Half-yearly Report
Fidelity China Special Situations PLC
Half-Yearly Report
For the 6 months ended 30 September 2014
Six months ended 30 September
2014
Net Asset Value per Share total return 16.8%
Share Price total return 14.3%
MSCI China total return (net) - in UK 10.1%
sterling
The Half-Yearly Report will shortly be available at www.fidelity.co.uk/china.
Commenting on results the Chairman, John Owen, stated:
The Company's Net Asset Value increased by 16.8% in the six months to 30
September 2014 (since launch the Net Asset Value has increased by 38.6%). The
Company's shares delivered a total return of 14.3% during the period, compared
to an index return of 10.1%. The outperformance was generated by investment in
companies reflecting `new' China, such as Alibaba and BitAuto, which benefit
from the shift to e-commerce and the reforms that are being introduced in
China. We believe that the effects of these positive changes will encourage
investors to see China in a new light and to invest in the world's second
largest economy measured by GDP.
For further information please contact:
Fidelity: Keren Holland
Tel: 020 7074 5262
Keren.holland@fil.com
Company Secretary:
Fidelity China Special Situations PLC Faith Pengelly
Tel: 01737 834156
Faith.pengelly@fil.com
Fidelity China Special Situations PLC
Half-Yearly Report
For the 6 months ended 30 September 2014
The Investment Objective and Performance
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.
Investment Performance
Six months
ended
30 September
2014
Net Asset Value ("NAV") per Share total return 16.8%
Share Price total return 14.3%
MSCI China Index total return (net) - in UK sterling 10.1%
Standardised Performance Total Return* %
01/10/ 01/10/ 01/10/ 01/10/ 19/04/2010 Since
2013 2012 2011 2010 **
launch
to to to to to
30/09/ 30/09/ 30/09/ 30/09/ 30/09/2010
2014 2013 2012 2011
NAV Performance +25.9 +36.8 +7.5 -30.5 +7.7 +38.6
Share Price +22.7 +35.0 -3.1 -33.1 +13.2 +21.5
Performance
Benchmark Index +4.4 +12.4 +13.4 -23.1 +1.4 +3.8
Performance
** Includes reinvested dividends
** Date of launch
Sources: Fidelity and Datastream
Past performance is not a guide to future returns
The Company's Net Asset Value increased by 16.8% in the six months to 30
September 2014 (since launch the Net Asset Value has increased by 38.6%). The
Company's shares delivered a total return of 14.3% during the period, compared
to an index return of 10.1%. The outperformance was generated by investment in
companies reflecting `new' China, such as Alibaba and BitAuto, which benefit
from the shift to e-commerce and the reforms that are being introduced in
China. We believe that the effects of these positive changes will encourage
investors to see China in a new light and to invest in the world's second
largest economy measured by GDP.
John Owen
Chairman
Summary of Results
30 September 31 March
2014 2014
Assets
Gross Asset Exposure £915.3m £806.6m
Net Assets £759.1m £656.2m
Gearing 20.6% 22.9%
Net Asset Value per Ordinary Share 132.86p 114.84p
Number of Ordinary Shares in issue 571,354,480 571,354,480
Stock market data
Share Price at the period/year end 117.30p 103.80p
Share Price period/year high 122.90p 108.80p
Share Price period/year low 97.20p 81.00p
Discount at the period/year end (11.7%) (9.6%)
Discount period/year high (13.9%) (13.0%)
Discount period/year low (5.0%) (4.9%)
Earnings for the six months ended 30 September 2014 2013
Revenue return per Ordinary Share1 1.52p 1.43p
Capital return per Ordinary Share1 17.65p 8.10p
Total return per Ordinary Share1 19.17p 9.53p
1 Based on the weighted average number of Ordinary Shares in issue during the
period
Sources: Fidelity and Datastream
Past performance is not a guide to future returns
Manager's Half-Yearly Review
In the six months to the end of September 2014, the Company's Net Asset Value
produced a total return of 16.8% and share price total return of 14.3%. This
compares to a total return of 10.1% from the MSCI China Index (in Sterling),
the Company's benchmark index.
Market Background
The six months under review have been an interesting time for the Chinese
market, with reforms taking place across all sections of the market and society
in China. For example, the Government has pledged to change the hukou system,
which will effectively give 100 million migrant workers equal social and health
care benefits as the residents of the cities they work in. This means there is
potential to release pent-up consumption demand for 100 million people as these
migrant workers, who currently lack the social safety net and support of their
locally-born neighbours, have less need to save. Another example is the
announcement of the Hong Kong-Shanghai Stock Connect programme, which will
enable international investors to access the domestic Chinese stock market
without the need to obtain a QFII quota from the Government, and give Chinese
investors the opportunity to access international equity markets. This is a
further step in opening up the Chinese financial markets and is also positive
for facilitators like Citic Securities (one of our investments). Steps are also
being taken by the Government to introduce market-orientated price mechanisms
across a range of industry sectors. This is encouraging management teams of
state-owned enterprises to work on behalf of shareholders by the introduction
of corporate practices that we take for granted in the West, for example
management incentive schemes. These are but a few examples of the ongoing
reforms being pushed through by the Government.
Whilst there are many positive factors to highlight there are also factors
contributing to the weakness in the Chinese market relative to many other
markets around the world. There are concerns over macroeconomic factors and
fear of how they will be resolved over time. Significant focus has been on
China's ability to meet the Government's short-term target of `around' 7.5%,
and investors are generally doubtful. 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 further from the
heady days of annual double digit growth. This should be welcomed as
consumer-driven growth is less volatile and more sustainable.
