REG-Fidelity China: Annual Financial Report
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FIDELITY CHINA SPECIAL SITUATIONS PLC ANNUAL FINANCIAL REPORT, PROXY FORM AND ADDITIONAL DISCLOSURES TO THE PRELIMINARY RESULTS FOR THE PERIOD TO 31 MARCH 2011 Further to the voluntary disclosure of the Company's annual results for the period ended 31 March 2011 by way of a preliminary announcement dated 21 June 2011, in accordance with the Disclosure and Transparency Rules ("the Rules") 4.1.3 and 6.3.5(2) this announcement contains the text of the preliminary announcement dated 21 June 2011 together with the additional text in compliance with the Rules. The Company's annual report and financial statements for the period ended 31 March 2011 together with the accompanying proxy form have been submitted to the UK Listing Authority, and will shortly be available for inspection on the National Storage Mechanism (NSM): www.hemscott.com/nsm.do (Documents will usually be available for inspection within two business days of this notice being given) The annual report and financial statements will shortly be available on the Company's website at https://www.fidelity.co.uk/static/pdf/common/investment-trusts/china-special-situations/fcss-annual-report-2011.pdf Christopher Pirnie, FIL Investments International, Company Secretary - 01737 837929 27 June 2011 FIDELITY CHINA SPECIAL SITUATIONS PLC Preliminary Announcement of Results For the period ended 31 March 2011 Chairman's Statement RESULTS FOR THE PERIOD FROM 19 APRIL 2010 TO 31 MARCH 2011 NAV PER SHARE: +5.24% SHARE PRICE: +10.00% BENCHMARK: +3.30% I have pleasure in presenting the first Annual Report for Fidelity China Special Situations PLC and would like to take the opportunity to welcome all our shareholders. PERFORMANCE REVIEW Over the period under review, China overtook Japan to become the world's second largest economy, driven by its rapid transition from a predominantly export-led economy to one that is increasingly influenced by domestic consumption. A key focus of China's twelfth five-year plan is to boost the consumption power of the less affluent by reducing the income gap between its citizens. This supports the consumer-consumption focus of the Portfolio Manager's investment thesis. These structural changes have been managed through a period of volatility for all equity markets, which has been amplified by sovereign debt concerns in the Eurozone and rising commodity prices, in particular food and energy. These issues have certainly heightened investor caution. Nevertheless, growth in the Chinese economy has been above 8% per annum, despite continued tightening of bank reserve requirements. This, along with interest rate rises imposed by the Chinese Government, has impacted the domestic property market. The main concern now is inflation, with the Chinese consumer price index running at 5.4% for the year to March 2011. This is likely to lead the Chinese government to implement a further round of tightening measures. Coupled with significant wage increases, these in the long term may end China's days as the cheap manufacturing base of the world. Against this backdrop, your Board believes that the growth in size and affluence of China's middle class - leading to a higher level of aggregate disposable income - will be an ongoing driver of domestic consumption. We expect that for this reason, the consumer-consumption story will continue to be a central focus for the Company's investment portfolio. Since the launch of the Company in April 2010, performance figures for the period to 31 March 2011 are encouraging. They provide a solid platform on which the Company can continue to achieve its investment objective of generating long term capital growth for its shareholders. In the period from 19 April 2010 to 31 March 2011, the Company's net asset value (NAV) per ordinary share increased from 99.01p to 104.20p, an increase of 5.24%. This compares with a rise in our benchmark, the MSCI China Index, of 3.30%. In the same period, the market price of the ordinary shares increased from 100.00p to 110.00p, an increase of 10%, and the ordinary shares traded at an average premium of 5.30%. As of 17 June 2011, being the latest practicable date prior to publication, the NAV of the Company was 93.86p per share and the share price was 94.50p per share, meaning that your shares were trading at a 0.68% premium to NAV. DIVIDEND As the Company's objective is to achieve long term capital growth, the Board does not expect that dividends will constitute a material element of any return to shareholders. However, in order to continue to qualify as an investment trust, the Company is required by Chapter 4 of Part 24 of the Corporation Tax Act 2010 not to retain more than 15% of the income it derives from shares and securities. This being the case, allowing for the number of shares eligible for a dividend, the Board recommends a final dividend of 0.25p per share to be approved by shareholders at the forthcoming Annual General Meeting. The dividend will be payable on 5 August 2011 to shareholders on the register on 22 July 2011 (ex dividend date 20 July 2011). SHARE ISSUES On 18 June 