Half Yearly Report

RNS Number : 5205Y

Baillie Gifford Shin Nippon PLC

04 September 2009

 



BAILLIE GIFFORD SHIN NIPPON PLC

Results for the six months to 31 July 2009

The net asset value per share (after deducting borrowings at fair value) rose by 2.9% and the share price rose by 13.6% significantly outperforming the Company's comparative index* which declined by 4.6%. 

	Economically sensitive holdings were amongst the strongest performing stocks as a prolonged global depression seemed less likely. As share prices recovered, performance benefited from the decision to maintain gearing. However, sterling returns were hampered by yen weakness over the period.
	The Japanese economy expanded in the second quarter of 2009, a far quicker return to growth than most commentators had expected and the cycle appears to have bottomed in February. Aggregate corporate profits in Japan have also started to recover on a quarter on quarter basis due to savage cost cutting.
	The establishment of a two party system should lead to greater levels of accountability. The new government has pledged to tackle some of Japan's long term challenges by boosting domestic consumption and reducing the country's reliance on exports. Further proposals include measures to support an already rising birth rate.
	Despite the improving sentiment, many Japanese smaller companies still trade at close to historically low valuations after the panic selling witnessed last year. Baillie Gifford Shin Nippon has used this as an opportunity to purchase new holdings in high quality companies which we believe have superior long term growth prospects.
	The Board and Managers believe that the Company holds many dynamic companies at present. The portfolio contains, for example, globally competitive manufacturers, such as Modec, a company that builds deep sea oil/gas production vessels, and companies that benefit from the expansion of the service sector in Japan, such as Message which provides care services for the elderly.

*  The Company's comparative index is a composite index of the Tokyo Second Section Index, the 
    TOPIX Small Index and the JASDAQ Index, weighted by market capitalisation, in sterling terms, 
    excluding income.

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 July 2009 the Company had total assets of £46.6m (before deduction of bank loan of £7.3m).

The Company is managed by Baillie Gifford & Co, an Edinburgh based fund management group with around £48 billion under management and advice as at 3 September 2009. 

Past performance is not a guide to future performance. Shin Nippon is listed on the stockmarket. The value of its shares and any income from those shares is not guaranteed and could go down as well as up. Investors may not get back the amount invested. You should regard your investment as long term. You can find up to date performance information about Shin Nippon at www.shinnippon.co.uk 

4 September 2009

- ends -

For further information please contact:

Anzelm Cydzik

Baillie Gifford & Co                            0131 275 2000

Roland Cross, Director,

Broadgate Marketing                            020 7726 6111

The following is the unaudited Half-Yearly Financial Report for the six months to 
31 July 2009.

BAILLIE GIFFORD SHIN NIPPON PLC

Half-Yearly Financial Report to 31 July 2009

Responsibility Statement

We confirm that to the best of our knowledge:

• the condensed set of financial statements has been prepared in accordance with the Accounting Standards Board's statement 'Half-Yearly Financial Reports';

• the Interim Management Report includes a fair review of the information required by Disclosure and Transparency Rules 4.2.7R (indication of important events during the first six months, and their impact on the financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year); and

• the Half-Yearly Financial Report includes a fair review of the information required by Disclosure and Transparency Rules 4.2.8R (disclosure of related party transactions and changes therein, see note 5 at the end of this document).

By order of the Board

BM Rose 

Chairman

3 September 2009

BAILLIE GIFFORD SHIN NIPPON PLC

Interim Management Report 

Over the reported six month period the Japanese market staged a healthy rebound, with the broad TOPIX index rising by almost 20% in local currency terms. It became increasingly apparent as the period progressed that the global economic slowdown was unlikely to be as prolonged as many had feared. Despite strong local currency based returns, Japan generally lagged the recovery in global markets due to yen weakness after a period of exceptional strength last year.