Credit growth has supported much of the rise in investment. This is clearly not
sustainable and could lead to issues for the financial system in the future.
Chinese economic growth rates in a global context are still high and a good
environment for individual companies to grow. This is particularly true for
companies in areas of the economy that the Government wants to grow at a faster
rate than the general economy, such as consumption.
Debt levels in China have rapidly expanded in the last five years, taking it
from around 120% of GDP to current estimates of around 250%. History teaches us
that such expansions usually end in significant non-performing assets,
particularly in areas where the poor investment has been most severe. I expect
the same in China and this is the main reason why the portfolio 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.
Significant contraction in liquidity and credit flow are the key factors in
defining financial crises. However, China has significant deposits supporting
the system and, importantly, the Government is the bank's majority shareholder
which can create liquidity if needed.
Finally, the property market is an area the bears particularly like to focus
on. We are clearly in the down cycle with volumes and pricing corrections.
There is significant oversupply in some regions but I believe the adjustment is
underway, and having visited many regions I find stories of `ghost cities' to
be exaggerated. There have been a number of mini-stimulus measures to try and
clear this supply, such as a relaxation of mortgage measures - although it is
important to highlight that the required levels of deposit are still very high
- and rules around purchasing second homes. I do believe that we will see
underlying demand respond and that we are unlikely to see the 30-40% fall in
property prices that some are calling for. From an investment perspective the
portfolio is overweight in the real estate sector due to a combination of very
low valuations and the fact that these stocks tend to perform well in an easing
cycle which I believe can continue for some time.
Portfolio Review
I assumed responsibility for managing the portfolio from Anthony Bolton on 1
April 2014. Many of the investments in the portfolio were already familiar to
me as I have been managing investments in China for over 12 years. The
portfolio I inherited was one I was very comfortable with and any changes made
since the handover have been part of my investment management process. In fact,
the first three months saw portfolio turnover of 26.6%, which is in line with
the portfolio's historic three month average turnover of 26.4%.
The IPO of Alibaba in September was a highlight of this six month period and it
was a very profitable event for shareholders of Fidelity China Special
Situations PLC. The portfolio opened an unlisted position two years ago that
valued Alibaba at $48 billion. On the day of the IPO Alibaba traded with a
market-cap of over $220 billion. I used this price strength to reduce the
holding, but Alibaba remains the largest overweight position as its talented
management team has built a dominant position in a market that represents one
of the biggest commercial opportunities most of us will see in our lifetimes -
e-commerce in China. The shift from offline to online in commerce is a global
trend, but is occurring even faster in China partly because, in the lower tier
cities, the traditional bricks and mortar infrastructure has not been built to
levels common in the West. Alibaba is at the heart of this change - gross
merchandise value is expected to surpass $300 billion this financial year, more
than Amazon and Ebay combined, yet continues to grow at rates above 30%.
Alibaba is clearly on track to be a globally recognised name, and will be a
company investors cannot ignore. So long as valuations remain reasonable
relative to growth and returns of the business, I believe this is likely to
remain a long-term holding in the portfolio.
Outperformance of the portfolio was driven by a number of holdings in the IT
sector, with Alibaba leading the way followed by BitAuto, an online platform
for car sales, however, over the last few months I have found valuations of IT
stocks to be less compelling following significant re-rating from the market.
Therefore, I decided to use market strength as an opportunity to take profits
by trimming positions such as BitAuto, while long-standing positions in Soufun
and Kingsoft were sold. Some of the positions in the financial sector, and more
specifically in securities companies such as Citic Securities, also proved
positive contributors.
E-commerce and securities companies fall within a broader theme underlying the
portfolio, which is `new' China. This theme encompasses companies that are
expected to be major beneficiaries of reform. I think that reform will be the
primary fundamental driver that underpins the Chinese market for many years
ahead. From speaking to companies, industry experts and spending time in China,
I think investors cannot underestimate its importance.
I have been adding exposure to real estate and insurance companies. This is
relatively contrarian, but I believe that both sectors trade at attractive
valuations as the market tends to ignore the whole sector amid macro-driven
concerns. I see significant opportunity in insurance as the market is still
very underpenetrated in China, the product offerings are improving, the sales
teams selling these products are getting better and we expect to see more and
more regulatory tailwinds as China looks to open up its financial markets.
Within real estate, I think the market is too negative on potential price
adjustments and ongoing regulatory easing in the market should support the
stocks that are trading at very low valuations.
Outlook
My view on the macroeconomic outlook is that growth will be subdued. The market
sometimes gets so engrossed in headline grabbing numbers such as GDP and
property prices that they are possibly missing the real long-term
opportunities; reform and the shift to a consumer-driven economic model. These
risks need to be monitored but I think they are manageable. I believe that
growth will be slower than in the past but it will still be at an enviable rate
in a global context, providing 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 see grow at a faster rate than the general
economy, for example consumption. I would be disappointed if I could not find
companies with solid growth stories in this environment. One of the big stories
to focus on for 2015 will be the implementation of reform. These reforms will
provide a solid foundation for China's next phase of development, and include
the opening up of financial and capital markets, the introduction of
market-orientated price mechanisms across a range of sectors, improvements in
efficiency and profitability of State Owned Enterprises and the release of
pent-up consumer demand via changes in social welfare, such as the hukou
system. This, coupled with attractive valuations makes China an attractive
opportunity for investors.
