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RNS

Annual Financial Report

Released 07:00 15-Oct-2019

RNS Number : 8296P
Scottish Oriental Smlr Co Tst PLC
15 October 2019
 

THE SCOTTISH ORIENTAL SMALLER COMPANIES TRUST PLC

Annual Financial Report for the year ended 31 August 2019

Financial Highlights

Total Return Performance for the year ended 31 August 2019 (audited)





Net Asset Value

1.1%

MSCI AC Asia ex Japan Index (£)

0.3%





Share Price

0.3%

MSCI AC Asia ex Japan Small Cap Index (£)

(8.1)%





Dividend Maintained at 11.5p per share

FTSE All-Share Index (£)

0.4%







 

Summary Data at 31 August 2019 (audited)





Shares in issue

29,873,784

Shareholders' Funds

£346.1m





Net Asset Value per share

1,158.42p

Market Capitalisation

£301.7m





Share Price

1,010.00p

Share Price Discount to Net Asset Value

12.8%





Ongoing Charges*

1.01%

Active Share (MSCI AC Asia Ex Japan Index)

99.7%





Net Cash

10%

Active Share (MSCI AC Asia Ex Japan Small Cap Index)

98.7%





*No performance fee was payable during the year (2018: nil).


 

Chairman's Statement

 

Scottish Oriental's Net Asset Value ("NAV") per share rose by 1.1 per cent in total return terms over the 12 months to 31 August 2019 while the 'comparative indices', the MSCI AC Asia ex Japan Index and the MSCI AC Asia ex Japan Small Cap Index, rose by 0.3 per cent and fell by 8.1 per cent respectively. As usual, we would stress that the Company is not invested with regard to any particular benchmark and these indices are shown to provide some context. In the Financial Highlights above you will see figures for the portfolio's active share against the two indices. These figures illustrate the extent to which our portfolio differs from each index; 100 per cent would indicate that there is no overlap whatsoever. The share price total return was 0.3 per cent. A performance fee was not earned this year.

 

The income per share was 12.50p compared to 9.19p last year. We are proposing an unchanged dividend of 11.50p. The earnings figure was boosted by a special dividend from Haw Par. The surplus will be added to the revenue reserve to be used, if necessary, in future.

 

During the year, the Company did not buy back any ordinary shares. 1,539,879 shares were held in Treasury at the year end. The Board continues to have 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.

 

The cash flow statement below shows that the turnover within the portfolio reduced slightly from the previous year's figure. We had expected turnover to fall further, but this did not happen for the reasons described in the Portfolio Managers' report.

 

Our comparatively large exposure to India held back Scottish Oriental's performance last year. However, you will see that our Investment Managers have been finding good companies for investment there and they are optimistic about their prospects. Overall, they are estimating earnings growth of 9 per cent from the portfolio this year and they are happy to have a cash reserve of 9.6 per cent at present to take advantage of opportunities as they arise.

 

Having spent 17 years with First State, Wee-Li decided to retire from the investment management industry. During her time with First State Stewart Asia ("FSSA") Wee-Li made a strong contribution to the management of Scottish Oriental in both lead and co-manager roles. She leaves with the Board's grateful thanks and best wishes.  Vinay is supported in managing Scottish Oriental by the full FSSA team of investment analysts and Scott McNab remains as deputy manager, maintaining his 18 year association with the company.

 

This year the Annual General Meeting will be held in Edinburgh at the offices of FSSA Investment Managers, 23 St Andrews Square, Edinburgh EH2 1BB. I look forward to seeing shareholders there.

 

 

James Ferguson

Chairman

14 October 2019

 

 

Portfolio Manager's Report

 

The Market

During the year ending 31 August 2019, Asian equity markets' performance was weak. Performance seems better when measured in sterling, but was flattered by the depreciating pound. The US-China trade war was the biggest driver of stock market performance, with share prices falling sharply in October, May and August as heightened tensions impacted investor sentiment. Following the October and May falls, markets recovered on hopes of improving relations only for the cycle to repeat.

 

Expectations for global growth weakened over the period. Correspondingly, earnings forecasts for Asian companies have been reduced, particularly in sectors exposed to trade. Asian stock markets were mixed. Pakistan was by far the weakest market with its prime minister forced to ask the IMF for another bailout as the country's foreign reserves dwindled. South Korea also fell sharply with its export dependent economy impacted by the global slowdown in trade. South East Asia was relatively strong with Indonesia, the Philippines and Thailand being the three best performing stock markets as these nations are perceived as being relatively insulated from any trade downturn.

 

Surprisingly, given the trade war, Chinese companies performed in line with the broader Asian market with domestic consumption holding up relatively well. By contrast the Indian consumer became increasingly cautious which led to poor performance from consumer companies.

 

Smaller companies underperformed their larger counterparts over the year with this underperformance most pronounced in Hong Kong, India, Indonesia, South Korea and Sri Lanka.

 

The Company's Performance

Scottish Oriental's investment performance over the year was subdued, reflecting the difficult environment, although a modest positive return was generated. The biggest contributor to performance was stock selection in Taiwan. All six of the Company's Taiwanese holdings produced healthy double digit returns. We reduced Scottish Oriental's exposure to Taiwan during the period as this strong share price performance led to expensive valuations. The Company also benefited significantly from its exposure to Hong Kong although most of the positive performance in this market was generated by the large position in Vitasoy. Indonesia was a further contributor; we increased Scottish Oriental's exposure to this market, adding to three holdings on increased conviction and initiating one new position.

 

The biggest detractor from performance was the Company's large exposure to India, where consumer confidence has been significantly dampened by an economic slowdown triggered by a liquidity crisis amongst its large non-banking financial corporation sector. Smaller companies have been disproportionately impacted, falling very sharply compared to their larger peers. Scottish Oriental's exposure to India has been maintained with share price weakness allowing us to initiate several new positions and to add to existing holdings. The Company's large Indian weighting is a direct result of us finding a large number of high quality companies in this market with strong and growing franchises run by exceptional management teams. Pakistan also negatively impacted performance with both of the Company's Pakistani holdings unable to avoid the country's economic woes.

 

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

 

Country/Region

Scottish Oriental

2019

%

Scottish Oriental

2018

%

MSCI*

2019

%

MSCI Small Cap^

2019

%

Stock Market Performance 2019 (Sterling)

%

China

9.1

8.7

38.2

13.1

1.3

Hong Kong

6.4

6.0

11.0

7.5

5.2

Taiwan

10.1

11.9

13.2

23.8

3.4

Greater China

25.6

26.6

62.4

44.4


Indonesia

10.6

7.6

2.5

2.9

21.7

Malaysia

0.8

2.1

2.5

3.7

(5.4)

Philippines

9.8

9.3

1.3

1.2

13.4

Singapore

5.7

5.6

3.9

7.6

7.6

Thailand

0.0

2.6

3.5

6.0

10.5

Vietnam

2.3

1.9

0.0

0.0

7.9

South East Asia

29.2

29.1

13.7

21.4


Bangladesh

1.8

1.7

0.0

0.0

0.2

India

29.1

29.0

10.3

16.2

(1.4)

Pakistan

1.5

1.7

0.0

0.6

(34.3)

Sri Lanka

2.1

4.3

0.0

0.0

0.7

Indian Subcontinent

34.5

36.7

10.3

 

16.8


South Korea

1.1

1.9

13.6

17.4

(13.4)

 

Net Current Assets

9.6

5.7

0.0

 

0.0


Net Assets

100.0

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

Principal Contributors to and Detractors from Performance

Top Five Contributors

 

Company

Country

Sector

Absolute Return (Sterling) %

Contribution Performance %

Vitasoy International

Hong Kong

Consumer Staples

57

1.8

Sinbon Electronics

Taiwan

Technology

70

1.4

Gujarat Gas

India

Utilities

18

0.8

Voltronic Power

Taiwan

Industrials

39

0.6

Blue Star

India

Industrials

15

0.6

 

Vitasoy International continued its strong sales growth in mainland China, which is increasingly its dominant market. Despite the significant scale it has already gained in mainland China, Vitasoy has an opportunity to build a much bigger business in this large market. We significantly reduced Scottish Oriental's position in Vitasoy during the period after exceptionally strong share price performance led to highly expensive valuations. However, we subsequently added to the holding when the share price weakened.

