Final Results

FIDELITY CHINA SPECIAL SITUATIONS PLC Final Results for the year ended 31 March 2014 Investment Performance (year to 31 March 2014) Net Asset Value ("NAV") per Share total return +19.5% Share Price total return +14.1% Benchmark Index - MSCI China Index total return -6.9% As at 31 March 2014 Equity Shareholders' Funds £656.2m Market Capitalisation £593.1m Capital Structure: Ordinary Shares of 1 penny 571,354,480 Standardised Performance Total Return * % 01/04/ 01/04/ 01/04/ 19/04/ Since 2013 2012 2011 20102 launch to to to to 31/03/ 31/03/ 31/03/ 31/03/ 2014 2013 2012 2011 NAV +19.5 +15.7 -18.5 +5.2 +18.6 Share Price +14.1 +15.0 -26.4 +10.0 +6.3 MSCI China Index -6.9 +12.2 -12.5 +3.3 -5.7 * Includes reinvested income Sources: Fidelity and Datastream Past performance is not a guide to future returns Summary of Results 2014 2013 Assets at 31 March Gross Asset Exposure £806.6m £774.2m Net Assets £656.2m £634.2m Gearing 22.9% 22.1% Net Asset Value per Ordinary Share 114.84p 97.09p Number of Ordinary Shares in issue 571,354,480 653,229,480 Stock market data at 31 March Share Price at year end 103.80p 92.00p Share Price year high 108.80p 99.00p Share Price year low 81.00p 70.00p (Discount) at year end (9.6%) (5.2%) (Discount) year high (13.0%) (9.1%) (Discount) year low/premium year high (4.9%) 3.8% Earnings for the year ended 31 March Revenue return per Ordinary Share* 1.18p 1.25p Capital return per Ordinary Share* 16.39p 11.76p Total return per Ordinary Share* 17.57p 13.01p Dividend for the year ended 31 March Dividend proposed per Ordinary Share 1.15p 1.00p Ongoing charges for the year to 31 March** 1.45% 1.80% * Based on the weighted average number of Ordinary Shares in issue during the year ** Ongoing charges (excluding finance costs and taxation) as a percentage of average Net Asset Values for the year (prepared in accordance with methodology recommended by the Association of Investment Companies) Sources: Fidelity and Datastream Past performance is not a guide to future returns Chairman's Statement I have pleasure in presenting the Annual Report of Fidelity China Special Situations PLC for the year ended 31 March 2014. PERFORMANCE REVIEW During the year under review, the Net Asset Value ("NAV") of the Company increased by 19.5%, outperforming the MSCI China Benchmark Index by 26.4%. The Company's share price increased by 14.1% (all figures on a total return basis). Whilst the appreciation in the Net Asset Value of the Company is encouraging, the share price remains at or around the launch price of £1.00, which is disappointing. This is as a result of poor investor sentiment toward emerging markets, particularly China, and the fact that many UK investors are turning their attention back to western economies, especially in the US and UK, where there are more positive signs of growth than previously. There are signs that the Chinese economy is entering a new development phase as the government looks to move away from an economic model driven by state-directed investment spending towards one more reliant on the increasingly wealthy Chinese consumer. Reforms announced by the government in last November's Third Plenary highlighted the desire by the government to achieve this and has also brought about some interesting investment opportunities. This is explained in more detail in the Portfolio Manager's Review. Overall an improving regulatory environment for many industries, a more level playing field for private companies, reforms removing government interference in determining prices for state-owned enterprises ("SOEs") and signs that the government is looking to encourage private capital into SOEs could provide fertile ground for investments, which the portfolio is well positioned to capitalise on. The slowing growth of the Chinese economy has to be expected given its unprecedented expansion during the last 15 years but the drivers of the investment case in China remain as pertinent now as they were in April 2010 when the Company was launched. The Board continues to believe that the Company offers an effective way for long-term UK investors to access ongoing growth in the Chinese economy. THE PORTFOLIO MANAGER In last year's Annual Report I wrote that Anthony Bolton was stepping down as Portfolio Manager of the Company on 31 March 2014 and Dale Nicholls would succeed him from 1 April 2014. Mr Nicholls has an excellent track record and has been investing in China successfully for ten years. He has worked with Mr Bolton since the latter part of 2013 to ensure an orderly and smooth handover and is now responsible for the Company's portfolio. The Directors are confident that Mr Nicholls will position the portfolio to take best advantage of China's continuing growth. Mr Nicholls will attend the Annual General Meeting on 18 July as will Mr Bolton. I am most grateful to Mr Bolton for the hard work and commitment he has shown to the Company over the last four years. During that time he has travelled extensively in mainland China and visited over 1,400 companies. While market circumstances may have been more difficult than originally envisaged, he has nonetheless, outperformed the Benchmark Index handsomely. On behalf of the Board, and the shareholders, I wish him well in his retirement. GEARING The Company entered into a revolving credit facility agreement with Scotiabank Europe PLC for US$150,000,000 on 17 February 2012. This was renewed on 14 February 2014 to continue for a further three years and has been fully drawn down. To achieve further gearing, the Company continues to use Contracts For Difference on a number of holdings in its portfolio. Further details are in the Annual Report. At 31 March 2014, the Company's gearing, defined as the Gross Asset Exposure in excess of Net Assets, was 22.9% (2013: 22.1%). DIVIDEND The Board recommends a dividend of 1.15 pence (2013: 1.00 pence) per Ordinary Share for the year ended 31 March 2014 for approval by shareholders at the forthcoming Annual General Meeting. The dividend will be payable on 25 July 2014 to shareholders on the register on 11 July 2014 (ex-dividend date 9 July 2014). Shareholders may choose to reinvest their dividends to purchase more shares in the Company. Details of the Dividend Reinvestment Plan are set out in the Annual Report. DISCOUNT AND PREMIUM The Board believes that it is in the best interests of shareholders if the share price of the Company tracks closely to the underlying NAV, which is published each business day. The Board has the ability to issue shares at a premium to NAV and to buy back shares at a discount to NAV where it is in the best interests of shareholders to do so. During the reporting year, in furtherance of this policy, the Board authorised the repurchase and cancellation at a discount of 81,875,000 Ordinary Shares. The Company has not repurchased any further Ordinary Shares for cancellation since the year end. The Board is seeking shareholder consent at the forthcoming Annual General Meeting to continue exercising these powers. TREASURY SHARES The Board has decided to seek shareholder approval to hold in Treasury any Ordinary Shares repurchased by the Company, rather than cancelling them. The Treasury shares would carry no voting rights or rights to receive a dividend and would have no entitlement in a winding up of the Company. No more than 10% of the issued Ordinary Share capital of the Company would be held in Treasury. Any shares held in Treasury would only be re-issued at NAV per share or at a premium to NAV per share. This would ensure that the net effect of repurchasing and then re-issuing the Ordinary Shares would enhance NAV per share. The Board is seeking Shareholder approval to implement these recommendations at the forthcoming Annual General Meeting. MANAGEMENT FEE With effect from 1 April 2014, the annual management fee payable to the Managers is to reduce further to 1.0% per annum of the Net Asset Value (2013: reduced from 1.5% to 1.2%). As a consequence, ongoing charges from 1 April 2014 are expected to be in the region of 1.25% per annum. Further details are included in the Directors' Report in the Annual Report. PERFORMANCE FEES The maximum performance fee that is payable for the year ending 31 March 2014 has also been reduced from 1.5% to 1.0% of the average Net Asset Value during the year. In addition, any out-performance against the Company's Benchmark Index (including the 2% hurdle rate), in excess of that required to reach this 1% maximum fee, will no longer be carried forward. Any under-performance against the Company's Benchmark Index (including the 2% hurdle rate), must still be made good before a performance fee is payable. Further details are included in the Directors' Report in the Annual Report. The Directors believe that these fee changes will benefit shareholders in forthcoming years. ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE ("AIFMD") The AIFMD is a European Directive affecting many investment funds, including the Company, which are managed or promoted within the European Union. It was implemented from 22 July 2013 and the Financial Conduct Authority has permitted a transitional period of one year. The Board has decided in principle to appoint FIL Investment Services (UK) Limited (a FIL Group company) as its Alternative Investment Fund Manager ("AIFM") in advance of the end of the transitional period on 22 July 2014. FIL Investment Services (UK) Limited will delegate the portfolio management (other than in unlisted securities) to FIL Investment Management (Hong Kong) Limited and for unlisted securities to FIL Investments International (both current Managers). An additional requirement of the AIFMD is to appoint a depositary on behalf of the Company to oversee the custody and cash arrangements of the Company. To this end the Board have agreed in principle to appoint J.P. Morgan Europe Limited to act as the Company's depositary. J.P. Morgan Europe Limited is part of the same group of companies as JPMorgan Chase Bank who act as the Company's current bankers and custodians and will continue to do so. THE BOARD In accordance with the UK Corporate Governance Code for Directors of FTSE 350 companies, the entire Board is subject to annual re-election at the forthcoming Annual General Meeting. The Directors' biographies can be found in the Annual Report. The Directors have a wide range of appropriate skills and experience to form a balanced Board for the Company. THE ANNUAL GENERAL MEETING - 18 JULY 2014 The Annual General Meeting of the Company will be held at the Merchant Taylors' Hall, 30 Threadneedle Street, London EC2R 8JB, on Friday 18 July 2014 at 12 noon. The Board is looking forward to having the opportunity to speak to shareholders. Anthony Bolton will be making a presentation on the year's results and Dale Nicholls, the newly appointed Portfolio Manager, will be talking about his investment style and the prospects for the Company for the year to come. We urge you to come and join us for this occasion. John Owen CMG MBE DL Chairman 5 June 2014 Portfolio Manager's Review PERFORMANCE REVIEW I am pleased to report that the good performance mentioned in last year's Annual Report continued in the year to 31 March 2014. Despite difficult overall market conditions, the Company's Net Asset Value ("NAV") rose 19.5% and the share price by 14.1% despite the market, as represented by the MSCI China Index, falling 6.9% over the same period. Stock selection really came into its own during the period, with many medium and smaller-sized private companies performing well while the bigger state-owned enterprises ("SOEs") languished. The Company's gearing magnified this outperformance. Several of the internet or internet-related companies held in the portfolio, such as SouFun, 21Vianet, BitAuto and Kingsoft, performed particularly strongly, rising by 158%, 174%, 224% and 295% respectively. The unlisted holding in Alibaba convertible shares was revalued during March 2014 to a market cap equivalent of US$100 billion ahead of the company's initial public offering later this year. This is expected to be one of the largest IPOs ever for a Chinese company. Healthcare companies also performed well; for example, the two biggest holdings in this sector, Lee's Pharmaceutical and Hutchison China MediTech, rose sharply as investors started to put higher valuations on their valuable pipelines of new drugs. The undervaluation of their pipelines was one of the reasons we were attracted to these companies. We had identified Wing Hang Bank in the past as a smaller listed Hong Kong bank that could be a takeover target. In the second half of the financial year the largest shareholders decided to put the bank up for sale and, as a result, the shares performed well. An agreed offer was received from the Singapore based bank, OCBC Bank, and if mainland banks had been allowed to join the bidding I believe the take-out valuation could have been even higher. One disappointment was AsiaInfo Linkage, a US-listed Chinese telephone software business, that had been discussing the terms of a possible management buyout ("MBO") for nearly two years. Our stance during this process was that the MBO terms were likely to be too low and when these were announced we believed the proposed transaction substantially undervalued the business, a view shared by some other institutional shareholders and proxy advice firms. Unfortunately, after a close-run vote the MBO terms were approved and we had to sell our shares at the agreed price. I fully expect the business to return to the stock market at a future date, probably in Hong Kong, and this is likely to happen at a much higher valuation than the one at which the recent deal was struck. INVESTMENT REVIEW Views on the outlook for the Chinese economy continue to be very polarised and the factors that worry the China bears have not changed much during the last few years. Concerns include the sustainability of a high level of GDP growth, the overall level of debt in China, the financial viability of local government financing vehicles, the outlook for residential property prices, potential bad debts in the banking system and the quality, and therefore safety, of savings vehicles such as wealth management products and those sold by trust companies. As discussed in previous reports, these factors are often evaluated by investors from a Western perspective which does not necessarily take into account the unique features of a centrally-run economy like China's. I would certainly agree that these areas present financial challenges but the idea that they will result in some imminent major financial crisis in China is, I believe, very far off the mark. Many of these issues involve Government-owned entities and the authorities are therefore likely to use all means at their disposal to address them. Once again, I would like to discuss some of these in greater depth in this report. It is true that the overall level of debt in China is high although, unlike in some countries in the West, the greater part of the borrowings is corporate rather than Government or personal debt. Partly this is due to corporates having to rely on debt because they are unable to source funds from capital markets as they would in the West. Although debt levels are high, so is the savings rate (much higher than in the West). A high savings rate makes higher debt levels less concerning. Also, nearly all the debt is borrowed internally so it is not exposed to changes in foreign lenders' views about China. In the past, China's current account surplus has been very healthy, putting the country in a strong financial position relative to its peers. Finally, most of the debt has been taken on to finance investment rather than consumption, which again differentiates China from other countries like the US. For all these reasons, I am much less concerned about overall debt levels in China, although I do agree that the authorities will need to curtail the rate at which debt is growing and we have already started to witness this change. Local government finance problems are principally a result of a mismatch between the duration of borrowing requirements and their funding. These vehicles borrow short-term (normally over one year) to finance long-term investment projects. Over time this will change as more long-term finance becomes available and local governments' share of the tax-take increases and their share of expenditure on services provided decreases (in China most tax revenues currently go to the Central Government while Local Governments fund most of the public services). There are certainly likely to be bad debts along the way, although many of these will be rolled forward when they come up for repayment. In the savings product area, wealthy investors in trust products will see losses particularly if the underlying funds have been invested in more risky and privately financed projects (government funded projects are likely to be treated more leniently). However, some losses are probably a good thing, as investors will begin to understand that such products are not risk free, as many currently believe them to be. Bad debts in the banking system will inevitably rise but as most banks are government-owned the systemic risks should not be high as they will definitely be supported. There is a very wide range of views about where bad debt write-offs will peak out in this cycle. Estimates vary from as low as 2% to over 20% of debts. Bank valuations at the time of writing probably discount a level of between 8% and 10%. As expressed previously, I am less optimistic about the outlook for GDP growth. The most recent figure for the first quarter of 2014 shows annualised growth of 7.4% and the official target for 2014 is 7.5%. I think this target will be difficult to reach (although the official published figure is likely to meet this target). A number