Half Yearly Report

RNS Number : 4777O

Baillie Gifford Shin Nippon PLC

20 September 2013

 



RNS Announcement

Baillie Gifford Shin Nippon PLC

Results for the six months to 31 July 2013

The Company's net asset value per share (after deducting borrowings at fair value) rose by 35.8% compared to a 16.3% rise in the Company's comparative index*. The share price rose 31.9%.

¾ Japanese markets performed strongly over the period as investors were enthused by announcements regarding more aggressive growth policies from both the Japanese government and the central bank.

¾ Many of the Company's top performing holdings during the period were online businesses, notably Start Today, the operator of the most popular apparel website in Japan, and F@N Communications, a facilitator for online marketing.

¾ Portfolio turnover was under 17%. Examples of new holdings include Kenko.com, a specialist online retailer of healthcare related items, and WDB Holdings which specialises in sourcing R&D staff for the biotechnology and food sectors.

¾ Many of the Company's holdings are operating in expanding niche markets so their profit growth is not conditional on positive trends in the broader economy. Despite the recent strong performance the Board remains encouraged by the number of Japanese businesses that the Managers are able to identify with strong growth prospects.

¾ During the period the Company issued 2.24m shares, 6.9% of its pre-existing issued share capital, at an average premium to net asset value of 3.8%. Subsequent to the period end, the Company has issued a further 375,000 shares at a premium to net asset value.

* The Company's comparative index is the MSCI Japan Small Cap Index total return and 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 July 2013 the Company had total assets of £108.0m (before deduction of bank loan of £7.7m).

The Company is managed by Baillie Gifford & Co, an Edinburgh based fund management group with around £102 billion under management and advice as at 19 September 2013.

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 long term. You can find up to date performance information about Shin Nippon at www.shinnippon.co.uk.

19 September 2013

For further information please contact:

Anzelm Cydzik, Baillie Gifford & Co

Tel: [phone]

Roland Cross, Director, Broadgate Mainland

Tel: [phone]

The following is the unaudited Half-Yearly Financial Report for the six months to 31 July 2013.

Responsibility statement

We confirm that to the best of our knowledge:

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

b)  the Half-Yearly 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, their impact on the financial statements and a description of the principal risks and uncertainties for the remaining six months of the year); and

c)  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).

By order of the Board

BM Rose

Chairman

19 September 2013

Half-Yearly Management Report

Japanese markets performed strongly over the period as investors were enthused by the announcements of more aggressive growth policies from both the Japanese government and central bank. The six months to 31 July 2013 was a good period for Shin Nippon: net asset value per share[1] rose by 35.8% compared to a 16.3% rise in the MSCI Japan Small Cap index (all total return

in sterling terms). It is interesting to note that in a period when the yen weakened, boosting the outlook for the large cap exporters in particular, Japanese small cap stocks in general kept pace with the broad market despite their greater domestic focus.

The Japanese economy was on a stronger footing in the first half of the year as domestic sentiment improved, signs of inflation emerged and exports recovered. That said, as we often note, many of Shin Nippon's holdings operate in expanding niche markets so their profit growth is not conditional on positive trends in the broader economy.

An obvious example is the growth of the internet market in Japan, something being driven by the rising use of smartphones. Many of Shin Nippon's best performing stocks over the period were online businesses. Start Today, the operator of the most popular apparel website in Japan, returned to favour with investors as new users signed up. Some fashion brands that had been experimenting with a rival website returned and are now exclusively using Start Today as their online sales channel. Digital Garage, an internet holding company, was another strong performer. In addition to providing small internet businesses with support for advertising strategies and payment solutions, it also invests in early stage internet start-up businesses. This is a particularly vibrant market at present and the prospects for realising gains on the portfolio of investments has risen as the IPO market in Japan has recovered. F@N Communications is also involved in online advertising, providing a convenient link between the numerous small blogs that wish to sell marketing space on their websites and the large advertisers. The company's growth has been strong recently as advertising starts to shift to more mobile-specific marketing strategies.

