Final Results

RNS Number : 3848A

Baillie Gifford Shin Nippon PLC

29 March 2012

 



BAILLIE GIFFORD SHIN NIPPON PLC

ANNUAL FINANCIAL REPORT

A copy of the Annual Report and Financial Statements for the year ended 31 January 2012 of Baillie Gifford Shin Nippon PLC has been submitted electronically to the National Storage Mechanism and will shortly be available for inspection at http://www.hemscott.com/nsm.do .

The Annual Report and Financial Statements for the year ended 31 January 2012 including the Notice of Annual General Meeting is also available on Baillie Gifford Shin Nippon's page of the Baillie Gifford website at:

www.shinnippon.co.uk 

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 January 2012 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

Company Secretaries

29 March 2012

BAILLIE GIFFORD SHIN NIPPON PLC 

Chairman's Statement

Performance

The Board reviews the Managers' performance over the previous 1, 3 and 5 years, with most emphasis placed on the 3 year figures. In the three years to 31 January 2012 the Company's comparative index rose 17.9% in sterling terms. Shin Nippon's net asset value per share rose by 43.9% during the period, while the share price rose by 74.7%. Borrowings were beneficial as was the strengthening of the yen against sterling, but the bulk of our outperformance resulted from good stock selection. The discount of the share price to net asset value narrowed from 21.7% to 4.9%. The Company's performance against its peer group was again encouraging with a net asset value total return ranking of 2/5 over 1 and 3 years and 1/5 over 5 years.

Over the twelve months to 31 January 2012 the comparative index rose by 0.5% in sterling terms. Shin Nippon's net asset value per share² fell by 1.7% during the period and the share price rose by 2.4%. The discount of the share price to net asset value narrowed from 8.8% to 4.9%, having ranged between a discount of 13.0% and a premium of 1.2% in the year.

Borrowing

The Company's debt of ¥1.15bn was due for repayment in 2011 and was renegotiated and rolled over at maturity. It now bears an interest rate of 2.24% and is due for repayment in 2014. Our resultant gearing at the end of our year was 17.4% gross and 14.3% net of cash balances.

Hedging

The Company undertook no hedging in the year during which the yen strengthened 9.1% against sterling. The Board continues to monitor currency exposure actively and will consider hedging if it is felt that the yen has diverged significantly from fair value.

Revenue

The Company's revenue earnings per share declined from 0.37p in the previous year to 0.32p. Dividend income increased by 10%, but this was more than offset by management charges and other expenses, as well as higher financing costs. The Board continues to manage expenses carefully and monitors the total expense ratio very closely.

AGM

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

Approval is also sought to renew the authority to buy back shares. The purpose of this facility is to enable the Board to buy back shares when the discount is substantial in absolute terms and in relation to its peers should that be deemed to be desirable. Any such purchase would improve the net asset value per share for remaining shareholders.

Board

We were very sorry that Angus Tulloch stepped down from the Board during the year and thank him for his robust and realistic contribution to the debates on our policies. We are delighted to welcome Merryn Somerset Webb in his place. Merryn has a strong knowledge of, and interest in Japan and has worked there as a stockbroker.

Outlook

2011 was unfortunately very eventful in Japan. In the spring it suffered its worst earthquake on record. The resulting tsunami was catastrophic, causing incredible damage even 6 miles inland and wiping out much of the area's infrastructure and economy. Considerable damage was done to the Fukushima nuclear plant. There were some criticisms of the Government in its handling of the ensuing crisis but much liquidity was pumped into the economy and many industries developed innovative responses to the challenges created.

Later on in the year, the widespread flooding in Thailand also caused considerable supply chain problems for several Japanese industries resulting in a fall in GNP in the final quarter of the year.

Politics continued to disappoint as Japan announced its 6^th prime minister in 5 years. In this area there always seem to be rays of hope, but the gestation period for good policies is incredibly long. In this case there are indications that Japan is moving gradually towards higher rates of consumption tax (VAT), and we would see this as a positive development. Interestingly, and purely as an aside, a VAT rate comparable to the West could reduce significantly the Japanese government deficit.

