Baillie Gifford Shin - Baillie Gifford Shin Nippon PLC Final Results
22/03/2023 07:00
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RNS Number : 7769T Baillie Gifford Shin Nippon PLC 22 March 2023
RNS Announcement
Baillie Gifford Shin Nippon PLC (BGS)
Legal Entity Identifier: X5XCIPCJQCSUF8H1FU83
Results for the year to 31 January 2023
Regulated Information Classification: Additional regulated information
required to be disclosed under the applicable laws and regulations.
The following is the results announcement for the year to 31 January 2023
which was approved by the Board on 21 March 2023.
Over the year to 31 January 2023, the Company's net asset value per share
declined by 1.2%(†) and its share price by 8.9%. The comparative index*
appreciated by 5.7%.
In sterling terms over three years, the net asset value was up by 0.5%(†)
and the share price was down 6.8%, while the Company's comparative index* was
up 6.6%. Over the five years to 31 January 2023, the Company's net asset value
per share appreciated by 2.9%(†) and its share price declined by 13.9%. Shin
Nippon's comparative index* return appreciated by 7.6% over this period.
¾ The Managers' unwavering focus on high-growth smaller companies is
currently out of sync with investor sentiment, so the recent performance in
absolute and relative terms is not unexpected. The Board recognises that the
valuation downgrade of growth companies does not always correlate with their
operational performance.
¾ Macro headwinds and the lingering effects of Covid-19 have led to poor
share price performance at many of the portfolio's internet companies such as
Infomart, Japan's leading online food ordering platform despite growing its
sales over the past year and generating a decent level of profits as well as
investing heavily for future growth, and online legal website Bengo4.com,
despite maintaining a high growth rate in sales and a very significant
increase in profitability.
¾ Among the positive contributors to performance over the year were
insurance company Lifenet, the leading online life insurer in Japan, drugstore
chain MatsukiyoCocokara and Kamakura Shinsho, an online platform for funerals
and end-of-life related services.
¾ Nine positions were sold and seven new positions were initiated in the
financial year, including one private company; plastic recycling company
JEPLAN which utilises a novel chemical method to recycle PET and polyester.
There are currently four private companies in the portfolio accounting for
3.0% of total assets.
¾ Growth stocks are now priced at levels that assume barely any future
increase in revenues or profits, which is in stark contrast to their
underlying fundamentals. The Board and Managers continue to believe that being
patient and seeing through market noise increases the chances of picking
exceptional companies that will deliver attractive long-term returns.
(†) After deducting borrowings at fair value.
* The Company's comparative index is the MSCI Japan Small
Cap Index (total return and in sterling terms). See disclaimer at the end of
this announcement.
Source: Refinitiv/Baillie Gifford and relevant underlying index providers. See
disclaimer at the end of this announcement.
Shin Nippon aims to achieve long term capital growth through investment
principally in small Japanese companies which are believed to have above
average prospects for growth. At 31 January 2023 the Company had total assets
of £633.5 million (before deduction of bank loans of £88.0 million).
The Company is managed by Baillie Gifford, an Edinburgh based fund management
group with approximately £227 billion under management and advice as at 17
March 2023.
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 shinnippon.co.uk
(http://www.shinnippon.co.uk) .
See disclaimer at the end of this announcement.
21 March 2023
For further information please contact:
Anzelm Cydzik, Baillie Gifford &
Co
Tel: 0131 275 2000
Jonathan Atkins, Director, Four Communications
Tel: 0203 920 0555 or 07872 495396
Chairman's Statement
Performance
Over the year to 31 January 2023, Shin Nippon's net asset value ('NAV') per
share* declined by 1.2% and its share price by 8.9%. The comparative index
(MSCI Japan Small Cap Index, total return in sterling terms) appreciated by
5.7%. As highlighted in my prior reports, your Board has historically reviewed
performance principally over rolling three-year periods and it is
disappointing to report relative underperformance over this period. Over the
three years to 31 January 2023, the Company's net asset value per share
appreciated by 0.5% during this period and its share price declined by 6.8%.
Shin Nippon's comparative index return appreciated by 6.6%.
Following a review and assessment of the Managers' time horizon for
investment, the Board has concluded that, going forward, performance should be
measured principally over rolling five-year periods. Over the five years to 31
January 2023, the Company's net asset value per share appreciated by 2.9% and
its share price declined by 13.9%. Shin Nippon's comparative index return
appreciated by 7.6% over this period. As you will note later in my report, at
this year's Annual General Meeting ('AGM') shareholders are being asked to
approve proposed changes to the Company's Objective and Policy, one of which
is to construct the portfolio through the identification of individual
companies which offer long term growth potential typically over a five rather
than three-to-five year period. Reviewing performance principally over
five-year periods aligns with this. As illustrated on page 6 of the Annual
Report and Financial Statements the Company outperformed the peer group over a
five-year period.
In the Managers' Report below, you will find a more detailed explanation of
the recent performance and commentary on some of the holdings, as well as
performance numbers over five and ten years. The Board maintains close
oversight of the performance of the Company. Although three year performance
has been disappointing and performance over the last two years has damaged
longer-term returns, we remain satisfied with the ten-year performance of the
Company. The Board recognises that the valuation downgrade of growth companies
does not always correlate with their operational performance. We remain
committed to the Managers' unwavering focus on high-growth smaller companies
and are confident that the Company is well placed to benefit from the long
term prospects of the companies held in the portfolio.
Growth investing is currently out of sync with investor sentiment and, as the
Managers' fundamental bottom-up investment approach does not consider the
make-up of the comparative index when constructing the portfolio, the recent
performance in absolute and relative terms is not unexpected and shareholders
should expect periods of underperformance. The Company also dropped back out
of the FTSE 250 index in March 2022, having been promoted in November 2020.
Outlook
The war in Ukraine is continuing to undermine sentiment in many ways. High
inflation is now a real threat to global growth and the inevitable increases
in interest rates will continue to provide headwinds in many economies. Shin
Nippon will not be immune to these issues.
That said, your Board was very encouraged to meet twenty-four different
companies on its recent trip to Japan. We met companies already owned in the
portfolio as well as some potential new holdings both in the listed and the
unlisted space. It was apparent that the negative effects of Covid-19 over the
last couple of years have largely dissipated, leading to a more positive
outlook with no visible evidence of any doom and gloom. However, there is no
getting away from the issue of the ageing population in Japan where people are
living longer and, where the economy is trying to grow, this inevitably puts
pressure on the ability to recruit suitable skilled labour. I have mentioned
this structural issue in previous statements. The companies we met were all
aware of these issues and your Board was left confident that they were being
addressed. The number of foreign workers in Japan continues to grow and this
trend will inevitably continue in the years ahead. There is no doubt that the
companies we met were engaging and confident about their future growth
prospects. We met some highly skilled individuals who are still trying to
disrupt norms and we were left feeling that the small cap sector in which the
Company invests is in good shape.
The Managers have for many years adopted a stock picking approach when shaping
the portfolio. As the Directors discovered on the trip, opportunities will
continue to present themselves and we are wholly supportive of the Managers in
seeking those out and continuing to strengthen the portfolio. The start-up
environment for companies is changing and Government policies are more
supportive. There is a positive attitude to creating wealth and starting
exciting, disruptive businesses. The Board and the Managers remain encouraged
by the outlook.
Borrowings
The Company's invested gearing increased over the course of the year from 11%
to 15%(†) whilst potential gearing was unchanged at 16%. Subsequent to the
year end, a new secured ¥2,000 million three-year revolving credit facility
was drawn down from ING Bank N.V. The Board agreed to increase gearing to
allow the Managers to invest in the strong pipeline of current opportunities,
bolstering the high growth nature of the portfolio at the right time and at
attractive valuations.
As at 31 January 2023, the Company had total borrowings of ¥14.1 billion
(£88.0 million) at an average interest rate of 1.4%. During the year the yen
weakened against sterling by 3.4%. The Company undertook no currency hedging
during the year and has no plans to do so.
Revenue Return and Ongoing Charges
Revenue return per share was 1.11p compared to 0.29p the prior year. The
revenue reserve remains in deficit therefore the Board is recommending that no
dividend be paid. The Company's ongoing charges were 0.74%(†) compared to
0.66% a year earlier. Although expenses decreased during the year the average
daily NAV fell from £719.1 million in 2022 to £521.3 million in 2023 causing
the increase in the overall ongoing charge percentage. A reconciliation of
this can be found at the end of this announcement.
Share Issuance and Buybacks
Having ranged between a 1.5% premium and 11.6% discount, averaging a 6.1%(†)
discount, the Company's shares ended the period at an 8.6% discount to the NAV
per share, having been at a 0.8% discount a year earlier.
