Half Yearly Report

RNS Number : 0854S

Baillie Gifford Shin Nippon PLC

03 September 2010

 



BAILLIE GIFFORD SHIN NIPPON PLC

Results for the six months to 31 July 2010

The Company's net asset value per share (after deducting borrowings at fair value) rose by 9.7% and the share price rose by 16.0%, outperforming the Company's comparative index* which increased by 6.0% in sterling terms.

·	Good relative performance can be attributed mainly to stock selection, particularly in Consumer Discretionary, Healthcare and Industrial sector stocks.  Sterling returns benefited from the yen strengthening over the period.
·	Recently announced first quarter profit figures for the Japanese market as a whole have been impressive and cashflow generation has been strong.  Despite this, smaller company valuations remain close to historic lows.
·	While year-on-year growth rates are slowing due to the improvement in conditions over the course of last year, exports, notably to China and the rest of Asia, continue to increase.  Business and consumer sentiment indicators are either buoyant, or recovering, and there are tentative signs that conditions in the real estate sector are improving as the availability of financing increases.
·	Baillie Gifford Shin Nippon continues to invest in companies operating in niche secular growth markets with the ability to grow their profits over many years, many of which are trading at valuations close to historic lows.

*    The Company's comparative index is the MSCI Japan Small Cap index in sterling terms, total return.

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 July 2010 the Company had total assets of £56.2m (before deduction of bank loan of £8.5m).

The Company is managed by Baillie Gifford & Co, an Edinburgh based fund management group with around £61 billion under management and advice as at 2 September 2010.

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. The Company has borrowed money to make further investments. This is commonly referred to as gearing. The risk is that, when this money is repaid by the Company, the value of these investments may not be enough to cover the borrowing and interest costs, and the Company makes a loss. If the Company's investments fall in value, gearing will increase the amount of this loss. The more highly geared the Company, the greater this effect will be.

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

2 September 2010

- ends -

For further information please contact:

Anzelm Cydzik

Baillie Gifford & Co                                                                              0131 275 2000

Roland Cross, Director,

Broadgate Mainland                                                                              020 7726 6111

The following is the unaudited Half-Yearly Financial Report for the six months to
31 July 2010.

BAILLIE GIFFORD SHIN NIPPON PLC

 

Half-Yearly Financial Report to 31 July 2010

 

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, and their impact on the financial statements,  and a description of the  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 4 at the end of this document).

By order of the Board

BM Rose

Chairman

2 September 2010

BAILLIE GIFFORD SHIN NIPPON PLC

Interim Management Report

Over the six months to 31 July 2010, Shin Nippon's net asset value per share (after deducting borrowings at fair value) rose by 9.7% compared to a rise of 6.0% in sterling terms in the MSCI Japan Small Cap index. Sterling returns over the period benefited from the strengthening yen. Japanese smaller companies outperformed both the broader Japanese market and most major world markets in sterling terms over the six months.

In local currency terms the Japanese market fell slightly due to investors' increasing concerns that the global economic recovery was losing momentum as the positive effects from various governments' stimulus packages wore off. There were also concerns that the negative impact of the strengthening yen on Japanese corporate profits would be significant. In this environment it was not surprising that some of the best performing stocks in the comparative index were those in domestic sectors, such as Healthcare and Consumer Staples. The Energy sector was among the weakest, most probably due to fears about global demand.   

The contrast between the lacklustre yen share price performance of Japanese smaller companies and their earnings performance is stark. Recently announced first quarter profit figures for the market as a whole have been impressive. The absolute level of aggregate profit for the market, on a quarterly basis, has almost recovered to the level prior to the Lehman crisis, despite the revenue base being approximately 15% lower. This is testament to the aggressive nature of the cost cutting undertaken by companies last year, and should stand corporate Japan in good stead. Cashflow generation has been very strong also.

During the six month period, it was encouraging to note improved performance from long term holdings in the Healthcare sector which had been somewhat out of favour last year. EPS, the provider of outsourced drug research services, and M3, a website for doctors that allows pharmaceutical companies to market new drugs directly to specialists, both performed impressively. In the Consumer Discretionary sector, one of last year's top performers, online fashion retailer Start Today continued its strong run.  Purchasing clothing over the internet is becoming more accepted by Japanese consumers, and this is forming a virtuous circle for Start Today, Japan's market leader. As more new users are attracted to Start Today's website, more brands sign up to offer their products on the site. This in turn attracts new individual users. In the Industrials sector, hydraulic joint manufacturer Nabtesco was again amongst the stronger performers. Given current concerns about global growth this might be surprising to some. However Nabtesco's fortunes are tied to demand from long term infrastructure and factory automation projects in China and other developing markets, rather than the weaker demand environment at present in Europe or the US. Some of the weaker performers in the portfolio were in the Information Technology area. Micronics Japan and Mimasu Semiconductor both suffered due to concerns that demand may be weaker in the second half of the year following some inventory build-up in the semiconductor industry.

