Fidelity China Special Situations PLC
LEI: 54930076MSJ0ZW67JB75
Half-Yearly Results for the six months ended 30 September 2017 (unaudited)
Financial Highlights:
Fidelity China Special Situations PLC's (the "Company") Net Asset Value ("NAV") per Share total return was +13.1% in the 6 months to 30 September 2017
The Company's Share Price total return for the six month period was +12.2%
Over a 3 year period, the NAV total return was 95.3% and the Share Price 91.2%, both significantly outperforming the Company's Benchmark Index (the MSCI China Index) return of +72.4%
Portfolio Manager, Dale Nicholls, believes there is still good value relative to the long-term growth potential in the Chinese market
Contacts
For further information, please contact:
Bonita Guntrip
Senior Company Secretary
01737 837320
FIL Investments International
Portfolio Manager's Half-Yearly Review
In the six months ended 30 September 2017, the NAV of the Company recorded a solid return of 13.1% and the share price 12.2%. This compared to a 18.2% rise in the MSCI China Index (the Company's Benchmark). Over the three year period, the NAV has returned 95.3% and the share price 91.2%, both outperforming the MSCI China Index which returned 72.4% (all returns on a total basis).
The relative NAV underperformance in the six month period under review can be broadly attributed to three areas: small-cap companies, IT and real estate developers. The ongoing rally in the market has been relatively narrow in scope, led by large-cap companies with real estate and IT significantly outperforming other sectors.
Small-Caps
The Company maintains a significant tilt towards small and mid-cap stocks, with a little more than 60% of the Company's assets in businesses with a market-cap below £5 billion. This compares to around 6% in the MSCI China Index. While we evaluate each business on its own merits, we generally find more ideas in the small and mid-cap area given many are under-researched and so offer mis-priced opportunities. However, smaller-cap companies have significantly lagged the broader market year-to-date. We can attribute part of this to the global trend of passive money entering the market and incremental new money finding its way to the biggest stocks by default, not because they are necessarily the best prospects with superior fundamentals. That said, a significant driver to large-cap outperformance has been the two largest stocks in the Index, Alibaba and Tencent, performing strongly and which have executed their business strategies very well. However, this is not necessarily the case for many of the other large-cap stocks in the Benchmark which continue to benefit from passive investor flows.
IT Sector
IT giants Alibaba and Tencent once again recorded extremely strong returns and their shares are more than 40% up over the reporting period. These are the Company's two largest holdings yet we remain underweight compared to the Index, hence both were relative detractors to performance. I continue to believe in the long-term opportunities in both. Alibaba holds a dominant e-commerce position that will go from strength-to-strength. It also has other very promising businesses in relatively early stages of development, such as Cloud and financial services. Tencent's WeChat platform has a massive 960 million users in China and is clearly the foremost online platform, but is still under-monetised relative to levels seen in the West, especially compared to the likes of Facebook. Both companies dominate online mobile smartphone payments, which further add to their extensive data sets. All of this means that Alibaba and Tencent have a captive audience and an increasing amount of extremely valuable data for advertising and identifying trends. However, with the two stocks representing close to one-third of the Benchmark, getting close to market weight would impede diversification and limit capital that could be allocated to smaller companies with better risk-reward profiles.
Elsewhere within IT, the large underweight in Baidu detracted from returns. Of the big three IT companies in China, I believe it faces the biggest challenges. Its primary business is online search, an area likely to lose market-share of online advertising spend against other areas with faster user growth, particularly social driven platforms like WeChat. Conversely, online classified platform 58.com was one of the main contributors to performance over the period after recording strong results driven by increasing property classifieds, especially in the rental market, in a growing number of cities.
The IT sector is a core investment for the Company. The structural technology shifts we see globally are happening faster in China and many companies play an important role as a consumption enabler. Also, data is now a key commodity for businesses that will continue to grow in importance over the mid-term. The Company's newest unlisted holding that was purchased in Q2 2017 is Jiguang, a leading "big data" platform (trading name is Aurora Mobile). It serves over 500,000 apps in China and works with around 250,000 developers, holding dominant market share in the "App Push Notification Service" segment. Jiguang has first mover advantage in this field and benefits from great depth and unique data granularity.
Real Estate Developers
The real estate sector has also rallied significantly, with a swathe of developers seeing share price appreciation of over 40%. However, I question the sustainability of this given increasing government measures to contain property prices. More worryingly, two of China's most highly leveraged companies, Sunac China and China Evergrande returned a staggering 237% and 251% respectively in this six-month review period. I continue to hold no developers as valuations are stretched and momentum is set to slow with government policy focused on taking the heat out of the property market.
China Consumer
Elsewhere, the Company's holdings in consumer related names, including China Meidong Auto, Yihai and Brilliance China added value. China Meidong Auto is a car dealership based in the Guangdong region that continues to grow its network while its excellent management team is highly successful in taking over weaker dealerships and turning them around. Hot pot condiment supplier Yihai continues to see growth from its relationship with popular hot pot restaurant chain Haidilao and rapidly growing retail sales of its products. Brilliance China, a joint venture with BMW, remains in a sweet spot for aspirational Chinese consumers.
The rising Chinese middle class and their increasing aspirations is a key reason for the Company's substantial overweight position in the consumer discretionary sector. Within this area, I have been finding great potential in consumer services. The Chinese consumer is a significant purchaser of goods, but we also see a greater demand for experiences and lifestyle consumption - travel, hotels, restaurants and education, to name a few. Education is a particularly interesting industry with companies offering a range of services from school and professional test preparation (New Oriental Education & Technology) to private schools (China Yuhua Education). Despite being 'discretionary' the household budget's spend on education is often viewed as a necessity in order to compete in an ever-increasing competitive environment. The lack of price sensitivity makes for interesting investment opportunities.
