REG-Fidelity China Special Situations Plc: Half-year Report
29/11/2023 07:15
FIDELITY CHINA SPECIAL SITUATIONS PLC
Half-Yearly results for the six months ended 30 September 2023 (unaudited)
Financial Highlights:
* Fidelity China Special Situations PLC reported a Net Asset Value (NAV)
return of -10.9% compared to the -10.3% return of the Benchmark Index in the
six months ended 30 September 2023.
* The share price return was -12.9% during the same period.
* Despite market sentiment, robust stock picking in the consumer discretionary
and health care sectors proved rewarding.
* The Portfolio Manager believes valuations remain compelling in historic and
absolute terms.
Recent Announcement
* Fidelity China Special Situations PLC FCSS has agreed heads of terms with
abrdn China Investment Company Limited ACIC in respect of a proposed
combination of ACIC with FCSS. Following the transaction, the enlarged FCSS
would continue to be managed in accordance with its existing investment
objective and policy by FIL Investment Management (Hong Kong) Limited with
Dale Nicholls continuing as the named portfolio manager. Please refer to the
stock exchange announcement released at 7am on 28 November 2023 for further
details.
Contacts
For further information, please contact:
Smita Amin
Company Secretary
FIL Investments International
01737 836347
Portfolio Manager’s Half-Yearly Review
Macro and market backdrop
At the beginning of the current financial year, it was already becoming clear
that the hoped-for boost from the lifting of China’s zero-Covid policy was
going to be less straightforward than anticipated. Rather than seeing an
immediate improvement, the economic outlook has remained uncertain, and this
has led to high levels of volatility in the stock market. However, the policy
backdrop has remained supportive, with the Chinese authorities returning to
market-friendly rhetoric and stepping up efforts to roll out an array of
stimulus measures to boost consumption and revive the economy since the July
Politburo meeting.
The property sector has continued to cause concern both domestically and
internationally, with tighter lending conditions leading to increased stress
on some highly leveraged privately-owned property developers. Policy support
has focused on the slowing residential market and lagging consumer sentiment,
with initiatives such as the easing of mortgage conditions, the loosening of
the definition of a ‘first home’ and allowing lower minimum down payment
ratios for both first and second homeowners – all in an effort to support
underlying demand for property. On the fiscal side, the government’s ongoing
focus on quality rather than quantity of economic growth, along with stretched
local government finances, has meant that the trend of large-scale and
leverage-fuelled infrastructure projects is likely to have run its course.
A sustained improvement in domestic regulation towards favouring the private
sector or a sustained stabilisation of key geopolitical relationships would
likely initiate a gradual rerating of Chinese stocks. We see positive signs of
Beijing nurturing high-end manufacturing and encouraging foreign
participation. A case in point is Xi Jinping’s announcement during the
recent BRI Forum that China will terminate all restrictions for foreign
participation in manufacturing.
One of the principal reasons why the post-Covid reopening fell flatter than
expected was that consumer confidence has remained muted. The factors driving
this include weak business confidence, particularly on the back of
well-publicised job cuts at the big tech companies, and youth unemployment
headlines. Weakness in the property market is also likely playing a part given
the significant weight of property on the consumer balance sheet. On the
positive side, Chinese citizens are sitting on record amounts of savings and
the assumption had been that they would be keen to travel and spend as soon as
they were able to do so. The recent ‘Golden Week’ holiday saw domestic
tourism rebound to pre-pandemic levels, although overseas travel remains below
trend. Despite the mixed signals, however, we believe consumption will likely
continue to be the prime driver of the recovery, supported by factors such as
the move towards urbanisation, which supports rising consumer purchasing
power. While this trend may have slowed down during Covid, it remains clearly
intact, and the overall levels of urbanisation still significantly lag levels
seen in the West.
The rise of the Chinese consumer has long been a major theme for Fidelity
China Special Situations, as evidenced by more than 40% of the portfolio held
in consumer stocks.
Performance and portfolio review
Chinese equities have experienced extreme volatility over the past six months,
erasing the gains since the market’s recent peak at the start of 2023. The
initial euphoria around China’s reopening was short-lived, as investor
sentiment and consumer confidence were both adversely affected by subdued
macroeconomic data and renewed stress on the financial and real estate sectors
since the second quarter. Against this uncertain backdrop, the Company’s NAV
declined by 10.9% in the six-month reporting period to 30 September 2023,
slightly more than the MSCI China Index (the Benchmark Index) which was down
by 10.3%. The Company’s share price fell by 12.9% over the same period,
reflecting a widening of the discount to NAV. (All performance data on a total
return basis.)
While an overweight exposure to financials and materials detracted from
performance during the period, robust stock picking in the consumer
discretionary and health care sectors proved rewarding.
Within the consumer area, some of the initial beneficiaries of reopening in
discretionary spending continued to post attractive gains. Holdings in Hisense
Home Appliances Group, the branded variety retailer MINISO and Lao Feng Xiang,
a leading jewellery retailer, all made gains, supported by their solid
execution and positive structural growth outlooks. These gains were partially
offset by the position in China Tourism Group Duty Free, which declined amid
weaker-than-expected consumer confidence.
Elsewhere in the consumer discretionary space, shares in automobile parts
manufacturer Intron Technology also declined on the back of disappointing
results. However, we believe that structural tailwinds in China’s auto
sector toward electrification continue to underpin its long-term outlook.
Within the health care sector, WuXi AppTec Group – one of our largest
holdings on both an absolute basis and relative to the Benchmark Index –
contributed positively to performance. It is a leading biopharma contract
development and manufacturing company and reported upbeat financial results.
Its shares were also supported by the hype around glucagon-like peptide 1
(GLP-1) drugs for weight-loss, spurred on by ground-breaking results from a
recent clinical study. The position in biotech company HUTCHMED China also
advanced on the back of better-than-expected results. Cost-saving initiatives
made a meaningful contribution to its earnings, and it has no near-term
funding needs as it has adequate cash to fund its upcoming research and
development (R&D) pipeline. Moreover, shares in the China-focused and Japan
listed drug developer GNI Group were supported by results that were in line
with expectations. It revised its revenue and profit guidance upwards after
receiving an upfront licence payment from Astellas for its US subsidiary
Cullgen.
In contrast, not holding NetEase and Li Auto held back returns relative to the
Benchmark Index. Shares of NetEase advanced amid easing industry crackdowns
and resilient demand in the gaming sector. The company has benefited from its
recent better-than-expected game blockbusters in China. Electric vehicle
manufacturers trended upwards on the back of the recent announcement of an
extended tax break on renewable automobile purchases. Thus, not holding Li
Auto, one of China’s largest pure-play electric vehicle companies, weighed
on relative returns.
Within financials, the position in credit facilitator Lufax Holding declined
as it released subdued results. Tightening lending criteria, driven by
weakness in China’s macroeconomic backdrop, has led to a decline in new
loans which poses a near-term headwind to the company’s earnings.
Nonetheless, Lufax remains substantially undervalued and provides significant
upside potential given its leading position in online lending to small and
medium-sized enterprises (SMEs) and attractive valuations.
ESG and engagement
We continue to develop our sustainability ratings system and processes to meet
the ever-evolving landscape of investing through an ESG lens. Before
highlighting our most recent updates, we believe it is important to reiterate
why we have institutionalised sustainability into our investment process.
