Baillie Gifford Shin Nippon : Interim Financial Report 31 July 2023

Interim	31 July 2023
financial report

Baillie Gifford Shin Nippon PLC

Shin Nippon's objective is to pursue long term capital growth through investment principally in small Japanese companies which are believed to have above average prospects for growth.

Comparative index

The index against which performance is compared is the MSCI Japan Small Cap Index (total return and in sterling terms).

Principal risks and uncertainties

The principal risks facing the Company are financial risk, private company (unlisted) investment risk, investment strategy risk, environmental, social and governance risk, discount risk, regulatory risk, custody and depositary risk, small company risk, operational risk, cyber security risk, leverage risk, political risk and emerging risks. An explanation

of these risks and how they are managed is set out on pages 8 to 10 of the Company's Annual Report and Financial Statements for the year to 31 January

2023 which is available on the Company's website: shinnippon.co.uk.

The principal risks and uncertainties have not changed since the date of that report.

Responsibility statement

We confirm that to the best of our knowledge:

a. the condensed set of Financial Statements has been prepared in accordance with FRS 104 'Interim Financial Reporting';

b. the Interim Management Report includes a fair review of the information required by Disclosure and Transparency Rule 4.2.7R (indication of important events during the first six months, their impact on the Financial Statements

and a description of the principal risks and uncertainties for the remaining six months of the year); and

c. the Interim Financial Report includes a fair review of the information required by Disclosure and Transparency Rule 4.2.8R (disclosure of related party transactions and changes therein).

On behalf of the Board

1. Skinner Chair
   21 September 2023

Bailie Gifford Shin Nippon PLC

Summary of unaudited results*

		31 January 2023
	31 July 2023	(audited)	% change
Shareholders' funds	£491.0m	£545.5m
Net asset value per ordinary share	156.9p	173.7p	(9.7)
(after deducting borrowings at fair value)*
Net asset value per ordinary share	156.9p	173.6p	(9.7)
(after deducting borrowings at book value)*
Share price	139.0p	158.8p	(12.5)
Comparative index†			1.1
Discount (borrowings at fair value)*	11.4%	8.6%
Discount (borrowings at book value)*	11.4%	8.5%
Active share*	95%	94%

	Six months to 31 July 2023	Year to 31 January 2023
Period's high and low	High	Low	High	Low
Net asset value per ordinary share	177.7p	152.8p	184.2p	139.2p
(after deducting borrowings at fair value)*
Share price	163.8p	136.2p	182.0p	131.8p
Premium/(discount) (borrowings at fair value)*	(6.4%)	(12.5%)	1.5%	(11.6%)

Longer term performance at 31 July 2023

	3 years	5 years	10 years
Net asset value per ordinary share#	(13.9%)	(17.1%)	173.1%
Share price	(24.3%)	(31.8%)	135.2%
Comparative index†	18.2%	6.5%	117.4%

Source: Refinitiv/Baillie Gifford and relevant underlying index providers. See disclaimer on page 22.

Notes

• See Glossary of Terms and Alternative Performance Measures on pages 20 and 21.

• The comparative index is the MSCI Japan Small Cap Index (total return and in sterling terms). See disclaimer on page 22.

• After deducting borrowings at fair value. See Glossary of Terms and Alternative Performance Measures on pages 20 and 21. Past performance is not a guide to future performance.

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Interim management report

The first half of this year saw a bifurcation in performance within the Japanese market. Mature large cap stocks in capital intensive and cyclical sectors did very well in share price terms, helping lift the broader Japanese indices to record highs. Their strong performance was largely due to improvements in corporate governance and shareholder return policies. A key driving factor for this has been the pressure applied on management teams by both domestic and overseas activist investors who have taken large stakes in many of these businesses. In addition, Yen weakness has helped inflate profits as most of these companies are exporters. In this environment and amid a complete lack of investor interest, high growth small cap stocks continued to languish.

In the six months to 31 July 2023, Shin Nippon's net asset value per share (in sterling, after deducting borrowings at fair value) fell by 9.7% compared

to a 1.1% rise in the MSCI Japan Small Cap index. The share price declined by 12.5% and finished the period at an 11.4% discount to the net asset value per share. During the period, 1,100,000 shares were bought back and are currently held in treasury. Over three and five years, the Company's net asset value per share is down 13.9% and 17.1% compared to the index which is up 18.2% and 6.5% respectively.

