Interim Results
Baillie Gifford Shin Nippon PLC
29 August 2003
BAILLIE GIFFORD SHIN NIPPON PLC
Results for the six months to 31 July 2003
Baillie Gifford Shin Nippon PLC's net asset value per share rose 26.0% over the
six months to 31 July 2003, in comparison with a 31.5% rise in sterling terms in
the Company's comparative index.* The last six months have seen small companies
significantly outperforming their larger peers, with the broad TOPIX index
increasing 16.4% in sterling terms. We continue to find businesses with strong
market positions and growth prospects on valuations below the market average.
• Optimistic outlook. With the prospect of sustained earnings and cashflow
growth, combined with an improving dividend outlook, the Board remains
optimistic about the outlook for small Japanese companies.
• Portfolio overweight in growth areas. The Company continues to find small
specialist retailers which can benefit from mismanagement of Japan's large
retailers. It is also overweight in Commerce and services where the
Managers believe the best secular growth opportunities can be found.
• Strong corporate profit growth. Operating profit growth for non-financial
companies exceeded 35% for the year to March 2003 as companies increased
their focus on returns rather than sales, leading to better cash generation
as evidenced by rising dividends.
• Japanese economic news exceeded expectations. Industrial production has
remained positive to meet real end demand, with exports, particularly into
China, stronger than expected. GDP forecasts have risen significantly from
less than 0.5%, with expectations of 1.5%-2.0% growth for the year to March
2004.
* The Company's comparative index is a market-capitalisation weighted composite
index of the Tokyo Second Section Index, the TOPIX Small Index and the JASDAQ
OTC Index, in sterling terms.
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Baillie Gifford Shin Nippon PLC aims to achieve capital growth through
investment in smaller Japanese companies. At 31 July 2003 the Company had total
assets of £42.5 million. An ISA and Share Plan are available.
The Company is managed by Baillie Gifford & Co., the leading independent
Edinburgh based fund management group with over £24 billion funds under
management and advice.
- ends -
For further information please contact:
Mark Urquhart / Alistair Way
Baillie Gifford & Co 0131 222 4000
Mike Lord, Director
Broadgate Marketing 020 7726 6111
Baillie Gifford & Co. is authorised and regulated by the Financial Services
Authority.
BAILLIE GIFFORD SHIN NIPPON PLC
Interim Report
The six months since January 2003 have provided some welcome relief after three
years of falling markets, with Shin Nippon's net asset value per share rising by
26.0% as compared to a sterling rise of 31.5% in the weighted index of the Tokyo
Stock Exchange Second Section, TOPIX Small and JASDAQ OTC. Small companies have
significantly outperformed their larger peers with the broad TOPIX index rising
16.4% in sterling terms over the same six month period. The net asset value and
share price have continued to increase since the end of July, at the time of
writing.
The market has rallied for a number of reasons encompassing both improving
fundamentals and sentiment. The economic news over the period has been
considerably better than expected. Industrial production has remained positive
to meet real end demand as capital expenditures have increased; exports have
been stronger than expected with Chinese demand a notable source of upside
surprise and consumption has been reasonably stable. Forecasts for GDP have
risen significantly over the first half of the year with most economists now
expecting growth of 1.5% - 2.0% for the fiscal year to March 2004.
At the corporate level, the behaviour of companies continues to improve.
Operating profit growth in the year to March 2003 was over 35% for non-financial
companies and we expect a further double digit increase this year as companies
continue to focus more on returns rather than sales maximisation. This change in
attitude has manifested itself in far better cash generation for corporate Japan
and there are signs that shareholders will share in these cashflows with a
quarter of listed companies raising dividends this year and many companies
starting to buy back their shares. We also continue to see foreign buyers of
assets and during the period Tesco, the UK supermarket group, made a tender
offer for one of Shin Nippon's holdings, C-Two Network, at a substantial premium
to the prevailing share price.
These fundamental developments have underpinned an improvement in market
sentiment. Volumes have improved substantially over the first six months of the
year and there has been consistent evidence of foreigners, who have long had an
underweight position in Japan, buying equities. There has also been a marked
reversal in the bond market with yields on ten year bonds rising from lows
around 0.5% back toward 1.0%. The period has seen some speculation returning to
the market. For example, the weighted index return was helped significantly by
the strong performance of the JASDAQ index which rose 41.1% in sterling terms
during the period buoyed by Yahoo Japan which represents almost one-fifth of the
index rising by 144%. This stock is relisting to the Tokyo Stock Exchange which
it will join as one of the thirty largest capitalisation stocks marking a
welcome removal of a distortion to small cap indices.
