Annual Report and Accounts

RNS Number : 4035P

Baillie Gifford Shin Nippon PLC

24 March 2009

 

Regulatory Announcement

BAILLIE GIFFORD SHIN NIPPON PLC ('the Company')

ANNUAL REPORT AND ACCOUNTS AND PROPOSED NEW ARTICLES OF ASSOCIATION

Copies of the Annual Report and Accounts for the year ended 31 January 2009 and the proposed new Articles of Association of the Company have been submitted to the UK Listing Authority and will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility, which is situated at:

Financial Services Authority

25 The North Colonnade

Canary Wharf

London

E14 5HS

Tel: [phone]

The Annual Report and Accounts for the year ended 31 January 2009 is also available on the Baillie Gifford website at:

http://www.bailliegifford.com/documents/70608_Shin%20Nippon%202009%20WEB.PDF

At the Annual General Meeting to be held on Wednesday 29 April 2009, it is proposed that new Articles of Association be adopted in order to update the Company's existing Articles of Association to take account of changes in UK company law brought about by the implementation of the Companies Act 2006. A summary of the proposed changes to the existing Articles of Association is set out in the Appendix to the Notice of Annual General Meeting within the Annual Report and Accounts for the year ended 31 January 2009. The new Articles of Association are available for inspection at the offices of Dickson Minto WS, Royal London House, 22-25 Finsbury Square, London EC2A 1DX and at the offices of Baillie Gifford & Co, Calton Square, 1 Greenside Row, Edinburgh, EH1 3AN. 

The unedited full text of those parts of the Annual Report and Accounts for the year ended 
31 January 2009 which require to be published by DTR 4.1 is set out on the following pages. 

                        Baillie Gifford & Co

Company Secretaries 

24 March 2009

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 as can be seen from the following graphs:

http://www.rns-pdf.londonstockexchange.com/rns/4035P_-2009-3-24.pdf

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 

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 the following graph shows:

http://www.rns-pdf.londonstockexchange.com/rns/4035P_1-2009-3-24.pdf

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. Further information is given in note 5.

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 from levels 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. 

   Michael Hathorn

17 March 2009

MANAGERS' REPORT  

Performance and Portfolio

Shin Nippon's net asset value per share (after deducting borrowings at fair value) declined by 15.3% over the year compared to a rise of 14.9% in the comparative index, which is comprised of a market capitalisation weighted composite of the TOPIX Small Index, the Tokyo Second Section Index and the JASDAQ.

The absence of excessive lending in Japan sheltered the Japanese banking system from the primary impact of the global financial crisis. Companies and individuals are in a relatively strong financial position in Japan, and bank lending is increasing. However, by the second half of the year the Japanese economy and stock market were feeling the full force of the global credit crunch. The local currency decline in the TOPIX in 2008 was the worst calendar year of performance in the post-war period. Export demand weakened dramatically and foreign funds were forced to sell Japanese equities to repay outstanding loans or to meet client redemptions. This selling pressure was focused on the higher quality stocks with attractive long term growth prospects that Shin Nippon tends to invest in. Highly illiquid, tiny companies, that Shin Nippon cannot hold, tended to be the strongest performers across the small cap indices due to low levels of foreign ownership. We also continued to hold a number of poorly performing stocks that had benefited from the long period of global expansion. Performance relative to the Company's benchmark was impacted by these factors, combined with the negative effect of the low cost yen gearing which compounded the impact of declining stock prices. 

For the year as a whole, the broad Japanese stock market outperformed other markets globally in sterling terms due to the strong rally in the yen. This sharp move in foreign exchange rates had a beneficial effect on Shin Nippon's one year return figure. As the year progressed investors became increasingly worried about the outlook for global growth and the Japanese currency was generally viewed as a safe haven. The period of yen appreciation coincided with small capitalisation Japanese stocks outperforming their larger peers. Smaller companies' businesses tend to be more focused on the domestic economy so their profit streams are more resilient than larger exporters' when the yen strengthens. Accordingly, domestic oriented sectors such as Pharmaceuticals and food, and Retail were amongst the best performing segments of the market. 

Japanese companies may report an aggregate net loss in the year to March 2009, due largely to the significant losses that will be reported by the big autos and consumer electronics companies this year. Conservative accounting practices such as writing down securities investments through the profit and loss account are also reducing company profits. Corporate earnings are likely to remain weak next year in the absence of a rapid rebound in overseas demand. However, the market is discounting a prolonged slump in profits with cyclically adjusted valuation levels presently at historically low levels.