2010, the Company was admitted to the FTSE 250 Index in recognition of the size of the Company's market capitalisation. Since the Company's launch, the shares have generally traded at a premium to their net asset value, reflecting demand for shares that is not satisfied by sellers. This being the case, the Company issued a total of 38,750,000 ordinary shares in separate issues during the period under review. A further 6,250,000 shares were issued after the period end. In addition the Company issued 166,250,000 "C" shares of 100 pence each, which were subsequently converted into 157,654,480 new ordinary shares on 1 March 2011. This issue was supported by existing shareholders who subscribed for 56% of the issue. At the General Meeting to approve the "C" share issue the Board received consent to issue further shares. The Board may continue to issue shares at a premium, in order to satisfy market demand, subject to shareholder approval at the Annual General Meeting. Qualified Foreign Institutional Investor (QFII) On 26 November 2011, the Investment Manager of the Company was granted QFII Status and a QFII quota through which the Company may invest in China "A" Shares through the Investment Manager. This facility allows the Portfolio Manager to invest directly into the potential growth opportunities of the "A" Share market. The Company has now fully funded its share of the quota (as required by State Administration of Foreign Exchange of the PRC ("SAFE")). THE BOARD Board members who were appointed in February 2010 are subject to election at the forthcoming Annual General Meeting of the Company. On 1 March 2011, Mr Douglas Naismith resigned as a Director and Mr Gary Shaughnessy was appointed to the Board. I would like to welcome Gary to the Board and thank Doug for his valuable contribution to the Company. Mr Shaughnessy will also be subject to election at the Annual General Meeting. Since my appointment as Chairman of the Board, the last year has been both challenging and fulfilling. The Board has held over twenty Board meetings and overseen two successful share issues, which have created the largest investment company listed on the London Stock Exchange providing direct exposure to China. In October 2010, the Board visited China and Hong Kong to witness first hand the investment opportunities there. During this visit it was clear that the key asset of the Company and that of its shareholders is the breadth and strength of Fidelity's investment team in Hong Kong, led by Anthony Bolton. CORPORATE GOVERNANCE As detailed in the Corporate Governance Statement on pages 25 to 30, the Board follows the approach recommended by the Association of Investment Companies in its Code of Corporate Governance. The volume and impact of regulatory change remain challenging for boards of all UK plc's. In particular, the uncertainties around the future of financial regulation in the UK, the potential impact of the Retail Distribution Review and the implementation of the Alternative Investment Fund Managers Directive (AIFMD) will add to the complexity of the governance framework of investment companies going forward. The Board regularly reviews regulatory change to ensure that the Company's governance arrangements meet best practice requirements. THE ANNUAL GENERAL MEETING - 29 JULY 2011 The Annual General Meeting of the Company will be held at the Barbican Centre, Silk Street, London, EC2Y 8DS, on Friday 29 July 2011 at 11.00am. Our Portfolio Manager, Anthony Bolton will be attending the Annual General Meeting and making a presentation highlighting the achievements and challenges of the initial period and the prospects for the year to come. John Owen Chairman 17 June 2011 Manager's Report When I wrote the first interim report in October last year I did so in a mood of optimism - my transition to Hong Kong was going well and I had settled back into a familiar fund manager's routine. I was enjoying meeting lots of Chinese companies, interacting with our team of analysts and other fund managers who follow China and reading lots of broker and other third party research. Most importantly, the NAV was up about 15% from launch. I did preface my remarks by saying it was still early days, however, and it is now clear that the fund's first period has been one of two halves. About the time I wrote my report the market and NAV peaked and the second half proved much tougher, with the market falling until it made a low in mid March round the time of the C share issue. There was some recovery in April but recently the NAV has returned to near 100p. The second half of the period and performance since the period end has been disappointing for investors and me personally. I still believe world equities are in a bull market and what we have recently experienced in Chinese stocks is a normal pause in that cycle. I do not yet see either the investor behaviour or market valuations that one would normally associate with a bull market peak. In fact, given the extraordinary world events in the first quarter of this year, markets have been remarkably resilient, illustrating how bull markets typically climb a "wall of worry". As I have maintained for some