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The following amendment has been made to the Final Results announcement released on 12 December 2023 at 16:27 under RNS No 5380W.
The gearing figure as at the time of writing, stated in the Chairman's statement, has been amended from 14.6% to 10.6%.
All other details remain unchanged. The full amended text is shown below.
LONDON STOCK EXCHANGE ANNOUNCEMENT
JPMORGAN CHINA GROWTH & INCOME PLC
FINAL RESULTS FOR THE YEAR ENDED 30TH SEPTEMBER 2023
Legal Entity Identifier: 549300S8M91P5FYONY25
Information disclosed in accordance with DTR 4.2.2
The Directors announce the Company's results for the year ended 30th September 2023.
CHAIRMAN'S STATEMENT
The year ended 30th September 2023 proved to be a period of remarkably different halves. During the first six months ended 31st March 2023, Chinese stock markets greeted with relief both the unexpected, immediate end of the Chinese government's zero-COVID policy and the government's decision to reverse several key policies, which had negatively impacted market sentiment. Reflecting this, the Company's total return on net assets (with net dividends reinvested) rose 7.9% in the first half, marginally outperforming the MSCI China Index.
With the impact of the country's reopening post COVID proving far less vigorous than originally anticipated, sentiment swiftly changed in the second half of the financial year. Consequently, Chinese stock markets have been volatile since March, buffeted by fragile business and consumer confidence, and increased concerns about rising youth unemployment, the heavily indebted property market and weakening export demand. Broader concerns about global macroeconomics, continued political tensions between the US and China, and the ongoing Russian-Ukrainian war dampened sentiment further. Faced with these challenges, growth stocks, which dominate the portfolio, fell sharply out of favour yet again. As a result, the Company's total return on net assets fell a disappointing -15.8% in the year ended 30th September 2023, underperforming the MSCI China Index, which, cushioned by state-owned value stocks particularly in the energy and financial services sector, declined by a more moderate -3.7%. The Company delivered a return to shareholders of -15.3% over the year, with the discount at which the shares traded over the 12 month period narrowing marginally.
While the Company's short-term performance is obviously disappointing, the Company has maintained its longer term track record of absolute gains over both five and ten years, comfortably outperforming its benchmark over these periods. This reflects the Manager's disciplined focus on long-term growth opportunities. Full details of investment performance, changes to the portfolio and the outlook can be found in the Investment Manager's Report in the Annual Report.
During the period of increased trading volatility during the second half of the year, the Board was in regular contact with the Manager and corporate broker, monitoring the Company's investment portfolio, its cash flows and loan covenants and the discount at which the Company's shares were trading. Following the lifting of COVID restrictions, the Board resumed its annual visit to China. In addition to spending time with the locally-based Portfolio Managers and supporting analysts, we met senior representatives of the Manager's recently acquired, domestically focused JPMorgan Asset Management (China) in Shanghai, visited some investee companies and met with industry experts and business leaders in Shanghai and Hong Kong.
Dividend
In line with the Company's dividend policy, for the year ended 30th September 2023, four quarterly dividends of 3.42 pence were paid to shareholders. For the year to 30th September 2024, in the absence of unforeseen circumstances, a quarterly dividend of 2.76 pence per share will be paid. This represents an annual dividend of 4% of the Company's NAV as at 29th September 2023.
Gearing
In July 2021, the Company extended its £50 million loan facility (with an option to increase to £60 million) with Scotiabank for a further two years. On 14th July 2023, this facility expired and the Company entered into a new loan facility agreement for two years with Industrial and Commercial Bank of China Limited, London Branch (ICBC), in respect of a revolving loan facility of up to £60.0 million. Following the year-end, as a result of market movements, the Company breached one of its loan covenants and subsequently repaid some of the loan facility to avoid any further breaches.
At the year-end the Company was 14.0% geared, having averaged approximately 15.9% throughout the year and, at the time of writing, was 10.6%. The Portfolio Managers have the flexibility to manage the gearing facility within a range set by the Board of 10% net cash to 20% geared, subject to daily market movements.
Share Issues and Repurchases
At last year's Annual General Meeting ('AGM'), shareholders granted the Directors authority to allot new shares and to repurchase the Company's shares for cancellation or to be held in Treasury. During the year, the Company did not repurchase or allot any shares. As in previous years, the Board's objective is to use share repurchase and share issuance authorities to help reduce the volatility in discounts and premiums by managing imbalances between supply and demand. We are therefore seeking approval from shareholders to renew the share issuance and repurchase authorities at the AGM.
The Board
In July 2023, the Board, through its Nomination Committee, carried out a comprehensive evaluation of the Board, its Committees, the individual Directors and the Chairman. Topics evaluated included the size and composition of the Board, Board information and processes, shareholder engagement and training and accountability. The evaluation confirmed the efficacy of the Board.
As a result of a change in personal commitments, May Tan has decided to retire from the Board at the forthcoming Annual General Meeting in January 2024. She joined the Board in August 2021 and has made a significant contribution to the Board during her tenure. On behalf of the Board, I would like to thank May, particularly for the support she gave the management team in Hong Kong during the COVID period. In accordance with its long-term succession programme, the Board plans to recruit a new Director during 2024 to replace May.
In accordance with the UK Corporate Governance Code, all of the Directors, with the exception of May Tan, will retire at the forthcoming AGM and, being eligible, will offer themselves for reappointment by shareholders.
Board Diversity
The Board recognises the value and importance of diversity in the boardroom. I am pleased to report that the Board meets the FCA Listing rules targets on gender diversity criteria, female representation in a senior role and ethnic representation on the Board.
Review of services provided by the Manager
During the year, the Board, through its Management Engagement Committee, carried out a thorough review of the investment management, secretarial and marketing services provided to the Company by the Manager, as well as the Depositary and Registration services provided to the Company by the outsourced service providers. Following this review, the Board has concluded that the continued appointment of the Manager and the outsourced service providers on the terms agreed is in the interests of the shareholders as a whole.
The Company's ongoing charges for the financial year, as a percentage of the average of the daily net assets during the year, were 1.12% (2022: 1.09%). This small increase reflected the decline in net assets during the period, combined with the relatively high proportion of fixed costs.
Reduction in Management Fees
The Board believes the Company should demonstrably represent value for money. After discussions with the Manager about the appropriate level of the management fee in a rapidly developing market such as China, the Board has agreed with the Manager that, with effect from 1st April 2024, we will introduce a tiered fee rate of 0.80% for the first tier of up to £400 million of net assets and 0.75% thereafter. Based on these revised fees, the proforma management fee would fall by over 11% and the proforma ongoing charge would be reduced to 1.04%.
Environment, Social and Governance (ESG) considerations
The Board has continued to engage with the Manager on the integration of ESG factors into its investment process. The Board has conducted a review during the year to satisfy itself that the Manager has a robust process in place with sufficient resources behind it and that ESG considerations are considered by the Portfolio Managers at every stage of the investment decision.
The Board shares the Manager's view of the importance of financially material ESG factors when making investments for the long term and, in particular, the necessity of continued engagement with investee companies throughout the duration of the investment. The Portfolio Managers' ESG report describes the developments in the ESG process that have taken place during the year together with examples of how these are implemented in practice.
Task Force on Climate-related Financial Disclosures (TCFD)
As a regulatory requirement, JPMorgan Asset Management (JPMAM) published its first UK TCFD Report for the Company in respect of the year ended 31st December 2022 on 30th June 2023. The report discloses estimates of the Company's portfolio climate-related risks and opportunities according to the Financial Conduct Authority (FCA) Environmental, Social and Governance (ESG) Sourcebook and TCFD. The report is available on the Company's website under the ESG documents section: https://am.jpmorgan.com/content/dam/jpm-am-aem/emea/regional/en/regulatory/esg-information/jpmorgan-china-growth-and-income-plc-esg-fund-report.pdf The Board is aware that best practice reporting under TCFD is still evolving with respect to metrics and input data quality, as well as the interpretation and implications of the outputs produced, and will continue to monitor developments as they occur.