On the political front, initial optimism about the prospects for the new governing party has all but dissipated. Early promising efforts to reduce wasteful government spending, to boost consumption and to curb the power of the bureaucrats have been overwhelmed by the ineptitude of the leaders of the Democratic Party of Japan (DPJ) in dealing with key issues, such as relations with the US and possible consumption tax increases. The poor result for the DPJ in the recent Upper House election means that no party has an overall majority, so passing new legislation will be a slow process. However, some cross-party consensus does seem to be developing for reform of the taxation system to help boost growth and to deal with the fiscal position.     

While recent economic releases in Japan have painted a mixed picture, there is little to suggest an imminent sharp slowdown. Exports, which have driven the recovery, continue to grow, particularly to Asia. The year-on-year growth rates are slowing on a monthly basis but this was to be expected given the very low base in early 2009. Corporate sentiment surveys tend to show that companies are still reasonably optimistic about future prospects. Consumer sentiment has recovered as the risk of job losses has diminished, but consumption has yet to improve significantly, perhaps because not many new jobs are being created at present. Deflation in the general economy remains a problem but there are tentative signs of improvement in the real estate markets as the availability of financing increases. Condominium sales have started to recover, in part thanks to discounted mortgage deals, while the office vacancy rate appears to have bottomed.

Against this background we have purchased a new holding in Tokyu REIT, a real estate vehicle that invests in office and commercial properties in Tokyo. New holdings were also taken in Daishinku, a crystal component manufacturer benefiting from increased demand for 3G mobile phones in China, and West Holdings, a tiny company that installs solar panels for leading electronics retailer Yamada Denki. Turnover within the portfolio continues to be low, in line with our long term and patient investment approach.   

Japanese smaller company valuations remain close to historic lows, despite a period of good earnings performance. This divergence between share price performance and profit generating ability has resulted in an increase in corporate activity over the last few months. The number of management teams buying out their companies at substantial premiums to their market cap has risen; meanwhile a record number of Chinese companies have been purchasing Japanese companies, attracted by the potential for their technology and brands in China. Shin Nippon continues to invest in companies operating in niche secular growth markets with the ability to grow their profits over many years.  

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 20 of the Company's full Annual Report and Financial Statements for the year to 31 January 2010.  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 Shin Nippon page of the Managers' website: www.shinnippon.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).

Related Party Transactions

Details of related party transactions are set out below in note 4 of the Condensed Financial Statements.

By order of the Board

Baillie Gifford & Co

2 September 2009

Past performance is not a guide to future performance

BAILLIE GIFFORD SHIN NIPPON PLC

INCOME STATEMENT

(unaudited)

	For the six months ended 31 July 2010			For the six months ended 31 July 2009			For the year ended 31 January 2010
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Net gains on investments (note 3)	-	4,592	4,592	-	24	24	-	4,771	4,771
Currency (losses)/gains	-	(548)	(548)	-	1,028	1,028	-	551	551
Income from investments	613	-	613	434	-	434	868	-	868
Investment management fee   (note 4)	(247)	-	(247)	(179)	-	(179)	(397)	-	(397)
Other administrative expenses	(123)	-	(123)	(111)	-	(111)	(236)	-	(236)
Net return before finance costs and taxation	243	4,044	4,287	144	1,052	1,196	235	5,322	5,557
Finance costs of borrowings	(88)	-	(88)	(72)	(37)	(109)	(152)	(37)	(189)
Net return on ordinary activities before taxation	155	4,044	4,199	72	1,015	1,087	83	5,285	5,368
Tax on ordinary activities      (note 5)	(43)	-	(43)	(28)	-	(28)	(59)	-	(59)
Net return on ordinary activities after taxation	112	4,044	4,156	44	1,015	1,059	24	5,285	5,309
Net return per ordinary share (note 7)	0.36p	13.00p	13.36p	0.14p	3.26p	3.40p	0.08p	16.99p	17.07p

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 period.

