Asian small-cap specialist, unloved asset class

Scottish Oriental Smaller Companies 22 November 2018 Review
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Scottish Oriental Smaller Companies

Asian small-cap specialist, unloved asset class

Investment trusts

 

22 November 2018

Price

918.0p

Market cap

£274.0m

AUM

£320.0m

NAV*

1,066.0p

Discount to NAV

13.9%

NAV**

1,078.1p

Discount to NAV

14.9%

*Excluding income. **Including income. As at 20 November 2018.

Yield

1.3%

Ordinary shares in issue

29.9m

Code

SST

Primary exchange

LSE

AIC sector

Asia Pacific ex-Japan

Benchmark

MSCI AC Asia ex-Japan

Share price/discount performance

Three-year performance vs index

52-week high/low

1,095.0p

840.0p

1,203.6p

1,000.4p

**Including income.

Gearing

Gross*

0.0%

Net*

6.7%

*As at 30 September 2018.

Analysts

Helena Coles

+44 (0)20 3077 5700

Mel Jenner

+44 (0)20 3077 5720

Scottish Oriental Smaller Companies is a research client of Edison Investment Research Limited

Scottish Oriental Smaller Companies is a research client of Edison Investment Research Limited

Scottish Oriental Smaller Companies Trust (SST) aims to deliver long-term capital growth from investing in smaller companies listed in Asia ex-Japan. The investment approach is bottom-up to find quality companies with sustainable growth that are reasonably valued. Unconstrained by the benchmark, the well-diversified portfolio of c 60 stocks represents the manager’s highest-conviction ideas, with a preference for domestically oriented businesses in less-developed economies, which can benefit from structural growth drivers. SST has a strong, long-term performance track record and over 10 years has delivered an annualised NAV total return of 18.5%. The trust’s current 14.9% discount to cum-income NAV is deeper than its three-year average, in part reflecting a more risk-averse market sentiment. There is scope for this discount to narrow should sentiment towards Asian equities, and small-caps in particular, improve.

12 months ending

Share price (%)

NAV (%)

MSCI AC Asia ex-Japan (%)

MSCI AC Asia ex-Japan Small Cap (%)

FTSE All-Share (%)

31/10/14

1.8

9.2

6.4

5.6

1.0

31/10/15

(9.8)

(5.3)

(3.6)

(1.7)

3.0

31/10/16

33.8

34.6

35.2

28.3

12.2

31/10/17

6.2

8.3

20.3

11.7

13.4

31/10/18

(14.3)

(11.2)

(10.0)

(14.8)

(1.5)

Source: Thomson Datastream. Note: All % on a total return basis in pounds sterling.

Investment strategy: Disciplined approach

The manager, Vinay Agarwal, has a rigorous bottom-up approach that involves an intensive schedule of over 1,600 company visits every year, and fundamental analysis to identify high-quality, well-managed companies with a good track record of capital allocation. Robust balance sheets, strong cash flows and reasonable valuations are also important criteria, and the manager has an investment horizon of three to five years. The manager is supported by First State Stewart Asia’s well-resourced team of 21 investment professionals located in Singapore, Hong Kong and Edinburgh.

Market outlook: Long-term prospects remain good

The MSCI Asia ex-Japan index has corrected c 13% in sterling terms since its peak in January 2018 and, reflecting a perceived higher risk associated with smaller companies, the MSCI Asia ex-Japan Small Cap index has fallen c 20%. Valuations have moderated and Asian equities appear attractively priced relative to global equities. Meanwhile, a robust outlook for Asia ex-Japan’s long-term GDP growth could be supportive for its equity markets’ prospects over time.

Valuation: Improved sentiment may narrow discount

SST’s current 14.9% discount to cum-income NAV is wider than the three-year average of 12.9%. The sharp correction in Asian equities has also afflicted most of SST’s peers and discounts have widened across the group. There may be scope for the discount to narrow should sentiment towards Asian equities improve.

