Annual Financial Report

RNS Number : 1457W

Scottish Oriental Smlr Co Tst PLC

04 November 2014

 

THE SCOTTISH ORIENTAL SMALLER COMPANIES TRUST PLC

("Scottish Oriental")

Annual Financial Report for the year ended 31 August 2014

Financial Highlights

Performance for the year ended 31 August 2014 (audited)
Net Asset Value *	13.5%	MSCI AC Asia ex Japan Index (£) *	13.2%
Share Price *	17.4%	MSCI AC Asia ex Japan Small Cap Index (£) *	13.0%
Dividend Maintained at 11.5p per share		FTSE All-Share Index (£) *	10.3%
* Total return (capital return with dividends reinvested)

Summary Data at 31 August 2014 (audited)
Shares in issue	31,643,650	Shareholders' Funds	£283.8m
Net Asset Value per share	896.93p	Market capitalisation	£268.7m
Share Price	849.00p	Share Price Discount to Net Asset Value	5.3%

Investment Policy and Objective

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

·   The Trust invests mainly in the shares of smaller Asian quoted companies, that is companies with market capitalisations of below US$1,500m, or the equivalent thereof, at the time of first investment.

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

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

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

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

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

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

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

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

Business Model and Strategy for Achieving Objectives

·   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's Net Asset Value per share increased by 13.5 per cent over the 12 months, while the MSCI AC Asia ex Japan rose by 13.2 per cent. As the discount narrowed, the share price increased by 17.4 per cent. A performance fee was earned for the fifth year in succession. This is based on a demanding target for the Company's share price total return over three years (the details are set out on page 44 of the Company's Annual Report).

Revenue returns per share have decreased to 9.59p compared to 14.56p last year, reflecting the increase in our investment in India. We are proposing an unchanged dividend of 11.5p net. The shortfall will be taken from the revenue reserve, as set out on page 46 of the Annual Report, reflecting our policy, which has been stated in the past, of using the reserve when necessary.

Wee-Li Hee returned from maternity leave in May and resumed her position as co-manager of Scottish Oriental as from July 2014. In this role she has primary responsibility for stock selection. Angus Tulloch remains as co-manager of the Trust. Martin Lau stepped down from a direct portfolio management role with Scottish Oriental but, along with the wider First State Stewart team, continues to generate investment ideas for consideration by its portfolio managers. Tom Allen remains deputy manager of the Trust.

The arrangements for complying with the Alternative Fund Managers Directive, to which I referred last year, are in place with First State Investments (UK) Limited as the Alternative Investment Fund Manager and J.P. Morgan Europe Limited as our depositary.

Our auditors, Chiene and Tait, indicated to us that they wished to resign following notification of an increase in regulation costs which made it difficult for them to audit quoted investment trusts. This was disappointing because the audit of Scottish Oriental has been conducted efficiently for many years. We have appointed Ernst and Young LLP, who are responsible for the audit of these accounts.

In August we agreed a £20 million loan with National Australia Bank fixed for five years at 3.135 per cent; this replaces a similarly sized loan of three years at 2.191 per cent which expired in the same month. Proceeds from this loan are being kept, for the time being, on sterling deposit. No new shares were issued during the year.

As this is written, the portfolio is 93 per cent invested. In general, equity markets appear fully valued and our managers are cautious for the reasons set out on page five of the Annual Report. The yield on our current equity portfolio is 2.1 per cent and the historic PE is 18x. We currently have £18.7 million net cash on our Balance Sheet, which will be invested gradually as opportunities emerge in our markets. We remain optimistic about the longer term prospects for smaller companies in Asia.

This year the Annual General Meeting will be held in London at the offices of First State Investments, Finsbury Circus House, 15 Finsbury Circus. I look forward to seeing shareholders there.

James Ferguson

Chairman

4 November 2014

Portfolio Manager's Report

Summary

In the year ending 31 August 2014, all Asian equity markets performed well, with the Indian market leading the rally. For the first half of the year, fears over the US Federal Reserve further curtailing their bond-purchasing programme weighed on the markets. As the year progressed, these worries were somewhat allayed by positive political developments in India, Thailand and Indonesia.

Scottish Oriental's performance over the year was pleasing both in absolute and relative terms. The Trust benefited from its high weighting in India, where the election of Narendra Modi and his Bharatiya Janata Party led to a new majority government and the greatest prospect for economic reform since Independence. We funded some of our purchases in India with disposals in Korea.

The outlook for the global economy and the performance of Asian equities is uncertain given the unwinding of unconventional monetary policies, slowing demand growth, surplus capacity in a number of industries, political tension and elevated asset values. A high level of public sector debt is a concerning feature of many economies globally as central banks are being forced to adopt highly unorthodox measures to promote and support growth. Longer term, ramifications of global money printing are still unclear. In the light of these challenges, markets are likely to remain volatile and we remain cautious, especially after recent developments in Ukraine and the Middle East. On a more positive note, most Asian economies are net energy importers and countries such as India are benefiting from a significant fall in oil prices.

Much of the above uncertainty is already reflected in the high valuations of quality consumer companies, as many look to their defendable franchises and strong cash flow generating characteristics as a place to hide at a time of minimal cash yields. In contrast, quality cyclical companies are less popular and Scottish Oriental intends to increase its exposure in this area as and when opportunities arise. Nowhere can current valuations be deemed especially attractive.

When such opportunities arise, the Trust will be able to draw down on a £20m sterling-denominated loan from National Australia Bank. This is a five-year loan at a fixed interest rate of 3.135 per cent which is due for repayment on 14 August 2019.

