Fidelity China Special Situations has announced results covering the year ended 31 March 2025. Over that period, the NAV return was 31.5%, lagging the MSCI China Index which returned 37.5%. The share price return was 35.8%, helped by a narrowing of the discount from 10.5% to 7.2%.
30,841,184 shares (5.9% of the company) were bought back at a discount.
The statement points out that the trust is now 15 years old and its annualised returns since inception are well ahead of the benchmark (8.7% in NAV terms, 8.2% in share price terms and 4.5% for the benchmark).
Revenue earnings per share rose to 10.18p, up 76% on last year. The dividend was increased from 6.4p to 8.0p. In addition, in light of a large exceptional dividend received from a holding in Lufax Holding, an online finance marketplace, it is proposing an additional special dividend of 1.0p.
The ongoing charges ratio has fallen from 0.98% to 0.89%, helped by the impact of the merger with abrdn China. The underperformance during the financial year meant that a previously accrued performance fee was not due to the manager. The ongoing charges ratio including the effect of performance fees was 0.74%.
The chairman highlights three newsworthy events over the trust’s financial year. He says:
- The first is President Xi’s meeting in February with Chinese entrepreneurs at a symposium of private enterprises. In the past, the Chinese government has been seen as sceptical of such businesses, but this gathering would seem to show a genuinely renewed commitment to embracing the role of private enterprise and entrepreneurs as part of China’s future.
- The second is DeepSeek – the headline-grabbing generative AI app that got the world’s attention in January, having invested less and provided arguably a better product than US peers. Far from being an anomaly, this is a typical example of Chinese enterprise and science-based invention.
- The third is electric vehicle (EV) maker BYD’s revenues overtaking Tesla’s for the first time recently. These factors, and others, have helped improve sentiment, which is also reflected in the 38% rise in the stock market. This strong performance is particularly encouraging given the prevailing high levels of geopolitical uncertainty.
The trust had 9.6% of its net assets invested in unquoted companies at the end of March. Autonomous driving specialist Pony.ai floated in the US stock market in November. The manager also added a new unquoted holding to the portfolio in February 2025, investing in Fujian Yangteng Innovations which sells private-labelled aftermarket auto parts online in Europe and North America. He also increased the position in ByteDance, the social media company whose assets include TikTok; it is now the largest unlisted holding in the portfolio.
[It has been great to see Fidelity China’s NAV pick up a bit, but we are still long way off the trust’s high in 2021, and the NAV was this level during 2018. On a forward price/earnings ratio of 11x versus 18x for the MSCI All Countries World Index, Chinese stocks are still cheap. The trust’s chairman thinks the Chinese government’s re-embrace of the private sector could have a big positive impact on the long-term outlook. The manager highlights the country’s focus on innovation and R&D. I think China also needs to build friendlier relations with its neighbours, taking advantage of the US’s increasing isolationism.]
Extracts from the manager’s report
Performance during the year was driven largely by domestically focused small and mid-cap stocks, financials, and several of the most innovative companies held, particularly those linked to AI and the electric vehicle (EV) supply chain.
Against a backdrop of stabilising economic activity, insurers and consumer finance companies delivered strong returns. LexinFintech Holdings, a leading FinTech lender, stood out with robust profit growth, improved asset quality, and successful execution of its strategic shift toward a more optimised product mix and stronger platform-based revenue. Similarly, Qifu Technology benefited from solid earnings growth, an expanding user base, and a strong ongoing programme of capital return. As an AI-enabled platform specialising in short-term consumer credit, Qifu has built a leading market position. The stimulus package also lifted sentiment across the broader financial sector, supporting holdings such as Ping An Insurance Company and China Life Insurance.
Investor enthusiasm for AI and digital transformation supported strong returns in holdings such as Alibaba Group Holding, which advanced on rising expectations for cloud platform demand. However, our underweight position relative to the MSCI China Index limited the positive contribution. VNET Group, one of China’s leading Internet Data Centre (IDC) operators, benefited from growing AI-related infrastructure demand.