During the course of the year, 100,000 shares were bought back at a cost of
£154,000 and are currently held in treasury. As part of this year's AGM
business, approval is again being sought to renew the authority to buy back
shares. This would enable the Company to buy back shares if the discount to
NAV was substantial in absolute terms or in relation to its peers, should that
be deemed desirable. Any such activity would enhance the NAV attributable to
existing shareholders.
Although no shares were issued during the year, there will also be an AGM
resolution to authorise the approval of share issuance, on a non pre-emptive
basis, of up to 10% of the Company's issued share capital. As done in the
past, any share issuance would be undertaken at a premium to NAV per share and
therefore be NAV accretive for existing shareholders. The Board is of the view
that being able to increase the size of the Company, when conditions permit,
helps to improve liquidity, reduces costs per share and potentially increases
the appeal of the Company to a wider range of shareholders.
Board Composition and Governance
I have thoroughly enjoyed my time as a Director and Chair of Baillie Gifford
Shin Nippon PLC but, as highlighted to the market back in December, I will not
be seeking re-election at the AGM in May. It has been a pleasure for me to
work with such an impressive Board and also such a talented team at Baillie
Gifford. I have thoroughly enjoyed my time on the Board and am proud of our
achievements over the last nine years.
On my retirement, I am pleased to report that Mr Jamie Skinner will take on
the chairship of the Board and Mr Kevin Troup will become Chair of the Audit
Committee. Ms Abigail Rotheroe has been appointed as the Chair of the
Nomination Committee, effective from 1 February 2023.
The composition of the ongoing Board is appropriate for the foreseeable future
and will be compliant with the pending diversity rules coming into effect for
accounting periods beginning on or after 1 April 2022.
Environmental, Social and Governance (ESG)
The consideration of ESG factors is part of the long term, active, patient and
growth focused approach to investment by our Managers. Your Board is pleased
with the focus the Managers place on ESG and the resources applied to it. ESG
in its widest sense is a broad and complex subject and it features as part of
every Board meeting. Some examples of engagement with companies undertaken by
the Managers can be found below.
Annual General Meeting - Objective & Policy and Articles of Association
In addition to the usual, and also aforementioned, AGM business, a resolution
is being put before shareholders to make a number of, principally, stylistic
changes to the Company's Objective and Policy, which will also help to clarify
some potential unintended ambiguities in the current wording and to align
investment horizons with the Managers'. A comparison of the proposed and
current wording can be found on pages 7 and 8 of the Annual Report and
Financial Statements. The Board is taking a prudent approach to these changes
and is treating them, in aggregate, as a material change. Therefore, in
accordance with the Listing Rules, the Company is required to seek shareholder
approval for the proposed amendments.
Furthermore, shareholders are being asked to approve changes to the Company's
Articles of Association, details of which can be found on pages 33 and 34 of
the Annual Report and Financial Statements. One of the amendments would, if
passed, permit the Company to hold virtual AGMs in the future. This authority
is being sought not as a replacement to in-person AGMs, but as an alternative
in extremis should it be required due to prevailing circumstances meaning that
an in-person meeting was not possible, as was the case at points during recent
years because of restrictions due to Covid-19.
This year's AGM will take place in person at Baillie Gifford's offices in
Edinburgh at 9:15am on Wednesday 17 May 2023. The Managers will be presenting
and the Board and I look forward to seeing as many of you there as possible.
M Neil Donaldson
21 March 2023
Past performance is not a guide to future performance.
Source: Refinitiv/Baillie Gifford and relevant underlying index providers. See
disclaimer at the end of this announcement.
* After deducting borrowings at fair value
† Alternative Performance Measure - see Glossary of Terms and Alternative
Performance Measures at the end of this announcement.
For a definition of terms see Glossary of Terms and Alternative Performance
Measures at the end of this announcement
Managers' Report
2022 was another difficult year for growth investing. A number of external
events weighed on investor sentiment. Global supply chains, especially autos
and semiconductors, are recovering gradually but continue to suffer from the
after-effects of the pandemic. The war in Ukraine had global repercussions as
Europe started weaning itself off Russian gas, driving up global energy prices
in the process. This has been a major cause of the high rates of inflation
being witnessed globally. Central banks across the world have been raising
interest rates in a bid to control inflation. This has resulted in significant
weakness in the share price of high growth stocks as investors worry that
higher interest rates would lead to weak demand for their goods and services
in the future.
Against this challenging backdrop, there have been encouraging signs. An
uptick in inflation is leading to wage growth in real terms. This is
particularly noteworthy as wages have been generally flat in Japan for the
past thirty years due to deflation. Increases in wages should lead to higher
consumer confidence and thus a more positive outlook for the domestic economy.
Japan has now fully reopened its borders to tourists, having eliminated all
Covid-related entry requirements. More recently, these green shoots of a
return to normality have been reflected in market sentiment. We are returning
to an environment where share prices are driven more by fundamentals than pure
macro developments. Despite disappointing share price performance, we note
that the vast majority of our holdings have actually exhibited good
operational progress.
Performance
Shin Nippon's focus is, and remains, to invest in fast-growing smaller
companies in Japan which are often run by dynamic founders. We continue to
believe that they are driving much-needed change, especially in light of an
ageing and shrinking workforce. We remain certain that investing in these
companies will enable us to generate attractive shareholder returns in the
long run, despite short-term turbulence. Companies in more traditional sectors
of the economy continue to face long-term challenges and we, therefore, prefer
to back companies that are disrupting the status quo.
For the year ending 31 January 2023, Shin Nippon's net asset value ('NAV')
decreased by 1.2% compared to an increase of 5.7% in the MSCI Japan Small Cap
Index (all figures total return and in sterling terms, NAV with borrowings at
fair value). Growth stocks have remained out of favour, reflecting the
market's preference for short-term certainty over long-term opportunity.
Encouragingly, the outlook seems to be getting less myopic. Following
continued share price weakness in the first half of the year, we witnessed a
more encouraging level of performance in the second half. We remain optimistic
regarding the long-term growth prospects of the high-growth businesses held in
Shin Nippon but note that the Company's weak performance over the past two
years has impacted the long-term numbers, which we consider a fairer way of
looking at performance. Over five years, Shin Nippon's NAV has increased by
2.9% versus an increase of 7.6% in the comparative index. Over ten years, Shin
Nippon's NAV has increased by 310.4% compared to an increase of 150.1% in the
MSCI Japan Small Cap Index.
Numerous macro headwinds and the lingering effects of Covid-19 have led to
poor share price performance at many of our internet companies. Infomart,
Japan's leading online food ordering platform, was one such poor performer.
The significant decline in eating out naturally hit a company that is
connecting suppliers with restaurants. Despite this extraordinarily tough
environment, Infomart has grown its sales over the past year and is returning
to higher profitability. Its recently started electronic invoicing business is
gaining traction as well. We remain attracted by the opportunities in both
segments and are hopeful that the market will re-evaluate Infomart on the back
of its improving fundamentals.
Online legal website Bengo4.com similarly remains out of fashion despite
maintaining a high growth rate in sales and a very significant increase in
profitability. Its electronic signature segment 'CloudSign' has established
itself as the industry standard in Japan to the extent that management is now
focusing on improving margins rather than just growing sales.
Another detractor to performance was biotech company Healios. Unfortunately,
its main drug failed to show improved patient outcomes in a clinical trial, so
we decided to sell the holding.
Among the positive contributors was insurance company Lifenet. It is the
leading online life insurer in Japan albeit with a still very small share of
the overall market. Lifenet's sales growth recently accelerated, and the
company is edging closer to profitability. It continues to partner with major
enterprises in Japan, like mobile provider KDDI and credit card company
Sumitomo Mitsui Card. The opportunity remains significant, and we continue to
believe that Lifenet is much nimbler than incumbent insurance companies and
will therefore be able to take market share for a long period of time.
Drugstore chain MatsukiyoCocokara was another strong performer. As referenced
in the interim report, the company recently acquired a smaller competitor and
is benefitting from the resultant synergies, leading to increased
profitability for the group as a whole. A large proportion of its sales come
from cosmetics which means that it should benefit from a recovery in inbound
tourism. Japanese cosmetics are highly appreciated, especially by Chinese
consumers, and MatsukiyoCocokara is well placed to satisfy any future
increases in demand.
Another beneficiary of Japan's reopening is Kamakura Shinsho, an online
platform for funerals and end-of-life related services. In-person funerals
have resumed in earnest in Japan following the removal of all Covid-era
restrictions. This has allowed the company to re-accelerate its sales growth
and boost its profitability which took a significant hit during Covid-19. The
funeral industry in Japan remains deeply conservative and is characterised by
very high prices. Kamakura Shinsho continues to disrupt this unhappy
status-quo to give consumers better choices. Its growth runway remains
significant.
Portfolio
Reflecting our bottom-up stock-picking approach, Shin Nippon's active share
remains high at 94%. This implies only a 6% overlap with the comparative
index. The portfolio turnover for the financial year was 13.8% which is in
line with our long investment horizon of five to ten years.
