Half-year Report

Fidelity China Special Situations Plc - Half-year Report

PR Newswire

London, November 29

FIDELITY CHINA SPECIAL SITUATIONS PLC

Half-Yearly results for the six months ended 30 September 2021 (unaudited)

Financial Highlights:

Contacts

For further information, please contact:

Natalia de Sousa

Company Secretary

01737 837846

FIL Investments International

Portfolio Manager’s Half-Yearly Review

THE PERIOD UNDER REVIEW – SOME COMMENTARY ON KEY EVENTSWell-publicised concerns over increasing regulation were a major factor in the Chinese markets’ decline during the reporting period. However, the current regulatory ‘cycle’ really began in the fourth quarter of 2020 when Ant Financial unexpectedly cancelled its initial public offering (IPO). This was followed by a series of anti-trust related measures in the internet sector, including Alibaba paying a hefty fine of US$2.8 billion. The next area of focus was on data and national security, culminating in a cybersecurity investigation into Didi (which is still ongoing) and the suspension of new downloads of its app. Outside the internet space, we saw policies focused on areas associated with ‘common prosperity’, which affected the property, healthcare and education industries – also dubbed China’s ‘Three Mountains’. The after-school tutoring sector was most severely impacted with many businesses unable to survive the restrictions imposed on certain core exam subjects and services.

Against this backdrop, the Company’s NAV declined 16.9% in UK sterling terms, while the MSCI China Index (the Benchmark Index) was down by 14.4% in the six-month reporting period to 30 September 2021. The Company’s share price fell by 23.7% over the same period, reflecting a widening of the discount to NAV.

In trying to understand and analyse the government’s actions, I believe it is important to recognise some key points. First, the ‘hand’ of the government, coupled with regulatory direction and implementation, is core to the investment landscape in any market. This is particularly true in China. Therefore, one needs to be aware of trends and the general direction of policy. We have clearly had periods of tightening in the past, for example, government-imposed restrictions around online gaming in 2018. In terms of future policy direction, it is important to be cognisant of the long-term goals laid out in policy documents like the Five-Year Plan when assessing how the regulatory landscape could change and impact an industry’s growth profile.

Second, many of these crackdowns are addressing problems that confront countries globally. Big tech and related challenges around anti-trust and data security are examples, as are the challenges around income inequality. While in many cases we can trace the path of regulation, unlike in most other countries, Beijing’s implementation can be swift, which often roils markets.

The property sector has been under the spotlight of both policymakers and investors for some time. Reining in property speculation is a crucial aspect of President Xi’s vision of a more equal society – think back to 2017 when he commented that houses are ‘for living in, not for speculation’. In this current period of scrutiny, it is worth remembering the second half of 2020 when there was a significant recovery in property sales in response to easy monetary policy being rolled out to stave off an economic slowdown amidst the COVID-19 pandemic. After the strong rebound, new measures were announced to control property developers. Of note, the ‘three red lines policy’ was imposed to limit developers’ leverage, with regulation targeting banks to control their overall exposure to the property sector; and at the start of 2021, a centralised land supply policy was implemented with the aim of controlling and lowering land costs.

At the time of writing, the market remains nervous about the property segment as no concrete plans have been announced by the authorities to assist with the potential defaults of struggling developers – with Evergrande the leading example of the sector’s woes (the portfolio does not have any exposure to this company). While it is likely that we will see some developers default, I feel that the systemic risk remains low. Although comparisons to the situation in the US around the financial crisis of 2008 can be drawn, they are very different given the nature of the companies involved and the general control Beijing has over the economy. In terms of Evergrande itself, it remains an evolving situation. My base case is a government led restructuring, with a focus on project completion and asset disposals to meet social obligations.

Broadly speaking, while I do not expect President Xi’s drive towards a healthier, less speculative property sector to be reversed anytime soon, one should not be surprised to see some policy fine tuning in the near-term as both property and land sales continue to slow down. All things considered; it is reasonable to expect some level of policy normalisation in the form of faster mortgage release in the not too distant future. More importantly, on the back of a period of tightening, there is significant scope to loosen policy.