Gearing
The Chinese market has rallied over the last six months supported by strong earnings revisions. This, combined with valuations that still stack up well compared to global markets and good flow of new ideas related to many of the ideas mentioned in this report, has led me to keep net gearing relatively high. We remain positive on the earnings outlook for the market, but I do envisage more shorting opportunities should valuations continue expanding, which would likely lower net market exposure. However, net gearing remains in the mid to high teens as a reflection of our conviction in the strong structural growth opportunities that exist in China.
Outlook
We are currently in the midst of a clear cyclical upturn in the economy. Supply-side reform in areas like steel and cement has helped to lift pricing across a range of commodities. On the policy front, there is increasing rhetoric focused on the risks associated with the build-up of credit we have seen in the economy. This focus could become stronger post recent leadership changes - all positive in addressing our major concern for the long-term health of the economy. The environment remains positive for ongoing growth in consumption as part of the natural expansion of the middle-class, a key investment theme for the portfolio. While market sentiment has clearly turned more positive to the risk-reward balance around the opportunities in the Chinese market, we still find good value relative to the long-term growth potential.
Dale Nicholls
Portfolio Manager
23 November 2017
Interim Management Report and Directors' Responsibility Statement
Gearing
The Company has a three year unsecured fixed rate loan facility agreement with Scotiabank Europe PLC for US$150,000,000. The agreement was effective on 14 February 2017 and the interest rate is fixed at 3.01% per annum until the facility terminates on 14 February 2020.
To achieve further gearing, the Company uses contracts for difference ("CFDs") on a number of holdings in its portfolio.
At 30 September 2017, the Company's gearing, defined as Gross Asset Exposure in excess of Net Assets, was 26.2% (31 March 2017: 27.6%; 30 September 2016: 25.5%). This is within the limit set by the Company's Prospectus of 30%.
Discount Management
The Company's discount widened slightly from 13.2% at the start of the reporting period to 14.0% at the end of the reporting period.
The Board recognises that the Company's share price is affected by the interaction of supply and demand in the market and investor sentiment towards China, as well as the performance of the NAV per Ordinary Share. Recognising these factors, and following a detailed review by the Board of the discount policy, it is the Board's belief at present that the discount is best addressed by repurchasing the Company's shares according to market conditions. Any shares repurchased can be held in Treasury or cancelled.
In the reporting period, the Company repurchased 300,000 Ordinary Shares into Treasury. Since the end of the reporting period and as at the date of this report, a further 200,000 Ordinary Shares have been repurchased into Treasury. No Ordinary Shares have been issued in the reporting period and as at the date of this report.
Allocation of Expenses
As mentioned in the Annual Report for the year ending 31 March 2017, management fees and finance costs have, since the launch, been apportioned equally between revenue and capital. As capital returns have contributed considerably more than revenue to the total returns over the life of the Company, the Board has a reasonable expectation that future returns will also be similar. The Directors have therefore decided that with effect from 1 April 2017, 75% of management fees and finance costs will be charged to capital and the remaining 25% will be charged to revenue. Although total returns remain unchanged, the capital return has decreased and the revenue return has increased. Consequently, the amount available for distribution as dividends out of revenue reserve has increased.
Principal Risks and Uncertainties
The Board, with the assistance of the Manager, has developed a risk matrix which, as part of the risk management and internal controls process, identifies the key risks and uncertainties faced by the Company.
The Board believes that the principal risks and uncertainties faced by the Company continue to fall into the following categories: market, performance, discount control, gearing and currency risks. Other risks facing the Company include cybercrime, tax and regulatory and operational (service providers) risks. Information on each of these risks is given in the Strategic Report section of the Annual Report for the year ended 31 March 2017 and can be found on the Company's pages of the Manager's website at www.fidelityinvestmenttrusts.com.
These principal risks and uncertainties have not materially changed in the six months to 30 September 2017 and are equally applicable to the remaining six months of the Company's financial year.
Transactions with the Managers and Related Parties
FIL Investment Services (UK) Limited is the Company's Alternative Investment Fund Manager ("AIFM") and has delegated the investment management (other than investment management in unlisted securities) to FIL Investment Management (Hong Kong) Limited. It has delegated the investment management of the unlisted securities and the company secretariat function to FIL Investments International. Transactions with the Managers and related party transactions with the Directors are disclosed in Note 14 below.
Going Concern
The Directors have considered the Company's investment objective, risk management policies, liquidity risk, credit risk, capital management policies and procedures, the nature of its portfolio (being mainly securities which are readily realisable) and its expenditure and cash flow projections. They have concluded that the Company has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing these Financial Statements.
By order of the Board.
FIL Investments International
23 November 2017
Directors' Responsibility Statement
The Disclosure and Transparency Rules ("DTR") of the UK Listing Authority require the Directors to confirm their responsibilities in relation to the preparation and publication of the Interim Management Report and Financial Statements.
The Directors confirm to the best of their knowledge that:
a) the condensed set of Financial Statements contained within the Half-Yearly Report has been prepared in accordance with the International Accounting Standards 34: "Interim Financial Reporting"; and
b) the Interim Management Report, together with the Portfolio Manager's Half-Yearly Review includes a fair review of the information required by DTR 4.2.7R and 4.2.8R.
The Half-Yearly Report has not been audited or reviewed by the Company's Independent Auditor.
The Half-Yearly Report was approved by the Board on 23 November 2017 and the above responsibility statement was signed on its behalf by Nicholas Bull, Chairman.
