Nippon Active Value Fund plc

LEI: 213800JOFEGZJYS21P75

Interim Results for the 6 months to 30 June 2021 (the "Interim Report")

London / Tokyo, 24 September 2021: Nippon Active Value Fund ("NAVF" or the "Fund"), an activist, Japan-focused Investment Trust, is pleased to announce its interim results for the 6 months to 30 June 2021.

http://www.rns-pdf.londonstockexchange.com/rns/8236M_1-2021-9-23.pdf

Media Enquiries

Alex Gorokhov

Director, Peregrine Communications

[email protected]

+44 20 3040 0892

Notes to Editors

About NAVF

Nippon Active Value Fund ("NAVF") is an Investment Trust listed on the Specialist Fund Segment of the London Stock Exchange. The investment advisor of the Fund is Rising Sun Management Limited ("RSM"). NAVF is targeting attractive levels of capital growth for shareholders from the active management of a focused portfolio of quoted small cap Japanese equity investments. RSM targets companies which are attractive, undervalued and have a substantial proportion of their market capitalisation held in cash and/or listed securities and/or realisable assets.

INVESTMENT OBJECTIVE, FINANCIAL INFORMATION AND PERFORMANCE SUMMARY

CHAIRMAN'S STATEMENT

I am pleased to present the second interim report of the Company. The Company's investment brief is to take advantage of corporate governance reforms in Japan to engage with management teams and encourage investee companies to make improved returns to their shareholders.

Over the six month period to the end of June 2021 the NAV per share and share price total return had increased by 10.1% and 17.5% respectively since the end of 2020. As a result, the discount narrowed from 6.2% to 2.6%. While we do not target a particular index benchmark, for comparison, the Tokyo Stock Exchange Second Section Index, the MSCI Japan Small Cap Index rose by 1.4% over the same period.

Over the period under review, short term market performance continued to be influenced by news flow regarding the COVID-19 pandemic and progress with vaccine development and rollout. NAVF has a concentrated portfolio invested in smaller companies which appear to be valued significantly more cheaply than the market as a whole. Most of the target companies have large holdings of cash and cash equivalents on their balance sheets and the portfolio should, we believe, perform well even in challenging market and economic conditions.

At the end of June 2021, 92.5% of the Company's IPO proceeds was invested. In December 2020, the Investment Adviser successfully closed a Special Purpose Vehicle which began to invest alongside NAVF in one of our target companies, Intage Holdings, in early 2021. This strategy enables NAVF to participate in building significant positions in slightly larger companies in which NAVF on its own would have insufficient fire power to command the attention of management. It is a strategy which the Board endorses, and it is likely to be repeated.

At the period end, the Investment Adviser have now built disclosable positions in 19 companies and the Investment Adviser's report which follows on pages 5 to 8 gives more details on some of the Company's significant holdings.

COVID-19

The pandemic has continued to affect in-person meetings with management. Although our US and EU-based Investment Adviser's team members have not been able to travel to Japan for meetings they have had constructive dialogues with their target companies through virtual meetings and their Tokyo-based President, Mr Mizuochi has been able to attend in person. The Board is satisfied that Rising Sun Management Limited ('RSM' or 'Rising Sun') have been able to carry out their due diligence and engagement effectively, despite the travel restrictions.

Our third party providers have all continued to deliver an uninterrupted service and we have not been made aware of any difficulties caused by switching to remote working. The Board would like to thank all our providers for their efforts in this regard.

Japanese Corporate Governance

At the end of the period under review, there were two developments in the regulatory environment. The first was an update to the Corporate Governance Code, which strengthens the requirement for independent directors and encourages greater scrutiny of intra-group transactions to ensure that minority shareholders are not disadvantaged.

At the end of June, the Tokyo Stock Exchange announced more details of the reorganisation of the listing structure, which will replace the Tokyo First Section with the Prime Index in June 2022.  Companies seeking inclusion in the Prime Index will have to meet a minimum market capitalisation requirement (though there will be a very generous grace period) as well as meeting higher corporate governance standards, including having a majority of external directors. We believe that these initiatives, as well as the continued support of the Japanese government to improve corporate governance in Japan, provide a supportive background for corporate activism in Japan.

