THE SCOTTISH ORIENTAL SMALLER COMPANIES TRUST PLC

Annual Financial Report for the year ended 31 August 2022

Financial Highlights

Chairman's Statement

I am pleased to present my first annual report as Chairman and am delighted to report that the Company has continued to build on last year's strong performance. The Net Asset Value ("NAV") per share rose by 10.0% in total return terms over the 12 months to 31 August 2022. This compares favourably to the MSCI AC Asia ex Japan Small Cap Index, MSCI AC Asia ex Japan Index, and the FTSE All-Share Index which returned -0.9%, -7.1% and +1.0% respectively during the same period. Following our review of the investment performance of the Company, the Board is pleased to see that the investment manager - FSSA Investment Managers - continues to return positive performance to shareholders.

During the period under review, the Company's share price total return increased by 10.3%.

Shareholders will note that the portfolio is not formally benchmarked against any of the aforementioned indices; comparative data from these indices is solely provided to bring context to the performance of the portfolio. This is further highlighted by the portfolio's active share against both the MSCI AC Asia ex Japan Small Cap Index (98.0%) and the MSCI AC Asia ex Japan Index (99.7%). If the portfolio fully mirrored the stocks held by an index, then the active share would be zero, conversely, if the portfolio did not hold any stocks in the index; the active share would be 100%.

A performance fee was not paid to the Investment Manager in the year under review.

The Portfolio Managers' Report below addresses the performance of the Company as well as recent portfolio activity and current positioning. It also analyses the top five contributors to performance all of which are Indonesian or Indian companies, as well as the bottom five detractors. Also included in the report is a review of the history of Scottish Oriental since its inception in March 1995. This review details the Company's original investment policy and how the Portfolio Managers' focus on risk management has led to long-term returns in excess of comparator indices, despite short-term periods of underperformance.

During the year, the Company bought back 2,504,180 ordinary shares. The share price discount has remained steady at around 14.0%. The Board continues to have no formal discount control mechanism in place. However, it is prepared to buy back shares opportunistically and to issue new shares at a small premium to NAV where market demand exists.

As announced in November 2021 the Board introduced a performance-related conditional tender offer. The offer will be made for up to 25% of the Company's outstanding share capital if, over the five-year period starting 1 September 2021 (and at five yearly intervals thereafter), the Company's NAV on a total return basis fails to exceed the total return of the MSCI AC Asia ex Japan Small Cap Index (net of fees) over the same period on a cumulative basis. During the year to 31 August 2022, the Company outperformed the MSCI AC Asia ex Japan Small Cap Index by 10.9%.

In last year's annual report, it was noted that the final dividend was not fully covered by earnings. However as many of our investee portfolio companies have emerged from the Covid-19 pandemic and return to "business as usual", cashflows have started to improve. This has led to an increase in income per share from 9.02p last year to 16.66p in the year to 31 August 2022. On account of this high level of income generation, the Board is proposing to increase the final dividend by 1.5p per share to 13.0p and to pay a special dividend of 1.0p per share, bringing total dividends for the year to 14.0p per share. This represents a 22% year on year increase in dividends paid to shareholders.

On 20 July 2022, James Ferguson stepped down as the Company's Chairman and retired from the Board. James was appointed as the Company's Chairman in April 2004 and during his tenure he oversaw an increase in the Company's market capitalisation from £42 million to over £290 million. He brought a wealth of experience to the Board and his contribution will be missed.

This year's Annual General Meeting ('AGM') will be held on Monday, 5 December 2022 at the offices of First Sentier Investors, Finsbury Circus House, 15 Finsbury Circus, London. I look forward to seeing those of you who can attend the meeting in person.

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

Finally, the Board welcomes communication from shareholders and I can be contacted directly through the Company Secretary at cosec@junipartners.com

Jeremy Whitley

Chair

27 October 2022

Portfolio Managers' Report

This report addresses the following topics -

1.   Company Performance

2.   Scottish Oriental's Corporate History:

-     Investment Philosophy and Outcomes

-     Changes in Portfolio Managers and Positioning

-     Portfolio Outlook

3.   Recent portfolio activity

4.   Ten Largest Holdings as at 31 August 2022

5.   Sector Analysis

6.   Portfolio Positioning

1.  Company Performance

Scottish Oriental continued its positive performance over the last 12 months. Its net asset value rose by 10% for the year ended 31 August 2022, compared to a decline of 0.9% for the MSCI AC Asia ex-Japan Small Cap Index and a decline of 7.1% for the MSCI AC Asia Ex Japan Index. The largest contributors to performance were the holdings in India and Indonesia. The biggest detractors from performance were the portfolio's holdings in South Korea and the Philippines.

