Annual Financial Report

RNS Number : 7950R

Scottish Oriental Smlr Co Tst PLC

30 October 2013

 

THE SCOTTISH ORIENTAL SMALLER COMPANIES TRUST PLC

("Scottish Oriental")

Annual Financial Report for the year ended 31 August 2013

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 2013.  

Financial Highlights

Performance for the year ended 31 August 2013 (audited)
Net Asset Value	20.1%	MSCI AC Asia ex Japan Index (£) *	10.1%
Share Price	21.7%	MSCI AC Asia ex Japan Small Cap Index (£) *	14.2%
Dividend Increase	4.5%	FTSE All-Share Index (£) *	18.9%
* Total return (capital return with dividends reinvested)

Summary Data at 31 August 2013 (audited)
Shares in issue	31,643,650	Shareholders' Funds	£253.63m
Net Asset Value per share	801.53p	Market capitalisation	£232.19m
Share Price	733.75p	Share Price Discount to Net Asset Value	8.5%

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$1,500m, or the equivalent thereof, at the time of first investment.

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

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

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

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

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

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

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

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

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 has had another good year. As you will see, the net asset value ("NAV") increased by 20.1 per cent over the 12 months, while the MSCI AC Asia ex Japan Index rose by 10.1 per cent. As the discount narrowed slightly, the share price increased by 21.7 per cent. A performance fee was earned by our investment manager for the fourth year in succession. This is based on a demanding target for the Company's share price total return over three years (the details are set out on page 21 of the annual report).

Earnings per share have increased again to 14.56p, compared to 14.39p last year. We are proposing a dividend of 11.5p net, an increase of 4.5 per cent. The undistributed balance of £879,000 will be added to the revenue reserve, as set out on page 20. It remains our intention to maintain at least this level of dividend, using our reserves if necessary.

Susie Rippingall, who succeeded Angus Tulloch as the manager of Scottish Oriental in October 2000, retired in April. We are extremely grateful for the exceptional results that she achieved for the trust during her thirteen years with us and she left with our best wishes. As we had announced, Angus Tulloch returned as the manager. His deputy, Wee Li, is at present on maternity leave and Martin Lau has been acting in her place.

During the year we raised £12.0 million from the issue of 1,430,000 shares, at a premium to NAV. The board has no formal discount control mechanism, but we will be prepared both to buy back shares opportunistically or to issue new shares at a small premium to NAV, provided that in each case this is in the interests of continuing shareholders.

Our arrangements for complying with the AIFMD are well advanced. First State has agreed to be the AIFM which will not involve any extra expense for Scottish Oriental. We are unfortunately obliged to engage a depositary; this will mean an extra cost for the Company.

As this is written, the portfolio is 93% invested. Our manager is cautious for the reasons set out on page 10, and it is useful to have reserves of cash because interesting buying opportunities are emerging. This is despite the fact that, in general, equity markets are fairly fully valued; our cash will be invested gradually.  The yield on our current equity portfolio is 2.9% and the historic PE is 14x. We remain optimistic about the longer term prospects for smaller companies in Asia.

The Annual General Meeting will be held in Edinburgh on 12 December 2013 at the offices of First State Investments, 23 St Andrew Square, and I look forward to seeing shareholders there."

James Ferguson

Chairman

30 October 2013

Portfolio Manager's Report

REVIEW

In the year ending 31 August 2013, Asian equities performed well, with notable gains achieved in China, Hong Kong, and Taiwan. All Asian stock markets rose during the period, with the exception of India and Indonesia. The external environment became more uncertain as the year progressed, amid concerns that the US Federal Reserve might be willing to scale back its stimulus programme. Markets became increasingly volatile as a result. Economic growth in the region was impacted by the slow pace of the recovery in the US, and by the malaise that continues to affect the economies of Europe. The macro situation globally meant weaker demand for Asian exports. However, slowing external demand was offset by higher domestic consumption, with consumers across the region benefiting from the availability of credit. Commodity prices fell for a second successive year, allowing authorities, in most Asian countries, to pursue accommodative fiscal and monetary policies.

Equities in China and Hong Kong performed strongly, reversing the disappointment of the previous year, as investors came to terms with the lower growth environment in China under its new leadership. Certain sectors such as textiles, which were widely sold off last year, performed well. Taiwan's stock market recorded a significant gain, with consumer stocks performing particularly well, in part because of better relations with China and commercial reforms. Just like last year, equities in the Philippines also rose sharply; the country continues to prosper from President Aquino's reforms and also from higher consumer spending, moderate inflation, and historically low interest rates. India and Indonesia, the worst performing markets, continued to suffer from slowing economic growth, current account deficits, high inflation, and depreciating currencies.

Scottish Oriental's performance over the year was pleasing both in absolute terms and also relative to its benchmark. The Trust outperformed the benchmark, the MSCI AC Asia ex Japan Index, for a third successive year. It also outperformed the MSCI Asia ex-Japan Small Cap Index. Scottish Oriental benefited from its exposure to Singapore, Taiwan, and Thailand, and from certain sectors, such as textiles in China. Strong returns from some of the Trust's larger holdings, such as Aeon Thana, Ezion Holdings, and St. Shine Optical, also helped performance.