The China market is trading at 9.5x price–to–earnings ratio compared to the S&P
500 trading at 18x yet its companies have enjoyed strong earnings growth over
the last few years. I am expecting companies in the portfolio to increase
earnings by over 20% in the coming year, and at some point this is expected to
be reflected in stock performance.
Dale Nicholls
Portfolio Manager
19 November 2014
Interim Management Report
DISCOUNT AND PREMIUM
The Board believes it is in the best interests of shareholders if the share
price of the Company tracks closely 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. There have been no share repurchases during the period.
GEARING
The Company has a revolving credit facility agreement with Scotiabank Europe
PLC for US$150,000,000. This facility has been fully drawn down.
The Company achieves further gearing by the use of Contracts For Difference on
a number of holdings in its portfolio and the use of other derivative
instruments. At 30 September 2014, the Company's gearing was 20.6%
(31 March 2014: 22.9%; 30 September 2013: 20.0%).
PERFORMANCE FEE
A performance fee is payable of 15% of any change in NAV attributable to
performance which is more than 2% above the return of the MSCI China Index
total return (net) - in UK sterling, including making good any cumulative
underperformance carried forward from previous years (including the 2% hurdle
each year). The performance fee is payable subject to a maximum in any year of
1.0% of the arithmetic mean of the value of assets calculated at the end of
each month during the year. Any out-performance above this cap is not carried
forward. If the Company under-performs, the under-performance must be made good
before any further performance fee becomes payable. A provision has been made
on a time apportioned basis of £2,558,000 for the six months ended 30 September
2014. The provision has reduced the NAV at 30 September 2014 by 0.3%.
PRINCIPAL RISKS AND UNCERTAINTIES
The Board, with the assistance of the Manager, has developed a risk matrix
which, as part of the internal controls process, identifies the key risks faced
by the Company. The Board believes that the principal risks and uncertainties
faced by the Company continue to fall into the following categories: market,
performance, discount control, gearing, currency, tax, regulatory and
operational - service providers. Information on each of these risks is detailed
in the Company's Annual Report for the year ended 31 March 2014 together with a
risk matrix listing the specific top risks identified by the Board. The Annual
Report is available for inspection on the Company's pages of the Manager's
website www.fidelity.co.uk/china.
GOING CONCERN
The Board receives regular reports from the Manager and the Directors have a
reasonable expectation that the Company has adequate resources to continue in
operational existence for the foreseeable future. Thus they continue to
adopt the going concern basis of accounting in preparing the financial
statements as outlined in the Annual Report for the year ended 31 March 2014.
By order of the Board
FIL Investments International
19 November 2014
Directors' Responsibility Statement
The Directors confirm to the best of their knowledge that:
a) the condensed set of financial statements contained within the Half-Yearly
Financial Report has been prepared in accordance with the International
Accounting Standards 34: "Interim Financial Reporting";
b) the Interim Management Report (which incorporates the Manager's Half-Yearly
Review) includes a fair review of the information required by Rule 4.2.7R of
the FCA's Disclosure and Transparency Rules and their impact on the condensed
set of financial statements and a description of the principal risks and
uncertainties for the remaining six months of the financial year; and
c) in accordance with Disclosure and Transparency Rule 4.2.8R there have been
no related party transactions during the six month period to 30 September 2014
and therefore nothing to report on any material effect by such a transaction on
the financial position or the performance of the Company during that period;
and there have been no changes in this position since the last Annual Report
that could have a material effect on the financial position or performance of
the Company in the first six months of the current financial year.
The Half-Yearly Financial Report has not been audited by the Company's
Independent Auditor.
The Interim Management Report was approved by the Board on 19 November 2014 and
the above responsibility statement was signed on its behalf by John Owen,
Chairman.
