Annual Financial Report

RNS Number : 1055V

Baillie Gifford Shin Nippon PLC

13 April 2016

 

Baillie Gifford Shin Nippon PLC

Annual Financial Report

A copy of the Annual Report and Financial Statements for the year ended 31 January 2016 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 2016 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 2016.

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 January 2016 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 2016

Chairman's Statement

I have pleasure in presenting my first report to you as your Chairman. Your Board reviews performance principally over rolling three year periods and I am delighted to report that in the three years to 31 January 2016, Shin Nippon's net asset value per share rose by 103.7% and its share price rose by 99.9% versus the comparative index (MSCI Japan Small Cap Index, total return in sterling terms) return of 47.4%. This was a period of strong performance in both absolute and relative terms.

Over the year to 31 January 2016 the Company's net asset value increased by 25.4% versus the comparative index return of 10.9%. The Company's share price also performed very well with an increase of 39.6% over the year. The past 12 months have been a good year for your Company.

Change of Portfolio Manager

On 1 December 2015, the Company's Portfolio Manager of 8 years, John MacDougall, stepped down to take up another role at Baillie Gifford, covering Global Equities. During John's time as Portfolio Manager the Company's performance was strong and, with the rest of the Board I would like to thank John and wish him well in his new role.

I am pleased to welcome our new Portfolio Manager, Praveen Kumar, to the Company. Praveen has been an investment manager in the Baillie Gifford Japanese Equities team since 2011 and worked closely with John MacDougall over the 12 months prior to taking over from John in December last year. The Board look forward to working with Praveen. In his first report to you, you will find a detailed explanation of the Company's performance and also some of the holdings.

Share Issuance

During the year the Company issued 600,000 shares (1.6% of the Company's share capital at 31 January 2015) at an average premium to net asset value of 3.6% raising £2.5m.

Borrowings

The Company's gearing at the year end was equivalent to 9% of net assets and the borrowings were beneficial to performance over the year. Our Manager continues to find interesting companies in which to invest and as a consequence this gearing level is likely to be maintained.

Revenue

Our revenue return per share improved from a loss of 1.01 pence per share last year to a loss of 0.78 pence per share this year. This was due to a 16% increase in portfolio dividend income and lower loan interest costs. These positive effects more than offset the higher management fee, which increased with the growth in net asset value.

AGM

At this year's AGM we are again seeking authority to issue new shares of up to 10% of the Company's share capital. Any shares issued would be for cash, on a non pre-emptive basis, and only at a premium to net asset value thus enhancing the 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.

Outlook

Shin Nippon is very much a stock picking fund and our new Portfolio Manager, Praveen, continues to find new, innovative companies with disruptive technologies. Praveen spent 6 weeks in Japan in the early part of the year, visiting existing holdings and potential new investments. His view of the market is positive with new exciting opportunities to be found.

Although the pace of economic change is modest there are encouraging signs that company boards are continuing to embrace improved corporate governance and that external non-executive input has now been recognised as a benefit to these businesses.

Inbound tourism has risen rapidly over the last few years most notably by visitors from China. Chinese tourists spend most of their money on shopping including rice cookers, personal care and luxury brand items and the Company has some exposure to this theme in its portfolio.

In addition, Japan's ageing population and labour shortage are creating new opportunities for Japanese entrepreneurs to create new solutions which in time could benefit the patient investor.

Your Board continues to be encouraged by the number of companies that show real opportunity for growth and both the Board and the Managers remain encouraged by the outlook.

More detailed information about the Company's Portfolio is contained within the Manager's report.

M Neil Donaldson

Chairman

24 March 2016

Past performance is not a guide to future performance.

Managers' Report

Last year's Managers' report noted the spread of entrepreneurial spirit beyond the Internet and digital sectors. Over the course of the year, there have been encouraging signs of this trend gathering pace. There is a growing sense in Japan that entrepreneurship could be highly rewarding and we view this as an exciting development for Shin Nippon.

