Baillie Gifford Shin Nippon PLC H1 Results

RNS Number : 3522O

Baillie Gifford Shin Nippon PLC

16 September 2011

 



BAILLIE GIFFORD SHIN NIPPON PLC

Results for the six months to 31 July 2011

The Company's net asset value per share (after deducting borrowings at fair value) rose by 4.2% compared to a 1.5% rise in the Company's comparative index*.  The share price rose 9.3% and its discount to net asset value narrowed from 8.8% to 4.3%.

·	The tragic earthquake that hit Japan during the period under review had a significant impact on the economy, however recent results have been better than many companies forecast initially.
·	Smaller company valuations remain attractive and in many cases suggest that the market does not expect any growth, which we believe is overly pessimistic.  Market volatility has allowed us to make new purchases in lowly valued companies, such as Nikkiso and Skymark, that are well placed to deliver strong earnings growth over the next few years.
·	Baillie Gifford Shin Nippon continues to invest in Japanese companies that have the potential to grow, either by exploiting an opportunity in an exciting new market within Japan or by broadening out geographically to benefit from the emergence of the Asian consumer.
·	Stock selection contributed to good relative performance.  Sterling returns benefitted from the yen strengthening over the period.

*    The Company's comparative index is the MSCI Japan Small Cap index total return and 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 July 2011 the Company had total assets of £67.1m (before deduction of bank loan of £9.1m).

The Company is managed by Baillie Gifford & Co, an Edinburgh based fund management group with around £69 billion under management and advice as at 15 September 2011.

15 September 2011

For further information please contact:

Anzelm Cydzik

Baillie Gifford & Co                                                                              0131 275 2000

Roland Cross, Director,

Broadgate Mainland                                                                              020 7726 6111

                                                                                                            or 07831 401309

The following is the unaudited Half-Yearly Financial Report for the six months to
31 July 2011.

BAILLIE GIFFORD SHIN NIPPON PLC

 

Half-Yearly Financial Report to 31 July 2011

 

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).

By order of the Board

BM Rose

Chairman

15 September 2011

BAILLIE GIFFORD SHIN NIPPON PLC

Half-Yearly Management Report

Over the six months to 31 July 2011, Shin Nippon's net asset value per share (after deducting borrowings at fair value) rose by 4.2% compared to a rise of 1.5% in sterling terms in the MSCI Japan Small Cap index. Sterling returns over the period benefited from the strengthening yen. The performance of Japanese smaller companies in general held up better than the broad Japanese market and most major world markets in sterling terms over the period.

The most significant event in Japan over the period was the devastating earthquake in Tohoku on the 11^th March. This was the largest recorded earthquake to have struck Japan and the consequent tsunami left  20,000 people dead or missing. This dreadful human tragedy had a major impact on the economy, which shrunk in the first two quarters of the year as manufacturing supply chains were disrupted and consumption was held back during the official period of mourning. While a great deal of rebuilding in the area worst affected has still to be carried out, the rebound in economic activity has been swift with most factories back up to pre-earthquake levels of production and consumer activity essentially back to normal. The earthquake may speed up the trend to shift production capacity overseas but that move was already in place at most well managed companies. 

In local currency terms the Japanese market fell over the six months, partly due to concerns about the impact of the natural disaster but also due to the re-emergence of worries about a slowdown in global growth. However, recently announced first quarter results have actually been better than many Japanese companies forecast initially, as demand rebounded surprisingly quickly. It seems likely that estimates for the full year will have to be revised up in many cases, as the benefits of large government reconstruction spending programmes boost growth in the second half of the year. The Japanese prime minister has just stepped down, taking responsibility for the poor handling of the response to the crisis by the authorities, but in the last few weeks of his tenure a serious debate has finally emerged regarding the privatisation of government assets to help pay for reconstruction and in the long term to help pay down government debt.

Healthcare companies, where growth is broadly uncorrelated  to movements in the wider economy, were amongst the strongest performing stocks.  Message, a leading operator of residential homes for the elderly, and M3, the messaging website that allows pharmaceutical companies to market their drugs cheaply to doctors, were two of the best performing holdings.

