Interim Results
Baillie Gifford Shin Nippon PLC
10 September 2007
BAILLIE GIFFORD SHIN NIPPON PLC
Results for the six months to 31 July 2007
For the six months to 31 July 2007, the Company's net asset value per share
declined by 8.2% compared with a 5.9% decline in the comparative index*. The
disappointing performance of the Japanese market has left the valuations of many
smaller Japanese companies at appealing levels.
• Smaller companies in aggregate delivered impressive growth in profits
during the last full year, and recently announced first quarter results
suggest that many profit forecasts this year are conservative. Dividends
have also been rising and this helped contribute to the revenue surplus in
the first half.
• The Japanese economy has continued to grow and is now substantially less
dependent on the US, as trade with Asia has expanded. The key domestic
drivers of growth remain in place, with companies investing more in
capital equipment and consumption remaining supportive.
• Investor sentiment towards the Japanese market has been impacted by global
cyclical concerns. This may have been compounded by some disappointment
that domestic consumption growth in Japan has not accelerated faster.
• During the period, stock selection and gearing were negative contributors
to the Company's performance. On the positive side, many of the stocks held
in the Manufacturing and Machinery sector performed well.
• The Board and Managers remain confident that the low cost of borrowing in
yen will help enhance portfolio returns in the long term.
• The Board and Managers are of the opinion that corporate Japan, in
particular largely domestic focused Japanese smaller companies, is
relatively better placed to deal with the risks associated with a possible
slowdown in global economic growth.
* 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 capital growth. At 31 July 2007 the Company had total assets of
£72.8 million (before deduction of bank loans of £12.0 million). The Company is
managed by Baillie Gifford & Co, an Edinburgh based fund management group with
around £52 billion funds under management and advice as at 6 September 2007.
- ends -
For further information please contact:
Anzelm Cydzik
Baillie Gifford & Co 0131 275 2000
Mike Lord, Director
Broadgate Marketing 020 7726 6111
The following is the unaudited Half-Yearly Financial Report for the six months
to 31 July 2007.
BAILLIE GIFFORD SHIN NIPPON PLC
Half - Yearly Financial Report 31 July 2007
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 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
c) 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
7 September 2007
BAILLIE GIFFORD SHIN NIPPON PLC
Interim Management Report
Investment Commentary
Despite continued steady economic expansion and further strong operational
performance from most companies, the Japanese market fell over the last six
months. Recent global cyclical concerns have weighed on sentiment while there
was perhaps also some disappointment that domestic consumption growth has not
accelerated. It was a difficult period for investing in small capitalisation
stocks as larger companies again proved to be more resilient in share price
terms. Shin Nippon's net asset value declined by 8.2% over the period compared
to a 5.9% fall in the weighted index of the TOPIX Small, JASDAQ and Tokyo Stock
Exchange Second Section.
The current economic growth cycle is now the longest period of expansion in
Japan since the war. The key domestic drivers remain in place with companies
investing more in capital equipment and consumption remaining supportive.
Productivity gains are also being made in many parts of the economy. Conditions
within the real estate market have improved further but consumer prices have so
far remained flat. One slight concern is that the tightness in the labour market
has yet to feed through to wage increases and significantly higher spending. We
believe it is only a matter of time before wages start to rise, boosting
consumer sentiment. Exports have continued to be buoyant, supported to some
extent by the weak yen although this situation has been reversing more recently.
Japan's dependence on the US has declined substantially over the past few years
as trade with Asia has expanded. We therefore believe economic growth in Japan
will remain fairly robust if the potential deterioration in the US economy
remains largely confined to that country. Further interest rate rises in Japan
may now be delayed given the global concerns.
After peaking in early 2006, smaller capitalisation stocks have now been
underperforming the broad market for about eighteen months. The fairly
indiscriminate nature of the sell-off has left many small stocks trading on
sizeable discounts to the overall market despite many of the companies having
much better growth prospects. Smaller companies in aggregate delivered
impressive growth in profits during the last full year, and recently announced
first quarter results suggest that many profit forecasts this year are
conservative. Dividends have also been rising and this helped contribute to the
revenue surplus in the first half.
