Annual Financial Report

RNS Number : 7757D

Scottish Oriental Smlr Co Tst PLC

28 October 2015

 

THE SCOTTISH ORIENTAL SMALLER COMPANIES TRUST PLC

Annual Financial Report for the year ended 31 August 2015

Financial Highlights

Performance for the year ended 31 August 2015 (audited)
Net Asset Value *	-8.5%	MSCI AC Asia ex Japan Index (£) *	-9.1%
Share Price *	-13.8%	MSCI AC Asia ex Japan Small Cap Index (£) *	-9.4%
Dividend Maintained at 11.5p per share		FTSE All-Share Index (£) *	-2.3%
* Total return (capital return with dividends reinvested)

Summary Data at 31 August 2015 (audited)
Shares in issue	31,494,663	Shareholders' Funds	£257.2m
Net Asset Value per share	816.57p	Market capitalisation	£227.4m
Share Price	722.00p	Share Price Discount to Net Asset Value	11.6%

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 Managers' Report and 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 ("NAV") per share fell by 8.5 per cent in total return terms over the 12 months, while the MSCI AC Asia ex Japan Index fell by 9.1 per cent on the same basis. As the discount widened, the share price decreased in total return terms by 13.8 per cent. A performance fee was earned for the sixth year in succession, bringing our ongoing charges to 1.05 per cent. It may seem strange that a performance fee (much reduced from the previous year) is payable for a year such as this. The answer is provided on page 42 of the Annual Report and is because it is based on a demanding target for the Company's share price total return over three years. It would require an exceptional result in the current year to produce another year's performance fee.

Revenue returns per share have increased to 15.58p compared to 9.59p last year. The increase arose from the receipt of a special dividend from Asia Satellite Telecom, which added 6.08p to the revenue return. We are proposing an unchanged dividend of 11.5p net. The undistributed balance of £1,307,000 will be added to the revenue reserve, as set out on page 44 of the Annual Report. It remains our present intention to maintain at least this level of dividend, using revenue reserves if necessary.

During the year the Company bought back for cancellation 148,987 shares, at an average discount to NAV of 14.2 per cent. Since the year end a further 81,000 shares have been bought back for cancellation, at an average discount to NAV of 13.3 per cent. The Board has no formal discount control mechanism, but will be prepared to buy back shares opportunistically and to issue new shares at a small premium to NAV, provided that in each case this is in the interests of continuing shareholders.

In March 2015 First State made the following announcement about the future of its business:

"These changes will see the First State Stewart (FSS) team split to form two new teams; one primarily based in Hong Kong and the other in Edinburgh. The separation of the teams protects FSS's current business and creates opportunities for further growth. Recognising that working as a small dynamic investment group has been critical to their success over the last 20 years, FSS wish to continue that, giving both teams their own identity and autonomy.

There will be no change to the teams' investment philosophy and process. Indeed, the split will help to ensure the teams' philosophy is not affected by an increase in its team size or assets.

In addition to this, the Edinburgh successor team will be rebranded Stewart Investors and will, in effect, become an investment division in its own right. Both teams will remain part of First State, reporting to Mark Lazberger, the Chief Executive Officer. Stewart Investors will continue to have a number of colleagues based in Singapore, London and in the near future, Sydney. The FSS Asia team will be primarily based in Hong Kong, with colleagues also working out of Singapore and Edinburgh."

Following this, your Board made a stock exchange announcement on 28 April 2015 that:

"The Board is pleased to confirm that following the separation it has been agreed that the Company will continue to be managed by Wee-Li Hee, who will be part of the FSS Asia team, supported by Scott McNab and Martin Lau.

It is the intention that there will be no other changes to the Company's existing management arrangements."

Your Board was unanimous in deciding that the combination of Wee-Li Hee, Martin Lau and Scott McNab, supported by their colleagues in Hong Kong and Singapore, was the best answer for the future management of the Trust. All three have provided a significant contribution to the Trust's stock picking for more than a decade. The change took place on 1 July 2015 when the FSS team separated and was effected smoothly, helped by the fact that our secretarial and AIFM arrangements remained as they were before.

For the Trust this was the end of an era, because it meant that Angus Tulloch was no longer involved with Scottish Oriental. He helped set up the Company in 1995 and, although he stepped down as lead manager in 2000, he has been concerned with it ever since. His contribution to its management has been very considerable and on behalf of shareholders past and present I would like to thank him. His observations have always been interesting and we shall miss them.

The long-term arguments for investment in smaller companies in Asia remain persuasive. The immediate outlook is much more challenging. We are in the midst of a period of unusual economic circumstances and it is difficult to guess how long it will take to return to more normal conditions. As you will see from their report, our managers are not particularly optimistic at the moment. However, they have cash available of £33.6 million as this is written and they are looking for opportunities to buy good companies for the long-term as these appear. At present, the smallest companies provide the best value, but these are difficult to buy as they tend to be illiquid. The yield on our current equity portfolio is 2.6 per cent and the historic price to earnings ratio is 16.

