Overview

I am pleased to share with you the half-yearly report for abrdn China Investment Company Limited (“the Company”), covering the six months to 30 April 2023 (“the Period”). During the Period, the Company’s net asset value (“NAV”) total return was 14.0% in sterling terms, while the share price total return was 11.5%. The MSCI China All Shares Index, the Company’s Reference Index returned 16.7% over the Period. The share price discount to NAV was 14.5% at 30 April 2023.

Compared with the investment backdrop at our financial year end in October 2022, the Period covered by this half-yearly report was much more positive for investors in Chinese equities. Whilst not always evident from reporting in the Western media, domestic sentiment now appears far more positive and China’s swift rollback of its zero-Covid measures during November and December, and a full reopening of borders by early January, drove a strong stock market rally with onshore and offshore Chinese companies seeing sharp gains across the board. The Shanghai Stock Exchange A Shares Index rose 11% in the six weeks following the lifting of Covid restrictions in early November. The rally was particularly strong as it followed a severe test of investors’ nerves in the wake of a host of domestic concerns, including Covid-related disruptions and growing pressure on the domestic real estate sector, compounded by the worsening global economic environment.

Despite the positive early indicators, the economic recovery has not been as smooth as many expected. The predicted rebound in consumption has failed to match the market’s high expectations. As a result, consumer companies, including many of those held by the Company, have come under selling pressure since February. The Company’s Investment Manager believes that the bulk of this recovery, aided by a restoration of consumer confidence, will happen in the second half of this year and into 2024 as employment and income prospects meaningfully improve for households. I am encouraged by the fact that the Chinese Government publicly declared its intention to support growth at the National People’s Congress in March 2023. This implies that the policy landscape is likely to remain accommodative in the months ahead.

Lawmakers have moved swiftly to ease pressure on a heavily indebted real estate sector, which is both a major driver of economic growth and a key source of personal wealth in China. Last year, the central government unveiled a swathe of measures, including easing home-buying requirements for individuals as well as a raft of policy tools, such as loan financing, bond issuance and equity financing assistance, to help developers avoid the worst effects of the liquidity crunch.

However, external pressures on China persist. There is still the looming spectre of global recession as central banks raise interest rates to fight rising inflation. China, where inflation is comparatively low compared to the West, is one of the few nations that is still able to employ looser monetary policy including lowering interest rates. Meanwhile, tensions simmer between China and Taiwan, and continue to flare between the US and China, as was illustrated by the US shooting down an alleged Chinese spy balloon that had strayed into its airspace. 

Against this backdrop, the Company’s performance was supported by a rebound in some sectors that had dragged down performance over the last financial year. The financial sector had been one of the main detractors to performance for the 12 months to 31 October 2022. However, it was one of the strongest performing sectors during the Period, after the Company’s holdings, particularly in the retail banks, rallied. The performance of investments in healthcare and materials were also positive during the Period. On a more negative note, given the Company’s consumer focus, consumer discretionary stocks detracted, reflecting how the pace of recovery in consumption has, so far, not lived up to investors’ expectations.

In terms of positioning, the Company’s Investment Manager continues to focus on five core themes: Aspiration, Digitalisation, Going Green, Health and Wealth. These are aligned to the Chinese government’s policy objectives and tap into the vast consumer market and rising affluence of a growing middle class in China. The Company’s Investment Manager has reviewed exposure to internet companies, increasing some positions and lowering the portfolio weight to others, for stock-specific reasons. More detail on the performance of the portfolio and changes to the holdings can be found in the Investment Manager's Review.

China’s reopening has had another direct positive impact for the Company. With the lifting of Covid restrictions heralding the return of travel, one of the Company’s portfolio managers, Elizabeth Kwik, was able to update shareholders in person at the Company’s Annual General Meeting in London in April. This provided our shareholders with a useful insight into the long-term outlook for China and the differences between how the region is reported in the Western media and the investment opportunities the Investment Manager sees locally. The Board is also due to travel to China later this year in order to meet with the abrdn investment team on the ground, as well as visit some of the companies in the Investment Portfolio. By then, it will have been two years since the mandate change, but it will be the first opportunity the Board has had to travel to the region together and meet with the broader team in Hong Kong and Shanghai.

Discount and Share Buy Backs

The discount at which the Company’s shares trade relative to the NAV operated in a narrow band between around -12% to -15% for most of the Period. At the end of April 2023 the share price was trading at a discount of 14.4% and since then the discount has remained unchanged.

The Board has continued to buy back shares in order to try to mute the volatility of the discount. During the Period, 1,721,633 shares were bought back at a total cost of £9.2m and a weighted average discount of 13.9%. This represented 3.8% of the issued share capital and added 3.2p, or 0.51%, to the Net Asset Value per Share. The shares are held in treasury.

