FIDELITY
CHINA SPECIAL
SITUATIONS PLC
Annual Report for the year ended 31 March 2024
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
Fidelity China Special Situations PLC
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Annual Report 2024
2020
2021
2022
2023
2024
+81.9%
-34.9%
-16.3%
-5.9%
Net Asset Value per Share total return
1,2
Year ended 31 March
+2.6%
2020
2021
2022
2023
2024
Share Price total return
1,2
-39.2%
-16.4%
-6.5%
+97.2%
Y
ear 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
20242023202220212020
Dividend per Share
4.68p
Y
ear ended 31 March
4.25p
5.50p
6.25p
6.40p
2020
2021
2022
2023
2024
-29.3%
-18.8%
-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 pages 92 and 93.
3 The Company’s Benchmark Index.
As at 31 March 2024
Equity Shareholders’ Funds
£1,176.0m
Market Capitalisation
£1,056.6m
Capital Structure
Ordinary Shares of 1 pence held outside of Treasury
525,681,434
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 decreased by 16.3% and the Share Price
decreased by 16.4%, whilst the Benchmark Index decreased by 18.8% (all performance data on a total return
basis).
2024 2023
Assets as at 31 March
Gross Asset Exposure £1,450.9m £1,659.1m
Net Assets £1,176.0m £1,338.4m
Gross Gearing
1,2
23.4% 23.9%
Net Gearing
1,2
20.8% 21.1%
Net Asset Value (“NAV”) per Share
2
223.71p 274.08p
Share Price and Discount data as at 31 March
Share Price at year end 201.00p 247.50p
Share Price: year high 248.50p 302.00p
Share Price: year low 182.60p 178.60p
Discount at year end
2
10.2% 9.7%
Discount: year high
2
12.9% 15.2%
Discount: year low
2
6.2% 0.2%
Earnings for the year ended 31 March – see page 61
Revenue Earnings per Share
2,3
5.78p 7.05p
Capital Loss per Share
2,3
(50.18p) (2.42p)
Total (Loss)/Earnings per Share
2,3
(44.40p) 4.63p
Ongoing Charges Ratio for the year to 31 March
2,4
0.98% 0.98%
Variable Management Fee 0.15% 0.20%
Ongoing Charges Ratio including Variable Management Fee for the year to 31 March
2,4
1.13% 1.18%
1 See Note 19 on page 90. Defined in the Glossary to the Annual Report on pages 99 and 100.
2 Alternative Performance Measures.
3 Based on the weighted average number of shares held outside of Treasury during the year.
4 Ongoing charges ratio (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). It is estimated that the ongoing charges ratio for the year ending 31 March 2025 will be 0.88%, the
significant reduction reflecting the management fees waived by the Manager in lieu of its contribution to the costs of the Company’s transaction with abrdn China
Investment Company Limited (“ACIC”). The transaction with ACIC is covered in more detail on pages 2 and 65.
Standardised Performance Total Return
1
(%)
10 years ended 31 March 20245 years ended 31 March 20243 years ended 31 March 20241 year ended 31 March 2024
-16.3
-44.1
-49.0
-4.3
+123.6
+125.7
+49.3
-5.9
-25.6
-41.8
-16.4
-18.8
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.
01
Annual Report 2024
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
Contents
Strategy
Chairman’s Statement 02
Portfolio Manager’s Review 07
Unlisted Investments
12
Spotlight on the Top 10 Holdings 14
Forty Largest Holdings 16
Distribution of the Portfolio 19
Attribution Analysis 20
Ten Year Record 21
Strategic Report
22
ESG in the Investment Process at Fidelity International 33
Governance
Board of Directors 36
Directors’ Report 37
Corporate Governance Statement 41
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 92
Information for Shareholders
Notice of Meeting 94
Glossary to the Annual Report 98
Shareholder Information 103
Data Protection 105
Alternative Investment Fund Manager’s Disclosure 106
Chairman’s Statement
Read more on pages 02 to 06
Ten Year Record
Read more on page 21
Portfolio Manager’s Review
Read more on pages 07 to 11
Unlisted Investments
Read more on pages 12 and 13
Spotlight on the Top 10 Holdings
Read more on pages 14 and 15
02
Fidelity China Special Situations PLC
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Annual Report 2024
Chairman’s Statement
With global uncertainties and geopolitical concerns remaining
heightened, as well as a softer-than-expected economy recovery
in the wake of COVID restrictions being lifted, investors in China
have once more faced a challenging year. Overall returns were
negative during the year with the small consolation that your
Company did manage again to outperform its Benchmark Index,
the MSCI China Index (in UK sterling terms).
In the reporting year to 31 March 2024, the net asset value
(“NAV”) per share total return of your Company was -16.3%, while
the Benchmark Index returned -18.8%. The share price total return
was -16.4%. After widening during the previous financial year, the
share price discount to NAV was relatively stable beginning the
period at 9.7% and ending it at 10.2%. Noticeably Chinese
companies – even in the state-owned sector – are becoming
increasingly focused on rewarding minority shareholders,
including through the payment of dividends. While we have
always expected your Company to generate the majority of its
returns from capital, dividends from underlying companies also
make a meaningful contribution to the total return. This has
helped us to grow the dividend paid each year since launch.
The current Chinese Year of the Dragon marks Dale Nicholls’ 10th
anniversary as your Portfolio Manager. While there have
undoubtedly been ups and downs for investors during this time
(particularly during 2021 and 2022), Dale has built an impressive
record, with the NAV outperforming the Benchmark Index over one,
five and 10 years. Over his tenure, he has generated a total
shareholder return of 125.7% (NAV total return of 123.0%), some 75
percentage points ahead of the Benchmark Index return of 49.3%.
A notable event during the year was the transaction by your
Company with the abrdn China Investment Company Limited
(“ACIC”). The transaction was concluded on 14 March 2024 and
provides benefits to both existing shareholders of Fidelity China
Special Situations PLC (“FCSS”) and former holders of ACIC.
Upon conclusion of the transaction (which was supported by
99.9% of ACIC shareholders voting at their shareholders meeting)
the Company’s assets grew by £126m, which brings greater
liquidity to our shares and a larger asset base (now well over £1
billion) over which to spread the Company’s fixed costs, helping
to otherwise reduce the level of ongoing charges for all investors.
As part of the transaction, the Manager (FIL Investment Services
(UK) Limited) contributed to the transaction costs, waiving eight
months of management fees on the assets transferred from ACIC,
thereby offsetting direct expenses to the Company. It also
reduced the fee level at the higher tier of assets (above £1.5
billion) from 0.70% to 0.65%. This is expected to lower the
ongoing costs of the Company further as it grows over the
longer-term. We welcome the former ACIC shareholders and look
forward to their continued support being rewarded. The very
short-term experience since the transaction has been
encouraging for both new and existing shareholders with the
share price rising from 197.40 pence on 14 March 2024 to 222.00
pence per share on 31 May 2024, an increase of 12.5%.
The main driving force of the Chinese economy in the past 10
years has been investment – whether at the government,
business or household level – leading to improvements in
infrastructure, strong export growth and a property boom. In the
current environment, export growth has weakened as a result of
I have pleasure in presenting the
Annual Report of Fidelity China
Special Situations PLC for the
year ended 31 March 2024.
Mike Balfour, Chairman
£1,176.0m
(As at 31 March 2024)
Equity Shareholders’ Funds
-16.3%
(Year ended 31 March 2024)
Net Asset Value per Share total return
-16.4%
(Year ended 31 March 2024)
Share Price total return
-18.8%
(Year ended 31 March 2024)
Benchmark Index total return
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Annual Report 2024
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
global supply chain diversification away from China as well as
US trade reluctance (expressed via tariffs and sanctions), and
infrastructure is now developed to the point where the marginal
impact of additional investment is reduced. Concerns in the
property market – particularly in the new-build sector, which has
a stronger contribution to overall growth – have been well
documented in recent years. With these three stalwarts of
economic growth curtailed a 5% GDP growth target – would be a
good outcome that underscores China’s resilience. While a US
plan to further restrict sales of advanced semiconductors to
China adds an element of uncertainty, particularly in some areas
of technology and automation, it is leading to a wave of Chinese
invention and investment to compensate. So far, China has
surprised in its ability to keep innovating in microchips in
particular. It is also leading the world in electric vehicles, green
energy technologies and battery technology and is making
strong progress with AI. All these are becoming increasingly
important industries that China could seek to lead globally in the
future.
Meanwhile, the Chinese stock market remains one of the most
lowly-valued large, liquid markets in the world. Market-level
performance has been disappointing for three years now, and it
is always difficult to know when share prices will start to reflect
intrinsic value rather than being marked down on poor sentiment.
However, the companies in the portfolio continue to show strong
earnings growth, and we remain confident that the market will
come to appreciate the value on offer in the future; it may
already have started to happen. As ever, having a large research
team on the ground in China is fundamental to success in
seeking out the best opportunities, particularly among smaller
and medium-sized companies, where the relatively higher growth
potential has yet to be reflected in share prices, and investor
awareness is low.
Being structured as a closed-ended investment company means
that your Company does not have the liquidity constraints of an
open-ended fund, and it can use this flexibility to invest in less
liquid assets with a longer-term view of returns. Up to 15% of Net
Assets plus Borrowings may be invested in unquoted companies
(those not yet listed on a stock exchange), allowing the Manager
to take advantage of the faster growth trajectory of earlier-stage
businesses before they are potentially listed on the public
markets. During the period under review, the number of unquoted
companies held in the portfolio reduced from nine to six,
following the IPOs of Beisen, Cutia Therapeutics and Tuhu Car in
April, June and September 2023 respectively. Unlisted holdings
now make up 12.8% of Net Assets, compared with 13.6% on
31 March 2023. 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. However, with valuations in the listed equity market
currently at historically low levels, Dale has said that any potential
new private investments would have to be very attractive in order
to win a place in the portfolio.
We have confidence in the strength of the detailed process for
the valuation of our unlisted holdings. They 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 follow the companies and the
sectors in which they operate. The valuation process is set out in
more detail on page12 of this report. The Board receives regular
updates from the FVC, with Alastair Bruce, our 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 its perception of emerging risks. Dale’s focus on
consumption and the domestic economy mitigates much of the
geopolitical risk that has increased in the last few years. In
particular, a greater focus on the opportunities in the domestic
market generated by industrial and technology companies is
helping Chinese businesses continue to innovate and grow, even
in a period of continued strain in the relationship between China
and the US.
ESG
While your Company is not a ‘green’ or ‘ethical’ fund, ESG factors
remain an important part of the work of the Portfolio Manager,
as continuing deterioration in the climate and other social and
governance concerns present a potential investment risk to your
portfolio. 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, more
needs to be done. Fidelity has a sustainable investing approach,
including engagement and voting principles and guidelines, as
well as having developed its own proprietary forward-looking
ESG ratings. The ratings of the companies in the portfolio are
ahead of the broader market and continue to improve. Details of
ESG engagements by the management team in the year under
review are included in the Portfolio Manager’s Review on the
following pages, and an explanation of how Fidelity has
embedded ESG factors in its investment decision-making can be
found on pages 33 to 35.
Gearing
During the year, the Company repaid its US$100m loan from The
Bank of Nova Scotia and replaced it with additional gearing by
way of contracts for difference (“CFDs”). Previously CFDs
accounted for around two-thirds of gearing and for the time
being this has risen to 100% to control costs. We continue to
believe that the judicious use of gearing (another benefit of the
investment trust structure) can enhance long-term capital and
income returns, although being more than 100% invested also
means that the NAV and share price may be more volatile and
can accentuate losses in a falling market. The overall level of
gearing remains broadly unchanged, with net gearing beginning
the year at 21.1% and ending it at 20.8%. Gearing in the past has
typically been in the range of 10% to 25%, and the current level
reflects Dale’s view that the low valuation of the Chinese equity
market means that there are many attractive investment
opportunities available on a bottom-up basis. Going forward, the
upper limit for net gearing will be 20% of Net Assets. Your Board
will continue to monitor the cost of fixed term debt, with the
ambition of reinstating an element of it in the future.
04
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Annual Report 2024
Chairman’s Statement continued
Dividend
Although the Company’s investment objective is to achieve
long-term capital growth, it has paid an increased dividend each
year since its inception, growing from 0.25 pence per share in
2011 to 6.25 pence per share in 2023, which is a compound
annualised growth rate of 25.8%.
The Board is pleased to recommend once again an increased
final dividend of 6.40 pence per share for the year ended
31 March 2024 for approval by shareholders at the Annual
General Meeting (“AGM”) to be held on 23 July 2024.
This represents an increase of 2.4% over the 6.25 pence paid in
respect of the prior year. The dividend will be payable on 31 July
2024 to shareholders on the register on 21 June 2024 (ex-
dividend date 20 June 2024).
The revenue per share earned by the Company during the year
was 5.78 pence, which is a decrease of 18.0% compared with the
7.05 pence earned in the prior year. This is primarily due to the
higher cost of gearing. This revenue per share does not fully
cover the recommended dividend for the year and as a result
Revenue Reserves, which have been built up over the years, will
be used to cover the shortfall. Following this, there will remain
3.78 pence per share in Revenue Reserves.
Discount management
The Board believes that investors are best served when the share
price trades close to the Company’s 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 repurchased since then have
been cancelled.
The Company’s discount was broadly stable during the reporting
year, widening marginally from 9.7% on 31 March 2023 to 10.2%
at the end of the period. This is perhaps notable in a period in
which many investment trusts saw their discounts widen,
sometimes materially. With sentiment towards China in particular
and investment trusts in general remaining challenging, the
Board authorised the repurchase of 21,650,191 shares (the
majority for cancellation) at a cost of £45,933,000, representing
3.5% of the issued share capital of the Company. Just under half
of the repurchases (by number of shares) took place between
August and November 2023. As well as helping to limit discount
volatility, share repurchases are of benefit to the remaining
shareholders, as the NAV per share is increased by purchasing
shares at a discount. Since the year end and as at the latest
practicable date of this report, the Company has repurchased a
further 2,696,249 shares for cancellation. The graph in the next
column 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 Charges Ratio
The Ongoing Charges Ratio (the costs of running the Company)
for the year was 0.98% (2023: 0.98%). The variable element of the
management fee (due to outperformance of the Benchmark
Index) was a charge of 0.15% (2023: 0.20%). Therefore, the
Ongoing Charges Ratio, including this variable element, for the
year was 1.13% (2023: 1.18%).
Management fee
Your Board continues to focus on achieving good value for the
Company’s shareholders. During the year under review, the
management fee paid to the Manager, FIL Investment Services
(UK) Limited, on the first £1.5 billion of Net Assets was reduced
from 0.90% to 0.85% (effective 1 July 2023). As mentioned above,
in tandem with the transaction with ACIC, the fee payable on Net
Assets should they exceed £1.5 billion has also been
renegotiated, falling from 0.70% to 0.65%. The variable element of
the fee of +/-0.20% remains unchanged.
Continuation Vote
Following the completion of the transaction with abrdn China
Investment Company Limited, your Board has committed to give
shareholders the opportunity to vote on the continuation of the
Company. The first vote will be at the AGM in 2029 and every five
years thereafter.
Board of Directors
After a programme of Board refreshment in recent years (with all
the Directors, including myself, having been appointed since 2020
as the Company’s founding Directors retired), there have been no
changes to the Board of Directors in the year under review. 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. I
noted in last year’s Annual Report that with two women and four
men, our Board currently falls short of the voluntary target of 40%
of FTSE 350 board members to be women, as set by the new
FCA Listing Rules. It should, however, be noted that from July
2019 to January 2023 at least 40% of the Board was comprised
(14%)
(12%)
(10%)
(8%)
(6%)
(4%)
(2%)
(0%)
Apr 23 Jun 23 Aug 23 Sep 23 Nov 23 Jan 24
Mar 2
4
FCSS - Discount to NAV
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
of women. In order to meet this target in the near term, we would
need to increase the number of Directors from six to seven, a
move that we have carefully assessed – in consultation with some
of our larger shareholders – and concluded that it would not
currently represent the best value for shareholders. It remains our
longer-term ambition to move closer to gender parity as and
when any of our current Directors retire from the Board.
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 23 July 2024. The Directors’
biographies can be found on page 36, 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 all shareholders.
