Annual Financial Report

RNS Number : 2091J

Baillie Gifford Shin Nippon PLC

25 March 2010

 

BAILLIE GIFFORD SHIN NIPPON PLC

ANNUAL FINANCIAL REPORT AND PROPOSED NEW

ARTICLES OF ASSOCIATION

Copies of the Annual Report and Financial Statements for the year ended 31 January 2010 and the proposed new Articles of Association of Baillie Gifford Shin Nippon PLC have been submitted to the UK Listing Authority and will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility, which is situated at:

Financial Services Authority
25 The North Colonnade
Canary Wharf
London
E14 5HS

Tel: [phone]

The Annual Report and Financial Statements for the year ended 31 January 2010 including the Notice of Annual General Meeting is also available on Baillie Gifford Shin Nippon's page of the Baillie Gifford website at:

www.shinnippon.co.uk 

At the Annual General Meeting to be held on 30 April 2010, it is proposed that new Articles of Association be adopted in order to take account of the implementation on 1 October 2009 of the last parts of the Companies Act 2006.  More detail on the proposed changes to the Articles of Association is set out in the Directors' Report, the Notice of Annual General Meeting and the Appendix to the Notice of Annual General Meeting within the Annual Report and Financial Statements for the year ended 31 January 2010.  Copies of the new Articles of Association are available for inspection at Royal London House, 22-25 Finsbury Square, London EC2A 1DX and Calton Square, 1 Greenside Row, Edinburgh EH1 3AN.

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 January 2010 which require to be published by DTR 4.1 is set out on the following pages.

Baillie Gifford & Co

Company Secretaries

25 March 2010

BAILLIE GIFFORD SHIN NIPPON PLC 

Chairman's Statement

Performance

Over the last year, after a two year period of pronounced weakness, Japanese markets in aggregate posted positive returns in local currency terms. However, for sterling investors the weakness in the Yen meant that these returns were reduced. Over the year to 31 January 2010 the Company's comparative index declined by 1.5% in sterling terms.  Shin Nippon's performance exceeded this with an improvement in net asset value (after deducting borrowings at fair value) of 14.1%, while the share price appreciated by 20.4%. The discount of the share price to net asset value narrowed during the period from 21.7% to 17.4% and ranged between 27.9% and 6.6% during the year. The Company's performance was sound against its peer group,  ranking it 3/5 for NAV total return performance over one year, 2/5 over three years and 1/5 over five years.

Stock selection was the source of the Company's good relative and absolute performance and this, along with the stock market and the economy, is discussed more fully in the Managers' report.

Borrowing

In March 2009 ¥250m of debt was repaid early and the Company ended the period with debt of ¥1.15bn. This has an interest cost of 2.025% and is due for repayment in August 2011. The resultant gearing at the end of the year was 18.2% gross and 16.8% net and was beneficial to performance during the course of the year.

Hedging

The Company undertook no hedging during the period, during which the Yen weakened by 10.9% against Sterling, moving from ¥/£129.48 to ¥/£145.27.  Movements in currency markets are monitored closely and hedging would be considered if the Yen diverged significantly from the Managers' estimate of fair value.

Revenue

Shin Nippon's remit is to pursue capital growth rather than income generation. The Company's revenue per share for the year fell from 1.54p in the previous period to 0.08p. The main reason for the decline was the 30.1% drop in investment income to £868,000 with companies cutting their dividends as profits fell sharply. During the previous year the Company also benefited from the recovery of £44,000 of VAT and related interest from HM Revenue & Customs. Shin Nippon's revenue reserve remains in deficit so a dividend is not possible.  

AGM

At this year's AGM the Board is seeking to renew the facility to issue new shares, and to re-issue any shares held in treasury (of which there are none at present), up to 5% of the Company's issued share capital for cash, on a non pre-emptive basis, but only at a premium to net asset value. No shares were issued during the financial year. Such authority would be used to feed natural market demand and would enhance the net asset value per share for existing shareholders.

Approval is also sought to renew the authority to buy back shares. The purpose of this facility is to enable the Board to buy back shares when the discount is substantial in absolute terms and in relation to its peers. Its impact would be to enhance the net asset value per share for existing shareholders.

Authority is also sought to adopt new Articles of Association so that the remaining parts of the Companies Act 2006 can be incorporated. 

Strategy

At this year's annual review of strategy with the Managers, the Board reaffirmed its view of the long term attractions of investing in smaller companies in Japan. Notable features discussed were: Japan as a major beneficiary of its proximity to China and strong regional growth; the existence of a substantial pool of smaller, innovative Japanese companies with strong competitive advantages in the region and the world;  many small companies in Japan are under-researched providing good potential for outperformance as a consequence of your Managers'  investment process; companies generally have strong balance sheets; many company valuations are very low on a historic basis at present; and, Shin Nippon benefits from low cost historic borrowings. There are, however, some negatives. Doubt remains over the political system. The new government of Prime Minister Hatoyama has had a rocky start on some financial issues but there are grounds for hoping that structural change is happening below the surface, albeit slowly. Also, corporate governance in Japan is still poor but, again, there are continuing signs of improvement.

I should mention also one area where your Company is materially different from its competitors. Shin Nippon's objective is to invest for the long term, and it does just that. The average holding term of its largest ten holdings is four years and four months and the portfolio turnover rate has averaged 27.5% annually over the past five financial years. This is in sharp contrast to many investment vehicles that have very high turnover rates but still claim to invest for the long term.

