Annual Financial Report

RNS Number : 4333U

Scottish Oriental Smlr Co Tst PLC

14 October 2010

 



THE SCOTTISH ORIENTAL SMALLER COMPANIES TRUST PLC

("Scottish Oriental")

Annual Financial Report for the year ended 31^st August 2010

Scottish Oriental is required under the UKLA's Disclosure and Transparency Rule 4.1 to make an announcement of the unedited full text of parts of its Annual Report and Accounts. The published Annual Report and Accounts, Notice of Annual General Meeting and Form of Proxy will be posted to shareholders and be available on the Scottish Oriental website (www.scottishoriental.com) in November 2010.  

Financial Highlights

Performance for the year ended 31st August 2010 (audited)
Net Asset Value	47.3%	MSCI AC Asia ex Japan Index (£) *	24.2%
Share Price	47.6%	MSCI AC Asia ex Japan Small Cap Index (£) *	34.3%
		FTSE All-Share Index (£) *	10.6%
* Total return (capital return with dividends reinvested)

Summary Data at 31st August 2010 (audited)
Shares in issue	30,213,650	Shareholders' Funds	£167.76m
Net Asset Value per Share	555.26p	Market Capitalisation	£146.08m
Share Price	483.50p	Share Price Discount to Net Asset Value	12.9%

Investment Policy and Objective

·   The Scottish Oriental Smaller Companies Trust PLC ("Scottish Oriental", "the Company" or "the Trust") aims to achieve long-term capital growth by investing in mainly smaller Asian quoted companies.

·   The Trust invests mainly in the shares of smaller Asian quoted companies, that is companies with market capitalisations of below US$1,000m, or the equivalent thereof, at the time of first investment.

·   The Trust may also invest in companies with market capitalisations of between US$1,000m and US$2,000m at the time of first investment, although not more than 20 per cent of the Trust's net assets at the time of investment will be invested in such companies.

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

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

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

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

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

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

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

Investment Statement

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

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

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

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

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

Chairman's Statement

Scottish Oriental had a good year. The net asset value increased by 47.3 per cent over the 12 months and the share price by a similar amount. The MSCI AC Asia ex Japan index rose by 24.2 per cent. A performance fee was earned for the first time since it was introduced in September 2005. The details of the fee, which is based on the Company's share price return over a three year period, are set out on page 21 of the Annual Report and Accounts. When this fee was established the rate of the base fee was reduced; at present it is 0.75 per cent per annum of the Company's net assets. The base fee is charged to income whereas the performance fee is charged to capital; it is included in the total expense ratio, which was 1.65 percent for the year.

Earnings per share have increased again, being 10.58p compared to 7.63p last year. This rise was caused partly by strong dividend growth from our investments, but also as a result of the Capital Finance Act 2009, which means that dividends from foreign companies are largely exempt from corporation tax. We are proposing a dividend of 8.5p net, an increase of 41.7 per cent. The undistributed balance of £629,000 will be added to the revenue reserve, as set out on page 20 of the Annual Report and Accounts. It remains our intention at least to maintain this proposed level of dividend, using our reserves if necessary. Although Scottish Oriental does not invest for income, it is interesting to note that over 5 years our dividend has risen by 327 per cent, reflecting a marked change in dividend policy in a number of equity markets.

Our Company Secretary has indicated to us that it does not wish to provide this service in future and consequently our secretarial contract will be transferred to Personal Assets Trust during the course of this financial year. Personal Assets has an experienced investment trust secretarial team that is based in Edinburgh and is well known to our managers. We are grateful for the service that the present secretarial department and their predecessors have provided since the foundation of the Company. There will be no change in the investment management arrangements with First State Investment Management (UK) Limited.

Hamish Macleod will be retiring at the Annual General Meeting in January. He was one of the early Directors of the Company and has served it very well since 1995. We shall miss his wise counsel and great knowledge of Asia. Janet Morgan will succeed him as the Senior Independent Director. During the year Anne West joined the Board and we are already benefiting from her very considerable investment experience.

The strength in many Asian equity markets has continued since Scottish Oriental's year end. It is hard to judge whether this rise in the markets will go further, particularly given the very high level of initial public offerings in some markets, and the short term outlook is uncertain. Our managers have found it increasingly difficult to identify new investments at suitable prices and, as this is written, over 5 per cent of the portfolio is in cash. No new investments have been made for a number of months. However, our longer term faith in the prospects for smaller companies in Asia remains undiminished.

James Ferguson

Chairman

14th October 2010

Portfolio Manager's Report

REVIEW

Asian equity markets achieved significant gains in the year ending 31^st August 2010, with the returns enhanced by the relative weakness of sterling.  These gains were supported by loose fiscal and monetary policy at a time when economic growth and corporate earnings in the Region were above expectations.  The equity market corrections which took place in January and May were caused mainly by external issues such as concerns over Europe's debt crisis or fears that economic growth in the US may be stalling.  Stronger economic growth combined with an increase in the rate of inflation resulted in a moderate rise in interest rates in a number of Asian countries.

Thailand was one of the best performing markets during the period, despite the uncertainty caused by the political demonstrations in Bangkok. The economic impact on the country proved to be temporary with an increase in domestic consumption and demand for residential property taking place once the political environment had stabilised. In contrast, China underperformed owing to concerns about the outlook for banks and property companies following the introduction of specific measures to reduce demand for residential property.

Scottish Oriental's performance over the year was pleasing both in absolute terms and also relative to its benchmark.  This was partly due to the outperformance of smaller companies, as seen by the relative strength of the MSCI Asia ex Japan Small Cap Index over the period under review.  The Trust also benefited from the strong returns from some of its larger holdings, particularly Aboitiz Power (Philippines), Aitken Spence (Sri Lanka) and Home Product Center (Thailand). 

Stockmarket Performance for the year ending 31^st August 2010

Country	Sterling %	Local Currency %	Country Allocation on 31st August 2010 %
China	16.1	9.8	10.3
Hong Kong	22.7	16.0	10.5
Taiwan	22.0	11.9	12.1
Greater China			32.9
Singapore	30.3	15.5	12.2
Thailand	56.1	35.4	11.9
Malaysia	44.7	21.6	7.6
Indonesia	48.2	25.2	6.8
Philippines	36.8	19.9	5.8
Vietnam	(8.8)	(5.9)	1.3
South East Asia			45.6
India	29.0	17.2	1.5
Sri Lanka	87.8	73.9	2.2
Indian Subcontinent			3.7
South Korea	22.5	10.9	10.6
MSCI*	24.2	13.8	-
Net current assets	-	-	7.2
Total			100.0

* Morgan Stanley Capital International AC Asia ex Japan Index

Greater China

The acceleration of China's economic growth and strong recovery in the property market resulted in a modest tightening of monetary policy in January.  The Government's decision to remove the currency peg in June had a limited impact on exchange rates and was viewed largely as a political measure to offset criticism from abroad.  The substantial level of new equity issues combined with relatively high valuations resulted in China's underperformance, despite corporate earnings being better than expectations in general.

