Fidelity China Special Situations plc (LON:FCSS) has announced its Annual Report for the year ended 31 March 2026.
FINANCIAL HIGHLIGHTS
- During the year ended 31 March 2026, the Company reported a Net Asset Value (NAV) total return of +10.7% and share price total return of +9.5%.
- Over the same period, the benchmark index, the MSCI China Index, returned +1.6%.
- The Board of recommends a final ordinary dividend of 9.00 pence per share, an increase of 12.5% from last year
- Stock selection was the primary driver of performance over the year, particularly in selected consumer discretionary, industrials and IT sectors.
CHAIRMAN’S STATEMENT
I have pleasure in presenting the Annual Report of Fidelity China Special Situations PLC for the year ended 31 March 2026.
While UK investors in Chinese equities have enjoyed a year of positive returns, it is important to note two external events – at the start and end of the year under review – that have had an appreciable impact on the quantum of those returns. Both events have their origins in the US, illustrating the interconnectedness of the modern global economy. The first was President Trump’s ‘Liberation Day’ trade tariffs, which unsettled markets and have had wide-ranging effects on global supply chains. The second was the war in Iran, launched by the US and Israel on 28 February 2026, which caused further market volatility in the final month of our financial year and continues to be a source of great concern, uncertainty and volatility. As I will discuss, China’s economy and stock market have largely held up well in the face of these challenges, but they have not been immune to their effects.
In the reporting year to 31 March 2026, the net asset value (“NAV”) total return of your Company was 10.7%, while the Benchmark Index (MSCI China Index (in UK sterling terms)) returned 1.6%, representing healthy outperformance. This was the result of good stock picking, particularly in the IT and consumer discretionary sectors. The share price total return was 9.5%, as the discount to NAV widened slightly from 7.3% at the beginning of the period to 8.5% at the end. With the corresponding returns at the half-year (to 30 September 2025) having been +29.7% and +28.7% respectively for the NAV and share price total returns, and +18.0% for the Benchmark, it has clearly been a year of two halves.
China’s economy remains resilient
Despite the global trade headwinds, the Chinese economy performed well in 2025, meeting the government forecast of 5.0% GDP growth. Exports were particularly strong, leading to a record trade surplus of $1.2 trillion, albeit with a rebalancing of trade away from the US towards the rest of the world. While the service sector also did relatively well, consumer consumption remained comparatively weak, as the government continued to struggle to persuade people to dip into their significant savings. The low level of consumer sentiment is closely connected to the ongoing problems in the property market and is, therefore, unlikely to improve materially until property prices bottom out, the timing of which remains uncertain.
The principal risk to the Chinese government’s GDP growth forecast of 4.5-5.0% in 2026 is the potential dampening of export demand as a result of the war in Iran. However, it is worth noting that, in its most recent World Economic Outlook (April 2026), the International Monetary Fund (“IMF”) downgraded its 2026 forecast for China by just 0.1% (versus January 2026) to 4.4%. Furthermore, that 4.4% figure actually represents an upgrade of last October’s IMF forecast of 4.2%. While a prolonged war in the Middle East would undoubtedly dampen global demand, with knock-on effects in China, the country is in a far better position to withstand these difficulties than would have been the case just a few years ago. This is largely due to its impressive transition to renewable energy generation, as well as its strategic oil reserve.
Looking ahead, the Chinese Communist Party’s 15th Five-Year Plan, approved at the National People’s Congress in March and covering the period 2026-2030, aims to provide a blueprint for continued growth in the face of demographic change. Much of the recent growth has come from exports and investment in infrastructure, but the government is keen for consumers to pick up the baton to create a more self-sustaining model that is less dependent on exports, government spending and debt finance. Structural reforms seek to reduce the effect of external inflation on the supply chain, as well as boosting employment for young people in a country where the population is both ageing and declining in numbers. China has many future-facing companies that are or could become world leading, not just in the familiar areas of electric vehicles, solar panels and battery storage, but increasingly in areas such as biotechnology, advanced semiconductors, AI and quantum computing. The focus on technology and innovation has been the driving force behind much of the economic and stock market strength, and this is backed up by an aspiration to grow research and development spending by 7% a year. Alongside this, a target to further reduce carbon emissions by 17% per unit of GDP from 2026 to 2030 will be supported by continued subsidies to trade in older goods for newer, more energy efficient ones, which will also boost consumer demand.
Your portfolio in the financial year
The Q&A with Portfolio Manager Dale Nicholls on the following pages contains a detailed review of the performance drivers and investments in your Company’s portfolio during the year.
Dale continues to take advantage of the specific features of the closed-end investment company structure, including gearing the portfolio, the ability to hold short positions and to own unlisted companies without the liquidity constraints of an open-ended fund. After a busy year in the unquoted portfolio last year, just one new private investment – HashKey, a cryptocurrency exchange operator – was added during this year, although it is now part of the quoted portfolio, having debuted on the Hong Kong Stock Exchange in December 2025. ByteDance, the technology company that amongst other things owns TikTok, continues to be the largest unlisted holding, with no date yet set for an initial public offering (“IPO”). Up to 15% of Net Assets plus Borrowings may be invested in unquoted private companies, allowing Dale to take advantage of the faster growth trajectory of earlier-stage businesses before they are listed on the public markets. More details of the unlisted holdings, which made up 11% of the total Net Assets at the year end and have added materially to your Company’s performance over time, are in the Annual Report.