Comparative Index and Performance Objectives

Setting an appropriate comparative index for Shin Nippon has always been a challenge. This was last reviewed formally in 2001 when the Board adopted a weighted composite index (in sterling terms) of the Tokyo Second Section, Topix Small and the JASDAQ indices. This is not ideal as the indices suffer from various structural problems such as having some constituents that are really quite large companies or a long tail of companies that are completely illiquid, but it was felt to be the best and fairest solution at the time. Since then the MSCI Japan Small Cap Index has become an established quality index covering smaller companies in Japan. Compared to the other available indices, it has a better match with the size of stocks that Shin Nippon invests in both at the top and bottom of its range, and the median capitalisation of its components is well matched to the Company's portfolio too. Also, the MSCI index is available on a total return basis.

In the last five years there has been a dramatic increase in dividend payouts in Japan, albeit from a very low base. The Board has decided therefore that all future performance comparisons will be compiled on a total return basis i.e. including income, and has adopted the MSCI Japan Small Cap Index, total return in sterling terms, as your Company's comparative index from 1 February 2010. The yield on the portfolio and the index is very similar at approximately two percent at present. For reference, the MSCI index increased by 2.1% over the year to 31 January 2010.

In addition, the Board has reviewed your Company's performance targets. As the objective is to achieve long term capital growth, the Board has decided that the key target for the Managers should be to outperform the comparative index and the Company's peer group over running periods of three years. In evaluating the Managers, the Board will take account of performance over one and five year periods as well. The Board and Managers are also very aware of the desire to generate absolute returns for shareholders.

Board

I was honoured to be appointed Chairman on 29 April 2009 on the retirement of Mike Hathorn. I should like to pay tribute to Mike's skills and patience in chairing us through many years, and which contributed to our positive long term performance. Over the last few years the Board has had an active programme of Board refreshment. Last year it was announced that Sarah Whitley would stand down in due course. It is planned that this will happen when a suitable replacement has been identified and an announcement will be made to this effect in due course. As a result all the Company's Directors will be independent of the Managers. As head of the Japanese department of Baillie Gifford, Sarah's advice will continue to be available to the Board.

Outlook

The Japanese economy is benefiting from the recovery in global trade. Exports from Japan to the rest of Asia have been especially buoyant in recent months. Investment in technology manufacturing equipment has been strong and there are now signs that capital expenditure in the machinery sector is picking up.  The wildcard remains domestic consumption, and the widely held consensus is that consumer spending will remain unexciting. However, there are some grounds to expect a more favourable outcome. Consumer confidence is recovering as demand for labourimproves, and families with children are in line for a significant increase in their monthly income when child allowance payments are introduced by the new government later this year.  

Corporate Japan has endured a very tough year. However, most Japanese companies deserve credit for their swift response to the dramatic collapse in global demand and the overall level of cost cutting has been very impressive. Some companies have even managed to regain previous peak levels of profitability already, despite sales being significantly lower than before the downturn.  In recent quarters aggregate profits for the market have taken many by surprise and consensus forecasts for the full year imply a major slowdown in the next few months which seems highly unlikely. The Board and Managers believe that the market tends to underestimate the impact on corporate profits of a cyclical recovery combined with aggressive cost reductions.

Despite the rosier background compared to twelve months ago, Japanese share prices have tended to lag the recovery in global share prices. Valuations remain low and attractive when compared to longer term averages. We remain encouraged by the underlying performance of the companies held and the Managers have been buying new holdings where the market appears to be ignoring the sustainability of the recent improvement in fundamentals.

Barry M Rose

15 March 2010

BAILLIE GIFFORD SHIN NIPPON PLC 

Managers' Report

Performance and Portfolio

Shin Nippon's net asset value per share (after deducting borrowings at fair value) increased by 14.1% over the year compared to a fall of 1.5% in the comparative index which comprised a market capitalisation weighted composite of the Tokyo Second Section Index, the TOPIX Small Index, and the JASDAQ. The sterling return was negatively impacted by the 10.9% fall in the value of the Yen over the twelve months.

At the beginning of this twelve month period the global economy appeared to be in freefall and there were lingering doubts about the stability of the financial system. The Japanese market endured a turbulent year reaching its low point in March before rallying over the summer, as signs started to emerge that the world's economy was responding to stimulus packages and that a global depression had been avoided. Towards the second half of the year Japanese indices generally weakened. Investors appear to have been worried about both the impact of short term yen strength on Japanese exporters and the threat of dilutive equity issuances after some of the larger, generally weaker Japanese companies announced large new financing issues. Some investors were no doubt also disappointed that the new government had dominated the headlines for mostly the wrong reasons during their first couple of months in office. These concerns probably help explain Japan's relative underperformance compared to other parts of the world.

Within Japan the economy has rebounded quickly, as it has tended to do in the past when global demand has reaccelerated. This naturally favoured the industries with most exposure to external demand such as Electricals & electronics and Manufacturing & machinery. Stocks in these sectors had been amongst the weakest performers in the previous year as global demand deteriorated.

