Baillie Gifford Shin Nippon : Final Results

RNS Announcement: Preliminary Results

Baillie Gifford Shin Nippon PLC

Legal Entity Identifier: X5XCIPCJQCSUF8H1FU83 Results for the year to 31 January 2019

Over the year the Company's net asset value per share (after deducting borrowings at book value) fell by 6.1% compared to a 7.8% fall in the comparative index*. The share price fell by7.2%.

In sterling terms over three years, the Company's comparative index is up45.4%, whilst the net asset value (with borrowings at fair value)† and share price are up by83.8% and91.0% respectively.

¾ Weak Chinese demand over the past year had a negative impact on some Japanese small caps.

¾ However, many of the rapid growth, online businesses that the Company owns performed well.

¾ Bengo4.com, which operates a website that connects lawyers with individuals and businesses seeking legal advice, was the largest positive contributor to performance.

¾ New investments included Raksul, which has developed an online, cloud-based system that connects service providers with clients in real-time; Akatsuki, a mobile gaming company; and Uzabase, a financial software company.

¾ The Company is seeking shareholder approval to permit investment in unlisted companies at a level of up to 10% of the portfolio (measured at time of investment).

^* The Company's comparative index for the year to 31 January 2019 was the MSCI Japan Small Cap Index (total return† in sterling terms).

† Alternative Performance Measure - see Glossary of Terms and Altnernative Performance Measures at the end of this document.

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 2019 the Company had total assets of £486.1m (before deduction of bank loans of £52.0m).

The Company is managed by Baillie Gifford & Co, an Edinburgh based fund management group with around £187 billion under management and advice as at 14 March 2019.

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 document.

14 March 2019

For further information please contact:

Alex Blake, Baillie Gifford & Co

Tel: [phone]

Roland Cross, Director, Four Broadgate

Tel: [phone] or 07831 401309

The year to 31 January 2019 was challenging for investors and the Company's net asset value per share* (NAV) and share price fell by 6.0% and 7.2% respectively, slightly ahead of the return of the comparative index (MSCI Japan Small Cap Index, total return in Sterling terms), which fell by 7.8%.

Your Board continues to review performance over a rolling three-year period. Over this period, the Company's NAV rose by 83.8% and its share price by 91.0% versus the comparative index return of 45.4%.

At 31 January 2019 the premium of the share price over the net asset value was 8.0%, slightly lower than the 9.3% of the previous year. The Board continues to monitor this premium carefully and will continue to manage this imbalance between buyers and sellers by issuing shares appropriately as noted below.

Share Split and Share Issuance

The Interim Management Report in July acknowledged the subdivision of the ordinary shares of the Company. This five for one split of five new ordinary shares of 2 pence replacing each ordinary share of 10 pence was approved at last year's AGM.

Also, during the year, the Company issued 36,025,000 shares (15.2% of share capital at 31 January 2018) at a premium to NAV raising net proceeds of £68.7m. The Board believes that both the share split and the continuing issuance of new shares will improve the liquidity of the stock and its appeal to a wider range of shareholders.

Borrowings

The Board continues to support the strategy of using gearing to enhance portfolio performance. Gearing at both the start and end of the year remained fairly constant at 10.5% and 10.6% respectively. Total borrowings throughout the year remained unchanged at ¥7.45bn. During the year the Yen strengthened against Sterling by 8.4%. Last year it weakened by almost the same amount. The Company continues with its policy of not engaging in currency hedging.

Revenue

During the year the Board announced a reduction in the annual management fee payable to Baillie Gifford & Co Limited, the Company's Managers and Secretaries. With effect from 1 January 2019 the Company's annual management fee will be calculated at 0.75% on the first £50m of net assets, 0.65% on the next £200m of net assets and 0.55% on the remainder (previously the first £50m tier was calculated at 0.95%).