Stockmarket performance for the year ending 31 August 2013

Country	Sterling %	Local Currency %	Country Allocation on 31 August 2013 %
China	17.5	14.4	15.6
Hong Kong	18.8	15.7	9.9
Taiwan	14.4	11.3	12.9
Greater China			38.4
Singapore	3.2	2.9	14.7
Thailand	1.9	1.9	5.1
Malaysia	6.3	8.8	5.1
Indonesia	(8.4)	2.2	4.3
Philippines	18.3	22.1	1.9
Vietnam	4.1	3.0	-
South East Asia			31.1
India	(5.6)	9.2	10.7
Sri Lanka	14.5	12.6	2.4
Indian Subcontinent			13.1
South Korea	8.0	2.9	7.1
MSCI*	10.1	9.3	-
Net current assets	-	-	10.3
Total			100.0

  * Morgan Stanley Capital International AC Asia ex Japan Index

Greater China

Economic growth slowed in China over the course of the year, despite efforts from the government to boost domestic consumption. The new government has shown a desire for higher quality growth, and it appears unwilling to spend its way out of the current slowdown, a tactic popular with the former regime. The most worrying development in China has been the growth of a shadow banking system. Its reformation will be at the top of the new leadership's agenda, as evidenced by the liquidity squeeze in the interbank market earlier this year. Nevertheless, we have been impressed with the intentions to limit corruption, reduce ostentatious spending, and create a level playing field for private enterprise.

Hong Kong has been impacted by China's softening macro situation. Retail sales continue to be influenced by the spending patterns of mainland tourists. Luxury goods retailers were adversely affected by China's austerity measures, as consumers became more reluctant to purchase visible displays of wealth. Demand for both commercial and residential real estate remained strong during the year. This prompted the government to apply further restrictions on mortgages and state its commitment to increasing the supply of affordable housing.

Taiwan continues to benefit from commercial reforms and better relations with China. The country has also prospered from its low inflationary environment, which has seen a number of higher end manufacturers relocate to Taiwan in the light of rapidly rising labour costs in China. Real wages in Taiwan have not risen in ten years. Domestic consumer stocks performed surprisingly well but more generally the country's economic growth is dependent on exports, the growth of which slowed during the period.

South East Asia

It was a much tougher year for Indonesia's economy. Economic growth slowed, in part because commodity prices fell, reducing foreign currency earnings, corporate profits and investment activity. This hurt an economy already suffering from a burgeoning current account deficit. Falling foreign exchange reserves, capital outflows, accelerating inflation, and a depreciating Rupiah, placed Indonesia's economy under further stress. The government made a positive move to reduce the current account deficit by cutting the fuel subsidy, the main cause of the country's rising oil import bill. The short-term impact, however, is further inflationary pressure. In addition, there appears to be a new wave of 'resource nationalism', which will increase the reluctance of domestic and foreign companies to invest in Indonesia.

The economic situation in Malaysia is stable, and has been supported by infrastructure investment and robust domestic consumption. Consumer indebtedness is a concern though; relative to GDP, consumer debt is now 83%, compared to 32% on the eve of the Asian financial crisis. The re-election of Prime Minister Najib and his Barisan Nasional coalition removed the overhang of political uncertainty and provided the government with the platform to enact much needed economic reforms. Inflation remains low but it is likely to rise owing to a gradual reduction in fuel subsidies.

The Philippines' economy continues to defy the regional trend. Growth has been supported by higher consumer spending, moderate inflation and historically low interest rates. The government continues to exercise fiscal discipline and has recorded budget surpluses in recent months. President Aquino has surpassed expectations in reforming the public procurement process, tackling corruption and taking on vested interests in areas such as family health and 'sin taxes'. Weak commodity prices have helped matters, resulting in lower than expected inflation. Strong business confidence has unfortunately left valuations at record levels.

Singapore's economic growth has also experienced a significant downturn despite the support provided by ongoing infrastructure investment. Weak external demand, particularly for manufactured products, has resulted in poor production and trade data. Furthermore, living costs are rising, the population is ageing, and there is an increasingly vocal discontent about growing inequality. Consequently the budget has focused on key concerns such as affordable housing supply, transportation needs and income support through the wage credit scheme. It will take time for tangible results to be seen, so it is unlikely the situation will change quickly.

Thailand's economy continues to recover from the devastating floods at the end of 2011. Domestic consumption, led by strong wage growth and low unemployment, has driven the economy at a time when exports remain soft. Consumption started to slow at the end of the year, however, as a number of populist government policies, such as the First Car Policy, came to an end, and fears heightened over consumer indebtedness. The political situation was relatively calm over the period but it remains to be seen whether the government will be able to make much needed investments in infrastructure.

Vietnam's economy continues to struggle, and will do into the foreseeable future. Exports have performed well, bucking the regional trend. The problem has been the banking sector, which is in a state of crisis. For years, aggressive lending drove growth but it has left the economy in a bad state. The situation is being addressed but it will take a long time for credit growth to pick up. Furthermore, the government continues to battle with inflation, and corruption is widespread.

