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Scottish Oriental (SST)

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Thursday 21 October, 2021

Scottish Oriental

Final Results

RNS Number : 7208P
Scottish Oriental Smlr Co Tst PLC
21 October 2021
 

THE SCOTTISH ORIENTAL SMALLER COMPANIES TRUST PLC

      Annual Financial Report for the year ended 31 August 2021

Financial Highlights

Total Return Performance for the year ended 31 August 2021 (audited)

 

 

 

 

Net Asset Value

28.4%

MSCI AC Asia ex Japan Index (£)

14.7%

 

 

 

 

Share Price

28.8%

MSCI AC Asia ex Japan Small Cap Index (£)

37.8%

 

 

 

 

Dividend maintained at 11.5p per share

FTSE All-Share Index (£)

26.9%

 

 

 

 

 

 

 

Summary Data at 31 August 2021 (audited)

 

 

 

 

Shares in issue

27,321,159

Shareholders' Funds

£345.5m

 

 

 

 

Net Asset Value per share

1,264.54p

Market Capitalisation

£297.8m

 

 

 

 

Share Price

1,090.00p

Share Price Discount to Net Asset Value

13.8%

 

 

 

 

Ongoing Charges*

1.02%

Active Share (MSCI AC Asia ex Japan Index)

99.9%

 

 

 

 

Net Cash

4.3%

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

96.8%

 

 

 

 

*No performance fee was payable during the year (2020: nil).

 

 

Chairman's Statement

 

Scottish Oriental had a much improved performance last year compared to the poor result for 2020. The Net Asset Value ("NAV") per share rose by 28.4 per cent in total return terms over the 12 months to 31 August 2021 while the 'comparative indices', the MSCI AC Asia ex Japan Index and the MSCI AC Asia ex Japan Small Cap Index, rose by 14.7 per cent and 37.8 per cent respectively. As usual, we would stress that the Company is not invested with regard to any particular benchmark and these indices are shown to provide some context. In the Financial Highlights above you will see figures for the portfolio's active share against the two indices. These figures illustrate the extent to which our portfolio differs from each index; 100 per cent would indicate that there is no overlap whatsoever. The share price total return was 28.8 per cent. A performance fee was not paid this year.

 

In last year's annual report we raised a note of caution that it was likely that our dividend could be cut this year. This view was based on the premise that the objective of Scottish Oriental since its inception has been capital growth with the dividend being a secondary consideration. However, in the very unusual circumstances that have prevailed recently, we have decided to recommend an unchanged dividend of 11.5p. This is not fully covered by earnings and would require the use of part of our revenue reserve.

 

We believe that this is a sensible compromise for this year, but that it should not be seen as a longer term policy of exhausting revenue reserves to maintain the dividend. Although it means that the outlook for the dividend will be uncertain, it will be a continuation of the approach that has served the trust well for many years. We expect that the portfolio's dividends for the year to August 2022 will be likely to increase, but it is too early to make an accurate estimate of the extent of this and to make any forecast for the dividend next year.

 

During the year, the Company bought back 1,852,871 ordinary shares. 4,092,504 ordinary shares were held in Treasury at the year end. The Board continues to have no formal discount control mechanism but will be prepared to buy back shares opportunistically and to issue new shares at a small premium to NAV.

 

The review of the method of selecting shares for the portfolio that I referred to last year has helped to improve the performance. It justified the strong emphasis on India rather than China, which has been beneficial. The Managers' report gives more details of this investment process.

 

The Managers are confident that the outlook for Asian equities over a 20-year time frame will be very strong. Due to this, and the availability of long-term debt at relatively low rates of interest, the Board approved the issue of £30 million of loan notes in March 2021 providing the Company with long-term financing. The privately placed loan notes were issued in one tranche, with a fixed coupon of 2.75 per cent payable semi-annually to be repaid 24 March 2041.

 

Our plan for Board succession is unchanged from last year. We value the balance of our three more recently appointed directors from diverse financial backgrounds alongside the experience of the two longer serving directors and I intend to step-down as Chairman within the next twelve months.

 

Despite the present background of concerns about China, you will see from the outlook section of the Managers' report that they are enthusiastic about the outlook for the companies in our portfolio. We share that optimism.

 

This year's Annual General Meeting will be held on 7 December 2021 at the offices of Juniper Partners Limited, 28 Walker Street, Edinburgh. I look forward to seeing shareholders then.

 

Managers' Report

 

This report addresses the following topics -

 

1.  Company Performance

2.  Our investment process and the attributes of Scottish Oriental's portfolio companies:

-  Market leaders in under-penetrated categories

-  Exceptional management teams

-  High returns on capital employed (ROCE)

-  Potential for strong earnings growth

-  An integrated approach to sustainability

3.  Recent Portfolio Activity

4.  Ten Largest Holdings as at 31 August 2021

5.  Sector Allocation as at 31 August 2021

6.  Portfolio Positioning and Outlook

 

1.  Company Performance

 

Scottish Oriental has enjoyed strong absolute investment performance over the last 12 months. It had a net asset value total return of 28.4% for the year ended 31 August 2021. The largest contributions to performance were the holdings in India, as business activity has gradually returned to normal in the country. The biggest detractors from performance were the holdings in Hong Kong and South Korea.

 

Top Five Contributors

 

Company

Country

Sector

Absolute Return (Sterling) %

Contribution Performance %

Mphasis

India

Technology

159

2.7

Mahindra Lifespace

India

Real Estate

166

2.2

Mahindra CIE Automotive

India

Consumer Discretionary

80

1.9

Hero Supermarket

Indonesia

Consumer Staples

118

1.6

Century Pacific Food

Philippines

Consumer Staples

51

1.6

 

Mphasis benefited from strong demand for its digital transformation and cloud migration capabilities. Global enterprises have increased their spending on these areas as a consequence of COVID-19 disruption. The company reported a large increase in the value of new deals signed during the period from new clients as well as its existing customers.

 

Mahindra Lifespace appointed a new Chief Executive Officer (CEO) who has focused on faster land acquisition and increasing the number of new project launches. In recent years, Indian residential property buyers have been moving rapidly from local developers to larger companies such as Mahindra Lifespace which have stronger balance sheets. The share price rose as the new CEO's initiatives combined with this industry tailwind are expected to drive an acceleration in its growth.

 

Mahindra CIE Automotive had declined during the previous period due to the impact on the Indian and European automotive industries from the COVID-19 pandemic. We added to Scottish Oriental's holding during this period. The company's management implemented initiatives to reduce its costs. It also gained market share from smaller competitors who are struggling. The revival of automotive demand in its key markets led to a rebound in its share price.

