Hong Leong Penny Stock Fund

Transcription

1 Reaching out to you Hong Leong Penny Stock Fund Annual Report 2016/ August 2017 Audited

2 Hong Leong Penny Stock Fund Contents Page Manager s Review and Report 1-9 Statement by the Manager 10 Trustee s Report 11 Independent Auditors Report Statement of Comprehensive Income 16 Statement of Financial Position 17 Statement of Changes in Equity 18 Statement of Cash Flows 19 Notes to the Financial Statements Performance Data Corporate Information 60 Corporate Directory 61 HONG LEONG PENNY STOCK FUND 1

3 Manager s Review and Report I. Fund information Fund Name Hong Leong Penny Stock Fund Fund Category Equity Fund Type Growth Investment Objective To achieve large percentage gains by investing in well-managed and financially stable companies which stocks are selling at prices close to or at deep discounts to their net tangible asset values. Benchmark FTSE Bursa Malaysia Emas Index Distribution Policy The Fund intends to provide Unitholders with Long-Term* capital growth. As such, cash distribution will be incidental to the overall capital growth objective and a substantial portion of the income returns from investments will be reinvested. The Fund may also declare distributions in the form of additional Units to its Unitholders. Breakdown of Unitholdings By Size Size of Holdings No. of Accounts No. of Units Held 5,000 and below 1,695 5,469, ,001 to 10, ,460, ,001 to 50,000 2,581 69,535, ,001 to 500,000 3, ,405, ,001 and above 413 2,605,801, Note: * Long-Term refers to a period of above 5 years. HONG LEONG PENNY STOCK FUND 1

4 II. Fund Performance Chart 1: Performance of the Fund versus the benchmark covering the last five financial years Percentage Growth /8/ /8/ /8/ /8/ /8/ /8/2017 From 31/08/2012 To 31/08/2017 Hong Leong Penny Stock Fund (HLPSF) FTSE Bursa Malaysia Emas Source: Lipper For Investment Management, In Malaysian Ringgit terms, exdistribution, NAV Per Unit-to-NAV Per Unit basis with gross income (if any) from HLPSF 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 PENNY STOCK FUND

5 Performance Review This Annual Report covers the twelve-month financial year from 1 September 2016 to 31 August The Fund posted a return of 11.50% in the past twelve months, while its benchmark the FTSE Bursa Malaysia Emas Index registered a return of 7.02%. During the financial year under review, the Fund had distributed income distributions of 1.10 sen per unit, 0.95 sen per unit and 1.20 sen per unit to its Unitholders on 20 September 2016, 18 January 2017 and 28 July 2017, respectively. Prior to the income distributions, the cumdistribution net asset values (NAV) per unit of the Fund were RM0.1324, RM and RM0.1252, while the ex-distribution NAV per unit were RM0.1218, RM and RM0.1134, 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 2017, the Fund garnered a return of 66.82% compared to the benchmark s return of 12.29% while distributing a total gross income of 7.35 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 2017 (Source: Lipper For Investment Management) HLPSF Return (%) Benchmark (%) 26/04/99 31/05/17 28/02/17 31/08/16 31/08/15 31/08/14 31/08/12 31/08/07 31/08/17 31/08/17 31/08/17 31/08/17 31/08/17 31/08/17 31/08/17 31/08/17 Since 3 Months Months Year Years Years Years Years Launch HONG LEONG PENNY STOCK FUND 3