Annual General Meeting
The Company’s AGM is at 11.00 am on Tuesday, 23 July 2024.
While the meeting will once again be hybrid in format, with
online attendance available, the Board and I hope to see as
many of you as possible in person on the day to mark Dale’s
10-year record of outperformance. Details of the AGM are on the
next page.
Outlook
While the Chinese economy remains sluggish, having failed to
reap fully the benefits from the post-COVID reopening, there are
undoubtedly signs of improvement. The March PMI figure – a
measure of the economic health of the manufacturing sector –
moved into positive territory (a reading above 50) for the first
time in six months, reaching its highest level since March 2023
and potentially signalling a more sustained period of
improvement. April trade data was good and showed a rise in
imports, indicating a possible rise in domestic demand. At the
same time, it is heartening to see that the Chinese authorities
have not been panicked into implementing one-off large
measures to boost the economy. They are going about things in a
gradually stimulating fashion on both the fiscal and the monetary
side, which will hopefully lead to a more balanced outcome.
Meanwhile, with Chinese equity market valuations at particularly
low levels, both relative to their own history and in a global
context, there should be many opportunities for investors to
participate profitably in the recovery.
Perhaps the major risk to our cautiously positive outlook is the
forthcoming US Presidential election. US relations with China
have stabilised somewhat, although increasing tariffs and trade
restrictions remain a concern. There is a significant risk that
relations could worsen and US may implement measures such as
raising tariffs on imports from China to 60%, which would
significantly harm Chinese exporters and would depress global
trade and exacerbate US inflation trends.
In Chinese culture, the Year of the Dragon is associated with
great change, good fortune and prosperity, to such an extent that
Dragon years have historically experienced ‘baby booms’. While
there can be no certainty that the Chinese equity market is itself
on the verge of a boom, the structural trends at play in the
economy, coupled with Dale and his team’s focus on selecting
the stocks best positioned to deliver value to shareholders,
should continue to support our positive medium to long-term view.
Meanwhile, we hope to see you, in person or virtually, at our
Annual General Meeting on 23 July 2024.
Mike Balfour
Chairman
10 June 2024
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Fidelity China Special Situations PLC
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Annual Report 2024
Chairman’s Statement continued
Annual General Meeting – Tuesday, 23 July 2024 at 11.00 am
The AGM of the Company will be held at 11.00 am on Tuesday, 23 July 2024 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 94 to 97.
For those shareholders who are unable 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 96 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 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 will also 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 134-206-210. 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.
07
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
Portfolio Manager’s Review
Question
How has the investment company
performed in the year to 31 March 2024?
Answer
The Company’s NAV delivered a total return of -16.3% for the
financial year ended 31 March 2024, outperforming the MSCI
China Index (the Benchmark Index), which returned -18.8%. While
overall returns were negative, the biggest contributors to
outperformance were stock selection in the consumer
discretionary (our largest sector weighting), industrials and
consumer staples sectors. We were overweight in all these
sectors compared to the Benchmark. In absolute terms, our
energy stocks were the best performers, although their weighting
is a very small part of the portfolio (c. 2% of total net assets), and
is underweight versus the Benchmark. Our overweight exposures
to financials and materials were the biggest drag on relative
returns, while the worst absolute performance was in real estate
– perhaps unsurprisingly, given another year of negative
headlines – although our exposure did outperform the
Benchmark. This is another small weighting, at only around 3% of
total net assets.
Question
What stocks have been the main drivers
of performance during the period and why?
Answer
Four of our top 10 relative performers are consumer discretionary
stocks, the best of which has been Hisense Home Appliances
Group. While the ‘white collar’ area of the consumer market has
had a tougher time, the lower end has been much more resilient,
supported by government stimulus in the case of home
appliances. Hisense has executed well in the mass-market
segment, growing its market share and margins in both 2023 and
so far in 2024. It had also been trading at a very cheap
valuation. The market began to recognise the value on offer with
the share price almost doubling in the year under review. It is
also among our best performing shares over the past 10 years.
Elsewhere in the consumer space, two clothing companies –
Crystal International Group and JNBY Design – were also notable
contributors. Crystal International is an apparel manufacturer, with
strong growth in sportswear, supported by excellent relationships
with the likes of Adidas and lululemon. JNBY is a designer
fashion brand offering a good value proposition for its niche
higher-end customers, and has been posting resilient sales
numbers despite economic headwinds. Its loyal and sophisticated
customer base with high fashion awareness helps mitigate
macro risks.
Logistics firm Sinotrans falls into the industrial sector, but also
benefits from consumer trends, with an increase in international
e-commerce transportation leading to strong performance.
Disruption in the Red Sea has also provided some support as air
transportation freight rates have increased.
Dale Nicholls was appointed
as Portfolio Manager of Fidelity
China Special Situations PLC on
1 April 2014. He has over 30
years of investment experience
and also manages one other
major Fidelity 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.
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HollySys Automation Technologies, a firm engaged in industrial
automation, was also among the largest contributors to positive
returns in the year. The company is in the process of being taken
private after a bid from a Hong Kong-based private equity group.
We decided to exit the position following its share price strength
prompted by the bid.
The portfolio does not have heavy exposure to Chinese auto
makers, mostly on the back of competition concerns, but, as a
global leader in the electric vehicle (EV) market, China offers
many opportunities to participate in growth. Our two biggest
detractors have exposure to the autos value chain. Hesai Group
is a global leader in three-dimensional LiDAR (laser range
determining) sensors, which are an important component in the
development of autonomous vehicles. While Hesai’s stock price
suffered over the reporting period, and was the largest detractor
to performance, we still see this as a structural growth
opportunity over the long-term. Intron Technology’s automotive
electronic components are applied in new energy, body control,
safety and power train systems. It detracted from performance
amid a tough market environment, with a price war in auto parts
putting pressure on margins.
Relative returns were also hurt by not holding state-owned banks,
China Construction Bank and Bank of China. We preferred not to
own these stocks given a poor outlook for their net interest
margins, due to falling lending rates, weak loan growth and the
potential impact on credit quality, if the government steps up
policies to encourage more lending. The portfolio did include
China Merchants Bank to mitigate this risk and for its consumer
lending franchise.
Question
The expected recovery of the Chinese
consumer has been somewhat
disappointing. Could 2024 see a change
in both consumer confidence and retail
sales?
Answer
Consumer confidence has indeed been weak but there are
reasons to anticipate an improvement. Bank deposits saw huge
growth during COVID and household balance sheets are very
strong, so there is spending power available, but people need
confidence to unlock it. Deposit growth has slowed down more
recently, which suggests a more optimistic outlook on spending.
There has been a bifurcation in confidence, with the white-collar
area suffering most, presumably hurt by bigger redundancies. In
general, lower-end products have performed better. Job cuts by
the big technology companies may now be largely behind us,
and a slowly improving employment picture could bring back
some confidence.
Consumer services have also outperformed consumer goods, for
example in the growth of travel since the lifting of COVID
restrictions. For now, we believe service-led consumption will
continue to dominate the recovery in China. Recent data has
shown that Chinese tourists spent more per trip now than the
pre-pandemic era. Railway travel has doubled year-to-date, and
air travel has almost tripled compared with 2023. Sectors such as
Macau gaming, tourism and internet platforms related to services
are well positioned to benefit. On the consumer goods side, the
government has announced measures to encourage durable
goods upgrades through subsidies or targeted credit support,
such as lowering the down payment requirement for car
purchases. We believe this should support increased industrial
production and manufacturing opportunities.
Weakness in the property sector has clearly been a significant
drag on overall economic growth, including the obvious impact
on consumer sentiment. Although retail sales have been more
volatile in the post-COVID period than previously, they continue
on a broadly upward trend, indicating some resilience in the face
of falling property sales. We feel confident that we will continue
to see ongoing policy loosening to support the property sector.
Question
We are reading about challenges in the
region with potential higher tariffs being
explored in the US and Europe, along
with other domestic challenges. How are
you managing this risk, and does this
bring with it opportunities?
Answer
With regard to US executive orders and sanctions, we are
working closely with Fidelity International’s legal and regulatory
experts to understand the policy direction and potential policy
response. In general, we believe that China would be keen to
have better relations with the US, and the greater dialogue
between Presidents Xi and Biden is encouraging. There is no
denying, however, that strategic competition between the two
countries is going to be a factor that will be with us for decades.
The good thing is that the market is becoming more comfortable
with this reality. China has been dealing with US tariffs for years,
and companies are well aware of the prospect that they might
be higher in the future. Former President Trump has even
suggested raising import tariffs to 60%, although one has to think
that stickier inflation in the US could mean it will be harder for the
government there to implement hikes of this magnitude.
Portfolio Manager’s Review continued
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STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
In terms of corporate-level geopolitical risk, it is something we
look at on a stock by stock basis. For example, we try to
incorporate sanction risks on companies with any significant
technology exporting from China to the US into our analysis. In
general, within our portfolio, revenue exposure to the US is limited
and any risk would appear to be mostly priced in. While the
video platform TikTok has again been in the headlines because
of a new US bill that would require it to be sold off or risk being
banned, it is important to remember that as a percentage of its
parent company ByteDance’s operations, TikTok is relatively small
and also loss-making, whereas the domestic business is highly
profitable and growing strongly. Meanwhile, the vast majority of
companies are largely unaffected by such geopolitical concerns.
Question
How have you utilised the investment
company structure this year? Has it been
beneficial?
Answer
Our approach to managing the gearing of the Company mostly
reflects the opportunity set that we see at any one time. Gearing
will naturally be higher when that opportunity set is plentiful and
vice versa. Given the significant swings in sentiment towards the
China market, we tend to see better risk-reward prospects when
sentiment is weak and valuations are lower. Gearing is primarily
deployed using contracts for difference (“CFDs”), which are
low-cost and represent a flexible way of increasing investment
exposure. During the year, we repaid the fixed-term loan facility,
and all gearing is currently via CFDs. However, this is something
we continue to evaluate and may look to reinstate an element of
fixed-term borrowing in the future if the terms are attractive.
We like to utilise all the tools the investment company structure
gives us, with historically a working maximum net exposure of
around 25% and a hard limit of 30% of gross assets. At the start
of the period under review, net gearing was 21.1%, which rose
over the following months, peaking at 25.5% by the end of August
2023 before falling slightly. At 31 March 2024, the portfolio’s net
market exposure was 120.8% (net gearing of 20.8%), which, while
marginally lower than at the start of the period, is still a notable
increase since late 2021, reflecting the compellingly attractive
valuations of the Chinese market and, therefore, the relative
appeal of greater levels of gearing to take advantage of
opportunities on offer. It is not anticipated that net gearing will
materially exceed 20% in the future, following a change of the
Board’s policy.
Because gearing increases market exposure, it magnifies returns
in strong market conditions, but also acts as a drag in times of
poor returns. As such, it was a negative contributor to relative
performance in the period under review, detracting by 3.75
percentage points. Nevertheless, we continue to believe that the
judicious use of gearing can be accretive to long-term capital
and income returns, allowing us the opportunity to capitalise on
the volatility in the Chinese market.
Question
Looking longer-term, what do you see as
the drivers of returns for China equities?
Answer
At a basic level, returns will be driven by a Company’s earnings
and the multiple that the market is willing to put on those
earnings. As mentioned, this multiple can swing significantly
depending on sentiment, which is often influenced by factors such
as geopolitics, which in many cases bear little influence on a
company’s earnings outlook. This is why we spend most of our
efforts analysing company fundamentals, and looking to
capitalise at times when these fundamentals are
underappreciated.
While China’s economy is forecast to slow from its current growth
rate of around 5%, it is expected to remain one of the fastest
growing major economies in the world. Its gradual shift towards
consumption-driven growth, fuelled by an expanding middle
class, rising incomes and technological innovation, provides a
solid backdrop for companies to thrive.
However, China’s financial markets in the shorter-term are often
heavily influenced by geopolitics and macro decisions, which
have been more of an issue in the last few years, amid one of
the longest and harshest regulatory environments. Despite this,
regulation trends are typically somewhat cyclical, and the
government is now increasingly focused on economic growth.
What is often not appreciated is the level of change that is
apparent on the ground, with winners emerging and innovation
flourishing across sectors, reflecting companies’ commitment to
building a competitive edge. Coupled with trends such as rapid
automation implementation driven by an aging population and
the energy transition, this continues to create interesting
investment opportunities. Consumer trends like experience-based
spending, health consciousness and premiumisation continue to
grow. There is also an increasing preference among Chinese
consumers and corporates for Chinese brands and local
suppliers, resulting in domestic companies taking ever greater
market share in what remains one of the world’s largest markets.
At the same time, and importantly, companies are increasingly
rewarding shareholders through dividends and share buybacks,
supported by recent government policy reforms and shareholders
demands. This trend is particularly prominent in the financial
sector, where state-owned enterprise companies have increased
dividend payout ratios, while smaller financial companies have
engaged in buybacks or boosted dividends.
Companies have started to recognise the potential value
accretion when valuations are at extreme levels. Internet
companies like Alibaba Group Holding and Tencent Holdings
have been some of the most aggressive in hiking both dividends
and buybacks. For many of these companies, we are seeing
shares outstanding decline for the first time.
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The Japanese equity market has been in the headlines in the
past year as a similar focus on boosting shareholder returns has
helped the main index to finally regain highs last seen more than
30 years ago. We have been closely monitoring Chinese
companies’ dividend payouts, buybacks and restricted share units
(RSU) for many years and believe that across the board – be it
state-owned or private companies, large or small-cap, utilities,
internet stocks or consumer names – management teams are
emphasising returns for minority shareholders.
In addition to this encouraging trend towards increasing
shareholder value, the Chinese stock markets also offer earnings
growth opportunities that compare well to other markets.
However, there will be differences across sectors and companies,
which underscores the importance of bottom-up stock selection.
Identifying companies with good long-term growth prospects, that
are cash generative and have strong management teams,
remains key to constructing a resilient portfolio that compounds
growth over the long-term.
Question
Which sectors are you particularly excited
about?
Answer
We continue to find companies offering compelling long-term
growth prospects within the industrial sector, driven by factors
such as ongoing industry consolidation and the continued fast
pace of innovation. China’s share of global patent applications is
approaching 50%, and companies are investing ever more into
research and development (R&D), which over time should feed
through into improved competitiveness, pricing power and returns
on capital. This is clear in areas like robotics and the related
supply chain. Fragmented industries like building materials,
including paint, pipes and waterproofing, are poised for further
consolidation, following the trajectory seen in more developed
markets. Moreover, many businesses are also benefiting from the
re-orientation of global supply chains and an increasing
preference for local suppliers.
In emerging sectors such as EVs and renewable energy, we are
finding opportunities among enablers in the EV value chain,
particularly those providing key components and services, such
as EV battery manufacturers or auto parts suppliers. Healthcare
also presents opportunities, especially in areas with low
penetration like medical devices. Chinese companies also now
have the third-largest number of innovative drugs in development
globally, and are fast catching up with Europe, which currently lies
second behind the US.
In addition, despite macroeconomic challenges, many companies
will continue to benefit from China’s long-term shift from export
and investment-led growth towards higher-quality growth driven
by consumption. Urbanisation and a growing middle class are
important factors underlying stronger consumer purchasing
power, offering notable structural growth opportunities for
under-penetrated products and services. Therefore, we are
equally excited about long-term structural beneficiaries in the
consumption space, with an abundance of investment
opportunities given many companies have seen their valuations
dragged down by weak overall market sentiment.
Question
You have just reached the milestone
of 10 years managing the Trust. With
strong NAV and share price comparative
performance versus the Benchmark Index,
outperforming by over 76% since your
tenure, what has been the key to that
success over the longer-term?
Answer
For me, the past 10 years has underlined how important it is for
us to stay focused on company level fundamentals. We operate
in a volatile market with significant swings in sentiment. Even
through tough markets of the last few years, we have had huge
winners driven by great market opportunities supported by great
management execution.
Supporting this is the calibre of the team of people we have on
the ground in China. Our analysts understand the DNA of
companies; they have long-standing relationships with the
companies they cover, and they understand the nuances of
trends. The ‘challenge’ of stock price volatility is also the
opportunity, and we are now finding many great companies
trading at bargain valuations. As long as our earnings forecasts
are accurate, we believe share prices will reflect the delivery of
those growth opportunities in the long-term.