 

Sinbon Electronics has benefited from greater customer demand for its cables and connectors in areas such as wind energy and medical equipment. This has resulted in strong sales and profit growth for the company. The share price rose much more rapidly than profits, resulting in expensive valuations. Therefore we sold more than half of Scottish Oriental's position in the company.

 

Gujarat Gas is a beneficiary of recent regulatory changes that banned the use of coal by industrial users in one of its main operating regions. This is expected to lead to a shift to natural gas amongst these customers. As a result the company should witness further growth in its sales and profits in the coming period.

 

Voltronic Power reported strong revenue and profit growth. It continued to benefit from the trend to outsource production of uninterruptible power supplies, and gained market share from more expensive competitors. The rise in the share price resulted in more expensive valuations so we reduced the Company's exposure.

 

Blue Star gained further market share in the room air conditioner segment and saw a corresponding rise in revenues and profits. The opportunity remains substantial for the company given low air conditioning penetration levels in India.

 

Top Five Detractors

 

Company

Country

Sector

Absolute Return (Sterling) %

Contribution Performance%

HealthCare Global Enterprises

India

Healthcare

(57)

(1.1)

Mahindra CIE

India

Consumer Discretionary

(39)

(0.9)

Godrej Industries

India

Materials

(31)

(0.7)

Jyothy Laboratories

India

Consumer Staples

(30)

(0.6)

Concepcion Industrial

Philippines

Industrials

(21)

(0.6)

 

HealthCare Global Enterprises has expanded aggressively since raising funds through its initial public offering in 2016. Its expansion has exceeded the company's own guidance as they have invested in areas outside of the core business of cancer treatment hospitals. This has led to a substantial increase in the company's leverage and the interest expense on its debt has turned the business loss-making. Our engagement with the company's management, seeking focus on improving its cash flows and moderating its pace of expansion, has not led to a change in their strategy. Our conviction in the quality of its management to build a sustainable, long-term business has reduced.

 

Mahindra CIE was affected by the cyclical downturn in the automotive industry in both its key markets, India and Europe. This resulted in recent profits failing to meet market expectations. However, the company has used this period of market weakness to acquire, thereby expanding its presence among new customers and gaining expertise in aluminium die-casting technology. The lower margins of the acquired business have affected Mahindra CIE's profitability in the near term. Mahindra CIE's management team have a strong track record of improving operational efficiency and we expect them to do the same with the acquired business. Therefore, the company is likely to emerge stronger from this cyclical downturn. As valuations became attractive following the decline in its share price, we have added to the Company's holding.

 

Godrej Industries' share price fell over the period, reflecting weakness in the share price of Godrej Consumer Products which makes up the largest component of the group's net asset value. Godrej Consumer Products has been impacted by weak consumer confidence, resulting in it discounting products to achieve sales volume growth. However, other companies controlled by Godrej Industries have performed well and the share price decline now means that the company trades at a significant discount to its net asset value. We remain very happy with the Company's holding and have added significantly to the position on share price weakness.

 

Jyothy Laboratories has also struggled to maintain sales given poor consumer sentiment in India. We had hoped that the company would seek a partnership with a multinational such as Henkel AG which would have given it access to a product portfolio and a research and development pipeline that would enable it to become a substantially bigger company over the long term. This has not happened. We believe the lack of externally hired professionals in key management roles is a competitive disadvantage for Jyothy Laboratories, and is likely to affect its long term development.

 

Concepcion Industrial was negatively impacted by aggressive pricing from a competitor in its key air conditioning segment, which resulted in a loss of market share. However, the company remains a dominant market leader in air conditioning in the Philippines and given the strength in its brands, products and distribution we expect the company to regain this market share in due course. We added to Scottish Oriental's holding during the year.

 

 

Portfolio activity

Purchases

During the year we invested £108m, adding 12 new companies to the portfolio.

 

51job is the largest online recruitment platform in China. It was founded by Rick Yan in 1998, who leads the company as its CEO and owns a 21 per cent stake. Recruit Holdings, the largest recruitment company in Japan, is the largest shareholder with a 37 per cent stake. Recruit is not involved in day to day management, but plays a role in governance with two representatives on 51job's Board. As the penetration level and price of online recruitment services increases in China, so does the company's opportunity for growth. Management is focused on expanding its service offering and improving its client mix. It is offering new services such as providing background checks and training for prospective employees, which is expected to improve the retention rate of its clients. It has also cut unprofitable customers. These initiatives are likely to increase its average revenue per user and its profitability.

 

ASM Pacific Technology (Hong Kong) is the world's largest manufacturer of back-end semiconductor and surface mount technology equipment, used in manufacturing electronic chips. It was founded in 1975 by its parent, ASM International, which continues to own a 25 per cent stake in the company. It is the only company which provides equipment for all major parts of the electronics manufacturing process. Higher penetration of electronics across automotive, industrial and consumer applications should drive consistent growth in the sales of its equipment over the long term. Management also has a strong track record of capital allocation. In 2011, it acquired the surface mount technology equipment business from Siemens for one euro. This now contributes half of ASM Pacific's business. The company is focused on building other such large businesses, such as advanced chip packaging.

 

Colgate-Palmolive India is the listed subsidiary of Colgate Palmolive Company. It has operated in India since 1937, and its parent owns a 51 per cent stake in the company. Colgate has been the dominant market leader in the Indian oral care industry for decades. Its market share of toothpaste has increased from 49 per cent to 52 per cent over ten years. Per capita consumption of toothpaste in India is less than half of the average of other developing countries. Colgate will benefit from higher per capita consumption and the shift towards premium oral care products. In recent years, the company has focused on gaining share in the fast growing "natural" segment of the industry. Its parent also has a large portfolio of personal care, home care and pet care products, which the company is likely to introduce in India as per capita incomes grow.

 

JNBY Design is the largest designer apparel retailer in China. It owns six brands and operates over 2,000 stores. It was founded 25 years ago by a husband and wife team, who still lead the company. Management's focus is on building a strong design capability by attracting high quality designers. It is also a leader in creating customer engagement across online and offline platforms. A majority of its sales are to customers who are part of its membership programme. Its focus on design and customer engagement has led to consistent growth in same store sales over the last 20 years. The company still has a long runway for growth, as it aims to replicate the success of its core "JNBY" brand across its five other brands which still have a small revenue base.   

