REG - Baillie Gifford Shin - Baillie Gifford Shin Nippon PLC Half-year Report
22/09/2023 07:00
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RNS Number : 2863N Baillie Gifford Shin Nippon PLC 22 September 2023
RNS Announcement
Baillie Gifford Shin Nippon PLC (BGS)
Legal Entity Identifier: X5XCIPCJQCSUF8H1FU83
Regulated Information Classification: Half Yearly Financial Report
The following is the unaudited Interim Financial Report for the six months to
31 July 2023 which was approved by the Board on 21 September 2023.
Over the six months to 31 July 2023, the Company's net asset value per
share† declined by 9.7% compared to a 1.1% increase in the MSCI Japan Small
Cap Index*. The share price decreased by 12.5%.
¾ There was a bifurcation in performance within the Japanese market in
the first half of this year. Mature large cap stocks in capital intensive and
cyclical sectors did very well in share price terms while high growth small
cap stocks continued to languish.
¾ A number of the manufacturing holdings supplying semiconductor and
industrial equipment sectors reported weak operating results due to excess
inventory and a weak Chinese economy. Contrary to their weak share prices,
most of the internet related holdings continued to perform well in operational
terms.
¾ Annualised portfolio turnover to 31 July 2023 was 10.9%. Three stocks
were sold: Brainpad; Broadleaf and Calbee. New positions were initiated in
SWCC Corp, a manufacturer of electric cables and wires, Appier, a developer of
artificial intelligence products, and Vector, Japan's largest public relations
company.
¾ The Company's share price ended the period at an 11.4% discount to
the NAV. 1,100,000 shares were bought back in the reporting period and are
currently held in treasury.
¾ Despite the challenging backdrop for high-growth small caps in Japan,
the majority of the portfolio's holdings continue to grow strongly whilst
their overall valuation multiples are well below their own long-term average.
¾ The Board and Managers remain firmly of the view that exceptional
long-term returns are likely to be generated by young, disruptive,
fast-growing and entrepreneurial smaller businesses in Japan.
† 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 July 2023 the Company had total assets of
£579.1 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 £219.4 billion under management and advice as at 21
September 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) .
22 September 2023
For further information please contact:
Anzelm Cydzik, Baillie Gifford & Co
Tel: 0131 275 2000
Jonathan Atkins, Four Communications
Tel: 0203 920 0555 or 07872 495396
The following is the unaudited Interim Financial Report for the six months to
31 July 2023.
Responsibility statement
We confirm that to the best of our knowledge:
a) the condensed set of Financial Statements has been prepared in accordance
with FRS 104 'Interim Financial Reporting';
b) the Interim Management Report includes a fair review of the information
required by Disclosure and Transparency Rule 4.2.7R (indication of important
events during the first six months, their impact on the Financial Statements
and a description of the principal risks and uncertainties for the remaining
six months of the year); and
c) the Interim Financial Report includes a fair review of the information
required by Disclosure and Transparency Rule 4.2.8R (disclosure of related
party transactions and changes therein).
On behalf of the Board
J Skinner
Chair
21 September 2023
Interim management report
The first half of this year saw a bifurcation in performance within the
Japanese market. Mature large cap stocks in capital intensive and cyclical
sectors did very well in share price terms, helping lift the broader Japanese
indices to record highs. Their strong performance was largely due to
improvements in corporate governance and shareholder return policies. A key
driving factor for this has been the pressure applied on management teams by
both domestic and overseas activist investors who have taken large stakes in
many of these businesses. In addition, Yen weakness has helped inflate profits
as most of these companies are exporters. In this environment and amid a
complete lack of investor interest, high growth small cap stocks continued to
languish.
In the six months to 31 July 2023, Shin Nippon's net asset value per share (in
sterling, after deducting borrowings at fair value) fell by 9.7% compared to a
1.1% rise in the MSCI Japan Small Cap index. The share price declined by 12.5%
and finished the period at an 11.4% discount to the net asset value per share.
During the period, 1,100,000 shares were bought back and are currently held in
treasury. Over three and five years, the Company's net asset value per share
is down 13.9% and 17.1% compared to the index which is up 18.2% and 6.5%
respectively.
We are disappointed by the weak performance over these varying periods, but
this has come in an environment where investor preference has switched from
high growth small cap stocks to cyclical companies and companies enhancing
corporate value. These companies offer little by way of growth, they make
uneconomic returns on capital at the best of times due to their capital
intensity and are ripe for disruption given their outdated business models.