There are three layers to our approach. The first is a foundation of robust
sustainable investing practices that helps to build sustainable financial
futures. The second layer is made up of different modules that will evolve to
meet dynamic requirements – building digital tools to support effective
analysis, integration, and the reporting of sustainability in our investment
process. The final layer is how we communicate our process externally (such as
meetings and engagement with companies’ management teams).
We equally believe our proprietary ratings add value to third-party ESG
research while adhering to our fundamental investment philosophy. Too often,
different ESG research providers reach different conclusions on the same
companies, due to different underlying methodologies and judgements on
materiality. Furthermore, by using an average, we feel that the ‘overall’
score used by others can mask a complex set of underlying ‘E’, ‘S’ and
‘G’ factors.
When dealing with so-called “less sustainable” companies, one can engage
with them to help implement effective change or exclude them entirely from
portfolios. We believe that the former has much greater potential to
positively impact future generations as well as returns over the long-term
(opportunities), particularly if an investor is willing to exert influence and
help companies to improve their ESG trajectory.
With all that said, it is important to note that the Company is not an ‘ESG
fund’ that aims to only invest in those companies dedicated to delivering
positive ESG impacts. Rather, we integrate ESG considerations into our
investment process to mitigate sustainability risks, which can have negative
implications for share prices as well as for people and the planet. Below is
an example of one of our recent engagements with a company in the portfolio to
help them – and therefore us – to manage sustainability risks.
TENCENT HOLDINGS: ENGAGEMENT CASE STUDY
Tencent’s ESG team proactively initiated a meeting with Fidelity which is in
itself encouraging. The meeting was wide-ranging and covered ‘E’, ‘S’
and ‘G’ factors. From an environmental perspective, Tencent has a goal of
full carbon neutrality by 2030. It is only one of the few technology, media
and telecom (TMT) company globally (and the first in China) to have received a
Science-Based Target-initiative (SBTi) approved greenhouse gas (“GHG”)
reduction target, behind Microsoft. During the meeting, we discussed
comprehensive GHG disclosures, including Scope 3 emissions (the last of the
three groups of targets required to achieve net zero and covering areas such
as employee travel and new headquarter constructions). The company has started
to look into the potential for Scope 3 emissions reduction, although the
actual change will happen in the medium rather than the short-term.
On the social aspect, Tencent recognises previous controversies related to
Diversity, Equity and Inclusion (DEI) and has proactively made steady progress
towards gender equity at board and company levels. We reiterated Fidelity’s
policy requiring a minimum of 30% female representation at the board level.
Following the appointment of a female non-executive director, the board of
Tencent has increased the ratio of female directors to 22.2% and intends to
raise this percentage further.
From a governance perspective, we recommended that the company should consider
greater disclosure on data privacy. Overall, we were impressed to see the
incremental progress Tencent is making in improving its ESG practices.
Current portfolio positioning
On a relative basis, at the reporting period end we were most overweight the
Benchmark Index in the industrials, health care, consumer discretionary and
information technology sectors. We were most underweight in utilities, energy
and communication services.
A notable change to the portfolio during the period was a significant decrease
in exposure to the consumer discretionary sector, triggered mostly by profit
taking. The proceeds of these sales have been deployed to increase our
allocation in consumer staples, materials and energy sectors.
In information technology, we trimmed our holding in Alibaba Group and
initiated a position (which we have since increased) in PDD Holdings, which is
the third largest e-commerce platform in China and shows outstanding
efficiency in supply chain management and cost control. This competitive edge
allows the company to offer very competitive pricing, driving continuous gains
in market share. This same edge is helping PDD to expand internationally via
its Temu brand, leveraging China’s supply chain to meet offshore demand.
Currently, Temu is still loss-making due to its significant investment in the
user acquisition phase, so in the near-term the expansion is a drag on PDD’s
profits. However, over the long-term, we believe there is good potential for
significant value to be created in this business, and therefore, the stock
offers great upside potential when profitability improves, and the market
takes a more positive view of the sustainability of its earnings.
Elsewhere in the consumer space, the positions in MINISO and Lao Feng Xiang
were sold to lock in profits which we recycled into better priced
opportunities elsewhere. For example, we purchased a new position in online
video platform operator iQiyi. It offers an attractive valuation and we
believe there is good potential for the competitive environment to improve.
Within the energy sector, we initiated a new position in integrated offshore
oil services provider China Oilfield Services, which is 50% owned by the
national oil company CNOOC. The company provides leading drilling services in
China, while its well service business is also starting to gain market share
overseas. We see favourable supply and demand dynamics in the mid-term and the
valuations are very compelling.
Premium growth in the life insurance market was negatively impacted during
Covid and the recovery has been muted. However, we still see good long-term
potential in the Chinese insurance market given the relatively low levels of
penetration. Capitalising on the weakness in stock prices, we increased our
stake in China’s second largest life insurer (by premium income), Ping An
Insurance Company of China. This is a high-quality company that looks
attractively valued as the overall weakness in the life insurance industry
bottoms out. The purchase was funded by selling the entire position in China
Pacific Insurance after its valuation moved upwards, with upside being
increasingly priced in.
Within the real estate sector, we initiated a new position in the state-owned
developer China Overseas Land & Investment (“COLI”), given its favourable
risk-reward profile following the recent market correction and policy easing
expectations for the sector. Against the backdrop of the ongoing property
downturn, we believe that leading state-owned players with low funding costs
are well placed to survive and to continue gaining market share, while
cash-strapped private developers with high levels of leverage are likely to
struggle. COLI has been excellent in controlling construction costs and enjoys
the lowest funding costs in the industry thanks to its prudent balance sheet.
This absolute cost advantage enables COLI to have the highest core net profit
margin among its peers.
We also added to building materials companies in the property value chain.
Beijing Oriental Yuhong Waterproof Technology is a long-term market share
gainer amid fast consolidation in the waterproof industry. As the construction
downcycle goes on, hundreds of small building materials companies have exited
the market. Yuhong, however, is likely to maintain and expand its market
leading position. Meanwhile, its shares are trading well below intrinsic value
given the extreme bearish market sentiment towards the property sector,
presenting an attractive balance of risk and reward.
We have outlined our five largest holdings below.
Gearing
We continue to believe that the judicious use of gearing can be accretive to
long-term capital and income returns, allowing us the opportunity to
capitalise on the volatility in the Chinese market. Gearing is primarily
deployed using contracts for difference, which are relatively low-cost and
represent a flexible way of increasing investment exposure, along with a fixed
term loan. At the start of the period under review, net gearing was 21.1%
which rose to 25.0% by the end of September.
Outlook
After a spell of increased uncertainty over China’s growth trajectory as it
emerged from Covid lockdowns, the mood music has moved to a slightly more
positive tone in recent weeks. Regulatory concerns are now less relevant, and
the narrative again focuses more on growth. While a 5% annual GDP growth
target seems largely on track, we believe the current backdrop reflects a more
measured growth outlook going into 2024.
In the face of a problematic property market in China, the refinancing
conditions for property developers will likely remain challenging in the
near-term despite more supportive policies. However, this is not detrimental
to all property developers. While we do not expect a significant property
rebound given the structural challenges, home prices are showing signs of
resilience, especially in top tier cities. Ultimately, the existing divergence
between various developers could be magnified further. The indiscriminate
sell-off so far this year has caused some mispricing and this provides an
opportunity for active investors who can successfully identify the leading
players who are most likely to benefit from lower funding costs and can gain
market share, while cash-strapped developers struggle.
