FIDELITY
CHINA SPECIAL
SITUATIONS PLC
Annual Report for the year ended 31 March 2023
Fidelity China Special Situations PLC
|
Annual Report 2023
The purpose of the Company is to offer investors who are building
a diversified portfolio a direct exposure to China, recognising
the size and growing importance of the country within the world
economy and its weighting within global stock market indices.
The investment objective of the Company is to achieve long-term
capital growth from an actively managed portfolio made up
primarily of securities issued by companies in China, both listed
and unlisted, as well as Chinese companies listed elsewhere. The
Company may also invest in companies with significant interests in
China.
The Year at a Glance
2019
2020
2021
2022
2023
+81.9%
-34.9%
-5.3%
-5.9%
Net Asset Value per Share total return
1,2
Year ended 31 March
+2.6%
2019
2020
2021
2022
2023
Share Price total return
1,2
-39.2%
-0.3%
-6.5%
+97.2%
Year ended 31 March
+0.3%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
20232022202120202019
Dividend per Share
4.68p
3.85p
Year ended 31 March
4.25p
5.50p
6.25p
2019
2020
2021
2022
2023
-29.3%
+0.9%
-1.0%
+29.1%
MSCI China Index total return
(in UK sterling terms)
1, 3
Year ended 31 March
+1.4%
1 Includes reinvested income.
2 Alternative Performance Measures. See page 92.
3 The Company’s Benchmark Index.
As at 31 March 2023
Equity Shareholders’ Funds
£1,338.4m
Market Capitalisation
£1,208.6m
Capital Structure
Ordinary Shares of 1 pence held outside of Treasury
488,325,628
Summary of the key aspects of the
Investment Policy
The Portfolio Manager will focus on identifying companies
which are most likely to benefit from China’s growth and
changing economy.
The Company is not restricted in terms of size or industry when
including companies in the portfolio and may invest in unlisted
securities.
The Company may also invest into other transferable securities,
collective investment schemes, money market instruments,
cash and deposits and is also able to use derivatives and
bank borrowing for gearing purposes and efficient portfolio
management.
The Company operates a variable management fee
arrangement which is calculated by referencing performance
relative to the MSCI China Index (in UK sterling terms).
In the reporting year, the Company’s Net Asset Value per Share increased by 2.6% and the Share Price
increased by 0.3%, whilst the Benchmark Index increased by 1.4% (all performance data on a total return basis).
Fidelity China Special Situations PLC
|
Annual Report 2023
2023 2022
Assets as at 31 March
Gross Asset Exposure £1,659.1m £1,765.6m
Net Assets £1,338.4m £1,400.6m
Gross Gearing
1,2
23.9% 26.1%
Net Gearing
1,2
21.1% 23.5%
Net Asset Value (“NAV”) per Share
2
274.08p 272.52p
Share Price and Discount data as at 31 March
Share Price at year end 247.50p 252.00p
Share Price: year high 302.00p 436.50p
Share Price: year low 178.60p 218.50p
Discount at year end
2
(9.7%) (7.5%)
Discount: year high (15.2%) (10.4%)
(Discount: year low)/Premium: year high (0.2%) 2.7%
Earnings for the year ended 31 March – see page 61
Revenue Earnings per Share
2,3
7.05p 6.42p
Capital Loss per Share
2,3
(2.42p) (152.81p)
Total Earnings/(Loss) per Share
2,3
4.63p (146.39p)
Ongoing Charges for the year to 31 March
2,4
0.98% 0.94%
Variable Management Fee 0.20% 0.20%
Ongoing Charges including Variable Management Fee for the year to 31 March
2,4
1.18% 1.14%
1 See Note 19 on page 89. Defined in the Glossary to the Annual Report on pages 98 and 99.
2 Alternative Performance Measures.
3 Based on the weighted average number of shares held outside of Treasury during the year.
4 Ongoing charges (excluding finance costs and taxation) expressed as a percentage of average net asset values for the year (prepared in accordance with guidance
issued by the Association of Investment Companies).
Standardised Performance Total Return
1
(%)
Since launch to 31 March 20235 years ended 31 March 20233 years ended 31 March 20231 year ended 31 March 2023
+2.6
+21.5
+20.4
+8.3
+219.1
+208.2
+71.2
+12.3
-7.5
-7.4
+0.3
+1.4
NAV per Share
Share Price
MSCI China Index (in UK sterling terms)
1 Includes reinvested income.
Financial Highlights
Sources: Fidelity International and Datastream.
Past Performance is not a guide to future returns.
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
01
Annual Report 2023
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
Contents
Strategy
Chairman’s Statement 02
Portfolio Manager’s Review 07
ESG in the Investment Process at Fidelity International 12
Unlisted Investments 15
Spotlight on the Top 10 Holdings 18
Forty Largest Holdings 20
Distribution of the Portfolio 23
Attribution Analysis 24
Ten Year Record 25
Strategic Report 26
Governance
Board of Directors 35
Directors’ Report 36
Corporate Governance Statement 40
Directors’ Remuneration Report 45
Statement of Directors’ Responsibilities 48
Report of the Audit and Risk Committee 49
Financial
Independent Auditor’s Report 53
Income Statement 61
Statement of Changes in Equity 62
Balance Sheet 63
Cash Flow Statement 64
Notes to the Financial Statements 65
Alternative Performance Measures 91
Information for Shareholders
Notice of Meeting 93
Glossary to the Annual Report 97
Shareholder Information 102
Data Protection 104
Alternative Investment Fund Manager’s Disclosure 105
Chairman’s Statement
Read more on pages 02 to 06
Ten Year Record
Read more on page 25
Portfolio Manager’s Review
Read more on pages 07 to 11
Unlisted Investments
Read more on pages 15 to 17
Spotlight on the Top 10 Holdings
Read more on pages 18 and 19
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
02
Fidelity China Special Situations PLC
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Annual Report 2023
Chairman’s Statement
After more than two years of volatile returns, it was pleasing to
see positive net asset value (“NAV”) and share price returns and
a return to outperformance for your Company against its
Benchmark Index, the MSCI China Index (in UK sterling terms).
China’s economic growth rate in 2022 was just 3%, the lowest in
decades, but the economy and stock market are now on a
recovery path following the removal of the zero-COVID policy.
In the reporting year to 31 March 2023, NAV per share total
return of your Company was 2.6% outperforming the Benchmark
Index which returned 1.4%. The share price total return was 0.3%.
The discount of the share price to the NAV widened to 9.7% at the
end of the year compared to 7.5% last year. While we expect the
Company to generate its returns primarily from capital, corporate
earnings growth in China and the maturing of business models
has meant healthy growth in dividends. Our own dividend –
which has grown every year since inception – makes an
important contribution to shareholder returns and this year grows
by 13.6% from 5.50 pence to 6.25 pence.
As our Portfolio Manager, Dale Nicholls, points out in his report,
investor pessimism towards China reached a peak in the early
part of the second half of our financial year. Encouragingly, the
rebound in sentiment since then is borne out by the six-months to
31 March 2023 total return performance figures, with the NAV
and share price rising by 12.1% and 11.2% respectively, compared
with a return of 7.3% on the Benchmark Index.
While the mood of investors in Chinese equities has swung
between extreme bearishness and euphoria over the past year,
the current backdrop reflects a more measured outlook. The
Board continues to believe that a direct exposure to China – the
world’s second-largest economy – is an important constituent of a
diversified portfolio. Although economic growth was lacklustre in
2022, the International Monetary Fund expects China’s GDP to
advance by 5.3% in 2023, ahead of the 3.9% average for
emerging markets and developing economies and well in excess
of the 1.3% forecast for advanced economies.
China is at a different point in the economic cycle to the rest of
the world; rising interest rates and inflation in the West have
meant very constraining central bank policies aimed at slowing
economies down, whereas the opposite is the case in China.
Inflation is not and has not been a problem and the authorities
are taking a more stimulative approach to boost growth. This is
being done at a measured pace to reduce unemployment,
particularly amongst the young, but at a level which doesn’t fan
speculation in the property sector which remains an issue.
Your portfolio has limited exposure to property as Dale prefers to
access the housing theme through areas such as home décor
and appliances. Consumer spending, which is expected to be
the primary engine of growth for the Chinese economy, is an
important driver of stock selection, with the consumer
discretionary sector containing many of the attractively valued,
fast-growing stocks that he favours. Having a large research team
on the ground in China is fundamental to seeking out the best
opportunities, particularly among medium and smaller-sized
companies, where the relatively higher growth potential has yet
to be reflected in share prices, and investor awareness is low.
I have pleasure in presenting the
Annual Report of Fidelity China
Special Situations PLC for the
year ended 31 March 2023.
Mike Balfour, Chairman
£1,338.4m
(As at 31 March 2023)
Equity Shareholders’ Funds
+2.6%
(Year ended 31 March 2023)
Net Asset Value per Share
(total return)
+0.3%
(Year ended 31 March 2023)
Share Price (total return)
+1.4%
(Year ended 31 March 2023)
Benchmark Index (total return)
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
03
Annual Report 2023
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
As a closed-ended fund and without the liquidity concerns that
would hamper an open-ended fund, the Company is able to
invest up to 15% of its Net Assets plus Borrowings in unquoted
companies (those not listed on a stock exchange). This allows the
Manager to take advantage of the faster growth trajectory of
earlier stage companies before they potentially become listed on
the public markets. Other than the unlisted shares in Xiaoju
Kuaizhi (Didi Chuxing) converting to listed American Depositary
Shares, there have been no new unlisted additions or changes to
the unlisted companies held in the portfolio in the reporting year.
However, the unlisted percentage increased from 13.2% of Net
Assets plus Borrowings on 31 March 2022 to 13.6% on 31 March
2023 given changes in the valuations of these companies and
changes to the size of the rest of the portfolio. If the Company
were to reach the 15% limit in unquoted companies, it does not
preclude us from further investment in existing holdings if fresh
capital was required by them.
Our unquoted investments are assessed regularly by Fidelity’s
dedicated Fair Value Committee (“FVC”), with advice from Kroll,
a third-party valuation specialist, as well as from the Fidelity
analysts, who look after these companies. An additional resource
has been added in the past year in the form of oversight by a
newly recruited Chinese unlisted investment specialist. The Board
receives regular updates from the FVC, with Alastair Bruce, the
Audit and Risk Committee Chairman, also providing expertise in
the area, having for many years been involved professionally in
private equity investing.
The Board is mindful of the risks of investing in a single emerging
market, however large and diverse it may be, and monitors both
current risks and our perception of emerging risks. The key risks
are set out on pages 28 to 32. We believe, however, that those
risks are outweighed by the opportunities offered by investing in
China in general, and in particular in Fidelity China Special
Situations. Dale’s focus on consumption and the domestic
economy mitigates much of the geopolitical risk which has been
heightened in the period under review. We share Dale’s
confidence that with the Chinese economy now having fully
reopened after the restrictions imposed by the government’s
zero-COVID policy, the opportunities for a continued rebound in
consumer spending are significant.
Environmental, Social and Governance (ESG) Investment and
Climate Change
ESG factors remain central to the work of both the Board and the
Portfolio Manager. Chinese businesses are under increasing
pressure to ensure that their activities are environmentally
sustainable and demonstrate social responsibility and good
corporate governance. Although there is progress in the form of
commitments and initiatives across a wide range of areas, much
more needs to be done. Fidelity has a sustainable investing
approach, which includes engagement and voting principles and
its proprietary forward-looking ESG ratings. This ratings system
leverages Fidelity’s internal research and interactions with
investee companies, where analysts quantify the direction of
change of a company’s ESG performance (positive, neutral or
negative trajectory) and rate the companies using a scale of A to
E. The Board pays close attention to the ratings of underlying
portfolio companies and challenges the Portfolio Manager and
his team on any stocks with lower ratings. The ratings of the
companies within the portfolio are well ahead of the broader
market and continue to improve.
The evaluation of ESG factors is a core part of our Portfolio
Manager’s investment process and he continues to see progress
regarding the level of engagement with and transparency of
Chinese companies. Sustainability factors are key topics of
conversation with companies and many management teams are
looking at ways to generate a more sustainable outcome for their
businesses. Although China continues to lag most other major
markets in this area, we are encouraged by the rates of
improvement the Manager is seeing. China’s regulators are
engaging with companies to improve the disclosure of ESG
metrics to better align themselves with the required standards.
Not only is this a good outcome globally, but we also believe that
progress on better ESG practices could be a key driver of
performance for the portfolio over the longer-term. Further details
of the Manager’s ESG practices are on page 10 and pages 12
to 14.
Gearing
We continue to believe that the judicious use of gearing (another
benefit of the investment trust structure) can be accretive to
long-term capital and income returns, although being more than
100% invested does also mean that the NAV and share price may
be more volatile and can accentuate losses in a falling market.
Net gearing at the year end was 21.1%, largely unchanged from
a year earlier when it was at 23.5%. The Company recently
renewed its loan facility for a period of one year at a fixed
interest annual rate of 6.335%. The Board would prefer to have a
diversified source of finance in the future, as well as CFDs, and
depending on terms hopes to be able to put in place longer-term
borrowing when this facility ends.
Dividend
Although the Company’s investment objective is to achieve
long-term capital growth, it has paid an increasing dividend each
year since its inception, growing from 0.25 pence per share in
2011 to 5.50 pence per share in 2022, which is a compound
annualised growth rate of 32.8%.
As indicated earlier, the Board is pleased to recommend once
again an increased final dividend of 6.25 pence per share for
the year ended 31March 2023 for approval by shareholders at
the Annual General Meeting (“AGM”) to be held on 20 July 2023.
This represents an increase of 13.6% over the 5.50 pence paid in
respect of the prior year and cements your Company’s status as
one of the Association of Investment Companies’ Next
Generation of Dividend Heroes. The dividend will be payable on
27 July 2023 to shareholders on the register on 16 June 2023
(ex-dividend date 15 June 2023).
The revenue per share earned by the Company during the year
was 7.05 pence, which is an increase of 9.8% over the 6.42 pence
earned in the prior year, and this fully covers the recommended
dividend.
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
04
Fidelity China Special Situations PLC
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Annual Report 2023
Chairman’s Statement continued
Discount Management
The Board believes that investors are best served when the share
price trades close to its NAV per share. However, we recognise
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 we seek to
maintain the Company’s discount in single digits in normal
market conditions. Historically, shares bought back were held in
Treasury and could be issued at a later date should the share
price move to a premium to NAV per share. As the number of
shares held in Treasury equated to 15% of the issued share
capital by 11 May 2023, shares bought since then have been
cancelled. There is an annual 14.99% cap in place that limits the
Company’s ability to repurchase its own shares in the market.
The Company’s discount widened from 7.5% at the start of the
reporting year to 9.7% on 31st March. To combat slightly tricky
and volatile market conditions during the year, the Board
authorised the repurchase of 25,631,781 shares into Treasury at a
cost of £57,249,000, representing 4.5% of the issued share capital
of the Company. These share repurchases have benefited
remaining shareholders as the NAV per share has been
increased by purchasing shares at a discount. Since the year end
and as at the date of this report, the Company has repurchased
a further 2,900,696 shares into Treasury and 2,238,726 shares for
cancellation. The graph below shows the movement of the
Company’s discount during the year.
At the forthcoming AGM, the Board is seeking to renew the
annual authority to repurchase up to 14.99% of the Company’s
shares, to be either cancelled or held in Treasury, as it has done
each year previously.
Ongoing Charge
The Ongoing Charge (the costs of running the Company) for the
year was 0.98% (2022: 0.94%). The variable element of the
management fee (due to outperformance of the Benchmark
Index) was a charge of 0.20% (2022: 0.20%). Therefore, the
Ongoing Charge, including this variable element, for the year
was 1.18% (2022: 1.14%).
The largest element of those running costs of the Company is the
management fee paid to Fidelity.
Management Fee
The Board has agreed a revised fee with the Manager, FIL
Investment Services (UK) Limited, with effect from 1 July 2023.
The revised fee will be 0.85% (reduced from 0.90%) on the first
£1.5 billion of net assets. It will remain at 0.70% on net assets
over £1.5 billion. The variable element of the fee of +/-0.20%
remains unchanged.
Change of Broker
Following a review of broker services provided to the Company,
we changed our corporate broker in March this year from Peel
Hunt to Jefferies International, who now acts as sole corporate
broker and financial adviser to the Company.
Board of Directors
This is my first annual report as Chairman, having taken over from
Nicholas Bull at the conclusion of the last AGM. Nicholas had
served on the Board since Fidelity China Special Situations PLC
was launched in April 2010, and as Chairman since 2016, and
we thank him for his wonderful stewardship of the Company.
Given my new position, Alastair Bruce, who joined the Board in
July 2021, has taken on my former role as Chairman of the Audit
and Risk Committee.
We have welcomed three new non-executive Directors in the past
12 months. Georgina Field, whose appointment was announced
in the last annual report, and who joined the Board on 1 July
2022, is an investment marketing specialist and founder and CEO
of White Marble Consulting. She was subsequently elected by
shareholders at the AGM on 20 July 2022.
We were sad to say goodbye to Linda Yueh who resigned and
stepped down from the Board on 31 December 2022 in order to
concentrate on a new role as a non-executive director of
Standard Chartered plc. Linda’s role as Senior Independent
Director is now undertaken by Vanessa Donegan. We are very
pleased to have added not one but two China experts to the
Board as non-executive Directors in recent months. Edward Tse, a
pioneer of management consulting in China, was appointed to
the Board on 24 November 2022. As well as acting as a
consultant to hundreds of companies on all critical aspects of
business in China, he has also advised Chinese government
organisations on strategy, state-owned enterprise reform and
Chinese companies going overseas, as well as advising the
World Bank and the Asian Development Bank.
Gordon Orr, who moved to mainland China from the UK in the
early 1990s, founded McKinsey’s management consulting
practice in the country, and led McKinsey in China and
subsequently Asia until 2015. Gordon was appointed to the
Board on 1 January 2023. He currently serves on the boards of
Hong Kong-listed companies Lenovo, Meituan and Swire Pacific,
and is the Vice Chairman of the China Britain Business Council.
0%
Apr 22
FCSS - Discount to NAV
May 22
Jul 22
Sep 22 Mar 23
Nov 22 Jan 23
(4%)
(8%)
(12%)
(16%)
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
05
Annual Report 2023
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
We are pleased that your Company’s Board includes a real
diversity and balance of relevant skills and experience, covering
China itself, accountancy, investment management, including
private equity and private equity valuations, and marketing
expertise. Owing to the changes in its composition during the
year, the Board no longer meets the target of 40% of FTSE 350
board members to be women as set by the FTSE Women
Leaders Review. Our Board composition currently has a 33%
women representation, however, it should be noted that from
1July to 31 December 2022 the Board exceeded the 40% target.
In the period from 24 July 2019 to 31 December 2022, at least
40% of the Board consisted of women. As all the current Directors
have served for less than five years, the Board wishes to take due
care in making the next appointment in order to meet the 40%
target and to space out succession planning. The present plan is
to recruit a female director before the AGM next year.
In accordance with the UK Corporate Governance Code for
Directors of FTSE 350 companies, all Directors are subject to
annual re-election at the AGM on 20 July 2023. I, together with
Alastair, Vanessa and Georgina will stand for re-election and
both Edward and Gordon, being newly appointed, will stand for
election at the AGM. The Directors’ biographies can be found on
page 35, and, between them, they have a wide range of
appropriate skills and experience to form a balanced Board to
support and oversee the Company in the best interests of
shareholders.
Annual General Meeting
The Company’s AGM is at 11.00 am on Thursday, 20 July 2023,
and the Board and I hope to see as many of you as possible on
the day. Details of the AGM are on the next page.
Outlook
After a year in which China’s economic growth was hampered by
lockdown restrictions, the current picture looks much brighter. GDP
growth is forecast to come back in line with longer-term trends at
above 5% in 2023, and the authorities are willing to stimulate
where needed to ensure sustainable growth is in line with the
government’s Common Prosperity agenda. ESG standards
continue to improve, and as Western governments experiment
with increasingly protectionist policies and try to tame inflation,
opportunities increase for China to move up the value chain in
manufacturing and services.
Against this improving backdrop, valuations in the stock market,
and in particular those of small and mid-cap companies in China,
remain relatively modest, with arguably the best opportunities to
be found among the less well-known companies that may be
overlooked by funds that lack a solid on-the-ground research
presence. Added to this, Dale’s flexible approach to portfolio
management allows your Company to adapt to changing
conditions, helping to ensure a profitable future.
While the Chinese stockmarkets are always likely to be volatile,
we are encouraged that all the building blocks remain in place
for continued healthy returns. There will be slips along the way
and we remain mindful of geopolitical issues such as the
relationship with the US and the status of Taiwan, however
structural trends such as the growing middle class and on-going
innovation support our positive medium to long-term view.
All the Directors on your Board, other than newly appointed
Edward and Gordon, are also shareholders in the Company, and
we remain committed to its future success.
Meanwhile, we hope to see you, in person or virtually, at our
Annual General Meeting on 20 July 2023, details of which are on
the next page.
Mike Balfour
Chairman
7 June 2023
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Fidelity China Special Situations PLC
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Annual Report 2023
Annual General Meeting – Thursday, 20 July 2023 at 11.00 am
The AGM of the Company will be held at 11.00 am on Thursday, 20 July 2023 at 4 Cannon Street, London EC4M 5AB (nearest tube
stations are St Paul’s or Mansion House) and virtually via the online Lumi AGM meeting platform. Full details of the meeting are
given in the Notice of Meeting on pages 93 to 96.
For those shareholders who would prefer not to attend in person, we will live-stream the formal business and presentations of the
meeting online.
Dale Nicholls, the Portfolio Manager, will be making a presentation to shareholders highlighting the achievements and challenges
of the year past and the prospects for the year to come. He and the Board will be very happy to answer any questions that
shareholders may have. Copies of his presentation can be requested by email at investmenttrusts@fil.com or in writing to the
Secretary at FIL Investments International, Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP.
Properly registered shareholders joining the AGM virtually will be able to vote on the proposed resolutions. Please see Note 9 to
the Notes to the Notice of Meeting on page 95 for details on how to vote virtually. Investors viewing the AGM online will be able
to submit live written questions to the Board and the Portfolio Managers and we will answer as many of these as possible at an
appropriate juncture during the meeting.
Further information and links to the Lumi platform may be found on the Company’s website at www.fidelity.co.uk/china. On the
day of the AGM, in order to join electronically and ask questions via the Lumi platform, shareholders will need to connect to the
website https://web.lumiagm.com.
Please note that investors on platforms, such as Fidelity Personal Investing, Hargreaves Lansdown, Interactive Investor or AJ Bell
Youinvest, will need to request attendance at the AGM in accordance with the policies of your chosen platform. They may request
that you submit electronic votes in advance of the meeting. If you are unable to obtain a unique IVC and PIN from your nominee or
platform, we would welcome your online participation as a guest. Once you have accessed https://web.lumiagm.com from your
web browser on a tablet or computer, you will need to enter the Lumi Meeting ID which is 192-504-083. You should then select the
‘Guest Access’ option before entering your name and who you are representing, if applicable. This will allow you to view the
meeting and ask questions, but you will not be able to vote.
Chairman’s Statement continued
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Annual Report 2023
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
Portfolio Manager’s Review
Question
It has been an extraordinary period for
investors over the past year, both in China
and globally. What are the main factors
that shareholders should understand?
Answer
Not too long ago, in fact after the 20th National Congress of the
Chinese Communist Party in October 2022, sentiment towards
Chinese equities was probably the lowest I have witnessed since
I started managing Chinese and broader Asian equities. This
bearishness was further fuelled by weakening macro data and
off the back of the country’s zero-COVID policy.
Then just before the end of 2022, there was an unexpected pivot
towards the country’s reopening and the end of China’s zero-
COVID policy. This caused a sudden shift in investor sentiment, as
the market started pricing in the benefits of reopening. The
National People’s Congress at the end of March 2023 clarified
the government’s focus on quality growth, primarily underpinned
by growth in domestic demand. As I write this year’s annual
review, questions are once again being raised about China’s
economic recovery, which is likely the main factor behind recent
market weakness. While growth rates on the whole have clearly
tempered in the second quarter, the government’s GDP target of
5% for the year looks achievable. This will make China one of the
few large economies that will see accelerating economic growth
in 2023. Corporate earnings should follow suit and see
accelerating growth, which again compares favourably to other
markets. In terms of corporates, messages are mixed, but we are
seeing clearer trends and distinctions between winners and
losers, with the stronger players confirming that operations are
returning to normal and are painting an optimistic picture of
recovery. Valuations as a whole remain towards the lower end of
historical levels, and remain attractive versus many global peers,
despite what is mostly a stronger growth outlook.
Consumption will most likely be the prime driver of the recovery,
supported by strong household balance sheets with deposit
levels increasing significantly over COVID. Property still remains a
significant component of these balance sheets. On the back of
ongoing loosening measures, we are seeing increasing signs of
the residential property market bottoming in terms of both
volumes and pricing. This all bodes well for spending to continue
to recover, similar to the post COVID recoveries we have seen in
other economies.
Geopolitics is another factor that continues to dominate
headlines and can cause turmoil in markets at times. As I have
said before I believe that strategic competition and related
tensions between China and the US will be with us for decades
and investors should expect this. It is important to remember that
these two economies are heavily intertwined and this is
recognised by the respective governments. The key thing we
need to evaluate as investors is how policies have the potential
to impact the fundamentals of individual companies. In the past
year, we have seen the US government further restrict sales of
leading-edge semiconductors and related equipment to China.
Dale Nicholls was appointed
as Portfolio Manager of Fidelity
China Special Situations PLC on
1 April 2014. He has 27 years
of investment experience and
also manages the Fidelity Pacific
Fund. He spends much of his
time speaking to management
teams and competitors of
companies in which he invests or
may choose to invest, engaging
with hundreds of companies
each year. He is supported
by 35 analysts based in Hong
Kong, Shanghai and Singapore,
of which 26 are dedicated to
covering Greater China stocks.
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Annual Report 2023
I believe there is potential for such restrictions to tighten further
– these are the type of risks that we build into our analysis. For
most companies, such risks are not a factor. Consequently, the
team and I continue to find many attractive opportunities across
the market.
Question
How has the Company performed in the
year under review, and how have things
changed since China’s zero-COVID policy
was removed?
Answer
The Company’s NAV delivered a total return of 2.6% for the
financial year ended 31 March 2023, outperforming the MSCI
China Index (the Benchmark Index) which returned 1.4%. Robust
stock picking in the Chinese consumption space (both
discretionary and staples) and in materials contributed positively
to performance. An overweight allocation in industrials also
added value. In contrast, selected names in financials and
communication services weighed on returns, as did an
overweight exposure to the information technology (“IT”) sector.
As discussed above, the biggest change post-COVID is the
outlook for the consumer. While the recovery is bumpy and varies
somewhat by sector, the path to recovery is clearly there. Having
said this, the obvious beneficiaries of reopening – particularly
travel and certain consumer stocks – saw a significant upswing
as the zero-COVID policy was lifted. However, this has made the
investment case less compelling for some companies and overall
I have reduced exposure to such names.
Clearly the resumption of normal business operations and supply
chains is another important change. As a result, we will be
looking for signs of recovering business confidence and related
indications of a pick-up in capex. Recent credit growth data is
encouraging. As the recovery broadens, I would expect
companies in other sectors such as industrials and financials to
benefit. At the same time, one needs to be wary of global trends
– many other economies may slow significantly, which can
impede a return in investor confidence and sentiment.
Question
Which stocks have performed well during
the period and why?
Answer
Macroeconomically, sensitive names in the consumer
discretionary space have fared well as faster than expected
reopening led to an accelerated consumption recovery in China.
Among the top contributors in the portfolio were positions in
branded variety retailer MINISO Group Holding and home
appliances manufacturer Hisense Home Appliances Group.
MINISO’s recent results were better than expected, demonstrating
good execution in brand and product upgrades, overseas
expansion and solid efficiency gains. Hisense’s profit recovery
remains well on track, led by robust overseas growth and solid
ongoing profitability from its joint venture with Hitachi. In addition,
retail jewellery player Luk Fook Holdings International has
enjoyed a rerating in the market, driven by pent-up post-
pandemic demand and market share gains as a result of
channel expansion. Also, within the consumer discretionary
sector, a short position in an auto manufacturer, known for their
design in electric vehicles (EVs), added to performance as the
stock declined owing to concerns of consumers favouring other
brands. The risk of lower market share was a key aspect of our
investment thesis for shorting the stock.
A holding outside the consumer sector that also proved
rewarding was the position in COSCO Shipping Energy
Transportation (“CSET”), the largest global oil tanker operator.
CSET benefited from tailwinds associated with a recovery in oil
demand as air and road traffic regained momentum.
Conversely, the lack of exposure to Chinese online retailer PDD
Holdings and an underweight stance in internet and gaming
giant Tencent Holdings held back relative returns. Tencent’s share
price was further boosted as it received new game licenses from
the Chinese regulator at the start of this year. This type of news,
such as the issuance of new gaming licenses, has been another
signal that regulatory pressures on the internet sector have
eased.
Within financials, shares of credit facilitator Lufax Holding
declined, triggered by concerns over fintech regulation,
deteriorating asset quality and heightened risks about a de-listing
of its American Depositary Receipts (ADRs) shares. Nonetheless,
we feel Lufax remains substantially undervalued and provides
upside potential given its leading position in small and medium-
sized enterprises’ (SMEs) online lending. Further, it is likely we will
see an easing of regulatory headwinds, albeit they will not
completely disappear. Challenging market conditions and weak
sentiment in 2022 also negatively weighed on the performance of
third-party wealth management company Noah Holdings. Despite
these challenges, Noah’s assets under management remain
resilient. It continues to grow its client base, positioning itself for
robust growth. Its strength is underpinned by structural tailwinds
from growth in the wealth management sector in China amid
rising household assets and its shift into alternative capital
market products.
Within the IT sector, a position in Chinese data-centre operator
VNET Group detracted from returns amid some corporate
governance concerns – notably, privatisation offers and then the
forced selling of the founder’s pledged shares by a large
shareholder. The company remains undervalued from a
fundamental perspective and its core business remains resilient
as evidenced by its recent huge order win from a new, sizable
and well-regarded client. Finally, it is worth highlighting that the
holding in AI (artificial intelligence) software maker SenseTime
weighed on performance owing to issues over a higher loss ratio
and a lack of standardisation in scaling up the business. We
closed out our position in the company in the third quarter.
Portfolio Manager’s Review continued
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Annual Report 2023
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
Question
What is your approach to gearing, and
what impact has it had on returns during
the year and over the longer-term?
Answer
The Company has the ability to gear (borrow in order to invest)
with the view that in the long-term, the judicious use of borrowing
can enhance capital returns for shareholders. Given the weak
market sentiment and broad-based corrections experienced after
the Congress meeting last October, many stocks with lower
regulatory risk were sold-off indiscriminately, and this presented
interesting opportunities to use gearing in order to add to some
long positions.
As at 31 March 2023, the Company’s Net Gearing, which nets off
short positions and hedges was 21.1%. For the year as a whole,
gearing slightly detracted from returns (gearing impact of -1.5%).
However, in the long-term the effect of gearing has been positive,
adding a cumulative 12% to total returns over my tenure as
Portfolio Manager.
Over the past few years, the portfolio’s net market exposure bias
has been predominantly long, fluctuating between 110-120%.
I dynamically manage gearing based on opportunities I see in
the market – generally gearing moves up when valuations are
lower and vice versa.
Question
What areas of the economy are you
particularly looking at? Are there
any sectors that you are specifically
interested in?
Answer
Further development of the capital markets, which could become
an asset allocation choice for domestic households given that
property is no longer viable for ‘investment purposes’, could give
rise to some interesting opportunities in the financial services
sector. For example, brokers are benefiting from increased
trading and the opening of new accounts. Noah Holdings is also
benefiting from decent structural tailwinds seen from the growing
wealth management/asset management industry, which as
previously highlighted, should see the shift in growth from
household assets into alternative and capital market products.
While there is large potential for increased market share gains
for Noah, especially in the area of high-net-worth assets, we are
cognisant of intensifying competition.
Within the property sector, the Company remains underexposed
to developers due to the avoidance of private developers.
However, a position is maintained in state-backed China
Overseas Land and Investment (“COLI”). Given continued
expectations of consolidation within the segment, COLI stands to
gain market share. We have strong conviction in:
• COLI’s high quality land bank (it has the highest proportion
of land bank in ‘Tier 1 and Tier 2’ cities versus other national
developers) – an important point, as it benefits from ongoing
urbanisation;
• Its product quality, which is well-known and well-recognised
by homebuyers;
• It has maintained solid profitability due to discipline and
pricing; and
• Its land acquisition kept pace during 2022, which should
ensure sufficient new sellable resources as demand
continues to recover.
Urbanisation continues to support rising consumer purchasing
power. Throughout my tenure as the Company’s Portfolio
Manager, I have been focused on the rise of the Chinese
consumer, and that remains the case, with approximately 43% of
the portfolio invested in consumer stocks at the year end, mainly
in stocks within the consumer discretionary sector.
JNBY Design is a leading player in the designer fashion apparel
industry. Its differentiated ‘fashion forward’ product offerings are
backed by a strong and stable local design team. Valuation-wise,
JNBY is trading on a price/earnings (P/E) multiple below 10
times, which is very attractive for a company with a solid growth
profile and track record. It also leverages its strong cash flows to
pay a healthy dividend. Encouragingly, within the consumer
discretionary sector, China’s jewellery market is expected to see
attractive growth, owing to higher per capital disposable income
growth. We expect the company Lao Feng Xiang to gain market
share and be a long-term winner in the country’s jewellery sector,
which is around RMB800 billion and growing at a compound
annual rate of between 7 and 8%. Similar to JNBY, the company
has strong brand equity and maintains a group of powerful and
loyal distributors. Further, with continued industry growth, it is in a
position to accelerate the pace of new and expanded stores. We
are also pleased that from a governance perspective, Lao Feng
Xiang’s management team has been improving its management
incentive plans.
We are continuing to witness a rapid pace of innovation in China.
This, combined with the ‘domestic substitution’ trend and ongoing
consolidation across a range of industries, has underpinned our
significant weighting in industrials. The core thesis around industry
consolidation remains very much in place – i.e. industries such as
building materials are very fragmented relative to more
developed markets but are expected to consolidate, seeing the
bigger and better players taking further market share. Although
some of our paint companies have lagged given ongoing
property concerns, we maintain a high level of conviction in the
future upside potential as their fundamentals normalise – notably
they should benefit from an increase in infrastructure investment
(albeit these projects are expected to be very targeted
compared to the spending we saw back in 2008).
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Annual Report 2023
Question
What are the major domestic
developments that investors should be
aware of?
Answer
In terms of external perception, there was a world of difference in
the reactions to the October 2022 Congress versus the National
People’s Congress in March 2023. However, in reality they were
both on the same page in terms of the government’s direction
and emphasis on various policies; of note, innovation,
consumption and the quality versus the quantity of economic
growth (a GDP target of 5% was announced for the year).
The overhaul of Alibaba Group Holding – China’s second-largest
listed company – is a major event. Designed to drive greater
autonomy and agility for each of its businesses, it has also forced
the market to consider the value of each business. This includes
the financial business Ant – the potential float of this business
should be taken positively by markets as a sign of progress
beyond the peak of regulatory tightening.
Also, within the internet space, ByteDance (an unlisted holding)
made headline news overseas after its TikTok app was banned
on government-owned devices in the US, UK and EU. Fortunately,
its domestic video-sharing app, Douyin, has seen more attractive
growth. The Chinese market accounts for 82% of ByteDance’s $70
billion total revenues, and domestic revenue growth remains
strong year-on-year amid a tepid economic environment
overseas. Focusing again on its overseas operations, in order to
address concerns over unauthorised access to US user data,
ByteDance has launched Project Texas, a comprehensive system
to protect data privacy. This, in turn, could result in a lower
probability of a complete ban. Even under the worst-case
scenario of a full ban, it would likely take a considerable amount
of time and negotiation before anything was enacted. Given all
this, we continue to be supportive holders of ByteDance.
Question
Environmental, social and governance
(“ESG”) themes are very topical among
investors. How do you approach ESG,
and can you outline specific examples
where engagement has resulted in good
outcomes for stakeholders?
Answer
All Fidelity managed funds have had ESG considerations
embedded in their investment process for a number of years. Our
research analysts consider ESG as part of their fundamental stock
assessments, using Fidelity’s proprietary Sustainability Rating and
Climate Rating frameworks. As well as this research, we are
active owners of our holdings and engage with companies on a
regular basis where we feel ESG practices could be improved.
