Fidelity China Special Situations (LON:FCSS) has announced its half-yearly results for the six months ended 30 September 2025 (unaudited).
Financial Highlights:
- During the six months ended 30 September 2025, Fidelity China Special Situations PLC reported an ordinary share price total return of +28.7% and Net Asset Value (NAV) return of +29.7%.
- The Benchmark Index, the MSCI China Index, produced a total return of +18.0% over the same timeframe.
- Core holdings in the consumer and industrials sectors, many aligning with advanced manufacturing and innovation themes, were the main contributors to performance.
- China remains a fertile ground for structural growth opportunities, particularly in sectors benefiting from rapid technological innovation, such as automation, electric vehicles, AI and advanced manufacturing.
PORTFOLIO MANAGER’S HALF-YEARLY REVIEW
MACRO AND MARKET BACKDROP
Chinese equities staged a strong rally over the six months to 30 September 2025. After a volatile start amid renewed US–China trade tensions, markets recovered as a temporary truce eased geopolitical concerns. Renewed interest in innovation-led sectors, supported by DeepSeek’s breakthrough artificial intelligence (AI) model earlier in the year and a rise in global biotech licensing deals from Chinese companies, reinforced optimism around the country’s technological capability and industrial competitiveness. Improved investor sentiment and increased retail participation supported record trading volumes, alongside strong southbound inflows led by domestic institutional investors seeking opportunities in Hong Kong listed financial and high-dividend stocks. Together, these dynamics supported a broad valuation re-rating ahead of the underlying earnings recovery.
External demand has remained firm, reflecting the strength in China’s global manufacturing base. The country’s production and supply chain ecosystems remain deeply integrated across a wide range of global industries – from advanced manufacturing to the electric vehicle (EV) supply chain. A strong focus on investment in research and development (R&D), along with sheer scale benefits, are driving gains in competitiveness for many companies. Many Chinese companies with meaningful overseas exposure have demonstrated global competitiveness through market share gains, even amid previous tariff hikes during US President Trump’s first term. While the portion of overseas sales is growing, over 95% of revenues for companies within the MSCI China Index (the Company’s Benchmark Index) are still derived domestically, a fact seemingly often overlooked by markets.
However, domestic conditions were more mixed. Consumer confidence remains weak amid a subdued property market recovery, and household spending has yet to regain momentum despite healthy balance sheets and high savings levels. Early signs of home price stabilisation in tier-one cities were encouraging, but recent data points have been less positive. Stabilisation here will be crucial to strengthening consumer confidence in my view.
Policy remained supportive but measured. Authorities have maintained a mix of fiscal and monetary support, prioritising controlled stabilisation through targeted, reactive policy adjustments over broad stimulus. Meanwhile, market focus has shifted towards sectors benefiting from significant innovation, AI development, and the government’s “anti-involution” campaign, which aims to reduce excessive, profit-eroding competition and industrial overcapacity. These initiatives are designed to address deflationary pressures and promote greater efficiency, contributing to market consolidation and a healthier long-term market environment.
We have noticed improved corporate governance and strong capital return trends across Chinese companies. Many firms have raised dividends, undertaken share buybacks and adopted more disciplined capital allocation practices, signalling a stronger alignment between management and investors.
PERFORMANCE AND PORTFOLIO REVIEW
The Company’s net asset value (NAV) rose by 29.7% over the six months to 30 September 2025, significantly outperforming the MSCI China Index, which gained 18.0%. The share price increased by 28.7% over the same period, with the discount to NAV widening slightly from 7.3% at the start of the period to end at 8.2%. (All performance data are on a total return basis.) Core holdings in the consumer and industrials sectors, many aligning with advanced manufacturing and innovation themes, were the main contributors to performance. The Company also benefited from limited exposure to the EV brands and e-commerce sectors, where fierce price competition has pressured profit margins and share prices.
Within the Company’s portfolio, our holding in leading automotive LiDAR supplier Hesai Group performed strongly. The company returned to profitability and delivered robust revenue growth in the second quarter of 2025, beating expectations on both volume and margin. Investor sentiment was further supported by its announcement of a planned Hong Kong listing.
Meanwhile, Pony.ai, a leading autonomous driving and robotaxi player, was also among the top contributors, despite notable post-listing volatility. Its shares advanced on continued strong development of the business, with new robotaxi operation approvals in cities like Shanghai and overseas markets such as the UAE, along with continued gains in unit economics as hardware costs decline. The company is nearing profitability on a single-vehicle basis, paving the way for further scale-driven efficiency. Fleet expansion and new international partnerships with major mobility operators, such as Uber, also strengthened its ecosystem and market position. Having first invested in Pony.ai as a private company, we retain conviction in its technology leadership, integrated ecosystem and long-term growth potential as China advances towards next-generation mobility.