Indian Subcontinent

India remains burdened with both large fiscal and current account deficits. Unfortunately the slowdown in the economy appears structural and is therefore unlikely to respond to lower interest rates. Politics remains the problem, as evidenced by the recent Land Acquisition Bill, which will make it costly, difficult, and time consuming to acquire land for infrastructure investments. The situation requires strong government as there has been a lack of reform. Tough and unpleasant decisions need to be taken in order to achieve long term benefits. 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 has experienced high levels of economic growth since the cessation of the civil war. However, growth and access to credit has slowed, and the government is now stuck in a difficult position as the only way to meet fiscal targets without growing tax revenue is to hold back on spending. This will naturally impact economic growth. The government has so far failed to reduce its large fiscal deficit, which has placed downward pressure on the currency. Scottish Oriental's holdings are companies with all or at least some of their revenues denominated in US dollars.  

South Korea

Economic growth in South Korea remains soft, through a combination of weak external demand and soft domestic consumption. The election of President Park Geun-hye, with her mantra of economic democratisation, served as proof that discontent with the country's widening income disparity is far-reaching. It also remains to be seen whether the new regime can exert tighter control of Korea's large industrial groups. The government has also tried to stimulate the struggling residential property market where demand has shifted away from ownership to the rental market despite relatively low interest rates.

Performance of individual equity holdings for the year ending 31 August 2013

Company	Country	Contribution Performance %	% of Shareholders' Funds at 31 August 2013
Best
Aeon Thana Sinsap	Thailand	1.9	1.1
Ezion Holdings	Singapore	1.9	2.1
St. Shine Optical*	Taiwan	1.6	-
Erawan Group*	Thailand	1.2	-
Super Group	Singapore	1.1	0.9
Worst
BW Plantation	Indonesia	(0.6)	1.3
Salamander Energy	Indonesia	(0.4)	0.9
Trinity	China	(0.4)	1.3
EID Parry (India)	India	(0.4)	1.1
Able C&C*	South Korea	(0.4)	-

*Sold prior to the year end.

The returns achieved by the Trust's five best performing stocks can be credited to increased domestic consumption in the region. Aeon Thana benefited from the surge in consumer confidence in Thailand, a result of strong wage growth and low unemployment, which led to greater acceptance of consumer credit in Thailand. Erawan Group also profited from consumption growth in Thailand, and from higher inbound tourist numbers. Instant beverages company Super Group continued to gain from the growth of its food ingredients business, which now accounts for a third of sales. St. Shine Optical, meanwhile, was rerated sharply as the company gained further market share in both Taiwan and Japan. Scottish Oriental reduced its exposure to the above consumer stocks over the course of the year as valuations reached unrealistic levels. Ezion Holdings, the best performing non-consumer stock, was able to take advantage of strong demand from the oil services sector, as its liftboats business continued to prosper.

BW Plantations'earnings were negatively affected by a number of logistical problems, as well as weakening crude palm oil prices. Fundamentally, however, the outlook for the company is satisfactory, as acreage will double by 2015. Salamander Energy also disappointed the market, which had expected better results from its oil exploration activity in Thailand. Although the long-term outlook for EID Parry remains positive, the company suffered as its fertiliser business experienced lower-than-expected sales following a drought in its key market, the state of Andhra Pradesh. The correction in Trinity's share price reflected investors' concerns that continued cost inflation, oversupply, and the evolving sophistication of Chinese consumers will make life harder for all but the top global fashion brands. Able C&C failed to adapt to increased competition at the lower end of Korea's fast moving cosmetics industry.

OUTLOOK

The performance of Asian equities is likely to continue to be influenced by the outlook for the global economy, and specifically by monetary policies in China, the West, and Japan. Asian stock markets have become more volatile in recent months. They will continue to react to news flow regarding the tapering of the US Federal Reserve's asset purchasing programme. We expect further volatility, as there appears to be no signs of a resolution in the short term. The stimulus programme being undertaken is unprecedented and the longer term consequences remain unknown. So far the risk of inflation has been limited but the risk remains that easy money may push prices higher and create currency volatility.

The current economic slowdown in Asia will have some beneficial effects in the longer term if the required structural reforms take place. In the case of India, the government must take advantage of the economic slowdown and sense of political paralysis to impose economic reforms in areas such as infrastructure. Such reforms will aid growth longer term. China can use its current slowdown to push through more radical reforms aimed at addressing the country's mounting socioeconomic and political problems. It is clear that Chinese citizens are demanding more of their government; they want to see more transparency, and require real changes in areas such as the environment.

Politics remains an interesting theme. Both China and Korea welcomed a change of leadership this year. The widening gap between rich and poor is a major issue for both of these countries, as it is for Hong Kong and Singapore where the governments must attempt to resolve the problems surrounding property ownership, which have seen many low income people forced out of the market.

Economic growth in Asia is unlikely to accelerate without a recovery in external demand. The region has become increasingly dependent on domestic consumption, and the valuations of locally focused consumer companies, especially in South East Asia, have become stretched. More generally, there are a limited number of companies trading on valuations that offer significant upside over the longer term. Scottish Oriental has increased its exposure to India where there are some excellent franchises with good management trading on reasonable valuations.