The impressive speed of the turnaround in aggregate profits for the Japanese market has taken many by surprise. While demand has only just started to improve gradually over the past couple of quarters, profitability in some cases has already returned to near record high levels. This highlights how aggressive companies had been in their cost cutting at the start of the year to allow them to cope with the dramatic slowdown in orders.

The subdued reaction in share prices to the improving news regarding economic and profit growth in Japan has allowed Shin Nippon to purchase several new holdings in stocks with exciting long term growth prospects, at depressed valuation levels. Nifco manufactures specialist plastic parts for automobiles, while Chugoku Marine Paints is also benefiting from the recovery in the global economy. More domestic focused new purchases include Point, a fashion retailer that is gaining market share, and Nihon M&A Center, which offers advisory services to small businesses and their owners.

Attribution

The table following this report contains information regarding the contribution to overall portfolio performance last year from our stock selection and asset allocation in each sector. As has been previously intimated, this breakdown is slightly artificial as we select stock purely on the basis of their individual merits but it does provide some details on the key factors contributing to performance.

The Company's good performance relative to its comparative index is broadly attributable to stock selection combined with the positive effect of maintaining our low cost yen gearing.

Electricals and electronics was by some margin the best performing sector in the market as the semiconductor cycle picked up, in response to the healthier demand for consumer electronics. Iriso Electronics, the manufacturer of electronic connectors, and Foster Electric, a company that makes earphones for portable music players and mobile phones at its production bases around Asia, were especially strong performers.

Another strongly performing area was the broad Manufacturing and machinery sector where share prices started to rise in anticipation of an increase in capital spending on equipment from very low levels. Industrial hydraulic joint maker Nabtesco is a good example of a machinery related holding that performed well as orders from the rest of Asia rebounded for construction equipment and high speed railway networks.

Retailwas one of the worst performing sectors, given the fairly lacklustre consumption background, but several of our niche retail stocks performed very strongly. Start Today is an online fashion retailer that is benefiting as Japanese consumers become more accustomed to buying clothing over the internet, while Daikokutenbussan and Don Quijote have both done well due to the increasing popularity of their discount formats.

In general, areas of the market that were less linked to the economic business cycle were amongst the poorer performers. The Pharmaceuticals and food sector, for example, declined overall and our holding in EPS, the coordinator of outsourced drug trials, was one of our worst performing holdings. While the company may not be benefiting particularly from the pickup in the economy, the longer term growth outlook for this business still looks very attractive.

Portfolio turnover remained low over the twelve month period at 21%, which is in line with our investment horizon of three to five years.

http://www.rns-pdf.londonstockexchange.com/rns/2091J_-2010-3-25.pdf 

Economy

As has been mentioned already, the Japanese economy has been recovering since early last year, spurred initially by increases in export demand. Forecasts for economic growth in Japan this year are being revised up as evidence of a more sustained improvement in conditions emerges. Industrial production and capacity utilisation have both been rising as orders from the rest of Asia have rebounded quickly. Japanese companies were quick to stop production when demand collapsed so there was no major inventory problem, and even now inventories are still below normal levels despite the recovery in production. This improvement in fundamentals has been reflected in the various business sentiment surveys including the one specific to smaller companies (see graph above). Access to credit has also improved as the year has progressed.

While overall consumption remains fairly subdued, consumer confidence is recovering as the labour market improves. Overtime payments are starting to rise again and households with children further stand to benefit from the introduction of child allowance benefits later this year. Deflation, the persistent drag on the domestic economy, persists and it remains to be seen whether the Bank of Japan will take a more active stance in fighting this problem.

The main political story of the year was the election of the Democratic Party of Japan in September's general election. This ended a period of virtually unbroken rule for the Liberal Democrat Party since the Second World War. The new party swept into office after a campaign promising new and innovative policies designed to boost domestic consumption and reduce the power of the bureaucracy. A combination of political inexperience and personal scandal has resulted in many people writing off the DPJ's chances of success already. It is far too early to tell whether their efforts to boost consumer spending will succeed but the initial signs regarding the reform of the civil service are more encouraging. The long era of meddling bureaucrats dictating policy to serve various vested interests, rather than the greater economic good, may be coming to an end.

Outlook

Japanese companies have returned to profitability in recent quarters thanks to the recovery in global trade and a dramatically reduced cost base. Forecasts for the full year to March 2010 are too low and consensus estimates will inevitably be revised upwards. We have been taking advantage of the apparent disconnect between the improving fundamentals and the relatively disappointing performance of the smaller Japanese markets to build up exciting new holdings in some attractively valued domestic niche growth companies, along with several globally competitive exporters with high exposure to growth in the rest of Asia. Over the next year the market's focus should turn to stocks that have the ability to generate sustainable earnings growth and this should favour the long term "winners" that Shin Nippon aims to hold.