As Japanese exports began to recover, particularly to other parts of Asia, so the share prices of companies more reliant on overseas demand rallied strongly. With it becoming increasingly apparent that a more consumer friendly government was likely to take control in Japan, the performance of domestically orientated companies also improved. Individual investors were especially active in the early stages of the rebound but more recently there has been evidence of renewed buying of Japanese shares by foreign investors, many of whom fled the market last year.   

Against this backdrop it is encouraging to report a better period of performance. Shin Nippon's net asset value per share (after deducting borrowings at fair value) rose by 2.9% compared to a sterling decline of 4.6% in the weighted index of the Tokyo Second Section Index, the TOPIX Small Index and the JASDAQ Index. Some of our more economically sensitive holdings that had struggled last year were amongst the strongest performing stocks, and the overall portfolio return benefited from the decision to remain geared.

Some of the best performing holdings over the period were in the Electricals and electronics sector as the outlook for technology-related companies improved. Stocks in the Manufacturing and machinery sector were also strong performers as the prospect of a recovery in capital investment throughout Asia improved. All our real estate related holdings rallied sharply as funding conditions for companies in the sector eased, thanks to government-backed lending schemes.

Unprecedented production cuts in Japan at the end of last year, and in the first few months of this year, resulted in record plunges in economic activity. However, the rapid reaction of Japanese companies to the sharp fall in demand helped prevent any build up of excess inventories. These actions combined with the positive effects of stimulus packages around the world helped the Japanese economy expand in the second quarter, a far quicker return to growth than most commentators had expected. The gradual revival in industrial production and exports, over the last six months, has in turn led to an upturn in both corporate and consumer confidence. 

Trying to forecast the investment implications of political machinations in Japan has been a notoriously fruitless task. However, there are grounds for genuine optimism regarding the newly elected government. While there are no immediate solutions, most of the Democratic Party of Japan's policies are targeted at the long term challenges facing Japan; the scale of the victory gives it a real mandate for change. Its key aim is to reduce Japan's dependence on exports and to boost domestic consumption. Various measures will be introduced intended to increase disposable income, funded by cuts to the vast bureaucracy and by reducing wasteful public works projects. High government debt and perhaps a less business friendly approach on labour issues will require careful monitoring.  One of the more interesting proposals is the introduction of a child allowance system to try to boost Japan's low but recently rising birth rate. Perhaps the most lasting legacy will be the establishment of a genuine two party system resulting in greater levels of accountability, after more than fifty years of almost unbroken rule by the Liberal Democratic Party.  

Aggregate corporate profits in Japan were extremely weak in the year to March due to the harsh demand environment. However, the positive effects of the aggressive cost cutting undertaken by many companies earlier this year are already filtering through. As capacity utilisation has picked up, profits have rebounded much faster than was widely expected. Many companies are also feeling the benefit from lower raw materials prices than last year. 

Turnover within the portfolio continues to be low, in line with our longer term investment horizon. However, new holdings have been purchased in several exciting companies that we believe have sustainable edges in attractive growth markets. Examples include Start Today, Japan's leading online apparel retailer, and Nifco, a company that specialises in manufacturing light-weight plastic car parts that help reduce automobile emissions. The portfolio continues to provide exposure to a mixture of domestic structural growth niches, such as the service sector, and specialist manufacturers that are exploiting the opportunities in developing markets.

The panic selling witnessed at the end of last year, combined with the market's obsession with near term profit figures, has provided patient investors many exciting opportunities in Japanese smaller companies. Shin Nippon has been taking advantage of this situation by purchasing new holdings in high quality companies with superior long term growth prospects, many trading at historically low valuations.

Principal Risks and Uncertainties

The principal risks facing the Company relate to the Company's investment activities. These risks are market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. An explanation of these risks and how they are managed is contained in note 20 of the Company's full Annual Report and Accounts for the year to 31 January 2009. The principal risks and uncertainties have not changed since the publication of the Annual Report, which can be obtained free of charge from Baillie Gifford & Co and is available on the Shin Nippon page of the Managers' website: www.shinnippon.co.uk. Other risks facing the Company include the following: gearing risk (the use of borrowings can magnify the impact of falling markets) and regulatory risk (that the loss of investment trust status or a breach of the UKLA Listing Rules could have adverse financial consequences and cause reputational damage).