 

Hero Supermarket rose after it announced that it will shut down its Giant branded hypermarket stores and focus its operations on IKEA, Guardian pharmacies and Hero Supermarket brands. The Giant branded stores were loss-making while its IKEA, Guardian and Hero Supermarket brands are profitable. This should lead to a marked improvement in the company's cash flows and return on capital employed.

 

Century Pacific Food reported strong revenue and profit growth as demand for its canned food products remained high due to their long shelf life and affordable pricing. The company has also been gaining market share in the dairy products category. Its initiatives to enter new categories such as alternative meat products should sustain its growth momentum in the coming years.

 

Top Five Detractors

 

Company

Country

Sector

Absolute Return (Sterling) %

Contribution Performance%

Philippine Seven

Philippines

Consumer Staples

(34)

(1.2)

Vitasoy International

 

Hong Kong

Consumer Staples

(27)

(0.9)

Nissin Foods

Hong Kong

Consumer Staples

(36)

(0.7)

NHN KCP

South Korea

Financials

(28)

(0.6)

Beijing Capital International Airport

China

(33)

(0.6)

 

Some of the detractors during the year were companies which operate businesses such as convenience stores, casual dining, and quick service restaurants. These businesses depend on customers visiting their stores, which was obviously affected by the COVID-19 lockdown. Our engagement with the management teams has indicated that their competitive position has strengthened during this period. Smaller competitors lack the strong balance sheets and technology investments which our holdings benefit from.

 

Philippine Seven has been severely affected by the continuing movement restrictions in the Philippines. Its convenience stores have witnessed a decline in customer footfall. The company has changed its product mix to increase the share of essential products in its stores, introduced new services such as ATMs and partnered with e-commerce and delivery platforms. As footfall gradually normalises, these initiatives should improve the company's profitability. We have added to Scottish Oriental's holding in the company.

 

Vitasoy International declined as it was affected by lower sales of its beverage products due to movement restrictions in Hong Kong as well as a temporary disruption to its fast growing business in China. The company has engaged proactively with authorities and increased investment in marketing to its Chinese consumers. Its products have regained their presence across major retail channels. Given its strong track record and long term growth potential in the Chinese market, we added to Scottish Oriental's holding in the company.

 

Nissin Foods' instant noodle products had benefited from pantry stocking during the previous year. We had reduced Scottish Oriental's holding during this period. As mobility levels improved in China, demand for its products fell to more normal levels. It also suffered cost inflation across its raw materials which affected its profitability.

 

South Korea's leading payment gateway service provider NHN KCP declined as it increased investment in expanding its service offering, which led to lower profitability. The company is likely to benefit from the structural increase in online spending in South Korea. The management has signed agreements to set up payment gateway services for large global clients. This should improve the company's growth prospects and its profitability. We have added to Scottish Oriental's holding.

 

Beijing Capital International   Airport reported weak operating profit due to a resurgence of COVID-19 and the re-imposition of movement controls in China. This led to a decline in passenger traffic. The company has reduced its operating expenses and should benefit from an improvement in passenger volumes, as travel penetration in China increases from a low base. We have added to Scottish Oriental's holding.

 

Through their history, portfolio holdings have faced several disruptions and have emerged stronger in each instance. We are convinced that there will be a similar outcome on this occasion also. As lockdowns were lifted in India, we observed a strong rebound in customer demand across sectors and a weaker competitive environment for our holdings. Indonesia and Philippines have suffered from more prolonged restrictions. We are confident of a similarly strong recovery in the performance of our holdings in these markets as mobility improves. Valuations are exceptionally attractive as market participants focus on the immediate disruption, while we are focused on the long term opportunity. We added to these holdings during the year.

 

2.  Our investment process and the attributes of Scottish Oriental's portfolio companies

 

We are conviction-based, bottom-up stock selectors. As a team, we conduct over 800 meetings with Asian smaller companies each year. Our goal is to identify companies which are managed by responsible stewards with whom we feel aligned; and businesses which have built leading positions in attractive categories with high returns on capital employed. We take a long-term perspective of valuations, with a preference for using simple measures rather than complicated financial models. Our research process is predicated upon assessing the potential downside of any investment as much as its potential upside.  We pay no attention to indices and think of risk as losing money rather than underperforming a market index. The country and sector weights of Scottish Oriental's portfolio are a residual outcome of our bottom-up stock selection process.

 

The characteristics of Scottish Oriental's holdings are detailed below:

 

Market leaders in under-penetrated categories

 

Many Asian economies are at early stages of their development. Most product and service categories are highly under-penetrated in these markets. We look for dominant franchises which have the ability to take the lion's share of profit growth in these market sectors. In our view, these are potentially large businesses, currently hiding in small market capitalisations, whose growth can generate attractive returns for patient investors.

 

Sarimelati Kencana is the exclusive franchise operator of Pizza Hut in Indonesia. The company has led the introduction of pizzas as a popular option for Indonesian diners. It operates over 500 stores of Pizza Hut, more than eight times as many as the next largest pizza restaurant operator. The management has consistently introduced innovative formats to stay ahead of changes in consumer preferences. They launched dedicated stores for food delivery as early as 2007 and have localised menus to cater to the varying tastes of each region. Its dedicated network of 250 delivery stores has paid dividends as demand for food delivery accelerated in recent years. The company's growth potential is significant. Domino's, the market leader in Australia and United Kingdom, has over 700 stores catering to a population of 25 million in Australia and over 1000 stores in the United Kingdom serving a population of 65 million. As the leader in Indonesia with over 270 million consumers, Pizza Hut's store footprint can grow by multiples. Sarimelati Kencana is valued at only 0.7 times its revenues, compared to Domino's in the UK at over 4 times its revenue and Domino's Indian franchise at 15 times its revenue. We are excited by the opportunity ahead. 

 

Uni-Charm Indonesia has built a dominant position in hygiene products in Indonesia, led by the premium brand positioning and technology of its parent, Unicharm Japan. The annual per capita usage of these products in Indonesia is as low as one-tenth of the levels of developed markets such as Japan. In the mid-2000's, Unicharm drove widespread adoption of diapers in Indonesia when it launched a range of affordable diapers. It has maintained over 40% market share in each of its product segments and is expected to continue leading the industry in introducing new products. The management is also taking initiatives to increase its exposure to more profitable products and distribution channels. In 2020, Kimberly Clark acquired Softex Indonesia, the second largest diaper and feminine care brand in Indonesia with about half the market share of Uni-Charm, paying 2.8 times its sales. Its Japanese parent is valued at 3.6 times sales and Kimberly Clark at 2.9 times. Uni-Charm Indonesia's valuation of 0.6 times sales appears compelling to us.

