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Pin to quick picksBaillie Gifford Shin Nippon PLC Regulatory News (BGS)

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Baillie Gifford Shin Nippon is an Investment Trust

To pursue long term capital growth through investment principally in small Japanese companies.

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Final Results

17 Mar 2020 09:35

RNS Number : 4267G
Baillie Gifford Shin Nippon PLC
17 March 2020
 

The following amendment has been made to the Baillie Gifford Shin Nippon PLC Final Results announcement released on 17/03/20 at 7am under RNS No 3672G.

 

A correction has been made to the Outlook section of the Managers' Report.

 

All other details remain unchanged.

 

The full amended text is shown below.

 

 

Announcement: Preliminary Results

 

Baillie Gifford Shin Nippon PLC

 

Legal Entity Identifier: X5XCIPCJQCSUF8H1FU83

 

The following is the results announcement for the year to 31 January 2020 which was approved by the Board on

16 March 2020.

 

 

Results for the year to 31 January 2020

Over the year the Company's net asset value per share (after deducting borrowings at fair value) rose by 9.0% compared to a 9.5% rise in the comparative index* (the net asset value per share (after deducting borrowings at book value) increased by 8.9%). The share price fell by 0.5% as the shares moved from a premium of 8.0% to a discount of 1.4%.

In sterling terms over three years, the Company's comparative index is up 18.1%, whilst the net asset value (with borrowings at fair value) and share price are up by 49.6% and 42.5% respectively.

 

¾ Contributors to positive performance included longstanding holding M3, which more than doubled its share price over the year as its core online drug marketing business saw an acceleration in sales. Infomart, which operates an online food ordering system for restaurants, and second hand housing renovation specialist, Katitas, were also strong performers.

 

¾ The largest detractors from performance included online cosmetics retailer Istyle, which has seen a collapse in sales from its key Hong Kong and Chinese markets, and Japan's leading online takeaway operator Demae-Can (formerly known as Yume No Machi) also suffered from a weak share price as management continue to make heavy upfront investments.

 

¾ Global markets continue to experience high levels of uncertainty as the coronavirus outbreak escalates. As patient and long-term growth investors, the current environment is giving rise to numerous exciting investment opportunities.

 

* The Company's comparative index for the year to 31 January 2020 was the MSCI Japan Small Cap Index (total return in sterling terms).

 

Alternative Performance Measure - see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

Source: Refinitiv/Baillie Gifford and relevant underlying index providers.

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 2020 the Company had total assets of £535.8m (before deduction of bank loans of £52.1m).

The Company is managed by Baillie Gifford & Co, an Edinburgh based fund management group with around £186 billion under management and advice as at 13 March 2020.

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 medium to long term. You can find up to date performance information about Shin Nippon at www.shinnippon.co.uk.

See disclaimer at the end of this announcement.

16 March 2020

For further information please contact:

Alex Blake, Baillie Gifford & Co

Tel: 0131 275 2859

 

Mark Knight, Four Communications

Tel : 0203 697 4200 or 07803 758810

 

 

Chairman's Statement

 

I am pleased to provide a report on your Company's performance for the year ended 31 January 2020. The Net Asset Value per share* (NAV) rose by 9.0% over the year, marginally behind the growth in the comparative index (MSCI Japan Small Cap index, total return in sterling terms) of 9.5%. Your Board continues to review progress over a rolling three year period. During this period the Company's NAV grew by 49.6% versus the comparative index return of 18.1% and the share price has increased by 42.5%.

Demand for the Company's shares exceeded supply at the start of the year, but this reversed over the course of the year, and the share price moved from an 8.0 % premium to NAV to a 1.4% discount to NAV. In turn the share price fell by 0.5% over the year.

There is no doubt that 2019 was a difficult period for small cap companies in Japan. Ongoing trade tariff disputes between China and the US naturally affected sentiment within Japan. The year-end date unfortunately coincided with the escalating concerns surrounding the coronavirus in China and time will yet tell as to how this will affect inbound tourism and the Japanese economy in general.

 

Share Issuance

 

During the year 6.13m shares were issued at a premium to NAV (the majority of this issuance took place during the first half of the year). This raised £11.14m of new money and represented 2.2% of the share capital as at 31 January 2019. Your Board believes that issuing new shares at a premium to NAV has a number of benefits for shareholders, including reducing the ongoing charges and improving the liquidity of the shares. Conversely with the premium slipping to a small discount at the year end your Board will monitor the situation carefully and is seeking authority to buy back shares where the Board considers it to be in the best interests of the shareholders and the Company as a whole.

 

Borrowings

 

The Manager continues to use gearing to enhance portfolio performance and your Board remains supportive of this strategy. Gearing at the year end was equivalent to 10% of net assets down from 11% the previous year.

Total borrowings remain unchanged at ¥7.45bn and during the year the yen marginally strengthened against sterling by 0.2%. The Company undertook no currency hedging during the year and has no plans to do so.

 

Revenue

 

The revenue return per share increased from 0.04p to 0.28p. The growth in portfolio income more than offset the increase in the management fee. Underlying income growth from the portfolio generated an increase in gross income of 17.9%. Total expenses increased by 3.2% and the management fee increased by 5.3% reflecting the increase in the average NAV over the year. Nevertheless, I am pleased to report a further reduction in the ongoing charges from 0.77% to 0.73%.

 

Stewardship

The consideration of stewardship factors is an integral part of the Managers' long term investment approach. Further detail on the Managers' approach can be found below, following the Review of Investments.

 

AGM

 

At this year's AGM your Board are again seeking authority to issue new shares of up to 10% of the Company's issued share capital. Any shares issued would be for cash, on a non-pre-emptive basis and only at a premium to NAV thereby enhancing net asset value for existing shareholders. Your Board continues to believe that by satisfying natural supply and demand for our shares we are acting in the best interest of existing shareholders. Your Board will monitor this closely.

Conversely your Board will once again be seeking the approval to buy back shares should they start trading at a substantial discount, over a sustained period of time either in absolute terms or in relation to its peers. If required this activity would also enhance the net asset value attributable to existing shareholders.

 

Governance

 

Simon Somerville, our Senior Independent Director, will retire from the Board at the AGM on 14 May. Simon has been a marvellous asset to the Company. His knowledge of Japan, its culture and its economy has been of invaluable benefit to the Board and Managers. He will be sorely missed and I thank him on your behalf for all the work he has done for us.