During the period under review, we engaged with optics
manufacturer Sunny Optical on the subject of board diversity.
Fidelity International (“Fidelity”) became a member of the 30%
Club HK Chapter in 2022, and in September the Group sent
letters to 26 companies with all-male boards to encourage
greater gender diversity. Sunny Optical was one of them.
This engagement is part of a 30% Club initiative that Fidelity is
involved with along with other investors. The company was
responsive and shared that a new female director will be joining
the board in 2023. While this still falls short of FIL’s standard, it
means that Sunny Optical will have its first female director, and
also that the level of board independence will rise significantly.
As well as gender, broader labour management for contract
workers was also mentioned. The company has been outsourcing
frontline manufacturing worker positions since 2018, and the
recent controversy over Foxconn’s use of agency workers on less
favourable terms than permanent staff has brought this topic into
the spotlight.
We also had an in-depth engagement with Tuhu Car (an
automotive services company, which is yet to list) in order to
better understand its ESG performance and provide advice. The
company confirmed it was the first time it had engaged
extensively with investors on ESG. As a private company, Tuhu Car
does not publish an annual ESG report. However, we have put
together an ESG profile for the company based on our
engagement, which showed that the company’s direct
environmental impact is limited to the energy consumption and
carbon emission associated with its warehouses and logistic
fleets. While Tuhu Car is still at a very early stage of measuring
and managing its direct environmental footprint as well as that of
its franchisees, we expect these disclosures to improve as the
company becomes more mature, and particularly once it has
listed.
Our engagement with state-backed logistics company Sinotrans
centred around its capital allocation. Regulators have called on
State-Owned Enterprises (SOEs) to improve the efficiency of their
capital allocation and we are optimistic that Sinotrans’s efforts in
this area could help drive a re-rating of the company. We first
sent a letter to the company on the subject, and then discussed
the suggestion in a face-to-face meeting. In the past few months,
we have continued to supply the company with peer analysis and
case studies for their internal assessment on the matter. Given
our suggestion that the company should increase its cash payout,
we were pleased to see it achieved a 45.2% full-year cash payout
ratio (dividend plus buyback) for its 2022 financial year. We
believe this should serve as a good starting point for further
capital allocation discussions with Sinotrans and we will continue
to engage with the company on this subject.
Portfolio Manager’s Review continued
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Annual Report 2023
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
Question
How has the portfolio’s exposure to
unlisted companies changed during the
year under review?
Answer
There has been no change in the number or names of unlisted
companies held in the portfolio in the year other than the unlisted
shares in Xiaoju Kuaizhi (Didi Chuxing) being converted to listed
American Depositary Shares (ADS). The percentage of the
portfolio in unlisted companies has moved around due to
changes in the value of the individual holdings, as well as the
value of the overall portfolio. The process of valuing the
Company’s unlisted investments is set out on page 15 and as an
example of its oversight, the Manager’s Fair Value Committee
has revalued ByteDance three times since October. As at the end
of March 2023, the Company had nine unlisted investments
valued at £192,878,000 being 13.6% of its total Net Assets plus
Borrowings (2022: ten unlisted investments valued at
£194,650,000 being 13.2% of Net Assets plus Borrowings). Of the
nine companies held during the year, three rose in value, five fell
in value and one was unchanged. The largest contributor to
performance was Pony.ai, with the biggest detractor being DJI
International.
Question
Investment performance in the year under
review has been volatile. What lessons
have you learnt over the period and what
are your expectations for the coming
months?
Answer
This has been a period that reminds me of just how much
sentiment can swing in the Chinese market, and how short-term
focused it can be. Policy clearly remains a key focus for the
market, but the market often gets overly focused on short-term
moves while losing perspective of longer-term goals and
historical cyclicality. We now see policy returning to a greater
focus on growth – this should not be a surprise. The lesson that is
reinforced is the importance of staying calm and focusing on risk/
reward. While we added to positions that were under pressure
and capitalised on our capacity to increase overall gearing, we
could, arguably, have been more aggressive when some were
labelling China as “uninvestable”.
Furthermore, the past year has once again underlined how
important it is for us to have people on the ground in China; even
when overseas market participants were most bearish, we were
still finding investment opportunities and were able to capitalise
on the input from our locally-based analysts to make decisions on
companies based on fundamentals.
Chinese onshore equities (i.e., A shares) have one of the lowest
correlations – of any major market – with the US S&P 500 Index
and, consequently, can be viewed as a good diversifier in a
global portfolio. Economically, China is at a different point in the
policy and economic cycle compared to most developed
countries currently. In fact, we would argue that it is possibly one
cycle ahead of other economies. In its April 2023 World
Economic Outlook (“WEO”), the International Monetary Fund has
forecast China’s GDP growth to be 5.3% in 2023 and 4.5% in
2024, both unchanged from the January WEO update, but with
the 2023 figure showing a 0.8 percentage point improvement on
the last full WEO in October 2022. Some analysts expect the 2023
forecast to be even higher given the strength of the domestic
economic data. Household finances are very healthy; the savings
rate is 35% and has been in the 30s for many years, compared
with around 9% in the UK. Consumption growth hinges on both
the ability and the willingness to spend; the ability to spend is
clearly there given there is effectively no household debt, but the
willingness to spend is dependent upon improved sentiment, and
we are now witnessing that too.
I continue to have a confidence in both the Chinese market and
the underlying companies we are invested in. As such, I maintain
a personal holding of 113,036 shares in the Company.
Dale Nicholls
Portfolio Manager
7 June 2023
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Annual Report 2023
ESG in the Investment Process at Fidelity
International
Fidelity International (“Fidelity”) has embedded Environmental,
Social and Governance (“ESG”) factors in its investment decision
making for a number of years. Fidelity has been a signatory to
the United Nations Principles for Responsible Investment (UNPRI)
since 2012 and submits an annual report detailing how it
incorporates ESG into its investment analysis. As a founding
signatory to the Net Zero Asset Managers Initiative, Fidelity has
committed to halving the carbon footprint of its investment
portfolios by 2030, from a 2020 baseline, starting with equity and
corporate bond holdings; and to reach net zero for holdings by
2050.
ESG integration at Fidelity is carried out at the fundamental
research analyst level within its investment teams, primarily
through the implementation of the Fidelity Proprietary
Sustainability Rating. This rating was established in 2019 and is
designed to generate a forward-looking and holistic assessment
of a company’s ESG risks and opportunities, based on sector
specific key performance indicators across 127 individual and
unique sub-sectors. A breakdown of the ratings of the companies
in the portfolio using MSCI and Fidelity’s own proprietary ratings
is on page 14. In addition, Fidelity’s portfolio managers are also
active in analysing the effects of ESG factors when making
investment decisions. ESG analysis complements financial
analysis to provide a complete view of every company that is
researched and monitored.
Fidelity’s approach to integrating ESG factors into its investment
analysis includes the following activities:
• In-depth research.
• Company engagement.
• Active ownership.
• Collaboration within the investment industry.
In addition to Fidelity’s Sustainability Ratings, Fidelity has
developed a proprietary Climate Rating, which is an important
part of its plans to reach net zero emissions across its portfolios.
It utilises its fundamental research capabilities to identify climate
related risks, net zero investments and targets for transition
engagement within the Fidelity investment universe. It assesses
which companies are in the best position to transition to net zero,
or have a positive trajectory towards transition. The Climate
Rating is designed to complement the broader Sustainability
Ratings, which score companies across a range of environmental,
social and governance criteria.
Although Fidelity’s analysts have overall responsibility for
analysing the environmental, social and governance performance
of the companies in which it invests, it has a dedicated
Sustainable Investing Team working closely with the investment
teams and responsible for consolidating Fidelity’s approach to
stewardship, engagement, including thematic engagement, ESG
integration and the exercise of its votes at general meetings.
The Sustainable Investing Team has a key role in assisting the
investment teams with ESG integration which includes:
• Implementing Fidelity’s proxy voting guidelines.
• Engagement with investee companies on ESG issues, utilising
Fidelity’s corporate access research capabilities and
investment scale to improve corporate behaviour, including
at company meetings.
• Working closely with the investment team globally across all
asset classes in integrating ESG into analysis and decision-
making.
• Providing internal ESG reporting including analyst reports,
portfolio manager reviews and industry analysis.
• Co-ordinating and responding to specific client queries on
ESG topics.
• Publishing client reporting on ESG integration and proxy
voting.
• Maintaining a thorough understanding of current ESG themes
and trends around the world.
• Attending external seminars and conferences focusing on
trending ESG issues and ESG integration.
• Providing ESG training to the investment team and across the
business.
During 2021, Fidelity introduced its sustainable investing voting
principles and guidelines. These seek to provide a clear overview
of Fidelity’s voting approach, promote improved corporate
behaviours and reduce risk, include environmental and social
factors, increase clarity of votes to issuers and clients and meet
current market best practices and stewardship expectations.
Examples of the policy include voting against companies not
meeting key criteria on climate change and against management
in developed markets with less than 30% female representation at
board level.
Fidelity’s investment approach involves bottom-up research. As
well as studying financial results, the portfolio managers and
analysts carry out additional qualitative analysis of potential
investments. They examine the business, customers and suppliers
and visit the companies in person to develop a view of every
company in which Fidelity invests. ESG factors are embedded in
this research process.
Examples of ESG factors that Fidelity’s investment teams may
consider as part of its company and industry analysis include:
• Corporate governance (e.g. Board structure, executive
remuneration).
• Shareholder rights (e.g. election of directors, capital
amendments).
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
• Changes to regulation (e.g. greenhouse gas emissions
restrictions, governance codes).
• Physical threats (e.g. extreme weather, climate change, water
shortages).
• Brand and reputational issues (e.g. poor health and safety
record, cyber security breaches).
• Supply chain management (e.g. increase in fatalities, lost
time injury rates, labour relations).
• Work practices (e.g. observation of health, safety and human
rights provisions and compliance with the provisions of the
Modern Slavery Act).
Fidelity operates analyst training and development programmes
which include modules on ESG themes, topics and strategies and
attendance at external seminars on the trending ESG issues in
the market globally as well as conferences to explore new ways
of integrating ESG into the investment process across all asset
classes.
Fidelity uses a number of external research sources around the
world that provide ESG-themed reports and it subscribes to an
external ESG research provider and rating agency to supplement
its organic analysis. Fidelity receives reports that include
company specific and industry specific research as well as ad
hoc thematic research looking at particular topics. The ESG
ratings are industry specific and are calculated relative to industry
peers and Fidelity uses these ratings in conjunction with its wider
analysis. Fidelity’s sources of ESG research are reviewed on a
regular basis.
The ESG ratings and associated company reports are included
on Fidelity’s centralised research management system. This is an
integrated desktop database, so that each analyst has a
first-hand view of how each company under their coverage is
rated according to ESG factors. In addition, ESG ratings are
included in the analyst research notes which are published
internally and form part of the investment decision. The external
research vendor also provides controversy alerts which include
information on companies within its coverage which have been
identified to have been involved in a high-risk controversy that
may have a material impact on the company’s business or its
reputation.
SUSTAINABILITY
KPIs
Cybersecurity
Risk management
Business continuity
plan
Bribery/corruption
prevention
Independent
auditing
Compensation
Code of conduct
Supplier
responsibilities
Inclusive culture
Corporate citizenship
Gender pay equity
Community
engagement
Learning &
development
Employee
wellbeing
Financial
wellness
Diversity
Carbon emission
Energy management
Waste reduction
Ecological impacts
Water conservation
Biodiversity
Recycling
Supply chain
monitoring
Public advocacy
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Fidelity International - Setting standards for its business
Sustainability built from the ground up
We apply the same KPIs to our own
business that we use for the
companies in which we invest.
And we expect to improve upon our
own ESG standards, just as we
would expect from others.
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
14
Fidelity China Special Situations PLC
|
Annual Report 2023
The ratings charts below show a breakdown of the stocks in the Company’s portfolio using MSCI and Fidelity International’s
own ESG ratings.
The chart below shows that the Company’s portfolio has a significantly lower carbon footprint than that of the Index.
Source: 31 March 2023, Fidelity International. Benchmark Index: MSCI China (Net). Long only and no re-scaling. The ESG ratings distribution calculation is based on the net
asset value of holdings excluding cash, short stock positions, hedges and options.
1
MSCI ESG Research. MSCI rates issuers on a AAA-CCC scale according to their exposure to industry specific ESG key issues and their ability to manage those
issues relative to peers. The ESG ratings distribution is based on Net Asset Value of holdings excluding cash, liquidity funds, derivatives and ETFs. Although Fidelity
International’s information providers, including without limitation, MSCI ESG Research LLC and its affiliates (the “ESG Parties”), obtain information from sources they
consider reliable, none of the ESG Parties warrants or guarantees the originality, accuracy and/or completeness of any data herein. None of the ESG Parties makes
any express or implied warranties of any kind, and the ESG Parties hereby expressly disclaim all warranties of merchantability and fitness for a particular purpose, with
respect to any data herein. None of the ESG Parties shall have any liability for any errors or omissions in connection with any data herein. Further, without limiting any
of the foregoing, in no event shall any of the ESG Parties have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost
profits) even if notified of the possibility of such damages.
2
All rights in the information provided by Institutional Shareholder Services Inc. and its affiliates (ISS) reside with ISS and/or its licensors. ISS makes no express or implied
warranties of any kind and shall have no liability for any errors, omissions or interruptions in or in connection with any data provided by ISS.
3
The Fidelity Sustainability Ratings were launched in June 2019. As of 31 March 2023, they cover a universe of c. 3,200 issuers in equity and fixed income. Fidelity have a
five-scale rating of A (best) to E (worst).
85.0
72.4
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306.2
386.7
215.9
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ESG AND CARBON EMISSIONS ASSESSMENT
ESG ratings – we continue to engage with companies to improve scores
1.3%
3.1%
9.5%
39.6%
19.5%
11.6%
3.2%
49.6%
0.5%
4.6%
21.5%
42.2%
12.9%
14.1%
4.1%
0.0%
0%
MSCI ESG ratings
1
(% NAV exposure)
60%
50%
40%
30%
20%
10%
AAA AA A B CCC Not Rated
BBB BB
Portfolio Index
5.5%
80.6%
34.4%
2.3%
0.0%
14.6%
6.6%
59.5%
11.1%
2.9%
0.7%
19.1%
0%
FIL Proprietary ESG ratings
3
(% NAV exposure)
90%
80%
70%
60%
50%
40%
30%
20%
10%
A B D E Not Yet Rated
C
Portfolio
Index
Carbon Emissions: Provides a normalised snapshot of the carbon emissions of all of the investments in the Company’s portfolio
measured in tons CO2e/$M invested.
Carbon Intensity: The amount of carbon by weight emitted per unit of energy consumed.
Weighted Average Carbon Intensity: Measures the weighted average carbon emissions per unit of revenue of each investment in
the Company’s portfolio.
ESG in the Investment Process at Fidelity
International continued
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
15
Annual Report 2023
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
The Company can invest up to 15% of its Net Assets plus
Borrowings in unlisted securities which carry on business, or have
significant interests, in China. The limit is applied at the time of
purchase.
The Directors believe that the ability to invest in unlisted securities
is a differentiating factor for the Company and will continue to be
a source of additional investment performance.
In the reporting year, the Company converted its holding of
unlisted preference shares in Xiaoju Kuaizhi (Didi Chuxing) to
American Depositary Shares (ADS).
No new investments were made in unlisted securities in the
reporting year.
At the year end, the Company had nine unlisted investments
valued at £192,878,000 being 13.6% of its Net Assets plus
Borrowings (2022: ten unlisted investments valued at
£194,650,000 being 13.2% of Net Assets plus Borrowings).
Unlisted Investments Valuation Process
The valuation of each unlisted investment is set by the Manager’s
Fair Value Committee (“FVC”) and includes input from the
analysts covering the securities, Fidelity’s unlisted specialist and
also advised upon by independent third party valuers, Kroll. The
FVC meets monthly to discuss, among other things, the valuation
of unlisted investments. However, between these meetings, 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
Fidelity analyst has been consulted.
Kroll undertakes a detailed review of each of the unlisted
investments on a quarterly basis. The Board is provided with
quarterly updates from the FVC, which includes the Fidelity
analysts’ recommendations, enabling the Board to have oversight
of and to have confidence in Fidelity’s process. The Board also
receives details of any price changes made outside the normal
quarterly cycle.
Twice yearly, ahead of the Company’s interim and its year end,
the Company’s Audit and Risk Committee has a meeting and
receives a detailed presentation from the FVC, Fidelity’s unlisted
specialist and Kroll, in order to satisfy itself that the unlisted
investments are carried at an appropriate value as at the
balance sheet date. The external Auditor attends the unlisted
valuations meeting ahead of the year end.
The work done by the Audit and Risk Committee on the unlisted
investments is set out in its report on page 51.
The basis of valuation is set out in Notes 2 (e) and (l) of the
Accounting Policies on pages 65 to 68.
Details of the unlisted company which listed in the reporting year.
Xiaoju Kuaizhi (Didi Chuxing)
(Purchased: August 2015)
Xiaoju Kuaizhi, popularly known as ‘Didi Chuxing’ is a major Chinese ride-sharing, artificial intelligence
and autonomous technology conglomerate, providing transportation services to more than 550 million
users in around 400 cities. It provides services including taxi hailing, private car hailing, bike and e-bike
sharing and food delivery to users in China via a smartphone application.
On 30 June 2021, Didi’s American Depositary Shares (“ADS”) listed on the New York Stock Exchange.
The preference shares held by the Company remained unlisted until they were converted to ADS in the
current reporting year.
Unlisted Investments
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
16
Fidelity China Special Situations PLC
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Annual Report 2023
Pony.ai
(Purchased: March 2020)
Pony.ai holds a leading position in the e-commerce market. It has built a comprehensive
ecosystem with superior breadth and depth and has a loyal merchant and consumer base to
support its pricing power. Pony.ai aims to deliver autonomous mobility everywhere by building
safe and reliable autonomous driving technology. It is a market leader in developing artificial
intelligence and autonomous driving technology solutions that will change traditional ways of
transportation. Pony.ai recently announced that it received a licence to operate its self-driving
taxis in China.
Venturous Holdings
(Purchased: December 2020)
Venturous Holdings’ mission is to make cities smart – more liveable, sustainable and productive,
contributing to the buildout of an All-Digital Urban Economy in China. Venturous’ focus is the four
‘must-have’ areas of Smart Energy, Smart Buildings, Smart Computing and Smart City
Management. It also provides strategic advice to CEOs and their management teams, which
covers corporate architecture designs, strategies, market expansions, capital plans, business
model expansions, partnerships and ecosystems.
Unlisted companies held in the Company’s portfolio as at 31 March 2023.
DJI International
(Purchased: May 2018)
DJI International’s platforms empower talented creators to capture images that were once out of
reach. Its flying and camera stabilisation systems redefine camera placement and motion through
an unparalleled commitment to R&D, a culture of constant innovation and curiosity, and a focus
on transforming complex technology into easy-to-use devices. Building on the ethos of “form
follows function”, today DJI’s drone related products are redefining industries (such as filmmaking,
agriculture, conservation, search and rescue, energy infrastructure) by combining advanced
technology with dynamic designs.
ByteDance
(Purchased: November 2018)
ByteDance is a leading internet entertainment and social media company with hundreds of
millions of users in China. Despite the threat of Baidu, Alibaba and Tencent, ByteDance is one of
the few contenders able to capture significant time-spent and advertisement revenue in China.
Among its best-known products are TikTok, Toutiao, BuzzVideo and Vigo Video. With products
available in over 150 markets, the company has offices in 126 cities and has more than 60,000
employees and 15 research and development centres around the globe.
Unlisted Investments continued
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Annual Report 2023
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
Cutia Therapeutics
(Purchased September 2021)
Cutia Therapeutics is an emerging leader in the dermatology and medical aesthetics space in
China, an area of great growth potential due to rising awareness of beauty management and the
improved purchasing power of Chinese residents. The company has a strong pipeline of products
as well as a robust business development plan and a growing base of patients/clients. It is
among the few market players to offer both aspects of beauty management (i.e. dermatological
treatments for conditions such as alopecia and injectables such as Botox), giving it a strong
competitive advantage.
Tuhu Car
(Purchased June 2021)
Tuhu provides car repair and maintenance services and has become a key player in China’s
highly fragmented automotive aftermarket sector. The company, founded in Shanghai twelve years
ago, runs an asset-light business model, but tightly controls the operation of its franchisees. Its
online platform allows car owners to purchase services and parts that can be installed at
physical stores. It collaborates with more than 13,000 partner centres across China.
Beisen
(Purchased April 2021)
Beisen is a cloud-based recruitment and HR company. Its talent platform provides corporate
clients with wide-ranging human resource services including talent assessment, recruitment,
performance management and staff feedback. The company is a beneficiary of firms speeding
up investment in cloud and AI services for human resources management and growing demand
for digital transformation.
Shortly after the Company’s year end, Beisen IPO’d in Hong Kong.
Chime Biologics
(Purchased: March 2021)
Chime Biologics is a biologics Contract Development and Manufacturing Organization (CDMO)
company. The company used to be part of JHL Biotech, which was founded by a group of
industry veterans. It supports its clients from early-stage biopharmaceutical development through
late-stage clinical and commercial manufacturing, catering to the needs of the biopharmaceutical
industry.
Shanghai Yiguo, purchased in December 2016 as an unlisted company in the portfolio, has not performed as expected. It is in
liquidation and valued at nil.
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
18
Fidelity China Special Situations PLC
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Annual Report 2023
Spotlight on the Top 10 Holdings
as at 31 March 2023
Based on Asset Exposure expressed as a percentage of Net Assets. Asset Exposure comprises
the value of direct equity investments plus market exposure to derivative instruments.
Tencent Holdings
% of Net Assets
12.8%
Tencent Holdings has a monopolistic 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 down
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 Communication Services
Alibaba Group Holding
% of Net Assets
9.0%
Alibaba Group Holding holds a leading position in the e-commerce market. 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. Its core e-commerce categories, including apparel
and make-up, will benefit from a recovery in consumption and pent-up demand in China. 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 Consumer Discretionary
Wuxi AppTec Group
% of Net Assets
2.5%
Wuxi AppTec Group is a leading biotech contract research and manufacturing (CDMO/CMO)
company. It is expected to benefit from global pharmaceutical industry growth and continued
research and development (R&D) investment by pharmaceutical companies. The continued trend
of outsourcing from in-house production to CDMO companies, particularly in China, also
underpins its position. It’s robust talent pool with strong technical skills has helped to drive a
loyal client base.
Industry Healthcare
Pony.ai (unlisted)
% of Net Assets
3.6%
Pony.ai holds a leading position in the e-commerce market. It has built a comprehensive
ecosystem with superior breadth and depth and has a loyal merchant and consumer base to
support its pricing power. Pony.ai aims to deliver autonomous mobility everywhere by building
safe and reliable autonomous driving technology. It is a market leader in developing artificial
intelligence and autonomous driving technology solutions that will change traditional ways of
transportation. Pony.ai recently announced that it received a licence to operate its self-driving
taxis in China.
Industry Consumer Discretionary
Hisense Home Appliances Group
% of Net Assets
2.4%
Hisense Home Appliance Group is principally engaged in the development, manufacture and
distribution of home electric appliances. The company’s main products include barrel washing
machines, rotary drum washing machines, on-hook air conditioners, cabinet air conditioners, side
by side combination refrigerators, multi-door refrigerators, computer refrigerators and mechanical
refrigerators, among others. The company distributes its products under the brand names of
Hisense, Ronshen and Kelon to both domestic and overseas markets.
Industry Consumer Discretionary
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Annual Report 2023
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
Crystal International Group
% of Net Assets
2.1%
Crystal International Group is a clothing manufacturer and has around 20 self-operating
manufacturing facilities spanning across five countries. It delivers over 470 million pieces of
apparel a year to the best-in-class apparel brands in the world, offering the right product at the
right time at the right cost. Its corporate culture of caring for customers, colleagues, society and
the global environment are its priorities and takes a holistic approach to sustainability using the
five pillars of Environment, Innovation, Product Integrity, Employee Care, and Community
Engagement.
Industry Consumer Discretionary
China Pacific Insurance Group
% of Net Assets
2.2%
China Pacific Insurance is a leading comprehensive insurance group in China, covering licences
of property and casualty insurance, life insurance, health insurance, agricultural insurance,
pension insurance and asset management. It provides a broad range of risk solutions to about
115 million customers via its worldwide agents.
Industry Financials
DJI International (unlisted)
% of Net Assets
2.3%
DJI International’s platforms empower talented creators to capture images that were once out of
reach. Its flying and camera stabilisation systems redefine camera placement and motion through
an unparalleled commitment to R&D, a culture of constant innovation and curiosity, and a focus
on transforming complex technology into easy-to-use devices. Building on the ethos of “form
follows function”, today DJI’s drone related products are redefining industries (such as filmmaking,
agriculture, conservation, search and rescue, energy infrastructure) by combining advanced
technology with dynamic designs.
Industry Information Technology
Chime Biologics (unlisted)
% of Net Assets
2.2%
Chime Biologics is a biologics Contract Development and Manufacturing Organization (CDMO)
company. The company used to be part of JHL Biotech, which was founded by a group of
industry veterans. It supports its clients from early-stage biopharmaceutical development through
late-stage clinical and commercial manufacturing, catering to the needs of the biopharmaceutical
industry.
China Life Insurance
% of Net Assets
2.3%
China Life Insurance is a large-scale national financial and insurance company. It provides life,
annuity, accident and health insurance through various business segments. Its other businesses
segment includes income and allocated cost of insurance agency businesses.
Industry Financials
Industry Manufacturing
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
20
Fidelity China Special Situations PLC
|
Annual Report 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 171,520 12.8 96,467
Alibaba Group Holding (shares and long CFDs)
e-commerce group 120,405 9.0 48,161
Pony.ai (unlisted)
Developer of artificial intelligence and autonomous driving technology solutions 48,272 3.6 48,272
WuXi AppTec Group (long CFDs)
Pharmaceutical, biopharmaceutical and medical device outsourcing provider 33,960 2.5 (888)
Hisense Home Appliances Group
Developer, manufacturer and distributor of household appliances 32,219 2.4 32,219
China Life Insurance (long CFDs)
Insurance company 30,766 2.3 27
DJI International (unlisted)
Manufacturer of drones 30,475 2.3 30,475
China Pacific Insurance Group (long CFDs)
Insurance company 29,390 2.2 (810)
Chime Biologics Convertible Bond (unlisted)
Contract Development and Manufacturing Organization (CDMO) 29,064 2.2 29,064
Crystal International Group
Clothing manufacturer 28,164 2.1 28,164
China Foods (shares and long CFD)
Processor and distributor of food and beverages 27,959 2.1 2,141
Venturous Holdings (unlisted)
Investment company 26,015 1.9 26,015
Luk Fook Holdings International (long CFD)
Jewellery company 24,853 1.9 (248)
ByteDance (unlisted)
Technology company 24,035 1.8 24,035
HollySys Automation Technologies
Provider of automation control system solutions 23,785 1.8 23,785
Postal Savings Bank of China
Commercial retail bank 22,965 1.7 22,965
MINISO Group Holding
Retail and wholesale business of lifestyle products 22,655 1.7 22,655
Noah Holdings
Wealth management company 22,168 1.7 22,168
Autohome
Online portal for automobile buyers 21,112 1.6 21,112
Focus Media Information Technology (shares and equity linked notes)
Advertising solution provider 20,462 1.5 20,462
Forty Largest Holdings
as at 31 March 2023
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
21
Annual Report 2023
|
Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
Asset Exposure Fair Value
£’000 %
1
£’000
Sinotrans (shares and long CFDs)
Logistics, storage and terminal services provider 20,441 1.5 9,545
Shandong Himile Mechanical Science and Technology (shares and equity linked
notes)
Developer, manufacturer and distributor of tire molds, giant tire curing presses, building
drums and castings 19,447 1.5 19,447
ERA (shares and equity linked notes)
Manufacturer of plastic valves and fittings 18,912 1.4 18,912
Meituan (shares and long CFDs)
Shopping platform for locally found consumer products and retail services 18,824 1.4 6,100
JD.com (shares and long CFDs)
Online retailer 18,582 1.4 17,029
RS Technologies
Silicon wafer manufacturer 17,869 1.3 17,869
Lenovo Group (long CFD)
Multinational technology company 16,992 1.3 (220)
China Overseas Grand Oceans Group
Investment holding company 16,812 1.3 16,812
Hutchison China MediTech
Pharmaceutical and healthcare group 16,720 1.2 16,720
Haitian International Holdings
Manufacturer and distributor of plastic injection moulding machines 16,523 1.2 16,523
China International Capital (long CFD)
Investment bank 16,265 1.2 104
Lufax Holding (long CFD)
Technology empowered personal financial services platform 16,185 1.2 389
Full Truck Alliance
Online commercial freight platform 16,104 1.2 16,104
China Lesso Group Holdings (long CFD)
Manufacturer of building materials and interior decoration products 15,820 1.2 (4,011)
SKSHU Paint Company
Paint manufacturing company 15,603 1.2 15,603
Lao Feng Xiang (shares and equity linked notes)
Jewellery company 14,962 1.1 14,962
Intron Technology Holdings
Automotive electronics solutions provider 14,896 1.1 14,896
Ping An Insurance Company of China
Provider of insurance, banking and investment products 14,676 1.1 14,676
Tuhu Car (unlisted)
Online retailer of automobile spare parts 14,024 1.0 14,024
Precision Tsugami (China)
High precision machine tool manufacturer 13,692 1.0 13,692
Forty largest long exposures (2022: 83.2%) 1,123,593 83.9 735,417
Other long exposures (2022: 55.1%) 715,103 53.5 590,546
Total long exposures before hedges (144 companies) 1,838,696 137.4 1,325,963
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
22
Fidelity China Special Situations PLC
|
Annual Report 2023
Asset Exposure Fair Value
£’000 %
1
£’000
Less: hedging exposures
Hang Seng Index (future) (119,369) (8.9) (4,524)
Hang Seng China Enterprises Index (future) (53,521) (4.0) (2,333)
Hang Seng China Enterprises Index (put option) (12,912) (1.0) 1,061
iShares China Large-Cap ETF (put option) (13,101) (1.0) 1,227
Total hedging exposures (198,903) (14.9) (4,569)
Total long exposures after the netting of hedges 1,639,793 122.5 1,321,394
Short exposures
Short CFDs (3 holdings) 19,086 1.4 (1,238)
Put options (1 holding) 188 – 29
Total short exposures 19,274 1.4 (1,209)
Gross Asset Exposure
2
1,659,067 123.9
Portfolio Fair Value
3
1,320,185
Net current assets (excluding derivative instruments) 18,236
Net Assets 1,338,421
1 Asset Exposure expressed as a percentage of Net Assets.
2 Gross Asset Exposure comprises market exposure to investments of £1,318,764,000 plus market exposure to derivative instruments of £340,303,000.
3 Portfolio Fair Value comprises investments of £1,318,764,000 plus derivative assets of £22,313,000 less derivative liabilities of £20,892,000.
Forty Largest Holdings continued
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
23
Annual Report 2023
|
Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
Distribution of the Portfolio
as at 31 March 2023
Sector
Asset
Exposure
%
1
Benchmark
Index
£’000
Consumer Discretionary 40.0 28.9
Communication Services 20.9 20.4
Financials 19.9 15.3
Industrials 17.6 5.4
Healthcare 13.3 5.7
Information Technology 11.6 6.0
Consumer Staples 5.5 6.1
Materials 4.9 3.6
Real Estate 2.6 3.3
Utilities 1.7 2.5
Energy 0.8 2.8
Total excluding hedging 138.8 100.0
Hedging (14.9) –
Total including hedging 123.9 100.0
Share Type
Listed in Hong Kong 37.8 48.2
Listed in US 21.1 8.1
China “H” Shares 18.1 21.9
China “A” Shares 16.3 16.1
Unlisted 14.4 –
Red Chips 9.5 5.4
Listed in Japan 2.6 –
Listed in Taiwan 1.5 –
Listed in UK 1.2 –
Listed in Germany 0.8 –
China “B” Shares 0.6 0.3
Total 123.9 100.0
Size of Company (Market Cap)
Large – above £5bn 41.8 87.9
Medium – between £1bn – £5bn 33.5 12.1
Small – below £1bn 34.2 –
Unlisted 14.4 –
Total 123.9 100.0
1 Asset Exposure expressed as a percentage of Net Assets.
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Fidelity China Special Situations PLC
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Annual Report 2023
Analysis of NAV total return for the year ended 31 March 2023 %
Impact of:
MSCI China Index (in Hong Kong dollar terms) -4.5
Stock Selection (in Hong Kong dollar terms) +25.5
Gearing (in Hong Kong dollar terms) -24.1
Currency translation into sterling +5.5
Share Repurchases +0.5
Other Costs -1.2
Cash +0.9
NAV total return for the year ended 31 March 2023 +2.6%
Ten Highest Contributors to NAV total return %
MINISO Group Holding +1.3
Hisense Home Appliances Group +1.2
Tencent Holdings +1.0
COSCO Shipping Energy Transportation +0.9
Trip.com Group +0.8
Intron Technology Holdings +0.6
Vipshop Holdings +0.5
Pony.ai (unlisted) +0.5
Luk Fook Holdings International +0.4
Beijing Chunlizhengda Medical Instruments +0.4
Ten Highest Detractors to NAV total return %
SenseTime -1.7
Lufax Holding -1.4
WuXi AppTec Group -1.3
VNET Group -0.8
Tongdao Liepin Group -0.6
BC Technology Group -0.6
Noah Holdings -0.6
China Lesso Group Holdings -0.4
Shimao Services Holdings -0.4
Hutchison China MediTech -0.4
Note: Derivative positions are included in the above investment positions.
Source: Fidelity International.
Attribution Analysis
as at 31 March 2023
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Annual Report 2023
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
For the year ended 31 March 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014
Investment Performance
Net Asset Value per Share total
return (%)
1
+2.6 -34.9 +81.9 -5.9 -5.3 +22.2 +38.8 +0.0 +45.3 +19.5
Share Price total return (%)
1
+0.3 -39.2 +97.2 -6.5 -0.3 +23.6 +45.8 -4.5 +39.9 +14.1
MSCI China Index total return
(in UK sterling terms) (%) +1.4 -29.3 +29.1 -1.0 +0.9 +23.8 +37.6 -16.2 +39.3 -6.9
Assets
Gross Asset Exposure (£m) 1,659.1 1,765.6 2,754.9 1,594.2 1,767.1 1,806.6 1,586.9 1,155.3 1,189.1 806.6
Net Assets (£m) 1,338.4 1,400.6 2,183.0 1,273.0 1,401.6 1,502.9 1,243.8 908.5 944.1 656.2
Gross Gearing (%)
1
23.9 26.1 26.2 25.2 26.1 20.2 27.6 27.2 25.9 22.9
Net Gearing (%)
1
21.1 23.5 18.4 23.2 20.9 14.2 22.4 27.2 21.1 18.9
Net Asset Value per Share (pence)
1
274.08 272.52 423.50 236.27 255.03 272.55 225.36 164.18 165.27 114.84
Share Price data at year end
Share Price (pence) 247.50 252.00 419.00 216.00 235.00 239.00 195.70 136.00 143.60 103.80
Discount (%)
1
9.7 7.5 1.1 8.6 7.9 12.3 13.2 17.2 13.1 9.6
Earnings and Dividends paid
Revenue Earnings per Share (pence)
1
7.05 6.42 4.70 4.51 4.06 3.80 2.92 2.07 1.41 1.18
Capital (Loss)/Earnings per Share
(pence)
1
(2.42) (152.81) 186.11 (19.67) (18.21) 45.86 60.01 (2.24) 50.17 16.39
Total Earnings/(Loss) per Share (pence)
1
4.63 (146.39) 190.81 (15.16) (14.15) 49.66 62.93 (0.17) 51.58 17.57
Dividend per Share (pence) 6.25 5.50 4.68 4.25 3.85 3.50 2.50 1.80 1.30 1.15
Ongoing Charges
Ongoing Charges (excluding variable
element of the management fee) (%)
1
0.98 0.94 0.97 0.99 1.02 1.11 1.16 1.20 1.29 1.45
Variable Management Fee 0.20 0.20 0.12 (0.20) (0.09) 0.00 n/a n/a n/a n/a
Ongoing Charges (including variable
management fee)
1
1.18 1.14 1.09 0.79 0.93 1.11 1.16 1.20 1.29 1.45
1 Alternative Performance Measures.
Sources: Fidelity International and Datastream.