6 Table 2: Return of the Fund based on NAV Per Unit-to-NAV Per Unit basis for the period 31 August 2016 to 31 August 2017 (Source: Lipper For Investment Management) NAV Per Unit Benchmark vs Benchmark (%) 31-Aug-17 RM , Aug-16 RM , Return (%) # # Return is calculated after adjusting for income distributions of 1.1 sen per unit on 20/09/2016, 0.95 sen per unit on 18/01/2017 and 1.2 sen per unit on 28/07/2017. Table 3: Financial Highlights The Net Asset Value attributable to Unitholders is represented by: 31-Aug-17 (RM) 31-Aug-16 (RM) Change (%) Unitholders Capital Retained Earnings Net Asset Value 302,056,107 68,940, ,996,280 79,805,117 90,849, ,654, Units in Circulation 3,256,674,375 1,278,365, HONG LEONG PENNY STOCK 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 31/08/16-31/08/ Financial Year 31/08/15-31/08/ Financial Year 31/08/14-31/08/ Source: Lipper For Investment Management, In Malaysian Ringgit terms, exdistribution, NAV Per Unit-to-NAV Per Unit basis with gross income (if any) from HLPSF reinvested. Table 5: Average Total Return (%) Average Total Return of the Fund 31/08/16 31/08/17 1 Year /08/14 31/08/17 3 Years /08/12 31/08/17 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 HLPSF reinvested. Table 6: Annual Total Return of the Fund Financial Year 31/08/16 31/08/17 31/08/15 31/08/16 31/08/14 31/08/15 31/08/13 31/08/14 31/08/12 31/08/13 Annual Total Return (%) Source: Lipper For Investment Management, In Malaysian Ringgit terms, exdistribution, NAV Per Unit-to-NAV Per Unit basis with gross income (if any) from HLPSF reinvested HONG LEONG PENNY STOCK FUND 5

8 III. INVESTMENT PORTFOLIO Chart 2: Asset Allocation - September 2016 to August 2017 Sep- 16 Oct- 16 Nov- 16 Dec- 16 Jan- 17 Feb- 17 Mar- 17 Apr- 17 May- 17 Jun- 17 Jul- 17 Aug- 17 Equities Warrants Collective Investment Schemes Chart 3: Sector Allocation as at 31 August 2017 Infrastructure Project Companies 4.02% Consumer Products 5.74% Hotel 0.51% Deposits & Cash Equivalents 12.13% Trading/Services 22.93% Construction 7.61% Properties 8.47% Technology 9.18% Industrial Products 11.20% Financials 18.21% 6 HONG LEONG PENNY STOCK FUND

9 Strategies employed during the period under review The second half of 2016 saw heightened market volatility due to Brexit, Federal Reserve (Fed) rate hike and policy uncertainties following the recent United States (US) election. As the market corrected, the Fund took the opportunity to buy into the dips. The Fund gradually reduced its exposure to high-dividend-yield stocks and deployed the cash in selected consumer and construction stocks, large-cap stocks that were trading at attractive valuations and technology stocks that will benefit from the improving external demand outlook. We continue to be positive on the Malaysia equities outlook as foreign shareholding level remains low and earnings expectations appear to have bottomed. The improving external demand outlook is expected to have a positive spill-over effect into Malaysia s economy. As of 31 August 2017, the Fund s top-three holdings are Public Bank Berhad (6.16%), Lotte Chemical Titan Holding Berhad (4.48%) and Telekom Malaysia Berhad (4.36%). 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. IV. MARKET REVIEW During the period under review, the MSCI AC Asia Pacific ex Japan Index rose 19.9%. The best performing markets were Hong Kong and Taiwan while the laggards were Philippines and Thailand. All regional markets performance was in positive territory during the period. In the local market, the FTSE Bursa Malaysia KLCI rose 5.7%. Small caps outperformed as the FTSE Bursa Malaysia Small Cap Index rose 10.5%. Regional equities performed surprisingly well during the third quarter of 2016 given the relatively benign response to Brexit and growing confidence among investors that any fallout from the decision was HONG LEONG PENNY STOCK FUND 7