Exhibit 1: Trust at a glance

Investment objective and fund background

Recent developments

SST’s objective is to provide shareholders with long-term capital growth through investment in smaller Asian (excluding Japanese and Australasian) quoted companies. Its assets are invested in a diversified portfolio of equities. While the manager takes account of cultural, political and economic factors, stock-specific features are the main driver of portfolio selection, with the aim of identifying good-quality companies with solid, long-term growth prospects.

16 October 2018: annual report for 12 months to end-August 2018. NAV TR -2.4% versus benchmark TR +2.2%.

16 October 2018: the board announced proposal to raise the permitted market capitalisation limit in the investment policy (see page 3).

16 October 2018: the board declared an annual dividend of 11.5p per share.

20 April 2018: interim report for six months to end-February 2018. NAV TR

-2.3% versus benchmark TR +3.4%.

Forthcoming

Capital structure

Fund details

AGM

December 2018

Ongoing charges

1.0% (FY18)

Group

First State Stewart

Interim results

April 2018

Net cash

6.7%

Manager

Vinay Agarwal

Year end

31 August

Annual mgmt fee

0.75%

Address

10 St Colme Street,

Edinburgh, EH3 6AA

Dividend paid

January/February

Performance fee

Yes (see page 7)

Launch date

March 1995

Trust life

Indefinite

Phone

+44 (0) 131 473 2200

Continuation vote

None

Loan facilities

None (see page 7)

Website

www.scottishoriental.co.uk

Dividend policy and history (financial years)

Share buyback policy and history (financial years)

Dividends paid annually. The board intends to at least maintain the level of dividend, using reserves if necessary, unless company distributions fall sharply.

Renewed annually, the board has authority to repurchase up to 14.99% and allot up to 10% of shares outstanding.

Shareholder base (as at 15 October 2018)

Portfolio exposure by geography (as at 31 October 2018)

Top 10 holdings (as at 31 October 2018)

Portfolio weight %

Company

Country

Sector

31 October 2018

31 October 2017*

SKF India

India

Industrials

3.8

3.1

Vitasoy International

Hong Kong

Consumer staples

3.6

N/A

Concepcion Industrial

Philippines

Industrials

3.2

2.9

Haw Par

Singapore

Consumer staples

3.1

2.2

Sinbon Electronics

Taiwan

Information technology

3.1

2.8

Delta Electronics

Thailand

Industrials

2.9

N/A

Towngas China

China

Utilities

2.9

3.3

Raffles Medical

Singapore

Healthcare

2.9

N/A

Blue Star

India

Industrials

2.8

2.8

Jyothy Laboratories

India

Healthcare

2.7

N/A

Top 10

30.9

26.2

Source: Scottish Oriental Smaller Companies Trust, Edison Investment Research, Bloomberg, Morningstar. Note: *N/A where not in October 2017 top 10.

Market outlook: Relatively attractive over long-term

The MSCI Asia ex-Japan index performed strongly between early 2016 and early 2018, fuelled by synchronous global growth, exceptionally accommodative monetary conditions and positive earnings momentum. Many of these factors are now reversing as interest rates rise, while global leading economic indicators have started to roll over (although they remain strong in the US, underpinned by the impact of recent tax reforms). Expectations for Asian earnings growth have also moderated considerably, following an exceptionally strong 2017. Consensus forecasts for the MSCI Asia ex-Japan index earnings in 2018 started the year at c 15%, and are currently around 6–7%. Headwinds for the region include higher oil prices (Asia is a net importer of oil) and escalating trade tensions between China and the US. These challenges have been reflected in a correction in Asian equities, with smaller-caps faring worse as they are perceived to be riskier than larger-caps. As shown in Exhibit 2 (LHS), since the January 2018 peak for Asian equities, the MSCI Asia ex-Japan Small Cap index has fallen c 13% in sterling terms and the MSCI Asia ex-Japan index has fallen c 20%. Meanwhile, MSCI World has been more resilient, bolstered by the strength of US equities, leaving the Asia’s equity valuations looking relatively modest, as shown in Exhibit 2 (RHS). Meanwhile, prospects for economic growth in Asia ex-Japan remain higher than for the world and advanced economies, which may help underpin superior equity returns over the long run. According to the International Monetary Fund’s World Economic Outlook in October 2018, the Asia ex-Japan region is expected to grow at 5.7% pa between 2018 and 2023. Over the same period, it expects world growth of 3.6% pa and 1.8% pa for advanced economies.

