Baillie GiffordChina - Baillie Gifford China Grwth Trst half-year results
03/10/2023 07:00
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RNS Number : 4372O Baillie Gifford China Grwth TrstPLC 03 October 2023
Baillie Gifford China Growth Trust plc
Legal entity identifier: 213800KOK5G3XYI7ZX18
Regulated information classification: Interim financial report.
Results for the six months to 31 July 2023
Net asset value per ordinary share* (18.7%)
Share Price* (20.5%)
Benchmark† (11.0%)
Source: Refinitiv / Baillie Gifford. All figures are total return(*). See
disclaimer at the end of this announcement.
* Alternative Performance Measure - see Glossary of Terms and
Alternative Performance Measures at the end of this announcement.
† Benchmark: MSCI China All Shares Index (in sterling terms)
The following is the unaudited Interim Financial Report for the six months to
31 July 2023 which was approved by the Board on 2 October 2023.
Interim management report
The bright lights of a consumption-led post-Covid recovery, fuelled by low
interest rates and excess savings, have so far failed to shine. Investors have
been left to ponder China's weaker-than-expected domestic economy, while
distrust between the two largest superpowers continues to act as a headwind.
Towards the end of the reporting period, the property market deteriorated
further, leading to concerns around financial stability. Property company
Country Garden and trust company Zhongzhi Enterprise Group made headlines for
missing coupon payments on their debt. This led to predictions of the collapse
of China's financial system - the same kind of dire prognostications made in
2001, 2008 and the Covid lockdowns.
While weakness in property hurts growth within the economy, we think the risk
of financial instability is low. Property sales are down almost 50 per cent
from their 2021 peak but prices have barely budged. Why? Because China never
experienced the asset price bubble that has precipitated almost every property
market collapse in developed markets. Property prices have grown at around 7
per cent per annum over the last decade, but income growth has surpassed this
at around 10 per cent per annum. Property should have become more affordable.
And while developers such as Country Garden have become over-indebted, the
Chinese consumer remains in very good health.
So why is activity so depressed?
• Firstly, Covid lockdowns undoubtedly hurt consumer confidence. It's
important to remember that lockdowns only ended in China in January this year,
versus almost 18 months ago in the west. In addition, the size of the Chinese
government's stimulus package equated to around only 10 per cent of GDP versus
an average of 70 per cent in the West, and Chinese stimulus did not take the
form of direct handouts. Instead, consumers saved
up an estimated $7tn of excess savings from their own earnings. Consumers,
therefore, have money to spend and, as the trauma of Covid fades and income
growth continues, we expect confidence to return and activity to improve.
• Secondly, the government's regulatory crackdown damaged private sector
confidence. Indeed, the private sector's contribution to the Chinese economy
is frequently underestimated. It accounts for nearly 50 per cent of tax
revenue, 60 per cent of GDP, 70 per cent of technological innovation and most
importantly, 80 per cent of jobs. It's been weak, partly because of Covid, and
partly because of concerns that Xi Jinping no longer supports entrepreneurs.
Over the past 12 months, the government has attempted to address these
concerns by clarifying the rationale behind the regulatory crackdown. Some of
our third party research providers argue that we're now witnessing the most
concerted effort to support the private sector in the history of the People's
Republic. This culminated in a 31-step support package aimed at promoting 'a
bigger, better and stronger private sector'. The package seeks to improve
market access, level the playing field with state-owned enterprises,
strengthen access to finance and incorporate more private sector input into
policymaking. Importantly, the latter may reduce the risk of future policy
errors. As with the Chinese consumer, the private sector remains, on average,
in very good health, with strong balance sheets and the ability to invest once
confidence improves.
• Finally, what about debt and the risk of contagion? Aggregate debt levels
are a challenge, but we think the risk of financial instability is low. The
majority of debt in the Chinese system circulates within a closed loop, ie it
is issued by state-owned banks to state-owned enterprises within the context
of a closed capital account. This gives the government the ability to decide
how quickly bad debts are recognised and to stagger recognition in line with
economic activity. In addition, the risk of contagion from hidden debt within
the system has been drastically reduced after the government's 2016-2017
campaign to clean up balance sheets and reduce shadow banking.
• Debt levels do limit the government's ability to offer a very large
stimulus package. However, gradual easing remains viable. Indeed, the
government's prudent approach to Covid stimulus and to the property market
over the last decade means that it has many levers to pull. China is one of
the very few countries that can lower interest rates in response to economic
weakness without raising fears of stagflation. It has also begun to relax the
restrictions it put on property in the early 2010s. For example, in July it
gave local and city governments the go-ahead to relax restrictions on home
purchases. In August we saw Guangzhou, a major tier-one city, become the first
to act. We expect others to follow suit and for the government's gradual
easing approach to bear fruit.
So, while economic growth is weaker than expected, the current consensus seems
excessively pessimistic. The regulatory crackdown seems to be over, the
government is moving to support the domestic economy, and the consumer is in
rude health. We just need to be patient.
Indeed, for all the gloomy reporting, the data suggests that we're starting to
see the fruits of this measured approach. There are signs that household
consumption is gaining momentum. Air passenger numbers and visits to the
casino-rich island of Macau are rapidly returning to pre-pandemic levels.
Income growth averaged 8 per cent in the most recent quarter, up from 4 per
cent in the first. And our consumer-related holdings in China have also posted
impressive recent quarterly numbers. As the trauma of Covid and the regulatory
crackdown fade, we expect a private sector and consumer-led recovery to take
root.
Unfortunately, weakness in the private sector and the domestic economy
resulted in Chinese equities performing poorly during the period. In a market
where most private sector companies depreciated in value, we saw state-owned
enterprises (SoEs) post significant gains. SoEs such as PetroChina, China
Mobile and Bank of China delivered around 50 per cent, 30 per cent and 20 per
cent share price appreciation respectively. While investors may look at SoEs
as a hedged play on a subdued economic recovery, we continue to believe that
these types of companies lack the growth profile and stakeholder alignment
that excite us as long-term investors. In this context, the Trust's
overwhelming exposure to private sector growth companies hurt our relative
performance.