In Industrials, holdings in Dongfang Electric and Morimatsu International Holdings, two leading diversified equipment and modular system makers, added value. Shares in Dongfang surged on market optimism around major hydropower projects and expectations of an earnings recovery. Morimatsu also gained, supported by robust new orders in the pharmaceutical sector, led by a capex rebound in the pharma sector globally.
Limited exposure to industries that had previously attracted strong investor enthusiasm, notably EVs and e-commerce, benefited performance. EV manufacturers BYD and Xiaomi faced challenges amid intensifying competition. Xiaomi’s debut model attracted significant investor interest, boosting sales and brand recognition. However, high valuation multiples proved difficult to sustain as margin pressure and weaker-than-expected second results weighed on sentiment. BYD also faced mounting pressure from aggressive price cuts across the industry, which continue to squeeze margins. Avoiding both names proved rewarding.
In the e-commerce and service platform space we remain cautious given intensifying competition industry wide. Against this backdrop, the lack of exposure to food delivery giant Meituan and e-commerce platform JD.com proved beneficial. Conversely, Alibaba Group Holding performed strongly, supported by renewed investor interest in AI applications, solid cloud results and signs of stabilisation in its core e-commerce business, partly helped by the synergy effect from its new food delivery business. However, our underweight position relative to the MSCI China Index limited the positive contribution.
Some long-term consumer-related positions weighed on returns, including Hisense Home Appliances Group, a major appliances and electronics manufacturer, and LexinFintech Holdings, a leading consumer finance lender. LexinFintech retreated after a period of strong gains, as investors took profits on solid earnings results. Hisense missed its second quarter revenue and profit estimates due to weakness in central air conditioning amid reduced trade-in support and a weak property market.
CURRENT PORTFOLIO POSITIONING
China remains a fertile ground for structural growth opportunities, particularly in sectors benefiting from rapid technological innovation, such as automation, electric vehicles, AI and advanced manufacturing. Meanwhile, the fruits of strong R&D in healthcare and ongoing import substitution in tech hardware and high-end industrial components further broaden the opportunity set.
The Company remains focused on domestically driven sectors such as healthcare, consumer, and select parts of industrials — areas less exposed to external shocks and closely aligned with China’s long-term strategic priorities. We continue to favour companies with scalable growth potential, sustainable competitive advantage, and strong management teams, which are better positioned to weather market volatility amid economic uncertainty.
Industrials remain the Company’s largest sector overweight exposure versus the Benchmark Index. A key holding in the sector is Full Truck Alliance (FTA), China’s dominant digital freight matching platform. By leveraging powerful network effects to match shippers with truckers more efficiently than traditional offline brokers, FTA offers durable growth potential as the logistics industry in China continues a structural shift to online.
We also invested in Ehang Holdings. The company offers early exposure to the next generation of urban air mobility as the world’s first eVTOL (electric vertical take-off and landing) manufacturer licensed to carry passengers commercially. Backed by strong policy support in China, the company holds a clear first-mover advantage, with commercialisation expected to begin gradually over the next three to five years. Its technological leadership and regulatory certification give it a strong lead versus competitors, while risk-reward remains attractive relative to its long-term growth potential in this transformative transport market.
While the consumer sector faces a more cautious earnings outlook, select franchises that can successfully tap into evolving consumer behaviour are demonstrating resilient growth, even in a challenging economic environment. Sportswear and outdoor gear remain areas of structural expansion, supported by rising participation rates and consumers’ willingness to pay premiums for functionality and health-related benefits. In addition, travel-related proxies continue to benefit from the ongoing shift toward experience-based consumption rather than spending on goods. These are among several categories that remain underpenetrated and offer attractive long-term growth potential.
We initiated a position in Xtep International, a leading domestic sportswear brand specialising in the fast-growing running segment. Benefiting from the trading-down trend in sportswear, Xtep is well positioned as a market share gainer, combining affordability with brand relevance. The strong growth of its premium Saucony brand broadens product mix and supports margin expansion. The company is trading at a compelling valuation with solid and improving dividends. In the food and beverage industry we added China Resources Beer to the portfolio. It is trading at attractive valuations relative to its solid market position and it is improving its product mix through ongoing premiumisation.
We also increased exposure to the leading online travel agency Trip.com following its share price weakness on concerns over near-term margin contraction due to increased international expansion investment and rising competition. We see this as an opportunity to add to a long-term structural winner with domestic dominance and growing global reach.
