Half-year Report
FIDELITY CHINA SPECIAL SITUATIONS PLC
Half-Yearly results for the six months ended 30 September 2023 (unaudited)
Financial Highlights:
- Fidelity China Special Situations PLC reported a Net Asset Value (NAV) return of -10.9% compared to the -10.3% return of the Benchmark Index in the six months ended 30 September 2023.
- The share price return was -12.9% during the same period.
- Despite market sentiment, robust stock picking in the consumer discretionary and health care sectors proved rewarding.
- The Portfolio Manager believes valuations remain compelling in historic and absolute terms.
Recent Announcement
- Fidelity China Special Situations PLC [FCSS] has agreed heads of terms with abrdn China Investment Company Limited [ACIC] in respect of a proposed combination of ACIC with FCSS. Following the transaction, the enlarged FCSS would continue to be managed in accordance with its existing investment objective and policy by FIL Investment Management (Hong Kong) Limited with Dale Nicholls continuing as the named portfolio manager. Please refer to the stock exchange announcement released at 7am on 28 November 2023 for further details.
Contacts
For further information, please contact:
Smita Amin
Company Secretary
FIL Investments International
01737 836347
Portfolio Manager’s Half-Yearly Review
Macro and market backdrop
At the beginning of the current financial year, it was already becoming clear that the hoped-for boost from the lifting of China’s zero-Covid policy was going to be less straightforward than anticipated. Rather than seeing an immediate improvement, the economic outlook has remained uncertain, and this has led to high levels of volatility in the stock market. However, the policy backdrop has remained supportive, with the Chinese authorities returning to market-friendly rhetoric and stepping up efforts to roll out an array of stimulus measures to boost consumption and revive the economy since the July Politburo meeting.
The property sector has continued to cause concern both domestically and internationally, with tighter lending conditions leading to increased stress on some highly leveraged privately-owned property developers. Policy support has focused on the slowing residential market and lagging consumer sentiment, with initiatives such as the easing of mortgage conditions, the loosening of the definition of a ‘first home’ and allowing lower minimum down payment ratios for both first and second homeowners – all in an effort to support underlying demand for property. On the fiscal side, the government’s ongoing focus on quality rather than quantity of economic growth, along with stretched local government finances, has meant that the trend of large-scale and leverage-fuelled infrastructure projects is likely to have run its course.
A sustained improvement in domestic regulation towards favouring the private sector or a sustained stabilisation of key geopolitical relationships would likely initiate a gradual rerating of Chinese stocks. We see positive signs of Beijing nurturing high-end manufacturing and encouraging foreign participation. A case in point is Xi Jinping’s announcement during the recent BRI Forum that China will terminate all restrictions for foreign participation in manufacturing.
One of the principal reasons why the post-Covid reopening fell flatter than expected was that consumer confidence has remained muted. The factors driving this include weak business confidence, particularly on the back of well-publicised job cuts at the big tech companies, and youth unemployment headlines. Weakness in the property market is also likely playing a part given the significant weight of property on the consumer balance sheet. On the positive side, Chinese citizens are sitting on record amounts of savings and the assumption had been that they would be keen to travel and spend as soon as they were able to do so. The recent ‘Golden Week’ holiday saw domestic tourism rebound to pre-pandemic levels, although overseas travel remains below trend. Despite the mixed signals, however, we believe consumption will likely continue to be the prime driver of the recovery, supported by factors such as the move towards urbanisation, which supports rising consumer purchasing power. While this trend may have slowed down during Covid, it remains clearly intact, and the overall levels of urbanisation still significantly lag levels seen in the West.
The rise of the Chinese consumer has long been a major theme for Fidelity China Special Situations, as evidenced by more than 40% of the portfolio held in consumer stocks.
Performance and portfolio review
Chinese equities have experienced extreme volatility over the past six months, erasing the gains since the market’s recent peak at the start of 2023. The initial euphoria around China’s reopening was short-lived, as investor sentiment and consumer confidence were both adversely affected by subdued macroeconomic data and renewed stress on the financial and real estate sectors since the second quarter. Against this uncertain backdrop, the Company’s NAV declined by 10.9% in the six-month reporting period to 30 September 2023, slightly more than the MSCI China Index (the Benchmark Index) which was down by 10.3%. The Company’s share price fell by 12.9% over the same period, reflecting a widening of the discount to NAV. (All performance data on a total return basis.)
While an overweight exposure to financials and materials detracted from performance during the period, robust stock picking in the consumer discretionary and health care sectors proved rewarding.
Within the consumer area, some of the initial beneficiaries of reopening in discretionary spending continued to post attractive gains. Holdings in Hisense Home Appliances Group, the branded variety retailer MINISO and Lao Feng Xiang, a leading jewellery retailer, all made gains, supported by their solid execution and positive structural growth outlooks. These gains were partially offset by the position in China Tourism Group Duty Free, which declined amid weaker-than-expected consumer confidence.
Elsewhere in the consumer discretionary space, shares in automobile parts manufacturer Intron Technology also declined on the back of disappointing results. However, we believe that structural tailwinds in China’s auto sector toward electrification continue to underpin its long-term outlook.
Within the health care sector, WuXi AppTec Group – one of our largest holdings on both an absolute basis and relative to the Benchmark Index – contributed positively to performance. It is a leading biopharma contract development and manufacturing company and reported upbeat financial results. Its shares were also supported by the hype around glucagon-like peptide 1 (GLP-1) drugs for weight-loss, spurred on by ground-breaking results from a recent clinical study. The position in biotech company HUTCHMED China also advanced on the back of better-than-expected results. Cost-saving initiatives made a meaningful contribution to its earnings, and it has no near-term funding needs as it has adequate cash to fund its upcoming research and development (R&D) pipeline. Moreover, shares in the China-focused and Japan listed drug developer GNI Group were supported by results that were in line with expectations. It revised its revenue and profit guidance upwards after receiving an upfront licence payment from Astellas for its US subsidiary Cullgen.
In contrast, not holding NetEase and Li Auto held back returns relative to the Benchmark Index. Shares of NetEase advanced amid easing industry crackdowns and resilient demand in the gaming sector. The company has benefited from its recent better-than-expected game blockbusters in China. Electric vehicle manufacturers trended upwards on the back of the recent announcement of an extended tax break on renewable automobile purchases. Thus, not holding Li Auto, one of China’s largest pure-play electric vehicle companies, weighed on relative returns.
Within financials, the position in credit facilitator Lufax Holding declined as it released subdued results. Tightening lending criteria, driven by weakness in China’s macroeconomic backdrop, has led to a decline in new loans which poses a near-term headwind to the company’s earnings. Nonetheless, Lufax remains substantially undervalued and provides significant upside potential given its leading position in online lending to small and medium-sized enterprises (SMEs) and attractive valuations.
ESG and engagement
We continue to develop our sustainability ratings system and processes to meet the ever-evolving landscape of investing through an ESG lens. Before highlighting our most recent updates, we believe it is important to reiterate why we have institutionalised sustainability into our investment process. There are three layers to our approach. The first is a foundation of robust sustainable investing practices that helps to build sustainable financial futures. The second layer is made up of different modules that will evolve to meet dynamic requirements – building digital tools to support effective analysis, integration, and the reporting of sustainability in our investment process. The final layer is how we communicate our process externally (such as meetings and engagement with companies’ management teams).
We equally believe our proprietary ratings add value to third-party ESG research while adhering to our fundamental investment philosophy. Too often, different ESG research providers reach different conclusions on the same companies, due to different underlying methodologies and judgements on materiality. Furthermore, by using an average, we feel that the ‘overall’ score used by others can mask a complex set of underlying ‘E’, ‘S’ and ‘G’ factors.
When dealing with so-called “less sustainable” companies, one can engage with them to help implement effective change or exclude them entirely from portfolios. We believe that the former has much greater potential to positively impact future generations as well as returns over the long-term (opportunities), particularly if an investor is willing to exert influence and help companies to improve their ESG trajectory.