10 likely to be contained. Developed market bond yields also hit alltime lows during the quarter as Janet Yellen reiterated the Fed s case for gradual rate increases. In Japan, Abe also announced a series of accommodative fiscal policies. China and Hong Kong market performed well as investors sentiment improved following the approval of the Shenzhen-Hong Kong stock connect. The fourth quarter of 2016 saw emerging markets underperforming developed markets as the surprise victory of Donald Trump resulted in higher US Dollar and US bond yields. The fall in bond prices led to redemptions in emerging market funds. The possibility of trade conflicts also resulted in forex weakness in the emerging market space. Crude oil rallied strongly as countries from outside the Organization of the Petroleum Exporting Countries (OPEC) agreed to reduce output following the agreement by OPEC members to cut production. Regional equities got off to a strong start in 2017, led by cyclical sectors such as the banking, technology and commodity sectors. The prospects of increased fiscal stimulus in the US and improving economic outlook spurred the return of fund inflows into emerging markets. Oil prices fell as high oil inventory levels and US rig counts led to rising concerns on oversupply of oil. The second quarter of 2017 saw markets carried over positive sentiments from previous quarter. The rally was driven by earnings upward revisions and foreign investor inflows. Some of the political developments included the announcement of a United Kingdom snap election by Prime Minister Theresa May and subsequently led the Conservatives to lose the majority. Pro-European centrist candidate Emmanuel Macron won the French presidential election and the Euro surged as political risk subsided. The Malaysia market performance was subdued for most part of the second half of 2016 as most corporate results continued to disappoint. Apart from a minor pre-budget 2017 run up, the market was trading sideways for most of the months. The local market was also hit along with most ASEAN countries following Donald Trump s surprise victory and sparked fears of US protectionist measures before recovering some of the losses towards the end of the year. The first half of HONG LEONG PENNY STOCK FUND

11 started brightly for Malaysia as the local market rallied along with global equity markets. Local market was buoyed by the return of foreign investors. The Malaysia market appears attractive due to the relatively low foreign ownership and the weak Ringgit. V. FUTURE PROSPECTS AND PROPOSED STRATEGIES In the US, the economy continues to look healthy as unemployment indicators have been falling sharply. Given the improving labour market, the Fed raised rates twice in the first half of 2017 and announced that it is looking to reduce the size of its balance sheet soon. The Fed believes that factors weighing on inflation appear to be temporary and is likely to continue to tighten monetary policy. In Europe, the European Central Bank (ECB) also hints at scaling down its quantitative exercise as the economic outlook continues to improve. We expect the market to be trade range-bound given that the local market is seen to be supported by local buying while upside will be capped by subdued corporate earnings growth. We maintain our bottom-up stock picking strategy and would take the opportunity to accumulate stocks that we like in the event of a market correction. We are positive on well-managed companies that will benefit from possible government pump priming such as those in the construction and consumer sectors. We continue to be well invested in selected large-cap stocks that are trading at attractive valuations. 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 PENNY STOCK FUND 9

12 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 16 to 57 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 2017 and of its financial performance, changes in equity and cash flows for the financial year ended 31 August 2017 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 PENNY STOCK FUND

13 TRUSTEE S REPORT TO THE UNITHOLDERS OF HONG LEONG PENNY STOCK FUND We have acted as the Trustee for Hong Leong Penny Stock 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 has been 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 have been 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 2017 by the Manager are not inconsistent with the objectives of the Fund. For Deutsche Trustees Malaysia Berhad Soon Lai Ching Senior Manager, Trustee Operations richard Lim Hock Seng Chief Executive Officer Kuala Lumpur 16 October 2017 HONG LEONG PENNY STOCK FUND 11

14 INDEPENDENT AUDITORS REPORT TO THE UNITHOLDERS OF HONG LEONG PENNY STOCK FUND REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS Our opinion In our opinion, the financial statements of Hong Leong Penny Stock Fund ( the Fund ) give a true and fair view of the financial position of the Fund as at 31 August 2017 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 2017, 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 16 to 57. 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. 12 HONG LEONG PENNY STOCK FUND

15 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 have no realistic alternative but to do so. HONG LEONG PENNY STOCK FUND 13

16 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. 14 HONG LEONG PENNY STOCK FUND