The main driver of the Company’s performance has always been
– and will always be – the individual stocks that we invest in, the
ability to choose from the whole market cap spectrum, from tech
giants through to entrepreneurial small and medium-sized
companies, and even new businesses yet to launch on the stock
market. This all-cap strategy allows me to unearth and invest in a
multitude of stocks that play into the growth and development of
the domestic consumer. While confidence remains weak,
spending power is significant, and we see the ongoing
emergence of strong domestic brands leveraging a deep
understanding of the local consumer and operating environment.
Portfolio Manager’s Review continued
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STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
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
Fidelity International integrates ESG factors into its investment
process, with research analysts incorporating ESG into company
assessments using proprietary Sustainability Rating and Climate
Rating frameworks. We also actively engage with companies to
improve their ESG practices.
Chinese companies have not historically performed well in
third-party ESG assessments, but a great deal of this is about
disclosure. If a company is not transparent about its supply chains
or its emissions, then the market will tend to assume the worst.
We have been working with the companies in our portfolio to
improve their disclosures, and this is resulting in good progress
on the governance front.
One such example through the review period was our
engagement with Medlive Technology, one of the largest online
physician platforms. The engagement focused on their
cybersecurity and data privacy practices, which had been lacking
in the past. We found that while the company places a strong
emphasis on data systems and policies, this was not adequately
reflected in their disclosures. Therefore, we recommended that
the company improves its transparency for all stakeholders,
strengthens cybersecurity privacy practices and increases
engagements with rating agencies. Subsequently, Medlive took
proactive steps, leading to enhanced cybersecurity, privacy
management and disclosures. These efforts were recognised by
rating agencies, contributing to an upgrade of the company’s
ESG rating. Additionally, Medlive established a board-level
committee to oversee key areas of information and data security.
Other noteworthy progress included our multi-year engagement
with leading Chinese sports equipment company ANTA Sports
Products. We encouraged enhancements in sustainable supply
chain management, an area that we identified as lagging global
best practices. By explaining essential aspects of industry leading
supply chain practices during our discussions, the company was
open to suggestions and proactively made improvements and
new commitments. For example, the company committed to
further measures for improving labour supply chain management,
workforce disclosure, publishing health and safety practices, and
supporting suppliers in obtaining ISO/Bluesign certifications.
As discussed in the question above on the drivers of returns for
China equities, better capital management is a key aspect of
improving governance. We actively engaged with many of the
companies we hold, and it is positive to see increased buyback
and dividend activity across the whole market. For example, we
encouraged wealth management firm Noah Holdings to improve
its capital allocation, for which, in our view, returns have been
held back by an over-capitalised balance sheet. Over the past
year, the company has made some improvements, including the
removal of dual share classes and the introduction of a (small)
dividend. In its most recent earnings release, it announced a 50%
payout ratio (which was at the top end of the newly announced
policy), as well as an additional 50% special dividend payout.
Question
Finally, with the completion of the
combining of assets with abrdn China
Investment Company Limited (ACIC), how
have you allocated these assets within the
portfolio?
Answer
The transaction with ACIC was a real team effort and thank you
to all involved. From a portfolio management perspective, I was
involved in the transition of assets throughout the transaction
process, making sure individual companies that I already owned
or would own came across ‘in-specie’ and the residual cash from
the ACIC portfolio was implemented into my best ideas. This cash
was invested as soon as the transaction was completed.
The key benefits of the transaction for the Company were greater
scale, an enhanced profile and increased liquidity. While we
were already by some way the largest in our Association of
Investment Companies (AIC) sector, the increased scale and
liquidity should help to bring Fidelity China Special Situations PLC
to the attention of more professional fund buyers, many of whom
may not consider investing in a portfolio below £1 billion.
Dale Nicholls
Portfolio Manager
10 June 2024
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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 can be a source
of additional investment performance. It allows the Portfolio
Manager to take advantage of the growth trajectory of early-
stage companies before they potentially become listed and this
can offer good opportunities for patient and long-term investors.
In the reporting year, the following companies listed on the Hong
Kong Stock Exchange: Beisen on 13 April 2023; Cutia
Therapeutics on 12 June 2023; and Tuhu Car on 26 September
2023.
No new investments were made in unlisted securities in the
reporting year.
At the year end, the Company had six unlisted investments
valued at £151,212,000 being 12.8% of its Net Assets (2023: nine
unlisted investments valued at £192,878,000 being 13.6% of Net
Assets plus Borrowings).
Overview of the Unlisted Investments Valuation Process
Unlisted investments in the Company’s portfolio are held at fair
value, which is defined as the value that would be paid for a
holding in an open-market transaction. The Manager’s Fair Value
Committee (“FVC”), which is independent of the Portfolio
Manager, provides recommended fair values to the Directors.
Twice yearly, ahead of the Company’s interim and its year end,
the Company’s Audit and Risk Committee receives a detailed
presentation from the FVC, Fidelity’s unlisted investments
specialist and Kroll (independent third-party valuers), in order to
satisfy itself that the unlisted investments are carried at an
appropriate value in accordance with Accounting Policies
Notes 2 (e) and (l) on pages 66 to 68 at the balance sheet date.
The external Auditor attends the unlisted valuations meeting
ahead of the Company’s year end.
The work completed by the Audit and Risk Committee on the
unlisted investments is set out in its report on page 52.
Workings of the Fair Value Committee
The valuation of each unlisted investment is set by the Manager’s
FVC and includes input from the analysts covering the securities,
Fidelity’s unlisted investments specialist and also advised upon
by the independent third-party valuers, Kroll.
Kroll, as independent valuers, undertake a detailed review of
each of the unlisted investments on a quarterly basis. The Board
is provided with the quarterly updates from the FVC, which
includes recommendations from the analysts’ and Fidelity’s
unlisted investments specialist, enabling the Board to have
oversight of and confidence in Fidelity’s process. Outside of the
normal quarterly cycle, the unlisted investments are monitored
daily 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. In
addition to this, the unlisted investments are monitored on a
weekly basis within a comparable movement model. If the
average movement of the selected proxies is +/-15%, a
revaluation of the relevant investment is considered.
Value of Unlisted Investments
Private companies in China are staying private for longer, with
their value increasing significantly in recent years. In 2015, there
were 60 private companies valued at over $1 billion; in 2023
there were over 340, showing the growth in number of these
private companies before they enter the public markets. The
current split of unlisted investments is as follows:
Equity value at the time of
investment
Company
count
% of total
unlisted
Micro (<$300 million) – Venturous
Holdings
1 20%
Small ($300 million – $2 billion) –
Chime Biologics
1 20%
Medium ($2 billion – $10 billion) –
Pony.ai
1 20%
Large (>$10 billion) – DJI
International & ByteDance
2 40%
Total 5*
* Shanghai Yiguo, the sixth unlisted investment in the Company’s portfolio, is in
liquidation and valued at nil.
Unlisted Investments
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STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
Pony.ai
(Purchased: March 2020)
Founded in 2016, in Silicon Valley, Pony.ai has quickly become a global leader in autonomous
mobility and is a pioneer in extending autonomous mobility technologies and services at a
rapidly expanding footprint of sites around the world. Operating Robotaxi, Robotruck and
Personally Owned Vehicle (POV) business units, Pony.ai is an industry leader in the
commercialisation of autonomous driving. In 2022, Pony.ai became the first autonomous company
to receive 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 2024.
DJI International
(Purchased: May 2018)
DJI International is the world’s largest manufacturer of drones. Its platforms empower creators to
capture images that were once out of reach. Its flying and camera stabilisation systems redefine
camera placement and motion through a commitment to research and development and a focus
on transforming complex technology into easy-to-use devices worldwide. Building on the ethos of
“form follows function”, DJI’s products combine advanced technology with dynamic designs in
industries such as filmmaking, agriculture, conservation, search and rescue, energy infrastructure.
Its high-precision control modules are also widely applied to flying toys.
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 Douyin, 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.
The US has given ByteDance until January 2025 to sell its TikTok product or face a ban by citing a
threat to national security. ByteDance has claimed that it would prefer to shut down TikTok if it
exhausts all legal options to fight the ban.
Chime Biologics
(Purchased: March 2021)
Chime Biologics is a leading biologics Contract Development and Manufacturing Organization
(CDMO) company. The company leverages its comprehensive capabilities and internationally
recognised expertise to support its clients from early-stage biopharmaceutical development
through to 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 (2023: nil).
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Spotlight on the Top 10 Holdings
as at 31 March 2024
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
11.0%
Tencent Holdings has a dominant 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 its gaming segment. Its increasing shareholder returns also underpin its long-term investment thesis.
Industry Communication Services
Alibaba Group Holding
% of Net Assets
3.5%
Alibaba Group Holding has a leading position in the e-commerce market. Its core e-commerce
categories, including apparel and makeup, will stand to benefit from any recovery and consumption
upgrades in China. Its new management team is focused on a clearer strategy by investing in
technology and user experiences, including logistics, product return, and customer service. Its
strategy to exit from non-core businesses, cut losses, and improve shareholder returns also
underpins a strong growth outlook.
Industry Consumer Discretionary
Pony.ai (unlisted)
% of Net Assets
3.6%
Founded in 2016, in Silicon Valley, Pony.ai has quickly become a global leader in autonomous
mobility and is a pioneer in extending autonomous mobility technologies and services at a
rapidly expanding footprint of sites around the world. Operating Robotaxi, Robotruck and
Personally Owned Vehicle (POV) business units, Pony.ai is an industry leader in the
commercialisation of autonomous driving. In 2022, Pony.ai became the first autonomous company
to receive a licence to operate its self-driving taxis in China.
Industry Consumer Discretionary
Ping An Insurance Company of China
% of Net Assets
3.9%
Ping An Insurance Company of China is a financial services holding company whose subsidiaries
provide insurance, banking, asset management, and financial services. It has a strong presence in
China, Hong Kong, and Macau, with expanding operations overseas. It has a robust structural growth
outlook and, within the broader sector, its operations are of relatively better quality with the best
distribution channels, earnings quality, and a strong management team. It trades at an attractive
valuation in comparison to its historical averages and the broader index.
Industry Financials
PDD Holdings
% of Net Assets
3.5%
PDD Holdings is the third largest e-commerce platform by Gross Merchandise Value (GMV) in China,
with outstanding efficiency in supply chain management and cost control. With its unique traffic
distribution method, PDD is able to offer the cheapest version of products and continuously gains
market share. The company is also expanding internationally to more than 50 countries via a new
shopping app called Temu by leveraging domestic supply chains in order to meet offshore demand.
Industry Consumer Discretionary
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STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
Crystal International Group
% of Net Assets
2.7%
Crystal International Group is a leading international clothing manufacturer. It delivers over 470
million pieces of apparel a year to the best-in-class apparel brands in the world, with a focus on
offering the right product at the right time and at the right cost. Its Dongguan factory is advanced
in automation and digitalisation after years of investment, which will also likely benefit its
overseas factories. It has achieved fully local-for-local operations in China and its relationships
with sportswear customers are getting stronger, supporting a robust growth outlook.
Industry Consumer Discretionary
China Foods
% of Net Assets
2.4%
China Foods is a beverage company engaged in the processing, bottling and distribution of
sparkling beverage products, and the distribution of still beverage products. It has the franchise
to produce and distribute Coca-Cola products in selected territories in China, giving them access
to a globally recognised and popular brand portfolio.
Industry Consumer Staples
DJI International (unlisted)
% of Net Assets
2.6%
DJI International is the world’s largest manufacturer of drones. Its platforms empower creators to
capture images that were once out of reach. Its flying and camera stabilisation systems redefine
camera placement and motion through a commitment to research and development and a focus
on transforming complex technology into easy-to-use devices worldwide. Building on the ethos of
“form follows function”, DJI’s products combine advanced technology with dynamic designs in
industries such as filmmaking, agriculture, conservation, search and rescue, and energy
infrastructure. Its high-precision control modules are also widely applied to flying toys.
Industry Information Technology
Chime Biologics (unlisted)
% of Net Assets
2.3%
Chime Biologics is a leading biologics Contract Development and Manufacturing Organization
(CDMO) company. The company leverages its comprehensive capabilities and internationally
recognised expertise to supports its clients from early-stage biopharmaceutical development
through to late-stage clinical and commercial manufacturing, catering to the needs of the
biopharmaceutical industry.
Industry Manufacturing
Hisense Home Appliances Group
% of Net Assets
2.6%
Hisense Home Appliances 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. It has good brand value across its assets (Hisense
Hitachi is the second largest air conditioning brand in China; Hisense washer & fridge products
are popular tier-2 brands) and is on track to gain market share and improve overall margins.
Industry Consumer Discretionary
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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 128,967 11.0 76,892
Ping An Insurance Company of China (shares and long CFD)
Provider of insurance, banking and investment products 46,017 3.9 12,977
Pony.ai (unlisted)
Developer of artificial intelligence and autonomous driving technology solutions 42,805 3.6 42,805
Alibaba Group Holding
e-commerce group 41,428 3.5 41,428
PDD Holdings (long CFD)
e-commerce group 40,975 3.5 (3,740)
Crystal International Group
Clothing manufacturer 31,842 2.7 31,842
Hisense Home Appliances Group
Developer, manufacturer and distributor of household appliances 30,901 2.6 30,901
DJI International (unlisted)
Manufacturer of drones 30,769 2.6 30,769
China Foods (shares and long CFDs)
Processor and distributor of food and beverages 27,877 2.4 2,683
Chime Biologics Convertible Bond (unlisted)
Contract Development and Manufacturing Organization 27,312 2.3 27,312
Venturous Holdings (unlisted)
Investment company 25,602 2.2 25,602
ByteDance (unlisted)
Technology company 24,724 2.1 24,724
Sinotrans (shares and long CFD)
Logistics, storage and terminal services provider 23,369 2.0 13,776
China Life Insurance (shares and long CFDs)
Insurance company 23,277 2.0 980
Luk Fook Holdings International (long CFD)
Jewellery company 19,627 1.7 (1,147)
HUTCHMED China
Biopharmaceutical company 18,387 1.6 18,387
NetEase (shares and long CFD)
Internet technology company 18,139 1.5 12,767
Haitian International Holdings
Manufacturer and distributor of plastic injection moulding machines 18,111 1.5 18,111
Lenovo Group (long CFDs)
Multinational technology company 18,104 1.5 (296)
JD.com (shares and long CFDs)
Online retailer 18,062 1.5 4,691
Forty Largest Holdings
as at 31 March 2024
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STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
Asset Exposure Fair Value
£’000 %
1
£’000
Meituan (shares and long CFDs)
Shopping platform for locally found consumer products and retail services 17,868 1.5 7,947
Focus Media Information Technology (shares and equity linked notes)
Advertising solution provider 17,086 1.5 17,086
China Oilfield Services (shares and equity linked notes)
Oilfield services provider 16,943 1.4 16,943
Autohome
Online portal for automobile buyers 16,490 1.4 16,490
Precision Tsugami (China)
High precision machine tool manufacturer 15,395 1.3 15,395
Noah Holdings
Wealth management company 14,882 1.3 14,882
China Merchants Bank
Commercial bank 14,847 1.3 14,847
Full Truck Alliance (shares and long CFD)
Online commercial freight platform 14,534 1.2 748
RS Technologies (long CFDs)
Silicon wafer manufacturer 13,903 1.2 1,256
WH Group
Meat and food processing company 13,829 1.2 13,829
Li-Ning
Sportswear and sports equipment company 13,697 1.2 13,697
Qifu Technology (shares and long CFD)
Credit-Tech services company 13,668 1.2 6,481
JNBY Design
Designer and seller of fashion apparel and footwear 13,618 1.2 13,618
Kweichow Moutai
Producer and distributor of alcoholic beverages 11,732 1.0 11,732
iQIYI (long CFD)
Provider of online entertainment video services 11,632 1.0 192
China Hongqiao Group
Producer of aluminium 11,590 1.0 11,590
Sinopec Kantons Holdings (shares and long CFD)
Storage and logistics company in the crude oil, petroleum and petrochemical industry 11,555 1.0 4,660
Qingdao Port International
Provider of port services 11,180 0.9 11,180
ANTA Sports Products
Sportswear company 10,974 0.9 10,974
Haier Smart Home
Manufacturer and distributor of household electrical appliances 10,903 0.9 10,903
Forty largest long exposures (2023: 83.9%) 932,621 79.3 625,914
Other long exposures (2023: 53.5%) 641,881 54.6 531,868
Total long exposures before hedges (149 companies) 1,574,502 133.9 1,157,782
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Asset Exposure Fair Value
£’000 %
1
£’000
Less: hedging exposures
Hang Seng Index (futures) (94,883) (8.1) (192)
Hang Seng China Enterprises Index (futures) (43,519) (3.7) (283)
Total hedging exposures (138,402) (11.8) (475)
Total long exposures after the netting of hedges 1,436,100 122.1 1,157,307
Short exposures
Short CFDs (3 holdings) 14,766 1.3 (1,246)
Gross Asset Exposure
2
1,450,866 123.4
Portfolio Fair Value
3
1,156,061
Net current assets (excluding derivative instruments) 19,953
Net Assets 1,176,014
1 Asset Exposure expressed as a percentage of Net Assets.
2 Gross Asset Exposure comprises market exposure to investments of £1,162,265,000 plus market exposure to derivative instruments of £288,601,000.