Annual General Meeting
The Company's twenty-ninth Annual General Meeting will be held at 60 Victoria Embankment, London EC4Y 0JP on Friday, 26th January 2024 at 11.30 a.m. The Board cannot stress strongly enough the importance of all shareholders exercising their right to vote, regardless of their size of holding, and hopes to welcome as many shareholders as possible to the AGM. As with previous years, you will have the opportunity to hear from members of our investment team. Their presentation will be followed by a question and answer session. Shareholders wishing to follow the AGM proceedings but choosing not to attend will be able to view them live and ask questions through conferencing software. Details on how to register, together with access details, can be found on the Company's website: www.jpmchinagrowthandincome.co.uk, or by contacting the Company Secretary at invtrusts.cosec@jpmorgan.com.
In accordance with normal practice, all voting on the resolutions will be conducted on a poll. Due to technological reasons, shareholders viewing the meeting via conferencing software will not be able to vote on the poll. We therefore encourage all shareholders, and particularly those who cannot attend physically, to submit their proxy votes in advance of the meeting, so that they are registered and recorded at the AGM. Proxy votes can be lodged in advance of the AGM either by post or electronically: detailed instructions are included in the Notes to the Notice of Annual General Meeting in the Annual Report. In addition, shareholders are encouraged to send any questions ahead of the AGM to the Board via the Company Secretary at the email address above. We will endeavour to answer relevant questions at the meeting or via the website depending on arrangements in place at the time.
If there are any changes to the above AGM arrangements, the Company will update shareholders through its website and, if appropriate, through an announcement on the London Stock Exchange.
My fellow Board members, representatives of JPMorgan and I look forward to the opportunity to meet and speak with shareholders after the formalities of the meeting have been concluded.
Stay Informed
The Company delivers email updates with regular news and views, as well as the latest performance. If you have not already signed up to receive these communications and you wish to do so, you can opt in via https://tinyurl.com/JCGI-Sign-Up or by scanning the QR code in the front of the Annual Report.
Outlook
With economic growth, domestic consumption and demand for exports in China likely to remain sluggish in the shorter term, Chinese stock markets look set to face continued challenges over the coming year. Moreover, while the recent resumption of high-level talks is encouraging, tensions between China and the US are likely to persist, and an escalation in anti-Chinese rhetoric ahead of next year's US presidential election cannot be ruled out. Other challenges include the continued uncertainties in the Chinese property market, the financial health of the nation's regional governments, rising youth unemployment and China's relations with Taiwan. Concerns about global supply chains and conflict in the Ukraine, as well as Israel and Palestine, may also impact market sentiment in the near term.
Whatever China's near-term prospects, the Portfolio Managers continue to focus on the bottom-up fundamentals of high-quality Chinese businesses that are capable of generating excess returns over the longer term. The Portfolio Managers are encouraged by recent shifts in Chinese government policies, designed to promote economic growth and boost consumer confidence. Moreover, they continue to find attractive investment opportunities provided by Chinese companies that offer superior earnings growth or that are benefitting shareholders by introducing regular dividend payments or share buyback programmes.
Having visited China this year, the Board shares the Portfolio Managers' optimism about the long-term prospects for the Chinese stock markets and the opportunities that will benefit the patient investor, and we believe our Company deserves a place within any fully diversified global portfolio. Since the listing of the Company 30 years ago, the Portfolio Managers have demonstrated their skills in navigating turbulent markets by focusing on investing in attractively priced, quality companies that offer sustainable long-term growth. We remain confident that the investment strategy, combined with the skills and experience of our well-resourced investment team, will enable the Company to deliver superior returns over the longer term.
Alexandra Mackesy
Chairman 12th December 2023
INVESTMENT MANAGER'S REPORT
Introduction
During the financial year ended 30th September 2023, the Company's net assets (in total return terms) declined 15.8% (in sterling terms) compared to a benchmark decline of 3.7%. However, the Company's long-term track record of outright gains and outperformance remains intact. In the ten years ended September 2023, it delivered average annualised returns of 7.1%, compared to an average benchmark return of 4.8% pa.
Setting the scene
The year under review was marked by a series of unexpected challenges. The most prominent was China's abrupt exit from its stringent zero COVID policy last December. Following a wave of COVID infections, life returned to normal by Q2 2023. After an initial round of enthusiasm about reopening, China's sluggish economic recovery undershot many people's expectations, with the exception of travel-related consumption. There are several reasons for this disappointing turn of events. Primarily, as we have discussed in previous reports, China faces the structural challenge of transitioning away from its heavy reliance on fixed asset investment, in particular property development. This process will take years, and meanwhile the property sector, which comprises 6% of the Chinese economy and 13% including related activities, remains challenged. Concerns about developers' balance sheet strength and declining property sales and prices are adversely impacting consumption and domestic growth more generally. What has disappointed us is that it is taking longer than expected for domestic consumer confidence to recover. This is reflected in lukewarm non-travel discretionary consumption, and a reluctance to invest.
A decline in Chinese exports has also been a drag on growth. Total exports declined 5.6% in USD terms in the first eight months of 2023, due in part to the depreciation of the renminbi. Higher overseas interest rates have dampened demand for Chinese exports, and there was a degree of front-loading of consumption during COVID, while some multinational companies have adopted a 'China+1' sourcing strategy, to strengthen their supply chains by reducing reliance on Chinese imports.
China's policy response to the economic slowdown became more active in 2023. In the property market, the regulatory focus has shifted from preventing an asset bubble to stimulating demand. Local governments were given the green light to remove various purchase restrictions, which should help unleash pent-up housing demand, while the legacy mortgage rate, which was set artificially high to prevent property speculation, was lowered to reduce the debt servicing burden on households. The loan prime rate (LPR) was also cut to reduce borrowing costs, and bank deposit rates were lowered simultaneously to protect bank margins. To stimulate demand for properties, the central government has advocated the redevelopment of shantytowns in large cities. All these policies are in addition to supply-side stimuli such as renewed access to onshore bond and equity markets for developers, intended to help strengthen their balance sheets. Arrangements are now in place to restructure the debt of troubled local government financing vehicles (LGFV, i.e. the issuers of quasi-municipal bonds). At the end of October, China's legislature approved a plan to issue RMB 1trn additional sovereign debt and to raise the fiscal deficit ratio for 2023 to 3.8% above the long-term ceiling of 3%. The magnitude and frequency of this stimulus policy surprised the market.
In terms of domestic politics, it was no surprise that President Xi secured his third term as leader in March, and assembled a new cabinet. Since then, industrial policies have generally been pro-business and pro-growth, acknowledging the challenges faced by the economy. To name a few of these policies, the government established a bureau, headed by the country's top economic planner, to oversee the development of the private economy. Cyber-security reviews of internet platforms were completed. After the last round of online platform regulations, online platform companies now operate under clearer regulations and guidelines. The way regulation is conducted has also changed from punishment and fines post events to consultation and setting guidelines before events. A good example of this is that regulators quickly proposed regulations on generative AI and large language models in order to safeguard the development of this new industry.
In terms of the external environment, persistently high inflation in US and Europe shaped the expectation that interest rates will be 'higher for longer'. Higher debt servicing costs squeezed household budgets and in turn cast a shadow over the demand for Chinese exports, putting further downward pressure on the renminbi. But there were also some positive developments. We were happy to see the resumption of high-level engagement between the China and US governments, which should help to reduce the risks of future misunderstandings and miscalculations.