Exhibit 2: Market performance and valuation

Asia ex-Japan and World indices: total returns over five years (in £ terms)

Asia ex-Japan and World valuation metrics (at 21 November 2018)

 

MSCI AC Asia ex-Japan

MSCI AC Asia ex-Japan Small Cap

MSCI AC World

P/E 12 months forward (x)

11.9

13.1

14.9

Price to book (x)

1.4

1.3

2.2

Dividend yield (%)

3.0

2.9

2.7

Source: Thomson Datastream, Bloomberg, MSCI, Edison Investment Research

Fund profile: Fundamental approach to small-caps

SST was launched in March 1995 with the objective to achieve long-term capital growth by investing mainly in smaller Asian (excluding Japan) companies, primarily with market capitalisations below US$1.5bn at the time of investment. At present, the trust is permitted to invest up to 20% of the portfolio in companies with market capitalisations between US$1.5bn and US$3bn. The board is seeking shareholders’ approval at the December 2018 AGM to amend the investment policy such that SST can primarily invest in companies with market capitalisations below $3bn at the time of investment, and be permitted to invest up to 20% of the fund in companies with market capitalisations of US$3bn to US$5bn. The current limits were set in September 2013 and since then, the average market capitalisations of the benchmark’s constituents have more than doubled, meaning many small-cap companies are now above the investment policy ceiling and unavailable to SST as potential investments. The board believes it is appropriate for the investment policy to be amended, to allow the manager flexibility to invest in larger companies than currently permitted, with no change to SST’s investment process. Gearing of up to 50% of net assets is permitted; however, the manager is wary of Asian equity valuations and a £20m loan facility was repaid early in June 2017. As at end-September 2018, the trust had a 6.7% net cash position.

Vinay Agarwal formally assumed the role of lead manager from Wee-Li Hee in July 2017, after a year as acting lead manager during her maternity leave. Hee has returned as a co-portfolio manager, ensuring continuity in the team.

The fund manager: Vinay Agarwal
The manager’s view: Good companies survive difficult markets

Agarwal is cognisant of challenging market conditions. Currencies in several Asian countries have weakened, higher oil prices are not helpful for a region that is a net importer of the commodity, and politics have been a destabilising force for some markets (for example, the dissolution of parliament in Sri Lanka). The manager notes that Asia, over time, has consistently experienced challenging periods and he does not view the current environment to be unusually hostile. He says that history shows high quality, well-managed businesses with strong cash flows, can survive difficult conditions, and generate rewarding returns over the long-run. Agarwal does not forecast outcomes for shorter-term issues; instead he remains focused on picking companies that can deliver growth over the long term. These are typically domestically oriented companies with businesses in underpenetrated sectors, low debt and able to self-fund their growth plans. Valuation discipline is important and despite the correction in Asia’s equity markets, Agarwal thinks, overall, they are still a bit expensive for the quality companies he favours, although some opportunities are arising.

