Interim Results

RNS Number : 3859D

Baillie Gifford Shin Nippon PLC

15 September 2008

 



15 September 2008

BAILLIE GIFFORD SHIN NIPPON PLC

Results for the six months to 31 July 2008

For the six months to 31 July 2008, the Company's net asset value per share, after deducting borrowings at fair value, declined by 11.7% compared with a 3.3% decline in the Company's comparative index*. The share price declined by 13.9%. 

Over the reported period, the Japanese market has fallen less than other major markets, with Japanese larger companies and stocks in more defensive sectors in general proving more resilient to share price declines than their smaller peers.  

The Managers continue to find and invest in individual stocks with attractive profit growth prospects that they believe will be significantly larger companies in five years' time. Additionally, it is notable that over 70% of companies listed on JASDAQ are now trading at below book value.

Japanese corporate profitability has been affected by the global economic slowdown.  However, there are reasons why this slowdown may have a milder impact on both small and large companies than previous global downturns.  At present: the vast majority of Japanese companies are financially very strong; corporate profits are now much more exposed to growth in developing economies, especially in Asia; many Japanese companies have disposed of loss making operations and shifted production overseas to reduce costs; and management focus on shareholder returns is much improved.

Stocks held in the Pharmaceuticals and food and Retail sectors performed well. The notable negative contributors to the Company's performance were exposure to the Real estate and construction sector and stock specific disappointments in the Commerce and services sector.

* 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.

Shin Nippon aims to achieve long-term capital growth principally through investment in small Japanese companies which are believed to have above average prospects for growth. At 31 July 2008 the Company had total assets of £48.6m (before deduction of bank loans of £8.9m).

The Company is managed by Baillie Gifford & Co, an Edinburgh based fund management group with around £50 billion under management and advice as at 11 September 2008. 

Past performance is no guarantee of 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. This is because the share price is determined by the changing conditions in the relevant stock markets in which the Company invests and by the supply and demand for the Company's shares. Investment in investment trusts should be regarded as medium to long term. You can find up to date performance information about Shin Nippon at www.shinnippon.co.uk 

- ends -

For further information please contact:

Anzelm Cydzik

Baillie Gifford & Co                                                                                                                   0131 275 2000

Roland Cross, Director,

Broadgate                                                                                                                                  020 7726 6111

The following is the unaudited Half-Yearly Financial Report for the six months to 
31 July 2008.

BAILLIE GIFFORD SHIN NIPPON PLC

Half-Yearly Financial Report to 31 July 2008

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 description of principal risks and uncertainties for the remaining six months of the year); and

• the Interim Management 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

AM HATHORN

Chairman

12 September 2008

BAILLIE GIFFORD SHIN NIPPON PLC

Interim Management Report 

The Japanese market fell over the six month period as the global economy slowed and inflation picked up around the world. Estimates for growth in Japan have been revised down and aggregate Japanese corporate profits are forecast to decline this year. The Japanese market did fall less than other major markets, probably reflecting the limited impact of the US sub-prime problems on its financial system and the very low levels of consumer and corporate debt. 

Against this background, the share prices of larger companies in general proved to be more resilient. Shin Nippon's net asset value declined by 11.7% over the period compared to a 3.3% fall in the weighted index of the Topix Small, JASDAQ and Tokyo Stock Exchange Second Section. 

Shin Nippon invests in companies with attractive long term growth prospects but these have not been favoured by the market recently. The net gearing position also detracted from performance over the period but we remain convinced of the long term attractions of borrowing cheaply in yen to invest in Japanese smaller companies.  

The recent extended period of expansion for the Japanese economy is, probably, coming to an end. Companies are moderating expenditure on new factories and equipment as export growth starts to wane. Consumer confidence has suffered as the prices for everyday purchases have increased but incomes have failed to rise. It remains to be seen whether the resignation of the unpopular Prime Minister, Yasuo Fukuda, will result in any significant political realignment. In the short term, in an effort to boost the stalling economy, a more generous government spending package, including some tax breaks and funding support for smaller companies, seems likely.  

The share prices of Japanese smaller companies have now been falling for over two and a half years. It will be tough for these companies to grow earnings in the near term with profit margins under pressure from rising raw materials and a fall back in capacity utilisation rates. The market is now discounting a major profit decline but there are a number of good reasons to expect this slowdown in Japan to be milder than in previous global downturns. Firstly, Japan has dealt with the bad debt problems that exacerbated previous recessions. The vast majority of companies are now financially very strong. Secondly, corporate profits are now much more exposed to growth in developing economies, especially in Asia. The US and Europe currently account for less than a third of Japanese exports. Thirdly, profitability is unlikely to fall as much as in the past because many companies have disposed of loss making operations and shifted production overseas to reduce costs. 