Performance commentary
To our disappointment, the company underperformed the market in the last financial year, due to both sector allocation and stock selection decisions. The use of gearing also contributed negatively, as the market declined over the period. During the review period, the outperformance of value stocks, led by state-owned enterprises in the energy and financial sectors, created a style headwind for our growth-tilted strategy. Over the year, the MSCI China Value Index has risen by 1.4% (in GBP) while the MSCI China Growth Index has fallen by 7.2% (in GBP). Our portfolio avoided capital-intensive state-owned enterprises and was overweight in several growth-oriented sectors including Information Technology, Consumer Discretionary and Healthcare. Our stock selection within these sectors detracted from returns over the period.
Within IT, Starpower, the Chinese leader in the production of power semiconductors, derated on ongoing concerns about oversupply, as the industry attracted several new entrants. Silergy, a Chinese producer of power management integrated circuits, suffered from longer-than-expected inventory digestion in the tech hardware space. However, we believe the company still has long-term structural growth opportunities and scope to gain market share. A few of our holdings in the Solar Industry, including equipment makers Zhejiang Jingsheng Mechanical and Suzhou Maxwell Technology, solar panel maker Longi Green Energy and solar glass maker Xinyi Solar, derated significantly due to concerns about industry overcapacity over the medium term.
Performance attribution
Year ended 30th September 2023
| % | % |
Contributions to total returns |
|
|
Benchmark return |
| -3.7 |
Sector allocation | -3.1 | |
Stock selection | -6.8 | |
Currency | -0.4 | |
Gearing/net cash | -0.2 | |
Investment Manager contribution |
| -10.5 |
Dividend/residual | | -0.5 |
Portfolio total return |
| -14.7 |
Management fee/Other expenses | | -1.1 |
Net asset value total return |
| -15.8 |
Ordinary share price total return |
| -15.3 |
Source: Factset, JPMAM, Morningstar.
Performance attribution analyses how the Company achieved its recorded performance relative to its benchmark.
Consumer discretionary detracted from relative returns due to our exposure to China's major e-commerce platforms Meituan, Alibaba and JD, which were marked down due to the insipid post-pandemic rebound. Historically widely owned by overseas investors, these were particularly susceptible to capital outflows from Hong Kong and foreign-based investors. However, in the case of Meituan and Alibaba, fundamental performance tracked expectations. Although top-line growth slowed from pre-COVID levels, margins and earnings growth were supported by cost saving measures. JD underperformed, as it is losing market share to other e-commerce channels and the initiatives taken to rekindle growth have so far proved ineffective.
The adverse performance as a result of our exposure to Healthcare was mainly due to an error of judgement on our part. We were optimistic about the post-pandemic recovery in discretionary healthcare demand, and positioned for it via exposure to Angelalign, a transparent orthodontics device maker, Aier Eye Hospital, a private eye hospital, and Imeik Technology, a dermo filler maker. However, these stocks all derated on concerns about the sustainability of discretionary healthcare service spending, despite respectable growth in Q1 and Q2 2023. Our holdings in healthcare equipment, namely Shenzhen Mindray and Qingdao Haier Biomedical, underperformed due to tight local government funding and delays in equipment tenders caused by an anti-corruption campaign in the public healthcare sector. We believe this adverse event is temporary in nature and will not change the long-term demand for better healthcare facilities in China and the competitiveness of these two companies in a global context.
|
| Relative | Stock |
|
|
| weight | return | Impact |
Top 10 Detractors | Company description | (%) | (%) | (%) |
Suzhou Maxwell | Solar equipment manufacturer with a focus on heterojunction | 1.5 | -62.3 | -1.25 |
Technologies Co., Ltd. | solar cell technology. | | | |
Meituan | The largest Chinese online-to-offline local life services platform | 1.9 | -36.4 | -0.86 |
| providing services such as food delivery, hotel booking and | | | |
| coupon sales. | | | |
Yunnan Energy New Material Co., Ltd. | The largest lithium battery separator manufacturer in the world. | 0.8 | -68.4 | -0.86 |
ENN Energy Holdings | A gas distributor to households and businesses. | 1.3 | -41.8 | -0.73 |
Limited | | | | |
JD.com, Inc. | A leading e-commerce company with a strong position in | 1.0 | -46.2 | -0.70 |
| electronics and household products supported by its | | | |
| strong inhouse logistic capabilities. | | | |
Alibaba Group Holding | A leading e-commerce company that also offers a | -5.0 | -24.4 | -0.67 |
Limited | comprehensive digital infrastructure including payment and | | | |
| cloud services. | | | |
StarPower Semiconductor Ltd. | The Chinese leader in the production of power semiconductors used in electric vehicles and solar panels. | 1.0 | -50.5 | -0.60 |
Zhejiang Jingsheng | A dominant supplier of silicon wafer growth furnaces, which | 1.3 | -38.6 | -0.52 |
Mechanical & Electrical | are used to make photovoltaic cells. | | | |
Angelalign Technology Inc. | A medical device company making transparent orthodontics | 1.0 | -29.9 | -0.49 |
| devices. | | | |
Xinyi Solar Holdings Ltd. | A leading manufacturer of solar panel glasses. | 1.2 | -34.2 | -0.48 |
Our overweight and stock selections in Communication Services and Real Estate contributed positively, partially offsetting the above mentioned negative impacts. Netease, China's second largest online gaming producer after Tencent, enhanced returns thanks to the resumption of online gaming title approval, improving margins and the company's ongoing share buyback programme. Focus Media, a niche advertisement agency providing offline display units and advertising in the lifts, outperformed as offline traffic recovered post-pandemic. The company has also made a significant effort to acquire new clients. Our relative outperformance in the troubled real estate sector was driven by our holdings in quality players with strong balance sheets - namely KE Holding, China's largest real estate agent network and property website, and China Resources Mixc Lifestyle Services, a property services company managing residential properties and premium shopping malls.
At the stock level, negative contributions were derived from both companies that we didn't own as well as those that we did own. Energy, a sector that comprises mainly state-owned, carbon-intensive energy companies such as Petrochina and China Shenhua Energy, was the best-performing sector over the review period, and our zero weighting hurt performance. We avoid this sector due to our view that it offers no structural growth and there are very few company-specific growth drivers in addition to the companies' carbon intensity. Our underweight position in Financials also detracted, as this sector also outperformed. Within financials, our preference for market-oriented joint stock banks such as China Merchants Bank, rather than large state-owned banks such as Industrial & Commercial Bank of China, also hurt performance.
|
| Relative | Stock |
|
|
| weight | return | Impact |
Top 10 Contributors | Company description | (%) | (%) | (%) |
Beijing Kingsoft Office | The company provides office and document editing software | 1.2 | 65.7 | 1.0 |
Software. Inc. | with over 500 million monthly active users. | | | |
Netease Inc | A leading provider of self-developed mobile and PC games | 2.1 | 26.1 | 0.8 |
| along with multimedia services. | | | |
Pinduoduo, Inc. | A leading e-commerce company focusing on the value segment with a rapidly growing international business | 1.8 | 43.5 | 0.7 |
| branded as Temu. | | | |
BeiGene Ltd | Biotech company focusing on the R&D of oncology | 0.1 | 56.0 | 0.6 |
| drugs. | | | |
NIO Inc. | Founded in 2014, Nio is an electric vehicle brand that now holds over 50% market share in the premium EV | -0.7 | 0.0 | 0.5 |
| market in China. | | | |
Li Ning Company Limited | A sportswear and sports equipment company. | -0.8 | 0.0 | 0.4 |
Shanghai Baosight Software Co., Ltd. | A software provider focusing on improving production efficiency and automation level of the steel industry. | 1.3 | 32.3 | 0.4 |
| It also has an internet data centre business. | | | |
Jiangsu Hengli Hydraulic | A manufacturer of hydraulic pumps and valves that are used in | 1.3 | 27.7 | 0.4 |
Co., Ltd. | construction equipment. | | | |
Bilibili, Inc. | Video sharing platform that specialses in Anime, Comics and | 0.1 | 52.8 | 0.3 |
| Games (ACG) and appeals to young audience. | | | |
Kangji Medical Holdings Limited | A medical device company making invasive surgical instruments and accessories. | 0.4 | 55.3 | 0.3 |
Transactions and sector allocation
Despite facing style headwinds due to our growth tilt, the Company maintained its overweights in sectors such as e-Commerce, Information Technology, Industrials and Renewable Energy, where we tend to find structural growth opportunities. However, we tried to rotate our holdings into companies with more certain prospects and/or more measured downside risks.
