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RNS

Annual Financial Report

Released 07:00 31-Oct-2017

RNS Number : 0213V
Scottish Oriental Smlr Co Tst PLC
31 October 2017
 

THE SCOTTISH ORIENTAL SMALLER COMPANIES TRUST PLC

Annual Financial Report for the year ended 31 August 2017

Financial Highlights

Total Return Performance for the year ended 31 August 2017 (audited)





Net Asset Value  (cum income)

15.7%

MSCI AC Asia ex Japan Index (£)

27.2%





Share Price

19.4%

MSCI AC Asia ex Japan Small Cap Index (£)

15.7%





Dividend Maintained at 11.5p per share

FTSE All-Share Index (£)

14.3%







 

Summary Data

at 31 August 2017 (audited)





Shares in issue

30,960,163

Shareholders' Funds

£369.3m





Net Asset Value per share

1,192.68p

Market Capitalisation

£330.2m





Share Price

1,066.50p

Share Price Discount to Net Asset Value

10.6%

Excludes shares held in Treasury.

 

 

Chairman's Statement

 

Over the 12 months to August, the Company's Net Asset Value per share rose by 15.7 per cent in total return terms, while the 'comparative indices', MSCI AC Asia ex Japan Index and MSCI AC Asia ex Japan Small Cap Index, rose by 27.2 per cent and 15.7 per cent, respectively. The difference between the two comparative indices is attributable to the strong performance of larger companies, specifically Chinese and Korean Information Technology stocks. We would stress that the Company is not invested with regard to a particular benchmark and these indices are shown to provide some context. The share price increased in total return terms by 19.4 per cent as the discount narrowed. A performance fee was not earned this year.

The income per share was 6.77p compared to 9.50p last year. We are proposing an unchanged dividend of 11.5p. The shortfall will be taken from the revenue reserve, as set out on page 51 of the Annual Report, reflecting our policy of using the reserve when necessary. At the beginning of June we used some of the Company's cash reserves to repay the borrowing of £20 million, which was at a fixed rate until 2019. After breakage costs, there is a net saving of £732,000 over the remaining term of the loan, which will benefit the revenue account in future. As you can see from our managers' report, they are not finding enough attractive opportunities at present to justify gearing up the portfolio.

During the year, the Company bought back 60,000 ordinary shares, all of which were held in Treasury at year end. The Board has no formal discount control mechanism but will be prepared to buy back shares opportunistically and to issue new shares at a small premium to NAV, provided that in each case this is in the interests of continuing shareholders.

The cash flow statement shows that the turnover within the portfolio was comparatively high this year.  This included a further increase in our Indian Subcontinent holdings to 32.8 per cent from 26.6 per cent. Our manager continues to find smaller companies with strong growth prospects within the Indian Subcontinent. A further cause of portfolio turnover has been the reduction in the number of holdings, 67 investments at year end compared to 76 last year. A number of companies were sold where the manager saw relatively weak earnings growth. The portfolio is now more focused on a smaller number of faster growing companies.

In April we announced changes in our management arrangements as follows:

'Wee-Li Hee, the lead portfolio manager for The Scottish Oriental Smaller Companies Trust plc, ("the Company") is due to return from maternity leave in July. In discussion with the First State Stewart Asia management team and the Board of Scottish Oriental, Wee-Li has expressed a preference to step back from lead portfolio manager responsibility for the Company.

Vinay Agarwal has been managing the Company's portfolio during Wee-Li's maternity leave and will assume the role of lead portfolio manager on a permanent basis with immediate effect. On return from maternity leave, Wee-Li will assume the role of co-portfolio manager for the Company. Scott McNab will remain deputy manager. Martin Lau will no longer have a formal role with the Company but will continue to provide company analysis and oversight in his role as joint managing partner of the First State Stewart Asia team.'

Janet Morgan is retiring from the Board at the Annual General Meeting this year. She was one of the founding Directors and the Company has benefited consistently from her advice over the last 22 years. We thank her for her many astute contributions and wish her well.  As announced recently, we have appointed Jeremy Whitley and Andrew Baird as Directors. Both of them have considerable global investment experience, particularly in the Asia Pacific region, and we welcome them. More details are shown on page 17 of the Annual Report.

Our investments represent reasonable value, the historic price earnings ratio being 21 times with expected earnings growth of 10 per cent in the current year and a 2.1 per cent historic dividend yield. However, our managers' caution is reflected in having 8.4 per cent in cash at the year end.  We are optimistic about prospects for our holdings and we will use the cash reserves to add to them if prices weaken.

 

This year the Annual General Meeting will be held in Edinburgh at the offices of First State Stewart Asia. I look forward to seeing shareholders there.

 

 

James Ferguson

Chairman

30 October 2017

 

 

Portfolio Manager's Report

 

During the year ending 31 August 2017, all Asian equity markets rose (measured in sterling) with the exception of the Philippines and Pakistan. After initial disbelief, markets responded positively to the election of Donald Trump in November 2016, expecting his presidency to be pro-growth. Global stock markets have risen, and in Asia, initial concerns that President Trump would be highly protectionist were quickly put to one side. The Federal Reserve increased rates in December and then again in March and June. As expectations for the speed of further rises declined, the US dollar weakened in 2017. Sterling continued to weaken into the autumn following the Brexit vote but has since rebounded and gained modestly against the US dollar.

 

The oil price has been relatively stable, with supply discipline from some of the larger producers countered by an increase in production of shale oil in the US when prices rise. Gold weakened in the latter half of 2016 but then strengthened in 2017, initially due to rising inflation expectations. These expectations diminished as 2017 progressed but gold continued to rise as the perilous situation on the Korean peninsula meant investors sought protection against a worst case outcome.

 

Scottish Oriental generated strong absolute returns over the year. However, the Company significantly underperformed the MSCI AC Asia ex Japan Index. Two factors caused this underperformance. The first was the difference in performance between smaller and larger companies with the performance of larger companies being driven by Chinese and Korean Information Technology stocks. The second was Scottish Oriental's country positioning with the Company being relatively heavily invested in South East Asia (Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam) and relatively lightly invested in North Asia (China, Hong Kong, Taiwan and South Korea). South East Asian companies have been much weaker than their North Asian counterparts over the past year with those in the North more exposed to the cyclical rebound in the global economy.

 

Although interest rates have increased in the US, a recent moderation in inflation has reduced pressure on Asia's central banks to raise rates, which has allowed domestic monetary policies to remain accommodative. Most Asian countries have experienced falling exports for the last two years, but there are signs export growth has now resumed. This, combined with various government-led infrastructure programmes, is resulting in a tentative return to investment.

 

The improved growth outlook appears to be priced into stock market valuations - particularly for the quality companies we favour. When we meet with companies, we are being told that volume growth is weak and it is difficult to increase prices given the lack of inflation expectations. Earnings growth has improved but in many cases this has been because of falling input costs which, in our view, is not sustainable. Debt levels in Asia are high, and getting higher. This will act as a significant dampener on Asia's economies when interest rates eventually rise. In the meantime, cheap money has lowered the cost of capital thereby increasing competition.

 

We continue to focus on the strength of company balance sheets and have sold some of the more leveraged holdings rather than giving their management teams the benefit of the doubt. It is also no coincidence that some of our larger weightings are in India, Indonesia and the Philippines. Given the size of their economies, these three countries have relatively low debt. Recent growth in these domestically-focused countries has come without notable increase to this debt. We believe the companies in the portfolio are well positioned to benefit from the growth that Asia offers and we would expect these companies to become bigger businesses in the years to come. The Company has relatively high cash levels and, while we would like to deploy these funds into such companies, we would prefer to make investments at more reasonable valuations, where we consider the risk-reward payoff to be more attractive.

 

Vinay Agarwal

Wee-Li Hee

Scott McNab

First State Investment Management (UK) Limited, Investment Manager

30 October 2017

 

 

 

Country Allocation at 31 August 2017 (based on geographical area of activity)

 

Country/Region

Scottish Oriental %

MSCI* %

MSCI Small Cap^ %

China

9.5

33.9

22.8

Hong Kong

7.2

11.6

7.9

Taiwan

11.4

13.8

19.9

Greater China

28.1

59.3

50.6

Indonesia

8.1

2.7

2.5

Malaysia

3.0

2.6

3.4

Philippines

7.5

1.3

1.1

Singapore

5.3

4.3

5.5

Thailand

2.4

2.5

3.9

Vietnam

1.1

0.0

0.0

South East Asia

27.4

13.4

16.4

Bangladesh

1.4

0.0

0.0

India

25.5

10.2

15.0

Pakistan

1.0

0.1

0.9

Sri Lanka

4.9

0.0

0.0

Indian Subcontinent

32.8

10.3

15.9

South Korea

3.3

17.0

17.1

Net current assets

8.4



Net assets

100.0

100.0

100.0

*Morgan Stanley Capital International AC Asia ex Japan Index

^Morgan Stanley Capital International AC Asia ex Japan Small Cap Index

 

 

 

Stock market performance for the year ending 31 August 2017

 

Country

Sterling %

Local Currency %

China

37.5

36.2

Hong Kong

23.0

22.0

Taiwan

30.9

22.4

Indonesia

11.2

10.0

Malaysia

4.2

7.9

Philippines

(4.7)

2.9

Singapore

24.3

21.9

Thailand

15.3

8.8

Vietnam

3.1

3.3

Bangladesh

15.4

16.8

India

19.4

12.1

Pakistan

(7.0)

(8.1)

Sri Lanka

5.4

8.9

South Korea

26.6

25.9

MSCI*

27.2

24.5

*Morgan Stanley Capital International AC Asia ex Japan Index

 

 

Greater China

 

China was the best performing market with fears of a weakening currency and capital outflows abating during the year. The implementation of various capital controls has been effective with foreign exchange reserves stabilising and the currency strengthening. Economic growth has exceeded expectations and producer price inflation has turned positive after several years of exerting deflationary pressure. The government appears to be doing a reasonable job of managing excess industrial capacity and credit growth has moderated. 