Over more meaningful periods, we note that macroeconomic forecasts tell us
very little about long-term returns from active stock investing in China. For
example, China's nominal GDP in US dollar terms has grown 10-fold over the
last 20 years, yet MSCI China has returned only 6 per cent per annum. These
unimpressive index-level returns mask fantastic performance at the individual
stock level. For example, over five years to the end of 2022, Chinese
companies accounted for 23 per cent of global companies that have returned at
least 15 per cent per annum share price return.
On a forward-looking basis, Chinese companies account for more than 40 per
cent of the 'growthy' companies in MSCI AWCI, ie, companies that are forecast
to deliver 15 per cent per annum three-year revenue growth. This is not to
deny that China has structural issues, but rather to illustrate the persistent
gap between perceived 'macro doom' and hidden 'micro bloom.' The latter is
where we focus our energies. We believe it is here that we can add value for
our clients in the long run.
The Trust portfolio remains overwhelmingly exposed to longer-term disruptive
and structural growth themes, or areas where we're likely to find 'micro
blooms.' This is reflected in forecast earnings growth for our portfolio of
around 15 per cent per annum over three years versus the benchmark at 9 per
cent. Encouragingly, the operational results of many of our holdings improved
after the reporting period. This was particularly true for our platform
companies where we have significant exposure.
Alibaba, the world's leading ecommerce platform, and Tencent, China's most
popular social networking app, both saw a return to double digit top line
growth suggesting that the recovery is gathering steam. More importantly, both
companies continue to benefit from structural growth opportunities in areas
such as ecommerce, cloud and enterprise software, and both remain very
attractively valued. For example, stripping out cash and investments,
Alibaba's ecommerce business is trading on a single digit price-earnings
multiple. ByteDance, our only unlisted holding, also delivered double digit
top
and bottom-line growth. ByteDance's operational performance, in particular,
continues to positively surprise as it executes on big growth opportunities in
advertising and ecommerce. We believe that it is only a matter of time before
this strong operational performance is rewarded with good share price returns.
But what of the external environment? We continue to expect geopolitics and
the US-China relationship to provide a long-term headwind to investor
sentiment, particularly in the context of the upcoming election cycle in the
US. However, we believe that the worst-case scenario of a clash of arms is
unlikely. Indeed, during the reporting period, there were tentative signs that
both sides were keen to stabilise their relationship. Treasury Secretary
Yellen's speech in April and reported comments by Secretary of State Blinken
on his visit to Beijing in June both indicated a more constructive approach.
More importantly, we note that at portfolio level, we remain very exposed to
domestic China. Around 85 per cent of our holdings' revenue comes from China
with only around 5 per cent from the US. As stock pickers, we try to factor
geopolitics into our analysis on a stock-by-stock basis and are more inclined
to invest in companies with strong domestic exposure, where further
transpacific 'decoupling' would be more net benefit than negative.
Portfolio
We continue to believe that balancing global perspectives with local insights
and ensuring a long-term focus in our analytical framework is the
key to avoiding market noise. During the period, a joint trip around China by
our Edinburgh and Shanghai-based managers reinforced this approach.
Our philosophy and investment horizons tend to afford excellent access to
company leaders who were thankful not to be bombarded with
spreadsheet-driven questions about earnings forecasts for the next three
months. We were fortunate to meet with founders and top management
at ByteDance, Tencent, Alibaba, Meituan and CATL, among others. This added
helpful insights to our ongoing reviews of the platform companies.
Discussions were broadly positive and complimentary about the new Premier, Li
Qiang. There was renewed confidence in the regulatory and macroeconomic
backdrop, numerous comments on China's supply chain advantage, plus increasing
evidence of localisation in areas such as automation and robotics.
A large and intensely competitive domestic market plus a supply chain
advantage is allowing China to develop superior products on a global stage in
various sectors. As an example, with electric vehicle (EV) penetration now
approaching 30 per cent of new car sales, China's scale and supply chain
advantages allow it to produce better products with smarter features that
should increasingly give it export opportunities that match its exciting
domestic growth. This has led to a new holding in BYD, a company whose
vertical integration should give it an edge in the highly competitive EV
market where cost advantage and ability to innovate quickly are key.
Some companies acknowledged the technological challenges brought by the
threatened east-west decoupling. China sees the US approach to chip
export controls as a threat to national development and technological
progress. The US considers that approach critical to safeguarding its national
security and maintaining its technological advantage.
In the long run, China's strong government backing, abundance of engineers and
large market provide some comfort that the country can navigate the
challenges. However, in the short term, we should continue to expect noise
around high-end chips and leading-edge manufacturing capacity. Our exposure to
semiconductors within the Trust portfolio is largely via analogue chip makers
such as SG Micro. Analogue semiconductor companies are likely to be insulated
from geopolitical concerns given their use of lagging-edge technology, yet
still likely to benefit from China's drive to foster a localised supply chain.
SG Micro's performance has been poor recently, on the back of a cyclical
adjustment in the semiconductor cycle and we have taken advantage of this
volatility to add to the holding.
We also continue to focus on potential winners in the consumer space. As
exemplified by colleagues in our Shanghai office who've only succumbed to
Covid in the last couple of months, people are now learning to live with the
pandemic. Restaurants and tourist attractions are busy again, but momentum
in the consumer service sector is only gradually transferring to consumer
products, with job creation slowly feeding into household income. While
China's slower recovery has meant inventory challenges for retailers such as
Li Ning, we have added to companies in the portfolio that have been
disproportionately affected by Covid. Despite recent operational and share
price weakness, we believe Shenzhou International, one of the world's leading
garment manufacturers, remains an excellent operator with a top-tier client
base, diversified manufacturing sites, and good growth prospects.