The slowdown in the property sector combined with weaker than expected credit growth and the negative impact from the power shortage situation, have had a detrimental effect on the wider economy with annualised gross domestic product growth of only 4.9% in the third quarter of 2021. It should be noted that economists and market commentators are broadly anticipating growth of around 8% overall for the year as China’s economy recovers from the effects of the pandemic. Consequently, I believe there is good potential for greater monetary and fiscal stimulus measures towards the end of this year.

PERFORMANCE AND PORTFOLIO REVIEWRegulatory concerns weighed on technology-related shares over the period, particularly in sectors such as communication services in the Company’s portfolio. Significant exposure in this sector was a key factor in the Company’s underperformance over the review period. In particular, the holding in the Chinese short-video application company Kuaishou Technology detracted from performance in light of negative regulatory news flow along with increased competitive pressures which have resulted in higher-than-expected promotional costs. Regulatory changes are also expected to impact its advertising network business as data sharing with external parties becomes more difficult. However, its short-video platform is still among the most popular social media companies in China, ranking third in terms of total time spent online following Tencent’s Weixin and ByteDance’s Douyin (both owned in the portfolio). It is also one of the few internet companies that has robust growth in users. Also, in the same sector, an exposure to Autohome, the largest auto internet platform in China, detracted from returns. The slowdown in car sales, with chip shortages being a major factor, have impacted promotional spend in the sector. However, I remain positive given its value proposition to OEMs (original equipment manufacturers) and dealers remains intact and would benefit from a recovery in car sales as supply chain pressures alleviate.

21Vianet Group is one of the largest carrier-neutral internet data centre (“IDC”) operators in China. However, its share price performance suffered with concerns over growing competition in the IDC market and news of a large shareholder announcing the sale of its stake. The latter is a short-term overhang, and I remain positive on the mid-term outlook for the stock. IDC demand is a structural growth story in China driven by factors such as increasing usage of internet via mobile devices on the consumer side and increasing demand for cloud and IT services on the enterprise side. Competitive intensity is rising on the wholesale side of the business – mostly serving the large internet companies – but this is now factored into forecasts and well understood in the market. The company’s management has been executing and delivering on its ambitious growth plans and earnings have either been in-line with or exceeded expectations.

The portfolio’s materials exposure also proved unrewarding over the period. A holding in Asia Cuanon Technology, a leading paint producer, underperformed as rising input costs negatively impacted margins. On the positive side, this company is pushing through price hikes and industry dynamics remain unchanged. I believe that the long-term story around industry consolidation is in place, and the company will continue to gain market share in this highly fragmented industry.

In terms of positive contributors, an overweight position in the healthcare space, coupled with an underweight real estate exposure, benefited the Company’s performance.

Within healthcare, an overweight position in WuXi AppTec Group supported returns. Policy-wise, as one of the ‘Three Mountains’, investors appeared overly cautious regarding potential regulatory changes in the healthcare sector. While I believe that we need to be concerned over pricing pressures in the generic drug sector, the continued emphasis from the government on developing the innovative drug sector remains very much intact. WuXi is a key facilitator in this area, especially as more Chinese companies increase their global market share and also license their products to global players. Furthermore, I believe the prospects for China establishing itself as a global hub for innovation in drug development will gain traction. WuXi AppTec’s management is very focused on its key strengths in talent attraction and retention. Long-term revenue/ earnings visibility remains compelling, with over 30% compound annual growth rate (“CAGR”) likely over the next three years.

Similarly, Bio-pharmaceutical company Hutchison China MediTech also added value over the six-month reporting period as it made progress on what continues to be an exciting development pipeline. The company is also building out its commercial platform in China with strong sales growth recently announced in its interim results. The announcement of an in-licensing deal with Epizyme also looks to be a positive step towards the company leveraging its growing domestic sales operation.

