Hong Leong Dividend Fund

Transcription

1 Reaching out to you Hong Leong Dividend Fund Annual Report 2017/ August 2018 Audited

2 Hong Leong Dividend Fund Contents Page Manager s Review and Report 1-11 Statement by the Manager 12 Trustee s Report 13 Independent Auditors Report Statement of Comprehensive Income 18 Statement of Financial Position 19 Statement of Changes in Equity 20 Statement of Cash Flows 21 Notes to the Financial Statements Performance Data Corporate Information 62 Corporate Directory 63 HONG LEONG DIVIDEND FUND 1

3 Manager s Review and Report I. FUND INFORMATION Fund Name Hong Leong Dividend Fund Fund Category Equity Fund Type Income Investment Objective To provide investors with a steady recurring income* that is potentially higher than prevailing fixed deposit rates. At the same time, the Fund also attempts to attain Medium-To-Long Term** capital appreciation. Benchmark FTSE Bursa Malaysia KLCI+12 Months KLIBOR Rate (70:30 weightage) Distribution Policy The Fund intends to provide regular income* and potentially, consistent Long-Term*** capital appreciation. Regular income returns will be declared on a best effort basis depending on interest rates, market conditions and performance of the Fund. As such, the Fund will strive to declare distributions annually, if any, in the form of either cash or additional Units to the Unitholders. Breakdown of Unitholdings By Size Size of Holdings No. of Accounts No. of Units Held 5,000 and below 5,001 to 10,000 10,001 to 50,000 50,001 to 500, ,001 and above Notes: * Income may be distributed in the form of cash and/or units. ** Medium-To-Long Term refers to a period of 3 to 5 years. *** Long-Term refers to a period of above 5 years , ,322, ,170, ,477, ,173, HONG LEONG DIVIDEND FUND 1

4 II. FUND PERFORMANCE Chart 1: Performance of the Fund versus the benchmark covering the last five financial years /08/ /08/ /08/ /08/ /08/2017 Percentage Growth 31/08/2018 From 31/08/2013 To 31/08/2018 Hong Leong Dividend Fund (HLDF) FTSE BM KLCI/12 Months KLIBOR (70:30) Source: Lipper For Investment Management, In Malaysian Ringgit terms, exdistribution, NAV Per Unit-to-NAV Per Unit basis with gross income (if any) from HLDF reinvested. Past performance is not necessarily indicative of future performance and unit prices and investment returns may go down, as well as up. 2 HONG LEONG DIVIDEND FUND

5 Performance Review This Annual Report covers the twelve-month financial year from 1 September 2017 to 31 August The Fund posted a return of 4.36% in the past twelve months while its benchmark the FTSE Bursa Malaysia KLCI+12 Months KLIBOR Index (70:30) registered a return of 3.15%. During the financial year under review, the Fund had distributed income distributions of 0.75 sen per unit, 0.75 sen per unit, 0.85 sen per unit, 0.85 sen per unit and 0.85 sen per unit to its Unitholders on 19 September 2017, 19 December 2017, 17 January 2018, 17 April 2018 and 19 July 2018 respectively. Prior to the income distributions, the cumdistribution net asset values (NAV) per unit of the Fund were RM0.5782, RM0.5763, RM0.5870, RM and RM while the ex-distribution NAV per unit were RM0.5709, RM0.5689, RM0.5787, RM and RM respectively. Unitholders should note that income distributions have the effect of reducing the NAV per unit of the Fund after distributions. For the five financial years ended 31 August 2018, the Fund registered a return of 50.83% compared to the benchmark s return of 10.07% while distributing a total gross income of sen per unit. As such, the manager concluded that the Fund has achieved its investment objective. Table 1: Performance of the Fund for the following periods as at 31 August 2018 (Source: Lipper For Investment Management) 31/05/18-28/02/18-31/08/17-31/08/16-31/08/15-31/08/13-31/08/08-06/01/05-31/08/18 31/08/18 31/08/18 31/08/18 31/08/18 31/08/18 31/08/18 31/08/18 Since 3 Months 6 Months 1 Year 2 Years 3 Years 5 Years 10 Years Inception HLDF (%) Benchmark (%) HONG LEONG DIVIDEND FUND 3

6 Table 2: Return of the Fund based on NAV Per Unit-to-NAV Per Unit basis for the period 31 August 2017 to 31 August 2018 (Source : Lipper For Investment Management) 31-Aug Aug-17 Return (%) NAV Per Unit RM RM # Benchmark 2, , vs Benchmark (%) # Return is calculated after adjusting for income distributions during the period under review. Table 3: Financial Highlights The Net Asset Value attributable to Unitholders is represented by: 31-Aug-18 (RM) 31-Aug-17 (RM) Change (%) Unitholders Capital Retained Earnings Net Asset Value 95,222,808 17,959, ,181,925 76,753,288 17,103,855 93,857, Units in Circulation 201,683, ,575, HONG LEONG DIVIDEND FUND

