Scottish Oriental - Final Results
07/11/2023 07:00
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RNS Number : 5404S Scottish Oriental Smlr Co Tst PLC 07 November 2023
THE SCOTTISH ORIENTAL SMALLER COMPANIES TRUST PLC
Annual Financial Report for the year ended 31 August 2023
Financial Highlights
Total Return Performance for the year ended 31 August 2023 (audited)
Net Asset Value 6.5% MSCI AC Asia ex Japan Small Cap Index (£) 1.8%
Share Price 8.4% MSCI AC Asia ex Japan Index (£) (8.4)%
Final dividend maintained at 13.0p per share FTSE All-Share Index (£) 5.2%
Summary Data at 31 August 2023 (audited)
Shares in issue 24,359,851 Shareholders' Funds £354.6m
Net Asset Value per share 1,455.6p Market Capitalisation £310.6m
Share Price 1,275.0p Share Price Discount to Net Asset Value 12.4%
Ongoing Charges Ratio* 1.60% Active Share (MSCI AC Asia ex Japan Small Cap Index) 97.5%
Ongoing Charges Ratio (excluding performance fee) 0.95%
Net Cash 4.0% Active Share (MSCI AC Asia ex Japan Index) 99.7%
*A performance fee of £2,247,000 is payable relating to the year ending 31
August 2023 (2022: nil)
Chairman's Statement
I am pleased to present my second annual report as Chairman and to report that
the Company has continued to build on the previous two years' strong
performance. The Net Asset Value ("NAV") per share rose by 6.5 per cent in
total return terms over the 12 months to 31 August 2023. This compares
favourably to the MSCI AC Asia ex Japan Small Cap Index, the MSCI AC Asia ex
Japan Index, and the FTSE All-Share Index which returned 1.8 per cent, -8.4
per cent and 5.2 per cent respectively during the same period.
During the period under review, the Company's share price increased by 8.4 per
cent. As a result, the discount narrowed to 12.4 per cent from 14.0 per cent
at the previous year end.
The Investment Manager's portfolio construction process is based on
fundamental, bottom up analysis, focused on corporate governance, growth
prospects, valuation and potential long term returns. As such this approach is
index agnostic and very much active in style. With a view to rewarding
performance which is better than the return investors would receive from
investing in the benchmark, there is a performance fee component to management
remuneration which is designed to incentivise the delivery of superior
performance above the MSCI AC Asia ex Japan Small Cap Index.
Following three years of share price growth, a performance fee of £2,247,000
was earned by the Investment Manager in the year under review. Following the
change to the Company's comparator index we have reviewed the terms of the
investment management agreement. The Investment Manager has agreed that for
the current three year performance period, a chain-linked comparator index,
using; (i) the MSCI AC Asia (ex-Japan) for periods up to and including 31
August 2021; and (ii) the MSCI AC Asia ex Japan Small Cap Index (GBP) for
periods with effect from 1 September 2021.
We believe that a system that fairly remunerates the investment manager for
long term outperformance is also a benefit to shareholders. We are currently
reviewing the terms of the investment management agreement and hope to provide
an update on this to shareholders in the coming months.
The Portfolio Managers' Report below addresses the performance of the Company
and expands on the investment process the managers have followed over many
years to take advantage of the key investment themes prevailing in the Asian
markets. The report goes on to examine reasons for the transactions that have
taken place which have resulted in the current positioning of the portfolio.
What comes across is a manager who considers all aspects of a company's
business model and the risks associated with investing whilst taking account
of the long term sustainable potential on offer. I hope you agree that it is a
most informative read.
During the year, the Company bought back 457,128 ordinary shares. The
Company's share price traded in a discount range of between 9.5 per cent and
16.1 per cent. Whilst the Board continues to have no formal discount control
mechanism in place the Company's shares are re-purchased in the market when
deemed appropriate to do so, within the buyback authority granted by
shareholders.
In last year's annual report, I reported an uplift to the Company's revenue
earnings per share from 9.02p to 16.66p. However in 2023, as a result of
changes to the investment portfolio, revenue earnings per share (largely
reflecting the dividends paid by the companies in our portfolio) has fallen to
14.19p. This should not be a cause of concern for shareholders as this is due
to the Investment Manager picking stocks that align with the Company's long
term capital growth objective. The Board is proposing to maintain the final
dividend per share at 13.0p, but not to pay an additional special dividend
this year.
Anne West has decided that after 13 years as a non-executive Director she will
step down from the Board at the forthcoming AGM. Anne has been a strong
presence on the Board and her very positive contributions will be missed. I am
pleased to report that following a thorough selection process Uma Bhugtiar
joined the Board on 19 October 2023. Uma is a corporate lawyer with a great
deal of experience in Asian capital markets. I am sure she will be a strong
addition to the Board and recommend that shareholders vote in favour of her
election at the AGM. As a Board we are always mindful of the mix of skills and
experience that we have and with that in mind we are in the process of
recruiting a fifth Director who should be appointed in early 2024.
Shareholders can keep up to date on the performance of the portfolio through
the Company's website at www. (http://www/) scottishoriental.com
The Board welcomes communication from shareholders and I can be contacted
directly through the Company Secretary at cosec@junipartners.com
(mailto:cosec@junipartners.com)
This year's Annual General Meeting ('AGM') will be held on Thursday, 7
December 2023 at the offices of Juniper Partners Limited, 28 Walker Street,
Edinburgh. The Board looks forward to seeing those of you who can attend the
meeting in person.
Jeremy Whitley
Chairman
6 November 2023
Portfolio Managers' Report
This report addresses the following topics -
1. Company Performance
2. Key Investment Themes in Scottish Oriental's Portfolio
3. Recent Portfolio Activity
4. Ten Largest Holdings as at 31 August 2023
5. Sector & Geographic Analysis
6. Portfolio Positioning & Outlook
1. Company Performance
Scottish Oriental continued its positive performance over the last 12 months.
Its net asset value rose by 6.5% for the year ended 31 August 2023, compared
to a gain of 1.8% for the MSCI AC Asia ex-Japan Small Cap index and a decline
of 8.4% for the MSCI AC Asia Ex Japan Index. The largest contributors to
performance were the holdings in Indonesia and India. The biggest detractors
from performance were the portfolio's holdings in South Korea and the
Philippines.
Top Five Contributors
Company Country Sector Absolute Return (Sterling) % Contribution Performance %
Mitra Adiperkasa Indonesia Consumer Discretionary 73.7 2.6
Hisense Home Appliances Hong Kong Consumer Discretionary 129.5 2.1
Selamat Sempurna Indonesia Consumer Discretionary 55.4 2.1
Astra Otoparts Indonesia Consumer Discretionary 143.5 1.9
CIE Automotive India India Consumer Discretionary 74.2 1.4
Mitra Adiperkasa reported strong sales and profit growth, benefiting from the
removal of movement restrictions in Indonesia as well as changes made to its
store network. The company is seeing strong demand across its portfolio of
premium discretionary retail and food & beverage formats in Indonesia. It
is also accelerating its expansion into other ASEAN countries through brands
such as Zara and Foot Locker.
Hisense Home Appliances also reported strong operating performance driven by
its central air conditioner businesses, as demand strengthened after Covid-19
restrictions were removed in China, while raw material costs also declined
leading to an improvement in its profitability levels. In addition, the
company announced the formation of a new employee stock option scheme for its
management. This is a crucial step in its ownership reform, which began in
2020. It intends to improve alignment of shareholders with the company's
management and create a stronger performance-oriented culture.
Selamat Sempurna, the largest manufacturer of filters for automotive and
off-highway applications in Indonesia, also delivered strong financial
performance, driven by robust demand in Indonesia and a demand recovery in
some of its international markets such as in Europe. As Selamat's product mix
has improved in favour of premium products, its profitability levels continue
to rise. The company continued to raise its quarterly dividend per share. The
management is building the company's product portfolio to cater to
applications in electric vehicles. The adoption of electric vehicles is at an
early stage in Indonesia and other key markets of the company. The
management's focus is to build a strong position in the emerging category.