The Board has confidence that the valuation process for our unlisted holdings is robust. They are assessed regularly by Fidelity’s dedicated Fair Value Committee (“FVC”), with advice from a third-party valuation specialist, as well as from Fidelity’s unlisted investment specialist in Hong Kong and the Fidelity analysts, who undertake research on the companies. The valuation process is set out in more detail in the Annual Report. The Board receives regular updates from the FVC overseeing this process, with Alastair Bruce, our Audit and Risk Committee Chairman, also providing expertise in this area, having for many years been involved professionally in private equity investing.
Gearing
Your Board continues to believe that the judicious use of gearing can enhance returns, although being more than 100% invested also means that the NAV and share price may be more volatile and can accentuate losses in a falling market, as well as being additive on the upside. Having repaid the Company’s US$100m loan in the financial year to 31 March 2024, gearing since then has been solely through contracts for difference (“CFDs”), which tend to be cheaper than prevailing longer-dated borrowing. However, your Board continues to review the position, and we have not ruled out reintroducing an element of fixed rate gearing in the future, should the terms become favourable.
Gearing once again remained around 20% (net asset exposure) during the year, beginning at 20.9% and ending at 19.3%, reflecting Dale’s view that the Chinese equity market remains very attractively valued and offers many interesting investment opportunities. While historically gearing has been in a range of 10-25%, the Board views a figure of around 20% as being the upper end of the normal range. The impact of gearing using CFDs was slightly negative during the year in review, detracting 0.8% to returns.
Dividend
The Company’s investment objective remains focused on achieving long-term capital growth; however, it has the enviable track record of having paid an increased dividend each year since inception, growing from 0.25 pence per share in 2011 to 8.00 pence in 2025, which is a compound annual growth rate of 28.1%. This has been supported by the increasing focus of Chinese companies on rewarding shareholders such as ourselves through increased dividend payments, which we pass on to you, our shareholders.
The year under review has been another very strong one for the Company’s revenue return, underpinned by strong cash flows in our underlying companies and corporate governance reforms that are encouraging companies to pay more. As such, we are pleased to be able to deliver further growth in the ordinary dividend, building on last year’s 25.0% increase in the ordinary dividend by recommending a final dividend of 9.00 pence per share, up 12.5% year-on-year.
The dividend will be payable on 28 July 2026 to shareholders on the register on 19 June 2026 (ex-dividend date 18 June 2026). The revenue per share earned by the Company during the year was 9.22 pence. Shareholders will note that this is lower than last year’s 10.18 pence but this included one exceptional dividend from Lufax which distorts the year-on-year comparison. This year’s dividend is once again fully covered by revenue from earnings, and we have been able to add back £3,329,000 to the revenue reserve, which now stands at 6.77 pence per share.
Discount management
While it is always our ambition that the share price should closely match the NAV, it is often the case that investment companies trade at a discount – indeed, at the time of writing, the average discount to NAV across the investment company sector was around 11.6%. Your Board’s policy is to aim for a discount in single figures in normal market conditions, and we pursue this actively by buying back shares in the market when supply exceeds demand. During the year, we repurchased 33,336,928 shares for cancellation (6.7% of the shares in issue (excluding treasury shares) at the start of the financial year) at a cost of just over £100 million. This was accretive to the NAV per share for continuing shareholders.
The share price began the year under review at a 7.3% discount to NAV and ended it at a discount of 8.5%. It is worth reiterating that the single-digit discount target is “in normal market conditions”, which the latter part of the review period arguably was not. Earlier I mentioned two significant external events during the year; each of these was accompanied by a widening of the discount: to just over 15% in the immediate aftermath of the Liberation Day tariff announcements, and to just over 13% in the first week of the war in Iran. Against this backdrop it is pleasing to note that for the vast majority of the period, the discount was well below 10%.
Your Board adjusts the repurchase of shares throughout the year depending on external factors and the level of the discount, and for substantial parts of the year there was very limited buyback activity. However, we have increased it during the Middle East conflict in a highly volatile environment, repurchasing a further 3,121,739 shares between the end of the period and the time of writing. While buybacks can only limit the discount to a certain extent if external factors are hugely negative, your Board is very mindful of the level of discount, and we aim to achieve our objective over the medium-term.
Ongoing Charges Ratio and Management Fee
The Ongoing Charges Ratio (the costs of running the Company) for the year was 0.92% (2025: 0.89%). The variable element of the management fee (due to outperformance of the Benchmark Index on a rolling three year basis) was a charge of 0.17% (2025: a credit of 0.15%). Therefore, the Ongoing Charges Ratio for the year, including this variable element, was 1.09% (2025: 0.74%).
Change of Auditor
In accordance with statutory requirements and FRC guidance on audit tenders, a competitive audit tender was conducted during the year as the Company’s previous auditor had been appointed for 10 years. Following this process the Board appointed PricewaterhouseCoopers LLP as the Company’s new auditor. PricewaterhouseCoopers LLP have replaced EY as auditor with effect from the year under review; their report is in the Annual Report.