Asset allocation
Investment process: Bottom-up, focused on quality

SST follows a bottom-up approach to find high-quality companies with sustainable and predictable growth, investing with a long-term horizon of three to five years or more. First State Stewart Asia’s team consists of 21 investment professionals located in Hong Kong, Singapore and Edinburgh. The size and the depth of the team support an intensive schedule of over 1,600 company visits pa, and rigorous evaluation of companies. The team looks for strong management, those with integrity and a good track record of capital allocation. They also seek to identify companies that have quality franchises with high barriers to entry, have sustainably attractive returns on capital employed and that are not dependent upon favourable regulation or political patronage. Valuation discipline is also an important part of the investment process and the manager is patient, building positions gradually, especially as small-caps can be illiquid and share price movements more sensitive to market transactions.

Current portfolio positioning

The shape of SST’s portfolio almost entirely reflects the manager’s high-conviction stock selection. The investment process does not involve asset allocation against sectors and countries, although they are part of the consideration to ensure a sufficiently well-diversified portfolio to help mitigate risk. As shown in Exhibit 3, as at end-September 2018 SST is most notably overweight India (18.5pp) and the Indian subcontinent accounts for 36.7% of the portfolio. Also of note is an 8.2% exposure to non-index countries in the frontier markets of Sri Lanka, Vietnam and Bangladesh. SST is also overweight some of the smaller countries within the index (such as the Philippines and Indonesia). These positions reflect the manager’s preference for investing in businesses in underpenetrated markets, with multi-year structural growth opportunities that are reasonably valued. Such companies are typically less well-known to the broader investment community. Agarwal is keen to find firms that can benefit from the trends in rising incomes and urbanisation, and often finds these characteristics in consumption-related stocks. As shown in Exhibit 4, the portfolio is overweight the consumer discretionary and consumer staples sectors, and many of the companies within the industrials sector are effectively exposure to the consumption theme. Examples include home appliances companies Concepcion and Blue Star, listed in the Philippines and India, respectively. Both companies are leading manufacturers of air conditioners within their respective markets, where they are gaining market share. They are also beneficiaries of the long-term structural growth potential for their products as their markets are very underpenetrated. The manager says that air conditioner penetration in India and the Philippines is at 8% and 11% respectively, compared with 74% in China.

Exhibit 3: Portfolio geographic exposure vs benchmark (% unless stated)

Portfolio end-Sept 2018

Portfolio end-Sept 2017

Change (pp)

Benchmark weight

Active weight vs benchmark (pp)

Trust weight/ benchmark wgt (x)

India

28.6

26.1

2.5

10.1

18.5

2.8

Taiwan

10.6

10.6

0.0

13.8

(3.2)

0.8

Philippines

8.9

9.2

(0.3)

1.2

7.7

7.4

Indonesia

8.5

7.7

0.8

2.4

6.1

3.5

China

7.8

9.6

(1.8)

35.0

(27.2)

0.2

Hong Kong

7.6

6.6

1.0

11.1

(3.5)

0.7

Singapore

6.0

4.3

1.7

4.1

1.9

1.5

Sri Lanka

4.4

5.0

(0.6)

0.0

4.4

N/A

Thailand

2.9

2.4

0.5

2.9

0.0

1.0

Vietnam

1.9

1.4

0.5

0.0

1.9

N/A

Bangladesh

1.9

1.3

0.6

0.0

1.9

N/A

Pakistan

1.8

1.3

0.5

0.1

1.7

18.0

Malaysia

1.2

3.3

(2.1)

2.9

(1.7)

0.4

South Korea

1.0

3.3

(2.3)

16.3

(15.3)

0.1

Net cash

6.7

7.9

(1.2)

100.0

100.0

100.0

Source: Scottish Oriental Smaller Companies Trust, Edison Investment Research

Exhibit 4: Portfolio sector exposure vs Asia ex-Japan indices (% unless stated)

Portfolio end- Sept 2018

Portfolio end-Sept 2017

Change (pp)

Benchmark weight

Active weight vs benchmark (pp)

Trust weight/ benchmark wgt (x)