3 Portfolio Fair Value comprises investments of £1,162,265,000 plus derivative assets of £7,103,000 less derivative liabilities of £13,307,000.
A full list of the Company’s holdings as at 31 March 2024 will be available on the Company’s website at www.fidelity.co.uk/china
from the day of the posting of this Annual Report.
Forty Largest Holdings continued
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STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
Distribution of the Portfolio
as at 31 March 2024
Sector
Asset
Exposure
%
1
Benchmark
Index
%
Consumer Discretionary 40.0 29.6
Communication Services 21.3 20.8
Financials 17.6 16.5
Industrials 17.4 5.2
Healthcare 11.0 4.5
Consumer Staples 10.2 5.2
Information Technology 7.5 6.1
Materials 3.9 3.5
Energy 3.1 3.8
Real Estate 2.5 2.2
Utilities 0.7 2.6
Total excluding hedging 135.2 100.0
Hedging (11.8) –
Total including hedging 123.4 100.0
Share Type
Listed in Hong Kong 43.4 46.2
Listed in US 21.3 8.1
China ‘H’ Shares 18.1 23.9
Unlisted 12.8 –
Red Chips 12.2 4.5
China ‘A’ Shares 10.1 17.0
Listed in Japan 2.4 –
Listed in UK 1.5 –
Listed in Germany 0.9 –
Listed in Taiwan 0.7 –
China ‘B’ Shares –0.3
Total 123.4 100.0
Size of Company (Market Cap)
Large – above £5bn 48.1 87.7
Medium – between £1bn – £5bn 28.5 12.2
Small – below £1bn 34.0 0.1
Unlisted 12.8 –
Total 123.4 100.0
1 Asset Exposure expressed as a percentage of Net Assets.
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Analysis of NAV total return for the year ended 31 March 2024 %
Impact of:
MSCI China Index (in Hong Kong dollar terms) -17.3
Stock Selection (in Hong Kong dollar terms) +11.3
Gearing (in Hong Kong dollar terms) -7.9
Currency translation into sterling -1.4
Share Repurchases +0.1
Other Costs -1.0
Cash -0.1
NAV total return for the year ended 31 March 2024 -16.3
Ten Highest Contributors to NAV total return %
Hisense Home Appliances Group +1.5
PDD Holdings +1.4
BC Technology Group +1.3
GNI Group +1.1
Sinotrans +0.9
Hollysys Automation Technology +0.8
Sharkninja Hong Kong +0.8
Crystal International Group +0.5
JNBY Design +0.5
Shanghai Kelai Mechatronics Engineering +0.3
Ten Highest Detractors to NAV total return %
Tencent Holdings -2.5
Alibaba Group Holding -1.7
Ping An Insurance Company of China -0.9
Hesai Group -0.9
Intron Technology Holdings -0.8
China Tourism Group Duty Free -0.7
Tuhu Car (unlisted) -0.7
Lufax Holding -0.7
WuXi AppTec -0.6
Peijia Medical -0.6
Note: Derivative positions are included in the above investment positions.
Source: Fidelity International.
Attribution Analysis
as at 31 March 2024
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STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
For the year ended 31 March 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015
Investment Performance
Net Asset Value per Share total
return (%)
1
-16.3 +2.6 -34.9 +81.9 -5.9 -5.3 +22.2 +38.8 +0.0 +45.3
Share Price total return (%)
1
-16.4 +0.3 -39.2 +97.2 -6.5 -0.3 +23.6 +45.8 -4.5 +39.9
MSCI China Index total return
(in UK sterling terms) (%) -18.8 +1.4 -29.3 +29.1 -1.0 +0.9 +23.8 +37.6 -16.2 +39.3
Assets
Gross Asset Exposure (£m) 1,450.9 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
Net Assets (£m) 1,176.0 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
Gross Gearing (%)
1
23.4 23.9 26.1 26.2 25.2 26.1 20.2 27.6 27.2 25.9
Net Gearing (%)
1
20.8 21.1 23.5 18.4 23.2 20.9 14.2 22.4 27.2 21.1
Net Asset Value per Share (pence)
1
223.71 274.08 272.52 423.50 236.27 255.03 272.55 225.36 164.18 165.27
Share Price data at year end
Share Price (pence) 201.00 247.50 252.00 419.00 216.00 235.00 239.00 195.70 136.00 143.60
Discount (%)
1
10.2 9.7 7.5 1.1 8.6 7.9 12.3 13.2 17.2 13.1
Earnings and Dividends paid
Revenue Earnings per Share (pence)
1
5.78 7.05 6.42 4.70 4.51 4.06 3.80 2.92 2.07 1.41
Capital (Loss)/Earnings per Share
(pence)
1
(50.18) (2.42) (152.81) 186.11 (19.67) (18.21) 45.86 60.01 (2.24) 50.17
Total (Loss)/Earnings per Share (pence)
1
(44.40) 4.63 (146.39) 190.81 (15.16) (14.15) 49.66 62.93 (0.17) 51.58
Dividend per Share (pence) 6.40 6.25 5.50 4.68 4.25 3.85 3.50 2.50 1.80 1.30
Ongoing Charges Ratio
Ongoing Charges Ratio (excluding
variable element of the management
fee) (%)
1
0.98 0.98 0.94 0.97 0.99 1.02 1.11 1.16 1.20 1.29
Variable Management Fee 0.15 0.20 0.20 0.12 (0.20) (0.09) 0.00 n/a n/a n/a
Ongoing Charges Ratio (including
variable management fee)
1
1.13 1.18 1.14 1.09 0.79 0.93 1.11 1.16 1.20 1.29
1 Alternative Performance Measures.
Sources: Fidelity International and Datastream.
Past performance is not a guide to future returns.
Ten Year Record
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Annual Report 2024
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 2024.
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 its Net Assets plus Borrowings 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 2024, the Company held six (2023: nine) unlisted
investments with a fair value of £151,212,000 (2023: £192,878,000)
representing 12.8% of Net Assets (2023: 13.6% of Net Assets plus
Borrowings).
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STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
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).
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 2024, the Company’s exposure to short derivative
instruments represented 13.5% of Net Assets (2023: 14.1% 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 2024, the Company’s largest exposure to any
single counterparty from all derivative activities was 0.2% of Net
Assets (2023: 0.3% 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 2024, the Company held no investments in other
listed investment companies (2023: 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. The Board has
requested that, in the future, the Portfolio Manager limits net
gearing to 20% of Net Assets.
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 2024, Gross Asset Exposure in excess of Net Assets
was 23.4% (2023: 23.9%).
As at the year end, the Company did not have any loan facilities.
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 2024,
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 16 to 21.
Results and Dividends
The Company’s results for the year ended 31 March 2024 are set
out in the Income Statement on page 61. The revenue earnings
per share was 5.78 pence and the capital loss per share was
50.18 pence, giving a total loss of 44.40 pence per 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 6.40 pence (2023:
6.25 pence) per ordinary share be paid on 31 July 2024 to
shareholders who appear on the register as at close of business
on 21 June 2024 (ex-dividend date 20 June 2024).
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 Charges Ratio 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
2024
%
Year ended
31 March
2023
%
Net Asset Value per Share total
return
1
-16.3 +2.6
Share Price total return
1
-16.4 +0.3
MSCI China Index total return -18.8 +1.4
Discount to Net Asset Value
1
10.2 9.7
Ongoing Charges Ratio
1
0.98 0.98
1 Alternative Performance Measures. See pages 92 and 93.
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The Board also monitors the factors contributing to investment
results, as set out in the NAV Attribution Analysis table on
page20. Long-term performance is also monitored and is set out
in the Ten Year Record on page 21.
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 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 as well as a principal risk confronting asset
managers and their investors. Globally, climate change effects
are already being experienced in the form of changing weather
patterns. Extreme weather events can potentially impact the
operations of investee companies, their supply chains and their
customers. The Board notes that the Manager has integrated ESG
considerations, including climate change, into the Company’s
investment process. Further details are on pages 33 to 35. The
Board will continue to monitor how this may impact the Company
as a risk to investment valuations and potentially shareholder
returns.
Other emerging risks may continue to evolve from unforeseen
geopolitical and economic events.
The Board, together with the Manager, is also monitoring the
emerging risks posed by the rapid advancement of artificial
intelligence (“AI”) and technology and how it may threaten the
Company’s activities and its potential impact on the portfolio and
investee companies. Although advances in computing power
mean that AI is a powerful tool that will impact society, there are
risks from its increasing use and manipulation with the potential
to harm, including a heightened threat to cybersecurity.
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 risks listed on pages 25 to 29 as the
principal risks and uncertainties faced by the Company.
Strategic Report continued
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STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
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 the US, e.g. trade
sanctions.
• Challenging regulatory environment
hindering foreign investment, including
US Executive Orders prohibiting
transactions by US persons in certain
publicly traded Chinese companies.
• The ongoing Ukraine/Russia conflict
remains a driver of uncertainty
impacting the global geopolitical
landscape, consumer spending and
industrial activity with the potential for
increased energy costs, rising food
prices and currency instability.
• The escalation of the Middle East
conflict has added another source of
geopolitical risks and economic
instability, elevating oil supply concerns
and driving prices upwards. China is a
major trading partner with countries in
the region and any disruption in trade
may have an impact on exports/
imports and the shipping sector.
• A South China Sea dispute could have
a negative impact on Chinese
companies, including reduced access
to global markets and technology,
potential sanctions and retaliatory
measures and possible weakening of
investment and confidence in Chinese
companies.
• Implications of tensions in the Taiwan
Strait region for China 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 portfolio is tilted to domestic Chinese
markets.
• The Board receives and reviews reports
from the Portfolio Manager on a regular
basis.
• Major adverse market events are
stress-tested for operational resilience and
financial impact.
Increasing
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Principal Risks Risk Description and Impact Risk Mitigation Trend
Market and
Economic Risks
(including
Currency Risk)
• Whilst China’s outlook for “controlled
stabilisation” is supported by targeted
policy measures, the property sector is a
source of increased uncertainty. Growth
in consumption remains subdued.
• The momentum from the growth in size
and wealth of the middle class
depends on China’s ability to generate
sustained productivity gains.
• China’s economy is vulnerable to
uncertain world growth prospects,
tightening in global financial
conditions, energy costs, rising food
prices, currency instability and
challenging regulatory environment.
• China faces several economic
headwinds, including an aging
population, environmental pollution,
isolation of the financial system and
debt concerns in its corporate and
local government sectors.
• 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 currency in which the Company
reports its results is sterling and its
ordinary shares trade 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 the
Manager’s ability to understand and
predict events in China. Independent 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
Investment
Performance
Risk (including
Gearing Risk)
• The Portfolio Manager may fail 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
Strategic Report continued
27
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
Principal Risks Risk Description and Impact Risk Mitigation Trend
Discount
Management
Risk
• The Board may fail 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, may exhaust
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 is aimed at keeping 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 marketplace when required in order
to keep the discount in single digits.
• Maintaining close communications with
major shareholders.
Stable
Unlisted
Securities Risk
• Valuations of unlisted securities may be
adversely affected by market
conditions.
• Initial public offering (IPO) of the
unlisted companies may face delays
leading to longer holding periods.
• 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 set a limit on the level
of investments 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, Fidelity’s unlisted investments
specialist and an external advisor.
Stable
Climate Change
Risk
• Impact on investment valuations,
business operations, the supply chain
of investee companies and
shareholder expectations.
• China’s climate change credentials are
likely to be less favourable when
compared to similar economies in
developed western markets.
• Reputational impact may arise by
being invested in a company with poor
climate change performance.
• The Board is provided with insights and
reports by the investment management
team.
• Fidelity uses a proprietary climate rating
designed to complement broader
sustainability ratings and is considered in
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).
Stable
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Principal Risks Risk Description and Impact Risk Mitigation Trend
Environmental,
Social and
Governance
(“ESG”) Risk
• Investor expectations and/or
regulatory requirements 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 on 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 to
reinforce 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 and operational
resilience.
Stable
Business
Continuity Risk
• Business process disruption risk from
continued threats of cyberattacks,
geopolitical threats and natural events,
such as earthquakes, resulting in
financial and/or reputational impact to
the Company affecting the functioning
of the business.
• Fidelity has Business Continuity and Crisis
Management Frameworks in place to
deal with business disruption and assure
operational resilience.
Stable
Strategic Report continued
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
Principal Risks Risk Description and Impact Risk Mitigation Trend
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 FCA’s three
lines of defence model.
Decreasing
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. The ability of overseas
investors to invest in VIEs could be
amended.
• Regulatory risk from the China Security
Regulatory Commission (“CSCR”)
guidelines that companies with VIE
structures require CSCR approval to list
overseas and are required 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
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.
Third-Party 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
compared to its Benchmark Index;
• The principal and emerging risks and uncertainties facing
the Company and their potential impact, as set out on
page24 to above;
• 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;
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Fidelity China Special Situations PLC
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Annual Report 2024
• Future income and expenditure forecasts; and
• Introduction of a continuation vote with effect from 2029 and
every five years thereafter.
The Company’s performance for the five year reporting period to
31 March 2024 was a NAV total return of -4.3% and a share price
total return of -5.9%, both outperforming the Benchmark Index
total return of -25.6%. 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 portfolio comprises sufficient readily realisable securities
which can be sold to meet funding requirements if
necessary; 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
page24. The Board has also considered the impact of regulatory
changes, continuing tensions between the US and China, and
China and Taiwan, unforeseen market events and also the
ongoing global implications of the Russia and Ukraine war and
the Middle East conflict, 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 37.
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
externally appointed Manager (FIL Investment Services (UK)
Limited) 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 22
and 23.
The Board receives regular reports from the Company’s Broker
which covers market activity, how the Company compares with its
peers in the China sector on performance, discount and share
repurchase activity, an analysis of the Company’s share register
and market trends.
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 Manager meets 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 33 to 35.
Strategic Report continued
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
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:
• The decision to combine assets with abrdn China Investment
Company Limited on 14 March 2024 (see further details in
the Chairman’s Statement on page 2 and also on page 65);
• The decision to introduce a continuation vote with effect from
2029 and every five years thereafter;
• The decision to hold a hybrid AGM in 2023 (and again this
year) in order to make the AGM more accessible and
improve the shareholder experience;
• Authorising the repurchase of 2,900,696 shares into Treasury
and 18,749,495 shares for cancellation 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. Since the year ended
31 March 2024 and up to the latest practicable date of this
report, a further 2,696,249 shares have been repurchased;
• The decision not to renew the Company’s credit facility for
US$100,000,000 and to use contracts for difference for
gearing purposes as they are generally a cheaper finance
option and offer more flexibility;
• 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 from 14 March 2024, the
reduction of the second tier management fee from 0.70% to
0.65% for Net Assets over £1.5 billion;
• The decision to carry out an external Board evaluation using
the services of Lintstock Ltd in accordance with the UK
Corporate Governance Code; and
• The decision to pay a final dividend of 6.40 pence per
ordinary share.
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. Due
regard will be given to the benefit of diversity on the Board,
including gender and ethnicity.