 

Exceptional management teams

 

Scottish Oriental's portfolio companies are led by owners and managers who have established track records of treating all stakeholders fairly in both good and bad times. They are ambitious to grow their business but also risk-aware in their pursuit of growth. Among Asian smaller companies, we typically find such characteristics in family owned businesses. Typically, they take a multi-decade view of their business, which allows them to act counter-cyclically and create value for all shareholders.

 

The Godrej family in India is the majority owner of Godrej Industries , the group's holding company which owns a 24% stake in Godrej Consumer Products, 47% in Godrej Properties and 62% in Godrej Agrovet. Since the group was founded in 1897, the family has acted as the steward of its businesses across four generations. Whilst the family is responsible for group governance, each business is managed by talented professional managers. This combination of family ownership and professional management has helped Godrej build leading businesses in market segments ranging from hair colours to residential real estate and animal feed. The family also has a strong reputation for treating all its stakeholders fairly. In 2020, it set up a housing finance company. It was injected into Godrej Industries for a nominal sum. Godrej Industries previously incubated Godrej Properties and Godrej Agrovet, which now have market capitalisations of US$ 6.2 billion and US$ 1.7 billion respectively. It has the potential to achieve similar results in the housing finance business as well. We believe that the holding company is attractively valued at a 60% discount to its stake in its listed subsidiaries. The family appears to have the same view, having increased its own ownership in Godrej Industries by 3% over the last year.

 

Vitasoy International was founded by the Lo family in Hong Kong before World War II, with the aim of providing nutritious soymilk to consumers at affordable prices. The management has expanded its product portfolio across a range of beverages. The family continues to play an active role in governance led by the Chairman, Winston Lo. They have recruited high quality professional managers with experience at leading multinationals with the objective of introducing global best-practice at Vitasoy. Roberto Guidetti was appointed the group's CEO in 2013. He has previously led Procter & Gamble's snacks businesses in Greater China and Coca-Cola's operations in Mainland China. Since his appointment, Vitasoy's sales in China have grown over four times in eight years, contributing 67% of the group's sales, compared to 29% in 2013. The opportunity in China remains large, with a market size of US$18 billion for ready to drink tea and US$2 billion for soymilk. The management is investing in launching healthier product variants and expanding the company's distribution network. Based on their track record and experience, we are confident that Vitasoy's management will succeed in building leading brands in China.

 

We often find that generational change in Asian family owned businesses can act as the catalyst for improvements. The new generation of owners have typically studied overseas or worked at global multinationals. Based on their experience, they introduce various governance and operational improvements to their own businesses.

 

At Century Pacific Food , Christopher Po, the group founder's son, took over the business as its CEO in 2013. He had spent 15 years working in various roles including as a consultant and as Head of Strategy for a leading Filipino conglomerate. Since his arrival, he de-merged the consumer business from the parent entity. He hired experienced professional managers from PepsiCo, Unilever and Procter & Gamble to manage the consumer business and listed this company as Century Pacific Food in 2014. Their canned products have benefited from strong demand during the prolonged lockdown in the Philippines. Christopher Po used this opportunity to strengthen the company's brand image among consumers and encourage channel partners to support the development of emerging products. In our view, Century Pacific remains attractively valued at 19 times forward earnings, given its growth potential.

 

High returns on capital employed (ROCE)

 

Under-penetrated Asian markets, can offer large growth opportunities. But we often find that management teams are tempted to engage in empire building or that low entry barriers in some industries tend to attract new competitors who drive down industry returns. We look for businesses in which the management has an established track record of allocating capital sensibly and with competitive advantages to sustain high returns on capital.

 

Zhejiang Weixing New Building   Materials is a leader in the large and fragmented plastic pipe industry in China. Its peers typically earn a majority of their revenues by selling pipes to real estate developers. This business model delivers large volumes but has thin margins and long working capital cycles. Since it was founded in 1999, Weixing's management has taken a different approach. They invested in building a strong retail brand and selling directly to end-consumers. Their product portfolio largely comprises high-end pipes which are priced at a premium to other pipe varieties. Weixing's strong brand in the retail distribution channel and its associated pricing power allows the company to earn twice the operating profit margins of its Chinese peers, with relatively lower working capital. Its median return on capital employed over the last 15 years is 40%. The company plans to continue growing steadily in its existing business, while using its strong distribution and established brand to launch new products.

 

Colgate-Palmolive India has earned a median return on capital employed (ROCE) of 91% over the last 15 years. With the product development support of its parent and large investments in brand building, Colgate has consistently maintained around 50% market share in the toothpaste category in India, almost three times as much as its next largest competitor. This has afforded it strong pricing power. It earns gross margins of 69%, which have improved substantially over the years. It also receives favorable terms of trade from its distributors and maintains negative working capital. The company's earnings per share have grown by almost 20 times in 20 years. This growth has been completely funded using its internal accruals, while consistently paying dividends to shareholders. Colgate has a large opportunity ahead, as more Indian consumers use oral care products more frequently, the company launches premium oral care variants and enters new categories such as personal care.

 

Potential for strong earnings growth

 

We avoid businesses which are run by families who are content with their income stream in the form of remuneration and dividends. We instead prefer to invest with owners and managers who are ambitious to build big businesses while being risk aware in their approach. These leaders seek sustainable, rather than reckless growth. Sustainable growth encourages an organisational culture which avoids complacency and creates new opportunities for its employees.

 

Metropolis Healthcare is a leading diagnostic laboratory chain in India, led by the second-generation entrepreneur Ameera Shah. Tests per patient in India are much lower than in other emerging markets. The industry is dominated by standalone laboratories without quality accreditations or trained employees. Organised national chains only comprise 16% of the industry.

The preference amongst patients for such chains has been rising, accelerated further by COVID-19. Metropolis has built a leading reputation in the industry over the past three decades. The company has grown its revenues at 16% CAGR over the last five years, almost twice the rate of its peers. Metropolis is expanding its network of patient service centres in smaller cities and increasing its focus on esoteric tests which deliver higher profitability. They also have a track record of leading industry consolidation through acquisitions. Despite being among the industry leaders, Metropolis accounts for only around 1.5% of industry revenues. The company has the potential to be a much larger and more profitable business over the long term.

 

Parade Technologies is an integrated circuit designer. Its products facilitate high-speed data transmission across electronic devices. Since the company was founded in 2005, it has built leading market shares in its key products such as high-speed interface integrated circuits. The management also has forged strong relationships with large customers such as Apple, with which Parade has maintained a monopoly position in certain products. Rising data transmission speed across devices requires new products, which drive higher prices and better profitability for Parade. The company has grown its revenues and its net profits by almost 10 times in 10 years. Data transmission speeds are likely to continue rising. Parade is also developing new products with applications in servers and automobiles. These can become large addressable markets for the company in the years ahead.