Japanese management focus on shareholder returns is much improved. As can be seen from the Company's investment income, which rose by 12% compared to the same period in the previous year, managements are continuing to increase dividends despite the tougher earnings environment. We are also starting to see companies using their strong balance sheets to make sensible, complementary acquisitions overseas, in contrast to the 'trophy' asset  purchases of the past. Encouragingly, the government has recently outlined new guidelines regarding the implementation of takeover defence measures, stressing that shareholder rather than management interests must be the sole consideration when responding to any bid for a company.

Pharmaceuticals and food was again the strongest performing sector for the six month period to 31 July. Our holding in EPS, which provides outsourced drug trial services for pharmaceutical companies, was amongst the best performers. The Retail sector also held up well, especially more defensive stocks like Sugi Pharmacy. There were some stock specific disappointments within the Commerce and services sector that detracted from overall performance. Fullcast, the staffing services company, and Message, which builds nursing care homes, suffered in share price terms after regulatory changes. Tecmo, the video game software maker, gave up some of last year's strong gains after a key developer left the company. The holdings within the Real estate and construction sector were especially weak as concerns increased about the creditworthiness of small property stocks given tighter lending conditions.  

Turnover remained low over the six months at 19.8%, in line with our long term investment horizon. We did increase exposure to the Pharmaceuticals and food sector with the purchase of Toho Pharmaceutical, a drug wholesaler that stands to benefit from the long term shift to generic drugs in Japan. Other new holdings include Zenrin, a company with world leading digital map making technology for use in car and mobile phone navigation systems, and Takeei, which re-processes construction industry waste to produce valuable recycled materials for resale. 

Short term profit trends are undoubtedly worsening for Japanese smaller companies, but this view has already become consensus. The market is now factoring in a significant and prolonged decline in earnings. We believe there are strong grounds to be more optimistic in the medium to long term given some of the changes that have taken place in Japan over the last decade. We continue to find and invest in individual stocks with attractive profit growth prospects that we believe will be significantly larger stocks in five years' time.  

The principal risks and uncertainties facing the Company and details of related party transactions are set out below in the Notes to the Condensed Financial Statements (notes 1 and 6 respectively).

By order of the Board 

Baillie Gifford & Co

12 September 2008

Past performance is no guarantee of future performance

BAILLIE GIFFORD SHIN NIPPON PLC

INCOME STATEMENT

(unaudited)

	For the six months ended                   31 July 2008			For the six months ended 31 July 2007			For the year ended 31 January 2008
	Revenue £’000	Capital £’000	Total £’000	Revenue £’000	Capital £’000	Total £’000	Revenue £’000	Capital £’000	Total £’000
Net losses on investments	-	(5,636)	(5,636)	-	(5,777)	(5,777)	-	(19,820)	(19,820)
Currency gains/(losses) (note 4)	-	21	21	-	269	269	-	(1,312)	(1,312)
Income (note 5)	679	-	679	591	-	591	1,119	-	1,119
Investment management fee   (note 6)	(215)	-	(215)	(304)	-	(304)	(559)	-	(559)
VAT recovery (note 7)	44	-	44	-	-	-	-	-	-
Other administrative expenses	(114)	-	(114)	(117)	-	(117)	(238)	-	(238)
Net return before finance costs and taxation	394	(5,615)	(5,221)	170	(5,508)	(5,338)	322	(21,132)	(20,810)
Finance costs of borrowings (note 11)	(101)	(67)	(168)	(115)	-	(115)	(249)	-	(249)
Net return on ordinary activities before taxation	293	(5,682)	(5,389)	55	(5,508)	(5,453)	73	(21,132)	(21,059)
Tax on ordinary activities      (note 8)	(41)	-	(41)	(36)	-	(36)	(69)	-	(69)
Net return on ordinary activities after taxation	252	(5,682)	(5,430)	19	(5,508)	(5,489)	4	(21,132)	(21,128)
Net return per ordinary share (note 10)	0.81p	(18.27p)	(17.46p)	0.06p	(17.73p)	(17.67p)	0.01p	(68.01p)	(68.00p)

    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.