Past performance is not a guide to future returns.
Ten Year Record
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
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Fidelity China Special Situations PLC
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Annual Report 2023
Strategic Report
The Directors have pleasure in presenting the Strategic Report of
the Company. The Chairman’s Statement and Portfolio Manager’s
Review on pages 2 to 11 form part of the Strategic Report.
Business and Status
The Company carries on business as an investment company and
has been accepted as an approved investment trust by HM
Revenue & Customs under Sections 1158 and 1159 of the
Corporation Tax Act 2010, subject to the Company continuing to
meet eligibility conditions. The Directors are of the opinion that
the Company has conducted its affairs in a manner which will
satisfy the conditions for continued approval.
The Company is registered as an investment company under
Section 833 of the Companies Act 2006 and its ordinary shares
are listed and traded on the London Stock Exchange. It is not a
close company and it has no employees.
Purpose
The purpose of the Company is to offer investors who are
building a diversified portfolio a direct exposure to China,
recognising the size and growing importance of the country within
the world economy and its weighting within global stock market
indices.
Investment Objective
The Company’s investment objective is to achieve long-term
capital growth from an actively managed portfolio made up
primarily of securities issued by companies in China, both listed
and unlisted, as well as Chinese companies listed elsewhere. The
Company may also invest in companies with significant interests
in China.
Strategy
In order to achieve the investment objective, the Company
operates as an investment company which has an actively
managed portfolio of investments. As an investment company, it
is able to gear the portfolio and the Board takes the view that
long-term returns for shareholders can be enhanced by the use
of gearing.
As part of the strategy, the Board has delegated the
management of the portfolio and certain other services to the
Manager (FIL Investment Services (UK) Limited). The Manager
delegates the investment management to FIL Investment
Management (Hong Kong) Limited and the company secretariat
function to FIL Investments International. The Portfolio Manager
aims to achieve a total return on the Company’s Net Assets over
the long-term in excess of the equivalent return on the MSCI
China Index (the Benchmark Index), as expressed in UK sterling.
The stock selection approach adopted by the Portfolio Manager
is considered to be well suited to achieving the objective. The
Board recognises that investing in equities is a long-term process
and that the Company’s returns will vary from year to year.
The Company’s strategy and principal activity have remained
unchanged throughout the year ended 31 March 2023.
Investment Management Philosophy, Style and Process
The Portfolio Manager makes full use of Fidelity International’s
extensive investment research presence and investment licenses
in China. He focuses on undervalued companies which have
good long-term growth prospects and which have been
underestimated by the wider market. Company visits and
management meetings comprise an important part of the
investment process. He has a bias to small and medium-sized
companies, where lower levels of research by competitors leads
to greater opportunities for mispricing – but he is not constrained
and may invest in large or mega cap companies such as State
Owned Enterprises where mispricing appears.
The Portfolio Manager may invest in companies listed in China
and Chinese companies listed elsewhere. He may also invest in
companies with significant interests in China. The Company is
also able to invest up to 15% of the portfolio in unlisted
companies with a view to their Initial Public Offering, thereby
providing investors in the Company with very wide-ranging
investment opportunities in China.
Investment Policy
The Company invests in a diversified portfolio consisting primarily
of securities issued by companies in China, both listed and
unlisted, as well as Chinese companies listed elsewhere. The
Company may also obtain exposure to other listed companies
which have significant interests in China.
The Company may invest through equities, index linked, equity
linked and other debt securities, cash deposits, money market
instruments, foreign currency exchange transactions, equity
related securities, forward transactions and other interests
including derivative instruments. Forward transactions and
derivatives, including futures, options and contracts for difference,
may be used to enhance portfolio performance as well as for
efficient portfolio management and hedging. The Company’s
interest in any single investment will not, on acquisition, exceed
15% of Net Assets plus Borrowings.
The Investment Manager is not required to ensure that the
Company’s cash resources are fully invested at all times.
Accordingly, there may be times when the Company holds cash
or money market instruments pending investment.
The Company may invest in China “A” Shares both directly
through the Investment Manager’s Qualified Foreign Institutional
Investor (“QFII”) license and indirectly through third parties who
have a QFII facility.
Unlisted Investments
The Company is able to invest up to 15% of Net Assets plus
Borrowings in unlisted securities which carry on business, or have
significant interests, in China.
As at 31 March 2023, the Company held nine (2022: ten) unlisted
investments with a fair value of £192,878,000 (2022:
£194,650,000) representing 13.6% (2022: 13.2%) of Net Assets plus
Borrowings.
Derivative Instruments
The Company may use derivative instruments for efficient portfolio
management, gearing and hedging purposes. They may also be
used to achieve the investment objective (i.e. to enhance portfolio
performance).
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Annual Report 2023
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
The Board has adopted a policy that the Gross Asset Exposure of
short positions held by the Company will not in aggregate
exceed 15% of Net Assets plus Borrowings.
As at 31 March 2023, the Company’s exposure to short derivative
instruments represented 14.1% (2022: 14.0%) of Net Assets plus
Borrowings.
It is the Board’s policy that total exposure to any single
counterparty from all activities, including, but not limited to, the
management of cash and the use of derivatives should not
exceed 15% of Net Assets plus Borrowings. Derivative exposures
are included after the netting off of off-setting positions and
allowing for any collateral placed by the counterparty with the
Company.
As at 31 March 2023, the Company’s largest exposure to any
single counterparty from all derivative activities was 0.3% (2022:
1.0%) of Net Assets plus Borrowings.
Investment in other Listed Investment Companies
The Company may invest no more than 10%, in aggregate, of its
Net Assets plus Borrowings at the time of acquisition in other
listed investment companies (including listed investment trusts),
but this restriction will not apply to investments in investment
companies or investment trusts which themselves have stated
investment policies to invest no more than 15% of their Net Assets
plus Borrowings in other listed investment companies (including
listed investment trusts).
As at 31 March 2023, the Company held no investments in other
listed investment companies (2022: nil).
Borrowing and Gearing Policy
The Board considers that long-term capital growth can be
enhanced by the judicious use of borrowing. The Board is
responsible for the Company’s gearing strategy with day-to-day
decisions being made by the Investment Manager within the
remit set by the Board in line with the Company’s Prospectus.
The Company may borrow up to 25% of Net Assets and the Gross
Asset Exposure of the Company, whether from borrowing or the
use of derivatives, may not exceed the Net Assets of the
Company by more than 30%. The Portfolio Manager is
responsible for operating within these limits.
During the year, the Gross Asset Exposure of the Company did
not exceed the Net Assets of the Company by more than 30%. As
at 31 March 2023, Gross Asset Exposure in excess of Net Assets
was 23.9% (2022: 26.1%).
Foreign Exchange Hedging Policy
The Company’s Financial Statements are denominated in UK
sterling, while investments are made and realised in currencies
other than UK sterling, including Chinese renminbi, Hong Kong
dollars and US dollars. It is the Company’s policy not to hedge
the underlying currencies of the holdings in the portfolio but
rather to take the currency risk into consideration when making
investment decisions.
Performance
The Company’s performance for the year ended 31 March 2023,
including a summary of the year’s activities, and details on trends
and factors that may impact future performance, are included in
the Chairman’s Statement and the Portfolio Manager’s Review on
pages 2 to 11. The Forty Largest Holdings, the Distribution of the
Portfolio, the Attribution Analysis and the Ten Year Record are on
pages 20 to 25.
Results and Dividends
The Company’s results for the year ended 31 March 2023 are set
out in the Income Statement on page 61. The revenue earnings
per share was 7.05 pence and the capital loss was 2.42 pence,
giving a total gain of 4.63 pence per ordinary share.
Under Section 1159 of the Corporation Tax Act 2010, the
Company is not able to retain more than 15% of its net income in
any reporting year to qualify as an investment company. The
Directors recommend that a final dividend of 6.25 pence (2022:
5.50 pence) per ordinary share be paid on 27 July 2023 to
shareholders who appear on the register as at close of business
on 16 June 2023 (ex-dividend date 15 June 2023).
Key Performance Indicators
The Board’s intention is for the NAV and share price to
outperform the Benchmark Index over the longer-term and that
the discount should be maintained in single digits in normal
market conditions. It regularly considers the costs of running the
Company with the aim of keeping the Ongoing Charge as low as
possible. The Board deems these to be the Company’s key
performance indicators (“KPIs”) and they are also comparable to
those reported by other investment companies. The Company’s
KPIs for the current and prior year are set out in the table below.
Year ended
31 March
2023
%
Year ended
31 March
2022
%
Net Asset Value per Share total
return
1
+2.6 -34.9
Share Price total return
1
+0.3 -39.2
MSCI China Index total return +1.4 -29.3
Discount to Net Asset Value
1
9.7 7.5
Ongoing Charges
1
0.98 0.94
1 Alternative Performance Measures. See pages 91 and 92.
The Board also monitors the factors contributing to investment
results, as set out in the NAV Attribution Analysis table on
page24. Long-term performance is also monitored and is set out
in the Ten Year Record on page 25.
Strategic Report continued
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Fidelity China Special Situations PLC
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Annual Report 2023
Principal Risks and Uncertainties and Risk Management
As required by provisions 28 and 29 of the 2018 UK Corporate Governance Code, the Board has a robust ongoing process for
identifying, evaluating and managing the principal risks and uncertainties faced by the Company, including those that could threaten
its business model, future performance, solvency or liquidity. The Board, with the assistance of the Alternative Investment Fund
Manager (FIL Investment Services (UK) Limited/the “Manager”), has developed a risk matrix which, as part of the risk management
and internal controls process, identifies the key existing and emerging risks and uncertainties that the Company faces. The Audit and
Risk Committee continues to identify any new emerging risks and take any action necessary to mitigate their potential impact. The
risks identified are placed on the Company’s risk matrix and graded appropriately. This process, together with the policies and
procedures for the mitigation of existing and emerging risks, is updated and reviewed regularly in the form of comprehensive reports
considered by the Audit and Risk Committee. The Board determines the nature and extent of any risks it is willing to take in order to
achieve its strategic objectives.
Climate change, which refers to a large scale shift in the planet’s weather patterns and average temperatures, 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. Further details are on pages 12 and
13. The Board will continue to monitor how this may impact the Company as a risk to investment valuations and potentially to
shareholder returns. Another emerging risk may be the de-coupling from China by developed economies.
The Manager also has responsibility for risk management for the Company. It works with the Board to identify and manage the
principal and emerging risks and uncertainties and to ensure that the Board can continue to meet its UK corporate governance
obligations.
The Board considers the following as the principal risks and uncertainties faced by the Company.
Principal Risks Risk Description and Impact Risk Mitigation Trend
Geopolitical
Risk
• Impact on the value of investments
and the Manager’s ability to access
markets freely.
• Continuing political and trade tensions
between China and US, e.g. trade
sanctions and China encouraging
Chinese companies to de-list from
the US.
• Regulatory interventions in certain
sectors of the financial markets in
China.
• The ongoing Ukraine/Russia conflict
polarising countries globally, e.g.
Western countries supplying counter-
offensive weapons and tanks leading
to further escalation.
• South China Sea Dispute could have a
negative impact on Chinese
investments, including reduced access
to global markets and technology,
sanctions and retaliatory measures
and possible weakening of investment
and confidence in Chinese companies.
• Implications of tensions in the Taiwan
Strait include potential military conflict
and increased tensions over trade and
economic issues over competing
territorial claims.
• The Board receives insights and
information, including research notes, from
the Manager and independent sources
on a regular basis.
• The Board receives and reviews reports
from the Portfolio Manager on a regular
basis.
• Major market contingency plans are
developed for more extreme events.
Increasing
Strategic Report continued
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Annual Report 2023
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
Principal Risks Risk Description and Impact Risk Mitigation Trend
Market and
Economic Risks
(including
Currency Risk)
• China’s newly announced economic
targets and policy setting are more
conservative and stability-oriented.
• The momentum from the growth in size
and wealth of the middle class is
tempered by the reduction in the size
of the working population.
• China’s economy is vulnerable to
uncertain world growth prospects,
tightening in global financial
conditions, energy costs, rising food
prices and currency instability.
• The ability of China’s centralised
government system to enact regulation
rapidly can adversely affect sectors or
individual companies and as a result
affect their stock market prices
negatively.
• The functional currency in which the
Company reports its results is sterling
and its shares are traded in sterling,
whilst the underlying investments are in
different currencies. The Company
does not hedge currencies.
• Growth may still exceed economic targets
as the stable policy setting may help
restore private sector confidence after a
policy-induced slowdown in the prior year.
• The Portfolio Manager and Manager’s
ability to understand and predict events in
China. Risk management insight is
provided on a regular basis.
• The Company holds a diversified portfolio
emphasising sectors of strategic
importance to China.
• Current projections are for China’s GDP to
continue to grow at above the global
average.
Stable
Operational Risk
• Financial losses or reputational
damage from inadequate or failed
internal processes, people and
systems or from external parties and
events.
• Fidelity’s Operational Risk Management
Framework is designed to pro-actively
prevent, identify and manage operational
risks inherent in most activities.
• Fidelity uses robust systems and
procedures dedicated to its operational
processes. Its risk management structure
is designed according to the three lines of
defence model.
Increasing
Investment
Performance
Risk (including
Gearing Risk)
• The Portfolio Manager fails to
outperform the Benchmark Index and
peers over the longer-term.
• High gearing levels in a falling market
accentuates share price weakness.
NAV performance can be affected by
selling stock in a falling market to keep
the gearing level within pre-agreed
limits.
• An investment strategy overseen by the
Board to optimise returns from investing in
China.
• Diversification of investments through
investment restrictions and guidelines
which are monitored and reported upon
by the Investment Manager.
• A well-resourced team of experienced
analysts covering the market.
• Board scrutiny of the Manager and the
ability in extreme circumstances to
change the Manager.
• Limit on gearing and oversight of the
Manager’s use of gearing by the Board.
Stable
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Fidelity China Special Situations PLC
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Annual Report 2023
Principal Risks Risk Description and Impact Risk Mitigation Trend
Variable Interest
Entity Structures
Risk
• The Company’s exposure to a number
of companies with all or part of their
businesses in Variable Interest Entities
(“VIEs”) is expected to remain
significant.
• Regulatory risk from the China Security
Regulatory Commission (“CSCR”)
guidelines that companies with VIE
structures will require CSCR approval
to list overseas and to comply with
Chinese laws.
• Whilst it is not expected that China will
change the rules to the extent that it will
ban foreign investment, this risk is closely
monitored.
Stable
Climate Change
Risk
• Impact on investment valuations,
business operations, the supply chain
and shareholder expectations.
• China’s climate change credentials will
likely be less favourable if compared
to similar companies in developed
western markets.
• Reputational impact may arise by
being invested in a company with poor
climate change matters.
• The Board is provided with insights and
reports provided by the investment
management team.
• Fidelity uses a proprietary climate rating
designed to complement broader
sustainability ratings and is considered by
the investment process where
appropriate.
• Fidelity’s climate rating analyses
companies in three core areas - net zero
target alignment, climate governance and
capital allocation to the transition - which
are in line with the guidance from the
Task Force on Climate-related Financial
Disclosures (TCFD) and the Institutional
Investors Group on Climate Change
(IIGCC).
Increasing
Discount
Management Risk
• The Board fails to implement its
discount management policy
successfully to keep the level of the
discount in single digits and in the face
of heavy selling pressure, exhausts its
authorised buyback facility. The impact
of excessive market volatility on the
Company’s NAV may also lead to a
widening of the discount.
• If investor perception towards China is
negative, then the shares in the
Company may trade at an increasing
discount to its underlying NAV.
• The Company’s discount management
policy has been implemented to keep the
discount in single digits during normal
market conditions.
• Continuing scrutiny by the Board, the
Manager and the Company’s Broker
within parameters set.
• Maintaining a reputation for standing in
the market-place when required in order
to keep the discount in single digits.
• Maintaining close communications with
major shareholders.
Increasing
Strategic Report continued
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Annual Report 2023
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
Principal Risks Risk Description and Impact Risk Mitigation Trend
Unlisted
Securities Risk
• Valuations of unlisted securities may be
adversely affected by market
conditions.
• Initial public offering (IPO) of the
unlisted companies may face
difficulties to come to the market and
to achieve marketability.
• Potential for less stringent standards of
governance compared with those of
listed entities.
• The valuation of unlisted shares relies
on third-party judgements.
• The Company has a limit on the extent of
the investment in unlisted companies and
the Manager has a track record of
identifying profitable opportunities.
• The Board’s Audit and Risk Committee
scrutinises the carrying value of unlisted
investments, and this is supported by the
Manager and an external advisor.
Stable
Environmental,
Social and
Governance
(“ESG”) Risk
• Investor expectations related to ESG
factors of the underlying investee
companies and the portfolio are not
perceived to be met.
• Reputational damage to the Company
may arise from perception in the
marketplace.
• Whilst the investment portfolio does not
target or employ any set limit of ESG
investments, the Manager is expected to
engage with companies where
sustainability issues arise.
• Fidelity carries out ESG considerations at
the fundamental research level.
• The Portfolio Manager and analysts carry
out additional quantitative and qualitative
analysis of potential investments to form a
view on ESG characteristics of every
investee company.
• The Manager has developed an ESG
investment risk oversight framework and
updated its Investment Risk Policy to set
minimum controls.
Stable
Key Person Risk
• Loss of the Portfolio Manager or other
key individuals could lead to potential
performance and/or operational
issues.
• The Manager has succession plans for
key dependencies.
• The depth of the team within Fidelity.
• The experience of the analysts covering
China.
Stable
Cybercrime and
Information
Security Risks
• Cybersecurity risk from cyberattacks or
threats to the functioning of global
markets and to the Manager’s own
business model, including its and the
Company’s outsourced suppliers.
• Risk of cybercrime such as phishing,
remote access threats, extortion and
denial-of-services attacks from
geopolitically motivated attacks.
• The risk is monitored by the Board with
the help of the Manager’s global
cybersecurity team and their extensive
Strategic Cyber and Information Security
program and assurances from outsourced
suppliers.
• Key performance indicators and metrics
have been developed by the Manager to
monitor the overall efficacy of
cybersecurity processes and controls and
to further enhance the Manager’s
cybersecurity strategy.
Stable
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Fidelity China Special Situations PLC
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Principal Risks Risk Description and Impact Risk Mitigation Trend
Business
Continuity Risk
(including Global
Pandemic Risk)
• Operational resilience risks could result
in financial and/or reputational impact
to the Company affecting the
functioning of the business and global
markets.
• Fidelity has Business Continuity and Event
Management Frameworks in place to
deal with business disruption and assure
operational resilience.
Stable
Other risks facing the Company include:
Tax and Regulatory Risks
There is a risk of the Company not complying with the tax and
regulatory requirements in the UK and China. A breach of Section
1158 of the Corporation Tax Act 2010 could lead to a loss of
investment trust status, resulting in the Company being subject to
tax on capital gains.
The Board monitors tax and regulatory changes at each Board
meeting and through active engagement with regulators and
trade bodies by the Manager.
Operational Risks
The Company relies on a number of third party service providers,
principally the Manager, Registrar, Custodian and Depositary. It is
dependent on the effective operation of the Manager’s control
systems and those of its service providers with regard to the
security of the Company’s assets, dealing procedures, accounting
records and the maintenance of regulatory and legal
requirements. The Registrar, Custodian and Depositary are all
subject to a risk-based programme of internal audits by the
Manager. In addition, service providers’ own internal control
reports are received by the Board on an annual basis and any
concerns are investigated. Risks associated with these service
providers is rated as low, but the financial consequences could
be serious, including reputational damage to the Company.
Viability Statement
In accordance with provision 31 of the 2018 UK Corporate
Governance Code, the Directors have assessed the prospects of
the Company over a longer period than the twelve month period
required by the “Going Concern” basis. The Company is an
investment trust with the objective of achieving long-term capital
growth. The Board considers long-term to be at least five years,
and accordingly, the Directors believe that five years is an
appropriate investment horizon to assess the viability of the
Company, although the life of the Company is not intended to be
limited to this or any other period.
In making an assessment on the viability of the Company, the
Board has considered the following:
• The ongoing relevance of the investment objective in
prevailing market conditions;
• The Company’s level of gearing;
• The Company’s NAV and share price performance;
• The principal and emerging risks and uncertainties facing
the Company as set out above and their potential impact;
• The future demand for the Company’s shares;
• The Company’s share price discount to the NAV;
• The liquidity of the Company’s portfolio;
• The level of income generated by the Company; and
• Future income and expenditure forecasts.
The Company’s performance for the five year reporting period to
31 March 2023 was well ahead of the Benchmark Index, with a
NAV total return of +8.3%, a share price total return of +12.3%
compared to the Benchmark Index total return of -7.5%. The Board
regularly reviews the investment policy and considers whether it
remains appropriate. The Board has concluded that there is a
reasonable expectation that the Company will be able to
continue in operation and meet its liabilities as they fall due over
the next five years based on the following considerations:
• The Investment Manager’s compliance with the Company’s
investment objective and policy, its investment strategy and
asset allocation;
• The fact that the portfolio comprises sufficient readily
realisable securities which can be sold to meet funding
requirements if necessary;
• The Board’s discount management policy; and
• The ongoing processes for monitoring operating costs and
income which are considered to be reasonable in
comparison to the Company’s total assets.
In preparing the Financial Statements, the Directors have
considered the impact of climate change as detailed on page 28
and also on page30. The Board has also considered the impact
of regulatory changes, continuing tensions between the US and
China, tensions with Taiwan and the ongoing global implications
of the Ukraine and Russia war, and how this may affect the
Company.
In addition, the Directors’ assessment of the Company’s ability to
operate in the foreseeable future is included in the Going
Concern Statement which is included in the Directors’ Report on
page 36.
Strategic Report continued
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
PROMOTING THE SUCCESS OF THE COMPANY
Under Section 172(1) of the Companies Act 2006, the Directors of
a company must act in a way they consider, in good faith, would
be most likely to promote the success of the Company for the
benefit of its members as a whole, and in doing so have regard
(amongst other matters) to the likely consequences of any
decision in the long-term; the need to foster relationships with the
Company’s suppliers, customers and others; the impact of the
Company’s operations on the community and the environment;
the desirability of the Company maintaining a reputation for high
standards of business conduct; and the need to act fairly as
between members of the Company.
As an externally managed Investment Trust, the Company has no
employees or physical assets, and a number of the Company’s
functions are outsourced to third parties. The key outsourced
function is the provision of investment management services by
the Manager, but other professional service providers support the
Company by providing administration, custodial, banking and
audit services. The Board considers the Company’s key
stakeholders to be the existing and potential shareholders, the
external appointed Manager and other third-party professional
service providers. The Board considers that the interest of these
stakeholders is aligned with the Company’s objective of
delivering long-term capital growth to investors, in line with the
Company’s stated objective and strategy, while providing the
highest standards of legal, regulatory and commercial conduct.
The Board, with the Portfolio Manager, sets the overall investment
strategy and reviews this at an annual strategy day which is
separate from the regular cycle of board meetings. In order to
ensure good governance of the Company, the Board has set
various limits on the investments in the portfolio, whether in the
maximum size of individual holdings, the use of derivatives, the level
of gearing and others. These limits and guidelines are regularly
monitored and reviewed and are set out on pages 26 and 27.
The Board places great importance on communication with
shareholders. The Annual General Meeting provides the key
forum for the Board and the Portfolio Manager to present to the
shareholders on the Company’s performance and future plans
and the Board encourages all shareholders to attend in person
or virtually and raise any questions or concerns. The Chairman
and other Board members are available to meet shareholders as
appropriate. Shareholders may also communicate with Board
members at any time by writing to them at the Company’s
registered office at FIL Investments International, Beech Gate,
Millfield Lane, Tadworth, Surrey KT20 6RP or via the Company
Secretary at the same address or by email at investmenttrusts@
fil.com. The Portfolio Managers meet with major shareholders,
potential investors, stock market analysts, journalists and other
commentators throughout the year. These communication
opportunities help inform the Board in considering how best to
promote the success of the Company over the long-term.
The Board seeks to engage with the Manager and other service
providers and advisers in a constructive and collaborative way,
promoting a culture of strong governance, while encouraging
open and constructive debate, in order to ensure appropriate
and regular challenge and evaluation. This aims to enhance
service levels and strengthen relationships with service providers,
with a view to ensuring shareholders’ interests are best served,
by maintaining the highest standards of commercial conduct
while keeping cost levels competitive.
Whilst the Company’s direct operations are limited, the Board
recognises the importance of considering the impact of the
Company’s investment strategy on the wider community and
environment. The Board believes that a proper consideration of
ESG issues aligns with the Company’s investment objective to
deliver long-term growth in both capital and income, and the
Board’s review of the Manager includes an assessment of their
ESG approach, which is set out on pages 12 to 14.
In addition to ensuring that the Company’s investment objective
was being pursued, key decisions and actions taken by the
Directors during the reporting year, and up to the date of this
report, have included:
• As part of the Board’s succession plan, the appointments of
Georgina Field on 1 July 2022, Edward Tse on 24 November
2022 and Gordon Orr on 1 January 2023;
• As part of the Board’s succession plan, the decision to
appoint Mike Balfour as Chairman of the Board to replace
Nicholas Bull on 20 July 2022 and Alastair Bruce as
Chairman of the Audit and Risk Committee on the change of
role for Mr Balfour;
• The decision to hold a hybrid AGM in 2022 (and again this
year) in order to make the AGM more accessible and
improve the shareholder experience;
• Authorising the repurchase of 25,631,781 ordinary shares in
the reporting year when the Company’s discount widened, in
line with the Board’s intention that the ordinary share price
should trade at a level close to the underlying NAV;
• The decision to renew the Company’s revolving fixed rate
credit facility for US$100,000,000 for gearing purposes;
• The decision to change the Company’s corporate broker
following a review of services provided;
• The decision to appoint an apprentice of the Board with
effect from 13 July 2023;
• Following discussions with the Manager, the reduction in the
first tier of the management fee from 0.90% to 0.85% with
effect from 1 July 2023; and
• The decision to pay a final dividend of 6.25 pence per
ordinary share, the highest rate since the Company was
launched.
Board Diversity
The Board’s overriding intention is to ensure that it is made up of
the best combination of people in order to achieve long-term
capital growth for the Company’s shareholders from an actively
managed portfolio of investments. To this effect, the Board, as
part of its succession plan, will continue to appoint individuals
who, together as a Board, will aim to ensure the continued
optimal promotion of the Company in the marketplace.
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Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Annual Report 2023
The table below reports the gender diversity of the Board as at
31 March 2023.
Gender Reporting
Number
of Board
Members
Percentage
of the Board
Number of
Senior Board
Positions (Senior
Independent
Director and
Committee
Chairs)
Men 4 67% 2
Women 2 33% 2
From 1 July 2022 and up until 31 December 2022, the Board’s
composition had exceeded the target of 40% of women on FTSE
350 company boards by the end of 2025 as set by the FTSE
Women Leaders Review. In the period from 24 July 2019 up to
31 December 2022, at least 40% of the Board was made up of
women. This is the third and successor phase to the Hampton-
Alexander Review which had a target of 33% of women board
members. Also, until 31 December 2022, the Board met the FCA
targets on diversity which were effective for accounting periods
commencing 1 April 2022 that at least 40% of the Board
members are women (currently 33%). However, the Board does
meet the FCA targets that one of the senior Board positions is
held by a woman. This senior position is held by Vanessa
Donegan as the Senior Independent Director. The Board fully
intends to meet the 40% target of women holding Board positions
in the Company in due course. However, as there has been three
new appointments over the last few months, the Board is mindful
of spacing out the timing of the next appointment.
The Board meets the recommendations of the Parker Review
Committee that each FTSE 250 company should have at least
one director from an ethnic minority background by 2024 so as to
improve the ethnic and cultural diversity of UK company boards
as can be seen from the table below. The Board also meets the
FCA targets that at least one Director is from an ethnic minority
background.
Ethnic Background Reporting
Number
of Board
Members
Percentage
of the Board
Number of
Senior Board
Positions (Senior
Independent
Director and
Committee
Chairs)
White British
or other White
(including
minority white
groups)
5 83% 4
Asian/Asian
British
1 17% 0
Environmental, Social and Governance (“ESG”) in the
Investment Process
The Board has contracted with the Manager to provide the
Company with investment management and administrative
services. The Board believes that ESG considerations are an
important input into the assessment of the value of its
investments. The investment universe is undergoing significant
structural change and is likely to be impacted by increasing
regulation as a result of climate change and other social and
governance factors. The Board is committed to reviewing how the
Manager applies ESG factors in the investment process. The
Fidelity group of companies (including the Manager and
Investment Manager) sets out its commitment to responsible
investing and provides a copy of its detailed Responsible
Investing at www.fidelity.co.uk/responsible-investing. Further
information on Fidelity International’s approach to ESG in the
investment process and sustainable investing can be found on
pages 12 to 14 and forms are part of this Strategic Report.
Socially Responsible Investment
The Manager’s primary objective is to produce superior financial
returns for the Company’s shareholders. It believes that high
standards of corporate social responsibility (CSR) make good
business sense and have the potential to protect and enhance
investment returns.
Corporate Engagement
The Board believes that the Company should, where appropriate,
take an active interest in the affairs of the companies in which it
invests and that it should exercise its voting rights at their general
meetings. It delegates the responsibility for corporate
engagement and shareholder voting to the Investment Manager
who updates the Board on any issues and activities. These
activities are reviewed regularly by the Manager’s corporate
governance team.
Streamlined Energy and Carbon Reporting (SECR)
As an investment company with all its activities outsourced to
third parties, the Company’s own direct environmental impact is
minimal. The Company has no premises, consumes no electricity,
gas or diesel fuel and consequently does not have a measurable
carbon footprint. The Company is categorised as a low energy
user (less than 40MWH) under the Streamlined Energy & Carbon
Reporting regulations and therefore is not required to disclose
any energy and carbon information in this Annual Report.
Future Developments
Some trends likely to affect the Company in the future are
common to many investment companies together with the impact
of regulatory change and emerging risks. The factors likely to
affect its future development, performance and position are set
out in the Chairman’s Statement and the Portfolio Manager’s
Review on pages 2 to 11.
By Order of the Board
FIL Investments International
Secretary
7 June 2023
Strategic Report continued
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Fidelity China Special Situations PLC
INFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGYGOVERNANCE
Board of Directors
Mike Balfour
Chairman (since 20 July 2022)
Appointed 1 October 2018
M
N
Mr Balfour is a non-executive Director of abrdn Investment Property
Income Trust plc and Schroder BSC Social Impact Trust plc. He is
Chairman of the Investment Committee of TPT Retirement Solutions and
sits on its Management Oversight Board and is also a Director of TPT
Investment Management Limited. He is a member of the Investment
Advisory Board of The Institute of Chartered Accountants of Scotland.
He was chief executive of Thomas Miller Investment Ltd until 2016 and
was previously chief executive at Glasgow Investment Managers and
chief investment officer at Edinburgh Fund Managers Limited. His early
investment management career was focused on the nascent equity
markets of Asia. He is a qualified Chartered Accountant.
Alastair Bruce
Director
Appointed 1 July 2021
A
M
N
Mr Bruce is a non-executive Director and Chairman of the Audit
Committee of ICG Enterprise Trust PLC. He was Managing Partner of
Pantheon Ventures between 2006 and 2013, having joined the firm in
1996. At Pantheon Ventures, he was involved in all aspects of the firm’s
business, particularly the management of Pantheon International PLC,
the expansion of Pantheon Ventures global platform and the creation
of a co-investment business. He has over twenty-five years of private
equity, investment management and financial experience. He is a
qualified Chartered Accountant.
Vanessa Donegan
Senior Independent Director
(since 1 January 2023)
Appointed 1 September 2020
A
M
N
Mrs Donegan is a non-executive Director of Herald Investment
Management Ltd., JP Morgan Indian Investment Trust plc, Invesco Asia
Trust plc (where she is also the Senior Independent Director) and State
Street Global Advisors Luxembourg SICAV. She has 37 years of Asian
fund management experience, including managing dedicated China
portfolios. She was Head of the Asia Pacific desk at Columbia
Threadneedle Investments Ltd. (formerly Threadneedle Investments Ltd.)
for twenty-one years and has extensive experience of marketing funds
to retail and institutional clients across the globe.
Georgina Field
Director
Appointed 1 July 2022
A
M
N
Ms Field is the founder and CEO of White Marble Consulting, a business
that specialises in investment marketing. She was previously a non-
executive Director of the Perpetual Income Growth Investment Trust plc,
overseeing its merger into the Murray Income Trust plc. She has over
twenty years’ experience in the investment industry, including two senior
roles leading marketing teams at asset management companies.
Gordon Orr
Director
Appointed 1 January 2023
A
M
N
Mr Orr is an independent non-executive Director at Hong Kong listed
Lenovo Group Limited, Meituan and Swire Pacific Limited, and a
non-executive Director of Sondrel PLC. He is a Board Member at EQT
AB, a Swedish private equity business, and is Vice Chairman of the
China Britain Business Council. He founded McKinsey’s consulting
practice in mainland China in the early 1990s and led it in China and
Asia until 2015, since when has served on several corporate boards.
Edward Tse
Director
Appointed 24 November 2024
A
M
N
Dr Tse is a non-executive Director of China Travel International
Investment Limited (Hong Kong) and a Board Member of Gridiron
Capital LLC (USA). He is an Advisor of CDIB Capital International,
Cyberport Hong Kong and Our Hong Kong Foundation. He is a Council
Member of World Economic Forum, a Governor of Hong Kong
Institution for International Finance and a Professor at The Chinese
University of Hong Kong. He is founder and CEO of Gao Feng Advisory
Company and became one of the pioneers in China’s management
consulting industry by building and running two leading international
management consulting firms (BCG and Booz) for 20 years. He has
also advised Chinese government organisations on strategies,
state-owned enterprise reform and Chinese companies going
overseas, as well as to the World Bank and the Asian Development
Bank.
Committee membership key
A
Audit and Risk
M
Management Engagement
N
Nomination and Remuneration
Committee Chair
All the Directors are non-executive Directors and all are considered to be independent by the Board.
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
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Annual Report 2023
Directors’ Report
The Directors have pleasure in presenting their report and the
audited Financial Statements of the Company for the year ended
31 March 2023.
The Company was incorporated in England and Wales as a
public limited company on 22 January 2010 under the registered
number 7133583 and was launched as an investment trust on the
London Stock Exchange on 19 April 2010.
Management Company
FIL Investment Services (UK) Limited (“FISL”) is the Company’s
appointed Alternative Investment Fund Manager (the
“AIFM”/“Manager”). FISL, as the Manager, has delegated the
investment management of the Company to FIL Investment
Management (Hong Kong) Limited and the role of Company
Secretary to FIL Investments International.
The Management Agreement will continue unless and until
terminated by either party giving to the other not less than six
months’ notice in writing. However, they may be terminated
without compensation if the Company is liquidated pursuant to
the procedures laid down in the Articles of Association of the
Company. The Management Agreement may also be terminated
forthwith as a result of a material breach of the Agreement or on
the insolvency of the Investment Manager or the Company. In
addition, the Company may terminate the Agreement by not less
than two months’ notice if the Investment Manager ceases to be
a subsidiary of FIL Limited.
FIL Limited has no beneficial interest in the shares of the
Company (2022: nil).
The Board reviews the Management Agreement at least annually
and details are included in the Corporate Governance Statement
on page 42.
Management Fee
Since 1 April 2021, the management fee is on a tiered basis of
0.90% on the first £1.5 billion of net assets reducing to 0.70% on
net assets over £1.5 billion, plus a variable element of +/- 0.20%.
With effect from 1 July 2023, the first tier of the management fee
will reduce from 0.90% to 0.85%.
The variable management fee (“VMF”) of +/-0.20% is based on the
Company’s NAV per share performance relative to the MSCI China
Index (in UK sterling terms) (the Company’s Benchmark Index). In
the event of outperformance against the MSCI China Index, the
maximum fee that the Company would pay on net assets up to
£1.5 billion is 1.10%, but if the Company underperforms, then the
overall fee can fall as low as 0.70% of net assets. For net assets
over £1.5 billion, the maximum fee payable would be 0.90% if the
Company outperforms the MSCI China Index and in the event of
underperformance this could fall as low as 0.50% of net assets. The
VMF element is calculated daily by referencing the performance of
the Company’s NAV to the performance of the MSCI China Index
on a three year rolling basis. The variable element of the fee
increases or decreases by 0.033% for each percentage point of the
three year NAV per ordinary share outperformance or
underperformance over the MSCI China Index to a maximum of
+0.20% or a minimum of -0.20%.
