Baillie Gifford China Growth Trust Final Results
RNS Announcement
Baillie Gifford China Growth Trust plc
Legal Entity Identifier: 213800KOK5G3XYI7ZX18
Results for the year to 31 January 2024
Regulated Information Classification: Additional regulated information required to be disclosed under the applicable laws and regulations.
The following is the results announcement for the year to 31 January 2024 which was approved by the Board on 2 April 2024.
Over the year the Company's net asset value total return† was negative 40.9% and the share price total return† was negative 40.8%, compared with a total return of negative 30.5% for the MSCI China All Shares Index (in sterling terms).
¾ In the period from 16 September 2020 (the date of the adoption of the China strategy), the Company's net asset value and share price returned negative 49.3% and negative 50.5% respectively compared to a total return of negative 39.4% for the MSCI China All Shares Index (in sterling terms).
¾ The portfolio's overwhelming exposure to non state-owned enterprise companies, particularly in the financials space, plus its underweight positions in energy and utilities (the two best performing sectors within the companies universe), contributed to the Company's relative underperformance.
¾ Contributors to performance included all four state-owned enterprises held in the Company's portfolio: Weichai Power, Brilliance China Automotive, Kweichow Moutai and Zijin Mining however the largest contributor to performance was ByteDance.
¾ The main stock detractors to performance were varied and included Li-Ning, Glodon and Meituan.
¾ The Company has also bought a number of stocks over the year. These include PDD Holdings, an ecommerce platform; BYD, a company that makes electric vehicles; Silergy, a company that designs analogue semiconductors; and Anker Innovations, a Chinese consumer electronic company.
¾ Over the period the Company has bought back 160,700 shares to be held in treasury.
¾ Whilst investment in China may prove volatile over a short term horizon, the Managers have a long-term investment approach and are optimistic about the prospects for the future.
† Alternative Performance Measure - see Glossary of terms and alternative performance measures at the end of this announcement. Source: LSEG/Baillie Gifford and relevant underlying index providers.
Baillie Gifford China Growth Trust aims to achieve long term capital growth through investment principally in Chinese companies which are believed to have above average prospects for growth. At 31 January 2024 the Company had total assets of £125 million.
The Company is managed by Baillie Gifford & Co, an Edinburgh based fund management group with approximately £230 billion under management and advice as at 1 April 2024.
Past performance is not a guide to future performance. The value of an investment and any income from it is not guaranteed and may go down as well as up and investors may not get back the amount invested. The Company may borrow money to make further investments. This is commonly referred to as gearing. The risk is that, when this money is repaid by the Company, the value of these investments may not be enough to cover the borrowing and interest costs, and the Company makes a loss. If the Company's investments fall in value, gearing will increase the amount of this loss. The more highly geared the Company, the greater this effect will be.
Investment in investment trusts should be regarded as medium to long term. You can find up to date performance information about China Growth at bailliegiffordchinagrowthtrust.com.
See disclaimer at the end of this announcement.
2 April 2024
For further information please contact:
Naomi Cherry, Baillie Gifford & Co
Tel: 0131 275 2000
Jonathan Atkins, Director, Four Communications
Tel: 0203 920 0555 or 07872 495396
Chair's statement
Performance
The 12 months under review have formed an extraordinary third consecutive year of market falls that has tested the patience of many investors. A year ago, the stock market looked set to embrace China's reopening: covid was becoming a thing of the past, consumer spending was expected to bounce back, regulation of large technology companies was abating, measures were being rolled out to restore confidence in the property sector and there were hopes that geopolitical tensions were easing and there may be some level of cooperation. Some but not all of this has occurred but frustratingly we have not seen the results benefit the Company's performance in this financial year.
Generally, the negative returns over the period have been driven by macroeconomics and geopolitics rather than the performance of the underlying companies in the portfolio. The listed holdings within the Company's portfolio continue to perform well operationally, delivering 17.7% earnings growth in the financial year.
During the financial year to 31 January 2024, the Company's net asset value total return, calculated by deducting borrowings at fair value, was negative 40.9% and the share price total return was negative 40.8%. This compares with a total return of negative 30.5% for the MSCI China All Shares Index (in sterling terms).
Over the period from 16 September 2020 (the date of the adoption of the China strategy), the Company's net asset value and share price returned negative 49.3% and negative 50.5% respectively compared to a total return of negative 39.4% for the MSCI China All Shares Index (in sterling terms).
The underperformance in 2023 can largely be attributed to the Company's lack of exposure to the energy sector (the only sector which saw a positive return) and financials (the third best performing sector and which returned a negative 15%) and overweight position in consumer discretionary which returned a negative 37%. Foreign investors stayed away from China and domestic investors moved into defensive sectors and state-owned enterprises ('SOE'). The FTSE China SOE index outperformed the non-SOE index in calendar year 2023, continuing a trend which began in 2021. Given that the Company invests for growth and as such is not weighted towards SOE companies, it has resulted in weaker performance relative to the benchmark.
As part of the Board's oversight of the Managers' investment approach, I attended a Baillie Gifford trip to China to the investment team in Shanghai and portfolio companies. In addition, the Board met with members of the Shanghai team virtually at its annual strategy day. The Board remains satisfied that the Managers are investing in accordance with its long term growth approach.
There will be periods of underperformance during the investment cycle as the Managers do not invest in trends, and as I have previously noted, the Managers have a long-term investment approach, and we would ask shareholders to judge performance over periods of five years or more. Further information about the Company's portfolio performance is covered by our portfolio managers in their Managers' Report.
Discount/premium and share issuance
The Company's share price discount to net asset value at the last financial year end was 6.3%, and the shares continued to trade at a discount for the duration of the financial year. The discount was volatile during the financial period, 15.5% at its widest and 2.6% at its narrowest. The Company's share price ended the year at a discount to net asset value of 6.2%.
No shares have been issued by the Company during the period as the shares have traded at a discount to net asset value. The Company bought back 160,700 shares into treasury over the period. The buy backs benefit shareholders in the Company by modestly enhancing the NAV per share. The Board continues to keep its liquidity policy under close review and recognises the need to address any sustained and significant imbalance of buyers and sellers. Details of the full liquidity policy can be found on page 29 of the Annual Report and Financial Statements. Between 31 January and 1 April 2024, no shares were issued and 389,189 shares were bought back into treasury.
Dividend
Since the adoption of the China strategy and the appointment of Baillie Gifford as Managers in September 2020, the Company's returns are now predominantly generated from capital growth as opposed to income. During the financial year, the revenue return per share increased by 13.1% from 2.14p to 2.42p.
The dividend policy of the Company, which became effective last year, is that any dividend paid will be by way of a final dividend and be not less than the minimum required for the Company to maintain its investment trust status.
The Board is proposing a final dividend of 2.0p, an increase of 17.6%, which, subject to shareholder approval, will be paid on 24 July 2024 to shareholders on the register at close of business on 21 June 2024, with the shares trading ex-dividend on 20 June 2024.
Ongoing Costs
The ongoing charges figure for the year is 0.97%. Last year, the ongoing charges were 0.94%.
Gearing
In April 2022, the Company entered into a $40m revolving credit facility with RBSI. As at 31 January 2024, a relatively modest $7.5m has been drawn down under the facility, and gearing stood at 4.2%. The Board consider that a prudent level of gearing is advantageous given the long term returns forecast in China equities by the Managers and is seeking to renew the loan facility in April 2024.
Unlisted investments
The Company holds one unlisted investment, ByteDance, which represented 8.4% of the total assets as at 31 January 2024. The valuation process is undertaken by Baillie Gifford and supplemented by an independent assessment by S&P Global, and is set out on page 52 of the Annual Report and Financial Statements.
ESG
The consideration of ESG factors is an integral part of the Managers' long-term investment approach. The Board reviews the Managers' engagement with portfolio companies at each Board meeting. In addition, the Board has also reviewed the Managers' approach to assessing geopolitical risks in 2023. Further details can be found on pages 42 to 49 of the Annual Report and Financial Statements.
The Board
As noted in my statement last year, I plan to step down from the Board on 30 April 2024 having completed my nine year tenure. I am pleased to confirm that Nicholas Pink, who joined the Board in September 2023 following a search undertaken with the support of an external recruitment consultant, will succeed me as Chair with effect from 1 May 2024. Nicholas has extensive senior management experience in financial services with previous roles at UBS Investment Bank including Global Head of Research and Head of Asia Research. Nicholas currently sits on the board of two other investment trusts.
I am also pleased to confirm that following a second search conducted by an external recruitment consultant this year, Sarah MacAulay will be joining the Board on 1 May 2024. Sarah is an experienced investment trust director and former portfolio manager with knowledge of the Asian region. I am delighted with both appointments and confident that the Company will be led by a competent board with wide ranging skills.
All Directors are subject to annual re-election at the AGM in June. Biographies of each of the Directors can be found on pages 59 and 60 of the Annual Report and Financial Statements.