Dividends and share buybacks tend to be their main attractions. Over the
long-term, we remain firmly of the view that exceptional returns are likely to
be generated by young, disruptive, fast-growing and entrepreneurial smaller
businesses in Japan and we are continuing to invest accordingly.
At a macro level, rising interest rates, inflation, and US-China tensions
continue to sour investor sentiment on growth stocks. A slowing Chinese
economy and signs of excess inventory in critical sectors like semiconductors
and industrial equipment are further dampening market confidence. In this
context, it is perhaps unsurprising to see weak operating results being
reported by many of our manufacturing holdings exposed to these end markets.
More encouragingly and contrary to their weak share price, most of our
internet holdings continue to perform admirably well in operational terms.
Among the top positive contributors to performance was Megachips, the sole
supplier of custom-made memory chips used in Nintendo's game cartridges.
Demand for Nintendo's 'Switch' gaming console has seen a resurgence following
the runaway success of the recently released Super Mario Brothers movie. This
has translated into rapid sales growth for Megachips. Nintendo has
historically been Megachips' largest customer and the latter has made a series
of investments over the years to diversify its business beyond Nintendo. These
are now bearing fruit, with the company reporting new customer wins in areas
like 5G and factory automation.
Online legal website Bengo4.com also performed strongly. The company is
continuing to see strong growth in its digital contracts business. In
addition, management has recently added a series of new features to the legal
website that makes its value proposition more compelling for lawyers. For
example, lawyers are now able to prepare for a case using Bengo4.com's
AI-enabled tool that trawls through voluminous legal literature and provides
lawyers with specific insights. Another example is the online legal library
which is a subscription based service that Bengo4.com launched recently. This
provides lawyers with a vast and easily searchable library of past cases and
rulings.
Cosmos Pharmaceutical was another strong performer. This is one of Japan's
leading discount stores that sells mainly food, cosmetics, daily necessities
and over-the-counter medicines. It operates a low-cost, 'Everyday Low Price'
strategy that is unique and disruptive within the Japanese retail sector. The
company deliberately makes slim margins whilst investing excess profits into
lower prices for consumers. This strategy has allowed Cosmos to relentlessly
take market share from weaker and traditional players who struggle to match
Cosmos's price points.
Litalico was among the largest negative contributors to performance. This is
an online employment agency that trains and secures jobs for adults with
disabilities. It also provides training, development courses and support for
disabled children and their families. There are nearly ten million disabled
adults and children in Japan. The Japanese government has mandated all
corporates to hire a certain percentage of disabled adults each year and this
mandated ratio has been rising each year. As the largest provider of such
services in Japan, this is a long-term structural tailwind for Litalico.
Management is investing aggressively in opening new training centres for
disabled adults and children and this has temporarily depressed profitability,
although annual sales growth remains well over 20%. The market, however, has
taken a dim view of this and has subsequently punished the shares.
Online funeral services provider Kamakura Shinsho also performed poorly in
share price terms. It operates an online platform that connects people looking
for funeral services with providers of such services. It charges the service
provider a fee for introducing customers. Funerals in Japan are an extensive
affair involving large gatherings in a sizeable and often costly venue and
typically last a number of days. Local funeral houses have a monopoly and
often charge egregious prices. Through its online model, Kamakura Shinsho
offers customers a choice of providers across Japan complete price
transparency and the option for customers to customize the product based on
their budgets. During Covid-19 traditional in-person ceremonies were replaced
by an improvised, low-cost online version which did not involve the sale of
funeral packages. This resulted in a collapse in Kamakura Shinsho's sales and
profits. With life returning to normal in Japan, traditional funeral
ceremonies have resumed in earnest and the company's sales and profits are
bouncing back strongly. Despite this, the market continues to harbour doubts
about the company's ability to sustain its growth.
Japan's only, pure-play online life insurer Lifenet was also among the poor
performers. It is continuing to take share from large, sleepy incumbents as
its brand recognition has improved. The company is also diversifying into
other related, profitable and potentially large areas like group credit
insurance where it insures individuals' mortgages in the event of death.
Japanese accounting standards have meant that Lifenet has had to recognise the
entire cost of selling a policy upfront rather than amortising it over the
life of the policy which is allowed under IFRS. This results in rising
accounting losses as the company write more new business, giving the
impression that this is a perennially loss-making enterprise. We believe this
is the view taken by the market, resulting in share price weakness. As of this
year, the company has adopted IFRS which should more accurately reflect the
underlying profitability of the business and change the market's perception of
the stock.
