.  

Among the top contributors was Kweichow Moutai, which benefited from easing concerns over price regulation for producers and distillers of the Chinese spirit Baijiu, and the implementation of well-received market-driven initiatives. Chacha Food, a leading nut-based snack company, performed well on the back of price rises and strong shipments. The portfolio's bias towards high-quality companies was rewarded by the strong performance of our largest holding, China Resources Land ("CR Land"), during the period. Despite substantial challenges in the real estate sector, CR Land, posted gains as investors gravitated towards higher-quality property companies.

The Investment Manager remains convinced of China's long-term structural growth prospects. In such a period of extreme volatility, the opportunity was taken to add some quality mainland companies and enhance the China mix of the portfolio. New additions included electric vehicle ("EV") battery maker Contemporary Amperex, which offers exposure to the growing mainland demand for EVs. It has a dominant market share with an extensive local supply chain and is a global leader in battery and energy-storage systems.   Vehicle electrification and the increased adoption of renewable energy will impact significantly China's ability to meet its net zero emission target by 2060.

Another new holding was Shenzhen Inovance, a leader in China's industrial automation sector, which is expected to be a key beneficiary of the increasing adoption of automation in China. Shenzhen Inovance has a focus on clean technology opportunities through its industrial robotics and process control products. Automation is an important piece of the broader energy transition effort as equipment and machinery upgrades increase energy efficiency in the manufacturing sector, which is a significant emitter of greenhouse gasses.

The Investment Manager believes that the current volatility presents an opportunity to invest in good companies in structurally growing sectors as their share prices have fallen to more attractive levels. Some examples of such companies are in the area of information technology.  Naura Technology's technology heritage and research and development strengths position it well to be at the forefront of China's semiconductor equipment development. Taiwan's Andes Technology is among the top three companies globally for RISC-V, an open-source instruction set architecture ("ISA") that defines the way software talks to a processor. The Investment Manager sees RISC-V gaining market share because of its simpler ISA and superior power-performance attributes. The Company also opened a position in Yonyou Network Technology, the largest enterprise resource planning ("ERP") provider in China.

In addition, the Investment Manager is seeing equivalent opportunities beyond China. As a result of increased choice in other markets such as India, the portfolio now has greater exposure to the Indian digital sector after participating in two initial public offers and building positions during the subsequent sell offs. FSN E-Commerce Ventures is a beauty and fashion e-commerce company, which is considered well positioned to meet aspirational demand in India. PB Fintech is the leading online insurance platform in India that enjoys a dominant market share. Although it underperformed over the period, partly due to the rotation from growth to value stocks, the company should deliver  healthy long-term growth, underpinned by increasing insurance penetration and financial literacy in its domestic market.

Over the period, the Company benefited from exposure to cyclically sensitive companies in the countries where the economic recovery from the pandemic has lagged, such as Ayala Land in the Philippines. The positioning within cyclical financial holdings also proved positive, especially in South-East Asia. Singaporean banks DBS Group and Oversea-Chinese Banking Corp performed well, driven by positive earnings and the resumption of pre-pandemic dividend payouts, while Indonesia-based Bank Central Asia and Thailand's Kasikornbank also contributed to performance. All should benefit from rising interest rates and the re-opening of South-East Asian economies as access to vaccines improve. More negatively, Housing Development Finance Corp, the leading housing finance company in India, detracted despite the recovery in mortgage demand. Subsequently, since the period end the company and HDFC Bank announced their planned merger leading to a sharp rise in the share price of both entities.  While subject to regulatory approvals and other customary closing conditions, the transaction will be the largest in India by value and will create one of the world's largest financial services companies.

In view of opportunities brought about by the re-opening of economies, the Investment Manager increased the Company's exposure to cyclical stocks, introducing India's largest passenger vehicle company, Maruti Suzuki, and Thailand's Kasikornbank. Maruti Suzuki is a subsidiary of Japan's Suzuki and boasts a dominant market share in the four-wheeler market in India. Kasikornbank is a leader in digitalisation and technology in the Thai market.  The company has a superior record in managing environmental, social and governance factors versus its domestic peers and is expected to benefit from a reopening of the country.

Revenue Account

For the six months ended 28 February 2022, the revenue account recorded a return on ordinary activities after taxation of £1,198,000, representing 0.97p per share, compared with a return of £2,861,000 for the six months to 28 February 2021 (2.28p per share). 

The bulk of this fall in revenue was due to the large Samsung special dividend received in the same period last year (worth approximately £1.5 million) which, as expected, was not repeated this year.

