Annual Financial Report

RNS Number : 0517K

Baillie Gifford Shin Nippon PLC

13 April 2015

 

Baillie Gifford Shin Nippon PLC

Annual financial report

A copy of the Annual Report and Financial Statements for the year ended 31 January 2015 of Baillie Gifford Shin Nippon PLC (the "Company") has been submitted electronically to the National Storage Mechanism and will shortly be available for inspection at http://www.morningstar.co.uk/uk/NSM.

The Annual Report and Financial Statements for the year ended 31 January 2015 including the Notice of Annual General Meeting is also available on the Company's page of the Baillie Gifford website at: www.shinnippon.co.uk and will be posted to shareholders on 13 April 2015.

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 January 2015 which require to be published by DTR 4.1 is set out on the following pages.

Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement.

Baillie Gifford & Co Limited

Managers and Secretaries

13 April 2015

Chairman's Statement

Performance

Your Board reviews performance primarily over rolling three year periods. It is pleasing that over the three years to 31 January 2015, Shin Nippon's net asset value per share rose by 95.3%, our share price rose by 91.9%, while our comparative index (MSCI Japan Small Cap index, total return in sterling terms) rose by 37.3%. This was a period of very strong absolute and relative performance.

However, in the year to 31 January 2015 we did record a period of small underperformance; our net asset value per share rose 11.7%, while the comparative index rose 13.2%. In contrast our share price was weak recording a fall of 2.1% having moved from a premium at the beginning of the year to a discount of 6.6% at the end of the financial year. Our share price had stood at a premium to net asset value for well over a year and still trades at a narrower discount than the rest of our sector. In the Managers' Report on page 8 of the Annual Report and Financial Statements you will find a detailed explanation of the Company's performance and some of the holdings. Your Board takes a very close interest in both of these topics. It has been gratifying that our strategy of identifying the most up-and-coming growth businesses in Japan and the Managers' stock selection have produced such strong returns in recent years.

Share Issuance

During the year the Company issued 500,000 shares (1.4% of the Company's share capital at 31 January 2014) at an average premium to net asset value of 7.7% raising £1.6m. This resulted in a small enhancement of net asset value for existing shareholders and it is anticipated that the impact on the liquidity of the shares will be positive.

Borrowing and Hedging

The Company's borrowings of ¥3.35 billion were unchanged during the year. Gearing was beneficial to performance and fell slightly during the year from 11% to 9%. As the Manager continues to identify interesting companies in which to invest, gearing is likely to be maintained.

The yen weakened against sterling during the year by 5%. We undertook no currency hedging in the year and have no immediate plans to do so.

Revenue

Our revenue return per share fell from a loss of 0.69p last year to a loss of 1.01p this year.

Dividend income was again strong and grew by a very healthy 23%, but this was offset by higher management fees due to the increase in net asset value, increased administrative costs and higher finance costs due to the larger loan drawn down in November 2013 being in place for the full year.

AGM

At this year's AGM we are seeking authority to issue new shares (and to re-issue any shares held in treasury, of which there are presently none) of up to 10% of the Company's share capital for cash on a non pre-emptive basis, but only at a premium to net asset value, thus enhancing net asset value for existing shareholders.

Approval will again be sought to renew our authority to buy back shares. This would enable the Company to buy back shares if the discount to net asset value is substantial in absolute terms or in relation to its peers, should that be deemed desirable. Any such activity would enhance the net asset value attributable to existing shareholders.

Governance

Last year I announced that I would be standing down from the Board at this year's AGM. After an extensive external search the Board was delighted to welcome Neil Donaldson to the Board last year and it has already benefited from his wise counsel. Assuming that shareholders approve his appointment, it is intended that Neil will become Chairman when I stand down.

I have been very privileged to be the Chairman of Shin Nippon for the last six years and rather longer as a Director. I very much hope that Neil will enjoy being Chairman and part of the Board as much as I have done, and wish him and the Company all the very best.

Outlook

The pace of political change in Japan continues to be rather slow, but its general direction has continued to be very encouraging. In November the Prime Minister, Mr Abe, took the opportunity to call a snap election to seek a delay in the implementation of a sales tax rise and strengthen his mandate for political and economic reforms. He gained a good majority and is in a strong position to continue his growth and change agenda, thus providing a positive backdrop to the Japanese stockmarket.