7 Table 4: The Highest and Lowest NAV Per Unit, Total Return of the Fund and the breakdown into Capital Growth and Income Distribution for the financial years Highest NAV Per Unit (RM) Lowest NAV Per Unit (RM) Capital Growth (%) Income Distribution (%) Total Return (%) Financial Year 31/08/17 31/08/ Financial Year 31/08/16 31/08/ Financial Year 31/08/15 31/08/ Source: Lipper For Investment Management, In Malaysian Ringgit terms, exdistribution, NAV Per Unit-to-NAV Per Unit basis with gross income (if any) from HLDF reinvested. Table 5: Average Total Return of the Fund Average Total Return (%) 31/08/17 31/08/18 1 Year /08/15 31/08/18 3 Years /08/13 31/08/18 5 Years Source: Lipper For Investment Management, In Malaysian Ringgit terms, exdistribution, NAV Per Unit-to-NAV Per Unit basis with gross income (if any) from HLDF reinvested. Table 6: Annual Total Return of the Fund Financial Year Annual Total Return (%) 31/08/17 31/08/ /08/16 31/08/ /08/15 31/08/ /08/14 31/08/ /08/13 31/08/ Source: Lipper For Investment Management, In Malaysian Ringgit terms, exdistribution, NAV Per Unit-to-NAV Per Unit basis with gross income (if any) from HLDF reinvested. HONG LEONG DIVIDEND FUND 5

8 III. INVESTMENT PORTFOLIO Chart 2: Asset Allocation - September 2017 to August % 80% 60% 40% 20% 0% Sep- 17 Oct- 17 Nov- 17 Dec- 17 Jan- 18 Feb- 18 Mar- 18 Apr- 18 May- 18 Jun- 18 Jul- 18 Aug- 18 Equities Collective Investment Schemes Warrants Chart 3: Sector Allocation as at 31 August 2018 Property 1.73% Utilities 3.74% Construction 3.83% Telecommunications & Media 4.83% Technology 6.03% Collective Investment Schemes 10.08% Industrial Products & Services 10.26% Deposits & Cash Equivalents 8.00% Financial Services 28.38% Consumer Products & Services 23.12% 6 HONG LEONG DIVIDEND FUND

9 Strategies employed during the period under review During the period in review, the Fund accumulated some large-cap stocks that were trading at undemanding valuations. The shock election result in the 14th General Election (GE14) was followed by a broad-based selling by foreign investors. The Fund took the opportunity to accumulate selected stocks that were trading at very attractive valuations that had emerged as a result of the foreign fund outflows. The Fund maintained its exposure in selected consumer and banking stocks that were expected to benefit from the uplift in consumer sentiment and disposable income. We maintain our positive view on Malaysia equities outlook as we expect the intensity of foreign fund outflows to subside. In the midto-long term outlook, we expect interest in Malaysia market from foreign investors to rise along with the improvement in clarity on government policies and the country s fiscal position. As of 31 August 2018, the Fund s top-three holdings are Hong Leong Islamic Institutional Income Management Fund II (7.08%), Malayan Banking Berhad (6.82%) and Bursa Malaysia Berhad (5.63%). Please be informed that all fees and charges incurred by our products and services are not subjected to Sales & Services Tax, which comes into effect on 1 September For the financial year under review, there were no significant changes in the state of affairs of the Fund or circumstances that would materially affect the interest of Unitholders up to the date of this Manager s report. HONG LEONG DIVIDEND FUND 7

10 IV. MARKET REVIEW During the period under review, the MSCI AC Asia Pacific ex Japan Index rose 0.4%. The best performing markets were India and Australia while the laggards were China and Singapore. In the local market, the FTSE Bursa Malaysia KLCI rose 2.6%. Small caps underperformed as the FTSE Bursa Malaysia Small Cap Index declined 13.7%. In the third quarter of 2017, China led the rally in regional equities as market sentiment was buoyed by strong economic data and announcement by the People s Bank of China (PBoC) with regards to targeted reserve requirement ratio (RRR) cut for banks. Market sentiment was also lifted by President Trump s tax proposal which included cuts in corporate and small business income taxes. Geopolitical tensions in North Korea caused some drag to market performance. In response to North Korea s repeated weapon tests, China ordered North Korean companies in China to shut down while US expanded sanction over North Korea, excluding it from international banking system. The strong upward momentum in markets extended to the fourth quarter of Market sentiment was predominantly supported by strong Euro economic growth data and approval of the US tax reform bill by the House of Representatives. Commodities also posted solid performance as due to strong global economic data, extension of the current Organization of the Petroleum Exporting Countries (OPEC) and non-opec deal to limit production and prolonged drawdown in the US crude inventories. After a very smooth year for equity markets in 2017, volatility reared its ugly head in the first quarter of The sell-off was initially sparked by investors worries about faster-than-expected inflation and faster-than-expected rise in interest rates. Just as markets appeared to have stabilised, another wave of sell-off was triggered by fears of a trade war between US and China. 8 HONG LEONG DIVIDEND FUND

