RNS Number : 6008D
SovGEM Limited
17 September 2008
Press Release 17 September 2008
SovGEM Limited
("SovGEM" or "the Company")
Interim Results
SovGEM Limited, an emerging market equity finance house, today reports its Interim Results for the six months ended 30 June 2008.
Highlights for financial period ended 30 June 2008:
*
Net Asset Value (NAV) per ordinary share 28.8p (30 June 2007: 33p), from
peak reported NAV of 34.4p (31 December 2007)
* Profit for period �213,849 (Loss (�283,309) 30th June 2007)
* Resilient performance relative to major Chinese indices (China's CSI 300
Index off 65% from peak October 2007)
Portfolio companies continue to report strong earnings and operating
* profits
Highlight since the period
*
Robust performance since period end, current NAV of 26.9p (as of 12th
September 2008)
Hugh de Lusignan, Chief Executive Officer and co-founder of SovGEM, said: "Despite the recent market volatility which has impacted on
our share price, we remain confident of our investment strategy.
"Our investments are focused on companies positioned to take advantage of the growing Chinese domestic growth. In our opinion Chinese
GDP growth will continue to outpace Western economic growth, and Chinese company valuations will recover to reflect this"
For further information:
SovGEM Limited
Hugh de Lusignan, Chief Executive Officer Tel: +44 (0) 20 7398 7700
hdelusignan@sovereigngroup.com
NOMAD & Broker:
Landsbanki Securities
(UK) Limited
Tom Hulme Tel: +44 (0) 20 7426 9000
tom.hulme@landsbanki.com
Media enquiries:
Abchurch
Charlie Jack/ Monique Tsang Tel: +44 (0) 20 7398 7700
charlie.jack@abchurch-group.com www.abchurch-group.com
A copy of the Interim Results and an updated presentation that will be given to investors and media will be put on the SovGEM website -
www.sovgem.com
Chairman and CEO's Report
The first half of 2008 has seen unprecedented volatility in global markets, despite these difficult conditions, we are satisfied that
our underlying portfolio of investee companies continue to report excellent operating profits and increased levels of turnover and demand
for their products.
The share prices of our investments have, of course, been impacted by the decline in share valuations globally. However, we are pleased
that they continue to outperform relative to the markets in which they are listed. When stability returns to markets we are confident that
we will be excellently placed to benefit from the correction that will follow in many of the share prices of our investee companies.
For the year to date the CSI 300 Index (the main Shanghai index) has fallen 61% and the Halter Index of Chinese stocks quoted in America
has declined 38%. SovGEM's NAV over the same period is down 21.8%.
The Chinese Economy
The start of 2008 was characterised by the markets growing concerns that the Chinese economy was overheating. This was highlighted by
the above trend growth of 11.8% reported in Chinese GDP for 2007. Fears were also growing as inflation in China started to rise above trend
with, in particular, food, commodity and energy prices growing steeply. Worries were exacerbated with poor weather conditions and a major
earthquake.
Conversely since June worries have switched directly from fears of overheating to fears that a US led global economic slowdown could
lead to a stalling rather than a soft landing in Chinese economic growth. Indeed, Chinese economic growth has slowed to 10.4% for the first
half of 2008 from 11.8% for the whole of 2007; this is partly because of a deceleration in export growth. Further, recent data has shown
China's trade surplus declined 9.6% in the first seven months of 2008 compared to the same period last year. Meanwhile fears over domestic
inflation are abating as food prices are beginning to fall, as are commodity and energy prices. The Economic Intelligence Unit (EIU)
forecast consumer price inflation to average 6.6% in 2008. The annual rate of inflation is expected to slow in the second half of 2008, and
average inflation will moderate to 4.4% in 2009.
In our opinion China will continue to grow at a level considerably faster than western economies (the EIU forecast real 9.8% GDP growth
2008 and 9% in 2009). Moreover the structural growth forces within China of massive urbanisation, moving up the value chain of
industrialisation, growing consumer spending and credit penetration are all intact. Many commentators have concentrated on the pain being
felt in the Chinese low value added export sectors (such as textiles and furniture); however, as an efficient producer of an increasing
number of products, China may in fact be benefiting from the increasingly competitive global market. This is illustrated in the recent
massive increase in Foreign Direct Investment (FDI) in China. Currently, foreign investments are flooding into China at more than 40%
annually, a sign that multinationals are accelerating their capacity relocation to China to beef up their competitive edge.
