Interim / Quarterly Report • Dec 14, 2020
Interim / Quarterly Report
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Half-Yearly Report for the 6 months ended 30 September 2020 The Company was launched to offer to investors who are building a diversified portfolio a direct exposure to China, recognising the size and growing importance of China within the world economy and its weighting within global stock market indices.
The investment objective of the Company is to achieve long-term capital growth from an actively managed portfolio made up primarily of securities issued by companies listed in China and Chinese companies listed elsewhere. The Company may also invest in listed companies with significant interests in China.
Read more page 04
| At a Glance | 02 |
|---|---|
| Financial Highlights | 03 |
| Portfolio Manager's Half-Yearly Review | 04 |
| Interim Management Report and Directors' Responsibility Statement |
10 |
| Top 5 Holdings | 13 |
| Twenty Largest Holdings | 14 |
| Income Statement | 18 |
|---|---|
| Statement of Changes in Equity | 20 |
| Balance Sheet | 22 |
| Cash Flow Statement | 23 |
| Notes to the Financial Statements | 24 |
| Glossary to the Half-Yearly Report | 34 |
|---|---|
| Shareholder Information | 39 |
| Directory | 41 |
DIRECTORS' REPORTS
Six months ended 30 September 2020
+51.1%
(30 September 2019: -5.9%)
Share Price total return1, 2
+56.2%
(30 September 2019: -6.0%)
1 Includes reinvested income.
Equity Shareholders' Funds
Capital Structure Ordinary Shares of 1 penny held outside Treasury
515,463,483
The Portfolio Manager will focus on identifying companies which are most likely to benefit from China's growth and changing economy.
The Company is not restricted in terms of size or industry of companies included in the portfolio and may invest in unlisted securities.
The Company may also invest into other transferable securities, collective investment schemes, money market instruments, cash and deposits and is also able to use derivatives and bank borrowing for gearing purposes and efficient portfolio management.
The Company operates a variable management fee arrangement which is calculated by referencing performance relative to the MSCI China Index (in sterling terms).
| 30 September 2020 |
31 March 2020 |
|
|---|---|---|
| Assets | ||
| Gross Asset Exposure | £2,284.5m | £1,594.2m |
| Net Assets | £1,813.2m | £1,273.0m |
| Gross Gearing1,2 | 26.0% | 25.2% |
| Net Gearing1,2 | 21.8% | 23.2% |
| Net Asset Value ("NAV") per Ordinary Share2 | 351.76p | 236.27p |
| Number of Ordinary Shares held outside Treasury | 515,463,483 | 538,809,043 |
| Share Price and Discount data | ||
| Share Price at period/year end | 332.00p | 216.00p |
| Share Price: period/year high | 332.00p | 253.00p |
| Share Price: period/year low | 212.00p | 185.00p |
| Discount at period/year end2 | 5.6% | 8.6% |
| Discount: period/year high | 13.2% | 17.7% |
| Discount: period/year low | 5.3% | 5.9% |
| Earnings for the six months ended 30 September – | 2020 | 2019 |
| see pages 18 and 19 | ||
| Revenue Earnings per Ordinary Share2,3 | 4.55p | 4.24p |
| Capital Earnings/(Loss) per Ordinary Share2,3 | 114.20p | (19.36p) |
| Total Earnings/(Loss) per Ordinary Share2,3 | 118.75p | (15.12p) |
| Ongoing Charges for the six months ended 30 September2,4 | 0.98% | 0.98% |
| Ongoing Charges including Variable Management Fee for the six months ended 30 September 2,4 |
0.98% | 0.78% |
1 Defined in the Glossary to the Half-Yearly Report on page 36.
2 Alternative Performance Measures.
3 Based on the weighted average number of ordinary shares held outside Treasury during the period.
4 Ongoing charges (excluding finance costs and taxation) expressed as a percentage of the average Net Asset Values for the period (prepared in accordance with methodology recommended by the Association of Investment Companies).
DIRECTORS' REPORTS
Sources: Fidelity and Datastream Past performance is not a guide to future returns
Over the reporting period from 1 April 2020 to 30 September 2020, the Company's share price rose by 56.2%, while the MSCI China Index (the Company's Benchmark Index) rose by 24.4%. The Company's NAV rose by 51.1% (all performance data on a total return basis).
Among the greatest portfolio beneficiaries in the period under review were consumerrelated stocks. The Company's sizeable position in China MeiDong Auto Holdings was well rewarded in an environment which played to luxury brands (in China MeiDong's case, BMW, Lexus and Porsche), after-sales services and generally improving car sales' margins. In addition, exposure to Yadea Group Holdings, the largest two-wheeler e-bike manufacturer in China with around 25% market share, also delivered strong results. Upcoming new regulation in the e-bike market is driving replacement activity and COVID-19 has led to a shift away from public transport. Industry leader Yadea Group is positioned well to benefit from industry consolidation with its innovative and expanding product line-up.
In the materials sector, SKSHU Paint Company, one of China's largest paint manufacturers, was also amongst the top portfolio contributors. Products include exterior architectural coating, interior household paint products and waterproofing materials. The paint business is an attractive industry, with solid margins, robust returns on capital and strong cash flow. Our participation in KE Holdings' initial public offering ("IPO") added value, with the company benefiting from expectations of market share gains through its franchise model and its integrated online and offline resource network. This leading Chinese property brokerage platform has strong pricing power as a result
of its quality standards, a healthy future return profile and strong cash flow generation.
Conversely, not owning Meituan Dianping and JD.com negatively impacted relative returns, with both companies, which are well represented in the Index, continuing to perform well over the review period. Neither name appears in the portfolio quite simply because I think there are better opportunities from a risk and reward perspective elsewhere. Among the financial holdings, China Pacific Insurance Group detracted from returns as concerns over its recovery period and the turnover impact of COVID-19 continued to impact performance negatively.
My focus continues to be on the underlying value of companies assessed by their growth prospects, underlying competitive strengths and the quality of management teams. This has led to a bias towards smaller companies. I continue to believe that as long as these companies can execute and deliver on their strategies and grow earnings over the midterm, this should be reflected in their share prices. I am pleased to see this is currently being reflected in the strong performance of the Company's NAV. That said, it must be noted that this bias was detrimental to performance earlier in the year and over the previous year. The portfolio continues to focus on 'New' China and the sectors we believe have attractively priced growth prospects over the mid-term, such as the consumption-related, technology and healthcare sectors.
There remains considerable opportunity in the supply of consumer goods to Chinese households, especially when viewed relative to homes in other countries and the predilection for upgrading and premiumisation among Chinese consumers which remains a growing
trend. Commentary on our top five holdings is on page 13.
A fertile space for new ideas has been the materials sector in China, which is among the top performing sectors over the review period. I am less interested in the pure commodity related players, but rather on companies with growing pricing power. China's paint industry remains highly fragmented, and COVID-19 has helped to accelerate further industry consolidation which benefits industry leaders. Among these, I am focused on the winners in this area such as paint manufacturers SKHSU Paint Company and Asia Cuanon Technology and tile manufacturer Monalisa Group. Asia Cuanon Technology is another leading paint supplier that is seeing an improving business mix and margin expansion. Monalisa Group has strong relationships with diversified highquality developers and the consolidation across that sector has helped to increase the company's market share.
In the financials sector, I am especially interested in the insurance sub-sector given the still low penetration in 'protection' type life insurance areas. I believe the insurance sector could also, over time, see renewed demand coming out of COVID-19 as people focus more on protection in areas like health insurance. I have been raising exposure to Ping An Insurance, which among its key strengths, has superior agent productivity, leading technology and capable management. Furthermore, the company has continued to build a strong interconnected platform across the group that brings strong synergies in customer acquisition, cross-selling and data access, notably across the healthcare sector.
Given the strong run in markets since March 2020 (notably in technology, healthcare and staples sectors), it has been more challenging to find compelling opportunities. However, there are pockets of value on offer, especially among small cap companies. For example, many Hong Kong small cap stocks are trading at single-digit Price-to-Earnings (PE) ratios, with well established market positions and healthy cashflows. The Company has exposure to Crystal International Group, for instance, one of the largest garment manufacturers in the world. This company is expanding into the sportswear category by signing up clients such as Nike and Adidas.
Finally, as the Chinese market has rallied over the last six months, I have reduced slightly the portfolio's net gearing. It was around 23% at the end of March 2020 and now stands at around 22%. As markets have gone up, valuations are less compelling, so I have reduced market exposure and have also selectively added to short positions. That said, I maintain a reasonably high level of gearing, still reflecting the significant value and opportunities I see in the market.