Baillie Gifford & Co

15 March 2010

Portfolio Performance Attribution for the Year to 31 January 2010

Computed relative to the comparative index†

	Index		Shin Nippon		Performance*		Contribution	Contribution attributable to:
	asset allocation		asset allocation		Shin		to relative	Stock	Asset
	31.01.09	31.01.10	31.01.09	31.01.10	Nippon	Index	return	selection	allocation
Portfolio Breakdown	%	%	%	%	%	%	%	%	%
Electricals and electronics	6.4	8.5	6.9	11.3	98.7	26.9	4.1	4.0	0.1
Manufacturing and machinery	14.3	16.4	33.3	31.7	14.0	11.5	2.7	0.6	2.1
Retail	12.1	11.0	26.1	22.8	3.7	(12.9)	2.3	4.0	(1.7)
Commerce and services	19.6	18.4	27.9	21.7	5.2	(6.1)	2.4	2.7	(0.3)
Pharmaceuticals and food	6.7	5.5	7.2	4.4	(18.5)	(6.6)	(0.9)	(0.7)	(0.2)
Real estate and construction	7.8	8.3	3.1	7.3	87.1	(4.3)	2.8	2.8	-
Financials	8.3	7.2	3.2	4.8	6.5	(22.3)	1.9	1.2	0.7
Information, communication and utilities	12.3	12.0	9.3	8.2	(10.5)	2.3	(1.4)	(1.2)	(0.2)
Chemicals and other materials	12.5	12.7	0.9	4.3	62.6	1.7	1.1	1.5	(0.4)
Cash and brokers' balances	-	-	10.3	1.6	(11.8)	-	(0.5)	-	(0.5)
Gearing	-	-	(28.2)	(18.1)	(8.5)	-	1.5	-	1.5
Total	100.0	100.0	100.0	100.0	15.5	(1.5)	17.2	15.8	1.3

Past performance is not a guide to future performance.

Source: HSBC/Nomura International plc.

Contributions cannot be added together, as they are geometric; for example to calculate how a return of 15.5% against an index return of (1.5%) translates into a relative return of 17.2%, divide the portfolio return of 115.5 by the index return of 98.5 and subtract one.

†The comparative index for the year to 31 January 2010 comprised a composite of the Tokyo Second Section Index, the TOPIX Small Index and the JASDAQ Index, weighted by market capitalisation, in sterling terms.

*The returns for Shin Nippon are total return (net income reinvested) whereas, due to the unavailability of total return data, the index returns are capital only returns (income not reinvested).  It is estimated that the index return would be higher by approximately 2 per cent per annum if net income was reinvested.

Investment Changes (£'000)

	Valuation  at 31.01.09	Net acquisitions/ (disposals)	Appreciation/ (depreciation)	Valuation at 31.01.10
Equities:
Electricals and electronics	2,642	(2)	2,283	4,923
Manufacturing and machinery	12,780	(323)	1,364	13,821
Retail	10,022	(270)	196	9,948
Commerce and services	10,691	(1,531)	331	9,491
Pharmaceuticals and food	2,772	(324)	(551)	1,897
Real estate and construction	1,200	(1,093)	896	3,189
Financials	1,236	769	106	2,111
Information, communication and utilities	3,572	483	(463)	3,592
Chemicals and other materials	347	936	609	1,892
Total investments	45,262	831	4,771	50,864
Net liquid assets	3,811	(2,707)	(482)	622
Total assets	49,073	(1,876)	4,289	51,486
Bank loans	(10,813)	1,793	1,103	(7,917)
Shareholders' funds	38,260	(83)	5,392	43,569

TWENTY LARGEST EQUITY HOLDINGS at 31 January 2010
		2010		2009
Name	Business	Value £'000	% of total assets	Value £'000
Message	Provides nursing services for the elderly	1,991	3.9	1,336
Nabtesco	Hydraulic equipment	1,967	3.8	1,151
Daikokutenbussan	Discount store for food and sundry goods	1,746	3.4	1,415
Don Quijote	Discount store chain	1,492	2.9	1,184
EPS	Provides clinical testing services	1,419	2.8	1,828
Hamakyorex	Trucking and warehousing	1,409	2.7	1,639
Nakanishi	Dental equipment	1,375	2.7	1,060
Pronexus	Financial printing services	1,308	2.5	1,764
Osaka Securities	Stock exchange operator	1,279	2.5	660
Shinko Plantech	Plant maintenance services	1,233	2.4	1,003
Shoei	Manufactures motor cycle helmets	1,213	2.4	1,138
H.I.S.	Discount travel agency	1,197	2.3	1,349
Cocokara Fine	Drugstore chain	1,148	2.2	953
First Juken	Builds and sells residential buildings	1,070	2.1	312
Accordia Golf	Golf course operator	1,063	2.1	726
Micronics Japan	Electronic measuring devices	1,050	2.0	-
Start Today	Internet fashion retailer	987	1.9	-
Horiba	Manufacturer of measuring instruments and analysers	970	1.9	777
Foster Electric	Headphone manufacturer	940	1.8	223
Askul	Office equipment supplier	908	1.8	1,173
		25,765	50.1	19,691

 

 

 

 

 

 

 

RELATED PARTY TRANSACTIONS

The Directors' fees for the year are detailed in the Directors' Remuneration Report in the Annual Report. No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under section 412 of the Companies Act 2006 other than as disclosed in note 4.

Baillie Gifford & Co are employed as Managers and Secretaries under a management agreement which is terminable on not less than twelve months' notice or on shorter notice in certain circumstances. The fee in respect of each quarter is 0.25% of the total net assets of the Company attributable to shareholders on the last day of that quarter.

