Annual Financial Report

RNS Number : 1919R

Scottish Oriental Smlr Co Tst PLC

31 October 2011

 

THE SCOTTISH ORIENTAL SMALLER COMPANIES TRUST PLC

("Scottish Oriental")

Annual Financial Report for the year ended 31^st August 2011

Scottish Oriental is required under the UKLA's Disclosure and Transparency Rule 4.1 to make an announcement of the unedited full text of parts of its Annual Report and Accounts. The published Annual Report and Accounts, Notice of Annual General Meeting and Form of Proxy will be posted to shareholders and be available on the Scottish Oriental website (www.scottishoriental.com) in November 2011.  

Financial Highlights

Performance for the year ended 31 August 2011 (audited)
Net Asset Value	11.4%	MSCI AC Asia ex Japan Index (£) *	3.7%
Share Price	24.1%	MSCI AC Asia ex Japan Small Cap Index (£) *	-0.5%
		FTSE All-Share Index (£) *	7.3%
* Total return (capital return with dividends reinvested)

Summary Data at 31st August 2011 (audited)
Shares in issue	30,213,650	Shareholders' Funds	£186.89m
Net Asset Value per Share	618.56p	Market Capitalisation	£181.28m
Share Price	600.00p	Share Price Discount to Net Asset Value	3.0%

Investment Policy and Objective

·   The Scottish Oriental Smaller Companies Trust PLC ("Scottish Oriental", "the Company" or "the Trust") aims to achieve long-term capital growth by investing in mainly smaller Asian quoted companies.

·   The Trust invests mainly in the shares of smaller Asian quoted companies, that is companies with market capitalisations of below US$1,000m, or the equivalent thereof, at the time of first investment.

·   The Trust may also invest in companies with market capitalisations of between US$1,000m and US$2,000m at the time of first investment, although not more than 20 per cent of the Trust's net assets at the time of investment will be invested in such companies.

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

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

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

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

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

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

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

Investment Statement

·   We aim to maximise the rate of return with due regard to risk. Risk is principally contained by focusing on soundly managed and financially strong companies, and by ensuring that the portfolio is reasonably well diversified geographically and by sector at all times. Quantitative analysis demonstrating the diversification of the Trust's portfolio of investments is contained in the country allocation and sector allocation analysis within the Portfolio Review.

·   While cultural, political, economic and sectoral influences play an important part in the decision-making process, the availability of attractively-priced, good quality companies with solid long-term growth prospects is the major determinant of investment policy.

·   Our country weightings bear no relationship to regional stock market indices. We do not consider ourselves obliged to hold investments in any individual market, sector or company.

·   Existing holdings are carefully scrutinised to ensure that our corporate performance expectations are likely to be met, and that market valuations are not excessive. Where otherwise, disposals are made.

·   Strong emphasis is placed on frequent visits to countries of the Region and on meeting the management of those companies in which the Trust is invested, or might invest.

Chairman's Statement

"Scottish Oriental had another good year. The net asset value increased by 11.4 per cent over the 12 months and the share price by 24.1 per cent. The MSCI AC Asia ex Japan Index rose by 3.7 per cent.

Earnings per share have increased again, being 11.39p compared to 10.58p last year. This rise was a result of continuing strong dividend growth from our investments. We are proposing a dividend of 9.0p net, an increase of 5.9 per cent. The undistributed balance of £724,000 will be added to the revenue reserve. It remains our intention at least to maintain this level of dividend, using our reserves if necessary.

A performance fee was earned for the second year in succession. The details of the fee, which is based on the Company's share price total return over a three year period, are set out on page 21 of the Annual Report. When this fee was established in September 2005, the rate of the base fee was reduced; it is 0.75 per cent per annum at present. The base fee is charged to income whereas the performance fee is charged to capital. Scottish Oriental's total expense ratio for the year was 1.01 per cent (2010: 1.00 per cent), but if the performance fee were to be included it would rise to 2.29 per cent (2010: 1.65 per cent). Up to the end of the last financial year, no deduction was made from the net asset value for the performance fee until it was earned at the end of the Trust's year. We have changed our policy on this and now an accrual is deducted from the net asset value that is released daily.

The transfer of our secretarial arrangements to Personal Assets Trust Administration Company Limited, about which I wrote last year, became effective on the 1^st March 2011. The transfer was carried out smoothly which is a tribute to both First State and our new secretarial team. We would like to re-iterate our thanks to those at First State and their predecessors for the secretarial service that they provided from the foundation of the Company.

We announced on the 15^th August 2011 that Scottish Oriental had borrowed US $32.5 million (£19.8 million) for 3 years at an interest cost of 2.19 per cent per annum. Our managers have not rushed to invest this money in the present turbulent conditions, but they are looking for suitable opportunities in the belief that they will be able to achieve a yield that is greater than the cost of borrowing. The present yield on our existing equity portfolio is 3.6 per cent.

We remain optimistic about the prospects for investment in Asia and particularly so as smaller and medium sized companies tend to be neglected at present. The predominant view in most equity markets is pessimistic despite the underlying strength in a number of economies and companies; this gives encouragement to our managers in their search for good companies at reasonable valuations."

James Ferguson

Chairman

31^st October 2011

Portfolio Manager's Report

REVIEW

The performance of Asian equity markets was again volatile for the year ending 31^st August 2011. Significant gains were achieved in the last months of 2010, supported by expectations of further monetary stimulus, particularly in the US, and by high levels of foreign funds allocated to the Region.  Economic growth in Asia remained robust. Combined with rising commodity prices, this resulted in higher than expected inflation.  In January and February 2011 there was a pause in the Region's outperformance as the prospect of tighter monetary policy combined with relatively expensive valuations prompted a reversal in the flow of funds towards more developed stockmarkets. Thereafter, the performance of Asian equities in general was mixed. Those countries which experienced higher inflation and corresponding tightening of monetary policies generated lower returns. 

India was the worst performing market during the period owing to concerns over persistently high inflation as well as evidence that political support for economic reforms has stalled.  Chinese equities were also weak as the Government's attempts to slow elements of the economy, particularly property development, resulted in a decline in funds available to the private sector.  The situation was exacerbated by accounting scandals affecting a number of US listed Chinese companies.  In contrast, Indonesian and Thai equities achieved significant gains in the year, supported by strong domestic consumption.

Scottish Oriental's performance over the year was gratifying both in absolute terms and also relative to its benchmark.  This was achieved in spite of the underperformance of smaller companies, as seen by the decline in the MSCI Asia ex Japan Small Cap Index over the period under review.  The Trust benefited from its high exposure to Indonesia and Thailand, as well as strong returns from some of its larger holdings, such as Security Bank and SM Development in the Philippines and JVM Co. and Cosmax in South Korea. 