As with politics, we have always had concerns about the quality of corporate governance in Japan's companies, albeit that this has certainly improved dramatically over the years. However, although not held by Shin Nippon, we were taken by surprise by the revelations that have come out of the Olympus scandal. Here it is alleged that very large trading losses have been routinely swept under the carpet, and when the new CEO, Michael Woodford, uncovered this scandal he was promptly sacked for his efforts. It is to be hoped that this scandal will accelerate the movement to much better governance standards.

With this background one may be forgiven for thinking that we may have lost our confidence in the future of the small company sector in Japan. Rather the opposite is the case. Indeed, it was notable that many of the portfolio's holdings continued to record excellent rates of growth last year despite all the problems I have listed. As I said in last year's statement we are rather encouraged by the interesting companies with good growth prospects that our Managers are increasingly identifying. Valuations are reasonable and there are many companies with strong competitive advantage and industry leadership both at home and overseas. Your Board and Managers remain optimistic for the sector and portfolio, and continue to maintain a reasonable level of gearing.

Barry M Rose

Chairman

21 March 2012

Past performance is not a guide to future performance.

BAILLIE GIFFORD SHIN NIPPON PLC 

Managers' Report

Recent coverage of the Japanese economy has been downbeat. Growth expectations have been pared in the wake of last year's earthquake and tsunami while the strong yen has clearly created challenges for exporters. However there are still areas that are experiencing very impressive rates of expansion. Spending on e-commerce, smartphones, energy efficient products and healthcare has risen sharply over the past five years for example. This has benefited the leading companies in developing industries such as internet shopping, online payment systems, mobile gaming, data storage, recycling, retail pharmacy, medical testing and nursing facilities for the elderly.

It is these emerging growth areas within Japan's 'new economy' that Shin Nippon, which translates as 'New Japan', tends to focus on. Many of the holdings in these dynamic sectors are run by younger, more entrepreneurial managements than average and in our opinion will be able to generate strong earnings growth irrespective of whether the broader economy is expanding.

Performance

The MSCI Japan Small Cap index (total return in sterling terms) rose 0.5% over the year while Shin Nippon's net asset value per share (after deducting borrowings at fair value) fell by 1.7%. Sterling returns benefited from the strengthening of the yen. The broad Japanese market underperformed world markets as a whole over the year and fared particularly badly in the period immediately after the earthquake and tsunami. However despite the inevitable short term disruption to the domestic economy, smaller companies, which as a whole tend to be more focused on the Japan market, in aggregate held up better over the year than did their large cap peers. It appears that investors were more concerned about the impact of a faltering global recovery on the larger Japanese exporters than about domestic demand.

Many of the top performing companies within the portfolio over the year were innovative internet companies working to create new markets or companies that use the internet as a business tool in order to disrupt an existing inefficient marketplace. Most of these companies have been held by Shin Nippon for several years so it is pleasing to see their multi-year growth opportunities continuing to develop and expand.

Zozotown, Start Today's market leading online apparel website, continued to gain new customers and attract new fashion brands. The value of items sold currently on Start Today's multi-brand website is still significantly less than the total revenues at some of Japan's leading single brand traditional bricks and mortar apparel retailers; this suggests Zozotown has significant scope to continue capturing market share. Similarly, M3 Inc's low cost, internet based, direct marketing to doctors continues to appeal to drug companies globally looking to reduce their overall promotion costs. The company has continued to expand overseas by buying specialist medical websites in Europe and by forming an alliance with an American company that has close relationships with a high proportion of US physicians. Digital Garage, an internet investment company with stakes in Japan's leading price comparison website and Twitter amongst others, was another one of the better performing holdings.

Even in older segments of the economy Japanese companies are harnessing the power of the internet. Monotaro, which supplies a huge variety of components to small manufacturing businesses, has developed an advanced online distribution system that has been winning customers away from inefficient, small traditional wholesalers. The strength of Monotaro's supply chain was highlighted in the aftermath of the earthquake; thanks to the inventory stored at its vast, industry leading, distribution centres, the company was one of the few distributors that managed to continue reliably supplying customers.

