Annual Financial Report

RNS Number : 3255C

Baillie Gifford Shin Nippon PLC

12 April 2017

 

Baillie Gifford Shin Nippon PLC

Annual Financial Report

A copy of the Annual Report and Financial Statements for the year ended 31 January 2017 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 2017 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 12 April 2017.

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 January 2017 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

12 April 2017

Chairman's Statement

Your Board continues to review performance primarily over a rolling three year period. I am delighted to report that Shin Nippon's performance continues to be strong. Over this period Shin Nippon's net asset value per share rose by 87.6% and its share price rose by 82.3% versus the comparative index (MSCI Japan Small Cap Index, total return in sterling terms) returns of 69.4%. This was yet again another period of strong performance both in absolute and relative terms.

Over the year to 31 January 2017 the comparative index rose by 34.9% with the net asset value per share and share price recording a similar uplift at 34.0% and 33.5% respectively. At 31 January 2017, the premium of the share price over the net asset value was 3.6%, marginally lower than the previous year. This has been another good year for your Company.

Portfolio Management Team

Last year I advised you of our new manager Praveen Kumar. I am delighted that the transition within the team has been so smooth. Praveen has spent some considerable time in Japan during the year, visiting many of our holdings and I am confident that this approach to our selective stock picking will continue to position your Company well for the future. The Japanese team at Baillie Gifford is particularly strong. Praveen is very ably assisted by Felicia Hjertman in the management of your portfolio and supported by the wider team.

Share Issuance

During the year the Company issued 2,620,000 shares (6.9% of the Company's Share Capital at 31 January 2016) at an average premium to net asset value of 4.7%, raising £14.6m. Over the past three years the Board has issued 3,720,000 new shares. In approving these share issuances your Board recognises that by increasing the size of the Company our shares are more likely to have improved liquidity and be more attractive to a wider range of shareholders.

Borrowings

The manager continues to use gearing to enhance portfolio performance. The Board is supportive of this strategy. The Company's gearing at the year end was equivalent to 7.7% of net assets and these borrowings were beneficial to performance. In late 2013 the Company negotiated a ¥3.35bn loan facility with ING and this facility has remained fully drawn. Your Board continues to review this policy and subsequent to the year end the Company arranged a further ¥2.0bn loan facility with ING to expire in November 2020 at the same time as the existing facility.

Revenue

Our revenue return per share improved considerably during the year from a loss of 0.78p per share last year to a surplus of 0.26p this year. This was due to the increase in portfolio dividend income more than offsetting the negative effect of the increased management fee (due to the uplift in net assets under management) and the higher Yen denominated loan interest costs (due to sterling weakness). During the year, the Board and the Managers agreed to introduce a third tier to the management fee of 0.55% on net assets in excess of £250m. As at 31 January 2017, the Company had net assets of approximately £234m. It is pleasing to note that for the first time the Company's Ongoing Charges Ratio has fallen below 1% to 0.96%.

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. Your Board believes that by satisfying natural supply and demand for our shares, we are acting in the best interests of existing shareholders. We will continue to monitor this closely.

As with issuing shares at a premium, the Board will again be seeking your approval to buy back shares should they start trading at a substantial discount either in absolute terms or in relation to its peers. Similarly, if required this activity would enhance the net asset value attributable to existing shareholders.

Outlook

In our Interim Management Report we commented on the EU Referendum result in the UK, along with concerns over global growth (China in particular), rising scepticism over unconventional monetary policy by central banks and further speculation over a rise in US interest rates. To this we now need to add the election of President Trump in the US and be mindful that all of these developments are still in their infancy. As such, uncertainty remains and caution in investment decision making is paramount. That said, our primary focus is on Japan and there have been significant developments in that market. Last year I highlighted the pace of economic change and the fact that company boards were improving corporate governance. This development is continuing and is to be welcomed. Companies are continuing to increase dividend payouts and company share buy backs are at an all time high. There are also a number of interesting developments in the Japanese labour market which will affect large as well as small companies in Japan. For example, the number of foreign workers in Japan surpassed 1 million for the first time last year and the time period that highly skilled, foreign born professionals must live in Japan in order to qualify for permanent residency will be reduced from 5 years to 3 years. These structural trends will help address the labour shortages in Japan which I highlighted in last year's report.