Board of Directors
In December 2025, Gordon Orr informed us that he did not intend to stand for re-election as a non-executive Director at the forthcoming Annual General Meeting (“AGM”). Gordon has a wealth of professional and non-executive experience in Hong Kong and mainland China and has been a great asset to your Company over the past three years, giving us valuable insights into the region through his vast network and ongoing business connections. After an exhaustive recruitment process, a strong candidate to replace Gordon has been found. I am pleased to welcome Bessie Lee to the Board from 2 June 2026. Bessie is a seasoned Chief Executive and non-executive director with over 30 years’ experience of driving strategic growth, digital transformation and innovation with particular knowledge and expertise in Chinese businesses.
We are confident that your Company’s Board continues to have a real diversity and balance of relevant skills and experience, including consultancy covering Chinese businesses, accountancy, investment management (including private equity and private equity valuation), marketing and oversight of investment companies.
In recent years, we have sought to pass on the benefit of our accumulated skills and knowledge by taking on a Board apprentice, a role put in place to help develop the next generation of individuals who may not otherwise find a route to becoming a non-executive director. Each apprentice serves a term of one year, during which time they attend all Board and Committee meetings as an observer. Further details are in the Annual Report.
Bessie Lee, having been appointed by the Board of Directors, will be standing for election by shareholders at the AGM. In accordance with the UK Corporate Governance Code for Directors of FTSE 350 companies, all the other Directors, with the exception of Gordon Orr, are subject to annual re-election at the Annual General Meeting (“AGM”) on 21 July 2026, in order to continue to support and oversee the Company in the best interests of all shareholders. The Directors’ biographies can be found in the Annual Report.
Articles of Association
The Board is proposing to increase the aggregate cap on Directors’ fees to provide greater flexibility for any future changes. The proposed new cap is £450,000 in aggregate per annum, which it is felt is in line with market practice, replacing the existing cap of £350,000 per annum which was put in place in 2021.
We have also taken the opportunity to make other changes of a minor, clarificatory or technical nature to the Articles, including clarifications in relation to hybrid general meetings to follow how practice has developed. However, the amendments do not provide for, and the Board has no intention to move to, fully virtual meetings. A full tracked version of all the changes proposed to the Articles is available at www.fidelity.co.uk/china . The principal changes proposed to the Articles are set out in more detail in the Directors’ Report in the Annual Report.
Annual General Meeting
The Company’s AGM will be at 11.00 am on 21 July 2026. The meeting will once again be a hybrid format, with online attendance available; however, I hope to see as many of you as possible in person on the day. Alongside the direct email updates that we now provide, it is one of the few opportunities in the year to sit down together – shareholders, the Board and the Manager – to talk about your investment. Please do join us if you can. Details of the AGM are below.
Among the business of the day will be a vote on a change in the investment policy, which will give the Company the ability to hold up to 20% of the portfolio in a single stock (currently the limit is 15%). At the Company’s year end, the largest holding, Tencent, was 12.3% of net assets but 15.2% of the Benchmark; while there is no intention of materially increasing this at present, the current policy has the effect of prohibiting Dale from taking an overweight position in the stock, which would limit his ability to express a strongly positive view on Tencent or other large Chinese companies in the future. Further information on the policy change can be found in the Notice of AGM.
Outlook
In a world where global geopolitics dominates the news agenda, China, by its considered, consistent behaviour, has been improving relationships around the world, with prominent European, Canadian and Latin American presidents and prime ministers treading the now quite well-worn path to President Xi’s door. While the country’s prospects are to some extent contingent on the Middle East conflict and the oil price, China is arguably benefiting from instability in other parts of the world through its growing global influence, and has much to offer in areas such as EVs, lower-cost solar power and other renewable energy technologies such as battery storage. Furthermore, relations between the US and China are better than many people appreciate, given areas of mutual dependence such as in rare earth minerals and semiconductors.
The steady-as-it-goes approach by the Chinese government to its own economy and international relations are both positive factors for the outlook for investments in the world’s second largest economy. One reason exports have grown so much is the highly competitive industrial landscape – domestic competition is intense in certain sectors, which puts Chinese companies in a very strong position when they turn their ambitions to global markets. This has led to a degree of domestic deflation that the Chinese authorities are keen to reverse, by tackling over-production and irrational price wars. This should ultimately lead to better capital allocation, strengthen corporate balance sheets and drive consolidation, yet is unlikely to threaten China’s dominance in these areas of the global supply chain.
As well as a healthy industrial base, the Chinese government also wants an improving stock market, but not a return to boom and bust as seen in the past. Corporate governance reforms are encouraging companies to reward their minority shareholders through dividends and share buybacks, policies that have proved successful in other markets such as Japan and South Korea. While there have been some interesting new issues (such as your Company’s holding HashKey, mentioned above), there is not the sort of surge in IPOs that would suggest an overheating market, and valuations remain reasonable by international standards, with good earnings growth projected for this year. China has many fantastic companies that are leading-edge and will be global leaders in the future, if they are not already, and it is the opinion of your Board and Portfolio Manager that the long-term opportunity set remains compelling.
Closer to home, your Board is proud of the Company’s record in utilising the strengths of the investment company structure to take advantage of the many opportunities in the Chinese market. The ability to boost returns through gearing, the unlisted portfolio, short positions, Dale’s long-term investment horizon, the strength of our dividend record and our undertaking of buybacks to enhance shareholder value have all added value over the medium and longer term. It has helped your Company to become one of the largest UK-based actively managed China funds, with a broad and diverse shareholder base including many individual investors. We thank you all for your continued support.