Given the market's worries about the direction of the global economy over the course of the year and the consequent impact on exporting companies, it is perhaps unsurprising that some of the domestic healthcare related holdings with good demand for their services and products performed well.

Message, a leading but still expanding operator of residential care homes for the elderly is benefitting from the rising demand for such facilities nationally. Our retail pharmacy operators, Cocokara Fine and Cosmos Pharmaceutical, are also doing well as demand for prescriptions increases and the market consolidates around a few efficient expanding chains that should dominate the market in the longer term.

This consolidation ties in with the pick-up in merger and acquisition activity in Japan, another positive and accelerating trend. Some companies are using their strong balance sheets and the yen's strength to expand overseas by acquiring international competitors something that should increase their long term growth prospects. Indeed, last year witnessed a record amount of overseas deals by value for Japanese companies. Following disruption caused by the earthquake, many management teams appear to have re-evaluated their companies' long term prospects and adopted a more aggressive strategy. Domestically, many ageing small business owners, because they lack a successor, are also seeking mergers to secure a future for their company. This kind of action should help make currently fragmented markets more efficient in the long term and is good for Nihon M&A, a holding that specialises in merger advisory services. It is adding more and more consultants every year to help it deal with the increasing number of enquiries it is receiving thanks to strong relationships with local accountancy offices.

Management buy-outs and the trend by which parent companies buy out their listed subsidiaries continued to be a feature of the market as well. Management teams and business owners clearly think that the market is significantly undervaluing many listed smaller companies and taking things into their own hands as a result. Two Shin Nippon holdings were bid for over the year with the most recent offer, for property company Sankei Building, representing approximately a 150% premium to the share price at the time.

Some of our holdings, in particular those that rely more on overseas demand did not perform as well as hoped this year but we remain convinced of the long term prospects for investments that benefit from long term trends such as rising incomes in developing markets and the introduction of automated production processes as wage costs rise in other Asian countries.

Portfolio

Given our long term investment horizon, stock turnover within the portfolio over the year remained relatively low at just 19.7%. Several of the most recent purchases have been focused on the new, emerging areas of the economy mentioned earlier. Some of the new holdings were too small to invest in until recently, but the companies are increasing in value as the market recognises just how quickly earnings are progressing. 

For example, Bit-isle is one of the leading operators of large data centres in Japan. Demand for data storage is rising rapidly as the penetration of data consumptive smartphones increases and as cloud computing becomes more popular. Obtaining permission for new data centres takes a long time given the power consumption of these buildings, so there is currently a significant shortage of storage capacity. Bit-isle is expanding some of its existing facilities and increasing the rental charges for its storage servers. GMO Payment Gateway, another recent investment, is a leading provider of payment processing services to shopping websites in Japan. GMO Payment has more than thirty thousand websites using its services and is a direct beneficiary of the rapid growth in the e-commerce market in Japan. F@N Communications is another example of a holding operating in a new industry that would not have existed just a decade or so ago. The company is one of Japan's largest providers of affiliate marketing services to companies looking to advertise on the internet. F@N Communications aggregates the details of huge numbers of tiny websites, particularly bloggers, and introduces them to large advertisers that are looking to place adverts on specialist websites where readers should be more interested in buying a related product. F@N Communications earns a commission when customers click through and buy from the original advertisers' website.

Other recent new purchases in more traditional parts of the economy include Endo Lighting, a company that designs, manufactures and installs architectural lighting in large commercial facilities. The company has been swift to switch to focus on energy efficient LED lighting systems and many companies, including supermarkets and convenience stores, have been rushing to introduce new lighting systems in the wake of the power shortages that followed the devastation at the Fukushima power plant. Another new holding that has seen existing beneficial trends accelerate since the natural disasters last year is Siix Corp. This company provides outsourced manufacturing and assembly services to the Japanese automobile and consumer electronics industries at low cost plants around the rest of Asia. Interest in Siix' services has been picking up following the disruption to supply chains in Japan last year as companies look to diversify their production base and minimise potential for disruption.