With all that said, it is important to note that the Company is not an ‘ESG fund’ that aims to only invest in those companies dedicated to delivering positive ESG impacts. Rather, we integrate ESG considerations into our investment process to mitigate sustainability risks, which can have negative implications for share prices as well as for people and the planet. Below is an example of one of our recent engagements with a company in the portfolio to help them – and therefore us – to manage sustainability risks.
TENCENT HOLDINGS: ENGAGEMENT CASE STUDY
Tencent’s ESG team proactively initiated a meeting with Fidelity which is in itself encouraging. The meeting was wide-ranging and covered ‘E’, ‘S’ and ‘G’ factors. From an environmental perspective, Tencent has a goal of full carbon neutrality by 2030. It is only one of the few technology, media and telecom (TMT) company globally (and the first in China) to have received a Science-Based Target-initiative (SBTi) approved greenhouse gas (“GHG”) reduction target, behind Microsoft. During the meeting, we discussed comprehensive GHG disclosures, including Scope 3 emissions (the last of the three groups of targets required to achieve net zero and covering areas such as employee travel and new headquarter constructions). The company has started to look into the potential for Scope 3 emissions reduction, although the actual change will happen in the medium rather than the short-term.
On the social aspect, Tencent recognises previous controversies related to Diversity, Equity and Inclusion (DEI) and has proactively made steady progress towards gender equity at board and company levels. We reiterated Fidelity’s policy requiring a minimum of 30% female representation at the board level. Following the appointment of a female non-executive director, the board of Tencent has increased the ratio of female directors to 22.2% and intends to raise this percentage further.
From a governance perspective, we recommended that the company should consider greater disclosure on data privacy. Overall, we were impressed to see the incremental progress Tencent is making in improving its ESG practices.
Current portfolio positioning
On a relative basis, at the reporting period end we were most overweight the Benchmark Index in the industrials, health care, consumer discretionary and information technology sectors. We were most underweight in utilities, energy and communication services.
A notable change to the portfolio during the period was a significant decrease in exposure to the consumer discretionary sector, triggered mostly by profit taking. The proceeds of these sales have been deployed to increase our allocation in consumer staples, materials and energy sectors.
In information technology, we trimmed our holding in Alibaba Group and initiated a position (which we have since increased) in PDD Holdings, which is the third largest e-commerce platform in China and shows outstanding efficiency in supply chain management and cost control. This competitive edge allows the company to offer very competitive pricing, driving continuous gains in market share. This same edge is helping PDD to expand internationally via its Temu brand, leveraging China’s supply chain to meet offshore demand. Currently, Temu is still loss-making due to its significant investment in the user acquisition phase, so in the near-term the expansion is a drag on PDD’s profits. However, over the long-term, we believe there is good potential for significant value to be created in this business, and therefore, the stock offers great upside potential when profitability improves, and the market takes a more positive view of the sustainability of its earnings.
Elsewhere in the consumer space, the positions in MINISO and Lao Feng Xiang were sold to lock in profits which we recycled into better priced opportunities elsewhere. For example, we purchased a new position in online video platform operator iQiyi. It offers an attractive valuation and we believe there is good potential for the competitive environment to improve.
Within the energy sector, we initiated a new position in integrated offshore oil services provider China Oilfield Services, which is 50% owned by the national oil company CNOOC. The company provides leading drilling services in China, while its well service business is also starting to gain market share overseas. We see favourable supply and demand dynamics in the mid-term and the valuations are very compelling.
Premium growth in the life insurance market was negatively impacted during Covid and the recovery has been muted. However, we still see good long-term potential in the Chinese insurance market given the relatively low levels of penetration. Capitalising on the weakness in stock prices, we increased our stake in China’s second largest life insurer (by premium income), Ping An Insurance Company of China. This is a high-quality company that looks attractively valued as the overall weakness in the life insurance industry bottoms out. The purchase was funded by selling the entire position in China Pacific Insurance after its valuation moved upwards, with upside being increasingly priced in.
Within the real estate sector, we initiated a new position in the state-owned developer China Overseas Land & Investment (“COLI”), given its favourable risk-reward profile following the recent market correction and policy easing expectations for the sector. Against the backdrop of the ongoing property downturn, we believe that leading state-owned players with low funding costs are well placed to survive and to continue gaining market share, while cash-strapped private developers with high levels of leverage are likely to struggle. COLI has been excellent in controlling construction costs and enjoys the lowest funding costs in the industry thanks to its prudent balance sheet. This absolute cost advantage enables COLI to have the highest core net profit margin among its peers.
We also added to building materials companies in the property value chain. Beijing Oriental Yuhong Waterproof Technology is a long-term market share gainer amid fast consolidation in the waterproof industry. As the construction downcycle goes on, hundreds of small building materials companies have exited the market. Yuhong, however, is likely to maintain and expand its market leading position. Meanwhile, its shares are trading well below intrinsic value given the extreme bearish market sentiment towards the property sector, presenting an attractive balance of risk and reward.
We have outlined our five largest holdings below.
Gearing
We continue to believe that the judicious use of gearing can be accretive to long-term capital and income returns, allowing us the opportunity to capitalise on the volatility in the Chinese market. Gearing is primarily deployed using contracts for difference, which are relatively low-cost and represent a flexible way of increasing investment exposure, along with a fixed term loan. At the start of the period under review, net gearing was 21.1% which rose to 25.0% by the end of September.
Outlook
After a spell of increased uncertainty over China’s growth trajectory as it emerged from Covid lockdowns, the mood music has moved to a slightly more positive tone in recent weeks. Regulatory concerns are now less relevant, and the narrative again focuses more on growth. While a 5% annual GDP growth target seems largely on track, we believe the current backdrop reflects a more measured growth outlook going into 2024.
In the face of a problematic property market in China, the refinancing conditions for property developers will likely remain challenging in the near-term despite more supportive policies. However, this is not detrimental to all property developers. While we do not expect a significant property rebound given the structural challenges, home prices are showing signs of resilience, especially in top tier cities. Ultimately, the existing divergence between various developers could be magnified further. The indiscriminate sell-off so far this year has caused some mispricing and this provides an opportunity for active investors who can successfully identify the leading players who are most likely to benefit from lower funding costs and can gain market share, while cash-strapped developers struggle.
While economic challenges and geopolitical risks remain, policy direction towards regulatory loosening is clear. We have already seen action taken to boost consumer confidence, such as tax breaks on the purchase of electric vehicles and lower mortgage requirements for home buyers. Although job and wage cuts have clearly hurt consumer confidence, we have the sense that the worst is behind us from our discussions with companies. Over the longer-term, improved corporate earnings could be a key driver for investor confidence to return.
China is at a different point in the economic cycle to many Western countries. Rising interest rates and inflation in the West have meant tightening central bank policies aimed at slowing economies down, whereas the opposite is the case in China. Inflation has not been a problem, and the authorities are taking a more stimulative approach to boost growth.
At the same time, valuations in the Chinese equity market – barring some post-Covid reopening beneficiaries in the consumer discretionary space – remain very compelling both in historic and absolute terms and compared to some other major markets. The low level of valuations is despite a corporate earnings outlook that compares well to most other large markets. Clearly, a lot of pessimism over the economy appears priced in.
It is widely recognised that the long-term plan of the Chinese government is to seek to reduce the economy’s reliance on investment and property and pivot away from some of the country’s traditional growth drivers towards high-end manufacturing and domestic consumption. The pace of innovation in China remains strong, primarily led by private enterprises in sectors such as industrials and health care. Globally, leading companies have emerged in areas such as electric vehicles and renewable energy. These are factors contributing to consolidation trends across a range of sectors, many of which remain very fragmented. While overseas investors may focus on the impact on China of de- globalisation and ‘near-shoring’ of industry, the corollary to this is an increasing preference among Chinese consumers for Chinese brands, resulting in domestic companies taking ever greater market share in what remains one of the world’s largest markets.
We have spent much time discussing the economic backdrop in China, which has clearly been challenging. What we feel is often missed are the stories of great individual companies executing well in industries where they have strong growth potential, but whose valuations are dragged down by the macro headlines and the general negative sentiment that we have discussed above. We believe that stock prices follow earnings in the long-term. Provided their earnings growth comes through, the upside potential is significant. Our team on the ground is focused on selecting the winners that will deliver, and that is where we are directing the Company’s capital.