The Managers
Since the change of mandate in September 2020, Roderick Snell and Sophie Earnshaw have been co-portfolio managers of the Company. Following a decision by the Managers to separate their China and Global Emerging Markets teams, the Board is pleased to announce that Linda Lin, partner at Baillie Gifford, will be joining Sophie as co-portfolio manager with effect from 1 February 2024 to replace Roderick who is stepping away to focus on his Emerging Market and Asia responsibilities. The Board would like to thank Roderick for his contribution to the Company over the last three and a half years.
Annual General Meeting
The AGM will be held at 4pm on Wednesday, 19 June 2024 at The Cavendish Hotel, 81 Jermyn Street, London SW1Y 6JF. The meeting will include a presentation from the Managers and all shareholders are invited to attend.
To accurately reflect the views of shareholders of the Company, the Board intends to hold the AGM voting on a poll, rather than by a show of hands as has been customary. This will ensure an exact and definitive result. The Board encourages all shareholders to exercise their votes on the AGM resolutions by completing and submitting the form of proxy enclosed with the Annual Report to ensure that your votes are represented at the meeting (whether or not you intend to attend in person). If you hold shares through a share platform or other nominee, the Board encourages you to contact these organisations directly as soon as possible to arrange for you to submit votes in advance of the AGM. Alternatively, the Association of Investment Companies' ('AIC') website theaic.co.uk/how-to-vote-your-shares has information on how to vote your shares if you hold them via one of the major platforms. The following link will also take you through to the AIC website where there is information on how your platform can help you attend the AGM in person theaic.co.uk/aic/ready-toinvest/shareholder-voting/attending-an-agm.
Should shareholders have questions for the Board or the Managers, or any queries as to how to vote, they are welcome, as always, to submit them by email to trustenquiries@bailliegifford.com or calling 0800 917 2112 (Baillie Gifford may record your call).
Outlook
Investor sentiment and related share trading have significantly influenced share price performance over the last three years, and share prices have diverged from their fundamentals. It is the fundamentals that our Managers remain focused on, as it is a company's operational progress over the long term that will deliver outperformance.
The combination of an ambitious entrepreneurial culture and bold top-down policies with the sheer scale of China's markets continues to provide a unique opportunity given lower valuations. A long-term investment horizon underpins our Managers' efforts as they seek to find the companies in China with the best sustainable growth outlook, regardless of their size, sector or position in an index. As I concluded in my Chair's statement last year, China is a market where there is likely to be ongoing short term volatility however the prospects for significant long term growth remain.
Susan Platts-Martin
Chair
2 April 2024
For a definition of terms, see Glossary of terms and alternative performance measures at the end of this announcement.
Past performance is not a guide to future performance.
See disclaimer at the end of this announcement.
Managers' Report
The year under review was disappointing and painful for Chinese equities, with our index falling by 30.5%. Indeed, it marks an extraordinary third consecutive year of drawdowns in our asset class. In the main, returns over the period have been driven by macroeconomics and geopolitics rather than company fundamentals. The holdings within the Company's portfolio continue to perform well operationally. Our listed holdings delivered 17.7% earnings growth in the financial year versus index-level earnings growth of only 2.1%. Despite this, the portfolio derated from a price-earnings multiple of 19x to 12x.
China's economy continues to transition away from its old model of property led growth to a new model of innovation led growth. The economy has been weak but is not in crisis. The country's GDP grew by 5.2% in 2023 and met the official growth target for the year. The International Monetary Fund does expect growth to slow in 2024, but only to 4.6%. The property market's drag on nominal growth continues, with nationwide sales numbers at 40 %of the 2021 peak, while there has only been a tentative stabilisation in sales of the top 100 largest developers. Despite the mortgage rate falling by around 150 basis points since 2021 and the pricing of property posting only single-digit declines over two years (though this industry-level data masks double-digit declines in some tier-one cities), the government is struggling to stimulate demand. Thankfully, other segments of the Chinese economy, namely household consumption and exports, were strong enough to offset this weakness. The post-covid rebound in consumer spending and the fall in the savings rate in the first quarter led to a welcome uptick in services growth. At the same time, strength in the US economy and China's continued global competitiveness saw robust export demand. Retail sales were up circa 15%, and real per capita household income was up circa 20% in 2023 versus 2019.
Unfortunately, the rally in consumer spending softened materially towards the end of the year, and the job market further deteriorated. In addition, the government's support for the economy was thought by many to be underwhelming. As such, market sentiment deteriorated as the year progressed.
Geopolitics was also a negative driver, with technological controls and economic barriers increasing even as relations between the US and China formally stabilised. December marked the worst net outflows of China/Hong Kong equities in 2023 and the third-largest monthly outflows in history. Foreign investors appear to be increasingly shunning China. Indeed, third-quarter data indicated that inbound foreign direct investment ('FDI') fell close to negative territory for the first time since 1998. FDI was only US$15bn for the first nine months of the year - a 92% drop from 2022. On the current trend, China may attract less FDI in 2023 than Poland.
This deterioration in sentiment was reflected in negative returns for our benchmark after a brief rally in the first quarter. The only sector in positive territory was energy, which posted circa 17% return over the year. The next best sector was utilities, which fell circa 9%, followed by financials at negative 15%. Domestic investors, faced with mixed economic data and disappointing levels of policy support, moved into defensive sectors an state-owned enterprises ('SOE'). The FTSE China SOE index outperformed the non-SOE index by 12% in 20231 , continuing a trend which began in 2021. In line with our investment philosophy, the portfolio's overwhelming exposure to growth sectors and non-SOE companies resulted in weaker relative performance than the benchmark.
Where does this leave us? In both absolute and relative terms, the valuation of Chinese equities is low. Our benchmark, MSCI China All Shares, is trading on circa 9x 2024 price earnings. This multiple is almost one standard deviation below its 5 and 10 year average, less than half that of US equities (MSCI USA is trading on 20x) and below that of both MSCI ACWI (16.6x) and Emerging Markets (MSCI EM 11.7x). As noted above, the Company's listed portfolio of holdings has derated to 12x over the year, despite delivering double-digit earnings growth.
Towards the end of the reporting period, we saw further signs of a significant government effort to address pockets of weakness in the economy and the rout in the stock market. In July, Beijing announced a 17-point plan to increase confidence in the private sector. This followed a concerted effort by Premier Li and a flurry of announcements at the highest levels designed to reassure the private sector of the government's continued support. Most importantly, the regulatory backdrop was largely stable for some of China's largest private sector companies, except for a quickly corrected misstep in gaming.
In February 2024, in response to the stock market rout, we saw Beijing begin to intervene in the equity market via the purchase of stock index funds and SOE buybacks while the former head of the China Securities Regulatory Commission was replaced. Concerning property, context is important. The government's long-term aim is to reduce the country's reliance on this sector as an engine of growth. Most Western economists would agree that this adjustment is necessary for the country's long-term economic health. With this in mind, the government's refusal to stimulate aggressively and provide a 'quick fix' becomes understandable. The initial focus of policymakers was on demand-side stabilisation measures. We saw mortgage rates fall to their lowest level on record and restrictions on purchasing removed. As noted above, these measures had limited success.
In the second half of 2023, we saw the government announce an increase in public-sector construction spending via the 'three major projects':
• The expansion of social housing;
• The renovation of urban villages; and
• The construction of civil infrastructure to increase resilience to natural disasters.
Then, finally, in January 2024, we saw the government begin to extend support to private-sector developers, the most distressed subsegment of the industry. Measures include:
• The People's Bank of China ('PBOC') announced RMB 350bn (circa US$50bn) in priority sector lending for real estate developers to execute the 'three major projects';
• The promise of additional credit support via banks; and
• Local governments in eight cities are beginning a pilot project to buy up vacant apartments from developers to reduce inventory and help stabilise cash flows.
Given China's pre-sale housing model2, improving the public's confidence in private sector developers' creditworthiness and ability to complete projects is crucial to stabilising the industry.
With developer finances still deteriorating and the economy slipping in and out of deflation, there is undoubtedly more work still to do. However, actions taken to date suggest a course correction is well underway at a time when pessimism about China is at an all-time high.
More importantly for us as active managers, China still offers a unique opportunity for growth. For example, of all companies in MSCI ACWI forecast to grow revenues at 20% per annum for the next three years, 40% come from China. While headline GDP continues to slow, there are ample structural opportunities in a variety of industries that continue to excite us. For example, in terms of automation and advanced manufacturing, China is already the largest industrial robotics market in the world. Yet robot density is only one-third of that of countries like Korea.
Another example would be the rise of domestic brands. In a whole host of industries, foreign brands still dominate. But this is changing. A good example would be cosmetics, where domestic leaders such as Proya continue to take share from mass-market foreign brands. A further example would be 'little giants': companies with advanced expertise in strategically important industries such as solar, batteries or semiconductors.