There have been several new holdings added to the portfolio over the last six
months as we continue to find attractive investment opportunities. In the
Commerce and services sector, new holdings include Hamakyorex, which manages
logistics for retailers, and Fullcast, which is benefiting from the trend to
temporary and part-time labour. We have also bought several companies classified
within the broadly defined Miscellaneous manufacturing sector: Nakanishi, which
is a leading supplier of dental hardware with a particularly strong presence in
China; Tamron, which is a specialist maker of camera lenses benefiting from the
strong demand for digital cameras; and Arrk, which is a product design and
prototype manufacturer profiting from the move by manufacturers to outsource
more development.
The shape of the portfolio in terms of overweights and underweights has remained
similar to the end of January. The portfolio's largest overweights remain in the
Retail sector where we continue to find small specialists capitalising on the
mismanagement of Japan's large retailers and Commerce and services where the
best secular growth opportunities continue to be found. There are also small
overweights in Financials, Miscellaneous manufacturing and Real estate and
construction. The largest underweight positions are in Information,
communication and utilities and Chemicals and other materials.
Valuations in Japan remain attractive despite the rise in stockmarkets since
January with growth coming through as companies change their behaviour to focus
more on profits and the uses of cashflows. At the smaller end of the market,
valuations remain lower than the large companies with price-earnings ratios in
the mid teens versus high teens for the market as a whole. The current average
price-earnings ratio for the portfolio is 16x. With the prospect of sustained
earnings and cashflow growth through a combination of secular top-line expansion
and restructuring gains combined with more cash coming back to shareholders we
remain optimistic about the outlook for small Japanese companies.
The following is the interim statement for the six months ended 31 July 2003
which has been neither reviewed nor audited by the auditors. This statement is
being printed and will be sent to all shareholders on 11 September 2003. Copies
will be available for inspection at the Registered Office of the Company or may
be obtained on request from the Managers and Secretaries after that date.
BAILLIE GIFFORD SHIN NIPPON PLC
STATEMENT OF TOTAL RETURN
(unaudited and incorporating the revenue account*)
for the six months ended for the six months ended for the year ended
31 July 2003 31 July 2002 31 January 2003
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Realised losses - (4,633) (4,633) - (1,862) (1,862) - (6,077) (6,077)
on investments
Unrealised - 11,969 11,969 - 3,466 3,466 - (3,741) (3,741)
gains/(losses) on
investments
Currency - (70) (70) - 2 2 - 335 335
(losses)/gains
(note 1)
Income (note 2) 305 - 305 244 - 244 398 - 398
Investment (167) - (167) (208) - (208) (358) - (358)
management fee
Other (74) - (74) (63) - (63) (157) - (157)
administrative
expenses
Net return before 64 7,266 7,330 (27) 1,606 1,579 (117) (9,483) (9,600)
finance costs and
taxation
Finance costs of (83) - (83) (107) - (107) (231) - (231)
borrowings
Return on (19) 7,266 7,247 (134) 1,606 1,472 (348) (9,483) (9,831)
ordinary
activities before
taxation
Tax on ordinary (28) - (28) (36) - (36) (59) - (59)
activities
Return on (47) 7,266 7,219 (170) 1,606 1,436 (407) (9,483) (9,890)
ordinary
activities after
taxation
Transfer (47) 7,266 7,219 (170) 1,606 1,436 (407) (9,483) (9,890)
(from)/to reserves
Return per (0.15p) 23.69p 23.54p (0.55p) 5.20p 4.65p (1.32p) (30.69p) (32.01p)
ordinary share
(note 4)
* The revenue 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.
BAILLIE GIFFORD SHIN NIPPON PLC
SUMMARISED BALANCE SHEET
at 31 July 2003
(unaudited)
31 July 2003 31 July 2002 31 January 2003
£'000 £'000 £'000
NET ASSETS
Listed Japanese equities 24,948 34,504 24,893
Unlisted equities - traded on the OTC/ Hercules Japan markets 12,025 12,262 6,573
- other unlisted 734 694 614
Total fixed asset investments 37,707 47,460 32,080
Net liquid assets 4,802 2,842 3,307
Total assets (before deduction of bank loans) 42,509 50,302 35,387
Bank loans (note 5) (7,225) (10,690) (7,101)
35,284 39,612 28,286
CAPITAL AND RESERVES
Called-up share capital 3,060 3,090 3,090
Capital reserves 36,171 40,185 29,096
Revenue reserve (3,947) (3,663) (3,900)
EQUITY SHAREHOLDERS' FUNDS 35,284 39,612 28,286
NET ASSET VALUE PER ORDINARY SHARE (note 6) 115.3p 128.2p 91.5p
Ordinary shares in issue (note 7) 30,600,492 30,900,492 30,900,492
