Final Results

RNS Number : 7237O

Baillie Gifford Shin Nippon PLC

12 March 2009

 



BAILLIE GIFFORD SHIN NIPPON PLC

Results for the year to 31 January 2009

The Company's net asset value per share, after deducting borrowings at fair value, declined by 15.3% and the share price declined by 25.9%; we obviously regard this performance as disappointing. The 14.9% rise in the Company's comparative index* was distorted by the strong performance of highly illiquid stocks with low levels of foreign ownership. Many of these tiny companies are too small for Shin Nippon to invest in. 

The Board and Managers continue to believe that the universe of investable Japanese smaller stocks provides numerous opportunities to invest in companies with the potential to grow earnings over the long term and that current depressed valuations do not reflect this. 

	The focus of the market on near term bad news has left many high quality, small companies with strong competitive positions trading at historically low valuation levels. This environment, where universal pessimism prevails and the long term growth potential of a company is ignored, provides countless investment opportunities for investors with a long term perspective.
	Estimates for economic growth were cut back dramatically during the year and it is now clear that Japan has entered a severe recession. While global demand remains subdued, the operating environment for Japanese companies will remain difficult. However, Japanese smaller companies' businesses tend to be more focused on the domestic economy so their profit streams should prove more resilient than larger exporters'. Over the last year, smaller Japanese companies have outperformed their larger peers.
	Japanese companies in general are in a strong financial position relatively and bank lending has been increasing. Companies are implementing broad ranging restructuring plans and a number of stimulus measures have been announced by the authorities.

* 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 through investment principally in small Japanese companies which are believed to have above average prospects for growth. At 31 January 2009 the Company had total assets of £49.1m (before deduction of bank loan of £10.8m).

The Company is managed by Baillie Gifford & Co, an Edinburgh based fund management group with around £39 billion under management and advice as at 11 March 2009. 

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. Investment in investment trusts should be regarded as medium to long term. You can find up to date performance information about Shin Nippon at www.shinnippon.co.uk 

• ends - 

For further information please contact:

Anzelm Cydzik

Baillie Gifford & Co                            0131 275 2000

Roland Cross, Director,

Broadgate Marketing                            020 7726 6111

BAILLIE GIFFORD SHIN NIPPON PLC 

Chairman's Statement

The stock market weakened over the Company's financial year as the outlook for aggregate Japanese corporate profits deteriorated significantly. The global economic slowdown intensified resulting in a sharp decline in exports from Japan. In this environment sectors that had benefited from global growth like Manufacturing and Machinery were amongst the weakest performing areas as investors switched into stocks in more domestically focused sectors such as Pharmaceuticals and Food, Retail and Commerce and Services. The valuation of smaller Japanese companies fell to historically low levels as the financial crisis forced foreign funds in particular to sell Japanese shares aggressively to repay loans or to meet redemptions. 

Shin Nippon's net asset value per share (after deducting borrowings at fair value) declined by 15.3% in the year to 31 January 2009, while the share price fell by 25.9%. Smaller companies in Japan outperformed their larger peers because they tend to have less exposure to overseas demand. The strong rally in yen which reduced the value of Japanese exporters' profits did, of course, boost sterling based investors' returns in Japan. While the absolute return over the last year has been disappointing, longer term returns relative to the peer group remain satisfactory.

Borrowing

Given the fall in the asset value we decided to reduce total borrowing during the period from ¥2.4bn to ¥1.4bn, which at 31 January equated to gearing of 28.3% of net assets if utilised fully. Borrowings were reduced by a further ¥250m to ¥1.15bn subsequent to the year end. Gearing was maintained at a relatively high level over the period because the Managers believe that the Company's holdings are valued very attractively from a long term perspective and have extremely conservatively managed balance sheets in general. With the fall in the market witnessed over the last twelve months, the net gearing position has clearly acted as a drag on performance, but the Board and Managers continue to believe that maintaining access to cheap, long term yen financing in the current credit environment is an advantage that will enhance portfolio returns in the long run. 

Hedging

Shin Nippon undertook no currency hedging over the year. The exchange rate as at 31 January 2009 was ¥/£129.5 which represented an appreciation of 63.2% from the ¥/£211.4 rate at the start of the period. As worries about the global financial crisis have increased, investors have sought refuge in the yen causing it to strengthen rapidly. We will continue to scrutinise currency movements closely and will consider hedging if we believe that the yen has diverged significantly from fair value. 

Revenue

Shin Nippon's investment remit is to pursue capital growth rather than income. Despite this, the Company's revenue per share increased to 1.54p over the year, compared to 0.01p in the previous period. Investment income rose by 26% to £1,241,000 following last year's 21% increase, mainly due to the strengthening of the yen. Japanese companies continued to raise their dividend payouts to boost shareholder returns although the increases were less than the previous year. The aggregate dividend yield on smaller companies has in fact risen to a historic high.