Angus Tulloch

Martin Lau

First State Investment Management (UK) Limited, Investment Manager

30 October 2013

Portfolio Review

Scottish Oriental's portfolio of investments is well diversified not only by country but also by sector. The largest country exposure is China with a 15.6 per cent position. Consumer Discretionary accounted for 19.4 per cent of the portfolio, the largest sector weighting. As at 31 August 2013 Scottish Oriental was invested in 93 different companies with the largest holding accounting for 2.4 per cent of the Portfolio. The aggregate of the trust's ten largest holdings was 18.1 per cent.

Country Allocation at 31^st August 2013 (based on geographical area of activity)

Country/Region	Scottish Oriental %	MSCI* %	MSCI Small Cap† %
China	15.6	25.1	20.0
Hong Kong	9.9	12.9	10.4
Taiwan	12.9	15.0	22.3
Greater China	38.4	53.0	52.7
Singapore	14.7	6.7	9.3
Thailand	5.1	3.1	3.9
Malaysia	5.1	4.9	5.6
Indonesia	4.3	3.3	4.2
Philippines	1.9	1.2	1.2
South East Asia	31.1	19.2	24.2
India	10.7	7.5	4.9
Sri Lanka	2.4	-	-
Indian Subcontinent	13.1	7.5	4.9
South Korea	7.1	20.3	18.2
Net current assets	10.3	-	-
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 structural slowdown has had a negative impact on corporate earnings and raised questions about the quality of banks' loan portfolios. Financial reform is likely to remain at the top of the agenda as the authorities remain concerned by the rapid growth of the shadow banking system. Such reform would impact financial institutions' behaviour and the pace of growth in broad credit. China's retail environment is looking increasingly competitive, leading to margin erosion, and ultimately profitless growth. A recent addition to the Trust's holdings in China is Singamas Container, the world's second largest container manufacturer, which is expected to benefit from a pick up in global trade in the medium term.

Hong Kong's US dollar currency peg has meant that quantitative easing policies undertaken by the US Federal Reserve have had a significant impact on the economy. Foreign exchange reserves have almost doubled to USD $300bn creating increased liquidity, which combined with record low interest rates, has fuelled a credit boom that has drastically increased property prices. Lower income investors have been priced out of the market, forcing the government to introduce dampening measures. The Manager is cautious of such seemingly unsustainable real estate valuations and has subsequently reduced Scottish Oriental's exposure to Hong Kong property.

The Trust's position in Taiwan increased over the period. The focus remains on those companies that are expected to gain from improved integration with China. There are a number of attractively valued smaller companies, more specifically in the industrial and technology sectors, with dividend yields in excess of 5 per cent. The Trust's largest position is in Chroma Ate, which has recovered well from cyclical lows.

ASEAN countries

Scottish Oriental remains overweight in Indonesia, despite the deteriorating macro economic picture. The Trust's holdings are largely focused on modern retail, a sector that will naturally continue to evolve and profit from Indonesia's favourable demographics as the country develops.

The Trust reduced its exposure to Malaysia over the course of the year. A number of the Trust's holdings were rerated in the weeks that followed the re-election of Prime Minister Najib and his Barisan Nasional coalition. Unfortunately these valuations were on occasion unsustainably high, so the Trust sold its entire position in both Aeon Credit Service and Eastern & Oriental. The Manager remains cautious as to the longer term effects of Malaysia's recent consumer boom, which has resulted in a significant increase in consumer indebtedness.

Although the holding is still overweight relative to the benchmark, Scottish Oriental significantly reduced its position in the Philippines. SM Development was taken over during the period and the Manager decided to sell the Trust's position, rather than except a stake in the new entity, SM Prime. Nevertheless the Trust also took advantage of a sharp pull back in the share price of Manila Water to establish a meaningful position.

Singapore remains an overweight position for the Trust. The holdings are diversified in terms of geographical reach with some, such as Petra Foods, having a broad regional focus and others, such as retailer Sheng Siong, operating exclusively on the island.

Thailand is another country where Scottish Oriental has reduced its exposure, especially in those companies that profited from increased consumer confidence, a product of higher wages and relatively low unemployment. The Trust is positioned to benefit from a pick up in export growth, which has been sluggish in recent years. 

Indian Sub-Continent

The biggest change to the Trust is the significant exposure to India. The poor state of the country's economy is well known. The Manager believes that India's politicians will eventually take the necessary reform measures; historically, political progress and common sense has prevailed in times of such fragility. The Manager has identified high quality franchises that will be able to prosper even if the domestic economy remains soft. In addition, a number of the new holdings including CMC and Tata Global Beverages have significant sales overseas, and therefore benefit from Rupee weakness.

In the near term, growth in Sri Lanka will be subdued. The easy credit that accompanied the end of the civil war has largely disappeared, and the risk of currency devaluation remains, as the government continues to pursue populist policies.