 

Scottish Oriental's exposure to China fell significantly over the year. We exited six holdings - nitrogenous fertiliser producer China Bluechemical; fabric producer Luthai Textile; shipping container manufacturer Singamas Container; handbag and leather goods manufacturer Sitoy; camera lens and module producer Sunny Optical; and infant formula producer Yashili. China Bluechemical and Singamas Container were sold on rebounds in their share prices. Luthai Textile and Yashili were sold on growth concerns. Sitoy was sold as we became increasingly concerned that management is being distracted from its attempts to build a branded retail business. Sunny Optical was sold on expensive valuations.

 

In contrast, we only purchased one new holding in China - Uni-President China, a manufacturer of beverages and instant noodles.

 

Hong Kong's economy improved with apartment prices buoyant despite various policy measures introduced to halt price rises. Retail spending and exports also resumed growth. This has seen a reduction in unemployment and an improvement in sentiment. An increasingly interventionist mainland China has raised questions over the integrity of the territory's Basic Law.

 

The Company's exposure to Hong Kong increased during the year with the purchase of restaurant operator Fairwood Holdings and bus company Kwoon Chung Bus. Both these companies show that it is still possible to find growth in Hong Kong's domestic economy.

 

Taiwan's stock market performed strongly over the year driven by its large technology sector. Relations with mainland China have deteriorated since the election of President Tsai Ing-wen evidenced by a significant decline in tourist arrivals from China. China has also sustained its efforts to isolate the island diplomatically. Taiwan's future remains very much intertwined with that of China and its economy is dependent on global growth as a consequence of its reliance on exports.

 

Scottish Oriental's exposure to Taiwan was reduced over the year. Five positions were sold - industrial PC manufacturer Axiomtek; testing equipment manufacturer Chroma ATE; industrial barcode printer manufacturers Godex International and TSC Auto ID Technology; and garment manufacturer Makalot Industrial. Chroma ATE was sold following strong share price performance whereas the other four companies were sold on growth concerns.

 

South East Asia

 

Indonesia's domestic economy was subdued with the government's ambitious infrastructure plans taking longer to implement than targeted. Low inflation allowed the central bank to cut its policy rate again in 2017 which may provide a modest boost to growth. A significant disappointment was the jailing on blasphemy charges of the former mayor of Jakarta, which has unnerved the significant Chinese business community.

 

Scottish Oriental's exposure to Indonesia increased during the year primarily as a result of additions to existing holdings but also through the purchase of Astra Otoparts, a manufacturer and distributor of automotive parts.

 

The Malaysian stock market performed poorly but there are indications that sentiment has reached its nadir with improving domestic demand; a return of foreign portfolio flows; infrastructure spending announcements; and significant Chinese investment pledges. Having survived the financial controversy regarding the strategic development company, 1Malaysia Development Berhad, the government is likely to focus its efforts on further stimulating the economy as a general election is due to take place within the next year.

 

The Company's Malaysian weighting is relatively unchanged over the year. One new holding was added - cement producer Lafarge Malaysia; and one position was sold, retailer Aeon Company.

 

The Philippine stock market fell when measured in sterling with the prospect of a current account deficit for 2017 seeing the currency weaken. Nevertheless, the economy continued to perform strongly with consumer confidence improving; remittances and outsourcing revenues rising; and infrastructure spending also providing a fillip to growth. President Duterte has been a wildcard but his high approval ratings domestically mean he is unlikely to change his behaviour.

 

Scottish Oriental's exposure to the Philippines increased over the year through additions to its existing holdings and the purchase of Concepcion Industrial, the country's leading manufacturer of air conditioners and refrigerators.

 

Singapore saw an improvement in its economy which benefited from the stronger external environment. The domestic economy has remained more muted, however, with weak employment growth meaning little wage inflation and poor sentiment. Private residential property prices continued to fall and the government removed some of its property cooling measures during the year.

 

The Company markedly reduced its exposure to Singapore over the year, with seven positions exited. Bukit Sembawang Estates and Tan Chong International were sold as we believed it was unlikely that the value in these companies would be realised for shareholders. M1 and Sheng Siong Group were sold on concerns about increasing competition. Hong Leong Finance was sold as it has found it increasingly difficult to grow; iFast on concerns over management's overseas strategy; and Tat Hong as it carried too much debt which management seemed unfocused on paying down.

 

Thailand's economy has been subdued with poor sentiment and high household indebtedness curtailing domestic spending. Investment has also been weak with government spending on infrastructure not meeting expectations. However, exports have been strong and the nation's high current account surplus has resulted in upward pressure on the baht, ironically leading to fears about falling export competitiveness. The death of King Bhumibol in October 2016 has left a void, and with the army showing little indication that it is willing to give up its grip on power, we are not expecting democratic elections.

 

The overall exposure to Thailand fell with Hana Microelectronics sold on expensive valuations and Somboon Advance Technology sold on growth concerns.

 

Vietnam was weak over the year. Following the election of Donald Trump, the US did not ratify the Trans-Pacific-Partnership, whilst a public sacking of a senior politburo official and downgrades to GDP forecasts have also impacted sentiment negatively. The government has clamped down on dissent, cut policy rates for the first time in three years, and increased its target for credit growth in response. The economy has many positives but care needs to be taken by the government to ensure past mistakes are not repeated.

 

Scottish Oriental added to its Vietnam position during the year with the purchase of conglomerate REE Corp.

 

Indian Subcontinent

 

Bangladesh's economy has performed strongly with GDP growth of almost 7 per cent. Until recently, remittances from its overseas workers, combined with garment industry exports, allowed the country to run a current account surplus. However, a recent jump in imports has seen the current account swing into deficit which will require monitoring. An additional issue is the low tax take given the persistent government deficit. The government attempted to address this by unifying the VAT rate in its June budget but this simplification has since been suspended which is a backwards step.

 

Scottish Oriental made its first ever investment in Bangladesh during the year in mortgage provider Delta Brac Housing Finance, which operates in a very under-penetrated sector.

 

India's economy slowed during the year. In November 2016, the government surprised with a demonetisation of the rupee that saw 86 per cent of the notes in issue effectively outlawed overnight in an attempt to reduce the prevalence of so-called black money in the informal sector. An overall GST (goods and services tax) was introduced in July, replacing multiple local and central taxes. Both measures should benefit India in the long-term as foundations for sustainable growth, but acted as temporary breaks on the economy. Election wins in some key states cemented prime minister Narendra Modi's grip on power but with this strengthened hand comes an increased risk of Hindu nationalism.

 

During the year, Scottish Oriental increased its overall exposure to India. Seven new stocks were purchased - courier company Blue Dart Express; cancer treatment specialist Healthcare Global Enterprises; HeidelbergCement India; Domino's Pizza franchise holder Jubilant Foodworks; Mahindra CIE which predominantly manufactures auto components; consumer goods company Jyothy Laboratories; and department store operator Shoppers Stop. Six companies were sold from the portfolio. Three of these were sold on expensive valuations - city gas supplier Mahanagar Gas; consumer goods company Marico; and conglomerate Tube Investments. Information Technology outsourcers Hexaware Technologies and Tata Consultancy Services were sold on a dull growth outlook and branded tea producer Tata Global Beverages was sold following a boardroom coup at its parent, which, in our opinion, made the likelihood of management turning the business around less likely.

 

After a promising start Pakistan's stock market fell over the last year, responding negatively to the forced resignation of prime minister Nawaz Sharif on corruption charges. Its economy remains finely balanced having completed an IMF programme in 2016. Although the fiscal deficit has fallen in recent years, it is now widening as is the current account deficit and there are concerns about a return to fiscal and monetary ill-discipline. More positively, consumer spending has been strong aided by improved security. Chinese investment should help improve some of Pakistan's creaking infrastructure whilst also boosting growth.

 

Scottish Oriental made its first ever investment in Pakistan during the year in auto assembler and retailer Indus Motors.