A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement.

BAILLIE GIFFORD SHIN NIPPON PLC

BALANCE SHEET

at 31 July 2010

(unaudited)

	31 July 2010	31 July 2009	31 January 2010
	£'000	£'000	£'000
Fixed asset investments
Listed equities	54,113	43,882	49,517
Unlisted equities †	1,172	1,211	1,347
	55,285	45,093	50,864
Current assets
Debtors	126	114	249
Cash and short term deposits	1,019	1,600	619
	1,145	1,714	868
Creditors
Amounts falling due within one year	(233)	(201)	(246)
Net current assets	912	1,513	622
Total assets less current liabilities	56,197	46,606	51,486
Creditors
Amounts falling due after more than one year (note 8)	(8,473)	(7,287)	(7,917)
Total net assets	47,724	39,319	43,569
CAPITAL AND RESERVES
Called-up share capital	3,110	3,110	3,110
Share premium	7,674	7,674	7,674
Capital redemption reserve	21,521	21,521	21,521
Capital reserve	19,951	11,638	15,908
Revenue reserve	(4,532)	(4,624)	(4,644)
Shareholders' funds	47,724	39,319	43,569

Net asset value per ordinary share (after deducting borrowings at fair value) (note 9)	153.1p	125.9p	139.6p
Net asset value per ordinary share (after deducting borrowings at par value)	153.5p	126.4p	140.1p
Ordinary shares in issue (note 10)	31,100,497	31,100,497	31,100,497

† Quoted on the Hercules Japan market

 

BAILLIE GIFFORD SHIN NIPPON PLC

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

(unaudited)

For the six months ended 31 July 2010

	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 2010	3,110	7,674	21,521	15,908	(4,644)	43,569
Net return on ordinary activities after taxation	-	-	-	4,043	112	4,155
Shareholders' funds at 31 July 2010	3,110	7,674	21,521	19,951	(4,532)	47,724

For the six months ended 31 July 2009

 

	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 2009	3,110	7,674	21,521	10,623	(4,668)	38,260
Net return on ordinary activities after taxation	-	-	-	1,015	44	1,059
Shareholders' funds at 31 July 2009	3,110	7,674	21,521	11,638	(4,624)	39,319

For the year ended 31 January 2010

	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 2009	3,110	7,674	21,521	10,623	(4,668)	38,260
Net return on ordinary activities after taxation	-	-	-	5,285	24	5,309
Shareholders' funds at 31 January 2010	3,110	7,674	21,521	15,908	(4,644)	43,569

^*The Capital reserve includes investment holding gains of £7,600,000 (31 July 2009 - losses of £2,445,000; 31 January 2010 - gains of £3,540,000). 

BAILLIE GIFFORD SHIN NIPPON PLC

CONDENSED CASH FLOW STATEMENT (unaudited)
	Six months to 31 July 2010 £'000		Six months to 31 July 2009 £'000		Year to 31 January 2010 £'000
NET CASH INFLOW FROM OPERATING ACTIVITIES	273		166		207
NET CASH OUTFLOW FROM SERVICING OF FINANCE	(85)		(145)		(217)
TOTAL TAX PAID	(47)		(33)		(56)
NET CASH INFLOW/ (OUTFLOW) FROM FINANCIAL INVESTMENT	218		102		(972)
NET CASH INFLOW/ (OUTFLOW) BEFORE FINANCING	359		90		(1,038)
FINANCING
Bank loans repaid	-		(1,793)		(1,793)
INCREASE/ (DECREASE) IN CASH	359		(1,703)		(2,831)
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
Increase/ (decrease) in cash in the period	359		(1,703)		(2,831)
Net outflow from bank loans	-		1,793		1,793
Exchange movement on bank loans	(557)		1,733		1,103
Exchange differences on cash	42		(629)		(482)
MOVEMENT IN NET DEBT IN THE PERIOD	(156)		1,194		(417)
NET DEBT AT START OF THE PERIOD	(7,298)		(6,881)		(6,881)
NET DEBT AT END OF THE PERIOD	(7,454)		(5,687)		(7,298)
RECONCILIATION OF NET RETURN BEFORE FINANCE COSTS AND TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES
Net return before finance costs and taxation	4,287		1,196		5,557
Gains on investments	(4,592)		(24)		(4,771)
Currency losses/ (gains)	548		(1,028)		(551)
Changes in debtors and creditors	30		22		(28)
NET CASH INFLOW FROM OPERATING ACTIVITIES	273		166		207