Other holdings also made meaningful contributions. Medlive Technology, an online professional physician platform, rallied following the successful launch of new AI driven services and accelerating AI commercialisation efforts. Meanwhile, Kingdee International Software Group, a domestic leader in enterprise resource planning (ERP) software, gained as it continues to benefit from a broader industry shift toward SaaS (software-as-a-service) models and hope that its AI-enabled features can accelerate penetration and improve pricing.
One of the most innovative and strategically important areas continues to be the EV sector, where Chinese companies are increasingly establishing global leadership. While we acknowledge the significant growth potential for EV manufacturers, my preferred exposure has been through suppliers further up the value chain, where competition tends to be less intense, allowing margins to be more attractive and stable. Holdings in Hesai Group, a leading automotive LiDAR supplier, and Precision Tsugami China, a specialist in high-precision small-size lathe machines, performed well. Precision Tsugami in particular benefited from strong order momentum, driven by rising demand from both the BYD supply chain and from manufacturers of AI server-related cooling systems.
On the other hand, not holding automakers BYD and Xiaomi detracted from performance compared to the MSCI China benchmark index. Xiaomi’s stock surged following the launch of its SU7 EV, which boosted sentiment across the EV space. However, I remain cautious given the competitive intensity in the auto sector along with relatively high valuations. In addition, we continue to believe a key differentiator of the company — backed by Fidelity’s research and private-market valuation expertise — to invest in unlisted companies broadens the opportunity set and represents an additional source of potential returns for the company.
TikTok developer ByteDance attracted attention given its role in the strategic tech sector and increasing global relevance, placing it at the intersection of innovation and geopolitical scrutiny. Encouragingly, the company emerged as a strong contributor to performance and our added stake in August last year further enhanced gains. ByteDance continued to deliver solid financial results and international expansion, despite continued uncertainty around TikTok’s US operations.
Conversely, leading autonomous driving player Pony.ai came under pressure post IPO in late 2024, following weaker-than-expected fourth-quarter results, despite this being less relevant given the early stage of this industry’s development. We remain confident in the long-term potential of its business given its strong technology platform and integrated ecosystem.
Overall, the unlisted investments delivered positive absolute returns to the portfolio during the review period, though performance was comparatively muted relative to the benchmark index, which benefited from a sentiment-driven rally fuelled by stimulus measures and AI-related catalysts.
On tariffs, Dale had this to say
US-China trade tensions were widely anticipated but escalated more than most expected. However, the recent agreement on temporary tariff reductions has offered some relief. While the headline cuts are substantial, tariffs remain materially higher than they were before the so-called “Liberation Day” and have already caused significant disruption for both consumers and companies. The base case is that tariffs will stay around these new levels after the 90-day period, but they continue to weigh on the earnings outlook, particularly for certain export-oriented industries.
Companies within the technology hardware and machinery sectors face the most direct pressure, with revenue impacts, given the uncertainty, and potential margin compression on lower utilisation levels as tariff costs ripple through supply chains. In our conversations with companies, few express concerns about losing market share, because these sectors are often already dominated by Chinese firms with similar supply chains. It is more a question of how demand will respond when prices rise.
So, a key part of our analysis centres around questions of price elasticity. I have reduced some exposure to the power equipment sector, where most companies share similar supply chains, with the bulk of manufacturing and sourcing based in China. But companies with diversified production footprints or strong market positioning may weather the impact more effectively over time.
Overall, we expect the direct tariff impact on the company to be insignificant. The company remains heavily invested in domestically driven sectors such as healthcare, consumer staples, and segments of industrials, which remain broadly resilient, supported by local demand and policy tailwinds, which are likely to be more significant in response to the tariff impact drag.
Lastly, some perspective is required: China is a market where sentiment can swing significantly, but underlying fundamentals tend to evolve at a much slower pace. Based on MSCI data, China’s revenue exposure to the US is around 3%, so while market volatility is unsettling, the fundamental long-term opportunity for most Chinese companies remains intact. In fact, the trade friction itself in many ways reflects the rising competitiveness of Chinese companies across a range of sectors.
FCSS : Fidelity China trails significant market rebound