The Company continues to be active in the unlisted domain. At the end of the period under review, the following unlisted names were held: ByteDance, DJI International, Pony.ai, SenseTime and Xiaoju Kuaizhi (Didi). In the reporting period, the valuation of ByteDance was increased by 27.4% in May and that of SenseTime by 93.2% in August. As at 30 September 2020, unlisted investments represented 4.7% of Gross Assets. Subsequent to the period end, the valuations of SenseTime and Pony.ai (both in November) were increased. On 24 November, the Company also invested in Full Truck Alliance, another unlisted company, at a cost of £12,078,000 (representing 0.6% of Gross Assets). We continue to evaluate opportunities, while maintaining a disciplined approach towards valuation.
Source: Refinitive Datastream, September 2020 Source: Refinitive Datastream, September 2020
recovery, but on the whole has been more restrained and targeted than measures seen in most western economies. Among supportive measures, the People's Bank of China ("PBoC") announced cuts for its re-lending and re-discount facilities to reduce funding costs for smaller firms and rural sectors. Separately, both the end-July Politburo economic meeting and the PBoC's second quarter Monetary Policy Implementation Report confirmed that the monetary While there are variances between regions and sectors, overall, the economy continues to recover. Successful control of the COVID-19 virus has clearly been a factor supporting the China recovery. Small localised outbreaks within the China region were handled swiftly and have not dented the improving overall economic momentum.
This is reflected in China's Purchasing Manager's Index ("PMI") which has recovered much sooner than other Asian countries (see chart above).
The third quarter GDP growth figure of 4.9% was supported by stronger services and external demand. Key laggards in the service sector – travel and leisure – are now gaining momentum after restrictions were loosened in mid-July 2020. Government stimulus has clearly been a factor supporting the recovery, but on the whole has been more restrained and targeted than measures seen in most Western economies. Among supportive measures, the
The third quarter GDP figure of 4.9% was supported by stronger services and external demand. Key laggards in the service sector – travel and leisure – are gaining momentum after restrictions were loosened in mid-July. Government stimulus has clearly been a factor supporting the People's Bank of China ("PBoC") announced cuts in its re-lending and re-discount facilities to reduce funding costs for smaller firms and rural sectors. Separately, both the end of July 2020 Politburo economic meeting and the PBoC's second quarter Monetary Policy Implementation Report confirmed that the monetary policy has turned towards a more neutral stance since May 2020, although the rollover of fiscal stimulus will continue. China remains on track to be the only major economy to grow in 2020.
Throughout the year, we have continued to see tensions rise between the US and China. I continue to believe that these tensions will be with us for decades to come. On the positive side, I believe this has become more of a consensus view and thus more "established" in markets. I would highlight that the Company remains focused on opportunities supported by ongoing structural shifts in China within the domestic economy and only has around 3% of
Source: Fidelity International, Factset October 2020 Source: Fidelity International, October 2020
We continue to see an acceleration in capital market reforms in China from the loosening of short-selling restrictions, lowering of foreign investment restrictions and the implementation of registration-based IPO mechanism. The registration-based IPO mechanism was launched last July on STAR Board and now being employed on ChiNext. In these markets listing criteria are also more flexible, such as alternative criteria on market cap, profitability, and allowing variable revenue from underlying holdings exposed to the US (see chart above). Chinese growth prospects remain attractive relative to its global peers in the West, and the policy impetus continues to favour domestic consumption drivers.
We continue to see an acceleration in capital market reforms in China; from the loosening of short-selling restrictions, the lowering of foreign investment restrictions and the implementation of a registration-based IPO mechanism. The registration-based IPO mechanism was launched last July on STAR Board and is now being employed on ChiNext.
In these markets, listing requirements are more flexible, such as alternative criteria on market cap, profitability, and allowing variable interest entity (VIE) structured companies to list. These were restricted under previous rules, so given this flexibility we could expect more
technology/new economy companies listed on the A-share market. We have already seen more IPOs of A-share and Red chip companies this year, and it is probable that we will see more to come given the US issues and the more flexible listing requirements. For example, the Hong Kong Stock Exchange raised a total of HK\$ 87.3 billion in the first half of 2020 from 59 new listings, marking a total increase of 22 percent in total funds raised compared with the same period last year*, and ensuring it maintained the top position in equity raising globally. Recent changes such as the removal of the QFII quota, the widening of the investment scope and the integration of the QFII and RMB QFII schemes will likely further boost inflows. The delay in Ant Group's IPO could be viewed as a setback, but we believe the momentum is clearly in the direction of deregulation and the opening up of markets.
Sustainable investing remains a core part of our investment process. We believe that high standards of corporate responsibility not only make good business sense, but have the potential to protect and enhance investment returns. Consequently, we integrate Environmental, Social and Governance ("ESG") issues into our research and investment decision-making process and believe that these have the potential to affect the long-term value of investments. We favour engagement over exclusion as positive influences on corporate behaviour can add real value for companies, investors and society. The priority themes that have formed part of the Company's recent ESG engagements include supply chain sustainability and corporate sustainability reporting.
Sportswear maker Li Ning is a good example of a company with whom we have consistently engaged on these issues. In 2018, our Sustainable Investing team initiated a thematic engagement on human rights and responsible sourcing in the supply chain within the apparel retail sector. Insufficient management of ESG factors in the supply chain opens companies up to reputational, operational and regulatory risk and the apparel industry is dominated by multi-tier supplier relationships with a lack of traceability and rapid market driven changes.
When we first engaged with Li Ning in late 2018, the company confirmed that it had assessment scorecards for each of its suppliers and that human rights had a 10% weighting of this assessment. The management team runs on-site assessments on each of their suppliers and if they are in serious breach of any human rights issues, then they will sever ties with that supplier. In relation to responsible sourcing, the team has an environmental management system for material suppliers, including
requirements on waste, water, hazardous materials and greenhouse gas emissions. At the time of the meeting, we requested that the company considers reporting on its management of human rights in its supply chain as well as its responsible sourcing policies.
In our discussions with the company in the second quarter of 2020, management confirmed that their supplier monitoring had been updated on the back of our 2018 requests, and now includes a more detailed model which focuses (among other topics) on equal employment, forced labour, freedom of association, child labour and young workers.
The Li Ning team has also initiated audits on its tier 2 and 3 suppliers and has increased its disclosure in its 2019 Sustainability Report. With regard to the environmental footprint of its suppliers, the company increased its focus on EHS (Environmental, Health and Safety) compliance with national and local laws and NGO (non-government organization) requirements, which includes environmental management, and management of water resources, wastewater, air emission, solid waste, chemical and energy. In addition, in its 2019 Sustainability Report the team disclosed the total number of plants that had on-site audits in the year and the approval rate of potential suppliers. It confirmed that it will gradually report on the results of their audits and a summary of actions taken in the next three to five years according to its internal sustainability strategy.
Li Ning has done a commendable job integrating ESG factors and the company is set to progress further on this front.
A perennial and universal governance topic is capital allocation. In China, its pertinence is particularly acute for some State Owned
Enterprises ("SOEs") whose senior management often face a set of incentives that does not prioritise capital markets and investors. As a result, it is not uncommon to find companies with excess cash that would be better used by returning it to shareholders than being spent on projects with low returns. Encouragingly, with the SOE reform continuing apace and clear policy direction from the government for SOEs to adopt equity-based incentive plans, we are seeing a change of attitude among SOE senior management as evidenced through our engagement experience.
One example is that of China Merchants Energy Shipping, a Chinese state-owned tanker shipping company. In February, our shipping analyst and ESG specialist met with board members including the Chairman. We put forward our case for increasing the company's dividend pay-out ratio, pointing to the improving business outlook and the much higher payout level of its global peers. The directors responded positively, and two months later raised its fiscal 2019 pay-out by 12 percentage points, which represented an increase of over a third from its previous level. Although the elevated pay-out still falls short of the global average, we see it as an encouraging step towards more effective capital allocation, especially considering how quickly the company responded to our suggestion.
Fidelity employs a proprietary sustainability rating process leveraging its internal research and interactions with corporates. Analysts assign an overall A to E rating (C being understood as the sector average) for each rated name on a sector relative basis. Based on Fidelity's own ESG proprietary ratings, the Company (as at the end of October 2020) had over three-quarters of the portfolio invested in companies rated A, B and C. While the majority of the remainder are not yet rated, I would note
that this unrated portion has consistently fallen as Fidelity continues to expand the depth of its ESG research coverage. I continue to believe our work in this area can be a source of alpha generation for the Company going forward, especially for the few D-rated companies in the portfolio which have good potential for improving these scores. Other cases would include those where we reach different conclusions to the market consensus, which is not uncommon with ESG data in many of the well-known indices often out of date.