Wee-Li Hee

Angus Tulloch

First State Investment Management (UK) Limited, Investment Manager

4 November 2014

Stockmarket performance for the year ending 31 August 2014

Country	Sterling %	Local Currency %
China	9.8	17.9
Hong Kong	12.0	20.2
Taiwan	16.2	24.6
Greater China
Indonesia	11.4	28.1
Malaysia	6.5	9.8
Philippines	15.7	21.5
Singapore	8.1	13.5
Thailand	14.1	21.6
Vietnam	25.1	34.7
South East Asia
India	42.0	40.0
Sri Lanka	14.8	20.6
Indian Subcontinent
South Korea	9.0	6.9
MSCI*	13.2	18.2	-

  * Morgan Stanley Capital International AC Asia ex Japan Index

Country Allocation at 31 August 2014 (based on geographical area of activity)

Country/Region	Scottish Oriental %	MSCI* %	MSCI Small Cap† %
China	15.1	24.8	20.5
Hong Kong	7.9	12.5	9.3
Taiwan	12.7	15.5	21.3
Greater China	35.7	52.8	51.1
Indonesia	2.5	3.3	3.9
Malaysia	4.2	5.0	5.2
Philippines	1.0	1.3	1.2
Singapore	16.4	6.2	8.8
Thailand	2.3	3.0	4.6
South East Asia	26.4	18.8	23.7
India	23.9	8.7	7.1
Sri Lanka	2.5	-	-
Indian Subcontinent	26.4	8.7	7.1
South Korea	4.9	19.7	18.1
Net current assets	13.6	-	-
Loan	(7.0)	-	-
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

China began the year on a positive note as macro indicators hinted of a pickup in economic growth. However, as we feared, this proved to be unsustainable as the country struggles under the burden of structural overcapacity and a suspect credit system. Taking a longer-term view, the Central government outlined plans to reform state owned enterprises with a particular focus on resources, finance and real estate. There is no doubt that this will be a painful process but, if followed through, should set the country on a path toward higher quality and more sustainable growth.

Scottish Oriental continues to have an under-weight position in China-related companies. The present slowdown will be tough for many franchises to bear and we continue to see cash flow numbers head in the wrong direction. We remain cautious as valuations still fail to reflect today's uncertain environment.

Hong Kong will always find life difficult when growth in the Chinese mainland falters. Weaker mainland tourist numbers were reflected in six consecutive months of falling retail volumes while property prices, which have been in bubble like territory for a number of years, have begun to show some sign of weakness as buyers from the mainland dry up. The recent public demonstrations have had relatively little impact on commerce, but were unsettling nonetheless and serve as a reminder of the potential threat to the Territory's autonomy.

The Trust has reduced its overall exposure as a result of these challenges.

Taiwan ended the year on a positive note, outperforming both China and Hong Kong. This was largely due to strong demand for the country's technology exports and improved relations with China as restrictions on cross-strait investment were relaxed. The financial sector advanced on the back of stronger domestic demand and some small signs of possible industry reform.

Although our overall position size in Taiwan remains similar to that of last year, we have chosen to replace two consumer names with Airtac and Flytech. Both of these companies should benefit from China's continued industrialisation.

South East Asia

Towards the end of the period Indonesia was buoyed by the presidential election of the pro-business leader, Joko Widodo. However, the country's significant current account deficit, falling foreign exchange reserves, capital outflows and a volatile rupiah will remain a significant challenge for the new president.

Scottish Oriental's exposure to Indonesia was significantly reduced during the year. Sumber Alfaria Trijaya and Nippon Indosari were sold on valuation concerns and replaced with Hero Supermarket, which is owned by the impressive regional retailer, Dairy Farm, and Modern International, the 7-11 franchise operator. Both have strong tailwinds in the shape of a growing middle class and the increasing penetration of modern retailing. Salamander Energy and BW Plantations were also disposed owing to concerns over management quality.

Malaysia started the year with higher-than-expected quarterly GDP growth and a current account surplus aided by strong exports. However, a decline in palm oil prices, the implementation of fuel subsidy reform, increased interest rates, a hike in electricity prices and the introduction of property cooling measures dampened domestic consumption and spending. The pro-Malay stance of the

Government also appears to have harmed the country's long term competitiveness.

The new addition to the Trust's holdings in Malaysia was AirAsia, the leading low-cost carrier which has successfully expanded throughout Asia by forming joint ventures with well-regarded domestic partners. Overall exposure has been reduced with the trimming of existing names on valuation concerns.

The Philippines finished the year on a high note as strong GDP numbers were driven by higher remittances from overseas workers and robust consumer spending. President Aquino showed more fiscal discipline than had been expected and was also effective at combating corruption and promoting greater transparency. Historically low rates have also helped to drive stock market valuations to record levels.

After the sale of property related names in the Philippines, the only holding left is Manila Water. This is a well-run water company controlled by Ayala Corporation, the country's oldest and one of the most respected conglomerates.

Singapore suffered from weak external demand and a lacklustre domestic economy as it battles against rising living costs and an ageing population. The recent budget attempts to address these issues with the introduction of a wage credit scheme and plans to increase the supply of affordable housing. Falling productivity remains an issue.

The Trust continues to have a large position in Singapore. The holdings are diversified in terms of geographical reach with some, such as Ezion and Petra Foods, having multinational exposure while others, such as M1 and Raffles Medical, are focused on the domestic economy.

Thailand's export and tourism numbers fell last year as political instability impacted demand. The military coup in May put a temporary end to the state of political unrest. However, the domestic economy remained subdued as it was adversely affected by soft consumption, high household indebtedness and low confidence. The potential situation remains fragile.

Due to political and economic concerns, our exposure to Thailand has declined with the sale of domestic finance and property related companies. New holdings Somboon Advance Technology and Delta Electronics are exporters to multinational customers and should be relatively unaffected by unrest.

Vietnam prospered over the year as a result of a stable currency, falling interest rates and low inflation. This provided a positive backdrop for a fragile banking sector which is struggling from years of unconstrained credit growth. The need for reduced corruption and state owned enterprise reform remains.

Indian Subcontinent

In India the election of Narendra Modi and the Bharatiya Janata Party generated great optimism around potential reforms. These could alleviate the economic malaise that has stifled the country and inhibited progress over many years. Modi is required to enact tough policies on taxation and infrastructure, as well as to address land and labour reform, for the longer-term development of the country.

Scottish Oriental significantly increased its position in India during the year, adding to existing holdings as well as purchasing new companies, such as Kansai Nerolac Paints, Pidilite Industries and Trent. We consider these to be well-run, quality franchises that should benefit from improved consumer sentiment and increased infrastructure spending.