Mike Balfour
Chairman
8 June 2026
ANNUAL GENERAL MEETING – TUESDAY, 21 JULY 2026 AT 11.00 AM
The AGM of the Company will be held at 11.00 am on Tuesday, 21 July 2026 at 4 Cannon Street, London EC4M 5AB (nearest tube stations are St Paul’s or Mansion House) and virtually via the online Lumi AGM meeting platform. Full details of the meeting are given in the Notice of Meeting on in the Annual Report.
For those shareholders who prefer not to attend in person, we will live-stream the formal business and presentations of the meeting online.
Dale Nicholls, the Portfolio Manager, will be making a presentation to shareholders discussing the performance of the past year and the prospects for the year to come. Dale and the Board will be very happy to answer any questions that shareholders may have. Following the AGM, copies of his presentation can be requested by email at [email protected] or in writing to the Secretary at FIL Investments International, Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP.
Properly registered shareholders joining the AGM virtually will be able to vote on the proposed resolutions. Please see Note 9 to the Notes to the Notice of Meeting in the Annual Report for details on how to vote virtually. Investors viewing the AGM online will be able to submit live written questions to the Board and the Portfolio Manager and these will be addressed at an appropriate juncture during the meeting.
Further information and links to the Lumi platform may be found in Note 9 in the Notes to the Notice of Meeting in the Annual Report. On the day of the AGM, in order to join electronically and ask questions via the Lumi platform, shareholders will need to connect to the website https://meetings.lumiconnect.com/100-346-066-599 .
Please note that investors on platforms, such as Fidelity Personal Investing, Hargreaves Lansdown, Interactive Investor or AJ Bell Youinvest, will need to request attendance at the AGM in accordance with the policies of your chosen platform. They may request that you submit electronic votes in advance of the meeting. If you are unable to obtain a unique IVC and PIN from your nominee or platform, we will also welcome your online participation as a guest. Once you have accessed https://meetings.lumiconnect.com/100-346-066-599 from your web browser on a tablet, smartphone or computer, you should then select the ‘Guest Access’ option before entering your name and who you are representing, if applicable. This will allow you to view the meeting and ask questions, but you will not be able to vote.
Further information on how to vote across the most common investment platforms is available at the following link: https://www.theaic.co.uk/how-to-vote-your-shares
PORTFOLIO MANAGER’S REVIEW
QUESTION
How has the Company performed in the year to 31st March 2026?
ANSWER
Over the year to 31 March 2026, the Company delivered a positive return in what has been a dynamic and evolving market environment. The Company’s net asset value (NAV) return was 10.7% over the period, significantly outperforming the MSCI China Index in UK sterling terms (the Benchmark), which delivered 1.6%. The share price returned 9.5% over the same period, with the discount to NAV widening slightly from 7.3% to 8.5%. Stock selection was the primary driver of strong performance over the year. (All performance data are on a total return basis).
The period was characterised by a tariffs shock at the beginning of 2025 and a tariffs truce in the later part of the year, a strong recovery supported by strong artificial intelligence (AI) related demand trends, followed by a more complex and volatile geopolitical environment into early 2026. Initial gains were driven by improving sentiment and renewed interest in innovation-led sectors, particularly following the launch of DeepSeek’s AI models. However, as we moved into 2026, technology-led strength gave way to a broad risk-off correction, as escalating geopolitical tensions in the Middle East drove oil and gas prices higher, reignited inflation concerns and weighed on the global growth outlook. On a positive note, China’s diversified economy offered more resilience versus the rest of Asia in those adverse scenarios. The country’s substantial domestic coal reserves, fast growing energy renewables, strategic crude inventories, and relatively low reliance on Middle East oil imports, help limit downside risks.
At the same time, while technological breakthroughs continued to support selected areas of the Chinese stock market and reinforced the long-term growth narrative, the near-term outlook for AI-related demand became more nuanced. Supply chain constraints, including memory shortages and energy-related disruptions, alongside margin pressure in downstream segments, have led to a more divergent performance at the sub-sector and company level. Investors became more selective, as greater scrutiny on earnings sustainability and broader macro expectations came back into focus in contrast to earlier broad-based AI-related optimism. This divergence is particularly evident in earnings expectations: while internet platforms and hyperscalers continue to invest heavily with limited near-term earnings contribution from AI, areas such as semiconductor and power-related equipment companies have been prime beneficiaries, with more meaningful upward revisions to earnings growth.
Domestically, consumer confidence remained subdued amid a gradual and uneven property market recovery. Household spending has yet to regain sustained momentum, despite elevated savings levels and some early signs of improving employment trends. Policy has remained supportive but targeted, with a clear emphasis on structural priorities such as industrial upgrading and quality growth by addressing excess competition across key sectors.
In this context stock selection remains key. The portfolio benefited from exposure to companies aligned with structural growth themes, particularly involving electrification, advanced manufacturing and selective areas of consumption. As market dispersion increased, a disciplined focus on fundamentals and competitive positioning proved increasingly important.
QUESTION
What positions were the biggest contributors and detractors this year, and what drove their performance?
ANSWER
Performance over the period was driven primarily by stock picking, with notable strength from selected consumer discretionary, industrials and information technology holdings.