Twenty Largest Holdings
as at 30 September 2017
The Gross Asset Exposures shown below measure the exposure of the Company's portfolio to market price movements in the shares owned or in the shares underlying the derivative instruments. The Fair Value is the value the portfolio could be sold for and is the value shown on the Balance Sheet. Where a 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 share has moved.
| Fair | |||
| Gross Asset Exposure | Value | ||
| £'000 | %1 | £'000 | |
| Long Exposures - shares unless otherwise stated | |||
| Tencent Holdings (shares and long CFD) | |||
| Internet, mobile and telecommunications services provider | 205,262 | 14.8 | 172,352 |
| Alibaba Group Holdings (shares and long CFD) | |||
| e-commerce group | 147,249 | 10.6 | 140,401 |
| China Pacific Insurance (Group) Co (shares and long CFD) | |||
| Insurance company | 67,640 | 4.9 | 21,214 |
| Hutchison China MediTech | |||
| Pharmaceutical and healthcare group | 46,454 | 3.3 | 46,454 |
| China Life Insurance Co (shares and long CFD) | |||
| Insurance company | 39,361 | 2.8 | 16,007 |
| 58.com | |||
| Online marketplace operator serving local merchants and consumers | 37,145 | 2.7 | 37,145 |
| Ctrip.com International | |||
| Travel services provider | 33,557 | 2.4 | 33,557 |
| China Petroleum & Chemical Corp (long CFD) | |||
| Oil and gas company based in Beijing | 27,998 | 2.0 | 5,910 |
| China Meidong Auto Holdings | |||
| Automobile dealership and maintenance group | 26,774 | 1.9 | 26,774 |
| CITIC Telecom International Holdings (long CFD) | |||
| Telecoms company | 23,091 | 1.7 | (3,012) |
| Shangri-La Asia | |||
| Luxury hotel group | 21,776 | 1.6 | 21,776 |
| Xiaoju Kuaizhi Inc ("Didi Chuxing") (Unlisted) | |||
| Mobile taxi booking applications developer | 21,479 | 1.5 | 21,479 |
| Noah Holdings | |||
| Asset managers | 20,262 | 1.5 | 20,262 |
| Shanghai International Airport Co | |||
| Shanghai's primary international airport operator | 20,133 | 1.4 | 20,133 |
| Yum China Holding | |||
| Restaurant chain operator | 19,020 | 1.4 | 19,020 |
| New Oriental Education & Technology Group | |||
| Private educational services provider | 18,424 | 1.3 | 18,424 |
| CT Environmental Group (shares and long CFD) | |||
| Wastewater treatment and industrial water supply services | 18,296 | 1.3 | (11,390) |
| Yihai International Holding | |||
| Hot pot seasonings and sauce producer | 18,165 | 1.3 | 18,165 |
| Brilliance China Automotive Holdings (long CFD) | |||
| Automobiles, microvans, and automotive components manufacturer | 17,382 | 1.2 | 3,780 |
| Far East Horizon (shares and long CFD) | |||
| Financial service company | 16,279 | 1.2 | 6,569 |
| ------------------ | ------------- | ------------------- | |
| Twenty largest long exposures | 845,747 | 60.8 | 635,020 |
| Other long exposures | 896,553 | 64.4 | 796,385 |
| ------------------ | ------------- | ------------------- | |
| Total long exposures before hedges (141 holdings) | 1,742,300 | 125.2 | 1,431,405 |
| ------------------ | ------------- | ------------------- | |
| Less: hedging exposures | |||
| Hang Seng China Enterprises Index (future) | (26,280) | (1.9) | 156 |
| iShares FTSE A50 China Index ETF (short CFD) | (24,249) | (1.7) | (7,123) |
| Hang Seng Index (put option) | (1,129) | (0.1) | 53 |
| ------------------ | ------------- | ------------------- | |
| Total hedging exposures | (51,658) | (3.7) | (6,914) |
| ------------------ | ------------- | ------------------- | |
| ------------------ | ------------- | ------------------- | |
| Total long exposures after the netting of hedges | 1,690,642 | 121.5 | 1,424,491 |
| ------------------ | ------------- | ------------------- | |
| Add: short exposures | |||
| Put option (1 holding) | 12,343 | 0.9 | 938 |
| Short CFDs (10 holdings) | 53,433 | 3.8 | (6,552) |
| ------------------ | ------------- | ------------------- | |
| Total short exposures | 65,776 | 4.7 | (5,614) |
| ------------------ | ------------- | ------------------- | |
| Gross Asset Exposure2 | 1,756,418 | 126.2 | |
| ------------------ | ------------- | ||
| Portfolio Fair Value3 | 1,418,877 | ||
| Net liabilities excluding derivative instruments | (27,541) | ||
| ------------------- | |||
| Net assets | 1,391,336 | ||
| ------------------- | |||
1 Gross Asset Exposure is expressed as a percentage of net assets
2 Gross Asset Exposure comprises market exposure to investments of £1,382,656,000 plus market exposure to derivative instruments of £373,762,000
3 Portfolio Fair Value comprises investments of £1,382,656,000 plus derivative assets of £80,627,000 less derivative liabilities of £44,406,000 (per the Balance Sheet)
4 At 30 September 2017, the Company held four unlisted investments with a fair value of £52,014,000 representing 3.5% of Gross Assets (31 March 2017: three unlisted investments with a fair value of £37,179,000 representing 2.7% of Gross Assets)
FINANCIAL STATEMENTS
Income Statement
for the six months ended 30 September 2017
| Six months ended 30 September 2017 unaudited | Year ended 31 March 2017 audited | Six months ended 30 September 2016 unaudited | ||||||||
| revenue | capital | total | revenue | capital | total | revenue | capital | total | ||
| Notes | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Revenue | ||||||||||
| Investment income | 4 | 19,577 | - | 19,577 | 20,534 | - | 20,534 | 17,871 | - | 17,871 |
| Derivative income | 4 | 6,882 | - | 6,882 | 6,182 | - | 6,182 | 5,644 | - | 5,644 |
| Other income | 4 | 131 | - | 131 | 162 | - | 162 | 84 | - | 84 |