The portfolio continues to offer attractive exposure to a mix of smaller Japanese growth companies that are expanding both in Japan, by innovating or disrupting an existing market, or by tapping into rising demand in overseas markets.

Outlook

The Japanese economy should benefit this year as the long awaited reconstruction programmes finally commence in the regions worst affected by the tsunami. Furthermore, recent moves by the Bank of Japan suggest that the Japanese authorities may be adopting a more proactive stance towards weakening the yen, which would help sentiment towards the Japanese market as a whole. Japan tends to perform well when the global economy is expanding, so the tentative signs that the US economy may be recovering are encouraging. We are finding many new and interesting investment ideas and Shin Nippon's portfolio of dynamic, high growth, lowly valued stocks is well placed to benefit from a variety of investment themes.

Baillie Gifford & Co

21 March 2012

Past performance is not a guide to future performance.

Portfolio Performance Attribution for the Year to 31 January 2012^†

Computed relative to the comparative index^††

	Index		Shin Nippon		Performance*		Contribution	Contribution attributable to:
	asset allocation		asset allocation		Shin Nippon	Index	to relative	Stock selection	Asset allocation	Gearing
	31.01.11	31.01.12	31.01.11	31.01.12			return
Portfolio Breakdown	%	%	%	%	%	%	%	%	%	%
Consumer Discretionary	21.6	20.8	31.0	25.1	(4.9)	5.9	(2.4)	(2.8)	0.4	-
Consumer Staples	8.5	10.1	6.7	10.4	16.8	11.3	0.4	0.3	0.1	-
Energy	0.7	0.7	2.3	1.3	(0.5)	5.7	(0.1)	(0.2)	0.1	-
Financials	18.5	18.1	8.1	7.1	(3.8)	(2.6)	0.1	(0.2)	0.3	-
Healthcare	4.5	4.6	13.0	14.6	7.1	8.3	0.5	(0.3)	0.8	-
Industrials	22.7	22.9	23.8	24.2	2.7	1.8	0.3	0.3	-	-
Information Technology	10.9	10.2	12.2	14.6	(0.8)	(9.8)	0.9	1.0	(0.1)	-
Materials	12.2	12.3	2.9	2.7	9.4	(6.9)	1.2	0.4	0.8	-
Telecommunication Services	0.1	-	-	-	-	-	-	-	-	-
Utilities	0.3	0.3	-	-	-	1.3	-	-	-	-
Total (excluding gearing)	100.0	100.0	100.0	100.0	1.3	0.5	0.8	(1.5)	2.3	-
Impact of gearing					(1.7)	-	(1.7)	-	-	(1.7)
Total (including gearing) **	100.0	100.0	100.0	100.0	(0.4)	0.5	(0.9)	(1.5)	2.3	(1.7)

Past performance is not a guide to future performance.

Source: Baillie Gifford & Co/Statpro

Contributions cannot be added together, as they are geometric; for example to calculate how a return of 1.3% against an index return of 0.5% translates into a relative return of 0.8%, divide the portfolio return of 101.3 by the index return of 100.5 and subtract one.

†    The performance attribution table is based on total assets

††   The comparative index for the year to 31 January 2012 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 (0.4%) excludes expenses and therefore differs from the NAV return (after deducting borrowings at fair value) of (1.7%) as a result.