New purchases and additions have been funded by small reductions to Shenzhen
Inovance and Estun Automation, which have delivered strong operational and
share price performance. Inovance, for example, has seen its share price
increase almost threefold since purchase as rapid technical improvements in
its products and growing market shares have resulted in strong revenue and
profit growth. We also reduced Hangzhou Tigermed to reflect the greater risks
around regulatory change and geopolitical challenges.
We are very conscious that recent times have not made it easy to invest in
China and that performance has been challenging against this backdrop. We gain
confidence from the fact that the operational performance of many companies in
the portfolio is strong, often in contrast to share prices. Indeed, our
conviction in our holdings and in the overall shape of the portfolio is
reflected in very low turnover during the period.
Performance
The portfolio underperformed against a weak market backdrop. The benchmark for
the period was minus 11 per cent, NAV was minus 18.7 per cent and the share
price was minus 20.5 per cent. All sectors within the benchmark posted
negative returns during the period other than energy which saw a single digit
rise. The worst returning sectors were healthcare, where the prospect of
further anti-corruption measures spooked the market, and real estate, where
macroeconomic weakness continued to bite. The portfolio underperformed the
benchmark largely due to our exposure to private companies which were out of
favour as expectations of an immediate recovery in consumption and property
disappointed.
Top relative detractors over the period include Li Ning, where concerns around
the speed and timing of China's post-Covid recovery came to the fore. Although
the company reported earnings in-line with expectations, the market remains
concerned about a short-term rise in inventory levels and increased
discounting in the face of weak demand. We continue to believe the company has
strong potential, given its growing market share and status as a strong
domestic brand which we believe should play well to the consumption shifts
taking place in China.
Glodon, a leading construction software company, also detracted from
performance. We believe this was largely driven by growing macroeconomic
concerns about the pace of China's recovery, levels of consumer confidence,
and therefore caution in the property sector, rather than any reflection of
changes to the long-term opportunity. The company, which continues to expect
revenues to double in the next three years, has undergone organisational
reforms to strengthen synergies between departments, and should benefit from
rising IT spend in a sector set to benefit from growth in digitisation over
the coming decade.
Other top detractors included SG Micro, an analogue semiconductor company that
is experiencing a short-term cyclical dislocation. As noted above, we have
taken advantage of share price weakness to add to our position. China
Merchants Bank was also weak given its lending exposure to the private
sector and wealth management.
The top relative contributors were A-share industrial manufacturing companies
exposed to structurally growing end markets, along with a mix of relatively
defensive companies.
Zhejiang Sanhua delivered mostly flat share price performance despite profit
growth of around 40 per cent in the period. The company specialises in
intelligent heating control components, where it has a positive outlook for
growth across its businesses: auto, air-conditioning, electrical appliances,
and
energy storage. Auto accounts for 30 per cent of Sanhua's business and is on
an uptrend, supported by the growth tailwind of its big clients Tesla and the
domestic EV maker BYD.
Shenzhen Megmeet was also a top contributor to performance, but it only
delivered a single digit rise in its share price despite posting around 25 per
cent growth in earnings in the period. The company makes power supply and
electric automation products for both industrial and consumer electronics
clients. It is exposed to exciting end markets that include industrial
automation, new energy vehicles, smart home appliances and advanced
intelligent manufacturing. After reporting solid results for 2022, Megmeet
also beat expectations for its Q1 earnings growth as its economies of scale
strengthen, it expands product capacity, and benefits from last year's changes
to its organisational structure. We remain focused on the long-term
opportunity that its multitier growth model aims to deliver.
Zijin Mining, a leading copper miner and an enabler of China's green
revolution, was also a top contributor delivering single digit share price
appreciation, as were Netease and Midea. Despite reporting quarterly results
during the period which were relatively weak, Zijin was a top contributor,
most likely due to its status as a state-owned enterprise (one of the few we
own in the portfolio). Netease is a leading game developer that continues
to deliver robust revenue and earnings growth, despite the weak economic
backdrop. It was one of the few portfolio companies to deliver double digit
growth in share price during the period. Midea is a leading white goods
manufacturer that arguably benefited from its status as an exceptionally
well-managed company and its relatively defensive return profile and strong
balance sheet.
Outlook
Looking back over the last three years, China has faced an unprecedented
series of challenges: Covid, a regulatory clampdown, and a worsening
geopolitical environment. These challenges have hurt private sector and
consumer confidence, negatively impacted sentiment towards the asset class,
and resulted in very weak returns. Looking forward, we think prospects for
China are much brighter. While growth in the property sector is likely to
remain lacklustre, we think the risk of financial instability is low. Indeed,
we believe a consumption-led recovery is gradually taking shape and that the
government's support for the private sector is likely to accelerate this
somewhat. Geopolitical concerns may remain a headwind to sentiment, but there
are signs that both sides want to stabilise the relationship.
More importantly, the attractions that China offers to bottom-up, active stock
pickers remain very much intact. While GDP growth overall may be
slowing, China continues to offer a number of large and growing structural
opportunities. China's multi-decade investments in research and development,
its investments in next-generation infrastructure, and its large and growing
middle class, provide a platform for growth across a wide range of industries.
We see 'micro blooms' or pockets of opportunity in areas as diverse as
healthcare, renewable energy, semiconductors, automation and domestic brands.
Our active approach to stock picking means that we can focus on finding the
very best Chinese growth companies within these opportunity sets, while
avoiding areas such as property that are in structural decline. With
valuations for our holdings at attractive levels in both an absolute and
relative sense, and with operational performance continuing to come through,
we remain optimistic about the prospects for future returns.
The principal risks and uncertainties facing the Company are set out below.
Baillie Gifford & Co
For a definition of terms, see Glossary of Terms and Alternative Performance
Measures at the end of this announcement.
Past performance is not a guide to future performance.