We purchased seven new holdings in the financial year, including one private
company. They represent an eclectic range of industries which illustrates our
non-dogmatic approach to investing. Among the new holdings was Avex, one of
Japan's leading music entertainment businesses. Led by the founder, who
remains in the role of chair, management used the pandemic disruption to
aggressively streamline the business and bolster the balance sheet. With a
return to normality, Avex should benefit from a recovery in the live music
industry and its strong net cash position will allow it to strengthen its
competitive position.
Within cosmetics we discovered and invested in the Osaka-based company I-ne.
The company name stands for "Innovation never ends". This relatively young
business specialises in female haircare products. Despite entering a
competitive market, it has consistently boasted mid-teen percentage revenue
growth. New products have grown even faster. True to its name, the company is
utilising new and innovative techniques like artificial intelligence to
analyse product-market fit and customer feedback. This in turn is driving
product development and the company has a good track record of developing hit
products. We are attracted by the growth prospects and believe that margins
can significantly improve in the future. Furthermore, the founder retains a
70% stake in the company which should provide good alignment.
We also invested in two niche manufacturing businesses: Nittoku and Kohoku
Kogyo. Both have significant global market share in their respective business
areas. Nittoku produces cutting-edge coil winding machinery. Coils are found
in virtually every electronic product, but the real attraction is a continuous
endeavour to reduce their size and improve performance. The former is
particularly important for mobile handsets, where the number of coils jumped
from eight in a 4G handset to 40 in 5G. The latter is of significance for
electric vehicles as better coils lead to increased performance. Kohoku Kogyo
is similarly exposed to electric vehicles. The company produces lead terminals
for aluminium electrolytic capacitors. Compared to an internal combustion
engine car, an electric vehicle requires two to four times as many capacitors.
Given the high-performance requirements and high value-add, Kohoku's products
are priced at a premium and this should allow the company to improve its
margins over time. It also produces optical isolators for undersea internet
data cables, an area in which we have seen increased activity by both nation
states and private companies such as Alphabet and Meta.
In the private company space, we invested in plastic recycling company JEPLAN.
In contrast to conventional mechanical recycling methods, JEPLAN utilises a
novel chemical method to recycle PET and polyester. JEPLAN's approach is
environmentally friendly, scalable and highly energy efficient. It is working
with companies like Coca-Cola Japan and Nestlé Japan in the food and drink
sector as well as apparel brands like Uniqlo and Snow Peak. Despite being
quite small and private, the company is already generating a decent level of
sales and is close to profitability.
Software company SpiderPlus was another addition to the portfolio. It offers
software as a service ('SaaS') solutions for the management of construction
sites. The construction industry in Japan is very large and has barely been
digitised. Even more importantly, it is plagued by an ageing and shrinking
workforce and a large number of unfilled positions. Tools to make workers more
efficient are therefore very valuable and Spiderplus' product enables
significant time and cost savings. The company is led by a dynamic founder
with a background in construction subcontracting and we admire the ambition he
has for his company.
We exited nine holdings over the financial year. Among them was CyberAgent, a
media company offering online advertisement, mobile games and online
television. Having been held since 2013, the share price has increased
markedly, and its advertising and gaming end markets are mature and becoming
more competitive. As such, we struggled to see the company growing its sales
and profits significantly from here. A somewhat idiosyncratic case was
specialist financial software company Uzabase. A private equity company
announced its intention to acquire Uzabase at a 72% premium which we felt was
attractive and therefore decided to tender our shares. While still somewhat
unusual in Japan, we have noted an increase in private equity activity over
the past few years.
We also sold Aeon Delight, a building security and maintenance company.
Contrary to our original investment hypothesis, the company has been unable to
diversify its client base meaningfully beyond its parent company Aeon. We also
had high hopes for the company in the Chinese market which remains large and
fragmented but even here, management have not shown the drive and dynamism to
seize the opportunity, opting to adopt a more piecemeal approach instead.
Outlook
Given the scale and speed of the downturn in high growth stocks post-Covid, we
remain very conscious that this has negatively affected Shin Nippon's short
and longer-term performance. However, this has also meant that growth stocks
are now priced at levels that assume barely any future increase in revenues or
profits, which is in stark contrast to their underlying fundamentals. Despite
the discomfort from volatility, we believe it is important to stay true to our
stated investment philosophy and process which has served shareholders well
over longer periods of time. Being patient and seeing through market noise
increases our chances of picking exceptional companies that will deliver
attractive long-term returns.
As Japan slowly moves out of Covid-19, the focus will return to long-term
challenges. A shrinking labour force calls for increased digitalisation and
more efficient ways of working. Global warming and high energy prices provide
motivation to decarbonise the Japanese and global economy. The inexorable
shift to electric vehicles requires a recalibration of the auto industry.
Geopolitics is leading to a reshaping of the semiconductor industry. All these
challenges call for dynamic and nimble enterprises, run by bold entrepreneurs
willing to seize the myriad of opportunities that these changes are creating.
We believe Japanese smaller companies are at the forefront of enabling many of
these industry shifts, thereby providing an exciting array of investment
opportunities.
Baillie Gifford & Co
21 March 2023
Source: Refinitiv/Baillie Gifford and relevant underlying index providers. See
disclaimer at the end of this announcement.
Past performance is not a guide to future performance.
For a definition of terms see Glossary of Terms and Alternative Performance
Measures at the end of this announcement.
Valuing Private Companies
We hold our private company investments at an estimation of 'fair value', i.e.
the price that would be paid in an open-market transaction. Valuations are
adjusted both during regular valuation cycles and on an ad hoc basis in
response to 'trigger events'. Our valuation process ensures that private
companies are valued in both a fair and timely manner.
The valuation process is overseen by a valuations committee at Baillie
Gifford, which takes advice from an independent third party (S&P Global).
The valuations committee is independent from the portfolio managers, as well
as Baillie Gifford's Private Companies Specialist team, with all voting
members being from different operational areas of the firm, and the portfolio
managers only receive final valuation notifications once they have been
applied.
We revalue the private holdings on a three-month rolling cycle, with one-third
of the holdings reassessed each month. For Baillie Gifford Shin Nippon, and
our other investment trusts, the prices are also reviewed twice per year by
the respective boards and are subject to the scrutiny of external auditors in
the annual audit process.
Recent market volatility has meant that recent pricing has moved much more
frequently than would have been the case with the quarterly valuations cycle.
Beyond the regular cycle, the valuations committee also monitors the portfolio
for certain 'trigger events'. These may include changes in fundamentals, a
takeover approach, an intention to carry out an Initial Public Offering
('IPO'), company news which is identified by the valuation team or by the
portfolio managers or changes to the valuation of comparable public companies.
The valuations committee also monitors relevant market indices on a weekly
basis and update valuations in a manner consistent with our external valuer's
(S&P Global) most recent valuation report where appropriate. When market
volatility is particularly pronounced the team does these checks daily. Any ad
hoc change to the fair valuation of any holding is implemented swiftly and
reflected in the next published net asset value. There is no delay.
Review of Investments
A review of some of the Company's new acquisitions together with a list of the
ten largest investments is given below.
Top Ten
Litalico
2.7% of total assets
Litalico provides training and employment assistance for disabled people and
educational services for children with developmental difficulties. It targets
the roughly five million adults and children in Japan who suffer from
cognitive and mental disabilities. The Japanese government has put in place
policies to improve access and employment opportunities for disabled people.
This should benefit the likes of Litalico that is one of the few players with
nationwide coverage. The company is also developing new businesses to support
its core operation of providing training and employment. These include
computer programming for kids, financial planning for families with disabled
members, and after school and day-care services. We think the growth
opportunity for the company could be quite attractive given these tailwinds.
It is run by a young and dynamic President who owns a large stake in the
business.
Nakanishi
2.5% of total assets
Nakanishi manufactures dental equipment, specialising in rotary cutting tools
(handpieces), where it is one among the few leading players globally. Whilst
developed economies are fairly mature in terms of trends in dental health
care, there is significant growth in emerging economies as standards of living
rise and hygiene regulations are tightened. Nakanishi looks particularly well
placed to exploit growth in the Chinese market where it has a leading market
share at the higher end of the market. The company is very profitable and has
had a good record of growth since listing in 2000. It is also run by the
founding Nakanishi family who own a significant stake in the business, thereby
ensuring strong alignment with minority shareholders.
Shoei
2.5% of total assets
Shoei is the leading manufacturer of premium motorcycle helmets globally. The
market is expanding thanks to growth in emerging markets and barriers to entry
are high given the strict safety requirements. Shoei has been operating in
this niche market for over four decades and has established a strong and
globally recognised brand. It operates exclusively at the premium end of the
market and therefore, is able to make very high margins and returns. The
company is run by a dynamic and sensible management team that have sought to
maintain the high-end nature of its products and continue to engage in
innovative product development.
