Scottish Oriental ups Asian Frontiers exposure – Scottish Oriental Smaller Companies says that, over the 12 months to August, its Net Asset Value per share rose by 15.7 per cent in total return terms, while the ‘comparative indices’, MSCI AC Asia ex Japan Index and MSCI AC Asia ex Japan Small Cap Index, rose by 27.2 per cent and 15.7 per cent, respectively. They point out that the difference between the two comparative indices is attributable to the strong performance of larger companies, specifically Chinese and Korean Information Technology stocks. The share price increased in total return terms by 19.4 per cent as the discount narrowed.
The income per share was 6.77p compared to 9.50p last year. They are proposing an unchanged dividend of 11.5p. The shortfall will be taken from the revenue reserve.
The managers’ report is extensive. Notably, the portfolio’s exposure to Frontier Markets in Asia has been increased with first time purchases in Bangladesh and Pakistan for example – among the highlights:
- Scottish Oriental’s exposure to China fell significantly as they exited six holdings – nitrogenous fertiliser producer China Bluechemical; fabric producer Luthai Textile; shipping container manufacturer Singamas Container; handbag and leather goods manufacturer Sitoy; camera lens and module producer Sunny Optical; and infant formula producer Yashili.
- The exposure to Hong Kong increased during the year with the purchase of restaurant operator Fairwood Holdings and bus company Kwoon Chung Bus. Both these companies show that it is still possible to find growth in Hong Kong’s domestic economy.
- Scottish Oriental’s exposure to Taiwan was reduced over the year. Five positions were sold – industrial PC manufacturer Axiomtek; testing equipment manufacturer Chroma ATE; industrial barcode printer manufacturers Godex International and TSC Auto ID Technology; and garment manufacturer Makalot Industrial.
- In Indonesia they bought Astra Otoparts, a manufacturer and distributor of automotive parts.
- The Malaysian weighting was relatively unchanged over the year. One new holding was added – cement producer Lafarge Malaysia; and one position was sold, retailer Aeon Company.
- Scottish Oriental’s exposure to the Philippines increased over the year through additions to its existing holdings and the purchase of Concepcion Industrial, the country’s leading manufacturer of air conditioners and refrigerators.
- They markedly reduced exposure to Singapore over the year, with seven positions exited. Bukit Sembawang Estates and Tan Chong International were sold as they believed it was unlikely that the value in these companies would be realised for shareholders. M1 and Sheng Siong Group were sold on concerns about increasing competition. Hong Leong Finance was sold as it has found it increasingly difficult to grow; iFast on concerns over management’s overseas strategy; and Tat Hong as it carried too much debt which management seemed unfocused on paying down.
- The overall exposure to Thailand fell with Hana Microelectronics sold on expensive valuations and Somboon Advance Technology sold on growth concerns.
- Scottish Oriental added to its Vietnam position during the year with the purchase of conglomerate REE Corp.
- Scottish Oriental made its first ever investment in Bangladesh during the year in mortgage provider Delta Brac Housing Finance, which operates in a very under-penetrated sector.
- Scottish Oriental increased its overall exposure to India. Seven new stocks were purchased – courier company Blue Dart Express; cancer treatment specialist Healthcare Global Enterprises; HeidelbergCement India; Domino’s Pizza franchise holder Jubilant Foodworks; Mahindra CIE which predominantly manufactures auto components; consumer goods company Jyothy Laboratories; and department store operator Shoppers Stop. Six companies were sold from the portfolio. Three of these were sold on expensive valuations – city gas supplier Mahanagar Gas; consumer goods company Marico; and conglomerate Tube Investments. Information Technology outsourcers Hexaware Technologies and Tata Consultancy Services were sold on a dull growth outlook and branded tea producer Tata Global Beverages was sold following a boardroom coup at its parent, which, in their opinion, made the likelihood of management turning the business around less likely.
- Scottish Oriental made its first ever investment in Pakistan during the year in auto assembler and retailer Indus Motors.
- They increased exposure to Sri Lanka by purchasing conglomerate John Keells Holdings.
- Scottish Oriental’s South Korean weighting was relatively unchanged over the year. Existing holdings were trimmed and two new holdings were added. Leeno Industrial is a producer of pins and sockets used in testing printed circuit boards and integrated circuits; and Vieworks is a provider of x-ray imaging technology.
Top performing and worst performing stocks included:
On the plus side – Blue Star in India which added 1.4%; Godrej Industries in India which added 1.4%; Pacific Basin Shipping in Hong Kong which added 1.3%; Godrej Properties in India which added 1.0%; and Jubilant Foodworks in India which added 1.0%.
On the minus side – Tong Ren Tang in China (0.5%); Raffles Medical Group in Singapore (0.5%); M1 in Singapore (0.4%); Indoco Remedies in India (0.4%); and Delfi Singapore (0.4%).
Blue Star, benefited from increasing demand for its air-conditioners and commercial refrigeration systems. Godrej Industries rose on strong share price performance from its subsidiary Godrej Properties as well as the expectation it will realise a significant gain when its agribusiness subsidiary Godrej Agrovet is listed. The share price of Pacific Basin Shipping rebounded as the market believed the outlook had improved in the commodity shipping sector. Godrej Properties is set to benefit from the introduction of GST in India which should favour the higher quality real estate developers. Jubilant Foodworks rose on the expectation of a successful turnaround following a change in management.
Tong Ren Tang was impacted by slowing growth in demand for its products but its brand remains one of the strongest in traditional Chinese medicine. Raffles Medical Group is incurring start-up losses as it gets closer to opening its Shanghai hospital. They are positive that this expansion will contribute meaningfully in the long term. M1 has been hurt by increasing competition and as they did not see the situation improving they disposed of M1. Indoco Remedies received a US Food and Drug Administration warning letter regarding production standards and has also seen product launch delays and increased investment weigh on its recent earnings. Delfi has suffered from the weak consumer environment in Indonesia. They say that they are monitoring both Indoco Remedies and Delfi closely.
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