As I reported last year, the European Court of Justice has ruled that investment trust management fees should be exempt from VAT. During the year the Company recovered £89,000 of VAT and related interest from HM Revenue & Customs. 

However, despite the increase in income over the previous year, Shin Nippon's revenue reserve remains in deficit so a dividend is not possible. 

The Board and the AGM

As was intimated in last year's Annual Report and Accounts, I will be stepping down from the Board at this year's Annual General Meeting. I am pleased to announce that Barry Rose will become Chairman of the Company. The process of Board refreshment has continued over the year and Iain McLaren was appointed as a new Director on 16 January 2009. Mr McLaren will take over from Mr Rose as Chairman of the Audit Committee. 

Given the weak market conditions it is not surprising that Shin Nippon's discount widened over the year along with other Japanese smaller company sector investment trusts. The Company's average discount has been 13.0% (with borrowings at fair value) but the figure varied widely during the period from 4.0% to 27.7%. The Company did not buy back any shares over the year but your Board believes that it is important that the Company retains the power to do so when the discount of the share price to net asset value becomes substantial in absolute terms and relative to peer trusts over a notable period of time. The purpose of this facility if utilised is to enhance net asset value per share for existing Shin Nippon shareholders. The Board is seeking permission therefore to renew the share buyback authority at the Annual General Meeting on 29 April 2009.

In addition, the Company is seeking to renew the Directors' authority to issue new shares and to re-issue any shares held in Treasury, up to 5% of the Company's issued share capital for cash, on a non-pre-emptive basis and only at a premium to net asset value. This authority would be used to feed natural market demand and would be asset enhancing for existing shareholders.  

The Board is also seeking approval to replace the existing Articles of Association with new articles which reflect the changes in law brought about by the implementation of the Companies Act 2006.

Outlook 

Japan is in the midst of a severe recession brought about by the slump in overseas demand exacerbated by the global financial crisis. This in turn has led to a sharp contraction in domestic expenditure on capital equipment. Capacity utilisation has fallen in various export focused industries, forcing many companies to announce wide-ranging restructuring plans including job layoffs. Japanese corporate profits will plunge this year and are likely to remain weak next year. This gloomy outcome is now the widely held consensus and much of the bad news seems to be reflected in share prices already. 

Looking to the longer term, there are a number of reasons to be optimistic that Japanese companies should be well placed to profit from any recovery. Having concentrated on paying down debt to repair their balance sheets over the past decade, Japanese companies do not need to go through the painful deleveraging process required elsewhere in the world; bank lending in Japan actually grew at its fastest pace in two decades in January 2009 despite the tough environment. Companies have begun to restructure swiftly this time rather than putting off tough decisions as they have done in previous downturns. Corporate Japan is benefiting from the swift decline in raw material prices which had hurt smaller companies in particular. Long term potential growth rates of companies could be boosted by taking advantage of the strong yen to make sensible overseas acquisitions. Lastly, the Japanese consumer has not over-borrowed so long term retrenchment in spending seems unlikely. 

Whilst the immediate economic backdrop is difficult the valuations of Japanese smaller companies have fallen to cyclically low levels already and this has, undoubtedly, attracted domestic individual investors; they were net purchasers of Japanese equities for the first time in eighteen years in 2008. Forced selling by foreigners over the past year has created numerous anomalies in share prices that Shin Nippon stands well placed to capitalise upon.

The environment, where universal pessimism prevails and the long term potential of a company is ignored, provides countless investment opportunities for those investors with a long term investment perspective. 

BAILLIE GIFFORD SHIN NIPPON PLC

The following is the unaudited preliminary statement for the year to 31 January 2009 which was approved by the Board on 11 March 2009. No dividend is payable.

INCOME STATEMENT

(unaudited)

	For the year ended 31 January 2009				For the year ended 31 January 2008
	Revenue £'000	Capital £'000	Total  £'000		Revenue £'000	Capital £'000	Total  £'000
Losses on investments†	-	(3,922)	(3,922)		-	(19,820)	(19,820)
Currency losses (note 2)‡	-	(3,383)	(3,383)		-	(1,312)	(1,312)
Income (note 3)	1,358	-	1,358		1,119	-	1,119
Investment management fee (note 4)	(345)	-	(345)		(559)	-	(559)
Other administrative expenses	(223)	-	(223)		(238)	-	(238)
Net return before finance costs and taxation	790	(7,305)	(6,515)		322	(21,132)	(20,810)
Finance costs of borrowings (note 6)	(222)	(80)	(302)		(249)	-	(249)
Net return on ordinary activities before taxation	568	(7,385)	(6,817)		73	(21,132)	(21,059)
Tax on ordinary activities	(87)	-	(87)		(69)	-	(69)
Net return on ordinary activities after taxation	481	(7,385)	(6,904)		4	(21,132)	(21,128)
Net return per ordinary share	1.54p	(23.74p)	(22.20p)		0.01p	(68.01p)	(68.00p)
(note 8)

   † Losses on investments include realised and unrealised 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 losses include: i) realised and unrealised currency exchange losses on yen bank loans, ii) exchange differences on the settlement of investment transactions and iii) exchange gains and losses on 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.  