The variable management fee charge for the year ended
31March 2023 was 0.20% (2022: 0.20%).
The total management fee for the year ended 31 March 2023
was £14,727,000 (2022: £19,643,000) as detailed in Note 4 on
page 70. This was made up of a base fee of £12,049,000 (2022:
£15,937,000) and a charge of £2,678,000 (2022: £3,706,000) on
the variable element based on the performance of the NAV
against the MSCI China Index.
The Board
Mike Balfour, Alastair Bruce and Vanessa Donegan all served on
the Board throughout the year ended 31 March 2023. Georgina
Field was appointed on 1 July 2022, Edward Tse was appointed
on 24 November 2022 and Gordon Orr was appointed on
1January 2023. Nicholas Bull served on the Board until 20 July
2022 and Linda Yueh served on the Board until 31December
2022. A brief description of all serving Directors as at the date of
this report is shown on page 35 and indicates their qualifications
for Board membership.
All serving Directors as at the date of this report will be seeking
election or re-election at the AGM on 20 July 2023.
Directors’ and Officers’ Liability Insurance
The Company maintains insurance cover for its Directors under its
own policy as permitted by the Companies Act 2006. This is in
addition to benefits under the Manager’s global Directors’ and
Officers’ liability insurance arrangements.
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), stress testing performed, 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 continue in
operational existence for the foreseeable future. The Board has
therefore concluded that the Company has adequate resources
to continue to adopt the going concern basis for the period to
30 June 2024 which is at least twelve months from the date of
approval of the Financial Statements. This conclusion also takes
into account the Board’s assessment of the ongoing risks from
evolving variants of COVID, the war in Ukraine, China’s tensions
with the US and Taiwan and significant market events. The
prospects of the Company over a period longer than twelve
months can be found in the Viability Statement on page 32.
Accordingly, the Financial Statements of the Company have been
prepared on a going concern basis.
Auditors’ Appointment
A resolution to reappoint Ernst & Young LLP as Auditor to the
Company will be proposed at the AGM on 20 July 2023.
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Fidelity China Special Situations PLC
INFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGYGOVERNANCE
Disclosure of Information to the Company’s Auditor
As required by Section 418 of the Companies Act 2006, each
Director in office as at the date of this Annual Report confirms that:
a) so far as each Director is aware, there is no relevant audit
information of which the Company’s Auditor is unaware; and
b) each Director has taken all the steps that ought to have
been taken as a Director to make himself/herself aware of
any audit information, and to establish that the Company’s
Auditor is aware of that information.
Corporate Governance
The Corporate Governance Statement forms part of this report
and can be found on pages 40 to 44.
Registrar, Custodian and Depositary Arrangements
The Company has appointed Link Group as its Registrar to
manage the Company’s share register, JPMorgan Chase Bank as
its Custodian, which is primarily responsible for safeguarding the
Company’s assets, and J.P. Morgan Europe Limited as its
Depositary, which is primarily responsible for the oversight of the
custody of investment funds and the protection of investors’
interests. Fees paid to these service providers are disclosed in
Note 5 on page 71.
Share Capital
The Company’s share capital comprises ordinary shares of
1pence each which are fully listed on the London Stock
Exchange. As at 31 March 2023, the issued share capital was
571,054,480 (2022: 571,054,480) of which 82,728,852 (2022:
57,097,071) shares were held in Treasury. Shares in Treasury do
not have voting rights, therefore the total number of shares with
voting rights was 488,325,628 (2022: 513,957,409).
Premium/Discount Management: Enhancing Shareholder
Value
The Board recognises the importance of the relationship between
the Company’s share price and the NAV per share and monitors
this closely. It seeks authority from shareholders each year to
issue shares at a premium or to repurchase shares at a discount
to the NAV, either for cancellation or holding in Treasury. The
Board will exercise these authorities to endeavour to keep the
discount in single digits in normal market circumstances and as
mentioned in the Chairman’s Statement on page 4.
Share Issues
No shares were issued during the year ended 31 March 2023
(2022: nil) and none have been issued since the year end and as
at the date of this report.
The authorities to issue shares and to disapply pre-emption rights
expire at the AGM on 20 July 2023 and resolutions to renew
these authorities will be put to shareholders at this AGM.
Share Repurchases
The Company repurchased 25,631,781 (2022: 1,506,074) shares
into Treasury during the year ended 31 March 2023. The Board
has determined that once shares held in Treasury reached 15% of
the issued share capital of the Company, further share
repurchases will be for cancellation. This has been the case from
12 May 2023. Since the year end and as at the date of this
report, the Company has repurchased a further 2,900,696
ordinary shares into Treasury and 2,238,726 ordinary shares for
cancellation.
The authority to repurchase shares expires at the AGM on 20 July
2023 and a resolution to renew the authority to repurchase
shares, either for cancellation or to buy into Treasury, will be put
to shareholders at this AGM.
Substantial Share Interests
As at 31 March and 30 April 2023, notification had been received
that the shareholders listed in the table below held more than 3%
of the voting share capital of the Company.
Shareholders
31 March
2023
%
30 April
2023
%
Fidelity Platform Investors 22.40 22.37
Hargreaves Lansdown 13.24 13.18
Lazard Asset Management 9.07 9.03
City of London Investment
Management 7.91 7.90
Allan & Gill Gray Foundation 7.48 7.52
Interactive Investor 5.04 5.07
An analysis of shareholders as at 31 March 2023 is detailed in
the table below.
Shareholders as at 31 March 2023
% of voting
share capital
Retail Investors
1
65.54
Mutual Funds 14.33
Pension Funds 10.10
Charities 7.48
Insurance Funds 2.20
Other 0.35
Total 100.00
1 Includes Fidelity Platform Investors (22.40%).
Additional Information required in the Directors’ Report
Information on proposed dividends, financial instruments and
disclosure on Streamlined Energy and Carbon Reporting (SECR)
is set out in the Strategic Report on pages 26 to 34.
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Annual Report 2023
ANNUAL GENERAL MEETING
THIS SECTION IS IMPORTANT AND REQUIRES YOUR
IMMEDIATE ATTENTION.
If you are in any doubt as to the action you should take, you
should seek your own personal financial advice from your
stockbroker, bank manager, solicitor or other financial
adviser authorised under the Financial Services and Markets
Act 2000.
The AGM of the Company will be held at 11.00 am on Thursday,
20 July 2023 at 4 Cannon Street, London EC4M 5AB and virtually
via the online Lumi AGM meeting platform. Full details of the
meeting are given in the Notice of Meeting on pages 93 to 96.
The Notice of Meeting and related papers are sent to
shareholders at least 20 working days before the AGM.
For those shareholders who would prefer not to attend in person,
we will live-stream the formal business and presentations of the
meeting online.
Dale Nicholls, the Portfolio Manager, will be making a
presentation to shareholders highlighting the achievements and
challenges of the year past and the prospects for the year to
come. He and the Board will be very happy to answer any
questions that shareholders may have. Copies of the Portfolio
Manager’s presentation can be requested by email at
investmenttrusts@fil.com or in writing to the Company Secretary
at FIL Investments International, Beech Gate, Millfield Lane, Lower
Kingswood, Tadworth, Surrey KT20 6RP.
Properly registered shareholders joining the AGM virtually will be
able to vote on the proposed resolutions. Please see Note 9 to
the Notes to the Notice of Meeting on page 95 for details on
how to vote virtually. Investors viewing the AGM online will be
able to submit live written questions to the Board and the
Portfolio Manager and these will be addressed on their behalf at
an appropriate juncture during the meeting.
Further information and links to the Lumi platform may be found
on the Company’s website www.fidelity.co.uk/china. On the day
of the AGM, in order to join electronically and ask questions via
the Lumi platform, shareholders will need to connect to the
website https://web.lumiagm.com.
We urge shareholders to vote and make use of the proxy form
provided. Please note that investors on platforms such as Fidelity
Personal Investing, Hargreaves Lansdown, Interactive Investor or
AJ Bell Youinvest will need to request attendance at the AGM in
accordance with the policies of your chosen platform. They may
request that you submit electronic votes in advance of the
meeting. If you are unable to obtain a unique IVC and PIN from
your nominee or platform, we will also welcome online
participation as a guest. Once you have accessed https://web.
lumiagm.com from your web browser on a tablet or computer,
you will need to enter the Lumi Meeting ID which is 192-504-083.
You should then select the ‘Guest Access’ option before entering
your name and who you are representing, if applicable. This will
allow you to view the meeting and ask questions but you will not
be able to vote.
Fidelity Platform Investors – Voting at AGMs
If you hold your shares in the Company through the Fidelity
Platform, then Fidelity passes on to you the right to vote on the
proposed resolutions at the Company’s AGM. Fidelity Platform
Investors are advised to vote online via the Broadridge Service (a
company that specialises in investor voting facilities). Investors
can sign up to this facility via their Fidelity Investor Account.
Proxy Voting
Link Group, the Registrar, introduced a paperless proxy voting
process in 2018. However, for ease of voting, we are sending a
paper Proxy Form to all shareholders who hold shares on the
main share register. This will assist shareholders to vote in
advance of the meeting should they decide not to attend in
person.
If you have sold, transferred or otherwise disposed of all your
shares in the Company, you should pass this document, together
with any accompanying documents, as soon as possible to the
purchaser or transferee, or to the stockbroker, bank or other
agent through whom the sale or transfer was effected, for
onward transmission to the purchaser or transferee.
At the AGM on 20 July 2023, resolutions will be proposed relating
to the items of business set out in the Notice of Meeting on
pages 93 and 94, including the items of special business
summarised below and on the next page.
Authority to Allot Shares
Resolution 12 is an ordinary resolution and provides the Directors
with a general authority to allot securities in the Company up to
an aggregate nominal value of £568,815. If passed, this
resolution will enable the Directors to allot a maximum of
56,881,500 ordinary shares which represents approximately 10%
of the issued ordinary share capital of the Company (including
Treasury Shares) as at 7 June 2023, and to impose any limits or
restrictions and make any arrangements which they consider
necessary or appropriate to deal with Treasury Shares, fractional
entitlements, record dates, legal, regulatory or practical problems
in, or under the laws of, any territory or any other matter. The
Directors would not intend to use this power unless they
considered that it was in the interests of shareholders to do so.
Any shares issued would be at NAV per ordinary share or at a
premium to NAV per ordinary share.
Authority to Disapply Pre-Emption Rights
Resolution 13 is a special resolution disapplying pre-emption
rights and granting authority to the Directors, without the need for
further specific shareholder approval, to make allotments of
equity securities or sale of Treasury shares for cash up to an
aggregate nominal value of £568,815 (including Treasury shares)
(approximately 10% of the issued ordinary share capital of the
Company as at 7 June 2023 and equivalent to 56,881,500
ordinary shares).
Directors’ Report continued
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Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Annual Report 2023
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Fidelity China Special Situations PLC
INFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGYGOVERNANCE
Authority to Repurchase Shares
Resolution 14 is a special resolution which renews the Company’s
authority to purchase up to 14.99% (72,429,600) of the ordinary
shares in issue (excluding Treasury shares) on 7 June 2023, either
for immediate cancellation or for retention as Treasury shares at
the determination of the Directors. Once shares are held in
Treasury, the Directors may only dispose of them in accordance
with the relevant legislation by subsequently selling the shares for
cash or by cancelling the shares. Purchases of ordinary shares
will be made at the discretion of the Directors and within
guidelines set from time to time by them in the light of prevailing
market conditions. Purchases will only be made in the market at
prices below the prevailing NAV per ordinary share.
Recommendation: The Board considers that each of
the resolutions is likely to promote the success of the
Company and is in the best interests of the Company and
its shareholders as a whole. The Directors unanimously
recommend that you vote in favour of the resolutions as they
intend to do in respect of their own beneficial holdings.
By Order of the Board
FIL Investments International
Secretary
7 June 2023
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Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Fidelity China Special Situations PLC
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Annual Report 2023
This Corporate Governance Statement forms part of the Directors’
Report. The Company is committed to maintaining high standards
of corporate governance. Accordingly, the Board has put in place
a framework for corporate governance which it believes is
appropriate for an investment company.
Corporate Governance Codes
The Board follows the principles and provisions of the UK
Corporate Governance Code (the “UK Code”) issued by the
Financial Reporting Council (the “FRC”) in July 2018 and the AIC
Code of Corporate Governance (the “AIC Code”) issued by the
Association of Investment Companies (the “AIC”) in February
2019. The AIC Code addresses the principles and provisions of
the UK Code. The FRC has confirmed that investment companies
which report against the AIC Code will meet their obligations
under the UK Code and paragraph 9.8.6 of the Listing Rules. This
Statement, together with the Statement of Directors’
Responsibilities on page 48, set out how the principles have
been applied.
The AIC Code can be found on the AIC’s website at www.theaic.
co.uk and the UK Code on the FRC’s website at www.frc.org.uk.
Statement of Compliance
The Company has complied with the recommendations of the AIC
Code and the relevant provisions of the UK Code for the year
under review and up to the date of this report, except in relation
to the UK Code provisions relating to the role of the chief
executive, executive directors’ remuneration, and the need for an
internal audit function. The Board considers that these provisions
are not relevant to the position of the Company, as it is an
externally managed investment company and has no executive
directors, employees or internal operations. All of its day to day
management and administrative functions are delegated to the
Manager.
THE BOARD
Board Composition
As at the date of this report, the Board, chaired by Mike Balfour,
consists of six non-executive Directors. The Directors believe that,
between them, they have good knowledge and wide experience
of business in China, the Asia region, unlisted investments and
their valuations, and of investment companies, and that the Board
has an appropriate balance of skills, experience, independence
and knowledge of the Company and length of service to
discharge its duties and provide effective strategic leadership
and proper governance of the Company.
Vanessa Donegan is the Senior Independent Director and fulfils
the role as a sounding board for the Chairman, intermediary for
the other Directors as necessary and acts as a channel of
communication for shareholders in the event that contact through
the Chairman is inappropriate.
Biographical details of all Directors are on page 35.
Tenure Policy
Directors appointed to the Board are subject to election and
subsequent annual re-election by shareholders at Annual General
Meetings and normally serve a term of up to nine years from
election.
Board Responsibilities
The Board has overall responsibility for the Company’s affairs
and for promoting the long-term success of the Company. All
matters which are not delegated to the Company’s Investment
Manager under the Management Agreement are reserved for
the Board’s decision. Matters reserved for the Board and
considered at meetings include decisions on strategy,
management, structure, capital, share issues, share repurchases,
gearing, financial reporting, risk management, investment
performance, share price discount, corporate governance, Board
appointments, and the appointment of the Investment Manager
and Company Secretary. The Board also considers shareholder
issues including communication and investor relations.
All Directors are independent of the Investment Manager and
considered to be free from any relationship which could
materially interfere with the exercise of their independent
judgement. The Board follows a procedure of notification of other
interests that may arise as part of considering any potential
conflicts and is satisfied that none has arisen in the year under
review.
All Directors are able to allocate sufficient time to the Company
to discharge their responsibilities fully and effectively. Each
Director is entitled to take independent professional advice, at
the Company’s expense, in the furtherance of their duties.
Board Meetings
The Board considers that it meets sufficiently regularly to
discharge its duties effectively and the table on the next page
gives the attendance record for the meetings held during the
reporting year. The Portfolio Manager and key representatives of
the Investment Manager are in attendance at these meetings.
Corporate Governance Statement
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Annual Report 2023
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Fidelity China Special Situations PLC
INFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGYGOVERNANCE
Board’s Attendance Record for the Reporting Year
Regular
Board
Meetings
Audit and
Risk
Committee
Meetings
Management
Engagement
Committee
Meetings
Nomination
and
Remuneration
Committee
Meetings
Mike Balfour 5/5 1/1* 1/1 1/1
Alastair Bruce 5/5 5/5 1/1 1/1
Nicholas Bull
1
2/2 n/a 1/1 n/a
Vanessa Donegan 5/5 5/5 1/1 1/1
Georgina Field
2
4/4 4/4 n/a 1/1
Gordon Orr
3
2/2 2/2 n/a 1/1
Edward Tse
4
3/3 3/3 n/a 1/1
Linda Yueh
5
3/3 4/4 1/1 n/a
* Appointed Chairman on 20 July 2022, therefore not a Member of the Audit and Risk Committee since this date, but is invited to attend the meetings.
1 Retired on 20 July 2022.
2 Appointed on 1 July 2022.
3 Appointed on 1 January 2023.
4 Appointed on 24 November 2022.
5 Retired on 31 December 2022.
Figures in the table above indicate those meetings for which
each Director was eligible to attend and attended in the year.
Regular Board meetings exclude ad hoc meetings for formal
approvals as well as due diligence meetings.
Between these meetings there is regular contact with the
Investment Manager and other meetings are arranged as
necessary. Additionally, Board Committees and sub-groups meet
to pursue matters referred to them by the Board and the
Chairman is in contact with the other Directors regularly without
representatives of the Investment Manager being present.
In addition to the formal Board and Committee meetings, the
Board normally undertakes an annual due diligence trip to China
in order to meet with the management of existing and potential
investee companies and also meet with Fidelity’s research and
analysts teams. However, because of continuing travel restrictions
due to the ongoing global pandemic, the due diligence trip to
China was unable to go ahead and instead the Board carried
out a series of due diligence sessions virtually.
Company Secretary
The Board has access to the advice and services of the Company
Secretary. The Company Secretary is responsible to the Board for
ensuring that Board procedures are followed and that applicable
rules and regulations are complied with.
Changes to the Board
Changes to the Board take place in accordance with the
Companies Act 2006, the Company’s Articles of Association and
the AIC Code. The Nomination and Remuneration Committee is
responsible for identifying possible candidates. However, any
proposal for the appointment of a new Director is discussed and
approved by the entire Board.
Director Training
Upon appointment, each Director is provided with all relevant
information regarding the Company and receives an induction on
the investment operations and administration functions of the
Company, together with a summary of their duties and
responsibilities to the Company. Directors also receive regular
briefings from, amongst others, the AIC, the Company’s
Independent Auditor and the Company Secretary, regarding any
proposed developments or changes in law or regulations that
affect the Company and/or the Directors. External consultants
who have no connection with the Company are used to identify
potential candidates. Sapphire Partners was hired in 2022 for the
searches that led to the appointment of Georgina Field, Edward
Tse and Gordon Orr.
Election and Re-Election of Directors
All newly appointed Directors stand for election by the
shareholders at the AGM following their appointment by the
Board. As the Company is a constituent member of the FTSE 350
Index, all other Directors are subject to annual re-election.
Directors standing for election and re-election at this year’s AGM
are listed with their details on page 35. The terms and letters of
appointment of Directors are available for inspection at the
registered office of the Company.
Board Evaluation
An annual evaluation of the Board, its Directors and its
Committees is undertaken ahead of each AGM. It takes the form
of written questionnaires and discussions, except for every third
year when an external evaluation is undertaken. The process is
considered to be constructive in terms of identifying areas for
improving the functioning and performance of the Board and its
Committees and action is taken on the basis of the results.
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
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Annual Report 2023
For the year under review, the performance and contribution to
the Company of each Director was considered using a written
questionnaire. The performance of the Chairman is evaluated by
the other Directors in the Chairman’s absence. It was concluded
that the Chairman and each Director have been effective and
that they continue to demonstrate commitment to their roles. The
process is considered to be constructive in terms of identifying
areas for improving the functioning and performance of the
Board and its Committees and action is taken on the basis of the
results. The Board considers the tenure of individual Directors
during the evaluation process.
As a FTSE 350 Company and in accordance with provision 21 of
the 2018 UK Corporate Governance Code, the Board carries out
an externally facilitated evaluation every third year. The last
external evaluation was carried out in 2021, therefore, the next
external evaluation will be for the year ending 31 March 2024.
Directors’ Remuneration and Share Interests
Details of the Directors’ remuneration and share interests are
disclosed in the Directors’ Remuneration Report on pages 46 and
47.
BOARD COMMITTEES
The Board has three Committees through which it discharges
certain of its corporate governance responsibilities. These are the
Audit and Risk Committee, the Management Engagement
Committee and the Nomination and Remuneration Committee.
Terms of reference of each Committee can be found on the
Company’s pages of the Manager’s website at
www.fidelity.co.uk/china.
Audit and Risk Committee
The Audit and Risk Committee is chaired by Alastair Bruce and
consists of all of the Directors, except for Mike Balfour which is in
line with the recommendation of the 2018 UK Corporate
Governance Code that a chairman of a board should not be a
member of an audit committee. Mr Balfour will generally be
invited to attend the Audit and Risk Committee meetings.
Full details of the Audit and Risk Committee are disclosed in the
Report of the Audit and Risk Committee on pages 49 to 52.
Management Engagement Committee
Composition
The Management Engagement Committee (the “Committee”) is
chaired by Mike Balfour and consists of all of the Directors.
Role and Responsibilities
The Committee is charged with reviewing and monitoring the
performance of the Investment Manager and for ensuring that the
terms of the Management Agreement remains competitive and
reasonable for shareholders. It meets at least once a year and
reports to the Board, making recommendations as appropriate.
Manager’s Reappointment
Ahead of the forthcoming AGM, the Committee has reviewed the
performance of the Manager and the fee basis and concluded
that it is in the interests of shareholders that the appointment of
the Manager should continue. Details of the fee arrangements for
the reporting year are in the Directors’ Report on page 36.
Nomination and Remuneration Committee
Composition
The Nomination and Remuneration Committee (the “Committee”)
is chaired by Vanessa Donegan and consists of all of the
Directors because the Board deems them all to be independent.
Role and Responsibilities
The Committee is charged with reviewing the composition, size and
structure of the Board and makes recommendations to the Board as
appropriate. It is charged with nominating new Directors for
consideration by the Board, and in turn for approval by shareholders.
The search for a candidate is carried out against a set of objective
criteria, with due regard for the benefits of diversity on the Board,
including gender, social and ethnic backgrounds. New Directors are
appointed on the basis of merit. Sapphire Partners, who have no
connection with the Company, were engaged to assist the Board in
recruiting independent non-executive directors to replace Nicholas
Bull and Linda Yueh when they retired from the Board. As a result of
this process, Georgina Field was appointed on 1 July 2022, Edward
Tse was appointed on 24November 2022 and Gordon Orr was
appointed on 1 January 2023.
The Committee also considers the election and re-election of
Directors ahead of each AGM. For the forthcoming AGM, it has
considered the performance and contribution to the Company of
each Director and concluded that each Director has been
effective and continues to demonstrate commitment to their role.
Accordingly, the Committee has recommended their continued
service to the Board.
The Committee also considers the remuneration of the Directors,
and takes into account their roles, their responsibilities and the
time involved in carrying out their duties effectively. It also makes
itself aware of Directors’ fees of other comparable investment
trust companies. Further details can be found in The
Remuneration Policy on page 45.
The Committee, on behalf of the Board, continues to appoint
apprentices of the Board in order to give board exposure to
aspiring non-executive directors. As a result of this process, the
Board has selected a Board apprentice who will start her
apprenticeship on 13 July 2023. She will attend all Board and
Committee meetings as an observer.
Succession Planning
The Committee is responsible for succession planning and for
Directors’ appointments.
ACCOUNTABILITY AND AUDIT
Financial Reporting
Set out on page 48 is a statement by the Directors of their
responsibilities in respect of the preparation of the Annual Report
and Financial Statements. The Auditor has set out its reporting
responsibilities within the Independent Auditor’s Report to the
Members on pages 53 to 60.
The Board has a responsibility to present fair, balanced and
understandable annual and half-yearly financial statements. All
financial statements are reviewed by the Audit and Risk
Committee and approved by the Board prior to their issue to
ensure that this responsibility is fulfilled.
Corporate Governance Statement continued
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Annual Report 2023
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Fidelity China Special Situations PLC
INFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGYGOVERNANCE
Risk Management and Internal Controls
The Board is responsible for the Company’s systems of risk
management and of internal controls and for reviewing their
effectiveness. The review takes place at least once a year. Such
systems are designed to manage rather than eliminate the risk of
failure to achieve business objectives and can only provide
reasonable, but not absolute, assurance against material
misstatement or loss.
The Board determines the nature and extent of any risks it is
willing to take in order to achieve its strategic objectives. It is
responsible for the design, implementation and maintenance of
controls and procedures to safeguard the assets of the Company
although these tasks have been delegated on a day-to-day basis
to the Manager. The system extends to operational and
compliance controls and risk management. Clear lines of
accountability have been established between the Board and the
Manager. The Manager provides regular reports on controls and
compliance issues to the Audit and Risk Committee and the
Board. In carrying out its review, the Audit and Risk Committee
has regard to the activities of the Manager, the Manager’s
compliance and risk functions and the work carried out by the
Company’s Auditor and also includes consideration of internal
controls of similar reports issued by the other service providers.
The Board, assisted by the Manager, has undertaken a rigorous
risk and controls assessment. This process also assists in
identifying any new emerging risks and the action necessary to
mitigate their potential impact. The Board confirms that this is an
effective robust ongoing process in order to identify, evaluate and
manage the Company’s principal business and operational risks,
and that it has been in place throughout the year ended 31
March 2023 and up to the date of this report. This process is in
accordance with the FRC’s “Risk Management, Internal Control
and Related Financial Business Reporting” guidance.
The Board has reviewed the need for an internal audit function
and has determined that the systems and procedures employed
by the Manager, which are subject to inspection by the
Manager’s internal and external audit processes, provide
sufficient assurance that a sound system of internal controls is
maintained to safeguard shareholders’ investments and the
Company’s assets. An internal audit function, specific to the
Company, is therefore considered unnecessary. The Audit and
Risk Committee meets the Manager’s internal audit
representative at least once a year. It receives a summary of the
Manager’s externally audited internal controls report on an
annual basis.
Whistle-Blowing Procedure
Part of the Manager’s role in ensuring the provision of a good
service, pursuant to the Management Agreement, includes the
ability for employees of Fidelity International (“Fidelity”) to raise
concerns through a workplace concerns escalation policy
(“whistle-blowing procedure”). Fidelity has advised the Board
that it is committed to providing the highest level of service to its
customers and to applying the highest standards of quality,
honesty, integrity and probity. The aim of the policy is to
encourage employees and others working for Fidelity to assist the
Company in tackling fraud, corruption and other malpractice
within the organisation and in setting standards of ethical
conduct. This policy has been endorsed accordingly by the
Board.
Bribery Act 2010
The Company is committed to carrying out business fairly,
honestly and openly. The Board recognises the benefits this has
to reputation and business confidence. The Board, the Manager,
the Manager’s employees and others acting on the Company’s
behalf, are expected to demonstrate high standards of behaviour
when conducting business.
The Board acknowledges its responsibility for the implementation
and oversight of the Company’s procedures for preventing
bribery, and the governance framework for training,
communication, monitoring, reporting and escalation of
compliance together with enforcing action as appropriate. The
Board has adopted a zero tolerance policy in this regard.
Criminal Finances Act 2017
The Company is subject to the Criminal Finances Act 2017 and
follows a zero tolerance policy to tax evasion and its facilitation.
The Directors are fully committed to complying with all legislation
and appropriate guidelines which are designed to prevent tax
evasion and the facilitation of tax evasion in the jurisdictions in
which the Company, its service providers, counterparties and
business partners operate.
Responsibility as an Institutional Shareholder
The Board has adopted the Manager’s Principles of Ownership
in relation to investments. These Principles include the pursuit of
an active investment policy through portfolio management
decisions, voting on resolutions at general meetings and
maintaining a continuing dialogue with the management of
investee companies. Fidelity International is a signatory to the UK
Stewardship Code which sets out the responsibilities of
institutional shareholders and agents. Further details of the
Manager’s Principles of Ownership and voting may be found at
www.fidelity.co.uk.
Relations with Shareholders
Communication with shareholders is given a high priority by the
Board and it liaises with the Manager and the Company’s Broker
who are in regular contact with the Company’s major institutional
investors to canvass shareholder opinion and to communicate its
views to shareholders. All Directors are made aware of
shareholders’ concerns and the Chairman, the Senior
Independent Director and, where appropriate, other Board
Directors, are available to meet with shareholders to discuss
strategy and governance. The Board regularly monitors the
shareholder profile of the Company and receives regular reports
from the Manager on meetings attended with shareholders and
any concerns raised in such meetings. The Board aims to provide
the maximum opportunity for dialogue between the Company
and shareholders. If any shareholder wishes to contact a
member of the Board directly, they should either email the
Company Secretary at investmenttrusts@fil.com or in writing at
FIL Investments International, Beech Gate, Millfield Lane, Lower
Kingswood, Tadworth, Surrey KT2 6RP. The Company Secretary
will attend to any enquiries promptly and ensure that they are
directed to the Chairman, the Senior Independent Director or the
Board as a whole, as appropriate.
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Fidelity China Special Situations PLC
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Annual Report 2023
The Board encourages all shareholders to attend the Company’s
AGM on 20 July 2023, details of which can be found on page 6.
Voting Rights in the Company’s Shares
Every person entitled to vote on a show of hands has one vote.
On a poll, every shareholder who is present in person or by
proxy or representative has one vote for every ordinary share
held. At general meetings, all proxy votes are counted and,
except where a poll is called, proxy voting is reported for each
resolution after it has been dealt with on a show of hands. The
proxy voting results are disclosed on the Company’s pages of the
Manager’s website at www.fidelity.co.uk/china.
Articles of Association
Any changes to the Company’s Articles of Association must be
made by special resolution.
On behalf of the Board
Mike Balfour
Chairman
7 June 2023
Corporate Governance Statement continued
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
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Annual Report 2023
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Fidelity China Special Situations PLC
INFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGYGOVERNANCE
Chairman’s Statement
The Directors’ Remuneration Report for the year ended 31 March
2023 has been prepared in accordance with the Large &
Medium-sized Companies & Groups (Accounts & Reports)
(Amendment) Regulations 2013 (the “Regulations”). As the Board
is comprised entirely of non-executive Directors and has no
employees, many parts of the Regulations, in particular those
relating to chief executive officer pay and employee pay, do not
apply and are therefore not disclosed in this report.
An ordinary resolution to approve the Directors’ Remuneration
Report will be put to shareholders at the AGM on 20 July 2023.
The Company’s Auditor is required to audit certain sections of this
report and where such disclosures have been audited, the
specific section has been indicated as such. The Auditor’s opinion
is included in its report on pages 53 to 60.
Directors’ Remuneration
The annual fee structure with effect from 1 April 2023 is as
follows: Chairman – £52,000 (2022: £48,000); Senior Independent
Director – £41,000 (2022: £38,000); Chairman of the Audit and
Risk Committee – £43,500 (2022: £40,000); and Director –
£34,500 (2022: £31,650). Directors’ remuneration is reviewed on
an annual basis to ensure that it remains competitive and
sufficient to attract and retain the quality of Directors needed to
manage the Company successfully.
The Board has a Remuneration Policy which is subject to a
binding vote, in the form of an ordinary resolution at every third
AGM. A binding vote means that if it is not successful, the Board
will be obliged to revise the policy and seek further shareholder
approval at a General Meeting specially convened for that
purpose.
The Remuneration Policy
The Company’s Articles of Association limit the aggregate fees
payable to the Directors to £350,000 per annum. Subject to this
overall limit, and based on the recommendations of the
Nomination and Remuneration Committee, it is the Board’s policy
to determine the level of Directors’ fees having regard to the time
spent by them on the Company’s affairs; the level of fees
payable to non-executive directors in the industry generally; the
requirement to attract and retain individuals with suitable
knowledge and experience; and the role individual Directors fulfil.
Other than fees and reasonable travel expenses incurred in
attending to the affairs of the Company, the Directors are not
eligible for any performance related pay or benefits, pension
related benefits, share options, long-term incentive schemes or
other taxable benefits. The Directors are not entitled to exit
payments and are not provided with any compensation for loss
of office.
The level of Directors’ fees is determined by the whole Board.
Directors do not vote on their own individual fees. The
Nomination and Remuneration Committee reviews the Company’s
Remuneration Policy and implementation on an annual basis.
Reviews are based on information provided by the Company’s
Manager and research from third parties and it includes
information on the fees of other similar investment trusts.
As a FTSE 350 company, and in accordance with provision 21 of
the 2018 UK Corporate Governance Code, the Board is required
to carry out an externally facilitated evaluation every third year of
its performance and this also includes input into the appropriate
level of Directors’ fees from an independent source.
No Director has a service contract with the Company. New
Directors are provided with a letter of appointment which,
amongst other things, provides that their appointment is subject
to the Companies Act 2006 and the Company’s Articles of
Association. Copies of the Directors’ letters of appointment are
available at each of the Company’s Annual General Meetings
and can be obtained from the Company’s registered office.
In common with most investment trusts there is no Chief Executive
Officer and there are no employees.
The Company’s Remuneration Policy will apply to new Board
members, who will be paid at the same level of fees as current
Board members.
Voting on the Remuneration Policy
The Remuneration Policy (the “Policy”), as set out above, was
approved at the AGM on 20 July 2022 with 99.90% of votes cast
in favour, 0.07% of votes cast against and 0.03% of votes withheld.
The current Policy has been followed throughout the year ended
31 March 2023 and up to the date of this report. The next vote
will be put to shareholders at the AGM in 2025 and the votes
cast will be disclosed on the Company’s pages of the Manager’s
website at: www.fidelity.co.uk/china.
Voting on the Directors’ Remuneration Report
At the AGM held on 20 July 2022, 99.91% of votes were cast in
favour of the Directors’ Remuneration Report for the year ended
31 March 2022, 0.06% of votes were cast against and 0.03% of
votes were withheld.
The Directors’ Remuneration Report for the year ended 31 March
2022 will be put to shareholders at the AGM on 20 July 2022,
and the votes cast will be disclosed on the Company’s pages of
the Manager’s website at: www.fidelity.co.uk/china.
Single Total Figure of Directors’ Remuneration
The single total aggregate Directors’ remuneration for the year
under review was £209,466 (2022: £185,383). This includes
expenses incurred by Directors in attending to the affairs of the
Company and are considered by HMRC to be a taxable
expense.
Information on individual Directors’ fees and taxable Directors’
expenses are shown in the table on the next page. The fees for
2023 are higher than 2022 due to the crossover between
Directors’ retirements and appointments. This is part of the
Board’s succession planning.
Directors’ Remuneration Report
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2024 2023 2023 2023 2022 2022 2022
Projected
Total
Fees
(Audited)
Taxable
Expenses*
(Audited)
Total
(Audited)
Fees
(Audited)
Taxable
Expenses*
(Audited)
Total
(Audited)
(£) (£) (£) (£) (£) (£) (£)
Remuneration of Directors
Mike Balfour
1
52,000 45,570 7,299 52,869 38,000 3,722 41,722
Alastair Bruce
2
43,500 37,464 – 37,464 22,500 – 22,500
Nicholas Bull
3
n/a 14,581 – 14,581 45,000 – 45,000
Vanessa Donegan
4
41,000 33,237 – 33,237 31,000 – 31,000
Georgina Field
5
34,500 23,738 – 23,738 n/a n/a n/a
Gordon Orr
6
34,500 7,912 – 7,912 n/a n/a n/a
Elisabeth Scott
7
n/a n/a n/a n/a 10,938 – 10,938
Edward Tse
8
34,500 11,165 – 11,165 n/a n/a n/a
Linda Yueh
9
n/a 28,500 – 28,500 34,208 15 34,223
Total 240,000 202,167 7,299 209,466 181,646 3,737 185,383
* Expenses incurred in attending to the affairs of the Company.
1 Appointed Chairman of the Board on 20 July 2022.
2 Appointed Chairman of the Audit and Risk Committee on 20 July 2022.
3 Retired on 20 July 2022.
4 Appointed Senior Independent Director on 1 January 2023.
5 Appointed on 1 July 2022.
6 Appointed on 1 January 2023.
7 Retired on 20 July 2021.
8 Appointed on 24 November 2022.
9 Retired on 31 December 2022.
Five Year Change Comparison in Directors’ Remuneration
The table below sets out the change in Directors’ fees over the last five years.