While economic challenges and geopolitical risks remain, policy direction
towards regulatory loosening is clear. We have already seen action taken to
boost consumer confidence, such as tax breaks on the purchase of electric
vehicles and lower mortgage requirements for home buyers. Although job and
wage cuts have clearly hurt consumer confidence, we have the sense that the
worst is behind us from our discussions with companies. Over the longer-term,
improved corporate earnings could be a key driver for investor confidence to
return.
China is at a different point in the economic cycle to many Western countries.
Rising interest rates and inflation in the West have meant tightening central
bank policies aimed at slowing economies down, whereas the opposite is the
case in China. Inflation has not been a problem, and the authorities are
taking a more stimulative approach to boost growth.
At the same time, valuations in the Chinese equity market – barring some
post-Covid reopening beneficiaries in the consumer discretionary space –
remain very compelling both in historic and absolute terms and compared to
some other major markets. The low level of valuations is despite a corporate
earnings outlook that compares well to most other large markets. Clearly, a
lot of pessimism over the economy appears priced in.
It is widely recognised that the long-term plan of the Chinese government is
to seek to reduce the economy’s reliance on investment and property and
pivot away from some of the country’s traditional growth drivers towards
high-end manufacturing and domestic consumption. The pace of innovation in
China remains strong, primarily led by private enterprises in sectors such as
industrials and health care. Globally, leading companies have emerged in areas
such as electric vehicles and renewable energy. These are factors contributing
to consolidation trends across a range of sectors, many of which remain very
fragmented. While overseas investors may focus on the impact on China of de-
globalisation and ‘near-shoring’ of industry, the corollary to this is an
increasing preference among Chinese consumers for Chinese brands, resulting in
domestic companies taking ever greater market share in what remains one of the
world’s largest markets.
We have spent much time discussing the economic backdrop in China, which has
clearly been challenging. What we feel is often missed are the stories of
great individual companies executing well in industries where they have strong
growth potential, but whose valuations are dragged down by the macro headlines
and the general negative sentiment that we have discussed above. We believe
that stock prices follow earnings in the long-term. Provided their earnings
growth comes through, the upside potential is significant. Our team on the
ground is focused on selecting the winners that will deliver, and that is
where we are directing the Company’s capital.
Dale Nicholls
Portfolio Manager
28 November 2023
Spotlight on the Top Five Holdings as at 30 September 2023
The top five holdings comprise 24.7% of the Company’s Net Assets.
Industry Communication Services
Tencent Holdings
% of Net Assets 10.1%
Tencent Holdings has a market leading position in social networking in China
and has enriched the user experience and benefits from a sizeable user base.
As China’s internet user growth slows and the internet industry focuses
increasingly on monetisation, Tencent is one of the best positioned companies
because of its very sticky user base and strong ecosystem which should lead to
overall margin expansion. An improving government tone towards mobile gaming
and an acceleration of new game approvals since early 2023 and strong domestic
game pipelines should underpin growth in Tencent’s gaming segment.
Industry Consumer Discretionary
Pony.ai (unlisted)
% of Net Assets 3.9%
The Toyota backed autonomous vehicle technology company, Pony.ai presents
significant growth potential as a market leader in an emerging new industry
that will transform traditional ways of transportation. The company plans to
commercialise autonomous driving for all sizes of vehicles and to operate on
both ridesharing and delivery service networks.
Industry Consumer Discretionary
Alibaba Group Holding
% of Net Assets 3.8%
Alibaba Group holds a leading position in the e-commerce market. Its core
e-commerce categories, including apparel and makeup, will benefit from a
recovery in consumption and pent-up demand in China. It has a comprehensive
ecosystem that has superior breadth and depth and is the foundation of its
loyal merchant and consumer base which supports its pricing power. Alibaba
announced in March 2023 that it will split the company into six businesses in
a move designed to unlock shareholder value and foster market competitiveness.
Industry Healthcare
Wuxi AppTec Group
% of Net Assets 3.5%
WuXi AppTec Group is a leading biotech contract research and manufacturing
(“CDMO/CMO”) company and one of the dominant global platforms in terms of
sales. It is a long-term compounder and is expected to benefit from global
pharmaceutical industry growth and continued research & development (R&D)
investment by pharmaceutical companies. The continued outsourcing trend from
in-house production to CDMO companies, particularly in China, also underpins
its position. WuXi has established a robust talent pool with strong technical
skills which has helped to drive a loyal and sticky client base.
Industry Consumer Discretionary
PDD Holdings
% of Net Assets 3.4%
PDD Holdings is the third largest e-commerce platform by GMV in China, with
outstanding efficiency in supply chain management and cost control. With its
unique traffic distribution method, PDD is able to offer the cheapest version
of products and continuously gains market share. The company is also expanding
internationally via a new shopping app called Temu by leveraging domestic
supply chains in order to meet offshore demand. PDD’s profit has recently
been impacted by its heavy investment during its user acquisition phase,
however, Temu offers great upside potential given the significant user growth
being seen.
Twenty Largest Holdings as at 30 September 2023
The Asset Exposures shown below measure the exposure of the Company’s
portfolio to market price movements in the shares, equity linked notes and
convertible bonds owned or in the shares underlying the derivative
instruments. The Fair Value is the value the portfolio could be sold for and
is the value shown on the Balance Sheet. Where a contract for difference
(“CFD”) is held, the fair value reflects the profit or loss on the
contract since it was opened and is based on how much the share price of the
underlying shares has moved.
Asset Exposure Fair
Value
£’000 % 1 £’000
Long Exposures – shares unless otherwise stated
Tencent Holdings (shares and long CFDs)
Internet, mobile and telecommunications service provider 114,086 10.1 63,568
Pony.ai (unlisted)
Developer of artificial intelligence and autonomous driving technology solutions 43,774 3.9 43,774
Alibaba Group Holding (shares and long CFD)
e-commerce group 43,596 3.8 20,175
WuXi AppTec Group (long CFDs)
Pharmaceutical, biopharmaceutical and medical device outsourcing provider 39,292 3.5 210
PDD Holdings (long CFD)
e-commerce group 38,981 3.4 (145)
DJI International (unlisted)
Manufacturer of drones 30,266 2.7 30,266
China Life Insurance (long CFDs)
Insurance company 29,533 2.6 444
Ping An Insurance Company of China (long CFD)
Provider of insurance, banking and investment products 29,355 2.6 (1,540)
Chime Biologics Convertible Bond (unlisted)
Contract Development and Manufacturing Organization 28,583 2.5 28,583
Venturous Holdings (unlisted)
Investment company 27,970 2.5 27,970
HollySys Automation Technologies
Provider of automation control system solutions 26,772 2.4 26,772
Hisense Home Appliances Group
Developer, manufacturer and distributor of household appliances 26,252 2.3 26,252
Crystal International Group
Clothing manufacturer 26,056 2.3 26,056
China Foods (shares and long CFD)
Processor and distributor of food and beverages 25,536 2.2 2,389
ByteDance (unlisted)
Technology company 25,411 2.2 25,411
ERA (shares and equity linked notes)
Manufacturer of plastic valves and fittings 23,066 2.0 23,066
Postal Savings Bank of China
Commercial retail bank 22,684 2.0 22,684
Sinotrans (shares and long CFDs)
Logistics, storage and terminal services provider 22,617 2.0 10,803
HUTCHMED China
Biopharmaceutical company 21,476 1.9 21,476
Autohome
Online portal for automobile buyers 19,692 1.7 19,692
--------------- --------------- ---------------
Twenty largest long exposures 664,998 58.6 417,906
Other long exposures 919,047 81.0 722,879
--------------- --------------- ---------------
Total long exposures before hedges (151 companies) 1,584,045 139.6 1,140,785
========= ========= =========
Less: hedging exposures
Hang Seng Index (future) (104,963) (9.2) 629
Hang Seng China Enterprises Index (future) (47,347) (4.2) 327
--------------- --------------- ---------------
Total hedging exposures (152,310) (13.4) 956
========= ========= =========
Total long exposures after the netting of hedges 1,431,735 126.2 1,141,741
========= ========= =========
Short exposures
Short CFDs (2 holdings) 13,656 1.2 (844)
--------------- --------------- ---------------
Gross Asset Exposure 2 1,445,391 127.4
========= =========
Portfolio Fair Value 3 1,140,897
Net current liabilities (excluding derivative instruments) (6,421)
