Abrdn Asiafocus Regulatory News (AAS)

ABRDN ASIA FOCUS PLC

Legal Entity Identifier (LEI):  5493000FBZP1J92OQY70

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 JULY 2023

· Net Asset Value (total return):  +7.6% compared to the Company's benchmark return, the MSCI AC Asia ex-Japan Small Cap Index, of +8.0%;

· Share price (total return basis): +7.3%;

· Since inception (1995):

o  Net Asset Value: +2283.6%;

o  Share price: +2158.4%;

o  Benchmark return, the MSCI AC Asia ex-Japan Small Cap Index: +261.3%.

· Dividends: Dividends totalling 6.41p (2022 - Ordinary dividend 6.4p) have been paid, with a further special dividend of 2.25p, bringing the total distribution for the year to 8.66p (2022 - 8.0p);

· AIC ISA millionaire: abrdn Asia Focus is one of the top 5 companies that would have made investors £1,000,000 if they had invested their full isa allowance from 1999 to 2023

· Succession planning of investment managers confirmed: Hugh Young has confirmed he will be retiring on 31 December 2023. abrdn Asia Focus's management remains in the experienced hands of Flavia Cheong, abrdn's Head of Equities, Asia Pacific, Gabriel Sacks and Xin-Yao Ng. 

Performance Highlights

Strategic Report

Chair's Statement

This marks my first annual statement for the Company as Chair, following Nigel Cayzer's retirement as a Director of the Company at last year's Annual General Meeting. Once again, the Board and I would like to reiterate our thanks to him for the enormous contribution he made in steering this investment trust forward since its launch.

Overview

The state of flux in global markets continues. Inflation in Asian economies was more moderate over the review period than elsewhere, and central banks not as aggressive in their rate hikes. Even so, the threat of a possible global recession spilling into the region weighed heavily on investors' minds. As ever, markets have paid close attention to US Federal Reserve (Fed) policy, which has put up rates 11 times since March 2022 (with a combined rise of 525 basis points).

As I referenced in the Half Yearly Report, China easing Covid restrictions raised expectations that a reopening economy would lead to greater demand across several sectors. This recovery has proved to be patchier than anticipated. Struggles in the country's property sector continue and political tensions exacerbated market volatility (once again rising US-China rhetoric was a notable feature).

By contrast, India has shown signs of recovery in urban consumer demand, and has a buoyant housing market. The Reserve Bank of India (RBI) forecasts GDP growth of 6.5% for the 23/24 fiscal year, putting India among the fastest-growing economies. Indonesia's market has also been stronger, with domestic spending particularly resilient.

Meanwhile, the ASEAN region continues to look attractive. Your Manager sees the bloc emerging as a key beneficiary of the shifts in global supply chains amid the evolving geopolitical landscape, especially between China and the US. In particular, corporate initiatives to embark on a China plus 1 or China plus 2 strategy as part of a supply chain diversification move is fuelling investment across ASEAN, with notable beneficiaries such as Vietnam, given its niche in apparel and electronics; Thailand, which is drawing interest from the printed circuit board supply chain because of its developed infrastructure and industrial parks; and Malaysia, for its engineering talent in software design companies. The bloc's supportive policies, cost competitiveness, industrial development, linkages to existing manufacturing hubs and rising middle-income consumers are structural drivers that are not only attracting foreign direct investment but also spurring intra-Asian trade, and in turn, boosting economic growth.

Investment Performance

Although the weaker global economic environment has continued to be challenging for investors, over the last 12 months, on a total return basis, the Company's net asset value ("NAV") rose +7.6% in sterling terms for the 12 months to the end of July 2023, while the share price return was +7.3% having been impacted by the widening of the NAV discount to 14.5%. By comparison, the MSCI AC Asia ex Japan Small Cap (total return) index returned +8.0% and the MSCI AC Asia ex Japan rose 0.8%. The outperformance of smaller companies in Asia against their large cap peers now stretches several years, with the small cap index outperforming large cap by more than 10% annually over the past 3 years, testament to the benefits of investing in this overlooked segment of the equity market. In addition I am pleased to note that in the two-year period from 1 August 2021 (the date that we set the Company's new Benchmark against the new investment policy), the NAV total return has been 6.1%, the share price total return has been 5.5% and the Benchmark return was 2.5%.

It has been especially satisfying to see the high-quality, cash-generative small companies favoured by your Manager fare well. This was notably the case in countries like India and Indonesia, where structural growth, huge consumer markets and rising adoption of technology led to strong performance from businesses in a variety of sectors, including banking, industrials, IT, and branded consumer products. You can read more detail on company-level performance in the Investment Manager's Report below.

While China has proved to be one of the weaker countries in terms of its performance, your Manager has taken advantage of volatility and attractive valuations of certain high-quality smaller companies to add exposure, from a relatively low base. This was aided by the change of mandate approved by shareholders last year (which saw the removal of the limit on company size at initiation), allowing your Manager greater flexibility in picking companies in larger markets such as China.

Asia is more than just China and India, however, and your Company's portfolio is highly diversified across the region, focusing on businesses with healthy balance sheets and strong growth prospects. Stock selection was strong in Korea and Taiwan, where companies involved in cutting-edge technologies and digital services benefitted from a recovery in sentiment towards the IT sector globally, supported by a wave of interest in Artificial Intelligence. Frontier markets such as Vietnam and Sri Lanka also had a pretty volatile ride due to political and economic pressures although ended the period on a much stronger footing, with some of the companies there among the portfolio's strongest performers.

Over the long term, the value of investing in such hand-picked smaller companies in Asia has proved their worth. £1,000 invested in 1995 is now worth £22,580 with dividends reinvested; and your Company is one of the top five among the Association of Investment Companies (AIC)'s ISA millionaires: a company that would have made investors over £1,000,000 had they invested their full ISA allowance from 1999 to 2023.

Dividend and Reserves

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.

Three interim dividends of 1.6p and a fourth interim of 1.61p have been paid in March, June, September and December 2023, totalling 6.41p (2022 - Ordinary dividend 6.4p). Furthermore, I am very pleased to report that the continuing strength of dividend generation from the portfolio has allowed the Company to declare a further special interim dividend in respect of the year ended 31 July 2023 of 2.25p per Ordinary share which will be paid on 20 December 2023 to shareholders on the register on the record date of 24 November 2023 (ex dividend 23 November 2023). The special dividend will bring the total distribution for the year to 8.66p (2022 - 8.0p).

The Board's strategy is to maintain the progressive dividend policy of the last 25 years (including with the flexibility to pay dividends out of capital reserves where merited in the future) in order to provide shareholders with a regular level of income alongside capital growth prospects. Following payment of the four interims and special dividend for the year to 31 July 2023, there remains well over a year's worth of reserves to cover the Ordinary dividend.

Share Capital and Gearing

One of the disappointing aspects of your Company's performance is the continuing discount to NAV. During the period the shares have traded at an average discount of -12.5%, which is higher than its long-term average. This is in line with the Company's immediate peers, at a time when investment trust discounts have moved to historically wide levels. 

Your Board is very mindful of the negative impact of large discounts to NAV to shareholders. As a result, we have started to buy back Ordinary shares in the market for treasury. In total 500,000 shares have been purchased in the Company's financial year (2022: nil), 0.3% of the Company's issued shares (excluding Treasury shares). A further 595,000 shares have been purchased since the end of the reporting to date.

We will continue to oversee the judicious use of share buy backs. The shares bought back in this reporting period were at a weighted average discount to NAV of -13.5%, supporting the twin aims of reducing the volatility of any discount whilst modestly enhancing the NAV for shareholders.

The Company's net gearing at 31 July 2023 was 12.1% with the debt provided by the £30m Loan Notes and the £36.6 million Convertible Unsecured Loan Stock redeemable in 2025. As at 18 October 2023, the latest practicable date, the net gearing stood at 10.2%.

Your Investment Manager

When we announced the amended investment policy in November 2021 (and approved by Shareholders in January 2022) we also introduced a number of other changes; one of which was to deepen the Company's management team, in particular the addition of Flavia Cheong, abrdn's Head of Equities, Asia Pacific, as joint lead manager alongside Hugh Young and Gabriel Sacks and now Xin-Yao Ng, both of whom have worked alongside Hugh for 15 and 5 years respectively. This was partially in recognition of the fact that the long-term success of your Company can be attributed to the strong teamwork at abrdn and that Hugh Young was nearing retirement. 

I can now confirm that Hugh will be retiring on 31 December 2023, the same point at which he retires from the Manager. Hugh has worked tirelessly on behalf of the Company since its launch and, both personally and on behalf of the Board, I would like to thank him and wish him the very best for his well-earned retirement. The cumulative long term performance disclosed on page 27 of the published Annual Report and Financial Statements for the year ended 31 July 2023 is testament to Hugh's skill, dedication and methodology that he has handed down to the management team over the years. While Hugh leaves us in good hands with a high-quality team across Asia (over 40 investment personnel across six countries) continuing the vital on-the-ground research as part of your Company's investment process, he will be much missed.

I know Hugh still views Asia's rapidly developing economies as providing a fertile ground for smaller companies. Your Manager continues to explore opportunities across the region to produce a genuinely diversified portfolio not reliant on any one market, looking for businesses with strong balance sheets, exceptional business models and demonstrating resilience to macro concerns.

Responsible Investment

Your Manager has long been at the forefront of including environmental, social and governance assessment in their investment research. Whilst your Company is not a 'sustainable fund', we have long acknowledged that the best companies are sustainable companies, and that is very much your Company's investment philosophy. Although the portfolio's MSCI ESG rating of 'BB' is in line with that of the benchmark it is pleasing to note that the Company's portfolio Economic Emission Intensity is only 13.6% of the benchmark. Further detailed information can be found in the ESG report on page 106 of the published Annual Report and Financial Statements for the year ended 31 July 2023.

Active engagement with your investee companies is also a hallmark of your Manager's long experience of investing in smaller companies in Asia. You can read more detail on company-level engagement and responsible investing on page 37 of the published Annual Report and Financial Statements for the year ended 31 July 2023.

The task force on climate-related financial disclosures (referred to as "TCFD") is now a global standard for reporting climate risks and opportunities. As a listed investment company, the Company is not subject to the FCA Listing Rule requirement to comply with TCFD reporting. However, the Board is a keen supporter of the ambitions of TCFD, as it believes it will improve disclosure of climate related risks. This in turn will help the Investment Manager and other stakeholders better assess the risks which will support sound investment decisions. Your Manager is subject to mandatory requirements to report on the Company as one of its products and the first abrdn Asia Focus plc TCFD Report, for the year ended 31 December 2022, is available under the 'Literature' section at asia-focus.co.uk.