Related Party Transactions

Details of related party transactions are set out below in note 5 of the Condensed Financial Statements.

By order of the Board 

Baillie Gifford & Co

3 September 2009

Past performance is not a guide to future performance

BAILLIE GIFFORD SHIN NIPPON PLC

INCOME STATEMENT

(unaudited)

	For the six months ended 31 July 2009			For the six months ended 31 July 2008			For the year ended 31 January 2009
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Net gains/(losses) on investments (note 3†)	-	24	24	-	(5,636)	(5,636)	-	(3,922)	(3,922)
Currency gains/(losses)‡	-	1,028	1,028	-	21	21	-	(3,383)	(3,383)
Income (note 4)	434	-	434	679	-	679	1,358	-	1,358
Investment management fee (note 5)	(179)	-	(179)	(215)	-	(215)	(389)	-	(389)
VAT recovered (note 6)	-	-	-	44	-	44	44	-	44
Other administrative expenses	(111)	-	(111)	(114)	-	(114)	(223)	-	(223)
Net return before finance costs and taxation	144	1,052	1,196	394	(5,615)	(5,221)	790	(7,305)	(6,515)
Finance costs of borrowings  (note 10)	(72)	(37)	(109)	(101)	(67)	(168)	(222)	(80)	(302)
Net return on ordinary activities before taxation	72	1,015	1,087	293	(5,682)	(5,389)	568	(7,385)	(6,817)
Tax on ordinary activities (note 7)	(28)	-	(28)	(41)	-	(41)	(87)	-	(87)
Net return on ordinary activities after taxation	44	1,015	1,059	252	(5,682)	(5,430)	481	(7,385)	(6,904)
Net return per ordinary share (note 9)	0.14p	3.26p	3.40p	0.81p	(18.27p)	(17.46p)	1.54p	(23.74p)	(22.20p)

 †Net gains/(losses) 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/(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 period. 

  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. 

BAILLIE GIFFORD SHIN NIPPON PLC

BALANCE SHEET

at 31 July 2009

(unaudited)

	31 July 2009	31 July 2008	31 January 2009
	£'000	£'000	£'000
Fixed asset investments
Listed equities	43,882	46,123	44,495
Unlisted equities	1,211	566	767
	45,093	46,689	45,262
Current assets
Debtors	114	133	147
Cash and short term deposits	1,600	2,088	3,932
	1,714	2,221	4,079
Creditors
Amounts falling due within one year	(201)	(302)	(268)
Net current assets	1,513	1,919	3,811
Total assets less current liabilities	46,606	48,608	49,073
Creditors
Amounts falling due after more than one year (note 10)	(7,287)	(8,874)	(10,813)
	39,319	39,734	38,260
CAPITAL AND RESERVES
Called-up share capital	3,110	3,110	3,110
Share premium	7,674	7,674	7,674
Capital redemption reserve	21,521	21,521	21,521
Capital reserve	11,638	12,326	10,623
Revenue reserve	(4,624)	(4,897)	(4,668)
Shareholders' funds	39,319	39,734	38,260

Net asset value per ordinary share (after deducting borrowings at fair value) (note 11)	125.9p	127.5p	122.3p
Net asset value per ordinary share (after deducting borrowings at par)	126.4p	127.8p	123.0p
Ordinary shares in issue (note 12)	31,100,497	31,100,497	31,100,497

BAILLIE GIFFORD SHIN NIPPON PLC 

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

(unaudited)

For the six months ended 31 July 2009

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at  1 February 2009	3,110	7,674	21,521	10,623	(4,668)	38,260
Net return on ordinary activities after taxation	-	-	-	1,015	44	1,059
Shareholders' funds at 31 July 2009	3,110	7,674	21,521	11,638	(4,624)	39,319

