Baillie Gifford Shin Nippon PLC Final Results

RNS Number : 4941S

Baillie Gifford Shin Nippon PLC

18 March 2016

 

RNS Announcement: Preliminary Results

Baillie Gifford Shin Nippon PLC

Results for the year to 31 January 2016

Over the year the Company's net asset value per share (after deducting borrowings at fair value) rose 25.4%, whilst the comparative index^* rose by 10.9% in sterling terms.  The share price increased by 39.6%

In sterling terms over three years, the Company's comparative index is up 47.4%, whilst the net asset value and share price are up by 103.7% and 99.9% respectively.

¾    Shin Nippon continues to focus on identifying the most exciting, up-and-coming growth businesses in Japan.

¾    Among the positive contributors to performance were a number of disruptive online businesses targeting the domestic market, including Istyle and Next. MonotaRO continues to grow sales and profits whilst precision surgical guidewire maker Asahi Intecc is seeing rising demand for its new generation of products.

¾    Turnover within the portfolio remains low, at 15%, however several new holdings were taken, including Sanbio, a recently listed biotech company with stem cell and regenerative medicine expertise; Bengo4.com, which runs a website that matches individuals with lawyers; and Broadleaf, an IT company that has developed an online, cloud based auto parts ordering system.

¾    On 1 December 2015, Praveen Kumar took over as the Company's Portfolio Manager.

¾    During the year, the Company issued 600,000 shares, 1.6% of its 31 January 2015 issued share capital, at an average premium to net asset value per share of 3.6%.

^* The Company's comparative index for the year to 31 January 2016 was the MSCI Japan Small Cap Index (total return in sterling terms).

Shin Nippon aims to achieve long term capital growth through investment principally in small Japanese companies which are believed to have above average prospects for growth. At 31 January 2016 the Company had total assets of £182.8m (before deduction of bank loan of £19.4m).

The Company is managed by Baillie Gifford & Co, an Edinburgh based fund management group with around £120 billion under management and advice as at 17 March 2016.

Past performance is not a guide to future performance. The value of an investment and any income from it is not guaranteed and may go down as well as up and investors may not get back the amount invested. The Company has borrowed money to make further investments. This is commonly referred to as gearing. The risk is that, when this money is repaid by the Company, the value of these investments may not be enough to cover the borrowing and interest costs, and the Company makes a loss. If the Company's investments fall in value, gearing will increase the amount of this loss. The more highly geared the Company, the greater this effect will be.

Investment in investment trusts should be regarded as medium to long term. You can find up to date performance information about Shin Nippon at www.shinnippon.co.uk.

17 March 2016

For further information please contact:

Alex Blake, Baillie Gifford & Co

Tel: [phone]

Roland Cross, Director, Four Broadgate

Tel: [phone] 

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

17 March 2016

 

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 has firmly established itself as the dominant player in the M&A 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 macroeconomic 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

17 March 2016

 

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		to relative	Stock	Asset
	31.01.15	31.01.16	31.01.15	31.01.16	Nippon	Index	return	selection	allocation	Gearing
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	17.1	19.4	21.2	8.2	2.3	2.2	-.	-
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.

 

Income statement

The following is the unaudited preliminary statement for the year to 31 January 2016 which was approved by the Board on 17 March 2016. No dividend is payable.

	For the year ended 31 January 2016 (unaudited)			For the year ended 31 January 2015 (audited)
	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 (unaudited)		At 31 January 2015 (audited)
	£'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	(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 (unaudited)

	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 (audited)

	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	32,549		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.

 

Twenty largest equity holdings at 31 January 2016 (unaudited)

Name	Business	2016 Value £'000	2016 % of total assets	2015 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	2.0	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	47.1

 

Notes to the condensed financial statements (unaudited)

1.		The Financial Statements for the year to 31 January 2016 have been prepared in accordance with the Financial Reporting Standard applicable in the UK and Republic of Ireland ('FRS 102') 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.
2.		Currency gains/(losses)	31 January 2016 £'000			31 January 2015 £'000
		Exchange differences on bank loans	(515)			991
		Other exchange differences	536			(333)
			21			658
3.		Investment management fee - all charged to revenue	31 January 2016 £'000			31 January 2015 £'000
		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.
6.	Net return per ordinary share		31 January 2016 £'000	31 January 2015 £'000
	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

 

Notes to the condensed financial statements (unaudited) (ctd)

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 2016 the Company had authority to buy back 5,572,607 shares. No shares were bought back during the year (2015 - nil). Share buy-backs are funded from the capital reserve. During the year the Company issued 600,000 shares on a non pre-emptive basis at a premium to net asset value for net proceeds of £2,476,000 (2015 - 500,000 shares for net proceeds of £1,584,000).
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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