Dale Nicholls, portfolio manager of Fidelity China Special Situations PLC (FCSS), discusses its continued focus on ‘New China’ sectors that will benefit from the country’s long-term growth story following strong, positive returns posted by the Trust in its annual results announced in June.

For China, we believe it is the vibrant corporate sector that should hold investors’ attention, with compelling long-term growth stories such as consumption, technology and healthcare.

The macroeconomic backdrop in China has been strong: it was one of the few economies to register growth in 2020 and the IMF is currently forecasting expansion of 8.4% for 20211. This is a healthy backdrop for corporate growth, but it is ‘new China’ that is likely to draw the lion’s share of this growth in the years’ ahead. This is our area of focus with the Fidelity China Special Situations investment trust.

The pandemic has accelerated many structural trends already underway in China - the wider penetration and acceptance of e-commerce, online entertainment and educational services, for example. The Chinese have moved to agile working, with a greater reliance on e-commerce. It is in these areas that we find the most compelling growth opportunities.

We aim to identify these companies before they have been discovered by the wider market. This means seeking out undervalued companies whose long-term growth prospects are not yet appreciated by the market. The Chinese market is the perfect hunting ground for stocks of this kind. The country’s market is broad with the winners still growing rapidly; there are plenty of hidden gems that fly under the radars of local and international analysts.

Strong opportunities

As the trust’s most recent results demonstrate, the pandemic created more opportunities for many of the companies in our portfolio.

  • China’s largest two-wheeler e-bike manufacturer, Yadea, has a strong market position, an expanding distribution network and focuses on innovative and differentiated products underpinned the share price’s performance. However, with valuations here also becoming less attractive we have now closed our position.
  • In the healthcare segment, Wuxi AppTec has benefited from ongoing strong global demand for contract research and manufacturing services. The company’s ability to grow its strong talent pool is a key strength. Looking ahead there is exciting potential from new technology developments in which the company continues to innovate, such as its cell/gene therapy.
  • The Initial public offering (IPO) of short-video application company Kuaishou Technology (one of the most popular social platforms in China) saw strong growth during the year. Kuaishou’s better-than-anticipated quarterly earnings lifted sentiment towards the stock. While the IPO was deemed to be a great success, the company’s growth outlook remains promising as it’s supported by the ramp-up of monetisation in advertising and livestreaming e-commerce.
  • Carrier-neutral internet data centre services provider 21Vianet Group saw strong performance as demand for cloud services increased. The shares have also benefited from expectations of increased demand for fifth generation (5G) applications.

Lifting private equity

China’s capital markets are increasingly dynamic with new businesses coming to market all the time, expanding and diversifying the opportunities available to investors. We are finding more opportunities to take positions in companies before they go public. In recent years the private markets in China have deepened - more companies are finding it possible to fulfil their capital needs with more rounds of capital raising pre-IPO.

The trust has already been using its 10% allowance to make investments in well-established but unlisted companies that are looking towards an IPO. As many shareholders remember, the trust was an early investor in Alibaba, three years before it listed publicly in a record breaking $25 billion IPO in 2014. We currently hold ByteDance, an internet technology company perhaps most famous for owning social media platform TikTok, but which also holds exciting domestic businesses - its content platform Toutiao and its video-sharing service Douyin.

Fidelity International has continued to invest in and grow its expertise in the private markets. Taken together with the growing opportunities has led us to conclude that we should have the ability to hold a greater proportion of the trust in unlisted investments. We are therefore placing before shareholders, at the Annual General Meeting, a proposal to increase our limit in unquoted firms from 10% to 15%.

PAST PERFORMANCE
  Jun 16 - Jun 17 Jun 17 - Jun 18 Jun 18 - Jun 19 Jun 19 - Jun 20 Jun 20 - Jun 21
Net Asset Value 34.4% 18.0% -12.8% 29.0% 45.2%
Share Price 44.4% 18.4% -7.3% 27.7% 52.2%
MSCI China Index 36.0% 19.3% -3.2% 16.5% 13.9%

Past performance is not a reliable indicator of future returns.

©2021 Morningstar Inc. All rights reserved. The MSCI China Index is a comparative index of the investment trust. Source: Morningstar as at 30.06.2021, bid-bid, net income reinvested.

1. Source: International Monetary Fund as at July 2021

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