 

An integrated approach to sustainability

 

We look for companies which have strong awareness of environmental, social and governance (ESG) issues integrated into their culture. They respect the environment and treat all stakeholders including their employees, tax authorities, business partners and local communities equitably. In our experience, most small Asian companies are keen to improve their ESG practices but may not have exposure to global best-practice. We proactively vote on all shareholder resolutions and engage on a range of issues from board composition to the safety of workers and the environmental impact of their operations. We also seek to introduce domain experts to the management teams. We have been encouraged to see that the management teams of Scottish Oriental's holdings have been receptive to our engagement.

 

The global cement industry has a poor reputation for sustainability. In stark contrast, HeidelbergCement India has integrated ESG issues into its growth aspirations. It enforces a zero-harm policy at its plants by linking the remuneration of its plant managers to their performance on safety parameters. It has achieved a net water positive position and consistently reduced its carbon footprint. The company's management is willing to invest in technology and alternative sources of energy to mitigate any risk of regulatory intervention in the future. Many of its peers have minimised investments in such areas in order to maximise short-term profits, which put their business at greater risk over the medium term. In our view, HeidelbergCement's approach positions it well to emerge as an industry leader in the coming years. 

 

The management of Century Pacific Food has developed a sustainability strategy focused on "Protein, Planet and People". The company has launched affordable milk products fortified with immunity boosters, as well as a new range of plant-based meat alternative products. It is among the first to achieve plastic neutrality in the Philippines. It is consistently increasing the share of its production powered by renewable energy sources. In order to increase the focus on employee development, the management has introduced safety, employee engagement and training measures into its performance evaluation criteria. Customers are increasingly prioritising healthier products with a low environmental footprint. Century Pacific's initiatives should ensure that it remains at the forefront of serving its customers effectively.

 

3.  Recent Portfolio Activity

New Holdings

 

During the year we added 17 new companies to the portfolio.

 

Beijing Capital International Airport is the owner and operator of Beijing's northern airport. It has historically been among the busiest airports globally in terms of passenger throughput. The establishment of a new airport in Beijing and the disruption led by the COVID-19 pandemic reduced passenger volumes. Whilst cost reduction initiatives and its strong balance sheet have allowed the company to remain resilient through the COVID-19 related disruption, domestic travel has been improving steadily in China. The resumption of international travel in the coming years should lead to a significant improvement in its passenger throughput and profitability.

 

China Overseas Grand Ocean is a property developer in China, focused on tier-three and tier-four cities. The company has a presence in 37 cities and its sales have grown at 24% compound annual growth rate (CAGR) over the last five years. Its management has also been disciplined in bidding for land sites, which has led to an improvement in its return on equity over this period. Its management plans to enter new cities which are currently dominated by small and lower quality developers. This should lead to consistent growth in the years ahead.

 

Credit Bureau Asia is the monopoly credit bureau service provider in Singapore and Cambodia. The company has partnered with global leaders to be the first mover in its key markets. It also has local partnerships with banks in each market, which creates a significant barrier to entry for new entrants. As financial penetration increases, the addressable market for Credit Bureau Asia should grow steadily. The company is also likely to enter new markets.

 

CTOS Digital is the leading credit bureau service provider in Malaysia, with over 70% market share. Its new management has led several changes to its business over the last five years. CTOS has launched several new products for its clients including banks, small enterprises and individual consumers. It has also strengthened its sales force, technology systems and processes. This should lead to strong growth in the years ahead. It also has the potential to expand its presence in other markets such as Thailand, where it has a stake in the leading credit bureau.

 

Eicher Motors is the leading premium motor cycle manufacturer in India. Its Royal Enfield brand has over 90% market share in the premium category (over 250 cc). Its management is focused on increasing distribution, building new revenue streams and strengthening the product portfolio. This should allow the company to grow consistently. The company's commercial vehicle joint-venture with Volvo suffered due to a severe cyclical downturn in the commercial vehicle market. Its performance should improve following a revival in consumer demand.

 

IIFL Wealth Management is the leading wealth management platform in India. The wealth management industry in India is under-penetrated and is likely to grow substantially in the coming years. The industry is dominated by local wealth managers due to restrictions relating to the transfer of funds outside the country. Despite being the market leader, IIFL Wealth Management's market share is only around 10%. It has consistently gained market share due to its strong brand and by acquiring smaller platforms. It is likely to lead the consolidation in the industry over the long term.

 

KEI Industries is one of the leading cable and wire manufacturers in India. Cables and wires are fast growing and fragmented markets in India. Informal operators who sell lower quality products comprise a large share of the industry and have been struggling. Well run companies like KEI have been gaining market share from such companies consistently. Over the last decade, KEI has successfully built a strong branded consumer cables business. This segment has higher profitability, lower working capital needs and significantly higher returns on capital employed than its unbranded power cables segment.

 

Mahanagar Gas is the licensed city gas distributor in Mumbai and its surrounding regions. Natural gas penetration is increasing in India led by cost, environmental and regulatory tailwinds. Due to its monopoly position and the lower taxes on gas compared to alternative fuels, the company has strong pricing power in its key markets. This allows it to fully pass on any input price increases, but partly retain the benefits of input price reductions. This has led to a consistent increase in its profitability.

 

Mobile World Investment is the largest retailer in Vietnam with over 4,000 stores selling electronics, home appliances and groceries. The company's electronics and white goods retail businesses are dominant in their respective segments and generate significant cash flows which are likely to be used in building the leading brand in the fragmented grocery retail market. The company has also entered the pharmacy segment which could be another area of growth.

 

Mr. DIY is the largest home improvement and general merchandise retailer in Malaysia, with a focus on value for money offerings. Due to its strong brand, high customer footfall and low rental expenses, Mr. DIY typically achieves a complete payback on development costs for new stores within two years. Its management believes that over the long term, its store network could be double its current size in the country. They have also been piloting new formats, such as Mr. Dollar and Mr. Toy. Following its initial public offer, its balance sheet is net cash. The strong balance sheet and consistent free cash flow generation will fund the expansion of its store network.

 

Parade Technologies is an integrated circuit designer in Taiwan. Parade's product portfolio is positioned in segments which facilitate high-speed data transmission. It has leading global market shares in its key products such as high-speed controllers and display port connectors. It should continue to benefit from a consistent upgrade in data transmission speeds across electronic devices. It is also entering new product segments in fast growing addressable markets like servers.