The revenue return per share increased from a deficit of 0.11p to a surplus of 0.04p. Gross portfolio income rose by 45.7% but the management fee rose 34.7% due to the increase in average NAV over the year. Certain other expenses increased by 17.8%. That said, I am delighted that our ongoing charges fell from 0.89% to 0.77%.

AGM

At this year's AGM we are again seeking authority to issue new shares on a non pre-emptive basis of up to 10% of the issued share capital of the Company. Any shares issued would be for cash and only at a premium to net asset value thus enhancing the net asset value to the existing shareholders.

As with issuing shares at a premium, the Board will again be seeking your approval to buy back shares should they start trading at a substantial discount either in absolute terms or in relation to its peers. Similarly, if required this activity would enhance the net asset value attributable to existing shareholders.

This year, your Board proposes an additional resolution to amend the investment policy to permit investment in unlisted companies at a level of up 10% of the portfolio (at the time of purchase) and to increase the maximum number of holdings from 75 to 80. Although we currently have made only one investment in an unlisted company, the Managers are seeing more unlisted opportunities and the Board is of the view that this is an appropriate moment to provide clarity for shareholders on the maximum level such investments might reach.

Governance

Francis Charig and Iain McLaren both retire from the Board at May's AGM. Both have served the Company with great distinction and have seen the Company grow hugely to its present level. Francis brought great knowledge and wisdom from his experience and Japanese contacts and Iain's control of Audit Committee matters has been exemplary. Both individuals will be sadly missed.

I am delighted to report that Professor Sethu Vijayakumar and Jamie Skinner CA have been appointed to the Board. Sethu is Professor of Robotics at Edinburgh University as well as a visiting professor at both Kyoto and Tokyo Universities. Sethu not only speaks Japanese but also writes it!

Jamie will assume the role of Audit Committee Chairman. Jamie spent most of his recent working career with Martin Currie in Edinburgh and I regard him as an investment trust professional.

I welcome both Sethu and Jamie to the Board and look forward to working with them in the years ahead.

Outlook

As a UK listed company, the Board and Managers have considered the implications of Brexit. Around half of the Company's investments are domestically focussed within Japan and the remaining holdings have minimal exposure to the UK. The Board is therefore not concerned about the impact of Brexit on the portfolio. Although the Y/£ exchange rate may react according to the market's view on the Brexit outcome reached, which would affect the value of the Company's shares, its borrowings are denominated in Yen so any exchange movements impacting the loans would be more than offset by opposite exchange movements affecting the portfolio. Additionally, there is the possibility of turbulence on the London Stock Exchange. Spikes in supply or demand for the Company's shares can however, be managed by share issuance or buybacks as appropriate.

More broadly, there seems to be greater uncertainty in the world regarding global growth than at any time over the last 10 years. However, the Company's strategy of seeking to identify smaller Japanese companies with strong growth potential means that the performance is more dependent on the ability of those companies to take advantage of their opportunities than on the global economy.

Similar themes to last year are still prevalent. There is still an ongoing labour shortage and access to experienced labour is arguably one of the biggest issues for companies in Japan. Retaining staff and introducing mechanisms and technologies to assess employee satisfaction and reward performance are massive challenges.

There is some cyclical slowdown in certain sectors but corporate Japan's mood is generally positive but cautious. Inbound tourism remains strong and there is strong growth in infrastructure projects supporting the Rugby World Cup in 2019 and the Olympic and Paralympic Games in 2020. Companies are also gradually seeing the need to invest capital expenditure for the future and are taking a less short-term view.

We remain positive. The start up environment for companies on our radar is changing. Government policies are more supportive. There is generally better access to capital and more importantly there is a new attitude to creating wealth and starting exciting, disruptive technology businesses. The Board and the Managers remain encouraged by the outlook.

More detailed information about the Company's portfolio is contained within the Managers Report below.

M Neil Donaldson

Chairman

14 March 2019

* 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 document.