 

Sri Lanka had another tough year. The government has been carrying out a difficult balancing act - cutting expenditure and raising taxes to reduce the budget deficit, whilst trying to maintain growth levels. Interest rates were also raised to combat high inflation levels. Tax collections have improved but are behind target because of delays in the implementation of the 2017 budget proposals. An extended period of drought followed by floods added to pressure on the economy. Nevertheless, progress is being made in putting the country's finances on a sustainable footing.

 

The Company increased its exposure to Sri Lanka by purchasing conglomerate John Keells Holdings.

 

South Korea

 

South Korea's stock market performed well, boosted by its large technology sector and despite a troubled year for the nation. President Park was impeached following a scandal surrounding bribes paid to her friend and "shaman advisor". The fallout led to Samsung heir Lee Jae-yong being arrested on charges of embezzlement, bribery and perjury and he was subsequently jailed. A diplomatic spat with China over South Korea's deployment of the American Terminal High Altitude Area Defense system led to an unofficial boycott of South Korean products by China. North Korea's increasingly bellicose behaviour further damaged sentiment.

 

Scottish Oriental's South Korean weighting was relatively unchanged over the year. Existing holdings were trimmed and two new holdings were added. Leeno Industrial is a producer of pins and sockets used in testing printed circuit boards and integrated circuits; and Vieworks is a provider of x-ray imaging technology.

 

Performance of individual equity holdings for the year ending 31 August 2017

 

Company

Country

Contribution Performance %

% of Shareholders' Funds (As of 31 August 2017)

Best




Blue Star

India

1.4

2.7

Godrej Industries

India

1.4

1.6

Pacific Basin Shipping

Hong Kong

1.3

-

Godrej Properties

India

1.0

1.5

Jubilant Foodworks

India

1.0

2.4









Worst




Tong Ren Tang

China

(0.5)

2.3

Raffles Medical Group

Singapore

(0.5)

1.4

M1

Singapore

(0.4)

-

Indoco Remedies

India

(0.4)

0.6

Delfi

Singapore

(0.4)

1.8

 

Blue Star, benefited from increasing demand for its air-conditioners and commercial refrigeration systems. Godrej Industries rose on strong share price performance from its subsidiary Godrej Properties as well as the expectation it will realise a significant gain when its agribusiness subsidiary Godrej Agrovet is listed. The share price of Pacific Basin Shipping rebounded as the market believed the outlook had improved in the commodity shipping sector. Godrej Properties is set to benefit from the introduction of GST in India which should favour the higher quality real estate developers. Jubilant Foodworks rose on the expectation of a successful turnaround following a change in management. 

 

Tong Ren Tang was impacted by slowing growth in demand for its products but its brand remains one of the strongest in traditional Chinese medicine. Raffles Medical Group is incurring start-up losses as it gets closer to opening its Shanghai hospital. We are positive that this expansion will contribute meaningfully in the long term. M1 has been hurt by increasing competition and as we did not see the situation improving we disposed of our M1 investment. Indoco Remedies received a US Food and Drug Administration warning letter regarding production standards and has also seen product launch delays and increased investment weigh on its recent earnings. Delfi has suffered from the weak consumer environment in Indonesia. We are monitoring both Indoco Remedies and Delfi closely.

 

Portfolio Review

 

Scottish Oriental's portfolio of investments is well diversified not only by country but also by sector. The largest country exposure is India with a 25.5 per cent position.  Consumer Discretionary accounted for 17.8 per cent of the portfolio, the largest sector weighting (see below). As at 31 August 2017, Scottish Oriental was invested in 67 different companies with the largest holding, SKF India, accounting for 3.0 per cent of the Portfolio (see page 12). The aggregate of the Company's ten largest holdings was 25.1 per cent.

 

Sector Allocation at 31 August 2017

 

Sector

%

Consumer Discretionary

17.8

Consumer Staples

13.7


31.5

Industrials

16.5

Information Technology

9.4

Financials

9.3

Healthcare

7.3

Utilities

6.7

Materials

6.5

Real Estate

3.1

Telecommunication Services

1.3


91.6

Net current assets

8.4

Net assets

100.0

 

 

Scottish Oriental's exposure to the Consumer Discretionary sector rose over the year predominantly as a result of the purchase of seven new holdings - Astra Otoparts, Fairwood Holdings, Indus Motors, Jubilant Foodworks, Mahindra CIE, Shoppers Stop and Texwinca Holdings. Several smaller positions were sold where we felt growth prospects were limited.

 

The Company's holdings in the Consumer Staples sector decreased over the period. Four companies were sold - Marico, Sheng Siong Group, Tata Global Beverages and Yashili. By contrast, only two new holdings were bought - Jyothy Laboratories and Uni-President China.

 

Scottish Oriental's position in the Industrials sector increased, owing to strong performance from investments such as Blue Star and Pacific Basin Shipping and establishing new positions in Blue Dart Express, Concepcion Industrial, John Keells Holdings, Kwoon Chung Bus, REE Corp and Voltronic Power, a producer of uninterruptible power supplies. Five positions were exited. Three of these - Pacific Basin Shipping, Singamas Container and Tube Investments - were sold following strong share price performance. The other two - Acset Indonusa and Tat Hong - were sold on balance sheet concerns.

 

Within the Information Technology sector, we have reduced our holdings in companies exposed to contract manufacturing including Axiomtek, Chroma ATE, Godex International, Hana Microelectronics, Hexaware Technologies, iFast, Sunny Optical, Tata Consultancy Services and TSC Auto ID Technology. Purchases included Leeno Industrial; cable and connector manufacturer Sinbon Electronics; and driver integrated circuit chip designer Sitronix Technology.

 

Exposure to the Financials sector increased with additions to some of the Company's existing holdings and the purchase of Delta Brac. One position, Hong Leong Finance, was sold.

 

Scottish Oriental's Healthcare position increased slightly with the purchase of Healthcare Global Enterprises and Vieworks. Poor performance from the Company's existing holdings reduced the impact these new holdings had on the overall Healthcare weighting.

 

Exposure to the Utilities sector increased as a result of additions to existing holdings.

 

Overall exposure to the Materials sector was unchanged, with the reduction in existing holdings and the sale of China Bluechemical compensated for by the purchase of Heidelbergcement India and Lafarge Malaysia.

 

The Company's weighting in the Real Estate sector increased with the reclassification of Godrej Properties and Mahindra Lifespace from the Financials sector.

 

Scottish Oriental's weighting in the Telecommunication Services sector fell with the sale of M1 and also the sale of Indonesian mobile operator XL Axiata which has been finding it difficult to compete given the strength of the market leader.

 

Vinay Agarwal

Wee-Li Hee

Scott McNab

First State Investment Management (UK) Limited, Investment Manager

30 October 2017

 

 

Ten Largest Equity Holdings at 31 August 2017

 

Company

Market

Value

% of Shareholders' Funds

SKF India

India

£11,004,158

3.0%

SKF India is the Indian subsidiary of the Sweden based SKF Group, which is a global leader in bearings, seals, mechatronics and lubrication systems. The company is the largest bearing manufacturer in India with a market share of more than 25 per cent. Its products are used in numerous segments including the automotive industry, heavy industry, energy, industrial machinery, oil and gas, and food and beverage. SKF India's focus on quality and product innovation should see it continue to grow for the foreseeable future.





Towngas China

China

£10,228,493

2.8%

Towngas China, a subsidiary of Hong Kong & China Gas, operates a gas distribution business in China focusing on both residential and commercial customers. The company also undertakes the construction of gas pipelines and other gas related services. The company continues to grow via investment in its existing operations as well as through acquisitions. The company's scale and reputation for safety and quality service should allow it to benefit from the government's policy to increase the share of natural gas in China's energy mix.





Blue Star

India

£10,015,340

2.7%

Blue Star was founded in 1943 in India as an agency for international air-conditioning and refrigeration brands of global companies. It has since established its own portfolio of air-conditioning and refrigeration products as well as being the exclusive distributor for several multinational brands in India. It has also entered into large air-conditioning engineering, procurement and construction (EPC) projects which will grow with the industrialisation of the country. Family owned but professionally run, the company is set to benefit from both growing consumer demand and a developing Indian economy.





Vitasoy International

Hong Kong

£9,186,323

2.5%

Vitasoy produces and distributes a wide range of non-alcoholic beverages to the Australasian, Hong Kong, Singaporean and mainland Chinese markets. The company's two main brands are VITASOY, a soybean-based soft drink, and VITA, a range of fruit juices, teas, milk, soft drinks and water. The company has performed strongly in China which now generates almost half of the company's revenues. Management is innovative yet conservative.





China Banking

Philippines

£9,134,587

2.5%

Established in July 1920, China Banking Corp has its roots catering mainly to the Chinese-Filipino market with many of the established Chinese-Filipino families as some of its earliest borrowers. Arguably the bank was too conservative historically, but in recent years it has evolved to become a more modern, retail-focused bank and growth has improved accordingly. The well-respected Sy family is the controlling shareholder which provides comfort in the culture and oversight of the bank.





