Annual Financial Report

RNS Number : 1502Q

Scottish Oriental Smlr Co Tst PLC

01 November 2012

 

THE SCOTTISH ORIENTAL SMALLER COMPANIES TRUST PLC

("Scottish Oriental")

Annual Financial Report for the year ended 31^st August 2012

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 2012.  

Financial Highlights

Performance for the year ended 31 August 2012 (audited)
Net Asset Value	7.9%	MSCI AC Asia ex Japan Index (£) *	-0.3%
Share Price	0.5%	MSCI AC Asia ex Japan Small Cap Index (£) *	-7.0%
		FTSE All-Share Index (£) *	10.2%
* Total return (capital return with dividends reinvested)

Summary Data at 31st August 2012 (audited)
Shares in issue	30,213,650	Shareholders' Funds	£201.60m
Net Asset Value per Share	667.26p	Market Capitalisation	£182.19m
Share Price	603.00p	Share Price Discount to Net Asset Value	9.6%

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

"As you will see from the Manager's report, Scottish Oriental's Net Asset Value performance over the year was good in both absolute and relative terms. The asset value increased by 7.9 per cent over the 12 months, while the MSCI AC Asia ex Japan Index fell by 0.3 per cent. As the discount widened to 9.6 per cent at the end of the year, the share price increased by only 0.5 per cent. The discount has now narrowed to 5.2 per cent. A performance fee was, however, earned for the third year in succession as this is based on a demanding target for the Company's share price total return over three years and the result for the period was satisfactory.

Earnings per share have increased again to 14.39p, compared to 11.39p last year. We are proposing a dividend of 11.0p net, an increase of 22 per cent. The undistributed balance of £1 million will be added to the revenue reserve. It remains our intention at least to maintain this level of dividend, using our reserves if necessary.

We announced last April that Susie Rippingall intends to retire in April 2013 and that Wee-Li Hee will join Angus Tulloch and Scott McNab as co-managers of the portfolio. Wee-Li joined the First State Investment team in Singapore in April 2002 as an analyst and in 2007 she became deputy manager for a number of institutional clients. Angus managed the portfolio from its inception in 1995 until Susie succeeded him in October 2000. Scott McNab, who has been much involved with our portfolio since 2004, will continue to work with Wee-Li and Angus. The plans for this change have been in place for some time and we believe that First State Investment's team approach will continue to produce good results for Scottish Oriental.

In August 2011 we borrowed $32.5 million for three years at 2.19 per cent per annum. We have been cautious about the investment of this money, which provides potential gearing of 9.6 per cent. In recent months our managers have been finding good opportunities at reasonable prices. As five new investments have been introduced since we published our interim report, the portfolio is now 2.1 per cent geared. The yield on our current equity portfolio is 3.2 per cent and the average PE is 13x.

We believe that the investment outlook is improving gradually, particularly with regard to the Chinese economy, despite the obvious concerns about the change in leadership and a slower pace of economic growth. As a consequence the new investments are biased towards more cyclical shares. We are grateful to our Manager and her colleagues for their efforts. They will continue to search for good smaller and medium sized investments in Asia that are available on reasonable terms.

The Annual General Meeting will be held in London this year on 24th January 2013 at the offices of First State Investments and I look forward to seeing shareholders there."

James Ferguson

Chairman

1st November 2012

Portfolio Manager's Report

REVIEW

In the year ending 31st August 2012, the performance of Asian equity markets was mixed, with significant gains achieved in South East Asia compared to losses in China and India. The external environment remained uncertain with ongoing concerns over the banking crisis in Europe as well as evidence of a slower than expected recovery in the US economy. The Region's economic growth was also disappointing as weaker demand for exports was only partially offset by higher domestic consumption. The correction in commodity prices contributed to more modest inflation which enabled the authorities, in most Asian countries, to pursue accommodative fiscal and monetary policies.

India was the worst performing major market as persistently high inflation combined with a slowdown in its economic growth resulted in weaker capital inflows and a significant depreciation of its currency. Chinese equities also fell as a significant number of listed companies announced disappointing results and guided down near term forecasts owing to the slowdown in the domestic economy. The Philippines' stockmarket rose sharply as historically low interest rates and well defined Government policies resulted in strong domestic consumption.

Scottish Oriental's performance over the year was pleasing both in absolute terms and also relative to its benchmark. This was achieved for a second consecutive year in spite of the underperformance of smaller companies, as seen by a decline in the MSCI Asia ex Japan Small Cap Index over the period under review. The Trust benefited from its exposure to Malaysia, the Philippines and Thailand as well as strong returns from some of its larger holdings, such as Amorepacific Group, Ezion Holdings and Security Bank.