The details of the management fees are as follows:

	2010 £'000		2009 £'000
Investment management fee	397		389
VAT recovered*	-		(44)
	397		345

*See note 5 below

PRINCIPAL RISKS AND UNCERTAINTIES

As an Investment trust, the Company invests in small Japanese company securities and makes other investments so as to achieve its investment objective of long term capital growth. The Company borrows money when the Board and Managers have sufficient conviction that the assets funded by borrowed monies will generate a return in excess of the cost of borrowing. In pursuing its investment objective, the Company is exposed to various types of risk that are associated with the financial instruments and markets in which it invests and could result in a reduction in the Company's net assets.

These risks are categorised as market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. The Board monitors closely the Company's exposures to these risks but does so in order to reduce the likelihood of a permanent loss of capital rather than to minimise the short term volatility.

The Company may enter into derivative transactions as explained in the Investment Policy on pages 21 and 22 of the Annual Report and Financial Statements. No such transactions were undertaken in the year under review.

The risk management policies and procedures outlined in this note have not changed substantially from the previous accounting period.

Market Risk

The fair value or future cash flows of a financial instrument or other investment held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - currency risk, interest rate risk and other price risk. The Board of Directors reviews and agrees policies for managing these risks and the Company's Investment Manager both assesses the exposure to market risk when making individual investment decisions and monitors the overall level of market risk across the investment portfolio on an ongoing basis. Details of the Company's investment portfolio are shown in note 9 on page 42 of the Annual Report and Financial Statements.

(i) Currency Risk

The Company's assets, liabilities and income are principally denominated in yen. The Company's functional currency and that in which it reports its results is sterling. Consequently, movements in the yen/sterling exchange rate will affect the sterling value of those items.

The Investment Manager monitors the Company's yen exposure (and any other overseas currency exposure) and reports to the Board on a regular basis. The Investment Manager assesses the risk to the Company of the overseas currency exposure by considering the effect on the Company's net asset value and income of a movement in the rates of exchange to which the Company's assets, liabilities, income and expenses are exposed. However, the country in which a company is listed is not necessarily where it earns its profits. The movement in exchange rates on overseas earnings may have a more significant impact upon a company's valuation than a simple translation of the currency in which the company is quoted.

Yen borrowings are used periodically to limit the Company's exposure to anticipated future changes in the yen/sterling exchange rate which might otherwise adversely affect the value of the portfolio of investments. The Company may also use forward currency contracts, although none have been used in the current or prior year.

Exposure to currency risk through asset allocation, which is calculated by reference to the currency in which the asset or liability is quoted, is shown below.

At 31 January 2010	Investments £'000		Cash and deposits £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	50,864		556		(7,917)		78		43,581
Total exposure to currency risk	50,864		556		(7,917)		78		43,581
Sterling	-		63		-		(75)		(12)
	50,864		619		(7,917)		3		43,569

*    Includes net non-monetary assets of £10,000.

At 31 January 2009	Investments £'000		Cash and deposits £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	45,262		3,925		(10,813)		24		38,398
Total exposure to currency risk	45,262		3,925		(10,813)		24		38,398
Sterling	-		7		-		(145)		(138)
	45,262		3,932		(10,813)		(121)		38,260

*      Includes net non-monetary assets of £10,000.

Currency Risk Sensitivity

At 31 January 2010, if sterling had strengthened by 10% against the yen, with all other variables held constant, total net assets and net return on ordinary activities after taxation would have decreased by £4,358,000 (2009 - £3,840,000). In percentage terms, total net assets would have decreased by 10.0% (2009 - 10.0%), and net return on ordinary activities after taxation would have decreased by 82.1% (2009 - 55.6%). A 10% weakening of sterling against the yen, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts.

(ii) Interest Rate Risk

Interest rate movements may affect the level of income receivable on cash deposits. They may also impact upon the market value of the Company's investments as the effect of interest rate movements upon the earnings of a company may have a significant impact upon the valuation of that company's equity.

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions and when entering borrowing agreements.

The Board reviews on a regular basis the amount of investments in cash and the income receivable on cash deposits.

The Company finances part of its activities through borrowings at approved levels. The amount of such borrowings and the approved levels are monitored and reviewed regularly by the Board.

The interest rate risk profile of the Company's financial assets and liabilities at 31 January 2010 is shown below. The main change to the interest rate risk profile during the year was the part repayment of the Yen bank loan totalling ¥250m.

Financial assets	2010			2009
	Fair value £'000	Weighted average interest rate		Fair value £'000	Weighted average interest rate
Cash:
Yen	556	nil		3,925	Nil
Sterling	63	0.01%		7	0.56%
	619			3,932

The cash deposits generally comprise call or short term money market deposits of less than one month and earn interest at floating rates based on prevailing bank base rates.

Financial Liabilities

The interest rate risk profile of the Company's financial liabilities at 31 January was:

	2010			2009
	Book value £'000	Weighted average interest rate	Weighted average period until maturity	Book value £'000	Weighted average interest rate	Weighted average period until maturity
Bank Loans:
Yen denominated - fixed rate	7,917	2.0%	18 months	10,813	2.0%	30 months

An interest rate risk sensitivity analysis has not been performed as the Company does not hold bonds and has borrowed funds at a fixed rate of interest.

(iii) Other Price Risk

Changes in market prices other than those arising from interest rate risk or currency risk may also affect the value of the Company's net assets. The Company's exposure to changes in market prices relates to the fixed asset investments as disclosed in note 9 of the Annual Report and Financial Statements.