Jubilant Foodworks

India

£9,037,450

2.4%

Jubilant Foodworks is the largest quick service restaurant operator in India and is the exclusive franchisee for Domino's Pizzas for India, Nepal, Bangladesh and Sri Lanka as well as for Dunkin' Donuts in India. Having expanded aggressively for the past few years, the focus of the company is now on improving its margins. It has survived the onslaught of loss-making food delivery start-ups in India. These start-ups disappointed on service and are now struggling financially with a number of them becoming insolvent. This is easing pressure on salaries of lower level staff and seeing customers return to Domino's as it remains a reliable delivery specialist.





Uni-President China

China

£8,686,863

2.3%

Uni-President China produces instant noodles and beverages and it appears to be navigating the difficult Chinese market better than most. Having cut the number of its products back, it is now focusing on increasing margins through premium product launches and is driving sales growth by advertising as opposed to price promotions. The company has significant excess production capacity so is likely to have minimal capital expenditure requirements for the next few years which should see strong cash generation.

 

Concepcion Industrial

Philippines

£8,507,524

2.3%

Concepcion Industrial is the Philippines' leading manufacturer of air conditioners and refrigerators. The Concepcion family of RFM Corp controls the company and manages operations, dominating both the board and senior executive posts. Joint ventures with United Technologies, Electrolux and Midea provide leading technology and the company's extensive sales and servicing network both enables the company to retain existing and win new customers and acts as a significant barrier to entry for the competition.





Tong Ren Tang

China

£8,465,604

2.3%

Tong Ren Tang Technologies is one of the oldest and most respected traditional Chinese medicine companies in China. Offering a range of affordable products for common ailments, the company's potential comes from continuing product development and launches, continuing growth of core products, expansion of its domestic sales channels both offline and online and its growing presence overseas.





Manila Water Company

Philippines

£8,425,501

2.3%

Manila Water is a private water services utility company in the Philippines, majority-owned by the Ayala group. Since 1997 the company has operated the East Zone of Metro Manila (40 per cent of the capital city) under a long term concession agreement. Management's execution has been excellent; water availability has increased from 65 per cent to 99 per cent. The company's approach is appropriately long term, as evidenced by the attitude to risk, which has seen management avoid potential opportunities in China and India, where regulatory risk is high. The company is using cash flows to slowly grow elsewhere in the Philippines and regionally. The group's target is for half of profits to be generated outside its core concession by 2020.





 

Vinay Agarwal

Wee-Li Hee

Scott McNab

First State Investment Management (UK) Limited, Investment Manager

 

30 October 2017

 



Ten Year Record

 

Capital

 

Year ended 31 August

Market Capitalisation

£m

Shareholders'

Funds

£m

 

NAV

p

 

Share Price

p

Discount

to NAV

%







2008

79.16

94.50

312.78

262.00

16.2

2009

98.95

113.86

376.85

327.50

13.1

2010

146.08

167.76

555.26

483.50

12.9

2011

181.28

186.89

618.56

600.00

3.0

2012

182.19

201.60

667.26

603.00

9.6

2013

232.19

253.63

801.53

733.75

8.5

2014

268.65

283.82

896.93

849.00

5.3

2015

227.39

257.18

816.57

722.00

11.6

2016

280.65

324.82

1,047.12

904.75

13.6

2017

330.19

369.26

1,192.68

1,066.50

10.6

 

Revenue

 

 

 

Year ended 31 August

 

 

Gross Revenue

£000

 

Available for ordinary shareholders £000

 

Earnings per share*

p

 

Dividend per share

(net)

p

 

 

Ongoing charges†

%

Ongoing charges

incl.

perf. fee

%

 

 

Actual gearing ‡  

 

 

Potential gearing










2008

3,643

2,008

6.64

5.00

0.78

-

98

101

2009

3,744

2,307

7.63

6.00

1.04

-

94

101

2010

4,940

3,197

10.58

8.50

1.00

1.65

94

101

2011

5,726

3,443

11.39

9.00

1.01

2.29

95

111

2012

7,073

4,348

14.39

11.00

1.01

1.96

97

110

2013

7,903

4,518

14.56

11.50

1.03

1.73

88

108

2014

6,339

3,035

9.59

11.50

1.03

1.36

93

107

2015

8,716

4,929

15.58

11.50

1.01

1.05

95

108

2016

6,740

2,966

9.50

11.50

1.04

1.04

92

106

2017

6,431

2,097

6.77

11.50

0.99

0.99

91

100

* The calculation of earnings per share is based on the revenue from ordinary activities after taxation and the weighted average number of ordinary shares in issue.

†  Management fee and all other operating expenses, excluding interest, expressed as a percentage of the average daily net assets during the year (2011 and prior: expressed as a percentage of the average month end net assets during the year).

Total assets less current liabilities and all cash and fixed interest securities (excluding convertibles) divided by shareholders' funds.

Total assets less current liabilities divided by shareholders' funds.

 

Cumulative Performance (taking year ended 31 August 2007 as 100)

 

 

Year ended 31 August

 

 

NAV

 

 

Share price

MSCI AC Asia ex Japan Index

 

FTSE All- Share Index

 

 

Earnings per share

 

 

Dividend per share








2007

100

100

100

100

100

100

2008

91

83

89

88

105

109

2009

109

104

94

77

120

130

2010

161

154

114

83

167

185

2011

179

191

115

86

179

196

2012

194

192

112

91

227

239

2013

233

234

120

105

229

250

2014

260

270

132

112

151

250

2015

237

230

117

105

245

250

2016

304

288

152

113

150

250

2017

346

340

188

125

107

250

 

 

 

 

 

Strategic Report

 

The purpose of this report is to provide shareholders with details of the Company's strategy and business model as well as the principal risks and challenges the Company has faced during the year under review.

 

The Board is responsible for the stewardship of the Company, including overall strategy, investment policy, borrowings, dividends, corporate governance procedures and risk management. Biographies of the directors can be found on page 17 of the Annual Report.

 

The Board assesses its performance in meeting the Company's objectives against the following Key

Performance Indicators, details of which can be found in the Financial Highlights, Ten Year Record,

Chairman's Statement and Portfolio Managers' Report:

 

·       the movement in net asset value per ordinary share on a total return basis;

·       the movement in the share price on a total return basis;

·       the discount; and

·       ongoing charges.

 

Business and Status

The Company is an investment company within the meaning of section 833 of the Companies Act 2006.

 

The Company carries on the business of an investment trust. The Company has been approved as an investment trust by HM Revenue and Customs subject to the Company continuing to meet eligibility conditions. The Company intends to conduct its affairs so as to enable it to comply with the ongoing requirements.

 

Business Model and Strategy for Achieving Objectives

·       We aim to maximise the rate of return with due regard to risk. Risk is principally contained by focusing on soundly managed and financially strong companies, and by ensuring that the portfolio is reasonably well diversified geographically and by sector at all times. Quantitative analysis demonstrating the diversification of the Trust's portfolio of investments is contained in the country allocation and sector allocation analysis within the Portfolio Managers' Report and Portfolio Review.

 

·       While cultural, political, economic and sectoral influences play an important part in the decision-making process, the availability of attractively-priced, good quality companies with solid long-term growth prospects is the major determinant of investment policy.

 

·       Our country weightings bear no relationship to regional stock market indices. We do not consider ourselves obliged to hold investments in any individual market, sector or company.

 

·       Existing holdings are carefully scrutinised to ensure that our corporate performance expectations are likely to be met, and that market valuations are not excessive. Where otherwise, disposals are made.

 

·       Strong emphasis is placed on frequent visits to countries of the Region and on meeting the management of those companies in which the Company is invested, or might invest.

 

Investment Policy and Objective

·       The Scottish Oriental Smaller Companies Trust plc aims to achieve long-term capital growth by investing in mainly smaller Asian quoted companies.

 

·       The Trust invests mainly in the shares of smaller Asian quoted companies, that is, companies with market capitalisations of below US$1,500m, or the equivalent thereof, at the time of first investment.

 

·       The Trust may also invest in companies with market capitalisations of between US$1,500m and US$3,000m at the time of first investment, although not more than 20 per cent of the Trust's net assets at the time of investment will be invested in such companies.

 

·       To enable the Trust to participate in new issues, it may invest in companies which are not quoted on any stock exchange, but only where the Investment Manager expects that the relevant securities will shortly become quoted.

 

·       For investment purposes, the investment Region includes China, Hong Kong, India, Indonesia, Malaysia, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam. Countries in other parts of Asia may be considered with approval of the Board.

 

·       With the objective of enhancing capital returns to shareholders, the Directors of the Trust will consider the use of long-term borrowings up to a limit of 50 per cent of the net assets of the Trust at the time of borrowing.

 

·       The Trust invests no more than 15 per cent of its gross assets in other listed investment companies (including listed investment trusts).

 

·       The Trust invests no more than 15 per cent of its total assets in the securities of any one company or group of companies at the time of investment.

 

·       The Trust reserves the right to invest in equity-related securities (such as convertible bonds and warrants) of companies meeting its investment criteria. In the event that the Investment Manager anticipates adverse equity market conditions, the Trust may invest in debt instruments in any country or currency.

 

·       The majority of the Trust's assets are denominated in Asian currencies or US dollars. The Trust reserves the right to undertake foreign exchange hedging of its portfolio.