There are tentative signs of entrepreneurship emerging in traditional sectors. This is exemplified by our recent investment, Nippon Ceramic, which manufactures sensors. There has been a recent change in leadership with the founder being replaced by his son. Whereas the founder led a company with a management style and growth prospects that were very dull, his son is young and ambitious. He has now set the company on a high growth path by prioritising overseas expansion and entry into fast growing end markets such as autos.

An increasing number of dynamic entrepreneurs continue to use the Internet to challenge traditional industries. They are building scalable business models that should result in rapid and sustainable growth. A couple of our recent investments illustrate this quite well. Bengo4.com runs a website that matches individuals seeking legal support with lawyers. Consumers don't always get access to the best legal advice and this problem is compounded by the sheer number of lawyers in Japan. By advertising their services on Bengo4.com, lawyers can advertise themselves to customers who can then make an informed choice. Another inefficient sector is the auto parts aftermarket. Garages deal with a large number of suppliers to source spare parts and the entire system is paper and fax-based. Consequently, a simple car repair job can take days. To remove this inefficiency, IT company Broadleaf has developed an online, cloud-based parts ordering system which is fast becoming the de facto industry standard.

A few of our investee companies are gradually being recognised as industry leaders. Nihon M&A Center has firmly established itself as the dominant player in the M&A Center advisory business for small and medium sized companies. Larger financial institutions in Japan are now seeking to tie up with Nihon M&A to tap into its expertise. Online cosmetic ratings website iStyle has seen its user-based rating system become very popular and this is now considered an important marketing tool by numerous large brands.

In general, for the small companies that Shin Nippon invests in, we believe that the quality of management teams and their business strategies have more influence rather than macro-economic factors. Although this remains the case, it is worth highlighting the government's efforts towards deregulation, as this has served to expand the growth opportunities available for small companies. Recent new regulation to encourage innovation in regenerative medicine is already seeing encouraging results. We have taken a holding in a biotech company that should benefit from these new rules. More details are included below. Inbound tourism remains very strong and this has led to a shortage of accommodation. To address this, the government is looking to legalise a hitherto prohibited practice of using private residences for short term lets. This should result in a new and sizeable opportunity for Next, a leading online real estate website operator. We saw yet another strong year for IPOs in Japan. The number of newly listed companies operating in innovative and fast growing areas of the economy continues to rise. This expanding set of potentially attractive businesses is an encouraging development for Shin Nippon.

Performance

The MSCI Japan Small Cap Index (total return in sterling terms) rose by 10.9% over the year while Shin Nippon's net asset value per share rose by 25.4% (after deducting borrowings at fair value). Investors in Japanese stocks were generally quite encouraged by the continued adoption of higher levels of governance across corporate Japan and the progress made towards deregulation.

Noticeable among the positive contributors to performance over the year were a number of disruptive online businesses targeting the domestic market. iStyle has seen strong growth in sales and profits as its cosmetics rating model has gained traction with a number of leading brands. It is now replicating this model in China where initial progress has been encouraging. Next is extending its advantage in the online real estate sector by expanding the range of services it delivers through its online platform. Sales and profit growth at MonotaRO remain at high levels as the company continues to take share from offline suppliers of maintenance and repair equipment. Precision surgical guidewire maker Asahi Intecc is enjoying rising demand for its new generation of products especially from overseas customers.

Company specific issues have led to poor performance from some names. Sales and profit growth at medical data management software provider Findex have suffered due to issues with its sales partners. The company is working actively to resolve what we believe to be a short term problem that should be easily fixed. Crowdworks, a crowd sourcing services provider, is gaining traction with customers across sectors but also remains loss making as it continues to invest in building its brand and scale of operations.

Portfolio

We pay less attention to the benchmark and focus more on each individual company's attractions. Consequently, 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 15%, 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 Sanbio, a recently listed company with stem cell and regenerative medicine expertise. It has developed a treatment for people who have suffered a stroke that can be effective even years after the initial brain injury. The treatment involves the injection of modified bone marrow stem cells into the brain near the site of the brain damage caused by the stroke. These stem cells act to promote tissue repair. A small sample size trial showed remarkable results with patients exhibiting highly significant increases in mobility just months after the treatment. Recent regulatory changes in Japan for regenerative medicine mean that Sanbio could get fast track approval for its therapy in a fairly short period of time.