Consumer discretionary

22.9

17.9

5.0

8.1

14.8

2.8

Industrials

18.9

18.2

0.7

6.9

12.0

2.7

Consumer staples

14.3

12.6

1.7

5.0

9.4

2.9

Information technology

8.4

9.5

(1.1)

29.6

(21.2)

0.3

Financials

7.9

9.4

(1.5)

24.0

(16.1)

0.3

Healthcare

7.2

7.8

(0.6)

3.0

4.2

2.4

Materials

4.8

6.1

(1.3)

4.8

0.0

1.0

Utilities

4.7

6.8

(2.1)

3.4

1.3

1.4

Real estate

2.7

3.0

(0.3)

5.9

(3.2)

0.5

Telecommunications

1.4

1.4

0.0

4.4

(3.0)

0.3

Energy

0.0

0.0

0.0

5.0

(5.0)

0.0

Cash

6.7

7.0

(0.3)

6.7

100.0

100.0

100.0

100.0

Source: Scottish Oriental Smaller Companies Trust, Edison Investment Research

Relative to the index, SST is most underweight China (-27.2pp), and is generally underweight the more developed countries including South Korea (-15.3pp) and Hong Kong (-3.5pp). These markets are relatively well-researched and have a larger proportion of their stocks above SST’s market capitalisation cap (currently $3bn). In terms of sectors, the portfolio is most underweight technology (-21.2pp) and financials (-16.1pp). Companies within these sectors tend to be very large-cap and outside of SST’s investment universe. The technology companies often trade on lofty valuations, while the financials tend to be state-owned and long-term prospects can be dependent upon government policy and political patronage. The manager finds these characteristics to be unattractive.

The most significant recent portfolio activity has been additions to existing holdings as stock price corrections presented opportunities. These have included Towngas China, which fell on rumours of the removal of connection fees for new gas users, an important source of its revenue. Agarwal evaluated this event to be unlikely and took advantage of Towngas’s weak share price to increase SST’s position. The market pullback allowed SST to add to Vitasoy, a Hong Kong-listed beverage company, which the manager believes has excellent management and potential to grow in China. It has one of the strongest beverage brands in the Greater China market, and a mature, highly cash-generative business in Hong Kong that can help to fund the company’s expansion plans.

SST’s portfolio has been repositioned over the past two years, shifting in favour of higher-growth companies and selling out of those Agarwal viewed as low-growth ‘value traps’ (shares that appear cheaply valued but are unlikely to appreciate). The number of holdings has also been reduced to allow an individual stock to contribute more meaningfully to performance. As at end-August 2018, SST held 57 stocks, down from 76 at end-August 2016. The estimated three-year earnings growth of new purchases over this period is c 17% compared to 11% for companies sold. The manager is very excited about the portfolio, which he believes consists of companies with strong and resilient structural growth drivers that can deliver performance over the long term.

Performance: Strong long-term performance

As shown in Exhibits 5 and 6, SST has a strong long-term performance track record and over 10 years, its NAV total return has significantly outperformed the MSCI Asia ex-Japan, MSCI Asia ex-Japan Small Cap and the FTSE All-Share indices. Over all periods shown, its NAV has also outperformed the MSCI Asia ex-Japan Small Cap index, arguably the more relevant comparator index for SST. It has underperformed its benchmark MSCI Asia ex-Japan index over shorter periods of one, three and five years, during which time index gains were dominated by large-cap names, especially in the Chinese internet sector, which are outside the portfolio’s investible universe.

Exhibit 5: Investment trust performance to 31 October 2018

Price, NAV and benchmark total return performance, one-year rebased

Price, NAV and benchmark total return performance (%)

Source: Thomson Datastream, Edison Investment Research. Note: Three, five and 10-year performance figures annualised.