   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 2008

(unaudited)

	31 July 2008	31 July 2007	31 January 2008
	£'000	£'000	£'000
Fixed asset investments
Listed equities	46,123	72,200	52,124
Unlisted equities	566	-	959
	46,689	72,200	53,083
Current assets
Debtors	133	97	105
Cash and short term deposits	2,088	840	3,601
	2,221	937	3,706
Creditors
Amounts falling due within one year	(302)	(348)	(271)
Net current assets	1,919	589	3,435
Total assets less current liabilities	48,608	72,789	56,518
Creditors
Amounts falling due after more than one year (note 11)	(8,874)	(11,986)	(11,354)
	39,734	60,803	45,164
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 - realised	12,570	33,514	18,571
Capital reserve - unrealised	(244)	118	(563)
Revenue reserve	(4,897)	(5,134)	(5,149)
Equity shareholders' funds	39,734	60,803	45,164

Net asset value per ordinary share (after deducting borrowings at fair value) (note 12)	127.5p	195.6p	144.4p
Net asset value per ordinary share (after deducting borrowings at par)	127.8p	195.5p	145.2p
Ordinary shares in issue (note 13)	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 2008

	Share capital £’000	Share premium £’000	Capital redemption reserve £’000	Capital reserve - realised £’000	Capital reserve – unrealised £’000	Revenue reserve £’000	Total shareholders’ funds £’000
Shareholders’ funds at 1 February 2008	3,110	7,674	21,521	18,571	(563)	(5,149)	45,164
Net return on ordinary activities after taxation	-	-	-	(6,001)	319	252	(5,430)
Shareholders’ funds at 31 July 2008	3,110	7,674	21,521	12,570	(244)	(4,897)	39,734

For the six months ended 31 July 2007

	Share capital £'000		Share premium £'000	Capital redemption reserve £'000	Capital reserve - realised £'000		Capital reserve - unrealised £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at 1 February 2007		3,060	6,616	21,521		34,357	4,783	(5,153)		65,184
Ordinary shares issued		50	1,058	-		-	-	-		1,108
Net return on ordinary activities after taxation		-	-	-		(843)	(4,665)	19		(5,489)
Shareholders' funds at 31 July 2007		3,110	7,674	21,521		33,514	118	(5,134)		60,803

For the year ended 31 January 2008

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve - realised £'000	Capital reserve - unrealised £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at 1 February 2007	3,060	6,616	21,521	34,357	4,783	(5,153)	65,184
Ordinary shares issued	50	1,058	-	-	-	-	1,108
Transfer between reserves*	-	-	-	3,749	(3,749)	-	-
Net return on ordinary activities after taxation	-	-	-	(19,535)	(1,597)	4	(21,128)
Shareholders' funds at 31 January 2008	3,110	7,674	21,521	18,571	(563)	(5,149)	45,164

*With effect from 1 February 2007, changes in fair value of investments which are readily convertible to cash, without accepting adverse terms, at the balance sheet date are included in realised, rather than unrealised, capital reserves. At 31 January 2008 the balances on both reserves were amended by a reserve transfer as at 1 February 2007 to reflect this change. 

BAILLIE GIFFORD SHIN NIPPON PLC

CONDENSED CASH FLOW STATEMENT (unaudited)
	Six months  to 31 July 2008 £'000		Six months to 31 July 2007 £'000		Year to 31 January 2008 £'000
NET CASH INFLOW FROM OPERATING ACTIVITIES	388		157		281
NET CASH OUTFLOW FROM SERVICING OF FINANCE	(189)		(108)		(240)
TOTAL TAX PAID	(43)		(38)		(67)
NET CASH INFLOW/ (OUTFLOW) BEFORE FINANCIAL INVESTMENT	156		11		(26)
Acquisitions of investments	(4,099)		(7,025)		(9,734)
Disposals of investments	4,889		5,977		13,697
Realised currency gains	75		7		189
NET CASH INFLOW/ (OUTFLOW) FROM FINANCIAL INVESTMENT	865		(1,041)		4,152
NET CASH INFLOW/ (OUTFLOW) BEFORE FINANCING	1,021		(1,030)		4,126
FINANCING
Ordinary shares issued	-		1,108		1,108
Bank loans drawn down	-		-		2,162
Bank loans repaid	(2,534)		-		(4,557)
NET CASH (OUTLFOW)/INFLOW FROM FINANCING	(2,534)		1,108		(1,287)
(DECREASE)/INCREASE IN CASH	(1,513)		78		2,839
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
(Decrease)/increase in cash in the period	(1,513)		78		2,839
Net outflow from bank loans	2,534		-		2,395
Exchange movement on bank loans	(54)		262		(1,501)
MOVEMENT IN NET DEBT IN THE PERIOD	967		340		3,733
NET DEBT AT START OF THE PERIOD	(7,753)		(11,486)		(11,486)
NET DEBT AT END OF THE PERIOD	(6,786)		(11,146)		(7,753)
RECONCILIATION OF NET RETURN BEFORE FINANCE COSTS AND TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES
Net return before finance costs and taxation	(5,221)		(5,338)		(20,810)
Losses on investments	5,636		5,777		19,820
Currency (gains)/losses	(21)		(269)		1,312
Changes in debtors and creditors	(6)		(13)		(41)
NET CASH INFLOW FROM OPERATING ACTIVITIES	388		157		281