I am delighted to report that Kevin Troup has been appointed to the Board. Kevin is a highly experienced ex fund manager with strong governance, business, analytical and decision making skills. Kevin joins us with excellent Japanese equities experience and I look forward to working with him in the years ahead.

 

Outlook

 

The Board and Managers have considered the implications of the remaining uncertainties around Brexit including the potential market reaction should the UK be unable to reach a trade agreement with the EU by the end of the transition period. As I commented last year, around half of the Company's investments are domestically focussed within Japan and the remaining holdings have minimal exposure to the UK. The value of the Company's shares would be affected by any impact, positively or negatively, on sterling but this would be partially offset by the effect of exchange movements on the Company's yen denominated borrowings. Additionally, the potential for volatility on the London Stock Exchange can be managed by the Board's power to issue or buy-back shares in response to the level of underlying demand. The Board will of course continue to monitor developments but is not concerned about the impact of Brexit on the Company. 

As I write this, the coronavirus continues to be a significant risk and one cannot possibly foresee the longer-term consequences for the Japanese economy, inbound tourism, the labour market or indeed the Olympic and Paralympic games. The Rugby World Cup in Japan last year was a huge success, with the eyes of the world on Japan. I sincerely hope that they will again have the opportunity to portray a strong and positive image to the outside world this summer.

An ageing population coupled with a shrinking workforce would on the face of it, be a huge worry. Japan, however, has been alert to these changing trends for some time now and has embraced what is known as the 'silver market' with enthusiasm. Changing technology can bring huge benefits to all, with a greater unity of purpose and sense of urgency. The Government accepts that change is necessary to address these issues and in the longer term should be beneficial for the country. The Company's Manager remains focussed on identifying companies with high growth potential and investing in them for the long term. Your Board remains positive that this approach should reward the patient investor.

 

 

M Neil Donaldson

Chairman

16 March 2020

 

* After deducting borrowings at fair value.

 

For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

 

Past performance is not a guide to future performance.

See disclaimer at the end of this announcement.

 

 

Managers' Report

 

Philosophy

Since the launch of Shin Nippon in 1985, our investment philosophy has remained consistent. We seek to invest in the most dynamic of smaller companies in Japan that have the potential to grow rapidly for at least five to ten years. These businesses are typically founded and managed by young, entrepreneurial individuals who are willing to take short-term risks in return for long term success. This, in essence, captures the spirit of Shin Nippon. We invest in companies with a view of generating attractive returns for our shareholders in the long run. Given the immaturity of the businesses that we invest in, and the inherent volatility in their shares, we are prepared to tolerate periods of weak performance without compromising on our investment philosophy that has served patient shareholders well over the long-term. Japan continues to be a fertile hunting ground for exciting and fast-growing smaller businesses that have the potential to become world-class companies. Given the widening pool of such businesses amidst changing attitudes towards risk-taking in Japan, we remain excited with the investment opportunities that are becoming available to us.

 

What we look for

How we invest

How we engage

Disruptive business models and dynamic entrepreneurs

Genuinely long-term:

five years and beyond

Serious about engagement and alignment

Domestic champions and global leaders

Fundamental, bottom-up research

Dedicated Governance and Sustainabilty team

Secular growth and innovation:

'New Japan'

Embracing asymmetry

Pragmatic approach

 

Performance

High growth small cap stocks in Japan endured a tough period over the past year as numerous macro headwinds dampened investor sentiment. Concerns over global growth, a slowing Chinese economy, the ongoing trade war between the US and China, and more recently, the emergence of a potentially lethal global pandemic, all resulted in a 'risk-off' sentiment. Consequently, business confidence in Japan remained depressed, leading to numerous companies deferring their investment plans in the face of falling orders from key end markets.

Amidst heightened volatility, Shin Nippon's net asset value per share (after deducting borrowings at fair value) rose 15.3% during the first half of the year but fell 5.5% in the second half. Consequently, for the full year ending 31 January 2020, Shin Nippon's net asset value per share increased by 9% compared to a 9.5% rise in the benchmark MSCI Japan Small Cap Index (total return in sterling terms). We believe a fairer way of looking at performance is to focus on the long-term. Over both five and ten years, Shin Nippon's net asset value per share has compounded at around 20% per annum, thereby outperforming its benchmark by 8% and 9% per annum respectively. This illustrates the benefits of embracing volatility and adopting a patient and long-term approach to investing. It is also indicative of the fact that Japanese small caps can be a very rewarding asset class to invest in for the long-term.

Amidst a challenging backdrop, companies exhibiting strong sales and earnings growth were rewarded handsomely by the market. The share price of longstanding holding M3 more than doubled over the past year as its core online drug marketing business saw an acceleration in sales, contrary to market expectations. It also continues to expand into new areas like clinical testing and doctor recruitment. In clinical testing, M3 is able to recruit patients for clinical trials much quicker than its peers, thanks to its vast online database of doctors who can refer relevant patients. It is disrupting the healthcare recruitment industry in a similar vein, utilising its online database to refer doctors for suitable openings at medical institutions across Japan. It is making good progress in replicating its business model in markets like China and the US. All these initiatives are expanding M3's addressable market and we continue to believe that it can grow rapidly for much longer than the market anticipates.

Infomart was another strong performer. Its online food ordering system for restaurants has become the de facto industry standard. To consolidate its already strong competitive position, it is continuing to add new features to its ordering platform. It recently launched an electronic invoicing system that is proving to be a major hit with clients from a range of sectors. The Japanese Ministry of Economy, Trade and Industry recently highlighted Infomart's invoicing system as an example of an innovative solution designed to improve productivity and reduce costs. This endorsement has raised the company's profile and has helped generate a lot of interest in its services. It has recently tied up with another portfolio holding, online payments services provider GMO Payment Gateway, to offer its customers short-term loans for working capital based on their credit history.

