Chairman's Statement

Background

Global markets remained volatile over the review period, with sentiment influenced by a sharp rise in interest rates from the US Federal Reserve (Fed) and fears that this could lead to a global recession. Towards the end of the period, China's decision to ease Covid-19 restrictions led to expectations that the country's re-opening would boost consumer demand and help export-oriented markets such as Taiwan and South Korea. Likewise, the diversification of supply chains has seen net benefits to Vietnam, India and Indonesia, amongst others in South East Asia.

Against this volatile market background, your Company's share price gained 5.5% on a total return basis with the discount to the net asset value("NAV") narrowing to 12.1%.  The NAV total return was 3.0% although that came in slightly lower than the benchmark MSCI AC Asia Pacific ex-Japan Small Cap Index's 3.8% increase.

Despite continued short-term market volatility, the Board is as confident as ever in the potential for Asia and its smaller companies over the long-term.  It is worth noting that £1,000 invested in your Company at inception is now worth over £22,950 on a NAV basis with dividends reinvested, a return of over 2195%. Indeed, according to a recent press release from the Association of Investment Companies (AIC) we are one of the top five companies that would have made investors £1,000,000 if they had invested their full isa allowance from 1999 to 2023.

This is the world's fastest-growing region, underpinned by powerful structural trends such as increasing affluence, rising urbanisation, and growing technology adoption. Exciting opportunities continue to abound in its small and mid-cap investment universe, where companies tend to be domestically oriented and low research coverage leaves considerable scope for active managers to take advantage of market mispricing.

Dividend
The Board recognises the importance of your Company's dividend income for many shareholders.  The Ordinary dividend has been maintained or raised every year since 1998, and your Board is firmly committed to the new enhanced and progressive dividend policy approved by shareholders in 2022.

Two interim dividends have been paid in the first six months of the year. The first interim dividend of 1.6p per Ordinary share was paid on 20 December 2022 to Ordinary shareholders on the register on 25 November 2022 and the second interim dividend was paid on 21 March 2023 to Ordinary shareholders on the register on 24 February 2023.  The Board has set a target dividend of at least 6.4p per Ordinary Share for the financial year ending 31 July 2023. The Board plans to maintain the progressive policy of the last 27 years in order to provide shareholders with a regular level of income alongside capital growth prospects.

Share Capital Management and Gearing
During the period the Ordinary shares have traded at an average discount of 11.9% and we did not buy back any Ordinary shares in the market. However, subsequent to the period 120,000 Ordinary shares have been acquired for treasury at a discount to the prevailing NAV per share.  The Board will continue to consider the use of share buybacks to both reduce the volatility of any discount and to modestly enhance the NAV per share for shareholders.

The Company's net gearing at 31 January 2023 was 13.7% with the debt provided by the £30 million unsecured Loan Notes 2035 and the £36.6m Convertible Unsecured Loan Stock redeemable in 2025.  As at 30 March 2023, the latest practicable date, the net gearing stood at 12.9%.

ESG

In my first report to Shareholders, I wanted to draw out the importance that your Board and Manager place upon Environmental, Social and Governance ("ESG") matters.  While ESG concerns do not form a specific part of the Company's investment objective, and the investment process does not exclude exposure to certain industries, the Investment Manager has long believed that a holistic assessment of business risks and active engagement, with the goal of improving the performance of the Company's portfolio, is vital before, during and after an investment is made. That includes a detailed understanding of the environmental, social and governance risks and opportunities associated with each holding. It is, therefore, very much embedded in the Investment Manager's approach to managing the Company and we will provide more detail on these important matters in your Company's Annual Report.

Outlook

The purpose of the Company remains the same as ever, to give investors access to Asia's exciting growth prospects via a concentrated portfolio of high-quality smaller companies. Your Company continues to benefit from a highly experienced management team, with excellent on-the-ground access to companies, business leaders and policymakers. They continue to uncover under-researched quality companies in what is a large and varied universe of Asian small caps.

Considering the current fragile state of the global economy, our view is that Asia is in a better position than many Western economies. For the most part, government finances and corporate balance sheets in the region are in good health. The wider macroeconomic risks (whether inflation or geopolitics related) persist, but one of the benefits of this Trust's small-cap emphasis is that it allows for a portfolio that is more geared to Asia's domestic growth story - indeed, at the end of the reporting period, over 80% of the underlying revenues of the companies in the portfolio came from within Asia itself.

In this regard, the Board is pleased to note there are positive signs for structural growth right across the region. China's re-opening should lead to a recovery in both domestic consumption and industry production. In turn, this could be a spur for Asia-wide exports, services, trade, and tourism.

Valuations are attractive and your Manager has positioned the portfolio to weather near-term risks - the majority of the companies in the portfolio hold net cash on their balance sheet - while keeping in mind the long-term secular trends across Asia:  rising local demand, a move to a lower-carbon future and the growth of Asia's technology and supply chains.  Accordingly, your Company's core investment strategy remains judicious - quality companies at a reasonable price with strong balance sheets and demonstrating sustainable earnings, delivering outperformance over the long-term.