11 Investor risk aversion spilled over to the second quarter of Soft China economic data, the weakening of the China Renminbi and the escalating risk of a trade war dampened investor sentiment. Tariffs on USD34 billion worth of products took effect on 6th July. This was followed by President Trump threatening tariffs to be imposed on another USD200 billion worth of Chinese imports if China retaliates. The Malaysia market was trading sideways in a tight range for most of the second half of 2017 due to lack of catalysts. The Budget 2018 failed to lift market sentiments despite the rise in crude oil prices and Ringgit. The lacklustre results season also capped upside to the market. The FTSE BM KLCI did rise to a new high in December on the back of window dressing activities. The return of foreign investors and rising commodity prices also helped boost market sentiment at the end of the year. The Malaysia market got off to what appeared to be a two-speed trend as the large-cap stocks continued to trend higher while small-cap stocks experienced intense selling pressure during the first quarter of Financials led the main index higher on the back of Bank Negara Malaysia s rate hike in January Foreign inflows into bigcap stocks carried the index higher as foreign investors confidence rose on the back of higher oil prices and strengthening Ringgit. Following the shock GE14 results, market was under intense selling pressure as foreign investors reduced their exposure to Malaysia equity market due to policy uncertainties by the new government and concerns about the fiscal deficit following the removal of Goods & Services Tax (GST). HONG LEONG DIVIDEND FUND 9

12 V. FUTURE PROSPECTS AND PROPOSED STRATEGIES Global economic data point towards a robust economic outlook. US retail sales growth remains strong while unemployment falls to multi-year lows. We expect trade concerns to weigh on market sentiment. However, we expect strong corporate earnings growth to support market valuations. For the local market, we expect local equities to see rangebound trading in the near term. Economic outlook remains solid and improving clarity on government policies is expected to lift market sentiment. We also expect market downside to be limited by the current undemanding market valuations. We would take the opportunity to accumulate stocks that we like in the event of a market correction. We like well-managed companies that will benefit from the improving consumer sentiment, particularly within the consumer and banking sectors. We continue to be invested in selected largecap stocks that are trading at attractive valuations and selected export stocks that will benefit from improving external demand outlook. 10 HONG LEONG DIVIDEND FUND

13 VI. SOFT COMMISSIONS The Manager has received soft commissions from brokers/dealers in the form of goods and services such as research materials, data and quotation services incidental to investment management of the Fund and investment related publications. Such soft commissions received are of demonstrable benefit to Unitholders. HONG LEONG DIVIDEND FUND 11

14 STATEMENT BY THE MANAGER I, Hoo See Kheng, as the Director of Hong Leong Asset Management Bhd, do hereby state that, in the opinion of the Manager, the financial statements set out on pages 18 to 59 are drawn up in accordance with the provision of the Deeds and give a true and fair view of the financial position of the Fund as at 31 August 2018 and of its financial performance, changes in equity and cash flows for the financial year ended 31 August 2018 in accordance with the Malaysian Financial Reporting Standards ( MFRS ) and International Financial Reporting Standards ( IFRS ). For and on behalf of the Manager, Hong Leong Asset Management Bhd (Company No.: M) HOO SEE KHENG Chief Executive Officer/Executive Director Kuala Lumpur 16 October HONG LEONG DIVIDEND FUND

15 TRUSTEE S REPORT TO THE UNITHOLDERS OF HONG LEONG DIVIDEND FUND We have acted as the Trustee for Hong Leong Dividend Fund ( the Fund ) for the financial year ended 31 August To the best of our knowledge, for the financial year under review, Hong Leong Asset Management Bhd ( the Manager ) has operated and managed the Fund in accordance with the following:- (a) limitations imposed on the investment powers of the Manager under the Deed(s), the Securities Commission s Guidelines on Unit Trust Funds, the Capital Markets and Services Act 2007 and other applicable laws; (b) valuation and pricing for the Fund is carried out in accordance with the Deed(s) of the Fund and applicable regulatory requirements; and (c) creation and cancellation of units for the Fund are carried out in accordance with the Deed(s) of the Fund and applicable regulatory requirements. We are of the view that the distributions made during the financial year ended 31 August 2018 by the Manager are not inconsistent with the objectives of the Fund. For Deutsche Trustees Malaysia Berhad Soon Lai Ching Senior Manager, Trustee Operations Ng Hon Leong Head, Trustee Operations Kuala Lumpur 16 October 2018 HONG LEONG DIVIDEND FUND 13