| ------------- | ------------- | ------------- | ----------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Total income | 26,590 | - | 26,590 | 26,878 | - | 26,878 | 23,599 | - | 23,599 | |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Gains on investments at fair value through profit or loss | - | 131,190 | 131,190 | - | 330,480 | 330,480 | - | 232,740 | 232,740 | |
| Gains on derivative instruments | - | 12,667 | 12,667 | - | 17,568 | 17,568 | - | 18,114 | 18,114 | |
| Foreign exchange (losses)/gains on other net assets | - | (3,863) | (3,863) | - | 6,936 | 6,936 | 660 | 6,153 | 6,813 | |
| Foreign exchange gains/(losses) on bank loans | - | 7,733 | 7,733 | - | (15,350) | (15,350) | - | (10,959) | (10,959) | |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Total income and gains | 26,590 | 147,727 | 174,317 | 26,878 | 339,634 | 366,512 | 24,259 | 246,048 | 270,307 | |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Expenses | ||||||||||
| Investment management fees and performance fees | 5 | (1,664) | (4,991) | (6,655) | (5,485) | (5,485) | (10,970) | (2,682) | (3,353) | (6,035) |
| Other expenses | (807) | - | (807) | (1,737) | - | (1,737) | (938) | - | (938) | |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Profit before finance costs and taxation | 24,119 | 142,736 | 166,855 | 19,656 | 334,149 | 353,805 | 20,639 | 242,695 | 263,334 | |
| Finance costs | 6 | (1,059) | (3,177) | (4,236) | (2,809) | (2,809) | (5,618) | (1,143) | (1,143) | (2,286) |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Profit before taxation | 23,060 | 139,559 | 162,619 | 16,847 | 331,340 | 348,187 | 19,496 | 241,552 | 261,048 | |
| Taxation | (632) | - | (632) | (709) | - | (709) | (615) | - | (615) | |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Profit after taxation for the period | 22,428 | 139,559 | 161,987 | 16,138 | 331,340 | 347,478 | 18,881 | 241,552 | 260,433 | |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Earnings per Ordinary Share | 7 | 4.06p | 25.29p | 29.35p | 2.92p | 60.01p | 62.93p | 3.42p | 43.72p | 47.14p |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
The Company does not have any income or expenses that are not included in the profit after taxation for the period. Accordingly the profit after taxation for the period is also the total comprehensive income for the period and no separate Statement of Comprehensive Income has been presented.
The total column of this statement represents the Income Statement of the Company and is prepared in accordance with IFRS. The revenue and capital columns are supplementary and presented for information purposes as recommended by the Statement of Recommended Practice issued by the AIC.
All of the profit and total comprehensive income is attributable to the equity shareholders of the Company. There are no minority interests.
No operations were acquired or discontinued in the period and all items in the above statement derive from continuing operations.
Statement of Changes in Equity
for the six months ended 30 September 2017
| Share l | capita | |||||||
| share | premium | redemption | other | capital | revenue | total | ||
| capital | account | reserve | reserve | reserve | reserve | equity | ||
| Note | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Six months ended 30 September 2017 (unaudited) | ||||||||
| Total equity at 31 March 2017 | 5,713 | 211,569 | 914 | 336,625 | 665,544 | 23,429 | 1,243,794 | |
| Repurchase of Ordinary shares | - | - | - | (647) | - | - | (647) | |
| Profit after taxation for the period | - | - | - | - | 139,559 | 22,428 | 161,987 | |
| Dividend paid to Shareholders | 8 | - | - | - | - | - | (13,798) | (13,798) |
| ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ||
| Total equity at 30 September 2017 | 5,713 | 211,569 | 914 | 335,978 | 805,103 | 32,059 | 1,391,336 | |
| ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ||
| Year ended 31 March 2017 (audited) | ||||||||
| Total equity at 31 March 2016 | 5,713 | 211,569 | 914 | 338,837 | 334,204 | 17,241 | 908,478 | |
| Repurchase of Ordinary shares | - | - | - | (2,212) | - | - | (2,212) | |
| Profit after taxation for the year | - | - | - | - | 331,340 | 16,138 | 347,478 | |
| Dividend paid to Shareholders | 8 | - | - | - | - | - | (9,950) | (9,950) |
| ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ||
| Total equity at 31 March 2017 | 5,713 | 211,569 | 914 | 336,625 | 665,544 | 23,429 | 1,243,794 | |
| ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ||
| Six months ended 30 September 2016 (unaudited) | ||||||||
| Total equity at 31 March 2016 | 5,713 | 211,569 | 914 | 338,837 | 334,204 | 17,241 | 908,478 | |
| Repurchase of Ordinary shares | - | - | - | (2,064) | - | - | (2,064) | |
| Profit after taxation for the period | - | - | - | - | 241,552 | 18,881 | 260,433 | |
| Dividend paid to Shareholders | 8 | - | - | - | - | - | (9,950) | (9,950) |
| ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ||
| Total equity at 30 September 2016 | 5,713 | 211,569 | 914 | 336,773 | 575,756 | 26,172 | 1,156,897 | |
| ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- | ----------------- |
Balance Sheet
at 30 September 2017
Company number 7133583
| 30.09.17 | 31.03.17 | 30.09.16 | ||
| unaudited | audited | unaudited | ||
| Notes | £'000 | £'000 | £'000 | |
| Non current assets | ||||
| Investments at fair value through profit or loss | 9 | 1,382,656 | 1,295,266 | 1,201,252 |
| ------------------- | ------------------- | ------------------- | ||