The Sri Lankan government failed, once again, to reduce its large fiscal deficit. This placed downward pressure on the currency and curtailed inflows of foreign direct investment. Questions persist as to the rule of law and there was no evidence of improving governance during the year.

The Trust retains the size of its position in Sri Lanka selling Expolanka and Aitken Spence Hotels and buying CT Holdings. The latter is a well-regarded family owned and run conglomerate in diverse consumer businesses.

South Korea

South Korea showed a positive return. Nevertheless, the economy suffered from a strong currency, especially against the Japanese yen. Corporate governance issues continued to haunt the corporate sector.

The Trust divested a number of holdings in South Korea in the healthcare sector, namely LG Life Sciences and Yuhan Corp, as the Government increased scrutiny of the pharmaceutical sector and clamped down on drug pricing practices. A new investment in Interojo, a quality contact lens maker and brand in South Korea and China, was made.

Performance of individual equity holdings for the year ending 31 August 2014

Company	Country	Contribution Performance %	% of Shareholders' Funds at 31 August 2014
Best
Amorepacific Group	South Korea	2.2	2.5
CMC	India	1.6	3.0
Tube Investments of India	India	1.3	1.4
EID Parry (India)	India	1.0	1.5
Marico	India	0.9	3.0
Worst
Pacific Hospital *	Taiwan	(0.7)	-
Tao Heung Holdings	Hong Kong	(0.7)	1.5
Tong Ren Tang	China	(0.4)	1.7
Singamas Container	China	(0.3)	1.1
Lalin Property *	Thailand	(0.3)	-

*Sold prior to the year end.

Amorepacific Group benefited from a valuation re-rating aided by results that surpassed market expectations. For four out of the five best performing names, the common theme is investor enthusiasm for Indian companies that were expected to benefit from the reforms after the election of Narendra Modi and the Bharatiya Janata Party. CMC, majority owned by Tata Consulting Services the leading IT Group in India, did well with successful entry into new overseas markets and expectations of winning new domestic IT projects on the back of the new Government's emphasis on e-governance. Tube Investments, the flagship company of the Murugappa Group, with an exposure to auto, finance and insurance sectors, will be a natural beneficiary of domestic economic growth. EID Parry is also considered to be a beneficiary of government deregulation and import substitution policies in both the sugar and fertilizer (mainly via Coromandel) industries. Marico improved with its portfolio of leading domestic consumer brands as well as the turnaround potential from acquired overseas brands.

Pacific Hospital failed to perform as new product launches have lacked innovation while cost pressures have affected margins. Tao Heung, the Hong Kong restaurant operator, has also faced cost issues but its long-term strategy seems sensible so we have added to our position. Tong Ren Tang is the leading traditional Chinese medicine brand in China, and has suffered recently from raw material price increases and from the uncertainty of state-owned enterprise reform. Singamas, the global number two container manufacturer, was affected by irrational competition that adversely affected prices over the last year. We expect the replacement cycle for containers to improve the situation. Lalin Property, as a Thai residential property developer, was unsurprisingly hurt by the political unrest over the year as buyers turned cautious in an unpredictable environment.

Wee-Li Hee

Angus Tulloch

First State Investment Management (UK) Limited, Investment Manager

4 November 2014

Portfolio Review

Scottish Oriental's portfolio of investments is well diversified not only by country but also by sector. The largest country exposure is India with a 23.9 per cent position (see page 7 of the Annual Report). Consumer Discretionary accounted for 19.5 per cent of the portfolio, the largest sector weighting. As at 31 August 2014, Scottish Oriental was invested in 77 different companies with the largest holding, CMC, accounting for 3.0 per cent of the Portfolio (see page 14 of the Annual Report). The aggregate of the Trust's ten largest holdings was 25.0 per cent.

Sector Allocation at 31 August 2014

Sector	%
Consumer Discretionary	19.5
Consumer Staples	16.6
	36.1
Industrials	12.5
Financials	11.1
Information Technology	10.0
Materials	7.9
Health Care	7.0
Utilities	3.3
Energy	2.8
Telecommunications Services	2.7
	93.4
Net current assets Loan	13.6 (7.0)
Net assets	100.0

Scottish Oriental's exposure to the Consumer Discretionary sector declined slightly as valuations drove the full disposals of Aeon Stores and Sumber Alfaria Trijaya. Sun Hing Vision and Johnson Health Technology were sold on increasing concerns over management's ability to evolve their business models. These were replaced with Trent, the supermarket subsidiary of the Tata Group in India, and Somboon Advance Technology, an auto parts manufacturer and exporter in Thailand.

The Trust's holdings in the Consumer Staples sector increased over the period, owing to a combination of strong outperformance from existing holdings such as Amorepacific Group and Marico as well as acquisitions of new companies such as Hero Supermarket and Haw Par.

The Trust added to its exposure to the Industrials sector, selling China property related names such as KD Holdings and Yungtay Engineering and revisiting names like AirAsia, Delta Electronics and Singapore Post as well as establishing new positions into quality Indian companies such as Container Corp and Tube Investments.

The Trust's exposure to Financials was reduced with sales of Thai stocks, Lalin Property and Tisco Financial, owing to an uncertain political environment. Century Properties and Security Bank in the Philippines were sold because of an increasing lack of confidence in management quality.

Exposure to the Information Technology sector slightly increased over the period due to outperformance of existing names like CMC and Wah Lee but there was also a sale of Singapore listed companies, Venture Corporation and CSE Global, owing to increasing concerns about their ability to compete in a global context.

Exposure to the Materials sector doubled over the period owing to the purchase of new holdings like CPMC, a packaging company in China, Kansai Nerolac Paints, the leading paint company in India, and Pidilite Industries, the premier adhesive brand in India.

The Trust's exposure to the Utilities sector doubled owing to modest additions and the subsequent outperformance of existing holdings, while the Telecommunications sector weighting also increased owing to the purchase of M1, a leading telecommunications operator in Singapore with a strong balance sheet.