16 INDEPENDENT AUDITORS REPORT TO THE UNITHOLDERS OF HONG LEONG DIVIDEND FUND REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS Our opinion In our opinion, the financial statements of Hong Leong Dividend Fund ( the Fund ) give a true and fair view of the financial position of the Fund as at 31 August 2018 and of its financial performance and its cash flows for the year then ended in accordance with Malaysian Financial Reporting Standards and International Financial Reporting Standards. What we have audited We have audited the financial statements of the Fund, which comprise the statement of financial position as at 31 August 2018, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, as set out on pages 18 to 59. Basis for opinion We conducted our audit in accordance with approved standards on auditing in Malaysia and International Standards on Auditing. Our responsibilities under those standards are further described in the Auditors responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence and other ethical responsibilities We are independent of the Fund in accordance with the By-Laws (on Professional Ethics, Conduct and Practice) of the Malaysian Institute of Accountants ( By-Laws ) and the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants ( IESBA Code ), and we have fulfilled our other ethical responsibilities in accordance with the By-Laws and the IESBA Code. 14 HONG LEONG DIVIDEND FUND

17 Information other than the financial statements and auditors report thereon The Manager of the Fund is responsible for the other information. The other information comprises Manager s Review & Report but does not include the financial statements of the Fund and our auditors report thereon. Our opinion on the financial statements of the Fund does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements of the Fund, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements of the Fund or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Manager for the financial statements The Manager of the Fund is responsible for the preparation of the financial statements of the Fund that give a true and fair view in accordance with Malaysian Financial Reporting Standards and International Financial Reporting Standards. The Manager is also responsible for such internal control as the Manager determine is necessary to enable the preparation of financial statements of the Fund that are free from material misstatement, whether due to fraud or error. In preparing the financial statements of the Fund, the Manager is responsible for assessing the Fund s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Manager either intend to liquidate the Fund, or to cease operations, or have no realistic alternative but to do so. HONG LEONG DIVIDEND FUND 15

18 Auditors responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements of the Fund as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with approved standards on auditing in Malaysia and International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with approved standards on auditing in Malaysia and International Standards on Auditing, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: (a) Identify and assess the risks of material misstatement of the financial statements of the Fund, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. (b) Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund s internal control. (c) Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Manager. 16 HONG LEONG DIVIDEND FUND

19 (d) Conclude on the appropriateness of the Manager s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Fund s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors report to the related disclosures in the financial statements of the Fund or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors report. However, future events or conditions may cause the Fund to cease to continue as a going concern. (e) Evaluate the overall presentation, structure and content of the financial statements of the Fund, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with the Manager regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. OTHER MATTERS This report is made solely to the unit holders of the Fund and for no other purpose. We do not assume responsibility to any other person for the content of this report. PRICEWATERHOUSECOOPERS PLT LLP LCA & AF 1146 Chartered Accountants Kuala Lumpur 16 October 2018 HONG LEONG DIVIDEND FUND 17

20 STATEMENT OF COMPREHENSIVE INCOME FOR THE FINANCIAL YEAR ENDED 31 AUGUST Note RM RM INVESTMENT INCOME Interest income 4 297, ,537 Dividend income 3,228,013 1,619,163 Net gain on financial assets at fair value through profit or loss ( FVTPL ) 10 4,291,070 9,232,106 Management fee rebate 5 4,018-7,820,907 11,118,806 EXPENDITURE Management fee 5 (1,530,217) (861,152) Trustee s fee 6 (71,410) (40,187) Auditors remuneration (6,600) (6,600) Tax agent s fee (2,950) (2,950) Transaction costs (1,010,762) (460,857) Other expenses (138,359) (108,211) (2,760,298) (1,479,957) PROFIT BEFORE TAXATION 5,060,609 9,638,849 Taxation 7 (3,396) (1,277) PROFIT AFTER TAXATION AND TOTAL COMPREHENSIVE INCOME FOR THE FINANCIAL YEAR 5,057,213 9,637,572 Profit after taxation is made up as follows: Realised amount 12,052,752 3,694,176 Unrealised amount (6,995,539) 5,943,396 5,057,213 9,637,572 Distributions for the financial year: Net distributions 8 7,076,056 2,063,746 Net distributions per unit (sen) Gross distributions per unit (sen) The accompanying notes to the financial statements form an integral part of these financial statements. 18 HONG LEONG DIVIDEND FUND