time, I still feel we are in a two-speed world where growth in the developed economies will be below normal for several years - the solution to the financial crisis has left them with debt problems that will hold back growth for the foreseeable future. The US, Europe and Japan have major challenges ahead and, although emerging markets will not be immune to the effects of this, I believe the relatively higher growth they offer will be increasingly attractive to investors. For the first part of 2011 investor flows have returned to developed markets and emerging market funds have seen redemptions. I believe this is a temporary pause and flows will return to emerging markets. One of the fascinating things about China is the fact that investors' attitudes to it are very polarised; it is like one of those optical illusions where some viewers perceive a smiling face and some a sad one - the same picture can provoke two very different interpretations. Some see China as the main driver of Asian growth, on its way to becoming the biggest economy in the world, while others are concerned about excessive credit growth and inflation, property and bad debt problems. Probably the truth lies somewhere between these two extremes. I want to spend some time in this report on the negative case as, although many of the concerns are valid, I believe some of the conclusions being drawn are wrong. Like any investment proposition, China is not without risks but I continue to believe that the case for investing is compelling. INFLATION My first observation is that in today's two-speed world most emerging markets are probably going to have to live with higher levels of structural inflation than in the recent past. Indeed, the actual level of inflation in China is probably higher than the 5.4% official figure suggests, maybe more like high single digits. China's new five year plan is targeting annual real wage increases of at least 7% and this does not sit easily with an official inflation target of 4%, which I believe will probably be increased in the future. That said, the Chinese authorities have many powers to influence inflation - powers like price controls which are generally not available in other countries. We have already seen this with official or unofficial price controls on a number of products. Recent evidence seems to suggest that food inflation which makes up 70% of China's official CPI is at or past its peak, although core inflation is creeping up. I would not want to say that inflation is not a problem but I do not think it will stop the bull market unless it gets completely out of control. The authorities must tread a delicate path between slowing the economy to alleviate inflationary pressures and suppressing growth too much but I believe they will strike the right balance. I am expecting growth to fall back to 7-8% compared with last year's 10%, but that is still a very attractive level relative to the developed world. PROPERTY Residential property prices in most Chinese cities have been in a generally rising trend for a number of years and affordability looks pretty stretched. Because of the negative public opinion associated with this, the Chinese authorities last year imposed a number of measures to cool demand, including unprecedented controls in some cities on buying multiple properties and purchases by individuals not resident in that city. These measures have removed a lot of the short term speculative money from the market. The Government has also embarked on a very ambitious social housing programme (10 million units this year and a total of 36 million over the next five years). A number of the negative reports I have received on China suggest that there are several empty cities in China; this may indeed be the case but the Chinese often build infrastructure well in advance of when it is needed and I expect most of the empty cities to fill up in time. These reports also suggest there are as many as 65 million empty apartments. I am unable to confirm a source for this figure and the research I have seen suggests a figure significantly smaller than this. Although empty, these properties are all owned by individuals who chose to keep them as empty shells (there is not a huge backlog of unsold apartments owned by developers). The key question is whether owners try to sell out if, as looks likely later this year, we experience a period of falling property prices. My view is that most will hold on, seeing property as a longer term investment rather than a short term speculation. Also, the mortgage debt against these properties is generally not high so they are unlikely to be forced sellers. The long term demand picture for residential housing is still very favourable. BAD LOANS China has experienced over two years of rapid credit growth. Government measures such as raising interest rates and increasing reserve requirements appear to have led to a slow down in the rate of growth, although lending outside the banking system still appears to be growing fast. Once credit has been expanded strongly it is always difficult to wean banks, companies and individuals off it. That said, credit at the individual level is