AAIF Abrdn Asian Income Fund Limited

abrdn Asian Income Fund Limited

Legal Entity Identifier: 549300U76MLZF5F8MN87

UNAUDITED HALF YEARLY REPORT FOR THE SIX MONTHS ENDED 30 JUNE 2024

Performance Highlights

·      The dividend yield at the end of the period was 5.5%.

·      The NAV increased by 6.8% on a total return basis for the six months ended 30 June 2024. This compares to an increase of 9.6% in the MSCI AC Asia Pacific ex Japan Index.

·      Ongoing charges of 0.86%.

For further information please contact:

Ben Heatley

Head of Closed End Fund Sales

abrdn Investments Limited

07796 564 562

Chairman's Statement

Highlights

·      Dividend yield: 5.5%, with a firm intention to continue to grow the dividend again for the current financial year.

·      NAV total return: 6.8% for the period compared to the Index total return of 9.6%.

·      Outperformance: the Company has outperformed the Index over 3 and 5 years in both NAV and share price total return terms.

·      Reduced management fees: ongoing charges decreased to 0.86% (2023: 1.00%).

Market Overview

In the first six months of 2024, we caught glimpses of the cautious optimism around Asian equities that was referenced in my last annual statement.

Pivotal themes that drove sentiment included the growing expectation that the US Federal Reserve will start to cut interest rates in the second half of 2024. In China, fresh targeted measures to support and stimulate the economy alleviated growth pressures. This provided a boost to confidence and led to a recovery in mainland equity markets, although some areas of concern persist around the over-leveraged property sector and foreign outflows. 

The Asian technology sector also strengthened, amid the rapid advance of artificial intelligence ("AI") and related applications. Good fundamentals and a positive outlook on the structural growth of the semiconductor and technology hardware sectors also underpinned sector optimism, mirroring the strong gains seen in the US with the 'Magnificent 7'.

There were several democratic elections across Asia during the period, including in India where the ruling Bharatiya Janata Party ("BJP"), led by Prime Minister Narendra Modi, formed a coalition government with its key allies. The new government is due to set out its budget intentions soon, which will provide some colour on the country's economic backdrop.

There were also some headwinds to markets, including uncertainty ahead of the US presidential election in November. The Investment Manager is watching US political developments closely, and what either a Trump re-election or Harris election would mean for Asia.

Performance

In this environment, over the six months to 30 June 2024, the net asset value ("NAV") rose by 6.8% on a total return basis, which compares to the MSCI AC Asia Pacific ex Japan Index's (the "Index") return of 9.6%. The share price total return for the period was 6.9%, and the share price ended the period at 215p, representing a discount of 13.1% to the NAV per share. Since the end of the period the discount has narrowed to 11.1%.

The Investment Manager's quality focused investment process relies on the knowledge network built over several decades by its team on the ground across Asia. Regular due diligence meetings with corporate management teams and business leaders have laid the groundwork to build a defensive portfolio of holdings that has delivered positive absolute returns during this period. Looking over the longer term, the Company has outperformed the Index over 3 and 5 years in both NAV and share price total return terms, generating positive absolute and relative returns for investors.

Portfolio Activity

The Investment Manager remains focused on enhancing the Company's dividend prospects and ensuring that the portfolio positioning accurately reflects its conviction in quality, with earnings visibility and cash flow generation a priority in the prevailing environment.

Within that context, the Investment Manager used market volatility to exit AEM Holdings and Hana Microelectronics in order to reallocate within the sector to other technology hardware companies with stronger business outlooks. Alongside topping up some of the existing Taiwanese holdings that have exposure to the AI demand growth, a holding was initiated in South Korea's SK Hynix, one of the World's biggest suppliers of high bandwidth memory chips that are used to power AI servers.

Elsewhere, the Investment Manager exited companies where valuations were rich relative to expected future earnings growth potential such as Momo.com and ASX, and instead added Mirvac, a high quality property group, and Transurban Group, the dominant toll road developer and operator in Australia.

Meanwhile, in China, the exit of SAIC Motor Group was used to fund initiations in companies with attractive dividend yield prospects such as Fuyao Glass Industry, the number two player in the global automotive glass industry behind Japan's Asahi Glass; Inner Mongolia Yili Industrial, the largest dairy brand in the country; and PICC Property & Casualty, the largest property and casualty insurer on the mainland.