Meanwhile, in the consumer discretionary sector, an overweight exposure to Xtep International proved rewarding. Chinese sportswear brands benefit from the secular tailwind of growing disposable income and rising awareness and interest in sports and healthy lifestyles. With the sector growing at low-to-mid teens CAGR and policymakers’ focus on increased sporting and exercising activities, top local brands (as well as top foreign labels) are outgrowing the industry. Whilst the long-term structural growth story regarding Chinese sports brands remains attractive, given where valuations reached during summer, I took profit and sold out of the holding.

Within industrials, the Company’s exposure to CIMC Enric, a manufacturer of gas equipment and liquid tanks with leading technology was positive. It has a product mix and strategy well aligned with China’s environmental goals. Clean energy equipment is leveraged to the increase in gas consumption, as its proportion in China’s primary energy mix grows, particularly with a higher proportion of LNG (liquified natural gas). Hydrogen-related equipment has long-term option value. The company’s joint venture with Hexagon of Norway in advanced hydrogen engines as well as its first-mover advantage in hydrogen energy products (including hydrogen cylinder, container, compressors, which incidentally also share some commonalities from its existing gas business) allow CIMC Enric to tap into the tremendous long-term demand in the green hydrogen market, although the current earnings contribution remains limited.

THE CONTINUED FOCUS ON ESG AND SUSTAINABILITYThe evaluation of environmental, social and governance (“ESG”) factors is a core part of Fidelity’s investment process and I continue to see progress regarding the level of engagement and transparency with Chinese companies. In particular, much has improved in areas such as board diversity and the environment. Sustainability factors are key topics of conversation with corporates and many management teams are looking at ways to generate a more sustainable outcome for their companies.

ESG market scores, such as Morningstar’s Sustainability Atlas, report that China continues to lag most other major markets. Despite this, we are encouraged by the fast rates of improvement we are seeing with China’s regulatory commission engaging with companies to improve the disclosure of ESG metrics to align themselves more with the standards in Hong Kong – Hong Kong ranks fourth in Morningstar’s Sustainability Atlas and is the most sustainable non-European market (the US ranks 13th out of 48 countries, while the UK is 15th).

Not only is this a good outcome globally, but I also believe better ESG practices are a key source of performance for the portfolio over the longer-term. In the past, I have referred to Fidelity’s proprietary ESG ratings system whereby its internal analysts assign ESG ratings to investee companies. For me, these ratings are far more ‘up to date’ than those of mainstream ratings agencies and also better reflect the result of our direct engagement with the companies that we invest in. Furthermore, I am pleased to highlight that the scores of the companies in the portfolio are well ahead of the Benchmark Index and continue to improve.

An ESG example in the portfolio is Beijing Oriental Yuhong Waterproof Technology, a leading player in the waterproofing industry, which is a key element in building construction. This company is extremely well managed, and scores well across our key ESG metrics. It has a strong environmental discipline, delivers high quality products, has good labour management, and maintains strong interest alignment with a significant proportion of staff being shareholders. By some measures, buildings are responsible for over 40% of global emissions, and thus, building technology can be a major factor in controlling and reducing emissions. It is also a major supplier of insulation – a key area for potential reduction.

CURRENT POSITIONINGAs discussed in the Annual Report for the year ended 31 March 2021, one of the bigger shifts in the portfolio has been a reduction in holdings in the consumer discretionary sector, mostly because of valuation levels, and an increase in holdings in materials and industrials. The thesis around industry consolidation in areas like building materials remains very much in place. However, I have trimmed some positions given rising concerns over the residential property slowdown and potential knock-on effects to the industry from the troubled developers in the market.

In the financial space, I remain positive on the outlook for life insurance on rising penetration over the mid-term. Near-term fundamentals generally remain tepid, but I believe this is more than factored into what remain very attractive valuations. Whilst I remain underweight the banking sector, I have built a position in the Postal Savings Bank of China, which I believe is undervalued given its strong, growing position in retail banking and wealth management helping to drive superior returns relative to the sector. We are encouraged by the clear focus of the new management team, including a strong emphasis on growing its green financing.