---------------
Net Assets 1,134,476
=========
1 Asset Exposure is expressed as a percentage of Net Assets.
2 Gross Asset Exposure comprises market exposure to investments of
£1,147,456,000 plus market exposure to derivative instruments of
£297,935,000.
3 Portfolio Fair Value comprises investments of £1,147,456,000 plus
derivative assets of £3,739,000 less derivative liabilities of £10,298,000.
Interim Management Report
Unlisted Investments
The Company can invest up to 15% of its Net Assets plus Borrowings in unlisted
companies which carry on business, or have significant interests, in China.
The limit is applied at the time of purchase of the investment. The unlisted
space in China allows the Portfolio Manager to take advantage of the faster
growth trajectory of earlier stage companies before they potentially become
listed on the public markets. This can offer excellent opportunities for
patient and long-term investors.
As at 30 September 2023, the Company had 12.8% of Net Assets plus Borrowings
in six unlisted investments (31 March 2023: 13.6% of Net Assets plus
Borrowings in nine unlisted investments). In the reporting period, the
following companies listed on the Hong Kong Stock Exchange: Beisen on 13 April
2023; Cutia Therapeutics on 12 June 2023; and Tuhu Car on 26 September 2023.
The unlisted investments in the Company’s portfolio are assessed regularly
by Fidelity’s dedicated Fair Value Committee (“FVC”) with advice from
Kroll, a third-party valuation specialist, and also the Fidelity analysts who
look after these companies. In addition, Fidelity has an unlisted investments
specialist focused on Chinese unquoted companies. The FVC meets monthly to
consider the valuation of the unlisted investments. However, the unlisted
investments are monitored on a daily basis for trigger events such as funding
rounds or news of fundamentals which may require the FVC to adjust the
valuation price as soon as the relevant Fidelity analyst has been consulted.
Kroll undertake a detailed review of each of the unlisted investments on a
quarterly basis. The FVC provides regular updates to the Board so that it has
oversight of the valuation process. The Board also receives details of any
price changes made outside of the normal quarterly cycle.
Twice yearly, ahead of the Company’s interim and its year end, the Audit and
Risk Committee has meetings whereby it receives a detailed presentation from
the FVC, Kroll and Fidelity’s unlisted specialist in order to satisfy itself
that the unlisted investments are carried at an appropriate value at the
balance sheet date. The external Auditor attends the unlisted valuations
meeting held ahead of the Company’s year end.
The basis of the valuation of the unlisted investments is set out in Notes 2
(e) and 2 (l) of the Accounting Policies which can be found on pages 65 to 68
of the Annual Report for the year ended 31 March 2023.
Gearing
The Board continues to believe that the judicious use of gearing (a benefit of
the investment trust structure) can be accretive to long-term capital and
income returns, although being more than 100% invested does mean that the NAV
and share price may be more volatile and can accentuate losses in a falling
market. Net gearing at the period end was 25.0% compared to 21.1% as at 31
March 2023.
The Company renewed its loan facility with Scotiabank Europe PLC for
US$100,000,000 on 14 February 2023 for a period of one year at a fixed
interest annual rate of 6.335%. It is the Board’s intention not to renew
this facility at maturity.
Discount Management
The Board believes that investors are best served when the share price trades
close to its NAV per share. However, the Board recognises that the share price
is affected by the interaction of supply and demand in the market based on
investor sentiment towards China, as well as the performance of the
Company’s portfolio. A discount control mechanism is in place whereby the
Board seeks to maintain the Company’s discount in single digits in normal
market conditions. Until May 2023, shares repurchased were held in Treasury.
However, once shares held in Treasury equated to 15% of the issued share
capital, shares repurchased since then have been cancelled. Shareholders
authorised the Directors to buyback up to 14.99% of the Company’s shares at
the last Annual General Meeting.
To combat tricky and volatile market conditions during the reporting period,
the Board undertook active discount management, the primary purpose of which
was, and remains, the intent to reduce discount volatility. Despite this
intervention, the Company’s discount widened from 9.0% at the start of the
reporting period to end the period at 12.0%. Over the six months, the Board
authorised the repurchase of 11,801,337 shares into Treasury and for
cancellation at a cost of £25,895,000, representing 2.1% of the issued share
capital of the Company. These share repurchases have benefited remaining
shareholders as the NAV per share has been increased by purchasing shares at a
discount. Subsequent to the period end and up to latest practicable date, the
Company has repurchased 5,397,163 shares for cancellation.
Ongoing Charge
The Ongoing Charge (the costs of running the Company) for the six months ended
30 September 2023 was 0.99% (31 March 2023: 0.98%). The variable element of
the management fee was a charge of 0.20% (31 March 2023: 0.20%). Therefore,
the Ongoing Charge including the variable element for the reporting period was
1.19% (31 March 2023: 1.18%).
Board of Directors
In the announcement made by the Company on 20 July 2023 with the results of
its Annual General Meeting (“AGM”), it was noted that Gordon Orr received
less than 80% of the votes cast in favour of his re-election, which was
predominantly the result of a large shareholder’s view on his being over
boarded. Whilst it is felt that Mr Orr was able to devote, and was in fact
devoting, sufficient time to the business of the Company, following further
discussions since the AGM, the Board confirms that Mr Orr will step down from
one of his board positions by 1 January 2024. His number of directorships is
therefore expected to have reduced ahead of the Company’s next Annual
General Meeting.
Principal and Emerging Risks
The Board, with the assistance of the Manager (FIL Investments Services (UK)
Limited), has developed a risk matrix which, as part of the risk management
and internal controls process, which identifies the key existing and emerging
risks and uncertainties faced by the Company.
The Board considers that the principal risks and uncertainties faced by the
Company continue to fall into the following risk categories: geopolitical;
market and economic (including currency risk); operational (including those of
third-party service providers); investment performance (including gearing
risk); variable interest entity structures; climate change; discount
management; unlisted securities; environmental, social and governance (ESG);
key person; cybercrime and information security; business continuity; and tax
and regulatory risks. Information on each of these risks is given in the
Strategic Report section of the Annual Report on pages 28 to 32 for the year
ended 31 March 2023 which can be found on the Company’s pages of the
Manager’s website at www.fidelity.co.uk/china.
While the principal risks and uncertainties are the same as those at the last
year end, the uncertainty continues to be heightened by the ongoing global
implications of the Russia and Ukraine conflict, conflict in the Middle East,
continuing tensions between China and the US, tensions with Taiwan. Western
sanctions on China on capital and trade flows and from the economic outlook
remaining challenging. The quantum of risks continues to change and the Board
remains vigilant in monitoring the risks.
