FCSS Fidelity China Special Situations Plc

FIDELITY CHINA SPECIAL SITUATIONS PLC

Half-Yearly results for the six months ended 30 September 2023 (unaudited)

 

 

Financial Highlights:

 

• Fidelity China Special Situations PLC reported a Net Asset Value (NAV) return of -10.9% compared to the -10.3% return of the Benchmark Index in the six months ended 30 September 2023.

 

• The share price return was -12.9% during the same period.

 

• Despite market sentiment, robust stock picking in the consumer discretionary and health care sectors proved rewarding.

 

• The Portfolio Manager believes valuations remain compelling in historic and absolute terms.

 

Recent Announcement

 

• Fidelity China Special Situations PLC [FCSS] has agreed heads of terms with abrdn China Investment Company Limited [ACIC] in respect of a proposed combination of ACIC with FCSS. Following the transaction, the enlarged FCSS would continue to be managed in accordance with its existing investment objective and policy by FIL Investment Management (Hong Kong) Limited with Dale Nicholls continuing as the named portfolio manager. Please refer to the stock exchange announcement released at 7am on 28 November 2023 for further details.

 

 

Contacts

 

For further information, please contact:

 

Smita Amin

Company Secretary

FIL Investments International

01737 836347

 

Portfolio Manager’s Half-Yearly Review

Macro and market backdrop
At the beginning of the current financial year, it was already becoming clear that the hoped-for boost from the lifting of China’s zero-Covid policy was going to be less straightforward than anticipated. Rather than seeing an immediate improvement, the economic outlook has remained uncertain, and this has led to high levels of volatility in the stock market. However, the policy backdrop has remained supportive, with the Chinese authorities returning to market-friendly rhetoric and stepping up efforts to roll out an array of stimulus measures to boost consumption and revive the economy since the July Politburo meeting.

The property sector has continued to cause concern both domestically and internationally, with tighter lending conditions leading to increased stress on some highly leveraged privately-owned property developers. Policy support has focused on the slowing residential market and lagging consumer sentiment, with initiatives such as the easing of mortgage conditions, the loosening of the definition of a ‘first home’ and allowing lower minimum down payment ratios for both first and second homeowners – all in an effort to support underlying demand for property. On the fiscal side, the government’s ongoing focus on quality rather than quantity of economic growth, along with stretched local government finances, has meant that the trend of large-scale and leverage-fuelled infrastructure projects is likely to have run its course.

A sustained improvement in domestic regulation towards favouring the private sector or a sustained stabilisation of key geopolitical relationships would likely initiate a gradual rerating of Chinese stocks. We see positive signs of Beijing nurturing high-end manufacturing and encouraging foreign participation. A case in point is Xi Jinping’s announcement during the recent BRI Forum that China will terminate all restrictions for foreign participation in manufacturing.

One of the principal reasons why the post-Covid reopening fell flatter than expected was that consumer confidence has remained muted. The factors driving this include weak business confidence, particularly on the back of well-publicised job cuts at the big tech companies, and youth unemployment headlines. Weakness in the property market is also likely playing a part given the significant weight of property on the consumer balance sheet. On the positive side, Chinese citizens are sitting on record amounts of savings and the assumption had been that they would be keen to travel and spend as soon as they were able to do so. The recent ‘Golden Week’ holiday saw domestic tourism rebound to pre-pandemic levels, although overseas travel remains below trend. Despite the mixed signals, however, we believe consumption will likely continue to be the prime driver of the recovery, supported by factors such as the move towards urbanisation, which supports rising consumer purchasing power. While this trend may have slowed down during Covid, it remains clearly intact, and the overall levels of urbanisation still significantly lag levels seen in the West.

The rise of the Chinese consumer has long been a major theme for Fidelity China Special Situations, as evidenced by more than 40% of the portfolio held in consumer stocks.

Performance and portfolio review
Chinese equities have experienced extreme volatility over the past six months, erasing the gains since the market’s recent peak at the start of 2023. The initial euphoria around China’s reopening was short-lived, as investor sentiment and consumer confidence were both adversely affected by subdued macroeconomic data and renewed stress on the financial and real estate sectors since the second quarter. Against this uncertain backdrop, the Company’s NAV declined by 10.9% in the six-month reporting period to 30 September 2023, slightly more than the MSCI China Index (the Benchmark Index) which was down by 10.3%. The Company’s share price fell by 12.9% over the same period, reflecting a widening of the discount to NAV. (All performance data on a total return basis.)

While an overweight exposure to financials and materials detracted from performance during the period, robust stock picking in the consumer discretionary and health care sectors proved rewarding.

Within the consumer area, some of the initial beneficiaries of reopening in discretionary spending continued to post attractive gains. Holdings in Hisense Home Appliances Group, the branded variety retailer MINISO and Lao Feng Xiang, a leading jewellery retailer, all made gains, supported by their solid execution and positive structural growth outlooks. These gains were partially offset by the position in China Tourism Group Duty Free, which declined amid weaker-than-expected consumer confidence.

Elsewhere in the consumer discretionary space, shares in automobile parts manufacturer Intron Technology also declined on the back of disappointing results. However, we believe that structural tailwinds in China’s auto sector toward electrification continue to underpin its long-term outlook.

Within the health care sector, WuXi AppTec Group – one of our largest holdings on both an absolute basis and relative to the Benchmark Index – contributed positively to performance. It is a leading biopharma contract development and manufacturing company and reported upbeat financial results. Its shares were also supported by the hype around glucagon-like peptide 1 (GLP-1) drugs for weight-loss, spurred on by ground-breaking results from a recent clinical study. The position in biotech company HUTCHMED China also advanced on the back of better-than-expected results. Cost-saving initiatives made a meaningful contribution to its earnings, and it has no near-term funding needs as it has adequate cash to fund its upcoming research and development (R&D) pipeline. Moreover, shares in the China-focused and Japan listed drug developer GNI Group were supported by results that were in line with expectations. It revised its revenue and profit guidance upwards after receiving an upfront licence payment from Astellas for its US subsidiary Cullgen.

In contrast, not holding NetEase and Li Auto held back returns relative to the Benchmark Index. Shares of NetEase advanced amid easing industry crackdowns and resilient demand in the gaming sector. The company has benefited from its recent better-than-expected game blockbusters in China. Electric vehicle manufacturers trended upwards on the back of the recent announcement of an extended tax break on renewable automobile purchases. Thus, not holding Li Auto, one of China’s largest pure-play electric vehicle companies, weighed on relative returns.

Within financials, the position in credit facilitator Lufax Holding declined as it released subdued results. Tightening lending criteria, driven by weakness in China’s macroeconomic backdrop, has led to a decline in new loans which poses a near-term headwind to the company’s earnings. Nonetheless, Lufax remains substantially undervalued and provides significant upside potential given its leading position in online lending to small and medium-sized enterprises (SMEs) and attractive valuations.

ESG and engagement
We continue to develop our sustainability ratings system and processes to meet the ever-evolving landscape of investing through an ESG lens. Before highlighting our most recent updates, we believe it is important to reiterate why we have institutionalised sustainability into our investment process. There are three layers to our approach. The first is a foundation of robust sustainable investing practices that helps to build sustainable financial futures. The second layer is made up of different modules that will evolve to meet dynamic requirements – building digital tools to support effective analysis, integration, and the reporting of sustainability in our investment process. The final layer is how we communicate our process externally (such as meetings and engagement with companies’ management teams).

