Half Yearly Report

RNS Number : 2900A

Baillie Gifford Japan Trust PLC

29 March 2012

 



Press Release

The Baillie Gifford Japan Trust PLC

Results for the six months to 29 February 2012

In the six months to 29 February 2012, The Baillie Gifford Japan Trust's net asset value per share increased by 3.0%* compared to a 5.7% increase in the TOPIX total return index (in sterling terms).  The Company's share price increased by 4.0%.

¾ Returns lagging the Company's benchmark were as a result of the share prices of large companies performing better than those of the mid and small-sized companies that the Company focuses on. Sterling returns were hindered marginally by the yen weakening 3.7% over the period.

¾ The use of gearing was beneficial to returns. Net gearing stood at 17% at the period end (31 August 2011 - 18%). We are optimistic about the business prospects of the companies that are held in the portfolio and regard valuations of the Japanese market to be anomalously low in a global context so borrowing continues to be invested in the market.

¾ Japanese company profits are likely to make good progress from here, supported by demand growth, cumulative cost cutting, and a weaker yen. The Bank of Japan has adopted an inflation target and Japan has begun discussions to join the Trans Pacific Partnership, a significant Pacific based free trade area and aims for negotiations on a Japan-EU economic partnership agreement. These moves are helpful for the Japanese corporate sector in our view.

¾ The Japanese economy contracted by 0.75% in real terms in 2011 as it was impacted by the Tohoku earthquake. It is expected to grow around 2% in 2012 as the post-earthquake reconstruction starts in earnest.

* after deducting borrowings at fair value.

The Baillie Gifford Japan Trust PLC aims to pursue long term capital growth principally through investment in medium to smaller sized Japanese companies which are believed to have above average prospects for growth. At 29 February 2012, the Company had total assets of £165.1m (before deduction of bank loans of £27.5m).

Baillie Gifford & Co, the Edinburgh based fund management group with around £79 billion under management and advice as at 28 March 2012, is appointed as investment managers and secretaries to The Baillie Gifford Japan Trust PLC.

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. 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. You should view your investment as long term. You can find up to date performance information about The Baillie Gifford Japan Trust PLC on the Company website at www.japantrustplc.co.uk.

28 March 2012

For further information please contact:

Sarah Whitley, Manager

The Baillie Gifford Japan Trust PLC

Tel: [phone]

Roland Cross, Director

Broadgate Mainland Marketing

Tel: [phone]

The following is the unaudited Half-Yearly Financial Report for the six months to 29 February 2012.

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 description of 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 - see note 3 at the end of this document).

By order of the Board

Richard A Barfield

Chairman

28 March 2012

Half-yearly management report

The six months to the end of February 2012 proved to be a better period for the Japanese stock market with the TOPIX total return (in sterling terms) rising by 5.7%.  The net asset value per share did less well gaining 3.0% as market attention was focused predominantly on large companies.  The yen depreciated by 3.7% against sterling and most other currencies as its position as a global safe haven asset is waning after Japan reported a trade deficit for 2011. 

Last autumn many Japanese manufacturers suffered further major disruption when a significant part of their production base in Thailand was damaged by floods.  This has retarded the recovery from last year's earthquake and tsunami and led to further profit downgrades for the year ending in March 2012.  However we expect that profits will finally recover in the year to March 2013 and this rebound will be enhanced by yen weakness.  The Japanese economy is also expected to recover and grow around 2% in 2012 as the reconstruction of Tohoku starts in earnest and the disruptions of last year, with supply shortages affecting sales, ending.  With the recovery in the US and continued growth in the rest of Asia, there are some signs that the deflation that Japan has suffered may be drawing to a close.