This year the Annual General Meeting will be held in Edinburgh at the offices of First State Stewart

Asia. I look forward to seeing shareholders there.

James Ferguson

Chairman

28 October 2015

Portfolio Manager's Report

Summary

In the year ending 31 August 2015, when measured in sterling, all Asian equity markets except for the Philippines fell. Despite the US curtailing its quantitative easing programme in October 2014, Asian markets were still positive for the first half of the Trust's year with interest rate cuts and stimulus measures in several countries boosting sentiment. As the year progressed, investor concern grew over the disappointing pace of reforms in Indonesia and India, scandal in Malaysia and the state of the Chinese economy.

Scottish Oriental's performance over the year was disappointing. The Trust suffered from its high weighting in Singapore where the market has been weak. Stock selection in Singapore further hindered performance, with Ezion adversely impacted by the falling oil price and Petra Foods' key operations in Indonesia being affected by poor consumer sentiment in that country.

The outlook for Asian equity markets remains uncertain. Although forecasts for economic growth and corporate earnings have fallen, increasing evidence of a slowdown in the US and Europe indicates that market expectations may still have further to fall given much of Asia's dependency on exports. It is probably no coincidence that, as weakening export conditions became more apparent, the speed of currency depreciations accelerated. It is not possible for a single nation, let alone an entire continent, to achieve wealth by debasing its currency. Competitive devaluations merely lead to increased competition for market share in the export sector and reduced purchasing power at home. The likely outcome will not be the creation of sustainable growth.

In China, the government looks set to continue its attempts to boost both the real economy and the stock market but this will remain akin to pushing on a string, given the various challenges that economy faces. Policies aimed at reducing corruption and increasing the quality of growth need to be endured for China to prosper in the longer-term. Many of the measures that the government is taking are sensible but others are short-term in nature and will not address the issues of overcapacity in certain industries and overvaluation in certain sectors of the stock market.

The outlook for India and South East Asia is slightly brighter given the greater number of quality companies. However, political discord and social tension are both risks to these regions and although valuations are cheaper than a year ago there are few bargains. Accordingly, the Trust will remain conservatively positioned and endeavour to seek out sustainably run businesses at reasonable valuations. The longer-term case for investing in Asia remains unchanged with the region's attractive demographics and expanding middle class providing structural growth that is missing in the developed world. Pockets of value have been found in Taiwan and China recently but we would need further market falls for us to feel enthusiastic about the medium-term prospects for the Trust.

When such opportunities arise, the Trust will be able to make use of its £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

Martin Lau

Scott McNab

First State Investment Management (UK) Limited, Investment Manager

28 October 2015

Country Allocation at 31 August 2015 (based on geographical area of activity)

Country/Region	Scottish Oriental %	MSCI* %	MSCI Small Cap† %
China	14.7	27.8	21.5
Hong Kong	8.3	12.8	9.2
Taiwan	12.3	15.0	16.9
Greater China	35.3	55.6	47.6
Indonesia	3.3	2.9	2.6
Malaysia	2.1	3.8	3.5
Philippines	1.3	1.8	1.6
Singapore	16.7	5.5	7.0
Thailand	4.1	2.8	4.0
South East Asia	27.5	16.8	18.7
India	23.1	10.0	12.0
Sri Lanka	3.8	-	-
Indian Subcontinent	26.9	10.0	12.0
South Korea	4.9	17.6	21.7
Net current assets	13.2	-	-
Loan	(7.8)	-	-
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

Stock Market Performance for the year ending 31 August 2015

Country	Sterling %	Local Currency %
China	(1.9)	(9.2)
Hong Kong	(1.1)	(8.4)
Taiwan	(7.8)	(7.1)
Indonesia	(18.8)	(9.7)
Malaysia	(29.3)	(12.7)
Philippines	5.0	4.2
Singapore	(14.8)	(11.1)
Thailand	(12.5)	(9.1)
Vietnam	(12.0)	(13.6)
India	(0.3)	1.2
Sri Lanka	(1.1)	(5.3)
South Korea	(20.3)	(13.9)
MSCI*	(9.1)	(9.0)	-

  * Morgan Stanley Capital International AC Asia ex Japan Index

Greater China

China struggled with weak economic growth over the year. The domestic stock markets seemingly defied gravity until June when they suffered an overdue correction. Initially the authorities attempted to halt the decline but eventually relented. The People's Bank of China has cut interest rates five times since November 2014 and also surprised markets with an albeit modest devaluation of the renminbi in an attempt to stimulate growth. However, the central government faces several challenges: namely state-owned-enterprise reform; over-capacity in a number of industries; high private and public debt levels; declining exports; and balancing economic growth with the health of the environment. It will take more than interest rate cuts to set the country on a path towards higher quality and more sustainable growth.

