Interim Results
Baillie Gifford Shin Nippon PLC
27 August 2004
BAILLIE GIFFORD SHIN NIPPON PLC
Results for the six months to 31 July 2004
Shin Nippon outperformed its comparative index* both in share price+ and net
asset value performance for the six months to 31 July 2004. The Company ranks
second in its AITC peer group in terms of six month and one year net asset value
performance.
• In the six months to 31 July 2004, the Company's share price rose by 23.4%+ and net asset value per
share by 17.3%, while the comparative index gained 16.2%.
• Out-performance was aided through the use of gearing and good stock selection in the Financials and
Real estate and construction sectors. Net gearing as at 31 July was 17.2%.
• Although partially driven by some speculative elements, small capitalisation stocks have out-performed
their larger peers. The TOPIX index has risen only 3.4% over the six months to 31 July 2004 (in
sterling terms).
• The trend in the Japanese economy remains positive with exports still rising sharply, particularly to
Korea and Taiwan. The Japanese consumer is becoming more confident.
• We think that the current upturn is long enough to resolve some of the structural issues for Japan and
have therefore recently re-financed some of our borrowings with a seven year loan.
• The Managers continue to find attractively valued stocks with good long term growth prospects, and are
optimistic about the duration and strength of the current economic cycle.
* The Company's comparative index is a composite index of the Tokyo Second
Section Index, the TOPIX Small Index and the JASDAQ OTC Index, weighted by
market capitalisation, in sterling terms.
+ Past performance is no guarantee of future performance.
Shin Nippon aims to achieve capital growth principally through investment in
smaller Japanese companies which are believed to have above average prospects
for capital growth. At 31 July 2004 the Company had total assets of £61.1
million.
The Company is managed by Baillie Gifford & Co., an Edinburgh based fund
management group with around £29 billion funds under management and advice.
27 August 2004
- ends -
For further information please contact:
Alistair Way
Baillie Gifford & Co 0131 275 2000
Mike Lord, Director
Broadgate Marketing 020 7726 6111
Baillie Gifford & Co. is authorised and regulated by the Financial Services
Authority.
BAILLIE GIFFORD SHIN NIPPON PLC
Interim Report
Shin Nippon's net asset value per share has risen by 17.3% over the last six
months, which compares to a sterling rise of 16.2% in the weighted index of the
TOPIX Small, JASDAQ OTC and Tokyo Stock Exchange Second Section. Small
capitalisation stocks have continued to perform better than their larger
counterparts over this period, as demonstrated by a sterling rise of just 3.4%
in the broad market TOPIX index. The Company ranks second in its AITC peer
group in terms of net asset performance over the six month period.
The main reason behind the strength in the equity market, particularly among
second tier stocks, has been the continuing positive trend in the Japanese
economy. Exports are still rising sharply, which is encouraging rapid growth in
domestic capital expenditure. There had been concerns that the boom in exports
to China could reverse given the Chinese government's attempts to slow its
economy, but there is still little sign of this. Meanwhile, exports to Korea
and Taiwan are accelerating and are becoming greater contributors to Japanese
GDP growth this year than China.
Japanese consumers are also becoming more confident, partly due to greater
buoyancy in the labour market. This increased consumption is not really showing
up in retail sales, but rather in spending on foreign travel, restaurants, and
services such as education and nursing care. The long term trend towards
increased consumption of services is a benefit to several of our stocks, such as
discount travel agent HIS. Meanwhile, corporate outsourcing of non-core
activities continues to accelerate, to the benefit of business service providers
such as product design engineer ARRK and third party logistics operator
Hamakyorex.
On the whole we are optimistic about the duration and strength of this economic
cycle in Japan and have therefore recently taken out a seven year loan to
re-finance part of the Company's borrowings at an attractive long-term rate.
Although the economy has been recovering since the start of 2002, corporate
inventories remain extremely low by historical standards, suggesting there is
little risk of an inventory adjustment derailing growth. The corporate sector
appears now much more efficiently managed, demonstrated by costs continuing to
fall despite the top-line improvement. Japanese GDP figures have been extremely
volatile in recent quarters, but better constructed data series such as
industrial production, machinery orders and the tertiary index have given a more
solid impression of above-trend economic expansion. We view the rising oil
price as only a minor risk factor, given Japan's extremely high energy
efficiency. The main risk factor remains Japan's economic sensitivity to
external demand from Asia and the US.
The sharp rise in small capitalisation equity prices since April 2003 has
undoubtedly contained something of a speculative element, driven by domestic
retail investors, as evidenced by the elevation of certain speculative internet
and software stocks to heady valuations reminiscent of the 1999 bubble. The
biggest individual contributor to Shin Nippon's performance in the six months
under review was the small IT services company MEW Information Systems, but on
the whole we have oriented the portfolio towards more reasonably valued stocks.