One of the most significant changes was our Q1 2023 decision to buy Alibaba, reducing our large underweight in this name. Although the company's growth has slowed, our decision to acquire exposure to the company again was based on some positive recent developments: (1) Alibaba's market share in core e-commerce businesses has stabilised; (2) the company has implemented a new organisation structure, intended to improve the accountability of each subsidiary's contribution to profitability; (3) it announced a plan to list a few subsidiaries, which may help to unlock value over time; and (4) its valuation had become very attractive.
This acquisition was funded in part by exiting Bilibili, the anime, comics & games (ACG) video platform, as its path to profitability was further delayed. We also took profits on some consumer stocks that had outperformed in the previous year, including Chongqing Brewery, Carlsberg's Chinese subsidiary.
Within the IT sector, we initiated a new position in BOE Technology, now the world's largest consumer electronics panel maker. This purchase is intended to increase our exposure to the cyclical recovery of the panel industry. The prices of some of the company's products have started to recover, and most importantly, its Korean competitors exited some areas of the market, creating a more favourable supply and demand picture going forwards. We also initiated a position in Foxconn Industrial International, a subsidiary of Taiwan-listed Hon Hai, which provides OEM and ODM services to consumer electronics and enterprise computing. It is benefiting from the global capex build-out of graphic processing unit (GPU) servers, due to its close ties with Nvidia, the semiconductor manufacturer, and US cloud suppliers. In addition, Foxconn's consumer electronics and traditional central processing unit (CPU) data centre businesses are recovering from post-pandemic destocking. These purchases were funded by reducing Beijing Kingsoft Office, a Chinese Microsoft Office equivalent with growth drivers from increasing subscriptions and potential opportunities to raise prices as AI functionality increases. We believed Beijng Kingsoft's valuation was stretched due to excessively optimistic assumptions, so we took the opportunity to reduce our exposure. We also booked some profits on Supcon Technology, an automation system provider for petrochemical processors and other industries following recent outperformance.
Within industrials, we maintained our exposure to the long-term structural growth prospects of solar energy and electric vehicles (EVs), but rotated positions to more attractively valued companies. We exited China's largest battery maker, Contemporary Aperex Technology, in Q1 2023, as our expected return was relatively unattractive. We also expect the business to experience margin pressures, as it may have to pass on more economic value to its downstream automaker clients, as many of them are still loss-making. We exited Changzhou Xingyu Lighting, an auto light component maker, as the valuation was no longer attractive based on our expected return framework. We initiated a new position in Ningbo Tuopu, an auto vibration control and lightweight chassis supplier that is very exposed to Tesla and has a good chance of supplying key components to Tesla's humanoid robot that is under development. We also added Hongfa Technology, a relay component maker supplying a wide range of industrial products, including EVs. Based on its success with Tesla and Chinese EV brands, Hongfa has secured major orders from European manufacturers, which allows it to grow its global market share.
In solar, we exited Tongwei, China's largest supplier of polysilicon, which is used in the production of solar panels. Tongwei has done well in the past two years, when polysilicon supplies were tight, whereas now the price of polysilicon is trending lower, as supply catches up with demand. We initiated a new position in Zhejiang Jingsheng Machinery (ZJM), a dominant supplier of silicon wafer growth furnaces, which are used to make photovoltaic cells. This industry has relatively high technical barriers to entry and ZJM has a growing consumable business producing silicon wafer growth crucibles. We also purchased Hangzhou First Applied Material, the largest solar panel membrane producer. In contrast to polysilicon, the price of solar panel membranes is slowly recovering from its cyclical trough.
We also made some portfolio changes in two sectors sensitive to the macroeconomic environment, namely property and financials. We exited property services companies Country Garden Services and Onewo, which are controlled by property developers Country Garden and China Vanke respectively. Prolonged weakness in new property sales has imposed further pressure on developers' balance sheets, reducing their capacity to develop new projects, which in turn damages the long-term growth profile of these facility management companies. We initiated a new position in the property platform KE Holding. The company should benefit from an incremental alleviation of property purchase restrictions in the secondary property market. It has demonstrated a great capability to manage cash flow during the downturn, as it has remained a highly cash-generative business.
We are taking advantage of low valuations to slowly reduce our underweight to financials by adding selective names. For example, we initiated a new position in China Pacific Insurance. The life insurance industry is showing signs of recovery after several years of restructuring which has rationalised the use of sales agents, and China Pacific's protection and investment-type products are both proving popular with customers in uncertain times.
Ten largest investments
As at 30th September
|
| 2023 | 2022 | ||
|
| Valuation |
| Valuation |
|
Company | Description of Activities | £'000 | %1 | £'000 | %1 |
Tencent | A Chinese technology company focusing on internet services. It is the world's largest video game vendor. It owns WeChat, among the largest Chinese and therefore global, social media app as well as a number of music, media and payment service providers. Its venture capital arm has holdings in over 600 companies with a focus on technology start-ups across Asia. | 27,858 | 10.6 | 28,091 | 8.4 |
Alibaba | A provider of online sales services. The Company provides internet infrastructure, electronic commerce, online financial, and internet content services through its subsidiaries. Alibaba offers its products and services worldwide. | 14,888 | 5.7 | - | - |
Meituan | An e-commerce company that offers services like food, dining and delivery on its platform throughout China. | 13,355 | 5.1 | 20,417 | 6.1 |
NetEase | A leading China-based technology company involved in developing and operating online games. Its online gaming services cover both mobile and personal computer games. | 9,291 | 3.5 | 8,921 | 2.7 |
Pinduoduo | Founded in 2015, it started as an online fresh produce vendor before expanding into a leading social commerce platform serving close to 900 million users. Pinduoduo pioneered 'Team Purchase' and 'C2M' (consumer to manufacturer) processes to aggregate user demand and share the information with manufacturers to tailor make products according to users' preferences. | 9,273 | 3.5 | 13,325 | 4.0 |
WuXi Biologics (Cayman) | Founded in 2010, it has become a leading global Contract Research, Development and Manufacturing Organization (CRDMO) offering end-to-end solutions that enable partners to discover, develop and manufacture biologics from concept to commercialisation. | 7,516 | 2.9 | 8,281 | 2.5 |
KE Holdings | An operator of an integrated online and offline platform for housing transactions and services in China. The Company offers existing and new home sales, home rentals, home renovation, real estate financial solutions, and other services. | 7,002 | 2.7 | - | - |
JD.com | China's leading one-stop e-commerce platform, providing 588.3 million active customers with direct access to a wide selection of products to tap into China's fast-growing e-commerce market through its mobile applications and websites. | 5,820 | 2.2 | 11,940 | 3.6 |
Kweichow Moutai | It manufactures and sells Moutai and other spirits which are sold in China and globally. | 5,730 | 2.2 | - | - |
China Merchants Bank | China's first joint-stock commercial bank wholly owned by corporate legal entities. Since its inception, CMB has been a trend setter in China's banking industry through a series of pioneering efforts. | 5,419 | 2.1 | 7,766 | 2.4 |
Ten Largest Investments |
| 106,152 | 40.5 |
|
|
1 Based on total investments of £262.0m (30th September 2022: £333.2m). Top ten investments at September 2022 representing £119.4m and 35.9% of total investments.