I remain positive about the value on offer in the Chinese stock market and my team and I try to ensure that we are best positioned to capitalise on these opportunities. In my view the recent closing of the discount between the share price and the NAV of the Company reflects a recognition of the positive earnings performance of the companies held in the portfolio, despite the virus and global economic and geopolitical challenges, as well as growing market confidence that they can continue to deliver on their potential. I continue to remain a shareholder in the Company in a personal capacity.
Portfolio Manager 7 December 2020
The Company is permitted to invest up to 10% of its Gross Assets in unlisted companies. As at 30 September 2020, the Company's unlisted investments represented 4.7% of Gross Assets (31 March 2020: 6.0%). The number and value in US dollars of the unlisted investments remains unchanged from that at year end other than the valuation of ByteDance which was increased in May 2020 and that of SenseTime which was increased in August 2020. However, due to the increase in the valuation of the Company's portfolio overall, the unlisted investments' Gross Assets percentage is lower than that at the year end. Since the reporting period end, the valuations of SenseTime and Pony.ai were increased. In addition, on 24 November 2020 the Company invested in Full Truck Alliance, an unlisted company, at a cost of £12,078,000 (representing Gross Assets of 0.6%). Details are in Note 16 (Post Balance Sheet Event) on page 33.
The Company has a three-year unsecured fixed rate facility agreement with Scotiabank Europe PLC for US\$100,000,000. The interest rate is fixed at 2.606% per annum until the facility terminates on 14 February 2023.
To achieve further gearing, the Company uses contracts for difference ("CFDs") on a number of holdings in its portfolio.
At 30 September 2020, the Company's gross gearing, defined as the Gross Asset Exposure in excess of Net Assets, was 26.0% (31 March 2020: 25.2%). The level of gross gearing is determined by the Manager within the limit set by the Company's Prospectus of 30%. Net gearing which nets off short positions was 21.8% (31 March 2020: 23.2%).
The Board recognises that the Company's share price is affected by the interaction of supply and demand in the market based on investor sentiment towards China and the performance of the NAV per share. The Board has a discount control policy in place whereby it seeks to maintain the discount in single digits in normal market conditions and will, subject to market conditions, repurchase shares with the objective of stabilising the share price discount within a single digit range.
The Company's discount narrowed significantly from 8.6% at the start of the reporting period to 5.6% at the end of the reporting period. During this period, the Board authorised the repurchase of 23,345,560 ordinary shares into Treasury, representing 4% 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. Since the end of the reporting period and as at the date of this report, the Company has not issued or repurchased any further ordinary shares for cancellation or into Treasury.
The Ongoing Charge (the costs of running the Company) for the six months ended 30 September 2020 was 0.98% (31 March 2020: 0.99%). The Ongoing Charge including the variable element was 0.98% (31 March 2020: 0.79%).
The Board has agreed a new fee arrangement with FIL Investment Services (UK) Limited, the Company's Alternative Investment Fund Manager (the "Manager"), from 1 April 2021. The revised fee structure will be on a tiered basis of 0.90% on the first £1.5 billion of Net Assets reducing to 0.70% on Net Assets over £1.5 billion. The variable element from the current fee structure of +/- 0.20% will remain unchanged. In addition, the fixed annual fee of £100,000 for services other than portfolio management will be removed. Based on assets as at 30 September 2020, the revised fee would have reduced the Ongoing Charge by 0.05%.
Having served on the Board as a Director since the Company's launch on 19 April 2010, Peter Pleydell-Bouverie stepped down from the Board at the conclusion of the Annual General Meeting ("AGM") on 23 July 2020. This was in line with the Board's succession plan. As Mr Pleydell-Bouverie's replacement, Vanessa Donegan was appointed to the Board as a non-executive Director and also as Chairman of the Investment Committee on 1 September 2020. Mrs Donegan has 37 years of Asian fund management experience, including managing dedicated China portfolios. She was Head of the Asia Pacific desk at Columbia Threadneedle Investments Ltd. (formerly Threadneedle Investments Ltd.) for twenty-one years and has extensive experience of marketing to retail and institutional clients across the globe. She is an independent non-executive director of Herald Investment Management Ltd., the JP Morgan Indian Investment Trust plc, the Invesco Asia Trust plc and the SSGA Luxembourg SICAV.
The Board, with the assistance of the Alternative Investment Fund Manager (FIL Investment Services (UK) Limited/the "Manager"), has developed a risk matrix which, as part of the risk management and internal controls process, identifies the key 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 categories: market, economic and geopolitical, investment performance, key person, discount control, gearing, cybercrime and pandemic risks. Other risks facing the Company include tax and regulatory and operational (third party service providers) risks. Information on each of these risks is given in the Strategic Report section of the Annual Report for the year ended
31 March 2020 which can be found on the Company's pages of the Manager's website at www.fidelity.co.uk/china.
These principal risks and uncertainties have not materially changed in the six months to 30 September 2020 and are equally applicable at the date hereof.
The risks arising from COVID-19 are being kept under constant review by the Board and the Manager. Investors should be prepared for market fluctuations and remember that holding shares in the Company should be considered to be a long-term investment. These risks are somewhat mitigated by the investment trust structure of the Company which means that no forced sales will 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 contingency plans in place to allow for the continuation of Fidelity's operations and to look after the safety of its employees. It is keeping its business continuity plans and its operational resilience strategies under constant review and will take all reasonable steps to continue 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. For example, to enhance its resilience, the Manager has mandated work from home arrangements and implemented split team working for those whose work is deemed necessary to be carried out in the office. The Manager has also imposed self-isolation arrangements on staff in line with Government recommendations and guidance. The Company's other third party service providers have also implemented similar measures to ensure business disruption can be kept to a minimum.
National lockdown measures started to ease in China from May 2020. While 'in-person' company meetings were paused, the Portfolio Manager and analysts continued to undertake a full schedule of virtual conversations with investee companies, which proved to be highly effective. Their access to corporates and industry experts remains as strong as ever. More recently, face-to-face meetings with companies have resumed where possible.
The Manager has delegated the Company's investment management (other than investment management of unlisted securities) to FIL Investment Management (Hong Kong) Limited. It has delegated the investment management of the unlisted securities and the company secretariat function to FIL Investments International. Transactions with the Managers and related party transactions with the Directors are disclosed in Note 15 on page 33.
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 (being mainly securities which are readily realisable) and its expenditure and cash flow projections and have concluded that the Company has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis in preparing these Financial Statements.
This conclusion also takes into account the Board's assessment of the continuing risks arising from COVID-19.
By order of the Board. FIL Investments International 7 December 2020
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:
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 7 December 2020 and the above responsibility statement was signed on its behalf by Nicholas Bull, Chairman.
Alibaba is a leader in the e-commerce market in China. The company benefits from high barriers to entry along with strong pricing power, supported by a loyal merchant and consumer base. The company has built a culture of continuous innovation and strong leadership, enabling it to expand into new businesses and to increase its addressable market. The pandemic has accelerated the trend towards digitalisation, which was already a long-term driver of Alibaba's e-commerce business growth. Alibaba's cloud business is increasing as more corporates use its infrastructure to become digital ready.
Tencent runs the dominant social network in China, WeChat. The company has invested successfully to improve its user experience and as a consequence its user base continues to grow. Tencent has consolidated its leading position in internet gaming by mediating a merger between Chinese streaming platforms Huya and DouYu, leaders in the rapidly growing esports market. Tencent holds a controlling stake in the new company after completion of the merger.
China MeiDong Auto enjoys the highest sales of luxury car brands (including BMW, Lexus and Porsche) in China. These brands continue to see strong demand, and while supply is constrained, leading dealers like China MeiDong Auto find themselves in prime position. In addition, the company is seeing
growth in its growing high margin after-sales services which bode well for the company's earnings growth.
A key reason for holding 21Vianet in the portfolio is the strong demand for internetdata-centers (IDCs) in China. This trend is likely to remain in place driven by consumers' increasing usage of the internet via mobile devices and growing demand for cloud and IT services from corporates. This accelerating trend towards digitalisation and cloud-based services will be a long-term driver of 21Vianet's earnings growth.
Ping An stands out as a leading insurer in China, with its superior agent productivity, leading technology, and entrepreneurial management. The company has highly effective share incentive schemes to motivate management and core employees based on profit and other key performance measures. The incorporation of technology into operations facilitates cost reduction and efficiency improvement, and this has become Ping An's core competitive edge against peers.
