Annual Financial Report

RNS Number : 7920B
Baillie Gifford Shin Nippon PLC
08 April 2013
 



 

BAILLIE GIFFORD SHIN NIPPON PLC

 

ANNUAL FINANCIAL REPORT

 

A copy of the Annual Report and Financial Statements for the year ended 31 January 2013 of Baillie Gifford Shin Nippon PLC (the "Company") has been submitted electronically to the National Storage Mechanism and will shortly be available for inspection at http://www.morningstar.co.uk/uk/NSM.

 

The Annual Report and Financial Statements for the year ended 31 January 2013 including the Notice of Annual General Meeting is also available on the Company's page of the Baillie Gifford website at: www.shinnippon.co.uk 

 

At the Annual General Meeting it is proposed that new Articles of Association are adopted. Following recent changes to statutory rules governing investment trusts, there is no longer a requirement for a company's articles to prohibit the distribution as a dividend of surpluses arising from the realisation of investments and shareholder approval is sought at the Annual General Meeting to remove this prohibition from the Company's Articles. Further details can be found in the Directors' Report within the Annual Report and Financial Statements for the year to 31 January 2013. Copies of the new Articles of Association are available for inspection at the offices of Dickson Minto W.S., Broadgate Tower, 20 Primrose Street, London, EC2A 2EW and Calton Square, 1 Greenside Row, Edinburgh EH1 3AN.

 

In order to meet continuing demand for the Company's shares, the Board is considering increasing the Company's capital base by issuing further shares at a premium to net asset value when the Board believes that it would be in the best interests of the Company to do so. To allow such issues, the Company requires to publish a Prospectus and expects to do so in May 2013.

 

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 January 2013 which require to be published by DTR 4.1 is set out on the following pages.

 

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.

 

 

Baillie Gifford & Co

Company Secretaries

8 April 2013


BAILLIE GIFFORD SHIN NIPPON PLC 

Chairman's Statement

 

Performance

The Board reviews performance principally over rolling three year periods. I am pleased to report that in the three year period to 31 January 2013 Shin Nippon's net asset value per share rose 51.6%, significantly more than the 23.7% increase in the Company's comparative index (MSCI Japan Small Cap Index total return in sterling terms). The share price rose by 94.5% over this period. Our borrowings were beneficial to performance and stock selection was strong.

Over the year to 31 January 2013 Shin Nippon's net asset value per share rose 20.2%, also significantly above the 3.3% rise in the Company's comparative index. The share price rose by 34% in the year. Stock selection was good and borrowings were helpful to performance in the year. The Yen weakening by 16.8% against Sterling was adverse but its weakness has improved sentiment towards Japanese companies which will most likely have benefited the share prices of the Company's holdings.

This strong record of performance was recognised at the Investment Week 'Investment Trust of the Year' awards where the Company won the 'Best Single Country Trust' category.

 

Share Issuance

During the year the share price moved from a discount of 4.9% to a premium of 5.9%. The share price stood at a premium to net asset value for last 6 weeks of the year to 31 January 2013. During this period the opportunity was taken to issue 1,555,020 shares (5% of our share capital at 31 January 2012) raising £3.28m. These shares were all issued at a premium to net asset value, which averaged 3%. This resulted in an enhancement of net asset value for existing shareholders. In approving these share issues the Board is mindful that by increasing the size of the Company the liquidity of the shares is likely to increase and the attractiveness to new shareholders should improve.

At the General Meeting held on 1 March 2013 shareholders approved the authority to issue up to 5% of issued share capital at a premium on a non pre-emptive basis until the AGM on 17 May 2013. 1,300,000 of the 1,632,775 shares available under this authority have subsequently been issued.

 

Borrowing and Hedging

The Company's borrowings were unchanged at ¥1.15bn (approximately £7.95m at 31 January 2013) during the year. The Company undertook no currency hedging in the period, but the Board continues to monitor the situation.

 

Revenue and Management Fee

The Company's revenue earnings per share declined from 0.32p to (0.07p). Despite continued dividend growth from the portfolio, investment income fell by 4.4% owing to Yen weakness. Furthermore, the uplift in net asset value over the year resulted in higher management charges. The Board continues to monitor the Company's expenses carefully. I am pleased to report that with effect from 1 April 2013, the management fee will be reduced to 0.95% on the first £50m of net assets and 0.65% thereafter.

 

AGM

At this year's AGM the Board is seeking authorisation for a facility to issue new shares (and to reissue any shares held in treasury, of which there are none currently), of up to 10% of the Company's issued share capital for cash, on a non pre-emptive basis, but only at a premium to net asset value. Such shares would be used to feed natural demand and would enhance the net asset value for existing shareholders.

Approval will also be sought to renew the authority to buy back shares. This would enable the Board to buy back shares if the discount to net asset value is substantial in absolute terms or in relation to its peers, should that be deemed to be appropriate. Any such activity would be net asset value enhancing for remaining shareholders.