Twenty Largest Holdings at 30 September 2014
Twenty Largest Holdings, including Balance Gross Asset %1
derivatives Sheet Value Exposure £
£'000 '000
Tencent Holdings Limited2 40,436 61,907 6.8
Provider of internet, mobile and
telecommunications value-added services
CITIC Securities Company Limited2 39,261 42,041 4.6
Broker and asset manager
Alibaba Group Holding Ltd 39,937 39,937 4.4
Major e-commerce group
Ping An Insurance (Group) Company of 16,788 25,863 2.8
China2
Insurance company
Hutchison China MediTech Limited3 22,506 22,506 2.5
Pharmaceutical and healthcare group
BitAuto Holdings Limited 20,791 20,791 2.3
Auto internet company
Haitong Securities2 17,151 20,300 2.2
Financial services group
Lee's Pharmaceutical Holdings Limited 19,373 19,373 2.1
Operator in the pharmaceutical
preparations sector
NASDAQ 100 Index (put option) 333 17,122 1.9
Put option on the NASDAQ 100 Index
China Pacific Insurance (Group) Co2 14,391 16,577 1.8
Insurance company
Green Dragon Gas3 16,056 16,056 1.8
Coal bed methane projects developer
China Lodging Group 15,015 15,015 1.6
Operates a chain of economy hotels
SAIC Motor Corporation Limited 14,781 14,781 1.6
Automobile manufacture and distribution
company
NetEase, Inc 14,654 14,654 1.6
Internet company
China Longyuan Power Group2 8,559 13,609 1.5
Wind power producer
New Oriental Education & Technology 11,689 11,689 1.3
Group
Provider of private educational
services
DJI Holdings3 11,388 11,388 1.2
Developer, promoter and distributor of
authorised lottery products
WuXi Pharma Tech 11,248 11,248 1.2
Pharmaceutical, biotechnology and
medical device research company
China Animal Healthcare2 10,039 11,045 1.2
Leading animal drug manufacturer
Li-Ning Company 10,563 10,563 1.1
Leading Chinese sports brand company
Twenty Largest Holdings (2013: 49.5%) 354,959 416,465 45.5
Other Investments including derivatives 468,781 498,800 54.5
Total Investments including derivatives 823,740 915,265 100.0
1 % of total gross asset exposure
2 Includes investment via CFDs
3 Quoted on AIM
Income Statement
Six months Year ended Six months
ended ended
31 March
30 2014 30
September September
2014 audited 2013
unaudited unaudited
revenue capital total revenue capital total revenue capital total
Notes £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Revenue
Investment 2 11,801 - 11,801 13,938 - 13,938 12,420 - 12,420
income
Other 2 9 - 9 5 - 5 3 - 3
income
Net 2 342 - 342 (25) - (25) 41 - 41
derivative
income/
(expense)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 12,152 - 12,152 13,918 - 13,918 12,464 - 12,464 income
Gains on - 106,028 106,028 - 99,249 99,249 - 46,531 46,531 investments designated at fair value through profit or loss
Net gains - 1,901 1,901 - 2,619 2,619 - 2,384 2,384 on derivative instruments held at fair value through profit or loss
Foreign (5) 377 372 (111) (696) (807) (44) (148) (192)
exchange
(losses)/
gains on
other net
assets
Foreign - (2,518) (2,518) - 8,776 8,776 - 6,023 6,023
exchange
(losses)/
gains on
bank loans
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 12,147 105,788 117,935 13,807 109,948 123,755 12,420 54,790 67,210
revenue and
gains
Expenses
Investment (1,785) (1,785) (3,570) (3,846) (3,846) (7,692) (1,844) (1,844) (3,688)
management
fee
Performance - (2,558) (2,558) - (6,416) (6,416) - (1,148) (1,148)
fee
Other (865) - (865) (1,635) - (1,635) (832) - (832)
expenses
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Profit 9,497 101,445 110,942 8,326 99,686 108,012 9,744 51,798 61,542
before
finance
costs and
taxation
Finance
costs
Interest on (328) (328) (656) (794) (794) (1,588) (403) (403) (806)
bank loans
--------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
Profit 9,169 101,117 110,286 7,532 98,892 106,424 9,341 51,395 60,736
before
taxation
Taxation (492) (245) (737) (358) 409 51 (357) (598) (955)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- --------
Net profit 8,677 100,872 109,549 7,174 99,301 106,475 8,984 50,797 59,781
after
taxation
for the
period
========= ========== ========== ========== ========== ========== ========== ========== =========
Earnings 3 1.52p 17.65p 19.17p 1.18p 16.39p 17.57p 1.43p 8.10p 9.53p
per
Ordinary
Share
========== ========== ========== ========== ========== ========== ========== ========== =========
The Company does not have any income or expenses that are not included in the
net profit for the period. Accordingly the "Net profit 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 and is prepared in accordance with IFRS. The revenue return and capital
return columns are supplementary and presented for information purposes as
recommended by the Statement of Recommended Practice issued by the Association
of Investment Companies.
All of the profit and total comprehensive income is attributable to the equity
shareholders of the Company. There are no minority interests.
All items in the above statement derive from continuing operations. No
operations were acquired or discontinued in the period.
Statement of Changes in Equity
Notes share share capital other capital revenue total
capital £ premium redemption reserve reserve £ reserve £ equity £
'000 account £ reserve £ £'000 '000 '000 '000
'000 '000
Equity 6,532 211,569 95 444,693 (39,170) 10,514 634,233
shareholders'
funds at 31
March 2013
Repurchase of 6 (575) - 575 (52,812) - - (52,812)
Ordinary
Shares
Net profit - - - - 50,797 8,984 59,781
after
taxation for
the period
Dividend paid 4 - - - - - (6,233) (6,233)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Equity 5,957 211,569 670 391,881 11,627 13,265 634,969
shareholders'
funds at 30
September
2013
========== ========== ========== ========== ========== ========== ==========
Equity 6,532 211,569 95 444,693 (39,170) 10,514 634,233
shareholders'
funds at 31
March 2013
Repurchase of 6 (819) - 819 (78,323) - - (78,323)
Ordinary
Shares
Net profit - - - - 99,301 7,174 106,475
after
taxation for
the year
Dividend paid 4 - - - - - (6,233) (6,233)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Equity 5,713 211,569 914 366,370 60,131 11,455 656,152
shareholders'
funds at 31
March 2014
Net profit - - - - 100,872 8,677 109,549
after
taxation for
the period