SovGEM continues to concentrate its investments on companies which will benefit from the continuing growth in domestic demand for their
products. We remain underweight to export related stocks.
The following review of our quoted company portfolio illustrates the very high growth rates that are being achieved by companies that
are correctly positioned to take advantage of the continuing Chinese growth story.
Highlights of Investments News
Despite the extreme market volatility our quoted investment companies continue to report strong fundamentals. The following eight
companies represent collectively just over 60% of our portfolio. All prices shown are as of close of business on 12 September 2008.
Independent forecasts have been used to calculate prospective valuations for indicative purposes. These are clearly subject to change, and
brokers' forecasts may have been revised without our knowledge.
Harbin Electric (NASDAQ: HRBN)
On 11 August 2008 Harbin Electric (Harbin) announced strong second quarter (2Q) results. Total revenues were up 71% and net income up
37% year-on-year (YOY). Harbin is forecast to achieve earnings per share (eps) of $1.43 in 2008 and $2.90 in 2009, helped by an accretive
acquisition of Weihai Hengda Electric Motor Co. Ltd. for $54m in cash (announced 11 July 2008). Therefore Harbin is on a current year p/e of
9.1x, falling to 4.5x in 2008. (Source: Dutton Associates). SovGEM purchased its initial stake at $2 per share in 2005; the current price of
Harbin is $13.06.
PureCircle (LSE:PURE)
PureCircle (PURE) is focused on the development and marketing of natural high-intensity sweeteners based on the stevia plant. Currently
80% of global supply of the stevia leaf is based in China. On 1 July 2008 PURE announced a $103m strategic investment by Wilmar
International and Olam International, both Singapore-listed companies. This development should allow PURE to increase substantially its
stevia plantation and extraction capacity in Asia. On 31 July 2008 PURE announced "substantial long-term contracts" had been won with
PepsiCo and Whole Earth Sweetener Co. SovGEM purchased PURE at IPO in December 2007 at 170p; the current share price is 238p.
Cadogan (LSE:CAD)
On 18 June 2008 Cadogan (CAD) announced it had raised �139m via an IPO at 230p and listed on the main London Stock Exchange. This
compared favourably with SovGEM's investments between 2006 and 2007 at an average equivalent price of 86.1p. However, on 22 July 2008 CAD
shares were temporally suspended as the company announced rulings from a local Ukrainian court which appeared to question the validity of
CAD's Pirkovskoe and Zagoryanska licences. At their interim results (29 August 2008) the Board of CAD stated: "we have taken measures to
protect our interests in the [disputed] licences and we remain confident about the validity of these licences and CAD's future prospects."
The current share price of CAD is 94p.
American Oriental (NYSE:AOB)
On 11 August 2008 American Oriental Bioengineering (AOB) reported 2Q 2008 results; Revenues increased 74% to $59m and net income rose
43.4% to $13.9m. During the subsequent earnings conference call, management announced they had signed a letter of intent to acquire a large
pharmaceutical distribution company in China. The company to be acquired was said to have generated approximately $550m in revenue last
year, is profitable and has a nationwide footprint covering both urban and rural districts. AOB stated that they expected to acquire this
company for $110m. Broker CRT estimates AOB has approximately $234m of cash on the balance sheet, and after the $110m acquisition and
working capital requirements has a further $64m available for further acquisitions.
CRT estimates total revenues of $248.7m for the full year of 2008 (2007: $160.4), net income of $62.9m (2007: $43.3m) and eps of $0.76.
At $7.02 AOB is on a p/e of 9.2x for the year to December 2008.
SinoEnergy (NASDAQ:SNEN)
SinoEnergy (SNEN) announced in July that it had completed a 1-for-2 share reverse split of its Common Stock and that subsequently its
application to list its stock on The Nasdaq Capital Market was approved. Prior to its listing on NASDAQ SNEN traded through the OTC Bulletin
Board.
On 15 August 2008 SNEN announced its third quarter results; highlights included net revenue of $10.2m, up 65.1%, and net income of
$4.0m, up 106.4% compared with 2Q.
The current market price of $6.64 compares to our purchase price of $3.40 (allowing for the reverse split).
Renesola (LSE:SOLA; NYSE:SOL)
ReneSola (SOLA) reported strong 2Q 2008 results on 19 August 2008 driven by higher-than-expected production output of 82.5MW. Second
quarter 2008 net revenues were $173m, which was an increase of 289% over 2Q 2007 ($44.5m).