BAILLIE GIFFORD SHIN NIPPON PLC

BALANCE SHEET

at 31 January 2009

(unaudited)

	At 31 January 2009		At 31 January 2008
	£'000		£'000
Fixed Assets
Investments		45,262		53,083
Current Assets
Debtors	147		105
Cash and short term deposits	3,932		3,601
	4,079		3,706
Creditors
Amounts falling due within one year	(268)		(271)
Net Current Assets		3,811		3,435
Total Assets less Current Liabilities		49,073		56,518
Creditors
Amounts falling due after more than one year (note 9)		(10,813)		(11,354)
Net Assets		38,260		45,164
Share Capital and Reserves
Called-up share capital		3,110		3,110
Share premium		7,674		7,674
Capital redemption reserve		21,521		21,521
Capital reserve - realised		14,549		18,571
Capital reserve - unrealised		(3,926)		(563)
Revenue reserve		(4,668)		(5,149)
Shareholders' funds		38,260		45,164
Net Asset Value Per Ordinary Share:
(after deducting borrowings at fair value)		122.3p		144.4p
Net Asset Value Per Ordinary Share:
(after deducting borrowings at par value)		123.0p		145.2p

BAILLIE GIFFORD SHIN NIPPON PLC

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

(unaudited)

For the year ended 31 January 2009

	Share capital £'000	Share premium  £'000	Capital redemption reserve £'000	Capital reserve - realised £'000	Capital reserve - unrealised £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at 1 February 2008	3,110	7,674	21,521	18,571	(563)	(5,149)	45,164
Net return on ordinary activities after taxation	-	-	-	(4,022)	(3,363)	481	(6,904)
Shareholders' funds at 31 January 2009	3,110	7,674	21,521	14,549	(3,926)	(4,668)	38,260

For the year ended 31 January 2008

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

  BAILLIE GIFFORD SHIN NIPPON PLC

SUMMARISED CASH FLOW STATEMENT (unaudited)
	For the year ended 31 January 2009			For the year ended 31 January 2008
	£'000	£'000			£'000	£'000
NET CASH INFLOW FROM OPERATING ACTIVITIES (note 11)		743				281
SERVICING OF FINANCE
Interest and breakage costs paid	(295)				(240)
NET CASH OUTFLOW FROM SERVICING OF FINANCE		(295)				(240)
TAXATION
Overseas tax suffered	(83)				(67)
TOTAL TAX PAID		(83)				(67)
FINANCIAL INVESTMENT
Acquisitions of investments	(6,436)				(9,734)
Disposals of investments	10,326				13,697
Exchange differences on settlement of investment transactions	80				88
NET CASH INFLOW FROM FINANCIAL INVESTMENT		3,970				4,051
NET CASH INFLOW BEFORE FINANCING		4,335				4,025
FINANCING
Ordinary shares issued	-				1,108
Bank loans drawn down	-				2,162
Bank loans repaid	(5,384)				(4,557)
NET CASH OUTFLOW FROM FINANCING		(5,384)				(1,287)
(DECREASE)/INCREASE IN CASH		(1,049)				2,738
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
(Decrease)/increase in cash		(1,049)				2,738
Net outflow from bank loans		5,384				2,395
Exchange movement on bank loans		(4,843)				(1,501)
Exchange differences on cash		1,380				101
MOVEMENT IN NET DEBT IN THE YEAR		872				3,733
NET DEBT AT 1 FEBRUARY		(7,753)				(11,486)
NET DEBT AT 31 JANUARY		(6,881)				(7,753)

  BAILLIE GIFFORD SHIN NIPPON PLC

TWENTY LARGEST EQUITY HOLDINGS at 31 January 2009 (unaudited)