| Current assets | ||||
| Derivative instruments | 9 | 80,627 | 48,639 | 41,076 |
| Amounts held at futures clearing houses and brokers | 2,181 | 2,069 | 4,119 | |
| Other receivables | 10 | 4,678 | 13,154 | 19,206 |
| Cash and cash equivalents | 80,353 | 47,722 | 45,211 | |
| ------------------- | ------------------- | ------------------- | ||
| 167,839 | 111,584 | 109,612 | ||
| ------------------- | ------------------- | ------------------- | ||
| Current liabilities | ||||
| Derivative instruments | 9 | (44,406) | (33,458) | (27,946) |
| Bank loans | 9 | - | - | (115,274) |
| Other payables | 11 | (2,821) | (9,933) | (10,747) |
| ------------------- | ------------------- | ------------------- | ||
| (47,227) | (43,391) | (153,967) | ||
| ------------------- | ------------------- | ------------------- | ||
| Net current assets/(liabilities) | 120,612 | 68,193 | (44,355) | |
| ------------------- | ------------------- | ------------------- | ||
| Total assets less current liabilities | 1,503,268 | 1,363,459 | 1,156,897 | |
| ------------------- | ------------------- | ------------------- | ||
| Non-current liabilities | ||||
| Bank loans | 9 | (111,932) | (119,665) | - |
| ------------------- | ------------------- | ------------------- | ||
| Net assets | 1,391,336 | 1,243,794 | 1,156,897 | |
| ------------------- | ------------------- | ------------------- | ||
| Equity attributable to equity shareholders | ||||
| Share capital | 12 | 5,713 | 5,713 | 5,713 |
| Share premium account | 211,569 | 211,569 | 211,569 | |
| Capital redemption reserve | 914 | 914 | 914 | |
| Other reserve | 335,978 | 336,625 | 336,773 | |
| Capital reserve | 805,103 | 665,544 | 575,756 | |
| Revenue reserve | 32,059 | 23,429 | 26,172 | |
| ------------------- | ------------------- | ------------------- | ||
| Total equity | 1,391,336 | 1,243,794 | 1,156,897 | |
| ------------------- | ------------------- | ------------------- | ||
| Net asset value per Ordinary Share | 13 | 252.23p | 225.36p | 209.62p |
| ------------------- | ------------------- | ------------------- |
Cash Flow Statement
at 30 September 2017
| Six months | Six months | ||
| ended | Year ended | ended | |
| 30 September | 31 March | 30 September | |
| 2017 | 2017 | 2016 | |
| unaudited | audited | unaudited | |
| £'000 | £'000 | £'000 | |
| Operating activities | |||
| Cash inflow from investment income | 17,424 | 19,331 | 15,064 |
| Cash inflow from derivative income | 6,304 | 6,095 | 5,366 |
| Cash inflow from other income | 131 | 162 | 84 |
| Cash outflow from Directors' fees | (82) | (168) | (41) |
| Cash outflow from other payments | (8,881) | (21,605) | (14,878) |
| Cash outflow from the purchase of investments | (195,780) | (447,722) | (218,640) |
| Cash outflow from the purchase of derivatives | (2,487) | (2,705) | (1,286) |
| Cash inflow from the sale of investments | 244,941 | 466,823 | 230,821 |
| Cash outflow from the sale of derivatives | (6,345) | (2,715) | (1,537) |
| Cash (outflow)/inflow from amounts held at futures clearing houses and brokers | (112) | 11,130 | 8,621 |
| ------------------- | ------------------- | ------------------- | |
| Net cash inflow from operating activities before servicing of finance | 55,113 | 28,626 | 23,574 |
| ------------------- | ------------------- | ------------------- | |
| Financing activities | |||
| Cash outflow from loan interest paid | (1,781) | (2,310) | (1,005) |
| Cash outflow from CFD interest paid | (1,197) | (2,042) | (807) |
| Cash outflow short CFD dividends paid | (1,196) | (1,084) | (448) |
| Cash outflow from the repurchase of Ordinary Shares | (647) | (2,720) | (2,572) |
| Cash outflow from dividends paid to shareholders | (13,798) | (9,950) | (9,950) |
| ------------------- | ------------------- | ------------------- | |
| Cash outflow from financing activities | (18,619) | (18,106) | (14,782) |
| ------------------- | ------------------- | ------------------- | |
| Increase in cash and cash equivalents | 36,494 | 10,520 | 8,792 |
| Cash and cash equivalents at the start of the period | 47,722 | 30,266 | 30,266 |
| Effect of foreign exchange movements | (3,863) | 6,936 | 6,153 |
| ------------------- | ------------------- | ------------------- | |
| Cash and cash equivalents at the end of the period | 80,353 | 47,722 | 45,211 |
| ------------------- | ------------------- | ------------------- |
Notes to the Financial Statements
1 Principal Activity
Fidelity China Special Situations PLC is an Investment Company incorporated in England and Wales with a premium listing on the London Stock Exchange. The Company's registration number is 7133583, and its registered office is Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey, KT20 6RP. The Company has been approved by HM Revenue & Customs as an Investment Trust under Section 1158 of the Corporation Tax Act, 2010 and intends to conduct its affairs so as to continue to be approved.
2 Publication of Non-statutory Accounts
The Financial Statements in this half-yearly financial report have not been audited by the Company's Independent Auditor and do not constitute statutory accounts as defined in section 434 of the Companies Act 2006 (the "Act"). The financial information for the year ended 31 March 2017 is extracted from the latest published financial statements of the Company. Those financial statements were delivered to the Registrar of Companies and included the Independent Auditor's Report which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Act.