Director 2023 2018 Change (%)
Chairman 48,000 42,000 +14.3%
Senior Independent Director 38,000 31,500 +20.6%
Audit and Risk Committee Chairman 40,000 32,000 +25.0%
Director 31,650 26,500 +19.4%
Expenditure on Remuneration and Distributions to Shareholders
The table below shows the total amount paid out on Directors’ remuneration and in distributions to shareholders. The projected
Directors’ remuneration for the year ending 31 March 2023 is disclosed in the table above.
31 March
2023
£
31 March
2022
£
Expenditure on Remuneration:
Aggregate of Directors’ Fees 209,466 185,383
Distribution to Shareholders:
Dividend payments 28,240,000 24,124,000
Shares repurchased 57,249,000 4,448,000
Directors’ Remuneration Report continued
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Annual Report 2023
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Fidelity China Special Situations PLC
INFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGYGOVERNANCE
Performance
The Company’s NAV per share total return and share price total return performance are measured against the return of the MSCI
China Index (in UK sterling terms) as this is the most appropriate Benchmark in respect of its objective. The graph below shows
performance for ten years to 31 March 2023.
Total Return Performance for Ten Years to 31 March 2023
+208.2%
+71.2%
0
25
50
75
100
125
150
175
200
225
250
275
300
325
350
375
400
425
450
475
500
525
550
+219.1%
NAV per Share
Share Price
MSCI China Index
(in UK sterling terms)
Mar 13
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18
Mar 19
Mar 20
Mar 21
Mar 23
Mar 22
Directors’ Interest in the Company’s Ordinary Shares
Although there is no requirement for the Directors to hold shares in the Company, shareholdings by Directors are encouraged. The
interests of the Directors in the shares of the Company are shown in the table below. All of the shareholdings are beneficial. The
Portfolio Manager, Dale Nicholls, also holds 113,036 shares in the Company.
Directors’ Shareholdings (Audited)
31 March
2023
31 March
2022
Change
during year
Mike Balfour 65,000 65,000 –
Alastair Bruce 43,800 43,800 –
Nicholas Bull
1
n/a 110,804 –
Vanessa Donegan 10,000 10,000 –
Georgina Field
2
2,250 n/a 2,250
Gordon Orr
3
– n/a –
Edward Tse
4
– n/a –
Linda Yueh
5
n/a 2,318 –
1 Retired on 20 July 2022.
2 Appointed on 1 July 2022. Purchase of shares.
3 Appointed on 1 January 2023.
4 Appointed on 24 November 2022.
5 Retired on 31 December 2022.
The above shareholdings remain unchanged as at the date of this report.
On behalf of the Board
Mike Balfour
Chairman
7 June 2023
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Statement of Directors’ Responsibilities
The Directors are responsible for preparing the Annual Report
and the Financial Statements in accordance with applicable
United Kingdom law and regulations.
Company law requires the Directors to prepare Financial
Statements for each financial period. Under that law they have
elected to prepare the Financial Statements in accordance with
UK-adopted International Accounting Standards (“IFRS”) in
conformity with the requirements of the Companies Act 2006 and
IFRIC interpretations. Under company law the Directors must not
approve the Financial Statements unless they are satisfied that
they give a true and fair view of the state of affairs of the
Company and of the profit or loss for the reporting period.
In preparing these Financial Statements the Directors are
required to:
• Select suitable accounting policies in accordance with IAS 8:
Accounting Policies, Changes in Accounting Estimates and
Errors, and then apply them consistently;
• Make judgements and estimates that are reasonable and
prudent;
• Present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
• Provide additional disclosures when compliance with the
specific requirements in IFRS is insufficient to enable users to
understand the impact of particular transactions, other
events and conditions on the Company’s financial position
and financial performance;
• State whether applicable IFRS and IFRIC interpretations have
been followed, subject to any material departures disclosed
and explained in the Financial Statements; and
• Prepare the Financial Statements on the going concern basis
unless it is inappropriate to assume that the Company will
continue in business.
The Directors are responsible for ensuring that adequate
accounting records are kept which disclose with reasonable
accuracy at any time the financial position of the Company and
to enable them to ensure that the Financial Statements comply
with the Companies Act 2006. They are also responsible for
safeguarding the assets of the Company and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, a Directors’ Report,
a Corporate Governance Statement and a Directors’
Remuneration Report that comply with that law and those
regulations.
The Directors have delegated to the Manager the responsibility
for the maintenance and integrity of the corporate and financial
information included on the Company’s pages of the Manager’s
website at www.fidelity.co.uk/china. Visitors to the website need
to be aware that legislation in the UK governing the preparation
and dissemination of the Financial Statements may differ from
legislation in their own jurisdictions.
The Directors confirm that to the best of their knowledge:
• The Financial Statements, prepared in accordance with
UK-adopted International Accounting Standards (“IFRS”) and
IFRIC interpretations, give a true and fair view of the assets,
liabilities, financial position and profit of the Company; and
• The Annual Report includes a fair review of the development
and performance of the business and the position of the
Company, together with a description of the principal risks
and uncertainties it faces.
The Directors consider that the Annual Report and Financial
Statements, taken as a whole, are fair, balanced and
understandable and provide the information necessary for
shareholders to assess the Company’s performance, business
model and strategy.
Approved by the Board on 7 June 2023 and signed on its behalf
by:
Mike Balfour
Chairman
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Annual Report 2023
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Fidelity China Special Situations PLC
INFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGYGOVERNANCE
I am pleased to present the formal report of the Audit and Risk
Committee (the “Committee”) to shareholders.
The primary responsibilities of the Committee are to ensure the
integrity of the Company’s financial reporting, the appropriateness
of the risk management and internal controls processes and the
effectiveness of the independent audit process and how this has
been assessed for the year ended 31 March 2023.
Composition of the Committee
The members of the Committee are myself as Chairman, and all
of the other Directors, except for Mike Balfour. This is in line with
the recommendation in the 2018 UK Corporate Governance
Code that the Chairman of the Board should not be a member of
the Audit and Risk Committee. He will generally be invited to
attend the Committee meetings as a guest. The Committee
members are considered independent non-executive Directors
and collectively have sufficient recent and relevant financial
experience to discharge their responsibilities fully.
The Committee’s performance is evaluated annually as part of
the overall Board evaluation process.
Role and Responsibilities of the Audit Committee
The Committee’s authority and duties are clearly defined in its
terms of reference which are available on the Company’s pages
of the Manager’s website at www.fidelity.co.uk/china. These
duties include:
• Establishing with the Auditor the nature and scope of the
audit, reviewing the Auditor’s quality control procedures and
reporting, the effectiveness of the audit process and the
Auditor’s independence and objectivity with particular
regard to the provision of non-audit services;
• Responsibility for making recommendations on the
appointment, reappointment and removal of the Auditor;
• Reviewing the effectiveness of the Company’s risk
management and internal control systems (including
financial, operational and compliance controls), considering
the scope of the work undertaken by the Manager’s Internal
Audit department, including review of the work performed by
Internal Audit, and reviewing the Company’s procedures for
detecting fraud;
• Monitoring the integrity of the Company’s half-yearly and
annual financial statements to ensure they are fair, balanced
and understandable;
• Reviewing the existence and performance of all controls
operating in the Company, including the review of internal
controls reporting of its service providers; and
• Reviewing the relationship with and the performance of third
party service providers (such as the Registrar, Custodian and
Depositary).
Meetings and Business considered by the Committee
Since the date of the last Annual Report (30 May 2022), the Committee has met four times and the Auditor attended three of the
meetings.
The following matters were reviewed at each Committee meeting:
• The Company’s risk management and internal controls framework;
• The Company’s compliance with its investment policy limits;
• The valuation of unlisted investments;
• The Depositary’s oversight reporting;
• The Company’s revenue and expenses forecasts and its Balance Sheet;
• The Company’s ongoing charge;
• The management fee calculations; and
• The Committee’s Terms of Reference.
.
Report of the Audit and Risk Committee
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Annual Report 2023
In addition, the following matters were considered at these meetings:
September 2022
• Review and challenge of the valuations of the Company’s unlisted investments with the
Manager’s Fair Value Committee, including the Manager’s unlisted specialist, and the
independent valuer, Kroll. See further details on the next page.
November 2022
• The Half-Yearly Report and Financial Statements and recommendation of its approval to
the Board
• The Going Concern Statement
• The Manager’s Risk Management Process Document
February 2023
• The Auditor’s engagement letter and audit plan for the Company’s year ending 31 March 2023
• Review of Fidelity’s AAF Reports (assurance reports on internal control)
• Internal Audit reporting, including review of the internal audit plan
• Cybersecurity update
March 2023
• Review and challenge of the valuations of the Company’s unlisted investments with the
Manager’s Fair Value Committee, including the Manager’s unlisted specialist, and the
independent valuer, Kroll. See further details on the next page.
June 2023
• Review of Fidelity’s Investment Trusts AAF Controls Report from PricewaterhouseCoopers LLP
• The Auditor’s findings from the audit of the Company
• The Auditor’s performance, independence and reappointment
• Compliance with Corporate Governance and regulatory requirements
• The Annual Report and Financial Statements and recommendation of its approval to the
Board
• The Viability, Fair, Balanced and Understandable and Going Concern Statements,
including the ongoing impact of the pandemic on the Company’s performance, prospects
and operations
• The final dividend payment to be recommended to the Board and shareholders for approval
Annual Report and Financial Statements
The Annual Report and Financial Statements are the responsibility of the Board and the Statement of Directors’ Responsibilities can be
found on page 48. The Committee advises the Board on the form and content of the Annual Report and Financial Statements, any issues
which may arise in relation to these and on any specific areas which require judgement. The Committee members apply their expertise
and knowledge in reviewing disclosures made in order to ensure that the Financial Statements are fair, balanced and understandable.
Significant Issues considered by the Committee during the year
Summarised below and on the next page are the most significant issues considered by the Committee in respect of these Financial
Statements and how these were addressed.
Recognition of
Investment Income
Investment income is recognised in accordance with Accounting Policy Note 2 (f) on page 66. The
Manager provided detailed revenue forecasts which the Committee reviewed and sought
explanations for any significant variances to these forecasts. The Committee also considered the
allocation of special dividends between revenue and capital and the reasons for classification of
these special dividends. The Committee reviewed the internal audit and compliance monitoring
reports received from the Manager, including an additional internal controls report (“AAF” report)
prepared by PricewaterhouseCoopers LLP (“PwC”) on behalf of the Manager, to satisfy itself that
adequate systems were in place for properly recording the Company’s investment income. The
Committee also reviewed reports provided by the Auditor on its work on the recognition of
investment income.
Report of the Audit and Risk Committee continued
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Annual Report 2023
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Fidelity China Special Situations PLC
INFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGYGOVERNANCE
Valuation, existence
and ownership
of investments
(including derivative
instruments)
The valuation of investments (including derivative instruments) is in accordance with Accounting
Policy Notes 2 (l) and 2 (m) on pages 67 and 68. The Committee took comfort from the
Depositary’s regular oversight reports that investment related activities are conducted in
accordance with the Company’s investment policy. The Committee received reports from the
Manager, the Depositary and an additional AAF report prepared by PwC on behalf of the
Manager which concluded that the controls around the valuation, existence and ownership of
investments operate effectively. The Committee also reviewed the reports provided by the Auditor
on its work on the valuation, existence and ownership of the Company’s investments, including the
derivative and unlisted investments.
Valuation of the
Unlisted Investments
The Manager as the AIFM, is authorised and responsible for performing the valuation of the
assets in the Company’s portfolio, including the unlisted investments. The valuation of unlisted
investments is in accordance with Accounting Policy Notes 2 (e) and (l) on pages 65 to 68. The
valuation of the unlisted investments is proposed by the Manager’s Fair Value Committee (“FVC”)
to the Audit and Risk Committee, who in turn reports these to the Board to ensure that the
Directors are satisfied that the process that the FVC adopts in recommending the valuation is
rigorous, reasonable and independent. The Committee receives reporting from the FVC which
includes recommendations from Kroll, an external company that provides global financial
information and services. The FVC report also includes detailed input from the Fidelity analysts
covering the unlisted companies. During the reporting year, Fidelity added an additional
specialist in unlisted investment Chinese companies who provides further insight. The Committee
reviews and challenges the proposed valuation methodologies for all of the unlisted investments.
Ahead of the Company’s year end, the Committee had a meeting to specifically review the
valuation of the unlisted investments. The FVC, Kroll and the Manager’s unlisted specialist
provided detailed analysis on the proposed valuation of each unlisted investment which the
Committee reviewed in order to gain comfort on the proposed valuations.
In addition, the Auditor reviewed the valuations of the unlisted investments in the Company’s
portfolio and reported its findings at the June 2023 Audit and Risk Committee meeting.
Management fee
calculation
The Company has a variable management fee structure in place. At each Committee meeting,
the Manager reports on the accruals for the variable part of the fee that have been included in
the Company’s NAV and confirms that it has been calculated in accordance with the
Management Agreement. These variable management fee accruals are reviewed by the
Committee. It also receives reporting on the work carried out by the Auditor that the Company’s
variable management fee has been calculated in accordance with the terms of the Management
Agreement.
The Company confirms that it has complied with the September
2014 Competition and Markets Authority Order in relation to the
performance and appointment of the Auditor, as set out below.
Independence and Effectiveness of the Audit Process
Ernst & Young LLP acted as the Company’s Auditor for the year
ended 31 March 2023.
With regard to the independence of the Auditor, the Committee
reviewed:
• The Auditor’s arrangements for managing any conflicts of
interest;
• The fact that no non-audit services were provided to the
Company during the reporting year and as at the date of
this report; and
• The statement by the Auditor that it remains independent
within the meaning of the regulations and their professional
standards.
With regard to the effectiveness of the audit process, the
Committee reviewed:
• The fulfilment by the Auditor of the agreed audit plan,
including the audit team’s approach to significant risks;
• The audit findings report issued by the Auditor on the audit
of the Annual Report and Financial Statements for the year
ended 31 March 2023; and
• Feedback from the Manager on the audit of the Company.
The Committee concluded that the Auditor continues to remain
independent and the audit process remains effective.
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Auditor’s Appointment and Audit Tenure
Ernst & Young LLP was appointed as the Company’s Auditor on
30 November 2015 following a formal audit tender process. The
Committee has reviewed the Auditor’s independence and the
effectiveness of the audit process prior to recommending its
reappointment for a further year. The Auditor is required to rotate
audit partners every five years and this is the first year that the
Audit Partner, Sarah Langston, has been in place. The Committee
will continue to review the Auditor’s appointment each year to
ensure that the Company is receiving an optimal level of service.
There are no contractual obligations that restrict the Company’s
choice of auditor.
Audit Fees
Fees paid to the Auditor for the audit of the Company’s Financial
Statements are disclosed in Note 5 on page 71. The audit fee for
the reporting year was £57,244 (2022: £52,500).
Alastair Bruce
Chairman of the Audit and Risk Committee
7 June 2023
Report of the Audit and Risk Committee continued
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Fidelity China Special Situations PLC
GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
Independent Auditor’s Report to the Members
of Fidelity China Special Situations PLC
Opinion
We have audited the Financial Statements of Fidelity China
Special Situations PLC (the ‘Company’) for the year ended
31March 2023 which comprise the Income Statement, the
Statement of Changes in Equity, the Balance Sheet, the Cash Flow
Statement and the related Notes 1 to 21, including a summary of
significant accounting policies. The financial reporting framework
that has been applied in their preparation is applicable law and
UK adopted international accounting standards.
In our opinion, the Financial Statements:
• Give a true and fair view of the Company’s affairs as at
31March 2023 and of its profit for the year then ended;
• Have been properly prepared in accordance with UK
adopted international accounting standards; and
• Have been prepared in accordance with the requirements of
the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in
the Auditor’s responsibilities for the audit of the Financial
Statements section of our report. We believe that the audit
evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
Independence
We are independent of the Company in accordance with the
ethical requirements that are relevant to our audit of the Financial
Statements in the UK, including the FRC’s Ethical Standard as
applied to listed public interest entities, and we have fulfilled our
other ethical responsibilities in accordance with these
requirements.
The non-audit services prohibited by the FRC’s Ethical Standard
were not provided to the Company and we remain independent
of the Company in conducting the audit.
Conclusions relating to going concern
In auditing the Financial Statements, we have concluded that the
Directors’ use of the going concern basis of accounting in the
preparation of the Financial Statements is appropriate. Our
evaluation of the Directors’ assessment of the Company’s ability
to continue to adopt the going concern basis of accounting
included:
• Confirming our understanding of the Company’s going
concern assessment process by engaging with the Directors
and the Company Secretary to determine if all key factors
were considered in their assessment.
• Inspecting the Directors’ assessment of going concern,
including the revenue and expense forecast, for the period to
30 June 2024 which is at least 12 months from the date of
approval of the Financial Statements. In preparing the
revenue forecast, the Company has concluded that it is able
to continue to meet its ongoing costs as they fall due.
• Reviewing the factors and assumptions, including the impact
of the current economic environment and other significant
events that could give rise to market volatility, as applied to
the revenue and expense forecast. Considering the
appropriateness of the methods used to calculate the
forecast and determining, through testing of the methodology
and calculations, that the methods utilised were appropriate
to be able to make an assessment of going concern for the
Company.
• In relation to the Company’s borrowing arrangements,
inspecting the Directors’ assessment of the risk of breaching
the debt covenants as a result of a reduction in the value of
the Company’s portfolio. Recalculating the Company’s
compliance with debt covenants in the scenarios assessed
by the Directors and performing reverse stress testing in
order to identify what factors would lead to the Company
breaching the financial covenants.
• Consideration of the mitigating factors that are within the
control of the Company, including a review of the Company’s
assessment of the liquidity of investments held and
evaluating the Company’s ability to sell investments in order
to cover the working capital requirements should its revenue
decline significantly.
• Reviewing the Company’s going concern disclosures
included in the Annual Report in order to assess whether the
disclosures were appropriate and in conformity with the
reporting standards.
Based on the work we have performed, we have not identified
any material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the
Company’s ability to continue as a going concern for a period to
30 June 2024 which is at least 12 months from when the Financial
Statements are authorised for issue.
In relation to the Company’s reporting on how they have applied
the UK Corporate Governance Code, we have nothing material to
add or draw attention to in relation to the Directors’ statement in
the Financial Statements about whether the Directors considered
it appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the Directors with
respect to going concern are described in the relevant sections
of this report. However, because not all future events or
conditions can be predicted, this statement is not a guarantee as
to the Company’s ability to continue as a going concern.
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Overview of our audit approach
Key audit matters
• Risk of incomplete or inaccurate revenue recognition, including the classification of special
dividends as revenue or capital items in the Income Statement.
• Risk of incorrect valuation and resultant impact on the unrealised gains/(losses) of the
unlisted investments.
• Risk of incorrect valuation of the listed investments or ownership of the entire investment
portfolio, including derivatives.
Materiality
• Overall materiality of £13.38m which represents 1% of the Company’s net asset value as at
31March 2023.
An overview of the scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for
the Company. This enables us to form an opinion on the Financial Statements. We take into account size, risk profile, the organisation
of the Company and effectiveness of controls, the potential impact of climate change and changes in the business environment when
assessing the level of work to be performed. All audit work was performed directly by the audit engagement team.
Climate change
There has been increasing interest from stakeholders as to how climate change will impact companies. The Company has determined
that the impact of climate change could affect the Company’s investments and their valuations and potentially shareholder returns.
These are explained on page 28 and on page 30 in the principal and emerging risks section, which forms part of the “Other
information,” rather than the audited Financial Statements. Our procedures on these disclosures therefore consisted solely of
considering whether they are materially inconsistent with the Financial Statements, or our knowledge obtained in the course of the
audit or otherwise appear to be materially misstated.
Our audit effort in considering climate change was focused on the adequacy of the Company’s disclosures in the Financial Statements
as set out in Note 2(a) and conclusion that there was no further impact of climate change to be taken into account. In line with UK
adopted international accounting standards, investments are valued at fair value, which for the Company are quoted bid prices for
investments in active markets at the balance sheet date. Investments which are unlisted are priced using market-based valuation
approaches. All investments therefore reflect the market participants view of climate change risk on the investments held by the
Company.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial
Statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud)
that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources
in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the
Financial Statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters.
Independent Auditor’s Report to the Members
of Fidelity China Special Situations PLC continued
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Annual Report 2023
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Fidelity China Special Situations PLC
GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
Risk Our response to the risk Key observations
communicated to
the Audit and Risk
Committee
Risk of incomplete or inaccurate
revenue recognition, including the
classification of special dividends
as revenue or capital items in the
Income Statement
Refer to the Report of the Audit and Risk
Committee (page 50); Accounting policies
(page66); and Note 3 of the Financial
Statements (page 70)
The Company has reported revenue of £44.68m
(2022: £41.28m).
During the year, the Company received special
dividends amounting to £2.34m (2022: £2.43m),
of which £1.18m (2022: £2.43m) was classified
as revenue and £1.16m (2022: £nil) as capital.
There is a risk of incomplete or inaccurate
recognition of revenue through the failure to
recognise proper income entitlements or to
apply an appropriate accounting treatment.
In addition to the above, the Directors may be
required to exercise judgement in determining
whether income received in the form of special
dividends should be classified as ‘revenue’ or
‘capital’ in the Income Statement.
We have performed the following
procedures:
We obtained an understanding of the processes
and controls surrounding revenue recognition
and classification of special dividends by
performing walkthrough procedures to evaluate
the design and implementation of controls;
For all dividends received and accrued, we
recalculated the income by multiplying the
investment holdings at the ex-dividend date,
traced from the accounting records, by the
dividend rate as agreed to an independent data
vendor. We also agreed all exchange rates to
an external source and, for a sample of
dividends received and dividends accrued, we
agreed amounts to bank statements;
For all dividends accrued, we assessed whether
the dividend obligations arose prior to 31 March
2023 with reference to an external source;
To test completeness of recorded income, we
tested that all expected dividends for each of
the investee companies had been recorded as
income with reference to an external source; and
For all dividend income during the year, we
reviewed the type of dividends paid with
reference to an external data source to identify
those which were special dividends. For special
dividends above our testing threshold, we
assessed the appropriateness of the Company’s
classification as either revenue or capital by
reviewing the rationale for the underlying
distribution.
The results of our
procedures identified
no material
misstatement in
relation to the risk of
incomplete or
inaccurate revenue
recognition, including
the classification of
special dividends as
revenue or capital
items in the Income
Statement.
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
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Risk Our response to the risk Key observations
communicated to
the Audit and Risk
Committee
Risk of incorrect valuation and
resultant impact on the unrealised
gains/(losses) of the unlisted
investments
Refer to the Report of the Audit and Risk
Committee page 51; Accounting policies pages
65 to 68; and Note 18 of the Financial
Statements (pages 87 and 88).
At 31 March 2023, the Company had nine
unlisted investments with a value of £192.88m
(2022: ten unlisted investments with a value of
£194.65m) and an unrealised gain of £25.99m
(2022: £17.80m).
We considered that the degree of subjectivity,
including the level of management judgement
and the risk that the valuation does not reflect
the most up to date information, results in a
fraud risk over misstatement of the valuation of
unlisted investments.
The unlisted investments are approved by the
Manager’s Fair Value Committee and these are
reviewed and challenged by the Directors. The
Manager engages Kroll to perform a valuation
which is then considered by the Manager’s Fair
Value Committee. The unlisted investment policy
applies methodologies consistent with the
International Private Equity and Venture Capital
Valuation guidelines (“IPEV”).
We have performed the following
procedures:
We obtained an understanding of the processes
and controls surrounding unlisted investment
pricing and by performing walkthrough
procedures to evaluate the design and
implementation of controls;
For all unlisted investments held at the year-end,
our specialist valuations team reviewed and
challenged the valuations. This included:
• Reviewing the latest valuation papers by
Kroll, a third-party service provider;
• Assessing whether the valuations have been
performed in line with the IPEV guidelines;
• Assessing the appropriateness of the data
inputs and challenging the assumptions
used to support the valuations; and
• Assessing other facts and circumstances,
such as market movement and comparative
information, that could have an impact on
the fair market value of the investments.
We obtained and assessed the valuation papers
including the assumptions and judgements in
determining the fair value of the unlisted
investments held by the Company at the
year-end;
Agreed 100% of exchange rates to a relevant
independent data vendor; and
We recalculated the total unrealised gains/
losses on unlisted investments as at the year-end
using the book-cost reconciliation.
The results of our
procedures identified
no material
misstatement in
relation to the risk of
incorrect valuation and
resultant impact on the
unrealised gains/
(losses) of the unlisted
investments.
Independent Auditor’s Report to the Members
of Fidelity China Special Situations PLC continued
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Fidelity China Special Situations PLC
GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
Risk Our response to the risk Key observations
communicated to
the Audit and Risk
Committee
Risk of incorrect valuation of the
listed investments or ownership
of the entire investment portfolio,
including derivatives
Refer to the Report of the Audit and Risk
Committee (page 51); Accounting policies
(pages 65 to 68); and Notes 10 and 11 of the
Financial Statements (pages 74 and 75)
At 31 March 2023, the Company held listed
investments with a value of £1,125.89m (2022:
£1,170.84m). The Company also has net
derivative assets amounting to £1.42m (2022:
£6.47m).
The valuation of the assets held in the
investment portfolio is the key driver of the
Company’s net asset value and total return.
Incorrect investment pricing, or a failure to
maintain proper legal title to the investments
held by the Company could have a significant
impact on the portfolio valuation and the return
generated for shareholders.
The fair value of the listed investments and
derivatives is determined using quoted market
prices at close of business on the reporting date.
We have performed the following
procedures:
We obtained an understanding of the processes
and controls surrounding investment pricing and
legal title by performing walkthrough
procedures;
For all listed investments in the portfolio, we
compared the market prices and exchange rates
applied to an independent pricing vendor. For
all derivatives, we compared the market prices
of the underlying instrument to an independent
pricing vendor and agreed cost price to the
Brokers’ confirmations. We recalculated the
investment and derivative valuations as at the
year-end;
We inspected the stale pricing report to identify
prices that had not changed and verified
whether the quoted price is a valid fair value;
and
We compared the Company’s investment
holdings at 31 March 2023 to the independent
confirmation received directly from the
Company’s Custodian and Depositary. We
agreed all year-end open derivative positions to
confirmations received independently from the
Company’s Brokers.
The results of our
procedures identified
no material
misstatement in
relation to the risk of
incorrect valuation of
the listed investments
or ownership of the
entire investment
portfolio, including
derivatives.
Our key audit matters remain unchanged from the prior year.
Our application of materiality
We apply the concept of materiality in planning and performing
the audit, in evaluating the effect of identified misstatements on
the audit and in forming our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually
or in the aggregate, could reasonably be expected to influence
the economic decisions of the users of the Financial Statements.
Materiality provides a basis for determining the nature and
extent of our audit procedures.
We determined materiality for the Company to be £13.38m
(2022: £14.01m), which is 1% (2022: 1%) of net asset value. We
believe that net asset value provides us with materiality aligned
to the key measure of the Company’s performance.
Performance materiality
The application of materiality at the individual account or
balance level. It is set at an amount to reduce to an
appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessments, together with our
assessment of the Company’s overall control environment, our
judgement was that performance materiality was 75% (2022: 75%)
of our planning materiality, namely £10.04m (2022: £10.50m). We
have set performance materiality at this percentage due to our
past experience of the audit that indicates a lower risk of
misstatements, both corrected and uncorrected.
Reporting threshold
An amount below which identified misstatements are considered
as being clearly trivial.
We agreed with the Audit and Risk Committee that we would
report to them all uncorrected audit differences in excess of
£0.67m (2022: £0.70m), which is set at 5% of planning materiality,
as well as differences below that threshold that, in our view,
warranted reporting on qualitative grounds.
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Given the importance of the distinction between revenue and
capital for investment trusts, we have also applied a separate
testing threshold for the revenue column of the Income Statement
of £1.83m (2022: £1.71m), being 5% of the net return on ordinary
activities before taxation (2022: 5% of the net return on ordinary
activities before taxation).
We evaluate any uncorrected misstatements against both the
quantitative measures of materiality discussed above and in light
of other relevant qualitative considerations in forming our
opinion.
Other information
The other information comprises the information included in the
Annual Report other than the Financial Statements and our
Auditor’s Report thereon. The Directors are responsible for the
other information contained within the Annual Report.
Our opinion on the Financial Statements does not cover the other
information and, except to the extent otherwise explicitly stated
in this report, we do not express any form of assurance
conclusion thereon.
Our responsibility is to read the other information and, in doing
so, consider whether the other information is materially
inconsistent with the Financial Statements or our knowledge
obtained in the course of the audit or otherwise appears to be
materially misstated. If we identify such material inconsistencies
or apparent material misstatements, we are required to
determine whether this gives rise to a material misstatement in
the Financial Statements themselves. If, based on the work we
have performed, we conclude that there is a material
misstatement of the other information, we are required to report
that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act
2006
In our opinion the part of the Directors’ remuneration report to
be audited has been properly prepared in accordance with the
Companies Act 2006.
In our opinion, based on the work undertaken in the course of
the audit:
• the information given in the Strategic Report and the
Directors’ Report for the financial year for which the
Financial Statements are prepared is consistent with the
Financial Statements; and
• the Strategic Report and Directors’ Report have been
prepared in accordance with applicable legal requirements.
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the Company
and its environment obtained in the course of the audit, we have
not identified material misstatements in the Strategic Report or
Directors’ Report.
We have nothing to report in respect of the following matters in
relation to which the Companies Act 2006 requires us to report to
you if, in our opinion:
• Adequate accounting records have not been kept, or returns
adequate for our audit have not been received from
branches not visited by us; or
• The Financial Statements and the part of the Directors’
Remuneration Report to be audited are not in agreement
with the accounting records and returns; or
• Certain disclosures of Directors’ remuneration specified by
law are not made; or
• We have not received all the information and explanations
we require for our audit.
Corporate Governance Statement
We have reviewed the Directors’ statement in relation to going
concern, longer-term viability and that part of the Corporate
Governance Statement relating to the Company’s compliance
with the provisions of the UK Corporate Governance Code
specified for our review by the Listing Rules.
Based on the work undertaken as part of our audit, we have
concluded that each of the following elements of the Corporate
Governance Statement is materially consistent with the Financial
Statements or our knowledge obtained during the audit:
• Directors’ statement with regards to the appropriateness of
adopting the going concern basis of accounting and any
material uncertainties identified set out on page 36;
• Directors’ explanation as to its assessment of the Company’s
prospects, the period this assessment covers and why the
period is appropriate set out on page 32;
• Director’s statement on whether it has a reasonable
expectation that the Company will be able to continue in
operation and meets its liabilities set out on page 36;
• Directors’ statement on fair, balanced and understandable
set out on page 48;
• Board’s confirmation that it has carried out a robust
assessment of the emerging and principal risks set out on
page 28;
• The section of the Annual Report that describes the review
of effectiveness of risk management and internal control
systems set out on page 43; and
• The section describing the work of the Audit and Risk
Committee set out on page 49.
Independent Auditor’s Report to the Members
of Fidelity China Special Situations PLC continued
Job No: 49563 Proof Event: 19 Black Line Level: 4 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Fidelity China Special Situations PLC
GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
Responsibilities of Directors
As explained more fully in the Statement of Directors’
Responsibilities set out on page 48, the Directors are responsible
for the preparation of the Financial Statements and for being
satisfied that they give a true and fair view, and for such internal
control as the Directors determine is necessary to enable the
preparation of Financial Statements that are free from material
misstatement, whether due to fraud or error.
In preparing the Financial Statements, the Directors are
responsible for assessing the Company’s ability to continue as a
going concern, disclosing, as applicable, matters related to
going concern and using the going concern basis of accounting
unless the Directors either intend to liquidate the Company or to
cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the Financial
Statements
Our objectives are to obtain reasonable assurance about
whether the Financial Statements as a whole are free from
material misstatement, whether due to fraud or error, and to
issue an Auditor’s report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with ISAs (UK) will always
detect a material misstatement when it exists. Misstatements can
arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on
the basis of these Financial Statements.
Explanation as to what extent the audit was considered
capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance
with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect irregularities, including
fraud. The risk of not detecting a material misstatement due to
fraud is higher than the risk of not detecting one resulting from
error, as fraud may involve deliberate concealment by, for
example, forgery or intentional misrepresentations, or through
collusion. The extent to which our procedures are capable of
detecting irregularities, including fraud is detailed below.
However, the primary responsibility for the prevention and
detection of fraud rests with both those charged with governance
of the Company and management.
• We obtained an understanding of the legal and regulatory
frameworks that are applicable to the Company and
determined that the most significant are the UK adopted
international accounting standards, the Companies Act
2006, the Association of Investment Companies Code of
Corporate Governance, the Association of Investment
Companies’ Statement of Recommended Practice, the Listing
Rules, the Corporate Governance Code, Section 1158 of the
Corporation Tax Act 2010 and the Companies
(Miscellaneous Reporting) Regulations 2018.
• We understood how the Company is complying with those
frameworks through discussions with the Audit and Risk
Committee and Company Secretary and review of Board
minutes and the Company’s documented policies and
procedures.
• We assessed the susceptibility of the Company’s Financial
Statements to material misstatement, including how fraud
might occur by considering the key risks impacting the
Financial Statements. We identified a fraud risk with respect
to the incomplete or inaccurate revenue recognition through
incorrect classification of special dividends as revenue or
capital items in the Income Statement and the incorrect
valuation and resultant impact on the unrealised gains/
(losses) of the unlisted investments. Further discussion of our
approach is set out in the section on key audit matters
above.
• Based on this understanding we designed our audit
procedures to identify non-compliance with such laws and
regulations. Our procedures involved review of the reporting
to the Directors with respect to the application of the
documented policies and procedures and review of the
Financial Statements to ensure compliance with the
reporting requirements of the Company.
A further description of our responsibilities for the audit of the
Financial Statements is located on the Financial Reporting
Council’s website at https://www.frc.org.uk/
auditorsresponsibilities. This description forms part of our
Auditor’s report.
Other matters we are required to address
• Following the recommendation from the Audit and Risk
Committee, we were appointed by the Company on
30November 2015 to audit the Financial Statements for the
year ending 31 March 2016 and subsequent financial
periods.
The period of total uninterrupted engagement including
previous renewals and reappointments is 8 years, covering
the years ending 31 March 2016 to 31 March 2023.
• The audit opinion is consistent with the additional report to
the Audit and Risk Committee.
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Use of our report
This report is made solely to the Company’s members, as a
body, in accordance with Chapter 3 of Part 16 of the Companies
Act 2006. Our audit work has been undertaken so that we might
state to the Company’s members those matters we are required
to state to them in an Auditor’s report and for no other purpose.
To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company and the
Company’s members as a body, for our audit work, for this
report, or for the opinions we have formed.
Sarah Langston
(Senior Statutory Auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
7 June 2023
Independent Auditor’s Report to the Members
of Fidelity China Special Situations PLC continued
Job No: 49563 Proof Event: 15 Black Line Level: 1 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Fidelity China Special Situations PLC
GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
Income Statement
for the year ended 31 March 2023
The Notes on pages 65 to 90 form an integral part of these Financial Statements.
Year ended 31 March 2023 Year ended 31 March 2022
Notes
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
Investment income 3 32,704 – 32,704 29,638 – 29,638
Derivative income 3 11,566 – 11,566 11,595 – 11,595
Other income 3 409 – 409 42 – 42
Total income 44,679 – 44,679 41,275 – 41,275
Losses on investments at fair value
through profit or loss 10 – (6,912) (6,912) – (603,831) (603,831)
Gains/(losses) on derivative
instruments 11 – 14,971 14,971 – (160,189) (160,189)
Foreign exchange gains – 8,167 8,167 – 1,429 1,429
Foreign exchange losses on bank
loan – (4,814) (4,814) – (3,569) (3,569)
Total income and gains/(losses) 44,679 11,412 56,091 41,275 (766,160) (724,885)
Expenses
Investment management fees 4 (3,012) (11,715) (14,727) (3,984) (15,659) (19,643)
Other expenses 5 (1,097) (4) (1,101) (1,393) (25) (1,418)
Profit/(loss) before finance costs
and taxation 40,570 (307) 40,263 35,898 (781,844) (745,946)
Finance costs 6 (3,956) (11,869) (15,825) (1,663) (4,989) (6,652)
Profit/(loss) before taxation 36,614 (12,176) 24,438 34,235 (786,833) (752,598)
Taxation 7 (1,149) – (1,149) (1,186) – (1,186)
Profit/(loss) after taxation for the
year 35,465 (12,176) 23,289 33,049 (786,833) (753,784)
Earnings/(loss) per ordinary share 8 7.05p (2.42p) 4.63p 6.42p (152.81p) (146.39p)
The Company does not have any income or expenses that are not included in the profit/(loss) after taxation for the year. Accordingly,
the profit/(loss) after taxation for the year is also the total comprehensive income for the year 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 year and all items in the above statement derive from continuing operations.