Board Succession

As I indicated at the half-year stage, as part of the Board's succession plan, Randal McDonnell, the Earl of Antrim, will be stepping down at this year's AGM having completed his service. I'd like to thank Randal for his service to the Company. It has been a pleasure to have him on the Board and his wise contributions will be much missed. 

Following a review of the Board's skills, background and experience, and with the support of Fletcher Jones, an independent specialist investment trust recruitment consultant, I am pleased to announce the appointment of Lucy Macdonald as his replacement who will be joining the Board immediately following the close of business of the AGM on 5 December 2023. Lucy has enjoyed a successful career in asset management and was, until 2020, managing director, CIO global equities at Allianz Global Investors. Lucy will bring significant investment experience to the Board. She is an experienced board director and is currently a member of the investment committee of the RNLI, a non-executive council member of the Duchy of Lancaster and senior independent director of JPMorgan Global Emerging Markets Income Trust Plc

To further diversify the Board's composition and deepen the bench strength on the Board with future Board succession in mind, I am also pleased to announce the appointment of Davina Curling with effect from 1 March 2024. Davina has also enjoyed a successful career in asset management and was formerly managing director, head of European equities at Russell Investments. More recently Davina has consulted on projects for small companies and start-ups in the financial, manufacturing and retail sectors. Davina is a non-executive director of Henderson Opportunities Trust plc and INVESCO Select Trust plc and is a member of the investment committee of St James's Place Wealth management. Davina will become Senior Independent Director upon appointment.

Your Board is cognisant of the FCA's diversity and inclusion Policy Statement PS22/3 and remains committed to corporate governance best practice as recommended in the Hampton-Alexander and Davies reviews. I am pleased to confirm that from 1 March 2024, the Board will be compliant with the new diversity and inclusion targets set out in Chapter 15 of the FCA's Listing Rules. 

Value for Money

We strive to keep the cost of investing low for shareholders to retain as much of the return on their investment as possible. Ongoing charges for the year were 0.92% (2022: 0.88%), primarily made up of the management fee. As you know, the fee was reduced in 2021 to 0.85% for the first £250m, 0.6% for the next £500m and 0.5% for market capitalisation over £750m, to provide even better value for money for shareholders. Importantly, the management fee is tied to the share price of the Company, and not the NAV. This aligns your Manager's fees with shareholder returns, and sets your Company apart from many of its peers. 

In addition, in 2022 the Company introduced a performance-linked conditional tender offer for up to 25% of the issued capital. Shareholders will be offered the opportunity to realise a proportion of their holding for cash at a level close to NAV less costs in the event of underperformance against the benchmark in the five year period ending 1 August 2026.

Your Board continues to keep all costs under review but believes that, given the breadth and depth of on-the-ground research by your Manager, the very selective stock picking (your Company's portfolio has an active share of 97.8 at year end) and the long-term outperformance, the current fees constitute good value for money.

Migration of abrdn Savings Plans to interactive investor ("ii")

The Company's Manager, abrdn, has been reviewing its current service provider for its investment trust share plans (abrdn Savings Plan, Children's Plan and ISA). In May 2022, abrdn completed the acquisition of ii, the UK's second largest, award-winning investment platform for self-directing private investors. Having considered the various options, abrdn has concluded its review and has decided to migrate its share plan customers to ii in December 2023, given the strength of the ii offering, its understanding of and enthusiasm for investment trusts and the strong representation of investment trusts in its customer portfolios. Following completion of the migration, plan participants should contact the Company's registrars, Equiniti (further details on page 111 of the published Annual Report and Financial Statements for the year ended 31 July 2023) if they would like to continue to receive hard copies of shareholder reports and communications and they will be added to the Company's mailing list. Plan participants who have queries in respect of the migration should raise them directly with abrdn's investor services team by email at inv.trusts@abrdn.com or by telephone on 0808 500 4000 or 00 44 1268 448 222 (Monday to Friday 9am to 5pm - call charges will vary).

Shareholder Engagement and Annual General Meeting

The Company's Annual General Meeting is scheduled for 11:00 a.m. on 5 December 2023. The AGM will be preceded by a short presentation from the management team and following the formal business there will be a light shareholder buffet lunch and the opportunity to meet the Directors. In addition to the usual ordinary business being proposed at the AGM, as special business the Board is seeking to renew the authority to issue new shares and sell treasury shares for cash at a premium without pre-emption rules applying and to renew the authority to buy back shares and either hold them in treasury for future resale (at a premium to the prevailing NAV per share) or cancel them. I would encourage all shareholders to support the Company and lodge proxy voting forms in advance of the meeting, regardless of whether they intend to attend in person.

In light of the significant take up from shareholders at the online presentation held in November 2022, in advance of the AGM, the Board has decided to hold another interactive Online Shareholder Presentation which will be held at 11:00 a.m. on 21 November 2023. At the presentation, shareholders will receive updates from the Chair and Manager and there will be the opportunity for an interactive question and answer session. Following the online presentation, shareholders will still have time to submit their proxy votes prior to the AGM and I would encourage all shareholders to lodge their votes in advance in this manner. Full registration details can be found at: asia-focus.co.uk.

Outlook

While it has been a tough period for small caps elsewhere, Asia's domestic growth story means that the region's diverse and fast-growing small companies are outpacing larger rivals. Asia is forecast to contribute around 70% of global growth for 2023, according to the IMF's last World Economic Outlook (published in April). Growth in Asia and the Pacific is set to accelerate to 4.6% this year from 3.8% in 2022.

As I have already referenced, although China's post-Covid recovery has thus far failed to take off and there has been much talk of the 'Japanification' of China's economy, improved policy messaging from China's government and more concrete measures could see an improved backdrop for companies over the longer term. Meanwhile, India's prime minister Narendra Modi continues to make the bold claim that India will become one of the world's top three economies within his third term (should he be re-elected in 2024).

Importantly your Company is able to invest in excellent companies spread across Asia and it is not dependent on investing solely in India or China. Recovery in Southeast Asia continues to gather pace and markets like Vietnam are providing a more positive environment for small-cap investors, notwithstanding significant volatility there during the year.

Stronger GDP growth should benefit the smaller companies targeted by this investment trust over time. But by no means does this measure alone automatically result in strong share-price performance. Pinpointing those businesses that can succeed and are capable of becoming 'multi-baggers' (stocks that deliver returns many times over the original investment), requires a disciplined, bottom-up stock picking approach.

Your Company remains positioned around Asia's long-term structural growth themes, such as greater domestic consumption that comes with Asia's rising affluence, booming infrastructure, the growth of digital, moving to a lower-carbon future, advances in health and wellness technology, and the opportunities offered by the rollout of 5G, big data and digital interconnectivity.

Relatively under-researched and inefficient markets across the whole Asian continent mean there is ample potential for unearthing hidden gems, companies with strong balance sheets and sustainable earnings prospects that can emerge stronger. I am confident that with extensive on-the-ground coverage and a highly experienced management team, your Manager is well positioned to keep finding quality companies among the hugely varied Asian small cap universe.

Krishna ShanmuganathanChair19 October 2023

Investment Manager's Review

Performance review

Asian small caps demonstrated strong performance over the 12-month review period to 31 July 2023, despite the volatility across global markets. The benchmark MSCI AC Asia Ex Japan Small Cap Index returned +8.0% in sterling terms over the review period. The Company's net asset value ("NAV") and share price, both in total return terms, increased by 7.6% and 7.3%, respectively.

As your Chair has highlighted earlier in this report, global markets have faced numerous challenges over the review period, including increasing inflation and interest rates (especially in developed markets), concerns regarding a potential global recession and a slower-than-expected China recovery. Nevertheless, Asian small caps have demonstrated remarkable resilience, outperforming their larger counterparts by a significant margin. Over the past three years, the cumulative outperformance of smaller companies in Asia against the large cap index has amounted to a meaningful 38 percentage points (the MSCI Asia ex Japan Small Cap gained 43% in the three years to 31 July 2023, compared with 4.2% for the MSCI Asia ex Japan). Heightened market volatility and macroeconomic uncertainty means our investment process gains even greater significance and we believe the unwavering rigour in seeking out quality has proven particularly advantageous over the 12-month period.

Our stock selection in India and Indonesia contributed to the positive performance, as both countries enjoyed resilient domestic spending during the review period. India-based engineering and technology solutions company Cyient, has seen a strong recovery in earnings as demand for engineering software and design services bounced-back in the aerospace industry, while margins benefited from management's restructuring efforts over the past few years. Prestige Estates, a property developer, released robust presales figures thanks to new projects and continued industry consolidation as they look to accelerate growth and become a national player. Similarly, Syngene, a contract research organisation working in pharmaceuticals, biotech and other industries, also benefited from a series of positive earnings reports.

The company's strategic investments to expand capacity in biologics manufacturing and discovery services, as well as its solid balance sheet and a low debt profile, contributed to its success over the review period. Shares of Indian downstream oil and gas company Aegis Logistics were especially strong in the last month of the period, as the company released good quarterly results. In Indonesia, Bank OCBC NISP announced robust first-quarter performance, buoyed by asset growth due to an improving economic climate. Other standout performers in Indonesia included Ultrajaya Milk Industry, a more consumer-driven business focused on household dairy products, and fuel distributor AKR Corporindo.

At a sector level, technology, industrials and financials were positives for the portfolio. A stabilising tech sector and rising enthusiasm for generative artificial intelligence (AI) saw strong performance in both Taiwan and Korea. Positive stock selection in both countries aided performance over the 12 months. In Korea, Park Systems, manufacturer of atomic force microscopy (AFM) systems, was the leading contributor to relative results over the year. AFM has diverse applications in advanced science and technology labs, and the size of the addressable market should grow over time given it is still a relatively new field. Leeno Industrial also generated strong returns, with an anticipated recovery in demand driven by AI and testing initiatives. Meanwhile, in Taiwan, Sunonwealth Electric Machine Industry, which manufactures industrial fans and Taiwan Union Technology, which distributes copper-clad laminate, also contributed to relative performance given an improved outlook for growth. In addition, Vietnam's leading IT group FPT Corporation advanced over the review period on continued strong results with the company reporting a 21% profit jump in the second quarter, driven by a 29% surge in IT service revenues.

