About JNBY Design
JNBY Design (HKG: 3306) operates as a designer-based enterprise. The company's main services include product development, production, logistics, retail, and customer service, offering a comprehensive retail experience. It primarily sells to the retail industry across various countries. The company was founded in 1994 and is based in Hangzhou, Zhejiang.
Latest JNBY Design News
Jun 8, 2021
06/08/2021 | 02:02am EDT Message : Financial Highlights: The Board of Fidelity China Special Situations PLC (the “Company”) recommends an annual dividend of 4.68 pence per share, an increase of 10.1% from last year. The Company recorded its highest annual net asset value (“NAV”) total return of +81.9% and share price total return of +97.2%, significantly outperforming the MSCI China Index return of +29.1%. The unlisted space in China has expanded quite markedly and offers some excellent opportunities for patient, long-term investors. At the reporting year end, the Company had 7.4% of Net Assets plus Borrowings in nine unlisted holdings. Subject to shareholder approval, the Board proposes increasing the Company’s permitted limit in unlisted holdings from 10% to 15% of Net Assets plus Borrowings. Contacts Natalia de Sousa CHAIRMAN’S STATEMENT The reporting year started just as the global pandemic was declared and finished as we began to emerge from the effects of the COVID-19 virus. In calendar year 2020 virtually every major economy in the world recorded negative GDP numbers with the exception of China which generated 2.3% growth in GDP. Not surprisingly, therefore, our Benchmark Index, the MSCI China index, returned 29.1% in the reporting year as investors recognised that China, having been first to experience the effects of the virus was also the first to emerge. Against that backdrop our Portfolio Manager achieved a total return on net asset value for the year of 81.9%. This is a remarkable achievement and in the Portfolio Manager’s Review Dale Nicholls sets out his investment philosophy, which has remained constant since his appointment. He has continued to concentrate on the increase in the wealth and the size of the middle class in China as the driver of growth in the value of companies which provide goods and services to the middle class. In the latter stages of the reporting year, in early 2021, the equity market in China consolidated, but our value driven approach underpinned our performance. In the year, our share price total return was 97.2% as the discount narrowed from around 10% to around 1% reflecting investors’ wish to be exposed to the Chinese economy through our investments in companies that are part of the remarkable growth of New China. We have always advocated that investors who wish to have a diversified portfolio should have a portion of it dedicated to China to gain exposure to the continuing growth in the Chinese economy. Certainly, in the last year, that has been proved right; and indeed the annual growth in the value of an investment in the Company over the last ten years has been 15.6% based on share price total return. Another benefit witnessed in recent times is that the Chinese equity market has been a useful diversifier of risk for investors seeking a diversified portfolio. ACCESSING CHINA’S GROWTH AS AN INVESTOR Fidelity China Special Situations was launched to offer sterling based investors an exposure to China. We chose a closed ended fund – an investment trust – as the vehicle for a number of reasons. Being immune from withdrawals of capital a closed ended fund can take longer-term decisions and purchase less liquid stocks. This has enabled us to invest in unlisted companies as well as those listed on a stock exchange. It gives the Manager the ability to gear the fund to assist performance and to take short positions. Liquidity for an investor in the Company is also assured through its critical mass and our membership of the FTSE 250 Index with a market capitalisation of £2,159.8m on 31 March 2021. As Dale explains in his Portfolio Manager’s Review, he has constructed the Company’s portfolio to benefit from “New China” and the extraordinary growth there in consumption. Only a small proportion of the companies he invests in are export based; they all benefit from domestic growth and because of that are, to a large extent, distanced from the effects of global geo-political goings on. The portfolio is therefore constructed to offer investors a “one stop shop” investment in China. Larger companies such as Tencent Holdings and Alibaba Group Holding are included, which are market leaders in New China, and as shown in the Annual Report, the forty largest holdings represent 63% of our total geared portfolio (expressed as a percentage of Gross Asset Exposure). A further 107 companies make up the balance of the portfolio giving exposure to a wide range of businesses predominantly in the New China category. Spread across the portfolio are our unlisted investments where we hope to benefit from significant uplifts in value when they come to IPO. FIDELITY AS MANAGER The Board has contracted with Fidelity to provide the Company with investment management and administrative services. In reviewing Fidelity, the Board notes Fidelity International’s strong position in fund management in China where it employs a significant number of analysts on the ground in both Shanghai and Hong Kong. Furthermore, the performance of Dale, as Portfolio Manager, since his appointment on 1 April 2014, has been very strong and well ahead of the Benchmark Index (NAV per share total return of +299.8% and share price per share total return of +342.5% compared to the Benchmark Index return of +156.4%). Some simplifications to our management agreement are set out below. DUE DILIGENCE VIRTUAL MEETINGS Each year the Board has visited China to spend time with Fidelity International’s analysts and staff, together with Dale, and to meet some of the companies in which we are invested. Travel was not possible this year and so we undertook a virtual trip. During the course of our due diligence week, we met management teams and key personnel from a number of companies in the portfolio and gained insight into how research is being conducted by Fidelity International’s analysts in a virtual environment. As in previous years, we listened to presentations from leading investment strategists and economists. We also spoke to members of Fidelity’s investment and research teams and in particular Fidelity’s Global Head of Stewardship & Sustainable Investing. Among the companies we met was Yadea - a world leader in electrically powered transportation. Founded in 2001, the company is now the largest two-wheel electric vehicle producer globally and its core business focuses on the design, research, development, manufacturing and sales of electric scooters and bicycles, among others. The company has poured considerable resources into technological innovation and has obtained several hundred patents, including graphene batteries, power motors and smart travel. We also heard from the management team of Intron Technology Holdings, a ‘technology enabler’ supporting manufacturers and components suppliers to incorporate enhancements and innovative solutions for critical automotive electronic components. Its business network covers 16 major cities in China. We also saw representatives from Renrui Human Resources Technology Holdings, JNBY Design Ltd, SKSHU Paint Company, Full Truck Alliance and Venturous Holdings. Details of our largest ten holdings are set out in the Annual Report. Our visit reconfirmed our confidence in the Portfolio Manager and his team of research analysts. It was also a useful insight into the manner in which virtual due diligence is carried out where no alternative exists. Market participants have adapted rapidly. UNLISTED COMPANIES At present the Company is permitted to invest up to 10% of its Net Assets plus Borrowings (which has been referred to as gross assets in previous reports) in unlisted companies. As the Portfolio Manager mentions in his Review, in recent years the unlisted space in China has expanded quite markedly and offers some excellent opportunities for patient, long-term investors. At the reporting year end, the Company had 7.4% of Net Assets plus Borrowings in nine unlisted holdings (2020: six unlisted investments representing 6.0% of Net Assets plus Borrowings). New additions to the portfolio in the twelve months to 31 March 2021 were Full Truck Alliance, Venturous Holdings and Chime Biologics. Since the end of the reporting year, the Company has also taken a new position in Beisen, and at the end of May 2021, the portfolio held ten unlisted investments totalling 8.1% of Net Assets plus Borrowings. Over the years we have been able to make investments in unlisted companies who have established their business model and are looking towards an IPO. Fidelity International has grown its expertise in this area both in identifying and also in valuing new opportunities and then in monitoring them as they progress to their IPO. 