Astra Otoparts, the market leader in Indonesia's auto-components industry, has
been a major beneficiary of the recovery in Indonesia's automotive sector. It
has improved its operating efficiency in recent years by consolidating its
manufacturing facilities and exiting joint-ventures which had delivered poor
performance. The company's balance sheet has also been strengthened in recent
years, and is currently at a net cash level. The improvement in automotive
industry demand, as well as these changes, led to meaningful operating
leverage and strong profit growth in recent periods.
CIE Automotive India, a leading automotive component manufacturer in India and
Europe, maintained strong sales and profit growth, driven by its Indian
operations where it has signed large new customers as well as gained market
share with its existing customers. The company was also able to pass through
higher energy costs to its customers in Europe. The management signed an
agreement to sell its German forgings plant, which earns low levels of
profitability. This decision is likely to lead to an improvement in CIE
Automotive India's return on capital employed (ROCE).
Top Five Detractors
Absolute Return (Sterling) % Contribution Performance %
Company Country Sector
Hero Supermarket Indonesia Consumer Staples (28.3) (0.8)
Avia Avian Indonesia Materials (30.2) (0.7)
Solara Active Pharma India Health Care (29.4) (0.5)
Sarimelati Kencana Indonesia Consumer Discretionary (22.8) (0.4)
Concepcion Industrial Philippines Industrials (27.3) (0.4)
Hero Supermarket declined after it reported operating losses (excluding
property divestments) due to weak performance of its supermarket business. The
company's performance has been gradually improving after Covid-19 restrictions
were relaxed. Its network of Guardian Health and Beauty stores achieved strong
sales growth and operating leverage. The management plans to improve inventory
management and cost controls, and develop new formats to reach more customers.
Avia Avian has faced a challenging period over the last year. The sharp
increase in raw material costs for the paint industry was passed on by the
industry leaders to consumers through price hikes, but this led to weaker
demand. Avian has focused on accelerating its new product launches, with a
recent product launch, Avitex Gold, receiving a strong customer response and
helping the company to gain further market share. The company has the
opportunity to lead the consolidation of the relatively fragmented paint
industry in Indonesia. The recent reduction in raw material costs is also
expected to provide a tailwind to the company's profitability levels.
Solara Active Pharma has witnessed a period of poor profitability, since the
demand for some of its key active pharmaceutical ingredients (APIs) declined
sharply after the pandemic. The management has partly mitigated the impact of
this by signing contracts with new customers, and expanding distribution into
new geographical markets. The company has also received regulatory approvals
for launching new products, which should contribute to an improvement in its
growth over the coming periods. We expect Solara's performance to improve
under a new CEO and CFO, who were appointed in recent months and are leading
the initiatives detailed above.
Sarimelati Kencana was negatively affected by a period of over-expansion of
its Pizza Hut restaurant network in recent years. The company has ceased
opening new outlets and will increase its focus on growing its sales per store
and operating efficiency. The Board has also appointed new senior management
members to strengthen the business going forward. This includes a new COO, Mr.
Lukito, who spent 17 years leading businesses at Procter & Gamble in Asia.
The management is also making changes to the store format and revamping the
menu. In recent years, the company suffered due to the high discounting by
online food aggregators, which is now waning. This should help its competitive
position as well.
Concepcion Industrial was challenged by intense competition in its home
appliance business. This has led to margin pressure attributed to higher costs
from promotions and discounting. The growth in the company's air conditioning
business has been resilient as the promotional activities took effect.
However, this was tempered by lower refrigerator sales, which management
attributed to reduced purchasing power and higher interest rates.
2. Key Investment Themes in Scottish Oriental's Portfolio
Our investment approach is based on bottom-up analysis to identify the most
promising opportunities, rather than being influenced by country or sector
preferences. We invest in businesses which are run by leaders who we feel
aligned with as minority shareholders, and have a strong track record of
treating all stakeholders fairly. This is particularly relevant in the Asian
context, where a large part of the investment universe comprises family owned
businesses. We prefer to invest with those families and management teams that
take a long-term view, build a performance oriented culture and employ a
conservative approach towards managing risks. We look for business franchises
that are market leaders in under-penetrated categories. Our assessment is
based on their ability to navigate changes in consumer preferences,
competitive intensity and business cycles over the long term. Due to the
market leading position of these businesses, they typically earn attractive
returns on capital employed (ROCE), as they enjoy strong bargaining power with
their customers, suppliers and channel partners. As the penetration levels of
these categories grow over time, we expect these businesses to emerge as the
large companies of the future.
Whist portfolio construction is bottom-up, by aggregating the holdings, we
observe that Scottish Oriental's portfolio is exposed to certain key
investment themes in the Asian region. The section below details these themes,
and lists examples of the portfolio's holdings which are well positioned to
capitalise on the opportunities arising from them.
Dominant consumer staples franchises
A number of Asian countries are still highly under-penetrated across consumer
staples categories, ranging from oral care to baby diapers. Scottish
Oriental's holdings comprise businesses which have built dominant brands in
these categories. This includes family owned businesses as well as
subsidiaries of large multi-national corporations. The categories in which
these companies operate offer attractive growth runways in the coming years.
This growth is expected to be driven by both higher volumes, as well as the
consumption of a larger share of premium products. In many instances,
premiumisation also leads to better profitability for our portfolio holdings.
Their strong brands, built by years of consistent investment in advertising,
provide the companies with substantial pricing power, leading to high levels
of profitability and attractive terms of trade with channel partners. 29.5% of
Scottish Oriental's portfolio is currently invested in consumer staples
businesses. These are brand owners which typically have dominant market shares
in their respective categories, such as the examples described below.
Colgate-Palmolive (India) has been present in India since 1937. Its parent,
Colgate Palmolive, is its majority shareholder with a 51% stake in the
company. A consistent focus on brand building, combined with a strong
distribution advantage, has cemented its dominant position of more than 50%
market share - almost 3 times as much as its nearest competitor. The average
Indian spends just 1 USD on oral care products each year, compared to USD 4 in
China and USD 11 in Brazil. Colgate's dominant market position in the country
allows it to command high levels of profitability, which it re-invests into
continued brand building efforts. Its pricing power allows it to earn high
returns on capital employed (ROCE), averaging more than 100% in recent years.
The company's management, led by its new CEO, Prabha Narasimhan, is focused on
increasing penetration of oral care in rural areas of India where it is still
at low levels, and increasing the share of premium variants in urban regions.
The company also has the potential to expand the product portfolio into other
categories, such as personal care. This offers Colgate a long runway for
sustainable growth in India.
Century Pacific Food is the largest canned food producer in the Philippines.
Since it listed in 2014, we have observed that its majority shareholders, the
Po family, have managed the business with high governance standards. They also
hired experienced professional managers from companies such as PepsiCo,
Unilever and Procter & Gamble to run its operations. The canned tuna
segment, in which Century Pacific is dominant, is well penetrated in the
Philippines. This segment is used to generate substantial cash flows. These
cash flows are judiciously invested to nurture new brands. An example of this
is in the dairy segment, where the company built its brand into the second
largest in the Philippines in a short period, and continues to gain market
share from its competitors. Similarly, the company's management has made
investments to incubate brands in areas such as pet food, condiments and
coconut based beverages, which offer a large growth opportunity for Century
Pacific in the coming years. In most of these categories, penetration levels
are lower than the company's canned tuna business. These categories are led by
brands operated by multi-national corporations (MNCs), which typically price
at high levels, leading to an unmet need for attractively priced alternatives.