We equally believe our proprietary ratings add value to third-party ESG research while adhering to our fundamental investment philosophy. Too often, different ESG research providers reach different conclusions on the same companies, due to different underlying methodologies and judgements on materiality. Furthermore, by using an average, we feel that the ‘overall’ score used by others can mask a complex set of underlying ‘E’, ‘S’ and ‘G’ factors.

When dealing with so-called “less sustainable” companies, one can engage with them to help implement effective change or exclude them entirely from portfolios. We believe that the former has much greater potential to positively impact future generations as well as returns over the long-term (opportunities), particularly if an investor is willing to exert influence and help companies to improve their ESG trajectory.

With all that said, it is important to note that the Company is not an ‘ESG fund’ that aims to only invest in those companies dedicated to delivering positive ESG impacts. Rather, we integrate ESG considerations into our investment process to mitigate sustainability risks, which can have negative implications for share prices as well as for people and the planet. Below is an example of one of our recent engagements with a company in the portfolio to help them – and therefore us – to manage sustainability risks.

TENCENT HOLDINGS: ENGAGEMENT CASE STUDY
Tencent’s ESG team proactively initiated a meeting with Fidelity which is in itself encouraging. The meeting was wide-ranging and covered ‘E’, ‘S’ and ‘G’ factors. From an environmental perspective, Tencent has a goal of full carbon neutrality by 2030. It is only one of the few technology, media and telecom (TMT) company globally (and the first in China) to have received a Science-Based Target-initiative (SBTi) approved greenhouse gas (“GHG”) reduction target, behind Microsoft. During the meeting, we discussed comprehensive GHG disclosures, including Scope 3 emissions (the last of the three groups of targets required to achieve net zero and covering areas such as employee travel and new headquarter constructions). The company has started to look into the potential for Scope 3 emissions reduction, although the actual change will happen in the medium rather than the short-term.

On the social aspect, Tencent recognises previous controversies related to Diversity, Equity and Inclusion (DEI) and has proactively made steady progress towards gender equity at board and company levels. We reiterated Fidelity’s policy requiring a minimum of 30% female representation at the board level. Following the appointment of a female non-executive director, the board of Tencent has increased the ratio of female directors to 22.2% and intends to raise this percentage further.

From a governance perspective, we recommended that the company should consider greater disclosure on data privacy. Overall, we were impressed to see the incremental progress Tencent is making in improving its ESG practices.

Current portfolio positioning
On a relative basis, at the reporting period end we were most overweight the Benchmark Index in the industrials, health care, consumer discretionary and information technology sectors. We were most underweight in utilities, energy and communication services.

A notable change to the portfolio during the period was a significant decrease in exposure to the consumer discretionary sector, triggered mostly by profit taking. The proceeds of these sales have been deployed to increase our allocation in consumer staples, materials and energy sectors.

In information technology, we trimmed our holding in Alibaba Group and initiated a position (which we have since increased) in PDD Holdings, which is the third largest e-commerce platform in China and shows outstanding efficiency in supply chain management and cost control. This competitive edge allows the company to offer very competitive pricing, driving continuous gains in market share. This same edge is helping PDD to expand internationally via its Temu brand, leveraging China’s supply chain to meet offshore demand. Currently, Temu is still loss-making due to its significant investment in the user acquisition phase, so in the near-term the expansion is a drag on PDD’s profits. However, over the long-term, we believe there is good potential for significant value to be created in this business, and therefore, the stock offers great upside potential when profitability improves, and the market takes a more positive view of the sustainability of its earnings.

Elsewhere in the consumer space, the positions in MINISO and Lao Feng Xiang were sold to lock in profits which we recycled into better priced opportunities elsewhere. For example, we purchased a new position in online video platform operator iQiyi. It offers an attractive valuation and we believe there is good potential for the competitive environment to improve.

Within the energy sector, we initiated a new position in integrated offshore oil services provider China Oilfield Services, which is 50% owned by the national oil company CNOOC. The company provides leading drilling services in China, while its well service business is also starting to gain market share overseas. We see favourable supply and demand dynamics in the mid-term and the valuations are very compelling.

Premium growth in the life insurance market was negatively impacted during Covid and the recovery has been muted. However, we still see good long-term potential in the Chinese insurance market given the relatively low levels of penetration. Capitalising on the weakness in stock prices, we increased our stake in China’s second largest life insurer (by premium income), Ping An Insurance Company of China. This is a high-quality company that looks attractively valued as the overall weakness in the life insurance industry bottoms out. The purchase was funded by selling the entire position in China Pacific Insurance after its valuation moved upwards, with upside being increasingly priced in.

Within the real estate sector, we initiated a new position in the state-owned developer China Overseas Land & Investment (“COLI”), given its favourable risk-reward profile following the recent market correction and policy easing expectations for the sector. Against the backdrop of the ongoing property downturn, we believe that leading state-owned players with low funding costs are well placed to survive and to continue gaining market share, while cash-strapped private developers with high levels of leverage are likely to struggle. COLI has been excellent in controlling construction costs and enjoys the lowest funding costs in the industry thanks to its prudent balance sheet. This absolute cost advantage enables COLI to have the highest core net profit margin among its peers.

We also added to building materials companies in the property value chain. Beijing Oriental Yuhong Waterproof Technology is a long-term market share gainer amid fast consolidation in the waterproof industry. As the construction downcycle goes on, hundreds of small building materials companies have exited the market. Yuhong, however, is likely to maintain and expand its market leading position. Meanwhile, its shares are trading well below intrinsic value given the extreme bearish market sentiment towards the property sector, presenting an attractive balance of risk and reward.

We have outlined our five largest holdings below.

Gearing
We continue to believe that the judicious use of gearing can be accretive to long-term capital and income returns, allowing us the opportunity to capitalise on the volatility in the Chinese market. Gearing is primarily deployed using contracts for difference, which are relatively low-cost and represent a flexible way of increasing investment exposure, along with a fixed term loan. At the start of the period under review, net gearing was 21.1% which rose to 25.0% by the end of September.

Outlook
After a spell of increased uncertainty over China’s growth trajectory as it emerged from Covid lockdowns, the mood music has moved to a slightly more positive tone in recent weeks. Regulatory concerns are now less relevant, and the narrative again focuses more on growth. While a 5% annual GDP growth target seems largely on track, we believe the current backdrop reflects a more measured growth outlook going into 2024.

In the face of a problematic property market in China, the refinancing conditions for property developers will likely remain challenging in the near-term despite more supportive policies. However, this is not detrimental to all property developers. While we do not expect a significant property rebound given the structural challenges, home prices are showing signs of resilience, especially in top tier cities. Ultimately, the existing divergence between various developers could be magnified further. The indiscriminate sell-off so far this year has caused some mispricing and this provides an opportunity for active investors who can successfully identify the leading players who are most likely to benefit from lower funding costs and can gain market share, while cash-strapped developers struggle.

While economic challenges and geopolitical risks remain, policy direction towards regulatory loosening is clear. We have already seen action taken to boost consumer confidence, such as tax breaks on the purchase of electric vehicles and lower mortgage requirements for home buyers. Although job and wage cuts have clearly hurt consumer confidence, we have the sense that the worst is behind us from our discussions with companies. Over the longer-term, improved corporate earnings could be a key driver for investor confidence to return.

China is at a different point in the economic cycle to many Western countries. Rising interest rates and inflation in the West have meant tightening central bank policies aimed at slowing economies down, whereas the opposite is the case in China. Inflation has not been a problem, and the authorities are taking a more stimulative approach to boost growth.