3 Basis of Preparation
These half-yearly financial statements have been prepared in accordance with International Accounting Standard 34: Interim Financial Reporting and use the same accounting policies as set out in the Company's Annual Report and Financial Statements for the year ended 31 March 2017. Those Financial Statements were prepared in accordance with; International Financial Reporting Standards ("IFRS"), to the extent that they have been adopted by the European Union, the Companies Acts that apply to companies reporting under IFRS, IFRC interpretations and, as far as it is consistent with IFRS, the Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts ("SORP") issued by the Association of Investment Companies ("AIC"), in November 2014.
As explained in the Interim Management Report and Responsibility Statement above, with effect from 1 April 2017, 25% of investment management fees and finance costs are charged to revenue and 75% to capital. Prior to 1 April 2017, investment management fees and finance costs were charged 50% to revenue and 50% to capital.
4 Income
| Six months | Year | Six months | |
| ended | ended | ended | |
| 30.09.17 | 31.03.17 | 30.09.16 | |
| unaudited | audited | unaudited | |
| £'000 | £'000 | £'000 | |
| Investment income | |||
| Overseas dividends | 19,426 | 20,278 | 17,776 |
| Overseas scrip dividends | 151 | 256 | 95 |
| ------------------- | ------------------- | ---------------- | |
| 19,577 | 20,534 | 17,871 | |
| ------------------- | ------------------- | ---------------- | |
| Derivative income | |||
| Dividends on long CFDs | 6,869 | 6,170 | 5,637 |
| Interest on short CFDs | 13 | 12 | 7 |
| ------------------- | ------------------- | ---------------- | |
| 6,882 | 6,182 | 5,644 | |
| ------------------- | ------------------- | ---------------- | |
| Other Income | |||
| Deposit interest | 131 | 162 | 84 |
| ------------------- | ------------------- | ---------------- | |
| Total income | 26,590 | 26,878 | 23,599 |
| =========== | =========== | =========== |
5 Investment Management Fees and Performance Fees
| revenue* | capital* | total | |
| £'000 | £'000 | £'000 | |
| Six months ended 30 September 2017 (unaudited) | |||
| Investment management fees | 1,664 | 4,991 | 6,655 |
| ------------------- | ------------------- | ---------------- | |
| Year ended 31 March 2017 (audited) | |||
| Investment management fees | 5,485 | 5,485 | 10,970 |
| ------------------- | ------------------- | ---------------- | |
| Six months ended 30 September 2016 (unaudited) | |||
| Investment management fees | 2,682 | 2,682 | 5,364 |
| Performance fees | - | 671 | 671 |
| ------------------- | ------------------- | ---------------- | |
| 2,682 | 3,353 | 6,035 | |
| =========== | =========== | =========== |
* As disclosed in Note 3, investment management fees for the six months ended 30 September 2017 are charged 25% to revenue and 75% to capital. For the year ended 31 March 2017 and the six months ended 30 September 2016, investment management fees were charged 50% to revenue and 50% to capital.
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 and FIL Investments International. They are all Fidelity group companies.
The Investment Managers provide investment management services for an annual fee of 1.0% of the net asset value ("NAV"). Fees are payable monthly in arrears and are calculated on the last business day of each month.
In addition, the Investment Managers are entitled to an annual performance fee of 15.0% of any change in the NAV per Ordinary Share attributable to performance which is more than 2% above the return on the MSCI China Index, subject to a maximum performance fee payable in any financial year equal to 1.0% of the arithmetic mean of the NAV calculated at the end of each month during the year. Any outperformance above the cap is lost. If the Company's NAV performance in any year is less than 2% above the return on the MSCI China Index, the under-performance must be made good before any further performance fee becomes payable. Both the NAV per Ordinary Share and the MSCI China Index are calculated on a total return basis.
There is no performance fee payable for the six months ended 30 September 2017 (year ended 31 March 2017: £nil and six months ended 30 September 2016: £671,000).
6 Finance Costs
| revenue* | capital* | total | |
| £'000 | £'000 | £'000 | |
| Six months ended 30 September 2017 (unaudited) | |||
| Interest on bank loans and overdrafts | 437 | 1,311 | 1,748 |
| Interest paid on CFDs | 323 | 969 | 1,292 |
| Dividends paid on short CFDs | 299 | 897 | 1,196 |
| ---------------- | ---------------- | ---------------- | |
| 1,059 | 3,177 | 4,236 | |
| ---------------- | ---------------- | ---------------- | |
| Year ended 31 March 2017 (audited) | |||
| Interest on bank loans and overdrafts | 1,278 | 1,278 | 2,556 |
| Interest paid on CFDs | 989 | 989 | 1,978 |
| Dividends paid on short CFDs | 542 | 542 | 1,084 |
| ---------------- | ---------------- | ---------------- | |
| 2,809 | 2,809 | 5,618 | |
| ---------------- | ---------------- | ---------------- | |
| Six months ended 30 September 2016 (unaudited) | |||
| Interest on bank loans and overdrafts | 527 | 527 | 1,054 |
| Interest paid on CFDs | 392 | 392 | 784 |
| Dividends paid on short CFDs | 224 | 224 | 448 |
| ---------------- | ---------------- | ---------------- | |
| 1,143 | 1,143 | 2,286 | |
| ---------------- | ---------------- | ---------------- |
* As disclosed in Note 3, finance costs for the six months ended 30 September 2017 are charged 25% to revenue and 75% to capital. For the year ended 31 March 2017 and the six months ended 30 September 2016, finance costs were charged 50% to revenue and 50% to capital.