The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Investment Manager. The Board meets regularly and at each meeting reviews investment performance, the investment portfolio and the rationale for the current investment positioning to ensure consistency with the Company's objectives and investment policies. The portfolio does not seek to reproduce the index, investments are selected based upon the merit of individual companies and therefore performance may well diverge from the comparative index.

Other Price Risk Sensitivity

A full list of the Company's investments is shown on pages 19 to 20 of the Annual Report and Financial Statements. In addition, a list of the 20 largest holdings together with various analyses of the portfolio by industrial sector and exchange listing are shown on pages 14 and 15 of the Annual Report and Financial Statements.

116.7% of the Company's net assets are invested in Japanese quoted equities (2009 - 118.3%). A 10% increase in quoted equity valuations at 31 January 2010 would have increased total net assets and net return on ordinary activities after taxation by £5,086,000 (2009 - £4,526,000). In percentage terms, total net assets would have increased by 11.7% (2009 - 11.8%), and net return on ordinary activities after taxation would have increased by 95.8% (2009 - 65.6%).A decrease of 10% would have had an equal but opposite effect.

Liquidity Risk

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is not significant as the majority of the Company's assets are in investments that are readily realisable.

The Company's investment portfolio is in Japanese small-cap equities which are typically less liquid than larger capitalisation stocks. The Manager monitors the liquidity of the portfolio on an ongoing basis.

The Board provides guidance to the Investment Managers as to the maximum exposure to any one holding (see Investment Policy on pages 21 and 22 of the Annual Report and Financial Statements).

The maturity profile of the Company's financial liabilities at 31 January was:

	2010 £'000	2009 £'000
In more than one year, but not more than two years In more than two years, but not more than five years	7,917 -	- 10,813
	7,917	10,813

The Company has the power to take out borrowings, which give it access to additional funding when required. The Company's borrowing facilities are detailed in note 12 of the Annual Report and Financial Statements.

The Company part repaid ¥250m of the fixed rate loan during the year.

Credit Risk

This is the risk that a failure of a counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss. This risk is managed as follows:

·     The Company's listed investments are held on its behalf by Mizuho Corporate Bank, Ltd and the Bank of New York Mellon as the Company's custodians. Bankruptcy or insolvency of the custodians may cause the Company's rights with respect to securities held by the custodian to be delayed. The Investment Manager monitors the Company's risk by reviewing the custodians' internal control reports and reporting its findings to the Board;

·    Investment transactions are carried out with a large number of brokers whose credit worthiness is reviewed by the Investment Manager. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations before any transfer of cash or securities away from the Company is completed; and

·    Cash is only held at banks that are regularly reviewed by the Managers.

Credit Risk Exposure

The exposure to credit risk at 31 January was:

	2010 £'000	2009 £'000
Cash and deposits	619	3,932
Debtors	239	137
	858	4,069

None of the Company's financial assets are past due or impaired.

Fair value of financial assets and financial liabilities

The Company's investments are stated at fair value and the Directors are of the opinion that the reported values of the Company's other financial assets and liabilities approximate to fair value with the exception of the long term borrowings which are stated at amortised cost. The fair value of the loans is shown below.

		2010		2009
		Book Value £'000	Fair* Value £'000	Book Value £'000	Fair* Value £'000
Fixed rate yen bank loans		7,917	8,060	10,813	11,035

* The fair value of each bank loan is calculated by reference to a Japanese government bond

 of comparable yield and maturity.

Gains and losses on hedges

At 31 January 2010 and 2009 there were no unrecognised gains/losses on hedges.

Capital Management

The Company does not have any externally imposed capital requirements other than the loan covenants as detailed in note 12 on page 43 of the Annual Report and Financial Statements. The capital of the Company is the ordinary share capital as detailed in note 13 of the Annual Report and Financial Statements. It is managed in accordance with its investment policy in pursuit of its investment objective, both of which are detailed on pages 21 and 22 of the Annual Report and Financial Statements, and shares may be repurchased or issued as explained on page 28 of the Annual Report and Financial Statements.

Fair Value of Financial Instruments

Fair values are measured using the following fair value hierarchy:

Level 1:	reflects financial instruments quoted in an active market.
Level 2:	reflects financial instruments whose fair value is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables includes only data from observable markets.
Level 3:	reflects financial instruments whose fair value is determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable market transactions in the same instrument and not based on available observable market data.

The valuation techniques used by the Company are explained in the accounting policies on page 39 of the Annual Report and Financial Statements.

The financial assets designated as valued at fair value through profit or loss are all categorised as Level 1 in the above hierarchy. None of the financial liabilities are designated at fair value through profit or loss in the financial statements.

Other Risks

Other risks faced by the Company include the following:

Regulatory Risk

Failure to comply with applicable legal and regulatory requirements could lead to suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report. Breach of section 842 of the Income and Corporation Taxes Act 1988 could lead to the Company being subject to tax on capital gains.

Baillie Gifford's Heads of Business Risk & Internal Audit and Regulatory Risk provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes. The Managers monitor investment movements and the level of forecast income and expenditure to ensure the provisions of section 842 are not breached.

Operational/Financial Risk 

Failure of the Managers' accounting systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. The Board reviews the Managers' Report on Internal Controls and the reports by other key third party providers are reviewed by the Manager on behalf of the Board.