Dividend paid 4 - - - - - (6,571) (6,571)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Equity 5,713 211,569 914 366,370 161,003 13,561 759,130
shareholders'
funds at 30
September
2014
========== ========== ========== ========== ========== ========== ==========
Balance Sheet
Company number 7133583
30.09.14 31.03.14 30.09.13
unaudited audited unaudited
Notes £'000 £'000 £'000
Non current assets
Investments designated at fair 814,479 735,319 715,355
value through profit or loss
---------- ---------- ----------
Current assets
Derivative assets held at fair 14,645 11,810 7,649
value through profit or loss
Amounts held at futures clearing 1,070 - -
houses and brokers
Other receivables 1,547 183 13,938
Cash and cash equivalents 37,537 16,662 6,482
---------- ---------- ----------
54,799 28,655 28,069
---------- ---------- ----------
Current liabilities
Derivative liabilities held at (5,384) (7,064) (4,821)
fair value through profit or loss
Bank loans (92,481) (89,963) (92,716)
Overseas capital gains tax (882) (637) (1,644)
payable
Other payables 5 (11,401) (10,158) (9,274)
---------- ---------- ----------
(110,148) (107,822) (108,455)
---------- ---------- ----------
Net current liabilities (55,349) (79,167) (80,386)
---------- ---------- ----------
Net assets 759,130 656,152 634,969
========== ========== ==========
Equity attributable to equity
shareholders
Share capital 6 5,713 5,713 5,957
Share premium account 211,569 211,569 211,569
Capital redemption reserve 914 914 670
Other reserve 366,370 366,370 391,881
Capital reserve 161,003 60,131 11,627
Revenue reserve 13,561 11,455 13,265
---------- ---------- ----------
Total equity shareholders' funds 759,130 656,152 634,969
========== ========== ==========
Net asset value per Ordinary 7 132.86p 114.84p 106.59p
Share
========== ========== ==========
Cash Flow Statement
Six months Year Six months
ended ended ended
30.09.14 31.03.14 30.09.13
unaudited audited unaudited
£'000 £'000 £'000
Operating activities
Cash inflow from investment income 10,431 12,902 9,980
Cash inflow from derivative income 291 74 101
Cash inflow from other income 9 5 3
Cash outflow from Directors' fees (78) (158) (78)
Cash outflow from other payments (10,856) (9,552) (3,037)
Cash outflow from purchase of (245,402) (390,418) (203,308)
investments
Cash outflow from the cost of (1,993) (8,226) (4,852)
derivatives
Cash inflow from sale of investments 277,988 465,349 235,952
Cash (outflow)/inflow from (621) 11,581 11,003
derivative positions closed
Cash (outflow)/inflow from amounts (1,070) 4,306 4,056
held at futures clearing houses and
brokers
---------- ---------- ----------
Net cash inflow from operating 28,699 85,863 49,820
activities before servicing of
finance
Servicing of finance
Cash outflow from interest on bank (645) (1,600) (811)
loans
---------- ---------- ----------
Net cash inflow from operating 28,054 84,263 49,009
activities and servicing of finance
---------- ---------- ----------
Financing activities
Cash outflow from the repurchase of (985) (79,183) (54,657)
Ordinary Shares
Dividends paid to shareholders (6,571) (6,233) (6,233)
---------- ---------- ----------
Net cash outflow from financing (7,556) (85,416) (60,890)
activities
---------- ---------- ----------
Increase/(decrease) in cash and cash 20,498 (1,153) (11,881)
equivalents
Cash and cash equivalents at the 16,662 18,511 18,511
beginning of the period
Effect of foreign exchange movements 377 (696) (148)
---------- ---------- ----------
Cash and cash equivalents at the end 37,537 16,662 6,482
of the period
========== ========== ==========
Notes to the Financial Statements
1 ACCOUNTING POLICIES
The Interim Financial Statements have been prepared in accordance with
International Accounting Standards ("IAS") 34: "Interim Financial Reporting".
The accounting policies adopted in the preparation of the Interim Financial
Statements are the same as those applied in the Company's Annual Report for the
year ended 31 March 2014.
Six Year Six
months ended months
ended 31.03.14 ended
30.09.14 30.09.13
unaudited audited unaudited
£'000 £'000 £'000
2 INCOME
Income from investments designated
at fair value through profit or
loss
Overseas dividends 11,801 12,946 11,747
Overseas scrip dividends - 686 457
UK dividends - 127 216
UK scrip dividends - 179 -
---------- ---------- ----------
11,801 13,938 12,420
---------- ---------- ----------
Other income
Deposit interest 9 5 3
---------- ---------- ----------
Net derivative income/(expense)
Dividends received on long CFDs 720 745 587
Interest paid on long CFDs (206) (328) (198)
Dividends paid on short CFDs (172) (442) (348)
---------- ---------- ----------
342 (25) 41
---------- ---------- ----------
Total income 12,152 13,918 12,464
========== ========== ==========
Six Year Six
months ended months
ended 31.03.14 ended
30.09.14 30.09.13
unaudited audited unaudited
3 EARNINGS PER ORDINARY SHARE
Revenue earnings per Ordinary 1.52p 1.18p 1.43p
Share
Capital earnings per Ordinary 17.65p 16.39p 8.10p
Share
---------- ---------- ----------
Total earnings per Ordinary 19.17p 17.57p 9.53p
Share
========== ========== ==========
The revenue, capital and total
earnings per Ordinary Share are
based on the net profit after
taxation in the period divided
by the weighted average number
of Ordinary Shares in issue
during the period, as shown
below:
Six Year Six
months ended months
ended 31.03.14 ended
30.09.14 30.09.13
unaudited audited unaudited
£'000 £'000 £'000
Revenue net profit after 8,677 7,174 8,984
taxation
Capital net profit after 100,872 99,301 50,797
taxation
---------- ---------- ----------
Total net profit after taxation 109,549 106,475 59,781
========== ========== ==========
Weighted average number of 571,354,480 605,705,576 627,470,518
Ordinary Shares in issue
========== ========== ==========
Six Year Six
months ended months
ended 31.03.14 ended
30.09.14 30.09.13
unaudited audited unaudited
£'000 £'000 £'000
4 DIVIDEND
Dividend paid
Dividend paid of 1.15 pence per 6,571 - -
Ordinary Share for the year ended
31 March 2014
Dividend paid of 1.00 pence per - 6,233 6,233
Ordinary Share for the year ended
31 March 2013
---------- ---------- ----------
6,571 6,233 6,233
========== ========== ==========
No dividend has been declared for the six month period to 30 September 2014.