 

Great Eastern Shipping (India) is an operator of offshore vessels, tankers and bulk carriers. It is managed by the Sheth family. They founded the business over 70 years ago, and own a 30 per cent stake. Management has a strong track record of acting counter-cyclically. Despite several cycles, Great Eastern Shipping has generated healthy returns, on average, over the last 15 years. The business cycle has been unfavourable recently. In 2018, the company suffered its first net loss in over 30 years. The management has been using this cyclical downturn to add capacity at attractive prices. As environmental regulations related to the shipping industry become increasingly stringent, higher operating costs are leading to higher rates of ship scrapping. This is expected to improve the industry's demand-supply balance, and lead to higher charter rates.

 

Nexteer Automotive (Hong Kong) is a leading global automotive steering system manufacturer. The Aviation Industry Corporation of China acquired a majority stake in the company in 2011 from General Motors, which had previously been its parent for over 100 years. The global automotive steering industry is consolidated among five large companies. Nexteer has consistently gained global market share since the change in its ownership, from 5 per cent in 2012 to 12 per cent currently. This trend should continue, as it builds a stronger position in the Chinese market by setting up new joint-ventures with its automotive customers. The introduction of new technologies such as electric vehicles and Advanced Driver Assistance Systems will create opportunities for the company to introduce new products. Management is also focused on continuing to improve the company's profitability by increasing the operating efficiency of poor performing plants in developed markets.

 

Nissin Foods is the leading noodle brand in Hong Kong. It was founded in 1984 by its Japanese parent, Nissin Foods Holdings. It is led by its Chairman Kiyotoka Ando, from the third generation of the group's founding family. The company has a dominant franchise in Hong Kong, with over 60 per cent market share in noodles. Its operations in Hong Kong are growing, as the company launches new products and increases its control over its distribution channels. However, it has a much larger growth opportunity in China, where it has 20 per cent market share in the premium noodle segment. Nissin has built a strong brand in China, based on its portfolio of healthier and higher quality products compared to its peers. Customer preferences are steadily shifting in favour of premium noodles and Nissin Foods is likely to be among the beneficiaries of this trend.

 

Oberoi Realty is the largest developer of premium residential property in India. It is led by Vikas Oberoi, who owns a 68 per cent stake in the company. The real estate sector in India is highly fragmented, with several local developers who have a reputation for poor business practices. Oberoi has built a reputation of delivering projects on time and of a high quality. After tough regulations were introduced in 2016, Oberoi has been gaining market share from the weaker local developers who are finding it difficult to comply with these stringent rules. Management has also adopted a counter-cyclical approach towards building its land-bank. It has a strong balance sheet which is allowing the company to buy land at attractive prices. This should help it to continue gaining market share and maintain its profitability.                                                           

 

Philippine Seven is the dominant convenience store operator in the Philippines, with the exclusive right to use the 7-Eleven brand. President Chain Store of Taiwan owns a majority stake of 52 per cent. Management is led by its CEO, Victor Paterno, who owns a 7 per cent stake and is from the second generation of the company's founding family. The company is the undisputed market leader in convenience stores due to its first mover advantage. It has over 2,500 stores which is a multiple of its next largest competitor. As the company has gained scale, its bargaining power with its suppliers has increased. This has led to an improvement in its profitability and level of free cash flow generation. Increased cash generation is being used to fund an acceleration in its store network rollout, which should strengthen its market position further.                                                            

 

Sarimelati Kencana is the exclusive franchise operator of Pizza Hut in Indonesia. It is majority owned by the Arifin family but is professionally managed. The company operates the leading pizza chain in Indonesia with over 450 stores, compared to 130 stores for its next largest competitor. Management is focused on accelerating the expansion of smaller "Pizza Hut Delivery" stores.  As the food delivery segment is growing rapidly in highly congested cities such as Jakarta, the company's investments in building its delivery network should help it strengthen its market position further. It has also received incentives such as lower royalty and store opening fees from its principal, Yum! Brands, for its store expansion. These incentives should help Sarimelati improve its profitability.

 

Tata Global Beverages has built leading tea and coffee brands in India and certain international markets such as the United Kingdom. The company's market leading positions in India's tea and coffee segments has led to a steadily growing and cash generative domestic franchise. However, sub-optimal capital allocation decisions in the past led to poor performing international operations, which depressed its overall returns on capital employed. There have been several encouraging changes to the company's culture and capital allocation under its new chairman, Mr. Natarajan Chandrasekaran. In recent years, the company has hired high quality professionals from multinationals including Glaxosmithkline, Diageo and Coca-Cola. Well regarded independent directors from larger consumer companies have also joined its board. Management has shut down or sold its loss making international operations in regions such as Russia and Eastern Europe, to increase focus on the profitable tea and coffee brands in India. Recently, the Tata Group decided to merge all its food businesses into Tata Global Beverages, including brands in pulses, spices and salt. As the products share a common distribution network, this should provide increased scale and bargaining power with distributors. Tata Global Beverages also operates a joint-venture with Starbucks in India, currently with 150 stores. Given strong consumer demand and improving profitability, its store expansion is expected to accelerate. This could emerge as a large and profitable business for the company over the long term. The company's net cash balance sheet positions it well to fund its growth.

                       

Zensar Technologies (India) is an information technology services provider. It was founded by the Goenka family in the 1960s. While the family still owns a majority stake, its management has been led by professionals from an early stage. Sandeep Kishore was appointed CEO in 2016. He has led significant changes to the management and operations of the company. Leaders of underperforming teams were replaced by external hires from large companies such as Infosys and HCL Technologies. Unprofitable clients and businesses were cut. Management invested in scaling up the fast growing digital services business, which now contributes almost half of sales. These initiatives are now driving faster revenue growth and higher profitability. The company should continue to grow steadily as it also adds new capabilities through bolt-on acquisitions. Operating leverage from the investments made over the past few years is expected to lead to further improvement in profitability.                                                                   

Significant additions to existing positions

We added to Scottish Oriental's holdings in a number of companies as share price weakness resulted in more attractive valuations. These companies included Philippine air conditioning and refrigeration manufacturer Concepcion Industrial; Pakistani auto manufacturer Indus Motor Company; and South Korean advanced image solutions provider Vieworks. We continued to build up positions for the Company in Sri Lanka's Hatton National Bank and Philippine casual dining restaurant operator Max's Group. We added to Scottish Oriental's investments in several companies on our increased conviction in the investment case. These companies included Indian conglomerate Godrej Industries; Indonesia's Mitra Adiperkasa, an operator of franchises in food and beverage, department stores, sportswear and fashion apparel; Indian information technology outsourcer Mphasis; Indonesian auto components manufacturer Selamat Sempurna; and Chinese traditional medicine producer Tong Ren Tang.

 

Sales

During the year we disposed of 13 holdings for the Company.

 

Three companies were sold following strong share price performance which resulted in expensive valuations. These were diagnostic and testing service provider Dr Lal Pathlabs, industrial gas company Linde India; and Federal Bank - all three companies being based in India.