Whilst we monitor the investment case for each of our holdings on a regular
basis, given our long- term orientation, portfolio activity remained low with
annualised turnover of 10.9%. We sold three stocks and bought an equal number
of new holdings. Artificial intelligence ('AI') consultancy Brainpad was sold
as we lost faith in management's ability to scale the business despite being
in an area that is witnessing significant growth. We also sold Broadleaf which
develops packaged software for the auto aftermarket industry. The company is
changing its entire business model from on-premise to the cloud and this poses
significant execution risks for a management team that has a patchy record of
executing large-scale internal projects. We also sold Japan's leading snack
company Calbee as we were concerned that growth rates might remain pedestrian
for many years following a lean period of new product development.
Among the new holdings was SWCC Corp, a leading domestic manufacturer of
electric cables and wires. The company appointed its first ever female
President a few years ago and she has instituted wide-ranging reforms across
the company in a bid to drastically improve profitability. In addition, SWCC
is also emerging as a key component supplier that facilitates the last-mile
delivery of renewable energy in Japan. Fast growing AI software company Appier
was another new addition to the portfolio. This is a Taiwanese company, run by
a husband and wife duo, which happens to be listed in Japan. The company has
developed a suite of AI products that enable retailers, both offline and
online, to target and reach potential customers, increase the lifetime value
of existing customers, and more accurately monitor their marketing spend to
improve return on investment. We also purchased shares in Vector, Japan's
largest PR company. It is run by a young and dynamic founder who retains a
large stake in the business. Using its dominant position in PR, Vector is
expanding into marketing and advertising where it seeks to offer a complete
package, ranging from the initial PR related activities all the way to the
post sales promotion for clients. This breadth of offering gives the company a
strong edge in our view.
Despite the challenging environment for high growth small caps in Japan, the
majority of Shin Nippon's holdings are continuing to grow strongly whilst
their overall valuation multiples have collapsed to levels that remain well
below their own long-term average. Many of the holdings are also demonstrating
sustained levels of profitability despite investing heavily for future growth.
These are all very positive developments in our view and increases our
conviction in Shin Nippon's current holdings. We have therefore continued to
deploy gearing which stood at 17% as at period end. We believe the key to
generating significant long-term returns from here is to remain patient and
optimistic.
The principal risks and uncertainties facing the Company are set out following
note 13 of this report.
Valuing private companies
We aim to hold our private company (unlisted) investments at '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 group at Baillie Gifford
which takes advice from an independent third party (S&P Global). The
valuations group is independent from the investment 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 (unlisted) holdings on a three-month rolling cycle,
with one-third of the holdings reassessed each month. During stable market
conditions, and assuming all else is equal, each investment would be valued
four times in a twelve month period. For 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.
Beyond the regular cycle, the valuations team 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.
Any ad-hoc change to the fair valuation of any holding is implemented swiftly
and reflected in the next published net asset value ('NAV'). There is no
delay.
The valuations team also monitors relevant market indices on a weekly basis
and updates 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 undertakes these checks daily.
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 and give
appropriate latitude to diverse processes of our different investment teams.
These principles do not all have to be positively reflected in each holding
our teams acquire.
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 do not.
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.