 

Arwana Citramulia is a leading Indonesian tile manufacturer. The Indonesian tile industry suffered from a decline in demand and over-capacity in 2015. Since then, the company has reduced its operating expenses significantly. It has also shifted its product mix in favour of higher-priced tiles. Arwana is now entering the high-end porcelain tile segment. It has potential to gain market share from imports which comprise a majority of this segment. This should improve its profitability and accelerate its growth.

 

Uni-Charm Indonesia has a dominant position in categories including baby diapers, feminine hygiene products and adult diapers in Indonesia, led by the premium brand positioning and technology of its parent, Unicharm Japan. The penetration of each of these segments is low. As per-capita incomes rise, demand for high quality diaper and feminine hygiene products is rising. The management has also taken initiatives such as strengthening its distribution in more profitable channels and introducing new premium products. These initiatives have led to higher market shares and profitability.

 

Solara Active Pharma is an Active Pharmaceutical Ingredients (API) manufacturer in India. Solara operates largely in developed markets which have higher barriers to entry due to more stringent quality requirements. This leads to higher profitability for the company compared to most of its peers. The API industry in India is expected to grow rapidly as domestic pharmaceutical companies substitute their imports of APIs with domestic supplies, while global customers also find alternative suppliers to reduce their dependence on Chinese API manufacturers.

 

Thermax is a leading engineering and capital goods company in India. Due to the depressed industrial cycle in India, customer demand for Thermax's boilers was weak over the last decade. The company used its strong free cash flows to expand into global markets seeking higher growth. This was unsuccessful and led to a decline in its returns on capital employed. A new CEO appointed in 2020 is making changes to capital allocation by reducing exposure to poorly performing global markets. His focus is on expanding Thermax's clean energy business for which customer demand is strong. The company should also benefit from an improvement in industrial demand in India.

 

TISCO Financial is among the leading financial services groups in Thailand. TISCO is focused on improving its return on assets, instead of aggressively growing its loan portfolio. Its return on assets is among the highest in the industry. The COVID-19 disruption has also had a limited impact on its loan portfolio, with only a small share of its customers opting for the government's loan moratorium facility. As automotive demand in the country gradually normalises, the company is likely to grow its loan book steadily.

 

Zinus is a leading global manufacturer of mattresses, selling through online channels. Bulky mattresses traditionally had high transportation costs. Zinus introduced the "Mattress In A Box" concept which allows them to sell at significantly lower prices than their competitors. The company is expanding its product portfolio and entering new markets. The company has grown its sales at a rate of more than 30% over the last 5 years and maintained high returns on equity. Its growth is likely to remain strong in the coming years as it implements its expansion strategy.

 

Significant additions to existing positions

 

We added to Scottish Oriental's holdings in a number of companies as share price weakness resulted in more attractive valuations. These companies included Vitasoy International , Ace Hardware Indonesia , Mitra Adiperkasa and Philippine Seven . We also added to the holdings in Uni-President China , Sinbon Electronics , JNBY Design and United Breweries as our conviction in their long term growth outlook increased.

 

Sales

 

We sold 15 holdings during the year.

 

51job was sold as we were disappointed by a lack of engagement with the management and poor communication related to its long term growth plans, including a takeover offer received by the company. Our industry analysis also indicated the emergence of strong new competitors, which could reduce the long term growth potential of the company.

 

Nexteer Automotive was sold after its share price rose significantly following strong automotive demand in its key markets. Our engagement with the company suggested intense competition in emerging areas such as advanced driver assisted systems. This could affect the company's growth and profitability. 

 

ACC and Ambuja Cements were initially purchased when their valuations had declined to extremely attractive levels during the COVID-19 disruption. As economic activity normalised and cement demand rose, their share prices rebounded and valuations rose significantly. The long term growth potential of these businesses is relatively lower, and as a consequence, the holdings were sold.

 

Great Eastern Shipping was sold following limited progress in our engagement with the company's management related to the de-merger or sale of its offshore oil services business. The long term prospects of this business are challenged and it is likely to continue diluting the returns from the group's shipping operations.

 

Zensar Technologies was sold due to challenges in some of its key customer segments. The company's management has been unable to effectively transition its business away from these clients.

 

APM Automotive was sold due to lower conviction in the long term prospects of Malaysia's automotive component industry, as well as in the capital allocation strategy of its management team.

 

Universal Robina was sold due to increasing risks to its profitability following a sharp increase in raw material costs. We believe that the company may not be able to raise prices adequately to cover these cost increases, due to intense competition across various categories in which it operates. This could lead to a decline in the company's profitability.

 

Hatton National   Bank was sold due to the challenging outlook for the Sri Lankan banking industry. Several macro-economic challenges have led to a weaker growth outlook and a rise in the industry's non-performing loans.

 

REE and Towngas China were disposed of due to lower conviction in the management's capital allocation strategy.

 

BASF India , Tata Consumer Products , Voltas and Leeno Industrial were sold as their valuations became expensive following strong performance and share price appreciation.

 

Significant reductions from existing positions

 

We reduced Scottish Oriental's holdings in a number of companies following strong share price appreciation which saw their valuations rise. These companies included Zhejiang Weixing New Building Materials , Emami , Blue Star , Mahindra Lifespace , Metropolis Healthcare , Mphasis , SKF India , Mr. DIY and Century Pacific Food .

 

We also reduced Scottish Oriental's holding in Nissin Foods , as our engagement with the company indicated that substantial inflation in its raw material costs could lead to a decline in its profitability.

 

Purchased and subsequently sold

 

Three holdings were purchased and subsequently sold during the year. We subscribed to two initial public offerings (IPOs), Gland Pharma and Ming Yuan Cloud but sold the holdings after significant share price appreciation led to their valuations becoming expensive. We purchased Quess following the appointment of a new CEO. The company's capital allocation had been poor and its staffing business had also been severely affected by the COVID-19 disruption. The new CEO has been implementing changes to improve the company's capital allocation. The strong economic recovery in India led to a sharp rise in its share price and expensive valuations, due to which we sold Scottish Oriental's holding.

 

4.  Ten Largest Investments as at 31 August 2021

 

Name of Holding

 

Country

Sector

% of Shareholder's Funds

Godrej Industries

India

Materials

4.1

It is a holding company which owns stakes in Godrej Consumer Products, Godrej Properties and Godrej Agrovet. Its subsidiaries and associates operate leading businesses in segments such as hair colors, household insecticides, real estate and crop protection products. The holding company trades at over 60% discount to the value of its stakes in its listed subsidiaries and associates.

Century Pacific Food

Philippines

Consumer Staples

3.8

Century Pacific owns leading brands for canned fish, tuna and meat in the Philippines. It has entered new, fast growing categories such as dairy and alternative meat products in recent years.