Stockmarket performance for the year ending 31^st August 2011

Country	Sterling %	Local Currency %	Country Allocation on 31 August 2011 %
China	(5.7)	0.0	15.5
Hong Kong	6.6	13.1	8.9
Taiwan	9.9	5.4	12.6
Greater China			37.0
Singapore	4.8	(1.3)	14.4
Thailand	20.5	22.3	8.4
Malaysia	4.7	5.4	8.4
Indonesia	19.5	19.5	5.4
Philippines	11.9	10.5	4.1
Vietnam	(9.6)	2.4	1.1
South East Asia			41.8
India	(12.1)	(8.8)	1.5
Sri Lanka	8.8	5.3	1.5
Indian Subcontinent			3.0
South Korea	14.0	7.4	13.2
MSCI*	3.7	4.0	-
Net current assets	-	-	15.7
Loan	-	-	(10.7)
Total			100.0

* Morgan Stanley Capital International AC Asia ex Japan Index

Greater China

Inflation in China remained high despite further tightening of monetary policy and more stringent limits on bank lending.  The main cause was the rise in commodity prices, particularly food, while demand remained supported by the rise in wages.  Higher costs have had a negative impact on corporate earnings, most notably for the manufacturing sector, where strong competition and weak export demand have limited companies' ability to raise prices. 

Hong Kong continued to experience strong domestic economic growth as the currency peg with the US dollar has resulted in sustained low interest rates. Retail sales continued to grow at a dramatic rate supported by higher disposable incomes as well as strong demand from mainland Chinese tourists.  The Government imposed further restrictions on lending for high-end residential properties in an attempt to limit price rises.

In Taiwan, there was a wide divergence in the performance of individual companies.  There were disappointing returns from a number of technology related companies owing to weak demand.  In contrast, there was a re-rating in the valuations of several consumer discretionary companies which were viewed as the beneficiaries of a stronger domestic economy, resulting from improved relations with China.  Scottish Oriental benefited from its holding in Taiwan Familymart, the second largest convenience store operator. 

South East Asia

Singapore's economy grew at a rapid rate at the end of 2010 and early part of 2011 as the Government continued to support its manufacturing base with the importation of unskilled labour.  It also allowed its property market to continue appreciating.  However, both these policies backfired during the May General Election, resulting in a significant decline in the ruling party's share of the popular vote.  It became clear that the Government had underestimated the level of dissatisfaction felt by its citizens, many of whom have suffered a decline in living standards in recent years. 

In Malaysia, the economic environment continued to improve with a stable labour market and a recovery in consumer sentiment.  However, the rise in raw material costs resulted in higher inflation and thus an increase in interest rates by the Central Bank.  The Prime Minister, Najib Razak, recently announced changes to controversial laws that will increase civil liberties in the Country.  While this is a positive development, it also reflects the Government's slow progress in reforming the economy and its attempts to improve its popularity prior to next year's General Election. 

Politics remained a dominant theme in Thailand culminating in the pro-Thaksin Pheu Thai Party winning the Parliamentary General Election held in May.  The country now has its first female Prime Minister, Yingluck Shinawatra, who has publicly committed herself to a policy of national reconciliation.  Economic growth remained robust and domestic demand, particularly in the rural areas, continued to grow, supported by high prices for agricultural products such as rice and rubber.

Indonesia's economy and equity market performed well, supported by strong demand for the Country's natural resources as well as low interest rates and a stable political environment.  The Central Bank has avoided a rise in interest rates this year, relying instead on a strong currency to curb upward pressure on inflation.

The much needed investment in the Philippines' infrastructure via more private-public partnerships is progressing, albeit at a slow pace.  In the meantime, economic growth has been strong, supported by low interest rates and strong Overseas Filipino Worker remittances which reached a record US$19 billion in 2010.  

Vietnam's economy has suffered from the Government's previous pro-growth policy which led to a devaluation of the currency and a sharply higher trade deficit. Higher food prices have resulted in inflation rising to more than 20% in 2011and the application of severely tight monetary policy, which has already had a dampening effect on consumption.

Indian Subcontinent

India continues to suffer from persistently high inflation, despite further monetary tightening by the Central Bank.  Economic growth has slowed and the outlook for corporate profits has deteriorated, resulting in a decline in earnings forecasts and a de-rating of equity valuations. In addition, much heralded economic reforms seem to have stalled. 

Sri Lanka's economic growth has accelerated since the end of the civil war in May 2009, fuelled by strong domestic demand and a rise in fixed asset investment. At the same time, the currency has appreciated, supported by strong capital inflows. Although the outlook for corporate earnings has improved, this is more than adequately reflected in valuations which are now expensive. 

South Korea

South Korea's economic growth has been strong, supported by robust demand for its exports and an improvement in domestic consumption.  Although the rate of inflation has increased, the corresponding rise in interest rates has been modest, mainly because a significant number of Korean households and smaller companies remain highly indebted.   

Performance of individual equity holdings for the year ending 31^st August 2011

Company	Country	Contribution Performance (£) %	% of Shareholders' Funds at 31st August 2011
Best
BFI Finance	Indonesia	1.9	-
JVM Co.	South Korea	1.7	2.6
Cosmax	South Korea	1.4	1.6
Security Bank	Philippines	0.9	1.9
SM Development	Philippines	0.9	1.6
Worst
Supermax	Malaysia	(0.8)	1.2
Boer Power	China	(0.7)	0.6
Amtek Engineering	Singapore	(0.7)	1.3
Samson Holding	China	(0.6)	1.0
Greens Holdings	China	(0.4)	0.5

For the five best performing stocks, the common theme is valuation re-rating as recent earnings have surpassed expectations.  BFI Finance benefited from the acquisition of a significant stake by a local investor as well as favourable financing terms for its recent bond issues. Scottish Oriental has since sold its position in this Company. For both JVM and Cosmax, the recovery in corporate earnings has been significant and has resulted in the resumption of analyst coverage with positive recommendations. Security Bank and SM Developments have benefited from the resilience of the Philippine economy with robust demand for both loans and affordable housing.

Supermax's earnings were lower than expected as the company was unable to raise prices to reflect fully the higher rubber price.  Share prices for both Boer Power and Samson Holding fell sharply, following the announcement of profit warnings which reflected the highly competitive nature of their respective industries. Amtek Engineering fell in line with other Singapore listed technology companies, despite achieving earnings that were in line with expectations.  Greens Holdings also continued to underperform, owing to concerns over the outlook for smaller companies in China. Despite their recent underperformance, Scottish Oriental continues to hold these companies, given their positive long term prospects and attractive valuations.