Your Board continues to support the stock picking nature of the Company. Opportunities continue to present themselves and we are wholly supportive of the Managers in seeking those out and continuing to strengthen the portfolio. 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 below.

M Neil Donaldson

31 March 2017

Past performance is not a guide to future performance.

See disclaimer at the end of this document.

Managers' Report

The past twelve months were tough and volatile for high growth small cap stocks in Japan. Geopolitical and macroeconomic factors caused a rotation into value and lower quality stocks which, in the short term, hurt performance. Share prices of a number of high growth companies held in the portfolio remained weak through this period.

We strongly believe that the high growth smaller companies in which we invest have the ability to grow at high rates irrespective of macro headwinds or sluggishness in the domestic economy. This is because these companies typically target large domestic profit pools, have a disruptive business model and generally compete with traditional, slow moving incumbents. There are also structural trends playing out in Japan that we believe will act as tailwinds for these high growth companies. Inbound tourism remains strong with just over 24 million visitors last year. This was the highest number since records began in the early 60's and over the last three years, the number of foreign visitors to Japan has grown 2.4 times. Leading ¥100 store operator Seria is seeing a surge in sales as tourists buy into its fixed price offering. Labour shortage in Japan is reaching alarming levels and is affecting companies across sectors. We recently witnessed a rather remarkable situation where the employees of a leading logistics company requested management to reduce the volumes of parcels delivered due to a shortage of delivery staff. Across the economy, the jobs-to-applicants ratio remains at all-time highs. IT staffing specialist TechnoPro is a direct play on this theme and is seeing strong demand for its services. Operational execution has been excellent so far and management are likely to achieve their mid-term plan targets one year ahead of schedule.

On the policy front, there have been a number of encouraging steps taken by the government to stimulate various sectors of the economy. Recent changes to the pharmaceutical law will now enable innovative regenerative therapies to gain accelerated regulatory approval. Portfolio holding Healios was among the three companies recently chosen to participate in this process. Whilst major developed economies such as the US and the UK seem buffeted by uncertainty due to a political environment where immigration appears to be a key issue, Japan is gradually moving in the opposite direction. The government has recently instituted a new visa scheme for skilled overseas workers in certain sectors that would enable them to gain permanent residency in just a year. We are seeing companies across sectors hire overseas workers although the numbers remain small. Corporate governance continues to improve and shareholder returns via buybacks and dividends remain at encouragingly high levels. In general, we believe that the operating environment for Japanese smaller companies continues to improve and there remains significant scope for disruptive businesses to achieve high levels of growth in future.

Performance

The MSCI Japan Small Cap Index (total return in sterling terms) rose by 34.9% over the year while Shin Nippon's net asset value per share rose by 34.0% (after deducting borrowings at fair value). Sterling based investors benefitted from the currency's weakness versus the yen over the course of the past year. We think that shorter-term performance measurements are of limited relevance in assessing investment ability and believe three to five years is a more sensible period over which to judge long-term performance.

Noticeable among the positive contributors to performance over the year were a number of disruptive online businesses targeting large and underdeveloped domestic markets. Yume No Machi is emerging as the clear leader in the nascent online takeaway industry and was the top performing stock over the past year. Management are taking aggressive steps to strengthen the company's competitive position. They recently announced a capital and business alliance with Japan's leading messaging platform LINE and this should give them access to LINE's considerable user base. Start Today was another strong performer over the year. It continues to increase its dominance in online fashion apparels. Growth has recently accelerated as the company has broadened the choice of brands and products available on its online platform.

Leading online real estate operator Next and online cosmetics rating website iStyle were two of the more disappointing stocks over the year. Management of both companies have been investing heavily to secure future growth and we remain quite excited by the long-term prospects of both companies. Specialist medical device maker Asahi Intecc and niche plastic car parts maker Daikyonishikawa also performed poorly. Both companies have meaningful overseas businesses and yen strength through the year depressed sales and profits although operationally, they continue to execute well.