The holding in Alibaba was increased during the period, reflecting improving e-commerce fundamentals, strong growth potential the cloud business and strengthening execution. Near-term profits remain constrained by investment in local services, but this should strengthen its ecosystem and engagement. The cloud business remains a key growth driver, leveraging proprietary AI technology to extend its competitive edge, while a higher dividend and stock buyback quota strengthen its investment appeal.
In consumer durables, a position in Aux Electrics was established. The mass-market air-conditioner manufacturer stands to benefit from China’s consumption downgrade as demand shifts toward affordable products. Its strong exposure to emerging markets supports a robust overseas outlook, while low valuations and an attractive dividend yield provide downside support.
Within unlisted investments, we added HashKey Holdings, the leading Hong Kong-based crypto exchange, offering leveraged exposure to the city’s regulated crypto trading market. With a strong market position and close alignment with policymakers, the company is well placed to benefit from growth in the market and potential regulatory easing, providing meaningful long-term upside optionality.
These additions were funded by profit-taking in financials, such as long-held insurer exposure to Ping An Insurance (Group) Company of China, amid an unfavourable interest rate environment. We also exited positions in consumer finance lender LexinFintech and QFin Holding following strong gains since late 2024 and amid signs of weaker credit trends and lingering uncertainty around new loan facilitation regulations.
Beyond these large sector exposures, and compared to the Index, we remain overweight in real estate, broadly neutral in Information Technology (IT) and communication services, and underweight in financials, mainly through an underweight in banks, where we see fewer opportunities.
We have outlined our five largest holdings below.
GEARING
Our approach to managing the Company’s market exposure remains consistent. We adjust exposure in line with the opportunities we see, generally increasing it when valuations are more attractive versus fundamentals and reducing it when the outlook is less compelling, or prices appear stretched. We continue to believe that the sensible use of gearing can enhance long-term capital and income returns, allowing us to take advantage of volatility in the Chinese market. During the six months ended 30 September 2025 we continued to use contracts for difference (CFDs) as a flexible and cost-effective method to increase exposure when opportunities arose.
Over the period, the Company’s net market exposure averaged around 119%, with net gearing falling to 19.6% at the end of the period from 20.5% at the start. Overall, gearing contributed positively over the six months, adding 3.0% to relative returns.
OUTLOOK
As we move into the latter stages of the year, the backdrop for Chinese equities appears increasingly constructive. Chinese policymakers have approved the 15th Five-Year Plan proposal at the Fourth Plenum, reaffirming the country’s commitment to building a ‘moderately prosperous society.’ The plan targets steady and sustainable growth, while emphasising technological self-sufficiency and stronger domestic demand. Meanwhile, the recent meeting between Presidents Xi and Trump in Busan produced a positive outcome, with both sides agreeing to extend tariff truces, suspend selected trade levies, and re-establish regular communication channels. Together, these developments point to a more predictable policy and external environment for companies and investors alike.
Policy support remains broadly accommodative in pursuit of these goals. Authorities continue to rely on targeted fiscal easing and flexible monetary tools to sustain growth and maintain liquidity.
A key element of the current policy framework is the government’s ‘anti-involution’ campaign, which aims to address deflationary pressures arising from excessive and inefficient competition, including fast-growing sectors such as EV and solar energy, and in some traditional industries such as paper and cement. The intent is to reduce excess capacity and destructive competition, while preserving confidence among private enterprises. Early evidence suggests that, while existing capacity has not been materially reduced, the pace of new capacity expansion is likely to slow. This should allow excess supply to be absorbed over time, supporting margins and profitability if demand holds up. The potential for consolidation may still be underappreciated by the market.
A more stable property sector also remains critical to restoring consumer confidence. Recent trends have been mixed, with both new and existing home prices falling further in September as policy support waned during what is typically a strong season, although Tier 1 cities such as Beijing, Shanghai and Hangzhou continued to show modest gains. I continue to believe stabilisation in the housing market is important for a broader recovery in household sentiment, which in turn is key to reviving domestic consumption. For now, the consumer environment remains subdued, and although there is divergent performance across categories, pockets of resilience can be found. Well-positioned franchises adapting to shifting consumer preferences continue to show growth, while weak investor sentiment has created some of the most attractively valued opportunities in the market.
Despite these cyclical challenges, China’s structural strengths remain clear. The country continues to lead globally in manufacturing scale, innovation, and technological upgrading. Its export profile is shifting away from the US towards other emerging markets, while Chinese firms continue moving further up the value chain. Rapid adoption of AI, highlighted by the success of domestic champions such as DeepSeek, demonstrates the ongoing strength of China’s innovation. Combined with its leadership in areas such as electric vehicles, digital infrastructure and smart manufacturing, these trends reinforce China’s long-term competitiveness and its role as a key driver of global productivity growth.