Investment Changes (£'000)

	Valuation  at 31.01.11	Net acquisitions/ (disposals)	Appreciation/ (depreciation)	Valuation at 31.01.12
Equities:
Consumer Discretionary	19,423	(2,793)	(909)	15,721
Consumer Staples	4,240	1,538	743	6,521
Energy	1,481	(601)	(76)	804
Financials	5,105	(309)	(360)	4,436
Healthcare	8,282	530	366	9,178
Industrials	15,162	(99)	138	15,201
Information Technology	7,729	1,600	(210)	9,119
Materials	1,823	(157)	52	1,718
Total investments	63,245	(291)	(256)	62,698
Net liquid assets	1,184	405	75	1,664
Total assets	64,429	114	(181)	64,362
Bank loans	(8,763)	-	(794)	(9,557)
Shareholders' funds	55,666	114	(975)	54,805

TWENTY LARGEST EQUITY HOLDINGS at 31 January 2012
		2012		2011
Name	Business	Value £'000	% of total assets	Value £'000
Start Today	Internet fashion retailer	2,925	4.5	3,537
Message	Provides nursing services for the elderly	2,883	4.5	2,723
Don Quijote	Discount store chain	2,514	3.9	2,151
Nabtesco	Hydraulic equipment	2,060	3.2	2,872
Hamakyorex	Third party logistics	1,911	3.0	1,874
Cocokara Fine	Drugstore chain	1,766	2.7	1,409
Monotaro	Supplies small machinery parts	1,689	2.6	809
M3	Online medical database	1,583	2.5	1,372
Nakanishi	Dental equipment	1,494	2.3	1,558
First Juken	Builds and sells residential buildings	1,461	2.3	1,656
Unipres	Manufactures automotive components	1,460	2.3	934
Daikokutenbussan	Discount store for food and sundry goods	1,428	2.2	1,657
EPS	Clinical testing services	1,418	2.2	1,800
Osaka Securities    Exchange	Stock exchange operator	1,370	2.1	1,183
FP Corp	Manufacture and sale of food containers	1,218	1.9	1,072
Nihon M&A Center	M&A advisory services	1,191	1.8	828
Dainippon Screen Manufacturing	Manufacturer of graphic arts equipment	1,151	1.8	1,241
Nippon Information Development	Computer system integration services	1,136	1.8	967
Iriso Electronics	Specialist connectors	1,134	1.8	1,171
Pronexus	Financial printing services	1,124	1.7	1,127
		32,916	51.1	31,941

 

 

 

 

 

 

 

RELATED PARTY TRANSACTIONS

The Directors' fees for the year are detailed in the Directors' Remuneration Report in the Annual Report. No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under section 412 of the Companies Act 2006 other than as disclosed in note 3.

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

The details of the management fees are as follows:

	2012 £'000		2011 £'000
Investment management fee	546		503

PRINCIPAL RISKS AND UNCERTAINTIES

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

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

The Company may enter into derivative transactions as explained in the Investment Policy on page 18 of the Annual Report and Financial Statements. No such transactions were undertaken in the year under review.

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

Market Risk

The fair value or future cash flows of a financial instrument or other investment held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - currency risk, interest rate risk and other price risk. The Board of Directors reviews and agrees policies for managing these risks and the Company's Investment Manager both assesses the exposure to market risk when making individual investment decisions and monitors the overall level of market risk across the investment portfolio on an ongoing basis. Details of the Company's investment portfolio are shown in note 8 on page 38 of the Annual Report and Financial Statements.

(i)   Currency Risk

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

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

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

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

At 31 January 2012	Investments £'000		Cash and deposits £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	62,698		1,652		(9,557)		116		54,909
Total exposure to currency risk	62,698		1,652		(9,557)		116		54,909
Sterling	-		60		-		(164)		(104)
	62,698		1,712		(9,557)		(48)		54,805

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

At 31 January 2011	Investments £'000		Cash and deposits £'000		Bank loans £'000		Other debtors and creditors* £'000		Net exposure £'000
Yen	63,245		1,304		(8,763)		7		55,793
Total exposure to currency risk	63,245		1,304		(8,763)		7		55,793
Sterling	-		-		-		(156)		(127)
	63,245		1,333		(8,763)		(149)		55,666

*      Includes net non-monetary assets of £19,000.

Currency Risk Sensitivity

At 31 January 2012, 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 £5,491,000 (2011 - £5,579,000). In percentage terms, total net assets would have decreased by 10.0% (2011 - 10.0%), and net return on ordinary activities after taxation would have decreased by 637.8% (2011 - 46.1%). A 10% weakening of sterling against the yen, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts.