DIRECTORS' REPORTS
The Gross Asset Exposures shown below measure the exposure of the Company's portfolio to market price movements in the shares 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.
| Fair | |||
|---|---|---|---|
| Gross Asset Exposure | Value | ||
| £'000 | %1 | £'000 | |
| Long Exposures – shares unless otherwise stated | |||
| Alibaba Group Holding (shares and long CFDs) | |||
| e-commerce group | 281,999 | 15.6 | 233,679 |
| Tencent Holdings (shares and long CFDs) | |||
| Internet, mobile and telecommunications service provider | 228,615 | 12.6 | 166,613 |
| China MeiDong Auto Holdings (shares and long CFD) | |||
| Automobile dealership and maintenance group | 94,390 | 5.2 | 63,708 |
| 21Vianet Group | |||
| Internet and data center service provider | 68,997 | 3.8 | 68,997 |
| Ping An Insurance (long CFD) | |||
| Financial services company | 56,649 | 3.1 | (3,574) |
| WuXi AppTec (long CFDs) | |||
| Pharmaceutical, biopharmaceutical and medical device | |||
| outsourcing provider | 48,106 | 2.6 | 14,708 |
| Hutchison China MediTech | |||
| Pharmaceutical and healthcare group | 46,247 | 2.5 | 46,247 |
| SKSHU Paint Company | |||
| Paint manufacturing company | 45,345 | 2.5 | 45,345 |
| China Pacific Insurance Group (long CFDs) | |||
| Insurance company | 42,289 | 2.3 | (13,405) |
| China Life Insurance Company (shares and long CFD) | |||
| Insurance company | 37,068 | 2.0 | 5,244 |
| Noah Holdings | |||
| Asset managers | 35,389 | 2.0 | 35,389 |
| Ctrip.com International | |||
| Travel services provider | 30,810 | 1.7 | 30,810 |
| Fair | |||
|---|---|---|---|
| Gross Asset Exposure | Value | ||
| £'000 | %1 | £'000 | |
| Asia Cuanon Technology | |||
| Development, manufacturing and sales of decorated | |||
| insulation products | 30,600 | 1.7 | 30,600 |
| Innovent Biologics (long CFDs) | |||
| Biopharmaceutical company | 29,293 | 1.6 | 16,040 |
| China Biologic Products Holdings | |||
| Blood plasma-based biopharmaceutical company | 26,797 | 1.5 | 26,797 |
| Monalisa Group | |||
| Manufacturer of ceramic products | 25,638 | 1.4 | 25,638 |
| Pony.ai (unlisted) | |||
| Developer of artificial intelligence and autonomous driving | |||
| technology solutions | 24,776 | 1.4 | 24,776 |
| Zhejiang Dahua Technology | |||
| Provider of video surveillance products and services | 24,539 | 1.4 | 24,539 |
| Shenzhen Yuto Packaging Technology | |||
| High-end brand packaging solutions provider | 23,920 | 1.3 | 23,920 |
| New Oriental Education & Technology Group | |||
| Private educational services provider | 23,638 | 1.3 | 23,638 |
| Twenty largest long exposures | 1,225,105 | 67.5 | 889,709 |
| Other long exposures | 1,169,588 | 64.5 | 955,670 |
| Total long exposures before hedges (138 holdings) | 2,394,693 | 132.0 | 1,845,379 |
| Less: hedging exposures | |||
| S&P/BNY Mellon China Select ADR Index (short CFD) | (8,803) | (0.5) | (349) |
| Hang Seng China Enterprises Index (future) | (84,826) | (4.6) | (726) |
| Hang Seng Index (future) | (23,302) | (1.3) | (389) |
| iShares FTSE A50 China Index ETF (put options) | (2,808) | (0.2) | 218 |
| Hang Seng China Enterprises Index (put options) | (27,994) | (1.5) | 2,263 |
| Total hedging exposures | (147,733) | (8.1) | 1,017 |
| Total long exposures after the netting of hedges | 2,246,960 | 123.9 | 1,846,396 |
| Fair | |||
|---|---|---|---|
| Gross Asset Exposure | Value | ||
| £'000 | %1 | £'000 | |
| Add: short exposures | |||
| Short CFDs (11 holdings) | 37,498 | 2.1 | 946 |
| Gross Asset Exposure2 | 2,284,458 | 126.0 | |
| Portfolio Fair Value3 | 1,847,342 | ||
| Net liabilities excluding derivative investments | (34,161) | ||
| Net Assets | 1,813,181 |
1 Gross Asset Exposure is expressed as a percentage of Net Assets.
2 Gross Asset Exposure comprises market exposure to investments of £1,721,038,000 plus market exposure to derivative instruments of £563,420,000.
3 Portfolio Fair Value comprises Investments of £1,721,038,000 plus derivative assets of £177,028,000 less derivative liabilities of £50,724,000 (per the Balance Sheet on page 22).
This page has been intentionally left blank
| six months ended 30 September 2020 unaudited |
||||
|---|---|---|---|---|
| Notes | revenue £'000 |
capital £'000 |
total £'000 |
|
| Revenue | ||||
| Investment income 4 |
17,614 | – | 17,614 | |
| Derivative income 4 |
10,967 | – | 10,967 | |
| Other income 4 |
70 | – | 70 | |
| Total income | 28,651 | – | 28,651 | |
| Gains/(losses) on investments at fair value through profit or loss |
– | 441,177 | 441,177 | |
| Gains/(losses) on derivative instruments | – | 166,289 | 166,289 | |
| Foreign exchange (losses)/gains on other net assets |
– | (4,397) | (4,397) | |
| Foreign exchange gains/(losses) on bank loans |
– | 2,879 | 2,879 | |
| Total income and gains/(losses) | 28,651 | 605,948 | 634,599 | |
| Expenses | ||||
| Investment management fees 5 |
(1,776) | (5,337) | (7,113) | |
| Other expenses | (594) | – | (594) | |
| Profit/(loss) before finance costs and taxation |
26,281 | 600,611 | 626,892 | |
| Finance costs 6 |
(1,334) | (4,001) | (5,335) | |
| Profit/(loss) before taxation | 24,947 | 596,610 | 621,557 | |
| Taxation 7 |
(1,164) | 459 | (705) | |
| Profit/(loss) after taxation for the period |
23,783 | 597,069 | 620,852 | |
| Earnings/(loss) per ordinary share 8 |
4.55p | 114.20p | 118.75p |
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 and is prepared in accordance with IFRS. 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.