Portfolio

We pay less attention to the benchmark and focus more on a company's individual attractions. Consequently, Shin Nippon's active share figure continues to be high at 94%, implying just a 6% overlap with the comparative index. Annualised turnover within the portfolio was 13.4%, consistent with our long-term investment approach. However, we made new investments over the year in a number of exciting companies with high growth prospects.

DesignOne helps small businesses by building and maintaining an online presence for them. Their clients typically would have little prior experience of doing business online. The growth potential for DesignOne is significant as there are a large number of such small businesses in Japan. eGuarantee is emerging as the dominant player in the large but underdeveloped domestic trade receivables guarantee market; it is backed by the giant trading company Itochu, which is also its largest shareholder. Through Itochu's extensive business links, eGuarantee has unparalleled access to small and medium sized businesses that are still in the early stages of improving their balance sheet and working capital management. We have also been adding to our holdings in high growth companies such as Next and iStyle where the share price has been particularly weak for reasons explained earlier.

We also sold a few holdings over the past year. Oisix is an online retailer of organic foods that has struggled to scale up its business. Instead, management are venturing into new and less attractive areas. We were not convinced by management's strategy so we decided to sell our holdings. We also sold our holdings in Komehyo, a specialist retailer of second hand luxury bags, due to significant deterioration in its competitive environment. Modec is a leading global player in floating vessels used for oil and gas exploration in harsh environments; we sold our holdings in this company on concerns relating to its largest customer Petrobras, the Brazilian national oil company, that is currently the subject of multiple investigations around financial impropriety.

Outlook

We remain excited by the long-term prospects for Japanese smaller companies and continue to find a number of new and exciting high growth ideas. It is highly encouraging to see an increasing crop of young, dynamic and ambitious entrepreneurs starting new businesses. With tailwinds in the form of long-term structural trends and an increasing level of government support, we believe the operating environment for smaller companies in Japan is excellent. We see this as a very encouraging development for Shin Nippon.

Baillie Gifford & Co

31 March 2017

Past performance is not a guide to future performance.

See disclaimer at the end of this document.

Portfolio Performance Attribution for the Year to 31 January 2017^*

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
	31.01.16	31.01.17	31.01.16	31.01.17
Portfolio Breakdown	%	%	%	%	%	%	%	%	%	%
Consumer   Discretionary	18.7	17.6	25.6	26.9	35.5	24.6	1.5	2.1	(0.6)	-
Consumer Staples	11.6	10.6	6.5	5.8	26.8	38.6	(0.7)	(0.6)	(0.1)	-
Energy	0.7	0.7	0.5	-	-	36.1	0.1	0.1	-	-
Financials	18.7	8.3	8.2	1.7	15.9	42.0	(1.1)	(0.4)	(0.6)	-
Health Care	5.9	5.6	15.8	14.8	26.6	21.5	(0.2)	0.6	(0.9)	-
Industrials	23.3	23.8	19.4	23.6	43.0	38.2	0.7	0.7	-	-
Information   Technology	10.3	11.8	23.6	24.1	35.4	44.8	(0.6)	(1.5)	0.9	-
Materials	10.3	10.7	-	-	-	49.5	(1.1)	-	(1.1)	-
Real Estate	-	10.2	-	2.7	(18.1)	-	0.5	(0.2)	0.7	-
Telecommunication   Services	-	-	0.4	0.4	26.8	-	-	-	-	-
Utilities	0.5	0.7	-	-	-	10.3	0.1	-	0.1	-
Total (excluding gearing)	100.0	100.0	100.0	100.0	3.83	34.9	(0.8)	0.5	(1.3)	-
Impact of gearing					0.6		0.6			0.6
Total (including gearing) **	100.0	100.0	100.0	100.0	34.6	34.9	(0.2)	0.5	(1.3)	0.6

Past performance is not a guide to future performance.

Source: Baillie Gifford/Statpro and relevant underlying index providers. See disclaimer at the end of this announcement.

Contributions cannot be added together, as they are geometric; for example to calculate how a return of 34.6% against an index return of 34.9% translates into a relative return of (0.2%), divide the portfolio return of 134.6 by the index return of 134.9, subtract one and multiply by 100.