List of investments as at 31 July 2023
Name Business Value % of total assets Absolute performance* %
£'000
Toyo Tanso Electronics company 16,727 2.9 20.8
GMO Financial Gate Face-to-face payment terminals and processing services 15,755 2.7 25.6
MatsukiyoCocokara Retail company 14,146 2.4 13.2
Litalico Provides employment support and learning support services for people with 13,952 2.4 (25.4)
disabilities
Descente Manufactures athletic clothing 13,944 2.4 2.0
Nakanishi Dental equipment 13,676 2.4 5.1
Shoei Manufactures motor cycle helmets 13,260 2.3 (9.2)
Cosmos Pharmaceuticals Drugstore chain 13,194 2.3 13.9
Megachips Electronic components 12,080 2.1 41.8
Nifco Value-added plastic car parts 11,681 2.0 11.3
Asahi Intecc Specialist medical equipment 11,300 2.0 13.5
Sho-Bond Infrastructure reconstruction 11,091 1.9 (7.5)
GA Technologies Interactive media and services 10,758 1.9 (2.5)
Optex Infrared detection devices 10,512 1.8 (22.3)
Raksul Internet based services 10,470 1.8 (11.4)
Katitas Real estate services 10,448 1.8 (26.6)
Technopro IT staffing 10,145 1.8 (18.9)
Torex Semiconductor Semiconductor company 10,130 1.8 (20.5)
Bengo4.com Online legal consultation 10,099 1.7 39.2
Lifenet Insurance Online life insurance 10,091 1.7 (29.0)
Top 20 243,459 42.1
Anest Iwata Manufactures compressors and painting machines 9,952 1.7 20.0
Enechange IT service management company 9,943 1.7 15.3
Snow Peak Designs & manufactures outdoor lifestyle goods 9,692 1.7 (27.8)
Horiba Manufacturer of measuring instruments 9,591 1.7 25.2
OSG Manufactures machine tool equipment 9,354 1.6 (17.1)
eGuarantee Guarantees trade receivables 9,033 1.6 (22.7)
Outsourcing Employment placement services 8,980 1.6 27.3
Kumiai Chemical Specialised agrochemicals manufacturer 8,719 1.5 7.2
Yonex Sporting goods 8,298 1.4 (3.4)
Tsugami Manufacturer of automated machine tools 8,039 1.4 (22.4)
Jeol Manufacturer of scientific equipment 7,768 1.3 13.7
Avex Entertainment management and distribution 7,445 1.3 (23.9)
Harmonic Drive Robotic components 7,371 1.3 (20.8)
Cybozu Develops and markets internet and intranet application software for businesses 7,012 1.2 (25.4)
SpiderPlus Construction project management platform 6,807 1.2 5.8
Iriso Electronics Specialist auto connectors 6,774 1.2 (19.3)
Infomart Internet platform for restaurant supplies 6,715 1.2 (10.5)
Noritsu Koki Holding company with interests in biotech and agricultural products 6,653 1.2 (7.1)
Kohoku Kogyo Manufacturer of lead terminals for aluminium electrolytic capacitors and 6,468 1.1 (14.5)
optical isolators for undersea cables
KH Neochem Chemical manufacturer 6,368 1.1 (24.8)
SIIX Out-sources overseas production 6,344 1.1 (2.7)
Kitz Industrial valve manufacturer 6,319 1.1 15.0
Peptidream Drug discovery and development platform 6,172 1.1 (21.2)
Wealthnavi Digital robo wealth-management 6,075 1.0 (14.1)
GMO Payment Gateway Online payment processing 5,862 1.0 (20.3)
Demae-Can Online meal delivery service 5,825 1.0 0.5
Kamakura Shinso Information Processing Company 5,723 1.0 (41.8)
Weathernews Weather information services 5,486 0.9 (20.2)
Jeplan u Chemical PET recycling 5,471 0.9 (3.2)
Nittoku Coil winding machine manufacturer 5,450 0.9 (14.5)
Gojo & Company Inc Class D Preferred u Diversified financial services 5,324 0.9 (5.8)
Seria Discount retailer 5,218 0.9 (25.9)
I-Ne Hair care range 5,161 0.9 (26.0)
MonotaRO Online business supplies 5,097 0.9 (21.9)
Nikkiso Industrial pumps and medical equipment 5,063 0.9 (21.0)
Nippon Ceramic Electronic component manufacturer 4,814 0.8 (6.9)
Kitanotatsujin Online retailer 4,797 0.8 (35.9)
Istyle Beauty product review website 4,784 0.8 (13.9)
Shima Seiki Machine industry company 4,707 0.8 (12.9)
Tsubaki Nakashima Industrial machinery 4,584 0.8 (35.2)
Inter Action Semiconductor equipment 4,560 0.8 (32.1)
Nabtesco Robotic components 4,503 0.8 (29.4)
Crowdworks Crowd sourcing services 4,294 0.7 (29.2)
Appier Software as a service company providing AI platforms 4,107 0.7 20.2 †
Daikyonishikawa Automobile part manufacturer 4,091 0.7 15.7
Vector PR Company 3,981 0.7 (15.7) †
WDB Holdings Human resource services 3,834 0.7 (13.1)
SWCC Electric wire and cable manufacturer 3,755 0.6 (1.9) †
Nihon M&A Center M&A advisory services 3,682 0.6 (45.3)
Pigeon Baby care products 3,408 0.6 (16.9)
Locondo E-commerce services provider 3,232 0.6 47.0
Freakout Holdings Digital marketing technology 3,178 0.5 (22.4)
Spiber u Textiles 3,008 0.5 (41.4)
M3 Online medical services 2,815 0.5 (18.1)
Poletowin Pitcrew Game testing and internet monitoring 2,770 0.5 (32.4)
oRo Develops and provides enterprise planning software 2,580 0.4 (13.6)
Moneytree K.K. Class B Preferred u AI based fintech platform 2,416 0.4 4.5
Akatsuki Mobile games developer 2,263 0.4 (18.5)
Total investments 575,194 99.3
Net liquid assets# 3,864 0.7
Total assets‡ 579,058 100.0
Bank loans (88,039) (15.2)