The Company’s share price has typically traded at a wider discount than that of its peers, albeit with less variation in level than other trusts in the sector. Although, there are times when all the peers’ discounts have widened to match that of the Company.

Revenue Account & Dividend Outlook

In the previous financial year, the Company paid a dividend of 2.2 pence per Ordinary share. The dividend was paid in order that the Company complied with the rules governing investment trusts, which includes the requirement that most of the net income is distributed to shareholders.

The surplus revenue last year arose largely as a result of the Company benefiting from a waiver of the management fee following the merger with Aberdeen New Thai Investment Trust PLC in November 2021. In the current year, the Company will pay a full year of management fees and, as a result, the charge in the current year is more representative of the ongoing expense than last year.

Loan Facility and Gearing

In April 2022, the Company entered into a two year £15m, unsecured, multi-currency, revolving loan facility with Industrial and Commercial Bank of China, London Branch. The facility was undrawn at the start of the Period, but £12.8m (CNH 106m) was drawn down in two tranches in December 2022 and January 2023. At the end of the Period, the cost of the funding was 4.11%. Since the end of the Period, the remaining £2.2m (CNH 19.8m) of the facility has been drawn. At the end of Period, the net gearing was 2.6%.

Change of Portfolio Administrator, Depositary, Registered Office, Custodian and Company Secretary

In April 2023, the Company completed the process of moving most of its support functions to various entities within BNP Paribas S.A. Group (“BNP”). The depositary and administration of the portfolio moved to BNP Paribas S.A., Guernsey Branch. The registered office of the Company moved to BNP Paribas House, St Julian's Avenue, St Peter Port, Guernsey, GY1 1WA. The custodian was also moved to BNP Paribas S.A. At the same time abrdn Holdings Limited was appointed Company Secretary.

The Board decided to make these changes as BNP is the preferred service partner of the Company’s Investment Manager, abrdn plc, and currently BNP provides these services to the majority of the investment companies that abrdn manages. The Company will be able to access a more competitive rate card for the provision of these vital services and at the same time, bringing the Company into abrdn’s administration model should result in improved reporting to the Board.

I would like to thank the teams at Northern Trust (Guernsey) Limited and Vistra Fund Services (Guernsey) Limited for the professional services and support they have provided to the Company over the years, including through the merger with Aberdeen New Thai in 2021 and, more recently, in the transfer of responsibilities to BNP.

Outlook

It has been a challenging time for the Company since our mandate change in November 2021.

However, the Chinese economy appears to be moving in the right direction. After a lengthy period of social and travel restrictions, we believe there is pent-up consumer demand in China. The reopening that is already underway should lead to a multi-stage recovery, with a gradual revival of domestic consumption. In turn, this should boost sectors ranging from tourism to healthcare, and property to banks.

China’s economic recovery appears to be underway, albeit at a slower and more gradual pace than elsewhere in Asia. This recovery is aided by supportive financial conditions. China’s inflation is lower than surrounding countries, meaning authorities have been more able to introduce accommodative monetary and fiscal policies to support economic growth. Projections from the International Monetary Fund (“IMF”) earlier this year forecast that China’s economy will grow 5.2% in 2023 (compared with 3% in 2022). China’s economy is also expected to contribute one third of overall global growth. Although the IMF also points out that “comprehensive macroeconomic policies and structural reforms” are still required.

At the heart of China’s economic growth is its rising middle class, supporting the high-quality companies favoured by the Company’s Investment Manager and providing opportunities to invest in companies that are set to deliver long-term capital growth. These companies are benefiting from rising affluence leading to growth in consumption, growing digital integration and more widespread technology adoption, the move to a greener, lower-carbon world, greater demand for healthcare products, and structural growth in consumer finance.

The Board and I remain convinced of China’s long-term potential. We are confident of the Company’s Investment Manager’s approach and believe the portfolio is well positioned for the future.

Helen Green
Chairman
27 June 2023

Discrete performance (%)

Total return; NAV to NAV, gross income reinvested, GBP. Share price total return is on a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value.

Source: abrdn Investments Limited, Lipper and Morningstar.

Past performance is not a guide to future results.

Note on change of investment strategy Prior to 26 October 2021, the Company's investment policy was to invest in emerging market funds of funds. Please note that performance data for time periods prior to 26 October 2021 relate to an investment objective and strategy that no longer applies.

Important information

Risk factors you should consider prior to investing:

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. This may mean your money is at greater risk.
• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
• The Company invests into other funds which themselves invest in assets such as bonds, company shares, cash and currencies. The objectives and risk profiles of these underlying funds may not be fully in line with those of this Company

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.

Find out more at www.abrdnchina.co.uk or by registering for updates. You can also follow us on social media: Twitter and LinkedIn.