Elsewhere, our positioning in several other companies also proved advantageous. Shares of Thailand-based TISCO Financial Group performed well as its conservative lending practices over the past few years proved prescient. Sri Lankan conglomerate John Keells Holdings, which operates in sectors including transportation, consumer goods, retail, leisure, property, and financial services, also advanced as a beneficiary of a recovery in tourism and the overall domestic economy in Sri Lanka following the implementation of significant structural reforms.

On the other side, your Company's exposure to China and Hong Kong, both among the worst-performing markets, dragged on performance. Consumer-related sectors bore the brunt of the selling and the property sector continued to languish. Key detractors in China included JOINN Laboratories., a drug testing business, and Sinoma Science & Technology, an advanced materials company focused on green energy solutions. Hong Kong-listed banking group Dah Sing Financial Holdings Limited and dry-bulk shipper Pacific Basin Shipping were also weak.

Our stock selection and overweight positioning in Singapore also weighed on overall performance. Among the main detractors in this market were investment holding company Yoma Strategic Holdings, a conglomerate operating in Myanmar, property developer Bukit Sembawang Estates and nanotechnology solutions provider Nanofilm. The latter reported weak semi-annual results due to slowing demand and high operating expenses.

Other detractors of note mainly included companies in the consumer discretionary, materials and health care sectors. Malaysian hotel operator Shangri-La Hotels Malaysia Bhd., Indonesia-focused M.P. Evans, which produces palm oil, and Thailand-based Mega Lifesciences PCL came under pressure. In addition, Taiwan-headquartered e-commerce operator momo.com underperformed, in part due to disappointing sales growth and broader concerns about the lacklustre pace of digital sales expansion following the easing of lockdown measures.

Portfolio Activity

Much the same as we have said in previous reports, market volatility creates price disconnects, which require managers to focus on fundamentals. We have a long-term approach to investing and favour businesses with clearer earnings visibility and stronger fundamentals, focusing on quality companies that are well placed in structurally growing areas, such as healthcare and technology. This approach also helps us mitigate downside risks to growth from inflationary pressures. As such, over the period we have reduced or exited positions where we felt there was less certainty in a company's earnings trajectory or where those earnings could be less resilient to current macro headwinds.

Keeping in line with the Company's focus on quality, we purchased shares in Taiwan's Sinbon Electronics, which makes cables and connectors for niche markets. The company supplies products and applications to sectors including green energy, industrial applications, automotive, medical equipment as well as communication and electronic peripherals. In a highly fragmented industry, its competitive edge lies in its capabilities to manufacture highly customised products for its diversified customer base, as well as its well-entrenched partnerships with its suppliers and clients. Although its shares were under pressure after the release of its 2023 first half results, we view it as a beneficiary of long-term structural trends such as the Internet of Things, 5G applications and electric vehicles, as well as growing demand for renewable energy, supported by solid order visibility over the next two to three years. The company operates a cost pass-through model which ensures healthy margins and cash-flow.

Another key purchase was Autohome, a dominant Chinese auto platform with more than 60 million daily active users. It trades at attractive valuations, with just the cash on its balance sheet representing more than 75% of the Group's total market value, and we see latent potential for consumer spending to pick up in China as the economy re-opens. Autohome has an asset-light business model, delivering comprehensive, independent and interactive content to automobile buyers and owners. Its core business benefits from the powerful network-effect characteristics of a classifieds business and it is the number one player in the market. Its original generated content drives high-quality user traffic, which in turn results in advertising and lead generation. It is also expanding into new areas of business, such as auto-related financing for example and used car sales.

As covered in our interim report, we added other Chinese companies to the portfolio including seeds & nuts producer ChaCha Food. With well-established brands, the company has high potential for growth as the largely fragmented snacks industry in China presents a consolidation opportunity. As an aside, we engaged with the company over the period to gain visibility on its risk management policies on key environmental, social and governance (ESG) topics, and to encourage the company to issue its first ESG report. We came away with a positive impression given ChaCha's comprehensive ESG practices in its daily operations, as well as its efforts to improve disclosure and business integration. We also added Kerry Logistics, one of Asia's largest integrated logistics providers. With its diversified customer base, we believe it is well placed to benefit from supply-chain relocation, e-commerce growth and intra-regional trade in Asia.

Against these purchases, we exited Pacific Basin Shipping, given the lack of visibility and momentum on shipping rates (despite the compelling supply and demand dynamic). The industry is likely to enter a significant capex cycle, which could also affect shareholder returns. Elsewhere, we sold Douzone Bizon, due to concerns over execution and an uncertain growth outlook, and divested from eCloudvalley Digital Technology, owing to poor disclosure and a slowdown in growth. Other sales included Absolute Clean Energy, IPH, Nazara Technologies and Tatva Chintan Pharma; small positions that we didn't feel compelled to scale up.

Outlook

We expect global market sentiment to remain volatile in the short term, given concerns regarding global growth, monetary policies in the US and other developed markets, as well as developments in China, where macroeconomic data remains soft. Having said that, at the time of writing the Chinese government has begun another round of easing measures which should increase support to the economy at the margin. While we are yet to see more impactful policy action, there are still good opportunities to invest in small cap stocks that trade at attractive valuations and that provide exposure to pockets of growth within China's domestic market.

Elsewhere, other Asian economies are benefiting from diversification in global supply chains. Companies are adding alternative sourcing locations, increasingly adopting "China plus one" or "plus two" strategies. We have kept a large allocation to India in the portfolio, where we have exposure to a diverse set of companies operating in a number of high-growth industries. India is in the early stages of a cyclical upswing, and enjoys a demographic dividend, meaning it is well-placed for sustainable long-term growth. The region will also gain from growing demand for AI-related apps and chips, especially in the semiconductor and consumer electronics segments.

Resource-rich Indonesia has a sizeable and dynamic domestic market with rising post-pandemic consumer demand. There is a more limited universe of small caps compared with elsewhere, but we believe the portfolio is invested in well-run businesses with vast long-term potential. Vietnam, meanwhile, has become a key player in manufacturing - benefiting from diversification in the global supply chain and numerous free-trade agreements. The country is on a growth track, and we continue to like the long-term macro story. On the other hand, we do see some near-term political risk in some parts of the region, with political uncertainty in Thailand and general elections for both India and Indonesia in 2024. Outside of Thailand though, we generally expect political stability with a continuity in policy-making which provides a positive backdrop for the corporate sector.

In summary, we continue to believe Asian small caps offer significant value. There are attractive opportunities around the structural themes of aspiration, building Asia, digital future, going green, health & wellness and tech enablers. Overall, we have been nimble, taking the opportunity to raise the portfolio's earnings visibility and reduce exposure to names where this visibility is less certain. As a result, we continue to favour quality Asian small-cap companies with solid balance sheets and sustainable earnings prospects that can emerge stronger and position the portfolio well in tough times. While performance of small caps in the region can be volatile, given our in-house research capabilities, investment management focus and bottom-up analysis, we expect to deliver for our shareholders in the long run.

Gabriel Sacks, Flavia Cheong, Xin-Yao Ng & Hugh Youngabrdn Asia Limited19 October 2023

Overview of Strategy

Business Model

The business of the Company is that of an investment company which seeks to qualify as an investment trust for UK capital gains tax purposes.

Investment Objective

On 27 January 2022 shareholders approved an amended investment objective. The Company aims to maximise total return to shareholders over the long term from a portfolio made up predominantly of quoted smaller companies in the economies of Asia excluding Japan.

Investment Policy

On 27 January 2022 shareholders approved an amended investment policy. The Company may invest in a diversified portfolio of securities (including equity shares, preference shares, convertible securities, warrants and other equity-related securities) predominantly issued by quoted smaller companies spread across a range of industries and economies in the Investment Region. The Investment Region includes Bangladesh, Cambodia, China, Hong Kong, India, Indonesia, Korea, Laos, Malaysia, Myanmar, Pakistan, The Philippines, Singapore, Sri Lanka, Taiwan, Thailand and Vietnam, together with such other economies in Asia as approved by the Board.

The Company may invest up to 10% of its net assets in collective investment schemes, and up to 10% of its net assets in unquoted companies, calculated at the time of investment.

The Company may also invest in companies traded on stock markets outside the Investment Region provided over 75% of each company's consolidated revenue, operating income or pre-tax profit is earned from trading in the Investment Region or the company holds more than 75% of their consolidated net assets in the Investment Region.

When the Board considers it in shareholders' interests, the Company reserves the right to participate in rights issues by an investee company.

Risk Diversification

The Company will invest no more than 15% of its gross assets in any single holding including listed investment companies at the time of investment.

Gearing

The Board is responsible for determining the gearing strategy for the Company. Gearing is used selectively to leverage the Company's portfolio in order to enhance returns where and to the extent this is considered appropriate to do so. Gearing is subject to a maximum gearing level of 25% of NAV at the time of draw down.

Investment Manager and Alternate Investment Fund Manager

The Company's Alternative Investment Fund Manager, appointed as required by EU Directive 2011/61/EU, is abrdn Fund Managers Limited ("aFML") (previously known as Aberdeen Standard Fund Managers Limited) which is authorised and regulated by the Financial Conduct Authority. Day to day management of the portfolio is delegated to abrdn Asia Limited ("abrdn Asia", the "Manager" or the "Investment Manager"). aFML and abrdn Asia are wholly owned subsidiaries of abrdn plc.

Delivering the Investment Policy

The Directors are responsible for determining the investment policy and the investment objective of the Company. Day to day management of the Company's assets has been delegated, via the AIFM, to the Investment Manager, abrdn Asia. abrdn Asia invests in a diversified range of companies throughout the Investment Region in accordance with the investment policy. abrdn Asia follows a bottom-up investment process based on a disciplined evaluation of companies through direct visits by its fund managers. Stock selection is the major source of added value. No stock is bought without the fund managers having first met management. abrdn Asia estimates a company's worth in two stages, quality then price. Quality is defined by reference to management, business focus, the balance sheet and corporate governance. Price is calculated by reference to key financial ratios, the market, the peer group and business prospects. Top-down investment factors are secondary in the abrdn Asia's portfolio construction, with diversification rather than formal controls guiding stock and sector weights. Whilst the management of the Company's investments is not undertaken with any specific instructions to exclude certain asset types or classes, the Investment Manager embeds ESG into the research of each asset class as part of the investment process. For the manager, ESG investment is about active engagement, in the belief that the performance of assets held around the world can be improved over the longer term.