Exhibit 6: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

10 years

Price relative to MSCI AC Asia ex-Japan

3.9

(0.6)

(0.8)

(4.8)

(16.8)

(25.5)

61.8

NAV relative to MSCI AC Asia ex-Japan

6.0

(0.2)

2.8

(1.3)

(11.6)

(10.9)

58.7

Price relative to MSCI AC Asia ex-Japan Small Cap

5.3

3.2

4.7

0.5

(0.3)

(11.7)

53.9

NAV relative to MSCI AC Asia ex-Japan Small Cap

7.4

3.7

8.5

4.2

6.0

5.6

51.0

Price relative to FTSE All-Share

(0.3)

(4.3)

(8.4)

(13.0)

(2.9)

(14.3)

116.1

NAV relative to FTSE All-Share

1.7

(3.9)

(5.1)

(9.9)

3.2

2.6

112.0

Source: Thomson Datastream, Edison Investment Research. Note: Data to end-October 2018. Geometric calculation.

Discount: Deeper than the three-year average

SST currently trades at a discount to cum-income NAV of 14.9% which is deeper than its three year average of 12.9%. The sharp correction in Asian equities, which has been more acute for smaller-caps, has affected many Asian funds and discounts to NAV have widened across the peer group. The board does not have a formal discount policy, but actively promotes the trust and regularly monitors its discount to NAV. It has the authority (renewed annually) to repurchase shares, if it believes this to be in the best interests of shareholders as a whole.

Exhibit 7: Share price discount to NAV (including income) over three years (%)

Source: Thomson Datastream, Edison Investment Research

Capital structure and fees

SST is a conventional investment trust with one class of share; there are currently 29.9m ordinary shares in issue and 1.5m are held in treasury. The board has the authority, renewable annually to repurchase up to 14.99% of shares outstanding and, during FY18, 1.1m shares were bought back at a cost of £10.9m.

First State Investment Management (UK) is paid an annual management fee of 0.75% of SST’s net assets. A performance fee is also payable subject to SST’s share price total return, exceeding the MSCI AC Asia ex-Japan index by 10 percentage points over a three-year period. The total fee payable to the investment manager is capped at 1.5% pa of the trust’s net assets.

Dividend policy and record

The trust’s primary objective is to generate capital gains rather than income. SST pays a dividend annually, which the board intends to at least maintain at the same level as the prior year. The FY18 dividend of 11.5p per share, unchanged from FY17, represents a yield of 1.3%. This was in excess of the income per share of 9.2p, with the shortfall taken from the revenue reserve, in line with the board’s policy to utilise these to help smooth dividend payments.

Peer group comparison

Exhibit 8 shows the AIC Asia-Pacific ex-Japan peer group of investment trusts with market capitalisations over £100m. This is a diverse group of members, including funds that invest in Australasia and those with an income focus – therefore, direct comparisons may not be meaningful. The trust ranks first for NAV total return performance over 10 years. Over one, three and five years, it has lagged the peer group averages and ranks 11th, 15th and 10th, respectively. However, the MSCI Asia ex-Japan Small Cap index has lagged the MSCI Asia ex-Japan index over all these three periods, and funds with a small-cap mandate such as SST have tended to underperform within this peer group.

Exhibit 8: AIC Asia Pacific ex-Japan peer group as at 20 November 2018*

% unless stated

Market cap £m

NAV TR 1 year

NAV TR 3 year

NAV TR 5 year

NAV TR 10 year

Discount (ex-par)

Ongoing charge

Performance fee

Net gearing

Dividend yield (%)

Scottish Oriental Smaller Cos

273.6

(9.7)

34.0

39.7

485.1

(14.7)

1.0

Yes

100

1.3

Aberdeen Asian Income

342.3

(4.4)

46.9

30.3

268.9

(10.9)

1.1

No

110

4.7

Aberdeen Standard Asia Focus

345.5

(5.1)

41.0

30.4

422.1

(13.9)

1.2

No

114

1.3

Aberdeen New Dawn

236.7

(7.0)

52.9

38.8

282.8

(14.2)

0.8

No

112

2.0

Edinburgh Dragon

641.5

(6.5)