South Korea

Scottish Oriental significantly reduced its exposure to South Korea in the last year. The outlook for the country's economy is negative, as both exports and domestic consumption have shown minimal signs of a recovery. Unfortunately, and often because of governance concerns, it has proven difficult to find attractively valued smaller companies in South Korea that may offer significant upside in the longer term.

Sector Allocation at 31 August 2013

Sector	%
Consumer Discretionary	19.4
Consumer Staples	13.3
	32.7
Energy	3.5
Financials	15.1
Healthcare	10.7
Information Technology	9.0
Industrial	11.4
Materials	3.4
Technology	1.3
Telecommunications Services	0.9
Utilities	1.7
	89.7
Net current assets	10.3
Net assets	100.0

The Trust's exposure to the Consumer Discretionary sector remains high, although it has fallen during the year. As highlighted throughout this report, the Manager has found it difficult to justify the valuations of many consumer stocks, especially those operating in South East Asia. As a result, the Trust sold its entire holding in Aeon Credit Malaysia and the Erawan Group. The Manager has identified alternative consumer discretionary companies, trading at more attractive valuations, such as Tao Heung Holdings and Trinity. The Trust's holdings in the Consumer Staples sector strengthened with the purchases of Standard Foods and Tata Global Beverages. The Manager will continue to favour sensibly managed, financially secure consumer businesses that are well placed to benefit from the strength of the Region's domestic economies.

The position in Financials was reduced. Those holdings with significant exposure to China's rapid credit expansion, such as Dah Sing Financial, were sold. Property companies are included within this sector; Scottish Oriental reduced its exposure to the Hong Kong and Singapore property markets, as commercial rental prices appear unsustainably high.

Scottish Oriental added to its Industrial sector exposure with the purchases of Indian companies Blue Dart Express and Lakshmi Machine Works. The sector has suffered from the global economic slowdown and consequential negative sentiment that has led to more attractive valuations.

The Trust's position in Information Technology was increased, as a result of a new position in CMC, and the Manager's decision to add to the Trust's existing position in Chroma Ate. Its exposure to the Healthcare sector was also increased with larger positions being taken in Pacific Hospital Supply and Ton Ren Tang Technology.

Exposure to stocks in cyclical Energy and Materials sectors remains low as the Trust attempts to avoid price-takers which may be vulnerable to further economic downturns. The purchases of EID Parry and Linde India, two companies well positioned to benefit from industry consolidation, doubled the Trust's exposure to the Materials sector. Scottish Oriental also has a very low weighting in the Telecommunications and Utilities sector owing to the limited number of small and reasonably valued companies.

Ten Largest Equity Holdings at 31 August 2013

Company	Market			Value	% of Shareholders' Funds
Chrome Ate	Taiwan			£6,236,507	2.4%
Established in 1984, Chroma is the leading electronic testing and measurement manufacturer in Taiwan. Testing equipment for power electronic and passive components is viewed as its core business and these components need replacing every 3 to 5 years. Management is also developing and marketing products in power electronics and clean technology test solutions, particularly in LED, solar cell/module, battery formation and electrical cars. These clean technology related products are expected to be a major contributor to earnings over the medium term supported by strong demand for battery formation equipment coming from US auto component manufacturers.
Ezion Holdings	Singapore			£5,227,593	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.
Tao Heung Holdings	Hong Kong			£4,860,141	1.9%
Tao Heung owns and operates a network of Chinese restaurants in Hong Kong and China. The company adopts a successful multi-brand strategy that allows several different restaurants to be run profitably in the same popular dining areas. It has a net-cash balance sheet and strong cash flows that will support future growth. The founders and senior management own more than 40% of the company.
Pacific Hospital Supply			Taiwan	£4,594,193	1.8%
The core business of Pacific Hospital Supply is the design and manufacture of medical devices, such as closed suction catheters. In addition the Company is involved in the production and installation of medical equipment and gas piping systems for hospitals in Taiwan. Pacific Hospital Supply produces more than 600 different medical devices, with revenues mainly from 200 key products. It has a vertically integrated manufacturing process with a particular expertise in plastic injection, blow moulding and extrusion. The Company undertakes ODM orders on behalf of some of the larger Japanese and European healthcare companies but sells under its own PASHCO brand in Taiwan and emerging markets.
Supermax	Malaysia			£4,593,279	1.8%
Supermax manufactures and distributes a wide range of latex gloves from its factories in Malaysia. The Company is different to the other Malaysian latex glove manufacturers in that it has developed its own marketing strategy. Supermax has five different brands - Supermax, Aurelia, Maxter, Medic-Dent and Supergloves. Its distribution network now includes over 750 distributors in 145 countries. Supermax is now the second largest supplier of latex gloves to the US dental market.
Asia Satellite Telecommunication			China	£4,561,213	1.8%
Asia Satellite Telecommunication is Asia's largest privately owned commercial satellite operator. TheCompany 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.
Tong Ren Tang	China			£4,272,545	1.7%
Tong Reng Tang is one of the oldest and most respected traditional Chinese medicine companies in China. The Company's history as a listed company has been interesting with strong growth achieved in 2000 to 2005 followed by a period of consolidation and more modest growth in 2006 to 2009 as Management focused on restructuring its distribution network. More recently the Company's earnings growth has accelerated as a result of increased medical coverage and higher disposable incomes. In addition, senior Management now have a financial incentive which is directly linked to the rate of growth of its profits. The Company is also relatively immune to China's medical reforms as more than 80% of its products are classified as OTC and priced below the minimum threshold.
Aeon Company	Malaysia			£3,976,225	1.6%
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.
Singamas Container	China			£3,860,981	1.5%
Singamas Container is the world's second largest producer of steel containers and a major logistics provider in the Asia Pacific Region. The Company operates 12 factories located throughout China which manufacture a wide range of containers. While the current uncertain economic environment has resulted in weak demand, the longer term outlook remains positive with the average age of the world's container fleet now more than 9 years versus a useful life of 15 years. Current replacement rates are exceptionally low. In addition, the industry has undergone a significant consolidation in the past 20 years with the four largest operators accounting for more than 90% of global capacity. Singamas Container is a well managed company operating in a difficult industry.
Public Financial		Hong Kong		£3,774,175	1.5%
Public Financial, a subsidiary of Public Bank in Malaysia, provides consumer finance to individuals on low incomes as well as taxi finance via its subsidiary Winton. In 2006, it acquired Asia Commercial Bank in Hong Kong which provided Public Financial with not only a Hong Kong banking licence but also a licence to operate in China, albeit only Shenzhen. Management have since been active in restructuring and expanding the Company's branch network in order to increase its access to low cost deposits.