Gearing
The average gearing ratio of the company over the year was 15.9%, compared to 15.6% during the previous financial year. Our intention initially was to keep the total borrowing level unchanged, as we believed that a lot of bad news had been priced into stock prices at current levels and we saw scope for some improvement in market fundamentals, as corporate earnings growth was starting to turn around, thanks to stimulus policies and cost-cutting initiatives. In June 2023, we opted to reduce the size of our debt facility, as tight credit market conditions meant we had to renew the loan on less favourable terms. As a result, although net borrowing has been reduced, the gearing level edged up slightly due to the market fall.
ESG Engagement over the year
Our investment philosophy centres on identifying quality companies with sustainable growth potential. We have a strong conviction that Environmental, Social and Governance (ESG) considerations (particularly Governance) should be the foundation of any long-term investment process. In our view, corporate policies at odds with such considerations are not sustainable over time. We therefore believe that integrating ESG factors into the investment process is critical to its success. To this end, we work closely with JPMAM's dedicated Sustainable Investment (SI) team, which pro-actively engages with existing portfolio names on ESG matters.
Examples of how we have worked with the SI team over the past year to address ESG issues in our portfolio companies and information regarding how ESG matters are integrated into our investment process are detailed in the ESG Report in the Annual Report. This report includes case studies relating to our ESG engagement with Alibaba, Silergy and Tencent.
Key voting statistics are given in the ESG report and some examples are provided to illustrate the principles which inform our voting.
Outlook
One of the biggest and most welcome changes since our last annual report is that all levels of the Chinese government have become increasingly pro-business and pro-growth. The key focus of the government's economic and industry policies has shifted from preventing asset bubbles to rejuvenating growth and restoring consumer confidence. We believe the authorities will deploy more policy tools until these goals are realised. We expect monetary and fiscal policies to remain supportive. On the fiscal front, policy initiatives may include a broader restructuring of local government debt, and greater support for households. In addition, the latest economic indicators show some early signs that the Chinese economy is stabilising and gathering some fresh momentum. We remain cautious on the near-term outlook for export demand, as foreign inflation and interest rates remain high and stickier than expected, and as overseas customers continue to expand their supply chains beyond China. However, we are seeing some evidence that foreign customers are regaining confidence in the stability of Chinese supply chains now the economy has fully reopened.
On the geopolitical front, against the grim backdrop of major conflicts in Eastern Europe and the Middle East, we believe that a competitive, yet still collaborative relationship between China and the US is in the best interests of both nations and the entire world. We expect tensions between the US and China to persist, as the two great powers compete for global influence, and we would not be surprised by an escalation in anti-Chinese rhetoric in the run-up to next year's US presidential election. Having said that, we believe the risk that the relationship will deteriorate sharply has been greatly reduced, following the recent resumption of high-level talks between the two superpowers.
Putting politics aside, China's economy is certainly facing some headwinds, but given the sheer size and breadth of its corporate sector, we are still finding idiosyncratic organic growth opportunities to enhance our portfolio. Although we now forecast Chinese GDP to grow 4% and 3.5% in real-terms in 2024 and 2025, lower than the 7-8% in real-terms achieved prior to COVID, there are still many companies that are forecast to grow earnings much more rapidly. For example, in the healthcare sector, global pharmaceutical companies are once again employing the services of Chinese contract development and manufacturing organisations (CDMOs), which are valued for the quality of their output and speed to market. The CDMOs have been especially helpful in the development and manufacture of the new and highly sought-after GLP-1 (glucagon-like peptide), a revolutionary treatment for diabetes and obesity. Our long-term holding in Asymchem Laboratories, and our new acquisition Sunresin New Materials, a supplier of purification resins used to make GLP-1, are both benefiting from this strong global demand.
Within the electric vehicle industry, Western countries have made headline news by restricting imports of Chinese vehicle manufacturers and battery makers. However, we have found a group of Chinese auto components makers that have proved themselves as reliable suppliers to Chinese EV brands and are now making inroads into Western markets. For example, Tesla has verified several such companies, including Hongfa Technology, Ningbo Tuopu Group and our long-term holding Fuyao Glass (auto glass maker), as Tier 1 suppliers. Such an endorsement has helped them win contracts from other American and European auto producers for their forthcoming EV models. These companies have also been astute in building production capacity outside China to serve overseas clients and save import tariffs.
Elsewhere, it is encouraging to see that even well-known large caps such as Alibaba, JD, Tencent and KE Holdings, whose top-line growth has slowed, are supporting profits by making efficiency gains. More importantly, these corporate behemoths have become increasingly investor-friendly - they are starting to pay dividends to support their share prices with continuous share buyback schemes, and to distribute their non-core investment portfolios to shareholders directly such as Tencent distributing its Meituan and JD shares to investors.
We are also pleased to report to our shareholders that JPMorgan has completed its 100% acquisition of China International Fund Management and has rebranded it JPMorgan Asset Management (China) Limited. It has over 30 seasoned investment professionals, all based in Shanghai and focusing on domestic equities.
In summary, in a slowing growth environment, some companies are becoming more mature and sophisticated in terms of their capital allocation by prioritising dividends and buybacks over non-core investment, which should enhance shareholder returns. Equity market valuations are now pricing in significant risk - the current Price/Earnings (P/E) ratio of the MSCI China Index is close to the lowest it has been in the last ten years, and the current Price/Book (P/B) ratio of the index is comparable to levels seen in 2009, at the time of the global financial crisis, and in 2003 during the SARS epidemic. We believe most of the widely discussed bad news has been priced in. At these low levels, we believe the market has significant scope to respond positively to incremental good news. We look forward to generating good returns for our shareholders in the coming year and beyond, to maintain the Company's long track record of outright gains and outperformance of the market.
Rebecca Jiang
Howard Wang
Li Tan
Investment Team 12th December 2023
PRINCIPAL AND EMERGING RISKS
The Directors confirm that they have carried out a robust assessment of the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity.
With the assistance of the Manager, the Audit Committee maintains a risk matrix which identifies the principal risks to which the Company is exposed and methods of mitigating against them as far as practicable. The risks identified and the broad categories in which they fall, and the ways in which they are managed or mitigated are summarised below.
The AIC Code of Corporate Governance requires the Audit Committee to put in place procedures to identify emerging risks. At each meeting, the Board reviews all potential risks and considers emerging risks which it defines as potential trends, sudden events or changing risks which are characterised by a high degree of uncertainty in terms of occurrence probability and possible effects on the Company. As the impact of emerging risks is understood, these risks may be entered on the Company's risk matrix and mitigating actions considered as necessary.