of factors are leading to slower growth. These include slowdowns in exports, in the property market and in wage growth as well as the effects of anti-pollution and anti-corruption campaigns. The anti-pollution campaign is leading to the closure of many steel and cement factories while the anti-corruption drive has resulted in a slowdown in investment projects at the provincial level. Also, unlike in the past, provincial leaders are now less incentivised on growth prospects at the provincial and city level. Furthermore, for the first time in a while, residential property prices are falling in many cities. Finally, it is worth remembering that even if growth were to fall to 5%, a figure well below the majority of forecasts, this incremental figure is still equivalent to about 20% of total UK GDP. More positively, the reform agenda that was announced during the year under review probably represents, in its breadth and boldness, the most significant reform package in China for three decades. The comprehensive release after the Third Plenum meeting in Beijing last November contained full details of sixty items in sixteen areas. Possibly the biggest headline reform is the change to the one-child policy. Although it will take many years for this to have any real effect on the economy, it has significant symbolic significance as this policy was unique to China. The reforms also include measures to reduce government intervention, giving the market a greater role in areas such as the pricing of resources, the setting of interest rates and currency convertibility. They pave the way for private banks and more bond financing and promise to level the playing field between SOEs and private companies. The proposed changes will establish more market-oriented state holding companies, will reform land rights for farmers, abolish the Hukou registration system in smaller cities and give migrant workers more access to welfare and social security. They will streamline government, abolish forced labour for offenders, increase the independence of the judiciary, accelerate new business approvals and capital projects, create new success measures for government officials beyond simple GDP growth, create more open competition for government tenders and rebalance the tax system between local and central government. Perhaps the most daring move is the establishment of a new Central Reform Group to oversee all aspects of reform and which is headed by President Xi Jinping himself. This underlines the seriousness with which the latest reforms are being taken in Beijing. In summary it would be wrong, I believe, to underestimate the long-term impact of the Third Plenum. Now we know the agenda, the spotlight has shifted to the execution of these reforms. One area that I would watch particularly closely in the future is the pace and extent of reforms to the SOEs. It will not be easy to reform these organisations as the necessary changes will strike right at the heart of some of the most entrenched vested interests in China. However, if it is radical enough, it has the potential to transform the economy and investment landscape of China. OUTLOOK Before I look forward, let me look back. Perhaps my biggest mistake over the last four years has been my optimism about the overall Chinese stock market. I argued that in an environment that was very positive for equities in general, the higher growth being experienced by China would stand out in a low growth world. In fact, it has been the rate of change of growth that has proved more important than the absolute growth rate itself. Stock markets in countries where the economic growth has been increasing (e.g. US and Japan) have generally done better than those where the opposite has been the case (China). This phase could now be drawing to a close. At the time of writing, stock market valuations in China are very cheap relative to their historical levels on most measures, sentiment is very negative and the local `A' share market has been in a bear market for over four years. These factors all suggest that now should be a time to be positive about the market outlook as much of the bad news is already discounted in prices. Hong Kong-listed medium and smaller-sized companies still appear very cheaply-valued against their mainland-listed peers. I expect this valuation gap to close in the future as more mainland money is allowed to invest in Hong Kong and we have recently seen measures that should act as a catalyst to these flows. Of course, China is not without risks and I have mentioned the longer-term challenges on the political and social front often in my previous reports. I believe there has to be more reform on this level over the next decade. Also the Japan-China relationship and events in North Korea must be watched as they could destabilise developments in the shorter-term. It is with somewhat mixed emotions that I hand over the reins to Dale Nicholls and it will be sad to end my direct involvement with the Company. I have thoroughly enjoyed managing the Company over the last four years even though the period has had its challenges. However, I know the Company is now in very capable hands and I wish Dale all the best for the future. I hope he will benefit from the Chinese bull market that I see ahead. My four years stay in Hong Kong has been the most interesting chapter in my long investment career. Since my first visit to China in 2003 and my first investments there in 2004, I have been hugely impressed by this country, the opportunities that it offers and the dedication and pragmatism of its businessmen. I am convinced that the twenty first century belongs to China and that patient investors will be well rewarded. Endorsing this view, I have recently significantly increased my personal shareholding in the Company. Finally, I would like to say that I very much appreciate the support you have shown me as shareholders. Thank you all very much. Anthony Bolton 28 April 2014 Portfolio Manager's Outlook INTRODUCTION I am pleased to write to you as the new Portfolio Manager of Fidelity China Special Situations PLC. I am honoured to be taking over from Anthony and want to thank him for his commitment to a smooth handover. We have worked together for years but over the last few months of Anthony's tenure we have been working particularly closely and he has been an "open book" in sharing his thoughts and resources. Managing this portfolio is a wonderful opportunity for a number of reasons. The pure focus on China is something that really excites me as there are a number of great investment opportunities that are currently available in the market - macro fears have created significant opportunity for the bottom-up stock picker. I am also attracted to the flexible structure that the Company offers. I have been investing in China for over a decade, but I have been at Fidelity for 18 years and managed money in Asia since 1999. My most visible track record is in the Fidelity Funds Pacific Fund, which I have now managed for over ten and a half years. Over this period I have been an active investor in Chinese equities and have worked closely with our investment teams in Hong Kong and Shanghai. Company meetings are a key part of my process and I work with our research teams to gather insight and understanding of companies within my investment universe. I share Anthony's view that China's economic model will shift more towards private consumption and services, offering many opportunities within this space. Similarly to Anthony, I also have a small and mid-cap bias as these tend to be less researched, which means more opportunities for mis-pricing. I try to let the stock picking drive portfolio construction. Therefore, I aim to build a portfolio of high conviction ideas with limited attention paid to the underlying Benchmark. In short, I am looking for well managed, cash generative companies with strong long-term growth prospects, where these attributes are not well understood by the markets and are not reflected in share price valuations. ECONOMIC OUTLOOK While I am a stock picker, the economic environment cannot be ignored, and sentiment here has impacted the Chinese market significantly over the last couple of years. Much focus has been on China's ability to meet the government's short-term target of `around' 7.5%, and investors are generally sceptical. I agree that it will be tough to reach this target, and would much prefer to see the government take this target down to a more realistic level. It is well documented that the government wants to drive a structural change in its economic model from one that is reliant on investment and exports to one driven by consumption. Due to this structural shift we should expect economic growth to fall from the heady days of year-on-year double digit growth, but this should also be welcomed as consumer-driven growth is less volatile and more sustainable. Also, credit growth has