TIDMFCSS
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 Fair
Exposure Value
£'000 %1 £'000
Long Exposures - shares unless otherwise
stated
Tencent Holdings (shares and long CFDs)
Internet, mobile and telecommunications 114,086 10.1 63,568
service provider
Pony.ai (unlisted)
Developer of artificial intelligence and 43,774 3.9 43,774
autonomous driving technology solutions
Alibaba Group Holding (shares and long
CFD)
e-commerce group 43,596 3.8 20,175
WuXi AppTec Group (long CFDs)
Pharmaceutical, biopharmaceutical and 39,292 3.5 210
medical device outsourcing provider
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 29,355 2.6 (1,540)
investment products
Chime Biologics Convertible Bond
(unlisted)
Contract Development and Manufacturing 28,583 2.5 28,583
Organization
Venturous Holdings (unlisted)
Investment company 27,970 2.5 27,970
HollySys Automation Technologies
Provider of automation control system 26,772 2.4 26,772
solutions
Hisense Home Appliances Group
Developer, manufacturer and distributor 26,252 2.3 26,252
of household appliances
Crystal International Group
Clothing manufacturer 26,056 2.3 26,056
China Foods (shares and long CFD)
Processor and distributor of food and 25,536 2.2 2,389
beverages
ByteDance (unlisted)
Technology company 25,411 2.2 25,411
ERA (shares and equity linked notes)
Manufacturer of plastic valves and 23,066 2.0 23,066
fittings
Postal Savings Bank of China
Commercial retail bank 22,684 2.0 22,684
Sinotrans (shares and long CFDs)
Logistics, storage and terminal services 22,617 2.0 10,803
provider
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 1,584,045 139.6 1,140,785
companies)
========= ========= =========
Less: hedging exposures
Hang Seng Index (future) (104,963) (9.2) 629
Hang Seng China Enterprises Index (47,347) (4.2) 327
(future)
--------- --------- ---------
------ ------ ------
Total hedging exposures (152,310) (13.4) 956
========= ========= =========
Total long exposures after the netting 1,431,735 126.2 1,141,741
of hedges
========= ========= =========
Short exposures
Short CFDs (2 holdings) 13,656 1.2 (844)
--------- --------- ---------
------ ------ ------
Gross Asset Exposure2 1,445,391 127.4
========= =========
Portfolio Fair Value3 1,140,897
Net current liabilities (excluding (6,421)
derivative instruments)
---------
------
Net Assets 1,134,476
=========
1Asset Exposure is expressed as a percentage of Net Assets.
2Gross Asset Exposure comprises market exposure to investments of £1,147,456,000
plus market exposure to derivative instruments of £297,935,000.
3Portfolio 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 Year
Six
months ended 31
months
ended 30 March
ended 30
September 2023
September
2023 audited
2022
unaudited
unaudited
Notes Revenue Capital Total Revenue Capital
Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000
£'000 £'000 £'000 £'000
Revenue
Investment 4 22,274 - 22,274 32,704 -
32,704 27,786 - 27,786
income
Derivative 4 9,709 - 9,709 11,566 -
11,566 9,925 - 9,925
income
Other 4 800 - 800 409 - 409
145 - 145
income
--------- --------- --------- --------- --------- ----
----- --------- --------- ---------
------ ------ ------ ------ ------ ----
-- ------ ------ ------
Total 32,783 - 32,783 44,679 -
44,679 37,856 - 37,856
income
========= ========= ========= ========= =========
========= ========= ========= =========
Losses on - (119,622) (119,622) - (6,912)
(6,912) - (52,166) (52,166)
investments
at
fair
value
through
profit or
loss
(Losses)/gai - (36,505) (36,505) - 14,971
14,971 - (88,129) (88,129)
ns
on
derivative
instruments
Foreign - (1,975) (1,975) - 8,167
8,167 - 13,614 13,614
exchange
(losses)/gai
ns
Foreign - (1,013) (1,013) - (4,814)
(4,814) - (13,800) (13,800)
exchange
losses on
bank loans
--------- --------- --------- --------- --------- ----
----- --------- --------- ---------
------ ------ ------ ------ ------ ----
-- ------ ------ ------
Total 32,783 (159,115) (126,332) 44,679 11,412
56,091 37,856 (140,481) (102,625)
income
and
(losses)/gai
ns
========= ========= ========= ========= =========