21 STATEMENT OF FINANCIAL POSITION AS AT 31 AUGUST Note RM RM ASSETS Cash and cash equivalents 9 7,548,234 13,668,477 Financial assets at fair value through profit or loss ( FVTPL ) ,122,613 79,396,709 Amount due from brokers/dealers 1,875, ,025 Amount due from the Manager -creation of units 178, ,342 Amount due from the Manager -management fee rebate 2,040 - Dividends receivable 77,000 82,912 Capital repayment receivable 156,000 - Tax recoverable - 11,557 TOTAL ASSETS 113,959,552 93,998,022 LIABILITIES Amount due to brokers/dealers 84,151 - Amount due to the Manager -cancellation of units 532,306 - Amount due to the Manager -management fee 144, ,980 Amount due to the Trustee 6,751 5,459 Amount due to the Manager -expenses Distribution payable Other payables and accruals 9,614 17,206 TOTAL LIABILITIES 777, ,879 NET ASSET VALUE OF THE FUND 113,181,925 93,857,143 EQUITY Unitholders capital 95,222,808 76,753,288 Retained earnings 17,959,117 17,103,855 NET ASSETS ATTRIBUTABLE TO UNITHOLDERS 113,181,925 93,857,143 UNITS IN CIRCULATION (UNITS) ,683, ,575,555 NET ASSET VALUE PER UNIT (RM) The accompanying notes to the financial statements form an integral part of these financial statements. HONG LEONG DIVIDEND FUND 19

22 STATEMENT OF CHANGES IN EQUITY FOR THE FINANCIAL YEAR ENDED 31 AUGUST 2018 Unitholders Retained capital earnings Total Note RM RM RM Balance as at 1 September ,753,288 17,103,855 93,857,143 Movement in net asset value: Creation of units from applications 44,408,902-44,408,902 Creation of units from distributions 6,869,359-6,869,359 Cancellation of units (29,934,636) - (29,934,636) Total comprehensive income for the financial year - 5,057,213 5,057,213 Distributions for the financial year 8 (2,874,105) (4,201,951) (7,076,056) Balance as at 31 August ,222,808 17,959, ,181,925 Balance as at 1 September ,329,256 9,131,721 26,460,977 Movement in net asset value: Creation of units from applications 72,504,219-72,504,219 Creation of units from distributions 1,948,529-1,948,529 Cancellation of units (14,630,408) - (14,630,408) Total comprehensive income for the financial year - 9,637,572 9,637,572 Distributions for the financial year 8 (398,308) (1,665,438) (2,063,746) Balance as at 31 August ,753,288 17,103,855 93,857,143 The accompanying notes to the financial statements form an integral part of these financial statements. 20 HONG LEONG DIVIDEND FUND

23 STATEMENT OF CASH FLOWS FOR THE FINANCIAL YEAR ENDED 31 AUGUST Note RM RM CASH FLOWS FROM OPERATING ACTIVITIES Proceeds from sales of financial assets at FVTPL 162,008,057 41,677,419 Purchase of financial assets at FVTPL (184,947,816) (92,008,948) Interest received 297, ,537 Dividends received 3,091,305 1,484,629 Management fee rebate received 1,978 - Management fee paid (1,502,533) (775,590) Trustee s fee paid (70,118) (37,718) Payment for other fees and expenses (156,315) (111,610) Tax refund received 11,557 - Net cash used in operating activities (21,266,079) (49,504,281) CASH FLOWS FROM FINANCING ACTIVITIES Cash proceeds from units created 44,755,142 72,729,681 Payments for cancellation of units (29,402,330) (14,630,408) Distributions paid (206,976) (114,880) Net cash generated from financing activities 15,145,836 57,984,393 NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (6,120,243) 8,480,112 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE FINANCIAL YEAR 13,668,477 5,188,365 CASH AND CASH EQUIVALENTS AT END OF THE FINANCIAL YEAR 9 7,548,234 13,668,477 The accompanying notes to the financial statements form an integral part of these financial statements. HONG LEONG DIVIDEND FUND 21