supported much of the rise in investment and this is clearly not sustainable and can lead to issues for the financial system down the road. Therefore, I would be more than comfortable to see growth in the 5-6% range. This is still an enviable growth rate in a global context and a good environment for individual companies to grow. This is particularly true for companies that lie within areas of the economy that the government wants to grow at a faster rate than the general economy, such as consumption. Total borrowing in China has rapidly expanded in the last five years, taking it from around 120% of GDP to over 200%. History teaches us that such expansions usually end in significant non-performing assets, particularly in areas where the malinvestment has been most severe. I expect the same in China and this is the main reason why the Company does not hold shares in Chinese banks. We are already seeing some well publicised defaults and I believe the sooner authorities start dealing with the problem the better. However, I agree with Anthony's view that a Lehman style financial crisis is highly unlikely. In my view, a key factor in defining a financial crisis is a significant contraction in liquidity and credit, but there are significant deposits supporting the system and, importantly the government is the bank's majority shareholder and it can create liquidity if needed. This all sounds like bad news for China, but the questions we need to ask are what does it mean for the earnings of individual companies and how much is priced into valuations? What many miss about China is the huge bifurcation in operating performance between the state-owned enterprises ("SOEs") and the private companies - the latter have recorded far superior earnings growth and returns on equity over the last five years, and this has been reflected in stock performance for these two groups. The reform agenda that has been announced will only serve to accelerate this performance gap. Last November's Third Plenary presented the blueprint for a wide range of bold and far-reaching reforms that will help transform China's economic and social scenery. CHINA REFORM At the time of writing, there has already been interesting developments with regards to the reform agenda and we have seen changes including ongoing interest rate deregulation, new banking licenses to private banks, the formation of free trade zones, the first case of a state-owned enterprise seeking private company participation (Sinopec) and the proposal of a Mutual Market Access pilot programme. This last initiative is interesting in terms of being a potential catalyst for closing the many valuation gaps that exist between Mainland China-listed and Hong Kong-listed shares. This type of regulatory support is beneficial for "new China" areas of the market, such as consumption and healthcare, which also have the most interesting growth drivers underpinning them. Furthermore, the Company can exercise its ability to invest in private companies as the environment for China's entrepreneurs should only see improvement over the coming years. Against this backdrop I currently favour companies in the consumer discretionary, information technology and healthcare sectors given their long-term growth potential relative to other industries. That said, some of the more mature areas of the market cannot be ignored. Much has been made about recent reforms and how this will level the playing field between SOEs and private companies. The assumption is that private companies have been given a freer rein to grow and eat into the market share of the SOEs. While I am a firm believer that "new China" is where I want to be positioned, I think the general disregard for all SOEs is creating opportunities to buy some good companies with high barriers to entry who can actually benefit from reforms. For instance, a move for more market-orientated pricing mechanisms means that SOEs who were previously restricted in their pricing by government policy should be able to raise prices. This should benefit the railway industry, including companies such as Guangshen Railway, which has not been able to raise passenger prices since the mid-1990s. INVESTMENT OPPORTUNITIES I would now like to discuss in more detail where I am finding opportunities, what I am looking to avoid and cover some of the changes I have made to the portfolio. In general, nothing much has changed versus when Anthony was manager. I have a similar approach to Anthony and we share similar views, so many of the changes were natural changes to the portfolio rather than a difference of opinion. Overall, attractive valuations have led to me increasing the equity exposure of the portfolio during the transition period. I remain positive on the mid-term growth opportunities in the consumer discretionary sector and believe in the rise of the China consumer. The Chinese government clearly wants to promote consumption in the economy and ongoing urbanisation will continue to support the growth of the middle class. Based on this view and current valuations of stocks in the sector I like names related to rising Chinese wealth and underpenetrated areas of consumption. The Company has holdings in areas related to consumption upgrades, such as SAIC Motor, which manufactures Volkswagen and GM automobiles via a joint venture, and Gree Electrical Appliances, which sells high quality air conditioning units. A number of holdings in the portfolio also fall within the theme of increased travel by mainland Chinese, both at home and abroad. China Lodging owns and manages mid-range hotels across China and China International Travel is a major travel agent that potential tourists use. The main destination for Chinese tourists is currently Hong Kong, and the primary reason for many is to shop. The Company has a number of high street retailers set to benefit from this trend, such as cosmetics retailer Bonjour and jeweller Luk Fook. As the nation gets wealthier, it aims to be healthier. Improving healthcare is a major priority for the government, and there are increasing signs of support for the development of private hospitals in the country. Hospital management group Phoenix Health Care is one of the first-movers in this area as is Fosun International, a conglomerate with a controlling stake in five hospitals. Alongside this, a number of Chinese healthcare companies have an attractive pipeline of drugs in different stages of development which are not reflected in the share price valuations. Over the last 18 months the internet and software sector has been a stellar performer. I think these technology companies will be at the forefront of change in China, whether it be through the way things are purchased, how people communicate or how they socialise. While I am positive on the long-term outlook, shorter-term valuations look less compelling following this strong run. Information technology holdings were trimmed in the first quarter of 2014 as the Company took profits, but more recently I have used volatile sentiment towards the sector to add to the higher quality names in the sector. Elsewhere within the `new China' theme I like the renewable energy sector. Despite a recent setback following wind companies announcing higher than expected operational costs and weak power generation numbers, I remain confident that renewable energy is an area with great long-term growth potential. Pollution is among the top issues for the government to address and China wants to become more energy self-sufficient, both of which will drive demand. Also, the government has a stated goal in its five year plan to increase its use of non-fossil fuels to 15% of total energy usage by 2020. As mentioned earlier, the Company has no investments in Chinese banks despite their low valuation due to ongoing regulatory risks and risk of rising `bad' debt levels. I think we still have quite a way to go here and would not be surprised if we hear negative news that non-performing loans come in higher than many expect. However, the insurance sector looks more interesting. While we need to understand each company's individual exposures, valuations are cheap and mid-term growth prospects strong. Additionally recent reforms, such as enabling insurance firms to invest in a wider range of assets and changing annuity rules, are positive for the sector. I also like brokers as many financial markets are still in the early stage of development and they will play an increasingly important role in financial market reform. Brokers with strong underwriting skills should benefit as companies will look to the markets to raise funds, supported by the end of the ban on IPO's. In conclusion, I have been working very closely with Anthony since the start of the year to ensure a smooth transition. We have similar views on the Chinese market and the companies we have been meeting. As a consequence there has been limited change in the portfolio. I