Dale Nicholls
Portfolio Manager
28 November 2023
Spotlight on the Top Five Holdings as at 30 September 2023
The top five holdings comprise 24.7% of the Company’s Net Assets.
Industry Communication Services
Tencent Holdings
% of Net Assets 10.1%
Tencent Holdings has a market leading position in social networking in China and has enriched the user experience and benefits from a sizeable user base. As China’s internet user growth slows and the internet industry focuses increasingly on monetisation, Tencent is one of the best positioned companies because of its very sticky user base and strong ecosystem which should lead to overall margin expansion. An improving government tone towards mobile gaming and an acceleration of new game approvals since early 2023 and strong domestic game pipelines should underpin growth in Tencent’s gaming segment.
Industry Consumer Discretionary
Pony.ai (unlisted)
% of Net Assets 3.9%
The Toyota backed autonomous vehicle technology company, Pony.ai presents significant growth potential as a market leader in an emerging new industry that will transform traditional ways of transportation. The company plans to commercialise autonomous driving for all sizes of vehicles and to operate on both ridesharing and delivery service networks.
Industry Consumer Discretionary
Alibaba Group Holding
% of Net Assets 3.8%
Alibaba Group holds a leading position in the e-commerce market. Its core e-commerce categories, including apparel and makeup, will benefit from a recovery in consumption and pent-up demand in China. It has a comprehensive ecosystem that has superior breadth and depth and is the foundation of its loyal merchant and consumer base which supports its pricing power. Alibaba announced in March 2023 that it will split the company into six businesses in a move designed to unlock shareholder value and foster market competitiveness.
Industry Healthcare
Wuxi AppTec Group
% of Net Assets 3.5%
WuXi AppTec Group is a leading biotech contract research and manufacturing (“CDMO/CMO”) company and one of the dominant global platforms in terms of sales. It is a long-term compounder and is expected to benefit from global pharmaceutical industry growth and continued research & development (R&D) investment by pharmaceutical companies. The continued outsourcing trend from in-house production to CDMO companies, particularly in China, also underpins its position. WuXi has established a robust talent pool with strong technical skills which has helped to drive a loyal and sticky client base.
Industry Consumer Discretionary
PDD Holdings
% of Net Assets 3.4%
PDD Holdings is the third largest e-commerce platform by GMV in China, with outstanding efficiency in supply chain management and cost control. With its unique traffic distribution method, PDD is able to offer the cheapest version of products and continuously gains market share. The company is also expanding internationally via a new shopping app called Temu by leveraging domestic supply chains in order to meet offshore demand. PDD’s profit has recently been impacted by its heavy investment during its user acquisition phase, however, Temu offers great upside potential given the significant user growth being seen.
Twenty Largest Holdings as at 30 September 2023
The Asset Exposures shown below measure the exposure of the Company’s portfolio to market price movements in the shares, equity linked notes and convertible bonds owned or in the shares underlying the derivative instruments. The Fair Value is the value the portfolio could be sold for and is the value shown on the Balance Sheet. Where a contract for difference (“CFD”) is held, the fair value reflects the profit or loss on the contract since it was opened and is based on how much the share price of the underlying shares has moved.
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|
| Fair | ||
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| £’000 | %1 | £’000 | |
| Long Exposures – shares unless otherwise stated |
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|
| |
| Tencent Holdings (shares and long CFDs) |
|
|
| |
| Internet, mobile and telecommunications service provider | 114,086 | 10.1 | 63,568 | |
| Pony.ai (unlisted) |
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|
| |
| Developer of artificial intelligence and autonomous driving technology solutions | 43,774 | 3.9 | 43,774 | |
| Alibaba Group Holding (shares and long CFD) |
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|
| |
| e-commerce group | 43,596 | 3.8 | 20,175 | |
| WuXi AppTec Group (long CFDs) |
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|
| |
| Pharmaceutical, biopharmaceutical and medical device outsourcing provider | 39,292 | 3.5 | 210 | |
| PDD Holdings (long CFD) |
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| |
| e-commerce group | 38,981 | 3.4 | (145) | |
| DJI International (unlisted) |
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|
| |
| Manufacturer of drones | 30,266 | 2.7 | 30,266 | |
| China Life Insurance (long CFDs) |
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|
| |
| Insurance company | 29,533 | 2.6 | 444 | |
| Ping An Insurance Company of China (long CFD) |
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| |
| Provider of insurance, banking and investment products | 29,355 | 2.6 | (1,540) | |
| Chime Biologics Convertible Bond (unlisted) |
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|
| |
| Contract Development and Manufacturing Organization | 28,583 | 2.5 | 28,583 | |
| Venturous Holdings (unlisted) |
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|
| |
| Investment company | 27,970 | 2.5 | 27,970 | |
| HollySys Automation Technologies |
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| Provider of automation control system solutions | 26,772 | 2.4 | 26,772 | |
| Hisense Home Appliances Group |
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|
| |
| Developer, manufacturer and distributor of household appliances | 26,252 | 2.3 | 26,252 | |
| Crystal International Group |
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| |
| Clothing manufacturer | 26,056 | 2.3 | 26,056 | |
| China Foods (shares and long CFD) |
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| |
| Processor and distributor of food and beverages | 25,536 | 2.2 | 2,389 | |
| ByteDance (unlisted) |
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| Technology company | 25,411 | 2.2 | 25,411 | |
| ERA (shares and equity linked notes) |
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| Manufacturer of plastic valves and fittings | 23,066 | 2.0 | 23,066 | |
| Postal Savings Bank of China |
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| Commercial retail bank | 22,684 | 2.0 | 22,684 | |
| Sinotrans (shares and long CFDs) |
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| Logistics, storage and terminal services provider | 22,617 | 2.0 | 10,803 | |
| HUTCHMED China |
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| Biopharmaceutical company | 21,476 | 1.9 | 21,476 | |
| Autohome |
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| |
| Online portal for automobile buyers | 19,692 | 1.7 | 19,692 | |
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| --------------- | --------------- | --------------- | |
| Twenty largest long exposures | 664,998 | 58.6 | 417,906 | |
| Other long exposures | 919,047 | 81.0 | 722,879 | |
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| --------------- | --------------- | --------------- | |
| Total long exposures before hedges (151 companies) | 1,584,045 | 139.6 | 1,140,785 | |
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| ========= | ========= | ========= | |
| Less: hedging exposures |
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|
| |
| Hang Seng Index (future) | (104,963) | (9.2) | 629 | |
| Hang Seng China Enterprises Index (future) | (47,347) | (4.2) | 327 | |
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| --------------- | --------------- | --------------- | |
| Total hedging exposures | (152,310) | (13.4) | 956 | |
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| ========= | ========= | ========= | |
| Total long exposures after the netting of hedges | 1,431,735 | 126.2 | 1,141,741 | |
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| ========= | ========= | ========= | |
| Short exposures |
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|
| |
| Short CFDs (2 holdings) | 13,656 | 1.2 | (844) | |
|
| --------------- | --------------- | --------------- | |
| Gross Asset Exposure2 | 1,445,391 | 127.4 |
| |
|
| ========= | ========= |
| |
| Portfolio Fair Value3 |
|
| 1,140,897 | |
| Net current liabilities (excluding derivative instruments) |
|
| (6,421) | |
|
|
|
| --------------- | |
| Net Assets |
|
| 1,134,476 | |
|
|
|
| ========= | |
1 Asset Exposure is expressed as a percentage of Net Assets.
2 Gross Asset Exposure comprises market exposure to investments of £1,147,456,000 plus market exposure to derivative instruments of £297,935,000.
3 Portfolio Fair Value comprises investments of £1,147,456,000 plus derivative assets of £3,739,000 less derivative liabilities of £10,298,000.
Interim Management Report
Unlisted Investments
The Company can invest up to 15% of its Net Assets plus Borrowings in unlisted companies which carry on business, or have significant interests, in China. The limit is applied at the time of purchase of the investment. The unlisted space in China allows the Portfolio Manager to take advantage of the faster growth trajectory of earlier stage companies before they potentially become listed on the public markets. This can offer excellent opportunities for patient and long-term investors.
