Fidelity China Special Situations trust looks to ramp up unlisted holdings

The trust believes China’s unlisted space offers ‘some excellent opportunities’

Dale Nicholls, portfolio manager of the £989m Fidelity China Special Situations investment trust
Dale Nicholls


The Fidelity China Special Situations trust is looking to boost its exposure to unlisted companies as its share price almost doubled over the past year.

In the £1.2bn trust’s annual results, published on Tuesday,  Fidelity proposed increasing the limit on investing in unlisted companies from 10% to 15%, subject to shareholder approval.

At year end, the trust, managed by Dale Nicholls (pictured), had 7.4% of net assets plus borrowings in nine unlisted holdings.

‘A sensible step’

AJ Bell head of active portfolios Ryan Hughes said: “Importantly, the China team at Fidelity have many years’ experience of investing in unlisted companies in China having first invested in Alibaba three years before it listed, while over the years more investments have been made including three this year.”

He added: “The investment trust vehicle is perfectly suited to this type of investment given its closed ended structure and therefore, this move upwards is a sensible step.”

Fidelity China Special Situations chairman Nicholas Bull said: “In recent years the unlisted space in China has expanded quite markedly and offers some excellent opportunities for patient long-term investors.”

Firms are taking longer to IPO

Bull added over the years the trust has been able to invest in unlisted companies that have established their business model and are looking towards an IPO.

He said: “At the same time, the period from investment to IPO has lengthened as unlisted companies are finding it possible to fulfil their capital needs with more rounds of capital raising pre-IPO. Taken together this has led us to conclude that we should have the ability to hold a greater proportion of the trust in unlisted investments.”

Unlisted companies are often larger than people think

One of the trust’s key holdings in the unlisted space is Byte Dance which owns Chinese content platform Toutiao and video-sharing service Douyin, as well as globally renowned social media app Tik Tok.

Hughes highlighted that while historically, investors would think of unlisted companies as being small, Byte Dance was recently valued at $250bn, making it twice as large as Unilever, the largest company in the FTSE 100.

Nicholls said that while Byte Dance’s domestic business remains the key driver of earnings growth in the short-term, “from a market capitalisation perspective, the company has the potential to become one of the largest companies in China”.

During the year the trust also initiated positions in China’s leading online commercial freight platform, Full Truck Alliance, Chime Biologics, a biologics contract research and manufacturing company which according to Nicholls is benefitting from the strong growth and development activity of the market for pharmaceutical biologics.

It also bought Venturous Holdings, a ‘deep technology’ conglomerate focused on investing in digital transformation, in particular, the smart city theme.

Share price and NAV almost double

Elsewhere, the company reported a share price increase of 97.2%, compared to the trust’s benchmark, the MSCI China Index which rose by 29.1%. Its NAV rose by 81.9%.

On a five-year basis, the trust’s share price total return was 227.9%, compared to the Morningstar China sector total returns of 110.9%, according to AIC data. It currently trades on a 1.6% discount.

The trust said its position in China Meidong Auto Holdings was a notable contributor to performance over the year, as it benefited from improving margins in car sales, strong after-sales services growth, as well as its strong brand and customer relationships.

It also highlighted its position in China’s largest e-bike manufacturer, Yadea Group Holdings as a strong contributor, as well as 21Vianet Group which saw strong demand for its cloud services.

Opportunities from pandemic

Nicholls said the trust benefitted from the opportunities provided by the Covid sell-off which offered some compelling valuations.

He said the portfolio’s core themes has not significantly changed, but Covid had accelerated structural trends already underway in China such as the wider penetration of e-commerce, online entertainment and educational services.