Top Five Contributors

Mitra Adiperkasa benefited from higher customer footfall across its retail and restaurant operations in Indonesia. During the Covid-19 led disruption, the company's management took several initiatives to shut down unprofitable stores and reduce operating expenses. As growth in same store sales resumed, these measures led to a substantial improvement in the company's profitability. The introduction of new brands such as Subway and Foot Locker should sustain the company's growth momentum.

Mahindra Lifespace rose after it reported a substantial increase in revenues and profit. The company's management, led by a new Chief Executive Officer (CEO) appointed in 2020 has focused on faster land acquisition and increasing the number of project launches. The company has also been benefiting from the trend among Indian residential property buyers of moving rapidly away from local developers to larger companies such as Mahindra Lifespace. This is expected to continue to drive an acceleration in demand for its residential projects.

Blue Star reported strong growth as the company continues to gain market share in the under-penetrated Indian air-conditioning industry. Its engineering, procurement and construction (EPC) projects business is also benefiting from increasing demand due to higher infrastructure and industrial investments. As the expectation is for the Indian air-conditioning industry to grow rapidly in the coming years, the company is making significant investments in its manufacturing, distribution and service capabilities to gain more market share.

Kei Industries rose after it also reported strong growth in revenues across its cables and wires operations. The company has benefited from an acceleration of the growth in the sales of branded consumer cables, which has higher profitability and lower working capital needs compared to its unbranded power cables segment. As its valuations have become expensive after its strong performance, we have reduced the Trust's holding.

Oberoi Realty also benefited from strong demand for residential property and the increasing preference among consumers for projects developed by reputed developers with strong balance sheets. The company's commercial and retail operations gained from higher mobility levels. New land acquisitions made in recent periods put Oberoi in a strong position to sustain its growth.

Top Five Detractors

Solara Active Pharma suffered from oversupply in a key product, due to which its sales declined sharply and the company also wrote down the value of its inventory. The management also cancelled its plan to merge with Aurore (announced last year), as Aurore did not meet its performance expectations. Demand for its key product is normalising gradually and the company is building new customer relationships. Their medium-term prospects remain strong as it launches new active pharmaceutical ingredient (API) products.

Ace Hardware Indonesia declined after it reported slow improvement in same store sales growth. The company was impacted by rising competition from e-commerce platforms and new large format stores such as IKEA. Ace has launched initiatives such as WhatsApp based shopping to mitigate this risk. It is also experimenting with smaller format "Ace Express" stores to accelerate growth. The management expects a gradual improvement in demand over the coming periods.

NHN KCP declined as the company's profitability was impacted by weak growth in its business with overseas clients, which earn high levels of profitability, while it continued to make investments to support its growth in the coming periods. The company's management has paused hiring to control costs. As the company's new contracts with large overseas clients are finalised, profitability is expected to improve.

JNBY Design was affected by movement restrictions across Chinese cities. Over this period, the company's investments in digital channels helped to mitigate the decline in its offline retail operations. JNBY successfully dealt with the initial disruption of Covid-19 in 2020, which was followed by a strong rebound in profitability as movement restrictions reduced. We added to the Trust's holding given the company's attractive valuation and its track record of successfully dealing with such disruptions.

Vitasoy International reported poor revenues and profitability as it was affected by lower sales of its beverage products due to movement restrictions in China as well as a temporary disruption to its fast growing business in the country. The company has increased investment in marketing and its revenues in China recovered significantly during the second half of the year. The company has also hired several experienced professionals, including a new CEO for its China operations, to support the growth of its business in the country.

2.  Scottish Oriental's Corporate History

Investment Philosophy and Outcomes

Scottish Oriental was launched in 1995, raising £23.7 million with a mandate to invest in smaller Asian companies. Over the following 27 years, the Company has navigated dramatic changes in its operating environment. The large markets of the time, such as Malaysia, Singapore and Hong Kong, have been eclipsed by the emergence of China and India. The market-capitalisation limits of the mandate have evolved to reflect the impact of inflation on the original size limit, from US$ 500 million in 1995 to US$ 5 billion today. Scottish Oriental has been managed by four different lead portfolio managers over this period. Through all these changes, the Trust has been anchored by the investment philosophy set out in the first Annual Report. Its key tenets, still hold true today.