Angus Tulloch

Martin Lau

First State Investment Management (UK) Limited, Investment Manager

30 October 2013

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 %
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)
2013	232.19	253.63	-	801.53	733.75	-	-	(8.5)

Revenue

Year ended 31 August	Gross Revenue £000	Available for ordinary shareholders £000	Earnings per share* p	Dividend per share (net) p	Ongoing charges† %	Ongoing charges incl. perf. fee %	Actual gearing ‡	Potential gearing Ω
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
2013	7,903	4,518	14.56	11.50	1.03	1.73	88	108

* 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: percentage expressed 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 August 2003 as 100)

Year ended 31 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
2003	100	100	100	100	100	100	100
2004	103	100	103	98	107	110	105
2005	138	136	167	122	129	193	173
2006	160	157	213	141	146	245	240
2007	197	201	-	193	158	326	307
2008	179	168	-	171	139	341	333
2009	215	210	-	182	122	391	400
2010	317	310	-	220	131	543	567
2011	354	385	-	223	136	584	600
2012	381	387	-	216	144	738	733
2013	458	470	-	232	165	747	767

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 UK Corporate Governance 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 Conduct 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 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 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 31 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, 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 £1,724,988 (2012: £1,795,277) is due to be paid for the twelve months ending 31 August 2013 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

Personal Assets Trust Administration Company Limited provides company secretarial, accounting and administrative services. The fee for the year ended 31 August 2013, which is payable quarterly in advance and linked to the movement in the Retail Price Index annually, was £102,750 (2012: £99,314). 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 accounts in accordance with applicable law and regulations.

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

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

·   select suitable accounting policies and then apply them consistently;

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

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

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

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

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

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

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

·   the 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

30 October 2013

Income Statement for the year ended 31 August 2013 (audited)

                                                                        2013                                                       2012

	Revenue £'000	Capital £'000	Total* £'000	Revenue £'000	Capital £'000	Total* £'000
Gains on investments	-	41,060	41,060	-	15,129	15,129
Income from investments [Note 1]	7,859	-	7,859	7,056	-	7,056
Other income [Note 1]	44	-	44	17	-	17
Investment management fee [Note 2]	(1,946)	(1,725)	(3,671)	(1,435)	(1,795)	(3,230)
Currency losses [Note 13]	-	(460)	(460)	-	(247)	(247)
Other administrative expenses [Note 3]	(635)	-	(635)	(457)	-	(457)
Net return before finance costs and taxation	5,322	38,875	44,197	5,181	13,087	18,268
Finance costs of borrowing [Note 4]	(460)	-	(460)	(461)	-	(461)
Net return on ordinary activities before taxation	4,862	38,875	43,737	4,720	13,087	17,807
Tax on ordinary activities [Note 5]	(344)	-	(344)	(372)	-	(372)
Net return attributable to equity shareholders	4,518	38,875	43,393	4,348	13,087	17,435
Net return per ordinary share [Note 7]	14.56p	125.31p	139.87p	14.39p	43.32p	57.71p

* 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 11.50p per share for the year ended 31 August 2013 (2012: 11.00p per share) which, if approved, will be payable on 31 January 2014 to shareholders recorded on the Company's shareholder register on 13 December 2013.

