TIDMSST
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)
MSCI AC Asia ex Japan Index
Net Asset Value 28.4% (GBP) 14.7%
MSCI AC Asia ex Japan Small
Share Price 28.8% Cap Index (GBP) 37.8%
Dividend maintained at
11.5p per share FTSE All-Share Index (GBP) 26.9%
Summary Data at 31 August 2021 (audited)
Shares in issue 27,321,159 Shareholders' Funds GBP345.5m
Net Asset Value 1,264.54p Market Capitalisation GBP297.8m
per share
Share Price Discount to
Share Price 1,090.00p Net Asset Value 13.8%
Active Share (MSCI AC Asia
Ongoing Charges* 1.02% ex Japan Index) 99.9%
Active Share (MSCI AC Asia
Net Cash 4.3% 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 GBP30 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 Contribution
Return (Sterling) 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 Contribution
Return (Sterling) 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 Industrials (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)
Scottish Scottish MSCI Small
Oriental Oriental MSCI(1) Cap(2)
2021 2020 2021 2021
Country/Region % % % %
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 Capital Total* Revenue Capital Total*
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'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
GBP'000 GBP'000 GBP'000 GBP'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 (4,525) -
capital gains
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
GBP'000 GBP'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 (192) -
Equity dividend paid (3,284) (3,435)
Buyback of ordinary shares (18,671) (5,691)
Issue of loan notes 30,000 -
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 redemption Capital Revenue
capital account reserve reserve reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'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 redemption Capital Revenue
capital account reserve reserve reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'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 The Board continues to work with
there are a number of related the Investment Manager, Juniper
emerging risks resulting from Partners and its other advisers
the pandemic that may impact to manage these risks as far as
the Company. These include possible in these uncertain times.
investment risks surrounding
the companies in the portfolio
such as reduced demand, reduced
turnover and supply chain breakdowns.
----------------------------------------------
Principal Risks
Risk Mitigation
----------------------------------------------
Investment objective and strategy
An inappropriate or unattractive The Board conducts an annual strategy
objective and strategy may reviews
have an adverse effect on Shareholder and consider investment performance,
returns or cause a reduction shareholder views and developments
in demand for the Company's in the
shares, both of which could marketplace as well as emerging
lead to a widening discount. 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 The Board reviews investment performance
may have an adverse effect at each quarterly Board meeting.
on Shareholder returns. The Investment Manager reports on
the Company's performance, transaction
In extreme circumstances, poor activity, individual holdings, portfolio
investment performance could characteristics and outlook.
lead to the Company breaching
loan covenants. 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 The Board regularly reviews and
impacted by financial and economic agrees policies for managing market
factors including market prices, price risk, interest rate risk,
interest rates, foreign exchange foreign currency risk, liquidity
rates, liquidity and credit risk and credit risk. These are
which could cause losses to explained in detail in note 15 to
the investment portfolio. the financial statements on pages
59 to 63 of the Annual Report.
----------------------------------------------
Share price discount/premium
to net asset value The Board has established share
A significant share price discount issuance and share buyback processes
or premium to the Company's to assist in the moderation of share
net asset value per share, price premium and discount to net
or related volatility, could asset value. Shareholders are kept
lead to high levels of uncertainty informed of developments as far
or speculation and the potential as practicable and are encouraged
to reduce investor confidence. 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 Operationally, COVID-19 is affecting
party service providers including each of the Company's key service
FSSA Investment Managers as providers and each has put in place
Investment Manager, Juniper the appropriate arrangements for
Partners as Company Secretary their staff to work from home. To
and Administrator, J P Morgan date these services have continued
as Depositary and Custodian without disruption and the operational
and Computershare as Registrar. arrangements have proven adequate.
Failure of the internal control The Board will continue to monitor
systems of these third parties these arrangements.
could result in inaccurate
information being reported The Audit Committee formally reviews
or risk to the Company's assets. 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 Compliance with relevant regulations
environment. Failure to comply is monitored on an ongoing basis
with s1158 of the Corporation by the Company Secretary and Investment
Tax Act 2010 could result in Manager who report regularly to
the Company losing investment the Board.
trust status and being subject
to tax on capital gains. Failure The Board monitors changes in the
to comply with other regulations regulatory environment and receives
could result in financial penalties regulatory updates from the Company
or the suspension of the Company's Secretary, Lawyers and Auditors
listing on the London Stock as relevant.
Exchange.
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 GBP22,500 was
due to the Directors (2020: GBP21,000).
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
GBP'000 GBP'000 GBP'000 GBP'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
GBP'000 GBP'000 GBP'000 GBP'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 2021 2020
and sales GBP'000 GBP'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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