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 Company in unlisted investments. We are therefore placing before shareholders, at the Annual General Meeting, a proposal to increase our limit from 10% to 15% of Net Assets plus Borrowings. Details of the unlisted companies currently held are set out in the Annual Report and a proposal to increase the cap on unlisted investments is set out below and in the Annual Report. ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) INVESTMENT The scale and sophistication of China’s modern equity markets belies the fact that they are only 30 years old. For many Chinese domestically listed A-share companies, the priorities to date have centred on survival and growth. More recently, however, corporate mentality has begun to shift as the country rebalances its economy from a model of growth at all costs to one that stresses quality and sustainability. A vast and growing body of middle-class consumers who care about the environmental and social footprints of what they buy means companies need to take sustainability more seriously. The rise of sustainable investing offers further incentives for companies to step up their ESG efforts for the sake of easier financing. Given this confluence of factors, it is unsurprising that companies are generally willing and, at times, keen to engage with investors on ESG issues. Launched during the reporting year under review, Fidelity International’s inaugural China Stewardship Report features a proprietary study of shareholder voting patterns across nearly 7,000 shareholder meetings and 40,000 company filings at Chinese A-share firms, plus on-the-ground evidence from Fidelity’s onshore ESG engagements in China. The report paints a clear picture of steady progress across-the-board when it comes to investment stewardship in China. As a stock picker, our Portfolio Manager attempts to assess the quality of governance in the companies he researches and visits, as experience has clearly shown that better governed companies make better investments. Dale and his investment team have been on the front foot in lobbying for better disclosure and governance. Fidelity International as an organisation embeds ESG factors in its investment decision making process including considerations relating to the reduction of carbon emissions by investee companies. In recent years Fidelity International has developed a proprietary sustainability ratings system leveraging its internal research and interactions with issuers. The ratings are designed to generate a forward-looking and holistic assessment of ESG risks and opportunities. Analysts quantify the direction of change of companies’ ESG performance (positive, neutral or negative trajectory). Analysts rate companies in ESG using a scale of A to E. The Board pays close attention to the ratings of underlying portfolio companies and challenges the Portfolio Manager and his team on any stocks with lower (so-called ‘D’ and ‘E’) ratings. Further details are below. RISKS As with the previous year, the year under review saw the Company’s ability to deal with a number of key risks stress-tested; most significantly, domestic and foreign investor sentiment. The principal risks facing the Company and investors, as identified by the Board, are set out below. GEARING The Company has a three-year unsecured fixed rate facility agreement with Scotiabank Europe PLC for US$100,000,000. The interest rate is fixed at 2.606% per annum until the facility terminates on 14 February 2023. To achieve further gearing, the Company uses contracts for difference (“CFDs”) on a number of holdings in its portfolio. Further details are in Note 19 to the Financial Statements below. At 31 March 2021, the Company’s Gross Gearing, defined as Gross Asset Exposure in excess of Net Assets, was 26.2% (2020: 25.2%). The level of Gross Gearing is determined by the Manager within the limit set by the Board of 30%. Net Gearing, which nets off short positions, was 18.4% at the year end (2020: 23.2%). DIVIDEND At the launch of the Company, it was envisaged that returns for investors would come from capital growth. Nevertheless, we have been able to increase the dividend per share every year since the Company launched (see the Annual Report for a record of the last ten years). With interest rates being low, the Directors recognise that the dividend has become a more important part of the total return to shareholders. The Board recommends a final dividend of 4.68 pence per share for the year ended 31 March 2021 for approval by shareholders at the Annual General Meeting (“AGM”) to be held on 20 July 2021. This represents an increase of 10.1% over the 4.25 pence paid in respect of the prior year. The dividend will be payable on 27 July 2021 to shareholders on the register on 18 June 2021 (ex-dividend date 17 June 2021). The revenue per share earned by the company during the year was 4.70 pence, which is an increase of 4.2% over the 4.51 pence earned in the prior year, and covers the recommended dividend. This highlights the point about risk diversification made earlier in that all other major equity markets experienced dividend declines during the year. DISCOUNT MANAGEMENT The Board believes that investors are best served when the share price trades close to net asset value. The Board recognises that the Company’s share price is affected by the interaction of supply and demand in the market based on investor sentiment towards China and the performance of the NAV per share. The Board has a discount control policy in place whereby it seeks to maintain the discount in single digits in normal market conditions and will, subject to market conditions, repurchase shares with the objective of stabilising the share price discount within a single digit range. The Company’s discount narrowed significantly from 8.6% at the start of the reporting year to 1.1% at the end of its reporting year. During the year, the Board authorised the repurchase of 23,345,560 shares into Treasury, representing 4.1% of issued share capital. These share repurchases have benefited remaining shareholders as the NAV per share has been increased by purchasing shares at a discount. Since the year end and as at the date of this report, the Company has not repurchased any more shares into Treasury or for cancellation. The graph below shows the progress of the Company’s discount during the year. DISCOUNT TO NAV At the forthcoming AGM, the Board is seeking to renew the annual authority to repurchase up to 14.99% of the Company’s shares, to be either cancelled or held in Treasury, as it has done each year previously. ONGOING CHARGES The Ongoing Charge for the year was 0.97% (2020: 0.99%). The variable element of the management fee was a charge of 0.12% (2020: credit 0.20%). Therefore, the Ongoing Charge for the year, including the variable element, was 1.09% (2020: 0.79%). MANAGEMENT FEES Recognising the growth in the net asset value of the Company, the Board agreed a new fee arrangement with FIL Investment Services (UK) Limited, the Company’s Alternative Investment Fund Manager (the “Manager”), with effect from 1 April 2021. The revised fee structure is on a tiered basis of 0.90% on the first £1.5bn of Net Assets reducing to 0.70% on