Shares of second-hand housing renovation specialist Katitas were also strong. It continues to grow rapidly as demand for its detached used homes remains strong. There are about 8 million empty or abandoned homes across Japan and this figure continues to rise each year given Japan's demographics and the trend towards urbanisation. This provides Katitas with an abundant supply of houses to choose from, which it then renovates to a high standard and sells to first time buyers at a price much lower than a comparable new build. Katitas is nearly ten times larger than its closest competitor in terms of units sold, giving it a strong competitive edge. Scientific and semiconductor equipment manufacturer JEOL, also made a significant positive contribution to performance. Following the withdrawal of a key competitor, JEOL's position in the scientific equipment business has improved considerably and it is seeing margins improve as a result. In semiconductor equipment, JEOL's new product, which it has co-developed with Intel subsidiary IMS, is seeing exceptionally strong demand as it helps reduce costs and time in the semiconductor manufacturing process. It also enables the production of more complex semiconductor chips. This is proving to be a significant driver of earnings for the company and its long-term growth prospects look very exciting.

Unlisted holding Moneytree also continues to do well operationally. It is now working with all the megabanks in Japan as well as a host of regional banks. Its artificial intelligence enabled customer management software is seeing rising adoption across numerous financial institutions and the company is adding new features to make the software more comprehensive. The unique characteristics and growth potential of Moneytree is gaining wider recognition amongst other venture capital investors. The company recently completed a funding round where it was valued at more than twice the amount we paid for it in 2017. We are continuing to engage with many other such exciting and fast-growing unlisted companies in Japan and see this area as an important source of new ideas.

Online cosmetics retailer iStyle was the largest negative contributor to performance over the past year. It recently launched a software-as-a-service package that allows cosmetics companies to track the online and offline shopping behaviour of consumers. Unfortunately, adoption of this new service has been very slow. Concurrently, the company has seen a collapse in sales from its key Hong Kong and Chinese markets owing to ongoing political unrest and general economic weakness. All of this has forced management to revise down their medium-term financial targets leading to a loss of credibility amongst investors. Japan's leading online takeaway operator Demae-Can (formerly known as Yume No Machi) also suffered from a weak share price as management continue to make heavy upfront investments to fend off the challenge from Uber Eats. This has resulted in the company making losses in the near term. Fabless semiconductor manufacturer Megachips reported significant losses following an ongoing restructuring program. As part of this, the company is exiting numerous loss-making businesses and is focussing on its most profitable chip business with Nintendo as well as its silicon-based timing device business. In the long-run, we believe the current measures will result in a sustainably profitable and better-quality business.

 

Portfolio

We pay less attention to the benchmark and focus more on a company's individual attractions. Consequently, Shin Nippon's active share continues to be high at 94%, implying just a 6% overlap with the comparative index. Portfolio turnover was 17.7% which remains in line with our philosophy of being patient and long-term investors with an investment horizon of at least five to ten years. We however did make some changes to the portfolio over the past year.

Among the new holdings bought was Kitanotatsujin, a specialist online cosmetics retailer with a differentiated business model. It operates a subscription model whereby consumers receive a selection of personalised cosmetic products for a monthly fee. The company doesn't use traditional advertising, relying instead on its in-house team of data analysts to monitor consumer behaviour and engage in targeted advertising. It currently has a significant waiting list for its recently launched skincare products. Given its proven track record of developing premium functional cosmetics that consumers like, we believe the company can grow rapidly for a number of years. Kumiai Chemical was another new purchase over the year. This is a niche chemicals company that makes the active chemical ingredient used in a range of highly effective and safe herbicides. Its flagship product 'AXEEV' is seeing exceptionally strong growth in the US and the company has recently gained approval to sell this in Latin America and India, both of which are very large end markets. We also took a holding in Descente, a Japanese brand of sporting goods. The company has historically been mismanaged by the founding family, but trading company Itochu recently took a controlling stake and has brought in new management in a bid to revive the flagging brand. In addition, leading Chinese sportswear company Anta Sports has recently formed a capital and business alliance with Descente and we believe this could result in significant growth opportunities for the company in China. Software companies Oro and Cybozu were also among the new additions to the portfolio. Both companies sell cloud-based software to small and medium sized businesses, enabling them to automate a number of functions, thereby reducing their labour intensity.

We also sold some stocks over the past year. Asics, a leading global brand of running shoes, continues to suffer as management have failed to respond adequately to competitive pressures, resulting in the company falling behind its traditional rivals like Nike and Adidas. We also sold our holding in high-end condominium builder Mugen Estate as it is facing a perfect storm of rising land acquisition costs and declining demand. It also has a very weak balance sheet that puts it in a precarious financial position. Longstanding holding ZOZO (formerly known as Start Today) was the subject of a tender offer by Z Holdings (formerly known as Yahoo Japan). We followed the dynamic founder of ZOZO in tendering a large part of our shares in the offer as we didn't have any conviction in the future growth prospects of ZOZO as part of the Yahoo Japan group and without its founder at the helm. The remainder of our holding in ZOZO was subsequently sold in the open market.

 

Outlook

As noted in our half yearly update, global markets continue to experience high levels of uncertainty and Japan is no exception. The slowdown in economic growth across many large economies is being exacerbated by the ongoing trade war between the US and China. In addition, the coronavirus pandemic is resulting in sharp falls across global equity markets. However, for us, as patient and long-term growth investors, the current environment is giving rise to numerous exciting investment opportunities. Many high quality and rapid growth companies, including some that we

currently own, are seeing sharp declines in their share price that appear to be divorced from the fundamental long-term attractions of these businesses. Contrary to the prevailing pessimistic sentiment, we remain excited at the prospect of investing in these businesses. We are confident that the inherent strengths of their business models will enable them to deliver attractive long-term returns for patient shareholders.

 

Baillie Gifford & Co

16 March 2020

 

For a definition of terms see Glossary of Terms and Alternative Performance Measures at the end of this announcement.

 

Past performance is not a guide to future performance.

See disclaimer at the end of this announcement.

 

 

 

 

 

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

Bengo4.com

2.8% of total assets

Bengo4.com operates a website for legal services in Japan where people in need of a lawyer can search for a specialist. With increasing instances of litigation in Japan and the government's desire to improve access to lawyers and raise the quality of advice available to individuals, there should be strong ongoing demand for Bengo4's services. Longer term, the company plans to offer these services to corporate clients, introduce online access to tax accountants and explore opportunities in legal technologies to reduce inefficiencies in the Japanese legal system. These initiatives should serve to expand the total addressable market for the company longer term.