| year ended 31 March 2020 audited |
six months ended 30 September 2019 unaudited |
ORTS DIRECTORS' REPORTS |
||||
|---|---|---|---|---|---|---|
| revenue | capital | total | revenue | capital | total | DIRECTORS' REP |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| 22,520 | – | 22,520 | 18,837 | – | 18,837 | |
| 9,015 | – | 9,015 | 8,435 | – | 8,435 | |
| 1,481 | – | 1,481 | 941 | – | 941 | |
| 33,016 | – | 33,016 | 28,213 | – | 28,213 | |
| – | (57,341) | (57,341) | – | (55,384) | (55,384) | |
| – | (33,597) | (33,597) | – | (41,507) | (41,507) | |
| – | 3,634 | 3,634 | – | 6,195 | 6,195 | |
| MENTS MENTS |
||||||
| – | (3,321) | (3,321) | – | (6,606) | (6,606) | |
| 33,016 | (90,625) | (57,609) | 28,213 | (97,302) | (69,089) | |
| FINANCIAL STATE FINANCIAL STATE |
||||||
| (3,031) | (6,409) | (9,440) | (1,511) | (3,199) | (4,710) | |
| (1,177) | – | (1,177) | (598) | – | (598) | |
| 28,808 | (97,034) | (68,226) | 26,104 | (100,501) | (74,397) | |
| (3,590) | (10,771) | (14,361) | (2,038) | (6,114) | (8,152) | |
| 25,218 | (107,805) | (82,587) | 24,066 | (106,615) | (82,549) | |
| (488) | – | (488) | (748) | 259 | (489) | |
| 24,730 | (107,805) | (83,075) | 23,318 | (106,356) | (83,038) | |
| 4.51p | (19.67p) | (15.16p) | 4.24p | (19.36p) | (15.12p) |
for the six months ended 30 September 2020
| share capital |
||
|---|---|---|
| Notes | £'000 | |
| Six months ended 30 September 2020 (unaudited) | ||
| Total equity at 31 March 2020 | 5,713 | |
| Repurchase of ordinary shares | 13 | – |
| Profit after taxation for the period | – | |
| Dividend paid to shareholders | 9 | – |
| Total equity at 30 September 2020 | 5,713 | |
| Year ended 31 March 2020 (audited) | ||
| Total equity at 31 March 2019 | 5,713 | |
| Repurchase of ordinary shares | 13 | – |
| (Loss)/profit after taxation for the year | – | |
| Dividend paid to shareholders | 9 | – |
| Total equity at 31 March 2020 | 5,713 | |
| Six months ended 30 September 2019 (unaudited) | ||
| Total equity at 31 March 2019 | 5,713 | |
| Repurchase of ordinary shares | 13 | – |
| (Loss)/profit after taxation for the period | – | |
| Dividend paid to shareholders | 9 | – |
| Total equity at 30 September 2019 | 5,713 | |
Company number 7133583
| 30.09.20 | 31.03.20 | 30.09.19 | ||
|---|---|---|---|---|
| unaudited | audited | unaudited | ||
| Notes | £'000 | £'000 | £'000 | |
| Non-current assets | ||||
| Investments at fair value through profit or loss | 10 | 1,721,038 | 1,289,807 | 1,387,576 |
| Current assets | ||||
| Derivative instruments | 10 | 177,028 | 39,152 | 11,924 |
| Amounts held at futures clearing houses and brokers |
37,736 | 39,495 | 77,356 | |
| Other receivables | 11 | 5,787 | 1,407 | 2,403 |
| Cash at bank | 6,320 | 38,523 | 29,224 | |
| 226,871 | 118,577 | 120,907 | ||
| Current liabilities | ||||
| Derivative instruments | 10 | (50,724) | (45,183) | (86,103) |
| Bank loans | – | – | (121,912) | |
| Other payables | 12 | (6,584) | (9,855) | (4,077) |
| (57,308) | (55,038) | (212,092) | ||
| Net current assets/(liabilities) | 169,563 | 63,539 | (91,185) | |
| Total assets less current liabilities | 1,890,601 | 1,353,346 | 1,296,391 | |
| Non–current liabilities | ||||
| Bank loans | (77,420) | (80,299) | – | |
| Net assets | 1,813,181 | 1,273,047 | 1,296,391 | |
| Equity attributable to equity shareholders | ||||
| Share capital | 13 | 5,713 | 5,713 | 5,713 |
| Share premium account | 211,569 | 211,569 | 211,569 | |
| Capital redemption reserve | 914 | 914 | 914 | |
| Other reserve | 248,491 | 307,049 | 330,356 | |
| Capital reserve | 1,307,634 | 710,565 | 712,014 | |
| Revenue reserve | 38,860 | 37,237 | 35,825 | |
| Total equity | 1,813,181 | 1,273,047 | 1,296,391 | |
| Net asset value per ordinary share | 14 | 351.76p | 236.27p | 236.10p |
| six months | six months | ||
|---|---|---|---|
| ended | year ended | ended | |
| 30 September 2020 |
31 March 2020 |
30 September 2019 |
|
| unaudited | audited | unaudited | |
| £'000 | £'000 | £'000 | |
| Operating activities | |||
| Cash inflow from investment income | 14,444 | 21,465 | 17,372 |
| Cash inflow from derivative income | 11,079 | 9,004 | 8,118 |
| Cash inflow from other income | 70 | 1,481 | 941 |
| Cash outflow from Directors' fees | (120) | (124) | (83) |
| Cash outflow from other payments | (6,855) | (10,377) | (5,250) |
| Cash outflow from the purchase of investments | (529,431) | (476,779) | (176,779) |
| Cash outflow from the settlement of derivatives | (27,290) | (154,858) | (50,061) |
| Cash inflow from the sale of investments | 532,218 | 558,055 | 157,387 |
| Cash inflow from the settlement of derivatives | 62,383 | 57,544 | 11,717 |
| Cash inflow from amounts held at futures clearing houses and brokers |
1,759 | 41,956 | 4,095 |
| Net cash inflow/(outflow) from operating activities before servicing of finance |
58,257 | 47,367 | (32,543) |
| Financing activities | |||
| Cash outflow from repayment of loan | – | (38,353) | – |
| Cash outflow from loan interest paid | (1,122) | (3,665) | (1,860) |
| Cash outflow from CFD interest paid | (3,758) | (10,595) | (6,445) |
| Cash outflow from short CFD dividends paid | (465) | (1,362) | (927) |
| Cash outflow from the repurchase of ordinary | (58,558) | (24,313) | (1,006) |
| shares | (22,160) | (21,153) | (21,153) |
| Cash outflow from dividends paid to shareholders | (99,441) | (31,391) | |
| Cash outflow from financing activities | (86,063) | ||
| Decrease in cash at bank | (27,806) | (52,074) | |
| Cash at bank at the start of the period | 38,523 | 86,963 | (63,934) 86,963 |
| Effect of foreign exchange movements | (4,397) | 3,634 | 6,195 |
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.
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 2020 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.
These Half-Yearly Financial Statements have been prepared in accordance with 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 2020. Those Financial Statements were prepared in accordance with International Financial Reporting Standards ("IFRS"), to the extent that they have been adopted by the European Union, the Companies Acts that apply to companies reporting under IFRS, 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 October 2019.
The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. 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 continuing risks arising from COVID-19.
| six months | six months | ||
|---|---|---|---|
| ended | year ended | ended | |
| 30.09.20 | 31.03.20 | 30.09.19 | |
| unaudited | audited | unaudited | |
| £'000 | £'000 | £'000 | |
| Investment income | |||
| Overseas dividends | 16,964 | 22,333 | 18,837 |
| Overseas scrip dividends | 650 | 187 | – |
| 17,614 | 22,520 | 18,837 | |
| Derivative income | |||
| Dividends received on long CFDs | 10,776 | 8,047 | 7,920 |
| Interest received on CFDs | 191 | 968 | 515 |
| 10,967 | 9,015 | 8,435 | |
| Other income | |||
| Interest received on collateral and deposits | 70 | 1,481 | 941 |
| Total income | 28,651 | 33,016 | 28,213 |
| Special dividends of £nil (year ended 31 March 2020: £1,822,000 and six months ended 30 September 2019: £nil) have been recognised in capital. |
|||
| revenue £'000 |
capital £'000 |
total £'000 |
|
|---|---|---|---|
| Six months ended 30 September 2020 (unaudited) |
|||
| Investment management fee – base | 1,776 | 5,328 | 7,104 |
| Investment management fee – variable* | – | 9 | 9 |
| 1,776 | 5,337 | 7,113 | |
| Year ended 31 March 2020 (audited) | |||
| Investment management fee – base | 3,031 | 9,094 | 12,125 |
| Investment management fee – variable* | – | (2,685) | (2,685) |
| 3,031 | 6,409 | 9,440 | |
| Six months ended 30 September 2019 (unaudited) |
|||
| Investment management fee – base | 1,511 | 4,532 | 6,043 |
| Investment management fee – variable* | – | (1,333) | (1,333) |
| 1,511 | 3,199 | 4,710 |
* For the calculation of the variable management fee element, the Company's NAV return was compared to the Benchmark Index return for the period from 1 July 2018 to the relevant reporting dates.
FIL Investment Services (UK) Limited is the Company's Alternative Investment Fund Manager ("the Manager") and has delegated portfolio management to FIL Investment Management (Hong Kong) Limited and FIL Investments International ("the Investment Managers"). They are all Fidelity group companies.
The Company charges base investment management fees at an annual rate of 0.90% of net assets. In addition, there is a +/-0.20% variation fee based on the Company's NAV per share performance relative to the Company's Benchmark Index. Fees are payable monthly in arrears and are calculated on a daily basis.