(ii)  Interest Rate Risk

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

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

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

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

The interest rate risk profile of the Company's financial assets and liabilities at 31 January 2012 is shown below. The main change to the interest rate risk profile during the year was the refinancing of the ¥1,150 million loan facility with the Royal Bank of Scotland plc.

Financial assets	2012			2011
	Fair value £'000	Weighted average interest rate		Fair value £'000	Weighted average interest rate
Cash:
Yen	1,652	Nil		1,304	Nil
Sterling	60	0.01%		29	0.01%
	1,712			1,333

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:

	2012			2011
	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	9,557	2.2%	30 months	8,763	2.0%	6 months

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

(iii) Other Price Risk

Changes in market prices other than those arising from interest rate risk or currency risk may also affect the value of the Company's net assets. The Company's exposure to changes in market prices relates to the fixed asset investments as disclosed in note 8 of the Annual Report and Financial Statements.

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

Other Price Risk Sensitivity

A full list of the Company's investments is shown on pages 16 to 17 of the Annual Report and Financial Statements. In addition, a list of the 20 largest holdings together with various analyses of the portfolio by industrial sector and exchange listing are shown on pages 11 and 12 of the Annual Report and Financial Statements.

114.4% of the Company's net assets are invested in Japanese quoted equities (2011 - 113.6%). A 10% increase in quoted equity valuations at 31 January 2012 would have increased total net assets and net return on ordinary activities after taxation by £6,270,000 (2011 - £6,325,000). 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 as the majority of the Company's assets are in investments that are readily realisable.

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

The Board provides guidance to the Investment Managers as to the maximum exposure to any one holding (see Investment Policy on page 18 of the Annual Report and Financial Statements).

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

	2012 £'000	2011 £'000
In less than one year In more than one year, but not more than five years	- 9,557	8,763 -
	9,557	8,763

The Company has the power to take out borrowings, which give it access to additional funding when required. The Company's borrowing facilities are detailed in notes 10 and 11 of the Annual Report and Financial Statements.

Credit Risk

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

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

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

·    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 2012 and 2011, all cash deposits were held with the custodian banks. The credit risk of the custodians 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 exposure to credit risk at 31 January was:

	2012 £'000	2011 £'000
Cash and deposits	1,712	1,333
Debtors	172	105
	1,884	1,438

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

Fair value of financial assets and financial liabilities

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

		2012		2011
		Book Value £'000	Fair* Value £'000	Book Value £'000	Fair* Value £'000
Fixed rate yen bank loans		9,557	9,618	8,763	8,763

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

 of comparable yield and maturity.

Gains and losses on hedges

At 31 January 2012 and 2011 there were no unrecognised gains/losses on hedges.

Capital Management

The Company does not have any externally imposed capital requirements other than the loan covenants as detailed in note 11 on page 39 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 18 of the Annual Report and Financial Statements, and shares may be repurchased or issued as explained on page 24 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 35 of the Annual Report and Financial Statements.

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

Other Risks

Other risks faced by the Company include the following:

Regulatory Risk

Failure to comply with applicable legal and regulatory requirements could lead to suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report. Breach of section 1159 of the Corporation Tax Act 2010 could lead to the Company being subject to tax on capital gains.

The Managers monitor investment movements and the level of forecast income and expenditure to ensure the provisions of section 1159 are not breached.

Baillie Gifford's Heads of Business Risk & Internal Audit and Regulatory Risk provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes.

Major regulatory change could impose unnecessary compliance burdens on the Company or threaten the viability of the investment company structure. In such circumstances representation is made to ensure that the special circumstances of investment trusts are recognised.

Operational/Financial Risk 

Failure of the Managers' accounting systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. The Managers have a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption or major disaster. The Board reviews the Managers' Report on Internal Controls and the reports by other key third party providers are reviewed by the Manager on behalf of the Board.