Finally, a resolution is proposed to permit dividend distributions to be made out of realised capital profits. This would bring the Articles of Association up to date following recent changes in legislation. It should be noted that, currently, the Board has no intention to announce a dividend.

 

Outlook

The Japanese political environment had a rare positive impact on the market over the last year. Shinzo Abe of the LDP, who was re-elected as prime minister in December, has been unusually forthright in his pro growth views, and his pressure on the Bank of Japan to target an inflation rate of 2% contrasts sharply with the deflation of recent times. This greatly encouraged investors and the year ended with very strong market rises.

It is far too soon to know whether there will be political consensus to pursue consistent growth policies, and given my sceptical comments about Japanese politics in previous years' statements I am probably not qualified to comment. However, what I can say is that we continue to be impressed by the interesting range of companies that our Manager is able to identify. These usually have strong competitive advantages, able managements and good potential to increase their market share. Indeed, it is a recurring theme that there are many young and talented entrepreneurs coming through in Japan. The share price ratings of the Companies we invest in continue to be reasonable. More information about our portfolio appears in the Manager's Report.

With this background your Board and Manager have an optimistic outlook for the portfolio, and for Japanese smaller companies in general. We expect to maintain a reasonably high level of gearing.

 

Barry M Rose

Chairman

26 March 2013

 

Past performance is not a guide to future performance.

 

 



BAILLIE GIFFORD SHIN NIPPON PLC 

Managers' Report

 

The Japanese small cap universe has become an increasingly rich hunting ground for investors looking for innovative, entrepreneurial companies. For many years most Japanese innovation remained hidden within obscure divisions of many of the vast conglomerates that dominated R&D budgets. It has now been more than a decade since the traditional "job-for-life" culture at those older, larger Japanese companies came to an end. Despite unemployment remaining relatively low, the lack of job certainty has resulted in more individuals taking what had, until recently, been the unusual step of setting up their own company. Business start-up costs have been falling thanks to advances such as cloud computing and 3D printing. Importantly, the emergence of inspirational, role-model entrepreneurs who have successfully challenged the orthodoxy and built several new, large businesses has further encouraged the more dynamic members of the younger generation to develop their promising ideas. These young entrepreneurs remain in the minority. Changing collective mindsets with regard to fostering greater societal tolerance of people trying something and failing (a necessary feature of most entrepreneurial, creative cultures) takes time. However, the initial signs are promising.

New companies with high growth potential are constantly being created within this vibrant and expanding subset of the Japanese economy. Often utilising the internet, some of these companies are forming entirely new niche markets or developing new business models, that are disrupting existing industries and gaining market share from sleepy incumbents. Many of these new companies benefit from ease of access to the large, discerning, online and wealthy populace in Japan. It is exactly these sorts of companies, those that have matured enough to list but when they are still at an early stage of expansion, that Shin Nippon focuses on to create a portfolio representing the new face of corporate Japan.

 

Performance

The MSCI Japan Small Cap index (total return in sterling terms) rose by 3.3% over the year while Shin Nippon's net asset value per share (after deducting borrowings at fair value) rose by 20.2%. The broader Japanese market generally lagged markets elsewhere in the world despite a late rally in the year caused by increased expectations that the more aggressive economic growth policies proposed by the new prime minister will stimulate inflation. The yen weakness that accompanied these developments proved to be a welcome relief for Japanese exporters but dampened returns for sterling investors.

Many companies are able to grow irrespective of the vagaries of the Japanese economy. A case in point was Shin Nippon's strongest performing holding last year, MonotaRO. The company runs a website that allows small businesses to order their everyday supplies cheaply and have them delivered efficiently. As the product range increases allowing MonotaRO to negotiate improved terms with suppliers and consequently reduce prices, the appeal of the website to customers rises. Despite the sluggish economy, the company has grown rapidly by winning market share from traditional wholesalers that focus on a narrow product offering and remain wedded to a costly "bricks and mortar" distribution model.

A relatively recent purchase, Endo Lighting, was another notable strong contributor to performance over the period. The company specialises in energy efficient LED lighting systems for commercial properties and Japan is leading the world in terms of early adoption. Profitability has increased rapidly in recent years because the company switched to focus aggressively on LED lighting just before the earthquake and tsunami caused a spike in power prices. Many businesses including retailers, restaurant chains and office developers have therefore been installing LED systems to reduce their power consumption and the outlook for orders remains strong.

In common with many countries around the world, Japan has an aging population. This backdrop provides several of our healthcare related holdings with fantastic opportunities to expand. The pharmacy industry is growing in Japan with several leading chains establishing strong positions as they consolidate the market. Shin Nippon holding Cosmos Pharmaceutical is gaining market share by expanding from its core region in the far West of Japan into neighbouring areas where competition is fairly limited and fragmented. Contract research organisation EPS was another strong performer as demand for its outsourced pharmaceutical trial services continued to rise.