Exposure to the Energy sector remains low though the Trust did add to Great Eastern Shipping in India, a company that engages in oil and gas transportation and offshore activities.

Wee-Li Hee

Angus Tulloch

First State Investment Management (UK) Limited, Investment Manager

4 November 2014

Ten Largest Equity Holdings at 31 August 2014

Company	Market			Value	% of Shareholders' Funds
CMC	India			£8,623,689	3.0%
CMC is an information technology service company specialising in the infrastructure sector where this is a captive asset base like ports, railways and container shipping. Majority owned by Tata Consultancy Services (TCS), one of India's leading IT service providers, CMC adopted UN best practices for software that gave the Company a competitive advantage in winning offshore contracts from its niche customer base. Earnings growth will come from increasing project wins and penetration into other sectors like utility IT spending.
Marico	India			£8,509,721	3.0%
Marico is one of the leading producers of consumer products in India. The company manufactures and distributes coconut hair oil products, under the 'Parachute' brand, specialist edible oils under the 'Saffola' and 'Sweekar' brands as well as cold water starch and processed foods. Parachute is the dominant coconut hair oil in India with nearly 50% share of the domestic market. Earnings growth continues to be driven by increasing market share, expanding distribution reach and new product development.
Taiwan Familymart	Taiwan			£7,406,057	2.6%
Majority owned by Japan Familymart, Taiwan Familymart has the exclusive right to operate Familymart convenience stores in Taiwan and is the second largest operator in the country with more than 20 per cent market share. This provides a steady platform for its expansion across China. Together with Tsing Hsin, owner of the largest noodle manufacturer in China, and their parent Japan Familymart the Company is cautiously opening new stores on the mainland to enhance future earnings growth.
Chroma ATE			Taiwan	£7,007,443	2.5%
Chroma ATE is the leading electronic testing and measurement manufacturer in Taiwan. The replacement demand for power electronic and passive components testing equipment provides a predictable revenue stream which management use to develop new products in LED, solar cell/module, battery formation and electrical cars. These clean technology solutions are supported by strong demand from US auto component manufacturers and are expected to be a significant contributor to earnings over the medium term.
Amorepacific Group	South Korea			£6,944,318	2.5%
Amorepacific Group is a holding company whose major asset is a significant 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. Growth will be determined from its expansion success in China as well as through acquisitions.
Raffles Medical Group			Singapore	£6,665,440	2.3%
Raffles Medical Group is the largest private medical group practice in Singapore. Founded in 1976 by the Chairman, Dr Loo Choon Yong, with just two clinics, the Group currently operates a network of clinics and a tertiary care private hospital with key specialities such as oncology and orthopaedics. On a smaller scale, it also offers insurance services and runs a consumer healthcare division. Future earnings growth will come from an increase in the number of hospital beds as well as further expansion of the network of medical clinics in Singapore and potential entry into other countries.
Minth	China			£6,598,907	2.3%
Established in 1997, Minth Group is a leading supplier of exterior automobile body parts in China, principally engaged in the design, manufacture and sale of body structural parts, decorative parts and trim for passenger cars. It is one of the largest manufacturers of core products for passenger cars in terms of sales in China. It is the Tier-1 supplier to both multinationals and Chinese automakers with more than 30 factories in China, focusing on the industry leaders, both globally and domestically.
Standard Foods	Taiwan			£6,576,202	2.3%
Standard Foods is a family-run manufacturer of health foods in Taiwan and China. It is engaged in the production and distribution of nutrition food, edible oil products, dairy products and beverages with strong niche market positions. The company is majority owned and run by its founder, Dr. Tsao, a former country manager for Quaker, who started the business by securing a licence to produce and sell Quaker products when his former employer decided to exit Taiwan. The business' financial strength offers a strong indication of stewardship, and its ability to generate strong cash flows is attractive.
Towngas China	China			£6,458,053	2.3%
Towngas China, a subsidiary of Hong Kong & China Gas, operates a gas distribution business in China. Its business includes the sale of LPG and piped gas to residential and commercial customers. The Company also undertakes the construction of gas pipelines and other gas related services. The Company continues to grow via investment in its existing operations as well as through acquisitions. Earnings should also benefit from Management's focus on reducing costs and greater integration of the existing operations.
Tata Global Beverages		India		£6,326,692	2.2%
Tata Global Beverages is the second largest tea company in the world by sales and part of the Tata Group, one of India's best well known business conglomerate. Over the years, the Company has diversified beyond tea and repositioned itself as a branded natural beverage company through acquisitions of global brands. Its two key brands, Tetley Tea and Tata Tea, are major players in their respective markets, the UK and India. Complementary to the beverage business, the Company has also formed joint ventures with established brands like Starbucks and PepsiCo to create another source of earnings growth.

Wee-Li Hee

Angus Tulloch

First State Investment Management (UK) Limited, Investment Manager

4 November 2014

Ten Year Record

Capital

			NAV		Price		Discount to NAV
Year ended 31 August	Market Capitalisation £m	Shareholders'Funds £m	Diluted (p)	Undiluted (p)	Ordinary (p)	Warrant (p)	Diluted %	Undiluted %
2005	54.23	61.57	219.95	241.56	212.75	112.50	(3.3)	(11.9)
2006	64.41	73.26	256.22	279.24	245.50	144.00	(4.2)	(12.1)
2007	94.87	104.14	-	344.67	314.00	-	-	(8.9)
2008	79.16	94.50	-	312.78	262.00	-	-	(16.2)
2009	98.95	113.86	-	376.85	327.50	-	-	(13.1)
2010	146.08	167.76	-	555.26	483.50	-	-	(12.9)
2011	181.28	186.89	-	618.56	600.00	-	-	(3.0)
2012	182.19	201.60	-	667.26	603.00	-	-	(9.6)
2013	232.19	253.63	-	801.53	733.75	-	-	(8.5)
2014	268.65	283.82	-	896.93	849.00	-	-	(5.3)