Indeed, because of our ability to avoid vast swathes of the index, our portfolio holdings delivered double-digit earnings growth in 2023 despite China's economic woes. For example, ByteDance, our largest holding at 8.4%, and only unlisted investment, reported over 35% revenue growth in the nine months to September, driven by continued monetisation of its vast userbase. Kweichow Moutai, a 5.9% holding and our second largest overweight, delivered circa 17% revenue and earnings growth over the same period, driven by the phenomenal strength of its domestic baijiu brand. Tencent, another large holding within the Company's portfolio, delivered 10% revenue growth in the most recent quarter and treble-digit earnings per share growth as capital allocation continued to improve. Or CATL, a 1.8% holding in the portfolio and the world's leading battery manufacturer, pre-announced that it would deliver 38-48% year-over-year revenue growth in 2023. CATL has grown its revenue and earnings by over 10x in the last four years and trades on less than 15x 2024 earnings. What comforts us during these challenging times is our holdings' continued strong operational performance and the knowledge that, over meaningful periods, share prices are likely to follow fundamentals.
However, we are anything but complacent and continue to interrogate the investment decisions we made since Baillie Gifford won the Company's mandate in 2020. For example, we have added two independent research providers to our list of resources to bolster our ability to ascertain a company's alignment with the Chinese state and the risks and opportunities of the broader geopolitical environment. Both specialise in analysing Chinese and US policy. We have commissioned work from our Risk Team on our trading decisions and have interrogated the research process, quality and investment decisions that led to our largest individual stock mistakes. We also continue to challenge our historic preference for privately run companies instead of SOEs.
At the firm level, we'd also like to highlight Baillie Gifford's continued support for our Chinese equities business. While some of our competitors are closing their Chinese operations, Baillie Gifford continues to invest. Our Shanghai office, which opened in 2019, has added resources yearly, with two new graduates joining in the last two years alongside a dedicated ESG analyst. We now have seven investment staff working out of Shanghai. We recently established a dedicated China team that will be responsible for our Chinese equity funds. As such, Sophie is excited to welcome Linda Lin, a partner at Baillie Gifford and an investment specialist on China, as co-manager for the Baillie Gifford China Growth Trust. Linda will replace Roderick Snell who will re-focus his attention on Asia Pacific. Establishing the dedicated China Team, of which Sophie is a part, and adding Linda as a formal decision maker to our China equity strategies, is a significant increase of resources.
Portfolio positioning and recent activity
Balancing global perspectives with local insights and ensuring a long-term focus in our analytical framework is critical to finding China's best and most innovative public and private growth companies. We undertook two joint trips around China, one in May 2023 and one in January 2024. Linda Lin led our most recent trip, and she was joined by managers from our Long Term Global Growth team and our Emerging Markets team.
Our philosophy and investment horizons afford excellent access to company leaders. Linda was fortunate to meet with founders and 'C-level' management from PDD Holdings, one of the new purchases for the Company, along with existing holdings Meituan, LONGi and KE Holdings.. We also met NIO, one of China's leading electric vehicle brands and a competitor to BYD; Kuaishou, a competitor to ByteDance; and Luckin Coffee, China's version of Starbucks. More broadly, while the atmosphere was somewhat gloomy, with negative local sentiment and weak consumer confidence, we found the trip uplifting at the most basic level of what companies are doing regarding growth. The entrepreneurial spirit that allows new companies to challenge entrenched incumbents and the huge spoils available to domestic victors have not changed. This type of growth is currently on offer at prices not seen in many years.
Our portfolio positioning remains relatively consistent compared to last year. We retain exposure to the sectors and companies that we believe offer the best long-term growth potential and upside. We have large overweight positions in consumer discretionary and industrials, and large underweights in lower growth sectors such as financials and utilities. We believe the portfolio is geared toward the themes likely to drive China's next decade of growth including:
• The energy transition, advanced manufacturing and robotics;
• 'Little giants';
• Leading domestic brands; and
• Long-duration growth companies in both traditional and online industries.
Portfolio turnover during the year was 7.9%, reflecting our confidence in our holdings despite the negative returns we experienced in 2023. New purchases during the period included PDD Holdings, Silergy, Anker Innovations and BYD. PDD has done a terrific job servicing the sizeable cost-conscious consumer market, taking share in areas increasingly vacated by Alibaba. Over the last few years, they have carved out a formidable niche targeting low-income users in lower-tier cities with a deeply-discounted 'treasure hunt' experience. Recently, the platform has gained traction with higher-income users in China and several overseas markets. The company has become increasingly cash-generative as it has moved away from massive marketing promotions without losing user traction. As one of the few Chinese ecommerce platforms that retains the potential for massive operational upside, we felt PDD was worthy of a place within the Company's portfolio. Silergy is an analogue semiconductor designer and benefits from tailwinds similar to SG Micro, including import substitution. We took advantage of the weakness in the shares on the back of a cyclical slowdown to buy this high-quality, high-growth business.
Anker Innovations is a Chinese consumer electronics company. Its record of making quality products at fair prices has earned it a valuable brand reputation among its Western customers. Indeed, the company leverages China's supply chain advantages in electronics to make high-quality products at reasonable prices. Our Shanghai office has worked over the past year to understand the company's strategy and the founder's motivations, giving us greater confidence in their ability to grow profitably and broaden their product offerings. Given its predominantly overseas revenue base, the stock is also a diversifier within the Company's portfolio.
We also bought an initial holding in BYD. BYD was founded in 1995 as a manufacturer of lithium-ion batteries for consumer applications like smartphones and notebooks. It grew rapidly to become one of the global battery leaders by the early 2000s when it also moved into electronics manufacturing services and autos. In retrospect, there was a much greater coherence to this strategy than the company were credited with at the time - in each new market that they entered, BYD has distinguished itself with a highly flexible, highly integrated manufacturing process characterised by significant levels of research and development ('R&D'), a focus on self- developed components and very rapid innovation cycles. They were early movers into the electric vehicle ('EV') market in 2006, where they leveraged their proprietary battery technology and manufacturing experience to become the leading EV manufacturer in China by 2018; in 2022, they overtook Tesla to become the world's largest EV maker by volume. The recent surge in market share partly reflects the advantages of having control over its supply chain when the rest of the industry has been struggling. Still, we also suspect it reflects a more enduring advantage as the company enters a virtuous circle of scale leveraging high R&D spend, which in absolute terms now dwarfs most of their competitors. If the company can remain one of the leading players in the fast-growing Chinese EV market, then we think the shares look attractive; if they can build on their more recent signs of progress in third-party battery sales or autos outside China, then the rewards may be even greater.
Sales of Burning Rock Biotech, Dada Nexus, Geely Automotive, and Hangzhou Tigermed funded these purchases. The US battle around Chinese American Depositary Receipts and the Holding Foreign Companies Accountable Act provided a technical challenge to our investment case for Burning Rock Biotech. We remain convinced that the market for next-generation sequencing in oncology is huge and that the data supporting Burning Rock's position was credible. However, we underestimated how much financing was necessary for a loss-making company, particularly via the equity market. This was a mistake. The company's inability to issue equity in the US, their only listing location, and their inability to obtain a secondary listing in Hong Kong due to their smaller size led to a vicious spiral in which investors sold down on concerns around delisting risk, the market capitalisation shrank, and the company's ability to fund its operations diminished.
We sold our holdings in Geely and Tigermed. Geely's vehicles have historically been popular with Chinese consumers who value its strong engine technology (partly bought in via the acquisition of Volvo) and mid-range prices. We believe the company's core advantage in engine technology has diminished with the shift to EVs. Given substantial investments outside the listed entity, the founder's alignment also appears to have shifted. We believe BYD's vertically integrated model and core expertise in battery technology make it much more likely to benefit from the shift to electric vehicles. Tigermed is a leading clinical research organisation. We have decided to sell the holding largely due to the increased risk of trade barriers overseas. We believe these barriers could substantially impact the company's ability to grow in the future.
Performance
The portfolio's performance was very disappointing in both absolute and relative terms. It underperformed against a falling benchmark. The benchmark for the period returned negative 30.5%, NAV negative 40.9% and the share price negative 40.8%. The portfolio's overwhelming exposure to non-SOE companies, particularly in the financials space, plus its underweight positions in energy and utilities (the two best-performing sectors within our universe), contributed to our relative underperformance. While this was undoubtedly painful, our portfolio exposure is in keeping with our growth philosophy, which has served us well over longer periods.
The main stock detractors to performance were varied. Li-Ning, a leading domestic sportswear brand, faced increased competition from multinational players such as Adidas and a weakening consumer backdrop. Discounting in the channel and an inventory correction in the second half spooked the market, resulting in a marked derating in the shares. This is a stock that we have significantly reduced at much higher price points. After the correction and the additional research we conducted, we are minded to continue holding the shares.
We believe the brand remains relatively strong and that this is not reflected in the 10x price-earnings multiple we are now being asked to pay.