Mitra Adiperkasa

Indonesia

Consumer Discretionary

3.6

It operates franchises for leading global brands including Zara, Starbucks, Domino's and Sephora in Indonesia. It serves as a proxy for consumer spending in Indonesia, due to its leading market positions.

Colgate-Palmolive India

India

Consumer Staples

3.3

Colgate is the market leader in the oral care segment in India, with about 50% market share in the toothpaste category. It also has potential to build a large presence in segments such as personal care.

Mahindra CIE Automotive

India

Consumer Discretionary

3.1

It is a leading automotive component manufacturer in India and Europe. The company has been gaining market share and introducing new products in its key markets.

Selamat Sempurna

Indonesia

Consumer Discretionary

3.1

It is the leading manufacturer of filters and radiators in Indonesia. Through its joint-venture with Donaldson (United States of America), it also exports products to global markets. Selamat Sempurna has the potential to consolidate the fragmented domestic industry and enter new segments such as air and water filters which have a large addressable market.

Uni-President China

China

Consumer Staples

3.0

The company operates leading instant noodle and beverage brands in China. Its management is focused on launching premium products which earn higher margins and for which consumer demand is growing fast.

Mphasis

India

Technology

2.8

Mphasis is an information technology services provider which assists global clients in their digital transformation and cloud computing efforts. Their clients' spending on these areas is growing significantly and Mphasis has built a leading position in these segments. 

Ace Hardware Indonesia

Indonesia

Consumer Discretionary

2.6

Ace Hardware is a leading hardware retailer in Indonesia. The industry is highly fragmented. Ace has the potential to gain significant market share from unorganised sector retailers which sell lower quality products. 

Hero Supermarket

Indonesia

Consumer Staples

2.6

The company operates several retail formats in Indonesia, through its Hero Supermarket brand and its franchises for IKEA and Guardian. It recently decided to shut down its loss making hypermarket format and has increased its focus on the profitable and fast growing IKEA franchise.

           

 

 

5.  Sector Allocation as at 31 August 2021

 

Sector

% Shareholder's Funds

 

2021

2020

Consumer Discretionary

28.9

23.8

Consumer Staples

25.5

27.2

Industrials

11.4

10.9

Technology

10.1

6.0

Materials

9.5

13.6

Financials

8.3

4.5

Real Estate

5.9

3.5

Healthcare

3.6

1.4

Utilities

2.0

0.8

Communication Services

-

0.7

Net current assets

4.7

7.6

Non-current liabilities

(9.9)

-

 

 

 

6.  Portfolio Positioning and Outlook

 

Country Allocation at 31 August 2021 (based on geographical area of activity)

 

Country/Region

Scottish Oriental

2021

%

Scottish Oriental

2020

%

MSCI¹

2021

%

MSCI Small Cap²

2021

%

China

8.9

7.6

39.1

11.0

Hong Kong

4.9

7.8

7.5

6.5

Taiwan

7.2

3.9

16.9

24.0

Greater China

21.0

19.3

63.5

41.5

Indonesia

18.6

12.6

1.4

1.7

Malaysia

2.0

-

1.6

3.5

Philippines

9.9

12.5

0.7

1.0

Singapore

3.0

1.2

2.5

5.9

Thailand

1.5

-

2.0

4.0

Vietnam

2.4

2.5

-

-

South East Asia

37.4

28.8

8.2

16.1

Bangladesh

1.4

1.7

-

-

India

41.7

39.4

13.4

21.8

Pakistan

1.3

1.1

-

0.4

Sri Lanka

-

0.6

-

-

Indian Subcontinent

44.4

42.8

13.4

22.2

South Korea

2.4

1.5

14.9

20.2

Net current assets

4.7

7.6

-

-

Non-current liabilities

(9.9)

-

-

-

Net Assets

100.0

100.0

100.0

100.0

¹ Morgan Stanley Capital International AC Asia ex Japan Index

² Morgan Stanley Capital International AC Asia ex Japan Small Cap Index

 

Almost 70% of Scottish Oriental's portfolio is invested in India, Indonesia and the Philippines. The country and sector positioning of the portfolio are a residual outcome of our bottom-up stock selection process. We have consistently found more quality businesses in these markets which meet our investment criteria, compared to more developed Asian countries. A few key reasons for this are detailed below.

 

We receive much greater access to key decision makers in these markets which allows us to assess our alignment. In China and South Korea, we can often speak only to investor relations personnel or Board Secretaries who are unable to offer insight into long term strategic issues and it therefore takes us longer to become comfortable with our assessment of company management. We also find more privately owned businesses in our preferred markets, compared to markets such as China which has a large number of state owned enterprises with national service obligations. Finally, market leaders across industries in India, Indonesia and the Philippines are still small companies owing to low market penetration. In more developed markets like China, the market leaders are already large businesses. For example, Blue Star and Concepcion Industrial, the leading air-conditioner manufacturers in India and the Philippines respectively, have market capitalisations of US$1.1 billion and US$200 million, compared to US$70 billion for Midea, the industry leader in China. We view companies like Blue Star and Concepcion Industrial as potentially large businesses, currently hiding in small market capitalisations.

 

We are excited about the outlook for Scottish Oriental's portfolio.

 

• The higher concentration among the top 10 and top 20 holdings reflects our increased conviction in the Company's largest holdings.

• The return on equity of the Company's investments has improved over recent years, with 2020's lower figure reflecting the impact COVID-19 had on some holdings.

• On the reduced earnings base that resulted from the impact of COVID-19, the earnings per share growth of Scottish Oriental's portfolio is expected to improve sharply in the coming years, reflecting a strong recovery.

• Scottish Oriental's holdings are attractively valued with the higher return on equity and expected growth in earnings per share only reflected through a modest premium on the price to earnings ratio of the portfolio compared to recent history. 