One segment of the market that would clearly benefit from some inflation is housing and the share prices of several of our holdings in this area benefited as investors anticipated the improvement in conditions. Next, a real estate advertising website that lists the largest selection of properties for sale or for rent in Japan, and Tokyo condominium developer Takara Leben, which is benefiting after several key rivals went out of business in the previous downturn, both outperformed.

Start Today, the e-commerce apparel company and one of last year's best performers, was the weakest performing holding over the year as the growth rate in new users slowed. We believe that top fashion brands will continue to be very selective in which companies they choose to partner with online and that Start Today, as market leader, should be able to grow in the future as online apparel shopping continues to increase in popularity in Japan.

 

Portfolio

Shin Nippon retains a long term investment horizon with current turnover within the portfolio implying an average holding period for stocks of over six years. However, several new holdings with attractive growth prospects were bought during the year.

One stock that was purchased early in the period was one of the biggest contributors to performance. Asahi Intecc manufactures and sells extremely accurate guidewires that are used in non-surgical procedures for patients suffering from heart disease. This type of treatment is gaining in popularity globally because it is cheaper and less risky than full heart surgery. Further, Asahi Intecc has been strengthening its international sales network to exploit rising global demand for its medical equipment.

More recently several relatively young companies with high growth potential have been identified and subsequently holdings acquired. Infomart operates an internet-based platform that allows restaurants to connect electronically with their suppliers. The proportion of catering supplies that are ordered online is rising quickly, from a very low base in Japan, as restaurants try to cut costs in what is a very competitive marketplace. Infomart is by far the largest player in this niche and there is potential for the company to increase its charges in the long term as it secures its place as the dominant ordering system.

SMS runs a website that provides useful information and services to Japanese nurses. Over 250,000 nurses have signed up to the site and this online community has proved to be very attractive to hospitals struggling to fill vacant positions. SMS earns a fee for every nurse recruited through the website. The company should continue to grow over the next decade as the number of nurses increases to meet demand.

Finally, Poletowin Pitcrew Holdings provides a trusted service to games software companies, testing new games before they are launched. Demand for their services is benefiting from the rapid growth globally in mobile gaming. Poletowin Pitcrew also provides exposure to another growth area, website monitoring services which benefits from the trend towards more oversight of online behaviour.

 

Outlook

Recent weakness in the Japanese economy may well result in more aggressive stimulus from the new prime minister and the next governor of the Bank of Japan. While an improvement in the economic situation in Japan would of course be welcome, it must be stressed that the operations of most of Shin Nippon's holdings are driven by long term secular trends. We remain encouraged at the increasing regularity with which we are meeting with dynamic, inspiring, young management teams in Japan which are building exciting, sustainable businesses with the potential for high returns. Shin Nippon's portfolio will continue to focus on this very specific and attractive subset within the broad Japanese smaller companies' universe.

 

 

 

Baillie Gifford & Co

26 March 2013

 

Past performance is not a guide to future performance.

 



 

Portfolio Performance Attribution for the Year to 31 January 2013

Computed relative to the comparative index††


Index

Shin Nippon

Performance*

Contribution

Contribution attributable to:



asset allocation

asset allocation

Shin

Nippon

Index

to relative

Stock

selection

Asset

allocation

Gearing


31.01.12

31.01.13

31.01.12

31.01.13

return

Portfolio Breakdown

%

%

%

%

%

%

%

%

%

%

Consumer Discretionary

20.8

20.2

25.1

22.1

2.2

(0.8) 

0.6

0.6

-

Consumer Staples

10.1

9.9

10.4

7.9

39.4

2.9 

3.6

3.5

0.1

Energy

0.7

0.5

1.3

1.3

28.9

(6.9) 

0.4

0.5

(0.1)

Financials

18.1

19.7

7.1

10.3

27.9

16.9

(0.6)

0.6

(1.2)

Healthcare

4.6

5.0

14.6

15.2

23.3

13.2 

2.7

1.4

1.3

Industrials

22.9

22.8

24.2

22.7

35.1

1.1 

6.8

6.8

-

Information Technology

10.2

10.5

14.6

18.0

(11.5)

0.9

(1.6)

(1.6)

-

Materials

12.3

11.2

2.7

1.7

8.9

(7.4)

1.4

0.4

1.0

Telecommunication Services

-

-

-

0.8

(0.3)

-

(0.3)

Utilities

0.3

0.2

-

-

(13.1) 

-

-

-












Total

(excluding gearing)

100.0

100.0

100.0

100.0

17.2

3.3

13.4

12.5

0.9

-

Impact of gearing





3.5

-

3.5

-

-

3.5

Total

(including gearing) **

100.0

100.0

100.0

100.0

21.4

3.3

17.4

12.5

0.9

3.5

 

Past performance is not a guide to future performance.

 

Source: Baillie Gifford & Co/Statpro

 

Contributions cannot be added together, as they are geometric; for example to calculate how a return of 17.2% against an index return of 3.3% translates into a relative return of 13.4%, divide the portfolio return of 117.2 by the index return of 103.3 and subtract one.