Stockmarket performance for the year ending 31^st August 2012

Country	Sterling %	Local Currency %	Country Allocation on 31 August 2012 %
China	(5.7)	(8.4)	14.1
Hong Kong	2.5	(0.4)	10.0
Taiwan	(1.2)	(0.5)	14.6
Greater China			38.7
Singapore	7.8	9.0	16.7
Thailand	11.9	14.2	8.2
Malaysia	12.0	14.4	8.4
Indonesia	(3.4)	5.3	5.1
Philippines	25.7	22.0	4.2
Vietnam	(13.0)	(15.1)	1.7
South East Asia			44.3
India	(10.1)	5.9	1.5
Sri Lanka	(23.8)	(10.4)	1.9
Indian Subcontinent			3.4
South Korea	2.5	6.3	12.3
MSCI*	(0.3)	1.6	-
Net current assets	-	-	11.5
Long term loan	-	-	(10.2)
Total			100.0

* Morgan Stanley Capital International AC Asia ex Japan Index

Greater China

In recent months it has become apparent that China's economic growth has slowed significantly. Unfortunately this has happened at a time of increased political uncertainty with the country facing a leadership transition. Fortunately inflation has fallen, as a result of lower commodity prices, and the Government has begun to ease monetary policy. It has also announced a number of 'pro-growth' policies such as additional infrastructure investment in the country's less developed areas.

Hong Kong'seconomic growth has been negatively affected by the slowdown in China's trade. In addition, greater political and economic uncertainty across the border has resulted in more modest growth in tourist arrivals and retail sales, particularly for luxury goods. Demand for both commercial and residential real estate has remained strong supported by low interest rates. This has prompted the Government to apply further restrictions on mortgages and state its commitment to increase the supply of affordable housing.

Relations between Taiwan and China continue to improve with both countries benefiting from the introduction of commercial reforms. The most recent development has been the signing of the Cross Straits Currency Clearing agreement which allows for renminbi clearing in Taiwan. The slowdown in the country's economic growth was largely expected given its high exposure to external trade. One interesting development has been the willingness of some higher end manufacturers to relocate production to Taiwan given the rapidly rising labour costs in China.

South East Asia

Singapore's economic growth has also experienced a significant slowdown despite the support provided by ongoing infrastructure investment. Following last year's election, the Government has pursued policies that aim to improve living standards, particularly for its lower income citizens. These measures have included an increase in supply of public sector housing as well as greater

restrictions on immigration.

In Malaysia, the economic environment has been stable supported by the Government's infrastructure investment and robust domestic consumption. Inflation has remained low largely due to the country's policy of subsidising fuel and other necessities. While the Government appears to accept that economic reforms are required, specifically to allow for a reduction in the fiscal deficit, the implementation of these has been delayed owing to the forthcoming General Election.

Thailand has experienced a recovery in both investment and consumer confidence following last year's devastating floods. This has been supported by a rise in Government expenditure as well as a significant increase in the minimum wage. The political environment has been relatively calm despite Thaksin Shinawatra's public requests to be allowed to return to Thailand.

Indonesia continues to experience strong economic growth with low interest rates providing support for domestic consumption and private investment. Unfortunately the Government has failed to address the high fuel subsidies thereby reducing the funds available for much needed infrastructure development. In addition, the Government appears to be adopting a more protective stance towards its natural resources with the implementation of policies that would restrict the export of unprocessed commodities.

The necessary investment in the Philippines' infrastructure via private-public partnerships is progressing albeit at a slow pace. This development should mean the country can once again compete for foreign direct investment particularly as an alternative location to China for the manufacturing sector. The domestic economy has been strong - supported by higher consumer spending, moderate inflation and historically low interest rates.

There has been a significant improvement in Vietnam's economy over the past twelve months. The key issue has been the decline in the trade deficit, which has now fallen to below the level of disbursed foreign direct investment. This has resulted in a stabilisation of the currency and a corresponding fall in both inflation and interest rates. However, the political environment has become more uncertain with the arrest of a number of businessmen without specific charges.

Indian Subcontinent

India remains burdened with high fiscal and current account deficits. Unfortunately the slowdown in the economy appears structural and is therefore unlikely to respond to lower interest rates. In addition, political resistance to the required economic reforms has increased the risks associated with further investment, particularly by foreign parties. At the same time, lower corporate profitability and cautious investor sentiment have impeded the corporate sector's ability to raise new equity and reduce historically high debt levels.

Sri Lanka'seconomic growth has accelerated since the end of the civil war in May 2009, supported by strong domestic demand and a rise in fixed asset investment. Earlier this year the Government ended its policy of using foreign currency reserves to support the exchange rate, resulting in a significant depreciation of the currency as well as a rise in inflation and interest rates.

South Korea

South Korea'seconomic growth has slowed owing to a combination of weak external demand and lower domestic consumption. The Central Bank has responded by reducing interest rates given the very high levels of household debt. This policy has failed to stimulate the residential property market and it seems that a structural change may be underway with demand shifting from owning to renting property.

Performance of individual equity holdings for the year ending 31^st August 2012

Company	Country	Contribution Performance %	% of Shareholders' Funds at 31st August 2012
Best
Aeon Credit Service	Malaysia	1.9	1.1
Cosmax	South Korea	1.3	1.9
Ezion Holdings	Singapore	1.3	2.1
Amorepacific Group	South Korea	1.2	2.2
Security Bank	Philippines	0.9	1.3
Worst
Pou Sheng International	China	(0.7)	0.6
Expolanka Holdings	Sri Lanka	(0.6)	0.6
Beijing Jingkelong	China	(0.6)	0.6
Lung Kee Holdings	China	(0.6)	0.8
JVM Co.	South Korea	(0.5)	1.3

The returns achieved by the Trust's five best performing stocks were largely due to greater recognition of their strong business franchises and positive long term earnings outlook. Aeon Credit Service benefited from the greater acceptance of consumer credit in Malaysia as well as the steady expansion of its branch network. The popularity of the Korean cosmetic brands has had a positive impact on earnings for both Cosmax and Amorepacific Group. Ezion Holdings continued to see strong demand for its liftboats, resulting in further upgrades to its forecast earnings. Security Bank remains well positioned to benefit from the strong demand for its banking services particularly from the Chinese Filipino community.