Net Assets over £1.5bn. The variable element from the current fee structure of +/-0.20% remains unchanged. In addition, the fixed annual fee of £100,000 for services other than portfolio management has been removed. The revised fee will provide savings on the overall percentage costs for shareholders. Details of the fee structure for the year ended 31 March 2021 are set out in the Directors’ Report in the Annual Report. BOARD OF DIRECTORS Elisabeth Scott who has served on the Board as a non-executive Director since 1 November 2011 and as Senior Independent Director since 22 July 2016, will step down from the Board at the conclusion of the AGM on 20 July 2021. I would like to thank her on behalf of the Board and all of the Company’s stakeholders for her invaluable contribution to the Company. We shall miss her wisdom as a Board member and as Senior Independent Director and she takes with her our good wishes for the future. Elisabeth will be replaced as Senior Independent Director by Linda Yueh on 20 July 2021. Having served on the Board as a Director since the Company’s launch on 19 April 2010, Peter Pleydell-Bouverie stepped down from the Board at the conclusion of the AGM on 23 July 2020. As Peter’s replacement, Vanessa Donegan was appointed to the Board as a non-executive Director and also as Chair of the Investment Committee on 1 September 2020. Mrs Donegan has 37 years of Asian fund management experience, including managing dedicated China portfolios. She was Head of the Asia Pacific desk at Columbia Threadneedle Investments Ltd. (formerly Threadneedle Investments Ltd.) for twenty-one years and has extensive experience of marketing to retail and institutional clients across the globe. She is an independent non-executive director of Herald Investment Management Ltd., the JP Morgan Indian Investment Trust plc, the Invesco Asia Trust plc and the SSGA Luxembourg SICAV. The Board’s succession plan for the next year is set out in the Corporate Governance Statement in the Annual Report. As part of the Board’s succession planning it has been decided that I will retire as Chairman at the AGM in 2022. Following a formal process, the Board has chosen Mike Balfour as my successor. As Mike is currently Chairman of the Audit and Risk Committee, the Director recruited to replace Elisabeth Scott was chosen also to succeed him as Chairman of the Audit and Risk Committee in 2022. The Board has appointed Alastair Bruce as a non-executive Director with effect from 1 July 2021. His biography is in the Annual Report and he will stand for election at the AGM on 20 July 2021. In accordance with the UK Corporate Governance Code for Directors of FTSE 350 companies, all Directors, with the exception of Elisabeth Scott, are subject to annual re-election at the AGM on 20 July 2021. Vanessa Donegan, having been appointed in the reporting year, is subject to election at the same AGM. The Directors’ biographies can be found in the Annual Report, and, between them, they have a wide range of appropriate skills and experience to form a balanced Board for the Company. BOARD APPRENTICE The Board continues to participate in the Board Apprentice Scheme which is the result of a government-supported scheme to give board exposure to aspiring non-executive directors, particularly women and minority groups. Kal Foley-Khalique was appointed as a Board Apprentice on 1 December 2020 for a period of one year. She attends all Board and Committee meetings as an observer and it is intended that this will assist her aspirations in securing a non-executive director role in the future. CHANGE ON WORDING OF THE INVESTMENT OBJECTIVE As described above, we are seeking shareholder consent to increase the limit of unlisted investment from 10% of Net Assets plus Borrowings to 15%. Recognising the growing importance of unlisted investments within the Company we feel that this should be reflected in the wording of the Investment Objective. The revised text of the Investment Objective is shown in the Appendix to the Notice of Meeting in the Annual Report. INVESTMENT MANAGEMENT AGREEMENTS AND INVESTMENT COMMITTEE The Board has taken the opportunity to simplify the two management agreements which had been in place since the launch of the Company into one agreement. While FIL Investment Services (UK) Limited will remain as the Company’s Alternative Investment Fund Manager (AIFM), all delegated investment management, including for the unlisted securities, will be carried out by FIL Investment Management (Hong Kong) Limited. Previously, the investment management of the unlisted securities was delegated to FIL Investments International (“FII”). The Board is also taking the opportunity to simplify its own committee structures by disbanding the Investment Committee. Its activities will be consolidated, with oversight of the Portfolio Manager taking place under the auspices of the main Board and valuations of hard to price assets in the Company’s portfolio being considered by the Audit and Risk Committee. These changes took effect from 1 June 2021 when a new Investment Management Agreement was entered into. Full details of the Investment Management Agreement are set out in the Annual Report. ARTICLES OF ASSOCIATION Among the temporary measures forced upon us by the COVID-19 pandemic was the closed session AGM we held last year. With the intention of providing the very best experience for shareholders longer-term and mindful of potential future restrictions, the Board is proposing amendments to the Articles of Association (the “Articles”) to enable the Company to hold ‘hybrid’ general meetings. ‘Hybrid meetings’ involve both the physical attendance by shareholders as well as by shareholders via electronic means. By changing the Company’s Articles, the Board will have the ability to determine whether a future AGM or general meeting should be held as a ‘physical meeting’ or as a ‘hybrid meeting’. My fellow Directors and I greatly enjoy the opportunity to meet and exchange views with shareholders and a physical meeting will remain our preferred format provided Government guidance permits it, but we are keen to provide virtual facilities for future AGMs should it be necessary. We have also taken the opportunity to update certain other provisions within the Articles, including for example, in relation to retirement of Directors, Directors’ fees and regulatory restrictions and information. 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. OUTLOOK It is now widely accepted that investors should have a direct exposure to China within a diversified portfolio. While recognising that investment in multinational companies may bring an indirect exposure through their global activities, the size and growth of the economy in China combined with the vast array of companies, both listed and unlisted, tapping into that growth potential makes direct exposure a compelling investment opportunity in my view. We have set out to provide that exposure through one single investment vehicle: Fidelity China Special Situations. We recognise that investors have other choices, in both closed-ended and open-ended vehicles, for making an investment in China, but our Portfolio Manager has constructed the portfolio to provide a broad-based exposure to “New China” focusing on the long-term growth trajectory of the underlying companies and based on fundamental research that ensures a disciplined approach to valuation. The Board remains very positive about the prospects for the Company. ANNUAL GENERAL MEETING - TUESDAY 20 JULY 2021 AT 11.00 AM In response to the ongoing pandemic, we are, once more, adjusting the format of the AGM this year. With travel restrictions in place, our Portfolio Manager will not be able to fly from Asia to London to attend the event and thus while we will be hosting a physical event, we anticipate very limited numbers in attendance. Guests will not be permitted. The AGM will be restricted to the formal business of the meeting as set out in the Notice of Meeting in the Annual Report and voting on the resolutions therein. It will be held at 11.00 am at 155 Bishopsgate, London EC2M 3YD. Appropriate social