Within consumer discretionary, the electric vehicle (EV) and autonomous driving segment had a really strong year. Both Hesai Group and Pony.ai were key contributors as profits were taken during the year, benefiting from rising investor confidence in next-generation mobility technologies. Hesai’s performance reflected its leadership in LiDAR (light detection and ranging, or laser radar), supported by strong momentum in ADAS (advanced driver assistance systems) adoption, improved shipment visibility, and emerging vertical opportunities in robotics. Pony.ai, a leading autonomous driving and robotaxi platform that we have owned at both private and public stages of its development, gained on continued execution in robotaxi deployment, including new operating approvals and partnerships, alongside improving unit economics as it scales—underpinning confidence in its path toward commercialisation and sustained growth.
The industrials sector was another key contributor. Preferred holdings across solar modules, batteries, inverters, and power electronics have captured the robust demand linked to AI data centre infrastructure and benefited from market leadership within the electrification value chain.
Ningbo Deye Technology, a leading solar inverter and energy storage system (ESS) maker, advanced on a significantly improved earnings trajectory, underpinned by a strong residential energy storage upcycle. A holding in the world’s largest EV battery maker CATL, also performed well, supported by strong EV and energy storage demand, rising utilisation, and the outlook for sustainable margins through scale and pricing power. Impro Precision Industries was another key contributor. This casting and machined components manufacturer advanced on resilient demand in higher-margin segments like high horsepower engines, early signs of recovery in more cyclical markets like hydraulic & agricultural equipment, and strong operational execution. More broadly, these positions reflect the portfolio’s focus on companies with strong competitive advantages and consequent pricing power, well placed to capture structural growth across electrification, energy storage, and industrial upgrading trends.
Relative performance also benefited from limited exposure to parts of the technology and internet sectors where increasing competition, margin pressure and relatively high valuations weighed on returns. This was particularly evident in our lack of exposure to Xiaomi, where the company’s performance was further impacted by slowing growth in its core handset business, reflecting intensifying competition and rising input costs, especially for memory components. Similarly, not holding Meituan and JD.com contributed positively, as sentiment across Chinese internet platforms remained weak due to subdued consumption trends, intensifying price wars in food delivery, and stricter value-added tax (VAT) enforcement.
Elsewhere in the IT sector, Zhongji Innolight was a notable contributor. As a leading supplier of optical interconnect solutions used in data centres, the company benefited from strong demand for high-speed optical modules driven by AI-related capacity expansion. Minimax, China’s first pure LLM (large language model) play listed globally, was also among the top contributors. We took profit from this holding after a strong performance post IPO.
By contrast, an underweight position in energy and financials, mainly SOE banks, detracted from relative performance. Escalating geopolitical conflict in the Middle East and the temporary closure of the Strait of Hormuz disrupted supply and drove oil prices higher. As a result, a lack of exposure to PetroChina, and other oil majors, hindered returns. Meanwhile, Chinese banks rallied on the back of a defensive rotation into high-yielding assets amid economic uncertainty. As such, not holding China Construction Bank and Industrial & Commercial Bank of China held back returns. Elsewhere within financials, leading consumer finance lender Lexin Fintech declined following a period of strong performance, as investors took profits against a backdrop of softer credit trends and ongoing regulatory overhang. We closed the position in July 2025.
Within industrials, our high-conviction positions in Full Truck Alliance (FTA) and Tuhu Car detracted from relative performance. FTA, China’s leading digital freight matching platform, saw a share price pull-back driven by concerns around a potential ADR delisting risk and developments in non-core businesses. The company has been receptive to investor feedback and has taken steps to refocus on its core operations. We continue to believe its scale, network effects and market leadership create meaningful barriers to entry, and we used the weakness to increase our position. Tuhu Car, a leading platform in automotive maintenance, was impacted by softer consumer sentiment and ongoing intense competition. However, we believe the underlying business remains resilient with strong long-term potential, and view the current risk-reward profile as attractive.
QUESTION
How is the Company currently positioned across sectors, and where are you seeing the most attractive and “special” opportunities in China right now?
ANSWER
Our sector weightings are a reflection of bottom-up stock picking, the key inputs of which include growth potential, levels of returns generated, our evaluation of management, and valuation levels. This tends to lead us to sectors where we see strong underlying growth trends and improving competitive dynamics, combined with increasing competitiveness and attractive valuations. Over the period, we reduced exposure to financials, taking profits, and increased the allocation to areas where risk-reward appears more compelling, particularly within industrials and selective consumer segments.
Cutting edge industrials continue to represent the largest area of exposure for the Company. We believe the market underappreciates the global competitiveness and innovation capabilities of many Chinese industrial companies, particularly those moving up the value chain into higher-end manufacturing, automation and AI-related infrastructure. A key focus is the power and energy ecosystem underpinning the AI buildout. While attention is often centred on semiconductors and memory chips, constraints are increasingly emerging downstream. Over the long-term, we think rising geopolitical tensions are likely to reinforce the case for renewable energy sources and the materials that underpin the energy transition. China’s scale manufacturing base and integrated supply chains position its companies well to capture this demand. In this context, we initiated a position in Wuxi Lead, a leading global supplier of lithium battery equipment and key partner to major manufacturers such as CATL. The company is well positioned to benefit from the ongoing battery capex cycle, supported by demand from energy storage and continued electrification. Emerging solid-state battery technology also offers a medium-term growth opportunity, with higher equipment intensity expected to support both cyclical recovery and structural upgrading within the battery value chain.