Both Bengo4.com and Broadleaf highlighted earlier were purchased during the year. In addition, we also purchased a new holding in Yonex, a leading global brand in badminton equipment. Badminton as a sport is seeing a surge in popularity especially in Asia, thanks to the large number of Asian players who dominate the world rankings. Given the potential size of some of these markets, we think the growth prospects for Yonex could be quite exciting over the long term.

Outlook

The focus for Shin Nippon remains to seek out and invest in young, high growth companies run by dynamic and entrepreneurial managers. Changing attitudes towards entrepreneurship and an increasingly global outlook at young companies is a hugely encouraging and welcome development. We believe this will give rise to an increasing number of up and coming high growth businesses in Japan and we remain excited by the prospects of investing in such companies.

Baillie Gifford & Co

24 March 2016

Past performance is not a guide to future performance.

Portfolio Performance Attribution for the Year to 31 January 2016^†

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
	31.01.15	31.01.16	31.01.15	31.01.16
Portfolio Breakdown	%	%	%	%	%	%	%	%	%	%
Consumer   Discretionary	17.5	18.7	30.1	25.6	34.0	19.6	3.9	3.2	0.7	-
Consumer Staples	9.7	11.6	5.7	6.5	19.6	31.7	(1.3)	(0.5)	(0.8)	-
Energy	0.7	0.7	0.9	0.5	(22.3)	(7.4)	(0.1)	(0.1)	-	-
Financials	20.2	18.7	9.0	8.2	19.3	1.9	2.3	1.4	0.9	-
Health Care	5.4	5.9	18.1	15.8	14.9	18.2	0.1	(0.5)	0.6	-
Industrials	24.5	23.3	17.2	19.4	21.2	8.2	2.3	2.3	-	-
Information   Technology	10.6	10.3	18.0	23.6	32.5	7.6	4.2	4.7	(0.4)	-
Materials	10.9	10.3	-	-	-	2.6	0.8	-	0.8	-
Telecommunication   Services	-	-	1.0	0.4	(45.5)	-	(0.5)	(0.5)	-	-
Utilities	0.5	0.5	-	-	-	15.7	-	-	-	-
Total (excluding gearing)	100.0	100.0	100.0	100.0	24.3	10.9	12.1	10.0	1.9	-
Impact of gearing					1.4		1.4			1.4
Total (including gearing) **	100.0	100.0	100.0	100.0	26.0	10.9	13.6	10.0	1.9	1.4

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 26.0% against an index return of 10.9% translates into a relative return of 13.6%, divide the portfolio return of 126.0 by the index return of 110.9, subtract one and multiply by 100.

†        The performance attribution table is based on total assets

††      The comparative index for the year to 31 January 2016 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 26.0% excludes expenses and therefore differs from the NAV return (after deducting borrowings at par value) of 25.0% as a result.

Investment Changes (£'000)

	Valuation  at 31.01.15 £'000	Net acquisitions/ (disposals) £'000	Appreciation/ (depreciation) £'000	Valuation at 31.01.16 £'000
Equities:
Consumer Discretionary	38,665	(5,164)	11,961	45,462
Consumer Staples	8,023	1,957	1,594	11,574
Energy	1,218	-	(289)	929
Financials	12,666	(411)	2,302	14,557
Healthcare	25,299	(630)	3,430	28,099
Industrials	24,000	5,245	5,161	34,406
Information Technology	28,715	4,180	9,046	41,941
Telecommunication Services	1,420	-	(657)	763
Total investments	140,006	5,177	32,548	177,731
Net liquid assets	7,523	(2,713)	276	5,086
Total assets	147,529	2,464	32,824	182,817
Bank loans	(18,8940)	(18)	(515)	(19,427)
Shareholders' funds	128,635	2,446	32,309	163,390