A detailed description of the investment process and risk controls employed by abrdn Asia is disclosed on pages 103 to 105 of the published Annual Report and Financial Statements for the year ended 31 July 2023. A comprehensive analysis of the Company's portfolio is disclosed on pages 30 to 40 of the published Annual Report and Financial Statements for the year ended 31 July 2023 including a description of the ten largest investments, the portfolio investments by value, sector/geographical analysis and currency/market performance. At the year end the Company's portfolio consisted of 62 holdings.

Comparative Indices

From 1 August 2021 the Manager has utilised the MSCI AC Asia ex Japan Small Cap Index (currency adjusted) as well as peer group comparisons for Board reporting. For periods prior to 1 August 2021, a composite index is used comprising the MSCI AC Asia Pacific ex Japan Small Cap Index (currency adjusted) up to 31 July 2021 and the MSCI AC Asia ex Japan Small Cap Index (currency adjusted) thereafter. It is likely that performance will diverge, possibly quite dramatically in either direction, from the comparative index. The Manager seeks to minimise risk by using in-depth research and does not see divergence from an index as risk.

Promoting the Company's Success

In accordance with corporate governance best practice, the Board is now required to describe to the Company's shareholders how the Directors have discharged their duties and responsibilities over the course of the financial year following the guidelines set out under section 172 (1) of the Companies Act 2006 (the "s172 Statement"). This Statement, from 'Promoting the Success of the Company' to "Long Term Investment", provides an explanation of how the Directors have promoted the success of the Company for the benefit of its members as a whole, taking into account the likely long term consequences of decisions, the need to foster relationships with all stakeholders and the impact of the Company's operations on the environment.

The purpose of the Company is to act as a vehicle to provide, over time, financial returns to its shareholders. The Company's Investment Objective is disclosed above. The activities of the Company are overseen by the Board of Directors of the Company.

The Board's philosophy is that the Company should operate in a transparent culture where all parties are treated with respect and provided with the opportunity to offer practical challenge and participate in positive debate which is focused on the aim of achieving the expectations of shareholders and other stakeholders alike. The Board reviews the culture and manner in which the Manager operates at its regular meetings and receives regular reporting and feedback from the other key service providers. 

Investment trusts, such as the Company, are long-term investment vehicles, with a recommended holding period of five or more years. Typically, investment trusts are externally managed, have no employees, and are overseen by an independent non-executive board of directors. Your Company's Board of Directors sets the investment mandate, monitors the performance of all service providers (including the Manager) and is responsible for reviewing strategy on a regular basis. All this is done with the aim of preserving and, indeed, enhancing shareholder value over the longer term.

Stakeholders

The Company's main stakeholders have been identified as its shareholders, the Manager (and Investment Manager), service providers, investee companies and debt providers. More broadly, the environment and community at large are also stakeholders in the Company. The Board is responsible for managing the competing interests of these stakeholders. Ensuring that the Manager delivers out performance for Ordinary shareholders over the longer term without adversely affecting the risk profile of the Company which is known and understood by the loan note holders and CULS holders. This is achieved by ensuring that the Manager stays within the agreed investment policy.

Shareholders

Shareholders are key stakeholders in the Company - they look to the Manager to achieve the investment objective over time. The following table describes some of the ways we engage with our shareholders:

The Manager

The key service provider for the Company is the Alternative Investment Fund Manager and the performance of the Manager is reviewed in detail at each Board meeting. The Manager's investment process is outlined on pages 103 to 105 and further information about the Manager is given on page 102 of the published Annual Report and Financial Statements for the year ended 31 July 2023. Shareholders are key stakeholders in the Company - they are looking to the Manager to achieve the investment objective over time and to maximise total return to shareholders over the long term from a portfolio made up predominantly of quoted smaller companies in the economies of Asia excluding Japan. The Board is available to meet at least annually with shareholders at the Annual General Meeting and this includes informal meetings with them over lunch following the formal business of the AGM. This is seen as a very useful opportunity to understand the needs and views of the shareholders. In between AGMs, the Directors and Manager also conduct programmes of investor meetings with larger institutional, private wealth and other shareholders to ensure that the Company is meeting their needs. Such regular meetings may take the form of joint presentations with the Investment Manager or meetings directly with a Director where any matters of concern may be raised directly. 

Other Service Providers

The other key stakeholder group is that of the Company's third party service providers. The Board is responsible for selecting the most appropriate outsourced service providers and monitoring the relationships with these suppliers regularly in order to ensure a constructive working relationship. Our service providers look to the Company to provide them with a clear understanding of the Company's needs in order that those requirements can be delivered efficiently and fairly. The Board, via the Management Engagement Committee, ensures that the arrangements with service providers are reviewed at least annually in detail. The aim is to ensure that contractual arrangements remain in line with best practice, services being offered meet the requirements and needs of the Company and performance is in line with the expectations of the Board, Manager, Investment Manager and other relevant stakeholders. Reviews include those of the Company's depositary and custodian, share registrar, broker and auditors. 

Principal Decisions

Pursuant to the Board's aim of promoting the long term success of the Company, the following principal decisions have been taken during the year:

Portfolio The Investment Manager's Review details the key investment decisions taken during the year and subsequently. The Investment Manager has continued to monitor the investment portfolio throughout the year under the supervision of the Board. A list of the key portfolio changes can be found in the Investment Manager's Report. 

Directorate During the year the Board has initiated a search for a new independent Director as part of the continuing Board succession plans culminating in the decision to appoint two new Directors as explained in the Chair's Statement above.

Long Term Investment

The Investment Manager's investment process seeks to outperform over the longer term. The Board has in place the necessary procedures and processes to continue to promote the long term success of the Company. The Board will continue to monitor, evaluate and seek to improve these processes as the Company continues to grow over time, to ensure that the investment proposition is delivered to shareholders and other stakeholders in line with their expectations.

Key Performance Indicators (KPIs)

The Board uses a number of financial performance measures to assess the Company's success in achieving its objective and to determine the progress of the Company in pursuing its investment policy. The main KPIs identified by the Board in relation to the Company, which are considered at each Board meeting, are as follows:

Principal Risks and Uncertainties

There are a number of risks which, if realised, could have a material adverse effect on the Company and its financial condition, performance and prospects. Risks are identified and documented through a risk management framework and further details on the risk matrix are provided in the Directors' Report. The Board, through the Audit Committee, has undertaken a robust review of the principal risks and uncertainties facing the Company including those that would threaten its business model, future performance, solvency or liquidity. Those principal risks are disclosed in the table below together with a description of the mitigating actions taken by the Board. The principal risks associated with an investment in the Company's Shares are published monthly on the Company's factsheet or they can be found in the pre-investment disclosure document published by the Manager, both of which are available on the Company's website. 

The Board also has a process to review longer term risks and consider emerging risks and if any of these are deemed to be significant these risks are categorised, rated and added to the risk matrix.

Macroeconomic risks arising from geo political uncertainty has been a significant risk during the year leading to rising interest rates and higher inflation. In addition to the risks listed below, the Board is also very conscious of the risks emanating from increased environmental, social and governance challenges. As climate change pressures mount, the Board continues to monitor, through its Manager, the potential risk that investee companies may fail to keep pace with the appropriate rates of change and adaption.

The Board does not consider that the principal risks and uncertainties identified have changed during the Year or since the date of this Annual Report and are not expected to change materially for the current financial year.

Promoting the Company

The Board recognises the importance of promoting the Company to prospective investors both for improving liquidity and enhancing the value and rating of the Company's shares. The Board believes an effective way to achieve this is through subscription to and participation in the promotional programme run by the Manager on behalf of a number of investment trusts under its management. The Company's financial contribution to the programme is matched by the Manager. The Manager reports quarterly to the Board giving analysis of the promotional activities as well as updates on the shareholder register and any changes in the make-up of that register.

The purpose of the programme is both to communicate effectively with existing shareholders and to gain new shareholders with the aim of improving liquidity and enhancing the value and rating of the Company's shares. Communicating the long-term attractions of your Company is key and therefore the Company also supports the Manager's investor relations programme which involves regional roadshows, promotional and public relations campaigns. 

Board Diversity

The Board recognises the importance of having a range of skilled, experienced individuals with the right knowledge represented on the Board in order to allow the Board to fulfil its obligations. The Board also recognises the benefits and is supportive of the principle of diversity in its recruitment of new Board members. The Board will not display any bias for age, gender, race, sexual orientation, religion, ethnic or national origins, or disability in considering the appointment of its Directors. Although the Board does not set diversity targets, it is mindful of best practice in this area, and the Board will continue to evolve in 2023/2024, with the stated aim of improving its diversity. At 31 July 2023, there were four male Directors and one female Director on the Board. Following the appointments of Lucy Macdonald and Davina Curling the Board will comprise three male Directors and three female Directors and will be compliant with the new diversity and inclusion targets set out in Chapter 15 of the FCA's Listing Rules.

Environmental, Social and Governance ("ESG") Engagement

Whilst the management of the Company's investments is not undertaken with any specific instructions to exclude certain asset types or classes, the Investment Manager embeds ESG into the research of each asset class as part of the investment process. ESG investment is about active engagement, with the goal of improving the performance of assets held around the world.

The Investment Manager aims to make the best possible investments for the Company, by understanding the whole picture of the investments - before, during and after an investment is made. That includes understanding the environmental, social and governance risks and opportunities they present - and how these could affect longer-term performance. Environmental, social and governance considerations underpin all investment activities. With 1,000+ investment professionals, the Investment Manager is able to take account of ESG factors in its company research, stock selection and portfolio construction - supported by more than 30 ESG specialists around the world. Please refer to pages 106 to 110 of the published Annual Report and Financial Statements for the year ended 31 July 2023 for further detail on the Investment Manager's ESG policies applicable to the Company.

The Company has no employees as the Board has delegated day to day management and administrative functions to abrdn Fund Managers Limited. There are therefore no disclosures to be made in respect of employees. The Company's socially responsible investment policy is outlined above.

Due to the nature of the Company's business, being a company that does not offer goods and services to customers, the Board considers that it is not within the scope of the Modern Slavery Act 2015 because it has no turnover. The Company is therefore not required to make a slavery and human trafficking statement. The Board considers the Company's supply chains, dealing predominantly with professional advisors and service providers in the financial services industry, to be low risk in relation to this matter.

The Company has no greenhouse gas emissions to report from the operations of its business, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013.