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 August 2013 (audited)

	2013			2012
	£'000	£'000	£'000		£'000
FIXED ASSETS - EQUITY INVESTMENTS [Note 8]		227,599			198,949
Current Assets:
Debtors [Note 9]	1,628		3,299
Cash and deposits	48,497		22,997
	50,125		26,296
Current Liabilities (due within one year)
Creditors [Note 10]	(24,091)		(3,154)
	(24,091)		(3,154)
Net Current Assets		26,034			23,142
Total Assets less Current Liabilities		253,633			222,091
Creditors (dues after one year)
Loan [Note 11]		-			(20,487)
Equity shareholders' funds		253,633			201,604
Represented by
Capital and reserves
Ordinary share capital [Note 12]		7,911			7,554
Share premium account [Note 13]		32,940			21,337
Warrant reserve [Note 13]
exercised		1,319			1,319
Capital reserve [Note 13]		201,465			162,590
Revenue reserve [Note 13]		9,998			8,804
		253,633			201,604
Net asset value per share [Note 14]		801.53p			667.26p

 

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

Reconciliation of Movements in Shareholders' Funds (audited)
For the year ended 31 August 2013
	Share capital	Share premium account	Warrant reserve exercised	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 August 2012	7,554	21,337	1,319	162,590	8,804	201,604
Realised gain on investments	-	-	-	36,244	-	36,244
Currency loss	-	-	-	(460)	-	(460)
Unrealised appreciation on investments in the year	-	-	-	4,816	-	4,816
Performance fee	-	-	-	(1,725)	-	(1,725)
Issue of new Ordinary shares	357	11,603	-	-	-	11,960
Income retained in the year	-	-	-	-	4,518	4,518
Dividend paid in the year	-	-	-	-	(3,324)	(3,324)
Balance at 31 August 2013	7,911	32,940	1,319	201,465	9,998	253,633

Reconciliation of Movements in Shareholders' Funds (audited)
For the year ended 31 August 2012
	Share capital	Share premium account	Warrant reserve exercised	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 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 31 August 2012	7,554	21,337	1,319	162,590	8,804	201,604

Summary Cash Flow Statement for the year ended 31 August 2013 (audited)

	2013 £'000	2012 £'000
Net cash inflow from operating activities	5,577	5,387
Returns on investments and servicing of finance	(460)	(477)
Taxation	(343)	(457)
Net cash inflow/(outflow) from capital expenditure and financial investment	12,090	(10,065)
Financing	8,636	(2,719)
Increase/(decrease) in cash	25,500	(8,331)

 

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 accounts, 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 and interest payable are dealt with on an accruals basis and are charged through the revenue column of the Income Statement.

(f)   The investment management fee has been charged in full to the 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 £43,000 (2012: £17,000) in relation to Taiwan tax reclaims from overseas listed companies.

(2) Investment Management Fee

	2013 £'000	2012 £'000
Performance fee	1,725	1,795
Investment management fee	1,946	1,435
	3,671	3,230

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

		2013 £'000	2012 £'000
Auditors' remuneration for:
-     Audit		13	13
-     Tax services		4	4
Directors' fees		80	75
Company secretarial fees		103	99
Bank, custodial and other expenses		435	266
		635	457

Since 1 July 2013 Directors' fees have been as follows:

Chairman of the Board                     £26,500 per annum

Each other Director                         £19,000 per annum

Prior to 1 July 2013 Directors' fees were as follows:

Chairman of the Board                     £25,000 per annum

Each other Director                         £18,000 per annum

(4) Finance Costs of Borrowing

	2013 £'000	2012 £'000
Costs in relation to bank borrowing	460	461

(5) Taxation

	2013 £'000	2012 £'000
Current tax: overseas tax	344	372

(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:

	2013 £'000	2012 £'000
Net gains on investments during the period	41,060	15,129
Other losses	(460)	(247)
Performance fee	(1,725)	(1,795)
Net investment income before tax	4,862	4,720
Total return for the period before taxation	43,737	17,807
Total return for the period before taxation multiplied by the effective rate of corporation tax of 23.58% (2012: 25.16%)	10,313	4,480
Effect of:
Capital returns not subject to corporation tax	(9,573)	(3,744)
Non-taxable income	(1,853)	(1,775)
Overseas tax	344	372
Movement on excess expenses	1,113	1,039
Current tax charge for the period	344	372
Under changes enacted in the Finance Act 2009, dividends and other distributions received from foreign companies from 1 July 2009 are largely exempt from corporation tax.
(c) Provision for deferred tax

The Company has a deferred tax asset of £3,038,000 (2012: £2,611,000) at 31 August 2013 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

	2013	2012
	£'000	£'000
Dividends paid in the period:
Dividend of 11.00p per share (2012 - 9.00p)
paid 31st January 2013	3,324	2,719

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.

	2013	2012
	£'000	£'000
Income available for distribution	4,518	4,348
Proposed dividend for the year ended 31 August 2013 - 11.50p
(2012 - 11.00p) payable 31 January 2014	(3,639)	(3,324)
Retained income for section 1158  Corporation Tax Act 2010 purposes	879	1,024

(7) Return per Ordinary Share

		2013			2012
	Revenue p	Capital p	Total p	Revenue p	Capital p	Total p
Net return per ordinary share	14.56	125.31	139.87	14.39	43.32	57.71
					2013	2012
Revenue return					£4,518,000	£4,348,000
Capital return					£38,875,000	£13,087,000
Weighted average ordinary shares in issue					31,023,198	30,213,650
There are no dilutive or potentially dilutive shares in issue.

