TIDMSST
RNS Number : 5404S
Scottish Oriental Smlr Co Tst PLC
07 November 2023
THE SCOTTISH ORIENTAL SMALLER COMPANIES TRUST PLC
Annual Financial Report for the year ended 31 August 2023
Financial Highlights
Total Return Performance for the year ended 31 August 2023
(audited)
MSCI AC Asia ex Japan Small
Net Asset Value 6.5% Cap Index (GBP) 1.8%
MSCI AC Asia ex Japan Index
Share Price 8.4% (GBP) (8.4)%
Final dividend maintained
at 13.0p per share FTSE All-Share Index (GBP) 5.2%
Summary Data at 31 August 2023 (audited)
Shares in issue 24,359,851 Shareholders' Funds GBP354.6m
Net Asset Value 1,455.6p Market Capitalisation GBP310.6m
per share
Share Price Discount to
Share Price 1,275.0p Net Asset Value 12.4%
Ongoing Charges Active Share (MSCI AC Asia
Ratio* 1.60% ex Japan Small Cap Index) 97.5%
Ongoing Charges
Ratio (excluding
performance fee) 0.95%
Active Share (MSCI AC Asia
Net Cash 4.0% ex Japan Index) 99.7%
*A performance fee of GBP2,247,000 is payable relating to the
year ending 31 August 2023 (2022: nil)
Chairman's Statement
I am pleased to present my second annual report as Chairman and
to report that the Company has continued to build on the previous
two years' strong performance. The Net Asset Value ("NAV") per
share rose by 6.5 per cent in total return terms over the 12 months
to 31 August 2023. This compares favourably to the MSCI AC Asia ex
Japan Small Cap Index, the MSCI AC Asia ex Japan Index, and the
FTSE All-Share Index which returned 1.8 per cent, -8.4 per cent and
5.2 per cent respectively during the same period.
During the period under review, the Company's share price
increased by 8.4 per cent. As a result, the discount narrowed to
12.4 per cent from 14.0 per cent at the previous year end.
The Investment Manager's portfolio construction process is based
on fundamental, bottom up analysis, focused on corporate
governance, growth prospects, valuation and potential long term
returns. As such this approach is index agnostic and very much
active in style. With a view to rewarding performance which is
better than the return investors would receive from investing in
the benchmark, there is a performance fee component to management
remuneration which is designed to incentivise the delivery of
superior performance above the MSCI AC Asia ex Japan Small Cap
Index.
Following three years of share price growth, a performance fee
of GBP2,247,000 was earned by the Investment Manager in the year
under review. Following the change to the Company's comparator
index we have reviewed the terms of the investment management
agreement. The Investment Manager has agreed that for the current
three year performance period, a chain-linked comparator index,
using; (i) the MSCI AC Asia (ex-Japan) for periods up to and
including 31 August 2021; and (ii) the MSCI AC Asia ex Japan Small
Cap Index (GBP) for periods with effect from 1 September 2021.
We believe that a system that fairly remunerates the investment
manager for long term outperformance is also a benefit to
shareholders. We are currently reviewing the terms of the
investment management agreement and hope to provide an update on
this to shareholders in the coming months.
The Portfolio Managers' Report below addresses the performance
of the Company and expands on the investment process the managers
have followed over many years to take advantage of the key
investment themes prevailing in the Asian markets. The report goes
on to examine reasons for the transactions that have taken place
which have resulted in the current positioning of the portfolio.
What comes across is a manager who considers all aspects of a
company's business model and the risks associated with investing
whilst taking account of the long term sustainable potential on
offer. I hope you agree that it is a most informative read.
During the year, the Company bought back 457,128 ordinary
shares. The Company's share price traded in a discount range of
between 9.5 per cent and 16.1 per cent. Whilst the Board continues
to have no formal discount control mechanism in place the Company's
shares are re-purchased in the market when deemed appropriate to do
so, within the buyback authority granted by shareholders.
In last year's annual report, I reported an uplift to the
Company's revenue earnings per share from 9.02p to 16.66p. However
in 2023, as a result of changes to the investment portfolio,
revenue earnings per share (largely reflecting the dividends paid
by the companies in our portfolio) has fallen to 14.19p. This
should not be a cause of concern for shareholders as this is due to
the Investment Manager picking stocks that align with the Company's
long term capital growth objective. The Board is proposing to
maintain the final dividend per share at 13.0p, but not to pay an
additional special dividend this year.
Anne West has decided that after 13 years as a non-executive
Director she will step down from the Board at the forthcoming AGM.
Anne has been a strong presence on the Board and her very positive
contributions will be missed. I am pleased to report that following
a thorough selection process Uma Bhugtiar joined the Board on 19
October 2023. Uma is a corporate lawyer with a great deal of
experience in Asian capital markets. I am sure she will be a strong
addition to the Board and recommend that shareholders vote in
favour of her election at the AGM. As a Board we are always mindful
of the mix of skills and experience that we have and with that in
mind we are in the process of recruiting a fifth Director who
should be appointed in early 2024.
Shareholders can keep up to date on the performance of the
portfolio through the Company's website at www.
scottishoriental.com
The Board welcomes communication from shareholders and I can be
contacted directly through the Company Secretary at
cosec@junipartners.com
This year's Annual General Meeting ('AGM') will be held on
Thursday, 7 December 2023 at the offices of Juniper Partners
Limited, 28 Walker Street, Edinburgh. The Board looks forward to
seeing those of you who can attend the meeting in person.
Jeremy Whitley
Chairman
6 November 2023
Portfolio Managers' Report
This report addresses the following topics -
1. Company Performance
2. Key Investment Themes in Scottish Oriental's Portfolio
3. Recent Portfolio Activity
4. Ten Largest Holdings as at 31 August 2023
5. Sector & Geographic Analysis
6. Portfolio Positioning & Outlook
1. Company Performance
Scottish Oriental continued its positive performance over the
last 12 months. Its net asset value rose by 6.5% for the year ended
31 August 2023, compared to a gain of 1.8% for the MSCI AC Asia
ex-Japan Small Cap index and a decline of 8.4% for the MSCI AC Asia
Ex Japan Index. The largest contributors to performance were the
holdings in Indonesia and India. The biggest detractors from
performance were the portfolio's holdings in South Korea and the
Philippines.
Top Five Contributors
Company Country Sector Absolute Contribution
Return (Sterling) Performance
% %
------------------------- ----------- ------------------------ ------------------- -------------
Mitra Adiperkasa Indonesia Consumer Discretionary 73.7 2.6
------------------------- ----------- ------------------------ ------------------- -------------
Hisense Home Appliances Hong Kong Consumer Discretionary 129.5 2.1
Selamat Sempurna Indonesia Consumer Discretionary 55.4 2.1
Astra Otoparts Indonesia Consumer Discretionary 143.5 1.9
CIE Automotive
India India Consumer Discretionary 74.2 1.4
Mitra Adiperkasa reported strong sales and profit growth,
benefiting from the removal of movement restrictions in Indonesia
as well as changes made to its store network. The company is seeing
strong demand across its portfolio of premium discretionary retail
and food & beverage formats in Indonesia. It is also
accelerating its expansion into other ASEAN countries through
brands such as Zara and Foot Locker.
Hisense Home Appliances also reported strong operating
performance driven by its central air conditioner businesses, as
demand strengthened after Covid-19 restrictions were removed in
China, while raw material costs also declined leading to an
improvement in its profitability levels. In addition, the company
announced the formation of a new employee stock option scheme for
its management. This is a crucial step in its ownership reform,
which began in 2020. It intends to improve alignment of
shareholders with the company's management and create a stronger
performance-oriented culture.
Selamat Sempurna, the largest manufacturer of filters for
automotive and off-highway applications in Indonesia, also
delivered strong financial performance, driven by robust demand in
Indonesia and a demand recovery in some of its international
markets such as in Europe. As Selamat's product mix has improved in
favour of premium products, its profitability levels continue to
rise. The company continued to raise its quarterly dividend per
share. The management is building the company's product portfolio
to cater to applications in electric vehicles. The adoption of
electric vehicles is at an early stage in Indonesia and other key
markets of the company. The management's focus is to build a strong
position in the emerging category.
Astra Otoparts, the market leader in Indonesia's auto-components
industry, has been a major beneficiary of the recovery in
Indonesia's automotive sector. It has improved its operating
efficiency in recent years by consolidating its manufacturing
facilities and exiting joint-ventures which had delivered poor
performance. The company's balance sheet has also been strengthened
in recent years, and is currently at a net cash level. The
improvement in automotive industry demand, as well as these
changes, led to meaningful operating leverage and strong profit
growth in recent periods.
CIE Automotive India , a leading automotive component
manufacturer in India and Europe, maintained strong sales and
profit growth, driven by its Indian operations where it has signed
large new customers as well as gained market share with its
existing customers. The company was also able to pass through
higher energy costs to its customers in Europe. The management
signed an agreement to sell its German forgings plant, which earns
low levels of profitability. This decision is likely to lead to an
improvement in CIE Automotive India's return on capital employed
(ROCE).