Pou Sheng International'searnings have been negatively affected by aggressive discounting by the sports retailers in China. This industry is undergoing a rapid consolidation and the Company should be well positioned to win market share given the support provided by its parent, Yue Yuen. Expolanka Holdings also reported disappointing results owing to a sharp slowdown in its freight forwarding business. The correction in the share price for Beijing Jingkelong reflected concerns over falling returns owing to excess supply of hypermarkets in the Greater Beijing area. Lung Kee Holdings has seen a significant slowdown in demand for its mould bases owing to weak exports as well as poor domestic demand. Although the long term outlook for JVM Co. remains positive, the Company has recently seen a delay in orders resulting in a decline in its share price.

OUTLOOK

The performance of Asian equities is likely to remain volatile over the short term given the uncertain outlook for both the European and American economies. Weak demand for Asia's exports will continue to have a negative impact on the Region's economic growth. Domestic consumption, particularly in the less developed countries in South East Asia, should continue to grow supported by historically low interest rates. However, higher inflation remains a risk particularly from higher commodity prices.

From a longer term perspective, the current economic slowdown is likely to have some beneficial effects. For China, the rapid slowdown in demand has had a significant impact on a number of industries, ranging from the closure of inefficient factories to a more disciplined approach to capital expenditure. This should ensure that companies have greater pricing power when there is a sustained recovery in demand. While capital investment in China will continue to grow, this is expected to be undertaken in a more disciplined manner with a focus on infrastructure development in the western provinces. In India, the Government seems to have accepted that the long term solution to the current economic slowdown is to impose further economic reforms.

Politics remains an interesting theme with both China and South Korea seeing a change of leadership at the end of this year. The widening gap between rich and poor is a major issue for both of these countries as well as Hong Kong and Singapore. This is partly associated with property ownership and whether people can afford to buy their home. Further measures to address these issues are expected over the medium term.

There is currently a wide divergence in the valuations of smaller companies in the Region. In South East Asia, there are a number of well positioned consumer companies whose expensive valuations largely reflect their long term growth prospects. This contrasts with the depressed valuations of a number of export related companies whose earnings have been negatively affected by rising costs and weak demand. Industry consolidation is expected to accelerate in this environment, thereby ensuring more benign operating conditions for these companies once demand returns. Scottish Oriental has been increasing its exposure to a number of these stocks as valuations are now compelling from a longer term perspective.

Susie Rippingall

Wee-Li Hee

Scott McNab

Angus Tulloch

First State Investment Management (UK) Limited, Investment Manager

1st November 2012

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 16.7 per cent position. Consumer Discretionary accounted for 29.9 per cent of the portfolio, the largest sector weighting. As at 31st August 2012 Scottish Oriental was invested in 87 different companies with the largest holding accounting for 2.2 per cent of the Portfolio. The aggregate of the Trust's ten largest holdings was 18.8 per cent.

Country Allocation at 31^st August 2012 (based on geographical area of activity)

Country/Region	Scottish Oriental %	MSCI* %	MSCI Small Cap† %
China	14.1	23.4	16.2
Hong Kong	10.0	11.8	9.5
Taiwan	14.6	14.8	21.7
Greater China	38.7	50.0	47.4
Singapore	16.7	7.6	9.6
Thailand	8.2	3.0	4.2
Malaysia	8.4	5.1	6.0
Indonesia	5.1	3.7	4.5
Philippines	4.2	1.2	1.8
Vietnam	1.7	-	-
South East Asia	44.3	20.6	26.1
India	1.5	8.6	7.8
Sri Lanka	1.9	-	-
Indian Subcontinent	3.4	8.6	7.8
South Korea	12.3	20.8	18.7
Net current assets	11.5	-	-
Long term loan	(10.2)	-	-
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. The recent slowdown in economic growth has had a negative impact on corporate earnings and raised concerns over the quality of the banks' loan portfolios. Although higher non performing loans are expected, these should be manageable, given the much stronger credit controls now imposed by the industry. In the meantime the Government will continue to support the economy with an easing in monetary policy and further economic reforms. A recent addition to the Trust's holdings in China is Tong Reng Tang which is exposed to the local healthcare industry.

Low interest rates continue to support Hong Kong's domestic economy. Inflation remains an issue, forcing the Government to raise the minimum wage in order to offset the higher cost of living. Strong demand for property has resulted in the imposition of further restrictions on mortgages as well as an increased supply of apartments, particularly more affordable units. One of Scottish Oriental's larger holdings is Tai Cheung Holdings, a high end residential property developer, which trades at a significant discount to its estimated net asset value.

There has been little change to the Trust's holdings in Taiwan over the year. The focus remains on those companies which are expected to benefit from the improved relations with China. There are a number of attractively valued smaller companies available with dividend yields in excess of 5%.