distancing and hygiene measures will be in place and under the circumstances it is unlikely that we will be able to offer the usual catering service. Ahead of the AGM, online presentations by the Portfolio Manager and me will be held at 9.30 am on 8 July 2021 which will cover a review of the Company’s reporting year and market outlook. You will also have the opportunity, then, to put your questions to us live. Details will be made available nearer the time at www.fidelity.co.uk/china . If anything changes then we will advise investors via the website. Copies of the Portfolio Manager’s presentation can be requested by email at email@example.com or in writing to the Secretary at FIL Investments International, Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey, KT20 6RP. We encourage all investors who have any questions or comments to contact the Secretary so that she can relay your comments to the Board, and we will respond in due course. We urge all shareholders to vote and make use of the proxy form provided. If you hold shares through the Fidelity Platform, other platforms or a nominee (and not directly in your own name), proxy forms are not provided, and you are advised to contact the company with which you hold your shares in order to lodge your voting instructions. NICHOLAS BULL Answer Pleasingly, the Company’s NAV per share return was 81.9% over the reporting year ending 31 March 2021. The Company’s share price, meanwhile, returned 97.2% in sterling terms versus the MSCI China Index’s return of 29.1%. (All performance data on a total return basis). Question Answer The year under review has certainly been one of the most challenging and unusual times I have experienced as an investor. The economic and social impact from COVID-19 has been unprecedented – at least in modern times – which in turn, has seen us work and live in different ways. With borders generally remaining closed, not just in China but across the Asia Pacific region and around the world, virtual communication has become the new ‘norm’. From an investment perspective, our research process has remained robust, with Fidelity’s investment team swiftly adapting to the changes we have endured. We have been doing a similar number of meetings, but mostly in a virtual format – and have found company management teams on the whole being very amenable and adaptable to this new reality. I still very much value face-to-face contact with management teams and on the ground due diligence meetings with the companies we invest in. The good news is that with life very much back to normal on the ground in China, our team there is back to doing just that. Without a doubt, our research team’s ongoing dedication and focus during this review period has been a key contributor to the portfolio’s strong performance. From an attribution perspective, ‘New China’ and consumer related stocks were particularly strong performers over the year. Of the 81.9% NAV total return, 47.1% was due to stock selection and 11.1% was from gearing. The strength of sterling detracted 18.3% from returns over the year. Further details on all the components contributing to the NAV total return are in the Attribution Analysis in the Annual Report. Many shareholders will remember that I previously showcased China Meidong Auto Holdings. Over the year, it has benefited from improving margins in car sales, coupled with strong after-sales services growth. It is also worth noting that during the peak of the lockdown in China back in the first quarter of 2020, we spoke to its management team who expected that strong brand and customer relationships would help position them well for when the pent-up demand story played out. Given China Meidong’s significant share price appreciation, I have reduced our exposure, but it still remains a core position in the portfolio. Also, within the transportation industry, a position in China’s largest two-wheeler e-bike manufacturer, Yadea Group Holdings, has been a notable contributor to performance. Yadea’s strong brand, coupled with its expanding distribution network and focus on innovative and differentiated products underpinned the share price’s performance. However, with valuations here also becoming less attractive, I have closed out the position. Focusing now on the healthcare segment, Wuxi AppTec (another core holding that I have previously highlighted) benefited from ongoing strong global demand for contract research and manufacturing services. The company’s ability to grow its strong talent pool is a key strength. Looking ahead there is exciting potential upside from new technology developments, such as its cell/gene therapy business. In terms of consumer technology companies, participating in the Hong Kong Initial Public Offering (IPO) of the Chinese short-video application company Kuaishou Technology also added to performance. Regarded as one of the most popular social platforms in China (akin to ByteDance, which is an unlisted position in the portfolio), Kuaishou’s better-than-anticipated quarterly earnings lifted sentiment towards the stock. While the IPO was deemed to be a great success, the company’s growth outlook remains promising as it’s supported by the ramp-up of monetisation in advertising and livestreaming e-commerce. The exposure to leading carrier-neutral internet data centre services provider 21Vianet Group also proved rewarding, with strong performance supported by robust demand for its cloud services, coupled with expectations of increased demand for fifth generation (5G) applications. In our view, its management has delivered on its strategy as it continues to expand the base of large wholesale clients. Conversely, not holding the likes of Meituan, Nio and Baidu weighed on relative performance as these stocks performed strongly over the reporting period. While I remain very positive on the outlook for industries such as electric vehicles, in many cases I find very little margin of safety given current valuations. In the “less-loved” parts of the market such as the materials sector, investments relating to the ‘industry consolidation’ theme delivered solid returns. Many industries remain very fragmented compared to industry structures we see in the West, but the process of market consolidation is clearly underway and it may have accelerated with the disruption the pandemic has brought. We remain very focused on identifying the winners to come out of this process. One of the subsectors that I have found attractive is the paint business, which is characterised by high margins, robust returns on capital and strong cash flows. Furthermore, and as highlighted above, industry dynamics coupled with increasing demand have resulted in leading paint players gaining market share, for example SKSHU Paint Company, one of China’s largest paint manufacturers. It offers products such as exterior architectural coatings, interior household paint products and waterproofing materials. Consistent market share gains have driven strong top-line growth and disciplined cost control has helped it maintain healthy margins. In the type of macro environment we have endured over the year, it’s been paramount for me and our analysts to focus on how management teams manage their costs and cash flows. The Company also holds Asia Cuanon Technology, another leading paint producer. It is also well positioned to benefit from industry consolidation, urban renovation and its penetration into lower tiered markets. Suffice to say that these factors have helped Asia Cuanon perform strongly over the year. Question Answer In the early days of COVID-19, we applied extra focus on companies’ balance sheets and their ability to survive for a period of potentially significantly lower revenues. In the ensuing sell-off in the market, I felt that in many cases valuations had become compelling. This provided opportunities to add to these names – leading to rising net leverage in the portfolio, primarily during the first half of the financial year. Later in the year, we saw strong moves in many parts of the market – with valuations becoming less attractive, and more selling has seen net gearing move down (despite