30.09.14 31.03.14 30.09.13
unaudited audited unaudited
£'000 £'000 £'000
5 OTHER PAYABLES
Securities purchased for future 6,266 125 2,614
settlement
Amount payable on share repurchases - 985 -
Performance fee 2,558 6,416 1,148
Other payables 2,577 2,632 5,512
---------- ---------- ----------
11,401 10,158 9,274
========== ========== ==========
Six months Year ended Six months
ended ended
30.09.14 31.03.14 30.09.13
unaudited audited unaudited
Shares £'000 Shares £'000 Shares £'000
6 SHARE
CAPITAL
Issued,
allotted
and fully
paid
Ordinary
Shares of
1 penny
each
Beginning 571,354,480 5,713 653,229,480 6,532 653,229,480 6,532
of the
period
Repurchase - - (81,875,000) (819) (57,490,000) (575)
of
Ordinary
Shares of
1 penny
each
---------- ---------- ---------- ---------- ---------- ----------
End of the 571,354,480 5,713 571,354,480 5,713 595,739,480 5,957
period
========== ========== ========== ========== ========== ==========
7 NET ASSET VALUE PER ORDINARY SHARE
The net asset value per Ordinary Share is based on net assets of £759,130,000
(31 March 2014: £656,152,000 and 30 September 2013: £634,969,000) and on
571,354,480 (31 March 2014: 571,354,480 and 30 September 2013: 595,739,480)
Ordinary Shares, being the number of Ordinary Shares in issue at the period
end.
8 UNAUDITED FINANCIAL STATEMENTS
The results for the six month periods to 30 September 2014 and 30 September
2013, which are unaudited, constitute non-statutory accounts within the meaning
of Section 435 of the Companies Act 2006. The figures and financial information
for the year to 31 March 2014 are extracted from the latest published Financial
Statements, on which the Independent Auditor gave an unqualified report, and
they have been delivered to the Registrar of Companies.
Glossary of Terms
AIF
Alternative Investment Fund. The Company is an AIF.
AIFM
Alternative Investment Fund Manager. The Board has appointed FIL Investment
Services (UK) Limited to act as the Company's AIFM.
AIFMD
The Alternative Investment Fund Managers Directive is a European Union
Directive and came into force on 22 July 2013. The implementation date was 22
July 2014.
BENCHMARK INDEX
The Benchmark Index is MSCI China Index total return - in UK sterling and is a
composite of China "B", "H", "Red Chip" and "P Chip" share classes.
CHINA "A" SHARES
Shares traded on the Chinese Stock Exchanges in Chinese renminbi. Foreign
investors were unable to participate in the China "A" Shares market until the
introduction of the QFII program in 2002 which provided a legal framework for
licensed QFIIs to invest in China "A" shares on the Chinese Stock exchanges and
certain other securities previously not eligible for investment by foreign
investors.
CHINA "B" SHARES
Shares traded on the Shenzhen Stock Exchange and Shanghai Stock Exchange in
Hong Kong dollars and US dollars, respectively. The shares were originally
intended to be available only to foreign individuals and institutional
investors, however, since February 2001 they have been available to domestic
individual investors who trade through legal foreign currency accounts.
CHINA "H" SHARES
Shares in companies incorporated in the PRC and listed on the Hong Kong Stock
Exchange. They are available to non-Chinese investors and are traded in Hong
Kong dollars on the Hong Kong Stock Exchange.
COLLATERAL
Assets provided as security.
CONTRACT FOR DIFFERENCE (CFD)
A Contract For Difference is a derivative. It is a contract between the Company
and an investment bank at the end of which the parties exchange the difference
between the opening price and the closing price of the underlying asset of the
specified financial instrument. It does not involve the Company buying or
selling the underlying asset, only agreeing to receive or pay the movement in
its share price. A Contract For Difference allows the Company to gain access to
the movement in the share price by depositing a small amount of cash known as
margin. The Company may reason that the asset price will rise, by buying
("long" position) or fall, by selling ("short" position). If the Company holds
long positions, dividends are received and interest is paid. If the Company
holds short positions, dividends are paid and interest is received.
DEBT
Bank borrowings and long Contracts For Difference.
DERIVATIVES
Financial instruments whose value is derived from the value of an underlying
asset or other financial instruments such as stocks, bonds, currency exchange
rates, real estate and commodities, or market benchmarks such as interest
rates. The main categories of derivatives are Contracts For Difference,
futures, and options.
DISCOUNT
If the share price of the Company is lower than the net asset value per
ordinary share, the Company's shares are said to be trading at a discount. It
is shown as a percentage of the net asset value per ordinary share.