Top Five Detractors
Absolute Return Contribution
Company Country Sector (Sterling) Performance
% %
---------------------- ------------ ----------------------- --------------- ------------
Hero Supermarket Indonesia Consumer Staples (28.3) (0.8)
Avia Avian Indonesia Materials (30.2) (0.7)
Solara Active Pharma India Health Care (29.4) (0.5)
Sarimelati Kencana Indonesia Consumer Discretionary (22.8) (0.4)
Concepcion Industrial Philippines Industrials (27.3) (0.4)
Hero Supermarket declined after it reported operating losses
(excluding property divestments) due to weak performance of its
supermarket business. The company's performance has been gradually
improving after Covid-19 restrictions were relaxed. Its network of
Guardian Health and Beauty stores achieved strong sales growth and
operating leverage. The management plans to improve inventory
management and cost controls, and develop new formats to reach more
customers.
Avia Avian has faced a challenging period over the last year.
The sharp increase in raw material costs for the paint industry was
passed on by the industry leaders to consumers through price hikes,
but this led to weaker demand. Avian has focused on accelerating
its new product launches, with a recent product launch, Avitex
Gold, receiving a strong customer response and helping the company
to gain further market share. The company has the opportunity to
lead the consolidation of the relatively fragmented paint industry
in Indonesia. The recent reduction in raw material costs is also
expected to provide a tailwind to the company's profitability
levels.
Solara Active Pharma has witnessed a period of poor
profitability, since the demand for some of its key active
pharmaceutical ingredients (APIs) declined sharply after the
pandemic. The management has partly mitigated the impact of this by
signing contracts with new customers, and expanding distribution
into new geographical markets. The company has also received
regulatory approvals for launching new products, which should
contribute to an improvement in its growth over the coming periods.
We expect Solara's performance to improve under a new CEO and CFO,
who were appointed in recent months and are leading the initiatives
detailed above.
Sarimelati Kencana was negatively affected by a period of
over-expansion of its Pizza Hut restaurant network in recent years.
The company has ceased opening new outlets and will increase its
focus on growing its sales per store and operating efficiency. The
Board has also appointed new senior management members to
strengthen the business going forward. This includes a new COO, Mr.
Lukito, who spent 17 years leading businesses at Procter &
Gamble in Asia. The management is also making changes to the store
format and revamping the menu. In recent years, the company
suffered due to the high discounting by online food aggregators,
which is now waning. This should help its competitive position as
well.
Concepcion Industrial was challenged by intense competition in
its home appliance business. This has led to margin pressure
attributed to higher costs from promotions and discounting. The
growth in the company's air conditioning business has been
resilient as the promotional activities took effect. However, this
was tempered by lower refrigerator sales, which management
attributed to reduced purchasing power and higher interest
rates.
2. Key Investment Themes in Scottish Oriental's Portfolio
Our investment approach is based on bottom-up analysis to
identify the most promising opportunities, rather than being
influenced by country or sector preferences. We invest in
businesses which are run by leaders who we feel aligned with as
minority shareholders, and have a strong track record of treating
all stakeholders fairly. This is particularly relevant in the Asian
context, where a large part of the investment universe comprises
family owned businesses. We prefer to invest with those families
and management teams that take a long-term view, build a
performance oriented culture and employ a conservative approach
towards managing risks. We look for business franchises that are
market leaders in under-penetrated categories. Our assessment is
based on their ability to navigate changes in consumer preferences,
competitive intensity and business cycles over the long term. Due
to the market leading position of these businesses, they typically
earn attractive returns on capital employed (ROCE), as they enjoy
strong bargaining power with their customers, suppliers and channel
partners. As the penetration levels of these categories grow over
time, we expect these businesses to emerge as the large companies
of the future.
Whist portfolio construction is bottom-up, by aggregating the
holdings, we observe that Scottish Oriental's portfolio is exposed
to certain key investment themes in the Asian region. The section
below details these themes, and lists examples of the portfolio's
holdings which are well positioned to capitalise on the
opportunities arising from them.
Dominant consumer staples franchises
A number of Asian countries are still highly under-penetrated
across consumer staples categories, ranging from oral care to baby
diapers. Scottish Oriental's holdings comprise businesses which
have built dominant brands in these categories. This includes
family owned businesses as well as subsidiaries of large
multi-national corporations. The categories in which these
companies operate offer attractive growth runways in the coming
years. This growth is expected to be driven by both higher volumes,
as well as the consumption of a larger share of premium products.
In many instances, premiumisation also leads to better
profitability for our portfolio holdings. Their strong brands,
built by years of consistent investment in advertising, provide the
companies with substantial pricing power, leading to high levels of
profitability and attractive terms of trade with channel partners.
29.5% of Scottish Oriental's portfolio is currently invested in
consumer staples businesses. These are brand owners which typically
have dominant market shares in their respective categories, such as
the examples described below.
Colgate-Palmolive (India) has been present in India since 1937.
Its parent, Colgate Palmolive, is its majority shareholder with a
51% stake in the company. A consistent focus on brand building,
combined with a strong distribution advantage, has cemented its
dominant position of more than 50% market share - almost 3 times as
much as its nearest competitor. The average Indian spends just 1
USD on oral care products each year, compared to USD 4 in China and
USD 11 in Brazil. Colgate's dominant market position in the country
allows it to command high levels of profitability, which it
re-invests into continued brand building efforts. Its pricing power
allows it to earn high returns on capital employed (ROCE),
averaging more than 100% in recent years. The company's management,
led by its new CEO, Prabha Narasimhan, is focused on increasing
penetration of oral care in rural areas of India where it is still
at low levels, and increasing the share of premium variants in
urban regions. The company also has the potential to expand the
product portfolio into other categories, such as personal care.
This offers Colgate a long runway for sustainable growth in
India.
Century Pacific Food is the largest canned food producer in the
Philippines. Since it listed in 2014, we have observed that its
majority shareholders, the Po family, have managed the business
with high governance standards. They also hired experienced
professional managers from companies such as PepsiCo, Unilever and
Procter & Gamble to run its operations. The canned tuna
segment, in which Century Pacific is dominant, is well penetrated
in the Philippines. This segment is used to generate substantial
cash flows. These cash flows are judiciously invested to nurture
new brands. An example of this is in the dairy segment, where the
company built its brand into the second largest in the Philippines
in a short period, and continues to gain market share from its
competitors. Similarly, the company's management has made
investments to incubate brands in areas such as pet food,
condiments and coconut based beverages, which offer a large growth
opportunity for Century Pacific in the coming years. In most of
these categories, penetration levels are lower than the company's
canned tuna business. These categories are led by brands operated
by multi-national corporations (MNCs), which typically price at
high levels, leading to an unmet need for attractively priced
alternatives. Century Pacific's products are positioned to fill
this gap, by providing quality offerings at reasonable prices to
consumers. The company has used this strategy to establish a strong
position in emerging product segments, and build a diversified
portfolio of branded food and beverage products.
Leading consumer discretionary businesses in under- penetrated
categories
In our experience, rising incomes drive a shift in consumption
patterns across countries. As penetration of consumer staples
rises, a larger share of incremental income is spent by consumers
on discretionary products, from residential real estate to home
appliances, or experiences such as entertainment and travel. Large
businesses have been built in these industries in countries that
are more economically developed. In countries like India, Indonesia
and Philippines, these categories are still at nascent stages of
development. As a result, market leaders in these industries are
still small businesses. Given the large and young populations in
these countries which aspire to consume more discretionary
products, these market leaders have the potential to grow
multi-fold over the long term.
However, some of these businesses are typically more sensitive
to the macro-economic environment and are cyclical. Due to the
large opportunity size, management teams can also often get carried
away, taking unnecessary risks. We focus on investing behind those
management teams which employ a conservative approach towards
growth. Scottish Oriental's holdings are businesses which have
witnessed several economic cycles in the past, and have emerged
from these cycles with stronger market positions. This is due to
their conservative balance sheets (which are typically net cash),
and a focus on managing costs efficiently. The recent period,
marked by the pandemic, is one such instance when demand across
several consumer discretionary categories in Asia was severely
disrupted. Market leaders in Scottish Oriental's portfolio emerged
out of this period with higher market shares, as many small
competitors with lack of access to finance and limited investments
in technology, struggled to survive. As demand has recovered, our
holdings are now capturing a large part of the growth in their
respective categories' profit pool. Such consumer discretionary
businesses comprise 22.2% of Scottish Oriental's portfolio.
Mitra Adiperkasa ('MAPI') operates the exclusive franchises for
leading global retail and food & beverage (F&B) brands in
Indonesia such as Zara and Starbucks, with over 2,500 stores.