Internet-based companies also tended to perform well over the period. In general, internet-based distributors seem to have been much more reliable than traditional retail channels  in the period immediately after the earthquake. Consequently, the appeal of internet ordering, for both consumers and companies, has risen further. Start Today, the leading fashion website in Japan, and Monotaro, a company that allows small business customers to order all their components directly from their website, witnessed very strong sales and share price performance over the period.  The long term growth in mobile internet usage continued and it was pleasing to see Capcom performing much better as the company started to demonstrate that it can adapt its strong console games' franchises to the mobile phone market.

The focus on energy conservation has become even more necessary as Japan plans for a future with lower reliance on nuclear energy after the Fukushima incident. We continue to investigate many smaller Japanese companies that should benefit from this move. In the current environment Hoshizaki Electric, a global leader in commercial refrigerators, performed well following strong sales of its new energy efficient models.

Foster Electric, the headphone supplier to leading mobile phone and portable music player manufacturers, had a poor six months due to some pressure on profitability as rare earth metal prices rose. However, the prospect of price increases in the near future to offset this, as several new products are launched, looks encouraging. Our real estate investments also failed to recover despite some of the overall figures regarding the Japanese property market starting to improve.

The recent volatility in markets has allowed us to make some new purchases in lowly valued companies that are capable of delivering strong earnings growth over the next few years. Nikkiso is a manufacturer of specialist industrial and medical pumps that has expanded its global presence by purchasing a European rival. The company also has attractive exposure to the rapid growth in the Chinese hospital market thanks to its joint venture with a leading Chinese medical equipment manufacturer. We have also taken holdings in two companies that should benefit from the acceleration of growth in markets that have been slow to take off in Japan.  The bankruptcy of Japan's flagship carrier has resulted in more landing slots becoming available at the recently expanded Haneda airport in Tokyo. This development makes it easier for leading low cost airline Skymark to expand and exploit the undoubted demand for low priced air travel in Japan. JP Holdings, a company that operates childcare facilities, now appears to have the support of the authorities to help meet the huge unmet demand from women who are keen to return to work after having children.

Shin Nippon continues to offer exposure to a blend of superior quality Japanese smaller companies that have the potential to grow either by exploiting an opportunity in an exciting new market within Japan or by broadening out geographically to benefit from the emergence of the Asian consumer. Despite the better period of relative performance, valuations in many cases suggest that the market does not expect any growth at all in the future which we believe is overly pessimistic.

The ¥1.15 billion bank loan was re-financed on 10 August 2011 for a further three years on similar terms.  

The principal risks and uncertainties facing the Company are outlined at the end of this document. Details of related party transactions are contained in note 4 of the condensed financial statements.

By order of the Board

Baillie Gifford & Co

15 September 2011

Past performance is not a guide to future performance

BAILLIE GIFFORD SHIN NIPPON PLC

INCOME STATEMENT

(unaudited)

	For the six months ended 31 July 2011			For the six months ended 31 July 2010			For the year ended 31 January 2011
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Net gains on investments (note 3)	-	2,471	2,471	-	4,592	4,592	-	12,795	12,795
Currency losses	-	(268)	(268)	-	(549)	(549)	-	(812)	(812)
Income from investments	673	-	673	613	-	613	1,108	-	1,108
Investment management fee   (note 4)	(275)	-	(275)	(247)	-	(247)	(503)	-	(503)
Other administrative expenses	(135)	-	(135)	(123)	-	(123)	(234)	-	(234)
Net return before finance costs and taxation	263	2,203	2,466	243	4,043	4,286	371	11,983	12,354
Finance costs of borrowings	(91)	-	(91)	(88)	-	(88)	(179)	-	(179)
Net return on ordinary activities before taxation	172	2,203	2,375	155	4,043	4,198	192	11,983	12,175
Tax on ordinary activities      (note 5)	(47)	-	(47)	(43)	-	(43)	(78)	-	(78)
Net return on ordinary activities after taxation	125	2,203	2,328	112	4,043	4,155	114	11,983	12,097
Net return per ordinary share (note 7)	0.40p	7.08p	7.48p	0.36p	13.00p	13.36p	0.37p	38.53p	38.90p

