RNS Number : 0500C
Prospect Japan Fund Ld
26 August 2008
THE PROSPECT JAPAN FUND LIMITED
INTERIM REPORT & UNAUDITED FINANCIAL STATEMENTS
CHAIRMAN'S REPORT
On 7 April, 2008 I was appointed to the role of Chairman of your Company from Mr. David Fitzwilliam-Lay, who had been Chairman since the
inception. On behalf of the Board and the Shareholders, I would like to thank him for his guidance and concern for the Company and
yourselves as owners.
The period under review has been extremely difficult for Investment Advisors globally.It has been a disappointing period of operations,
with the Fund suffering from the underperformance of the real estate sector, and the net asset value ("NAV") per share of the Company
falling from 179p to 133p, a decline of 25.70%. The Topix Small Index fell by 2.04%. The Japanese stock market has not been immune from the
effects of the credit crisis and the rapid rise in the price of oil, which has continued to challenge other world markets. The Interim
Management Report covers the review of the market background and outlook in more detail.
On 20 November, 2007 the Board authorised a drawdown agreement of up to US$40,000,000 with the Royal Bank of Scotland (RBS). This
facility has now been withdrawn by RBS and the outstanding loan amount repaid (see Note 7). The Board is currently reviewing alternative
arrangements to replace the leverage facility, since the Investment Advisor is of the view that it is important for them to be able to be
positioned to take advantage of opportunities that they believe will be available going forward.
The valuation of the market continues to be attractive in terms of earnings, but in the global environment of caution, a change in
sentiment is vital.
John Hawkins
Chairman
22 August 2008
INTERIM MANAGEMENT REPORT AND INVESTMENT ADVISOR'S REPORT
For the period from 1 January, 2008 to 30 June, 2008
Market Performance (%), US$ NAV
YTD 2008 1 Year 3 Year 5 Year
Prospect Japan Fund (25.70%) (42.67%) (23.12%) 36.55%
Topix Small (2.04%) (14.33%) 3.12% 69.06%
Prospect Japan Fund inception date is 20 December 1994. Topix Small is the capitalization-weighted index designed to measure the stocks
not included in the Topix 500 Index that are listed on the First Section of the Tokyo Stock Exchange. As of August 2003, the benchmark of
the Prospect Japan Fund changed from TSE2 to Topix Small since its characteristics with respect to average market capitalization more
closely resemble the investment strategy pursued by the portfolio. Above performance of the Fund is net of fees and expenses and includes
reinvestment of dividends and capital gains. Source: Prospect Asset Management, Inc. Source: Bloomberg.
Review
The Fund had a difficult half year to 30 June 2008, down 25.7%. Weakness in the real estate sector contributed to the Fund's
underperformance.
Two themes continue to dominate global markets in 2008: The credit crisis and the surge in oil. While Japan is certainly not immune to
either of these factors, we would argue the economy is better positioned than other G-8 countries, and the Japanese market is poised for a
period of relative out performance. We would also note that activism and shareholder accountability is gaining momentum among domestic
institutions.
Investors in Japanese real estate related equities may be forgiven for asking why the asset class has performed so poorly in light of
reports of how the Japanese financial institutions have largely avoided exposure to sub prime loans in the US. Also reports have
consistently noted that Japanese property, particularly central Tokyo commercial and office space has remained buoyant, with until very
recently reports of higher transacted prices for direct property and higher asking rents for existing sites. While the set of circumstances
between the US and Japanese housing and lending markets have been different, the effects, particularly for small cap residential developers
and J-REITS, have been virtually identical.
The US sub prime mess has been caused by excess leverage and contracting credit, resulting in weakening real estate prices and the
inability to refinance debt. In Japan, the inability of the J-REITS to raise fresh equity in the capital markets has backed up the chain of
transactions in the property sector. Many condominium developers, for example, began projects two years ago on the premise the completed
buildings would be then sold into the J-REITS. As the J-REITS have become unable to acquire these properties, the developers have been
forced to take this inventory on their balance sheets. The past several months have seen the developers being forced to write down the value
of these assets, and in select cases, realise losses.