| revenue | capital | total | |
|---|---|---|---|
| £'000 | £'000 | £'000 | |
| Six months ended 30 September 2020 (unaudited) |
|||
| Interest on bank loans and overdrafts | 278 | 834 | 1,112 |
| Interest paid on CFDs | 940 | 2,818 | 3,758 |
| Dividends paid on short CFDs | 116 | 349 | 465 |
| 1,334 | 4,001 | 5,335 | |
| Year ended 31 March 2020 (audited) | |||
| Interest on bank loans and overdrafts | 876 | 2,628 | 3,504 |
| Interest paid on CFDs | 2,374 | 7,121 | 9,495 |
| Dividends paid on short CFDs | 340 | 1,022 | 1,362 |
| 3,590 | 10,771 | 14,361 | |
| Six months ended 30 September 2019 (unaudited) |
|||
| Interest on bank loans and overdrafts | 470 | 1,410 | 1,880 |
| Interest paid on CFDs | 1,336 | 4,009 | 5,345 |
| Dividends paid on short CFDs | 232 | 695 | 927 |
| 2,038 | 6,114 | 8,152 | |
| revenue | capital | total | |
|---|---|---|---|
| £'000 | £'000 | £'000 | |
| Six months ended 30 September 2020 | |||
| (unaudited) | |||
| UK corporation tax | 459 | (459) | – |
| Overseas taxation | 705 | – | 705 |
| Taxation charge for the period | 1,164 | (459) | 705 |
| Year ended 31 March 2020 (audited) | |||
| UK corporation tax | – | – | – |
| Overseas taxation | 488 | – | 488 |
| Taxation charge for the year | 488 | – | 488 |
| Six months ended 30 September 2019 (unaudited) |
|||
| UK corporation tax | 259 | (259) | – |
| Overseas taxation | 489 | – | 489 |
| Taxation charge for the period | 748 | (259) | 489 |
| 8 Earnings/(Loss) per Ordinary Share |
| Total earnings/(loss) per ordinary share | 118.75p | (15.16p) | (15.12p) |
|---|---|---|---|
| Capital earnings/(loss) per ordinary share | 114.20p | (19.67p) | (19.36p) |
| Revenue earnings per ordinary share | 4.55p | 4.51p | 4.24p |
| unaudited | audited | unaudited | |
| 30.09.20 | 31.03.20 | 30.09.19 | |
| ended | year ended | ended | |
| six months | six months |
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 show below:
| £'000 | £'000 | £'000 | |
|---|---|---|---|
| Revenue profit after taxation for the period | 23,783 | 24,730 | 23,318 |
| Capital profit/(loss) after taxation for the period | 597,069 | (107,805) | (106,356) |
| Total profit/(loss) after taxation for the period | 620,852 | (83,075) | (83,038) |
| number | number | number | |
| Weighted average number of ordinary shares held outside Treasury |
522,836,127 | 548,133,431 | 549,391,529 |
| six months | six months | |||||
|---|---|---|---|---|---|---|
| ended 30.09.20 |
year ended 31.03.20 |
ended 30.09.19 |
||||
| unaudited | audited | unaudited | ||||
| £'000 | £'000 | £'000 | ||||
| Dividend of 4.25 pence per ordinary share paid | ||||||
| for the year ended 31 March 2020 | 22,160 | – | – | |||
| Dividend of 3.85 pence per ordinary share paid for the year ended 31 March 2019 |
– | 21,153 | 21,153 | |||
| 22,160 | 21,153 | 21,153 | ||||
| 10 Fair Value Hierarchy to estimate the fair values. |
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 |
|||||
| Classification | Input | |||||
| Level 1 | Valued using quoted prices in active markets for identical assets | |||||
| 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, |
||||||
| Level 2 | either directly or indirectly Valued by reference to valuation techniques using inputs that are not based |
|||||
| Level 3 | on observable market data | |||||
| 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 2020 (Accounting Policies Notes 2(l) and (m) on pages 62 and 63). The table below sets out the Company's fair value hierarchy:
| 30 September 2020 (unaudited) | level 1 £'000 |
level 2 £'000 |
level 3 £'000 |
total £'000 |
|---|---|---|---|---|
| Financial assets at fair value through | ||||
| profit or loss | ||||
| Investments – shares | 1,628,744 | 3,518 | 88,776 | 1,721,038 |
| Derivative instrument assets | 2,482 | 174,546 | – | 177,028 |
| 1,631,226 | 178,064 | 88,776 | 1,898,066 | |
| Financial liabilities at fair value through profit or loss |
||||
| Derivative instrument liabilities | (1,115) | (49,609) | – | (50,724) |
| Financial liabilities at fair value | ||||
| Bank loan | – | (79,799) | – | (79,799) |
| level 1 | level 2 | level 3 | total | |
| 31 March 2020 (audited) | £'000 | £'000 | £'000 | £'000 |
| Financial assets at fair value through profit or loss |
||||
| Investments - shares | 1,208,661 | – | 81,146 | 1,289,807 |
| Derivative instrument assets | 4,849 | 34,303 | – | 39,152 |
| 1,213,510 | 34,303 | 81,146 | 1,328,959 | |
| Financial liabilities at fair value through profit or loss |
||||
| Derivative instrument liabilities | (3,173) | (42,010) | – | (45,183) |
| Financial liabilities at fair value | ||||
| Bank loan | – | (82,687) | – | (82,687) |
| £'000 1,308,222 2,331 1,310,553 |
£'000 – 9,593 |
£'000 79,354 – |
£'000 1,387,576 11,924 |
|---|---|---|---|
| 9,593 | 79,354 | 1,399,500 | |
| (349) | (83,278) | (2,476) | (86,103) |
| – | (122,247) | – | (122,247) |
| 30.09.19 | |||
| unaudited | |||
| £'000 | |||
| 407 | |||
| 1,939 | |||
| 57 | |||
| 2,403 | |||
| 30.09.19 | |||
| unaudited | |||
| £'000 | |||
| 2,545 | |||
| 782 | |||
| 750 | |||
| 4,077 | |||
| 30.09.20 unaudited £'000 2,991 2,740 56 5,787 30.09.20 unaudited £'000 4,397 1,628 559 6,584 |
31.03.20 audited £'000 274 1,037 96 1,407 31.03.20 audited £'000 8,350 782 723 9,855 |
| 30.09.20 | 31.03.20 | 30.09.19 | |
|---|---|---|---|
| unaudited | audited | unaudited | |
| £'000 | £'000 | £'000 | |
| Securities purchased for future settlement | 4,397 | 8,350 | 2,545 |
| Investment management, secretarial and | |||
| administration fees | 1,628 | 782 | 782 |
| Accrued expenses | 559 | 723 | 750 |
| 6,584 | 9,855 | 4,077 |
| 30 September 2020 unaudited |
31 March 2020 audited |
30 September 2019 unaudited |
||||
|---|---|---|---|---|---|---|
| number of shares |
£'000 | number of shares |
£'000 | number of shares |
£'000 | |
| Issued, allotted and fully paid | ||||||
| Ordinary shares of 1 penny each held outside Treasury | ||||||
| Beginning of the period 538,809,043 | 5,388 | 549,574,480 | 5,496 | 549,574,480 | 5,496 | |
| Ordinary shares repurchased into Treasury |
(23,345,560) | (233) | (10,765,437) | (108) | (480,000) | (5) |
| End of the period | 515,463,483 | 5,155 | 538,809,043 | 5,388 | 549,094,480 | 5,491 |
| Ordinary shares of 1 penny each held in Treasury* | ||||||
| Beginning of the period | 32,545,437 | 325 | 21,780,000 | 217 | 21,780,000 | 217 |
| Ordinary shares repurchased into Treasury |
23,345,560 | 233 | 10,765,437 | 108 | 480,000 | 5 |
| End of the period | 55,890,997 | 558 | 32,545,437 | 325 | 22,260,000 | 222 |
| Total share capital | 5,713 | 5,713 | 5,713 |
* 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 23,345,560 (year ended 31 March 2020: 10,765,437 and six months ended 30 September 2019: 480,000) ordinary shares and held them in Treasury. The cost of repurchasing these shares of £58,558,000 (year ended 31 March 2020: £24,313,000 and six months ended 30 September 2019: £1,006,000) was charged to the Other Reserve.
The calculation of the net asset value per ordinary share is based on the following:
| 30.09.20 | 31.03.20 | 30.09.19 | |
|---|---|---|---|
| unaudited | audited | unaudited | |
| Net assets | £1,813,181,000 | £1,273,047,000 | £1,296,391,000 |
| Ordinary shares held outside Treasury | 515,463,483 | 538,809,043 | 549,094,480 |
| Net asset value per ordinary share | 351.76p | 236.27p | 236.10p |
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.
FIL Investment Services (UK) Limited is the Company's Alternative Investment Fund Manager ("the Manager") and has delegated portfolio management to FIL Investment Management (Hong Kong) Limited and FIL Investments International. They are all Fidelity group companies.
Customer: Fidelity Project Title: China Special Sits Half Year Rpt 2020 T: 0207 055 6500 F: 020 7055 6600 DIRECTORS' REPORTSFINANCIAL STATEMENTS 15 Transactions with the Managers and Related Parties Details of the current fee arrangements are given in Note 5 above. During the period, management fees of £7,113,000 (year ended 31 March 2020: £9,440,000 and six months ended 30 September 2019: £4,710,000), and accounting, administration and secretarial fees of £50,000 (year ended 31 March 2020: £100,000 and six months ended 30 September 2019: £50,000) were payable to the Managers. Fidelity also provides the Company with marketing services. The total amount payable for these services was £109,000 (year ended 31 March 2020: £175,000 and six months ended 30 September 2019: £128,000). Amounts payable to the Managers 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 five non-executive Directors (as shown on page 41) 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 £42,000, the Audit and Risk Committee Chairman receives an annual fee of £32,000, the Chairman of the Unlisted Investment Committee receives an annual fee of £31,500, the Senior Independent Director receives an annual fee of £31,500 and the other Director receives an annual fee of £26,500. The following members of the Board hold ordinary shares in the Company at the date of this report: Mike Balfour 65,000 shares, Nicholas Bull 110,804 shares, Elisabeth Scott 19,819 shares and Linda Yueh 2,318 shares.