Scottish Oriental continues to have an under-weight position in China-related companies. The ongoing slowdown will be tough for many companies to bear and we see little evidence of pricing power in what remains a fiercely competitive market. We remain cautious as valuations still fail to reflect today's uncertain environment.

Hong Kong always finds life difficult when growth in the Chinese mainland falters. The Chinese government's ongoing anti-corruption drive has resulted in a decline in tourism from the mainland which in turn has significantly affected retail spending in Hong Kong, especially for luxury brands. Public demonstrations over the autonomy of the Territory and rising social tensions are both reminders of the potential threat to Hong Kong's status as a financial safe haven.

The Trust's Hong Kong portfolio is relatively unchanged over the year.

Taiwan underperformed both China and Hong Kong over the year when measured in sterling. Sentiment was impacted by weak economic growth expectations from China (a country with which, politics aside, Taiwan's fate is very much intertwined). Also, a lack of new technology product launches combined with slowing demand in the West hurt Taiwan's electronics-heavy export sector. Elections to be held in January 2016 will potentially raise the spectre of a return to a less harmonious relationship with China.

We replaced Taiflex Scientific with three new technology holdings: TSC Auto ID Technology and GoDEX International, both niche barcode printer companies with growing own-brand franchises, and Axiomtek, an associate company of Advantech, one of the world's largest industrial PC companies.

South East Asia

Indonesia started the year buoyed by the presidential election win of pro-business leader, Joko Widodo. The honeymoon was short-lived and much of the last year has been spent grappling in parliament over necessary reform measures and infrastructure projects. The President has yet to deal with the country's significant current account deficit, falling foreign exchange reserves, capital outflows and a falling rupiah.

Scottish Oriental's exposure to Indonesia increased during the year. Modern Internasional was sold on valuation concerns but was replaced with Selamat Sempurna, an auto parts manufacturer, and XL Axiata, which is controlled by Malaysia's Axiata Group, one of the largest telecommunications companies in Asia. Both should benefit from Indonesia's growing middle class.

Malaysia suffered the most over the year. As a net exporter of hydrocarbons, the country's finances are negatively impacted by the falling oil price. The likely result will be a widening of the budget deficit in 2015. The ongoing financial controversy regarding the government-owned strategic development company, 1Malaysia Development Berhad, has further hurt perceptions of the capability of the government. The ringgit has declined sharply and ended the year at a level only reached during the Asian Financial Crisis. This raised concerns over the possibility of capital controls and a reintroduction of a currency peg. The implementation of the Goods and Services Tax in April 2015 as well as weak commodity prices further dampened domestic consumption. The pro-Malay stance of the government also continues to harm the country's long-term competitiveness.

The Trust has further cut its position in Malaysia with the sale of AirAsia on balance sheet concerns and Media Prima and Supermax on concerns over strategy. One new holding is APM Automotive, a manufacturer of auto parts controlled by the well-regarded Tan Chong Group.

The Philippines was the only country that finished the year on a positive note when measured in sterling. Strong remittances from overseas workers, growth in the business process outsourcing industry, resilient corporate earnings, robust consumer spending and historically low inflation all helped to maintain investor enthusiasm. However, with President Aquino stepping down next year, the capability and agenda of his successor and the next government will require monitoring.

We initiated a position in the conservatively-run China Banking Corporation, controlled by the well-respected Sy family.

Singapore continued to suffer from weak external demand and a lacklustre domestic economy as it battles against falling productivity, rising living costs and an ageing population. Significant events over the year include the death of the well-respected founding Prime Minister, Lee Kuan Yew, and the celebration of the country's 50th year of independence. The government also called an early general election.

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

Thailand's domestic economy remained subdued, affected by soft consumption, falling exports, high household indebtedness, little investment and the resultant low confidence. Weak agricultural commodity prices affected rural consumption, while delays in the progress of public infrastructure projects also added pressure. The country unfortunately ended the year suffering from a bomb explosion in Bangkok which may derail the recovery in tourism. The military government remains in power, but recent cabinet changes are expected to bode well for the implementation of much-needed stimulus measures.

The overall exposure to Thailand was increased by adding to our holding in Delta Electronics and buying MC Group, the leading domestic jeans brand.

Vietnam fell over the year as concerns remain over export growth amid the weak global environment and the long-term sustainability of the country's cheap labour model. The year ended positively with improving economic indicators and the government announcing the removal of foreign ownership caps on selected industries. However, reduced corruption and state-owned-enterprise reform are very much necessary for Vietnam's current cyclical recovery to become more structural in nature.