 

†    The performance attribution table is based on total assets

 

††   The comparative index for the year to 31 January 2013 was the MSCI Japan Small Cap index, total return and in sterling terms.

 

*    The returns are total returns (net income reinvested), calculated on a monthly linked method

 

**  The total return performance of 21.4% excludes expenses and therefore differs from the NAV return (after deducting borrowings at fair value) of 20.2% as a result.

 

 

Investment Changes (£'000)

 


Valuation

 at

31.01.12

Net acquisitions/

(disposals)

 

Appreciation/

(depreciation)

Valuation

at

31.01.13

Equities:





Consumer Discretionary

15,721

786

112

16,619

Consumer Staples

6,521

(2,835)

2,338

6,024

Energy

804

-

216

1,020

Financials

4,436

2,066

1,317

7,819

Healthcare

9,178

228

2,150

11,556

Industrials

15,201

(2,444)

4,469

17,226

Information Technology

9,119

5,491

(997)

13,613

Materials

1,718

(510)

108

1,316

Telecommunications

-

649

(25)

624

Total investments

62,698

3,431

9,688

75,817

Net liquid assets

1,664

(259)

(148)

1,257

Total assets

64,362

3,172

9,540

77,074

Bank loans

(9,557)

-

1,609

(7,948)

Shareholders' funds

54,805

3,172

11,149

69,126


 

TWENTY LARGEST EQUITY HOLDINGS

at 31 January 2013

 



2013

2012

Name

Business

Value

£'000

 

% of total

assets

Value

£'000

MonotaRO

Supplies small machinery parts

3,007

3.9

1,689

Don Quijote

Discount store chain

2,372

3.1

2,514

EPS

Clinical testing services

2,034

2.6

1,418

Nabtesco

Hydraulic equipment

2,011

2.6

2,060

Hamakyorex

Third party logistics

1,995

2.6

1,911

Message

Provides nursing services for the elderly

1,989

2.6

2,883

Cocokara Fine

Drugstore chain

1,906

2.5

1,766

First Juken

Builds and sells residential buildings

1,772

2.3

1,461

Nakanishi

Dental equipment

1,758

2.3

1,494

Nihon M&A Center

M&A advisory services

1,697

2.2

1,191

Asics

Sports shoes and clothing

1,627

2.1

984

M3

Online medical database

1,606

2.1

1,583

Takara Leben

Leasing and management of real estate

1,594

2.1

574

Nikkiso

Industrial pumps and medical equipment

1,553

2.0

951

Endo Lighting

Energy efficient lighting

1,532

2.0

808

Start Today

Internet fashion retailer

1,438

1.9

2,925

Japan Exchange Group

Stock exchange operator

1,409

1.8

-

Asahi Intecc

Specialist medical equipment

1,391

1.8

-

Unipres

Manufactures automotive components

1,349

1.8

1,460

OSG

Cutting tool manufacturer

1,333

1.7

-



35,373

46.0


 

 

 

 

 

 

 


 

MANAGEMENT FEE ARRANGEMENTS

 

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. The fee is 1% of the net assets of the Company attributable to it's shareholders, calculated and payable on a quarterly basis. With effect from 1 April 2013 the annual fee is 0.95% of the first £50m of net assets of the Company, 0.65% of the net assets in excess of £50m, calculated and payable quarterly.

 

The details of the management fees are as follows:

 


2013

£'000


2012

£'000





Investment management fee

621


546

 

 

PRINCIPAL RISKS AND UNCERTAINTIES

 

As an Investment trust, the Company invests in small Japanese company securities and makes other investments so as to achieve its investment objective of long term capital growth. The Company borrows money when the Board and Managers have sufficient conviction that the assets funded by borrowed monies will generate a return in excess of the cost of borrowing. In pursuing its investment objective, the Company is exposed to various types of risk that are associated with the financial instruments and markets in which it invests and could result in a reduction in the Company's net assets.

 

These risks are categorised as market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. The Board monitors closely the Company's exposures to these risks but does so in order to reduce the likelihood of a permanent loss of capital rather than to minimise the short term volatility.

 

The Company may enter into derivative transactions as explained in the Investment Policy on page 18 of the Annual Report and Financial Statements. No such transactions were undertaken in the year under review.

 

The risk management policies and procedures outlined in this note have not changed substantially from the previous accounting period.

 

Market Risk

The fair value or future cash flows of a financial instrument or other investment held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - currency risk, interest rate risk and other price risk. The Board of Directors reviews and agrees policies for managing these risks and the Company's Investment Managers both assess the exposure to market risk when making individual investment decisions and monitor the overall level of market risk across the investment portfolio on an ongoing basis. Details of the Company's investment portfolio are shown in note 8 of the Annual Report and Financial Statements.

 

 

(i)   Currency Risk

The Company's assets, liabilities and income are principally denominated in yen. The Company's functional currency and that in which it reports its results is sterling. Consequently, movements in the yen/sterling exchange rate will affect the sterling value of those items.

