Fidelity China’s Dale Nicholls doubles investors’ money in three years. Nicholas Bull, chairman, said “It is now increasingly accepted by investment professionals that China’s sheer economic size, along with its record of delivering year on year growth, means that anyone building an investment portfolio should consider having an exposure to China. The end of the financial year also marked three years for Dale Nicholls as Portfolio Manager of Fidelity China Special Situations PLC and the Company’s seventh anniversary. Dale has continued the good work by previous portfolio manager Anthony Bolton and has increased the NAV over his tenure, returning 101.8% versus an Index return of 60.6%.”
Over the year to 31 March 2017, the MSCI China Index rose by 37.6% and Fidelity China Special Situations’ NAV posted a 38.8% total return. The share price recorded a 45.8% total return as a result of the reduction in the share price discount to NAV (from 17.2% to 13.2%). The Board is recommending a final dividend of 2.50p for the year ended 31 March 2017. This represents an increase of 38.9% over the 1.80p paid in respect of the prior year.
Extracts from the manager’s report
Hutchison China Meditech (“HCM”), a longstanding top 10 position in the portfolio, returned over 70% over the period. HCM is a Chinese pharmaceutical company listed on the UK AIM market with a strong traditional Chinese medicine business generating strong cash flows for the company to support its R&D efforts. The manager says that the company continues to develop its exciting pipeline including a number of advanced oncology drugs where it is teaming up with global multi-nationals like Astra Zeneca. In March 2017, HCM announced positive phase 3 data on a colon cancer drug it is developing called fruquitinib, putting it one step closer to being marketed. Its share price rallied significantly on this news and the Fidelity China continues to hold this position with strong prospects from other potential market leading drugs in their pipeline. In addition, HCM dual listed on the Nasdaq market in March 2016, broadening the potential investor base to the US market and its in-depth coverage of the healthcare sector.
China Sanjiang Fine Chemicals was also a major contributor as it experienced a significant widening of price spreads across a range of chemical products, and it rallied from very low valuations.
China Meidong Auto, a car dealership based in the Guangdong region, was another contributor to returns. The manager says that its share price more than doubled over the year as it continues to execute its strategy well, integrating acquired businesses against the backdrop of strong auto sales.
The portfolio’s holdings in financials detracted from performance against the Index. The largest overweight position relative to the MSCI China Index is China Pacific Insurance. Given the low penetration of life insurance products in China, the growth potential remains significant over the medium-term. The company’s focus is on higher margin products and improving its sales force. However, the insurance sector came under regulatory scrutiny following a series of big investments by insurance companies not related to their core business. In addition, there were concerns over their property and casualty business performance. Dale Nicholls believes that these concerns are overdone and China Pacific Insurance is significantly undervalued.
Dale says that “While there is significant opportunity in listed companies focused on China across a range of stock markets, there is a great deal of activity and innovation in exciting companies that have not reached the listing stage. Following last year’s shareholder vote, the Company now has the ability to hold up to 10% in unlisted companies, and I see this ability to gain exposure to a broader subsection of the entrepreneurial activity in China as a key strength of the Company. At the time of writing there are four unlisted holdings now representing around 4% of the portfolio. Firstly Xiaoju Kuaizhi (‘Didi Chuxing’), the leading ride-sharing player in China, cemented their dominance in the acquisition of Uber China last year. The second one is China Internet Plus Holdings (formerly ‘Meituan’), the leader in China in so-called offline-to-online services. They aim to effectively be the Alibaba of the services sector in areas like food delivery, restaurant reservations and ticket bookings. The third is Shanghai Yiguo E-Commerce (‘Yiguo’), a leading fresh food e-commerce company, which aims to create a ‘farm-to-table’ e-commerce platform. It is the exclusive operator of the fresh food segment on Alibaba’s T-Mall Supermarket and both Alibaba and its management team are strategic investors. This is a relatively underdeveloped industry in China and one that offers huge growth potential as consumers become more health conscious whilst also seeking greater convenience. There continues to be a number of interesting unlisted opportunities available across a range of sectors.
Since the end of the financial reporting period, the Company has added a fourth unlisted position in Jiguang, a leading app developer service provider and big data platform in China. By the end of 2016, Jiguang served over 400,000 apps in China and worked with 200,000 developers, holding dominant market share in the “App Push Notification Service” segment in China. Jiguang should structurally benefit from the fast-growing mobile ‘software as a service’ and big data application market, and has first mover advantage in this field with its depth and unique data granularity.”
FCSS : Fidelity China’s Dale Nicholls doubles investors’ money in three years