Descente
2.5% of total assets
Descente is a sportswear manufacturer. It has a portfolio of owned and
licensed brands which include names like Descente, Le Coq Sportif, Umbro and
Srixon. Its portfolio of brands varies by price and category. For example,
Descente is predominantly a high-end skiing and active-wear brand whereas
Umbro is more of a mid-market brand best known for football. It has a heritage
in performance sportswear, backed by research and development, which feeds
into its product range, particularly at the higher end. Roughly 50% of its
revenue comes from South Korea and 40% from Japan. China is a big opportunity
for Descente where it has a joint venture with Anta Sports, China's largest
sportswear brand by revenue. It appointed a new President in June 2019
signalling less of a reliance on the founding family. This followed on from
trading house Itochu upping its stake in Descente to around 40%. This rejig
should give Descente fresh impetus and it has set out plans to be more
aggressive in China and refocus on profitability in Japan. It also seems
confident that a downturn in its South Korea business is temporary in nature.
On top of this, Olympic sporting years are ahead in both Japan and China. This
along with health and well-being increasingly becoming a policy lever should
be helpful. Overall, an improving demand backdrop along with a more focused
strategy should mean sales and profit can grow meaningfully from here.
TechnoPro
2.5% of total assets
TechnoPro is a technology-focused staffing company. It supplies engineers to
the machinery, electrical, electronics, information systems, software,
biotechnology, construction and energy sectors. It is well placed to benefit
from structural growth drivers such as the labour shortage in Japan. The IT
industry is witnessing severe shortages of labour and as the leading provider
of engineers to this sector, TechnoPro is well positioned to enjoy strong
growth for many years.
Snow Peak
2.4% of total assets
Snow Peak is Japan's leading brand of high-end camping items with a line-up of
roughly 800 products. It has a strong reputation within Japan's camping
community and has a dedicated and growing user-base. Camping as a recreational
activity is seeing strong growth in Japan as an increasing number of 'second'
baby boomers (those born in the early 1970s) and young families embrace this
form of recreation. In the US, where the company is expanding aggressively,
roughly 1 in 3 households now undertake camping, representing a large market
for Snow Peak. The company is run by a father (founder) and daughter duo who
between them own nearly 30% of the company, thereby ensuring strong alignment.
The daughter is the chief designer of Snow Peak's products and has a
background in fashion and design. We think the long-term growth prospects for
the company could be quite exciting given the favourable industry background
and its strong brand.
MatsukiyoCocokara
2.3% of total assets
MatsukiyoCocokara is a leading drugstore in Japan. It was formed through the
merger of Matsumotokiyoshi, a high end cosmetics retailer, and Cocokara Fine,
a drugstore. The combined entity now holds among the largest market share by
number of stores in Japan. The integration of both businesses has been
progressing well and there are considerable synergies to be had from joint
procurement and operational rationalisation. The combined entity has been
realising these merger benefits, leading to rising margins. In addition, the
cosmetics business should be a big beneficiary of inbound tourism whereas the
drugstore part should have long-term structural growth opportunities due to
Japan's demographics.
Toyo Tanso
2.2% of total assets
Toyo Tanso makes speciality carbon products and has a leading global share in
isotropic graphite used in renewable energy equipment and semiconductor
manufacturing. It also has a leading global share in silicon carbide coated
graphite materials that are used in the manufacture of compound
semiconductors. Due to its excellent heat resistance and durability, Toyo
Tanso's isotropic graphite is a key consumable part of the heaters and
crucibles used in the manufacturing process of monocrystal silicon which is
the raw material for solar-cell devices and semiconductors. Both markets are
expected to see strong growth in the coming years, thanks to the proliferation
of devices that are using an increasing number of chips in them as well as the
emphasis on increasing the use of renewable energy. Toyo Tanso's isotropic
graphite and silicon carbide coated devices are high margin products and given
the favourable industry backdrop, we believe this has the potential of
transforming the company's margin and returns profile. This is a family run
business with nearly 30% of the company being held by the family and related
investment vehicles. We think this ensures strong long-term alignment with
minorities.
Lifenet Insurance
2.2% of total assets
Lifenet Insurance is a fast-growing online life insurance business. It offers
plain-vanilla life insurance products and sells predominantly through its own
online platform. Its direct-to-consumer model allows it to price
competitively, potentially an enduring competitive advantage. Incumbent peers
tend to operate people-heavy distribution channels and are burdened with an
ill-fitting cost base. Lifenet's customer centricity is backed by skills and
expertise in systems development. It is a mix between an insurer and an
internet-services business. We think this combination is attractive. Indeed,
third-party businesses in Japan are increasingly keen to team up with Lifenet.
The regulatory environment in Japan makes it difficult for new entrants to
write business on their own books, this is further help for Lifenet. We think
Lifenet is an ambitious and nimble business attacking a huge, rather stale,
industry.
Optex
2.1% of total assets
Optex is a global leader in infrared and laser sensors used in areas such as
surveillance systems, intrusion detection and factory automation. More
recently, the company has been successful in expanding the areas of
application for its sensors, a couple of examples being in remote monitoring
of customer facilities and acceleration sensors that measure how safely people
drive cars (which is then used for calculating insurance premiums for
customers). The number of growing areas of applications for its sensors means
that Optex is well placed to enjoy high growth rates for many years.
New Buys
GMO Financial Gate
1.6% of total assets
GMO Financial Gate ('GMOFG') is a leading offline digital payments provider.
Unlike online digital payments that happen exclusively over the internet,
offline digital payments take place either at a physical store or at IoT
enabled terminals like vending machines, ticketing machines, self-checkout
terminals and automated parking meters. Offline transactions also typically
involve the use of a terminal (card reader, QR code scanner etc.) that
supports a wide range of payment methods like credit/debit cards, points cards
and QR codes. While most payments companies in Japan operate in the online
payments space and continue to focus all their energies in this area, the
offline market has basically been left uncontested. GMOFG has filled this gap
and is looking to automate what remains a very large addressable market, many
magnitudes larger than the market for online payments. Along with offering
automated offline payments solutions like transaction processing and terminal
sales, GMOFG has also partnered with VISA and Sumitomo Mitsui Financial Group
(one of Japan's largest credit card issuers) to build an alternate offline
payments network that is low cost and much faster compared to traditional
networks operated by other card companies. It has also developed a terminal
called 'Stera' that operates exclusively on this new network and supports an
extensive range of payment methods. Stera also comes with an 'App Store' style
option for merchants from where they can download and install seamlessly a
range of applications that help them with things like inventory management and
electronic invoicing. As part of the GMO group, GMOFG has a very strong edge
in terms of being part of the GMO ecosystem and can offer end-to-end solutions
to the considerable client base of the GMO Group. The company has been growing
rapidly and given all the attractions mentioned above, growth here could be
sustained for many years to come.
Avex
1.4% of total assets
Avex is one of the largest music entertainment businesses in Japan. The
company has a proven record in discovering domestic artists and managing and
developing their careers. It has successfully promoted several million-record
selling artists in Japan. Avex is now expanding in other related areas such as
visual software and targeting overseas markets. The pandemic has severely
disrupted the business as no live events or shows have been held for at least
a couple of years. Management have sold some assets to strengthen their
balance sheet and have also managed to sell some of their treasury shares to
longstanding shareholder and business partner CyberAgent. This has resulted in
a significant net cash position on Avex's balance sheet. As the pandemic-era
restrictions are removed, we should see a strong snap back in sales and profit
growth for Avex, and along with its rock-solid balance sheet, we feel the
company could be in prime position to invest aggressively to further
strengthen its competitive position. The founder is still involved in the
business as the Chair owns about 7% of the company, and the rest of the
management team are longstanding Avex employees, so overall there appears to
be strong alignment.
Nittoku
1.0% of total assets
Nittoku is a leading global manufacturer of coil winding systems. Its coil
winding machines enjoy a high global market share percentage and the overall
industry is characterised by a rational oligopoly. Coils are used in a number
of attractive end markets, the most prominent of which are the automotive
industry and mobile handsets. In automotive, there is a long standing trend of
motorising parts like windows and doors all of which require an increasing
number of coils. However, the most important development is the move to
electric vehicles. EVs rely on large, complex coils in the car engine itself.
Given Nittoku's expertise in high quality coil winding the company should see
increased demand from automobile OEMs. In mobile handsets, we can observe a
similar trend: a 5G handset uses far more advanced coils than a 4G handset.
With consumers slowly switching over to better mobile phones we see a very
long growth runway for Nittoku.