 

Outsourcing

2.7% of total assets

Outsourcing provides outsourcing services for manufacturing, IT and civil engineering companies. Rising demand for employees and the tight labour market in Japan provides a supportive industry background for the company. The company has been the first to adopt a new business model in this industry which appears to have given them a good first mover advantage. Outsourcing has set up Professional Employer Organisations (PEOs), vehicles that employ seasonal workers on a permanent basis. The specialist workers are then leased back to companies that pay to be members of the PEO. The system is popular as it allows companies seeking workers to avoid taking on full-time staff, and Outsourcing does not have to bid up for seasonal workers when they are required. The blue-chip list of clients is impressive.

 

MonotaRO

2.7% of total assets

MonotaRO sells a huge variety of everyday business necessities directly to small Japanese companies through its website. In the past, small businesses had to deal with a vast array of different wholesalers and suppliers on a regular basis. MonotaRO's website has several million different items available to order. Most products are available for next day delivery and MonotaRO can normally offer lower prices because they are ordering in bulk. The number of registered customers is rising whilst a greater proportion of higher margin private brand products are being sold.

 

Infomart

2.6% of total assets

Infomart operates a cloud-based internet platform to connect Japanese restaurants with their suppliers. The restaurant industry is extremely competitive, and Infomart's system allows businesses to cut cost significantly by simplifying the previously inefficient ordering process. The proportion of restaurant supplies that are sourced online is rising but the industry is still at a very early stage of development. Infomart is by far the largest player in this space and has the potential to raise fees in the long term.

 

Katitas

2.5% of total assets

Katitas is a specialist real-estate developer that buys and renovates old, abandoned homes before selling it on to first-time buyers. The problem of empty houses in Japan is reaching acute levels, resulting in a hollowing out of entire communities. There are an estimated 8 million old or abandoned houses across Japan, most of them vacant. A lot of these are ancestral homes which families, despite living elsewhere, are reluctant to sell. For authorities looking to regenerate local economies, the only option is to demolish these properties and build new establishments, often for business purposes. The families are generally reluctant to give up these properties for sentimental reasons. Katitas offers an attractive option for these families by offering to acquire these houses and the associated land for a reasonable price, renovate these to a high standard before selling them. In the process, Katitas also ends up playing a part in rejuvenating local communities. Because these houses are scattered across Japan, sourcing potential is quite difficult. Over the years, Katitas has developed a strong network of local contacts across Japan that ensures a steady supply of properties they can buy. The company generates very attractive margins despite selling these properties at a meaningful discount to new-builds. Finally, second-hand home ownership in Japan is exceptionally low compared to other developed markets although this is changing and should provide a long-term tailwind for Katitas.

 

Horiba

2.5% of total assets

Horiba makes analysers for a range of applications such as car engines, semiconductors, medical devices and scientific research. It has strong global competitive positions and a good financial record. We are particularly excited by its exposure to the automotive sector, where it has an 80% market share in motor exhaust gas analysers which are seeing strong growth in demand owing to tightening emissions standards and new fuel technology. It is also slowly building a strong position in EVs with respect to testing for batteries, drivetrains and other critical modules. In the medical sector Horiba's haematology analysers are also seeing buoyant demand and its semiconductor business is benefitting significantly from the ongoing investment globally in new chip capacity.

 

Nihon M&A Center

2.5% of total assets

Nihon M&A provides merger advice to small and medium sized businesses in Japan. Many elderly business founders in Japan with no natural successor are looking for solutions to secure the long-term future of their company. There are also many companies in Japan with strong balance sheets looking to consolidate their industry to make operations more efficient. Nihon M&A earns a fee if it successfully introduces two companies that end up merging. The company has a strong pipeline of new deals due to strong links with local banks and tax accountants.

 

JEOL

2.5% of total assets

JEOL is a specialist manufacturer of high-powered microscopes and other scientific analysis equipment. The company has strong global market positions in its niche markets which are growing on the back of increased R&D spending both by academia and the corporate sector. The company has a history of developing new products targeted at these areas. As an example, it has recently developed a direct electron beam mask writer that is used in the early stages of the semiconductor development process to etch circuit patterns onto a silicon substrate. This could disrupt the current method of using mask blanks to indirectly transfer patterns onto silicon substrates and open up a significant market opportunity for the company.

 

M3

2.5% of total assets

M3 is a Japanese company that provides online marketing support for pharmaceutical companies. It runs a medical website with an interactive portal that doctors can log into and pick up targeted email messages about relevant new drug developments. This online marketing is much cheaper for the pharmaceutical companies than face-to-face contact through sales representatives and allows for more efficient time-management by doctors. Growth has been rapid in Japan and M3 is now starting to show signs of replicating the business model successfully overseas. The company has obtained a worthwhile foothold in the US in several key areas such as cardiology and oncology, while acquisitions in Europe and China are helping the company develop its network of doctors there.

 

Peptidream

2.4% of total assets

Traditionally, drugs can be categorised as either small molecules or large biologics such as antibodies, with both having their respective advantages and disadvantages in modern day medicine. By combining chemistry from the small molecule area with advances in the screening and identification of candidates used in the development of biologics, Peptidream has developed a system that seeks to maximise the advantages and remove the limitations of existing drug discovery. Through extensively licensing this technology to large pharmaceutical companies, in addition to developing their own drug pipeline, we believe that Peptidream is well positioned to capitalise on its proprietary system.

 

New Buys

Cybozu

0.4% of total assets

Cybozu is a software-as-a-service business. It develops tools, mainly for smaller and medium-sized businesses, which support team collaboration and better working practices. Its best known product is called Kintone, a cloud-based data and workflow management platform which it launched in 2011. Its products are low cost and can be customised so that non-IT personnel can easily modify the software to suit their needs. Cybozu has a subscription-based model which means that this is a very high margin business. There is an ongoing shift amongst corporate Japan in terms of improving worker efficiency and productivity improvement software such as Cybozu's are in high demand. Given the potential size of the customer base and the sticky nature of customers when it comes to ERP software in general, we think the company has very attractive long-term growth prospects.

 

Descente

0.6% 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.

 

Kitanotatsujin

1.8% of total assets

Kitanotatsujin is an online retailer of own-branded functional cosmetics and skincare products. It is run by its young and dynamic founder who retains a large stake in the business. Kitanotatsujin has developed a unique business model where it charges customers a monthly or annual subscription fee. Its products are available only on its own website and the company develops these products to treat specific health and skin ailments. It takes a very scientific and data-centric approach to product development, marketing and monitoring of its products. This has resulted in a high level of efficiency in terms of its spending on these activities, thereby allowing the company to make very attractive margins due to high repeat subscriptions. The company seems to have carved a niche for itself with the broader cosmetics industry in Japan and we think the growth opportunity for it could be quite significant.