In last year's half yearly update, we highlighted concerns related to trade protectionism and a cyclical slowdown in key global sectors. Both these headwinds gathered steam through the year and dampened investor sentiment, resulting in a weak stock market. High growth small cap stocks in Japan fell sharply as investors regarded them as being particularly vulnerable to external shocks.

Weak Chinese demand over the past year had a negative impact on some Japanese small caps. In 2017, Japanese suppliers of factory automation equipment saw strong orders from Chinese customers. However, demand weakness last year led to fewer orders being placed as inventory levels rose. Harmonic Drive, a leading global manufacturer of speed reduction gears used in smaller robots, saw a near 50% decline in orders. Although it remains a strong global player with high market shares and best-in-class products, the severe fall in orders led to significant share price weakness. Conditions in the important Chinese and US automobile sectors also remained tough. After nearly three decades of growth, car sales in China fell last year. In the US, sales declined for most major Japanese car companies. As a result, smaller auto parts suppliers like Nippon Ceramic, a leading global manufacturer of ultrasonic sensors for cars, and IRISO Electronics, a manufacturer of connectors for car electronics, suffered operationally. Despite challenging conditions, both companies remain resilient. They have strong balance sheets and are investing in new product development to secure future growth.

In comparison, the domestic environment for small caps remained favourable. Labour shortage, a recurring theme in recent Managers' reports, is becoming extreme. The jobs-to-applicants ratio remains at an all-time high and the economy now has near full employment. The employment rate of women aged 15 to 64 in Japan is now higher than in the US. Despite the government's attempts at bringing in overseas workers, the labour market remains incredibly tight. Industries such as IT are seeing very high levels of demand for experienced engineers. This is proving to be a boon for TechnoPro, one of Japan's largest IT staffing specialists. Inbound tourism remained strong and Japan welcomed just over 30 million visitors last year. The government has set an official goal to attract 40 million inbound visitors by 2020 and 60 million by 2030. Companies such as infrastructure repair and maintenance specialist Sho-Bond are seeing strong orders from both private and public-sector clients as Japan prepares to host international events like the Rugby World Cup and the Summer Olympic and Paralympic Games.

Many of our rapid growth, online businesses performed well last year. GMO Payment Gateway, a leading online payments provider, continues to generate strong growth as it expands into new areas within financial services. Labour market tightness is resulting in increased job mobility as more people embrace flexible working. Crowdworks, a leading online platform for crowdsourced services, is seeing fast growth both in user numbers and the amount of work being delivered through its platform. Orders at Japan's largest online food delivery company, Yume No Machi, accelerated sharply last year. This nascent industry is growing quickly as Japanese consumers become more comfortable with the concept of ordering food online using smartphone apps. Management are making heavy investments to build scale at the cost of short-term profits.

Performance

For the year ending 31 January 2019, the MSCI Japan Small Cap index (total return in sterling terms) fell by 7.8% while Shin Nippon's net asset value per share (after deducting borrowings at fair value) fell by 6.0%. Given our long-term investment horizon, a fairer way of looking at performance is to focus on the long-term. Over three and five years, the comparative index is up by 45.4% and 82.7% while the Company's net asset value per share is up by 83.8% and 157.4% respectively.

Many of our favourite online disruptors were among the top performers over the past year. Bengo4.com was the largest positive contributor to performance. It operates a website that connects lawyers with individuals and businesses seeking legal advice. Lawyers register as members and pay Bengo4.com a fee to market themselves on its website. This service has grown quite popular and approximately a third of Japan's lawyers are now registered members. Bengo4.com also has a rapidly growing business providing online, cloud-based contracts that can be securely signed. This alternative to traditional paper-based contracts is seeing rapid adoption by companies of all sizes and has become a major growth driver for the company. Longstanding holding MonotaRO maintained its incredible record of delivering very high growth rates over the years despite numerous challenges. It recently started operations at a new, automated warehouse that nearly doubles its sales capacity, thereby giving it significant room for future growth.