24 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 AUGUST THE FUND, THE MANAGER AND THEIR PRINCIPAL ACTIVITIES Hong Leong Dividend Fund ( the Fund ) was constituted pursuant to the execution of a Deed dated 22 December 2004 and Supplemental Deeds dated 11 December 2007 and 30 April 2010 between the Manager, Hong Leong Asset Management Bhd, AmTrustee Berhad and the registered unitholders of the Fund. AmTrustee Berhad has been replaced with Deutsche Trustees Malaysia Berhad ( the Trustee ) effective 1 September 2012 and Supplemental Master Deeds were entered into between the Manager, the Trustee and the registered unitholders of the Fund on 27 July 2012 and 25 March 2015 to effect the change ( the Deeds ). The Fund aims to provide investors with a steady recurring income that is potentially higher than prevailing fixed deposit rates. At the same time, the Fund also attempts to attain Medium-To-Long Term capital appreciation. The Fund will invest in stocks which have good dividend payout policies and reasonable Medium-To-Long Term capital appreciation opportunities. Stocks with good dividend payout policies are those that have been consistently paying high dividends (i.e. dividend yields at and/or above market average) over the last three to five years, and are able to sustain the dividend payments at least over the next one year. The Fund will invest primarily in equity securities that will generate good income yields, i.e. having paid dividends three out of the last five years, historical track record of awarding good dividends, or potential to provide high dividends within the next 12 months. At the same time, the Fund also invests in fixed income securities with good credit qualities and yield enhancement opportunities. Fixed income securities with good credit qualities generally are investment-grade securities that have relatively low risk of a default. The Fund commenced operations on 6 January 2005 and will continue its operations until terminated as provided under Part 12 of the Deed. 22 HONG LEONG DIVIDEND FUND

25 The Manager of the Fund is Hong Leong Asset Management Bhd, a company incorporated in Malaysia. The principal activity of the Manager is the management of unit trust funds and private investment mandates. Its holding company is Hong Leong Capital Berhad, a company incorporated in Malaysia and listed on the Main Market of Bursa Malaysia Securities Berhad. The financial statements were authorised for issue by the Manager on 16 October SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the financial statements: (a) Basis of preparation The financial statements have been prepared in accordance with the Malaysian Financial Reporting Standards ( MFRS ) and International Financial Reporting Standards ( IFRS ). The financial statements have been prepared under the historical cost convention, as modified by the financial assets and financial liabilities at fair value through profit or loss. The preparation of financial statements in conformity with MFRS and IFRS requires the use of certain critical accounting estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported financial year. It also requires the Manager to exercise their judgment in the process of applying the Fund s accounting policies. The Manager believes that the underlying assumptions are appropriate and the Fund s financial statements therefore present the financial position results fairly. Although these estimates and judgment are based on the Manager s best knowledge of current events and actions, actual results may differ. HONG LEONG DIVIDEND FUND 23

26 The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 2(l). The Fund has applied the relevant new accounting standards, amendments and improvements to published standards and interpretations to existing accounting standards that are effective 1 January 2017 are as follows: Amendments to MFRS 107 Statement of Cash Flows Disclosure Initiative introduce an additional disclosure on changes in liabilities arising from financing activities. The adoption of these amendments did not have any impact on the current period and is not likely to affect future years. The standards, amendments to published standards and interpretations to existing standards that are applicable to the Fund but not yet effective and have not been early adopted are as follows: MFRS 9 Financial Instruments (effective from 1 January 2018) will replace MFRS 139 Financial Instruments: Recognition and Measurement. MFRS 9 retains but simplifies the mixed measurement model in MFRS 139 and establishes three primary measurement categories for financial assets: amortised cost, fair value through profit or loss and fair value through other comprehensive income ( OCI ). The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are always measured at fair value through profit or loss with an irrevocable option at inception to present changes in fair value in OCI (provided the instrument is not held for trading). A debt instrument is measured at amortised cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and interest. 24 HONG LEONG DIVIDEND FUND

27 For liabilities, the standard retains most of the MFRS 139 requirements. These include amortised cost accounting for most financial liabilities, with bifurcation of embedded derivatives. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity s own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. MFRS 9 introduces an expected credit losses model on impairment that replaces the incurred loss impairment model used in MFRS 139. The expected credit losses model is forward-looking and eliminates the need for a trigger event to have occurred before credit losses are recognised. The Fund has reviewed its financial assets and liabilities and does not expect any impact from the adoption of the new standard on 1 September There will be no impact on the Fund s accounting for financial assets as the Fund s investments are currently measured at fair value through profit or loss and will continue to be measured on the same basis under MFRS 9. There will be no impact on the Fund s accounting for financial liabilities as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Fund does not have any such liabilities. The new impairment model requires the recognition of impairment provisions based on expected credit losses ( ECL ) rather than only incurred credit losses as is the case under MFRS 139. It applies to financial assets classified at amortised cost. Based on the assessments undertaken to date, the Fund does not expect any loss allowance to be recognised upon adoption of MFRS 9. HONG LEONG DIVIDEND FUND 25