Krishna Shanmuganathan
Chairman
30 March 2023

Investment Manager's Review

Overview
The six months to the end of January 2023 can be split into three distinct periods. The first, in August and September, was noteworthy for the level of concern among investors about the pace of interest rate increases in the US, reflected in a global sell-off across a number of markets. The strength of the US dollar also contributed to market volatility.

In October, the focus shifted to the Communist Party Congress in Beijing and President Xi Jinping's consolidation of power. After securing an unprecedented third term in office President Xi filled the country's leadership team with close allies.  Investors reacted nervously and the markets in mainland China and Hong Kong were among the weakest during this month. The volatility spread to wider Asian markets, and, notably, to Asian smaller companies, which underperformed both the wider region and those in developed markets.

November and December, however, saw a marked change in sentiment. China announced a sharp U-turn in policy with the removal of Covid-19 restrictions, driving a strong rally across many Asian markets particularly those more closely linked to the mainland.

Portfolio Review

The information technology sector made the most positive contribution to performance where your Manager targets high-quality companies which offer growth but are also profitable, have strong cash flows, robust balance sheets, and trade at reasonable valuations.

Prominent among them was Korea's Park Systems which is an exciting prospect thanks to its innovative products and dominant position in atomic force microscopy - an emerging imaging field - which has a number of growing applications within advanced science and technology labs.

In the same sector, the portfolio saw good contributions from Leeno Industrial, Koh Young Technology and Taiwan's Andes Technology. However, not every holding in the sector made gains. Some in the technology supply chain, such as Nanofilm, were affected by concerns about a drop in demand for Apple products. AEM Holdings, which produces tests for semiconductors, was also weak due to fears of a cyclical downturn in the sector.

Our Indian holdings also boosted your Company's returns thanks to good stock selection. Aegis Logistics, which is primarily focused on operating port terminals, was a strong performer, as was Vijaya Diagnostic Centre, which owns a network of diagnostics clinics in Southern India. Elsewhere, positive contributions came from Indonesia and Thailand with Bank OCBC NISP benefiting from the broader economic recovery in Indonesia, clearly reflected in a 60% rise in the bank's net profits in the third quarter.

The Vietnamese government's attempt to address corruption and speculative activity in the property market impacted our holding in property developer Nam Long due to the resultant delays in land purchases and project launches.  Your Manager however remains confident in the reputation of the company and believes it should benefit from the government's intervention over the long-term. Also in Vietnam, information technology group FPT Corp was another detractor from performance, but we were reassured to see it publish strong annual results with revenues and earnings both beating expectations.

Stock selection in China and Hong Kong was also a source of weakness. Among the main detractors were Joinn Laboratories, Sinoma Science & Technology and Pacific Basin Shipping. The last of these suffered from forecasts of lower global growth and a decline in freight rates, but your Manager continues to see value in the stock, given expectations of strong free cash flow generation and therefore healthy dividend payouts.

ChaCha Food, which was added to the portfolio during the period, was another detractor but your Manager saw the ongoing weakness in the Chinese equity market as an opportunity to add to the position. It is among China's leading nuts producers with well established brands, including the largest roasted seeds brand locally which generates healthy cash flow. It has high growth potential as the highly fragmented snacks industry presents a consolidation opportunity for a focused, vertically integrated company with strong brands. You can read more about your Manager's rationale behind holding this stock below.

Turning to portfolio activity, your Manager continued to maintain discipline in the portfolio's quality focus, especially given the challenging backdrop. Alongside the investment in ChaCha Food, a new position was also initiated in Kerry Logistics Network, one of the largest integrated logistics providers in Asia with a diversified customer base. Your Manager believes the company is well placed to benefit from supply-chain relocation, e-commerce growth and intra-regional trade in Asia. The position in Douzone Bizon was sold due to concerns over execution and an uncertain growth outlook. The holding in eCloudvalley was also divested, owing to poor disclosure and a slowdown in growth.

Gabriel Sacks, Flavia Chong,
Xin Yao Ng & Hugh Young

abrdn Asia Limited
30 March 2023

Ten Largest Investments

As at 31 January 2023

Investment Portfolio

Investment Case Studies

Cha Cha Food

Seeds of growth: ChaCha is a dominant player in a niche category of the foods industry in China. The company's cash cow is its seeds segment, which accounts for the bulk of sales. Its sunflower seed products cover different price bands from the classic red-bag seeds to flavoured blue-bag seeds and on up to the high-end Kuizhen series. Growth will come from ChaCha's nuts business, where the company is expanding its product portfolio and driving greater penetration.

In which year did we first invest?

2022

Where is the head office?

Anhui, China

What does the company do?

ChaCha Food is among China's leading seeds and nuts producers with well established brands, including the largest roasted seeds brand domestically.

Why do we like the investment?

ChaCha has been a leading player in China's packaged roasted seeds and nuts market since it was first set up in 1996. We view the company as well established within a fast-changing snack market. Its superior product quality, strong branding and deep-rooted distribution channels have the makings of a long-term winner.