 

A portfolio review by the Investment Manager is provided above and the investments held at the year end are contained in the Company's Annual Report.

 

Investment Manager

First State Investment Management (UK) Limited has been Investment Manager since 20 March 1995. In order to comply with the Alternative Investment Fund Managers Directive, with effect from 2 July 2014 the Company terminated its investment management agreement with First State Investment Management (UK) Limited and appointed First State Investments (UK) Limited as its Alternative Investment Fund Manager ("AIFM"). First State Investments (UK) Limited delegated portfolio management services to First State Investment Management (UK) Limited.

 

A summary of the terms of the Investment Management Agreement is contained in note 2 of the Accounts on page 49 of the Annual Report.

 

The Board regularly appraises the performance and effectiveness of the investment management arrangements of the Company. As part of this process, such arrangements are reviewed formally once a year. In relation to the Board's formal review, the performance and effectiveness of such arrangements are measured against certain criteria. These include the Company's growth and return; performance against the Company's peer group; the success of the Company's investment strategy; the effectiveness, quality and standard of investment resource dedicated by the Investment Manager to the Company; and the level of the Investment Manager's fee in comparison to its peer group.

 

The Board, having conducted its review, considers that the Investment Manager's continued appointment as investment manager to the Company is in the best interests of shareholders.

 

Principal Risks and Uncertainties

The Board believes that the principal risks facing the Company relate to the Company's investment activities and include market risk, interest rate risk, foreign currency risk, other price risk, liquidity risk and credit risk. An explanation of these risks and how they are managed is contained on pages 54 to 57 of the Annual Report.

 

Other risks faced by the Company include breach of regulatory rules which could lead to suspension of the Company's Stock Exchange listing, financial penalties, or a modified audit report. Breach of Section 1158 of the Corporation Tax Act 2010 could lead to the Company losing its approval as an investment trust and being subject to tax on capital gains.

 

In the mitigation and management of these risks, the Board regularly monitors the investment environment and the management of the Company's investment portfolio, and applies the principles detailed in the guidance provided by the Financial Reporting Council. Compliance with regulatory rules is monitored on a daily basis by the Company Secretary who reports to the Board at each Board Meeting. The Company's internal controls are described in more detail on page 26 of the Annual Report.

 

Social, Community and Human Rights Issues

The Company has given discretionary voting powers to the Investment Manager. The Board supports the integration by the Investment Manager of environmental, social and governance issues in its investment decision making. In the Investment Manager's view, this assists the sustainable performance of the Company.

 

The Board and Outlook

The Company has six Directors. Three are women and three are men. The Company has no employees.

 

The Chairman provides an outlook for the Company in his statement on page 2 of the Annual Report.

 

On behalf of the Board

PATAC Limited

Company Secretary

30 October 2017



Statement of Directors' Responsibilities

 

The Directors are responsible for preparing the Annual Report in accordance with applicable law and regulations.

 

Company law requires the Directors to prepare accounts for each financial year.

 

Under that law the Directors have elected to prepare the accounts in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), including FRS102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland". Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the assets, liabilities, financial position and the profit or loss of the Company for that period. In preparing these accounts, the Directors are required to:

 

·       select suitable accounting policies and then apply them consistently;

·       make judgments and accounting estimates that are reasonable and prudent; and

·       state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the accounts.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the accounts and the Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

The Directors confirm that suitable accounting policies, applied consistently and supported by reasonable and prudent judgements and estimates, have been used in the preparation of the accounts and that applicable accounting standards have been followed.

 

The Directors consider that the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy. In reaching this conclusion, the Directors have assumed that the reader of the Annual Report and Accounts has a reasonable level of knowledge of the investment industry.

 

The accounts are published on the Company's website www.scottishoriental.com which is maintained by the Investment Manager. The maintenance and integrity of the corporate and financial information relating to the Company is the responsibility of the Investment Manager. The work carried out by the auditor does not involve consideration of the maintenance and integrity of this website and, accordingly, the auditor accepts no responsibility for any changes that may have occurred to the accounts since they were initially presented on the website. Visitors to the website need to be aware that legislation in the United Kingdom governing the preparation and dissemination of accounts may differ from legislation in other jurisdictions.

 

Each of the Directors confirms that to the best of his or her knowledge:

 

·       the accounts, prepared in accordance with applicable United Kingdom accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

·       the Strategic Report and the Directors' Report include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that the Company faces.

 

By order of the Board

James Ferguson

Chairman

30 October 2017



 

Income Statement for the year ended 31 August 2017 (audited)

                                                                       

                                                                        2017                                                       2016

 

 

Revenue

£'000

Capital

£'000

Total*

£'000

Revenue

£'000

Capital

£'000

Total*

£'000








Gains on investments [Note 8]

-

47,524

47,524

-

69,895

69,895

Income from investments [Note 1]

6,383

-

6,383

6,657

-

6,657

Other income [Note 1]

48

-

48

83

-

83

Investment management fee [Note 2]

(2,625)

-

(2,625)

(2,110)

-

(2,110)

Currency gains

-

79

79

-

1,801

1,801

Other administrative expenses [Note 3]

(801)

-

(801)

(731)

-

(731)








Net return before finance costs and taxation

 

3,005

 

47,603

 

   50,608

 

3,899

 

71,696

 

75,595

Finance costs of borrowing [Note 4]

(471)

(649)

(1,120)

(629)

-

(629)








Net return on ordinary activities before taxation

 

2,534

 

46,954

 

  49,488

 

3,270

 

71,696

 

  74,966

Tax on ordinary activities [Note 5]

(437)

(513)

(950)

(304)

-

(304)








Net return attributable to equity

shareholders

 

2,097

 

46,441

 

48,538

 

2,966

 

71,696

 

74,662








Net return per ordinary share [Note 7]

6.77p

149.94p

156.71p

9.50p

229.72p

239.22p








 

* The total column of this statement is the Profit and Loss Account of the Company. The revenue and capital columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.

 

There are no items of other comprehensive income, therefore this statement is the single statement of comprehensive income of the Company.

 

The Board is proposing a dividend of 11.50p per share for the year ended 31 August 2017 (2016: 11.50p per share) which, if approved, will be payable on 19 January 2018 to shareholders recorded on the Company's shareholder register on 8 December 2017.

 

The accounting policies and the notes on the accounts can be found below.

 

All revenue and capital items derive from continuing operations.

 



 

Summary Statement of Financial Position as at 31 August 2017 (audited)

 


2017

2016


£'000

£'000

£'000

£'000






FIXED ASSETS - EQUITY INVESTMENTS [Note 8]


338,385


297,737

Current Assets:





    Debtors [Note 9]

2,083


7,458


    Cash and deposits

32,816


47,352



34,899


54,810


Current Liabilities

(due within one year)





    Creditors [Note 10]

(4,028)


(7,728)



(4,028)


(7,728)


Net Current Assets


30,871


47,082

Total Assets less Current Liabilities


369,256


344,819

   





Creditors (due after one year)





    Loan [Note 11]


-


(20,000)

Equity shareholders' funds


369,256


324,819

Represented by





Capital and reserves





Ordinary share capital [Note 12]


7,853


7,853

Share premium account


34,259


34,259

Capital redemption reserve


58


58

Capital reserve


318,511


272,611

Revenue reserve


8,575


10,038

 


369,256


324,819






Net asset value per share [Note 13]


1,192.68p


1,047.12p

 

 The accounting policies and the notes on the accounts can be found below.



 

Summary Cash Flow Statement for the year ended 31 August 2017 (audited)

 


 

2017

2016


 

£'000

£'000

 

Net cash outflow from operations before dividends, interest, purchases and sales [Note 14]

(3,022)

(3,191)

Dividends received from investments

6,976

6,389

Interest received from deposits

48

83

Purchases of investments

(177,941)

(72,604)

Sales of investments

185,734

90,814

Cash from operations

11,615

21,491

Taxation


(1,009)

(261)

Net cash inflow from operating activities

10,606

21,230


 

 

 

Financing activities



Interest paid on borrowings

(471)

(630)

Repayment of loan including breakage costs

(20,649)

-

Equity dividend paid

(3,560)

(3,612)

Buyback of ordinary shares

(541)

(3,411)

Net cash outflow from financing activities

(25,221)

(7,653)


 

 

 

(Decrease)/increase in cash and cash equivalents

(14,615)

13,577

Cash and cash equivalents at the start of the period

47,352

31,974

Effect of currency gains

79

1,801

Cash and cash equivalents at the end of the period*

32,816

47,352


 

 

 

*Cash and cash equivalents represents cash at bank


 



 

 



 


Statement of Changes in Equity (audited)


For the year ended 31 August 2017









Ordinary

Share capital

Share premium account

Capital

redemption

reserve

 

Capital reserve

 

Revenue

reserve

 

 

Total


£'000

£'000

£'000

£'000

£'000

£'000

Balance at 31 August 2016

 

7,853

 

34,259

 

58

 

272,611

 

10,038

 

324,819

Total comprehensive income:

 

 

 






Return for the year

 