ASEAN countries

Scottish Oriental continues to have a large position in Singapore. The holdings are diversified in terms of geographical reach with some, such as Amtek Engineering and SuperGroup, having multinational exposure while others, such as Bukit Sembawang Estates and Yongnam Holdings, focus on the domestic economy.

The Trust remains overweight in Thailand. Strong domestic consumption should continue, supported by an increase in the minimum wage and low interest rates. Infrastructure spending has also increased following last year's devastating floods. The Trust sold its longstanding position in Home Product Center as the Company was viewed as a major beneficiary of the post-flood reconstruction and its valuation became expensive.

Although there was no change to the Trust's holdings in Malaysia, the positions in Aeon Company and Aeon Credit Service were reduced following a re-rating of their valuations. The outlook for these companies remains positive given their exposure to growth in domestic consumption.

Scottish Oriental continues to have a high exposure to Indonesia with a particular emphasis on those companies which are involved in modern retailing. Sumber Alfaria Trijaya owns and operates a network of Alfamart stores throughout Java and Bali. These stores are described as grocery 'top up' stores providing people with their basic necessities. Nippon Indosari Corpindo is the leading manufacturer of bread in Indonesia, with more than 70% of its products sold through modern retailers such as Alfamart.

The Trust's holdings in the Philippines remain focused on the domestic economy. Century Properties is a well established residential property developer with a strong reputation for building premium developments in Metro Manila. It has a strong international sales network that targets overseas foreign workers.

The Trust retains a small position in Vietnam. Although the outlook for the economy has improved there are concerns that the Government's commitment to economic reforms may be wavering. However, this is more than adequately reflected in corporate valuations which are now trading at very attractive levels. Exposure is via Vietnam Enterprise Investments.

Indian Sub-Continent

Scottish Oriental continues to have a low weighting in India as valuations for well managed companies remain expensive. Economic growth has slowed and the outlook for corporate earnings is overshadowed by rising costs and weakening demand. The Trust continues to hold small positions in Castrol (India) and Marico and will look to add to its exposure, following the identification of suitable companies trading on attractive valuations.

Although the outlook for corporate earnings in Sri Lanka remains positive, this is largely reflected in valuations. Unfortunately the risk of further currency devaluation remains given the Government's populist policies. Consequently, Scottish Oriental holds companies which are either beneficiaries of a weaker rupee such as Aitken Spence Hotels and Expolanka Holdings, or have a natural currency hedge in the form of overseas earnings such as Dialog Axiata.

South Korea

The Trust reduced its holdings in South Korea over the period with the sale of Nice E-banking Services, IDIS Holdings and Intelligent Digital Integrated Security. Unfortunately the slowdown in economic growth resulted in a more challenging operating environment for these companies.

Sector Allocation at 31^st August 2012

Sector	%
Consumer Discretionary	29.9
Consumer Staples	8.7
	38.6
Energy	3.8
Financials	21.1
Healthcare	9.8
Information Technology	9.7
Industrial	13.2
Materials	0.7
Telecommunications Services	0.5
Utilities	1.3
	98.7
Net current assets	11.5
Long term loan	(10.2)
Net assets	100.0

Scottish Oriental's high exposure to the Consumer Discretionary sector remains unchanged although there were some significant adjustments to the underlying holdings. These changes included the sale of Shirble Department Stores in China and Next Media in Hong Kong. The Trust's holdings in the Consumer Staples sector increased with the acquisition of Sheng Siong Group in Singapore. There remains a wide selection of companies in these sectors which fulfil the Manager's investment requirements in terms of management quality, strong business franchise and robust financial position. In addition, these consumer-related companies will continue to benefit from the strength of the Region's domestic economies.

The Trust's position in the Financials sector increased mainly due to the outperformance of a number of holdings. 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.

Scottish Oriental increased its position in the Industrial sector with additions to existing positions as well as the purchase of KD Holding in Taiwan and Ticon Industrial Connection in Thailand. As a result of the global economic slowdown, valuations for a number of companies in the sector have fallen to attractive levels.

The Trust's exposure to Healthcare increased not only via additions to existing positions but also due to strong returns from a number of holdings such as Supermax in Malaysia.

There was a reduction in Scottish Oriental's holding in the Information Technology sector with the sale of Sinocom Software in China owing to weak demand and rising costs.