At the same time, valuations in the Chinese equity market – barring some post-Covid reopening beneficiaries in the consumer discretionary space – remain very compelling both in historic and absolute terms and compared to some other major markets. The low level of valuations is despite a corporate earnings outlook that compares well to most other large markets. Clearly, a lot of pessimism over the economy appears priced in.

It is widely recognised that the long-term plan of the Chinese government is to seek to reduce the economy’s reliance on investment and property and pivot away from some of the country’s traditional growth drivers towards high-end manufacturing and domestic consumption. The pace of innovation in China remains strong, primarily led by private enterprises in sectors such as industrials and health care. Globally, leading companies have emerged in areas such as electric vehicles and renewable energy. These are factors contributing to consolidation trends across a range of sectors, many of which remain very fragmented. While overseas investors may focus on the impact on China of de- globalisation and ‘near-shoring’ of industry, the corollary to this is an increasing preference among Chinese consumers for Chinese brands, resulting in domestic companies taking ever greater market share in what remains one of the world’s largest markets.

We have spent much time discussing the economic backdrop in China, which has clearly been challenging. What we feel is often missed are the stories of great individual companies executing well in industries where they have strong growth potential, but whose valuations are dragged down by the macro headlines and the general negative sentiment that we have discussed above. We believe that stock prices follow earnings in the long-term. Provided their earnings growth comes through, the upside potential is significant. Our team on the ground is focused on selecting the winners that will deliver, and that is where we are directing the Company’s capital.

Dale Nicholls
Portfolio Manager
28 November 2023

Spotlight on the Top Five Holdings as at 30 September 2023

The top five holdings comprise 24.7% of the Company’s Net Assets.

Industry Communication Services
Tencent Holdings
% of Net Assets  10.1%

Tencent Holdings has a market leading position in social networking in China and has enriched the user experience and benefits from a sizeable user base. As China’s internet user growth slows and the internet industry focuses increasingly on monetisation, Tencent is one of the best positioned companies because of its very sticky user base and strong ecosystem which should lead to overall margin expansion. An improving government tone towards mobile gaming and an acceleration of new game approvals since early 2023 and strong domestic game pipelines should underpin growth in Tencent’s gaming segment.

Industry Consumer Discretionary
Pony.ai (unlisted)
% of Net Assets  3.9%

The Toyota backed autonomous vehicle technology company, Pony.ai presents significant growth potential as a market leader in an emerging new industry that will transform traditional ways of transportation. The company plans to commercialise autonomous driving for all sizes of vehicles and to operate on both ridesharing and delivery service networks.

Industry Consumer Discretionary
Alibaba Group Holding
% of Net Assets  3.8%

Alibaba Group holds a leading position in the e-commerce market. Its core e-commerce categories, including apparel and makeup, will benefit from a recovery in consumption and pent-up demand in China. It has a comprehensive ecosystem that has superior breadth and depth and is the foundation of its loyal merchant and consumer base which supports its pricing power. Alibaba announced in March 2023 that it will split the company into six businesses in a move designed to unlock shareholder value and foster market competitiveness.

Industry Healthcare
Wuxi AppTec Group
% of Net Assets  3.5%

WuXi AppTec Group is a leading biotech contract research and manufacturing (“CDMO/CMO”) company and one of the dominant global platforms in terms of sales. It is a long-term compounder and is expected to benefit from global pharmaceutical industry growth and continued research & development (R&D) investment by pharmaceutical companies. The continued outsourcing trend from in-house production to CDMO companies, particularly in China, also underpins its position. WuXi has established a robust talent pool with strong technical skills which has helped to drive a loyal and sticky client base.

Industry Consumer Discretionary
PDD Holdings
% of Net Assets  3.4%

PDD Holdings is the third largest e-commerce platform by GMV in China, with outstanding efficiency in supply chain management and cost control. With its unique traffic distribution method, PDD is able to offer the cheapest version of products and continuously gains market share. The company is also expanding internationally via a new shopping app called Temu by leveraging domestic supply chains in order to meet offshore demand. PDD’s profit has recently been impacted by its heavy investment during its user acquisition phase, however, Temu offers great upside potential given the significant user growth being seen.

Twenty Largest Holdings as at 30 September 2023

The Asset Exposures shown below measure the exposure of the Company’s portfolio to market price movements in the shares, equity linked notes and convertible bonds owned or in the shares underlying the derivative instruments. The Fair Value is the value the portfolio could be sold for and is the value shown on the Balance Sheet. Where a contract for difference (“CFD”) is held, the fair value reflects the profit or loss on the contract since it was opened and is based on how much the share price of the underlying shares has moved.

	Asset Exposure		Fair  Value
	£’000	%1	£’000
Long Exposures – shares unless otherwise stated
Tencent Holdings (shares and long CFDs)
Internet, mobile and telecommunications service provider	114,086	10.1	63,568
Pony.ai (unlisted)
Developer of artificial intelligence and autonomous driving technology solutions	43,774	3.9	43,774
Alibaba Group Holding (shares and long CFD)
e-commerce group	43,596	3.8	20,175
WuXi AppTec Group (long CFDs)
Pharmaceutical, biopharmaceutical and medical device outsourcing provider	39,292	3.5	210
PDD Holdings (long CFD)
e-commerce group	38,981	3.4	(145)
DJI International (unlisted)
Manufacturer of drones	30,266	2.7	30,266
China Life Insurance (long CFDs)
Insurance company	29,533	2.6	444
Ping An Insurance Company of China (long CFD)
Provider of insurance, banking and investment products	29,355	2.6	(1,540)
Chime Biologics Convertible Bond (unlisted)
Contract Development and Manufacturing Organization	28,583	2.5	28,583
Venturous Holdings (unlisted)
Investment company	27,970	2.5	27,970
HollySys Automation Technologies
Provider of automation control system solutions	26,772	2.4	26,772
Hisense Home Appliances Group
Developer, manufacturer and distributor of household appliances	26,252	2.3	26,252
Crystal International Group
Clothing manufacturer	26,056	2.3	26,056
China Foods (shares and long CFD)
Processor and distributor of food and beverages	25,536	2.2	2,389
ByteDance (unlisted)
Technology company	25,411	2.2	25,411
ERA (shares and equity linked notes)
Manufacturer of plastic valves and fittings	23,066	2.0	23,066
Postal Savings Bank of China
Commercial retail bank	22,684	2.0	22,684
Sinotrans (shares and long CFDs)
Logistics, storage and terminal services provider	22,617	2.0	10,803
HUTCHMED China
Biopharmaceutical company	21,476	1.9	21,476
Autohome
Online portal for automobile buyers	19,692	1.7	19,692
	---------------	---------------	---------------
Twenty largest long exposures	664,998	58.6	417,906
Other long exposures	919,047	81.0	722,879
	---------------	---------------	---------------
Total long exposures before hedges (151 companies)	1,584,045	139.6	1,140,785
	=========	=========	=========
Less: hedging exposures
Hang Seng Index (future)	(104,963)	(9.2)	629
Hang Seng China Enterprises Index (future)	(47,347)	(4.2)	327
	---------------	---------------	---------------
Total hedging exposures	(152,310)	(13.4)	956
	=========	=========	=========
Total long exposures after the netting of hedges	1,431,735	126.2	1,141,741
	=========	=========	=========
Short exposures
Short CFDs (2 holdings)	13,656	1.2		(844)
	---------------	---------------		---------------
Gross Asset Exposure2	1,445,391	127.4
	=========	=========
Portfolio Fair Value3				1,140,897
Net current liabilities (excluding derivative instruments)				(6,421)
				---------------
Net Assets				1,134,476
				=========

1 Asset Exposure is expressed as a percentage of Net Assets.

2 Gross Asset Exposure comprises market exposure to investments of £1,147,456,000 plus market exposure to derivative instruments of £297,935,000.