Two of our other strongest performing holdings, Infomart and M3, might not, at a first glance, appear to be businesses with the potential for high growth, operating in the restaurant supply and pharmaceutical marketing sectors respectively. However, both are disrupting existing practices having adopted efficient online business models. This has resulted in both companies expanding rapidly as they gain market share from more traditional competitors. Infomart has built an online ordering platform for restaurants. This allows businesses to order all their supplies conveniently rather than telephoning several different wholesalers. The more wholesalers and suppliers that the company signs to its site, the more attractive it becomes to cost-conscious restaurant owners. M3 allows drug companies to send targeted promotional messages to doctors. This costs substantially less than using traditional sales representatives and having them present during a doctor's working day. With M3's system, doctors are able to read relevant information on products and developments when convenient. The company has been expanding this business internationally after forming good relationships with global pharmaceutical companies in Japan. Other notable performers included two businesses that are well placed to grow due to long term societal shifts within Japan. Nihon M&A provides advisory services to the growing number of elderly business founders who, faced with the lack of a successor, are seeking to merge to secure the long term future of their companies. It is currently training new advisors in response to a fast rising number of enquiries. JP Holdings is one of the leading independent operators of nursery schools. A key way to boost Japan's economy is to make places at nursery schools more widely available and accessible so that more women can return to the workplace as their children grow up. With increased government support for the sector likely, JP Holdings as a respected and trusted player is positioned well to benefit.

Turnover within the portfolio remains low; however there are two noteworthy new holdings. The government recently announced deregulation of the prescription market, allowing more drugs to be sold online. This change has allowed Kenko.com, a specialist online retailer of healthcare related items, to expand rapidly into this new market. WDB Holdings is a small temporary staffing agency specialising in R&D staff for the biotechnology and food sectors. While the company should benefit from rising demand as the economy recovers, it also stands to benefit from the measures that make it easier for women to return to work. The vast majority of the company's job-seekers are mothers who didn't return to work immediately after having their first child.

Half-Yearly Management Report (ctd)

Despite the strong performance of the majority of our holdings, we remain encouraged by the number of emerging Japanese businesses that we are identifying with strong growth prospects. Shin Nippon continues to focus on the most innovative, entrepreneurial businesses within the broader Japanese small cap universe.

The Alternative Fund Managers Directive became law in July 2013.  This legislation introduces a requirement for investment trusts to appoint an Alternative Investment Fund Manager (AIFM) who will be regulated under the directive and responsible for portfolio and risk management. Companies have until July 2014 to comply.  Following discussions with the Managers and having sought legal advice, the Board currently expects to appoint Baillie Gifford as the Company's AIFM.

The principal risks and uncertainties facing the Company are set out at the end of this document.

By order of the Board

Baillie Gifford & Co

19 September 2013

Past performance is not a guide to future performance

Income statement (unaudited)

	For the six months ended 31 July 2013			For the six months ended 31 July 2012			For the year ended 31 January 2013
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Net gains on investments (note 3)	-	25,242	25,242	-	5,270	5,270	-	9,688	9,688
Currency gains	-	156	156	-	94	94	-	1,378	1,378
Income from investments	640	-	640	684	-	684	1,165	-	1,165
Investment management fee (note 4)	(433)	-	(433)	(298)	-	(298)	(621)	-	(621)
Other administrative expenses	(143)	-	(143)	(143)	-	(143)	(283)	-	(283)
Net return before finance costs and taxation	64	25,398	25,462	243	5,364	5,607	261	11,066	11,327
Finance costs of borrowings	(85)	-	(85)	(103)	-	(103)	(201)	-	(201)
Net return on ordinary activities before taxation	(21)	25,398	25,377	140	5,364	5,504	60	11,066	11,126
Tax on ordinary activities (note 5)	(46)	-	(46)	(48)	-	(48)	(82)	-	(82)
Net return on ordinary activities after taxation	(67)	25,398	25,331	92	5,364	5,456	(22)	11,066	11,044
Net return per ordinary share (note 7)	(0.20p)	74.70p	74.50p	0.30p	17.25p	17.55p	(0.07p)	35.53p	35.46p

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.