OUTLOOK

The short term outlook for Asian equities is expected to be overshadowed by current economic events in Europe and the US.  Forecasts for global economic growth are being revised down as many western nations are forced to apply more prudent fiscal policies.  In the meantime, interest rates are expected to remain at current low levels despite the recent rise in inflation.  Asia's economies are not immune to this slowdown, given their historic reliance on exports.  However, the impact is likely to be more modest because real interest rates are still low and structural change continues to support growth in domestic consumption. 

Inflation remains the key medium term risk to Asia from both an economic and a political perspective.  The rise in commodity prices has resulted in not only more expensive manufactured goods but also increased food prices, as higher fuel and fertiliser prices raise the cost of production.  The situation has been exacerbated by tighter labour markets, particularly in China, which have pushed up wages, resulting in stable demand despite the rise in food prices.   In addition, rapid urban development has reduced the amount of land used for agriculture and declining availability of water has reduced yields.  A sustained rise in the cost of living usually results in more vocal resistance to the incumbent political regime.  Most Governments in Asia would rather use costly, inefficient subsidies than face the risk of social unrest.  There is hope that a slowdown in global economic growth will result in an easing in commodity prices and moderation in the rate of inflation.  If not, prices rises are likely to remain above expectations until supply catches up with demand.

Although valuations for Asian smaller companies appear attractive, the outlook for corporate earnings remains uncertain.  A number of companies, most notably exporters, continue to struggle to sustain margins owing to strong competition and limited pricing power.  Scottish Oriental's investment philosophy is well suited for the current uncertainty, given its focus on well managed, financially sound companies. 

In addition, the Trust will be able to utilise the US$32.5m additional cash from the loan with Scotiabank Europe.  This is a 3 year loan at a fixed interest rate of 2.19% which is due for repayment on 12 August 2014.  This borrowing will enable the Trust to invest further in the mispriced assets which invariably arise in periods of high volatility. 

Susie Rippingall

Scott McNab

Angus Tulloch

First State Investment Management (UK) Limited, Investment Manager

31^st October 2011

Portfolio Review

Scottish Oriental's portfolio of investments is well diversified not only by country but also by sector.  The largest country exposure is China with a 15.5 per cent position.  Consumer Discretionary accounted for 31.4 per cent of the portfolio, the largest sector weighting.  As at 31^st August 2011 Scottish Oriental was invested in 88 different companies with the largest holding, JVM Co, accounting for 2.6 per cent of the Portfolio.  The aggregate of the Trust's ten largest holdings was 18.0 per cent.

Country Allocation at 31^st August 2011 (based on geographical area of activity)

Country/Region	Scottish Oriental %	MSCI* %	MSCI Small Cap† %
China	15.5	24.1	17.3
Hong Kong	8.9	11.6	10.7
Taiwan	12.6	15.4	20.8
Greater China	37.0	51.1	48.8
Singapore	14.4	7.1	8.3
Thailand	8.4	2.7	3.8
Malaysia	8.4	4.5	4.6
Indonesia	5.4	3.9	4.2
Philippines	4.1	0.9	1.4
Vietnam	1.1	-	-
South East Asia	41.8	19.1	22.3
India	1.5	9.7	10.1
Sri Lanka	1.5	-	-
Indian Subcontinent	3.0	9.7	10.1
South Korea	13.2	20.1	18.8
Net current assets	15.7	-	-
Loan	(10.7)	-	-
Net assets	100.0	100.0	100.0

* Morgan Stanley Capital International AC Asia ex Japan Index

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

Greater China

Scottish Oriental continues to have an underweight position in China-related companies.  The Government is applying administrative pressures to tackle over-investment in both commercial and residential property.  These measures include restrictions on bank lending which has resulted in a lack of credit available to small and medium sized companies.  In addition, the imposition of price controls for certain key products, such as fuel, results in further distortions to the long term demand and supply imbalance.  Valuations, particularly for the export related companies, are no longer expensive but the outlook for corporate earnings remains uncertain.

Hong Kong's domestic economy remains supported by low interest rates.  However, inflation has gained momentum and may undermine consumer spending if wages fail to keep up with the higher cost of living.  The Government appears determined to curtail the high cost of residential property by raising supply, particularly for the more affordable units.  Scottish Oriental is mainly invested in consumer related companies, such as Aeon Stores and Dickson Concepts.

There was a change in the Trust's holdings in Taiwan, with the replacement of a number of technology related companies with those companies that are well positioned to benefit from the improved relations with China.  New positions include Johnson Health Tech and Lumax International, which have operations in both China and Taiwan. 

South East Asia

Scottish Oriental continues to have a large position in Singapore.  The holdings are diversified in terms of geographical reach with some, such as CSE Global and Petra Foods, having multinational exposure while others, such as Hong Leong Finance and Raffles Medical, focus on the domestic economy. 

The Trust remains overweight in Thailand.  Strong domestic consumption should continue, supported by the new Government's economic policies which include financial incentives for buyers of new cars and low end residential property. Valuations remain attractive with a number of the Trust's holdings, such as Aeon Thana Sinsap and Tisco Financial, providing dividend yields of more than 5%. 

There were a number of changes to the Trust's holdings in Malaysia.  Both Hong Leong Financial Group and Jobstreet Corp were sold following a re-rating of their valuations and replaced by a new position in Aeon Credit Services, which provides consumer finance to middle income consumers. 

The Trust's exposure to Indonesia has been reduced following the sale of two finance related companies - BFI Finance and OCBC NISP - owing to expensive valuations and longer term concerns over the outlook for interest rates and the strength of the banking system.  The Central Bank has kept interest rates unchanged despite the rise in inflation which has fuelled strong demand for loans and rising asset values.

Scottish Oriental's holdings in the Philippines remain focused on the domestic economy.  SM Development, part of the well respected SM Group, is a middle income residential property developer that is enjoying strong demand for the sale of its apartments.

The Trust retains a small position in Vietnam.  Although the short term outlook for the economy remains uncertain owing to high inflation and the unstable currency, equity valuations are now attractive.  Exposure is via the Vietnam Enterprise Fund. 

Indian Sub-Continent

Scottish Oriental continues to have a small weighting in India as valuations for well managed companies remain high.  Economic growth is expected to slow, owing to higher interest rates, and this has yet to be fully reflected in forecasts for corporate earnings.  The Trust continues to hold small positions in Castrol (India) and Marico and will look to add to its exposure, following the identification of suitable companies trading on attractive valuations.

Although the outlook for corporate earnings in Sri Lanka has improved, this is more than adequately reflected in corporate valuations, which are now expensive, particularly for those companies exposed to the domestic economy.   Scottish Oriental sold its remaining position in Aitken Spence and replaced it with a new holding in Expolanka which provides logistics support for the garment industry in South and South East Asia.

South Korea

The Trust added to its holdings in South Korea over the period with the purchase of Hana Tour Service and LG Life Sciences.  Hana Tour is South Korea's leading travel company, selling through an extensive network of agents countrywide.  LG Life Sciences is one of Korea's leading pharmaceutical companies with a strong focus on research and development.