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

Ten Largest Equity Holdings at 31^st August 2012

Company	Market			Value	% of Shareholders' Funds
Amorepacific Group	South Korea			£4,350,090	2.2%
Amorepacific Group is a holding company whose major asset is a 35% stake in Amorepacific Corp, South Korea's leading domestic cosmetics company. Amorepacific Corp has two key brands, Hera and Sulwhasoo, which are sold domestically and overseas, mainly in China and France. The Group's other businesses include cosmetics bottling, green tea manufacturing and advertising services.
Ezion Holdings	Singapore			£4,245,641	2.1%
Ezion was created in March 2007 via a backdoor listing into Nylect Technology Limited. The Chief Executive and major shareholder is TK Chew, who was previously Chief Executive of KS Energy. Mr Chew established an impressive track record in his previous position. The Company was established to own and lease out liftboats which are used for the maintenance and operational support of offshore platforms. Ezion also has a fleet of more than 20 ships, which include ballastable vessels, barges and tugs, of which half are under long term contracts and the rest on charter. The Company has already commissioned six liftboats with two more due for completion by the end of next year.
Aeon Company	Malaysia			£3,924,993	1.9%
Aeon Company owns and operates general merchandise stores as well as standalone Maxvalu supermarkets in Malaysia. The Company has been operating there for over 20 years and has developed a strong network of suppliers and distributors. Aeon's stores target the middle-income consumer and are located in high-density residential estates in the suburbs of major towns. Despite strong competition from hypermarkets, the Company has been able to identify new store locations albeit at a conservative pace. Management are impressive with a strong focus on customer service.
Asia Satellite Telecommunication			China	£3,893,614	1.9%
Asia Satellite Telecommunication is Asia's largest privately owned commercial satellite operator. The Company presently owns and operates four satellites, which provide transponder capacity primarily to the broadcasting and telecommunications markets, both public and private. More than 50% of revenues are derived from China, Hong Kong and Taiwan and its 'footprint' covers approximately two thirds of the world's population. Profits in recent years have been negatively affected by the slowdown in demand for transponder capacity and increased competition from China's State-owned satellite operators. All new satellites will have the technology that meets China's stringent security requirements, which should result in stronger demand.
Cosmax	South Korea			£3,834,472	1.9%
Established in 1992, Cosmax is a leading cosmetic original design manufacturer in South Korea, producing a wide range of make-up and skin care products. The Company supplies not only the domestic cosmetic 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 shadows for Maybelline and gel eyeliners for L'Oreal. These products were designed in-house and have stimulated demand for other new products from existing clients.
Aeon Thana Sinsap	Thailand			£3,803,429	1.9%
Aeon Thana Sinsap, a subsidiary of the Aeon Group of Japan, is a consumer finance company which provides personal loans, credit cards and cash advances. The Company has four Regional head offices, supporting 93 branches of which more than half are located outside Bangkok. Growth will continue to come from customers outside Bangkok owing to lower market penetration and less competition.  Management have a very conservative provisioning policy and are rigorous in the evaluation of new loan applications as well as being prompt and persistent in chasing late repayments.
TK Corp	South Korea			£3,604,491	1.8%
Established in 1965, 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. 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.
Salamander Energy	Indonesia			£3,517,200	1.7%
Salamander Energy was established in 2005 by a team of experienced geologists with the objective of buying existing oil and gas producing assets in South East Asia as well as to explore for new assets in this Region. The Company obtained a main board listing on the London Stock Exchange in December 2006 because its producing assets in Indonesia and Thailand already had a three year history. Salamander finds itself with limited competition either in bidding for producing assets or in exploration as the sites are either too small for the big operators or away from the national companies' focused locations.
Media Prima	Malaysia			£3,390,515	1.7%
Media Prima is the leading media company in Malaysia with exposure to TV, radio and outside advertising as well as 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%.
Vietnam Enterprise Investments		Vietnam		£3,389,265	1.7%
Managed by Dragon Capital, Vietnam Enterprise Investments is an investment holding company which aims to achieve a balanced portfolio of investments in Vietnam. The Company has been investing in Vietnam for more than 17 years and has assets under management of approximately US$400m.

Susie Rippingall

Wee-Li Hee

Scott McNab

Angus Tulloch

First State Investment Management (UK) Limited, Investment Manager

1st November 2012

Ten Year Record

Capital

			NAV		Price		Discount to NAV
Year ended 31st August	Market Capitalisation £m	Shareholders'Funds £m	Diluted (p)	Undiluted (p)	Ordinary (p)	Warrant (p)	Diluted %	Undiluted %
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	314.00	-	-	(8.9)
2008	79.16	94.50	-	312.78	262.00	-	-	(16.2)
2009	98.95	113.86	-	376.85	327.50	-	-	(13.1)
2010	146.08	167.76	-	555.26	483.50	-	-	(12.9)
2011	181.28	186.89	-	618.56	600.00	-	-	(3.0)
2012	182.19	201.60	-	667.26	603.00	-	-	(9.6)

Revenue

Year ended 31st 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 Ω
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	1.00	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

* 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 daily net asset value during the year (2011 and prior: Total expense ratio, being the management fee and all other operating expenses, excluding interest, expressed as a percentage of the month end net assets during the year.

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

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

Cumulative Performance (taking year ended 31^st August 2002 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
2002	100	100	100	100	100	100	100
2003	126	126	136	113	101	111	100
2004	130	127	140	111	108	122	105
2005	174	172	227	138	130	215	173
2006	202	198	291	159	147	273	240
2007	249	254	-	218	159	363	307
2008	226	212	-	193	140	379	333
2009	272	265	-	205	123	436	400
2010	401	391	-	248	132	605	567
2011	446	485	-	251	137	651	600
2012	482	487	-	244	145	822	733

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. 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 16 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 Code 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, the Investment Manager and the Company Secretary;

·   Custody of the Company's assets has been delegated to JPMorgan Chase. The records maintained by JPMorgan Chase permit the Company's holdings to be readily identified. The Investment Manager and Company Secretary carry 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 and Company Secretary'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.