After the significant recent correction in technology related names, I feel that the risk/ reward payoff is now tipping much more in our favour in these companies. While there is still risk of new regulation, as we think about what could come next, there is a good chance that we are near or close to a “peak” in terms of negative news flow. As discussed earlier, the government has ambitious long-term goals in areas of economic development and innovation. Clearly these will be difficult to achieve without a vibrant private sector. At the same time, valuations for many companies have moved to historical lows and look even more compelling when we compare them to global peers.

As is often the case with broad-based corrections, some stocks with lesser regulatory risk have also been sold off, presenting opportunities. Interestingly, this includes some smaller companies that could actually benefit since most of the new regulation focuses on larger companies. As I have added to some long positions, and closed some of the short positions, net gearing for the portfolio has increased and, at the time of writing, was around 23%.

Also contributing to the higher leverage is the addition of three new unlisted holdings. Tuhu Car is the number one brand for independent auto aftermarket product and services in China. It greatly improves efficiency through an Online-to-Offline model by combining its outstanding online platform to offline branded franchisees. Cutia Therapeutics is an emerging leader in the dermatology and medical aesthetics space in China, an area of great growth potential. Beijing Beisen is a first-class HRM (human resource management) software company. It is the clear leader and should continue to take market share from its competitors due to its superior cloud and integrated solutions for talent management. Despite the market correction, I still feel positive about the outlook for the unlisted portion of the portfolio and the progress being made in the respective businesses. I am pleased with and appreciative of shareholders approval of the proposal at the AGM in July 2021 to raise the limit on unlisted stocks to 15% of Net Assets plus Borrowings, given the flexibility that this provides to capitalise on potential new opportunities. As at 30 September 2021, the level of investment in unlisted securities was 11.3%. The unlisted investments in the portfolio contributed 1.7% to the Company’s NAV return during the six month reporting period.

Looking forward, it is important to be focused on the risks in China and to follow regulatory developments closely. In addition, developments in the property sector will be keenly monitored as this has been a significant driver of both economic growth and of local government finances, and a major component of the health of the consumer balance sheet. Clearly, we are at a turning point for the sector – lower levels of activity are a given, but any significant correction in prices could clearly impact the consumers’ mindset. Higher taxes, including property taxes, are other possibilities that will need to be considered. Having said this, and as mentioned earlier in my report, when coming out of a period of tightening there is significant scope for Beijing to adjust its policies.

It has been a volatile period, but we have seen times like this before, and most likely will see them again. While the combination of the risks I have outlined above is negatively impacting sentiment towards China currently, history teaches us that these are usually the periods that offer the most attractive opportunities. Corporate earnings for the market are forecast to grow over 15% for the next twelve months, with the Company’s portfolio comfortably above this level. Meanwhile, the market overall is trading on a price earnings multiple that is attractive relative to history and relative to other stock markets globally. On the ground in the region, Fidelity continues to place key emphasis on growing and developing its research team to help identify and analyse the best investment opportunities – both in the listed and unlisted areas of the market. Furthermore, as we engage with companies, we note that even those in the regulatory cross hairs generally remain positive and resilient as they navigate the changing environment.

Details of the Company’s Top 5 Holdings can be found below and include my theses for investing in these positions.

I have always disclosed in the Annual Report that I am a shareholder in the Company and in line with recommendations around disclosing one’s “skin in the game”, I can confirm that I currently own 96,742 shares.

DALE NICHOLLSPortfolio Manager29 November 2021

SPOTLIGHT ON THE TOP 5 HOLDINGS AS AT 30 SEPTEMBER 2021

The top five holdings comprise 28.9% of the Company’s Net Assets.

TWENTY LARGEST HOLDINGS AS AT 30 SEPTEMBER 2021

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.

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

2 Gross Asset Exposure comprises market exposure to investments of £1,775,879,000 plus market exposure to derivative instruments of £511,141,000.

3 Portfolio Fair Value comprises Investments of £1,775,879,000 plus derivative assets of £15,652,000 less derivative liabilities of £26,713,000 (per the Balance Sheet below).