Subsequent rounds of funding for SenseTime and Pony.ai, both unlisted companies, were finalised post period end. As a result, in November 2020, the valuation of SenseTime was increased by 15.8% from £17,713,000 to £20,508,000 and the valuation of Pony.ai was increased by 64.2% from £24,776,000 to £40,674,000. If both increases in value had been applied at 30 September 2020, the net assets of the Company would have increased by 1.03%.
On 24 November 2020, the Company invested in Full Truck Alliance, an unlisted company, at a cost of £12,078,000 which represented 0.6% of Gross Assets.
As at 30 November 2020, total unlisted investments represented 5.8% of Gross Assets.
A negotiable certificate issued by a US bank representing a specified number of shares in a foreign stock that is traded on a US Exchange.
The Association of Investment Companies ("AIC"). The Company is a member of the AIC.
Alternative Investment Fund ("AIF"). The Company is an AIF.
Alternative Investment Fund Manager ("AIFM"). The Board has appointed FIL Investment Services (UK) Limited to act as the Company's AIFM.
The Alternative Investment Fund Managers Directive ("AIFMD") is a European Union Directive implemented on 22 July 2014.
The Company uses the following Alternative Performance Measures which are all defined in this Glossary:
The Company's auditor is Ernst & Young LLP.
MSCI China Index total return (in sterling terms) and is a composite of China "A", "B", "H", "Red Chip" and "P Chip" share classes and foreign listings (e.g. ADRs).
The Company's broker is Peel Hunt LLP.
Shares traded on the Chinese Stock Exchanges in Chinese renminbi. Foreign investors were unable to participate in the China "A" Shares market until the introduction of the QFII program in 2002 which provided a legal framework for licensed QFIIs to invest in China "A" Shares on the Chinese Stock exchanges and certain other securities previously not eligible for investment by foreign investors.
Shares traded on the Shenzhen Stock Exchange and Shanghai Stock Exchange in Hong Kong dollars and US dollars, respectively. The shares were originally intended to be available only to foreign individuals and institutional investors, however since February 2001, they have also been available to domestic individual investors who trade through legal foreign currency accounts.
Shares in companies incorporated in the PRC and listed on the Hong Kong Stock Exchange. They are available to non-Chinese investors and are traded in Hong Kong dollars on the Hong Kong Stock Exchange.
Currency of the PRC.
The Shanghai Stock Exchange, the Shenzhen Stock Exchange and any other stock exchange located within the PRC from time to time.
ChiNext is a NASDAQ-style board of the Shenzhen Stock Exchange for innovative and fast-growing companies especially high-tech companies. It started trading in October 2009. The MSCI added stocks trading on Shenzhen's ChiNext board to its indices for the first time in May 2019, allowing foreign investors to tap the tech-focused board by investing in the indices.
Assets provided as security.
Customer: Fidelity Project Title: China Special Sits Half Year Rpt 2020 T: 0207 055 6500 F: 020 7055 6600 DIRECTORS' REPORTSINFORMATION FOR SHAREHOLDERSChiNext A contract for difference is a derivative. It is a contract between the Company and an investment bank at the end of which the parties exchange the difference between the opening price and the closing price of the underlying asset of the specified financial instrument. It does not involve the Company buying or selling the underlying asset, only agreeing to receive or pay the movement in its share price. A contract for difference allows the Company to gain access to the movement in the share price by depositing a small amount of cash known as margin. The Company may reason that the asset price will rise, by buying ("long" position) or fall, by selling ("short" position). If the Company holds long positions, dividends are received and interest is paid. If the Company holds short positions, dividends are paid and interest is received.
An entity that holds (as intermediary) the Company's assets, arranges the settlement of transactions and administers income, proxy voting and corporate actions. The Company's Custodian is JPMorgan Chase Bank.
Bank borrowings and long contracts for difference.
An entity that oversees the custody, cash arrangements and other AIFM responsibilities of the Company. J.P. Morgan Europe Limited act as the Company's Depositary.
Financial instruments whose value is derived from the value of an underlying asset or other financial instruments. The main categories of derivatives are contracts for difference, warrants, futures and options.
If the share price of the Company is lower than the Net Asset Value per Ordinary Share, the Company's shares are said to be trading at a discount. It is shown as a percentage of the Net Asset Value per Ordinary Share.
Debt instruments whose return on investment is linked to specific equities or equity markets. The return on equity linked notes may be determined by an equity index, a basket of equities, or a single equity.
The carrying value in the Balance Sheet which represents the amount that would be received or paid on disposal of the financial asset or liability.
An agreement to buy or sell a currency, commodity or other asset at a specified future date and at a predetermined price.
An agreement to buy or sell a stated amount of a security, currency or commodity at a specific future date and at a pre-agreed price.
DIRECTORS' REPORTS
Net Assets plus borrowings.
The value of the portfolio to which the Company is exposed, whether through direct or indirect investment (including the economic value of the exposure in the underlying asset of the derivatives, but excluding forward currency contracts).
Gross Asset Exposure in excess of Net Assets.
A hedge position demonstrates risk reduction qualities by delivering short exposure to an asset which has regional congruence and a correlation of at least 80% to long exposures in the Company's portfolio. It therefore distinguishes itself from a "short" which is a position not opened with the objective of reducing the long exposure in the portfolio. Qualifying hedge exposures do not count towards the short exposure limits. For the purposes of calculating Gross Asset Exposure, the exposure attributed to the hedge positions will be deducted from the exposure of the corresponding long positions. Short positions are added to long positions in arriving at the Gross Asset Exposure.
Debt instruments whose return on investment is linked to changes in interest rates, stock exchanges, or other price indices.
FIL Investment Management (Hong Kong) Limited.
Together, represents the Investment Manager and the Unlisted Investment Manager.
FIL Investment Services (UK) Limited is the appointed Manager under the Alternative Investment Fund Managers Directive ("AIFMD") and has delegated the investment management of the Company to the Investment Managers.
The Benchmark Index of the investment performance of the Company, in sterling terms.
A global electronic marketplace for buying and selling securities, as well as the benchmark index for US technology stocks.
The value of the Company's assets minus its liabilities.
Net Asset Value is sometimes described as "Shareholders' Funds" and is the total value of the Company's assets less the total value of its liabilities. For valuation purposes, it is common to express the Net Asset Value on a per Ordinary Share basis.
The NAV per Ordinary Share is calculated as Shareholders' Funds divided by the number of ordinary shares in issue.
Net Gearing is the total of all long exposures, less short exposures and less exposures hedging the portfolio in excess of Net Assets.
Net Market Exposure is the total of all long exposures, less short exposures and less exposures hedging the portfolio.
Total operating expenses (excluding finance costs and taxation) incurred by the Company as a percentage of the average daily Net Asset Values for the reporting period.
An option is a contract which gives the right but not the obligation to buy or sell an underlying asset at an agreed price on or before an agreed date. Options may be calls (buy) or puts (sell) and are used to gain or reduce exposure to the underlying asset on a conditional basis.
Companies controlled by mainland China individuals, with the establishment and origin of the company in mainland China. P Chips are incorporated outside of the PRC and traded on the Stock Exchange of Hong Kong with a majority of revenues or assets derived from mainland China.
The Company's portfolio which may be made up of equities, index linked securities, equity linked notes and other debt securities, cash deposits, money market instruments, foreign currency exchange transactions and other interests including derivatives (such as futures, options and contracts for difference).
Dale Nicholls is the appointed Portfolio Manager of the Company and is responsible for managing the Company's assets.
The People's Republic of China (excluding Taiwan, Hong Kong and the Macau Special Administrative Region of the PRC).
If the share price of the Company is higher than the Net Asset Value per Ordinary Share, the Company's shares are said to be trading at a premium. The premium is shown as a percentage of the Net Asset Value per Ordinary Share.
The Investment Manager is a QFII (a Qualified Foreign Institutional Investor) and as such has been granted a QFII licence by the China Securities Regulatory Commission ("CSRC") which permits the Company to invest in China "A" Shares through the Investment Manager and has received an allocation of quota for onshore investment from the State Administration of Foreign Exchange of the PRC ("SAFE").
Customer: Fidelity Project Title: China Special Sits Half Year Rpt 2020 T: 0207 055 6500 F: 020 7055 6600 DIRECTORS' REPORTSINFORMATION FOR SHAREHOLDERSOngoing Charges (excluding Variable Companies incorporated outside China but which are based in mainland China. Red Chips are listed on, and are required to observe the filing and reporting requirements of the Hong Kong Stock Exchange. Red Chips typically have a significant portion of their business interests located in mainland China and many are owned, either directly or indirectly, by organisations or enterprises controlled by the Chinese state, provinces or municipalities.