 

Ten companies were sold following a reappraisal of the strength of their respective businesses. We sold South Korean cosmetics company Amorepacific Group, as Chinese consumers appear to be increasingly less loyal to its brands. Courier company Blue Dart Express had suffered from increasing competition but the decision to sell the holding was triggered by the company entering into a partnership with a group we are uncomfortable with. Philippine cement producer Cemex Holdings has plans for significant new capacity which will increase leverage; Thai electronics manufacturer Delta Electronics was sold on concerns of decreasing alignment with the controlling shareholder; Sri Lankan conglomerate Hemas Holdings was sold on disappointment at management's perseverance with poorly performing businesses, such as hotels; Sri Lankan conglomerate John Keells was sold as the difficult operating environment had  hampered the company's efforts to improve returns; cement producer Lafarge Malaysia was sold on a deteriorating competitive and economic outlook; Philippine utility Manila Water has been expanding outside Manila which we believe will lead to lower returns and higher leverage; Chinese automobile body part manufacturer Minth has had several departures from its management team which could see the company struggle to manage the current downturn in the global automotive cycle; and Indian department store group Shoppers Stop was sold because of concerns about the new management's aggressive expansion strategy.

 

 

Significant reductions from existing positions

We reduced Scottish Oriental's holdings in several companies following strong share price appreciation which saw their valuations rise. These companies included Taiwanese analogue integrated circuit designer Silergy; Taiwanese cable and connector manufacturer Sinbon Electronics; convenience store operator Taiwan Familymart; Hong Kong-based non-alcoholic beverage producer Vitasoy; and Taiwanese uninterruptible power supply maker Voltronic Power.

 

We reduced the Company's positions in Philippine bank China Banking; Sri Lankan telecom operator Dialog Axiata; noodle and beverage manufacturer Uni-President China; and Taiwanese networking equipment manufacturer Wistron NeWeb, following a reappraisal of the strength of their respective businesses.

 

Purchased and subsequently sold

Three companies were purchased during the year and subsequently sold. Two - Chinese sportswear brand Li Ning; and Indian cinema operator PVR - after their share prices rose sharply following the initial purchase. A small position in diversified financial firm Edelweiss Financial Services was initially purchased on the expectation it would navigate the fallout from India's non-banking financial corporation crisis well. This should still be the case but the crisis appears worse than we first feared so we sold our investment to await a better opportunity to buy the company.

 

Ten Largest Equity Holdings at 31 August 2019

 

Company

Market

Sector

% of Shareholders' Funds

SKF India

India

Industrials

3.5%

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.





Colgate-Palmolive India

India

Consumer Staples

3.4%

Colgate-Palmolive India is the listed subsidiary of Colgate Palmolive Company. It has operated in India since 1937, and its parent owns a 51 per cent stake in the company. Colgate has been the dominant market leader in the Indian oral care industry for decades. Its market share of toothpaste has increased from 49 per cent to 52 per cent over 10 years. Per capita consumption of toothpaste in India is less than half of the average of other developing countries. Colgate should benefit from higher per capita consumption and the shift towards premium oral care products. In recent years, the company has focused on gaining share in the fast growing "natural" segment of the industry. Its parent also has a large portfolio of personal care, home care and pet care products, which the company is likely to introduce in India as per capita incomes grow.





Haw Par

Singapore

Consumer Staples

3.2%

Haw Par is the holding company of the Wee family of Singapore. The bulk of its net asset value comes from its stake in United Overseas Bank, one of the top three banks in Singapore. The company also has a significant stake in property company United Overseas Land. In addition, Haw Par operates a large healthcare business which generates exceptional returns on capital as a result of its high margins, testament to the strength of its core Tiger Balm brand.

 

 




Blue Star

India

Industrials

3.0%

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.





Concepcion Industrial

Philippines

Industrials

3.0%

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 enables the company both to retain existing and win new customers and acts as a significant barrier to entry for the competition.





Selamat Sempurna

Indonesia

Consumer Staples

2.8%

Selamat Sempurna grew from a small family run producer of automotive radiators to become a leading manufacturer of filter and radiator products based in Indonesia. It has an extensive product range, mainly under the flagship brands Sakura (filters) and ADR (radiators), and a majority of sales is derived from exports. As a testimony to its quality and expertise, the company has formed several joint ventures with well-known names such as Donaldson in the USA and POSCO in Korea.  Growth will come from achieving further economies of scale and penetration into new export markets.    

 





Towngas China

China

Utilities

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. It 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.

 

Mphasis

India

Technology

2.8%

Mphasis was formed in June 2000 by the merger of the US-based information technology consulting company Mphasis Corporation and the Indian information technology services company BFL Software Limited. Its former controlling shareholder, Hewlett-Packard, sold its stake to private equity firm Blackstone in 2016. Its new owner installed a new management team and since then growth has been strong and the company no longer relies on Hewlett-Packard for the bulk of its work.

 





Gujarat Gas

India

Utilities

2.7%

Gujarat Gas is India's largest city gas distributor with approximately 70 per cent of its sales coming from industrial customers. Historically the industrial segment has been more volatile than retail-sold compressed natural gas as pricing is market driven and customers are quick to switch to fuel oil when it is cheaper. However Gujarat Gas has managed this volatility well and should be able to achieve double digit volume growth as it targets higher utilisation of its young network and increases sales to the "stickier" retail segment.





Mitra Adiperkasa

Indonesia

Consumer Discretionary

2.6%

Mitra Adiperkasa is the Indonesian operator of various international franchises in food and beverage, department stores, sportswear and fashion apparel. Run by the Nursalim family who are keen to repair their reputation following the Asian Financial Crisis, the company has top tier partners such as Starbucks, Converse and Zara. Following poor performance caused by over-expansion, inventory build-up, a weak rupiah and poor consumer sentiment, Mitra Adiperkasa has resumed growth and is improving its margins.

 

 

Sector Allocation at 31 August 2019

 

Sector

2019

%

2018

%

Consumer Discretionary

22.2

22.0

Consumer Staples

15.9

14.6

Industrials

14.5

18.3

Technology

10.3

9.1

Healthcare

6.0

7.6

Financials

5.9

7.7

Utilities

5.5

5.2

Materials

4.3

6.5

Real Estate

3.3

1.9

Communication Services

2.5

1.4


90.4

94.3

Net current assets

9.6

5.7

Net assets

100.0

100.0

 

 

 

Investment Process

We are conviction-based, bottom-up stock selectors with a strong emphasis on high quality proprietary research. 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 Scottish Oriental's portfolio. Country weightings bear no relationship to regional stock market indices and we do not consider ourselves obliged to hold investments in any individual market, sector or company. As a result, the Company's asset allocation on a country and industry level is a residual of our stock selection process. 

 

The number of holdings in the portfolio has now stabilised, falling by one from last year to 56. Nonetheless, portfolio turnover has been higher than we would have expected. Market volatility afforded some opportunities to buy companies at attractive prices although such opportunities were short-lived with us becoming sellers, on occasion, mere months after initiating a position. A larger number of companies than usual were sold because of a change in our assessment of management. Assessment of management is the most important part of our investment process so it is chastening when we get this wrong. The most common issue we had was how companies chose to go about expanding, either through choice of partner or attitude to risk. Given high levels of uncertainty in the world, now is not the time to have doubts about the companies in Scottish Oriental's portfolio so we felt it was prudent to sell rather than wait and worry.