the rising weight of unlisted holdings). The shorting book has also been larger than it has been historically. There hasn’t been a significant change in the portfolio’s core themes. In fact, within many of these areas, COVID-19 has accelerated structural trends already underway in China, for example, the wider penetration and acceptance of e-commerce, online entertainment and educational services, which bodes well for structural growth industries such as information technology (IT) and certain consumer discretionary sectors. With so-called COVID-19-beneficaries significantly outperforming the broader market, the valuation gap between different sectors and parts within the market became more extreme over the year. We saw large cap, well-loved stocks in sectors such as big tech and biotech trade at steep multiples versus their smaller cap peers or versus the multiples of other sectors. With this in mind, and as highlighted earlier, we found several attractive opportunities within areas such as materials and textiles. Within financials, I continue to favour insurers, given the low penetration in protection-type life insurance areas and expected demand growth given higher incomes. The insurance sector could also, over time, see renewed demand from COVID-19, as people focus more on protection in areas such as health insurance. The portfolio continues to hold an exposure to China Pacific Insurance Group, which is the third largest insurance group in China covering life and property and casualty segments. I also have a positive view towards the management team’s new efforts to incentivise their workforce and boost productivity. In the depths of COVID-19, I initiated a position in the aircraft lessor BOC Aviation. Whilst potentially appearing to be in the ‘eye of the COVID-19 storm’ and being valued accordingly, we had confidence that it was well placed to weather the storm and come out stronger. Thankfully this has played out to date, with the company clearly faring better than its peers. While its airline clients have been under pressure, as we have seen in previous downturns, it is worth bearing in mind that failing airlines don’t equate to failing lessors as aircraft are usually re-leased to stronger players. Leveraging the strength of its balance sheet, market conditions provide an opportunity for BOC Aviation to meaningfully grow its leasing book. Also, the market seems to be pricing in significant changes in long-term travel patterns, which I think is unlikely to occur. Yes, there could be some impact to travel demand as we grow more comfortable with video conferencing, but the underlying propensity to travel driven by the expanding middle class in countries like China, we feel, will return. Another sector that I feel is somewhat neglected in the market, despite strong underlying growth prospects and good consolidation potential, is flexible staffing. A key holding here is Renrui Human Resources Technology Holdings, which is the largest flexible staffing service provider in China, with more than 3,000 clients in 30 provinces and 150 cities across China. Its size makes it very competitive, with other players in this space significantly lagging Renrui in terms of quality, speed and service capability. Other opportunities were also found in the more cyclical parts of the market. A good example is the shipping industry, being as we are in the rebalancing phase of the tanker cycle, with tanker demand recovering while destocking continues. Meanwhile, the supply side remains very tight and order books (as a percentage of fleet) are at historical lows. Areas such as dry bulk should see an earlier recovery aided by targeted stimulus and infrastructure projects. China Merchants Energy Shipping, one of the largest shipping conglomerates in the world is held in the portfolio, which should benefit from the expected recovery. Finally, extended valuations have created more shorting opportunities. While these will never be very large positions, the short book has grown over the period to over 3% of Net Assets. As discussed earlier, stock specific areas such as electric vehicles provide some interesting opportunities for shorting. With valuations as elevated as they are, I feel that the market could be underestimating just how competitive this sector will prove to be. Question Answer As Chinese equities have been one of the best performing asset classes during 2020, valuations are currently not as attractive as they were at the start of the review period. However, as the charts in the Annual Report indicate, relative to other markets such as the US, Chinese stocks continue to trade at a significant discount, with arguably better mid-term growth prospects. China Equity Valuations: MSCI China I believe the return to ‘normality’ in China should also mean lower risks relative to other economies with higher uncertainties relating to the virus as well as policy direction. More recently, performance has broadened out across the market – compared to the more crowded trades in 2020. Not only have we been looking at valuations across sectors but from an intra-sector perspective; for example, well-known names in the consumer space have performed strongly such as Li Ning (a leading sportswear brand in China), which has traded much more favourably than other comparable smaller names such as Xtep International (the third largest sportswear brand in China). In general, I have trimmed names where valuations were particularly stretched and continue to favour more attractively priced small and mid-cap stocks. While the valuation gap appears to have begun to close in recent months, there still remain significantly undervalued companies in this part of the market. Question Answer My top five holdings in aggregate comprise 30.6% of the portfolio (as at 31 March 2021). Tencent Holdings*: I am keen on Tencent given its strong position in running the dominant social network in China and the attendant benefits of powerful network effects. Tencent has carefully nurtured and enriched user experience and benefits from a sizeable user base. As China’s internet user growth slows down Tencent’s enviable user base constitutes an extremely deep moat. Tencent recently consolidated its leading position in internet gaming by mediating a merger between Chinese game broadcasting platforms Huya and DouYu, thus securing a controlling stake in the new company post the completion of the merger. Alibaba Group Holding*: Alibaba holds a leading position in e-commerce space. The company has built a comprehensive ecosystem that has superior breadth and depth and is the foundation of the highly sticky merchants and consumers base, which ultimately supports its pricing power. Furthermore, the company is nurtured in an environment of continuous innovation which has enabled it to expand beyond its comfort zone and increase the addressable market. The pandemic has accelerated the trend towards digitalisation, which is a long-term driver of Alibaba’s growth in the e-commerce business. Its cloud business is also likely to excel, as more corporates use its infrastructure to become digital ready. We also saw antitrust regulation in the technology space, notably resulting in a fine for Alibaba. The extent of the fine was largely as expected and it announced that it will fully comply and look at ways to further strengthen customer value creation and experience and introduce new measures to lower entry barriers and costs of operations on its platform. Ping An Insurance: Ping An stands out as a leading insurer in China, with its superior agent productivity, leading technology and entrepreneurial management. The company has well-rounded share incentive schemes to motivate management and core employees based on profit and other key performance measures. The incorporation of technology into its operations facilities cost reduction/efficiency improvement which has become part of Ping An’s core competitive edge against peers. WuXi AppTec: The company is a long-term beneficiary from increasing pharmaceutical and biotech contract research and manufacturing (CDMO/CMO) demand globally. China’s CDMO/ CMO business