Glodon, a software provider to the construction industry, and SG Micro, an analogue chip designer, are examples of where cyclical issues have overwhelmed the structural case in the short term. SG Micro operates in the analogue semiconductor industry, which remains dominated by foreign players. China's desire to reduce its import bill and establish a globally competitive, homegrown semiconductor industry is a significant long-term tailwind for the company. In the short term, however, we saw the company suffer as the industry entered a cyclical downturn. We are confident that the company's competitive advantage remains strong and that its position as a domestic leader will see it benefit once the cycle turns. We added to this company in the first half of the reporting period after the first correction in the shares. Glodon is a dominant cost estimation software provider to the construction industry. Its software helps its clients reduce costs and increase the efficiency of their operations. Software penetration in this industry is low and rising, and we believe Glodon is likely to benefit from this tailwind in the long run. In the near term, however, cyclical weakness in property and construction resulted in revenue and profit growth, disappointing the market.
Meituan was also a detractor. The shares fell markedly despite the company delivering circa 25% revenue growth in the first nine months of the year and turning profitable. Indeed, in the third quarter of 2023, its earnings grew by almost 200%. We met Wang Xing, the founder of the company, in January of this year and continue to hold him in high regard. Meituan retains a dominant position in food delivery and is utilising its delivery network to expand into adjacent categories. In top-tier cities, Meituan delivers products in under half an hour. In addition, Meituan has a dominant position in restaurant bookings and travel. Competition from ByteDance in this part of the business has seen margins fall. However, growth has accelerated markedly due to ByteDance's entrance and the subsequent rise in online penetration. The fall in margins is yet to impact absolute profit growth materially. The company also has loss-making initiatives such as ride-hailing and community group buy. These are gradually turning profitable or being scaled back, leading to exceptional profit growth for the company. Despite this, Meituan is only trading on 15x price earnings. We are inclined to add to our holding.
Other detractors to performance included gearing which sits at around 3-4 % and stocks such as Centre Testing International, Ping An Insurance and Estun. Whilst gearing has been a detractor to performance over the near term, we continue to believe that it should be value accretive over the long term given our expectations for attractive returns in the asset class relative to the cost of debt. We decided to add to our position in Centre Testing International in January 2024, after the shares fell.
Centre Testing International is the leading private sector company in China's testing and inspection market. The company derated substantially as part of a general sell-off in growth stocks and in response to cyclical weakness in some of its end markets. We believe the company is a high-quality operator with a sizeable, long-term growth opportunity ahead of it, and, as such, we decided to take advantage of share price weakness to build a more sizeable position in the Company's portfolio. Ping An Insurance and Estun were reduced in the first half of the reporting period due to concerns about changes in the regulatory backdrop and increased competition, respectively.
Contributors to performance included all four state- owned enterprises held in the Company's portfolio: Weichai Power, Brilliance China Automotive, Kweichow Moutai and Zijin Mining. Of these, only Weichai and Brilliance China Automotive delivered a positive return. Zijin, a leading gold and copper miner, delivered 10 % revenue growth in the first three quarters of 2023, yet the shares fell 11% during the period. On 12x earnings, we believe the company has significant upside ahead of it driven by the energy transition. As noted above, Kweichow Moutai delivered 17% revenue and earnings growth in the first nine months of 2023, yet its share price fell 19%. Moutai is arguably the strongest and most durable brand in China. It has 800 years of heritage and can price its baijiu at a significant premium. The financial returns of this business are also exceptional.
Brilliance China Automotive is something of a special situation. It is an automaker and BMW's partner in China. The company was relisted in Q4 2022 after a period of suspension. The share price was at a very depressed level at the point of relisting. In January and July 2023, Brilliance China Automotive declared two special dividend payouts to shareholders totalling 1.92 Hong Kong dollars per share, while the shares were trading around four Hong Kong dollars on average. While a +40% yearly return is encouraging, the future case for Brilliance China Automotive does rely on decisions around next year's special dividend payment and its new management team's operational execution.
ByteDance was our largest contributor over the year. Despite delivering circa 35% revenue growth in the first nine months of the year, our independent valuation team wrote the shares down by 11%, less than the benchmark decline. This was due to a fall in the peer group valuation and supported by valuations observed in the secondary market. We believe that ByteDance offers outstanding growth potential even if one excludes the US business. ByteDance continues to monetise its vast user base in China and to take a substantial share within ecommerce. We are confident that its exceptional operational performance will be rewarded by substantial share price returns over meaningful periods.
Silergy and Midea were also contributors to performance. Silergy is an analogue semiconductor designer and benefits from similar tailwinds to SG Micro (discussed above). Due to its exposure to different end markets, the cycle turned down earlier for Silergy relative to SG Micro. It experienced a marked correction in its share price as demand weakened. The cycle for Silergy has now turned, and, as such, its shares have begun to recover. We bought Silergy during its cyclical correction and are pleased to see it rebound after purchase. Midea is a leading white goods manufacturer and a high-quality compounder. It delivered 7% revenue growth and 10% earnings growth in the first nine months of the year, and the shares were flat during the period. It trades on circa 11x price-earnings and will likely continue growing at high single-digit and low double-digit rates for a long time.
Outlook
As discussed above, China's economy continues to transition away from its old model of property led growth to a new model of innovation led growth. There is clearly a risk that the government fails to manage this transition successfully. However, we remain cautiously optimistic. In terms of the old growth model, policy is increasingly focused on stabilising the most distressed segments of the property industry. Any stabilisation here could be very meaningful for consumer confidence, which could in turn be very meaningful for domestic demand. In terms of the new growth model, China has made significant progress in areas such as renewable energy, electric vehicles and, increasingly, semiconductors. The days of recycling export earnings into infrastructure led growth are over and China is now exporting capital around South- east Asia and into other developing regions. This gives enormous growth opportunities to Chinese companies whose business strategies are aligned to China's national objectives.
These growth opportunities are reflected in the operational performance of the companies we own within the Company. As noted above, our listed holdings delivered 17.7% underlying earnings growth. Despite this, the portfolio's value fell by c. 40%. This extraordinary divergence between earnings and value is a reflection of sentiment, rather than operational performance. Sentiment is driven both by the economic transition alluded to above and by geopolitics between the US and China. As China's success in transitioning to its new growth model becomes clearer, it is likely that sentiment will improve and that other pools of capital, in addition to the US, will become materially invested in the attractive returns on offer in China.
Despite a difficult couple of years of performance, Baillie Gifford continues to believe that China remains an exciting hunting ground for growth investors. As such, we continue to invest in our capabilities here and have added significant resource. With valuations low in both an absolute and relative sense, we believe that the opportunity in China has becoming even more compelling. As such, we remain optimistic about future returns.
Roderick Snell
Sophie Earnshaw
Baillie Gifford & Co
2 April 2024
1 The period of performance referred to for both the FTSE China SOE index and the FTSE China non-SOE index is the year 2023 versus the Trust reporting period which is 31 January 2023 to 31 January 2024.
2 Chinese consumers pay significant amounts upfront before construction of the property is finished.
For a definition of terms, see Glossary of terms and alternative performance measures at the end of this announcement.
Source: LSEG/Baillie Gifford and relevant underlying index providers.
Past performance is not a guide to future performance.
See disclaimer at the end of this announcement.
Review of investments
A review of the Company's ten largest investments as at 31 January 2024.
ByteDance (valuation £10,551,000, 8.4% of total investments at 31 January 2024)
ByteDance is a social media and short form video company and it represents the Company's first private investment. It was founded in 2012 by Yiming Zhang and the company has grown to rank amongst the world's largest companies of its kind. Its short form video app, Douyin, is a market leader in China, and TikTok, its global equivalent, is dominating the format globally. ByteDance benefits from a technological edge in machine learning which it uses to bring out new applications tailored to different media forms and different demographics. The company's ability to innovate in this space is exceptional and we believe one of the key drivers of its likely future success. We believe ByteDance has the potential to be a generation defining media company.
Tencent (valuation £9,330,000, 7.4% of total investments at 31 January 2024)
Tencent is a leading social media and entertainment platform. It has a dominant position in online gaming and an ecosystem in WeChat that we believe is one of the strongest in China. Monetisation of WeChat's over one billion monthly active users represents one growth driver for the company. Further growth opportunities are provided by Tencent's strong positions in cloud infrastructure and consumer and SME lending, along with its portfolio of investee companies which span online music streaming, ecommerce, and short form video. Pony Ma, the founder and Chairman of the company, is indelibly focused on the long term and has executed exceptionally well in one of China's fastest moving industries.