17 (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 unitholders of the Fund and for no other purpose. We do not assume responsibility to any other person for the content of this report. PRICEWATERHOUSECOOPERS (No. AF: 1146) Chartered Accountants Kuala Lumpur 16 October 2017 HONG LEONG PENNY STOCK FUND 15

18 STATEMENT OF COMPREHENSIVE INCome FOR THE FINANCIAL YEAR ENDED 31 AUGUST note RM rm INVESTMENT INCOME Interest income 4 1,081, ,827 Dividend income 6,196,600 4,481,148 Net gain on financial assets at fair value through profit or loss ( FVTPL ) 10 23,908,422 21,128,266 31,186,909 26,247,241 EXPENDITURE Management fee 5 (3,710,055) (2,320,619) Trustee s fee 6 (173,136) (108,296) Auditors remuneration (7,800) (8,200) Tax agent s fee (5,150) (2,950) Transaction costs (1,900,381) (1,260,174) Other expenses (432,290) (273,787) (6,228,812) (3,974,026) PROFIT BEFORE TAXATION 24,958,097 22,273,215 Taxation 7 - (57,718) PROFIT AFTER TAXATION AND TOTAL COMPREHENSIVE INCOME FOR THE FINANCIAL YEAR 24,958,097 22,215,497 Profit after taxation is made up as follows: Realised amount 13,546,877 5,631,261 Unrealised amount 11,411,220 16,584,236 24,958,097 22,215,497 Distributions for the financial year: Net distributions 8 60,185,537 10,475,035 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. 16 HONG LEONG PENNY STOCK FUND

19 STATEMENT OF FINANCIAL POSITION AS AT 31 AUGUST note RM RM ASSETS Cash and cash equivalents 9 33,052,440 32,659,432 Financial assets at fair value through profit or loss ( FVTPL ) ,012, ,763,081 Amount due from brokers/dealers 11,275,615 2,565,754 Amount due from the Manager-creation of units 4,718,605 1,460,320 Dividends receivable 413, ,048 TOTAL ASSETS 375,471, ,865,635 LIABILITIES Amount due to brokers/dealers 3,764, ,402 Amount due to the Manager-management fee 454, ,531 Amount due to the Trustee 21,213 10,011 Amount due to the Manager-expenses 9,817 - Distribution payable 183,142 - Other payables and accruals 42,645 25,091 TOTAL LIABILITIES 4,475,526 1,211,035 NET ASSET VALUE OF THE FUND 370,996, ,654,600 EQUITY Unitholders capital 302,056,107 79,805,117 Retained earnings 68,940,173 90,849,483 NET ASSETS ATTRIBUTABLE TO UNITHOLDERS 370,996, ,654,600 UNITS IN CIRCULATION (UNITS) 11 3,256,674,375 1,278,365,161 NET ASSET VALUE PER UNIT (RM) The accompanying notes to the financial statements form an integral part of these financial statements. HONG LEONG PENNY STOCK FUND 17

20 STATEMENT OF CHANGES IN EQUITY FOR THE FINANCIAL YEAR ENDED 31 AUGUST 2017 unitholders Retained capital earnings Total note RM RM RM Balance as at 1 September ,805,117 90,849, ,654,600 Movement in net asset value: Creation of units from applications 196,465, ,465,115 Creation of units from distributions 54,595,559-54,595,559 Cancellation of units (15,491,554) - (15,491,554) Total comprehensive income for the financial year - 24,958,097 24,958,097 Distributions for the financial year 8 (13,318,130) (46,867,407) (60,185,537) Balance as at 31 August ,056,107 68,940, ,996,280 Balance as at 1 September ,694,217 79,109, ,803,238 Movement in net asset value: Creation of units from applications 38,774,122-38,774,122 Creation of units from distribution 10,087,284-10,087,284 Cancellation of units (12,750,506) - (12,750,506) Total comprehensive income for the financial year - 22,215,497 22,215,497 Distribution for the financial year 8 - (10,475,035) (10,475,035) Balance as at 31 August ,805,117 90,849, ,654,600 The accompanying notes to the financial statements form an integral part of these financial statements. 18 HONG LEONG PENNY STOCK FUND