Twenty largest equity holdings at 31 January 2016
		2016		2015
Name	Business	Value £'000	% of total assets	Value £'000
Asahi Intecc	Specialist medical equipment	6,458	3.5	3,595
Next	Provides online property information	6,221	3.4	2,418
MonotaRO	Online business supplies	6,002	3.3	3,575
GMO Payment Gateway	Online payment processing	5,986	3.3	1,936
Nihon M&A Center	M&A advisory services	5,804	3.2	4,424
iStyle	Cosmetics website	5,717	3.1	744
M3	Online medical services	4,535	2.5	3,855
Start Today	Internet fashion retailer	4,230	2.3	2,611
Nifco	Industrial fastener manufacturer	4,170	2.3	2,865
Infomart Corp	Internet platform for restaurant supplies	3,770	2.1	3,064
Pigeon	Baby care products	3,592	2.0	2,664
Cocokara Fine	Drugstore chain	3,567	1.9	1,523
Harmonic Drive	Robotic components	3,442	1.9	2,620
Daikyonishikawa	Automobile part manufacturer	3,335	1.8	1,592
Nakanishi	Dental equipment	3,284	1.8	2,945
Hoshizaki Electric	Commercial kitchen equipment	3,248	1.8	2,276
Iriso Electronics	Specialist auto connectors	3,180	1.7	3,323
Cookpad	Recipe website	3,121	1.7	3,523
Cyberagent	Internet advertising and content	3,111	1.7	2,823
Takara Leben	Residential property developer	3,083	1.7	3,045
		85,856	47.0

Key Performance Indicators

The key performance indicators (KPIs) used to measure the progress and performance of the Company over time are established industry measures and are as follows:

-        the movement in net asset value per share compared to the comparative index;

-        the movement in the share price;

-        the discount/premium of the share price to the net asset value per share; and

-        the ongoing charges.

These are also compared against the Company's peers. Performance is assessed over periods of one, three and five years.

A historical record of the KPIs is shown on pages 3 to 5 and on page 19 of the Annual Report and Financial Statements.

Future Developments of the Company

The outlook for the Company for the next 12 months is set out in the Chairman's Statement on page 2 of the Annual Report and Financial Statements and the Managers' Report on pages 9 and 10 of the Annual Report and Financial Statements.

Management fee arrangements

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:

	2016 £'000		2015 £'000
Investment management fee	1,123		897

Principal Risks

As explained on pages 25 and 26 of the Annual Report and Financial Statements there is a process for identifying, evaluating and managing the risks faced by the Company on a regular basis. The Directors have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. A description of these risks and how they are being managed or mitigated is set out below:

Financial Risk - The Company's assets consist of listed securities and its principal risks are therefore market related and include market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. An explanation of those risks and how they are managed is contained in note 17 to the Financial Statements on pages 46 to 49 of the Annual Report and Financial Statements. To mitigate this risk the Board considers at each meeting various portfolio metrics including individual stock performance and weightings, the top and bottom contributors to performance and relative sector weightings against the comparative index. The Manager provides rationale for stock selection decisions. A comprehensive strategy meeting is held annually to facilitate challenge of the Company's strategy.

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. To mitigate this risk, 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. Shareholder documents and announcements, including the Company's published Interim and Annual Report and Financial Statements, are subject to stringent review processes, and procedures are in place to ensure adherence to the Transparency Directive with reference to inside information.

Custody and Depositary Risk - safe custody of the Company's assets may be compromised through control failures by the Depositary, including cyber hacking. To mitigate this risk, the Board receives six monthly reports from the Depositary confirming safe custody of the Company's assets. Cash and portfolio holdings are independently reconciled to the Custodian's records by the Managers. The Custodian's audited internal controls reports are reviewed by Baillie Gifford's Internal Audit Department and a summary of the key points is reported to the Audit Committee and any concerns investigated.

Small Company Risk - the Company has investments in smaller companies which are generally considered higher risk as changes in their share prices may be greater and the shares may be harder to sell. Smaller companies may do less well in periods of unfavourable economic conditions. To mitigate this risk, the Board reviews the investment portfolio at each meeting and discusses the investment case and portfolio weightings with the Managers. A spread of risk is achieved by holding a minimum of 40 stocks and the relative industry weightings against the comparative index are considered at each Board meeting.