A small number of stocks were especially weak over the period and they hurt the
company's relative performance. In the Information, communication and utilities
sector both Intertrade, a specialist financial software provider, and Sammy
Networks, a mobile phone content company, reported disappointing results. While
in the Commerce and services segment, Fullcast and Nova suffered after
regulatory breaches. However, many of the stocks held in the Manufacturing and
machinery sector performed well. Shinko Plantech, an oil and petrochemical plant
maintenance company, and Nabtesco, a robotic equipment manufacturer, both
benefited from strong domestic demand as their customers spend more on capital
equipment.
In February the company issued 500,000 shares at a premium, marginally enhancing
net asset value per share. Over the six months gearing detracted from
performance, but we remain confident that the low cost of borrowing in yen will
help enhance portfolio returns in the long term.
Despite the recent turbulence in markets, stock turnover within the portfolio
has remained relatively low. New holdings were taken in several stocks including
EPS, a provider of outsourced research to the pharmaceutical industry, and Iriso
Electronics, a specialist manufacturer of connectors used in automobile
electronics. Shares were also purchased in Round One, a bowling alley operator
that is increasing prices successfully.
Related Party Transactions
Details of related party transactions are contained in note 6. The investment
management fee is payable to Baillie Gifford & Co. There have been no material
changes in the related party transactions described in the last annual report.
Principal Risks and Uncertainties
There remains the risk of further weakness in the yen which would reduce returns
to a sterling based trust investing in yen denominated equities. Furthermore,
rising labour costs due to the tight labour market in Japan may have a
proportionately greater impact on smaller companies. The broader macro economic
background is also not without risks, in particular those associated with a
potential global slowdown in economic activity. However, compared with other
countries we believe that corporate Japan, and in particular largely domestic
focused smaller Japanese companies, is relatively less exposed to the potential
problems that this would bring. With low levels of corporate and consumer
borrowing, Japan also seems to be at a different stage of the credit cycle
compared with other markets.
Outlook
Determining exactly when sentiment towards smaller capitalisation Japanese
stocks will turn around is difficult, but valuations in many cases now look
compelling. The extreme recent volatility has provided lots of attractive
opportunities for the company.
By order of the Board
Baillie Gifford & Co
7 September 2007
Past performance is no guarantee of future performance
BAILLIE GIFFORD SHIN NIPPON PLC
INCOME STATEMENT
(unaudited)
For the six months ended For the six months ended For the year ended
31 July 2007 31 July 2006 31 January 2007
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Realised (losses)/ gains on
investments - (1,224) (1,224) - 4,649 4,649 - 6,024 6,024
Unrealised losses on
investments - (4,553) (4,553) - (26,537) (26,537) - (29,197) (29,197)
Currency gains (note 4) - 269 269 - 409 409 - 1,538 1,538
Income (note 5) 591 - 591 526 - 526 929 - 929
Investment management fee
(note 6) (304) - (304) (373) - (373) (694) - (694)
Other administrative
expenses (117) - (117) (109) - (109) (210) - (210)
Net return before finance
costs and taxation 170 (5,508) (5,338) 44 (21,479) (21,435) 25 (21,635) (21,610)
Finance costs of
borrowings (115) - (115) (120) - (120) (226) - (226)
Net return on ordinary
activities before
taxation 55 (5,508) (5,453) (76) (21,479) (21,555) (201) (21,635) (21,836)
Tax on ordinary
activities (note 7) (36) - (36) (33) - (33) (57) - (57)
Net return on ordinary
activities after taxation 19 (5,508) (5,489) (109) (21,479) (21,588) (258) (21,635) (21,893)
Net return per ordinary
share (note 9) 0.06p (17.73p) (17.67p) (0.36p) (70.19p) (70.55p) (0.84p) (70.70p) (71.54p)
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
CONDENSED BALANCE SHEET
at 31 July 2007
(unaudited)
31 July 2007 31 July 2006 31 January 2007
£'000 £'000 £'000
Fixed assets
Listed equities 72,200 77,727 76,704
Unlisted equities - 1,208 197
72,200 78,935 76,901
Current assets
Debtors 97 976 108
Cash and short term deposits 840 499 762
937 1,475 870
Creditors
Amounts falling due within one year (note 10) (348) (3,688) (2,451)