Hong Kong's economy also experienced a strong recovery, supported by the normalisation of external trade and low interest rates.  Domestic consumption improved owing to higher levels of employment and rising incomes.  Strong demand for residential property has prompted the Government to impose further restrictions on lending for high-end residential properties. 

The strong demand for technology related products provided further support to Taiwan's economic recovery.  However, of greater long term significance has been the improvement in relations between China and Taiwan which culminated in the signing of the Economic Cooperation Framework Agreement (ECFA) in June. 

South East Asia

Singapore also experienced a strong recovery in its economic growth as demand returned for its exports and services.  The Government opted to allow the currency to strengthen in order to offset the pickup in inflation.  This helped fuel demand for residential property and resulted in a number of measures being imposed in an attempt to moderate property price rises.

Thailand's economy performed well given the high level of political uncertainty which plagued the country from February until May.  The problems started with the Supreme Court's verdict over the disputed assets of the former Prime Minister Thaksin Shinawatra which resulted in the initially peaceful rallies held by the political opposition in Bangkok.  The situation turned violent and a number of fatalities were recorded before the army took control and removed the demonstrators.  The economic impact was short lived with a strong recovery in domestic consumption supported by the Government's loose fiscal and monetary policy.  Thai smaller companies enjoyed a period of significant outperformance.

In Malaysia, the improving economic environment, stable labour market and strong consumer sentiment have resulted in higher inflation and an increase in interest rates by the Central Bank.  The political environment has become a greater concern than in the past, with people questioning the effectiveness of the Prime Minister, Najib Razak, particularly his ability to enact much needed economic reforms, such as an end to fuel price subsidies.

The equity market responded positively to the election of Benigno Aquino as President of the Philippines in June with investors optimistic about his proposed economic reforms and anti-corruption credentials.  Economic growth has accelerated supported by low interest rates and strong overseas foreign worker remittances which reached a record US$17 billion in 2009.    Smaller companies significantly outperformed their larger counterparts over the period.

Indonesia's economy and equity market have performed well, supported by strong demand for the country's natural resources as well as low interest rates and a stable political environment.  Although higher food and fuel prices have resulted in rising inflation the Central Bank's monetary policy has remained unchanged.  In general smaller Indonesian companies underperformed. 

Vietnam's equity market performance has suffered from the Government's aggressively pro-growth policy which has resulted in a devaluation of the currency and a sharply higher trade deficit. The uncertainty over the country's currency mechanism has encouraged local investors to hold gold and foreign currency rather than equities.

Indian Subcontinent

India's economic growth rate has accelerated beyond its historic average supported by low interest rates and strong consumer spending.  However, inflation has also risen and remained persistently close to 10% this year.  The Central Bank's response so far has been only a modest tightening of monetary policy.  In addition, the economic reform process has slowed.

The Sri Lankan stockmarket has continued to outperform supported by an improved outlook for the economy now that peace has been restored throughout the country.  There has been an increase in demand for agriculture and services, particularly for those related to tourism.

South Korea

South Korea's economic recovery has been strong supported by robust demand for its exports and an improvement in domestic consumption.  Although the rate of inflation has increased, the corresponding rise in interest rates has been modest mainly because a significant number of Korean households and smaller companies remain highly indebted.   

Performance of individual equity holdings for the year ending 31^st August 2010

Company	Country	Performance %	% of Shareholders' Funds On 31st August 2010
Best
Aitken Spence	Sri Lanka	315.3	1.2
Aboitiz Power	Philippines	262.1	0.8
Home Product Center	Thailand	240.0	2.4
Dynasty Ceramics	Thailand	158.6	1.1
Tisco Financial	Thailand	132.4	2.0
Worst
EuNetworks	Singapore	-62.4	0.4
Paxys	Philippines	-43.1	0.2
Ezion Holdings	Singapore	-10.2	1.1
Nice e-Banking Services	South Korea	-2.8	0.9
Next Media	Hong Kong	2.2	0.6

For the five best performing stocks, the common theme is the valuation re-rating which took place following a significant rise in their earnings forecasts.    In Sri Lanka, the end of the civil war has resulted in a sharp rise in tourist arrivals, which has had a positive impact on the occupancy levels and room rates at Aitken Spence's hotels.  Aboitiz Power benefited from the power shortages in the Philippines which pushed up the rates it achieved for some of its power plants.  Both Home Product Center and Dynasty Ceramics are companies which have benefited from the recovery in consumer spending and strong demand for residential property in Thailand.  In addition, the pickup in loan growth in Thailand has resulted in an improved outlook for Tisco Financial.

EuNetworks performed poorly following a second rights issue and a complete change in senior management; the outlook with the new management team and strengthened balance sheet should be much improved.    Paxys continues to suffer from a loss of competitiveness in its call centre business but is now trading at depressed valuations.  Ezion Holdings remains focused on its core business, building and leasing liftboats, but a lack of positive newsflow caused the share price to underperform.  Both Nice e-Banking Services and Yuhan Corp experienced an increase in competition in their respective industries, resulting in a temporary slowdown in growth in their corporate earnings and also share price underperformance.  Next Media's share price fell following the company's announcement that it would suspend dividend payments and invest the funds in the pay TV industry in Taiwan.

OUTLOOK

The current economic environment has resulted in new challenges for the Region's Central Banks. It now seems likely that the developed economies are facing a period of low economic growth with deflationary pressures in the form of high unemployment and deleveraging by both the private and public sector.  In contrast, economic growth in Asia has been robust, supported by loose fiscal and monetary policies.  The rate of inflation has increased, initially due to rising food prices, and is now being reflected in higher costs particularly wages.  Several countries have already raised interest rates, albeit by modest amounts.  The key uncertainty is the outlook for exports, particularly those relating to consumer demand in Europe and the US.  If these fall sharply, then the authorities will need to keep interest rates low to offset the deflationary impact on their economies. However, an expansion of demand for Asia's exports would provide additional fuel to the region's growth and may result in a more aggressive tightening of monetary policy next year.  As an aside, lower interest rates have already resulted in strong demand for residential property, resulting in some countries imposing more stringent restrictions on mortgages. 

