9th Dec 2024 10:19
(Alliance News) - Fidelity China Special Situations PLC on Monday reported mixed results during an uncertain half-year, but remained hopeful of improved confidence.
The Surrey, England-based investment trust, which focuses on long-term growth opportunities in Asia, noted its asset value per share was 252.18 pence at September 30, up 13.0% from 223.71p at March 31.
However, the firm saw a NAV total return of 16.1%, compared with 24.5%, its benchmark, set by the Morgan Stanley Capital International China index.
Fidelity China noted the benchmark's rise was "mostly generated in September alone" following stimulus measures which included a rate cut by the People's Bank of China. According to the investor, overall sentiment towards the market remains mixed.
"The surge in Chinese equities in the last week of the review period masks the broader picture, where the best performance for most of the period came from traditionally defensive sectors such as energy, utilities, telecoms and state-owned banks", the company said.
Despite interventions to reduce volatility, Fidelity China reported that the discount to NAV had widened from 10.2% at the start of the period to end at 12.4%
Pretax profit in the last six months rose slightly to GBP191.1 million from GBP133.4 million the year prior.
Fidelity China declared no half-year dividend, unchanged year-on-year.
The investor's top performers were Ping An Insurance Co and China Life Insurance. Underperformance was attributed in part to unlisted holdings, including Tik Tok-owner ByteDance Ltd. Nonetheless, Fidelity China stood by the decision to raise its stake in ByteDance, describing the technology firm as "among the most valuable private companies globally".
Fidelity China said it had marked down valuations of unlisted assets due to "the difficult market backdrop" but added: "We believe that the solid business performance of many of the listed companies bodes well for more positive valuations for [unlisted] companies going forward."
Industrial firms are the investor's largest overweight sector, it said. The company highlighted its holding in Tuhu Car Inc, a Chinese auto maintenance franchise which went public in 2023 and was Fidelity China's largest purchase in the last six months.
"With rising automobile penetration in China in recent years, maintenance is a growing market, resulting from an aging car fleet, and we see great potential for Tuhu Car to gain further market share through industry consolidation," Fidelity China said.
"The company should also be a beneficiary of any improvement in consumer confidence," it added.
Fidelity China reiterated the impact of weak consumption, driven by a lack of confidence in the property market, coupled with wage concerns and geopolitical tensions.
"Our sense from discussions with many companies on the ground is that we have now most likely seen the worst of the job cuts, particularly in areas like the big technology companies," the company said. "Coupled with the policy support for the real estate sector, there is meaningful scope for confidence to gradually improve".
Macroeconomic concerns persist, specifically potential US tariffs on Chinese goods, though Fidelity China said the threat was not unexpected.
"Some of the export-focused companies we see on the ground have remained extremely competitive and have been taking pre-emptive actions for years, with many of them moving production offshore."
Fidelity China added: "While the earnings outlook for China in aggregate is not weak in a global context, and we see improvement in areas like technology, until very recently the general trend of earnings revisions has been downward. The hope is that supportive policies can help drive a turn in economic fundamentals, leading to an improved earnings outlook. "
Domestic investors recognised a "fundamental change" in the Chinese government's commit to boosting the economy, according to Fidelity China. The company's optimism remains cautious.
Fidelity China shares were up 4.7% at 225.60 pence each on Monday morning in London.
By Holly Munks, Alliance News reporter
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