has significant investment potential, driven by a structural shift from generic to innovative drugs in the country’s pharmaceutical market. Wuxi has established a talent pool with strong technical skills, which has helped drive a loyal client base. Looking ahead, there is exciting potential upside from new technology developments, such as its cell/gene therapy business. SKSHU Paint Company: The company is one of China’s largest paint manufacturers and is benefitting as the sector is undergoing consolidation with the leaders gaining market share. We have seen consistent market share gains drive strong top-line growth and disciplined cost control has helped it maintain healthy margins. I am also positive as the paint business is characterised by high margins, robust returns on capital and strong cash flows. * Given the large weighting in the Index of 28.9% to these two companies and the portfolio weighting of 22.3%, the portfolio is underweight these two companies for diversification purposes and I believe there is more value in other parts of the market at present, as mentioned in the report. Top 5 positions (as at 31 March 2021) Sector Answer China’s diverse listed universe/public markets remain the primary investible areas for investors looking to access the country’s long-term growth story. However, as China’s corporate landscape continues to expand and evolve, there are growing opportunities within its vibrant and diverse unlisted/private equity market. Fidelity China Special Situations has been able to invest in Chinese unlisted companies since we launched the Company back in 2010. As many shareholders remember, we were early investors in Alibaba (now one of the world’s largest companies), which we had held as an unlisted holding for nearly three years before its record-breaking US$25bn IPO in 2014. Today, a key holding in the unlisted space of the portfolio is ByteDance, an internet technology company with core domestic Chinese products being its content platform Toutiao and its video-sharing service Douyin. It also currently owns the more globally popular social media app TikTok, although its 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. Additions during the year were: Full Truck Alliance is the leading online commercial freight platform in China in the full-truck-load segment. The company has consolidated the road logistics market to become the dominant online marketplace. It has significant market share and covers 80% of the total road logistic market volume. Since the year end, it has filed for an IPO. Chime Biologics is a biologics contract research and manufacturing company in China that is benefiting from the strong growth and development activity of the market for pharmaceutical biologics. Like market leader Wuxi Biologics, the company has a strong focus on R&D and has in place a reputable and committed team. The company was spun out of JHL Biotech (previously listed in Taiwan), in order to have a stronger presence in China. Venturous Holdings is a ‘deep technology’ conglomerate focused on investing in digital transformation, in particular, the smart city theme. In its next stage of development, China is focused on making cities faster, safer, greener and more liveable by embracing structural reforms and a new era of digital technologies. At the end of March 2021, the Company had a weighting of 7.6% of Net Assets in nine unlisted holdings. We have the expectation that some of these unlisted positions will IPO within the next 12 to 18 months. Since the end of the reporting period, we have invested in one further unlisted company, talent management company Beisen. Further details in the Annual Report. Question The Chinese economy appears to have fully normalised and the worst of the pandemic shock to corporate profits seems to be behind us. Is that a fair assessment? Answer The economic backdrop for China remains strong as the economy continues to recover. A “first in, first out” recovery has clearly been a factor supporting the economy, as the spread of COVID-19 remains largely under control and exporters have been taking advantage of supply-side disruptions in western countries. China’s GDP growth came in at a stellar 18.3% year-on-year in the first quarter of 2021 (albeit from a low base). Meanwhile, the country’s 2020 annual GDP growth came in at 2.3%, largely the result of China being the first major economy in the world to return to pre-COVID-19 normalcy. Government stimulus has also clearly been a factor supporting the recovery, but overall has been more restrained and targeted than policy measures seen in most western economies. This, therefore, leaves room for further policy support if required. The government reiterated its aim to provide ‘balanced’ policy support at the National People’s Congress (NPC) in March, which in turn has seen policymakers once again focus on debt and liquidity. While China will look at a more prudent policy approach, with the potential for tightening, it will remain flexible. Also, at the NPC, the government approved its 14th Five Year Plan, which essentially flags key economic objectives and macro policy. This Plan emphasises high-quality development, with an aim of ensuring that overall productivity grows faster than GDP, plus a focus on keeping urban unemployment within a set range. China also de-emphasised, rather than abandoned its GDP target – setting the 2021 growth target at ‘above 6%’. This GDP target offers enough leeway for policymakers to tackle potential uncertainties, such as COVID-19 and US-China relations. Beijing intends to re-double its efforts to foster innovation to improve technology self-sufficiency. The government plans to increase R&D spending by more than 7% per year, enhancing intellectual property protection and offering more market incentives to researchers. Many corporates have reconfirmed these policy aims with us. Boosting domestic demand remains a top priority, with plans to increase household income and confidence via supporting employment and small and medium size enterprises, improving the social safety net and reducing hukou restrictions in large cities. Hukou is the household registration system in China that the government has used to help allocate labour resources in the economy, equality of urban and rural residents’ status and the urbanisation of cities. And again, management teams have highlighted to us that the labour market is indeed healthy. Question Sustainability is a key topic for you as an investor. Why is it so important and how does that play out in your investment process? Answer Sustainable investing remains an integral part of our investment process. We believe that high standards of corporate responsibility make good business sense and have the potential to protect and enhance investment returns. Consequently, we integrate Environmental, Social and Governance (ESG) issues into our research and investment decision-making process. Further details on this topic can be found below. We favour engagement over exclusion as positive influences on corporate behaviour can add real value for companies, our investors and society. The priority themes that have formed part of our recent ESG engagements include supply chain sustainability and corporate sustainability reporting. Fidelity International has developed a proprietary sustainability rating leveraging our internal research and interactions with issuers (companies are assigned an overall A to E rating). The objective of the sustainability ratings is to assess the ESG risks facing companies and to rate how an issuer is managing these risks. To understand how companies approach ESG issues, we need to uncover the right information. I continue to believe our work in this area can help to mitigate against risk and be a source of alpha generation for the Company going forward, especially for companies in the portfolio which have good potential for improving these scores. Other cases would include those where we reach different conclusions to the market consensus, which is not uncommon with ESG data in many of the well-known indices often out of date. When it comes to putting ESG into