Following a strong recovery year to date, equity valuations have somewhat normalised. The MSCI China Index now trades at around 13 times 12-month forward earnings, still more than 40% below the prospective multiple of the S&P 500. Recent performance has become increasingly concentrated in high-beta and momentum-driven segments such as technology and AI, while widening dispersion continues to create selective opportunities where fundamentals and share prices have diverged. In this environment we remain focused on companies with durable earnings visibility, exposure to structural growth themes and disciplined capital allocation. We see particular promise in advanced manufacturing, automation, and technology-enabled industrials; areas aligned with policy priorities and capable of compounding value over time. The consumer sector remains a key area of focus given low expectations and valuations, along with the potential for consumer confidence to gradually return.
DALE NICHOLLS
Portfolio Manager
8 December 2025
SPOTLIGHT ON THE TOP FIVE HOLDINGS AS AT 30 SEPTEMBER 2025
The top five holdings comprise 35.1% of the Company’s Net Assets.
Industry Communication Services
Tencent Holdings
% of Net Assets 14.3%
Tencent Holdings has a dominant position in China’s digital ecosystem with a broad portfolio across social networking, gaming, digital content, and financial technology. Its flagship platforms, WeChat and QQ, provide deep user engagement and form a highly integrated ecosystem that connects communication, entertainment, and commerce. As China’s internet user growth moderates and the internet industry focuses increasingly on monetisation, Tencent is well placed to utilise AI to deepen user engagement and enhance monetisation. Furthermore, the company continues to diversify into higher-margin businesses such as short-form video, mini-programmes, and e-commerce services, while gaming remains a key growth driver supported by a strong pipeline of domestic and international titles.
Industry Consumer Discretionary
Alibaba Group Holding
% of Net Assets 9.5%
Alibaba Group Holding is a leading technology conglomerate with a dominant position in China’s e-commerce and cloud computing markets. Its cloud division, Alibaba Cloud, is the largest in China and one of the most advanced globally, serving as a key pillar of long-term growth. The company performed well during the reporting period, supported by renewed investor interest in AI applications, solid cloud results, and signs of stabilisation in its core e-commerce business – partly helped by synergies from its new food delivery operation. Alibaba’s renewed strategic focus on operational efficiency, user experience, and disciplined capital allocation reinforces its competitive position in a maturing domestic market. It has also announced significant capital expenditure to strengthen its cloud infrastructure, enhance AI capabilities, and expand data services, positioning it to capture the structural demand for digital transformation across industries.
Industry Consumer Discretionary
PDD Holdings
% of Net Assets 4.9%
PDD Holdings is China’s third-largest e-commerce platform by Gross Merchandise Value (GMV), known for its efficiency in supply chain management and cost control. Its proprietary traffic distribution model enables it to offer low-cost products and steadily capture market share. The company’s international expansion, via its fast-growing app Temu, has extended operations to more than 50 countries. By leveraging China’s manufacturing base to meet global demand, PDD has established a scalable and cross-border commerce model.
Industry Communication Services
ByteDance (unlisted)
% of Net Assets 3.7%
ByteDance is one of the largest internet entertainment companies in China and among the few with notable success in overseas markets, primarily through TikTok. The company continues to demonstrate exceptional product innovation and development capabilities within the social media business, capturing a growing share of user time and engagement. Despite its scale, ByteDance remains under-monetised, with major platforms such as Douyin and TikTok still in the early stages of advertising monetisation. This offers meaningful upside potential as monetisation efficiency improves and ad load increases. Its ecosystem benefits from powerful content recommendation algorithms, data-led service integration and strong user engagement. Despite ongoing uncertainty surrounding TikTok’s US operations, ByteDance’s growth prospects remain robust. This resilience is underpinned by its strong financial performance, international expansion, and leadership in AI innovation.
Industry Information Technology
Pony.ai
% of Net Assets 2.7%
Pony.ai is a leading autonomous vehicle technology company in China. Strong government support for the development of homegrown autonomous driving solutions provides a favourable policy backdrop. The company’s technology leadership, demonstrated by smooth ride performance and advanced handling of extreme situations, reinforces its competitive edge. As China aims to demonstrate readiness in autonomous mobility and potentially export its technology, Pony.ai is well positioned to benefit from rising adoption and the gradual commercial rollout of robotaxi services.