Indian Subcontinent

In India the progress of economic reform by Prime Minister Narendra Modi and the Bharatiya Janata Party generated sufficient optimism over the year to enable the country to deliver the second-best market performance in the benchmark. However, the challenge of land reform, infrastructure development and the difficulties of a political standstill are hindering Modi's progress. Recent economic data are less than encouraging. Despite the setbacks we are optimistic that foundations are steadily being laid to enable more sustainable growth.

During the year, Scottish Oriental reduced its position in India slightly, selling out of EID Parry, Great Eastern Shipping and Lakshmi Machine Works on valuation and cyclical concerns. We initiated toehold positions in three new companies: Godrej Industries, Indoco Remedies and SKF India.

Politics continued to dominate in Sri Lanka with a new president elected in January 2015 and a coalition government formed following August's parliamentary elections. Early indications on the coalition's efficacy are promising but much needs to be done to stamp out corruption, ensure fair competition and reduce the fiscal deficit without impacting growth. More positively, domestic consumption has been improving and record tourist arrivals and remittances from overseas workers compensate for the country's large trade deficit.

The Trust increased the size of its position in Sri Lanka by adding to Hemas Holdings, a domestic-focused conglomerate with a number of strong, internationally-experienced partners.

South Korea

South Korea ended the year recovering from the economic impact of the Middle East Respiratory Syndrome outbreak which impacted consumption markedly. Over the period the export economy suffered from its position caught between Japan and China. There was no sign of improvement to corporate governance issues and this continues to make South Korea a difficult market for us.

The Trust sold two holdings in South Korea, namely DGB Financial Group and Interojo, on change of management and strategic concerns. A new investment in Cuckoo Electronics, the leading rice cooker brand in South Korea, was made.

Performance of individual equity holdings for the year ending 31 August 2015

Company	Country	Contribution Performance %	% of Shareholders' Funds at 31 August 2015
Best
Marico	India	1.4	3.0
Amorepacific Group	South Korea	1.3	3.1
Kansai Nerolic Paints	India	1.1	2.2
Hana Tour Service	South Korea	0.7	1.4
Blue Dart Express	India	0.6	1.5
Worst
Ezion	Singapore	(1.4)	0.9
Towngas China	China	(1.0)	1.9
Trinity	China	(1.0)	0.8
Chroma ATE	Taiwan	(0.9)	1.6
Petra Foods	Singapore	(0.8)	2.1

Amorepacific Group benefited from a further valuation re-rating, aided by strong results and continued success overseas and in China. Hana Tour Service benefited from China inbound travel to Korea winning a duty-free store concession at Incheon Airport and was appointed sole operator of the Korea Visa Application Centre in China. Blue Dart Express, the Indian subsidiary of DHL, continued to deliver as the favoured logistics provider in India. Marico's strong domestic brands gained further market share, while its acquired overseas brands also improved their performance. Kansai Nerolac Paints benefited from an increase in demand amid the improving property market in India.

Ezion fell sharply as the falling oil price resulted in customers postponing deliveries and delaying new contracts. Chroma ATE is exposed to a slowdown in demand for semiconductor testing equipment and also its clean energy equipment business has been impacted by the falling oil price. As the leading chocolate brand in Indonesia Petra Foods was affected by the weak rupiah and poor consumer sentiment. We remain comfortable with Ezion, Chroma ATE and Petra Foods' management teams and have maintained our positions. Towngas China was affected by concerns around weaker gas demand due to China's economic slowdown, government intervention on pricing, and its renminbi exposure. With a new management team in place, Trinity is in the process of brand rebuilding while suffering from declining retail spending by mainland Chinese shoppers. We have taken advantage of the weakness in both Towngas China and Trinity's share prices and have added to our positions in these companies.

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 23.1 per cent position (see page 6 of the Annual Report). Consumer Discretionary accounted for 19.5 per cent of the portfolio, the largest sector weighting. As at 31 August 2015, Scottish Oriental was invested in 80 different companies with the largest holding, Amorepacific Group, accounting for 3.1 per cent of the Portfolio (see page 12 of the Annual Report). The aggregate of the Trust's ten largest holdings was 25.8 per cent.

Sector Allocation at 31 August 2015

Sector	%
Consumer Discretionary	19.5
Consumer Staples	19.2
	38.7
Industrials	14.4
Financials	12.2
Information Technology	9.5
Health Care	6.1
Materials	6.1
Telecommunications Services	3.8
Utilities	2.9
Energy	0.9
	94.6
Net current assets Loan	13.2 (7.8)
Net assets	100.0

Scottish Oriental's exposure to the Consumer Discretionary sector was stable over the year.

AirAsia was sold on balance sheet concerns and Media Prima and Tai Ping Carpets were sold on concerns over management's strategy. These were replaced with Cuckoo Electronics, Korea's leading rice cooker brand, Selamat Sempurna, an auto parts manufacturer, and Sitoy, a handbag and small accessories manufacturer.