-

 

-

 

-

 

46,441

 

2,097

 

48,538

Transactions with owners recognised directly in equity:







Buyback of ordinary shares

 

-

 

-

 

-

 

(541)

 

-

 

(541)

Dividend paid in the year††

 

-

 

-

 

-

 

-

 

(3,560)

 

(3,560)

Balance at 31 August 2017

 

7,853

 

34,259

 

58

 

318,511

 

8,575

 

369,256

See note 12  †† See note 6


 

 

Statement of Changes in Equity (audited)


For the year ended 31 August 2016











Ordinary

Share capital

Share premium account

Capital

redemption

reserve

Warrant reserve exercised

 

Capital reserve

 

Revenue

reserve

 

 

Total


£'000

£'000

£'000

£'000

£'000

£'000


Balance at 31 August 2015

 

7,874

 

32,940

 

37

 

1,319

 

204,321

 

10,684

 

257,175

Total comprehensive income:

 

 

 







Return for the year

 

-

 

-

 

-

 

-

 

71,696

 

2,966

 

74,662

Transactions with owners recognised directly in equity:








Buyback of ordinary shares

 

(21)

 

-

 

21

 

-

 

(3,406)

 

-

 

(3,406)

Dividend paid in the year††

 

-

 

-

 

-

 

-

 

-

 

(3,612)

 

(3,612)

Transfer of warrant reserve to share premium*

 

 

-

 

 

1,319

 

 

-

 

 

(1,319)

 

 

-

 

 

-

 

 

-

Balance at 31 August 2016

 

7,853

 

34,259

 

58

 

-

 

272,611

 

10,038

 

324,819

See note 12  †† See note 6 *As approved by the Board on 15 December 2015 

 

 

 

 

Accounting Policies

 

Basis of accounting

(a)  The Scottish Oriental Smaller Companies Trust plc is a public company limited by shares, incorporated and domiciled in Scotland, and carries on business as an investment trust.  Details of the Company's registered office can be found in the Annual Report.

 

These accounts have been prepared in accordance with applicable accounting standards and under the historical cost convention (modified to include the revaluation of fixed asset investments which are recorded at fair value), the Companies Act 2006, UK Generally Accepted Accounting Practice ("UK GAAP"), including FRS 102, and the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued in November 2014 (the "SORP"). These accounts are prepared on a going concern basis.

 

In order to better reflect the activities of the Company and in accordance with guidance issued by the AIC, supplementary information which analyses the Profit and Loss Account between items of revenue and capital nature has been presented in the Income Statement.

 

The accounts have also been prepared on the assumption that approval as an investment trust will continue to be granted.

 

The functional and reporting currency of the Company is pounds sterling as most investors in the Company are based in the United Kingdom.

 

Income

(b)  Dividends on securities are brought into account on the date on which the security is quoted "ex dividend'' on the stock exchange in the country in which the security is listed. Foreign dividends include any withholding taxes payable to the tax authorities. Where a scrip dividend is taken in lieu of cash dividends, the net amount of the cash dividend declared is credited to the revenue account. Any excess in the value of shares received over the amount of cash dividend foregone is recognised as capital. Interest on securities is accounted for on a time apportioned basis so as to reflect the effective yield on the investment.

 

(c)  Overseas income is recorded at rates of exchange ruling at the date of receipt.

 

(d)  Bank interest receivable is dealt with on an accruals basis and taken to revenue.

 

Expenses

(e)  Expenses are dealt with on an accruals basis and are charged through the revenue column of the Income Statement.

 

(f)   The investment management fee has been charged in full to the revenue column of the Income Statement. The performance fee is chargeable in full to the capital column of the Income Statement.

 

Financial Instruments

 

(g) The Company has elected to adopt Sections 11 and 12 of FRS 102 in respect of financial instruments.

 

(h) Financial assets and liabilities are recognised in the Company's Statement of Financial Position when it becomes party to the contractual provisions of the instrument.

 

(i) Listed investments have been designated upon initial recognition as fair value through profit or loss. Investments are recognised and de-recognised at trade date where a purchase or sale is under a contract whose terms require delivery within the time frame established by the market concerned, and are initially measured at cost. Subsequent to initial recognition, investments are valued at fair value which for listed investments is deemed to be bid price or last traded price. Gains and losses arising from changes in fair value are included as a capital item in the Income Statement and are ultimately recognised in the Capital Reserve. Gains and losses arising on realisation of investments are shown in the Capital Reserve.

 

(j) Equities include ordinary shares and warrants.

 

(k) Cash and cash equivalents include cash at hand, deposits held on call with banks and other short term highly liquid investments with maturities of three months or less.

 

(l) Debtors and creditors do not carry any interest, are short term in nature, and are stated as nominal value less any allowance for irrecoverable amounts as appropriate.  This is deemed to be the recoverable amount for debtors and the settlement amount for creditors.

 

(m) Long-term borrowings are initially measured at proceeds less transaction costs and subsequently measured at amortised cost using the effective interest method. Finance costs of such borrowings are charged to revenue in the period in which they are incurred. Interest costs incurred on long-term borrowings are charged to revenue on a time apportioned basis over the life of the liability. Breakage costs on long-term borrowings are charged to capital.

 

Foreign currency

(n)  Exchange rate differences on capital items are included in the Capital Reserve, and on income items in the Revenue Reserve.

 

(o)  All assets and liabilities denominated in foreign currencies have been translated at year end exchange rates.

 

Dividends

(p)  Interim dividends are recognised in the period in which they are paid and final dividends are recognised in the period in which they are approved by the Company's shareholders.

 

Taxation

(q)  Current tax payable is based on taxable profit for the year.  In accordance with the SORP, any tax relief on expenses is allocated between capital and revenue on the marginal basis using the Company's effective rate of corporation tax for the year.

 

Deferred taxation is provided using the liability method on all timing differences, calculated at the rate at which it is anticipated the timing differences will reverse. Deferred tax assets are recognised only when, on the basis of available evidence, it is more likely than not that there will be taxable profits in the future against which the deferred tax asset can be offset.

 

Owing to the Company's status as an investment trust, and the intention to continue to meet the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation of investments.

 

Significant judgements and estimates

(r)   The preparation of the Company's financial statements requires the Directors to make judgements, estimates and assumptions that affect the reported amounts recognised in the financial statements and disclosure of contingent liabilities. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in future periods. There have been no significant judgements, estimates or assumptions for the current or preceding financial year.

 

Reserves

 

Share premium account

(s)  The share premium represents the difference between the nominal value of new ordinary shares issued and the consideration the Company receives for these shares. This account is non-distributable.

 

Capital redemption reserve

(t)   The capital redemption reserve represents the nominal value of ordinary shares bought back for cancellation. This reserve is non-distributable.

 

 

Warrant reserve exercised

(u)  The warrant reserve represents proceeds from the issue of warrants. As all warrants have been exercised, the Board approved the transfer of the warrant reserve to the share premium account on 15 December 2015. This reserve is non-distributable.

 

Capital reserve

(v)   Gains and losses on the realisation of investments, realised exchange differences of a capital nature and returns of capital are accounted for in this reserve. Increases and decreases in the valuation of investments held at the year end and unrealised exchange differences of a capital nature are also accounted for in this reserve. The articles of the Company stipulate that this reserve is non-distributable. However, subject to a change to the Company's articles approved by shareholders, this reserve could be made distributable should the need arise.

 

Revenue reserve

(w)  Any surplus/deficit arising from the net revenue return for the year is taken to/from this reserve. This reserve is distributable to shareholders by way of dividend.

 

 

NOTES ON THE ACCOUNTS (audited):

 

(1) Income

Income from investments relates to dividends. Other income relates to bank deposit interest.

 

(2) Investment Management Fee

 


2017

£'000

 

2016

£'000

 

Investment management fee

2,625

2,110

 

Management

First State Investment Management (UK) Limited has been Investment Manager since 20 March 1995. In order to comply with the Alternative Investment Fund Managers Directive, with effect from 2 July 2014 the Company terminated its investment management agreement with First State Investment Management (UK) Limited and appointed First State Investments (UK) Limited as its Alternative Investment Fund Manager. First State Investments (UK) Limited delegated portfolio management services to First State Investment Management (UK) Limited.

 

The terms of the Agreement provide for payment of a base fee of 0.75 per cent per annum of the Company's net assets payable quarterly in arrears. In addition an annual performance fee may be payable to the Investment Manager. The total fee payable to the Investment Manager is capped at 1.5 per cent per annum of the Company's net assets.

 

The performance fee is based on the Company's share price total return (''SPTR''), taking the change in share price and dividend together, over a three year period. If the Company's SPTR exceeds the SPTR of the MSCI AC Asia ex Japan Index over the three year period plus ten percentage points, a performance fee is payable to the Investment Manager. The objective of the performance fee is to give the Investment Manager ten per cent of the additional value generated for shareholders by such outperformance. No performance fee (2016: £nil) is due to be paid for the year ended 31 August 2017.