Broker Hanson Westhouse (HW) currently forecast revenues of $669.5m for 2008, and $1,450m for 2009 (2007: $173m). Eps estimates are 32p
for 2008 and 63.1p for 2009 (2007: 21.4p). At the current market price of 392p (SovGEM paid 79p) the implied p/e for 2008 is 12.25x and for
2009 is 6.2x.
Worldwide Energy & Manufacturing (OTCBB: WEMU)
On 24 June 2008 SovGEM purchased 72,222 shares in WEMU at $4.50 ($325,000) as part of a PIPE transaction that raised in total $4.7m.
SovGEM also received 46,944 Series A Warrants exercisable for 24 months at $7, and 25,278 Series B warrants exercisable at $9 for 36
months.
WEMU, headquartered in South San Francisco, California, with its production facilities based in and around Shanghai, is a 14-year-old
engineering-oriented firm specializing in solar PV panel, mechanical, electronics and fibre optic products manufacturing.
On 19 August 2008 WEMU announced 2Q revenues of $6.9m, up 166.7% YOY as a result of an increase in orders at WEMU's energy division.
Moreover on 8 July 2008 WEMU had announced solar modular orders valued at approximately $15m.
The current share price of WEMU is $6.75.
Tianyin Pharmaceuticals (OTCBB: TYNP)
On 8 September August 2008 TYNP announced unaudited preliminary financial results for the years ended 30 June 2008. Revenue and net
income are expected to be $33 million and $5.9 million respectively. The Company also issued financial guidance for fiscal 2009. In 2009
revenue and net income are estimated to increase at least 28% and 26% respectively from 2008
On 31 July 2008 TYNP announced it had received Chinese SFDA approval for Simvastatin tablets, a statin drug used to control
hypercholesterolemia and coronary heart diseases.
The current share price of TYNP is $2.30; SovGEM's effective purchase price was $1.60 for 312,500 shares.
Business Outlook
We remain optimistic, despite the current market volatility, about the prospects both for our investee companies and growth in China
over the foreseeable future.
Your Board is constantly considering ways to narrow the discount to net asset value at which our ordinary shares trade and continue to
take the views of all shareholders and advisors into account. When market conditions allow we will look to expand the size of our funds
under management.
Garth Milne (Chairman) & Hugh de Lusignan (Chief Executive Officer)
12th September, 2008 INCOME STATEMENT- UNAUDITED
Six month period ended 30 June 2008
Six months to 30 Six months Year ended
June 2008 to 30 June 31 December
� 2007 2007
� �
Note
Revenue - - -
Gain on sale of non current 391,471 113,857 807,073
assets
Gains in fair value of assets 34,402 78,873 -
held at fair value through
profit or loss
Losses in fair value of assets (10,000) (135,323) (110,819)
held at fair value through
profit or loss
Administrative expenses (213,857) (351,023) (623,649)
____________ ____________ ____________
Operating profit/(loss) 202,016 (293,616) 72,605
Finance income 8,228 8,543 13,079
Investment income 3,605 1,764 7,005
____________ ____________ ____________
Results for the period before 213,849 (283,309) 92,689
taxation
Tax expense, net - - -
____________ ____________ ____________
213,849 (283,309) 92,689
Net results for the period ____________ ____________ ____________
Total and continuing
Basic and diluted earnings per 2 0.93 pence (1.24) pence 0.41 pence
share ____________ ____________ ____________
BALANCE SHEET-UNAUDITED
As at 30 June 2008
30 June 30 June 31 December
2008 2007 2007
� � �
Note
Assets
Non current assets
Long term financial assets 3 6,443,141 7,514,037 7,725,974
Current assets
Trade and other receivables 16,103 9,977 23,063
Cash and cash equivalents 4 296,502 522,387 320,659
____________ ____________ ____________
312,605 532,364 343,722
Total current assets ____________ ____________ ____________
Total Assets 6,755,746 8,046,401 8,069,696
____________ ____________ ____________
Equity
Equity attributable to
shareholders of SovGEM Limited
Share capital 5 228 228 228
Reserve in respect of share 5 54,435 29,343 54,435
options
Share premium account 5 2,868,171 2,868,171 2,868,171
Revaluation reserve 5 2,036,226 3,711,449 3,543,378
Retained earnings 5 1,592,342 1,002,497 1,378,495