Valuing private companies
We aim to hold our private company investments at 'fair value' i.e. the price
that would be paid in an open-market transaction. Valuations are adjusted both
during regular valuation cycles and on an ad-hoc basis in response to 'trigger
events'. Our valuation process ensures that private companies are valued in
both a fair and timely manner.
The valuation process is overseen by a valuations group at Baillie Gifford
which takes advice from an independent third party (S&P Global). The
valuations group is independent from the investment team, with all voting
members being from different operational areas of the firm, and the portfolio
managers only receive final valuation notifications once they have been
applied.
We revalue the private holdings on a three-month rolling cycle, with one-third
of the holdings reassessed each month. For investment trusts, the prices are
also reviewed twice per year by the respective investment trust boards and are
subject to the scrutiny of external auditors in the annual audit process.
Beyond the regular cycle, the valuations team also monitors the portfolio for
certain 'trigger events'. These may include: changes in fundamentals; a
takeover approach; an intention to carry out an Initial Public Offering
('IPO'); company news which is identified by the valuation team or by the
portfolio managers or changes to the valuation of comparable public companies.
Any ad-hoc change to the fair valuation of any holding is implemented swiftly
and reflected in the next published net asset value ('NAV'). There is no
delay.
The valuations team also monitors relevant market indices on a weekly basis
and updates valuations in a manner consistent with our external valuer's
(S&P Global) most recent valuation report where appropriate. When market
volatility is particularly pronounced the team undertakes these checks daily.
List of investments as at 31 July 2023 (unaudited)
Name Business Value % of total assets *
£'000
Alibaba Online retailer, payments and cloud business 11,984 7.0
Tencent Social media and entertainment company 11,243 6.6
ByteDance (u) Social media and entertainment company 10,462 6.1
Kweichow Moutai Luxury baijiu maker 8,677 5.1
Ping An Insurance Life and health insurance 8,482 5.0
Meituan Online food delivery company 6,404 3.7
China Merchants Bank Consumer lending and wealth management 5,531 3.2
Zhejiang Sanhua Intelligent Controls Heating and cooling component manufacturer 4,850 2.8
Zijin Mining Renewable energy enabler 4,536 2.7
Li Ning Domestic sportswear manufacturer 4,478 2.6
BeiGene Immunotherapy biotechnology company 4,009 2.4
NetEase Gaming and entertainment business 3,577 2.1
CATL Electric vehicle battery maker 3,529 2.1
Proya Cosmetics Cosmetics and personal care company 3,442 2.0
Shandong Sinocera Functional Material Online retailer 3,410 2.0
JD.com Online retailer 3,354 2.0
Midea White goods and robotics manufacturer 3,116 1.8
Ping An Bank SME and consumer lender 3,065 1.8
Shenzhen Megmeet Electrical Power electronics manufacturer 2,918 1.7
Shenzhou International Garment manufacturer 2,671 1.6
Guangzhou Kingmed Diagnostics Diagnostics company 2,649 1.6
ENN Energy Gas distributor and provider 2,647 1.6
SG Micro Corp Semiconductor designer 2,642 1.5
Estun Automation Robotics and factory automation company 2,534 1.5
Fuyao Glass Industry Automotive glass manufacturer 2,483 1.5
Centre Testing International Electrical components & equipment 2,334 1.4
Shenzhen Inovance Technology Factory automation company 2,334 1.4
Kingsoft Software for SMEs and corporates 2,327 1.4
Weichai Power Construction machinery and heavy duty trucks 2,282 1.3
Geely Automobile Domestic automotive manufacturer 2,235 1.3
HUAYU Automotive Systems Automotive parts manufacturer 2,137 1.3
Yonyou Network Technology Software for SMEs and corporates 1,913 1.1
Kingdee International Software Software for SMEs and corporates 1,888 1.1
KE Holdings† Online real estate 1,817 1.1
Brilliance China Automotive Automotive makers and BMW partner 1,761 1.0
Asymchem Laboratories (Tianjin) Life sciences contract research organisation 1,744 1.0
Glodon Software provider to the construction industry 1,720 1.0
Minth Automotive parts manufacturer 1,560 0.9
Sunny Optical Technology Electronic components for smartphones and autos 1,427 0.8
WuXi AppTec Life sciences contract research organisation 1,419 0.8
Robam Appliances White goods manufacturer 1,385 0.8
Beijing United Information Tec Industrial ecommerce platform 1,349 0.8
Sungrow Power Supply Component supplier to renewables industry 1,335 0.8
Longi Solar energy provider 1,272 0.7
Yifeng Pharmacy Chain Drug retailer 1,157 0.7
Sinocare Diagnostics and diabetes company 1,147 0.7
Topchoice Medical Dental services provider 1,133 0.7
Jiangsu Azure Air freight & logistics 1,038 0.6
Pop Mart Toy and collectibles maker 1,009 0.6
Dongguan Yiheda Automation Co Industrial machinery 939 0.6
Byd Company Electric vehicle manufacturer 865 0.5
Yunnan Energy New Material Component supplier to renewables industry 763 0.4
Hangzhou Tigermed Consulting Clinical trial contract research organisation 745 0.4
Kinlong Building products 743 0.4
Hua Medicine (Shanghai) Diabetes drug manufacturer 712 0.4
New Horizon Health Early cancer detection 699 0.4
Medlive Technology Medical dictionary and marketing organisation 604 0.4
Dada Nexus† Logistics and warehousing provider 366 0.2
Burning Rock Biotech† Liquid biopsy cancer testing company 219 0.1
Total investments 169,071 99.1
Net liquid assets 1,501 0.9
Total assets 170,572 100.0
Borrowings (5,829) (3.4)
Shareholders' funds 164,743 96.6
* Total assets before deduction of loans.
(u) Denotes unlisted investment (private company).