This investment philosophy has held the Trust in good stead. An investment of £1,000 made at the inception of Scottish Oriental would have returned a net asset value of £18,706 today, compared with £5,076 if the same sum had been invested in the MSCI AC Asia ex Japan Index.

A central aspect of our investment philosophy is the focus on risk management. Scottish Oriental's long-term returns are predicated upon preserving capital during downturns, not on chasing upside during periods of euphoria. As the calendar year returns show, the Trust did not keep pace with the market's returns during the dot-com bubble in 1999, the years before the global financial crisis or the recent period before Covid-19. In each of these periods, we found market participants becoming fascinated with the shiny objects of the time - whether this was the technology companies in the late 1990s, highly leveraged real estate and infrastructure developers in 2007 or loss-making businesses touting an eventual "path to profitability" in recent years. The Portfolio Manager's Review at the global financial crisis in 2007 highlighted this challenge.

"In its pursuit of capital preservation as well as growth, the Trust's Board and its Investment Manager have always accepted that it is sometimes necessary to forego short term gains. In the past such an approach has led to long term outperformance of the benchmark and, more important, exceptional capital returns."

The portfolio's conservative positioning helped to preserve capital in the inevitable subsequent downturns as well as the periods of recovery following them. Since inception, the Trust's performance exceeded that of the benchmark index in 78% of down market periods compared to 43% of up market periods. We have observed a similar result during the last five years as well. In the most recent financial year, Scottish Oriental's net asset value increased by 10% compared with a decline of 0.9% for the MSCI AC Asia ex Japan Small Cap Index and a decline of 7.1% for the MSCI Asia ex Japan Index. These outcomes reflect the consistency in the Trust's investment philosophy and process over the years.

Changes in Portfolio Managers and Positioning

While Scottish Oriental's investment philosophy has remained unchanged, the opportunity set for investing in small companies in Asia is dramatically different today. In 1996, the largest markets in which the Trust was invested included Hong Kong (31%), Thailand (18%) and Singapore (18%). The largest Asian economies today, China and India, were in aggregate below 4% of the Trust's exposure at the time as these countries were still early in their development. At inception, Scottish Oriental also held over 100 investments. This was due to the short public trading record of many companies at the time and Angus Tulloch, the first portfolio manager, decided to mitigate this risk by diversifying the portfolio across a large number of holdings. Over time, China and India emerged as the driving force of economic activity in Asia and the listed companies serving these economies began to offer the most attractive opportunities.

With changes in the economic environment, the managers began to find more opportunities in large markets such as India, Indonesia and the Philippines. The market leaders here were still small companies due to low market penetration, but had the potential to emerge as the large-caps of the future. In China, the market leaders were already large businesses and many of the companies operating in relatively mature markets like Singapore, Malaysia and Hong Kong had limited growth prospects. The stock selection shifted in favour of India, Indonesia and the Philippines, which currently comprise 73% of Scottish Oriental's portfolio. The portfolio was also consolidated among the highest conviction holdings. The number of holdings has declined from 77 in 2016 to 57 currently. The weight of the top 10 holdings has increased from 26% to 39% and the top 20 holdings has increased from 44% to 63% since 2016. There were 35 holdings which were each below 1% weight in 2016 (the portfolio "tail"), which has declined to 15 holdings currently.

However, as we have often observed in the case of businesses in which we invest, witnessing the results of changes made can take longer than expected. This was true for Scottish Oriental as well. Our key markets were severely impacted by Covid-19. Business operations of the Trust's holdings in India normalised relatively fast. However, businesses in Indonesia and the Philippines, particularly those operating in sectors such as retail and quick service restaurants, which were dependent on customers visiting their stores, were affected by the prolonged movement restrictions in these countries. This impacted Scottish Oriental's performance negatively in 2020 and 2021. However, our engagement with the management teams of these companies indicated that their competitive positions had only strengthened during the period. Their competitors, in most instances smaller companies from the informal sector, lacked the financial and technological resources to withstand the disruption. As business activity normalises in these countries, our holdings are positioned to emerge with a larger share of their categories' profit pools.

In recent years, there have been further changes to the Trust's investment mandate, which are listed below.