Events during the Period

At the Company's Annual General Meeting held on 15 December 2021, all resolutions, including the continuation vote and the introduction of five-yearly performance-related conditional tender offers, in addition to the regular continuation votes, were passed.  The first period during which the Company's performance against the Benchmark will be assessed for the purposes of implementing the first conditional tender offer commenced on 1 September 2021 and will last until 31 August 2026.   Subsequent conditional tender offers will be assessed every five years thereafter.

The Board

As part of its succession plans, the Board was pleased to welcome Matthew Dobbs as a non-executive Director with effect from 1 February 2022.  Mr Dobbs is a renowned Asian and Small Companies investment expert and brings a wealth of knowledge and experience to the Board.   

Gearing

The Board believes that the sensible use of modest financial gearing should enhance returns to shareholders over the longer term.  At the beginning of the financial year the Company had in place a £75 million three year loan facility, of which £25 million was fixed and fully drawn down with a further £40 million of the revolving £50 million facility drawn down.  The facility will expire in July 2022 and the Board will be considering the options for a replacement facility in advance of its expiry.  Should the Board decide not to renew the facility any outstanding borrowing would be repaid through the proceeds of equity sales as required.

At 28 February 2022, £40 million of the revolving facility and £25 million of the fixed loan facility were drawn down and the net gearing position was 9.8%, compared to 7.9% at the end of August 2021.

The Investment Manager continues to monitor closely gearing levels and bank covenants. As at 20 April 2022 the Company's net assets stood at £576.9 million and net gearing was 10.5%.  These levels remain comfortably within the covenant limits.

Discount and Share Buybacks

The discount level of the Company's shares is closely monitored by the Board and Investment Manager and the Board seeks to manage the discount in line with the peer group.  During the six months to 28 February 2022, 2,504,682 shares were bought back and held in treasury.  Since 28 February 2022, a further 851,096 shares have been bought back into treasury.

Outlook

The horrific events unfolding in Ukraine are a stark reminder of the uncertain times in which we live. From an economic perspective, rising inflation and an increasingly hawkish Fed were already of concern before the escalation of Russia-Ukraine hostilities, and a protracted conflict risks intensifying this. Covid-19 also remains a threat and, although Omicron appears to be less virulent than previous variants, further flare-ups of the virus and mutations cannot be ruled out. Nevertheless, the continued increase in vaccinations across Asia is encouraging and positive for consumption, corporates and the wider economy.

China's economy remains under pressure due to tightening regulation, the common-prosperity policy, the zero-Covid strategy and strained relations with the US. However, Beijing is implementing measures to stimulate a recovery and return to a stable growth track. The Investment Manager believes that the geopolitical situation will accelerate China's drive for self-sufficiency, which will provide plenty of investment opportunities across diverse sectors such as consumption, technology and green energy.

The Board and the Investment Manager are acutely aware of the challenges facing investors and will monitor developments closely, particularly the second-order effects on inflation and global growth prospects. Further, the current market environment underlines the importance of maintaining an active approach to investing, with a strong focus on holding high-quality businesses with strong balance sheets that can withstand the effects of inflation through strong pricing power.

In addition, the Board remains positive on the long-term prospects for Asia. It remains the world's fastest-growing region, underpinned by powerful structural trends such as increasing affluence, rising urbanisation and growing technology adoption. This offers a plethora of investment opportunities and valuations in the region look appealing versus global and US equities despite higher growth prospects in Asia.

James Will
Chairman
21 April 2022

Interim Management Report and Directors' Responsibility Statement

Principal Risks and Uncertainties

There are a number of risks which, if realised, could have a material adverse effect on the Company and its financial position, performance and prospects. The Board has in place a robust process to identify, assess and monitor the principal risks and uncertainties facing the Company and to identify and evaluate newly emerging risks.  A summary of the principal risks and uncertainties facing the Company is summarised below under the following headings:

-     Investment Performance

-     Concentration Risk

-     Major market event or geo-political risk

-     Resource

-     Reliance on Third Party Service Providers

-     Discount volatility

-     Gearing

-     Regulatory

Details of these risks and a description of the mitigating actions which the Company has taken are provided in detail on pages 14 and 15 of the 2021 Annual Report. 

In addition to these risks, there are also a large number of international political and economic uncertainties which could have an impact on the performance of Asian markets and the Board is monitoring closely the current geo-political risks, market volatility and uncertainty associated with Russia's invasion of Ukraine. There also continues to be a number of contingent risks associated with Covid-19 which the Board monitors, that might impact the Company and the markets in which it operates.