Net current assets/(liabilities) 589 (2,213) (1,581)
Total assets less current liabilities 72,789 76,722 75,320
Creditors
Amounts falling due after more than one year (note 11) (11,986) (11,233) (10,136)
Total net assets 60,803 65,489 65,184
CAPITAL AND RESERVES
Called-up share capital 3,110 3,060 3,060
Share premium 7,674 6,616 6,616
Capital redemption reserve 21,521 21,521 21,521
Capital reserve - realised 33,514 33,178 34,357
Capital reserve - unrealised 118 6,118 4,783
Revenue reserve (5,134) (5,004) (5,153)
Shareholders' funds 60,803 65,489 65,184
Net asset value per ordinary share 195.5p 214.0p 213.0p
Ordinary shares in issue (note 12) 31,100,497 30,600,497 30,600,497
BAILLIE GIFFORD SHIN NIPPON PLC
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
(unaudited)
For the six months ended 31 July 2007
Share Share Capital Capital Capital Revenue Total
capital premium redemption reserve - reserve - reserve shareholders'
reserve realised unrealised funds
£'000 £'000 £'000 £'000 £'000 £'000 £'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 six months ended 31 July 2006
Share Share Capital Capital Capital Revenue Total
capital premium redemption reserve - reserve - reserve shareholders'
reserve realised unrealised funds
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Shareholders' funds
at 1 February 2006 3,060 6,616 21,521 28,485 32,290 (4,895) 87,077
Net return on
ordinary activities
after taxation - - - 4,693 (26,172) (109) (21,588)
Shareholders' funds
at 31 July 2006 3,060 6,616 21,521 33,178 6,118 (5,004) 65,489
For the year ended 31 January 2007
Share Share Capital Capital Capital Revenue Total
capital premium redemption reserve - reserve - reserve shareholders'
reserve realised unrealised funds
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Shareholders' funds
at 1 February 2006 3,060 6,616 21,521 28,485 32,290 (4,895) 87,077
Net return on
ordinary activities
after taxation - - - 5,872 (27,507) (258) (21,893)
Shareholders' funds
at 31 January 2007 3,060 6,616 21,521 34,357 4,783 (5,153) 65,184
BAILLIE GIFFORD SHIN NIPPON PLC
CONDENSED CASH FLOW STATEMENT
(unaudited)
Six months Six months to Year to
to 31 July 2007 31 July 2006 31 January 2007
£'000 £'000 £'000
NET CASH INFLOW/(OUTFLOW) FROM OPERATING ACTIVITIES (note 13) 157 (82) (65)
NET CASH OUTFLOW FROM SERVICING OF FINANCE (108) (124) (238)
TOTAL TAX PAID (38) (31) (55)
FINANCIAL INVESTMENT
Acquisitions of investments (7,025) (19,149) (31,127)
Disposals of investments 5,977 14,063 26,621
Realised currency gains/(losses) 7 44 (152)
NET CASH OUTFLOW FROM FINANCIAL INVESTMENT (1,041) (5,042) (4,658)
NET CASH OUTFLOW BEFORE FINANCING FINANCING (1,030) (5,279) (5,016)
Ordinary shares issued 1,108 - -
INCREASE/(DECREASE) IN CASH 78 (5,279) (5,016)
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
Increase/(decrease) in cash in the period 78 (5,279) (5,016)
Exchange movement on bank loans 262 365 1,690
MOVEMENT IN NET DEBT IN THE PERIOD 340 (4,914) (3,326)
NET DEBT AT START OF THE PERIOD (11,486) (8,160) (8,160)
NET DEBT AT END OF THE PERIOD (11,146) (13,074) (11,486)
BAILLIE GIFFORD SHIN NIPPON PLC
TWENTY LARGEST EQUITY HOLDINGS
at 31 July 2007
Name Sector Value % of total
£'000 assets
Shinko Plantech Manufacturing and machinery 2,733 3.8
Funai Zaisan Consultants Financials 2,439 3.3
Juki Manufacturing and machinery 2,321 3.2
Nabtesco Manufacturing and machinery 2,307 3.2
Pronexus Manufacturing and machinery 2,089 2.9
Moshi Moshi Hotline Commerce and services 1,982 2.7
Modec Manufacturing and machinery 1,969 2.7
Harakosan Real estate and construction 1,765 2.4
Suruga Corp Real estate and construction 1,701 2.3
Tecmo Commerce and services 1,694 2.3
Aruze Manufacturing and machinery 1,645 2.2
USS Company Commerce and services 1,579 2.2
H.I.S. Commerce and services 1,485 2.0
Message Commerce and services 1,480 2.0
Bando Chemical Industries Manufacturing and machinery 1,439 2.0
Imagineer Information, communication and utilities 1,430 2.0
Japan Asia Investment Financials 1,429 2.0
Ryobi Chemicals and other materials 1,429 2.0
Intage Information, communication and utilities 1,413 1.9
Nakanishi Manufacturing and machinery 1,369 1.9
35,698 49.0
BAILLIE GIFFORD SHIN NIPPON PLC
Notes to the condensed set of financial statements
1. 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
2007 has been extracted from the statutory accounts which have been filed
with the Registrar of Companies. The Auditors' Report on those accounts was
not qualified and did not contain statements under the sections 237(2) or
(3) of the Companies Act 1985.