Twenty Largest Holdings as at 30 September 2025
The Asset Exposures shown below measure the exposure of the Company’s portfolio to market price movements in the shares and convertible bonds owned or in the shares underlying the derivative instruments. The Fair Value is the value the portfolio could be sold for and is the value shown on the Statement of Financial Position. Where a contract for difference (“CFD”) is held, the fair value reflects the profit or loss on the contract since it was opened and is based on how much the share price of the underlying shares has moved.
| Asset Exposure | Fair Value £’000 | ||
| £’000 | %1 | ||
| Long Exposures – shares unless otherwise stated | |||
| Tencent Holdings (shares and long CFDs) | |||
| Communication Services | 248,658 | 14.3 | 153,568 |
| Alibaba Group Holding (shares and long CFDs) | |||
| Consumer Discretionary | 165,570 | 9.5 | 70,248 |
| PDD Holdings | |||
| Consumer Discretionary | 84,945 | 4.9 | 84,945 |
| ByteDance (unlisted) | |||
| Communication Services | 64,462 | 3.7 | 64,462 |
| Pony.ai | |||
| Information Technology | 46,282 | 2.7 | 46,282 |
| Hesai Group | |||
| Consumer Discretionary | 37,284 | 2.1 | 37,284 |
| Contemporary Amperex Technology (shares and long CFDs) | |||
| Industrials | 35,143 | 2.0 | 16,685 |
| China Foods (shares and long CFD) | |||
| Consumer Staples | 34,008 | 2.0 | (2,605) |
| Trip.com Group | |||
| Consumer Discretionary | 33,808 | 1.9 | 33,808 |
| NetEase | |||
| Communication Services | 30,991 | 1.8 | 30,991 |
| Venturous Holdings (unlisted) | |||
| Financials | 30,299 | 1.7 | 30,299 |
| Full Truck Alliance (long CFD) | |||
| Industrials | 29,847 | 1.7 | (1,423) |
| Crystal International Group | |||
| Consumer Discretionary | 29,250 | 1.7 | 29,250 |
| Ping An Insurance (Group) Company of China (long CFDs) | |||
| Financials | 27,122 | 1.6 | (300) |
| Chime Biologics Convertible Bond (unlisted) | |||
| Health Care | 26,882 | 1.5 | 26,882 |
| Sinotrans (shares and long CFD) | |||
| Industrials | 26,166 | 1.5 | 13,011 |
| Tuhu Car | |||
| Industrials | 25,283 | 1.5 | 25,283 |
| H World Group | |||
| Consumer Discretionary | 24,973 | 1.4 | 24,973 |
| Hisense Home Appliances Group (long CFD) | |||
| Consumer Discretionary | 23,834 | 1.4 | (2,572) |
| Zijin Mining Group | |||
| Materials | 22,874 | 1.3 | 22,874 |
| ————— | ————— | ————— | |
| Twenty largest long exposures | 1,047,681 | 60.2 | 703,945 |
| Other long exposures | 1,300,123 | 74.6 | 968,980 |
| ————— | ————— | ————— | |
| Total long exposures before hedges (145 companies) | 2,347,804 | 134.8 | 1,672,925 |
| ========= | ========= | ========= | |
| Less: hedging exposures | |||
| Hang Seng Index (future) | (104,773) | (6.0) | (1,118) |
| Hang Seng China Enterprises Index (future) | (93,574) | (5.4) | (708) |
| ————— | ————— | ————— | |
| Total hedging exposures | (198,347) | (11.4) | (1,826) |
| ========= | ========= | ========= | |
| Total long exposures after the netting of hedges | 2,149,457 | 123.4 | 1,671,099 |
| ========= | ========= | ========= | |
| Short exposures | |||
| Short CFDs (4 holdings) | 65,806 | 3.8 | (5,290) |
| ————— | ————— | ————— | |
| Gross Asset Exposure2 | 2,215,263 | 127.2 | |
| ========= | ========= | ||
| Portfolio Fair Value3 | 1,665,809 | ||
| Net current assets (excluding derivative instruments) | 75,967 | ||
| ————— | |||
| Net Assets | 1,741,776 | ||
| ========= | |||
1 Asset Exposure expressed as a percentage of Net Assets.
2 Gross Asset Exposure comprises market exposure to investments of £1,655,634,000 plus market exposure to derivative instruments of £559,629,000.
3 Portfolio Fair Value comprises investments of £1,655,634,000 plus derivative assets of £31,845,000 less derivative liabilities of £21,670,000.
Fidelity China Special Situations PLC (LON:FCSS), the UK’s largest China Investment Trust, capitalises on Fidelity’s extensive, locally-based analyst team to find attractive opportunities in a market too big to ignore.