The sell-off in share prices, as the market has focused on near term bad news, has produced many good opportunities for investors willing to look through the downturn in stocks with strong competitive positions and exciting long term growth prospects. We have been taking advantage of some of the valuation discrepancies that have occurred to purchase new 

holdings in leading companies like Start Today*, a rapidly growing internet apparel retailer, Sysmex, a medical testing equipment manufacturer that is gaining market share overseas, and Toshiba Plant Systems & Services, one of the few specialist nuclear power plant construction companies globally. Other newly acquired stocks include several companies that are benefiting from the consolidation of their domestic markets. Examples include Toho Pharmaceutical, a drug wholesaler that benefits also from the aging population in Japan, and Aeon Delight*, a shopping mall maintenance company.

Attribution

The first table that follows this report details the contribution to overall portfolio performance last year from our stock selection and asset allocation in each sector. This breakdown is slightly artificial because we choose stocks on the basis of their individual merits but it provides some information on the key factors contributing to performance. 

The Manufacturing and machinery sector contains a very diverse range of companies, not all of which are tied closely to the global economic cycle. Nakanishi, for example, manufactures dental drill parts and is taking advantage of the long term improvement in dental hygiene standards in developing countries. However, the sector as a whole performed very poorly as the global economy slowed. We, clearly, did not reduce our exposure to this theme enough and some of the previously strongly performing holdings in this sector were especially weak. Juki, a global leader in industrial sewing machines, performed particularly poorly as capital spending plans were cut in China. However, we have maintained our holding as its long term growth prospects remain attractive as garment factories around Asia look to reduce costs by automating more processes. Shares of Wacom, which makes electronic pen tablets for inputting information into computers, were very weak as demand slowed but the company should benefit in the medium term from a tie-up with Microsoft. 

Despite the Financials sector holding up well generally, our holdings performed poorly for stock specific reasons. As an example, Japan Asia Investment, a venture capital company, suffered as the value of its early stage investments declined. 

Real estate and construction was another area that performed poorly. As consumer sentiment fell, demand for condominiums dropped causing inventories to increase. Our holding in Tokyu Livable, a real estate broker, performed poorly in this environment. Harakosan, a condominium developer, also suffered and we sold the shares as funding conditions within the real estate market deteriorated over the year. The government has reversed a previous request and is now instructing banks to lend more to real estate companies to try to revive the market.

We have maintained high weightings in Commerce and services and Retail for several years now as we believe the small companies operating in these markets are benefiting from structural change in Japan. Overall performance benefited from these positions because the domestic focused stocks did well generally. Stable growers like Daikokutenbussan, a discount supermarket operator, and new purchase Culture Convenience Club, a DVD rental chain, benefited from the economic slowdown as more Japanese people stayed at home rather than going out for food or entertainment. 

*Purchased subsequent to the year end.

Exposure to the best performing sector, Pharmaceuticals and food, was increased over the course of the year with the purchases of Toho Pharmaceutical and Oenon Holdings, a Japanese spirit maker that provides supermarkets with private brand alcoholic drinks. Portfolio turnover remained low over the year at 21%, in line with our long term investment horizon of three to five years. 

Economy 

Estimates for economic growth were cut back dramatically during the year and it is now clear that Japan has entered a severe recession. Following the sudden and pronounced drop in export demand, domestic capital expenditure plans have been put on hold. Production cuts are being implemented to try to reduce the level of inventories which have jumped in recent months. Broad-ranging restructuring plans, including job cuts, have been announced by many struggling companies. The deteriorating employment situation has weighed on consumer sentiment, but a sharp fall in spending seems unlikely because Japanese households tend to be cash rich. The political situation whereby the ruling party does not control both houses remains unhelpful, but there has to be a general election this year which could resolve the stalemate. A number of stimulus packages have been announced already but the government may have to do more. The Bank of Japan has already cut interest rates back to close to zero in an attempt to stimulate demand. Corporate sentiment should receive a boost from the decline in raw material costs. This should particularly benefit small capitalisation stocks, many of which have struggled to raise their own prices to offset the increase in input costs witnessed over the past few years.