49.3

40.8

261.6

(11.7)

0.8

No

104

1.2

Fidelity Asian Values

278.1

(2.2)

55.2

72.3

393.0

3.0

1.2

No

100

1.4

Henderson Far East Income

408.8

(5.3)

44.0

38.5

211.6

0.5

1.1

No

102

6.8

Invesco Asia

182.3

(10.6)

56.0

72.3

356.2

(12.3)

1.0

No

100

2.1

JPMorgan Asian

305.8

(7.7)

71.9

76.8

292.1

(10.9)

0.7

No

100

4.8

Martin Currie Asia Unconstrained

123.1

(9.7)

48.7

34.8

151.3

(15.3)

1.1

No

104

2.4

Pacific Assets

314.1

1.9

49.2

74.3

377.1

(2.3)

1.3

No

100

1.0

Pacific Horizon

175.6

(16.2)

58.7

61.2

310.5

1.1

1.0

No

100

0.2

Schroder Asia Pacific

660.2

(12.6)

59.6

71.8

408.9

(12.5)

1.0

No

109

1.4

Schroder Asian Total Return

296.9

(9.6)

65.4

82.0

338.6

2.1

1.0

Yes

106

1.5

Schroder Oriental Income

591.2

(4.8)

44.1

54.0

428.4

0.3

0.9

Yes

105

4.2

Simple average

345.0

(7.3)

51.8

54.5

332.5

(7.5)

1.0

104

2.4

SST rank in sector

11

11

15

10

1

15

9

11

12

Source: Morningstar, Edison Investment Research. Note: *Performance data to 19 November 2018. TR = total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

The board

SST’s board consists of five directors, all of whom are independent and non-executive. Chairman James Ferguson and Alexandra Mackesy were appointed in 2004, and Anne West in 2010. Jeremy Witley and Andrew Baird were both appointed in 2017. Dr Janet Morgan resigned from the board in December 2017, having served since the trust’s launch in 1995.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2018 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Neither this Communication nor any copy (physical or electronic) of it may be (i) taken or transmitted into the United States of America, (ii) distributed, directly or indirectly, in the United States of America or to any US person (within the meaning of regulations Regulation S made under the US Securities Act 1933, as amended), (iii) taken or transmitted into or distributed in Canada, Australia, the Republic of Ireland or the Republic of South Africa or to any resident thereof, except in compliance with applicable securities laws, (iv) taken or transmitted into or distributed in Japan or to any resident thereof for the purpose of solicitation or subscription or offer for sale of any securities or in the context where the distribution thereof may be construed as such solicitation or offer, or (v) or taken or transmitted into any EEA state other than the United Kingdom. Any failure to comply with these restrictions may constitute a violation of the securities laws or the laws of any such jurisdiction. The distribution of this Communication in or into other jurisdictions may be restricted by law and the persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Scottish Oriental Smaller Companies and prepared and issued by Edison, in consideration of a fee payable by Scottish Oriental Smaller Companies. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2018 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Neither this Communication nor any copy (physical or electronic) of it may be (i) taken or transmitted into the United States of America, (ii) distributed, directly or indirectly, in the United States of America or to any US person (within the meaning of regulations Regulation S made under the US Securities Act 1933, as amended), (iii) taken or transmitted into or distributed in Canada, Australia, the Republic of Ireland or the Republic of South Africa or to any resident thereof, except in compliance with applicable securities laws, (iv) taken or transmitted into or distributed in Japan or to any resident thereof for the purpose of solicitation or subscription or offer for sale of any securities or in the context where the distribution thereof may be construed as such solicitation or offer, or (v) or taken or transmitted into any EEA state other than the United Kingdom. Any failure to comply with these restrictions may constitute a violation of the securities laws or the laws of any such jurisdiction. The distribution of this Communication in or into other jurisdictions may be restricted by law and the persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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