 

BAILLIE GIFFORD SHIN NIPPON PLC

TWENTY LARGEST EQUITY HOLDINGS at 31 July 2010 (unaudited)
Name		Business	Value £'000	% of total assets
	Start Today	Internet fashion retailer	2,407	4.3
	Message	Provides nursing services for the elderly	2,117	3.8
	EPS	Provides clinical testing services	2,018	3.6
	Nabtesco	Hydraulic equipment	1,966	3.5
	Daikokutenbussan	Discount store for food and sundry goods	1,821	3.2
	Don Quijote	Discount store chain	1,771	3.2
	Nakanishi	Dental equipment	1,487	2.6
	Hamakyorex	Third party logistics	1,466	2.6
	H.I.S.	Discount travel agency	1,454	2.6
	Cocokara Fine	Drugstore chain	1,373	2.4
	First Juken	Builds and sells residential buildings	1,307	2.3
	M3	Online medical database	1,190	2.1
	Osaka Securities Exchange	Stock exchange operator	1,172	2.1
	Pronexus	Financial printing services	1,133	2.0
	Shoei	Manufactures motor cycle helmets	1,129	2.0
	Horiba	Manufacturer of measuring instruments and analysers	1,120	2.0
	Shinko Plantech	Plant maintenance services	1,095	2.0
	Nippon Thompson	Needle roller bearings	1,043	1.9
	Moshi Moshi Hotline	Call centre operator	1,034	1.8
	Accordia Golf	Golf course operator	1,004	1.8
			29,107	51.8

BAILLIE GIFFORD SHIN NIPPON PLC

	NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)
1.	The condensed financial statements have been prepared on the basis of the same accounting policies as set out in the Company's Annual Financial Statements at 31 January 2010 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.  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 January 2010 has been extracted from the statutory accounts which have been filed with the Registrar of Companies and contain an unqualified Auditors' Report and do not contain a statement under sections 498 (2) or (3) of the Companies Act 2006.
		Six months to 31 July 2010		Six months to 31 July 2009	Year to 31 January 2010
		£'000		£'000	£'000
3.	Net gains/ (losses) on investments
	Gains/(losses) on sales on investments	531		(3,972)	(5,210)
	Movement in investment holdings gains/losses	4,061		3,996	9,981
		4,592		24	4,771
4.	Baillie Gifford & Co are employed by the Company as Managers and Secretaries under a management agreement which is terminable on not less than twelve months' notice or on shorter notice in certain circumstances.  The fee in respect of each quarter is 0.25% of the total net assets of the Company attributable to its shareholders on the last day of that quarter. Miss SJM Whitley, who was a Director of the Company until her retiral on 17 June 2010, is a partner of Baillie Gifford & Co.
5.	The Company suffers overseas withholding tax on its equity income currently at the rate of 7%.
6.	No interim dividend will be declared.
		Six months to 31 July 2010		Six months to 31 July 2009	Year to 31 January 2010
		£'000		£'000	£'000
7.	Net return per ordinary share
	Revenue return		112	44	24
	Capital return		4,044	1,015	5,285
	Total return		4,156	1,059	5,309
	Net return per ordinary share is based on the above totals of revenue and capital and on 31,100,497 (31 July 2009 - 31,100,497 and 31 January 2010 - 31,100,497) ordinary shares, being the weighted average number of ordinary shares in issue during the period. There are no dilutive or potentially dilutive shares in issue.
8.	The amounts falling due after more than one year represent a bank loan of £8.5 million (¥1.15 billion) outstanding under a yen loan facility repayable on 10 August 2011 (31 July 2009 - £7.3 million (¥1.15 billion); 31 January 2010 - £7.9 million (¥ 1.15 billion)).
9.	The fair value of the bank loan at 31 July 2010 was £8,577,000 (31 July 2009 - £7,440,000; 31 January 2010 - £8,060,000).
	BAILLIE GIFFORD SHIN NIPPON PLC
	NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) (Ctd)
10.	At 31 July 2010 the Company had authority to buy back 4,661,964 of its own shares in accordance with the authority granted at the AGM in April 2010. No shares were bought back during the period under review.
11.	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 £3,000 (31 July 2009 - £5,000; 31 January 2010 - £11,000) and transaction costs on sales amounted to £3,000 (31 July 2009 - £5,000; 31 January 2010 - £10,000).
12.	None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

 

 

END

 

 

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