Nonetheless, this disparity may seem a bit extreme when one considers J-REITS have healthy balance sheets, with average loan to value
ratios of 50% versus 80%-90% for private funds. Also according to Nikkei Veritas, the aggregate debt of all 42 J-REITS with terms ending
March 2009 is �946bn, ($8.9bn) which represents just 1.5% of the total loans of the domestic bank loans to the real estate industry. Bank
loans to the real estate industry have without question been tightening, but one has to question if the banks are not being unduly cautious.
Outlook
Shareholders are beginning to matter
Japan's Pension Fund Association last year adopted a policy of opposing director reappointments at firms whose return on equity has
remained below 8% for three consecutive years, unless management provides sufficient explanations or makes satisfactory proposals. A recent
Nikkei survey found that some 46% of the 1,579 non financial firms that close their books in March and hold shareholder meetings this month
posted below 8% return on equitiy for a third consecutive year. The pension association voted against some 39% of director reappointment
proposals at general shareholder meetings in June 2007.
After decades of silence, Japan's big institutional shareholders are increasingly demanding performance and accountability, providing
the most pressure yet for Japanese companies to improve their corporate governance. Nissay Asset Management, the fund management arm of
Japan's largest life insurer, said it already has voted against 90% of the poison pill resolutions this year, up from 40% last year. This is
a change from normal practice, where Japanese institutional shareholders would unanimously support management decisions. The lack of
pressure from shareholders has been cited as one of the reasons why management has paid less attention to shareholder interests and instead
focused on the needs of customers, employees and other stakeholders.
Perhaps the most encouraging news came through an interview with the president of cosmetics maker Shiseido. Since Livedoor's hostile
takeover attempt of Nippon Broadcasting (9402) in 2005, over 10% of listed companies have introduced anti-takeover measures. Shiseido
recently chose to abandon its poison pill measures, saying "boosting corporate value is the best takeover defense."
On 12 August 2008, RBS notified the Prospect Japan Fund that an event of default had occurred. Funds to repay the loan were raised
within a week of the notice. The default will have no long term effect on the Fund.
Risks and Opportunities Over The Next Six Months
Risks
J-REITs and real estate are the two largest sectors in the Fund. For the real estate sector, the largest risk is bank lending. Many
banks are under pressure to shrink their balance sheets, and are curtailing lending to real estate. Whether banks extend financing or
refinancing to real estate companies has determined survivability. As a result, there have been several high profile failures of real estate
developers recently, with the market discounting more to come. Similarly in the JREIT space, a tangible risk revolves around the ability of
individual companies to secure refinancing, and the competitiveness of the rates they are offered. At present, banks tend to judge J-REITs
on the credit worthiness of their sponsors, as opposed to the quality of underlying assets. This practice has led to a bifurcation in the
market in which large J-REITs with brand-name sponsors securing the financing needed to continue with property acquisitions and even public
offering of new units and smaller companies with less reputable sponsors being overlooked.
Opportunities
Real estate and construction comprises 10% of Japan's economy, and there may be political pressure for banks to put a floor under the
market. Tax policies or other changes, such as administrative guidance to encourage less draconian lending practices, may be implemented.
The opportunities lie in consolidation or M&A in the sectors, as evidenced by the merger announcement by Azel (1872) and Gro-bels (3528),
two significant holdings in the Fund, and Oaktree, a US private equity fund, announcing a take over bid for Re-plus REIT (8986) at a 41%
premium over the closing price of the day of the announcement.
The Prospect Japan Fund is a closed-end investment company incorporated in Guernsey, and listed on the London Stock Exchange. The
Company's investment objective is to achieve long-term capital growth from a portfolio of securities primarily of smaller Japanese companies
listed or traded on Japanese Stock Markets. Past performance is no indication of future results.
Prospect Asset Management, Inc.
22 August, 2008
RESPONSIBILITY STATEMENT
For the period from 1 January, 2008 to 30 June, 2008
Responsibility statement of the directors in respect of the Interim financial report
We confirm that to the best of our knowledge that:
*this set of interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting;
*the Interim Management Report includes information detailed in the Interim Management Report & Investment Advisor's Report and Notes to
the Condensed Interim Financial Statements which provides a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure 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) DTR4.2.7R of the Disclosure 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 entity during that period; and
any changes in the related party transactions described in the last annual report that could do so.