Discount Volatility

The discount at which the Company's shares trade can widen. The Board monitors the level of discount and the Company has authority to buy back its own shares.

Gearing Risk

The Company may borrow money for investment purposes (sometimes known as 'gearing'). If the investments fall in value, any borrowings will magnify the extent of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings.

All borrowings require the prior approval of the Board and gearing levels are discussed by the Board and Managers at every meeting. The majority of the Company's investments are in quoted securities that are readily realisable.

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT, DIRECTORS' REMUNERATION REPORT AND THE FINANCIAL STATEMENTS

The Directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

•     select suitable accounting policies and then apply them consistently;

•     make judgements and accounting estimates that are reasonable and prudent;

•     state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements respectively; and

•     prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors have delegated responsibility to the Managers for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the Directors, whose names and functions are listed within the Directors and Management section, confirm that, to the best of their knowledge:

•     the financial statements, which have been prepared in accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice), give a true and fair view of the assets, liabilities, financial position and net return of the Company; and

•     the Directors' Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

By order of the Board

IAIN A MCLAREN

Director

15 March 2010

 

INCOME STATEMENT

	For the year ended 31 January 2010				For the year ended 31 January 2009
	Revenue £'000	Capital £'000	Total  £'000		Revenue £'000	Capital £'000	Total  £'000
Gains/(losses) on investments†	-	4,771	4,771		-	(3,922)	(3,922)
Currency gains/(losses) (note 2)‡	-	551	551		-	(3,383)	(3,383)
Income (note 3)	868	-	868		1,358	-	1,358
Investment management fee (note 4)	(397)	-	(397)		(345)	-	(345)
Other administrative expenses	(236)	-	(236)		(223)	-	(223)
Net return before finance costs and taxation	235	5,322	5,557		790	(7,305)	(6,515)
Finance costs of borrowings (note 6)	(152)	(37)	(189)		(222)	(80)	(302)
Net return on ordinary activities before taxation	83	5,285	5,368		568	(7,385)	(6,817)
Tax on ordinary activities	(59)	-	(59)		(87)	-	(87)
Net return on ordinary activities after taxation	24	5,285	5,309		481	(7,385)	(6,904)
Net return per ordinary share	0.08p	16.99p	17.07p		1.54p	(23.74p)	(22.20p)
(note 9)

   † Gains/(losses) on investments include gains and losses on disposals and holding gains and losses on the investment portfolio resulting from: i) changes in the local currency fair value of the investments and, ii) movements in the yen/sterling exchange rate.

‡   Currency losses include: i) currency exchange gains and losses on yen bank loans, ii) exchange differences on the settlement of investment transactions and iii) other exchange differences arising from the retranslation of cash balances.

   The total column of this statement is the profit and loss account of the Company.

All revenue and capital items in this statement derive from continuing operations. No operations were acquired or discontinued during the year.

   A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been   reflected in the above statement. 

BALANCE SHEET

at 31 January 2010

	At 31 January 2010		At 31 January 2009
	£'000	£'000	£'000	£'000
Fixed Assets
Investments		50,864		45,262
Current Assets
Debtors	249		147
Cash and short term deposits	619		3,932
	868		4,079
Creditors
Amounts falling due within one year	(246)		(268)
Net Current Assets		622		3,811
Total Assets less Current Liabilities		51,486		49,073
Creditors
Amounts falling due after more than one year (note 10)		(7,917)		(10,813)
Total net assets		43,569		38,260
Capital and Reserves
Called-up share capital		3,110		3,110
Share premium		7,674		7,674
Capital redemption reserve		21,521		21,521
Capital reserve		15,908		10,623
Revenue reserve		(4,644)		(4,668)
Shareholders' funds		43,569		38,260
Net Asset Value Per Ordinary Share:
(after deducting borrowings at fair value)		139.6p		122.3p
Net Asset Value Per Ordinary Share:
(after deducting borrowings at par value)		140.1p		123.0p

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 31 January 2010

	Called-up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at 1 February 2009	3,110	7,674	21,521	10,623	(4,668)	38,260
Net return on ordinary activities after taxation	-	-	-	5,285	24	5,309
Shareholders' funds at 31 January 2010	3,110	7,674	21,521	15,908	(4,644)	43,569

For the year ended 31 January 2009

	Called-up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at 1 February 2008	3,110	7,674	21,521	18,008	(5,149)	45,164
Net return on ordinary activities after taxation	-	-	-	(7,385)	481	(6,904)
Shareholders' funds at 31 January 2009	3,110	7,674	21,521	10,623	(4,668)	38,260

 