Dividend

The Company's intention is to look to achieve its returns primarily through capital appreciation. As such, no specific dividend policy has been established and any distributions will be made entirely at the discretion of the Board, taking into consideration the requirement to ensure the Company's compliance with the rules relating to investment trusts. The Board has decided not to declare an interim dividend for the period ended 30 June 2021.

Outlook

Our Investment Advisers at RSM and their delegated research providers, Dalton Investments Japan, have a long and impressive track record in investing in the Japanese equity market. The RSM team in Tokyo has been strengthened by an additional dedicated analyst. The Board is confident of their ability to identify a strong portfolio of investment targets and that investee companies will be increasingly receptive to proposals from RSM and other corporate activists.

Rosemary Morgan

Chairman

23 September 2021

INVESTMENT ADVISER'S REPORT

Performance

At 31 December 2020, the net assets of the Company stood at £117.0 million and net asset value per NAVF share stood at 113.58p. As of 30 June 2021, these had advanced to £127.0 million and 123.20p respectively. Both these measures have continued to advance since, reaching £132.0 million and 128.12p respectively as at 18 August 2021.

Portfolio Composition

As at 1 January 2021, at the beginning of the period under review, NAVF's portfolio was 88.0% invested in 20 stocks and the decision had been taken to sell two: Katakura Industries being too illiquid to allow the building of a meaningful position and Nittetsu Mining for pursuing a strategy inconsistent with its principal business. In the end, NAVF exited the former but chose to retain a 1% interest in the latter. The latter remains an interesting company, albeit in RSM's view with too great a focus on its domestic urban property portfolio rather than its overseas mining activities. Its share price is up over 42% over the past twelve months, remains volatile and unpredictable, and NAVF's base holding allows it to make proposals to the AGM should it choose to do so. We continue to follow Nittetsu Mining with interest but most of our focus is elsewhere.

By the end of June 92.5% of the IPO proceeds was invested and, as at 18 August 2021, 95.0% invested. Due to the natural low liquidity of many smaller Japanese companies and, therefore, the danger of 'free riders' influencing the price against NAVF as the portfolio was assembled, we were at first reluctant to reveal complete details of its makeup. These concerns have lessened now that NAVF is substantially fully invested (save for some necessary liquidity) and we are pleased to share NAVF's top ten holdings below by percentage shareholding in the individual portfolio companies and value invested, in each case as at 18 August 2021:

Our analysts' latest views of several of these key stocks are included at the conclusion of this report - it is gratifying to note they have all outperformed the MSCI Japanese Smaller Companies Index during the period under review.

In July 2021, shortly after the period under review, the RSM Investment Committee made the decision, subsequently ratified by NAV's board of directors as being strategy consistent, to add a new investment to the portfolio. This restores the number of holdings to twenty. As at 18 August 2021, NAVF's investment in the new investee company remained below the 1% limit which would require a public disclosure to be made with respect to NAVF's shareholding under the Japanese Foreign Exchange and Foreign Trade Act.

Activism: its rewards and frustrations

The Investment Adviser's Report included in the NAVF annual report for the year ended 31 December 2020 (the "December 2020 Annual Report") referenced the creation of Earle 1927 LLC ("Earle"), a Special Purpose Vehicle ("SPV") set up to invest in Intage Holdings alongside NAVF pursuant to a concert party agreement signed by both NAVF and Earle. Earle was seeded with approximately US$ 19 million by third-party, largely US, investors, and this had been fully invested by 6 August 2021, giving the concert party a combined position of 3,150,000 shares or 7.79% of the Intage Holdings' share capital. Not only is the concert party's holding in Intage Holdings RSM's biggest 'bet', but Intage Holdings is also the recipient of our most frequent engagement with management. We have now met with them, at the highest level, several times (virtually) and the dialogue is ongoing.