Balance sheet (unaudited)

	At 31 July 2013	At 31 July 2012	At 31 January 2013
	£'000	£'000	£'000
Fixed asset investments
Listed equities	107,293	68,432	75,817
Current assets
Debtors	513	171	432
Cash and short term deposits	842	1,289	2,378
	1,355	1,460	2,810
Creditors
Amounts falling due within one year	(631)	(233)	(1,553)
Net current assets	724	1,227	1,257
Total assets less current liabilities	108,017	69,659	77,074
Creditors
Amounts falling due after more than one year (note 8)	(7,712)	(9,398)	(7,948)
Total net assets	100,305	60,261	69,126
Capital and reserves
Called up share capital	3,490	3,110	3,266
Share premium	16,419	7,674	10,795
Capital redemption reserve	21,521	21,521	21,521
Capital reserve	63,396	32,296	37,998
Revenue reserve	(4,521)	(4,340)	(4,454)
Shareholders' funds	100,305	60,261	69,126
Net asset value per ordinary share (after deducting borrowings at fair value) (note 9)	287.3p	193.6p	211.6p
Net asset value per ordinary share (after deducting borrowings at par value)	287.4p	193.8p	211.7p
Ordinary shares in issue (note 10)	34,900,497	31,100,497	32,655,517

Reconciliation of movements in shareholders' funds (unaudited)

For the six months ended 31 July 2013

	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 Feb 2013	3,266	10,795	21,521	37,998	(4,454)	69,126
Ordinary shares issued (note 10)	224	5,624	-	-	-	5,848
Net return on ordinary activities after taxation	-	-	-	25,398	(67)	25,331
Shareholders' funds at 31 July 2013	3,490	16,419	21,521	63,396	(4,521)	100,305

For the six months ended 31 July 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 Feb 2012	3,110	7,674	21,521	26,932	(4,432)	54,805
Net return on ordinary activities after taxation	-	-	-	5,364	92	5,456
Shareholders' funds at 31 July 2012	3,110	7,674	21,521	32,296	(4,340)	60,261

For the year ended 31 January 2013

	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 Feb 2012	3,110	7,674	21,521	26,932	(4,432)	54,805
Ordinary shares issued	156	3,121	-	-	-	3,277
Net return on ordinary activities after taxation	-	-	-	11,066	(22)	11,044
Shareholders' funds at 31 January 2013	3,266	10,795	21,521	37,998	(4,454)	69,126

*    The Capital reserve includes investment holding gains of £45,093,000 (31 July 2012 - gains of £18,387,000; 31 January 2013 - gains of £21,361,000).

Condensed cash flow statement (unaudited)

	Six months to 31 July 2013	Six months to 31 July 2012	Year to 31 January 2013
	£'000	£'000	£'000
Net cash inflow from operating activities	28	248	309
Net cash outflow from servicing of finance	(86)	(104)	(209)
Total tax paid	(47)	(48)	(82)
Net cash outflow from financial investment	(7,289)	(502)	(2,481)
Net cash outflow before financing	(7,394)	(406)	(2,463)
Ordinary shares issued	5,848	-	3,277
(Decrease)/increase in cash	(1,546)	(406)	814
Reconciliation of net cash flow to movement in net debt
(Decrease)/increase in cash in the period	(1,546)	(406)	814
Exchange movement on bank loan	236	159	1,609
Exchange differences on cash	10	(17)	(148)
Movement in net debt in the period	(1,300)	(264)	2,275
Net debt at start of the period	(5,570)	(7,845)	(7,845)
Net debt at end of the period	(6,870)	(8,109)	(5,570)
Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities
Net return before finance costs and taxation	25,462	5,607	11,327
Gains on investments	(25,242)	(5,270)	(9,688)
Currency gains	(156)	(94)	(1,378)
Changes in debtors and creditors	(36)	5	48
Net cash inflow from operating activities	28	248	309

Twenty largest equity holdings at 31 July 2013 (unaudited)