Software company Brainpad has developed an artificial intelligence-based software product that helps companies design targeted marketing campaigns by predicting changes in consumer behaviour with a high level of accuracy. Brainpad is seeing rapid adoption of its software by both large and medium-sized companies, resulting in rapid sales and profit growth. Specialist medical device manufacturer Asahi Intecc is expanding beyond its traditional cardiovascular related areas, thereby increasing its addressable market. Following the end of a joint venture with its US partner Abbott Labs, Asahi Intecc has now taken full control of marketing and distribution in the US and is already seeing its market share rise.

Among the poorer performers were companies suffering from a slowdown in cyclical sectors. Both Optex, a manufacturer of industrial security and fault detection systems, and Nabtesco, a motion control technologies specialist, saw a significant fall in orders. While both companies remain globally competitive in their respective areas, this short-term weakness was taken negatively by the market. Outsourcing was another weak performer as the market took a dim view of management's decision to issue new shares to strengthen the balance sheet after a series of debt-funded acquisitions. Sales at Seria, one of Japan's leading ¥100 store operators, suffered as the company struggled with upgrading its inventory management system. The shares were sold off aggressively as investors questioned management's capability in getting the company back to growing fast again.

Portfolio

We focus on a company's individual attractions and pay little attention to the benchmark. Consequently, Shin Nippon's active share continues to be high at 94%, implying just a 6% overlap with the comparative index. Annualised turnover within the portfolio was 18.7%. We identified many attractive high growth ideas and sold some existing holdings where we no longer had conviction. We participated in the IPO of Raksul, a fast-growing business run by its young and entrepreneurial founder. It has developed an online, cloud-based system that connects service providers with clients in real-time. It is currently focussing on disrupting the domestic printing and logistics sectors, both of which are very inefficient, traditional and quite large.

We took a holding in Akatsuki, a mobile gaming company that is developing a potentially exciting new business in E-sports, an industry that is seeing explosive growth globally. KH Neochem is a specialist chemicals manufacturer that enjoys an oligopoly in its key products. It makes environmentally friendly chemicals used in cosmetics, refrigerants for air conditioners and building materials. Uzabase is a young, financial software company that is trying to disrupt a market dominated by Bloomberg and Thomson Reuters through its own low-cost offering. It has one of the largest databases of private companies in Asia and has already gained meaningful market share in Japan. It also has a fast-growing business in the US where it provides a subscription based financial news service. It is differentiating itself by offering a large selection of original content prepared by a panel of well-known industry experts.

We sold our holding in high-end rice cooker manufacturer Zojirushi as it is failing to cope with intensifying competition and pricing pressure. Shares in condominium builder Takara Leben were also sold as sales and profits continue to shrink due to weak demand and rising land and labour costs. It also has a weak balance sheet that leaves the company with little room for error. We have been disappointed by management's capital allocation at online recipe website Cookpad and web-based rental property aggregator Lifull. Both companies are expanding overseas despite significant growth opportunities in Japan and we have therefore sold our holdings in both companies. Auto parts maker Unipres is struggling to grow its business, mirroring the fortunes of its main customer Honda. Management's efforts at diversifying their client base have yielded very little and we struggled to retain any enthusiasm for owning the shares.

Outlook

Ongoing reforms in Japan are resulting in new business opportunities for smaller companies. Despite the current slowdown, we believe major global trends like automation and electrification of cars remain intact. There is ample scope for growth in these areas for Japanese small caps. Shin Nippon continues to focus on investing in dynamic and innovative smaller businesses and we are encouraged by the numerous investment opportunities emerging in various sectors.

Baillie Gifford & Co

14 March 2019

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 document.

Income statement (unaudited)

The following is the unaudited preliminary statement for the year to 31 January 2019 which was approved by the Board on 14 March 2019. No dividend is payable.

