AVI JAPAN OPPORTUNITY TRUST PLC INTERIM REPORT 2021

The Directors present the unaudited Interim Report for the six months ended 30 June 2021.

Copies of the Interim Report can be obtained from the Company's website ("AJOT" or the "Company") www.ajot.co.uk or by contacting the Company Secretary by telephone on 01392 477500.

Investment Objective

The investment objective is to provide Shareholders with capital growth in excess of the MSCI Japan Small Cap Index, through the active management of a focused portfolio of equity investments listed or quoted in Japan which have been identified by AVI as undervalued and having a significant proportion of their market capitalisation held in cash, listed securities and/or realisable assets.

Portfolio Statistics^*

Performance Summary

As at the close of business on the 14th September 2021, the share price was 123.50 pence per Share and the NAV per Share of the Company was 126.02 pence.

*For all Alternative Performance Measures, please refer to the definitions in the Glossary below.

** MSCI Japan Small Cap Total Return Index (£ adjusted total return)

Chairman's Statement

"Considering the continued positive corporate governance developments and compelling valuations, Japan makes for an attractive investment destination and a well-deserved home in a balanced global portfolio."

Norman Crighton, Chairman

Introductory Comments

Welcome to the third interim report of AVI Japan Opportunity Trust plc ("the Company", or "AJOT"), covering the period from 1 January 2021 to 30 June 2021. Your Company finds itself in good health, with performance ahead of our benchmarks and validation of our Company's strategy steadily building. With the distractions of the Tokyo Olympics concluding what has undoubtedly been a challenging period, we look forward with great optimism to the coming year as the one in which corporate Japan as a whole definitively passes the point of no return for governance reform. We are very proud of the role your investment manager, AVI, will have played in that transformation.

The first half of 2021 saw a resumption of corporate activity and shareholder engagement return to Japan with fervour. The headline grabbing developments at Toshiba are a great showcase for the good that can come from shareholder engagement and AVI was at the forefront of this year's AGM activity. This contrasts to 2020 which was a challenging year for the Investment Strategy, with subdued corporate activity and delayed engagement knocking the wind out of corporate reform.

AVI submitted shareholder proposals to seven companies' June AGMs, subsequently withdrawing four after shareholder friendly actions were taken by management. It was pleasing to see more proposals withdrawn than not, showcasing the positive impact that patient, behind-the-scenes engagement can have. There are numerous other successful cases of positive change brought about by private engagement, where satisfactory improvements were made prior to needing to submit shareholder proposals.

Japan has been a tough place to invest in 2021, however considering the continued positive corporate governance developments and compelling valuations, Japan makes for an attractive investment destination and a well-deserved home in a balanced global portfolio.

Performance and Dividend

Your Company generated a net asset value ("NAV") per share total return of +2.7% over the six months to 30^th June, compared to a return of +1.4% from the MSCI Japan Small Cap Total Return Index (measured in GBP terms). It was a favourable period for value stocks and small cap companies kept pace with their large cap counterparts. While not affecting relative performance, the Yen depreciated by -8%, which strongly detracted from returns.

Since the end of the period covered by this report, the Share Price and NAV have strengthened to 123.5 pence and 126.0 pence per Share respectively. These represent gains of 10.3% for the share Price and 13.5% for the NAV. Both numbers have substantially outperformed the benchmark index which has risen by 9.7% over the same period.

The Board has elected to propose an interim dividend of 0.70 pence per share. As stated in the Prospectus at the Initial Public Offering ("IPO"), the Company intends to distribute substantially all the net revenue arising from the portfolio and is expected to pay an annual dividend, but this may vary substantially from year to year.

Investment Strategy

AJOT was launched in October 2018 to capitalise on undervalued, overlooked, high-quality companies, whose value would be unlocked through a more supportive environment for corporate governance reform. AJOT has built a portfolio of attractive companies and there are few places to invest globally where you can replicate such portfolio characteristics.

The companies in the portfolio have proven their quality over the past year. Despite facing tremendous disruption from COVID, operating profits of the portfolio for the six-month period ending 31 March 2021 grew 11%, faring better than the -7% for the companies in the MSCI Japan Small Cap. Over the last year they grew 1%, again outperforming the MSCI Japan Small Cap whose operating profits fell -11%.