During a period of strong growth in the 2010s, management expanded
its store footprint aggressively. When demand weakened in
subsequent years, the company suffered from a decline in
profitability as well as high debt levels. This led to a strong
focus on cost efficiency and efforts to strengthen the balance
sheet. The management shut down poor performing brands, sold stakes
in certain ventures to private equity investors to de-leverage the
balance sheet and became more conservative in its growth strategy.
These initiatives have delivered results, with improvements in
growth, margins, working capital and a net cash position currently.
After movement restrictions were lifted in Indonesia, Mitra
Adiperkasa has benefited from a sharp rebound in domestic demand.
The company's relationship with its principals has also
strengthened. Given MAPI's success in Indonesia, several key brands
such as Zara and Foot Locker have invited the company to lead their
expansion in other ASEAN markets. Even as this increases the
company's total addressable market, the company's management is
pursuing this expansion cautiously. Their focus is on sustaining
MAPI's attractive return on capital employed, while growing the
business steadily.
Blue Star is a leading air conditioner and heating, ventilation
and air conditioning (HVAC) company, with a history of operating
for eighty years in India. The business is controlled by the Advani
family, which founded the company and continue to lead its
operations. Vir Advani, from the third generation of its founding
family, was appointed CEO in 2016. Under his leadership, the
company has gained market share in the residential air-conditioner
category consistently, emerging as one of the largest brands in the
country. Air conditioning penetration is low in India, at only 8%
compared to over 70% in China. This offers potential for
substantial growth for Blue Star as income levels rise. The company
also operates a large HVAC projects business, installing and
maintaining systems in hospitals, stadiums and underground rail
networks. The company has consciously focused on limiting its
investment in this capital intensive segment, and selected
customers carefully, which has allowed Blue Star to grow the
business consistently while maintaining high return on capital. As
the business achieves larger scale, it also has the opportunity to
significantly improve its profitability levels by gaining operating
leverage.
Radico Khaitan is one of the largest spirits companies in India,
also established eighty years ago. In India, the spirits industry
is dominated by whisky, which is a highly competitive market with
multinational corporations including Diageo and Pernod Ricard
having a large presence. While Radico has a strong presence in
whisky, its management identified the unmet need in other spirit
segments, including vodka, gin and rum. The company has built
dominant brands in these categories, competing successfully against
global leaders. For example, its flagship product in vodka, Magic
Moments, is dominant with 60% share of vodka consumption in the
country. Over the last fifteen years, the management's focus has
been to increase the share of premium products in its portfolio. As
of Fiscal Year 2023, 58% of its Branded Spirits sales come from
premium products, compared to the industry average of 20-25%. Given
the strong demand and ability to successfully incubate new brands,
the company has embarked upon a new capital expenditure program to
expand capacity and to backward integrate to facilitate more
control over its ingredients for higher quality products. This
should deliver strong growth as well as improving profitability for
Radico in the coming years.
JNBY Design is a leading premium fashion apparel brand in China
with multiple brands targeting different demographics. The acronym
stands for "Just naturally be yourself," and the firm's strategy is
to create unique designs which encourage individual expression.
Founded in 1994, the company has built a long track record of
scaling its core JNBY brand while improving profitability. We are
closely aligned with the original husband-and-wife founders, who
still own a majority stake in the company and also lead its
operations. JNBY's performance has been resilient during the
industry challenges of recent years. This has been achieved by
focusing on organic growth and building digital distribution
channels while remaining disciplined on inventory levels and
discounting policies. The management has also focused on
consistently improving the efficiency levels of its stores, which
has helped in maintaining the company's high profitability levels
despite subdued consumer demand due to a weak macro-economic
environment. As China emerges from the pandemic, we expect demand
to improve gradually. JNBY has the potential to grow its core brand
steadily, while also scaling up smaller brands. The management has
a track record of disciplined capital allocation, with a focus on
returning capital to shareholders through a high dividend payout
ratio. We expect this to continue going forward.
High quality industrial suppliers
It is expected that industrial activity and infrastructure
development will witness strong growth across most Asian countries
in the coming years. However, we observe a number of challenges in
these industries. The business model for infrastructure development
in most Asian countries is dependent on Government contracts or
licenses. Obtaining the license or contract often involves corrupt
practices which are unacceptable to us. The terms of these
contracts can also be changed arbitrarily and payments can be
delayed by the customer (the relevant Government authority). In the
case of large industrial or mining companies, we find many
instances where the businesses are run to maximise scale rather
than profitability. The cyclicality of these industries and the
high levels of asset intensity, often lead to low returns on
capital employed. We have avoided investing in such businesses.
Scottish Oriental's portfolio comprises industrial businesses which
are suppliers to infrastructure developers, miners or heavy
industries, which benefit from the same growth opportunities, but
are likely to achieve this without the risks mentioned above. Some
of these
companies offer products which are critical for their customers'
operations but are a low share of their customers' total
manufacturing cost. This gives their customers low incentive to
switch to alternative suppliers. In other instances, the business
model is based on developing customised applications for different
customer segments which acts as a barrier to entry for new
competitors. Such advantages allow these companies to earn
attractive returns on capital. These high quality industrials
comprise 9.3% of Scottish Oriental's portfolio.
Sinoseal is the market leader in the niche mechanical sealing
equipment segment in China. Mechanical seals are essential
components used in various industries, including oil and gas,
chemicals and pharmaceutical manufacturing. They are
mission-critical industrial consumables that operate in harsh
environments, and their low price compared to the total project
cost means customers are less price-sensitive. A malfunctioning
seal can lead to safety issues or a shutdown in production, which
creates high barriers to entry and an oligopoly market structure.
The low price-sensitivity of its customer base, along with the
consolidated market, allows Sinoseal to earn high levels of
profitability. It is also a consumable product, which drives a
recurrent after-market business. Sinoseal has consistently focused
on improving its product quality, which is now on par with
multinationals, while enjoying a much lower cost base than foreign
peers. It has consistently gained market share as customers
increasingly prefer to use domestic suppliers. The company is also
expanding into new end markets as well as building a larger export
business, as many of its existing customers are building
manufacturing facilities outside China.
Sinbon Electronics is a Taiwanese manufacturer of mechanical
cables. The company historically operated in the highly competitive
consumer electronics cable segment, which had low levels of
profitability. It gradually exited the segment and built a large
portfolio of cables for industrial, renewable energy,
communications, automotive and medical applications. The company's
products are customised for each application, ranging from robots
used to sort inventory in warehouses to wind turbines and medical
equipment. This requires a large product portfolio, and close
relationships built with customers over decades to develop cables
for new applications. Sinbon has built a strong reputation as a
reliable supplier. This requirement for customised applications as
well as long lead times for approval from customers leads to
limited competition, allowing the company to earn attractive levels
of profitability. The management has also been proactive in
entering new industries, ranging from electric vehicle charging
stations to aerospace, which can become large segments for the
company in future.
Hongfa Technology is the largest industrial relay manufacturer
globally. Its product portfolio covers traditional applications
such as home appliances and electricity meters, as well as emerging
applications like electric vehicles (EVs), solar modules, and
internet of things (IoT) devices in manufacturing. Over the past
decade, the company has emerged from being a relatively small
player, to being the dominant player in its home market of China,
as well as establishing strong relationships with many global
customers. The key drivers of this improvement in its market
position have been the company's focus on the relay market, while
its major competitors like Panasonic have varied businesses. Hongfa
also benefited from the substantial scale of the home appliance
industry in China, which allowed the company to scale up its own
business and reduce fixed costs. This cost benefit is passed on to
its customers to gain market share. In emerging areas such as
renewable energy and electric vehicle applications, Hongfa is
expected to benefit from strong growth as well as higher
profitability, as the average selling price of relays in these
segments are higher compared to that of their traditional
applications.
Specialised financial services providers
The financial services industry is dominated by large banks and
insurance companies which sit outside the investment universe of
smaller companies. Smaller universal banks and non-bank finance
companies which compete directly against these large institutions
typically face challenges including higher funding costs, inferior
technology systems and difficulty in retaining clients. Instead of
investing in such universal banks or finance companies, Scottish
Oriental's portfolio comprises specialised lenders which have
remained focused on a few categories where they have strong domain
knowledge to compete against larger banks. They manage their
balance sheets conservatively, while maintaining consistently
strong asset quality. The financial services opportunity beyond
lending is growing rapidly in Asia. This includes services such as
wealth management, mutual funds and insurance products, which are
still highly underpenetrated in most Asian countries. Holdings in
Scottish Oriental's portfolio, including the largest registrar and
transfer agent for mutual funds, and the leading wealth management
platform in India, are expected to benefit from this opportunity.
Such specialised financial services businesses comprise 10.1% of
Scottish Oriental's portfolio.