Revenue

Year ended 31 August	Gross Revenue £000	Available for ordinary shareholders £000	Earnings per share* p	Dividend per share (net) p	Ongoing charges† %	Ongoing charges incl. perf. fee %	Actual gearing ‡	Potential gearing Ω
2005	2,262	960	3.77	2.60	1.48	-	93	105
2006	2,416	1,239	4.78	3.60	0.88	-	94	101
2007	3,379	1,812	6.35	4.60	0.83	-	94	101
2008	3,643	2,008	6.64	5.00	0.78	-	98	101
2009	3,744	2,307	7.63	6.00	1.04	-	94	101
2010	4,940	3,197	10.58	8.50	1.00	1.65	94	101
2011	5,726	3,443	11.39	9.00	1.01	2.29	95	111
2012	7,073	4,348	14.39	11.00	1.01	1.96	97	110
2013	7,903	4,518	14.56	11.50	1.03	1.73	88	108
2014	6,339	3,035	9.59	11.50	1.03	1.36	93	107

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

†  Management fee and all other operating expenses, excluding interest, expressed as a percentage of the daily net asset value during the year (2011 and prior: percentage expressed of the month end net assets during the year).

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

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

Cumulative Performance (taking year ended 31 August 2004 as 100)

Year ended 31 August	NAV per share	Price per share	Price per warrant	MSCI AC Asia ex Japan Index	FTSE All Share Index	Earnings per share	Dividend per share
2004	100	100	100	100	100	100	100
2005	134	136	162	125	120	176	165
2006	155	157	207	144	136	223	228
2007	191	200	-	197	147	297	291
2008	173	167	-	174	130	310	316
2009	209	209	-	185	114	357	380
2010	308	308	-	224	122	494	538
2011	343	383	-	227	126	532	570
2012	370	385	-	220	134	672	696
2013	444	468	-	236	154	680	728
2014	497	542	-	260	164	448	728

Strategic Report

The purpose of this report is to provide shareholders with details of the Company's strategy and business model as well as the principal risks and challenges the Company has faced during the year under review.

The Board is responsible for the stewardship of the Company, including overall strategy, investment policy, borrowings, dividends, corporate governance procedures and risk management. Biographies of the directors can be found on page 19 of the Annual Report.

The Board assesses its performance in meeting the Company's objectives against the following Key

Performance Indicators, details of which can be found in the Financial Highlights, Ten Year Record,

Chairman's Statement and Portfolio Managers' Report:

·       The movement in net asset value per ordinary share on a total return basis;

·       The movement in the share price on a total return basis;

·       The discount; and

·       Ongoing charges.

Business and Status

The Company is an investment company within the meaning of section 833 of the Companies Act 2006.

The Company carries on the business of an investment trust. The Company has been approved as an investment trust by HM Revenue and Customs subject to the Company continuing to meet eligibility conditions. The Company intends to conduct its affairs so as to enable it to comply with the ongoing requirements.

Business Model and Strategy for Achieving Objectives

·       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.

Investment Policy and Objective

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

·       The Trust invests mainly in the shares of smaller Asian quoted companies, that is companies with market capitalisations of below US$1,500m, or the equivalent thereof, at the time of first investment.

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

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

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

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

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

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

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

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

A portfolio review by the Investment Manager is provided above and the investments held at the year end are contained in the Company's Annual Report.

Investment Manager

First State Investment Management (UK) Limited has been Investment Manager since 20 March 1995. In order to comply with the Alternative Investment Fund Managers Directive, with effect from 2 July 2014 the Company has terminated its investment management agreement with First State Investment Management (UK) Limited and has appointed First State Investments (UK) Limited as its Alternative Investment Fund Manager. First State Investments (UK) Limited has delegated portfolio management services to First State Investment Management (UK) Limited.

A summary of the terms of the Investment Management Agreement is contained in Note 2 of the Accounts on page 44.

The employees of the Investment Manager own 42,083 Shares in the Company.

The Board regularly appraises the performance and effectiveness of the investment managerial arrangements of the Company. As part of this process, such arrangements are reviewed formally once a year. In relation to the Board's formal review, the performance and effectiveness of such arrangements are measured against certain criteria. These include the Company's growth and return; performance against the Company's peer group; the success of the Company's investment strategy; the effectiveness, quality and standard of investment resource dedicated by the Investment Manager to the Company; and the level of the Investment Manager's fee in comparison to its peer group.

The Company has given discretionary voting powers to the Investment Manager. The Board supports the integration by the Investment Manager of environmental, social and governance issues in its investment decision making. In the Investment Manager's view, this assists the sustainable performance of the Company.

The Board, having conducted its review, considers that the Investment Manager's continued appointment as investment manager to the Company is in the best interests of shareholders.

Principal Risks and Uncertainties

The financial risk management objectives and policies of the Company are contained in Note 15 to the accounts on page 49 of the Annual Report. The principal risks facing the Company relate to the Company's investment activities and include market risk, interest rate risk, foreign currency risk, other price risk, liquidity risk and credit risk. An explanation of these risks and how they are managed is contained on pages 49 to 53 of the Annual Report.

Social, Community and Human Rights Issues

The Company has given discretionary voting powers to the Investment Manager. The Board supports the integration by the Investment Manager of environmental, social and governance issues in its investment decision making. In the Investment Manager's view, this assists the sustainable performance of the Company.

The Board

The Company has four Directors. One is a man and three are women. The Company has no employees.

On behalf of the Board

Steven K Davidson

Company Secretary

4 November 2014

Statement of Directors' Responsibilities

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

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

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

·       select suitable accounting policies and then apply them consistently;

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

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

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

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

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

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

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

·       the 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 risks and uncertainties that the Company faces.