† Includes investment in American Depositary Receipt (ADR)
Income statement (unaudited)
For the year ended
For the six months ended For the six months ended 31 January 2023
31 July 2023 31 July 2022 (audited)
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Net losses on investments - (39,036) (39,036) - (23,719) (23,719) - (12,378) (12,378)
Currency gains - 172 172 - (325) (325) - (216) (216)
Income 1,932 - 1,932 1,944 - 1,944 2,407 - 2,407
Investment management fee (note 3) (140) (421) (561) (161) (484) (645) (311) (932) (1,243)
Other administrative expenses (244) - (244) (290) - (290) (550) - (550)
Net return before finance costs and taxation 1,548 (39,285) (37,737) 1,493 (24,528) (23,035) 1,546 (13,526) (11,980)
Finance costs of borrowings (65) (193) (258) (59) (173) (232) (116) (347) (463)
Net return on ordinary activities before taxation 1,483 (39,478) (37,995) 1,434 (24,701) (23,267) 1,430 (13,873) (12,443)
Tax on ordinary activities (148) - (148) (78) - (78) (105) - (105)
Net return on ordinary activities after taxation 1,335 (39,478) (38,143) 1,356 (24,701) (23,345) 1,325 (13,873) (12,548)
Net return per ordinary share (note 4) 2.15p (63.66p) (61.51p) 2.18p (39.83p) (37.65p) 2.14P (22.37p) (20.23p)
Note: nil nil 1.70p
Dividends paid and payable per share (note 5)
The total column of this statement represents the profit and loss account of
the Company. The supplementary revenue and capital columns are prepared under
guidance published by the Association of Investment Companies.
All revenue and capital items in this statement derive from continuing
operations.
A Statement of Comprehensive Income is not required as the Company does not
have any other comprehensive income and the net return on ordinary activities
after taxation is both the profit and comprehensive income for the period.
Balance sheet (unaudited)
At 31 July 2023 At 31 January 2023
£'000 £'000
Notes
Fixed assets
Investments held at fair value through profit or loss 6 169,071 209,499
Current assets
Debtors 310 26
Cash and cash equivalents 1,572 1,000
1,882 1,026
Creditors
Amounts falling due within one year 7 (6,210) (6,585)
Net current liabilities (4,328) (5,559)
Total assets less current liabilities 164,743 203,940
Capital and reserves
Share capital 17,087 17,087
Share premium account 31,780 31,780
Capital redemption reserve 41,085 41,085
Capital reserve 68,270 107,748
Revenue reserve 6,521 6,240
Shareholders' funds 164,743 203,940
Net asset value per ordinary share* 265.66p 328.87p
Shares in issue 8 62,012,982 62,012,982
*See Glossary of Terms and Alternative Performance Measures at the end of this
announcement.
Statement of changes in equity (unaudited)
Six months to 31 July 2023
Share premium account Capital redemption reserve
Share capital £'000 £'000 Capital reserve * Revenue reserve Shareholders'
£'000 £'000 £'000 funds
£'000
Shareholders' funds at 1 February 2023 17,087 31,780 41,085 107,748 6,240 203,940
Net return on ordinary activities after taxation - - - (39,478) 1,335 (38,143)
Dividends paid (note 5) - - - - (1,054) (1,054)
Shareholders' funds at 31 July 2023 17,087 31,780 41,085 68,270 6,521 164,743
Six months to 31 July 2022
Share premium account Capital redemption reserve
Share capital £'000 £'000 Capital reserve * Revenue reserve Shareholders'
£'000 £'000 £'000 funds
£'000
Shareholders' funds at 1 February 2022 17,087 31,780 41,085 121,621 7,768 219,341
Net return on ordinary activities after taxation - - - (24,701) 1,356 (23,345)
Dividends paid (note 5) - - - - (2,854) (2,854)
Shareholders' funds at 31 July 2022 17,087 31,780 41,085 96,920 6,270 193,142
* The Capital reserve as at 31 July 2023 includes investment holding
losses of £64,882,000 (31 July 2022 - losses of £52,916,000)
Condensed statement of cash flows (unaudited)
Six months Six months
to 31 July 2023 to 31 July 2022
£'000 £'000
Cash flows from operating activities
Net return on ordinary activities before taxation (37,995) (23,267)
Net losses on investments 39,036 23,719
Currency (gains)/losses (172) 325
Finance costs of borrowings 258 232
Overseas withholding tax suffered (159) (145)
Overseas withholding tax reclaims received 11 66
Changes in debtors (248) (205)
Changes in creditors (149) (53)
Cash from operations* 582 672
Interest paid (257) (222)
Net cash inflow from operating activities 325 450
Cash flows from investing activities
Acquisitions of investments (1,814) (18,629)
Disposals of investments 3,206 17,466
Net cash inflow/(outflow) from investing activities 1,392 (1,163)
Cash flows from financing activities
Equity dividends paid (note 5) (1,054) (2,854)
Net cash outflow from financing activities (1,054) (2,854)
Increase/(decrease) in cash and cash equivalents 663 (3,567)
Exchange movements (91) 248
Cash and cash equivalents at start of period 1,000 5,496
Cash and cash equivalents at end of period† 1,572 2,177
* Cash from operations includes dividends received in the period of
£1,614,000 (31 July 2022 - £1,642,000) and deposit interest received of
£9,000 (31 July 2022 - £1,000).
† Cash and cash equivalents represent cash at bank and short term money
market deposits repayable on demand.
Notes to the financial statements (unaudited)
1. Basis of accounting
The condensed Financial Statements for the six months to 31 July 2023 comprise
the statements set out above. They have been prepared in accordance with FRS
104 'Interim Financial Reporting' and the AIC's Statement of Recommended
Practice issued in November 2014 and updated in July 2022 with consequential
amendments, and have not been audited or reviewed by the Auditor pursuant to
the Auditing Practices Board Guidance on 'Review of Interim Financial
Information'. The Financial Statements for the six months to 31 July 2023 have
been prepared on the basis of the same accounting policies as set out in the
Company's Annual Report and Financial Statements at 31 January 2023.