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Statement of Changes in Equity
for the year ended 31 March 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
Total equity at 31 March 2022 5,710 211,569 917 244,043 889,958 48,424 1,400,621
Repurchase of ordinary shares 15 – – – (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
Total equity at 31 March 2021 5,710 211,569 917 248,491 1,676,791 39,499 2,182,977
Repurchase of ordinary shares 15 – – – (4,448) – – (4,448)
(Loss)/profit after taxation for
the year – – – – (786,833) 33,049 (753,784)
Dividend paid to shareholders 9 – – – – – (24,124) (24,124)
Total equity at 31 March 2022 5,710 211,569 917 244,043 889,958 48,424 1,400,621
The Notes on pages 65 to 90 form an integral part of these Financial Statements.
Job No: 49563 Proof Event: 15 Black Line Level: 1 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Fidelity China Special Situations PLC
GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
Notes
31 March
2023
£’000
31 March
2022
£’000
Non-current assets
Investments at fair value through profit or loss 10 1,318,764 1,365,485
Current assets
Derivative instruments 11 22,313 23,994
Amounts held at futures clearing houses and brokers 34,813 32,220
Other receivables 12 11,939 14,204
Cash at bank 72,943 73,673
142,008 144,091
Current liabilities
Derivative instruments 11 (20,892) (17,524)
Bank loan 13 (80,857) (76,043)
Other payables 14 (20,602) (15,388)
(122,351) (108,955)
Net current assets 19,657 35,136
Net assets 1,338,421 1,400,621
Equity attributable to equity shareholders
Share capital 15 5,710 5,710
Share premium account 16 211,569 211,569
Capital redemption reserve 16 917 917
Other reserve 16 186,794 244,043
Capital reserve 16 877,782 889,958
Revenue reserve 16 55,649 48,424
Total equity 1,338,421 1,400,621
Net asset value per ordinary share 17 274.08p 272.52p
The Financial Statements on pages 61 to 90 were approved by the Board of Directors on 7 June 2023 and were signed on its behalf by:
Michael Balfour
Chairman
Balance Sheet
as at 31 March 2023
Company number 7133583
The Notes on pages 65 to 90 form an integral part of these Financial Statements.
Job No: 49563 Proof Event: 16 Black Line Level: 2 Park Communications Ltd Alpine Way London E6 6LA
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Cash Flow Statement
for the year ended 31 March 2023
Year ended
31 March
2023
£’000
Year ended
31 March
2022
£’000
Operating activities
Cash inflow from investment income 30,352 26,752
Cash inflow from derivative income 11,484 11,481
Cash inflow from other income 409 42
Cash outflow from Directors’ fees (195) (181)
Cash outflow from other payments (15,638) (21,626)
Cash outflow from the purchase of investments (429,715) (733,693)
Cash outflow from the purchase of derivatives (7,957) (4,095)
Cash outflow from the settlement of derivatives (485,760) (549,387)
Cash inflow from the sale of investments 480,407 936,723
Cash inflow from the settlement of derivatives 510,263 387,497
Cash outflow from amounts held at futures clearing houses and brokers (2,593) (12,348)
Net cash inflow from operating activities before servicing of finance 91,057 41,165
Financing activities
Cash outflow from loan interest paid (2,242) (2,009)
Cash outflow from CFD interest paid (12,099) (3,037)
Cash outflow from short CFD dividends paid (254) (1,707)
Cash outflow from the repurchase of ordinary shares (57,119) (4,448)
Cash outflow from dividends paid to shareholders (28,240) (24,124)
Cash outflow from financing activities (99,954) (35,325)
(Decrease)/increase in cash at bank (8,897) 5,840
Cash at bank at the start of the year 73,673 66,404
Effect of foreign exchange movements 8,167 1,429
Cash at bank at the end of the year 72,943 73,673
The Notes on pages 65 to 90 form an integral part of these Financial Statements.
Job No: 49563 Proof Event: 15 Black Line Level: 1 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Fidelity China Special Situations PLC
GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
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 Accounting Policies
The Company’s Financial Statements have been prepared in accordance with UK-adopted International Accounting Standards
(“IFRS”), IFRIC interpretations and as far as it is consistent with IFRS, with 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. The accounting policies adopted in the preparation of these Financial Statements are summarised below.
a) Basis of accounting – The Financial Statements have been prepared on a going concern basis and under the historical cost
convention, except for the measurement at fair value of investments and derivative instruments. The Directors have a reasonable
expectation that the Company has adequate resources to continue in operational existence up to 30 June 2024 which is at least
twelve months from the date of approval of these Financial Statements. In making their assessment the Directors have reviewed
income and expense projections and the loan agreement, reviewed the liquidity of the investment portfolio, stress testing performed
and considered the Company’s ability to meet liabilities as they fall due. This conclusion also takes into account the Director’s
assessment of the risks faced by the Company as detailed in the Going Concern Statement on page 36.
In preparing these Financial Statements the Directors have considered the impact of climate change risk as a principal and as an
emerging risk as set out on page 28 and on page 30, and have concluded that there was no further impact of climate change to be
taken into account as the investments are valued based on market pricing. In line with IFRS 13 investments are valued at fair value,
which for the Company are quoted bid prices for investments in active markets at the balance sheet date. Investments which are
unlisted are priced using market-based valuation approaches. All investments therefore reflect the market participants view of climate
change risk on the investments held by the Company.
The Company’s Going Concern Statement in the Directors’ Report on page 36 takes account of all events and conditions up to
30 June 2024 which is at least twelve months from the date of approval of these Financial Statements.
b) Adoption of new and revised International Accounting Standards – the accounting policies adopted are consistent with those
of the previous financial year.
At the date of authorisation of these Financial Statements, the following revised IAS were in issue but not yet effective:
• IAS 1 Presentation of Financial Statements (amendments);
• IAS 8 Accounting Policies, Changes in Accounting estimates and errors (amendments); and
• IAS 12 Income Taxes (amendments).
The Directors do not expect that the adoption of the above Standards will have a material impact on the Financial Statements of the
Company in future periods.
c) Segmental reporting – The Company is engaged in a single segment business and, therefore, no segmental reporting is provided.
d) Presentation of the Income Statement – In order to reflect better the activities of an investment company and in accordance with
guidance issued by the AIC, supplementary information which analyses the Income Statement between items of a revenue and capital
nature has been prepared alongside the Income Statement. The revenue profit after taxation for the year is the measure the Directors
believe appropriate in assessing the Company’s compliance with certain requirements set out in Section 1159 of the Corporation Tax
Act 2010.
e) Significant accounting estimates, assumptions and judgements – The preparation of the Financial Statements requires the use
of estimates, assumptions and judgements. These estimates, assumptions and judgements affect the reported amounts of assets and
liabilities at the reporting date. While estimates are based on best judgement using information and financial data available, the
actual outcome may differ from these estimates.
The key sources of estimation and uncertainty relate to the fair value of the unlisted investments.
Job No: 49563 Proof Event: 16 Black Line Level: 2 Park Communications Ltd Alpine Way London E6 6LA
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Notes to the Financial Statements continued
2 Accounting Policies continued
Judgements
The Directors consider whether each fair value is appropriate following detailed review and challenge of the pricing methodology.
The judgement applied in the selection of the methodology used (see Note 2 (l) below) for determining the fair value of each unlisted
investment can have a significant impact upon the valuation.
Estimates
The key estimate in the Financial Statements is the determination of the fair value of the unlisted investments by the Manager’s Fair
Value Committee (“FVC”), with support from an external valuer and Fidelity’s unlisted investments specialist, for detailed review and
appropriate challenge by the Directors. This estimate is key as it significantly impacts the valuation of the unlisted investments at the
Balance Sheet date. When no recent primary or secondary transaction in the company’s shares have taken place, the fair valuation
process involves estimation using subjective inputs that are unobservable (for which market data is unavailable). The estimates
involved in the valuation process may include the following:
(i) The selection of appropriate comparable companies. Comparable companies are chosen on the basis of their business
characteristics and growth patterns;
(ii) The selection of a revenue metric (either historical or forecast);
(iii) The selection of an appropriate illiquidity discount factor to reflect the reduced liquidity of unlisted companies versus their listed
peers;
(iv) The estimation of the likelihood of a future exit of the position through an initial public offering (“IPO”) or a company sale;
(v) The selection of an appropriate industry benchmark index to assist with the valuation; and
(vi) The calculation of valuation adjustments derived from milestone analysis and future cash flows (i.e. incorporating operational
success against the plans/forecasts of the business into the valuation).
As the valuation outcomes may differ from the fair value estimates a price sensitivity analysis is provided in Other Price Risk Sensitivity
in Note 18 below to illustrate the effect on the Financial Statements of an over or under estimation of fair value.
The risk of an over or under estimation of fair value is greater when methodologies are applied using more subjective inputs.
Assumptions
The determination of fair value by the FVC involves key assumptions dependent upon the valuation techniques used. The valuation
process recognises that the price of a recent investment may be an appropriate starting point for estimating fair value. The Multiples
approach involves subjective inputs and therefore presents a greater risk of over or under estimation, particularly in the absence of a
recent transaction.
f) Income – Income from equity investments and long contracts for difference (“CFDs”) is credited to the revenue column of the
Income Statement on the date on which the right to receive the payment is established, normally the ex-dividend date. Overseas
dividends are accounted for gross of any tax deducted at source. Where the Company has elected to receive its dividends in the form
of additional shares rather than cash, the amount of the cash dividend foregone is recognised as income. Any excess in the value
of the shares received over the amount of the cash dividend foregone is recognised as a gain in the capital column of the Income
Statement. Special dividends are treated as a revenue receipt or a capital receipt depending on the facts and circumstances of each
particular case.
Interest received on CFDs, collateral and bank deposits are accounted for on an accruals basis and credited to the revenue column of
the Income Statement. Interest received on CFDs represent the finance costs calculated by reference to the notional value of the CFDs.
g) Functional currency and foreign exchange – The functional and reporting currency of the Company is UK sterling, which is the
currency of the primary economic environment in which the Company operates. Transactions denominated in foreign currencies are
reported in UK sterling at the rate of exchange ruling at the date of the transaction. Assets and liabilities in foreign currencies are
translated at the rates of exchange ruling at the Balance Sheet date. Foreign exchange gains and losses arising on translation are
recognised in the Income Statement as a revenue or a capital item depending on the nature of the underlying item to which they
relate.
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2 Accounting Policies continued
h) Investment management and other expenses – These are accounted for on an accruals basis and are charged as follows:
• The base investment management fee is allocated 25% to revenue and 75% to capital;
• The variable investment management fee is charged/credited to capital as it is based on the performance of the net asset value
per share relative to the Benchmark Index; and
• All other expenses are allocated in full to revenue with the exception of those directly attributable to share issues or other capital
events.
i) Finance costs – Finance costs comprise interest on the bank loan and overdrafts and finance costs paid on CFDs, which are
accounted for on an accruals basis, and dividends paid on short CFDs, which are accounted for on the date on which the obligation
to incur the cost is established, normally the ex-dividend date. Finance costs are allocated 25% to revenue and 75% to capital.
j) Taxation – The taxation charge represents the sum of current taxation and deferred taxation.
Taxation currently payable is based on the taxable profit for the year. Taxable profit differs from profit before taxation, as reported in
the Income Statement, because it excludes items of income or expense that are taxable or deductible in other years and items that
are never taxable or deductible. The Company’s liability for current taxation is calculated using taxation rates that have been enacted
or substantially enacted by the Balance Sheet date.
Deferred taxation is the taxation expected to be payable or recoverable on differences between the carrying amounts of assets and
liabilities in the Financial Statements and the corresponding taxation bases used in the computation of taxable profit based on tax
rates that have been enacted or substantively enacted when the taxation is expected to be payable or recoverable, and is accounted
for using the balance sheet liability method. Deferred taxation liabilities are recognised for all taxable temporary differences and
deferred taxation assets are recognised to the extent that it is probable that taxable profits will be available against which deductible
temporary differences can be utilised.
Taxation is charged or credited to the revenue column of the Income Statement, except where it relates to items of a capital nature, in
which case it is charged or credited to the capital column of the Income Statement. Where expenses are allocated between revenue
and capital any tax relief in respect of the expenses is allocated between revenue and capital returns on the marginal basis using the
Company’s effective rate of corporation tax for the accounting period. The Company is an approved Investment Trust under Section
1158 of the Corporation Tax Act 2010 and is not liable for UK taxation on capital gains.
k) Dividend paid to shareholders – Dividends payable to equity shareholders are recognised when the Company’s obligation to
make payment is established.
l) Investments – The portfolio of financial assets is managed and its performance evaluated on a fair value basis, in accordance with
a documented investment strategy, and information about the portfolio is provided on that basis to the Company’s Board of Directors.
Under IFRS 9 investments are held at fair value through profit or loss, which is initially taken to be their cost, and is subsequently
measured at bid or last traded prices, depending upon the convention of the exchange on which they are listed, where available, or
otherwise at fair value based on published price quotations.
Investments which are not quoted, or are not frequently traded, are stated at the best estimate of fair value. The Manager’s Fair Value
Committee (“FVC”), which is independent of the Portfolio Manager’s team, and with support from the external valuer and Fidelity’s
unlisted investments specialist, provides recommended fair values to the Directors. These are based on the principles outlined in Note
2 (e) above. The unlisted investments are valued at fair value following a detailed review and appropriate challenge by the Directors
of the pricing methodology proposed by the FVC.
The techniques applied by the FVC when valuing the unlisted investments are predominantly market-based approaches. The market-
based approaches are set out below and are followed by an explanation of how they are applied to the Company’s unlisted
portfolio:
• Multiples;
• Industry Valuation Benchmarks; and
• Available Market Prices.
Job No: 49563 Proof Event: 16 Black Line Level: 2 Park Communications Ltd Alpine Way London E6 6LA
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Notes to the Financial Statements continued
2 Accounting Policies continued
The nature of the unlisted investment will influence the valuation technique applied. The valuation approach recognises that the price
of a recent investment, if resulting from an orderly transaction, generally represents fair value as at the transaction date and may be
an appropriate starting point for estimating fair value at subsequent measurement dates. However, consideration is given to the facts
and circumstances as at the subsequent measurement date, including changes in the market or performance of the investee company.
Milestone analysis and future cash flows are used where appropriate to incorporate the operational progress of the investee company
into the valuation. Consideration is also given to the input received from the Fidelity analyst that covers the company, Fidelity’s unlisted
investments specialist and from an external valuer. Additionally, the background to the transaction must be considered. As a result,
various multiples-based techniques are employed to assess the valuations particularly in those companies with established revenues.
An absence of relevant industry peers may preclude the application of the Industry Valuation Benchmarks technique and an absence
of observable prices may preclude the Available Market Prices approach.
The unlisted investments are valued according to a three month cycle of measurement dates. The fair value of the unlisted investments
will be reviewed before the next scheduled three monthly measurement date on the following occasions:
• At the year end and half year end of the Company; and
• Where there is an indication of a change in fair value (commonly referred to as ‘trigger’ events).
In accordance with the AIC SORP, the Company includes transaction costs, incidental to the purchase or sale of investments within
losses on investments held at fair value through profit or loss in the capital column of the Income Statement and has disclosed them in
Note 10 below.
m) Derivative instruments – When appropriate, permitted transactions in derivative instruments are used. Derivative transactions into
which the Company may enter include CFDs, futures, options, warrants and forward currency contracts. Under IFRS 9 derivatives are
classified at fair value through profit or loss – held for trading, and are initially accounted and measured at fair value on the date the
derivative contract is entered into and subsequently measured at fair value as follows:
• CFDs – the difference between the strike price and the value of the underlying shares in the contract, calculated in accordance
with accounting policy 2 (l) above;
• Futures – the difference between contract price and the quoted trade price; and
• Options – the quoted trade price for the contract.
Where such transactions are used to protect or enhance income, if the circumstances support this, the income derived is included in
derivative income in the revenue column of the Income Statement. Where such transactions are used to protect or enhance capital, if
the circumstances support this, the gains and losses derived are included in gains/(losses) on derivative instruments held at fair value
through profit or loss in the capital column of the Income Statement. Any positions on such transactions open at the year end are
reflected on the Balance Sheet at their fair value within current assets or current liabilities.
The Company obtains equivalent exposure to equities through the use of CFDs. All gains and losses in the fair value of the CFDs
are included in gains/(losses) on derivative instruments held at fair value through profit or loss in the capital column of the Income
Statement.
n) Amounts held at futures clearing houses and brokers – Cash deposits are held in segregated accounts on behalf of brokers as
collateral against open derivative contracts. These are carried at amortised cost.
o) Other receivables – Other receivables include amounts receivable on settlement of derivatives, securities sold for future settlement,
accrued income, taxation recoverable and other debtors and prepayments incurred in the ordinary course of business. If collection is
expected in one year or less (or in the normal operating cycle of the business, if longer) they are classified as current assets. If not,
they are presented as non-current assets. Other receivables are recognised initially at fair value and, where applicable, subsequently
measured at amortised cost using the effective interest rate method and as reduced by appropriate allowance for estimated
irrecoverable amounts.
p) Bank loans – Loans are initially included in the Financial Statements at cost, being the fair value of the consideration received
net of any issue costs relating to the borrowing. After initial recognition, the loans are measured at amortised cost using the effective
interest rate method. The amortised cost is calculated by taking into account any issue costs and any discount or premium on
settlement.
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
2 Accounting Policies continued
q) Other payables – Other payables include amounts payable on settlement of derivatives, securities purchased for future settlement,
investment management fees, loan interest payable, amounts payable for repurchase of shares, finance costs payable and expenses
accrued in the ordinary course of business. Other payables are classified as current liabilities if payment is due within one year or
less (or in the normal operating cycle of the business, if longer). If not, they are presented as non-current liabilities. Other payables
are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate
method.
r) Other reserve – The full cost of ordinary shares repurchased and held in Treasury is charged to the Other Reserve.
s) Capital reserve – The following are transferred to capital reserve:
• Gains and losses on the disposal of investments and derivatives instruments;
• Changes in the fair value of investments and derivative instruments, held at the year end;
• Foreign exchange gains and losses of a capital nature;
• Variable investment management fees;
• 75% of base investment management fees;
• 75% of finance costs;
• Dividends receivable which are capital in nature;
• Taxation charged or credited relating to items which are capital in nature: and
• Other expenses which are capital in nature.
Technical guidance issued by the Institute of Chartered Accountants in England and Wales in TECH 02/17BL, guidance on the
determination of realised profits and losses in the context of distributions under the Companies Act 2006, states that changes in
the fair value of investments which are readily convertible to cash, without accepting adverse terms at the Balance Sheet date, can
be treated as realised. Capital reserves realised and unrealised are shown in aggregate as capital reserve in the Statement of
Changes in Equity and the Balance Sheet. At the Balance Sheet date, the portfolio of the Company consisted of investments listed
on a recognised stock exchange and derivative instruments contracted with counterparties having an adequate credit rating, and
the portfolio was considered to be readily convertible to cash, with the exception of the level 3 investments which had unrealised
investment holding gains of £25,993,000 (2022: unrealised investment holding gains of £17,794,000). See Note 18 on pages 79 to 88
for further details on the level 3 investments.
Job No: 49563 Proof Event: 16 Black Line Level: 2 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Notes to the Financial Statements continued
3 Income
Year ended
31 March
2023
£’000
Year ended
31 March
2022
£’000
Investment income
Overseas dividends 31,949 28,632
Overseas scrip dividends 755 1,006
32,704 29,638
Derivative income
Dividends received on long CFDs 11,282 11,483
Interest received on CFDs 284 112
11,566 11,595
Other income
Interest received on collateral and deposits 409 42
Total income 44,679 41,275
Special dividends of £1,155,000 (2022: £nil) have been recognised in capital.
4 Investment Management Fees
Year ended 31 March 2023 Year ended 31 March 2022
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
Investment management fee – base 3,012 9,037 12,049 3,984 11,953 15,937
Investment management fee – variable – 2,678 2,678 – 3,706 3,706
3,012 11,715 14,727 3,984 15,659 19,643
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 is 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. 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 1.10% on net assets up to £1.5 billion and reducing to
0.90% on net assets over £1.5 billion. If the Company underperforms, then the overall fee can fall as low as 0.70% 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. With effect from 1 July 2023, the first tier of the management fee will reduce from 0.90% to 0.85%.
The base investment management fee has been allocated 75% to capital reserve in accordance with the Company’s accounting
policies.
Further details of the terms of the Management Agreement are given in the Directors’ Report on page 36.
Job No: 49563 Proof Event: 15 Black Line Level: 1 Park Communications Ltd Alpine Way London E6 6LA
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
5 Other Expenses
Year ended
31 March
2023
£’000
Year ended
31 March
2022
£’000
Allocated to revenue:
AIC fees 21 21
Custody fees 157 352
Depositary fees 57 73
Directors’ expenses 13 5
Directors’ fees
1
202 182
Legal and professional fees 77 207
Marketing expenses 263 264
Printing and publication expenses 50 50
Registrars’ fees 69 55
Other expenses 131 131
Fees payable to the Company’s Independent Auditor for the audit of the Financial Statements 57 53
1,097 1,393
Allocated to capital:
Legal and professional fees 4 25
Other expenses 1,101 1,418
1 Details of the breakdown of Directors’ fees are provided within the Directors’ Remuneration Report on page 46.
6 Finance Costs
Year ended 31 March 2023 Year ended 31 March 2022
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
Interest paid on bank loan and overdrafts 663 1,989 2,652 505 1,516 2,021
Interest paid on CFDs* 3,230 9,689 12,919 731 2,193 2,924
Dividends paid on short CFDs 63 191 254 427 1,280 1,707
3,956 11,869 15,825 1,663 4,989 6,652
* Increased compared to the prior year due to an increase in interest rates.
Finance costs have been allocated 75% to capital reserve in accordance with the Company’s accounting policies.
Job No: 49563 Proof Event: 16 Black Line Level: 2 Park Communications Ltd Alpine Way London E6 6LA
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Notes to the Financial Statements continued
7 Taxation
Year ended 31 March 2023 Year ended 31 March 2022
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
a) Analysis of the taxation charge for
the year
Overseas taxation 1,149 – 1,149 1,186 – 1,186
Taxation charge for the year
(see Note 7b) 1,149 – 1,149 1,186 – 1,186
b) Factors affecting the taxation charge for the year
The taxation charge for the year is lower than the standard rate of UK corporation tax for an investment trust company of 19% (2022:
19%). A reconciliation of the standard rate of UK corporation tax to the taxation charge for the year is shown below:
Year ended 31 March 2023 Year ended 31 March 2022
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
Profit/(loss) before taxation 36,614 (12,176) 24,438 34,235 (786,833) (752,598)
Profit/(loss) before taxation multiplied by
the standard rate of UK corporation tax of
19% (2022: 19%) 6,957 (2,313) 4,644 6,505 (149,498) (142,993)
Effects of:
Capital (gains)/losses not taxable* – (2,168) (2,168) – 145,570 145,570
Income not taxable (6,116) – (6,116) (5,560) – (5,560)
Expenses not deductible – 1,987 1,987 – 666 666
Excess expenses (841) 2,494 1,653 (945) 3,262 2,317
Overseas taxation 1,149 – 1,149 1,186 – 1,186
Taxation charge (Note 7a) 1,149 – 1,149 1,186 – 1,186
* The Company is exempt from UK corporation tax on capital gains as it meets the HM Revenue & Customs criteria for an investment company set out in Section 1159 of
the Corporation Tax Act 2010.
c) Deferred taxation
A deferred tax asset of £37,583,000 (2022: £35,407,000), in respect of excess expenses of £150,330,000 (2022: £141,629,000) has not
been recognised as it is unlikely that there will be sufficient future taxable profits to utilise these expenses.
In the Spring Budget of 2021, the UK Government announced that from 1 April 2023 the corporation tax rate will increase to 25%.
This rate has been substantively enacted at the balance sheet date and has therefore been applied to calculate the unrecognised
deferred tax asset for the current year (2022: 25%).
Job No: 49563 Proof Event: 15 Black Line Level: 1 Park Communications Ltd Alpine Way London E6 6LA
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
8 Earnings/(Loss) per Ordinary Share
Year ended
31 March
2023
Year ended
31 March
2022
Revenue earnings per ordinary share 7.05p 6.42p
Capital loss per ordinary share (2.42p) (152.81p)
Total earnings/(loss) per ordinary share 4.63p (146.39p)
The earnings/(loss) per ordinary share is based on the profit/(loss) after taxation for the year divided by the weighted average
number of ordinary shares held outside of Treasury during the year, as shown below:
£’000 £’000
Revenue profit after taxation for the year 35,465 33,049
Capital loss after taxation for the year (12,176) (786,833)
Total profit/(loss) after taxation for the year 23,289 (753,784)
Number Number
Weighted average number of ordinary shares held outside of Treasury 503,045,428 514,922,357
9 Dividends Paid to Shareholders
Year ended
31 March
2023
£’000
Year ended
31 March
2022
£’000
Dividend paid
Dividend of 5.50 pence per ordinary share paid for the year ended 31 March 2022 28,240 –
Dividend of 4.68 pence per ordinary share paid for the year ended 31 March 2021 – 24,124
28,240 24,124
Dividend proposed
Dividend proposed of 6.25 pence per ordinary share for the year ended 31 March 2023 30,199 –
Dividend proposed of 5.50 pence per ordinary share for the year ended 31 March 2022 – 28,240
30,199 28,240
The Directors have proposed the payment of a dividend for the year ended 31 March 2023 of 6.25 pence per ordinary share which is
subject to approval by shareholders at the Annual General Meeting on 20 July 2023 and has not been included as a liability in these
Financial Statements. The dividend will be paid on 27 July 2023 to shareholders on the register at the close of business on 16 June
2023 (ex-dividend date 15 June 2023).
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Notes to the Financial Statements continued
10 Investments at Fair Value through Profit or Loss
2023
£’000
2022
£’000
Total investments* 1,318,764 1,365,485
Opening book cost 1,630,492 1,701,567
Opening investment holding (losses)/gains (265,007) 465,708
Opening fair value of investments 1,365,485 2,167,275
Movements in the year
Purchases at cost 440,666 728,039
Sales – proceeds (480,475) (925,998)
Losses on investments (6,912) (603,831)
Closing fair value 1,318,764 1,365,485
Closing book cost 1,514,572 1,630,492
Closing investment holding losses (195,808) (265,007)
Closing fair value of investments 1,318,764 1,365,485
* The fair value hierarchy of the investments is shown in Note 18 below.
The Company received £480,475,000 (2022: £925,998,000) from investments sold in the year. The book cost of these investments when
they were purchased was £556,586,000 (2022: £799,114,000). These investments have been revalued over time and until they were
sold any unrealised gains/losses were included in the fair value of the investments.
Investment transaction costs incurred in the acquisition and disposal of investments, which are included in the losses on investments
were as follows:
Year ended
31 March
2023
£’000
Year ended
31 March
2022
£’000
Purchases transaction costs 599 1,501
Sales transaction costs 742 1,478
1,341 2,979
The portfolio turnover rate for the year was 35.5% (2022: 45.2%). The portfolio turnover rate measures the Company’s trading activity. It
is calculated by taking the average of the total amount of securities purchased and the total amount of securities sold in the reporting
year divided by the average fair value of investments.
Job No: 49563 Proof Event: 15 Black Line Level: 1 Park Communications Ltd Alpine Way London E6 6LA
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
11 Derivative Instruments
Year ended
31 March
2023
£’000
Year ended
31 March
2022
£’000
Net gains/(losses) on derivative instruments
Realised gains/(losses) on CFDs 6,913 (206,340)
Realised gains on futures 16,590 39,391
Realised (losses)/gains on options (2,645) 4,656
Movement in investment holding gains on CFDs 353 379
Movement in investment holding (losses)/gains on futures (4,466) 1,814
Movement in investment holding losses on options (1,774) (89)
14,971 (160,189)
2023
Fair value
£’000
2022
Fair value
£’000
Fair value of derivative instruments recognised on the Balance Sheet*
Derivative instrument assets 22,313 23,994
Derivative instrument liabilities (20,892) (17,524)
1,421 6,470
* The fair value hierarchy of the derivative instruments is shown in Note 18 below.
Fair value
£’000
2023
Asset
exposure
£’000
Fair value
£’000
2022
Asset
exposure
£’000
At the year end the Company held the following derivative
instruments
Long CFDs 7,409 512,674 5,898 568,330
Short CFDs (1,238) 19,086 (80) 14,149
Futures (hedging exposure) (6,857) (172,890) (2,391) (176,746)
Call options 204 2,161 387 2,642
Put options (long exposure) (414) 5,097 – –
Put options (short exposure) 29 188 1,128 4,096
Put options (hedging exposure) 2,288 (26,013) 1,528 (12,395)
1,421 340,303 6,470 400,076
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Notes to the Financial Statements continued
12 Other Receivables
2023
£’000
2022
£’000
Amounts receivable on settlement of derivatives 10,135 12,924
Securities sold for future settlement 148 80
Accrued income 1,513 794
Taxation recoverable 13 202
Other receivables 130 204
11,939 14,204
13 Bank Loan – repayable within one year
2023
£’000
2022
£’000
Fixed rate unsecured US dollar loan
US dollar 100,000,000 fixed at a rate of 6.335% 80,857 –
US dollar 100,000,000 fixed at a rate of 2.606% – 76,043
80,857 76,043
The prior loan agreement with Scotiabank Europe PLC matured on 14 February 2023 and the Company entered into a one year
unsecured loan agreement with The Bank of Nova Scotia, London Branch. The new agreement was obtained by novating the existing
agreement. The interest rate of the new agreement is fixed at 6.335% per annum until the agreement terminates on 13 February 2024.
14 Other Payables
2023
£’000
2022
£’000
Securities purchased for future settlement 12,402 2,206
Amounts payable on settlement of derivatives 4,731 10,994
Investment management fees 1,266 1,307
Accrued expenses 1,096 724
Finance costs payable 977 157
Amounts payable for repurchase of shares 130 –
20,602 15,388
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
15 Share Capital
Number of
shares
2023
£’000
Number of
shares
2022
£’000
Issued, allotted and fully paid
Ordinary shares of 1 pence each held outside Treasury
Beginning of the year 513,957,409 5,140 515,463,483 5,155
Ordinary shares repurchased into Treasury (25,631,781) (256) (1,506,074) (15)
End of the year 488,325,628 4,884 513,957,409 5,140
Ordinary shares of 1 pence each held in Treasury*
Beginning of the year 57,097,071 570 55,590,997 555
Ordinary shares repurchased into Treasury 25,631,781 256 1,506,074 15
End of the year 82,728,852 826 57,097,071 570
Total share capital 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 year, the Company repurchased 25,631,781 (2022: 1,506,074) ordinary shares and held them in Treasury. The cost of
repurchasing these shares of £57,249,000 (2022: £4,448,000) was charged to the Other Reserve.
16 Capital and Reserves
Share
capital
£’000
Share
premium
account
£’000
Capital
redemption
reserve
£’000
Other
reserve
£’000
Capital
reserve
£’000
Revenue
reserve
£’000
Total
equity
£’000
At 1 April 2022 5,710 211,569 917 244,043 889,958 48,424 1,400,621
Losses on investments (see Note 10) – – – – (6,912) – (6,912)
Gains on derivative instruments
(see Note 11) – – – – 14,971 – 14,971
Foreign exchange gains – – – – 8,167 – 8,167
Foreign exchange losses on bank
loan – – – – (4,814) – (4,814)
Investment management fees
(see Note 4) – – – – (11,715) – (11,715)
Other expenses (see Note 5) – – – – (4) – (4)
Finance costs (see Note 6) – – – – (11,869) – (11,869)
Revenue profit after taxation for
the year – – – – – 35,465 35,465
Dividend paid to shareholders
(see Note 9) – – – – – (28,240) (28,240)
Repurchase of ordinary shares
(see Note 15) – – – (57,249) – – (57,249)
At 31 March 2023 5,710 211,569 917 186,794 877,782 55,649 1,338,421
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Notes to the Financial Statements continued
16 Capital and Reserves continued
Share
capital
£’000
Share
premium
account
£’000
Capital
redemption
reserve
£’000
Other
reserve
£’000
Capital
reserve
£’000
Revenue
reserve
£’000
Total
equity
£’000
At 1 April 2021 5,710 211,569 917 248,491 1,676,791 39,499 2,182,977
Losses on investments (see Note 10) – – – – (603,831) – (603,831)
Losses on derivative instruments (see
Note 11) – – – – (160,189) – (160,189)
Foreign exchange gains – – – – 1,429 – 1,429
Foreign exchange losses on bank
loan – – – – (3,569) – (3,569)
Investment management fees
(see Note 4) – – – – (15,659) – (15,659)
Other expenses (see Note 5) – – – – (25) – (25)
Finance costs (see Note 6) – – – – (4,989) – (4,989)
Revenue profit after taxation for the
year – – – – – 33,049 33,049
Dividend paid to shareholders
(see Note 9) – – – – – (24,124) (24,124)
Repurchase of ordinary shares
(see Note 15) – – – (4,448) – – (4,448)
At 31 March 2022 5,710 211,569 917 244,043 889,958 48,424 1,400,621
The capital reserve balance at 31 March 2023 includes investment holding losses on investments of £195,808,000 (2022: losses of
£265,007,000) as detailed in Note 10 above. See Note 2 (s) above for further details. The revenue, capital and other reserves are
distributable by way of dividend.
17 Net Asset Value per Ordinary Share
The calculation of the net asset value per ordinary share is based on the following:
2023 2022
Net assets £1,338,421,000 £1,400,621,000
Ordinary shares held outside of Treasury at year end 488,325,628 513,957,409
Net asset value per ordinary share 274.08p 272.52p
It is the Company’s policy that shares held in Treasury will only be reissued at net asset value per share or at a premium to net asset
value per share and, therefore, shares held in Treasury have no dilutive effect.
Job No: 49563 Proof Event: 15 Black Line Level: 1 Park Communications Ltd Alpine Way London E6 6LA
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
18 Financial Instruments
Management of risk
The Company’s investing activities in pursuit of its investment objective involve certain inherent risks. The Board confirms that there is
an ongoing process for identifying, evaluating and managing the risks faced by the Company. The Board with the assistance of the
Investment Manager, has developed a risk matrix which, as part of the internal control process, identifies the risks that the Company
faces. Principal risks identified are geopolitical, market and economic (including currency), operational, investment performance
(including gearing), variable interest entity structures, climate change, discount management, unlisted securities, environmental, social
and governance (“ESG”), key people, cybercrime and information security and business continuity (including global pandemic).
Other risks identified are tax and regulatory and operational risks, including those relating to third party service providers covering
investment management, marketing and business development, company secretarial, fund administration and operations and support
functions. Risks are identified and graded in this process, together with steps taken in mitigation, and are updated and reviewed on
an ongoing basis. Risks identified are shown in the Strategic Report on pages 28 to 32.
This Note is incorporated in accordance with IFRS 7: Financial Instruments: Disclosures and refers to the identification, measurement
and management of risks potentially affecting the value of financial instruments.
The Company’s financial instruments may comprise:
• Equity shares (listed and unlisted), equity linked notes, convertible bonds and rights issues;
• Derivative instruments including CFDs, warrants, futures and options written or purchased on stocks and equity indices and
forward currency contracts;
• Cash, liquid resources and short-term receivables and payables that arise from its operations; and
• Bank borrowings.
The risks identified by IFRS 7 arising from the Company’s financial instruments are market price risk (which comprises interest rate risk,
foreign currency risk and other price risk), liquidity risk, counterparty risk, credit risk and derivative instrument risk. The Board reviews
and agrees policies for managing each of these risks, which are summarised below. These policies are consistent with those followed
last year.
Market price risk
Interest rate risk
The Company finances its operations through its share capital raised. In addition, the Company has derivative instruments and an
unsecured fixed rate loan facility for US$100,000,000 expiring on 13 February 2024. The Company has drawn down the whole of this
facility as disclosed in Note 13 above.