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 2011

(unaudited)

	31 July 2011	31 July 2010	31 January 2011
	£'000	£'000	£'000
Fixed asset investments
Listed equities	66,032	54,113	63,245
Unlisted equities †	-	1,172	-
	66,032	55,285	63,245
Current assets
Debtors	904	126	124
Cash and short term deposits	1,154	1,019	1,333
	2,058	1,145	1,457
Creditors
Amounts falling due within one year (note 8)	(10,096)	(233)	(9,036)
Net current assets	(8,038)	912	(7,579)
Total assets less current liabilities	57,994	56,197	55,666
Creditors
Amounts falling due after more than one year (note 8)	-	(8,473)	-
Total net assets	57,994	47,724	55,666
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	30,094	19,951	27,891
Revenue reserve	(4,405)	(4,532)	(4,530)
Shareholders' funds	57,994	47,724	55,666

Net asset value per ordinary share (after deducting borrowings at fair value) (note 9)	186.5p	153.1p	179.0p
Net asset value per ordinary share (after deducting borrowings at par value)	186.5p	153.5p	179.0p
Ordinary shares in issue (note 10)	31,100,497	31,100,497	31,100,497

† Investments quoted on the Hercules Japan market were classified as unlisted as this market was not an official stock exchange until it merged with the JASDAQ market on 12 October 2010.

 

BAILLIE GIFFORD SHIN NIPPON PLC

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

(unaudited)

For the six months ended 31 July 2011

	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	-	-	-	2,203	125	2,328
Shareholders' funds at 31 July 2011	3,110	7,674	21,521	30,094	(4,405)	57,994

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 year ended 31 January 2011

	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	-	-	-	11,983	114	12,097
Shareholders' funds at 31 January 2011	3,110	7,674	21,521	27,891	(4,530)	55,666

^*The Capital reserve includes investment holding gains of £15,333,000 (31 July 2010 - gains of £7,601,000; 31 January 2011 - gains of £14,892,000). 

BAILLIE GIFFORD SHIN NIPPON PLC

CONDENSED CASH FLOW STATEMENT (unaudited)
	Six months to 31 July 2011 £'000		Six months to 31 July 2010 £'000		Year to 31 January 2011 £'000
NET CASH INFLOW FROM OPERATING ACTIVITIES	242		273		440
NET CASH OUTFLOW FROM SERVICING OF FINANCE	(107)		(85)		(171)
TOTAL TAX PAID	(46)		(47)		(83)
NET CASH (OUTFLOW)/INFLOW FROM FINANCIAL INVESTMENT	(294)		218		447
(DECREASE)/INCREASE IN CASH	(205)		359		633
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
(Decrease)/increase in cash in the period	(205)		359		633
Exchange movement on bank loans	(313)		(556)		(846)
Exchange differences on cash	26		41		81
MOVEMENT IN NET DEBT IN THE PERIOD	(492)		(156)		(132)
NET DEBT AT START OF THE PERIOD	(7,430)		(7,298)		(7,298)
NET DEBT AT END OF THE PERIOD	(7,922)		(7,454)		(7,430)
RECONCILIATION OF NET RETURN BEFORE FINANCE COSTS AND TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES
Net return before finance costs and taxation	2,466		4,286		12,354
Gains on investments	(2,471)		(4,592)		(12,795)
Currency losses	268		549		812
Changes in debtors and creditors	(21)		30		69
NET CASH INFLOW FROM OPERATING ACTIVITIES	242		273		440

 