Management

First State Investment Management (UK) Limited has been Investment Manager since 20^th March 1995. The current Investment Management Agreement was put in place on 1 March 2011 ("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 £1,795,277 (2011: £2,405,137) is due to be paid for the twelve months ending 31st August 2012 and this fee will be charged against the Company's capital.

The Investment Manager's appointment as investment manager 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 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.

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.

Company Secretary

Company Secretarial, accounting and administrative services were provided by First State Investment Management (UK) Limited for a fee, initially based on £35,000 per annum until 31st March 1996 and subsequently increased in line with the UK Retail Price Index annually, until 28th February 2011. On 1st March 2011 Personal Assets Trust Administration Company Limited were appointed to provide these services for an annual fee of £97,500 plus VAT payable quarterly in advance and linked to the movement in the Retail Price Index annually. The appointment is terminable on three months' notice.

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 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 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 financial statements 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 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 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.

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

1st November 2012

Income Statement for the year ended 31^st August 2012 (audited)

                                                                        2012                                                       2011

	Revenue £'000	Capital £'000	Total* £'000	Revenue £'000	Capital £'000	Total* £'000
Gains on investments	-	15,129	15,129	-	20,237	20,237
Income from investments [Note 1]	7,056	-	7,056	5,696	-	5,696
Other income [Note 1]	17	-	17	30	-	30
Investment management fee [Note 2]	(1,435)	(1,795)	(3,230)	(1,452)	(2,405)	(3,857)
Currency (losses)/gains [Note 13]	-	(247)	(247)	-	470	470
Other administrative expenses [Note 3]	(457)	-	(457)	(461)	-	(461)
Net return before finance costs and taxation	5,181	13,087	18,268	3,813	18,302	22,115
Finance costs of borrowing [Note 4]	(461)	-	(461)	(18)	(54)	(72)
Net return on ordinary activities before taxation	4,720	13,087	17,807	3,795	18,248	22,043
Tax on ordinary activities [Note 5]	(372)	-	(372)	(352)	-	(352)
Net return attributable to equity Shareholders	4,348	13,087	17,435	3,443	18,248	21,691
Net return per ordinary share [Note 7]	14.39p	43.32p	57.71p	11.39p	60.40p	71.79p

* 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.

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 11.00p per share for the year ended 31^st August 2012 (2011: 9.00p per share) which, if approved, will be payable on 31 January 2013 to shareholders recorded on the Company's shareholder register on 14 December 2012.

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

All revenue and capital items derive from continuing operations.

Summary Balance Sheet as at 31^st August 2012 (audited)

	2012			2011
	£'000	£'000	£'000		£'000
FIXED ASSETS - EQUITY INVESTMENTS [Note 8]		198,949			177,549
Current Assets:
Debtors [Note 9]	3,299		999
Cash and deposits	22,997		31,328
	26,296		32,327
Current Liabilities (due within one year)
Creditors [Note 10]	(3,154)		(3,028)
	(3,154)		(3,028)
Net Current Assets		23,142			29,299
Total Assets less Current Liabilities		222,091			206,848
Creditors (dues after one year)
Loan [Note 11]		(20,487)			(19,960)
Equity shareholders' funds		201,604			186,888
Represented by
Capital and reserves
Ordinary share capital [Note 12]		7,554			7,554
Share premium account [Note 13]		21,337			21,337
Warrant reserve [Note 13]
exercised		1,319			1,319
Capital reserve [Note 13]		162,590			149,503
Revenue reserve [Note 13]		8,804			7,175
		201,604			186,888
Net asset value per share [Note 14]		667.26p			618.56p

 

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

Reconciliation of Movements in Shareholders' Funds (audited)
For the year ended 31st August 2012
	Share capital	Share premium account	Warrant reserve exercised	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31st August 2011	7,554	21,337	1,319	149,503	7,175	186,888
Realised gain on investments	-	-	-	10,799	-	10,799
Currency loss	-	-	-	(247)	-	(247)
Unrealised appreciation on investments in the year	-	-	-	4,330	-	4,330
Performance fee	-	-	-	(1,795)	-	(1,795)
Income retained in the year	-	-	-	-	4,348	4,348
Dividend paid in the year	-	-	-	-	(2,719)	(2,719)
Balance at 31st August 2012	7,554	21,337	1,319	162,590	8,804	201,604

Reconciliation of Movements in Shareholders' Funds (audited)
For the year ended 31st August 2011
	Share capital	Share premium account	Warrant reserve exercised	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31st August 2010	7,554	21,337	1,319	131,255	6,300	167,765
Realised gain on investments	-	-	-	30,867	-	30,867
Currency gain	-	-	-	470	-	470
Unrealised depreciation on investments in the year	-	-	-	(10,630)	-	(10,630)
Performance fee	-	-	-	(2,405)	-	(2,405)
Finance costs of borrowing	-	-	-	(54)	-	(54)
Income retained in the year	-	-	-	-	3,443	3,443
Dividend paid in the year	-	-	-	-	(2,568)	(2,568)
Balance at 31st August 2011	7,554	21,337	1,319	149,503	7,175	186,888

Summary Cash Flow Statement for the year ended 31^st August 2012 (audited)

	2012 £'000	2011 £'000
Net cash inflow from operating activities	5,387	3,846
Returns on investments and servicing of finance	(477)	(34)
Taxation	(457)	(453)
Net cash outflow from capital expenditure and financial investment	(10,065)	(1,926)
Equity dividend paid	(2,719)	(2,568)
Financing	-	19,813
(Decrease)/increase in cash	(8,331)	18,678

 

Accounting Policies

Basis of accounting

(a)  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 better to 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.