Kumiai Chemical

0.9% of total assets

Kumiai Chemical is an R&D type agro-chemicals manufacturer. It researches, manufactures and licenses out chemical compounds for use as active ingredients in end products like herbicides and earns royalties in return. About 40% of sales come from overseas markets. It also sells in Japan through ZEN-NOH, one of the largest agricultural co-ops. Kumiai specialises in developing highly potent herbicides specifically for herbicide-resistant weeds. It typically takes around 10 years to develop such herbicides and Kumiai has a proven track record of bringing innovative products to market. One example is AXEEV, an active ingredient that Kumiai developed in 2011 that can be used as a herbicide on all cereals except rice. It is effective on a wide range of weeds, especially those resistant to glyphosate, a commonly used herbicide. Global food production is struggling to keep up with demand amid a natural limit to arable land and the emergence of herbicide resistant super-weeds is affecting yields. Products like AXEEV that address this issue are increasingly being sought after. The potential market size for products like AXEEV is huge and global in nature. Most of the current sales come from North America but Kumiai is expanding into Latin America and Asia. It has built a portfolio of similar, highly effective compounds for various crops that it plans to bring to the market over the next few years. All of its products are patent protected and major global agro-chemical companies such as BASF and NuFarm have licensed Kumiai's compounds.

 

Litalico

0.5% of total assets

Litalico provides training and employment assistance for disabled people and educational services for children with developmental difficulties. It targets the roughly 5 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, especially in view of the upcoming Paralympic Games to be held in Tokyo in 2020. 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 also run by a young and dynamic President who owns a large stake in the business.

 

Oro

0.7% of total assets

Oro is an ERP software vendor focusing on the SME market. Its core product is Zac Enterprise, a comprehensive cloud-based software product. It is built with a special 'parametric design' which means that it comes with a database of nearly 14,000 parameters that can be easily configured by the end-user even without a high level of technical expertise. Each parameter allows the user to add new functions based on their requirement. In short, this is a highly customisable software that allows for speedy implementation and that can be dynamically adjusted to suit the varying needs of an end user. Zac is an affordable software package even for the smallest of SMEs so barriers to adoption should be quite low. Zac allows for automating tasks such as marketing, real-time project management, cost accounting, expense management and procurement, to name a few. SMEs in Japan have under-invested in IT for many years so the level of IT adoption and sophistication is quite low. Coupled with labour shortage, the demand backdrop for Oro's products seems quite positive. This is a founder run company where both founders own nearly 60% of the shares, thereby ensuring strong alignment with minorities. Given the favourable demand backdrop and the quality of its product, Oro has the potential to grow it sales and profits at a rapid pace for a number of years.

 

Snow Peak

0.4% 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.

 

Tsugami

1.3% of total assets

Tsugami is a machine tool manufacturer specialising in automatic lathes. It has high market shares in Japan and overseas, most notably China. It generates 80% of sales from overseas so the mature domestic market is of less importance to its long-term growth prospects. Within overseas, China accounts for just over half of total sales and is growing rapidly. Sales in China are undertaken by a subsidiary listed in Hong Kong and 71% owned by Tsugami. The end markets for Tsugami's products in China are huge and growing, and the company has built a strong reputation for product quality and service reliability given its nationwide network. Although quite small at the moment, Tsugami also has an Indian business that is growing fast in a market that is very immature. Management have indicated they might list the Indian subsidiary in the near future, following the same playbook as the Hong Kong subsidiary.

 

Baillie Gifford Statement on Stewardship

 

Reclaiming Activism for Long-Term Investors

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 company management and their boards to be ambitious and focus their investments on long-term value creation. We understand that it is easy for businesses 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 businesses away from destructive financial engineering towards activities that create genuine economic 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 minority shareholders. There is no fixed formula, but it is our expectation that boards have the resources, cognitive diversity and information they need to fulfil these responsibilities. We believe that a board works best when there is strong independent representation able to assist, advise and constructively test 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 alignment with genuine long-term shareholders. We are accepting of significant pay-outs 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 companies to maintain strong relationships with all stakeholders, treating employees, customers, suppliers, governments and regulators in a fair and transparent manner. We do not believe in one-size-fits-all governance and we recognise that different shareholder structures are appropriate for different businesses. However, regardless of structure, companies must always respect the rights of all equity owners.

 

Sustainable business practices

We look for companies to act as responsible corporate citizens, working within the spirit and not just the letter of the laws and regulations that govern them. We believe that corporate success will only be sustained if a business's long-run impact on society and the environment is taken into account. Management and boards should therefore understand and regularly review this aspect of their activities, disclosing such information publicly alongside plans for ongoing improvement.

 

 

Income statement

 

The following is the preliminary statement for the year to 31 January 2020 which was approved by the Board on 12 March 2020. No dividend is payable.

 

For the year ended

31 January 2020

For the year ended

31 January 2019

Revenue

£'000

Capital

£'000

Total

£'000

Revenue

£'000

Capital

£'000

Total

£'000

Gains/(losses) on investments

37,952 

37,952 

(32,225)

(32,225)

Currency losses (note 2)

(320)

(320)

(3,875)

(3,875)

Income

6,006 

6,006 

5,092 

5,092 

Investment management fee (note 3)

(3,023)

(3,023)

(2,871)

(2,871)

Other administrative expenses

(560)

(560)

(601)

(601)

Net return before finance costs and taxation

2,423 

37,632 

40,055 

1,620 

(36,100)

(34,480)

Finance costs of borrowings (note 4)

(1,032)

(1,032)

(1,005)

(1,005)

Net return on ordinary activities before taxation

1,391 

37,632 

39,023 

615 

(36,100)

(35,485)

Tax on ordinary activities

(601)

(601)

(509)

(509)

Net return on ordinary activities after taxation

790 

37,632 

38,422 

106 

(36,100)

(35,994)

Net return per ordinary share (note 6)

0.28p

13.57p

13.85p

0.04p

(13.98p)

(13.94p)

 

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

 

At 31 January 2020

At 31 January 2019

£'000

£'000

£'000

£'000

Fixed assets

Investments held at fair value through profit or loss (note 7)