3 Portfolio Fair Value comprises investments of £1,147,456,000 plus derivative assets of £3,739,000 less derivative liabilities of £10,298,000.

Interim Management Report

Unlisted Investments
The Company can invest up to 15% of its Net Assets plus Borrowings in unlisted companies which carry on business, or have significant interests, in China. The limit is applied at the time of purchase of the investment. The unlisted space in China allows the Portfolio Manager to take advantage of the faster growth trajectory of earlier stage companies before they potentially become listed on the public markets. This can offer excellent opportunities for patient and long-term investors.

As at 30 September 2023, the Company had 12.8% of Net Assets plus Borrowings in six unlisted investments (31 March 2023: 13.6% of Net Assets plus Borrowings in nine unlisted investments). In the reporting period, the following companies listed on the Hong Kong Stock Exchange: Beisen on 13 April 2023; Cutia Therapeutics on 12 June 2023; and Tuhu Car on 26 September 2023.

The unlisted investments in the Company’s portfolio are assessed regularly by Fidelity’s dedicated Fair Value Committee (“FVC”) with advice from Kroll, a third-party valuation specialist, and also the Fidelity analysts who look after these companies. In addition, Fidelity has an unlisted investments specialist focused on Chinese unquoted companies. The FVC meets monthly to consider the valuation of the unlisted investments. However, the unlisted investments are monitored on a daily basis for trigger events such as funding rounds or news of fundamentals which may require the FVC to adjust the valuation price as soon as the relevant Fidelity analyst has been consulted. Kroll undertake a detailed review of each of the unlisted investments on a quarterly basis. The FVC provides regular updates to the Board so that it has oversight of the valuation process. The Board also receives details of any price changes made outside of the normal quarterly cycle.

Twice yearly, ahead of the Company’s interim and its year end, the Audit and Risk Committee has meetings whereby it receives a detailed presentation from the FVC, Kroll and Fidelity’s unlisted specialist in order to satisfy itself that the unlisted investments are carried at an appropriate value at the balance sheet date. The external Auditor attends the unlisted valuations meeting held ahead of the Company’s year end.

The basis of the valuation of the unlisted investments is set out in Notes 2 (e) and 2 (l) of the Accounting Policies which can be found on pages 65 to 68 of the Annual Report for the year ended 31 March 2023.

Gearing
The Board continues to believe that the judicious use of gearing (a benefit of the investment trust structure) can be accretive to long-term capital and income returns, although being more than 100% invested does mean that the NAV and share price may be more volatile and can accentuate losses in a falling market. Net gearing at the period end was 25.0% compared to 21.1% as at 31 March 2023.

The Company renewed its loan facility with Scotiabank Europe PLC for US$100,000,000 on 14 February 2023 for a period of one year at a fixed interest annual rate of 6.335%. It is the Board’s intention not to renew this facility at maturity.

Discount Management
The Board believes that investors are best served when the share price trades close to its NAV per share. However, the Board recognises that the share price is affected by the interaction of supply and demand in the market based on investor sentiment towards China, as well as the performance of the Company’s portfolio. A discount control mechanism is in place whereby the Board seeks to maintain the Company’s discount in single digits in normal market conditions. Until May 2023, shares repurchased were held in Treasury. However, once shares held in Treasury equated to 15% of the issued share capital, shares repurchased since then have been cancelled. Shareholders authorised the Directors to buyback up to 14.99% of the Company’s shares at the last Annual General Meeting.

To combat tricky and volatile market conditions during the reporting period, the Board undertook active discount management, the primary purpose of which was, and remains, the intent to reduce discount volatility. Despite this intervention, the Company’s discount widened from 9.0% at the start of the reporting period to end the period at 12.0%. Over the six months, the Board authorised the repurchase of 11,801,337 shares into Treasury and for cancellation at a cost of £25,895,000, representing 2.1% of the issued share capital of the Company. These share repurchases have benefited remaining shareholders as the NAV per share has been increased by purchasing shares at a discount. Subsequent to the period end and up to latest practicable date, the Company has repurchased 5,397,163 shares for cancellation.

Ongoing Charge
The Ongoing Charge (the costs of running the Company) for the six months ended 30 September 2023 was 0.99% (31 March 2023: 0.98%). The variable element of the management fee was a charge of 0.20% (31 March 2023: 0.20%). Therefore, the Ongoing Charge including the variable element for the reporting period was 1.19% (31 March 2023: 1.18%).

Board of Directors
In the announcement made by the Company on 20 July 2023 with the results of its Annual General Meeting (“AGM”), it was noted that Gordon Orr received less than 80% of the votes cast in favour of his re-election, which was predominantly the result of a large shareholder’s view on his being over boarded. Whilst it is felt that Mr Orr was able to devote, and was in fact devoting, sufficient time to the business of the Company, following further discussions since the AGM, the Board confirms that Mr Orr will step down from one of his board positions by 1 January 2024. His number of directorships is therefore expected to have reduced ahead of the Company’s next Annual General Meeting.

Principal and Emerging Risks
The Board, with the assistance of the Manager (FIL Investments Services (UK) Limited), has developed a risk matrix which, as part of the risk management and internal controls process, which identifies the key existing and emerging risks and uncertainties faced by the Company.

The Board considers that the principal risks and uncertainties faced by the Company continue to fall into the following risk categories: geopolitical; market and economic (including currency risk); operational (including those of third-party service providers); investment performance (including gearing risk); variable interest entity structures; climate change; discount management; unlisted securities; environmental, social and governance (ESG); key person; cybercrime and information security; business continuity; and tax and regulatory risks. Information on each of these risks is given in the Strategic Report section of the Annual Report on pages 28 to 32 for the year ended 31 March 2023 which can be found on the Company’s pages of the Manager’s website at www.fidelity.co.uk/china.

While the principal risks and uncertainties are the same as those at the last year end, the uncertainty continues to be heightened by the ongoing global implications of the Russia and Ukraine conflict, conflict in the Middle East, continuing tensions between China and the US, tensions with Taiwan. Western sanctions on China on capital and trade flows and from the economic outlook remaining challenging. The quantum of risks continues to change and the Board remains vigilant in monitoring the risks.

Climate change continues to be a key emerging issue, as well as a principal risk, confronting asset managers and their investors. The Board notes that the Manager has integrated ESG considerations, including climate change, into the Company’s investment process. The Board will continue to monitor how this may impact the Company as a risk to investment valuations and potentially to shareholder returns.

Investors should be prepared for market fluctuations and remember that holding shares in the Company should be considered to be a long-term investment. Risks are partially mitigated by the investment trust structure of the Company which means that no forced sales need to take place to deal with any redemptions. Therefore, investments in the Company’s portfolio can be held over a longer time horizon.

The Manager has appropriate business continuity and operational plans in place to ensure the continued provision of services, including investment team key activities of portfolio managers, analysts and trading/support functions. It reviews its operational resilience strategies on an ongoing basis and continues to take all reasonable steps in meeting its regulatory obligations and to assess operational risks, the ability to continue operating and the steps it needs to take to serve and support its clients, including the Board.