The Board has taken into consideration the new FCA’s Listing
Rules requirements (LR 9.8.6R(9), (10) and (11)) regarding the
targets on board diversity that:
• at least 40% of individuals on the Board are women;
• at least one senior Board position (chairman, chief executive
officer (“CEO”), senior independent director or chief
financial officer (“CFO”)) is held by a woman; and
• at least one board member should be from a non-white
ethnic background, as defined by the Office of National
Statistics criteria.
The Board considers that as an externally managed investment
trust, with no CEO or CFO, the Chairman of the Company, the
Senior Independent Director and Chairman of the Audit and Risk
Committee to be senior positions.
As required by the FCA Listing Rules, the Company’s reporting
against these targets is set out in the tables below. The data was
collected on a self-identifying basis. As at 31 March 2024, the
target of at least one senior Board position held by a woman
and for at least one individual to be from a minority ethnic
background had been met. The target of 40% of women on the
Board has not been met in the reporting year due to Board
changes, but as part of the Board’s succession planning, the
Board fully intends to meet this target. After consultation with
some major shareholders, it was agreed that this will be
addressed when there is a natural change to the existing Board.
Gender Reporting
Number
of Board
Members
Percentage
of the Board
Number of
Senior Board
Positions
(Chair, Senior
Independent
Director and
Committee
Chairs)
Men 4 67% 2
Women 2 33% 1
Ethnic Background Reporting
Number
of Board
Members
Percentage
of the Board
Number of
Senior Board
Positions
(Chair, Senior
Independent
Director and
Committee
Chairs)
White British
or other White
(including
minority white
groups)
5 83% 3
Asian/Asian
British
1 17% 0
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Annual Report 2024
CORPORATE AND SOCIAL RESPONSIBILITY
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 33 to 35 and is 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 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.
Task Force on Climate-Related Financial Disclosures (TCFD)
The Manager’s product level disclosure consistent with the Task
Force on Climate-Related Financial Disclosures (TCFD) can be
found on the Company’s pages of the Manager’s website at
https://investment-trusts.fidelity.co.uk.
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.
On behalf of the Board
Mike Balfour
Chairman
10 June 2024
Strategic Report continued
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Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
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 35. 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.
Fidelity follows 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).
• Changes to regulation (e.g. greenhouse gas emissions
restrictions, governance codes).
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Fidelity China Special Situations PLC
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Annual Report 2024
• 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 re-search 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.
world
that
provide
ESG-themed
reports
and
it
subscribes
to
an
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
G
O
V
E
R
N
A
N
C
E
P
E
R
F
O
R
M
A
N
C
E
I
N
D
I
C
A
T
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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.
ESG in the Investment Process at Fidelity
International
continued
35
Annual Report 2024
|
Fidelity China Special Situations PLC
STRATEGYFINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS
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 Portfolio Manager and his investment team continue to engage with companies to improve scores.
The chart below shows that the Company’s portfolio has a significantly lower carbon footprint than that of the Index.
Source: 31 March 2024, Fidelity International. Benchmark Index: MSCI China (Net). Long only and rescaled. The ESG ratings distribution calculation is based on the net asset
value of holdings.
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 2024, they cover a universe of around 4,000 issuers in equity and fixed income. Fidelity
have a five-scale rating of A (best) to E (worst).
0
50
100
150
200
250
300
Portfolio Carbon
Emissions
(tCO2e/US$m
invested)
Portfolio Carbon
Emissions
(tCO2e/US$m
revenue)
Weighted Average
Carbon Intensity
(tCO2e/US%m)
135.9
90.3
268.4
112.6
230.3
107.1
Portfolio Index
ESG AND CARBON EMISSIONS ASSESSMENT
Carbon Emissions: Provides a normalised snapshot of the carbon emissions of all of the investments in the Company’s portfolio
measured in tons CO2e/US$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.
0%
10%
20%
30%
40%
50%
60%
70%
3.6%
4.9%
52.0%
54.3%
14.9%
20.1%
3.0%
3.2%
2.3%
0.6%
24.2%
16.9%
ADCBNot ratedE
Portfolio Index
FIL Proprietary ESG ratings
3
(% NAV exposure)
0%
5%
10%
15%
20%
25%
30%
35%
1.4%
2.3%
AAA BBBBBANot ratedB
Portfolio Index
AA CCC
3.1%
10.7%
12.2%
18.0%
17.7%
23.1%
17.0%
27.2%
15.8%
14.7%
1.4%
3.8%
31.4%
0.3%
MSCI ESG ratings
1
(% NAV exposure)
Carbon Footprint (tonnes CO2e per US$m invested)
2
36
Fidelity China Special Situations PLC
|
Annual Report 2024
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 Property Income Trust
Limited and Schroder BSC Social Impact Trust plc. He is Chairman of
TPT Investment Management Limited and sits on the board of its
parent company, TPT Retirement Solutions 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 both ICG Enterprise Trust PLC and Barings Emerging
EMEA Opportunities 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 25 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 and the Senior Independent
Director of JPMorgan Indian Investment Trust plc and Invesco Asia Trust
plc in addition to being a non-executive Director of Herald Investment
Management Ltd. 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 21 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 Chief Executive Officer 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 Murray Income Trust plc.
She has over 20 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. 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 he has served on
several corporate boards.
Edward Tse
Director
Appointed 24 November 2022
A M N
Dr Tse is a non-executive Director of China Travel International
Investment Limited (Hong Kong), China Oriental Group and Ping An
Life Insurance Company of China as well as an Adviser of CDIB Capital
International and Our Hong Kong Foundation. He is founder and Chief
Executive Officer of Gao Feng Advisory Company, Professor of
Managerial Practice at Cheung Kong Graduate School of Business,
and Advisory Board Member cum Adjunct Professor of Institute for
China Business at the University of Hong Kong. He 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 independent.
37
Annual Report 2024
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Fidelity China Special Situations PLC
INFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGYGOVERNANCE
Directors’ Report
The Directors have pleasure in presenting their report and the
audited Financial Statements of the Company for the year ended
31 March 2024.
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 (2023: nil).
The Board reviews the Management Agreement at least annually
and details are included in the Corporate Governance Statement
on page 43.
Management Fee
The Company has a management fee arrangement which
comprises a base fee, based on Net Assets, plus a positive or
negative variable element.
With effect from 1 July 2023, the base management fee on the
first £1.5 billion of Net Assets reduced from 0.90% to 0.85%. It
remained unchanged at 0.70% on Net Assets over £1.5 billion
until 14 March 2024, when on the completion of the combination
transaction with abrdn China Investment Company Limited, it
reduced to 0.65% on Net Assets over £1.5 billion. The variable
management fee (“VMF”) of +/- 0.20% remained unchanged.
The 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). 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 share outperformance or
underperformance over the MSCI China Index to a maximum of
+0.20% or a minimum of -0.20%. In the event of outperformance,
the maximum fee that the Company would pay on Net Assets up
to £1.5 billion is 1.05%, but in the case of underperformance, it
can fall as low as 0.65%. For Net Assets over £1.5 billion, the
maximum fee payable would be 0.85% if the Company
outperforms the MSCI China Index or in the case of
underperformance, it could fall as low as 0.45%.
The variable management fee charge for the year ended
31 March 2024 was 0.15% (2023: 0.20%).
The total management fee for the year ended 31 March 2024
was £11,421,000 (2023: £14,727,000) as detailed in Note 4 on
page 70. This was made up of a base fee of £9,719,000 (2023:
£12,049,000) and a charge of £1,702,000 (2023: £2,678,000) on
the variable element based on the performance of the NAV
against the MSCI China Index.
The Board
All Directors served on the Board throughout the year ended
31 March 2024. A brief description of all serving Directors as at
the date of this report is shown on page 36 and indicates their
qualifications for Board membership.
All serving Directors as at the date of this report will be seeking
re-election at the AGM on 23 July 2024.
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, 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 2025 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 the war in Ukraine, the
Middle East conflict, China’s tensions with the US and Taiwan and
significant market events.
Accordingly, the Financial Statements of the Company have been
prepared on a going concern basis.
The prospects of the Company over a period longer than twelve
months can be found in the Viability Statement on pages 29 and 30.
Auditors’ Appointment
A resolution to reappoint Ernst & Young LLP as Auditor to the
Company will be proposed at the AGM on 23 July 2024.
38
Fidelity China Special Situations PLC
|
Annual Report 2024
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 41 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 2024, the issued share capital was
611,310,982 (2023: 571,054,480) of which 85,629,548 (2023:
82,728,852) shares were held in Treasury. Shares in Treasury do
not have voting rights, therefore the total number of shares with
voting rights was 525,681,434 (2023: 488,325,628). The issued
share capital of 611,310,982 shares includes 59,005,997 shares
issued as a result of the Company’s transaction with abrdn China
Investment Company Limited on 14 March 2024.
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
On 14 March 2024, the Company issued 59,005,997 shares as a
result of the transaction with abrdn China Investment Company
Limited. Other than this, no shares were issued during the year
ended 31 March 2024 (2023: 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 23 July 2024 and resolutions to renew
these authorities will be put to shareholders at this AGM.
Share Repurchases
The Company repurchased 2,900,696 (2023: 25,631,781) shares
into Treasury and 18,749,495 (2023: nil) for cancellation during
the year ended 31 March 2024. In May 2023, the Board decided
that once shares held in Treasury reached 15% of the issued
share capital of the Company, further share repurchases would
be for cancellation and this has been the case since 12 May
2023. Since the year ended 31 March 2024 and as at the latest
practicable date of this report, the Company has repurchased a
further 2,696,249 shares for cancellation.
The authority to repurchase shares expires at the AGM on 23 July
2024 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 2024, 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
2024
%
30 April
2024
%
Fidelity Platform Investors 18.96 18.82
City of London Investment
Management 13.99 14.39
Hargreaves Lansdown 11.26 11.19
Lazard Asset Management 10.29 10.33
Allan & Gill Gray Foundation 6.96 6.98
Interactive Investor 5.04 5.06
Allspring Global Investments 4.00 4.18
An analysis of shareholders as at 31 March 2024 is detailed in
the table below.
Shareholders as at 31 March 2024
% of voting
share capital
Retail Investors
1
55.47
Mutual Funds 22.93
Pension Funds 11.42
Charities 6.96
Insurance Funds 2.41
Other 0.81
Total 100.00
1 Includes Fidelity Platform Investors (18.96%).
Directors’ Report continued
39
Annual Report 2024
|
Fidelity China Special Situations PLC
INFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGYGOVERNANCE
Additional Information required in the Directors’ Report
Information on proposed dividends, financial instruments,
disclosure on Streamlined Energy and Carbon Reporting (SECR)
and Task Force on Climate-Related Financial Disclosures (TCFD) is
set out in the Strategic Report on pages 22 to 32.
ANNUAL GENERAL MEETING – TUESDAY,
23JULY 2024 AT 11.00 AM
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 Tuesday,
23 July 2024 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 94 to 97.
The Notice of Meeting and related papers are sent to
shareholders at least 20 working days before the AGM.
For those shareholders who are unable 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 96 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
134-206-210. 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
A paper Proxy Form will be sent 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 23 July 2024, resolutions will be proposed relating
to the items of business set out in the Notice of Meeting on
pages 94 and 95, 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 £608,614. If passed, this
resolution will enable the Directors to allot a maximum of
60,861,400 ordinary shares which represents approximately 10%
of the issued ordinary share capital of the Company (including
Treasury Shares) at the latest practicable date of this report, 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 £608,614 (including Treasury shares)
(approximately 10% of the issued ordinary share capital of the
Company at the latest practicable date of this report and
equivalent to 60,861,400 ordinary shares).
40
Fidelity China Special Situations PLC
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Annual Report 2024
Authority to Repurchase Shares
Resolution 14 is a special resolution which renews the Company’s
authority to purchase up to 14.99% (78,395,400) of the ordinary
shares in issue (excluding Treasury shares) at the latest
practicable date of this report, 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
10 June 2024
Directors’ Report continued
41
Annual Report 2024
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Fidelity China Special Situations PLC
INFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGYGOVERNANCE
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 36.
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 Manager and 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 and Manager are in attendance at
these meetings.
Between these meetings there is regular contact with the
Investment Manager and 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 and Manager
being present.
In addition to the formal Board and Committee meetings held in
the reporting year, the Board undertook a 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.
Corporate Governance Statement
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Annual Report 2024
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
1
5/5 n/a 1/1 1/1
Alastair Bruce 5/5 5/5 1/1 1/1
Vanessa Donegan 5/5 5/5 1/1 1/1
Georgina Field 5/5 5/5 1/1 1/1
Gordon Orr 5/5 5/5 1/1 1/1
Edward Tse 5/5 5/5 1/1 1/1
1 As Chairman of the Board, Mr Balfour is not a Member of the Audit and Risk Committee but is invited to attend the meetings.
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 meetings in relation to the
transaction with abrdn China Investment Company Limited and
other ad hoc meetings for formal approvals as well as due
diligence meetings.
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. External consultants who have no
connection with the Company are used to identify potential
candidates.
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.
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. All
Directors being eligible, are standing for re-election at this year’s
AGM and their details are listed on page 36. 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. The
tenure of individual Directors is also considered as part of this
process.
As a FTSE 350 Company and in accordance with provision 21 of
the 2018 UK Corporate Governance Code, the Board carried out
an externally facilitated evaluation this year using the services of
Lintstock Ltd. which has no connection with the Company or the
Manager. It was concluded that the Chairman, each Director and
the Manager had been effective and continue to demonstrate
commitment to their roles. The tenure of the Directors was also
considered during the evaluation process. It was also concluded
that the Board and its Committees continue to function and
perform well.
The next external evaluation will be for the Company’s year
ending 2027.
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, as set out on the next page,
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.
Corporate Governance Statement continued
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Fidelity China Special Situations PLC
INFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGYGOVERNANCE
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 Manager and for ensuring that the terms of the
Management Agreement remain 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 AGM on 23 July 2024, 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 37.
Nomination and Remuneration Committee
Composition
The Nomination and Remuneration Committee (the “Committee”)
is chaired by Vanessa Donegan and consists of all of the
Directors.
Role and Responsibilities
The Committee meets at least once a year and 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.
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
appointed a Board apprentice who started her apprenticeship on
13 July 2023 for a term of one year. She attends 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.
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 financial, 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 relevant to the Company’s audit. It 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 there is an effective
robust ongoing process in place 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 31March
2024 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.
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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. Accordingly, this policy has been endorsed 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. In addition, the Portfolio Manager also
meets with major shareholders and investors in the UK. 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 its 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.
The Board encourages all shareholders to attend the Company’s
AGM on 23 July 2024, details of which can be found on page 6.
Full details of the Notice of Meeting are on pages 94 to 97.
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 after the AGM.
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
10 June 2024
Corporate Governance Statement continued
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Annual Report 2024
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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
2024 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 23 July 2024.
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 2024 is as
follows: Chairman – £54,000 (2023: £52,000); Chairman of the
Audit and Risk Committee – £45,500 (2023: £43,500); Senior
Independent Director – £42,500 (2023: £41,000); and Director –
£36,000 (2023: £34,500). 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 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”) is subject to a binding
vote at every third AGM. 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 2024 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 2023, 99.82% of votes were cast in
favour of the Directors’ Remuneration Report for the year ended
31 March 2023, 0.15% of votes were cast against and 0.03% of
votes were withheld.
The Directors’ Remuneration Report for the year ended 31 March
2024 will be put to shareholders at the AGM on 23 July 2024,
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
ended 31 March 2024 was £245,153 (2023: £209,466). 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.
Directors’ Remuneration Report
46
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Annual Report 2024
2025 2024 2024 2024 2023 2023 2023
Projected
Total
Fees
(Audited)
Taxable
Expenses*
(Audited)
Total
(Audited)
Fees
(Audited)
Taxable
Expenses*
(Audited)
Total
(Audited)
(£) (£) (£) (£) (£) (£) (£)
Remuneration of Directors
Mike Balfour
1
54,000 52,000 5,153 57,153 45,570 7,299 52,869
Alastair Bruce
2
45,500 43,500 – 43,500 37,464 – 37,464
Vanessa Donegan
3
42,500 41,000 – 41,000 33,237 – 33,237
Georgina Field
4
36,000 34,500 – 34,500 23,738 – 23,738
Gordon Orr
5
36,000 34,500 – 34,500 7,912 – 7,912
Edward Tse
6
36,000 34,500 – 34,500 11,165 – 11,165
Nicholas Bull
7
n/a n/a n/a n/a 14,581 – 14,581
Linda Yueh
8
n/a n/a n/a n/a 28,500 – 28,500
Total 250,000 240,000 5,153 245,153 202,167 7,299 209,466
* 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 Appointed Senior Independent Director on 1 January 2023.
