Fidelity China shrugs off virus – Fidelity China Special Situations’ annual report for the year ended 31 March 2020 shows an NAV return of -5.9% and a return to shareholders of -6.5%. MSCI China returned -1.0% over that period. The dividend has been upped by 10.4% to 4.25p. Markets had started to recover from the worst of their falls by 31 March and , since then, the NAV has risen from 236.3p to 270.0p, as China’s economy recovers from the effects of the virus.
Unlisteds
Did you know? The portfolio currently has six unlisted investments representing 6.0% of the company’s gross assets (maximum 10% permitted), including Bytedance (TikTok), Didi (ride hailing), DJI (manufacturers of drones) and Pony.ai (driverless vehicles).
Geared into the recovery
Gearing was a factor in the company’s underperformance over the period but also contributed to the trust’s recovery. At 31 March 2020, the company’s gross gearing was 25.2% (2019: 26.1%). The level of gross gearing is determined by the manager within the limit set by the company’s prospectus of 30%. Net gearing which nets off short positions was 23.2% (2019: 20.9%).
Performance drivers
The manager’s report is presented in the form of questions and answers. talking about performance the manager says ” heavier than benchmark weighting to smaller-sized companies was a significant factor in the relative underperformance. The conservative write-down of values of some of the unlisted companies also detracted from performance.”
What about the top five holdings specifically? And what have been the key contributors and detractors?
The portfolio’s preferred consumption-led holdings delivered strong performance over the reporting period. A noteworthy contribution came from China Meidong Auto Holdings, a prominent automobile dealership network and long-term top holding, which focuses on the premium car segment in China, with brands such as BMW, Porsche and Lexus. Its revenues exceeded expectations supported by accelerated new store openings. It also reported encouraging growth in margins, as the increase in luxury car sales boosted strong growth in its aftersales service business.
Alibaba Group Holding and Tencent Holdings continue to be core holdings in the portfolio and are central pillars of the Chinese economy in general, with businesses spanning e-commerce, online gaming, cloud services and rapidly growing finance businesses centres around payment. Many of these businesses are seeing accelerated growth as a result of the virus outbreak. Notwithstanding the fact we have significant exposure to both stocks, and that they have contributed to performance, our relative underweight position contributed to us lagging the Index. In my view there are better opportunities to be had elsewhere at the moment.
The position in 21Vianet Group, the leading carrier-neutral internet data centre (IDC) in China, boosted returns. Carrier neutral IDCs allow a range of customers to locate their servers and networking equipment in one location. China’s internet infrastructure industry is among the fastest growing in the world, driven by mobile as well as enterprise-led data demand. Adding Alibaba as an enterprise client was a key win, evidencing strong strategy execution from management.
Among financial holdings, China Pacific Insurance Group (also a top five holding) and China Life Insurance Company detracted from returns, amid concerns over impact on agency productivity as the restriction limited any engagement and direct sales. Nervous investors overlooked the strong jumpstart in China Life Insurance’s sales and the encouraging growth in new business value margins reported in its recent results. Both stocks are trading near historical low valuations despite the strong growth prospects for the industry in the mid-term. This is another area where I feel growth could accelerate coming out of the shutdown.
Chinese wealth management specialist Noah Holdings experienced fraud-related losses in one of its supply chain financing products in the early months of the period under review. The management team engaged proactively in the subsequent evaluation and reviewed all its products comprehensively. While remaining mindful of the impact of investment flows in the short-term, I am confident the company can recover and that its long-term positioning in a market with significant growth potential remains unchanged. Its recent quarterly results demonstrated the resilience of the underlying business model and I retain conviction in its management team. I have added to the position.
Another key detractor over the year was a position in Hutchison China MediTech. Shares in the biotechnology company suffered after its largest shareholder reduced its stake as it realised some value from its long-term holding. In doing so, the parent company accepted a discounted valuation, which weighed on investor sentiment. Hutchison China MediTech continues to see solid cash flows from its traditional Chinese medicine business and continues to maintain solid progress in what is an exciting oncology drug pipeline.”