BAILLIE GIFFORD SHIN NIPPON PLC

TWENTY LARGEST EQUITY HOLDINGS at 31 July 2011 (unaudited)
Name		Business	Value £'000	% of total assets
	Start Today	Internet fashion retailer	3,569	5.3
	Message	Nursing services for the elderly	3,105	4.6
	Nabtesco	Hydraulic equipment	2,357	3.5
	Don Quijote	Discount store chain	2,234	3.3
	Hamakyorex	Third party logistics	2,041	3.0
	EPS	Clinical testing services	1,743	2.6
	H.I.S.	Discount travel agency	1,704	2.5
	Cocokara Fine	Drugstore chain	1,692	2.5
	Monotaro	Supplies small machinery parts	1,659	2.5
	Daikokutenbussan	Discount store for food and sundry goods	1,597	2.4
	M3	Online medical database	1,590	2.4
	Nakanishi	Dental equipment	1,519	2.3
	Iriso Electronics	Specialist connectors	1,321	2.0
	Unipres	Manufacturer of automotive components	1,304	2.0
	Asics	Sports shoes and clothing	1,268	1.9
	First Juken	Builds and sells residential buildings	1,210	1.8
	Nippon Thompson	Needle roller bearings	1,210	1.8
	Nihon M&A Center	M&A advisory services	1,165	1.7
	Osaka Securities Exchange	Stock exchange operator	1,124	1.7
	Horiba	Manufacturer of measuring instruments and analysers	1,100	1.6
			34,512	51.4

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 2011 and in accordance with the ASB's Statement 'Half-Yearly Financial Reports' and have not been audited or reviewed by the Auditors pursuant to the Auditing Practices Board Guidance on 'Review of Interim Financial Information.' The Company's assets, the majority of which are investments in quoted securities which are readily realisable, exceed its liabilities significantly.  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 2011 has been extracted from the statutory accounts which have been filed with the Registrar of Companies. The Auditors'  Report on these accounts was not qualified and did not contain a statement under sections 498 (2) or (3) of the Companies Act 2006.
		Six months to 31 July 2011		Six months to 31 July 2010	Year to 31 January 2011
		£'000		£'000	£'000
3.	Net gains on investments
	Gains on sales on investments	2,030		531	1,443
	Movement in investment holdings gains	441		4,061	11,352
		2,471		4,592	12,795
4.	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 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 2011		Six months to 31 July 2010	Year to 31 January 2011
		£'000		£'000	£'000
7.	Net return per ordinary share
	Revenue return		125	112	114
	Capital return		2,203	4,043	11,983
	Total return		2,328	4,155	12,097
	Net return per ordinary share is based on the above totals of revenue and capital and on 31,100,497 (31 July 2010 - 31,100,497 and 31 January 2011 - 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 within one year include a bank loan of £9,076,000  (¥1.15 billion) outstanding under a yen loan facility repayable on 10 August 2011 (31 July 2010 - £8,473,000 (¥1.15 billion) included in amounts falling due after more than one year; 31 January 2011 - £8,763,000 (¥ 1.15 billion)).
9.	The fair value of the bank loan at 31 July 2011 was £9,076,000 (31 July 2010 - £8,577,000; 31 January 2011 - £8,763,000).
	BAILLIE GIFFORD SHIN NIPPON PLC
	NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited) (Ctd)
10.	At 31 July 2011 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 2011. 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 £4,000 (31 July 2010 - £3,000; 31 January 2011 - £5,000) and transaction costs on sales amounted to £4,000 (31 July 2010 - £3,000; 31 January 2011 - £6,000).
12.	None of the views expressed in this document should be construed as advice to buy or sell a particular investment.
Principal Risks and Uncertainties The principal risks facing the Company relate to the Company's investment activities. These risks are market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. An explanation of these risks and how they are managed is contained in note 19 of the Company's Annual Report and Financial Statements for the year to 31 January 2011. The principal risks and uncertainties have not changed since the publication of the Annual Report, which can be obtained free of charge from Baillie Gifford & Co and is available on the Shin Nippon page of the Managers' website: www.shinnippon.co.uk. Other risks facing the Company include the following: gearing risk (the use of borrowing can magnify the impact of falling markets), the risk that the discount can widen, regulatory risk (that the loss of investment trust status or a breach of the UKLA Listing Rules could have adverse financial consequences and cause reputational damage), and operational/financial risk (failure of service providers' accounting systems could lead to inaccurate reporting or financial loss). Further information can be found on page 19 of the Annual Report.
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.
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