still very low in China by international standards. One area that observers are particularly concerned about is loans by banks to vehicles set up by local Governments to help finance infrastructure and other local projects. Listed banks have lent RMB 6.25 trillion to these vehicles. The bank regulator (CBRC) has required all banks to look at such loans very closely and it appears as if up to 20% are at some sort of risk of not being repaid. The other thing that worries investors is that local Governments' main source of income is usually selling land they own to developers. If there are problems in the property market, it may become more difficult for them to sell land, which would restrict their financing flexibility. I agree that this is a risk, particularly from 2012 when many of these loans become due. However, I believe the central Government will step in to help the local Governments through any temporary difficulties. Investors are rightly concerned about inflation, the property market and credit growth, but for the reasons I have outlined here I believe the conclusions they have drawn are too pessimistic. On a more positive note, the authorities have launched an ambitious and challenging new five year plan which envisages a major transition of the economy away from low value manufactured exports towards domestic consumption and the growth of services. They have put specific targets on how much of GDP will in the future come from these two areas. Interestingly, this very much endorses the strategy that I have pursued in managing the fund, with my main focus being on these two areas. I do not think anyone should underestimate the challenges from this major change of course for the economy, with many workers having to retrain for completely new careers in new places. However, the pragmatism and flexibility of Chinese workers and their managers impresses me. The five year plan also underwrites a further phase of urbanisation in China. Some people worry about the demographics of China, with an aging population due to the one child policy. I think in maybe ten years time this could be a problem but today the continued shift of workers from rural areas to cities is the more important trend. Finally, the five year plan underwrites the so called "S curve" effect where domestic growth speeds up once a certain level of GDP per head is exceeded. The growth in the China consumer story remains for me the dominant investment theme which will continue to exert a positive influence on markets long after the short term concerns have been resolved. KOREA One other risk in the region that has particularly concerned me is the political situation between North and South Korea. We have seen several hostile acts from the North on the South and my concern is that, if this continues, next time the reaction of the South may be to retaliate. Such an event I believe would, at least in the short term, be very worrying for investors in the region. I think Chinese equities would be affected by this. Because of my concern I have purchased out of the money put options on the Korean index to protect about 25% of the fund's gross assets. Like any form of insurance it is something that I hope will not be needed. The cost of these options has been the largest negative contributor to the fund's performance during the period. I have recently renewed these options for a further six month period. GEARING The Company has two types of gearing. The first is a bank debt facility of US$100m (post the C share issue increased to US$150m). The debt is in US$ rather than HK$ as I believe there is a possibility of the Hong Kong US dollar peg being removed at some stage and the HK$ moving up against the US$. The second form of gearing is through derivatives principally via contracts for difference against some of the largest holdings. PORTFOLIO The fund continues to be mainly focused on the Chinese consumption and service sectors with about a third of the fund in consumer sectors, like retailers, luxury cars, food and drink, consumer products, internet and hotels and restaurants, and about half the fund in service businesses, such as financial services, mobile telephony, healthcare, IT services and education. The rest of the fund is in materials companies (gold and paper), domestically-orientated manufacturing companies and some investment companies. The portfolio remains very underweight in most exporters, and infrastructure and commodity names, including oil shares. This low oil exposure has hurt the fund this period but for the moment I am maintaining the position. On commodities in general, I think the valuations are high, they are very popular and over-owned and therefore risky. I do not think they reflect the slowing growth in China and low growth in the rest of the world. It is interesting that Glencore, one of the most successful commodity trading houses, has chosen now to list when, maybe, a number of commodity prices are near a peak. Oil is different from other commodities, having a political angle that the others largely do not. We will have to watch the situation in the Middle East carefully and especially Saudi Arabia. I also view