Viability Statement

The Company does not have a formal fixed period strategic plan but the Board formally considers risks and strategy at least annually. The Board considers the Company, with no fixed life, to be a long term investment vehicle, but for the purposes of this viability statement has decided that a period of three years is an appropriate period over which to report. The Board considers that this period reflects a balance between looking out over a long term horizon and the inherent uncertainties of looking out further than three years.

· In assessing the viability of the Company over the review period the Directors have conducted a robust review of the principal risks, focusing upon the following factors:

· The principal risks detailed in the Strategic Report;

· The ongoing relevance of the Company's investment objective in the current environment;

· The demand for the Company's Shares evidenced by the historical level of premium and or discount;

· The level of income generated by the Company;

· The level of gearing provided by the Company's Loan Stock and Loan Notes (including the flexibility afforded by the additional £35m available for drawing under the Loan Note Facility to repay CULS if required in 2025); and

· In the event of triggering the conditional Tender Offer in 2026, the liquidity of the Company's portfolio including the results of stress test analysis performed by the Manager under a wide number of market scenarios.

In making this assessment, the Board has examined scenario analysis covering the impact of significant historical market events such as the 2008 Global Financial Crisis, Covid-19 and the Chinese Devaluation on the liquidity of the portfolio, as well as future scenarios such as geo-political tensions in East Asia, and how these factors might affect the Company's prospects and viability in the future.

Accordingly, taking into account the Company's current position, the fact that the Company's investments are mostly liquid and the potential impact of its principal risks and uncertainties, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due for a period of three years from the date of this Report. In making this assessment, the Board has considered that matters such as significant economic or stock market volatility, a substantial reduction in the liquidity of the portfolio or changes in investor sentiment could have an impact on its assessment of the Company's prospects and viability in the future.

Future

The Board's view on the general outlook for the Company can be found in my Chair's Statement whilst the Investment Manager's views on the outlook for the portfolio are included in the Investment Manager's Review.

The Strategic Report has been approved by the Board and signed on its behalf by:

Krishna Shanmuganathan,Chair19 October 2023

Results

Performance (total return)

Ten Largest Investments

As at 31 July 2023

Portfolio

Investment and ESG Case Studies

Sinoma Science

In which year did we first invest?

2022

% Holding:

2.5%

Where is their head office? Beijing, China

What is their web address? www.sinomatech.com/en/p_s/

What does the company do?

Sinoma is one of the largest wind turbine blade producers in China and the third largest battery separator maker, which is backed by strong R&D capability and support from its parent group.

Why do we like the investment?

We view the stock as a proxy for growth of wind energy. Sinoma is also one of the best state-owned enterprises (SOEs) in China focusing on the development ofnew materials.

Among the company's key strengths is its research and development (R&D) capability. Upon its Shenzhen listing in 2006, Sinoma had inherited a few R&D institutes, including a national laboratory that was focused on developing fibreglass materials. The company has continued to build on its solid R&D foundation.

Sinoma's capable management deserves mention. It has demonstrated strong entrepreneurship in developing downstream applications including wind turbine blades and battery separators. The team has also been stable and runs the company like a privately owned enterprise despite its SOE roots.

As a result, the company is now the largest wind blade producer, second-largest fibreglass maker and the No.3 separator maker in China. It also has a large trove of new materials waiting to be commercialised including hydrogen storage tanks. The hydrogen storage tank segment is a small but rapidly growing business, with potential for growth. The industry has policy support because it is a key development area for thecentral government.

When did we engage Sinoma on ESG?

We last met Sinoma in November 2022.

What were the key areas of engagement?

We have engaged Sinoma mostly around climate change, especially on disclosure of its ESG efforts. Its disclosure around water management and carbon emission given its exposure in fibreglass production is still subpar. However, we expect further ESG improvements ahead because of the parent group's consolidation of its wind turbine blade business into Sinoma. Also, as its revenue contribution from the separator business increases, this should also enhance its ESG credentials.

The company has also demonstrated leadership in wind turbine blade disposal by forming an alliance which it leads with its largest customer Goldwind to collect decommissioned wind turbine blades. Owing to technology constraints, the current blade recycle rateis low (less than 10%), but Sinoma is well positioned totake on future opportunities as and when the right technology emerges.

On the fibreglass front, the company believes its carbon emissions per tonne for this business is at least 20% lower than peers, thus it believes that it can gain market share once clients start to focus more on ESG.

What is the result of our engagement?

We continue our ongoing engagement with Sinoma and encouragingly, MSCI upgraded the company's ESG rating from B to BB in August 2022, citing its increasing involvement in clean tech and peer-leading R&D investment. MSCI also highlighted improvements in Sinoma's carbon mitigation practices, including use of renewable energy.

When do we next meet the company and what will be on the ESG agenda?

We recently met Sinoma during a research trip to China and we will look to engage the company in December to discuss the restructuring of its glass fibre business, including the timeline and impact on its operations from an ESG perspective, including carbon emissions and water usage and management.

Medikaloka Hermina

In which year did we first invest?

2021

% Holding:

2.3%

Where is their head office?

Jakarta, Indonesia

What is their web address?

https://herminahospitals.com/en

What does Medikaloka Hermina do?

The Indonesian hospital operator started out as a maternity clinic with seven inpatient beds in east Jakarta in 1985. Since then, it has grown into the country's largest private hospital group by number of operational beds, with 45 hospitals across 31 cities. 

Why do we like the company?

Hermina is the lowest-cost hospital operator in Indonesia, best positioned to provide healthcare coverage for the masses in the country, that benefits from the roll-out of BJPS (Indo's universal healthcare scheme) and structural rise in healthcare demand.

It is very clear in their positioning, targeting the mass market, and has a key competitive strength in cost leadership to serve this target customer segment. Of the company's founding members, some continue to run the hospital and have executed well on the strategy.

Hermina's core strength is in women's and children's health-care services, given its beginnings in maternity services. It has strong brand equity in obstetrics, gynaecology and paediatrics. More than 73,000 babies are born in Hermina hospitals every year. 

Interests are generally aligned, with management owning shares and key doctors incentivised by a partner-model, where they own shares in the hospitals they work in.

Overall, we regard Hermina as a good quality operator in its field.

When did we engage Medikaloka Hermina on ESG?

We last met Hermina in May 2023.

What were the key areas of engagement?

Our focus remains on engaging Hermina to disclose more around its sustainability efforts, especially around carbon emissions with the company having a high weighted average carbon intensity due to its geographic spread across Indonesia. We have discussed electricity usage, which is the main way that the company contributes to carbon emissions, given that power is mostly generated from coal.

We also track its progress in terms of alignment with the UN SDGs, in particular, SDG 3.8, achieve universal health coverage, including financial risk protection, access to quality essential healthcare services and access to safe, effective, quality, and affordable essential medicines and vaccines for all.

Being the lowest cost operator, Hermina is in a good position to make healthcare affordable to the masses in a country where a large proportion of the population is still relatively poor.

What is the result of our engagement?

Hermina is making an effort to disclose more around sustainability in its annual reports. It has publicised its efforts in the following areas.

On the environmental front, all its hospitals have implemented the green hospital concept, leading to a significant reduction in its environmental footprint (e.g., waste, energy use, water use, and greenhouse gas emissions). Recently, it introduced solar energy to two of its hospitals, in Depok and Bogor.

In terms of social impact, Hermina focuses on public health efforts and assisting underprivileged local communities around its hospitals. It routinely conducts events to provide free medical services.

On governance, it has created a unique and favourable structure, where the shareholders, management and key doctors are incentivised and aligned to minority interests.

We view Hermina as one of the investments whereby business and social good come together well. We have been invested in Hermina for years for abrdn portfolios well before it turned profitable, and we have been engaging the company consistently on its performance delivery. If Hermina does well, it will contribute to the greater good of society in Indonesia in the end.

When do we next meet the company and what will be on the ESG agenda?

We are planning to meet the company in January 2024 and get an update on potential health-care policy changes, tariffs as well as the roll-out of JKN (National Health Insurance) programme, given that these areas would drive mass health-care penetration.

Vijaya Diagnostic Centre

In which year did we first invest?

2021

% Holding:

1.5%

Where is their head office?

Hyderabad, India

What is their web address?

https://www.vijayadiagnostic.com/

What does Vijaya Diagnostic Centre do?

Founded in 1981, Vijaya Diagnostic Centre has grown to become the largest diagnostics provider in South India.

Why do we like the company?

Vijaya has a long growth runway ahead despite its regional market leadership in South India. A large part of this is due to a structural change seen in India: Historically, the country has underspent in healthcare, resulting in under penetration of essential medical diagnostics services. Now, with an expanding and increasingly more affluent middle class, demand for healthcare services is rising alongside greater insurance penetration. Vijaya is well-placed to benefit as medical services become better developed across the board, and costs turn more affordable for the masses.

Compared to its peers, the company draws 95% of revenue from the end consumer segment (patients), which is typically less price sensitive and more driven by brand strength. Also, Vijaya's one-stop shop model, with radiology and pathology in every centre, makes it more convenient for patients and increases the barrier to entry for competitors, including the new-age digital disrupters - as the capital requirement for radiology machines is relatively high. Vijaya is free-cash-flow generative and has a business model that looks as good as its peers, with nationwide reach.

When did we engage Vijaya on ESG?

We last met Vijaya in April 2023.

What were the key areas of engagement?

Since its initial public offering in 2021, there has not been much in terms of disclosures around ESG and sustainability from the company. So, in the April meeting, our key topics of discussion included labour management, especially around employee engagement, training and turnover, corporate behaviour as well as corporate governance and disclosure. In particular, we are keen to encourage Vijaya on greater reporting of alignment with the United Nations' Sustainable Development Goals (SDGs) by companies, given this is an area of increasing investor interest. In particular, UN SDG 3, which focuses on ensuring healthy lives and promoting well-being for all at all ages. Medical diagnostics testing is an essential part of healthcare, which drives better outcomes for patients. Despite this, access to diagnostics across India remains mixed.

One of the focus areas for Vijaya is in making diagnostic services affordable for Indians who have historically underspent on medical care, for a range of reasons, including affordability. This runs parallel to their aim of expanding into India's Tier 2 and Tier 3 cities that have a longer runway for growth and expansion compared to the metropolises, which they expect to be at least 50% of their capital expenditure for the next 3 years. For example, in a previous meeting, the company explained how it has acquired high-end CT scan machines that cost significantly more than the standard models to do mammography tests without compromising patients' health. Vijaya is not charging a premium for this service, rather it is relying on higher rate of utilisation to make money.