Revenue and Dividends

Revenue earnings per share were 5.73p for the six month period ended 30 June 2024, which compares to 6.28p per share for the first six months of the previous year. There were special dividends in 2023 which have not been repeated this year and some higher yielding companies have moved from paying dividends on a semi-annual to annual basis thereby spreading their dividend payments over the full year. The Company has continued to benefit from the Investment Manager's focus on high-yielding companies with strong fundamentals, where it believes there is room for significant increases in dividend receipts.

The Company has already declared first and second interim dividends of 2.55p per share in respect of the year ending 31 December 2024, with the second interim dividend payable on 23 August 2024 to shareholders on the register on 26 July 2024.

The Board is very aware of the importance of dividends to shareholders. In the absence of unforeseen circumstances it is the Board's intention to once again increase the level of dividend for the year (2023: 11.75p, representing a dividend yield of 5.5% as at 30 June 2024) which will enable the Company to retain its status as a "next generation dividend hero" as recognised by the Association of Investment Companies.

The Company's attractive dividend yield and dividend growth record reflect the Investment Manager's conviction in quality as an investment style that works in Asia, and the ability of the portfolio's holdings to continue to deliver resilient compounding earnings and income growth over the medium term.

Ongoing Charges

As set out in detail in the 2023 Annual Report, with effect from 1 January 2024, the Company has benefited from a negotiated reduction in the management fee, with the annual fee now calculated on the lower of market capitalisation and net assets, at 0.75% up to £300 million and 0.60% over £300 million. It is pleasing to note that this has contributed to a reduction in the ongoing charges ratio during the period, which is expected to be 0.86% for the current financial year compared to 1.00% in 2023, a reduction of 14%.

Share Capital Management

The Company bought back 7.9 million shares during the period to be held in treasury, representing 4.7% of the shares in issue at the start of the period, at an average discount of 12.6% and providing an estimated enhancement of 0.58% to the NAV per share. Subsequent to the period-end the Company has continued to buy back shares and a total of 2.2 million further shares have been acquired.

These buybacks provide an enhancement to the Company's NAV and benefit all shareholders. The Company will continue to selectively buy back shares in the market, in normal market conditions and at the discretion of the Board.

Gearing

The Company has a £50 million revolving credit facility which matures in March 2025. At the period end, £32.2 million of the facility was drawn down, resulting in gearing (net of cash) of 7.1%, compared to 7.5% at the beginning of the period.

Board Composition

During the period, the Board was pleased to announce the appointment of Jane Routledge as an independent non-executive Director of the Company, with effect from 8 May 2024. 

Jane has significant marketing experience with a long career in the investment management sector. She has held a number of senior marketing positions including at Schroders, Invesco, Hermes and Seven Investment Management. She is currently a non-executive director of M&G Credit Income Investment Trust plc and Brown Advisory US Smaller Companies plc.

Outlook

The potential return of Donald Trump as US President has caused uncertainties in markets across Asia. Given Donald Trump's actions in his previous term, investors are justifiably concerned about the risk of tariffs and a renewed trade conflict with Asia. Such measures, if implemented, would weigh on currencies, businesses, consumer sentiment, economies and risk appetite in general. However, this potential impact should be weighed against the likely boost from the expected easing of interest rates by the Federal Reserve in the latter months of 2024. While we would expect uncertainty to persist through to the election in November and beyond, we would see any potential impact from US policy and political developments as a nuanced one, with differing impacts across different economies, sectors, businesses and the consumer.

In China, the Third Plenum, a major meeting held roughly once every five years to map out the general direction of the country's long-term social and economic policies, has just concluded. There was an emphasis on discussing near-term issues, reflecting some urgency following a disappointing second-quarter of GDP growth. While there were few details on reforms, the tone and focus remained unchanged, with a balance between security and development goals. Post the Plenum, there has been incremental stimulus, starting with the cutting of policy rates by the central bank and the easing of demand and supply conditions in the bond market.

Over the longer term, we continue to view Asia as one of the most compelling regions for investors looking for growth and income potential.  The region is clearly more than just China, with opportunities abounding across the broader area. Asian markets have been tarnished by investor concerns over China, but we believe this overlooks the excellent progress the broader Asian region has made in recent years in strengthening its economies, shoring up its currencies, creating employment, adopting technology and driving innovation.

More than 50% of Asian equity total returns now come from dividends and dividend growth. Companies in Asia have less geared balance sheets than their global peers and free cash flow generation cover on dividends has been increasing, both of which highlight the potential for increasing payout ratios in the region.  Today, we believe little of this significant progress is priced into markets, with the MSCI Asia Pacific ex Japan Index trading on just 13xPE, compared to the S&P 500 Index on nearly 21xPE. We believe that the often overlooked dividend credentials of Asian equities will become ever more attractive, with investors increasingly recognising the income potential of some of the world's most exciting companies.