As at 30 September 2023, the Company had 12.8% of Net Assets plus Borrowings in six unlisted investments (31 March 2023: 13.6% of Net Assets plus Borrowings in nine unlisted investments). In the reporting period, the following companies listed on the Hong Kong Stock Exchange: Beisen on 13 April 2023; Cutia Therapeutics on 12 June 2023; and Tuhu Car on 26 September 2023.
The unlisted investments in the Company’s portfolio are assessed regularly by Fidelity’s dedicated Fair Value Committee (“FVC”) with advice from Kroll, a third-party valuation specialist, and also the Fidelity analysts who look after these companies. In addition, Fidelity has an unlisted investments specialist focused on Chinese unquoted companies. The FVC meets monthly to consider the valuation of the unlisted investments. However, the unlisted investments are monitored on a daily basis for trigger events such as funding rounds or news of fundamentals which may require the FVC to adjust the valuation price as soon as the relevant Fidelity analyst has been consulted. Kroll undertake a detailed review of each of the unlisted investments on a quarterly basis. The FVC provides regular updates to the Board so that it has oversight of the valuation process. The Board also receives details of any price changes made outside of the normal quarterly cycle.
Twice yearly, ahead of the Company’s interim and its year end, the Audit and Risk Committee has meetings whereby it receives a detailed presentation from the FVC, Kroll and Fidelity’s unlisted specialist in order to satisfy itself that the unlisted investments are carried at an appropriate value at the balance sheet date. The external Auditor attends the unlisted valuations meeting held ahead of the Company’s year end.
The basis of the valuation of the unlisted investments is set out in Notes 2 (e) and 2 (l) of the Accounting Policies which can be found on pages 65 to 68 of the Annual Report for the year ended 31 March 2023.
Gearing
The Board continues to believe that the judicious use of gearing (a benefit of the investment trust structure) can be accretive to long-term capital and income returns, although being more than 100% invested does mean that the NAV and share price may be more volatile and can accentuate losses in a falling market. Net gearing at the period end was 25.0% compared to 21.1% as at 31 March 2023.
The Company renewed its loan facility with Scotiabank Europe PLC for US$100,000,000 on 14 February 2023 for a period of one year at a fixed interest annual rate of 6.335%. It is the Board’s intention not to renew this facility at maturity.
Discount Management
The Board believes that investors are best served when the share price trades close to its NAV per share. However, the Board recognises that the share price is affected by the interaction of supply and demand in the market based on investor sentiment towards China, as well as the performance of the Company’s portfolio. A discount control mechanism is in place whereby the Board seeks to maintain the Company’s discount in single digits in normal market conditions. Until May 2023, shares repurchased were held in Treasury. However, once shares held in Treasury equated to 15% of the issued share capital, shares repurchased since then have been cancelled. Shareholders authorised the Directors to buyback up to 14.99% of the Company’s shares at the last Annual General Meeting.
To combat tricky and volatile market conditions during the reporting period, the Board undertook active discount management, the primary purpose of which was, and remains, the intent to reduce discount volatility. Despite this intervention, the Company’s discount widened from 9.0% at the start of the reporting period to end the period at 12.0%. Over the six months, the Board authorised the repurchase of 11,801,337 shares into Treasury and for cancellation at a cost of £25,895,000, representing 2.1% of the issued share capital of the Company. These share repurchases have benefited remaining shareholders as the NAV per share has been increased by purchasing shares at a discount. Subsequent to the period end and up to latest practicable date, the Company has repurchased 5,397,163 shares for cancellation.
Ongoing Charge
The Ongoing Charge (the costs of running the Company) for the six months ended 30 September 2023 was 0.99% (31 March 2023: 0.98%). The variable element of the management fee was a charge of 0.20% (31 March 2023: 0.20%). Therefore, the Ongoing Charge including the variable element for the reporting period was 1.19% (31 March 2023: 1.18%).
Board of Directors
In the announcement made by the Company on 20 July 2023 with the results of its Annual General Meeting (“AGM”), it was noted that Gordon Orr received less than 80% of the votes cast in favour of his re-election, which was predominantly the result of a large shareholder’s view on his being over boarded. Whilst it is felt that Mr Orr was able to devote, and was in fact devoting, sufficient time to the business of the Company, following further discussions since the AGM, the Board confirms that Mr Orr will step down from one of his board positions by 1 January 2024. His number of directorships is therefore expected to have reduced ahead of the Company’s next Annual General Meeting.
Principal and Emerging Risks
The Board, with the assistance of the Manager (FIL Investments Services (UK) Limited), has developed a risk matrix which, as part of the risk management and internal controls process, which identifies the key existing and emerging risks and uncertainties faced by the Company.
The Board considers that the principal risks and uncertainties faced by the Company continue to fall into the following risk categories: geopolitical; market and economic (including currency risk); operational (including those of third-party service providers); investment performance (including gearing risk); variable interest entity structures; climate change; discount management; unlisted securities; environmental, social and governance (ESG); key person; cybercrime and information security; business continuity; and tax and regulatory risks. Information on each of these risks is given in the Strategic Report section of the Annual Report on pages 28 to 32 for the year ended 31 March 2023 which can be found on the Company’s pages of the Manager’s website at www.fidelity.co.uk/china.
While the principal risks and uncertainties are the same as those at the last year end, the uncertainty continues to be heightened by the ongoing global implications of the Russia and Ukraine conflict, conflict in the Middle East, continuing tensions between China and the US, tensions with Taiwan. Western sanctions on China on capital and trade flows and from the economic outlook remaining challenging. The quantum of risks continues to change and the Board remains vigilant in monitoring the risks.
Climate change continues to be a key emerging issue, as well as a principal risk, confronting asset managers and their investors. The Board notes that the Manager has integrated ESG considerations, including climate change, into the Company’s investment process. The Board will continue to monitor how this may impact the Company as a risk to investment valuations and potentially to shareholder returns.
Investors should be prepared for market fluctuations and remember that holding shares in the Company should be considered to be a long-term investment. Risks are partially mitigated by the investment trust structure of the Company which means that no forced sales need to take place to deal with any redemptions. Therefore, investments in the Company’s portfolio can be held over a longer time horizon.
The Manager has appropriate business continuity and operational plans in place to ensure the continued provision of services, including investment team key activities of portfolio managers, analysts and trading/support functions. It reviews its operational resilience strategies on an ongoing basis and continues to take all reasonable steps in meeting its regulatory obligations and to assess operational risks, the ability to continue operating and the steps it needs to take to serve and support its clients, including the Board.
The Company’s other third-party service providers also have similar measures to ensure that business disruption is kept to a minimum.
Transactions with the Manager and Related Parties
The Manager has delegated the Company’s investment management to FIL Investment Management (Hong Kong) Limited and the role of company secretary to FIL Investments International. Transactions with the Manager and related party transactions with the Directors are disclosed in Note 15 to the Financial Statements below.
Going Concern Statement
The Directors have considered the Company’s investment objective, risk management policies, liquidity risk, credit risk, capital management policies and procedures, the nature of its portfolio and its expenditure and cash flow projections. The Directors, having considered the liquidity of the Company’s portfolio of investments (being mainly securities which are readily realisable), the projected income and expenditure and the loan facility agreement, are satisfied that the Company is financially sound and has adequate resources to meet all of its liabilities and ongoing expenses and can continue in operational existence for a period of at least twelve months from the date of this Half-Yearly Report.
This conclusion takes into account the Board’s assessment of the ongoing risks as outlined above.
Accordingly, the Financial Statements of the Company have been prepared on a going concern basis.
By Order of the Board
FIL Investments International
28 November 2023
Directors’ Responsibility Statement
The Disclosure and Transparency Rules (“DTR”) of the UK Listing Authority require the Directors to confirm their responsibilities in relation to the preparation and publication of the Interim Management Report and Financial Statements.
The Directors confirm to the best of their knowledge that:
a) the condensed set of Financial Statements contained within this Half-Yearly Report has been prepared in accordance with the International Accounting Standards 34: Interim Financial Reporting; and
b) the Portfolio Manager’s Half-Yearly Review and the Interim Management Report above, include a fair review of the information required by DTR 4.2.7R and 4.2.8R.