 

The Investment Managers monitor the Company's yen exposure (and any other overseas currency exposure) and report to the Board on a regular basis. The Investment Managers assess the risk to the Company of the overseas currency exposure by considering the effect on the Company's net asset value and income of a movement in the rates of exchange to which the Company's assets, liabilities, income and expenses are exposed. However, the country in which a company is listed is not necessarily where it earns its profits. The movement in exchange rates on overseas earnings may have a more significant impact upon a company's valuation than a simple translation of the currency in which the company is quoted.

 

Yen borrowings are used periodically to limit the Company's exposure to anticipated future changes in the yen/sterling exchange rate which might otherwise adversely affect the value of the portfolio of investments. The Company may also use forward currency contracts, although none have been used in the current or prior year.

 

Exposure to currency risk through asset allocation, which is calculated by reference to the currency in which the asset or liability is quoted, is shown below.

 

 

 

At 31 January 2013

 

 

Investments

£'000


Cash and deposits

£'000


 

Bank

loans

£'000


Other debtors and creditors*

£'000


 

Net

exposure

£'000

Yen

75,817


2,318


(7,948)


(905)


69,282

Total exposure to currency risk

75,817


2,318


(7,948)


(905)


69,282

Sterling

-


60


-


(216)


(156)


75,817


2,378


(7,948)


(1,121)


69,126

*    Includes net non-monetary assets of £11,000.

 

 

 

At 31 January 2012

 

 

Investments

£'000


Cash and deposits

£'000


 

Bank

loans

£'000


Other debtors and creditors*

£'000


 

Net

exposure

£'000

Yen

62,698


1,652


(9,557)


116


54,909

Total exposure to currency risk

 

62,698


 

1,652


 

(9,557)


 

116


 

54,909

Sterling

-


60


-


(164)


(104)


62,698


1,712


(9,557)


(48)


54,805

*      Includes net non-monetary assets of £10,000.

 

Currency Risk Sensitivity

At 31 January 2013, if sterling had strengthened by 10% against the yen, with all other variables held constant, total net assets and net return on ordinary activities after taxation would have decreased by £6,928,000 (2012 - £5,491,000). A 10% weakening of sterling against the yen, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts.

 

(ii)  Interest Rate Risk

Interest rate movements may affect the level of income receivable on cash deposits. They may also impact upon the market value of the Company's investments as the effect of interest rate movements upon the earnings of a company may have a significant impact upon the valuation of that company's equity.

 

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions and when entering borrowing agreements.

 

The Board reviews on a regular basis the amount of investments in cash and the income receivable on cash deposits.

 

The Company finances part of its activities through borrowings at approved levels. The amount of such borrowings and the approved levels are monitored and reviewed regularly by the Board.

 

The interest rate risk profile of the Company's financial assets and liabilities at 31 January 2013 is shown below. There was no significant change to the interest rate risk profile during the year.

 

Financial assets

2013


2012



 

Fair value

£'000

Weighted average interest rate


 

Fair value

£'000

Weighted average interest rate


Cash:







Yen

2,318

Nil


1,652

Nil


Sterling

60

0.01%


60

0.01%



2,378



1,712



 

The cash deposits generally comprise overnight call or short term money market deposits and earn interest at floating rates based on prevailing bank base rates.

 

Financial Liabilities

 

The interest rate risk profile of the Company's financial liabilities at 31 January was:

 


2013

2012


 

 

Book value

£'000

 

Weighted average interest rate

Weighted average period until maturity

 

 

Book value

£'000

 

Weighted average interest rate

Weighted average period until maturity







Yen denominated - fixed rate

7,948

2.2%

18 months

9,557

2.2%

30 months

 

An interest rate risk sensitivity analysis has not been performed as the Company does not hold bonds and has borrowed funds at a fixed rate of interest.

 

(iii) Other Price Risk

Changes in market prices other than those arising from interest rate risk or currency risk may also affect the value of the Company's net assets. The Company's exposure to changes in market prices relates to the fixed asset investments as disclosed in note 8 of the Annual Report and Financial Statements.

 

The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Investment Managers. The Board meets regularly and at each meeting reviews investment performance, the investment portfolio and the rationale for the current investment positioning to ensure consistency with the Company's objectives and investment policies. The portfolio does not seek to reproduce the index, investments are selected based upon the merit of individual companies and therefore performance may well diverge from the comparative index.

 

Other Price Risk Sensitivity

A full list of the Company's investments is shown on pages 16 to 17 of the Annual Report and Financial Statements. In addition, a list of the 20 largest holdings together with various analyses of the portfolio by industrial sector and exchange listing are shown on pages 11 and 12 of the Annual Report and Financial Statements.

 

109.7% of the Company's net assets are invested in Japanese quoted equities (2012 - 114.4%). A 10% increase in quoted equity valuations at 31 January 2013 would have increased total net assets and net return on ordinary activities after taxation by £7,582,000 (2012 - £6,270,000). A decrease of 10% would have had an equal but opposite effect. This analysis does not include the effect on the management fee of changes in quoted equity valuations.