We are disappointed by the weak performance over these varying periods, but this has come in an environment where investor preference has switched from high growth small cap stocks to cyclical companies and companies enhancing corporate value. These companies offer little by way of growth, they make uneconomic returns on capital at the best of times due to their capital intensity and are ripe for disruption given their outdated business models. Dividends and share buybacks tend to be their main attractions. Over the long-term, we remain firmly of the view that exceptional returns are likely to be generated by young, disruptive, fast-growing and entrepreneurial smaller businesses in Japan and we are continuing to invest accordingly.

At a macro level, rising interest rates, inflation, and US-China tensions continue to sour investor sentiment on growth stocks. A slowing Chinese economy and signs of excess inventory in critical sectors like semiconductors and industrial equipment are further dampening market confidence. In this context, it is perhaps unsurprising to see weak operating results being reported by many of our manufacturing holdings exposed to these end markets. More encouragingly and contrary to their weak share price, most of our internet holdings continue to perform admirably well in operational terms.

Among the top positive contributors to performance was Megachips, the sole supplier of custom-made memory chips used in Nintendo's game cartridges. Demand for Nintendo's 'Switch' gaming console has seen a resurgence following the runaway success of the recently released Super Mario Brothers movie. This has translated into rapid sales growth for Megachips. Nintendo has historically been Megachips' largest customer and the latter has made a series of investments over the years to diversify its business beyond Nintendo. These are now bearing fruit, with the company reporting new customer wins in areas like 5G and factory automation.

Online legal website Bengo4.com also performed strongly. The company is continuing to see strong growth in its digital contracts business. In addition, management has recently added a series of new features to the legal website that makes its value proposition more compelling for lawyers. For example, lawyers are now able to prepare for a case using Bengo4.com's AI-enabled tool that trawls through voluminous legal literature and provides lawyers with specific insights. Another example is the online legal library which is a subscription based service that Bengo4.com launched recently. This provides lawyers with a vast and easily searchable library of past cases and rulings.

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Interim financial report 2023

Bailie Gifford Shin Nippon PLC

Cosmos Pharmaceutical was another strong performer. This is one of Japan's leading discount stores that sells mainly food, cosmetics, daily necessities and over-the-counter medicines. It operates a low-cost, 'Everyday Low Price' strategy that is unique and disruptive within the Japanese retail sector.

The company deliberately makes slim margins whilst investing excess profits into lower prices for consumers. This strategy has allowed Cosmos to relentlessly take market share from weaker and traditional players who struggle to match Cosmos's price points.

Litalico was among the largest negative contributors to performance. This is an online employment agency that trains and secures jobs for adults with disabilities. It also provides training, development courses and support for disabled children and their families. There are nearly ten million disabled adults and children in Japan. The Japanese government has mandated all corporates to hire

a certain percentage of disabled adults each year and this mandated ratio has been rising each year. As the largest provider of such services in Japan, this is a long-term structural tailwind for Litalico.

Management is investing aggressively in opening new training centres for disabled adults and children and this has temporarily depressed profitability, although annual sales growth remains well over 20%. The market, however, has taken a dim view of this and has subsequently punished the shares.

Online funeral services provider Kamakura Shinsho also performed poorly in share price terms. It operates an online platform that connects people looking for funeral services with providers of such services.

It charges the service provider a fee for introducing customers. Funerals in Japan are an extensive affair involving large gatherings in a sizeable and often

costly venue and typically last a number of days. Local funeral houses have a monopoly and often charge egregious prices. Through its online model, Kamakura Shinsho offers customers a choice of providers across Japan complete price transparency and the option for customers to customize the product based on their budgets. During Covid-19 traditional in-person ceremonies were replaced by an improvised, low-cost online version which did not involve the sale of funeral packages. This resulted in a collapse in Kamakura Shinsho's sales and profits. With life returning to normal in Japan, traditional funeral ceremonies have resumed in earnest and the company's sales and profits are bouncing back strongly. Despite this, the market continues to harbour doubts about the company's ability to sustain its growth.

Japan's only, pure-play online life insurer Lifenet was also among the poor performers. It is continuing to take share from large, sleepy incumbents as its brand recognition has improved. The company is also diversifying into other related, profitable and potentially large areas like group credit insurance where it insures individuals' mortgages in the event of death. Japanese accounting standards have meant that Lifenet has had to recognise the entire cost of selling a policy upfront rather than amortising it over the life of the policy which is allowed under IFRS. This results in rising accounting losses as the company write more new business, giving the impression that this is a perennially loss-making enterprise. We believe this is the view taken by the market, resulting in share price weakness. As of this year, the company has adopted IFRS which should more accurately reflect the underlying profitability of the business and change the market's perception of the stock.

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