The portfolio trades on an EV/EBIT of 5.0x, with net cash and listed investment securities covering 83% of the market cap. All the while, the portfolio generates operating margins of 11.5% and a cash-adjusted ROE of 27%. What is equally important - if more difficult to measure - are the relationships that AVI has built with the companies over the past three years. Knowing the right people and being in regular contact, allows for a more constructive engagement relationship - and one that is more likely to bear fruit.

2021 is looking like a more supportive environment for the Investment Strategy, and with further planned engagement over the remainder of the year and hopefully continued positive earnings' trends, the portfolio remains well positioned.

Share Premium and Issuance

As at 30 June 2021, your Company's shares traded at a premium of 0.8% to net asset value per share. Over the period under review, this ranged from a 2% discount to a 6% premium.

The Board monitors the discount/premium situation carefully, ensuring investors are protected on the downside from a widening discount while also taking advantage of the premium to grow the Company. Over the period under review, the Board issued 15,130,960 new shares, 12,107,323 of which were issued in February under a placing at a 2% premium, while 250,000 shares were repurchased at a 1% discount. The net result was an increase in the total shares outstanding from 117,489,742 to 132,370,702.

During the period under review, as part of AVI's commitment to invest one quarter of its management fee in AJOT shares, AVI purchased 100,000 shares.

Debt Structure and Gearing

At the end of the period, AJOT had ¥2.9 billion of debt, with gross gearing standing at 13% of NAV. Not all the debt was utilised, largely due to a recent sale of Secom Joshinetsu, and net gearing was circa 4.4%.

Annual General Meeting

The Company's Annual General Meeting was held on 28 April 2021. All resolutions were passed by a large majority of those voting. The Board thanks Shareholders for their continuing support.

Closing Remarks

I would like to welcome Makiko Shimada and Kaz Sakai to AVI's Japan team. They are already making contributions to the Investment Strategy, and I expect with their experience working in Tokyo and native Japanese language skills, they will prove invaluable to the team, increasing capacity for company engagement and research.

The Board would like to thank Shareholders for their continued trust and support. If you have any queries, please do not hesitate to contact me personally ([email protected]) or alternatively speak to our broker Singer Capital Markets to arrange a meeting.

Norman Crighton

Chairman

15 September 2021

Chairman's ESG update

"We look forward to helping everyone work together to improve all aspects of ESG for the investment trust industry."

Norman Crighton, Chairman

In the Chairman's Statement in the last Annual Report, several paragraphs were dedicated to a discussion on how the Company could engage meaningfully with its stakeholders on Environmental, Social and Governance ("ESG") issues. During the first half of the year, I spoke with several shareholders of the three investment trusts of which I am a director, and subsequently several service providers on a confidential basis about their ESG approach. As the Directors have made corporate governance central to the custodianship of Shareholders' interests, most of the time was spent discussing Environmental and Social ("E&S") issues. I would like to thank all those who took part.

The aim of the discussions with the various investment managers was not to determine, encourage or suggest that they use ESG criteria in stock selection. Some investment mandates may take that into consideration, others will not. The aim was to start a conversation on how ESG criteria are applied within their own organisations. Shareholders pay investment managers, lawyers, accountants, and other service providers significant fees so many are keen to establish that some of that money is used to further E&S issues.

All but one of the stakeholders approached was willing to discuss E&S issues in detail and those agreeable gave up a great deal of their valuable time to participate. The overwhelming impression from my discussions was that many Shareholders and service providers are treating E&S considerations with an increasing sense of importance and that changes being made in these areas are being driven from the ground up, by shareholders, clients and staff rather than top down by governments or industry bodies. Some individuals have taken it upon themselves to push E&S matters up the corporate agenda, whereas others have created committees to ensure that ESG issues are promoted within their organisation and encouraged in the wider community. It is clear that an organisation's ESG principles are now scrutinised when Shareholders and service providers determine with whom to do business. As one person said, "If we pay anyone, then we believe they should adhere to our ESG principles."