Name	Business	Value £'000	% of total assets
MonotaRO	Supplies small machinery parts	3,940	3.6
Nihon M&A Center	M&A advisory services	3,338	3.1
Don Quijote	Discount store chain	3,244	3.0
Start Today	Internet fashion retailer	3,213	3.0
M3	Online medical database	2,821	2.6
Digital Garage	Internet business incubator	2,638	2.4
Nabtesco	Hydraulic equipment	2,302	2.1
Pigeon	Baby care products	2,197	2.0
Nakanishi	Dental equipment	2,174	2.0
Hamakyorex	Third party logistics	2,120	2.0
First Juken	Builds and sells residential buildings	2,055	1.9
Asics	Sports shoes and clothing	2,002	1.9
Takara Leben	Leasing and management of real estate	1,999	1.9
Enplas	Manufactures plastic components for electronics industry	1,948	1.8
Asahi Intecc	Specialist medical equipment	1,942	1.8
Japan Exchange Group	Stock exchange operator	1,931	1.8
Iriso Electronics	Specialist connectors	1,927	1.8
Nifco	Industrial fastener manufacturer	1,926	1.8
H.I.S.	Discount travel agency	1,882	1.7
Message	Provides nursing services for the elderly	1,878	1.7
		47,477	43.9

Notes to the condensed financial statements (unaudited)

1.	The condensed financial statements have been prepared on the basis of the same accounting policies as set out in the Company's Annual Report and Financial Statements at 31 January 2013 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'. 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 loan covenants are reviewed by the Board on a regular basis. Accordingly, the Half-Yearly Financial Report has 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.
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 2013 has been extracted from the statutory accounts which have been filed with the Registrar of Companies. The Auditors' Report on these accounts was not qualified and did not contain a statement under sections 498 (2) or (3) of the Companies Act 2006.
3.		Six months to 31 July 2013	Six months to 31 July 2012	Year to 31 January 2013
		£'000	£'000	£'000
	Net gains on investments
	Gains/(losses) on sales of investments	1,510	(496)	948
	Movement in investment holdings gains	23,732	5,766	8,740
		25,242	5,270	9,688
4.	Baillie Gifford & Co are employed by the Company 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. With effect from 1 April 2013 the annual management fee is 0.95% on the first £50m of net assets and 0.65% on the remaining net assets, calculated quarterly. The annual fee previously was 1.0% of net assets, calculated quarterly.
5.	The Company suffers overseas withholding tax on its equity income currently at the rate of 7.15%.
6.	No interim dividend will be declared.
7.		Six months to 31 July 2013	Six months to 31 July 2012	Year to 31 January 2013
		£'000	£'000	£'000
	Net return per ordinary share
	Revenue return	(67)	92	(22)
	Capital return	25,398	5,364	11,066
	Total return	25,331	5,456	11,044
	Net return per ordinary share is based on the above totals of revenue and capital and on 34,001,554 (31 July 2012 - 31,100,497 and 31 January 2013 - 31,146,303) 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.
8.	The amounts falling due after more than one year include a bank loan of £7,712,000 (¥1.15 billion) outstanding under a yen loan facility repayable on 8 August 2014 (31 July 2012 - £9,398,000 (¥1.15 billion); 31 January 2013 - £7,948,000 (¥ 1.15 billion)).
9.	The fair value of the bank loan at 31 July 2013 was £7,737,000 (31 July 2012 - £9,457,000; 31 January 2013 - £7,990,000).

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

10.	The Company has the authority to issue shares/sell treasury shares at a premium to net asset value as well as to buy back shares at a discount to net asset value. During the period under review, 2,244,980 shares were issued at a premium to net asset value raising net proceeds of £5,848,000. No shares were bought back during the period under review.
11.	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 £7,000 (31 July 2012 - £3,000; 31 January 2013 - £11,000) and transaction costs on sales amounted to £3,000 (31 July 2012 - £2,000; 31 January 2013 - £8,000).
12.	The Half-Yearly Financial Report will be available on www.shinnippon.co.uk ‡ and will be posted to shareholders on or around 26 September 2013.
13.	None of the views expressed in this document should be construed as advice to buy or sell a particular investment.
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 19 of the Company's Annual Report and Financial Statements for the year to 31 January 2013. 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: regulatory risk (that the loss of investment trust status or a breach of the applicable legal and regulatory requirements could have adverse financial consequences and cause reputational damage); operational/financial risk (failure of service providers' accounting systems could lead to inaccurate reporting or financial loss); the risk that the discount can widen; and gearing risk (the use of borrowing can magnify the impact of falling markets). Further information can be found on page 19 of the Annual Report.

‡      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.

-Ends-

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[1] After deducting borrowings at fair value

 

END

 

 

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