We have had excellent returns from our holdings in the Financials sector, with
the niche consumer loan companies OMC Card, Nissin and Sanyo Shinpan performing
well as bankruptcies and credit costs decline and sector consolidation
accelerates. Our holdings in the Real estate and construction sector also did
well, with companies such as condominium developer Goldcrest and property asset
manager Kennedy Wilson enjoying improving activity as asset price deflation
eases.
Share price performance has been less favourable from our holdings in the
machinery and semiconductor-related sectors, despite buoyant operational
performance and rising earnings estimates for most of these stocks. Clearly
there are fears about sustainability of this economic cycle, with some investors
viewing this as a cyclical peak year for earnings. As mentioned above, we are
more optimistic, and the portfolio's biggest overweight sector position at
present is in Miscellaneous manufacturing and machinery.
On the whole, although small companies in aggregate are less cheap relative to
large companies after the very strong price performance, we remain optimistic.
The Company's portfolio avoids the most speculatively valued sectors, and we
continue to find attractively valued stocks with good long term growth
prospects.
The following is the interim statement for the six months ended 31 July 2004
which has been neither reviewed nor audited by the auditors. This statement is
being printed and will be sent to all shareholders on 10 September 2004. Copies
will be available for inspection at the Registered Office of the Company or may
be obtained on request from the Managers and Secretaries after that date.
BAILLIE GIFFORD SHIN NIPPON PLC
STATEMENT OF TOTAL RETURN
(unaudited and incorporating the revenue account*)
for the six months ended for the six months ended for the year ended
31 July 2004 31 July 2003 31 January 2004
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Realised
gains/(losses) on
investments - 5,783 5,783 - (4,633) (4,633) - (2,542) (2,542)
Unrealised gains on
investments - 1,482 1,482 - 11,969 11,969 - 18,777 18,777
Currency gains/(losses)
(note 2) - 471 471 - (70) (70) - 42 42
Income (note 3) 328 - 328 305 - 305 524 - 524
Investment management fee (271) - (271) (167) - (167) (389) - (389)
Other administrative
expenses (80) - (80) (74) - (74) (160) - (160)
Net return before finance
costs and taxation (23) 7,736 7,713 64 7,266 7,330 (25) 16,277 16,252
Finance costs of
borrowings (86) - (86) (83) - (83) (170) - (170)
Return on ordinary
activities before
taxation (109) 7,736 7,627 (19) 7,266 7,247 (195) 16,277 16,082
Tax on ordinary
activities (19) - (19) (28) - (28) (43) - (43)
Return on ordinary
activities after taxation (128) 7,736 7,608 (47) 7,266 7,219 (238) 16,277 16,039
Transfer (from)/to
reserves (128) 7,736 7,608 (47) 7,266 7,219 (238) 16,277 16,039
Return per ordinary share
(note 5) (0.42p) 25.28p 24.86p (0.15p) 23.69p 23.54p (0.78p) 53.14p 52.36p
* The revenue 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.
BAILLIE GIFFORD SHIN NIPPON PLC
SUMMARISED BALANCE SHEET
at 31 July 2004
(unaudited)
31 July 2004 31 July 2003 31 January 2004
£'000 £'000 £'000
FIXED ASSET INVESTMENTS
Listed Japanese equities 51,483 24,948 38,320
Unlisted equities - traded on the OTC/ Hercules Japan markets 6,335 12,025 10,791
- other unlisted 928 734 809
58,746 37,707 49,920
Net liquid assets 2,341 4,802 1,451
Total assets (before deduction of bank loans) 61,087 42,509 51,371
Bank loans (note 6) (9,374) (7,225) (7,266)
51,713 35,284 44,105
CAPITAL AND RESERVES
Called-up share capital 3,060 3,060 3,060
Capital reserves 52,919 36,171 45,183
Revenue reserve (4,266) (3,947) (4,138)
EQUITY SHAREHOLDERS' FUNDS 51,713 35,284 44,105
NET ASSET VALUE PER ORDINARY SHARE (note 7) 169.0p 115.3p 144.4p
Ordinary shares in issue (note 8) 30,600,497 30,600,492 30,600,492
BAILLIE GIFFORD SHIN NIPPON PLC
SUMMARISED CASH FLOW STATEMENT
(unaudited)
Six months Six months to Year to
to 31 July 2004 31 July 2003 31 January
£'000 £'000 £'000
NET CASH (OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES (note 9) (158) 40 118
NET CASH OUTFLOW FROM SERVICING OF FINANCE (81) (82) (168)
TOTAL TAX PAID (20) (28) (44)
FINANCIAL INVESTMENT
Acquisitions of investments (14,432) (7,843) (19,423)
Disposals of investments 10,551 9,912 18,588
Realised currency profit 43 54 207
NET CASH (OUTFLOW)/INFLOW FROM FINANCIAL INVESTMENT (3,838) 2,123 (628)