Going concern
The Directors have considered the nature of the Company's assets, its
liabilities, projected income and expenditure together with its investment
objective and policy, dividend policy and principal risks and uncertainties,
as set out below. The Board has, in particular, considered the impact of
heightened market volatility due to macroeconomic and geopolitical concerns,
and reviewed the results of specific leverage and liquidity stress testing but
does not believe the Company's going concern status is affected. The Company's
assets, the majority of which are investments in quoted securities which are
readily realisable, exceed its liabilities significantly. All borrowings
require the prior approval of the Board. Gearing levels and compliance with
borrowing covenants are reviewed by the Board on a regular basis. The Company
has continued to comply with the investment trust status requirements of
section 1158 of the Corporation Tax Act 2010 and the Investment Trust
(Approved Company) (Tax) Regulations 2011. Accordingly, the Directors consider
it appropriate to adopt the going concern basis of accounting in preparing
these Financial Statements and confirm that they are not aware of any material
uncertainties which may affect the Company's ability to continue to do so over
a period of at least twelve months from the date of approval of these
Financial Statements.
2. Financial information
The financial information contained within this Interim Financial Report does
not constitute statutory accounts as defined in sections 434 to 436 of the
Companies Act 2006. The financial information for the year ended 31 January
2023 has been extracted from the statutory accounts which have been filed with
the Registrar of Companies. The Auditor's Report on those accounts was not
qualified, did not include a reference to any matters to which the Auditor
drew attention by way of emphasis without qualifying the report, and did not
contain a statement under sections 498(2) or (3) of the Companies Act 2006.
3. Investment manager
Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford
& Co, was appointed by the Company as its Alternative Investment Fund
Manager and Company Secretary on 16 September 2020. The investment management
function has been delegated to Baillie Gifford & Co. Dealing activity and
transaction reporting have been further sub-delegated to Baillie Gifford
Overseas Limited and Baillie Gifford Asia (Hong Kong) Limited. The management
agreement is terminable on not less than three months' notice or on shorter
notice in certain circumstances. The annual management fee is (i) 0.75% of the
first £50 million of Net Asset Value; plus (ii) 0.65% of Net Asset Value
between £50 million and £250 million; plus (iii) 0.55% of Net Asset Value in
excess of £250 million, calculated and payable quarterly.
4. Net return per ordinary share
Six months to Six months to Year to
31 July 2023 31 July 2002 31 January 2023
£'000 £'000 £'000
Revenue return on ordinary activities after taxation 1,335 1,356 1,325
Capital return on ordinary activities after taxation (39,478) (24,701) (13,873)
Total net return (38,143) (23,345) (12,548)
Weighted average number of ordinary shares in issue 62,012,982 62,012,982 62,012,982
Net return per ordinary share is based on the above totals of revenue and
capital and the weighted average number of ordinary shares in issue during
each period.
There are no dilutive or potentially dilutive shares in issue.
5. Dividends
Six months to Six months to
31 July 2023 31 July 2022
£'000 £'000
Amounts recognised as distributions in the period: 1,054 2,854
Previous year's final of 1.70p (2022 - 4.60p) paid on 26 July 2023
6. Fixed assets - investments
Fair value hierarchy
The fair value hierarchy used to analyse the basis on which the fair values of
financial instruments held at fair value through the profit or loss account
are measured is described below. Fair value measurements are determined by the
lowest (that is the least reliable or least independently observable) level of
input that is significant to the fair value measurement for the individual
investment in its entirety as follows:
Level 1 - using unadjusted quoted prices for identical instruments in an
active market;
Level 2 - using inputs, other than quoted prices included within Level 1, that
are directly or indirectly observable (based on market data); and
Level 3 - using inputs that are unobservable (for which market data is
unavailable).
Level 1 Level 2 Level 3 Level 4
As at 31 July 2023 £'000 £'000 £'000 £'000
Listed equities 158,609 - - 158,609
Unlisted ordinary shares - - 10,462 10,462
Total financial asset investments 158,609 - 10,462 169,071
Level 1 Level 2 Level 3 Level 4
As at 31 January 2023 (audited) £'000 £'000 £'000 £'000
Listed equities 197,546 - - 197,546
Unlisted ordinary shares - - 11,953 11,953
Total financial asset investments 197,546 - 11,953 209,499
7. Bank loans
The Company has a two year US$40 million revolving credit facility with The
Royal Bank of Scotland (International) Limited which expires on 13 April 2024.
At 31 July 2023 creditors falling due within one year include borrowings of
£5.8 million (US$7.5 million) (31 January 2023 - £6.1 million (US$7.5
million)) drawn down under the facility.
8. Share capital
The Company has authority to allot shares under section 551 of the Companies
Act 2006 or sell shares held in treasury. Such authorities will only be used
to issue shares or sell shares from treasury at, or at a premium to, net asset
value and only when the Directors believe that it would be in the best
interests of the Company to do so. In the six months to 31 July 2023 no
ordinary shares were issued from Treasury (in the year to 31 January 2023 no
shares were issued from Treasury).
The Company also has authority to buy back shares. In the six months to 31
July 2023 no ordinary shares were bought back for cancellation (in the year to
31 January 2023 no ordinary shares were bought back for cancellation)
therefore the Company's authority remains unchanged at 9,295,746 ordinary
shares.
9. Related party transactions
There have been no transactions with related parties during the first six
months of the current financial year that have materially affected the
financial position or the performance of the Company during that period and
there have been no changes in the related party transactions described in the
last Annual Report and Financial Statements that could have had such an effect
on the Company during that period.
None of the views expressed in this document should be construed as advice to
buy or sell a particular investment.
10. Contingent asset
HMRC have indicated they will repay overpaid taxes for the accounting periods
ending 2008 and 2009 of £1.1 million plus interest. As the repayment is
probable, but not virtually certain, the Company is disclosing £1.1 million
as a contingent asset.