practice, for me, it’s all about engagement. For example, we had a positive ESG engagement with a Chinese innovative drug producer whereby the CFO demonstrated a clear understanding of the company’s key ESG issues and was able to articulate its management approach, suggesting robust measures around executive remuneration design, incentivising sales teams, supplier quality control, and employee and supplier misconduct particularly in relation to anti-bribery and corruption behaviours. There were also clear signs of the company taking ESG seriously and wanting to establish itself as a leader on this front, and it was positive to see the company being receptive to our suggestion of setting improvement targets for its key environmental impact. From a corporate governance perspective, its board meets four times a year, with each meeting lasting four to six hours. In addition, all of the company’s directors participate in the annual strategy meeting. With the entire board being independent and two of the directors being industry experts, the board is well positioned to provide meaningful strategic guidance and managerial oversight. Key Performance Indicators (KPIs) of senior management are well aligned with its business development strategy and focus. KPIs for senior sales managers are based on a wide array of factors rather than a single top-line number, suggesting a more holistic assessment that tends to lead to more sustainable outcomes. We plan to monitor the company on the setting of environmental performance targets and to have more in-depth discussions on supply chain management, talent acquisition and retention and anti-bribery and corruption management as a next step. Question Answer We have genuinely seen an increasing willingness among most Chinese corporates to engage on a range of ESG matters. Take, for example, newly listed companies proactively engaging with us on their first discussions regarding ESG topics. This clearly demonstrates that we are viewed as a trusted partner by many Chinese firms and hence are well positioned to facilitate positive ESG change at these companies, many of whom are just starting their ESG journey. Another example is Pony.ai (the autonomous driving company, which is an unlisted holding). During our engagements with the company, we were made aware of their proactive approach in partnering with local government to provide the necessary training to drivers-at-risk to help them transition into new roles. They highlighted that they have already hired some former taxi drivers to be their safety drivers and maintenance workers but will investigate other ways to address this issue in a more structured way. Furthermore, China’s ambition to reach peak carbon emissions before 2030 and achieve carbon neutrality by 2060 will require companies to transform to a lower-carbon business model. Improved ESG reporting that makes emissions data visible, comparable and accountable is a key component for achieving these goals and will further help embed ESG into the way Chinese corporates operate and think. Question Answer The key areas to monitor from a risk perspective are geopolitical and regulatory developments. While the Biden administration is likely to take a more measured approach, we continue to believe that these tensions will be with us for decades to come. With tightening regulation around technology shipments, we spend a lot of time evaluating potential risks around companies’ supply chains. On the positive side, we believe this tension has become more “established” in markets - thus a more collaborative dialogue could be an area of positive upside. Going forward, we feel that this will be more about a competitive as opposed to an adversarial approach. Taiwanese/Chinese relations remain a sensitive issue and any developments need watching. We should highlight, though, that the portfolio remains focused on opportunities supported by ongoing structural shifts in China’s domestic economy and only has around 5% of revenue from underlying holdings exposed to the US. We do need to follow regulatory developments closely in China. Recently we have seen draft regulation in the fintech space and the executive order (EO) in January 2021 from the US prohibiting investment in Chinese equities associated with the Chinese military. We also saw antitrust regulation in the technology space in China, notably resulting in a fine for Alibaba. The extent of the fine was largely as expected, which amounted to 18.2bn Yuan (equivalent to around 4% of the company’s domestic revenue in 2019). Overall, with greater regulatory certainty established, we believe that Alibaba looks quite attractively valued versus many other companies in the tech space. While Chinese markets do still look attractive relative to other major peers, valuations are now well above historical averages and investors should be mindful of this. I believe stock picking will become even more critical in the delivery of value to shareholders. One needs to stay disciplined around valuation - picking great companies is not the same as picking great stocks. In closing, we have come through an unprecedented year, the likes of which we will hopefully never see again. On the whole, I have been impressed by the resilience of our investee companies in managing through challenging circumstances. Geopolitical issues may indeed be grabbing the headlines, but they are rarely problematic for companies focused on rapidly developing local markets. More importantly, it is the effective execution by these companies that is key to the performance of the Trust. China’s rising weight in global indices still has a long way to go - I continue to believe its growth will represent the biggest shift in equity exposure we will see this decade. On the back of this, we continue to grow our investment resources, with Team China now the largest geographical research team at Fidelity International. I am incredibly proud of this team and its members’ resilience and hard work, day in and day out. It is their diligent application of critical analysis that helps us unearth the gems that will drive tomorrow’s performance. I remain confident that our significant resources and process will continue to deliver value for shareholders and I remain personally invested in the Company. DALE NICHOLLS PRINCIPAL RISKS AND UNCERTAINTIES AND RISK MANAGEMENT As required by provisions 28 and 29 of the 2018 UK Corporate Governance Code, the Board has a robust ongoing process for identifying, evaluating and managing the principal risks and uncertainties faced by the Company, including those that could threaten its business model, future performance, solvency or liquidity. The Board, with the assistance of the Alternative Investment Fund Manager (FIL Investment Services (UK) Limited/ the “Manager”), has developed a risk matrix which, as part of the risk management and internal controls process, identifies the key existing and emerging risks and uncertainties that the Company faces. The Audit and Risk Committee continues to identify any new emerging risks and take any action necessary to mitigate their potential impact. The risks identified are placed on the Company’s risk matrix and graded appropriately. This process, together with the policies and procedures for the mitigation of existing and emerging risks, is updated and reviewed regularly in the form of comprehensive reports considered by the Audit and Risk Committee. The Board determines the nature and extent of any risks it is willing to take in order to achieve its strategic objectives. The Manager also has responsibility for risk management for the Company. It works with the Board to identify and manage the principal risks and uncertainties and to ensure that the Board can continue to meet its UK corporate governance obligations. The Board considers the following as the principal risks and uncertainties faced by the Company. Principal Risks Market, Economic and Geopolitical risk Investing in an emerging market such as the People’s Republic of China (PRC) subjects the Company to a higher level of market risk than investment in a more developed market. This is due