Sector Allocation at 31^st August 2011

Sector	%
Consumer Discretionary	31.4
Consumer Staples	5.7
	37.1
Energy	2.8
Financial	20.9
Information Technology	11.0
Industrial	11.0
Healthcare	9.5
Materials	0.7
Telecommunications Services	0.8
Utilities	1.2
	95.0
Net current assets	15.7
Loan	(10.7)
Net assets	100.0

Scottish Oriental's exposure to the Consumer Discretionary sector increased significantly over the period, owing to a combination of strong outperformance from existing holdings as well as the acquisition of new companies.  The Trust's holdings in the Consumer Staples sector were largely unchanged.  There remains a wide selection of companies in these sectors which fulfil the Manager's investment requirements in terms of management quality, strong business franchise and robust financial position.  In addition, these consumer-related companies will continue to benefit from the strength of the domestic economies in the Region. 

The Trust reduced its position in Financials as a number of finance companies were sold following a re-rating of their valuations.   Included in this sector are property companies as well as banks and consumer finance companies.  The outlook for property markets remains positive over the longer term and valuations are relatively attractive.

Overall exposure to the Information Technology and Industrial sectors were largely unchanged although there was some change in the underlying holdings, with the sales of Powertech Technology in Taiwan and Dynasty Ceramics in Thailand. 

The Trust's exposure to Healthcare increased with strong performance of the existing holdings, such as Raffles Medical in Singapore, as well as the acquisition of new holdings, such as Pacific Hospital Supply in Taiwan.

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

Ten Largest Equity Holdings at 31^st August 2011

Company	Market	Value	% of Shareholders' Funds
JVM Co.	South Korea	£4,865,008	2.6%
JVM designs and produces automatic tablet dispensing and packaging machines (ATDPS) and semi-automatic tablet dispensers. The ATDPS digitizes the entire medicine preparation process from sorting, distribution, information printing and inventory management to billing.  It is used in hospitals, large pharmacies and nursing homes and one unit typically handles the work of three or four pharmacists. The outlook for earnings is positive, supported by the recent launch of the company's new range of products.
Security Bank	Philippines	£3,515,190	1.9%
Established in 1959, Security Bank is an independent corporate bank with a strong position in the mass affluent Chinese community.  In recent years, its assets have been growing at a faster rate than its peers, owing to the successful cross-marketing of a range of innovative products, including corporate, consumer and investment banking services.
Tisco Financial	Thailand	£3,442,718	1.8%
Tisco Financial is a diversified financial services company with investment banking, stockbroking, asset management and consumer finance divisions.  In 2005, the company completed a restructuring which effectively changed Tisco into a bank and gave it access to low cost deposits.   The consumer finance division is currently the largest contributor to earnings with a specific emphasis on hire purchase.  Tisco has a very conservative provisioning policy for non-performing loans. Management is highly regarded and has a strong focus on the long term career development of its employees.
Media Prima	Malaysia	£3,360,030	1.8%
Media Prima is the leading media company in Malaysia with exposure to TV, radio and outside advertising as well as newspapers via its ownership of New Straits Times Press.  The company has four free to air TV channels of which TV 3, Malaysia's leading network, is the largest contributor to the Group's earnings. The combined viewership market share for the company's four TV channels is about 50%.
Amorepacific Group	South Korea	£3,269,685	1.7%
Amorepacific Group is a holding company whose major asset is a 35% stake in Amorepacific Corp, Korea's leading domestic cosmetics company.  Amorepacific Corp has two key brands, Hera and Sulwhasoo, which are sold domestically and overseas, mainly in China and France.  The Group's other businesses include cosmetics bottling, green tea manufacturing and advertising services. It has a strong balance sheet and management continue to look for suitable acquisitions.
Texwinca	China	£3,145,819	1.7%
Texwinca's core businesses are the production of knitted fabric and garment retailing.  The company is one of the largest manufacturers of knitted jersey in the world, operating from a single production base in Dongguan, China.  Management's stringent cost controls combined with economies of scale support this division's superior margins.   Texwinca's retail operations are under several brands including Baleno, S&K and the I.P. Zone.  The focus is on China where it operates over 3,800 stores.   Earnings growth is expected to come from steady expansion in textile production capacity combined with improved margins from the retailing business.

Aeon Company	Malaysia		£3,080,859	1.7%
Aeon Company owns and operates Jusco general merchandise stores as well as standalone Maxvalu supermarkets in Malaysia.  The company has been operating there for over 20 years and has developed a strong network of suppliers and distributors.  Aeon's stores target the middle-income consumer and are located in high-density residential estates in the suburbs of major towns. Despite strong competition from hypermarkets, the company has been able to identify new store locations albeit at a conservative pace.   Management are impressive with a strong focus on customer service.
SM Development	Philippines		£3,074,937	1.6%
SM Development, part of the SM Group, is involved in the investment and development of both residential and commercial properties in the Philippines.  The company has benefited from having access to land near or beside SM Prime's shopping malls.  Demand for residential property remains strong, owing to insufficient supply and robust remittances from overseas workers.  SM Development also has a substantial investment portfolio which is retained to provide stable cash flows.
Ezion Holdings		Singapore	£3,013,972	1.6%
Ezion was created in March 2007 via a backdoor listing into Nylect Technology Limited.  The Chief Executive and major shareholder is TK Chew, who was previously Chief Executive of KS Energy.  Mr Chew established an impressive track record in his previous position.   The company was established to own and lease out liftboats which are used for the maintenance and operational support of offshore platforms.  Ezion also has a fleet of more than 20 ships, which include ballastable vessels, barges and tugs, of which half are under long term contracts and the rest on charter.  The company has already commissioned four liftboats with a fifth due for completion by early next year.
TK Corp	South Korea		£2,984,286	1.6%
Established in 1965, TK Corp manufactures industrial fittings, with a specific focus on electronic and piping system for ships, petrochemical and power plants.  The company has successfully expanded its capacity in recent years and increased its global market share at the expense of its European competitors. The majority of its revenues are from overseas and the company has recently set up offices in Houston, Beijing, India and Europe to handle these. TK Corp's wide product range of more than 45,000 items is a key barrier to entry.  In addition, the company's strong financial position allows it to hold substantial inventory which ensures timely delivery for customers.