Climate change continues to be a key emerging issue, as well as a principal
risk, confronting asset managers and their investors. The Board notes that the
Manager has integrated ESG considerations, including climate change, into the
Company’s investment process. The Board will continue to monitor how this
may impact the Company as a risk to investment valuations and potentially to
shareholder returns.
Investors should be prepared for market fluctuations and remember that holding
shares in the Company should be considered to be a long-term investment. Risks
are partially mitigated by the investment trust structure of the Company which
means that no forced sales need to take place to deal with any redemptions.
Therefore, investments in the Company’s portfolio can be held over a longer
time horizon.
The Manager has appropriate business continuity and operational plans in place
to ensure the continued provision of services, including investment team key
activities of portfolio managers, analysts and trading/support functions. It
reviews its operational resilience strategies on an ongoing basis and
continues to take all reasonable steps in meeting its regulatory obligations
and to assess operational risks, the ability to continue operating and the
steps it needs to take to serve and support its clients, including the Board.
The Company’s other third-party service providers also have similar measures
to ensure that business disruption is kept to a minimum.
Transactions with the Manager and Related Parties
The Manager has delegated the Company’s investment management to FIL
Investment Management (Hong Kong) Limited and the role of company secretary to
FIL Investments International. Transactions with the Manager and related party
transactions with the Directors are disclosed in Note 15 to the Financial
Statements below.
Going Concern Statement
The Directors have considered the Company’s investment objective, risk
management policies, liquidity risk, credit risk, capital management policies
and procedures, the nature of its portfolio and its expenditure and cash flow
projections. The Directors, having considered the liquidity of the Company’s
portfolio of investments (being mainly securities which are readily
realisable), the projected income and expenditure and the loan facility
agreement, are satisfied that the Company is financially sound and has
adequate resources to meet all of its liabilities and ongoing expenses and can
continue in operational existence for a period of at least twelve months from
the date of this Half-Yearly Report.
This conclusion takes into account the Board’s assessment of the ongoing
risks as outlined above.
Accordingly, the Financial Statements of the Company have been prepared on a
going concern basis.
By Order of the Board
FIL Investments International
28 November 2023
Directors’ Responsibility Statement
The Disclosure and Transparency Rules (“DTR”) of the UK Listing Authority
require the Directors to confirm their responsibilities in relation to the
preparation and publication of the Interim Management Report and Financial
Statements.
The Directors confirm to the best of their knowledge that:
a) the condensed set of Financial Statements contained within this
Half-Yearly Report has been prepared in accordance with the International
Accounting Standards 34: Interim Financial Reporting; and
b) the Portfolio Manager’s Half-Yearly Review and the Interim Management
Report above, include a fair review of the information required by DTR 4.2.7R
and 4.2.8R.
The Half-Yearly Report has not been audited or reviewed by the Company’s
Independent Auditor.
The Half-Yearly Report was approved by the Board on 28 November 2023 and the
above responsibility statement was signed on its behalf by Mike Balfour,
Chairman.
FINANCIAL STATEMENTS
Income Statement for the six months ended 30 September 2023
Six months ended 30 September 2023 Year ended 31 March 2023 Six months ended 30 September 2022
unaudited audited unaudited
Notes Revenue Capital Total Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
Revenue
Investment income 4 22,274 – 22,274 32,704 – 32,704 27,786 – 27,786
Derivative income 4 9,709 – 9,709 11,566 – 11,566 9,925 – 9,925
Other income 4 800 – 800 409 – 409 145 – 145
--------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total income 32,783 – 32,783 44,679 – 44,679 37,856 – 37,856
========= ========= ========= ========= ========= ========= ========= ========= =========
Losses on investments at fair value through profit or loss – (119,622) (119,622) – (6,912) (6,912) – (52,166) (52,166)
(Losses)/gains on derivative instruments – (36,505) (36,505) – 14,971 14,971 – (88,129) (88,129)
Foreign exchange (losses)/gains – (1,975) (1,975) – 8,167 8,167 – 13,614 13,614
Foreign exchange losses on bank loans – (1,013) (1,013) – (4,814) (4,814) – (13,800) (13,800)
--------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total income and (losses)/gains 32,783 (159,115) (126,332) 44,679 11,412 56,091 37,856 (140,481) (102,625)
========= ========= ========= ========= ========= ========= ========= ========= =========
Expenses
Investment management fees 5 (1,293) (5,056) (6,349) (3,012) (11,715) (14,727) (1,544) (6,002) (7,546)
Other expenses (669) (3) (672) (1,097) (4) (1,101) (486) – (486)
--------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- ---------------
Profit/(loss) before finance costs and taxation 30,821 (164,174) (133,353) 40,570 (307) 40,263 35,826 (146,483) (110,657)
Finance costs 6 (3,426) (10,279) (13,705) (3,956) (11,869) (15,825) (1,256) (3,770) (5,026)
--------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- ---------------
Profit/(loss) before taxation 27,395 (174,453) (147,058) 36,614 (12,176) 24,438 34,570 (150,253) (115,683)
Taxation 7 (1,177) 383 (794) (1,149) – (1,149) (1,476) 433 (1,043)
--------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- ---------------
Profit/(loss) after taxation for the period 26,218 (174,070) (147,852) 35,465 (12,176) 23,289 33,094 (149,820) (116,726)
========= ========= ========= ========= ========= ========= ========= ========= =========
Earnings/(loss) per ordinary share 8 5.43p (36.06p) (30.63p) 7.05p (2.42p) 4.63p 6.45p (29.22p) (22.77p)
========= ========= ========= ========= ========= ========= ========= ========= =========
The Company does not have any income or expenses that are not included in the
profit/(loss) after taxation for the period. Accordingly, the profit/(loss)
after taxation for the period is also the total comprehensive income for the
period and no separate Statement of Comprehensive Income has been presented.
The total column of this statement represents the Income Statement of the
Company. The revenue and capital columns are supplementary and presented for
information purposes as recommended by the Statement of Recommended Practice
issued by the AIC.
All the profit/(loss) and total comprehensive income is attributable to the
equity shareholders of the Company. There are no minority interests.
No operations were acquired or discontinued in the period and all items in the
above statement derive from continuing operations.