 

We were also able to buy some companies that now fall within Scottish Oriental's recently enlarged market capitalisation constraints. There is no set definition of what makes a small company but we have found that with the rise of China and India, domestic companies operating in these countries can be quite large indeed despite showing the smaller company characteristics that we have looked for over the years. One such company is Colgate-Palmolive India. Whilst the company dominates oral care in India, it is still a relatively small company with revenues of several hundred million US dollars. Its parent generates more than half of its revenues from products other than those in the oral care segment, areas that are still nascent for Colgate-Palmolive India. However its distribution advantages resulting from the Colgate brand's dominance should allow it to fast track growth in the Palmolive brand, which the company's management believes India is now ready for. In addition, the company is further investing in distribution, seeking to enlarge its reach by 20% and is also increasing spend on advertising and promotion to the highest level as a percentage of sales in several years. This should result in improved market share and will serve to both create demand for its new products and reinforce the strength of its existing brands. We believe the company has taken the longer term decisions necessary to ensure it will have a much bigger business in the decades to come.

 

Another company with a larger market capitalisation is 51job. Despite being barely 20 years old the company has a 15 year track record as a listed company which allows us to see how it has handled past cycles. We believe that a company's history is highly instructive and we have witnessed how 51job successfully transitioned from being predominantly a print-advertising business to an online recruitment platform, showing innovation where others failed. Having grown rapidly over the past two decades to become China's leading recruitment platform, the company is now targeting a similar position in human resource services which is a less cyclical business, as revenues are more recurring in nature. Management is investing in automating as much as possible for this new area to allow it to benefit from the economies of scale that a successful platform business can achieve. Comparable companies in other countries are much larger and 51job has a good chance of matching this success. The company is highly cash generative leading to a large net cash surplus on its balance sheet. This is a concern for us as it is unlikely that this cash will be needed to fund growth and we have shared our concern with the company's founder. Commencement of dividends or stock buybacks might encourage us to increase our position.

 

Meeting with management teams remains a key part of our investment process. We do not focus on the short term in these meetings, instead seeking to understand the sustainable competitive advantages that will ensure growing profits for many years to come. For example, we added significantly to the Company's existing position in Mphasis following meetings with management which increased our conviction in the company's ability to adapt to changes within the global information technology industry. As the industry shifts towards digital and cloud based applications, Mphasis is evolving its processes faster than larger companies. This is expected to lead to faster growth and better profitability in the future.

 

Our meeting with Selamat Sempurna in Indonesia also increased our conviction in the long term prospects of the business, which saw us add to the Company's position. The company has moved its product mix towards more complex, high technology air filters, which is leading to higher levels of profitability, with the share of low margin car filters falling from 50 per cent to 30 per cent of sales over the last five years. The recent trade tariffs imposed on Chinese products should also help the company as its partner, Donaldson US, shifts its purchases to Selamat Sempurna to diversify from its Chinese suppliers. In its regional operations, the company is focused on acquiring its distributors. This allows the company to manage its channel inventory more efficiently. These initiatives should allow the company to grow sustainably over the long term.

 

Outlook

We have become used to picking up the newspaper and alternately reading that Presidents Trump and Xi are increasing tariffs on billions of dollars of each other's goods, or that there are hopes for a rapprochement at the next global summit. This has served well to distract from what else has been going on in the world. Growth continues to slow and attempts in the West to commence "normalising" interest rates appear to have failed. The US yield curve is now inverted which is an indicator of pending recession. Exports from Asia are at best stalling, and at worst falling, which is unsurprising given weakening US and European economies. We do not know whether central banks will again resort to money printing in the face of this new slowdown or hold back and take the medicine that should have been administered a decade back, but indications are in favour of more money printing. In Asia, interest rate cuts have started with the most aggressive central bank being that of India. The Indian economy is suffering a hangover from its non-banking financial corporation crisis. Too much wholesale-funded money was lent too cheaply to too many people and the default by a major player spelled the end to this largesse, which acted as a sharp brake on the economy with both liquidity and confidence badly dented. We have heard numerous times from friends and contacts in India that they do not remember the economy being so weak. We have not heard such reports from China but both countries have seen a marked slowdown in GDP growth. This has flowed through to more modest growth expectations for companies. South Korea has suffered from its own trade spat with Japan which has further hurt its export-dependent economy. Prospects for South East Asia's economies appear better. Domestic economies, in the main, are in decent shape and we are increasingly hearing of Chinese companies moving manufacturing to South East Asia to circumvent trade tariffs.

 

Despite the difficulties facing India, its companies continue to represent by far Scottish Oriental's largest source of investment ideas. The economy and its companies have managed to grow through thick and thin in the past and the long term outlook for the country remains unchanged, driven by attractive demographics, a vibrant democracy and an increasing middle class. Share price weakness amongst smaller companies has allowed us to initiate a number of new positions where we believe the future is bright and also to add to existing holdings with a similarly strong outlook. India is relatively uncorrelated with the rest of Asia given its large domestic economy. The recent slowdown the country has experienced was of its own making but the typical Indian consumer still carries relatively low levels of debt. As has happened in the past, India will recover and its best companies will prosper whilst its weaker ones will fade. One company which we expect to prosper is Oberoi Realty. It has experienced limited impact from the liquidity crisis as the customers for its homes are typically owner-occupiers rather than speculators and are not highly leveraged. The company is also investing in its annuity business - offices, malls and hotels that will generate recurrent income and steady cash flows. Property development is a long term industry. Companies need to plan today for what they will be doing in five years' time and that is exactly what the management of Oberoi Realty are doing. A solid balance sheet is allowing the company to take advantage of opportunities which should enable it to become a larger business in the future.

 

Scottish Oriental also has a large weighting in companies in Indonesia and the Philippines. Like India, both countries have sizeable domestic economies, attractive demographics and an underleveraged consumer. Stock market weakness gave us an opportunity to buy Philippine Seven, a company we have been watching for some time but which has limited shares trading. We have seen how successful the convenience store format is elsewhere in Asia, such as Taiwan and Thailand. As the undisputed leader, Philippine Seven is intent on strengthening its dominance through continued store expansion as well as initiatives such as selling coffee, hot food and services such as bill payments. A change in accounting standards will see the company's earnings fall in the current financial year but cash flows are unchanged and the business continues to go from strength to strength. We expect Philippine Seven to grow for the foreseeable future as it benefits from changing consumption patterns in the Philippines.

 

Another company benefiting from changing consumption patterns in Mitra Adiperkasa. It operates more than 100 consumer brands in Indonesia and has been successful in introducing these brands to Indonesia's under-penetrated retail market. The retail sector has modernised rapidly in Indonesia and Mitra Adiperkasa has been at the vanguard of this. The company has grown Starbucks to become a large business in its own right in Indonesia, with well over 400 stores, and is targeting 60 new stores per annum. Mitra Adiperkasa has a large presence in fashion which is a notoriously difficult area. However, given the wide range of brands it represents, there is not an over-reliance on any one brand which reduces risk. Having over expanded in the mid-2000s, the company is now much more focused on margins than scale without profitability. We believe it has successfully evolved and now has the systems and team in place to support the long term sustainable growth that Indonesia offers. Given our increased conviction, we were pleased that temporary market weakness allowed us to increase Scottish Oriental's stake in the company.

 

Despite the above examples, we have struggled to fully invest Scottish Oriental's funds over the past year and the cash position has risen. Every holding in the portfolio is weighted based upon our conviction in a company's prospects, as well as its valuation. The cash position is a residual. As investors, we like companies which have net cash balance sheets. It could be argued that this is an inefficient use of capital from time to time, but we back management teams who will use this strength in periods of crisis - when the most attractive opportunities arise - and create long-term value for shareholders. We would like Scottish Oriental's shareholders to think in a similar way. Our aim is to preserve capital and grow it sensibly. Cash gives us the tremendous option to do this.