Many of those contacted believed that the UN Principles of Responsible Investment ("UNPRI") provided a useful standard. I encourage everyone to familiarise themselves with the Principles (www.unpri.org). Another common theme was that many Shareholders and service providers use interactions with other groups to promote their ESG agenda. This may include the companies in which investment managers invest on behalf of shareholders, other shareholders they might interact with, as well as governments, national pension funds and other interested parties.

On Environmental issues, the main concern was climate change. Several recognised that business travel is one of the biggest sources of carbon emissions within their workplace and had used offset programs in the past. Some were now in the process of refining that approach to find the best offset program or reduce business travel accordingly. Others still were looking to quantify less obvious sources of carbon emissions by asking staff to detail their modes of travel to work. Once the problem has been measured, it is much easier to work on a solution. The Board felt this was a very sensible approach and will be adopting this in the coming months for your Company. Many were looking to lower carbon emissions by encouraging more environmentally friendly modes of transport such as cycling or walking to work, which may mean the installation of bicycle racks and showers. Only one of the companies approached was able to say that they used green suppliers for their electricity, but we are sure that number will increase over time.

The response to Social issues was even more positive. Social issues such as sexism, racism, bullying and mental health are all now front of mind, and all are working hard to address these problems. The Directors are particularly pleased that some of the money that Shareholders pay to service providers is being used to address mental health, which has been brought so clearly into focus during the pandemic. Too many of us, who have worked in the industry long enough to have lost friends and colleagues to suicide, drugs, alcohol or just over-work, understand the importance of proper mental health support. Commendably, some stakeholders are also expanding this care into support for groups outside their offices. Many stakeholders support local charities with one stakeholder going even further and donating 10% of corporate profit to charities around the world, selected by employees.

The E&S issues touched on above should be important in a civilised society but all too often they are downplayed in the quest for profit. One stakeholder approached has established an Ethics Committee, which we applaud. Acting ethically by definition means identifying and solving ESG issues.

During these discussions it was suggested that the Company should introduce a framework to measure progress in ESG issues. I am reluctant to do this now as many groups already have a great deal of form-filling to deal with and adding to that burden should be avoided. We will however continue to discuss ESG with our stakeholders on an informal basis for the moment and I will report back to Shareholders in the next Annual Report. For now your Board will be satisfied to see an improvement in ESG standards from all of your stakeholders. Some are just beginning to address E&S issues whereas others have a very sophisticated approach. We look forward to helping everyone work together to improve all aspects of ESG for the investment trust industry.

The investment trust industry pays billions of pounds to investment managers and hundreds of millions of pounds to accountants, lawyers, company secretaries and all the other groups that make our businesses run effectively. It is a fact that shareholders of investment trusts have now added E&S to their list of priorities along with governance. I believe that investment trust boards, as the representatives of shareholders, have a duty to reflect these new priorities, and to ensure that they are communicated clearly and addressed proactively. Just as the industry responded to higher governance standards during my own career from the 1990's onwards, so must the entire industry react to increasing concerns about E&S standards. On behalf of my fellow Directors and Shareholders, we very much look forward to working together to improve ESG standards for the investment trust industry.

Norman Crighton

Chairman

15 September 2021

Investment Manager's Report

"Whilst the underlying fundamental performance of your portfolio companies has been strong, and the backdrop for shareholder engagement and corporate activity is becoming increasingly supportive, share prices have not kept pace with the underlying trend."

Joe Bauernfreund

In your Company's last Annual Report we wrote about the remarkable year that 2020 had been and the unprecedented challenges we have all had to confront. The first half of 2021 has seen an easing of those challenges thanks to the rollout of vaccines around the world.

Japan has been slower than the US, UK and Europe to approve and rollout a vaccine, and this appears to have impacted stock market performance. Whilst the MSCI America, Europe and Asia Pacific ex Japan have returned 13.4%, 10.6%, and 5.3% in the first half of 2021, the MSCI Japan is up only 0.2% (all in GBP).

The good news is that Japan is now rapidly ramping up its vaccine rollout programme. Since early June the number of vaccines being administered daily has jumped to over 1 million. At the current pace, the expectation is that by October Japan will have administered more vaccines per person that the EU and US. At some point therefore, we are confident that the Japanese stock market will play catch up with the rest of the world on the re-opening trade.