JEPLAN
0.9% of total assets
JEPLAN is a private company that has developed a proprietary chemical
recycling technology for polyethylene terephthalate ('PET') plastics. This
technology can also be extended to recycling apparels. JEPLAN's technology is
the only production-proven chemical recycling method that has been certified
by the USFDA. Chemical recycling is superior to existing and conventional
mechanical recycling. It removes significant amounts of impurities from
recycled materials thereby generating high grade virgin PET that is far
superior to that generated by conventional mechanical recycling. Chemical
recycling is also more energy efficient, environmentally friendly and scalable
than existing mechanical recycling methods. Following an independent external
audit, JEPLAN claim that their novel chemical recycling process contributes to
as much as a 45% reduction in greenhouse gases relative to mechanical
recycling. While the price of chemically recycled virgin PET is not yet
competitive versus mechanical recycled PET, JEPLAN aims to achieve parity in
3-5 years through additional capacity additions and further process
improvements. JEPLAN already boasts of an impressive client list that includes
the likes of Coca-Cola Japan, Uniqlo, Snow Peak, Nestlé Japan, Kirin, Suntory
and Kao, to name a few. The global market for recycled PET is sizeable and
JEPLAN currently only has a tiny share, so there should be many years of
growth ahead for the company. It is a founder run company and the two
co-founders own roughly a third of the shares between them.
SpiderPlus
0.8% of total assets
SpiderPlus is aiming to digitise Japan's construction industry. The company
provides architectural drawing and construction site management software.
Foremen on construction sites can use SpiderPlus' SaaS offering to save
significant time previously spent on administrative duties. SpiderPlus is led
by a founder with a background in the construction industry and the company is
characterised by a closeness to their customers and a keen desire to solve
their problems. The overall construction market in Japan is massive but IT
spend is a tiny fraction of this, meaning that SpiderPlus potentially has a
very long growth runway. Given this opportunity set, management are
unsurprisingly pursuing sales growth and are willing to incur temporary
losses.
Kohoku Kogyo
0.7% of total assets
Kohoku Kogyo is a leading global manufacturer of lead terminals for aluminium
electrolytic capacitors and optical isolators for undersea cables. The company
enjoys a high market share in both aluminium electrolytic capacitators and
optical isolators. Lead terminals are used in a variety of end products, from
home appliances to electric vehicles. The main growth driver is in battery
electric vehicles, which require 2-4x as many capacitors as internal
combustion engine vehicles. Given the higher requirements and premium nature
of the product, these lead terminals are 5-7x as profitable as more
commoditised terminals. The optical isolator segment is buoyed by significant
investment in undersea cables to improve global internet connectivity. This is
pursued by both national governments as well as private players such as
Alphabet and Meta.
I-ne
0.5% of total assets
I-ne is a small Osaka-based cosmetics company founded by a young entrepreneur
who owns nearly 70% of the business. The company's main area of focus is
female hair care and for a young company, it already boasts a very high market
share and brand recognition. Despite being introduced over five years ago and
in a market that is very competitive and saturated with similar products,
I-ne's hair care range has continued to grow at a high rate since launch.
Interestingly, some of the newer products they have launched are growing at an
even faster pace. The company makes extensive use of AI-driven data analytics,
all of which have been developed in-house, to gather market intelligence and
user feedback which they then feed into their product development process. We
believe the company has good growth prospects given its unique product
development model and a proven track record of developing hit products on a
reasonably consistent basis.
Baillie Gifford Statement on Stewardship
Baillie Gifford's over-arching ethos is that we are 'actual' investors. We
have a responsibility to behave as supportive and constructively engaged
long-term investors. We invest in companies at different stages in their
evolution, across vastly different industries and geographies and we celebrate
their uniqueness. Consequently, we are wary of prescriptive policies and
rules, believing that these often run counter to thoughtful and beneficial
corporate stewardship. Our approach favours a small number of simple
principles which help shape our interactions with companies.
Our Stewardship Principles
Prioritisation of long-term value creation
We encourage our holdings to be ambitious and focus their investments on
long-term value creation. We understand that it is easy to be influenced by
short-sighted demands for profit maximisation but believe these often lead to
sub-optimal long- term outcomes. We regard it as our responsibility to steer
holdings away from destructive financial engineering towards activities that
create genuine economic and stakeholder value over the long run. We are happy
that our value will often be in supporting management when others don't.
A constructive and purposeful board
We believe that boards play a key role in supporting corporate success and
representing the interests of all capital providers. There is no fixed
formula, but it is our expectation that boards have the resources,
information, cognitive and experiential diversity they need to fulfil these
responsibilities. We believe that good governance works best when there are
diverse skillsets and perspectives, paired with an inclusive culture and
strong independent representation able to assist, advise and constructively
challenge the thinking of management.
Long-term focused remuneration with stretching targets
We look for remuneration policies that are simple, transparent and reward
superior strategic and operational endeavour. We believe incentive schemes can
be important in driving behaviour, and we encourage policies which create
genuine long-term alignment with external capital providers. We are accepting
of significant payouts to executives if these are commensurate with
outstanding long-run value creation, but plans should not reward mediocre
outcomes. We think that performance hurdles should be skewed towards long-term
results and that remuneration plans should be subject to shareholder approval.
Fair treatment of stakeholders
We believe it is in the long-term interests of all enterprises to maintain
strong relationships with all stakeholders - employees, customers, suppliers,
regulators and the communities they exist within. We do not believe in
one-size-fits-all policies and recognise that operating policies, governance
and ownership structures may need to vary according to circumstance.
Nonetheless, we believe the principles of fairness, transparency and respect
should be prioritised at all times.
Sustainable business practices
We believe an entity's long-term success is dependent on maintaining its
social licence to operate and look for holdings to work within the spirit and
not just the letter of the laws and regulations that govern them. We expect
all holdings to consider how their actions impact society, both directly and
indirectly and encourage the development of thoughtful environmental
practices. Climate change, environmental impact, social inclusion, tax and
fair treatment of employees should be addressed at board level, with
appropriately stretching policies and targets focused on the relevant material
dimensions. Boards and senior management should understand, regularly review
and disclose information relevant to such targets publicly, alongside plans
for ongoing improvement.
Corporate Governance and Sustainability Engagement
By engaging with companies, we seek to build constructive relationships with
them, to better inform our investment activities and, where necessary, effect
change within our holdings, ultimately with the goal of achieving better
returns for our shareholders. The two examples below demonstrate our
stewardship approach through constructive, ongoing engagement.
Outsourcing
Outsourcing is a staffing company focused on the manufacturing and IT sectors.
Outsourcing came under scrutiny in 2021 after accounting irregularities were
revealed at a major consolidated subsidiary. We have had a number of
engagements with the company since that time to better understand the context
for the internal failures in controls and to encourage management and the
board to improve not just processes but also the cultural elements that
created the conditions for the fraudulent behaviour. We have been encouraged
by their progress, and this year was notable for two reasons. The first is
their decision to change their governance to an internationally recognised
board-with-three committees structure. This places them within a select cohort
of approximately 2.5% of quoted companies in Japan (as of 2022). The second is
their observation that as a result of an externally facilitated board
evaluation, they discovered that there were differences in the information
available to internal and external directors. This led to a rethink about how
they increase the external directors' understanding of the business and
facilitate their involvement in important internal meetings. These are both
helpful indications that not only is the company pursuing proactive changes to
address the specifics of the 2021 controversy, the second and third-order
effects are improving governance overall, in line with a company whose
governance must mature as its business does.
Istyle
Istyle operates in a range of cosmetic beauty segments. They run a beauty
portal, a marketing business, e-commerce sites and a staffing business for
salons. Ahead of their 2022 AGM we engaged with the company to discuss board
independence, their deal with Amazon and emissions reporting. Board
independence has been a recurring topic of conversation and we were encouraged
that they intended to appoint a new non-Japanese, female outside director in
2022. They were particularly interested in someone who can bring expertise in
diversity and support women's progression within the company. This recruitment
was delayed due to the Amazon deal, but they expected it to proceed in 2023.
On the recent convertible bond deal with Amazon, board positions and
independence were also discussed, as granting Amazon a seat on the board would
have impacted the independence. Lastly, the discussion covered Istyle's
approach to emissions reporting. They are currently exploring the ways in
which they impact the environment and are undertaking various sustainability
initiatives. The meeting provides an illustrative example of how our
engagements build year on year and evolve and develop in line with a company's
development and market context.