John A. Hawkins
Christopher W. Sherwell
22 August 2008
UNAUDITED INCOME STATEMENT
for the period from 1 January, 2008 to 30 June, 2008
Revenue Capital Total
Revenue Capital Total
01.01.2008 to 01.01.2008 to 01.01.2008 to
01.01.2007 to 01.01.2007 to 01.01.2007 to
30.06.2008 30.06.2008 30.06.2008
30.06.2007 30.06.2007 30.06.2007
Notes In U.S. Dollars In U.S. Dollars In U.S. Dollars
In U.S. Dollars In U.S. Dollars In U.S. Dollars
Investment income 3,567,580 - 3,567,580
2,619,690 - 2,619,690
Interest income 11,972 - 11,972
- - -
Foreign exchange movements - 545,957 545,957
- (507,385) (507,385)
Total Income 3,579,552 545,957 4,125,509
2,619,690 (507,385) 2,112,305
4 Management fee (1,185,679) - (1,185,679)
(1,790,750) - (1,790,750)
5 Other expenses (814,209) - (814,209)
(1,055,805) - (1,055,805)
Loan Interest (434,795) - (434,795)
- - -
(Loss)/gain on financial assets
at fair value through profit or loss - (48,230,999) (48,230,999)
- 16,508,860 16,508,860
Total Expenses (2,434,683) (48,230,999) (50,665,682)
(2,846,555) 16,508,860 13,662,305
(Loss)/gain for the year before tax 1,144,869 (47,685,042) (46,540,173)
(226,865) 16,001,475 15,774,610
3 Withholding tax (247,727) - (247,727)
(166,168) - (166,168)
(Loss)/gain for the year after tax 897,142 (47,685,042) (46,787,900)
(393,033) 16,001,475 15,608,442
2 (Loss)/gain per Ordinary Share -
Basic & Diluted (0.465)
0.152
The above results relate to continuing operations of the Company.
UNAUDITED STATEMENT OF CHANGES IN EQUITY
for the period from 1 January, 2008 to 30 June, 2008
Capital
Capital Capital Capital Reserve/
Redemption Redemption Revenue
Reserve/ Reserve/ Exchange
Share capital Reserve Reserve Reserve
Realised Unrealised Differences Total
In U.S. Dollars In U.S. Dollars In U.S. Dollars In U.S. Dollars In
U.S. Dollars In U.S. Dollars In U.S. Dollars In U.S. Dollars
Balances at 1 January, 2008 101,070 314,439 93,320,845 (15,420,402)
160,025,164 (57,072,290) 45,023 181,313,849
Movements during the period
Realised losses on investments sold - - - -
(34,784,465) - - (34,784,465)
Movement on unrealised loss on
revaluation of investments - - - -
- (13,446,534) - (13,446,534)
Gains on foreign exchange - - - -
- - 545,957 545,957
Return on ordinary activities - - - 897,142
- - - 897,142
Repurchase of shares (455) 455 (704,206) -
- - - (704,206)
Balances at 30 June, 2008 100,615 314,894 92,616,639 (14,523,260)
125,240,699 (70,518,824) 590,980 133,821,743
for the period from 1 January, 2007 to 30 June, 2007
Capital
Capital Capital Capital Reserve/
Redemption Redemption Revenue
Reserve/ Reserve/ Exchange
Share capital Reserve Reserve Reserve
Realised Unrealised Differences Total
In U.S. Dollars In U.S. Dollars In U.S. Dollars In U.S. Dollars In
U.S. Dollars In U.S. Dollars In U.S. Dollars In U.S. Dollars
Balances at 1 January, 2007 102,824 312,685 96,730,082 (14,097,274)
142,497,446 (3,172,177) 36,295 222,409,881
Movements during the period
Realised gains on investments sold - - - -
22,025,352 - - 22,025,352
Movement on unrealised loss on
revaluation of investments - - - -
- (5,516,492) - (5,516,492)
Losses on foreign exchange - - - -
- - (507,385) (507,385)
Deficit on ordinary activities - - - (393,033)
- - - (393,033)
Repurchase of shares (675) 675 (1,446,159) -
- - - (1,446,159)
Balances at 30 June, 2007 102,149 313,360 95,283,923 (14,490,307)
164,522,798 (8,688,669) (471,090) 236,572,164
UNAUDITED STATEMENT OF ASSETS AND LIABILITIES
as at 30 June, 2008