BAILLIE GIFFORD SHIN NIPPON PLC
SUMMARISED CASH FLOW STATEMENT
(unaudited)
Six months Six months to Year to
to 31 July 2003 31 July 2002 31 January
2003
£'000 £'000 £'000
NET CASH INFLOW/(OUTFLOW) FROM OPERATING ACTIVITIES 40 (52) (120)
NET CASH OUTFLOW FROM SERVICING OF FINANCE (82) (126) (255)
TOTAL TAX PAID (28) (34) (59)
FINANCIAL INVESTMENT
Acquisitions of investments (7,843) (10,693) (18,719)
Disposals of investments 9,912 9,098 20,456
Realised currency gains/(losses) 54 98 (51)
NET CASH INFLOW/(OUTFLOW) FROM FINANCIAL INVESTMENT 2,123 (1,497) 1,686
NET CASH INFLOW/(OUTFLOW) BEFORE FINANCING 2,053 (1,709) 1,252
FINANCING
Net inflow/(outflow) from bank loans - 544 (2,563)
Shares purchased for cancellation (221) - -
NET CASH (OUTFLOW)/INFLOW FROM FINANCING (221) 544 (2,563)
INCREASE/(DECREASE) IN CASH 1,832 (1,165) (1,311)
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
Increase/(decrease) in cash in the period 1,832 (1,165) (1,311)
Net (inflow)/outflow from bank loans - (544) 2,563
Exchange movement on bank loans (124) (96) 386
MOVEMENT IN NET DEBT IN THE PERIOD 1,708 (1,805) 1,638
NET DEBT AT START OF PERIOD (4,115) (5,753) (5,753)
NET DEBT AT END OF PERIOD (2,407) (7,558) (4,115)
BAILLIE GIFFORD SHIN NIPPON PLC
TWENTY LARGEST EQUITY HOLDINGS
at 31 July 2003
Name Business Market % of total
value assets
£'000
* Fuji Seal Packaging and shrink-wrap materials 1,260 3.0
Arisawa Manufacturing Specialist electronic materials 1,257 3.0
Bandai Maker of toys, cartoons and character goods 1,249 2.9
* LeoPalace21 Condominium developer and lessor 1,234 2.9
* Kappa Create Revolving sushi restaurants 1,222 2.9
USS Company Second-hand car auctioneer 1,178 2.8
Sumisho Lease Specialist leasing operator 1,103 2.6
Koei Games software developer 1,068 2.5
* Tamron Camera lens manufacturer 1,057 2.5
* Goodwill Group Part-time labour and nursing care 1,052 2.5
Nissin Consumer loans and business finance 1,018 2.4
Sanyo Shinpan Finance Consumer loans and credit cards 988 2.3
Kose Cosmetics manufacturer 916 2.2
Eneserve Power generation equipment 848 2.0
Japan Retail Fund Investment Corp Shopping centre real estate investment trust 837 2.0
Uniden Phone handset manufacturer 808 1.9
* MEW Information Systems Business software developer 805 1.9
Taiyo Ink Manufacturing Maker of specialist inks 799 1.9
Tsumura Herbal medicines 787 1.8
Taito Arcade operator 774 1.8
20,260 47.8
* Denotes unlisted holdings traded on the OTC/Hercules Japan markets.
BAILLIE GIFFORD SHIN NIPPON PLC
NOTES
31 July 2003 31 July 2002 31 January 2003
£'000 £'000 £'000
1. Currency (losses)/gains
Realised exchange differences 54 64 77
Movement in unrealised exchange differences (124) (62) 258
(70) 2 335
2. Income includes stock lending fee income of £27,000 (31 July 2002 and 31
January 2003 - £nil).
3. No interim dividend will be declared.
4. Return per ordinary share
Revenue return (47) (170) (407)
Capital return 7,266 1,606 (9,483)
Return per ordinary share is based on the above totals of revenue and
capital and on 30,663,475 (31 July 2002 and 31 January 2003 - 30,900,492)
ordinary shares, being the weighted average number of ordinary shares in
issue during the period.
5. Bank loans of £7.2 million (Y1.4 billion) have been drawn down under yen
loan facilities which are repayable between August 2004 and May 2005 (31
July 2002 - £10.7 million (Y2.0 billion); 31 January 2003 - £7.1 million
(Y1.4 billion)).
6. There was no dilution to net asset value per share at any date. The
2,517,896 outstanding warrants at 31 July 2003 are exercisable at 200p on
30 April in either of the remaining years 2004 or 2005. No warrants were
exercised during the period.
7. Between 1 February 2003 and the date of the AGM in May 2003 the Company
bought back 300,000 ordinary shares with a nominal value of £30,000 at a
total cost of £221,000. The Company's authority to buy back its own
ordinary shares was renewed at the AGM in May 2003 in respect of 4,587,013
ordinary shares (equivalent to 14.99% of its share capital at that date).
No further shares were bought back during the period and, therefore, at 31
July 2003 the Company's authority to buy back its own shares remained
unchanged at 4,587,013 ordinary shares.
8. The financial information for the year ended 31 January 2003 has been
extracted from the full accounts, which have been filed with the Registrar
of Companies and which contain an unqualified Auditors' Report.
9. The accounting policies applied in calculating the interim figures are
consistent with those used in the Annual Financial Statements. The Interim
Report was approved by the Board on 28 August 2003.
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