Income

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

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

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

Expenses

(e)  Expenses of management and interest payable 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.

(f)   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.

Valuation of Investments

(g)  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)  Equities include ordinary shares and warrants.

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

Foreign currency

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

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

Cash and liquid resources

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

Long term borrowings and finance costs

(m) Long term borrowings are carried in the Balance Sheet at fair value. Finance costs of such borrowings are charged to capital in the period in which they are incurred. Interest costs incurred on long-term borrowings are charged to income on a time apportioned basis over the life of the liability. Breakage costs on long term borrowings are charged to capital.

Dividends

(n)  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

(o)  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.

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.

NOTES ON THE ACCOUNTS (audited):

(1) Income

Income from investments relates to dividends. Other income relates to bank deposit interest and £17,000 (2011: £27,000) in relation to Taiwan tax reclaims from overseas listed companies.

(2) Investment Management Fee

	2012 £'000	2011 £'000
Performance fee	1,795	2,405
Investment management fee	1,435	1,452
	3,230	3,857

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

(3) Other Administrative Expenses

		2012 £'000	2011 £'000
Auditors' remuneration for:
-     Audit		13	12
-     Tax services		4	4
Directors' fees		75	78
Company secretarial fees		99	75
Bank, custodial and other expenses		266	292
		457	461

Since 1st July 2012 Directors' fees have been as follows:

Chairman of the Board                     £25,000 per annum

Each other Director                         £18,000 per annum

Prior to 1st July 2012 Directors' fees were as follows:

Chairman of the Board                     £23,500 per annum

Each other Director                         £17,000 per annum

(4) Finance Costs of Borrowing

		2012			2011
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Costs in relation to bank borrowing	461	-	461	18	54	72
	461	-	461	18	54	72

(5) Taxation

		2012			2011
(a) Analysis of charge in period	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Current tax:
Overseas tax	372	-	372	352	-	352
	372	-	372	352	-	352

(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:

	2012 £'000	2011 £'000
Net gains on investments during the period	15,129	20,237
Other (losses)/gains	(247)	470
Performance fee	(1,795)	(2,405)
Finance costs of borrowing	-	(54)
Net investment income before tax	4,720	3,795
Total return for the period before taxation	17,807	22,043
Total return for the period before taxation multiplied by the effective rate of corporation tax of 25.16% (2011: 27.16%)	4,480	5,987
Effect of:
Capital returns not subject to corporation tax	(3,744)	(5,624)
Non-taxable income	(1,775)	(1,547)
Overseas tax	372	352
Movement on excess expenses	1,039	1,184
Current tax charge for the period	372	352
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

The Company has a deferred tax asset of £2,611,000 (2011: £1,755,000) at 31^st August 2012 in respect of unrelieved tax losses carried forward. This asset has not been recognised in the accounts as it is unlikely under current legislation that it will be capable of being offset against future taxable profits.

(6) Dividends

	2012	2011
	£'000	£'000
Dividends paid in the period:
Dividend of 9.00p per share (2011 - 8.50p)
paid 10th February 2012	2,719	2,568

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 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.

	2012	2011
	£'000	£'000
Income available for distribution	4,348	3,443
Proposed dividend for the year ended 31st August 2012 - 11.00p
(2011 - 9.00p) payable 31st January 2013	(3,324)	(2,719)
Retained income for section 1158  Corporation Tax Act 2010 purposes	1,024	724

(7) Return per Ordinary Share

		2012			2011
	Revenue p	Capital p	Total p	Revenue p	Capital p	Total p
Net return per ordinary share	14.39	43.32	57.71	11.39	60.40	71.79
					2012	2011
Revenue return					£4,348,000	£3,443,000
Capital return					£13,087,000	£18,248,000
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	£'000
Cost at 31st August 2011	141,593
Unrealised appreciation	35,956
Valuation at 31st August 2011	177,549
Purchases at cost *	44,658
Sales - proceeds *	(38,387)
Sales - realised gains on sales	10,799
Unrealised appreciation on investments in the year	4,330
Valuation at 31st August 2012	198,949
Cost at 31st August 2012	158,663
Closing unrealised appreciation	40,286
All investments are listed on recognised stock exchanges. * These figures include the following charges. Transaction Costs During the year the Company incurred transaction costs of £139,000 (2011: £179,000) on the purchase of investments and £154,000 (2011: £275,000) on the sale of investments.

	2012	2011
(9) Debtors	£'000	£'000
Sales awaiting settlement	2,391	-
Accrued income	585	763
Overseas tax recoverable	320	236
VAT recoverable	3	-
	3,299	999

	2012	2011
(10) Creditors (amounts falling due within one year)	£'000	£'000
Purchases awaiting settlement	865	143
Performance fee	1,795	2,405
Finance costs of borrowing	-	21
Interest due on loan	22	18
Other creditors	472	441
	3,154	3,028

	2012	2011
(11) Creditors (amounts falling due after one year)	£'000	£'000
US$32,500,000 fixed rate loan 2.191% 12/08/14	20,487	19,960

The main covenants relating to the loan are that total net assets shall not fall below £80 million and the ratio of adjusted total net assets to debt shall exceed 3.333 to 1. There were no breaches of loan covenants during the year.