30.06.2008 31.12.2007 30.06.2007
Notes In U.S. Dollars In U.S. Dollars In U.S. Dollars
Non-current assets
6 Financial assets 145,836,993 195,997,753 225,627,115
designated at fair
value through profit
or loss
Current assets
Receivables 2,768,135 894,083 831,305
Cash and cash 1,879,068 8,431,150 25,303,323
equivalents
Total current assets 4,647,203 9,325,233 26,134,628
Current liabilities
7 Short term 15,309,646 23,309,646 15,189,579
borrowings
Payables 1,352,807 699,491 -
Net current (12,015,250) (14,683,904) 10,945,049
liabilities
Total assets less 133,821,743 181,313,849 236,572,164
current liabilities
Equity
8 Share capital 100,615 101,070 102,149
8 Redemption reserve 92,616,639 93,320,845 95,283,923
8 Capital redemption 314,894 314,439 313,360
reserve
9 Other reserves 40,789,595 87,577,495 140,872,732
Total equity 133,821,743 181,313,849 236,572,164
Ordinary Shares in 100,615,520 101,070,520 102,149,520
issue
2 Net Asset Value per 1.33 1.79 2.32
Ordinary Share
The Financial Statements on pages 11 to 18 were approved by the Board of Directors on 22 August 2008 and signed on its behalf by:
John A. Hawkins
Christopher W. Sherwell
UNAUDITED CASH FLOW STATEMENT
for the period from 1 January, 2008 to
30 June, 2008
01.01.2008 to 01.01.2007 to
30.06.2008 30.06.2007
In U.S. Dollars In U.S. Dollars
Cash flows from operating activities
Net cash inflow from operating 215,797 440,272
activities
Cash flows from investing activities
Purchase of investments (48,991,267) (152,040,734)
Sale of investments 50,381,637 177,127,649
Net cash inflow from financing 1,390,370 25,086,915
activities
Net cash inflow before financing 1,606,167 25,527,187
Cash flows from financing activities
Repurchase of shares (704,206) (1,446,160)
Repayment of short term borrowings (8,000,000) -
Net cash outflow from financing (8,704,206) (1,446,160)
activities
(Decrease)/increase in cash and cash (7,098,039) 24,081,027
equivalents
Reconciliation of net cash flow to
movement in net funds
Net cash (outflow)/inflow (7,098,039) 24,081,027
Effects of foreign exchange rate 545,957 (507,385)
changes
Cash and cash equivalents at beginning 8,431,150 1,729,681
of period
Cash and cash equivalents at end of 1,879,068 25,303,323
period
NOTES AND ACCOUNTING POLICIES
NOTE 1 Principal Accounting Policies
Basis of Accounting
The interim condensed financial statements for the six months ended 30 June 2008 have been prepared in accordance with IAS 34 Interim
Financial Reporting.
The interim condensed financial statements do not include all the information and disclosures required in the annual financial
statements, and should be read in conjunction with the Company's Annual Report and Audited Financial Statements as at 31 December 2007.
NOTE 2 (Deficit)/Return per Ordinary Share - Basic & Diluted and Net Asset Value per Ordinary Share - Basic & Diluted
The return/deficit per Ordinary Share - Basic and Diluted has been calculated based on the weighted average number of Ordinary Shares of
100,704,861 and a net deficit of US$46,787,900 (2007: on 102,639,990 Ordinary Shares and a net return of US$15,608,442).
There were no dilutive elements to shares issued or repurchased during the year.
The Net Asset Value per Ordinary Share - Basic and Diluted has been calculated based on the number of shares in existence at the balance
sheet date 100,615,520 (2007: 101,070,520) and shareholders' funds attributable to equity interests of US$133,812,743 (2007:
US$181,313,849).