Computer Age Management is India's largest registrar and
transfer agent of mutual funds with a market share of 70%. It is a
dominant player in a duopoly, and has gained market share
consistently over the past decade. Its value lies in allowing its
asset management clients to focus on their core business while
optimising costs. Its efficient service levels and reputation for
compliance has meant that the company has not lost any clients over
this period and has relationships with the leading asset management
companies. The company has attractive growth potential, as Indian
households increase their investments in mutual funds from a low
base currently. The management has built a large physical presence
in India through its branches and a strong technology platform on
which it is now building new businesses such as Account
Aggregation, Alternative Investment Funds (AIFs) and an insurance
repository. Its asset light business model allows it to earn high
margins, with its return on capital employed (ROCE) in excess of
100%.
360 One is India's largest independent wealth management
company. It offers a range of services to high-net-worth
individuals and caters to different segments of this growing
market. Historically, wealth management has not been a large sector
in the financial services industry in India. With higher levels of
formalisation in the economy, as well as generational change among
high net-worth families, there is a greater adoption of wealth
management platforms. Over the last fifteen years, the management
of 360 One, led by the founder Karan Bhagat who still leads
operations as its CEO, has built a solid track record of serving
clients and adhering to best practices in risk management and
compliance. In recent years, the management's focus has been on
increasing the share of recurring business (compared to more
volatile transaction based revenues), which is likely to improve
the consistency of the company's profitability. The wealth
management industry remains fragmented in India, and 360 One has
the potential to lead the industry's consolidation in the coming
years. This creates an attractive growth opportunity for the
company.
TISCO Financial ('TISCO') is a financial services group based in
Thailand. Unlike its larger universal banking peers, TISCO's loan
portfolio is focused on niche segments such as automotive
hire-purchase loans. The company has a conservative lending
philosophy and a strong focus on risk management. In recent years,
despite low lending spreads and high non-performing loans, its
larger peers expanded their loan portfolios consistently. This has
led to a weak balance sheet and poor returns on assets for the
large Thai banks. In contrast, over the last decade, TISCO has
contracted its loan book to avoid diluting its asset quality and
return on assets. The bank's management has focused on returning
capital to shareholders through a high dividend payout, while also
maintaining a strong capital position. The company has consistently
earned high return on assets, while most of its peers have
struggled. As the competitive intensity reduces due to the poor
asset quality of the large banks, TISCO now has an opportunity to
grow in its preferred lending segments. Its management is now
pursuing steady growth, while maintaining its profitability
levels.
Technology hardware providers and software service companies
Technological intensity is rising across industries globally,
which is expected to drive growth for hardware and software
companies engaged in the technology value chain in Asia. However,
we are cautious about a few risks common to companies operating in
this industry. Firstly, a number of smaller companies in the
technology hardware supply chain operate as contract manufacturers
for their customers. This gives them limited bargaining power, with
their customers demanding annual reductions in their selling prices
and long payment terms. Secondly, many of these companies have
faced a period of strong cyclical demand over the last few years,
as several categories witnessed strong demand and constrained
supply during the pandemic. This allowed such companies to earn a
period of exceptional profitability. In our experience, such growth
and profitability is unlikely to be sustainable as demand in these
industries moderates. Finally, we are cognisant of risks emanating
from technology adoption cycles and disruptions, which are
unpredictable. Given the substantial increase in valuations for
many such companies in recent periods, Scottish Oriental's exposure
to such businesses has reduced. However, we continue to find
attractively valued software services companies in countries such
as India and Vietnam, which are likely to benefit from the
continued
migration to cloud services and digitisation across industries.
Our investments also include integrated circuit designers based in
Taiwan and China, which have strong market positions in their niche
categories, asset light business models and are gaining market
share from smaller competitors or multi-national corporations. Such
businesses currently comprise 5.1% of Scottish Oriental's
portfolio.
Mphasis is a leading software services provider based in India
with a strong global presence, with the United States of America
being its largest market. It offers a comprehensive range of
services, including application development, infrastructure
management, and digital transformation solutions to its clients.
This allows Mphasis to serve a wide range of industries and
clients, with a reputation for delivering high-quality solutions
and services. The company witnessed a change in its ownership and
management since 2016, when Blackstone acquired Hewlett Packard's
majority stake in the business. Blackstone appointed a new CEO,
Nitin Rakesh, under whose leadership the business has been
transformed. Mphasis has been able to build relationships with
leading financial institutions globally, gaining market share from
much larger software service providers. The management has also
built a presence in new regions like Europe and Canada, which
supports the company's long term growth prospects. The management
has embraced emerging technologies, such as artificial intelligence
applications and automation, which should lead to more growth
opportunities going forward.
FPT is a leading Vietnamese technology company providing IT
services, software development, and digital transformation
solutions. The company also has a fixed line broadband business,
and runs educational institutions, which it uses to recruit well
trained software engineers. The company was founded in 1988 to
provide technology solutions for the food industry, and has since
expanded into a diversified IT corporation. Today, it has a solid
competitive position in the global IT services market, especially
in Japan where it is gaining share from domestic software service
providers as well as Chinese vendors. In recent years, the company
has made investments to build capabilities in the United States of
America, which offers a substantial opportunity for its business in
the coming years. It has also consistently increased the share of
its digital technology business, which has boosted the company's
profitability. The company benefits from a strong talent pool in
Vietnam, given the steady growth in the number of computer
engineers, and offers affordable courses to meet the rising demand
for quality education in the country.
Parade Technologies is an integrated circuit designer based in
Taiwan, specialising in display technologies for various electronic
devices. It has built leading market shares in its key products,
such as high-speed interface integrated circuits and embedded
display port timing controllers. The management has also built
strong relationships with large customers such as Apple, with which
Parade has maintained a monopoly position in certain products. The
key industry tailwind is the increasing speed of data transmission
across devices. Higher speeds require new products, which drive
higher prices and better profitability for Parade. The company is
also a first mover in building new products with applications in
servers and automobiles, which we expect to grow into large markets
in the coming years.
3. Recent Portfolio Activity
New Holdings
The resumption of travel across all major Asian countries
allowed our team members to visit companies in each of Scottish
Oriental's key markets during the last year. These visits helped
inform our views on the development of various economies after the
recent period of disruption driven by Covid-19. It also allowed us
to meet management teams across our investment universe, which led
to the generation of several new investment ideas during the year.
We added 12 new holdings to the portfolio.
Metropolis Healthcare is a leading diagnostics company in India,
where the industry is highly fragmented and dominated by 'mom and
pop' laboratories. We think the company has the opportunity to lead
the industry's consolidation over the long term. Metropolis was
held in the Trust after it listed in 2019, but we sold out after
valuations re-rated amid exceptional profitability during Covid-19,
when demand for its diagnostics services rose sharply. Since then,
its valuations have moderated significantly as Covid-19 testing
requirements eased. The management is taking several initiatives to
improve growth over the medium-term, such as building the
preventive diagnostics segment of the business, building a stronger
platform to engage digitally with customers and accelerating its
network expansion. The industry's competitive intensity, which was
led by loss-making start-ups which had entered over the last few
years, also appears to be waning. This should further support the
improvement in Metropolis' profitability.
Mphasis is a leading information technology outsourcing company
in India, which was set up by Hewlett Packard in 2000. Blackstone
acquired a majority stake in the company in 2016. The new owner
installed a new management team led by CEO Nitin Rakesh, under
whose leadership the business has transformed over the last seven
years. The company invested in building capabilities in new
segments and signed contracts with large new clients. It also
expanded its geographic footprint by building a larger business in
Europe. This has led to consistent growth in Mphasis' revenue and
profits in recent years. Its asset-light business model allows the
company to earn high returns on capital employed as well. As the
demand for cloud computing and digital transformation moderated
after Covid-19, the company's growth slowed down and its valuations
reached attractive levels, we initiated a holding in the company.
Mphasis' growth potential remains strong, as it continues to gain
market share with key customers as well as scale up new business
verticals.
Fila Holdings is the owner of the Fila brand globally, which the
company operates directly in South Korea and the United States, and
has franchised in other markets. It also owns a majority stake of
52% in Acushnet, the owner and operator of Titleist branded golf
equipment, and has a 15% stake in a joint-venture with Anta Sports
to manufacture Fila branded products in China. The company has
taken actions to strengthen the Fila brand in recent years,
including hiring senior management from leading global sportswear
groups such as Nike, Adidas and Under Armour. The distribution
channel is changing from wholesale to directly operated retail
stores and e-commerce in US and South Korea, which should aid
Fila's profitability. The balance sheet is net cash and the company
has announced a new shareholder return policy, which should lead to
a substantial increase in dividends and share buybacks in the
coming years.
Tokai Carbon Korea is the dominant manufacturer of Silicon
Carbide (SiC) rings, which are used as a consumable product in
semiconductor manufacturing. The company has a monopoly position in
supplying SiC rings to leading global customers. This has allowed
it to earn high levels of profitability. The memory industry, in
which SiC rings are used, is expected to grow steadily over the
next decade as technological intensity increases, driven by
applications such as artificial intelligence. The company's
management is also developing new product categories such as
Titanium Carbide susceptors.