This also reflects its stringent quality control of its production line and supply chain. ChaCha has historically been a strong offline channel player with an established distribution network. Among the major domestic snack players, ChaCha is also one of the few which manufactures its products in-house rather than resorting to outsourcing, thereby gaining an edge in food quality. It has local production and processing farms that are close to raw material and distribution terminals, resulting in more efficient and less costly transport of its products. A well-established supply chain also adds to the strength: ChaCha sources 80% of raw materials for its daily nuts directly from the main production areas during harvest season, then ships back, processes and sells the products within the same quarter.

Another core strength has been a nimble organisational structure after several rounds of management and strategy reform since 2015 (with the latest in the second half of 2021 following the return of chairman Chen Xianbao). The company has been resilient in a tough operating environment amid the pandemic. We have seen it maintain decent growth over the short term, with a smooth price increase in its seeds segment and recovery in its monthly shipments, at a time when most food and beverage categories have been seeing softening demand.

For ChaCha, the seeds segment has been its cash cow, thanks to a dominant market share in China. Looking ahead, the nuts division is set to drive growth, supported by its larger total addressable market and positioning as daily consumption over leisure snacks. The company is following a "nuts plus" strategy to build up a diversified nut product portfolio, and it has started selling upgraded nut milk products online. ChaCha uses the online channel mainly as an extension of its offline distribution strength, as well as a platform for the company to engage with younger consumers and as part of the trial and testing of new products.

All this has increased our conviction in ChaCha's outlook. We see high-growth potential for ChaCha, as the highly fragmented industry presents a consolidation opportunity for a focused, vertically integrated player with strong brands.

On the ESG front, ChaCha has only a B rating from MSCI because its levels of disclosure are not high. We recently engaged with ChaCha to gain visibility on its risk-management policies in key ESG topics and to encourage the company to issue its first ESG report. We came away with a positive impression because ChaCha surprised us with its comprehensive and some best-in-class ESG practices in its daily operations, and its efforts to improve disclosure and business integration. The call enhanced our view on its ESG quality, and strengthened our confidence that ChaCha would be rated higher by MSCI after improving its disclosure. This would be a key area that we would look to work with ChaCha in future.

Prestige Estates

Expanding beyond the south: Having been a leading property developer in South India, Prestige Estates is looking to drive growth by diversifying from its base in Bangalore to other parts of India, such as Mumbai (with its Prestige Jardan Classic residential development pictured above) and New Delhi.

 In which year did we first invest?

2019

Where is the head office?

Bangalore, Karnataka, India

What does the company do?

It is a leading South Indian developer with a good reputation for executing and completing projects, covering segments such as residential, commercial, retail, hospitality and property management.

Why do we like the investment?

We regard Prestige Estates as a quality developer with a strong track record of residential housing development and a growing investment property portfolio. Founded in 1986, the group has completed more than 270 projects through the years. It has continued to show decent growth in pre-sales, completions, launches and rental income. Having been a leading player in South India, Prestige is looking to drive growth by diversifying from its base in Bangalore to other parts of India, such as Mumbai and New Delhi. Its expansion strategy has been sensible, as it is opting to add new projects through tie-ups with developers in other regions, such as HDFC in affordable housing.

Prestige has more than 150 million sq ft of real estate space in its pipeline and around a quarter of this is in locations outside south India. Its most recent updates have highlighted a new asset creation cycle as the company is planning an aggressive scaling up across all its business segments over the next five years, including the rebuilding of its shopping mall pipeline. Capital discipline is key and we would monitor how the company executes on this, albeit operating cash flows have been strong and pre-sales momentum remains positive. There is also support from a substantial improvement in the company's liquidity position, following the conclusion of a spin-off of assets to Blackstone and a stake sale in one of its office blocks.

More broadly, the government's bold housing programme is taking shape with affordable homes being built across the country, while sector reform such as the Real Estate (Regulation and Development) Act (RERA) has triggered large-scale consolidation in the industry, with the strongest impact on the residential segment. We expect good quality developers with strong balance sheets and brands, such as Prestige Estates, likely to benefit the most. The consolidation theme is still happening with Prestige getting more deals from banks offloading their assets. We also see urbanisation and population growth, combined with increasing disposable income and the increase in nuclear families, as fuelling the overall demand for housing over the longer term.

With regard to the environment, social and governance (ESG) aspects, Prestige Estates has yet to have an MSCI ESG rating, but we are encouraged by the company's efforts towards a greener planet. The company is committed to designing and delivering assets with "green building" certification, while also incorporating water conservation and waste recycling. For instance, the company has installed rainwater harvesting mechanisms at all its project locations. Compared with conventional buildings, overall Prestige has conserved more than 30% of water in its portfolio of green buildings. Its freshwater consumption also fell by 19% in FY2022. The company also recycled 29% of its overall waste in FY2022. As for the social aspect, in terms of talent management, Prestige uses online learning resources to enhance the skills of its workforce, with a learning platform that has videos, articles, podcasts and TED Talks on various topics and interests. In addition, it has in place an employee well-being policy and Prevention of Sexual Harassment (POSH) policy that applies to all employees. We have also seen some progress in corporate governance. Independent representation on the board of directors is about 56%, while Prestige increased the number of female directors on the nine-member board to two in FY2020 from one previously.

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