Outlook

While global demand remains subdued, the operating environment for Japanese companies will remain difficult. However, the majority of companies will survive due to their strong balance sheets. Those that do emerge will be more efficient in the long run after another round of restructuring. Stronger companies may even be able to use the strong yen to strengthen their position in attractive overseas markets with judicious acquisitions. 

http://www.rns-pdf.londonstockexchange.com/rns/4035P_2-2009-3-24.pdf

After three years of weakness, culminating in the recent bouts of forced selling by foreigners, the valuations of Japanese small capitalisation stocks suggest that the market expects several years of sustained weakness in earnings. Price to book ratios touched low levels historically, as shown in the graph above, and the dividend yield on the small cap market has reached an all time high. This period of weakness has resulted in sell-side coverage of smaller Japanese companies all but disappearing, providing genuine stock pickers with even more scope to add value. We continue to believe that the Japanese small cap universe provides numerous opportunities to invest in companies with the potential to grow rapidly over the medium to long term, and current depressed valuations do not recognise this. The current environment, where long term winners have been savagely de-rated as the market focuses on short term noise, is perfectly suited to the strengths of Baillie Gifford's experienced Japanese equities team.

Baillie Gifford & Co

17 March 2009

Portfolio Performance Attribution for the Year to 31 January 2009

Computed relative to the comparative index†

Portfolio breakdown	Index asset  allocation		Shin Nippon asset allocation		Performance*		Contribution  to relative  return	Contribution attributable to:
	31.01.08 %	31.01.09 %	31.01.08 %	31.01.09 %	Shin  Nippon %	Index %	%	Stock selection %	Asset allocation %
Electricals and electronics	8.4	6.4	5.3	6.9	(42.3)	(3.4)	(2.8)	(2.9)	0.1
Manufacturing and machinery	16.6	14.3	40.3	33.3	(17.4)	(4.3)	(8.8)	(5.5)	(3.3)
Retail	10.2	12.1	16.6	26.1	45.8	34.7	3.6	1.8	1.8
Commerce and services	18.0	19.6	25.5	27.9	11.3	20.8	(1.7)	(2.1)	0.4
Pharmaceuticals and food	5.7	6.7	2.7	7.2	57.8	52.1	(0.5)	(0.4)	(0.1)
Real estate and construction	8.8	7.8	10.5	3.1	(52.7)	4.3	(4.0)	(3.8)	(0.2)
Financials	8.7	8.3	5.9	3.2	(52.5)	21.3	(4.4)	(4.2)	(0.2)
Information, communication and utilities	11.2	12.3	8.3	9.3	3.0	17.8	(1.1)	(1.1)	-
Chemicals and other materials	12.4	12.5	2.0	0.9	(66.8)	12.8	(1.7)	(1.9)	0.2
Cash and brokers' balances	-	-	7.9	10.3	66.9	-	2.9	-	2.9
Gearing	-	-	(25.0)	(28.2)	68.5	-	(9.5)	-	(9.5)
Total	100.0	100.0	100.0	100.0	(14.3)	14.9	(25.4)	(18.6)	(8.3)

Past performance is not a guide to future performance. 

Source: HSBC/Nomura International plc. 

Contributions cannot be added together, as they are geometric; for example to calculate how a return of (14.3%) against an index return of 14.9% translates into a relative return of (25.4%), divide the portfolio return of 85.7 by the index return of 114.9 and subtract one. 

†The comparative index comprises a composite of the Tokyo Second Section Index, the TOPIX Small Index and the    JASDAQ Index, weighted by market capitalisation, in sterling terms. 

* The returns for Shin Nippon are total return (net income reinvested) whereas, due to the unavailability of total return data, the index returns are capital only returns (income not reinvested). It is estimated that the index return would be higher by approximately 2 per cent per annum if net income was reinvested. 

Investment Changes (£'000)

	Valuation  at 31.01.08	Net acquisitions/ (disposals)	Appreciation/ (depreciation)	Valuation at 31.01.09
Equities:
Electricals and electronics	2,379	1,583	(1,320)	2,642
Manufacturing and machinery	18,258	(2,173)	(3,305)	12,780
Retail	7,526	(686)	3,182	10,022
Commerce and services	11,571	(1,554)	674	10,691
Pharmaceuticals and food	1,233	678	861	2,772
Real estate and construction	4,763	(1,723)	(1,840)	1,200
Financials	2,685	(26)	(1,423)	1,236
Information, communication and utilities	3,743	(139)	(32)	3,572
Chemicals and other materials	925	141	(719)	347
Total investments	53,083	(3,899)	(3,922)	45,262
Net liquid assets	3,435	(1,084)	1,460	3,811
Total assets	56,518	(4,983)	(2,462)	49,073
Bank loans	(11,354)	5,384	(4,843)	(10,813)
Equity shareholders' funds	45,164	401	(7,305)	38,260