During the reporting period your Company returned 2.7% in GBP. This compares with a return for the benchmark index, the MSCI Japan Small Cap Index, of 1.4%. Over the course of the past 6 months the Yen has depreciated by 8.0% against the Pound, which has been a headwind to sterling-based returns.

Undoubtedly the COVID-19 pandemic has had an impact on your Company's performance. Our investments suffered sharp declines in earnings during the first quarter of 2020; plans for shareholder activism were put on hold and corporate governance reform slowed as prioritises were placed elsewhere.

However, we are encouraged that on all these fronts we are seeing extremely positive developments.

Fundamental Operating Environment

The recovery in sales and profits that our portfolio companies have experienced since the summer of 2020 has been extremely strong. The majority are now back to pre-COVID levels of profits and some have even surpassed them. Whilst companies were quick to downgrade forecasts as the world grappled with the uncertainty of COVID-19, many have been slow to revise them back upwards. Despite companies surpassing those forecasts in recent quarters, share price performance in many cases has been lacklustre. This reflects a lack of investor interest rather than any fundamental concern. As earnings continue to grow, we expect share prices to follow.

Shareholder Activism

Much shareholder engagement was delayed during 2020 because of the pandemic. Many investors took the view that they needed to give companies time to see how the virus played out before making public demands. However, there is evidence that corporate activity levels are increasing. Our portfolio benefitted from one such example when Secom Joshinetsu (at the time a 5% weight) agreed to be taken over by its parent company, Secom. We expect several more similar transactions to occur in the coming years.

Corporate Governance Reform

In addition to pressure from the increasing number of activist investors in Japan, companies are also facing pressure from the regulators to continue to improve corporate governance and to focus to an ever greater extent on shareholder returns. The revision to the Corporate Governance Code requires subsidiary companies to have a greater proportion of independent directors, whilst changes to the stock exchange listing rules will make it more challenging for some companies to retain their listing in their present form. All of these measures improve our negotiating position when engaging with portfolio companies.

Whilst the underlying fundamental performance of your portfolio companies has been strong, and the backdrop for shareholder engagement and corporate activity is becoming increasingly supportive, share prices have not kept face with the underlying trend. The portfolio trades at a 5.0x EV/EBIT multiple which, while higher than at the start of the year (4.3x), on a constant portfolio basis (ignoring changes in weights) it has not increased and remains highly compelling.

AVI Shareholder Engagement

AVI's approach to engaging with portfolio companies is designed to be constructive and patient, but at the same time firm. Our preference is to work collaboratively with management in private, to make constructive suggestions as to how to make operational and strategic improvements, as well as to corporate governance. A good example of this approach is Fujitec, where AVI was instrumental in getting management to make changes to their corporate governance standards, as well as to some of their business practices. Fujitec remains a core holding of your Company and has generated a total return of 67% since we first invested in it.

It goes without saying that much of our engagement takes place in private. An increasing number of portfolio companies are working with AVI team members on adopting proposals that we have made to management, and the fact that so many companies are happy working with us in this way is testament to the success of the Stewardship Code and Corporate Governance Code.

Occasionally we feel compelled to put companies under pressure. During the past 6 months we submitted shareholder proposals to seven different companies. We were very pleased that four of these companies adopted the measures we were proposing, and we withdrew the formal proposals before they were ever made public. The relationship with all of these companies continues to be constructive and collaborative, and we feel confident that management will continue to make improvements that will unlock further value for shareholders.

Our shareholder engagement has been focused mainly on governance issues however, we are fundamentally committed to supporting long-term sustainable businesses that will grow and participate in the prosperity of the economy with a responsible approach to the environment, society, and governance. We believe that the integration of ESG and sustainability considerations into our Investment Strategy is not only essential to comprehensively understanding each investment's ability to create long term value but aligned with our values as responsible investors. As such, AVI has committed to a new integrated ESG policy and became a signatory to the UN-supported Principles for Responsible Investment (PRI) and a supporter of TCFD this year.

Our intense approach to shareholder engagement has meant that we have expanded the investment team at AVI, and I am pleased to welcome Kaz Sakai and Makiko Shimada who join myself, Daniel Lee and Yuki Nichols in London, together with Jason Bellamy who is based in Tokyo.