The Company’s other third-party service providers also have similar measures to ensure that business disruption is kept to a minimum.

Transactions with the Manager and Related Parties
The Manager has delegated the Company’s investment management to FIL Investment Management (Hong Kong) Limited and the role of company secretary to FIL Investments International. Transactions with the Manager and related party transactions with the Directors are disclosed in Note 15 to the Financial Statements below.

Going Concern Statement
The Directors have considered the Company’s investment objective, risk management policies, liquidity risk, credit risk, capital management policies and procedures, the nature of its portfolio and its expenditure and cash flow projections. The Directors, having considered the liquidity of the Company’s portfolio of investments (being mainly securities which are readily realisable), the projected income and expenditure and the loan facility agreement, are satisfied that the Company is financially sound and has adequate resources to meet all of its liabilities and ongoing expenses and can continue in operational existence for a period of at least twelve months from the date of this Half-Yearly Report.

This conclusion takes into account the Board’s assessment of the ongoing risks as outlined above.

Accordingly, the Financial Statements of the Company have been prepared on a going concern basis.

By Order of the Board
FIL Investments International
28 November 2023

Directors’ Responsibility Statement

The Disclosure and Transparency Rules (“DTR”) of the UK Listing Authority require the Directors to confirm their responsibilities in relation to the preparation and publication of the Interim Management Report and Financial Statements.

The Directors confirm to the best of their knowledge that:

a) the condensed set of Financial Statements contained within this Half-Yearly Report has been prepared in accordance with the International Accounting Standards 34: Interim Financial Reporting; and

b) the Portfolio Manager’s Half-Yearly Review and the Interim Management Report above, include a fair review of the information required by DTR 4.2.7R and 4.2.8R.

The Half-Yearly Report has not been audited or reviewed by the Company’s Independent Auditor.

The Half-Yearly Report was approved by the Board on 28 November 2023 and the above responsibility statement was signed on its behalf by Mike Balfour, Chairman.

FINANCIAL STATEMENTS

Income Statement for the six months ended 30 September 2023

		Six months ended 30 September 2023  unaudited			Year ended 31 March 2023  audited			Six months ended 30 September 2022  unaudited
	Notes	Revenue  £’000	Capital  £’000	Total  £’000	Revenue  £’000	Capital  £’000	Total  £’000	Revenue  £’000	Capital  £’000	Total  £’000
Revenue
Investment income	4	22,274	–	22,274	32,704	–	32,704	27,786	–	27,786
Derivative income	4	9,709	–	9,709	11,566	–	11,566	9,925	–	9,925
Other income	4	800	–	800	409	–	409	145	–	145
		---------------	---------------	---------------	---------------	---------------	---------------	---------------	---------------	---------------
Total income		32,783	–	32,783	44,679	–	44,679	37,856	–	37,856
		=========	=========	=========	=========	=========	=========	=========	=========	=========
Losses on investments at fair value through profit or loss		–	(119,622)	(119,622)	–	(6,912)	(6,912)	–	(52,166)	(52,166)
(Losses)/gains on derivative instruments		–	(36,505)	(36,505)	–	14,971	14,971	–	(88,129)	(88,129)
Foreign exchange (losses)/gains		–	(1,975)	(1,975)	–	8,167	8,167	–	13,614	13,614
Foreign exchange losses on bank loans		–	(1,013)	(1,013)	–	(4,814)	(4,814)	–	(13,800)	(13,800)
		---------------	---------------	---------------	---------------	---------------	---------------	---------------	---------------	---------------
Total income and (losses)/gains		32,783	(159,115)	(126,332)	44,679	11,412	56,091	37,856	(140,481)	(102,625)
		=========	=========	=========	=========	=========	=========	=========	=========	=========
Expenses
Investment management fees	5	(1,293)	(5,056)	(6,349)	(3,012)	(11,715)	(14,727)	(1,544)	(6,002)	(7,546)
Other expenses		(669)	(3)	(672)	(1,097)	(4)	(1,101)	(486)	–	(486)
		---------------	---------------	---------------	---------------	---------------	---------------	---------------	---------------	---------------
Profit/(loss) before finance costs and taxation		30,821	(164,174)	(133,353)	40,570	(307)	40,263	35,826	(146,483)	(110,657)
Finance costs	6	(3,426)	(10,279)	(13,705)	(3,956)	(11,869)	(15,825)	(1,256)	(3,770)	(5,026)
		---------------	---------------	---------------	---------------	---------------	---------------	---------------	---------------	---------------
Profit/(loss) before taxation		27,395	(174,453)	(147,058)	36,614	(12,176)	24,438	34,570	(150,253)	(115,683)
Taxation	7	(1,177)	383	(794)	(1,149)	–	(1,149)	(1,476)	433	(1,043)
		---------------	---------------	---------------	---------------	---------------	---------------	---------------	---------------	---------------
Profit/(loss) after taxation for the period		26,218	(174,070)	(147,852)	35,465	(12,176)	23,289	33,094	(149,820)	(116,726)
		=========	=========	=========	=========	=========	=========	=========	=========	=========
Earnings/(loss) per ordinary share	8	5.43p	(36.06p)	(30.63p)	7.05p	(2.42p)	4.63p	6.45p	(29.22p)	(22.77p)
		=========	=========	=========	=========	=========	=========	=========	=========	=========

The Company does not have any income or expenses that are not included in the profit/(loss) after taxation for the period. Accordingly, the profit/(loss) after taxation for the period is also the total comprehensive income for the period and no separate Statement of Comprehensive Income has been presented.

The total column of this statement represents the Income Statement of the Company. The revenue and capital columns are supplementary and presented for information purposes as recommended by the Statement of Recommended Practice issued by the AIC.

All the profit/(loss) and total comprehensive income is attributable to the equity shareholders of the Company. There are no minority interests.

No operations were acquired or discontinued in the period and all items in the above statement derive from continuing operations.

Statement of Changes in Equity for the six months ended 30 September 2023

	Notes	Share  capital  £’000	Share  premium  account  £’000	Capital  redemption  reserve  £’000	Other  reserve  £’000	Capital  reserve  £’000	Revenue  reserve  £’000	Total  equity  £’000
Six months ended 30 September 2023 (unaudited)
Total equity at 31 March 2023		5,710	211,569	917	186,794	877,782	55,649	1,338,421
Repurchase of ordinary shares into Treasury	13	–	–	–	(6,965)	–	–	(6,965)
Repurchase of ordinary shares for cancellation	13	(89)	–	89	(18,930)	–	–	(18,930)
(Loss)/profit after taxation for the period		–	–	–	–	(174,070)	26,218	(147,852)
Dividend paid to shareholders	9	–	–	–	–	–	(30,198)	(30,198)
		---------------	---------------	---------------	---------------	---------------	---------------	---------------
Total equity at 30 September 2023		5,621	211,569	1,006	160,899	703,712	51,669	1,134,476
		=========	=========	=========	=========	=========	=========	=========
Year ended 31 March 2023 (audited)
Total equity at 31 March 2022		5,710	211,569	917	244,043	889,958	48,424	1,400,621
Repurchase of ordinary shares into Treasury	13	–	–	–	(57,249)	–	–	(57,249)
(Loss)/profit after taxation for the year		–	–	–	–	(12,176)	35,465	23,289
Dividend paid to shareholders	9	–	–	–	–	–	(28,240)	(28,240)
		---------------	---------------	---------------	---------------	---------------	---------------	---------------
Total equity at 31 March 2023		5,710	211,569	917	186,794	877,782	55,649	1,338,421
		=========	=========	=========	=========	=========	=========	=========
Six months ended 30 September 2022 (unaudited)
Total equity at 31 March 2022		5,710	211,569	917	244,043	889,958	48,424	1,400,621
Repurchase of ordinary shares into Treasury	13	–	–	–	(23,532)	–	–	(23,532)
(Loss)/profit after taxation for the period		–	–	–	–	(149,820)	33,094	(116,726)
Dividend paid to shareholders	9	–	–	–	–	–	(28,240)	(28,240)
		---------------	---------------	---------------	---------------	---------------	---------------	---------------
Total equity at 30 September 2022		5,710	211,569	917	220,511	740,138	53,278	1,232,123
		=========	=========	=========	=========	=========	=========	=========