	For the year ended 31 January 2019			For the year ended 31 January 2018
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
(Losses)/gains on investments*	-	(32,225)	(32,225)	-	108,387	108,387
Currency (losses)/gains (note 2)†	-	(3,875)	(3,875)	-	3,591	3,591
Income	5,092	-	5,092	3,496	-	3,496
Investment management fee (note 3)	(2,871)	-	(2,871)	(2,131)	-	(2,131)
Other administrative expenses	(601)	-	(601)	(510)	-	(510)
Net return before finance costs and taxation	1,620	(36,100)	(34,480)	855	111,978	112,833
Finance costs of borrowings (note 4)	(1,005)	-	(1,005)	(732)	-	(732)
Net return on ordinary activities before taxation	615	(36,100)	(35,485)	123	111,978	112,101
Tax on ordinary activities	(509)	-	(509)	(350)	-	(350)
Net return on ordinary activities after taxation	106	(36,100)	(35,994)	(227)	111,978	111,751
Net return per ordinary share# (note 6)	0.04p	(13.98p)	(13.94p)	(0.11p)	52.31p	52.20p

* Gains on investments include gains and losses on disposals and holding gains and losses on the investment portfolio resulting from: i) changes in the local currency fair value of the investments and, ii) movements in the yen/sterling exchange rate.

† Currency gains include: i) currency exchange gains and losses on yen bank loans, ii) exchange differences on the settlement of investment transactions and, iii) other exchange differences arising from the retranslation of cash balances.

^# Prior year figures restated for the five for one share split on 21 May 2018.

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 (unaudited)

	At 31 January 2019		At 31 January 2018
	£'000	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		479,874		443,917
Current assets
Debtors	2,706		2,833
Cash and cash equivalents	5,750		5,668
	8,456		8,501
Creditors
Amounts falling due within one year	(2,229)		(3,129)
Net current assets		6,227		5,372
Total assets less current liabilities		486,101		449,289
Creditors
Amounts falling due after more than one year (note 7)		(51,946)		(47,877)
Net assets		434,155		401,412
Capital and reserves
Share capital		5,469		4,749
Share premium account		163,191		95,174
Capital redemption reserve		21,521		21,521
Capital reserve		249,351		285,451
Revenue reserve		(5,377)		(5,483)
Shareholders' funds		434,155		401,412
Net asset value per ordinary share* (after deducting borrowings at book value)		158.8p		169.1p
Ordinary shares in issue*(note 8)		273,452,485		237,427,485

*Prior year figures restated for the five for one share split on 21 May 2018.

Statement of changes in equity (unaudited)

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 8)	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

For the year ended 31 January 2018

	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 2017	4,040	40,094	21,521	173,473	(5,256)	233,872
Ordinary shares issued (note 8)	709	55,080	-	-	-	55,789
Net return on ordinary activities after taxation	-	-	-	111,978	(227)	111,751
Shareholders' funds at 31 January 2018	4,749	95,174	21,521	285,451	(5,483)	401,412

*The capital reserve balance at 31 January 2019 includes investment holding gains of £150,046,000 (31 January 2018 - gains of £222,272,000).

Cash flow statement (unaudited)

	For the year ended 31 January 2019		For the year ended 31 January 2018
	£'000	£'000	£'000	£'000
Cash flows from operating activities
Net return on ordinary activities before taxation	(35,485)		112,101
Net losses/(gains) on investments	32,225		(108,387)
Currency losses/(gains)	3,875		(3,591)
Finance costs of borrowings	1,005		732
Overseas withholding tax	(453)		(328)
Increase in debtors, accrued income and prepaid expenses	(631)		(227)
Increase in creditors and prepaid income	52		253
Cash inflow from operations		588		553
Interest paid		(963)		(736)
Net cash outflow from operating activities		(375)		(183)
Cash flows from investing activities
Acquisitions of investments	(155,313)		(107,413)
Disposals of investments	85,032		25,850
Net cash outflow from investing activities		(70,281)		(81,563)
Shares issued	70,576		53,950
Bank loans drawn down	-		28,429
Net cash inflow from financing activities		70,576		82,379
(Decrease)/increase in cash and cash equivalents		(80)		633
Exchange movements		162		(485)
Cash and cash equivalents at 1 February		5,668		5,520
Cash and cash equivalents at 31 January*		5,750		5,668