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. To mitigate this risk, Baillie Gifford has 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. To mitigate this risk, 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' or 'leverage'). 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.

To mitigate this risk, all borrowings require the prior approval of the Board and leverage 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. Further information on leverage can be found on page 56 of the Annual Report and Financial Statements and in the Glossary of Terms on page 56 of the Annual Report and Financial Statements.

Political Risk - the Board is aware that the proposed UK Referendum on its membership of the European Union introduces elements of political uncertainty which may have practical consequences for the Company and its Managers. Developments will be closely monitored and considered by the Board and the Managers

Viability Statement

In accordance with provision C2.2 of the UK Corporate Governance Code, published by the Financial Reporting Council in September 2014, the Directors have assessed the prospects of the Company over a period of five years. The Directors believe this period to be appropriate as it reflects the Company's longer term investment strategy and to be a period during which, in the absence of any adverse change to the regulatory environment and to the tax treatment afforded to UK investment trusts, they do not expect there to be any significant change to the current principal risks facing the Company nor to the effectiveness of the controls employed to mitigate those risks. Furthermore, the Directors do not reasonably envisage any change in strategy or any events which would prevent the Company from operating over a period of five years.

In considering the viability of the Company, the Directors have conducted a robust assessment of each of the principal risks and uncertainties detailed on pages 6 and 7 of the Annual Report and Financial Statements and in particular the impact of market risk where a significant fall in Japanese small equities markets would adversely impact the value of the investment portfolio. The Directors have also considered the Company's leverage and liquidity in the context of the fixed term secured bank loan which is due to expire in 2020. Although the Company's revenue account is expected to remain in deficit, its investments are primarily listed equities which are readily realisable and so capable of being sold to provide funding if required. In addition, all of the key operations required by the Company are outsourced to third party service providers and it is reasonably considered that alternative providers could be engaged at relatively short notice.

Based on the Company's processes for monitoring revenue projections, share price discount/premium, the Managers' compliance with the investment objective, asset allocation, the portfolio risk profile, leverage, counterparty exposure, liquidity risk and financial controls, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five years.

Going Concern

In accordance with the Financial Reporting Council's guidance on going concern and liquidity risk, the Directors have undertaken a rigorous review of the Company's ability to continue as a going concern.

The Company's principal risks are market related and include market risk, liquidity risk and credit risk. An explanation of these risks and how they are managed is contained in note 17 to the Financial Statements. The Company's assets, which are primarily investments in quoted securities which are readily realisable, exceed its liabilities significantly. All borrowings require the prior approval of the Board. Gearing levels and compliance with loan covenants are reviewed by the Board on a regular basis. Accordingly, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the Financial Statements.

Financial Instruments

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 2016	Investments £'000		Cash and deposits £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	177,731		5,049		(19,427)		121		163,474
Total exposure to currency risk	177,731		5,049		(19,427)		121		163,474
Sterling	-		57		-		(141)		(84)
	177,731		5,106		(19,427)		(20)		163,390

*   Includes net non-monetary assets of £15,000.

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.

Currency Risk Sensitivity

At 31 January 2016, 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 £16,347,000 (2015 - £12,889,000). 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 2016 is shown below. There was no significant change to the interest rate risk profile during the year.

Financial Assets
	2016 Fair value £'000	2016 Weighted average interest rate		2015 Fair value £'000	2015 Weighted average interest rate
Cash:
Yen	5,049	Nil		8,137	Nil
Sterling	57	0.01%		44	0.01%
	5,106			8,181

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:

	2016			2015
	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	19,427	2.2%	58 months	18,894	2.5%	70 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 17 to 18 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 15 and 16 of the Annual Report and Financial Statements.

108.8% of the Company's net assets are invested in Japanese quoted equities (2015 - 108.8%). A 10% increase in quoted equity valuations at 31 January 2016 would have increased total net assets and net return on ordinary activities after taxation by £17,773,000 (2015 - £14,001,000). 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:

	2016 £'000	2015 £'000
In less than one year: -      accumulated interest In more than one year, but not more than five years -      repayment of loan -      accumulated interest In more than five years: -      repayment of loan -      accumulated interest	440 19,507 1,677 - -	485 - 1,940 18,989 400
	21,624	21,814

The Company has the power to take out borrowings, which gives 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 2016 and 2015, 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:

	2016 £'000	2015 £'000
Cash and deposits	5,106	8,181
Debtors	580	741
	5,686	8,922

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 are shown below.