The Half-Yearly Report has not been audited or reviewed by the Company’s Independent Auditor.
The Half-Yearly Report was approved by the Board on 28 November 2023 and the above responsibility statement was signed on its behalf by Mike Balfour, Chairman.
FINANCIAL STATEMENTS
Income Statement for the six months ended 30 September 2023
|
|
| Six months ended 30 September 2023 | Year ended 31 March 2023 | Six months ended 30 September 2022 | ||||||
|
|
| Revenue | Capital | Total | Revenue | Capital | Total | Revenue | Capital | Total |
| Revenue |
|
|
|
|
|
|
|
|
|
|
| Investment income | 4 | 22,274 | – | 22,274 | 32,704 | – | 32,704 | 27,786 | – | 27,786 |
| Derivative income | 4 | 9,709 | – | 9,709 | 11,566 | – | 11,566 | 9,925 | – | 9,925 |
| Other income | 4 | 800 | – | 800 | 409 | – | 409 | 145 | – | 145 |
|
|
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- |
| Total income |
| 32,783 | – | 32,783 | 44,679 | – | 44,679 | 37,856 | – | 37,856 |
|
|
| ========= | ========= | ========= | ========= | ========= | ========= | ========= | ========= | ========= |
| Losses on investments at fair value through profit or loss |
| – | (119,622) | (119,622) | – | (6,912) | (6,912) | – | (52,166) | (52,166) |
| (Losses)/gains on derivative instruments |
| – | (36,505) | (36,505) | – | 14,971 | 14,971 | – | (88,129) | (88,129) |
| Foreign exchange (losses)/gains |
| – | (1,975) | (1,975) | – | 8,167 | 8,167 | – | 13,614 | 13,614 |
| Foreign exchange losses on bank loans |
| – | (1,013) | (1,013) | – | (4,814) | (4,814) | – | (13,800) | (13,800) |
|
|
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- |
| Total income and (losses)/gains |
| 32,783 | (159,115) | (126,332) | 44,679 | 11,412 | 56,091 | 37,856 | (140,481) | (102,625) |
|
|
| ========= | ========= | ========= | ========= | ========= | ========= | ========= | ========= | ========= |
| Expenses |
|
|
|
|
|
|
|
|
|
|
| Investment management fees | 5 | (1,293) | (5,056) | (6,349) | (3,012) | (11,715) | (14,727) | (1,544) | (6,002) | (7,546) |
| Other expenses |
| (669) | (3) | (672) | (1,097) | (4) | (1,101) | (486) | – | (486) |
|
|
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- |
| Profit/(loss) before finance costs and taxation |
| 30,821 | (164,174) | (133,353) | 40,570 | (307) | 40,263 | 35,826 | (146,483) | (110,657) |
| Finance costs | 6 | (3,426) | (10,279) | (13,705) | (3,956) | (11,869) | (15,825) | (1,256) | (3,770) | (5,026) |
|
|
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- |
| Profit/(loss) before taxation |
| 27,395 | (174,453) | (147,058) | 36,614 | (12,176) | 24,438 | 34,570 | (150,253) | (115,683) |
| Taxation | 7 | (1,177) | 383 | (794) | (1,149) | – | (1,149) | (1,476) | 433 | (1,043) |
|
|
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- |
| Profit/(loss) after taxation for the period |
| 26,218 | (174,070) | (147,852) | 35,465 | (12,176) | 23,289 | 33,094 | (149,820) | (116,726) |
|
|
| ========= | ========= | ========= | ========= | ========= | ========= | ========= | ========= | ========= |
| Earnings/(loss) per ordinary share | 8 | 5.43p | (36.06p) | (30.63p) | 7.05p | (2.42p) | 4.63p | 6.45p | (29.22p) | (22.77p) |
|
|
| ========= | ========= | ========= | ========= | ========= | ========= | ========= | ========= | ========= |
The Company does not have any income or expenses that are not included in the profit/(loss) after taxation for the period. Accordingly, the profit/(loss) after taxation for the period is also the total comprehensive income for the period and no separate Statement of Comprehensive Income has been presented.
The total column of this statement represents the Income Statement of the Company. The revenue and capital columns are supplementary and presented for information purposes as recommended by the Statement of Recommended Practice issued by the AIC.
All the profit/(loss) and total comprehensive income is attributable to the equity shareholders of the Company. There are no minority interests.
No operations were acquired or discontinued in the period and all items in the above statement derive from continuing operations.
Statement of Changes in Equity for the six months ended 30 September 2023
|
|
|
| Share | Capital |
|
|
|
|
| Six months ended 30 September 2023 (unaudited) |
|
|
|
|
|
|
|
|
| Total equity at 31 March 2023 |
| 5,710 | 211,569 | 917 | 186,794 | 877,782 | 55,649 | 1,338,421 |
| Repurchase of ordinary shares into Treasury | 13 | – | – | – | (6,965) | – | – | (6,965) |
| Repurchase of ordinary shares for cancellation | 13 | (89) | – | 89 | (18,930) | – | – | (18,930) |
| (Loss)/profit after taxation for the period |
| – | – | – | – | (174,070) | 26,218 | (147,852) |
| Dividend paid to shareholders | 9 | – | – | – | – | – | (30,198) | (30,198) |
|
|
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- |
| Total equity at 30 September 2023 |
| 5,621 | 211,569 | 1,006 | 160,899 | 703,712 | 51,669 | 1,134,476 |
|
|
| ========= | ========= | ========= | ========= | ========= | ========= | ========= |
| Year ended 31 March 2023 (audited) |
|
|
|
|
|
|
|
|
| Total equity at 31 March 2022 |
| 5,710 | 211,569 | 917 | 244,043 | 889,958 | 48,424 | 1,400,621 |
| Repurchase of ordinary shares into Treasury | 13 | – | – | – | (57,249) | – | – | (57,249) |
| (Loss)/profit after taxation for the year |
| – | – | – | – | (12,176) | 35,465 | 23,289 |
| Dividend paid to shareholders | 9 | – | – | – | – | – | (28,240) | (28,240) |
|
|
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- |
| Total equity at 31 March 2023 |
| 5,710 | 211,569 | 917 | 186,794 | 877,782 | 55,649 | 1,338,421 |
|
|
| ========= | ========= | ========= | ========= | ========= | ========= | ========= |
| Six months ended 30 September 2022 (unaudited) |
|
|
|
|
|
|
|
|
| Total equity at 31 March 2022 |
| 5,710 | 211,569 | 917 | 244,043 | 889,958 | 48,424 | 1,400,621 |
| Repurchase of ordinary shares into Treasury | 13 | – | – | – | (23,532) | – | – | (23,532) |
| (Loss)/profit after taxation for the period |
| – | – | – | – | (149,820) | 33,094 | (116,726) |
| Dividend paid to shareholders | 9 | – | – | – | – | – | (28,240) | (28,240) |
|
|
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- |
| Total equity at 30 September 2022 |
| 5,710 | 211,569 | 917 | 220,511 | 740,138 | 53,278 | 1,232,123 |
|
|
| ========= | ========= | ========= | ========= | ========= | ========= | ========= |
Balance Sheet as at 30 September 2023
Company number 7133583
|
|
| 30.09.23 | 31.03.23 | 30.09.22 |
| Non-current assets |
|
|
|
|
| Investments at fair value through profit or loss | 10 | 1,147,456 | 1,318,764 | 1,256,604 |
|
|
| --------------- | --------------- | --------------- |
| Current assets |
|
|
|
|
| Derivative instruments | 10 | 3,739 | 22,313 | 15,978 |
| Amounts held at futures clearing houses and brokers |
| 24,438 | 34,813 | 66,612 |
| Other receivables | 11 | 10,390 | 11,939 | 44,391 |
| Cash at bank |
| 51,258 | 72,943 | 11,551 |
|
|
| --------------- | --------------- | --------------- |
|
|
| 89,825 | 142,008 | 138,532 |
|
|
| ========= | ========= | ========= |
| Current liabilities |
|
|
|
|
| Derivative instruments | 10 | (10,298) | (20,892) | (34,150) |
| Bank loan |
| (81,870) | (80,857) | (89,843) |
| Other payables | 12 | (10,637) | (20,602) | (37,900) |
| Bank overdraft |
| – | – | (1,120) |
|
|
| --------------- | --------------- | --------------- |
|
|
| (102,805) | (122,351) | (163,013) |
|
|
| --------------- | --------------- | --------------- |
| Net current (liabilities)/assets |
| (12,980) | 19,657 | (24,481) |
|
|
| ========= | ========= | ========= |
| Net assets |
| 1,134,476 | 1,338,421 | 1,232,123 |