In general, valuations for Asia's equity markets are reasonable, supported by strong growth in corporate earnings.  However in our opinion, analysts have a tendency to be optimistic in their outlook for the global economy and there is a risk that forecasts for corporate earnings may have to be reduced.  Alternatively, if economic growth in the developed world proves to be stronger than expected, Asia's interest rates will need to rise at a faster than expected rate, something that is being largely ignored by equity markets in the Region. 

Scottish Oriental's investment philosophy is well suited for the current uncertainty given its focus on well managed, financially sound companies. In addition, the Trust is well positioned to benefit from the growth in domestic consumption in the Region.

Susie Rippingall

Scott McNab

Angus Tulloch

First State Investment Management (UK) Limited, Investment Manager

14th October 2010

Portfolio Review

Scottish Oriental's portfolio of investments is well diversified not only by country but also by sector.  The largest country exposure is Singapore with a 12.2 per cent position.  Financials accounted for 24.4 per cent of the portfolio, the largest sector weighting.  As at 31^st August 2010 Scottish Oriental was invested in 87 different companies with the largest holding, Home Product Center, accounting for 2.4 per cent of the Portfolio.  The aggregate of the Trust's ten largest holdings was 17.8 per cent.

Country Allocation at 31^st August 2010

Country/Region	Scottish Oriental %	MSCI* %	MSCI Small Cap† %
China	10.3	26.1	20.3
Hong Kong	10.5	10.7	9.4
Taiwan	12.1	15.2	22.3
Greater China	32.9	52.0	52.0
Singapore	12.2	7.1	7.4
Thailand	11.9	2.3	3.5
Malaysia	7.6	4.4	3.9
Indonesia	6.8	3.3	2.6
Philippines	5.8	0.7	1.0
Vietnam	1.3	-	-
South East Asia	45.6	17.8	18.4
India	1.5	11.1	14.7
Sri Lanka	2.2	-	-
Indian Subcontinent	3.7	11.1	14.7
South Korea	10.6	19.1	14.9
Net current assets	7.2	-	-
Net assets	100.0	100.0	100.0

* Morgan Stanley Capital International AC Asia ex Japan Index

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

Greater China

Scottish Oriental continues to have an underweight position in China-related companies.  The Government appears committed to curtailing the level of speculation in the local property market which raises the likelihood of a difficult operating environment for the banks and property companies. Consumer related companies have performed well supported by strong retail spending and aggressive expansion.  However, the valuations are now expensive and earnings forecasts do not adequately reflect the risk of greater competition and rising costs.

Hong Kong's domestic economy should experience strong growth over the medium term as the currency peg with the US dollar means that interest rates will remain lower and for longer than its regional peers. Demand for residential property should remain strong particularly for the more affordable units.  Scottish Oriental is mainly invested in consumer related companies, such as Aeon Stores and Next Media.

The Trust has been increasing its exposure to Taiwan, with a particular focus on those companies which are exposed to the domestic economy.  Further positive announcements relating to China-Taiwan relations are likely next year as the Chinese look to win support for the ruling KMT party prior to the Presidential election, due in early 2012. Scottish Oriental's new holdings CTCI Corp and Yungtay Engineering both provide exposure to the expected increase in fixed capital investment. 

South East Asia

Scottish Oriental's holdings in Singapore are diversified in terms of geographical reach with some, such as CSE Global and Petra Foods, having exposure to the global market while others, such as M1 and Raffles Medical, are focused on the domestic economy. 

The Trust remains overweight in Thailand.  Domestic consumption has improved significantly since the political situation stabilised, supported by low interest rates and a strong residential property market.  Valuations remain attractive, with a number of the Trust's holdings, such as Aeon Thana Sinsap and Amarin Printing, providing dividend yields of more than 6%. 

Exposure to Malaysia is largely unchanged, with the Trust having a significant exposure to the domestic economy through its holding in Aeon Co. and Media Prima.  The diminishing power of UMNO, the Government's coalition, should be positive over the longer term as it should allow Malaysian democracy to mature and raise the level of accountability for politicians.  However, it also threatens to slow the pace of economic reform in the short term.

The Trust's exposure to Indonesia was increased following the acquisition of Salamander Energy.  This is a London listed oil and gas exploration and production company with assets located in Indonesia and Thailand. The Trust retains its position in Jaya Real Property and Pembangunan Jaya Ancol which provide exposure to the buoyant residential property market.

Scottish Oriental's holdings in the Philippines remain focused on the domestic economy.  SM Development, part of the well respected SM Group, is a middle income residential property developer that is enjoying strong demand for the sale of its apartments.

The Trust retains a small position in Vietnam.  Although the short term outlook for the economy remains uncertain owing to the high trade deficit, rising inflation and unstable currency, equity valuations are now attractive.  Exposure is via Vietnam Enterprise Investments. 

Indian Sub-Continent

Scottish Oriental continues to have a small position in India.  Valuations are expensive and forecasts for corporate earnings are optimistic.  Interest rates need to rise significantly in order to curtail inflation.  In addition the much heralded economic reforms seem to have stalled. 

Although the outlook for corporate earnings in Sri Lanka has improved, this is more than adequately reflected in corporate valuations, which are now expensive.  Consequently Scottish Oriental has reduced its position in Sri Lanka selling its entire holding in Commercial Bank of Ceylon and reducing its position in both Aitken Spence and Dialog Axiata. 

South Korea

The Trust's holdings in South Korea were largely unchanged over the period.  The exception was the disposal of S1 Corp as a result of concerns over the company's plans to diversify away from its core security business. Scottish Oriental also invested in TK Corp when its share price fell sharply following the announcement of its 2009 results, which were below expectations due to a delayed recovery in demand.

Sector Allocation at 31^st August 2010

Sector	%
Consumer: discretionary	24.1
Consumer: staple	4.9
	29.0
Energy	3.6
Financial	24.4
Information Technology	11.3
Industrial	11.1
Healthcare	8.3
Materials	0.8
Telecommunications Services	2.4
Utilities	1.9
	92.8
Net current assets	7.2
Net assets	100.0

Scottish Oriental continues to have a high exposure to the Consumer Discretionary and Consumer Staples sectors. In these sectors, there is a wider selection of companies that fulfill the Investment Manager's investment requirements in terms of management quality, a strong business franchise and robust financial position.  In addition, these consumer-related companies will continue to benefit from the strength of the domestic economies in the region. 