List of Investments as at 31 January 2023
Name Business 2023 % of Absolute(†) 2022
Value total assets Performance Value
£'000 % £'000
Litalico Provides employment support and learning 17,296 2.7 (10.3) 17,425
support services for people with disabilities
Nakanishi Dental equipment 16,153 2.5 32.7 8,378
Shoei Manufactures motor cycle helmets 15,876 2.5 11.8 14,971
Descente Manufactures athletic clothing 15,573 2.5 (2.4) 17,512
TechnoPro IT staffing 15,571 2.5 36.7 14,269
Snow Peak Designs and manufactures outdoor lifestyle 14,943 2.4 (10.2) 17,097
goods
MatsukiyoCocokara Retail company 14,731 2.3 61.5 11,067
Toyo Tanso Electronics company 14,181 2.2 38.6 5,301
Lifenet Insurance Online life insurance 13,364 2.2 98.5 4,690
Optex Infrared detection devices 13,314 2.1 37.3 5,606
Raksul Inc Internet based services 12,867 2.0 (27.2) 14,841
Torex Semiconductor Semiconductor company 12,857 2.0 (0.1) 14,020
eGuarantee Guarantees trade receivables 12,543 2.0 26.1 10,002
Katitas Real estate services 12,455 2.0 (10.7) 18,818
Sho-Bond Infrastructure reconstruction 12,445 2.0 8.7 16,518
Tsugami Manufacturer of automated machine tools 12,250 1.9 8.0 14,359
GA Technologies Interactive media and services 11,594 1.8 29.1 6,282
OSG Manufactures machine tool equipment 11,135 1.8 0.1 9,915
Nifco Value-added plastic car parts 10,574 1.7 (0.6) 10,837
Cybozu Develops and markets internet and intranet 10,534 1.7 80.7 8,817
application software for businesses
Top 20 270,256 42.8
Megachips Electronic components 10,209 1.6 (35.7) 16,415
GMO Financial Gate Face-to-face payment terminals and processing 10,181 1.6 31.7(#) -
services
Cosmos Pharmaceuticals Drugstore chain 9,900 1.6 (13.9) 8,942
Yonex Sporting goods 9,828 1.6 72.2 5,497
Harmonic Drive Robotic components 9,342 1.5 (5.8) 9,715
Tsubaki Nakashima Industrial machinery 9,069 1.4 (20.6) 11,275
Avex Entertainment management and distribution 8,960 1.4 65.5(#) -
Kamakura Shinso Information Processing Company 8,937 1.4 102.7 3,455
Noritsu Koki Holding company with interests in biotech and 8,886 1.4 24.2 9,440
agricultural products
Asahi Intecc Specialist medical equipment 8,774 1.4 12.0 3,984
Iriso Electronics Specialist auto connectors 8,500 1.4 (8.5) 8,590
Kumiai Chemical Specialised agrochemicals manufacturer 8,200 1.3 10.2 5,986
Nihon M&A Center M&A advisory services 7,907 1.2 (28.2) 9,201
Anest Iwata Manufactures compressors and painting 7,852 1.2 12.6 6,658
machines
Peptidream Drug discovery and development platform 7,829 1.2 (5.1) 6,844
Horiba Manufacturer of measuring instruments 7,775 1.2 (3.0) 9,719
Infomart Internet platform for restaurant supplies 7,751 1.2 (39.0) 12,525
Kitanotatsujin Online retailer 7,492 1.2 46.4 5,212
KH Neochem Chemical manufacturer 7,436 1.2 (6.6) 8,172
GMO Payment Gateway Online payment processing 7,351 1.2 18.0 12,520
Seria Discount retailer 7,120 1.1 (2.8) 5,533
Outsourcing Employment placement services 7,076 1.1 (24.9) 8,423
Wealthnavi Digital robo wealth-management 7,074 1.1 (16.0) 8,795
Weathernews Weather information services 6,935 1.1 (11.1) 7,705
Enechange IT service management company 6,922 1.1 (30.7) 7,581
Jeol Manufacturer of scientific equipment 6,878 1.1 (40.1) 19,044
Inter Action Semiconductor equipment 6,813 1.1 (26.3) 6,193
SIIX Out-sources overseas production 6,579 1.0 6.2 5,448
MonotaRO Online business supplies 6,552 1.0 2.1 10,499
Bengo4.com Online legal consultation 6,488 1.0 (45.9) 8,883
Nabtesco Robotic components 6,449 1.0 4.8 8,622
Nittoku Coil winding machine manufacturer 6,403 1.0 34.6(#) -
JEPLAN (u) Chemical PET recycling 5,653 0.9 (6.6)(# ) -
Gojo & Company Inc Class D Preferred (u) Diversified financial services 5,650 0.9 7.3 5,266
Crowdworks Crowd sourcing services 5,481 0.9 75.3 2,903
Shima Seiki Machine industry company 5,402 0.9 9.3 1,082
Kitz Industrial valve manufacturer 5,352 0.8 23.9 4,520
SpiderPlus Construction project management platform 5,347 0.8 (28.1)(#) -
Spiber (u) Synthetic spider silk 5,131 0.8 (27.9) 7,116
Nikkiso Industrial pumps and medical equipment 5,017 0.8 19.4 3,730
Poletowin Pitcrew Game testing and internet monitoring 4,948 0.8 (8.9) 5,399
Nippon Ceramic Electronic component manufacturer 4,882 0.8 (0.9) 5,246
WDB Holdings Human resource services 4,465 0.7 (21.9) 5,953
Kohoku Kogyo Manufacturer of lead terminals for aluminium 4,374 0.7 (6.5)(#) -
electrolytic capacitors and optical isolators for
undersea cables
Pigeon Baby care products 4,171 0.7 (8.4) 3,742
Freakout Holdings Digital marketing technology 4,097 0.6 5.7 3,309
Demae-Can Online meal delivery service 3,947 0.6 (44.3) 1,942
M3 Online medical services 3,454 0.5 (22.0) 5,733
I-ne Hair care range 3,111 0.5 24.3(# ) -
Calbee Branded snack foods 3,062 0.5 9.8 2,891
oRo Develops and provides enterprise planning 2,991 0.5 (21.5) 5,341
software
Daikyonishikawa Automobile part manufacturer 2,837 0.4 3.8 3,529
Akatsuki Mobile games developer 2,833 0.4 (14.0) 4,732
Brainpad Business data analysis 2,472 0.4 (36.5) 4,604
Locondo E-commerce services provider 2,401 0.4 (12.7) 3,722
Moneytree K.K. Class B Preferred (u) AI based fintech platform 2,312 0.4 (45.4) 4,234
Istyle Beauty product review website 1,516 0.2 149.3 2,383
Broadleaf Online platform for buying car parts 1,292 0.2 26.3 2,930
Total investments 625,922 98.8
Net liquid assets* 7,544 1.2
Total assets 633,466 100.0
Bank loans (88,013) (13.9)
Shareholders' funds 545,453 86.1
† Absolute performance (in sterling terms) has been
calculated on a total return basis over the period 1 February 2022 to 31
January 2023.
Source: Baillie Gifford/Statpro and relevant underlying data index providers.
See disclaimer at end of this document.
#( ) Figures relate to part period
returns where the investment has been purchased in the period.
u ( ) Unlisted holding (private company).
*( ) See Glossary of Terms and
Alternative Performance Measures at the end of this announcement.
Past performance is not a guide to future performance.
Income Statement
For the year ended 31 January
Notes 2023 2023 2023 2022 2022 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Losses on investments - (12,749) (12,749) - (182,288) (182,288)
Currency gains 2 - 2,214 2,214 - 4,612 4,612
Income 9,617 - 9,617 7,436 - 7,436
Investment management fee 3 (3,154) - (3,154) (4,048) - (4,048)
Other administrative expenses (679) - (679) (684) - (684)
Net return before finance costs and taxation 5,784 (10,535) (4,751) 2,704 (177,676) (174,972)
Finance costs of borrowings 4 (1,332) - (1,332) (1,064) - (1,064)
Net return before taxation 4,452 (10,535) (6,083) 1,640 (177,676) (176,036)
Tax on ordinary activities (962) - (962) (744) - (744)
Net return after taxation 3,490 (10,535) (7,045) 896 (177,676) (176,780)
Net return per ordinary share 6 1.11p (3.35p) (2.24p) 0.29p (56.95p) (56.66p)
The total column of this statement is the profit and loss account of the
Company. The supplementary revenue and capital return columns are prepared
under guidance published by the Association of Investment Companies.
All revenue and capital items in this statement derive from continuing
operations.
A Statement of Comprehensive Income is not required as all gains and losses of
the Company have been reflected in the above statement.