†        The performance attribution table is based on total assets

††      The comparative index for the year to 31 January 2017 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 34.6% excludes expenses and therefore differs from the NAV return (after deducting borrowings at par value) of 33.9% as a result. See disclaimer at the end of this document and Glossary of Terms on Page 57 of the Annual Report and Financial Statements.

Investment Changes (£'000)

	Valuation  at 31.01.16 £'000	Net acquisitions/ (disposals) £'000	Appreciation/ (depreciation) £'000	Valuation at 31.01.17 £'000
Equities:
Consumer Discretionary	45,462	6,173	16,148	67,783
Consumer Staples	11,574	79	2,870	14,523
Energy	929	(1,424)	495	-
Financials	3,870	590	(139)	4,321
Healthcare	28,099	1,670	7,386	37,155
Industrials	40,210	2,625	16,608	59,443
Information Technology	41,941	3,871	14,974	60,786
Real Estate	4,883	1,535	298	6,716
Telecommunication Services	763	-	190	953
Total investments	177,731	15,119	58,830	251,680
Net liquid assets*	5,086	(177)	859	5,768
Total assets	182,817	14,942	59,689	257,448
Bank loan	(19,427)	(18)	(4,131)	(23,576)
Shareholders' funds	163,390	14,924	55,558	233,872

* See Glossary of Terms on page 57 of the Annual Report and Financial Statements

Twenty largest equity holdings at 31 January 2017
		2017		2016
Name	Business	Value £'000	% of total assets	Value £'000
MonotaRO	Online business supplies	7,618	3.0	6,002
Start Today	Internet fashion retailer	6,982	2.7	4,230
Yume No Machi	Online meal delivery service	6,834	2.7	2,984
iStyle	Cosmetics website	6,517	2.5	5,717
Nihon M&A Center	M&A advisory services	6,304	2.4	5,804
Asahi Intecc	Specialist medical equipment	6,031	2.3	6,458
Harmonic Drive	Robotic components	5,893	2.3	3,442
M3	Online medical services	5,729	2.2	4,535
Next	Provides online property information	5,670	2.2	6,221
Daikyonishikawa	Automobile part manufacturer	5,467	2.1	3,335
Pigeon	Baby care products	5,244	2.0	3,592
GMO Payment Gateway	Online payment processing	5,095	2.0	5,986
Infomart Corp	Internet platform for restaurant supplies	5,057	2.0	3,770
Toshiba Plant Systems   and Services	Plant engineering company	4,835	1.9	2,139
Nifco	Industrial fastener manufacturer	4,773	1.9	4,170
Takara Leben	Residential property developer	4,754	1.8	3,083
Seria	Discount retailer	4,565	1.8	-
Megachips	Electronic components	4,437	1.7	884
Technopro Holdings	IT staffing	4,254	1.7	-
Iriso Electronics	Specialist auto connectors	4,253	1.7	3,180
		110,312	42.9

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.

An explanation of these measures can be found in the Glossary of Terms on page 57 of the Annual Report and Financial Statements.

These are also compared against the Company's peers. Performance is assessed over periods of one, three and five years, although the Board reviews performance principally over rolling three year periods.

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 year is set out in the Chairman's Statement and the Managers' Report above.

Related Party Transactions

The Directors' fees for the year are detailed in the Directors' Remuneration Report on page 29 of the Annual Report and Financial Statements. No Director has a contract of service with the Company. During the years reported no Director was interested in any contract or other matter requiring disclosure under section 412 of the Companies Act 2006.

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. With effect from 1 September 2016 the annual management fee is 0.95% on the first £50m of net assets, 0.65% on the next £200m of net assets and 0.55% on the remaining net assets. Prior to 1 September 2016 the fee was 0.95% on the first £50m of net assets and 0.65% on the remaining net assets. Management fees are calculated and payable quarterly.

The details of the management fees are as follows:

	2017 £'000		2016 £'000
Investment management fee	1,590		1,123

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.