 

The Investment Manager's appointment is subject to termination on one year's notice. The

Company is entitled to terminate the Investment Manager's appointment on less than the specified notice period subject to compensation being paid to the Investment Manager for the period of notice not given. The compensation in the case of the Investment Manager's termination is based on 0.75% of the value of the Company's net assets up to the date of termination on a pro rata basis. In addition a termination performance fee amount may be due to the Investment Manager based on the Company's three year performance up to the date of termination and paid on a pro rata basis.

 

The Agreement sets out matters over which the Investment Manager has authority and the limits above which board approval is required. In addition the Board has a formal schedule of matters specifically reserved to it for decision. This includes determination and monitoring of the Company's investment objectives and policy and its future strategic direction, gearing policy, matters relating to the buy-back and issuance of the Company's shares, appointment and removal of third party service providers, review of key investment and financial data and the Company's corporate governance and risk control arrangements.

 

(3) Other Administrative Expenses

 


2017

£'000

 

2016

£'000

 

Auditors' remuneration for:



 

-     audit services

21

22

-     non-audit services in respect of taxation compliance

-

6

Directors' fees

102

88

Company secretarial fees

111

109

Bank, custodial and other expenses

567

506


801

731

 

Company Secretary

PATAC Limited provides company secretarial, accounting and administrative services. The fee for the year ended 31 August 2017, which is payable quarterly in advance and linked to the movement in the Retail Price Index annually, was £111,000 (2016: £109,000). The appointment is terminable on three months' notice.

 

(4) Finance Costs of Borrowing

 

Costs in relation to bank borrowings:


2017

2016


Revenue

£'000

Capital

£'000

Total

£'000

Revenue

£'000

Capital

£'000

Total

£'000

Interest costs

471

-

471

629

-

629

Breakage costs

-

649

649

-

-

-


471

649

1,120

629

-

629

 

(5) Taxation

 

(a)  Analysis of charge in the year

Overseas tax:


2017

2016


Revenue

£'000

Capital

£'000

Total

£'000

Revenue

£'000

Capital

£'000

Total

£'000

Tax on overseas dividends

437

-

437

304

-

304

Indian capital gains tax

-

513

513

-

-

-


437

513

950

304

-

304

 



 

(b) Factors affecting the tax charge for the year

The tax assessed for the period is different from that calculated when corporation tax is applied to the total return. The differences are explained below:

 


2017

£'000

2016

£'000




Return for the year before taxation

49,488

74,966




Total return for the period before taxation multiplied by the standard rate of corporation tax of 19.00% (2016: 20.00%)

 

9,403

 

14,993

Effect of:



Capital returns not subject to corporation tax

(9,045)

(14,339)

Non-taxable income

(1,213)

(1,331)

Overseas tax

950

304

Unutilised management expenses

855

677

Total tax charge for the year

950

304




Under changes enacted in the Finance Act 2009, dividends and other distributions received from foreign companies from 1 July 2009 are largely exempt from corporation tax.




(c) Provision for deferred tax



The Company has a deferred tax asset of £5,227,000 (2016: £4,748,000) at 31 August 2017 in respect of unrelieved tax losses carried forward. This asset has not been recognised in the accounts as it is unlikely under current legislation that it will be capable of being offset against future taxable profits.

 

 

6) Dividends

 


2017

2016


£'000

£'000

Dividends paid in the period:



Dividend of 11.50p per share (2016 - 11.50p)



paid 20 January 2017

3,560

3,612

 

The below proposed dividend in respect of the financial year is the basis upon which the requirements of section 1158 of the Corporation Tax Act 2010 are considered. The proposed dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these accounts.

 


2017

2016


£'000

£'000

 

Income available for distribution

2,097

2,966

Proposed dividend for the year ended 31 August 2017 - 11.50p



(2016 - 11.50p) payable 19 January 2018

(3,560)

(3,560)

 

Amount transferred from retained income

 

(1,463)

 

(594)



 

(7) Return per Ordinary Share

 



2017



2016



Revenue

p

Capital

p

Total

p

Revenue

p

Capital

p

Total

p








Net return per ordinary share

6.77

149.94

156.71

9.50

229.72

239.22













2017

2016








Revenue return





£2,097,000

£2,966,000

Capital return





£46,441,000

£71,696,000

Weighted average ordinary shares

in issue

 

 





 

30,973,341

 

31,210,771

There are no dilutive or potentially dilutive shares in issue.

 

           

(8) Equity Investments

£'000



Cost at 31 August 2016

214,738

Unrealised appreciation

82,999

Valuation at 31 August 2016

297,737

Purchases at cost

174,147

Sales - proceeds

(181,023)

Sales - realised gains on sales

53,939

Unrealised depreciation on investments in the year

(6,415)

Valuation at 31 August 2017

338,385

Cost at 31 August 2017

261,801

Closing unrealised appreciation

76,584



Gains on Investments


Realised gains on sales

53,939

Unrealised losses on the fair value of investments during the year

(6,415)


47,524

 

All investments are listed on recognised stock exchanges.

 

Transaction Costs

During the year the Company incurred transaction costs of £490,000 (2016: £208,000) on the purchase of investments and £511,000 (2016: £354,000) on the sale of investments.

 


 


2017

2016

(9) Debtors

£'000

£'000




Sales awaiting settlement

1,398

6,109

Accrued income

617

999

Sundry debtors

68

350


2,083

7,458

 

 


2017

2016

(10) Creditors (amounts falling due within one year)

£'000

£'000




Purchases awaiting settlement

3,163

6,957

Management fee payable

691

609

Other creditors

174

135

Interest due on loan

-

27


4,028

7,728

 


2017

2016

(11) Creditors (amounts falling due after one year)

£'000

£'000




£20,000,000 fixed rate loan 3.135% 14/08/19

-

20,000

 

The £20,000,000 loan was repaid in full including all interest on 1 June 2017. Breakage costs of £649,000 were incurred and charged to capital in accordance with the Company's accounting policies.

 

 

(12)       Share Capital

 

The allotted and fully paid capital is £7,853,416 (2016: £7,853,416) represented by 31,413,663 ordinary shares of 25p each (2016: 31,413,663). During the year the Company bought back 60,000 (2016: 474,500) ordinary shares at a cost of £541,000 (2016: £3,406,000), all of which are held in Treasury (2016: 393,500 held in Treasury and 81,000 cancelled). The Company held 453,500 ordinary shares in Treasury at the year end (2016: 393,500), being 1.3 per cent of share capital, with a nominal value of £113,375 (2016: £98,375).  There have been no shares issued or bought back since the year end.

 

The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This will include:

 

-          the level of equity shares in issue; and

-          the extent to which revenue in excess of that which is required to be distributed should be retained.

 

The capital of the Company is the ordinary share capital, the other reserves and the fixed rate loan as described in note 11. It is managed in accordance with its investment policy in pursuit of its investment objective, which is detailed on page 19 of the Annual Report.

 

 

(13) Net Asset Value per Ordinary Share

 

Net assets per share are based on total net assets of £369,256,000 (2016: £324,819,000) divided by 30,960,163 (2016: 31,020,163) ordinary shares of 25p each in issue (excludes shares held in Treasury).

 

 

(14) Cash Flow Statement

 

Reconciliation of total return on ordinary activities before finance costs and tax to net cash outflow before dividends, interest, purchases and sales

2017

2016


 

 

£'000

£'000

Net return on activities before finance costs and taxation


50,608

75,595

Net (gains)/losses on investments


 

(47,524)

(69,895)

Currency gains


 

(79)

(1,801)

Dividend Income


 

(6,383)

(6,657)

Interest Income


 

(48)

(83)

Increase in creditors


 

122

-

Decrease/(increase) in Debtors


 

282

(350)

Net cash outflow from operations before dividends, interest, purchases and sales

(3,022)

(3,191)

 

 

(15) Risk Management, Financial Assets and Liabilities

 

The Company invests mainly in smaller Asian quoted companies. Other financial instruments comprise cash balances and short-term debtors and creditors. The Investment Manager follows the investment process outlined on page 19 of the Annual Report and in addition the Board conducts quarterly reviews with the Investment Managers. The Investment Manager's Risk and Compliance department monitors the Company's investment and borrowing powers to ensure that risks are controlled and minimised. Additionally, its Compliance and Risk Committee reviews risk management processes monthly.

 

The main risks that the Company faces from its financial instruments are market risk (comprising interest rate, currency and other price risks) and credit risk. As the Company's assets are mainly in readily realisable securities, other than in exceptional circumstances there is no significant liquidity risk. The Board, in conjunction with the Investment Manager, regularly reviews and agrees policies for managing each of these risks. The Investment Manager's policies for managing these risks are available on the website and summarised below.

 

Market Risk

The fair value of, or future cash flows from, a financial instrument held by the Company will fluctuate because of changes in market prices.

 

Interest Rate Risk

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions.

 

During the year the Company held a £20 million five year fixed rate loan with National Australia Bank. The loan was repaid in full on 1 June 2017. The Company is exposed to interest rate risk on interest receivable from bank deposits and interest payable on bank overdraft positions.

 

The interest rate risk profile of the Company at 31 August is show below.