hope this report has enabled you to understand my approach better and that you share my optimism given the great opportunities in the Chinese market. I look forward to keeping you informed on future developments in a market that continues to offer great promise. Dale Nicholls 5 June 2014 Strategic Report The Directors have pleasure in presenting the Strategic Report of the Company which replaces and enhances reporting previously included in the `Business Review' section of the Directors' Report. It provides a review of the Company's business and describes the principal risks and uncertainties it faces. The report includes an analysis of the performance of the Company during the financial year and the position at the year end, its objective, strategy and risks and how these are measured using Key Performance Indicators. The Chairman's Statement, Portfolio Manager's Review and the Portfolio Manager's Outlook form part of the Strategic Report. BUSINESS AND STATUS The Company carries on business as an investment trust and has been accepted as an approved investment trust by HM Revenue & Customs under Sections 1158 and 1159 of the Corporation Tax Act 2010, subject to the Company continuing to meet eligibility conditions. The Directors are of the opinion that the Company has conducted its affairs in a manner which will satisfy the conditions for continued approval. The Company is registered as an investment company under Section 833 of the Companies Act 2006 and operates as such. It is not a close company and has no employees. OBJECTIVE The investment objective of the Company is to achieve long-term capital growth from an actively managed portfolio made up primarily of securities issued by companies listed in China or Hong Kong and Chinese companies listed elsewhere. The Company may also invest in listed companies with significant interests in China and Hong Kong. STRATEGY In order to achieve this objective, the Company has an actively managed portfolio of investments and operates as an investment Company. As such, it is able to gear the portfolio and the Board takes the view that long-term returns for shareholders can be enhanced by using gearing in a carefully considered and monitored way. As part of the strategy, the Board has delegated the management of the portfolio and certain other services. The Portfolio Manager aims to achieve a capital return in excess of the equivalent return on the MSCI China Index (the Company's Benchmark Index), as expressed in UK sterling. The stock selection approach adopted by the Portfolio Manager is considered to be well suited to achieving this objective. The objective, strategy and principal activity have remained unchanged throughout the year ended 31 March 2014. The summary of the year's activities and indications of future developments and the factors likely to affect this have been reviewed and supported by the Board. Details can be found in the Chairman's Statement, the Portfolio Manager's Review and in the Portfolio Manager's Outlook above. The Board recognises that investing in equities is a long-term process and that the Company's returns will vary from year to year. INVESTMENT POLICY The Company invests in a diversified portfolio consisting primarily of securities issued by companies listed in China or Hong Kong and Chinese companies listed on other stock exchanges. The Company may also obtain exposure to other listed companies which have significant interests in China or Hong Kong. The Company may invest through equities, index linked, equity linked and other debt securities, cash deposits, money market instruments, foreign currency exchange transactions, equity related securities, forward transactions and other interests including derivative instruments. Forward transactions and derivatives, including futures, options and contracts for difference, may be used to enhance portfolio performance as well as for efficient portfolio management and hedging. The Company's interest in any one investment will not, on acquisition, exceed 15% of the portfolio value. In addition, the Company may invest in China "A" Shares both directly through the Investment Manager's Qualified Foreign Institutional Investor ("QFII") licence and indirectly through third parties who have a QFII facility. During the year the Company invested in equity linked notes, call and put options, long and short contracts for difference and warrants and utilised the QFII licence of the Investment Manager. Unlisted Investments The Company is permitted to invest up to 5% of Gross Assets in unlisted securities issued in companies which carry on business, or which have significant interests, in China or Hong Kong. As at 31 March 2014, the Company had invested in two unlisted investments with fair value of £32,232,000, representing 4.3% of Gross Assets. Use of Derivative Instruments The Company may use derivative instruments for efficient portfolio management, gearing and hedging purposes. They may also be used to achieve the investment objective (i.e. to enhance portfolio performance). The Board has adopted a policy that the Gross Asset Exposure of short positions held by the Company will not in aggregate exceed 15% of Gross Assets. It is the Board's policy that total exposure to any single counterparty from all activities, including, but not limited to, the management of cash and the use of derivatives should not exceed 15% of Gross Assets. Derivative exposures are included after the netting of off-setting positions and allowing for any collateral placed by the counterparty with the Company. As at 31 March 2014, the Company's exposure to short derivative instruments represented 1.8% of Gross Assets. The Company's exposure to any single counterparty from all derivative activities was 7.6%. Investment in other Investment Companies The Board has set a limit of 15% on the proportion of the Company's Gross Assets that can be invested in the securities of other listed investment companies (including listed investment trusts) which themselves do not have stated investment policies. As at 31 March 2014, the Company held no investments in other investment companies. Borrowing and Gearing policy The Board considers that long-term capital growth can be enhanced by the judicious use of borrowing. The Board is responsible for the Company's gearing strategy with day-to-day decisions being made by the Manager within the remit set by the Board. The Company may borrow up to 25% of Net Assets and the Board has adopted the policy that the Gross Asset Exposure of the Company, whether from borrowing or the use of derivatives, will not exceed the Net Assets of the Company by more than 30%. The Portfolio Manager is responsible for operating within these limits. During the year, the Gross Asset Exposure of the Company did not exceed the limit of 30% of Net Assets. As at 31 March 2014, Gross Asset Exposure in excess of Net Assets was 22.9%. Foreign exchange hedging policy The Company's financial statements are denominated in UK sterling, while investments are made and realised in currencies other than UK sterling, including Chinese renminbi, Hong Kong dollars and US dollars. It is the policy not to hedge the underlying currencies of the holdings in the portfolio but rather to take the currency risk into consideration when making investment decisions. DIVIDEND POLICY As the Company's objective is to achieve long-term capital growth, the Board does not expect that dividends will constitute a material element of any return to shareholders. However, in order to continue to qualify as an investment company, the Company is required by Section 1159 of the Corporation Tax Act 2010 to distribute sufficient net income so that it retains no more than 15% of its income. FIL'S INVESTMENT MANAGEMENT PHILOSOPHY, STYLE AND PROCESS In order to achieve the investment policy the Board has delegated the management of the investment portfolio and certain other services to FIL Investment Management (Hong Kong) Limited and FIL Investments International (collectively "FIL"). FIL's distinctive investment approach is "bottom up" stock picking - investing in companies on the basis of their underlying strengths, facilitated by extensive research capabilities. FIL has had a presence in Asia since 1969 and now has offices in seven countries across the region, including in three cities in mainland China and in Hong Kong. The Hong Kong office is FIL's second largest in the region, and the analysts in the Hong Kong investment team evaluate companies, meet their managements and interpret the effects of international and local events. PERFORMANCE In the year ended 31 March 2014, the Company's Net Asset Value total return was 19.5%, outperforming the MSCI China Index which fell by 6.9%. Details on future trends and factors that may impact the future performance of the Company are included in the Chairman's Statement above, the Portfolio Manager's Review above and in the Portfolio