By order of the Board

James Ferguson

Chairman

4 November 2014

Income Statement for the year ended 31 August 2014 (audited)

                                                                        2014                                                    2013

	Revenue £'000	Capital £'000	Total* £'000	Revenue £'000	Capital £'000	Total* £'000
Gains on investments [Note 8]	-	32,701	32,701	-	41,060	41,060
Income from investments [Note 1]	6,267	-	6,267	7,859	-	7,859
Other income [Note 1]	72	-	72	44	-	44
Investment management fee [Note 2]	(1,986)	(859)	(2,845)	(1,946)	(1,725)	(3,671)
Currency losses	-	(1,050)	(1,050)	-	(460)	(460)
Other administrative expenses [Note 3]	(658)	-	(658)	(635)	-	(635)
Net return before finance costs and taxation	3,695	30,792	34,487	5,322	38,875	44,197
Finance costs of borrowing [Note 4]	(441)	-	(441)	(460)	-	(460)
Net return on ordinary activities before taxation	3,254	30,792	34,046	4,862	38,875	43,737
Tax on ordinary activities [Note 5]	(219)	-	(219)	(344)	-	(344)
Net return attributable to equity shareholders	3,035	30,792	33,827	4,518	38,875	43,393
Net return per ordinary share [Note 7]	9.59p	97.31p	106.90p	14.56p	125.31p	139.87p

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

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

recognised in the Income Statement.

The Board is proposing a dividend of 11.50p per share for the year ended 31 August 2014 (2013: 11.50p per share) which, if approved, will be payable on 23 February 2015 to shareholders recorded on the Company's shareholder register on 12 December 2014.

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

All revenue and capital items derive from continuing operations.

Summary Balance Sheet as at 31 August 2014 (audited)

	2014			2013
	£'000	£'000	£'000		£'000
FIXED ASSETS - EQUITY INVESTMENTS [Note 8]		265,080			227,599
Current Assets:
Debtors [Note 9]	1,009		1,628
Cash and deposits	40,656		48,497
	41,665		50,125
Current Liabilities (due within one year)
Creditors [Note 10]	(2,924)		(24,091)
	(2,924)		(24,091)
Net Current Assets		38,741			26,034
Total Assets less Current Liabilities		303,821			253,633
Creditors (due after one year)
Loan [Note 11]		(20,000)			-
Equity shareholders' funds		283,821			253,633
Represented by
Capital and reserves
Ordinary share capital [Note 12]		7,911			7,911
Share premium account		32,940			32,940
Warrant reserve
exercised		1,319			1,319
Capital reserve		232,257			201,465
Revenue reserve		9,394			9,998
		283,821			253,633
Net asset value per share [Note 13]		896.93p			801.53p

 

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

Reconciliation of Movements in Shareholders' Funds (audited)
For the year ended 31 August 2014
	Share capital	Share premium account	Warrant reserve exercised	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 August 2013	7,911	32,940	1,319	201,465	9,998	253,633
Profit for the year	-	-	-	30,792	3,035	33,827
Dividend paid in the year	-	-	-	-	(3,639)	(3,639)
Balance at 31 August 2014	7,911	32,940	1,319	232,257	9,394	283,821

Reconciliation of Movements in Shareholders' Funds (audited)
For the year ended 31 August 2013
	Share capital	Share premium account	Warrant reserve exercised	Capital reserve	Revenue reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 August 2012	7,554	21,337	1,319	162,590	8,804	201,604
Profit for the year	-	-	-	38,875	4,518	43,393
Issue of new Ordinary shares	357	11,603	-	-	-	11,960
Dividend paid in the year	-	-	-	-	(3,324)	(3,324)
Balance at 31 August 2013	7,911	32,940	1,319	201,465	9,998	253,633

 

 

 

Summary Cash Flow Statement for the year ended 31 August 2014 (audited)

	2014 £'000	2013 £'000
Net cash inflow from operating activities	2,177	3,782
Returns on investments and servicing of finance	(438)	(460)
Taxation	(219)	(343)
Net cash (outflow)/inflow from capital expenditure and financial investment	(6,310)	13,885
Equity dividend paid Financing	(3,639) 588	(3,324) 11,960
(Decrease)/increase in cash	(7,841)	25,500

 

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"). Financial assets and liabilities are recognised in the Company's Balance Sheet when it becomes party to the contractual provisions of the instrument.

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

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

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

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

Income

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

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

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

Expenses

(e)  Expenses and interest payable are dealt with on an accruals basis and are charged through the revenue column of the Income Statement.

(f)   The investment management fee has been charged in full to the revenue column of the Income Statement. The performance fee is chargeable in full to the capital column of the Income Statement.

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

(h)  Equities include ordinary shares and warrants.

Foreign currency

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

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

Cash and liquid resources

(k)  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

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

Dividends

(m) 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

(n)  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 £4,000 (2013: £43,000) in relation to Taiwan tax reclaims from overseas listed companies.

(2) Investment Management Fee

	2014 £'000	2013 £'000
Investment management fee	1,986	1,946
Performance fee	859	1,725
	2,845	3,671

Management

First State Investment Management (UK) Limited has been Investment Manager since 20 March 1995. In order to comply with the Alternative Investment Fund Managers Directive, with effect from 2 July 2014 the Company has terminated its investment management agreement with First State Investment Management (UK) Limited and has appointed First State Investments (UK) Limited as its Alternative Investment Fund Manager. First State Investments (UK) Limited has delegated portfolio management services to First State Investment Management (UK) Limited.

The terms of the Agreement provide for payment of a base fee of 0.75 per cent 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. The total fee payable to the Investment Manager is capped at 1.5 per cent per annum of the Company's net assets.

The performance fee is based on the Company's share price total return (''SPTR''), taking the change in share price and dividend together, over a three year period. If the Company's SPTR exceeds the SPTR of the Company's benchmark index (the MSCI AC Asia ex Japan Index) over the three year period plus ten percentage points, a performance fee is payable to the Investment Manager. The objective of the performance fee is to give the Investment Manager ten per cent of the additional value generated for shareholders by such outperformance. A performance fee of £858,508 (2013: £1,724,988) is due to be paid for the twelve months ending 31 August 2014 and this fee will be charged against the Company's capital.

The Investment Manager's appointment 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 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.

(3) Other Administrative Expenses

		2014 £'000	2013 £'000
Auditors' remuneration for:
-     audit services		19	13
-     non-audit services in respect of taxation compliance		10	4
Directors' fees		84	80
Company secretarial fees		106	103
Bank, custodial and other expenses		439	435
		658	635

Company Secretary

Personal Assets Trust Administration Company Limited provides company secretarial, accounting and administrative services. The fee for the year ended 31 August 2014, which is payable quarterly in advance and linked to the movement in the Retail Price Index annually, was £105,767 (2013: £102,750). The appointment is terminable on three months' notice.