·      The Trust's market capitalisation limits have gradually changed from US$ 500 million at the time of inception to US$ 5 billion currently. This reflects the substantial increase in the average market capitalisation of listed companies across Asia-ex Japan over the same period. Holdings such as Ambuja Cement, Eicher Motors, Parade Technologies and Zhejiang Weixing New Building Materials, which we purchased after the most recent increase in the market capitalisation limit, have delivered strong returns. It has helped to create a larger and more attractive investment universe for Scottish Oriental.

·      Historically, the Trust's mandate permitted investments in Australia, New Zealand and Japan, but each investment required approval from the Board of Directors. The investment process was simplified by including these markets into Scottish Oriental's investment universe without the need for explicit approval from the Board. During the year, we made our first investment in Australia in the copper miner OZ Minerals. We subsequently sold after BHP Group made an offer to acquire the company at a substantial premium to the prevailing price. We are evaluating several opportunities in these markets but have no investments currently.

·      A fixed rate gearing facility for £30 million was raised in March 2021. The Trust has raised gearing facilities in the past, however, the previous facilities had relatively short maturity periods of three to five years. In this instance, the facility is repayable in 2041, which allows us to take a long-term view. Given the attractive investment opportunities available across our investment universe, the gearing has been deployed.

Portfolio outlook

The first Manager's Review in 1995 highlighted that the economic environment in Asia was affected by several concerns. There were fears of rising interest rates, risks that countries with large current account deficits would suffer substantial currency depreciation and worries about the potential fall-out from the collapse of Barings Bank. Bottom-up investors like us also faced challenges of smaller companies in Asia having short listed track records and the regulations protecting minority shareholders being at their early stages of evolution. Despite all of these risks, being a shareholder of Scottish Oriental since inception would have been a rewarding experience.

The current lockdowns in China and the worries about rising inflation, interest rates and weakening currencies create an investing environment that bears resemblance to that in 1995. However, the market leading businesses in which Scottish Oriental invests have faced several crises during this period and have emerged stronger from each of them. The universe of smaller companies in Asia is much larger, their listed track records are longer and the regulations protecting minority shareholders are also well established. Bottom-up stock pickers like us have a more favourable hunting ground than we have had in the past.

This is reflected in the Trust's portfolio, which is more consolidated among its highest conviction holdings than it has been historically. The earnings growth expected for the portfolio is high as companies recover from the Covid-19 disruption, while returns on equity (ROE) have also improved. Despite the higher growth and ROEs, the portfolio's valuations are attractive and cheaper than in past years. With this portfolio of market leading businesses poised to emerge as the large companies of the future, we are excited about the Trust's prospects in the coming years.

3.  Recent Portfolio Activity

New Holdings

During the year we added seven new holdings to the portfolio.

Autobio Diagnostics ('Autobio') is the leading in-vitro diagnostics (IVD) reagent and machine manufacturer in China. The immunological IVD market in China is large and has grown consistently, as the penetration of diagnostic services has risen. Multinational companies dominate the industry, however, domestic manufacturers have gained market share in recent years. Autobio has built a leading position by consistently improving the quality of its products, which are now comparable to leading multinationals in many areas. The company's management is ambitious with a target of gaining market share in its existing categories, while also entering new segments.

Computer Age Management ('CAMS') is India's largest registrar and transfer agent of mutual funds with a dominant market share of 70%. CAMS' outsourced back-office services allow its asset management clients to focus on their core business and reduce costs. The company has significant growth potential, as households increase their investments in financial assets from a low base currently. The management is also building new businesses such as Account Aggregation and an insurance repository that could increase in size in the coming years. This provides the company significant growth potential over the long-term, while its asset light business model leads to returns on capital employed (ROCE) in excess of 100%.

Escorts Kubota ('Kubota') is a leading Indian tractor and construction equipment manufacturer. The company was founded by the Nanda family in India, which continues to lead its operations. In 2021, Kubota acquired a majority stake in the company. Escorts Kubota is expected to benefit from the technological and managerial expertise of the Japanese parent, which should help the company launch new products and improve operational efficiency. Kubota also plans to use the company's low cost Indian manufacturing base to gain market share globally, which adds to the company's growth prospects.