In terms of policy, the Bank of Japan has begun to follow other central banks in unconventional monetary measures such as directly purchasing assets and adopting an inflation target.  Such policies are usually supportive of stock markets and domestic assets such as property, which should help weaken the yen.  Profits will therefore be boosted by demand growth, the benefits of cumulative cost cutting post crisis and a weaker yen.  In the political sphere, Mr Noda has managed to get Japan to join the discussions about a major Pacific based free trade area called the Trans Pacific Partnership which could make a significant positive difference to manufacturers and Japan's growth rate in the long term as may the negotiations on a Japan-EU economic partnership agreement. There are many unresolved issues, not least the restart of nuclear power generating capacity, but any progress on policy, whilst perhaps unexpected, is welcome. 

We bought four new stocks in the past six months; Endo Lighting which has been benefiting from the rapid uptake of LED lighting in Japan, Kakaku which runs a price comparison and restaurant review website, Fuji Heavy Industries which makes niche-brand Subaru cars and a REIT which specialises in logistics. We sold five companies where prospects were less encouraging, including a small holding in Olympus which was hit by accounting fraud. Turnover has remained low at less than 10% of the portfolio and we have continued to invest nearly all the borrowings in the market, which was helpful for performance over the period.  There has been some share price weakness in some of the faster growing companies such as internet retailer Start Today and Gree, the mobile phone gaming company, but we remain confident that these do not reflect any underlying deterioration in the investment cases.  The strongest contributors to performance were Japan Tobacco: its overseas business continues to grow strongly and the government may sell part of its holding allowing the company more scope to manage its balance sheet; and Isuzu Motors which continues to benefit from a strong competitive position in small trucks. 

Outlook

After a very difficult 2011, 2012 has begun with better news from Japan and prospects for companies look encouraging.  Whilst there remain uncertainties about global recovery and the rate of expansion in China, action has been taken in Europe to avert the worst outcomes and the data from the US is surprising the pessimists.  Japanese overseas businesses in Asia are continuing to grow in aggregate and profits in Japan should expand faster than global profits this year. Policy, both fiscal and monetary, is supportive.  Growth companies, which are less cyclical or yen sensitive, have been out of favour in the stock market in the last six months but we think continue to offer attractive long term opportunities.  Valuations in Japan remain anomalously low in a global context and we continue to invest the borrowings in the market.

Past performance is not a guide to future performance.

Income statement (unaudited)

	For the six months ended 29 February 2012			For the six months ended 28 February 2011			For the year ended 31 August 2011
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Gains on sales of investments	-	284	284	-	1,459	1,459	-	1,672	1,672
Changes in investment holding gains	-	2,565	2,565	-	22,247	22,247	-	16,594	16,594
Currency gains/(losses) (note 4)	-	900	900	-	773	773	-	(930)	(930)
Income from investments and interest receivable	1,374	-	1,374	1,155	-	1,155	2,664	-	2,664
Investment management fee	(662)	-	(662)	(736)	-	(736)	(1,331)	-	(1,331)
Other administrative expenses	(144)	-	(144)	(160)	-	(160)	(313)	-	(313)
Net return before finance costs and taxation	568	3,749	4,317	259	24,479	24,738	1,020	17,336	18,356
Finance costs of borrowings	(323)	-	(323)	(277)	-	(277)	(596)	-	(596)
Net return on ordinary activities before taxation	245	3,749	3,994	(18)	24,479	24,461	424	17,336	(17,760)
Tax on ordinary activities	(96)	-	(96)	(81)	-	(81)	(186)	-	(186)
Net return on ordinary activities after taxation	149	3,749	3,898	(99)	24,479	24,380	238	17,336	17,574
Net return per ordinary share (note 6)	0.24p	6.05p	6.29p	(0.16p)	39.52p	39.36p	0.38p	27.99p	28.37p

All revenue and capital items in this statement derive from continuing operations. No operations were acquired or discontinued during the year.