|
|
| ========= | ========= | ========= |
| Equity attributable to equity shareholders |
|
|
|
|
| Share capital | 13 | 5,621 | 5,710 | 5,710 |
| Share premium account |
| 211,569 | 211,569 | 211,569 |
| Capital redemption reserve |
| 1,006 | 917 | 917 |
| Other reserve |
| 160,899 | 186,794 | 220,511 |
| Capital reserve |
| 703,712 | 877,782 | 740,138 |
| Revenue reserve |
| 51,669 | 55,649 | 53,278 |
|
|
| --------------- | --------------- | --------------- |
| Total equity |
| 1,134,476 | 1,338,421 | 1,232,123 |
|
|
| ========= | ========= | ========= |
| Net asset value per ordinary share | 14 | 238.07p | 274.08p | 244.47p |
|
|
| ========= | ========= | ========= |
Cash Flow Statement for the six months ended 30 September 2023
|
| Six months | Year | Six months |
| Operating activities |
|
|
|
| Cash inflow from investment income | 18,806 | 30,352 | 24,344 |
| Cash inflow from derivative income | 8,129 | 11,484 | 9,648 |
| Cash inflow from other income | 800 | 409 | 145 |
| Cash outflow from Directors' fees | (125) | (195) | (95) |
| Cash outflow from other payments | (7,337) | (15,638) | (8,143) |
| Cash outflow from the purchase of investments | (315,682) | (429,715) | (215,661) |
| Cash outflow from the purchase of derivatives | (1,910) | (7,957) | (3,966) |
| Cash outflow from the settlement of derivatives | (152,776) | (485,760) | (215,801) |
| Cash inflow from the sale of investments | 356,034 | 480,407 | 231,473 |
| Cash inflow from the settlement of derivatives | 132,953 | 510,263 | 189,426 |
| Cash inflow/(outflow) from amounts held at futures clearing houses and brokers | 10,375 | (2,593) | (34,392) |
|
| --------------- | --------------- | --------------- |
| Net cash inflow/(outflow) from operating activities before servicing of finance | 49,267 | 91,057 | (23,022) |
|
| ========= | ========= | ========= |
| Financing activities |
|
|
|
| Cash outflow from bank loan, collateral and overdraft interest paid | (2,561) | (2,242) | (1,190) |
| Cash outflow from CFD interest paid | (11,245) | (12,099) | (2,741) |
| Cash outflow from short CFD dividends paid | – | (254) | (254) |
| Cash outflow from the repurchase of ordinary shares into Treasury | (7,095) | (57,119) | (21,409) |
| Cash outflow from the repurchase of ordinary shares for cancellation | (17,878) | – | – |
| Cash outflow from dividends paid to shareholders | (30,198) | (28,240) | (28,240) |
|
| --------------- | --------------- | --------------- |
| Cash outflow from financing activities | (68,977) | (99,954) | (53,834) |
|
| ========= | ========= | ========= |
| Decrease in cash at bank | (19,710) | (8,897) | (76,856) |
| Cash at bank at the start of the period | 72,943 | 73,673 | 73,673 |
| Effect of foreign exchange movements | (1,975) | 8,167 | 13,614 |
|
| --------------- | --------------- | --------------- |
| Cash at bank at the end of the period | 51,258 | 72,943 | 10,431 |
|
| ========= | ========= | ========= |
| Represented by: |
|
|
|
| Cash at bank | 51,258 | 72,943 | 11,551 |
| Bank overdraft | – | – | (1,120) |
|
| --------------- | --------------- | --------------- |
|
| 51,258 | 72,943 | 10,431 |
|
| ========= | ========= | ========= |
Notes to the Financial Statements
1 Principal Activity
Fidelity China Special Situations PLC is an Investment Company incorporated in England and Wales with a premium listing on the London Stock Exchange. The Company’s registration number is 7133583 and its registered office is Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP. The Company has been approved by HM Revenue & Customs as an Investment Trust under Section 1158 of the Corporation Tax Act 2010 and intends to conduct its affairs so as to continue to be approved.
2 Publication of Non-statutory Accounts
The Financial Statements in this Half-Yearly Report have not been audited or reviewed by the Company’s Independent Auditor and do not constitute statutory accounts as defined in section 434 of the Companies Act 2006 (the “Act”). The financial information for the year ended 31 March 2023 is extracted from the latest published Financial Statements of the Company. Those Financial Statements were delivered to the Registrar of Companies and included the Independent Auditor’s Report which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Act.
3 ACCOUNTING POLICIES
(i) Basis of Preparation
These Half-Yearly Financial Statements have been prepared in accordance with UK-adopted International Accounting Standard 34: Interim Financial Reporting and use the same accounting policies as set out in the Company’s Annual Report and Financial Statements for the year ended 31 March 2023. Those Financial Statements were prepared in accordance with UK-adopted International Accounting Standards (“IFRS”) in conformity with the requirements of the Companies Act 2006, IFRC interpretations and, as far as it is consistent with IFRS, the Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts (“SORP”) issued by the Association of Investment Companies (“AIC”) in July 2022.
(ii) Going Concern
The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for a period of at least twelve months from the date of approval of these Financial Statements. Accordingly, the Directors consider it appropriate to adopt the going concern basis of accounting in preparing these Financial Statements. This conclusion also takes into account the Board’s assessment of the ongoing risks as disclosed in the Going Concern Statement above.
4 Income
|
| Six months | Year | Six months |
| Investment income |
|
|
|
| Overseas dividends | 22,274 | 31,949 | 27,030 |
| Overseas scrip dividends | – | 755 | 756 |
|
| --------------- | --------------- | --------------- |
|
| 22,274 | 32,704 | 27,786 |
|
| ========= | ========= | ========= |
| Derivative income |
|
|
|
| Dividends received on long CFDs | 9,405 | 11,282 | 9,849 |
| Interest received on CFDs | 304 | 284 | 76 |
|
| --------------- | --------------- | --------------- |
|
| 9,709 | 11,566 | 9,925 |
|
| ========= | ========= | ========= |
| Other income |
|
|
|
| Interest received on collateral and deposits | 800 | 409 | 145 |
|
| --------------- | --------------- | --------------- |
| Total income | 32,783 | 44,679 | 37,856 |
|
| ========= | ========= | ========= |
Special dividends of £1,458,000 have been recognised in capital during the period (year ended 31 March 2023: £1,155,000 and six months ended 30 September 2022: £nil).
5 Investment Management Fees
|
| Revenue | Capital | Total |
| Six months ended 30 September 2023 (unaudited) |
|
|
|
| Investment management fee – base | 1,293 | 3,879 | 5,172 |
| Investment management fee – variable | – | 1,177 | 1,177 |
|
| --------------- | --------------- | --------------- |
|
| 1,293 | 5,056 | 6,349 |
|
| ========= | ========= | ========= |
| Year ended 31 March 2023 (audited) |
|
|
|
| Investment management fee – base | 3,012 | 9,037 | 12,049 |
| Investment management fee – variable | – | 2,678 | 2,678 |
|
| --------------- | --------------- | --------------- |
|
| 3,012 | 11,715 | 14,727 |
|
| ========= | ========= | ========= |
| Six months ended 30 September 2022 (unaudited) |
|
|
|
| Investment management fee – base | 1,544 | 4,632 | 6,176 |
| Investment management fee – variable | – | 1,370 | 1,370 |
|
| --------------- | --------------- | --------------- |
|
| 1,544 | 6,002 | 7,546 |
|
| ========= | ========= | ========= |
FIL Investment Services (UK) Limited (a Fidelity group company) is the Company’s Alternative Investment Fund Manager (“the Manager”) and has delegated portfolio management to FIL Investment Management (Hong Kong) Limited (“the Investment Manager”).
