THE SCOTTISH ORIENTAL SMALLER COMPANIES TRUST PLC

Annual Financial Report for the year ended 31 August 2023

Financial Highlights

Chairman's Statement

I am pleased to present my second annual report as Chairman and to report that the Company has continued to build on the previous two years' strong performance. The Net Asset Value ("NAV") per share rose by 6.5 per cent in total return terms over the 12 months to 31 August 2023. This compares favourably to the MSCI AC Asia ex Japan Small Cap Index, the MSCI AC Asia ex Japan Index, and the FTSE All-Share Index which returned 1.8 per cent, -8.4 per cent and 5.2 per cent respectively during the same period.

During the period under review, the Company's share price increased by 8.4 per cent. As a result, the discount narrowed to 12.4 per cent from 14.0 per cent at the previous year end.

The Investment Manager's portfolio construction process is based on fundamental, bottom up analysis, focused on corporate governance, growth prospects, valuation and potential long term returns. As such this approach is index agnostic and very much active in style. With a view to rewarding performance which is better than the return investors would receive from investing in the benchmark, there is a performance fee component to management remuneration which is designed to incentivise the delivery of superior performance above the MSCI AC Asia ex Japan Small Cap Index.

Following three years of share price growth, a performance fee of £2,247,000 was earned by the Investment Manager in the year under review. Following the change to the Company's comparator index we have reviewed the terms of the investment management agreement. The Investment Manager has agreed that for the current three year performance period, a chain-linked comparator index, using; (i) the MSCI AC Asia (ex-Japan) for periods up to and including 31 August 2021; and (ii) the MSCI AC Asia ex Japan Small Cap Index (GBP) for periods with effect from 1 September 2021.

We believe that a system that fairly remunerates the investment manager for long term outperformance is also a benefit to shareholders. We are currently reviewing the terms of the investment management agreement and hope to provide an update on this to shareholders in the coming months.

The Portfolio Managers' Report below addresses the performance of the Company and expands on the investment process the managers have followed over many years to take advantage of the key investment themes prevailing in the Asian markets. The report goes on to examine reasons for the transactions that have taken place which have resulted in the current positioning of the portfolio. What comes across is a manager who considers all aspects of a company's business model and the risks associated with investing whilst taking account of the long term sustainable potential on offer. I hope you agree that it is a most informative read.

During the year, the Company bought back 457,128 ordinary shares. The Company's share price traded in a discount range of between 9.5 per cent and 16.1 per cent. Whilst the Board continues to have no formal discount control mechanism in place the Company's shares are re-purchased in the market when deemed appropriate to do so, within the buyback authority granted by shareholders.

In last year's annual report, I reported an uplift to the Company's revenue earnings per share from 9.02p to 16.66p. However in 2023, as a result of changes to the investment portfolio, revenue earnings per share (largely reflecting the dividends paid by the companies in our portfolio) has fallen to 14.19p. This should not be a cause of concern for shareholders as this is due to the Investment Manager picking stocks that align with the Company's long term capital growth objective. The Board is proposing to maintain the final dividend per share at 13.0p, but not to pay an additional special dividend this year.

Anne West has decided that after 13 years as a non-executive Director she will step down from the Board at the forthcoming AGM. Anne has been a strong presence on the Board and her very positive contributions will be missed. I am pleased to report that following a thorough selection process Uma Bhugtiar joined the Board on 19 October 2023. Uma is a corporate lawyer with a great deal of experience in Asian capital markets. I am sure she will be a strong addition to the Board and recommend that shareholders vote in favour of her election at the AGM. As a Board we are always mindful of the mix of skills and experience that we have and with that in mind we are in the process of recruiting a fifth Director who should be appointed in early 2024.

Shareholders can keep up to date on the performance of the portfolio through the Company's website at www.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

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

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

5.  Sector & Geographical Analysis

Country Allocation at 31 August 2023 (based on geographical area of activity)

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.

*Source: Bloomberg

FSSA Investment Managers

6 November 2023

Income Statement for the year ended 31 August 2023 (audited)                

                                                                        2023                                                        2022

* 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)

Total tax paid for the year ended 31 August 2023 was £3,011,000 (2022: £4,049,000).