Alibaba (valuation £9,249,000, 7.4% of total investments at 31 January 2024)
Alibaba is a leading online retailer. Its ecommerce business is returning to growth after a period of intensified competition and share loss. Steadily increasing online penetration in segments such as grocery and Fast Moving Consumer Goods remains a long term driver for the business, whilst the company's efforts to integrate live streaming and social media into the platform aim to revitalise the platform following stiff competition for customers and merchants attention from competitors. In addition, Alibaba retains a strong position in infrastructure as a service, or the cloud, where it has a similar business to Amazon Web Services. The company has taken the decision to focus on profitable growth as opposed to growth at any cost. Alibaba's partnership structure and its capable and experienced management team are well-aligned with shareholders.
Kweichow Moutai (valuation £7,447,000, 5.9% of total investments at 31 January 2024)
Kweichow Moutai is one of the most important and iconic Chinese brands. It manufactures premium baijiu (white alcohol) which has a heritage and respect embedded within Chinese culture. Its unique brewing conditions and process provide a core competitive advantage. When combined with supply scarcity and limited competition in the very high- end market, Moutai is able to price at a premium and maintain a loyal customer base. It is an extremely profitable business. We believe in the strength and heritage of the brand, the sustainability of revenue growth, and the longevity of its core competitive advantage.
China Merchants Bank (valuation £4,133,000, 3.3% of total investments at 31 January 2024)
China Merchants Bank is a leading consumer bank in China with a lengthy track record and solid market share. It has outcompeted its state-owned rivals via a relentless focus on the consumer. As such, it has built up an enviable position in consumer lending and in wealth management, both segments with strong growth potential. In terms of lending quality, this has been strong through the cycle and we believe this is a bank that will continue to offer attractive returns to shareholders.
Zijin Mining (valuation £3,969,000, 3.2% of total investments at 31 January 2024)
Zijin Mining is a Chinese gold and copper company with ambitious volume growth plans through organic expansion and M&A, particularly in its copper business. Copper is an economically sensitive commodity that should benefit from economic activity globally but should be further boosted meaningfully by green investment (be it renewable generation or electric vehicles). Indeed, copper is an essential enabler of the green revolution. We do not think the upside to the commodity price, nor Zijin's growth potential, is being adequately factored in by the market.
Ping An Insurance (valuation £3,741,000, 3.0% of total investments at 31 January 2024)
Ping An Insurance is one of China's leading financial services groups. It is China's second largest life insurer, a market with growth potential driven by China's emerging middle class and rising disposable income. It also has a leading position in property and casualty insurance where it has consistently delivered strong returns. In addition, it has consistently invested in artificial intelligence and machine learning in order to increase the efficiency and long-term viability of its core business. Again, this is a company with a long-term, growth mind-set that we believe will deliver substantial returns to shareholders.
NetEase (valuation £3,220,000, 2.6% of total investments at 31 January 2024)
NetEase is one of the most successful gaming companies in China, second only to Tencent, with a proven track record of developing popular, high-quality titles on both mobile and PC. It has successfully monetized its titles whilst protecting the gamer experience and its brand name and the company culture continues to attract and retain the best game developers in China. Its financials are attractive and it is a well-managed company. The gaming industry in China continues to grow, particularly on mobile, and NetEase appears well placed to benefit from this for many years.
Zhejiang Sanhua Intelligent Controls (valuation £3,202,000, 2.6% of total investments at 31 January 2024)
Zhejiang Sanhua is one of the world's largest manufacturers of controls and components for heating, ventilation and air conditioning ('HVAC') systems, electric vehicles and home appliances. Sanhua has a global customer base of top tier manufacturers, with half of their revenues generated from China and half from overseas. The company has over 50% market share in its key products. Sanhua's ability to produce quality at scale is a key competitive advantage. This is a founder-owned company whose global position has been underappreciated in a China context. We expect Sanhua to benefit from consumption growth in general, as well as growth in the electric vehicle market, and an industry shift in home appliances towards stricter environmental standards.
Midea (valuation £3,077,000, 2.5% of total investments at 31 January 2024)
Midea is the world's largest home appliance business, listed in Shenzhen. It is a great quality business, investing for growth and appears very cheap. Home appliance businesses are dull yet make great returns (28-29% return on equity), require little capital, have brand equity and throw off a healthy level of cash, some of which is returned to Midea shareholders via a 4% dividend yield. This company stands out given its category leadership and desire to grow the business in a meaningful way. It is investing in technology, is at the forefront of innovation (22,000 patents and counting), is expanding its product range and geographic reach and also buying in additional brands at good prices. The move into robotics though the acquisition of Kuka, a world leader, could be particularly interesting, not least due to efficiency gains likely in its own business.
List of investments at 31 January 2024
|
Name |
Business |
Value £'000 |
% of total assets |
|
ByteDance u |
Social media and entertainment company |
10,551 |
8.4 |
|
Tencent |
Social media and entertainment company |
9,330 |
7.4 |
|
Alibaba Group |
Online retailer, payments and cloud business |
9,249 |
7.4 |
|
Kweichow Moutai |
Luxury baijiu maker |
7,447 |
5.9 |
|
China Merchants Bank |
Consumer lending and wealth management |
4,133 |
3.3 |
|
Zijin Mining Group |
Renewable energy enabler |
3,969 |
3.2 |
|
Ping An Insurance |
Life and health insurance |
3,741 |
3.0 |
|
NetEase |
Gaming and entertainment business |
3,220 |
2.6 |
|
Zhejiang Sanhua Intelligent Controls |
Heating and cooling component manufacturer |
3,202 |
2.6 |
|
Midea Group |
White goods and robotics manufacturer |
3,077 |
2.5 |
|
BeiGene |
Immunotherapy biotechnology company |
2,811 |
2.2 |
|
Meituan |
Online food delivery company |
2,759 |
2.2 |
|
Weichai Power |
Construction machinery and heavy duty trucks |
2,756 |
2.2 |
|
Fuyao Glass Industry Group |
Automotive glass manufacturer |
2,550 |
2.0 |
|
PROYA |
Cosmetics and personal care company |
2,527 |
2.0 |
|
PDD Holdings |
Broadline Retail |
2,354 |
1.9 |
|
Shenzhou International |
Garment manufacturer |
2,290 |
1.8 |
|
CATL |
Electric vehicle battery maker |
2,263 |
1.8 |
|
ENN Energy |
Gas distributor and provider |
2,138 |
1.7 |
|
Silergy |
Semiconductors and Semiconductor Equipment |
2,118 |
1.7 |
|
Shandong Sinocera Functional Material |
Advanced materials manufacturer |
2,044 |
1.6 |
|
Centre Testing International |
Electrical Components and Equipment |
1,953 |
1.6 |
|
Guangzhou Kingmed Diagnostics |
Diagnostics company |
1,933 |
1.5 |
|
Shenzhen Inovance Technology |
Factory automation company |
1,850 |
1.5 |
|
Brilliance China Automotive |
Automotive makers and BMW partner |
1,784 |
1.4 |
|
Shenzhen Megmeet Electrical |
Power electronics manufacturer |
1,764 |
1.4 |
|
KE Holdings* |
Online real estate |
1,726 |
1.4 |
|
Anker Innovations |
Technology Hardware, Storage and Peripherals |
1,721 |
1.4 |
|
Ping An Bank |
SME and consumer lender |
1,714 |
1.4 |
|
Li Ning |
Domestic sportswear manufacturer |
1,594 |
1.3 |
|
HUAYU Automotive Systems |
Automotive parts manufacturer |
1,556 |
1.2 |
|
Estun Automation |
Robotics and factory automation company |
1,438 |
1.1 |
|
BYD |
Automobiles |
1,312 |
1.0 |
|
SG Micro Corp |
Semiconductor designer |
1,208 |
1.0 |
|
Yifeng Pharmacy Chain |
Drug retailer |
1,162 |
0.9 |
|
Yonyou Network Technology |
Software for SMEs and corporates |
1,141 |
0.9 |
|
Sinocare |
Diagnostics and diabetes company |
1,124 |
0.9 |
|
Asymchem Laboratories (Tianjin) |
Life sciences contract research organisation |
1,074 |
0.9 |
|
Kingdee International Software |
Software for SMEs and corporates |
1,058 |
0.8 |
|
Robam Appliances |
White goods manufacturer |
1,037 |
0.8 |
|
Sungrow Power Supply |
Component supplier to renewables industry |
944 |
0.8 |
|
WuXi AppTec |
Life sciences contract research organisation |
922 |
0.7 |
|
Sunny Optical Technology |
Electronic components for smartphones and autos |
909 |
0.7 |
|
LONGi |
Solar energy provider |
830 |
0.7 |
|
Kingsoft |
Software for SMEs and corporates |
815 |
0.7 |
|
Pop Mart |
Toy and collectibles maker |
811 |
0.6 |
|
Minth |
Automotive parts manufacturer |
800 |
0.6 |
|
JD.com |
Online retailer |
797 |
0.6 |
|
Glodon |
Software provider to the construction industry |
654 |
0.5 |
|
Jiangsu Azure |
Air Freight and Logistics |
629 |
0.5 |
|
Beijing United Information Tec |
Industrial ecommerce platform |
627 |
0.5 |
|
Topchoice Medical |
Dental services provider |
588 |
0.5 |
|
Medlive Technology |
Medical dictionary and marketing organisation |
574 |
0.5 |
|
Hua Medicine (Shanghai) |
Diabetes drug manufacturer |
546 |
0.4 |
|
New Horizon Health |
Early cancer detection |
449 |
0.4 |
|
Dongguan Yiheda Automation Co |
Industrial Machinery |
443 |
0.4 |
|
Kinlong |
Building Products |
396 |
0.3 |
|
Yunnan Energy New Material |
Component supplier to renewables industry |
339 |
0.3 |
|
Total investments |
|
124,751 |
99.5 |
|
Net liquid assets† |
|
550 |
0.5 |
|
Total assets |
|
125,301 |
100.0 |
|
Borrowings |
|
(5,890) |
(4.9) |
|
Shareholders' funds |
|
119,411 |
95.1 |
u Denotes unlisted holding (private company).