Susie Rippingall

Scott McNab

Angus Tulloch

First State Investment Management (UK) Limited, Investment Manager

31^st October 2011

Ten Year Record

Capital

			NAV		Price		Discount to NAV
Year ended 31st August	Market Capitalisation £m	Shareholders'Funds £m	Diluted (p)	Undiluted (p)	Ordinary (p)	Warrant (p)	Diluted %	Undiluted %
2002	31.51	35.29	133.77	138.56	123.75	49.50	(7.5)	(10.7)
2003	39.73	44.55	163.94	174.91	156.00	67.50	(4.8)	(10.8)
2004	39.94	46.00	169.14	180.50	156.75	69.50	(7.3)	(13.2)
2005	54.23	61.57	219.95	241.56	212.75	112.50	(3.3)	(11.9)
2006	64.41	73.26	256.22	279.24	245.50	144.00	(4.2)	(12.1)
2007	94.87	104.14	344.67	344.67	314.00	-	(8.9)	(8.9)
2008	79.16	94.50	312.78	312.78	262.00	-	(16.2)	(16.2)
2009	98.95	113.86	376.85	376.85	327.50	-	(13.1)	(13.1)
2010	146.08	167.76	555.26	555.26	483.50	-	(12.9)	(12.9)
2011	181.28	186.89	618.56	618.56	600.00	-	(3.0)	(3.0)

Revenue

Year ended 31st August	Gross Revenue £000	Available for ordinary shareholders £000	Earnings per share* p	Dividend per share(net) p	Total expense ratio %	Total expense ratio incl. perf. fee %	Actual gearing †	Potential gearing  ‡
2002	1,211	445	1.75	1.50	1.51	1.51	105	109
2003	1,314	496	1.95	1.50	1.28	1.28	100	109
2004	1,567	547	2.14	1.58	1.54	1.54	102	108
2005	2,262	960	3.77	2.60	1.48	1.48	93	105
2006	2,416	1,239	4.78	3.60	0.88	0.88	94	101
2007	3,379	1,812	6.35	4.60	0.83	0.83	94	101
2008	3,643	2,008	6.64	5.00	0.78	0.78	98	101
2009	3,744	2,307	7.63	6.00	1.04	1.04	94	101
2010	4,940	3,197	10.58	8.50	1.00	1.65	94	101
2011	5,726	3,443	11.39	9.00	1.01	2.29	95	111

* The calculation of earnings per share is based on the revenue from ordinary activities after taxation and the weighted average number of ordinary shares in issue.

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

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

Cumulative Performance (taking year ended 31^st August 2001 as 100)

Year ended 31st August	NAV per share	Price per share	Price per warrant	MSCI AC Asia ex Japan Index	FTSE All Share Index	Earnings per share	Dividend per share
2001	100	100	100	100	100	100	100
2002	125	135	165	99	79	68	83
2003	158	170	225	112	80	76	83
2004	163	170	232	110	85	84	87
2005	218	231	375	137	103	147	144
2006	252	267	480	158	116	187	199
2007	311	341	-	216	126	248	254
2008	282	285	-	192	111	259	276
2009	340	356	-	204	97	298	331
2010	501	526	-	247	104	413	470
2011	559	652	-	249	108	445	497

Principal Risks and Uncertainties

In the Directors' view, the description of the Company's development over the year and the identification of its key performance indicators are contained in the Financial Highlights, Ten Year Record, Chairman's Statement and Portfolio Manager's Report. In the Finance Act 2009, dividends and other distributions received from foreign companies from 1st July 2009 are for the most part exempt from corporation tax. The principal risks facing the Company relate to its investment activities and include market price risk and foreign currency risk. Further details of these risks are disclosed in note 16 of the Accounts. Information on the Company's internal controls is set out below.

Internal Controls

The Directors are ultimately responsible for the internal controls of the Company which aim to ensure that proper accounting records are maintained, the assets are safeguarded and the financial information used within the business and for publication is reliable. The Directors are required to review the effectiveness of the Company's system of internal control. The Code states that the review should cover all material controls, including financial, operational and compliance controls and risk management systems. Operational and reporting systems are in place to identify, evaluate and monitor the operational risks potentially faced by the Company and to ensure that effective internal controls have been maintained throughout the period under review and up to the date of approval of this Annual Report. The Board confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Company. A full review of all internal controls is undertaken annually and the Board confirms that it has reviewed the effectiveness of the system of internal control. These controls include:

·   Reports at regular Board meetings of all security and revenue transactions effected on the Company's behalf. These transactions can only be entered into following appropriate authorisation procedures determined by the Board, the Investment Manager and the Company Secretary;

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

·   The Investment Manager's compliance and risk department monitors compliance by individuals and the Investment Manager's operations with the rules of the Financial Services Authority and provides regular reports to the Board;

·   A risk matrix is prepared which identifies the significant risks faced by the Company and the Investment Manager's and Company Secretary's controls in place to manage these risks effectively.

These systems are designed to manage rather than eliminate risk and can, however, only provide reasonable and not absolute assurance against material misstatement or loss.

Management

First State Investment Management (UK) Limited has been appointed as Investment Manager and Company Secretary under an agreement dated 20th March 1995 (as amended by supplemental agreements dated 31st July 1998, 22nd November 2005, 27th September 2006, 24th March 2009, 15th January 2010 and replaced by a new Investment Management Agreement on 1 March 2011) ("the Agreement").

The terms of the Agreement provide for payment of a base fee of 0.75% per annum of the Company's net assets payable quarterly in arrears. In addition an annual performance fee may be payable to the Investment Manager. These fees are capped, in aggregate, at an amount not exceeding or equal to 5% of the lower of (1) the gross asset value of the Company and (2) its market capitalisation, in each case at the relevant 31st August year end.

The performance fee is based on the Company's share price total return ("SPTR"), taking the change in share price and dividend together, over a three year period. If the Company's SPTR exceeds the SPTR of the Company's benchmark index (the MSCI AC Asia ex Japan Index) over the three year period plus ten percentage points then a performance fee is payable to the Investment Manager. The objective of the performance fee is to give the Investment Manager ten per cent of the additional value generated for shareholders by such outperformance. A performance fee of £2,405,137 is due to be paid for the twelve months ending 31st August 2011 and this fee will be charged against the Company's capital.

The Investment Manager's appointment as investment manager is subject to termination on one year's notice. The Company is entitled to terminate the Investment Manager's appointment on less than the specified notice period subject to compensation being paid to the Investment Manager for the period of notice not given. The compensation in the case of the Investment Manager's termination as investment manager is based on 0.75% of the value of the Company's net assets up to the date of termination on a pro rata basis. In addition a termination performance fee amount may be due to the Investment Manager based on the Company's three year performance up to the date of termination and paid on a pro rata basis.

The Agreement sets out matters over which the Investment Manager has authority and the limits above which board approval is required. In addition the Board has a formal schedule of matters specifically reserved to it for decision. This includes determination and monitoring of the Company's investment objectives and policy and its future strategic direction, gearing policy, matters relating to the buy-back and issuance of the Company's shares, appointment and removal of third party service providers, review of key investment and financial data and the Company's corporate governance and risk control arrangements.