INTERIM MANAGEMENT REPORT AND DIRECTORS’ RESPONSIBILITY STATEMENT

UNLISTED COMPANIESThe Company is permitted to invest up to 15% of its Net Assets plus borrowings in unlisted companies. The unlisted space in China continues to expand quite markedly and offers excellent opportunities for patient and long-term investors.

Since the year end, the Company has invested in three unlisted companies which are Beijing Beisen, Tuhu Car and Cutia Therapeutics. As at 30 September 2021, the Company had 11.3% of Net Assets plus borrowings in twelve unlisted investments (31 March 2021: 7.4% of Net Assets plus borrowings in nine unlisted investments).

GEARINGThe Company has a three-year unsecured fixed rate facility agreement with Scotiabank Europe PLC for US$100,000,000. The interest rate is fixed at 2.606% per annum until the facility terminates on 14 February 2023.

To achieve further gearing, the Company uses contracts for difference (“CFDs”) on a number of holdings in its portfolio.

At 30 September 2021, the Company’s Gross Gearing, defined as the Gross Asset Exposure in excess of Net Assets, was 27.5% (31 March 2021: 26.2%). The level of Gross Gearing is determined by the Manager within the limit set by the Board of 30%. Net Gearing, which nets off short positions, was 21.9% (31 March 2021: 18.4%).

DISCOUNT MANAGEMENTThe Board believes that investors are best served when the Company’s share price trades close to its net asset value. The Board recognises that the share price is affected by the interaction of supply and demand in the market based on investor sentiment towards China and the performance of the NAV per share. The Board has a discount control policy in place whereby it seeks to maintain the discount in single digits in normal market conditions. Subject to market conditions, it will authorise the repurchase of shares with the objective of stabilising the share price discount within a single digit range.

The Company’s discount widened from 1.1% at the start of the reporting period to 9.2% at the end of the reporting period. In September 2021, the Board authorised the repurchase of 440,000 ordinary shares into Treasury in an effort to control the discount. Prior to that, the Company had not carried out any share repurchases since September 2020. These share repurchases have benefited remaining shareholders as the NAV per share has been increased by purchasing shares at a discount. Since the end of the reporting period and as at the date of this report, the Company has repurchased a further 576,229 ordinary shares into Treasury. No shares have been repurchased for cancellation.

ONGOING CHARGEThe Ongoing Charge (the costs of running the Company) for the six months ended 30 September 2021 was 0.92% (31 March 2021: 0.97%). The variable element of the management fee was a charge of 0.20% (31 March 2021: 0.12%). Therefore, the Ongoing Charge including the variable element for the reporting period was 1.12% (31 March 2021: 1.09%).

MANAGEMENT FEESWith effect from 1 April 2021, the Board agreed a reduced management fee with the Manager, FIL Investment Services (UK) Limited. The revised fee structure is on a tiered basis of 0.90% on the first £1.5 billion of net assets, reducing to 0.70% on net assets over £1.5 billion. The variable element of +/- 0.20% from the previous fee structure remains unchanged. At the same time, the fixed annual fee of £100,000 for services other than portfolio management has been removed. The revised fee will provide savings on the overall percentage costs for shareholders assuming net assets remained constant.

BOARD OF DIRECTORSHaving served on the Board as a non-executive Director since 1 November 2011 and as a Senior Independent Director since 22 July 2016, Elisabeth Scott stepped down from the Board at the conclusion of the Annual General Meeting (“AGM”) on 20 July 2021. She was succeeded as a non-executive Director by Alastair Bruce who was appointed to the Board on 1 July 2021 and as Senior Independent Director by Linda Yueh from 20 July 2021.

As part of the Board’s succession plan, Nicholas Bull will retire as Chairman at the AGM in July 2022. Following a formal process, it was decided by the Board that Mike Balfour will succeed him as Chairman at the conclusion of the AGM. Mr Bruce will succeed Mr Balfour as Chairman of the Audit and Risk Committee at the conclusion of the same AGM.