Investment Strategy Risk - pursuing an investment strategy to fulfil the Company's objective which the market perceives to be unattractive or inappropriate, or an ineffective implementation of an attractive or appropriate strategy, may lead to reduced returns for shareholders and, as a result, a decreased demand for the Company's shares. This may lead to the Company's shares trading at a widening discount to their Net Asset Value. To mitigate this risk, the Board regularly reviews and monitors the Company's objective and investment policy and strategy; the investment portfolio and its performance; the level of discount/premium to Net Asset Value at which the shares trade; and movements in the share register.

Discount Risk - the discount/premium at which the Company's shares trade relative to its Net Asset Value can change. The risk of a widening discount is that it may undermine investor confidence in the Company. To manage this risk, the Board monitors the level of discount/premium at which the shares trade and the Company has authority to buy back its existing shares when deemed by the Board to be in the best interests of the Company and its shareholders.

Regulatory Risk - failure to comply with applicable legal and regulatory requirements such as the tax rules for investment trust 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 and the Market Abuse 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. To mitigate this risk, the Board receives six monthly reports from the Depositary confirming safe custody of the Company's assets held by the Custodian. 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. In addition, the existence of assets is subject to annual external audit.

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 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.

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 and in the Glossary of Terms on page 57 of the Annual Report and Financial Statements.

Political Risk - Political developments are closely monitored and considered by the Board. The Board has noted the results of the UK referendum on continuing membership of the European Union and the announcement by the Scottish Government that it will seek to hold a second referendum on Scottish independence. Whilst there is considerable uncertainty at present, the Board will continue to monitor developments as they occur and assess the potential consequences for the Company's future activities.

Viability Statement

In accordance with provision C2.2 of the UK Corporate Governance Code the Directors have assessed the prospects of the Company over a period of five years. The Directors continue to 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 loans which are 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 Financial Statements have been prepared on the going concern basis as it is the Directors' opinion, having assessed the principal risks and other matters set out in the Viability Statement above, that the Company will continue in operational existence for a period of at least twelve months from the date of approval of these Financial Statements.

Financial Instruments and Risk Management

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 2017	Investments £'000		Cash and deposits £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	251,680		5,459		(23,576)		681		234,244
Total exposure to currency risk	251,680		5,459		(23,576)		681		234,244
Sterling	-		61		-		(433)		(372)
	251,680		5,520		(23,576)		248		233,872

*   Includes net non-monetary assets of £23,000.

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.

Currency Risk Sensitivity

At 31 January 2017, 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 £23,424,000 (2016 - £16,347,000). 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 2017 is shown below. There was no significant change to the interest rate risk profile during the year.

Financial Assets

	2017 Fair value £'000	2017 Weighted average interest rate		2016 Fair value £'000	2016 Weighted average interest rate
Cash:
Yen	5,459	Nil		5,049	Nil
Sterling	61	0.01%		57	0.01%
	5,520			5,106

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:

	2017			2016
	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	23,576	2.2%	46 months	19,427	2.2%	58 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 above.

107.6% of the Company's net assets are invested in Japanese quoted equities (2016 - 108.8%). A 10% increase in quoted equity valuations at 31 January 2017 would have increased total net assets and net return on ordinary activities after taxation by £25,168,000 (2016 - £17,773,000). 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:

	2017 £'000	2016 £'000
In less than one year: -      accumulated interest In more than one year, but not more than five years: -      repayment of loan -      accumulated interest	553 23,653 1,502	440 19,507 1,677
	25,688	21,624

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:

- 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;

- 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 securitiesaway from the Company is completed;

- 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

- At 31 January 2017 and 2016, 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:

	2017 £'000	2016 £'000
Cash and deposits	5,520	5,106
Debtors	778	580
	6,298	5,686

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.

			2017				2016
		Book Value £'000	Par Value £'000	Fair* Value £'000	Book Value £'000	Par Value £'000		Fair* Value £'000
Fixed rate yen bank loans		23,576	23,653	24,216	19,427	19,507		20,022

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

Capital Management

The capital of the Company is its share capital and reserves as set out in note 13 of the Annual Report and Financial Statements together with its borrowings (see note 11 of the Annual Report and Financial Statements). The Company's investment objective and policy is set out on page 6 of the Annual Report and Financial Statements. In pursuit of the Company's objective, the Board has a responsibility for ensuring the Company's ability to continue as a going concern and details of the related risks and how they are managed are set out on pages 6 to 7 and pages 25 to 26 of the Annual Report and Financial Statements, respectively. The Company has the ability to buy back and issue shares (see pages 22 and 23 of the Annual Report and Financial Statements) and changes to the share capital during the year are set out in note 12 of the Annual Report and Financial Statements. The Company does not have any externally imposed capital requirements other than the covenants on its loan which are detailed in note 11 of the Annual Report and Financial Statements.