The Trust has a large position in Financials.  Included in this sector are property companies as well as banks and consumer finance companies.  The outlook for property markets remains positive over the longer term and valuations are relatively attractive.

Exposure to the Industrial sector increased, with the acquisition of a number of companies which are well positioned to benefit from changing business practices in Asia.   These stocks included 104 Corp and Jobstreet, which provide internet recruitment services in Taiwan and Malaysia respectively.

The Trust's exposure to the Information Technology, Healthcare and Telecom sectors was largely unchanged and remains focused on those companies with attractive valuations and robust earnings.

Scottish Oriental continues to have a limited exposure to stocks in the cyclical Energy and Materials sectors as these tend to be price-takers rather than price-setters and may be vulnerable to a slowdown in the global economy.  It also has a very low weighting in the Utilities sector, owing to the limited number of small but reasonably valued companies.

Ten Largest Equity Holdings at 31^st August 2010

Company	Market		Value	% of Shareholders' Funds
Home Product Center	Thailand		£3,967,026	2.4%
Home Product Center, part of the Land & House Group, operates a network of stores selling a wide range of home improvement products.  These include electrical items, light fittings, construction materials, tools and furniture.  The company has about 14% of the home improvement market in Thailand, significantly larger than the competition which tends to be 'mom and pop' stores.  Management believe that same store sales growth of 10% per annum is sustainable over the medium term owing to consumers' preference for modern retailing environments. Management is experienced and well incentivised.
Security Bank	Philippines		£3,826,457	2.3%
Established in 1959, Security Bank is an independent corporate bank with a strong position among the local affluent Chinese community.  The bank has recruited professional senior management with extensive experience.  Security Bank is the 10th largest bank in terms of assets in the Philippines.  Growth has come from the successful cross marketing of a range of innovative products, including corporate, consumer and investment banking services.
Tisco Financial	Thailand		£3,299,565	2.0%
Tisco Financial is a diversified financial services company with investment banking, stockbroking, asset management and consumer finance divisions.  In 2005, the company completed a restructuring which effectively changed Tisco into a bank and gave it access to low cost deposits.   The consumer finance division is currently the largest contributor to earnings with a specific emphasis on hire purchase.  Tisco has a very conservative provisioning policy for non-performing loans. Management is highly regarded and has a strong focus on the long term career development of its employees.
SM Development	Philippines		£3,032,266	1.8%
SM Development, part of the SM Group of companies, is involved in the investment and development of both residential and commercial properties in the Philippines.  The company has benefited from having access to land near or beside SM Prime's shopping malls.  Demand for residential property remains strong owing to insufficient supply and robust remittances from overseas workers.  SM Development also has a substantial investment portfolio which is retained to provide stable cash flows in the form of interest and dividend income.
Yuhan Corp	South Korea		£2,840,133	1.7%
Established in 1926, Yuhan Corp is Korea's second largest pharmaceutical company in terms of sales.  The company is involved in five different businesses: prescription drugs, over-the-counter drugs, active pharmaceutical ingredients as well as household products and veterinary drugs.  Yuhan Corp also has five subsidiaries, all of which are profitable.  The largest of these is Yuhan Kimberly which is the largest sanitary napkin and diaper supplier in Korea.  This 30% owned joint venture with Kimberly-Clark supplies 100% of Kimberly's diaper requirements in China.  This is a professionally managed company which not only benefits from the strength of its existing brands but also has a history of successfully developing new products.
TK Corp	South Korea		£2,756,990	1.6%
TK Corp manufactures industrial fittings, with a specific focus on electronic and piping systems for ships, petrochemical and power plants.  The company has successfully expanded its capacity in recent years and increased its global market share at the expense of its European competitors. Approximately 70% of revenues are from overseas and the company has recently set up offices in Houston, Beijing, India and Europe to handle these. TK Corp's wide product range of more than 45,000 items is a key barrier to entry.  In addition, the company's strong financial position allows it to hold substantial inventory which ensures timely delivery for customers.
Media Prima	Malaysia		£2,575,161	1.5%
Media Prima is the leading media company in Malaysia with exposure to TV, radio, outside advertising and newspapers via its ownership of New Straits Times Press.  The company has four free to air TV channels of which TV 3, Malaysia's leading network, is the largest contributor to the Group's earnings. The combined viewership market share for the company's four TV channels is about 50%.  Media Prima is well positioned to benefit from the recent recovery in advertising revenues.
Raffles Medical Group	Singapore		£2,461,516	1.5%
Raffles Medical Group operates a network of medical clinics throughout Singapore as well as Raffles Hospital which was opened in March 2001.  This is a general hospital with key specialities such as oncology and orthopaedics.  The company has also obtained the appropriate licences and can now provide healthcare insurance products for individuals and companies.  Future earnings growth will come from an increase in the number of hospital beds as well as further expansion of the network of medical clinics.
JVM Co.		South Korea	£2,458,497	1.5%
JVM designs and produces automatic tablet dispensing and packaging machines (ATDPS) and semi-automatic tablet dispensers. The ATDPS digitizes the entire medicine preparation process from sorting, distribution, information printing and inventory management to billing.  It is used in hospitals, large pharmacies and nursing homes and one unit typically handles the work of three or four pharmacists. In 2008, the company suffered a significant loss from its exposure to foreign exchange contracts ('KIKO') which were partially reversed in 2009.  These contracts have now been terminated and JVM's founder resigned from his position as CEO, taking full responsibility for this investment.  The underlying business continues to perform well supported by the recent launch of the company's new range of products.
Cosmax	South Korea		£2,453,672	1.5%
Cosmax is a leading cosmetic original design manufacturer in Korea, producing a wide range of make-up and skin care products.   The Company supplies not only the domestic cosmetics producers such as Amorepacific, Able C&C, Somang Cosmetics and The FACE SHOP but also international companies such as L'Oreal and Johnson & Johnson.  Cosmax has been successful in making several 'hit' products such as eye-shadow for Maybelline and gel eyeliner for L'Oreal.  These products were designed in-house and have stimulated demand for other new products from existing clients.