Balance Sheet as at 30 September 2023
Company number 7133583

	Notes	30.09.23  unaudited  £’000	31.03.23  audited  £’000	30.09.22  unaudited  £’000
Non-current assets
Investments at fair value through profit or loss	10	1,147,456	1,318,764	1,256,604
		---------------	---------------	---------------
Current assets
Derivative instruments	10	3,739	22,313	15,978
Amounts held at futures clearing houses and brokers		24,438	34,813	66,612
Other receivables	11	10,390	11,939	44,391
Cash at bank		51,258	72,943	11,551
		---------------	---------------	---------------
		89,825	142,008	138,532
		=========	=========	=========
Current liabilities
Derivative instruments	10	(10,298)	(20,892)	(34,150)
Bank loan		(81,870)	(80,857)	(89,843)
Other payables	12	(10,637)	(20,602)	(37,900)
Bank overdraft		–	–	(1,120)
		---------------	---------------	---------------
		(102,805)	(122,351)	(163,013)
		---------------	---------------	---------------
Net current (liabilities)/assets		(12,980)	19,657	(24,481)
		=========	=========	=========
Net assets		1,134,476	1,338,421	1,232,123
		=========	=========	=========
Equity attributable to equity shareholders
Share capital	13	5,621	5,710	5,710
Share premium account		211,569	211,569	211,569
Capital redemption reserve		1,006	917	917
Other reserve		160,899	186,794	220,511
Capital reserve		703,712	877,782	740,138
Revenue reserve		51,669	55,649	53,278
		---------------	---------------	---------------
Total equity		1,134,476	1,338,421	1,232,123
		=========	=========	=========
Net asset value per ordinary share	14	238.07p	274.08p	244.47p
		=========	=========	=========

Cash Flow Statement for the six months ended 30 September 2023

	Six months  ended  30 September  2023  unaudited  £’000	Year  ended  31 March  2023  audited  £’000	Six months  ended  30 September  2022  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 investments	(315,682)	(429,715)	(215,661)
Cash outflow from the purchase of derivatives	(1,910)	(7,957)	(3,966)
Cash outflow from the settlement of derivatives	(152,776)	(485,760)	(215,801)
Cash inflow from the sale of investments	356,034	480,407	231,473
Cash inflow from the settlement of derivatives	132,953	510,263	189,426
Cash inflow/(outflow) from amounts held at futures clearing houses and brokers	10,375	(2,593)	(34,392)
	---------------	---------------	---------------
Net cash inflow/(outflow) from operating activities before servicing of finance	49,267	91,057	(23,022)
	=========	=========	=========
Financing activities
Cash outflow from bank loan, collateral and overdraft interest paid	(2,561)	(2,242)	(1,190)
Cash outflow from CFD interest paid	(11,245)	(12,099)	(2,741)
Cash outflow from short CFD dividends paid	–	(254)	(254)
Cash outflow from the repurchase of ordinary shares into Treasury	(7,095)	(57,119)	(21,409)
Cash outflow from the repurchase of ordinary shares for cancellation	(17,878)	–	–
Cash outflow from dividends paid to shareholders	(30,198)	(28,240)	(28,240)
	---------------	---------------	---------------
Cash outflow from financing activities	(68,977)	(99,954)	(53,834)
	=========	=========	=========
Decrease in cash at bank	(19,710)	(8,897)	(76,856)
Cash at bank at the start of the period	72,943	73,673	73,673
Effect of foreign exchange movements	(1,975)	8,167	13,614
	---------------	---------------	---------------
Cash at bank at the end of the period	51,258	72,943	10,431
	=========	=========	=========
Represented by:
Cash at bank	51,258	72,943	11,551
Bank overdraft	–	–	(1,120)
	---------------	---------------	---------------
	51,258	72,943	10,431
	=========	=========	=========

Notes to the Financial Statements

1 Principal Activity
Fidelity China Special Situations PLC is an Investment Company incorporated in England and Wales with a premium listing on the London Stock Exchange. The Company’s registration number is 7133583 and its registered office is Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP. The Company has been approved by HM Revenue & Customs as an Investment Trust under Section 1158 of the Corporation Tax Act 2010 and intends to conduct its affairs so as to continue to be approved.

2 Publication of Non-statutory Accounts
The Financial Statements in this Half-Yearly Report have not been audited or reviewed by the Company’s Independent Auditor and do not constitute statutory accounts as defined in section 434 of the Companies Act 2006 (the “Act”). The financial information for the year ended 31 March 2023 is extracted from the latest published Financial Statements of the Company. Those Financial Statements were delivered to the Registrar of Companies and included the Independent Auditor’s Report which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Act.

3 ACCOUNTING POLICIES
(i) Basis of Preparation
These Half-Yearly Financial Statements have been prepared in accordance with UK-adopted International Accounting Standard 34: Interim Financial Reporting and use the same accounting policies as set out in the Company’s Annual Report and Financial Statements for the year ended 31 March 2023. Those Financial Statements were prepared in accordance with UK-adopted International Accounting Standards (“IFRS”) in conformity with the requirements of the Companies Act 2006, IFRC interpretations and, as far as it is consistent with IFRS, the Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts (“SORP”) issued by the Association of Investment Companies (“AIC”) in July 2022.

(ii) Going Concern
The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for a period of at least twelve months from the date of approval of these Financial Statements. Accordingly, the Directors consider it appropriate to adopt the going concern basis of accounting in preparing these Financial Statements. This conclusion also takes into account the Board’s assessment of the ongoing risks as disclosed in the Going Concern Statement above.

4 Income

	Six months  ended  30.09.23  unaudited  £’000	Year  ended  31.03.23  audited  £’000	Six months  ended  30.09.22  unaudited  £’000
Investment income
Overseas dividends	22,274	31,949	27,030
Overseas scrip dividends	–	755	756
	---------------	---------------	---------------
	22,274	32,704	27,786
	=========	=========	=========
Derivative income
Dividends received on long CFDs	9,405	11,282	9,849
Interest received on CFDs	304	284	76
	---------------	---------------	---------------
	9,709	11,566	9,925
	=========	=========	=========
Other income
Interest received on collateral and deposits	800	409	145
	---------------	---------------	---------------
Total income	32,783	44,679	37,856
	=========	=========	=========

Special dividends of £1,458,000 have been recognised in capital during the period (year ended 31 March 2023: £1,155,000 and six months ended 30 September 2022: £nil).