For the six months ended 31 July 2008

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at  1 February 2008	3,110	7,674	21,521	18,008	(5,149)	45,164
Net return on ordinary activities after taxation	-	-	-	(5,682)	252	(5,430)
Shareholders' funds at 31 July 2008	3,110	7,674	21,521	12,326	(4,897)	39,734

For the year ended 31 January 2009

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at  1 February 2008	3,110	7,674	21,521	18,008	(5,149)	45,164
Net return on ordinary activities after taxation	-	-	-	(7,385)	481	(6,904)
Shareholders' funds at  31 January 2009	3,110	7,674	21,521	10,623	(4,668)	38,260

*The Capital reserve includes a loss of £2,445,000 relating to the revaluation of investments (31 July 2008 - loss of £11,819,000; 31 January 2009 - loss of £6,441,000). 

BAILLIE GIFFORD SHIN NIPPON PLC

CONDENSED CASH FLOW STATEMENT (unaudited)
	Six months  to 31 July 2009 £'000		Six months to 31 July 2008 £'000		Year to 31 January 2009 £'000
NET CASH INFLOW FROM OPERATING ACTIVITIES	166		388		743
NET CASH OUTFLOW FROM SERVICING OF FINANCE	(145)		(189)		(295)
TOTAL TAX PAID	(33)		(43)		(83)
NET CASH INFLOW FROM FINANCIAL INVESTMENT	102		860		3,970
NET CASH INFLOW BEFORE FINANCING	90		1,016		4,335
FINANCING
Bank loans repaid	(1,793)		(2,534)		(5,384)
DECREASE IN CASH	(1,703)		(1,518)		(1,049)
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
Decrease in cash in the period	(1,703)		(1,518)		(1,049)
Net outflow from bank loans	1,793		2,534		5,384
Exchange movement on bank loans	1,733		(54)		(4,843)
Exchange differences on cash	(629)		5		1,380
MOVEMENT IN NET DEBT IN THE PERIOD	1,194		967		872
NET DEBT AT START OF THE PERIOD	(6,881)		(7,753)		(7,753)
NET DEBT AT END OF THE PERIOD	(5,687)		(6,786)		(6,881)
RECONCILIATION OF NET RETURN BEFORE FINANCE COSTS AND TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES
Net return before finance costs and taxation	1,196		(5,221)		(6,515)
(Gains)/losses on investments	(24)		5,636		3,922
Currency (gains)/losses	(1,028)		(21)		3,383
Changes in debtors and creditors	22		(6)		(47)
NET CASH INFLOW FROM OPERATING ACTIVITIES	166		388		743

  BAILLIE GIFFORD SHIN NIPPON PLC

TWENTY LARGEST EQUITY HOLDINGS  at 31 July 2009 (unaudited)
Name		Business	Value £'000	% of total assets
	Nabtesco	Hydraulic equipment manufacturer	1,826	3.9
	Message	Provides nursing services for the elderly	1,651	3.5
	Pronexus	Financial printing services	1,586	3.4
	EPS	Provides clinical testing services	1,554	3.3
	Hamakyorex	Trucking and warehousing	1,375	3.0
	Don Quijote	Discount store chain	1,334	2.9
	H.I.S.	Discount travel agency	1,224	2.6
	Daikokutenbussan	Discount store for food and sundry goods	1,133	2.4
	Cocokara Fine	Drug store chain operator	1,112	2.4
	Micronics Japan	Electronic testing device manufacturer	1,061	2.3
	Shoei	Manufactures motorcycle helmets	1,025	2.2
	Nakanishi	Dental equipment	1,011	2.2
	Osaka Securities Exchange	Stock and futures exchange	996	2.1
	Horiba	Measuring instrument manufacturer	991	2.1
	Nishimatsuya Chain	Baby clothing retailer	921	2.0
	Shinko Plantech	Plant maintenance services	911	1.9
	Moshi Moshi Hotline	Call-centre operator	892	1.9
	Askul	Office equipment supplier	882	1.9
	So-Net M3	Online medical database	879	1.9
	Start Today	Internet shopping site operator	864	1.9
			23,228	49.8