Fair Value of Financial Instruments

The fair value hierarchy used to analyse the basis on which the fair values of financial instruments held at fair value through the profit or loss account are measured is described below. Fair value measurements are categorised on the basis of the lowest level input that is significant

to the fair value measurement.

Level 1:           using unadjusted quoted prices for identical instruments in an active market;

Level 2:           using inputs, other than quoted prices included within Level 1, that are directly or indirectly observable (based on market data); and

Level 3:           using inputs that are unobservable (for which market data is unavailable).

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 at www.bailliegifford.com or 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 on page 57 of the Annual Report and Financial Statements) at 31 January 2017 are as follows:

Leverage

	Gross method	Commitment method
Maximum Limit	2.50:1	2.00:1
Actual	1.10:1	1.10:1

Statement of Directors' Responsibilities

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

Company law requires the Directors to prepare Financial Statements for each financial year. Under that law they have elected to prepare the Financial Statements in accordance with applicable law and UK Accounting Standards including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland'. 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 year. In preparing these Financial Statements, the Directors are required to:

- select suitable accounting policies and then apply them consistently;

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

- state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Financial Statements; and

- prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

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

- the Financial Statements, which have been prepared in accordance with applicable law and UK Accounting Standards including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', give a true and fair view of the assets, liabilities, financial position and net return of the Company;

- 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

- 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

31 March 2017

Income statement

	For the year ended 31 January 2017				For the year ended 31 January 2016
	Revenue £'000	Capital £'000	Total  £'000		Revenue £'000	Capital £'000	Total  £'000
Gains on investments†	-	58,830	58,830		-	32,548	32,548
Currency (losses)/gains (note 2)‡	-	(3,072)	(3,072)		-	21	21
Income	2,912	-	2,912		1,798	-	1,798
Investment management fee (note 3)	(1,590)	-	(1,590)		(1,123)	-	(1,123)
Other administrative expenses	(386)	-	(386)		(362)	-	(362)
Net return before finance costs and   taxation	936	55,758	56,694		313	32,569	32,882
Finance costs of borrowings (note 4)	(544)	-	(544)		(423)	-	(423)
Net return on ordinary activities      before taxation	392	55,758	56,150		(110)	32,569	32,459
Tax on ordinary activities	(291)	-	(291)		(180)	-	(180)
Net return on ordinary activities after   taxation	101	55,758	55,859		(290)	32,569	32,279
Net return per ordinary share (note 6)	0.26p	142.88p	143.14p		(0.78p)	87.14p	86.36p

† 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 supplementary revenue and capital return columns 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 Comprehensive Income is not required as all gains and losses of the Company have been reflected in the above statement.

Balance sheet at 31 January 2017

	At 31 January 2017		At 31 January 2016
	£'000	£'000	£'000	£'000
Fixed Assets
Investments held at fair value through profit or loss		251,680		177,731
Current Assets
Debtors	801		595
Cash and cash equivalents	5,520		5,106
	6,321		5,701
Creditors
Amounts falling due within one year	(553)	5,768	(615)
Net Current Assets		257,448		5,086
Total Assets less Current Liabilities				182,817
Creditors
Amounts falling due after more than one year (note 7)		(23,576)		(19,427)
Net assets		233,872		163,390
Capital and Reserves
Called up share capital		4,040		3,778
Share premium account		40,094		25,733
Capital redemption reserve		21,521		21,521
Capital reserve		173,473		117,715
Revenue reserve		(5,256)		(5,357)
Shareholders' funds		233,872		163,390
Net asset value per ordinary share: (after deducting borrowings at book value)		579.0p		432.5p
Net asset value per ordinary share: (after deducting borrowings at fair value)		577.4p		431.0p
Net asset value per ordinary share: (after deducting borrowings at par value)		578.8p		432.3p