(8) Equity Investments	£'000
Cost at 31 August 2012	158,663
Unrealised appreciation	40,286
Valuation at 31 August 2012	198,949
Purchases at cost *	89,409
Sales - proceeds *	(101,819)
Sales - realised gains on sales	36,244
Unrealised appreciation on investments in the year	4,816
Valuation at 31 August 2013	227,599
Cost at 31 August 2013	182,497
Closing unrealised appreciation	45,102
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 £239,000 (2012: £139,000) on the purchase of investments and £379,000 (2012: £154,000) on the sale of investments.

	2013	2012
(9) Debtors	£'000	£'000
Sales awaiting settlement	816	2,391
Accrued income	639	585
Overseas tax recoverable	170	320
Sundry debtors	3	3
	1,628	3,299

	2013	2012
(10) Creditors (amounts falling due within one year)	£'000	£'000
US$32,500,000 fixed rate loan	20,957	-
Purchases awaiting settlement	755	865
Performance fee	1,725	1,795
Interest due on loan	23	22
Other creditors	631	472
	24,091	3,154

	2013	2012
(11) Creditors (amounts falling due after one year)	£'000	£'000
US$32,500,000 fixed rate loan 2.191% 12/08/14	-	20,487

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 allotted capital is £7,910,912 (2012: £7,553,412) represented by 31,643,650 ordinary shares of 25p each (2012: 30,213,650). During the year the Company issued 1,430,000 ordinary shares (2012: nil) for gross proceeds of £11,994,000.

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 2012	21,337	1,319	162,590	8,804
Realised gain on investments	-	-	36,244	-
Currency loss	-	-	(460)	-
Unrealised appreciation on investments in the year	-	-	4,816	-
Performance fee	-	-	(1,725)	-
Issue of new Ordinary shares	11,603	-	-	-
Income retained in the year	-	-	-	4,518
Dividend paid in the year	-	-	-	(3,324)
Balance at 31 August 2013	32,940	1,319	201,465	9,998

The capital reserve includes investment holding gains amounting to £45,102,000 (2012: £40,286,000), 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 £253,633,000 (2012: £201,604,000) divided by 31,643,650 (2012: 30,213,650) ordinary shares of 25p each in issue.

 

 

 

 

 

 

 

 

 

 

 

 

15) Cash Flow Statement

 

	2013 £'000 (audited)	2012 £'000 (audited)
(a) Reconciliation of total income to net cash inflow
from operating activities
Income	7,903	7,073
Administration expenses	(2,581)	(1,892)
Decrease/(increase) in debtors	150	(3)
(Increase)/decrease in dividends accounted for but not yet received	(54)	178
Increase in creditors	159	31
Net cash inflow from operating activities	5,577	5,387

 

(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	22,997	25,500	-	48,497
Loan due between one and five years	(20,487)	-	20,487	-
Loan due within one year	-	-	(20,957)	(20,957)
	2,510	25,500	(470)	27,540

(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 31 August 2013. 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 2013			31 August 2012
	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	66,619	331	66,950	50,137	244	50,381
Taiwanese dollars	32,862	5,298	38,160	29,471	666	30,137
Singapore dollars	35,427	1,010	36,437	32,234	1,552	33,786
Indian rupees	27,248	-	27,248	2,947	-	2,947
Korean won	17,920	179	18,099	24,873	1,429	26,302
Thai baht	12,992	54	13,046	16,451	27	16,478
Malaysian ringgits	12,870	-	12,870	16,872	-	16,872
Indonesian rupiahs	8,518	10	8,528	6,751	-	6,751
US Dollars	-	8,483	8,483	3,389	(4,943)	(1,554)
Sri Lankan rupees	6,097	-	6,097	3,773	-	3,773
Philippine pesos	4,744	-	4,744	8,534	-	8,534
Total foreign currency	225,297	15,365	240,662	195,432	(1,025)	194,407
Sterling	2,302	10,669	12,971	3,517	3,680	7,197
Total currency	227,599	26,034	253,633	198,949	2,655	201,604

Other Price Risk

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

Other Price Risk Sensitivity

If market values at the Balance Sheet date had been 10% higher or lower with all other variables remaining constant, the return attributable to ordinary shareholders for the year ending 31 August 2013 would have increased/(decreased) by £25,363,000 (2012 increased/(decreased) by £20,160,000) 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 31 August 2013 was as follows:

	2013		2012
	Balance sheet	Maximum exposure	Balance  sheet	Maximum exposure
Current assets	£'000	£'000	£'000	£'000
Receivables	1,628	1,628	3,299	3,299
Cash at bank	48,497	48,497	22,997	22,997
	50,125	50,125	26,296	26,296

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 31 August 2013 and 2012 are an abridged version of the statutory accounts for those years. The Auditor has reported on the 2013 and 2012 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 2012 have been filed with the Registrar of Companies and those for 2013 will be delivered in due course.

The 2013 Annual Report will be posted to shareholders in November 2013 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]

30 October 2013

 

END

 

 

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