Manager's Outlook above. The Forty Largest Investments are listed, the Distribution of the Portfolio and the Attribution Analysis are set out below. A full list of the Company's holdings as at 31 March 2014 is available on the Company's page of the Manager's website. RESULTS AND DIVIDENDS The Company's results are set out in the Income Statement below. The net profit after taxation for the year ended 31 March 2014 was £106.5 million, of which the revenue return was £7.2 million. The Directors recommend that a dividend of 1.15 pence (2013: 1.00 pence) per Ordinary Share be paid on 25 July 2014 to shareholders who appear on the register as at the close of business on 11 July 2014 (ex-dividend date 9 July 2014). KEY PERFORMANCE INDICATORS ("KPIs") Given the Company's objective and strategy, the Board has identified the following KPIs against which performance can be measured. Year Year ended ended 31 31 March March 2014 2013 % % Net Asset Value total return +19.5 +15.7 Share price total return +14.1 +15.0 MSCI China Index total return -6.9 +12.2 Discount to Net Asset Value 9.6 5.2 Ongoing charges 1.45 1.80 Sources: Fidelity and Datastream As well as the KPIs set out above, the Board also regularly monitor other relevant statistics, such as the various factors contributing to investment results, as set out in the Attribution Analysis below. The principal risks and uncertainties stated below and include descriptions of other performance indicators, their monitoring and management which are important to the business of the Company. PRINCIPAL RISKS AND UNCERTAINTIES AND RISK MANAGEMENT The Board confirms that there is an ongoing process for identifying, evaluating and managing the principal risks faced by the Company. The process is regularly reviewed by the Board in accordance with the Financial Reporting Council's ("FRC's") "Internal Control: Revised Guidance for Directors". The Board is responsible for the Company's system of internal control and for reviewing its effectiveness. An internal controls report providing an assessment of risks, together with controls to mitigate these risks, is prepared by the Managers and considered by the Audit Committee at each of its meetings. The Board also determines the nature and extent of any risks it is willing to take in order to achieve its strategic objectives. The Board considers the following as the principal risks facing the Company: Principal Risks Risk Mitigation Market risk Investing in an emerging market such as the PRC subjects the Company to a higher level of market risk than investment in a more developed market. This is due, among other things, to the existence of greater market volatility, lower trading volumes, the risk of political and economic instability, legal and regulatory risks, risks relating to accounting practices, disclosure and settlement, a greater risk of market shut down, standards of corporate governance and more governmental limitations on foreign investment than are typically found in developed markets. The Board reviews material economic, market and legislative changes at each Board meeting. The Company has exposure to a number of companies with all or part of their business in Variable Interest Entity ("VIE") structures. These are entities where there is a controlling interest that is not based on the majority of voting rights and may result in a risk to investors being unable to enforce their ownership rights in certain circumstances. Performance risk The achievement of the Company's performance objective relative to the market requires the taking of risk, such as strategy, asset allocation and stock selection, and may lead to underperformance of the Benchmark Index. Management of the risks set is carried out by the Board. The Company has a clearly defined strategy and investment remit. There is a clearly defined management agreement, and borrowing/derivative limits are also set by the Board. The portfolio is managed by a highly experienced Portfolio Manager. The Board relies on the Portfolio Manager's skills and judgement to make investment decisions based on research and analysis of individual stocks and sectors. The Board reviews the performance of the portfolio against the Company's Benchmark Index and that of its competitors and the outlook for the market with the Portfolio Manager at each Board meeting. The emphasis is on long-term investment performance and the Board accepts that by targeting long-term results the Company risks volatility in the shorter-term. Unlisted investments are managed by FIL Investments International. Performance improved and was well ahead of its Benchmark Index in the 2013/14 financial year as outlined in the Portfolio Manager's Review above. The Company has also out-performed its Benchmark Index since launch. Other risks facing the Company include: Discount control risk Due to the nature of investment trusts, the Board cannot control the discount at which the Company's share price trades to Net Asset Value. However, it can influence this through its share repurchase policy and through creating demand for shares through good performance and an active investor relations programme. The Company's share price, NAV and discount volatility are monitored daily by the Managers and by the Board. Gearing risk The Company has the option to invest up to the total of any loan facilities and to use Contracts For Difference (CFDs) to invest in equities. The principal risk is that while in a rising market the Company should benefit from gearing, in a falling market the impact would be detrimental. Other risks are that the cost of gearing may be too high or that the term of the gearing inappropriate in relation to market conditions. On 17 February 2012, the Company entered into a revolving credit facility agreement with Scotiabank Europe PLC for US$150,000,000 and this was renewed to continue for a further three years on 14 February 2014. The facility has been fully drawn down. Additional geared exposure is being achieved through the use of long CFDs. The Board regularly considers gearing and gearing risk. Currency risk The functional currency and presentational currency of the Company in which it reports its results, is UK sterling. Most of its assets and its income are denominated in other currencies, mainly Hong Kong dollars and US dollars. Consequently, it is subject to currency risk on exchange rate movements between UK sterling and these other currencies. It is the Company's policy not to hedge against currency risks. Borrowings are denominated in US dollars and, therefore, the effect of US dollar exchange rate movements on assets denominated in US dollars will be offset by the effect on these loans. Further details can be found in Note 18 to the Financial Statements in the Annual Report. Tax and Regulatory risks A breach of Section 1158 of the Corporation Tax Act 2010 could lead to a loss of investment trust status, resulting in the Company being subject to tax on capital gains. A breach of other legal and regulatory rules may lead to suspension from listing on the Stock Exchange or a qualified audit report. The Board receives regular reports from the Managers confirming regulatory compliance during the year. The Alternative Investment Fund Managers Directive ("AIFMD"), details of which are provided in the Chairman's Statement above, requires the Board to appoint an Alternative Investment Fund Manager ("AIFM") by 22 July 2014. An additional requirement of the AIFMD is to appoint a depositary on behalf of the Company and details are provided in the Chairman's Statement above. The Board monitors the tax and regulatory changes at each Board meeting and is provided with regular briefings from the Association of Investment Companies ("AIC") as well as details of industry and the Managers lobbying activities. Operational risks - Service Providers The Company has no employees and relies on a number of third party service providers, principally the Managers, Registrar and Custodian. The Company is dependent on the Managers' control systems and those of its Custodian and Registrar, both of which are monitored and managed by the Managers in the context of the Company's assets and interests on behalf of the Board. The security of the Company's assets, dealing procedures, accounting records and the maintenance of regulatory and legal requirements, among other things, rely on the effective operation of such systems. The Managers, Registrar and Custodian are subject to a risk-based programme of internal audits by the Managers. In addition, service providers' own internal controls reports are received by the Board and any concerns investigated. BOARD DIVERSITY The Board carries out any candidate search against a set of objective criteria on the basis of merit, with due regard for the benefits of diversity on the Board, including gender. As at 31 March 2014, there were five male Directors and one female Director. EMPLOYEE, SOCIAL, COMMUNITY