(12)       Share Capital

The authorised capital is £8,190,058 (2011: same) represented by 32,760,234 ordinary shares of 25p each (2011: same). The allotted capital is £7,553,412 (2011: same) represented by 30,213,650 ordinary shares of 25p each (2011: 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.

Other than the loan covenants described in note 11 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.

(13) Reserves	Share premium account	Warrant reserve exercised	Capital reserve	Revenue reserve
	£'000	£'000	£'000	£'000
Balance at 31 August 2011	21,337	1,319	149,503	7,175
Realised gain on investments	-	-	10,799	-
Currency loss	-	-	(247)	-
Unrealised appreciation on investments in the year	-	-	4,330	-
Performance fee	-	-	(1,795)	-
Income retained in the year	-	-	-	4,348
Dividend paid in the year	-	-	-	(2,719)
Balance at 31 August 2012	21,337	1,319	162,590	8,804

The capital reserve includes investment holding gains amounting to £40,286,000 (2011: £35,956,000), as disclosed in Note 8.  The revenue reserve is distributable by way of dividend.

(14) Net Asset Value per Ordinary Share

Net assets per share are based on total net assets of £201,604,000 (2011: £186,888,000) divided by 30,213,650 (2011: same) ordinary shares of 25p each in issue.

 

(15) Cash Flow Statement

 

	2012 £'000 (audited)	2011 £'000 (audited)
(a) Reconciliation of total income to net cash inflow
from operating activities
Income	7,073	5,726
Administration expenses	(1,892)	(1,913)
(Increase)/decrease in debtors	(3)	2
Decrease/(increase) in dividends accounted for but not yet received	178	(84)
Increase in creditors	31	115
Net cash inflow from operating activities	5,387	3,846

 

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

	At the start of the Year £'000	Cash  Flows £'000	Non-cash Changes £'000	At the end of the Year £'000
Cash	31,328	(8,331)	-	22,997
Loans due between one and five years	(19,960)	-	(527)	(20,487)
	11,368	(8,331)	(527)	2,510

(16) Risk Management, Financial Assets and Liabilities

The Company invests mainly in smaller Asian quoted companies. Other financial instruments comprise cash balances, short-term debtors, creditors and a fixed rate loan. The Investment Manager follows the investment process outlined above 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 risks (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.

Movements in interest rates, to the extent that they affect the fair value of the Company's fixed rate borrowings, may also affect the amount by which the Company's share price is at a discount or a premium to the net asset value (assuming that the Company's share price is unaffected by movements in interest rates). Throughout the year the Company held a U$32.5 million three year fixed rate bank rate loan.

Foreign Currency Risk

The majority of the Company's assets, liabilities and income are denominated in currencies other than sterling (the currency which the Company reports its results) as at 31st August 2012. 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 2012			31 August 2011
	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	50,137	244	50,381	45,356	330	45,686
Singapore dollars	32,234	1,552	33,786	25,565	6,658	32,223
Taiwanese dollars	29,471	666	30,137	23,434	636	24,070
Korean won	24,873	1,429	26,302	24,727	-	24,727
Malaysian ringits	16,872	-	16,872	15,724	77	15,801
Thai baht	16,451	27	16,478	15,691	37	15,728
Philippine pesos	8,534	-	8,534	7,701	-	7,701
Indonesian rupiahs	6,751	-	6,751	7,848	-	7,848
Sri Lankan rupees	3,773	-	3,773	2,871	-	2,871
Indian rupees	2,947	-	2,947	2,764	19	2,783
US dollars	3,389	(4,943)	(1,554)	1,935	(15)	1,920
Chinese yuan	-	-	-	1,634	-	1,634
Total foreign currency	195,432	(1,025)	194,407	175,250	7,742	182,992
Sterling	3,517	3,680	7,197	2,299	1,597	3,896
Total currency	198,949	2,655	201,604	177,549	9,339	186,888

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 2012 would have increased/(decreased) by £20,160,000 (2011 increased/(decreased) by £18,689,000) 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 2012 was as follows:

	2012		2011
	Balance sheet	Maximum exposure	Balance  sheet	Maximum exposure
Current assets	£'000	£'000	£'000	£'000
Receivables	3,299	3,299	999	999
Cash at bank	22,997	22,997	31,328	31,328
	26,296	26,296	32,327	32,327

17. Related Party Transactions

The Directors' fees for the year are detailed in the Directors' Remuneration Report in the Annual Report. 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 2012 and 2011 are an abridged version of the statutory accounts for those years. The Auditor has reported on the 2012 and 2011 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 2011 have been filed with the Registrar of Companies and those for 2012 will be delivered in due course.

The 2012 Annual Report will be posted to shareholders in November 2012 and copies will be available from the Company's website www.scottishoriental.com and the Company's registered office at 10 St Colme Street, Edinburgh, EH3 6AA.

Enquiries:	Steven Davidson, Company Secretary
	Telephone [phone]

1^st November 2012

 

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