 

The Company's portfolio trades on a historic price earnings ratio of 16 times, with expected earnings growth of nine per cent in the current year. This offers better value but slower growth than at the same point last year. While we are cautiously optimistic about the prospects for Scottish Oriental's companies in the coming years, uncertainty abounds and there are many risks in the short term. Should this uncertainty result in significant market weakness we would embrace the opportunity to add to the Company's holdings at cheaper valuations, but we believe keeping some powder dry is prudent in the current environment.

 

 

Vinay Agarwal

Scott McNab

First State Investment Management (UK) Limited, Investment Manager

 

14 October 2019



Ten Year Record

 

Capital

 

Year ended 31 August

Market Capitalisation

£m

Shareholders'

Funds

£m

 

NAV

p

 

Share Price

p

Discount

to NAV

%







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

2018

304.71

345.40

1,156.20

1,020.00

11.8

2019

301.73

346.06

1,158.42

1,010.00

12.8

 

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










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

2018

7,004

2,825

9.19

11.50

1.01

1.01

94

100

2019

7,648

3,734

12.50

11.50

1.01

1.01

88

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 2009 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








2009

100

100

100

100

100

100

2010

147

148

121

107

139

142

2011

164

183

123

111

149

150

2012

177

184

119

118

189

183

2013

213

224

128

135

191

192

2014

238

259

141

144

126

192

2015

217

220

125

136

204

192

2016

278

276

161

147

125

192

2017

316

326

200

162

89

192

2018

307

311

199

163

120

192

2019

307

308

194

157

164

192

 

 

 

 

 

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. It should be read in conjunction with the Chairman's Statement and the Portfolio Managers' Report which provide a review of the Company's investment activity and a look to the future.

 

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 20 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 Company's portfolio of investments is contained in the country allocation and sector allocation analysis within the Portfolio Managers' Report.

 

·       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 are not determined by reference 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 Investment Region and on meeting the management of those companies in which the Company is invested, or might invest.

 

Investment Objective

 

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

 

 

 

 

 

Investment Policy

 

·       The Company invests mainly in the shares of smaller Asian quoted companies, that is, companies with market capitalisations of below US$3,000m, or the equivalent thereof, at the time of first investment.

·       The Company may also invest in companies with market capitalisations of between US$3,000m and US$5,000m at the time of first investment, although not more than 20 per cent of the Company's net assets at the time of investment will be invested in such companies.

 

·       To enable the Company 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 Company will consider the use of long-term borrowings up to a limit of 50 per cent of the net assets of the Company at the time of borrowing.

 

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

 

·       The Company 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 Company 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 Company may invest in debt instruments in any country or currency.

 

·       The majority of the Company's assets are denominated in Asian currencies or US dollars. The Company 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 listed on pages 17 and 18 of the 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 53 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.

 

 

Responsible Investing

The Investment Manager takes a strategic approach to responsible investing and stewardship, focused on quality investment processes, a culture of stewardship across the organisation and engaging all employees in responsible investing. The team believe that environmental, social and governance ("ESG") issues comprise sources of long-term risk and return and can therefore impact long-term investment value. The team also believe that, as stewards of shareholders' funds, they can achieve better long-term investment outcomes through active company engagement and by exercising the equity ownership rights they hold on behalf of shareholders.

 

The Investment Manager is a signatory to the UK Stewardship Code and has maintained the highest tiering - Tier 1 - awarded by the Financial Reporting Council for the quality of stewardship related activities and disclosures. The Investment Manager is also a signatory to the Principles for Responsible Investment, achieving in its most recent assessment 7 A+ ratings and 1 A rating for the 8 areas of assessment, and it is fully compliant with the CFA Institute's Code of Ethics and Standards of Professional Conduct for asset managers.

 

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 58 to 61 of the Annual Report.

 

Other risks faced by the Company include breach of regulatory rules which could lead to suspension of the Company's London 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, "Guidance on Risk Management, Internal Controls and Related Financial and Business Reporting". 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 30 of the Annual Report.

 

Social, Community and Human Rights Issues

The Board undertakes an annual review of environmental, social and governance factors in the context of the investment portfolio, considering the Investment Manager's approach to the responsible investment of shareholders' funds.

 

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 five Directors. Two are women and three are men. The Company has no employees.

 

The Chairman provides an outlook for the Company in his statement above.

 

On behalf of the Board

PATAC Limited

Company Secretary

14 October 2019



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 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

14 October 2019



 

Income Statement for the year ended 31 August 2019 (audited)

                                                                       

                                                                        2019                                                       2018

 

 

Revenue

£'000

Capital

£'000

Total*

£'000

Revenue

£'000

Capital

£'000

Total*

£'000








Losses on investments [Note 7]

-

(649)

(649)

-

(10,181)

(10,181)

Income from investments [Note 1]

7,544

-

7,544

6,983

-

6,983

Other income [Note 1]

104

-

104

21

-

21

Investment management fee [Note 2]

(2,544)

-

(2,544)

(2,680)

-

(2,680)

Currency gains/(losses)

-

1,252

1,252

-

(1,228)

(1,228)

Other administrative expenses [Note 3]

(824)

-

(824)

(928)

-

(928)








Net return on ordinary activities before taxation

 

4,280

 

603

 

  4,883

 

3,396

 

(11,409)

 

  (8,013)

Tax on ordinary activities [Note 4]

(546)

(238)

(784)

(571)

(767)

(1,338)








Net return attributable to equity

shareholders

 

3,734

 

365

 

4,099

 

2,825

 

(12,176)

 

(9,351)








Net return per ordinary share [Note 6]

12.50p

1.22p

13.72p

9.19p

(39.60)p

(30.41)p








 

* 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 2019 (2018: 11.50p per share) which, if approved, will be payable on 17 January 2020 to shareholders recorded on the Company's shareholder register on 6 December 2019.

 

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 2019 (audited)

 


2019

2018


£'000

£'000

£'000

£'000






FIXED ASSETS - EQUITY INVESTMENTS [Note 7]


312,736


325,728






CURRENT ASSETS





    Debtors [Note 8]

8,483


1,496


    Cash and deposits

40,949


19,046



49,432


20,542


CURRENT LIABILITIES

(due within one year)





    Creditors [Note 9]

(16,104)


(870)



(16,104)


(870)


Net Current Assets


33,328


19,672

Total Assets less Current Liabilities


346,064


345,400






CAPITAL AND RESERVES





Ordinary share capital [Note 10]


7,853


7,853

Share premium account


34,259


34,259

Capital redemption reserve


58


58

Capital reserve


295,754


295,389

Revenue reserve


8,140


7,841

Total Equity Shareholders' Funds


346,064


345,400






Net asset value per share [Note 11]


1,158.42p


1,156.20p

 

 The accounting policies and the notes to the Accounts can be found below.