AND HUMAN RIGHTS ISSUES The Company has no employees and all of its Directors are non-executive. The Company's day-to-day activities are carried out by third parties. The Company has not adopted a policy on human rights as it has no employees and its operational processes are delegated. The Company's financial reports are printed by a company which has won awards for its environmental awareness and further details of this may be found on the back cover of this report. SOCIALLY RESPONSIBLE INVESTMENT The Manager's primary objective is to produce superior financial returns for the Company's shareholders. It believes that high standards of corporate social responsibility ("CSR") make good business sense and have the potential to protect and enhance investment returns. Consequently, its investment process takes social, environmental and ethical issues into account when, in the Manager's view, these have a material impact on either investment risk or return. CORPORATE ENGAGEMENT The Board believes that the Company should, where appropriate, take an active interest in the affairs of the companies in which it invests and that it should exercise its voting rights at their general meetings. Unless there are any particularly controversial issues (which are then referred to the Board) it delegates the responsibility for corporate engagement and shareholder voting to the Managers. These activities are reviewed annually. By order of the Board FIL Investments International Secretary 5 June 2014 Forty Largest Holdings as at 31 March 2014 Forty Largest Holdings, including derivatives Balance Gross %1 Sheet Asset Value Exposure £'000 £'000 Tencent Holdings Limited2 31,754 37,983 4.7 Provider of internet, mobile and telecommunications value-added services Wing Hang Bank Limited 37,731 37,731 4.7 Provider of commercial banking and related financial services Alibaba Group3 31,232 31,232 3.9 Major e-commerce group CITIC Securities Company Limited 23,704 23,704 2.9 Broker and asset manager AIA Group2 16,949 21,886 2.7 Insurance company 21Vianet Group 21,313 21,313 2.6 Provider of carrier-neutral internet data centre services Hutchison China MediTech Limited4 18,380 18,380 2.3 Pharmaceutical and healthcare group SAIC Motor Corporation Limited 17,811 17,811 2.2 Automobile manufacturer and distribution company Lee's Pharmaceutical Holdings Limited 16,604 16,604 2.1 Operator in the pharmaceutical preparations sector NetEase, Inc 15,530 15,530 1.9 Internet company Haitong Securities 15,199 15,199 1.9 Financial services group New Oriental Education & Technology Group 14,761 14,761 1.8 Provider of private educational services Hang Seng China Enterprises Index Call Option 1,018 14,108 1.7 A long position on the Hong Kong Exchange "H" Shares Index China Longyuan Power Group2 8,921 13,838 1.7 Wind power producer Li-Ning Company 13,128 13,128 1.6 Leading sports brand company BitAuto Holdings Limited 12,999 12,999 1.6 Auto internet company China Lodging Group 12,810 12,810 1.6 Operates a chain of economy hotels WuXi Pharma Tech 11,904 11,904 1.5 Pharmaceutical, biotechnology, and medical device research company SITC International Holdings2 10,611 11,731 1.5 Leading shipping logistics company Ping An Insurance (Group) Company of China 11,267 11,267 1.4 Insurance company Air China2 9,050 11,018 1.4 Air passenger, air freight and air mail transportation services Green Dragon Gas4 10,924 10,924 1.4 Coal bed methane projects developer SouFun Holdings Limited 10,347 10,347 1.3 Real estate internet websites operator Guangshen Railway Co 10,101 10,101 1.3 Railway company Kingsoft 9,467 9,467 1.2 Software company China Animal Healthcare2 8,479 9,458 1.2 Manufacturer and distributor of drugs for animals ChinaCache International Holdings 9,269 9,269 1.1 Provider of content delivery network and cloud computing Newocean Energy Holdings 8,987 8,987 1.1 Distributor of liquefied petroleum gas Ports Design2 6,012 8,973 1.1 Designs, manufactures and retails fashion garments Formosa Optical Technology 8,679 8,679 1.1 Distributor of optometry products China International Travel Service 8,511 8,511 1.1 Leading tour operator Asia Satellite Telecommunications Company Limited 8,186 8,186 1.0 Premier regional satellite operator China Meidong Auto Holdings 7,690 7,690 1.0 Automobile dealership and maintenance group Forterra Trust 7,452 7,452 0.9 Developer of commercial real estate Global Logistic Properties2 5,047 7,405 0.9 Industrial and logistics infrastructure provider Shanghai Industrial Holdings Ltd2 4,929 7,106 0.9 Real estate, infrastructure, medicine and consumer products group Fortune Oil 7,044 7,044 0.8 Oil and gas supplier Huadian Power International Corp2 5,827 7,034 0.8 Power producer CSI Properties Limited2 6,507 6,833 0.8 Property company Pax Global Technology 6,505 6,505 0.8 Manufacturer of point-of-sale terminals Forty Largest Holdings (2013: 68.5%) 502,639 544,908 67.5 1 % of total gross asset exposure 2 Includes investment in CFDs 3 Convertible preference shares in an unlisted investment (see Note 18 on in the Annual Report) 4 Quoted on AIM A full list of the Company's holdings as at 31 March 2014 will be available on the Company's page of the Manager's website. Distribution of the Portfolio as at 31 March 2014 % Benchmark of % Gross Asset Exposure Industry Consumer Discretionary 22.4 5.3 Financials 22.2 37.5 Information Technology 20.0 12.5 Healthcare 11.9 1.8 Industrials 6.4 6.6 Energy 5.2 13.6 Utilities 4.0 3.9 Consumer Staples 2.7 5.9 Index Derivative 1.9 - Telecommunication Services 1.7 9.6 Materials 1.6 3.3 Total 100.0 100.0 Share Type Listed in Hong Kong 50.8 24.1 Listed in US 14.8 - China "A" Shares 11.1 - China "H" Shares 8.4 50.2 Red-Chips 4.8 24.9 Unlisted stocks 4.0 - Listed in Singapore 2.1 - Listed in Taiwan 1.1 - Listed in UK 1.1 - China "B" Shares 0.7 0.8 Listed in Australia 0.6 - Listed in Canada 0.5 - Total 100.0 100.0 % Benchmark of % Gross Asset Exposure Size of Company (Market Cap (UK £)) Large - above £5bn 23.1 78.2 Medium - between £1bn - £5bn 27.2 21.2 Small - below £1bn 45.7 0.6 Unlisted 4.0 - Total 100.0 100.0 Attribution Analysis Analysis of change in NAV during the year ended 31 March 2014 Pence per share NAV at 31 March 2013 97.09 Impact of MSCI China Index - UK sterling equivalent -6.71 Impact of Portfolio Management +23.47 Impact of Gearing +1.04 Impact of Share Repurchases +1.11 Impact of Dividend -1.00 Impact of Other Costs -2.55 Impact of Cash/Currency +2.39 NAV at 31 March 2014 114.84 Industry contributors and detractors (pence per share) Information Technology 20.6 Healthcare 6.0 Index Derivative 0.5 Energy 0.2 Telecommunication Services 0.1 Utilities 0.0 Materials -0.2 Industrials -1.8 Consumer Staples -1.9 Financials -2.1 Consumer Discretionary -4.6 Note: Derivative positions are included in the above investment positions Source: Fidelity 10 Highest contributors by investment positions(pence per share) Tencent Holdings Limited 3.87 21Vianet Group 3.61 SouFun Holdings Limited 3.56 BitAuto Holdings Limited 2.64 Kingsoft 2.57 ChinaCache International Holdings 1.81 Wing Hang Bank Limited 1.80 WuXi Pharma Tech 1.79 Hutchison China MediTech Limited 1.44 Sina Corporation 1.21 Note: Derivative positions are included in the above investment positions Source: Fidelity 10 Highest detractors by investment positions(pence per share) Ping An insurance (Group) Company of China -1.21 Air China -1.07 DBA Telecommunication Holdings Limited -1.02 Ports Design -0.99 Yantai Changyu Pioneer Wine Company -0.84 CITIC Securities Company Limited -0.81 China Southern Airlines -0.64 Kunlun Energy Company -0.64 Shanghai Jahwa United Company Limited -0.49 CSI Properties Limited -0.49 Note: Derivative positions are included in the above investment positions Source: Fidelity RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH THE MANAGERS FIL Investment Management (Hong Kong) Limited is the Manager and FIL Investments International is the unlisted securities Manager and the Secretary of the Company. Details of the investment management fee payable, are given in Note 4 of the Annual Report and the secretarial and administration fees payable are detailed in Note 5 of the Annual Report. Key management compensation paid was £167,000 (2013: £167,000). This included fees paid to the Directors, which are disclosed in the Directors' Remuneration Report in the Annual Report, and £ 12,000 (2013: £12,000) of employer National Insurance Contributions. Statement of Directors' Responsibilities The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial period. Under that law they have elected to prepare the Financial Statements in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union. The Financial Statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss for the period. In preparing these Financial Statements the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether applicable IFRS have been followed, subject to any material departures