4 Appointed on 1 July 2022.
5 Appointed on 1 January 2023.
6 Appointed on 24 November 2022.
7 Retired on 20 July 2022.
8 Resigned 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 2024 2019 Change (%)
Chairman 52,000 42,000 +23.8%
Audit and Risk Committee Chairman 43,500 32,000 +35.9%
Senior Independent Director 41,000 31,500 +30.2%
Director 34,500 26,500 +30.2%
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 2025 is disclosed in the table above.
31 March
2024
£
31 March
2023
£
Expenditure on Remuneration:
Aggregate of Directors’ Fees 245,153 209,466
Distribution to Shareholders:
Dividend payments 30,198,000 28,240,000
Shares repurchased 45,933,000 57,249,000
Directors’ Remuneration Report continued
47
Annual Report 2024
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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 2024.
Total Return Performance for Ten Years to 31 March 2024
+123.6%
+49.3%
0
25
50
75
100
125
150
175
200
225
250
275
300
325
350
375
400
425
450
475
500
+125.7%
NAV per Share
Share Price
MSCI China Index
(
in UK sterlin
g
terms
)
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18
Mar 19
Mar 20
Mar 21
Mar 22
Mar 24
Mar 23
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 shares in the Company.
Directors’ Shareholdings (Audited)
31 March
2024
31 March
2023
Change
during year
Mike Balfour 65,000 65,000 –
Alastair Bruce 43,800 43,800 –
Vanessa Donegan 10,000 10,000 –
Georgina Field 2,250 2,250 –
Gordon Orr – – –
Edward Tse – – –
The above shareholdings remain unchanged as at the date of this report.
On behalf of the Board
Mike Balfour
Chairman
10 June 2024
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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 loss 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 10 June 2024 and signed on its behalf
by:
Mike Balfour
Chairman
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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 2024.
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) and
considering the scope of the work undertaken by the
Manager’s Internal Audit function;
• 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 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 (7 June 2023), the Committee has met five times and the Auditor attended three of these
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 charges ratio;
• The management fee calculations; and
• The Committee’s Terms of Reference.
.
Report of the Audit and Risk Committee
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In addition, the following matters were considered at these meetings:
September 2023
• Detailed review 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 2023
• The Half-Yearly Report and Financial Statements and recommendation of its approval to
the Board
• The Going Concern Statement
• Review of Fidelity’s Investment Trusts AAF Controls Report from PricewaterhouseCoopers LLP
• The Manager’s Risk Management Process Document
February 2024
• The Auditor’s engagement letter and audit plan for the Company’s year ending 31 March 2024
• Review of Fidelity’s Risk and Internal Control environment
• Fidelity’s Internal Audit reporting, including review of the internal audit plan
• Cybersecurity and potential threats and attacks and the controls in place to mitigate the risks
March 2024
• Detailed review 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 2024
• 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 following review and conclusion by the Committee that they are Fair, Balanced and
Understandable
• The Viability and Going Concern Statements, including the impact of China’s reopening
following the pandemic, the war in Ukraine, the Middle East and Red Sea conflicts,
significant market events and regulatory changes 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 pages 66
and 67. 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 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, including the allocation of special dividends.
Report of the Audit and Risk Committee continued
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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
Policies 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 PricewaterhouseCoopers
LLP 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 investments.
Valuation of the
Unlisted Investments
The Manager as the AIFM, is authorised and responsible for performing the valuation of the
Company’s unlisted investments, the valuation of which is in accordance with Accounting Policies
Notes 2 (e) and (l) on pages 66 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 reporting received
from the FVC 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 and also Fidelity’s unlisted investment specialist who
provides further insight. The Committee reviews and challenges the proposed valuation
methodologies for all of the unlisted investments 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 2024 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 2024.
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 2024; 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, Denise Davidson, 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 Tender
An audit tender process will be completed in 2025. This process
will be led by the Audit Committee, who will complete an
assessment of external auditors’ proposals. Following this
assessment, a recommendation will be made to the Board
regarding whether a change of Auditor should be made.
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 £71,000 (2023: £57,000). The fee of
£71,000 includes £10,000 in relation to the audit work carried out
for the transaction with abrdn China Investment Company Limited.
Alastair Bruce
Chairman of the Audit and Risk Committee
10 June 2024
Report of the Audit and Risk Committee continued
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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 31
March 2024 which comprise the Income Statement, the Statement
of Changes in Equity, the Balance Sheet, the Cash Flow Statement
and the related Notes 1 to 20, 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 2024 and of its loss 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 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 2025 which is at least 12 months from the date of
approval of the Financial Statements. In preparing the
revenue and expense 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 and the liquidity
assessment of the investments and determined, through
testing of the methodology and calculations, that the
methods, inputs and assumptions utilised are appropriate to
be able to make an assessment for the Company;
• Consideration of the mitigating factors included in the
revenue and expense forecast that are within the control of
the Company. We reviewed the Company’s assessment of
the liquidity of investments held and evaluated the
Company’s ability to sell those investments in order to cover
working capital requirements should revenue decline
significantly; and
• 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 2025 which is at least 12 months from when these
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
• Risk of incorrect accounting for the transaction between the Company and abrdn China
Investment Company Limited (‘ACIC’)
Materiality
• Overall materiality of £11.76m which represents 1% of the Company’s net asset value as at
31March 2024.
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
Stakeholders are increasingly interested in 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. This is explained
on page 24 and on page 27 in the principal and emerging risks section, which form part of the “Other information,” rather than the
audited Financial Statements. Our procedures on the 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 as the investments
are valued based on market pricing. 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. Based on our work we have not identified the impact of climate change on the
Financial Statements to be a key audit matter or to impact a key audit matter.
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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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
(pages 66 and 67); and Note 3 of the Financial
S
tatements (page 70)
The Company has reported revenue of £38.94m
(2023: £44.68m).
During the year, the Company received special
dividends amounting to £2.37m (2023: £2.34m),
of which £0.91m (2023: £1.18m) was classified
as revenue and £1.46m (2023: £1.16) 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
2024 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 investments held during the year, we
reviewed the type of dividends paid with
reference to an external data source to identify
those which were special dividends. There were
two special dividends above our testing
threshold, and we have 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.
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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 66 to 68); and Note 18 of the Financial
S
tatements (page 88).
At 31 March 2024, the Company had six unlisted
investments with a value of £157.01m (2023: nine
unlisted investments with a value of £192.88m)
and an unrealised gain of £44.76m (2023:
£25.99m).
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 Manager’s Fair
Value Committee papers including the
assumptions and judgements in determining the
fair value of the unlisted investments held by the
Company at the year-end;
Agreed the cost of the sold unlisted investments
to the supporting sale agreements and traced
the payments to bank statement;
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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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 66 to 68); and Notes 10 and 11 of the
F
inancial Statements (pages 74 and 75).
At 31 March 2024, the Company held listed
investments with a value of £1,005.26m (2023:
£1,125.89m). The Company also has derivative
assets amounting to £7.10m (2023: £22.31m)
and derivative liabilities amounting to £13.31m
(2023: £20.89m).
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 2024 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.
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Risk Our response to the risk Key observations
communicated to
the Audit and Risk
Committee
Risk of incorrect accounting for
the transaction between the
Company and abrdn China
Investment Company Limited
(‘ACIC’)
Accounting Policies (page 65); and Notes 15
and 16 of the Financial Statements (pages 77
and 78).
On 28 November 2023, proposals relating to the
combining with ACIC was announced by way of
a Guernsey scheme of reconstruction.
Implementation of the transaction would result in
voluntary winding up of ACIC and the transfer of
part of ACIC’s cash, investments and interest
income to the Company in return for the issue of
New Shares by the Company on a formula asset
value (“FAV”) for FAV basis. The transaction was
approved in the General meeting on 11 March
and implemented on 13 March 2024.
There is a risk that cash, investments and interest
income transferred from ACIC to the Company
are not recorded correctly. There is also a risk
that the issuance of shares related to the
transaction are incorrectly accounted for and
incorrectly disclosed in the Financial Statements
of the Company.
We have performed the following
procedures:
We obtained an understanding of the process
on how the transaction was recorded and the
issuance of shares calculated;
We have reviewed the formula asset value
calculations and checked the calculation agreed
to the scheme of reconstruction;
We have agreed the number of shares issued
pursuant to the transaction to the LSE
announcements and agreed to the accounting
records of the Company;
We agreed the cash, investments and interest
income transferred to the Company, as part of
the transaction, to the accounting records of the
Company;
We revalued the investments transferred using
market prices and exchange rates provided by
an independent pricing vendor, and traced the
cash transferred through bank statements; and
We reviewed the disclosures in the Financial
Statements to ensure the transaction was correctly
accounted for, and the Strategic Report, including
Section 172 statement, provided details of the
transaction.
The results of our
procedures identified
no material
misstatement in
relation to the
transaction between
the Company and
ACIC.
In the current year we have added a key audit matter on ‘Risk of
incorrect accounting for the transaction between the Company
and abrdn China Investment Company Limited (‘ACIC’)‘ as it is a
significant event that occurred during the period, and has a
material impact on the Financial Statements of the Company.
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 £11.76m
(2023: £13.38m), which is 1% (2023: 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% (2023: 75%)
of our planning materiality, namely £8.82m (2023: £10.04m). 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
£0.59m (2023: £0.67m), which is set at 5% of planning materiality,
as well as differences below that threshold that, in our view,
warranted reporting on qualitative grounds.
Independent Auditor’s Report to the Members
of Fidelity China Special Situations PLC
continued
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
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 £1.43m (2023: £1.83m), being 5% (2023: 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 37;
• 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 pages 29 and 30;
• 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 37;
• 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 24;
• 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.
Responsibilities of Directors
As explained more fully in the Directors’ responsibilities
statement 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.
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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
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 30
November 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 9 years, covering
the years ending 31 March 2016 to 31 March 2024.
• The audit opinion is consistent with the additional report to
the Audit and Risk Committee.
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.
Denise Davidson
(Senior Statutory Auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
10 June 2024
Independent Auditor’s Report to the Members
of Fidelity China Special Situations PLC
continued
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
Income Statement
for the year ended 31 March 2024
The Notes on pages 65 to 91 form an integral part of these Financial Statements.
Year ended 31 March 2024 Year ended 31 March 2023
Notes
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
Investment income 3 26,123 – 26,123 32,704 – 32,704
Derivative income 3 11,154 – 11,154 11,566 – 11,566
Other income 3 1,659 – 1,659 409 – 409
Total income 38,936 – 38,936 44,679 – 44,679
Losses on investments at fair value
through profit or loss 10 – (155,001) (155,001) – (6,912) (6,912)
(Losses)/gains on derivative
instruments 11 – (54,790) (54,790) – 14,971 14,971
Foreign exchange (losses)/gains – (3,858) (3,858) – 8,167 8,167
Foreign exchange gains/(losses)
on bank loan – 1,517 1,517 – (4,814) (4,814)
Total income and (losses)/gains 38,936 (212,132) (173,196) 44,679 11,412 56,091
Expenses
Investment management fees 4 (2,430) (8,991) (11,421) (3,012) (11,715) (14,727)
Other expenses 5 (1,203) (35) (1,238) (1,097) (4) (1,101)
Profit/(loss) before finance costs
and taxation 35,303 (221,158) (185,855) 40,570 (307) 40,263
Finance costs 6 (6,699) (20,098) (26,797) (3,956) (11,869) (15,825)
Profit/(loss) before taxation 28,604 (241,256) (212,652) 36,614 (12,176) 24,438
Taxation 7 (812) – (812) (1,149) – (1,149)
Profit/(loss) after taxation for the
year 27,792 (241,256) (213,464) 35,465 (12,176) 23,289
Earnings/(loss) per ordinary
share 8 5.78p (50.18p) (44.40p) 7.05p (2.42p) 4.63p
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.
On 13 March 2024, the Company combined assets with abrdn China Investment Company Limited (“ACIC”), following a Guernsey
scheme of reconstruction. No other operations were acquired or discontinued during the year.
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Statement of Changes in Equity
for the year ended 31 March 2024
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 2023 5,710 211,569 917 186,794 877,782 55,649 1,338,421
New ordinary shares issued in
respect of the transaction with
ACIC 15 590 126,198––––126,788
Contribution in respect of the
transaction with ACIC by the
Manager –400––––400
Repurchase of ordinary shares
into Treasury 15 – – – (6,965) – – (6,965)
Repurchase of ordinary shares
for cancellation 15 (187) – 187 (38,968) – – (38,968)
(Loss)/profit after taxation for
the year ––––(241,256) 27,792 (213,464)
Dividend paid to shareholders 9 –––––(30,198) (30,198)
Total equity at
31 March 2024 6,113 338,167 1,104 140,861 636,526 53,243 1,176,014
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
The Notes on pages 65 to 91 form an integral part of these Financial Statements.
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
Notes
31 March
2024
£’000
31 March
2023
£’000
Non-current assets
Investments at fair value through profit or loss 10 1,162,265 1,318,764
Current assets
Derivative instruments 11 7,103 22,313
Amounts held at futures clearing houses and brokers 24,589 34,813
Other receivables 12 10,066 11,939
Cash at bank 7,858 72,943
49,616 142,008
Current liabilities
Derivative instruments 11 (13,307) (20,892)
Bank loan 13 – (80,857)
Other payables 14 (9,802) (20,602)
Bank overdrafts (12,758) –
(35,867) (122,351)
Net current assets 13,749 19,657
Net assets 1,176,014 1,338,421
Equity attributable to equity shareholders
Share capital 15 6,113 5,710
Share premium account 16 338,167 211,569
Capital redemption reserve 16 1,104 917
Other reserve 16 140,861 186,794
Capital reserve 16 636,526 877,782
Revenue reserve 16 53,243 55,649
Total equity 1,176,014 1,338,421
Net asset value per ordinary share 17 223.71p 274.08p
The Financial Statements on pages 61 to 91 were approved by the Board of Directors on 10 June 2024 and were signed on its behalf by:
Mike Balfour
Chairman
Balance Sheet
as at 31 March 2024
Company number 7133583
The Notes on pages 65 to 91 form an integral part of these Financial Statements.
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Cash Flow Statement
for the year ended 31 March 2024
Year ended
31 March
2024
£’000
Year ended
31 March
2023
£’000
Operating activities
Cash inflow from investment income 26,240 30,352
Cash inflow from derivative income 10,891 11,484
Cash inflow from other income 1,659 409
Cash outflow from Directors’ fees (236) (195)
Cash outflow from other payments (13,104) (15,638)
Cash outflow from the purchase of investments (592,266) (429,715)
Cash outflow from the purchase of derivatives (1,910) (7,957)
Cash outflow from the settlement of derivatives (301,285) (485,760)
Cash inflow from the sale of investments 703,150 480,407
Cash inflow from the settlement of derivatives 260,351 510,263
Cash outflow from amounts held at futures clearing houses and brokers 10,224 (2,593)
Net cash inflow from operating activities before servicing of finance 103,714 91,057
Financing activities
Cash inflow from the issuance of ordinary shares in respect of the transaction with ACIC 5,156 –
Cash inflow from the Fidelity contribution in respect of the transaction with ACIC 400 –
Cash outflow from loan interest paid (5,138) (2,242)
Cash outflow from the settlement of the bank loan (79,340) –
Cash outflow from CFD interest paid (22,695) (12,099)
Cash outflow from short CFD dividends paid – (254)
Cash outflow from the repurchase of ordinary shares into Treasury (7,095) (57,119)
Cash outflow from the repurchase of ordinary shares for cancellation (38,789) –
Cash outflow from dividends paid to shareholders (30,198) (28,240)
Cash outflow from financing activities (177,699) (99,954)
Decrease in cash at bank (73,985) (8,897)
Cash at bank at the start of the year 72,943 73,673
Effect of foreign exchange movements (3,858) 8,167
Cash at bank at the end of the year (4,900) 72,943
Represented by:
Cash at bank
7,858
72,943
Bank overdrafts
(12,758)
–
(4,900)
72,943
The Notes on pages 65 to 91 form an integral part of these Financial Statements.
