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Fidelity China wants to invest more in unlisted companies

Fidelity China Special Situations has published results for the year ended 31 March 2016. For the year under review, the company’s NAV total return increased by 0.02% while the share price total return fell by 4.53%. The Benchmark Index, MSCI China, fell by 16.17%. The Board recommends a dividend of 1.80 pence (2015: 1.30 pence) per share for the year ended 31 March 2016 for approval by shareholders at the forthcoming Annual General Meeting. This represents a 38.5% increase on the 1.30 pence paid in respect of the prior year.

Under its current investment policy, Fidelity China is permitted to invest 5% of gross assets in unlisted securities issued by companies which carry on business, or which have significant interests, in China or Hong Kong. The Board is seeking to revise this limit to 10% of gross assets as there are now more potential unlisted investment opportunities and the revised limit would allow the manager to react quickly if investment opportunities occur.

Dale Nichol’s manager’s report says several positions in the consumer discretionary sector contributed to positive
returns against the MSCI China Index. The position in budget hotel operator China Lodging rallied after it reported improved free cash flow in light of new franchised hotel openings and an increase in pre-paid membership. The exposure to New Oriental Education & Technology Group also proved rewarding as demand for its after-school tutorial services proved resilient. The company’s strong brand and emphasis on the quality of teachers supported an improvement in enrolment levels. Rising utilisation levels and the impact of heavy online investment is helping to drive margin improvement. Meanwhile, bakery chain Gourmet Master reported a recovery in its operating margins across geographies – China, Taiwan and US – while ongoing growth in its same store sales also bolstered sentiment towards the stock. Another consumption-led position in Zhejiang Supor Cookware continues to see strong results and is clearly benefiting from the strong technology support offered by its largest shareholder, France’s SEB, which continues to support a strong rollout of new products in the Chinese market.

Elsewhere, an overweight position in oncology and immunology focused drug innovator Hutchison China MediTech contributed to returns. Investors favoured the drug maker’s promising product pipeline and drug-specific partnerships with global healthcare leaders. The company has also now listed in the US which should support further understanding. Online games producer NetEase supported returns given the strong performance of its mobile games. Among industrial holdings, conviction in Shanghai International Airport’s prospects proved rewarding, given the solid growth in traffic and emergence as an international travel hub. The increase in its leasable area after the renovation of one of its key terminals also improved the prospects of its non-aeronautical business.

Conversely, China Animal Healthcare was the single largest detractor to relative performance over the year. The company manufactures and markets drugs and vaccines for poultry and other livestock, and there is a clear growth
opportunity in this industry. However, during the year, its auditor resigned, accounting records were lost and its listing was suspended. Consequently its position was written down to zero. Elsewhere, CITIC Securities, which provides brokerage, trading and underwriting services suffered a volatile year in line with the market. While the position was reduced, the clampdown on margin finance and swings in market sentiment impacted trading volumes and consequently CITIC Securities’ revenue potential.

FCSS : Fidelity China wants to invest more in unlisted companies

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