21 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 208,260, ,235,023 Purchase of financial assets at FVTPL (382,823,688) (212,202,869) Interest received 1,081, ,827 Dividends received 5,615,519 4,011,549 Management fee paid (3,470,015) (2,268,723) Trustee s fee paid (161,934) (105,875) Payment for other fees and expenses (417,869) (288,048) Net cash used in operating activities (171,915,432) (3,981,116) CASH FLOWS FROM FINANCING ACTIVITIES Cash proceeds from units created 247,802,389 47,530,366 Payments for cancellation of units (15,491,554) (12,750,506) Distributions paid (60,002,395) (10,475,035) Net cash generated from financing activities 172,308,440 24,304,825 NET INCREASE IN CASH AND CASH EQUIVALENTS 393,008 20,323,709 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE FINANCIAL YEAR 32,659,432 12,335,723 CASH AND CASH EQUIVALENTS AT END OF THE FINANCIAL YEAR 9 33,052,440 32,659,432 The accompanying notes to the financial statements form an integral part of these financial statements. HONG LEONG PENNY STOCK FUND 19

22 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 AUGUST THE FUND, THE MANAGER AND THEIR PRINCIPAL ACTIVITIES Hong Leong Penny Stock Fund ( the Fund ) was constituted pursuant to the execution of a Deed dated 12 March 1999 and Supplemental Deeds dated 18 December 2000, 2 June 2009 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 achieve large percentage gains by investing in wellmanaged and financially stable companies which stocks are selling at prices close to or at deep discounts to their net tangible asset values. The Fund will invest with a value investment strategy across equity securities of all market capitalisation levels of companies operating in Malaysia. Generally, companies that have valuations at a discount to the market and/or its sector peers are selected. The Fund may also invest in stocks with market capitalisation of up to RM1 billion that are not well-covered by equity research houses and stockbrokers. The Fund commenced operations on 26 April 1999 and will continue its operations until terminated as provided under Part 12 of the Deed. 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 HONG LEONG PENNY STOCK FUND

23 2. 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 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. 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(I). HONG LEONG PENNY STOCK FUND 21

24 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 2016 are as follows: Amendments to MFRS 101 Presentation of financial statements - Disclosure initiative Annual Improvements to MFRS Cycle The adoption of these amendments did not have any impact on the current period or any prior 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: Amendments to MFRS 107 Statement of Cash Flows Disclosure Initiative (effective from 1 January 2017) introduce an additional disclosure on changes in liabilities arising from financing activities. 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. 22 HONG LEONG PENNY STOCK FUND

25 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. MFRS 15 Revenue from Contracts with Customers (effective from 1 January 2018) replaces MFRS 118 Revenue and MFRS 111 Construction Contracts and related interpretations. The standard deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity s contracts with customers. The core principle in MFRS 15 is that an entity recognises revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The Fund will apply these standards when effective. These standards are not expected to have a significant impact on the Fund s financial statements. HONG LEONG PENNY STOCK FUND 23

26 (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 and quoted warrant 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 and dividends 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-management 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. 24 HONG LEONG PENNY STOCK FUND

27 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. 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. HONG LEONG PENNY STOCK FUND 25

28 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 profit rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in profit or loss. If loans and receivables has a variable profit rate, the discount rate for measuring any impairment loss is the current effective profit 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 26 HONG LEONG PENNY STOCK FUND

29 an improvement in the debtor s credit rating), the reversal of the previously recognised impairment loss is recognised in statement of comprehensive income. 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. HONG LEONG PENNY STOCK FUND 27

30 (f) Amount due from/to brokers/dealers Amount due from/to brokers/dealers represents 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. 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. 28 HONG LEONG PENNY STOCK FUND