The entity that manages the Company's shareholder register. The Company's Registrar is Link Asset Services.
The return generated in a given period from investments:
• Revenue Return – reflects the dividends and interest from investments and other income, net of expenses, finance costs and taxation;
Also described as Net Asset Value, Shareholders' Funds represent the total value of the Company's assets less the total value of its liabilities as shown in the balance sheet.
The position of the Company when it has sold a security or derivative that it does not own but is now committed to eventually purchase in order to satisfy its obligation to sell. It is a strategy used to capitalise on an expected decline in the security's or derivative's price.
The return on the share price or Net Asset Value per Ordinary Share taking into account the rise and fall of share prices and the dividends paid to shareholders. Any dividends received by the shareholder are assumed to have been reinvested in additional shares (for share price total return) or the Company's assets (for Net Asset Value total return).
Total shareholder return (TSR) is the total return of shares to shareholders, or the capital gains, plus dividends paid.
Ordinary shares of the Company that have been repurchased by the Company and not cancelled but held in Treasury. These shares do not receive dividends, have no voting rights and are excluded from the Net Asset Value calculation.
FIL Investments International.
Companies not listed on a regulated stock exchange. They are stated at best estimate of fair value, based on recognised valuation techniques which may take account of recent arm's length transactions in the investments. FIL Investment Services (UK) Limited is the Company's Unlisted Investment Manager.
The Company has a Variable Management Fee (VMF) structure. The base fee is 0.90% of net assets per annum plus a +/- 0.20% variation fee based on performance relative to the Company's Benchmark Index (the MSCI China Index). The maximum fee that the Company will pay is 1.10% of Net Assets, but if the Company underperforms against the Benchmark Index, then the overall fee could be as low as 0.70% of Net Assets.
With effect from 1 April 2021, there will be a new VMF structure in place which will be on a tiered basis. The annual base fee will be 0.90% on the first £1.5 billion of Net Assets reducing to 0.70% on Net Assets over £1.5 billion. The variable element from the current fee structure of +/- 0.20% will remain unchanged.
A derivative security that gives the Company the right to purchase securities (usually equity) from the issuer at a specific price and within a certain time frame.
Fidelity China Special Situations PLC is a company listed on the London Stock Exchange and you can buy its shares through a platform, stockbroker, share shop or bank. Fidelity also offers a range of options, so that you can invest in a way that is best for you. Details of how to invest can be found on Fidelity's website at www.fidelityinvestmenttrusts.com.
Shareholders and Fidelity's Platform Investors should contact the appropriate administrator using the contact details given below and in the next column. Links to the websites of major platforms can be found online at www.fidelityinvestmenttrusts.com.
Contact Link Asset Services, Registrar to Fidelity China Special Situations PLC, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU.
Telephone: 0371 664 0300 (calls are charged at the standard geographic rate and will vary by provider. Calls outside the United Kingdom will be charged at the applicable international rate. Lines are open 9:00 – 17:30, Monday to Friday excluding public holidays in England and Wales).
Details of individual shareholdings and other information can also be obtained online from the Registrar's Share Portal at www.signalshares.com. Shareholders are able to manage their shareholding online by registering for the Share Portal, a free and secure online access service. Facilities include: Account Enquiry – Shareholders can access their personal shareholding, including share transaction history, dividend payment history and obtain an up-to-date shareholding valuation.
Amendment of Standing Data – Shareholders can change their registered postal address and add, change or delete dividend mandate instructions. Shareholders can also download forms such as change of address, stock transfer and dividend mandates as well as buy and sell shares in the Company.
Should you have any queries in respect of the Link Share Portal, contact the helpline on 0371 664 0391 (calls are charged at the standard geographic rate and will vary by provider. Calls outside the United Kingdom will be charged at the applicable international rate. Lines are open 9:00 – 17:30, Monday to Friday excluding public holidays in England and Wales).
Customer: Fidelity Project Title: China Special Sits Half Year Rpt 2020 T: 0207 055 6500 F: 020 7055 6600 DIRECTORS' REPORTSINFORMATION FOR SHAREHOLDERSShareholder Information Link Asset Services offer a low cost share dealing service to buy or sell shares. Further information is available at www.linksharedeal.com, or by telephoning 0371 664 0445 (calls are charged at the standard geographic rate and will vary by provider. Calls outside the United Kingdom will be charged at the applicable international rate. Lines are open 8:00 – 16:30, Monday to Friday excluding public holidays in England and Wales).
The Link Share Dealing Service allows you to deal in the shares of other companies for which Link Asset Services acts as Registrar, provided you are already a shareholder in the relevant company, and that company offers the Share Deal facility to its shareholders.
Contact Fidelity, using the freephone numbers given below, or by writing to: UK Customer Service, Fidelity, PO Box 391, Tadworth, Surrey KT20 9FU.
Website: www.fidelity.co.uk/its
Private investors: call free on 0800 41 41 10, 9:00 – 18:00, Monday to Saturday.
Financial advisers: call free on 0800 41 41 81, 8:00 – 18:00, Monday to Friday.
General enquiries should be made to the Secretary, at the Company's registered office: FIL Investments International, Investment Trusts, Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP.
Telephone: 01737 837846
Email: [email protected]
Website: www.fidelityinvestmenttrusts.com
If you hold Fidelity China Special Situations PLC shares in an account provided by Fidelity International, you will receive a report every six months detailing all of your transactions and the value of your shares.
| 30 September 2020 | Half-Yearly period end |
|---|---|
| December 2020 | Announcement of Half-Yearly results |
| December 2020 | Publication of Half-Yearly Report |
| 31 March 2021 | Financial year end |
| June 2021 | Publication of Annual Report |
| July 2021 | Annual General Meeting |
Customer: Fidelity Project Title: China Special Sits Half Year Rpt 2020 T: 0207 055 6500 F: 020 7055 6600 DIRECTORS' REPORTSINFORMATION FOR SHAREHOLDERSDirectory Nicholas Bull FCA (Chairman) Mike Balfour CA (Chairman of the Audit and Risk Committee) Vanessa Donegan (Chairman of the Investment Committee) Elisabeth Scott (Senior Independent Director) Linda Yueh
FIL Investment Services (UK) Limited Beechgate Millfield Lane Lower Kingswood Tadworth Surrey KT20 6RP
FIL Investment Management (Hong Kong) Limited Level 21 Two Pacific Place 88 Queensway Admiralty Hong Kong
FIL Investments International Beech Gate Millfield Lane Lower Kingswood Tadworth Surrey KT20 6RP Email: [email protected]
JPMorgan Chase Bank (London Branch) 125 London Wall London EC2Y 5AJ
J.P. Morgan Europe Limited 25 Bank Street London E14 5JP
Peel Hunt LLP Moor House 120 London Wall London EC2Y 5ET
Ernst & Young LLP 25 Churchill Place London E14 5EY
Charles Russell Speechlys LLP 5 Fleet Place London EC4M 7RD
Link Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU
The Company is an investment trust which is a public limited company and has certain regulatory obligations such as the requirement to send documents to its shareholders, for example, the Annual Report and other documents that relate to meetings of the Company. The Company will therefore collect shareholders' personal data such as names, addresses and identification numbers and investor codes and will use this personal data to fulfil its statutory obligations.
Any personal data collected will be kept securely on computer systems and in some circumstances on paper. Personal information is kept secure in line with Fidelity's Information Security policies and standards. If you are unhappy with how we have used your personal data, you can complain by contacting the UK Data Protection Officer, Fidelity International, Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP.
In order to assist the Company in meeting its statutory requirements, the Company delegates certain duties around the processing of this data to its third party service providers, such as the Company's Registrar and Printers. The Company has appointed Fidelity to undertake marketing activities for the Company and their privacy statement can be found on the Company's website at https://investment-trusts.fidelity.co.uk/privacy-policy/
The Company's agreements with the third party service providers have been updated to be compliant with GDPR requirements. The Company confirms to its shareholders that their data will not be shared with any third party for any other purpose, such as for marketing purposes. In some circumstances, it may be necessary to transfer shareholders' personal data across national borders to Fidelity Group entities operating in the European Economic Area ("EEA"). Where this does occur, the European standard of protections will be applied to the personal data that is processed. Where personal data is transferred within the Fidelity group, but outside of the EEA, that data will subsequently receive the same degree of protection as it would in the EEA.
We will keep the personal data for as long as is necessary for these purposes and no longer than we are legally permitted to do so.
Shareholders can access the information that the Company holds about them or ask for it to be corrected or deleted by contacting Fidelity's UK Data Protection Officer, Fidelity International, Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP.
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