The corporate sector is also in good heart, with strong balance sheets and buoyed by Japan being a major beneficiary of lower energy prices. There have also been encouraging signs that wage rises are being granted in a variety of industries, giving hope of increasing consumer demand in the future. The Board is also encouraged by improving corporate governance in Japan.

At the individual company level the Managers continue to find interesting companies in which to invest. At times, share ratings are not at bargain levels, but the portfolio benefits from companies with strong competitive advantages, with every prospect of gaining further market share. The Board and Managers remain very encouraged by the outlook.

Barry M Rose

Chairman

24 March 2015

Past performance is not a guide to future performance.

Managers' Report

The great opportunities for the small but expanding cohort of Japan's entrepreneurs working to change business practices and offerings for the better have been noted in recent Managers' reports. A lingering concern was that the majority of these innovators were focused on the internet and digital sectors. However, there are now encouraging signs that positive entrepreneurial developments are spreading to other parts of the economy.

In the past year we have met with hungry, young business founders with big ambitions in sectors such as robotics and biotechnology. Several appear to have made globally relevant technological advances in their fields of expertise. This contrasts with some of the attractive smaller internet businesses in Japan that are capable of growing rapidly in the domestic market, but generally lack the ability to expand overseas. We view this broadening of the opportunity set as an exciting long term trend for Shin Nippon. 

The biotech industry has significant growth potential for Japan Inc and has been identified by the government as a key industry to support and foster over the coming years. Japan has always enjoyed a strong reputation for its pharmaceutical research, as exemplified by Professor Yamanaka jointly winning the Nobel Prize for his stem cell research in late 2012. However, progress in commercialising the good research emanating from Japanese universities has been disappointing thus far. In an effort to address this weakness, the government has diverted significant funds towards biotech research over recent years and has overhauled the drug approval process to accelerate approval for innovative stem cell treatments. This should help give early stage Japanese biotech companies an edge over similar businesses elsewhere in the world where the approval process for novel therapeutics typically remains very conservative. We have recently purchased two new holdings in this area and more details are included below.   

In general we do not believe that macro-economic factors overly influence the small businesses in which Shin Nippon invests. The quality of management teams and their business strategies typically have a much greater impact on the success or failure of a small company. This remains the case but it is worth highlighting the increasing shortage of labour in Japan as the baby-boomers retire and as the economic environment has improved. Rising wages should be a long term driver of automation and innovative solutions that promote more flexible forms of employment. We retain exposure to several automation companies within the portfolio, both traditional industrial robotic businesses and software providers that help automate processes in non-manufacturing businesses. During the period we made an investment in a newly listed company that is the leader in the burgeoning freelance employee market. 

Last year witnessed another rise in the number of IPOs in Japan and there has been a noticeable increase in the number of newly listed businesses that operate in the innovative and expanding parts of the economy. This encouraging development is expanding the range of potentially attractive investments available to Shin Nippon.

Performance

The MSCI Japan Small Cap Index (total return in sterling terms) rose by 13.2% over the year while Shin Nippon's net asset value per share rose by 11.7% (after deducting borrowings at fair value), ending the period at an all time high. Investors in Japanese stocks have been buoyed by the re-election of Mr Abe as Prime Minister to continue his reflationary, reformist agenda, while significant progress has been made by regulators in improving corporate governance.

Several holdings that are building strong businesses overseas were among the positive contributors to performance over the year. Asics has continued to see strong sales growth of its running shoes outside Japan, particularly in developing markets. In the healthcare sector, M3 has been successfully developing additional profitable segments that take advantage of the vast online network of doctors that the company has accumulated around the world. Meanwhile, Sysmex's advanced blood testing equipment has been selling well in China. One of the earlier new purchases in the financial year, Cookpad, was another strong performer; profits from advertising on the company's popular recipe website have been advancing quickly.

Performance from some of the earlier stage internet related businesses has been disappointing. Profit growth at Yume No Machi, the online takeaway ordering service, and Oisix, the organic online supermarket, has been held back by extra marketing costs incurred to build the companies' brands.

Portfolio

Shin Nippon's active share figure continues to be high at 94%, implying just a 6% overlap between the portfolio and the comparative index. Annualised turnover within the portfolio was 11.8%, consistent with our long term investment approach. However, new investments were made over the year in several companies with high growth potential.