____________ ____________ ____________
Total equity 6,551,402 7,611,688 7,844,707
Liabilities
Current
Trade and other payables 204,344 434,713 224,989
____________ ____________ ____________
Total liabilities 204,344 434,713 224,989
____________ ____________ ____________
Total equity and liabilities 6,755,746 8,046,401 8,069,696
____________ ____________ ____________
STATEMENT OF RECOGNISED INCOME AND EXPENSE - UNAUDITED
Six months to 30 Six months Year ended
June 2008 to 30 June 31 December
� 2007 2007
� �
Profit /(loss) for the 213,849 (283,309) 92,689
financial period
(Loss)/gain on revaluation of (1,064,389) 1,620,633 1,937,043
available for sale financial
assets-
taken direct to equity
Derecognition of unrealised (442,763) (80,003) (564,484)
gains on disposals
____________ ____________ ____________
Total recognised income and (1,293,303) 1,257,321 1,465,248
expense attributable to equity
holders
____________ ____________ ____________
STATEMENT OF CASH FLOWS- UNAUDITED
Six Month Period Ended 30 June 2008
Six months to 30 June Six months Year ended
2008 to 30 June 31 December
� 2007 2007
� �
Note
Profit after tax 213,849 (283,309) 92,689
Adjustments for:
Gain on sale of non current (391,471) (113,857) (807,073)
assets
Movements in fair value assets (24,402) 56,450 110,819
held at fair value
Income received from investing (11,833) (10,307) (20,084)
activities
Decrease/(Increase) in 6,960 13,040 (46)
receivables
(Decrease)/Increase in (20,645) 157,096 (52,628)
payables
Share based payments - - 25,092
____________ ____________ ____________
Net cash decrease from (227,542) (180,887) (651,231)
operating activities
Investing activities
Interest received 8,228 8,543 13,080
Investment income 3,605 1,764 7,005
Purchase of investments (418,433) (1,297,455) (2,046,246)
Proceeds from sale of 609,985 805,133 1,812,762
investments ____________ ____________ ____________
Net cash generated/(used) in 203,385 (482,015) (213,399)
investing activities ____________ ____________ ____________
Net decrease in cash and cash (24,157) (662,902) (864,630)
equivalents ____________ ____________ ____________
Cash and cash equivalents at 320,659 1,185,289 1,185,289
beginning of period ____________ ____________ ____________
Cash and cash equivalents at 296,502 522,387 320,659
end of period 4 ____________ ____________ ____________
NOTES TO THE FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
These interim financial statements are for the six months ended 30 June 2008.
The financial statements have been prepared in accordance with applicable International Financial Reporting Standards (IFRS) as adopted
by the EU.
They are prepared in accordance with the Company's accounting policies as set out at the end of this document.
2. Earnings per share
The basic earnings per share is based on the profit attributable to ordinary shareholders divided by the weighted average number of
shares issued during the period.
Six months Six months Year ended
to 30 June to 30 June 31
2007 December
2008 � 2007
� �
Net results for the period 213,849 (283,309) 92,689
__________ __________ __________
__ __ __
Weighted average number of ordinary 22,775,000 22,775,000 22,775,000
shares of 0.001p in issue __________ __________ __________
__ __ __
Net asset value per share 28.77p 33.42p 35.43p
Earnings/(loss) per share - basic and 0.93p (1.24)p 0.41p
diluted
3 Long term financial assets
The amount recognised in the balance sheet relate to the following investment types:
30 June 30 June 31 December
2008 2007 2007
� � �
Long term available-for-sale 6,118,310 6,987,258 7,425,544
financial assets
Financial assets at fair value 324,831 526,779 300,430
through profit or loss
____________ ____________ ____________
6,443,141 7,514,037 7,725,974
____________ ____________ ____________
3.1 Long term available-for-sale financial assets
30 June 30 June 31 December
2008 2007 2007
� � �
Listed equity securities 4,680,131 5,043,773 5,326,593
Unlisted financial assets 1,438,179 1,943,485 2,098,951
____________ ____________ ____________
6,118,310 6,987,258 7,425,544
____________ ____________ ____________
The listed financial assets have been stated at fair value. Fair value is determined by valuing the financial assets at the appropriate
closing bid price on 30 June 2008.