 

Liquidity Risk

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is not significant as the majority of the Company's assets are in investments that are readily realisable.

 

The Company's investment portfolio is in Japanese small-cap equities which are typically less liquid than larger capitalisation stocks. The Managers monitor the liquidity of the portfolio on an ongoing basis.

 

The Board provides guidance to the Investment Managers as to the maximum exposure to any one holding (see Investment Policy on page 18 of the Annual Report and Financial Statements).

 

The maturity profile of the Company's financial liabilities at 31 January was:

 


2013

£'000

2012

£'000

In less than one year

In more than one year, but not more than five years

7,948

-

-

9,557


7,948

9,557

 

The Company has the power to take out borrowings, which give it access to additional funding when required. The Company's borrowing facilities are detailed in note 11 of the Annual Report and Financial Statements.

 

 

Credit Risk

This is the risk that a failure of a counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss. This risk is managed as follows:

·     The Company's listed investments are held on its behalf by Mizuho Corporate Bank Ltd and the Bank of New York Mellon as the Company's custodians. Bankruptcy or insolvency of the custodians may cause the Company's rights with respect to securities held by the custodian to be delayed. The Investment Managers monitor the Company's risk by reviewing the custodians' internal control reports and reporting their findings to the Board;

·    Investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the Investment Managers. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations before any transfer of cash or securities away from the Company is completed;

·    The creditworthiness of the counterparty to transactions involving derivatives, structured notes and other arrangements, wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest, are subject to rigorous assessment by the Investment Managers; and

·    At 31 January 2013 and 2012, all cash deposits were held with the custodian banks. The credit risk of the custodians is reviewed as detailed above. Cash may also be held at banks that are regularly reviewed by the Managers. If the credit rating of a bank where a cash deposit was held fell significantly, the Managers would endeavour to move the cash to an institution with a superior credit rating.

 

Credit Risk Exposure

The exposure to credit risk at 31 January was:


2013

£'000

2012

£'000

Cash and deposits

2,378

1,712

Debtors

421

172


2,799

1,884

 

None of the Company's financial assets are past due or impaired.

 

Fair value of financial assets and financial liabilities

The Company's investments are stated at fair value and the Directors are of the opinion that the reported values of the Company's other financial assets and liabilities approximate to fair value with the exception of the long term borrowings which are stated at amortised cost. The fair value of the loans is shown below.



2013

2012



Book Value

£'000

Fair* Value

£'000

Book Value

£'000

Fair* Value

£'000

Fixed rate yen bank loans


7,948

7,990

9,557

9,618

 

* The fair value of each bank loan is calculated by reference to a Japanese government bond

 of comparable yield and maturity.

 

Gains and losses on hedges

At 31 January 2013 and 2012 there were no unrecognised gains/losses on hedges.

 

Capital Management

The Company does not have any externally imposed capital requirements other than the loan covenants as detailed in note 11 on page 39 of the Annual Report and Financial Statements. The capital of the Company is the ordinary share capital as detailed in note 12 of the Annual Report and Financial Statements. It is managed in accordance with its investment policy in pursuit of its investment objective, both of which are detailed on page 18 of the Annual Report and Financial Statements, and shares may be repurchased or issued as explained on pages 23 and 24 of the Annual Report and Financial Statements.

 

 

Fair Value of Financial Instruments

Fair values are measured using the following fair value hierarchy:

 

Level 1:

reflects financial instruments quoted in an active market.

 

Level 2:

reflects financial instruments whose fair value is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables includes only data from observable markets.

 

Level 3:

reflects financial instruments whose fair value is determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable market transactions in the same instrument and not based on available observable market data.

 

The valuation techniques used by the Company are explained in the accounting policies on page 35 of the Annual Report and Financial Statements.

 

The financial assets designated as valued at fair value through profit or loss are all categorised as Level 1 in the above hierarchy. None of the financial liabilities are designated at fair value through profit or loss in the financial statements.

 

Other Risks

Other risks faced by the Company include the following:

 

Regulatory Risk

Failure to comply with applicable legal and regulatory requirements could lead to suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report. Breach of section 1158 of the Corporation Tax Act 2010 could lead to the Company being subject to tax on capital gains.

 

The Managers monitor investment movements and the level of forecast income and expenditure to ensure the provisions of section 1158 are not breached.

 

Baillie Gifford's Heads of Business Risk & Internal Audit and Regulatory Risk provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes.

 

Major regulatory change could impose disproportionate compliance burdens on the Company. In such circumstances representation is made to ensure that the special circumstances of investment trusts are recognised.

 

Operational/Financial Risk 

Failure of the Managers' accounting systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. The Managers have a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption or major disaster. The Board reviews the Managers' Report on Internal Controls and the reports by other key third party providers are reviewed by the Managers on behalf of the Board.