30.06.2008 31.12.2007
In U.S. Dollars In U.S. Dollars
Net Asset Value per Ordinary Share - Basic and 1.33 1.79
Diluted
NOTE 3 Taxation
The Company has been granted Exempt Status under the terms of The Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 to income tax in
Guernsey. Its liability is an annual fee of �600. With effect from 1 January, 2008 Guernsey taxation legislation was changed, with the
standard rate of income tax for Guernsey resident companies now 0%. There is no impact on the Company with regard to this change as it will
continue to apply for Exempt Status.
The amount disclosed as taxation in the Income Statement relates solely to withholing tax suffered at the source of income in the
investing country, Japan.
NOTE 4 Management Fee
The management fee is payable to the Manager, Prospect Asset Management (Channel Islands) Limited, monthly in arrears at a rate of 1.5%
per annum of the Net Asset Value, which is calculated as of the last business day of each month. Total management fees for the period
amounted to US$1,185,679 (2007: US$1,790,750) of which US$170,244 (2007: US$282,287) is due and payable at the period end. The Management
Agreement dated 1 December, 1994 shall remain in force until determined by the Fund, or upon the Manager giving the Fund not less than three
months' notice in writing, subject to additional provisions included in the agreement regarding a breach by either party.
NOTE 5 Other Expenses
01.01.2008 to 01.01.2007 to
30.06.2008 30.06.2007
In U.S. Dollars In U.S. Dollars
Brokers' commission 282,753 457,138
Administration and secretarial fees* 197,613 299,884
General expenses 143,931 79,787
Custodian's fees and charges** 105,808 164,349
Directors' remuneration 66,930 40,995
Auditors' fees 17,174 13,652
814,209 1,055,805
*The administration and secretarial fees are payable to Northern Trust International Fund Administration Services (Guernsey) Limited,
monthly in arrears and is 0.25% of the Net Asset Value of the Fund, which is calculated as of the last business day of each month. Total
administration and secretarial fees for the period amounted to US$197,613 (2007: US$299,884) of which US$28,374 (2007: US$47,048) is due and
payable at the period end.
**The custodian's fees and charges are payable to Northern Trust (Guernsey) Limited, monthly in arrears and is 0.08% of the Net Asset
Value of the Fund, which is calculated as of the last business day of each month. Total custodian's fees and charges for the period amounted
to US$105,808 (2007: US$164,349) of which US$9,882 (2007: US$39,362) is due and payable at the period end.
NOTE 6 Financial assets designated at fair value through profit or loss
01.01.2008 to 01.01.2007 to 01.01.2007 to
30.06.2008 31.12.2007 30.06.2007
In U.S. Dollars In U.S. Dollars In U.S. Dollars
Opening book cost 253,070,043 223,234,305 223,234,305
Purchases at cost 49,750,432 235,632,928 166,383,538
Proceeds on sale (51,680,193) (223,324,908) (177,327,413)
Realised (loss)/gain on sale (34,784,465) 17,527,718 22,025,352
Closing book cost 216,355,817 253,070,043 234,315,782
Closing unrealised depreciation (70,518,824) (57,072,290) (8,688,667)
Fair value as at period/year end 145,836,993 195,997,753 225,627,115
NOTE 7 Short Term Borrowings
On 20 November, 2007 the Company entered into a drawdown loan agreement of up to US$40,000,000 with Royal Bank of Scotland (RBS). As at
30 June, 2008 the loan amount drawn down was US$15,309,646 (31 December 2007: US$23,309,646). On 7 May, 2008 the Company repaid US$8,000,000
of the loan.
In connection with the facility agreement, the Company entered into a Guernsey law security interest agreement in favour of RBS over its
custody accounts held with Northern Trust (Guernsey) Limited.
The loan may be applied for investment leverage purposes only and shall be repaid on the latest of (i) the day falling 364 days from the
date of the drawing down of the loan, and (ii) any extension date agreed by the the Company and RBS.
On 12 August, 2008 Royal Bank of Scotland (RBS) requested immediate repayment of its loan with the Company as an event of default
21.11(c) had occurred. This event of default required repayment of the loan if the NAV per share is 25% or more less than the NAV per share
falling three months earlier. On 18 August, 2008 the total outstanding on the loan including accrued interest of US$15,329,073.86 was
repaid.