Principal risks and uncertainties
The principal risks facing the Company are inappropriate business strategy,
adverse market conditions, poor investment performance, operational risk, tax
and regulatory change or breach, single country risk, emerging market risk,
unlisted securities, gearing, cyber security risk, and climate and governance
risk. An explanation of these risks and how they are managed is set out on
pages 23 to 25 of the Company's Annual Report and Financial Statements for the
year to 31 January 2023 which is available on the Company's website:
bailliegiffordchinagrowthtrust.com.
The principal risks and uncertainties have not changed since the date of the
Annual Report.
Responsibility statement
We confirm that to the best of our knowledge:
a. the condensed set of Financial Statements has been prepared in accordance
with FRS 104 'Interim Financial Reporting';
b. the Interim Management Report includes a fair review of the information
required by Disclosure Guidance and Transparency Rule 4.2.7R (indication of
important events during the first six months, their impact on the Financial
Statements and a description of the principal risks and uncertainties for the
remaining six months of the year); and
c. the Interim Financial Report includes a fair review of the information
required by Disclosure Guidance and Transparency Rule 4.2.8R (disclosure of
related party transactions and changes therein).
On behalf of the Board
Susan Platts-Martin
Chair
2 October 2023
Glossary of terms and Alternative Performance Measures (APM)
An alternative performance measure is a financial measure of historical or
future financial performance, financial position, or cash flows, other than a
financial measure defined or specified in the applicable financial reporting
framework.
Total assets
This is the Company's definition of Adjusted Total Assets, being the total of
all assets less current liabilities, before deduction of all borrowings.
Shareholders' funds and Net Asset Value
Shareholders' Funds is the value of all assets held less all liabilities, with
borrowings deducted at book cost. Net Asset
Value ('NAV') is the value of all assets held less all liabilities, with
borrowings deducted at either book value or fair value. Per share amounts are
calculated by dividing the relevant figure by the number of ordinary shares in
issue.
Net liquid assets
Net liquid assets comprise current assets less current liabilities, excluding
borrowings.
Net Asset Value (borrowings at book value) (APM)
Borrowings are valued at adjusted net issue proceeds. Book value approximates
amortised cost.
31 July 31 January
2023 2023
Shareholders' funds (borrowings at book value) £164,743,000 £203,940,000
Shares in issue 62,012,982 62,012,982
Net asset value per ordinary share (borrowings at book value) 265.66p 328.87p
Discount/premium (APM)
As stockmarkets and share prices vary, an investment trust's share price is
rarely the same as its net asset value. When the share price is lower than the
net asset value per share it is said to be trading at a discount. The size of
the discount is calculated by subtracting the share price from the net asset
value per share and is usually expressed as a percentage of the net asset
value per share. If the share price is higher than the net asset value per
share, this situation is called a premium.
31 July 31 January
2023 2023
Closing NAV per share 265.66p 328.87p
Closing share price 243.00p 308.00p
Discount (8.5%) (6.3%)
Total return (APM)
The total return is the return to shareholders after reinvesting the dividend
on the date that the share price goes ex-dividend.
31 July 31 July 31 January 31 January
2023 2023 2023 2023
NAV Share price NAV Share price
Closing NAV per share/share price (a) 265.66p 243.00p 328.87p 308.00p
Dividend adjustment factor* (b) 1.006801 1.007763 1.014030 1.014557
Adjusted closing NAV per share/share price (c=a x b) 267.47p 244.89p 333.48p 312.48p
Opening NAV per share/share price (d) 328.87p 308.00p 353.70p 339.25p
Total return (c÷d)-1 (18.7%) (20.5) (5.7%) (7.9%)
* The dividend adjustment factor is calculated on the assumption that the
dividends paid out by the Company are reinvested into the shares of the
Company at the cum income NAV at the ex-dividend date.
Ongoing charges (APM)
The total expenses (excluding borrowing costs) incurred by the Company as a
percentage of the average net asset value. The ongoing charges are calculated
on the basis prescribed by the Association of Investment Companies.
Gearing (APM)
At its simplest, gearing is borrowing. Just like any other public company, an
investment trust can borrow money to invest in additional investments for its
portfolio. The effect of the borrowing on the shareholders' assets is called
'gearing'. If the Company's assets grow, the shareholders' assets grow
proportionately more because the debt remains the same. But if the value of
the Company's assets falls, the situation is reversed. Gearing can therefore
enhance performance in rising markets but can adversely impact performance in
falling markets.
Gearing is the Company's borrowings expressed as a percentage of shareholders'
funds.
Gross gearing is the Company's borrowings at book value less cash and cash
equivalents (as adjusted for investment and share buy-back/issuance
transactions awaiting settlement) expressed as a percentage of shareholders'
funds.
Leverage (APM)
For the purposes of the UK Alternative Investment Fund Managers Regulations,
leverage is any method which increases the Company's exposure, including the
borrowing of cash and the use of derivatives. It is expressed as a ratio
between the Company's exposure and its net asset value and can be calculated
on a gross and a commitment method. Under the gross method, exposure
represents the sum of the Company's positions after the deduction of sterling
cash balances, without taking into account any hedging and netting
arrangements. Under the commitment method, exposure is calculated without the
deduction of sterling cash balances and after certain hedging and netting
positions are offset against each other.
Active share (APM)
Active share, a measure of how actively a portfolio is managed, is the
percentage of the portfolio that differs from its comparative index. It is
calculated by deducting from 100 the percentage of the portfolio that overlaps
with the comparative index. An active share of 100 indicates no overlap with
the index and an active share of zero indicates a portfolio that tracks the
index.
Private (unlisted) company
An unlisted (private) company means a company whose shares are not available
to the general public for trading and not listed on a stock exchange.