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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 2025 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, 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 37.
In preparing these Financial Statements the Directors have considered the impact of climate change risk as an emerging and a
principal risk as set out on page 24 and on page 27, 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 37 takes account of all events and conditions up to 30
June 2025 which is at least twelve months from the date of approval of these Financial Statements.
Issue of Ordinary Shares in respect of the transaction with abrdn China Investment Company Limited (“ACIC”)
On 13 March 2024, the Company issued New ordinary shares which were provided to shareholders of ACIC, in connection with the
combination of the assets of the Company with the assets of ACIC.
The Directors have considered the substance of the assets and activities of ACIC in determining whether the acquisition represents
the acquisition of a business. In this case, the acquisition is not considered to be an acquisition of a business, and therefore, has not
been treated as a business combination. Rather, the cost to acquire the assets and liabilities of ACIC has been allocated between
the acquired identifiable assets and liabilities based on their relative fair values on the acquisition date without attributing any amount
to goodwill or to deferred taxes. Assets transferred comprised investments, cash and receivables. A total of £126,789,000 of assets
were acquired as a result of the transaction with ACIC. This comprised investments (£120,754,000), cash (£5,156,000) and receivables
(£879,000).
The Manager agreed to contribute towards the transaction with ACIC, as described below.
A contribution of £715,000, representing eight months of management fees, in respect of the assets transferred by ACIC to the
Company, that would otherwise be payable by the enlarged Company to the Manager in the year to 31 March 2025.
Additionally, the Manager agreed to make a cash contribution to the Company equal to £500,000. In the year to 31 March 2024, the
Company has recognised an initial contribution of £400,000, with a further £100,000 being recognised in the year to 31 March 2025,
to align with the reduction of management fees and the recognition of expenses relating to the transaction and issuance of shares.
The Company has recognised the contribution from the Manager in the Share premium account as described in Note 16.
Furthermore, the Manager has agreed that following the transaction with ACIC, the base management fee payable by the Company
under the Management Agreement will reduce from 0.70% to 0.65% on the Company’s Net Assets in excess of £1.5 billion. This is
expected to lower the ongoing costs of the Company as it grows over the longer-term.
b) Adoption of new and revised International Accounting Standards – the accounting policies adopted are consistent with those
of the previous financial year.
Notes to the Financial Statements
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Notes to the Financial Statements continued
2 Accounting Policies continued
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 7 Statement of Cash Flows;
• 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.
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 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.
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
2 Accounting Policies continued
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 on securities, interest for 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.
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.
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2 Accounting Policies continued
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). 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.
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 International 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);
• 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 (losses)/gains 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.
Notes to the Financial Statements continued
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
2 Accounting Policies continued
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 (losses)/gains 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 securities sold for future settlement, amounts receivable on settlement of derivatives,
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.
q) Other payables – Other payables include securities purchased for future settlement, amounts payable on settlement of derivatives,
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 and ordinary shares repurchased for cancellation
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 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 £10,288,000 (2023: unrealised investment holding gains of £25,993,000). See Note 18 on pages 80 to 89 for further
details on the level 3 investments.
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3 Income
Year ended
31 March
2024
£’000
Year ended
31 March
2023
£’000
Investment income
Overseas dividends 26,052 31,949
Overseas scrip dividends – 755
Interest on securities 71 –
26,123 32,704
Derivative income
Dividends received on long CFDs 10,525 11,282
Interest received on CFDs 629 284
11,154 11,566
Other income
Interest received on collateral, deposits and money market funds 1,659 409
Total income 38,936 44,679
Special dividends of £1,458,000 (2023: £1,155,000) have been recognised in capital.
4 Investment Management Fees
Year ended 31 March 2024 Year ended 31 March 2023
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
Investment management fee – base 2,430 7,289 9,719 3,012 9,037 12,049
Investment management fee – variable – 1,702 1,702 – 2,678 2,678
2,430 8,991 11,421 3,012 11,715 14,727
FIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager (“the Manager”) and has delegated portfolio
management to FIL Investment Management (Hong Kong) Limited (“the Investment Manager”).
The base investment management fee for the period from 1 April to 30 June 2023 was charged at an annual rate of 0.90% on the
first £1.5 billion of Net Assets, reducing to 0.70% of Net Assets over £1.5 billion. Since 1 July 2023, it has been charged at an annual
reduced rate of 0.85% on the first £1.5 billion of Net Assets and remained unchanged at 0.70% on Net Assets over £1.5 billion until
14March 2024, when on completion of the transaction with ACIC, it reduced to 0.65% on Net Assets over £1.5 billion.
In addition, there is a +/-0.20% variable fee based on the Company’s NAV per share performance relative to the Company’s
Benchmark Index measured daily over a three-year rolling basis.
Fees are payable monthly in arrears and are calculated on a daily basis. The base investment management fee has been allocated
75% to capital reserve in accordance with the Company’s accounting policies.
Further details of the terms of the Management Agreement are given in the Directors’ Report on page 37.
Notes to the Financial Statements continued
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
5 Other Expenses
Year ended
31 March
2024
£’000
Year ended
31 March
2023
£’000
Allocated to revenue:
AIC fees 21 21
Custody fees 101 157
Depositary fees 52 57
Directors’ expenses 79 13
Directors’ fees
1
240 202
Legal and professional fees 143 77
Marketing expenses 269 263
Printing and publication expenses 39 50
Registrars’ fees 63 69
Other expenses 125 131
Fees payable to the Company’s Independent Auditor for the audit of the Financial Statements 71 57
1,203 1,097
Allocated to capital:
Legal and professional fees 35 4
Other expenses 1,238 1,101
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 2024 Year ended 31 March 2023
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
Interest paid on bank loan and overdrafts 1,117 3,352 4,469 663 1,989 2,652
Interest paid on CFDs 5,582 16,746 22,328 3,230 9,689 12,919
Dividends paid on short CFDs –––63 191 254
6,699 20,098 26,797 3,956 11,869 15,825
Finance costs have been allocated 75% to capital reserve in accordance with the Company’s accounting policies.
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7 Taxation
Year ended 31 March 2024 Year ended 31 March 2023
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
a) Analysis of the taxation charge for
the year
Overseas taxation 812 – 812 1,149 – 1,149
Taxation charge for the year
(see Note 7b) 812 – 812 1,149 – 1,149
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 25% (2023:
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 2024 Year ended 31 March 2023
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
Profit/(loss) before taxation 28,604 (241,256) (212,652) 36,614 (12,176) 24,438
Profit/(loss) before taxation multiplied by
the standard rate of UK corporation tax of
25% (2023: 19%) 7,151 (60,314) (53,163) 6,957 (2,313) 4,644
Effects of:
Capital losses/(gains) not taxable
1
– 53,033 53,033 – (2,168) (2,168)
Income not taxable (6,406) – (6,406) (6,116) – (6,116)
Expenses not deductible – 4,604 4,604 – 1,987 1,987
Excess expenses (745) 2,677 1,932 (841) 2,494 1,653
Overseas taxation 812 – 812 1,149 – 1,149
Taxation charge (Note 7a) 812 – 812 1,149 – 1,149
1 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 £39,515,000 (2023: £37,583,000), in respect of excess expenses of £158,059,000 (2023: £150,330,000) has not
been recognised as it is unlikely that there will be sufficient future taxable profits to utilise these expenses.
The UK corporation tax rate increased from 19% to 25% from 1 April 2023. The rate of 25% has been applied to calculate the
unrecognised deferred tax asset for the current year (2023: 25%).
Notes to the Financial Statements continued
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
8 Earnings/(Loss) per Ordinary Share
Year ended
31 March
2024
Year ended
31 March
2023
Revenue earnings per ordinary share 5.78p 7.05p
Capital loss per ordinary share (50.18p) (2.42p)
Total (loss)/earnings per ordinary share (44.40p) 4.63p
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 27,792 35,465
Capital loss after taxation for the year (241,256) (12,176)
Total (loss)/profit after taxation for the year (213,464) 23,289
Number Number
Weighted average number of ordinary shares held outside of Treasury 480,806,725 503,045,428
9 Dividends Paid to Shareholders
Year ended
31 March
2024
£’000
Year ended
31 March
2023
£’000
Dividend paid
Dividend of 6.25 pence per ordinary share paid for the year ended 31 March 2023 30,198 –
Dividend of 5.50 pence per ordinary share paid for the year ended 31 March 2022 – 28,240
30,198 28,240
Dividend proposed
Dividend proposed of 6.40 pence per ordinary share for the year ended 31 March 2024 33,471 –
Dividend proposed of 6.25 pence per ordinary share for the year ended 31 March 2023 – 30,199
33,471 30,199
The Directors have proposed the payment of a dividend for the year ended 31 March 2024 of 6.40 pence per ordinary share which is
subject to approval by shareholders at the Annual General Meeting on 23 July 2024 and has not been included as a liability in these
Financial Statements. The dividend will be paid on 31 July 2024 to shareholders on the register at the close of business on 21 June
2024 (ex-dividend date 20 June 2024).
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10 Investments at Fair Value through Profit or Loss
2024
£’000
2023
£’000
Total investments
1
1,162,265 1,318,764
Opening book cost 1,514,572 1,630,492
Opening investment holding losses (195,808) (265,007)
Opening fair value of investments 1,318,764 1,365,485
Movements in the year
Purchases at cost 586,707 440,666
Assets acquired in respect of the transaction with ACIC 120,754 –
Sales – proceeds (708,959) (480,475)
Losses on investments (155,001) (6,912)
Closing fair value 1,162,265 1,318,764
Closing book cost 1,398,894 1,514,572
Closing investment holding losses (236,629) (195,808)
Closing fair value of investments 1,162,265 1,318,764
1 The fair value hierarchy of the investments is shown in Note 18.
The Company received £708,959,000 (2023: £480,475,000) from investments sold in the year. The book cost of these investments when
they were purchased was £823,139,000 (2023: £556,586,000). 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
2024
£’000
Year ended
31 March
2023
£’000
Purchases transaction costs 720 599
Sales transaction costs 740 742
1,460 1,341
The portfolio turnover rate for the year was 57.7%, excluding the ACIC transaction (2023: 35.5%). 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.
Notes to the Financial Statements continued
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
11 Derivative Instruments
Year ended
31 March
2024
£’000
Year ended
31 March
2023
£’000
Net change to (losses)/gains on derivative instruments
Realised (losses)/gains on CFDs (74,311) 6,913
Realised gains on futures 27,951 16,590
Realised losses on options (4,632) (2,645)
Movement in investment holding (losses)/gains on CFDs (11,900) 353
Movement in investment holding gains/(losses) on futures 6,382 (4,466)
Movement in investment holding gains/(losses) on options 1,720 (1,774)
(54,790) 14,971
2024
Fair value
£’000
2023
Fair value
£’000
Fair value of derivative instruments recognised on the Balance Sheet
1
Derivative instrument assets 7,103 22,313
Derivative instrument liabilities (13,307) (20,892)
(6,204) 1,421
1 The fair value hierarchy of the derivative instruments is shown in Note 18.
Fair value
£’000
2024
Asset
exposure
£’000
Fair value
£’000
2023
Asset
exposure
£’000
At the year end the Company held the following derivative
instruments
Long CFDs (4,483) 412,237 7,409 512,674
Short CFDs (1,246) 14,766 (1,238) 19,086
Futures (hedging exposure) (475) (138,402) (6,857) (172,890)
Call options ––204 2,161
Put options (long exposure) ––(414) 5,097
Put options (short exposure) ––29 188
Put options (hedging exposure) ––2,288 (26,013)
(6,204) 288,601 1,421 340,303
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12 Other Receivables
2024
£’000
2023
£’000
Securities sold for future settlement 5,957 148
Amounts receivable on settlement of derivatives 2,161 10,135
Accrued income 1,726 1,513
Taxation recoverable 12 13
Other receivables 210 130
10,066 11,939
13 Bank Loan – repayable within one year
2024
£’000
2023
£’000
Fixed rate unsecured US dollar loan
US dollar 100,000,000 fixed at a rate of 6.335%
1
– 80,857
– 80,857
1 The unsecured loan with The Bank of Nova Scotia, London Branch was repaid on 13 February 2024.
14 Other Payables
2024
£’000
2023
£’000
Securities purchased for future settlement 6,843 12,402
Amounts payable on settlement of derivatives 1,078 4,731
Investment management fees 678 1,266
Finance costs payable 610 977
Accrued expenses 414 1,096
Amounts payable for repurchase of shares for cancellation 179 –
Amounts payable for repurchase of shares into Treasury – 130
9,802 20,602
Notes to the Financial Statements continued
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
15 Share Capital
Number of
shares
2024
Nominal
value
£’000
Number of
shares
2023
Nominal
value
£’000
Issued, allotted and fully paid
Ordinary shares of 1 pence each held outside of Treasury
Beginning of the year 488,325,628 4,884 513,957,409 5,140
New ordinary shares issued in respect of the transaction with ACIC 59,005,997 590 ––
Ordinary shares repurchased into Treasury (2,900,696) (29) (25,631,781) (256)
Ordinary shares repurchased for cancellation (18,749,495) (187) ––
End of the year 525,681,434 5,258 488,325,628 4,884
Ordinary shares of 1 pence each held in Treasury
1
Beginning of the year 82,728,852 826 57,097,071 570
Ordinary shares repurchased into Treasury 2,900,696 29 25,631,781 256
End of the year 85,629,548 855 82,728,852 826
Total share capital 6,113 5,710
1 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.
On 13 March 2024, the Company acquired £126.8 million of Net Assets from ACIC, in consideration for the issue of 59,005,997 new
shares to ACIC shareholders in accordance with the Scheme.
During the year, the Company repurchased 2,900,696 (2023: 25,631,781) ordinary shares and held them in Treasury. The cost of
repurchasing these shares of £6,965,000 (2023: £57,249,000) was charged to the Other Reserve.
The Company also repurchased 18,749,495 (2023: nil shares) ordinary shares for cancellation. The cost of repurchasing these shares
of £38,968,000 (2023: £nil) was charged to the Other Reserve.
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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 2023 5,710 211,569 917 186,794 877,782 55,649 1,338,421
Losses on investments (see Note 10) ––––(155,001) – (155,001)
Losses on derivative instruments
(see Note 11) ––––(54,790) – (54,790)
Foreign exchange losses ––––(3,858) – (3,858)
Foreign exchange gains on bank loan –––– 1,517 – 1,517
Investment management fees (see Note 4) –––– (8,991) – (8,991)
Other expenses (see Note 5) –––– (35) – (35)
Finance costs (see Note 6) ––––(20,098) – (20,098)
Revenue profit after taxation for the year –––––27,792 27,792
Dividend paid to shareholders
(see Note 9) –––––(30,198) (30,198)
New ordinary shares issued in respect of the
transaction with ACIC (see Note 15) 590 126,198––––126,788
Contribution in respect of the transaction with
ACIC by the Manager (see Note 2 (a)) –400––––400
Repurchase of ordinary shares into Treasury
(see Note 15) – – – (6,965) – – (6,965)
Repurchase of ordinary shares for cancellation
(see Note 15) (187) – 187 (38,968) – – (38,968)
At 31 March 2024 6,113 338,167 1,104 140,861 636,526 53,243 1,176,014
Notes to the Financial Statements continued
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
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 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
The capital reserve balance at 31 March 2024 includes investment holding losses on investments of £236,629,000 (2023: losses
of £195,808,000) as detailed in Note 10 above. See Note 2 (s) 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 net assets divided by the number of ordinary shares held
outside of Treasury.
2024 2023
Net assets £1,176,014,000 £1,338,421,000
Ordinary shares held outside of Treasury at year end 525,681,434 488,325,628
Net asset value per ordinary share 223.71p 274.08p
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 so that shares held in Treasury have no dilutive effect.
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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), investment performance (including
gearing), discount management, unlisted securities, climate change, environmental, social and governance (“ESG”), key person,
cybercrime and information security, business continuity, operational and variable interest entity structures. 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 24 to 29.
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 and in addition, the Company has derivative instruments. The unsecured
fixed rate loan facility for US$100,000,000 expired on 13 February 2024 as disclosed in Note 13.