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 29 February 2012 £'000	At 28 February 2011 £'000	At 31 August 2011 £'000
Fixed assets
Investments	163,200	166,176	158,284
Current assets
Debtors	5,789	558	191
Cash and short term deposits	3,986	1,103	4,162
	9,775	1,661	4,353
Creditors
Amounts falling due within one year:
Bank loans (note 7)	-	(13,508)	-
Other creditors	(7,914)	(684)	(419)
	(7,914)	(14,192)	(419)
Net current assets/(liabilities)	1,861	(12,531)	3,934
Total assets less current liabilities	165,061	153,645	162,218
Creditors
Amounts falling due after more than one year:
Bank loans (note 7)	(27,456)	(13,132)	(28,511)
Total net assets	137,605	140,513	133,707
Capital and reserves
Called up share capital	3,097	3,097	3,097
Share premium	22,110	22,110	22,110
Capital redemption reserve	203	203	203
Capital reserve	119,302	122,696	115,553
Revenue reserve	(7,107)	(7,593)	(7,256)
Shareholders' funds	137,605	140,513	133,707
Net asset value per ordinary share (after deducting borrowings at fair value)	221.6p	226.3p	215.2p
Net asset value per ordinary share (after deducting borrowings at par value)	222.2p	226.9p	215.9p
Ordinary shares in issue (note 8)	61,935,000	61,935,000	61,935,000

Reconciliation of movements in shareholders' funds (unaudited)

For the six months ended 29 February 2012

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2011	3,097	22,110	203	115,553	(7,256)	133,707
Net return on ordinary activities after taxation	-	-	-	3,749	149	3,898
Shareholders' funds at 29 February 2012	3,097	22,110	203	119,302	(7,107)	137,605

For the six months ended 28 February 2011

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2010	3,097	22,110	203	98,217	(7,494)	116,133
Net return on ordinary activities after taxation	-	-	-	24,479	(99)	24,380
Shareholders' funds at 28 February 2011	3,097	22,110	203	122,696	(7,593)	140,513

For the year ended 31 August 2011

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2010	3,097	22,110	203	98,217	(7,494)	116,133
Net return on ordinary activities after taxation	-	-	-	17,336	238	17,574
Shareholders' funds at 31 August 2011	3,097	22,110	203	115,553	(7,256)	133,707

*      Capital reserve as at 29 February 2012 includes investment holding gains of £38,915,000(28 February 2011 - £42,003,000; 31 August 2011 - £36,350,000).

Condensed cash flow statement (unaudited)

	Six months to 29 February 2012 £'000	Six months to  28 February 2011 £'000	Year to 31 August 2011 £'000
Net cash inflow from operating activities	387	154	1,108
Net cash outflow from servicing of finance	(327)	(285)	(658)
Total tax paid	(85)	(69)	(188)
Net cash outflow from financial investment	(248)	(4,714)	(2,240)
Net cash outflow before financing	(273)	(4,914)	(1,978)
Net cash inflow from bank loans	-	-	113
Decrease in cash	(273)	(4,914)	(1,865)
Reconciliation of net cash flow to movement in net debt
Decrease in cash in the period	(273)	(4,914)	(1,865)
Net cash inflow from bank loans	-	-	(113)
Exchange differences on bank loans	1,055	868	(890)
Exchange differences on cash	97	(76)	(66)
Movement in net debt in the period	879	(4,122)	(2,934)
Net debt at start of the period	(24,349)	(21,415)	(21,415)
Net debt at end of the period	(23,470)	(25,537)	(24,349)
Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities
Net return before finance costs and taxation	4,317	24,738	18,356
Gains on investments	(2,849)	(23,706)	(18,266)
Realised exchange differences	155	96	40
Unrealised exchange differences on bank loans	(1,055)	(868)	890
Changes in debtors and creditors	(181)	(106)	88
Net cash inflow from operating activities	387	154	1,108

Twenty largest holdings as at 29 February 2012 (unaudited)