As outlined in the December 2020 Annual Report, the response of the President of Sakai Ovex, Shintaro Matsuki, to our November 2020 management buyout proposal at Yen 2,350 per share, was to launch his own offer for Sakai Ovex in February 2021 at Yen 2,850. When it became obvious that the Murakami family were buying up stock, Mr Matsuki increased his offer to Yen 3,000. Even at this level, he narrowly failed to reach the two-thirds ownership he sought in order to proceed, and his tender failed. However, he and his advisers, Mizuho Securities, engaged with the Murakamis, restructured the deal with their input, and re-launched the tender at Yen 3,810. Although, NAVF will not have an ongoing interest in Sakai Ovex once it has been privatised, an attractive part of the original deal, NAVF will be able to exit its position entirely at roughly double its 'in' price. Consequently, NAVF has tendered its entire holding into the offer. The MBO completed in early September. The cash NAVF receives will be redeployed elsewhere in the existing portfolio.

Outlook

It must be fair to say that the performance of NAVF since its London Stock Exchange Listing in February 2020, on the eve of the pandemic, represents proof of concept. Put another way, NAVF and RSM have done 'what it says on the tin' and what we said we would do. Those portfolio companies with which we have engaged actively, Nihon Denkei, Sakai Ovex, Ebara Jitsugyo, Intage Holdings, have all reacted strongly in the market. Some take us more seriously than others. We hope, in the very near future, to demonstrate to the doubters, that ignoring us is not a wise course and can have profound consequences.

Analysts' short reports (10^th August 2021):  compiled by RSM's affiliate Dalton KK in Tokyo based on unaudited information included in the most recent trading updates published by the respective portfolio companies.

Ebara Jitsugyo (YTD up 25.6%, last 1 month down -13.9%)

o  Ebara Jitsugyo is a highly seasonal business with most of its revenue and profit achieved in calendar Q1.

o  The company is struggling to beat its performance last year. The company had a large order from the government in that year, and has failed to increase its order intake estimate for FY21, which was left unchanged at down -8% YoY, likely hurting investor sentiment. In addition, the company has already achieved an operating profit of ¥3.4 billion by 1H 2021, which is equal to the company's fiscal full year 2021 estimate.

o  Ebara's capital allocation for the benefit of equity holders was also underwhelming, as the company only looks to buy up to ¥1 billion of equity (3.6% of shares outstanding), compared to 4.7% purchased in 2020.

o  RSM remains enthused by Ebara Jitsugyo's key position in the environmental arena and its ESG credentials. It has also already demonstrated, most obviously by raising its dividend several times, that it is aware of the need to respond to changes in the Corporate Governance Code and stimulate its share price. We do not believe this process is over yet.

·      Nihon Denkei (YTD up 43.9%, last 1 month up 2.1%)

o  Q1 22 revenue up 10.7% YoY to ¥17.6 billion (no IR presentation for Q1) with a 170bp gross margin improvement YoY.

o  The company's FY revenue guidance is unchanged from 11 May 2021 released at ¥90 billion (up 8.8%) vs ¥82.7 billion in FY20, but falls short of FY19 revenue of ¥93.4 billion. Meanwhile, operating profit has returned to the pre-Covid level of ¥2.5 billion.

o  Q1 22 order intake increased 33% YoY to ¥23.7 billion.           

o  The company believes demand for its measuring instruments will remain strong, supported by the automotive and electronic device industries.

·      Mitsuboshi Belting (YTD up 10.7%, last 1 month up 5.6%)

o  Q1 revenue was up by 43% YoY with export demand (up +47.6% YoY) leading the post COVID recovery.

o  Following Q1 numbers, the company is looking to beat fiscal year guidance as auto industry demand remains strong, supported by inventory shortages. Margins recovered in both the domestic and export markets for the company's belting products.

·      Nippon Fine Chemical (YTD up 26.9%, last 1 month up 16.7%)

o  The company revised upwards its 1H operating profit forecast from ¥1.95 billion to ¥2.25 billion (15.4% increase). The original flat-growth guidance was too conservative, as we expected. The company is likely to exceed its full year forecast. The valuation remains reasonable at 13x PER, 2.5x EV/EBITDA, and 0.9x PBR. 

o  It seems that the phospholipid products, called "Lipid", are growing to be the third core product of the company, following cosmetic material and sanitation products. By using the material for drug capsules, the active ingredients inside are delivered to their target site more precisely and better achieve the desired therapeutic effect (so called Drug Delivery System technology). The core client today is Gilead Pharmaceutical who formally adopted Lipid as their DDS, and contracted for volume supply. Nippon Fine Chemical spent ¥3 billion on capacity expansion and remains confident on ROI of the investment. Some other clients are in the trial stages of Lipid, while NFC already expects mass production in the future. 