Century Pacific's products are positioned to fill this gap, by providing
quality offerings at reasonable prices to consumers. The company has used this
strategy to establish a strong position in emerging product segments, and
build a diversified portfolio of branded food and beverage products.
Leading consumer discretionary businesses in under- penetrated categories
In our experience, rising incomes drive a shift in consumption patterns across
countries. As penetration of consumer staples rises, a larger share of
incremental income is spent by consumers on discretionary products, from
residential real estate to home appliances, or experiences such as
entertainment and travel. Large businesses have been built in these industries
in countries that are more economically developed. In countries like India,
Indonesia and Philippines, these categories are still at nascent stages of
development. As a result, market leaders in these industries are still small
businesses. Given the large and young populations in these countries which
aspire to consume more discretionary products, these market leaders have the
potential to grow multi-fold over the long term.
However, some of these businesses are typically more sensitive to the
macro-economic environment and are cyclical. Due to the large opportunity
size, management teams can also often get carried away, taking unnecessary
risks. We focus on investing behind those management teams which employ a
conservative approach towards growth. Scottish Oriental's holdings are
businesses which have witnessed several economic cycles in the past, and have
emerged from these cycles with stronger market positions. This is due to their
conservative balance sheets (which are typically net cash), and a focus on
managing costs efficiently. The recent period, marked by the pandemic, is one
such instance when demand across several consumer discretionary categories in
Asia was severely disrupted. Market leaders in Scottish Oriental's portfolio
emerged out of this period with higher market shares, as many small
competitors with lack of access to finance and limited investments in
technology, struggled to survive. As demand has recovered, our holdings are
now capturing a large part of the growth in their respective categories'
profit pool. Such consumer discretionary businesses comprise 22.2% of Scottish
Oriental's portfolio.
Mitra Adiperkasa ('MAPI') operates the exclusive franchises for leading global
retail and food & beverage (F&B) brands in Indonesia such as Zara and
Starbucks, with over 2,500 stores. During a period of strong growth in the
2010s, management expanded its store footprint aggressively. When demand
weakened in subsequent years, the company suffered from a decline in
profitability as well as high debt levels. This led to a strong focus on cost
efficiency and efforts to strengthen the balance sheet. The management shut
down poor performing brands, sold stakes in certain ventures to private equity
investors to de-leverage the balance sheet and became more conservative in its
growth strategy. These initiatives have delivered results, with improvements
in growth, margins, working capital and a net cash position currently. After
movement restrictions were lifted in Indonesia, Mitra Adiperkasa has benefited
from a sharp rebound in domestic demand. The company's relationship with its
principals has also strengthened. Given MAPI's success in Indonesia, several
key brands such as Zara and Foot Locker have invited the company to lead their
expansion in other ASEAN markets. Even as this increases the company's total
addressable market, the company's management is pursuing this expansion
cautiously. Their focus is on sustaining MAPI's attractive return on capital
employed, while growing the business steadily.
Blue Star is a leading air conditioner and heating, ventilation and air
conditioning (HVAC) company, with a history of operating for eighty years in
India. The business is controlled by the Advani family, which founded the
company and continue to lead its operations. Vir Advani, from the third
generation of its founding family, was appointed CEO in 2016. Under his
leadership, the company has gained market share in the residential
air-conditioner category consistently, emerging as one of the largest brands
in the country. Air conditioning penetration is low in India, at only 8%
compared to over 70% in China. This offers potential for substantial growth
for Blue Star as income levels rise. The company also operates a large HVAC
projects business, installing and maintaining systems in hospitals, stadiums
and underground rail networks. The company has consciously focused on limiting
its investment in this capital intensive segment, and selected customers
carefully, which has allowed Blue Star to grow the business consistently while
maintaining high return on capital. As the business achieves larger scale, it
also has the opportunity to significantly improve its profitability levels by
gaining operating leverage.
Radico Khaitan is one of the largest spirits companies in India, also
established eighty years ago. In India, the spirits industry is dominated by
whisky, which is a highly competitive market with multinational corporations
including Diageo and Pernod Ricard having a large presence. While Radico has a
strong presence in whisky, its management identified the unmet need in other
spirit segments, including vodka, gin and rum. The company has built dominant
brands in these categories, competing successfully against global leaders. For
example, its flagship product in vodka, Magic Moments, is dominant with 60%
share of vodka consumption in the country. Over the last fifteen years, the
management's focus has been to increase the share of premium products in its
portfolio. As of Fiscal Year 2023, 58% of its Branded Spirits sales come from
premium products, compared to the industry average of 20-25%. Given the strong
demand and ability to successfully incubate new brands, the company has
embarked upon a new capital expenditure program to expand capacity and to
backward integrate to facilitate more control over its ingredients for higher
quality products. This should deliver strong growth as well as improving
profitability for Radico in the coming years.
JNBY Design is a leading premium fashion apparel brand in China with multiple
brands targeting different demographics. The acronym stands for "Just
naturally be yourself," and the firm's strategy is to create unique designs
which encourage individual expression. Founded in 1994, the company has built
a long track record of scaling its core JNBY brand while improving
profitability. We are closely aligned with the original husband-and-wife
founders, who still own a majority stake in the company and also lead its
operations. JNBY's performance has been resilient during the industry
challenges of recent years. This has been achieved by focusing on organic
growth and building digital distribution channels while remaining disciplined
on inventory levels and discounting policies. The management has also focused
on consistently improving the efficiency levels of its stores, which has
helped in maintaining the company's high profitability levels despite subdued
consumer demand due to a weak macro-economic environment. As China emerges
from the pandemic, we expect demand to improve gradually. JNBY has the
potential to grow its core brand steadily, while also scaling up smaller
brands. The management has a track record of disciplined capital allocation,
with a focus on returning capital to shareholders through a high dividend
payout ratio. We expect this to continue going forward.
High quality industrial suppliers
It is expected that industrial activity and infrastructure development will
witness strong growth across most Asian countries in the coming years.
However, we observe a number of challenges in these industries. The business
model for infrastructure development in most Asian countries is dependent on
Government contracts or licenses. Obtaining the license or contract often
involves corrupt practices which are unacceptable to us. The terms of these
contracts can also be changed arbitrarily and payments can be delayed by the
customer (the relevant Government authority). In the case of large industrial
or mining companies, we find many instances where the businesses are run to
maximise scale rather than profitability. The cyclicality of these industries
and the high levels of asset intensity, often lead to low returns on capital
employed. We have avoided investing in such businesses. Scottish Oriental's
portfolio comprises industrial businesses which are suppliers to
infrastructure developers, miners or heavy industries, which benefit from the
same growth opportunities, but are likely to achieve this without the risks
mentioned above. Some of these companies offer products which are critical for
their customers' operations but are a low share of their customers' total
manufacturing cost. This gives their customers low incentive to switch to
alternative suppliers. In other instances, the business model is based on
developing customised applications for different customer segments which acts
as a barrier to entry for new competitors. Such advantages allow these
companies to earn attractive returns on capital. These high quality
industrials comprise 9.3% of Scottish Oriental's portfolio.
Sinoseal is the market leader in the niche mechanical sealing equipment
segment in China. Mechanical seals are essential components used in various
industries, including oil and gas, chemicals and pharmaceutical manufacturing.
They are mission-critical industrial consumables that operate in harsh
environments, and their low price compared to the total project cost means
customers are less price-sensitive. A malfunctioning seal can lead to safety
issues or a shutdown in production, which creates high barriers to entry and
an oligopoly market structure. The low price-sensitivity of its customer base,
along with the consolidated market, allows Sinoseal to earn high levels of
profitability. It is also a consumable product, which drives a recurrent
after-market business. Sinoseal has consistently focused on improving its
product quality, which is now on par with multinationals, while enjoying a
much lower cost base than foreign peers. It has consistently gained market
share as customers increasingly prefer to use domestic suppliers. The company
is also expanding into new end markets as well as building a larger export
business, as many of its existing customers are building manufacturing
facilities outside China.