In encouraging the company to do more around its disclosures so that the market can recognise the company's efforts and understand its role in delivery diagnostics, we engaged Vijaya and provided a summary of disclosures that we would like them to make in their forthcoming sustainability report. This included a range of granular disclosures, as well as the company's alignment with UN SDG 3. On the environment front, we have also sought to assess the company's impact in terms of carbon emissions impact, mainly through checking on its energy and electricity usage.

What is the result of our engagement?

In response, the company told us it has started taking steps to engage an agency to help Vijaya capture the necessary data that we have suggested through our engagement. We will continue to monitor and engage with Vijaya once the sustainability report is made available to explore ways to further improve disclosures around ESG and sustainability such that it is recognised by the market and external ratings agencies. 

When do we next meet the company and what will be on the ESG agenda?

We would look to follow up on issues such as employee engagement, turnover and corporate behaviour.

John Keells

In which year did we first invest?

1997

% Holding:

2.6%

Where is their head office?

Colombo, Sri Lanka

What is their web address?

https://www.keells.com

What does the company do?

John Keells (JKH) has been in business for 153 years. It is Sri Lanka's largest conglomerate operating in several sectors including leisure (hotels & resorts in Sri Lanka and Maldives), transportation (ports and logistics infrastructure), consumer foods (beverages and ice cream), retail (supermarket chain) and property and financial services (banking and insurance).

Why do we like the investment?

JKH is a diversified group with high-quality assets that serves as a good proxy for the Sri Lankan economy. It is essentially a large company operating in a small market. Management have executed well and the group has been able to attract the best talent locally which should ensure that it continues to thrive over the long term, especially given the exciting potential for Sri Lanka in areas such as tourism and transhipment.

Many of John Keells' businesses are capital-intensive and the group is nearing the tail end of a long investment cycle. In particular, Cinnamon Life Integrated Resort in Colombo (pictured below) is costing about US$1 billion, with just US$100 million to go, versus its market capitalisation of around US$600 million. It is the first integrated resort in Sri Lanka and the largest private investment project. This big project is finally in the harvesting stage, with revenues from most of the residential units sold already recognised in FY2021. From FY2024 onwards, we expect the mall and casino to start operating, which is likely to contribute substantially to the group.

More broadly, the group has also been able to ride through Sri Lanka's debt crisis because a large part of its business is earned in overseas currencies, especially the US dollar. As a result, the group was not overly affected by the depreciation of the Sri Lankan rupee, while its businesses that were more exposed to overseas customers, such as ports and its hospitality segment in the Maldives, held up well, mitigating the impact from the domestic uncertainty on its local operations. Now, the economy is off from its trough and so John Keells' domestic business is stabilising as well. The currency is fluid again and tourism should slowly recover, which bodes well for spending at the hotels, mall and casino at its integrated resort.

How do we assess John Keells on its ESG efforts?

We view John Keells as one of the best governed groups in Sri Lanka with good disclosures on the environmental and social aspects, although the group is not rated by MSCI. Domestically, John Keells was ranked first in the Transparency in Corporate Reporting (TRAC) Assessment by Transparency International Sri Lanka (TISL) for the third consecutive year, with a 100% score for transparency in disclosure practices.

As a part of the group's ongoing efforts towards increasing emphasis on its ESG aspects, John Keells reformulated its ESG framework in collaboration with an international third-party consulting firm, by setting revised group-wide ESG ambitions and translating such ambitions to ESG-related targets.

A key area of focus has been the environmental impact. For FY2022/23, the group's carbon footprint per million rupees of revenue decreased by 29% and water withdrawn per million rupees of revenue decreased by 31%, respectively compared to the previous year. A project to highlight would be "Plasticcyle", its initiative to reduce usage of single-use plastics, support responsible disposal, and promote recycling initiatives and innovation to support a circular economy. Despite the challenges posed by the economic crisis, 'Plasticcycle' has collected 127,000 kg of recyclable plastic waste since its inception in 2017/18.

When do we next meet the company and what will be on the ESG agenda?

We have been engaging with John Keells on material ESG risks, specifically around anti-money laundering (AML) controls and counter-terrorism financing. Looking ahead, we will continue to engage with John Keells on these fronts. With the casino set to start operating in FY2024, we plan to meet the company early in the new year to focus on the selection process for the casino operator and that operator's credibility, as well as their stance towards AML practices and counter-terrorism financing.

Directors' Report

The Directors present their Report and the audited financial statements for the year ended 31 July 2023.

Results and Dividends

Details of the Company's results and proposed dividends are shown above.

Investment Trust Status

The Company (registered in England & Wales No. 03106339) has been accepted by HM Revenue & Customs as an investment trust subject to the Company continuing to meet the relevant eligibility conditions of Section 1158 of the Corporation Tax Act 2010 and the ongoing requirements of Part 2 Chapter 3 Statutory Instrument 2011/2999 for all financial years commencing on or after 1 August 2012. The Directors are of the opinion that the Company has conducted its affairs for the year ended 31 July 2023 so as to enable it to comply with the ongoing requirements for investment trust status.

Individual Savings Accounts

The Company has conducted its affairs so as to satisfy the requirements as a qualifying security for Individual Savings Accounts. The Directors intend that the Company will continue to conduct its affairs in this manner.

Capital Structure, Buybacks and Issuance

The Company's capital structure is summarised in note 14 to the financial statements. 

At 31 July 2023, there were 156,457,978 fully paid Ordinary shares of 5p each (2022 - 156,953,631 Ordinary shares of 5p each) in issue with a further 52,244,590 Ordinary shares of 5p held in treasury (2022 - 51,744,590 Ordinary shares of 5p each held in treasury). During the year 500,000 Ordinary shares were purchased in the market for treasury (2022 - nil). During the period and up to the date of this report no Ordinary shares were issued for cash and no shares were sold from or purchased into treasury.

On 14 December 2022, 6,334 units of Convertible Unsecured Loan Stock 2025 were converted into 2,158 new Ordinary shares of 5p each. On 14 June 2023 6,419 units of Convertible Unsecured Loan Stock 2025 were converted into 2,189 new Ordinary shares of 5p each. In accordance with the terms of the CULS Issue, (as adjusted to reflect the five for one share subdivision in February 2022), the conversion price of the CULS for both conversions was determined at 293.0p nominal of CULS for one Ordinary share of 5p.

Voting Rights

Ordinary shareholders are entitled to vote on all resolutions which are proposed at general meetings of the Company. The Ordinary shares carry a right to receive dividends. On a winding up, after meeting the liabilities of the Company, the surplus assets will be paid to Ordinary shareholders in proportion to their shareholdings.

CULS holders have the right to attend but not vote at general meetings of the Company. A separate resolution of CULS holders would be required to be passed before any modification or compromise of the rights attaching to the CULS can be made.

Gearing

On 1 December 2020 the Company issued a £30 million Senior Unsecured Loan Note (the "Loan Note") at an annualised interest rate of 3.05%. The Loan Note is unsecured, unlisted and denominated in sterling and due to mature in 2035. The Loan Note ranks pari passu with the Company's other unsecured and unsubordinated financial indebtedness.

Management Agreement

The Company has appointed abrdn Fund Managers Limited ("aFML"), a wholly owned subsidiary of abrdn plc, as its alternative investment fund manager. aFML has been appointed to provide investment management, risk management, administration and company secretarial services and promotional activities to the Company. The Company's portfolio is managed by abrdn Asia Limited ("abrdn Asia") by way of a group delegation agreement in place between aFML and abrdn Asia. In addition, aFML has sub-delegated administrative and secretarial services to abrdn Holdings Limited and promotional activities to abrdn Investments Limited ("aIL"). 

Management Fee

With effect from 1 August 2021 the annual management fee has been charged at 0.85% for the first £250,000,000, 0.60% for the next £500,000,000 and 0.50% over £750,000,000. Investment management fees are charged 25% to revenue and 75% to capital.

The management agreement may be terminated by either the Company or the Manager on the expiry of three months' written notice. On termination, the Manager would be entitled to receive fees which would otherwise have been due to that date. 

The Management Engagement Committee reviews the terms of the management agreement on a regular basis and have confirmed that, due to the long-term relative performance, investment skills, experience and commitment of the investment management team, in their opinion the continuing appointment of aFML and abrdn Asia is in the interests of shareholders as a whole.

Political and Charitable Donations

The Company does not make political donations (2022 - nil) and has not made any charitable donations during the year (2022 - nil).

Risk Management

Details of the financial risk management policies and objectives relative to the use of financial instruments by the Company are set out in note 19 to the financial statements.

The Board

The current Directors, Randal Dunluce (The Earl of Antrim), C Black, K Shanmuganathan, L Cooper and A Finn, together with N Cayzer who retired on 30 November 2022, were the only Directors who served during the year. Pursuant to Principle 23 of the AIC's Code of Corporate Governance which recommends that all directors should be subject to annual re-election by shareholders, all the members of the Board will retire at the AGM scheduled for 5 December 2022 and, with the exception of the Earl of Antrim, will offer themselves for re-election. Details of each Director's contribution to the long term success of the Company are provided on page 49 of the published Annual Report and Financial Statements for the year ended 31 July 2023.

The Board considers that there is a balance of skills and experience within the Board relevant to the leadership and direction of the Company and that all the Directors contribute effectively.

In common with most investment trusts, the Company has no employees. Directors' & Officers' liability insurance cover has been maintained throughout the year at the expense of the Company.

The Role of the Chair

The Chair is responsible for providing effective leadership to the Board, by setting the tone of the Company, demonstrating objective judgement and promoting a culture of openness and debate. The Chair facilitates the effective contribution, and encourages active engagement, by each Director. In conjunction with the Company Secretary, the Chair ensures that Directors receive accurate, timely and clear information to assist them with effective decision-making. The Chair leads the evaluation of the Board and individual Directors, and acts upon the results of the evaluation process by recognising strengths and addressing any weaknesses. The Chair also engages with major shareholders and ensures that all Directors understand shareholder views.

The Company has announced that Davina Curling will become Senior Independent Director with effect from her appointment to the Board on 1 March 2024. Prior to then the Audit Committee Chairman in combination with the other independent Directors will continue to fulfil the duties of the senior independent director, acting as a sounding board for the Chair and acting as an intermediary for other Directors as applicable. The Audit Committee Chairman and, following appointment, Senior Independent Director are both available to shareholders to discuss any concerns they may have.