Whirlpool of India is the 75% owned subsidiary of Whirlpool
Corporation, and has a strong position in several consumer durable
products in India such as refrigerators, washing machines and air
conditioners. It has had a presence in the country for thirty five
years, and has established a track record of consistent growth
along with high return on capital employed (ROCE). Each of its
categories has relatively low penetration levels compared to other
emerging markets, which offers an attractive growth opportunity.
Recently, the company also acquired a local kitchen appliances
brand, Elica, which has provided Whirlpool with an opportunity to
enter a large category where it did not have a presence in India.
We expect the company's management to strengthen its market share
and improve profitability over the medium term.
Hongfa Technology is the largest relay maker globally with a
strong market position and impressive growth prospects. Its product
portfolio covers traditional applications such as home appliances
and power meters, as well as growth opportunities in new
applications like electric vehicles (EVs), solar, and internet of
things (IoT). It has been gaining share from major competitors due
to its focus on relay, large global scale which provides the
company a substantial cost advantage and proactive customer project
management. As new segments such as renewable energy and new energy
vehicles gain adoption globally, this offers Hongfa a large growth
opportunity in the coming years.
Biocon is a leading Indian pharmaceutical company, with
operations in generics, biosimilars and contract development &
manufacturing (CDMO). In recent years, the company has increased
its focus on the biosimilars business, which it has been operating
since 2007. It was operated in partnership with Viatris (a global
pharmaceutical company) in the past. Biocon acquired Viatris for
US$ 3.3 billion last year. This will allow the company to control
the manufacturing as well as distribution for its biosimilars,
without relying on a partner. The global biosimilar market is large
and expected to grow steadily as an increasing number of patented
drugs will lose patent protection. The company also has a strong
track record of regulatory compliance with the US FDA. A strong
R&D focus and regulatory approvals should allow Biocon to
launch new products in the coming years and scale up the
business.
Luk Fook Holdings is a leading jewellery retailer in Hong Kong
and mainland China, founded by the Wong family which still leads
the company's operations and owns a controlling stake. The
company's footprint in China is large with 2,700 franchisee-owned
stores and has been expanding consistently. Luk Fook has suffered
from a period of weak demand due to lower customer footfall and
fewer social occasions such as weddings in China. However, the
company continues to gain market share from small, unorganised
sector competitors which have struggled during this challenging
period. Demand should improve after the removal of Covid-19
restrictions as well as a resumption in travel to Hong Kong and
Macau, where the group also operates a large store network. Over
the long term, the management expects to more than double its store
count in China, which will drive the company's growth.
Crompton Greaves Consumer Electricals is an Indian maker of
electrical consumer durables, such as fans, water heaters and
pumps, as well as lighting. It has strong market positions across
all its key product segments. The company's asset-light operations
allows it to earn high return on capital employed (ROCE) and
substantial free cash flow. The company's new management plans to
extend the strong brand of Crompton into new categories, such as
kitchen appliances, to accelerate its revenue and profit growth in
the coming periods.
Silergy is the largest analogue integrated circuit (IC) designer
in Asia. Despite being the leading Asian power management IC design
company, its market share in the highly fragmented Chinese industry
remains low. Since the trade war was initiated in 2018, Silergy's
major customers have been shifting towards domestic IC designers.
Silergy is well positioned to capture a large part of this change
in customer preferences. Its founders, one of whom continues to
lead its operations, are focused on building a comprehensive
product portfolio to compete effectively against global leaders.
This has strengthened the company's competitive position against
global peers such as Texas Instruments, and Silergy has
consistently gained market share in recent years. The company has
faced a sharp decline in demand over the last year, as global
consumer electronics demand deteriorated after Covid-19. In this
period, management has reduced costs. As demand is expected to
recover in the coming years, Silergy should witness a period of
strong growth and an improvement in its profitability.
Delhivery is the largest third party logistics (3PL) company in
India and primarily serves the e-commerce industry, which is
expected to grow rapidly as penetration of the category rises from
its nascent stage currently. Unlike most "new-age" internet
businesses, the company has a profitable core business and a strong
and stable management team. Delhivery has built a market leading
position, which allows it to gain substantial economies of scale
against its smaller competitors. This creates a virtuous cycle, as
the company passes on part of its lower costs to its customers, in
order to gain market share. The company has the potential to
consolidate the fragmented logistics industry, as well as enter
adjacent service segments.
AirTac International is a leading pneumatic components producer
in China. The founder, Mr. Wang Shih Chung, continues to lead
AirTac as its Chairman. AirTac has consistently built a diversified
product portfolio, maintained low costs, and offers prompt service
levels to its customers. This has helped the company to build a
strong market position and gain market share consistently, despite
the presence of large global competitors. Its long term track
record of growth and returns on capital employed are also strong.
The management is now focused on creating new revenue streams such
as linear guides, which could be a large growth opportunity in the
coming years.
Sales
We sold 12 holdings during the year. KEI Industries, CIE
Automotive India, Haitian International, Arwana Citramulia,
Sporton, Bosch and Autobio Diagnostics were sold as their
valuations became expensive following strong performance and share
price appreciation. Mobile World, Voltronic Power and Eicher Motors
were small positions, and were sold to consolidate the portfolio
into higher-conviction opportunities. Ace Hardware was sold after
our conviction in its growth prospects was reduced, following
recent engagements with management regarding their response to the
increasing competition from e-commerce platforms. Zinus was also
sold after our recent engagements left us with lower conviction in
its business outlook. Zinus' announcement of a provision related to
a product litigation raised concerns about its quality standards.
The management's focus on achieving scale makes us believe that
this will prevent an improvement in the company's cash flow and
also raises risks of more quality related issues in the future.
Purchased and subsequently sold
ASM Pacific Technology is a leading back-end semiconductor
testing equipment manufacturer. The recent cyclical downturn across
the semiconductor value chain has affected its growth in recent
quarters and its valuations declined to attractive levels. Higher
penetration of electronics across automotive, industrial and
consumer applications is expected to drive sales of its equipment
over the long term. We initiated a holding for the Trust given its
attractive valuations. Subsequently, its valuations increased
sharply due to expectations of a strong improvement in demand, as
well as ASM's position in servicing some artificial intelligence
applications. However, performance across most of its businesses
remains muted, due to continuing weak demand across consumer
electronics categories. As its valuations became less attractive,
we sold Scottish Oriental's holding
Amorepacific Corporation operates several cosmetics brands. The
company has a strong presence in China as well as in duty-free
stores at airports which form a large part of its sales. Both of
these channels have been severely impacted by reduced travel and
weak consumer demand. The company's performance was also hurt by
increasing competition from local brands in China. To address this
issue, the company hired new senior management and optimised its
store network by shutting down poor performing stores in China. We
initiated a position in the company when its valuations were
attractive due to the concerns of weak demand in China.
Subsequently, the re-opening of the Chinese economy and expectation
of higher travel related spending led to a sharp increase in the
company's valuation. We sold Scottish Oriental's holding as the
recovery in the business is likely to be slow, given the intense
competition from local competitors as well as multinationals in
China, which forms a large share of Amorepacific's business.
4. Ten Largest Investments as at 31 August 2023
Name of Holding Country Sector % of Shareholders'
Funds
Colgate-Palmolive
(India) India Consumer Staples 6.0
---------------------------- ----------------- ------------------------ -------------------
Colgate is the market leader in the oral care segment in India,
with about 50% market share in the toothpaste category. It
also has potential to build a larger presence in segments such
as personal care.
Selamat Sempurna Indonesia Consumer Discretionary 4.2
---------------------------- ----------------- ------------------------ -------------------
Selamat is the leading manufacturer of filters and radiators
in Indonesia. Through its joint venture with Donaldson (based
in the United States of America), it also exports products
to global markets. Selamat has the potential to consolidate
the fragmented domestic industry and enter new segments such
as air and water filters, which have a large addressable market.
Uni-President China China Consumer Staples 4.2
---------------------------- ----------------- ------------------------ -------------------
The company operates leading instant noodle and beverage brands
in China. Its management is focused on launching premium products
which earn higher margins, while strengthening the company's
distribution in emerging channels.
Godrej Industries India Materials 4.0
---------------------------- ----------------- ------------------------ -------------------
Godrej Industries is a holding company, which owns stakes in
Godrej Consumer Products, Godrej Properties and Godrej Agrovet.
Its subsidiaries and associates operate leading businesses
in segments such as hair colour, household insecticide, real
estate and crop protection products
Century Pacific
Food Philippines Consumer Staples 3.9
---------------------------- ----------------- ------------------------ -------------------
Century Pacific is the largest canned food producer in the
Philippines. The company is gaining traction in emerging categories
such as milk and pet food products which should drive steady
growth over the medium term.