Company Secretary

Company Secretarial, accounting and administrative services were provided by First State Investment Management (UK) Limited for a fee, initially based on £35,000 per annum until 31st March 1996 and subsequently increased in line with the UK Retail Price Index annually, until 28th February 2011. On 1st March 2011 Personal Assets Trust Administration Company Limited were appointed to provide these services for an annual fee of £97,500 plus VAT payable quarterly in advance. The appointment is terminable on three months' notice following the initial period to 28th February 2012.

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Directors' Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.

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

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

·   select suitable accounting policies and then apply them consistently;

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

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

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

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

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

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

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

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

By order of the Board

James Ferguson

Chairman

31^st October 2011

Income Statement for the year ended 31^st August 2011 (audited)

                                                                        2011                                                       2010

	Revenue £'000	Capital £'000	Total* £'000	Revenue £'000	Capital £'000	Total* £'000
Gains on investments	-	20,237	20,237	-	52,760	52,760
Income from investments [Note 1]	5,696	-	5,696	4,933	-	4,933
Other income [Note 1]	30	-	30	7	-	7
Investment management fee [Note 2]	(1,452)	(2,405)	(3,857)	(1,131)	(937)	(2,068)
Currency gains [Note 13]	-	470	470	-	825	825
Other administrative expenses [Note 3]	(461)	-	(461)	(323)	-	(323)
Net return before finance costs and taxation	3,813	18,302	22,115	3,486	52,648	56,134
Finance costs of borrowing [Note 4]	(18)	(54)	(72)	-	-	-
Net return on ordinary activities before taxation	3,795	18,248	22,043	3,486	52,648	56,134
Tax on ordinary activities [Note 5]	(352)	-	(352)	(289)	(129)	(418)
Net return attributable to equity Shareholders	3,443	18,248	21,691	3,197	52,519	55,716
Net Return per ordinary share [Note 7]	11.39p	60.40p	71.79p	10.58p	173.83p	184.41p

* The total column of this statement is the Profit and Loss Account of the Company.

A Statement of Total Recognised Gains and Losses has not been prepared as any gains or losses are

recognised in the Income Statement.

The Board is proposing a dividend of 9.00p per share for the year ended 31^st August 2011 (2010: 8.50p per share) which, if approved, will be payable on 10^th February 2012 to shareholders recorded on the Company's shareholder register on 16^th December 2011.

The accounting policies on pages 36 and 37 and the notes on pages 38 to 45 form part of the Annual Report and Accounts.

All revenue and capital items derive from continuing operations.

Summary Balance Sheet as at 31 August 2011 (audited)

	2011			2010
	£'000	£'000	£'000		£'000
FIXED ASSETS - EQUITY INVESTMENTS [Note 8]		177,549			155,708
Current Assets:
Debtors [Note 9]	999		1,314
Cash and deposits	31,328		12,650
	32,327		13,964
Current Liabilities (due within one year)
Creditors [Note 10]	(3,028)		(1,907)
	(3,028)		(1,907)
Net Current Assets		29,299			12,057
Total Assets less Current Liabilities		206,848			167,765
Creditors (dues after one year)
Loan [Note 11]		(19,960)			-
Equity shareholders' funds		186,888			167,765
Represented by
Capital and reserves
Ordinary share capital [Note 12]		7,554			7,554
Share premium account [Note 13]		21,337			21,337
Warrant reserve [Note 13]
exercised		1,319			1,319
Capital reserve [Note 13]		149,503			131,255
Revenue reserve [Note 13]		7,175			6,300
		186,888			167,765
Net asset value per share [Note 14]		618.56p			555.26p

 

The accounting policies on pages 36 and 37 and the notes on pages 38 to 45 form part of the Annual Report and Accounts.

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

Reconciliation of Movements in Shareholders' Funds (audited)
For the year ended 31 August 2010
	Share capital	Share premium account	Warrant reserve exercised	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31st August 2009	7,554	21,337	1,319	78,736	4,916	113,862
Realised gain on investments	-	-	-	20,058	-	20,058
Currency gain	-	-	-	825	-	825
Unrealised appreciation on investments in the year	-	-	-	32,702	-	32,702
Performance fee	-	-	-	(937)	-	(937)
Indian Capital Gains Tax	-	-	-	(129)	-	(129)
Income retained in the year	-	-	-	-	3,197	3,197
Dividend paid in the year	-	-	-	-	(1,813)	(1,813)
Balance at 31st August 2010	7,554	21,337	1,319	131,255	6,300	167,765

Summary Cash Flow Statement for the year ended 31^st August 2011 (audited)

	2011 £'000	2010 £'000
Net cash inflow from operating activities	3,846	3,316
Returns on investments and servicing of finance	19,779	-
Taxation	(453)	(583)
Net cash (outflow)/ inflow from capital expenditure and financial investment	(1,926)	3,508
Equity dividend paid	(2,568)	(1,813)
Increase in cash	18,678	4,428

 

Accounting Policies

Basis of accounting

(a)  These accounts have been prepared in accordance with applicable accounting standards and under the historical cost convention (modified to include the revaluation of fixed asset investments which are recorded at fair value), the Companies Act 2006 and the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued in January 2009 (the "SORP") except for certain illiquid stocks which have been valued at the last traded price, as has been the Company's practice. The Directors consider the last traded price for such stocks to be the best estimate of fair value. Financial assets and liabilities are recognised in the Company's Balance Sheet when it becomes party to the contractual provisions of the instrument.

In order better to reflect the activities of the Company and in accordance with guidance issued by the AIC, supplementary information which analyses the Profit and Loss Account between items of revenue and capital nature has been presented in the Income Statement.

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

The financial statements, and the net asset value per share figures, have been prepared in accordance with UK Generally Accepted Accounting Practice ("UK GAAP").

The functional and reporting currency of the Company is pounds sterling as most investors in the Company are based in the United Kingdom.

Income

(b)  Dividends on securities are brought into account on the date on which the security is quoted "ex dividend'' on the stock exchange in the country in which the security is listed. Interest on securities is accounted for on a time appointed basis. Foreign dividends include any withholding taxes payable to the tax authorities. Where a scrip dividend is taken in lieu of cash dividends, the net amount of the cash dividend declared is credited to the revenue account. Any excess in the value of shares received over the amount of cash dividend foregone is recognised as capital.

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

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

Expenses

(e)  Expenses of management and interest payable are dealt with on an accruals basis and are charged through the revenue column of the Income Statement except any performance fee for the Investment Manager, which is charged to capital.

(f)   The base investment management and company secretarial fees have been charged in full to the Income Account. The performance fee is chargeable in full to the Capital Account.