In the biotech area, we purchased a new holding in Peptidream.  Drug types traditionally can either be classified as small molecule or large biologics; there are advantages and disadvantages to both approaches. Peptidream has developed a proprietary system that should enhance the drug discovery process by combining the best of both approaches. The company is developing its own drugs with this system and has also licensed the technology to big pharmaceutical partners.

Many biotech researchers have been trying to develop a new drug delivery system that can accurately deliver anticancer drugs to cancerous cells. This goal has proved to be very difficult to achieve but new holding NanoCarrier has made some real progress. The company's nanoparticles allow the use of higher toxicity drug payloads through accurate targeting and controlled release. The coming decades offer real hope that nanoparticle based cancer drugs will make sizable therapeutic inroads into treating cancer, particularly for hard-to-treat solid tumours. 

Crowdworks is a recently listed 'crowdsourcing' company.  The online network earns a fee from linking freelance workers in Japan with companies looking for short term staff to work on particular projects. The company has moved quickly to establish an industry leading position both in terms of the number of freelancers on the network and the quality of large clients who regularly recruit through the website. A new holding was purchased as the industry and company are growing rapidly from a very low base.

Outlook

Shin Nippon continues to focus on identifying the most exciting, up-and-coming growth businesses in Japan.  The start-up community remains vibrant, while increased efforts to make the Japanese stockmarket a more attractive place to invest are encouraging. The recent broadening out into new sectors of the range of businesses that meet Shin Nippon's investment criteria is a welcome and healthy development for the long term.

Baillie Gifford & Co Limited

24 March 2015

Past performance is not a guide to future performance.

Portfolio Performance Attribution for the Year to 31 January 2015^†

Computed relative to the comparative index^††

	Index		Shin Nippon		Performance*		Contribution	Contribution attributable to:
	asset allocation		asset allocation		Shin Nippon	Index	to relative return	Stock selection	Asset allocation	Gearing
	31.01.14	31.01.15	31.01.14	31.01.15
Portfolio Breakdown	%	%	%	%	%	%	%	%	%	%
Consumer   Discretionary	18.8	17.5	26.5	30.1	8.8	10.7	(0.4)	(0.2)	(0.2)	-
Consumer Staples	8.9	9.7	5.2	5.7	46.0	27.1	0.4	0.8	(0.4)	-
Energy	0.7	0.7	1.5	0.9	(34.6)	(11.2)	(0.4)	(0.3)	(0.1)	-
Financials	18.8	20.2	8.8	5.9	17.5	16.3	(0.3)	-	(0.3)	-
Health Care	5.4	5.4	13.1	18.1	27.7	2.8	2.3	3.1	(0.8)	-
Industrials	24.7	24.5	17.4	20.3	27.6	12.7	2.4	2.4	-	-
Information   Technology	11.4	10.6	24.9	18.0	(13.8)	12.9	(5.7)	(5.6)	(0.1)	-
Materials	11.1	10.9	1.0	-	-	10.3	0.8	0.6	0.2	-
Telecommunication   Services	-	-	1.6	1.0	(21.7)	-	(0.4)	(0.3)	(0.1)	-
Utilities	0.2	0.5	-	-	-	10.5	-	-	-	-
Total (excluding gearing)	100.0	100.0	100.0	100.0	11.3	13.2	(1.7)	(0.1)	(1.6)	-
Impact of gearing					1.0		1.0			1.0
Total (including gearing) **	100.0	100.0	100.0	100.0	12.4	13.2	(0.7)	(0.1)	(1.6)	1.0

Past performance is not a guide to future performance.

Source: Baillie Gifford/Statpro

Contributions cannot be added together, as they are geometric; for example to calculate how a return of 12.4% against an index return of 13.2% translates into a relative return of (0.7)%, divide the portfolio return of 112.4 by the index return of 113.2, subtract one and multiply by 100.

†          The performance attribution table is based on total assets

††        The comparative index for the year to 31 January 2015 was the MSCI Japan Small Cap index, total return and in sterling terms.

*          The returns are total returns (net income reinvested), calculated on a monthly linked method.

**       The total return performance of 12.4% excludes expenses and therefore differs from the NAV return (after deducting borrowings at par value) of 11.4% as a result.