|
|
| Movement in risk |
|
|
| status in year to |
Principal risk | Description | Mitigation/Control | 30th September 2023 |
Investment management and performance | |||
Geopolitical | Geopolitical risk can cause volatility in the markets in which the Company is invested; restrictions on the ability to invest and the free movement of capital and also potentially impact the ability of the Manager and other service providers to carry on business as usual. Specifically in China, we have seen instances of the government interfering in certain sectors of the financial markets as well as concerns relating to US-China trade tensions, potential conflict involving Taiwan and wider questions about supply chains and human rights in China. These concerns have led to international investors reducing their investments in China, and could risk damaging overseas sentiment towards Chinese equities further. | The Board meets advisers and gathers insights from both JP Morgan and independent sources on a regular and ongoing basis and takes advice from the Manager and its professional advisers. | è |
Investment Under-performance | An inappropriate investment decision may lead to sustained investment underperformance against the Company's benchmark index and peer companies, resulting in the Company's shares trading on a wider discount as well as discontent amongst the Company's shareholders. | The Board aims to manage this risk by diversification of investments through its investment restrictions and guidelines which are monitored and reported on by the Manager. The Manager provides the Directors with timely and accurate management information, including performance data and attribution analyses, revenue estimates and transaction reports. The Board monitors the implementation and results of the investment process with the investment managers, who attend all Board meetings, and reviews data which show statistical measures of the Company's risk profile. | é |
Investment Strategy | An ill-advised corporate initiative, for example an inappropriate takeover of another company or an ill-timed issue of new capital; misuse of the investment trust structure, for example inappropriate gearing; or if the Company's chosen strategy is no longer appropriate, may lead to a lack of investor demand. | The Board discusses this on a regular and ongoing basis with the Manager and corporate advisers based on information provided both at and between Board meetings (see above risk regarding Investment Underperformance). The Company states its strategy clearly in its Half-Year and Annual Reports and its website. The investment managers employ the Company's gearing within a strategic range set by the Board. | é |
Loss of Investment Team or Investment Manager | A sudden departure of one or more members of the investment management team could result in a deterioration in investment performance. | The Board seeks assurance that the Manager takes steps to reduce the likelihood of such an event by ensuring appropriate succession planning and the adoption of a team-based approach, as well as special efforts to retain key personnel. The Board engages privately with the investment managers on a regular basis and visits them annually in Shanghai and Hong Kong. | è |
Share Price Discount | A disproportionate widening of the discount relative to the Company's peers could result in a loss of value for shareholders. | In order to manage the Company's discount, which can be volatile, the Company operates a share repurchase programme. The Board regularly discusses discount policy and has set parameters for the Manager and the Company's broker to follow. The Board receives regular reports and is actively involved in the discount management process. | é |
Corporate Governance | Changes in financial, regulatory or tax legislation may adversely affect the Company. | The Manager makes recommendations to the Board on accounting, dividend and tax policies and the Board seeks external advice where appropriate. The Board receives regular reports from its broker, depositary, registrar and Manager as well as its legal advisers and the Association of Investment Companies on changes to governance and regulations which could impact the Company and its industry. The Company monitors events and relies on the Manager and its other key third party providers to manage this risk by preparing for any changes. It also receives updates from its advisors on corporate governance issues and reviews its related policies regularly. | è |
Shareholder Relations | Details of the Company's compliance with Corporate Governance best practice, including information on relations with shareholders, are set out in the Corporate Governance Statement in the Annual Report. | The Board receives regular reports from the Manager and the Company's broker about shareholder communications, their views and their activity. In addition, the Board engages directly with major shareholders and encourages all shareholders to engage with the Board and Investment Managers at the AGM and through the increased use of webcasts, periodic meetings and the introduction of email updates. | è |
Financial | The financial risks faced by the Company include market price risk, interest rate risk, currency risk, liquidity risk and credit risk. | Counterparties are subject to daily credit analysis by the Manager. In addition the Board receives reports on the Manager's monitoring and mitigation of credit risks on share transactions carried out by the Company. Further details are disclosed in the Annual Report. | é |
Operational risks | |||
Cyber crime | Disruption to, or failure of, the Manager's accounting, dealing or payments systems or the depositary's or custodian's records may prevent accurate reporting and monitoring of the Company's financial position. In addition to threatening the Company's operations, such an attack is likely to raise reputational issues which may damage the Company's share price and reduce demand for its shares. | Details of how the Board monitors the services provided by the Manager, its associates and depositary and the key elements designed to provide effective internal control are included within the Risk Management and Internal Control section of the Directors' Report in the Annual Report•. The threat of cyber attack, in all its guises, is regarded as at least as important as more traditional physical threats to business continuity and security. The Company benefits directly or indirectly from all elements of JPMorgan's Cyber Security programme. The information technology controls around the physical security of JPMorgan's data centres, security of its networks and security of its trading applications are tested independently. | è |
Fraud/other operating failures or weaknesses | The risk of fraud or other control failures or weaknesses within the Manager or other service providers could result in losses to the Company. | The Audit Committee receives independently audited reports on the Manager's and other service providers' internal controls, as well as a report from the Manager's Compliance function. The Company's management agreement obliges the Manager to report on the detection of fraud relating to the Company's investments and the Company is afforded protection through its various contracts with suppliers, of which one of the key protections is the Depositary's indemnification for loss or misappropriation of the Company's assets held in custody. | è |
Regulatory risk | |||
Legal and Regulatory | In order to qualify as an investment trust, the Company must comply with Section 1158 of the Corporation Tax Act 2010 ('Section 1158'). Details of the Company's approval are given under 'Structure of the Company'. Were the Company to breach Section 1158, it may lose investment trust status and, as a consequence, gains within the Company's portfolio would be subject to Capital Gains Tax. | The Section 1158 qualification criteria are continually monitored by the Manager and the results reported to the Board each month. The Company must also comply with the provisions of the Companies Act 2006 and, since its shares are listed on the London Stock Exchange, the UKLA Listing Rules, Disclosure Guidance and Transparency Rules ('DTRs') and, as an Investment Trust, the Alternative Investment Fund Managers Directive ('AIFMD'). A breach of the Companies Act 2006 could result in the Company and/or the Directors being fined or the subject of criminal proceedings. Breach of the UKLA Listing Rules or DTRs could result in the Company's shares being suspended from listing which in turn would breach Section 1158. The Board relies on the services of its Company Secretary, JPMorgan Funds Limited and its professional advisers to ensure compliance with the Companies Act 2006, the UKLA Listing Rules, DTRs and AIFMD. | è |
Economic and geopolitical | |||
Global pandemics | COVID-19 has highlighted the speed and extent of economic damage that can arise from a pandemic. The risk remains that new variants or other viruses may not respond to existing vaccines, may be more lethal and may spread rapidly around the world, presenting risks to the operations of the Company, the Manager and its investee companies. | The Board receives reports on the business continuity plans of the Manager and other third party providers. The effectiveness of these measures were assessed throughout the course of the COVID-19 pandemic and the Board will continue to monitor developments as they occur and seek to learn lessons which may be of use in the event of future pandemics. | ê |
ESG Risk | Failure to recognise non-financial risks in portfolio construction and stock selection and/or to explain our ESG approach to current/potential investors. | The Manager integrates ESG scoring into stock selection alongside financial measures and portfolio level measures such as carbon intensity/CO2 emissions are aggregated and presented alongside the benchmark index. The Board can determine the appetite for ESG as well as financial factors in portfolio construction via investment restrictions and guidelines and the investment policy. The Board determines the description of the ESG approach and policies in the Annual Report and other investor communications. | è |
Climate change | Climate change is one of the most critical issues confronting asset managers and their investors. Climate change may have a disruptive effect on individual investee companies and the operations of the Manager and other major service providers. | The Manager's investment process integrates consideration of environmental, social and governance factors into decisions on which stocks to buy, hold or sell (see the ESG report). This includes the approach investee companies take to recognising and mitigating climate change risks. The Manager aims to influence the management of climate related risks through engagement and voting and is a participant of Climate Action 100+ and a signatory of the United Nations Principles for Responsible Investment. As extreme weather events become more common, in particular with the typhoons, flooding and droughts experienced in China, the resiliency, business continuity planning and the location strategies of our services providers will come under greater scrutiny. | è |
Emerging risk | Description | Mitigation/Control |
|
Social unrest within China | If economic growth and consumer demand remain sluggish and unemployment rises in China, there is a risk disruptive social unrest could occur at a local or national level. Such disorder could disrupt the companies in which our Company invests, and negatively impact both our manager's operations within China and international sentiment towards Chinese equities. | The Board and the Portfolio Managers understand the inherent risks associated with investing in emerging markets such as China. While focusing on the long term, the Manager is mindful of these risks when considering investment strategy and portfolio construction, and keeps the Board regularly informed about any issues that might impact China and the portfolio. |
|
China - US tensions | Increased anti-China rhetoric in the run up to the US Presidential election which may heighten tensions between the US and China. | The Board works with the Manager using JPMorgan's resources to monitor developments on a continuous basis. Working closely with the Board, the Portfolio Managers will keep shareholders regularly informed of its views using various communication methods such as webcasts, monthly fact sheets and the Company's website. |
|
Artificial Intelligence (AI) | While it might equally be deemed a force for good, there appears to be an increasing risk to society from the threat posed by AI. Advances in computing power means that AI has become a powerful tool that will impact society, with a wide range of applications that include the potential to harm. | The Board will work to monitor developments concerning AI as its use evolves and consider how it might threaten the Company's activities, which may include a heightened threat to cybersecurity. The Board will work closely with JPMF in identifying these threats and, in addition, monitor the strategies of our service providers. |
|
TRANSACTIONS WITH THE MANAGER AND RELATED PARTIES
Details of the management contract are set out in the Directors' Report in the Annual Report. The management fee payable to the Manager for the year was £2,468,000 (2022: £3,399,000).