Board Diversity

The Board recognises the importance of having a range of skilled, experienced individuals with the right knowledge represented on the Board in order to allow it to fulfil its obligations. The Board also recognises the benefits and is supportive of, and will give due regard to, the principle of diversity in its recruitment of new Board members. The Board will not display any bias for age, gender, race, sexual orientation, socio-economic background, religion, ethnic or national origins or disability in considering the appointment of Directors. The Board will continue to ensure that all appointments are made on the basis of merit against the specification prepared for each appointment. The Board will take account of the targets set out in the FCA's Listing Rules, which are set out overleaf.

The Board has resolved that the Company's year-end date is the most appropriate date for disclosure purposes. The following information has been provided by each Director through the completion of questionnaires. 

Table for reporting on gender as at 31 July 2023

Table for reporting on ethnic background as at 31 July 2023

Notes:

1. The Company did not meet the target that at least 40% of Directors are women as set out in LR 9.8.6R (9)(a)(i) for the year ended 31 July 2023. However, following the appointments of Ms Macdonald and Ms Curling on 5 December 2023 and 1 March 2024 the Board expects to be compliant for the year ending 31 July 2024.

2. The Company meets the target that at least one Director is from a minority ethnic background as set out in LR 9.8.6R (9)(a)(iii)

3. The Company does not meet the target for the year to 31 July 2023 as the Chair is not a woman and the Company did not have a Senior Independent Director. However, with effect from 1 March 2024, Ms Davina Curling will join the Board as an independent non executive Director and as Senior independent Director and the Company will therefore be compliant for the year ending 31 July 2024. The Company is externally managed and does not have any executive staff specifically it does not have either a CEO or CFO. 

4. This column is not applicable as the Company is externally managed and does not have any executive staff. 

Corporate Governance

The Company is committed to high standards of corporate governance. The Board is accountable to the Company's shareholders for good governance and this statement describes how the Company has applied the principles identified in the UK Corporate Governance Code as published in July 2018 (the "UK Code"), which is available on the Financial Reporting Council's (the "FRC") website: frc.org.uk.

The Board has also considered the principles and provisions of the AIC Code of Corporate Governance as published in February 2019 (the "AIC Code"). The AIC Code addresses the principles and provisions set out in the UK Code, as well as setting out additional provisions on issues that are of specific relevance to the Company. The AIC Code is available on the AIC's website: theaic.co.uk.

The Board considers that reporting against the principles and provisions of the AIC Code, which has been endorsed by the FRC provides more relevant information to shareholders.

The Board confirms that, during the year, the Company complied with the principles and provisions of the AIC Code and the relevant provisions of the UK Code, except as set out below.

1. Interaction with the workforce (provisions 2, 5 and 6);

2. the role and responsibility of the chief executive (provisions 9 and 14);

3. previous experience of the chairman of a remuneration committee (provision 32);

4. executive directors' remuneration (provisions 33 and 36 to 40); and

5. senior independent director (provision 12) (see below);

For the reasons set out in the AIC Code, and as explained in the UK Corporate Governance Code, the Board considers that provisions 1 to 4 above are not relevant to the position of the Company, being an externally-managed investment company. In particular, all of the Company's day-to-day management and administrative functions are outsourced to third parties. As a result, the Company has no executive directors, employees or internal operations. The Company has therefore not reported further in respect of provisions 1 to 4 above. See 'Nomination Committee' below for further details on the appointment of a new Senior Independent Director. The full text of the Company's Corporate Governance Statement can be found on the Company's website: asia-focus.co.uk.

During the year ended 31 July 2023, the Board had five scheduled meetings. In addition, the Audit Committee met twice and the Management Engagement Committee met once and there has been a number of ad hoc Board meetings. Between meetings the Board maintains regular contact with the Manager. Directors have attended the following scheduled Board meetings and Committee meetings during the year ended 31 July 2023 (with their eligibility to attend the relevant meeting in brackets):

Policy on Tenure

In compliance with the provisions of the AIC Code, it is expected that Directors will serve in accordance with the nine year time limits laid down by the AIC Code.

Board Committees

Audit Committee

The Audit Committee Report is on pages 59 to 61 of the published Annual Report and Financial Statements for the year ended 31 July 2023.

Nomination Committee

All appointments to the Board of Directors are considered by the Nomination Committee which comprises all of the Directors. The Board's overriding priority in appointing new Directors to the Board is to identify the candidate with the best range of skills and experience to complement existing Directors. The Board also recognises the benefits of diversity and its policy on diversity is referred to in the Strategic Report on page 22 of the published Annual Report and Financial Statements for the year ended 31 July 2023.

As part of the continuing Board succession and refreshment plans, the Earl of Antrim will be retiring from the Board at the AGM to be held on 5 December 2023. Therefore, during the year the Nomination Committee commenced a search for a new independent non executive Director using the services of Fletcher Jones Limited, an independent recruitment consultant. As part of the search a specification of desired attributes and qualities was prepared and the recruitment process culminated in the decision to appoint Ms Lucy Macdonald and Ms Davina Curling as independent non-executive Directors with effect from the close of business of the AGM on 5 December 2023 and 1 March 2024, respectively and Ms Curling has agreed to become Senior Independent Director.

The Board undertakes an annual evaluation of the Board, Directors, the Chair and the Audit Committee which is conducted by questionnaires. The 2023 evaluation was conducted using questionnaires and highlighted certain areas of further focus such as continuing professional development which will be addressed with input where necessary from the Company's advisors. Overall, the Committee has concluded that the Board has an excellent balance of experience, knowledge of investment markets, legal regulation and financial accounting and continues to work in a collegiate and effective manner. 

The Nomination Committee has reviewed the contributions of each Director ahead of their proposed re-elections at the AGM on 5 December 2023. Ms Black has continued to bring significant financial promotion, marketing and communications expertise to the Board and has been closely involved in the ongoing development of the Company's website; Mr Shanmuganathan has continued to bring his deep experience of Asia and has seamlessly assumed the role of Chair during the year to great effect; Mr Cooper has brought the weight of his significant local Asian market experience to the Board's discussions; and Mr Finn has brought relevant and recent accounting and financial experience to the board and has led the Audit Committee with expertise. For the foregoing reasons, with the exception of the Earl of Antrim who will be retiring from the Board at the forthcoming AGM, the independent members of the Nomination Committee have no hesitation in recommending the re-election of each Director who will be submitting themselves for re-election at the AGM on 5 December 2023.

Management Engagement Committee

The Management Engagement Committee comprises all of the Directors and is chaired by Mr Finn. The Committee is responsible for reviewing the performance of the Investment Manager and its compliance with the terms of the management and secretarial agreement. The terms and conditions of the Investment Manager's appointment, including an evaluation of fees, are reviewed by the Committee on an annual basis. The Committee believes that the continuing appointment of the Manager on the terms agreed is in the interests of shareholders as a whole.

Remuneration Committee

Under the UK Listing Authority rules, where an investment trust has only non-executive directors, the Code principles relating to directors' remuneration do not apply. Accordingly, matters relating to remuneration are dealt with by the full Board, which acts as the Remuneration Committee, and is chaired by the Chair.

The Company's remuneration policy is to set remuneration at a level to attract individuals of a calibre appropriate to the Company's future development. Further information on remuneration is disclosed in the Directors' Remuneration Report on pages 55 to 57 of the published Annual Report and Financial Statements for the year ended 31 July 2023.

Terms of Reference

The terms of reference of all the Board Committees may be found on the Company's website asia-focus.co.uk and copies are available from the Company Secretary upon request. The terms of reference are reviewed and re-assessed by the Board for their adequacy on an annual basis.

Internal Control

In accordance with the Disclosure and Transparency Rules (DTR 7.2.5), the Board is ultimately responsible for the Company's system of internal control and for reviewing its effectiveness and confirms that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Company. This process has been in place for the year under review and up to the date of approval of this Annual Report and Financial Statements. It is regularly reviewed by the Board and accords with the FRC Guidance.

The Board has reviewed the effectiveness of the system of internal control. In particular, it has reviewed and updated the process for identifying and evaluating the significant risks affecting the Company and policies by which these risks are managed.

The Directors have delegated the investment management of the Company's assets to the abrdn Group within overall guidelines, and this embraces implementation of the system of internal control, including financial, operational and compliance controls and risk management. Internal control systems are monitored and supported by the abrdn Group's internal audit function which undertakes periodic examination of business processes, including compliance with the terms of the management agreement, and ensures that recommendations to improve controls are implemented.

Risks are identified and documented through a risk management framework by each function within the abrdn Group's activities. Risk includes financial, regulatory, market, operational and reputational risk. This helps the internal audit risk assessment model identify those functions for review. Any weaknesses identified are reported to the Board, and timetables are agreed for implementing improvements to systems. The implementation of any remedial action required is monitored and feedback provided to the Board.

The significant risks faced by the Company have been identified as being financial; operational; and compliance-related.

The key components of the process designed by the Directors to provide effective internal control areoutlined below:

· the Manager prepares forecasts and management accounts which allow the Board to assess the Company's activities and review its performance;

· the Board and Manager have agreed clearly defined investment criteria, specified levels of authority and exposure limits. Reports on these issues, including performance statistics and investment valuations, are regularly submitted to the Board and there are meetings with the Manager and Investment Manageras appropriate;

· as a matter of course the Manager's compliance department continually reviews abrdn's operations and reports to the Board on a six monthly basis;

· written agreements are in place which specifically define the roles and responsibilities of the Manager and other third party service providers and, where relevant, ISAE3402 Reports, a global assurance standard for reporting on internal controls for service organisations, or their equivalents are reviewed;

· the Board has considered the need for an internal audit function but, because of the compliance and internal control systems in place within abrdn, has decided to place reliance on the Manager's systems and internal audit procedures; and

· at its October 2023 meeting, the Audit Committee carried out an annual assessment of internal controls for the year ended 31 July 2023 by considering documentation from the Manager, Investment Manager and the Depositary, including the internal audit and compliance functions and taking account of events since 31 July 2023. The results of the assessment, that internal controls are satisfactory, were then reported to the Board at the next Board meeting.

Internal control systems are designed to meet the Company's particular needs and the risks to which it is exposed. Accordingly, the internal control systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and by their nature can only provide reasonable and not absolute assurance against mis-statement and loss.

Going Concern

In accordance with the Financial Reporting Council's guidance the Directors have undertaken a rigorous review of the Company's ability to continue as a going concern. The Company's assets consist of equity shares in companies listed on recognised stock exchanges and are considered by the Board to be realisable within a relatively short timescale under normal market conditions. The Board has set overall limits for borrowing and reviews regularly the Company's level of gearing, cash flow projections and compliance with banking covenants. The Board has also reviewed stress testing and liquidity analysis to ensure that even in significant negative markets the Company would still be able to raise sufficient capital to repay its liabilities.