Kansai Nerolac
Paints India Industrials 3.5
---------------------------- ----------------- ------------------------ -------------------
Kansai Nerolac is a leading paint company with a dominant market
share in automotive paints in India. Under a new CEO, the company
has also taken several initiatives to improve its market position
in decorative paints, by launching several new products, engaging
with channel partners and expanding its distribution.
Blue Star India Industrials 3.4
---------------------------- ----------------- ------------------------ -------------------
Blue Star operates one of the leading air-conditioner brands
in India, which has been gaining market share consistently.
The company executes engineering, procurement and construction
(EPC) projects as well which are expected to grow with industrial
and infrastructure development.
Philippine Seven Philippines Consumer Staples 3.4
---------------------------- ----------------- ------------------------ -------------------
It is the leading convenience store operator in the Philippines,
with the exclusive right to use the 7-Eleven brand in the country.
Philippine Seven is expected to lead the development of the
convenience store industry in the country, as penetration is
still at low levels.
Castrol India India Materials 2.8
---------------------------- ----------------- ------------------------ -------------------
Castrol is the largest Indian automotive lubricants company.
The company is 51% owned by British Petroleum (BP). The management
is taking numerous steps to accelerate Castrol's growth, such
as entering new product segments in its core business, expanding
distribution as well as launching products and services in
adjacent categories.
Mitra Adiperkasa Indonesia Consumer Discretionary 2.8
---------------------------- ----------------- ------------------------ -------------------
Mitra Adiperkasa franchises for leading global brands including
Zara, Starbucks, Domino's and Sephora in Indonesia. It serves
as a proxy for consumer spending in Indonesia, due to its leading
market positions across specialty fashion, sports and F&B segments..
5. Sector & Geographical Analysis
Sector % Shareholder's Funds
2023 2022
----------- -----------
Consumer Staples 29.5 28.3
----------- -----------
Consumer Discretionary 22.2 32.1
----------- -----------
Materials 16.4 13.0
----------- -----------
Financials 10.1 9.1
----------- -----------
Industrials 9.3 9.8
----------- -----------
Healthcare 5.8 2.6
----------- -----------
Technology 5.1 4.5
----------- -----------
Real Estate 4.2 5.0
----------- -----------
Utilities 2.2 2.9
----------- -----------
Logistics 0.3 -
----------- -----------
Net Current Assets 4.4 2.3
----------- -----------
Non-Current Liabilities (9.5) (9.6)
----------- -----------
Country Allocation at 31 August 2023 (based on geographical area
of activity)
Scottish Scottish MSCI Small
Oriental Oriental Cap(1) MSCI(2)
2023 2022 2023 2023
Country/Region % % % %
China 11.7 13.6 8.5 34.4
---------- ---------- ------------ ---------
Hong Kong 5.1 4.6 4.5 6.3
---------- ---------- ------------ ---------
Taiwan 4.8 8.0 24.0 17.3
---------- ---------- ------------ ---------
Greater China 21.6 26.2 37.0 58.0
---------- ---------- ------------ ---------
Indonesia 17.7 21.9 2.5 2.3
---------- ---------- ------------ ---------
Malaysia - - 2.8 1.6
---------- ---------- ------------ ---------
Philippines 9.6 9.2 1.0 0.7
---------- ---------- ------------ ---------
Singapore 2.6 3.1 5.3 3.7
---------- ---------- ------------ ---------
Thailand 1.6 0.9 3.9 2.3
---------- ---------- ------------ ---------
Vietnam 1.8 2.0 - -
---------- ---------- ------------ ---------
South East Asia 33.3 37.1 15.5 10.6
---------- ---------- ------------ ---------
Bangladesh 0.9 1.2 - -
---------- ---------- ------------ ---------
India 45.2 40.7 29.8 17.1
---------- ---------- ------------ ---------
Pakistan 0.3 0.8 - -
---------- ---------- ------------ ---------
Indian Subcontinent 46.4 42.7 29.8 17.1
---------- ---------- ------------ ---------
South Korea 3.8 1.3 17.7 14.3
---------- ---------- ------------ ---------
Net Current Assets 4.4 2.3 - -
---------- ---------- ------------ ---------
Non-Current Liabilities (9.5) (9.6) - -
---------- ---------- ------------ ---------
Net Assets 100.0 100.0 100.0 100.0
---------- ---------- ------------ ---------
(1) Morgan Stanley Capital International AC Asia ex Japan Small
Cap Index
(2) Morgan Stanley Capital International AC Asia ex Japan
Index
6. Portfolio Positioning & Outlook
We noted varying economic outlooks during our recent visits to
companies across Asian countries. The operating environment for
businesses in China is difficult, with regulatory disruptions in
industries such as healthcare and e-commerce, as well as the
challenges emerging in the real estate industry. Large economies
which are driven by exports to Western markets, including South
Korea and Taiwan, are also facing cyclical challenges as demand
across the global technology supply chain is weak. In contrast,
businesses in countries such as India and Indonesia, whose revenues
are largely driven by domestic demand trends, are witnessing
stronger prospects as their economies have recovered from the
pandemic. These countries saw a period of relatively weak economic
growth during the previous decade. In this period, businesses
de-leveraged their balance sheets and the governments of these
countries introduced various reforms. Their stronger financial
position and the formalisation of the economy has helped the
market-leading organised sector companies to gain market share from
their competitors in the informal sector. This provides a tailwind
to Scottish Oriental's holdings, with companies in India and
Indonesia comprising over 60% of the portfolio.
Scottish Oriental's investment philosophy has remained unchanged
since inception. While we are cognisant of macro-economic
challenges, political and sectoral influences, these do not drive
our investment decisions. The manager's focus remains on finding
well run businesses with solid long-
term growth prospects available at attractive valuations. Our
investment universe of smaller companies in Asia has grown
consistently in recent years. In fact, there are now over 11,500
companies in Asia (ex-Japan, Australia and New Zealand) between US$
100 million and US$ 5 billion in market capitalisation. This
universe of companies has grown by 26% over the last 5 years*.
Scottish Oriental's active watch-list of companies, which we
regularly monitor, has also grown consistently in size as our
coverage has expanded and new businesses have been listed in Asia.
The market-leading businesses in which we prefer to invest have
emerged out of the pandemic with stronger competitive positions
than before. We expect them to capture a greater share of the
growth in their respective industries' profit pools in the coming
years.
We are excited about the outlook for the portfolio. It remains
concentrated among our highest conviction holdings, with the top 20
holdings comprising 60% of the portfolio. The median return on
equity of the portfolio has consistently improved, which indicates
the strong earnings quality of the holdings. At a median level, the
portfolio's holdings continue to maintain a net cash balance sheet,
which makes them more resilient against the ongoing challenge of
higher finance costs. The portfolio's forecasted growth has
moderated from the high base of recent years, which was largely due
to the reopening of economies after the pandemic. On a normalised
base, the portfolio's holdings continue to offer attractive growth
opportunities in the years ahead. In addition, the valuations, in
the context of the attractive growth potential and high returns on
equity, appear to be at acceptable levels.
As at 31 August 2017 2018 2019 2020 2021 2022 2023
Weight of top 10% holdings 25.1% 29.2% 29.6% 31.6% 31.8% 39.2% 38.2%
------ ------ ------ ------ ------ ------ ------
Weight of top 20% holdings 44.0% 50.8% 50.4% 52.4% 54.8% 63.1% 60.4%
------ ------ ------ ------ ------ ------ ------
Weighted average Return
on Equity 13.6% 15.0% 16.3% 15.9% 15.3% 18.8% 19.2%
------ ------ ------ ------ ------ ------ ------
Weighted average 2-year
forecast annualised EPS
growth 14.2% 7.3% 1.5% 8.6% 34.1% 21.2% 17.6%
------ ------ ------ ------ ------ ------ ------
Weighted average forward
P/E 20.5x 26.8x 15.0x 24.9x 23.0x 17.4x 18.3x
------ ------ ------ ------ ------ ------ ------
*Source: Bloomberg
FSSA Investment Managers
6 November 2023
Income Statement for the year ended 31 August 2023 (audited)
2023
2022
Revenue Capital Total* Revenue Capital Total*
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Gains on investments - 22,540 22,540 - 26,452 26,452
Income from investments 8,411 - 8,411 9,238 - 9,238
Other income 42 - 42 1 - 1
Investment management
fee (2,549) - (2,549) (2,453) - (2,453)
Performance fee - (2,247) (2,247) - - -
Currency losses - (713) (713) - (21) (21)
Other administrative
expenses (697) - (697) (698) - (698)
-------- -------- -------- -------- -------- --------------
Net return on ordinary
activities before finance
costs and taxation 5,207 19,580 24,787 6,088 26,431 32,519
Finance costs (835) - (835) (835) - (835)
-------- -------- -------- -------- -------- --------------
Net return on ordinary
activities before taxation 4,372 19,580 23,952 5,253 26,431 31,684
Tax on ordinary activities (876) (2,677) (3,553) (901) (1,803) (2,704)
-------- -------- -------- -------- -------- --------------
Net return attributable
to equity
shareholders 3,496 16,903 20,399 4,352 24,628 28,980
-------- -------- -------- -------- -------- --------------
Net return per ordinary
share 14.19p 68.60p 82.79p 16.66p 94.26p 110.92p
* The total column of this statement is the Profit & Loss
Account of the Company. The revenue and capital columns are
supplementary to this and are prepared under guidance published by
the Association of Investment Companies.
