Half-year Financial Report

Fidelity China Special Situations PLC delivered a strong six‑month performance to 30 Sept 2025 with NAV total return +29.7% (share price +28.7%) versus the MSCI China Index +18.0%, lifting NAV per share to 358.53p, driven by core consumer and industrial holdings tied to advanced manufacturing and AI. Key contributors included Hesai, Pony.ai, Dongfang Electric and Morimatsu, while limited exposure to high‑competition EV and e‑commerce names (eg, BYD, Xiaomi, Meituan, JD) aided results; net market exposure averaged ~119% with net gearing at 19.6% (adding c.3.0% to returns) and unlisted investments rose to 9.9% of net assets after a £22.7m HashKey acquisition. Management repurchased 9.03m shares for cancellation (£25.3m) as the discount widened slightly to 8.2%; the team views the outlook as constructive—supported by policy measures, a US–China trade truce and AI-driven re‑rating—but flags mixed domestic consumption/property dynamics and ongoing geopolitical risks.

Analysis

Fidelity China Special Situations PLC reported a NAV total return of +29.7% and a share price total return of +28.7% for the six months to 30 September 2025, materially outperforming the MSCI China Index return of +18.0%; NAV per share rose to 358.53p and total earnings per share for the period were 80.92p. Performance was driven by core consumer and industrial positions aligned with advanced manufacturing and AI themes, with specific contributors cited as Hesai Group, Pony.ai, Dongfang Electric and Morimatsu; limited exposure to margin‑pressured EV and e‑commerce names (BYD, Xiaomi, Meituan, JD) also aided returns.

Portfolio construction used modest leverage and derivatives: average net market exposure was around 119% with net gearing of 19.6% (down from 20.5%), and gearing contributed +3.0% to relative returns; unlisted investments rose to £171.95m (9.9% of net assets) following a £22.67m HashKey purchase. The Board repurchased 9.03m shares for cancellation at a cost of £25.28m as the discount widened slightly to 8.2%, ongoing charges (annualised) were 0.93% (1.07% including the variable fee element), and the top five holdings account for 35.1% of net assets (Tencent 14.3%, Alibaba 9.5%).

Management cites constructive policy/backdrop — a US–China tariff truce, the 15th Five‑Year Plan and targeted fiscal/monetary support — but highlights mixed domestic demand, a still‑fragile property market, concentrated market performance in high‑beta AI/tech segments, and geopolitical risks. Valuations have re‑rated (MSCI China ~13x 12‑month forward earnings) yet remain below US multiples, creating selective opportunities but implying sensitivity to policy shifts, housing stabilisation data and AI momentum; unlisted valuation and liquidity risks remain relevant given 9.9% unlisted exposure.

Key Decisions for Investors

• Consider selective exposure to China names with durable earnings visibility and structural exposure to AI, advanced manufacturing or automation, given policy support and the trust's outperformance
• Avoid broad exposure to high‑competition EV and low‑margin e‑commerce franchises or hedge positions in those segments given the article's cited margin pressure and downside risks
• For holders of the trust, consider maintaining or modestly increasing positions given strong NAV performance, ongoing share repurchases and sub‑10% discount, but monitor the discount and be prepared to reduce exposure if the discount widens beyond c.10% or net gearing rises materially
• Watch near‑term domestic indicators (home prices, consumer spending) and geopolitics (US–China trade/front‑line developments) as primary catalysts that should inform trimming or adding to China equity exposure