			2016				2015
		Book Value £'000	Par Value £'000	Fair* Value £'000	Book Value £'000	Par Value £'000		Fair* Value £'000
Fixed rate yen bank loans		19,427	19,507	20,022	18,894	18,989		19,745

*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 44 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 22 and 23 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 40 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.

Alternative Investment Fund Managers (AIFM) Directive

In accordance with the AIFM Directive, information in relation to the Company's leverage and the remuneration of the Company's AIFM, Baillie Gifford & Co Limited, is required to be made available to investors. In accordance with the Directive, the AIFM remuneration policy is available from Baillie Gifford & Co Limited on request (see contact details on the back cover of the Annual Report and Financial Statements) and the numerical remuneration disclosures in respect of the AIFM's first relevant reporting period (year ended 31 March 2016) will be made available in due course.

The Company's maximum and actual leverage levels (see Glossary of Terms below) at 31 January 2016 are as follows:

Leverage

	Gross method	Commitment method
Maximum Limit	2.50:1	2.00:1
Actual Limit	1.12:1	1.12:1

Statement of Directors' Responsibilities in respect of the Annual 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 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 position and 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

M Neil Donaldson

Chairman

24 March 2016

 

Income statement

	For the year ended 31 January 2016				For the year ended 31 January 2015
	Revenue £'000	Capital £'000	Total  £'000		Revenue £'000	Capital £'000	Total  £'000
Gains on investments†	-	32,548	32,548		-	12,806	12,806
Currency gains (note 2)‡	-	21	21		-	658	658
Income	1,798	-	1,798		1,554	-	1,554
Investment management fee (note 3)	(1,123)	-	(1,123)		(897)	-	(897)
Other administrative expenses	(362)	-	(362)		(381)	-	(381)
Net return before finance costs and   taxation	313	32,569	32,882		276	13,464	13,740
Finance costs of borrowings (note 4)	(423)	-	(423)		(495)	-	(495)
Net return on ordinary activities      before taxation	(110)	32,569	32,459		(219)	13,464	13,245
Tax on ordinary activities	(180)	-	(180)		(155)	-	(155)
Net return on ordinary activities after   taxation	(290)	32,569	32,279		(374)	13,464	13,090
Net return per ordinary share (note 6)	(0.78p)	87.14p	86.36p		(1.01p)	36.35p	35.34p

† 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.

Balance sheet at 31 January 2016

	At 31 January 2016		At 31 January 2015
	£'000	£'000	£'000	£'000
Fixed Assets
Investments		177,731		140,006
Current Assets
Debtors	595		757
Cash and cash equivalents	5,106		8,181
	5,701		8,938
Creditors
Amounts falling due within one year (note 7)	(615)		(1,415)
Net Current Assets		5,086		7,523
Total Assets less Current Liabilities		182,817		147,529
Creditors
Amounts falling due after more than one year (note 7)		(19,427)		(18,894)
Net assets		163,390		128,635
Capital and Reserves
Called up share capital		3,778		3,718
Share premium account		25,733		23,317
Capital redemption reserve		21,521		21,521
Capital reserve		117,715		85,146
Revenue reserve		(5,357)		(5,067)
Shareholders' funds		163,390		128,635
Net Asset Value Per Ordinary Share: (after deducting borrowings at book value)		432.5p		346.0p
Net Asset Value Per Ordinary Share: (after deducting borrowings at fair value)		431.0p		343.7p
Net Asset Value Per Ordinary Share: (after deducting borrowings at par value)		432.3p		345.8p

Statement of changes in equity

For the year ended 31 January 2016

	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 2015	3,718	23,317	21,521	85,146	(5,067)	128,635
Ordinary shares issued	60	2,416	-	-	-	2,476
Net return on ordinary activities after taxation	-	-	-	32,569	(290)	32,279
Shareholders' funds at 31 January 2016	3,778	25,733	21,521	117,715	(5,357)	163,390