EQUITY LINKED NOTES OR ELN
Debt instruments whose return on investment is linked to specific equities or
equity markets. The return on equity linked notes may be determined by an
equity index, a basket of equities, or a single equity.
FORWARD CURRENCY CONTRACT
An agreement to buy or sell a currency, commodity or other asset at a specified
future date and at a predetermined price. It is not standardised and is not
traded on organised exchanges.
FUTURE OR FUTURE CONTRACT
An agreement to buy or sell a stated amount of a security, currency or
commodity at a specific future date and at a pre-agreed price.
GEARING
Gross asset exposure in excess of net assets.
GROSS ASSETS
Net Assets plus borrowings.
GROSS ASSET EXPOSURE
The value of the portfolio to which the Company is exposed, whether through
direct or indirect investment (including the economic value of the exposure in
the underlying asset of the derivatives, but excluding forward currency
contracts).
HEDGING
A hedge position will demonstrate risk reduction qualities by delivering short
exposure to an asset which has regional congruence and a correlation of at
least 80% to long exposures in the Company's portfolio. It therefore
distinguishes itself from a "short" which is a position not opened with the
objective of reducing the long exposure in the portfolio. Qualifying hedge
exposures do not count towards the short exposure limits. For the purposes of
calculating gross asset exposure the exposure attributed to the hedge positions
will be deducted from the exposure of the corresponding long positions.
INDEX LINKED SECURITIES
Debt instruments whose return on investment is linked to changes in interest
rates, stock exchanges, or other price indices.
MANAGEMENT FEE
The annual management fee is 1.0% of the Net Asset Value of the Company. Prior
to 1 April 2014 it was 1.2%.
NET ASSET VALUE OR NAV PER ORDINARY SHARE
The NAV per ordinary share is calculated as shareholders' funds divided by the
number of ordinary shares in issue.
OPTIONS
Options provide the right to acquire or sell instruments at an agreed price at
an agreed date. Options may be call or put and are used to gain or reduce
exposure to the underlying asset on a conditional basis.
P CHIPS
Companies controlled by mainland individuals, with the establishment and origin
of the company in mainland China. P Chips are incorporated outside of the
People's Republic of China (PRC) and traded on the Stock Exchange of Hong Kong
with a majority of revenues or assets derived from Mainland China.
PERFORMANCE FEE
The Investment Managers are entitled to an annual performance fee of 15% of any
change in NAV attributable to performance which is more than 2% above the
returns on the MSCI China Index total return - in UK sterling (after making
good any cumulative under-performance, including the 2% hurdle, carried forward
from previous years), subject to a maximum performance fee payable in any year
equal to 1.0% of the arithmetic mean of the value of assets with the valuation
calculated at the end of each month during the year.
PREMIUM
If the share price of the Company is higher than the net asset value per
ordinary share, the Company's shares are said to be trading at a premium. The
premium is shown as a percentage of the net asset value per ordinary share.
PUT OPTION
An option contract giving the owner the right, but not the obligation, to sell
a specified amount of underlying security at a specified price within a
specified time. This is the opposite of a call option, which gives the holder
the right to buy shares.
RED CHIPS
The term used to describe companies incorporated outside China but which are
based in mainland China. Red Chips are listed on, and are required to observe
the filing and reporting requirements of, the Hong Kong Stock Exchange. Red
Chips typically have a significant portion of their business interests located
in mainland China and many are owned, either directly or indirectly, by
organisations or enterprises controlled by the Chinese state, provinces or
municipalities.
SHAREHOLDERS' FUNDS
Also described as net asset value, shareholders' funds represent the total
value of the Company's assets less the total value of its liabilities as shown
in the balance sheet.
UNLISTED SECURITIES
Securities which are not listed on a regulated stock exchange. These are stated
at best estimate of fair value, based on recognised valuation techniques which
may take account of recent arm's length transactions in the investments.
Directory
BOARD OF DIRECTORS
John Owen CMG MBE DL (Chairman)
Nicholas Bull FCA (Senior Independent Director)
David Causer FCA
(Chairman of the Audit Committee)
The Hon. Peter Pleydell-Bouverie DL
(Chairman of the Investment Committee)
Elisabeth Scott
Andrew Wells
ALTERNATIVE INVESTMENT FUND MANAGER (AIFM)
FIL Investment Services (UK) Limited
Oakhill House
130 Tonbridge Road
Hildenborough
Tonbridge
Kent TN11 9DZ
INVESTMENT MANAGER
FIL Investment Management (Hong Kong) Limited
Level 21
Two Pacific Place
88 Queensway
Admiralty
Hong Kong
UNLISTED INVESTMENT MANAGER, SECRETARY AND REGISTERED OFFICE
FIL Investments International
Beech Gate
Millfield Lane
Lower Kingswood
Tadworth
Surrey
KT20 6RP
FINANCIAL ADVISERS AND STOCKBROKERS
Cenkos Securities plc
6,7,8 Tokenhouse Yard
London
EC2R 7AS
INDEPENDENT AUDITOR
Grant Thornton UK LLP
Chartered Accountants and Registered Auditor
30 Finsbury Square
London
EC2P 2YU
BANKERS AND CUSTODIAN
JPMorgan Chase Bank (London Branch)
125 London Wall
London
EC2Y 5AJ
DEPOSITARY
J.P. Morgan Europe Limited
25 Bank Street
London
E14 5JP
REGISTRARS
Capita Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
LAWYERS
Slaughter and May
One Bunhill Row
London
EC1Y 8YY
Speechly Bircham LLP
6 New Street Square
London
EC4A 3LX
Information for Investors
CONTACT INFORMATION
Private investors: call free on 0800 41 41 10, 9am to 6pm, Monday to Saturday.