NOTE 8 Share Capital, Share Premium, Redemption Reserve & Capital Redemption Reserve
Authorised Share Capital 30.06.2008
Number of shares In U.S. Dollars
150,000,000 Ordinary Shares of US$0.001 each 150,000
60,000,000 "C" Ordinary Shares of US$0.01 each 600,000
Issued and fully paid Shares
Capital
Redemption Redemption
Ordinary Shares Share Capital Reserve Reserve
Number of shares In U.S. Dollars In U.S. Dollars In U.S. Dollars
101,070,520 Balance at 1 101,070 93,320,845 314,439
January, 2008
Shares acquired and
cancelled
(455,000) during the period (455) (704,206) 455
100,615,520 Balance at 30 June, 100,615 92,616,639 314,894
2008
Ordinary Shares are not puttable instruments. As such they are not required to be classified as debt under IAS 32.
The Company may purchase, subject to various terms as set out in the Articles, a maximum of 7,251,950 Ordinary Shares, equivalent to
7.2% of the Issued share capital of the Company as at 30 June, 2008. During the year, shares were purchased and cancelled as follows:-
Price per Share Percentage of
Date Shares In U.S. Dollars share capital
11 January, 2008 250,000 1.600 0.25%
23 January, 2008 10,000 1.470 0.01%
31 January, 2008 10,000 1.660 0.01%
1 February, 2008 10,000 1.650 0.01%
6 March, 2008 50,000 1.530 0.05%
12 March, 2008 75,000 1.440 0.07%
14 March, 2008 25,000 1.440 0.02%
20 March, 2008 25,000 1.380 0.02%
455,000 0.44%
Note 9 Other Reserves
Capital Capital Capital Reserve/
Accumulated Reserve/ Reserve/ Exchange
Losses Realised Unrealised Differences
Total
In U.S. Dollars In U.S. Dollars In U.S. Dollars In U.S. Dollars In
U.S. Dollars
Balances at 1 January, 2008 (15,420,402) 160,025,164 (57,072,290) 45,023
87,577,495
Movements during the period
Realised loss on investments sold - (34,784,465) - -
(34,784,465)
Movement on unrealised loss on
revaluation of investments - - (13,446,534) -
(13,446,534)
Gain on foreign exchange - - - 545,957
545,957
Return on ordinary activities 897,142 - - -
897,142
Balances at 30 June, 2008 (14,523,260) 125,240,699 (70,518,824) 590,980
40,789,595
Note 10 Reconciliation of Surplus/(Deficit) on Ordinary Activities to Net Cash Inflow from Operating Activities
30.06.2008
30.06.2007
In U.S. Dollars In
U.S. Dollars
Revenue surplus/(deficit) on ordinary activities for the period 897,142
(393,033)
(Increase)/decrease in dividends receivable and other receivables (575,496)
946,970
Decrease in other creditors (105,849)
(113,665)
Net cash inflow from operating activities 215,797
440,272
NOTE 11 Related Party Transactions
Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the
other party in making financial or operational decisions.
The Directors are responsible for the determination of the investment policy of the Group and have overall responsibility for the
Group's activities.
Mr Rupert Evans is a Director of the Manager.
Directors' fees are disclosed in Note 5. The basic fee payable to Directors is �15,000, the Chairman of the Audit Committee �17,500 and
the Chairman of the Board �20,000. The Chairman is temporarily also Chairman of the Audit Committee and receives a fee of �22,500.
NOTE 12 Segmental Reporting
The Directors are of the opinion that the Company operates in single business and geographical segments, being investment business in
Japan.
NOTE 13 Subsequent Events
On 12th August, 2008 Royal Bank of Scotland (RBS) requested immediate repayment of its loan with the Company as an event of default
21.11(c) had occured. This event of default requires repayment of the loan if the NAV per share is 25% or more less than the NAV per share
falling three months earlier. On 18 August, 2008 the total outstanding on the loan including accrued interest of US$15,329,073.86 was
repaid.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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