Valuation of Investments

(g)  Listed investments have been designated upon initial recognition as fair value through profit or loss. Investments are recognised and de-recognised at trade date where a purchase or sale is under a contract whose terms require delivery within the time frame established by the market concerned, and are initially measured at cost. Subsequent to initial recognition, investments are valued at fair value which for listed investments is deemed to be bid market or last traded prices. Gains and losses arising from changes in fair value are included as a capital item in the Income Statement and are ultimately recognised in the Capital Reserve. In accordance with the guidance given in the Association of Investment Companies SORP issued in January 2009 the Capital Reserve is not separated into realised and unrealised.

(h)  Equities include ordinary shares and warrants.

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

Foreign currency

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

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

Cash and liquid resources

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

Long term borrowings and finance costs

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

Dividends

(n)  Interim dividends are recognised in the period in which they are paid and final dividends are recognised in the period in which they are approved by the Company's shareholders.

Taxation

(o)  In accordance with Financial Reporting Standard 19, deferred taxation is provided using the liability method on all timing differences, calculated at the rate at which it is anticipated the timing differences will reverse. Deferred tax assets are recognised only when, on the basis of available evidence, it is more likely than not that there will be taxable profits in the future against which the deferred tax asset can be offset.

Owing to the Company's status as an investment trust, and the intention to continue to meet the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation of investments.

NOTES ON THE ACCOUNTS (audited):

(1) Income

Income from investments relates to dividends. Other income relates to bank deposit interest and £27,000 (2010: £7,000) in relation to Taiwan tax reclaims from overseas listed companies.

(2) Investment Management Fee

	2011 £'000	2010 £'000
Performance fee	2,405	937
Investment management fee	1,452	1,131
	3,857	2,068

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

(3) Other Administrative Expenses

		2011 £'000	2010 £'000
Auditors' remuneration for:
-     Audit		12	12
-     Tax services		4	-
Directors' fees		78	69
Company secretarial fees		75	51
Bank, custodial and other expenses		292	191
		461	323

Since 1st July 2011 Directors' fees have been as follows:

Chairman of the Board                     £23,500 per annum

Each other Director                         £17,000 per annum

Prior to 1st July 2011 Directors' fees were as follows:

Chairman of the Board                     £22,500 per annum

Each other Director                         £16,000 per annum

(4) Finance Costs of Borrowing

		2011		2010
	Revenue £'000	Capital £'000	Total £'000	Total £'000
Costs in relation to bank borrowing	18	54	72	-

(5) Taxation

		2011			2010
(a) Analysis of charge in period	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Current tax:
Prior year adjustment	-	-	-	(30)	-	(30)
Overseas tax	352	-	352	319	129	448
	352	-	352	289	129	418

(b) Factors affecting the tax charge for the period

The tax assessed for the period is different from that calculated when corporation tax is applied to the total return. The differences are explained below:

	2011 £'000	2010 £'000
Net gains on investments during the period	20,237	52,760
Other gains	470	825
Performance fee	(2,405)	(937)
Finance costs of borrowing	(54)	-
Net investment income before tax	3,795	3,486
Total return for the period before taxation	22,043	56,134
Total return for the period before taxation multiplied by the effective rate of corporation tax of 27.16% (2010: 28%)	5,987	15,718
Effect of:
Capital returns not subject to corporation tax	(5,624)	(15,004)
Prior year adjustment	-	(30)
Non-taxable income	(1,547)	(1,383)
Overseas tax	352	448
Movement on excess expenses	1,184	669
Current tax charge for the period	352	418
Under changes enacted in the Finance Act 2009, dividends and other distributions received from foreign companies from 1st July 2009 are largely exempt from corporation tax.
(c) Provision for deferred tax

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

(6) Dividends

	2011	2010
	£'000	£'000
Dividends paid in the period:
Dividend of 8.50p per share (2010 - 6.00p)
paid 28th January 2011	2,568	1,813

We note below the proposed dividend in respect of the financial year, which is the basis upon which the requirements of section 1158 of the Corporation Tax Act 2010 are considered. The proposed dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.

	2011	2010
	£'000	£'000
Income available for distribution	3,443	3,197
Proposed dividend for the year ended 31st August 2011 - 9.00p
(2010 - 8.50p) payable 10th February 2012	(2,719)	(2,568)
Retained income for section 1158  Corporation Tax Act 2010 purposes	724	629

(7) Return per Ordinary Share

		2011			2010
	Revenue p	Capital p	Total p	Revenue p	Capital p	Total p
Net return per ordinary share	11.39	60.40	71.79	10.58	173.83	184.41
					2011	2010
Revenue return					£3,443,000	£3,197,000
Capital return					£18,248,000	£52,519,000
Weighted average ordinary shares in issue					30,213,650	30,213,650
There are no dilutive or potentially dilutive shares in issue.

(8) Equity Investments	£'000
Cost at 31st August 2010	109,122
Unrealised appreciation	46,586
Valuation at 31st August 2010	155,708
Purchases at cost *	57,896
Sales - proceeds *	(56,292)
Sales - realised gains on sales	30,867
Unrealised depreciation on investments in the year	(10,630)
Valuation at 31st August 2011	177,549
Cost at 31st August 2011	141,593
Closing unrealised appreciation	35,956
All investments are listed on recognised stock exchanges. * These figures include the following charges. Purchases £'000 Transaction Costs Sales £'000 Total £'000 Stamp duty Brokerage Other Fees 31 138 10 104 159 12 135 297 22 179 275 454

	2011	2010
(9) Debtors	£'000	£'000
Sales awaiting settlement	-	450
Accrued income	763	679
Overseas tax recoverable	236	183
VAT recoverable	-	2
	999	1,314

	2011	2010
(10) Creditors (amounts falling due within one year)	£'000	£'000
Purchases awaiting settlement	143	626
Performance fee	2,405	937
Finance costs of borrowing	21	-
Interest due on loan	18	-
Other creditors	441	344
	3,028	1,907

	2011	2010
(11) Creditors (amounts falling due after one year)	£'000	£'000
US$32,500,000 fixed rate loan 2.191% 12/08/14	19,960	-

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

(12)       Share Capital

The authorised capital is £8,190,058 (2010: same) represented by 32,760,234 ordinary shares of 25p each (2010: same). The allotted capital is £7,553,412 (2010: same) represented by 30,213,650 ordinary shares of 25p each (2010: same).

The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This will include:

-          the level of equity shares in issue; and

-          the extent to which revenue in excess of that which is required to be distributed should be retained.

Other than the loan covenants described in note 11 the Company does not have any externally imposed capital requirements. The capital of the Company is the ordinary share capital as detailed above. It is managed in accordance with its investment policy in pursuit of its investment objective.