========= ========= ========= =========
Expenses
Investment 5 (1,293) (5,056) (6,349) (3,012) (11,715)
(14,727) (1,544) (6,002) (7,546)
management
fees
Other (669) (3) (672) (1,097) (4)
(1,101) (486) - (486)
expenses
--------- --------- --------- --------- --------- ----
----- --------- --------- ---------
------ ------ ------ ------ ------ ----
-- ------ ------ ------
Profit/(loss 30,821 (164,174) (133,353) 40,570 (307)
40,263 35,826 (146,483) (110,657)
)
before
finance
costs and
taxation
Finance 6 (3,426) (10,279) (13,705) (3,956) (11,869)
(15,825) (1,256) (3,770) (5,026)
costs
--------- --------- --------- --------- --------- ----
----- --------- --------- ---------
------ ------ ------ ------ ------ ----
-- ------ ------ ------
Profit/(loss 27,395 (174,453) (147,058) 36,614 (12,176)
24,438 34,570 (150,253) (115,683)
)
before
taxation
Taxation 7 (1,177) 383 (794) (1,149) -
(1,149) (1,476) 433 (1,043)
--------- --------- --------- --------- --------- ----
----- --------- --------- ---------
------ ------ ------ ------ ------ ----
-- ------ ------ ------
Profit/(loss 26,218 (174,070) (147,852) 35,465 (12,176)
23,289 33,094 (149,820) (116,726)
)
after
taxation
for the
period
========= ========= ========= ========= =========
========= ========= ========= =========
Earnings/(lo 8 5.43p (36.06p) (30.63p) 7.05p (2.42p)
4.63p 6.45p (29.22p) (22.77p)
ss)
per
ordinary
share
========= ========= ========= ========= =========
========= ========= ========= =========
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 5,710 211,569 917 186,794 877,782
55,649 1,338,421
at 31
March 2023
Repurchase 13 - - - (6,965) - -
(6,965)
of ordinary
shares into
Treasury
Repurchase 13 (89) - 89 (18,930) - -
(18,930)
of ordinary
shares for
cancellation
(Loss)/profit - - - - (174,070)
26,218 (147,852)
after
taxation for
the period
Dividend 9 - - - - -
(30,198) (30,198)
paid to
shareholders
--------- --------- ---------- --------- --------- --
------- ---------
------ ------ ----- ------ ------ --
---- ------
Total equity 5,621 211,569 1,006 160,899 703,712
51,669 1,134,476
at 30
September
2023
========= ========= ========= ========= =========
========= =========
Year ended
31 March
2023
(audited)
Total equity 5,710 211,569 917 244,043 889,958
48,424 1,400,621
at 31
March 2022
Repurchase 13 - - - (57,249) - -
(57,249)
of ordinary
shares into
Treasury
(Loss)/profit - - - - (12,176)
35,465 23,289
after
taxation for
the year
Dividend 9 - - - - -
(28,240) (28,240)
paid to
shareholders
--------- --------- ---------- --------- --------- --
------- ---------
------ ------ ----- ------ ------ --
---- ------
Total equity 5,710 211,569 917 186,794 877,782
55,649 1,338,421
at 31
March 2023
========= ========= ========= ========= =========
========= =========
Six months
ended 30
September
2022
(unaudited)
Total equity 5,710 211,569 917 244,043 889,958
48,424 1,400,621
at 31
March 2022
Repurchase 13 - - - (23,532) - -
(23,532)
of ordinary
shares into
Treasury
(Loss)/profit - - - - (149,820)
33,094 (116,726)
after
taxation for
the period
Dividend 9 - - - - -
(28,240) (28,240)
paid to
shareholders
--------- --------- ---------- --------- --------- --
------- ---------
------ ------ ----- ------ ------ --
---- ------
Total equity 5,710 211,569 917 220,511 740,138
53,278 1,232,123
at 30
September
2022
========= ========= ========= ========= =========
========= =========
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 10 1,147,456 1,318,764 1,256,604
through profit or loss
--------- --------------- ---------------
------
Current assets
Derivative instruments 10 3,739 22,313 15,978
Amounts held at futures 24,438 34,813 66,612
clearing houses and
brokers
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 (12,980) 19,657 (24,481)
(liabilities)/assets
========= ========= =========
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 1,006 917 917
reserve
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 14 238.07p 274.08p 244.47p
ordinary share
========= ========= =========
Cash Flow Statement for the six months ended 30 September 2023
Six Year Six months