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

The Board considers that the principal risks and uncertainties faced by the Company fall into the following categories: market, economic and geopolitical; investment performance; pandemic; gearing; discount control; key person; environmental, social and governance (“ESG”); and cybercrime risks. Other risks facing the Company include tax and regulatory and operational (third party 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 2021 which can be found on the Company’s pages of the Manager’s website at www.fidelity.co.uk/china.

These principal risks and uncertainties have not materially changed during the six months to 30 September 2021 and are equally applicable to the remaining six months of the Company’s financial year.

Risks from emerging new variants of COVID-19 continue, including the availability of suitable vaccines to tackle the new variants. Investors should be prepared for market fluctuations and remember that holding shares in the Company should be considered to be a long-term investment. These risks are somewhat mitigated by the investment trust structure of the Company which means that no forced sales need to take place to deal with any redemptions. Therefore, investments in the Company’s portfolio can be held over a longer time horizon.

The Manager carries on reviewing its business continuity plans and its operational resilience strategies on an ongoing basis. It continues to take all reasonable steps in meeting its regulatory obligations and to assess operational risks, the ability to continue operating and the steps it needs to take to serve and support its clients, including the Board. The Manager has appropriate business continuity plans in place and the provision of services continued to be supplied without interruption during the pandemic and continues to do so.

Investment team key activities, including those of portfolio managers, analysts and trading/ support functions, have continued to perform well despite the operational challenges posed when working from home or when split team arrangements were in place.

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

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

GOING CONCERN STATEMENTThe 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. They have considered the liquidity of the Company’s portfolio of investments (being mainly securities which are readily realisable), the projected income and expenditure and the loan facility agreement. The Directors are satisfied that the Company is financially sound and has sufficient resources to meet all of its liabilities and ongoing expenses and can continue in operational existence for a period of at least twelve months from the date of this Half-Yearly Report. Accordingly, they continue to adopt the going concern basis in preparing these Financial Statements.

This conclusion also takes into account the Board’s assessment of the ongoing risks from COVID-19 and evolving variants as set out above.

By order of the Board.FIL INVESTMENTS INTERNATIONAL29 November 2021

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

The Directors confirm to the best of their knowledge that:

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

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

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

The Half-Yearly Report was approved by the Board on 29 November 2021 and the above responsibility statement was signed on its behalf by Nicholas Bull, Chairman.

INCOME STATEMENT FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2021

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

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

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

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

STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2021

BALANCE SHEET AS AT 30 SEPTEMBER 2021Company number 7133583

CASH FLOW STATEMENT FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2021

NOTES TO THE FINANCIAL STATEMENTS

1 PRINCIPAL ACTIVITYFidelity 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 ACCOUNTSThe Financial Statements in this Half-Yearly Report have not been audited or reviewed by the Company’s Independent Auditor and do not constitute statutory accounts as defined in section 434 of the Companies Act 2006 (the “Act”). The financial information for the year ended 31 March 2021 is extracted from the latest published Financial Statements of the Company. Those Financial Statements were delivered to the Registrar of Companies and included the Independent Auditor’s Report which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Act.

3 ACCOUNTING POLICIES(i) Basis of PreparationOn 31 December 2020, International Financial Reporting Standards as adopted by the European Union at that date were brought into UK law and became UK-adopted international accounting standards, with future changes being subject to endorsement by the UK Endorsement Board. There was no impact or changes to the accounting policies from the transition.

These Half-Yearly Financial Statements have been prepared in accordance with UK-adopted International Accounting Standard 34: Interim Financial Reporting and use the same accounting policies as set out in the Company’s Annual Report and Financial Statements for the year ended 31 March 2021. Those Financial Statements were prepared in accordance with International Accounting Standards (“IAS”) in conformity with the requirements of the Companies Act 2006, IFRC interpretations and, as far as it is consistent with IAS, 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 October 2019.

The AIC updated the SORP in April 2021. The Directors have sought to prepare these financial statements in accordance with this SORP where the recommendations are consistent with IAS.