gold differently from the other commodities as it has characteristics more like a currency. In a world where so many currencies have problems, some exposure to gold makes sense to me. Within financials, the main exposure is to Hong Kong-based banks (about 12% of the gross assets) and property companies (about 5%) rather than mainland banks and property companies. The fund's only exposure to the mainland residential property market is through two estate agent companies (about 1% of the fund). Because of the Government's tightening measures and the uncertainties about the banks' bad loans and the poor short term outlook for the property market on the mainland, I have preferred the Hong Kong companies. Hong Kong banks are benefiting from good loan growth, the prospect of higher margins and the effects of the internationalisation of the RMB. This should be a new source of revenue as the Hong Kong-based banks are in pole position to benefit from this trend. The majority of the fund is invested in private companies rather than state owned enterprises. Private companies are generally more dynamic although they can also be more risky. Also, 44% of the fund is in small companies with a market capitalisation below £1 billion, 28% in medium-sized companies (£1-5 billion) and another 28% in large companies over £5 billion. I continue to feel the medium-sized and smaller companies offer some of the best potential and they are also the least well researched. Fidelity has received its QFII licence and clearance to invest so, since the period end, I have been using this quota to invest in Chinese "A" Shares. Most of our quota has been used to replace the broker provided QFII that we have used to date. The majority of the fund's "A" share exposure is in financial shares, where the "A" shares often sell at a significant discount to the Hong Kong-listed shares of dual-listed companies (companies listed in both the mainland and Hong Kong). In most other areas, I continue to find the "A" shares expensive relative to the shares of similar companies listed in Hong Kong or the US. At the period end, 66% of the gross assets was in Hong Kong-listed shares, 8.5% was in mainland-listed "A" or "B" shares, about 15% in US-listed shares and 7.5% in Chinese exposed companies in other markets. As well as underlying exposure to RMB through investments held, the Company also had additional RMB exposure through RMB foreign exchange contracts. In summary, I remain as convinced as ever by the long-term case for investing in China. In the short term, there are challenges as the Chinese authorities try to effect a soft landing for their economy, but I believe they will succeed. I expect investment flows to resume their trend out of the developed world into emerging markets like China; this may lead, at some stage, to valuations going well above fair value. I hope that with the help of our excellent team here in Hong Kong, we can continue to uncover the companies that are best placed to benefit from the ongoing transformation of China's economy. Anthony Bolton 17 June 2011 PRINCIPAL RISKS AND UNCERTAINTIES AND RISK MANAGEMENT The Board confirms that there is an ongoing process for identifying, evaluating and managing the principal risks faced by the Company. The Board, with the assistance of the Manager, has developed a risk matrix which, as part of the internal controls process, identifies the key risks that the Company faces. The matrix has identified strategic, marketing and business development, investment management, company secretarial, fund administration and operations and support function risks. The Board reviews and agrees policies for managing these risks. The process is regularly reviewed by the Board in accordance with the FRC's "Internal Control: Revised Guidance for Directors on the Combined Code". Risks are identified, reviewed and graded. This process, together with the policies and procedures for the mitigation of risks, is updated and reviewed regularly in the form of comprehensive internal controls reports considered by the Audit Committee. The Board also determines the nature and extent of any risks it is willing to take in order to achieve its strategic objectives. The Board considers the following as the major specific risks for the Company: Top Risks Risk Mitigation Political and legislative The Board reviews material economic, market and change in China. Emerging legislative changes at each Board meeting. An market risk in China. Investment Review report is also produced at each meeting to assess the Company's portfolio performance. Loss of reputation in the Reputational risks are often the consequence of risk market place. events in another category, such as investment performance, corporate governance rules or regulatory issues. The Board performs reviews of such risks on a periodic basis. Poor management of assets The Company has a clearly defined strategy and or long term investment remit. Performance is reviewed at each under-performance. Board meeting, including performance attribution and income forecasts. There is a clearly defined management agreement, and borrowing/derivative limits are also set by the Board. The