Statement of Changes in Equity for the six months ended 30 September 2023
Notes Share Share Capital Other Capital Revenue Total
capital premium redemption reserve reserve reserve equity
£’000 account reserve £’000 £’000 £’000 £’000
£’000 £’000
Six months ended 30 September 2023 (unaudited)
Total equity at 31 March 2023 5,710 211,569 917 186,794 877,782 55,649 1,338,421
Repurchase of ordinary shares into Treasury 13 – – – (6,965) – – (6,965)
Repurchase of ordinary shares for cancellation 13 (89) – 89 (18,930) – – (18,930)
(Loss)/profit after taxation for the period – – – – (174,070) 26,218 (147,852)
Dividend paid to shareholders 9 – – – – – (30,198) (30,198)
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total equity at 30 September 2023 5,621 211,569 1,006 160,899 703,712 51,669 1,134,476
========= ========= ========= ========= ========= ========= =========
Year ended 31 March 2023 (audited)
Total equity at 31 March 2022 5,710 211,569 917 244,043 889,958 48,424 1,400,621
Repurchase of ordinary shares into Treasury 13 – – – (57,249) – – (57,249)
(Loss)/profit after taxation for the year – – – – (12,176) 35,465 23,289
Dividend paid to shareholders 9 – – – – – (28,240) (28,240)
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total equity at 31 March 2023 5,710 211,569 917 186,794 877,782 55,649 1,338,421
========= ========= ========= ========= ========= ========= =========
Six months ended 30 September 2022 (unaudited)
Total equity at 31 March 2022 5,710 211,569 917 244,043 889,958 48,424 1,400,621
Repurchase of ordinary shares into Treasury 13 – – – (23,532) – – (23,532)
(Loss)/profit after taxation for the period – – – – (149,820) 33,094 (116,726)
Dividend paid to shareholders 9 – – – – – (28,240) (28,240)
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total equity at 30 September 2022 5,710 211,569 917 220,511 740,138 53,278 1,232,123
========= ========= ========= ========= ========= ========= =========
Balance Sheet as at 30 September 2023
Company number 7133583
Notes 30.09.23 31.03.23 30.09.22
unaudited audited unaudited
£’000 £’000 £’000
Non-current assets
Investments at fair value through profit or loss 10 1,147,456 1,318,764 1,256,604
--------------- --------------- ---------------
Current assets
Derivative instruments 10 3,739 22,313 15,978
Amounts held at futures clearing houses and brokers 24,438 34,813 66,612
Other receivables 11 10,390 11,939 44,391
Cash at bank 51,258 72,943 11,551
--------------- --------------- ---------------
89,825 142,008 138,532
========= ========= =========
Current liabilities
Derivative instruments 10 (10,298) (20,892) (34,150)
Bank loan (81,870) (80,857) (89,843)
Other payables 12 (10,637) (20,602) (37,900)
Bank overdraft – – (1,120)
--------------- --------------- ---------------
(102,805) (122,351) (163,013)
--------------- --------------- ---------------
Net current (liabilities)/assets (12,980) 19,657 (24,481)
========= ========= =========
Net assets 1,134,476 1,338,421 1,232,123
========= ========= =========
Equity attributable to equity shareholders
Share capital 13 5,621 5,710 5,710
Share premium account 211,569 211,569 211,569
Capital redemption reserve 1,006 917 917
Other reserve 160,899 186,794 220,511
Capital reserve 703,712 877,782 740,138
Revenue reserve 51,669 55,649 53,278
--------------- --------------- ---------------
Total equity 1,134,476 1,338,421 1,232,123
========= ========= =========
Net asset value per ordinary share 14 238.07p 274.08p 244.47p
========= ========= =========
Cash Flow Statement for the six months ended 30 September 2023
Six months Year Six months
ended ended ended
30 September 31 March 30 September
2023 2023 2022
unaudited audited unaudited
£’000 £’000 £’000
Operating activities
Cash inflow from investment income 18,806 30,352 24,344
Cash inflow from derivative income 8,129 11,484 9,648
Cash inflow from other income 800 409 145
Cash outflow from Directors' fees (125) (195) (95)
Cash outflow from other payments (7,337) (15,638) (8,143)
Cash outflow from the purchase of investments (315,682) (429,715) (215,661)
Cash outflow from the purchase of derivatives (1,910) (7,957) (3,966)
Cash outflow from the settlement of derivatives (152,776) (485,760) (215,801)
Cash inflow from the sale of investments 356,034 480,407 231,473
Cash inflow from the settlement of derivatives 132,953 510,263 189,426
Cash inflow/(outflow) from amounts held at futures clearing houses and brokers 10,375 (2,593) (34,392)
--------------- --------------- ---------------
Net cash inflow/(outflow) from operating activities before servicing of finance 49,267 91,057 (23,022)
========= ========= =========
Financing activities
Cash outflow from bank loan, collateral and overdraft interest paid (2,561) (2,242) (1,190)
Cash outflow from CFD interest paid (11,245) (12,099) (2,741)
Cash outflow from short CFD dividends paid – (254) (254)
Cash outflow from the repurchase of ordinary shares into Treasury (7,095) (57,119) (21,409)
Cash outflow from the repurchase of ordinary shares for cancellation (17,878) – –
Cash outflow from dividends paid to shareholders (30,198) (28,240) (28,240)
--------------- --------------- ---------------
Cash outflow from financing activities (68,977) (99,954) (53,834)
========= ========= =========
Decrease in cash at bank (19,710) (8,897) (76,856)
Cash at bank at the start of the period 72,943 73,673 73,673
Effect of foreign exchange movements (1,975) 8,167 13,614
--------------- --------------- ---------------
Cash at bank at the end of the period 51,258 72,943 10,431
========= ========= =========
Represented by:
Cash at bank 51,258 72,943 11,551
Bank overdraft – – (1,120)
--------------- --------------- ---------------
51,258 72,943 10,431
========= ========= =========
Notes to the Financial Statements
1 Principal Activity
Fidelity China Special Situations PLC is an Investment Company incorporated in
England and Wales with a premium listing on the London Stock Exchange. The
Company’s registration number is 7133583 and its registered office is Beech
Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP. The Company
has been approved by HM Revenue & Customs as an Investment Trust under Section
1158 of the Corporation Tax Act 2010 and intends to conduct its affairs so as
to continue to be approved.
2 Publication of Non-statutory Accounts
The Financial Statements in this Half-Yearly Report have not been audited or
reviewed by the Company’s Independent Auditor and do not constitute
statutory accounts as defined in section 434 of the Companies Act 2006 (the
“Act”). The financial information for the year ended 31 March 2023 is
extracted from the latest published Financial Statements of the Company. Those
Financial Statements were delivered to the Registrar of Companies and included
the Independent Auditor’s Report which was unqualified and did not contain a
statement under either section 498(2) or 498(3) of the Act.
3 ACCOUNTING POLICIES
(i) Basis of Preparation
These Half-Yearly Financial Statements have been prepared in accordance with
UK-adopted International Accounting Standard 34: Interim Financial Reporting
and use the same accounting policies as set out in the Company’s Annual
Report and Financial Statements for the year ended 31 March 2023. Those
Financial Statements were prepared in accordance with UK-adopted International
Accounting Standards (“IFRS”) in conformity with the requirements of the
Companies Act 2006, IFRC interpretations and, as far as it is consistent with
IFRS, the Statement of Recommended Practice: Financial Statements of
Investment Trust Companies and Venture Capital Trusts (“SORP”) issued by
the Association of Investment Companies (“AIC”) in July 2022.
(ii) Going Concern
The Directors have a reasonable expectation that the Company has adequate
resources to continue in operational existence for a period of at least twelve
months from the date of approval of these Financial Statements. Accordingly,
the Directors consider it appropriate to adopt the going concern basis of
accounting in preparing these Financial Statements. This conclusion also takes
into account the Board’s assessment of the ongoing risks as disclosed in the
Going Concern Statement above.
4 Income
Six months Year Six months
ended ended ended
30.09.23 31.03.23 30.09.22
unaudited audited unaudited
£’000 £’000 £’000
Investment income
Overseas dividends 22,274 31,949 27,030
Overseas scrip dividends – 755 756
--------------- --------------- ---------------
22,274 32,704 27,786
========= ========= =========
Derivative income
Dividends received on long CFDs 9,405 11,282 9,849
Interest received on CFDs 304 284 76
--------------- --------------- ---------------
9,709 11,566 9,925
========= ========= =========
Other income
Interest received on collateral and deposits 800 409 145
--------------- --------------- ---------------
Total income 32,783 44,679 37,856
========= ========= =========
Special dividends of £1,458,000 have been recognised in capital during the
period (year ended 31 March 2023: £1,155,000 and six months ended 30
September 2022: £nil).