months ended ended
ended 31 March 30 September
30 2023 2022
September audited unaudited
2023 £'000 £'000
unaudited
£'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 (315,682) (429,715) (215,661)
investments
Cash outflow from the purchase of (1,910) (7,957) (3,966)
derivatives
Cash outflow from the settlement of (152,776) (485,760) (215,801)
derivatives
Cash inflow from the sale of 356,034 480,407 231,473
investments
Cash inflow from the settlement of 132,953 510,263 189,426
derivatives
Cash inflow/(outflow) from amounts held 10,375 (2,593) (34,392)
at futures clearing houses and brokers
--------- --------- ---------------
------ ------
Net cash inflow/(outflow) from 49,267 91,057 (23,022)
operating activities before servicing
of finance
========= ========= =========
Financing activities
Cash outflow from bank loan, collateral (2,561) (2,242) (1,190)
and overdraft interest paid
Cash outflow from CFD interest paid (11,245) (12,099) (2,741)
Cash outflow from short CFD dividends - (254) (254)
paid
Cash outflow from the repurchase of (7,095) (57,119) (21,409)
ordinary shares into Treasury
Cash outflow from the repurchase of (17,878) - -
ordinary shares for cancellation
Cash outflow from dividends paid to (30,198) (28,240) (28,240)
shareholders
--------- --------- ---------------
------ ------
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 - 755 756
dividends
--------------- --------------- ---------------
22,274 32,704 27,786
========= ========= =========
Derivative income
Dividends received on 9,405 11,282 9,849
long CFDs
Interest received on 304 284 76
CFDs
--------------- --------------- ---------------
9,709 11,566 9,925
========= ========= =========
Other income
Interest received on 800 409 145
collateral and
deposits
--------------- --------------- ---------------
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 1,293 3,879 5,172
fee - base
Investment management - 1,177 1,177
fee - variable
--------------- --------------- ---------------
1,293 5,056 6,349
========= ========= =========
Year ended 31 March
2023 (audited)
Investment management 3,012 9,037 12,049
fee - base
Investment management - 2,678 2,678
fee - variable
--------------- --------------- ---------------
3,012 11,715 14,727
========= ========= =========
Six months ended 30
September 2022
(unaudited)
Investment management 1,544 4,632 6,176
fee - base
Investment management - 1,370 1,370
fee - variable
--------------- --------------- ---------------
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 642 1,927 2,569
and overdrafts
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 663 1,989 2,652
and overdrafts
Interest paid on CFDs 3,230 9,689 12,919
Dividends paid on short 63 191 254
CFDs
--------------- --------------- ---------------
3,956 11,869 15,825
========= ========= =========
Six months ended 30
September 2022
(unaudited)
Interest on bank loan, 309 927 1,236
collateral and
overdrafts
Interest paid on CFDs 884 2,652 3,536
Dividends paid on short 63 191 254
CFDs
--------------- --------------- ---------------
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 794 - 794
charge
--------------- --------------- ---------------
Taxation charge for the 1,177 (383) 794
period
========= ========= =========
Year ended 31 March
2023 (audited)
UK corporation tax - - -
Overseas taxation 1,149 - 1,149
charge
--------------- --------------- ---------------
Taxation charge for the 1,149 - 1,149
year
========= ========= =========
Six months ended 30
September 2023
(unaudited)
UK corporation tax 433 (433) -
Overseas taxation 1,043 - 1,043
charge
--------------- --------------- ---------------
Taxation charge for the 1,476 (433) 1,043
period
========= ========= =========
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 5.43p 7.05p 6.45p
ordinary share
Capital loss per (36.06p) (2.42p) (29.22p)
ordinary share
--------------- --------------- ---------------
Total (30.63p) 4.63p (22.77p)
(loss)/earnings per
ordinary share
========= ========= =========
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 26,218 35,465 33,094