Company is managed by a highly experienced Portfolio Manager. The Asia Pacific Investment Management team supports the Portfolio Manager, and the Asia Pacific Chief Investment Officer and the Board review performance regularly. Key man risk The Portfolio Manager has committed to manage the portfolio until at least 2013. Succession plans will be developed at an appropriate time and in the interim there is an experienced Asia Pacific Investment team in place supporting him. Impact of Alternative The Association of Investment Companies ("AIC") Investment Fund Managers provides regular briefing updates and these are ("AIFM") Directive. reviewed by the Board. Fidelity is also directly involved in industry lobbying. The AIFM Directive legislation is still being developed but is likely to have a lesser impact on investment trusts than as originally drafted. Further risks identified within this matrix are: External risks Market risk The Company's assets consist mainly of listed securities in China and Hong Kong and the principal risks are therefore market related such as market recessions, interest rate movements, deflation/inflation, terrorism and protectionism. Risks to which the Company is exposed and which form part of the market risks category are included in Note 18 to the financial statements on pages 47 to 52 together with summaries of the policies for managing these risks. These comprise: market price risk; foreign currency risk; interest rate risk; liquidity risk; counterparty risk and credit risk. The Company's fixed term, fixed rate loan facility was renewed and increased to $150m in April 2011. In addition to traditional bank debt, the Company utilises contracts for difference as a secondary gearing mechanism. The Company relies on a number of main service providers, including principally the Managers, Registrar and Custodians. The Investment Managers are members of a privately owned group of companies on which a regular report is provided to the Board. The Managers, Registrar and Custodian are subject to regular audits by the internal audit team and the other service providers' own internal controls reports are received by the Board and any concerns investigated. Risks related to PRC Investing in an emerging market such as the PRC subjects the Company to a higher level of market risk than investment in a more developed market. This is due to, among other things, the existence of 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, and more governmental limitations on foreign investment than are typically found in developed markets. Share price risk The Board is not able to control the prices at which the Company's ordinary shares trade; they may not reflect the value of the underlying investments. However, it can have an influence in the market by maintaining the profile of the Company through an active marketing campaign and, under certain circumstances, through repurchasing or issuing shares. Internal risks Investment management The Board relies on the 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 and competitors and the outlook for the market with the Investment Managers at each Board meeting. The emphasis is on long term investment performance and the Board accepts that by targeting long term results the Company risks volatility in the shorter term. Currency risk The Company's total return and balance sheet are affected by foreign exchange movements because the Company has assets and income which are denominated in US dollars and HK dollars whilst the Company's reporting currency is sterling. While it is the Company's policy not to hedge currency, the fact that borrowings are in US dollars and the contracts for difference are in HK dollars means that part of the investment portfolio funded by borrowing is naturally hedged against changes in the exchange rates. Further details can be found in Note 18 to the financial statements on pages 47 to 52. Governance, operational, financial, compliance, administration etc While it is believed that the likelihood of poor governance, compliance and operational administration by other third party service providers is low, the financial consequences could be serious, including the associated reputational damage to the Company. Your Board is responsible for the Company's system of internal controls and for reviewing its effectiveness. Details of this process are provided in the Corporate Governance Statement within this Annual Report. Financial and financial instrument risks The financial instrument risks faced by the Company are shown in Note 18 to the financial statements on pages 47 to 52. Other risks monitored on a regular basis include derivative positions, which are subject to daily monitoring, together with the Company's cash position. RELATED PARTY TRANSACTIONS FIL Investment Management (Hong Kong) Limited is the Manager and FIL Investments International the unlisted Investment Manager and Secretary of the Company. Details of the investment management fee payable, are given in Note 4 on page 40 and the secretarial and administration fees payable are detailed in Note 5 on page 40. Fees paid to the Directors are disclosed on page 31 in the