7 Earnings per Ordinary Share
| Six months | Year | Six months | |
| ended | ended | ended | |
| 30.09.17 | 31.03.17 | 30.09.16 | |
| unaudited | audited | unaudited | |
| Revenue earnings per Ordinary Share | 4.06p | 2.92p | 3.42p |
| Capital earnings per Ordinary Share | 25.29p | 60.01p | 43.72p |
| ------------------- | ------------------- | ------------------- | |
| Total earnings per Ordinary Share | 29.35p | 62.93p | 47.14p |
| ------------------- | ------------------- | ------------------- | |
| Net revenue profit after taxation for the period | 22,428 | 16,138 | 18,881 |
| Net capital profit after taxation for the period | 139,559 | 331,340 | 241,552 |
| ------------------- | ------------------- | ------------------- | |
| Net total profit after taxation for the period | 161,987 | 347,478 | 260,433 |
| ------------------- | ------------------- | ------------------- | |
| Weighted average number of Ordinary Shares held outside Treasury in issue | 551,899,179 | 552,192,288 | 552,472,677 |
| ------------------- | ------------------- | ------------------- |
8 Dividend Paid to Shareholders
| Six months | Year | Six months | |
| ended | ended | ended | |
| 30.09.17 | 31.03.17 | 30.09.16 | |
| unaudited | audited | unaudited | |
| £'000 | £'000 | £'000 | |
| Dividend paid of 2.50 pence per Ordinary Share for the year ended 31 March 2017 | 13,798 | - | - |
| Dividend paid of 1.80 pence per Ordinary Share for the year ended 31 March 2016 | - | 9,950 | 9,950 |
| ------------------- | ------------------- | ------------------- | |
| 13,798 | 9,950 | 9,950 | |
| =========== | =========== | =========== |
No dividend has been declared for the six months ended 30 September 2017.
9 Fair Value Hierarchy
Under IFRS 13: Fair Value Measurement, the International Accounting Standards Board requires investment companies to disclose the fair value hierarchy that classifies financial instruments measured at fair value at one of three levels, according to the relative reliability of the inputs used to estimate the fair values.
| Classification | Input |
| Level 1 | Valued using quoted prices in active markets for identical assets |
| Level 2 | Valued by reference to valuation techniques using observable inputs other than quoted prices included within level 1 |
| Level 3 | Valued by reference to valuation techniques using inputs that are not based on observable market data |
Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset. The valuation techniques used by the Company are as disclosed in the Company's Annual Report for the year ended 31 March 2017 (Accounting Policies, Notes 2(l) and 2(m) on pages 45 and 46). The table below sets out the Company's fair value hierarchy:
| level 1 | level 2 | level 3 | total | ||||||
| 30 September 2017 (unaudited) | £'000 | £'000 | £'000 | £'000 | |||||
| Financial assets at fair value through profit or loss | |||||||||
| Investments - shares | 1,323,903 | - | 55,679 | 1,379,582 | |||||
| Investments - equity linked notes | - | 3,074 | - | 3,074 | |||||
| Derivative instruments | 156 | 80,471 | - | 80,627 | |||||
| ------------------- | ------------------- | ------------------- | ------------------- | ||||||
| 1,324,059 | 83,545 | 55,679 | 1,463,283 | ||||||
| =========== | =========== | =========== | =========== | ||||||
| Financial liabilities at fair value through profit or loss | |||||||||
| Derivative instruments | - | (44,406) | - | (44,406) | |||||
| ------------------- | ------------------- | ------------------- | ------------------- | ||||||
| Financial liabilities at amortised cost | |||||||||
| Bank Loan - US dollar 150,000,000 | - | (112,213) | - | (112,213) | |||||
| =========== | =========== | =========== | =========== | ||||||
| level 1 | level 2 | level 3 | total | ||||||
| 31 March 2017 (audited) | £'000 | £'000 | £'000 | £'000 | |||||
| Financial assets at fair value through profit or loss | |||||||||
| Investments - shares | 1,225,115 | - | 37,179 | 1,262,294 | |||||
| Investments - equity linked notes | - | 2,972 | - | 2,972 | |||||
| Derivative instruments | 487 | 48,152 | - | 48,639 | |||||
| ------------------- | ------------------- | ------------------- | ------------------- | ||||||
| 1,225,602 | 51,124 | 37,179 | 1,313,905 | ||||||
| =========== | =========== | =========== | =========== | ||||||
| Financial liabilities at fair value through profit or loss | |||||||||
| Derivative instruments | - | (33,458) | - | (33,458) | |||||
| ------------------- | ------------------- | ------------------- | ------------------- | ||||||
| Financial liabilities at amortised cost | |||||||||
| Bank Loan - US dollar 150,000,000 | - | (119,098) | - | (119,098) | |||||
| ------------------- | ------------------- | ------------------- | ------------------- | ||||||
| level 1 | level 2 | level 3 | total | ||||||
| 30 September 2016 (unaudited) | £'000 | £'000 | £'000 | £'000 | |||||
| Financial assets at fair value through profit or loss | |||||||||
| Investments - shares | 1,173,791 | - | 24,287 | 1,198,078 | |||||
| Investments - equity linked notes | - | 3,174 | - | 3,174 | |||||
| Derivative instruments | - | 41,076 | - | 41,076 | |||||
| ------------------- | ------------------- | ------------------- | ------------------- | ||||||
| 1,173,791 | 44,250 | 24,287 | 1,242,328 | ||||||
| =========== | =========== | =========== | =========== | ||||||
| Financial liabilities at fair value through profit or loss | |||||||||
| Derivative instruments | - | (27,946) | - | (27,946) | |||||
| ------------------- | ------------------- | ------------------- | ------------------- | ||||||
| Financial liabilities at amortised cost | |||||||||
| Bank Loan - US dollar 150,000,000 | - | (115,864) | - | (115,864) | |||||
| ------------------- | ------------------- | ------------------- | ------------------- | ||||||