Shareholders' funds 491,019 84.8
* Absolute performance is in sterling terms and has been
calculated on a total return basis over the period
1 February 2023 to 31 July 2023.
u Private company (unlisted) investment.
† Figures relate to part period returns where the investment has
been purchased in the period.
# See Glossary of Terms and Alternative Performance Measures below.
‡ Total assets less current liabilities, before deduction of
borrowings. See Glossary of Terms and Alternative
Performance Measures below.
Source: Baillie Gifford/Revolution and relevant underlying data providers. See
disclaimer below.
Income statement (unaudited)
For the six months to 31 July 2023 For the six months ended 31 July 2022
Notes Revenue Capital Total Revenue Capital Total
£'000
£'000
£'000
£'000
£'000 £'000
Net losses on investments 3 - (65,599) (65,599) - (32,239) (32,239)
Currency gains - 11,510 11,510 - 3,740 3,740
Income from investments 4,225 - 4,225 4,753 - 4,753
Investment management fee 4 (1,521) - (1,521) (1,546) - (1,546)
Other administrative expenses (310) - (310) (330) - (330)
Net return before finance costs and taxation 2,394 (54,089) (51,695) 2,877 (28,499) (25,622)
Finance cost of borrowings (713) - (713) (671) - (671)
Net return on ordinary activities before taxation 1,681 (54,089) (52,408) 2,206 (28,499) (26,293)
Tax on ordinary activities 5 (422) - (422) (475) - (475)
Net return on ordinary activities after taxation 1,259 (54,089) (52,830) 1,731 (28,499) (26,768)
Net return per ordinary share 7 0.40p (17.24p) (16.84p) 0.55p (9.07p) (8.52p)
The accompanying notes below are an integral part of the Financial Statements.
The total column of this statement is the profit and loss account of the
Company. The supplementary revenue and capital 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 (unaudited)
Notes At 31 July At 31 January 2023
2023 (audited)
£'000 £'000
Fixed assets
Investments held at fair value through profit or loss 8 575,194 625,922
Current assets
Debtors 2,763 3,047
Cash and cash equivalents 3,655 6,946
6,418 9,993
Creditors
Amounts falling due within one year 9 (51,780) (46,154)
Net current liabilities (45,362) (36,161)
Total assets less current liabilities 529,832 589,761
Creditors
Amounts falling due after more one year 9 (38,813) (44,308)
Total net assets 491,019 545,453
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 202,026 257,719
Revenue reserve 917 (342)
Shareholders' funds 491,019 545,453
Net asset value per ordinary share 156.9p 173.6p
(after deducting borrowings at book value)
Ordinary shares in issue 11 313,052,485 314,152,485
Statement of changes in equity (unaudited)
For the six months ended 31 July 2023
Share capital £'000 Share premium account £'000 Capital redemption reserve £'000 Capital reserve* Revenue reserve £'000 Shareholders' funds
£'000 £'000
Shareholder's funds at 1 February 2023 6,285 260,270 21,521 257,719 (342) 545,453
Ordinary shares bought back into treasury - - - (1,604) - (1,604)
Net return on ordinary activities after taxation - - - (54,089) 1,259 (52,830)
Shareholders' funds at 31 July 2023 6,285 260,270 21,521 202,026 917 491,019
For the six months ended 31 July 2022
Share capital £'000 Share premium account £'000 Capital redemption reserve £'000 Capital reserve* £'000 Revenue reserve £'000 Shareholders' funds
£'000
Shareholders' funds at 1 February 2022 6,285 260,270 21,521 268,408 (3,832) 552,652
Net return on ordinary activities after taxation - - - (28,499) 1,731 (26,768)
Shareholders' funds at 31 July 2022 6,285 260,270 21,521 239,909 (2,101) 525,884
*The Capital reserve includes investment holding gains of £6,551,000 (31 July
2022 - gains of £36,090,000).