5 Investment Management Fees
Revenue Capital Total
£’000 £’000 £’000
Six months ended 30 September 2023 (unaudited)
Investment management fee – base 1,293 3,879 5,172
Investment management fee – variable – 1,177 1,177
--------------- --------------- ---------------
1,293 5,056 6,349
========= ========= =========
Year ended 31 March 2023 (audited)
Investment management fee – base 3,012 9,037 12,049
Investment management fee – variable – 2,678 2,678
--------------- --------------- ---------------
3,012 11,715 14,727
========= ========= =========
Six months ended 30 September 2022 (unaudited)
Investment management fee – base 1,544 4,632 6,176
Investment management fee – variable – 1,370 1,370
--------------- --------------- ---------------
1,544 6,002 7,546
========= ========= =========
FIL Investment Services (UK) Limited (a Fidelity group company) is the
Company’s Alternative Investment Fund Manager (“the Manager”) and has
delegated portfolio management to FIL Investment Management (Hong Kong)
Limited (“the Investment Manager”).
The base investment management fee for the period from 1 April to 30 June 2023
was charged at an annual rate of 0.90% on the first £1.5 billion of net
assets, reducing to 0.70% of net assets over £1.5 billion. Since 1 July 2023,
it has been charged at an annual reduced rate of 0.85% on the first £1.5
billion of net assets and has remained unchanged at 0.70% on net assets over
£1.5 billion.
In addition, there is a +/-0.20% variable fee based on the Company’s NAV per
share performance relative to the Company’s Benchmark Index measured daily
over a three-year rolling basis. In the event of outperformance against the
Benchmark Index, the maximum fee that the Company would pay overall is 1.05%
(1.10% until 30 June 2023) on net assets up to £1.5 billion and reducing to
0.85% (0.90% until 30 June 2023) on net assets over £1.5 billion. If the
Company underperforms, then the overall fee can fall as low as 0.65% (0.70%
until 30 June 2023) on net assets up to £1.5 billion and reducing to 0.50% on
net assets over £1.5 billion.
Fees are payable monthly in arrears and are calculated on a daily basis. The
base investment management fee has been allocated 75% to capital reserve in
accordance with the Company’s accounting policies.
6 Finance Costs
Revenue Capital Total
£’000 £’000 £’000
Six months ended 30 September 2023 (unaudited)
Interest on bank loan and overdrafts 642 1,927 2,569
Interest paid on CFDs 2,784 8,352 11,136
Dividends paid on short CFDs – – –
--------------- --------------- ---------------
3,426 10,279 13,705
========= ========= =========
Year ended 31 March 2023 (audited)
Interest on bank loan and overdrafts 663 1,989 2,652
Interest paid on CFDs 3,230 9,689 12,919
Dividends paid on short CFDs 63 191 254
--------------- --------------- ---------------
3,956 11,869 15,825
========= ========= =========
Six months ended 30 September 2022 (unaudited)
Interest on bank loan, collateral and overdrafts 309 927 1,236
Interest paid on CFDs 884 2,652 3,536
Dividends paid on short CFDs 63 191 254
--------------- --------------- ---------------
1,256 3,770 5,026
========= ========= =========
Finance costs have been allocated 75% to capital reserve in accordance with
the Company’s accounting policies.
7 Taxation
Revenue Capital Total
£’000 £’000 £’000
Six months ended 30 September 2023 (unaudited)
UK corporation tax 383 (383) –
Overseas taxation charge 794 – 794
--------------- --------------- ---------------
Taxation charge for the period 1,177 (383) 794
========= ========= =========
Year ended 31 March 2023 (audited)
UK corporation tax – – –
Overseas taxation charge 1,149 – 1,149
--------------- --------------- ---------------
Taxation charge for the year 1,149 – 1,149
========= ========= =========
Six months ended 30 September 2023 (unaudited)
UK corporation tax 433 (433) –
Overseas taxation charge 1,043 – 1,043
--------------- --------------- ---------------
Taxation charge for the period 1,476 (433) 1,043
========= ========= =========
8 Earnings/(Loss) per Ordinary Share
Six months Year Six months
ended ended ended
30.09.23 31.03.23 30.09.22
unaudited audited unaudited
Revenue earnings per ordinary share 5.43p 7.05p 6.45p
Capital loss per ordinary share (36.06p) (2.42p) (29.22p)
--------------- --------------- ---------------
Total (loss)/earnings per ordinary share (30.63p) 4.63p (22.77p)
========= ========= =========
The earnings/(loss) per ordinary share is based on the profit/(loss) after
taxation for the period divided by the weighted average number of ordinary
shares held outside Treasury during the period, as shown below:
£’000 £’000 £’000
Revenue profit after taxation for the period 26,218 35,465 33,094
Capital loss after taxation for the period (174,070) (12,176) (149,820)
--------------- --------------- ---------------
Total (loss)/profit after the taxation for the period (147,852) 23,289 (116,726)
========= ========= =========
Number Number Number
Weighted average number of ordinary shares held outside of Treasury 482,649,498 503,045,428 512,714,728
========== ========== ==========
9 Dividend Paid to Shareholders
Six months Year Six months
ended ended ended
30.09.23 31.03.23 30.09.22
unaudited audited unaudited
£’000 £’000 £’000
Dividend of 6.25 pence per ordinary share paid for the year ended 31 March 2023 30,198 – –
Dividend of 5.50 pence per ordinary share paid for the year ended 31 March 2022 – 28,240 28,240
--------------- --------------- ---------------
30,198 28,240 28,240
========= ========= =========
No dividend has been declared for the six months ended 30 September 2023 (six
months ended 30 September 2022: £nil).
10 Fair Value Hierarchy
The Company is required to disclose the fair value hierarchy that classifies
its financial instruments measured at fair value at one of three levels,
according to the relative reliability of the inputs used to estimate the fair
values.
Classification Input
Level 1 Valued using quoted prices in active markets for identical assets
Level 2 Valued by reference to inputs other than quoted prices included in level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly
Level 3 Valued by reference to valuation techniques using inputs that are not based on observable market data
Categorisation within the hierarchy has been determined on the basis of the
lowest level input that is significant to the fair value measurement of the
relevant asset. The valuation techniques used by the Company are as disclosed
in the Company’s Annual Report for the year ended 31 March 2023 (Accounting
Policies Notes 2 (e), (l) and (m) on pages 65 to 68). The table below sets out
the Company’s fair value hierarchy:
30 September 2023 (unaudited) Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Financial assets at fair value through profit or loss
Investments 915,517 45,802 186,137 1,147,456
Derivative instrument assets 956 2,783 – 3,739
--------------- --------------- --------------- ---------------
916,473 48,585 186,137 1,151,195
========= ========= ========= =========
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities – (10,298) – (10,298)
--------------- --------------- --------------- ---------------
Financial liabilities at fair value
Bank loan – (81,790) – (81,790)
========= ========= ========= =========
31 March 2023 (audited) Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Financial assets at fair value through profit or loss
Investments 1,081,458 44,428 192,878 1,318,764
Derivative instrument assets 2,492 19,821 – 22,313
--------------- --------------- --------------- ---------------
1,083,950 64,249 192,878 1,341,077
========= ========= ========= =========
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities (7,271) (13,621) – (20,892)
--------------- --------------- --------------- ---------------
Financial liabilities at fair value
Bank loan – (81,092) – (81,092)
========= ========= ========= =========
30 September 2022 (unaudited) Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Financial assets at fair value through profit or loss
Investments 981,880 45,681 229,043 1,256,604
Derivative instrument assets 8,453 7,525 – 15,978
--------------- --------------- --------------- ---------------
990,333 53,206 229,043 1,272,582
========= ========= ========= =========
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities – (32,930) (1,220) (34,150)
--------------- --------------- --------------- ---------------
Financial liabilities at fair value
Bank loan – (89,421) – (89,421)
========= ========= ========= =========
The table below sets out the movements in level 3 investments during the
period:
30.09.23 31.03.23 30.09.22
unaudited audited unaudited
£’000 £’000 £’000
Level 3 investments at the beginning of the period 192,878 194,650 194,650
Transfers into level 3 at cost 1 17,316 – –
Transfers out of level 3 – at cost 2 (11,758) (9,971) (9,971)
Unrealised gains recognised in the Income Statement (12,299) 8,199 44,364
--------------- --------------- ---------------
Level 3 investments at the end of the period 186,137 192,878 229,043
========= ========= =========
1 Financial instruments are transferred into level 3 on the date they are
suspended, delisted or if they have not traded for thirty days.