 

Interest Rate Risk Profile

 


2017

£'000


2016

£'000

 

Cash

32,816


47,352

Fixed rate bank loan

-


(20,000)


32,816


27,352

 

Interest Rate Sensitivity

Considering effects on cash balances and fixed rate borrowings, an increase of 50 basis points in interest rates would have increased net assets and total return for the period by £164,000 (2016: £137,000). A decrease of 50 basis points would have had an equal but opposite effect. The calculations are based on the cash balances at the balance sheet date and are not representative of the year as a whole.

 

Foreign Currency Risk

The majority of the Company's assets, liabilities and income were denominated in currencies other than sterling (the currency in which the Company reports its results) as at 31 August 2017. The Balance Sheet therefore can be significantly affected by movements in foreign exchange rates. It is not the Company's policy to hedge this risk on a continuing basis but the Company reserves the right to undertake foreign exchange hedging of its portfolio. The revenue account is subject to currency fluctuation arising on dividends paid in foreign currencies. The Company does not hedge this currency risk.



 

 

Foreign Currency Risk Exposure by Currency of Denomination

 


31 August 2017

31 August 2016


 

 

Overseas investments £000

 

 

Net monetary assets

 £000

 

Total currency exposure £000

 

 

Overseas investments £000

 

 

Net monetary assets

 £000

 

Total currency exposure £000








Indian rupee

94,060

(1,008)

93,052

76,178

203

76,381

Hong Kong dollar

61,828

214

62,042

66,187

-

66,187

Taiwanese dollar

41,976

257

42,233

42,853

784

43,637

Indonesian rupiah

30,067

(527)

29,540

15,271

(819)

14,452

Philippine peso

27,679

(6)

27,673

10,265

-

10,265

Singapore dollar

19,578

125

19,703

40,618

202

40,820

US dollar

-

19,351

19,351

-

19,303

19,303

Sri Lankan rupee

17,980

-

17,980

9,678

(101)

9,577

Korean won

12,302

-

12,302

11,930

-

11,930

Malaysian ringgit

10,988

-

10,988

8,025

-

8,025

Thai baht

8,989

644

9,633

15,608

24

15,632

Vietnamese dong

4,209

3,164

7,373

1,124

-

1,124

Bangladeshi taka

5,127

-

5,127

-

-

-

Pakistan rupee

3,602

(963)

2,639

-

-

-

Total foreign currency

338,385

21,251

359,636

297,737

19,596

317,333

Sterling

-

9,620

9,620

-

7,486

7,486

Total currency

338,385

30,871

369,256

297,737

27,082

324,819

 

 

Currency Risk Sensitivity

At 31 August 2017, if sterling had strengthened by 5% in relation to all currencies, with all other variables held constant, total net assets and total return on ordinary activities would have decreased by the amounts shown below. A 5% weakening of sterling against all currencies, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts. The analysis is performed on the same basis for 2016.


 

2017

£000

 

2016

 £000




Indian rupee

4,653

3,819

Hong Kong dollar

3,102

3,309

Taiwanese dollar

2,112

2,182

Indonesian rupiah

1,477

723

Philippine peso

1,384

513

Singapore dollar

985

2,041

US dollar

968

965

Sri Lankan rupee

899

479

Korean won

615

597

Malaysian ringgit

549

401

Thai baht

482

782

Vietnamese dong

369

56

Bangladeshi taka

256

-

Pakistan rupee

132

-

Total

17,983

15,867

 

Other Price Risk

Changes in market prices, other than those arising from interest rate or currency risk, will affect the value of quoted investments. It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular country or sector. The Investment Manager monitors market prices throughout the year and reports to the Board on a regular basis.

 

Other Price Risk Sensitivity

If market values at the Balance Sheet date had been 10% higher or lower with all other variables remaining constant, the return attributable to ordinary shareholders for the year ending 31 August 2017 would have increased/(decreased) by £33,838,500 (2016: increased/(decreased) by £29,773,700) and equity reserves would have increased/(decreased) by the same amount.

 

Liquidity Risk

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is not significant as the majority of the Company's assets are investments in quoted securities that are readily realisable. The Company has the power to take out borrowings, which could give it access to additional funding when required.

 

The contractual maturities of financial liabilities at the year end, based on the earliest date on which payment can be required, are as follows:

 


2017

2016


 

3 months

or less

£000

 

3 to 12

months

 £000

 

More than 12 months

£000

 

3 months

or less

£000

 

3 to 12

months

 £000

 

More than 12 months £000








Bank loan (repaid 1 June 2017)

-

-

-

184

470

21,225

Amount due to brokers

Other creditors and accruals

3,163

 

865

 

-

-

 

-

-

6,957

 

744

 

-

-

 

-

-


4,028

-

-

7,885

470

21,225

 

Credit Risk

This is the risk that a failure of a counterparty to a transaction to discharge its obligations under that transaction could result in a loss to the Company.

 

Investment transactions are carried out with a large number of approved brokers, whose credit-standing is reviewed periodically by the Investment Manager. Transactions are ordinarily done on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations before any transfer of cash or securities away from the Company is completed.

 

Cash exposures are carefully managed to ensure that money is placed on deposit with reputable counterparties meeting a minimum credit rating.

 

None of the Company's financial assets are past due or impaired.

 

In summary, compared to the amounts in the Balance Sheet, the maximum exposure to credit

risk at 31 August 2017 was as follows:

 


      2017

      2016


Balance sheet

Maximum exposure

Balance

 sheet

Maximum exposure

Current assets

£'000

£'000

£'000

£'000






Receivables

2,083

2,083

7,458

7,458

Cash at bank

32,816

32,816

47,352

47,352


34,899

34,899

54,810

54,810

 

 



 

Financial Instruments Measured at Fair Value





Level 1

Level 2

Level 3

Total

As at 31 August 2017

£'000

£'000

£'000

£'000






Listed equities

338,385

-

-

338,385

Total financial instruments

338,385

-

-

338,385

 


Level 1

Level 2

Level 3

Total

As at 31 August 2016

£'000

£'000

£'000

£'000






Listed equities

297,737

-

-

297,737

Total financial instruments

297,737

-

-

297,737

 

The tables above provide an analysis of financial assets and financial liabilities based on the fair value hierarchy described below. Short term balances are excluded from the tables as their carrying value at the reporting date approximates to their fair value.

 

Fair Value Hierarchy

The fair value hierarchy used to analyse the fair values of financial assets and liabilities is described below. The Company has early adopted 'Amendments to FRS102: Fair Value Hierarchy Disclosures', issued by the Financial Reporting Council in March 2016, for the purpose of this hierarchy disclosure.

 

The levels are determined by the lowest (that is, the least reliable or least independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:

 

Level 1 - investments with prices quoted in an active market;

 

Level 2 - investments whose fair value is based directly on observable current market prices or is indirectly being derived from market prices; and

 

Level 3 - investments whose fair value is determined using a valuation technique based on assumptions that are not supported by observable current market prices or are not based on observable market data.

 

 

16. Related Party Transactions

The Directors' fees for the year are detailed in the Directors' Remuneration Report in the Annual Report. An amount of £22,000 was outstanding to the Directors at the year end (2016: £15,000). No Director has a contract of service with the Company. During the year no Director was interested in any matter requiring disclosure under section 412 of the Companies Act 2006.

 

 

17. Alternative Investment Fund Managers Directive

Under the Alternative Investment Fund Managers Directive the Company is required to publish maximum exposure levels for leverage on a 'Gross' and 'Commitment' basis. The process for calculating exposure under each method is largely the same, except that, where certain conditions are met, the Commitment method allows instruments to be netted off to reflect 'netting' or 'hedging' arrangements and the Company's leverage exposure would then be reduced. The AIFM set maximum leverage levels of 3.0 and 1.7 times the Company's net asset value under the 'Gross' and 'Commitment' methods respectively. At the Company's year end the levels were 0.98 and 1.01 times the Company's net asset value.

 

The Alternative Investment Fund Managers Directive requires the AIFM to make available certain remuneration disclosures to investors. This information is available from the AIFM on request.

 

The financial information contained within this announcement does not constitute statutory accounts as defined in sections 434 and 435 of the Companies Act 2006. The results for the years ended 31 August 2017 and 2016 are an abridged version of the statutory accounts for those years. The Auditor has reported on the 2017 and 2016 accounts, their reports for both years were unqualified and did not contain a statement under sections 495 to 498 of the Companies Act 2006. Statutory accounts for 2016 have been filed with the Registrar of Companies and those for 2017 will be delivered in due course.

 

 

The 2017 Annual Report will be posted to shareholders in November 2017 and copies will be available from the Company's website www.scottishoriental.com and the Company Secretary's office at 21 Walker Street, Edinburgh, EH3 7HX.

 

PATAC Limited now acts as Company Secretary to the Company in its corporate name, having previously nominated a named individual. There has been no change to the company secretarial services provided to the Company.

 

 

Enquiries:

PATAC Limited, Company Secretary


Telephone 0131 538 6610

 

30 October 2017

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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Annual Financial Report - RNS