The Board is also mindful of the risks arising from emerging environmental, social and governance ("ESG") challenges and climate change.  The Board continues to monitor, through the Investment Manager, the potential risk that investee companies may fail to keep pace with ESG and climate change developments.

In the view of the Board, in all other respects, the principal risks and uncertainties have not changed materially during the six months to 28 February 2022.  The Board continues to monitor the risk environment and does not expect the risks facing the Company to change materially in the second half of the financial year ended 31 August 2022.

Going Concern

The Directors have undertaken a rigorous review of the Company's ability to continue as a going concern.  The Company's assets consist substantially of equity shares in companies listed on recognised stock exchanges and in most circumstances are realisable within a short timescale.

The Company has a three year loan facility of £75 million in place until July 2022.  The Board has set limits for borrowing and regularly monitors the Company's covenant compliance and gearing levels and is satisfied that there is sufficient headroom in place and flexibility if required. A replacement option will be sought in advance of the expiry of the facility in July 2022, or, should the Board decide not to renew this facility, any outstanding borrowing would be repaid through the proceeds of equity sales as required. 

The Board has considered the impact of Covid-19 and believes that this will have a limited financial impact on the Company's operational resources and existence.  The Company's portfolio comprises entirely "Level One" assets (listed on a recognisable exchange and realisable within a short timescale), and the Company employs a relatively low level of gearing.  The Board has been regularly updated by the Investment Manager on the resilience of the Investment Manager's systems as well as those of the other key third party service providers and is satisfied that suitable business continuity plans are in place and have proved effective throughout the course of the pandemic.

The Directors are mindful of the principal risks and uncertainties disclosed above and, having reviewed forecasts detailing revenue and liabilities, they believe that the Company has adequate financial resources to continue its operational existence for the foreseeable future and for at least twelve months from the date of this Report.  Accordingly, they continue to adopt the going concern basis of accounting in preparing the financial statements. 

Related Party Disclosures and Transactions with the Alternative Investment Fund Manager and Investment Manager

Aberdeen Standard Fund Managers Limited ("ASFML") has been appointed as the Company's Alternative Investment Fund Manager ("AIFM").

ASFML has (with the Company's consent) delegated certain portfolio and risk management services, and other ancillary services, to Aberdeen Asset Managers Limited and abrdn Asia Limited which are regarded as related parties under the UKLA's Listing Rules. Details of the fees payable to ASFML are set out in note 13 to the condensed financial statements.

Responsibility Statement of the Directors in respect of the Half-Yearly Financial Report

The Disclosure Guidance and Transparency Rules of the UK Listing Authority require the Directors to confirm their responsibilities in relation to the preparation and publication of the Interim Management Report and Financial Statements.

The Directors confirm to the best of their knowledge that:

-        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 give a true and fair view of the assets, liabilities, financial position and return of the Company for the period ended 28 February 2022; and;

-        the Interim Management Report, together with the Chairman's Statement includes a fair review of the information required by:

a)      DTR 4.2.7R of the Disclosure Guidance and Transparency Rules , being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

b)      DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Company during that period; and any changes in the related party transactions described in the last Annual Report that could do so.

The Half-Yearly Financial Report was approved by the Board and the above Directors' Responsibility Statement was signed on its behalf by the Chairman.

For Asia Dragon Trust plc,
James Will
Chairman
21 April 2022

Ten Largest Investments

As at 28 February 2022

Investment Portfolio

 Our Investment Manager's Case Studies

Budweiser APAC (Hong Kong)

What does the company do?

Budweiser APAC ("Bud APAC") is the market leading beer business in the Asia Pacific by retail sales value. It is the Asian arm of Anheuser-Busch InBev, the world's largest beer company.

Why do we like the investment?

Bud APAC is the most profitable brewer in the Asia Pacific, due to its leadership in the premium and super premium segments. It has a strong portfolio of globally-recognised brands including the flagship Budweiser brand, and also Corona, Stella Artois, Hoegaarden and Becks. In addition, Bud APAC has a portfolio of local brands including Harbin in China and Cass in South Korea. Its overall portfolio comprises more than 50 brands.

The business is consistently and comfortably cash flow positive. This gives Bud APAC a competitive advantage compared to its peers, enabling investment in commercialisation and promotional activities to extend its market lead. We also see Bud APAC as best positioned to capitalise on continued premiumisation in China, with exciting growth prospects for super premium beer in the mainland over the medium to long-term.

What is our key area of engagement?

We have engaged extensively with Bud APAC on its strong credentials in respect of water stress in the environment and its many initiatives in this area whilst also working with MSCI to assist it in recognising Bud APAC's substantial work in this area.