 

 

Vinay Agarwal

Sreevardhan Agarwal

FSSA Investment Managers

 

Income Statement for the year ended 31 August 2021 (audited)

 

  2021    2020

 

 

Revenue

£'000

Capital

£'000

Total*

£'000

Revenue

£'000

Capital

£'000

Total*

£'000

 

 

 

 

 

 

 

Gains/(losses) on investments

-

82,214

82,214

-

(45,575)

(45,575)

Income from investments

6,872

-

6,872

6,273

-

6,273

Other income

-

-

-

35

-

35

Investment management fee

(2,422)

-

(2,422)

(2,301)

-

(2,301)

Currency gains/(losses)

-

132

132

-

(4,002)

(4,002)

Other administrative expenses

(880)

-

(880)

(867)

-

(867)

 

 

 

 

 

 

 

Net return on ordinary activities before finance costs and taxation

 

3,570

 

82,346

 

  85,916

 

3,140

 

(49,577)

 

  (46,437)

Finance costs

(373)

-

(373)

-

-

-

 

 

 

 

 

 

 

Net return on ordinary activities before taxation

 

3,197

 

82,346

 

  85,543

 

3,140

 

(49,577)

 

  (46,437)

Tax on ordinary activities

(649)

(6,997)

(7,646)

(701)

(256)

(957)

 

 

 

 

 

 

 

Net return attributable to equity

Shareholders

 

2,548

 

75,349

 

77,897

 

2,439

 

(49,833)

 

(47,394)

 

 

 

 

 

 

 

Net return per ordinary share

9.02p

266.82p

275.84p

8.19p

(167.34)p

(159.15)p

 

 

 

 

 

 

 

 

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

 

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

 

The Board is proposing a dividend of 11.50p per share for the year ended 31 August 2021 (2020: 11.50p per share) which, if approved, will be payable on 14 January 2022 to shareholders recorded on the Company's shareholder register on 3 December 2021.

 

All revenue and capital items derive from continuing operations.

 

Summary Statement of Financial Position as at 31 August 2021 (audited)

 

 

2021

2020

 

£'000

£'000

£'000

£'000

 

 

 

 

 

Investments held at fair value through profit or loss

 

363,500

 

267,326

 

 

 

 

 

Current Assets

 

 

 

 

  Debtors

1,163

 

1,044

 

  Cash and deposits

17,546

 

22,459

 

 

18,709

 

23,503

 

Current Liabilities (due within one year)

 

 

 

 

  Creditors

(2,386)

 

(1,381)

 

 

(2,386)

 

(1,381)

 

Net Current Assets

 

16,323

 

22,122

 

 

 

 

 

Non-current Liabilities

 

 

 

 

Deferred tax liabilities on Indian capital gains

(4,525)

 

-

 

Loan notes

(29,812)

 

-

 

 

 

(34,337)

 

-

Total Assets less Liabilities

 

345,486

 

289,448

 

 

 

 

 

Capital and Reserves

 

 

 

 

Ordinary share capital

 

7,853

 

7,853

Share premium account

 

34,259

 

34,259

Capital redemption reserve

 

58

 

58

Capital reserve

 

296,908

 

240,134

Revenue reserve

 

6,408

 

7,144

Total Equity Shareholders' Funds

 

345,486

 

289,448

 

 

 

 

 

Net asset value per share

 

1,264.54p

 

992.14p

 

 

Cash Flow Statement for the year ended 31 August 2021 (audited)

 

 

 

2021

 

2020

 

 

£'000

 

£'000

 

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

(3,587)

 

(3,239)

Dividends received from investments

6,246

 

6,332

Interest received from deposits

-

 

35

Purchases of investments

(134,490)

 

(169,109)

Sales of investments

121,979

 

161,576

Cash from operations

(9,852)

 

(4,405)

Taxation

 

(3,046)

 

(957)

Net cash outflow from operating activities

(12,898)

 

(5,362)

 

Financing activities

Expenses paid in relation to loan notes

Equity dividend paid

(192)

(3,284)

 

-

(3,435)

Buyback of ordinary shares

Issue of loan notes

(18,671)

30,000

 

(5,691)

-

Net cash inflow/(outflow) from financing activities

7,853

 

(9,126)

 

 

 

 

 

Decrease in cash and cash equivalents

(5,045)

 

(14,488)

Cash and cash equivalents at the start of the year

22,459

 

40,949

Effect of currency gains/(losses)

132

 

(4,002)

Cash and cash equivalents at the end of the year*

17,546

 

22,459

 

 

 

 

 

*Cash and cash equivalents represents cash at bank

 

 

 

 

 

 

 

 

 

Statement of Changes in Equity (audited)

For the year ended 31 August 2021

 

 

 

 

 

 

 

 

Ordinary

Share capital

Share premium account

Capital

redemption

reserve

 

Capital reserve

 

Revenue

reserve

 

 

Total

 

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 31 August 2020

 

7,853

 

34,259

 

58

 

240,134

 

7,144

 

289,448

Total comprehensive income:

 

 

 

 

 

 

 

 

Return for the year

 

-

 

-

 

-

 

75,349

 

2,548

 

77,897

Transactions with owners recognised directly in equity:

 

 

 

 

 

 

Buyback of Ordinary shares

 

-

 

-

 

-

 

(18,575)

 

-

 

(18,575)

Dividend paid in the year

 

-

 

-

 

-

 

-

 

(3,284)

 

(3,284)

Balance at 31 August 2021

 

7,853

 

34,259

 

58

 

296,908

 

6,408

 

345,486

 

 

 

Statement of Changes in Equity (audited)

For the year ended 31 August 2020

 

 

 

 

 

 

 

 

Ordinary

Share capital

Share premium account

Capital

redemption

reserve

 

Capital reserve

 

Revenue

reserve

 

 

Total

 

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 31 August 2019

 

7,853

 

34,259

 

58

 

295,754

 

8,140

 

346,064

Total comprehensive income:

 

 

 

 

 

 

 

 

Return for the year

 

-

 

-

 

-

 

(49,833)

 

2,439

 

(47,394)

Transactions with owners recognised directly in equity:

 

 

 

 

 

 

Buyback of Ordinary shares

 

-

 

-

 

-

 

(5,787)

 

-

 

(5,787)

Dividend paid in the year

 

-

 

-

 

-

 

-

 

(3,435)

 

(3,435)

Balance at 31 August 2020

 

7,853

 

34,259

 

58

 

240,134

 

7,144

 

289,448

 

 

 

Principal Risks and Uncertainties

The Board has carried out a careful assessment of the principal and emerging risks facing the Company, these risks, together with a summary of the mitigating action the Board takes to manage these risks, are set out below.

 

Emerging Risks - COVID-19 Pandemic

Risk

Mitigation

The Board acknowledges that there are a number of related emerging risks resulting from the pandemic that may impact the Company. These include investment risks surrounding the companies in the portfolio such as reduced demand, reduced turnover and supply chain breakdowns.

The Board continues to work with the Investment Manager, Juniper Partners and its other advisers to manage these risks as far as possible in these uncertain times.

Principal Risks

Risk

Mitigation

Investment objective and strategy

An inappropriate or unattractive objective and strategy may have an adverse effect on Shareholder returns or cause a reduction in demand for the Company's shares, both of which could lead to a widening discount.

 

The Board conducts an annual strategy reviews

and consider investment performance,

shareholder views and developments in the

marketplace as well as emerging risks which

could impact the Company.