Balance Sheet
As at 31 January
Notes 2023 2023 2022 2022
£'000 £'000 £'000 £'000
Fixed assets
Investments held at fair value through profit or loss 7 625,922 610,857
Current assets
Debtors 3,047 2,604
Cash and cash equivalents 6,946 33,505
9,993 36,109
Creditors
Amounts falling due within one year 8 (46,154) (3,212)
Net current (liabilities)/assets (36,161) 32,897
Total assets less current liabilities 589,761 643,754
Creditors
Amounts falling due after more than one year 8 (44,308) (91,102)
Net assets 545,453 552,652
Capital and reserves
Share capital 6,285 6,285
Share premium account 260,270 260,270
Capital redemption reserve 21,521 21,521
Capital reserve 257,719 268,408
Revenue reserve (342) (3,832)
Shareholders' funds 545,453 552,652
Net asset value per ordinary share 173.6p 175.9p
Ordinary shares in issue 9 314,152,345 314,252,485
Statement of Changes in Equity
For the year ended 31 January 2023
Notes Share Share Capital Capital Revenue Shareholders'
capital premium redemption reserve* reserve funds
£'000 account reserve £'000 £'000 £'000
£'000 £'000
Shareholders' funds at 1 February 2022 6,285 260,270 21,521 268,408 (3,832) 552,652
Ordinary shares bought back into treasury 9 - - - (154) - (154)
Net return on ordinary activities after - - - (10,535) 3,490 (7,045)
taxation
Shareholders' funds at 31 January 2023 6,285 260,270 21,521 257,719 (342) 545,453
For the year ended 31 January 2022
Notes Share Share Capital Capital Revenue Shareholders'
capital premium redemption reserve* reserve funds
£'000 account reserve £'000 £'000 £í000
£'000 £'000
Shareholders' funds at 1 February 2021 6,026 229,149 21,521 446,084 (4,728) 698,052
Ordinary shares issued 9 259 31,121 - - - 31,380
Net return on ordinary activities after - - - (177,676) 896 (176,780)
taxation
Shareholders' funds at 31 January 2022 6,285 260,270 21,521 268,408 (3,832) 552,652
* The capital reserve balance as at 31 January 2023 includes investment
holding gains of £60,696,000 (2022 - gains of £55,061,000).
Cash Flow Statement
For the year ended 31 January
2023 2023 2022 2022
£'000 £'000 £'000 £'000
Cash flows from operating activities
Net return on ordinary activities before taxation (6,083) (176,036)
Net losses on investments 12,749 182,288
Currency gains (2,214) (4,612)
Finance costs of borrowings 1,332 1,064
Overseas withholding tax (892) (677)
Increase in debtors, accrued income and prepaid expenses (681) (591)
Increase/(decrease) in creditors 27 (220)
Cash inflow from operations 4,238 1,216
Interest paid (1,292) (982)
Net cash inflow from operating activities 2,946 234
Cash flows from investing activities
Acquisitions of investments (137,003) (132,308)
Disposals of investments 108,576 90,619
Net cash outflow from investing activities (28,427) (41,689)
Shares issued - 31,995
Ordinary shares bought back into treasury and stamp duty thereon (154) -
Bank loans repaid - -
Bank loans drawn down - 32,667
Net cash (outflow)/inflow from financing activities (154) 64,662
(Decrease)/increase in cash and cash equivalents (25,635) 23,207
Exchange movements (924) (140)
Cash and cash equivalents at 1 February 33,505 10,438
Cash and cash equivalents at 31 January* 6,946 33,505
* Cash and cash equivalents represent cash at bank and deposits repayable on
demand.
Notes to the Financial Statements
1. The Financial Statements for the year to 31 January 2023 have been
prepared in accordance with FRS 102 'The Financial Reporting Standard
applicable in the UK and Republic of Ireland' on the basis of the accounting
policies set out in the Annual Report and Financial Statements for the year
ended 31 January 2023.
2. Currency gains
2023 2022
£'000 £'000
Exchange differences on bank loans 3,138 4,752
Other exchange differences (924) (140)
2,214 4,612
3. Investment Management Fee
2023 2022
£'000 £'000
Investment management fee 3,154 4,048
Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford
& Co, has been appointed as the Company's Alternative Investment Fund
Manager ('AIFM') and Company Secretaries. Baillie Gifford & Co Limited has
delegated portfolio management services to Baillie Gifford & Co. Dealing
activity and transaction reporting have been further sub-delegated to Baillie
Gifford Overseas Limited and Baillie Gifford Asia (Hong Kong) Limited.
The Investment Management Agreement sets out the matters over which the
Managers have authority in accordance with the policies and directions of, and
subject to restrictions imposed by, the Board. The Management Agreement is
terminable on not less than six months' notice. Compensation fees would only
be payable in respect of the notice period if termination were to occur
sooner. The annual management fee for the year to 31 January 2023 was 0.75% on
the first £50m of net assets, 0.65% on the next £200m of net assets and
0.55% on the remainder. The fees are calculated and paid on a quarterly basis.
4. The Company paid interest of £37,000 (2022 - £48,000) in respect of
yen deposits held by the custodian bank.
5. No dividend will be declared.
6. Net Return Per Ordinary Share
2023 2023 2023 2022 2022 2022
Revenue Capital Total Revenue Capital Total
Net loss on ordinary activities after taxation 1.11p (3.35p) (2.24p) 0.29p (56.95p) (56.66p)
The returns per ordinary share set out above are based on the net revenue gain
of £3,490,000 (2022 - gain of £896,000) and net capital loss of £10,535,000
(2022 - net capital loss of £177,676,000) and on 314,222,074 ordinary shares
(2022 - 311,992,773), being the weighted average number of ordinary shares in
issue during the year. There are no dilutive or potentially dilutive shares in
issue.
7. Fixed Assets - Investments
Investments in securities are financial assets designated at fair value
through profit or loss. In accordance with Financial Reporting Standard 102,
the tables provide an analysis of these investments based on the fair value
hierarchy described below, which reflects the reliability and significance of
the information used to measure their fair value.
Fair Value Hierarchy
The fair value hierarchy used to analyse the basis on which the fair values of
financial instruments held at fair value through the profit or loss account
are measured is described below. Fair value measurements are categorised on
the basis of the lowest level input that is significant to the fair value
measurement.
Level 1 - using unadjusted quoted prices for identical instruments in an
active market;
Level 2 - using inputs, other than quoted prices included within Level 1, that
are directly or indirectly observable (based on market data); and
Level 3 - using inputs that are unobservable (for which market data is
unavailable).
As at 31 January 2023 Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Quoted equities 607,176 - - 607,176
Unlisted securities - - 18,746 18,746
Total financial asset investments 607,176 - 18,746 625,922
As at 31 January 2022 Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Quoted equities 594,241 - - 594,241
Unlisted securities - - 16,616 16,616
Total financial asset investments 594,241 - 16,616 610,857
8. The bank loans are stated after deducting the arrangement fees of
£174,000 which are amortised over the terms of the loans. Amortisation of the
arrangement fees during the year was £49,000 (2022 - £36,000).
Borrowing facilities
At 31 January 2023
ING Bank N.V. - 3 year ¥7,000 million loan at 1.400% maturing 27 November
2023.
ING Bank N.V. - 3 year ¥5,000 million loan at 1.400% maturing 8 November
2024.
ING Bank N.V. - 7 year ¥2,100 million loan at 1.693% maturing 18 December
2024.
At 31 January 2022
ING Bank N.V. - 3 year ¥7,000 million loan at 1.400% maturing 27 November
2023.
ING Bank N.V. - 3 year ¥5,000 million loan at 1.400% maturing 8 November
2024.
ING Bank N.V. - 7 year ¥2,100 million loan at 1.693% maturing 18 December
2024.
Subsequent to the year end, on 3 March 2023, the Company drew down a new
secured ¥2,000 million 3 year revolving credit facility from ING Bank N.V.
The fair value of the bank loans at 31 January 2023 was £87,725,000 (31
January 2022 - £91,174,000). See Glossary of Terms and Alternative
Performance Measures at the end of this announcement.
9. At 31 January 2023 the Company had authority to buy back 47,006,447
shares. 100,000 shares were bought back during the year (2022 - nil). Share
buy-backs are funded from the capital reserve.
During the year the Company issued no shares on a non pre-emptive basis (2022
- 12,960,000 shares for net proceeds of £31,380,000).
Between 1 February and 17 March 2023 the Company did not buy back or issue any
shares.
10. Analysis of Change in Net Debt
31 January Cash Exchange Movement Other non-cash changes 31 January
2022
Flows
£'000
2023
£'000
£'000 £'000 £'000
Cash and cash equivalents 33,505 (25,635) (924) - 6,946
Loans due within one year - - - (43,705) (43,705)
Loans due in more than one year (91,102) - 3,138 43,656 (44,308)
(57,597) (25,635) 2,214 (49) (81,067)
11. The Annual Report and Financial Statements will be available on the
Company's website shinnippon.co.uk(†) on or around 11 April 2023.
12. The financial information set out above does not constitute the Company's
statutory accounts for the years ended 31 January 2023 or 2022 but is derived
from those accounts. Statutory accounts for 2022 have been delivered to the
Registrar of Companies, and those for 2023 will be delivered in due course.
The auditor has reported on those accounts; their reports were (i)
unqualified, (ii) did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 (2) or (3) of the
Companies Act 2006.
† 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.
Glossary of Terms and Alternative Performance Measures ('APM')
An alternative performance measure is a financial measure of historical or
future financial performance, financial position, or cash flows, other than a
financial measure defined or specified in the applicable financial reporting
framework. The APMs noted below are commonly used measures within the
investment trust industry and serve to improve comparability between
investment trusts.