TWENTY LARGEST EQUITY HOLDINGS at 31 January 2009
		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

RELATED PARTY TRANSACTIONS

The Directors' fees for the year are detailed in the Directors' Remuneration Report. No Director has a contract of services with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under section 232 of the Companies Act 1985 other than as disclosed in note 4. Baillie Gifford & Co are employed 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 shareholders on the last day of that quarter. 

The full details of the management fee are shown in note 4.

PRINCIPAL RISKS AND UNCERTAINTIES

The Company's assets consist mainly of listed securities and its principal risks are therefore market related and include 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 then to minimise the short term volatility. 

Further information on these risks and how they are managed is contained in the Annual Report. 

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 842 of the Income and Corporation Taxes Act 1988 could lead to the Company being subject to tax on capital gains. 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. The Managers monitor investment movements and the level of forecast income and expenditure to ensure the provisions of section 842 are not breached. 

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 Board reviews the Managers' Report on Internal Controls and the reports by other key third party providers are reviewed by the Manager on behalf of the Board. 

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

The Directors are responsible for preparing the Annual 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 UK Accounting Standards (UK Generally Accepted Accounting Practice).

The financial statements are required by law to 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 those financial statements, the Directors are required to: 

• select suitable accounting policies and then apply them consistently; 

• make judgements and estimates that are reasonable and prudent; 

• state whether they comply with applicable UK accounting standards, subject to any material departures disclosed and explained in the financial statements; and 

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business (in which case there should be supporting assumptions or qualifications as necessary).

The Directors confirm that they have complied with the above requirements in preparing the financial statements.

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect 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 comply with that law and those regulations.

We confirm that to the best of our knowledge:

• the financial statements, prepared in accordance with the applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

• the Annual Report includes a fair view 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 the Company faces.

By Order of the Board

AM Hathorn
Chairman

17 March 2009

INCOME STATEMENT

	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 9)

   † Losses on investments include realised and unrealised gains and losses on the investment portfolio resulting from: 

‡   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) 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 2009

	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 10)		(10,813)		(11,354)
Total 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)
Equity 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

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

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

CASH FLOW STATEMENT
	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 14)		743				281
SERVICING OF FINANCE
Interest and breakage costs paid	(295)				(240)
NET CASH OUTFLOW FROM SERVICING OF FINANCE		(295)				(240)
TAXATION
Overseas tax paid	(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)

NOTES

1.	The financial information within this announcement has been extracted from the audited financial statements for the year to 31 January 2009 which 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
	Dividends	1,241		985
	Interest on VAT recovered	45		-
	Deposit interest	3		17
	Income from investments and interest receivable	1,289		1,002
	Stock lending income	69		117
		1,358		1,119
	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.	The Company has accumulated tax losses and accordingly no corporation tax is payable. The Company currently suffers overseas withholding tax on its equity income at the rate of 7%.
8.	No dividend will be declared.

		31 January 2009		31 January 2008
		£'000		£'000
9.	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)
10.	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).  During the year, bank loans of ¥1bn were repaid incurring breakage costs of £80,000 which have been charged to capital.
11.	The fair value of the bank loans at 31 January 2009 was £11,035,000 (2008 - £11,595,000).
12.	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.
13.	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 £8,000 (2008 - £19,000) and transaction costs on sales amounted to £13,000 (2008 - £25,000).
		31 January 2009		31 January 2008
		£'000		£'000
14.	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	3,383		1,312
	Increase in accrued income	(40)		(24)
	Decrease in other debtors	4		27
	Decrease in creditors	(11)		(44)
	Net cash inflow from operating activities	743		281
15.	Post Balance Sheet Event The Company repaid ¥250 million of the ¥1.4 billion bank loan on 2 March 2009.
16.	The Report and Accounts will be available on the Company's website www.shinnippon.co.uk on or around 24 March 2009.
17.	The financial information set out above does not constitute the Company's statutory accounts for the year ended will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held on 29 April 2009.
18.	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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