·      Chiyoda Integre (YTD up 1.7%, last 1 month down -1.2%)

o  Strong Q1 numbers with revenue and operating profit on track to beat company estimates set earlier in the year. Revenue in Q2 was up +44.6% YoY. Fiscal year numbers are likely to exceed company estimates at this rate.

o  The company is seeing demand return particularly in its audio visual segment, driven by stay-at-home/work-from-home related demand. Revenue rebounded strongly in Southeast Asia, up +31% YoY.

·      Nittetsu Mining announced Q1 earnings on 4 August 2021:

o  Overall, the numbers were strong supported by the rally in commodity prices. The company increased its guidance from 10 May 2021 to an increase in revenue of 8%, driven by a rally in copper prices, and if an increase in operating profit of 21% of commodity prices hold up, this is likely to prove conservative.

o  The company also increased the dividend pay-out ratio to 30% for FY21, from 22%.

o  The company used IR presentation slides for their Q1 results for the first time (away from their mid-term slides) indicating a greater willingness to engage with investors.

o  If a capitalisation rate of 7% is applied to its real estate business, the metals business is effectively included for free (Y1.8bn NOI, 7% cap rate = Y25bn of real estate value). It is likely that, the market will therefore treat it as a commodity stock.

Rising Sun Management Limited

23 September 2021

PORTFOLIO SECTORS BREAKDOWN

As at 30 June 2021

INTERIM MANAGEMENT REPORT

The Directors are required to provide an Interim Management Report in accordance with the Financial Conduct Authority ("FCA") Disclosure Guidance and Transparency Rules ("DTR") and consider the Chairman's Statement and the Investment Adviser's Report in this half-yearly report to provide details of the important events which have occurred during the period and their impact on the financial statements. The following statements on related party transactions, going concern and the Directors' Responsibility Statement below, together constitute the Interim Management Report for the Company for the period ended 30 June 2021. The outlook for the Company for the remaining six months of the year ending 31 December 2021 is discussed in the Chairman's Statement and the Investment Adviser's Report.

RISKS AND UNCERTAINTIES

The principal and emerging risks and uncertainties facing the Company are detailed in the Company's most recent Annual Report for the period ended 31 December 2020. These remain unchanged during the period under review.

The principal and emerging risks, together with a summary of the processes and internal controls used to manage and mitigate risks where possible are outlined in the Annual Report for the period ended 31 December 2020.

The Board is responsible for the management of risks and uncertainties faced by the Company. The Board relies on the Investment Adviser, who will seek to mitigate these risks through active asset management initiatives and carrying out due diligence work on potential targets before entering into any investments. The principal and emerging risks and uncertainties of the Company are continuously monitored by the Board, with input from the Investment Adviser.

The Board are of the opinion that these principal and emerging risks and uncertainties remain and are very much applicable to the remaining six months of the Company's financial year.

RELATED PARTY TRANSACTIONS

The Company's Investment Adviser is Rising Sun Management Limited and is considered a related party under the Listing Rules. With effect from first admission, the Investment Adviser is entitled to receive annual advisory fee calculated as 0.85 per cent. of the Company's net assets (exclusive of VAT). Investment advisory fees paid during the period to 30 June 2021 is £506,000. There is no performance fee payable to the Investment Adviser.

GOING CONCERN

The Board has a reasonable expectation that the Company has adequate resources to continue in operational existence for at least the following twelve-month period from the date of this report. In reaching this conclusion, the Directors have considered the liquidity of the Company's portfolio of investments as well as its cash position, income, and expense flows. The Company's net assets as at 30 June 2021 were £127.0 million (31 December 2020: £117.0 million). As at 30 June 2021, the Company held £119.9 million (31 December 2020: £102.9 million) in quoted investments and had cash and cash equivalents of £6.6 million (31 December 2020: £12.6 million). The total expenses (excluding finance costs and taxation) for the period ended 30 June 2021 is £0.9 million (30 June 2020: £0.7 million).