Investment Changes (£'000)

	Valuation  at 31.01.14	Net acquisitions/ (disposals)	Appreciation/ (depreciation)	Valuation at 31.01.15
Equities:
Consumer Discretionary	33,445	4,061	1,159	38,665
Consumer Staples	6,583	(1,334)	2,774	8,023
Energy	1,886	-	(668)	1,218
Financials	11,058	(3,824)	1,008	8,242
Healthcare	16,594	4,169	4,536	25,299
Industrials	21,955	601	5,868	28,424
Information Technology	31,495	(492)	(2,288)	28,715
Materials	1,308	(2,103)	795	-
Telecommunications	2,057	(259)	(378)	1,420
Total investments	126,381	819	12,806	140,006
Net liquid assets	7,447	627	(551)	7,523
Total assets	133,828	1,446	12,255	147,529
Bank loans	(19,867)	(18)	991	(18,894)
Shareholders' funds	113,961	1,428	13,246	128,635

Twenty largest equity holdings at 31 January 2015
		2015		2014
Name	Business	Value £'000	% of total assets	Value £'000
Nihon M&A Center	M&A advisory services	4,424	3.0	3,233
M3	Online medical database	3,855	2.6	2,812
Don Quijote	Discount store chain	3,836	2.6	2,969
Asics	Sport shoes and clothing	3,829	2.6	2,475
Asahi Intecc	Specialist medical equipment	3,595	2.4	2,783
MonotaRO	Online business supplies	3,575	2.4	3,413
Cookpad	Recipe website	3,523	2.4	-
Iriso Electronics	Specialist auto connectors	3,323	2.3	2,921
Infomart	Internet platform for restaurant supplies	3,064	2.1	2,059
Takara Leben	Residential property developer	3,045	2.1	1,721
Nakanishi	Dental equipment	2,945	2.0	2,194
Nabtesco	Robotic components	2,901	2.0	2,277
Nifco	Industrial fastener manufacturer	2,865	1.9	1,991
Cyberagent	Internet advertising and content	2,823	1.9	2,846
H.I.S.	Discount travel agency and theme parks	2,708	1.8	1,965
Pigeon	Baby care products	2,664	1.8	1,997
Harmonic Drive	Robotic components	2,620	1.8	1,026
Start Today	Internet fashion retailer	2,611	1.8	2,626
Japan Exchange Group	Stock exchange operator	2,458	1.7	2,355
Sysmex	Medical testing equipment	2,439	1.6	1,378
		63,103	42.8	45,041

Management fee arrangements

In order to comply with the Alternative Investment Fund Managers Directive ('AIFMD'), the Company has appointed Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, as its Alternative Investment Fund Manager ('AIFM') with effect from 1 July 2014. Baillie Gifford & Co Limited was also appointed Company Secretaries with effect from the same date. The investment management agreement with Baillie Gifford & Co has been terminated and the Company has entered into a new agreement with Baillie Gifford & Co Limited. The management fee and notice period are unchanged under these new arrangements. Baillie Gifford & Co Limited has delegated portfolio management services to Baillie Gifford & Co; therefore the Company's portfolio continues to be managed by Baillie Gifford & Co.

The Board as a whole fulfils the function of the Management Engagement Committee.

The Investment Management Agreement sets out the matters over which the Managers have authority in accordance with the policies and directions of, and subject to restrictions imposed by, the Board. The Management Agreement is terminable on not less than six months' notice. Compensation fees would only be payable in respect of the notice period if termination were to occur sooner. The annual management fee payable is 0.95% on the first £50m of net assets and 0.65% on the remaining net assets, calculated and payable quarterly.

The details of the management fees are as follows:

	2015 £'000		2014 £'000
Investment management fee	897		869

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 Objective and Policy on page 6 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 year.

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 Managers both assess the exposure to market risk when making individual investment decisions and monitor 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 8 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 Managers monitor the Company's yen exposure (and any other overseas currency exposure) and report to the Board on a regular basis. The Investment Managers assess 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 2015	Investments £'000		Cash and deposits £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	140,006		8,137		(18,894)		(358)		128,891
Total exposure to currency risk	140,006		8,137		(18,894)		(358)		128,891
Sterling	-		44		-		(300)		(256)
	140,006		8,181		(18,894)		(658)		128,635

*   Includes net non-monetary assets of £16,000.