Directors' Remuneration Report. On 1 March 2011, Douglas Naismith resigned from the Board and Gary Shaughnessy was appointed as a non-executive Director of the Company. Mr Shaughnessy is also Managing Director of Fidelity International's UK Defined Contribution and Retail business. Mr Shaughnessy is an Executive Director of FIL Investments International a member of the FIL Limited Group of Companies. No Director has a contract of service with the Company and no contracts existed during or at the end of the financial period in which any Director was materially interested and which were significant in relation to the Company's business except as disclosed in relation to Mr Shaughnessy's interests in the Management Agreement. There have been no other related party transactions requiring disclosure under International Accounting Standard 24. The interests of the Directors and FIL Limited in the ordinary shares of the Company as at 31 March 2011 are shown on page 22. As at the date of this report, 47.6% of the issued ordinary share capital was held by investors in the Fidelity Individual Savings Account and the Fidelity Investment Trust Share Plan. As at the date of this report notification had been received of the following interests in 3% or more of the voting rights and /or issued ordinary share capital of the Company: Substantial shareholders % FIL Limited1 47.72 1Direct holding on own account (6.45%) and indirect holdings for Fidelity's ISA and Share Plan clients (41.27%). Holdings as at 31 March 2011 STATEMENT OF DIRECTORS' RESPONSIBILITIES The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial period. Under the law they have elected to prepare the financial statements in accordance with International Financial Reporting Standards as adopted by the EU (IFRS). The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss for the period. In preparing these financial statements the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether applicable IFRS have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for ensuring that adequate accounting records are kept which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Under applicable law and regulations the Directors are also responsible for preparing a Directors' Report, including a Business Review, a Directors' Remuneration Report and a Corporate Governance Statement that comply with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's pages of the Manager's website www.fidelity.co.uk/its. Visitors to the website need to be aware that legislation in the United Kingdom governing the preparation and dissemination of the financial statements may differ from legislation in their jurisdictions. We confirm that to the best of our knowledge the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and the Directors' Report includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties it faces. Enquiries: Chris Davies, FIL Investments International - 01737 837 723 Christopher Pirnie, FIL Investments International, Company Secretary - 01737 837929 For Press Enquiries, please contact Anne Read on 020 7961 4409 or 07850 549839 Income Statement for the period from 19 April 2010 to 31 March 2011 revenue capital total Revenue £'000 £'000 £'000 Investment income 9,447 - 9,447 Other income 23 - 23 Net derivative income 30 - 30 Total income* 9,500 - 9,500 Gains on investments designated at fair - 32,177 32,177 value through profit or loss Losses on derivative instruments held - (12,211) (12,211) at fair value through profit or loss Foreign exchange losses on other net (39) (513) (552) assets Foreign exchange gains on bank loans - 3,004 3,004 Total income and gains 9,461 22,457 31,918 Expenses Investment management fee (3,746) (3,746) (7,492) Other expenses (2,435) - (2,435) Profit before finance costs and 3,280 18,711 21,991 taxation Finance costs Interest on bank loans (523) (523) (1,046) Profit before taxation 2,757 18,188 20,945 Taxation** (426) - (426) Net profit after taxation for the 2,331 18,188 20,519 period Earnings per ordinary share 0.47p 3.67p 4.14p The Company does not have any income or expense that is not included in the net profit for the period. Accordingly the net profit after taxation for the period is also the total comprehensive income for the period and no separate Statement of Comprehensive Income has been presented. The total column of this statement represents the Income Statement of the Company and is prepared in accordance with IFRS. The revenue and capital columns are supplementary and presented for information purposes as recommended by the Statement of Recommended Practice issued by the Association of Investment Companies. All of the profit and total comprehensive income is attributable to the equity shareholders of the Company. There are no minority interests. All items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period. The Company was incorporated on 22 January 2010 and operations commenced when its shares were listed on the London Stock Exchange on 19 April 2010. * 31.03.11 £'000 Income from investments designated at fair value through profit or loss Overseas dividends 8,783 Overseas scrip dividends 664 9,447 Other income