The unlisted financial assets have been stated at fair value. Fair value is determined by using recent arms length transactions and
valuation models where a recent arms length transaction does not exist. Where this is not possible the company uses the Directors'
valuation.
3.1 Long term available-for-sale financial assets (cont'd)
2008 2008 2008 2007
Listed Unlisted Total Total
� � � �
Opening fair value as at 1 January 5,326,593 2,098,951 7,425,544 4,967,397
2008
Purchases at cost 418,433 - 418,433 1,919,296
Disposals in the period - at (218,515) - (218,515) (1,005,690)
cost
Transfers 459,608 (459,608) - -
Transfers as a result of - - - 171,982
exercising of warrants
Movement from changes in fair (1,305,988) (201,164) (1,507,152) 1,372,559
value
____________ ____________ ____________ ____________
Closing fair value as at 30 4,680,131 1,438,179 6,118,310 7,425,544
June 2008
____________ ____________ ____________ ____________
Closing cost as at 30 June 2,973,614 936,488 3,910,102 3,843,975
2008
Gain as at 30 June 2008 1,706,517 501,691 2,208,208 3,581,569
____________ ____________ ____________ ____________
4,680,131 1,438,179 6,118,310 7,425,544
____________ ____________ ____________ ____________
All the listed equity securities have been issued by publicly traded companies
3.2 Financial assets at fair value through profit or loss
30 June 30 June 31 December
2008 2007 2007
� � �
Financial assets at fair value
through profit or loss
Designated at fair value through 250,702 258,889 250,338
profit or loss - Convertible debt
Held for trade at fair value 74,129 267,890 50,092
through profit or loss - Stock
warrants
____________ ____________ ____________
324,831 526,779 300,430
__________ ____________ ____________
3.2 Financial assets at fair value through profit or loss (cont'd)
Movements in the period
2008 2008 2008 2007
Designated Held for Total Total
� trade � �
�
Opening fair value as at 1 250,338 50,092 300,430 456,281
January 2008
Purchases at cost - - - 126,950
Gains in changes in fair value 364 65,464 65,828 -
Transfers as a result of - - - (171,982)
exercising of warrants
Losses in changes in fair - (41,427) (41,427) (110,819)
value
____________ ____________ ____________ ____________
Closing fair value as at 30 250,702 74,129 324,831 300,430
June 2008
____________ ____________ ____________ ____________
Closing cost as at 30 June 392,679 - 392,679 258,889
2008
Gain/(loss) as at 30 June 2008 (141,977) 74,129 (67,848) 41,541
____________ ____________ ____________ ____________
250,702 74,129 324,831 300,430
____________ ____________ ____________ ____________
Convertible debt has been designated at fair value through profit or loss where it has not been possible to separately value the
embedded derivative. The financial instrument has been included at its fair value.
Warrants are held for trade and have been valued using an appropriate option pricing model at the time of acquisition and as at 30 June
2008.
4. Cash and cash equivalents
30 June 30 June 31 December
2008 2007 2007
� � �
Cash at bank and in hand 137,823 154,737 215,113
Short term deposits 158,679 367,650 105,546
____________ ____________ ____________
296,502 522,387 320,659
____________ ____________ ____________
5. Statement of movement of reserves
Share Reserve in respect
Share premium Revaluation of share options Retained
Total
Capital account Reserve � earnings
Equity
� � � �
�
As at 1 January 2007 228 2,868,171 2,170,819 29,343 1,285,806
6,354,367
Available for sale securities
-Unrealised gain on - - 1,620,634 - -
1,620,634
revaluation of available for
sale financial assets - taken
direct to equity
-Derecognition of unrealised - - (80,004) - -
(80,004)
gains on disposals
___________ ___________ ___________ ___________ ___________
___________
Net income recognised directly - - 1,540,630 - -
1,540,630
in equity
Net results for the period - - - - (283,309)
(283,309)
ended 30 June 2007
___________ ___________ ___________ ___________ ___________
___________
Total recognised income and - - 1,540,630 - (283,309)
1,257,321
expense for the period
Employee share based - - - -
-
transactions
___________ ___________ ___________ ___________ ___________
___________
As at 30 June 2007 228 2,868,171 3,711,449 29,343 1,002,497
7,611,688
As at 1 January 2008 228 2,868,171 3,543,378 54,435 1,378,493
7,844,705
Available for sale securities
-Unrealised loss on revaluation of available for - - (1,064,389) - -
(1,064,389)
sale financial assets - taken direct to equity
-Derecognition of unrealised gains on disposals - - (442,763) - -
(442,763)
___________ ___________ ___________ ___________ ___________
___________
Net income recognised directly in equity - - (1,507,152) - -
(1,507,152)
Net results for the period ended 30 June 2008 - - - - 213,849
213,849
___________ ___________ ___________ ___________ ___________
___________
Total recognised income and expense for the period - - (1,507,152) - 213,849
(1,293,303)
Employee share based transactions - - - - -
-
___________ ___________ ___________ ___________ ___________
___________
As at 30 June 2008 228 2,868,171 2,036,226 54,435 1,592,342
6,551,402
___________ ___________ ___________ ___________ ___________
___________
6. Statutory Accounts
These financial statements do not constitute statutory accounts.