What is the result?

MSCI upgraded its ESG rating of Bud APAC from BBB to A in December 2021. The rating agency highlighted lower water risk exposure as a key driver for this upgrade, the second in the two years since Bud APAC's listing.  Bud APAC achieved a 17% reduction in its water usage in 2020 compared to 2017. It also has a clear target for its breweries in high-risk sites to reach a water efficiency of 2.0 per hectolitre of production by 2025, compared to the overall level of 2.5 in 2020.

MSCI also noted that the company has begun linking executive pay with sustainability performance, including occupational safety. Aside from training farmers on sustainable farming, Bud APAC has begun soil testing at some parts of the agricultural supply chain, aimed at sequestering carbon. On the community front, Bud APAC is also taking seriously its responsibility to promote responsible drinking. It has conducted "Smart Drinking" marketing campaigns across its APAC markets, provided consumers with high-quality no-alcohol and low-alcohol beers and improved alcohol literacy through guidance labelling of its beers.  

AIA Group (Hong Kong)

What does the company do?

AIA is the largest independent publicly listed pan-Asian life insurance group offering a wide range of products. Present in 18 markets, AIA is well positioned to take advantage of the growing affluence of a rising middle class across the region.

Why do we like the investment?

One of AIA's key competitive advantages is its premier agency strategy to target the affluent, with best-in-class agents who are more extensively trained than those of AIA's domestic peers. The group's management is stable, with a wealth of experience, and they have successfully executed AIA's strategy over the years. 

While its new business sales were affected by Covid-19, AIA's rapid adoption of digital tools helped mitigate the impact. AIA noted that this focus on using digital to transform AIA into a simpler, faster and more connected organisation is driving higher distribution productivity, delivering greater efficiency and improving customer experience. In 2021, for instance, over 95% of policies bought were issued electronically. AIA has over 9.2 million registered customers. Around 75% of claims were submitted digitally, with 100% of claims paid digitally. Last year, the group's value of new business grew by 18% to US$3.4 billion, led by its China business.

The Chinese life insurance market remains significantly underpenetrated, offering tremendous growth potential for AIA and the group is making good progress in establishing and growing its premier agency strategy in new geographies. More broadly, AIA is well positioned to benefit from structural trends, including an ageing Asian population and rising disposable income amid an expanding middle class. Asia's diversity has also meant that AIA is able to pitch high-margin health and medical policies in mature markets, including Hong Kong and Singapore, while offering long-term savings plans in countries with younger demographics, such as China. 

What is our key area of engagement?

We have spoken with AIA on its approach to sustainability on a number of occasions, the latest of which was in early October 2021. The discussions covered net zero and the company's five sustainability pillars; they included specific conversations on people and culture and the development of more detailed key performance indicators in relation to the sustainability pillars . It is clear that the group is making good progress.

What is the result?

An independent endorsement of the progress made has been that MSCI upgraded AIA's ESG rating from A to AA on 27 October 2021, highlighting the company's development of its workforce as a significant driver of the upgrade.  AIA's employee turnover dropped from 13.5% in 2019 to 9.5% in 2020, which was better than the industry average of 12.8% in 2020. MSCI also highlighted AIA's initiatives on responsible investment.

AIA assesses its investment portfolio's exposure to ESG risks across fixed income and equity asset classes, and it proactively engages with investee companies on sustainability principles. Encouragingly, all of these were topics that we had engaged with the company on before the rating upgrade. 

AIA has pledged to reach net zero greenhouse gas emissions by 2050 and is also committed to the Science Based Targets Initiative ("SBTi") to set ambitious emissions reduction targets in line with the latest climate science. In addition, AIA has completed its divestment from coal in directly managed listed equity and fixed income exposure, seven years ahead of schedule.

Condensed Statement of Comprehensive Income (unaudited)

Condensed Statement of Financial Position (unaudited)

Condensed Statement of Changes in Equity (unaudited)

Condensed Statement of Cash Flows (unaudited)

Notes to the Financial Statements

Alternative Performance Measures

Copies of the Company's Half Yearly Report for the six months ended 28 February 2022 will be posted to shareholders in April 2022 and will be available thereafter on the Company's website: https://www.asiadragontrust.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.

* Neither the content of the Company's website nor the content of any website accessible from hyperlinks on the Company's website (or any other website) is (or is deemed to be) incorporated into, or forms (or is deemed to form) part of this announcement.

Aberdeen Asset Managers Limited

Secretary

21 April 2022