Susie Rippingall

Scott McNab

Angus Tulloch

First State Investment Management (UK) Limited, Investment Manager

14th October 2010

Ten Year Record

Capital

			NAV		Price		Share (Discount)/Premium
Year ended 31st August	Market Capitalisation £m	Shareholders'Funds £m	Diluted (p)	Undiluted (p)	Ordinary (p)	Warrant (p)	Diluted %	Undiluted %
2001	23.43	28.20	112.55	110.72	92.00	30.00	(18.3)	(16.9)
2002	31.51	35.29	133.77	138.56	123.75	49.50	(7.5)	(10.7)
2003	39.73	44.55	163.94	174.91	156.00	67.50	(4.8)	(10.8)
2004	39.94	46.00	169.14	180.50	156.75	69.50	(7.3)	(13.2)
2005	54.23	61.57	219.95	241.56	212.75	112.50	(3.3)	(11.9)
2006	64.41	73.26	256.22	279.24	245.50	144.00	(4.2)	(12.1)
2007	94.87	104.14	344.67	344.67	314.00	-	(8.9)	(8.9)
2008	79.16	94.50	312.78	312.78	262.00	-	(16.2)	(16.2)
2009	98.95	113.86	376.85	376.85	327.50	-	(13.1)	(13.1)
2010	146.08	167.76	555.26	555.26	483.50	-	(12.9)	(12.9)

Revenue

Year ended 31st August	Gross Revenue £000	Available for ordinary shareholders £000	Earnings per share* p	Dividend per share(net) p	Total expense ratio %	Actual gearing †	Potential gearing ‡
2001	1,387	654	2.56	1.81	1.43	100	112
2002	1,211	445	1.75	1.50	1.51	105	109
2003	1,314	496	1.95	1.50	1.28	100	109
2004	1,567	547	2.14	1.58	1.54	102	108
2005	2,262	960	3.77	2.60	1.48	93	105
2006	2,416	1,239	4.78	3.60	0.88	94	101
2007	3,379	1,812	6.35	4.60	0.83	94	101
2008	3,643	2,008	6.64	5.00	0.78	98	101
2009	3,744	2,307	7.63	6.00	1.04	94	101
2010	4,940	3,197	10.58	8.50	1.65	94	101

* 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.

† Total assets (including all debt used for investment purposes) less all cash and fixed interest securities (excluding convertibles) divided by shareholders' funds.

‡ Total assets (including all debt used for investment purposes) divided by shareholders' funds.

Cumulative Performance (taking year ended 31^st August 2000 as 100)

Year ended 31st August	NAV per share	Price per share	Price per warrant	MSCI AC Asia ex Japan Index	FTSE All Share Index	Earnings per share	Dividend per share
	p	p
2000	100	100	100	100	100	100	100
2001	98	109	124	62	83	131	140
2002	116	146	204	70	67	89	116
2003	143	185	278	82	70	99	116
2004	147	186	287	82	78	109	122
2005	191	252	464	106	97	192	202
2006	223	291	594	126	113	244	279
2007	300	372	-	176	126	324	357
2008	272	310	-	161	115	339	388
2009	328	388	-	175	106	389	465
2010	483	572	-	218	117	540	659

Principal Risks and Uncertainties

In the Directors' view, the description of the Company's development over the year and the identification of its key performance indicators are contained in the Financial Highlights, Ten Year Record, Chairman's Statement and Portfolio Manager's Report.  In the Finance Act 2009, dividends and other distributions received from foreign companies from 1^st July 2009 are for the most part exempt from corporation tax. The principal risks facing the Company relate to its investment activities and include market price risk and foreign currency risk. Further details of these risks are disclosed in note 15 of the Accounts. Information on the Company's internal controls is set out below.

Internal Controls

The Directors are ultimately responsible for the internal controls of the Company which aim to ensure that proper accounting records are maintained, the assets are safeguarded and the financial information used within the business and for publication is reliable. The Directors are required to review the effectiveness of the Company's system of internal control. The Combined Code on Corporate Governance states that the review should cover all material controls, including financial, operational and compliance controls and risk management systems. Operational and reporting systems are in place to identify, evaluate and monitor the operational risks potentially faced by the Company and to ensure that effective internal controls have been maintained throughout the period under review and up to the date of approval of this Annual Report. The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Company. A full review of all internal controls is undertaken annually and the Board confirms that it has reviewed the effectiveness of the system of internal control. These controls include:

·           Reports at regular Board Meetings of all security and revenue transactions effected on the Company's behalf. These transactions can only be entered into following appropriate authorisation procedures determined by the Board and the Investment Manager;

·           Custody of the Company's assets has been delegated to JP Morgan Chase. The records maintained by JP Morgan Chase permit the Company's holdings to be readily identified. The Investment Manager carries out regular reconciliations with the custodian's records of the Company's cash and holdings;

·           The Investment Manager's compliance and risk department monitors compliance by individuals and the Investment Manager's operations with the rules of the Financial Services Authority and provides regular reports to the Board;

·           A risk matrix is prepared which identifies the significant risks faced by the Company and the Investment Manager's controls in place to manage these risks effectively.

These systems are designed to manage rather than eliminate risk and can, however, only provide reasonable and not absolute assurance against material misstatement or loss.

Related Party Transactions

First State Investment Management (UK) Limited has been appointed as Investment Manager and Company Secretary under an agreement dated 20th March 1995 (as amended by supplemental agreements dated 31st July 1998, 22nd November 2005, 27th September 2006, 24th March 2009, and 15^th January 2010) ("the Agreement"). The terms of the Agreement provide for payment of a base fee of 0.75% 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. These fees are capped, in aggregate, at an amount not exceeding or equal to 5% of the lower of (1) the gross asset value of the Company and (2) its market capitalisation, in each case at the relevant 31st August year end.

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 Company's benchmark index (the MSCI AC Asia ex Japan Index) over the three year period plus ten percentage points then 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. A performance fee of £936,801 is due to be paid for the twelve months ending 31^st August 2010 and this fee will be charged against the Company's capital.A company secretarial fee, initially based on £35,000 per annum until 31st March 1996 and subsequently increased in line with the UK Retail Prices Index annually, is also payable to the Investment Manager.  The fee payable for the year to 31^st August 2010 was £51,180.

The Investment Manager's appointment as investment manager is subject to termination on one year's notice. Its appointment as company secretary is subject to termination by not less than six months' notice. The Company is entitled to terminate the Investment Manager's appointment as investment manager and company secretary 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 as investment manager 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. In the case of the Investment Manager's appointment as company secretary the compensation is based on the secretarial fee for the last full year prior to termination and paid on a pro rata basis.  Details of the investment management fee are set out in Note 2 of the Accounts.

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.

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Directors' Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.

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

Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the assets, liabilities, financial position and of the profit or loss of the Company for that period. In preparing these financial statements, 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 financial statements;

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 financial statements 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 judgments and estimates, have been used in the preparation of the accounts and that applicable accounting standards have been followed.