At 31 January 2014	Investments £'000		Cash and deposits £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	126,381		7,546		(19,867)		93		114,153
Total exposure to currency   risk	126,381		7,546		(19,867)		93		114,153
Sterling	-		60		-		(252)		(192)
	126,381		7,606		(19,867)		(159)		113,961

*   Includes net non-monetary assets of £11,000.

Currency Risk Sensitivity

At 31 January 2015, 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 £12,889,000 (2014 - £11,415,000). A 10% weakening of sterling against the yen, with all other variables held constant, would have had a similar but opposite effect on the financial statement amounts.

(ii)   Interest Rate Risk

Interest rate movements may affect directly 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 2015 is shown on pages 45 and 46 of the Annual Report and Financial Statements. There was no significant change to the interest rate risk profile during the year.

Financial assets
	2015 Fair value £'000	2015 Weighted average interest rate		2014 Fair value £'000	2014 Weighted average interest rate
Cash:
Yen	8,137	Nil		7,546	Nil
Sterling	44	0.01%		60	0.01%
	8,181			7,606

The cash deposits generally comprise overnight call or short term money market deposits 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:

	2015			2014
	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	18,894	2.5%	70 months	19,867	2.5%	82 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 8 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 Managers. 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 16 to 17 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.

108.8% of the Company's net assets are invested in Japanese quoted equities (2014 - 110.9%). A 10% increase in quoted equity valuations at 31 January 2015 would have increased total net assets and net return on ordinary activities after taxation by £14,001,000 (2014 - £12,638,000). A decrease of 10% would have had an equal but opposite effect. This analysis does not include the effect on the management fee of changes in quoted equity valuations.

Liquidity Risk

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is not significant in normal market conditions 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 Managers monitor the liquidity of the portfolio on an ongoing basis and relevant guidelines are in place.

The Board provides guidance to the Investment Managers as to the maximum exposure to any one holding (see Objective and Policy on page 6 of the Annual Report and Financial Statements).

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

	2015 £'000	2014 £'000
In less than one year: -      accumulated interest In more than one year, but not more than five years -      accumulated interest In more than five years: -      repayment of loan -      accumulated interest	485 1,940 18,989 400	510 2,040 19,987 929
	21,814	23,466

The Company has the power to take out borrowings, which give it access to additional funding when required.

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:

¾ The Depositary is liable for the loss of financial instruments held in custody. The Depositary will ensure that any delegate segregates the assets of the Company. The Depositary has delegated the custody function to Bank of New York Mellon SA/NV London Branch. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed. The Investment Managers monitor the Company's risk by reviewing the custodian's internal control reports and reporting their findings to the Board;

¾ Investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the Investment Managers. 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;

¾ The creditworthiness of the counterparty to transactions involving derivatives, structured notes and other arrangements, wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest, are subject to rigorous assessment by the Investment Managers; and

¾ At 31 January 2015 and 2014, all cash deposits were held with the custodian banks. The credit risk of the custodian is reviewed as detailed above. Cash may also be held at banks that are regularly reviewed by the Managers. If the credit rating of a bank where a cash deposit was held fell significantly, the Managers would endeavour to move the cash to an institution with a superior credit rating.

Credit Risk Exposure

The maximum exposure to credit risk at 31 January was:

	2015 £'000	2014 £'000
Cash and deposits	8,181	7,606
Debtors	741	191
	8,922	7,797

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 loan is shown below.

			2015				2014
		Book Value £'000	Par Value £'000	Fair* Value £'000	Book Value £'000	Par Value £'000		Fair* Value £'000
Fixed rate yen bank loans		18,894	18,989	19,745	19,867	19,987		20,945

*The fair value of each bank loan is calculated by reference to a Japanese government bond of comparable yield and maturity.

Capital Management

The Company does not have any externally imposed capital requirements other than the loan covenants as detailed in note 11 on page 42 of the Annual Report and Financial Statements. The capital of the Company is the ordinary share capital as detailed in note 12 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 page 6, of the Annual Report and Financial Statements, and shares may be repurchased or issued as explained on pages 21 and 22 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 38 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 such as the tax rules for investment companies, the UKLA Listing Rules and the Companies Act could lead to suspension of the Company's Stock Exchange listing, financial penalties, a qualified audit report or the Company being subject to tax on capital gains. Baillie Gifford's Business Risk, Internal Audit and Compliance Departments provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes.

Major regulatory change could impose disproportionate compliance burdens on the Company. In such circumstances representation is made to ensure that the special circumstances of investment trusts are recognised.