Safe custody fees amounting to £51,000 (2022: £72,000) were payable to JPMorgan Chase Bank N.A. during the year of which £21,000 (2022: £17,000) was outstanding at the year end.
The Manager may carry out some of its dealing transactions through group subsidiaries. These transactions are carried out at arm's length. The commission payable to JPMorgan Securities Limited for the year was £9,000 (2022: £26,000).
Handling charges on dealing transactions amounting to £34,000 (2022: £52,000) were payable to JPMorgan Chase Bank N.A. during the year of which £6,000 (2022: £6,000) was outstanding at the year end.
The Company also held cash in the JPMorgan US Dollar Liquidity Fund, which is managed by JPMorgan Asset Management (Europe) S.à r.l. At the year end this was valued at £4,000 (2022: £8,085,000). Interest amounting to £212,000 (2022: £59,000) was receivable during the year.
Fees amounting to £224,000 (2022: £434,000) were receivable from stock lending transactions during the year. JPMorgan Investor Services Limited commissions in respect of such transactions amounted to £25,000 (2022: £48,000).
At the year end, total cash of £83,000 (2022: £2,865,000) was held with JPMorgan Chase Bank, N.A. in a non interest bearing current account.
Full details of Directors' remuneration and shareholdings can be found in the Director's Remuneration Report in the Annual Report.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Financial Statements for each financial year. Under that law the Directors have elected to prepare the Financial Statements in accordance with applicable law and United Kingdom Accounting Standards, comprising Financial Reporting Standard 102 'the Financial Reporting Standard applicable in the UK and Republic of Ireland' (FRS 102). Under company law the Directors must not approve the Financial Statements unless they are satisfied that, taken as a whole, the Annual Report and Financial Statements are fair, balanced and understandable, provide the information necessary for shareholders to assess the Company's performance, business model and strategy and that they give a true and fair view of the state of affairs of the Company and of the total return 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;
• state whether applicable UK Accounting Standards comprising FRS 102, have been followed, subject to any material departures disclosed and explained in the Financial Statements;
• make judgments and accounting estimates that are reasonable and prudent; and
• prepare the Financial Statements on a 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.
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 are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Financial Statements are published on the www.jpmchinagrowthandincome.co.uk website, which is maintained by the Company's Manager. The maintenance and integrity of the website maintained by the Manager is, so far as it relates to the Company, the responsibility of the Manager. The work carried out by the Auditor does not involve consideration of the maintenance and integrity of this website and, accordingly, the Auditor accepts no responsibility for any changes that have occurred to the accounts since they were initially presented on the website. The accounts are prepared in accordance with UK legislation, which may differ from legislation in other jurisdictions.
Under applicable law and regulations the Directors are also responsible for preparing a Strategic Report, a Directors' Report and a Directors' Remuneration Report that comply with that law and those regulations.
Each of the Directors, whose names and functions are listed in the Directors' Report confirm that, to the best of their knowledge:
• the Company's Financial Statements, which have been prepared in accordance with applicable law and United Kingdom Accounting Standards, comprising FRS102, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and
• the Strategic 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 it faces.
The Directors consider that the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position, performance, business model and strategy.
For and on behalf of the Board
Alexandra Mackesy
Chairman
12th December 2023
FINANCIAL STATEMENTS
STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30th September 2023
| 2023 | 2022 | ||||
| Revenue | Capital | Total | Revenue | Capital | Total |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
Net losses on investments held at fair value through | | | | | | |
profit or loss | - | (45,372) | (45,372) | - | (158,974) | (158,974) |
Net foreign currency gains/(losses)1 | - | 4,740 | 4,740 | - | (10,027) | (10,027) |
Income from investments | 3,305 | - | 3,305 | 3,693 | - | 3,693 |
Other income | 440 | - | 440 | 493 | - | 493 |
Gross return/(loss) | 3,745 | (40,632) | (36,887) | 4,186 | (169,001) | (164,815) |
Management fee | (617) | (1,851) | (2,468) | (850) | (2,549) | (3,399) |
Other administrative expenses | (628) | - | (628) | (605) | - | (605) |
Net return/(loss) before finance costs and taxation | 2,500 | (42,483) | (39,983) | 2,731 | (171,550) | (168,819) |
Finance costs | (735) | (2,206) | (2,941) | (281) | (845) | (1,126) |
Net return/(loss) before taxation | 1,765 | (44,689) | (42,924) | 2,450 | (172,395) | (169,945) |
Taxation charges | (208) | - | (208) | (199) | - | (199) |
Net return/(loss) after taxation | 1,557 | (44,689) | (43,132) | 2,251 | (172,395) | (170,144) |
Return per share | 1.87p | (53.71)p | (51.84)p | 2.71p | (207.20)p | (204.49)p |
1 £6,155,000 due to an exchange gain on the loan which is denominated in US dollars and £1,415,000 due to net exchange loss on cash and cash equivalents (2022: £11,660,000 due to an exchange loss on the loan which is denominated in US dollars and £1,633,000 due to net exchange gains on cash and cash equivalents).
STATEMENT OF CHANGES IN EQUITY
For the year ended 30th September 2023
| Called up |
| Exercised | Capital |
|
|
|
|
| share | Share | warrant | redemption | Other | Capital | Revenue |
|
| capital | premium | reserve | reserve | reserve1 | reserves2 | reserve2 | Total |
| £000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
At 30th September 2021 | 20,803 | 80,951 | 3 | 581 | 37,392 | 333,672 | - | 473,402 |
Net (loss)/return | - | - | - | - | - | (172,395) | 2,251 | (170,144) |
Dividend paid in the year (note 2) | - | - | - | - | - | (16,721) | (2,251) | (18,972) |
At 30th September 2022 | 20,803 | 80,951 | 3 | 581 | 37,392 | 144,556 | - | 284,286 |
Net (loss)/return | - | - | - | - | - | (44,689) | 1,557 | (43,132) |
Dividend paid in the year (note 2) | - | - | - | - | - | (9,825) | (1,557) | (11,382) |
At 30th September 2023 | 20,803 | 80,951 | 3 | 581 | 37,392 | 90,042 | - | 229,772 |