There are no items of other comprehensive income, therefore this
statement is the single statement of comprehensive income of the
Company.
The Board is proposing a final dividend of 13.0p per share for
the year ended 31 August 2023 (2022: 14.0p, inclusive of a special
dividend of 1.0p) which, if approved at the AGM, will be payable on
12 January 2024 to shareholders recorded on the Company's
shareholder register on 1 December 2023.
All revenue and capital items derive from continuing
operations.
Summary Statement of Financial Position as at 31 August 2023
(audited)
2023 2022
GBP'000 GBP'000 GBP'000 GBP'000
Investments held at fair value through
profit or loss 372,660 368,442
Current Assets
Debtors 1,052 1,421
Cash and deposits 18,089 7,490
--------- ---------
19,141 8,911
Current Liabilities (due within
one year)
Creditors (3,572) (1,145)
--------- ---------
(3,572) (1,145)
Net Current Assets 15,569 7,766
Non-Current Liabilities
Deferred tax liabilities on Indian
capital gains (3,820) (3,184)
Loan notes (29,832) (29,822)
--------- ---------
(33,652) (33,006)
---------- ----------
Total Assets less Liabilities 354,577 343,202
========== ==========
Capital and Reserves
Ordinary share capital 7,853 7,853
Share premium account 34,259 34,259
Capital redemption reserve 58 58
Capital reserves 304,661 293,325
Revenue reserve 7,746 7,707
---------- ----------
Total Equity Shareholders' Funds 354,577 343,202
========== ==========
Net asset value per share 1,455.58p 1,382.93p
Cash Flow Statement for the year ended 31 August 2023 (audited)
2023 2022
GBP'000 GBP'000
Net cash outflow from operations before
dividends, interest, purchases and sales
of investments (3,254) (3,189)
Dividends received from investments 8,894 9,018
Interest received from deposits 42 1
---------- ---------
Cash inflow from operations 5,682 5,830
Taxation (971) (905)
---------- ---------
Net cash inflow from operating activities 4,711 4,925
---------- ---------
Investing activities
Purchases of investments (124,575) (96,948)
Sales of investments 142,938 117,221
Capital gains tax paid on the sale of
investments (2,041) (3,144)
Net cash inflow from investing activities 16,322 17,129
Financing activities
Interest paid (825) (825)
Equity dividend paid (3,457) (3,053)
Buyback of ordinary shares (5,439) (28,211)
Net cash outflow from financing activities (9,721) (32,089)
Increase/(decrease) in cash and cash
equivalents 11,312 (10,035)
Cash and cash equivalents at the start
of the year 7,490 17,546
Effect of currency losses (713) (21)
Cash and cash equivalents at the end
of the year* 18,089 7,490
*Cash and cash equivalents represents
cash at bank
Total tax paid for the year ended 31 August 2023 was
GBP3,011,000 (2022: GBP4,049,000).
Statement of Changes in Equity (audited)
For the year ended 31 August 2023
Ordinary Share Capital
share premium redemption Capital Revenue
capital account reserve reserves reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Balance at
31 August 2022 7,853 34,259 58 293,325 7,707 343,202
--------------------- --------- --------- ------------ ----------- ---------- ----------
Total comprehensive
income:
Return for
the year - - - 16,903 3,496 20,399
--------------------- --------- --------- ------------ ----------- ---------- ----------
Transactions
with owners
recognised
directly in
equity:
--------------------- --------- --------- ------------ ----------- ---------- ----------
Dividend paid
in the year - - - - (3,457) (3,457)
--------------------- --------- --------- ------------ ----------- ---------- ----------
Buyback of
Ordinary shares - - - (5,567) - (5,567)
--------------------- --------- --------- ------------ ----------- ---------- ----------
Balance at
31 August 2023 7,853 34,259 58 304,661 7,746 354,577
--------------------- --------- --------- ------------ ----------- ---------- ----------
Statement of Changes in Equity (audited)
For the year ended 31 August 2022
Ordinary Share Capital
share premium redemption Capital Revenue
capital account reserve reserves reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Balance at
31 August 2021 7,853 34,259 58 296,908 6,408 345,486
--------------------- --------- --------- ------------ ----------- ---------- -----------
Total comprehensive
income:
Return for
the year - - - 24,628 4,352 28,980
--------------------- --------- --------- ------------ ----------- ---------- -----------
Transactions
with owners
recognised
directly in
equity:
--------------------- --------- --------- ------------ ----------- ---------- -----------
Dividend paid
in the year - - - - (3,053) (3,053)
--------------------- --------- --------- ------------ ----------- ---------- -----------
Buyback of
Ordinary shares - - - (28,211) - (28,211)
--------------------- --------- --------- ------------ ----------- ---------- -----------
Balance at
31 August 2022 7,853 34,259 58 293,325 7,707 343,202
--------------------- --------- --------- ------------ ----------- ---------- -----------
Principal Risks and Uncertainties
The Board has carried out a thorough assessment of risks faced
by the Company. Below we have set out the principal and emerging
risks identified from the consideration. The Company faces emerging
risks from climate change and global political events. The impact
of these on the principal risks is detailed below, together with
a summary of the mitigating action taken to manage these risks.
------------------------------------------------------------------------------------------
Emerging Risks
Risk Mitigation
-----------------------------------------------
Environmental, Social and
Governance ("ESG") The investment process is focused
There is increased awareness on ESG issues and, as set out on
of the challenges posed by pages 21 and 22 of the Annual Report,
ESG and climate change. The puts a great deal of emphasis on
increasing volume, short implementation good Governance. Overall the specific
deadlines and lack of commonality potential effects of climate change
of new ESG regulations issued are difficult, if not impossible
by multiple regulators, accompanied to predict. The Board and Investment
by increased regulatory focus Manager continue to monitor material
and labeling and marketing physical and transition risks and
of investment products as having opportunities as part of the investment
ESG characteristics increase process.
the perceived risk of greenwashing.
-----------------------------------------------
Social and political events
Although not possible to predict
Economic and political events the scale of unknown events, the
continue to impact global equity Investment Manager invests in a
markets. Particularly relevant portfolio of high quality companies
for the Company is the poor which are resilient to market downturns.
economic relationship between
the United States and China. The Board and the Investment Manager
Investment flows have been discuss the resiliency of the portfolio
significantly impacted; this as part of regular meetings. Please
has the potential to impact refer to the Investment Managers'
supply chains and may affect report on pages 5 to 18 of the Annual
other countries in Asia. Report for further details
-----------------------------------------------
Principal Risks
Risk Mitigation
-----------------------------------------------
Investment objective and strategy
An inappropriate or unattractive The Board conducts annual strategy
objective and strategy may reviews
have an adverse effect on Shareholder and considers investment performance,
returns or cause a reduction shareholder views and developments
in demand for the Company's in the marketplace as well as emerging
shares, both of which could risks which could impact the Company.
lead to a widening discount.
The Board reviews changes to the
shareholder register at quarterly
Board meetings and engages the Administrator
to continually monitor the discount
at which the Company's shares trade,
reporting regularly to the Board
No change to this risk and buying back shares when appropriate.
-----------------------------------------------
Investment performance
Poor investment performance The Board reviews investment performance
may have an adverse effect at each quarterly Board meeting.
on Shareholder returns. The Investment Manager reports on
the Company's performance, transaction
In extreme circumstances, poor activity, individual holdings, portfolio
investment performance could characteristics and outlook.
lead to the Company breaching
loan covenants. The Investment Manager is formally
appraised at least annually by the
Management Engagement Committee.
The Board reviews compliance with
No change to this risk the Company's loan covenants on
a quarterly basis.
-----------------------------------------------
Financial and Economic
The Company's investments are The Board regularly reviews and
impacted by financial and economic agrees policies for managing market
factors including market prices, price risk, interest rate risk,
interest rates, foreign exchange foreign currency risk, liquidity
rates, liquidity and credit risk and credit risk. These are
which could cause losses to explained in detail in note 16 to
the investment portfolio. the Financial Statements on pages
64 to 68 of the Annual Report.
No change to this risk
-----------------------------------------------
Share price discount/premium
to net asset value The Board has established share
A significant share price discount issuance and share buyback processes
or premium to the Company's to assist in the moderation of share
net asset value per share, price premium and discount to net
or related volatility, could asset value. Shareholders are kept
lead to high levels of uncertainty informed of developments as far
or speculation and the potential as practicable and are encouraged
to reduce investor confidence. to attend briefings, such as the
Company's Annual General Meeting,
No change to this risk to understand the implementation
of the investment policy to achieve
the Company's objectives.