Interest rate risk exposure
The values of the Company’s financial instruments that are exposed to movements in interest rates are shown below:
2024
£’000
2023
£’000
Exposure to financial instruments that bear interest
Long CFDs – exposure less fair value 416,720 505,265
Bank overdrafts 12,758 –
Bank loan – 80,857
429,478 586,122
Exposure to financial instruments that earn interest
Short CFDs – exposure plus fair value 13,520 17,848
Amounts held at futures clearing houses and brokers 24,589 34,813
Cash at bank 7,858 72,943
45,967 125,604
Net exposure to financial instruments that bear interest 383,511 460,518
Notes to the Financial Statements continued
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
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;
• 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
2024
Total
£’000
Chinese renminbi 92,336 – – 1,372 93,708
Euro 10,903–––10,903
Hong Kong dollar 704,175 148,557 18,153 – 870,885
Japanese yen 5,787 22,134 125 341 28,387
Taiwan dollar 7,603 – 12 – 7,615
Thai baht 439–––439
UK sterling 17,752 – 209 – 17,961
US dollar 323,270 103,144 16,156 6,145 448,715
1,162,265 273,835 34,655 7,858 1,478,613
1 The asset exposure of long CFDs after the netting of hedging exposures.
2 Other receivables include amounts held at futures clearing houses and brokers.
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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
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 –––11
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.
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, other payables, bank overdrafts and US dollar denominated bank loan.
The currency profile of these financial liabilities is shown below:
Currency
Asset
exposure of
short
derivative
instruments
1
£’000
Other
payables
£’000
Bank
overdrafts
£’000
2024
Total
£’000
Hong Kong dollar – 5,994 12,744 18,738
UK sterling – 1,271 14 1,285
US dollar 14,766 2,537 – 17,303
14,766 9,802 12,758 37,326
Currency
Asset
exposure of
short
derivative
instruments
1
£’000
Other
payables
£’000
US dollar
bank loan
£’000
2023
Total
£’000
Hong Kong dollar 13,842 13,658 – 27,500
UK sterling – 1,823 – 1,823
US dollar 5,432 5,121 80,857 91,410
19,274 20,602 80,857 120,733
1 The asset exposure of short derivative instruments excluding hedging exposures.
Notes to the Financial Statements continued
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
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.
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 2024, £2,811,000 (2023: £15,601,000) 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 £2,613,000 (2023: £5,814,000), HSBC Bank plc £198,000
(2023: £5,397,000) and UBS AG £nil (2023: £4,390,000). As at 31 March 2024, £24,589,000 (2023: £34,813,000), 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 £15,689,000 (2023:
£24,694,000) in cash, J.P. Morgan Securities plc £5,186,000 (2023: £7,273,000) in cash and Morgan Stanley & Co. International Ltd
£3,714,000 (2023: £2,846,000) 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 on the next page:
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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
2024
Net
amount
£’000
Financial
instruments
£’000
Margin
account
received as
collateral
£’000
CFDs 7,103 – 7,103 (3,844) (2,389) 870
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
2024
Net
amount
£’000
Financial
instruments
£’000
Margin
account
pledged as
collateral
£’000
CFDs (12,832) – (12,832) 3,844 8,900 (88)
Futures (exchange traded) (475) – (475) – 475 –
(13,307) – (13,307) 3,844 9,375 (88)
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 –
Notes to the Financial Statements continued
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
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 increased the loss after taxation for the year and decreased the net assets
of the Company by £3,835,000 (2023: decreased the profit after taxation and decreased the net assets by £3,797,000). 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 increased the loss after
taxation for the year and decreased the net assets of the Company (2023: decreased the profit after taxation and decreased the net
assets) by the following amounts:
Currency
2024
£’000
2023
£’000
Chinese renminbi 8,519 17,467
Euro 991 948
Hong Kong dollar 77,468 82,028
Japanese yen 2,581 3,200
Taiwan dollar 692 1,791
Thai baht 40 –
US dollar 39,219 42,223
129,510 147,657
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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 decreased the loss after taxation for the year and increased the
net assets of the Company (2023: increased the profit after taxation and increased the net assets) by the following amounts:
Currency
2024
£’000
2023
£’000
Chinese renminbi 10,412 21,348
Euro 1,211 1,159
Hong Kong dollar 94,683 100,257
Japanese yen 3,154 3,911
Taiwan dollar 846 2,189
Thai baht 49 –
US dollar 47,935 51,606
158,290 180,470
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 22 to 32.
An increase of 10% in the share prices of the listed investments held at the Balance Sheet date would have decreased the loss after
taxation for the year and increased the net assets of the Company by £100,526,000 (2023: increased the profit after taxation and
increased the net assets by £112,588,000). 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 decreased the loss after
taxation for the year and increased the net assets of the Company by £15,701,000 (2023: increased the profit after taxation and
increased the net assets by £19,288,000). A decrease of 10% in the valuation would have had an equal but opposite effect.
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 decreased the loss after taxation for
the year and increased the net assets of the Company by £25,907,000 (2023: increased the profit after taxation and increased the net
assets by £30,176,000). 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), 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
2024
Book value
£’000
Fair value
£’000
2023
Book value
£’000
Fixed rate unsecured loan of US dollar 100,000,000
1
––81,092 80,857
1 The unsecured fixed rate loan facility for US$100,000,000 was repaid on 13 February 2024 as disclosed in Note 13.
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.
Notes to the Financial Statements continued
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
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
2024
Total
£’000
Investments 980,975 24,282 157,008 1,162,265
Derivative instrument assets – 7,103 – 7,103
980,975 31,385 157,008 1,169,368
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities (475) (12,832) – (13,307)
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)
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18 Financial Instruments continued
Level 3 investments (unlisted and delisted investments)
2024
£’000
2023
£’000
Pony.ai 42,805 48,272
DJI International 30,769 30,475
Chime Biologics 27,312 29,064
Venturous Holdings 25,602 26,015
ByteDance 24,724 24,035
Tuhu Car (moved into Level 1) – 14,024
Cutia Therapeutics (moved into Level 1) – 11,575
Beisen (moved into Level 1) – 9,418
Shanghai Yiguo – –
4 listed investments whose listings are currently suspended 5,796 –
157,008 192,878
Pony.ai
Pony.ai develops artificial intelligence and autonomous driving technology solutions for transportation and is an unlisted company. The
valuation at 31 March 2024 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 2024, its fair value was £42,805,000 (book cost: £24,892,000).
DJI International
DJI International is a manufacturer of drones and is an unlisted company. The valuation at 31 March 2024 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
2024, its fair value was £30,769,000 (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 2024 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 2024, its fair value was £27,312,000
(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 2024 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. As at 31 March 2024, its fair value was £25,602,000 (book cost:
£23,701,000).
ByteDance
ByteDance develops applications for smart phones and is an unlisted company. The valuation at 31 March 2024 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 2024, its fair value was £24,724,000 (book cost: £7,361,000).
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 2024 (book cost: £11,806,000).
Companies whose listings are suspended
Four listed companies in the portfolio have had their listing suspended: DBA Telecommunication (Asia) Limited (suspended July
2014), China Animal Healthcare Limited (suspended March 2015), BNN Technology Limited (suspended September 2017) and China
Renaissance Holdings (suspended April 2023). All holdings have been valued at £nil, apart from China Renaissance Holdings which
has been valued at £5,796,000.
Notes to the Financial Statements continued
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
18 Financial Instruments continued
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
2024
Level 3
£’000
2023
Level 3
£’000
Level 3 investments at the beginning of the year 192,878 194,650
Purchases at cost – –
Sales proceeds - Venturous Holdings (2,943) –
Sales gain - Venturous Holdings 615 –
Transfers into level 3 at cost – China Renaissance Holdings 17,316 –
Transfers out of level 3 at cost
1
(35,153) (9,971)
Unrealised (loss)/profit recognised in the Income Statement (15,705) 8,199
Level 3 investments at the end of the year 157,008 192,878
1 Financial instruments are transferred out of level 3 when they become listed. See page 88 for more information.
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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 22 and 23. The principal
risks and their management are disclosed in the Strategic Report on pages 24 to 29 and in Note 18 above.
The Company’s gearing at the year end is set out below:
2024
Gross gearing Net gearing
Exposure
£’000 %
1
Exposure
£'000 %
1
Investments 1,162,265 98.8 1,162,265 98.8
Long CFDs 412,237 35.1 412,237 35.1
Total long exposures before hedges 1,574,502 133.9 1,574,502 133.9
less: short derivative instruments hedging the above (138,402) (11.8) (138,402) (11.8)
Total long exposures after the netting of hedges 1,436,100 122.1 1,436,100 122.1
Short CFDs 14,766 1.3 (14,766) (1.3)
Gross Asset Exposure/net market exposure* 1,450,866 123.4 1,421,334 120.8
Net Assets 1,176,014 1,176,014
Gearing
2
23.4% 20.8%
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 – (188) –
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%
* Defined in the Glossary of Terms on pages 99 and 100.
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.
Notes to the Financial Statements continued
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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
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 37. During the year, management fees of
£11,421,000 (2023: £14,727,000) were payable to Fidelity. At the Balance Sheet date, management fees of £678,000 (2023: £1,266,000)
were accrued and included in other payables. Fidelity also provides the Company with marketing services. The total amount payable
for these services was £269,000 (2023: £263,000). At the Balance Sheet date, marketing services of £91,000 (2023: £43,000) were
accrued and included in other payables.
FIL Investment Services (UK) Limited agreed to contribute towards the costs of the transaction with ACIC and an amount equal to eight
months of management fees in the year to 31 March 2025, that would otherwise be payable by the enlarged Company to the AIFM
in respect of the assets transferred by ACIC to the Company pursuant to the Scheme was waived. In the financial period ended 31
March 2024, the Company has recognised an initial contribution of £400,000 in respect of the transaction with ACIC, with the balance
being recognised in the year ending 31 March 2025.
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, £23,000 (2023: £22,000) of employers’ National Insurance
contributions were paid by the Company. At the Balance Sheet date, Directors’ fees of £26,000 (2023: £22,000) were accrued and
payable.
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Alternative Performance Measures
Discount/Premium
The discount/premium is considered to be an Alternative Performance Measure. It is the difference between the Net Asset Value
(“NAV”) per Ordinary Share of the Company and the Ordinary 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 page 99 and on page 101.
Gearing
Gearing (both gross and net) is considered to be an Alternative Performance Measure. See Note 19 on page 90 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 79 for further details.
Ongoing Charges Ratio
The ongoing charges ratio is considered to be an Alternative Performance Measure. It 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.
2024 2023
Investment management fees (£’000) 9,719 12,049
Other expenses (£’000) 1,238 1,101
Ongoing charges (£’000) 10,957 13,150
Variable management fees (£’000) 1,702 2,678
Average net assets (£’000) 1,122,589 1,338,770
Ongoing charges ratio 0.98% 0.98%
Ongoing charges ratio including variable management fees 1.13% 1.18%
The ongoing charges ratio represents the total expenses of the Company, excluding transaction costs, interest payments, tax and non-
recurring expenses expressed, as a percentage of the average daily net asset value, in accordance with guidance issued by the AIC.
The ongoing charges ratio, excluding the variable management fee, for the year ended 31 March 2024 was 0.98%. It is estimated that
the ongoing charges ratio for the year ending 31 March 2025 will be 0.88%, the significant reduction reflecting the management fees
waived by the Manager in lieu of its contribution to the costs of the Company’s transaction with ACIC.
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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GOVERNANCEINFORMATION FOR SHAREHOLDERS FINANCIAL STRATEGY
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 2024 and 31 March 2023.
2024
Net asset
value per
share
Share
price
31 March 2023 274.08p 247.50p
31 March 2024 223.71p 201.00p
Change in the year -18.4% -18.8%
Impact of dividend reinvestment +2.1% +2.4%
Total return for the year -16.3% -16.4%
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%
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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 Tuesday, 23 July 2024 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 2024.
2. To declare that a final dividend for the year ended 31
March 2024 of 6.40 pence per ordinary share be paid to
shareholders who appear on the register as at close of
business on 21 June 2024.
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 re-elect Mr Gordon Orr as a Director.
8. To re-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 2024.
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 at the latest practicable date of this
document. 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 £608,614 (approximately
10% of the aggregate nominal amount of the issued share
capital of the Company (including Treasury shares) at the
latest practicable date of this document) 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 £608,614
(approximately 10% of the aggregate nominal amount
of the issued share capital of the Company (including
Treasury shares) at the latest practicable date of this
document); 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) at the latest practicable date of this document, 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
Notice of Meeting
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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 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
)
t
he maximum number of shares hereby authorised to be
purchased shall be 78,395,400;
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
10 June 2024
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 Friday, 19 July 2024. 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.
T
o 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 Friday, 19 July 2024. 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 Friday, 19 July 2024.
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Notice of Meeting continued
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 Friday, 19 July 2024 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. An electronic proxy
appointment via the Proxymity Platform may be revoked
completely by sending an authenticated message via the
platform instructing the removal of your proxy vote.
7. Unless otherwise indicated on the Form of Proxy, CREST
voting, Proximity 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 Friday, 19 July 2024. 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 134-206-210. 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 134-206-210. 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
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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.
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 Friday, 19 July 2024. 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 the latest practicable date prior to the publication of
this document, the Company’s issued share capital consisted
of 608,614,733 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 522,985,185.
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.
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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 Ratio;
• 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 subsidiary 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.
Glossary to the Annual Report
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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)
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 and
consequently it is tax efficient for the Company.
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 Investments International.
Forward 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.
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Glossary to the Annual Report continued
Kroll
Kroll 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.
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 China market. The Index represents approximately 15% of
the free float-adjusted market capitalisation of the China equity
universe.
MSCI China Small Cap Index
Designed to measure the performance of the small cap segment
of the China market. The Index represents approximately 14% of
the free float-adjusted market capitalisation of the China equity
universe.
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. The Company currently has no 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.
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.
Net Market Exposure
Net Market Exposure is the total of all long exposures, less short
exposures and less exposures hedging the portfolio.
Ongoing Charges Ratio (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. P
Chips are incorporated outside of the PRC and traded on the
Stock Exchange of Hong Kong with a majority of revenues or
assets derived from mainland China.
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.
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FINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS STRATEGY
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.
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 have
exceeded the cost of those ordinary shares and the amounts
paid by the Manager to meet costs relating to acquisitions.
It is not distributable by way of dividends 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 dividends.
• 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.
•
C
apital 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
dividends.
• 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 dividends.
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 or
derivative’s price.
Size of Company (By 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
Total shareholder return 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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Variable Management Fee (VMF)
The Company has a Variable Management Fee (VMF) structure.
The base fee is on a tiered basis of 0.85% on the first £1.5
billion of Net Assets, reducing to 0.65% 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 would
pay if it outperforms is 1.05% on Net Assets up to £1.5 billion
and reducing to 0.85% on Net Assets over £1.5 billion, but if the
Company underperforms against the Benchmark Index, then the
overall fee could be as low as 0.65% on Net Assets up to £1.5
billion, reducing to 0.45% 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.
Glossary to the Annual Report continued
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FINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS STRATEGY
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.fidelity.co.uk/its
Shareholders on the main share register
Contact Link Group, Registrar to Fidelity China Special Situations
PLC, 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: 0207 961 4240
Email: investmenttrusts@fil.com
Website: www.fidelity.co.uk/its
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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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
Central Square
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.
Shareholder Information continued
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FINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS STRATEGY
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.
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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 37.
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 22 and 23.
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 24 to 29 and in Note 18 to the Financial
Statements on pages 80 to 89.
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
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FINANCIAL GOVERNANCEINFORMATION FOR SHAREHOLDERS STRATEGY
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 2024, actual leverage was 1.51 for the
Gross Method and 1.35 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 83.
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 2024, 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) 1,301 0.11% 2,613 –
HSBC Bank plc (UK) 1,068 0.09% 198 –
J.P. Morgan Securities plc (UK) (5,242) (0.45%) – 5,186
Morgan Stanley & Co International (UK) (3,746) (0.32%) – 3,714
UBS AG (UK) 890 0.08% – 895
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 2024 from CFDs was a loss of £97,385,000.
To find out more about Fidelity China Special Situations PLC, visit our 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
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www.fidelity.co.uk/its