to greater market volatility, lower trading volumes, the risk of political and economic instability, legal and regulatory risks, risks relating to accounting practices, disclosure and settlement, a greater risk of market shut down, standards of corporate governance and more governmental limitations on foreign investment than are typically found in developed markets. The Portfolio Manager’s success or failure to protect and increase the Company’s assets against this background is core to the Company’s continued success. The geo-political tensions between the US and China remain. In November 2020, the US issued an Executive Order prohibiting transactions by US persons in publicly traded securities of certain Chinese companies determined to be associated with the Chinese military. The Biden administration is expected to continue to exert pressure on China in trade negotiations. COVID-19 continues to be a global pandemic with severe market and economic impacts. Central banks have taken unprecedented emergency monetary actions and national governments have provided considerable fiscal and policy support. The Chinese economy has recovered well, attributed to the more successful control of the pandemic and increasing industrial production. Economic growth exceeded expectations. The risk of the likely effects of COVID-19 on the markets is discussed in the Chairman’s Statement and in the Portfolio Manager’s Review above. These risks are somewhat mitigated by the Company’s investment trust structure which means no forced sales need to take place to deal with any redemptions. Therefore, investments can be held over a longer time horizon. The Board reviews market, economic and geo-political risks and legislative changes at each Board meeting. Most of the Company’s assets and income are denominated in currencies other than sterling which is the Company’s functional and presentation currency. As a result, movements in exchange rates may affect the UK sterling value of these items. This includes the US dollar loan facility. Risks to which the Company is exposed in the market risk and currency risk categories are included in Note 18 to the Financial Statements below together with summaries of the policies for managing these risks. The Company’s unlisted investments by their nature, involve a higher degree of valuation and performance uncertainties and liquidity risks compared with other investments in the portfolio. No transaction is made in an unlisted investment until the Investment Manager is satisfied that it has been through sufficient scrutiny and approval process. As at 31 March 2021, holdings in unlisted companies was 7.4% of Net Assets plus Borrowings. The Board reviews and challenges all unlisted investments and their valuations. The Company has exposure to a number of companies with all or part of their business in Variable Interest Entity (“VIE”) structures. A VIE structure facilitates foreign investment in sectors of the Chinese domestic economy which prohibit foreign ownership. The essential purpose of the VIE structure is to convey the economic benefits and operational control of ownership without direct equity ownership itself. As these entities have a controlling interest that is not based on the majority of voting rights, there is a risk to investors of being unable to enforce their ownership rights in certain circumstances. The proportion of the portfolio which is invested in companies operating a VIE structure is monitored on a monthly basis by the Manager and holdings are reported to the Board on a regular basis. As at 31 March 2021, 44.4% (2020: 52.3%) of the companies in the portfolio had a VIE structure (Benchmark Index: 49.2% (2020: 43.4%)). Investment Performance Risk The achievement of the Company’s investment performance objective relative to the market requires the taking of risk, such as strategy, asset allocation and stock selection, and may lead to NAV and share price underperformance compared to the Benchmark Index. The Company has a clearly defined investment strategy and remit. Borrowing and derivative limits are set by the Board in line with the Company’s Prospectus. The portfolio is managed by a highly experienced Portfolio Manager who is supported by a large team of analysts. The Board relies on the Portfolio Manager’s skills and judgement to make investment decisions based on research and analysis of individual stocks and sectors. The Board reviews the performance of the portfolio against the Company’s Benchmark Index and that of its competitors and the outlook of the markets with the Portfolio Manager. The emphasis is on long-term investment performance and the Board accepts that by targeting long-term results the Company risks volatility and underperformance in the shorter-term. Performance for the financial year is outlined in the Chairman’s Statement and Portfolio Manager’s Review above. Pandemic risk With the pandemic continuing to evolve and variants of COVID-19 appearing, it is evident that although COVID-19 is being tackled by the arrival of vaccines, risks remain. The roll-out of vaccines globally is slow and the effectiveness against the variants is uncertain. There continues to be increased focus from financial services regulators around the world on the contingency plans of regulated financial firms. The Manager carries on reviewing its business continuity plans and operational resilience strategies on an ongoing basis and continues to take all reasonable steps in meeting its regulatory obligations and to assess operational risks, the ability to continue operating and the steps it needs to take to serve and support its clients, including the Board. For example, to enhance its resilience, the Manager has mandated that all staff work from home and has implemented split team working for those whose work is deemed necessary to be carried out in an office. The Manager follows the self-isolation and lock-down arrangements on staff in line with Government recommendations and guidance. PricewaterhouseCoopers LLP has also confirmed in the AAF Internal Controls report issued to Fidelity International that there have not been any significant changes to Fidelity International’s control environment as a result of COVID-19. Further to this, the Manager has provided the Board with assurance that the Company has appropriate business continuity plans and the provision of services has continued to be supplied without interruption during the pandemic. Investment team key activities, including portfolio managers, analysts and trading/support functions, are performing well despite the operational challenges posed by working from home or split team arrangements. The Company’s other third party service providers have also confirmed the implementation of similar measures to ensure no business disruption. Gearing risk The Company has a US$100,000,000 unsecured fixed rate facility agreement with Scotiabank Europe PLC which has been fully drawn down. The principal risk is that the Portfolio Manager fails to use gearing effectively, resulting in a failure to outperform in a rising market or underperform in a falling market. Other risks are that the cost of gearing may be too high or that the term of the gearing inappropriate in relation to market conditions. In addition to the loan facility, the Company can use contracts for difference (“CFDs”) to obtain further gearing exposure. The Board regularly considers the level of gearing and gearing risk and sets limits within which the Portfolio Manager must operate. Discount Control risk Due to the nature of investment companies, the Board cannot control the discount at which the Company’s share price
JNBY Design Frequently Asked Questions (FAQ)
When was JNBY Design founded?
JNBY Design was founded in 1994.
Where is JNBY Design's headquarters?
JNBY Design's headquarters is located at 39 Yile Road, Hangzhou.
What is JNBY Design's latest funding round?
JNBY Design's latest funding round is IPO.
How much did JNBY Design raise?
JNBY Design raised a total of $30M.
Who are the investors of JNBY Design?
Investors of JNBY Design include NewQuest Capital Partners and Vision Knight Capital.