-----------------------------------------------
Operational
The Company is reliant on third The Audit Committee formally reviews
party service providers including each service provider at least annually,
FSSA Investment Managers as considering their reports on internal
Investment Manager, Juniper controls.
Partners as Company Secretary
and Administrator, J P Morgan Further details of the Company's
as Depositary and Custodian internal control and risk management
and Computershare as Registrar. system is provided on page 37 of
Failure of the internal control the Annual Report.
systems of these third parties
could result in inaccurate
information being reported
or risk to the Company's assets.
The assessed risk level has
increased due to the heightened
threat and sophistication of
a potential cyber attack.
-----------------------------------------------
Regulatory
The Company operates in a regulatory Compliance with relevant regulations
environment. Failure to comply is monitored on an ongoing basis
with s1158 of the Corporation by the Company Secretary and Investment
Tax Act 2010 could result in Manager who report regularly to
the Company losing investment the Board.
trust status and being subject
to tax on capital gains. Failure The Board monitors changes in the
to comply with other regulations regulatory environment and receives
could result in financial penalties regulatory updates from the Company
or the suspension of the Company's Secretary, Lawyers and Auditors
listing on the London Stock as relevant.
Exchange.
No change to this risk
-----------------------------------------------
Statement of Directors' Responsibilities in Respect of the
Annual Financial Report
In accordance with the Disclosure Guidance and Transparency
Rules, we confirm that to the best of our knowledge:
-- the Accounts, prepared in accordance with applicable United
Kingdom accounting standards, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company; and
-- the Strategic Report and the Directors' Report include a fair
review of the development and performance of the business and the
position of the Company, together with a description of the
principal and emerging risks and uncertainties that the Company
faces.
In addition, each of the Directors considers that the Annual
Report, taken as a whole, is fair, balanced and understandable and
provides the information necessary for shareholders to assess the
Company's performance, position, business model and strategy.
Going Concern
In assessing the Company's ability to continue as a going
concern the Directors have considered the Company's investment
objective detailed on page 25 of the Annual Report, risk management
policies detailed on pages 31 and 32 of the Annual Report, the
nature of its portfolio and expenditure projections and believe
that the Company has adequate resources, an appropriate financial
structure and suitable management arrangements in place to continue
in operational existence for the foreseeable future and for at
least 12 months from the date of the Annual Report. In addition,
the Board has had regard to the Company's investment performance
(see above), the price at which the Company's shares trade relative
to their NAV (see above) and ongoing investor interest in the
continuation of the Company (including feedback from meetings and
conversations with Shareholders).
The Directors performed an assessment of the Company's ability
to meet its liabilities as they fall due. In performing this
assessment, the Directors took into consideration the following
factors:
-- cash and cash equivalents balances and the portfolio of
readily realisable securities which can be used to meet short-term
funding commitments;
-- the ability of the Company to meet all of its liabilities and
ongoing expenses from its assets;
-- revenue, operating and finance cost forecasts for the forthcoming year;
-- continued adherence to the loan covenants;
-- the ability of third-party service providers to continue to provide services; and
-- three potential downside scenarios including stress testing
the Company's portfolio for a 30% fall in the value of the
investment portfolio; a 50% fall in dividend income; and a similar
level of share buybacks to the current year. The cumulative impact
of these three downside scenarios would leave the Company with a
positive net cash position.
Based on this assessment, the Directors are confident that the
Company will have sufficient funds to continue to meet its
liabilities as they fall due for at least 12 months from the date
of approval of the financial statements, and therefore have
prepared the financial statements on a going concern basis.
Related Party Transactions
The Directors' fees for the year are detailed in the Directors'
Remuneration Report on pages 39 to 41 of the Annual Report. An
amount of GBP20,800 was outstanding to the Directors at the year
end (2022: GBP23,500). No Director has a contract of service with
the Company. During the year no Director had any related party
transactions requiring disclosure under section 412 of the
Companies Act 2006.
The management and performance fees for the year are detailed in
note 2 to the Financial Statements and amounts payable to the
Investment Manager at year end are detailed in note 10 to the
Financial Statements. The Investment Management team's individual
shareholdings in the Company are set out on page 4 of the Annual
Report.
Alternative Investment Fund Managers Directive (unaudited)
Under the Alternative Investment Fund Managers Directive the
Company is required to publish maximum exposure levels for leverage
on a 'Gross' and 'Commitment' basis. The process for calculating
exposure under each method is largely the same, except that, where
certain conditions are met, the Commitment method allows
instruments to be netted off to reflect 'netting' or 'hedging'
arrangements and the Company's leverage exposure would then be
reduced. The AIFM set maximum leverage levels of 3.0 and 1.7 times
the Company's net asset value under the 'Gross' and 'Commitment'
methods respectively. At the Company's year end the levels were
respectively 1.06 and 1.10 times the Company's net asset value.
The Alternative Investment Fund Managers Directive requires the
AIFM to make available certain remuneration disclosures to
investors. This information is available from the AIFM on
request.
Notes:
1. The Scottish Oriental Smaller Companies Trust plc is a public
company limited by shares, incorporated and domiciled in Scotland,
and carries on business as an investment trust.
The accounts are prepared in accordance with the Companies Act
2006, United Kingdom Generally Accepted Accounting Practice
(Accounting Standards "UK GAAP") including Financial Reporting
Standard (FRS) 102 "The Financial Reporting Standard applicable
in the UK and Republic of Ireland" and the Statement of
Recommended Practice "Financial Statements of Investment Trust
Companies and Venture Capital Trusts" ("the SORP") issued by the
Association of Investment Companies in July 2022.
All of the Company's operations are of a continuing nature.
The accounts have been prepared on a going concern basis under
the historical cost convention, as modified by the revaluation of
investments held at fair value through profit or loss.
Estimates and judgements are continually evaluated and are based
on historical experience and other factors, including expectations
of future events that are believed to be reasonable under the
circumstances.
There is one area of significant judgement -
-- The Directors use their judgement in selecting the
appropriate rate of capital gains tax to apply to unrealised gains
on Indian investments. The Directors have chosen to apply a rate of
10% on unrealised gains on Indian investments. Please refer to note
5 (a) on page 59 of the Annual Report for further details.
The accounts have also been prepared on the assumption that
approval as an investment trust will continue to be granted.
The functional and reporting currency of the Company is pounds
sterling as this is the currency of the Company's share capital and
the currency in which most of its shareholders operate.
2. The Company held the following categories of financial instruments as at 31 August 2023:
Level
Level 1 Level 2 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
Listed equities 313,937 58,723 - 372,660
Total 313,937 58,723 - 372,660
================ ========================= ================ ============ =======
The Company held the following categories of financial
instruments as at 31 August 2022:
Level
Level 1 Level 2 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
Listed equities 368,442 - - 368,442
---------------- ------------------------- ---------------- ---------------- -------
Total 368,442 - - 368,442
================ ========================= ================ ================ =======
The above table provides an analysis of financial assets and
financial liabilities based on the fair value hierarchy described
below. Short term balances are excluded from the table as their
carrying value at the reporting date approximates to their fair
value.
Fair Value Hierarchy
Investments in securities are financial assets designated at
fair value through profit or loss on initial recognition. In
accordance with FRS102, these investments are analysed using the
fair value hierarchy described below. Short term balances are
excluded as their carrying value at the reporting date approximates
their fair value.
The levels are determined by the lowest level of input that is
significant to the fair value measurement for the individual
investment in its entirety as follows:
Level 1 - investments with prices quoted in an active
market;
Level 2 - investments whose fair value is based directly on
observable current market prices or is indirectly being derived
from market prices; and
Level 3 - investments whose fair value is determined using a
valuation technique based on assumptions that are not supported by
observable current market data.
3. Cashflow reconciliation
Reconciliation of net return on ordinary
activities before finance costs and taxation
to net cash outflow from operations before 2023 2022
dividends, interest, purchases and sales GBP'000 GBP'000
Net return on activities before finance costs
and taxation 24,787 32,519
Net gains on investments (22,540) (26,452)
Currency losses 713 21
Dividend income (8,411) (9,238)
Interest income (42) (1)
Increase/(decrease) in creditors 2,300 (44)
(Increase)/decrease in debtors (61) 6
Net cash outflow from operations before
dividends, interest, purchases and sales (3,254) (3,189)
4. These are not statutory accounts in terms of Section 434 of
the Companies Act 2006. Full audited accounts for the year to 31
August 2023 will be sent to shareholders in November 2023 and and
copies will be available from the Company's website
www.scottishoriental.com and the Company Secretary's office at 28
Walker Street , Edinburgh, EH3 7HR. The audited accounts for the
year ended 31 August 2023 will be lodged with the Registrar of
Companies.
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