In the following section we describe the major detractors and contributors to returns over the period.

Secom Joshinetsu

Secom Joshinetsu was the largest contributor over the first six months of the year, adding 3.3% to performance. The strong contribution came following a takeover bid from its parent company, Secom, at a 66% premium to the prevailing share price.

Although perhaps happening sooner than anticipated, Secom Joshinetsu's privatisation did not come as a complete surprise. We commented in AJOT's 2020 Annual Report that "Given the multitude of potential conflicts of interest with minority investors…. our thesis is that Secom will buy in Secom Joshinetsu". This is the third listed subsidiary buyout that we have been exposed to since the launch of AJOT, which has been a hugely rewarding theme.

While we had anticipated that Secom Joshinetsu would benefit from a privatisation event, the investment was not reliant on it. Our conviction was grounded in the high-quality business, installation of security systems, and the sticky, recurring nature of the service contracts. In the past four quarters, the business only once suffered a profit decline once, and over the past year, profits grew +2%, vs an -11% decline for the companies in the MSCI Japan Small Cap Index. 

Secom Joshinetsu is a great example of the possible upside from corporate events, which many of our remaining portfolio companies could be beneficiaries of. Exposure specifically to the listed subsidiary theme stood at 16% at the end of June, and we hope that continued pressure on improving corporate governance might see at least one of these privatised over the coming year.

DTS

Although a relatively new investment (Jan 2020) and one that only reached full size at the start of this year, DTS contributed 1.1% to performance, as its share price appreciated by +26%.

We made an investment in DTS, along with NS Solutions, to gain exposure to the digitalisation theme. While institutions have made some efforts to digitalise in the face of remote working, they still have a long way to go. Crucially, Japan is short of experienced IT engineers, and companies do not have the in-house IT expertise to develop new digital solutions, relying on third parties.

DTS is an outsourced IT system provider, offering solutions for upgrading IT systems across a range of applications. Its over 5,000 strong work force is becoming increasingly valuable as demand increases and the supply of IT engineers dwindles. Although 2020 was a difficult year, with companies delaying large IT projects due to COVID disruptions, DTS grew operating profits by +1.3% to an all-time high, increased its dividend by 9% and announced a buyback for 0.8% of shares outstanding.

Crucially, although overlooked by investors, DTS has been successfully shifting its business towards higher growth Digital Transformation ("DX") business. The new President, Mr.Kitamura, has committed to focusing on DX and recurring business, which we expect will generate significant shareholder value. DX-related business now accounts for 30% of sales, compared with 13% two years ago.

While DTS has lagged peers in its shift to DX, it is fast catching up. However, this has not been reflected in its valuation, trading on an EV/EBIT of 7.2x compared to peers on 14.6x. We have been privately engaging with the company and it is encouraging that some of our suggestions are starting to be implemented (M&A, share buyback, introduction of stock-based compensation plan). DTS is due to announce a new mid-term plan next summer. We will be making suggestions to management ahead of this and see it as a potential rerating catalyst, along with continued earnings growth.

C Uyemura

C Uyemura, a manufacturer of chemicals used in the production of electronic devices, contributed 1.1% to performance with its share price appreciating by +31%. The share price was driven higher after the company announced a string of shareholder friendly actions in May.

Along with releasing a public mid-term business plan for the first time, C Uyemura announced stock-based compensation for directors, a 2-for-1 stock split to improve liquidity, a 9% buyback over the next 3 years and revised up earnings by +22% (to the highest in the company's history). This sends a powerful message to the market helping to change investors' perception of C Uyemura from a sleepy family-oriented company, to a more progressive shareholder-friendly one.

We put in a significant amount of effort to engaging with management behind closed doors, suggesting multiple ways in which C Uyemura could increase its corporate value. While we have been consistently engaging with management, having an expanded team allowed us to step up the pressure earlier this year, which we believe was a contributing factor behind C Uyemura's shareholder-friendly announcements.

Despite the strong share price appreciation, C Uyemura is still trading on a 4.6x EV/EBIT multiple, with net cash and investment securities covering 53% of its market cap. C Uyemura is a candidate for promotion to the Prime Section under the new Tokyo Stock Exchange market structure, a potential catalyst for a valuation re-rating. Coupled with a strong earnings backdrop, we are optimistic about C Uyemura's prospects.