In light of the COVID-19 pandemic, the Directors have fully considered and assessed the Company's portfolio of investments. A prolonged and deep market decline could lead to falling values in the investments or interruptions to cashflow. However, the Company currently has more than sufficient liquidity available to meet any future obligations.

The market and operational risks associated with the COVID-19 pandemic, and the ongoing economic impact of measures introduced to combat its spread were discussed and are continually monitored by the Board.  The Investment Adviser, Administrator and other key service providers are providing regular updates on operational resilience. The Board is satisfied that the key service providers have the ability to continue to operate efficiently in a remote or virtual working environment.

DIRECTORS' STATEMENT OF RESPONSIBILITY FOR THE HALF-YEARLY REPORT

The Directors confirm to the best of their knowledge that:

• The condensed set of financial statements contained within the half-yearly report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting" as required by DTR 4.2.4R.

• The Interim Management Report includes a fair review of the information required by 4.2.7R and 4.2.8R of the FCA's Disclosure Guidance and Transparency Rules.

Rosemary Morgan

Chairman

For and on behalf of the Board of Directors

23 September 2021

CONDENSED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

CONDENSED STATEMENT OF FINANCIAL POSITION (UNAUDITED)

CONDENSED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

The Company's distributable reserves consist of the capital reserve attributable to realised capital profits and revenue reserve.

The notes on pages 16 to 24 form part of these interim financial statements.

CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)

* Cash inflow from dividends received for the period is £ 1,668,000 (30 June 2020: £576,000)

The notes on pages 16 to 24 form part of these interim financial statements.

NOTES TO THE INTERIM FINANCIAL STATEMENTS

Rights attaching to the Ordinary Shares

Dividend rights: All Ordinary Shares are entitled to participate in dividends which the Company declares from time to time in respect of the Ordinary Shares, proportionate to the amounts paid or credited as paid on such Ordinary Shares.

Rights as respect to capital: On a winding-up or a return of capital, in the event that the Directors resolve to make a distribution to Shareholders, all Ordinary Shares are entitled to a distribution of capital in the same proportions as capital is attributable to them, after taking into account any net assets attributable to the C Shares in issue (if any).

Voting rights: Every Shareholder shall have one vote for each Ordinary Share held.

  The Company's Investment Adviser monitors the liquidity of the Company's portfolio on a regular basis.

(iii) Currency risks

The majority of the Company's assets will be denominated in a currency other than Sterling (predominantly in Japanese yen) and changes in the exchange rate between Sterling and Japanese yen may lead to a depreciation of the value of the Company's assets as expressed in Sterling and may reduce the returns to the Company from its investments and, therefore, negatively impact the level of dividends paid to Shareholders.

Management of currency risks

The Company does not currently intend to enter into any arrangements to hedge its underlying currency exposure to investment denominated in Japanese yen, although the Investment Adviser and the Board may review this from time to time.

(iv) Interest rate risks

The Company pays interest on its borrowings. As such, the Company is exposed to interest rate risk due to fluctuations in the prevailing market rates.

Management of interest rate risks

Prevailing interest rates are taken into account when deciding on borrowings.

(v) Credit risks

Cash and other assets held by the custodian

Cash and other assets that are required to be held in custody will be held by the custodian or its sub-custodians. Cash and other assets may not be treated as segregated assets and will therefore not be segregated from any custodian's own assets in the event of the insolvency of a custodian.

Cash held with any custodian will not be treated as client money subject to the rules of the FCA and may be used by a custodian in the course of its own business. The Company will therefore be subject to the creditworthiness of its custodians. In the event of the insolvency of a custodian, the Company will rank as a general creditor in relation thereto and may not be able to recover such cash in full, or at all.

Management of credit risks

The Company has appointed Northern Trust Global Services Limited as its custodian. The credit rating of Northern Trust was reviewed at time of appointment and will be reviewed on a regular basis by the Investment Adviser and/or the Board.

The Investment Adviser monitors the Company's exposure to its counterparties on a regular basis and the position is reviewed by the directors at Board meetings.

ALTERNATIVE PERFORMANCE MEASURES ("APM")

GLOSSARY

COMPANY INFORMATION

Company Security Identifiers