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

List of Investments at 31 January 2019

Name	Business		2019 Value £'000	2019 % of total assets	Absolute# Performance %	2018 Value £'000
Asahi Intecc	Specialist medical equipment		16,047	3.3	21.5	11,983
Bengo4.com	Online legal consultation		15,347	3.2	143.9	5,230
Outsourcing	Employment placement services		13,261	2.7	(33.6)	12,801
Nihon M&A Center	M&A advisory services		12,877	2.6	(9.0)	11,876
Istyle	Beauty product review website		12,691	2.6	(18.8)	12,515
MonotaRO	Online business supplies		12,500	2.6	46.5	10,919
Peptidream	Drug discovery and development platform		11,630	2.4	11.7	10,121
Megachips	Electronic components		11,626	2.4	(25.8)	10,799
GMO Payment Gateway	Online payment processing		11,471	2.4	27.7	10,101
OSG	Manufactures machine tool equipment		11,155	2.3	(11.3)	3,559
Horiba	Manufacturer of measuring instruments		11,098	2.3	(16.0)	8,603
Raksul	Internet based services		10,683	2.2	107.2	-
Infomart	Internet platform for restaurant supplies		10,548	2.2	63.3	6,553
H.I.S.	Discount travel agency and theme parks		10,391	2.1	13.7	7,100
Katitas	Real estate services		10,154	2.1	7.3	7,311
Sho-Bond	Infrastructure reconstruction		9,432	1.9	(3.1)	7,736
Healios K.K.	Regenerative medicine		9,323	1.9	(13.7)	7,955
Toshiba Plant Systems and Services	Plant engingeering company		9,068	1.9	4.8	5,226
Noritsu Koki	Holding company with interests in biotech and agricultural products		8,631	1.8	(30.8)	9,475
Yume No Machi	Online meal delivery service		8,562	1.8	(14.0)	9,917
Top 20			226,495	46.7
Kitz Corp	Industrial valve manufacturer		8,535	1.8	(4.3)	-
Nippon Ceramic	Electric component manufacturer		8,497	1.7	(9.6)	7,870
Nifco	Value-added plastic car parts		8,267	1.7	(23.7)	10,010
Brainpad	Business data analysis		8,062	1.7	185.5	1,958
Cosmos Pharmaceuticals	Drugstore chain		7,810	1.6	17.2	2,196
Technopro Holdings	IT staffing		7,784	1.6	5.3	6,700
Hamakyorex	Third party logistics		7,519	1.6	13.2	4,760
Shoei	Manufactures motor cycle helmets		7,368	1.5	(17.0)	7,924
Harmonic Drive	Robotic components		6,883	1.4	(45.1)	9,105
Jeol	Manufacturer of scientific equipment		6,779	1.4	64.5	4,306
Broadleaf	Online platform for buying car parts		6,684	1.4	10.2	6,830
Sato Holdings	Barcode and RFID technology		6,495	1.3	(19.2)	6,601
Crowdworks	Crowdsourcing services		6,446	1.3	82.1	2,636
Cocokara Fine	Drugstore chain		6,396	1.3	(15.4)	5,543
Locondo	E-commerce services provider		6,384	1.3	31.9	3,216
eGuarantee	Guarantees trade receivables		6,305	1.3	19.1	3,864
Pigeon	Baby care products		6,145	1.3	9.4	6,661
M3	Online medical services		6,040	1.3	(14.7)	7,989
ZOZO	Internet fashion retailer		5,996	1.2	(25.1)	10,165
Nakanishi	Dental equipment		5,802	1.2	3.9	4,584
IRISO Electronics	Specialist auto connectors		5,772	1.2	(29.7)	8,473
WDB Holdings	Human resource services		5,758	1.2	(28.2)	6,774
Optex	Infrared detection devices		5,626	1.2	(39.8)	11,402
Seria	Discount retailer		5,471	1.1	(43.6)	7,500
KH Neochem	Chemical manufacturer		5,319	1.1	(15.9)	-
Anest Iwata	Manufactures compressors and painting machines		5,232	1.1	(11.7)	-
Torex Semiconductor	Semiconductor company		4,900	1.0	(18.4)	1,337
Sanbio	Stem cell based stroke treatment		4,868	1.0	(33.7)	9,506
Daikyonishikawa	Automobile part manufacturer		4,861	1.0	(30.1)	5,646
Poletowin Pitcrew	Game testing and internet monitoring		4,610	0.9	(17.0)	3,890
Nabtesco	Robotic components		4,121	0.8	(38.2)	6,828
List of Investments at 31 January 2019 (Ctd)