Teikoku Sen-i

Teikoku Sen-i (Teikoku) was the largest detractor over the period, reducing returns by 1.0%, as its share price fell -12%.

Teikoku manufactures disaster prevention equipment including fire hoses, special rescue vehicles and pumps for flood control. In a country so precariously situated for a variety of natural disasters, Teikoku has a strong base of potential customers. This has allowed the business to generate double-digit operating margins and expand into new product lines while shifting earnings away from the legacy textile business, which accounts for 20% of sales compared to 40% almost 15 years ago.

However, the next year will be comparatively tough for Teikoku, with sales of high-margin special purpose vehicles used at nuclear reactor sites declining, which is forecast to reduce margins from 13% to 11%, despite 2% sales growth. We are optimistic, however, that longer term, with a tailwind from the need to invest in disaster prevention infrastructure, Teikoku will be able to shift to other high margin business lines and continue to grow profits. In fact, last year it announced plans to open a new factory to increase capacity in anticipation of future growth.

On only a 5.3x EV/EBIT multiple with net cash and investment securities covering 69% of the market cap, the anticipated weakness is more than priced in.

Bank of Kyoto

The Bank of Kyoto detracted 0.8% from performance as its share price fell -6%. The Bank of Kyoto is a relatively new position which we added to the position during the interim period.

The Bank of Kyoto is more a Japan ETF than a bank, owning a collection of exceptionally high-quality businesses like Nidec and Nintendo. The investments alone, after tax, account for 156% of the Bank of Kyoto's market cap with the core banking business being ascribed a large negative value. Over the interim period, our estimated value of these investments plus the value of the bank, fell by a modest -1%, with the share price falling -4% as the discount widened from 61.8% to 63.5%.

While the Bank suffered from an increase in provisions from loan-losses due to COVID, it continued its efforts to streamline costs, with operating expenses falling -2.5% after falling -3.7% the year before. We attribute the share price weakness less to operating issues, and more to investors taking profits after the share price rose 41% in the second half of 2020.

Our investment case in the Bank of Kyoto is predicated on being exposed to an attractive portfolio of blue chip Japanese companies while increasing pressure from regulators to improve regional banks operating performance continues. On a 64% discount, investors are pricing in a low prospect of change and given the upside, we can be patient.

Toagosei

Toagosei detracted a modest 0.6% from returns, with a -6% share price performance over the interim period. Toagosei is a diversified chemical manufacturer, producing inputs for a variety of end products from cosmetics to instant glues.

As part of its 2020 mid-term management plan, Toagosei pledged to expand sales in high-value-added businesses (namely semiconductor chemicals), boost margins to double digits, and conduct 6% worth of buybacks over three years. Despite disruption from COVID-19 on global demand for Toagosei's end products, Toagosei has made progress. Profits for the most recent quarter grew 37% year-on-year, with management revising up H1 guidance for 52% profit growth and operating margins of 11.7%, while buybacks are running ahead of pace, with 2.7% bought back in 2020, and plans to buyback another 2.7% in 2021.

It is hard to explain Toagosei's lacklustre share price performance with the fundamental performance. With no sell-side coverage, we attribute the weakness more to a lack of market awareness. While somewhat out of management hands, there is a lot of room to improve investor communication, which is something we are impressing on the Board.

With 66% of the market cap covered by net cash and investment securities, trading on an EV/EBIT of 3.7x and a buoyant operating environment, we are optimistic that over the rest of the year, Toagosei's share price will catch up with the fundamentals.

Outlook

Over the past weeks the Japanese equity market, along with your Company's NAV, has increased sharply. Change of political leadership, along with a successful rollout of the vaccine have led to increased optimism about the prospects for the Japanese economy and for the stock market. With valuations remaining on wide discounts to other markets, Japan represents an attractive destination for investors to focus on.  We look forward to the remainder of the year, not just from an earnings perspective but also to continue with our engagement efforts to narrow the gap between the share prices and fundamental values of the companies in our portfolio.

Joe Bauernfreund

Asset Value Investors

15 September 2021