7 Accounting policies
7.1 Overall considerations
The significant accounting policies that have been used in the preparation of these financial statements are summarised below:
Basis of preparation
The financial statements have been prepared using the measurement bases specified by IFRS for each type of asset, liability, income and
expense. The measurement bases are more fully described in the accounting policies below.
All accounting estimates and assumptions that are used in preparing the financial statements are consistent with SovGEM's latest
approved budget forecast where applicable. Judgements are based on the information available to management, actual results may ultimately
differ from those estimates.
7.2 Foreign currency translation
SovGEM's financial statements are presented in Sterling, denoted by the symbol "�", which is the Company's functional and presentational
currency.
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the
transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the remeasurement of monetary
balance sheet items at year-end exchange rates are recognised in the income statement and are included in administrative expenses.
The Company holds financial assets held in foreign currencies that are remeasured at fair value at year end. At year end the fair value
of these financial assets are translated into the functional currency using the appropriate closing exchange rate.
7.3 Income and expense recognition
Gains and losses are measured by reference to the fair value of consideration received or receivable by the Company for the sale of long
term financial assets. Gains and losses are recognised upon completion of the transaction.
Gains and losses from the sale of long term financial assets are recognised when all of the following conditions have been satisfied:
� Sale documentation completed;
� Title of the long term financial asset has been transferred to the purchaser.
Operating expenses are recognised in the income statement upon utilisation of the service or at the date of their origin. Interest
income is reported using the effective interest method. Dividends received are recognised at the time of their distribution.
7.4 Accounting for long term financial assets
Financial assets are divided into the following categories:
� Financial assets at fair value through profit or loss;
� Available-for-sale financial assets.
Financial assets accounted for at fair value through profit or loss includes warrants and convertible debt where the embedded derivative
is not separable from the underlying instrument.
Financial assets at fair value through profit or loss are initially recognised at fair value and are subsequently carried at fair value.
Gains and losses arising from the changes in the fair value of financial assets at fair value through profit or loss category are included
in the income statement in the period in which they arise. Where investments have a separate embedded derivative, but it is not possible to
measure the embedded derivative separately either at acquisition or at a subsequent financial reporting date, the company shall designate
the entire hybrid (combined) investment as at fair value through profit or loss.
Available-for-sale financial assets are those intended to be held for an indefinite period of time, which may be sold in response to
needs for liquidity or changes in interest rates, exchange rates or equity prices.
Available-for-sale financial assets are initially recognised at fair value and are subsequently carried at fair value net of transaction
costs. Gains and losses arising from the changes in the fair value of available for sale financial assets are recognised directly to the
revaluation reserve through the statement of total recognised income and expense, until the financial asset is derecognised or impaired at
which time the cumulative gain or loss previously recognised in equity is recognised in the income statement.
The fair values of quoted investments in active markets are based on current bid prices. If the market for a financial asset is not
active (and for unlisted securities) fair values are established by using valuation techniques. These include the use of recent arm's length
transactions, discounted cash flow analysis and available financial information.
The principal area of critical judgement is establishing the fair value of the unquoted portfolio. However, in almost every unquoted
investment that is held a transaction has occurred, or is proceeding that provides an independent assessment of fair value. Where this is
not possible the Company uses the Directors' valuation, based on recent market information.
Impairments
Available-for-sale assets are reviewed for impairment by reference to current market prices and the latest financial information. In the
case of impairment of available-for-sale assets, any loss previously recognised in equity is transferred to the income statement. Impairment
losses recognised in the income statement on equity instruments are not reversed through the income statement. Impairment losses recognised
previously on debt securities are reversed through the income statement when the increase can be related objectively to an event occurring
after the impairment loss was recognised in the income statement.