Haitian International ('Haitian') is the leading plastic injection moulding machine (PIMM) manufacturer in China. Based on its scale advantages as the market leader, the company earns attractive levels of profitability and returns on capital employed across business cycles. In recent periods, its growth has been negatively affected by the cyclical downturn in China. Over this period, Haitian has gained market share and is shifting its product portfolio in favour of machines with higher clamping force, which earn higher levels of profitability. The strong growth in electric vehicles should lead to an improvement in the company's growth prospects in the future. It is also expanding into markets outside China, using its strong, net cash balance sheet.

Parade Technologies ('Parade') is an integrated circuit designer. Its products facilitate high-speed data transmission across 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. Data transmission speeds have been increasing consistently across devices. Higher speeds require new products, which drive higher prices and better profitability for Parade. Data transmission speeds are likely to continue rising. Parade is also the first mover in building new products with applications in servers and automobiles. These can become large addressable markets for the company in the years ahead.

Avia Avian ('Avian') is the market leader in Indonesia's decorative paint industry. Avian's extensive distribution network has helped it gain market share from its competitors who are dependent on third-party distributors. The company has also established dominant positions in niche areas such as waterproofing paints as well as wood & metal paints, which have historically not been areas of focus for multinationals. The Indonesian paint industry remains fragmented. We expect Avian to lead the industry's consolidation in the coming years. Its vertical integration allows it to earn high margins and returns on capital employed. It also has a strong net - cash balance sheet that should support its growth.

Sporton International ('Sporton') is the market leader in the electromagnetic testing and certification industry globally. As various electronic applications upgrade to new technology standards, the addressable market for the company's testing and certification business should grow consistently. Following years of investments in research and development, Sporton has built a leading position in the niche electromagnetic testing category. The introduction of fifth generation broadband cellular technology (known as 5G) is leading to improved prospects for its revenue growth. Its high market share also allows Sporton to earn attractive levels of profitability.  

Sales

We sold nine holdings during the year.

Thermax, Mr. DIY Group, CTOS Digital, Mphasis, Metropolis Healthcare and SKF India were sold as their valuations became expensive following strong performance and share price appreciation.

Emami was sold due to increasing risks to its profitability following a sharp increase in raw material costs. Its management intends to focus on improving its growth prospects, due to which it may not be able to raise prices adequately to cover these cost increases. Its valuations had also become relatively expensive after appreciation in its share price.

China Overseas Grand Oceans Group and Zhejiang Weixing New Building Materials were sold due to concerns related to a significant slowdown in the Chinese residential property industry. We expect this to impact the growth prospects as well as profitability of both companies.

Purchased and subsequently sold

We purchased a holding in OZ Minerals, a leading copper and gold miner in Australia. The company has a strong track record of developing high quality copper assets operating in the first quartile of the global cost curve. Its management has also achieved its growth while maintaining a net cash balance sheet. It has significant growth prospects as it develops a new mine in Australia, which is currently at early stages of exploration. Based on its attractive prospects, BHP Group announced a bid for the company at a substantial premium to the prevailing price. As its valuations became expensive following the bid, we sold our holding in the company.

4.  Ten Largest Investments as at 31 August 2022

5.  Sector Analysis

6.  Portfolio Positioning

Country Allocation at 31 August 2022 (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

FSSA Investment Managers

Income Statement for the year ended 31 August 2022 (audited)

                                                                        2022                                                        2021

* 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 dividends of 14.0p per share (made up of a final dividend of 13.0p per share and a special dividend of 1.0p per share) for the year ended 31 August 2022 (2021: 11.50p per share) which, if approved, will be payable on 13 January 2023 to shareholders recorded on the Company's shareholder register on 2 December 2022.

All revenue and capital items derive from continuing operations.

Summary Statement of Financial Position as at 31 August 2022 (audited)

Total tax paid for the year ended 31 August 2022 was £4,049,000 (2021: £3,046,000).

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 22 of the Annual Report, risk management policies detailed on pages 28 and 29 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 this 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 negative net cash position. However, share buybacks would not be undertaken without the due consideration of cash resources, and there is no formal discount control policy in place.

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 36 to 38 of the Annual Report. An amount of £23,500 was outstanding to the Directors at the year end (2021: £22,500). 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 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 1.08 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.  Details of the Company's registered office can be found on the inside back cover of the Annual Report.

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 55 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 2022:

The Company held the following categories of financial instruments as at 31 August 2021:

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.  

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 2022 will be sent to shareholders in November 2022 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.

5.  The audited accounts for the year ended 31 August 2022 will be lodged with the Registrar of Companies.