2 Financial instruments are transferred out of level 3 when they become
listed.
No income has been recognised from the unlisted investments during the period
(year ended 31 March 2023 and six months ended 30 September 2022: £nil). No
additional disclosures have been made in respect of the unlisted investments
as the underlying financial information is not publicly available.
11 Other Receivables
30.09.23 31.03.23 30.09.22
unaudited audited unaudited
£’000 £’000 £’000
Amounts receivable on settlement of derivatives 3,788 10,135 639
Securities sold for future settlement 703 148 40,746
Accrued income 5,768 1,513 2,691
Taxation recoverable 12 13 225
Other receivables 119 130 90
--------------- --------------- ---------------
10,390 11,939 44,391
========= ========= =========
12 Other Payables
30.09.23 31.03.23 30.09.22
unaudited audited unaudited
£’000 £’000 £’000
Amounts payable on settlement of derivatives 5,175 4,731 31,855
Securities purchased for future settlement 1,624 12,402 1,213
Investment management fees payable 974 1,266 1,206
Accrued expenses 944 1,096 551
Amounts payable for the cancellation of shares 1,052 – –
Amounts payable for the repurchase of shares – 130 2,123
Finance costs payable 868 977 952
--------------- --------------- ---------------
10,637 20,602 37,900
========= ========= =========
13 Share Capital
30 September 2023 31 March 2023 30 September 2022
unaudited audited unaudited
Number of £’000 Number of £’000 Number of £’000
shares shares shares
Issued, allotted and fully paid
Ordinary shares of 1 pence each held outside of Treasury
Beginning of the period 488,325,628 4,884 513,957,409 5,140 513,957,409 5,140
Ordinary shares repurchased into Treasury (2,900,696) (29) (25,631,781) (256) (9,953,633) (100)
Ordinary shares repurchased for cancellation (8,900,641) (89) – – – –
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
End of the period 476,524,291 4,766 488,325,628 4,884 504,003,776 5,040
========== ========== ========== ========== ========== ==========
Ordinary shares of 1 pence each held in Treasury*
Beginning of the period 82,728,852 826 57,097,071 570 57,097,071 570
Ordinary shares repurchased into Treasury 2,900,696 29 25,631,781 256 9,953,633 100
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
End of the period 85,629,548 855 82,728,852 826 67,050,704 670
========== ========== ========== ========== ========== ==========
Total share capital 5,621 5,710 5,710
========== ========== ==========
* The ordinary shares held in Treasury carry no rights to vote, to receive a
dividend or to participate in a winding up of the Company.
During the period, the Company repurchased 2,900,696 (year ended 31 March
2023: 25,631,781 and six months ended 30 September 2022: 9,953,633) ordinary
shares into Treasury. The cost of repurchasing these shares of £6,965,000
(year ended 31 March 2023: £57,249,000 and six months ended 30 September
2022: £23,532,000) was charged to the Other Reserve.
The Company also repurchased 8,900,641 (year ended 31 March 2023 and six
months ended 30 September 2022: nil shares) ordinary shares for cancellation.
The cost of repurchasing these shares of £18,930,000 (year ended 31 March
2023 and six months ended 30 September 2022: £nil) was charged to the Other
Reserve.
14 Net Asset Value per Ordinary Share
The calculation of the net asset value per ordinary share is based on the
following:
30.09.23 31.03.23 30.09.22
unaudited audited unaudited
Net assets £1,134,476,000 £1,338,421,000 £1,232,123,000
Ordinary shares held outside of Treasury 476,524,291 488,325,628 504,003,776
Net asset value per ordinary share 238.07p 274.08p 244.47p
========= ========= =========
It is the Company’s policy that shares held in Treasury will only be
reissued at net asset value per ordinary share or at a premium to net asset
value per ordinary share and, therefore, shares held in Treasury have no
dilutive effect.
15 Transactions with the Managers and Related Parties
FIL Investment Services (UK) Limited is the Company’s Alternative Investment
Fund Manager and has delegated portfolio management to FIL Investment
Management (Hong Kong) Limited. Both companies are Fidelity group companies.
Details of the current fee arrangements are given in Note 5 above. During the
period, management fees of £6,349,000 (year ended 31 March 2023: £14,727,000
and six months ended 30 September 2022: £7,546,000) were payable to Fidelity.
Fidelity also provides the Company with marketing services. The total amount
payable for these services was £132,000 (year ended 31 March 2023: £263,000
and six months ended 30 September 2022: £58,000). Amounts payable at the
Balance Sheet date are included in other payables and are disclosed in Note 12
above.
At the date of this report, the Board consisted of six non-executive Directors
(as shown in the Half-Yearly Report) all of whom are considered to be
independent by the Board. None of the Directors has a service contract with
the Company.
The Chairman receives an annual fee of £52,000, the Audit and Risk Committee
Chairman receives an annual fee of £43,500, the Senior Independent Director
receives an annual fee of £41,000 and each other Director receives an annual
fee of £34,500. The following members of the Board hold ordinary shares in
the Company at the date of this report: Mike Balfour 65,000 shares, Alastair
Bruce 43,800 shares, Vanessa Donegan 10,000 shares, Georgina Field 2,250
shares, Gordon Orr nil shares and Edward Tse nil shares.
The financial information contained in this Half-Yearly Results Announcement
does not constitute statutory accounts as defined in section 435 of the
Companies Act 2006. The financial information for the six months ended 30
September 2023 and 30 September 2022 has not been audited or reviewed by the
Company’s Independent Auditor.
The information for the year ended 31 March 2023 has been extracted from the
latest published audited financial statements, which have been filed with the
Registrar of Companies, unless otherwise stated. The report of the Auditor on
those financial statements contained no qualification or statement under
sections 498(2) or (3) of the Companies Act 2006.
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on the Company's website (or any other website) is
incorporated into, or forms part of, this announcement.
A copy of the Half-Yearly Report will shortly be submitted to the National
Storage Mechanism and will be available for inspection at
www.morningstar.co.uk/uk/NSM
The Half-Yearly Report will also be available on the Company's website at
www.fidelity.co.uk/china where up to date information on the Company,
including daily NAV and share prices, factsheets and other information can
also be found.
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