Sinbon Electronics is a Taiwanese manufacturer of mechanical cables. The
company historically operated in the highly competitive consumer electronics
cable segment, which had low levels of profitability. It gradually exited the
segment and built a large portfolio of cables for industrial, renewable
energy, communications, automotive and medical applications. The company's
products are customised for each application, ranging from robots used to sort
inventory in warehouses to wind turbines and medical equipment. This requires
a large product portfolio, and close relationships built with customers over
decades to develop cables for new applications. Sinbon has built a strong
reputation as a reliable supplier. This requirement for customised
applications as well as long lead times for approval from customers leads to
limited competition, allowing the company to earn attractive levels of
profitability. The management has also been proactive in entering new
industries, ranging from electric vehicle charging stations to aerospace,
which can become large segments for the company in future.
Hongfa Technology is the largest industrial relay manufacturer globally. Its
product portfolio covers traditional applications such as home appliances and
electricity meters, as well as emerging applications like electric vehicles
(EVs), solar modules, and internet of things (IoT) devices in manufacturing.
Over the past decade, the company has emerged from being a relatively small
player, to being the dominant player in its home market of China, as well as
establishing strong relationships with many global customers. The key drivers
of this improvement in its market position have been the company's focus on
the relay market, while its major competitors like Panasonic have varied
businesses. Hongfa also benefited from the substantial scale of the home
appliance industry in China, which allowed the company to scale up its own
business and reduce fixed costs. This cost benefit is passed on to its
customers to gain market share. In emerging areas such as renewable energy and
electric vehicle applications, Hongfa is expected to benefit from strong
growth as well as higher profitability, as the average selling price of relays
in these segments are higher compared to that of their traditional
applications.
Specialised financial services providers
The financial services industry is dominated by large banks and insurance
companies which sit outside the investment universe of smaller companies.
Smaller universal banks and non-bank finance companies which compete directly
against these large institutions typically face challenges including higher
funding costs, inferior technology systems and difficulty in retaining
clients. Instead of investing in such universal banks or finance companies,
Scottish Oriental's portfolio comprises specialised lenders which have
remained focused on a few categories where they have strong domain knowledge
to compete against larger banks. They manage their balance sheets
conservatively, while maintaining consistently strong asset quality. The
financial services opportunity beyond lending is growing rapidly in Asia. This
includes services such as wealth management, mutual funds and insurance
products, which are still highly underpenetrated in most Asian countries.
Holdings in Scottish Oriental's portfolio, including the largest registrar and
transfer agent for mutual funds, and the leading wealth management platform in
India, are expected to benefit from this opportunity. Such specialised
financial services businesses comprise 10.1% of Scottish Oriental's portfolio.
Computer Age Management is India's largest registrar and transfer agent of
mutual funds with a market share of 70%. It is a dominant player in a duopoly,
and has gained market share consistently over the past decade. Its value lies
in allowing its asset management clients to focus on their core business while
optimising costs. Its efficient service levels and reputation for compliance
has meant that the company has not lost any clients over this period and has
relationships with the leading asset management companies. The company has
attractive growth potential, as Indian households increase their investments
in mutual funds from a low base currently. The management has built a large
physical presence in India through its branches and a strong technology
platform on which it is now building new businesses such as Account
Aggregation, Alternative Investment Funds (AIFs) and an insurance repository.
Its asset light business model allows it to earn high margins, with its return
on capital employed (ROCE) in excess of 100%.
360 One is India's largest independent wealth management company. It offers a
range of services to high-net-worth individuals and caters to different
segments of this growing market. Historically, wealth management has not been
a large sector in the financial services industry in India. With higher levels
of formalisation in the economy, as well as generational change among high
net-worth families, there is a greater adoption of wealth management
platforms. Over the last fifteen years, the management of 360 One, led by the
founder Karan Bhagat who still leads operations as its CEO, has built a solid
track record of serving clients and adhering to best practices in risk
management and compliance. In recent years, the management's focus has been on
increasing the share of recurring business (compared to more volatile
transaction based revenues), which is likely to improve the consistency of the
company's profitability. The wealth management industry remains fragmented in
India, and 360 One has the potential to lead the industry's consolidation in
the coming years. This creates an attractive growth opportunity for the
company.
TISCO Financial ('TISCO') is a financial services group based in Thailand.
Unlike its larger universal banking peers, TISCO's loan portfolio is focused
on niche segments such as automotive hire-purchase loans. The company has a
conservative lending philosophy and a strong focus on risk management. In
recent years, despite low lending spreads and high non-performing loans, its
larger peers expanded their loan portfolios consistently. This has led to a
weak balance sheet and poor returns on assets for the large Thai banks. In
contrast, over the last decade, TISCO has contracted its loan book to avoid
diluting its asset quality and return on assets. The bank's management has
focused on returning capital to shareholders through a high dividend payout,
while also maintaining a strong capital position. The company has consistently
earned high return on assets, while most of its peers have struggled. As the
competitive intensity reduces due to the poor asset quality of the large
banks, TISCO now has an opportunity to grow in its preferred lending segments.
Its management is now pursuing steady growth, while maintaining its
profitability levels.
Technology hardware providers and software service companies
Technological intensity is rising across industries globally, which is
expected to drive growth for hardware and software companies engaged in the
technology value chain in Asia. However, we are cautious about a few risks
common to companies operating in this industry. Firstly, a number of smaller
companies in the technology hardware supply chain operate as contract
manufacturers for their customers. This gives them limited bargaining power,
with their customers demanding annual reductions in their selling prices and
long payment terms. Secondly, many of these companies have faced a period of
strong cyclical demand over the last few years, as several categories
witnessed strong demand and constrained supply during the pandemic. This
allowed such companies to earn a period of exceptional profitability. In our
experience, such growth and profitability is unlikely to be sustainable as
demand in these industries moderates. Finally, we are cognisant of risks
emanating from technology adoption cycles and disruptions, which are
unpredictable. Given the substantial increase in valuations for many such
companies in recent periods, Scottish Oriental's exposure to such businesses
has reduced. However, we continue to find attractively valued software
services companies in countries such as India and Vietnam, which are likely to
benefit from the continued migration to cloud services and digitisation across
industries. Our investments also include integrated circuit designers based in
Taiwan and China, which have strong market positions in their niche
categories, asset light business models and are gaining market share from
smaller competitors or multi-national corporations. Such businesses currently
comprise 5.1% of Scottish Oriental's portfolio.
Mphasis is a leading software services provider based in India with a strong
global presence, with the United States of America being its largest market.
It offers a comprehensive range of services, including application
development, infrastructure management, and digital transformation solutions
to its clients. This allows Mphasis to serve a wide range of industries and
clients, with a reputation for delivering high-quality solutions and services.
The company witnessed a change in its ownership and management since 2016,
when Blackstone acquired Hewlett Packard's majority stake in the business.
Blackstone appointed a new CEO, Nitin Rakesh, under whose leadership the
business has been transformed. Mphasis has been able to build relationships
with leading financial institutions globally, gaining market share from much
larger software service providers. The management has also built a presence in
new regions like Europe and Canada, which supports the company's long term
growth prospects. The management has embraced emerging technologies, such as
artificial intelligence applications and automation, which should lead to more
growth opportunities going forward.
FPT is a leading Vietnamese technology company providing IT services, software
development, and digital transformation solutions. The company also has a
fixed line broadband business, and runs educational institutions, which it
uses to recruit well trained software engineers. The company was founded in
1988 to provide technology solutions for the food industry, and has since
expanded into a diversified IT corporation. Today, it has a solid competitive
position in the global IT services market, especially in Japan where it is
gaining share from domestic software service providers as well as Chinese
vendors. In recent years, the company has made investments to build
capabilities in the United States of America, which offers a substantial
opportunity for its business in the coming years. It has also consistently
increased the share of its digital technology business, which has boosted the
company's profitability. The company benefits from a strong talent pool in
Vietnam, given the steady growth in the number of computer engineers, and
offers affordable courses to meet the rising demand for quality education in
the country.