5 Investment Management Fees

	Revenue  £’000	Capital  £’000	Total  £’000
Six months ended 30 September 2023 (unaudited)
Investment management fee – base	1,293	3,879	5,172
Investment management fee – variable	–	1,177	1,177
	---------------	---------------	---------------
	1,293	5,056	6,349
	=========	=========	=========
Year ended 31 March 2023 (audited)
Investment management fee – base	3,012	9,037	12,049
Investment management fee – variable	–	2,678	2,678
	---------------	---------------	---------------
	3,012	11,715	14,727
	=========	=========	=========
Six months ended 30 September 2022 (unaudited)
Investment management fee – base	1,544	4,632	6,176
Investment management fee – variable	–	1,370	1,370
	---------------	---------------	---------------
	1,544	6,002	7,546
	=========	=========	=========

FIL Investment Services (UK) Limited (a Fidelity group company) is the Company’s Alternative Investment Fund Manager (“the Manager”) and has delegated portfolio management to FIL Investment Management (Hong Kong) Limited (“the Investment Manager”).

The base investment management fee for the period from 1 April to 30 June 2023 was charged at an annual rate of 0.90% on the first £1.5 billion of net assets, reducing to 0.70% of net assets over £1.5 billion. Since 1 July 2023, it has been charged at an annual reduced rate of 0.85% on the first £1.5 billion of net assets and has remained unchanged at 0.70% on net assets over £1.5 billion.

In addition, there is a +/-0.20% variable fee based on the Company’s NAV per share performance relative to the Company’s Benchmark Index measured daily over a three-year rolling basis. In the event of outperformance against the Benchmark Index, the maximum fee that the Company would pay overall is 1.05% (1.10% until 30 June 2023) on net assets up to £1.5 billion and reducing to 0.85% (0.90% until 30 June 2023) on net assets over £1.5 billion. If the Company underperforms, then the overall fee can fall as low as 0.65% (0.70% until 30 June 2023) on net assets up to £1.5 billion and reducing to 0.50% on net assets over £1.5 billion.

Fees are payable monthly in arrears and are calculated on a daily basis. The base investment management fee has been allocated 75% to capital reserve in accordance with the Company’s accounting policies.

6 Finance Costs

	Revenue  £’000	Capital  £’000	Total  £’000
Six months ended 30 September 2023 (unaudited)
Interest on bank loan and overdrafts	642	1,927	2,569
Interest paid on CFDs	2,784	8,352	11,136
Dividends paid on short CFDs	–	–	–
	---------------	---------------	---------------
	3,426	10,279	13,705
	=========	=========	=========
Year ended 31 March 2023 (audited)
Interest on bank loan and overdrafts	663	1,989	2,652
Interest paid on CFDs	3,230	9,689	12,919
Dividends paid on short CFDs	63	191	254
	---------------	---------------	---------------
	3,956	11,869	15,825
	=========	=========	=========
Six months ended 30 September 2022 (unaudited)
Interest on bank loan, collateral and overdrafts	309	927	1,236
Interest paid on CFDs	884	2,652	3,536
Dividends paid on short CFDs	63	191	254
	---------------	---------------	---------------
	1,256	3,770	5,026
	=========	=========	=========

Finance costs have been allocated 75% to capital reserve in accordance with the Company’s accounting policies.

7 Taxation

	Revenue  £’000	Capital  £’000	Total  £’000
Six months ended 30 September 2023 (unaudited)
UK corporation tax	383	(383)	–
Overseas taxation charge	794	–	794
	---------------	---------------	---------------
Taxation charge for the period	1,177	(383)	794
	=========	=========	=========
Year ended 31 March 2023 (audited)
UK corporation tax	–	–	–
Overseas taxation charge	1,149	–	1,149
	---------------	---------------	---------------
Taxation charge for the year	1,149	–	1,149
	=========	=========	=========
Six months ended 30 September 2023 (unaudited)
UK corporation tax	433	(433)	–
Overseas taxation charge	1,043	–	1,043
	---------------	---------------	---------------
Taxation charge for the period	1,476	(433)	1,043
	=========	=========	=========

8 Earnings/(Loss) per Ordinary Share

	Six months  ended  30.09.23  unaudited	Year  ended  31.03.23  audited	Six months  ended  30.09.22  unaudited
Revenue earnings per ordinary share	5.43p	7.05p	6.45p
Capital loss per ordinary share	(36.06p)	(2.42p)	(29.22p)
	---------------	---------------	---------------
Total (loss)/earnings per ordinary share	(30.63p)	4.63p	(22.77p)
	=========	=========	=========

The earnings/(loss) per ordinary share is based on the profit/(loss) after taxation for the period divided by the weighted average number of ordinary shares held outside Treasury during the period, as shown below:

	£’000	£’000	£’000
Revenue profit after taxation for the period	26,218	35,465	33,094
Capital loss after taxation for the period	(174,070)	(12,176)	(149,820)
	---------------	---------------	---------------
Total (loss)/profit after the taxation for the period	(147,852)	23,289	(116,726)
	=========	=========	=========

 

	Number	Number	Number
Weighted average number of ordinary shares held outside of Treasury	482,649,498	503,045,428	512,714,728
	==========	==========	==========

9 Dividend Paid to Shareholders

	Six months  ended  30.09.23  unaudited  £’000	Year  ended  31.03.23  audited  £’000	Six months  ended  30.09.22  unaudited  £’000
Dividend of 6.25 pence per ordinary share paid for the year ended 31 March 2023	30,198	–	–
Dividend of 5.50 pence per ordinary share paid for the year ended 31 March 2022	–	28,240	28,240
	---------------	---------------	---------------
	30,198	28,240	28,240
	=========	=========	=========

No dividend has been declared for the six months ended 30 September 2023 (six months ended 30 September 2022: £nil).

10 Fair Value Hierarchy
The Company is required to disclose the fair value hierarchy that classifies its financial instruments measured at fair value at one of three levels, according to the relative reliability of the inputs used to estimate the fair values.

Classification	Input
Level 1	Valued using quoted prices in active markets for identical assets
Level 2	Valued by reference to inputs other than quoted prices included in level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly
Level 3	Valued by reference to valuation techniques using inputs that are not based on observable market data

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset. The valuation techniques used by the Company are as disclosed in the Company’s Annual Report for the year ended 31 March 2023 (Accounting Policies Notes 2 (e), (l) and (m) on pages 65 to 68). The table below sets out the Company’s fair value hierarchy:

30 September 2023 (unaudited)	Level 1  £’000	Level 2  £’000	Level 3  £’000	Total  £’000
Financial assets at fair value through profit or loss
Investments	915,517	45,802	186,137	1,147,456
Derivative instrument assets	956	2,783	–	3,739
	---------------	---------------	---------------	---------------
	916,473	48,585	186,137	1,151,195
	=========	=========	=========	=========
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities	–	(10,298)	–	(10,298)
	---------------	---------------	---------------	---------------
Financial liabilities at fair value
Bank loan	–	(81,790)	–	(81,790)
	=========	=========	=========	=========

 

31 March 2023 (audited)	Level 1  £’000	Level 2  £’000	Level 3  £’000	Total  £’000
Financial assets at fair value through profit or loss
Investments	1,081,458	44,428	192,878	1,318,764
Derivative instrument assets	2,492	19,821	–	22,313
	---------------	---------------	---------------	---------------
	1,083,950	64,249	192,878	1,341,077
	=========	=========	=========	=========
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities	(7,271)	(13,621)	–	(20,892)
	---------------	---------------	---------------	---------------
Financial liabilities at fair value
Bank loan	–	(81,092)	–	(81,092)
	=========	=========	=========	=========

 