530,633 

479,874 

Current assets

Debtors

3,141 

2,706 

Cash and cash equivalents

5,736 

5,750 

8,877 

8,456 

Creditors

Amounts falling due within one year (note 8)

(41,112)

(2,229)

Net current (liabilities)/assets

(32,235)

6,227 

Total assets less current liabilities

498,398

486,101 

Creditors

Amounts falling due after more than one year (note 8)

(14,682)

(51,946)

Net assets

483,716 

434,155 

Capital and reserves

Share capital

5,591 

5,469 

Share premium account

174,208 

163,191 

Capital redemption reserve

21,521 

21,521 

Capital reserve

286,983 

249,351 

Revenue reserve

(4,587)

(5,377)

Shareholders' funds

483,716 

434,155 

Net asset value per ordinary share

173.0p

158.8p

Ordinary shares in issue (note 9)

279,577,485

273,452,485

 

 

 

Statement of changes in equity

 

For the year ended 31 January 2020

 

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 2019

5,469

163,191

21,521

249,351

(5,377)

434,155

Ordinary shares issued (note 9)

122

11,017

-

-

11,139

Net return on ordinary activities after taxation

-

-

-

37,632

790 

38,422

Shareholders' funds at 31 January 2020

5,591

174,208

21,521

286,983

(4,587)

483,716

 

For the year ended 31 January 2019

 

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 2018

4,749

95,174

21,521

285,451 

(5,483)

401,412 

Ordinary shares issued (note 9)

720

68,017

-

68,737 

Net return on ordinary activities after taxation

-

-

-

(36,100)

106 

(35,994)

Shareholders' funds at 31 January 2019

5,469

163,191

21,521

249,351 

(5,377)

434,155 

 

* The capital reserve balance at 31 January 2020 includes investment holding gains of £150,872,000 (31 January 2019 - gains of £150,046,000).

 

 

Cash flow statement

 

For the year ended

31 January 2020

For the year ended

31 January 2019

 

£'000

£'000

£'000

£'000

Cash flows from operating activities

Net return on ordinary activities before taxation

39,023 

(35,485)

Net (gains)/losses on investments

(37,952)

32,225 

Currency losses

320 

3,875 

Finance costs of borrowings

1,032 

1,005 

Overseas withholding tax

(601)

(453)

Increase/(decrease) in debtors, accrued income and prepaid expenses

17 

(631)

Increase in creditors and prepaid income

55 

52 

Cash inflow from operations

1,894 

588 

Interest paid

(999)

(963)

Net cash inflow/(outflow) from operating activities

895 

(375)

Cash flows from investing activities

Acquisitions of investments

(100,686)

(155,313)

Disposals of investments

88,851 

85,032 

Net cash outflow from investing activities

(11,835)

(70,281)

Shares issued

11,139 

70,576 

Net cash inflow from financing activities

11,139 

70,576 

Increase/(decrease) in cash and cash equivalents

199 

(80)

Exchange movements

(213)

162 

Cash and cash equivalents at 1 February

5,750 

5,668 

Cash and cash equivalents at 31 January*

5,736 

5,750 

* Cash and cash equivalents represent cash at bank and deposits repayable on demand.

 

 

List of Investments at 31 January 2020

 

 

 

Name

 

 

Business

2020

Value

£'000

2020

% of

total assets

Absolute#

Performance

%

2019

Value

£'000

Bengo4.com

Online legal consultation

14,835 

2.8

21.5 

15,347

 

Outsourcing

Employment placement services

14,502 

2.7

(16.7)

13,261

 

MonotaRO

Online business supplies

14,477 

2.7

16.3

12,500

 

Infomart

Internet platform for restaurant supplies

14,171 

2.6

52.8 

10,548

 

Katitas

Real esate services

13,592 

2.5

45.8 

10,154

 

Horiba

Manufacturer of measuring instruments

13,470 

2.5

33.0 

11,098

 

Nihon M&A Center

M&A advisory services

13,441 

2.5

18.4 

12,877

 

JEOL

Manufacturer of scientific equipment

13,282 

2.5

84.0 

6,779

 

M3

Online medical services

13,184 

2.5

106.2 

6,040

 

Peptidream

Drug discovery and development platform

12,998 

2.4

13.3 

11,630

 

Raksul

Internet based services

12,941 

2.4

18.4 

10,683

 

Asahi Intecc

Specialist Medical Equipment

12,238 

2.3

29.7 

16,047

 

GMO Payment Gateway

Online payment processing

12,128 

2.3

27.3 

11,471

 

Brainpad

Business data analysis

11,802 

2.2

19.1

8,062

 

Harmonic Drive

Robotic components

11,068 

2.1

32.9 

6,883

 

Cosmos Pharmaceuticals

Drugstore chain

10,709 

2.0

16.2 

7,810

 

Sho-Bond

Infrastructure reconstruction

10,613 

2.0

19.6 

9,432

 

Shoei

Manufactures motor cycle helmets

10,576 

2.0

36.6 

7,368

 

Technopro Holdings

IT staffing

10,222 

1.9

32.2 

7,784

 

Kitanotatsujin

Online cosmetics retailer

9,873 

1.8

32.2

-

 

Top 20

250,122 

 

46.7

 

Demae Can (formerly Yume No Machi)

 

Online meal delivery service

9,712 

 

1.8

(28.6)

8,562

 

OSG

Manufactures machine tool equipment

9,375 

1.8

(13.9)

11,155

 

Nifco

Value-added plastic car parts

9,079 

1.7

12.1 

8,267

 

Healios K.K.