Parade Technologies is an integrated circuit designer based in Taiwan,
specialising in display technologies for various electronic devices. It has
built leading market shares in its key products, such as high-speed interface
integrated circuits and embedded display port timing controllers. The
management has also built strong relationships with large customers such as
Apple, with which Parade has maintained a monopoly position in certain
products. The key industry tailwind is the increasing speed of data
transmission across devices. Higher speeds require new products, which drive
higher prices and better profitability for Parade. The company is also a first
mover in building new products with applications in servers and automobiles,
which we expect to grow into large markets in the coming years.
3. Recent Portfolio Activity
New Holdings
The resumption of travel across all major Asian countries allowed our team
members to visit companies in each of Scottish Oriental's key markets during
the last year. These visits helped inform our views on the development of
various economies after the recent period of disruption driven by Covid-19. It
also allowed us to meet management teams across our investment universe, which
led to the generation of several new investment ideas during the year. We
added 12 new holdings to the portfolio.
Metropolis Healthcare is a leading diagnostics company in India, where the
industry is highly fragmented and dominated by 'mom and pop' laboratories. We
think the company has the opportunity to lead the industry's consolidation
over the long term. Metropolis was held in the Trust after it listed in 2019,
but we sold out after valuations re-rated amid exceptional profitability
during Covid-19, when demand for its diagnostics services rose sharply. Since
then, its valuations have moderated significantly as Covid-19 testing
requirements eased. The management is taking several initiatives to improve
growth over the medium-term, such as building the preventive diagnostics
segment of the business, building a stronger platform to engage digitally with
customers and accelerating its network expansion. The industry's competitive
intensity, which was led by loss-making start-ups which had entered over the
last few years, also appears to be waning. This should further support the
improvement in Metropolis' profitability.
Mphasis is a leading information technology outsourcing company in India,
which was set up by Hewlett Packard in 2000. Blackstone acquired a majority
stake in the company in 2016. The new owner installed a new management team
led by CEO Nitin Rakesh, under whose leadership the business has transformed
over the last seven years. The company invested in building capabilities in
new segments and signed contracts with large new clients. It also expanded its
geographic footprint by building a larger business in Europe. This has led to
consistent growth in Mphasis' revenue and profits in recent years. Its
asset-light business model allows the company to earn high returns on capital
employed as well. As the demand for cloud computing and digital transformation
moderated after Covid-19, the company's growth slowed down and its valuations
reached attractive levels, we initiated a holding in the company. Mphasis'
growth potential remains strong, as it continues to gain market share with key
customers as well as scale up new business verticals.
Fila Holdings is the owner of the Fila brand globally, which the company
operates directly in South Korea and the United States, and has franchised in
other markets. It also owns a majority stake of 52% in Acushnet, the owner and
operator of Titleist branded golf equipment, and has a 15% stake in a
joint-venture with Anta Sports to manufacture Fila branded products in China.
The company has taken actions to strengthen the Fila brand in recent years,
including hiring senior management from leading global sportswear groups such
as Nike, Adidas and Under Armour. The distribution channel is changing from
wholesale to directly operated retail stores and e-commerce in US and South
Korea, which should aid Fila's profitability. The balance sheet is net cash
and the company has announced a new shareholder return policy, which should
lead to a substantial increase in dividends and share buybacks in the coming
years.
Tokai Carbon Korea is the dominant manufacturer of Silicon Carbide (SiC)
rings, which are used as a consumable product in semiconductor manufacturing.
The company has a monopoly position in supplying SiC rings to leading global
customers. This has allowed it to earn high levels of profitability. The
memory industry, in which SiC rings are used, is expected to grow steadily
over the next decade as technological intensity increases, driven by
applications such as artificial intelligence. The company's management is also
developing new product categories such as Titanium Carbide susceptors.
Whirlpool of India is the 75% owned subsidiary of Whirlpool Corporation, and
has a strong position in several consumer durable products in India such as
refrigerators, washing machines and air conditioners. It has had a presence in
the country for thirty five years, and has established a track record of
consistent growth along with high return on capital employed (ROCE). Each of
its categories has relatively low penetration levels compared to other
emerging markets, which offers an attractive growth opportunity. Recently, the
company also acquired a local kitchen appliances brand, Elica, which has
provided Whirlpool with an opportunity to enter a large category where it did
not have a presence in India. We expect the company's management to strengthen
its market share and improve profitability over the medium term.
Hongfa Technology is the largest relay maker globally with a strong market
position and impressive growth prospects. Its product portfolio covers
traditional applications such as home appliances and power meters, as well as
growth opportunities in new applications like electric vehicles (EVs), solar,
and internet of things (IoT). It has been gaining share from major competitors
due to its focus on relay, large global scale which provides the company a
substantial cost advantage and proactive customer project management. As new
segments such as renewable energy and new energy vehicles gain adoption
globally, this offers Hongfa a large growth opportunity in the coming years.
Biocon is a leading Indian pharmaceutical company, with operations in
generics, biosimilars and contract development & manufacturing (CDMO). In
recent years, the company has increased its focus on the biosimilars business,
which it has been operating since 2007. It was operated in partnership with
Viatris (a global pharmaceutical company) in the past. Biocon acquired Viatris
for US$ 3.3 billion last year. This will allow the company to control the
manufacturing as well as distribution for its biosimilars, without relying on
a partner. The global biosimilar market is large and expected to grow steadily
as an increasing number of patented drugs will lose patent protection. The
company also has a strong track record of regulatory compliance with the US
FDA. A strong R&D focus and regulatory approvals should allow Biocon to
launch new products in the coming years and scale up the business.
Luk Fook Holdings is a leading jewellery retailer in Hong Kong and mainland
China, founded by the Wong family which still leads the company's operations
and owns a controlling stake. The company's footprint in China is large with
2,700 franchisee-owned stores and has been expanding consistently. Luk Fook
has suffered from a period of weak demand due to lower customer footfall and
fewer social occasions such as weddings in China. However, the company
continues to gain market share from small, unorganised sector competitors
which have struggled during this challenging period. Demand should improve
after the removal of Covid-19 restrictions as well as a resumption in travel
to Hong Kong and Macau, where the group also operates a large store network.
Over the long term, the management expects to more than double its store count
in China, which will drive the company's growth.
Crompton Greaves Consumer Electricals is an Indian maker of electrical
consumer durables, such as fans, water heaters and pumps, as well as lighting.
It has strong market positions across all its key product segments. The
company's asset-light operations allows it to earn high return on capital
employed (ROCE) and substantial free cash flow. The company's new management
plans to extend the strong brand of Crompton into new categories, such as
kitchen appliances, to accelerate its revenue and profit growth in the coming
periods.
Silergy is the largest analogue integrated circuit (IC) designer in Asia.
Despite being the leading Asian power management IC design company, its market
share in the highly fragmented Chinese industry remains low. Since the trade
war was initiated in 2018, Silergy's major customers have been shifting
towards domestic IC designers. Silergy is well positioned to capture a large
part of this change in customer preferences. Its founders, one of whom
continues to lead its operations, are focused on building a comprehensive
product portfolio to compete effectively against global leaders. This has
strengthened the company's competitive position against global peers such as
Texas Instruments, and Silergy has consistently gained market share in recent
years. The company has faced a sharp decline in demand over the last year, as
global consumer electronics demand deteriorated after Covid-19. In this
period, management has reduced costs. As demand is expected to recover in the
coming years, Silergy should witness a period of strong growth and an
improvement in its profitability.