Statement of changes in equity

For the year ended 31 January 2017

	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 2016	3,778	25,733	21,521	117,715	(5,357)	163,390
Ordinary shares issued	262	14,361	-	-	-	14,623
Net return on ordinary activities after taxation	-	-	-	55,758	101	55,859
Shareholders' funds at 31 January 2017	4,040	40,094	21,521	173,473	(5,256)	233,872

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

Cash flow statement
	For the year ended    31 January 2017    (unaudited)			For the year ended       31 January 2016      (audited)
	£'000	£'000		£'000	£'000
Cash flows from operating activities
Net return on ordinary activities before taxation	56,150			32,459
Net gains on investments	(58,830)			(32,548)
Currency gains/(losses)	3,072			(21)
Finance costs of borrowings	544			423
Overseas withholding tax	(252)			(160)
Increase in accrued income and prepaid expenses	(379)			(193)
Increase in creditors and prepaid income	102			31
Cash inflow/(outflow) from operations		407			(9)
Interest paid		(509)			(416)
Net cash outflow from operating activities		(102)			(425)
Cash flows from investing activities
Acquisitions of investments	(43,987)			(28,859)
Disposals of investments	28,822			24,197
Net cash outflow from investing activities		(15,165)			(5,662)
Shares issued	14,623			2,476
Net cash inflow from financing activities		14,623			2,476
Decrease in cash and cash equivalents		(644)			(3,611)
Exchange movements		1,058			536
Cash and cash equivalents at 1 February		5,106			8,181
Cash and cash equivalents at 31 January *		5,520			5,106

* 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 2017 have been prepared in accordance with FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' on the basis of the accounting policies set out in the Annual Report and Financial Statements which are unchanged from the prior year and have been applied consistently. The Company has early adopted the amendments to section 34 of FRS 102 regarding fair value hierarchy disclosures.
		31 January 2017 £'000		31 January 2016 £'000
2.	Currency (losses)/gains
	Exchange differences on bank loans	(4,131)		(515)
	Other exchange differences	1,059		536
		(3,072)		21
		31 January 2017 £'000		31 January 2016 £'000
3.	Investment management fee - all charged to revenue
	Investment management fee	1,590		1,123
	The annual management fee is 0.95% on the first £50m of net assets, 0.65% on the next £200m of net assets and 0.55% on the remaining net assets, calculated quarterly. Prior to 1 September 2016 the fee was 0.95% on the first £50m of net assets and 0.65% on the remaining net assets.
4.	The Company paid interest on bank loans of £537,000 (2016 - £423,000) and £7,000 (2016 - £nil) in respect of Yen deposits held by the Custodian Bank.
5.	No dividend will be declared.
		31 January 2017 £'000		31 January 2016 £'000
6.	Net return per ordinary share
	Revenue return	101		(290)
	Capital return	55,758		32,569
	Total return	55,859		32,279
	The returns per ordinary share set out below are based on the above returns and on 39,024,022 ordinary shares (2016 - 37,377,963), 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	0.26p		(0.78p)
	Capital return	142.88p		87.14p
	Total return	143.14p		86.36p
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 2017 ING Bank N.V. - 7 year ¥3,350 million loan at 2.217% maturing 27 November 2020. At 31 January 2016 ING Bank N.V. - 7 year ¥3,350 million loan at 2.217% maturing 27 November 2020.

8.	At 31 January 2017 the Company had authority to buy back 5,726,254 shares. No shares were bought back during the year (2016 - nil). Share buy-backs are funded from the capital reserve. During the year the Company issued 2,620,000 shares on a non pre-emptive basis at a premium to net asset value for net proceeds of £14,623,000 (2016 - 600,000 shares for net proceeds of £2,476,000).
9.	The Annual Report and Financial Statements will be available on the Company's website www.shinnippon.co.uk† on or around 12 April 2017.
10.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 January 2017. The financial information for 2017 is derived from the statutory accounts for 2016, which have been delivered to the Registrar of Companies. The Auditor has reported on the 2016 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 2017 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 18 May 2017. 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.

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- ends -

 

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