* Includes investments in American Depositary Receipts ('ADRs').
† For a definition of terms used, see Glossary of terms and alternative performance measures at the end of this announcement.
|
|
Listed equities % |
Unlisted Securities % |
Net liquid Assets % |
Total Assets % |
|
31 January 2024 |
91.1 |
8.4 |
0.5 |
100.0 |
|
31 January 2023 |
94.0 |
5.7 |
0.3 |
100.0 |
Figures represent percentage of total assets.
Baillie Gifford - statement on stewardship
Baillie Gifford's overarching ethos is that we are 'Actual' investors. That means we seek to invest for the long term. Our role as an engaged owner is core to our mission to be effective stewards for our clients. As an active manager, we invest in companies at different stages of their evolution across many industries and geographies, and focus on their unique circumstances and opportunities. Our approach favours a small number of simple principles rather than overly prescriptive policies. This helps shape our interactions with holdings and ensures our investment teams have the freedom and retain the responsibility to act in clients' best interests.
Long-term value creation
We believe that companies that are run for the long term are more likely to be better investments over our clients' time horizons. We encourage our holdings to be ambitious, focusing on long-term value creation and capital deployment for growth. We know events will not always run according to plan. In these instances we expect management to act deliberately and to provide appropriate transparency. We think helping management to resist short-term demands from shareholders often protects returns. We regard it as our responsibility to encourage holdings away from destructive financial engineering towards activities that create genuine value over the long run. Our value will often be in supporting management when others don't.
Alignment in vision and practice
Alignment is at the heart of our stewardship approach. We seek the fair and equitable treatment of all shareholders alongside the interests of management. While assessing alignment with management often comes down to intangible factors and an understanding built over time, we look for clear evidence of alignment in everything from capital allocation decisions in moments of stress to the details of executive remuneration plans and committed share ownership. We expect companies to deepen alignment with us, rather than weaken it, where the opportunity presents itself.
Governance fit for purpose
Corporate governance is a combination of structures and behaviours; a careful balance between systems, processes and people. Good governance is the essential foundation for long-term company success. We firmly believe that there is no single governance model that delivers the best long-term outcomes. We therefore strive to push back against one-dimensional global governance principles in favour of a deep understanding of each company we invest in. We look, very simply, for structures, people and processes which we think can maximise the likelihood of long-term success. We expect to trust the boards and management teams of the companies we select, but demand accountability if that trust is broken.
Sustainable business practices
A company's ability to grow and generate value for our clients relies on a network of interdependencies between the company and the economy, society and environment in which it operates. We expect holdings to consider how their actions impact and rely on these relationships. We believe long-term success depends on maintaining a social licence to operate and look for holdings to work within the spirit and not just the letter of the laws and regulations that govern them. Material factors should be addressed at the board level as appropriate.
Income statement
For the year ended 31 January
|
|
Notes |
2024 Revenue £'000 |
2024 Capital £'000 |
2024 Total £'000 |
2023 Revenue £'000 |
2023 Capital £'000 |
2023 Total £'000 |
|
Losses on investments |
|
- |
(83,606) |
(83,606) |
- |
(12,378) |
(12,378) |
|
Currency gains/(losses) |
|
- |
105 |
105 |
- |
(216) |
(216) |
|
Income |
2 |
2,599 |
- |
2,599 |
2,407 |
- |
2,407 |
|
Investment management fee |
3 |
(255) |
(765) |
(1,020) |
(311) |
(932) |
(1,243) |
|
Other administrative expenses |
|
(523) |
- |
(523) |
(550) |
- |
(550) |
|
Net return before finance costs and taxation |
|
1,821 |
(84,266) |
(82,445) |
1,546 |
(13,526) |
(11,980) |
|
Finance costs of borrowings |
|
(136) |
(408) |
(544) |
(116) |
(347) |
(463) |
|
Net return before taxation |
|
1,685 |
(84,674) |
(82,989) |
1,430 |
(13,873) |
(12,443) |
|
Tax |
|
(187) |
- |
(187) |
(105) |
- |
(105) |
|
Net return after taxation |
|
1,498 |
(84,674) |
(83,176) |
1,325 |
(13,873) |
(12,548) |
|
Net return per ordinary share |
5 |
2.42p |
(136.61p) |
(134.19p) |
2.14p |
(22.37p) |
(20.23p) |
The total column of this statement is the profit and loss account of the Company. The supplementary revenue and capital return columns are prepared under guidance published by the Association of Investment Companies.
All revenue and capital items in this statement derive from continuing operations.
A Statement of Comprehensive Income is not required as all gains and losses of the Company have been reflected in the above statement.
Balance sheet
As at 31 January
|
|
Notes |
2024 |
2024 £'000 |
2023 £'000 |
2023 £'000 |
|
Fixed assets |
|
|
|
|
|
|
Investments held at fair value through profit or loss |
6 |
|
124,751 |
|
209,499 |
|
Current assets |
|
|
|
|
|
|
Debtors |
|
23 |
|
26 |
|
|
Cash and cash equivalents |
8 |
926 |
|
1,000 |
|
|
|
|
949 |
|
1,026 |
|
|
Creditors |
|
|
|
|
|
|
Amounts falling due within one year: |
|
(6,289) |
|
(6,585) |
|
|
Net current liabilities |
|
|
(5,340) |
|
(5,559) |
|
Total assets less current liabilities |
|
|
119,411 |
|
203,940 |
|
Capital and reserves |
|
|
|
|
|
|
Share capital |
|
|
17,087 |
|
17,087 |
|
Share premium account |
|
|
31,780 |
|
31,780 |
|
Capital redemption reserve |
|
|
41,085 |
|
41,085 |
|
Capital reserve |
|
|
22,775 |
|
107,748 |
|
Revenue reserve |
|
|
6,684 |
|
6,240 |
|
Shareholders' funds |
|
|
119,411 |
|
203,940 |
|
Net asset value per ordinary share* |
|
|
193.06p |
|
328.87p |
|
Ordinary shares in issue |
5 |
|
61,852,282 |
|
62,012,982 |
* See Glossary of terms and alternative performance measures at the end of this announcement.
Statement of changes in equity
For the year ended 31 January 2024
|
|
Share capital £'000 |
Share premium account £'000 |
Capital redemption reserve £'000 |
Capital reserve £'000 |
Revenue reserve £'000 |
Shareholders' funds £'000 |
|
Shareholders' funds at 1 February 2023 |
17,087 |
31,780 |
41,085 |
107,748 |
6,240 |
203,940 |
|
Dividends paid during the year |
- |
- |
- |
- |
(1,054) |
(1,054) |
|
Net return after taxation |
- |
- |
- |
(84,674) |
1,498 |
(83,176) |
|
Ordinary shares bought back into treasury |
- |
- |
- |
(299) |
- |
(299) |
|
Shareholders' funds at 31 January 2024 |
17,087 |
31,780 |
41,085 |
22,775 |
6,684 |
119,411 |
For the year ended 31 January 2023
|
|
Share capital £'000 |
Share premium account £'000 |
Capital redemption reserve £'000 |
Capital reserve £'000 |
Revenue reserve £'000 |
Shareholders' funds £'000 |
|
Shareholders' funds at 1 February 2022 |
17,087 |
31,780 |
41,085 |
121,621 |
7,768 |
219,341 |
|
Dividends paid during the year |
- |
- |
- |
- |
(2,853) |
(2,853) |
|
Net return after taxation |
- |
- |
- |
(13,873) |
1,325 |
(12,548) |
|
Shareholders' funds at 31 January 2023 |
17,087 |
31,780 |
41,085 |
107,748 |
6,240 |
203,940 |
* The capital reserve unrealised includes investment holding losses of £96,532,000 (2023 - losses of £26,491,000) as disclosed in note 9.