Condensed cash flow statement (unaudited)
Six months to Six months to
31 July 31 July
2023 2022
£'000 £'000
Cash flows from operating activities
Net return on ordinary activities before taxation (52,408) (26,293)
Net losses on investments 65,599 32,239
Currency gains (11,510) (3,740)
Finance costs of borrowings 713 671
Overseas withholding tax (557) (521)
Changes in debtors and creditors 1,182 397
Cash from operations 3,019 2,753
Interest paid (687) (664)
Net cash inflow from operating activities 2,332 2,089
Net cash outflow from investing activities (15,530) (31,524)
Ordinary shares bought back into treasury and stamp duty thereon (1,604) -
Bank loans repaid (11,486) -
Bank loans drawn down 23,799 -
Net cash inflow from financing activities 10,709 -
Decrease in cash and cash equivalents (2,489) (29,435)
Exchange movements (802) (770)
Cash and cash equivalents at start of period 6,946 33,505
Cash and cash equivalents at end of period* 3,655 3,300
* Cash and cash equivalents represent cash at bank and deposits repayable on
demand.
Notes to the financial statements (unaudited)
01. Basis of accounting
The condensed Financial Statements for the six months to 31 July 2023 comprise
the statements set out above together with the related notes below. They have
been prepared in accordance with FRS 104 'Interim Financial Reporting' and the
principles of the AIC's Statement of Recommended Practice issued in November
2014 and updated in July 2022 with consequential amendments and have not been
audited or reviewed by the Auditor pursuant to the Auditing Practices Board
Guidance on 'Review of Interim Financial Information'. The Financial
Statements for the six months to 31 July 2023 have been prepared on the basis
of the same accounting policies as set out in the Company's Annual Report and
Financial Statements at 31 January 2023.
Going concern
The Directors have considered the nature of the Company's principal risks and
uncertainties, as set out on the inside front cover, together with its current
position, investment objective and policy, its assets and liabilities and
projected income and expenditure. The Board has, in particular, considered the
impact of heightened market volatility and reviewed the results of specific
leverage and liquidity stress testing, but does not believe the Company's
going concern status is affected. The Company's assets, which are primarily
investments in quoted securities which are readily realisable (Level 1),
exceed its liabilities significantly and could be sold to repay borrowings if
required. All borrowings require the prior approval of the Board. Gearing
levels and compliance with loan covenants are reviewed by the Board on a
regular basis. The Company has continued to comply with the investment trust
status requirements of section 1158 of the Corporation Tax Act 2010 and the
Investment Trust (Approved Company) Regulations 2011. Accordingly, the
Directors considered it appropriate to adopt the going concern basis of
accounting in preparing these Financial Statements and confirm that they are
not aware of any material uncertainties which may affect the Company's ability
to continue in operational existence for a period of at least twelve months
from the date of approval of these Financial Statements.
02. Financial information
The financial information contained within this Interim Financial Report does
not constitute statutory accounts as defined in sections 434 to 436 of the
Companies Act 2006. The financial information for the year ended 31 January
2023 has been extracted from the statutory accounts which have been filed with
the Registrar of Companies. The Auditor's Report on these accounts was not
qualified, did not include a reference to any matters to which the Auditor
drew attention by way of emphasis without qualifying their report, and did not
contain a statement under sections 498 (2) or (3) of the Companies Act 2006.
03. Net losses on investments
Six months Six months
to 31 July to 31 July
2023 2022
£'000 £'000
Gains/(losses) on sales of investments 1,648 (13,268)
Movement in investment holding gains (67,247) (18,971)
(65,599) (32,239)
04. Investment manager
Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford
& Co, has been appointed by the Company as its Alternative Investment Fund
Manager (AIFM) and Company Secretary. The investment management function has
been delegated to Baillie Gifford & Co. The management agreement can be
terminated on six months' notice. The annual management fee is 0.75% on the
first £50m of net assets, 0.65% on the next £200m of net assets and 0.55% on
the remainder, calculated and payable quarterly.
05. Tax
The Company suffers overseas withholding tax on its equity income, currently
at the rate of 10%.
06. Dividends
No interim dividend will be declared.
07. Net return per ordinary share
Six months to 31 July 2023 Six months to 31 July 2022
£'000 £'000
Revenue return 1,259 1,731
Capital return (54,089) (28,499)
Total return (52,830) (26,768)
Net return per ordinary share is based on the above totals of revenue and
capital and on 313,792,816 (31 July 2022 - 314,252,485) ordinary shares, being
the weighted average number of ordinary shares in issue during the period.