CASH FLOW STATEMENT
	For the year ended 31 January 2010			For the year ended 31 January 2009
	£'000	£'000		£'000	£'000
NET CASH INFLOW FROM OPERATING ACTIVITIES (note 14)		207			743
SERVICING OF FINANCE
Interest and breakage costs paid	(217)			(295)
NET CASH OUTFLOW FROM SERVICING OF FINANCE		(217)			(295)
TAXATION
Overseas tax paid	(56)			(83)
TOTAL TAX PAID		(56)			(83)
FINANCIAL INVESTMENT
Acquisitions of investments	(10,938)			(6,436)
Disposals of investments	10,036			10,326
Exchange differences on settlement of investment transactions	(70)			80
NET CASH (OUTFLOW)/INFLOW FROM FINANCIAL INVESTMENT		(972)			3,970
NET CASH (OUTFLOW)/INFLOW BEFORE FINANCING		(1,038)			4,335
FINANCING
Bank loans repaid	(1,793)			(5,384)
NET CASH OUTFLOW FROM FINANCING		(1,793)			(5,384)
DECREASE IN CASH		(2,831)			(1,049)
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
Decrease in cash		(2,831)			(1,049)
Net cash outflow from bank loans		1,793			5,384
Exchange movement on bank loans		1,103			(4,843)
Exchange differences on cash		(482)			1,380
MOVEMENT IN NET DEBT IN THE YEAR		(417)			872
OPENING NET DEBT		(6,881)			(7,753)
CLOSING NET DEBT		(7,298)			(6,881)

 

BAILLIE GIFFORD SHIN NIPPON PLC

NOTES

1.	The financial statements for the year to 31 January 2010 have been prepared on the basis of the same accounting policies used for the year to 31 January 2009. The Directors consider the Company's functional currency to be sterling as the Company's shareholders are predominantly based in the UK and the Company is subject to the UK's regulatory environment.
		31 January 2010		31 January 2009
		£'000		£'000
2.	Currency gains/(losses)
	Exchange differences on bank loans	1,103		(4,843)
	Other exchange differences	(552)		1,460
		551		(3,383)
3.	Income includes stocklending fee income of nil (2009 - £69,000). The stock lending arrangements were terminated during the year to 31 January 2009. The maximum aggregate value of securities on loan during the year to 31 January 2009 amounted to £19.1m.
		31 January 2010		31 January 2009
		£'000		£'000
4.	Investment management fee - all charged to revenue
	Investment management fee	397		389
	VAT recovered (see note 5)	-		(44)
		397		345
	Baillie Gifford & Co are employed by the Company as Managers and Secretaries under a management agreement which is terminable on not less then twelve months' notice or on shorter notice in certain circumstances. The fee in respect of each quarter is 0.25% of the total net assets of the Company attributable to its shareholders on the last day of that quarter. Miss SJM Whitley, a Director of the Company, is a partner of Baillie Gifford & Co.
5.	VAT Recovered In 2007 the European Court of Justice ruled that investment trust management fees should be exempt from VAT. HMRC has accepted the Managers' repayment claims for the periods from 1990 to 1996 and from 2000 to 2007. £44,000 of VAT together with £45,000 of interest was received by the Managers on behalf of the Company and was recognised in the year to 31 January 2009.
6.	The Company paid interest on bank loans of £152,000 (2009 - £222,000). During the year the company incurred costs of £37,000 (2009 - £80,000) relating to the early repayment of bank loans which have been charged to capital.
7.	The Company currently suffers overseas withholding tax on its equity income at the rate of 7%.
8.	No dividend will be declared.

		31 January 2010		31 January 2009
		£'000		£'000
9.	Net return per ordinary share
	Revenue return	24		481
	Capital return	5,285		(7,385)
	Total return	5,309		(6,904)
	The returns per ordinary share set out below are based on the above returns and on 31,100,497 ordinary shares (2009 - 31,100,497), being the weighted average number of ordinary shares in issue during the year.  There are no potentially dilutive shares in issue.
	Revenue return	0.08p		1.54p
	Capital return	16.99p		(23.74p)
	Total return	17.07p		(22.20p)
10.	A bank loan of £7.9 million (¥1.15 billion) has been drawn down under a yen loan facility which is repayable on 10 August 2011 (2009 - bank loans of £10.8 million (¥1.4 billion) repayable on 10 August 2011). During the year the Company part repaid  ¥250m of the bank loan incurring breakage costs of £37,000 which have been charged to capital.
11.	The fair value of the bank loans at 31 January 2010 was £8,060,000 (2009 - £11,035,000).
12.	At 31 January 2010 the Company had authority to buy back 4,661,964 shares. No shares were bought back during the year. Share buy-backs are funded from the capital reserve.
13.	Transaction costs incurred on the purchase and sale of the investments are added to the purchase cost or deducted from the sale proceeds, as appropriate. During the period, transaction costs on purchases amounted to £11,000 (2009 - £8,000) and transaction costs on sales amounted to £10,000 (2009 - £13,000).
		31 January 2010		31 January 2009
		£'000		£'000
14.	Reconciliation of Net Return before Finance Costs and Taxation to Net Cash Inflow from Operating Activities
	Net return before finance costs and taxation	5,557		(6,515)
	(Gains)/losses on investments	(4,771)		3,922
	Currency (gains)/losses	(551)		3,383
	Increase in accrued income	(35)		(40)
	Decrease  in other debtors	1		4
	Increase/(decrease) in creditors	6		(11)
	Net cash inflow from operating activities	207		743
15.	The Report and Accounts will be available on the Company's website www.shinnippon.co.uk on or around 25 March 2010.
16.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 January 2010.  The financial information for 2009 is derived from the statutory accounts for 2009, which have been delivered to the Registrar of Companies.  The Auditors have reported on the 2009 and 2010 accounts, their reports for both years were unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985 and, for the 2010 accounts, did not contain a statement under sections 495 to 497 of the Companies Act 2006.  The statutory accounts for 2010 will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held on 30 April 2010. None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

 

END

 

 

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