Music to our ears
Smaller companies becoming larger over time
At Scottish Oriental, what excites us most about the portfolio is that we own smaller companies across Asia which have the potential to emerge as much larger businesses in future. They operate in underpenetrated sectors in large markets, which offer a long runway for growth. We believe these companies can grow multiple times their current size, as income levels per head of population (per-capita) across Asia continue their steady rise. We highlight one of our holdings from the entertainment sector below.
Music to our ears
In the entertainment category, we own Cloud Music, the second largest online music platform in China with over 200 million active monthly users. It is majority-owned by Netease, which has a distinct culture that differentiates it from most other Chinese internet businesses. The company’s management takes a long-term view and is willing to invest out of step with broader economic market cycles. Instead of aggressive mergers and acquisition activity, its focus is on organic growth and earning high returns on capital.
In the entertainment category, we own Cloud Music, the second largest online music platform in China with over 200 million active monthly users. It is majority-owned by Netease, which has a distinct culture that differentiates it from most other Chinese internet businesses. The company’s management takes a long-term view and is willing to invest out of step with broader economic market cycles. Instead of aggressive mergers and acquisition activity, its focus is on organic growth and earning high returns on capital.
Philippine Seven Corporation is the exclusive franchise operator for 7-Eleven stores in the Philippines, with a market cap of just US$1.4bn*. Under the leadership of Jose Victor Paterno, who comes from the founding family of the business, Philippine Seven has built a dominant position in convenience stores, with over 4,000 stores across the country and 58% market share – more than twice as large as its nearest competitor. The management has also broadened its product range to serve the evolving needs of consumers, such as fresh coffee and meal options as well as basic financial services.
The supply of content in China is fragmented, which provides online music platforms with strong bargaining power
The online music industry in China is an attractive duopoly, with Cloud Music and Tencent Music being the largest players. Meanwhile, the supply of content in China is fragmented, which provides online music platforms with strong bargaining power. Cloud Music also has strong pricing power due to its loyal user base, and in recent years, it has focused on expanding the share of paying users. Cloud Music has the potential to grow steadily and earn substantially higher levels of profitability over time.
A long history of investing in Asian small caps
At Scottish Oriental, our investment approach is aimed at preserving capital and growing it sensibly. This approach has remained steadfast since the Trust was established in 1995. We construct the portfolio by focusing on specific company quality over broader macroeconomic factors, meeting with hundreds of companies each year to seek out high-quality businesses with competent management teams and an established track record of performing well in different business environments.
After three decades of investing in Asia, we have built strong networks across the region. We are long-term investors, with an investment horizon of at least five years (and typically beyond), which means we are often viewed favourably by the owners and management teams of these companies as a long-term stakeholder.
We are excited about the long-term outlook for Scottish Oriental’s holdings and believe that they will continue to provide investors with attractive growth opportunities in the years ahead.
About Scottish Oriental Smaller Companies Trust plc
Scottish Oriental is one of the longest running investment trusts that invests in Asian smaller companies.
Risk factors
Capital at risk. The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back significantly less than the original amount invested.
Important Information
This document has been prepared for informational purposes only and is only intended to provide a summary of the subject matter covered and does not purport to be comprehensive. The views expressed are the views of the writer at the time of issue and may change over time. It does not constitute investment advice and/or a recommendation and should not be used as the basis of any investment decision. This document is not an offer document and does not constitute an offer or invitation or investment recommendation to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this document.
Net Asset Value (NAV) performance is not the same as share price performance and shareholders may realise returns that are lower or higher than NAV performance.
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In the UK, issued by First Sentier Investors (UK) Funds Limited which is authorised and regulated by the Financial Conduct Authority (registration number 143359). Registered office Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB number 2294743.
Scottish Oriental Smaller Companies Trust plc (“Company”) is an investment trust, incorporated in Scotland with registered number SC0156108, whose shares have been admitted to the Official List of the London Stock Exchange plc. The Company is an alternative investment fund and has appointed First Sentier Investors (UK) Funds Limited as the alternative investment fund manager for the Company. Further information is available from Client Services, First Sentier Investors (UK) Funds Limited, Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB or by telephoning 0800 587 4141 between 9am and 5pm Monday to Friday or by visiting www.scottishoriental.com. Telephone calls with First Sentier Investors may be recorded.
First Sentier Investors entities referred to in this document are part of First Sentier Investors a member of MUFG, a global financial group. First Sentier Investors includes a number of entities in different jurisdictions. MUFG and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk including loss of income and capital invested.
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