Name	Business	2019 Value £'000	2019 % of total assets	Absolute# Performance %	2018 Value £'000
Digital Garage	Internet business investor	4,073	0.8	(21.0)	9,864
JP Holdings	Operates child-care facilities	4,038	0.8	(3.6)	1,744
Calbee	Branded snack foods	4,022	0.8	(0.2)	5,074
Aeon Delight	Shopping mall maintenance	3,960	0.8	11.3	3,117
Moneytree K.K. Class B Preferred u	Al based fintech platform	3,253	0.7	133.9	1,391
SIIX	Outsources overseas production	3,227	0.7	(32.1)	4,589
Yonex	Sporting goods	3,127	0.7	3.8	1,840
CyberAgent	Japanese internet advertising and content	3,049	0.6	(19.4)	10,048
Akatsuki	Mobile games developer	3,008	0.6	14.4	-
Nikkiso	Industrial pumps and medical equipment	2,976	0.6	(14.1)	4,089
Asics	Sports shoes and clothing	2,758	0.6	(3.9)	2,910
Gumi	Mobile games developer	2,733	0.6	(37.3)	2,428
Findex	Healthcare software developer	2,608	0.5	(20.5)	3,081
Nanocarrier	Biotech company	2,040	0.4	(65.4)	5,480
Dream Incubator	Early stage business support	1,818	0.4	(36.2)	1,819
Hoshizaki Electric	Commercial kitchen equipoment	1,629	0.3	(19.1)	5,978
Tenpos Holdings	Refurbished kitchen equipment retailer	1,628	0.3	(15.4)	1,677
Freakout Holdings	Digital marketing technology	1,614	0.3	(24.2)	1,639
Weathernews	Weather information services	1,538	0.3	(4.8)	1,660
Takemoto Yohki	Plastic containers for cosmetics	1,246	0.3	2.8	-
Morpho	Image processing technologies	1,186	0.2	(53.1)	2,528
Uzabase	Financial data services	811	0.2	(13.2)	-
DesignOne Japan	Online platform for small local businesses	166	<0.1>	(72.2)	2,947
Mugen Estate	Real estate services	136	<0.1>	(43.4)	5,516
Total Investments		479,874	98.7
Net liquid assets*		6,227	1.3
Total assets		486,101	100.0
Bank loans		(51,946)	(10.7)
Shareholders' funds		434,155	89.3

# Absolute performance (in sterling terms) has been calculated on a total return basis*over the period 1 February 2018 to 31 January 2019.

uUnlisted holding.

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

Source: Baillie Gifford/Statpro and underlying data providers. See disclaimer at end of this document.