Regenerative medicine

8,878 

1.7

10.6 

9,323

 

Cocokara Fine

Drugstore chain

8,583 

1.6

36.1 

6,396

 

iStyle

Beauty product review website

8,264 

1.5

(42.5)

12,691

 

eGuarantee

Guarantees trade receivables

7,846 

1.5

26.9 

6,305

 

Noritsu Koki

Holding company with interests in biotech

and agricultural products

7,592 

 

1.4

(6.4)

8,631

 

Broadleaf

Online platform for buying car parts

7,175 

1.3

12.3 

6,684

 

Tsugami

Manufacturer of automated machine tools

6,947 

1.3

3.3

-

 

Hamakyorex

Third party logistics

6,943 

1.3

(13.0)

7,519

 

Pigeon

Baby care products

6,924 

1.3

(5.3)

6,146

 

Anest Iwata

Manufactures compressors and painting

machines

6,543 

 

1.2

10.5 

5,232

 

Sato Holdings

Barcode and RFID technology

6,346 

1.2

24.9 

6,495

 

Gumi

Mobile games developer

6,293 

1.2

16.0 

2,733

 

Torex Semiconductor

Semiconductor company

6,107 

1.1

22.7 

4,900

 

WDB Holdings

Human resource services

6,067 

1.1

6.1 

5,758

 

Seria

Discount retailer

5,904 

1.1

(8.1)

5,471

 

KH Neochem

Chemical manufacturer

5,559 

1.0

(4.0)

5,319

 

Nippon Ceramic

Electronic component manufacturer

5,529 

1.0

(0.1)

8,497

 

Poletewin Pitcrew

Game testing and internet monitoring

5,520 

1.0

7.0 

4,610

 

Nakanishi

Dental equipment

5,502 

1.0

6.1 

5,802

 

Iriso Electronics

Specialist auto connectors

5,471 

1.0

(4.2)

5,772

 

Kitz

Industrial valve manufacturer

5,449 

1.0

(11.5)

8,535

 

Megachips

Electronic components

5,428 

1.0

(37.4)

11,626

 

Nabtesco

Robotic components

5,396 

1.0

15.4 

4,121

 

Digital Garage

Internet business investor

5,357 

1.0

57.5 

4,073

 

Nikkiso

Industrial pumps and medical equipment

5,173 

1.0

40.0 

2,976

 

Kumai Chemical

Specialised agrochemicals manufacturer

4,959 

0.9

2.9

-

 

Optex

Infrared detection devices

4,853 

0.9

(21.4)

5,626

 

List of Investments at 31 January 2020 (Ctd)

 

 

 

 

Name

 

 

Business

2020

Value

£'000

2020

% of

total assets

Absolute#

Performance

%

2019

Value

£'000

Akatsuki

Mobile games developer

4,801 

0.9

(19.4)

3,008

JP Holdings

Operates child-care facilities

4,707 

0.9

15.2 

4,038

Uzabase

Financial data services

4,688 

0.9

18.3 

811

AEON Delight

Shopping mall maintenance

4,350 

0.8

(4.3) 

3,960

H.I.S.

Discount travel agency and theme parks

4,286 

0.8

(37.5) 

10,392

Calbee

Branded snack foods

4,259 

0.8

4.7

4,022

Findex

Healthcare software developer

4,212 

0.8

97.6

2,608

Locondo

E-commerce services provider

3,994 

0.7

(40.0) 

6,384

Oro

Develops and provides enterprise planning

software

3,805 

0.7

24.3† 

-

Yonex

Sporting goods

3,493 

0.7

(1.1) 

3,127

CyberAgent

Japanese internet advertising and content

3,350 

0.6

27.2

3,049

Descente

Manufactures athletic clothing

3,276 

0.6

19.0† 

-

Moneytree K.K. Class B

Preferred u

AI based fintech platform

3,260 

0.6

0.2

3,253

Daikyonishikawa

Automobile part manufacturer

3,224 

0.6

(30.1) 

4,861

SIIX

Outsources overseas production

3,183 

0.6

(13.4) 

3,227

Crowdworks

Crowd sourcing services

3,050 

0.6

(39.9) 

6,446

Litalico

Provides employment support and learning

support services for people with

disabilities

2,732 

0.5

59.3† 

-

Morpho

Image processing technologies

2,524 

0.5

43.1

1,186

Cybozu

Develops and markets internet and intranet

application software for businesses

2,252 

0.4

14.6† 

-

Weathernews

Weather information services

2,048 

0.4

36.9

1,538

Dream Incubator

Early stage business support

1,974 

0.4

12.6

1,818

Tempos Holdings

Refurbished kitchen equipment retailer

1,927 

0.4

18.8

1,628

Snow Peak

Designs & manufactures outdoor lifestyle

goods

1,898 

0.4

(32.3)

-

Freakout Holdings

Digital marketing technology

1,832 

0.3

(36.6) 

1,614

Nanocarrier

Biotech company

1,543 

0.3

(16.5) 

2,040

Takemoto Yohki

Plastic containers for cosmetics

1,069 

0.2

(37.8) 

1,246

Total investments

530,633 

99.0

Net liquid assets*

5,168 

1.0

Total assets

535,801 

100.0

Bank loans

(52,085)

(9.7)

Shareholders' funds

483,716 

90.3

# Absolute performance (in sterling terms) has been calculated on a total return basis* over the period 1 February 2019 to 31 January 2020.

Source: Baillie Gifford/Statpro and underlying data 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.

* See Glossary of Terms and Alternative Performance Measures at the end of this announcement.

Notes to the condensed financial statements

 

1.

The Financial Statements for the year to 31 January 2020 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 which are unchanged from the prior year and have been applied consistently.

 

2.

Currency (losses)/gains

31 January 2020

£'000

31 January 2019

£'000

 

Exchange differences on bank loans

(107)

(4,037)

 

Other exchange differences

(213)

162

 

(320)

(3,875)

 

 

 

 

3.

Investment management fee - all charged to revenue

31 January 2020

£'000

31 January 2019

£'000

 

 

Investment management fee

3,023

2,871

 

 

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-deligated to Baillie Gifford Overseas 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 2020 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. Prior to 1 January 2019, the annual management fee was 0.95% on the first £50m of net assets, 0.65% on the next £200m and 0.55% on the remainder.

 

4.

The Company paid interest on bank loans of £1,014,000 (2019 - £992,000) and £18,000 (2019 - £13,000) in respect of Yen deposits held by the Custodian Bank.

 

5.

No dividend will be declared.

 

6.

Net return per ordinary share

31 January 2020

£'000

31 January 2019

£'000

Revenue return

790 

106 

Capital return

37,632

(36,100)

Total return

38,422 

 (35,994)

The returns per ordinary share set out below are based on the above returns and on 277,319,745 ordinary shares (2019 - 258,154,060), being the weighted average number of ordinary shares in issue during the year. There are no dilutive or potentially dilutive shares in issue.

Revenue return

0.28p

0.04p 

Capital return

13.57p

(13.98p)

Total return

13.85p

(13.94p)

 

 

Notes to the condensed financial statements (ctd)

7.