28 (b) Financial assets and financial liabilities Classification Financial assets are designated at fair value through profit or loss when their performance are managed and evaluated on a fair value basis. The Fund designates its investment in quoted equity securities, quoted collective investment schemes, quoted warrant and unquoted collective investment scheme as financial assets at fair value through profit or loss at inception. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and have been included in assets. The Fund s loans and receivables comprise cash and cash equivalents, amount due from brokers/dealers, amount due from the Manager-creation of units, amount due from the Manager-management fee rebate, dividends receivable and capital repayment receivable. Financial liabilities are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability. The Fund classifies amount due to brokers/dealers, amount due to the Manager-cancellation of units, amount due to the Managermanagement fee, amount due to the Trustee, amount due to the Manager-expenses, distribution payable and other payables and accruals as other financial liabilities. Recognition and measurement Regular purchases and sales of financial assets are recognised on the trade-date the date on which the Fund commits to purchase or sell the asset. Investments are initially recognised at fair value. Transaction costs are expensed in the statement of comprehensive income. Financial liabilities, within the scope of MFRS 139, are recognised in the statement of financial position when, and only when, the Fund becomes a party to the contractual provisions of the financial instrument. 26 HONG LEONG DIVIDEND FUND

29 Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Fund has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognised when it is extinguished, i.e. when the obligation specified in the contract is discharged or cancelled or expired. Unrealised gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss are presented in the statement of comprehensive income within net gain or loss on financial assets at fair value through profit or loss in the period which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the statement of comprehensive income as part of dividend income when the Fund s right to receive payments is established. Quoted investments are valued at the last done market prices quoted on Bursa Malaysia Securities Berhad ( Bursa Securities ) at the date of the statement of financial position. If a valuation based on the market price does not represent the fair value of the quoted investments, for example during abnormal market conditions or when no market price is available, including in the event of a suspension in the quotation of the quoted securities for a period exceeding 14 days, or such shorter period as agreed by the Trustee, then the quoted securities are valued as determined in good faith by the Manager, based on the methods or bases approved by the Trustee after appropriate technical consultation. Unquoted collective investment scheme is valued at the last published NAV per unit at the date of the statement of financial position. HONG LEONG DIVIDEND FUND 27

30 Deposits with licensed financial institutions are stated at cost plus accrued interest calculated on the effective interest method over the period from the date of placement to the date of maturity of the respective deposits, which is a close estimate of their fair value due to the short term nature of the deposits. Loans and receivables and other financial liabilities are subsequently carried at amortised cost using the effective interest method. Impairment For assets carried at amortised cost, the Fund assesses at the end of the reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the statement of comprehensive income. If loans and receivables has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Fund may measure impairment on the basis of an instrument s fair value using an observable market price. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor s credit rating), the reversal of the previously recognised impairment loss is recognised in the statement of comprehensive income. 28 HONG LEONG DIVIDEND FUND

31 When an asset is uncollectible, it is written off against the related allowance account. Such assets are written off after all the necessary procedures have been completed and the amount of the loss has been determined. (c) Functional and presentation currency Items included in the financial statements of the Fund are measured using the currency of the primary economic environment in which the Fund operates (the functional currency ). The financial statements are presented in Ringgit Malaysia ( RM ), which is the Fund s functional and presentation currency. (d) Income recognition Dividend income is recognised on the ex-dividend date when the Fund s right to receive payment is established. Interest income from deposits with licensed financial institutions is recognised on the effective interest method on an accrual basis. Realised gain or loss on disposal of quoted investments is accounted for as the difference between the net disposal proceeds and the carrying amount of quoted investments, determined on a weighted average cost basis. (e) Cash and cash equivalents For the purpose of statement of cash flows, cash and cash equivalents comprise cash at banks and deposits held in highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. (f) Amount due from/to brokers/dealers Amount due from/to brokers/dealers represent receivables/ payables for investments sold/purchased that have been contracted for but not yet settled or delivered on the statement of financial position date respectively. HONG LEONG DIVIDEND FUND 29

32 These amounts are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment for amount due from brokers/dealers. A provision for impairment of amount due from a broker/dealer is established when there is objective evidence that the Fund will not be able to collect all amounts due from the relevant broker/dealer. Significant financial difficulties of the broker/dealer, probability that the broker/dealer will enter bankruptcy or financial reorganisation, and default in payments are considered indicators that the amount due from brokers/dealers is impaired. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. (g) Taxation Current tax expense is determined according to Malaysian tax laws at the prevailing tax rate based on the taxable profit earned during the financial year. (h) Distributions A distribution to the Fund s unitholders is accounted for as a deduction from realised reserve. A proposed distribution is recognised as a liability in the financial year in which it is approved by the Board of Directors of the Manager. (i) Transaction costs Transaction costs are costs incurred to acquire or dispose financial assets or liabilities at fair value through profit or loss. They include fees and commissions paid to agents, advisors and brokers/dealers. Transaction costs, when incurred, are immediately recognised in the statement of comprehensive income as expenses. 30 HONG LEONG DIVIDEND FUND