Delhivery is the largest third party logistics (3PL) company in India and
primarily serves the e-commerce industry, which is expected to grow rapidly as
penetration of the category rises from its nascent stage currently. Unlike
most "new-age" internet businesses, the company has a profitable core business
and a strong and stable management team. Delhivery has built a market leading
position, which allows it to gain substantial economies of scale against its
smaller competitors. This creates a virtuous cycle, as the company passes on
part of its lower costs to its customers, in order to gain market share. The
company has the potential to consolidate the fragmented logistics industry, as
well as enter adjacent service segments.
AirTac International is a leading pneumatic components producer in China. The
founder, Mr. Wang Shih Chung, continues to lead AirTac as its Chairman. AirTac
has consistently built a diversified product portfolio, maintained low costs,
and offers prompt service levels to its customers. This has helped the company
to build a strong market position and gain market share consistently, despite
the presence of large global competitors. Its long term track record of growth
and returns on capital employed are also strong. The management is now focused
on creating new revenue streams such as linear guides, which could be a large
growth opportunity in the coming years.
Sales
We sold 12 holdings during the year. KEI Industries, CIE Automotive India,
Haitian International, Arwana Citramulia, Sporton, Bosch and Autobio
Diagnostics were sold as their valuations became expensive following strong
performance and share price appreciation. Mobile World, Voltronic Power and
Eicher Motors were small positions, and were sold to consolidate the portfolio
into higher-conviction opportunities. Ace Hardware was sold after our
conviction in its growth prospects was reduced, following recent engagements
with management regarding their response to the increasing competition from
e-commerce platforms. Zinus was also sold after our recent engagements left us
with lower conviction in its business outlook. Zinus' announcement of a
provision related to a product litigation raised concerns about its quality
standards. The management's focus on achieving scale makes us believe that
this will prevent an improvement in the company's cash flow and also raises
risks of more quality related issues in the future.
Purchased and subsequently sold
ASM Pacific Technology is a leading back-end semiconductor testing equipment
manufacturer. The recent cyclical downturn across the semiconductor value
chain has affected its growth in recent quarters and its valuations declined
to attractive levels. Higher penetration of electronics across automotive,
industrial and consumer applications is expected to drive sales of its
equipment over the long term. We initiated a holding for the Trust given its
attractive valuations. Subsequently, its valuations increased sharply due to
expectations of a strong improvement in demand, as well as ASM's position in
servicing some artificial intelligence applications. However, performance
across most of its businesses remains muted, due to continuing weak demand
across consumer electronics categories. As its valuations became less
attractive, we sold Scottish Oriental's holding
Amorepacific Corporation operates several cosmetics brands. The company has a
strong presence in China as well as in duty-free stores at airports which form
a large part of its sales. Both of these channels have been severely impacted
by reduced travel and weak consumer demand. The company's performance was also
hurt by increasing competition from local brands in China. To address this
issue, the company hired new senior management and optimised its store network
by shutting down poor performing stores in China. We initiated a position in
the company when its valuations were attractive due to the concerns of weak
demand in China. Subsequently, the re-opening of the Chinese economy and
expectation of higher travel related spending led to a sharp increase in the
company's valuation. We sold Scottish Oriental's holding as the recovery in
the business is likely to be slow, given the intense competition from local
competitors as well as multinationals in China, which forms a large share of
Amorepacific's business.
4. Ten Largest Investments as at 31 August 2023
Name of Holding Country Sector % of Shareholders' Funds
Colgate-Palmolive (India) India Consumer Staples 6.0
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
larger presence in segments such as personal care.
Selamat Sempurna Indonesia Consumer Discretionary 4.2
Selamat is the leading manufacturer of filters and radiators in Indonesia.
Through its joint venture with Donaldson (based in the United States of
America), it also exports products to global markets. Selamat 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 4.2
The company operates leading instant noodle and beverage brands in China. Its
management is focused on launching premium products which earn higher margins,
while strengthening the company's distribution in emerging channels.
Godrej Industries India Materials 4.0
Godrej Industries 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 colour,
household insecticide, real estate and crop protection products
Century Pacific Food Philippines Consumer Staples 3.9
Century Pacific is the largest canned food producer in the Philippines. The
company is gaining traction in emerging categories such as milk and pet food
products which should drive steady growth over the medium term.
Kansai Nerolac Paints India Industrials 3.5
Kansai Nerolac is a leading paint company with a dominant market share in
automotive paints in India. Under a new CEO, the company has also taken
several initiatives to improve its market position in decorative paints, by
launching several new products, engaging with channel partners and expanding
its distribution.
Blue Star India Industrials 3.4
Blue Star operates one of the leading air-conditioner brands in India, which
has been gaining market share consistently. The company executes engineering,
procurement and construction (EPC) projects as well which are expected to grow
with industrial and infrastructure development.
Philippine Seven Philippines Consumer Staples 3.4
It is the leading convenience store operator in the Philippines, with the
exclusive right to use the 7-Eleven brand in the country. Philippine Seven is
expected to lead the development of the convenience store industry in the
country, as penetration is still at low levels.
Castrol India India Materials 2.8
Castrol is the largest Indian automotive lubricants company. The company is
51% owned by British Petroleum (BP). The management is taking numerous steps
to accelerate Castrol's growth, such as entering new product segments in its
core business, expanding distribution as well as launching products and
services in adjacent categories.
Mitra Adiperkasa Indonesia Consumer Discretionary 2.8
Mitra Adiperkasa 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 across
specialty fashion, sports and F&B segments..
5. Sector & Geographical Analysis
Sector % Shareholder's Funds
2023 2022
Consumer Staples 29.5 28.3
Consumer Discretionary 22.2 32.1
Materials 16.4 13.0
Financials 10.1 9.1
Industrials 9.3 9.8
Healthcare 5.8 2.6
Technology 5.1 4.5
Real Estate 4.2 5.0
Utilities 2.2 2.9
Logistics 0.3 -
Net Current Assets 4.4 2.3
Non-Current Liabilities (9.5) (9.6)
Country Allocation at 31 August 2023 (based on geographical area of activity)
Country/Region Scottish Oriental Scottish Oriental MSCI Small Cap¹ MSCI²
2023 2022 2023 2023
% % % %
China 11.7 13.6 8.5 34.4
Hong Kong 5.1 4.6 4.5 6.3
Taiwan 4.8 8.0 24.0 17.3
Greater China 21.6 26.2 37.0 58.0
Indonesia 17.7 21.9 2.5 2.3
Malaysia - - 2.8 1.6
Philippines 9.6 9.2 1.0 0.7
Singapore 2.6 3.1 5.3 3.7
Thailand 1.6 0.9 3.9 2.3
Vietnam 1.8 2.0 - -
South East Asia 33.3 37.1 15.5 10.6
Bangladesh 0.9 1.2 - -
India 45.2 40.7 29.8 17.1
Pakistan 0.3 0.8 - -
Indian Subcontinent 46.4 42.7 29.8 17.1
South Korea 3.8 1.3 17.7 14.3
Net Current Assets 4.4 2.3 - -
Non-Current Liabilities (9.5) (9.6) - -
Net Assets 100.0 100.0 100.0 100.0
¹ Morgan Stanley Capital International AC Asia ex Japan Small Cap Index
² Morgan Stanley Capital International AC Asia ex Japan Index
6. Portfolio Positioning & Outlook
We noted varying economic outlooks during our recent visits to companies
across Asian countries. The operating environment for businesses in China is
difficult, with regulatory disruptions in industries such as healthcare and
e-commerce, as well as the challenges emerging in the real estate industry.