Financial advisers: call free on 0800 41 41 81, 8am to 6pm, Monday to Friday.
www.fidelity.co.uk/its
Existing shareholders who have a specific query regarding their holding or need
to provide update information, for example a change of address, should contact
the appropriate administrator.
Holders of ordinary shares Capita Asset Services, Registrars to Fidelity China
Special Situations PLC, The Registry, 34 Beckenham Road, Beckenham, Kent BR3
4TU.
Telephone: 0871 664 0300 (calls cost 10p per minute plus network extras.
Lines are open 8.30am to 5.30pm, Monday to Friday) Email:
shareholderenquiries@capita.co.uk
Details of individual shareholdings and other information can also be obtained
from the Registrars' website: www.capitaregistrars.com
Fidelity Share Plan investors Fidelity Investment Trust Share Plan, PO Box
12062, Mellon House, Ingrave Road, Brentwood, Essex CM14 9LX. Telephone: 0845
358 1107 (calls to this number are charged at 3.95p per minute from a BT
landline. Other telephone service providers' costs may vary).
Fidelity ISA investors Private Investors call free on 0800 41 41 10 and
Financial Advisers call free on 0800 41 41 81, or by writing to: UK Customer
Service, Fidelity Worldwide Investment, Oakhill House, 130 Tonbridge Road,
Hildenborough, Tonbridge, Kent TN11 9DZ.
General enquiries should be made to FIL Investments International, the
Secretary, at the Company's registered office:
FIL Investments International, Investment Trusts, Beech Gate, Millfield Lane,
Lower Kingswood, Tadworth, Surrey KT20 6RP.
Telephone: 01732 36 11 44 Fax: 01737 83 68 92 www.fidelity.co.uk/its
FINANCIAL CALENDAR
November 2014 - announcement of Interim results
Beginning of December - Posting of Half-Yearly Report
31 March 2015 - financial year end
June 2015 - publication of Annual Report
July 2015 - Annual General Meeting payment of dividend
-
30 September 2015 - Interim period end
FURTHER INFORMATION
The Fidelity Individual Savings Account ("ISA") is offered and managed by
Financial Administration Services Limited. The Fidelity Investment Trust Share
Plan is managed by FIL Investments International. Both companies are authorised
and regulated by the Financial Conduct Authority. The Fidelity Investment Trust
Share Plan is administered by The Bank of New York Mellon and shares will be
held in the name of The Bank of New York Nominees Limited.
The value of savings and eligibility to invest in an ISA will depend on
individual circumstances and all tax rules may change in the future. Fidelity
investment trusts are managed by FIL Investments International. Fidelity only
gives information about its own products and services and does not provide
investment advice based on individual circumstances. Should you wish to seek
advice, please contact a Financial Adviser.
Please note that the value of investments and the income from them may fall as
well as rise and the investor may not get back the amount originally invested.
Past performance is not a guide to future returns. For funds that invest in
overseas markets, changes in currency exchange rates may affect the value of
your investment. Investing in small and emerging markets can be more volatile
than other more developed markets.
Reference in this document to specific securities should not be construed as a
recommendation to buy or sell these securities, but is included for the
purposes of illustration only. Investors should also note that the views
expressed may no longer be current and may already have been acted upon by
Fidelity.
Fidelity, Fidelity Worldwide Investment, the Fidelity Worldwide Investment logo
and symbol are trademarks of FIL Limited.
The content of websites referred to in this document do not form part of this
Half-Yearly Report.
Warning to Shareholders
SHARE FRAUD WARNING
Share fraud includes scams where investors are called out of the blue and
offered shares that often turn out to be worthless or non-existent, or an
inflated price for shares they own. These calls come from fraudsters operating
in `boiler rooms' that are mostly based abroad.
While high profits are promised, those who buy or sell shares in this way
usually lose their money.
The Financial Conduct Authority (FCA) has found most share fraud victims are
experienced investors who lose an average of £20,000, with around £200m lost in
the UK each year.
PROTECT YOURSELF
If you are offered unsolicited investment advice, discounted shares, a premium
price for shares you own, or free company or research reports, you should take
these steps before handing over any money:
1. Get the name of the person and organisation contacting you.
2. Check the FCA Register at www.fca.org.uk/register to ensure they are
authorised.
3. Use the details on the FCA Register to contact the firm.
4. Call the FCA Consumer Helpline on 0800 111 6768 if there are no contact
details on the Register or you are told they are out of date.
5. Search the FCA's website list of unauthorised firms and individuals to avoid
doing business with.
6. REMEMBER: if it sounds too good to be true, it probably is!
If you use an unauthorised firm to buy or sell shares or other investments, you
will not have access to the Financial Ombudsman Service or Financial Services
Compensation Scheme (FSCS) if things go wrong.
REPORT A SCAM
If you are approached about a share scam you should tell the FCA using the
share fraud reporting form at www.fca.org.uk/scams, where you can find out
about the latest investment scams. You can also call the Consumer Helpline on
0800 111 6768.
If you have already paid money to share fraudsters you should contact Action
Fraud on
0300 123 2040
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