The Trust's holdings in the Consumer Staples sector increased over the period, owing to strong outperformance from existing holdings such as Amorepacific Group and Vitasoy, and the addition to existing position Sheng Siong as well as a new holding, Yashili, the Chinese dairy company jointly controlled by Danone and China Mengniu.

The Trust's position in the Industrials sector increased, owing to outperformance from existing holdings such as Blue Dart Express and Interplex, the addition to existing positions in Delta Electronics and Hemas Holdings, and establishing a new position in SKF India, the Indian subsidiary of SKF Group of Sweden.

The Trust's exposure to Financials was relatively unchanged, selling DGB Financial Group on management concerns but adding the conservatively run China Banking Corporation in the Philippines.

Exposure to the Information Technology sector decreased slightly over the period primarily as a result of underperformance of existing holdings such as Chroma ATE and Lumax International. There were a number of new purchases: GoDEX International, TSC Auto ID Technology, Axiomtek and Sunny Optical, added on reasonable valuations. All have the potential to expand market share in their respective industries. Taiflex Scientific was sold on increasing concerns about its ability to compete in a global context.

Exposure to the Materials sector fell over the period due to the sale of CPMC and EID Parry on valuation concerns. Two positions were added, China BlueChemical, the leading nitrogenous fertiliser manufacturer in China, majority owned by the CNOOC Group, and Godrej Industries, the parent company of Godrej Properties which is also held in the Trust.

The Trust's Health Care weighting was reduced following the sale of Microport Scientific which is refocusing its business following the acquisition of a US-based orthopaedic device franchise, as well as the sales of Interojo and Supermax.

The Trust's exposure to the Utilities sector increased as a result of modest additions to existing holdings, while the Telecommunications sector weighting also increased owing to the purchase of XL Axiata, the Indonesian telecommunications operator and the outperformance of Dialog Axiata in Sri Lanka.

Exposure to the Energy sector declined further with the underperformance of Ezion and the sale of Great Eastern Shipping in India on valuation concerns.

Wee-Li Hee

Martin Lau

Scott McNab

First State Investment Management (UK) Limited, Investment Manager

28 October 2015

Ten Largest Equity Holdings at 31 August 2015

Company	Market			Value	% of Shareholders' Funds
Amorepacific Group	South Korea			£8,033,244	3.1%
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 by its expansion success in China as well as through acquisitions.
Marico	India			£7,639,295	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 per cent 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			£7,467,103	2.9%
Majority owned by Japan Familymart, Taiwan Familymart has the exclusive right to operate Familymart convenience stores in Taiwan and is the second largest operator of convenience stores in the country with more than 20 per cent market share. This provides a steady platform for their expansion across China in a joint venture with their parent Japan Familymart and Tsing Hsin, owner of the largest noodle manufacturer in China. This joint venture is cautiously opening new stores on the mainland which will enhance future earnings growth for the company.
CMC			India	£7,104,377	2.8%
CMC is an information technology service company specialising in the infrastructure sector. 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 such as utility IT spending.
Raffles Medical	Singapore			£6,991,075	2.7%
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.
Standard Foods			Taiwan	£6,194,810	2.4%
Standard Foods is a family-run food manufacturer in Taiwan and China. It is engaged in the production and distribution of health food, edible oil products, dairy products and beverages with strong niche market positions. It also holds the Quaker Oats franchise for Taiwan. The company's brands enable it to generate robust cash flows. Strong stewardship from the chairman furthers the investment case.
Ton Ren Tang Technologies	China			£6,053,342	2.4%
Tong Ren Tang Technologies is one of the oldest and most respected traditional Chinese medicine companies in China. Offering a range of affordable products for common ailments, the company's potential comes from continuing product development and launches, continuing growth of core products, expansion of its domestic sales channels both offline and online and its growing presence overseas.
Kansai Nerolac Paints	India			£5,658,963	2.2%
Kansai Nerolac is the third largest paint company in India. It is the market leader in industrial and automotive paints and a leading company in decorative paints. Majority owned by Kansai Paints of Japan, a global leader in automotive paints, the company benefits from strong technological support and established relationships with key automotive customers from its parent. It is expected to be a beneficiary of recovering automotive demand, an improving property development market and the home improvement trend in India.
Minth	China			£5,555,584	2.2%
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.
Petra Foods		Singapore		£5,356,237	2.1%
Petra Foods is a manufacturer and distributor of its own brand chocolate confectionery products in its core markets of Indonesia, Malaysia, the Philippines and Singapore. The Group has an established portfolio of chocolate confectionery brands with a dominant market share in Indonesia. Petra Foods also distributes a portfolio of well-known third party brands. Growth will come as increased wealth leads to improving affordability and thus rising consumption.