The financial statements 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 Auditors does not involve consideration of the maintenance and integrity of this website and, accordingly, the Auditors accepts no responsibility for any changes that may have occurred to the financial statements 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 financial statements may differ from legislation in other jurisdictions.

The Directors confirm that to the best of their knowledge:

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

·      the Directors' Report includes a fair view 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

14h October 2010

Income Statement for the year ended 31^st August 2010 (audited)

                                                                        2010                                                       2009

	Revenue £'000	Capital £'000	Total* £'000	Revenue £'000	Capital £'000	Total* £'000
Gains on investments	-	52,760	52,760	-	18,754	18,754
Income from investments [Note 1]	4,933	-	4,933	3,726	-	3,726
Other income [Note 1]	7	-	7	18	-	18
Investment management fee [Note 2]	(1,131)	(937)	(2,068)	(591)	-	(591)
Currency gains /(losses) [Note 12]	-	825	825	-	(160)	(160)
Other administrative expenses [Note 3]	(323)	-	(323)	(306)	-	(306)
Net return before finance costs and taxation	3,486	52,648	56,134	2,847	18,594	21,441
Finance costs of borrowing [Note 4]	-	-	-	(1)	-	(1)
Net return on ordinary activities before taxation	3,486	52,648	56,134	2,846	18,594	21,440
Tax on ordinary activities [Note 5]	(289)	(129)	(418)	(539)	(29)	(568)
Net return attributable to equity shareholders	3,197	52,519	55,716	2,307	18,565	20,872
Net Return per ordinary share [Note 7]	10.58p	173.83p	184.41p	7.63p	61.45p	69.08p

* The total column of this statement is the Profit and Loss Account of the Company.

A Statement of Total Recognised Gains and Losses has not been prepared as any gains or losses are

recognised in the Income Statement.

The Board is proposing a dividend of 8.50p per share for the year ended 31^st August 2010 (2009: 6.00p per share) which, if approved, will be payable on 28^th January 2011 to shareholders recorded on the Company's shareholder register on 17^th December 2010.

The notes on pages 38 to 45 of the Annual Report and Accounts with the accounting policies on pages 36 and 37 of the Annual Report and Accounts form part of the Annual Report and Accounts.

All revenue and capital items derive from continuing operations.

Summary Balance Sheet as at 31 August 2010 (audited)

	2010			2009
	£'000	£'000	£'000		£'000
FIXED ASSETS - EQUITY INVESTMENTS [Note 8]		155,708			105,054
Current Assets:
Debtors [Note 9]	1,314		1,588
Cash and deposits	12,650		8,222
	13,964		9,810
Current Liabilities (due within one year)
Creditors [Note 10]	(1,907)		(1,002)
	(1,907)		(1,002)
Net Current Assets		12,057			8,808
Total Assets less Current Liabilities		167,765			113,862
Provision for liabilities and charges
Deferred tax [Note 5]		-			-
Equity shareholders' funds		167,765			113,862
Represented by
Capital and reserves
Ordinary share capital [Note 11]		7,554			7,554
Share premium account [Note 12]		21,337			21,337
Warrant reserve [Note 12]
exercised		1,319			1,319
Capital Reserve [Note 12]		131,255			78,736
Revenue Reserve [Note 12]		6,300			4,916
		167,765			113,862
Net asset value per share [Note 13]		555.26p			376.85p

 

The notes on pages 38 to 45 of the Annual Report and Accounts with the accounting policies on pages 36 and 37 of the Annual Report and Accounts form part of the Annual Report and Accounts.

Reconciliation of Movements in Shareholders' Funds (audited)
For the year ended 31 August 2010
	Share Capital	Share Premium Account	Warrant Reserve Exercised	Capital Reserve	Revenue Reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31st August 2009	7,554	21,337	1,319	78,736	4,916	113,862
Realised gain on investments	-	-	-	20,058	-	20,058
Currency gain	-	-	-	825	-	825
Unrealised appreciation on investments in the year	-	-	-	32,702	-	32,702
Performance fee	-	-	-	(937)	-	(937)
Indian Capital Gains Tax	-	-	-	(129)	-	(129)
Income retained in the year	-	-	-	-	3,197	3,197
Dividend paid in the year	-	-	-	-	(1,813)	(1,813)
Balance at 31st August 2010	7,554	21,337	1,319	131,255	6,300	167,765

Reconciliation of Movements in Shareholders' Funds (audited)
For the year ended 31st August 2009
	Share Capital	Share Premium Account	Warrant Reserve Exercised	Capital Reserve	Revenue Reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31st August 2008	7,554	21,337	1,319	60,171	4,120	94,501
Realised gains on investments	-	-	-	6,546	-	6,546
Currency loss	-	-	-	(160)	-	(160)
Unrealised appreciation on investments in the year	-	-	-	12,208	-	12,208
Performance fee	-	-	-	-	-	-
Indian capital gains tax	-	-	-	(29)	-	(29)
Income retained in the year	-	-	-	-	2,307	2,307
Dividend paid in the year	-	-	-	-	(1,511)	(1,511)
Balance at 31st August 2009	7,554	21,337	1,319	78,736	4,916	113,862

Summary Cash Flow Statement for the year ended 31^st August 2010 (audited)

	2010 £'000	2009 £'000
Net cash inflow from operating activities	3,316	3,078
Interest paid on borrowings	-	(1)
Taxation	(583)	(802)
Net cash inflow from capital expenditure and financial investment	3,508	4,593
Equity dividend paid	(1,813)	(1,511)
Increase in cash	4,428	5,357

 

Accounting Policies

These accounts have been prepared in accordance with applicable accounting standards and under the historical cost convention modified to include the revaluation of fixed asset investments which are recorded at fair value, the Companies Act 2006 and the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (issued in January 2009 (the "SORP")) except for certain illiquid stocks which have been valued at the last traded price, as has been the Company's practice. The Directors consider the last traded price for such stocks to be the best estimate of fair value.  Financial assets and liabilities are recognised in the Company's Balance Sheet when it becomes party to the contractual provisions of the instrument.

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 financial statements, and the net asset value per share figures, have been prepared in accordance with UK Generally Accepted Accounting Practice ("UK GAAP").

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

(a)       Dividends on securities are brought into account on the date on which the security is quoted "ex dividend'' on the stock exchange in the country in which the security is listed. Interest on securities is accounted for on a time appointed basis. 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.

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

(c)        Bank interest receivable, interest payable and expenses of management are dealt with on an accruals basis and are charged through the revenue column of the Income Statement except any performance fee for the investment manager which is charged to capital.