disclosed and explained in the Financial Statements; and • prepare the Financial Statements on the going concern basis unless it is inappropriate to assume that the Company will continue in business. The Directors are responsible for ensuring that adequate accounting records are kept which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Under applicable law and regulations the Directors are also responsible for preparing a Strategic Report, a Directors' Report, a Corporate Governance Statement and a Directors' Remuneration Report that comply with that law and those regulations. The Directors have delegated responsibility for the maintenance and integrity of the corporate and financial information included on the Company's pages of the Manager's website www.fidelity.co.uk/its to the Managers. Visitors to the website need to be aware that legislation in the UK governing the preparation and dissemination of the Financial Statements may differ from legislation in their jurisdictions. We confirm that to the best of our knowledge the Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and the Strategic Report and Directors' Report include a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties it faces. We confirm that we consider the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy. Approved by the Board on 5 June 2014 and signed on its behalf. John Owen Chairman Income Statement for the year ended 31 March 2014 Year Year ended ended 31.03.14 31.03.13 revenue capital total revenue capital total £'000 £'000 £'000 £'000 £'000 £'000 Revenue Investment 13,938 - 13,938 14,278 - 14,278 income* Other 5 - 5 5 - 5 income* Net (25) - (25) 856 - 856 derivative (expense)/ income* ---------- ---------- ---------- ---------- ---------- ---------- Total 13,918 - 13,918 15,139 - 15,139 income* Gains on - 99,249 99,249 - 87,198 87,198 investments designated at fair value through profit or loss Net gains/ - 2,619 2,619 - (115) (115) (losses) on derivative instruments held at fair value through profit or loss Foreign (111) (696) (807) (19) 890 871 exchange (losses)/ gains on other net assets Foreign - 8,776 8,776 - (4,898) (4,898) exchange gains/ (losses) on bank loans ---------- ---------- ---------- ---------- ---------- ---------- Total 13,807 109,948 123,755 15,120 83,075 98,195 income and gains Expenses Investment (3,846) (10,262) (14,108) (4,187) (4,187) (8,374) management and performance fees Other (1,635) - (1,635) (1,573) - (1,573) expenses ---------- ---------- ---------- ---------- ---------- ---------- Profit 8,326 99,686 108,012 9,360 78,888 88,248 before finance costs and taxation Finance (794) (794) (1,588) (871) (871) (1,742) costs ---------- ---------- ---------- ---------- ---------- ---------- Profit 7,532 98,892 106,424 8,489 78,017 86,506 before taxation Taxation (358) 409 51 (289) (809) (1,098) ---------- ---------- ---------- ---------- ---------- ---------- Net profit 7,174 99,301 106,475 8,200 77,208 85,408 after taxation for the year ========== ========== ========== ========== ========== ========== Earnings 1.18p 16.39p 17.57p 1.25p 11.76p 13.01p per Ordinary Share - basic and diluted ========== ========== ========== ========== ========== ========== Year Year ended ended 31.03.14 31.03.13 £'000 £'000 * INCOME Investment income Overseas dividends 12,946 13,195 Overseas scrip dividends 686 526 UK dividends 127 284 UK scrip dividends 179 273 ---------- ---------- 13,938 14,278 ---------- ---------- Other income Deposit interest 5 5 ---------- ---------- Net derivative (expense)/income Dividends received on long CFDs 745 1,234 Less: interest paid on long CFDs (328) (328) Interest received on short CFDs - 8 Less: dividends paid on short CFDs (442) (58) ---------- ---------- (25) 856 ---------- ---------- Total income 13,918 15,139 ========== ========== Statement of Changes in Equity for the year ended 31 March 2014 share capital premium redemption account reserve share other capital revenue total capital reserve reserve reserve equity £'000 £'000 £'000 £'000 £'000 £'000 £'000 Equity 6,598 211,569 29 449,909 (116,378) 7,248 558,975 shareholders' funds at 31 March 2012 Repurchase of (66) - 66 (5,216) - - (5,216) Ordinary Shares Net profit - - - - 77,208 8,200 85,408 after taxation for the year Dividend paid - - - - - (4,934) (4,934) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Equity 6,532 211,569 95 444,693 (39,170) 10,514 634,233 shareholders' funds at 31 March 2013 Repurchase of (819) - 819 (78,323) - - (78,323) Ordinary Shares Net profit - - - - 99,301 7,174 106,475 after taxation for the year Dividend paid - - - - - (6,233) (6,233) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Equity 5,713 211,569 914 366,370 60,131 11,455 656,152 shareholders' funds at 31 March 2014 Balance Sheet as at 31 March 2014 Company number 7133583 2014 2013 £'000 £'000 Non current assets Investments designated at fair value through 735,319 712,898 profit or loss ---------- ---------- Current assets Derivative assets held at fair value through 11,810 8,592 profit or loss Amounts held at futures clearing houses and - 4,056 brokers Other receivables 183 3,131 Cash and cash equivalents 16,662 18,511 ---------- ---------- 28,655 34,290 ---------- ---------- Current liabilities Derivative liabilities held at fair value (7,064) (3,110) through profit or loss Bank loans (89,963) (98,739) Overseas capital gains tax payable (637) (1,046) Other payables (10,158) (10,060) ---------- ---------- (107,822) (112,955) ---------- ---------- Net current liabilities (79,167) (78,665) ---------- ---------- Net assets 656,152 634,233 ========== ========== Equity attributable to equity shareholders Share capital 5,713 6,532 Share premium account 211,569 211,569 Capital redemption reserve 914 95 Other reserve 366,370 444,693 Capital reserve 60,131 (39,170) Revenue reserve 11,455 10,514 ---------- ---------- Total equity shareholders' funds 656,152 634,233 ========== ========== Net asset value per Ordinary Share 114.84p 97.09p ========== ========== Cash Flow Statement for the year ended 31 March 2014 Year Year ended ended 31.03.14 31.03.13 £'000 £'000 Operating activities Cash inflow from investment income 12,902 13,394 Cash inflow from net derivative income 74 867 Cash inflow from other income 5 5 Cash outflow from Directors' fees (158) (156) Cash outflow from other payments (9,552) (9,618) Cash outflow from the purchase of investments (390,418) (443,379) Cash outflow from the costs of derivatives (8,226) (17,861) Cash inflow from the sale of investments 465,349 445,595 Cash inflow from the proceeds of derivatives 11,581 20,054 Cash inflow/(outflow) from amounts held at 4,306 (384) futures clearing houses and brokers ---------- ---------- Net cash inflow from operating activities 85,863 8,517 before servicing of finance Servicing of finance Cash outflow on interest on bank loans (1,600) (1,736) ---------- ---------- Net cash inflow from operating activities and 84,263 6,781 servicing of finance ---------- ---------- Financing activities Cash outflow from the repurchase of Ordinary (79,183) (4,349) Shares Cash outflow from dividends paid to (6,233) (4,934) shareholders ---------- ---------- Net cash outflow from financing activities (85,416) (9,283) ---------- ---------- Decrease in cash and cash equivalents (1,153) (2,502) Net cash and cash equivalents at the start of 18,511 20,123 the year Effect of foreign exchange movements (696) 890 ---------- ---------- Cash and cash equivalents at the end of the 16,662 18,511 year ========== ========== STATUS OF RESULTS ANNOUNCEMENT The financial information contained in this announcement does not constitute statutory accounts as defined in the Companies Act 2006. The 2014 Annual Report and Financial Statements will be filed with the Registrar of Companies shortly. The report of the Auditor's for the year ended 31 March 2014 contains no qualification or statement under section 498(2) or (3) of the Companies Act 2006. The comparative figures are extracted from the audited financial statements of Fidelity China Special Situations PLC for the year ended 31 March 2013, which have been filed with the Registrar of Companies. The report of the Auditor on those financial statements contained no qualification or statement under section 498(2) or (3) of the Companies Act 2006. A copy of the Annual Report will shortly be submitted to the National Storage Mechanism and will be available for inspection at www.morningstar.co.uk/uk/NSM. The Annual Report and Financial Statements will be posted to shareholders as soon as is practicable and in any event no later than 19 June 2014 and will shortly be available on the Company's website at www.fidelity.co.uk/its. Enquiries: Christopher Pirnie - Head of UK and Ireland Company Secretariat, FIL Investment International - 01737 837929 Keren Holland - Corporate Communications, FIL Investments International - 0207 074 5262

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