There are no dilutive or potentially dilutive shares in issue.
08. Fair value financial assets
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).
The Company's investments are financial assets held at fair value through
profit or loss. In accordance with FRS 102, an analysis of the Company's
financial asset investments based on the fair value hierarchy described above
is shown below.
As at 31 July 2023 Level 1 Level 2 Level 3 Total
£'000
£'000 £'000 £'000
Listed equities 558,975 - - 558,975
Private company (unlisted) securities - - 16,219 16,219
Total financial asset investments 558,975 - 16,219 575,194
As at 31 January 2023 Level 1 Level 2 Level 3 Total
£'000
£'000
£'000
£'000
Listed equities 607,176 - - 607,176
Private company (unlisted) securities - - 18,746 18,746
Total financial asset investments 607,176 - 18,746 625,922
There have been no transfers between levels of the fair value hierarchy during
the period. The fair value of listed investments is last traded price which is
equivalent to the bid price on Japanese markets. Listed investments are
categorised as Level 1 if they are valued using unadjusted quoted prices for
identical instruments in an active market and as Level 2 if they do not meet
all these criteria but are, nonetheless, valued using market data. Private
company (unlisted) investments are valued at fair value by the Directors
following a detailed review and appropriate challenge of the valuations
proposed by the Managers. The Managers' private company valuation policy
applies methodologies consistent with the International Private Equity and
Venture Capital Valuation guidelines 2018 ('IPEV'). The techniques applied are
predominantly market- based approaches. The market-based approaches available
under IPEV are set out below:
• Multiples;
• Industry Valuation Benchmarks; and
• Available Market Prices.
Further information on the private company (unlisted) valuation process is
provided above.
The Company's holdings in private company (unlisted) investments are
categorised as Level 3 as unobservable data is a significant input to their
fair value measurements.
09. Financial liabilities
The amounts falling due within one year include bank loans of £49,226,000
(¥9.00 billion) outstanding under yen loan facilities repayable on 27
November 2023 and the revolving credit facility repayable on a three monthly
basis (31 January 2023 - bank loans of £43,705,000 (¥7.00 billion)). The
amounts falling due after more than one year include bank loans of
£38,813,000 (¥7.10 billion) outstanding under yen loan facilities repayable
between 8 November 2024 and 18 December 2024 (31 January 2023 - £44,308,000
(¥7.10 billion)).
10. Fair value financial liabilities
The fair value of the bank loans at 31 July 2023 was £87,979,000 (31 January
2023 - £87,725,000).
11. Share capital
The Company has the authority to issue shares/sell treasury shares at a
premium to net asset value as well as to buy back shares at a discount to net
asset value. During the period under review, no shares were issued (31 July
2022 - nil). 1,100,000 shares were bought back during the period under review
at a cost of £1,604,000 (31 July 2022 - nil).
12. Transaction costs
Transaction costs incurred on the purchase and sale of the investments are
added to the purchase cost or deducted from the sale proceeds, as appropriate.
During the period, transaction costs on purchases amounted to £23,000 (31
July 2022 - £36,000) and transaction costs on sales amounted to £14,000 (31
July 2022 - £25,000).
13. Related party transactions
There have been no transactions with related parties during the first six
months of the current financial year that have materially affected the
financial position or the performance of the Company during that period and
there have been no changes in the related party transactions described in the
last Annual Report and Financial Statements that could have had such an effect
on the Company during that period.
None of the views expressed in this document should be construed as advice to
buy or sell a particular investment.
Principal risks and uncertainties
The principal risks facing the Company are financial risk, private company
(unlisted) investment risk, investment strategy risk, environmental, social
and governance risk, discount risk, regulatory risk, custody and depositary
risk, small company risk, operational risk, cyber security risk, leverage
risk, political risk and emerging risks. An explanation of these risks and how
they are managed is set out on pages 8 to 10 of the Company's Annual Report
and Financial Statements for the year to 31 January 2023 which is available on
the Company's website: shinnippon.co.uk‡. The principal risks and
uncertainties have not changed since the date of that report.
The Interim Financial Report will be available on shinnippon.co.uk‡ and will
be posted to shareholders on or around 4 October 2023.
‡ Neither the contents of the Managers' website nor the contents of any
website accessible from hyperlinks on the Managers' 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).
Shareholders' funds and 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 note 9 above.
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 in note 10
above.
