Baillie Gifford Shin Nippon : Interim Financial Report 31 July 2022

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, investment strategy risk, climate and governance risk, discount risk, regulatory risk, custody and depositary risk, small company risk, operational risk, leverage risk, political risk and emerging risks. An explanation of these risks and how they are managed is set out on pages 8 and 9 of the Company's Annual Report and Financial Statements for the year to 31 January 2022 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:

1. the condensed set of Financial Statements has been prepared in accordance with FRS 104 'Interim Financial Reporting';
2. 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
3. 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 MN Donaldson Chairman

22 September 2022

The first half of this year has been overshadowed by geopolitical and macroeconomic events. The tragic situation in Ukraine, aside from human suffering, has caused a spike in energy prices and exacerbated inflationary pressures globally. While still low from a Western perspective, inflation in Japan has edged up to just below 3% after decades of deflation. However, the Bank of Japan is keeping interest rates low which has led to a weakening of the yen. Investors tend to seek safety in higher yielding, less growth-oriented companies under these circumstances. The shocking assassination of former prime minister Shinzo Abe in early July also weighed on market sentiment. Despite the challenging environment, we remain confident that the innovative, high-growth companies we own in the portfolio are well placed to deliver attractive returns over the long term given their adaptability and growth opportunity.

In the six months to 31 July 2022, Shin Nippon's net asset value per share (after deducting borrowings at fair value) fell by 4.8% compared to a 0.9% rise in the MSCI Japan Small Cap index (total return and in sterling terms). The Company's share price ranged between a premium to net asset value of 1.5% and a discount of 8.9%, averaging a discount of 4.0%. Over three years, the Company's net asset value per share is down 8.4% compared to the index which is up 1.6%. We are disappointed by the weak performance over six months and three years, but this is not unexpected after a long period of strong outperformance and especially given the extremely challenging environment for high-growth small cap stocks more recently. Performance however remains strong over longer periods. Over five and ten years, the Company's net asset value per share is up 25.0% and 332.3% versus the index's 11.8% and 154.4% respectively.

The market rotation away from high-growth stocks to economically-sensitive businesses has resulted in a significant valuation compression for the former despite no significant change in their growth prospects. Strong near-term earnings growth for cyclical businesses in sectors like shipping and energy has inflated the overall return of the index, thereby leading to Shin Nippon's underperformance. We have little exposure to these traditional cyclical sectors as we believe such companies are facing long-term structural headwinds which will significantly impair their current business models and earnings capacity in the long run.

Past performance is not a guide to future performance.

Given the sharp reversal in sentiment around high growth small cap stocks, many of our internet companies performed poorly in share price terms despite recording impressive rates of sales and profit growth. Online printing, logistics and advertising platform Raksul was among the poor performers despite recording over 30% growth in sales and profits so far this year. The company has suffered from Covid-19 related slowdown but is seeing demand bounce strongly. Another poor performer was training and employment assistance company LITALICO. Its offering is geared towards people with disabilities and children with developmental issues. The company was impacted by the pandemic and it has at the same time invested heavily in future growth. We believe that these investments will stand LITALICO in good stead in the long run. Management is forecasting a near 30% growth in profits for the current fiscal year, but recent quarterly results suggest profit growth running at over 70%. Longstanding holding Infomart, Japan's leading online food ordering platform for restaurants, also performed poorly. It is temporarily sacrificing profitability as management invest in the business and this was not taken well by the market. It recently published an ambitious five-year plan that envisages a doubling of sales and nearly five-fold growth in profits, driven partly by price hikes.

Cautious investor sentiment towards semiconductor related stocks resulted in weak share price performance by most of our related holdings. Among these was JEOL, a specialist semiconductor equipment manufacturer. Whilst orders for its new semiconductor production kit remain robust, the market remains concerned about the likelihood of a sharp slowdown in demand. Sportswear manufacturer Descente suffered from weak demand in China due to repeated lockdowns as authorities continue to enforce a zero Covid-19 policy. China is a key market for Descente where it has a joint venture with Anta Sports, one of China's largest and most successful sporting goods manufacturer. Longstanding holding Nihon M&A, Japan's largest M&A consultancy for small businesses, was another poor performer. Management had to deal with an improper accounting issue which distracted its focus from sales and marketing activities. The problem was largely to do with the timing of recording sales rather than anything serious. Management has addressed the issue to the satisfaction of the regulator and has strengthened internal controls to prevent the recurrence of such issues in future.

Six Months Performance

(figures plotted on a monthly basis and rebased to 100 at 31 January 2022)

105

100

95

90

85

80

• See Glossary of Terms and Alternative Performance Measures on pages 17 and 18.
  † MSCI Japan Small Cap Index (total return and in sterling terms).
  Source: Refinitiv/Baillie Gifford and relevant underlying index providers. See disclaimer on page 19.

NAV

(after deducting borrowings at fair value)*

Share price Comparative Index†

Positive contribution to performance came from an eclectic group of companies. Bucking the trend of share price weakness among internet companies in general, online real estate company GA Technologies put in a strong performance and was the largest contributor in the period. It is digitalising the staid Japanese real estate market by offering a number of software-as-a-service products. Growth in all business segments was very strong and the company has achieved profitability on an operating basis which was rewarded by the market. Demand for Shoei's premium motorcycle helmets has been exceptionally strong as its key markets, most notably North America and Europe, reopen post the pandemic. In contrast, the large Chinese market was hampered by supply chain issues. Overall and despite the weakness in China, Shoei's sales and profits are continuing to grow at a rapid pace thanks to the strength of its brand and the safety credentials of its helmets. Leading global badminton brand Yonex also performed well. It struck a partnership with the China Badminton Association in 2021 and subsequently, the Chinese team did very well in the Tokyo Olympics. This has boosted its profile in China where the company is now seeing rapid growth in sales and profits. Drugstore chain MatsukiyoCocokara was another strong performer. It is reaping the benefits of its merger in 2021 with Cocokara Fine. Synergies

from the merger are flowing through to improved profitability at the group level. With its focus on beauty and cosmetics, the company should further benefit from a return of overseas tourists to Japan once travel restrictions are eased. Following a Covid-19 induced slump, Optex, a leading global manufacturer of sensors for residential and industrial security applications and factory automation, recorded a sharp recovery in orders from clients, especially those based in Europe.

Portfolio activity was higher than usual as we identified several exciting investment opportunities. Turnover for the six months to 31 July 2022 was 17% annualised and active share remains high at 94%. We sold seven stocks and bought five new holdings, including one private company. Shopping mall maintenance company Aeon Delight was sold as we lost faith in management's ability to drive growth especially in overseas markets. Findex, a software developer in the healthcare industry, was also sold as we felt that the company had reached a natural limit in terms of the growth opportunity in its core market. JP Holdings, Japan's largest private sector child day-care services provider, continues to suffer from intensifying competition and we were not convinced that management has the capabilities to navigate these challenging circumstances, hence we decided to sell our holding. Game developer Gumi was