 

Discount/Premium Volatility

The discount/premium at which the Company's shares trade can change. The Board monitors the level of discount/premium and the Company has authority to buy back or issue shares when deemed to be in the best interest of all shareholders.

 

Gearing Risk

The Company may borrow money for investment purposes (sometimes known as 'gearing'). If the investments fall in value, any borrowings will magnify the extent of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings.

 

All borrowings require the prior approval of the Board and gearing levels are discussed by the Board and Managers at every meeting. The majority of the Company's investments are in quoted securities that are readily realisable.



 

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS

 

The Directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.

 

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

 

•     select suitable accounting policies and then apply them consistently;

•     make judgements and accounting estimates that are reasonable and prudent;

•     state whether applicable United Kingdom Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements respectively; and

•     prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

 

The Directors have delegated responsibility to the Managers for the maintenance and integrity of the Company's page on the Managers' website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

Each of the Directors, whose names and functions are listed within the Directors and Management section, confirm that, to the best of their knowledge:

 

•     the financial statements, which have been prepared in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), give a true and fair view of the assets, liabilities, financial position and net return of the Company; and

•     the Directors' Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

 

By order of the Board

 

BARRY M ROSE

Chairman

26 March 2013

 

 

INCOME STATEMENT

 


For the year ended

31 January 2013

 


For the year ended

31 January 2012


Revenue

£'000

Capital

£'000

Total 

£'000


Revenue

£'000

Capital

£'000

Total 

£'000

 

Gains/(losses) on investments

-

9,688

9,688


-

(256)

(256)

Currency gains/(losses) (note 2)

-

1,378

1,378


-

(703)

(703)

Income

1,165

-

1,165


1,219

-

1,219

Investment management fee (note 3)

(621)

-

(621)


(546)

-

(546)

Other administrative expenses

(283)

-

(283)


(272)

-

(272)

Net return before finance costs and taxation

 

261

11,066

11,327


401

(959)

(558)

Finance costs of borrowings (note 4)

(201)

-

(201)


(218)

-

(218)

Net return on ordinary activities before taxation

 

60

11,066

11,126


183

(959)

(776)

Tax on ordinary activities

(82)

-

(82)


(85)

-

(85)

Net return on ordinary activities after taxation

(22)

11,066

11,044


98

(959)

(861)

 

Net return per ordinary share

(0.07p)

35.53p

35.46p


0.32p

(3.08p)

(2.76p)

(note 6)








 

   Gains/(losses) on investments include gains and losses on disposals and holding gains and losses on the investment portfolio resulting from: i) changes in the local currency fair value of the investments and, ii) movements in the yen/sterling exchange rate.

 

‡   Currency gains/(losses) include: i) currency exchange gains and losses on yen bank loans, ii) exchange differences on the settlement of investment transactions and iii) other exchange differences arising from the retranslation of cash balances.

 

   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 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

at 31 January 2013

 


At 31 January 2013

At 31 January 2012


£'000

£'000

£'000

£'000

Fixed Assets





Investments


75,817 


62,698 






Current Assets





Debtors

432 


182 


Cash and short term deposits

2,378 


1,712 



2,810 


1,894 


Creditors





Amounts falling due within one year (note 7)

(1,553)


(230)







Net Current Assets


1,257


1,664






Total Assets less Current Liabilities


77,074


64,362






Creditors





Amounts falling due after more than one year (note 7)


(7,948)


(9,557)

Total net assets


69,126 


54,805 

 

Capital and Reserves





Called up share capital


3,266 


3,110 

Share premium


10,795 


7,674 

Capital redemption reserve


21,521 


21,521 

Capital reserve


37,998 


26,932 

Revenue reserve


(4,454)


(4,432)

Shareholders' funds


69,126 


54,805 

 

 





Net Asset Value Per Ordinary Share:





(after deducting borrowings at fair value)


211.6p


176.0p






Net Asset Value Per Ordinary Share:





(after deducting borrowings at par value)


211.7p


176.2p






 

 

 

 

 

 

 

 

 


RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

 

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 February 2012

3,110

7,674

21,521

26,932

(4,432)

54,805

Ordinary shares issued (note 9)

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

 

 

 

For the year ended 31 January 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 February 2011

3,110

7,674

21,521

27,891

(4,530)

55,666

 

Net return on ordinary activities after taxation

-

-

-

(959)

98

(891)

 

Shareholders' funds at 31 January 2012

3,110

7,674

21,521

26,932

(4,432)

54,805



 

CASH FLOW STATEMENT

 


For the year ended

31 January 2013

For the year ended

31 January 2012


£'000

£'000


£'000

£'000

 

NET CASH INFLOW FROM OPERATING ACTIVITIES (note 11)


 

309 



 

342 

 

SERVICING OF FINANCE






Interest and breakage costs paid

(209)



(255)


NET CASH OUTFLOW FROM SERVICING OF FINANCE


(209)



(255)

 

TAXATION






Overseas tax paid

(82)