NET CASH (OUTFLOW)/INFLOW BEFORE FINANCING (4,097) 2,053 (722)
FINANCING
Net inflow from bank loans 2,536 - -
Shares purchased for cancellation - (221) (220)
NET CASH INFLOW/(OUTFLOW) FROM FINANCING 2,536 (221) (220)
(DECREASE)/INCREASE IN CASH (1,561) 1,832 (942)
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
(Decrease)/increase in cash in the period (1,561) 1,832 (942)
Net inflow from bank loans (2,536) - -
Exchange movement on bank loans 428 (124) (165)
MOVEMENT IN NET DEBT IN THE PERIOD (3,669) 1,708 (1,107)
NET DEBT AT START OF THE PERIOD (5,222) (4,115) (4,115)
NET DEBT AT END OF THE PERIOD (8,891) (2,407) (5,222)
BAILLIE GIFFORD SHIN NIPPON PLC
TWENTY LARGEST EQUITY HOLDINGS
at 31 July 2004
Name Business Market % of total
value assets
£'000
Arisawa Manufacturing Specialist electronic materials 1,734 2.8
Fuji Seal Packaging and shrink-wrap materials 1,711 2.8
Sumisho Lease Specialist leasing operator 1,687 2.8
Goldcrest Condominium developer 1,634 2.7
USS Company Second-hand car auctioneer 1,554 2.5
Sanyo Shinpan Finance Consumer loans and credit cards 1,522 2.5
Seiko Diversified precision manufacturer 1,436 2.4
* ARRK Outsourced product design 1,374 2.2
Bandai Makers of toys, cartoons and character goods 1,340 2.2
* En-Japan Online job agency 1,338 2.2
* SES Semiconductor cleaning equipment 1,305 2.1
Nippon Thompson Linear motion guides 1,181 1.9
CKD Pneumatic machinery 1,142 1.9
SMBC Friend Securities Retail broker 1,106 1.8
Kose Cosmetics manufacturer 1,105 1.8
OMC Card Credit card company 1,099 1.8
Nissin Consumer loans and business finance 1,087 1.8
Sodick Electric discharge machines 1,023 1.7
Eneserve Power generation equipment 1,017 1.7
Nippon Light Metal Aluminium processor 1,016 1.7
26,411 43.3
* Denotes unlisted holdings traded on the OTC/Hercules Japan markets.
BAILLIE GIFFORD SHIN NIPPON PLC
NOTES
1. The financial statements for the six months to 31 July 2004 have been prepared on the basis of the
accounting policies set out in the Company's Annual Financial Statements at 31 January 2004. The
Interim Report was approved by the Board on 26 August 2004. None of the views expressed in this
document should be construed as advice to buy or sell a particular investment.
31 July 2004 31 July 2003 31 January 2004
£'000 £'000 £'000
2. Currency gains/(losses)
Realised exchange differences 43 54 207
Movement in unrealised exchange differences 428 (124) (165)
471 (70) 42
3. Income includes stock lending fee income of £52,000 (31 July 2003 - £27,000; 31 January 2004 -
£81,000).
4. No interim dividend will be declared.
5. Return per ordinary share
Revenue return (128) (47) (238)
Capital return 7,736 7,266 16,277
Return per ordinary share is based on the above totals of revenue and capital and on 30,600,494 (31 July
2003 - 30,663,475; 31 January 2004 - 30,631,725) ordinary shares, being the weighted average number of
ordinary shares in issue during the period.
6. Bank loans of £9.4 million (Y1.9 billion) have been drawn down under yen loan facilities which are
repayable between August 2004 and March 2007 (31 July 2003 - £7.2 million (Y1.4 billion); 31 January 2004
- £7.3 million (Y1.4 billion)).
7. There was no dilution to net asset value per share at any date. The 2,517,891 outstanding warrants at 31
July 2004 are exercisable at 200p each on 30 April 2005.
8. At 31 July 2004 the Company had authority to buy back 4,587,013 of its own shares for cancellation in
accordance with the authority granted at the AGM in April 2004. No shares were bought back during the
period under review. During the period 5 warrants were exercised.
9. Reconciliation of operating revenue to net cash
(outflow)/inflow from operating activities
Net return before finance costs and taxation (23) 64 (25)
Decrease/(increase) in accrued income 10 (6) (14)
(Increase)/decrease in other debtors (36) (20) 11
(Decrease)/increase in creditors (109) 2 146
Net cash (outflow)/inflow from operating (158) 40 118
activities
10. The financial information contained within this interim report does not constitute statutory accounts as
defined in section 240 of the Companies Act 1985. The financial information for the year ended 31
January 2004 has been extracted from the statutory accounts which have been filed with the Registrar of
Companies and which contain an unqualified Auditors' Report and do not contain a statement under the
sections 237(2) or (3) of the Companies Act.
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