(d)        In accordance with Financial Reporting Standard 19, 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.

Due 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.

(e)        The base investment management and company secretarial fees have been charged in full to the Income Account.  The performance fee is chargeable in full to the Capital Account.

(f)         Equities include ordinary shares and warrants.

(g)        Valuation of Investments

Listed investments have been designated upon initial recognition as fair value through profit or loss. Investments are recognised and de-recognised at trade date where a purchase or sale is under a contract whose terms require delivery within the time frame established by the market concerned, and are initially measured at cost. Subsequent to initial recognition, investments are valued at fair value which for listed investments is deemed to be bid market or last traded prices. 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. In accordance with the guidance given in the Association of Investment Companies SORP issued in January 2009 the Capital Reserve is not separated into realised and unrealised.

(h)        Gains and losses arising on realisation of investments are shown in the Capital Reserve.

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

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

(k)        Interest costs incurred on long-term borrowings are charged to income on a time apportioned basis over the life of the liability. Breakage costs are charged to capital.

(l)         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.

NOTES ON THE ACCOUNTS (audited):

(1) Income

Income from investments relates to dividends.

Other income relates to bank deposit interest and £7,000 (2009: £Nil) in relation to Taiwan tax reclaims from overseas listed companies and £Nil (2009: £11,000) interest on repayment of VAT.

(2) Investment Management Fee

	2010 £'000	2009* £'000
Performance fee	937	-
Investment management fee	1,131	591
	2,068	591

The basis of calculation of the investment management fee and performance fee is set out in the management section of the Directors' Report.

*In 2007 the European Court of Justice ruled that investment management fees should be exempt from VAT. Since then, HMRC has accepted the Investment Manager's repayment claims for 2001 to 2007. During the year ended 31 August 2009  the Company received a reimbursement of £60,000 being recognised in the year ended 31 August 2009 together with interest thereon of £11,000.  No VAT was recovered for the period which ran from the launch of the Company in 1995 to December 1996 as all VAT had been previously recovered at that time.  A protective claim is still in place covering the intermediate 1996 to 2001 time period but it is now extremely unlikely that any repayment will result from this. 

(3) Other Administrative Expenses

Auditors' remuneration		12	10
Directors' fees		69	62
Company secretarial fees		51	50
Bank, custodial and other expenses		191	184
		323	306

Since 1st July 2010 Directors' fees have been as follows:

Chairman of the Board                     £22,500 per annum

Each other Director                         £16,000 per annum

Prior to 1st July 2010 Directors' fees were as follows:

Chairman of the Board                     £21,000 per annum

Each other Director                         £15,000 per annum

(4) Finance Costs of Borrowing

Bank overdraft interest

-

1

(5) Taxation

		2010			2009
(a) Analysis of charge in period	Income £'000	Capital £'000	Total £'000	Income £'000	Capital £'000	Total £'000
Current tax:
Corporation tax	-	-	-	612	-	612
Prior year adjustment	(30)	-	(30)	-	-	-
Double tax relief	-	-	-	(145)	-	(145)
Overseas tax	319	129	448	192	29	221
	289	129	418	659	29	688
Deferred tax:
Origination and reversal of timing     differences	-	-	-	(120)	-	(120)
	289	129	418	539	29	568

(b) Factors affecting the tax charge for the period

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:

	2010 £'000	2009 £'000
Net gains on investments during the period	52,760	18,754
Other gains / (losses)	825	(160)
Net investment income before tax	2,549	2,846
Total return for the period before taxation	56,134	21,440
Total return for the period before taxation multiplied by the effective rate of corporation tax of 28% (2009: 28%)	15,718	6,003
Effect of:
Capital returns not subject to corporation tax	(15,004)	(5,207)
Prior year adjustment	(30)	-
Non-taxable income	(1,383)	(276)
Overseas tax	448	77
Income taxable in different periods	-	91
Movement on excess expenses	669	-
Current tax charge for the period	418	688
Under changes enacted in the Finance Act 2009, dividends and other distributions received from foreign companies from 1st July 2009, are largely exempt from corporation tax.
(c) Provision for deferred tax
Income taxable in different periods	-	-
Provision at start of period	-	120
Deferred tax charge in period	-	(120)
Provision at end of period	-	-
The deferred tax provision has been released in full as a consequence of the UK legislative   change to the taxation of foreign dividends paid on or after 1st July 2009.

The Company has a deferred tax asset of £669,000 at 31^st August 2010 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 to be offset against future taxable profits.

(6) Dividends

	2010	2009
	£'000	£'000
Dividends paid in the period:
Dividend of 6.00p per share (2009 - 5.00p)
paid 29th January 2010	1,813	1,511

We note below the proposed dividend in respect of the financial year, which is the basis upon which the requirements of section 1158 of the Corporation Tax Act 2010 (formally section 842 of the Income and Corporation Taxes Act 1988) 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 financial statements.

Income available for distribution	3,197	2,307
Proposed dividend for the year ended 31st August 2010 - 8.50p
(2009 - 6.00p) payable 28th January 2011	(2,568)	(1,813)
Retained income for section 1158  Corporation Tax Act 2010 purposes	629	494

(7) Return per Ordinary Share

		2010			2009
	Income p	Capital p	Total p	Income p	Capital p	Total p
Net return per ordinary share	10.58	173.83	184.41	7.63	61.45	69.08
					2010	2009
Revenue return					£3,197,000	£2,307,000
Capital return					£52,519,000	£18,565,000
Weighted average ordinary shares in issue					30,213,650	30,213,650
There are no dilutive or potentially dilutive shares in issue.

(8) Equity Investments	Equities £'000
Cost at 31st August 2009	91,170
Unrealised appreciation	13,884
Valuation at 31st August 2009	105,054
Purchases at cost *	39,839
Sales - proceeds *	(41,945)
Sales - realised gains on sales	20,058
Unrealised appreciation on investments in the year	32,702
Valuation at 31st August 2010	155,708
Cost at 31st August 2010	109,122
Closing unrealised appreciation	46,586
All investments are listed on recognised stock exchanges. * These figures include the following charges. Purchases £'000 Transaction Costs Sales £'000 Total£'000 Stamp duty Brokerage Other Fees 36 157 9 113 213 23 149 370 32 202 349 551

	2010	2009
(9) Debtors	£'000	£'000
Sales awaiting settlement	450	1,062
Accrued income	679	413
Overseas tax recoverable	183	112
VAT recoverable	2	1
	1,314	1,588

	2010	2009
(10) Creditors (amounts falling due within one year)	£'000	£'000
Purchases awaiting settlement	626	532
Corporation tax	-	222
Other creditors	1,281	248
	1,907	1,002

(11)       Share Capital

The authorised capital is £8,190,058 (2009: same) represented by 32,760,234 ordinary shares of 25p each (2009: same). The allotted capital is £7,553,412 (2009: same) represented by 30,213,650 ordinary shares of 25p each (2009: same).