(4) Finance Costs of Borrowing

	2014 £'000	2013 £'000
Costs in relation to bank borrowing	441	460

(5) Taxation

	2014 £'000	2013 £'000
Current tax: overseas tax	219	344

(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:

	2014 £'000	2013 £'000
Return for the period before taxation	34,046	43,737
Total return for the period before taxation multiplied by the standard rate of corporation tax of 22.17% (2013: 23.58%)	7,548	10,313
Effect of:
Capital returns not subject to corporation tax	(7,017)	(9,573)
Non-taxable income	(1,389)	(1,853)
Overseas tax	219	344
Unutilised management expenses	858	1,113
Current tax charge for the period	219	344
Under changes enacted in the Finance Act 2009, dividends and other distributions received from foreign companies from 1 July 2009 are largely exempt from corporation tax.
(c) Provision for deferred tax

The Company has a deferred tax asset of £4,088,000 (2013: £3,038,000) at 31 August 2014 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

	2014	2013
	£'000	£'000
Dividends paid in the period:
Dividend of 11.50p per share (2013 - 11.00p)
paid 31 January 2014	3,639	3,324

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 accounts.

	2014	2013
	£'000	£'000
Income available for distribution	3,035	4,518
Proposed dividend for the year ended 31 August 2014 - 11.50p
(2013 - 11.50p) payable 23 February 2015	(3,639)	(3,639)
(Amount transferred from revenue reserve)/retained income	(604)	879

(7) Return per Ordinary Share

		2014			2013
	Revenue p	Capital p	Total p	Revenue p	Capital p	Total p
Net return per ordinary share	9.59	97.31	106.90	14.56	125.31	139.87
					2014	2013
Revenue return					£3,035,000	£4,518,000
Capital return					£30,792,000	£38,875,000
Weighted average ordinary shares in issue					31,643,650	31,023,198
There are no dilutive or potentially dilutive shares in issue.

(8) Equity Investments	£'000
Cost at 31 August 2013	182,497
Unrealised appreciation	45,102
Valuation at 31 August 2013	227,599
Purchases at cost *	97,875
Sales - proceeds *	(93,095)
Sales - realised gains on sales	10,603
Unrealised appreciation on investments in the year	22,098
Valuation at 31 August 2014	265,080
Cost at 31 August 2014	197,880
Closing unrealised appreciation	67,200
Gains on Investments Realised gains on sales Unrealised gains on the fair value of investments during the year l All investments are listed on recognised stock exchanges. * These figures include the following charges. Transaction Costs During the year the Company incurred transaction costs of £244,000 (2013: £239,000) on the purchase of investments and £331,000 (2013: £379,000) on the sale of investments.	10,603 22,098 32,701

	2014	2013
(9) Debtors	£'000	£'000
Sales awaiting settlement	349	816
Accrued income	611	639
Overseas tax recoverable	49	170
Sundry debtors	-	3
	1,009	1,628

	2014	2013
(10) Creditors (amounts falling due within one year)	£'000	£'000
US$32,500,000 fixed rate loan	-	20,957
Purchases awaiting settlement	1,353	755
Performance fee	859	1,725
Interest due on loan	26	23
Other creditors	686	631
	2,924	24,091

	2014	2013
(11) Creditors (amounts falling due after one year)	£'000	£'000
£20,000,000 fixed rate loan 3.135% 14/08/19	20,000	-

The main covenants relating to the loan are that total net assets shall not fall below £80 million and the ratio of total borrowings to adjusted total net asset value shall not exceed 30% at any time. There were no breaches of loan covenants during the year.

(12)       Share Capital

The allotted capital is £7,910,912 (2013: £7,910,912) represented by 31,643,650 ordinary shares of 25p each (2013: 31,643,650). During the year the Company did not issue any ordinary shares (2013: issed 1,430,000 ordinary shares for gross proceeds of £11,994,000).

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

-          the level of equity shares in issue; and

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

The capital of the Company is the ordinary share capital, the other reserves and the fixed rate loan as described in Note 11. It is managed in accordance with its investment policy in pursuit of its investment objective, which are detailed on pages 20 and 21 of the Annual Report.

(13) Net Asset Value per Ordinary Share

Net assets per share are based on total net assets of £283,821,000 (2013: £253,633,000) divided by 31,643,650 (2013: 31,643,650) ordinary shares of 25p each in issue.

 

(14) Cash Flow Statement

 

	2014 £'000 (audited)	2013 £'000 (audited)
(a) Reconciliation of total income to net cash inflow
from operating activities
Income	6,339	7,903
Administration expenses	(2,644)	(2,581)
Performance fee	(859)	(1,725)
Decrease in debtors	124	150
Decrease/(increase) in dividends accounted for but not yet received	28	(54)
(Decrease)/increase in creditors	(811)	89
Net cash inflow from operating activities	2,177	3,782

 

(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	48,497	(7,841)	-	40,656
Loan due between one and five years	-	(20,000)	-	(20,000)
Loan due within one year	(20,957)	19,412	1,545	-
	27,540	(8,429)	1,545	20,656

(15) 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 on page 20 of the Annual Report and in addition the Board conducts quarterly reviews with the Investment Managers. 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 risk (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

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 held a US$32.5 million three year fixed rate bank loan until maturity on 12 August 2014 and entered into a £20 million five year fixed rate loan with National Australia Bank on 14 August 2014. The Company is also exposed to minimal interest rate risk on interest receivable from bank deposits and interest payable on bank overdraft positions.

The interest rate risk profile of the Company's financial liabilities and the maturity profile of the undiscounted future cash flows in respect of the Company's contractual financial liabilities at 31 August are show below.