31 (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. (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. HONG LEONG PENNY STOCK FUND 29

32 (k) Segmental information Operating segments are reported in a manner consistent with the internal reporting used by the chief operating decisionmaker. 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. (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. 30 HONG LEONG PENNY STOCK FUND

33 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. 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 2017 Financial assets Cash and cash equivalents (Note 9) - 33,052,440 33,052,440 Financial assets at FVTPL (Note 10) 326,012, ,012,013 Amount due from brokers/dealers - 11,275,615 11,275,615 Amount due from the Manager -creation of units - 4,718,605 4,718,605 Dividends receivable - 413, , ,012,013 49,459, ,471,806 Financial liabilities Amount due to brokers/dealers - 3,764,138 3,764,138 Amount due to the Manager -management fee - 454, ,571 Amount due to the Trustee - 21,213 21,213 Amount due to the Manager -expenses - 9,817 9,817 Distribution payable - 183, ,142 Other payables and accruals - 42,645 42,645-4,475,526 4,475,526 HONG LEONG PENNY STOCK FUND 31

34 2016 Financial assets Cash and cash equivalents (Note 9) - 32,659,432 32,659,432 Financial assets at FVTPL (Note 10) 134,763, ,763,081 Amount due from brokers/dealers - 2,565,754 2,565,754 Amount due from the Manager -creation of units - 1,460,320 1,460,320 Dividends receivable - 417, , ,763,081 37,102, ,865,635 Financial liabilities Amount due to brokers/dealers - 961, ,402 Amount due to the Manager -management fee - 214, ,531 Amount due to the Trustee - 10,011 10,011 Other payables and accruals - 25,091 25,091-1,211,035 1,211,035 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 326,012, ,358,304 - Quoted collective investment shemes - 10,089,440 - Quoted warrant - 315, ,012, ,763, HONG LEONG PENNY STOCK FUND

35 The table below summarises the sensitivity of the Fund s net asset value and profit after taxation to movements in prices of quoted equity securities, quoted collective investment schemes and quoted warrant at the end of each reporting period. The analysis is based on the assumptions that the price of the quoted equity securities, quoted collective investment schemes and quoted warrant fluctuated by 5% with all other variables held constant. This represents management s best estimate of a reasonable possible shift in the quoted equity securities, quoted collective investment schemes and quoted warrant having regard to the historical volatility of the prices. Impact on profit after taxation/ % Change in market net asset price of financial value value assets at FVTPL rm rm % 309,711,412 (16,300,601) 0% 326,012,013-5% 342,312,614 16,300, % 128,024,927 (6,738,154) 0% 134,763,081-5% 141,501,235 6,738,154 (ii) Interest rate risk Interest rate risk is the risk that the value of the Fund s investments and its return will fluctuate because of changes in market interest rates. Interest rate is a general economic indicator that will have an impact on the management of the Fund. The Fund s exposure to the interest rate risk is mainly confined to short term placements with licensed financial institutions. The Manager overcomes the exposure by way of maintaining deposits on short term basis. HONG LEONG PENNY STOCK FUND 33

36 As at end of each reporting period, the Fund is not exposed to a material level of interest rate risk as the deposits with licensed financial institutions are placed on a short term basis. (b) Credit risk Credit risk refers to the risk that an issuer or counterparty will default on its contractual obligation resulting in financial loss to the Fund. The credit risk arising from placements of deposits with licensed financial institutions is managed by ensuring that the Fund will only place deposits in reputable licensed financial institutions. The settlement terms of the proceeds from the creation of units receivable from the Manager are governed by the Securities Commission Malaysia s Guidelines on Unit Trust Funds. For amount due from brokers/dealers, the settlement terms are governed by the relevant rules and regulations as prescribed by Bursa Securities. The credit/default risk is minimal as all transactions in quoted investments are settled/paid upon delivery using approved brokers/dealers. 34 HONG LEONG PENNY STOCK FUND