The base investment management fee for the period from 1 April to 30 June 2023 was charged at an annual rate of 0.90% on the first £1.5 billion of net assets, reducing to 0.70% of net assets over £1.5 billion. Since 1 July 2023, it has been charged at an annual reduced rate of 0.85% on the first £1.5 billion of net assets and has remained unchanged at 0.70% on net assets over £1.5 billion.
In addition, there is a +/-0.20% variable fee based on the Company’s NAV per share performance relative to the Company’s Benchmark Index measured daily over a three-year rolling basis. In the event of outperformance against the Benchmark Index, the maximum fee that the Company would pay overall is 1.05% (1.10% until 30 June 2023) on net assets up to £1.5 billion and reducing to 0.85% (0.90% until 30 June 2023) on net assets over £1.5 billion. If the Company underperforms, then the overall fee can fall as low as 0.65% (0.70% until 30 June 2023) on net assets up to £1.5 billion and reducing to 0.50% on net assets over £1.5 billion.
Fees are payable monthly in arrears and are calculated on a daily basis. The base investment management fee has been allocated 75% to capital reserve in accordance with the Company’s accounting policies.
6 Finance Costs
|
| Revenue | Capital | Total |
| Six months ended 30 September 2023 (unaudited) |
|
|
|
| Interest on bank loan and overdrafts | 642 | 1,927 | 2,569 |
| Interest paid on CFDs | 2,784 | 8,352 | 11,136 |
| Dividends paid on short CFDs | – | – | – |
|
| --------------- | --------------- | --------------- |
|
| 3,426 | 10,279 | 13,705 |
|
| ========= | ========= | ========= |
| Year ended 31 March 2023 (audited) |
|
|
|
| Interest on bank loan and overdrafts | 663 | 1,989 | 2,652 |
| Interest paid on CFDs | 3,230 | 9,689 | 12,919 |
| Dividends paid on short CFDs | 63 | 191 | 254 |
|
| --------------- | --------------- | --------------- |
|
| 3,956 | 11,869 | 15,825 |
|
| ========= | ========= | ========= |
| Six months ended 30 September 2022 (unaudited) |
|
|
|
| Interest on bank loan, collateral and overdrafts | 309 | 927 | 1,236 |
| Interest paid on CFDs | 884 | 2,652 | 3,536 |
| Dividends paid on short CFDs | 63 | 191 | 254 |
|
| --------------- | --------------- | --------------- |
|
| 1,256 | 3,770 | 5,026 |
|
| ========= | ========= | ========= |
Finance costs have been allocated 75% to capital reserve in accordance with the Company’s accounting policies.
7 Taxation
|
| Revenue | Capital | Total |
| Six months ended 30 September 2023 (unaudited) |
|
|
|
| UK corporation tax | 383 | (383) | – |
| Overseas taxation charge | 794 | – | 794 |
|
| --------------- | --------------- | --------------- |
| Taxation charge for the period | 1,177 | (383) | 794 |
|
| ========= | ========= | ========= |
| Year ended 31 March 2023 (audited) |
|
|
|
| UK corporation tax | – | – | – |
| Overseas taxation charge | 1,149 | – | 1,149 |
|
| --------------- | --------------- | --------------- |
| Taxation charge for the year | 1,149 | – | 1,149 |
|
| ========= | ========= | ========= |
| Six months ended 30 September 2023 (unaudited) |
|
|
|
| UK corporation tax | 433 | (433) | – |
| Overseas taxation charge | 1,043 | – | 1,043 |
|
| --------------- | --------------- | --------------- |
| Taxation charge for the period | 1,476 | (433) | 1,043 |
|
| ========= | ========= | ========= |
8 Earnings/(Loss) per Ordinary Share
|
| Six months | Year | Six months |
| Revenue earnings per ordinary share | 5.43p | 7.05p | 6.45p |
| Capital loss per ordinary share | (36.06p) | (2.42p) | (29.22p) |
|
| --------------- | --------------- | --------------- |
| Total (loss)/earnings per ordinary share | (30.63p) | 4.63p | (22.77p) |
|
| ========= | ========= | ========= |
The earnings/(loss) per ordinary share is based on the profit/(loss) after taxation for the period divided by the weighted average number of ordinary shares held outside Treasury during the period, as shown below:
|
| £’000 | £’000 | £’000 |
| Revenue profit after taxation for the period | 26,218 | 35,465 | 33,094 |
| Capital loss after taxation for the period | (174,070) | (12,176) | (149,820) |
|
| --------------- | --------------- | --------------- |
| Total (loss)/profit after the taxation for the period | (147,852) | 23,289 | (116,726) |
|
| ========= | ========= | ========= |
|
| Number | Number | Number |
| Weighted average number of ordinary shares held outside of Treasury | 482,649,498 | 503,045,428 | 512,714,728 |
|
| ========== | ========== | ========== |
9 Dividend Paid to Shareholders
|
| Six months | Year | Six months |
| Dividend of 6.25 pence per ordinary share paid for the year ended 31 March 2023 | 30,198 | – | – |
| Dividend of 5.50 pence per ordinary share paid for the year ended 31 March 2022 | – | 28,240 | 28,240 |
|
| --------------- | --------------- | --------------- |
|
| 30,198 | 28,240 | 28,240 |
|
| ========= | ========= | ========= |
No dividend has been declared for the six months ended 30 September 2023 (six months ended 30 September 2022: £nil).
10 Fair Value Hierarchy
The Company is required to disclose the fair value hierarchy that classifies its financial instruments measured at fair value at one of three levels, according to the relative reliability of the inputs used to estimate the fair values.
| Classification | Input |
| Level 1 | Valued using quoted prices in active markets for identical assets |
| Level 2 | Valued by reference to inputs other than quoted prices included in level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly |
| Level 3 | Valued by reference to valuation techniques using inputs that are not based on observable market data |
Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset. The valuation techniques used by the Company are as disclosed in the Company’s Annual Report for the year ended 31 March 2023 (Accounting Policies Notes 2 (e), (l) and (m) on pages 65 to 68). The table below sets out the Company’s fair value hierarchy:
|
| Level 1 | Level 2 | Level 3 | Total |
| Financial assets at fair value through profit or loss |
|
|
|
|
| Investments | 915,517 | 45,802 | 186,137 | 1,147,456 |
| Derivative instrument assets | 956 | 2,783 | – | 3,739 |
|
| --------------- | --------------- | --------------- | --------------- |
|
| 916,473 | 48,585 | 186,137 | 1,151,195 |
|
| ========= | ========= | ========= | ========= |
| Financial liabilities at fair value through profit or loss |
|
|
|
|
| Derivative instrument liabilities | – | (10,298) | – | (10,298) |
|
| --------------- | --------------- | --------------- | --------------- |
| Financial liabilities at fair value |
|
|
|
|
| Bank loan | – | (81,790) | – | (81,790) |
|
| ========= | ========= | ========= | ========= |
|
| Level 1 | Level 2 | Level 3 | Total |
| Financial assets at fair value through profit or loss |
|
|
|
|
| Investments | 1,081,458 | 44,428 | 192,878 | 1,318,764 |
| Derivative instrument assets | 2,492 | 19,821 | – | 22,313 |
|
| --------------- | --------------- | --------------- | --------------- |
|
| 1,083,950 | 64,249 | 192,878 | 1,341,077 |
|
| ========= | ========= | ========= | ========= |
| Financial liabilities at fair value through profit or loss |
|
|
|
|
| Derivative instrument liabilities | (7,271) | (13,621) | – | (20,892) |
|
| --------------- | --------------- | --------------- | --------------- |
| Financial liabilities at fair value |
|
|
|
|
| Bank loan | – | (81,092) | – | (81,092) |
|
| ========= | ========= | ========= | ========= |
|
| Level 1 | Level 2 | Level 3 | Total |
| Financial assets at fair value through profit or loss |
|
|
|
|
| Investments | 981,880 | 45,681 | 229,043 | 1,256,604 |
| Derivative instrument assets | 8,453 | 7,525 | – | 15,978 |
|
| --------------- | --------------- | --------------- | --------------- |
|
| 990,333 | 53,206 | 229,043 | 1,272,582 |
|
| ========= | ========= | ========= | ========= |
| Financial liabilities at fair value through profit or loss |
|
|
|
|
| Derivative instrument liabilities | – | (32,930) | (1,220) | (34,150) |
|
| --------------- | --------------- | --------------- | --------------- |
| Financial liabilities at fair value |
|
|
|
|
| Bank loan | – | (89,421) | – | (89,421) |
|
| ========= | ========= | ========= | ========= |
The table below sets out the movements in level 3 investments during the period:
|
| 30.09.23 | 31.03.23 | 30.09.22 |
| Level 3 investments at the beginning of the period | 192,878 | 194,650 | 194,650 |
| Transfers into level 3 at cost1 | 17,316 | – | – |
| Transfers out of level 3 – at cost2 | (11,758) | (9,971) | (9,971) |
| Unrealised gains recognised in the Income Statement | (12,299) | 8,199 | 44,364 |
|
| --------------- | --------------- | --------------- |
| Level 3 investments at the end of the period | 186,137 | 192,878 | 229,043 |
|
| ========= | ========= | ========= |
1 Financial instruments are transferred into level 3 on the date they are suspended, delisted or if they have not traded for thirty days.