Wee-Li Hee

Martin Lau

Scott McNab

First State Investment Management (UK) Limited, Investment Manager

28 October 2015

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 %
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)
2015	227.39	257.18	-	816.57	722.00	-	-	(11.6)

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
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
2015	8,716	4,929	15.58	11.50	1.01	1.05	95	108

* 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 average daily net assets during the year (2011 and prior: expressed as a percentage of the average 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 2005 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
2005	100	100	100	100	100	100	100
2006	116	115	128	115	113	127	138
2007	143	148	-	158	123	168	177
2008	129	123	-	140	108	176	192
2009	156	154	-	148	95	202	231
2010	230	227	-	180	101	281	327
2011	256	282	-	182	105	302	346
2012	276	283	-	176	112	382	423
2013	332	345	-	189	128	386	442
2014	371	399	-	209	137	254	442
2015	338	339	-	185	129	413	442

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 17 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 Managers' Report and 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 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 42.

The Board regularly appraises the performance and effectiveness of the investment management 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 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 Board believes that 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 47 to 51 of the Annual Report.

Other risks faced by the Company include breach of regulatory rules which could lead to suspension of the Company's Stock Exchange listing, financial penalties, or a qualified audit report. Breach of Section 1158 of the Corporation Tax Act 2010 could lead to the Company being subject to tax on capital gains.

In the mitigation and management of these risks, the Board regularly monitors the investment environment and the management of the Company's investment portfolio, and applies the principles detailed in the guidance provided by the Financial Reporting Council. The Company's internal controls are described in more detail on page 25 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. Three are women and one is a man. The Company has no employees.

On behalf of the Board

Steven K Davidson

Company Secretary

28 October 2015

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

28 October 2015

Income Statement for the year ended 31 August 2015 (audited)

                                                                        2015                                                       2014

	Revenue £'000	Capital £'000	Total* £'000	Revenue £'000	Capital £'000	Total* £'000
(Losses)/gains on investments [Note 8]	-	(28,037)	(28,037)	-	32,701	32,701
Income from investments [Note 1]	8,623	-	8,623	6,267	-	6,267
Other income [Note 1]	93	-	93	72	-	72
Investment management fee [Note 2]	(2,136)	(107)	(2,243)	(1,986)	(859)	(2,845)
Currency gains/(losses)	-	1,268	1,268	-	(1,050)	(1,050)
Other administrative expenses [Note 3]	(779)	-	(779)	(658)	-	(658)
Net return before finance costs and taxation	5,801	(26,876)	(21,075)	3,695	30,792	34,487
Finance costs of borrowing [Note 4]	(630)	-	(630)	(441)	-	(441)
Net return on ordinary activities before taxation	5,171	(26,876)	(21,705)	3,254	30,792	34,046
Tax on ordinary activities [Note 5]	(242)	-	(242)	(219)	-	(219)
Net return attributable to equity shareholders	4,929	(26,876)	(21,947)	3,035	30,792	33,827
Net return per ordinary share [Note 7]	15.58p	(84.95p)	(69.37p)	9.59p	97.31p	106.90p

* 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 2015 (2014: 11.50p per share) which, if approved, will be payable on 22 January 2016 to shareholders recorded on the Company's shareholder register on 11 December 2015.

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 2015 (audited)

	2015			2014
	£'000	£'000	£'000		£'000
FIXED ASSETS - EQUITY INVESTMENTS [Note 8]		243,170			265,080
Current Assets:
Debtors [Note 9]	3,312		1,009
Cash and deposits	31,974		40,656
	35,286		41,665
Current Liabilities (due within one year)
Creditors [Note 10]	(1,281)		(2,924)
	(1,281)		(2,924)
Net Current Assets		34,005			38,741
Total Assets less Current Liabilities		277,175			303,821
Creditors (due after one year)
Loan [Note 11]		(20,000)			(20,000)
Equity shareholders' funds		257,175			283,821
Represented by
Capital and reserves
Ordinary share capital [Note 12]		7,874			7,911
Share premium account		32,940			32,940
Capital redemption reserve		37			-
Warrant reserve exercised		1,319			1,319
Capital reserve		204,321			232,257
Revenue reserve		10,684			9,394
		257,175			283,821
Net asset value per share [Note 13]		816.57p			896.93p

 

 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 2015
		Share capital	Share premium account	Warrant reserve exercised	Capital redemption reserve	Capital reserve	Revenue reserve	Total
		£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 August 2014		7,911	32,940	1,319	-	232,257	9,394	283,821
Return for the year		-	-	-	-	(26,876)	4,929	(21,947)
Buyback of ordinary shares Dividend paid in the year		(37) -	- -	- -	37 -	(1,060) -	- (3,639)	(1,060) (3,639)
Balance at 31 August 2015		7,874	32,940	1,319	37	204,321	10,684	257,175

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

 

 

 

Summary Cash Flow Statement for the year ended 31 August 2015 (audited)

	2015 £'000	2014 £'000
Net cash inflow from operating activities	4,778	2,177
Returns on investments and servicing of finance	(627)	(438)
Taxation	(242)	(219)
Net cash outflow from capital expenditure and financial investment	(9,165)	(3,715)
Equity dividend paid Net cash (outflow)/inflow from financing	(3,639) (1,055)	(3,639) 588
Decrease in cash	(9,950)	(5,246)
Cash at the start of the year	40,656	48,497

Effect of currency gains/(losses)                                                            1,268                  (2,595)

Cash at the end of the year

31,974

40,656

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 price 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 Taiwan tax reclaims of £nil (2014: £4,000) from overseas listed companies.