2. The condensed set of financial statements have not been audited or reviewed
by the Auditors pursuant to the Auditing Practices Board guidance on 'Review
of Interim Financial Information'.
3. The condensed set of financial statements has been prepared on the basis of
the same accounting policies as set out in the Company's Annual Financial
Statements at 31 January 2007 and in accordance with the Accounting
Standards Board's statement 'Half -Yearly Financial Reports'.
In the current financial year, the Company will adopt Financial Reporting
Standard 29 'Financial Instruments: Disclosures' (FRS 29) for the first
time. As FRS 29 is a disclosure standard, there is no impact of that change
in accounting policy on the half-yearly financial report. Full details of
the change will be disclosed in the Annual Report for the year ended 31
January 2008.
Six months to Six months to Year to
31 July 2007 31 July 2006 31 January 2007
£'000 £'000 £'000
4. Currency gains/(losses)
Realised exchange differences 381 44 (152)
Movement in unrealised exchange differences (112) 365 1,690
269 409 1,538
5. Income includes stock lending fee income of £56,000 (31 July 2006 -
£56,000; 31 January 2007 - £111,000).
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. The Company has accumulated tax losses as the total expenses normally
exceed income in any year.
Accordingly no corporation tax is payable. The Company currently suffers
overseas withholding tax on its equity income at the rate of 7%.
8. No interim dividend will be declared.
9. The returns per ordinary share are based on the following:
Revenue return 19 (109) (258)
Capital return (5,508) (21,479) (21,635)
Total return (5,489) (21,588) (21,893)
Net return per ordinary share is based on the above totals of revenue and
capital and on 31,068,990 (31 July 2006 and 31 January 2007 - 30,600,497)
ordinary shares, being the weighted average number of ordinary shares in
issue during the period.
10. The amounts falling due within one year at 31 July 2006 include a bank loan
of £2.3 million (Y 500 million). The amounts falling due within one year at
31 January 2007 include a bank loan of £2.1 million (Y500 million).
11. The amounts falling due after more than one year represent bank loans of
£12.0 million (Y2.9 billion) outstanding under yen loan facilities which
are repayable between October 2010 and March 2014 (31 July 2006 - £11.3
million (Y2.4 billion); 31 January 2007 - £10.1 million (Y2.4 billion)).
During the period, a bank loan of Y500 million was repaid and a bank loan
of Y500 million was drawn down.
12. At 31 July 2007 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 2007. No shares were bought back during the period under review.
During the period the Company issued 500,000 shares at a premium to net
asset value for a total consideration of £1,108,000 resulting in an
estimated uplift in net asset value per share of 0.04%.
Year to
Six months to 31 Six months to 31 January
July 2007 31 July 2006 2007
£'000 £'000 £'000
13. Reconciliation of net return before finance costs
and taxation to net cash inflow/(outflow) from
operating activities
Net return before finance costs and taxation (5,338) (21,435) (21,610)
Losses on investments 5,777 21,888 23,173
Currency gains (269) (409) (1,538)
Changes in debtors and creditors (13) (126) (90)
Net cash inflow/(outflow) from operating activities 157 (82) (65)
14. The half-yearly financial report is available on the Managers' website
www.bailliegifford.com and will be posted to shareholders on or around
20 September 2007.
15. None of the views expressed in this document should be construed as
advice to buy or sell a particular investment.
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