10 Other Receivables
| 30.09.17 | 31.03.17 | 30.09.16 | |
| unaudited | audited | unaudited | |
| £'000 | £'000 | £'000 | |
| Securities sold for future settlement | 2,041 | 12,487 | 15,794 |
| Accrued income | 2,569 | 621 | 3,348 |
| Other receivables | 68 | 46 | 64 |
| ------------------- | ------------------- | ------------------- | |
| 4,678 | 13,154 | 19,206 | |
| =========== | =========== | =========== |
11 Other Payables
| 30.09.17 | 31.03.17 | 30.09.16 | |
| unaudited | audited | unaudited | |
| £'000 | £'000 | £'000 | |
| Securities purchased for future settlement | 868 | 6,104 | 6,377 |
| Performance fee payable to the Managers | - | - | 671 |
| Other amounts payable to the Managers | 1,202 | 3,041 | 3,109 |
| Accrued expenses | 751 | 788 | 590 |
| ------------------- | ------------------- | ------------------- | |
| 2,821 | 9,933 | 10,747 | |
| =========== | =========== | =========== |
12 Share Capital
| Six months ended | Year ended | Six months ended | ||||
| 30.09.17 | 31.03.17 | 30.09.16 | ||||
| unaudited | audited | unaudited | ||||
| number of | number of | number of | ||||
| shares | £'000 | shares | £'000 | shares | £'000 | |
| Issued, allotted and fully paid | ||||||
| Ordinary Shares of 1 penny each held outside Treasury | ||||||
| Beginning of the period | 551,914,480 | 5,519 | 553,339,480 | 5,533 | 553,339,480 | 5,533 |
| Ordinary Shares repurchased into Treasury | (300,000) | (3) | (1,425,000) | (14) | (1,425,000) | (14) |
| ------------------- | ------------------- | ------------------- | ------------------- | ------------------- | ------------------- | |
| End of the period | 551,614,480 | 5,516 | 551,914,480 | 5,519 | 551,914,480 | 5,519 |
| =========== | =========== | =========== | =========== | =========== | =========== | |
| Held in Treasury | ||||||
| Beginning of the period | 19,440,000 | 194 | 18,015,000 | 180 | 18,015,000 | 180 |
| Ordinary Shares repurchased into Treasury | 300,000 | 3 | 1,425,000 | 14 | 1,425,000 | 14 |
| ------------------- | ------------------- | ------------------- | ------------------- | ------------------- | ------------------- | |
| End of the period | 19,740,000 | 197 | 19,440,000 | 194 | 19,440,000 | 194 |
| =========== | =========== | =========== | =========== | =========== | =========== | |
| Total share capital | 571,354,480 | 5,713 | 571,354,480 | 5,713 | 571,354,480 | 5,713 |
| =========== | =========== | =========== | =========== | =========== | =========== | |
During the period the Company repurchased 300,000 Ordinary Shares (year ended 31 March 2017: 1,425,000 and six months ended 30 September 2016: 1,425,000) and held them in Treasury. The cost of repurchasing these shares of £647,000 (year ended 31 March 2017: £2,212,000 and six months ended 30 September 2016: £2,064,000) was charged to the Other Reserve.
The shares held in Treasury carry no rights to vote, to receive a dividend or to participate in a winding up of the Company.
13 Net Asset Value Per Ordinary Share
The net asset value per Ordinary Share is based on net assets of £1,391,336,000 (31 March 2017: £1,243,794,000 and 30 September 2016: £1,156,897,000) and on 551,614,480 (31 March 2017: 551,914,480 and 30 September 2016: 551,914,480) Ordinary Shares, being the number of Ordinary Shares held outside Treasury in issue at the period end. It is the Company's policy that Ordinary Shares held in Treasury will only be issued at a premium to net asset value per share and, therefore, the shares held in Treasury have no dilutive effect.
14 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 and FIL Investments International ("the Investment Managers"). They are all Fidelity group companies.
Details of the fee arrangements are given in Note 5. The following amounts were charged by the Investment Managers in the period; investment management fees: £6,655,000 (year ended 31March 2017: £10,970,000 and six months ended 30 September 2016: £5,364,000), performance fees: £nil (year ended 31 March 2017: £nil and six months ended 30 September 2016: £671,000) and accounting, administration and secretarial fees: £300,000 (year ended 31 March 2017: £600,000 and six months ended 30 September 2016: £300,000). Fidelity also provides the Company with marketing services. The amount charged for these services was £106,000 (year ended 31 March 2017: £257,000 and six months ended 30 September 2016: £163,000). Amounts payable to the Managers at the Balance Sheet date are included in other payables and are disclosed in Note 11.
As at 30 September 2017, the Board consisted of six non-executive Directors all of whom are considered to be independent by the Board, apart from John Ford who is employed by Fidelity. None of the Directors has a service contract with the Company.
The Chairman receives an annual fee of £42,000, the Audit Committee Chairman receives an annual fee of £32,000, the Chairman of the Investment Committee receives an annual fee of £31,500, the Senior Independent Director receives an annual fee of £31,500 and each other Director receives an annual fee of £26,500, apart from John Ford who waives his Directors' fees. The following members of the Board hold Ordinary Shares in the Company: Nicholas Bull 90,804 shares, David Causer 65,804 shares, John Ford 7,720 shares, Peter Pleydell-Bouverie 78,683 shares, Elisabeth Scott 19,819 shares and Vera Hong Wei 3,015 shares.
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.
ENDS
A copy of the Half-Yearly Report will shortly be submitted to the National Storage Mechanism and will be available for inspection at www.morningstar.co.uk/uk/NSM
The Half-Yearly Report will also be available on the Company's website at www.fidelityinvestmenttrusts.com where up to date information on the Company, including daily NAV and share prices, factsheets and other information can also be found.