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	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

Cash flow statement
	For the year ended    31 January 2016    (unaudited)			For the year ended       31 January 2015      (audited)
	£'000	£'000		£'000	£'000
Cash flows from operating activities
Net return on ordinary activities before taxation	32,459			13,245
Net gains on investments	(32,548)			(12,806)
Currency gains	(21)			(658)
Finance costs of borrowings	423			495
Overseas withholding tax	(160)			(148)
Increase in accrued income and prepaid expenses	(193)			(71)
Increase in creditors and prepaid income	31			47
Cash (outflow)/inflow from operations		(9)			104
Interest paid		(416)			(480)
Net cash outflow from operating activities		(425)			(376)
Cash flows from investing activities
Acquisitions of investments	(28,859)			(15,482)
Disposals of investments	24,197			15,182
Net cash outflow from investing activities		(5,662)			(300)
Shares issued	2,476			1,584
Net cash inflow from financing activities		2,476			1,584
(Decrease)/increase in cash and cash equivalents		(3,611)			908
Exchange movements		536			(333)
Cash and cash equivalents at start of year		8,181			7,606
Cash and cash equivalents at end of year		5,106			8,181)

* Cash and cash equivalents represent cash at bank and short term money market deposits repayable on demand.

Notes

1.	The Financial Statements for the year to 31 January 2016 have been prepared on the basis of the accounting policies set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The Financial Reporting Standard applicable in the UK and Republic of Ireland ('FRS 102') has been introduced which the Company must adopt for its financial year ending 31 January 2016. Following the application of the new reporting standard and the AIC's issued Statement of Recommended Practice, there has been no impact on the Company's Income Statement, Balance Sheet or Statement of Changes in Equity (previously called the Reconciliation of Movements in Shareholders' Funds) for the period previously reported. The Cash Flow Statement reflects the presentational requirements of FRS 102, which are different to FRS 1. In addition, the Cash Flow Statement reconciles to cash and cash equivalents whereas under previous UK GAAP the Cash Flow Statement reconciled to cash. Note 13 'Capital and Reserves' identifies which reserves are distributable. The Company has early adopted the amendments to Section 34 of FRS 102 regarding fair value hierarchy disclosures (see note 17 on page 49 of the Financial Report and Financial Statements).
		31 January 2016 £'000		31 January 2015 £'000
2.	Currency gains/(losses)
	Exchange differences on bank loans	(515)		991
	Other exchange differences	536		(333)
		21		658
		31 January 2016 £'000		31 January 2015 £'000
3.	Investment management fee - all charged to revenue
	Investment management fee	1,123		897
	The annual management fee is 0.95% on the first £50m of net assets and 0.65% on the remaining net assets, calculated quarterly.
4.	The Company paid interest on bank loans of £423,000 (2015 - £495,000).
5.	No dividend will be declared.
		31 January 2016 £'000		31 January 2015 £'000
6.	Net return per ordinary share
	Revenue return	(290)		(374)
	Capital return	32,569		13,464
	Total return	32,279		13,090
	The returns per ordinary share set out below are based on the above returns and on 37,377,963 ordinary shares (2015 - 37,038,511), 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	(0.78p)		(1.01p)
	Capital return	87.14p		36.35p
	Total return	86.36p		35.34p
7.	The Company has a 7 year fixed rate loan with ING Bank N.V. for ¥3,350 million - drawn down as follows: At 31 January 2016 ING Bank N.V. - 7 year ¥3,350 million loan at 2.217% maturing 27 November 2020. At 31 January 2015 ING Bank N.V. - 7 year ¥3,350 million loan at 2.517% 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.	The Annual Report and Financial Statements will be available on the Company's website www.shinnippon.co.uk† on or around 13 April 2016.
10.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 January 2016. The financial information for 2015 is derived from the statutory accounts for 2015, which have been delivered to the Registrar of Companies. The Auditor has reported on the 2015 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 2016 will be finalised on the basis of the financial information presented in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held on 20 May 2016. 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

 

 

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