Large economies which are driven by exports to Western markets, including
South Korea and Taiwan, are also facing cyclical challenges as demand across
the global technology supply chain is weak. In contrast, businesses in
countries such as India and Indonesia, whose revenues are largely driven by
domestic demand trends, are witnessing stronger prospects as their economies
have recovered from the pandemic. These countries saw a period of relatively
weak economic growth during the previous decade. In this period, businesses
de-leveraged their balance sheets and the governments of these countries
introduced various reforms. Their stronger financial position and the
formalisation of the economy has helped the market-leading organised sector
companies to gain market share from their competitors in the informal sector.
This provides a tailwind to Scottish Oriental's holdings, with companies in
India and Indonesia comprising over 60% of the portfolio.
Scottish Oriental's investment philosophy has remained unchanged since
inception. While we are cognisant of macro-economic challenges, political and
sectoral influences, these do not drive our investment decisions. The
manager's focus remains on finding well run businesses with solid long-
term growth prospects available at attractive valuations. Our investment
universe of smaller companies in Asia has grown consistently in recent years.
In fact, there are now over 11,500 companies in Asia (ex-Japan, Australia and
New Zealand) between US$ 100 million and US$ 5 billion in market
capitalisation. This universe of companies has grown by 26% over the last 5
years*. Scottish Oriental's active watch-list of companies, which we regularly
monitor, has also grown consistently in size as our coverage has expanded and
new businesses have been listed in Asia. The market-leading businesses in
which we prefer to invest have emerged out of the pandemic with stronger
competitive positions than before. We expect them to capture a greater share
of the growth in their respective industries' profit pools in the coming
years.
We are excited about the outlook for the portfolio. It remains concentrated
among our highest conviction holdings, with the top 20 holdings comprising 60%
of the portfolio. The median return on equity of the portfolio has
consistently improved, which indicates the strong earnings quality of the
holdings. At a median level, the portfolio's holdings continue to maintain a
net cash balance sheet, which makes them more resilient against the ongoing
challenge of higher finance costs. The portfolio's forecasted growth has
moderated from the high base of recent years, which was largely due to the
reopening of economies after the pandemic. On a normalised base, the
portfolio's holdings continue to offer attractive growth opportunities in the
years ahead. In addition, the valuations, in the context of the attractive
growth potential and high returns on equity, appear to be at acceptable
levels.
As at 31 August 2017 2018 2019 2020 2021 2022 2023
Weight of top 10% holdings 25.1% 29.2% 29.6% 31.6% 31.8% 39.2% 38.2%
Weight of top 20% holdings 44.0% 50.8% 50.4% 52.4% 54.8% 63.1% 60.4%
Weighted average Return on Equity 13.6% 15.0% 16.3% 15.9% 15.3% 18.8% 19.2%
Weighted average 2-year forecast annualised EPS growth 14.2% 7.3% 1.5% 8.6% 34.1% 21.2% 17.6%
Weighted average forward P/E 20.5x 26.8x 15.0x 24.9x 23.0x 17.4x 18.3x
*Source: Bloomberg
FSSA Investment Managers
6 November 2023
Income Statement for the year ended 31 August 2023 (audited)
2023
2022
Revenue Capital Total* Revenue Capital Total*
£'000 £'000 £'000 £'000 £'000 £'000
Gains on investments - 22,540 22,540 - 26,452 26,452
Income from investments 8,411 - 8,411 9,238 - 9,238
Other income 42 - 42 1 - 1
Investment management fee (2,549) - (2,549) (2,453) - (2,453)
Performance fee - (2,247) (2,247) - - -
Currency losses - (713) (713) - (21) (21)
Other administrative expenses (697) - (697) (698) - (698)
Net return on ordinary activities before finance costs and taxation 19,580 24,787
5,207 6,088 26,431 32,519
Finance costs (835) - (835) (835) - (835)
Net return on ordinary activities before taxation 19,580 23,952
4,372 5,253 26,431 31,684
Tax on ordinary activities (876) (2,677) (3,553) (901) (1,803) (2,704)
Net return attributable to equity 20,399
shareholders 3,496 16,903 4,352 24,628 28,980
Net return per ordinary share 14.19p 68.60p 82.79p 16.66p 94.26p 110.92p
* 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 final dividend of 13.0p per share for the year ended
31 August 2023 (2022: 14.0p, inclusive of a special dividend of 1.0p) which,
if approved at the AGM, will be payable on 12 January 2024 to shareholders
recorded on the Company's shareholder register on 1 December 2023.
All revenue and capital items derive from continuing operations.
Summary Statement of Financial Position as at 31 August 2023 (audited)
2023 2022
£'000 £'000 £'000 £'000
Investments held at fair value through profit or loss 372,660 368,442
Current Assets
Debtors 1,052 1,421
Cash and deposits 18,089 7,490
19,141 8,911
Current Liabilities (due within one year)
Creditors (3,572) (1,145)
(3,572) (1,145)
Net Current Assets 15,569 7,766
Non-Current Liabilities
Deferred tax liabilities on Indian capital gains (3,820) (3,184)
Loan notes (29,832) (29,822)
(33,652) (33,006)
Total Assets less Liabilities 354,577 343,202
Capital and Reserves
Ordinary share capital 7,853 7,853
Share premium account 34,259 34,259
Capital redemption reserve 58 58
Capital reserves 304,661 293,325
Revenue reserve 7,746 7,707
Total Equity Shareholders' Funds 354,577 343,202
Net asset value per share 1,455.58p 1,382.93p
Cash Flow Statement for the year ended 31 August 2023 (audited)
2023 2022
£'000 £'000
(3,254) (3,189)
Net cash outflow from operations before dividends, interest, purchases and
sales of investments
Dividends received from investments 8,894 9,018
Interest received from deposits 42 1
Cash inflow from operations 5,682 5,830
Taxation (971) (905)
Net cash inflow from operating activities 4,711 4,925
Investing activities
Purchases of investments (124,575) (96,948)
Sales of investments 142,938 117,221
Capital gains tax paid on the sale of investments (2,041) (3,144)
Net cash inflow from investing activities 16,322 17,129
Financing activities
Interest paid (825) (825)
Equity dividend paid (3,457) (3,053)
Buyback of ordinary shares (5,439) (28,211)
Net cash outflow from financing activities (9,721) (32,089)
Increase/(decrease) in cash and cash equivalents 11,312 (10,035)
Cash and cash equivalents at the start of the year 7,490 17,546
Effect of currency losses (713) (21)
Cash and cash equivalents at the end of the year* 18,089 7,490
*Cash and cash equivalents represents cash at bank
Total tax paid for the year ended 31 August 2023 was £3,011,000 (2022:
£4,049,000).
Statement of Changes in Equity (audited)
For the year ended 31 August 2023
Ordinary Share premium account Capital
share capital redemption Capital reserves Revenue
reserve reserve Total
£'000 £'000 £'000 £'000 £'000 £'000
Balance at 31 August 2022
7,853 34,259 58 293,325 7,707 343,202
Total comprehensive income:
Return for the year - - - 16,903 3,496 20,399
Transactions with owners recognised directly in equity:
Dividend paid in the year
- - - - (3,457) (3,457)
Buyback of Ordinary shares
- - - (5,567) - (5,567)
Balance at 31 August 2023
7,853 34,259 58 304,661 7,746 354,577
Statement of Changes in Equity (audited)
For the year ended 31 August 2022
Ordinary Share premium account Capital
share capital redemption Capital reserves Revenue
reserve reserve Total
£'000 £'000 £'000 £'000 £'000 £'000
Balance at 31 August 2021
7,853 34,259 58 296,908 6,408 345,486
Total comprehensive income:
Return for the year - - - 24,628 4,352 28,980
Transactions with owners recognised directly in equity:
Dividend paid in the year
- - - - (3,053) (3,053)
Buyback of Ordinary shares
- - - (28,211) - (28,211)
Balance at 31 August 2022
7,853 34,259 58 293,325 7,707 343,202
Principal Risks and Uncertainties
The Board has carried out a thorough assessment of risks faced by the Company.