(80)


TOTAL TAX PAID


(82)



(80)

 

FINANCIAL INVESTMENT






Purchases of investments

(13,173)



(12,120)


Sales of investments

10,775 



12,401 


Exchange differences on settlement of investment transactions

(83)



16


NET CASH INFLOW FROM FINANCIAL INVESTMENT


(2,481)



297

 

FINANCING






Ordinary shares issued

3,277



-


NET CASH INFLOW FROM FINANCING


3,277



-

 

INCREASE IN CASH


 

814



 

304

 

RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT






Increase in cash


814



304

Exchange movement on bank loans


1,609



(794)

Exchange differences on cash


(148) 



75 

 

MOVEMENT IN NET DEBT IN THE YEAR


2,275



(415)

OPENING NET DEBT


(7,845)



(7,430)

CLOSING NET DEBT


(5,570)



(7,845)







 



BAILLIE GIFFORD SHIN NIPPON PLC

 

NOTES

 

1.

The financial statements for the year to 31 January 2013 have been prepared on the basis of the same accounting policies used for the year to 31 January 2012.

 

In accordance with the Financial Reporting Council's guidance on going concern and liquidity risk, the Directors have undertaken a rigorous review of the Company's ability to continue as a going concern. 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 loan covenants are reviewed by the Board on a regular basis. Accordingly, the financial statements have 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.

 

The Directors consider the Company's functional currency to be sterling as the Company's shareholders are predominantly based in the UK and the Company is subject to the UK's regulatory environment.

 



31 January 2013


31 January 2012

 



£'000


£'000

 

2.

Currency gains/(losses)




 


Exchange differences on bank loans

1,609


(794)

 


Other exchange differences

(231)


91

 


 

1,378


(703)

 


 




 



 



31 January 2013


31 January 2012

 



£'000


£'000

 

3.

Investment management fee - all charged to revenue




 


Investment management fee

621


546

 



 


Baillie Gifford & Co are employed by the Company as Managers and Secretaries under a management agreement which is terminable on not less then six months' notice or on shorter notice in certain circumstances. The fee is 1% of the net assets of the Company attributable to it's shareholders, calculated and payable on a quarterly basis. With effect from 1 April 2013 the annual fee is 0.95% of the first £50m of net assets of the Company, 0.65% of the net assets in excess of £50m, calculated and payable quarterly.

 

 

4.

The Company paid interest on bank loans of £201,000 (2012 - £218,000).

 

 

5.

No dividend will be declared.

 

 

 

 

 




 



 

31 January 2013


31 January 2012


 

£'000


£'000

6.

Net return per ordinary share





Revenue return

(22)


98


Capital return

11,066


(959)


Total return

11,044


(861)


 





The returns per ordinary share set out below are based on the above returns and on 31,146,303 ordinary shares (2012 - 31,100,497), being the weighted average number of ordinary shares in issue during the year.  There are no potentially dilutive shares in issue.

 


Revenue return

(0.07p)


0.32p


Capital return

35.53p


(3.08p)


Total return

35.46p


(2.76p)


 




7.

A bank loan of £7.9 million (¥1.15 billion) has been drawn down under a yen loan facility which is repayable on 8 August 2014 (2012 - bank loan of £9.6 million (¥1.15 billion) repayable on 8 August 2014).



8.

The fair value of the bank loan at 31 January 2013 was £7,990,000 (2012 - £9,618,000).



9.

At 31 January 2013 the Company had authority to buy back 4,661,964 shares. No shares were bought back during the year. Share buy-backs are funded from the capital reserve. During the year the Company issued 1,555,020 shares on a non-pre-emptive basis at a premium to net asset value for proceeds of £3.28m. Between 1 February 2013 and 22 March 2013 the Company issued a further 1,300,000 shares on a non pre-emptive basis at a premium to net asset value for proceeds of £3,157,000



10.

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 £11,000 (2012 - £8,000) and transaction costs on sales amounted to £8,000 (2012 - £9,000).




 

31 January 2013


31 January 2012


 

£'000


£'000

11.

Reconciliation of Net Return before Finance Costs and Taxation to Net Cash Inflow from Operating Activities





Net return before finance costs and taxation

11,327


(558)


(Gains)/losses on investments

(9,688)


256


Currency (gains)/losses

(1,378)


703


Increase in accrued income and prepayments

(6)


(67)


Decrease in other debtors

-


14


Increase/(decrease) in creditors

54


(6)


Net cash inflow from operating activities

309


342



 

12.

 

 

 

 

 

 

The financial information set out above does not constitute the Company's statutory accounts for the year ended
31 January 2013.  The financial information for 2012 is derived from the financial statements for 2012, which have been delivered to the Registrar of Companies.  The Auditors have reported on the 2012 and 2013 accounts, their reports for both years were unqualified and did not contain a statement under sections 495 to 497 of the Companies Act 2006.  The statutory accounts for 2013 will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held on 17 May 2013.

 

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 Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

- ends -


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