The Investment Manager remains confident in a bottom-up quality approach, focusing on well-managed companies with strong cash flows and earnings visibility, leveraging the many structural growth drivers across the region to grow both capital and income over the long term.

Ian Cadby

Chairman

15 August 2024

Investment Portfolio

As at 30 June 2024 

Condensed Statement of Comprehensive Income

Condensed Statement of Comprehensive Income (cont'd)

Condensed Balance Sheet

The financial statements were approved by the Board of Directors and authorised for issue on 15 August 2024 and

were signed on its behalf by:

Ian Cadby

Chairman

The accompanying notes are an integral part of the financial statements.

Condensed Statement of Changes in Equity

Condensed Statement of Cash Flows

Notes to the Financial Statements

For the year ended 30 June 2024

Alternative Performance Measures

Interim Board Report - Disclosures

Principal Risk Factors

The principal risks and uncertainties affecting the Company are set out below and in detail on pages 22 to 23 of the Annual Report for the year ended 31 December 2023 and are not expected to change materially for the remaining six months of the Company's financial year.

The risks outlined below are those risks that the Directors considered at the date of this Half Yearly Report to be material but are not the only risks relating to the Company or its shares. If any of the adverse events described below actually occur, the Company's financial condition, performance and prospects and the price of its shares could be materially adversely affected and shareholders may lose all or part of their investment. Additional risks which were not known to the Directors at the date of this Half Yearly Report, or that the Directors considered at the date of this Report to be immaterial, may also have an effect on the Company's financial condition, performance and prospects and the price of the shares.

If shareholders are in any doubt as to the consequences of their acquiring, holding or disposing of shares in the Company or whether an investment in the Company is suitable for them, they should consult their stockbroker, bank manager, solicitor, accountant or other independent financial adviser authorised under the Financial Securities and Markets Act 2000 (as amended by the Financial Services Act 2012) or, in the case of prospective investors outside the United Kingdom, another appropriately authorised independent financial adviser.

The risks can be summarised under the following headings:

·      Investment strategy and objectives;

·      Investment portfolio, investment management;

·      Financial obligations;

·      Financial;

·      Regulatory;

·      Operational; and

·      Income and dividend risk.

In addition to these risks, the Board is conscious of the ongoing impacts of the conflicts in Ukraine and the Middle East, as well as continuing tensions between the US and China. The Board is also conscious of the impact of inflation and higher interest rates on financial markets. The Board considers that these are risks that could have further implications for financial markets. An explanation of other risks relating to the Company's investment activities, specifically market, liquidity and credit risk, and a note of how these risks are managed, are contained in note 18 on pages 81 to 89 of the Annual Report for the year ended 31 December 2023.

Going Concern

The Directors have undertaken a robust review of the Company's ability to continue as a going concern. The Company's assets consist primarily of a diverse portfolio of listed equity shares which in most circumstances are realisable within a very short timescale. The Directors have reviewed forecasts detailing revenue and liabilities, have set limits for borrowing and reviewed compliance with banking covenants, including the headroom available.

The Company has a £50 million revolving credit facility which matures in March 2025. In the event that it is not possible to renew the loan, the Board considers that there is sufficient portfolio liquidity to enable it to be repaid.

Having taken these factors into account, the Directors believe that the Company has adequate financial resources to continue its operational existence for the foreseeable future and at least 12 months from the date of this Half Yearly Report. Accordingly, the Directors continue to adopt the going concern basis in preparing these financial statements.

Directors' Responsibility Statement

The Directors are responsible for preparing this Half Yearly Financial Report in accordance with applicable law and regulations. The Directors confirm that to the best of their knowledge:

·      the condensed set of interim financial statements contained within the Half Yearly Financial Report which have been prepared in accordance with IAS 34 "Interim Financial Reporting", give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;

·      the Half-Yearly Board Report includes a fair review of the information required by rule 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 financial year); and

·      the Half-Yearly Board Report includes a fair review of the information required by 4.2.8R (being related party transactions that have taken place during the first six months of the financial year and that have materially affected the financial position of the Company during that period; and any changes in the related party transactions described in the last Annual Report that could do so).

On behalf of the Board

Ian Cadby

Chairman

15 August 2024

The Half Year Report will be posted to shareholders in August 2024 and copies will be available on the Company's website (www.asian-income.co.uk*).

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