(2) Investment Management Fee

	2015 £'000	2014 £'000
Investment management fee	2,136	1,986
Performance fee	107	859
	2,243	2,845

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 £106,787 (2014: £858,508) is due to be paid for the twelve months ending 31 August 2015 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

		2015 £'000	2014 £'000
Auditors' remuneration for:
-     audit services		18	19
-     non-audit services in respect of taxation compliance		6	10
Directors' fees		84	84
Company secretarial fees		108	106
Bank, custodial and other expenses		563	439
		779	658

Company Secretary

Personal Assets Trust Administration Company Limited provides company secretarial, accounting and administrative services. The fee for the year ended 31 August 2015, which is payable quarterly in advance and linked to the movement in the Retail Price Index annually, was £107,685 (2014: £105,767). The appointment is terminable on three months' notice.

(4) Finance Costs of Borrowing

	2015 £'000	2014 £'000
Costs in relation to bank borrowing	630	441

(5) Taxation

	2015 £'000	2014 £'000
Current tax: overseas tax	242	219

(b) Factors affecting the tax charge for the year

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:

	2015 £'000	2014 £'000
Return for the year before taxation	(21,705)	34,046
Total return for the period before taxation multiplied by the standard rate of corporation tax of 20.58% (2014: 22.17%)	(4,467)	7,548
Effect of:
Capital returns not subject to corporation tax	5,509	(7,017)
Non-taxable income	(1,775)	(1,389)
Overseas tax	242	219
Unutilised management expenses	733	858
Current tax charge for the year	242	219
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 £4,606,000 (2014: £4,088,000) at 31 August 2015 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

	2015	2014
	£'000	£'000
Dividends paid in the period:
Dividend of 11.50p per share (2014 - 11.50p)
paid 23 February 2015	3,639	3,639

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.

	2015	2014
	£'000	£'000
Income available for distribution	4,929	3,035
Proposed dividend for the year ended 31 August 2015 - 11.50p
(2014 - 11.50p) payable 22 January 2016	(3,622)	(3,639)
Amount transferred to revenue reserve/(from revenue reserve)	1,307	(604)

(7) Return per Ordinary Share

		2015			2014
	Revenue p	Capital p	Total p	Revenue p	Capital p	Total p
Net return per ordinary share	15.58	(84.95)	(69.37)	9.59	97.31	106.90
					2015	2014
Revenue return					£4,929,000	£3,035,000
Capital return					(£26,876,000)	£30,792,000
Weighted average ordinary shares in issue					31,638,801	31,643,650
There are no dilutive or potentially dilutive shares in issue.

(8) Equity Investments	£'000
Cost at 31 August 2014	197,880
Unrealised appreciation	67,200
Valuation at 31 August 2014	265,080
Purchases at cost *	57,160
Sales - proceeds *	(51,033)
Sales - realised gains on sales	11,737
Unrealised depreciation on investments in the year	(39,774)
Valuation at 31 August 2015	243,170
Cost at 31 August 2015	215,744
Closing unrealised appreciation	27,426
Gains/(losses) on Investments Realised gains on sales Unrealised losses on the fair value of investments during the year All investments are listed on recognised stock exchanges. * These figures include the following costs: Transaction Costs During the year the Company incurred transaction costs of £137,000 (2014: £244,000) on the purchase of investments and £150,000 (2014: £331,000) on the sale of investments.	11,737 (39,774) (28,037)

	2015	2014
(9) Debtors	£'000	£'000
Sales awaiting settlement	2,538	349
Accrued income	731	611
Overseas tax recoverable	43	49
	3,312	1,009

	2015	2014
(10) Creditors (amounts falling due within one year)	£'000	£'000
Purchases awaiting settlement	504	1,353
Management fee payable	483	534
Performance fee	107	859
Interest due on loan	29	26
Stamp duty payable on share buybacks	5	-
Other creditors	153	152
	1,281	2,924

	2015	2014
(11) Creditors (amounts falling due after one year)	£'000	£'000
£20,000,000 fixed rate loan 3.135% 14/08/19	20,000	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 £7,873,666 (2014: £7,910,912) represented by 31,494,663 ordinary shares of 25p each (2014: 31,643,650). During the year the Company bought for cancellation 148,987 ordinary shares at a cost of £1,060,000. Since the year end the Company has bought for cancellation a further 81,000 ordinary shares at a total cost of £571,000.