Total Assets
This is the Company's definition of Adjusted Total Assets, being the total
value of all assets held less all liabilities (other than liabilities in the
form of borrowings).
Net Asset Value
Also described as shareholders' funds, Net Asset Value ('NAV') is the value of
total assets less liabilities (including borrowings). The NAV per share is
calculated by dividing this amount by the number of ordinary shares in issue.
Net Asset Value (Borrowings at Book Value)
Borrowings are valued at adjusted net issue proceeds.
The Company's yen denominated loans are valued at their sterling equivalent
and adjusted for their arrangement fees. The value of the borrowings on this
basis is set out in notes 10 and 11 on page 59 of the Annual Report and
Financial Statements.
Net Asset Value (Borrowings at Fair Value) (APM)
This is a widely reported measure across the investment trust industry.
Borrowings are valued at an estimate of their market worth. The Company's yen
denominated loans are fair valued using methodologies consistent with
International Private Equity and Venture Capital Valuation ('IPEV')
guidelines. The value of the borrowings on this basis is set out above. A
reconciliation from Net Asset Value (with borrowings at book value) to Net
Asset Value per ordinary share (with borrowings at fair value) is provided
below.
31 January 31 January
2023
2022
Net Asset Value per ordinary share 173.6p 175.9p
(borrowings at book value)
Shareholders' funds £545,453,000 £552,652,000
(borrowings at book value)
Add: book value of borrowings £88,013,000 £91,102,000
Less: fair value of borrowings (£87,725,000) (£91,174,000)
Shareholders' funds £545,741,000 £552,580,000
(borrowings at fair value)
Shares in issue at year end 314,152,485 314,252,485
Net Asset Value per ordinary share 173.7p 175.8p
(borrowings at fair value)
Premium/Discount (APM)
As stockmarkets and share prices vary, an investment trust's share price is
rarely the same as its NAV. When the share price is lower than the NAV per
share it is said to be trading at a discount. The size of the discount is
calculated by subtracting the share price from the NAV per share and is
usually expressed as a percentage of the NAV per share. If the share price is
higher than the NAV per share, this situation is called a premium.
2023 2023 2022 2022
NAV NAV NAV NAV
(book) (fair) (book) (fair)
Closing NAV per share 173.6p 173.7p 175.9p 175.8p
Closing share price 158.8p 158.8p 174.4p 174.4p
Discount (8.5%) (8.6%) (0.9%) (0.8%)
The average discount/premium (APM) is calculated by taking an average of the
daily discount/premium percentage using NAV (fair) for the year to 31 January
2023.
Ongoing Charges (APM)
The total expenses (excluding borrowing costs) incurred by the Company as a
percentage of the average net asset value (with debt at fair value). The
ongoing charges have been calculated on the basis prescribed by the
Association of Investment Companies.
A reconciliation from the expenses detailed in the Income Statement above is
provided below:
31 January 31 January
2023
2022
Investment management fee £3,154,000 £4,048,000
Other administrative expenses £679,000 £684,000
Total expenses (a) £3,833,000 £4,732,000
Average daily cum-income net asset value (with debt at fair value) (b) £521,337,000 £719,124,000
Ongoing charges (a) ÷ (b) (expressed as a percentage) 0.74% 0.66%
Total Return (APM)
The total return is the return to shareholders after reinvesting the net
dividend on the date that the share price goes ex-dividend. The Company does
not pay a dividend, therefore, the one year total returns for the share price
and NAV per share at book and fair value are the same as the percentage
movements in the share price and NAV per share at book and fair value as
detailed above.
Gearing (APM)
At its simplest, gearing is borrowing. Just like any other public company, an
investment trust can borrow money to invest in additional investments for its
portfolio. The effect of the borrowing on the shareholders' assets is called
'gearing'. If the Company's assets grow, the shareholders' assets grow
proportionately more because the debt remains the same. But if the value of
the Company's assets falls, the situation is reversed. Gearing can therefore
enhance performance in rising markets but can adversely impact performance in
falling markets.
Gearing represents borrowings at book less cash and cash equivalents expressed
as a percentage of shareholders' funds.
Potential gearing is the Company's borrowings expressed as a percentage of
shareholders' funds.
Equity gearing is the Company's borrowings adjusted for cash, expressed as a
percentage of shareholders' funds.
2023 2023 2022 2022
Gearing(†) Potential Gearing(†) Potential
£'000 Gearing(#) £'000 Gearing(#)
£'000 £'000
Borrowings (a) 88,013 88,013 91,102 91,102
Cash and cash 6,082 - 32,028 -
equivalents (b)
Shareholders' funds (c) 545,453 545,453 552,652 552,652
15.0% 16.1% 10.7% 16.5%
(†) Gearing: ((a) - (b)) ÷ (c), expressed as a percentage.
(#) Potential gearing: (a) ÷ (c), expressed as a percentage.
Leverage
For the purposes of the Alternative Investment Fund Managers (AIFM)
Regulations, leverage is any method which increases the Company's exposure,
including the borrowing of cash and the use of derivatives. It is expressed as
a ratio between the Company's exposure and its net asset value and can be
calculated on a gross and a commitment method. Under the gross method,
exposure represents the sum of the Company's positions after the deduction of
sterling cash balances, without taking into account any hedging and netting
arrangements. Under the commitment method, exposure is calculated without the
deduction of sterling cash balances and after certain hedging and netting
positions are offset against each other.
Active Share (APM)
Active share, a measure of how actively a portfolio is managed, is the
percentage of the quoted equity portfolio that differs from its comparative
index. It is calculated by deducting from 100 the percentage of the portfolio
that overlaps with the comparative index. An active share of 100 indicates no
overlap with the index and an active share of zero indicates a portfolio that
tracks the index.
Net Liquid Assets
Net liquid assets comprise current assets less current liabilities, excluding
borrowings.
Share Split
A share split (or stock split) is the process by which a company divides its
existing shares into multiple shares. Although the number of shares
outstanding increases, the total value of the shares remains the same with
respect to the pre-split value.
Unlisted (Private) Company
An unlisted (private) company means a company whose shares are not available
to the general public for trading and not quoted on a stock exchange.
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No Provider has any obligation to update, modify or amend the data or to
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herein changes or subsequently becomes inaccurate.
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respect of any loss or damage suffered by you as a result of or in connection
with any opinions, recommendations, forecasts, judgements, or any other
conclusions, or any course of action determined, by you or any third party,
whether or not based on the content, information or materials contained
herein.
MSCI Index data
Source: MSCI. The MSCI information may only be used for your internal use, may
not be reproduced or redisseminated in any form and may not be used as a basis
for or a component of any financial instruments or products or indices. None
of the MSCI information is intended to constitute investment advice or a
recommendation to make (or refrain from making) any kind of investment
decision and may not be relied on as such. Historical data and analysis should
not be taken as an indication or guarantee of any future performance analysis,
forecast or prediction.
The MSCI information is provided on an 'as is' basis and the user of this
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Sustainable Finance Disclosure Regulation ('SFDR')
The EU Sustainable Finance Disclosure Regulation ('SFDR') does not have a
direct impact in the UK due to Brexit, however, it applies to third-country
products marketed in the EU. As Baillie Gifford Shin Nippon PLC is marketed in
the EU by the AIFM, BG & Co Limited, via the National Private Placement
Regime ('NPPR') the following disclosures have been provided to comply with
the high-level requirements of SFDR. The AIFM has adopted Baillie Gifford
& Co's Governance and Sustainable Principles and Guidelines as its policy
on integration of sustainability risks in investment decisions. Baillie
Gifford & Co's approach to investment is based on identifying and holding
high quality growth businesses that enjoy sustainable competitive advantages
in their marketplace. To do this it looks beyond current financial
performance, undertaking proprietary research to build an in-depth knowledge
of an individual company and a view on its long-term prospects. This includes
the consideration of sustainability factors (environmental, social and/or
governance matters) which it believes will positively or negatively influence
the financial returns of an investment. More detail on the Managers' approach
to sustainability can be found in the Governance and Sustainability Principles
and Guidelines document, available publicly on the Baillie Gifford website
bailliegifford.com.
Taxonomy Regulation
The Taxonomy Regulation establishes an EU-wide framework or criteria for
environmentally sustainable economic activities in respect of six
environmental objectives. It builds on the disclosure requirements under SFDR
by introducing additional disclosure obligations in respect of alternative
investment funds that invest in an economic activity that contributes to an
environmental objective. The Company does not commit to make sustainable
investments as defined under SFDR. As such, the underlying investments do not
take into account the EU criteria for environmentally sustainable economic
activities.
Regulated Information Classification: Additional regulated information
required to be disclosed under the applicable laws
- ends -
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