		2009		2008
Name	Business	Value £'000	% of total assets	Value £'000
EPS	Provides clinical testing services	1,828	3.7	1,233
Pronexus	Financial printing services	1,764	3.6	2,304
Hamakyorex	Trucking and warehousing	1,639	3.3	925
Daikokutenbussan	Discount store for food and sundry goods	1,415	2.9	275
H.I.S.	Discount travel agency	1,349	2.7	1,032
Message	Provides nursing services for the elderly	1,336	2.7	1,444
Intage	Marketing research services	1,286	2.6	1,073
Moshi Moshi Hotline	Call centre operator	1,204	2.5	1,438
Don Quijote	Discount store chain	1,184	2.4	953
Askul	Office equipment supplier	1,173	2.4	891
USJ	Operates a theme park in Japan	1,154	2.4	1,182
Nabtesco	Hydraulic equipment	1,151	2.3	1,636
Shoei	Manufactures motor cycle helmets	1,138	2.3	1,427
Doutor Nichires Holdings	Coffee shop and restaurant chain	1,107	2.3	840
Nakanishi	Dental equipment	1,060	2.2	1,289
So-Net M3	Online medical database	1,059	2.2	905
Nishimatsuya Chain	Baby clothing retailer	1,032	2.1	724
Culture Convenience Club	Speciality bookstore and DVD rental chain	1,029	2.1	-
Shinko Plantech	Plant maintenance services	1,003	2.0	2,028
Sugi Holdings	Drugstore chain	998	2.0	1,181
		24,909	50.7	22,780

BAILLIE GIFFORD SHIN NIPPON PLC

NOTES

(unaudited)

1.	The financial statements for the year to 31 January 2009 have been prepared on the basis of the same accounting policies used for the year to 31 January 2008.  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 2009		31 January 2008
		£'000		£'000
2.	Currency losses
	Realised exchange differences	731		662
	Unrealised exchange differences	(4,114)		(1,974)
		(3,383)		(1,312)
3.	Income includes stocklending fee income of £69,000 (2008 - £117,000).  The stock lending arrangements were terminated during the year and therefore at 31 January 2009 the aggregate value of securities on loan amounted to nil (2008-£13.4m) and the aggregate value of the collateral amounted to nil (2008 - £18.4m, held in Japanese Government Bonds). The maximum aggregate value of securities on loan during the year amounted to £19.1m (2008 - £36.8m).
		31 January 2009		31 January 2008
		£'000		£'000
4.	Investment management fee - all charged to revenue
	Investment management fee	389		559
	VAT recovered (see note 5)	(44)		-
		345		559
	Baillie Gifford & Co are employed by the Company as Managers and Secretaries under a management agreement which is terminable on not less then 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.
5.	VAT Recovered In 2007 the European Court of Justice ruled that investment trust management fees should be exempt from VAT. Since then HMRC has accepted the Managers' repayment claims for the periods from 1990 to 1996 and from 2000 to 2007. £44,000 of VAT together with £45,000 of interest was received by the Managers on behalf of the Company in respect of these periods. These amounts have been paid to the Company and recognised in the current year.
6.	The Company paid interest on bank loans of £222,000 (2008 - £249,000). During the year the company incurred costs of £80,000 relating to the early repayment of bank loans which have been charged to capital.
7.	No dividend will be declared.
BAILLIE GIFFORD SHIN NIPPON PLC NOTES (Ctd) (unaudited)

		31 January 2009		31 January 2008
		£'000		£'000
8.	Net return per ordinary share
	Revenue return	481		4
	Capital return	(7,385)		(21,132)
	Total return	(6,904)		(21,128)
	The returns per ordinary share set out below are based on the above returns and on 31,100,497 ordinary shares (2008 - 31,068,990), being the weighted average number of ordinary shares in issue during the year.
	Revenue return	1.54p		0.01p
	Capital return	(23.74p)		(68.01p)
	Total return	(22.20p)		(68.00p)
9.	A bank loan of £10.8 million (¥1.4 billion) has been drawn down under a yen loan facility which is repayable on 10 August 2011, (2008 - bank loans of £11.4 million (¥2.4 billion) repayable between 10 August 2011 and 26 March 2014).
10.	At 31 January 2009 the Company had authority to buy back 4,661,964 shares. No shares were bought back during the year. Under the provisions of the Company's Articles share buy-backs are funded from the realised capital reserve.
		31 January 2009		31 January 2008
		£'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	(6,515)		(20,810)
	Losses on investments	3,922		19,820
	Currency losses	3,382		1,312
	Increase in accrued income	(40)		(24)
	Decrease in other debtors	4		27
	Decrease in creditors	(10)		(44)
	Net cash inflow from operating activities	743		281
12.	Post Balance Sheet Event  The Company repaid ¥250 million of the ¥1.4 billion bank loan on 2 March 2009.

13.

The Report and Accounts will be available on the Company's website www.shinnippon.co.uk  on or around  24 March 2009.

14.

The financial information set out above does not constitute the Company's statutory accounts for the year ended  31 January 2009 under section 240 of the Companies Act 1985. The financial information for 2008 is derived from the statutory accounts for 2008, which have been delivered to the Registrar of Companies. The Auditors have reported on the 2008 accounts, their report was unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The statutory accounts for 2009 will be finalised on the basis of the financial information presented in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held on 29 April 2009.  None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

 

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