31 July 2023 31 January 2023
Net Asset Value per ordinary share (borrowings at book value) 156.9p 173.6p
Shareholders' funds (borrowings at book value) £491,019,000 £545,453,000
Add: book value of borrowings £88,039,000 £88,013,000
Less: fair value of borrowings (£87,979,000) (£87,725,000)
Shareholders' funds (borrowings at fair value) £491,079,000 £545,741,000
Shares in issue at period end 313,052,485 314,152,485
Net Asset Value per ordinary share (borrowings at fair value) 156.9p 173.7p
Net liquid assets
Net liquid assets comprise current assets less current liabilities, excluding
borrowings.
Discount/premium (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.
31 July 2023 31 July 2023 31 January 2023 31 January 2023
NAV (book) NAV (fair) NAV (book) NAV (fair)
Closing NAV per share 156.9p 156.9p 173.6p 173.7p
Closing share price 139.0p 139.0p 158.8p 158.8p
Discount 11.4% 11.4% 8.5% 8.6%
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.
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).
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. Gross gearing is
the Company's borrowings expressed as a percentage of shareholders' funds.
31 July 2023 31 January 2023
Gearing* Gross Gearing† Gearing* Gross Gearing†
£'000
£'000 £'000 £'000
Borrowings (a) 88,039 88,039 88,013 88,013
Cash and cash equivalents (b) 3,450 - 6,082 -
Shareholders' funds (c) 491,019 491,019 545,453 545,453
17.2% 17.9% 15.0% 16.1%
* Gearing: ((a) - (b)) ÷ (c), expressed as a percentage.
†Gross gearing (a) ÷ (c), expressed as a percentage.
Leverage (APM)
For the purposes of the Alternative Investment Fund Managers ('AIFM') Directive, 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 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.
Private (unlisted) company
A private (unlisted) company company means a company whose shares are not
available to the general public for trading and not listed on a stock
exchange.
Third party data providers disclaimer
No third party data provider ('Provider') makes any warranty, express or
implied, as to the accuracy, completeness or timeliness of the data contained
herewith nor as to the results to be obtained by recipients of the data. No
Provider shall in any way be liable to any recipient of the data for any
inaccuracies, errors or omissions in the index data included in this document,
regardless of cause, or for any damages (whether direct or indirect) resulting
therefrom.
No Provider has any obligation to update, modify or amend the data or to
otherwise notify a recipient thereof in the event that any matter stated
herein changes or subsequently becomes inaccurate.
Without limiting the foregoing, no Provider shall have any liability
whatsoever to you, whether in contract (including under an indemnity), in tort
(including negligence), under a warranty, under statute or otherwise, in
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
information assumes the entire risk of any use made of this information. MSCI,
each of its affiliates and each other person involved in or related to
compiling, computing or creating any MSCI information collectively, the 'MSCI
Parties' expressly disclaims all warranties (including, without limitation,
any warranties of originality, accuracy, completeness, timeliness,
non-infringement, merchantability and fitness for a particular purpose) with
respect to this information. Without limiting any of the foregoing, in no
event shall any MSCI Party have any liability or any direct, indirect,
special, incidental, punitive, consequential (including, without limitation,
lost profits) or any other damages (msci.com).
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 Shin Nippon 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 ESG Principles and Guidelines
as its policy on integration of sustainability risks in investment decisions.
Baillie Gifford & Co believes that a company cannot be financially
sustainable in the long run if its approach to business is fundamentally out
of line with changing societal expectations. It defines 'sustainability' as a
deliberately broad concept which encapsulates a company's purpose, values,
business model, culture, and operating practices.
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 up 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. The likely impact on the
return of the portfolio from a potential or actual material decline in the
value of investment due to the occurrence of an environmental, social or
governance event or condition will vary and will depend on several factors
including but not limited to the type, extent, complexity and duration of an
event or condition, prevailing market conditions and existence of any
mitigating factors.
Whilst consideration is given to sustainability matters, there are no
restrictions on the investment universe of the Company, unless otherwise
stated within in its Investment Objective & Policy. Baillie Gifford &
Co can invest in any companies it believes could create beneficial long-term
returns for investors. However, this might result in investments being made in
companies that ultimately cause a negative outcome for the environment or
society.
More detail on the Investment Manager's approach to sustainability can be
found in the ESG Principles and Guidelines document, available publicly on the
Baillie Gifford website bailliegifford.com.
The underlying investments do not take into account the EU criteria for
environmentally sustainable economic activities established under the EU
Taxonomy Regulation.
- ends -
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