Cash flow statement
For the year ended 31 January
|
|
2024 £'000 |
2024 £'000 |
2023 £'000 |
2023 £'000 |
|
Net return before taxation |
(82,989) |
|
(12,443) |
|
|
Adjustments to reconcile company profit before tax to net cash flow from operating activities |
||||
|
Net losses on investments |
83,606 |
|
12,378 |
|
|
Currency (gains)/losses |
(105) |
|
216 |
|
|
Finance costs of borrowings |
544 |
|
463 |
|
|
Other capital movements |
|
|
|
|
|
Changes in debtors |
3 |
|
74 |
|
|
Changes in creditors |
(97) |
|
(25) |
|
|
Taxation |
|
|
|
|
|
Overseas withholding tax suffered |
(198) |
|
(181) |
|
|
Overseas withholding tax reclaims received |
11 |
|
76 |
|
|
Cash from operations* |
|
775 |
|
558 |
|
Interest paid |
|
(541) |
|
(451) |
|
Net cash inflow from operating activities |
|
234 |
|
107 |
|
Cash flows from investing activities |
|
|
|
|
|
Acquisitions of investments |
(14,521) |
|
(27,760) |
|
|
Disposals of investments |
15,663 |
|
25,723 |
|
|
Net cash inflow/(outflow) from investing activities |
|
1,142 |
|
(2,037) |
|
Cash flows from financing activities |
|
|
|
|
|
Equity dividends |
(1,054) |
|
(2,853) |
|
|
Shares bought back |
(299) |
|
- |
|
|
Net cash outflow from financing activities |
|
(1,353) |
|
(2,583) |
|
Increase/(decrease) in cash and cash equivalents |
|
23 |
|
(4,783) |
|
Exchange movements |
|
(97) |
|
287 |
|
Cash and cash equivalents at start of year |
|
1,000 |
|
5,496 |
|
Cash and cash equivalents at end of year |
|
926 |
|
1,000 |
* Cash from operations includes dividends received of £2,576,000 (2023 - £2,402,000) and interest received of £23,000 (2023 - £5,000).
Notes to the Financial Statements
1. Basis of accounting
The Financial Statements for the year to 31 January 2024 have been prepared in accordance with FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' on the basis of the accounting policies set out in the Annual Report and Financial Statements for the year 31 January 2024 which are consistent with those applied for the year ended 31 January 2023.
2. Income
|
|
2024 £'000 |
2023 £'000 |
|
Income from investments |
|
|
|
Overseas dividends |
2,576 |
2,402 |
|
|
|
|
|
Other income |
|
|
|
Interest |
23 |
5 |
|
Total income |
2,599 |
2,407 |
3. Investment manager
Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, was appointed as the Company's Alternative Investment Fund Managers ('AIFM') and Company Secretary on 16 September 2020. Baillie Gifford & Co Limited has delegated portfolio management services to Baillie Gifford & Co. Dealing activity and transaction reporting has been further sub-delegated to Baillie Gifford Overseas Limited and Baillie Gifford Asia (Hong Kong) Limited.
The Investment Management Agreement between the AIFM and the Company sets out the matters over which the Managers have authority in accordance with the policies and directions of, and subject to restrictions imposed by, the Board. The Investment Management Agreement is terminable on not less than three months' notice or on shorter notice in certain circumstances. Compensation would only be payable if termination occurred prior to the expiry of the notice period. The annual management fee is (i) 0.75% of the first £50 million of net asset value; plus (ii) 0.65% of net asset value between £50 million and £250 million; plus (iii) 0.55% of net asset value in excess of £250 million, calculated and payable quarterly.
4. Net return per ordinary share
|
|
2023 Revenue |
2023 Capital |
2023 Total |
2023 Revenue |
2023 Capital |
2023 Total |
|
Net return per ordinary share |
2.42p |
(136.61p) |
(134.19p) |
2.14p |
(22.37p) |
(20.23p) |
Revenue return per ordinary share is based on the net revenue return on ordinary activities after taxation of £1,498,000 (2023 -£1,325,000), and on 61,981,380 (2023 - 62,012,982) ordinary shares, being the weighted average number of ordinary shares in issue during each year.
Capital return per ordinary share is based on the net capital loss for the financial year of £84,674,000 (2023 - loss £13,873,000) and on 61,981,380 (2023 - 62,012,982) ordinary shares, being the weighted average number of ordinary shares in issue during each year.
There are no dilutive or potentially dilutive shares in issue.
5. Ordinary dividends
|
|
2024
|
2023
|
2024 £'000 |
2023 £'000 |
|
Amounts recognised as distributions in the period: |
|
|
|
|
|
Previous year's final dividend (paid 26 July 2023) |
1.70p |
4.60p |
1,054 |
2,853 |
Also set out below are the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of section 1158 of the Corporation Tax Act 2010 are considered. The revenue available for distribution by way of dividends for the year is £1,498,000 (2023 - £1,325,000)
|
|
2024 |
2023 |
2024 £'000 |
2023 £'000 |
|
Dividends paid and proposed in the period: |
|
|
|
|
|
Proposed final dividend per ordinary share (payable 24 July 2024) |
2.00p |
1.70p |
1,229 |
1,054 |
6. Investments
Investments in securities are financial assets held at fair value through profit or loss on initial recognition. In accordance with FRS102 the tables above provide an analysis of these investments based on the fair value hierarchy described below which reflects the reliability and significance of the information used to measure their fair value.
Fair value hierarchy
The levels are determined by the lowest (that is the least reliable or least independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:
Level 1 - using unadjusted quoted prices for identical instruments in an active market;
Level 2 - using inputs, other than quoted prices included within Level 1, that are directly or indirectly observable (based on market data); and
Level 3 - using inputs that are unobservable (for which market data is unavailable).
The valuation techniques used by the Company are explained in the accounting policies on page 99 of the Annual Report and Financial Statements. The Company's unlisted ordinary share investment at 31 January 2024 was valued using the market approach using comparable traded multiples. A sensitivity analysis of the unlisted security is on page 110 of the Annual Report and Financial Statements.
|
As at 31 January 2024 |
Level 1 £'000 |
Level 2 £'000 |
Level 3 £'000 |
Total £'000 |
|
Securities |
|
|
|
|
|
Listed equities |
114,200 |
- |
- |
114,200 |
|
Unlisted equities |
- |
- |
10,551 |
10,551 |
|
Total financial asset investments |
114,200 |
- |
10,551 |
124,751 |
|
As at 31 January 2023 |
Level 1 £'000 |
Level 2 £'000 |
Level 3 £'000 |
Total £'000 |
|
Securities |
|
|
|
|
|
Listed equities |
197,546 |
- |
- |
197,546 |
|
Unlisted equities |
- |
- |
11,953 |
11,953 |
|
Total financial asset investments |
197,546 |
- |
11,953 |
209,499 |
7. In the year to 31 January 2024 no shares were issued from treasury (in the year to 31 January 2023 - no shares were issued from treasury). The Company's shareholder authority permits it to hold shares bought back in treasury. Under such authority, treasury shares may be subsequently either sold for cash (at a premium to net asset value per ordinary share) or cancelled. At 31 January 2024 the Company had authority to buy back 9,135,046 ordinary shares. During the year to 31 January 2024, no ordinary shares (2023 - nil) were bought back for cancellation and 160,700 ordinary shares (2023 - nil) were bought back into treasury. Under the provisions of the Company's Articles of Association share buy-backs are funded from the capital reserve.
8. Analysis of change in net debt
|
|
1 February |
Cash flows |
Exchange movement |
31 January |
|
Cash and cash equivalents |
1,000 |
23 |
(97) |
926 |
|
Loans due within one year |
(6,092) |
- |
202 |
(5,890) |
|
|
(5,092) |
23 |
105 |
(4,964) |
|
|
1 February |
Cash flows |
Exchange movement |
31 January |
|
Cash and cash equivalents |
5,496 |
(4,783) |
287 |
1,000 |
|
Loans due within one year |
(5,590) |
- |
(502) |
(6,092) |
|
|
(94) |
(4,783) |
(215) |
(5,092) |
9. The Annual Report and Financial Statements will be available on the Company's website bailliegiffordchinagrowthtrust.com† on or around 11 April 2024.
10. The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 January 2024 or 2023 but is derived from those accounts. Statutory accounts for 2023 have been delivered to the Registrar of Companies, and those for 2024 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.
† Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.
Glossary of terms and alternative performance measures ('APM')
An alternative performance measure ('APM') is a financial measure of historical or future financial performance, financial position, or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework. The APMs noted below are commonly used measures within the investment trust industry and serve to improve comparability between investment trusts.
Total assets
This is the Company's definition of adjusted total assets, being the total value of all assets less current liabilities, before deduction of all borrowings.
Net asset value
Net asset value is the value of total assets less liabilities (including borrowings). The net asset value per share ('NAV') is calculated by dividing this amount by the number of ordinary shares in issue (excluding treasury shares).
Net liquid assets
Net liquid assets comprise current assets less current liabilities, excluding borrowings.