Statement of Directors' Responsibilities in Respect of the Annual Financial Report

In accordance with the Disclosure Guidance and Transparency Rules, we confirm that to the best of our knowledge:

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

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

In addition, each of the Directors considers that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, position, business model and strategy.

Going Concern

In assessing the Company's ability to continue as a going concern the Directors have considered the Company's investment objective detailed on page 25 of the Annual Report, risk management policies detailed on pages 31 and 32 of the Annual Report, the nature of its portfolio and expenditure projections and believe that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future and for at least 12 months from the date of the Annual Report. In addition, the Board has had regard to the Company's investment performance (see above), the price at which the Company's shares trade relative to their NAV (see above) and ongoing investor interest in the continuation of the Company (including feedback from meetings and conversations with Shareholders).

The Directors performed an assessment of the Company's ability to meet its liabilities as they fall due. In performing this assessment, the Directors took into consideration the following factors:

·      cash and cash equivalents balances and the portfolio of readily realisable securities which can be used to meet short-term funding commitments;

·      the ability of the Company to meet all of its liabilities and ongoing expenses from its assets;

·      revenue, operating and finance cost forecasts for the forthcoming year;

·      continued adherence to the loan covenants;

·      the ability of third-party service providers to continue to provide services; and

·      three potential downside scenarios including stress testing the Company's portfolio for a 30% fall in the value of the investment portfolio; a 50% fall in dividend income; and a similar level of share buybacks to the current year. The cumulative impact of these three downside scenarios would leave the Company with a positive net cash position.

Based on this assessment, the Directors are confident that the Company will have sufficient funds to continue to meet its liabilities as they fall due for at least 12 months from the date of approval of the financial statements, and therefore have prepared the financial statements on a going concern basis.

Related Party Transactions

The Directors' fees for the year are detailed in the Directors' Remuneration Report on pages 39 to 41 of the Annual Report. An amount of £20,800 was outstanding to the Directors at the year end (2022: £23,500). No Director has a contract of service with the Company. During the year no Director had any related party transactions requiring disclosure under section 412 of the Companies Act 2006.

The management and performance fees for the year are detailed in note 2 to the Financial Statements and amounts payable to the Investment Manager at year end are detailed in note 10 to the Financial Statements. The Investment Management team's individual shareholdings in the Company are set out on page 4 of the Annual Report.

Alternative Investment Fund Managers Directive (unaudited)

Under the Alternative Investment Fund Managers Directive the Company is required to publish maximum exposure levels for leverage on a 'Gross' and 'Commitment' basis. The process for calculating exposure under each method is largely the same, except that, where certain conditions are met, the Commitment method allows instruments to be netted off to reflect 'netting' or 'hedging' arrangements and the Company's leverage exposure would then be reduced. The AIFM set maximum leverage levels of 3.0 and 1.7 times the Company's net asset value under the 'Gross' and 'Commitment' methods respectively. At the Company's year end the levels were respectively 1.06 and 1.10 times the Company's net asset value.

The Alternative Investment Fund Managers Directive requires the AIFM to make available certain remuneration disclosures to investors. This information is available from the AIFM on request.

Notes:

1.   The Scottish Oriental Smaller Companies Trust plc is a public company limited by shares, incorporated and domiciled in Scotland, and carries on business as an investment trust.

The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice (Accounting Standards "UK GAAP") including Financial Reporting Standard (FRS) 102 "The Financial Reporting Standard applicable

in the UK and Republic of Ireland" and the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" ("the SORP") issued by the Association of Investment Companies in July 2022.

All of the Company's operations are of a continuing nature.

The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments held at fair value through profit or loss.

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

There is one area of significant judgement -

·      The Directors use their judgement in selecting the appropriate rate of capital gains tax to apply to unrealised gains on Indian investments. The Directors have chosen to apply a rate of 10% on unrealised gains on Indian investments. Please refer to note 5 (a) on page 59 of the Annual Report for further details.

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

The functional and reporting currency of the Company is pounds sterling as this is the currency of the Company's share capital and the currency in which most of its shareholders operate.

2.     The Company held the following categories of financial instruments as at 31 August 2023:

The Company held the following categories of financial instruments as at 31 August 2022:

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

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.