Participatory notes (or P notes)
A P-note is a certificate-based instrument that can be issued by a
counterparty bank and provides a synthetic stock exposure to an underlying
equity instrument. The synthetic exposure results in the P-note having the
same performance as the underlying stock but carries an additional currency
exposure due to the P-note being denominated in US$. P-notes are unleveraged
instruments.
Variable Interest Entity (VIE')
VIE structures are used by some Chinese companies to facilitate access to
foreign investors in sectors of the Chinese domestic economy which prohibit
foreign ownership. The purpose of the VIE structure is to give the economic
benefits and operational control of ownership without direct equity ownership
itself. The structures are bound together by contracts and foreign investors
are not directly invested in the underlying company.
None of the views expressed in this document should be construed as advice to
buy or sell a particular investment.
Baillie Gifford China Growth Trust aims to achieve long term capital growth
through investment principally in Chinese companies which are believed to have
above average prospects for growth. At 31 July 2023 the Company had total
assets of £171m.
You can find up-to-date performance information about Baillie Gifford China
Growth Trust at bailliegiffordchinagrowthtrust.com‡.
Baillie Gifford China Growth Trust is managed by Baillie Gifford, the
Edinburgh based fund management group with around £213 billion under
management and advice in active equity and bond portfolios for clients in the
UK and throughout the world (as at 2 October 2023).
Investment Trusts are UK public limited companies and are not authorised or
regulated by the Financial Conduct Authority.
‡ Neither the contents of the Managers' website nor the contents of
any website accessible from hyperlinks on the Managers' website (or any other
website) is incorporated into, or forms part of, this announcement.
Past performance is not a guide to future performance. The value of an
investment and any income from it is not guaranteed and may go down as well as
up and investors may not get back the amount invested. This is because the
share price is determined by the changing conditions in the relevant stock
markets in which the Company invests and by the supply and demand for the
Company's shares.
For further information please contact:
Naomi Cherry, Baillie Gifford & Co
Tel: 0131 474 5548
Jonathan Atkins, Four Communications
Tel: 0203 920 0555 or 07872 495396
Third party data provider disclaimer
No third party data provider ('Provider') makes any warranty, express or
implied, as to the accuracy, completeness or timeliness of the data contained
herewith nor as to the results to be obtained by recipients of the data. No
Provider shall in any way be liable to any recipient of the data for any
inaccuracies, errors or omissions in the index data included in this document,
regardless of cause, or for any damages (whether direct or indirect) resulting
therefrom.
No Provider has any obligation to update, modify or amend the data or to
otherwise notify a recipient thereof in the event that any matter stated
herein changes or subsequently becomes inaccurate.
Without limiting the foregoing, no Provider shall have any liability
whatsoever to you, whether in contract (including under an indemnity), in tort
(including negligence), under a warranty, under statute or otherwise, in
respect of any loss or damage suffered by you as a result of or in connection
with any opinions, recommendations, forecasts, judgements, or any other
conclusions, or any course of action determined, by you or any third party,
whether or not based on the content, information or materials contained
herein.
MSCI index data
Source: MSCI. The MSCI information may only be used for your internal use, may
not be reproduced or redisseminated in any form and may not be used as a basis
for or a component of any financial instruments or products or indices. None
of the MSCI information is intended to constitute investment advice or a
recommendation to make (or refrain from making) any kind of investment
decision and may not be relied on as such. Historical data and analysis should
not be taken as an indication or guarantee of any future performance analysis,
forecast or prediction.
The MSCI information is provided on an 'as is' basis and the user of this
information assumes the entire risk of any use made of this information. MSCI,
each of its affiliates and each other person involved in or related to
compiling, computing or creating any MSCI information (collectively, the 'MSCI
Parties') expressly disclaims all warranties (including, without limitation,
any warranties of originality, accuracy, completeness, timeliness,
non-infringement, merchantability and fitness for a particular purpose) with
respect to this information. Without limiting any of the foregoing, in no
event shall any MSCI Party have any liability or any direct, indirect,
special, incidental, punitive, consequential (including, without limitation,
lost profits) or any other damages. (msci.com).
Sustainable finance disclosure regulation ('SFDR')
The EU SFDR does not have a direct impact in the UK due to Brexit, however, it
applies to third-country products marketed in the EU. As Baillie Gifford China
Growth Trust is marketed in the EU by the AIFM, Baillie Gifford & Co
Limited, via the National Private Placement Regime (NPPR) the following
disclosures have been provided to comply with the high-level requirements of
SFDR. The AIFM has adopted Baillie Gifford & Co's ESG Principles and
Guidelines as its policy on integration of sustainability risks in investment
decisions.
Baillie Gifford & Co's approach to investment is based on identifying and
holding high quality growth businesses that enjoy sustainable competitive
advantages in their marketplace. To do this it looks beyond current financial
performance, undertaking proprietary research to build an in-depth knowledge
of an individual company and a view on its long-term prospects. This includes
the consideration of sustainability factors (environmental, social and/or
governance matters) which it believes will positively or negatively influence
the financial returns of an investment.
The likely impact on the return of the portfolio from a potential or actual
material decline in the value of investment due to the occurrence of an
environmental, social or governance event or condition will vary and will
depend on several factors including but not limited to the type, extent,
complexity and duration of an event or condition, prevailing market conditions
and existence of any mitigating factors.
Whilst consideration is given to sustainability matters, there are no
restrictions on the investment universe of the Company, unless otherwise
stated within in its Investment Objective & Policy. Baillie Gifford &
Co can invest in any companies it believes could create beneficial long-term
returns for investors. However, this might result in investments being made in
companies that ultimately cause a negative outcome for the environment or
society.
More detail on the Investment Manager's approach to sustainability can be
found in the ESG Principles and Guidelines document, available publicly on the
Baillie Gifford website bailliegifford.com.
The underlying investments do not take into account the EU criteria for
environmentally sustainable economic activities established under the EU
Taxonomy Regulation.
- ends -
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