Name	Business	Value £'000	% of total assets*
Itochu	Trading conglomerate	6,954	4.2
Don Quijote	Discount store operator	4,639	2.8
Japan Tobacco	Tobacco manufacturer	4,096	2.5
Rakuten	Internet retailer	4,056	2.5
KDDI	Mobile telecommunications	3,975	2.4
Gree	Social network games	3,934	2.4
Canon	Printers and copiers	3,797	2.3
Tokyo Tatemono	Property leasing and development	3,791	2.3
Misumi Group	Precision machinery parts distributor	3,783	2.3
Otsuka Corp	IT solutions for companies	3,739	2.3
Inpex	Oil and gas producer	3,668	2.2
Industrial and Infrastructure Fund	Logistics REIT	3,654	2.2
Osaka Securities Exchange	Stock exchange	3,650	2.2
Shimadzu	Environmental testing equipment	3,594	2.2
Hitachi High-Technologies	Semiconductor production equipment	3,484	2.1
Mitsubishi Electric	Industrial electric conglomerate	3,462	2.1
Isuzu Motors	Commercial vehicle manufacturer	3,408	2.1
Keihin	Honda related parts supplier	3,299	2.0
Mitsubishi UFJ Lease & Finance	Leasing company	3,223	1.9
Sysmex	Medical equipment	3,202	1.9
		77,408	46.9

*      Before deduction of bank loans

Notes to the condensed financial statements (unaudited)

1.	The condensed financial statements for the six months to 29 February 2012 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 August 2011 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 with borrowing covenants are reviewed by the Board on a regular basis. In accordance with the Company's Articles of Association, shareholders have the right to vote annually at the Annual General Meeting on whether to continue the Company.  The next continuation vote will be in November 2012. The Directors have no reason to believe that the continuation resolution will not be passed at the Annual General Meeting. 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 August 2011 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 sections 498 (2) or (3) of the Companies Act 2006.
3.	The management agreement with Baillie Gifford & Co is terminable on not less than 6 months' notice, or on shorter notice in certain circumstances. The annual fee is 1.0% of the net assets of the Company, calculated on a quarterly basis.
4.	Currency gains/(losses)	Six months to 29 February 2012 £'000	Six months to 28 February 2011 £'000	Year to 31 August 2011 £'000
	Exchange differences on:
	Cash balances	97	(76)	(66)
	Bank loans	1,055	868	(890)
	Other items	(252)	(19)	26
		900	773	(930)
5.	No interim dividend will be declared.
6.	Net return per ordinary share	Six months to 29 February 2012 £'000	Six months to 28 February 2011 £'000	Year to 31 August 2011 £'000
	Revenue return on ordinary activities after taxation	149	(99)	238
	Capital return on ordinary activities after taxation	3,749	24,479	17,336
	Net return per ordinary share is based on the above totals of revenue and capital and on 61,935,000 (28 February 2011 and 31 August 2011 - 61,935,000) ordinary shares, being the weighted average number of ordinary shares in issue during each period. There are no dilutive or potentially dilutive shares in issue.

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

7.	Bank loans of £27.5million (¥3.6billion) have been drawn down under yen loan facilities which are repayable between August 2013 and August 2014 (28 February 2011 - £26.6million (¥3.6billion); 31 August 2011 - £28.5million (¥3.6billion)).
8.	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. No shares were issued or bought back during the period under review.
9.	Transaction costs incurred on the purchase and sale of the investments are added to the purchase cost or deducted from the sales proceeds, as appropriate. During the period, transaction costs on purchases amounted to £6,000 (28 February 2011 - £8,000; 31 August 2011 - £14,000) and transaction costs on sales amounted to £8,000 (28 February 2011 - £5,000; 31 August 2011 - £13,000).
10.	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 August 2011.  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 Japan Trust page of the Managers' website www.japantrustplc.co.uk†. Other risks facing the Company include the following:  regulatory risk (that the loss of investment trust status or a breach of 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 18 of the Annual Report and Financial Statements.
11.	The Half-Yearly Financial Report is available at www.japantrustplc.co.uk† and will be posted to shareholders on or around 19 April 2012.
	None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

†      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.

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