We have also maintained a meaningful exposure to companies exposed to global EV and automation trends, as Chinese companies have achieved scale in supplying critical components and materials in those areas. Minth Group is a good example. Its strengths in aluminium and advanced plastics automotive parts, combined with a vertically integrated manufacturing model, position the company to serve both traditional and new energy vehicles, where demand for lighter battery and chassis structures is increasing. Its new business in robotics and AI liquid cooling is also showing great potential. Meanwhile, we trimmed positions in Pony.ai and Hesai Group, selling into strength to take some profit following their strong performance over the period, though both remain key holdings in the portfolio.
Within consumer-related sectors, positioning remains selective. The challenges facing these industries are well known, which has led to a sustained period of underperformance and given rise to some attractively valued opportunities. While overall consumer sentiment remains subdued, there are pockets of recovery from cyclical troughs. In staples, we have selectively added exposure to areas such as dairy and beer, where industry conditions are beginning to bottom out and competitive landscapes are improving after smaller players have exited the markets. We also initiated a position in low-cost hog raiser Muyuan Foods, since the industry, having gone through a severe downturn marked by low hog prices and increased feed costs, is starting to see signs of supply adjustment and market consolidation.
Aside from consumer companies showing potential for cyclical recovery, we also hold some consumer discretionary names who have maintained strong brands which capture consumer trends, alongside cost efficiencies that enable them to sustain growth in a challenging environment. We particularly see this playing out in sportswear and travel-related segments. Sportswear benefits from structural tailwinds, including rising participation and health awareness, and where brand can be a key competitive advantage. Travel expenditure also continues to grow as consumer trends move more towards experience-led consumption and improving mobility. Accordingly we see high-quality hotel chains along with value for money brands being able to capture this opportunity. Both areas remain underpenetrated versus more developed markets, offering attractive long-term growth potential.
Elsewhere, within Financials we purchased HashKey, the largest regulated crypto exchange in Hong Kong, investing in the private company in August last year ahead of its subsequent listing. The core investment case rests on its strong position in a growing, regulated trading market where, irrespective of views on underlying crypto assets, trading activity is becoming more established. More importantly, we see significant optionality from Hong Kong’s early and favourable moves on regulation, including stablecoin licensing. With the city’s potential as a testing ground for mainland China and HashKey closely engaged in regulatory developments, the company is well placed to benefit from potential regulatory easing and broader market evolution.
Beyond the large sector exposures mentioned already, we remain overweight versus the index in healthcare, real estate and communication services, broadly neutral in IT and materials, and underweight in financials, mainly through an underweight in banks, where we see few opportunities in the large state-owned enterprises.
We outline our five largest holdings in the Annual Report.
QUESTION
How have recent signals from the Chinese government, including the latest Party Plenum and longer-term economic plans, influenced where you’re finding opportunities?
ANSWER
Recent policy signals, including the latest Party Plenum and the 15th Five-Year Plan (2026–2030), reinforce a broadly stable pro-growth policy stance and continued support for structural priorities such as innovation, industrial upgrading and quality growth. While the external environment remains uncertain, particularly around geopolitics and trade, the more constructive and pro-business tone from policymakers has helped position China as a more stable and predictable environment for both businesses and investors.
At the macro level, the direction of travel remains one of gradual stabilisation rather than a sharp recovery. The GDP growth target was set at c.4.5–5%, slightly lower than in recent years, reflecting a shift towards more sustainable growth and risk control, supported by targeted fiscal measures and accommodative monetary policy. While overall consumption and economic activity remain relatively soft, we are starting to see signs of stabilisation in areas such as employment, wage growth and secondary property market activity in top-tier cities.
Consumption remains central to China’s long-term growth ambitions. In the near term, household spending continues to reflect cautious behaviour following a general economic slowdown and the property downturn. However, broadly speaking the consumer balance sheet is in good shape, as weaker spending has led to elevated savings levels and less debt. Policy direction continues to be supportive — the recent relaxation of homebuying restrictions in Shanghai and Shenzhen are good examples. The significant correction in supply, in the form of housing starts, remains the main factor likely to drive a stabilisation in market pricing, which is important in terms of wealth effects for the consumer. Structural growth drivers for the mid-term consumption outlook include areas such as services, healthcare and leisure.
Importantly, the opportunity set remains highly company specific. Even in a more challenging macro environment, we are seeing a growing number of businesses adapting effectively through cost discipline, improving operational efficiency, and product innovation. In many industries, market consolidation is accelerating, creating clearer differentiation between winners and laggards.
From a portfolio perspective, this reinforces our focus on bottom-up stock selection. We continue to find opportunities in companies with strong competitive positioning, clear growth drivers and the ability to navigate a more measured recovery environment.
QUESTION
Current geopolitical tensions are high, with conflicts in Ukraine and the Middle East dominating headlines globally; how are these influencing the portfolio performance and positioning in the reporting year?
ANSWER
China is relatively less exposed to direct external energy shocks than many economies, supported by lower reliance on oil and gas, a growing share of cleaner energy, and the presence of significant strategic reserves. As a result, the direct impact of recent geopolitical tensions on the portfolio has been limited.
The more relevant channels to monitor are indirect, including global supply chain disruption, inflationary pressures, and any spillover into consumer sentiment.
Over the medium-term, sustained higher energy prices and increased concerns over energy security could accelerate the global transition to renewable energy sources and electrification. With clear global leadership across EVs, batteries, energy storage systems and renewable supply chains, many Chinese companies stand to benefit.