2 Financial instruments are transferred out of level 3 when they become listed.
No income has been recognised from the unlisted investments during the period (year ended 31 March 2023 and six months ended 30 September 2022: £nil). No additional disclosures have been made in respect of the unlisted investments as the underlying financial information is not publicly available.
11 Other Receivables
|
| 30.09.23 | 31.03.23 | 30.09.22 |
| Amounts receivable on settlement of derivatives | 3,788 | 10,135 | 639 |
| Securities sold for future settlement | 703 | 148 | 40,746 |
| Accrued income | 5,768 | 1,513 | 2,691 |
| Taxation recoverable | 12 | 13 | 225 |
| Other receivables | 119 | 130 | 90 |
|
| --------------- | --------------- | --------------- |
|
| 10,390 | 11,939 | 44,391 |
|
| ========= | ========= | ========= |
12 Other Payables
|
| 30.09.23 | 31.03.23 | 30.09.22 |
| Amounts payable on settlement of derivatives | 5,175 | 4,731 | 31,855 |
| Securities purchased for future settlement | 1,624 | 12,402 | 1,213 |
| Investment management fees payable | 974 | 1,266 | 1,206 |
| Accrued expenses | 944 | 1,096 | 551 |
| Amounts payable for the cancellation of shares | 1,052 | – | – |
| Amounts payable for the repurchase of shares | – | 130 | 2,123 |
| Finance costs payable | 868 | 977 | 952 |
|
| --------------- | --------------- | --------------- |
|
| 10,637 | 20,602 | 37,900 |
|
| ========= | ========= | ========= |
13 Share Capital
|
| 30 September 2023 | 31 March 2023 | 30 September 2022 | |||
|
| Number of |
| Number of |
| Number of |
|
| Issued, allotted and fully paid |
|
|
|
|
|
|
| Ordinary shares of 1 pence each held outside of Treasury |
|
|
|
|
|
|
| Beginning of the period | 488,325,628 | 4,884 | 513,957,409 | 5,140 | 513,957,409 | 5,140 |
| Ordinary shares repurchased into Treasury | (2,900,696) | (29) | (25,631,781) | (256) | (9,953,633) | (100) |
| Ordinary shares repurchased for cancellation | (8,900,641) | (89) | – | – | – | – |
|
| ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- |
| End of the period | 476,524,291 | 4,766 | 488,325,628 | 4,884 | 504,003,776 | 5,040 |
|
| ========== | ========== | ========== | ========== | ========== | ========== |
| Ordinary shares of 1 pence each held in Treasury* |
|
|
|
|
|
|
| Beginning of the period | 82,728,852 | 826 | 57,097,071 | 570 | 57,097,071 | 570 |
| Ordinary shares repurchased into Treasury | 2,900,696 | 29 | 25,631,781 | 256 | 9,953,633 | 100 |
|
| ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- |
| End of the period | 85,629,548 | 855 | 82,728,852 | 826 | 67,050,704 | 670 |
|
| ========== | ========== | ========== | ========== | ========== | ========== |
| Total share capital |
| 5,621 |
| 5,710 |
| 5,710 |
|
|
| ========== |
| ========== |
| ========== |
* The ordinary shares held in Treasury carry no rights to vote, to receive a dividend or to participate in a winding up of the Company.
During the period, the Company repurchased 2,900,696 (year ended 31 March 2023: 25,631,781 and six months ended 30 September 2022: 9,953,633) ordinary shares into Treasury. The cost of repurchasing these shares of £6,965,000 (year ended 31 March 2023: £57,249,000 and six months ended 30 September 2022: £23,532,000) was charged to the Other Reserve.
The Company also repurchased 8,900,641 (year ended 31 March 2023 and six months ended 30 September 2022: nil shares) ordinary shares for cancellation. The cost of repurchasing these shares of £18,930,000 (year ended 31 March 2023 and six months ended 30 September 2022: £nil) was charged to the Other Reserve.
14 Net Asset Value per Ordinary Share
The calculation of the net asset value per ordinary share is based on the following:
|
| 30.09.23 | 31.03.23 | 30.09.22 |
| Net assets | £1,134,476,000 | £1,338,421,000 | £1,232,123,000 |
| Ordinary shares held outside of Treasury | 476,524,291 | 488,325,628 | 504,003,776 |
| Net asset value per ordinary share | 238.07p | 274.08p | 244.47p |
|
| ========= | ========= | ========= |
It is the Company’s policy that shares held in Treasury will only be reissued at net asset value per ordinary share or at a premium to net asset value per ordinary share and, therefore, shares held in Treasury have no dilutive effect.
15 Transactions with the Managers and Related Parties
FIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager and has delegated portfolio management to FIL Investment Management (Hong Kong) Limited. Both companies are Fidelity group companies.
Details of the current fee arrangements are given in Note 5 above. During the period, management fees of £6,349,000 (year ended 31 March 2023: £14,727,000 and six months ended 30 September 2022: £7,546,000) were payable to Fidelity. Fidelity also provides the Company with marketing services. The total amount payable for these services was £132,000 (year ended 31 March 2023: £263,000 and six months ended 30 September 2022: £58,000). Amounts payable at the Balance Sheet date are included in other payables and are disclosed in Note 12 above.
At the date of this report, the Board consisted of six non-executive Directors (as shown in the Half-Yearly Report) all of whom are considered to be independent by the Board. None of the Directors has a service contract with the Company.
The Chairman receives an annual fee of £52,000, the Audit and Risk Committee Chairman receives an annual fee of £43,500, the Senior Independent Director receives an annual fee of £41,000 and each other Director receives an annual fee of £34,500. The following members of the Board hold ordinary shares in the Company at the date of this report: Mike Balfour 65,000 shares, Alastair Bruce 43,800 shares, Vanessa Donegan 10,000 shares, Georgina Field 2,250 shares, Gordon Orr nil shares and Edward Tse nil shares.
The financial information contained in this Half-Yearly Results Announcement does not constitute statutory accounts as defined in section 435 of the Companies Act 2006. The financial information for the six months ended 30 September 2023 and 30 September 2022 has not been audited or reviewed by the Company’s Independent Auditor.
The information for the year ended 31 March 2023 has been extracted from the latest published audited financial statements, which have been filed with the Registrar of Companies, unless otherwise stated. The report of the Auditor on those financial statements contained no qualification or statement under sections 498(2) or (3) of the Companies Act 2006.
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.
A copy of the Half-Yearly Report will shortly be submitted to the National Storage Mechanism and will be available for inspection at www.morningstar.co.uk/uk/NSM
The Half-Yearly Report will also be available on the Company's website at www.fidelity.co.uk/china where up to date information on the Company, including daily NAV and share prices, factsheets and other information can also be found.
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