Discount/Premium Volatility

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

Gearing Risk

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

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

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT 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 (Generally Accepted Accounting Practice). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

•     select suitable accounting policies and then apply them consistently;

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

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

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

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

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

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

By order of the Board

BARRY M ROSE

Chairman

21 March 2012

 

INCOME STATEMENT

	For the year ended 31 January 2012				For the year ended 31 January 2011
	Revenue £'000	Capital £'000	Total  £'000		Revenue £'000	Capital £'000	Total  £'000
(Losses)/gains on investments†	-	(256)	(256)		-	12,795	12,795
Currency losses (note 2)‡	-	(703)	(703)		-	(812)	(812)
Income	1,219	-	1,219		1,108	-	1,108
Investment management fee (note 3)	(546)	-	(546)		(503)	-	(503)
Other administrative expenses	(272)	-	(272)		(234)	-	(234)
Net return before finance costs and taxation	401	(959)	(558)		371	11,983	12,354
Finance costs of borrowings (note 4)	(218)	-	(218)		(179)	-	(179)
Net return on ordinary activities before taxation	183	(959)	(776)		192	11,983	12,175
Tax on ordinary activities	(85)	-	(85)		(78)	-	(78)
Net return on ordinary activities after taxation	98	(959)	(861)		114	11,983	12,097
Net return per ordinary share	0.32p	(3.08p)	(2.76p)		0.37p	38.53p	38.90p
(note 6)

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

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

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

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

BALANCE SHEET

at 31 January 2012

	At 31 January 2012		At 31 January 2011
	£'000	£'000	£'000	£'000
Fixed Assets
Investments	62,698		63,245
Current Assets
Debtors	182		124
Cash and short term deposits	1,712		1,333
	1,894		1,457
Creditors
Amounts falling due within one year (note 7)	(230)		(9,036)
Net Current Assets		1,664		(7,579)
Total Assets less Current Liabilities		64,362		55,666
Creditors
Amounts falling due after more than one year (note 7)		(9,557)		-
Total net assets		54,805		55,666
Capital and Reserves
Called-up share capital		3,110		3,110
Share premium		7,674		7,674
Capital redemption reserve		21,521		21,521
Capital reserve		26,932		27,891
Revenue reserve		(4,432)		(4,530)
Shareholders' funds		54,805		55,666
Net Asset Value Per Ordinary Share:
(after deducting borrowings at fair value)		176.0p		179.0p
Net Asset Value Per Ordinary Share:
(after deducting borrowings at par value)		176.2p		179.0p

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 31 January 2012

	Called up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 February 2011	3,110	7,674	21,521	27,891	(4,530)	55,666
Net return on ordinary activities after taxation	-	-	-	(959)	98	(891)
Shareholders' funds at 31 January 2012	3,110	7,674	21,521	26,932	(4,432)	54,805

For the year ended 31 January 2011

	Called up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 February 2010	3,110	7,674	21,521	15,908	(4,644)	43,569
Net return on ordinary activities after taxation	-	-	-	11,983	114	12,097
Shareholders' funds at 31 January 2011	3,110	7,674	21,521	27,891	(4,530)	55,666

 

CASH FLOW STATEMENT
	For the year ended 31 January 2012			For the year ended 31 January 2011
	£'000	£'000		£'000	£'000
NET CASH INFLOW FROM OPERATING ACTIVITIES (note 11)		342			440
SERVICING OF FINANCE
Interest and breakage costs paid	(255)			(171)
NET CASH OUTFLOW FROM SERVICING OF FINANCE		(255)			(171)
TAXATION
Overseas tax paid	(80)			(83)
TOTAL TAX PAID		(80)			(83)
FINANCIAL INVESTMENT
Purchases of investments	(12,120)			(9,016)
Sales of investments	12,401			9,510
Exchange differences on settlement of investment transactions	16			(47)
NET CASH INFLOW FROM FINANCIAL INVESTMENT		297			447
INCREASE IN CASH		304			633
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
Increase/(decrease) in cash		304			633
Exchange movement on bank loans		(794)			(846)
Exchange differences on cash		75			81
MOVEMENT IN NET DEBT IN THE YEAR		(415)			(132)
OPENING NET DEBT		(7,430)			(7,298)
CLOSING NET DEBT		(7,845)			(7,430)