Notes to the condensed financial statements

1.		The Financial Statements for the year to 31 January 2019 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 2019 £'000			31 January 2018 £'000
		Exchange differences on bank loans	(4,037)			4,076
		Other exchange differences	162			(485)
			(3,875)			3,591
3.		Investment management fee - all charged to revenue	31 January 2019 £'000			31 January 2018 £'000
		Investment management fee	2,871			2,131
		On 1 January 2019 the annual management fee was reduced to 0.75% on the first £50m of net assets, 0.65% on the next £200m of net assets and 0.55% on the remainder. 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 of net assets and 0.55% on the remainder.
4.		The Company paid interest on bank loans of £992,000 (2018 - £717,000) and £13,000 (2018 - £15,000) in respect of Yen deposits held by the Custodian Bank.
5.		No dividend will be declared.
6.	Net return per ordinary share		31 January 2019 £'000	31 January 2018 £'000
	Revenue return		106	(227)
	Capital return		(36,100)	111,978
	Total return		(35,994)	111,751
	The returns per ordinary share set out below are based on the above returns and on 258,154,060 ordinary shares (2018 - 214,092,280), 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		0.04p		(0.11p)
	Capital return		(13.98p)		52.31p
	Total return		(13.94p)		52.20p

Notes to the condensed financial statements (ctd)

7.	The Company has arranged secured fixed rate borrowings, drawn down as follows: 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. At 31 January 2018 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 (2018 - £25,000). The fair value of the bank loans at 31 January 2019 was £52,810,000 (31 January 2018 - £48,646,000). See Glossary of Terms and Alternative Performance Measures at the end of this announcement.
8.	At 31 January 2019 the Company had authority to buy back 36,471,042 shares. No shares were bought back during the year (2018 - nil). Share buy-backs are funded from the capital reserve. During the year the Company issued 36,025,000 shares on a non pre-emptive basis at a premium to net asset value for net proceeds of £68,737,000 (2018 - 7,090,000 shares for net proceeds of £55,789,000).
9.	The Annual Report and Financial Statements will be available on the Company's website www.shinnippon.co.uk† on or around 10 April 2019.
10.	The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 January 2019 or 2018. The financial information for 2018 is derived from the statutory accounts for 2018 which have been delivered to the Registrar of Companies. The auditor has reported on the 2018 accounts; their report was (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. The statutory accounts for 2019 will be finalised on the basis of the financial information presented by the Directors in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held on 17 May 2019. None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

† 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)

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 2019	31 January 2018
Net Asset Value per ordinary share (borrowings at book value)	158.8p	169.1p
Shareholders' funds (borrowings at book value)	£434,155,000	£401,412,000
Add: book value of borrowings	£51,946,000	£47,877,000
Less: fair value of borrowings	(£52,810,000)	(£48,646,000)
Shareholders' funds (borrowings at fair value)	£433,291,000	£400,643,000
Shares in issue at year end	273,452,485	237,427,485
Net Asset Value per ordinary share (borrowings at fair value)	158.5p	168.7p

Net Asset Value (Borrowings at Par Value) (APM)

Borrowings are valued at their nominal par value. The Company's yen denominated loans are valued at their sterling equivalent. The value of the borrowings on this basis is set out above.

	31 January 2019	31 January 2018
Net Asset Value per ordinary share (borrowings at book value)	158.8p	169.1p
Shareholders' funds (borrowings at book value)	£434,155,000	£401,412,000
Add: book value of borrowings	£51,946,000	£47,877,000
Less: par value of borrowings	(£52,040,000)	(£47,995,000)
Shareholders funds' (borrowings at par value)	£434,061,000	£401,294,000
Shares in issue at year end	273,452,485	237,427,485
Net Asset Value per ordinary share (borrowings at par value)	158.7p	169.0p

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.

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.

Performance Attribution (APM)

Portfolio Performance Attribution illustrates how the portfolio has performed in absolute terms and relative to the comparative index. Performance is calculated on this basis for the portfolio holdings according to their relevant industrial sector classifications. Contributions to relative performance against the index are attributed to either stock selection (relative performance derived from the selection of stocks within an industrial sector) or asset allocation (relative performance derived from overall allocation to each industrial sector).

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.

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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MSCI Index data

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