(13) Reserves	Share premium account	Warrant reserve exercised	Capital reserve	Revenue reserve
	£'000	£'000	£'000	£'000
Balance at 31 August 2010	21,337	1,319	131,255	6,300
Realised gain on investments	-	-	30,867	-
Currency gain	-	-	470	-
Unrealised depreciation on investments in the year	-	-	(10,630)	-
Performance fee	-	-	(2,405)	-
Finance costs of borrowing	-	-	(54)	-
Income retained in the year	-	-	-	3,443
Dividend paid in the year	-	-	-	(2,568)
Balance at 31 August 2011	21,337	1,319	149,503	7,175

The capital reserve includes investment holding gains amounting to £35,956,000 (2010: £46,586,000), as disclosed in Note 8.  The revenue reserve is distributable by way of dividend.

(14) Net Asset Value per Ordinary Share

Net assets per share are based on total net assets of £186,888,000 (2010: £167,765,000) divided by 30,213,650 (2010: same) ordinary shares of 25p each in issue.

(15) Cash Flow Statement

 

	2011 £'000 (audited)	2010 £'000 (audited)
(a) Reconciliation of total income to net cash inflow
from operating activities
Income	5,726	4,940
Administration expenses	(1,913)	(1,454)
Decrease / (increase) in debtors	2	(1)
Decrease in dividends accounted for but not yet received	(84)	(266)
Increase in creditors	115	97
Net cash inflow from operating activities	3,846	3,316

 

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

	At the start of the Year £'000	Cash  Flows £'000	Non-cash Changes £'000	At the end of the Year £'000
Cash	12,650	18,678	-	31,328
Loans due between one and five years	-	(19,813)	(147)	(19,960)
	12,650	(1,135)	(147)	11,368

(16) Risk Management, Financial Assets and Liabilities

The Company invests mainly in smaller Asian quoted companies. Other financial instruments comprise cash balances, short-term debtors, creditors and a fixed rate loan. The Investment Manager follows the investment process outlined above and in addition the Board conducts quarterly reviews with the Investment Management team. The Investment Manager's Risk and Compliance department monitors the Company's investment and borrowing powers to ensure that risks are controlled and minimised. Additionally, its Compliance and Risk Committee reviews risk management processes monthly.

The main risks that the Company faces from its financial instruments are market prices (comprising interest rate, currency and share price risks) and credit risk. As the Company's assets are mainly in readily realisable securities, other than in exceptional circumstances there is no significant liquidity risk. The Board, in conjunction with the Investment Manager, regularly reviews and agrees policies for managing each of these risks. The Investment Manager's policies for managing these risks are detailed below.

Market Risk

The fair value of, or future cash flows from, a financial instrument held by the Company will fluctuate because of changes in market prices. These valuations are deemed to represent the fair value of the investments.

Interest Rate Risk

As the Company does not invest in either fixed or floating rate securities at present, interest rate risk exposure is restricted to interest receivable on bank deposits or interest payable on bank overdraft positions which will be affected by fluctuations in interest rates.

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions.

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

Foreign Currency Risk

The majority of the Company's assets, liabilities and income are denominated in currencies other than sterling (the currency which the Company reports its results) as at 31st August 2011. The Balance Sheet therefore can be significantly affected by movements in foreign exchange rates. It is not the Company's policy to hedge this risk on a continuing basis but the Company reserves the right to undertake foreign exchange hedging of its portfolio. The revenue account is subject to currency fluctuation arising on dividends paid in foreign currencies. The Company does not hedge this currency risk.

Foreign Currency Risk Exposure by Currency of Denomination

	31 August 2011			31 August 2010
	Overseas investments £000	Net monetary assets  £000	Total currency exposure £000	Overseas investments £000	Net monetary assets £000	Total currency exposure £000
Hong Kong dollars	45,356	330	45,686	36,341	612	36,953
Singapore dollars	25,565	6,658	32,223	19,049	8,905	27,954
Korean won	24,727	-	24,727	17,630	-	17,630
Taiwanese dollars	23,434	636	24,070	20,284	1,511	21,795
Malaysian ringits	15,724	77	15,801	12,815	62	12,877
Thai baht	15,691	37	15,728	20,035	(162)	19,873
Indonesian rupiahs	7,848	-	7,848	9,325	56	9,381
Philippine pesos	7,701	-	7,701	9,645	-	9,645
Sterling	2,299	1,597	3,896	2,207	1,004	3,211
Sri Lankan rupees	2,871	-	2,871	3,609	72	3,681
Indian rupees	2,764	19	2,783	2,542	-	2,542
US dollars	1,935	(15)	1,920	2,226	(3)	2,223
Chinese yuan	1,634	-	1,634	-	-	-
Total	177,549	9,339	186,888	155,708	12,057	167,765

Other Price Risk

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

Other Price Risk Sensitivity

If market values at the Balance Sheet date had been 10% higher or lower with all other variables remaining constant, the return attributable to ordinary shareholders for the year ending 31st August 2011 would have increased/(decreased) by £18,689,000 (2010 increased/(decreased) by £16,776,000) and equity reserves would have increased/(decreased) by the same amount.

Credit Risk

This is the risk that a failure of a counterparty to a transaction to discharge its obligations under that transaction could result in a loss to the Company.

Investment transactions are carried out with a large number of approved brokers, whose credit-standing is reviewed periodically by the Investment Manager.

Cash exposures are carefully managed to ensure that money is placed on deposit with reputable counterparties meeting a minimum credit rating.

In summary, compared to the amounts in the Balance Sheet, the maximum exposure to credit risk at 31st August 2011 was as follows:

	2011		2010
	Balance sheet	Maximum exposure	Balance  sheet	Maximum exposure
Current assets	£'000	£'000	£'000	£'000
Receivables	999	999	1,314	1,314
Cash at bank	31,328	31,328	12,650	12,650
	32,327	32,327	13,964	13,964

17. Related Party Transactions

The Directors' fees for the year are detailed in the Directors' Remuneration Report in the Annual Report. No Director has a contract of service with the Company. During the year no Director was interested in any matter requiring disclosure under section 412 of the Companies Act 2006.

The financial information contained within this announcement does not constitute statutory accounts as defined in sections 434 and 435 of the Companies Act 2006. The results for the years ended 31st August 2011 and 2010 are an abridged version of the statutory accounts for those years. The Auditor has reported on the 2011 and 2010 accounts, their reports for both years were unqualified and did not contain a statement under sections 495 to 498 of the Companies Act 2006. Statutory accounts for 2010 have been filed with the Registrar of Companies and those for 2011 will be delivered in due course.

The 2011 Annual Report will be posted to shareholders in November 2011 and copies will be available from the Company's website www.scottishoriental.com and the Company's registered office at 10 St Colme Street, Edinburgh, EH3 6AA.

Enquiries:	Steven Davidson, Company Secretary
	Telephone [phone]

31^st October 2011

 

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