An assessment for impairment is undertaken at least at each balance sheet date.
7.5 Income taxes
The Company is registered in Jersey and is out with the scope of UK taxation.
7.6 Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand deposits, together with other short term, highly liquid investments that are
readily convertible into known amounts of cash which are subject to insignificant risk of change in value.
7.7 Share based payments
Where employees are rewarded using share-based payments, the fair values of employees' services are determined indirectly by reference
to the fair value of the instrument granted to the employee. This fair value is appraised at the grant date and excludes the impact of
non-market vesting conditions (for example, profitability and sales growth targets).
All equity-settled share-based payments are ultimately recognised as an expense in the income statement with a corresponding credit to
"other reserves".
If vesting periods or other non-market vesting conditions apply, the expense is allocated over the vesting period, based on the best
available estimate of the number of share options expected to vest. Estimates are revised subsequently if there is any indication that the
number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognised in the
current period. No adjustment is made to any expense recognised in prior periods if share options that have vested are not exercised.
Upon exercise of share options, the proceeds received net of attributable transaction costs are credited to share capital, and, where
appropriate, share premium.
Retained earnings include all current and prior period results as disclosed in the income statement.
No dividends have been paid since the Company's inception.
7.8 Financial liabilities
Financial liabilities are obligations to pay cash or other financial assets and are recognised when the group becomes a party to the
contractual provisions of the instrument. Financial liabilities are recorded initially at fair value, net of direct issue costs.
Financial liabilities are recorded at amortised cost using the effective interest method, with interest-related charges recognised as an
expense in finance cost in the income statement. Finance charges, including premiums payable on settlement or redemption and direct issue
costs, are charged to the income statement on an accruals basis using the effective interest method and are added to the carrying amount of
the instrument to the extent that they are not settled in the period in which they arise.
A financial liability is derecognised only when the obligation is extinguished, that is, when the obligation is discharged or cancelled
or expires.
7.9 Trade and other receivables
Trade receivables are initially measured at fair value and subsequent to initial recognition at amortised cost using the effective
interest method, less provision for impairment. Any change in their value through impairment or reversal of impairment is recognised in the
income statement.
Provision against trade receivables is made when there is objective evidence that the group will not be able to collect all amounts due
to it in accordance with the original terms of those receivables. The amount of the write-down is determined as the difference between the
asset's carrying amount and the present value of estimated future cash flows.
7.10 Reserves
The company has the following reserves:
* Share capital; * Reserve in respect of share options; * Share premium account;
* Revaluation reserve;
* Retained earnings.
Share capital is determined using the nominal value of shares that have been issued.
Equity settled share-based employee remuneration is also credited to reserves in respect of share options until related stock options
are exercised.
Share premium reserves hold the excess amount over the nominal value of shares issued and price paid for shares, net of listing
expenses.
Revaluation reserve includes gains and losses due to the revaluation of certain financial assets.
Retained earnings include all current and prior period results as disclosed in the income statement.
7.11 Areas of critical judgement
Valuation of unquoted investments
The principal area of critical judgement is establishing the fair value of the unquoted portfolio. However, in almost every unquoted
investment that is held a transaction has occurred, or is proceeding that provides an independent assessment of fair value. Where this is
not possible the Company uses the Directors' valuation, which is based on recent market information.
Impairments
Available-for-sale assets are reviewed for impairment by reference to current market prices and the latest financial information. The
Directors monitor the Company's portfolio on a daily basis. If a financial asset falls significantly in value the directors will review the
available financial information on the financial assets in order to determine whether the asset is impaired.
An assessment for impairment is undertaken at least at each balance sheet date.
Designation of financial assets as fair value through profit or loss
The Directors will consider whether the embedded derivative in a financial instrument can be separately valued. Where the Directors are
unable to separately value the embedded derivative the financial assets will be designated at fair value through profit or loss. All
warrants that are held by the Company are held for trade at fair value through profit or loss.
8. Availability of Interim Report
The Company's Interim Report will be available for one month from the Company's registered office at 6 Britannia Place Bath Street, St
Helier, Jersey, JE2 4SU, Channel Islands and also pursuant to Rule 26 of the AIM Rules for Companies on the investor relations section of
the Company's website; www.sovgem.com
This information is provided by RNS
The company news service from the London Stock Exchange
END
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