 

Summary Cash Flow Statement for the year ended 31 August 2019 (audited)

 


 

2019

2018


 

£'000

£'000

 

Net cash outflow from operations before dividends, interest, purchases and sales [Note 12]

(3,418)

(3,535)

Dividends received from investments

7,720

7,117

Interest received from deposits

104

21

Purchases of investments

(92,436)

(119,010)

Sales of investments

112,925

118,698

Cash from operations

24,895

3,291

Taxation


(808)

(1,329)

Net cash inflow from operating activities

24,087

1,962

 

Financing activities

Equity dividend paid

 

(3,435)

 

(3,559)

Buyback of ordinary shares

(1)

(10,945)

Net cash outflow from financing activities

(3,436)

(14,504)


 

 

 

Increase/(decrease) in cash and cash equivalents

20,651

(12,542)

Cash and cash equivalents at the start of the period

19,046

32,816

Effect of currency gains/(losses)

1,252

(1,228)

Cash and cash equivalents at the end of the period*

40,949

19,046


 

 

 

*Cash and cash equivalents represents cash at bank


 



 

 



 


Statement of Changes in Equity (audited)


For the year ended 31 August 2019









Ordinary

Share capital

Share premium account

Capital

redemption

reserve

 

Capital reserve

 

Revenue

reserve

 

 

Total


£'000

£'000

£'000

£'000

£'000

£'000

Balance at 31 August 2018

 

7,853

 

34,259

 

58

 

295,389

 

7,841

 

345,400

Total comprehensive income:

 

 

 






Return for the year

 

-

 

-

 

-

 

365

 

3,734

 

4,099

Transactions with owners recognised directly in equity:







Dividend paid in the year††

 

-

 

-

 

-

 

-

 

(3,435)

 

(3,435)

Balance at 31 August 2019

 

7,853

 

34,259

 

58

 

295,759

 

8,140

 

346,064

 †† See note 5


 

 


Statement of Changes in Equity (audited)


For the year ended 31 August 2018









Ordinary

Share capital

Share premium account

Capital

redemption

reserve

 

Capital reserve

 

Revenue

reserve

 

 

Total


£'000

£'000

£'000

£'000

£'000

£'000

Balance at 31 August 2017

 

7,853

 

34,259

 

58

 

318,511

 

8,575

 

369,256

Total comprehensive income:

 

 

 






Return for the year

 

-

 

-

 

-

 

(12,176)

 

2,825

 

(9,351)

Transactions with owners recognised directly in equity:







Buyback of ordinary shares

 

-

 

-

 

-

 

(10,946)

 

-

 

(10,946)

Dividend paid in the year††

 

-

 

-

 

-

 

-

 

(3,559)

 

(3,559)

Balance at 31 August 2018

 

7,853

 

34,259

 

58

 

295,389

 

7,841

 

345,400

See note 10  †† See note 5


 

 

 

 

 

 

 

 

 

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 on the inside back cover of the Annual Report.

 

These Accounts have been prepared under the historical cost convention (modified to include the revaluation of fixed asset investments which are recorded at fair value) and in accordance with 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") and the 2017 amendments. 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 this is the currency of the Company's share capital and the currency in which most of its shareholders operate.

 

Income

(b)  Dividends on securities are recognised 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. Special dividends are credited to revenue or capital based on the nature of the dividend.

 

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

 

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

 

Expenses

(e)  Expenses are accounted for 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 classified 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. 

 

Foreign currency

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

 

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

 

Dividends

(o)  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

(p)  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

(q)  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

(r)   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

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

 

Capital reserve

(t)   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. Any performance fee due is deducted from the Capital reserve. The cost of shares bought back to be held in Treasury is also deducted from 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

(u)  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

 


2019

£'000

 

2018

£'000

 

Investment management fee

2,544

2,680

 

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 (2018: £nil) is due to be paid for the year ended 31 August 2019.

 

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

 


2019

£'000

2018

£'000

Auditors' remuneration for audit services

23

22

Directors' fees

117

123

Company secretarial fees

119

115

Bank, custodial and other expenses

565

668


824

928

 

Company Secretary

PATAC Limited provides company secretarial, accounting and administrative services. The fee for the year ended 31 August 2019, which is payable quarterly in advance and linked to the movement in the Retail Price Index annually, was £119,000 (2018: £115,000). Following discussions between the Board and PATAC a revised fee has been agreed effective from 1 September 2019. The fee will be £155,000 for the year to 31 August 2020, £195,000 for the year to 31 August 2021 and £195,000 per annum plus an annual adjustment to reflect the increase in the Consumer Price Index thereafter. The appointment is terminable on three months' notice.

 

 

(4) Taxation

 

(a)  Analysis of charge in the year

Overseas tax:


2019

2018


Revenue

£'000

Capital

£'000

Total

£'000

Revenue

£'000

Capital

£'000

Total

£'000

Tax on overseas dividends

546

-

546

571

-

571

Indian capital gains tax

-

238

238

-

767

767


546

238

784

571

767

1,338

 

 

(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:

 


2019

2018


Revenue

£'000

Capital

£'000

Total

£'000

Revenue

£'000

Capital

£'000

Total

£'000

Return for the year before taxation

4,280

603

4,883

3,396

(11,409)

(8,013)








Total return for the period before taxation multiplied by the standard rate of corporation tax of 19.00% (2018: 19.00%)

 

 

 

 

813

 

 

 

 

115

 

 

 

 

928

 

 

 

 

645

 

 

 

 

(2,168)

 

 

 

 

(1,523)

Effect of:







Non-taxable losses on investments

 

-

 

123

 

123

 

-

 

1,935

 

1,935

Non-taxable losses/(gains) on foreign currency

 

-

 

(238)

 

(238)

 

-

 

233

 

233

Non-taxable income

(1,433)

-

(1,433)

(1,327)

-

(1,327)

Overseas tax

546

238

784

571

767

1,338

Unutilised management expenses

620

-

620

682

-

682

Total tax charge for the year

546

238

784

571

767

1,338

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 £6,421,000 (2018: £5,867,000) at 31 August 2019 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.

 

 

 

 

 

 

5) Dividends

 


2019

2018


£'000

£'000

Dividends paid in the period:



Dividend of 11.50p per share (2018 - 11.50p)



paid 18 January 2019

3,435

3,559

 

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.

 


2019

2018


£'000

£'000

 

Income available for distribution

3,734

2,825

Proposed dividend for the year ended 31 August 2019 - 11.50p



(2018 - 11.50p) payable 17 January 2020

(3,435)

(3,435)

 

Amount transferred to/(from) retained income

 

299

 

(610)

 

 

 

 

(6) Return per Ordinary Share

 



2019



2018



Revenue

p

Capital

p

Total

p

Revenue

p

Capital

p

Total

p








Net return per ordinary share

12.50

1.22

13.72

9.19

(39.60)

(30.41)













2019

2018








Revenue return





£3,734,000

£2,825,000

Capital return





£365,000

(£12,176,000)

Weighted average ordinary shares

in issue





 

29,873,784

 

30,750,547

There are no dilutive or potentially dilutive instruments in issue.

 

(7) Equity Investments

£'000



Cost at 31 August 2018

292,617

Unrealised appreciation

33,111

Valuation at 31 August 2018

325,728

Purchases at cost

107,721

Sales - proceeds

(120,064)

Sales - realised gains on sales

18,195

Unrealised depreciation on investments in the year

(18,844)

Valuation at 31 August 2019

312,736

Cost at 31 August 2019

298,469

Closing unrealised appreciation

14,267



Gains/(losses) on Investments


Realised gains on sales

18,195

Unrealised losses on the fair value of investments during the year

(18,844)


(649)

 

All investments are listed on recognised stock exchanges.