Whilst the Company has no direct exposure to the energy majors, it does have a significant holding in areas of structural growth and competitiveness through CATL in the battery market. We also maintain selective exposure to areas such as gold within the materials sector, which should provide some diversification in periods of heightened geopolitical uncertainty. Some near-term margin pressure may emerge in areas exposed to higher energy and transportation costs, and positioning has been adjusted accordingly.
While the portfolio typically exhibits higher volatility than the benchmark, periods of broad-based market declines amid highlighted geopolitical risk can amplify short-term price movements. Overall, while the external environment has become more uncertain, we have not made material changes to positioning. A significant portion of the portfolio remains focused on companies with drivers less impacted by short-term geopolitical developments.
QUESTION
The Company can borrow in order to invest; how have you used this gearing over the year? Has it been beneficial to performance?
ANSWER
Our approach to gearing remains consistent, typically increasing net market exposure when valuations are more attractive and moderating when risk-reward conditions become less compelling. Over the period, the Company’s net market exposure averaged around 120%, with net gearing declining to 19.3% at the end of the year from 20.5% at the start. Gearing continued to be implemented primarily through CFDs, providing a flexible and cost-efficient way to adjust exposure as market conditions evolved.
In terms of impact, gearing by means of CFDs slightly pared overall gains during the 12-month period, detracting 0.8% from relative returns. This largely reflects the more volatile market backdrop. Nevertheless, we continue to view gearing as an important tool for enhancing long-term performance, particularly in markets such as China where volatility can create attractive opportunities to deploy capital selectively.
QUESTION
Many shareholders may have seen ByteDance (TikTok) in the news this year, how has this investment performed? And what is your outlook for the Hong Kong IPO pipeline and the Company’s unlisted holdings more broadly?
ANSWER
The TikTok situation evolved because of sustained regulatory scrutiny — beginning with US pressure under the Trump administration in 2020 and intensifying through subsequent legislation requiring divestment of its US business or a potential ban — to a structured compromise. This culminated in a spin-off of the US operations into a separately controlled entity, allowing continued operation in the US, with ByteDance retaining a minority economic stake (~20%) but with reduced control.
Despite the external headwinds, ByteDance remains our largest unlisted holding. The investment has performed strongly over time and continues to be underpinned by a highly profitable domestic business, alongside a growing international market share. While the US remains an important market, the broader global user base, now exceeding two billion, represents a much larger long-term monetisation opportunity. We are seeing encouraging progress in areas such as international e-commerce, which, if it follows a similar trajectory to the domestic business, could become a very meaningful driver of value.
We first invested in ByteDance in 2018, recognising early its strong product innovation and rare ability among Chinese internet companies to build a genuinely global platform. Our closed-ended structure has allowed us to take a long-term view and, importantly, to add to the position in the secondary market when valuations became more attractive in mid-2024 amid uncertainty around TikTok’s US operations and regulatory risks.
The subsequent resolution of US regulatory concerns has removed a key obstacle to progress, and we continue to view the company as well positioned for growth, supported by strong underlying profitability, ongoing international expansion and increasing application of AI across its platforms. The case of ByteDance illustrates the advantage of our investment approach — maintaining conviction through periods of volatility and adding exposure when sentiment is weak.
More broadly, the Hong Kong IPO market has evolved positively in recent years, with easing regulations and a more structured framework designed to attract Chinese companies for primary listings and dual listings. It is increasingly seen as a stable and well established venue for Chinese companies to access international capital. At the same time, the quality of the IPO pipeline has improved, with a greater proportion of companies coming to market with robust business models, stronger operating track records and more transparent disclosure.
This reflects a deeper structural shift rather than a short-term trend. China continues to produce a growing number of innovative companies across areas such as technology, advanced manufacturing and new consumption models, supported by sustained investment in research and development. As a result, we expect the Hong Kong IPO pipeline to remain active and increasingly diverse over time.
From a portfolio perspective, unlisted investments remain an important part of the Company’s opportunity set, allowing us to access high-quality businesses early in their growth journey. Our approach remains selective and valuation disciplined, with a focus on companies that demonstrate scalable growth potential, clear paths to monetisation and the potential to create long-term shareholder value.
QUESTION
How do you include corporate governance in your investment process, and how do you engage with companies to protect shareholder interests?
ANSWER
Corporate governance is central to our investment process and something we assess at the outset of investing and on an ongoing basis through proactive engagement with companies.
At a high level, we have seen clear progress in China’s governance framework in recent years. Many of the core building blocks are now in place, including updates to the Corporate Governance Code, a revised Company Law that strengthens shareholder participation, and higher expectations for boards and independent directors. The direction of travel is positive, with increasing emphasis on transparency, accountability and minority shareholder protection.
More importantly, the focus is now shifting from rules to implementation. We are seeing encouraging signs in areas such as stricter oversight of controlling shareholders, greater accountability for independent directors and improved disclosure standards. There is also growing emphasis on shareholder returns, including more consistent dividend policies and increased use of buybacks.
That said, governance in China operates within a regimented market structure. Controlling shareholders, including the State in some cases, continue to play an important role, and engagement tends to be more incremental in nature.
This is where our approach is important. We engage regularly with companies on areas such as board structure, capital allocation, potential dual-listing, related-party transactions and executive remuneration, with a focus on improving alignment with minority shareholders.