taxation for the period
Capital loss after (174,070) (12,176) (149,820)
taxation for the period
--------------- --------------- ---------------
Total (loss)/profit after (147,852) 23,289 (116,726)
the taxation for the
period
========= ========= =========
Number Number Number
Weighted average number of 482,649,498 503,045,428 512,714,728
ordinary shares held outside of
Treasury
========== ========== ==========
9 Dividend Paid to Shareholders
Six Year Six months
months ended ended
ended 31.03.23 30.09.22
30.09.23 audited unaudited
unaudited £'000 £'000
£'000
Dividend of 6.25 pence per ordinary 30,198 - -
share paid for the year ended 31 March
2023
Dividend of 5.50 pence per ordinary - 28,240 28,240
share paid for the year ended 31 March
2022
--------- --------- ---------------
------ ------
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 - (10,298) - (10,298)
liabilities
--------- --------- --------- ---------
------ ------ ------ ------
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 (7,271) (13,621) - (20,892)
liabilities
--------- --------- --------- ---------
------ ------ ------ ------
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 - (32,930) (1,220) (34,150)
liabilities
--------- --------- --------- ---------
------ ------ ------ ------
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 192,878 194,650 194,650
the beginning of the
period
Transfers into level 3 at 17,316 - -
cost1
Transfers out of level 3 (11,758) (9,971) (9,971)
- at cost2
Unrealised gains (12,299) 8,199 44,364
recognised in the Income
Statement
--------------- --------------- ---------------
Level 3 investments at 186,137 192,878 229,043
the end of the period
========= ========= =========
1Financial instruments are transferred into level 3 on the date they are
suspended, delisted or if they have not traded for thirty days.
2Financial 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 3,788 10,135 639
settlement of
derivatives
Securities sold for 703 148 40,746
future settlement
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 5,175 4,731 31,855
settlement of
derivatives
Securities purchased 1,624 12,402 1,213
for future settlement
Investment management 974 1,266 1,206
fees payable
Accrued expenses 944 1,096 551
Amounts payable for the 1,052 - -
cancellation of shares
Amounts payable for the - 130 2,123
repurchase of shares
Finance costs payable 868 977 952
--------------- --------------- ---------------
10,637 20,602 37,900
========= ========= =========
13 Share Capital
30 31 March 30
September 2023 September
2023 audited 2022
unaudited 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 488,325,628 4,884 513,957,409 5,140 513,957,409
5,140
the period
Ordinary (2,900,696) (29) (25,631,781) (256) (9,953,633)
(100)
shares
repurchased
into
Treasury
Ordinary (8,900,641) (89) - - - -
shares
repurchased
for
cancellation
----------- ---------- ------------ ---------- ----------- --
--------
------ ------- ----- ------- ------ --
-----
End of the 476,524,291 4,766 488,325,628 4,884 504,003,776
5,040
period
========== ========== ========== ========== ==========
==========
Ordinary
shares of 1
pence
each held in
Treasury*
Beginning of 82,728,852 826 57,097,071 570 57,097,071
570
the period
Ordinary 2,900,696 29 25,631,781 256 9,953,633
100
shares
repurchased
into
Treasury
----------- ---------- ------------ ---------- ----------- --
--------
------ ------- ----- ------- ------ --
-----
End of the 85,629,548 855 82,728,852 826 67,050,704
670
period
========== ========== ========== ========== ==========
==========
Total share 5,621 5,710
5,710
capital
========== ==========
==========
*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 476,524,291 488,325,628 504,003,776
outside of Treasury
Net asset value per 238.07p 274.08p 244.47p
ordinary share
========= ========= =========
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.
This information was brought to you by Cision http://news.cision.com
END
(END) Dow Jones Newswires
November 29, 2023 02:01 ET (07:01 GMT)
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