Interest rate risk exposure
The values of the Company’s financial instruments that are exposed to movements in interest rates are shown below:
2023
£’000
2022
£’000
Exposure to financial instruments that bear interest
Long CFDs – exposure less fair value 505,265 562,432
Bank loan 80,857 76,043
586,122 638,475
Exposure to financial instruments that earn interest
Short CFDs – exposure plus fair value 17,848 14,069
Amounts held at futures clearing houses and brokers 34,813 32,220
Cash at bank 72,943 73,673
125,604 119,962
Net exposure to financial instruments that bear interest 460,518 518,513
Job No: 49563 Proof Event: 16 Black Line Level: 2 Park Communications Ltd Alpine Way London E6 6LA
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Notes to the Financial Statements continued
18 Financial Instruments continued
Foreign currency risk
The Company’s profit/(loss) after taxation and its net assets can be affected by foreign exchange movements because the Company
has income, assets and liabilities which are denominated in currencies other than the Company’s functional currency which is UK
sterling.
Three principal areas have been identified where foreign currency risk could impact the Company:
• Movements in currency exchange rates affecting the value of investments and bank loan;
• Movements in currency exchange rates affecting short-term timing differences, for example, between the date when an investment
is bought or sold and the date when settlement of the transaction occurs; and
• Movements in currency exchange rates affecting income received.
Currency exposure of financial assets
The Company’s financial assets comprise of investments, long positions on derivative instruments, short-term debtors and cash at
bank. The currency exposure profile of these financial assets is shown below:
Currency
Investments
held at
fair value
through
profit or loss
£’000
Asset
exposure of
long
derivative
instruments
1
£’000
Other
receivables
2
£’000
Cash
at bank
£’000
2023
Total
£’000
Chinese renminbi 170,913 – – 21,221 192,134
Euro 10,432 – – – 10,432
Hong Kong dollar 601,107 270,181 34,483 24,043 929,814
Japanese yen 35,111 – 84 – 35,195
South Korean won – – – 1 1
Taiwan dollar 19,621 – 72 8 19,701
UK sterling 16,221 – 130 – 16,351
US dollar 465,359 50,848 11,983 27,670 555,860
1,318,764 321,029 46,752 72,943 1,759,488
1 The asset exposure of long CFDs and options after the netting of hedging exposures.
2 Other receivables include amounts held at futures clearing houses and brokers.
Job No: 49563 Proof Event: 15 Black Line Level: 1 Park Communications Ltd Alpine Way London E6 6LA
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
18 Financial Instruments continued
Currency
Investments
held at
fair value
through
profit or loss
£’000
Asset
exposure of
long
derivative
instruments
1
£’000
Other
receivables
2
£’000
Cash
at bank
£’000
2022
Total
£’000
Chinese renminbi 287,250 – – 48 287,298
Euro 10,977 – – – 10,977
Hong Kong dollar 553,457 313,964 40,791 71,767 979,979
Japanese yen 32,796 – – – 32,796
Singapore dollar 14,421 – – – 14,421
South Korean won – – – 1 1
Taiwan dollar 18,452 – 208 8 18,668
UK sterling 21,493 – 204 – 21,697
US dollar 426,639 67,867 5,221 1,849 501,576
1,365,485 381,831 46,424 73,673 1,867,413
1 The asset exposure of long CFDs and options after the netting of hedging exposures.
2 Other receivables include amounts held at futures clearing houses and brokers.
Currency exposure of financial liabilities
The Company finances its investment activities through its ordinary share capital, reserves and borrowings. The Company’s financial
liabilities comprise short positions on derivative instruments, US dollar denominated bank loan and other payables. The currency
profile of these financial liabilities is shown below:
Currency
Asset
exposure of
short
derivative
instruments*
£’000
US dollar
bank loan
£’000
Other
payables
£’000
2023
Total
£’000
Hong Kong dollar 13,842 – 13,658 27,500
UK sterling – – 1,823 1,823
US dollar 5,432 80,857 5,121 91,410
19,274 80,857 20,602 120,733
Currency
Asset
exposure of
short
derivative
instruments*
£’000
US dollar
bank loan
£’000
Other
payables
£’000
2022
Total
£’000
Hong Kong dollar 8,403 – 12,064 20,467
UK sterling – – 1,773 1,773
US dollar 9,842 76,043 1,551 87,436
18,245 76,043 15,388 109,676
* The asset exposure of short derivative instruments excluding hedging exposures.
Job No: 49563 Proof Event: 16 Black Line Level: 2 Park Communications Ltd Alpine Way London E6 6LA
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Notes to the Financial Statements continued
18 Financial Instruments continued
Other price risk
Other price risk arises mainly from uncertainty about future prices of financial instruments. It represents the potential loss the Company
might suffer through price movements in its investment positions. The Board meets quarterly to consider the asset allocation of the
portfolio and the risk associated with particular industry sectors within the parameters of the investment objective.
The Investment Manager is responsible for actively monitoring the portfolio selected in accordance with the overall asset allocation
parameters and seeks to ensure that individual stocks also meet an acceptable risk/reward profile. Other price risks arising from
derivative positions, mainly due to the underlying exposures, are assessed by the Investment Manager’s specialist derivative
instruments team.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulties in meeting obligations associated with financial liabilities. The
Company’s assets mainly comprise readily realisable securities and derivative instruments which can be sold easily to meet funding
commitments if necessary. Short-term flexibility is achieved by the use of a bank overdraft, if required. The Company has the facility to
borrow up to US$100,000,000 (2022: US$100,000,000) until 13 February 2024. The current borrowing is shown in Note 13 above.
Counterparty risk
Certain derivative instruments in which the Company may invest are not traded on an exchange but instead will be traded between
counterparties based on contractual relationships, under the terms outlined in the International Swaps and Derivatives Association’s
(“ISDA”) market standard derivative legal documentation. These are known as Over The Counter (“OTC”) trades. As a result, the
Company is subject to the risk that a counterparty may not perform its obligations under the related contract. In accordance with
the risk management process which the Investment Manager employs, this risk is minimised by only entering into transactions with
counterparties which are believed to have an adequate credit rating at the time the transaction is entered into, by ensuring that formal
legal agreements covering the terms of the contract are entered into in advance, and through adopting a counterparty risk framework
which measures, monitors and manages counterparty risk by the use of internal and external credit agency ratings and evaluates
derivative instrument credit risk exposure.
Collateral
For OTC and exchange traded derivative transactions, collateral is used to reduce the risk of both parties to the contract. Collateral is
managed on a daily basis for all relevant transactions. At 31 March 2023, £15,601,000 (2022: £21,395,000) was held by the brokers in
cash denominated in US dollars in a segregated collateral account, on behalf of the Company, to reduce the credit risk exposure of
the Company. This collateral comprised: Goldman Sachs International Ltd £5,814,000 (2022: £5,559,000), HSBC Bank plc £5,397,000
(2022: £nil), UBS AG £4,390,000 (2022: £nil) and J.P. Morgan Securities plc £nil (2022: £15,836,000). As at 31 March 2023, £34,813,000
(2022: £32,220,000), shown as amounts held at futures clearing houses and brokers on the Balance Sheet, was held by the Company,
in a segregated collateral account on behalf of the brokers, to reduce the credit risk exposure of the brokers. The collateral comprised:
UBS AG £24,694,000 (2022: £27,437,000) in cash, J.P. Morgan Securities plc £7,273,000 (2022: £nil) in cash, Morgan Stanley & Co.
International Ltd £2,846,000 (2022: £3,977,000) in cash and HSBC Bank plc £nil (2022: £806,000) in cash.
Offsetting
To mitigate counterparty risk for OTC derivative transactions, the ISDA legal documentation is in the form of a master agreement
between the Company and the broker. This allows enforceable netting arrangements in the event of a default or termination event.
Derivative instrument assets and liabilities that are subject to netting arrangements have not been offset in preparing the Balance
Sheet.
The Company’s derivative instrument financial assets and liabilities recognised in the Balance Sheet and amounts that could be
subject to netting in the event of a default or termination are shown below:
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
18 Financial Instruments continued
Financial assets
Gross
amount
£’000
Gross amount
of recognised
financial
liabilities
set off on
the balance
sheet
£’000
Net amount
of financial
assets
presented on
the balance
sheet
£’000
Related amounts not set off
on balance sheet
2023
Net
amount
£’000
Financial
instruments
£’000
Margin
account
received as
collateral
£’000
CFDs 19,792 – 19,792 (9,040) (9,704) 1,048
Options 2,521 – 2,521 (414) (2,107) –
22,313 – 22,313 (9,454) (11,811) 1,048
Financial liabilities
Gross
amount
£’000
Gross amount
of recognised
financial
assets
set off on
the balance
sheet
£’000
Net amount
of financial
liabilities
presented on
the balance
sheet
£’000
Related amounts not set off
on balance sheet
2023
Net
amount
£’000
Financial
instruments
£’000
Margin
account
pledged as
collateral
£’000
CFDs (13,621) – (13,621) 9,040 4,581 –
Futures (exchange traded) (6,857) – (6,857) – 6,857 –
Options (414) – (414) 414 – –
(20,892) – (20,892) 9,454 11,438 –
Financial assets
Gross
amount
£’000
Gross amount
of recognised
financial
liabilities
set off on
the balance
sheet
£’000
Net amount
of financial
assets
presented on
the balance
sheet
£’000
Related amounts not set off
on balance sheet
2022
Net
amount
£’000
Financial
instruments
£’000
Margin
account
received as
collateral
£’000
CFDs 20,951 – 20,951 (7,240) (13,711) –
Put options 3,043 – 3,043 – (3,043) –
23,994 – 23,994 (7,240) (16,754) –
Financial liabilities
Gross
amount
£’000
Gross amount
of recognised
financial
assets
set off on
the balance
sheet
£’000
Net amount
of financial
liabilities
presented on
the balance
sheet
£’000
Related amounts not set off
on balance sheet
2022
Net
amount
£’000
Financial
instruments
£’000
Margin
account
pledged as
collateral
£’000
CFDs (15,133) – (15,133) 7,240 4,950 (2,943)
Futures (exchange traded) (2,391) – (2,391) – 2,391 –
(17,524) – (17,524) 7,240 7,341 (2,943)
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Notes to the Financial Statements continued
18 Financial Instruments continued
Credit risk
Financial instruments may be adversely affected if any of the institutions with which money is deposited suffer insolvency or other
financial difficulties. All transactions are carried out with brokers that have been approved by the Investment Manager and are settled
on a delivery versus payment basis. Limits are set on the amount that may be due from any one broker and are kept under review
by the Investment Manager. Exposure to credit risk arises on outstanding security transactions and derivative instrument contracts and
cash at bank.
Derivative instrument risk
A Derivative Instrument Charter, including an appendix entitled Derivative Risk Measurement and Management, details the risks
and risk management processes used by the Investment Manager. This Charter was approved by the Board and allows the use of
derivative instruments for the following purposes:
• To gain exposure to equity markets, sectors or individual investments;
• To hedge equity market risk in the Company’s investments with the intention of mitigating losses in the events market falls;
• To enhance portfolio returns by writing call and put options; and
• To take short positions in equity markets, which would benefit from a fall in the relevant market price, where the Investment
Manager believes the investment is overvalued. These positions distinguish themselves from other short exposures held for
hedging purposes since they are expected to add risk to the portfolio.
The risk and investment performance of these instruments are managed by an experienced, specialist derivative team of the
Investment Manager using portfolio risk assessment tools for portfolio construction.
RISK SENSITIVITY ANALYSIS
Interest rate risk sensitivity analysis
Based on the financial instruments held and interest rates at the Balance Sheet date, an increase of 1.00% in interest rates throughout
the year, with all other variables held constant, would have decreased the profit after taxation for the year and decreased the
net assets of the Company by £3,797,000 (2022: increased the loss after taxation and decreased the net assets by £4,425,000).
A decrease of 1.00% in interest rates throughout the year would have had an equal but opposite effect.
Foreign currency risk sensitivity analysis
Based on the financial assets and liabilities held and currency exchange rates ruling at the Balance Sheet date, a strengthening of
the UK sterling exchange rate by 10% against other currencies, with all other variables held constant, would have decreased the profit
after taxation for the year and decreased the net assets of the Company (2022: increased the loss after taxation and decreased the
net assets) by the following amounts:
Currency
2023
£’000
2022
£’000
Chinese renminbi 17,467 26,118
Euro 948 998
Hong Kong dollar 82,028 87,228
Japanese yen 3,200 2,982
Singapore dollar – 1,311
Taiwan dollar 1,791 1,697
US dollar 42,223 37,649
147,657 157,983
Job No: 49563 Proof Event: 15 Black Line Level: 1 Park Communications Ltd Alpine Way London E6 6LA
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18 Financial Instruments continued
Based on the financial assets and liabilities held and the exchange rates ruling at the Balance Sheet date, a weakening of the UK
sterling exchange rate by 10% against other currencies would have increased the profit after taxation for the year and increased the
net assets of the Company (2022: decreased the loss after taxation and increased the net assets) by the following amounts:
Currency
2023
£’000
2022
£’000
Chinese renminbi 21,348 31,922
Euro 1,159 1,220
Hong Kong dollar 100,257 106,613
Japanese yen 3,911 3,644
Singapore dollar – 1,602
Taiwan dollar 2,189 2,074
US dollar 51,606 46,015
180,470 193,090
Other price risk sensitivity analysis
Changes in market prices affect the profit/(loss) after taxation for the year and the net assets of the Company. Details of how the
Board sets risk parameters and performance objectives are disclosed in the Strategic Report on pages 26 to 34.
An increase of 10% in the share prices of the listed investments held at the Balance Sheet date would have increased the profit after
taxation for the year and increased the net assets of the Company by £112,588,000 (2022: decreased the loss after taxation and
increased the net assets by £117,084,000). A decrease of 10% in share prices of the investments designated at fair value through profit
or loss would have had an equal but opposite effect.
An increase of 10% in the valuation of unlisted investments held at the Balance Sheet date would have increased the profit after
taxation for the year and increased the net assets of the Company by £19,288,000 (2022: decreased the loss after taxation and
increased the net assets by £19,465,000). A decrease of 10% in the valuation would have had an equal but opposite effect. There are
no inputs which would result in a material change in the value of the unlisted investments.
Derivative instruments exposure sensitivity analysis
The Company invests in derivative instruments to gain or reduce exposure to the equity market. An increase of 10% in the share prices
of the investments underlying the derivative instruments at the Balance Sheet date would have increased the profit after taxation for
the year and increased the net assets of the Company by £30,176,000 (2022: decreased the loss after taxation and increased the net
assets by £36,359,000). A decrease of 10% in share prices of the investments underlying the derivative instruments would have had an
equal but opposite effect.
Fair Value of Financial Assets and Liabilities
Financial assets and liabilities are stated in the Balance Sheet at values which are not materially different to their fair values. As
explained in Notes 2 (l) and (m) above, investments and derivative instruments are shown at fair value. In the case of cash at bank,
book value approximates to fair value due to the short maturity of the instruments. The exception is the US dollar denominated bank
loan, its fair value having been calculated by discounting future cash flows at current US dollar interest rates.
Fair value
£’000
2023
Book value
£’000
Fair value
£’000
2022
Book value
£’000
Fixed rate unsecured loan of US dollar 100,000,000 81,092 80,857 75,897 76,043
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.
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Notes to the Financial Statements continued
18 Financial Instruments continued
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 explained in Notes 2 (e), (l) and (m). The
table below sets out the Company’s fair value hierarchy:
Financial assets at fair value through profit or loss
Level 1
£’000
Level 2
£’000
Level 3
£’000
2023
Total
£’000
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)
Financial assets at fair value through profit or loss
Level 1
£’000
Level 2
£’000
Level 3
£’000
2022
Total
£’000
Investments 1,103,568 67,267 194,650 1,365,485
Derivative instrument assets 2,843 21,151 – 23,994
1,106,411 88,418 194,650 1,389,479
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities (2,391) (15,133) – (17,524)
Financial liabilities at fair value
Bank loan – (75,897) – (75,897)
Job No: 49563 Proof Event: 15 Black Line Level: 1 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
18 Financial Instruments continued
Level 3 investments (unlisted and delisted investments)
2023
£’000
2022
£’000
Pony.ai 48,272 41,134
DJI International 30,475 32,363
Chime Biologics 29,064 27,081
Venturous Holdings 26,015 27,831
ByteDance 24,035 25,773
Tuhu Car 14,024 14,296
Cutia Therapeutics 11,575 10,720
Beisen 9,418 10,656
Xiaoju Kuaizhi (Didi Chuxing) (moved to Level 1) – 4,796
Shanghai Yiguo – –
3 listed investments whose listings are currently suspended – –
192,878 194,650
Pony.ai
Pony.ai develops artificial intelligence and autonomous driving technology solutions for transportation and is an unlisted company. The
valuation at 31 March 2023 is based on the company’s financial performance, the macro-environment and benchmarking the position
to a range of comparable market data. As at 31 March 2023, its fair value was £48,272,000 (book cost: £24,892,000).
DJI International
DJI International is a manufacturer of drones and is an unlisted company. The valuation at 31 March 2023 is as follows: the D shares
valuation is based on the strike price of the put option in place and the B shares valuation is based on the company’s performance,
the macro-environment, product development and benchmarking the position to a range of comparable market data. As at 31 March
2023, its fair value was £30,475,000 (book cost: £22,416,000).
Chime Biologics
Chime Biologics is a China-based Contract Development and Manufacturing Organization (CDMO) that provides a solution supporting
customers from early-stage biopharmaceutical development through late-stage clinical and commercial manufacturing and is an
unlisted company. The valuation at 31 March 2023 is based on analysis of the company performance, the terms of the convertible
note and benchmarking the position to a range of comparable market data. As at 31 March 2023, its fair value was £29,064,000
(book cost: £25,227,000).
Venturous Holdings
Venturous Holdings is an investment company with a focus in smart city technology companies and is an unlisted company. The
valuation at 31 March 2023 is based on a review of the company’s portfolio including performance, the wider macro-environment
and benchmarking the position to a range of comparable market data with consideration given to the price of shares when
US$21.2 million of funding was raised in December 2022. As at 31 March 2023, its fair value was £26,015,000 (book cost:
£26,029,000).
ByteDance
ByteDance develops application software and is an unlisted company. The valuation at 31 March 2023 is based on the company’s
financial performance, the macro-environment and benchmarking the position to a range of comparable market data. Consideration
was also given to a recent transaction whereby G42 bought a US$100 million stake in the company. As at 31 March 2023, its fair
value was £24,035,000 (book cost: £7,361,000).
Tuhu Car
Tuhu Car is an online retailer of automobile spare parts and is an unlisted company. The valuation at 31 March 2023 is based on
the company’s performance, the macro-environment and benchmarking the position to a range of comparable market data. As at
31 March 2023, its fair value was £14,024,000 (book cost: £13,129,000).
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Notes to the Financial Statements continued
18 Financial Instruments continued
Cutia Therapeutics
Cutia Therapeutics is a specialty pharmaceutical company and is an unlisted company. The valuation at 31 March 2023 is based on
the company’s performance, the macro-environment and benchmarking the position to a range of comparable market data. As at
31 March 2023, its fair value was £11,575,000 (book cost: £10,266,000).
Beisen
Beisen is a Chinese talent management company that offers talent management and measurement solutions and is an unlisted
company. The valuation at 31 March 2023 is based on the company’s financial performance, the macro-environment and
benchmarking the position to a range of comparable market data. As at 31 March 2023, its fair value was £9,418,000 (book cost:
£11,758,000).
Since the year ended 31 March 2023, the company has listed on the Hong Kong Stock Exchange.
Shanghai Yiguo
Shanghai Yiguo operates an e-commerce platform, selling fruit and vegetables online to customers in China and is an unlisted
company. The company has commenced liquidation proceedings and following internal review, the valuation at £nil remained
appropriate as at 31 March 2023 (book cost: £11,806,000).
Companies whose listings are suspended
Three listed companies in the portfolio have had their listing suspended: DBA Telecommunication (Asia) Limited (suspended July
2014), China Animal Healthcare Limited (suspended March 2015) and BNN Technology Limited (suspended September 2017). As at
31 March 2023, each holding has been valued at £nil.
Significant holdings
Details of significant holdings are noted below in accordance with the disclosure requirements of paragraph 82 of the AIC SORP. The
Company is required to provide a list of all investments at the balance sheet date with a value greater than 5% of its portfolio and at
least the ten largest investments, including the value of each investment and for unlisted investments included in the list, additional
detail is required as shown below. This disclosure includes turnover, pre-tax profits and net assets attributable to investors, as reported
within the most recently audited financial statements of the investee companies.
Latest
Financial
Statements
Income
recognised
from the
holding in
the year
Turnover
£’000
Pre-tax
profit/(loss)
£’000
Net assets
attributable to
shareholders
£’000
Pony.ai n/a nil Information not publicly available
DJI International n/a nil Information not publicly available
Chime Biologics n/a nil Information not publicly available
Movements in level 3 investments during the year
2023
Level 3
£’000
2022
Level 3
£’000
Level 3 investments at the beginning of the year 194,650 166,464
Purchases at cost – 35,153
Transfers out of level 3 at cost* (9,971) (26,330)
Unrealised profits recognised in the Income Statement 8,199 19,363
Level 3 investments at the end of the year 192,878 194,650
* Financial instruments are transferred out of level 3 when they become listed.
Job No: 49563 Proof Event: 15 Black Line Level: 1 Park Communications Ltd Alpine Way London E6 6LA
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
19 Capital Resources and Gearing
The Company does not have any externally imposed capital requirements. The financial resources of the Company comprise its share
capital, reserves and gearing, which are disclosed on the Balance Sheet. The Company is managed in accordance with its investment
policy and in pursuit of its investment objective, both of which are detailed in the Strategic Report on pages 26 and 27. The principal
risks and their management are disclosed in the Strategic Report on pages 28 to 32 and in Note 18 above.
The Company’s gearing at the year end is set out below:
2023
Gross gearing Net gearing
Exposure
£’000 %
1
Exposure
£'000 %
1
Investments 1,318,764 98.5 1,318,764 98.5
Long CFDs 512,674 38.3 512,674 38.3
Call options 2,161 0.2 2,161 0.2
Put options (long exposure) 5,097 0.4 5,097 0.4
Total long exposures before hedges 1,838,696 137.4 1,838,696 137.4
less: short derivative instruments hedging the above (198,903) (14.9) (198,903) (14.9)
Total long exposures after the netting of hedges 1,639,793 122.5 1,639,793 122.5
Short CFDs 19,086 1.4 (19,086) (1.4)
Put options (short exposure) 188 0.0 (188) 0.0
Gross Asset Exposure/net market exposure* 1,659,067 123.9 1,620,519 121.1
Net Assets 1,338,421 1,338,421
Gearing
2
23.9% 21.1%
2022
Gross gearing Net gearing
Exposure
£’000 %
1
Exposure
£’000 %
1
Investments 1,365,485 97.5 1,365,485 97.5
Long CFDs 568,330 40.6 568,330 40.6
Call options 2,642 0.2 2,642 0.2
Total long exposures before hedges 1,936,457 138.3 1,936,457 138.3
less: short derivative instruments hedging the above (189,141) (13.5) (189,141) (13.5)
Total long exposures after the netting of hedges 1,747,316 124.8 1,747,316 124.8
Short CFDs 14,149 1.0 (14,149) (1.0)
Put options (short exposure) 4,096 0.3 (4,096) (0.3)
Gross Asset Exposure/net market exposure* 1,765,561 126.1 1,729,071 123.5
Net Assets 1,400,621 1,400,621
Gearing
2
26.1% 23.5%
* Defined in the Glossary of Terms on pages 98 and 99.
1 Exposure to the market expressed as a percentage of Net Assets.
2 Gearing is the amount by which Gross Asset Exposure/net market exposure exceeds Net Assets expressed as a percentage of Net Assets.
Job No: 49563 Proof Event: 16 Black Line Level: 2 Park Communications Ltd Alpine Way London E6 6LA
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20 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 the Directors’ Report on page 36. During the year, management fees of
£14,727,000 (2022: £19,643,000) were payable to the Manager. At the Balance Sheet date, management fees of £1,266,000 (2022:
£1,307,000) were accrued and included in other payables. Fidelity also provides the Company with marketing services. The total
amount payable for these services was £263,000 (2022: £264,000). At the Balance Sheet date, marketing services of £43,000 (2022:
£4,000) were accrued and included in other payables.
Disclosures of the Directors’ interests in the shares of the Company and fees and taxable expenses, relating to reasonable travel
expenses, payable to the Directors are given in the Directors’ Remuneration Report on pages 46 and 47. In addition to the fees
and taxable expenses disclosed in the Directors’ Remuneration Report, £22,000 (2022: £19,000) of employers’ National Insurance
contributions were paid by the Company. At the Balance Sheet date, Directors’ fees of £22,000 (2022: £15,000) were accrued and
included in other payables.
21 Post Balance Sheet Event
On 13 April 2023 following an initial public offering, Beisen listed on the Hong Kong Stock Exchange.
Notes to the Financial Statements continued
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
Alternative Performance Measures
Discount/Premium
The discount/premium is considered to be an Alternative Performance Measure. It is the difference between the NAV per Ordinary
Share of the Company and the share price expressed as a percentage of the NAV per Ordinary Share. Details of the Company’s
discount/premium are on the Financial Highlights page and are both defined in the Glossary of Terms on pages 98 and 99.
Gearing
Gearing is considered to be an Alternative Performance Measure. See Note 19 on page 89 for details of the Company’s gearing.
Net Asset Value (“NAV”) per Ordinary Share
The NAV per Ordinary Share is considered to be an Alternative Performance Measure. See the Balance Sheet on page 63 and Note
17 on page 78 for further details.
Ongoing charges
Ongoing charges are considered to be an Alternative Performance Measure. The ongoing charges ratio has been calculated in
accordance with guidance issued by the AIC as the total of management fees and other expenses expressed as a percentage of the
average net assets throughout the year.
2023
£’000
2022
£’000
Investment management fees (£’000) 12,049 15,937
Other expenses (£’000) 1,101 1,418
Ongoing charges (£’000) 13,150 17,355
Variable management fees (£’000) 2,678 3,706
Average net assets (£’000) 1,338,770 1,848,490
Ongoing charges ratio 0.98% 0.94%
Ongoing charges ratio including variable management fees 1.18% 1.14%
Revenue, Capital and Total Earnings per Share
Revenue, capital and total earnings per share are considered to be Alternative Performance Measures. See the Income Statement on
page 61 and Note 8 on page 73 for further details.
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Total Return Performance
Total return performance is considered to be an Alternative Performance Measure. NAV per share total return includes reinvestment of
the dividend in the NAV of the Company on the ex-dividend date. Share price total return includes the reinvestment of the net dividend
in the month that the share price goes ex-dividend.
The tables below provide information relating to the NAV per share and share prices of the Company, the impact of the dividend
reinvestments and the total returns for the years ended 31 March 2023 and 31 March 2022.
2023
Net asset
value per
share
Share
price
31 March 2022 272.52p 252.00p
31 March 2023 274.08p 247.50p
Change in the year +0.6% -1.8%
Impact of dividend reinvestment +2.0% +2.1%
Total return for the year +2.6% +0.3%
2022
Net asset
value per
share
Share
price
31 March 2021 423.50p 419.00p
31 March 2022 272.52p 252.00p
Change in the year -35.7% -39.9%
Impact of dividend reinvestment +0.8% +0.7%
Total return for the year -34.9% -39.2%
Alternative Performance Measures continued
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FINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS STRATEGY
Notice is hereby given that the Annual General Meeting
of Fidelity China Special Situations PLC will be held at 4
Cannon Street, London EC4M 5AB and virtually via the Lumi
AGM meeting platform on Thursday, 20 July 2023 at 11.00 am
for the following purposes:
1. To receive and adopt the Annual Report and Financial
Statements for the year ended 31 March 2023.
2. To declare that a final dividend for the year ended
31 March 2023 of 6.25 pence per ordinary share be paid
to shareholders who appear on the register as at close of
business on 16June 2023.
3. To re-elect Mr Mike Balfour as a Director.
4. To re-elect Mr Alastair Bruce as a Director.
5. To re-elect Mrs Vanessa Donegan as a Director.
6. To re-elect Ms Georgina Field as a Director.
7. To elect Mr Gordon Orr as a Director.
8. To elect Dr Edward Tse as a Director.
9. To approve the Directors’ Remuneration Report (excluding
the section headed The Remuneration Policy set out on
page45) for the year ended 31 March 2023.
10. To reappoint Ernst & Young LLP as Auditor of the Company to
hold office until the conclusion of the next general meeting at
which financial statements are laid before the Company.
11. To authorise the Directors to determine the Auditor’s
remuneration.
To consider and, if thought fit, to pass the following special
business resolutions of which Resolution 12 will be proposed
as an ordinary resolution and Resolutions 13 and 14 as special
resolutions.
Authority to Allot Shares and Disapply Pre-Emption Rights
Resolutions 12 and 13 will, if approved, authorise the Directors
to allot a limited number of ordinary shares (or sell any ordinary
shares which the Company elects to hold in Treasury) for cash
without first offering such shares to existing ordinary shareholders
pro-rata to their existing holdings. The limit set by the Board is
10% of the number of ordinary shares of the Company (including
Treasury shares) in issue on 7 June 2023. The Directors will only
issue new ordinary shares, or dispose of ordinary shares held
in Treasury, under this authority in order to take advantage of
opportunities in the market as they arise and only if they believe
it is advantageous to the Company’s shareholders to do so. Any
ordinary shares held in Treasury would be re-issued at no less
than net asset value (“NAV”) per ordinary share, or at a premium
to NAV per ordinary share. This would ensure that the net effect
of repurchasing and then re-issuing the ordinary shares would
enhance NAV per ordinary share.
12. THAT the Directors be and they are hereby generally and
unconditionally authorised in accordance with Section 551
of the Companies Act 2006 (the “Act”) to exercise all the
powers of the Company to allot shares in the Company or
to grant rights to subscribe for or to convert any securities
into shares in the Company (“relevant securities”) up to an
aggregate nominal amount of £568,815 (approximately 10%
of the aggregate nominal amount of the issued share capital
of the Company (including Treasury shares) as at 7 June
2023) and so that the Directors may impose any limits or
restrictions and make any arrangements which they consider
necessary or appropriate to deal with Treasury Shares,
fractional entitlements, record dates, legal, regulatory or
practical problems in, or under the laws of, any territory or
any other matter, such authority to expire at the conclusion of
the next Annual General Meeting (“AGM”) of the Company
or the date 15 months after the passing of this resolution,
whichever is the earlier, but so that this authority shall allow
the Company to make offers or agreements before the
expiry of this authority which would or might require relevant
securities to be allotted after such expiry as if the authority
conferred by this resolution had not expired. All previous
unexpired authorities are revoked, but without prejudice to
any allotment of shares or grant of rights already made,
offered or agreed to be made pursuant to such authorities.
13. THAT, subject to the passing of Resolution 12, as set out
above, the Directors be and they are hereby authorised,
pursuant to Sections 570-573 of the Act to allot equity
securities (as defined in Section 560 of the Act) for cash
pursuant to the authority given by the said Resolution 12
and/or to sell ordinary shares held by the Company as
Treasury shares for cash, as if Section 561 of the Act did not
apply to any such allotment or sale, provided that this power
shall be limited:
a) to the allotment of equity securities or sale of Treasury
shares up to an aggregate nominal amount of £568,815
(approximately 10% of the aggregate nominal amount
of the issued share capital of the Company (including
Treasury shares) as at 7 June 2023); and
b) by the condition that allotments of equity securities or
sales of Treasury shares may only be made pursuant
to this authority at a price of not less than the NAV per
ordinary share
and this power shall expire at the conclusion of the next
AGM of the Company or the date 15 months after the
passing of this resolution, whichever is the earlier, save
that this authority shall allow the Company to make offers
or agreements before the expiry of this authority, and the
Directors may allot equity securities in relation to such an
offer or agreement as if the authority conferred by this
resolution had not expired.
Authority to Repurchase Shares
Resolution 14 is a special resolution which, if approved, will
renew the Company’s authority to purchase up to 14.99% of the
number of ordinary shares in issue (excluding Treasury shares)
on 7 June 2023, either for immediate cancellation or for retention
as Treasury shares, at the determination of the Board. Once
shares are held in Treasury, the Directors may only dispose of
them in accordance with the relevant legislation by subsequently
selling the shares for cash or cancelling the shares. Purchases
of ordinary shares will be at the discretion of the Directors and
Notice of Meeting
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Notice of Meeting continued
within guidelines set by them from time to time in the light of
prevailing market conditions. Purchases will only be made in the
market at prices below the prevailing NAV per ordinary share,
thereby resulting in an increased NAV per ordinary share.
14. THAT the Company be and is hereby generally and
unconditionally authorised in accordance with Section 701
of the Companies Act 2006 (the “Act”) to make market
purchases (within the meaning of Section 693 of the Act) of
ordinary shares of 1 pence each (the “shares”) in the capital
of the Company provided that:
a) the maximum number of shares hereby authorised to be
purchased shall be 72,429,600;
b) the minimum price which may be paid for an ordinary
share is 1 pence;
c) the maximum price (excluding expenses) which may be
paid for each share is the higher of:
(i) 5% above the average of the middle market
quotations for the shares as derived from the
London Stock Exchange Official List for the five
business days preceding the date of purchase; and
(ii) the higher of the price of the last independent
trade and the highest current independent
purchase bid on the London Stock Exchange at the
time the purchase is carried out;
d) the authority hereby conferred shall expire at the
conclusion of the next AGM of the Company unless such
authority is renewed prior to such time; and
e) the Company may make a contract to purchase shares
under the authority hereby conferred prior to the expiry
of such authority which will or may be executed wholly
or partly after the expiration of such authority and
may make a purchase of shares pursuant to any such
contract.
By Order of the Board
FIL Investments International
Secretary
7 June 2023
Notes to the Notice of Meeting:
1. A member of the Company entitled to attend and vote at
the Annual General Meeting may appoint a proxy or proxies
to attend and to speak and vote instead of him. A member
may appoint more than one proxy in relation to the Annual
General Meeting provided that each proxy is appointed to
exercise the rights attached to a different share or shares
held by that member. A proxy need not be a member of the
Company. To appoint a proxy via the share portal at
www.signalshares.com, you will need to log in to your
share portal account or register if you have not previously
done so. To register you will need your Investor Code which
can be found on your Form of Proxy.
2. A Form of Proxy is enclosed and must be returned to the
Registrar at the address on the form to arrive not later than
11:00 on Tuesday, 18 July 2023. Completion and return
of the form of proxy will not prevent a shareholder from
subsequently attending the meeting and voting in person or
virtually if they so wish.
3. To be effective, the instrument appointing a proxy, and
any power of attorney or other authority under which it is
signed (or a copy of any such authority certified notarially
or in some other way approved by the Directors), must be
deposited with the Company’s Registrar, PXS 1, Link Group,
Central Square, 29 Wellington Street, Leeds LS1 4DL not less
than 48 hours before the time for holding the meeting or
adjourned meeting or, in the case of a poll taken more than
48 hours after it is demanded, not less than 24 hours before
the time appointed for the taking of the poll at which it is to
be used (in each case excluding non-business days).
4. In the case of joint holders, the vote of the senior who
tenders the vote shall be accepted to the exclusion of the
votes of the other joint holders and for this purpose, seniority
shall be determined by the order in which the names stand
in the Register of Members.
5. To appoint a proxy or to give or amend an instruction to a
previously appointed proxy via the CREST system, the CREST
message must be received by the issuer’s agent RA10
by 11:00 on Tuesday, 18 July 2023. For this purpose, the
time of receipt will be taken to be the time (as determined
by the timestamp applied to the message by the CREST
Applications Host) from which the issuer’s agent is able
to retrieve the message. After this time, any change of
instructions to a proxy appointed through CREST should
be communicated to the proxy by other means. CREST
Personal Members or other CREST sponsored members and
those CREST Members who have appointed voting service
provider(s) should contact their CREST sponsor or voting
service provider(s) for assistance with appointing proxies
via CREST. For further information on CREST procedures,
limitations and systems timings please refer to the CREST
Manual. We may treat as invalid a proxy appointment sent
by CREST in the circumstances set out in Regulation 35(5) of
the Uncertified Securities Regulations 2001. In any case your
proxy form must be received by the Company’s Registrar no
later than 11:00 on Tuesday, 18 July 2023.