Interest Rate Risk Profile

2014                 2013

£'000                £'000

Fixed rate bank loan - Sterling denominated                                                   20,000              -

Fixed rate bank loan - US$ denominated                                                        -                      20,957

Maturity Profile

2014                 2013

Within              Within

5 years             1 year

£'000                £'000

Repayment of loans                                                                                      20,000              20,957

Interest Rate Sensitivity

Considering effects on cash balances and fixed rate borrowings, an increase of 50 basis points in interest rates would have increased net assets and total return for the period by £103,000 (2013: £138,000). A decrease of 50 basis points would have had an equal but opposite effect. The calculations are based on the cash balances at the balance sheet date and are not representative of the year as a whole.

Foreign Currency Risk

The majority of the Company's assets, liabilities and income are denominated in currencies other than sterling (the currency which the Company reports its results) as at 31 August 2014. 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 2014			31 August 2013
	Overseas investments £000	Net monetary assets  £000	Total currency exposure £000	Overseas investments £000	Net monetary assets  £000	Total currency exposure £000
Indian rupee	67,960	110	68,070	27,248	-	27,248
Hong Kong dollar	66,422	(9)	66,413	66,619	331	66,950
Singapore dollar	45,287	829	46,116	35,427	1,010	36,437
Taiwanese dollar	36,073	5,765	41,838	32,862	5,298	38,160
US dollar	-	14,144	14,144	-	8,483	8,483
Korean won	13,883	-	13,883	17,920	179	18,099
Malaysian ringgit	11,819	-	11,819	12,870	-	12,870
Indonesian rupiah	7,158	-	7,158	8,518	10	8,528
Sri Lankan rupee	7,044	-	7,044	6,097	-	6,097
Thai baht	6,435	(191)	6,244	12,992	54	13,046
Philippine peso	2,999	-	2,999	4,744	-	4,744
Total foreign currency	265,080	20,648	285,728	225,297	15,365	240,662
Sterling	-	(1,907)	(1,907)	2,302	10,669	12,971
Total currency	265,080	18,741	283,821	227,599	26,034	253,633

Currency Risk Sensitivity

At 31 August 2014, if sterling had strengthened by 5% in relation to all currencies, with all other variables held constant, total net assets and total return on ordinary activities would have decreased by the amounts shown below. A 5% weakening of sterling against all currencies, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts. The analysis is performed on the same basis for 2013.

	2014 £000	2013  £000
Indian rupee	3,404	1,362
Hong Kong dollar	3,321	3,348
Singapore dollar	2,306	1,822
Taiwanese dollar	2,092	1,908
US dollar	707	424
Korean won	694	905
Malaysian ringgit	591	644
Indonesian rupiah	358	426
Sri Lankan rupee	352	305
Thai baht	312	652
Philippine peso	150	237
Total	14,287	12,033

Other Price Risk

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

Other Price Risk Sensitivity

If market values at the Balance Sheet date had been 10% higher or lower with all other variables remaining constant, the return attributable to ordinary shareholders for the year ending 31 August 2014 would have increased/(decreased) by £26,508,000 (2013 increased/(decreased) by £22,529,000) and equity reserves would have increased/(decreased) by the same amount.

Liquidity Risk

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is not significant as the majority of the Company's assets are investments in quoted securities that are readily realisable. The Company has the power to take out borrowings, which give it access to additional funding when required. The Company's current borrowing facility is detailed in note 11 above.

The contractual maturities of financial liabilities at the year end, based on the earliest date on which payment can be required, are as follows:

	2014			2013
	3 months or less £000	3 to 12 months  £000	More than 12 months £000	3 months or less £000	3 to 12 months  £000	More than 12 months £000
Bank loan	183	470	22,479	137	21,281	-
Amount due to brokers Other creditors and accruals Performance fee accrued	1,353 686 859	- - -	- - -	755 631 1,725	- - -	- - -
	3,081	470	22,479	3,248	21,281	-

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 creditstanding is reviewed periodically by the Investment Manager. Transactions are ordinarily done on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations before any transfer of cash or securities away from the Company is completed.

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

In summary, compared to the amounts in the Balance Sheet, the maximum exposure to credit

risk at 31 August 2014 was as follows:

	2014		2013
	Balance sheet	Maximum exposure	Balance  sheet	Maximum exposure
Current assets	£'000	£'000	£'000	£'000
Receivables	1,009	1,009	1,628	1,628
Cash at bank	40,656	40,656	48,497	48,497
	41,665	41,665	50,125	50,125

Financial Instruments Measured at Fair Value

	Level 1	Level 2	Level 3	Total
As at 31 August 2014	£'000	£'000	£'000	£'000
Listed equities	265,080	-	-	265,080
Loan	(20,000)	-	-	(20,000)
Total financial instruments	245,080	-	-	245,080

	Level 1	Level 2	Level 3	Total
As at 31 August 2013	£'000	£'000	£'000	£'000
Listed equities	227,599	-	-	227,599
Loan	(20,957)	-	-	(20,957)
Total financial instruments	206,642	-	-	(206,642)

Investments in securities are financial assets designated at fair value through profit or loss on initial recognition. In accordance with Financial Reporting Standard 29 'Financial Instruments: Disclosures', the tables above provide an analysis of these investments based on the fair value hierarchy described below. Short term balances are excluded from the tables as their carrying value at the reporting date approximates to their fair value.

Fair Value Hierarchy

The fair value hierarchy used to analyse the fair values of financial assets is described below. The levels are determined by the lowest (that is the least reliable or least independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:

Level 1 - investments with quoted prices 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 prices or are not based on observable market data.

16. 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.

17. Alternative Investment Fund Managers Directive

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 1.0 and 1.1 times the Company's net asset value.

The Alternative Investment Fund Managers Directive requires the Alternative Investment Fund Manager ("AIFM") to make remuneration disclosures in next year's Annual Report.

The financial information contained within this announcement does not constitute statutory accounts as defined in sections 434 and 435 of the Companies Act 2006. The results for the years ended 31 August 2014 and 2013 are an abridged version of the statutory accounts for those years. The Auditor has reported on the 2014 and 2013 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 2013 have been filed with the Registrar of Companies and those for 2014 will be delivered in due course.

The 2014 Annual Report will be posted to shareholders in November 2014 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]

4 November 2014

 

END

 

 

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