Fair Value - 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).

During the year investments with a book cost of nil (2019 - £3,142,723) were transferred from Level 1 to Level 2. Investments with book costs of £3,142,723 were transferred from Level 2 to Level 1 (2019 - nil). Unlisted securities are categorised as Level 3. None of the financial liabilities are designated at fair value through profit or loss in the Financial Statements.

 

As at 31 January 2020

Level 1

£'000

Level 2

£'000

Level 3

£'000

Total

£'000

Listed equities

527,373

527,373 

Unlisted securities

3,260 

3,260 

Total financial asset investments

527,373 

3,260 

530,633 

 

 

 

 

 

As at 31 January 2019

Level 1

£'000

Level 2

£'000

Level 3

£'000

Total

£'000

Listed equities

471,753 

4,868 

476,621 

Unlisted securities

3,253 

3,253 

Total financial asset investments

471,753 

4,868 

3,253 

479,874 

 

Notes to the condensed financial statements (ctd)

8.

The amounts falling due within one year include bank loans of £37,403,000 and the amount falling due after more than one year include bank loans of £14,681,000.

The Company has arranged secured fixed rate borrowings, drawn down as follows:

At 31 January 2020

ING Bank N.V. - 7 year ¥3,350 million loan at 2.217% maturing 27 November 2020.

ING Bank N.V. - 3 year 8 month ¥2,000 million loan at 1.301% maturing 27 November 2020.

ING Bank N.V. - 7 year ¥2,100 million loan at 1.693% maturing 18 December 2024.

 

At 31 January 2019

ING Bank N.V. - 7 year ¥3,350 million loan at 2.217% maturing 27 November 2020.

ING Bank N.V. - 3 year 8 month ¥2,000 million loan at 1.301% maturing 27 November 2020.

ING Bank N.V. - 7 year ¥2,100 million loan at 1.693% maturing 18 December 2024.

 

The bank loans are stated after deducting the arrangement fees of £201,000 which are amortised over the terms of the loans. Amortisation of the arrangement fees during the year was £32,000 (2019 - £32,000).

 

The fair value of the bank loans at 31 January 2020 was £52,626,000 (31 January 2019 - £52,810,000). See Glossary of Terms and Alternative Performance Measures at the end of this announcement.

9.

At 31 January 2020 the Company had authority to buy back 41,234,115 shares. No shares were bought back during the year (2019 - nil). Share buy-backs are funded from the capital reserve.

During the year the Company issued 6,125,000 shares on a non pre-emptive basis at a premium to net asset value for net proceeds of £11,139,000 (2019 - 36,025,000 shares for net proceeds of £68,737,000). Between 1 February and 13 March 2020 the Company issued no further shares.

10.

 

 

31 January

2019

£'000

 

Cash Flows

£'000

 

Exchange

Movement

£'000

Other

Non-cash

Changes

£'000

 

31 January

2020

£'000

 

Cash and cash equivalents

5,750 

199

(213)

5,736 

 

Loans due within one year

-

(37,403)

(37,403)

 

Loans due in more than one year

(51,946)

-

(107)

37,371 

(14,682)

 

Total

(46,196)

199

(320)

(32)

(46,349)

11. 

The Annual Report and Financial Statements will be available on the Company's website www.shinnippon.co.uk on or around 8 April 2020.

12. 

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 January 2020 or 2019 but is derived from those accounts. Statutory accounts for 2019 have been delivered to the Registrar of Companies, and those for 2020 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.

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.

14. 

Post Balance Sheet Event Subsequent to the 31 January year end, the net asset value per share fell by 29.7% (as at 13 March 2020) as the market reacted to the escalating coronavirus outbreak.

 

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.

 

Total Assets

Total assets less current liabilities, before deduction of all 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 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 with reference to Japanese government bonds of comparable yield and maturity. 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

 2020

31 January

2019

Net Asset Value per ordinary share (borrowings at book value)

 

173.0p

 

158.8p 

Shareholders' funds (borrowings at book value)

£483,716,000 

£434,155,000 

Add: book value of borrowings

£52,085,000 

£51,946,000 

Less: fair value of borrowings

(£52,626,000)

(£52,810,000)

Shareholders' funds (borrowings at fair value)

£483,175,000 

£433,291,000 

Shares in issue at year end

279,577,485 

273,452,485

Net Asset Value per ordinary share (borrowings at fair value)

 

172.8p

 

158.5p

 

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.

 

2020 NAV (book)

2020 NAV (fair)

2019 NAV (book)

2019 NAV (fair)

Closing NAV per share

173.0p

172.8p

158.8p

158.5p

Closing share price

170.4p

170.4p

171.2p

171.2p

(Discount)/premium

(1.5%)

(1.4%)

7.8%

8.0%

 

 

 

 

Glossary of Terms and Alternative Performance Measures (APM) (Ctd)

 

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 reconcilliation from the expenses detailed in the Income Statement above is provided below.

 

 

31 January

 2020

31 January

2019

Investment management fee

£3,023,000

£2,871,000

Other administrative expenses

£560,000

£601,000

Total expenses (a)

£3,583,000

£3,472,000

Average daily cum-income net asset value (with debt at fair value) (b)

 

£490,280,000

 

£458,032,000

Ongoing charges (a)÷(b)

 

 

(expressed as a percentage)

0.73%

0.77%

 

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.

 

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, bonds and property expressed as a percentage of shareholders' funds.

 

 

 

2020

Gearing

£'000

 

2020

Potential Gearing#

£'000

 

2019

Gearing

£'000

2019

Potential

Gearing#

£'000

Borrowings (a)

52,085

52,085

51,946

51,946

Cash and cash

equivalents (b)

 

4,588

 

-

 

4,814

 

-

Shareholders' funds (c)

483,716

483,716

434,155

434,155

 

9.8

10.8

10.9

12.0

 

Gearing ((a) - (b)) ÷ (c), expressed as a percentage.

# Potential 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.

 

Glossary of Terms and Alternative Performance Measures (APM) (Ctd)

 

Active Share (APM)

Active share, a measure of how actively a portfolio is managed, is the percentage of the listed 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.

 

 

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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

 

MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This document is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data 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.

 

Regulated Information Classification: Additional regulated information required to be disclosed under the applicable laws

 

 

- ends -

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