Discount/premium (APM)
As stockmarkets and share prices vary, an investment trust's share price is rarely the same as its NAV. When the share price is lower than the NAV it is said to be trading at a discount. The size of the discount is calculated by subtracting the NAV from the share price and is usually expressed as a percentage of the NAV. If the share price is higher than the NAV, it is said to be trading at a premium.
|
|
|
2024 |
2023 |
|
Closing NAV |
(a) |
193.06p |
328.87p |
|
Closing share price |
(b) |
181.00p |
308.00p |
|
Discount |
((b)-(a)) / (a) |
(6.2%) |
(6.3%) |
Total Return (APM)
The total return is the return to shareholders after reinvesting the net dividend on the date that the share price goes ex-dividend.
|
|
|
2024 NAV
|
2024 Share price |
2023 NAV
|
2023 Share price |
|
Closing NAV per share/share price |
(a) |
193.06p |
181.00p |
328.87p |
308.00p |
|
Dividend adjustment factor* |
(b) |
1.006801 |
1.007763 |
1.014030 |
1.014557 |
|
Adjusted closing NAV per share/share price |
(c = (a) x (b) |
194.37p |
182.41p |
333.48p |
312.48p |
|
Opening NAV per share/share price |
(d) |
328.87p |
308.00p |
353.70p |
339.25p |
|
Total return |
(c) ÷ (d)-1 |
(40.9%) |
(40.8%) |
(5.7%) |
(7.9%) |
* The dividend adjustment factor is calculated on the assumption that the dividend of 1.70p (2023 - 4.60p) paid by the Company during the year was
reinvested into shares of the Company at the cum income NAV/share price, as appropriate, at the ex-dividend date.
Ongoing Charges (APM)
The total expenses (excluding borrowing costs) incurred by the Company as a percentage of the average net asset value. The ongoing charges have been calculated on the basis prescribed by the Association of Investment Companies. A reconciliation from the expenses detailed in the Income statement above is provided below.
|
|
|
2024 |
2023 |
|
Investment management fee |
|
£1,020,000 |
£1,243,000 |
|
Other administrative expenses |
|
£523,000 |
£550,000 |
|
Total expenses |
(a) |
£1,543,000 |
£1,793,000 |
|
Average daily cum-income net asset value |
(b) |
£158,468,461 |
£190,419,970 |
|
Ongoing charges ((a) ÷ (b) expressed as a percentage) |
|
0.97% |
0.94% |
Gearing (APM)
At its simplest, gearing is borrowing. Just like any other public company, an investment trust can borrow money to invest in additional investments for its portfolio. The effect of the borrowing on shareholders' funds is called 'gearing'. If the Company's assets grow, shareholders' funds grow proportionately more because the debt remains the same. But if the value of the Company's assets falls, the situation is reversed. Gearing can therefore enhance performance in rising markets but can adversely impact performance in falling markets.
Gearing is the Company's borrowings adjusted for cash and cash equivalents expressed as a percentage of shareholders' funds.
Gross gearing is the Company's borrowings expressed as a percentage of shareholders' funds.
|
|
|
2024 |
2023 |
||
|
|
|
Gearing* £'000 |
Gross Gearing† £'000 |
Gearing* £'000 |
Gross Gearing† £'000 |
|
Borrowings |
(a) |
5,890 |
5,890 |
6,092 |
6,092 |
|
Cash and cash equivalents |
(b) |
925 |
- |
1,000 |
- |
|
Shareholders' funds |
(c) |
119,411 |
119,411 |
203,940 |
203,940 |
|
|
|
4.2% |
4.9% |
2.5% |
3.0% |
*Gearing: ((a)-(b)) divided by (c), expressed as a percentage.
† Gross gearing: (a) divided by (c), expressed as a percentage.
Leverage (APM)
For the purposes of the Alternative Investment Fund Managers (AIFM) Regulations, leverage is any method which increases the Company's exposure, including the borrowing of cash and the use of derivatives. It is expressed as a ratio between the Company's exposure and its net asset value and can be calculated on a gross and a commitment method. Under the gross method, exposure represents the sum of the Company's positions after the deduction of sterling cash balances, without taking into account any hedging and netting arrangements. Under the commitment method, exposure is calculated without the deduction of sterling cash balances and after certain hedging and netting positions are offset against each other.
Active share (APM)
Active share, a measure of how actively a portfolio is managed, is the percentage of the portfolio that differs from its comparative index. It is calculated by deducting from 100 the percentage of the portfolio that overlaps with the comparative index. An active share of 100 indicates no overlap with the index and an active share of zero indicates a portfolio that tracks the index.
Unlisted (Private) Company
An unlisted (private) company means a company whose shares are not available to the general public for trading and not listed on a stock exchange.
Variable Interest Entity ('VIE')
VIE structures are used by some Chinese companies to facilitate access to foreign investors in sectors of the Chinese domestic economy which prohibit foreign ownership. The purpose of the VIE structure is to give the economic benefits and operational control of ownership without direct equity ownership itself. The structures are bound together by contracts and foreign investors are not directly invested in the underlying company.
Treasury shares
The Company has the authority to make market purchases of its ordinary shares for retention as treasury shares for future reissue, resale, transfer or for cancellation. Treasury shares do not receive distributions and the Company is not entitled to exercise the voting rights attaching to them.
Third party data provider disclaimer
No third party data provider ('Provider') makes any warranty, express or implied, as to the accuracy, completeness or timeliness of the data contained herewith nor as to the results to be obtained by recipients of the data.
No Provider shall in any way be liable to any recipient of the data for any inaccuracies, errors or omissions in the index data included in this document, regardless of cause, or for any damages (whether direct or indirect) resulting therefrom. No Provider has any obligation to update, modify or amend the data or to otherwise notify a recipient thereof in the event that any matter stated herein changes or subsequently becomes inaccurate.
Without limiting the foregoing, no Provider shall have any liability whatsoever to you, whether in contract (including under an indemnity), in tort (including negligence), under a warranty, under statute or otherwise, in respect of any loss or damage suffered by you as a result of or in connection with any opinions, recommendations, forecasts, judgements, or any other conclusions, or any course of action determined, by you or any third party, whether or not based on the content, information or materials contained herein.
MSCI index data
The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an 'as is' basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the 'MSCI Parties') expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages (msci.com).
Sustainable Finance Disclosure Regulation ('SFDR')
The EU Sustainable Finance Disclosure Regulation ('SFDR') does not have a direct impact in the UK due to Brexit, however, it applies to third-country products marketed in the EU. As Baillie Gifford China Growth Trust is marketed in the EU by the AIFM, Baillie Gifford & Co Limited, via the National Private Placement Regime ('NPPR') the following disclosures have been provided to comply with the high-level requirements of SFDR.
The AIFM has adopted Baillie Gifford & Co's stewardship principles and guidelines as its policy on integration of sustainability risks in investment decisions.
Baillie Gifford & Co believes that a company cannot be financially sustainable in the long run if its approach to business is fundamentally out of line with changing societal expectations. It defines 'sustainability' as a deliberately broad concept which encapsulates a company's purpose, values, business model, culture, and operating practices.
Baillie Gifford & Co's approach to investment is based on identifying and holding high quality growth businesses that enjoy sustainable competitive advantages in their marketplace. To do this it looks beyond current financial performance, undertaking proprietary research to build up an in-depth knowledge of an individual company and a view on its long-term prospects. This includes the consideration of sustainability factors (environmental, social and/or governance matters) which it believes will positively or negatively influence the financial returns of an investment. The likely impact on the return of the portfolio from a potential or actual material decline in the value of investment due to the occurrence of an environmental, social or governance event or condition will vary and will depend on several factors including but not limited to the type, extent, complexity and duration of an event or condition, prevailing market conditions and existence of any mitigating factors.
Whilst consideration is given to sustainability matters, there are no restrictions on the investment universe of the Company, unless otherwise stated within in its Investment Objective & Policy. Baillie Gifford & Co can invest in any companies it believes could create beneficial long-term returns for investors. However, this might result in investments being made in companies that ultimately cause a negative outcome for the environment or society.
More detail on the Investment Managers' approach to sustainability can be found in the ESG Principles and Guidelines document, available publicly on the Baillie Gifford website bailliegifford.com and by scanning the QR code on page 125 of the Annual Report and Financial Statements.
The underlying investments do not take into account the EU criteria for environmentally sustainable economic activities established under the EU Taxonomy Regulation.
Taxonomy Regulation
The Taxonomy Regulation establishes an EU-wide framework of criteria for environmentally sustainable economic activities in respect of six environmental objectives. It builds on the disclosure requirements under SFDR by introducing additional disclosure obligations in respect of alternative investment funds that invest in an economic activity that contributes to an environmental objective. The Company does not commit to make sustainable investments as defined under SFDR. As such, the underlying investments do not take into account the EU criteria for environmentally sustainable economic activities.
Regulated Information Classification: Additional regulated information required to be disclosed under the applicable laws.
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