Operational Risk

Failure of Baillie Gifford's 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. Baillie Gifford have a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption or major disaster. The Board reviews Baillie Gifford's Report on Internal Controls and the reports by other key third party providers are reviewed by Baillie Gifford on behalf of the Board.

Discount/Premium Volatility

The discount/premium at which the Company's shares trade can change. The Board monitors the level of discount/premium and the Company has authority to buy back or issue shares when deemed to be in the best interest of all shareholders.

Leverage 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. Covenant levels are monitored regularly. The Company's investments are in listed securities that are readily realisable.

Statement of directors' responsibilities in respect of the Annual Report and 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 United Kingdom Accounting Standards (United Kingdom 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:

¾ select suitable accounting policies and then apply them consistently;

¾ make judgements and accounting estimates that are reasonable and prudent;

¾ state whether applicable United Kingdom Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

¾ 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. Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The Directors have delegated responsibility to the Managers for the maintenance and integrity of the Company's page on the Managers' 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:

¾ the financial statements, which have been prepared in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), give a true and fair view of the assets, liabilities, financial position and net return of the Company;

¾ the annual report and financial statements taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy; and

¾ the Strategic 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

Barry M Rose

Chairman

24 March 2015

 

Income statement

	For the year ended 31 January 2015				For the year ended 31 January 2014
	Revenue £'000	Capital £'000	Total  £'000		Revenue £'000	Capital £'000	Total  £'000
Gains on investments†	-	12,806	12,806		-	32,841	32,841
Currency gains (note 2)‡	-	658	658		-	858	858
Income	1,554	-	1,554		1,259	-	1,259
Investment management fee (note 3)	(897)	-	(897)		(869)	-	(869)
Other administrative expenses	(381)	-	(381)		(301)	-	(301)
Net return before finance costs and   taxation	276	13,464	13,740		89	33,699	33,788
Finance costs of borrowings (note 4)	(495)	-	(495)		(231)	(15)	(246)
Net return on ordinary activities      before taxation	(219)	13,464	13,245		(142)	33,684	33,542
Tax on ordinary activities	(155)	-	(155)		(97)	-	(97)
Net return on ordinary activities after   taxation	(374)	13,464	13,090		(239)	33,684	33,445
Net return per ordinary share (note 6)	(1.01p)	36.35p	35.34p		(0.69p)	96.62p	95.93p

† Gains 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 gains 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. The revenue and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in this statement derive from continuing operations.

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 2015

	At 31 January 2015		At 31 January 2014
	£'000	£'000	£'000	£'000
Fixed Assets
Investments		140,006		126,381
Current Assets
Debtors	757		202
Cash and short term deposits	8,181		7,606
	8,938		7,808
Creditors
Amounts falling due within one year (note 7)	(1,415)		(361)
Net Current Assets		7,523		7,447
		147,529
Total Assets less Current Liabilities				133,828
Creditors
Amounts falling due after more than one year (note 7)		(18,894)		(19,867)
Net assets		128,635		113,961
Capital and Reserves
Called up share capital		3,718		3,668
Share premium account		23,317		21,783
Capital redemption reserve		21,521		21,521
Capital reserve		85,146		71,682
Revenue reserve		(5,067)		(4,693)
Shareholders' funds		128,635		113,961
Net Asset Value Per Ordinary Share:
(after deducting borrowings at book value)		346.0p		310.7p
Net Asset Value Per Ordinary Share:
(after deducting borrowings at fair value)		343.7p		307.8p
Net Asset Value Per Ordinary Share:
(after deducting borrowings at par value)		345.8p		310.4p

Reconciliation of movements in shareholders' funds

For the year ended 31 January 2015

	Called up share capital £'000	Share premium account £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 February 2014	3,668	21,783	21,521	71,682	(4,693)	113,961
Ordinary shares issued (note 8)	50	1,534	-	-	-	1,584
Net return on ordinary activities after taxation	-	-	-	13,464	(374)	13,090
Shareholders' funds at 31 January 2015	3,718	23,317	21,521	85,146	(5,067)	128,635

For the year ended 31 January 2014

	Called up share capital £'000	Share premium account £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 February 2013	3,266	10,795	21,521	37,998	(4,454)	69,126
Ordinary shares issued	402	10,988	-	-	-	11,390
Net return on ordinary activities after taxation	-	-	-	33,684	(239)	33,445
Shareholders' funds at 31 January 2014	3,668	21,783	21,521	71,682	(4,693)	113,961