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FINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS STRATEGY
6. Proxymity Voting – If you are an institutional investor, you
may also be able to appoint a proxy electronically via the
Proxymity platform, a process which has been agreed
by the Company and approved by the Registrar. For
further information regarding Proxymity, please go to
www.proxymity.io. Your proxy must be lodged by no
later than 11:00 on Tuesday, 18 July 2023 in order to be
considered valid. Before you can appoint a proxy via
this process, you will need to have agreed to Proxymity’s
associated terms and conditions. It is important that you
read these carefully as you will be bound by them and they
will govern the electronic appointment of your proxy.
7. Unless otherwise indicated on the Form of Proxy, CREST
voting or any other electronic voting channel instruction, the
proxy will vote as they think fit or, at their discretion, withhold
from voting.
8. All members are entitled to attend and vote at the AGM
and ask questions. The right to vote at the meeting will be
determined by reference to the Register of Members as at
close of business on Tuesday, 18 July 2023. Shareholders
are urged to vote using the Form of Proxy provided or
electronically where permitted by your nominee or platform.
9. The Company is pleased to be able to offer facilities for
shareholders to attend, ask questions and vote at the AGM
electronically in real time should they wish to do so. The
details are set out below.
In order to join the AGM electronically and ask questions
via the platform, shareholders will need to connect to the
following site https://web.lumiagm.com. Lumi is available
as a mobile web client, compatible with the latest browser
versions of Chrome, Firefox, Edge and Safari and can be
accessed using any web browser, on a PC or smartphone
device.
Once you have accessed https://web.lumiagm.com from
your web browser on a tablet or computer, you will be asked
to enter the Lumi Meeting ID which is 192-504-083. You
will then be prompted to enter your unique 11 digit Investor
Code (“IVC”) including any leading zeros and ‘PIN’. Your PIN
is the last 4 digits of your IVC. This will authenticate you as a
shareholder.
Your IVC can be found on your share certificate or
as detailed on your proxy form. Signal Shares users
(www.signalshares.com) will find this under ‘Manage your
account’ when logged in to the Signal Shares portal. You can
also obtain this by contacting Link, our Registrar, by calling
+44 (0) 371 277 1020*
Access to the AGM will be available from 30 minutes before
the meeting start time, although the voting functionality
will not be enabled until the Chairman of the meeting
declares the poll open. During the AGM, you must ensure
you are connected to the internet at all times in order to vote
when the Chairman commences polling on the Resolutions.
Therefore, it is your responsibility to ensure connectivity for
the duration of the AGM via your wi-fi. A user guide to the
Lumi platform is available on the Company’s pages of the
Manager’s website at: www.fidelity.co.uk/china.
If you wish to appoint a proxy other than the Chairman of
the meeting and for them to attend the virtual meeting on
your behalf, please submit your proxy appointment in the
usual way before contacting Link Group on +44 (0) 371 277
1020* in order to obtain their IVC and PIN. It is suggested
that you do this as soon as possible and at least 48 hours
(excluding non-business days) before the meeting.
If your shares are held within a nominee/platform and
you wish to attend the electronic meeting, you will need to
contact your nominee as soon as possible. Your nominee will
need to present a corporate letter of representation to Link
Group, the Registrar, as soon as possible and at least 72
hours (excluding non-business days) before the meeting, in
order that they can obtain for you your unique IVC and PIN
to enable you to attend the electronic meeting.
If you are unable to obtain a unique IVC and PIN
from your nominee or platform, we will also welcome
online participation as a guest. Once you have accessed
https://web.lumiagm.com from your web browser on a
tablet or computer, you will need to enter the Lumi
Meeting ID which is 192-504-083. You should then select the
‘Guest Access’ option before entering your name and who you
are representing, if applicable. This will allow you to view the
meeting and ask questions but you will not be able to vote.
* Lines are open from 09:00 to 17:30 Monday to Friday, excluding public
holidays in England and Wales. Calls are charged at the standard
geographic rate and will vary by provider. Calls outside the UK will be
charged at the applicable international rate.
10. Any person to whom this notice is sent who is a person
nominated under Section 146 of the Companies Act 2006 to
enjoy information rights (a “Nominated Person”) may, under
an agreement between him and the member by whom he
was nominated, have a right to be appointed (or to have
someone else appointed) as a proxy for the meeting. If a
Nominated Person has no such proxy appointment right
or does not wish to exercise it, he may, under any such
agreement, have a right to give instructions to the member
as to the exercise of voting rights. The statement of the rights
of members in relation to the appointment of proxies in
Note 1 above does not apply to Nominated Persons. The
right described in that paragraph can only be exercised by
members of the Company.
11. If the Chairman, as a result of any proxy appointments, is
given discretion as to how the votes which are the subject
of those proxies are cast and the voting rights in respect
of those discretionary proxies, when added to the interests
in the Company’s securities already held by the Chairman,
result in the Chairman holding such number of voting rights
that he has a notifiable obligation under the Disclosure and
Transparency Rules, the Chairman will make the necessary
notifications to the Company and the Financial Conduct
Authority. As a result, any member holding 3% or more of
the voting rights in the Company who grants the Chairman a
discretionary proxy in respect of some or all of those voting
rights and so would otherwise have a notification obligation
under the Disclosure and Transparency Rules, need not make
separate notification to the Company and the Financial
Conduct Authority.
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12. Pursuant to Regulation 41 of the Uncertificated Securities
Regulations 2001, the Company has specified that to
be entitled to attend and vote at the AGM (and for the
purpose of determining the number of votes they may cast),
members must be entered on the Register of Members by
close of business on Tuesday, 18 July 2023. If the meeting is
adjourned then, to be so entitled, members must be entered
on the Register of Members by close of business on the day
two days before the time fixed for the adjourned meeting,
or, if the Company gives notice of the adjourned meeting, at
any other time specified in that notice.
13. As at 7 June 2023 (the latest practicable date prior to the
publication of this document), the Company’s issued share
capital consisted of 568,815,754 ordinary shares carrying
one vote each. The number of shares held by the Company
in Treasury was 85,629,548. Therefore, the total number of
shares with voting rights in the Company was 483,186,206.
14. Any corporation which is a member can appoint one or
more corporate representatives who may exercise on its
behalf all of its powers as a member provided that they do
not do so in relation to the same shares.
15. Shareholders and any proxies or representatives they
appoint understand that by attending the meeting they
are expressly agreeing that they are willing to receive any
communications, including communications relating to the
Company’s securities, made at the meeting.
16. It is possible that, pursuant to requests made by members of
the Company under Section 527 of the Companies Act 2006,
the Company may be required to publish on its website a
statement setting out any matter relating to the audit of the
Company’s accounts (including the Auditor’s report and the
conduct of the audit) that is to be laid before the AGM or
any circumstance connected with an Auditor of the Company
ceasing to hold office since the previous meeting at which
the Annual Report and Financial Statements were laid. The
Company may not require the Shareholders requesting any
such website publication to pay its expenses in complying
with such requests. Where the Company is required to
place a statement on a website under Section 527 of the
Companies Act 2006, it must forward the statement to the
Company’s Auditor not later than the time when it makes
the statement available on the website. The business which
may be dealt with at the AGM includes any statement that
the Company has been required under Section 527 of the
Companies Act 2006 to publish on its website.
17. No Director has a service contract with the Company.
18. A copy of this notice and other information required by
Section 311A of the Companies Act 2006 is published on the
Company’s website at www.fidelity.co.uk/china.
Registered office: Beech Gate, Millfield Lane, Lower Kingswood,
Tadworth, Surrey KT20 6RP.
Notice of Meeting continued
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FINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS STRATEGY
AAF REPORT
A report prepared in accordance with the Audit and Assurance
Faculty guidance issued by the Institute of Chartered Accountants
in England and Wales.
ADR (AMERICAN DEPOSITARY RECEIPT)
A negotiable certificate issued by a US bank representing a
specified number of shares in a foreign stock that is traded on a
US Exchange.
AIC
The Association of Investment Companies (“AIC”). The Company
is a member of the AIC.
AIF
Alternative Investment Fund (“AIF”). The Company is an AIF.
AIFM
Alternative Investment Fund Manager (“AIFM”). The Board has
appointed FIL Investment Services (UK) Limited to act as the
Company’s AIFM (the Manager).
AIFMD
The Alternative Investment Fund Managers Directive (“AIFMD”) is
a European Union Directive implemented on 22 July 2014.
ALTERNATIVE PERFORMANCE MEASURES
The Company uses the following Alternative Performance
Measures which are all defined in this Glossary:
• Discount/Premium;
• Gearing;
• Net Asset Value (NAV) per Ordinary Share;
• Ongoing Charges;
• Revenue, Capital and Total Returns; and
• Total Return Performance (Net Asset Value Total Return or
Ordinary Share Price Total Return).
ASSET EXPOSURE
The value of an underlying security or instrument to which
the Company is exposed, whether through direct or indirect
investment (including the economic value of the exposure in the
underlying asset of derivatives).
AUDITOR
Ernst & Young LLP, or such other auditor, as the Company may
appoint from time to time.
BENCHMARK INDEX
MSCI China Index total return (in UK sterling terms) and is a
composite of China “A”, “B“, “H“, “Red Chip“ and “P Chip“ share
classes and foreign listings (e.g. ADRs).
BROKER
The Company’s Broker is Jefferies International Limited.
CAPITAL GAINS TAX (CGT)
The tax that may be payable if shares are sold at a profit.
CHINA “A” SHARES
Shares traded on the Chinese Stock Exchanges in Chinese
renminbi. Foreign investors were unable to participate in the
China “A” Shares market until the introduction of the QFII program
in 2002 which provided a legal framework for licensed QFIIs to
invest in China “A” Shares on the Chinese Stock exchanges and
certain other securities previously not eligible for investment by
foreign investors.
CHINA “B” SHARES
Shares traded on the Shenzhen Stock Exchange and Shanghai
Stock Exchange in Hong Kong dollars and US dollars,
respectively. The shares were originally intended to be available
only to foreign individuals and institutional investors, however,
since February 2001 they have also been available to domestic
individual investors who trade through legal foreign currency
accounts.
CHINA “H” SHARES
Shares in companies incorporated in the PRC and listed on the
Hong Kong Stock Exchange. They are available to non-Chinese
investors and are traded in Hong Kong dollars on the Hong Kong
Stock Exchange.
CHINESE RENMINBI
Currency of the PRC.
CHINESE STOCK EXCHANGES
The Shanghai Stock Exchange, the Shenzhen Stock Exchange and
any other stock exchange located within the PRC from time to
time.
ChiNEXT
ChiNext is a NASDAQ-style board of the Shenzhen Stock
Exchange for innovative and fast-growing companies, especially
high-tech companies. It started trading in October 2009. The
MSCI added stocks trading on Shenzhen’s ChiNext board to its
indexes for the first time in May 2019, allowing foreign investors
to tap the tech-focused board by investing in the indexes.
COLLATERAL
Asset provided as security for the unrealised gain or loss under a
contract for difference.
CONTRACT FOR DIFFERENCE (CFD)
A contract for difference is a derivative. It is a contract between
the Company and an investment house at the end of which the
parties exchange the difference between the opening price and
the closing price of an underlying asset of the specified financial
instrument. It does not involve the Company buying or selling the
underlying asset, only agreeing to receive or pay the movement
in its share price. A contract for difference allows the Company
to gain access to the movement in the share price by depositing
a small amount of cash known as collateral. The Company may
reason that the asset price will rise, by buying (“long” position)
Glossary to the Annual Report
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Glossary to the Annual Report continued
or fall, by selling (“short” position). If the Company holds long
positions, dividends are received and interest is paid. If the
Company holds short positions, dividends are paid and interest
is received.
CORPORATION TAX
The tax the Company may have to pay on its profits for a year. As
an investment trust, the Company is exempt from corporation tax
on its capital gains and does not pay tax on any UK dividends.
It can also offset expenses against any taxable income.
CUSTODIAN
An entity that holds (as intermediary) the Company’s assets,
arranges the settlement of transactions and administers income,
proxy voting and corporate actions. The Company’s Custodian is
JPMorgan Chase Bank.
DEBT
Bank borrowings and long contracts for difference.
DEPOSITARY
An entity that oversees the custody, cash arrangements and other
AIFM responsibilities of the Company. J.P.Morgan Europe Limited
act as the Company’s Depositary.
DERIVATIVES
Financial instruments (such as futures, options and contracts
for difference) whose value is derived from the value of an
underlying asset.
DISCOUNT
If the share price of the Company is lower than the net asset
value per ordinary share, the Company is said to be trading at a
discount. The discount is shown as a percentage of the net asset
value per ordinary share.
EARNINGS
The earnings generated in a given period from investments:
• Revenue Earnings – reflects the dividends and interest from
investments and other income, net of expenses, finance costs
and taxation;
• Capital Earnings – reflects the return on capital, excluding
any revenue earnings; and
• Total Earnings – reflects the aggregate of revenue and
capital earnings.
EQUITY LINKED NOTES (ELNS)
Debt instruments whose return on investment is linked to specific
equities or equity markets. The return on equity linked notes may
be determined by an equity index, a basket of equities, or a
single equity.
FAIR VALUE
The carrying value in the Balance Sheet which represents the
amount that would be received or paid on disposal of the
financial asset or liability.
FIL LIMITED
The ultimate parent company of the FIL Group of companies.
Incorporated in Bermuda.
FIDELITY INTERNATIONAL (FIDELITY)
FIL Limited and its subsidiary group of companies.
FORWARD CURRENCY CONTRACT
An agreement to buy or sell a currency, commodity or other asset
at a specified future date and at a predetermined price.
FUTURE
An agreement to buy or sell a fixed amount of an asset at a fixed
future date and a fixed price.
GROSS ASSET EXPOSURE
The value of the portfolio to which the Company is exposed,
whether through direct or indirect investment (including the
economic value of the exposure in the underlying asset of the
derivatives but excluding forward currency contracts).
GROSS GEARING
Gross Asset Exposure in excess of Net Assets.
HEDGING
A strategy aimed at minimising or eliminating the risk or loss
through adverse movements, normally involving taking a position
in a derivative such as a future or an option. For the purposes
of calculating Gross Asset Exposure, the exposure attributed to
the hedge positions will be deducted from the exposure of the
corresponding long positions. Short positions are added to long
positions in arriving at the Gross Asset Exposure.
INDEX LINKED SECURITIES
Debt instruments whose return on investment is linked to changes
in interest rates, stock exchanges, or other price indices.
INITIAL PUBLIC OFFERING (IPO)
An initial public offering (IPO) is the first sale of stock by a private
company to the public. IPOs are often issued by smaller, younger
companies seeking the capital to expand, but can also be done
by large privately owned companies looking to become publicly
traded.
INVESTMENT MANAGER
FIL Investment Management (Hong Kong) Limited.
JEFFRIES INTERNATIONAL LIMITED
The Company’s Broker.
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FINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS STRATEGY
KROLL
Kroll is an independent risk and financial solution provider. It
provides an objective and independent assessment of value
using sophisticated valuation methodologies. It constantly
monitors changing regulations and consistently provides input to
Accounting Standards Boards as they develop implementation
guidance and new financial reporting rules with valuation
implications.
LINK GROUP
The Company’s Registrar.
MANAGEMENT AGREEMENT
The agreement between FIL Investment Management (Hong
Kong) Limited and the Company regarding the management of
the Company’s investments.
MANAGER
FIL Investment Services (UK) Limited is the appointed Manager
under the Alternative Investment Fund Managers’ Directive
(“AIFMD”) and has delegated the investment management of the
Company to the Investment Manager.
MSCI CHINA INDEX
The Benchmark Index of the investment performance of the
Company, in UK sterling terms.
MSCI CHINA MID CAP INDEX
Designed to measure the performance of the mid cap segment
of the Chinese markets. With 333 constituents, the Index covers
approximately 15% of the free float-adjusted market capitalisation
in China.
MSCI CHINA SMALL CAP INDEX
Designed to measure the performance of the small cap segment
of the China market. With 221 constituents, the Index represents
approximately 14% of the free float-adjusted market capitalisation
in China.
NASDAQ
A global electronic marketplace for buying and selling securities,
as well as the benchmark index for US technology stocks.
NET ASSETS
The value of the Company’s assets minus its liabilities.
NET ASSETS PLUS BORROWINGS
Net Assets plus bank loans.
NET ASSET VALUE
Net asset value is sometimes described as “Shareholders’ Funds”
and is the total value of the Company’s assets less the total value
of its liabilities. For valuation purposes, it is common to express
the net asset value on a per ordinary share basis.
NET ASSET VALUE PER ORDINARY SHARE
The net asset value divided by the number of ordinary shares in
issue and not held in Treasury.
NET GEARING
Net Gearing is the total of all long exposures, less short
exposures and less exposures hedging the portfolio in excess of
Net Assets. See Note 19 on page 89.
NET MARKET EXPOSURE
Net Market Exposure is the total of all long exposures, less short
exposures and less exposures hedging the portfolio.
ONGOING CHARGES (EXCLUDING VARIABLE MANAGEMENT
FEE)
Total operating expenses (excluding finance costs and taxation)
incurred by the Company as a percentage of the average daily
net asset values for the reporting year.
OPTION
An option is a contract which gives the right but not the
obligation to buy or sell an underlying asset at an agreed price
on or before an agreed date. Options may be calls (buy) or puts
(sell) and are used to gain or reduce exposure to the underlying
asset on a conditional basis.
P CHIPS
Companies controlled by mainland China individuals, with the
establishment and origin of the company in mainland China.
PChips are incorporated outside of the PRC and traded on the
Stock Exchange of Hong Kong with a majority of revenues or
assets derived from mainland China.
PORTFOLIO
The Company’s portfolio which may be made up of equities,
index linked securities, equity linked notes and other debt
securities, cash deposits, money market instruments, foreign
currency exchange transactions and other interests including
derivatives (such as futures, options and contracts for difference).
PORTFOLIO MANAGER
Dale Nicholls is the appointed Portfolio Manager of the Company
and is responsible for managing the Company’s assets.
PRC
The People’s Republic of China.
PRE-EMPTION RIGHTS
Section 561 of the Companies Act 2006 provides that a company
offering a new issue of shares must first make an offer of these
shares, on the same or more favourable terms, in proportion
to the nominal value held to existing shareholders. At each
Annual General Meeting, the Board seeks shareholder approval
to disapply pre-emption rights provision, up to 10% of the
Company’s issued share capital.
PREMIUM
If the share price of the Company is higher than the net asset
value per ordinary share, the Company’s shares are said to be
trading at a premium. The premium is shown as a percentage of
the net asset value per ordinary share.
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Glossary to the Annual Report continued
PROSPECTUS
The Prospectus of the Company dated 7 January 2011.
QFII
The Investment Manager is a QFII (a Qualified Foreign
Institutional Investor) and as such has been granted a QFII
licence by the China Securities Regulatory Commission (“CSRC”)
which permits the Company to invest in China “A” Shares through
the Investment Manager and has received an allocation of quota
for onshore investment from the State Administration of Foreign
Exchange of the PRC (“SAFE”).
RED CHIPS
Companies incorporated outside China but which are based in
mainland China. Red Chips are listed on, and are required to
observe the filing and reporting requirements of the Hong Kong
Stock Exchange. Red Chips typically have a significant portion of
their business interests located in mainland China and many are
owned, either directly or indirectly, by organisations or enterprises
controlled by the Chinese state, provinces or municipalities.
REGISTRAR
An entity that manages the Company’s shareholder register. The
Company’s Registrar is Link Group.
RESERVES
• Share premium account represents the amount by
which the proceeds from the issue of ordinary shares
has exceeded the cost of those ordinary shares. It is not
distributable by way of dividend and it cannot be used to
fund share repurchases.
• Capital redemption reserve represents the nominal value
of ordinary shares repurchased and cancelled. It cannot be
used to fund share repurchases and is not distributable by
way of dividend.
• Other reserve is a distributable premium reserve created
on 21 April 2010 when High Court approval was given for
the share premium account to be cancelled. As a result,
£452,232,000 was transferred from the share premium
account to the other reserve. It can be used to fund share
repurchases.
• Capital reserve represents realised gains or losses on
investments and derivatives sold, unrealised increases and
decreases in the fair value of investments and derivatives
held and other income and costs recognised in the capital
column of the Income Statement. It can be used to fund
share repurchases and it is distributable by way of dividend.
• Revenue reserve represents the net revenue surpluses
recognised in the revenue column of the Income Statement
that have not been distributed as dividends to shareholders.
It is distributable by way of dividend.
SECRETARY
FIL Investments International.
SHAREHOLDERS’ FUNDS
Shareholders’ funds are also described as “net asset value” and
represent the total value of the Company’s assets less the total
value of its liabilities as shown in the balance sheet.
SHORT STOCK EXPOSURE
The position of the Company when it has sold a security or
derivative that it does not own but is now committed to eventually
purchase in order to satisfy its obligation to sell. It is a strategy
used to capitalise on an expected decline in the security’s or
derivative’s price.
SIZE OF COMPANY (MARKET CAP)
Large – above £5bn
Medium – between £1bn – £5bn
Small – below £1bn
TOTAL RETURN PERFORMANCE
The return on the share price or net asset value per ordinary
share taking into account the rise and fall of share prices and the
dividends paid to shareholders. Any dividends received by the
shareholder are assumed to have been reinvested in additional
shares (for share price total return) or the Company’s assets (for
net asset value total return).
TOTAL SHAREHOLDER RETURN (TSR)
Total shareholder return (TSR) is the total return of shares to
shareholders, or the capital gains, plus dividends paid.
TREASURY SHARES
Ordinary shares of the Company that have been repurchased
by the Company and not cancelled but held in Treasury. These
shares do not pay dividends, have no voting rights and are
excluded from the net asset value per ordinary share calculation.
UNLISTED COMPANIES
Companies not listed on a regulated stock exchange. They
are stated at best estimate of fair value, based on recognised
valuation techniques which may take account of recent arm’s
length transactions in the investments.
VARIABLE INTEREST ENTITY (VIE)
A variable interest entity (VIE) structure is designed to facilitate
foreign investment in sectors of the Chinese domestic economy
which prohibit foreign ownership. The essential purpose of the
VIE structure is to convey the economic benefits and operational
control of ownership without direct equity ownership itself. As the
controlling interest is not based on having the majority of voting
rights, there may be a risk to an investor of being unable to
enforce their ownership rights in certain circumstances.
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FINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS STRATEGY
VARIABLE MANAGEMENT FEE (VMF)
The Company has a Variable Management Fee (VMF)
structure. The base fee is on a tiered basis of 0.90% on the first
£1.5billion of Net Assets, reducing to 0.70% on Net Assets over
£1.5 billion per annum plus a +/- 0.20% variation fee based on
performance relative to the Company’s Benchmark Index (the
MSCI China Index). The maximum fee that the Company could
pay if it outperforms is 1.10% on Net Assets up to £1.5 billion
and reducing to 0.90% on Net Assets over £1.5 billion, but if the
Company underperforms against the Benchmark Index, then the
overall fee could have been as low as 0.70% on Net Assets up to
£1.5 billion, reducing to 0.50% on Net Assets over 1.5 billion.
WARRANTS
A derivative security that gives the Company the right to purchase
securities (usually equity) from the issuer at a specific price and
within a certain time frame.
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Investing in Fidelity China Special Situations PLC
Fidelity China Special Situations PLC is a company listed on the
London Stock Exchange and you can buy its shares through a
platform, stockbroker, share shop or bank. Fidelity also offers
a range of options, so that you can invest in a way that is best
for you. Details of how to invest and the latest Key Information
Document can be found on the Company’s pages of the
Manager’s website at www.fidelity.co.uk/china.
CONTACT INFORMATION
Shareholders and Fidelity’s Platform Investors should contact the
appropriate administrator using the contact details given below
and in the next column. Links to the websites of major platforms
can be found online at www.fidelityinvestmenttrusts.com.
Shareholders on the main share register
Contact Link Group, Registrar to Fidelity China Special Situations
PLC, 10th Floor, Central Square, 29 Wellington Street, Leeds
LS14DL.
Email: shareholderenquiries@linkgroup.co.uk
Telephone: 0371 664 0300 (calls are charged at the standard
geographic rate and will vary by provider. Calls outside the
United Kingdom will be charged at the applicable international
rate. Lines are open 9:00 – 17:30, Monday to Friday excluding
public holidays in England and Wales).
Details of individual shareholdings and other information can
also be obtained online from the Registrar’s Share Portal at
www.signalshares.com. Shareholders are able to manage their
shareholding online by registering for the Share Portal, a free
and secure online access service. Facilities include:
Account Enquiry – Shareholders can access their personal
shareholding, including share transaction history, dividend
payment history and obtain an up-to-date shareholding valuation.
Amendment of Standing Data – Shareholders can change
their registered postal address and add, change or delete
dividend mandate instructions. Shareholders can also download
forms such as change of address, stock transfer and dividend
mandates as well as buy and sell shares in the Company.
Should you have any queries in respect of the Link Share Portal,
contact the helpline on 0371 664 0391 (calls are charged at
the standard geographic rate and will vary by provider. Calls
outside the United Kingdom will be charged at the applicable
international rate. Lines are open 9:00 – 17:30, Monday to Friday
excluding public holidays in England and Wales).
Fidelity Platform Investors
Contact Fidelity, using the freephone numbers given below, or by
writing to: UK Customer Service, Fidelity, PO Box 391, Tadworth,
Surrey KT20 9FU.
Website: www.fidelity.co.uk
Private investors: call free on 0800 41 41 10, 9:00 – 18:00,
Monday to Saturday.
Financial advisers: call free on 0800 41 41 81, 8:00 – 18:00,
Monday to Friday.
General Enquiries
General enquiries should be made to the Secretary, at the
Company’s registered office: FIL Investments International,
Investment Trusts, Beech Gate, Millfield Lane, Lower Kingswood,
Tadworth, Surrey KT20 6RP.
Telephone: 01737 836347
Email: investmenttrusts@fil.com
Website: www.fidelityinvestmenttrusts.com
If you hold Fidelity China Special Situations PLC shares in an
account provided by Fidelity International, you will receive a
report every six months detailing all of your transactions and the
value of your shares.
ShareGift
You may donate your shares to charity free of charge through
ShareGift. Further details are available at www.sharegift.org.uk.
Shareholder Information
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FINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS STRATEGY
Managers and Advisors
Alternative Investment Fund Manager
(AIFM/the Manager)
FIL Investment Services (UK) Limited
Beech Gate
Millfield Lane
Lower Kingswood
Tadworth
Surrey
KT20 6RP
Investment Manager
FIL Investment Management
(Hong Kong) Limited
Level 21
Two Pacific Place
88 Queensway
Admiralty
Hong Kong
Secretary and Registered Office
FIL Investments International
Beech Gate
Millfield Lane
Lower Kingswood
Tadworth
Surrey
KT20 6RP
Email: investmenttrusts@fil.com
Banker and Custodian
JPMorgan Chase Bank (London Branch)
125 London Wall
London
EC2Y 5AJ
Depositary
J.P.Morgan Europe Limited
25 Bank Street
London
E14 5JP
Financial Adviser and Stockbroker
Jefferies International Limited
100 Bishopsgate
London
EC2N 4JL
Independent Auditor
Ernst & Young LLP
25 Churchill Place
London
E14 5EY
Lawyer
Simmons & Simmons LLP
1 Ropemaker Street
London
EC2Y 9SS
Registrar
Link Group
10th Floor
29 Wellington Street
Leeds
LS1 4DL
Company Information
The Company’s initial public offering was on 19 April 2010. The
original subscription price for each share was £1. The Company
also issued “C” shares of £1 each on 1 March 2011 and these
were subsequently converted into new ordinary shares.
The Company is a member of the Association of Investment
Companies (“AIC”) from whom general information on investment
trusts can be obtained by telephoning 020 7282 5555 (email
address: enquiries@theaic.co.uk).
Price Information
The share price of the Company is published daily in The
Financial Times under the heading “Investment Companies”.
It is also published in the Times and The Daily Telegraph.
Price and performance information is also available at
www.fidelity.co.uk/china
Investors can also obtain current share price information by
telephoning Fidelity for free on 0800 41 41 10 or FT Cityline on
0905 817 1690 (voice activated service) (calls charged at 60p
per minute on a per second basis from a BT landline. Charges
from other telephone networks may vary). The Reuters Code
for Fidelity China Special Situations PLC is FCSS, the SEDOL is
B62Z3C7 and the ISIN is GB00B62Z3C74.
Net Asset Value (“NAV”) Information
The Company’s NAV is calculated and released to the London
Stock Exchange on a daily basis.
Job No: 49563 Proof Event: 16 Black Line Level: 2 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Data Protection
General Data Protection Regulation (“GDPR”)
What personal data is collected and how it is used
The Company is an investment trust which is a public limited company and has certain regulatory obligations such as the
requirement to send documents to its shareholders, for example, the Annual Report and other documents that relate to meetings
of the Company. The Company will therefore collect shareholders’ personal data such as names, addresses and identification
numbers or investor codes and will use this personal data to fulfil its statutory obligations.
Any personal data collected will be kept securely on computer systems and in some circumstances on paper. Personal information
is kept secure in line with Fidelity’s Information Security policies and standards. If you are unhappy with how we have used your
personal data, you can complain by contacting the UK Data Protection Officer at Fidelity International, Beech Gate, Millfield Lane,
Lower Kingswood, Tadworth, Surrey KT20 6RP.
Sharing personal data
In order to assist the Company in meeting its statutory requirements, the Company delegates certain duties around the processing
of this data to its third party service providers, such as the Company’s Registrar and Printers. The Company has appointed
Fidelity to undertake marketing activities for the Company and their privacy statement can be found on the Company’s website at
https://investment-trusts.fidelity.co.uk/security-policy/
The Company’s agreements with the third party service providers have been updated to be compliant with GDPR requirements.
The Company confirms to its shareholders that their data will not be shared with any third party for any other purpose, such as for
marketing purposes. In some circumstances, it may be necessary to transfer shareholders’ personal data across national borders
to Fidelity Group entities operating in the European Economic Area (“EEA”). Where this does occur, the European standard of
protections will be applied to the personal data that is processed. Where personal data is transferred within the Fidelity Group, but
outside of the EEA, that data will subsequently receive the same degree of protection as it would in the EEA.
Retention Period
Personal data will be kept for as long as is necessary for these purposes and no longer than legally permitted to do so.
Requesting access, making changes to your personal data and other important information
Shareholders can access the information that the Company holds about them or ask for it to be corrected or deleted by contacting
Fidelity’s UK Data Protection Officer, Fidelity International, Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP.
Job No: 49563 Proof Event: 15 Black Line Level: 1 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Fidelity China Special Situations PLC
FINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS STRATEGY
In compliance with the Alternative Investment Fund Managers’ Directive (“AIFMD”), the Board has appointed FIL Investment
Services (UK) Limited (“FISL”) as the Company’s Alternative Investment Fund Manager (“AIFM”). FISL has delegated the investment
management to FIL Investment Management (Hong Kong) Limited (“FIMHK”) and the company secretarial function to FIL Investments
International. Details of the current Management Agreement can be found in the Directors’ Report on page 36.
The table below discloses information required by the Alternative Investment Fund Managers’ Regulations 2013.
Function AIFM Role and Responsibility AIFMD Disclosure
Investment
management
The AIFM provides portfolio management of
assets and investment advice in relation to the
assets of the Company. It has delegated this
function to FIL Investment Management (Hong
Kong) Limited.
The Board remains responsible for setting the
investment strategy, investment policy and
investment guidelines and the AIFM operates
within these guidelines.
Details of the Company’s investment objective,
strategy and investment policy, including limits, are
on pages 26 and 27.
Risk
management
The AIFM has a responsibility for risk
management for the Company which is in
addition to the Board’s corporate governance
responsibility for risk management.
The Company has a Risk Management
Process Document which demonstrates that
risk management is separated functionally
and hierarchically from operating units and
demonstrates independence safeguards. The
Manager maintains adequate risk management
systems in order to identify, measure and monitor
all risks at least annually under AIFMD. The
Manager is responsible for the implementation
of various risk activities such as risk systems, risk
profile, risk limits and testing.
The Board, as part of UK corporate governance,
remains responsible for the identification of
significant risks and for the ongoing review of the
Company’s risk management and internal control
processes.
The AIFM has an ongoing process for identifying,
evaluating and managing the principal risks faced
by the Company and this is regularly reviewed
by the Board. The Board remains responsible for
the Company’s system of risk management and
internal controls and for reviewing its effectiveness.
Further details can be found in the Strategic Report
on pages 28 to 32 and in Note 18 to the Financial
Statements on pages 79 to 88.
Valuation of
illiquid assets
The AIFMD requires the disclosure of the
percentage of the Alternative Investment Fund’s
assets which are subject to special arrangements
arising from their illiquid nature and any new
arrangements for managing the liquidity of the
Company.
As at the date of this report, none of the Company’s
assets were subject to special arrangements arising
from their illiquid nature.
Alternative Investment Fund Manager’s
Disclosure
Job No: 49563 Proof Event: 16 Black Line Level: 2 Park Communications Ltd Alpine Way London E6 6LA
Customer: Fidelity Project Title: FCSS Annual Report 2023 T: 0207 055 6500 F: 020 7055 6600
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Function AIFM Role and Responsibility AIFMD Disclosure
Leverage
The Company uses leverage to increase its
exposure primarily to the stock markets of China
and currently holds long derivatives to achieve
this. The AIFM has set maximum levels of leverage
that are reasonable. It has implemented systems
to calculate and monitor compliance against
these limits and has ensured that the limits have
been complied with at all times.
There are two methods of calculating leverage
– the Gross Method which does not reduce
exposure for hedging; and the Commitment
Method which does reduce exposure for hedging.
The maximum leverage limits are 1.80 for the Gross
Method of calculating leverage and 1.50 for the
Commitment Method.
At 31 March 2023, actual leverage was 1.61 for the
Gross Method and 1.48 for the Commitment Method.
Liquidity
management
The AIFM, in consultation with the Board,
maintains a liquidity management policy which is
considered at least annually.
No new arrangements for managing the liquidity of
the Company have been made. Further details can
be found in Note 18 on page 82.
Remuneration
of the AIFM
The AIFM operates under the terms of Fidelity’s
Global Remuneration Policy Statement. This
ensures that the AIFM complies with the
requirements of the FCA’s Remuneration Code
(SYSC19A); the AIFM Remuneration Code
(SYSC19B) and the BIPRU Remuneration Code
(SYSC19C).
Details of Fidelity International’s Global Remuneration
Policy can be found at www.fidelityinternational.
com/global/remuneration/default.page
EU Securities Financing Transactions Regulation (“SFTR”)
The following disclosures relate to contracts for difference (“CFDs”) held by the Company which may be considered Total Return
Swaps under the SFTR, which came into force on 12 January 2016.
As at 31 March 2023, all CFDs were contracted bilaterally with open maturities:
Broker
Fair Value
£’000
Percentage
of
Net Assets
Collateral
held by the
broker
£’000
Collateral
held by the
Company
£’000
Goldman Sachs International (UK) 770 0.06% 5,814 –
HSBC Bank plc (UK) 6,445 0.48% 5,397 –
J.P. Morgan Securities plc (UK) (1,859) (0.14%) – 7,273
Morgan Stanley & Co International (UK) (2,722) (0.20%) – 2,846
UBS AG (UK) 3,537 0.26% 4,390 –
Collateral held by the broker was denominated in US dollars and held in a segregated account on behalf of the Company with a
maturity of one day. The total return for the year ended 31 March 2023 from CFDs was a gain of £5,659,000.
Alternative Investment Fund Manager’s
Disclosure continued
To find out more about Fidelity China Special Situations PLC, visit our new website www.fidelity.co.uk/china where you can read
articles and watch videos on the Company.
Fidelity, Fidelity International, the Fidelity International logo and symbol are trademarks of FIL Limited
Printed on FSC® certified paper.
100% of the inks used are vegetable oil based 95% of press chemicals are recycled for further
use and on average 99% of any waste associated with this production will be recycled.
The FSC® logo identifies products which contain wood from well-managed forests
certified in accordance with the rules of the Forest Stewardship Council®.
This document is printed on Cocoon Silk; a paper made using 50% recycled
fibre from genuine waste paper and 50% virgin fibre.
The unavoidable carbon emissions generated during the manufacture and delivery of
this document, have been reduced to net zero through a verified, carbon offsetting project.
www.fidelityinvestmenttrusts.com
Fidelity China Special Situations PLC
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Annual Report 2023