  BAILLIE GIFFORD SHIN NIPPON PLC

TWENTY LARGEST EQUITY HOLDINGS  at 31 July 2008 (unaudited)
Name		Sector	Value £'000	% of total assets
	Shinko Plantech	Manufacturing and machinery	2,013	4.1
	Pronexus	Manufacturing and machinery	1,715	3.5
	EPS	Pharmaceuticals and food	1,600	3.3
	Shoei	Manufacturing and machinery	1,547	3.2
	Nabtesco	Manufacturing and machinery	1,538	3.2
	Moshi Moshi Hotline	Commerce and services	1,356	2.8
	USS Company	Commerce and services	1,267	2.6
	Nakanishi	Manufacturing and machinery	1,256	2.6
	Aruze	Manufacturing and machinery	1,247	2.6
	Sugi Pharmacy	Retail	1,243	2.5
	Aeon Mall	Real estate and construction	1,110	2.3
	USJ	Commerce and services	1,090	2.2
	Message	Commerce and services	1,083	2.2
	Modec	Manufacturing and machinery	1,080	2.2
	Hamakyorex	Commerce and services	1,053	2.2
	Intage	Information, communication and utilities	1,012	2.1
	Don Quijote	Retail	1,008	2.1
	Japan Asia Investment	Financials	1,003	2.1
	Funai Zaisan Consultants	Financials	959	2.0
	Cocokara Fine	Retail	952	2.0
			25,132	51.8

  BAILLIE GIFFORD SHIN NIPPON PLC

	NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)
1.	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 the Company’s full Annual Report and Accounts for the year to 31 January 2008 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. The principal risks and uncertainties have not changed since the publication of the Annual Report.
2.	The condensed financial statements for the six months to 31 July 2008 have been prepared on the basis of the same accounting policies as set out in the Company’s Annual Financial Statements at 31 January 2008 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.’
3.	The financial information contained within this half-yearly financial report does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The financial information for the year ended 31 January 2008 has been extracted from the statutory accounts which have been filed with the Registrar of Companies and which 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 2008		Six months to 31 July 2007	Year to 31 January 2008
			£’000	£’000	£’000
4.	Currency gains/ (losses)
	Realised exchange differences		(298)	381	662
	Movement in unrealised exchange differences		319	(112)	(1,974)
			21	269	(1,312)
5.	Income
	Dividends		586	523	985
	Stocklending income		47	56	117
	Interest on VAT recovery		45	-	-
	Deposit interest		1	12	17
			679	591	1,119
6.	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.
7.	VAT Recovery In 2007 the European Court of Justice ruled that investment management fees should be exempt from VAT. Since then HMRC has accepted the Managers’ repayment claims for the periods from 1990 to 1996 and from 2000 to 2007. During the period the Company received a reimbursement of £44,000 in this regard, plus £45,000 interest thereon.
8.	The Company has accumulated tax losses and accordingly no corporation tax is payable. The Company currently suffers overseas withholding tax on its equity income at the rate of 7%.
9.	No interim dividend will be declared.
		Six months to 31 July 2008		Six months to 31 July 2007	Year to 31 January 2008
			£’000	£’000	£’000
10.	Net return per ordinary share
	Revenue return		252	19	4
	Capital return		(5,682)	(5,508)	(21,132)
	Total return		(5,430)	(5,489)	(21,128)
	Net return per ordinary share is based on the above totals of revenue and capital and on 31,100,497 (31 July 2007 – 31,036,961 and 31 January 2008 – 31,068,990) ordinary shares, being the weighted average number of ordinary shares in issue during the period.
11.	The amounts falling due after more than one year represent bank loans of £8.9 million (¥1.9 billion) outstanding under yen loan facilities which are repayable between August 2011 and October 2012 (31 July 2007 - £12.0 million (¥2.9 billion); 31 January 2008 - £11.4 million (¥2.4 billion)). During the period a bank loan of ¥500 million was repaid incurring breakage costs of £67,000 which have been charged to capital.
12.	The fair value of the bank loans at 31 July 2008 was £8,961,000 (31 July 2007 - £11,960,000; 31 January 2008 - £11,595,000)
13.	At 31 July 2008 the Company had authority to buy back 4,661,964 of its own shares for cancellation in accordance with the authority granted at the AGM in April 2008. No shares were bought back during the period under review.
14.	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 £6,000 (31 July 2007 - £13,000; 31 January 2008 - £19,000) and transaction costs on sales amounted to £7,000 (31 July 2007 - £11,000; 31 January 2008 - £25,000).
15.	The Half–Yearly Financial Report will be available on the Shin Nippon page of the Managers’ website www.shinnippon.co.uk on or around 25 September 2008.
16.	None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

 

 

 

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