1 Created during the year ended 30th September 1999, following a cancellation of the share premium account.
2 These reserves form the distributable reserves of the Company and may be used to fund distributions to investors.
STATEMENT OF FINANCIAL POSITION
At 30th September 2023
| 2023 | 2022 |
| £'000 | £'000 |
Fixed assets |
|
|
Investments held at fair value through profit or loss | 262,005 | 333,206 |
Current assets |
|
|
Debtors | 157 | 1,997 |
Cash and cash equivalents | 87 | 10,950 |
| 244 | 12,947 |
Current liabilities | | |
Creditors: amounts falling due within one year | (669) | (61,867) |
Net current liabilities | (425) | (48,920) |
Total assets less current liabilities | 261,580 | 284,286 |
Non current liabilities |
|
|
Creditors: amounts falling due after more than one year | (31,808) | - |
Net assets | 229,772 | 284,286 |
Capital and reserves |
|
|
Called up share capital | 20,803 | 20,803 |
Share premium | 80,951 | 80,951 |
Exercised warrant reserve | 3 | 3 |
Capital redemption reserve | 581 | 581 |
Other reserve | 37,392 | 37,392 |
Capital reserves | 90,042 | 144,556 |
Revenue reserve | - | - |
Total shareholders' funds | 229,772 | 284,286 |
Net asset value per share | 276.2p | 341.7p |
STATEMENT OF CASH FLOWS
For the year ended 30th September 2023
| 2023 | 20221 |
| £'000 | £'000 |
Cash flows from operating activities |
|
|
Net loss before finance costs and taxation | (39,983) | (168,819) |
Adjustment for: | | |
Net losses on investments held at fair value through profit or loss | 45,372 | 158,974 |
Net foreign currency (gains)/losses | (4,740) | 10,027 |
Dividend income | (3,305) | (3,693) |
Interest income | (216) | (59) |
Realised gain/(loss) on foreign exchange transactions | 95 | (776) |
Realised exchange (loss)/gain on liquidity fund | (990) | 1,089 |
Increase in accrued income and other debtors | (8) | (17) |
Increase in accrued expenses | 44 | 6 |
Net cash outflow from operations before dividends and interest | (3,731) | (3,268) |
Dividends received | 3,068 | 3,412 |
Interest received | 216 | 59 |
Net cash (outflow)/inflow from operating activities | (447) | 203 |
Purchases of investments | (184,366) | (233,601) |
Sales of investments | 208,204 | 265,482 |
Settlement of foreign currency contracts | - | (129) |
Net cash inflow from investing activities | 23,838 | 31,752 |
Dividends paid | (11,382) | (18,972) |
Repayment of bank loans | (53,866) | (12,470) |
Drawdown of bank loans | 34,318 | 9,995 |
Utilisation of bank overdraft | - | (124) |
Interest paid | (2,804) | (920) |
Net cash (outflow) from financing activities | (33,734) | (22,491) |
(Decrease)/increase in cash and cash equivalents | (10,343) | 9,464 |
Cash and cash equivalents at start of year | 10,950 | 36 |
Exchange movements | (520) | 1,450 |
Cash and cash equivalents at end of year | 87 | 10,950 |
Cash and cash equivalents consist of: | | |
Cash and short term deposits | 83 | 2,865 |
Cash held in JPMorgan US Dollar Liquidity Fund | 4 | 8,085 |
Total | 87 | 10,950 |
1 The presentation of the Cash Flow Statement, as permitted under FRS 102, has been changed so as to present the reconciliation of 'net return/(loss) before finance costs and taxation' to 'net cash (outflow)/inflow from operating activities' on the face of the Cash Flow Statement. Previously, this was shown by way of note. Interest paid has also been reclassified to financing activities, previously shown under operating activities, as this relates to the loans drawn down. Other than consequential changes in presentation of the certain cash flow items, there is no change to the cash flows as presented in previous periods.
Analysis of changes in net debt
| As at |
| Other | As at |
| 30th September |
| non-cash | 30th September |
| 2022 | Cash flows | charges1 | 2023 |
| £'000 | £'000 | £'000 | £'000 |
Cash and cash equivalents |
|
|
|
|
Cash | 2,865 | (2,495) | (287) | 83 |
Cash equivalents | 8,085 | (7,848) | (233) | 4 |
| 10,950 | (10,343) | (520) | 87 |
Borrowings: |
|
|
|
|
Debt due within one year | (57,511) | 49,142 | 8,369 | - |
Debt due after one year | - | (29,594) | (2,214) | (31,808) |
| (57,511) | 19,548 | 6,155 | (31,808) |
Net debt | (46,561) | 9,205 | 5,635 | (31,721) |
1 Other non-cash charges represents the foreign exchange gains and losses on amounts held in foreign currency.
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting policies
Basis of accounting
The Financial Statements are prepared under the historical cost convention, modified to include fixed asset investments at fair value, and 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 July 2022.
All of the Company's operations are of a continuing nature.
The Financial Statements have been prepared on a going concern basis. In forming this opinion, the Directors have considered the Company's investment objective, risk management policies, capital management policies and procedures, the nature of the portfolio and revenue as well as expenditure projections, taking into account the heightened market volatility since the COVID-19 outbreak, the growing geopolitical risk to include tensions between China and the United States and the ongoing conflict between Russia and Ukraine and more recently Israel and Palestine. The Company's shareholders voted for the continuation of the Company at the 2023 AGM. The next continuation vote will be at the 2028 AGM.
The policies applied in these Financial Statements are consistent with those applied in the preceding year.
2. Dividends
(a) Dividends paid and declared
| 2023 | 2022 |
| £'000 | £'000 |
Dividends paid |
|
|
2023 first quarterly interim dividend of 3.42p (2022: 5.7p) | 2,846 | 4,743 |
2023 second quarterly interim dividend of 3.42p (2022: 5.7p) | 2,846 | 4,743 |
2023 third quarterly interim dividend of 3.42p (2022: 5.7p) | 2,845 | 4,743 |
2023 fourth quarterly interim dividend of 3.42p (2022: 5.7p) | 2,845 | 4,743 |
Total dividends paid in the period | 11,382 | 18,972 |
In respect of the year ending 30th September 2024, the first quarterly interim dividend of 2.76p per share amounting to £2,296,000 (2023: 3.42p per share amounting to £2,846,000) has been declared and paid. In accordance with the accounting policy of the Company, this dividend will be reflected in the Financial Statements for the year ending 30th September 2024.
(b) Dividend for the purposes of Section 1158 of the Corporation Tax Act 2010 ('Section 1158')
The requirements of Section 1158 are considered on the basis of the dividend paid and declared in respect of the financial year, shown above. For the year ended 30th September 2023, the dividends declared were paid during the year as shown above.
The aggregate of the distributable reserves is £90,042,000 (2022: £144,556,000). Please note that at the Annual General Meeting ('AGM') 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 Company's dividend policy.
The aggregate of the distributable reserves after the payment of the first quarterly dividend for the year ended 2024 will amount to £87,746,000 (2022: £141,710,000).
3. Return/(loss) per share
| 2023 | 2022 |
| £'000 | £'000 |
Revenue return | 1,557 | 2,251 |
Capital loss | (44,689) | (172,395) |
Total loss | (43,132) | (170,144) |
Weighted average number of shares in issue during the year | 83,202,465 | 83,202,465 |
Revenue return per share | 1.87p | 2.71p |
Capital loss per share | (53.71)p | (207.20)p |
Total loss per share | (51.84)p | (204.49)p |
4. Net asset value per share
| 2023 | 2022 |
Net assets (£'000) | 229,772 | 284,286 |
Number of shares in issue | 83,202,465 | 83,202,465 |
Net asset value per share | 276.2p | 341.7p |
5. Status of results announcement
2022 Financial Information
The figures and financial information for 2022 are extracted from the Annual Report and Financial Statements for the year ended 30th September 2022 and do not constitute the statutory accounts for that year. The Annual Report and Financial Statements has been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.
2023 Financial Information
The figures and financial information for 2023 are extracted from the Annual Report and Financial Statements for the year ended 30th September 2023 and do not constitute the statutory accounts for that year. The Annual Report and Financial Statements includes the Report of the Independent Auditor which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Financial Statements will be delivered to the Registrar of Companies in due course.
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.
12th December 2023
For further information:
Lucy Dina,
JPMorgan Funds Limited
020 7742 4000
ENDS
A copy of the 2023 Annual Report and Financial Statements will shortly be submitted to the FCA's National Storage Mechanism and will be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
The 2023 Annual Report and Financial Statements 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.
JPMORGAN FUNDS LIMITED
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