 

The Board reviews changes to the shareholder

register at quarterly Board meetings and

engages the Administrator to continually

monitor the discount at which the Company's

shares trade, reporting regularly to the Board

and buying back shares when appropriate.

Investment performance

Poor investment performance may have an adverse effect on Shareholder returns.

 

In extreme circumstances, poor investment performance could lead to the Company breaching loan covenants.

 

The Board reviews investment performance at each quarterly Board meeting. The Investment Manager reports on the Company's performance, transaction activity, individual holdings, portfolio characteristics and outlook.

 

Investment performance and the portfolio composition has been monitored specifically in light of the COVID-19 pandemic.

 

The Investment Manager is formally appraised at least annually by the Management Engagement Committee.

 

The Board reviews compliance with the Company's loan covenants on a quarterly basis.

Financial and Economic

The Company's investments are impacted by financial and economic factors including market prices, interest rates, foreign exchange rates, liquidity and credit which could cause losses to the investment portfolio.

 

 

The Board regularly reviews and agrees policies for managing market price risk, interest rate risk, foreign currency risk, liquidity risk and credit risk. These are explained in detail in note 15 to the financial statements on pages 59 to 63 of the Annual Report.

Share price discount/premium to net asset value

A significant share price discount or premium to the Company's net asset value per share, or related volatility, could lead to high levels of uncertainty or speculation and the potential to reduce investor confidence.

 

The Board has established share issuance and share buyback processes to assist in the moderation of share price premium and discount to net asset value. Shareholders are kept informed of developments as far as practicable and are encouraged to attend briefings, such as the Company's Annual General Meeting, to understand the implementation of the investment policy to achieve the Company's objectives.

Operational

The Company is reliant on third party service providers including FSSA Investment Managers as Investment Manager, Juniper Partners as Company Secretary and Administrator, J P Morgan as Depositary and Custodian and Computershare as Registrar. Failure of the internal control systems of these third parties could result in inaccurate information being reported or risk to the Company's assets.

 

Operationally, COVID-19 is affecting each of the Company's key service providers and each has put in place the appropriate arrangements for their staff to work from home. To date these services have continued without disruption and the operational arrangements have proven adequate. The Board will continue to monitor these arrangements.

 

The Audit Committee formally reviews each service provider at least annually, considering their reports on internal controls.

 

Further details of the Company's internal control and risk management system is provided on page 32 of the Annual Report.

Regulatory

The Company operates in a regulatory environment. Failure to comply with s1158 of the Corporation Tax Act 2010 could result in the Company losing investment trust status and being subject to tax on capital gains. Failure to comply with other regulations could result in financial penalties or the suspension of the Company's listing on the London Stock Exchange. 

 

Compliance with relevant regulations is monitored on an ongoing basis by the Company Secretary and Investment Manager who report regularly to the Board.

 

The Board monitors changes in the regulatory environment and receives regulatory updates from the Company Secretary, Lawyers and Auditors as relevant.

 

The Board has been updated on any regulatory

changes proposed in respect of the response to the COVID-19 pandemic as required.

 

Statement of Directors' Responsibilities in Respect of the Annual Financial Report

 

In accordance with the Disclosure Guidance and Transparency Rules, we confirm that to the best of our 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 loss of the Company; and

 

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

 

In addition, each of the Directors considers that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, position, business model and strategy.

 

Going Concern

The Directors believe, in the light of the controls and review processes reported in the Report of the Audit Committee on page 32 of the Annual Report and bearing in mind the nature of the Company's business and assets, which are considered to be readily realisable if required, that the Company has adequate resources to continue operating for at least twelve months from the date of approval of the financial statements. For this reason, they continue to adopt the going concern basis in preparing the accounts.

 

 

Related Party Transactions

Related party transactions with the Directors, for the year ended 31 August 2021 are disclosed in the Directors' Report on pages 34 to 37 of the Annual Report. At the year end £22,500 was due to the Directors (2020: £21,000).

 

The AIFM, the Investment Manager and the Company have entered into the Investment Management Agreement. Pursuant to the terms of the Investment Management Agreement, the AIFM has delegated to First Sentier Investors (UK) Funds Limited the management of the Company's portfolio subject to its and the Directors' overall supervision. Details of transactions during the year are disclosed in note 2 of the Annual Report. Amounts outstanding at the year end are shown in note 9 of the Annual Report.

 

Notes:

 

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

 

The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice (Accounting Standards "UK GAAP") including Financial Reporting Standard (FRS) 102 "The Financial Reporting Standard applicable

in the UK and Republic of Ireland" and the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" ("the SORP") issued by the Association of Investment Companies in April 2021.

 

All of the Company's operations are of a continuing nature.

 

The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments held at fair value through profit or loss.

 

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

 

There is one area of significant judgement -

 

· The Directors use their judgement in selecting the appropriate rate of capital gains tax to apply to unrealised gains on Indian investments. The Directors have chosen to apply a rate of 10% on unrealised gains on Indian investments. Please refer to note 4 (a) on page 55 of the Annual Report for further details.

 

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

 

The functional and reporting currency of the Company is pounds sterling as this is the currency of the Company's share capital and the currency in which most of its shareholders operate.

 

2.  The Company held the following categories of financial instruments as at 31 August 2021:

 

 

Level 1

Level 2

Level 3

Total

 

£'000

£'000

£'000

£'000

Listed equities

363,500

-

-

363,500

Total

363,500

-

-

363,500

 

 

The Company held the following categories of financial instruments as at 31 August 2020:

 

 

Level 1

Level 2

Level 3

Total

 

£'000

£'000

£'000

£'000

Listed equities

267,326

-

-

267,326

Total

267,326

-

-

267,326

 

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

Fair Value Hierarchy

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

 

The levels are determined by the lowest level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:

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

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

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

 

3. 

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

2021

£'000

2020

£'000

Net return on activities before finance costs and taxation

 

85,916

(46,437)

Net (gains)/losses on investments

 

 

(82,214)

45,575

Currency (gains)/losses

 

 

(132)

4,002

Dividend income

 

 

(6,872)

(6,273)

Interest income

 

 

-

(35)

Increase/(decrease) in creditors

 

 

53

(54)

Increase in debtors

 

 

(338)

(17)

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

(3,587)

(3,239)

           

 

 

4.  These are not statutory accounts in terms of Section 434 of the Companies Act 2006.  Full audited accounts for the year to 31 August 2021 will be sent to shareholders in October 2021 and and copies will be available from the Company's website www.scottishoriental.com and the Company Secretary's office at 28 Walker Street , Edinburgh, EH3 7HR.

 

5.  The audited accounts for the year ended 31 August 2021 will be lodged with the Registrar of Companies.

 

 

 

 

 

 

 

 

 

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