For example, we have actively engaged with China Mengniu Dairy to strengthen capital allocation and shareholder returns, through higher dividend payouts and share buybacks. Over time, we have witnessed a meaningful increase in its payout. A similar shift has been observed in holdings such as Tsingtao Brewery, where improving capital return policies have supported shareholder returns. More broadly, rising distributions from underlying holdings in our portfolio have contributed to the Company’s own ordinary dividend growth of around 11% per annum over the past five years, reflecting a steady improvement in total shareholder returns.
In another case, we engaged with Full Truck Alliance following concerns around a potential ADR delisting in April 2025, which had weighed on the share price despite strong underlying fundamentals. The company has been receptive to this feedback and has initiated discussions with the Hong Kong Stock Exchange. While there is no clear timetable for a potential H-share listing, the process is underway, and the company has continued to provide updates through regular investor meetings. This reflects our broader approach of engaging not only on governance structures, but also on strategic decisions that can protect and enhance shareholder interests.
Overall, while the framework continues to evolve, we believe governance standards in China are moving in the right direction. Combined with increasing institutional participation and regulatory support, this is gradually creating a more investable and transparent market over time.
QUESTION
How do you assess current valuations after a strong year?
ANSWER
Following a strong period of performance, it is important to consider the evolution of market sentiment. Twelve to eighteen months ago Chinese equities were trading at deeply depressed valuations amid concerns around the market’s “investability.” The recovery through 2025 was driven in part by multiple expansion, supported by a more constructive policy backdrop and increasing recognition of Chinese companies’ competitiveness.
As we move through 2026, the dynamic is shifting. Shareholder returns are increasingly supported by earnings rather than a further re-rating. As a result, sector dispersion remains elevated, with a widening gap between companies able to deliver sustainable growth and those facing structural or cyclical pressures.
Valuations remain a supportive backdrop. Despite the rebound, Chinese equities continue to trade at a meaningful discount to global peers. The MSCI China Index is currently trading at around 11.4x forward earnings, broadly in line with its long-term average, and at an approximate 43% discount to the S&P 500 on a forward P/E basis. Further improvements in fundamentals — ultimately coming through in more conviction around the earnings outlook — could help bolster investor confidence.
In an environment where sentiment can shift quickly, this reinforces the importance of a disciplined, bottom-up approach to stock selection, with a focus on companies capable of delivering resilient earnings and long-term value creation.
QUESTION
Finally, looking forward, what excites you most about Fidelity China Special Situations, and what would you highlight to FCSS shareholders?
ANSWER
Looking ahead, the most compelling opportunity remains the ability to invest in high-quality companies operating in structurally growing industries, with durable competitive advantages and offering attractive valuations. Sentiment has improved from previously depressed levels, but the broader market backdrop is likely to remain volatile, particularly amid ongoing geopolitical uncertainty. Additional areas of opportunity are where valuations and sentiment remain at depressed levels, with the potential for the outlook to stabilise and gradually improve. Such sectors would tend to include consumer, property and some financials.
China’s ability to innovate remains a key source of long-term growth. China continues to demonstrate depth in research and development, and engineering talent, supporting progress across AI, advanced manufacturing and digital infrastructure. While the near-term trajectory of AI model development continues to evolve, we remain constructive on the theme and assess opportunities on a company-by-company basis. In particular, accelerating investment and adoption are creating opportunities beyond the models themselves, notably across cloud platforms, data infrastructure and the power and electrification systems required to support increasing demand. Companies like Zhongji Innolight and Weichai Power illustrate how Chinese firms are strengthening their position in the AI infrastructure value chain. In particular, Weichai’s ability to extend its capabilities from traditional heavy-duty engines into power solutions for data centres highlights the flexibility of established industrial players to participate in new growth areas.
We are also seeing China’s competitive position strengthen across industrial and technology supply chains as companies move up the value chain into higher-end manufacturing, automation, robotics and markets driven by electrification. This progress is underpinned by scale, cost advantages and increasingly integrated capabilities, positioning Chinese firms well to capture a larger share of global demand. It is particularly evident in the energy transition arena, where rising geopolitical tensions and energy security concerns are reinforcing investment in renewables, energy storage and related materials.
In automation and next generation mobility, companies such as Ubtech Robotics, Pony.ai and EHang provide exposure to emerging technologies including robotics and autonomous transport. While commercialisation is still at an early stage, we believe these areas represent important long-term opportunities as adoption gradually scales across industrial and consumer applications.
We are also seeing attractive opportunities in consumer facing sectors, where leading brands such as Anta Sports continue to gain market share through product innovation and strong execution. At the same time, newer formats such as discount snack retail, including Busy Ming, reflect evolving consumer behaviour and the shift towards more experiential and value-driven spending.
We see selective opportunities in frontier areas. For example, our investment in HashKey reflects both a core exchange business in a growing, regulated market in digital assets and longer-term optionality as Hong Kong develops as a testing ground for new regulation, including areas like stablecoins.
Overall, while macro uncertainty and market volatility are likely to persist, they also create opportunities for profitable investment over the medium-term. Periods of dislocation can lead to mispricing, particularly in markets where sentiment shifts quickly. Against this backdrop, our focus remains on identifying companies that are mispriced relative to their long-term earnings’ prospects. We believe this disciplined approach positions the portfolio well to deliver attractive long-term returns for our shareholders. As a shareholder in the Company, I remain excited about the Company’s future.
Dale Nicholls
Portfolio Manager, Fidelity China Special Situations plc
8 June 2026