Deposit interest 12 Income from Fidelity Institutional Liquidity Fund plc 11 23 Net derivative income Income received on long CFDs 68 Less: expenses paid on long CFDs (38) 30 Total income 9,500 ** relates to overseas taxation only Statement of Changes in Equity for the period from 19 April 2010 to 31 March 2011 share share premium other capital revenue total capital account reserve reserve reserve equity £'000 £'000 £'000 £'000 £'000 £'000 Proceeds from offer for 4,600 455,400 - - - 460,000 subscription and placing Fees and expenses of - (3,168) - - - (3,168) the offer for subscription and placing Cancellation of share - (452,232) 452,232 - - - premium account1 Issue of ordinary 387 42,262 - - - 42,649 shares Additional share - (200) - - - (200) listing costs2 Proceeds from "C" share 1,577 164,673 - - - 166,250 offer and placing Fees and expenses of - (2,087) - - - (2,087) the "C" share offer and placing Net profit after - - - 18,188 2,331 20,519 taxation for the period Equity shareholders' 6,564 204,648 452,232 18,188 2,331 683,963 funds at 31 March 2011 1 Court approval was given on 21 April 2010 for the Company's share premium account to be cancelled. As a result £452,232,000 was transferred to the other reserve account. This is a distributable reserve. 2 Costs associated with block listing application fees charged by the London Stock Exchange. The Company was incorporated on 22 January 2010 and operations commenced when its shares were listed on the London Stock Exchange on 19 April 2010. Balance Sheet as at 31 March 2011 Company No. 7133583 £'000 Non current assets Investments designated at fair value through profit or loss 720,287 Current assets Derivative assets held at fair value through profit or loss 2,729 Amounts held at futures clearing houses and brokers 3,280 Other receivables 7,388 Cash and cash equivalents 25,184 38,581 Current liabilities Derivative liabilities held at fair value through profit or (1,582) loss Bank loan (62,013) Other payables (11,310) (74,905) Net current liabilities (36,324) Net assets 683,963 Equity attributable to equity shareholders Share capital 6,564 Share premium account 204,648 Other reserve 452,232 Capital reserve 18,188 Revenue reserve 2,331 Total equity shareholders' funds 683,963 Net asset value per ordinary share 104.20p The financial statements were approved by the Board of Directors on 17 June 2011 and were signed on its behalf by: John Owen Chairman 17 June 2011 The Company was incorporated on 22 January 2010 and operations commenced when its shares were listed on the London Stock Exchange on 19 April 2010. Cash Flow Statement for the period from 19 April 2010 to 31 March 2011 £'000 Operating activities Cash inflow from investment income 7,736 Cash outflow from net derivative income (26) Cash inflow from other income 21 Cash outflow from Directors' fees (105) Cash outflow from other payments (6,645) Cash outflow from purchase of investments (1,066,951) Cash outflow from purchase of derivatives (16,857) Cash inflow from sale of investments 380,884 Cash inflow from sale of derivatives 3,499 Cash outflow from amounts held at futures clearing houses and (3,280) brokers Net cash outflow from operating activities before servicing of (701,724) finance Servicing of finance Cash outflow on interest on bank loans (1,040) Net cash outflow from operating activities and servicing of finance (702,764) Financing activities Cash inflow from the offer for subscription and placing 460,000 Cash inflow from the issue of ordinary shares 42,649 Cash inflow from the "C" share offer and placing 166,250 Cash outflow from the costs of the offer for subscription and (3,168) placing Cash outflow from the costs of the issue of ordinary shares (200) Cash outflow from the costs of the "C" share offer and placing (2,087) Cash inflow from bank loan 62,013 Net cash inflow from financing activities 725,457 Increase in cash and cash equivalents 22,693 Reconciliation of cash and cash equivalents Net cash inflow from cash and cash equivalents 22,693 Effect of foreign exchange gains 2,491 Cash and cash equivalents at the end of the period 25,184 The Company was incorporated on 22 January 2010 and operations commenced when its shares were listed on the London Stock Exchange on 19 April 2010. The above statements are prepared in accordance with International Financial Reporting Standards ("IFRS"). This preliminary statement, which has been agreed with the Auditor, was approved by the Board on 17 June 2011. It is not the Company's statutory financial statements. The statutory financial statements for the period ended 31 March 2011 have been approved and audited but have not yet been filed with the registrar of companies. The statutory financial statements for the period ended 31 March 2011 has received an unqualified audit report, does not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying the report and does not contain statements under section 498(2) and (3) of the Companies Act 2006. The annual report and financial statements will be posted to shareholders as soon as is practicable and in any event no later than 27 June 2011. END
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