The Directors are mindful of the Principal Risks and Uncertainties disclosed in the Strategic Report on pages 20 and 21 of the published Annual Report and Financial Statements for the year ended 31 July 2023and they believe that the Company has adequate financial resources to continue its operational existence for a period of 12 months from the date of approval of this Annual Report. They have arrived at this conclusion having confirmed that the Company's diversified portfolio of realisable securities is sufficiently liquid and could be used to meet short-term funding requirements were they to arise, including in potentially less favourable market conditions. The Directors have also reviewed the revenue and ongoing expenses forecasts for the coming year. Accordingly, the Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the financial statements.

Management of Conflicts of Interest

The Board has a procedure in place to deal with a situation where a Director has a conflict of interest. As part of this process, the Directors prepare a list of other positions held and all other conflict situations that may need to be authorised either in relation to the Director concerned or his connected persons. The Board considers each Director's situation and decides whether to approve any conflict, taking into consideration what is in the best interests of the Company and whether the Director's ability to act in accordance with his or her wider duties is affected. Each Director is required to notify the Company Secretary of any potential, or actual, conflict situations that will need authorising by the Board. Authorisations given by the Board are reviewed at each Board meeting.

No Director has a service contract with the Company although Directors are issued with letters of appointment upon appointment. The Directors' interests in contractual arrangements with the Company are as shown in note 18 to the financial statements. No other Directors had any interest in contracts with the Company during the period or subsequently.

The Board has adopted appropriate procedures designed to prevent bribery. The Company receives periodic reports from its service providers on the anti-bribery policies of these third parties. It also receives regular compliance reports from the Manager.

The Criminal Finances Act 2017 introduced a new corporate criminal offence of "failing to take reasonable steps to prevent the facilitation of tax evasion". The Board has confirmed that it is the Company's policy to conduct all of its business in an honest and ethical manner. The Board takes a zero-tolerance approach to facilitation of tax evasion, whether under UK law or under the law of any foreign country.

Accountability and Audit

The respective responsibilities of the Directors and the auditors in connection with the financial statements are set out on pages 58 and 69 of the published Annual Report and Financial Statements for the year ended 31 July 2023respectively.

Each Director confirms that:

· so far as he or she is aware, there is no relevant audit information of which the Company's auditors are unaware; and,

· each Director has taken all the steps that they could reasonably be expected to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company's auditors are aware of that information.

Additionally there have been no important events since the year end that impact this Annual Report.

The Directors have reviewed the independent auditors' procedures in connection with the provision of non-audit services. No non-audit services were provided by the independent auditors during the year and the Directors remain satisfied that the auditors' objectivity and independence has been safeguarded.

Independent Auditors

At the November 2022 AGM shareholders approved the re-appointment of PricewaterhouseCoopers LLP ("PwC") as independent auditors to the Company. PwC has expressed its willingness to continue to be the Company's auditors and a Resolution to re-appoint PwC as the Company's auditors and to authorise the Directors to fix the auditors' remuneration will be put to the forthcoming Annual General Meeting.

Substantial Interests

The Board has been advised that the following shareholders owned 3% or more of the issued Ordinary share capital of the Company at 31 July 2023:

There have been no significant changes notified in respect of the above holdings between 31 July 2023 and 19 October 2023.

The UK Stewardship Code and Proxy Voting

Responsibility for actively monitoring the activities of portfolio companies has been delegated by the Board to the AIFM which has sub-delegated that authority to the Manager.

The Manager is a tier 1 signatory of the UK Stewardship Code which aims to enhance the quality of engagement by investors with investee companies in order to improve their socially responsible performance.

Relations with Shareholders

The Directors place a great deal of importance on communication with shareholders. The Annual Report is widely distributed to other parties who have an interest in the Company's performance. Shareholders and investors may obtain up to date information on the Company through the Manager's freephone information service and the Company's website asia-focus.co.uk. The Company responds to letters from shareholders on a wide rangeof issues.

The Board's policy is to communicate directly with shareholders and their representative bodies without the involvement of the abrdn Group (either the Company Secretary or the Manager) in situations where direct communication is required and usually a representative from the Board meets with major shareholders on an annual basis in order to gauge their views.

The Notice of the Annual General Meeting, included within the Annual Report and financial statements, is sent out at least 20 working days in advance of the meeting. All shareholders have the opportunity to put questions to the Board or the Manager, either formally at the Company's Annual General Meeting or, where possible, at the subsequent buffet luncheon for shareholders. The Company Secretary is available to answer general shareholder queries at any time throughout the year.

Consumer Duty

The FCA's Consumer Duty rules were published in July 2022. The rules comprise a fundamental component of the FCA's consumer protection strategy and aim to improve outcomes for retail customers across the entire financial services industry through the assessment of various outcomes, one of which is an assessment of whether a product provides value. Under the Consumer Duty, the Manager is the product 'manufacturer' of the Company and therefore the Manager was required to publish its assessment of value from April 2023. Using a newly developed assessment methodology, the Manager assessed the Company as 'expected to provide fair value for the reasonably foreseeable future'. As this was the first year of assessment, the Board gained an understanding of the Manager's basis of assessment and no concerns were identified with either the assessment method or the outcome of the assessment.

Special Business at the Annual General Meeting

Directors' Authority to Allot Relevant Securities

Approval is sought in Resolution 10, an ordinary resolution, to renew the Directors' existing general power to allot securities but will also, provide a further authority (subject to certain limits), to allot shares under a fully pre-emptive rights issue. The effect of Resolution 10 is to authorise the Directors to allot up to a maximum of 103.9m shares in total (representing approximately 2/3 of the existing issued capital of the Company), of which a maximum of 51.9m shares (approximately 1/3 of the existing issued share capital) may only be applied to fully pre-emptive rights issues. This authority is renewable annually and will expire at the conclusion of the next Annual General Meeting. The Board has no present intention to utilise this authority.

Disapplication of Pre-emption Rights

Resolution 11 is a special resolution that seeks to renew the Directors' existing authority until the conclusion of the next Annual General Meeting to make limited allotments of shares for cash of up to 10% of the issued share capital other than according to the statutory pre-emption rights which require all shares issued for cash to be offered first to all existing shareholders. This authority includes the ability to sell shares that have been held in treasury (if any), having previously been bought back by the Company. The Board has established guidelines for treasury shares and will only consider buying in shares for treasury at a discount to their prevailing NAV and selling them from treasury at or above the then prevailing NAV.

New shares issued in accordance with Resolution 11 and subject to the authority to be conferred by Resolution 10 will always be issued at a premium to the NAV per Ordinary share at the time of issue. The Board will issue new Ordinary shares or sell Ordinary shares from treasury for cash when it is appropriate to do so, in accordance with its current policy. It is therefore possible that the issued share capital of the Company may change between the date of this document and the Annual General Meeting and therefore the authority sought will be in respect of 10% of the issued share capital as at the date of the Annual General Meeting rather than the date of this document.

Purchase of the Company's Shares

Resolution 12 is a special resolution proposing to renew the Directors' authority to make market purchases of the Company's shares in accordance with the provisions contained in the Companies Act 2006 and the Listing Rules of the Financial Conduct Authority. The minimum price to be paid per Ordinary share by the Company will not be less than 5p per share (being the nominal value) and the maximum price should not be more than the higher of (i) 5% above the average of the middle market quotations for the shares for the preceding five business days; and (ii) the higher of the last independent trade and the current highest independent bid on the trading venue where the purchase is carried out.

The Directors do not intend to use this authority to purchase the Company's Ordinary shares unless to do so would result in an increase in NAV per share and would be in the interests of shareholders generally. The authority sought will be in respect of 14.99% of the issued share capital as at the date of the Annual General Meeting rather than the date of this document. 

The authority being sought in Resolution 12 will expire at the conclusion of the next Annual General Meeting unless it is renewed before that date. Any Ordinary shares purchased in this way will either be cancelled and the number of Ordinary shares will be reduced accordingly or under the authority granted in Resolution 11 above, may be held in treasury. During the year the Company has not bought back any Ordinary shares for Treasury.

If Resolutions 10 to 12 are passed then an announcement will be made on the date of the Annual General Meeting which will detail the exact number of Ordinary shares to which each of these authorities relate.

These powers will give the Directors additional flexibility going forward and the Board considers that it will be in the interests of the Company that such powers be available. Such powers will only be implemented when, in the view of the Directors, to do so will be to the benefit of shareholders as a whole.

Notice of Meetings

Resolution 13 is a special resolution seeking to authorise the Directors to call general meetings of the Company (other than Annual General Meetings) on 14 days' notice. This approval will be effective until the Company's next Annual General Meeting in 2024. In order to utilise this shorter notice period, the Company is required to ensure that shareholders are able to vote electronically at the general meeting called on such short notice. The Directors confirm that, in the event that a general meeting is called, they will give as much notice as practicable and will only utilise the authority granted by Resolution 13 in limited and time sensitive circumstances.

Dividend Policy

As a result of the timing of the payment of the Company's quarterly dividends, the Company's Shareholders are unable to approve a final dividend each year. In line with good corporate governance, the Board therefore proposes to put the Company's dividend policy to Shareholders for approval at the Annual General Meeting and on an annual basis thereafter.

The Company's dividend policy shall be that dividends on the Ordinary Shares are payable quarterly in relation to periods ending October, January, April and July. It is intended that the Company will pay quarterly dividends consistent with the expected annual underlying portfolio yield. The Company has the flexibility in accordance with its Articles to make distributions from capital. Resolution 4, an ordinary resolution, will seek shareholder approval for the dividend policy.

Recommendation

Your Board considers Resolutions 10 to 13 to be in the best interests of the Company and its members as a whole and most likely to promote the success of the Company for the benefit of its members as a whole. Accordingly, your Board unanimously recommends that shareholders should vote in favour of Resolutions 10 to 13 to be proposed at the AGM, as they intend to do in respect of their own beneficial shareholdings amounting to 14,060 Ordinary shares. 

By order of the Boardabrdn Holdings Limited -Secretaries280 BishopsgateLondon EC2M 4AG19 October 2023

Statement of Comprehensive Income

Statement of Financial Position

Statement of Changes in Equity

Statement of Cash Flows

Notes to the Financial Statements

For the year ended 31 July 2023