  BAILLIE GIFFORD SHIN NIPPON PLC

	NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)
	The condensed financial statements for the six months to 31 July 2009 have been prepared on the basis of the same accounting policies as set out in the Company's Annual Financial Statements at 31 January 2009 and in accordance with the ASB's Statement 'Half-Yearly Financial Reports' and have not been audited or reviewed by the Auditors pursuant to the Auditing Practices Board Guidance on 'Review of Interim Financial Information.'
2.	The financial information contained within this half-yearly financial report does not constitute statutory accounts as defined in sections 434 to 436 of the Companies Act 2006. The financial information for the year ended 31 January 2009 has been extracted from the statutory accounts which have been filed with the Registrar of Companies and contain an unqualified Auditors' Report and do not contain a statement under sections 237(2) or (3) of the Companies Act 1985.
		Six months to  31 July 2009		Six months to 31 July 2008	Year to 31 January 2009
		£'000		£'000	£'000
3.	Net gains/ (losses) on investments
	Losses on sales on investments	(3,972)		(2,288)	(5,201)
	Write-off of cost to recognise permanent diminution in value	-		-	(751)
	Movement in investment holdings gains/losses	3,996		(3,348)	2,030
		24		(5,636)	(3,922)
4.	Income
	Dividends		434	586	1,241
	Interest on VAT recovered (note 6)		-	45	45
	Deposit interest		-	1	3
	Income from investments and interest receivable		434	632	1,289
	Stock lending income		-	47	69
			434	679	1,358
5.	Baillie Gifford & Co are employed by the Company as Managers and Secretaries under a management agreement which is terminable on not less than twelve 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, is a partner of Baillie Gifford & Co.
6.	In 2007 the European Court of Justice ruled that investment trust management fees should be exempt from VAT. HMRC accepted the Managers' repayment claims for the periods from 1990 to 1996 and from 2000 to 2007 and repaid £44,000 of VAT together with £45,000 of interest thereon to the Company in the year to 31 January 2009.
7.	The Company has accumulated tax losses and accordingly no corporation tax is payable. The Company suffers overseas withholding tax on its equity income currently at the rate of 7%.
8.	No interim dividend will be declared.
	BAILLIE GIFFORD SHIN NIPPON PLC
	NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) (Ctd)
		Six months to  31 July 2009		Six months to 31 July 2008	Year to 31 January 2009
		£'000		£'000	£'000
9.	Net return per ordinary share
	Revenue return		44	252	481
	Capital return		1,015	(5,682)	(7,385)
	Total return		1,059	(5,430)	(6,904)
	Net return per ordinary share is based on the above totals of revenue and capital and on 31,100,497 (31 July 2008 - 31,100,497 and 31 January 2009 - 31,100,497) ordinary shares, being the weighted average number of ordinary shares in issue during the period. There are no dilutive or potentially dilutive shares in issue.
10.	The amounts falling due after more than one year represent a bank loan of £7.3 million (¥1.15 billion) outstanding under a yen loan facility repayable on 10 August 2011 (31 July 2008 - £8.9 million (¥1.9 billion); 31 January 2009 - £10.8 million (¥ 1.4 billion)). During the period ¥250 million of the bank loan was repaid incurring breakage costs of £37,000 which have been charged to capital.
11.	The fair value of the bank loan at 31 July 2009 was £7,440,000 (31 July 2008 - £8,961,000; 31 January 2009 - £11,035,000).
12.	At 31 July 2009 the Company had authority to buy back 4,661,964 of its own shares in accordance with the authority granted at the AGM in April 2009. No shares were bought back during the period under review.
13.	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 £5,000 (31 July 2008 - £6,000; 31 January 2009 - £8,000) and transaction costs on sales amounted to £5,000 (31 July 2009 - £7,000; 31 January 2009 - £13,000).
14.	The Half-Yearly Financial Report will be available on the Shin Nippon page of the Managers' website www.shinnippon.co.uk on or around 17 September 2009.
	None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

 

END

 

 

IR UUUBWBUPBGQW