30 September 2022 (unaudited)	Level 1  £’000	Level 2  £’000	Level 3  £’000	Total  £’000
Financial assets at fair value through profit or loss
Investments	981,880	45,681	229,043	1,256,604
Derivative instrument assets	8,453	7,525	–	15,978
	---------------	---------------	---------------	---------------
	990,333	53,206	229,043	1,272,582
	=========	=========	=========	=========
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities	–	(32,930)	(1,220)	(34,150)
	---------------	---------------	---------------	---------------
Financial liabilities at fair value
Bank loan	–	(89,421)	–	(89,421)
	=========	=========	=========	=========

The table below sets out the movements in level 3 investments during the period:

	30.09.23  unaudited  £’000	31.03.23  audited  £’000	30.09.22  unaudited  £’000
Level 3 investments at the beginning of the period	192,878	194,650	194,650
Transfers into level 3 at cost1	17,316	–	–
Transfers out of level 3 – at cost2	(11,758)	(9,971)	(9,971)
Unrealised gains recognised in the Income Statement	(12,299)	8,199	44,364
	---------------	---------------	---------------
Level 3 investments at the end of the period	186,137	192,878	229,043
	=========	=========	=========

1 Financial instruments are transferred into level 3 on the date they are suspended, delisted or if they have not traded for thirty days.

2 Financial instruments are transferred out of level 3 when they become listed.

No income has been recognised from the unlisted investments during the period (year ended 31 March 2023 and six months ended 30 September 2022: £nil). No additional disclosures have been made in respect of the unlisted investments as the underlying financial information is not publicly available.

11 Other Receivables

	30.09.23  unaudited  £’000	31.03.23  audited  £’000	30.09.22  unaudited  £’000
Amounts receivable on settlement of derivatives	3,788	10,135	639
Securities sold for future settlement	703	148	40,746
Accrued income	5,768	1,513	2,691
Taxation recoverable	12	13	225
Other receivables	119	130	90
	---------------	---------------	---------------
	10,390	11,939	44,391
	=========	=========	=========

12 Other Payables

	30.09.23  unaudited  £’000	31.03.23  audited  £’000	30.09.22  unaudited  £’000
Amounts payable on settlement of derivatives	5,175	4,731	31,855
Securities purchased for future settlement	1,624	12,402	1,213
Investment management fees payable	974	1,266	1,206
Accrued expenses	944	1,096	551
Amounts payable for the cancellation of shares	1,052	–	–
Amounts payable for the repurchase of shares	–	130	2,123
Finance costs payable	868	977	952
	---------------	---------------	---------------
	10,637	20,602	37,900
	=========	=========	=========

13 Share Capital

	30 September 2023 unaudited		31 March 2023 audited		30 September 2022 unaudited
	Number of  shares	£’000	Number of  shares	£’000	Number of  shares	£’000
Issued, allotted and fully paid
Ordinary shares of 1 pence each held outside of Treasury
Beginning of the period	488,325,628	4,884	513,957,409	5,140	513,957,409	5,140
Ordinary shares repurchased into Treasury	(2,900,696)	(29)	(25,631,781)	(256)	(9,953,633)	(100)
Ordinary shares repurchased for cancellation	(8,900,641)	(89)	–	–	–	–
	-----------------	-----------------	-----------------	-----------------	-----------------	-----------------
End of the period	476,524,291	4,766	488,325,628	4,884	504,003,776	5,040
	==========	==========	==========	==========	==========	==========
Ordinary shares of 1 pence each held in Treasury*
Beginning of the period	82,728,852	826	57,097,071	570	57,097,071	570
Ordinary shares repurchased into Treasury	2,900,696	29	25,631,781	256	9,953,633	100
	-----------------	-----------------	-----------------	-----------------	-----------------	-----------------
End of the period	85,629,548	855	82,728,852	826	67,050,704	670
	==========	==========	==========	==========	==========	==========
Total share capital		5,621		5,710		5,710
		==========		==========		==========

* The ordinary shares held in Treasury carry no rights to vote, to receive a dividend or to participate in a winding up of the Company.

During the period, the Company repurchased 2,900,696 (year ended 31 March 2023: 25,631,781 and six months ended 30 September 2022: 9,953,633) ordinary shares into Treasury. The cost of repurchasing these shares of £6,965,000 (year ended 31 March 2023: £57,249,000 and six months ended 30 September 2022: £23,532,000) was charged to the Other Reserve.

The Company also repurchased 8,900,641 (year ended 31 March 2023 and six months ended 30 September 2022: nil shares) ordinary shares for cancellation. The cost of repurchasing these shares of £18,930,000 (year ended 31 March 2023 and six months ended 30 September 2022: £nil) was charged to the Other Reserve.

14 Net Asset Value per Ordinary Share
The calculation of the net asset value per ordinary share is based on the following:

	30.09.23  unaudited	31.03.23  audited	30.09.22  unaudited
Net assets	£1,134,476,000	£1,338,421,000	£1,232,123,000
Ordinary shares held outside of Treasury	476,524,291	488,325,628	504,003,776
Net asset value per ordinary share	238.07p	274.08p	244.47p
	=========	=========	=========

It is the Company’s policy that shares held in Treasury will only be reissued at net asset value per ordinary share or at a premium to net asset value per ordinary share and, therefore, shares held in Treasury have no dilutive effect.

15 Transactions with the Managers and Related Parties
FIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager and has delegated portfolio management to FIL Investment Management (Hong Kong) Limited. Both companies are Fidelity group companies.

Details of the current fee arrangements are given in Note 5 above. During the period, management fees of £6,349,000 (year ended 31 March 2023: £14,727,000 and six months ended 30 September 2022: £7,546,000) were payable to Fidelity. Fidelity also provides the Company with marketing services. The total amount payable for these services was £132,000 (year ended 31 March 2023: £263,000 and six months ended 30 September 2022: £58,000). Amounts payable at the Balance Sheet date are included in other payables and are disclosed in Note 12 above.

At the date of this report, the Board consisted of six non-executive Directors (as shown in the Half-Yearly Report) all of whom are considered to be independent by the Board. None of the Directors has a service contract with the Company.

The Chairman receives an annual fee of £52,000, the Audit and Risk Committee Chairman receives an annual fee of £43,500, the Senior Independent Director receives an annual fee of £41,000 and each other Director receives an annual fee of £34,500. The following members of the Board hold ordinary shares in the Company at the date of this report: Mike Balfour 65,000 shares, Alastair Bruce 43,800 shares, Vanessa Donegan 10,000 shares, Georgina Field 2,250 shares, Gordon Orr nil shares and Edward Tse nil shares.

 

 

The financial information contained in this Half-Yearly Results Announcement does not constitute statutory accounts as defined in section 435 of the Companies Act 2006. The financial information for the six months ended 30 September 2023 and 30 September 2022 has not been audited or reviewed by the Company’s Independent Auditor.

The information for the year ended 31 March 2023 has been extracted from the latest published audited financial statements, which have been filed with the Registrar of Companies, unless otherwise stated. The report of the Auditor on those financial statements contained no qualification or statement under sections 498(2) or (3) of the Companies Act 2006.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

A copy of the Half-Yearly Report will shortly be submitted to the National Storage Mechanism and will be available for inspection at www.morningstar.co.uk/uk/NSM

The Half-Yearly Report will also be available on the Company's website at www.fidelity.co.uk/china where up to date information on the Company, including daily NAV and share prices, factsheets and other information can also be found.