Cash flow statement
	For the year ended    31 January 2015			For the year ended       31 January 2014
	£'000	£'000		£'000	£'000
Net cash inflow from operating activities (note 9)		252			94
Servicing of finance
Interest paid	(480)			(180)
Breakage costs paid	-			(15)
Net cash outflow from servicing of finance		(480)			(195)
Taxation
Overseas tax paid	(148)			(89)
Total tax paid		(148)			(89)
Financial investment
Purchases of investments	(15,482)			(33,513)
Sales of investments	15,182			14,767
Exchange differences on settlement of investment transactions	218			(188)
Net cash inflow from financial investment		(82)			(18,934)
Financing
Ordinary shares issued	1,584			11,390
Bank loan repaid	-			(6,882)
Bank loan drawn down	-			19,926
Net cash inflow from financing		1,584			24,434
Increase in cash		1,126			5,310

Reconciliation of net cash flow to movement in net debt

		For the year ended 31 January 2015		For the year ended 31 January 2014
			£'000			£'000
Increase in cash			1,126			5,310
Net inflow from bank loans			-			(13,044)
Exchange movements on bank loans			991			1,128
Exchange differences on cash			(551)			(82)
Other non-cash changes			(18)			(3)
Movement in net debt in the year			1,548			(6,691)
Opening net debt			(12,261)			(5,570)
Closing net debt			(10,713)			(12,261)

Notes

1.	The financial statements for the year to 31 January 2015 have been prepared on the basis of the same accounting policies used for the year to 31 January 2014.
		31 January 2015 £'000		31 January 2014 £'000
2.	Currency gains/(losses)
	Exchange movement on bank loans	991		1,128
	Other exchange differences	(333)		(270)
		658		858
		31 January 2015 £'000		31 January 2014 £'000
3.	Investment management fee - all charged to revenue
	Investment management fee	897		869
	The annual management fee is 0.95% on the first £50m of net assets and 0.65% on the remaining net assets, calculated quarterly. Prior to 1 April 2013 the annual fee was 1.0% of net assets, calculated quarterly.
4.	The Company paid interest on bank loans of £495,000 (2014 - £231,000 and loan breakage costs of £15,000).
5.	No dividend will be declared.
		31 January 2015 £'000		31 January 2014 £'000
6.	Net return per ordinary share
	Revenue return	(374)		(239)
	Capital return	13,464		33,684
	Total return	13,090		33,445
	The returns per ordinary share set out below are based on the above returns and on 37,038,511 ordinary shares (2014 - 34,861,637), being the weighted average number of ordinary shares in issue during the year. There are no dilutive or potentially dilutive shares in issue.
	Revenue return	(1.01p)		(0.69p)
	Capital return	36.35p		96.62p
	Total return	35.34p		95.93p
7.	The Company has a 7 year fixed rate loan with ING Bank NV for ¥3,350 million maturing 27 November 2020.
8.	At 31 January 2015 the Company had authority to buy back 5,527,637 shares. No shares were bought back during the year. Share buy-backs are funded from the capital reserve. During the year the Company issued 500,000 shares on a non pre-emptive basis at a premium to net asset value for net proceeds of £1.6m.

9.	Reconciliation of Net Return before Finance Costs and Taxation to Net Cash Inflow from Operating Activities	31 January 2015 £'000		31 January 2014 £'000
	Net return before finance costs and taxation	13,740		33,788
	Gains on investments	(12,806)		(32,841)
	Currency gains	(658)		(858)
	Increase in accrued income and prepayments	(71)		(32)
	Increase in creditors	47		37
	Net cash inflow from operating activities	252		94
10.	The Report and Accounts will be available on the Company's website www.shinnippon.co.uk† on or around 13 April 2015.
11.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 January 2015. The financial information for 2014 is derived from the statutory accounts for 2014, which have been delivered to the Registrar of Companies. The Auditors have reported on the 2014 accounts, their report was unqualified and did not contain a statement under section 495 to 497 of the Companies Act 2006. The statutory accounts for 2015 will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held on 21 May 2015. None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

†      Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

- ends -

 

END

 

 

ACSSFFFLDFISESL