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 18 and 19 of the Annual Report.

(13) Net Asset Value per Ordinary Share

Net assets per share are based on total net assets of £257,175,000 (2014: £283,821,000) divided by 31,494,663 (2014: 31,643,650) ordinary shares of 25p each in issue.

 

(14) Cash Flow Statement

 

	2015 £'000 (audited)	2014 £'000 (audited)
(a) Reconciliation of total income to net cash inflow
from operating activities
Income	8,716	6,339
Administration expenses	(2,915)	(2,644)
Performance fee	(107)	(859)
Decrease in debtors	6	124
(Increase)/decrease in dividends accounted for but not yet received	(120)	28
Decrease in creditors	(802)	(811)
Net cash inflow from operating activities	4,778	2,177

 

(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	40,656	(8,682)	-	31,974
Loan due between one and five years	(20,000)	-	-	(20,000)
	20,656	(8,682)	-	11,974

(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 18 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 £20 million five year fixed rate loan with National Australia Bank. 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

2015                 2014

£'000                £'000

Fixed rate bank loan - Sterling denominated                                                   20,000              20,000

Maturity Profile

2015                 2014

Within              Within

5 years             5 years

£'000                £'000

Repayment of loans                                                                                      22,510              23,140

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 £60,000 (2014: £103,000). 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 2015. 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 2015			31 August 2014
	Overseas investments £000	Net monetary assets  £000	Total currency exposure £000	Overseas investments £000	Net monetary assets  £000	Total currency exposure £000
Indian rupee	59,322	2,165	61,487	67,960	110	68,070
Hong Kong dollar	60,222	101	60,323	66,422	(9)	66,413
Singapore dollar	41,769	1,017	42,786	45,287	829	46,116
Taiwanese dollar	31,637	393	32,030	36,073	5,765	41,838
US dollar	-	18,601	18,601	-	14,144	14,144
Korean won	12,629	-	12,629	13,883	-	13,883
Thai Baht	10,676	63	10,739	6,435	(191)	6,244
Sri Lankan rupee	9,745	-	9,745	7,044	-	7,044
Indonesian rupiah	8,531	-	8,531	7,158	-	7,158
Malaysian ringgit	5,339	-	5,339	11,819	-	11,819
Philippine peso	3,300	(20)	3,280	2,999	-	2,999
Total foreign currency	243,170	22,320	265,490	265,080	20,648	285,728
Sterling	-	(8,315)	(8,315)	-	(1,907)	(1,907)
Total currency	243,170	14,005	257,175	265,080	18,741	283,821

Currency Risk Sensitivity

At 31 August 2015, 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 2014.

	2015 £000	2014  £000
Indian rupee	3,074	3,404
Hong Kong dollar	3,016	3,321
Singapore dollar	2,139	2,306
Taiwanese dollar	1,602	2,092
US dollar	930	707
Korean won	631	694
Thai baht	537	312
Sri Lankan rupee	487	352
Indonesian rupiah	427	358
Malaysian ringgit	267	591
Philippine peso	164	150
Total	13,274	14,287

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 2015 would have increased/(decreased) by £24,317,000 (2014 increased/(decreased) by £26,508,000) 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:

	2015			2014
	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	186	472	21,852	183	470	22,479
Amount due to brokers Other creditors and accruals Performance fee accrued	504 641 107	- - -	- - -	1,353 686 859	- - -	- - -
	1,438	472	21,852	3,081	470	22,479

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 2015 was as follows:

	2015		2014
	Balance sheet	Maximum exposure	Balance  sheet	Maximum exposure
Current assets	£'000	£'000	£'000	£'000
Receivables	3,312	3,312	1,009	1,009
Cash at bank	31,974	31,974	40,656	40,656
	35,286	35,286	41,665	41,665

Financial Instruments Measured at Fair Value

	Level 1	Level 2	Level 3	Total
As at 31 August 2015	£'000	£'000	£'000	£'000
Listed equities	243,170	-	-	243,170
Loan	-	(20,000)	-	(20,000)
Total financial instruments	243,170	(20,000)	-	223,170

	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	265,080	(20,000)	-	245,080

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. An amount of £15,000 was outstanding to the Directors at the year end (2014: £14,000). 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 available certain remuneration disclosures to investors. This information is available from the AIFM on request.

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 2015 and 2014 are an abridged version of the statutory accounts for those years. The Auditor has reported on the 2015 and 2014 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 2014 have been filed with the Registrar of Companies and those for 2015 will be delivered in due course.

The 2015 Annual Report will be posted to shareholders in November 2015 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]

28 October 2015

 

END

 

 

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