Transaction Costs

During the year the Company incurred transaction costs of £266,000 (2018: £319,000) on the purchase of investments and £376,000 (2018: £366,000) on the sale of investments.


 


2019

2018

(8) Debtors

£'000

£'000




Sales awaiting settlement

8,167

1,027

Accrued income

316

469


8,483

1,496

 

 


2019

2018

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

£'000

£'000




Purchases awaiting settlement

15,283

-

Management fee payable

651

648

Other creditors

170

222


16,104

870

 

(10)       Share Capital

 

The allotted and fully paid capital is £7,853,416 (2018: £7,853,416) represented by 31,413,663 ordinary shares of 25p each (2018: 31,413,663). During the year the Company did not buy back any ordinary shares (2018:1,086,379 ordinary shares bought back for Treasury at a total cost of £10,946,000). The Company held 1,539,879 ordinary shares in Treasury at the year end (2018: 1,539,879), being 4.9 per cent of share capital, with a nominal value of £384,970 (2018: £384,970).  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 and the other reserves. It is managed in accordance with its investment policy in pursuit of its investment objective, which is detailed in the Strategic Report above.

 

(11) Net Asset Value per Ordinary Share

 

Net assets per share are based on total net assets of £346,064,000 (2018: £345,400,000) divided by 29,873,784 (2018: 29,873,784) ordinary shares of 25p each in issue (excludes shares held in Treasury).

 

(12) Cash Flow Statement

 

Reconciliation of net return on ordinary activities before taxation to net cash outflow from operations before dividends, interest, purchases and sales

2019

£'000

2018

£'000

Net return before taxation


4,883

(8,013)

Net losses on investments


 

649

10,181

Currency (gains)/losses


 

(1,252)

1,228

Dividend Income


 

(7,544)

(6,983)

Interest Income


 

(104)

(21)

(Decrease)/increase in creditors


 

(50)

5  

Decrease in debtors


 

-

68

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

(3,418)

(3,535)

 

(13) 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 in the Strategic Report above and in addition the Board conducts quarterly reviews with the Investment Manager. The Investment Manager's Risk and Compliance department monitors the Investment Manager's compliance with 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.

 

To mitigate this risk, the Investment Manager focuses on investing in soundly managed and financially strong companies with good growth prospects and ensures the portfolio is diversified geographically and by sector at all times. Existing holdings are scrutinised to ensure corporate performance expectations are met and valuations are not excessive. The portfolio valuation and transactions undertaken by the Investment Manager are regularly reviewed by the Board.

 

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.

 

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

 


2019

£'000


2018

£'000

 

Cash

40,949


19,046


40,949


19,046

 

 

Interest Rate Sensitivity

Considering effects on cash balances, an increase of 50 basis points in interest rates would have increased net assets and total return for the period by £205,000 (2018: £95,000). A decrease of 50 basis points would have had an equal but opposite effect. The calculations are based on the cash balances at the date of the Statement of Financial Position 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 2019. The Statement of Financial Position 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 2019

31 August 2018


 

 

Overseas investments £000

 

 

Net monetary assets

 £000

 

Total currency exposure £000

 

 

Overseas investments £000

 

 

Net monetary assets

 £000

 

Total currency exposure £000








Indian rupee

100,822

(3,387)

97,435

100,283

-

100,283

Hong Kong dollar

47,877

87

47,964

50,644

78

50,722

Indonesian rupiah

36,558

(188)

36,370

26,268

-

26,268

Philippine peso

34,061

-

34,061

32,032

1,027

33,059

Taiwanese dollar

34,836

(781)

34,055

41,064

162

41,226

US dollar

5,623

27,993

33,616

-

9,054

9,054

Singapore dollar

19,617

121

19,738

19,371

157

19,528

Vietnamese dong

7,934

-

7,934

6,497

57

6,554

Sri Lankan rupee

7,409

-

7,409

14,915

-

14,915

Bangladeshi taka

6,182

-

6,182

6,003

-

6,003

Pakistan rupee

5,082

-

5,082

5,811

72

5,883

Korean won

3,853

-

3,853

6,619

-

6,619

Malaysian ringgit

2,882

-

2,882

7,138

-

7,138

Thai baht

-

-

-

9,083

-

9,083

Total foreign currency

312,736

23,845

336,581

325,728

10,607

336,335

Sterling

-

9,483

9,483

-

9,065

9,065

Total currency

312,736

33,328

346,064

325,728

19,672

345,400

 

 

Currency Risk Sensitivity

At 31 August 2019, 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 2018.


 

2019

£000

 

2018

 £000




Indian rupee

4,872

5,014

Hong Kong dollar

2,398

2,536

Indonesian rupiah

1,818

1,313

Philippine peso

1,703

1,653

Taiwanese dollar

1,703

2,061

US dollar

1,681

453

Singapore dollar

987

976

Vietnamese dong

397

328

Sri Lankan rupee

370

746

Bangladeshi taka

309

300

Pakistan rupee

254

294

Korean won

193

331

Malaysian ringgit

144

357

Thai baht

-

454

Total

16,829

16,816

 

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 date of the Statement of Financial Position had been 10% higher or lower with all other variables remaining constant, the return attributable to ordinary shareholders for the year ending 31 August 2019 would have increased/(decreased) by £31,273,600 (2018: increased/(decreased) by £32,572,800) 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:

 


2019

2018


 

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








Amount due to brokers

Other creditors and accruals

15,283

 

821

-

 

-

-

 

-

-

 

870

-

 

-

-

 

-


 16,104

-

-

870

-

-

 

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 Statement of Financial Position, the maximum exposure to credit risk at 31 August 2019 was as follows:

 


      2019

      2018


Statement of Financial Position

Maximum exposure

Statement of Financial Position

Maximum exposure

Current assets

£'000

£'000

£'000

£'000






Receivables

8,483

8,483

1,496

1,496

Cash at bank

40,949

40,949

19,046

19,046


49,432

49,432

20,542

20,542

 

Fair Value Hierarchy

Investments in securities and financial assets are designated at fair value through profit or loss on initial recognition. In accordance with FRS102, these investments are analysed using the fair value hierarchy below. Short term balances are excluded as their carrying value at the reporting date approximates their fair value.

 

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.

 

All of the Company's investments were categorised as Level 1 for the year to 31 August 2019 (2018: All investments Level 1).

 

14. Related Party Transactions

The Directors' fees for the year are detailed in the Directors' Remuneration Report on pages 31 to 33 of the Annual Report. An amount of £21,000 was outstanding to the Directors at the year end (2018: £19,000). No Director has a contract of service with the Company. During the year no Director had any related party transactions requiring disclosure under section 412 of the Companies Act 2006.

 

The management fees for the year are detailed in Note 2 and amounts payable to the Investment Manager at year end are detailed in Note 9. The Investment Management team's holdings in the Company are set out on page 3 of the Annual Report.

 

Alternative Investment Fund Managers Directive (unaudited)

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 respectively 1.01 and 1.02 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 2019 and 2018 are an abridged version of the statutory accounts for those years. The Auditor has reported on the 2019 and 2018 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 2018 have been filed with the Registrar of Companies and those for 2019 will be delivered in due course.

 

 

The 2019 Annual Report will be posted to shareholders in October 2019 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.

 

Enquiries:

PATAC Limited, Company Secretary


Telephone 0131 538 1400

 

15 October 2019

 


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Annual Financial Report - RNS