Below we have set out the principal and emerging risks identified from the
consideration. The Company faces emerging risks from climate change and global
political events. The impact of these on the principal risks is detailed
below, together with a summary of the mitigating action taken to manage these
risks.
Emerging Risks
Risk Mitigation
Environmental, Social and Governance ("ESG")
There is increased awareness of the challenges posed by ESG and climate The investment process is focused on ESG issues and, as set out on pages 21
change. The increasing volume, short implementation deadlines and lack of and 22 of the Annual Report, puts a great deal of emphasis on good Governance.
commonality of new ESG regulations issued by multiple regulators, accompanied Overall the specific potential effects of climate change are difficult, if not
by increased regulatory focus and labeling and marketing of investment impossible to predict. The Board and Investment Manager continue to monitor
products as having ESG characteristics increase the perceived risk of material physical and transition risks and opportunities as part of the
greenwashing. investment process.
Social and political events
Although not possible to predict the scale of unknown events, the Investment
Manager invests in a portfolio of high quality companies which are resilient
Economic and political events continue to impact global equity markets. to market downturns.
Particularly relevant for the Company is the poor economic relationship
between the United States and China. Investment flows have been significantly
impacted; this has the potential to impact supply chains and may affect other
countries in Asia. The Board and the Investment Manager discuss the resiliency of the portfolio
as part of regular meetings. Please refer to the Investment Managers' report
on pages 5 to 18 of the Annual Report for further details
Principal Risks
Risk Mitigation
Investment objective and strategy
An inappropriate or unattractive objective and strategy may have an adverse The Board conducts annual strategy reviews
effect on Shareholder returns or cause a reduction in demand for the Company's
shares, both of which could lead to a widening discount. and considers 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.
No change to this risk
Investment performance
Poor investment performance may have an adverse effect on Shareholder returns. 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.
In extreme circumstances, poor investment performance could lead to the
Company breaching loan covenants.
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.
No change to this risk
Financial and Economic
The Company's investments are impacted by financial and economic factors The Board regularly reviews and agrees policies for managing market price
including market prices, interest rates, foreign exchange rates, liquidity and risk, interest rate risk, foreign currency risk, liquidity risk and credit
credit which could cause losses to the investment portfolio. risk. These are explained in detail in note 16 to the Financial Statements on
pages 64 to 68 of the Annual Report.
No change to this risk
Share price discount/premium to net asset value
A significant share price discount or premium to the Company's net asset value The Board has established share issuance and share buyback processes to assist
per share, or related volatility, could lead to high levels of uncertainty or in the moderation of share price premium and discount to net asset value.
speculation and the potential to reduce investor confidence. 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.
No change to this risk
Operational
The Company is reliant on third party service providers including FSSA The Audit Committee formally reviews each service provider at least annually,
Investment Managers as Investment Manager, Juniper Partners as Company considering their reports on internal controls.
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. Further details of the Company's internal control and risk management system
is provided on page 37 of the Annual Report.
The assessed risk level has increased due to the heightened threat and
sophistication of a potential cyber attack.
Regulatory
The Company operates in a regulatory environment. Failure to comply with s1158 Compliance with relevant regulations is monitored on an ongoing basis by the
of the Corporation Tax Act 2010 could result in the Company losing investment Company Secretary and Investment Manager who report regularly to the Board.
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.
The Board monitors changes in the regulatory environment and receives
regulatory updates from the Company Secretary, Lawyers and Auditors as
relevant.
No change to this risk
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 profit or 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
In assessing the Company's ability to continue as a going concern the
Directors have considered the Company's investment objective detailed on page
25 of the Annual Report, risk management policies detailed on pages 31 and 32
of the Annual Report, the nature of its portfolio and expenditure projections
and believe that the Company has adequate resources, an appropriate financial
structure and suitable management arrangements in place to continue in
operational existence for the foreseeable future and for at least 12 months
from the date of the Annual Report. In addition, the Board has had regard to
the Company's investment performance (see above), the price at which the
Company's shares trade relative to their NAV (see above) and ongoing investor
interest in the continuation of the Company (including feedback from meetings
and conversations with Shareholders).
The Directors performed an assessment of the Company's ability to meet its
liabilities as they fall due. In performing this assessment, the Directors
took into consideration the following factors:
· cash and cash equivalents balances and the portfolio of readily
realisable securities which can be used to meet short-term funding
commitments;
· the ability of the Company to meet all of its liabilities and
ongoing expenses from its assets;
· revenue, operating and finance cost forecasts for the forthcoming
year;
· continued adherence to the loan covenants;
· the ability of third-party service providers to continue to provide
services; and
· three potential downside scenarios including stress testing the
Company's portfolio for a 30% fall in the value of the investment portfolio; a
50% fall in dividend income; and a similar level of share buybacks to the
current year. The cumulative impact of these three downside scenarios would
leave the Company with a positive net cash position.
Based on this assessment, the Directors are confident that the Company will
have sufficient funds to continue to meet its liabilities as they fall due for
at least 12 months from the date of approval of the financial statements, and
therefore have prepared the financial statements on a going concern basis.
Related Party Transactions
The Directors' fees for the year are detailed in the Directors' Remuneration
Report on pages 39 to 41 of the Annual Report. An amount of £20,800 was
outstanding to the Directors at the year end (2022: £23,500). No Director has
a contract of service with the Company. During the year no Director had any
related party transactions requiring disclosure under section 412 of the
Companies Act 2006.
The management and performance fees for the year are detailed in note 2 to the
Financial Statements and amounts payable to the Investment Manager at year end
are detailed in note 10 to the Financial Statements. The Investment Management
team's individual shareholdings in the Company are set out on page 4 of the
Annual Report.
Alternative Investment Fund Managers Directive (unaudited)
Under the Alternative Investment Fund Managers Directive the Company is
required to publish maximum exposure levels for leverage on a 'Gross' and
'Commitment' basis. The process for calculating exposure under each method is
largely the same, except that, where certain conditions are met, the
Commitment method allows instruments to be netted off to reflect 'netting' or
'hedging' arrangements and the Company's leverage exposure would then be
reduced. The AIFM set maximum leverage levels of 3.0 and 1.7 times the
Company's net asset value under the 'Gross' and 'Commitment' methods
respectively. At the Company's year end the levels were respectively 1.06 and
1.10 times the Company's net asset value.
The Alternative Investment Fund Managers Directive requires the AIFM to make
available certain remuneration disclosures to investors. This information is
available from the AIFM on request.
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.
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 July
2022.
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 5 (a) on page 59 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 2023:
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Listed equities 313,937 58,723 - 372,660
Total 313,937 58,723 - 372,660
The Company held the following categories of financial instruments as at 31
August 2022:
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Listed equities 368,442 - - 368,442
Total 368,442 - - 368,442
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. Cashflow reconciliation
2023 2022
Reconciliation of net return on ordinary activities before finance costs and £'000 £'000
taxation to net cash outflow from operations before dividends, interest,
purchases and sales
Net return on activities before finance costs and taxation 24,787 32,519
Net gains on investments (22,540) (26,452)
Currency losses 713 21
Dividend income (8,411) (9,238)
Interest income (42) (1)
Increase/(decrease) in creditors 2,300 (44)
(Increase)/decrease in debtors (61) 6
Net cash outflow from operations before dividends, interest, purchases and (3,254) (3,189)
sales
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 2023 will be sent to
shareholders in November 2023 and and copies will be available from the
Company's website www.scottishoriental.com (http://www.scottishoriental.com)
and the Company Secretary's office at 28 Walker Street, Edinburgh, EH3 7HR.
The audited accounts for the year ended 31 August 2023 will be lodged with the
Registrar of Companies.
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