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 Company does not have any externally imposed capital requirements. The capital of the Company is the ordinary share capital as detailed above. It is managed in accordance with its investment policy in pursuit of its investment objective.

(12) Reserves	Share premium account	Warrant Reserve Exercised	Capital Reserve	Revenue Reserve
	£'000	£'000	£'000	£'000
Balance at 31 August 2009	21,337	1,319	78,736	4,916
Realised gain on investments	-	-	20,058	-
Indian capital gains tax	-	-	(129)	-
Currency gain	-	-	825	-
Unrealised appreciation on investments in the year	-	-	32,702	-
Performance fee	-	-	(937)	-
Income retained in the year	-	-	-	3,197
Dividend paid in the year	-	-	-	(1,813)
Balance at 31 August 2010	21,337	1,319	131,255	6,300

The capital reserve includes investment holding gains amounting to £46,586,000 (2009: £13,884,000), as disclosed in Note 8.  The revenue reserve is distributable by way of dividend.

(13) Net Asset Value per Ordinary Share

Net assets per share are based on total net assets of £167,765,000 (2009: £113,862,000) divided by 30,213,650 (2009: same) ordinary shares of 25p each in issue.

(14) Cash Flow Statement

 

	2010 £'000 (audited)	2009 £'000 (audited)
(a) Reconciliation of total income to net cash inflow
from operating activities
Income	4,940	3,744
Administration expenses	(1,454)	(898)
(decrease) / Increase in debtors	(1)	1
(decrease) / Increase in dividends accounted for but not yet received	(266)	103
Increase in creditors	97	128
Net cash inflow from operating activities	3,316	3,078

 

(b) Analysis of changes in cash and net debt during the year

	At the start of the Year £'000	Cash  Flows £'000	At the end of the Year £'000
Cash	8,222	4,428	12,650

(15) Risk Management, Financial Assets and Liabilities

The Company invests mainly in smaller Asian quoted companies. Other financial instruments comprise cash balances, short-term debtors and creditors. The Investment Manager follows the investment process outlined in the section for Investment Policy and Objective at the beginning of this report ,and in addition the Board conducts quarterly reviews with the Investment Management team. The Investment Manager's Risk and Compliance department monitors the Company's investment and borrowing powers to ensure that risks are controlled and minimised. Additionally, its Compliance and Risk Committee reviews risk management processes monthly.

The main risks that the Company faces from its financial instruments are market prices (comprising interest rate, currency and share 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 detailed 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. These valuations are deemed to represent the fair value of the investments.

Interest Rate Risk

As the Company does not invest in either fixed or floating rate securities at present, interest rate risk exposure is restricted to interest receivable on bank deposits or interest payable on bank overdraft positions which will be affected by fluctuations in interest rates.

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.

Foreign Currency Risk

The majority of the Company's investment portfolio was invested in overseas securities as at 31^st August 2010. The Balance Sheet therefore can be significantly affected by movements in foreign exchange rates. It is not the Company's policy to hedge this risk on a continuing basis but the Company reserves the right to undertake foreign exchange hedging of its portfolio. The revenue account is subject to currency fluctuation arising on dividends paid in foreign currencies. The Company does not hedge this currency risk.

Foreign Currency Risk Exposure by Currency of Denomination

	31 August 2010			31 August 2009
	Overseas investments £000	Net monetary assets £000	Total currency exposure £000	Overseas investments £000	Net monetary assets £000	Total currency exposure £000
Hong Kong dollars	36,341	612	36,953	21,144	562	21,706
Singapore dollars	19,049	8,905	27,954	18,923	5,119	24,042
Taiwanese dollars	20,284	1,511	21,795	9,042	555	9,597
Thai baht	20,035	(162)	19,873	12,867	87	12,954
Korean won	17,630	-	17,630	12,106	(61)	12,045
Malaysian ringgits	12,815	62	12,877	7,861	8	7,869
Philippine pesos	9,645	-	9,645	6,696	-	6,696
Indonesian rupiahs	9,325	56	9,381	5,755	(4)	5,751
Sri Lankan rupees	3,609	72	3,681	4,438	-	4,438
Sterling	2,207	1,004	3,211	-	(300)	(300)
Indian rupees	2,542	-	2,542	4,314	134	4,448
US dollars	2,226	(3)	2,223	532	2,017	2,549
Australian dollars	-	-	-	1,376	691	2,067
Total	155,708	12,057	167,765	105,054	8,808	113,862

Other Price Risk

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

Other Price Risk Sensitivity

If market values at the Balance Sheet date had been 10% higher or lower with all other variables remaining constant, the return attributable to ordinary shareholders for the year ending 31st August 2010 would have increased/decreased by £16,776,000 (2009 increased/decreased by £11,386,000) and equity reserves would have increased/decreased by the same amount.

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.

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

In summary, compared to the amounts in the Balance Sheet, the maximum exposure to credit risk at 31st August 2010 was as follows:

	2010		2009
	Balance Sheet	Maximum exposure	Balance Sheet	Maximum exposure
Current assets	£'000	£'000	£'000	£'000
Receivables	1,314	1,314	1,588	1,588
Cash at bank	12,650	12,650	8,222	8,222
	13,964	13,964	9,810	9,810

16. Related Party Transactions

The Directors' fees for the year are detailed in the Directors' Remuneration Report in the Annual Report and Accounts.  No Director has a contract of service with the Company.  During the year no Director was interested in any matter requiring disclosure under Section 412 of the Companies Act 2006.

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 31st August 2010 and 2009 are an abridged version of the statutory accounts for those years. The Auditor has reported on the 2009 and 2010 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 2009 have been filed with the Registrar of Companies and those for 2010 will be delivered in due course.

The 2010 Annual Report will be posted to shareholders in November 2010 and copies will be available from the Company's website www.scottishoriental.com and the Company's registered office at 23 St Andrew Square, Edinburgh, EH2 1BB.

Enquiries:	Charlotte Lawrence / Sarah Menzies First State Investments, Ph: 44 (0) 131 473 2200

  14^th October 2010

 

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