33 (j) Unitholders capital The unitholders contributions to the Fund meet the criteria to be classified as equity instruments under MFRS 132 Financial Instruments: Presentation. Those criteria include: the units entitle the unitholder to a proportionate share of the Fund s net asset value; the units are the most subordinated class and class features are identical; there is no contractual obligations to deliver cash or another financial asset other than the obligation on the Fund to repurchase the units; and the total expected cash flows from the units over its life are based substantially on the profit or loss and change in the net asset value of the Fund. The outstanding units are carried at the redemption amount that is payable at the date of the statement of financial position if unitholder exercises the right to put the unit back to the Fund. Units are created and cancelled at prices based on the Fund s net asset value per unit at the time of creation and cancellation. The Fund s net asset value per unit is calculated by dividing the net assets attributable to unitholders with the total number of outstanding units. (k) Segmental information Operating segments are reported in a manner consistent with the internal reporting used by the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Investment Committee of the Fund s manager that undertakes strategic decisions for the Fund. HONG LEONG DIVIDEND FUND 31

34 (l) Critical accounting estimates and judgments in applying accounting policies The Fund makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual results. To enhance the information content of the estimates, certain key variables that are anticipated to have material impact to the Funds results and financial position are tested for sensitivity to changes in the underlying parameters. Estimates and judgments are continually evaluated by the Manager and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In undertaking any of the Fund s investment, the Manager will ensure that all assets of the Fund under management will be valued appropriately, that is at fair value and in compliance with the Securities Commission Malaysia s Guidelines on Unit Trust Funds. However, the Manager is of the opinion that there are no accounting policies which require significant judgment to be exercised. 3. RISK MANAGEMENT OBJECTIVES AND POLICIES The Fund is exposed to a variety of risks which include market risk (inclusive of price risk and interest rate risk), credit risk, liquidity risk and capital risk. Financial risk management is carried out through internal control process adopted by the Manager and adherence to the investment restrictions as stipulated in the prospectus. 32 HONG LEONG DIVIDEND FUND

35 The following table analyses the financial assets and financial liabilities of the Fund in the statement of financial position as at the reporting date: Loans and Financial receivables/ assets other financial at FVTPL liabilities Total RM RM RM 2018 Financial assets Cash and cash equivalents (Note 9) - 7,548,234 7,548,234 Financial assets at FVTPL (Note 10) 104,122, ,122,613 Amount due from brokers/dealers - 1,875,563 1,875,563 Amount due from the Manager -creation of units - 178, ,102 Amount due from the Manager -management fee rebate - 2,040 2,040 Dividends receivable - 77,000 77,000 Capital repayment receivable - 156, , ,122,613 9,836, ,959,552 Financial liabilities Amount due to brokers/dealers - 84,151 84,151 Amount due to the Manager -management fee - 144, ,664 Amount due to the Trustee - 6,751 6,751 Amount due to the Manager -expenses Amount due to the Manager -cancellation of units - 532, ,306 Distribution payable Other payables and accruals - 9,614 9, , , Financial assets Cash and cash equivalents (Note 9) - 13,668,477 13,668,477 Financial assets at FVTPL (Note 10) 79,396,709-79,396,709 Amount due from brokers/dealers - 314, ,025 Amount due from the Manager -creation of units - 524, ,342 Dividends receivable - 82,912 82,912 79,396,709 14,589,756 93,986,465 HONG LEONG DIVIDEND FUND 33

36 Loans and Financial receivables/ assets other financial at FVTPL liabilities Total RM RM RM Financial liabilities Amount due to the Manager -management fee - 116, ,980 Amount due to the Trustee - 5,459 5,459 Amount due to the Manager -expenses Distribution payable Other payables and accruals - 17,206 17, , ,879 All liabilities are financial liabilities which are carried at amortised cost. (a) Market risk (i) Price risk Price risk arises mainly from the uncertainty about future prices of investments. It represents the potential loss the Fund might suffer through holding market positions in the face of price movements. The Manager manages the risk of unfavourable changes in prices by continuous monitoring of the performance and risk profile of the investment portfolio. The price risk is managed through diversification and selection of securities and other financial instruments within specified limits according to the Deeds. The Fund s overall exposure to price risk is as follows: RM RM Financial assets at FVTPL: - Quoted equity securities 92,715,632 79,386,254 - Quoted collective investment schemes 3,398, Quoted warrant - 10,455 - Unquoted collective investment scheme 8,008, ,122,613 79,396, HONG LEONG DIVIDEND FUND