(ii) Going ConcernThe Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for a period of at least twelve months from the date of approval of these Financial Statements. Accordingly, the Directors consider it appropriate to adopt the going concern basis of accounting in preparing these Financial Statements. This conclusion also takes into account the Board’s assessment of the continuing risks arising from COVID-19 and evolving variants.

4 INCOME

Special dividends of £nil (year ended 31 March 2021: £29,083,000 and six months ended 30 September 2020: £nil) have been recognised in capital.

5 INVESTMENT MANAGEMENT FEES

* For the calculation of the variable management fee element, the Company’s NAV return was compared to the Benchmark Index return on a daily basis. The period used to assess the performance was from 1 July 2018 until a three year history was established. From 1 July 2021 the performance period is now on a rolling three year basis.

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

From 1 April 2021, the base investment management fee is charged at an annual rate of 0.90% on the first £1.5 billion of net assets, reducing to 0.70% of net assets over £1.5 billion. Prior to this date, the investment management fee was charged at an annual rate of 0.90% of net assets. In addition, there is a +/-0.20% variation fee based on the Company’s NAV per share performance relative to the Company’s Benchmark Index. Fees are payable monthly in arrears and are calculated on a daily basis.

6 FINANCE COSTS

7 TAXATION

8 EARNINGS/(LOSS) PER ORDINARY SHARE

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

9 DIVIDEND PAID TO SHAREHOLDERS

No dividend has been declared for the six months ended 30 September 2021 (six months ended 30 September 2020: £nil).

10 FAIR VALUE HIERARCHYThe 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.

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 2021 (Accounting Policies Notes 2(l) and (m) on pages 70 and 71). The table below sets out the Company’s fair value hierarchy:

11 OTHER RECEIVABLES

12 OTHER PAYABLES

13 SHARE CAPITAL

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

During the period, the Company repurchased 440,000 (year ended 31 March 2021 and six months ended 30 September 2020: 23,345,560) ordinary shares and held them in Treasury. The cost of repurchasing these shares of £1,388,000 (year ended 31 March 2021 and six months ended 30 September 2019: £58,558,000) was charged to the Other Reserve.

14 NET ASSET VALUE PER ORDINARY SHAREThe calculation of the net asset value per ordinary share is based on the following:

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

15 TRANSACTIONS WITH THE MANAGERS AND RELATED PARTIESFIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager and has delegated portfolio management to FIL Investment Management (Hong Kong) Limited. Both companies are Fidelity group companies.

Details of the current fee arrangements are given in Note 5 above. During the period, management fees of £10,779,000 (year ended 31 March 2021: £18,591,000 and six months ended 30 September 2020: £7,113,000), and accounting, administration and secretarial fees of £nil (year ended 31 March 2021: £100,000 and six months ended 30 September 2020: £50,000) were payable to Fidelity. Fidelity also provides the Company with marketing services. The total amount payable for these services was £117,000 (year ended 31 March 2021: £195,000 and six months ended 30 September 2020: £109,000). Amounts payable at the Balance Sheet date are included in other payables and are disclosed in Note 12 above.

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

The Chairman receives an annual fee of £45,000, the Audit and Risk Committee Chairman receives an annual fee of £38,000, the Senior Independent Director receives an annual fee of £36,000 and each other Director receives an annual fee of £30,000. The following members of the Board hold ordinary shares in the Company at the date of this report: Mike Balfour 65,000 shares, Alastair Bruce 7,300 shares, Nicholas Bull 110,804 shares, Vanessa Donegan 10,000 shares and Linda Yueh 2,318 shares.

The financial information contained in this Half-Yearly Results Announcement does not constitute statutory accounts as defined in section 435 of the Companies Act 2006. The financial information for the six months ended 30 September 2020 and 30 September 2020 has not been audited or reviewed by the Company’s Independent Auditor.

The information for the year ended 31 March 2021 has been extracted from the latest published audited financial statements, which have been filed with the Registrar of Companies, unless otherwise stated. The report of the Auditor on those financial statements contained no qualification or statement under sections 498(2) or (3) of the Companies Act 2006.

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

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

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