 

BAILLIE GIFFORD SHIN NIPPON PLC

NOTES

1.	The financial statements for the year to 31 January 2012 have been prepared on the basis of the same accounting policies used for the year to 31 January 2011. In accordance with the Financial Reporting Council's guidance on going concern and liquidity risk issued in 2009, the Directors have undertaken a rigorous review of the Company's ability to continue as a going concern. The Company's assets, the majority of which are 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 that the Company will continue in operational existence for the foreseeable future. The Directors consider the Company's functional currency to be sterling as the Company's shareholders are predominantly based in the UK and the Company is subject to the UK's regulatory environment.
		31 January 2012		31 January 2011
		£'000		£'000
2.	Currency (losses)/gains
	Exchange differences on bank loans	(794)		(846)
	Other exchange differences	91		34
		(703)		(812)
		31 January 2012		31 January 2011
		£'000		£'000
3.	Investment management fee - all charged to revenue
	Investment management fee	546		503
	Baillie Gifford & Co are employed by the Company as Managers and Secretaries under a management agreement which is terminable on not less then six months' notice or on shorter notice in certain circumstances. The fee in respect of each quarter is 0.25% of the total net assets of the Company attributable to its shareholders on the last day of that quarter. Miss SJM Whitley, a Director of the Company until she retired on 17 June 2010, is a partner of Baillie Gifford & Co.
4.	The Company paid interest on bank loans of £218,000 (2011 - £179,000).
5.	No dividend will be declared.

		31 January 2011		31 January 2011
		£'000		£'000
6.	Net return per ordinary share
	Revenue return	98		114
	Capital return	(959)		11,983
	Total return	(861)		12,097
	The returns per ordinary share set out below are based on the above returns and on 31,100,497 ordinary shares (2011 - 31,100,497), being the weighted average number of ordinary shares in issue during the year.  There are no potentially dilutive shares in issue.
	Revenue return	0.32p		0.37p
	Capital return	(3.08p)		38.53p
	Total return	(2.76p)		38.90p
7.	A bank loan of £9.6 million (¥1.15 billion) has been drawn down under a yen loan facility which is repayable on 8 August 2014 (2011 - bank loan of £8.8 million (¥1.15 billion) repayable on 10 August 2011).
8.	The fair value of the bank loans at 31 January 2012 was £9,618,000 (2011 - £8,763,000).
9.	At 31 January 2012 the Company had authority to buy back 4,661,964 shares. No shares were bought back during the year. Share buy-backs are funded from the capital reserve.
10.	Transaction costs incurred on the purchase and sale of the investments are added to the purchase cost or deducted from the sale proceeds, as appropriate. During the period, transaction costs on purchases amounted to £8,000 (2011 - £5,000) and transaction costs on sales amounted to £9,000 (2011 - £6,000).
		31 January 2012		31 January 2011
		£'000		£'000
11.	Reconciliation of Net Return before Finance Costs and Taxation to Net Cash Inflow from Operating Activities
	Net return before finance costs and taxation	(558)		12,354
	Losses/(gains) on investments	256		(12,795)
	Currency losses	703		812
	(Increase)/decrease in accrued income	(67)		68
	Decrease/(increase) in other debtors	14		(17)
	(Decrease)/increase in creditors	(6)		18
	Net cash inflow from operating activities	342		440
12.	The Annual Report and Financial Statements will be available on the Company's website www.shinnippon.co.uk on or around 29 March 2012.
13.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 January 2012.  The financial information for 2011 is derived from the financial statements for 2011, which have been delivered to the Registrar of Companies.  The Auditors have reported on the 2011 and 2012 accounts, their reports for both years were unqualified and did not contain a statement under sections 495 to 497 of the Companies Act 2006.  The statutory accounts for 2012 will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held on 4 May 2012. 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

 

 

FR SEMFDUFESEID